Summary

Following intense debate on Australia’s existing law on misuse of market power, the Harper Review’s Final Report has recommended an entirely new section 46 of the Competition and Consumer Act

The new section would prohibit a business with substantial market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition, and would require the court identifying this conduct to balance a range of pro-competitive and anti-competitive purposes and effects. While the ACCC has welcomed the proposal, the new test presents significant risk and uncertainty, particularly because it is unclear how the test would work in practice. Treasury is now consulting on the proposal and the opportunity to make further submissions is open until 26 May 2015.

  1. Section 46 overview

Section 46 of the Competition and Consumer Act 2010 (CCA), which deals with the misuse of market power, emerged as a key battleground in the early days of the Competition Policy Review and only became more controversial through the Draft Report and beyond.  It became totemic of the battle between big and small business and divided competition lawyers, academics and current and former commissioners of the Australian Competition and Consumer Commission (ACCC).

Section 46 currently provides that:

A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of:

  1. eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;
  2. preventing the entry of a person into that or any other market; or
  3. deterring or preventing a person from engaging in competitive conduct in that or any other market.

Section 46 is the main provision of Australia’s competition law that deals with the unilateral conduct of a single business.  While multilateral conduct such as mergers or collusion among competitors may often raise at least prima facie competition issues, unilateral conduct is the essence of competition and should only be interfered with under specific circumstances.

Competition or antitrust laws throughout the world recognise the unique position of unilateral conduct and the need to protect vigorous competition for the benefit of consumers while also regulating the conduct of businesses with market power that may be destructive of competition.  These laws apply various filters to make this distinction, whether by looking for a predatory intent, focusing on particular forms of exclusionary conduct, or providing defences relating to efficiency or business justification.

Critics of the current section 46 have argued that the test is too difficult to prove and may result in some anti-competitive behaviour going unpunished.  Criticism has been levelled at every aspect of section 46, but has recently been focused on the “purpose” and the “take advantage” elements.

  1. The “purpose” element

Historically, criticisms of section 46 have focused on perceived difficulties in proving one of the three proscribed purposes, leading to suggestions that the effect rather than the purpose of the conduct should be examined.

Various formulations of an “effects” test have been proposed to every significant review of the competition law including the Hilmer Review of 1993 and the Dawson Review of 2003, and have been rejected on the basis that they would risk capturing legitimate competitive behaviour and that this risk would chill competition to the detriment of consumers.

Concerns about the difficulty in proving purpose have arguably been overstated.  The ACCC acknowledges that it has never lost a section 46 case on the basis of purpose, though it has stated that it has chosen not to take certain cases because it did not feel it could establish a relevant purpose.  Legislative amendments have made it clear that the proscribed purpose only needs to be a substantial purpose and not the only purpose; and that the required purpose may be inferred from conduct.

More recent objections to the section 46 “purpose” element appear to be on the basis of principle, arguing for example that:

  • the section 46 purpose requirement is inconsistent with the principle that competition policy should be fundamentally concerned with the effect of market behaviour on consumer welfare, rather than the intentions of market participants; and
  • the section 46 proscribed purposes, which include eliminating or damaging a competitor or preventing or deterring a person from entering or competing in a market, are inconsistent with the principle that competition policy should be concerned with the protection of competition rather than with individual competitors, and that vigorous competition may indeed entail an intent to damage a competitor.

These arguments from principle seem to have gained more currency as arguments about the practical difficulties of proving purpose have been answered to a greater or lesser degree.

  1. The “take advantage” element

To “take advantage” of market power simply means to use that market power.  The courts have suggested a number of tests to judge whether or not a business has taken advantage of its market power, which come down to whether a business without substantial market power would have, or profitably could have, engaged in the conduct in question.

The “take advantage” element has proved difficult to apply in practice.  There have been somewhat inconsistent court decisions about the precise test to apply, with the 2003 Rural Press case in particular interpreted by some commentators to suggest that a business would not be found to take advantage of its market power if there were any imaginable circumstances in which a business without market power couldhave engaged in the same conduct.

Following that case, on the ACCC’s recommendation a new section 46(6A) was introduced to clarify the “take advantage” element and lower the evidentiary threshold by allowing the Court to consider:

  1. whether the conduct was materially facilitated by the corporation’s substantial degree of power in the market;
  2. whether the corporation engaged in the conduct in reliance on its substantial degree of power in the market;
  3. whether it is likely that the corporation would have engaged in the conduct if it did not have a substantial degree of power in the market; and
  4. whether the conduct is otherwise related to the corporation’s substantial degree of power in the market.

The only completed section 46 case relating to conduct since the introduction of section 46(6A) is the recent Pfizer case (see our separate update here), in which Flick J referred to section 46(6A)(c) as well as judicial precedent in applying a would rather than a could test.  It appears from Pfizer that the legislative amendments to section 46 may assist in narrowing the scope of conduct permitted by the “take advantage” test.

  1. The Draft Report

The Draft Report recommended a substantial overhaul of section 46:1

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

This proposal added an “effects” test, removing the requirement to prove an anticompetitive purpose, and also removed the “taking advantage” element.  Both of these elements have been used to help distinguish legitimate competition from anti-competitive conduct.  The Panel explained that:

The test of ‘substantially lessening competition’ would enable the courts to assess whether the conduct is harmful to the competitive process.  The application of that test will ordinarily make the ‘take advantage’ test redundant.

