Time to change the focus

Phil Taylor, Partner and David Blacktop, Senior Associate | Friday 8 May 2009

First published in NZLawyer, 1 May 2009.

The economic environment, a change of Government and a changing of the guard at the Commerce Commission provide an opportunity for the Commission to shift its balance towards a greater emphasis on resolving cases earlier and at lower cost to New Zealand Inc.

The Commission's "deterrence" phase

The thermometer of success is merely the jealousy of the malcontents. (Salvador Dali)

If Paula Rebstock's tenure as Chair of the Commerce Commission is judged by "the jealously of the malcontents", then based on the level of comment attracted over recent months alone, her tenure has been extraordinarily successful.

The Commission under Ms Rebstock has grown not only its numbers, but also its sophistication, experience and expertise and, importantly, its reputation for being a strong regulator. Indeed, increasing its enforcement impact was one of the Commission's strategic priorities during Ms Rebstock's time as Chair. Through several high profile "wins", the Commission has established a reputation for a "bite as bad as its bark" and generated much greater awareness of the rules of competition than was previously the case.

This period in its history could be described as a "deterrence" phase. The sense from business is that the Commission has focussed almost entirely on sending the signal that breaches will be prosecuted and that its desire to send a message of zero tolerance for non-compliance has led it to leave no stone unturned in pursuing enforcement successes. It also appears to have been a strong factor considered by the Commission in investigating and issuing proceedings in particular cases. At times, there has been a feeling that sending a deterrent message has been achieved but at the expense of reaching an earlier, lower cost resolution.

With a change in the Chair, a change in Minister, and most importantly the current economic outlook, it is an appropriate time to step back and question how implementation of New Zealand's competition laws should be developed over the next five years and the role the Commission should adopt. In his pioneering work on antitrust policy, E.S Mason commented that:

"What we are concerned with in the main are not questions of crime and punishment but the devising of rules relating to market structure and business practices that will prevent the unhealthy, and facilitate the healthy, growth of the economy. It is a question of hygiene rather than morals."

The new Chair has the opportunity to move the Commission beyond deterrence, towards a phase of greater and earlier engagement with business regarding the substance of investigations in order to better balance achieving the Commission's goals and minimising the current high costs of investigations.

The role of competition policy

In one of the very earliest Commerce Act cases, the Court of Appeal held that the Commerce Act was "based on the premise that society's resources are best allocated in a competitive market where rivalry between firms ensures maximum efficiency in the use of resources".

Implicit in this statement is recognition that while facilitating competition is the primary focus of the Commerce Act, the fundamental and underlying policy objective is to promote New Zealand's economic interests and economic efficiency. After all, the Commerce Act was introduced as part of the package of economic reforms post-1984, designed to maximise New Zealand's economic efficiency.

The MED has made conceptually similar statements in its "Code of Good Regulatory Practice" where it states that regulations should only be adopted where "the costs on society are justified by the benefits to society, and that achieve objectives at lowest cost, taking into account alternative approaches to regulation".

Promoting economic efficiency via the Commerce Act depends not only on outcomes but also on approach. The Commission's approach to administering the legislation, prioritising its focus and carrying out its duties all have direct impacts on the New Zealand economy. Having now established its reputation as a strong and sophisticated regulator with zero tolerance for non-compliance , the issue is what approach will most benefit New Zealand Inc and further the underlying policy objective of the legislation, i.e., greater economic efficiency?

A change of focus

It goes without saying that deterrence remains an important goal, but given the work it has already done, there is limited benefit for New Zealand Inc in the Commission continuing to focus principally on a deterrence reputation. That is not to say there is no room for enforcement action in some cases.

The costs of enforcement action are high – the time and costs associated with Court proceedings associated with investigations as well as Court are hugely burdensome for those involved. Justice Sackville's comments in Seven Network Limited v News Limited provide a cautionary tale. He estimated that the parties had spent in the order of A$200m on legal costs alone and noted that this did not include possible appeals.

The costs go beyond direct legal costs and include indirect costs resulting from uncertainty and the management time and resource required. Investigations and litigation distract management time, reducing management focus on core responsibilities – creating dynamic and innovative firms that compete strongly in markets.

The Commission's strong enforcement reputation means it can and should shift the balance towards seeking to engage with business to find solutions that achieve the correct policy outcome for the least cost on a case by case basis. A forthright discussion and expression of its concerns at an early stage with the aim of achieving a pragmatic and effective solution can save a lot of time, cost and effort and promote better outcomes for New Zealand Inc.

The best information for the minimum cost

This change of focus should also be applied during investigations. Commission investigations involve huge costs similar to those involved in litigation.

Of course the Commission needs to be able to investigate. The only question is ensuring that the Commission gets the best information it can, for the minimum cost to the economy. There is a sense among business that the Commission does not appreciate the costs that its investigations impose or the effects of those costs on the bottom line, which can manifest themselves in reduced profits, investment in expanding the business, and employment.

For example, business people often express frustration with the breadth of section 98 notices (which require a person to provide information to the Commission), in terms of subject matter and time period. While in our experience the Commission is generally open to refining the requests (so long as the refined scope still captures the information it requires), given the time and cost impact of these notices on businesses, there is considerable scope for the Commission to make better and more effective use of the section 98 process through a consultative approach and by providing greater context for what it is seeking.

Methodology which encourages market participants and the Commission agreeing the scope for section 98 notices would provide the Commission with the information it needs and lower the cost to the economy as a whole. From the Commission's perspective, more efficient section 98 notices will lessen its need to review irrelevant material. It always has the opportunity to have a second bite once it has considered the initial agreed scope of information and given the greater efficiency up-front, time should not be an issue.

Achieving engagement – Section 100 orders as a "barrier" to effective engagement

There is a strong desire for the Commission to work alongside business to achieve outcomes. While there is often good engagement between the Commission and business sectors, some adjustments would procure a stronger relationship, ensure that all parties are fully aware of each other's position and mitigate any aspects which tend to entrench positions, rather than provide a platform for a constructive solution.

The Commission's use of section 100 orders is an example of a practice that can get in the way of resolving issues.

Section 100 orders are confidentiality orders which were originally enacted to protect the disclosure of confidential information provided to the Commission. More recently, the Commission has used these orders to prohibit witnesses from disclosing details of any matters discussed at Commission interviews, including the questions asked and the answers given.

Through these orders businesses are unable to receive information from their own employees about what is discussed at the Commission interviews as the company is not usually permitted to attend (and any lawyers attending are subject to the same confidentiality orders).

These orders do provide the Commission with an investigative advantage, but at the same time they can create a real barrier to resolution by preventing the business under investigation – which can only act through its employees – from having a full understanding of the matters at issue. In the same way, the Commission's co-operation and leniency policy, which effectively require businesses to be prepared to admit breaches of the Commerce Act before the Commission will provide any substantive indication of its concerns, can also be a barrier to resolution. If employees are not candid with their employer, and the Commission will not indicate its concerns, the business is left with insufficient knowledge of the problem and an insufficient basis to resolve it proactively and constructively. Although the business will want to address any problem it has at an early stage (rather than spend money on a protracted investigation), it is left in the dark.

Now would seem ideal for the Commission to reflect on altering its approach – letting down its strict guard on its enforcement powers where necessary to enable business and the Commission to get to and address the substance of matters more quickly and more efficiently.