The Government has this week announced its intention to implement controversial changes to the Commerce Act 1986, which, when implemented, will significantly alter New Zealand's competition law framework.
The most significant change is a fundamental overhaul of the misuse of market power prohibition, replacing the current purpose-based test with a combined purpose and effects test. Other changes include the repeal of the intellectual property (IP) exceptions; an expansion of the cartel prohibition to capture land covenants and an increase in penalties for breach of the mergers prohibition.
Overhaul of misuse of market power prohibition
In early 2019, the Ministry of Business, Innovation and Employment released a Discussion Paper proposing to amend New Zealand's misuse of market power prohibition to move away from the purpose-based test to a combined purpose and effects test, aligned with the equivalent Australian prohibition which was amended in 2017.
The current law prohibits a firm with a substantial degree of market power from taking advantage of that power for an anticompetitive purpose. In practice, it requires firms with market power to ask themselves whether they would adopt the same conduct if they did not have a substantial degree of market power. Traditionally this has provided a pretty clear benchmark for firms to self-assess their own conduct. The NZCC has, however, found it too difficult to enforce.
The proposed reform would prohibit a firm with a substantial degree of market power from engaging in any conduct that has the purpose, effect, or likely effect of substantially lessening competition in a market. During the consultation phase, it was identified that the inability to predict the market outcome of actions will lead to New Zealand's larger businesses simply becoming more conservative in how they act in market. This in turn, potentially lowers the efficiency of the very companies New Zealand needs to be its highest performing because of the breadth of their market impact.
The Minister has rightly acknowledged that, "there are some forms of conduct that could, on the face of it, appear to breach the prohibition, despite not having an exclusionary purpose". 1 However, no defence for firms with a legitimate business justification have been included in the proposed reform. Instead businesses are asked to trust that the NZCC will not take such cases, and if they do, that the courts should not find a breach. Having advocated for the inclusion of a business justification defence, we remain of the view that businesses should not be subjected to potentially lengthy and expensive NZCC investigations due to overly expansive legislative drafting, and it is better to have clarity on the scope of the prohibition from the outset.
To help businesses achieve comfort as to the legality of their intended conduct, the proposed reform would also introduce a regime allowing parties to seek authorisation from the NZCC for conduct that may contravene the misuse of market power prohibition, but which is nevertheless in the public interest. Although this may be helpful on a theoretical level, in practice, a great many businesses will likely find this an unworkable solution. In our experience, businesses typically do not have the luxury of putting their proposed initiatives on hold for the many months that an authorisation process typically takes. For these reasons, we remain of the view that inclusion of a legitimate business justification defence would be much better for the business community, and ultimately New Zealand Inc, than relying on authorisation as a safety valve to the expansive nature of the proposed prohibition.
The end of the IP exception
The proposed reforms will also repeal the current IP exception. Our view remains that if these exceptions are repealed, it will result in firms less being less willing to license their IP to others, and there will inevitably be a perceived reduction in the value of IP. The Minister is confident that any issues about the treatment of IP can be dealt with by including a transitional period to allow businesses to review pre-existing IP arrangements and by the NZCC issuing guidelines. However, the interrelationship between IP and competition law is complicated. We expect it will be difficult for the NZCC to prepare meaningful guidance that covers the significant array of potential scenarios.
There is also a question as to whether businesses can place any weight on any NZCC guidelines given that the Court of Appeal has held that the NZCC is not bound by its guidelines and is free to reissue new guidelines, even in the middle of a live investigation. By comparison, the European Union has developed two block exemption regulations to provide legally binding comfort to businesses which satisfy the requirements that their IP arrangements will not be subject to ex-post competition law scrutiny. In this respect, the proposed reform package falls short of international best practice and there is a real risk it will increase uncertainty in New Zealand's business environment.
Cartel prohibition expanded to capture land covenants
The reforms also propose expanding the scope of the cartel prohibition to apply to land covenants in addition to contracts, arrangements and understandings. This was required because the 2017 amendments to the cartel prohibition inadvertently removed land covenants from the scope of the cartel prohibition.
However, we are concerned that this proposal, without the inclusion of any additional defence for legitimate land covenants, will in fact result in land covenants being treated more strictly than other types of agreements. This is because, while the 2017 amendments introduced a range of exceptions to the cartel prohibition (such as the collaborative activities exception), those exceptions are not applicable in the context of land covenants. Ideally, supplementary amendments will be made to the proposed reforms during the legislative process to reflect this.
Penalties increase for anticompetitive mergers
The reform package increases the maximum penalties for corporate entities that breach the prohibition on anticompetitive mergers or acquisitions, to align them with the current maximum penalties for other restrictive trade practices (i.e. the greater of $10 million and three times the value of any commercial gain or 10% of turnover if the commercial gain cannot be ascertained). There is merit in reviewing the penalties given that they have remained unchanged since 1990 and so are out of step with the balance of the regime.
However, the justification provided for the change highlights a broader issue. The justification was that since 2018, the NZCC has investigated eight mergers where clearance was not sought, and the number of investigations has been said to illustrate that the current penalties are not a sufficient deterrent.
However, in the context of a voluntary merger control regime, where the onus is on parties to self-assess whether or not an acquisition complies with the Commerce Act, it should be expected that there will inevitably be a number of NZCC investigations in order for the NZCC to cross-check when it learns of acquisitions that have not been brought to its attention.
To use the number of investigations to demonstrate a problem with deterrence reflects a misunderstanding of the regime. An investigation says nothing about illegality. If the NZCC concludes an investigation without taking any action that suggests that the parties' self-assessment was in fact correct.
A better indicator would be the number of acquisitions that have resulted in the NZCC taking proceedings. This at least indicates that the NZCC was of the view that parties were incorrectly self-assessing the competitive effects of proposed transactions, or behaving in a cavalier fashion, such that an increase in penalties may provide a better deterrent effect. However, we are aware of the NZCC having taken enforcement proceedings in relation to only two acquisitions during that same two-year period.
We query whether the Government's comments about the number of NZCC investigations perhaps signals instead that it is dissatisfied with the existing voluntary nature of New Zealand's merger control regime. It is possible that a move to a compulsory notification regime may be next on the agenda.
If you would like to discuss how the proposed changes could affect your business, or you would like assistance in considering your options for responding to these proposals, please get in touch with one of our experts listed below.