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Competition law - what's coming up?

February 16, 2018

Contacts

Partners Anne Callinan, James Craig
Senior Associates Nina Blomfield

Competition law (inc cartels)

Year ahead - new cartel laws come into force shortly 

Last year was marked by the long-awaited passing of the Commerce (Cartels and Other Matters) Amendment Act 2017 on 14 August 2017, after floundering before Parliament for six long years. The significant changes introduced by the Act included: 

  1. Replacing the “per se” prohibition on price fixing with a prohibition on “cartel provisions”, defined as a provision with the purpose or effect of “fixing prices”, “restricting output”, or “allocating markets”. As defined, these terms frequently appear in joint venture, distribution and franchise agreements; 
  2. Improved exceptions for certain pro-competitive conduct - namely, collaborative activities, vertical supply contracts and joint buying agreements; 
  3. The introduction of a clearance regime (similar to that already available for mergers) for companies wishing to enter arrangements that might include a cartel provision, but might also be regarded as a collaborative activity; and 
  4. A new regime for the international shipping industry, previously excused from the Commerce Act sections dealing with anti-competitive arrangements between competitors. 

After a nine-month transition period, the new “cartel provision” sections will come into force in mid-May this year. It is therefore timely to ensure that your business arrangements are compliant with the new laws, or otherwise consider whether any of the new exceptions could apply. Helpfully, the Commerce Commission has recently published its Competitor Collaboration Guidelines in January, which now shed light on how the Commission will enforce the cartel prohibition, their approach to the new exceptions, and how clearance applications will be processed. The Guidelines can be found here.

Compliance is particularly important given the introduction of a new Bill to Parliament on 15 February 2018 proposing jail sentences of up to seven years for cartel conduct.

In this update, we summarise the key points in relation to the exceptions and outline the process for obtaining a clearance from the Commission. We also signal a few areas to watch out for in the year ahead. 

Collaborative activities exception 

Given the width of the new cartel law, the exceptions are critical. They form targeted carve-outs for efficiency-enhancing activities that enrich the New Zealand economy, but would otherwise be prohibited because they involve a “cartel provision” either fixing prices, allocating markets, or restricting output. The most significant is the collaborative activities exception.

The term “collaborative activity” is defined as an enterprise, a venture, or an activity, in trade, that is:

  1. carried on in co-operation by two or more persons; and 
  2. is not for the dominant purpose of lessening competition between any two or more of the parties. 

The striking feature of this new exception is its broad wording, which represents a significant expansion of the previous allowance for joint ventures. With the focus now being primarily on substance rather than form, the new exception has the capacity to accommodate a wider range of trade practices within its reach.

There are three key elements to the collaborative activities exception.

Co-operation

The first requisite element is co-operation. This means that the parties must be working jointly toward the same goal. An agreement between parties about how to run their separate businesses would not possess the necessary level of cooperation. 

Not for the dominant purpose of lessening competition 

The second requirement is that the activity must not be for the “dominant purpose of lessening competition between any 2 or more of the parties”. This element tests the true intention behind the activity, and is designed to sift out anti-competitive conduct that is simply dressed-up as a collaboration. There may be more than one purpose, but the principal objective that the parties are working towards must not be an anti-competitive one. 

Cartel provision must be “reasonably necessary” for collaborative activity to take place

The provision must also be reasonably necessary for the purpose of the collaboration. This means it must be clearly justified or “necessary within reason”. Cartel provisions that are merely desirable or preferable are not eligible. 

This element calls for a pragmatic and commercial assessment as to whether the collaboration would be significantly hindered without the cartel provision. If there are reasonable alternatives that do not require cartel provisions then it cannot be said the cartel provision is reasonably necessary for the collaboration. 

Vertical supply contracts 

Often a supplier may be in competition with a customer – for example, where a supplier sells directly to end customers through an internet page or its own store, but also sells to wholesalers who then resupply to the same end customers. In that example, since the original supplier is in competition with the wholesaler, there is a good chance the supply agreement would contain a cartel provision. This is where the vertical supply exception kicks in. There are four requirements for the exception: 

  1. There must be a contract. Arrangements and understandings do not qualify; 
  2. The contract must obviously contain a cartel provision;
  3. The cartel provision must relate to the supply of goods or services. This requires a “relatively close connection”. In a supply agreement, setting the price at which A will supply goods to B will relate to the supply of goods. Similarly, setting a maximum resale price for the supplier would also relate to the supply of goods. On the other hand, a provision restricting B from supplying different goods from those supplied by A will not relate to the supply of goods from A to B; and 
  4. The provision must not have the dominant purpose of lessening competition between the parties. Notably this aspect does not include the qualifier “substantial” - so any lessening of competition, regardless of whether it is “real or of substance”, will disqualify an agreement if that is the dominant purpose. A “dominant purpose” is the main or most influential purpose. 

