Trans-Pacific Partnership: significant from a competition - - PDF document

Trans-Pacific Partnership: significant from a competition perspective or “next generation” political spin? — Part 2

Prudence Smith, Nick Taylor and Aurore Vande-Kerchove JONES DAY

The Trans-Pacific Partnership (TPP) Leaders’ State- ment1 of 9 September 2012 heralded the TPP as a “next generation” regional agreement on trade and investment implying that it goes significantly further than previous free trade agreements. This article presented in three sections evaluates that claim with respect to the effects of the TPP from an antitrust or competition law perspective. The first section of the paper (in last month’s part2 and in this part) identifies seven significant limitations

• n the scope and depth of the TPP’s competition chapter

that will undermine its relevance. On the other hand, the second section (in the final part) of the paper discusses three sets of competition- like provisions that are contained within the TPP that may well have a significant impact. The third section (in the final part) of the paper also discusses how the enforcement of existing competition laws in relation to commercial conduct arising from the implementation of the TPP’s core trade-related provi- sions will be instrumental in the partnership achieving its full potential.

Monopoly export legislation

A number of countries have a history of putting in place legislation that designates a board or company to be the monopoly exporter — particularly where by doing so, a country’s producers can obtain significant market power in export markets. The predominant purpose of this legislation is to earn monopoly rents for the country’s growers.3 Second, there are no provisions in the TPP that requires countries to abolish agricultural single desks or to provide that other parties can bypass the single desk when exporting to TPP countries. For example, under NSW state legislation,4 Ricegrowers Ltd (SunRice) holds an exclusive appointment for all export sales of rice from that state. In NZ,5 only Zespri International Ltd (and any “collaborative” marketers approved by the Kiwifruit New Zealand) are permitted to supply kiwifruit for export sale. Case study: Zespri International Ltd Kiwifruits are seasonal with supply occurring in autumn and winter. During the Northern Hemisphere autumn and winter, a multitude of countries supply kiwifruit, but in the Southern Hemisphere’s winter, only two countries account for almost all the kiwifruit sold — Chile and NZ. In Chile, anyone can purchase kiwifruit from growers and export them around the world, but in NZ (with two limited exceptions), only Zespri International Ltd (Zespri) is permitted to export kiwifruit. In 2004, Korea and Chile entered into a free trade agreement that progressively reduced tariffs between them, including the tariff on the importation into Korea of Chilean kiwifruit. The Chilean growers expected to do well in Korea displacing sales from NZ that remained subject to a Korean import tariff. However, as the Korean Fair Trade Commission (KFTC) investigation later revealed, Zespri entered into a range of exclusive supply arrangements for the supply of its kiwifruits to two of Korea’s most important supermarket chains, e-mart and Lotte. This conduct was specifically entered into at that time because the tariff reduction had enabled the Chilean competitors of Zespri to begin to make significant inroads into the Korean market. As a result, despite the tariff reduction, in 2010 the Chilean share of the Korean Southern Hemisphere kiwi market sales fell and the prices paid by Korean consumers rose. competition and consumer law news October 2016 250

The KFTC concluded that the exclusive dealing arrangements constituted an abuse of dominance by Zespri and the company was ordered to pay a penalty of approximately A$500,000 and report any future exclusive dealing arrangements to the KFTC. As a post-script to this case, a Chile-NZ free trade agreement has since reduced the tariff on NZ kiwifruit exported to Korea. Tariff reductions or other changes in trade deals can result in your country’s exports being displaced by improved access for products from a competing country. This can cause swings in output that are much greater than the year-on-year changes in consumption in a domestic market and can create strong incentives to engage in anticompetitive conduct to maintain revenue. This implies that competition authorities may have a particular role in ensuring that companies with dominant positions do not misuse that dominance to undermine the realisation of the full benefits of a free trade agreement. Again, the TPP could have required jurisdictions to exempt exports destined for other TPP jurisdictions from the single desk provisions.6

TPP does not prevent countries legislating to abrogate the effect of its competition laws in specific cases

