I INTRODUCTION

Competition in New Zealand markets is primarily regulated under the Commerce Act 1986 (Act), which aims to promote competition in markets for the long-term benefit of consumers in New Zealand.2 Closely modelled on the Australian Trade Practices Act 1974 (Cth),3 the Act was introduced as part of an ambitious programme of economic reforms undertaken by New Zealand's fourth Labour Government in the mid-1980s 'aimed at reducing the role of government in business, promoting competition and strengthening the role of markets in determining prices and allocating resources.'4 A central plank in the government's reform programme, the Act was intended to safeguard New Zealand's newly deregulated markets against manipulation and abuse.

Unilateral market power is regulated under the Act through two mechanisms, contained in Section 36 and Part 4 respectively. Section 36 sets out New Zealand's general misuse of market power provision, which prohibits firms with a substantial degree of power in a market from engaging in anticompetitive conduct for a proscribed purpose. Part 4 'provides for the regulation of the price and quality of goods or services in markets where there is little or no competition and little or no likelihood of a substantial increase in competition'.5

Section 36 of the Act is thought to be unique amongst countries with a developed competition law, in that it is not concerned with the effect of the unilateral exercise of market power on competition in a market. Instead, Section 36(2) prohibits a person with substantial market power from 'taking advantage' of that power for the purpose of (1) restricting a person's entry to a market; (2) preventing or deterring a person from competing in a market; or (3) eliminating a person from a market.

Significantly, for reasons explored later in this Chapter, the question of whether Section 36 is fit for purpose has been widely canvassed in recent years, and prior to the outbreak of the covid-19 global pandemic, the New Zealand government was expected to announce in the first half of 2020 regarding whether Section 36 would be amended to align with the key elements of the equivalent Australian (effects-based) provision. It is anticipated that the government's focus on New Zealand's covid-19 response will result in a delay to this process.

Formal guidance on Section 36 in its current form is published on the New Zealand Commerce Commission (Commission) website.6 Guidance can also be derived from New Zealand case law and information published on the Commission's case register, which includes enforcement outcomes and selected open investigations. Guidance can also be drawn from past Australian case law on Section 46 of the Competition and Consumer Act 2010 (Cth).7

The Act applies to all Crown corporations that engage in trade, as if they were private companies.8 The Act also applies to the Crown itself insofar as it engages in trade.9 However, the Crown is not liable to be prosecuted for an offence under the Act10 or to pay a pecuniary penalty.11 Rather, if a court is satisfied beyond reasonable doubt that the Crown has contravened an offence provision of the Act, it may make a declaration accordingly.12

II YEAR IN REVIEW

There were no judgments of the New Zealand courts relating to Section 36 of the Act in 2019. The Commission opened one investigation, into the pricing and terms on which competitors access data from the Meteorological Service of New Zealand Ltd and the National Institute of Water and Atmospheric Research.

Uncertainty as to the timing of any legislative changes concerning Section 36 of the Act was, and continues to be, the main issue facing both the Commission and New Zealand businesses. This is discussed in more detail in Section VIII of this chapter. The lack of both public and private prosecutions under Section 36 in recent years is almost certainly due to the challenges associated with its application and, in particular, the counterfactual analysis used by the New Zealand courts in order to determine whether a person has taken advantage of its substantial market power.

Current active investigation of the Commerce Commission (as at April 2020)

Sector Investigating authority Conduct Case opened
Science and technology Commerce Commission Investigation into the pricing and terms on which competitors can access weather data from the Meteorological Service of New Zealand Ltd and the National Institute of Water and Atmospheric Research September 2019

III MARKET DEFINITION AND MARKET POWER

Section 36 applies to firms that have a 'substantial degree of power in a market'. As the Act was modelled on Australian legislation, New Zealand draws heavily on the guidance provided by Australian case law for its analysis of market definition and market power. Although Australia has recently amended its misuse of market power provision, this has not impacted its market power or market power analysis.

i Market definition

The Act defines a market as 'a market in New Zealand for goods or services as well as all other goods or services that, as a matter of fact and commercial common sense, are substitutable for them'.13

When determining the relevant market, the main task is, therefore, to identify goods and services that would, in response to changing prices, be treated as substitutes.14 Both supply-side and demand-side substitutability are relevant.

