New Zealand Law Society - Reform of misuse of market power law

Reform of misuse of market power law

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In November 2015 the Government released an important issues paper Targeted Review of the Commerce Act 1986 on which submissions are due by 9 February.

The paper includes a discussion on potential reform of three aspects of the Commerce Act. The most important and controversial of these is the proposed reform of New Zealand’s misuse of market power.

In the paper, the Ministry of Business, Innovation & Employment (MBIE) expresses the preliminary view that the operation of our misuse of market power law has not been satisfactory and that our law should be strengthened.

Significant implications

The proposed strengthening of New Zealand misuse of market power law has significant implications. The small size of our economy means that there are a number of markets in which one or more companies could be said to have substantial market power.

I consider that a strengthening of New Zealand’s market power law is justified. However, depending on the form of the revised law, there are risks that such strengthening could discourage normal competitive conduct by large firms. Submissions on the paper will be important to ensure that the proposed law does not go too far.

The paper follows criticism of the effectiveness of our misuse of market power law as contained in s 36 of the Commerce Act 1986. The Commerce Commission has expressed the view that s 36 is too hard to enforce and does not capture anti-competitive single firm conduct that should be caught by a prohibition on misuse of market power.

The paper also follows the recent proposal in Australia to strengthen the equivalent Australian misuse of market power prohibition by inclusion of an “effects test”. The effects test proposed in Australia would prohibit conduct by a firm with substantial market power which has the effect of substantially lessening competition.

Will New Zealand now also move towards such an effects test?

Such a test would be a dramatic change for our competition laws. It would mean that dominant firms would have to be much more careful in engaging in conduct which might have an effect on competitors.

Anti-competitive effect

Unlike a number of other jurisdictions, New Zealand (and Australian) competition law does not currently prohibit dominant firms from engaging in conduct with an anti-competitive effect. Instead what s 36 of the Commerce Act prohibits is conduct with certain anti-competitive purposes.

The current prohibition in s 36 has three limbs or elements.

First, a firm must have a substantial degree of power in a market.

Secondly, the firm must “take advantage” of that market power. The courts have interpreted the “take advantage” element as requiring the firm to be engaging in conduct that it would not engage in if it the firm was in a competitive market.1 This test has also been called the “counterfactual” test and is controversial.

Thirdly, the firm must engage in the conduct for certain anti-competitive purposes. The proscribed purposes are:

  • to deter the entry of a person into a market;
  • to prevent or deter a person from engaging in competitive conduct; or
  • to eliminate a person from a market.

In Australia, s 46 of the Competition and Consumer Act 2010 is very similar to s 36 of New Zealand’s Commerce Act. On 31 March 2015 the comprehensive Harper review of Australian competition law recommended the introduction of an effects test into s 46.

Not a useful test

In the view of the Harper Review panel the “take advantage” limb of s 46 was not a useful test to distinguish competitive from anti-competitive conduct by a single firm.

In particular, the Harper Review report said business conduct should not be immunised just because it is often undertaken by firms without market power. The report noted that the same conduct might raise competition concerns if engaged in by a dominant firm even though it would not raise concerns if engaged in by firms without market power. The report referred to exclusive dealing, loss-leader pricing and cross-subsidisation as examples of such conduct.

The Harper review report also criticised the focus of s 46 on harm to individual competitors. The current purpose test in s 46 (and also in the New Zealand s 36) focuses on anti-competitive purposes aimed at a particular person or competitor rather than on competition in the market as a whole. The report commented that usually competition law is not concerned with harm to individual competitors but only with harm to competition overall.

The report also suggested that the current purpose test in s 46 was inconsistent with the focus of equivalent prohibitions in overseas jurisdictions. The report referred in particular to the law in the United States, Canada and European Union, noting those laws have been framed so as to examine the effects on competition of commercial conduct as well as the purpose of the conduct.

Accordingly in the view of the Harper review panel, the prohibition ought to be directed to conduct that has the purpose or effect of harming the competitive process.

Significant amendments

The Harper review report therefore suggested two significant amendments to the current law.

First, it suggested removing the “take advantage” element from the prohibition.

Secondly, it suggested altering the current “purpose” test to what it described as the “standard test in Australia’s competition law”, namely the purpose, effect or likely effect of substantially lessening competition.