However, there was concern that the “substantially lessening competition” test might not necessarily be applied by the ACCC and the courts to distinguish between competitive and anti-competitive behaviour with the precision of the elements it would replace.

The Draft Report proposed to address these concerns by introducing a defence providing that the primary prohibition would not apply if the conduct in question:

  1. would be a rational business decision by a corporation that did not have a substantial degree of power in a market; and
  2. would be likely to have the effect of advancing the long-term interests of consumers.

Both limbs created considerable uncertainties, and the need for a business to establish both of them was seen to render the proposed defence unworkable.  On the other hand, the ACCC argued that no defence was necessary, and some small business advocates argued that no defence was appropriate.

  1. The Final Report

The Final Report confirms the open-ended prohibition of the Draft Report:

(1) A corporation that has a substantial degree of power in a market shall not engage in conduct if the conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in that or any other market.

The Panel acknowledges the criticism of the defence proposed in the Draft Report, but instead of modifying that defence – for example by deleting the second limb or treating each limb as a sufficient defence – it removes it altogether, proposing instead to require that a court have regard to certain factors in determining whether conduct has the purpose or effect of lessening competition:

(2) Without limiting the matters that may be taken into account for the purposes of subsection (1), in determining whether conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in a market, the court must have regard to:

(a) the extent to which the conduct has the purpose, or would have or be likely to have the effect, of increasing competition in the market including by enhancing efficiency, innovation, product quality or price competitiveness in the market; and

(b) the extent to which the conduct has the purpose, or would have or be likely to have the effect, of lessening competition in the market including by preventing, restricting or deterring the potential for competitive conduct in the market or new entry into the market.

The practical impact of this addition is unclear.  If it only requires the courts to consider the ways in which conduct may both increase and lessen competition, it will merely confirm existing practice in respect of other provisions of the CCA.  References to enhancing efficiency, innovation, product quality and price competitiveness may be intended to evoke a business justification defence – just as references to preventing, restricting or deterring competitive conduct or market entry might be welcomed by individual competitors, despite the Panel’s efforts to avoid mentioning them.  But the mention of these factors may not give a clear impression of the impact they will have on any competition assessment.

It does appear that none of these factors will be relevant except to the extent that they increase or lessen competition.  The extent to which efficiency gains can be counted in the assessment of a lessening of competition – rather than as a public benefit in an authorisation context – remains unclear in Australian case law and is hardly clarified by the ACCC’s Merger Guidelines:

The ACCC generally only considers merger-related efficiencies to be relevant to s. 50 merger analyses when it involves a significant reduction in the marginal production cost of the merged firm and there is clear and compelling evidence that the resulting efficiencies directly affect the level of competition in a market...

In cases where a merger is likely to achieve significant efficiencies, but the efficiencies do not prevent a substantial lessening of competition, the merger may only proceed if authorised by the Tribunal.  The Tribunal may consider whether gains in efficiency constitute a public benefit that outweighs the public detriment from the substantial lessening of competition.

The implication remains that efficiency and innovation will only be relevant to the competition test where they affect the competitive structure of a market, such as by allowing smaller businesses to compete more effectively against a larger incumbent.  It is not clear whether an efficiency gain by a large incumbent – the kind of business likely to be subject to the new section 46 – would be seen as increasing competition for the purposes of such a test. 

It may be that ACCC and judicial attitudes towards efficiency gains are changing – or would change as the intention and effect of the proposed new section 46 were reconciled – but any change would take time to become apparent.  And although efficiency and innovation would certainly be counted as public benefits in the authorisation process recommended by the Final Report, it is hard to see how any process with a six-month timeframe would avoid harming some dynamic competitive conduct.

The wording of the proposed provision also suggests that the court will have to take into account both purposes and effects in determining whether conduct has a particular purpose or effect.  There is no indication of how different purposes and effects might be weighed by the court, but it is apparent that the Panel’s proposal does not provide an effective business justification or efficiency defence. 

The need for businesses to predict how the ACCC and a court would weigh purposes, effects and likely effects in two subsidiary competition tests in order to determine purpose, a final competition test may well result in a reduction in vigorous and beneficial competitive activity. 

In the end, the proposed new section 46 clearly restates the problem of aggressive conduct that may threaten existing or potential competitors in its pursuit of efficiency and competitive advantage – but it does little to advance any solution.

The Final Report recommends that the ACCC issue guidelines regarding its approach to the new section, which would provide some additional certainty as to enforcement by the ACCC.  However, the ACCC may interpret its own guidelines differently over time and may retract or amend those guidelines in the future.  Any such guidelines would not limit a court’s determination and would not have any impact on third party legal action.

  1. Response to the recommendation

The Panel’s recommendation would remove two of the key mechanisms applied by the Australian courts to distinguish between competitive and anti-competitive unilateral conduct, replacing them with a competition test whose application in this context is difficult to predict and is not made significantly clearer by the proposed directions to the court.

We remain concerned that the proposed section 46 would increase uncertainty as to the risk of ACCC investigation and legal action, and will result in less dynamic, less responsive and more conservative decisions by businesses that may be considered to have market power, particularly given the lack of availability of any defence to conduct that was engaged in for a legitimate business justification.

We expect there will be strong and continued discussion these issues through the Treasury’s public consultation process and beyond.  Although the Harper Review has now been completed, the debate over section 46 and the “effects” test has a long way to run.