In assessing substitutability, the Commission15 and the courts consider the following dimensions of a market:

  1. the goods or services supplied or received (the product dimension);
  2. the level in the supply chain at which the parties operate (the functional dimension);
  3. the geographic area the goods or services are being supplied in (the geographic dimension);
  4. the different customer types (the customer dimension); and
  5. the time period within which the market operates (the temporal dimension).16

Delineating the relevant market is not always a straightforward exercise. For this reason, the Commission often uses the hypothetical monopolist or SSNIP (i.e., 'a small but significant non-transitory increase in price') test to determine demand-side substitutability.17 Under the SSNIP test, the Commission begins with a potential market definition that covers a reasonably narrow set of goods or services and analyses the effect of a small, but significant price increase.18

ii Market power

The Commission and the courts take an economic approach to the question of market power. Market power is the ability to act without constraint and arises as a result of a range of circumstances.19 A large market share does not necessarily equate to market power.20 The existence and extent of barriers to entry are the primary considerations in determining market power21 as is the ability to raise and hold prices above the competitive level.22

Market power must be substantial in order to meet the threshold test in Section 36. The Act's definition of substantial as 'real or of substance' does not apply to Section 36;23 instead, substantial is understood to mean 'large or weighty' or 'considerable'.24

IV ABUSE

i Overview

New Zealand's rule against anti-competitive unilateral conduct is framed in a way to prohibit a person with a substantial degree of market power from 'taking advantage' of their market power for an anticompetitive purpose. Specifically, Section 36(2) of the Act provides:

A person that has a substantial degree of power in a market must not take advantage of that power for the purpose of:
  1. restricting the entry of a person into that or any other market;
  2. preventing or deterring a person from engaging in competitive conduct in that or any other market; or
  3. eliminating a person from that or any other market.

Take advantage

Once the 'substantial degree of market power' threshold is satisfied, the second limb of Section 36 –the requirement that a firm must 'take advantage' of its market power – is intended to ensure that there is an adequate 'causal connection' between a firm's market power and the conduct at issue.25

To establish whether a firm has taken advantage of its market power, the New Zealand courts apply a 'counterfactual test' which asks whether a firm without a substantial degree of market power could rationally have engaged in the conduct in question.26 If the answer is yes, then the firm has not 'taken advantage' of its market power. The premise of the counterfactual test was described by the Supreme Court in Commerce Commission v. Telecom Corp of New Zealand Ltd:

The essential point is that if the dominant firm would, as a matter of commercial judgement, have acted in the same way in a hypothetically competitive market, it cannot logically be said that its dominance has given it the advantage that is implied in the concepts of using or taking advantage of dominance or a substantial degree of market power. Conversely, if the dominant firm would not have acted in the same way in a hypothetically competitive market, it can logically be said that its dominance did give it the necessary advantage. This is because it can then reasonably be concluded that it was its dominance or substantial degree of market power that caused, enabled or facilitated its acting as it did in the actual market.27

The counterfactual test has attracted considerable criticism. The Commission itself has described the test as difficult, complex and costly to apply, and lacking certainty and predictability for day-to-day decision-making.28 These observations largely reflect the significant challenges associated with determining the exact conditions which should be assumed to be present in the hypothetical market (i.e., one in which the firm in question does not possess market power).

Critics also argue that the test fails to consider the competitive impact of the impugned conduct on the actual market,29 and centres on a fictitious market in which unrealistic market conditions may be present.30 As one commentator notes, 'The counterfactual as so designed substitutes a hypothetical inquiry into the incentives of a firm without market power for an examination of the actual or probable effects of conduct undertaken by one that possesses it.'31 While concerns have been raised over the test's potential to generate both type 1 and type 2 errors,32 the possibility of false negatives is thought to be a particular risk due to the fact that an action may be competitively neutral (or even pro-competitive) when undertaken by a firm without market power, but the same action may have exclusionary effects when undertaken by a firm with market power.33 In the words of one commentator, '[Use of the counterfactual] is akin to saying that because a person can walk into a room with a lighted match without setting off an explosion, doing so in a room where there is a suspected gas leak did not 'cause' the explosion.'34

Purpose

The final limb of Section 36 – that a person with a substantial degree of market power must take advantage of that power for one of the purposes outlined in Section 36(2)(a) to (c) – differentiates between a straight exercise of market power (such as monopoly pricing) and the exercise of market power for an exclusionary purpose.35 Given the wording of Section 36(2)(a) to (c), the purpose need not relate to the market in which the person has the substantial degree of market power and can also relate to any other market.

Section 2(5B) of the Act deems a person to have acted for a particular purpose if that purpose was a substantial purpose.

Section 36B enables a firm's purpose to be inferred from conduct or from any other relevant circumstances. However, as the Privy Council cautioned in Carter Holt Harvey Building Products Ltd v. Commerce Commission:

[W]hile it is legitimate to infer 'purpose' from use of a dominant position producing an anti-competitive effect, it may be dangerous to argue the converse that because the anti-competitive purpose was present, therefore there was use of a dominant position. This is because the effect of preventing a monopolist from competing with its competitors like everyone else would be to protect inefficient competitors.36

A monopolist, like all other firms, is allowed to compete with its competitors,37 and firms of all sizes engage in conduct that is designed to harm their competitors on a daily basis; as the Australian Competition and Consumer Commission noted in its submissions to the New Zealand Government on Section 36 in 2015, 'this is exactly what occurs in well-functioning competitive markets'.38 What is unlawful is for a monopolist to take advantage of its market power to achieve those objectives. Consequently, it has been observed that 'the purpose element of a Section 36 case is usually straightforward: the handwringing takes place in the assessment of the connection element [i.e. the 'taking advantage' limb of Section 36]'.39

