The ramifications of the StuffMe decision will affect all future mergers, because it ultimately is an expansion of the Commerce Commission’s powers, writes the University of Auckland’s An Hertogen

After the Court of Appeal declined the appeal for the ‘StuffMe’ media merger last week, some commentators suggested the parties should have abandoned their case much earlier and spent their money on journalism rather than on lawyers. After all, the Commerce Commission and the High Court had already ruled against them, therefore their appeals were meritless.

But were they really?

The inclusion of media plurality (having more than one media voice to ensure diversity of views) and the impact on democracy raised the novel issue of whether detriments other than a reduction of competition could be taken into account.

You don’t need to take my word for it: the Commerce Commission has admitted media plurality was not the type of factor it usually considers. Moreover, before the parties could take their case to the Court of Appeal, they needed leave from the High Court. The High Court allowed the appeal, in part because its “decision on the scope of the Commission’s jurisdiction … is of general importance and relatively novel.”

To understand whether the Commerce Commission could take into account media plurality, let’s look briefly at the legal regime. The Commerce Act 1986 prohibits mergers that are likely to “substantially lessen competition”. Anyone engaging in such a merger can be brought before the courts. If parties think their merger could substantially lessen competition, they can apply to the Commerce Commission for clearance. The Commerce Commission then compares competition with and without the merger and grants clearance if competition is not likely to substantially lessen.

However, the Act also says the Commerce Commission can authorise an anti-competitive merger if it is “of such a benefit to the public that it should be permitted”. This power is important in a small economy like New Zealand, where too much emphasis on competition alone might mean ending up with a lot of small businesses that are inefficient. The Act therefore allows mergers with redeeming features that benefit the public at large. The key question is, of course, how are these redeeming factors determined?

It remains to be seen whether the public indeed dodged a bullet here or simply got in the line of fire of a different one.

The question in the StuffMe case was whether negative detriments beyond the reduction in competition could be taken into account. Past cases had never addressed this specific question. There had been a few general, but ambiguous, statements about detriments, but the cases had not dealt with a refusal to authorise purely on the basis of non-competitive detriments, such as the loss of plurality and democratic accountability at stake in the StuffMe merger.

The Commerce Commission traditionally defines public benefit as “any gain to the public of New Zealand that would result from the proposed transaction”, but crucially adds that only “anti-competitive detriments that arise in the market(s) where we find a lessening of competition” count.  On the Commission’s analysis, the net gains of the StuffMe merger outweighed the negative impact on competition which pointed towards the merger being allowed.

Moreover, this traditional position fits in with the Commerce Act more broadly, and specifically with the public benefit test for restrictive trade practices other than mergers. For these, the Act states the public benefits needs to be weighed against the anti-competitive detriments. And although the Act phrases the legal tests for the authorisation of mergers and restrictive trade practices differently, the Courts have held that they are the same.

The Commission, in its StuffMe decision, said it was not proposing the public benefit test for mergers should be different from that of restrictive trade practices, seemingly oblivious to the fact that this is difficult to square with the extension of the public benefit test to include non-competitive detriments.

The new test, which looks beyond anti-competitive detriments, leads to odd results under the Commerce Act.

The ramifications of this case will affect all future mergers, because it ultimately is an expansion of the Commerce Commission’s powers.

As already outlined, the first step in a merger review is whether competition is likely to lessen substantially. If it is not, the Commission grants clearance, even though the merger may have unsavoury detriments outside of competition. It might even reduce media plurality, as in the example of a media market with many equally-sized players whose owners and editors are of the same political persuasion, and in which one of these players acquires the only other company with a different worldview. Yet, at the clearance stage, the Commission has no jurisdiction to look at those detriments, which leaves no room to decline clearance because of a loss in media plurality. This suggests that the Act does not truly give the Commission the power to look beyond anti-competitive detriments, and again points to the novelty of the approach taken in StuffMe.

To sum up, when the Commerce Commission included detriments other than lessening of competition, it took a step that fully deserved to be tested in the courts. And there is a lot at stake, not only for the parties involved and the media sector more broadly. The ramifications of this case will affect all future mergers, because it ultimately is an expansion of the Commerce Commission’s powers. From the Commission’s perspective, there is hardly going to be a more sympathetic case than a media merger to justify expanding its powers. However, letting our feelings about this merger determine how we feel about the law that is being developed is not a recipe for success.

Under the new test, if a merger is likely to substantially lessen competition in a market (which can be as small as the Stratford community newspaper market – did you just look up where Stratford is?), whether it goes ahead depends on three Commissioners finding a detriment somewhere in society at large that can be linked to the transaction and outweighs the efficiency gains. It remains to be seen whether the public indeed dodged a bullet here or simply got in the line of fire of a different one.

With the scope of the public benefit test far from set in stone, the parties should not be faulted for pursuing their appeals. Moreover, by funding the opportunity to explore the reach of the public benefit test, they provided us with a valuable public service. The dogged pursuit of a private appeal is not how we usually think of the public service that media companies perform, and it is doubly ironic that they did so in a case where the concept of “public benefit” was central.

That said, whether the legal test has become any clearer remains to be seen: my initial impression of the Court of Appeal’s judgment is that it opens up a few new questions and a few new routes that the public benefit test could travel.

Disclaimer: From October to December 2006, I was briefly employed as a legal assistant in the Competition team at Russell McVeagh who are acting for the appellants in this case.

Dr An Hertogen is a senior lecturer at the University of Auckland's Faculty of Law

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