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Brief Counsel

Overhaul of competition law on the way?

17 June 2014

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​National is promising a wide-ranging overhaul of New Zealand’s competition law as part of its Business Growth Agenda (BGA) for a third term. 

This would include a review of the market power provision in section 36 of the Commerce Act and would be in addition to the cartel criminalisation legislation, now awaiting its second reading.

We look at the likely scope of change.

Scope of reform

Section 36 is the big item on the reform agenda.  The Commerce Commission has been campaigning for change for months and won an important ally in the Productivity Commission which came down with a series of recommendations in its report, delivered earlier this month, on boosting services sector productivity.

The Australian Government is also conducting a “root and branch” review of their almost identical framework and the intention is that the two reviews will run in parallel and that the outcome should advance or at least be consistent with the trans-Tasman harmonisation programme.

Other reform issues identified by the Government were:

  • the cease and desist regime, and
  • the prohibition against resale price maintenance

and by the Productivity Commission:

  • whether the Commerce Act should be amended to create a more proactive role for the Commerce Commission by enabling it to undertake studies on competition in any specific market in the economy.  Currently it can do so only in relation to the telecommunications industry under the Telecommunications Act 2001.

Section 36

Section 36 is similar to section 46 of the Australian Competition and Consumer Act and provides that a person with a substantial degree of power in a market must not take advantage of that power for the purpose of:

  • restricting the entry of competitors into the market
  • preventing or deterring persons within the market from engaging in competitive conduct, or
  • eliminating a person from the market.

The Productivity Commission considers that this focus on the purpose rather than the effect of the behaviour sets Australia and New Zealand apart from most other jurisdictions and that the exclusive reliance of the New Zealand courts on the counterfactual test puts New Zealand “even more apart” than Australia.

It recommends that New Zealand explore the merits of a more effects-based approach aimed at assessing whether conduct has harmed dynamic market efficiency.

Chapman Tripp comments

We have written extensively in recent times on the depth of the Commerce Commission’s frustration with section 36: refer NZ Commerce Commission on mission for tools upgrade and Commissions gang up against counterfactual test.

Clearly it must be a matter for serious concern when a regulator has no confidence in the instruments at its disposal so to that extent, we welcome the review.

Much more problematic is whether it will produce a meaningful improvement in real terms.  Finance Minister Bill English has already warned that legislative change may not deliver big gains on the ground.

This is because, whatever the weaknesses with counterfactual analysis, there are also issues with any alternative.  This is a difficult area for legislation, involving the need to establish a bright line distinction between abuse of market power and legitimate competition (see our commentary: What if we deep six section 36? What then?).

The practical dilemma is that section 36 currently facilitates strong competition from firms with market power.  An “effects” test risks shackling those firms by disallowing commercial conduct that would be legitimate for firms without market power.  In a small economy, where we need everyone performing at their best, that could be significant. 

The Australians are already wrestling with this problem.  Rachel Trindale, Dr Alexandra Merrett and Dr Rhonda Smith in The grass is always greener? The effects vs purpose debate resumes note that:

“….a legal test for unilateral conduct that turns on effect is a blunt instrument compared to the fine tuning our courts can bring to the current purposive test with its lynchpin of take advantage”.

And:

“Fixing deficiencies identified by the case law is a reason for amending the law; simply trying to make it easier to win cases is not a reason for lowering the bar for legal liability or extending its reach.”  

Also there is an established jurisprudence around the current system which gives it the advantage of certainty for market participants.  This is not an argument for continuing with the status quo.  But it is an argument for embarking on change only if satisfied that the benefits will outweigh the disruption costs.

Next steps

When these conversations begin in earnest this side of the Tasman, it will be important that the business community is heard. 

While the Commerce Act promotes competition for the long-term benefit of consumers, it is business that will have to operate in the uncharted territory of the new version of section 36 and that will face the costs of any “market studies” a newly empowered Commerce Commission may choose to embark upon.

For further information, please contact the lawyers featured.

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