Regarding the specific nature of the 'purpose' inquiry, the New Zealand courts have held that purpose can be established on either a subjective or objective analysis.40 In some circumstances purpose can also be inferred from evidence of the anticompetitive effect of a firm's conduct.41

ii Exclusionary abuses

Predatory pricing

It is not disputed that in principle, predatory pricing can constitute a breach of Section 36.42 However, the New Zealand courts have proven reluctant to condemn price cutting as anticompetitive, on the basis that the reduction of prices generally reflects competition at work,43 and that it is not desirable for powerful firms to be reluctant to engage in discounting out of concern for breaching Section 36.44

The leading New Zealand decision on predatory pricing is Carter Holt Harvey Building Products Ltd v. Commerce Commission.45 This case concerned a dominant glasswool insulation manufacturer, which in response to the launch of a competing wool-based insulation product, developed its own wool-based product and for a period of seven months, offered it on a '2-for-1' basis. This translated to a per-bale price that was between 17 per cent and 28 per cent below the dominant firm's supply cost. Overturning the decisions of the New Zealand High Court46 and Court of Appeal,47 the majority of the Privy Council controversially held that the dominant firm had not misused its market power for the purpose of Section 36; rather, its sustained below-cost pricing strategy was held to be simply a rational response to strong competition.

In Carter Holt Harvey, the majority of the Privy Council was at pains to emphasise that Section 36 is not intended to deny a dominant firm the opportunity to protect its market share by engaging in price cutting strategies:

a monopolist is entitled like everyone else to compete with his competitors. He is not required to stand idly by as he sees his market share being eaten into by others who are not dominant. That would be stifling competition – the very thing the section [Section 36] is designed to promote, for the consumer's benefit.48

Significantly, following Carter Holt Harvey, a powerful firm will only be guilty of misusing its market power in a predatory pricing case if (1) the firm prices below a measure of variable cost for a period of time; and (2) there is the potential for the firm to recoup its losses at a later date. On the issue of recoupment, the majority of the Privy Council held:

There must . . . be a causal connection between the dominant position and the conduct which is alleged to have breached section 36. That will not be so unless the conduct has given the dominant firm some advantage that it would not have had in the absence of its dominance. It is the ability to recoup losses because its price-cutting has removed competition and allows it to charge supra-competitive prices that harms consumers. Treating recoupment as a fundamental element in determining a claim of predatory pricing provides a simple means of applying the section without affecting the object of protecting consumer interests . . .49

Margin squeeze

A margin squeeze occurs where a vertically integrated firm with market power in respect of the supply of an upstream input sets its prices in the upstream and downstream markets at levels that prevent efficient competitors from operating profitably in the downstream market. In New Zealand, the so-called 'Data Tails' litigation involved an alleged margin squeeze where the Commission asserted that Telecom (which owned New Zealand's national telecommunications network) overcharged downstream competitors for access to its wholesale network, which prevented them from offering retail end-to-end high-speed data services on a competitive basis. Both the High Court50 and the Court of Appeal51 held that Telecom had breached Section 36 by imposing a margin squeeze on its downstream competitors. Significantly, the High Court effectively treated the case as a constructive refusal to deal.52 After holding that Telecom possessed requisite market power for the purposes of Section 36, it then approached the question of whether Telecom had 'taken advantage' of this market power by asking firstly whether Telecom was obliged to grant competitors access to its wholesale network, and secondly whether the prices Telecom charged its competitors were greater than the prices it would have charged in a hypothetical competitive market. On appeal, the Court of Appeal clarified that under the requisite counterfactual test, the first limb of the inquiry involved asking whether a non-dominant Telecom would in fact grant competitors access to its wholesale network.53

Exclusive dealing

While exclusive dealing arrangements can benefit competition (for instance, by encouraging investment by retailers and distributors in advertising and after-sales care), they can also raise competition issues where they deny competitors access to an important input or a significant distribution channel. As exclusive dealing arrangements are typically bilateral, they lend themselves to challenge under Section 27 of the Act, which prohibits firms from entering into contracts, arrangements or understandings with the purpose or effect of substantially lessening competition. However, a breach of Section 36 will occur if a firm uses its substantial market power through an exclusive dealing arrangement for one of the purposes prohibited under Section 36(2)(a)–(c).54

Leveraging

Leveraging market power through tying or bundling will constitute a breach of Section 36 if it involves a firm taking advantage of its market power for a purpose proscribed under Section 36(2)(a)–(c). The leading New Zealand case on tying is Port Nelson Ltd v. Commerce Commission.55 Port Nelson possessed market power in respect of the supply of tugs, but required tug users to also purchase pilotage services from the Port. The High Court held that the 'tug tie' (as it was referred to in the litigation) breached Section 36.56 This finding was upheld in the Court of Appeal.

