The Legislative Framework
The cartel prohibition
The Commerce Act's cartel prohibition prohibits competitors from entering into or giving effect to contracts, arrangements or understandings that contain a provision that:
- fixes the price of goods or services that two or more parties to the agreement supply or acquire in competition with each other;
- restricts output by preventing, restricting or limiting the production, capacity, supply or acquisition of goods or services that two or more parties to the agreement supply or acquire in competition with each other; or
- allocates markets by allocating between two or more parties to the agreement:
- the persons or classes of persons to or from whom the parties supply or acquire goods or services in competition with each other; or
- the geographic areas in which the parties supply or acquire goods or services in competition with each other.
An arrangement can breach the cartel prohibition even if it has no impact on competition in the overall market – i.e. it is a per se offence.
The “collaborative activities” exception
However, New Zealand competition law recognizes that there are some limited circumstances under which the inclusion of a cartel provision may in fact be pro-competitive. In recognition of this, there are three key exceptions to the cartel prohibition. Where those exceptions apply, any contract, arrangement or understanding is instead subject only to an assessment of whether it has the purpose, effect or likely effect of substantially lessening competition in a market – in other words, where the exceptions apply, a rule of reason test is used to assess the legality of the arrangement.
The most relevant exception to the cartel prohibition when considering the ability of competitors to work together in relation to sustainability initiatives is the collaborative activities exception. In order to satisfy the collaborative activities exception, the parties must show that they are cooperating in an ongoing enterprise or venture in trade (i.e. that they are in some form of ongoing collaboration), that the "dominant purpose" of that collaboration is not to lessen competition between them, and that any cartel provision is reasonably necessary for achieving the purpose of that collaboration.
Given it is intended to allow competitors to work together for legitimate (not anti-competitive) reasons, ideally there would be sufficient scope within such an exception to allow competitors to collaborate on sustainability initiatives without exposing them to competition law risk. However, this has not been the experience of many New Zealand businesses. The NZCC has indicated that it will take a technical approach to the collaborative activities exception, including requiring more substantive integration between the competitors to amount to a “collaborative activity” (i.e. competitors each agreeing standards in relation to their separate businesses would not be sufficient), and indicating that it will apply a strict approach to what is “reasonably necessary”. The collaborative activities exception was introduced in 2017. Since that time, there have not been any cases decided by the courts on what the collaborative activities exception requires, and so the only guidance available is the NZCC's Competitor Collaboration Guidelines and one collaborative activities “clearance” decision by the NZCC. In many areas of competition law in New Zealand, the lack of local case law can often be overcome, or at least mitigated, by drawing on overseas cases applying similar legal concepts. Unfortunately, however, the New Zealand exceptions to the cartel prohibition, including the collaborative activities exception, are unique and so overseas cases are of limited assistance.
The options available for parties considering a collaboration
When parties are concerned that a collaboration they are considering with a competitor may breach the Commerce Act, they have three options:
- seek “authorization” from the NZCC;
- seek a collaborative activities “clearance” from the NZCC; or
- self-assess the legality of their proposed collaboration.
An “authorization” and a “clearance” are different in nature. The NZCC may grant an authorization even where a collaboration is otherwise considered to breach the Commerce Act if the NZCC is satisfied that the public benefits of the collaboration outweigh the detriments to competition. By contrast, the NZCC may grant a collaborative activities clearance where it is satisfied that the collaborative activities exception applies (i.e. that the collaboration does not breach the Commerce Act).
As the regime currently stands, there is a risk that sustainability initiatives are being chilled due to businesses having concerns that the cartel prohibition may apply, and the impractical nature of the authorization and clearance regimes described above (the challenges and limitations of these options are further discussed below). That is obviously a concern for New Zealand's sustainability initiatives, and is arguably an outcome that is inconsistent with the broader purpose of the Commerce Act, which is to “promote competition in markets for the long-term benefit of consumers within New Zealand”. In particular, the fact that the Commerce Act's purpose refers to the long-term benefit of consumers has been interpreted as recognition that the Commerce Act is intended to apply a “total welfare standard” – i.e. to consider the overall economic welfare of New Zealanders, and not just to promote short-term competition between businesses at the expense of longer term economic welfare of both consumers and producers. This means that there should be scope for sustainability to be relevant to decisions made under the Commerce Act where the goals of sustainability initiatives can be demonstrated to be for the long-term benefit of consumers within New Zealand. New Zealand's competition regime recognizes that, at times, the specific prohibitions may not consider the overall benefits to the public. The authorization regime arguably fills that gap, as discussed further below.
