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University of Otago Law Theses and Dissertations |
Last Updated: 25 September 2023
A Critical Analysis of New Zealand’s 2022 Monopoly Amendment Will It Pass Go?
Charles ED Baker
A dissertation submitted in partial fulfilment of the requirements of the degree of Bachelor of Laws (Honours) at the University of Otago – Te Whare Wānanga o Ōtākou.
October 2022
Acknowledgements
Thank you to my supervisor, Professor Rex Ahdar, for your feedback and guidance this year.
Thank you to my family for your support. In particular to David and Benjamin for your attentive editing skills.
Last, thank you to my friends for your opinions, criticisms, and discussions on this subject throughout the year.
List of Abbreviations
NZCC: The New Zealand Commerce Commission
ACCC: The Australian Competition and Consumer Commission SLC: Substantial Lessening of Competition
MBIE: The Ministry of Business, Innovation, and Employment
Table of Contents
Introduction
This dissertation conducts a critical assessment of the 2022 amendment to s 36, the misuse of market power section, of the Commerce Act 1986. It argues that the new substantial lessening of competition (SLC) standard is a welcome reprieve from the previous s 36. This is because it focuses directly on the effect of the conduct and in doing so provides a useful tool to capture and deter anti-competitive conduct. However, there are issues with the section. It does not adequately distinguish between a lessening of competition resulting from ‘competition on its merits’ or ‘legitimate business conduct’ and a lessening resulting from illegitimate competitive behaviour. Furthermore, it creates uncertainty for firms who wish to comply with the section ex-ante.
Chapter one explains the history of the previous section and how it has been applied. Chapter two then examines several criticisms which have been levelled at that section. These include that the section was inconsistent with the Act, the interpretation of the ‘take advantage of’ element drew unreliable inferences, and that it was complex, unpredictable, and flawed. Thereafter, the focus turns to the amended SLC section. Chapter three discusses the amendment and how the new section will apply with reference to case law from other sections which contain a similar test. Chapter four evaluates the new section and considers its benefits, its pitfalls and how they might be mitigated, and how the new section may impact New Zealand’s unique market structure. Chapter five then offers a series of statutory amendments which would attempt to resolve some of the shortcomings of the new section.
Chapter One: A History of the Previous Section 36
The previous prohibition against anti-competitive unilateral conduct was s 36(2) of the Commerce Act 1986.1 This prohibition required three elements. First, the firm must have had a ‘substantial degree of market power’. This excludes firms with little market power from review as they are unlikely to be of concern. Second, that substantial degree of market power must have been taken advantage of. This acts as a causal nexus between the substantial degree of market power and the conduct in question.2 Third, the firm must have acted for one of three exclusionary purposes.
I The old ‘use’ and ‘dominance’ test
Prior to the Commerce Amendment Act 2001 (2001 No 32), the previous section 36 had two substantive differences.3 Instead of a ‘substantial degree of market power’, the requisite threshold was a ‘dominant position’. In addition, ‘use’ was in place of ‘take advantage of’.
A ‘Dominance’
‘Dominance’ was given its ordinary dictionary definition by the Court of Appeal in Telecom Corporation of New Zealand Ltd v Commerce Commission.4 Cooke P used synonyms such as "a prevailing, commanding, ascendant, governing, primary, principal or leading influence" to define it.5 His Honour also stated that there could be no more than one dominant person in any given market.6
1 Commerce Act 1986, s 36(2).
2 Commerce Commission v Telecom Corp of New Zealand Ltd [2010] NZSC 111, [2011] 1 NZLR 577 [0867] at
[14].
3 See Commerce Act 1986, s 36(2). As at 28 April 1986.
4 Telecom Corporation of New Zealand Ltd v Commerce Commission [1992] NZCA 595; [1992] 3 NZLR 429 (CA).
5 At 434.
6 At 434.
B ‘Use’
‘Use’ was interpreted by the Privy Council in Telecom Corporation of New Zealand Ltd v Clear Communications Ltd (Telecom v Clear).7 The context of the case is useful in clarifying what a ‘use’ is. In 1989 the telecommunications industry in New Zealand was opened to competition. Telecom effectively enjoyed a monopoly as a network operator until Clear Communications (Clear) entered the market in 1989. Clear wished to set up an interconnection onto the Public Service Telecommunications Network (PSTN) which was owned by Telecom. The terms of the interconnection agreement (ICA) were in dispute in this case.
In most other countries, statutory guidance and mechanisms regulated ICAs. This is because it is generally inefficient to have infrastructure-based competition in utilities markets and therefore regulation is used to mimic competition. In 1990, the regulation of interconnections in New Zealand was left to market forces and scrutiny under s 36.8
In the ICA negotiations, Telecom asked Clear to contribute a certain amount to the costs of Telecom’s network. The Privy Council, in deciding that this request was not a ‘use’, stated:9
... it cannot be said that a person in a dominant market position "uses" that position for the purposes of s 36 unless [sic] he acts in a way which a person not in a dominant position but otherwise in the same circumstances would have acted.
There was no ‘use’ because Telecom was charging the opportunity cost for interconnection, something which a non-dominant firm would have done in a competitive market.10
The approach used by the Privy Council to examine ‘use’ is called the ‘counterfactual test’. It is similar to the test espoused by the High Court of Australia five years earlier in Queensland
7 Telecom Corporation of New Zealand Ltd v Clear Communications Ltd [1995] 1 NZLR 385 (PC) [Telecom v
Clear].
8 At 390.
9 At 403. Note that ‘unless’ should be substituted for ‘if’ for the statement to correspond to the Court’s intention. See Yvonne van Roy “The Privy Council decision in Telecom v Clear: Narrowing the Application of s 36 of the Commerce Act 1986” [1995] 2 NZLJ 54 at 56.
Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (QWI).11 In that case, Mason CJ and Wilson J, in holding that BHP had ‘taken advantage of’ its substantial market power, stated:12
It is only by virtue of its control of the market and the absence of other suppliers that BHP can afford, in a commercial sense, to withhold Y-bar from the appellant. If BHP lacked that market power — in other words, if it were operating in a competitive market — it is highly unlikely that it would stand by, without any effort to compete, and allow the appellant to secure its supply of Y-bar from a competitor.
As in Telecom v Clear, this requires consideration of whether the same conduct would be done by a person lacking dominance.
II Parliament’s Response
Parliament was unhappy with the interpretations given to ‘use’ and ‘dominance’. It considered the meaning given to dominance set the test too high.13 Parliament therefore replaced ‘dominance’ with the words ‘substantial degree of market power’. This sought to achieve Parliament’s original intent of focusing on an economic analysis whilst lowering the threshold for a firm’s actions to be reviewable.14 Therefore, more firms would be subject to the section.15
Parliament also considered the interpretation of ‘use’ to be restrictive.16 It was seen as “unduly narrowing the conduct that can be found to be exclusionary.”17 In changing the wording to ‘take advantage of’, Parliament intended to adopt a relatively more flexible approach as it considered had been taken in QWI.18 The Select Committee for the Bill made a clear statement as to the intended effect of this amendment:19
11 Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1989] HCA 6, (1989) 167 CLR 177 [QWI]. See 0867, above n 2, at [16] which notes the shared nature of the test.
12 At 585 and 586. Note that the Australian section used the words ‘take advantage of’ instead of ‘use’.
13 Commerce Amendment Bill 2001 (296-2) (commentary) [Bill Commentary] at 11.
14 At 11.
15 James Aitken, Alan Lear, and Hamish Dixon “New Zealand: Changes to Commerce Act and business acquisition 'safe harbours'” (2001) 20(7) IFLR 64 at 64.
16 Bill Commentary, above n 13, at 14.
17 Chris Noonan Competition Law in New Zealand (5th ed, Thomson Reuters New Zealand, Wellington, 2017) at 485.
18 Bill Commentary, above n 13, at 13.
Government members wish to make very clear that the intention of Parliament in adopting the words "take advantage of" would be to reverse this interpretation by the Privy Council, and to provide the New Zealand courts with the opportunity to apply the test with an appropriate level of flexibility without giving them carte blanche to adopt a subjective purpose driven approach.
III Taking Advantage of a Substantial Degree of Market Power
These amendments were interpreted by the Supreme Court in Commerce Commission v Telecom Corp of New Zealand Ltd (0867) 15 years after the Privy Council decision.20 At this stage of the telecommunications drama Telecom and Clear had entered into an ICA. The terms of the agreement established that when a call was made by a subscriber on one network (the calling network) to a subscriber on another network (the terminating network), the calling network paid the terminating network a per minute “terminating” charge.21 Telecom had the greater number of customers and so received more payments from Clear than it paid to Clear. This changed when customers started to use dial up internet service providers (ISPs) to access the internet. Clear had recruited many ISPs to its network meaning it now received relatively more terminating charges.
Telecom then introduced the ‘0867 package’. This gave free calling to Telecom’s residential customers who dialled up the ISPs on its network or on rival networks who had adopted the 0867 prefix.22 Telecom considered calls to 0867 numbers outside the ICA and therefore to not result in terminating charges. The goal was to attract customers and ISPs to Telecom’s network and encourage Clear to adopt the 0867 prefix thereby lowering the terminating charges payable by Telecom.
Although Telecom’s conduct was considered under the law prior to the 2001 amendments, the Supreme Court still provided guidance on the amendments. The Court first noted that the change from dominance to substantial degree of market power was “of no present moment” to the case.23 Then, departing from Parliament’s intent, the Court stated that “the expressions ‘use’ and ‘take advantage of’ involve the same inquiry.”24 The Court took this view because it
20 0867, above n 2.
21 At 577.
22 At 578.
23 At [1].
24 At [1].
considered that “use implicitly meant advantageous use.”25 The Court also viewed the causal nexus between dominance and conduct as one of enablement; “there will be use of dominance when the dominance enables the conduct to be undertaken and the purpose to be achieved.”26
The following outlines the Supreme Court’s approach to section 36. First, an approach should be taken which gives firms “a reasonable basis for predicting in advance whether their proposed conduct falls foul of s 36”.27 Second, a substantial degree of market power acts as a threshold to a claim. Firms have market power when they can act unconstrained in a way not possible in a competitive market.28 Therefore, “any firm that is substantially unconstrained by competitive pressures has substantial market power.”29 Third, in performing the counterfactual, a hypothetical competitive market must be created which replicates the actual market but denies the firm in question all aspects of its substantial degree of market power.30 Fourth, assessing how a hypothetical comparator will act in that market is essentially a commercial judgment.31 The Court noted that when undertaking this judgement:32
Economic analysis may be helpful in constructing the hypothetically competitive market and to point to those factors which would influence the firm in that market. But it must always be remembered that the “use” question is a practical one, concerned with what the firm in question would or would not have done in the hypothetically competitive market. As the question is one of rational commercial judgment, the test should be what the otherwise dominant firm would, rather than could, do in the hypothetical market.
Fifth, the Supreme Court used the same ‘counterfactual’ test as the Privy Council in Telecom v Clear, but re-introduced it as a ‘comparative’ exercise:33
... if the dominant firm would, as a matter of commercial judgment, have acted in the same way in a hypothetically competitive market, it cannot logically be said that its dominance has
25 0867, above n 2, at [1].
26 At [14].
27 At [30].
28 At [33].
29 At [33].
30 At [36].
31 At [35].
32 At [35].
33 At [31].
given it the advantage that is implied in the concepts of using or taking advantage of dominance or a substantial degree of market power.
This comparative exercise is intended to act as a “filtering mechanism” for anti-competitive conduct.34 Without it, the section could be used to challenge any conduct done by a firm with a substantial degree of market power for an exclusionary purpose.35 That would capture a large amount of beneficial conduct which competition is intended to promote. The exercise therefore seeks to differentiate between a reduction in competition resulting from “the operation of the competitive process itself” and a reduction resulting from “‘improper’ means”.36 The lion’s share of criticism levelled at the section concerns its inability to reliably distinguish between those two behaviours. The next chapter explores that and other criticisms of the section.
34 Andrew Gavil “Imagining a Counterfactual Section 36: Rebalancing New Zealand’s Competition Law Framework” (2015) 46 VUWLR 1043 at 1051.
35 At 1051.
36 At 1051.
Chapter Two: Criticisms of the Previous Section 36
Most of the criticisms levelled at the previous s 36 have been used by commentators, regulators, and advisory bodies to call for amendment.37 This part discusses those criticisms and illustrates why amendment was necessary.
I Inconsistencies
A A Focus on Competitors, not Competition.
