New Zealand Law Students Journal
Last Updated: 12 November 2012
THE BATHTUB PRINCIPLE:
IS OUR COMMERCE ACT IN HOT WATER?
In 1776 Adam Smith wrote “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”1 The selfish desire of the producer to maximise profits will drive competition and benefit the consumer. It is when separate producers combine that they can distort market forces at the expense of consumers. Sections 27-29 of the Commerce Act
1986 reflect this 230 year old concept by preventing agreements that can
lessen competition. However, the free market is not
distorted by agreements
within groups of “interconnected”2 companies
because parents and subsidiaries share the interest of maximising the wealth of
their common shareholders. This means that
although they are separate companies
in a legal sense they should be viewed as a single economic unit for antitrust
The repealed section 44(1)(b) of the Commerce Act3
was an exception to the rule that anticompetitive arrangements are
illegal. This exception applied to such contracts, arrangements,
or covenants where the only parties are interconnected bodies. The courts are
likely to interpret the repeal of
section 44(1)(b) as a sign Parliament wants to
treat anticompetitive agreements between interconnected companies the same as
agreements between separate companies. This would be adopting the old
‘bathtub’ principle; to do so would not
take into account
the decisions reached overseas and would be inconsistent with the purpose of
* Candidate for LLB, University of Otago.
1 A. Smith. An Inquiry into the Nature and Causes of the Wealth of Nations, (a selected edition)
(Oxford University Press, 1993), p. 22.
2Any two bodies corporate will be treated as interconnected under section 2(7) of the
Commerce Act 1986 if “one of them is a body corporate of which the other is a subsidiary” (section 2(7)(a)), or “both of them are subsidiaries” section 2(7)(b)).
3 Repealed on 26 May 2001 by section 10(1) of the Commerce
Amendment Act 2001 (2001 No 32).
82 The New Zealand Law Students’ Journal (2006) 1 NZLSJ
The section 44(1)(b) exception recognised that groups of
interconnected companies operate as one economic identity and
arrangement entered into between them could not substantially lessen
competition.4 A wider interpretation would mean any
agreement between these bodies, even if it was made purely to harm a third party
not illegal under the Commerce Act. This interpretation appears to be at
odds with the purpose of the Act, to encourage competition,
and may explain why
the section was repealed in May 2001. However, as will be shown, anticompetitive
agreements between interconnected
bodies would be better served through
section 36 action rather than sections 27-29.
Section 44(1)(b) could have been applied in Direct Holdings Ltd v Feltex Furnishings of NZ Ltd and Smith & Brown Ltd5. In that case, Direct Holdings alleged that Feltex, a furniture manufacturer, refused to supply them with bedding because of an anticompetitive agreement with interconnected body Smith & Brown, a furniture distributor. Direct Holdings gained an interim injunction against Feltex under section 27 and 29 of the Commerce Act 1986, but, strangely, section
44(1)(b) was never raised in argument. Accordingly, the courts have no direct
authority on the matter should it arise again.
The ‘bathtub’ principle that existed in the U.S, meant that two
bodies that were not managed independently can be found
to have breached
anti-trust laws by entering into an agreement with the other. In
Copperweld Corp. v Independence Tube Corp.6, Burger CJ
overturned the bathtub principle when he held a parent company and its
subsidiary are not capable of reaching
an anticompetitive agreement in
breach of section 1 of the Sherman Act. In that case, Copperweld Corporation
Tube Co from Lear Siegler, Inc, the sale and purchase agreement
included a non-competition order. Shortly before Regal Tube
transferred to Copperweld, an officer of Regal took a position in Lear
Siegler, and set up Independence Tube
Mills to compete directly with
Regal. Copperweld then petitioned those in the industry not to do business
with the new company.
4 Y van Roy, Guidebook to New Zealand Competition Laws (Commerce Clearing House (New
Zealand), 1987), p. 25.
5  NZHC 192; (1986) 1 NZBLC 102,614.
6  USSC 137; 467 U.S. 752, p. 769 (1984).
Is our Commerce Act in Hot Water? 83
Mills then brought civil action against Copperweld, alleging that Copperweld
had entered into an anticompetitive conspiracy with
Regal Tube Co.
Burger CJ reached the conclusion that the bathtub principle or
‘intra- enterprise conspiracy doctrine’ was erroneously
founded on a
principle that competing bodies could not avoid breaching the Sherman Act by
merging into one company7. If they did, any subsequent arrangement
between the two bodies could be illegal. A misinterpretation of this
led to courts finding that any anticompetitive agreements within
interconnected companies are illegal. Thus, the bathtub principle
apply in this case because the Copperweld group was not founded on a
breach of the Sherman Act. Moreover, the arrangement
in question should not
attract liability because it is expected that the subsidiary will act for
the benefit of the parent.
“If a parent and a wholly owned
subsidiary do ‘agree’ to a course of action, there is no sudden
of economic resources that had previously served different
interests, and there is no justification for § 1
The Copperweld decision remains authoritative in The United States and
has since been extended to include partly owned
Louisiana Power and Light Co. v. United Gas Pipe Line Co. and Pennzoil
Co.,9 but could not protect conspiracies between teams in
the complex structure of major league soccer in Fraser v. Major League
Soccer.10 The Copperweld decision was also applied in
obiter in Queensland Wire Industries Pty Ltd v. Broken Hill Pty
Ltd11 where it was authority for deciding that any
supply agreement between BHP and its subsidiary was irrelevant to the Trade
Practices Act 1974. In that case, the plaintiff was successful under section 46
of the Trade Practices Act 1974, the equivalent of our section 36. Europe has
taken the same approach, in Viho v Commission12 the
European Court of Justice held that because the Parker Pen Group held 100% of
the shares in its subsidiaries it was entitled
to divide national markets
up between them. However, in
7 United States v. Yellow Cab Co. USSC 122; , 332 U.S. 218, p. 67 (1947).
8 Copperweld Corp. v. Independence Tube Corp.,  USSC 137; 467 US 752 (1984), p. 770.
9 479 So.2d 1149 (La.), (1986).
