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Competition Law: A Year in Review 2017

Home Insights Competition Law: A Year in Review 2017

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Contributed by: Sarah Keene, Troy Pilkington and Hannah Loke

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Published on: December 13, 2017

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2017 has been an active year in New Zealand competition law, with the introduction of new cartel prohibitions and new exemptions, a number of merger clearance applications blocked by the Commerce Commission (NZCC), and rapid movements towards the introduction of a new "market study" power for the NZCC.

This update looks back at the key New Zealand competition law developments during 2017.

Legislative Reform

Finally – the implementation of the Cartels Act

After a 6-year journey through Parliament, the Commerce (Cartels and Other Matters) Amendment Act 2017 (Cartels Act) received Royal Assent on 14 August 2017. The Cartels Act makes a number of fundamental changes to the Commerce Act 1986 – including:

  • expanding the scope of the price fixing prohibition to also specifically prohibit "market allocation" and "output restriction" arrangements between competitors (now known as the prohibition on "cartel provisions"); and
  • introducing new exemptions to the cartel prohibition – namely:
    • a new "collaborative activities" exemption, which replaces the previous joint venture exemption to provide a more flexible and "fit for purpose" exemption for pro-competitive collaboration between competitors; and
    • a new exemption for cartel provisions that are included in vertical supply contracts (where certain requirements are met).

See more details of these changes here.

The enactment of the Cartels Act is a positive step for businesses – namely:

  • ending the six years of uncertainty as it languished before Parliament; and
  • introducing exemptions that are better formulated to enable competitors to work together in appropriate circumstances.

Introduction of NZCC market study powers

In June, the then-Commerce and Consumer Affairs Minister announced that the National-led Government was recommending empowering the NZCC to undertake market studies at the initiation of the Minister.1It was not proposed that the NZCC be given the power to undertake those studies of its own volition, as the Government was concerned about the costs to businesses of responding to market studies, and the risk of the NZCC engaging in unnecessary "fishing expeditions".2

With the recent change in Government, the new Labour-led Government has said:

  • it is "quite keen to give the Commerce Commission the power to self initiate ... If the Commerce Commission believes there's a public interest in looking into a specific market, then we should take the politics out and let them do it";3 and
  • it would like that power to be introduced before the end of 2018 – seemingly as a political response to the media noise calling for an inquiry into New Zealand petrol prices.  

There is scope for debate about whether giving the NZCC the ability to initiate market studies results in more or less political considerations to come into play in making decisions about which industries to study. In one sense, enabling the NZCC to self-initiate reduces political accountability for the costs and outcomes (or lack of outcomes, based on overseas experience of similar regimes); and may increase the prospect of a study lacking the political backing necessary to achieve any consequential policy reforms off the back of the findings.

On the other hand, enabling the NZCC to self-initiate market studies will provide it with a freer rein than it has within the narrow ambit of its merger, cartel or market power enforcement powers to identify and focus on markets and businesses that it considers would benefit from a wider market examination. While we had seen political accountability and targeted focus as a benefit of studies only being initiated at the request of the Minister, it is likely that budget limits and resource constraints will, in any event, necessarily place constraints on the number and scope of the studies the NZCC self-initiates, and no doubt the relevant policy makers are reflecting on other mechanisms to ensure the regime includes the correct level of checks and balances.

Market power reform on ice – but for how long?

Due to the NZCC's long-stated concerns about New Zealand's current prohibition on taking advantage of market power, the Ministry of Business, Innovation and Employment (MBIE) commenced a targeted review of that prohibition in November 2015.

Following that review, it was announced in June 2017 that any recommendations in relation to the market power prohibition would be put on ice until June 2018.  That was because MBIE, and the then National-led Government, considered it difficult to identify where any issues with the market power prohibition had led to actual harm to competition.

The Labour Party's pre-election policy manifesto outlines an intention to conduct an "urgent" review of the Commerce Act - with a specific focus on the market power prohibition, which it says "has been found to be inadequate". 

