Certain types of conduct in the Commerce Act are prohibited regardless of their impact upon competition. The kinds of conduct which fall into this category are price fixing, resale price maintenance, and taking advantage of a substantial degree of market power for an unlawful anti-competitive purpose. Other conduct is prohibited only if it has the purpose, effect, or likely effect of substantially lessening competition in a market. This includes anti-competitive agreements and exclusionary arrangements between competitors.
The Commerce Act is administered and enforced by the Commerce Commission, whose activities include investigation and prosecution of anti-competitive conduct. The Commerce Commission has statutory powers to assist it gather information and evidence in the investigation of anti-competitive conduct, including powers to compel the production of documents and information and to obtain and execute search warrants.
3.1 Price fixing
Price fixing is absolutely prohibited under the Commerce Act. Price fixing involves an agreement between people or businesses in competition with each other that has the purpose, effect or likely effect of fixing, controlling or maintaining the price for goods or services (including any discount, allowance, rebate or credit in relation to those goods or services). The price-fixing prohibition is in the process of being replaced by a prohibition on “cartel provisions,” discussed in more detail further in this chapter.
3.2 Anti-competitive agreements
The Commerce Act prohibits a person entering into and giving effect to a contract, arrangement or understanding that contains a provision that has the purpose, effect or likely effect of substantially lessening competition in a market. The Commerce Act also prohibits agreements between persons in competition with each other that contain “exclusionary provisions.” Exclusionary provisions are provisions that have the purpose of preventing, restricting or limiting the supply or acquisition of goods or services to or from particular persons. It is a defense to the prohibition on exclusionary provisions if the provision does not have the purpose, effect or likely effect of substantially lessening competition in a market. The prohibition on exclusionary provisions is currently in the process of being repealed by the legislation discussed below. Once the prohibition is repealed, such agreements will fall to be assessed under the general prohibition on agreements with the purpose, effect or likely effect of substantially lessening competition in a market.
3.3 Resale price maintenance
Resale price maintenance is absolutely prohibited. The prohibition against resale price maintenance covers a range of different conduct, including persuading or inducing a reseller not to sell goods below a specified price, withholding supply on the basis that a reseller has sold goods below a specified price, and entering into an agreement for the supply of goods where the minimum resale price is specified. Suppliers are permitted to issue recommended retail prices but must not enforce any minimum price. It is also permissible for a supplier to specify a maximum price for resale, so long as this does not amount to a de facto actual price at which the reseller must sell.
The Commerce Act prohibits a person with a substantial degree of power in a market from taking advantage of their market power for the purpose of restricting the entry of a person into a market, preventing or deterring a person from engaging in competitive conduct in a market, or eliminating a person from a market. There is also a specific prohibition on a person taking advantage of market power in trans-Tasman markets.
4.1 Predatory pricing
A person with a substantial degree of power in a market may take advantage of their market power if they price below cost in order to restrict the entry of a third party into a market, prevent or deter that party from engaging in competitive conduct in a market, or eliminate that party from a market. In order for this conduct to amount to predatory pricing, the courts have found that the person with substantial market power must intend to recoup their loss from pricing below cost by raising prices after the third party has been restricted from entering the market.
Companies can apply to the Commission for authorization of anti-competitive agreements, price fixing, resale price maintenance and exclusive dealing, but not misuse of market power. In order for such an authorization application to be granted, the Commission must be satisfied that there are sufficient public benefits to outweigh the detrimental effect the practice would have on competition.
There are a number of exceptions to the restrictive trade practices provisions in Part II of the Commerce Act. For instance, these provisions do not apply to a contract, arrangement or understanding containing a provision relating to conditions of employment. Nor do they apply to the entering into a contract for the sale of a business in so far as it contains a provision that is solely for the protection of the purchaser in respect of the goodwill of the business. There is also a specific exception for entering into a contact, arrangement or understanding licensing intellectual property rights, although this exception does not apply to the “misuse of market power” provision.
The Commerce Act prohibits a merger only if there is, or is likely to be, a substantial lessening of competition in a market. There are no compulsory financial or market share notification thresholds under the Commerce Act. Notification is a voluntary process at the parties’ discretion. However, guidelines issued by the Commerce Commission indicate that an acquisition may not substantially lessen competition where:
- the top three firms in the relevant market post acquisition have a market share of below 70 percent and the merged firm will have a 40 percent or less share of the relevant market; or
- the top three firms in the relevant market post acquisition have a market share above 70 percent and the merged firm will have a 20 percent or less market share.
