Abuse of dominance

Definition of abuse of dominance

How is abuse of dominance defined and identified? What conduct is subject to a per se prohibition?

Section 46 of the Competition and Consumer Act 2010 (Cth) (CCA) is directed at prohibiting a firm with a substantial degree of market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition. It is not directed at prohibiting the possession of a substantial degree of market power, although the existence of that power is a precondition for section 46. Section 46 was amended in November 2017 to include a competitive effects test. There is no longer a requirement to show that a firm has ‘taken advantage’ of its substantial market power, for one of three proscribed anticompetitive purposes, for a contravention to be established.

‘Substantial lessening of competition’ is a concept that is used in other prohibitions in the CCA. ‘Lessening of competition’ is defined to include preventing or hindering competition (section 4G). The courts have found that a lessening of competition means a reduction or loss of competition as a result of the conduct that is ‘meaningful or relevant to the competitive process’ (Stirling Harbour Services Pty Ltd v Bunbury Port Authority (2000), Rural Press v ACCC (2003)) and that it involves considering the future state of competition with and without the impugned conduct (Dandy Power Equipment (1982)). The ACCC’s guidelines on section 46 explains that ‘conduct substantially lessens competition when it interferes with the competitive process in a meaningful way by deterring, hindering or preventing competition’.

As noted above, section 46 is not limited to particular anticompetitive purposes. The assessment of purpose is a subjective inquiry as to what a firm intended to achieve through its conduct. Direct evidence of purpose is not necessary. Purpose can be inferred from a firm’s conduct, the conduct of any other person or the relevant circumstances. The courts have found in Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989), Boral Besser Masonry Ltd v ACCC (2003) and other cases that meeting competition is a legitimate purpose and have cautioned against confusing aggressive competitive intent with anticompetitive behaviour.

There is no misuse of market power conduct that is subject to a per se prohibition. However, in its guidelines, the Australian Competition and Consumer Commission (ACCC) identifies the following types of conduct that may involve a misuse of market power: refusal to deal, restricting access to an essential input, predatory pricing, loyalty rebates, margin or price squeezing, and tying and bundling.

Exploitative and exclusionary practices

Does the concept of abuse cover both exploitative and exclusionary practices?

The misuse of market power prohibition will only cover exploitative and exclusionary practices to the extent that those practices are engaged in by a firm with substantial market power and have the purpose, effect or likely effect of substantially lessening competition. It is less common for exploitative practices to be caught under the prohibition as courts have typically distinguished between conduct to meet competition and conduct that is anticompetitive. For example, defensive price cutting or profit maximisation may not be caught by the section 46 prohibition except where it is engaged in with an anticompetitive purpose or has an anticompetitive effect (or likely effect). Exclusionary practices may be caught by the prohibitions against cartel conduct (Division 1, Part IV), concerted practices (section 45), anticompetitive agreements (section 45) and exclusive dealing that substantially lessens competition (section 47).

Link between dominance and abuse

What link must be shown between dominance and abuse? May conduct by a dominant company also be abusive if it occurs on an adjacent market to the dominated market?

Since 6 November 2017, there is no longer a requirement to show that there is a link between a firm’s substantial degree of market power and its conduct. A firm with substantial market power will contravene section 46 if its conduct has the purpose, effect or likely effect of substantially lessening competition in any other market in which it supplies or acquires goods or services, or supplies or acquires goods indirectly through other persons, even though it may not have market power in those markets.

Defences

What defences may be raised to allegations of abuse of dominance? When exclusionary intent is shown, are defences an option?

There are no specific defences that may be raised to allegations of misuse of market power, but efficiency gains or other pro-competitive purposes or effects will be considered in assessing if the conduct is pro-competitive rather than anticompetitive overall. A firm may also argue that it does not have a substantial degree of market power.

Since 6 November 2017, it has been possible for firms to apply to the ACCC for authorisation of conduct that might contravene section 46. Authorisation provides the firm engaging in the conduct with legal immunity. Authorisation cannot, however, be sought for past conduct. The ACCC may grant authorisation if it is satisfied that the conduct either does not have the effect or likely effect of substantially lessening competition or meets the ‘net public benefit’ test. At present, there have been no applications for authorisation of conduct that might contravene section 46.