The TPP does not seek to prevent governments passing laws to override the application of general competition laws. New Zealand’s Dairy Industry Restructuring Act 2001 (DIRA) is an example of such a legislative abrogation. The DIRA enabled the merger of the country’s two largest dairy cooperatives, the NZ Dairy Group and Kiwi Co-operative Dairies Ltd, together with the NZ Dairy Board, to form Fonterra. According to the NZ Commerce Commission, Fonterra has a “substantial degree of market power in a number of key domestic New Zealand dairy markets”.7 Additionally, Fonterra is also a very substantial player in export markets — although this is not relevant under domestic NZ law. To enable the merger to proceed, the government passed the DIRA which overrode the competition law merger prohibition in s 47 of the Commerce Act 1986 (NZ). To address domestic competition issues princi- pally in relation to the company’s power as a buyer of raw milk from growers, the Commerce Act imposes a range of rights for growers including to enter and exist as a member of the cooperative and limits the volume and duration of Fonterra’s contracts with growers so that minimum volumes of raw milk are available to other

• companies. The safeguards do not explicitly address

customer side issues and they may cease to have effect in either of NZ’s main islands if Fonterra’s share of raw milk purchases from growers falls below 20% in any given season. This legislation illustrates how domestic industry considerations can result in legislation that overrides competition law provisions to the potential detriment of foreign consumers, a circumstance that the TPP does not seek to prevent.

Weak provisions concerning private rights

• f action

While the TPP contains an explicit provision8 requir- ing that the competition law provide a right of private action in the courts (or a right to seek compensation via the competition authority), the provision lacks key aspects of specificity required for it to constitute a full measure of damages for all affected persons, and the necessary ancillary machinery to make that provision effective is lacking. A key weakness of Art 16.3 of the TPP is that it does not specify which private parties can obtain redress. The US system illustrates how the practical import of this provision is likely to be very limited, particularly in the context of the TPP. Under federal laws, foreign direct purchaser plaintiffs can, in principal, recover damages from companies that breach antitrust laws provided they fit within a class of victims that includes US plaintiffs. However, particularly in cartel cases, foreign plaintiffs

• ften are indirect purchasers who do not purchase the

products directly from the cartelists but rather down- stream from second or third layer distributors. Indirect customers cannot generally take damages actions under federal laws in the US and instead redress is available on a state-by-state basis through a patchwork of statutes and parens patriae actions by the state Attorney-General

• n behalf of residents of the state concerned. The TPP’s

requirement for parties to adopt a private right of action does not require the right of action to include foreign plaintiffs (generally nor from TPP member countries specifically) and it does not require the right of action to cover indirect purchasers. More broadly, the EU provides a demonstration of the limitation of a TPP provision that merely provides for a right of private action without the necessary ancillary machinery provisions. The EU’s core compe- tition law provisions9 have been held to provide a right

• f private action in all member states even without

explicit legislation concerning private rights.10 Five TPP countries are countries with a civil law tradition and, although some have passed specific pro- visions in the competition law to enable private enforce- ment action, this is not generally necessary because competition and consumer law news October 2016 251

there is a more general provision in the Civil Code to the effect that: “Every unlawful act that causes damage onto another person obliges the wrongdoer to compensate such damage.”11 In theory, the common law system has an analogous tort (the tort of breach of statutory duty) but that tort requires that the action be brought by a person who belongs to the class for whose protection the statute was

• passed. Consequently, common law countries need a

specific competition law provision to enable private rights of action and, with the exception of Brunei, the six common law TPP countries have already done so. However, merely providing for private rights without the necessary machinery provisions was found to be

• ineffective. In the European Commission’s words: “[D]ue

to national procedural obstacles and legal uncertainty,

• nly few victims currently obtain compensation.”12

In particular, countries with a civil law tradition do not generally provide for discovery and it has therefore been difficult or impossible for most plaintiffs to com- mence or sustain their proceedings. This is why the EU found it necessary to pass a directive on antitrust that provides:

• a right to “full” compensation including, in addi-

tion to actual losses, lost profits and interest for both direct and indirect purchasers (subject to a passing on defence);

• a right for private parties to seek and obtain a

discovery order to obtain the necessary evidence;

• a qualified right to access to the competition

authority’s file (where it meets a proportionality test); and

• assistance for plaintiffs in the arrangements for

quantifying harm through a statutory presumption that cartels cause harm and providing that courts may estimate the harm where evidence of quanti- fication is unavailable. Separately, the EU has also recognised that an adequate system of private redress also needs a collective redress mechanism (ie, a class actions regime or similar).13 The most important of the above provisions concerns the power of the courts to order discovery which is not, under the civil law system, generally available. Because the TPP’s private action provision lack the associated machinery provisions necessary to exercise the right, that provision is unlikely to contribute in any significant way to the existing provisions that already exist concerning private actions.

