Simply put, the new test extends the same competition standard in section 27 of the Commerce Act 1986 which applies to contracts, arrangements or understandings, to purely unilateral conduct. That is the “substantially lessens competition”, or the SLC test. This brings New Zealand’s law in line with many overseas jurisdictions.
While overseas precedent will assist, there remains uncertainty as to how the Commission and the Courts will apply the new test in the context of section 36 in practice. The Commission released guidelines last week (the guidelines) which set out the factors the Commission expects to consider when interpreting the new test. However, the Commission has avoided being prescriptive, noting the guidelines are general in nature and not an attempt to codify the Commission’s approach.
By contrast, while the previous law was considered by many to set too high a threshold for enforcement against firms with market power, it had the advantage of a body of case law that allowed for more certainty as to whether a firm’s conduct might contravene the misuse of market power prohibition. The business and legal communities, and no doubt the Commission as well, will be looking to the first case in the courts for more granularity as to how the new test will be interpreted.
In addition to the changes to section 36, the Commission can now consider intellectual property (IP) related conduct as it does any other conduct under the Commerce Act 1986. The Commission has released separate draft guidelines on the application of competition law to IP rights.
How is the new test different to the previous test?
The new test is different to the previous test as it:
- Is framed more broadly and applies to potentially any “conduct” by a firm with a substantial degree of market power.
- Removes the need to show a firm’s conduct resulted from it “taking advantage” of its market power. Instead, any conduct that substantially lessens competition will breach the provision.
- Removes the need to establish an anticompetitive purpose. Instead, it is sufficient if the conduct has an anticompetitive effect (although an anti-competitive purpose will also breach the new test). The threshold for this is whether conduct “substantially lessens competition”, or the SLC test.
Overall, it is likely the Commission will challenge more behaviour from companies in New Zealand with substantial market power.
What conduct may breach the amended section 36?
The guidelines set out examples of conduct which, if engaged in by businesses with substantial market power, may breach the amended section 36. This includes a refusal to supply, exclusive dealing arrangements, price and margin squeezing, loyalty rebates, tying and bundling, and predatory pricing.
These are not new areas of concern. The amendments do not fundamentally change the types of conduct which we would expect to fall within the purview of section 36. Instead, the new test enables the Commission to re-think how it assesses such conduct under New Zealand law. Internationally, there is a substantial body of case law, grounded in economic principles, that provides a framework for assessing such conduct. However, this is not always consistent across jurisdictions and the Commission’s Guidelines provide limited insight as to which approaches it would favour. This is concerning given that such conduct can also be pro-competitive (e.g. tying / bundling, discounting).
Indeed, there is some concern that the new test goes too far, and may place firms under an obligation or “special responsibility" (similar to a European style of enforcement) to ensure that their conduct does not substantially lessen competition in a market. However, it is positive that the Guidelines expressly aim to distinguish between desirable competition (even where it harms competitors) and conduct that harms the competitive process. This is the appropriate touchstone for assessing misuse of market power.
Comparison to Australia
The amendment aligns section 36 with Australia's equivalent provision (section 46 of Australia's Competition and Consumer Act 2010), which came into force in November 2017.
So far, private litigants have had the most success under Australia’s new misuse of market power test. Australia’s competition regulator, the Australian Competition and Consumer Commission (ACCC), has only completed one case through trial, a case against Tasmanian Ports Corporation Party Limited. It was a relatively straightforward case for the regulator, in relation to a discriminatory charge imposed as a direct response to the attempted entry of a competitor. The case sheds little light on the operation of the new misuse of market power test, as the ACCC could well have been successful under the higher threshold of the old Australian provision (which was similar to New Zealand’s test prior to the amendment). There are also ongoing cases in Australia brought by the ACCC against Mastercard and privately between Epic Games (the developer of Fortnite) and both Google and Apple, which will no doubt be watched carefully for guidance as to how the New Zealand test may be interpreted by the courts.
With today’s new test having been well foreshadowed, many of New Zealand’s large firms have likely been considering their business practices to ensure compliance with the new misuse of market power test. The stakes are high for these firms, as non-compliance can lead to significant penalties and reputational damage.
There will naturally be some uncertainty in the next few years regarding the exact boundaries of the new law. The Guidelines leave room for interpretation and there remains uncertainty as to how the courts will apply the new law, and what conduct will be at risk of breaching the amended section 36. Nevertheless, firms can take comfort that genuine pro-competitive conduct (such as innovating, improving efficiency and responding to competitive forces) is at low risk of posing section 36 issues.
If you have any questions or require any other guidance, please contact our team or your usual Bell Gully adviser.