609 paragraphs later...

Stopping well-dug-in incumbents from using their market power to prevent or deter competition has always been one of the most challenging issues for competition policy. It's important - maybe even more important than before, with the emergence of the new generation of 600 pound gorillas (Amazon, Facebook, Google) - but intrinsically is also very hard to define and police.

For one thing, we want the 600 pound gorillas to be vigorous competitors and not just sit like Smaug  on their monopolistic hoard of profits. But it's not easy to distinguish 'vigorous' from 'anti-competitive'. A behemoth offers a big discount: is that a big win to celebrate for consumers, or a proscribed attempt to scare away potential entrants?

It doesn't help that our current law (section 36 of the Commerce Act), and the New Zealand jurisprudence around it, aren't in the best place. Anti-competitive abuse of market power is a hard thing to grapple with at the best of times, but you wouldn't bring our knife to that gunfight.

The Aussies are onto it. Last November their new approach came into effect, with section 46(1) of their Competition and Consumer Act now reading "A corporation 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".

Previously their wording was the one we are still running with, "A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of: (a) eliminating or substantially damaging a competitor... (b) preventing the entry of a person ... or (c) deterring or preventing a person from engaging in competitive conduct...".

Junking "taking advantage" means that the complex legal exercise of linking the use of market power to the conduct (the 'counterfactual test') can also be thrown overboard. That's been the element that has stymied our Commerce Commission from getting any results and has led it to flag away trying to enforce s36. And introducing "effects" means that the big bunfight over "purpose" can be sidestepped. Barring the occasional smoking gun of damning internal e-mails, "purpose" is susceptible of many interpretations and it can be a lottery which view a court will take (and one that cuts both ways, judges wrongly seeing abuse where there wasn't, or, also wrongly, seeing no abuse where there was).

"Effects" is no walk in the park, either, but at least it offers the chance to do some empirical analysis of what happens in a market when a powerful incumbent does something, and takes us away from trying to peer into people's state of mind.

All of which is by way of introduction to what must be the last gasp of the old Aussie regime, the Pfizer case, which has just had its latest outing in the Aussie courts. You'll find all the details here at the very useful Australian Competition Law website. It dates back to 2012, when the Aussies were operating the old version of the legislation, the one we're still lumbered with.

What happened was that Pfizer held the patent on a widely prescribed and enormously lucrative drug, Lipitor, which helps control cholesterol. But the patent ran out in 2012 and, unsurprisingly, various manufacturers of a generic version were drooling at the prospect of getting into the game. Pfizer knew the boom days were over for Lipitor but reckoned it might at least minimise the hit to the bottom line if it could make a go of competing in the generic market with its own generic version.

Its bright idea was a trio of direct selling to Aussie pharmacies (bypassing the big drug wholesalers which chemists typically use); setting up a bank of dollar credits for pharmacists based on how much Lipitor they sold before the patent ran out; and then paying out the credits if pharmacists signed up to a deal where they agreed to sell large quantities of Pfizer's generic version rather than the opposition's.

Enter the ACCC in 2014. Unsurprisingly: patent-holders up against patent expiry have got up to some very questionable things overseas. In particular the ACCC didn't like that requirement to stock up big on Pfizer's generic version, as it looked as if it was intended to lock up most of the market and starve the other generic manufacturers of oxygen. I didn't like the look of it, either, and I'm not surprised the ACCC challenged it. Abuse of dominance is always a grey area, but I've always liked Robert Willig's characterisation of it as not leaving enough room on the dance floor for the other dancers. The bulk purchasing requirement looked like it failed the dancing room test. If I was on the ACCC I'd have probably pressed the Go button, too.

And it would have blown up in my face, just as it has in the ACCC's. The ACCC lost the first case, in the Aussie Federal Court, in 2015, and now it's lost the appeal to the Full Federal Court. The upshot is that Pfizer was found to have had market power, found to have taken advantage of it, but - wait for it - not with the proscribed purpose.

Both courts ended up accepting Pfizer's explanation, that "at all relevant times, Pfizer was seeking to position itself to remain a viable supplier of atorvastatin [the molecule in Lipitor] into the future rather than to hinder or deter others from competing in the atorvastatin market. At all relevant times, Pfizer well understood that any aspiration to hinder or deter the very substantial corporations which manufactured and supplied generic pharmaceuticals in Australia would have been pointless", as the Full Federal Court at [455] described the Federal Court's finding.

They couldn't have had the purpose, in short, because no-one in their right minds thought blockage or prevention or deterrence of new competition was remotely possible (if there had been an 'effects' test, Pfizer would have passed it, too). And indeed I found myself having some sympathy for Pfizer. The big pharmaceutical wholesalers were each vertically aligned with a generic manufacturer: Pfizer faced not only the loss of the Lipitor revenues but all the revenues in the new generic market, which would go to the wholesale-aligned manufacturers. So no wonder it was willing to scrap hard to get at least some share.

And, as the Federal Court said, in scrapping hard - which we want the Pfizers of this world to do - Pfizer did no more than what was par for the course in the very sharp-elbowed jostling that goes on when patents expire. As the Full Federal Court said at [559], Pfizer's cunning plan "was not atypical of the conduct which other pharmaceutical manufacturers had taken in the past and would take again in the launch phase of a new pharmaceutical. After all, the generics manufacturers were expected to, and did, in fact, vigorously compete with Pfizer by discounting their generic atorvastatin to 90% or 100% in order to gain traction in the post 18 May 2012 atorvastatin market".

And so the curtain very nearly falls on the "taking advantage...for the purpose" regime. The ACCC might yet appeal: whether the Full Federal Court has bomb-proofed the risk of being reversed with its 199-page, 609-paragraph, 29-months-in-the-making judgement remains to be seen.

Either way, the Aussies will soon ('soon' in the legal sense of 'not quite glacially') have seen the back of the artificiality of "taking advantage"; of the second-guessing of "purpose"; and of no role for actual effects. On this occasion, in Australia, it looks as if the old approach nonetheless found its way to the right answer, despite the rickety analytical mechanism. In New Zealand, unless the current government kicks on with its competition policy reforms, we're still stuck with what is effectively a lottery for both the Commission and the businesses caught up in section 36.