Wednesday, 10 June 2020

It creeps ever closer

Back in May 2014, our Productivity Commission said that "s36 [of the Commerce Act, which forbids anti-competitive abuse of market power] should be reviewed, through a thorough legal and economic analysis that assesses reform options against the objectives of economic efficiency (particularly dynamic efficiency) and the long-term interests of consumers". Even before that, there'd been legal and academic debate about s36's usefulness or otherwise.

Six years later, after two MBIE reviews and many submissions and cross-submissions (including mine), we've finally got to the point where the government has decided that yes, s36 is indeed going to be changed, and in the process it will be lined up with its Australian equivalent. MBIE's announcement this week of the proposed changes is here, the Cabinet paper proposing them is here and the admirably comprehensive Regulatory Impact Statement done by MBIE is here (there's a particularly good explanation of the anti-competitive rorts that are at issue on pp 6-7 and why they're different from hard-nosed but fair competition). On present scheduling we should see legislation introduced in "early 2021" and hopefully passed sometime next year. 

s36 as it stands is flawed. As interpreted by the courts, and I'm quoting p4 of the Cabinet paper here and later, "a firm only takes advantage of its market power (and thus breaches the Act) if a business without substantial market power (but otherwise in the same circumstances) would not have engaged in the same conduct". But as the Cabinet paper says, "Some types of conduct (such as exclusive dealing) can harm competition when engaged in by a firm with market power, but are also commonly engaged in by firms without substantial market power, without harming competition. The current section 36 will likely fail to prohibit such conduct, since firms may engage in the conduct regardless of whether they have substantial market power". 

And apart from the logical defect in the "take advantage" test, it was effectively impracticable to apply: "the ‘take advantage’ test requires the development of a complex ‘hypothetical counterfactual’ market, in which the firm in question does not have market power ... [It] requires a number of (potentially arbitrary, unrealistic and/or subjective) assumptions to be made about what a hypothetical market in which the firm in question did not have market power would look like".

So we're going to move to the Aussie position, and flag away all the 'taking advantage' counterfactual speculation. Instead, the new s36 will cut to the chase: it will "prohibit firms with market power from engaging in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market. This would focus the prohibition directly on the anticompetitive nature of the conduct, and is likely to significantly decrease the cost and complexity of enforcement".

Significantly, MBIE's Impact Statement noted (p10) that "Now that Australia has changed its law, to our knowledge New Zealand is the only country requiring a strict causal connection between market power and the conduct in question". Consistency with other countries' practices isn't always a good idea, but when you're the only one out of step in the great march past of competition authorities, it was looking high time to dismantle that causal connection and go directly to an "effects test".

There are a number of other planned Commerce Act tidy-ups, too. The main one is that potentially anti-competitive deployment of intellectual property like patents has previously effectively had a free pass, as it appeared to have the protection of s45 and s36(3) of the Commerce Act. I say "appeared" because (a) "the exemptions have gone almost entirely untested in the courts" as the Cabinet paper says on p9 and (b) I've never been able to read s45 without losing the will to live. In any event IP-based rorts will forfeit whatever existing protection they've got.

The only thing I'd quibble about - apart from the usual irritation with government announcements, where they shelter what priority they propose to give the legislation behind the Official Information Act  - is the proposal to amend the Act "making it easier for the Commerce Commission to cooperate with other domestic agencies by sharing information it holds, subject to appropriate safeguards", as the announcement put it. The "appropriate safeguards" aren't specified yet: they'll need to be solid. The Commission has its own compulsory information gathering powers under s98 and can get search warrants under s98A: there should be a tough threshold test before any of that information gets passed around the wider public sector agencies. Maybe that's in mind, but if not it'll be worth raising at the - final, final, final? - round of Select Committee submissions next year.