Absence

• f

provisions to enable competition authorities or private persons from obtaining evidence in other TPP countries and enforcing remedies

As noted above, competition laws of exporting coun- tries commonly provide for implicit or explicit exemp- tions for export cartels and, even where competition laws do apply to export transactions, they may often not meet the case selection criteria of the exporting coun- try’s competition agency. For these reasons, it may often be the case that only the competition agencies and customers in importing countries may seek to take action against trade between TPP countries. Significant challenges confront both public and pri- vate parties in importing countries, particularly when the alleged perpetrators have no presence in the importing

• country. Even if a perpetrator has a distribution subsid-

iary in an importing country, the relevant evidence may

• nly be in the power, custody or control of the parent

company in the exporting country. In these circumstances, international instruments that facilitate the gathering of evidence or the enforcement of remedies may be the key to whether any enforcement of competition laws, even for hard core cartel conduct,

• ccurs at all.

Internationally, there are mechanisms to facilitate such international enforcement actions. Seven of the 11 TPP countries are also members of the Organisation for Economic Co-operation and Development (OECD), which in 2014 adopted its third generation of recommendations for international cooperation on competition law enforce-

• ment. Many initiatives can be taken without legislation,

but one of the key features included in the recommen- dation is that governments enact “information gate- ways” in their domestic competition laws by which evidence that is already in the files of one competition agency can be shared with a second competition agency.14 Examples of “information gateway” provisions include the ability of the:

• Australian15 authorities each to share information

with any domestic or foreign law enforcement agency; or

• New Zealand authority16 to enter into an agree-

ment with another agency pursuant to which it can share information with another agency. Information gateways do not assist where a country’s agency is investigating conduct that another agency has not, and will not, investigate as would be the case in relation to an exempt export cartel. To address this kind

• f situation, the OECD recommendation proposes that

governments consider adopting mechanisms that pro- vide for one country (say an importing country) to request assistance from another (say an exporting coun- try) in gathering information as part of an investigation concerning a breach of the importing country’s laws. The assistance could be for the collection of information from parties on a voluntary basis or through the execu- tion of search and seizure powers. In the criminal sphere, countries frequently have bilateral mutual legal assistance treaties (MLATs) in competition and consumer law news October 2016 252

place for assistance in criminal law enforcement and there are a limited number of examples of multilateral MLATs (eg, the Association of Southeast Asian Nations (ASEAN) has a multilateral MLAT in place and the EU has such arrangements in its treaties). However, MLATs that are designed for use in general criminal law enforcement are not suitable for enforcing competition laws, particularly in a multilateral context, because many countries have administrative or civil enforcement regimes for their competition laws rather than criminal enforcement regimes. Indeed in the TPP context, all the countries have either wholly administrative enforcement systems,17 wholly civil court enforcement systems18 or dual systems in which civil enforcement remains the predominant form of enforcement than criminal enforce- ment.19 Many international cooperation agreements between competition law agencies provide a mechanism for requests for assistance in the collection of information from parties on a voluntary basis. A typical clause provides that each country’s competition authority would “assist the other Party’s competition authority, upon request, in locating and obtaining evidence and wit- nesses, and in obtaining voluntary compliance with requests for information, in the requested Party’s terri- tory”.20 However, only a few provide for the exercise of compulsory information collection powers. An example

• f a type of competition-specific MLAT provisions that

could have assisted in trans-TPP’s competition law investigations can be seen in the Australian-US agree- ment on mutual antitrust enforcement assistance which provides that one government can request assistance from the other to gather evidence in that country’s territory including, where appropriate, via search and

• seizure. Although the agreement has not often been

used, there have been occasions when it has. Part III of the Canadian Competition Act 1985 provides very extensive enabling provisions for competition law- related MLATs to be entered into.

Competition chapter requires little in relation to enforcement of competition laws domestically and is not subject to TPP’s

• wn dispute settlement provisions

It is interesting to compare the provisions concerning what countries are required to adopt with respect to enforcing the provisions of the telecommunications and anticorruption chapters with the competition law chap- ter:

• In the telecommunications chapter, each govern-

ment commits to:21

… provide its competent authority with the authority to enforce the [relevant] obligations … That author- ity shall include the ability to impose effective sanctions, which may include financial penalties, injunctive relief (on an interim or final basis), or modification, suspension or revocation of licences.

