Major changes to the Commerce Act expected in early 2014

The Commerce (Cartels and Other Matters) Amendment Bill ("Cartels Bill") proposes the most significant reforms to the Commerce Act 1986 ("Act")since its inception, including expanding the cartel prohibition, introducing seven year jail sentences for cartel conduct and a new collaborative activities exemption. 

During 2013, the Cartels Bill moved ever closer to enactment with the Select Committee reporting on the Bill in May having considered numerous submissions.  The Select Committee recommended only minor amendments to the Bill, including:

  • deleting the specific prohibition on bid-rigging on the basis that bid-rigging conduct would be caught by the other prohibitions on price fixing, market allocation or output restriction agreements;
  • providing for a grace period of nine months from enactment before the expanded prohibitions on market allocation and output restrictions apply;
  • clarifying that the jurisdictional reach of the Act will cover conduct that occurs outside of New Zealand if any act or omission forming part of that conduct occurs in New Zealand; and
  • repealing the exemption from the Act for international shipping.

Guidelines for the new world

The Select Committee and Cabinet also recommended that the Commerce Commission (the "NZCC") issue guidelines setting out when it will seek criminal sanctions, and guidelines on how it will interpret the new "collaborative activities" exemption: 

  • The NZCC issued a draft of its Competitor Collaboration Guidelines in October 2013.1  The draft Guidelines provide a helpful high-level indicator of the NZCC's likely approach to the new exemption.  However, with just four pages on the collaborative activities exemption (compared with over 40 - 70 pages for equivalent guidelines in the EU, US and Canada), and no hypothetical examples, the draft does not yet provide businesses with sufficient clarity and certainty to self-assess potential deals.2  The NZCC is currently considering feedback on the draft Guidelines, with the intention of having final Guidelines ready for when the Cartels Bill is enacted.
  • The NZCC is yet to issue specific guidelines on when it will seek criminal cartel sanctions (which are still being drafted).  However, it issued Criminal Prosecution Guidelines and updated Enforcement Response Guidelines in October 2013 that set out its approach to seeking criminal prosecutions under its existing criminal powers (for example, under the Fair Trading Act 1986 and Crimes Act 1961 ("Crimes Act")).   These guidelines, mirroring the Solicitor General's guidelines, provide that criminal sanctions will be sought where the NZCC considers it has a reasonable prospect of obtaining a conviction and criminal prosecution is in the public interest.

Cartels, murder and terrorism

On 5 December, Commerce Minister Craig Foss released a Supplementary Order Paper ("SOP") that provides that when the Cartels Bill is enacted, cartel conduct will be a Category Four offence under the Crimes Act, the most serious possible and the same classification as murder, treason and terrorism.3  This demonstrates the seriousness with which the Government regards cartel conduct.

Market power reform?

The NZCC Chair has made clear that the NZCC would like the Cartels Bill to also reform the market power prohibitions, in particular to move from New Zealand's existing "anticompetitive purpose" based test to include an "effects" based test.4

Perhaps as a result of the NZCC's submissions, in December 2013 opposition MP Clayton Cosgrove released a separate SOP seeking to introduce a heavily amended market power prohibition, which is designed to remove the current case law developed counterfactual test (which asks whether the same conduct would have been engaged in by a firm without market power) in favour of a focus on whether the conduct had an anti-competitive effect.  It remains to be seen whether this opposition SOP receives any traction with the Government.

Next steps

The Bill is expected to be enacted during the first half of 2014.  For existing arrangements, the new prohibitions on “market allocation” and “output restrictions” apply nine months from enactment.  Criminal sanctions will apply two years from enactment.

Friends with benefits

The trend of competition regulators looking to enhance their co-operation efforts with overseas counterparts continued during 2013.  For the NZCC these developments include:

  • the ACCC and NZCC entering a co-operation agreement in February 2013 that gives effect to the mutual information exchange regime provided for in the Commerce (International Co-operation, and Fees) Act 2012 enabling the two regulators to share compulsorily acquired information;
  • the commencement, in October 2013, of the Trans-Tasman Proceedings Act 2010 enabling penalties for breaches of New Zealand’s competition laws to be directly enforceable in Australia and vice versa (as Australia passed corresponding legislation in March 2010); and
  • the continued progress of the Trans-Pacific Partnership, a free trade agreement between 13 countries, which contains a section on competition policy, and if implemented, could lead to a convergence of competition policy across the region including a greater degree of co-operation, consultation and information exchange between the US regulators and the NZCC.5

Mergers and Acquisitions

Clearances

2013 saw just the second declined merger in four years.  The NZCC declined Hamilton Radiology's application to acquire Medimaging, the only competing provider of MRI radiology services in Hamilton, as:6

  • it considered high capital costs and access to radiologists would deter new entry; and
  • it rejected the applicant's 'failing firm' argument on the basis that it was not satisfied that Medimaging would exit the market in the absence of Hamilton Radiology's acquisition.

