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Competition Update – A mid-summer dream for the Commerce Commission, or a nightmare on Queen Street for big businesses?

Home Insights Competition Update – A mid-summer dream for the Commerce Commission, or a nightmare on Queen Street for big businesses?

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Contributed by: Sarah Keene, Troy Pilkington, Christopher Graf, Sam Holmes.

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Published on: November 18, 2015

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Yesterday the Minister of Competition and Consumer Affairs (Minister) released an issues paper calling for submissions on potential reforms to the Commerce Act, including reforms to the much-maligned market power prohibition and the potential introduction of market power studies for the Commerce Commission (NZCC).

Drafted by the Ministry of Business, Innovation and Employment (MBIE) and available on MBIE’s website,1 the issues paper discusses the following key points of note:

Market power reform: 

MBIE’s preliminary view is that the current market power prohibition (s 36) is not working satisfactorily, on the basis that it is:

  • too complex and costly to enforce;
  • inconsistent with the substantial lessening of competition prohibitions in the Commerce Act for anti-competitive agreements and mergers (ss 27 and 47); and
  • inconsistent with the market power prohibitions in other countries (except Australia). 

MBIE’s preliminary view reflects the long-held position of the NZCC, which has seen it publicly indicate it will not take action to enforce the current market power prohibition. Some experienced competition law practitioners take the view that the NZCC’s stance in relation to enforcement has become a self-fulfilling prophecy, and there is no problem with the wording of s 36 itself (under which, it must not be forgotten, the NZCC has achieved the highest ever penalties under the Commerce Act). In any event, the practical effect of the NZCC’s position, in the context also of the Harper Review recommendations in Australia, is that change to the market power prohibition seems on the cards.

MBIE signalled two potential s 36 reform options it may consider (pending submissions):

  • Removing the “taking advantage”requirement from the existing prohibition. A firm with market power would breach s 36 if it undertook conduct with an anti-competitive purpose, such as eliminating a competitor, preventing a competitor from competing, or restricting the entry of a competitor. This removes the causal link between the conduct and the firm’s market power. It effectively creates a duty on large companies to pull their punches when dealing with competitors.
  • Moving to an “effects or purpose based” test. A firm with market power would breach s 36 if it engaged in conduct that had the purpose, effect or likely effect of substantially lessening competition. This would align the market power prohibition with the existing anti-competitive agreement and merger prohibitions, except that it would apply to unilateral conduct. This is similar to the market power reform recommended in the Harper Review in Australia.

Both options present real issues for businesses with strong market positions:  

  • Removing “taking advantage” without more would be a terrible outcome. Rod Sims, the ACCC Chair observed only a couple of weeks ago that firms always have the purpose of damaging their competitors – damage to competitors is inherent in the process of competition (ie getting ahead at competitors’ expense). To prohibit firms with market power from engaging in conduct with the purpose of damaging competitors, without requiring proof that such conduct is linked to that market power or would not occur in a competitive market, would require powerful firms to be more competitively conservative than other less powerful competitors. This would be a very poor policy outcome – especially for a small economy like New Zealand’s which requires large efficient businesses to be as competitive as possible.
  • Moving to an effects based test makes it difficult for a powerful firm to determine in advance whether its conduct is lawful. In the s 27 / s 47 context, the “effect” of an agreement can be assessed at a later point in time after the agreement has been entered into. In the misuse of market power context, this would mean a firm with market power won't know until some months or years later whether its conduct was illegal or not. 

To the extent that MBIE wants to more closely align the prohibition with s 27 (the prohibition on anti-competitive agreements), it should at least remove the actual effect part of the test. The prohibition could be limited to conduct that has the “purpose” or “likely effect” of substantially lessening competition in a market. If that approach is taken it would also need to be clear that “likely effect” for the purposes of s 36 means a “probable” outcome that is “reasonably foreseeable” at the time the conduct is undertaken by the firm with market power, and is not merely a “real risk”, as “likely” has been interpreted in the merger control context. (Note here, that New Zealand is an outlier, even as compared to Australia, in setting such a low threshold of probability for “likely” in the merger control context). 