The Labour-led Government will likely look to reform the market power prohibition – probably by adopting the prohibition recently introduced in Australia. Australian law now prohibits firms with a substantial degree of market power from engaging in "conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition" in a market4 – ie it:

  • removes the "taking advantage" limb; and
  • can apply not only where a firm has an anti-competitive purpose, but where a firm's conduct has an anti-competitive effect.

Australian legal advisers have described this change to the law as "bold" and "controversial". They also cite the lack of legislative guidance as creating uncertainty for businesses.5

Mergers and acquisitions

In the M&A space, 2017 was notable for the NZCC taking a more interventionist approach than previously – with:

  • a significant jump in the proportion of declined merger clearances (see chart below); and
  • the NZCC taking its first merger enforcement proceedings since 2006 (in relation to a transaction that it had previously cleared in 2015, but was not implemented at that time).

Responding to this increase in clearance declines, the NZCC Chair has said it is not a sign of change in process or approach from the Commission,6 but rather that the number of declines reflect the challenging clearance applications that came before it during 2017. 

The declined clearances were:

  • Sky/Vodafone, which was declined on the basis of concerns that the merged entity would leverage Sky's market power over premium live sports content to foreclose competition by other broadband and mobile competitors.7
  • Vero/Tower, which was declined as it combined the second and third largest personal insurers,8 and the NZCC considered that the target would be more competitive in the counterfactual; either standalone or under different ownership (in a competitive bid process).  Additionally, the NZCC concluded that remaining competitors would not be sufficient to constrain unilateral and coordinated conduct as between the merged entity and larger insurer, IAG.

    Vero and Tower began the process of appealing the NZCC's decision to the High Court, but abandoned the appeal in November.
  • Aon/Fire Protection Inspection Services, which was declined on the basis that the parties were the largest suppliers of fire inspection services in New Zealand, the NZCC considered that they would in the future foreclose access to fire inspection services, and remaining competitors would not be sufficient to constrain the merged entity.

The NZCC also declined an application for authorisation or clearance for the proposed merger of newspaper and online news publishers Fairfax NZ and NZME.

In declining that application, the NZCC said:

  • it was not satisfied that the merger would not substantially lessen competition on the reader side of the two-sided market for the supply of free online national news, and in separate markets for Sunday newspapers and for community newspapers in certain "overlap" areas; and
  • the merger's significant quantified net public benefits of up to NZ$200m (largely in the form of operational synergies) were outweighed by an unquantifiable detrimental effect to New Zealand democracy due to the loss of media plurality and quality.

The NZCC therefore declined to grant authorisation. 

The parties appealed the NZCC's decision to the High Court in October. As at publication, a judgment is yet to be published.

Merger investigations and proceedings

The NZCC has confirmed that it is conducting "several" investigation into mergers where the parties have chosen to not seek NZCC clearance.9

The most high-profile of those is the NZCC's investigation of Platinum Equity's acquisition of OfficeMax, which would combine Winc (formerly called Staples) and OfficeMax under common ownership. That combination had been cleared by the NZCC in 2015, but was not implemented within the 12-month period of clearance protection - as the US part of that global merger was blocked. 

The NZCC has now reached a different view to its view in 2015 – deciding that the combination would substantially lessen competition in the supply of stationery to large corporate and government customers. It joined injunction proceedings initiated by third party competing bidder Complete Office Supplies to prevent the transaction completing.

This is the first time the NZCC has taken proceedings opposing a merger since 2006. Although the ACCC has advised it will not oppose the deal in Australia, the NZCC has cited different market dynamics in New Zealand.10 It is also likely that Fuji Xerox's recent difficulties,11 including its suspension from the Government's office suppliers' panel,12 is one reason for the NZCC reaching a different view to 2015. 

The Platinum/OfficeMax proceedings are scheduled to be heard in June 2018.

Cartel enforcement

Real estate agent price fixing

During 2017 the NZCC continued its enforcement against alleged collusive conduct between real estate agencies – with a number of real estate agencies continuing to admit liability and reach settlement with the NZCC,13 taking total agreed penalties to nearly $20m (as set out in Table One below).

