Section 36 of the Commerce Act back in the spotlight

The Government’s focus on competition law reform continues.  Last week, the Ministry of Business, Innovation & Employment (MBIE) released a Discussion Paper, Review of Section 36 of the Commerce Act and Other Matters which proposes that New Zealand should follow Australia and adopt an “effects” based test for our unilateral conduct prohibition.

Déjà vu?

If you think you’ve read this before, you’re almost right.  In November 2015, MBIE released an Issues Paper, which considered options to deal with what it viewed as the unsatisfactory operation of s36.  MBIE’s view was that the complex counterfactual test element of s36 – which asks, is this how a company would behave in a competitive market? – makes it very difficult for the Commerce Commission to deal with anti-competitive conduct by powerful businesses (see our earlier Alert here).

Since then, Australia has forged ahead, in 2017 adopting an effects based test for misuse of market power.

What is the issue?

Given the small and remote nature of the New Zealand economy, our major markets are inevitably dominated by a few market participants. Proponents for change argue that s36 in its current form is unsatisfactory because the focus on purpose, and application of the complex counterfactual test allows the behaviour of large, powerful firms to proceed unchecked. On the flip side, big business would argue that change creates uncertainty and could deter innovation and other competitive activities.

The Discussion Paper concludes that our current law is not in the long term interests of consumers as competition is distorted by the behaviour of large incumbent businesses. In particular, there is whole raft of conduct that might be harmless absent market power but is harmful where a firm has market power (e.g. bundling or refusals to supply).

What is the current and proposed law?

Section 36 in its current form prohibits a company with a “substantial degree of power in a market” from “taking advantage” of that power for a prescribed anti-competitive purpose.

The proposal is to move to an effects based test:

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 market.

Consistency with Australia and other English speaking jurisdictions is one factor motivating the desire for change; New Zealand is the only country with modern competition law that requires an anti-competitive purpose and does not consider the effects of the conduct.

Other changes on the table

The Commerce Act contains carve-outs for intellectual property rights (IPRs).  Some of these are contained in s36.  The Discussion Paper proposes to remove these carve-outs on the basis that they are either unnecessary (and can be assessed on a case-by-case basis) or may protect potentially anti-competitive use of IPRs.

The Discussion Paper also seeks views on whether s36A of the Act (misuse of trans-Tasman market power) should be retained.

Finally, the Discussion Paper proposes that the new cartel prohibitions should apply to covenants to close an unintentional loophole.

Next steps?

Submissions are due by 1 April 2019. Please contact a member of our competition team if you would like assistance with your submission or to discuss the proposed changes.

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