On Wednesday, 16 March 2016, Prime Minister Malcolm Turnbull announced that the Federal Government will adopt the Harper Review recommendations to substitute an “effects test” for the current “purpose” (or “taking advantage”) test in the misuse of market power provisions of the Competition and Consumer Act 2010.

Proponents for the change have argued that the current law leaves small businesses vulnerable to abuse by big players, while opponents argue that the proposed change will create uncertainty for all businesses big or small and have a “chilling effect” on innovation.

In this alert, we provide a brief recap of the current prohibition against misuse of market power, outline the recommendations in the Harper Review, and conclude with a discussion of the possible implications of the proposed changes.

The Current Law

Section 46 seeks to stop companies from using their market power to manipulate the market to their advantage.

The key elements which determine whether a company has misused its market power under section 46 are:

  1. Did the corporation have “substantial market power”?
  2. Did the corporation “take advantage” of its substantial market power”?
  3. Did the corporation take advantage of that power for proscribed anti-competitive purpose?

The “take advantage” test has caused the most controversy over the years. Indeed, the high bar set by the courts for determining whether a company “took advantage” of its substantial market power resulted in the failure of several high profile cases brought by the regulator, the Australian Competitor and Consumer Commission (ACCC) and led to calls from the regulator and small business groups for a relaxation of the section. In essence, the courts ruled that there was no “taking advantage” of substantial market power if there was a legitimate commercial or business rationale for the conduct under scrutiny. To put it another way, if the company would have acted the same way without its substantial market power, it could not be said to have “taken advantage” of its power.

The Harper Panel and Issues with the Current Law

The Harper Review stemmed from the Coalition’s pledge during the 2013 election campaign to have a “root and branch” review of Australian competition policy. Section 46 was included in that review because of its perceived ineffectiveness in protecting small businesses from the conduct of big business.

After examining the case law, the Harper Panel concluded that the “take advantage” test did not distinguish between, on the one hand, egregious anti-competitive behaviour which should be unlawful because of its overall effect on competition in the market and, on the other hand, conduct which, although harmful to individual competitors, did not harm competition overall.

The Harper Panel’s Recommendation

In its Final Report, the Panel proposed that section 46 be re-framed as follows:

“to prohibit a corporation with substantial degree of market power from engaging in conduct if the conduct has the purpose, effect or likely effect of substantially lessening competition in that or any other market”.

When adopted into law, section 46 will be a radically different animal from that with which businesses and their lawyers have grappled to this point. The “purpose” test will be widened to include an “effects” test, and the “take advantage’ element will be replaced by a “substantially lessening competition” test.

Considerations for Small and Big Businesses

Although misuse of market power claims can be brought by aggrieved competitors, the great bulk of such claims have been prosecuted by the ACCC.

However, the ACCC’s successes have been few and far between. Indeed, one could say that the commission has become “gun-shy” about section 46 cases, if its recent focus on using the unconscionability provisions in the Australian Consumer Law to pursue claims against the large supermarket chains in particular for section 46 type conduct is any guide.

Should the Federal Government successfully legislate the changes, the ACCC can be expected to run a number of cases to test the efficacy of the new law. Small businesses may also see the changes as an opportunity to bring private actions of their own against corporations which they allege are engaging in conduct that is substantially lessening competition.

Currently, businesses only need consider whether their conduct might be considered as having an anti-competitivepurpose when acting in the market. When the proposed changes become law, businesses will need to consider whether the effect or likely effect of their conduct in the market could substantially lessen competition. Implementation of run of the mill business strategies such as:

  • setting prices of your products to compete with competitors;
  • negotiating trading terms with buyers or sellers; and
  • implementing business strategies to harm competitors,

may need to be reconsidered when the changes take effect.