Table One – real estate agency settled price fixing penalties

Real estate agency

Penalty

Barfoot and Thompson

$2.6 million

Harcourts Group

$2.6 million

LJ Hooker

$2.5 million

Ray White

$2.2 million

Bayleys

$2.2 million

Property Page Ltd

$100,000

Online Realty Ltd

$1.05 million

Lugton’s Ltd

$1 million

Success Realty

$900,000

Manawatu 1994

$1.25 million

Unique Realty

$1.25 million

Property Brokers

$1.45 million

However, several real estate agents chose not to settle with the NZCC – including Hamilton-based real estate agents Lodge and Monarch. The proceedings went to a contested High Court hearing in September. In November, the High Court released its judgment dismissing the NZCC's claims, despite other real estate agents involved in the same alleged conduct having admitted liability.14 The High Court held that:

  • although the defendants had entered into an arrangement or understanding, and had given effect to it;
  • the arrangement did not have the purpose of fixing, controlling or maintaining the price of real estate sales or advertising services as "nothing in the arrangement… constrains any freedom to charge any price to any individual vendor on any individual transaction" (ie, the agencies retained discretion to deviate from their agreement).

The NZCC has announced that it will appeal this decision to the Court of Appeal, stating that it "raises significant legal issues that warrant an appeal".

The NZCC's leniency regime

The NZCC has also advised that it received "several" leniency applications during the year; and it is currently reviewing the leniency policy, to ensure it is "as effective as possible".

Authorisations of anti-competitive practices

Finally, the NZCC considered two applications for authorisation of restricted trade practices during 2017 – namely:

  • In April, the NZCC authorised the Nelson and Tasman Councils' application to jointly operate the two landfills in the Nelson-Tasman region, subject to imposing conditions requiring any surpluses to be solely used to fund the Councils' respective waste-related activities;
  • In September, the NZCC received an application for an authorisation for collective bargaining from the Waikato-Bay of Plenty Chicken Growers Association. The Association, on behalf of its members, is seeking to collectively negotiate the terms and conditions by which members supply chicken growing services to Inghams. A draft determination issued in November reached a preliminary view to authorise the application, with a final determination expected in the coming months.

Concluding comments

It has been a busy year for New Zealand competition law – and those involved will be looking forward to a rest as they sit down to their (potentially collectively bargained) poultry this Christmas dinner.

If you have any questions in relation to any of the issues discussed above, please contact any of the contacts listed below.


FOOTNOTES
  1. MBIE "Targeted Review of the Commerce Act 1986". Accessible here.
  2. See more details here.
  3. Hamish Rutherford "Competition watchdog could get power to conduct probes without Government approval" (4 December 2017) Stuff.  Accessible here.
  4. Australian Competition and Consumer Law Act 2010, s 46.
  5.  See, for example, Allens "The Government's proposed amendments to Australia's competition laws". Accessible here and King & Wood Mallesons "Section 46 changes to crack down on misuse of market power in Australian competition law" (5 September 2016).  Accessible here.
  6.  "Vero's Tower takeover appeal to be heard in January" (5 September 2017) NZ Herald.  Accessible here.
  7.  [2017] NZCC 1 and 2 Vodafone Europe B.V. and Sky Network Television Limited at [X2].
  8.  [2017] NZCC 18 Vero Insurance New Zealand Limited and Tower Limited at [X2].
  9. ∧  Commerce Commission 2017 Annual Report, p 14.  Accessible here.
  10.  Susan Edmunds "ComCom to continue with court action to block merger, despite Aussie green light" (5 December 2017) Stuff.  Accessible here.
  11.  See, for example, Tom Pullar-Strecker "Serious Fraud Office says new investigation under way into Fuji Xerox" (3 October 2017) Stuff.  Accessible here.
  12.  Fiona Rotherham "Fuji Xerox canned from one government contract, suspended from another" (2 October 2017) National Business Review.  Accessible here.
  13.  Namely, in April 2017 Property Brokers Ltd, and its director Tim Mordaunt, reached a court-approved settlement with the NZCC to pay penalties of $1.45 million and $50,000 for agreeing with competing real estate agencies in the Manawatu region to pass-on to customers the full cost of advertising a property on Trade Me.
  14.  This includes Online Realty being handed a penalty of $1.05m, as Table One indicates.

This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.

 

 

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