The other nine merger applications in 2013 resulted in clearance.  Notable clearance decisions include:

  • Bertelsmann and Pearson's successful application to combine their respective consumer book publishing businesses.  In addition to the constraint from remaining competitors, the NZCC cleared the combination on the basis that the key book retailers in New Zealand, The Warehouse, Paper Plus and Whitcoulls, all sell products other than books that gives them countervailing power as they can switch, or threaten to switch, volumes away from books to other products in response to an increase in book prices, thereby disciplining the merged entity.7
  • Thermo Fisher's successful application to acquire Life Technologies Corporation.  Both companies operate in the life sciences industry, with the key area of overlap being the production of foetal bovine serum, which is used in cell cultures to stimulate cell reproduction. Clearance was obtained on the basis of the worldwide divestment of Thermo Fisher's cell culture business, first offered to the European Commission, including Life's HyClone facility near Tauranga.  The clearance process was notable for the high degree of international co-operation between regulators, including cross-appointment of Australian Competition and Consumer Commission ("ACCC") and NZCC commissioners.8

New M&A and Authorisation Guidelines

In 2013, the NZCC released the much anticipated revised Mergers and Acquisitions Guidelines ("M&A Guidelines") and Authorisation Guidelines (updating the previous versions issued in 2003 and 1997 respectively).

The updated Guidelines include the following changes from the NZCC's existing M&A Guidelines:

  • The NZCC has moved with the current fashion amongst international competition regulators of no longer regarding market definition as a fixed parameter but rather a loose framework for considering the 'more important' questions of incentives and constraints on the parties post merger.
  • They provide additional guidance on the NZCC's approach to acquisitions within "bidding markets", how competition needs to be assessed in multi-sided platform markets, the NZCC's analysis of partial ownership structures, and mergers between competing buyers. 
  • They propose changing some established NZCC terminology, for example the 'safe harbours' become 'concentration indicators' (on the basis 'safe harbours' indicated a "degree of safety that did not exist"), and 'barriers to entry' become 'conditions to entry', although the NZCC has indicated these changes do not represent a substantive change in approach.  

The draft Authorisation Guidelines were well overdue and provide:

  • That the NZCC, in assessing public benefits and detriments, will continue to consider a "total welfare" standard (rather than focussing on "consumer welfare" as some other international regulators do).
  • That "benefits" are not limited to economic efficiencies.  However, the list of broader benefits that an applicant might wish to raise has been replaced with a list of categories of efficiencies.
  • That benefits and detriments will be discounted by the NZCC according to when they are expected to occur and how likely they are to occur.
  • Useful examples of the types of evidence that the NZCC will accept as supporting a party's claim of net public benefit.

Merger investigations

In June 2013 the NZCC opened an investigation into Wilson Parking's acquisition of 60% of the assets of competing car parking business Tournament Parking.  The NZCC's investigation is ongoing - if the NZCC decides to bring proceedings it will be the first merger control proceedings since it successfully challenged New Zealand Bus's acquisition of Mana Coach Services in 2006.

Access to court documents

As in other countries, third party access to information obtained by antitrust regulators through co-operation with defendants or leniency applicants has been a contentious issue in New Zealand. 

In April 2013, the Court of Appeal confirmed that the air cargo cartel proceedings case file, including an agreed statement of facts between the defendants and the NZCC, could not be accessed by Schenker, a freight forwarding business.9 Schenker's request for the file was premised on it investigating whether it may have suffered loss as a result of the alleged conduct.

On balance on the facts, the Court of Appeal refused access even on a redacted basis to the documents sought, upholding the lower court's finding that redaction could not cure the harm to confidentiality and privacy interests.

While the Schenker decision provides guidance on how the Court will consider requests access to case files, the NZCC has not yet provided general guidance on how it will respond to requests for these same documents under the Official Information Act 1982 (which the NZCC is subject to as a public body).

Air NZ sets new record for price fixing penalties

In June 2013 the High Court approved a settlement between the NZCC and Air New Zealand in which Air New Zealand agreed to pay a $7.5 million penalty for price-fixing on international air cargo, the largest penalty for cartel conduct in New Zealand.

In endorsing the settlement amount,10 the Court noted that Air New Zealand’s conduct was not as culpable as some of the other airlines pursued by the NZCC and Air New Zealand had not been a participant in a cartel on a global basis.  However, the magnitude of the penalty in comparison to other airlines reflected Air New Zealand’s high volume of cargo business in New Zealand and a lower discount for its co-operation with the NZCC (of 20%) given it contested the proceedings for longer than all the other airlines.

The penalty brings the ongoing air cargo proceedings brought by the NZCC to a close.

Warning for SKY

In October 2013 the NZCC concluded its investigation into pay TV provider Sky's agreements with telco RSPs through which the RSPs are able to bundle Sky's pay TV channels with their phone and broadband services.11

The investigation focussed on the "key commitments" that Sky imposed in its contracts with 3 of the 4 largest RSPs in New Zealand, namely Vodafone, Telecom and Callplus.  The "key commitment" is essentially an exclusivity clause that forced the RSPs to not partner with any other content providers if they wanted to enter into a relationship with Sky.

The NZCC found that the "key commitments" were likely to have previously substantially lessened competition (ie in breach of s 27 of the Act) and were at risk of previously being a misuse of market power (ie in breach of s 36 of the Act), but that they no longer breached the Act due to "market developments" (namely the entry of new pay TV providers offering content via the internet).

On the basis that the NZCC did not consider there to be a continuing breach it issued a formal warning rather than initiating proceedings.

This decision is a marked departure from the NZCC's previous enforcement responses, ironically against the RSPs, in which it continued to pursue market power proceedings years after the conduct was no longer relevant to the market (for example, it continued with proceedings against Telecom relating to conduct that occurred in 1999 in the dial-up internet space for 10 years after the conduct occurred, and when dial-up internet use had largely been replaced by broadband).

Looking ahead

We expect 2014 to be another dynamic year for competition law in New Zealand, with significant changes to the Act almost certain to be enacted in the next few months.  We look forward to keeping you informed.