The previous section 36 prohibited the taking advantage of a substantial degree of market power for one of three exclusionary purposes:38
(a) restricting the entry of a person into that or any other market; or
(b) preventing or deterring a person from engaging in competitive conduct in that or any other market; or
(c) eliminating a person from that or any other market.
All these purposes are directed toward a ‘person’ i.e., an incumbent or entrant. That position is inconsistent with the purpose of the Commerce Act 1986 in promoting “competition in markets for the long-term benefit of consumers within New Zealand.”39 The purpose is to promote competition not to protect competitors, except where “the latter may promote the former.”40 Indeed, harm to a competitor may be beneficial and the “expected outcome of vigorous competition.”41 As the Harper Panel, which conducted a “Root and Branch” review of Australian Competition Law in 2015, notes, “competition law is concerned with harm to competition itself — that is, the competitive process.”42 By requiring an exclusionary purpose, the section therefore fails to align with the Act’s purpose.
37 See Ian Harper, Peter Anderson, Su McCluskey, and Michael O’Bryan Competition Policy Review Final Report (The Treasury, March 2015) [Harper Panel]; Hon Kris Faafoi MP Review of Section 36 of the Commerce Act and Other Matters: Policy Decisions (Ministry of Business, Innovation, and Employment, 18 February 2020) [MBIE]; Productivity Commission Boosting productivity in the services sector (May 2014) [Productivity Commission]; and Gavil, above n 34.
38 Commerce Act, s 36(2).
39 Commerce Act, s 1A.
40 Union Shipping NZ Ltd v Port Nelson Ltd [1990] NZHC 61; [1990] 2 NZLR 662 (HC) [Union Shipping] at 700.
41 Harper Panel, above n 37, at 339.
42 At 339.
B Inconsistency with Other Sections
The previous s 36 is different to s 27, which prohibits anti-competitive contracts, arrangements, and understandings, and s 47 which prohibits certain business acquisitions.43 Both sections use a SLC standard. Andrew Gavil argues that this discrepancy is unnecessary and undermines the collective cohesiveness of the sections.44 Gavil suggests that:45
Similar threats of anticompetitive effect, whether collusive or exclusionary, ought to be treated alike since they pose similar competitive threats. This would provide for a common evolution of techniques and standards for assessing exclusionary conduct across all three provisions.
There is nothing wrong per se about using different standards for different types of anti- competitive conduct; the peculiarity of certain conduct may require an individualised approach. However, Gavil’s suggestion does have merit as these sections, on a final analysis, should all be examining how competition has been affected. In addition, using like sections may enhance administrative and compliance efficiency as all parties would only have to be familiar with one standard.
II Unreliable Inferences
The comparative exercise in 0867 is prone to drawing unreliable inferences.46 Andrew Gavil discusses this issue in depth.47 These unreliable inferences mean that the section creates false negatives and may create false positives. A false negative occurs when a test incorrectly exculpates anti-competitive conduct. A false positive occurs when a test incorrectly condemns ‘pro-competitive’ conduct.
43 Commerce Act, ss 27 and 47.
44 Gavil, above n 34, at 1063.
45 At 1064.
46 0867, above n 2, at [31].
47 Gavil, above n 34.
A False Negatives
The comparative exercise first infers that if a firm in a competitive market would perform some conduct, then a firm with a substantial degree of market power cannot be said to be taking advantage of its power if it adopts the same conduct.48 This is an unreliable inference which creates false negatives.
The inference first fails to account for “the significance of the dominant firm's market power and its consequences for the conduct's effect on competition and the competitive process in the market as it actually exists.”49 It is well accepted that conduct done by a firm with a substantial degree of market power has the ability to cause greater anti-competitive harm compared to when the same conduct is performed by a firm without market power.50 Cento Veljanovski notes in this regard that adherence to the counterfactual as a means of exculpating conduct is:51
... akin to saying that because a person can walk into a room with a lighted match without setting off an explosion, doing so in a room where there is a suspected gas leak did not “cause” the explosion.
Because of this, the exercise is generally considered to be “incumbent friendly.”52
Second, the inference essentially gives a “green light” to firms with a substantial degree of market power to do as they like as it is not difficult for them to show that a firm without market power would have done the same conduct.53 The Harper Panel provides some examples:54
Conduct such as exclusive dealing, loss-leader pricing and cross-subsidisation may all be undertaken by firms without market power without raising competition concerns, while the same conduct undertaken by a firm with market power might raise competition concerns.
48 Gavil, above n 34, at 1056.
49 At 1071.
50 MBIE, above n 37, at 12; and Rex Ahdar “The unfulfilled promise of New Zealand’s monopolisation law: Sources, symptoms and solutions” (2009) 16 CCLJ 291 at 293.
51 Cento Veljanovski “The flawed market power counterfactual” [2013] 7 NZLJ 247 at 248.
52 Neil Anderson “What if we deep six section 36 and counterfactual? What then?” (1 April 2014) thelawyermag.com <https://www.thelawyermag.com/au/archived/what-if-we-deep-six-section-36-and- counterfactual-what-then/208839>.
53 Ahdar, above n 50, at 298.
54 Harper Panel, above n 37, at 61.
Price discrimination, loyalty rebates, bundling, and refusals to deal can also lead to the same comparison.55 To take one example, Mark Berry, the former New Zealand Commerce Commission (NZCC) Chair, notes that exclusive dealing “may be economically rational and may have pro-competitive effects in the hypothetically competitive market.”56 However, when such conduct is carried out by a firm with a substantial degree of market power it can foreclose large portions of the market and result in significant anti-competitive effects.57
A systematic failure to condemn anti-competitive unilateral conduct harms competition. False negatives are dangerous because they “allow large firms to suppress competition and innovation from new, smaller firms.”58 Gavil notes that false negatives “can amplify incentives to undertake harmful conduct for both the defendant and others, harming competition and consumers.”59 Furthermore, the doctrine of stare decisis may exculpate similar future anti- competitive conduct.60 Failure to deter anti-competitive conduct is of particular concern to New Zealand given that there are “greater levels of concentration, and a weaker tendency of markets to self-correct because of higher entry barriers, and consumers having fewer choices.”61 Indeed, a lack of competition has been cited as one of the reasons for New Zealand’s sub-par productivity.62
B False Positives
Gavil also argues that the comparative exercise creates false positives. He argues that it does not necessarily follow that because a firm without a substantial degree of market power would not do some conduct, then a firm with a substantial degree of market power who does that conduct must be acting for an anti-competitive purpose.63 This inference again disregards the “unique circumstances of the firm with substantial market power.”64
55 RBB Economics “Response by RBB Economics to proposals relating to the misuse of market power and the introduction of ‘concerted practices’” (November 2014) at 4.
56 Mark Berry “New Zealand Antitrust: Some Reflections on the First Twenty-Five Years” (2013) 10(2) Loy. U. Chi. Int'l L. Rev. 125 at 145.
57 MBIE, above n 37, at 12.
58 Productivity Commission, above n 37, at 132.
59 Gavil, above n 34, at 1060.
60 See Frank Easterbrook “Limits of Antitrust” (1984) 63 Texas Law Review 1 at 2.
61 Productivity Commission, above n 37, at 132 citing Michal Gal “The effects of smallness and remoteness on competition law – the case of New Zealand” (2007) 14(3) CCLJ 292.
62 At 132.
63 Gavil, above n 34, at 1057.
64 At 1057.
Gavil’s formulation appears to be incorrect. The comparative exercise does not require a consideration or provide a meaningful analysis of anti-competitive purpose. It only specifies whether a ‘taking advantage of’ has occurred. The Supreme Court in 0867 did not suggest that an anti-competitive purpose is inferred when a firm with a substantial degree of market power does something that a firm without that power would not do. In fact, it expressly warned against conflating the take advantage and purpose analyses and treated them as distinct inquiries.65 The recent case of Australian Competition and Consumer Commission v Pfizer Australia Pty Ltd also dispels Gavil’s claim.66 In that case, the Federal Court of Australia found that Pfizer had taken advantage of its market power but did not have an anti-competitive purpose.
A more appropriate framing of a possible false positive is that the exercise infers that if a firm with a substantial degree of market power does some conduct a firm without that power would not do, then it must be taking advantage of its market power. However, this does not appear to be a real issue. It is difficult to conceive of a situation in which a case would be brought where the conduct was not anti-competitive and, in addition, would not have been done by a firm with a substantial degree of market power.
III Complex, Unpredictable, and Flawed
The main concern proffered by the Minister for Commerce and Consumer Affairs, the Hon David Clark MP, on the first reading of the Commerce Amendment Bill was that the hypothetical model had proved very difficult in practice.67 In particular, there are difficulties associated with constructing the hypothetical market and analysing what the hypothetical comparator would do therein.68
65 0867, above n 2, at [11].
66 Australian Competition and Consumer Commission v Pfizer Australia Pty Ltd [2015] FCA 113, (2015) 323
ALR 429.
67 (16 March 2021) 750 NZPD 1411 [(16 March 2021) NZPD].
68 Productivity Commission, above n 37, at 129.
A Constructing the Hypothetical Market
The comparative exercise involves the creation of a hypothetical market which denies the firm in question all aspects of its market power.69 How that market is structured can often be decisive to the outcome of a case.70 The features of that market are open to debate71 and require difficult assumptions, which need not be realistic or practical, to be made about what it looks like.72 The amorphous nature of this exercise means, as the Ministry of Business, Innovation, and Employment (MBIE) note:73
Given the array of possible inputs, assumptions and value judgements involved, it is difficult for the Commission or private litigants to predict which scenario the court will use as the counterfactual.
Having a predictable hypothetical market is important for market participants and new entrants so that they can be certain “they will be able to compete on their merits and not be subject to anti-competitive behaviour by the incumbent”. 74
MBIE pessimistically notes that the current form of predictability is that firms know the NZCC may find it difficult to bring an action.75 This is not a desirable form of predictability. MBIE, again pessimistically, argues that this complexity, and therefore lack of certainty, incentivises firms to engage in conduct which may breach s 36.76 At the very least it does limit the ability to pursue legitimate claims when they do arise. MBIE summarises the issue as follows:77
Overall, the current interpretation of the prohibition presents risks that some anti-competitive conduct will not be illegal, that – even if conduct is illegal – no enforcement action will be taken, and that – even if enforcement action is taken – that such action will not be successful.
69 0867, above n 2, at [36].
70 See MBIE, above n 37, at 13.
71 Productivity Commission, above n 37, at 129.
72 MBIE, above n 37, at 13; and 0867, above n 2, at [29].
73 MBIE, above n 37, at 13.
74 At 14.
75 At 14.
76 At 13.
77 At 15.
B Applying the Test to Certain Conduct is Flawed
In certain instances, it is not possible to formulate the comparator in a way which removes the firm’s substantial degree of market power. This often occurs in cases involving pure or close- to-pure monopolies. In these cases, the conduct at issue is often performed with reference to some facet of the firm’s monopoly. Therefore, using the comparative exercise to eliminate market power may remove the very issue in dispute. The Court of Appeal decision in the 0867 saga noted this difficulty:78
The reality of the case is that it is about terminating charges which are markedly above cost and the willingness of Telecom, under threat of regulation, to share its monopoly rents with Clear. Any realistic counterfactual must take monopoly rents as a given. It is difficult to see how there can be any plausible counterfactual about the distribution of monopoly rents where non- dominance has to be assumed: in the absence of dominance there can be no monopoly rents.
Cento Veljanovski notes that the reason the Supreme Court, on appeal, got itself into “such a bind” was because it was:79
... impossible to formulate a counterfactual that did not assume away the problem (a disproportionately high share of dial up internet traffic) that Telecom was trying to deal with. The counterfactual was so close to the factual as to assume away the competition abuse, ...
This means that the comparative exercise is not being applied as intended. The exercise is used to remove the firm’s substantial degree of market power. In these cases, doing so is not possible because the resulting comparison makes little sense. That failure and the resulting failure of the Courts to adhere to the exercise demonstrates that the test itself is flawed.
