19 December 2011

This alert looks back at some of the interesting developments in New Zealand competition law in 2011.

Criminalisation imminent
In October 2011, the Government introduced a Bill to Parliament, the Commerce (Cartels and Other Matters) Amendment Bill (the "Bill"), which proposes significant reforms to the Commerce Act 1986 ("Commerce Act"), including 7 year jail terms for those involved in cartel conduct.¹  This Bill, subject to minor changes, is likely to be law within the next year.

In addition to criminalisation, other notable changes proposed in the Bill include:²

• a new cartel prohibition: the current price fixing prohibition is expanded to specifically include all four OECD categories of cartel conduct for both the civil and criminal cartel offence. All contracts arrangements or understandings containing a provision that has the purpose of price fixing, market allocation, bid rigging or output restriction, will be prohibited;
• a new "collaborative activities" exception: the joint venture exception is replaced with a new exception for "collaborative activities" which is intended to be broader than the existing joint venture exemption;

• clearances for "collaborative activities": a new regime is proposed which would enable the New Zealand Commerce Commission ("NZCC") to grant clearance for "collaborative activities" where the NZCC is satisfied that the "collaborative activities" do not substantially lessen competition; and

• expanded jurisdiction for the Commerce Act: the Bill would align the Commerce Act's jurisdiction with the conspiracy rules under the Crimes Act which would mean that if any part of a prohibited act occurs in New Zealand then the whole of that act will be deemed to have occurred in New Zealand. This would greatly expand the existing jurisdiction of the Commerce Act.

To address concerns about new substantive laws being enforced criminally, the Bill proposes that the new criminal sanctions will only take effect after the other changes have been in place for two years. This will enable businesses to become accustomed to the new regime, and the NZCC to publish guidelines on how it intends to exercise its prosecutorial discretion, before defendants may face imprisonment.

The Bill has been referred to the Commerce Select Committee for public consultation. Timing for its progression will need to be determined by the new Parliament.

Authorisations are back
Prior to 2011, the NZCC had not received any applications for the authorisation of mergers on public benefits grounds since 2002. Merger parties have been reluctant to submit themselves to the authorisation process as it has been perceived as a costly, timely and cumbersome process. To address these concerns the NZCC launched a new streamlined authorisation process in June 2009 for applications that meet certain criteria; namely for mergers and restrictive trade practices that have obvious public benefits and a relatively limited impact on competition in the relevant market.³

During 2011 the NZCC received two applications for merger authorisation:

• The first, received by the NZCC in February 2011, was a standard authorisation application for the two remaining wool scourers in New Zealand to merge, resulting in a monopoly in the wool scouring industry. The NZCC granted authorisation in July 2011 on the basis that the benefits to New Zealand (increased productive and administrative efficiencies) outweighed the competitive detriments (which the NZCC considered would be mitigated by the fact that the new entity would be constrained from offshore wool scourers).⁴ The NZCC's decision to authorise the merger was appealed by one of the merger parties' customers. In November, the High Court (consisting of a Judge and a lay member economist) dismissed the appeal, allowing the merger to proceed. The High Court affirmed the NZCC's quantitative approach to the analysis of public benefits and detriments, and held that while the margin of benefits to detriments was closer than the NZCC had determined, the benefits of the merger were still likely to outweigh the detriments.
• The second, received by the NZCC in May 2011, was the first authorisation application submitted under the NZCC's streamlined authorisation regime. This application was for the only two private hospital operators in a regional city, Palmerston North, to combine their operations on the basis that both are experiencing declining revenues and returns in their operations there, and that prevents either from undertaking the necessary capital investment to maintain their facilities at an optimal level. The NZCC granted authorisation within the streamlined timeframe in July 2011. Under the new streamlined process, the NZCC has two months to reach a decision, which is comparable to the standard clearance process.⁵

The NZCC also received two applications during 2011 for authorisation of restrictive trade practices:

• In July, the NZCC received its first application under the streamlined authorisation regime for authorisation of restrictive trade practices. In that case, the NZCC granted authorisation to allow competing refrigerant wholesalers to agree to supply refrigerants only to customers that are trained and licensed to safely handle refrigerants. The NZCC did not consider that this exclusionary arrangement would lessen competition, and granted authorisation on the basis that the exclusionary arrangement would lead to net benefits to the public "in the form of increased compliance with safety regulations and a reduction in the release of potentially hazardous substances into the atmosphere".
• In September, Fonterra sought authorisation to collaborate with other New Zealand producers (led by Silver Fern Farms) and importers to collectively negotiate with shipping lines for their freight requirements. Fonterra has submitted that the coordinated and aggregated demand through this collaboration will provide public benefits by fast tracking the investment by shipping lines and ports. The NZCC released its draft decision in mid-December stating that its preliminary view is that the proposal would be unlikely to substantially lessen competition and did not give rise to price fixing or exclusionary issues, and therefore does not need an authorisation.

New Mergers & Acquisitions Guidelines
The NZCC is currently in the process of considering whether to update its Merger and Acquisition Guidelines,⁶ which were published in 2003.⁷ Although these Guidelines are not binding on the NZCC, they provide important guidance as to the NZCC's approach to the clearance and authorisation processes. The NZCC has indicated that any updated guidelines will reflect recent court judgments, developments in its own practices, and will have regard to recent updates to merger guidelines in other jurisdictions.⁸ Revision of the guidelines is welcomed to improve clarity and certainty, particularly in light of several court decisions that have identified gaps and ambiguities in the current guidelines,⁹ and to reflect the most up-to-date approaches to merger analysis.

Cross-appointments between the NZCC and the ACCC
Under the New Zealand and Australian governments' Single Economic Market Outcomes Framework,¹⁰ cross-appointments between the Australian Competition and Consumer Commission ("ACCC") and the NZCC have been made for a three year term from 1 December 2010 to 30 November 2013. NZCC Chair, Dr Mark Berry, has been appointed an Associate Commissioner of the ACCC, and Chair of the ACCC’s Mergers Review Committee, Dr Jill Walker, has been appointed an Associate Commissioner of the NZCC. The appointments are intended to further enhance regulatory alignment, cooperation and coordination between the two regulators. The first NZCC merger clearance application that Dr Walker is sitting on is Pact Group's application for clearance to acquire the plastic pails business of Viscount (this application is still being considered by the NZCC). Dr Berry is sitting on the equivalent ACCC process for this transaction in Australia.

Cartel penalties are growing
2011 has been notable for the series of penalty proceedings arising from settlement agreements between defendants and the NZCC. In the 2010/2011 financial year, pecuniary penalties totalling $34.95 million have been awarded to the NZCC, the majority of which were issued as a result of settlement of price fixing proceedings.

In proceedings arising from the alleged air cargo cartel the Court endorsed the following agreed penalties:¹¹

• NZ$6.5 million against Qantas Airways;
• NZ$6.0 million against Cargolux; and
• NZ$1.6 million against British Airways.

The penalty of $6.5 million imposed on Qantas Airways is the highest penalty imposed on a party for price fixing conduct in New Zealand to date.¹²  A further eight airlines are continuing to defend the air cargo cartel charges.¹³

In proceedings arising from the alleged freight forwarding cartel, the Court endorsed the following agreed penalties:¹⁴

• NZ$1.15 million against EGL Inc;
• NZ$2.5 million against Geologistics International (Bermuda) Ltd;
• NZ$2.7 million against Panalpina World Transport (Holdings) Ltd;
• NZ$1.4 million against BAX Global Inc; and
• NZ$1.1 million against Schenker AG.

Although parties are able to jointly submit an agreed penalty to the High Court for approval, it is ultimately the role of the Court to determine whether the agreed penalty is appropriate, having regard to all relevant matters. The string of penalty decisions in 2011 creates a useful body of precedent on the factors relevant to penalty assessment.

New record fine
In April 2011, the High Court imposed the highest ever Commerce Act penalty (NZ$12 million) against Telecom for breaching s 36 of the Act (which prohibits taking advantage of market power for certain anti-competitive purposes).¹⁵

This case is notable as it was the first time the High Court has been asked to rule on a contested penalty hearing since the maximum penalties were doubled in 2001 (rather than being negotiated beforehand between the NZCC and the defendant).  The penalty ordered by the Court was only half the level of penalty sought by the NZCC.