Specific forms of abuse

Types of conduct

Rebate schemes

Rebate schemes may contravene section 46 if they are used by a firm with substantial market power for the purpose, or with the effect or likely effect, of substantially lessening competition. Under section 46, the form of discounting does not matter; either retroactive or incremental rebates could be a contravention if the elements of section 46 are made out.

In its section 46 guidelines, the Australian Competition and Consumer Commission (ACCC) acknowledges that rebates usually do not harm competition and can reduce the overall price consumers pay for goods and services. The ACCC considers that a firm with market power may breach section 46 by offering a rebate that is conditional on a distributor meeting sales targets, such as volume rebates that are based on a customer purchasing a large quantity of its requirements from the firm.

Tying and bundling

Tying and bundling may contravene section 46 if they are engaged in by a firm with substantial market power and subject to establishing the other elements for a contravention of section 46. Notably, a firm may contravene section 46 if it bundles a product for which it is the only supplier with another product that it supplies in another market in which it may not have a substantial degree of market power. In ACCC v Baxter Healthcare Pty Ltd (2008), the Full Federal Court found that Baxter had a substantial degree of power in the market for sterile fluids, of which it took advantage by offering bundles of its sterile fluids with its peritoneal dialysis (PD) products, which were subject to competition from imports, for a prohibited purpose. The bundled package was significantly cheaper than the prices for acquiring individual products separately. The court also found that Baxter had the purpose of deterring or preventing competition from rival suppliers of PD products.

Exclusive dealing

Exclusive dealing is typically addressed under section 47 of the Competition and Consumer Act 2010 (Cth) (CCA), which applies to all firms regardless of market power. Exclusive dealing is subject to a competition test and will only be prohibited where it has the purpose, effect or likely effect of substantially lessening competition. The courts have found that exclusive dealing in the form of exclusive distributorships or other non-price vertical restraints may be pro-competitive in that they may restrict intra-brand competition but promote inter-brand competition (see Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001)). However, this is not always the case. In Universal Music v ACCC (2003), the Federal Court found that the restriction on parallel importing that Universal and Warner wanted to impose on distributors was not pro-competitive and was a strategy designed with an anticompetitive purpose in mind.

Non-compete provisions are more likely to be dealt with under the civil or criminal prohibitions on cartel conduct, which apply to market-sharing agreements between competitors (ie, agreements that allocate customers, suppliers or territories). There is no requirement of market power under the cartel prohibitions.

Predatory pricing

Since 6 November 2017, predatory pricing is no longer specifically prohibited by section 46. However, it may be caught by the general misuse of market power prohibition (section 46(1)). In its guidelines on section 46, the ACCC expressly identifies predatory pricing as a type of conduct that has a greater potential to involve a misuse of market power.

Prior to 6 November 2017, a corporation with a substantial share of a market was prohibited from pricing below the ‘relevant cost’ of supply for a sustained period for one of three proscribed purposes (section 46(1AA)). This specific predatory pricing prohibition was introduced in 2007 but never tested by the courts. The CCA also provided that a corporation that engages in pricing below ‘relevant cost’ for a sustained period may be taking advantage of its market power in breach of section 46(1) even if there is no ability to recoup losses (section 46(1AAA)). These specific provisions, including the removal of recoupment as a necessary element, have been repealed.

The most recent predatory pricing case is ACCC v Cabcharge (2010). The case was settled by admission, in which Cabcharge admitted to contravening section 46(1) by supplying taxi meters and associated fare schedule updates below cost for an anticompetitive purpose. Penalties in relation to Cabcharge’s admitted predatory pricing conduct were A$3 million.

Price or margin squeezes

A price squeeze by vertically integrated companies with a substantial degree of market power may constitute a breach of section 46 of the CCA if the elements of the prohibition are established. The price squeeze must be accompanied by evidence that the squeeze has the purpose, effect or likely effect of substantially lessening competition. In its section 46 guidelines, the ACCC states that a firm with market power can engage in a margin or price squeeze to disadvantage its competitors in a downstream market, which may prevent an equally efficient competitor from competing on its merits.

