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Competition Alert – A Year in Review

Home Insights Competition Alert – A Year in Review

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Contributed by: Sarah Keene, Troy Pilkington, Sam Holmes and Hannah Loke

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Published on: December 18, 2018

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Like tinsel on the tree and cricket on the beach, it would not be Christmas without Russell McVeagh's review of the year's developments in New Zealand competition law. True to form, 2018 has been another eventful year, with new laws coming into force, new laws (including jail time) proposed, and a number of significant Commerce Commission investigations and proceedings. 

Sit back with your eggnog and enjoy this whip-through of 2018. 

Law changes

Cartel criminalisation
The Labour-led Government's progress towards introducing seven year jail sentences for cartel conduct continued in 2018, with the Commerce (Criminalisation of Cartels) Amendment Bill passing its second reading in Parliament in October. 

While controversial (the Select Committee could not agree that introducing criminal sanctions for cartel conduct was warranted), the expectation is that criminalisation of cartel conduct will be introduced during 2019. The only remaining area of debate appears to relate to how the defence to the criminal offence is structured. 

See our October Competition Alert for further thoughts on cartel criminalisation.

Market power reform
While no formal law reform process has yet commenced, the Government has as recently as December restated its intention "to review section 36 (the market power prohibition) on the basis that it is costly and complex to enforce, and may not be sufficiently deterring anti-competitive conduct by powerful firms".1

We expect that process to kick-off in earnest in 2019, and that the Government will look to follow the recent law change in Australia where businesses with market power are prohibited from engaging in conduct with the purpose or effect of substantially lessening competition in a market. That "effects-based" prohibition would remove the current requirement in New Zealand law that conduct is only illegal if the business would not have undertaken the same conduct in a competitive market.   

In the meantime, the Commerce Minister has sent a letter to the Commerce Commission (Commission) emphasising that "whatever the outcome of this review, I expect that the Commission will be as committed to enforcing section 36 as it is to enforcing any other provision in the Commerce Act".2 That is understood to be in response to suggestions that the Commission would not be actively enforcing s 36 pending reform of the law due to its perception that the existing law is too difficult to enforce. 

Market studies powers introduced and quickly put to work
In October the Commerce Amendment Act was passed enabling the Commission, either by its own initiation or by recommendation from the Commerce Minister, to undertake market studies (referred to as "competition studies") on an industry where it is considered to be in the public's interest to do so.

It was widely tipped that this power was introduced due to concerns about the operation of the retail fuel market. The Commerce Minister wasted little time in setting the Commission free to use those new powers in that industry, with the Commission commencing a competition study into the retail fuel industry on 6 December. The terms of reference for that competition study are very wide – effectively enabling the Commission to consider any, and all, aspects of that industry.3

At the same time, the Commission has published draft guidelines for consultation on its proposed processes and approach to conducting competition studies.4 Submissions are due on those draft guidelines by 31 January 2019.

Expanded cartel prohibitions fully in force
The expanded cartel prohibitions introduced in August 2017 fully came into force in May 2018, including for arrangements that pre-dated the law change. That means the expanded prohibition on cartel conduct (which includes price fixing, output restriction, and market allocation) now applies to all such arrangements. 

New Commerce Commission processes

Competitor collaboration guidelines
Reflecting the law changes introduced to the cartel prohibition in August 2017, in January 2018 the Commission released its finalised Competitor Collaboration Guidelines, which outline how it intends to interpret the expanded prohibition and the associated changes to the cartel exemptions (including the introduction of the "collaborative activities" and "vertical supply contract" exemptions). 

The guidelines are a useful tool for businesses looking to understand the Commission's approach (they can be found here).

Updated cartel leniency programme guidelines
In June, the Commission also updated their Cartel Leniency Policy Guidelines.5 The policy grants immunity to the first participant in a cartel to inform the Commission of that cartel, contingent on their subsequent full cooperation with the Commission. Subsequent participants may also receive "cooperation concessions" if they fully cooperate with the Commission's investigation process.

