The Harper Review into Australia’s Competition Laws

The Commonwealth government’s ‘root and branch’ review of Australia’s competition laws has reached the half-way mark. Proposed reform of section 46 of the Competition and Consumer Act 2010 is especially controversial.

On 27 March 2014 the Commonwealth government, fulfilling an election promise, launched a ‘root and branch’ review of Australia’s competition laws. To conduct the review, the government appointed a four-person panel headed by Professor Ian Harper, that included the Victorian Bar’s Michael O’Bryan QC. On 22 September 2014, after a period of consultation, this panel published a draft report.

The draft report recommends changes to many areas of Australia’s competition law and regulatory infrastructure.

The most controversial recommendation relates to s 46 of the Competition and Consumer Act 2010. That provision prohibits a corporation with a substantial degree of market power from taking advantage of that power for an exclusionary purpose. It is a provision that was broadly modelled on some of the US Supreme Court jurisprudence under section 2 of the Sherman Act 1890– the anti-monopolization prohibition.

A New Section 46

In relation to s 46, the panel recommended that:

1) an ‘effects test’ be introduced (in addition to the current ‘purpose test’); and

2) the ‘taking advantage’ causal test be removed.

Specifically, the panel recommended that the new s 46 prohibit conduct which has the purpose, or would have or be likely to have the effect, of substantially lessening competition in any market. (The underlined part is the ‘effects test’.)

A Defence Against Regulatory Overreach?

To answer criticism that the change introduces regulatory overreach, the panel has additionally recommended that there be a defense for conduct that would be commercially rational in a competitive market (and hence presumptively efficient) and enhances efficiency in the actual market under consideration. The defendant must prove any defence.

The panel’s proposed s 46 has been strongly opposed by the ‘big end of town’, as well as by the current Federal Opposition. In August 2014 it led to a very public spat, conducted in the pages of the AFR and online in the Conversation, between current and past ACCC Commissioners.

Effects Test

An ‘effects test’ is verbal shorthand for the ACCC only needing to prove in a court that impugned firm conduct directly harms (as judged by economists) competition in a market. An effects test will lead, even more than currently, to every s 46 trial becoming a battle of economic experts. It is the apotheosis of the takeover of competition law by economics, a takeover which began with the US Supreme Court’s adoption of the ‘Chicago School’ of antitrust theory in its landmark Sylvania (1977) case. That economics should found competition law is now global orthodoxy. While it is no trivial task to prove competitive harm, once that is proved, the intent of the firm is irrelevant.

Both the US and EU have the effects test, and Australian cases are often run as de facto effects test cases anyway.

Taking Advantage

The more substantial reform is that the panel’s proposed s 46 has the additional effect of removing the current ‘taking advantage’ causal test.

A company takes advantage of its market power if it would not (or could not) engage in the impugned conduct if it did not have market power. This is a causal test, requiring the ACCC to prove a counterfactual. The test was propounded in a series of cases in the early noughties by the Gleeson High Court (see especially Melways (2001) and Boral (2003)).

This causal test is a strong brake on ACCC enforcement. The reason is that economics informs us that business conduct, presumptively efficient in a competitive market, might become inefficient when engaged in by a firm with market power.

To give just one example, for the case of a firm ‘tying’ two of its products together for sale to customers (which happens frequently in competitive markets), MIT Professor Michael Whinston famously showed that, when the firm has market power in one of the products, then, under certain conditions, tying could ‘leverage’ that market power into the market for the other product (Whinston, ‘Tying, Foreclosure and Exclusion’ (1990) 80 American Economic Review 837).

When the High Court required the ACCC to prove that a dominant firm would not or could not engage in the impugned conduct absent its market power, it undercut the policy underpinning s 46. Since then, ACCC anti-monopolization enforcement has been tentative.

No Bright Line?

Both the purpose test and the ‘taking advantage’ causal test serve as brakes on ACCC enforcement. The US has the first test, and the EU is stumblingly developing a form of the second test. Either brake is sufficient – they are substitute means of providing dominant firms with the ‘bright line’ they need to inform their commercial decisions when faced with a legal prohibition on their conduct.

Thanks to the Gleeson High Court, Australia currently has both brakes, placing Australia outside the Western mainstream in the area of monopolization in competition law. On the other hand, the proposed reform, critics say, involves no brake: a company could sleep-walk into competitive harm.

In fact, the panel’s proposed defence provides the ‘bright line’ businesses need. It reverses the onus of proof of the current ‘taking advantage’ test. Prove to a court that impugned conduct is efficient, and a defendant firm will remain on the right side of the ‘bright line’. The proposed defence is a brake on the conduct of firms with market power, rather than on ACCC enforcement.

Next Step

17 November 2014 is the closing date for further submissions to the Harper Panel on its Draft Report. The Final Report is due sometime in March 2015.