Issue F: A Possible Clearance Process for Trade Practices
Within this section…
Background
80. The Act does not provide a clearance process for trade practices. If parties want to obtain protection from challenge under Part 2 of the Act (other than sections 36 and 36A) they must apply to the Commission for an authorisation and argue their case on public benefit grounds. Thus, unlike mergers, parties cannot apply to the Commission for a clearance on the grounds that the conduct is not anticompetitive.
81. A trade practices clearance would have much the same effect as a merger clearance. It would immunize the parties to the conduct from legal challenge. To be consistent with an authorisation for restrictive trade practices:
- Conduct predating the application would not be immune from legal action (see section 59B); and
- There would need to be scope to vary or revoke a clearance at a later date, as is provided for by section 65.28
82. As with restrictive trade practice authorisations, trade practice clearances would not be available for the purpose-based prohibitions in sections 36 and 36A. It would be difficult for the Commission to be satisfied that a party did not have an anticompetitive purpose.
The issue
83. It is possible that firms may not be engaging in activities that are not anticompetitive because of concerns that they may attract a Commission investigation, or litigation by the Commission or a private party. In addition, firms may be modifying their practices in suboptimal ways to reduce risks of noncompliance with Part 2. Although an applicant could seek an authorisation, it is a complex, time-consuming and expensive process. Clearance could be of benefit in two situations:
- Conduct that is at the margins of legality and illegality – There is, inevitably, some uncertainty about whether some conduct is lawful or not. The availability of a clearance system may be a way of reducing some of the uncertainty; and
- A technical contravention of a per se prohibition – Occasionally practices may amount to a technical infringement of a per se prohibition but nevertheless be competitively benign. This issue is discussed below under the subheading "Per se offences".
Analysis
Predictability
84. A clearance by the Commission would spur parties to proceed with conduct that they might otherwise have not given effect to. A decision by the Commission to decline a clearance application would provide greater business certainty about the risks of giving effect to the conduct.
Cost effectiveness
85. The Commission would need a substantial increase in its annual budget if there were to be a significant number of applications. Alternatively, the Commission may need to divert resources to the investigation of applications from other equally or more important matters. However, we think it is unlikely that the Commission would be flooded with trivial applications. If the conduct is clearly not illegal then there is no value in using management and staff time and paying lawyers and economists to prepare an application.29 That said, it is possible that there would be a significant number of applications in the first year. Parties may see a new clearance system as an opportunity to obtain approval for conduct that they have wanted to give effect to for some years.
Clear and consistent legislation
86. This criterion clearly favours the introduction of a trade practices clearance system. There is no difference in the main policy arguments for and against a merger clearance system and a trade practice clearance system.
Per se Offences
Background
87. The treatment of price fixing and RPM as per se offences under the Commerce Act originated from United States antitrust law via the Australian Trade Practices Act. However, there is an important difference between the US and New Zealand. In the US the per se rules have been developed by the courts.
88. The US Supreme Court has stated that "protection of price competition from conspiratorial restraint is an object of special solitude under the antitrust laws"30 because restrictions on free and open price competition pose an actual or potential threat to the central nervous system of the economy."31 At the same time, the Supreme Court has recognised that not all arrangements among actual or potential competitors that have an impact on price are per se violations of the Sherman Act.32 Thus agreements that involve price fixing in a literal sense can be found to not be per se offences. Here are two examples:
89. In Broadcast Music Inc v Columbia Broadcasting Systems33 the Supreme Court held that the rule of reason should be applied to blanket music performance licences offered by copyright holders who operated a joint venture to market such licences; and
90. In Chicago Board of Trade v United States34 the Supreme Court upheld a rule requiring that all commodities traded after the exchange had closed for the day be sold at that day's closing price on the exchange. It held that any impact on price was ancillary to the principal and lawful purpose of regulating the exchange.
91 Overall, the position in the US is that the per se rule is the principal mode of analysis for restraints that have the purpose or effect of limiting price competition. However, in limited situations the courts have reviewed the facts and undertaken a market analysis to decide whether the rule of reason should be applied.35 This provides the flexibility in the US to categorise agreements on price in a targeted way in special circumstances.
The issue
920. The Commerce Act provides some flexibility in relation to the per se offences by providing scope for the Commission to authorise restrictive trade practices. However, as already noted elsewhere authorisation applications must be argued on public benefit grounds. They are more complex, time consuming and expensive than a clearance system would be.
93. If the Act were to be amended to allow for clearance of the per se offences, then the anticompetitive presumption in sections 30, 37 and 38 would need to be set aside by the Commission. As is the case when the Commission is considering the detriments pursuant to an authorisation application, the conduct would be analysed on its actual rather than presumed effect.36
Analysis
Quality of outcomes
94. In our view the most important issue is whether the availability of clearances would weaken the effectiveness of the per se prohibitions in Part 2. Looking at section 30 first, it is essential for the Act to send a strong signal that cartel activity is unacceptable. As the OECD Committee on Competition Law and Policy stated in 1998, hard core cartels are "the most egregious violation of competition law and hence a principal focus of competition policy and enforcement."
95. In addition, an OECD survey concluded that the parties to cartel agreements are not honest business people who inadvertently become involved in a technical violation. Rather, they realise that their conduct is harmful and unlawful, and they sometimes go to great lengths to keep their agreements secret.37 We agree with this statement. Parties to cartels would take no comfort from a clearance system because they would know that there would be no prospect of obtaining a clearance. They would also know that alerting the Commission to their activities would almost inevitably lead to an investigation by the Commission, followed by the risk of court action, punishment and considerable harm to the firms' reputations.
96. The case for RPM clearances is, if anything, a little stronger, because modern economics literature is mixed on the costs and benefits of RPM.38
Clear and consistent legislation
97. It can be argued that a merger clearance is a ruling by the Commission that it is satisfied that the proposed merger is unlikely to contravene the Act. Mergers that are likely to contravene the Act can only be authorised. Therefore, the same approach should be applied in relation to any clearance system for trade practices. If the Commission assesses that a practice is price fixing or RPM as defined by the Act then it contravenes the Act and should, therefore, only be able to be considered under the authorisation system.
98. Another way of looking at it is that a merger clearance is a ruling by the Commission that it is satisfied that the proposed merger is unlikely to be anticompetitive. Therefore, the scheme of the Act will not be harmed if per se offences could be cleared.
Conclusions
99. Our preliminary views are that:
- A clearance system should be introduced for trade practices; and
- Conduct that falls within the definitions of the per se offences should be able to be cleared.
Questions
Q7. Should a clearance system be introduced for trade practices?
Q8. Assuming a clearance system is introduced, should it apply to price fixing and resale price maintenance?
Q9. Assuming a clearance system is introduced, what features should it have in relation to such matters as timeframes, undertakings, ability to vary, revoke or replace a clearance and appeal rights?
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