There has been controversy concerning the submission of the ACCC to the Competition Policy Review that section 46, the abuse of dominance provision, should be amended to introduce an “effects” test. In the Review’s draft report it is proposed that an “effects” test be introduced, subject to a new defence if the conduct has a rational business purpose and is in the interests of consumers. Partner, George Raitt discusses the issues concerning the existing and proposed tests.

The Review’s issues paper released in April this year observes that distinguishing between a dominant firm’s unilateral conduct which is a normal incident of competition,  and  conduct  which  should be treated as an unlawful abuse of market power,  is  internationally  recognised to be one of the most complex and controversial areas in competition policy. However, the Review’s draft report does not engage in any meaningful way with the international controversy or the differences between Australia’s current law and major trading partners.

Perhaps the Review considers it desirable to simplify the issues for an audience that does not enjoy legal and economic expertise. Certainly the public debate on the “effects” test has been simplistic. Nevertheless, it is desirable that the analysis of the problem, the policy issues and consequences of any change in the law should be credible in the international context.

The current law, section 46 of the Competition & Consumer Act, prohibits a corporation having a substantial degree of power in a market from taking advantage of that power to deter or prevent competitive conduct. In its submission to the Review, the ACCC argued that the law should be changed to prohibit a corporation having a substantial degree of power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition. The ACCC put the case for an “effects” test on several bases. First, the ACCC says it has long argued that the failure to have an “effects” test is a gap in the law. As the Review notes, there has been a long history of reviews which have recommended against an “effects” test, so the long standing nature of the debate is not productive to elucidate reasons which can be critically assessed in the current context.

Second, the ACCC says it has experience of serious complaints where anti-competitive effects have been alleged by market participants but the ACCC considered that there was not a prohibited purpose. No details are provided to support this suggestion of mischief occurring beyond the reach of the current law. Proponents of the “effects” test believe it is obvious that big business is exploiting its market power to the detriment of consumers, and argue that it is necessary to introduce an “effects” test to make it easier for the ACCC to successfully prosecute dominant firms. To develop “evidence-based” policy requires some validation of the “mischief” beyond a  conscientious  belief  held  by  advocates.

Third, the ACCC states that the omission of an “effects” test is inconsistent with international trends, citing an apparently unpublished working draft paper concerning New Zealand’s competition law. Again, there is no acknowledgement of the international controversy and divergence in laws and decisions of courts and tribunals around the world. For example, reference could be made to the US Antitrust Modernisation Commission report of 2007, or the European Commission guidance on single firm conduct of 2008, or the US Department of Justice report on single firm conduct of 2009 (subsequently withdrawn), to indicate that this is not a harmonious area of competition law or policy.

Fourth, the ACCC considers that the problem with the current law is the drafting which has lent itself to unduly narrow interpretation by the courts. The reality of our legal system is that the legislature enacts laws whose meaning is determined by the courts (based on the presumed intent of the legislature). It seems to be a common complaint of the executive branch of government that laws and decisions of courts fail to live up to their expectations. It is fundamentally a good thing that those who enforce the law are accountable not to themselves but to the public and other institutions of government. The ACCC considers that such problems of interpretation will not occur if the law is changed, because the legislation is an “economic statute”, and this will guide the court’s interpretation. This is ironic given past experience, and overlooks the often stated view of the courts and judges that they are applying the law to determine the rights and liabilities of parties – they are not applying economic theory or, much less, the opinions of economists (which typically differ). The US Antitrust Modernisation Commission recently took a similar view that the opinions of economists are not sufficiently certain and predictable to form a basis for legal regulation.

Fifth, to exemplify the second and fourth arguments, the ACCC cites recent court decisions in which it says there was a clear anti-competitive purpose and significant anti- competitive effect but, under current law, the section 46 case failed because it could not be demonstrated that anti-competitive harm was the result of the dominant firm exercising its market power. In the most recent such case, Cement Australia, the ACCC successfully proved its case that the corporation entered into and gave effect to an agreement having an anti-competitive purpose in contravention of section 45. It is noteworthy that section 45 has an “effects” test, but the court considered that any anti-competitive effect of the exclusive supply contract was dissipated by market factors. Thus there was a break in the chain of causation between the anti-competitive agreement and any anti-competitive effect. Unlike many areas of law where “causation” is a well-established requirement, the “effects” test that appears in section 45 refers to “effects or likely effects”. It has been held that a “likely effect” is one which has “real chance or possibility” of occurring. That is, it is not necessary than any actual effect occur, or if it does, that it be caused by the anti-competitive conduct. It may well be doubted that the law should be changed to endorse a policy that legal liability attach to a dominant firm without the need to demonstrate that anti-competitive harm was caused by the exercise of its market power.

Sixth, both the ACCC and the Review point out that section 46 refers to the purpose of harming competitors or deterring competitive conduct by competitors. Courts have observed that the purpose of the legislation is to protect competition rather than individual competitors. However, as competition is intangible and forensically difficult to observe, if not unobservable, the words used in section 46 seem to be a reasonable drafting technique to identify a proxy for “competition”. In proposing to change the subject matter from harm to competitors to harm to competition, the Review raises a significant point: it is anomalous that the legislation give competitors a civil action. Many cases under section 46 concern competitors using the provision not for altruistic purposes but for strategic competitive or commercial advantage. Litigation of this kind bears a significant responsibility for the tortured interpretation of the law by the courts.

The Review adopts much of the ACCC’s submission with, however, the addition of the following: the accused corporation would have a defence if it proves that the conduct in question would be rational for a corporation that did not have substantial market power and the conduct would be likely to have the effect of advancing the long-term interests of consumers. The “rational decision” defence does not compensate for the lack of clear causal nexus between the anti-competitive harm and the exercise of market power. Further, it re-opens the question of the hypothetical standard by which conduct is assessed under the current “taking advantage” requirement, i.e. is the conduct possible in a hypothetical competitive market in which market power is absent? The reverse onus of proof is abhorrent given that the matters which must be proved are virtually incapable of proof, presumably intentionally so.

We are finally left to wonder whether sensible law reform can occur in the current politically charged climate, without verifiable data concerning the “mischief” to be addressed and solid comparative analysis to address the consequences of changing the law. A new law along the lines advocated by the ACCC and proposed by the Review would be novel. We may well doubt that it will be productive to create further divergence in international competition laws applying to dominant firm conduct, and to repeat the years of testing of a new law in the courts that the current provisions have undergone. The Review’s draft report is open for submissions until 17 November 2014 and the final report is due by March 2015.