10 L.L.C. 284 F.3d 47 C.A.1 (Mass.), (2002).
11 167 CLR, p. 177.
12  4 CMLR 229.
Gosme/Martell-DMPO OJ13 the same reasoning could not
apply, because the parent, who only held half the voting rights over the
subsidiary, could not exercise
independent control. This finding is consistent
with the original Copperweld decision, and the meaning of
“interconnected” bodies under section 7 of the Commerce Act. Thus,
only when independent
control can be exercised over a subsidiary, an
otherwise anticompetitive agreement will not be combining separate economic
Section 1 of the Sherman Act provides in part: “Every contract,
combination in the form of trust or otherwise, or
restraint of trade or commerce among the several States, or with
foreign nations, is declared to be illegal.”
The difference between this
and our own section 27 of the Commerce Act 1986 is that ours
contains the provision: “that
has the purpose, or has or is likely to have
the effect.” As such, it does not need to be an agreement in restraint of
merely to have that effect is enough. Notwithstanding that,
section 29(1A) provides a defence for exclusionary
collusive agreement provision is essentially the same as the provision that
exists in the U.S.
It is our economic environment where the differences lie. The sudden
deregulation of government departments in the 1980s lead to
natural monopolies in telecommunications, power, post and rail sectors. With
such a large amount of market power
laying in the hands of relatively few
companies the misuse of market power could easily restrain anyone trying to
Even if these monopolies were split into a group of two or more
companies it would be too easy for the resulting interconnected
body to combine
to unfairly suppress their competition. This does not mean section 27 should be
used to control these powerful interconnected
groups. Queensland Wire
Industries shows that the Australian equivalent of our section 36
places sufficient restraints on the use of a group’s
for anticompetitive means. Moreover, since section 36(4) treats interconnected
bodies as a single economic unity
for assessing market power it would be unfair
to treat interconnected bodies as separate identities for the purposes of
27-29. This will mean they will have the disadvantage of being treated
as having the combined market power of the group
13  L 185/23.
assessing whether an individual subsidiary has misused their market
power under section 36, whilst being treated as independent
bodies for assessing
whether they have reached an anticompetitive agreement under sections
To punish anticompetitive agreements between interconnected companies
would prevent them from working in unison to shut out
a competitor but it will
also force them to act independently on more innocent matters. Almost every
instruction that a
parent company makes to their subsidiary will take the
form of a contract, arrangement or understanding, and, even if the
subsidiary had no choice in the decision, will be illegal under sections
27-29. In such a situation, the requirement of
competition would not be a high enough threshold. As recognised in
Queensland Wire Industries substantially lessening competition is a
common goal amongst many businesses and should only be illegal if separate
combine for that purpose.
Agreements between companies are targeted in the Commerce Act because
it removes the natural competitiveness of the free
market. In any such
agreement, two or more entities that previously pursued their own interests are
combining to act as one for
their common benefit. This reduces the diverse
directions in which economic power was previously aimed and suddenly increases
economic power moving in one particular direction. When two interconnected
bodies reach an agreement, the result is entirely different.
It is in the
individual interests of each body to pursue the interests of their common
shareholders. Thus, there is no other
side to assist, and any agreement that
they reach would not be a parting, or a compromise in any form, from
as an individual company.
Any rule that punished cooperation between interconnected bodies would
make companies less likely to divide their structure
and deprive the market of
any efficiencies that decentralised management may bring. The intention
of the Act is to
encourage competition but efficiency should not be
needlessly targeted, when competition remains unaffected.
Parliament has shown a desire to punish attempts at restricting
competition through using the words “for the purpose
36 and “has the purpose” in section 27(4). Accordingly,
it may be argued that it does not matter that agreements
interconnected bodies do not effect competition as an anticompetitive purpose
alone may be harmful. However, as a
group of interconnected companies
should be viewed as a single economic unit, an anticompetitive attempt within
such a unit is
no more harmful than an anticompetitive attempt by a single
company of the same size. The law for these two business structures
identical. Thus, an anticompetitive attempt within such a group should only be
punished if the group satisfies the criteria
of section 36.
With no clear answer from the Commerce Act and no binding authority on the matter, the law relating to agreements between interconnected bodies remains uncertain. Although judges are often reluctant to place too much emphasis on economic evidence, such reasoning is necessary on this point to bring true meaning to sections
27-29. An economist will be able to show the court that the object of
sections 27-29 is to prevent distortion of the free market. An economist will also be able to show that agreements between interconnected bodies that can be independently controlled by a parent will not distort the free market because the group share common intentions. This is why overseas courts, notably the Copperweld decision, have not applied similar sections to agreements between interconnected bodies. Finally, the sections 27-29 should only be interpreted by looking to surrounding sections. To view interconnected bodies as separate companies under sections 27-29 would be inconsistent with section 36(4), which views them as a single economic unit. It is for these reasons that our Commerce Act should reinstate section 44(1)(b); to exclude agreements between interconnected bodies from scrutiny under sections 27-29.