The Draft Report of the Competition Policy Review released yesterday aims to set the pathway for resuscitating productivity growth in Australia, shining a light on areas of the economy in need of reform. It focuses on what is needed to promote productivity enhancing choice, diversity and innovation and focussing on areas such as health, planning laws, power and road transport.

The Draft Report recommends changes to key competition laws that apply to all Australian businesses. It leaves no stone unturned, suggesting an overhaul of cartel laws, removing special price signalling rules, reframing the prohibition on misuse of market power, streamlining merger clearance processes, and rewriting the rules on supply chain restraints, including third line forcing. These recommendations are summarised below.

Cartel laws & price signalling

The Draft Report recommends simplification of the cartel laws which it describes as 'excessively complex'.

There are proposals to: 

  • extend the reach of the law to conduct wherever occurring that affects markets or consumers in Australia, a US style 'effects' approach;
  • limit cartel provisions to cartels between actual competitors and 'likely' competitors – the current threshold for 'potential' competitors is very low, having been applied in a recent case where 'is at least possible' that the parties would be competitors;
  • significantly broaden the joint venture defence to cartel conduct so that collaborative arrangements are only illegal if they have the purpose or effect of substantially lessening competition.

These recommendations, if followed, will improve the ability of businesses that don't actually compete (but might in future) to engage with one another in productive joint economic activities.

Importantly, the Draft Report finds that the prohibitions against price signalling (which are currently confined to the banking sector) do not strike the right balance of distinguishing between pro- and anti-competitive behaviour and should be removed. Instead, in a proposal leaning towards the European approach, it recommends extending the current prohibition on anti-competitive contracts, arrangements and understandings to cover 'concerted practices' – that is, a regular disclosure or exchange of information between firms – if that practice has the purpose or likely effect of substantially lessening competition.

Vertical practices & third line forcing

The Draft Report recommends broadening the current exemptions for vertical practices between suppliers and customers by:

  • only prohibiting non-price vertical arrangements in connection with the supply or acquisition of goods or services (even where the parties may otherwise be competitors) where this would have the purpose or likely effect of substantially lessening competition;
  • retaining the existing vertical price prohibitions (ie the resale price maintenance provisions) but extend the existing notification process to such arrangements and exempting resale price maintenance between related bodies corporate;
  • removing the per se prohibition on 'third line forcing' and subjecting this conduct to a substantial lessening of competition test for illegality.

These would be welcome reforms that would greatly simplify the current law which 'overreaches' in many respects. The current law in these areas is out of step with many leading anti-trust jurisdictions and the proposed reforms would reduce business compliance costs without unduly risking competition.

The introduction of a notification process for resale price maintenance – under which conduct notified to the ACCC is exempted within 14 days unless the ACCC objects on competition and/or public benefit grounds – would be likely to prove a particularly popular mechanism for many suppliers struggling to deal with the increased level of free-rider problems arising from the pervasive nature of the internet.

Misuse of market power

The debate over misuse of market power will continue to rage, but the Panel has clearly come down on the side of change, finding that the law to date has been ineffective and that the polarised debate about change to date has been unproductive.

The recommendation is to adopt an ‘effects’ test for the misuse of market power prohibition rather than testing the purpose of unilateral conduct. The new test would make it unlawful for a corporation with substantial market power to engage in conduct that has the purpose or likely effect of substantially lessening competition in a market. This is controversial, particularly the removal of the existing 'taking advantage' element of the existing provision. In order to protect against fears of 'over reach' and 'chilling' of pro-competitive conduct, a new 'defence' would apply if a company can prove (1) its conduct would have been a rational business decision by a company without market power and (2) would be in the long term interests of consumers.

As advisors, we can be comfortable that the first element of the defence is an appropriate safeguard if the law moved to an effects test, but we are uncomfortable with the second additional element of the defence. It is an untested and uncertain concept and, as a result, could result in the chilling effect on competitive conduct of which critics of an 'effects' test have warned. For example, what if a supermarket engaging in unilateral conduct that reduced prices and thereby resulted in the exit of, say, smaller bakers and butchers? Would a Court necessarily conclude that the lower market prices were, by definition, in the best long term interests of consumers, or might a Court also need to consider whether the reduction in diversity and choice might not be in the long term best interests of consumers?

Merger Clearance

No changes are recommended to the substantive rule which prohibits anti-competitive mergers. The Panel rejects concerns expressed in some quarters about creeping acquisitions and 'national champion' arguments.

The Panel recommends streamlining the formal merger clearance and authorisation processes so that:

  • formal clearance (on pure competition grounds) and authorisation (on public benefit grounds) mechanisms are collapsed into one;
  • the ACCC is the first instance decision maker with a strict three month timeframe to decide if it is satisfied that the merger doesn’t lessen competition or that the public benefits outweigh the anti-competitive detriments;
  • the Australian Competition Tribunal loses it's first instance authorisation role (as used in the recent Murray Goulburn and AGL applications) but remains the review body for ACCC decisions.

These are sensible proposals for reform, however the devil will be in the detail as to whether the proposed 'streamlining' of any new formal merger clearance / authorisation will make it practicably workable; the current formal clearance process has never been used, largely because of the extremely onerous information and procedural requirements associated with it.

Submissions make a difference

The Draft Report notes the value of submissions to the Review Panel.

Next steps

Submissions on the Draft Report are due 17 November 2014. Minter Ellison will be lodging a further submission.