The long-awaited Harper Review final report was released on 31 March 2015. This update highlights key recommendations relevant to the life sciences sector.

ALIGN THE MISUSE OF MARKET POWER PROHIBITION

The Harper Review recommends bringing the misuse of market power prohibition into line with the other provisions in Part IV of the Competition and Consumer Act 2010 (Cth) (CCA). If implemented, these amendments would expand the reach of section 46 and make it easier to prove a contravention, primarily because of the removal of the “take advantage” limb and the addition of an “effects” test.

The three key changes recommended by the Harper Review are: 

  1. Expanding section 46 to encompass the standard Part IV effects test (in addition to the existing purpose test). If implemented, this would make it easier to prove contraventions of section 46. The Australian Competition and Consumer Commission (ACCC) has long advocated for this change on the basis that it is difficult for the ACCC to prove the subjective purpose of an accused. 
  2. Removing the “take advantage” limb. If implemented, this would make it more difficult for a firm with market power to defend its actions. The taking advantage limb has traditionally provided comfort to firms engaging in conduct that would be a rational business strategy even for a firm without substantial market power. The Harper Review initially proposed including an express defence to this effect. The removal of this limb in favour of exclusive reliance on the standard Part IV substantial lessening of competition test would expand the reach of the prohibition and place significant importance on the interpretation of that test. The Harper Review recommends requiring Courts to have regard to specific factors that increase or lessen competition including efficiency, innovation, product quality or price competitiveness.
  3. Introducing the standard Part IV substantial lessening of competition test in place of the existing proscribed anti-competitive purposes. If implemented, a key issue will be whether there is sufficient certainty associated with the application of this test in the context of misuse of market power. The Harper Review recommends requiring Courts to have regard to specific factors that increase or lessen competition including efficiency, innovation, product quality or price competitiveness. In our view, the inclusion of those factors would not alter the nature of the test. Existing jurisprudence establishes that the test requires a comparison of the state of competition in the relevant market with and without the conduct, including pro-competitive and anti-competitive factors.

The Harper Review also recommends allowing the ACCC to authorise conduct which satisfies a public benefit test (which requires that public benefits outweigh public detriments, including any lessening of competition). This change would standardise section 46 with other provisions of Part IV. However, the time and cost associated with an authorisation application means that significant forward planning and investment would be required by firms with substantial market power seeking to rely on authorisation as a basis to engage in conduct that could lessen competition.

If the recent matter of ACCC v Pfizer were to be decided under the new (amended) section 46, it is likely, in our view, that the Federal Court would reach the same outcome because:

  • in relation to the allegation that Pfizer misused its market power, the Federal Court held that Pfizer had taken advantage of its market power
  • the ACCC did not to plead an anti-competitive effect (despite having the opportunity to do so in relation to its allegation that Pfizer engaged in exclusive dealing); and
  • on the Federal Court’s findings, an argument that Pfizer’s conduct had, or was likely to have had, the effect of substantially lessening competition in the Australian atorvastatin market is unlikely to succeed.

REPEAL THE INTELLECTUAL PROPERTY EXCEPTION

The Panel recommends that an overarching review of Australia’s intellectual property (IP) regime be undertaken, by way of a 12-month Productivity Commission inquiry. In the Panel’s view, the review should address:

  • competition policy issues in IP arising from new developments in technology and markets; and
  • the principles underpinning the inclusion of IP provisions in international trade agreements the Panel also recommends that a separate independent review should assess governmental processes for establishing negotiating mandates to include IP provisions in such agreements.

In addition, the Panel recommends that the IP exception in section 51(3) of the CCA be repealed. This recommendation is particularly relevant to IP rights holders and any party entering into licences or assignments involving IP rights. Currently, section 51(3) of the CCA provides a limited exception, for certain types of transactions involving IP rights, from the application of Part IV of the CCA. More specifically, the IP exception covers certain conditions in licences or assignments of IP rights in respect of patents, trademarks, registered designs, copyright and circuit layouts. However, the exception is limited, in that it does not extend to the prohibitions in Part IV against resale price maintenance (section 48) and the misuse of market power (section 46). In the Panel’s view, repealing the IP exception should not depend on, nor be delayed pending, the outcome of the proposed Productivity Commission inquiry.

If the latter recommendation is implemented, transactions previously protected from regulatory scrutiny by the operation of section 51(3) may give rise to material competition risks (for example, for originator manufacturers of pharmaceutical products) going forward. Importantly, however:

  • the Panel recommends that IP licences and assignments should remain exempt from the cartel provisions of the CCA, consistent with the general position in respect of vertical supply arrangements;
  • in the Panel’s view, such vertical arrangements involving IP rights should only contravene the competition law if they have the purpose, effect, or likely effect, of substantially lessening competition; and
  • competition law risks arising from the repeal of section 51(3) may be mitigated in circumstances where IP licensing or assignment arrangements produce offsetting public benefits, by applying for an exemption from the CCA through the usual notification or authorisation processes.

DEREGULATE PHARMACY OWNERSHIP AND LOCATION RULES

In the Panel’s view, current restrictions on the ownership and location of pharmacies in Australia are unnecessary to ensure that pharmacies meet community expectations of safety, access and standard of care. By implication, those restrictions unduly restrict competition. The Panel recommends that such rules be repealed and replaced with regulations that effectively promote safety, access and standard of care but are less harmful to competition (and, in turn, less detrimental to the long-term interests of consumers). Likewise, we note that the recent National Commission of Audit (in its Phase One report) also recommended that pharmacy ownership and location rules be deregulated.

Importantly, due to the significant expected impact on the pharmacy sector, the Panel considers it likely that transitional arrangements will form an integral part of the reform process and contends that negotiations for the next Community Pharmacy Agreement afford the Australian Government an opportunity to implement such transitional arrangements with a view to the eventual removal of location rules.

We note that the Panel’s recommended changes to the merger exemption process, the ACCC’s powers, and the authorisation and notification regime may also be relevant to businesses in the life sciences sector.