In relation to Section 36, bundling has also been considered by the Commission in two investigations. The first concerned the compulsory bundling of 'dinner, bed and breakfast' by the sole hotelier in the tourist resort village of Aoraki/Mt Cook. The hotelier was found to have breached Section 36 by leveraging its market power in the accommodation market to foreclose competition in the local restaurant market.57

The second investigation considered Telecom's bundling of broadband services. Telecom offered a NZ$10 discount on broadband to customers who also purchased homeline (local calls) and toll services. Telecom had market power in respect of local calls, but not in respect of tolls or broadband. In its investigation report, the Commission outlined a test for determining whether bundling constituted 'taking advantage' of market power for the purposes of Section 36: could an equally efficient supplier of a competitive product compete with the bundled discount? To answer this question, the Commission spread the discount across the competitive services. As the average margin was found to be positive, no breach of Section 36 was found to have occurred, since efficient competitors could earn positive margins over the combined calling and broadband offering when they sold similar bundles.58

Refusal to deal

The starting proposition under New Zealand law is that outside of certain regulated industries,59 firms are generally permitted to determine for themselves who they will do business with.60 There is one caveat, however: while the 'essential facilities doctrine' has been discussed in a number of cases,61 these have not been determinative and it is an open question as to whether the doctrine operates in New Zealand. In Commerce Commission v. Bay of Plenty Electricity Ltd,62 the New Zealand High Court cited with approval the High Court of Australia's approach to the essential facilities doctrine in Queensland Wire Industries Pty Ltd v. Broken Hill Proprietary Co Ltd, and indicated that were the doctrine accepted in New Zealand, four requirements would need to be made out: (1) for a facility or input to be considered 'essential', it must not be practically duplicable or economically viable to replicate; (2) where an input is used to produce a product in a downstream market, there must be no close substitutes to the downstream product; (3) the dominant firm must control the essential facility or input; and (4) there must not be any legitimate business rationale for the refusal to deal.

ii Discrimination and exploitative abuses

Section 36 does not prohibit discriminatory or exploitative practices such as price discrimination or excessive pricing by a firm with a substantial degree of market power, unless, in engaging in the relevant conduct, the firm in question takes advantage of its market power for one of the exclusionary purposes listed in Section 36(2)(a)–(c). One scenario in which a breach of Section 36 can occur is where a monopoly input supplier competes with its customers in a downstream market, and sets its upstream prices so high as to prevent its customers from competing effectively in the downstream market, such as occurred in the 'Data Tails' litigation.63

Significantly, Part 4 of the Act provides for the regulation of the price and quality of goods and services sold in markets where there is little or no competition and little or no likelihood of a substantial increase in competition.64 Regulation under Part 4 of the Act is not imposed lightly, however: there must be scope for the exercise of substantial market power in relation to the relevant goods or services, and the benefit of regulating the goods or services under Part 4 must materially exceed the costs of regulation.65 Regulation is imposed by way of an Order in Council issued by the Governor General, outlining the goods or services to be regulated and the types of regulation that will apply.66 An Order in Council may only be issued upon the recommendation of the Minister of Commerce,67 following a formal inquiry by the Commission into the state of competition in the relevant market.68 Currently, Part 4 of the Act applies to electricity lines services,69 gas pipeline services70 and certain services supplied at Auckland, Wellington and Christchurch airports.71

Under the Telecommunications Act 2001, the Commission also regulates certain fixed-line and mobile services by setting the price or access terms, or both, for those services, and reports on competition, performance and developments in telecommunications markets. These functions aim to promote competition in telecommunications markets for the benefit of consumers.72 Amendments to the Telecommunications Act 2001 passed on 7 November 2017 also provide for the regulation of ultra-fast broadband (UFB) fibre networks. Under the new regulatory regime, the Commission is responsible, inter alia, for regulating the maximum revenue that the largest UFB network operator can generate and the quality of the service it must deliver, and operating an information disclosure regime in respect of local fibre companies.

Under the Dairy Industry Restructuring Act 2002, the Commission also conducts annual reviews of Fonterra's73 milk price manual and its calculation of the 'base milk price'.

V REMEDIES AND SANCTIONS

i Sanctions

Section 80 of the Act allows the courts to impose pecuniary penalties for contraventions of Part 2 of the Act, which includes Section 36.

A penalty of up to NZ$500,000 may apply to an individual. For companies, the court may impose penalties of up to the greater of: NZ$10 million; or where the commercial gain resulting from the contravention can be ascertained, three times the value of that commercial gain; or where the commercial gain cannot be ascertained, 10 per cent of turnover of the company and its interconnected companies. In many instances the turnover of the company and interconnected companies will produce the largest maximum penalty.

