Commerce Amendment Bill

on behalf of the Minister of Commerce and Consumer Affairs: I present to the House a legislative statement on the Commerce Amendment Bill.

ASSISTANT SPEAKER (Hon Jenny Salesa): That legislative statement is published under the authority of the House and can be found on the Parliament website.

I move, That the Commerce Amendment Bill be now read a third time.

It brings me great pride to rise for this third reading. Although it’s primarily focused on implementing two policy changes, this bill now comprises a package of reforms I’m confident will support competition law and infrastructure in this country to function more effectively. This House has carefully examined the possible consequences of the changes made by the bill. It has also taken the opportunity to make some further improvements to the Commerce Act, such as to the scheme for authorising conduct that is in the public interest.

Perhaps the most notable of this bill’s achievements is that it consummates, along—good grief, who wrote this speech? Someone is trying to obviously sex up the Commerce Amendment Bill late on a Thursday afternoon. But anyway, according to my notes, this bill’s achievements—one of the most important ones—is to consummate a long-held desire to make section 36 fit for purpose.

💬 Andrew Bayly: Did he use the word “sex”?

💬 Hon Member: Sexy afternoon!

I can hear the excitement in the House as the Commerce Amendment Bill makes its way through. The Commerce Act is prohibition legislation; section 36 is one of its central pillars. It stops anti-competitive unilateral conduct. The intention behind section 36 has always been to deter firms with substantial market power from harming competition.

When the Commerce Act was first passed in 1986, section 36 did this by prohibiting firms from “using” their position of power in a market to exclude or inhibit their rivals. In 1994, the Privy Council decided the plaintiff in a case would have to construct a hypothetical market for the court in which the defendant firm lacks substantial market power and demonstrate that the defendant would not have undertaken the conduct in that hypothetical market. In 2001, Parliament tried to express its dissatisfaction with this approach by amending section 36. Instead of prohibiting dominant firms from using their market power in anti-competitive ways, section 36 prohibited them from taking advantage of their market power. The 2001 amendment did not ultimately spare the prohibition from these thought experiments. With time, the complexities involved in satisfying the counterfactual test have become increasingly apparent and obstructive to the effective enforcement of section 36.

In 2014, the Productivity Commission recognised these problems with section 36 and the attendant costs to our economy of large firms suppressing competition and innovation from new, smaller firms. Of the counterfactual test, the Productivity Commission said that it “causes problems because it focuses on the actions of firms in the hypothetical counterfactual world where a firm lacks substantial market power rather than on market outcomes.” Now Parliament is finally in a position to resolve this.

The new section 36 prohibition inserted by this bill finally dispenses with the counterfactual test. It finally focuses the prohibition on market outcomes. It finally fulfils the original aim of deterring dominant firms from actions harmful to the competitive process. The way the bill achieves this is relatively straightforward. It simply asks whether a firm with substantial market power has acted with purpose, effect, or likely effect of substantially lessening competition in a relevant market. This test is not a novel one. It operates already in the Act’s prohibitions against anti-competitive agreements and anti-competitive mergers or acquisitions. It also operates in Australia’s prohibition against anti-competitive unilateral conduct.

It’s natural that the reforms have raised some concerns, but Parliament has had the opportunity to consider these in depth. We have thought carefully about how the new prohibition might be applied in various situations by the courts and by large firms attempting to manage their liability, and this has given me comfort that the risks with the reforms are modest.

The conclusion I hope we have all reached is that the process of firms competing on their merits for market share and the wallets of consumers would be better protected by these reforms to section 36.

I can make similar remarks about the other main policy of the bill, which is to get rid of provisions that prevent scrutiny of certain conduct involving intellectual property. So long as there are possible instances—competition harm safe harbours will undermine the Act’s promise to protect competition. As I hope I’ve made clear already, I do not believe practices involving intellectual property are always anti-competitive. Intellectual property rights are typically used in ways that advance the aims of competition law. But it’s not safe to assume this conduct is never anti-competitive just because it involves intellectual property. The bill repeals these provisions to reflect the Government’s view that intellectual property rights should be treated no differently under competition law to any other form of property.

