Dialogue: Commerce Act beefed up with new amendments

By MARY PETERS and MATTHEW DUNNING*

With all the recent political action, many of New Zealand's business audience may have missed the recent passing of the Commerce Amendment Act (No 2).

Now that the act has received Royal Assent its provisions come into effect immediately, replacing the Commerce Amendment Bill 1999 and the Supplementary Order Paper (SOP 37).

The act also updates generic price control provisions in the Commerce (Controlled Goods or Services) Bill.

So what will it mean to the average New Zealand business in today's competitive environment? Two critical changes - to sections 36 and 47 - are worth noting in particular, as they could well have some impact on your organisation.

Sections 36 and 36A of the former Commerce Act, which outlawed unilateral misuse of a "dominant position," have been replaced by new sections that prohibit taking advantage of a "substantial degree of power in a market."

In a nutshell, the effect of this amendment on businesses in competitive environments will be to widen the scope of behaviour that potentially breaches this section.

This is the same as the equivalent provisions in Australia's competition legislation and lowers the threshold for conduct caught by that section.

This change will take effect immediately, despite the select committee's recommendation that a transitional period be applied.

The act also replaces "use" (of the dominant position) in sections 36 and 36A with "take advantage of" (a substantial degree of power in a market).

As well as bringing the wording in line with the Australian provision, this aimed to reverse the Privy Council's narrow definition of the word "use," and a perceived undesirably high threshold.

A new section, 36B, clarifies that the court can infer the existence of anti-competitive purpose set out in section 36 ("taking advantage of a substantial degree of power in a market") and 36A ("taking advantage of market power in transtasman markets").

Section 47 prohibits any mergers and acquisitions that "substantially lessen competition." Previously, the act prohibited any merger or acquisition that resulted in the strengthening of a "dominant position."

Now, the threshold has been lowered and acquisitions which might previously have not breached the dominant position test could breach the substantial lessening of competition test.

Again, this amendment is aimed to bring New Zealand into line with Australian competition law.

The explanatory memorandum to the bill stated that this will "facilitate a more economic approach to defining anti-competitive behaviour." The Commerce Commission has indicated that it intends to take this into account.

The commission recently released a draft practice note outlining its proposed approach to business acquisitions under the new regime and is inviting comment from interested parties.

Inevitably, there will be an element of uncertainty for those contemplating business acquisitions while the commission comes to grips with application of the amended section 47.

What is clear is that a more stringent test will now be applied in this area.

Other points worthy of note:

* Body corporates will not be able to indemnify their agents for cost liabilities relating to pecuniary penalties, contracts, arrangements, or understandings that have the effect of substantially lessening competition in the market.

* The Commerce Commission will be able, in certain circumstances, to issue cease and desist orders (a type of administrative injunction) to terminate conduct that appears to be in breach of the Act.

These are intended to be quick and inexpensive alternatives to the court system. This part of the act has yet to come into force.

* The maximum pecuniary penalty for a body corporate will be increased to the greater of: $10 million, or either three times the value of any commercial gain or expected commercial gain, or if commercial gain is not known, 10 per cent of the turnover of the body corporate and its interconnected bodies corporate (if any).

* The types of arrangements deemed to "substantially lessen" competition have not been expanded, as was initially proposed.

* Contracts, arrangements or understandings containing exclusionary provisions, which were previously a per se breach of section 29, will now only constitute a breach if they substantially lessen market competition.

* The Commerce Commission will be exempt from having to undertake to pay damages when seeking an interim injunction.

New provisions enable the commission to use formulae in authorising prices and also enable the Minister of Commerce to seek advice and receive reports from the commission on thresholds for improving controls.

These changes have been made at a time when there is a Commerce Commission inquiry into airports and the electricity sector is under scrutiny.

Paul Swain and Trevor Mallard have also commented in the media that the amendments respond to dominance in the petrol and telecommunications industries, particularly in respect of domestic consumption.

Where to from here?

After three years of reviewed proposals and draft legislation, New Zealand finally has an amended Commerce Act.

The stated purpose of the amendments is to "beef up the Commerce Act" and give the Commerce Commission "more teeth."

Businesses must be more vigilant now that the scope of anti-competitive behaviour has been widened and penalties increased.

* Mary Peters and Matthew Dunning are Russell McVeagh litigation partners and senior members of the firm's Competition Law practice group. They can be contacted at matthew.dunning@russellmcveagh.com or mary.peters@russellmcveagh.com