78 Commerce Commission v Telecom Corp of New Zealand Ltd [2009] NZCA 338, [2010] NZCCLR 10 at [100].
79 Veljanovski, above n 51, at 248.
C An Example: Carter Holt Harvey Building Products Group Ltd v Commerce Commission (CHH)
CHH demonstrates both these issues.80 This case concerned the alleged 2-for-1 predatory pricing by Carter Holt Harvey’s (CHH) subsidiary Insulation New Zealand Company (INZCO) of its Wool Line insulation product in response to competition from New Wool Products’ (NWP) Wool Bloc. That response was initiated because of a demand from distributors for a competitively priced ‘green’ product. The effect of the 2-for-1 price was to sell Wool Line at 17-28% below the cost of production.81
Both the High Court and Court of Appeal found that CHH had breached s 36.82 John Belgrave, the NZCC chair at the time, was pleased with the outcome and stated: "It is important that the Commerce Act is effective in protecting innovation in the marketplace.”83 However, the decision was then overturned by the Privy Council.84
1 Majority
The majority did not challenge the High Court’s findings on dominance and purpose.85 They first stated that: 86
... a monopolist is entitled like everyone else to compete with his competitors. He is not required to stand idly by as he sees his market share being eaten into by others who are not dominant.
80 Carter Holt Harvey Building Products Group Ltd v Commerce Commission [2004] UKPC 37, [2006] 1 NZLR 145 [CHH].
81 CHH, above n 80, at [16].
82 See Commerce Commission v Carter Holt Harvey Building Products Ltd [2000] NZHC 1220; (2000) 9 TCLR 535 (HC); and
Carter Holt Harvey Building Products Group Ltd v Commerce Commission [2001] NZCA 298; (2001) 10 TCLR 247 (CA). 83 New Zealand Commerce Commission “Court of Appeal upholds Commerce Act breach by Carter Holt Harvey” (9 November 2001) comcom.govt.nz < https://comcom.govt.nz/news-and-media/media- releases/archive/court-of-appeal-upholds-commerce-act-breach-by-carter-holt-harvey>.
84 CHH, above n 80.
85 At [23].
86 At [23].
They then stated that they could not see how INZCO could have retained its market share if it had not responded to the demands of its distributors for a competitively priced wool-based product by lowering the price.87
In constructing the hypothetical, the majority considered that the financial ability to cut prices was not market power; “Cutting [prices] only becomes unlawful when the dominant firm is shown to have done so by use of its position of dominance.”88 That ‘use’ was said to be demonstrated when prices are cut with a view to recouping the losses by raising prices whilst retaining market share and without fear of reprisals.89 The majority considered that the recoupment element provides a useful means of applying the section whilst protecting consumer interests.90
In assessing the counterfactual, the majority stated that “it is by no means self-evident that INZCO would have behaved any differently if it had not been in a dominant position in the market”.91 They saw the obvious response in a truly competitive market as one where the price was cut to a competitive level.92 Therefore, the majority was not persuaded the conduct was any different from what a non-dominant firm of equivalent financial strength would have done in the same circumstances.
2 Minority
The minority disagreed, finding that INZCO’s conduct had breached s 36. They considered that it was necessary to regard the comparator as having no particular financial strength. This was due to the undoubted strength of INZCO in that capacity and s 3(8)(a) of the Commerce Act 1986 which states that in assessing dominance, regard shall be had to, among other things, access to capital.93 However, the minority ran into trouble when creating the counterfactual and asked how the attributes of the comparator were to be identified.94 They noted the exercise is
87 CHH, above n 80, at [25].
88 At [60].
89 At [60].
90 At [67].
91 At [29].
92 At [29].
93 At [77]. Note that s 3(8) has now been repealed.
94 At [78].
not demanded by statute but is a judicially constructed tool used to assist in answering the statutory question of causality.95
The minority also considered that the business imperatives which led INZCO to price Wool Line below cost made construction of a comparator “not in a dominant position but otherwise in the same circumstances as INZCO highly unreal”.96 This was because the minority did not consider the conduct to be normal predatory pricing.97 INZCO was not attempting to promote Wool Bloc and recoup its losses, it was trying to protect Pink Batts.98
The minority then set out their grievances with the exercise. They stated that if the circumstances regarding Pink Batts and the agreements between INZCO and its builder merchants were attributed to the comparator then it would be in a dominant position. However, if those attributes were not attributed to it, then the result of the counterfactual becomes obvious:99
How could a competitor who was not in a dominant position expect to protect the share of a favoured product in a competitive market by selling another product at a highly uncommercial price?
They concluded this by stating that the comparison, in the present case, seemed to them to be “wholly unreal”.100
The minority noted that at no stage was the price of Pink Batts reduced to compete on price with Wool Bloc. Instead, “Wool Line was the goat tethered in order to lure the tiger to destruction. Like the goat, the fate of Wool Line was immaterial.”101 Their withers were unwrung to the concern that if CHH was prevented from reducing the price it would be prevented from competing, stating:102
95 CHH, above n 80, at [78].
96 At [79].
97 At [79].
98 At [81].
99 At [81].
100 At [81].
101 At [83].
INZCO was, of course, entitled to compete with Wool Bloc in order to protect Pink Batts’ market share. But it was not entitled to compete by taking steps that relied on its dominant position or that would not have been taken by a non-dominant competitor.
The minority noted that the price of Pink Batts could have been reduced, but aside from this there may have been little that could have been done in the short-term.103 Instead, they stated that in the long-term INZCO could have developed a better or cheaper product to compete with Wool Bloc on a commercial basis i.e., on merit.104
3 Analysis
This case demonstrates the two flaws described in this part. The majority considered that financial strength was part of the counterfactual, whereas the minority did not. This demonstrates the complexity and uncertainty inherent in creating the hypothetical market. On one view, the case turned on whether financial strength was included.
It is submitted that financial strength should be considered a facet of market power. This is because it allows firms to act in an unconstrained manner. For example, it allows a firm to price below cost for an extended period without losing market share, something which would not be possible in a competitive market. Without this financial strength, INZCO would not have been able to price its products in the way it did and so ‘compete’ with Wool Bloc. The majority, in contrast, explicitly considered below cost pricing to be fair competition and something which would occur in a competitive market.105 However, in competitive markets below cost pricing is unsustainable and should be looked at with suspicion.
The minority also illustrate how the comparative exercise makes little sense in particular circumstances. This was highlighted by the statement:106
How could a competitor who was not in a dominant position expect to protect the share of a favoured product in a competitive market by selling another product at a highly uncommercial price?
103 CHH, above n 80, at [84].
104 At [84].
105 At [29].
106 At [81].
It is not expected that a non-dominant firm would have a favoured product, nor would it be able to sell another product at an uncommercial price to protect that favoured product. Nonetheless, those are the distinguishing features of the case and without them any assessment of the actions of the firm would be meaningless. Yet with them, the exercise is “wholly unreal”107 because the counterfactual becomes so close to the “factual as to assume away the competition abuse.”108
IV The Commerce Commission
As Mr Clark notes, the NZCC has had a very difficult time effectively enforcing s 36:109
The Commerce Commission has been unsuccessful in three of its five cases before the courts. The last of these cases concerned conduct in the early 2000s. It is not sustainable to have a law that the competition authority is not able to enforce effectively.
Matt Sumpter also notes that from 2013 to 2021 the Commission only investigated seven potential misuse of market power cases, with no action being taken in any of them.110 Sumpter puts this failure down to the Commission’s litigation losing streak of the mid-to-late 2000s which made them “gun-shy”.111
Mark Berry, a former NZCC chair, identifies the root of this losing streak. He states that although the section itself demonstrates no problems, the judicial analysis of it “seriously narrowed its application”.112 Berry believes this because the “application of monopoly rules based on hypothetical thought experiments, involving the creation of make-believe market structures and predictions of behaviour in make-believe worlds, is highly problematic.”113 Neil Anderson notes that these issues cumulated in the Commission putting s 36 “in the too hard
107 CHH, above n 80, at [81].
108 Veljanovski, above n 51, at 248.
109 Hon Dr David Clark MP “Stronger regulation to promote competition passes third reading” (Beehive press release, 30 March 2022). Note, the Commerce Commission is the regulatory body charged with administering anti-competitive conduct.
110 Matt Sumpter “The Politics and Practice of New Zealand Competition Law” (2021) 66(4) The Antitrust Bulletin 462 at 467.
111 At 468.
112 Berry, above n 56, at 145.
113 At 154.
basket, and that is not good for anyone.”114 Anderson states that s 36 needs to be in a form in which “the regulator charged with administering it is prepared to do so.”115 As that has not been the case, the Commission has found it easier and cheaper to focus on merger and cartel work.116
The flawed, complex, and uncertain nature of s 36 has limited the Commission’s ability to administer competition concerns and so some harmful conduct has most likely gone undeterred. This effect has inevitably been exacerbated by the Commission’s “gun-shy” nature. That is, the Commission may have felt less inclined to bring a case, even where there was a good chance of success. When the Commission fails to bring cases, it has an added detrimental impact to its reputation and integrity; it needs to take cases to signal to other market participants that they “could be next if they don’t start observing their legal advice.”117
114 Anderson, above n 52.
115 Anderson.
116 Sumpter, above n 110, at 468.
117 At 468 and 469.
Chapter Three: The New Section 36
I Amendment
On 5 April 2022, the Commerce Amendment Act 2022 received royal assent thereby introducing several amendments to the Commerce Act 1986.118 The main substantive amendment redrafts s 36 to a SLC standard. Two other amendments of note are the introduction of an authorisation regime for unilateral conduct119 and the repeal of the intellectual property related exceptions for anti-competitive practices.120
A Section 36
Section 36 was amended to the following:121
(1) A person that has a substantial degree of power in a market must not engage in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition in—
(a) that market; or(b) any other market in which the person, or an interconnected person,—
(i) supplies or acquires, or is likely to supply or acquire, goods or services; or(ii) supplies or acquires, or is likely to supply or acquire, goods or services indirectly through 1 or more other persons.
Except for requiring a substantial degree of market power, the wording of this section is similar to s 27(1).122 In both Australia and New Zealand, the presence of other SLC sections was cited as a good reason to amend s 36 to a SLC standard.123 This is because the section will incorporate “standards and concepts ... at least well enough known as to be susceptible to practically
118 Note that the amendments discussed below come into force on 5 April 2023. See Commerce Amendment Act 2022, s 2.
119 Commerce Amendment Act, s 24. See also MBIE, above n 37, at 23. This is a novel addition for unilateral conduct which allows the Commission to authorise conduct which is prima facie prohibited but is nevertheless in the public benefit.
120 Commerce Amendment Act, ss 17 and 20. Instead of being seen as “anathema” and “incompatible” Competition and IP are now “seen as being complementary to each other, as both seek to increase productivity and innovation.” See (16 March 2021) NZPD, above n 67; and MBIE, above n 37, at 15.
121 Commerce Amendment Act, s 17.
122 Commerce Act, s 27(1). This section prohibits the entering contracts, arrangements, and understandings which contain a provision that has the purpose, likely effect, or effect, of substantially lessening competition in a market.
123 MBIE, above n 37, at 24; and Harper Panel, above n 37, at 341.
workable ex ante analysis.”124 Given this congruity, it is reasonable to expect that case law from sections which contain an SLC standard will be leveraged when interpreting the new s36. This appears to be the expectation from the aforementioned commentary. Therefore, understanding how the new section will apply requires consideration of how those other sections have been applied.
II How the New Section will Work
This part assesses how the new section will likely apply with reference to case law from similar sections within the Commerce Act.
(1) Purpose, Likely Effect, or Effect
The section requires the conduct of the firm with a substantial degree of market power to have the purpose, likely effect, or effect of substantially lessening competition in a market. As these are disjunctive elements, only one must be satisfied.
1 Purpose
Purpose was defined by the High Court in Union Shipping NZ Ltd v Port Nelson Ltd:125
The word used is not merely "intention". Intention to do an act, which it is known will have anticompetitive consequences, in itself is not enough. "Purpose" implies object or aim. The requirement is that "the conduct producing the consequences was motivated or inspired by a wish for the occurrence of the consequences”.