There are other improvements to the law, however. Far less has been said in this House about some other worthwhile amendments that the bill makes. I wish to highlight just a couple of them—firstly, the inclusion of covenants in our cartel regime. In 2017, Parliament made some significant reforms to the cartel regime. The prohibition against cartels is the way the Commerce Act creates direct or per se liability for certain features and agreements between competitors that are generally harmful to competition. The Act now defines cartel provisions as provisions that involve price fixing, market allocation, or restricting output. The Act also provides a range of exceptions, recognising cases in which a cartel is unlikely to be anti-competitive in practice.

Cartel provisions can also be found in land covenants. Covenants were overlooked by the 2017 reforms to the cartel regime. This bill proposes to rectify that. No longer will land covenants provide an opportunity to restrict the productive use of land by a competitor. That would be something that, no doubt, the supermarket chains will be most interested in.

Tougher penalties for anti-competitive mergers is the other aspect that I wish to comment on. Another important way that the Act protects the competitive process is through its prohibition against anti-competitive mergers or acquisitions. For this prohibition to be effective, it needs to be able to deter entities that may benefit significantly, in commercial terms, from the merger. The bill ensures this can happen by increasing the monetary penalty the courts can impose if entities are found to have contravened the prohibition. The Act increases the monetary penalty that courts can impose, to be in the order of $10 million.

I extend my thanks to everyone who has played a part in the development and the scrutiny of these improvements to the Commerce Act. Particularly in relation to section 36, I’d like to acknowledge that I am one among a series of actors who have sought to reform this area—or at least I can say that the Minister of Commerce, the respective Ministers of Commerce, in this Government and previous Governments, have done that. I’m proud of the contribution that this bill will make to the state of competition in the interests of consumers in this country, and the general excitement that it has added to a Thursday afternoon sitting of this House. Madam Speaker, I commend this bill to the House.

Thank you, Madam Speaker. I do acknowledge the Hon Andrew Little, the speaker who’s just sat down—the stand-in Minister—and I think he did a great job. I compliment him on trying to “sex up”, I think was the term, quote, unquote—wasn’t it, Minister?—the Commerce Amendment Bill’s third reading. Very important, these things, of course, and what this bill is about is a vital part of the engine room around how New Zealand businesses can operate in New Zealand.

At the outset, I will say that National will be supporting this bill because we think it’s vital for a small economy that we have a dynamic market where people can operate efficiently and effectively and be competitive. So that part of what this bill is seeking to do is incredibly important for New Zealand to get right.

Notwithstanding that, there are some issues with this bill that we have had concerns with, and we certainly discussed those at great length during the committee of the whole House stage. They really relate to the two big, core aspects of this bill—namely, the new section 36 issue of misuse of market power, and the second one is the intellectual safe havens component. My good colleague the Hon Todd McClay had put up three Supplementary Order Papers which we thought would be useful in terms of trying to refine what was in this bill to more adequately reflect and create the right playing field for businesses to actively compete in the New Zealand market place.

So I just want to turn to both of these two components, and I’ll just address my first comments to new section 36 in clause 14. What new section 36 states is that it prohibits firms with substantial market power from taking advantage of that power for an anti-competitive purpose. Of course, if you look at the business dynamics of New Zealand, unfortunately, we have arrived in many industries where there’s two or maybe three major players that dominate the market—and I use that word in the general sense and not in the Commerce Commission sense, because if you’re dominant, it has a whole different meaning from that perspective.

But that is where, unfortunately, the New Zealand market place has ended up. We have these major players, and then we often have a raft of mid-tier and small-tier players underneath. So to make sure we’ve got the right dynamic, we need to have regard for what is the reality of today, which is that there are often duopolies in place. The Minister referred to the supermarket study that’s under way, and, of course, there’s been the fuel market study that was conducted last year. Unfortunately, we haven’t seen any benefit come out of that one, but, hopefully, we might do out of the supermarket study. So what the bill does is replace the phrase “taking advantage”, which is a test at the moment, to move it from an intention test to an effects-based test, and it has an explicit prohibition on firms with a substantial degree of market power engaging in conduct that has the purpose, effect, or likely effect of substantially lessening competition.

Now, the changes that are being put in place to some extent reflect what’s gone on in Australia. Australia, under Malcolm Turnbull, did a review of this sector and made some changes, and this is quite a substantive change. It may not mean much, but it moves us from an intention test to an effects legal test. What we’re concerned about is what that actually means and what it means for firms that have to now think in terms of that new test.