The Authorization Regime
As noted above, parties can apply to the NZCC for it to authorize conduct, agreements or mergers that would be likely to substantially lessen competition where the public benefit test is satisfied. This requires the NZCC to determine that despite the breach of the Commerce Act, the conduct will result, or will be likely to result, in such a benefit to the public that the detriment is outweighed and there is a net benefit.
The question that follows is how “public benefit” should be interpreted. The key debate in this area in New Zealand has been whether “public benefit” should be confined to economic benefits or whether this could and should be interpreted more broadly to included other societal benefits. Were the purpose of the Commerce Act to solely promote economic efficiency, it would be difficult to argue that the public benefit could be interpreted broadly to include non-economic factors, such as sustainability.
However, given the purpose of the Commerce Act, New Zealand courts have determined that “public benefit” is not limited to economic considerations. The leading case on this is NZME v Commerce Commission (“NZME”). This case considered the proposed merger of media publishers where an authorization application was declined on the basis that media quality and plurality would be harmed by the merger. The parties appealed that decision but were unsuccessful on appeal. The Court of Appeal found that, in practice, public benefit has never been limited to purely economic or market considerations, and that “Parliament cannot have intended to exclude [non-economic] considerations where a proposed transaction is likely to cause them”. Accordingly, this decision recognizes that other non-economic factors may also be relevant, and it is likely that this reasoning would also extend to considering sustainability factors.
While this case law provides helpful flexibility for the authorization regime to consider sustainability factors, from a practical perspective (in terms of timeliness and confidentiality), the authorization regime, unfortunately, does not provide a solution to most businesses considering sustainability initiatives with their competitors. This is because the authorization process is a public process that requires a formal application to the NZCC, a filing fee of 36,800NZD, public submissions, economic evidence, and an average timeframe of around 180 working days.
The “Collaborative Activities” Clearance Regime
As noted above, parties to a collaboration could (instead of seeking authorization) apply to the NZCC for a collaborative activities “clearance” – in effect, seeking confirmation from the NZCC that the NZCC agrees that the collaborative activities exception applies to their proposed initiative.
However, again unfortunately, the clearance regime does not provide a practical solution for most businesses considering sustainability initiatives with their competitors. Reflecting that, despite having been in force for seven years, to date only one business has sought a collaborative activities clearance, and that application was declined by the NZCC. The reasons that the clearance process is not seen as a practical solution for businesses is because it is also a public process that requires a formal application to the NZCC, a filing fee of 3,680NZD, public submissions, economic evidence, and the only clearance process to date took approximately eight months.
NZCC collaboration and sustainability guidelines
The NZCC has identified that there is a risk that the Commerce Act is chilling sustainability collaboration and, therefore, it has released guidelines that attempt to give businesses guidance when considering sustainability collaborations with competitors (“Sustainability Guidelines”). In the Sustainability Guidelines, the NZCC acknowledges that collaborations between competitors for the purpose of achieving sustainability objectives may raise issues under both the cartel prohibition (s 30) and the anti-competitive agreement prohibition (s 27).
The Sustainability Guidelines attempt to offer guidance on two things:
- When collaborations with a purpose of achieving sustainability goals will bring about competition concerns and when they will not. The Sustainability Guidelines clarify (unsurprisingly) that, “Collaboration between businesses in unlikely to breach the Commerce Act if the collaboration does not affect competition between businesses”. One of the examples given for this is a transparently developed, non-binding and publicly accessible industry-wide framework for reporting climate-related information. Although this is helpful confirmation, this is not the type of case where guidance is needed. To provide useful guidance and comfort to businesses, the NZCC's guidelines need to provide views on more difficult or “edge” case scenarios. The Sustainability Guidelines also consider the kinds of sustainability collaborations that may raise competition concerns (for example, competitors agreeing on a list of suppliers of sustainable packaging could cause issues if there was an agreement that only suppliers on the list would be used, as this would be market allocation). The Sustainability Guidelines make it clear that the NZCC cannot consider sustainability collaborations any differently to other kinds of collaborations; and
- When the cartel exceptions may or may not apply in the context of these sustainability collaborations. However, the Sustainability Guidelines do not go far enough to give any real legal comfort as to when the collaborative activities exception will be considered to apply, instead offering various factors which will make the collaborative activities exception more or less likely to apply.
