The Commerce Act - Ripe for reform?
Introduction
1
Next year the Commerce Act 1986
will celebrate its 25th anniversary. In the last decade a number of significant
amendments have been made to the Act including in 2001 the change from the
dominance to a substantial lessening of market power competition test for
mergers and most recently the changes to the regulatory framework under Part 4
of the Act. However many of the key
provisions and processes under the Act remain the same as the year in which the first PC virus 'Brain' started to
spread (1986) or at best, the year in which Boris Yeltsin was elected President
of Russia prior to the collapse of the Soviet Union
(1991).
2
Human
nature is to leave the status quo until a crisis emerges which mandates
change. However, if New Zealand is serious about
improving our long run sustainable growth rate then, in my view all pieces of
commercial legislation, including the Commerce Act should be reviewed and
improved on a regular basis. The issues
at play are not particularly sexy or politically charged. Nevertheless, they do impact on commercial
decision making and are accordingly worthy of some attention.
3
This
paper will discuss:
3.1
The
need for a clearance process for restrictive trade practices.
3.2
Possible
changes to the authorisation regime.
3.3
The protection of confidential
information.
3.4
The
Commission's interview and information gathering powers.
3.5
The
height of the bar in merger review.
4
The views expressed in this
paper are the authors alone and do not necessarily represent the views of DLA
Phillips Fox or its clients.
A clearance process for restrictive trade practices
5
In its 2007 review of the
clearance and authorisation provisions under the Commerce Act 1986, the
Ministry of Economic Development stated:
We reach a preliminary conclusion that a clearance system should be
introduced. It could be useful in
relation to conduct that is at the margins of legality and illegality and for
technical breaches of the per se provisions.
6
This statement highlights the
two options available in terms of a trade practices clearance process.
7
The first option is that a
clearance should be only granted to a person who can satisfy the Commerce
Commission that its contract, arrangement or understanding will not, or will not
be likely to, contravene the Act (including
per se provisions such as price fixing). For example, a party who believed that an
arrangement fell within the joint venture exception could apply for clearance[1].
8
The second option is that a
clearance should be granted to a person who can satisfy the Commerce Commission
that its contract, arrangement or understanding will not, or will not be likely
to, substantially lessen competition in any market (even where the contract,
arrangement or understanding breaches one of the per se rules).
9
Before considering the merits
of each option, I consider three arguments that one might raise against having
any kind of clearance regime.
Arguments against a
clearance process
10
The first argument is that the
economic benefits of a transaction involving assets or shares (in terms of
efficiency gains) are generally greater than lesser forms of collaboration
between competitors (with the other end of the spectrum being a bare price
fixing arrangement). On this basis, it is
acceptable and appropriate for the competition framework to differentiate
between those considering undertaking an acquisition of assets or shares (where
a clearance is available) and those considering some other 'lesser' form of
collaboration.
11
I suspect as matter of
principle this argument has some merit (and there will be others in the
audience who are much better qualified to consider this issue). However, in practice there are presumably
many forms of collaboration which do have material economic benefits but do not
happen to involve the acquisition of assets or shares. Facilitating these transactions is therefore
a worthwhile exercise.
12
The second argument is that the
mergers involve major investment and are significantly more difficult to unwind
than other 'lesser' forms of collaboration.
As a result of the investment parties need certainty before proceeding. It is also in the public interest to have a
merger review system which assesses mergers prior to consummation.
13
While not entirely meeting the
point, given the penalties for breaching the restrictive trade practices
provisions of the Commerce Act, there is certainly significant risk involved
for anyone embarking on a collaboration which may breach the Act. This may
discourage legal and pro-competitive collaboration. A clearance process would address this risk.
14
Finally, there is the practical
argument that a clearance process for restrictive trade practices will see the
Commission flooded with applications for clearance. After all, contracts, arrangements or
understandings are much more common than mergers (particularly in the last 18
months!).
15
To some extent the answer to
this depends on the scope of the clearance regime as discussed below. I think the risk of that occurring is small
because of confidentiality issues, cost and a healthy fear that most businesses
have of getting on the Commission's radar unless there is good reasons for
doing so. Only significant matters would
continue to come before the Commission.
Scope of clearance process
16
Should the Commission be
permitted to 'clear' 'per se' conduct namely price fixing, exclusionary conduct[2]
or resale price maintenance?
