Misuse of market power

2009 saw the prohibition on misuse of market power (section 36 of the Commerce Act) regain some prominence in competition law litigation.  Iconic for its difficulty and controversy more than for its utility, some aspects of section 36 were confirmed and some new boundaries explored.

The two key cases in 2009 involved Telecom.  Not much can be read into this.  There are only a few firms in New Zealand which the Commerce Commission can confidently claim possess the requisite “substantial degree of market power” to be subject to the section 36 restrictions.  It does mean, however, that the fact situations involve telecommunications esoterica, with jargon such as 0867 and data tails.


First, section 36 cases take an age to work their way through the court system.  The result is that aficionados face not only a diet of telecommunications esoterica, but old esoterica.  The 0867 proceeding relates to slights and wrongs that are alleged to have occurred when dial up internet was king.  And data tails have been regulated since 2004.

Second, the controversy continues to be around the use, and implementation, of the so-called “counterfactual test” relating to whether the accused was taking advantage of its market power in the exercise of the alleged offence.  The Privy Council established in 1995, and reinforced in 2005, that a large firm is allowed to compete hard on the merits.  It will only be “taking advantage” of its market power if it does something that it would not have done in a competitive market.  If the answer is that the firm would have done the same thing in a competitive market, then it’s pretty hard to argue that it was relying on its market power at the time.

Critics argue that the test is too hypothetical, and too hard to apply in practice.  The Commission, possibly section 36’s biggest critic, explained its loss in the Court of Appeal on 0867 in those terms.  It has appealed to the Supreme Court explicitly asking the Supreme Court to change the law by dropping the counterfactual test on the grounds that it robs section 36 of all enforceability.

Inconveniently for the Commission’s argument to the Supreme Court, the Commission subsequently won the data tails litigation in the High Court.  The court applied an orthodox counterfactual test, followed the Privy Council approach, and decided that the Commission had made its section 36 case.  Telecom has appealed.  But, at least in 2009, the lesson was that winning and losing under section 36 may, for the Commission, be more about picking the battles than complaining about the rigour of the counterfactual test.

New boundaries explored

The most far reaching decision may be the Commission’s attempt to draw the Supreme Court into law reform.  Past and present governments have been aware of the arguments for and against the counterfactual test, and have decided not to change the law established by the Privy Council.  Given this, the Commission is pushing the boundaries of its role by seeking law reform in the courts. 

In a very real sense, the Commission is now competing with the Ministry of Economic Development over who shapes competition law policy in this area.  To add insult to injury, were the Supreme Court to take up the Commission’s invitation, the effect would be retrospective – altering in 2010 the legal standard against which decisions regarding dial up internet were made in 1999.

This only highlights the perils of seeking law reform through the courts.  Whether the Supreme Court will resist the temptation to “reform” section 36, and will take note of these wider institutional and public law boundaries, is a question for 2010.

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Related topics: Competition, regulatory & antitrust; Commerce Commission

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