• In the transparency and anti-corruption chapter,

each government commits to “make the commis- sion of [the relevant offences] liable to sanctions that take into account the gravity of that offence”22 and “ensure that legal persons held liable for [the relevant offences]are subject to effective, propor- tionate and dissuasive criminal or non-criminal sanctions, which include monetary sanctions”23 and that “no Party shall fail to … enforce its [relevant] laws or other measures adopted”.24

• By contrast, the competition law chapter only

commits members to actions that constrain enforce- ment agencies such as a requirement to procedural fairness before imposing a sanction.25 Also, in contrast with the chapters on telecommuni- cations, anti-corruption, state-owned enterprises (SOEs) and designated monopolies, the competition law chapter is not subject to the dispute settlement mechanism which means that moral suasion is the only mechanism to encourage the parties to comply. Putting the competition law chapter beyond the inter-country dispute settlement procedure is normal in many international trade agree- ments (eg, the North American Free Trade Agreement). On the other hand, it is significant that the TPP does make certain chapters such as the chapter concerning SOEs and designated monopolies, and the competition law provisions of the chapter concerning the telecom- munications subject to the dispute settlement mecha-

• nism. By contrast, in the North American Free Trade

Agreement, the provisions concerning SOEs sit in the competition chapter and are thus outside the dispute settlement mechanism.

Prudence Smith Of Counsel Jones Day prudencesmith@jonesday.com www.jonesday.com Nick Taylor Partner Jones Day njtaylor@jonesday.com www.jonesday.com

competition and consumer law news October 2016 253

Aurore Vande-Kerchove Associate Jones Day avandekerchove@jonesday.com www.jonesday.com

Footnotes

1. Statement from the Trans-Pacific Partnership Leaders (9 Sep- tember 2012) available at www.mofa.go.jp/policy/economy/ tpp/pdf/tpp_120909_3.pdf. 2. P Smith, N Taylor and A Vande-Kerchove “Trans-Pacific Partnership: significant from a competition perspective or “next generation” political spin? — Part 1” (2016) 32(7) CCLN 234. 3. See for example, Productivity Commission Single-Desk Mar- keting: Assessing the Economic Arguments Staff Research Paper (July 2000), 11 available at www.pc.gov.au/research/ supporting/single-desk/singledesk.pdf. 4. Rice Marketing Act 1983 (NSW). 5. Kiwifruit Industry Restructuring Act 1999 (NZ). 6. For example, NZ’s kiwifruit export Regulations specifically exclude sales from Australia from their purview. 7. See NZ Commerce Commission “The Dairy Industry Restruc- turingAct” (24 November 2014) available at www.comcom.govt.nz/ regulated-industries/dairy-industry/the-dairy-industry-restructuring- act/. 8. TPP, Art 16.3 available at https://ustr.gov/tpp/. 9. Treaty on the Functioning of the European Union, Arts 101 and 102. 10. Courage Ltd v Bernard Crehan and Bernard Crehan v Courage Ltd Case C-453/99 [2001] ECR I-6297. 11. For example, see the Dutch Civil Code 1838, Art 1401 which is also found in the Indonesian Civil Code 1847, Art 1365. A similar provision appears in French Civil Code 1804, Art 1382. 12. European Commission “Antitrust: Commission welcomes Coun- cil adoption of Directive on antitrust damages actions” media release (10 November 2014). 13. European Union Commission Recommendation on Common principles for Injunctive and Compensatory Collective Redress Mechanisms in the Member States concerning Violations of Rights granted under Union Law (11 June 2013) available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/ ?uri=CELEX:32013H0396&from=EN. 14. Organisation for Economic Co-operation and Development Recommendation of the OECD Council concerning Interna- tional Co-operation on Competition Investigations and Pro- ceedings (2014), Pt VII, paras 10–15 available at www.oecd.org/ daf/competition/2014-rec-internat-coop-competition.pdf. 15. SeeCompetitionandConsumerAct2010(Cth)(CCA),s155AAA(12). 16. See Commerce Act 1986 (NZ), ss 99C–99P. 17. As with Singapore and Malaysia. 18. As with NZ. 19. As with Japan and Australia. 20. Agreement between the Government of Canada and the Gov- ernment of the United Mexican States Regarding the Applica- tion of their Competition Laws (2001), Art III(3)(a). See a similar provision in the US/Canada Agreement Regarding the Application of Their Competition and Deceptive Marketing Practices Laws (1995), Art III(3)(a). 21. TPP, Art 13.20. 22. TPP, Art 26.7(2). 23. TPP, Art 26.7(3). 24. TPP, Art 26.9(1). 25. TPP, Art 16.2.

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