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The Commerce Act: What Small to Medium Businesses in New Zealand Need To Know
2 November, 2023 | Bret Gower
The Commerce Act 1986 (“the Act”) controls the way that all businesses trading within New Zealand operate. It prohibits anti-competitive behaviour and helps benefit consumers that purchase goods and services. The Act covers restrictive trade practices, mergers and acquisitions, price fixing, misuse of market power and actions that reduce competition in the market – and is enforced by the Commerce Commission
All businesses and professional associations in New Zealand are subject to the Act, so it’s important you understand the law and what your business needs to do to comply.
What is the purpose of the Commerce Act?
The Act states as its purpose
“The purpose of this Act is to promote competition in markets for the long-term benefit of consumers within New Zealand.”
Anti-competitive behaviour can limit consumer choice, prevent new entrants to the market, and result in artificially inflated prices for goods and services. The Act is designed to protect consumer choice by restricting and regulating anti-competitive behaviour.
It can act as protection for small to medium businesses by preventing large competitors from using their power to prevent entrance into the market, and it prevents your competitors from working together in ways that harm competition.
Who does the Commerce Act apply to?
Any company or individual selling products or services within New Zealand’s borders is subject to the Act. It applies regardless of where the business or individual is based – which means that companies and individuals selling services into New Zealand from overseas are still subject to the law.
Businesses (and company Directors) can be held liable for the behaviour of employees where training and compliance systems were not in place.
Intellectual property rights holders are also subject to the law, where the misuse of those intellectual property rights stifles competition in the market. This can be particularly relevant to franchisee rights and needs to be dealt with carefully.
Professional associations are also covered by the Act. While they can promote industry standards and best practices, they must avoid colluding to restrict competition or collectively fixing prices.
Individuals need to be aware of when selling goods they have made, or goods they have purchased and are on-selling crosses from being a private transaction, into being an activity that is covered by the rules of the Act.
What kinds of behaviour or activities are anti-completive according to the Commerce Act?
Small to medium business should avoid having discussions or agreements with competitors regarding pricing strategies. Where a business has employees that are involved with setting prices or developing sales strategies, the business should also make sure these employees are trained on what they can and can’t do regarding anti-competitive behaviour.
It can be easy for a business to be caught out by discussions that take place at industry events for example.
Collusive Practices & Cartel behaviour
Collusive behaviour is any form of secret or illegal cooperation or agreement between competitors to manipulate the market, restrict competition or gain an unfair advantage. All of the activities listed below are collusive practices under the Act.
Collusive behaviour becomes cartel behaviour when the competitors have entered into a more formal and explicit agreement to commit the anti-competitive behaviour. Both can incur significant penalties, however the penalties for cartel behaviour are particularly severe and more likely to draw the ire of the Commerce Commission.
This is when you agree with one or more competitors to sell a product or service at a certain price.
This is when you agree with a competitor to create restrictions around who you sell to or what you sell.
These restrictions might be:
- Geographic boundary lines (such as one competitor agreeing to only sell in South Auckland and one agreeing to only sell in West Auckland)
- Sticking to only one particular industry or type of customer to sell to (for example one competitor agrees to go after only residential building customers and the other to only sell to commercial building customers)
- Restricting your products and services (e.g., one competitor only sells cat toys, the other agrees to only sell dog toys)
This is when competitors agree to restrict the amount of a product they sell, creating artificially inflated demand, often leading to artificially inflated prices.
This is when competitors join together and manipulate the bidding process to their advantage (or to one company’s advantage). The idea is to ensure that one particular party wins the bid at an artificially inflated price.
For example, four companies get together and bid on providing readymade meals to a hospital. The companies agree that three of the companies will provide bids to provide each meal at $8-12, and that the chosen “winner” will provide a bid at $7, when under natural circumstances some of those companies may have chosen to bid at a price of under $7.
Collusive tendering is a form of bid rigging
It covers any situation where competitors come together to agree what prices they will submit for contracts, tenders, or projects. Sometimes the competitors agree to divide contracts between each other, i.e., we agree that competitor A provides the best price for project X, and when project Y comes up, we agree that competitor B can provide the best price.
A group boycott is when two or more businesses or competitors agree to stop or refuse to deal with a particular individual, firm or supplier. The idea is to prevent the subject of the boycott from entering a market, or to prevent them from accessing the necessary goods and services they need for their business or trade. An example would be retailers coming together to agree to not stock a certain product, which may force the supplier to lower their price or agree to unfavourable supply terms.
Information exchange is when competitors share confidential or proprietary information that is not publicly available, such as individual company strategies, pricing details, production costs, sales volumes, customer lists, or future business plans. Sharing this information can lead to coordinated behaviour and harm competition in the market.
Joint ventures or strategic alliances for anticompetitive purposes
Regular joint ventures and strategic alliances are not prevented by the Act, these business deals are generally considered normal practice. However, if the joint venture or strategic alliance is entered into with the intent to commit anti-competitive behaviour for example price fixing, allocating markets, etc., it could violate the Act.