Penalties can also be imposed on persons who are accessories, that is, who have aided, abetted, procured, induced, attempted to induce or have been in any way, directly or indirectly, knowingly concerned in or a party to a contravention of Section 36.74 Accessory liability is widely cast and can extend to directors, employees and professional advisers. However, due to the requirement for actual knowledge, advisers, directors and staff will not be liable for innocent conduct.

Section 82 of the Act allows for damages to be awarded for loss or damage caused by a contravention of Part 2, and Section 82A allows for an award of exemplary damages. Damages or exemplary damages, or both, may be in addition to a pecuniary penalty already ordered for the same conduct.75 To date, no damages have been awarded under Section 82 for misuse of market power as the actions have either failed or been settled.

ii Behavioural remedies

The Act authorises the court to grant an injunction to restrain a person from engaging in any contravention or attempted contravention of Part 2, or from engaging in conduct that would give rise to accessory liability under the Act.76 Injunctions can be permanent or interim.77 The Commission is not required to give an undertaking as to damages when applying for an injunction.78

Section 89 contains additional remedies that allow a court where a contract or covenant breaches the Act to vary, cancel or require a party to the contract or covenant to compensate another party to the contract.79 More widely, the court has the power to make such an order or orders as it thinks appropriate against those persons involved in a breach of Part 2.80 This can include the power to grant declarations in respect of past or future conduct.81

iii Structural remedies

The Act does not currently provide structural remedies for a contravention of Section 36. This could change as part of the review of Section 36 being carried out by the New Zealand Government.

VI PROCEDURE

The Commission is responsible for enforcement of the Act and has wide powers to investigate and prosecute breaches of the Act. The Commission cannot investigate all suspected or alleged breaches of the Act, and consequently it has developed and published guidelines on investigation and enforcement. The key policies of relevance to investigations into misuse of market power are the Enforcement Response Guidelines,82 Enforcement Criteria83 and Model Litigant Policy.84

The Enforcement Response Guidelines describe the potential enforcement responses available and include compliance advice letters, warning letters, injunctions, civil proceedings85 and negotiated settlements.

In deciding whether to investigate, and the type of enforcement appropriate, the Commission considers the following enforcement criteria: the extent of detriment suffered by consumers or businesses; the seriousness of the contravening conduct; and the public interest in the matter.

The Model Litigant Policy describes how the Commission must act in litigating matters under the Act. This includes dealing with litigation promptly, efficiently and without unnecessary delay or expense, considering the possibilities for alternate means of avoiding or resolving litigation and at all times acting according to the Commission's purpose of promoting dynamic and responsive markets.86

i Investigation

The Act grants the Commission wide powers of investigation including to require a person to supply information, produce documents or appear before the Commission to give evidence.87 These powers are available to the Commission regardless of whether proceedings have been commenced.88 The Commission may make a voluntary information request before using the investigation powers contained in the Act. The Act also permits an employee of the Commission to conduct a search under a warrant (i.e., dawn raids).89 Information requests may be made of the person being investigated but also of other industry participants.

A person may not refuse to comply with a notice issued under Section 98 on the grounds it may incriminate that person.90 Refusal to comply with a Section 98 notice, giving false or misleading information or evidence, or resisting or delaying a search warrant are all offences91 punishable, in the case of an individual, by a maximum fine of NZ$100,000, and in other cases a maximum fine of NZ$300,000.92

The Commission's power to request information or documents under Section 98 must be used to investigate potential breaches of the Act and not to probe market activity generally.

An investigation can be initiated by the Commission of its own volition or be prompted by a complaint from a third party.

When investigating a breach of Section 36A of the Act, the Commission can require information or documents from a person ordinarily resident in Australia or who carries on business in Australia.93 Where the Commission has entered into a cooperation arrangement with an overseas regulator or government,94 the Commission can provide compulsorily acquired information and investigative assistance to the overseas regulator.95

ii Enforcement measures

The Commission has a range of methods that it uses to enforce Part 2 of the Act, with less significant infractions being dealt with using low level or administrative responses (such as a 'compliance advice letter'96 or warning letter) through to more serious breaches being pursued in the courts.97

iii Negotiated settlements

The Commission has stated that it is receptive to requests to resolve matters early through negotiation and agreement.98 An approach to make a settlement proposal can be on a 'without prejudice' basis for civil proceedings.

A negotiated settlement can be used before proceedings commence with an out-of-court settlement, or during proceedings. An out-of-court settlement requires an admission of liability, with the Commission and the party under investigation agreeing on the terms of settlement. With an in-court settlement, the defendant admits liability according to an agreed summary of fact and the parties make a joint submission to the court on the appropriate penalty; however, the penalty will ultimately be set by the court.99 Settlement outcomes are generally published.

iv Court proceedings

The Commission is more likely to consider issuing court proceedings where: the conduct is of significant public interest or concern, the conduct is deliberate or repeated, there has been a disregard for the law, the detriment is significant, for deterrence reasons or if the Commission wants the court to determine an important area of the law.100

Very few cases regarding breach of Section 36 have been fully litigated as the cases are often settled. Additionally in the last decade, lack of certainty over the counterfactual test when considering a potential breach of Section 36 has made it difficult for the Commission to undertake court proceedings.

