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Dealing with competitors: a primer on the Commerce Act

on Tuesday, 17 September 2013. Posted in Latest Articles, Business

Competitors provide a constant challenge for most businesses. Healthy competition is an essential part of a modern free enterprise system. However, competition can also lead to unfair business practices and be prejudicial to the interests of consumers and society as a whole.

To avoid these problems, a number of business laws are designed to promote healthy competition and prevent the misuse of market dominance. The Commerce Act is the most important piece of legislation governing competition in New Zealand.

Everyone who is in business needs to be aware of the Commerce Act’s requirements. You also have a commercial interest in ensuring that your competitors comply with the Act.

Commerce Act 1986

The purpose of the Commerce Act is “to promote competition in markets for the long-term benefit of consumers within New Zealand”. One of the key concepts within the Commerce Act is the concept of “the market.”

Your business market may be as large as providing telecommunication services nationwide or as small as the sale of food in a small town. For you to understand your obligations under the Commerce Act (and the obligations of your competitors) you first need to understand the nature of the market or markets in which your business operates.

Your obligations under the Commerce Act

To promote competition the Commerce Act establishes a strict code prohibiting certain practices within business markets. For example, the Act prohibits businesses from:

  • Entering into contracts, arrangements or understandings if their purpose or likely effect (whether direct or indirect) is to substantially lessen competition in a market;

  • Using market power to restrict, deter or eliminate competition within a market; or

  • Engaging in price fixing or resale price maintenance.

Business purchases

The Commerce Act also prohibits business acquisitions that have or are likely to have the effect of substantially reducing competition in a market. Consequently, if you operate a business within a specific market and you want to acquire another business within that same market, you need to consider whether your acquisition of that business will have an effect on competition.

If you are considering a business purchase that may have an impact on competition in a particular market you may need to ask the Commerce Commission to approve your purchase. The Commerce Commission should approve the purchase if it is satisfied that the purchase will not have a substantially anti-competitive effect. Even if the effect will be anti-competitive, the Commerce Commission may still approve the purchase if it is satisfied that the public benefits from the acquisition will outweigh the harm from its anti-competitive effects.

It is your responsibility to seek the Commerce Commission’s approval to any business purchase you propose that will have an impact on competition within a market. If you do not do so and it is later established that your business purchase has anti-competitive effects, you may become liable for significant fines or face injunctions to prevent or restrict your business activities.

Your competitors’ obligations under the Commerce Act

If you believe that any of your competitors are breaching their obligations under the Commerce Act, you can apply to the court for an injunction to restrain their activities. You could also make a complaint to the Commerce Commission. However, in general the Commerce Commission will only take enforcement action when a consumer issue is involved, or some other public purpose is to be served by doing so. Otherwise it will leave the protection of merely private interests to those directly involved.

Penalties for breaching the Commerce Act

The penalties for breaching the Commerce Act are significant. Courts may impose fines of up to $500,000 on an individual and up to $10 million on a company. If a company has made an identifiable commercial gain from its wrongdoing the fine may be even higher: up to three times the amount of the commercial gain, or if that is too hard to establish, up to 10% of the combined turnover of the company and its associate companies.

Given the size of these potential penalties, you need to ensure that you take steps to ensure that you meet all of your obligations under the Commerce Act. If you breach the Act but have a compliance programme in place designed to avoid breaches of the Act, this may influence whether the Commerce Commission will take action against you, particularly for minor breaches. Having a compliance programme in place may also have an effect on the level of any fine and other sanctions that a court is likely to impose.

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