The reference to ‘motivated’ is incorrect as purpose is not the same as motive.126 The High Court of Australia in News Limited v South Sydney District Rugby League Football Club Limited (News Limited) explained why: “The purpose of conduct is the end sought to be
124 Paul Schoff “Submission on Draft Report of the Competition Policy Review” (Minter Ellison, November 2014) at 5.
125 Union Shipping, above n 40, at 707.
126 Paul Scott “The Purpose of Substantially Lessening Competition: The Divergence of New Zealand and Australian Law” [2011] WkoLawRw 9; (2011) 19(1) Waikato Law Review 168 at 173 citing Newton v Federal Commissioner of Taxation [1958] UKPCHCA 1; (1958) 98 CLR 1 (PC) at 70.
accomplished by the conduct. The motive for conduct is the reason for seeking that end.”127 Purpose can include a ‘main’ or ‘ancillary’ purpose so long as the ancillary purpose is substantial.128
In New Zealand, a pragmatic mixed objective-subjective approach is taken to assessing purpose. Glazebrook J in ANZCO Foods Waitara Ltd v AFFCO New Zealand Ltd (ANZCO) took an objective approach but recognised that on the margin there may be a role for subjective evidence but only where “such evidence exists and it is restricted to cases where it is borderline as to whether there might be an anticompetitive effect.”129 It must also be noted that ‘purpose’ is not intended to capture those statements directed toward a competitor which are “couched in war like or sports metaphors”, the purpose must be to substantially lessen competition.130
2 Likely Effect
An effect is ‘likely’ when there is a “a real and substantial risk that the stated consequence will happen.”131 This necessarily involves a retrospective assessment, focusing on the likely effects at the time the conduct was engaged in. However, in Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union, the Full Court of the Federal Court of Australia held that if the conduct ran its course and did not have the specified effect, it would be rare to hold that the effect had been likely.132 McGechan J in the High Court decision of Commerce Commission v Port Nelson Ltd disagreed:133
... that retrospective approach assumes normal conditions have continued to operate over the intervening period concerned. If some abnormal factor has intervened, perhaps altering ensuing effects, there are obvious dangers in reasoning back from ultimate effects to earlier likelihoods.
127 News Limited v South Sydney District Rugby League Football Club Limited [2003] HCA 45, (2003) 215 CLR 563 [News Limited] at [18].
128 Commerce Act, s 2(5)(b).
129 ANZCO Foods Waitara Ltd v AFFCO New Zealand Ltd [2005] NZCA 166; [2006] 3 NZLR 351 (CA) [ANZCO] at [261].
130 Scott, above n 126, at 181.
131 Port Nelson Ltd v Commerce Commission [1996] NZCA 230; [1996] 3 NZLR 554 (CA) at 562 and 563.
132 Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 27 ALR 367 (FCAFC) at 381.
133 Commerce Commission v Port Nelson Ltd (1995) 5 NZBLC 103,762 (HC) at 103,780.
The Court of Appeal in Port Nelson Ltd v Commerce Commission agreed with McGechan J, stating that the finding of no actual effect “is neither inconsistent with, nor undermines” a finding that there was a likely effect.134
3 Effect
The effect limb is straightforward. It asks whether a substantial lessening of competition resulted from the conduct.
(2) Substantial lessening of Competition
1 Competition
The new section directly assesses how competition is affected. Competition is defined within the Commerce Act as “workable or effective” competition and as such does not rest upon text- book notions of perfect competition.135 Matt Sumpter illustrates that a relative net loss in competition can be viewed as a move along a continuum from perfect competition to natural monopoly power.136 Sumpter states that “Competition law does not mind if firms compete their way across the market power spectrum through innovation and hard work.” 137 What it does mind is when firms do not compete on merit.
In Re Queensland Co-operative Milling Assoc Ltd (QCMA) competition was described as a “dynamic process” and not a situation.138 It was also noted that the antithesis of competition is undue market power i.e., the “power to raise price and exclude entry.”139 Although competition is not a ‘situation’, the structure of the market is important. The Tribunal in QCMA highlighted five important structural factors in assessing competition, with number (2), the ease of entry, being the “ultimate regulator of competitive conduct”:140
134 Port Nelson Ltd v Commerce Commission, above n 131, at 567.
135 Commerce Act, s 3(1).
136 Matt Sumpter New Zealand Competition Law and Policy (CCH, Auckland, 2010) at 188.
137 At 190.
138 Re Queensland Co-operative Milling Assoc Ltd (1976) 8 ALR 481 (TPT) [QCMA] at 515 and 516.
139 At 515.
140 At 516.
(1) the number and size distribution of independent sellers, especially the degree of market concentration;
(2) the height of barriers to entry, that is the ease with which new firms may enter and secure a viable market;
(3) the extent to which the products of the industry are characterized by extreme product differentiation and sales promotion;
(4) the character of “vertical relationships” with customers and with suppliers and the extent of vertical integration; and
(5) the nature of any formal, stable, and fundamental arrangements between firms which restrict their ability to function as independent entities.
The tribunal also stated that “competition expresses itself as rivalrous market behaviour” and requires “independent rivalry in all dimensions of the price-product-service packages”.141 Rex Ahdar contends that the initial and central inquiry in assessing competition should be active rivalry; “Is there sustained rivalry between independent businesses and will this be significantly diminished by the defendant’s proposed behaviour, practice, or merger?”142 Rivalry is a behavioural concept,143 in which firms strive “independently to out-manoeuvre rivals in order to secure a larger market share, through the introduction of lower prices, better products, better service, more efficient techniques of production and so on.”144 That rivalry will be more pronounced between competitors who are comparable, but that is not to insist that competition requires a “level-playing field”.145
Chris Noonan notes that the process of competition may harm competitors but simply because a firm “temporarily achieves a position of superiority is not itself indicative that a given market is not subject to effective competition.”146 That is especially the case where the superiority is derived from innovation or product branding.147 The Full Court of the Federal Court of
141 QCMA, above n 138, at 515.
142 Rex Ahdar “The Centrality of Rivalry” (2021) 66(4) The Antitrust Bulletin 510 at 510.
143 At 518 citing John Vickers “Concepts of competition” (1995) 47 Oxford Econ. Papers 1 at 3.
144 At 516 citing Lyn Stevens and David Round “The Commerce Act 1986—A Legal and Economic Commentary upon Some Fundamental Concepts” (1987) 12 NZULR 231 at 237.
145 At 517 and 518.
146 Noonan, above n 17, at 44.
147 At 155.
Australia in Universal Music Australia v Australian Competition and Consumer Commission
(Universal Music) took a similar position when it stated:148
Competition is a process and the effect upon competition is not to be equated with the effect upon competitors, although the latter may be relevant to the former. Competition is a means to the end of protecting the interests of consumers rather than competitors in the market.
Noonan also contends it would be erroneous to equate competition with rivalry because that would suggest any elimination of rivalry is anti-competitive.149 It would also downplay the significance of the threat of entry acting as a constraint on incumbents.150
A strict equality between competition and rivalry is inappropriate. Rivalry, although central, should not be the exhaustive focus given that there are other important factors.151 However, in most instances, the elimination of rivalry will be anti-competitive. For it not to be, Noonan must either be referring to the situation in which rivalry is ‘eliminated’ by competition on its merits or equating rivalry with the number of competitors. If it is the latter, then Noonan has made an error as rivalry, and competition, are not to be equated with the number of competitors, although “there is an obvious sense in which competition does require some competitors.”152 If it is the former, it raises the question as to whether ‘competition on its merit’ can be said to eliminate rivalry. It is submitted that this can only occur when all other firms are eliminated. There can be no rivalry if there are no other firms. However, where other firms remain, rivalry will have intensified. Those surviving firms will continue to attempt to out-manoeuvre one another and build upon their previous improvements. Accordingly, to equate competition with rivalry may, in some very specific situations, lead to an erroneous conclusion. Nonetheless, in most situations, it is a helpful and central concept in assessing competition.
The importance of rivalry between market participants and the constraints on their ability to set trading terms, including constraints from customers, is emphasised by commentators.153
148 Universal Music Australia v Australian Competition and Consumer Commission [2003] FCAFC 193, (2003) 131 FCR 529 [Universal Music] at [242].
149 Noonan, above n 17, at 46.
150 At 46.
151 Ahdar, above n 142, at 518.
152 At 514. See William Shepherd “The Economics of Industrial Organization” (2d ed, 1985).
153 John Land, Jesse Owens, and Leela Cejnar, “The Meaning of “Competition” (2010) 24(1) NZULR 98 at 98.
Therefore, from the foregoing, two of the most important factors in assessing ‘competition’ are rivalry and the constraints, both potential and actual, that others place on the incumbent(s).
2 Substantial Lessening
‘Lessening’ is defined within the Commerce Act to include references to hindering or preventing competition.154 Therefore, preserving the status quo or the failing to act may amount to a contravention.
‘Substantial’ is also defined within the Act to mean “real or of substance.”155 This position is reflected in the High Court decision of Woolworths Ltd v Commerce Commission (Woolworths), a merger case, where ‘substantial’ was equated with ‘material’.156 The High Court considered a lessening of competition to be equivalent to an increase in market power or a reduction in competitive constraints.157 Therefore, a SLC requires a material increase in market power or a material reduction in competitive constraints.158 In practice, ‘substantial’ “must, to some extent, be of uncertain incidence and a matter of judgment.”159 It is also a relative rather than an absolute concept. Therefore, a SLC “must be assessed in terms of the particular circumstances, including the market involved in the particular case.”160 Furthermore, a short-term effect, especially where it is readily corrected by market processes, is unlikely to be substantial.161
3 Assessing a Substantial Lessening of Competition
A counterfactual approach known as the “future-with-and-without” test is taken to assessing whether there has been a SLC.162 Smithers J in Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (Dandy Power) outlined the approach:163
154 Commerce Act, s 3(2).
155 Section 2(1A).
156 Woolworths Ltd v Commerce Commission [2007] NZHC 1351; (2008) 8 NZBLC 102,128 (HC) [Woolworths] at [129].
157 At [127].
158 Tony Dellow and Anna Parker Commercial Law in New Zealand (online looseleaf ed, LexisNexis) at 33.8. 159 Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd [1938] ArgusLawRp 7; (1982) 44 ALR 173 (FCA) [Dandy Power] at 192.
160 ANZCO, above n 129, at [240].
161 At [247] citing Universal Music, above n 148, at [242].
162 Dellow and Parker, above n 158, at 33.10.
163 Dandy Power, above n 159, at 191.
To my mind one must look at the relevant significant portion of the market, ask oneself how and to what extent there would have been competition therein but for the conduct, assess what is left and determine whether what has been lost in relation to what would have been, is seen to be a substantial lessening of competition.
In Re Weddel Crown Corp Ltd the NZCC set out a series of non-exhaustive factors to assist in determining whether competition had been substantially lessened:164
(1) What is the extent to which competition is foreclosed by the conduct, etc, and what alternatives do others in the market have?
(2) Does the conduct have the effect of threatening independent initiatives of operators in the market?
(3) Does the conduct have the effect of causing operators in the market to compete less vigorously?
(4) Does the conduct enable the parties thereto to exercise power over others...?
(5) Does the conduct affect the ability or desire of potential entrants to enter the market in question?
The Commission has also stated that it will examine how the conduct has affected countervailing buyer power.165
In ANZCO, Glazebrook J suggested that the net effect on competition should be assessed whereby the pro-competitive effects (including efficiencies) and anti-competitive effects are weighed.166 Young J, in contrast, appeared to consider these pro-competitive justifications to be irrelevant.167 A net approach would also be counter to Cooke P’s statement in New Zealand Apple & Pear Marketing Board v Apple Fields Ltd where he noted that a SLC is prima facie condemned, “no matter how justified it might seem to be in a particular case.”168 In any event, the authorisation process appears to be a more valid place to consider ‘pro-competitive’ justifications.169 To do otherwise, would be to cut across the authorisation regime.
164 See Dellow and Parker, above n 158, at 33.9 citing Re Weddel Crown Corp Ltd (1987) 1 NZBLC (Com) 104,200 at 104,212. Note that ‘agreement’ has been replaced with ‘conduct’ and the sentences amended to reflect the application of these factors to s 36.
165 Commerce Commission “Fact Sheet, The Commerce Act, Agreements that substantially lessen competition” (July 2018) comcom.govt.nz < https://comcom.govt.nz/ data/assets/pdf_file/0025/90961/Agreements-that- substantially-lesson-competition-Fact-sheet-July-2018.pdf> at 3.
166 ANZCO, above n 129, at [249].
167 At [139].
168 New Zealand Apple & Pear Marketing Board v Apple Fields Ltd [1989] NZCA 169; [1989] 3 NZLR 158 (CA) at 162.
169 See Bill Commentary, above n 13, at 7.
In Woolworths, the High Court considered that multiple counterfactuals could be assessed.170 This involves identifying all of the possible counterfactuals and making an assessment against the least favourable, even if it is not the most likely counterfactual.171 In contrast, Australia only considers the counterfactuals “without the restraint” and “the status quo of ‘with the restraint’ as the basis for comparison.”172 The multiple counterfactual approach was in the context of a merger case, has received critical comment,173 and no other jurisdiction requires such an analysis.174 Therefore, it is unlikely to apply to the new s 36. However, the judiciary should make that clear.
