First published in NZ Lawyer, Issue 181, 5 April 2012
With the Commerce (Cartels and Other Matters) Amendment Bill (the Bill) likely to be passed in the near future, much has been made of the impact that criminalisation of cartel conduct will have on the New Zealand business environment. While the "Cartels" aspect of the Bill has grabbed the limelight, the "Other Matters" have, perhaps unsurprisingly, remained in the background. However, one of the "Other Matters" is certainly worth a mention as it will bring a welcome change to the law relating to joint ventures.
The Bill introduces a new collaborative activity exemption (the new exemption) to replace the much debated and often criticised joint venture exemption (the current JV exemption) which currently exists in the Commerce Act. We look at the scope of the new exemption and comment on whether it addresses the issues that exist within the current JV exemption.
Joint Ventures and the Commerce Act
The Commerce Act governs JVs affecting competition in New Zealand markets. Depending on how they are structured, JVs can fall for review under either the general prohibition against arrangements which substantially lessen competition (section 27 of the Act) or under the merger and acquisition regime contained in section 47 of the Act. Section 47 prohibits acquisitions that have the effect or likely effect of substantially lessening competition in a market. Importantly, where a JV is between competitors and affects price (even indirectly), it also risks falling foul of the per se prohibition on price fixing contained in section 30.
Where the JV is structured as a merger or acquisition the parties can apply for clearance from the Commerce Commission. Alternatively, if a JV is likely to substantially lessen competition, the JV parties can apply to the Commerce Commission for authorisation on public benefit grounds. The effect of clearance or authorisation is effectively to immunise the JV from challenge under ss 27, 30 and 47. It is those situations where JV parties do not seek clearance or authorisation that the current and new exemptions come into play.
Current JV Exemption
The effect of the current JV exemption is to exempt particular limited conduct from the per se price fixing prohibition in section 30. It does not (and nor will the new exemption) exempt JVs from challenge under sections 27 or 47. The current JV exemption provision applies to both unincorporated and incorporated JVs. However, the exact application and scope of the current JV exemption remains uncertain despite being in force for more than 25 years. This in itself is enough to warrant a review of the provision.
Much of this uncertainty stems from the ambiguous language used in the current JV exemption provision and the inexact requirements that need to be met before the exemption will apply. For example, to attract the protection of the current JV exemption, the parties need to show that any goods provided by the parties to the JV are "jointly produced by the parties in pursuance of the joint venture" or that any services supplied by the parties are "in pursuance of and made available as a result of" the JV.
Unfortunately, the provision has been subject to little judicial consideration and there has been only limited guidance from the New Zealand Commerce Commission concerning its proper reading. This guidance suggests the current JV exemption is narrow in nature and will only apply where it can be shown the JV is likely to provide "significant new enterprise" or provide something far greater or sufficiently different from that which could be provided by any single party acting alone. The rationale in adopting such a narrow interpretation seems to be to ensure the JV exemption is not simply used as a cloak for price fixing. However, in reality the effect is to seriously limit the usefulness of the exemption.
Against this background and impending criminalisation of cartel conduct, a broader exemption is a welcome development.
The new exemption will save cartel provisions in contracts, arrangements or understandings, where those cartel provisions are "reasonably necessary" for the purposes of a collaborative activity. A "collaborative activity" is defined as an enterprise, venture or other activity, in trade, that:
- is carried on by two or more persons in co-operation; and
- is not carried on for the dominant purpose of lessening competition.
As is the case currently, JVs will still be subject to a substantial lessening of competition test under sections 27 or 47, despite being exempted from the per se cartel prohibition. These sections will continue to provide a safeguard against collaborative activity that is anti-competitive.
In developing the new exemption, the Ministry of Economic Development (the MED) canvassed several options, including the "ancillary restraints" defence used in the US. Ultimately, the MED favoured the collaborative activity exemption believing it to be broad enough to cover both JVs and ancillary restraints. On top of providing greater scope, the MED believes the new exemption will provide a number of other advantages over both the other options canvassed and the current JV exemption:
- Removes the requirement that activity be carried out jointly (which allows more legitimate activity to be included such as consortia bidding and syndicated loans);
- Removes the necessity of defining 'joint venture' which has proved difficult as legitimate collaborative activity can take a variety of forms, ranging from strategic alliances to resource pooling;
- Provides greater certainty with respect to scope; and
- Makes it clear that the Act encourages pro-competitive, innovative, and efficiency enhancing activities.
Additionally, the MED intends that the new exemption will address any 'overreach' risk by preventing the application of the cartel offence to pro competitive or benign arrangements. In the future the MED has suggested guidelines may be developed to provide further certainty to the new exemption. Guidelines may identify specific features of agreements that would always be exempt, in order to provide businesses with additional certainty in entering collaborative efficiency enhancing agreements.
As a further protection, the Bill also provides for a clearance regime under which the parties can prospectively apply to the Commission for clearance of a cartel provision. Clearance will be granted where the cartel provision is 'reasonably necessary' for the collaborative activity and is not likely to have the effect of substantially lessening competition.
While tucked away alongside some headline-grabbing legislative changes, the changes to the current JV exemption do deserve some air-time of their own. The exact scope of the new exemption is yet to be tested, but it is undoubtedly wider and clearer than its predecessor. It certainly provides some welcome comfort to parties of efficiency enhancing JVs, that they will not breach the Commerce Act on a technicality, particularly where this breach could potentially constitute a criminal offence.