• When Parliament introduced the Act in 1986, it expected the courts to give an economic interpretation to the word "dominance". "Dominance" is the threshold used for both section 36 (misuse of a dominant position) and section 47 (mergers). And up until 1992 the courts did this.

• But in 1992 the Court of Appeal in Telecom Corp of NZ Ltd v Commerce Commission adopted an approach that raised the threshold. The Court moved away from assessing "dominance" solely on the basis of an economic interpretation of "high market power". It applied a dictionary definition to "dominance". Subsequent decisions have modified this approach but the result is a higher threshold than intended, being one of "high market control".

• Similarly in 1994, the Privy Council added a new test to section 36 that required "use" to be proven by reference to formula rather than reasoning on the facts of each case. This focus on hypothetical formula risks narrowing the interpretation of the anti-competitive conduct and further increasing the evidential burden to applicants of establishing a case.

• There has also been some inconsistency in the courts' interpretation of the evidential burden for proving exclusionary "purpose" under section 36. Purpose is difficult to establish as it relates to what is in the mind of the dominant firm.

• It is difficult to know how many cases have not been brought on account of the raised threshold for section 36. This is because there is no formal recording system for "would be" cases.

• The Commerce Commission's safe harbours for merger proposals were developed in 1996 taking into account the courts' interpretation of 'dominance'. The safe harbour under these guidelines is:
  • The merged entity has less than a:
    • 40% market share; or
    • 60% market share where one other market participant has at least a 15% market share.

• These are some of the more permissive merger guidelines in the world and have been described by some commentators as "the Antipodean alternative" in which only "bonecrushing dominance" is prohibited.

• The current merger test does not allow a merger to be scrutinised on the basis that it may facilitate collusion between firms.

Why has the Government proposed changes to the proposals currently in the Commerce Amendment Bill?

• The previous Government proposed amending section 36 to apply to firms with a "high degree of market power". This option was problematic as it inserted novel words in the Act, which would have created uncertainty until the Courts clarified their meaning.

• The preferred option is to adopt the equivalent Australian provision of "substantial degree of power in a market". This has advantages of:
  • Reduced costs for businesses operating in both countries, which may facilitate investment in New Zealand;
  • Reduced uncertainty for businesses as they can use the case law developed in Australia to assist in their interpretation of the section;
  • Greater protection for business against anti-competitive behaviour in an increased range of markets; and
  • Effective competition will mean lower prices and better quality and service for consumers.

• The previous Government's proposed amendments to section 47 on mergers and acquisitions were also problematic.

• Its proposal to base the section 47 prohibition on the concepts of "high market power" and "joint dominance" had disadvantages. These concepts are relatively novel. Joint dominance is a European concept that is, in a merger context, still in an early stage of development.

• Rather the Government's decision to move to the test of "substantially lessening competition" will align this important area of competition law with Australia and squarely signals that the issue to be examined is the effect on competition.

What mergers would have been stopped under a revised dominance threshold?

• The best example of a proposed merger that would probably be blocked is the recent proposal by TransAlta to acquire Contact. The revised threshold would be triggered as it would recognise the market power that would arise from the merged entity being a substantial "marginal price setter" in the wholesale electricity market. That is, the merged entity would be the price setter for a good part of the time regardless of the output and price decisions of more cost effective electricity producers.

• It is also likely that the acquisition in the retail petrol industry of the Top Group and Solo by BP, in the early days of deregulation in the late 1980s, would have been blocked under the revised threshold. The threshold would have been triggered as the acquisition would have raised the potential for substantially lessening competition as the acquisition took two maverick competitors out of the market.

• It has never been envisaged that a revised merger threshold would stop a significant number of mergers each year. In practice mergers that trigger the threshold would be allowed to proceed if it was expected they generate efficiency gains that would outweigh any anti-competitive detriment. And even where they didn't the proposal could, in consultation with the Commerce Commission, be reconfigured, probably through divestiture of shares or assets, to enable it to proceed.

What has been the Commerce Commission's experience with seeking interim injunctions?

• The Commerce Commission has only applied to the High Court for three interim injunctions since 1986.

• The requirement for the Commission to give undertakings as to damages is considered by the Commission to be a major disincentive.

• The Commission has never had an award of damages made against it.

Are there instances where the courts have imposed low penalties for breaches of the Commerce Act?

• Prior to August 1998 there was a concern that the courts were imposing inappropriately low penalties for breaches of the Act. Up until that date the highest penalty imposed was $500,000¹ on Port Nelson Ltd. While on the face of it this amount is substantial it was for three breaches of the Act and the company was a repeat offender.

• Other penalty awards from 1990-1998 were low. They ranged from $5,000 to $250,000 with most in the $30,000 to $50,000 range. For example, in 1990 a penalty of $5,000 was imposed against Herberts Bakery for resale price maintenance. In 1991 BP had a penalty imposed against it $40,000 for price fixing. In 1992 and 1993 Sealy New Zealand and Accent Footwear respectively had penalties imposed of $30,000 for resale price maintenance and in 1996 a group of seven Toyota Dealers each had a $50,000 penalty imposed for price fixing.

• In August 1998 two penalty awards set at more appropriate levels were:
  • awards against a Christchurch bus company of $380,000 and its chief executive of $10,000 for bid rigging; and

  • the total award against nine meat companies of $5.5 million for price fixing.

Will the public have the opportunity to comment on the policies?

• The Minister of Commerce will introduce a supplementary order paper (SOP) to the Commerce Amendment Bill currently before the Commerce Select Committee. This SOP will be introduced before the middle of the year and it is intended to be released for public submission.

1 The maximum penalty for bodies corporate is $5 million and for individuals is $500,000. return