4 Conclusions on SLC
When a firm’s conduct is appraised, the Court will have to consider the state of competition with and without the conduct. That will involve considering whether there has been a material reduction in rivalry and in the competitive constraints, both actual and potential.
III The Australian Experience
On 23 August 2017, Australia amended s 46 of the Competition and Consumer Act 2010 (Cth) to a SLC standard.175 The Australian Competition and Consumer Commission (ACCC) subsequently released guidance for the new section.176 This guidance provides a useful insight into what the ACCC believes will amount to a contravention and forms a model for the NZCC to base their guidance upon.
In its guidance, the ACCC confirms that it will use the ‘future-with-and-without’ test.177 It states that conduct will substantially lessen competition when it “interferes with the
170 Woolworths, above n 156, at [116].
171 Mark Berry and Paul Scott "Merger Analysis of Failing or Exiting Firms Under the Substantial Lessening of Competition Threshold" (2010) 16(2) Canta LR 272 at 287.
172 Paul Scott "It Ain't Necessarily So: Australian Competition and Consumer Commission v Pfizer Australia Pty Ltd and the Reasons for Reforming s 36 of the Commerce Act" (2020) 51(2) VUWLR 265 at 292.
173 Berry and Scott, above n 171, at 287.
174 Scott, above n 172, at 292.
175 Competition and Consumer Amendment (Misuse of Market Power) Bill 2017 (Cth), sch 1 – Misuse of Market Power.
176 Australian Competition and Consumer Commission Guidelines on the Misuse of Market Power (31 August 2018) [ACCC Guidelines]. Note, that this document has no legal force. See at 2.
177 At 2.23.
competitive process in a meaningful way by deterring, hindering or preventing competition”, a reiteration of the law.178 The ACCC states that this can be done by raising barriers to competition or to entry.179 It will investigate claims with “the aim of distinguishing between vigorous competitive activity which is desirable, and economically inefficient monopolistic practices that may exclude rivals and harm the competitive process.”180 In assessing those claims, the ACCC will refer to a series of factors,181 including the firm’s commercial rationale for the conduct.182 It states that this commercial rationale may be relevant in “understanding the conduct in question and assessing its purpose and/or effect on competition.”183 However, this will not amount to a defence and conduct may still have the effect or likely effect of substantially lessening competition even if the firm did not have the requisite purpose.184
The ACCC also provides a series of examples as to what it believes will amount to a contravention. These include: refusals (including constructive refusals) to supply key inputs if it would prevent or hinder a downstream competitor; restricting access to an essential input given that it creates insurmountable entry barriers; low pricing where it is below cost and predatory; loyalty rebates conditional on the retailer meeting certain targets as they prevent competition among the retailer’s suppliers; unconditional rebates where they amount to predatory pricing; a margin squeeze which makes it uncommercial for downstream competitors to offer a ‘competitive price’; and tying and bundling where they are used to ‘leverage’ market power from one market into another.185
The ACCC states that the following are unlikely to substantially lessen competition and may even enhance competition:186
(a) Innovation, regardless of how ‘big’ the firm is
(b) Efficient conduct designed to drive down costs
(c) Responding to price competition with matching or more competitive (above cost) price offers
178 ACCC Guidelines, above, n 176, at 2.24.
179 At 2.24.
180 At 4.1.
181 At 6.1.
182 At 2.22.
183 At 2.22.
184 At 2.22.
185 At 3.4, 3.5, 3.7, 3.12, 3.13, 3.15, and 3.20.
186 At 4.3 and 4.4.
(d) Responding efficiently to other forms of competition in the market such as product offerings and terms of supply
It states that the focus of s 46 is on protecting the integrity of the market so that firms have the “incentive to enter or operate more efficiently, price competitively, and offer better products to their customers.”187 In addition, the ACCC will grant authorisation where it is satisfied that the conduct is “either unlikely to substantially lessen competition or likely to result in a net public benefit.”188 It notes that this process is both formal and public and is not available ex post.189
187 ACCC Guidelines, above n 176, at 4.4.
188 At 5.2.
189 At 5.3 and 5.4.
Chapter Four: Evaluating the New Section 36 I A Focus on Effects
The new section removes the ‘take advantage of’ element thereby removing the need for a causal nexus between the conduct and the firm’s substantial degree of market power. That element was used as a proxy to assess how competition had been affected by examining the hypothetical conduct of a hypothetical comparator. Instead of relying on those unreliable inferences, the new section requires a direct assessment of how competition has been affected.
The actual or likely effects of conduct are more important than that previous hypothetical inquiry.190 This is because they focus directly on the harm at issue i.e., how competition has been impacted. As the Productivity Commission notes, the actions of a firm in a hypothetical market are “not only harder to pin down, they are also unreliable proxies for market outcomes”.191 In some instances, examining whether there is a causal link between the conduct and a firm’s market power may offer a good proxy, but as has been demonstrated, the inquiry engaged in under the previous s 36 was ill-suited to that task.
A focus on effects also means that the section recognises the proposition that a powerful firm has a greater potential to damage competition than a firm which lacks such power.192 This is a distinction which was lost on the previous s 36. It exculpated any conduct if that conduct would be done by a firm without a substantial degree of market power. This direct focus on harm and recognition that powerful firms have greater anti-competitive potential means that the NZCC and other litigants, in comparison to the previous s 36, will have a much more useful and potent tool to capture and deter anti-competitive conduct.
Nonetheless, there is a concern because, like the previous s 36, the test uses a counterfactual inquiry when assessing effect and likely effect. However, this counterfactual only requires a comparison between the state of competition with and without the conduct, both of which are not entirely removed from reality. This is a relatively easier assessment, and one that Courts
190 Gavil, above n 34, at 1046.
191 Productivity Commission, above n 37, at 132.
192 Caron Beaton-Wells “The Harper Review: Qualified Hope for Australian Competition Law” (2015) 48(4) The Australian Economic Review 417, at 422.
are familiar with, than the previous counterfactual which required first, the construction of a hypothetical comparator and second, the assessment of what it would do in the hypothetical market, both of which are divorced from reality.
A focus on the competitive effects of conduct also aligns with the purpose of the Commerce Act in enhancing competition for the benefit of consumers. The previous section required a purpose to exclude a competitor. However, sometimes damage to competitors is the desired result of competition. This change therefore makes it clear that the concern is with how competition is affected, not necessarily how competitors are affected.
II A Chilling Effect
A recurring concern is that the new section may stifle legitimate competition and protect inefficient competitors. The elimination of inefficient competitors and the subsequent redeployment of their resources to more productive areas of the economy is an integral part of the competitive process193 and a key element of the Schumpeterian creative destruction theory.194 The tendency of the section to create uncertainty and false positives may cause a chilling effect.
A Uncertainty
It is oft recited that firms require a reasonable degree of certainty as to whether their conduct will breach the law. This need has been recognised by the Supreme Court:195
It is important when addressing the statutory concept of use of market power to take an approach which gives firms and their advisers a reasonable basis for predicting in advance whether their proposed conduct falls foul of s 36 and risks a substantial financial penalty.
193 See Productivity Commission, above n 37, at 129.
194 Ricardo Caballero “Creative Destruction” in Steven Durlauf and Lawrence Blume (eds) Economic Growth
(Palgrave Macmillan, London, 2010) 24 at 24.
195 0867, above n 2, at [30].
Without certainty, the decision making of firms can be hindered. This may disincentivise them from innovating or competing on legitimate grounds to the the detriment of dynamic efficiency and therefore long-term consumer benefit.196
Many firms believe that the previous section provided certainty. Air New Zealand considers it offered a good degree of certainty because the purpose of conduct could be assessed at the time it was engaged in.197 MBIE notes that some submitters also believe that the previous test had a relatively simple thought experiment; “would we do this if we didn’t have market power?”198 However, that ostensible certainty belies a more complex and flawed test.
Any change to the section will necessarily result in some uncertainty as the application of a SLC standard to unilateral conduct is novel and unknown. The more pressing certainty issue is that the ‘effect’ limb of the new section holds firms responsible for the unforeseeable consequences of their actions. The analysis of ‘effect’ requires an ex-post assessment, but the actual effect of conduct may not be reasonably foreseeable, or it might be impossible to know, ex ante.199 Reaching an informative conclusion about ‘effect’ would also require the firm to have information it could not and should not know about the market and competitors due to the provisions prohibiting cartel conduct.200 In addition, undertaking such a comprehensive assessment may require onerous information gathering and analysis.201 This may be justified in larger markets like the European Union and the United States, where firms and regulators have comparatively more resources, than in smaller markets like New Zealand and Australia.202
However, two points can be noted here. First, it is unlikely that a firm will be completely blind as to how its conduct will affect the market. This excludes those instances where an intervening event drastically transforms the conduct so that it substantially lessens competition, which will be rare in any event. Second, the aim of the section is to encourage and protect competition. Achieving that goal may often be at odds with using a standard which exonerates conduct
196 Productivity Commission, above n 37, at 128.
197 At 128 citing Chris Bowden “Boosting productivity in the services sector: Air New Zealand response to 2nd interim report” (Air New Zealand, 14 March 2021) at 1.
198 MBIE, above n 37, at 14.
199 Brent Fisse, "Misuse of Market Power: Improving the Australian SLC Model," (2020) 48(5) ABLR 450 at 450.
200 Russell McVeagh “Submission to the Economic Development, Science, and Innovation Committee on the Commerce Amendment Bill 2021” (30 April 2021) at 6.
201 Productivity Commission, above n 37, at 129.
202 At 129.
because its effects were not reasonably foreseeable. Although, this does mean that firms who wish to engage in conduct but do not have the satisfactory means of ascertaining its effect may be hesitant to engage in it.
There are two further points of note. First, identifying the relevant counterfactual in the SLC test may create uncertainty. Bell Gully notes the irony in this given the proposed amendment sought to remove these difficulties.203 Second, uncertainty may be mitigated because these types of analyses are undertaken with other sections, like s 27.204 However, although the sections may appear similar, as Allens Linklaters notes, the reality of compliance differs between unilateral sections and contract, arrangement, and understanding sections.205 Compliance with the latter “can be structured by businesses into the normal legal process of contract review and internal sign-off”.206 The former requires assessing any activity done by a firm with market power which presents a more complex and “markedly different compliance exercise”.207
B False Positives
There is a concern that the new section may capture economically beneficial conduct and create false positives. This is because it mistakenly treats all conduct which substantially lessens competition as worthy of condemnation. Two examples are discussed below.
Buddle Findlay, in its submissions to MBIE, provides an exaggerated, albeit interesting, example:208
... if a firm with a substantial degree of market power identified a new way to produce a product or service that would substantially cut costs (i.e., innovation), and the likely effect of developing
203 Glenn Shewan, Torrin Crowther, Penny Pasley and Chloe Kannangara “Government to strengthen laws against anti-competitive conduct by firms with market power.” (19 June 2020) bellgully.com
<https://www.bellgully.com/insights/government-to-strengthen-laws-against-anti-competitive-conduct-by- firms-with-market-power/>.
204 MBIE, above n 37, at 20.
205 Allens Linklaters “Harper Review Submission” allens.com.au
<https://www.allens.com.au/globalassets/pdfs/insights/competition-consumer- regulatory/harperreviewsubmission.pdf> at 1.
206 At 1.
207 At 1.
208 Buddle Findlay “Submission to the Economic Development, Science, and Innovation Committee on the Commerce Amendment Bill 2021” (30 April 2021) at 3.23.
that product or service would be to put most of the firm’s competitors out of business, it appears that pursuing that innovation could breach the proposed new section 36.
Although the ACCC would consider this conduct to be acceptable,209 Buddle Findlay suggest that all the elements of the section would prima facie be met.210 Buddle Findlay did not elaborate on its reasoning, however competition may have been substantially lessened in two ways. First, the conduct has removed all other competitors therefore eliminating all rivalry and the constraints those firms placed on the incumbent. Second, innovation can lower costs or increase product quality, or both. Those improvements make it more difficult for competitors to enter the market. Therefore, on one view, the barriers to entry have been raised and so the constraints offered by potential entrants have decreased.
However, the first conclusion relies on the presumption that eliminating competitors is anti- competitive. As has been argued, this may or may not be the case. Where competitors are eliminated on ‘merit’, as above, competition law should not intervene as that is the type of behaviour competition intends to promote. Furthermore, if the above improvements were considered as ‘barriers to entry’ an absurd outcome would arise whereby a less efficient firm could argue that because their competitor has a lower cost of production or produces a better product then it is entitled to pursue an action under s 36. It is also odd given that the same outcome could be achieved by a firm without a substantial degree of market power and would not be subject to action under s 36.