17
The answer to this question
depends on your view as to the harm posed by this conduct. If your view is that such conduct is
acceptable provided it doesn't substantially lessen competition in a market,
then you would be in favour of allowing the Commission to clear such conduct
provided they are satisfied it does not have the requisite effect on the
relevant market. If, on the other hand,
you believe that such conduct has detrimental effects which are less than the
SLC threshold but still of concern, you would not wish the Commission to clear
such conduct using the SLC test.
18
If you fall into this latter camp,
there are a couple of options open to you.
You might consider that the Commission could clear the conduct if public
benefit outweighed the detriment (i.e. merge the clearance and authorisation
regimes into a single process).
Alternatively, you might consider imposing a lesser test than the SLC
test (if one existed).
19
My tentative view is that it is
a bridge too far to contemplate the Commission clearing 'per se' breaches of
the Commerce Act in the absence of countervailing efficiency arguments. Any clearance process should be limited to
considering whether the conduct falls within one of the exceptions to the per
se offences (i.e. was a valid joint venture) or otherwise gives rise to a
substantial lessening of competition.
20
On this basis, those who technically
fall foul of the per se provisions would still need to avail themselves of some
type of authorisation process which makes this an appropriate place in my paper
to consider possible changes to make this process more palatable.
Possible changes to the authorisation regime
21
It is widely acknowledged that
the authorisation regime for restrictive trade practices is complex, expensive
and time consuming. The Commission
should be applauded for its recent efforts to streamline the process[3]. However,
this work is obviously constrained by the existing statutory framework.
Notification process
22
To cater for the technical
breaches of the per se provisions, I would suggest adopting a notification
regime similar to that which applies in Australia in relation to exclusive
dealing, third line forcing and collective bargaining. In its 2007 paper, the Ministry of Economic
Development canvassed a notification regime for SME collective bargaining but I
see no reason why such a regime should not apply more broadly.
23
As is the case with collective
bargaining in Australia,
a party would notify the Commission of the relevant arrangement using a
prescribed form. Immunity would come
into force within a specified period from the time in which the Commission
receives the notification unless the Commission objected (which it would do if
it failed to reach some kind of low threshold regarding the public benefits vs.
Competitive detriment). From there, I
wouldn't envisage the more complex process which then follows in Australia. Rather, it would then be open to the notifier
to make an application for authorisation.
Authorisation process
24
A threshold question is whether
a separate stand-alone authorisation process is required? Could arguments of efficiencies be raised as
part of a single application which is dealt with by the Commission in the same
manner as the current clearance process for mergers (i.e. no conference and
more limited involvement of third parties).
25
I suspect the answer is that a
separate stand alone process is required for the following reasons:
25.1
It is more difficult to assess
and quantify efficiency effects of a merger or collaboration than it is to
analyse competitive detriments, thus more care needs to be taken before
granting immunity on this basis.
25.2
An authorisation takes away the
ability a third party to have its day in Court to stop an otherwise
anti-competitive merger or arrangement, agreement or understanding. On this basis a process which gives that
third party formal standing is required.
26
This then raises the issue as
the extent of the third party involvement, given that competitors of the
applicant are likely to do everything possible to hold up the relevant merger
or arrangement.
27
In respect of trade practices
authorisations, the current process provides that the Commission may call a
conference and the applicant or any other person who has been sent a draft
determination may require a conference to be held. Importantly, once a conference is held, any
party who participated in the conference has a right of appeal in respect of
the determination of the Commission. In
my experience, this third party appeal right is a strong disincentive for
parties to seek an authorisation.
28
In its discussion paper, the
Ministry of Economic Development "tended towards the view that decisions
about when to hold a conference should be the Commission's alone". I tentatively support that view although the
risk is that it might spell the end of the conferences (as has occurred in
respect of the clearance process). An
alternative approach would simply be to remove appeal rights from third parties
attending a conference.
29
A further point on the
authorisation process is the ability of the Commission to revoke or vary an
authorisation if "there has been a material change in circumstances since
the authorisation was granted". At
first blush this appears to defeat the whole purpose of an authorisation which
is to give the parties certainty to proceed with the contract, arrangement or
understanding (with associated investment).
The Ministry of Economic Development reached the preliminary view that
the Commission should not have the power to vary, replace or revoke an
authorisation on its own motion.
