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What if we deep six section 36 and counterfactual? What then?

03 April 2014

This article first appeared in Australasian Lawyer online

Policy makers in New Zealand seem set to tackle section 36 of the Commerce Act – the competition law behemoth that is New Zealand’s prohibition against “monopolisation”. 

Section 36 prohibits firms from “taking advantage” of substantial market power for anti-competitive purposes and, in that sense, largely tracks the format of section 46 of the Competition and Consumer Act in Australia.  The work will take place in parallel with the more extensive Australian “root and branch” review, the scope of which is set to include whether section 46 “captures all behaviours of concern”.

The New Zealand Commerce Commission considers section 36 an ineffective enforcement tool.  The Commission is particularly frustrated with the courts’ insistence that “counterfactual” analysis of what would happen if the firm in question lacked market power be used to distinguish between a firm “taking advantage” of market power (which is illegal) and just “having” market power (which is not).
This approach is considered to be speculative and inherently unreliable.  Ultimately, it is thought to be just too incumbent-friendly.
To some, this is an odd objection because the logic of the position taken by the courts is sound: coincidence of market power and objectionable conduct is not sufficient.  To have “taken advantage” of market power, there must be a causal link between the firm’s market power and the conduct.  Counterfactual analysis flushes that out.
Still, the time for debate on the merits of the courts’ position may now have passed.  The Productivity Commission has endorsed the Commission’s view and, more recently, the Minister of Finance has signalled a willingness to look at the issue.
For the record, we are not convinced that the outcomes to date under section 36 have been all that bad.  Mind you, we acted for Telecom in the 0867 case where counterfactual analysis was central to a successful defence.  So the point has already been made: “you would say that”.
But we can all agree that we want section 36 in a form that the regulator charged with administering it is prepared to do so.  That is currently not the case.  The Commerce Commission has put section 36 in the too hard basket, and that is not good for anyone.
So what do we do?  The starting point, assuming we must avoid counterfactual analysis, must be that we need to move away from the current statutory language of “taking advantage”.  If that language stays, we have to assume the courts will try to make sense of it – and there’s no reason to expect they will land anywhere different.
That means that we may have to begin with a clean sheet of paper, scouring the globe for alternative monopolisation prohibition formulations that avoid the dreaded chore of the counterfactual.  However, there may not be many attractive options out there.
  • In Europe, an “abuse” of dominance is defined (under Article 102) to include specific kinds of conduct, including: imposing unfair conditions; limiting production to the detriment of consumers; and discriminating in the context of equivalent transactions.
  • In the USA, section 5 of the Federal Trade Commission Act prohibits “unfair methods of competition”.
The level of discretion inherent in these concepts is a bit scary.  Do we really want the Commerce Commission to be issued with a “know it when we see it” formulation?
In the murky world of competition law, evil is in the eye of the beholder.  That is especially problematic in smaller economies like New Zealand where there are typically greater levels of market consolidation than would be the case in deeper markets.  New Zealand needs its incumbents to be competing hard, setting the commercial standard.
If we import these somewhat ethereal concepts of “fairness” from Europe or the USA, we risk forcing those incumbents to throttle back lest the Commission take offence to a particular commercial practice.
Reading back, none of this has been particularly helpful.  So, how about this for a plan: we repeal section 36 and reformulate section 27 (the New Zealand equivalent of Australia’s section 45) to prohibit not just agreements that substantially lessen competition, but any conduct – be it co-ordinated or unilateral – that substantially lessens competition.
That approach would at least put us in the company of the Devil we know - although there would be a touch of irony in following it.
In competition law, section 27 is determined by reference to, wait for it, counterfactual analysis.  The court asks: if this agreement hadn’t happened, what would have happened instead (i.e. in the counterfactual)?  Under section 27, if the agreement lessens competition relative to what would otherwise happen, breach has occurred.
On the face of it, this speculative exercise should be no less vexing than trying to figure out what a firm that lacked market power would have done in the context of a section 36 inquiry.  The difference is that the Commission seems relatively comfortable with the counterfactual analysis required by section 27.  Maybe that makes it worth a go?
A word of warning however.  The main problem with any “effects test” is that it can operate to saddle the incumbent with a “special responsibility” to make sure its conduct does not adversely impact smaller competitors.
This is antithetical to the approach of the courts to date, which has been to draw a clear distinction between promoting competition and protecting competitors.  This idea is often captured as a reluctance to “hold an umbrella over the head” of inefficient or sub-scale competitors.  We should not abandon this philosophy lightly.
So, any “effects test” for unlawful unilateral conduct would require a mature view of competition in the relevant market context.  If competition is simply equated with rivalry, then we will have by default locked in a special responsibility for anyone with market power.
We can draw some comfort in this regard from the fact that the Commerce Act is directed towards the long-term benefit of consumers.  However, any new legislation may need something more direct and explicit to maintain an appropriate balance. 

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