Russell McVeagh provides another example:211
... a firm with a substantial degree of market power should be permitted to refuse to supply a downstream customer/competitor irrespective of the likely effect or effect on competition where the customer is a bad debtor, has become a credit risk, presents a downstream safety risk to consumers (e.g. because it does not observe safe business practices), or has failed to observe its reasonable contractual obligations.
209 See ACCC Guidelines, above n 176, at 4.3 and 2.22. The ACCC explicitly considered such conduct to be acceptable and their ‘commercial rationale’ assessment may also exonerate the conduct.
210 Buddle Findlay, above n 208, at 3.24.
211 Russell McVeagh, above n 200, at 14.
This refusal is based on a legitimate business justification.212 That justification could be considered a barrier to entry. Because of these raised ‘barriers to entry’ the downstream firm is unable to compete. Therefore, the rivalry and the constraints that competitor would impose on others have been eliminated. As a result, there may be a SLC.
Parliament’s intent could not have been for these examples to be prohibited even if, on one view, they raise entry barriers and decrease rivalry. That would allow for inefficient and risk- laden competitors to bring claims, stymie commerce, and chill competition. No one would suggest that a firm should be obliged to supply a downstream competitor who is a credit risk or not produce a cheaper or higher quality product. However, this intent is not clear from the statutory wording. Currently, there is no “clear avenue”, apart from authorisation, for this kind of conduct to be lawful.213 The problem is that the section does not distinguish between a lessening of competition resulting from ‘competition on its merits’ or ‘legitimate business conduct’ and a lessening resulting from illegitimate competitive behaviour.
MBIE attempted to appease these concerns by stating that it would be unlikely that the Court would take the view that conduct like the above would be a SLC.214 As noted, the ACCC has also made clear that this kind of conduct would not be pursued by them.215 The same would be expected of the NZCC. Nonetheless, it is “extremely unsatisfactory” for firms to have to rely on an assumed view of the law.216 Particularly when those assumed views appear to be contrary to a plain reading of the section. As a result, firms will have no reasonable basis for discerning whether their conduct will amount to a contravention. The concern here is not just with the above examples, which are clearly not intended to be caught, but also with more marginal conduct in which the ‘competition on its merits’ or ‘legitimate business conduct’ element of the behaviour may be less obvious or subject to debate.
In addition, enforcer discretion will not be able to be relied upon to avoid these issues because, while the NZCC may not challenge this conduct, there is still the potential for litigation as the large majority of cases are threatened or filed by private litigants.217 Therefore, it may be up
212 See Russell McVeagh, above n 200, at 13.
213 Buddle Findlay, above n 208, at 3.25.
214 MBIE, above n 37, at 24.
215 ACCC Guidelines, above n 176, at 4.3.
216 Buddle Findlay, above n 208, at 3.21.
217 See Russell McVeagh, above n 200, at 16.
“to the judiciary to try and make the prohibition workable.”218 Buddle Findlay contends, however, that “if is intended that certain types of conduct should be excluded from the scope of 36, that should be addressed in legislation.”219
III A Misconception About Overreach?
The ACCC submitted to the Harper Panel that there appeared to be a misconception about the risk of overreach stating that the elimination of competitors “is not necessarily evidence of a lessening of competition” and that firms who create better products and more efficient processes and pass savings on to consumers will be “enhancing competition, not lessening it.”220 The NZCC also noted this and stated:221
[The test] is about preserving the process of competition by ensuring that firms do not put in place obstacles that mean its competitors are unable to enter and expand based on the merits of their own products and services. A firm which offers better products or better services and so ‘beats’ its competitors has not lessened competition as that term is correctly understood.
Katharine Kemp also states that “gains in dynamic efficiency are not merely an outcome of competition but a manifestation of competition itself: that is, innovation is a means of competing and increasing competition.”222
These statements provide an elucidation of the intended meaning of the section. However, the gloss they add is not clear from a plain reading of the section. The statements do not resolve the concern that a plain reading may condemn ‘competition on its merits’ and ‘legitimate business conduct’. It therefore does not appear that there is a ‘misconception’ of overreach, there may indeed be, at least theoretically, overreach and consequently a risk that ‘beneficial’ conduct will be condemned. However, that overreach will be mitigated by three factors. First, the judiciary is likely to add a gloss to the section to resolve this issue. Second, authorisation
218 See Russell McVeagh, above n 200, at 15.
219 Buddle Findlay, above n 208, at 3.27. See also Russell McVeagh, above n 200, at 15.
220 Australian Competition and Consumer Commission “Submission to the Competition Policy Review – Response to the Draft Report” (26 November 2014) at 52.
221 New Zealand Commerce Commission “Targeted Review of the Commerce Act 1986” (21 July 2016) [New Zealand Commerce Commission] at 22.
222 Katharine Kemp “’The Big Chill'? A Comparative Analysis of Effects-Based Tests for Misuse of Market Power” [2017] UNSWLawJl 19; (2017) 40(2) UNSWLJ 493 at 522.
will be available. Third, the adverse effects of overreach may be avoided by commercial incentives.
A Judicial Gloss
Given the risk of overreach, it would be expected, pragmatic, and necessary for the judiciary to intervene and place a gloss on the section. That gloss should be set down in the first case to consider the new s 36. It should distinguish between a lessening of competition resulting from ‘competition on its merits’ or ‘legitimate business conduct’ and a lessening resulting from illegitimate behaviour. In doing so, it will need to differentiate between those barriers to entry created in the above examples and barriers to entry in the pejorative sense such as predatory pricing and tying or bundling. It will also need to make clear that the elimination of competitors is not per se anti-competitive.
A suggested approach would be for the Court to ask whether “competitors are unable to enter and expand based on the merits of their own products and services.”223 This would resolve the overreach issue and give firms more certainty, but only once the judiciary has settled the law. This is not an extremely desirable result. However, it may be unrealistic to expect the wording of the statute to do everything given the amorphous and technically challenging nature of statutorily defining what anti-competitive conduct is. Leaving the interpretation to the judiciary will avoid this ‘definition problem’ whereby any statutory rule which attempts to precisely define what conduct is and is not caught may lead to unintended instances of over or under capture. Through this flexibility, the judiciary will hopefully be able to sculpt a workable standard through a common-sense approach to the section.
B Authorisation
Authorisation could also mitigate some of these concerns. A firm will be able to request authorisation where it believes its proposed conduct may breach s 36. The addition of an authorisation regime may have even been intended to act as a paradigm shift for unilateral conduct. Where a firm is considering some conduct, like the above examples, which is ostensibly beneficial and justified but may, on a plain reading, breach s 36 then perhaps, instead
223 New Zealand Commerce Commission, above n 221, at 22.
of relying on the section, authorisation is now intended to resolve such an issue. However, a more likely explanation is that this feature was added to align with other SLC sections which also allow for authorisation.224
Furthermore, the authorisation regime has several issues which make it particularly ill-suited to assessing unilateral conduct ex ante. As Brent Fisse states, authorisation is a “bureaucratic, time-consuming and costly solution that requires disclosure of commercial plans to the public and hence to competitors and free-loaders.”225 Fisse also notes several other concerns:226
(a) [it] can only be sought for future conduct, such that planned conduct must be put on hold while the application is considered
(b) [it] may reduce the impact of competitive strategies of the firm by exposing them to scrutiny by customers and rivals
(c) firms may be reluctant to apply for authorisation where application may be seen as an admission the firm possesses SMP
(d) is therefore not the functional equivalent of an efficiency defence
(e) [it] [is subject to possible delay and imposes cost].
This is not to say that authorisation could not be expedited for clear public benefit applications. However, as the process currently stands, it does appear that its theoretical niceties in exculpating conduct are largely supplanted by the practical realities of engaging in the process.
C Commercial Incentives
As MBIE notes in a practical and rather cynical manner, any aversion to risk or uncertainty will likely be constrained by the commercial incentives which encourage firms to compete aggressively and within the bounds of the law to obtain market share and win over customers.227 However, that is an unsatisfactory response to a legitimate concern about the section. The commercial incentives MBIE refers to will be shaped by the substantial penalties which will apply if a firm is found to breach the section.228 Where the section can ostensibly
224 See Commerce Act, s 58.
225 Fisse, above n 199, at 451.
226 At 456 citing Katharine Kemp “Misuse of Market Power – What an ‘Effects Test’ Would Mean for New Zealand” (CLPINZ conference, 19 August 2020) penultimate slide.
227 MBIE, above n 37, at 32.
228 Commerce Act, s 80(2B).
be contravened by legitimate conduct there may be a resulting decrease in the commercial incentives to compete.
IV Alignment with Australia
Aligning New Zealand’s unilateral conduct laws with Australia could bring about a range of benefits. First, there would be lower ‘behind the border’ transaction costs as trans-Tasman firms would only need to be familiar with one rule.229 Second, institutions could share their knowledge and experience.230 In this regard, MBIE notes that consistency between the two countries would promote predictability by allowing both domestic and Australian case law to be drawn on.231 Although there are practical reasons for alignment, New Zealand appears to differ from Australia in the interpretation of the purpose element of the section.
A Objective or Subjective
Whereas Australia takes a subjective approach to purpose, New Zealand takes a mixed objective-subjective approach. The High Court of Australia stated in News Limited that a mixed approach is not the “product of reasoned statutory interpretation” and that s 4F impliedly acknowledges that purpose is subjective.232 Furthermore, an objective approach gives undue weight to ‘effect’ when there is a clear distinction between purpose and effect.233 Paul Scott agrees stating that “if courts could infer purpose from effect and likely effect it would leave the purpose limb capturing nothing that the other limbs did not catch.”234
In ANZCO, Glazebrook J took an objective-subjective approach to purpose.235 Glazebrook J noted that it would be contrary to the intended mischief of the section if a party could escape liability based upon a subjective assessment of purpose.236 Her Honour also recognised that there may be some role for subjective evidence.237 Furthermore, Glazebrook J stated that: 238
229 Productivity Commission, above n 37, at 135.
230 At 135.
231 MBIE, above n 37, at 24.
232 News Limited, above n 127, at [63]; and see Competition and Consumer Act 2010 (Cth), s 4F.
233 News Limited, above n 127, at [63].
234 Scott, above n 126, at 175.
235 ANZCO, above n 129, at [257] and [258].
236 At [260].
237 At [261]. See n 129 for full quote.
238 At [262].
[The Commerce Act] regulates only those activities that threaten competition and is based on the premise that normally the market should be left to operate by itself. It would be inconsistent with such a philosophy to regulate wishful thinking that could in fact objectively have no anticompetitive effect.
Her Honour also noted the comments of McGechan J and R G Blunt in Union Shipping NZ Ltd v Port Nelson Ltd who were reluctant to adopt an entirely subjective approach. They considered that “an objective assessment of state of mind has much to commend it in the commercial field. Subjectivity of purpose was more natural to the criminal law.”239 As a result of taking a predominantly objective approach, Glazebrook J applied the counterfactual test to purpose. This contrasts with Australian authority where it is considered “meaningless and distracting to discuss the world with and without the purpose.”240
Young J disagreed with Glazebrook J, stating that if an objective purpose were taken, the elements of “effect” and “likely effect” would do all of the work “leaving nothing (or next to nothing) to be covered by “purpose”.241 Furthermore, s 2(5) of the Commerce Act, which is substantially similar to Australia’s s 4F, did not appear consistent with an objective approach.242 However, his Honour refused to give any determinative assessment as the question was not directly in issue.243
The Court of Appeal in Port Nelson Ltd v Commerce Commission thought that the distinction was unimportant in practice. This was because:244
There will be very little difference in most cases between ascertaining subjective purpose by inference from what was said and done and ascribing objectively a purpose from evidence of what was said and done.
239 ANZCO, above n 129, at [252] citing Union Shipping, above n 40, at 709.
240 Australian Competition & Consumer Commission v Liquorland (Australia) Pty Ltd [2006] FCA 826, (2006) ATPR 42-123 at [802].