However, the problem with this is that it might encourage the Commission
to put artificial time limits on authorisations to cater for changing market
circumstances. My tentative view would
be to favour the status quo on this issue.
Protection of confidential
information
30
My concern here is not with the
Commission but with the Courts. For good
reason Court processes are open and public and judges require good reasons
before refusing to provide information to the public and the media
(particularly if it goes to the reasons for the Courts decision). However, in the competition and regulatory
area there is a need for a particular focus on confidentiality both to protect
the commercial interests of the participants and also more importantly to
protect the process of competition.
This raises the issue of whether, in trade practices cases, it is
necessary to give Courts greater guidance on confidentiality issues rather than
simply relying on judicial discretion.
31
A starting point might be to
require the High Court to grant confidentiality orders in respect of
information which could be withheld under the Official Information Act 1992
(currently it is at the Courts discretion).
If a higher Court wishes to release this information and all parties
(including the Commission) oppose then I would argue that either the issue
should be referred back to the High Court (which has the best understanding of
the relevant case). Alternatively, in
these circumstances, release of the information should only occur if the higher
Court is satisfied that:
31.1
the information is no longer confidential; and
31.2
release of the information is
in the public interest.
Commission's powers
32
Section 100 of the Commerce Act
(Powers of Commission to prohibit disclosure of information, documents and
evidence) was recently considered in the judgment of the Court in the Air New Zealand proceedings. I note that section 100 and its use in cartel
investigations is an area which is ripe for legislative reform. This is particularly so given the recent
announcements relating to possible criminalisation.
33
The other area where
uncertainty exists relates to the right of legal counsel for the company to
attend interviews where individuals are being interviewed by the
Commission. Where the legal counsel
purports to act for both the company and the individual this can give rise to
conflict of interest issues.
34
While there will be others who
have more informed views on this topic, it seems to me that:
34.1
where an employee is being
interviewed regarding activities undertaken in the course of his employment,
the company should be entitled to be represented by its lawyer; and
34.2
that lawyer needs to be very
mindful of the potential for conflict of interest if he or she also acts for
the employee but this is a matter between the employee, employer and the lawyer
and should not be a basis for the lawyer being excluded from any interview.
35
Again, this is a matter which
needs to be sorted in the context of criminalisation.
36
Finally, I wonder if given the
advances of technology (including the internet) I wonder if it is time to
review issues such as the power of the Commission to obtain documents off-shore
or (a matter currently before the Courts) and whether the Commission should be
required to pay some proportion of the costs of extensive electronic searches,
particularly if the party is not a target of the Commission.
Bar for merger clearance
applications set too high?
37
As you will know, section 66 of
the Commerce Act states that the Commission must give a clearance if it is
satisfied that acquisition would not, or would not be likely to, substantially
lessening competition in a market.
38
The issue here is that the
Court of Appeal in the Foodstuffs/Woolworths case effectively ruled that if the
Commission were in doubt about the competitive effects of a merger, it was
appropriate for the Commission to decline to give clearance in respect of the
merger. Previously Courts had
effectively glossed over the requirement for the Commission to be 'satisfied'
in respect of a lack of a substantial lessening of competition. Rather, the Courts had simply considered
whether or not the Commission's underlying competition analysis was
correct.
39
Accordingly, it is possible
that a merger might be permitted under section 47 of the Act but nevertheless
fail to obtain clearance because the Commission could not be satisfied under
that section.
40
One option might to be to amend
the Commerce Act to put the onus back onto the Commission to grant clearance
within a specified time unless it is satisfied that the acquisition would, or
would be likely to, substantially lessen competition in any market. However, this is effectively a blast from the
past (being the position under the Act prior to 1991, albeit with a much
shorter time frame). You would also
have to cater for the situation where parties failed to adequately comply with
Commission information requests. On
balance, I think such an amendment would create more problems than it would
solve and we probably learn to live with the small gap which exists between
sections 47 and 66 of the Commerce Act.
|
Mark Williamson Partner Direct |
|
[1] In its discussion paper on Cartel Criminalisation, the Ministry of
Economic Development float the idea of a
clearance process for joint ventures and long term contracts.
[2] Exclusionary conduct (assuming you can understand the section)
might be considered not to be a true per se offence because it is a defence
[3] See Commerce Commission Streamlined Authorisation Guidelines