While the NZCC publishing the Sustainability Guidelines was a well-intended initiative, feedback from the business community is that they do not go far enough to give any meaningful comfort to businesses considering sustainability collaborations with competitors. That is particularly the case given that the cartel prohibition is subject to significant civil and criminal penalties (including possible imprisonment), and the NZCC has demonstrated that it applies a very technical approach to the cartel prohibition (taking cartel proceedings even where businesses considered they were acting ethically or for proper reasons). We consider that the NZCC could play a greater role by providing better certainty on which types of collaborations will be an enforcement priority, and which types of collaborations it would not consider to be problematic (although we acknowledge that it is limited in its ability to do so).
The NZCC may argue that there are already processes in place which are intended to deliver this type of certainty – i.e. the authorization process and the collaborative activities clearance process. However, that view fails to recognize that collaborations need to occur on a regular basis and often it is not practical to engage with the NZCC, or a public process, in order to make business decisions. While a collaborative activities clearance or authorization may be appropriate for a few large scale and long-term arrangements which can justify the time and cost of the clearance process, this is not the case for most collaborations.
Compounding these concerns, while the NZCC can and has published guidelines (as noted above), the Commerce Act does not empower the NZCC to make binding guidance, and the courts have expressly said that the NZCC can depart from its own guidance. Accordingly, NZCC guidelines are not confidently relied upon by businesses. We see merit in express legislative changes that would allow the NZCC to publish binding guidance (or at the very least to require the NZCC to apply its own guidelines in making enforcement decisions). This would allow the NZCC to meaningfully counteract the chilling effects on collaborations between businesses that the Commerce Act currently gives rise to.
Recommendations to Better Support Sustainability Collaborations
It appears that the New Zealand Government has recognized the limitations described above. On 5 December 2024, the New Zealand Ministry of Business, Innovation and Employment (“MBIE”) launched a targeted review of the Commerce Act to promote competition in New Zealand. One of the areas of the Commerce Act that MBIE is specifically seeking feedback on is anti-competitive conduct and how the Commerce Act could facilitate beneficial collaboration. The MBIE discussion document (“Discussion Document”) specifically refers to industry arrangements to meet net zero targets as one of the ways that competitor collaboration can be beneficial. The Discussion Document sets out a variety of options that could be used to address the issue of competition law chilling sustainable collaborations. These options include:
- The Commerce Act explicitly gives the NZCC a role in issuing guidance;
- Empowering the NZCC, on its own initiative, to issue binding rules that create a safe harbour from the prohibitions;
- Introducing a statutory notification regime for specified classes of arrangements;
- Empowering the NZCC, on its own initiative, to make class exemptions; and
- Providing an exception for small businesses so they do not have to pay the application fee to the NZCC for an authorization.
Ultimately a combination of these options may be desirable, but the problem would not, for example, be solved only by seeking to waive the application fee for authorizations for small businesses, as the legal costs and substantial time delays may still act as a disincentive for business. Similarly, legislating the NZCC's role in issuing guidance is unlikely to be significant enough to provide businesses the comfort they need to embark on sustainability collaborations without material Commerce Act risk.
In terms of what we consider would be the better options, we look to the EU as an example of where binding safe harbours can offer businesses increased legal certainty. In particular, the EU's “block exemptions” regime (which allow the European Commission, via regulation, to define particular types of arrangements to be exempt) provides, in our view, better legal certainty for commercial actors on how competition law will apply to them and guidance on the circumstances in which the European Commission will consider that the benefits of the agreement are likely to outweigh the costs.
In the New Zealand context, binding safe harbours could be set up as specific kinds of collaborations that would be deemed to satisfy the collaborative activities exception. This would provide greater commercial certainty by enabling firms to structure their collaborations with confidence in the sustainability space without fear of falling foul of the cartel prohibition, while leaving room for the NZCC to consider whether there is a substantial lessening of competition, if necessary. Giving the NZCC the ability to determine these safe harbours through secondary legislation would also provide the necessary flexibility to amend or introduce safe harbours over time (although it would be important that there are processes in place that do not undermine the objective of legal certainty, such as consultation, both when safe harbours are introduced and before they are removed).
We consider such a binding safe harbours regime would provide the appropriate balance between promoting competition and promoting sustainability and would better reflect the long-term and total welfare purpose of the Commerce Act. In that regard, the MBIE review of the New Zealand competition law regime is timely and provides a significant opportunity to develop competition law in a manner that acknowledges modern-day issues, like climate change, which are expected to benefit from greater competitor collaboration.