241 ANZCO, above n 129, at [145].
242 At [145].
243 At [147].
244 Port Nelson Ltd v Commerce Commission, above n 131, at 564.
This will be useful where the firm in question has “received capable competition law advice and sanitised any documents.”245 In the more recent case of Lodge Real Estate Ltd v Commerce Commission, the Supreme Court declined to resolve the objective/subjective debate as it was not in argument.246
B Impossibility
New Zealand and Australian case law also differs on whether the impossibility of an effect negates purpose. In New Zealand, the approach taken is unclear. Young J in ANZCO stated that there is no need to demonstrate an effect or likely effect for there to be the requisite purpose.247 This was because first, requiring an effect or likely effect would “equate purpose with effect and likely effect”,248 and second, due to the “uncertainties, expense and imperfections” in assessing an anti-competitive effect or likely effect, the Court should ease the burden of deeming conduct a breach where it is permissive to do so.249 Glazebrook J disagreed stating that if an effect or likely effect could not be achieved then, assessed objectively, there could be no purpose.250 Her Honour stated: “I am unable to attribute to AFFCO a purpose (end in view), whether subjectively or objectively, which it must have been perfectly well aware it could not achieve.”251
In Australia, the impossibility of an effect does not negate purpose. The Full Court of the Federal Court of Australia in Universal Music stated that “A person may have the purpose of securing a result which it is, in fact, impossible for that person to achieve.”252 The Court treated purpose as an alternative to likely effect and effect given the clear disjunctive nature of the section.253 The Court in Seven Network Ltd v News Ltd also stated that:254
245 Scott, above n 126, at 181.
246 Lodge Real Estate Ltd v Commerce Commission [2020] NZSC 25, [2020] 1 NZLR 238 at [172].
247 ANZCO, above n 129, at [152].
248 Scott, above n 126, at 186 citing ANZCO at [145] and [147].
249 ANZCO at [152].
250 At [257].
251 At [278].
252 Universal Music, above n 148, at [249].
253 At [249].
254 Seven Network Ltd v News Ltd [2009] FCAFC 166, (2009) 182 FCR 160 at [897].
Such an inquiry would be, in effect, an inquiry into whether the provision had the likely effect of substantially lessening competition in that market. That approach would obviate or blur the distinction between purpose and likely effect or effect.
Paul Scott agrees with this approach because “Parliament does not legislate redundancies.”255 Scott also notes that purpose “serves as a surrogate or predictor of effect” and that if “the parties believe they can successfully lessen competition, courts should accept that belief.”256 Scott believes this is justified because:257
A party who says there should be no liability in these circumstances is saying we tried to behave anticompetitively, but due to circumstances beyond our control, we failed.258 That they were wrong is no reason to condone their behaviour.
C Conclusions on Purpose
New Zealand Courts will need to confront these interpretative differences head on to resolve the inconsistencies they create and, in doing so, decide if New Zealand will follow Australia. Until these inconsistencies are resolved, the benefits of cross-border congruity will be of less weight and the major Australian related justification will be that because Australia changed New Zealand should too. As the legislation currently reads, the changes that Scott suggests do appear warranted.259
First, a subjective approach to purpose should be taken. An objective approach creates redundancies and does not fit with a plain disjunctive reading of the section. Second, the impossibility of an effect or likely effect should be irrelevant as to purpose. This will again avoid redundancies. This will have the added effect of enhancing administrative efficiency as conduct with a clear purpose can be dealt with without needing to assess effect or likely effect.
255 Scott, above n 126, at 172.
256 At 172.
257 At 172.
258 At 172 citing Phillip Areeda “The Changing Contours of the Per Se Rule” (1985) 54 Antitrust LJ 27 at 28.
259 At 192.
V False Negatives
The new section may also fail to deter conduct designed to illegitimately eliminate competitors. As the Productivity Commission illustrates:260
... a monopolist might arbitrarily eliminate a party from a market (for example, by refusing to supply a required input) without necessarily lessening competition to a substantial degree if other participants remain.
This has been referred to as the ‘Kronos Effect’.261 Kronos was a Greek Titan who, on the warning of an oracle, ate all his children to prevent any of them from dethroning him. As Scott explains, the “Kronos effect is a dominant firm's efforts to consume its potential successors in their infancy.”262 The SLC standard might permit this kind of illegitimate conduct to occur because those small firms who are ‘eaten’ may be so insignificant that their elimination does not amount to a SLC.263 In contrast, the previous s 36 would most likely have captured this kind conduct.264
However, this analysis fails to consider two points. First, a ‘lessening’ includes a prevention or hindering of competition. A Kronos-like firm who systematically excludes small competitors from competing may be ‘preventing or hindering’ competition. In addition, the assessment of competition is a relative concept. Therefore, where a firm with a substantial degree of market power, like a monopolist, illegitimately excludes small competitors, the effect on relative competition will be greater than it would be in an otherwise competitive market.
VI New Zealand’s Unique Market and International Competitiveness
Matt Sumpter contends that in New Zealand there is often a trade-off between “maintaining local competition” and the need for firms to “reach a sufficient scale in order to compete effectively in this country and offshore.”265 As New Zealand is a a trading nation which does
260 Productivity Commission, above n 37, at 134.
261 Scott, above n 172, at 290 citing Tim Wu The Master Switch: The Rise and Fall of Information Empires
(Atlantic Books, London, 2010) at 24–27.
262 At 291.
263 At 291.
264 At 291.
265 Sumpter, above n 136, at 22.
rely on ‘national champions’, it is prudent to consider the consequences that different rules would have for these firms.266
Those in favour of retaining the previous s 36 argue that New Zealand “has higher concentration in its markets, which is to be expected and is desirable if firms are to achieve economies of scale.”267 Therefore, overly zealous action against those firms may result in a detriment to the economy.268 This may occur under the new s 36 which appears to have the potential to be overzealous. A more ‘lenient’ rule would not unnecessarily hinder large firms from reaching the scale necessary to compete both domestically and internationally. To be clear, this is not a request for an ineffective rule. It is an argument that when considering two rules, one which systematically fails to capture some anti-competitive conduct, and another which systematically captures beneficial conduct, then the former should be favoured so that firms can, without undue impediment, reach the scale necessary to compete. This is particularly so when the incorrect condemnation of beneficial conduct is perpetuated by the doctrine of stare decisis.269
However, there is another side to this coin. As Mark Berry notes, New Zealand is characterised by high degrees of market concentration, high entry barriers, and inefficient levels of production.270 The first two factors, along with New Zealand’s small size, mean that the domestic market is unlikely to exhibit desirable competitive dynamics.271 Because of these highly concentrated markets, firms with market power have a greater potential to cause damage to the competitive process. Economies of scale may themselves become barriers to entry and increase the risk of market power enduring.272 This means that competitive challenges are especially valuable and “a standard for judging unilateral conduct that tends toward protecting the status quo may well have adverse long-term consequences for the economy's dynamism.”273
266 See Michael Porter “Competition and Antitrust: Toward a Productivity-Based Approach to Evaluating Mergers and Joint Ventures” (2001) 46(4) The Antitrust Bulletin 919 at 932.
267 Productivity Commission, above n 37, at 131.
268 At 131.
269 See Easterbrook, above n 60, at 2.
270 Berry, above n 56, at 128.
271 At 128.
272 (4 April 2001) 591 NZPD 8734.
273 Gavil, above n 34, at 1062.
In addition, ‘national champions’ will benefit from this increased domestic competition. If firms are not forced to compete at home they may lose their international competitiveness.274
Consideration of New Zealand’s unique market structure and international competitiveness can lead reasonable minds down either path; a systematically over or under inclusive rule. However, it does not lead the same person to the conclusion that a wholly ineffective rule should be used. The previous s 36 was ineffective. Therefore, this makes it unsuitable for any rigorous comparison with the new section in this part. The new section does appear to be over inclusive and that may have a detrimental or beneficial impact upon New Zealand’s international competitiveness. Nonetheless, it will ensure that competitive challenges are able to be made.
274 Porter, above n 266, at 932.
Chapter Five: Alternatives
This chapter recommends some amendments to s 36 which intend to respond to the main substantive difficulties arising from the new section. The first is the removal of the purpose element of the SLC test. The second involves either the addition of an exclusionary purpose element or a legitimate business justification defence. Removal of the purpose element should take place regardless. However, the two other amendments serve as alternatives to the judicial ‘gloss’ described previously.
I Remove Reference to Purpose
The purpose limb of the section should be removed so as to only require the likely effect or effect of substantially lessening competition. Its inclusion is inconsistent with how the section should work and is unnecessary.
It is submitted that a mixed objective-subjective approach is the most pragmatic interpretation of purpose given that in most cases inferences will have to be drawn from conduct and other circumstances as well as relying on direct evidence of the parties.275 However, as has been demonstrated, a subjective approach is the more appropriate interpretation of the section. Although it is more appropriate, a subjective assessment of purpose is unreliable because it may be “indeterminate, mistaken, self-preferring or the product of simple inattention.”276 Given that a subjective approach to purpose may be misleading, its use as an indicator of what could be harmful conduct is unsound.277
The inclusion of purpose as an alternative to likely effect or effect also distracts from what the logical “exclusive concern” of the prohibition should be. 278 That is the “actual or potential (in the sense of likely) anti-competitive impact of the conduct by a powerful firm.”279 The anti- competitive impact is what causes harm to the economy and is what the Commerce Act directs
275 Dellow and Parker, above n 158, at 35.6.1.
276 Katharine Kemp “Submission in Response to The Treasury Discussion Paper on Options to Strengthen the Misuse of Market Power Law: A Third Way: Objective Anticompetitive Purpose” (12 February 2016) at 22. 277 Scott, above n 126, at 172.
278 Beaton-Wells, above n 192, at 422. Note, although ‘likely effect’ does not necessarily result in competitive harm it is a necessary element as without it one would have to wait for competitive the harm to arise before pursuing a claim.
279 At 422 and 423.
consideration toward.280 A purpose to substantially lessen competition is not necessarily concomitant with a likely effect or an effect. Nor does the demonstration of a benign purpose necessarily provide any meaningful analysis as to the effect or likely effect. In fact, there does not need to be a likely effect or effect for purpose to be established. The concern this creates was highlighted in ANZCO where Glazebrook J stated that it would be at odds with the Commerce Act “to regulate wishful thinking that could in fact objectively have no anticompetitive effect.”281 Instead, unilateral conduct rules should focus on the “economic consequences, not the hearts and minds of dominant firms.”282
In any event, even if the more pragmatic objective-subjective approach to purpose were taken, the likely effect limb appears to capture the kind of conduct that that formulation of purpose is intended to capture. In addition, it does not capture effects which are impossible, given that they must be likely. One could argue that the removal of the purpose element would hinder the capture of conduct carried out for an anti-competitive purpose, but which never eventuates because of an intervening event. That would be true, but the likely effect limb also captures that kind of conduct. Analysis of the likely effect is a retrospective assessment of what was likely at the time the conduct was engaged in.283 This means that conduct with a likely effect of substantially lessening competition which, for whatever reason, did not eventuate would still be caught. The likely effect limb is therefore a better indicator than the purpose limb and captures the type of conduct which the purpose limb is unnecessarily used for.
It is submitted that purpose should also be removed from s 27. However, one argument against this is that purpose may be more appropriate under s 27 given that those cases involve analysing the purpose of a specific provision.284 In contrast, s 36 cases involve evaluating the purpose of a firm’s conduct. It appears to be a more straightforward and insightful task to assess the purpose based upon a worded provision than relying on, what is in most cases, an inference based on conduct.
The purpose element is also easier to satisfy than engaging in an effects-based analysis. This was noted by Young J in ANZCO where he stated that due to the “uncertainties, expense and
280 Commerce Act, s 1A.
281 ANZCO, above n 129, at [262].
282 Kemp, above n 276, at 22.
283 Commerce Commission v Port Nelson Ltd, above n 133, at 103,780.
284 Giltrap City Ltd v Commerce Commission [2004] 1 NZLR 608 (CA) at [73].
imperfections” in assessing effect or likely effect, the Court should ease the burden of deeming conduct a breach where it is permissive to do so i.e., by not requiring an attendant likely effect or effect when establishing purpose.285 It is odd for two disjunctive elements, purpose and likely effect, which involve similar considerations and the same resulting penalties to differ in their ease to satisfy.286 This allows potential litigants to shop around and choose purpose over likely effect or effect. This is harmful because it incentivises the use of a purpose element which may be misleading, which is inconsistent with what the aim of the section should be, and which is made redundant by the likely effect limb.