Restrictive Trade Practices
Section 27 of the Act prohibits agreements or arrangements that substantially lessen competition in the market. SMEs should take particular care when entering into contracts or agreements that could restrict competition or hinder consumer choice.
Mergers and Acquisitions
Under the Act, the Commerce Commission has the authority to assess mergers and acquisitions to ensure they do not substantially lessen competition in the market. Most SME’s themselves would not meet the revenue or asset thresholds that would trigger the requirement for the Commerce Commission to approve the merger or acquisition.
However, where a small to medium business is being acquired by a large company, the thresholds may be met to require Commerce Commission consent to the transaction. We acted for a medium sized food distributor that was selling their business to a larger food distributor, and Commerce Commission consent was required as a condition of the sale (this can also be dealt with using a ‘no objection’ type of condition if it is not immediately apparent whether Commerce Commission consent is required or not).
If the combined value of the NZ revenue of the business purchasing and the NZ revenue of the business being purchased are over NZD 100 million, or the business purchasing produces more than NZD 200 million in revenue in New Zealand, then Commerce Commission approval may be required.
If the combined value of the assets in New Zealand of the business purchasing and business being purchased are over NZD 100 million, or the business purchasing has more than NZD 200 million in assets in New Zealand, then Commerce Commission approval may be required.
Abuse of Market Power
Abuse of market power is sometimes known as monopolisation or misuse of market dominance. The Act does not specifically define what “substantial market power” is but is generally taken to be a significant degree of market influence that allows a business to act independently of competitive forces.
Essentially large companies are not allowed to use their size or market share to harm competition in the market or make things worse for consumers. Examples would be imposing unfair trading terms on suppliers, excluding competitors or exploiting consumers.
Holding a dominant position in the market is not illegal, but using that position to prevent competition, restrict new entrants, or harm consumers is a violation of the Act.
Few small to medium businesses in New Zealand wield “substantial market power’, but in limited geographies, or in small, niche markets they may fall foul of this law.
Enforcement and Penalties
The Commerce Commission is the regulatory body responsible for enforcing the Act. They have extensive investigative and enforcement powers, including the ability to conduct inquiries, seek information, and impose penalties for breaches of the Act.
Businesses found in breach of the Act may face substantial financial penalties. Fines can reach up to $10 million or three times the commercial gain derived from the breach, or 10% of annual turnover, whichever is greater.
In certain cases, serious breaches of the Act may result in criminal charges, leading to fines and potential imprisonment for individuals involved.
Businesses harmed by anti-competitive conduct can also pursue private damages claims against the offending parties, seeking compensation for losses suffered due to the breach.
Aside from the monetary and potential criminal penalties, Commerce Commission charges can bring significant reputational harm to both individuals and businesses. Commerce Commission investigations are published on their public website, and charges are often highlighted in the media.
Exemptions and Authorizations
Certain practices that may seem anti-competitive can be exempted under the Act if they fulfil specific criteria. SMEs should be aware of the exemptions available to them and the authorization process if their activities could potentially breach the Act but are deemed to be in the public interest.
Compliance and Mitigating Risks
Compliance with the Act is essential for SMEs to avoid costly penalties and reputational damage. To ensure compliance, businesses should:
- Educate Employees: Ensure that all employees are aware of the Act’s key provisions and potential consequences of non-compliance.
- Implement Compliance Programs: Develop and implement robust compliance programs that align with the Act and address potential risks.
- Seek Legal Advice: When in doubt, seek legal advice to ensure that business practices and agreements are compliant with the Act.
- Self-Assessment: Regularly assess business practices to identify and rectify any potential anti-competitive behaviours or practices.
For small to medium businesses in New Zealand, understanding the Commerce Act is of paramount importance to ensure compliance with competition law. By adhering to the Act’s provisions and promoting fair competition, SMEs can thrive in the New Zealand marketplace while upholding the principles of consumer welfare and market efficiency. Taking the necessary steps to comply with the Act will not only mitigate legal risks but also contribute to a healthier and more vibrant New Zealand business environment.
Smith and Partners can help you decipher the Act – in relation to your particular industry and circumstances – and then determine whether you are at risk of non-compliance and if relevant help you put steps in place to prevent that occurring. If you are the subject of a Commerce Commission investigation, we can advise you in relation to the process and can assist with responding to Commerce Commission enquiries and representation if necessary.
Ready to ensure your small business is fully compliant with the Commerce Act and protect your interests? Contact Bret Gower, our expert commercial and regulatory compliance lawyer, today. With his deep knowledge of New Zealand’s business landscape and extensive experience in handling Commerce Act matters, Bret can provide tailored guidance to safeguard your business.
Don’t risk costly penalties, legal hassles, or reputational damage. Reach out to Bret Gower now to assess your compliance, develop effective strategies, and navigate any Commerce Commission investigations with confidence. Your business’s success and legal peace of mind are just a call or message away. Contact Bret Gower and secure your business’s future today.