Significant factors that influenced the penalty ordered by the Court included the finding that the goal of specific deterrence requires the penalty to take account of Telecom's size and resources, and the absence of cooperation or acknowledgement of wrongdoing by Telecom.¹⁶

Telecom has appealed to the Court of Appeal against both liability and penalty. The appeal was heard in September 2011, and parties are currently awaiting judgment.

NZCC's jurisdiction tested
The High Court has issued three decisions this year which bear on the ability of the NZCC to pursue foreign companies in respect of alleged breaches of the Commerce Act:

• In April 2011, the High Court upheld an Australian company's (Visy Board) protest to jurisdiction in respect of causes of action brought by the NZCC alleging that conduct in Australia affected a "New Zealand trans-Tasman market".¹⁷  The Court ruled that it is not possible at law for a "trans-Tasman market" to constitute a "market in New Zealand" for the purpose of s 27(1) of the Commerce Act. The only causes of action that passed the "jurisdictional gateway" were those that pleaded conduct occurring in New Zealand. The NZCC is appealing this decision to the Court of Appeal.
• The second case relates to the NZCC's air cargo cartel proceedings. In August 2011, the High Court ruled that it had jurisdiction to determine claims not only in relation to cargo travelling from New Zealand ('outbound cargo'), but also to claims in relation to cargo travelling to New Zealand ('inbound cargo').¹⁸ The airlines had argued that there was no "market in New Zealand" for inbound cargo because services occurred and were negotiated at the overseas point of origin.  The High Court disagreed with that position and took an expansive view of what constitutes a "market in New Zealand". The High Court's decision signals that where defendants engage in conduct for the supply of services in New Zealand it is sufficient to establish jurisdiction if part of the market is situated in New Zealand. What constitutes part of the market may be determined with reference to where the customers are located, as it is ultimately the customers who decide "what they want, and how and when they need it".¹⁹  On this expanded view, a Court could arguably find that an arrangement that was formed overseas can affect a "market in New Zealand", if there are ultimately customers in New Zealand that buy the product affected by the arrangement.
• In the third case, determined in October 2011, a defendant to the NZCC's freight forwarding cartel proceedings (Kuehne+Nagel) lost its protest to jurisdiction.  Kuehne+Nagel contested the NZCC's jurisdiction on the basis that it was merely a holding company based in Switzerland, and it had no involvement in the operation or management of freight forwarding operations in New Zealand. The High Court found the NZCC had established a good arguable case that implementation of the alleged agreements in New Zealand may be attributed to Keuhne+Nagel, through its direction of, or with the agreement of, companies within its corporate group. Keuhne+Nagel has been granted leave to appeal this decision to the Court of Appeal.²⁰

As discussed above, the Commerce (Cartels and Other Matters) Amendment Bill proposes to expand and clarify the jurisdictional boundaries of the Commerce Act, by enlarging its extraterritorial application, and broadening the circumstances in which overseas conduct can be attributed to persons resident and carrying on business in New Zealand.

Shhh! the NZCC is investigating
In March 2011, the Court of Appeal overturned a November 2009 decision of the High Court in which the High Court quashed s 100 "gagging" orders made by the NZCC during the course of its four year air cargo cartel investigation.²¹ These s 100 orders²² had been issued by the NZCC to prohibit Air NZ personnel from divulging to Air NZ the details of their interviews with the NZCC. The High Court had held that s 100 orders cease to have effect once proceedings are issued and that employees are allowed to reveal the questions that they were asked during a NZCC interview (but not the answers they gave in response). The Court of Appeal overturned these rulings and the decision returns significant power to the NZCC to "gag" interviewees even after proceedings have commenced.  The decision reinforces the importance of companies ensuring they receive from their employees a full description of relevant events and their involvement in them before they are interviewed by the NZCC.

Looking ahead
We expect 2012 to be a dynamic year for competition law in New Zealand, with the significant changes to the Commerce Act on the horizon. We look forward to keeping you informed of how the proposed amendments to the Commerce Act progress through the Commerce Select Committee.

Contributed by Madeleine Brett-Williams, Victoria Deane, Lucy George, Troy Pilkington, Chris Bowden, Sarah Keene and Andrew Peterson.

 

This publication is included in Russell McVeagh's website : www.russellmcveagh.com

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