For the telecommunications industry, a firm may breach the CCA by taking advantage of market power even if there is no anticompetitive purpose, provided there is an anticompetitive effect. Part XIB of the CCA prohibits a telecommunications carrier or carriage service provider from engaging in anticompetitive conduct, which is defined to include taking advantage of a substantial degree of power in a telecommunications market. However, this prohibition is a variant of section 46 as it does not require an anticompetitive purpose and is effects-based, that is, under Part XIB, the misuse of market power must have the effect or likely effect of substantially lessening competition.

Refusals to deal and denied access to essential facilities

Section 46 is intended to prohibit conduct that restricts competition rather than the interests of particular persons or competitors. A refusal to deal is therefore only prohibited under section 46 if it has an anticompetitive purpose or effect. For example, in Melway Publishing v Robert Hicks Pty Ltd (2001), the High Court emphasised that a firm with substantial market power is under no legal obligation to appoint new wholesale distributors and recognised that non-price vertical restraints in distribution could promote inter-brand competition. There have been other cases where refusals to deal have been found to be justified by a supplier’s legitimate business interests (eg, Top Performance Motors Pty Ltd v Ira Berk (Qld) Pty Ltd (1975) and Regent’s Pty Ltd v Subaru (Aust) Pty Ltd (1996)). These cases are still relevant even though they involve the previous section 46 prohibition.

The ACCC’s guidelines on section 46 expressly address refusals to deal, considering a situation where an incumbent firm refuses to provide access to an input that it manufactures locally, and is essential to compete downstream. The ACCC notes that transport of the input to the local market would involve a significant cost for a new entrant. The ACCC considers the effect of the refusal to supply to be to prevent the new entrant entering the market and is of the view that the conduct would be likely to breach section 46. It should be noted that this example was heavily criticised in comments on the ACCC’s Interim Guidelines on section 46, as it focused on protecting competitors, rather than the competitive process. Nonetheless, the example was retained in the updated version of the guidelines.

In ACCC v Cabcharge (2010), the ACCC obtained penalties totalling A$14 million, including A$11 million for admissions by Cabcharge relating to its refusal to allow competitor non-cash systems for payment to process Cabcharge cards. On 1 May 2017, the ACCC instituted proceedings against a private hospital operator for allegedly refusing to deal with a group of surgeons who were seeking to establish a competing private day surgery facility.  However, this case was dismissed by the Federal Court in March 2020. More recently, on 9 December 2019, the ACCC instituted proceedings against a port owner alleging the port sought to prevent a new entrant from competing with its marine pilotage and towage business by, among other things, failing to provide berths for its tugs.  This case has been set down for hearing in April 2021.

There are, however, express prohibitions on refusals to supply in the CCA that apply to all corporations, including those without market power. A refusal to supply may be in breach of the CCA if it can be characterised as:

  • an agreement that has the purpose, effect or likely effect of substantially lessening competition (section 45);
  • exclusive dealing (section 47); or
  • resale price maintenance (section 48).

 

In relation to access to essential facilities, section 46 does not create an obligation on owners of essential facilities to give third parties access to those facilities. However, if the elements of section 46(1) are made out, it may be possible to use section 46 to create a de facto access regime, though there would be some difficulties in framing the appropriate court orders (see NT Power Generation Pty Ltd v Power and Water Authority (2004)). There is also a general access regime in Part IIIA of the CCA for bottleneck infrastructure and a telecommunications access regime in Part XIC, while access to gas and electricity infrastructure are dealt with under the National Gas Law and National Electricity Law respectively. Aside from those access regimes, there is no separate ‘essential facilities’ doctrine in Australia.

Predatory product design or a failure to disclose new technology

There has not been a section 46 case in Australia on such conduct, although it may be possible to bring such a case if the requisite elements of section 46 are present. Such behaviour may also be caught by the civil or criminal prohibitions on cartel conduct if it involves an agreement between competitors. There is no requirement of market power under the cartel prohibitions.

Price discrimination

In general, price discrimination does not of itself necessarily involve a misuse of market power. However, if price or non-price discrimination amounts to conduct by a firm with substantial market power that has the purpose, effect or likely effect of substantially lessening competition, then it may contravene section 46 of the CCA. Price discrimination usually manifests in the form of other conduct such as bundling, price squeezes and refusals to deal.

