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Manufacturing firm warned over anti-competitive agreement

October 2015
Release No. 33

Manufacturing firm warned over anti-competitive roofing products agreement

The Commerce Commission has issued a formal warning to manufacturing firm Consolidated Alloys (N.Z.) Limited (CA) over the inclusion of an anti-competitive clause in a negotiated settlement with roofing products competitor Edging Systems (NZ) Limited (ESL).

The settlement agreement was entered into to resolve a commercial dispute about whether ESL’s EZ-Edge product breached CA’s registered patent over soft-edge flashing products for use on residential metal roofs. CA’s patent was registered in 1995 and expired on 10 August 2015.

The Commission became aware of the agreement in September 2014 when ESL applied for and was granted conditional immunity under the Commission’s leniency programme.

Under the negotiated settlement, ESL agreed to pay CA a lump sum and royalties on annual sales of EZ-Edge. It also agreed not to sell any other soft-edge flashing products covered by the patent other than EZ-Edge until June 2023. The Commission considers this clause had the purpose and likely effect of substantially lessening competition after the patent expiry date in breach of section 27 of the Commerce Act.

ESL developed and began selling a new soft-edge product innovation called Vent Edge in late 2013 after the settlement agreement was signed. There was also a dispute between the parties about whether Vent Edge was covered by the patent. Competition brought about by EZ-Edge and Vent Edge has led to some price decreases. The Commission believes that had CA used the clause to prevent the sale of Vent Edge there would have been a substantial lessening of competition after the patent expired.

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While the clause may have been inserted to protect the royalty payments, only one of multiple purposes needs to be anti-competitive to breach the Commerce Act. An intended consequence of the clause was to exclude the only likely competitor from entering the market with another competing product. As well as restricting the sale of competing products for a considerable period of time, it exceeded the duration of the associated royalty.

However, Commission Chair Dr Mark Berry said following the Commission’s investigation, CA formally advised that it would not enforce the restrictive clause in the settlement agreement. CA has also not prevented ESL from selling Vent Edge.

“Without a court ruling we can’t determine whether the patent validly applied to any of ESL’s flashing products. However, we believe the clause would have restricted competition after the patent expired, ultimately impacting on customers’ choice. Clauses like this protect established products by limiting innovation and the development of more efficient or better value products that benefit consumers,” Dr Berry said.

“Given CA has advised ESL that it will not enforce the clause restricting the sale of other soft-edge flashing products and no harm has been caused, we consider a public warning is appropriate. No further action will be taken in this case.

“This investigation is a reminder to all businesses that it can be risky to enter into settlement agreements that contain clauses that affect the ability of other parties to compete in any market. Care is required, particularly where competitors are involved.”

A copy of the investigation report can be found here.

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