Brian Fallow: Law tweak to Commerce Act to make sure giants play fair

Given the behaviour of this country's supermarket duopoly, it's no surprise the New Zealand Food and Grocery Council supports the law change. Photo / Supplied

OPINION:

Coming soon to a market near you: tougher law to curb the misuse of market power.

The economic development select committee has reported back on the Commerce Amendment Bill, which amends the Commerce Act's section 36, relating to unilateral anti-competitive behaviour by firms with substantial market power.

How ineffectual the current law, drafted in the laissez-faire 1980s and tweaked in 2001, is in this respect is evident in the fact that the Commerce Commission has only ever taken five cases under section 36 (only one of which related to conduct since 2001) and prevailed in only two of them.

And of 45 proceedings taken by private litigants none has resulted in a court finding contravention or ordering damages, though some were settled out of court.

It strains credulity to believe that for a generation now none of the companies with substantial power in New Zealand markets have used or taken advantage of that power to anti-competitive effect. But effect has not been the test; purpose or intent is.

The present section 36 says: "A person that has a substantial degree of power in a market must not take advantage of that power for the purpose of (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 market."

The bill would amend that to: "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 that market."

The law change that now looks set to occur has a deep taproot. The Commerce Commission has long sought it. The Productivity Commission recommended a review of section 36 back in 2014, which the Ministry of Business, Innovation and Enterprise (MBIE) has subsequently carried out.

The problem with the status quo is that the courts, including their lordships on the Privy Council, have ruled that the way to figure out whether section 36 has been contravened is to go through an exercise of the imagination, the counterfactual test, which is to ask themselves if a firm in the same market but without market power would have done what the firm with substantial power is accused of. If they think it might, that is fine, as if the size and market share of the firms made no difference.

The courts, in short, are asked to erect an edifice of speculation on epistemologically boggy ground. It is hard enough to know what is true in the actual world, without being too confident about other possible worlds which we don't inhabit and cannot observe.

Even if you are comfortable with such counterfactual thought experiments, economist Donal Curtin, who served as a Commerce Commissioner for 11 years, points out that the fact that a company with market power can meet that test even if the effect of its behaviour is to damage the competitive process means the whole point of the Commerce Act has been bypassed.

By redefining the harm to be avoided as the "substantial lessening of competition" the amendment also brings this part of the Commerce Act into line with its provisions governing mergers and acquisitions, and anti-competitive contracts, arrangements and understandings. It is a concept with plenty of case law to draw on.

The Commerce Commission says a substantial lessening of competition test will not prevent dominant firms from improving their position by outperforming their rivals. "[It] will protect the competitive process by ensuring firms with substantial market power do not engage in exclusionary conduct that prevents competitors from entering and expanding on the merits of their own products and service. It will not prevent firms with substantial market power from improving their market position at the expense of smaller rivals if this is achieved by outperforming those rivals in terms of efficiency, innovation and/or better value goods and services."

Commerce Commission chair Anna Rawlings. Photo / Mark Mitchell

An effects test would bring New Zealand law into line with other developed countries, MBIE says, including — since a similar law change in 2017 — Australia.

It is supported by, among others, the New Zealand Food and Grocery Council (unsurprisingly, given the behaviour of the supermarket duopoly), the Motor Trade Association, ElectricKiwi and Consumer NZ.

Opponents include Business New Zealand and the Insurance Council, law firms Russell McVeagh and Buddle Findlay, New Zealand Steel and Chorus.

Russell McVeagh considers the amendment unnecessary and unhelpful but submits that if it is to proceed "has the effect" should be dropped, leaving only "has the purpose or likely effect".

It argues that an effects test is necessarily retrospective, requires firms to use information they cannot have and could render firms liable for the unforeseen and unforeseeable consequences of their unilateral conduct.

It warns of a chilling effect on, for example, discounts that consumers would welcome, likely to be all the greater given New Zealand's small markets are more prone to concentration than elsewhere.

National Party MPs on the select committee, in a dissenting opinion in the reported-back version of the bill, agree.

But is it plausible that a firm can acquire substantial power in a market which it understands so poorly as to be surprised when its behaviour substantially lessens competition in it?

Business NZ reckons it is. It says that in 1998 the Privy Council emphasised that traders are entitled to know in advance whether their conduct is compliant or not.

"The difficulty with an effects analysis is that it can be hard to predict the impact of proposed conduct before [a business] embarks on any initiative. Furthermore, all business firms are ultimately locked in a struggle to eliminate their rivals. That is competition."

MBIE's response is that the amended prohibition is aimed at protecting the competitive process and not individual or inefficient competitors.

In any case there is to be a year's grace period between the bill receiving the royal assent and coming into force, during which the Commerce Commission is to issue guidelines as to what kinds of conduct it would consider likely to breach the new law.

"To the extent that the 'take advantage of' test is predictable in its outcomes, this arguably reflects the high probability that conduct will not contravene section 36 in its current formulation," MBIE told the select committee.

In other words, the certainty that comes from confidence a dominant firm can pretty much do what it pleases without fear of competition law is not certainty worth defending.