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Why look at Australian Law?
The competition law provisions of the Australian Trade Practices Act 1974 (ATPA) have been amended a number of times in recent years with many changes coming into force on 1 January 2007, others passed on 24 September 2007 and further changes proposed, including the much publicised calls for criminalisation of so-called "cartel" behaviour. As the Australian and New Zealand governments have recognised the need for greater integration and co-ordination of competition laws between the two countries it is timely to review whether and how these changes might affect New Zealand business.
Of the most recent amendments to the ATPA the main change is intended to make it easier to establish predatory pricing. Other key changes to the ATPA in recent years are:
- streamlined merger processes;
- increased penalties and prohibitions on indemnifying employees – which brings Australia more into line with New Zealand;
- a revised joint venture defence to price-fixing and exclusionary provisions prohibitions;
- the introduction of a competition defence to exclusive dealing and third line forcing (ie. supplying products on the condition that the purchaser acquires other products from another person);
- fast track immunity from competition law for collective bargaining arrangements between small businesses.
Some of these changes to the ATPA such as the amendment in relation to predatory pricing should not, in our view, be followed. Other changes appear to be sensible, but should be reflected on after seeing how useful they are in practice, such as the collective bargaining immunity process discussed below.
Any proposal for criminalisation of cartels should be carefully reviewed.
Predatory Pricing
On 25 September 2007, the Trade Practices Amendment Act (No.1) 2007 came into force. This amendment will significantly amend section 46 of the ATPA in relation to predatory pricing. The current wording of section 46 is substantially the same as section 36 of the Commerce Act 1986 (NZCA).
Predatory pricing covers a situation where, for example, a corporation with substantial market power takes advantage of that power to price its goods or services at below cost so it can damage other less powerful competitors. Predatory pricing has always been within the ambit of section 46 ATPA / 36 NZCA which prohibits misuse of market power.
There has however been a perceived difficulty in challenging predatory pricing under the previous wording of section 46 ATPA and existing wording of section 36 NZCA. Predatory pricing is tricky as it challenges one of the primary objectives of competition law: low prices to customers. Distinguishing low prices due to predatory reasons from those due to sound business reasons, such as short-run promotions or legitimate loss leading can be difficult.
Potential problems in the case-law have developed as judges have narrowly interpreted the circumstances in which conduct can be said to be taking advantage of market power. The main required elements of a predatory pricing under the previous wording of section 46 ATPA and existing wording of section 36 NZCA are that the firm must:
- have a substantial degree of market power;
- be pricing below some measure of cost;
- pricing being a "use" of market power for an exclusionary purpose; and
- not be meeting a rival's price.
In particular the need to prove that a firm used its power has made successfully claiming a breach of section 46 ATPA / 36 NZCA very difficult. The Courts have used a "counterfactual" test: if the firm acted in the way a firm without market power would have acted, then section 46 ATPA / 36 NZCA will not be breached.
The new amendments attempt to address these difficulties by prohibiting a corporation with a 'substantial market share' from supplying goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying the goods and services. This must be done for the same purpose of:
- eliminating or substantially damaging a competitor;
- preventing the entry of a person into any market; or
- deterring or preventing a person from engaging in competitive conduct in any market.
The effect of these amendments is that it will no longer be explicitly necessary to prove that a corporation has 'substantial market power'. A large market share will be sufficient for the provision to apply, even if that market share does not equate to market power. This may be the case, for example, because of low barriers to entry.
Economic theory states that in order to be able to lessen competition in the terms of the relevant purpose, a firm must have or create market power. The amendment is therefore arguably based on questionable logic and may not remove consideration of market power from the analysis.
The Explanatory Memorandum to the new Act states that recoupment need not proved to establish a breach of the new provision, contrary to the current position regarding predatory pricing in Australia (as well as New Zealand). As the Senator proposing the amendment intended, this potentially makes proving breach of competition law significantly easier.
For firms with a significant market share, the amendments are likely to increase the importance of considering how courts might perceive the purpose of discounting before implementing a below cost pricing strategy. Purpose may be established by inference or by direct evidence, and it is sufficient that the anti-competitive purpose is a substantial and an operative one, even if the corporation has acted for a number of different purposes. This will create significant uncertainty for businesses.
Alongside such uncertainty, significant ambiguities still remain: what is a substantial share of the market? what is the relevant measure of cost? what is a sustained period? will market power considerations creep into the analysis anyway? Lack of clarity between legitimate and predatory discounting, combined with potentially far more companies being captured by the new provision, may mean that the new provision deters more legitimate discounting than it prevents illegitimate discounting with resultant overall increased prices for consumers.