The intellectual property exemption:

MBIE has said that issues relating to the existing intellectual property (IP) exemptions are better dealt with in the context of their own legislative review. In our view, this would be a mistake.

The approach to IP rights is inextricably linked to competition law and, in particular, the approach to market power prohibitions – IP rights necessarily create some degree of market power. The Commerce Act specifically mentions the IP interface with market power in s 36(3). It is not possible to properly consider the appropriate scope of New Zealand’s market power prohibition without giving consideration to the IP exemptions. 

In a modern, data heavy, hi-tech and knowledge-based economy, IP, particularly copyright and patents, are often entwined in market power complaints. A detailed review of New Zealand’s trading partner markets would reveal that IP issues feature heavily in market power enforcement in these jurisdictions. To exclude the IP exemptions from the review is to only consider half the story and, of most concern, to focus the market power debate primarily on the methods of competition and the products and services that were the essential facilities of the past, missing the opportunity to debate the appropriate balance for the type of competition that will create future growth opportunities for the New Zealand economy. 

If IP is relegated to the “too hard” basket there is a real risk that any reform that results from the review will be ineffective (given the uncertainty in the application of the current exemptions) and not fit for purpose to foster productive markets and competition into the next decade. 

Market study powers: 

MBIE has called for submissions on whether the NZCC (or potentially a new agency) should have the power to conduct market studies. 

While there are obvious benefits to policy makers in having information about market dynamics being collected and analysed by the NZCC, we are sceptical that the benefits to the New Zealand markets would outweigh the costs.  

In the UK, where the regulators have market study powers, the studies have been subject to criticism for the amount of taxpayer resources that they consume and the significant costs they impose on firms in the industries that are subject to market studies. It has been estimated that a firm’s external costs in a typical UK market study can be £4m and internal costs over £2.5m,2 and often very few changes are implemented as a result of the studies, which calls into question whether they achieve sufficient benefits for consumers to justify their cost. 

Overseas experience also suggests that the burden of market studies will inevitably fall on particular industries that have a high profile with consumers, such as banking, insurance, grocery retailing and telecommunications. Given the costs of a market study, by definition, are borne equally by all market participants, those costs are invariably passed on to consumers (no business is competitively disadvantaged by passing on those costs) so market studies effectively become a tax on consumers in those industries, further calling into question their net benefit.

Enforcement by the NZCC:

MBIE has also called for submissions on the NZCC's enforcement powers. In particular, MBIE is concerned that:

  • The NZCC’s ability to reach settlements with defendants under the Commerce Act is weak, because it is only contractual in nature and relies upon the High Court for enforcement, and is weaker than the NZCC’s powers to obtain enforceable undertakings under the Fair Trading Act and Telecommunications Act; and
  • The NZCC’s existing “cease and desist” regime is not needed, is ineffective (having only been used once in 14 years) is not cost-effective or timely, and does not provide any benefits over-and-above the NZCC’s ability to obtain interim injunctions.

There are real problems for the NZCC in achieving effective enforcement in a timely and cost efficient way, under the Commerce Act, so this review is appropriate. However, before leaping to an enforceable undertakings regime, it is important to recognise the difference between the Commerce Act and Fair Trading Act regimes.

Allegations under the Commerce Act often rest on complex economic arguments about closeness of competition, costs of supply, and appropriate State limits on freedom to contract. Because the likely options and reactions of other market participants are highly relevant to the analysis, the defendant will not always be well placed to assess allegations made against it by the NZCC. 

While MBIE’s aim is greater simplicity and speed in enforcement, it will be important that any enforceable undertaking regime includes appropriate checks and balances on the NZCC’s discretion before it can impose any penalty-like sanctions on defendants (in addition to standard appeal rights, which are often costly to exercise in practice). 

We see a refreshed role for an independent lawyer, such as a retired judge, to act as a Hearings Commissioner (similar to the European Commission and UK Competition and Markets Authority) as having the potential to strike a fair balance between speed and natural justice in such a regime.

Next steps

MBIE has requested submissions by 9 February 2016. 

If you are uncertain as to how the review or MBIE’s suggested options may affect your business, please contact one of the contributors below.

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FOOTNOTES
  1. See here.
  2. (OECD 2008).

This publication 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.

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