Exploitative prices or terms of supply

Merely charging excessively high prices or putting in place exploitative terms of supply is not a misuse of market power under section 46 unless all the elements of section 46 are made out. The ACCC does, however, have the power to hold price inquiries in relation to the supply of goods or services under Part VIIA of the CCA. This price surveillance power enables the ACCC to declare goods and services to restrict a person’s ability to increase the price of such goods or services during a specified period.

Abuse of administrative or government process

The use of government process to exclude rivals from a market or to increase rivals’ costs may theoretically involve a breach of section 46 if an anticompetitive purpose or effect (or likely effect) can be demonstrated. Under the previous iteration of section 46, it would have been difficult in practice to establish that the use of a public government process involved ‘taking advantage’ of one’s market power for a proscribed purpose. With the removal of the ‘taking advantage’ requirement, there is potentially more scope for such conduct to be challenged as a misuse of market power, if rivals of a firm with a substantial degree of market power are foreclosed as a result.

Mergers and acquisitions as exclusionary practices

Mergers and acquisitions are subject to a substantial lessening of competition test under section 50 of the CCA. Amendments to the CCA in 2012 were intended to address ‘creeping acquisitions’ and the accretion of a substantial degree of market power over time through small, incremental acquisitions.

However, recently, the ACCC (like other regulators) has been considering how to regulate large digital platforms including how to respond to acquisitions by such platforms of start-ups that may be small or nascent at the time of the acquisition, but which may or could evolve into significant competitors. In its Digital Platforms Inquiry, the recommendations in the ACCC’s Final Report included the following directed at the market power of digital platforms in the context of acquisitions:

  • reform to merger laws to more explicitly allow the ACCC to consider the likelihood a transaction could remove a potential competitor, and the amount and nature of data that may be accessed because of the acquisition (which would apply to all mergers); and
  • introduction of a voluntary notification protocol for large digital platforms regarding the acquisition of any business with activities in Australia.

 

In mid-2020, the ACCC launched an investigation into Facebook’s US$400 million completed acquisition of Giphy. Giphy is a web-based animated gif search engine and platform provider. The ACCC’s investigation is considering whether the transaction provides Facebook with access to data about its rivals, and whether access to that data strengthens its market power by entrenching its position in online advertising or whether it may impact rivals’ access to Giphy, or both.  In the past, the ACCC has usually included reviews of completed acquisitions on its public mergers register.  However, the ACCC removed the acquisition from the public register.  At the time of writing, the ACCC has not made any public statements indicating it has made any decisions or concluded its investigation.

On 14 January 2021, Google closed its $2.1 billion acquisition of Fitbit Inc before the ACCC had completed its public informal merger review, which commenced in February 2020. Google first announced its plans to acquire Fitbit in November 2019, following which it voluntarily engaged with the ACCC regarding the deal (there is no mandatory merger filing process in Australia).  The ACCC rejected a long-term behavioural undertaking offered by Google which sought to address competition concerns with the deal (in similar terms to the remedy accepted by the EC in the matter), indicating it continued to have concerns that the acquisition may result in Fitbit’s rivals being squeezed out of the wearables market due to reliance on Google’s Android system and other Google services required to ensure their devices work effectively.  The ACCC also indicated it was concerned that the acquisition would further consolidate Google’s leading position in relation to the collection of user data, which supports its significant market power in online advertising and is likely to have applications in health markets.  The ACCC was also continuing to investigate the potential impact on wearable operating systems, providing Google the ability to be a gatekeeper for wearables data.  As the parties closed the transaction before the ACCC had completed its review, the ACCC is now continuing to investigate the matter, treating it as an enforcement investigation which will be conducted confidentially. 

Other abuses

Section 46 of the CCA does not list particular types of conduct that would be a misuse of market power, and subject to establishing the elements required for a contravention of section 46, the type of conduct that may be proscribed is not closed. The ACCC has identified the following conduct as having a greater potential to involve a misuse of market power: refusals to deal, restricting access to essential inputs, predatory pricing, loyalty rebates, margin or price squeezes, and tying and bundling. However, it also notes that it is not possible to identify with precision particular types of conduct that necessarily involve a misuse of market power, as whether conduct amounts to a misuse of market power will depend on the circumstances.

Law stated date

Correct as of

Give the date on which the information above is accurate.

January 2021.