While the changes to the guidelines were largely to make them more user-friendly, the Commission did signal a move away from committing to supporting any specific levels of discounts for "second in" cooperating parties.

See our June Competition Alert for more information.

Launch of cartel whistleblowing tool
In August, the Commission launched a whistleblowing tool to allow members of the public to anonymously report suspected cartels.6 The whistleblowing tool is separate to the Commission's leniency policy, which is for cartel participants.

Merger control

Clearance applications
In the merger clearance space, the Commission was notably less interventionist in 2018 than it had been in 2017 (which saw over half of all clearance applications declined). The Commission received nine clearance applications, and during the course of the year eight applications were approved,  one was declined, and one was withdrawn, with two applications pending at the time of writing (see chart below).

This signals a return to a clearance/decline ratio more similar to historically average levels, which reflects the Commission's view that 2017 had been an anomaly due to a number of problematic applications coming before it in the same year, as opposed to it signaling a change in approach from the Commission. However, it may also reflect that the Commission is receiving fewer applications for clearance than previously, with the Commission observing that "in the last two years we have seen an increase in non-notified mergers that we need to investigate further".7 This may be a reaction to the perception that the Commission has been taking a stricter approach to clearances, where the threshold for a decline is lower than the threshold for the Commission being able to establish that a transaction breaches the law if clearance has not been sought (see further under the following heading).  

Merger investigations and prosecutions
As noted above, the Commission has seen an increase in non-notified mergers that it needs to investigate further. The Commission said during 2018 that investigations into mergers where the parties have chosen not to seek clearance are a priority,8 and it has begun publishing the fact of such investigations as a matter of process. The perception is that the Commission is also becoming increasingly interventionist in its enforcement against such mergers.   

Of particular note in respect of the Commission's merger investigations and prosecutions:

  • In July, the Commission withdrew its proceedings against Platinum for its acquisition of OfficeMax in New Zealand, but only after Platinum agreed to divest Winc in New Zealand (thereby removing any overlap in the office supplies markets) to a purchaser approved by the Commission.9 
  • In July, the Commission filed High Court proceedings against Wilson Parking alleging it substantially lessened competition for the supply of car parking in the Boulcott Street area in central Wellington when it acquired the rights to operate in the Capital car park.10
  • In June, the Commission opened an investigation into Fulton Hogan's proposed acquisition of Stevenson Group, citing concerns relating to the potential competitive effects of the proposed acquisition on quarry markets in Auckland and North Waikato.11 The Commission closed that investigation in October after Fulton Hogan agreed not to acquire Stevenson’s Huntly quarry as part of the transaction, thereby eliminating the overlap that give rise to competition concerns.12 
  • As at the current date, the Commission's website says it has four open merger investigations. This includes a long-running investigation into First Gas Limited's acquisition of GasNet Limited's gas distribution assets in the Bay of Plenty, which was opened in March 2017. There are currently no public signs of when that investigation will conclude or otherwise lead to proceedings.

Fairfax / NZME
In September, the Court of Appeal affirmed the High Court's upholding of the Commission's decision to decline to grant Fairfax and NZME clearance or authorisation to merge their businesses.13

The most notable aspect of this decision is the Court's affirmation that the Commission has jurisdiction to take into account non-economic detriments in the context of an authorisation decision (which is contrary to the Commission's authorisation guidelines at the time of its decision). The Court of Appeal stated that the Commerce Act permits authorisation on wide grounds, including economic and non-economic considerations. 

Tennex / San-i-Pak authorisation
In its first merger authorisation application since the Court of Appeal decision in Fairfax / NZME, the Commission is currently considering an application by Tennex to acquire San-i-Pak, which would result in Tennex being the only provider of medical and quarantine waste disposal services in the South Island.14 This is a transaction that the Commission previously declined clearance for in February 2016.15

The Commission has published a draft determination outlining its preliminary view that the transaction should be authorised despite the likelihood of increased prices, on the basis that the consolidation of the two firms would result in cost savings and benefits of $1.3m in net present value over 10 years.