VII PRIVATE ENFORCEMENT

Damages, exemplary damages and injunctions are available for private enforcement of a breach of Section 36.101 Pecuniary penalties are only available if the action is brought by the Commission. There have been very few private enforcement actions brought in the last decade, due in large part, in the authors' view, to the difficulties with the application of Section 36 and the counterfactual analysis used by the New Zealand courts in order to determine whether a person has taken advantage of its substantial market power.

VIII FUTURE DEVELOPMENTS

In recent years, significant questions have been raised as to whether Section 36 sufficiently safeguards the New Zealand economy from unilateral abuses of market power. The Commission and the Australian Competition and Consumer Commission have both been critical of Section 36's preoccupation with purpose, and the counterfactual test for determining whether a firm has 'taken advantage' of its market power.

A public consultation run by the Ministry of Business, Innovation and Employment (MBIE) from late 2015 to mid-2016 concluded that further work should be carried out on the costs and benefits of adopting alternative wording to Section 36, and the extent of actual harm resulting from Section 36 as currently drafted. In view of MBIE's recommendations, Cabinet invited the Minister of Commerce and Consumer Affairs to report back to the government in 2018 on whether it would be appropriate to produce an 'options paper' on Section 36.

In parallel with these investigations, Australia conducted a thorough review of its misuse of market power provision (Section 46 of the Competition and Consumer Act 2010 (Cth)), upon which New Zealand's own Section 36 was based. The Australian review concluded that the Australian economy would be better served by a unilateral misuse of market power provision that focused on whether a firm's conduct had an anticompetitive effect, rather than on whether the firm's purpose was anticompetitive. The Australian government announced in March 2016 that it would be implementing this law change, and in August 2017, Section 46 was amended accordingly.

The recent amendments to the Australian law have profoundly shaped recent discussions in New Zealand concerning the future of Section 36, with MBIE recommending in a Discussion Paper released for public consultation in late 2018102 that New Zealand adopt an adapted version of the new Australian legislation as follows:

A person [which, for the avoidance of doubt, includes a company or other entity] 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 a market.

Prior to the outbreak of covid-19, the government was expected to make final policy decisions on Section 36 in early 2020. It is anticipated that this process may be delayed due to the government's focus on New Zealand's pandemic response.


Footnotes

1 Anna Ryan is a partner, Ellen Sewell is a senior associate and Kristina Sutherland is an associate at Lane Neave.

2 Section 1A of the Act. This purpose statement was inserted into the Act on 26 May 2001, by Section 4 of the Commerce Amendment Act 2001.

3 Now the Competition and Consumer Act 2010 (Cth).

4 James Every-Palmer, 'The State and Monopolies: New Zealand's Experience', (2010) 12(2) Otago Law Review 227, 229.

5 Section 52 of the Act.

6 Commerce Commission, Taking Advantage of Market Power Fact Sheet (2018) < https://comcom.govt.nz/__data/assets/pdf_file/0041/89897/Taking-advantage-of-market-power-Fact-sheet-July-2018.pdf>; Commerce Commission, Where Tying Harms Competition Case Study (2018) < (https://comcom.govt.nz/__data/assets/pdf_file/0029/116993/Where-tying-harms-competition-Case-study-July-2018.pdf)>; Commerce Commission, Predatory Pricing or Competitive Price Matching? Case Study (2018) < (https://comcom.govt.nz/__data/assets/pdf_file/0031/116995/Predatory-pricing-or-competitive-price-matching-Case-study-July-2018.pdf)>; Commerce Commission, Assessing a Refusal to Supply Case Study (2018) < https://comcom.govt.nz/__data/assets/pdf_file/0027/116991/Assessing-a-refusal-
to-supply-Case-study-July-2018.pdf
>.

7 It is important to note, however, that changes to the Australian law that came into force on 6 November 2017 mean that the wording of the Australian and New Zealand provisions are no longer aligned, and even prior to the Australian law change, there was a divergence in the way in which the Australian and New Zealand courts applied the 'take advantage' limb of the respective countries' misuse of market power provisions.

8 Section 6 of the Act.

9 Section 5 of the Act. 'Trade' is defined in Section 2(1) of the Act as 'any trade, business, industry, profession, occupation, activity of commerce, or undertaking relating to the supply or acquisition of goods or services or to the disposition or acquisition of any interest in land.' The question of whether the Minister of Health was 'engaged in trade' for the purposes of Section 36 of the Act was considered by both the New Zealand High Court and the Court of Appeal in Glaxo New Zealand Ltd v. Attorney General [1991] 3 NZLR 129 (HC & CA).