As with collaborative activities, any agreement that does not have the purpose of increasing output or lowering prices will be scrutinised closely by the Commission. If the parties are unable to point to another legitimate purpose, the Commission may reach the view that the dominant purpose is to lessen competition. 

Joint buying and promotion agreements 

The joint buying exception only provides a safe-haven from the cartel provisions to fix prices - if a joint buying agreement contains a provision that allocates markets or restricts output, it will not be eligible for the exception. The conduct will only be exempt if it can be shown that the provision: 

  1. Relates to the price of goods or services collectively acquired or advertised by the competitors; and either
  2. Provides for the collective negotiation of the price for goods or services that will eventually be purchased individually; or 
  3. Provides for an intermediary to take title to the goods and resell them to the competing buyers. 

Clearance process 

For the collaborative activities exception, it is possible to gain legal certainty by testing a proposed collaborative agreement through the clearance process. The Commission will grant a clearance if it is satisfied that the collaboration meets the elements outlined above. However, despite the wording of the exception itself (which only refers to purpose and not the effects of the cartel provision), when seeking a clearance, the parties will also need to convince the Commission that the agreement does not have the “effect” or “likely effect” of substantially lessening competition in the market.

Confidentiality

Some parties may wish for the very fact of a clearance application to be kept confidential. Requests for fact confidentiality are assessed by the Commission on a case by case basis, but in order to determine applications, the Commission will normally have to speak to outside parties. As such, it is “highly unlikely” that requests for fact confidentiality will be granted as it would often hinder the Commission’s ability to assess applications. 

All information received and produced by the Commission is also subject to the Official Information Act, including applications and determinations. However, that Act does not require the Commission to reveal information where it is commercially sensitive and would be likely to prejudice the supply of similar information in future, potentially deterring future applications. The Commission therefore recognises and protects against disclosure of sensitive information. 

Authorisation

If the Commission reaches the view that the transaction will lead to a substantial lessening of competition, it will decline the clearance application. But that is not the end of the story - the proposed collaboration may still proceed lawfully if it receives an “authorisation”. An authorisation involves a separate process that entails weighing-up the harm of the proposed agreement against the public benefits that would come about. 

It is possible to apply for an authorisation for any anti-competitive agreement, even where the conduct does not fall within the exceptions or where a clearance is not available. 

Other developments

Market studies powers 

In December last year, newly appointed Minister of Commerce and Consumer Affairs, Kris Faafoi indicated he would like to “take the politics out” of decision making on market studies by granting the Commission the ability to launch inquiries on its own initiative. The stated aim was to introduce these changes before the end of 2018, to be ready for action in 2019. The comments mark a shift from the previous Government’s position, which was that such inquiries should require the Minister’s approval. 

Although Minister Faafoi stopped short of indicating which markets might merit a probe, Minister of Energy, Megan Woods had previously commented in November that a probe into fuel margins is a “live option”. That comment came off the back of the Fuel Market Financial Performance Study, conducted by the Ministry for Business, Innovation and Employment and completed in November 2017. That study found there was “reason to believe that fuel prices in New Zealand might not be reasonable”. 

Reform of s 36 - taking advantage of market power

The prospect of reform to s 36, relating to taking advantage of market power, is also on the horizon. The Labour Party’s 2017 election manifesto stated that the current approach to that section (ie the counterfactual test), was inadequate and merited a broader review than the “narrow review” commissioned by National earlier last year. If the Government does look to change the law, they could look to the recent changes introduced in Australia. Those changes included: 

  1. Removal of the “taking advantage” element, which does away with the need for the counterfactual test altogether; and 
  2. Amending the section so that it applies not only where there is one of the prescribed anti-competitive purposes, but also where the conduct has an anti-competitive effect. 

Criminalisation

On 15 February 2018 the Government introduced a new Bill to criminalise cartel conduct. A link to our recent article on this development is here.

Who to ask?

Our specialists are pleased to assist with any questions regarding the cartel law and exceptions and how they will be applied, along with any other queries you may have.
 

Contributors jesse.tizard@simpsongrierson.com