Interestingly, drawing on the Court of Appeal's judgment in NZME v Commerce Commission,16 the Commission noted that despite the Commerce Act giving specific prominence to efficiency considerations in mergers, efficiencies should not be considered exhaustive in assessing society's interest in a transaction, and that the Commission must also consider non-economic detriments in appropriate cases.17 This indicates that for future authorisation applications there will be much less certainty for applicants in relation to the types of issues that the Commission will take into consideration than there was prior to the NZME / Fairfax decision.

Cartel proceedings

While the Commission's website lists a number of open investigations into anti-competitive conduct,18 2018 only saw two proceedings on the litigation front:

  • In April, the Commission filed civil proceedings against Prices Pharmacy 2011 Limited for an alleged price fixing agreement with competing Nelson pharmacies, whereby an alleged agreement was reached in May 2016 to increase the dispensing charge that consumers paid for fully funded prescription items from $5 to $6.
  • In November, the Court of Appeal overturned the High Court's 2017 decision that dismissed the Commission's claim that Hamilton real estate agents, including Lodge and Monarch, had reached a price fixing arrangement or understanding by agreeing to pass on Trade Me advertising costs to customers.  Importantly, the Court affirmed that:
    • the test for reaching an arrangement or understanding does not incorporate the requirement of a moral obligation; instead, it is sufficient that there is a consensus and expectation between the parties (ie a meeting of the minds); and
    • collusion on a start or offer price is unlawful, even where the competitors retain some discretion as to the final price.

This decision should make it easier for the Commission to prove price fixing arrangements in the future. 

Crystal ball gazing

Like the years before, 2018 was a busy year with law reform developments and an active Commission.  Looking into the crystal ball, 2019 should be no different – in particular with the Commission's first competition study due to kick-off in earnest, the impending introduction of criminal sanctions for cartel conduct, and the expected reform of the market power prohibition. For those involved, it will be a case of a (hopefully) Merry Christmas and a busy New Year.    

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

FOOTNOTES
  1. MBIE Discussion Paper Protecting business and consumers from unfair commercial practices (December 2018).  Accessible here.
  2. Letter to Dr Mark Berry from Hon Kris Faafoi "Annual letter of expectations for 2018/19".  Accessible here.
  3. "Terms of Reference for Competition Study into Retail Fuel Markets" (5 December 2018) Gazette. Accessible here.
  4. See the draft guidelines here.
  5. See the full guidelines here, and an overview here.
  6. More information here.
  7. Commerce Commission Priorities 2018/19 at 4.
  8. Commerce Commission 2018 Annual Report at 25.
  9. "Commission approves purchaser for Winc to address competition concerns" (4 July 2018) Commerce Commission.  Accessible here.
  10. "Proceedings filed against Wilson Parking over acquisition of Wellington carpark" (20 July 2018) Commerce Commission.  Accessible here.
  11. "Investigation opened into Fulton Hogan's proposed acquisition of Stevenson Group" (14 June 2018) Commerce Commission.  Accessible here.
  12. "Commission closes investigation into Fulton Hogan's acquisition of Stevenson's construction materials business" (15 October 2018) Commerce Commission.  Accessible here.
  13. NZME Limited & Ors v Commerce Commission [2018] NZCA 389.
  14. "Commission proposes to authorise Tennex's acquisition of San-i-Pak" (29 November 2018) Commerce Commission. Accessible here.
  15. "Tennex Capital Limited and San-i-pak Limited – Notice seeking clearance" (21 October 2015) Commerce Commission. Accessible here.
  16. NZME Limited & Ors v Commerce Commission [2018] NZCA 389.
  17. At [24] – [26] of the draft determination.
  18. See the Commission's merger investigation register here.
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