10 Section 5(3).

11 Section 5(2).

12 Section 5(4).

13 Section 3(1A) of the Act.

14 Commerce Commission v. New Zealand Bus Ltd (2006) 11 TCLR 679 (HC) at [123].

15 As market definition plays a central role in applications for clearance or authorisation of a proposed merger under Part 5 of the Act, helpful guidance on market definition can be found in the Mergers and Acquisitions Guidelines issued by the Commerce Commission in July 2019 (the Guidelines).

16 Paragraph 3.14 of the Guidelines.

17 Paragraph 3.17 of the Guidelines.

18 The Commission generally uses 5% as the SSNIP (paragraph 3.18 of the Guidelines).

19 Boral Besser Masonry Ltd v. Australian Competition and Consumer Commission (2003) 215 CLR 374, [2003] HCA 5 at [137].

20 ibid; Commerce Commission v. Southern Cross Medical Care Society (2001) 10 TCLR 269 (CA) at [68].

21 Boral Besser, see note 19.

22 ibid at [136] and Commerce Commission, Taking Advantage of Market Power Fact Sheet, see note 19.

23 Section 2(1A) of the Act.

24 See Mark Berry and Lewis Evans (eds), Competition Law at the Turn of the Century: A New Zealand Perspective (Victoria University Press, 2004) 250.

25 Carter Holt Harvey Building Products Ltd v. Commerce Commission [2006] 1 NZLR 145 (PC) at [51].

26 Telecom Corp of New Zealand Ltd v. Clear Communications Ltd (1994) 5 NZBLC 103,552; [1995] 1 NZLR 385 (PC) at NZBLC 103,566; NZLR 403, considered and endorsed again by the Privy Council in Carter Holt Harvey v. Commerce Commission, see note 25 at [9], [29] and [60], and by the New Zealand Supreme Court in Commerce Commission v. Telecom Corp of New Zealand Ltd [2010] NZSC 111 at [31].

27 ibid.

28 Commerce Commission, Submission to the Ministry of Business, Innovation and Employment, Review of Section 36 of the Commerce Act and other matters, 1 April 2019 at [11].

29 This language was used in the Australian case of Melway Publishing v. Robert Hicks (2001) ATPR 41-805; 205 CLR 1 (HCA) at [44].

30 The New Zealand courts have expressly noted that the counterfactual need not depend on realistic or practical assumptions, and unrealistic scenarios are permitted – see Turners & Growers Ltd v. Zespri Group Ltd HC Auckland CIV-2009-404-4392, 12 August 2011 at [345].

31 Andrew Gavil, 'Imagining a Counterfactual Section 36: Rebalancing New Zealand's Competition Law Framework' (2015) 46 Victoria University of Wellington Law Review 1043 at 1053.

32 i.e. a 'false positive' or 'false negative', respectively.

33 See Ministry of Business, Innovation and Employment, Discussion Paper: Review of s36 of the Commerce Act and other matters (2018), 18; Australian Competition and Consumer Commission, Submissions to Treasury, Options to strengthen the misuse of market power law (2016).

34 Cento Veljanovski, 'The Flawed Market Power Counterfactual' (2013) New Zealand Law Journal 247, 252.

35 See note 33 at 13.

36 See note 25 at [40].

37 Telecom v. Clear, see note 26 at 103,565; 402-403; Carter Holt Harvey v. Commerce Commission, see note 25 at [51].

38 Australian Competition and Consumer Commission, Submissions to the Ministry of Business, Innovation and Employment, Targeted Review of the Commerce Act 1986 (2016) 4.

39 Matt Sumpter, New Zealand Competition Law and Policy (CCH, 2010) 274.

40 See Port Nelson Ltd v. Commerce Commission (1996) 5 NZBLC 104,142, 104,151; [1996] 3 NZLR 554, 564.

41 New Zealand Private Hospitals Association - Auckland Branch (Inc) v. Northern Regional Health Authority HC Auckland CP440/94, 7 December 1994, 24.

42 See, for example, Commerce Commission, Taking Advantage of Market Power Fact Sheet and Predatory Pricing or Competitive Price Matching? Case Study, see note 6.

43 Port Nelson v. Commerce Commission, see note 40 at NZBLC 104,158; NZLR 572.

44 Carter Holt Harvey v. Commerce Commission, see note 25 at [66].

45 ibid.

46 Commerce Commission v. Carter Holt Harvey Building Products Group Ltd (2000) 9 TCLR 535.

47 Carter Holt Harvey Building Products Group Ltd v. Commerce Commission [2001] NZCA 298; (2001) 10 TCLR 247.

48 See note 25 at [23].

49 ibid.

50 Commerce Commission v. Telecom Corporation of New Zealand Ltd HC Auckland CIV-2004- 404-1333, 9 October 2009; Commerce Commission v. Telecom Corporation of New Zealand Ltd HC Auckland CIV-2004- 404-1333, 19 April 2011.