The Senator introducing the amendment was motivated primarily to protect small businesses. This amendment may do that to some degree, but creates a risk of increased prices and protecting inefficient rivals.
Other changes to taking advantage of market power
The remaining proposed changes to the market power regime reflect a 2004 Senate Economics References Committee Report on how competition law could better protect small businesses. These changes cover a number of possible loopholes in the ATPA:
- a corporation must not take advantage of its power in one market in any other market ("leveraging");
- more than one firm may have a substantial degree of market power in one market; and
- substantial degree of market power does not require absolute freedom from competitive constraints from competitors and buyers or sellers.
These are logical additions to the ATPA, and are consistent with many other competition law regimes internationally. By and large, we consider these principles to be part of current New Zealand law. However, the first principle may have been somewhat threatened by the Privy Council's Carter Holt Harvey decision requirement for "use" in the context of the previous statutory provision. In that case, below cost pricing of a newly introduced insulation product was not seen to be linked to Carter Holt's substantial power primarily due to its Pink Batts product.
Collective bargaining
In Australia, as in New Zealand, it is per se illegal for competitors to fix prices. However, the conduct can be authorised if it is shown to be in the public interest.
From 1 January 2007, Australia introduced a new notification process to authorise collective bargaining by "small" businesses dealing with "big" businesses. This change was introduced as a result of concerns regarding the time and cost burden of the usual authorisation process, a concern which is mirrored in New Zealand.
The amendment essentially introduces an alternative process for immunising collective bargaining which is intended to be simpler and more efficient. The parties to the collective bargaining arrangement give a notice to the ACCC which includes details of the participants and the proposed "target" with whom the participants intend to negotiate. Generally, the notifying party must not reasonably expect that the price of the goods or services to be supplied or acquired will exceed A$3m in any 12-month period, although that amount has been increased for certain industries. After 28 days of the parties giving the ACCC notice, collective bargaining is immunised from the main competition law provisions of the ATPA, unless the ACCC issues an objection notice.
The New Zealand Ministry of Economic Development has indicated that it is considering whether this process would be a useful addition to the NZCA, following its recent consultation on Part V, which broadly covers clearance and authorisation processes and rights of appeal.
There has been no great rush to use the new provisions. Since the scheme's introduction only five notifications have been lodged while in the same period, the ACCC has granted and varied 26 authorisations using the usual process.
Reasons why businesses have not yet used the new process significantly are likely to include those set out in the ACCC's guide to collective bargaining notifications, that is:
- immunity under the notification system is for three years, rather than the longer time periods available under the authorisation process;
- the limited value thresholds that apply under the notification system may be a deterrent for some mid-sized firms; and
- where there is uncertainty about the identity of the targets and members of the collective bargaining group, the conditions for the collective bargaining authorisation process may be impossible to fulfil.
Also, notifications can be revoked by the ACCC at any time (after consultation) on the basis that they are not granted after as full an analysis as an authorisation. The uncertainty for business is, therefore, considerably greater than under the usual authorisation process. New Zealand should only consider adopting a similar streamlined process if the underlying concerns are in fact met. Whether the new process adds more than the extra resources required to police, is as yet uncertain as the process is young.
An alternative reform, and one that would more clearly address the underlying concerns, would be the introduction of a competition defence to price-fixing under the NZCA and the creation of a short, cheap process by which the Commerce Commission could clear agreements that were unlikely to lessen competition substantially.
Criminalisation of cartels
Criminalisation of cartels has also been proposed in Australia. The Federal Treasurer has committed to criminalising cartels for both companies and individuals. Penalties are likely to include up to five years imprisonment for individuals for participation in serious cartel conduct. This has the potential to cover the conduct of New Zealand-based businesses and their employees.
At present in New Zealand, breaches of competition law simply give rise to financial penalties, potential civil damages and the possibility of director disqualification. However, the international trend towards criminalisation suggests that it would not be unexpected if New Zealand followed the lead of Australia, as well as the US and UK, and introduced a similar criminal offence. That would be the most significant change to New Zealand's competition laws for many years.
Final thoughts
The current state of the law in relation to misuse of market power (section 36 of the NZCA) is not ideal. It has been interpreted narrowly and in a manner inconsistent with its objective to deter anti-competitive conduct. However, for the reasons discussed the Australian amendment is not an appropriate solution to this situation. New Zealand should not follow Australia's lead on this issue.
Many of the other recent changes to Australian competition laws have either been logical or a step in the right direction. To fully assess many of the changes relevant to New Zealand requires reflection of their benefits in practice, as rushing into changes creates increased costs and uncertainty for business. We will have to wait and see what approach is proposed as part of any changes to Part V of the NZCA.
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
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