These market share and concentration levels are referred to by the Commerce Commission as “concentration indicators”. There are two types of voluntary notification to the Commission:
- an application for a formal clearance, which will be granted if the Commission is satisfied that a transaction does not substantially lessen competition; and
- an application for formal authorization where a transaction may substantially lessen competition but there are sufficient public benefits arising from the transaction that it should be permitted.
There are no penalties for failing to notify a transaction to the Commission as notification is voluntary. The risk in not approaching the Commission is that, in addition to the disruption to the transaction if the Commission decides to intervene, there is the possibility of various penalties being imposed for breach of the Commerce Act if the acquisition substantially lessens competition in a market. Under the Commerce Act, the courts can order that penalties of up to NZD5 million be paid by companies or up to NZD500,000 in the case of an individual for an anti-competitive merger. The courts may also impose injunctions, and private actions can be brought by third parties who have been detrimentally affected (see the next paragraph). In addition, the courts can issue orders for the disposal of the assets or shares. The Commission has published mergers and acquisitions guidelines. The current guidelines were published in July 2013 and outline the considerations the Commission takes into account when assessing a merger, and the process that the Commission takes to assess a clearance application. The guidelines encourage potential applicants to have pre-notification discussions with the Commission to determine the information and evidence the Commission is likely to require to make its assessment.
The Commerce Act is administered and enforced by the Commission. Failure to comply with the Act can result in serious consequences for both the company and the individuals concerned or involved in the breach. Under the Commerce Act, the courts can order that civil penalties be paid in respect of any breach of the restrictive trade practices in Part II by companies of up to the greater of NZD10 million, or three times the value of any commercial gain or, if commercial gain is not known, 10 percent of the company’s turnover (including the turnover of all of its interconnected bodies corporate, if any). Penalties of up to NZD500,000 can be imposed on individuals. Companies cannot indemnify individuals for penalties or legal costs incurred from price fixing. In addition, private actions can be brought by third parties (e.g., competitors, customers or consumers) which have been detrimentally affected by the anti-competitive conduct seeking damages for the amount of the loss suffered. The courts may also impose injunctions to restrain anti-competitive conduct and vary or nullify anti-competitive contracts or arrangements.
The Commerce Commission has a Leniency Policy for Cartel Conduct (Leniency Policy). Under the Leniency Policy, immunity is available to the first person involved in a cartel who reports the cartel to the Commerce Commission. An applicant may still apply for immunity even after the Commerce Commission is aware of a cartel, provided it does not have sufficient evidence to commence court proceedings. The Leniency Policy also includes a marker system, enabling an applicant to preserve their place as an immunity applicant for a specified time while they gather the necessary information to support their application. There are various conditions that apply to the grant of leniency, including that the person seeking leniency has not coerced others to participate and provides full and continuing cooperation to the Commerce Commission. The Leniency Policy includes provision for cooperation concessions for cartel participants who are not eligible for immunity but wish to cooperate with the Commerce Commission in exchange for a recommended reduction in penalty. The Commerce Commission also has a Cooperation Policy covering non-cartel matters under which it may agree to take a lower level of enforcement action, or no action at all, against an individual or business in exchange for information and full, continuing and complete cooperation.
The Commerce Act also applies to conduct engaged in outside New Zealand by any person residing or carrying on business in New Zealand to the extent that such conduct affects a market in New Zealand. The Commerce Act will also apply to persons outside New Zealand, even if they are not residents or do not carry on business in New Zealand themselves, if they are involved in directing agents to carry out conduct in New Zealand.
The Commerce (Cartels and Other Matters) Amendment Bill (Bill) is currently before Parliament. The Bill completed its second reading in Parliament on 26 November 2014 and is unlikely to be passed until some point in 2015. The Bill’s current wording makes some significant changes to the Commerce Act, including:
- introducing a new prohibition (to replace the current price-fixing prohibition) on entering into or giving effect to a contract, arrangement or understanding that contains a “cartel provision” – this is defined as price fixing, restricting output or market allocation;
- replacing the joint ventures exception to price fixing, with a “collaborative activities” exemption;
- allowing for clearances to be sought from the Commission for contracts, arrangements or understandings containing a cartel provision where the parties are involved in a collaborative activity and the cartel provision is reasonably necessary for that collaborative activity; and
introducing a new criminal offence for entering into or giving effect to a contract, arrangement or understanding that contains a cartel provision with the intention of price fixing, restricting output or market allocating. This involves prison sentences up to seven years for individuals, and penalties of up to NZ10 million for corporates. The civil penalties will also remain in place. These criminal penalties will not come into force until two years after the Bill is passed.