That test is already used (in both Australia and New Zealand) to assess whether contracts arrangements and understandings are anti-competitive (in New Zealand under s 27 of the Commerce Act). A test based on whether there is an effect or likely effect of substantially lessening competition is also used for assessment of whether business acquisitions are anti-competitive (s 47 Commerce Act).

The proposal to introduce an effects test into the misuse of market power prohibition has been controversial both in Australia and New Zealand. A number of those opposing reform have expressed concerns that introducing an effects test would create uncertainty and so “chill” competitive behaviour in the market.

In my view this concern has been overstated. A test based on an effect of substantially lessening competition has been in use for some time in assessing whether contracts and arrangements and business acquisitions are in breach of the Commerce Act. Accordingly, the test is well known.

Further, the outcome of misuse of market power cases decided under the current prohibition have been hard to predict under the “take advantage” test (with the Privy Council sometimes taking a different view from the Court of Appeal as in the Carter Holt case,2 and the High Court of Australia often taking a different view from that of the Full Federal Court). Therefore, in my view, it is difficult to argue that the suggested reformulation of the misuse of market power prohibition would be any more uncertain in its application than the current prohibition.

It is undoubtedly the case, though, that there are risks involved with moving to an effects test if the “taking advantage” element of s 36 is also removed.

Justice Yates of the Federal Court of Australia outlined one such risk in a conference presentation in October.3 This was that a firm with market power that enforces its patents or other intellectual property rights could potentially achieve an outcome that has the effect of substantially lessening competition in the market.

Such conduct would still not be prohibited if the “taking advantage” of element to misuse of market power was preserved. A firm without market power would still wish to enforce its intellectual property rights and so a firm with market power that does so cannot be said to be taking advantage of market power. (In New Zealand this point is made absolutely clear by s 36(3).)

However if we moved to an effects test, and also removed the take advantage element of s 36, then the enforcement of intellectual property rights by firms with market power could well be caught by the prohibition.

In response to the Harper Review recommendation the Australian Government issued a discussion paper in December 2015 Options to strengthen the misuse of market power law. The discussion paper included a number of options for amendment to s 46 of the Australian Competition and Consumer Act 2010 including the option recommended by the Harper Review Panel.

Not satisfactory

In the New Zealand issues paper released in November, MBIE expresses the view that the operation of s 36 has not been satisfactory. It states that s 36:

  • fails to punish anti-competitive conduct by powerful firms;
  • is too complex to allow for cost-effective and timely application; and
  • is misaligned with other prohibitions in the Commerce Act (ss 27 and 47 both include an “effects test”) and with equivalent provisions in a number of foreign jurisdictions.

The paper then sets out three reform options for s 36, being to remove the “take advantage” element, to add an effects test to s 36 or to both remove the take advantage of element and also add an effects test. The last of these options is the same as that recommended in Australia by the Harper Review panel.

These options, and particularly the last of these options, will likely significantly increase the circumstances in which the prohibition in s 36 applies.

This is of real importance to New Zealand businesses given the large number of concentrated markets in which one or more companies could well be said to have substantial market power.

Submissions on the New Zealand issues paper are accordingly important to ensure that any strengthened misuse of market power provision does not go too far.

Submissions might also ensure that any strengthened section is mitigated against by the introduction of appropriate exemptions or an ability to seek authorisation. (The issues paper did note the possibility of inserting an affirmative “efficiency defence” and the possibility of allowing the authorisation of conduct under s 36 where the conduct brings net efficiency benefits despite having anti-competitive effects.)

Given the submission deadline of 9 February, there is still time to influence the form of the proposed strengthened prohibition on misuse of market power.

John Land is a competition law specialist and commercial litigator at Bankside Chambers in Auckland. Formerly a partner of Kensington Swan for 20 years, he can be contacted on 09 379 1513 or john.land@bankside.co.nz

1. Commerce Commission v Telecom (2008) 12 TCLR 168 at [55] (the “Telecom 0867 case”).

2. Carter Holt Harvey v Commerce Commission (2004) 11 TCLR 200.

3. Justice David Yates The Intersection of Intellectual Property Rights with Competition Law University of South Australia 13th Annual Competition Law and Economics Workshop, 24 October 2015.

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