II Add an Exclusionary Purpose Element or a Legitimate Business Justification Defence
These additions attempt to define the scope of the section more appropriately. They do this by providing a mechanism to distinguish between a lessening of competition resulting from ‘competition on its merits’ or ‘legitimate business conduct’ and a lessening resulting from illegitimate behaviour. They would also mitigate the risk of at least one unlucky firm being subjected to a costly and protracted privately litigated test-case in order to obtain the aforementioned judicial gloss.
A Exclusionary Purpose
MBIE considered the inclusion of an exclusionary purpose element, similar to that in the previous s 36, under ‘option 2’ and provided one possible formulation:287
(3) A person that has a substantial degree of power in a market must not engage in conduct that
(a) is for an exclusionary purpose; and(b) has, or is likely to have, the effect of substantially lessening competition.
Katharine Kemp contends that incorporating an exclusionary element, not an exclusionary purpose per se, would clarify that “the provision is concerned with conduct which tends to
285 ANZCO, above n 129, at [152]; and Scott, above n 126, at 186.
286 Similar considerations will occur where an objective-subjective approach to purpose is taken. See News Limited, above n 127, at [63]; and ANZCO, above n 129, at [145].
287 MBIE, above n 37, at 25; and Buddle Findlay, above n 208, at 3.30.
exclude competitors.”288 Likewise, this element would clarify that the section is concerned with conduct done with the purpose to exclude.
This element may prevent legitimate conduct like innovation and refusals to supply risk-laden competitors from being captured by s 36. Purpose “means more than a broad, diffuse desire to stymie rivals, or prevent the erosion of one’s market share: it requires a distinct, focused, anti- competitive ‘object or aim’.”289 The distinct object of innovation is not to exclude but to stymie rivals by producing a better product. The distinct object of refusing to supply a risk-laden competitor is to ensure payment. It may be that exclusion is done under the guise of a credit- risk justification but that is something which could be examined under an exclusionary purpose assessment. As Ahdar notes, while the line between a general desire to stymie competitors and a targeted aim to deter a particular competitor is conceptually clear it may be difficult to draw in practice.290 Nevertheless, “judges are well used to discerning the fine nuances and shades of intent” and “there is little reason to believe they could not so here.”291
Inclusion of this purpose element would also reduce the likelihood of firms being responsible for the unforeseeable consequences of their conduct. Firms tend to have substantially more information about the purposes for which they act than the effect of their conduct.292 This would therefore increase business certainty and minimise the risk of false positives.
Although the failings of the purpose limb associated with the SLC test have been canvassed in this dissertation, the way in which this element is formulated is different. It is true that the anti- competitive effect of conduct is more important than the “hearts and minds of dominant firms.”293 However, the suggested formulation will focus on the more practical objective- subjective interpretation, consistent with the previous s 36, as a subjective approach may be misleading.294 This depends less on the heart and mind of a firm. In addition, although this change does focus one part of the section on competitors, not competition, a criticism of the previous section, that concern is mitigated because the section also requires, in conjunction, an assessment of how competition itself has been or is likely to be affected by the conduct. In this
288 Kemp, above n 222, at 524.
289 Ahdar, above n 50, at 304 citing Union Shipping, above n 40, at 707.
290 At 305.
291 At 305.
292 Harper Panel, above n 37, at 341.
293 Kemp, above n 276, at 22.
294 See Commerce Act, s 36B.
way, the amendment attempts to strike a better balance between that focus on effects whilst limiting the capture and deterrence of beneficial conduct.
B Legitimate Business Justification
This defence would allow conduct which is “demonstrably justified to protect a legitimate business interest”.295 Russell McVeagh provides one possible formulation.296 This formulation, when combined with a SLC test removed of purpose, reads as follows:
(1) A person that has a substantial degree of power in a market must not engage in conduct that has, or is likely to have, the effect of substantially lessening competition...
...
(3) Nothing in this section applies to any conduct carried out by a person where that person can demonstrate that:
(a) it engaged in the conduct for the dominant purpose of protecting a legitimate business interest; and(b) the conduct was reasonably necessary to protect that legitimate business interest.
Russell McVeagh states that this defence would be suitable where the legitimate business conduct is “clearly outside the scope of what the Government intends to prohibit.”297
This defence would give firms greater certainty in their affairs and ensure that conduct like innovation and refusals to supply risk-laden competitors would not be caught. However, what a legitimate business interest is and whether the conduct was ‘reasonably’ necessary’ to protect such interests are difficult questions of judgement. Such questions of commercial judgement may even be outside the Court’s expertise and decision making capacity.
The concept of a legitimate business interest may be very broad. It would clearly include innovation and refusals to supply risk-laden competitors. However, whether it would include the maintenance of an anti-competitive vertical supply arrangement is a more difficult question. There may be a ‘legitimate business interest’ in protecting that structure, especially when a
295 Russell McVeagh, above, n 200, at 13.
296 See recommendations under “We recommend an amendment to Clause 14” at 5.
297 At 13.
firm made use of the structure prior to obtaining a substantial degree of market power.298 A more exposing question is whether there is a legitimate business interest in being the sole market participant or in maximising profits.
It is tempting to define a legitimate business interest as an interest that a firm without a substantial degree of market power would have. However, that would raise the same difficult questions posed by the previous s 36, now with the onus reversed. It could be an interest which is not exclusionary. However, that would essentially be the same as the exclusionary purpose element discussed above but with the onus reversed.
The impression from the foregoing is that defining a legitimate business interest may raise more questions than it seeks to answer. The suggested defence may also involve many ‘public benefit’ considerations and so cut across the authorisation process, making it redundant. In addition, the NZCC has greater experience and expertise in those matters and is therefore better placed than the Court to perform those types of analyses.
Nonetheless, Russell McVeagh argues that this approach is better because it frames the legislative provision appropriately and does not leave the ‘difficult’ cases to the discretion of the NZCC, which would be fine, except that, as noted, many cases are threatened by private litigants.299 Furthermore, as has been argued, the judiciary will likely have to add a gloss to the section to avoid an absurd literal interpretation. That gloss may in essence be a legitimate business justification test of some description. If that is the case, it could be considered more appropriate to legislate that standard in than to leave it to the discretion of the Courts.300
298 See Melway Publishing Pty Ltd v Robert Hicks Pty Ltd t/as Auto Fashions Australia [2001] HCA 13, (2001) 205 CLR 1.
299 Russell McVeagh, above n 200, at 15 and 16.
300 See Buddle Findlay, above n 208, at 3.27.
Conclusion
Mark Berry states that “the history of antitrust reflects a ‘continuing, and perhaps never ending, search for an appropriate [monopolization] rule.’”301 The amendment to s 36 aptly represent this philosophy. These amendments are welcome and refreshing given the poor state of the previous section. That section and the way in which the ‘take advantage of’ element had been interpreted meant that it was based on unreliable inferences, complex, unpredictable, and flawed. The new section is an improvement because it focuses directly on the effect to competition.
However, there are still concerns. On a plain reading the section does not distinguish between a lessening of competition resulting from ‘competition on its merits’ or ‘legitimate business conduct’ and a lessening resulting from illegitimate competitive behaviour. Furthermore, firms will have a difficult time knowing ex ante whether their conduct will be in breach of the section. This dissertation has suggested that, although the NZCC will not pursue certain conduct, it is likely that the Court will place a ‘gloss’ on the section to avoid an absurd interpretation and provide firms with greater certainty.
The proposed amendments seek to highlight and remedy the issues with the new section. The purpose limb of the SLC test should be removed regardless because it is an unnecessary element which distracts from what the concern of the section should be. The addition of an exclusionary purpose element or a legitimate business justification defense would act as an alternative to relying on a judicial gloss and would re-assure firms that ‘competition on its merits’ and ‘legitimate business conduct’ are acceptable.
With this amendment, the NZCC and other litigants have obtained a potent tool to combat anti- competitive conduct. Balanced use of this tool will improve competition. However, there are legitimate concerns with the section which will need to be addressed at the earliest opportunity, whether by the judiciary or the legislature. Therefore, the dice may need to be rolled a few more times before the section can pass go.
301 Berry, above n 56, at 146.
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2. Australia
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Australian Competition and Consumer Commission v Pfizer Australia Pty Ltd [2015] FCA 113, (2015) 323 ALR 429.
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B Legislation
Commerce Act 1986.
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2. Australia
Competition and Consumer Amendment (Misuse of Market Power) Bill 2017 (Cth).
C Books and Chapters in Books
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Katharine Kemp “Uncovering the Roots of Australia's Misuse of Market Power Provision: Is It Time to Reconsider?” (2014) 42(5) ABLR 329.
Katharine Kemp “'Taking Advantage' of Substantial Market Power, and Other Profit-Focused Tests for Unilateral Anticompetitive Conduct” [2015] MonashULawRw 23; (2016) 41(3) Mon LR 655.
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Lyn Stevens and David Round “The Commerce Act 1986—A Legal and Economic Commentary upon Some Fundamental Concepts” (1987) 12 NZULR 231.
Matt Sumpter “The Politics and Practice of New Zealand Competition Law” (2021) 66(4) The Antitrust Bulletin 462.
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E Parliamentary and Government Materials
Hon Dr David Clark MP “Stronger regulation to promote competition passes third reading” (Beehive press release, 30 March 2022).
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Hon Kris Faafoi MP Review of Section 36 of the Commerce Act and Other Matters: Policy Decisions (Ministry of Business, Innovation, and Employment, 18 February 2020).
(4 April 2001) 591 NZPD 8734.
(16 March 2021) 750 NZPD 1411.
(17 March 2022) 758 NZPD 8296.
2. Australia
Australian Competition and Consumer Commission Guidelines on the Misuse of Market (31 August 2018).
F Reports
Ian Harper, Peter Anderson, Su McCluskey, and Michael O’Bryan Competition Policy Review Final Report (The Treasury, March 2015).
Productivity Commission Boosting productivity in the services sector (May 2014).
G Internet Resources
Allens Linklaters “Harper Review Submission” allens.com.au
<https://www.allens.com.au/globalassets/pdfs/insights/competition-consumer- regulatory/harperreviewsubmission.pdf>.
Neil Anderson “What if we deep six section 36 and counterfactual? What then?” (1 April 2014) thelawyermag.com <https://www.thelawyermag.com/au/archived/what-if-we-deep-six- section-36-and-counterfactual-what-then/208839>.
Commerce Commission “Fact Sheet, The Commerce Act, Agreements that substantially lessen competition” (July 2018) comcom.govt.nz < https://comcom.govt.nz/ data/assets/pdf_file/0025/90961/Agreements-that-substantially- lesson-competition-Fact-sheet-July-2018.pdf>.
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New Zealand Commerce Commission “Court of Appeal upholds Commerce Act breach by Carter Holt Harvey” (9 November 2001) comcom.govt.nz <https://comcom.govt.nz/news-and- media/media-releases/archive/court-of-appeal-upholds-commerce-act-breach-by-carter-holt- harvey>.
Glenn Shewan, Torrin Crowther, Penny Pasley and Chloe Kannangara “Government to strengthen laws against anti-competitive conduct by firms with market power.” (19 June 2020) bellgully.com <https://www.bellgully.com/insights/government-to-strengthen-laws-against- anti-competitive-conduct-by-firms-with-market-power/>.
H Theses
William Barris “Window dressing: the Commerce Amendment Act 2001 and policing the misuse of market power in New Zealand” (LLM Research Paper, Victoria University of Wellington, 2002).
I Other Resources
Australian Competition and Consumer Commission “Submission to the Competition Policy Review – Response to the Draft Report” (26 November 2014).
Chris Bowden “Boosting productivity in the services sector: Air New Zealand response to 2nd interim report” (Air New Zealand, 14 March 2021).
Buddle Findlay “Submission to the Economic Development, Science, and Innovation Committee on the Commerce Amendment Bill 2021” (30 April 2021).
Katharine Kemp “Submission in Response to The Treasury Discussion Paper on Options to Strengthen the Misuse of Market Power Law: A Third Way: Objective Anticompetitive Purpose” (12 February 2016).
Katharine Kemp “Misuse of Market Power – What an ‘Effects Test’ Would Mean for New Zealand” (CLPINZ conference, 19 August 2020).
New Zealand Commerce Commission “Targeted Review of the Commerce Act 1986” (21 July 2016).
RBB Economics “Response by RBB Economics to proposals relating to the misuse of market power and the introduction of ‘concerted practices’” (November 2014).
Russell McVeagh “Submission to the Economic Development, Science, and Innovation Committee on the Commerce Amendment Bill 2021” (30 April 2021).
Paul Schoff “Submission on Draft Report of the Competition Policy Review” (Minter Ellison, November 2014).
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