So the Ministry of Business, Innovation and Employment’s view on the current section 36 is that they think it’s flawed. They state that it has potential to fail, to deter, or penalise some forms of anti-competitive conduct; it’s costly and complex to enforce; and, arguably, creates some unpredictability. So my good colleague put up Supplementary Order Paper (SOP) 92, which amends clause 14.

So in that current wording that is going to pass through this House, because the Labour Party has control of it, is just rather than use the term “purpose” or “has or is likely to have an effect”, just to simplify it to say “has the purpose or is likely to have an effect.” So what it’s done is reduce the impact or the aspect about it in terms of requiring companies to think about the immediate impact of what their actions are going to have in terms of how it’s regarded from a competitive situation.

So, if I give you an example, if a company is operating—it’s a mechanical shop, let’s say—and offers a big discount to some of its big customers, as a reward for the type of service and the extent of service that they bring to that business, and if that is offered—and, in effect, it is a loyalty payment or a discount—this might have the unintended consequences of driving smaller truck operators—let’s say in the same town or in the region—out of business because the firm has the ability to discount the price.

Now, in many cases, that’s common practice because a firm will want to recognise large customers who bring a lot of business to them, and, obviously, discount the price. But under this arrangement, what we’re worried about is, to the extent that it does drive the competitor out of the market, then this will now be caught under this new test, and we’re worried about that effects-basis to this test. It’s quite difficult for companies to assess what the likely impact is of certain aspects or how they’re conducting their business and what it will mean for their competitors. So that’s the first major thing. I think it’s a shame that the House and the Government hasn’t picked up the SOP that the Hon Todd McClay put up.

The other one is in regards to the intellectual property aspect. I’d draw the House’s attention again to the letter that was sent to the Minister but was also sent to us around the intellectual property (IP) issue of safe havens. This letter is signed by the chief executive of the Screen Association, executive director of the New Zealand Writers Guild, the chief executive of the Interactive Games and Entertainment Association, and the executive director of the Screen Production Development Association. Basically, this letter says that they are very, very worried about the way that international firms will now regard New Zealand as a place to invest or to conduct business in because of the changes in the bill regarding the safe haven of intellectual property. Specifically, what it says is “We worry that these unnecessary legislative changes will discourage overseas film studios from licensing their intellectual property to New Zealand; secondly, it discourages international investment in the New Zealand film industry and discourages local film makers and writers from realising the true value of their creative products.” It also talks about the video gaming industry.

One of the most disappointing things during the debate is that I asked the Minister directly whether he had spoken to the New Zealand gaming association about these IP changes, which I think are incredibly significant. We’ve got a growing, exciting gaming industry, probably worth about $300 million at the moment, and it’s a dynamic growth path. Obviously, they’re having trouble getting people from overseas to come and work here, but it opens huge opportunities for our young people, Māori, Pasifika, because of the creative skills that they bring to the gaming industry. And yet here we are, we’re going to pass a piece of legislation that cuts to the core of that particular industry, but also the film industry and the writers. These are hardly people that are out there advocating on a scale that is unreasonable; these are people who want to see the creative industry in New Zealand flourish, and we’re not going to help them with this bill.

The question is that the motion be agreed to.

Thank you, Madam Speaker. I appreciate the opportunity to take a brief call on the third reading of the Commerce Amendment Bill. As the chair of the Economic Development, Science and Innovation Committee I’d like to also thank all of those who have contributed to this bill: the officials, the Minister, the select committee members, and those who made submissions on this bill.

The Commerce Amendment Bill amends the Commerce Act 1986 to improve the reach and functioning of competition law, consistent with the Act’s purpose of promoting competition in markets for the long-term benefit of consumers within New Zealand. The reality is we do have a small market here in New Zealand, and at times we do need the Government to offer support to the market because it can be susceptible to anti-competitive behaviour. We’ve already heard in the speeches on this third reading some examples of that. So this is legislation that is certainly needed and is certainly important.

The reality is that we need to have effective protections against firms with substantial market power who may be engaging in anti-competitive conduct, and the Commerce Commission needs this legislation in order to enforce that. I commend this bill to the House.

This debate is interrupted and is set down for resumption next sitting day. The House stands adjourned until 2 p.m. on Tuesday, 29 March 2022.

The House adjourned at 4.55 p.m.