Government to strengthen laws against anti-competitive conduct by firms with market power

19 June 2020

​​​The government ha​s announced significant changes to New Zealand's law which seeks to limit the misuse of market power. These changes could trigger the need for firms with market power to undertake a detailed review of their existing commercial arrangements.

Alongside these amendments, the government intends to change the competition law treatment of intellectual property (IP) rights and covenants. The proposed amendments also increase penalties for businesses engaging in anti-competitive mergers, which has been a major enforcement focus of the Commerce Commission in recent years. A Bill will be introduced in the next Parliamentary term, in early 2021, detailing these proposed reforms. ​

1. Amendments to New Zealand's misuse of market power law

Section 36 of the Commerce Act currently prevents businesses with a substantial degree of market power from taking advantage of such power for certain, proscribed, anti-competitiv​​e purposes.

The Commerce Commission has publically stated that it considers there are practical difficulties in enforcing section 36 and that reform is needed.1​​ The Commission has indicated that it sees the issues with the effectiveness of section 36 stemming primarily from the way the courts have interpreted "taking advantage" as requiring a “counterfactual test". This test asks whether, hypothetically, the business would rationally have behaved in the same way if it did not have substantial market power. In the Commission's view, the analysis is problematic as it may require the Commission to “ignore… commercial realities and the impact on the market of the conduct, and ask a purely hypothetical question".2​​​

The government's intended reforms will align section 36 with Australia's equivalent provision (section 46 of Australia's Competition and Consumer Act), to read as follows:

A person that has a substantial degree of power in a market must not engage in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competitio​n in a market.

Fundamentally, it would mean that firms with market power would be prohibited from engaging in conduct that substantially lessens competition in a market (SLC), regardless of whether they would rationally have done the same thing if they did not have market power, and regardless of whether smaller firms engage in such conduct. Such changes would remove the need to apply a hypothetical test, and would significantly lower the threshold for enforcement against firms with market power. While it is true that this SLC test already applies to arrangements with third parties, embedding a SLC assessment in the misuse of market power test means it would also apply to unilateral conduct, i.e. to everything a firm does, whether by way of contract or otherwise.

While many businesses appreciate the need for some change, there is a concern the proposed changes go too far. Changing to an “effects" based test could place firms under an obligation or “special responsibility" (similar to a European style of enforcement) to ensure that their conduct does not adversely impact competition in the market. Com​​petition is, to put it crudely, a blood sport – normal, vigorous competition by small or large firms has the potential to harm competitors (large and small), which could ultimately lead to fewer competitors in a market. The effects test is not aimed at such vigorous competition – there would need to be an impact on competition as a process. However, there is a real risk that businesses “pull their punches" if they believe that causing harm to less efficient competitors (e.g. by taking market share through competitive initiatives) could be a proxy for risk under the amended section 36.

In contrast, the current law (while admittedly not perfect) is reasonably certain in its application. Indeed, to date, there have been limited examples advanced of harmful conduct which escapes the reach of the current provision, but which would be caught under the new test. Under the current test, the need for a causal connection between the market power and the conduct makes self-assessment much easier, as firms can ask 'would I do this if I did not have substantial market power?'. An effects test, however, is likely to introduce uncertainty and ambiguity to everyday business decisions. Firms that may have market power will have to carefully consider a range of commercial conduct (such as competitors' access to key inputs and even rebate and discount arrangements).

While in jurisdictions like Europe dominant firms may be large enough that they have sufficient resources to make a detailed assessment of the likely effect of each new business decision, the size of firms in New Zealand means many simply do not have such resources. Conclusions of whether certain behaviour would cause a SLC can often hinge on the definition of the relevant “market" at issue and an assessment of the relevant “counterfactual" (which is ironic given that the proposed amendments are aimed at removing the current counterfactual test under section 36).

When undertaking a SLC assessment, including when considering a proposed merger, the Commission will often take many months, and have the benefit of substantial resources, access to economists and the ability to obtain detailed third party ​information. Firms undertaking a self-assessment do not have access to such information and resources – nor do they have the time. The significant costs imposed on firms as part of the proposed test may result in deferred investment (potentially to the detriment of competition).

While alignment with the law in Australia can be beneficial, such alignment should not be at the expense of ensuring any amendments are tailored to New Zealand's particular circumstances. The Australian regulator has commenced its first court proceedings under its amended laws (accusing a Tasmanian port company of restricting access to its port facilities for a competing marine pilotage and towing business). However, it could be several years before a final decision is made by the Australian courts. New Zealand would benefit from observing the development of the law in Australia before making any amendments here, which would enable us to make a better assessment as to whether such a test would benefit New Zealand.

While the timeframe of the legislation means that no urgent action is required, we recommend New Zealand firms that may have substantial market power keep a close eye on these amendments and lodge submissions on the draft legislation when released next year.

2. Changes to competition law treatment of IP rights

The Commerce Act currently shields some conduct related to protection of IP from examination under section 36 as well as the sections of the Commerce Act on cartels and anti-competitiv​​e agreements. The proposed reforms will remove these provisions so that the Commission can consider IP-related conduct as it does any other conduct.

It will be important for the government to tread carefully w​​hen it comes to changing how IP rights will be assessed. The IP and competition law interface is very complex, as shown by the amount of litigation in other jurisdictions involving IP and competition law.

Such cases demonstrate that there may indeed be cause for treating IP rights differently to other types of property. Furthermore, the nature of any amendments to section 36 could well affect the desirability of IP-related exemptions. For example, an “effects" based section 36 test may create a need for a broad IP-related exemption to avoid undue uncertainty for firms when seeking to enforce IP rights. Under the proposed section 36 amendments a firm which may have substantial market power would need to carefully consider refusing to licence new technology to a competitor if, without it, their competitors cou​​ld fall by the wayside. There is a risk that incentives to innovate, where the technology created by such innovation can be protected with IP rights, could be eroded if competitors could bypass the IP protection and access the technology pursuant to section 36. The question of pricing any such access is also fraught with complexity.

3. Other changes to the Commerce Act

Other amendments to the Commerce Act inclu​de:

  • increasing penalties for businesses engaging in anti-competitive mergers (which are currently lower than for breaches of other sections of the Commerce Act). Against the background of New Zealand's voluntary merger regime, pursuing completed, anti-competitive mergers has been an area of active focus by the Commission in recent years. Increased penalties will increase the deterrent effect of this enforcement. At the same time, we are disappointed not to see some “de minimis" threshold introduced into New Zealand's merger control regime. Currently the prohibition on anti-competitive mergers can capture very small transactions where the costs of administering the Com​merce Act far outweigh any potential competitive harm. We consider that the government should reconsider this before introducing the legislation,
  • changes to the treatment of anti-competitive covenants relating to land. When the cartel prohibition replaced the earlier price fixing prohibition in 2017, covenants were inadvertently excluded from the 'automatic' prohibition. These changes would ensure covenants relating to land have equivalent treatment to other arrangements under the Commerce Act,
  • increasing the maximum number of Commerce Commissioners from six to eight to reflect the Commission's growing responsibilities in recent years (including the market studies regime and the expansion of the Commission's role in regulating consumer finance), and
  • making it easier for the Commission to cooperate with other domestic agencies by sharing the information it holds, subject to appropriate safeguards.

If you have any questions about the matters raised i​n this update please get in touch with the contacts listed, or your usual Bell Gully advisor. ​

2 at 22 and 23. ​

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.