Following a Productivity Commission report in May 2014, the NZ Government has now announced, as part of its Business Growth Agenda, a review of the misuse of market power prohibition, a number of enforcement mechanisms and the need for a market studies power under the Commerce Act 1986.  The Ministry of Business, Innovation and Employment has now released an Issues Paper setting out its preliminary assessment of the current regime and options for reform.

1. Anti-competitive exclusionary conduct (misuse of market power)

The current section 36 of the Commerce Act is similar to the Australian position:

  • applying to those corporations with a substantial degree of market power; and
  • preventing them from “taking advantage” of that power with a certain purpose (in the case of NZ, to exclude competitors from the market by restricting their entry or eliminating them, or deterring others from engaging in competitive conduct).

As is the case in Australia, there is no defence where the elements of the provision are made out (other than the Australian carve out for acquisition of plant or equipment), and authorisation is not available (except in Australia for conduct which also comes within another provision of the Act and which is authorised or notified in relation to those provisions).

The Ministry’s preliminary view is that the provision has not operated satisfactorily, on the basis that it appears to be:

  • failing to maximise the long-term benefit of consumers, by failing to punish anticompetitive conduct by powerful firms;
  • too complex to allow for cost-effective and timely application; and
  • not aligned with other prohibitions in the Commerce Act – which use an “effects” or “purpose” test – or with equivalent provisions in a number of foreign jurisdictions (the US, the EU and Canada do not require that a powerful firm “take advantage” of its market power).

The options presented for submission include:

  • retaining the status quo, and allowing change to emerge over time through judicial interpretation, or alternatively inserting interpretation guidance into the Act as has been done in relation to s 46 of the CCA in Australia;
  • removing the “take advantage” requirement, such that a firm with a substantial degree of market power would be in breach simply by undertaking conduct with the necessary purpose;
  • replacing the purpose requirement with an “effects” or “effects or purpose” test, as recommended by the Harper Review in relation to the Australian provision;
  • a combination of the above two changes;
  • some further options included an affirmative “efficiency defence”, or an incorporation of efficiency considerations within the elements of the provision, or an authorisation regime; and
  • some more unconventional options, such as reversing the burden of proof in relation to the “take advantage” element where a firm has a substantial degree of market power and acted with an anti-competitive purpose, or limiting liability to reasonably foreseeable anti-competitive effects (akin to liability in negligence).

2. Alternative enforcement mechanisms

The paper notes that the costs and delays associated with standard competition law enforcement processes are a universal issue, which has resulted in alternative enforcement mechanisms being developed to resolve competition issues more efficiently.  In NZ was attempted through the introduction of administrative settlements and the cease and desist regime (see the Commerce Commission’s Enforcement Response Guidelines for more details).

The Ministry’s preliminary view is that the settlements regime is not operating satisfactorily on the basis that it:

  • is weak because it is based on contractual arrangements, and financial penalties for alleged breaches can only be imposed with the approval of the High Court;
  • the parties may fail to make all provisions public, reducing the deterrent effect;
  • if the terms were breached, the Commerce Commission needs to take a long and costly civil claim to the High Court, including establishing that monetary damages are an insufficient remedy to obtain specific performance of the agreed outcomes; and
  • is misaligned with recent changes to the Fair Trading Act 1986 and the Telecommunications Act 2001, where enforceable undertaking regimes were introduced.

The Ministry also has a preliminary view that the cease and desist regime is not operating satisfactorily, as it:

  • is less necessary as a result of changes to the High Court’s Commercial List, the introduction of pre-emptive regulatory regimes in certain sectors, and the fact that the Commerce Commission no longer needs to give an undertaking as to damages when seeking an interim injunction;
  • has been ineffective, because it has been used only once in 14 years;
  • would be unlikely to be cost-effective and timely, due to its cumbersome procedural requirements; and
  • is not aligned with other relevant legislation the Commerce Commission enforces, and may unduly duplicate the (interim) injunction process.

The following options are presented for discussion:

  • modification of the cease and desist regime to resemble more successful ad hoc adjudicative procedures, eg the stop order regime under the Financial Markets Conduct Act, which do not provide for a separate Commissioner to make an order, or for an affected party to be heard (other than potentially for an interim stop order), has short time limits and does not provide for an express right to call or cross-examine witnesses;
  • repeal of the cease and desist regime and reliance on the settlements regime as the main alternative enforcement mechanism; and
  • repeal of the cease and desist regime but modification of the settlement regime, eg by changing it to an enforceable undertakings system, without provision for a “penalty-like” financial payment.

3. Market studies

The paper notes the growing trend for the use of market studies by competition agencies, with at least 40 agencies having the ability to conduct such studies.  However, it notes that there is no formal power in NZ specifically directed at analysing competition across any market for the purpose of improving market performance, which was identified by the OECD as a significant gap in its competition framework.

The issues paper identifies three interconnected approaches:

  • diagnosing market problems;
  • removing regulatory barriers to competition; and
  • building an evidence base as a precursor to enforcement.

The Ministry’s view is that a formal market studies power may be justified if there is a definable gap in the competition framework that aligns with one or more of these approaches.  It has a preference for the first two, while recognising the potential for concerns about conflicts of interest between the role of enforcing competition law and undertaking market studies which may lead to competition advocacy.  On the other hand, it considered the third approach unlikely to be unhelpful.

The Ministry has requested submissions on these issues by Tuesday 9 February 2016.