Commerce Commission's powers under scrutiny in Supreme Court

In this article, senior associate Jenny Stevens reviews the Supreme Court's first decision over the lawfulness of the Commerce Commission's use of information-gathering section 98 notices – which held that the Commission overstepped its powers in a pharmaceutical industry investigation.

The court struck down the notice in the case, in a decision that has possible implications for other commercial parties, particularly against the backdrop of a proliferation of statutory notices being issued by the Commission over recent times.

Many companies at the centre of investigations have found it easier to simply comply with these formal requests for information and documents even when there have been serious concerns as to scope. The Supreme Court's decision helps to clarify the scope of the power and the circumstances in which that power can be successfully challenged.

The central issue

The issue before the court was whether a notice issued by the Commission under section 98 of the Commerce Act 1986 seeking certain information from AstraZeneca Limited was valid.

The Commission issued the notice after it became aware from the media that AstraZeneca may have sought to "tie" the proposed provision of one pharmaceutical to the continued supply of another drug. The Commission considered this conduct may have been in breach of section 36 of the Act, which prohibits those with a substantial degree of power in a market from taking advantage of that power for an anti-competitive purpose. The Commission began an investigation and issued a statutory notice to AstraZeneca under section 98 of the Act requiring the company to provide certain information and documents. AstraZeneca applied for judicial review of the notice on the ground it was beyond the Commission's powers and invalid.

The conduct being investigated took place in the context of dealings between PHARMAC and AstraZeneca. This put section 53 of the New Zealand Public Health & Disability Act 2000 at issue. It provides an exemption from the restrictive trade practices sections of the Commerce Act for certain agreements PHARMAC enters into and associated conduct related to the supply of pharmaceuticals. The Supreme Court said that section 53 recognises that PHARMAC may in effect be a monopsonist (i.e. a sole or dominant purchaser) for particular pharmaceutical products and, that in order to be successful in its role, it may need to adopt practices that would clash with the prohibitions in the Commerce Act.

AstraZeneca argued its conduct was covered by section 53 and that there was no power for the Commission to issue the notice.

In the High Court

Justice Panckhurst upheld the section 98 notice in the High Court. First, he said it could not be certain at the time the notice was issued whether AstraZeneca's actions fell into the section 53 exemption. Until the Commission was in full possession of the facts, it could not form this view. Second, he said that the clear purpose of section 53 was to protect PHARMAC and not pharmaceutical suppliers. It was implicit in this finding that the court considered there may be potential to interpret section 53 in a way such that AstraZeneca could not bring itself within its ambit.

To the Court of Appeal

AstraZeneca appealed the decision. The Court of Appeal dismissed the appeal by a 2-1 majority. The majority did not favour Justice Panckhurst's first reason but considered the second could not be so easily dismissed and acknowledged that it may be legitimate to read the section 53 language down given the clear indication as to its purpose. The majority considered this question should not be decided in a factual vacuum and so the Commission should be free to advance its investigation.

However, in a lengthy dissenting judgment, Justice Fogarty said that the wording of section 53 was plain, could not be read down and that as AstraZeneca's conduct fell within that wording the Commission had no power to issue the notice.

Supreme Court

AstraZeneca again appealed. Justice Blanchard gave the unanimous judgment of the Supreme Court allowing the appeal and, in essence, adopting the reasoning given by Justice Fogarty in the Court of Appeal.

The Supreme Court found that on the facts available to the Commission at the time of the issue of the notice, AstraZeneca's activity in attempting to tie the supply of one pharmaceutical to another was so plainly within the scope of the section 53 exemption as to preclude the use by the Commission of the section 98 power.

To be fair to the Commission, the current wording of this pharmaceutical exemption had not previously been subject to any judicial consideration. The fact that at least three of the nine judges who have considered this issue on its way through the courts, considered it possible that the exemption would not apply to AstraZeneca in these circumstances is evidence of the potential for ambiguity that existed on the face of the section and the facts before the Commission. With the benefit of the Supreme Court's interpretation of section 53, the Commission may well have not issued the notice.

Points of principle and the implications

The decision is quite fact-specific in terms of applying section 53. However, important general principles emerge that are relevant on an ongoing basis for the Commission in its use of the section 98 power:

• The Commission's purpose in issuing a section 98 notice must be the investigation of some activity which may be unlawful under the Commerce Act. An activity which can be seen to be plainly not unlawful (here, by reason of the section 53 exemption) cannot be the subject of such a notice. Drawing on Australian case law, the court considered this was an objective test: "is the matter identified in the notice capable, after allowing for undiscovered facts, of amounting to a contravention?". This is to be assessed on the basis of the material already available to the Commission.

• The Commission does not have the power to use the notice to check whether it has the necessary power by reference to something it may discover on a "fishing expedition" pursuant to the notice. There must be a reasonable basis for the Commission to believe that there may be undiscovered facts that could give rise to a contravention.

In summary, and adopting the words of the court:

"A notice of this kind must be justified on the basis of the Commission's knowledge of the matter it is investigating (here the attempted tie) at the time of the notice. The Commission is certainly not entitled to proceed on the basis that it can issue a notice first and then have its power to do so judged retrospectively by what it might find...."

For further information, please contact your usual Bell Gully adviser or:

Phil Taylor
Partner

Torrin Crowther
Partner

Simon Ladd
Partner

Jenny Stevens
Partner

Disclosure: Bell Gully acted for PHARMAC in this proceeding but the author of this article was not involved in the case.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.