51 Telecom Corporation of New Zealand Ltd v. Commerce Commission [2012] NZCA 278; Telecom Corporation of New Zealand Ltd v. Commerce Commission [2012] NZCA 344.

52 See Bradley Aburn, 'Margin Squeezing: The Superfluous 'Fancy Phrase' of New Zealand Competition Law' (2012) Auckland University Law Review 216 for a useful discussion.

53 See note 51 at [131] – [132]. The Court of Appeal found that while the High Court had not expressly referred to it, in context it had applied counterfactual analysis, and was correct in finding that Telecom was obliged to grant competitors access to its wholesale network, in the sense that in the agreed counterfactual a non-dominant Telecom would not rationally have refused to grant such access. For an Australian example of misuse of market power in respect of the pricing of an essential input, see Queensland Wire Industries Pty Ltd v. Broken Hill Pty Co Ltd (1989) 167 CLR 177; [1989] HCA 6.

54 See, for example, Auckland Regional Authority v. Mutual Rental Cars (Auckland Airport) Ltd [1987] 2 NZLR 647, (1987) 2 TCLR 141, (1988) 2 NZBLC 103,041 (HC). The argument that an exclusive dealing arrangement breached Section 36 was also advanced in Bond & Bond Ltd v. Fisher & Paykel Ltd (1986) 2 TCLR 79, (1987) 1 NZBLC 102,622 (HC); Marine Resources (NZ) Ltd (in rec) v. Natural Gas Corp of NZ Ltd HC Hamilton CP237/91, 8 April 1993; Turners & Growers v. Zespri Group, see note 30.

55 See note 40.

56 Commerce Commission v. Port Nelson Ltd [1995] TCLR 406.

57 See Commerce Commission, Where Tying Harms Competition Case Study, see note 6.

58 Commerce Commission, Investigation Report, Telecom Bundling of Broadband Services (21 December 2007).

59 Such as telecommunications (in respect of interconnection) and the dairy industry (in respect of raw milk).

60 Subject to their obligations under New Zealand's human rights legislation.

61 See, for example, Auckland Regional Authority v. Mutual Rental Cars (Auckland Airport) Ltd [1987] 2 NZLR 647; (1987) 2 TCLR 141, (1988) 2 NZBLC 103,041 (HC); Union Shipping NZ Ltd v. Port Nelson Ltd [1990] 2 NZLR 662, (1990) 3 NZBLC 101,618 (HC); Telecom Corp of New Zealand Ltd v. Clear Communications Ltd [1995] 1 NZLR 385 (PC).

62 HC Wellington CIV-2001-485-917, 13 December 2007.

63 Discussed above under the heading 'Margin squeeze'.

64 Section 52 of the Act.

65 Section 52G.

66 Section 52N.

67 Section 52L and M.

68 Section 52H – K.

69 See Part 4, Subpart 9.

70 See Part 4, Subpart 10.

71 See Part 4, Subpart 11.

72 Section 18 of the Telecommunications Act 2001.

73 New Zealand's largest dairy cooperative.

74 Section 80(1) of the Act.

75 Section 82A(2).

76 Section 81.

77 Section 88(2).

78 Section 88A.

79 Sections 89(2) and (3).

80 Section 89(1).

81 The courts also have an inherent power to grant declaratory relief under the Declaratory Judgments Act 1908.

85 New Zealand has criminal liability in the Act for a few specific matters relating to cartel conduct. Broader criminal liability for cartel conduct is set to be introduced in 2021 under the Commerce (Criminalisation of Cartels) Amendment Act 2019.

86 See note 83, 1.

87 Section 98A.

88 Section 98G.

89 Section 98A.

90 Section 106(4).

91 Section 103(1).

92 Section 103(4).

93 Section 98H. Section 36A prohibits taking advantage of power in trans-Tasman markets. It is sufficient in complying with an information request under Section 98H to supply the information or documents requested to the Australian Competition and Consumer Commission (ACCC) (see Section 98H(2)). Likewise, the Commission may receive information and documents on behalf of the ACCC where the ACCC requires any information or documents from a person resident or carrying on business in New Zealand (see Section 99A).

94 The Commerce Commission currently has cooperation arrangements with Australia and Canada.

95 Section 99I.

96 The Enforcement Response Guidelines, see note 81, contain useful summaries of the Commission's use of 'compliance advice letters' and 'warning letters' (see [30]–[44]). Unlike compliance advice letters, warning letters are generally published on the Commission's website.

97 Where possible, the Commission prefers to encourage compliance with the law through the use of non-enforcement options (see Enforcement Response Guidelines, see note 81 [10]).

98 ibid [65].

99 See for example Commerce Commission v. New Zealand Milk Corporation Ltd [1994] 2 NZLR 730.

100 Enforcement Response Guidelines, see note 81 [51] – [53] sets out the Commission's approach to issuing court proceedings and lists these and other factors as relevant.

101 Sections 81, 82(1) and 82A of the Act.

102 See note 33.