On 12 December 2010, the Government released an Exposure Draft of the Competition and Consumer Amendment Bill (No 1) 2011 proposing to amend the Competition and Consumer Act 2010 (Cth) (CCA) (formerly known as the Trade Practices Act 1974) and introduce civil prohibitions against anti-competitive price signalling and information exchanges (Government Bill). The Government Bill forms part of a number of measures contained in the Government’s Competitive and Sustainable Banking System reform package.
The Treasury has received 25 submissions in response to the Government Bill, many of which have voiced significant concerns about issues including:
- the unilateral nature of the prohibitions and their significant breadth compared to prohibitions in the European Union (EU) and the United States (US);
- the per se nature of one of the two prohibitions and the high risk of regulatory overreach;
- the sectoral application of the measures through prescribing goods and services by regulation, without any specified criteria to determine the basis for such prescription; and
- the lack of adequate exceptions to address any unintended consequences of chilling legitimate business disclosures.
The Government had stated that it intended to introduce the Government Bill on 8 February 2011 during the first sitting of Parliament. However, as at the date of this publication, it has neither been introduced nor been listed in the Daily Bills List.
The Government’s release of a proposed price signalling law follows the introduction of the Competition and Consumer (Price Signalling) Bill 2010 into the House of Representatives by the Coalition (Coalition Bill). On 23 November 2010 the Selection Committee asked the House of Representatives Standing Committee on Economics to inquire into and report on the Coalition Bill by 30 May 2011. The House of Representatives Standing Committee has received 7 submissions in response to the Coalition Bill.
In this note, we consider the key components and concerns of the Government Bill and compare and contrast these against the Coalition Bill.
Price signalling and information exchanges
The Government Bill and Coalition Bill are directed at disclosures of information to competitors, through practices including “price signalling” and information exchanges. “Price signalling” commonly refers to the practice by which companies make a public announcement about future pricing intentions. The Explanatory Note to the Government Bill defines price signalling as “communications between competitors which facilitate prices above the competitive level and can lead to inefficient outcomes for the economy and reduce wellbeing for consumers.”1 The Explanatory Memorandum to the Coalition Bill further notes that the effect of price signalling is “to eliminate uncertainty” about prices thus “reducing the inherent risks of competition.”2
Information exchanges with competitors generally refer to direct disclosures of information with competitors, which may or may not be public exchanges.
Nevertheless, while some such disclosures may be directed at competitors, with the hope of persuading them to raise prices, information disclosures to competitors can also be pro-competitive, efficiency-enhancing, or competitively benign.
Road to reform – from petrol to banking
The measures proposed in the Government Bill and Coalition Bill arise in the context of previous proposals directed at concerns by the Australian Competition and Consumer Commission (ACCC) about the narrow legislative scope of prohibiting anti-competitive conduct pursuant to a “contract, arrangement or understanding” under s 45 of the CCA. These concerns originally emerged in the context of the petrol industry – specifically from the ACCC’s losses in respect of the “petrol cases” which involved price fixing allegations against retail petrol station operators – and shifted to focus on the banking sector late last year.
Petrol cases and the requirement of commitment
Cases brought by the ACCC against petrol retailers have held that an element of “commitment” or sense of moral obligation to comply is required between competitors for an alleged “understanding” to exist.3 The mere hope or expectation that a person will act in a particular manner is insufficient to constitute an “understanding”.
These principles resulted in the Federal Court in Apco finding that there was no “commitment” element to establish an “understanding” between the parties, and therefore no breach of the CCA, when petrol station operator (A) repeatedly took calls from another operator (B), who disclosed its future pricing information, but (A) did not commit to increase its prices accordingly. The High Court then refused special leave to appeal the decision.
Policy proposals in response to petrol cases
Until recently, the debate has focussed on whether the requirement of commitment in the judicial interpretation of “understanding” was set too high. Various reform suggestions and initiatives have followed, including a Treasury proposal to amend the Trade Practices Act 1974 (as it then was) to remove the requirement of commitment from the meaning of understanding in s 45.4 More recently, the ACCC Commissioner Jill Walker suggested that the commitment requirement was a “gap in the law [which] should be addressed” through a “European type prohibition against facilitating or concerted practices.” 5
Current price signalling concerns in banking
Although the ACCC has stated that it continues to believe there is price coordination within petrol retailing,6 current political debate about interest rates has shifted the focus to the banking sector. The Government has stated that its measures have the purpose of preventing “banks from engaging in anti-competitive price signalling that is designed to keep interest rates higher than they would otherwise be”.7
The prohibitions may of course apply much more broadly. Under the Government Bill, as currently drafted, this application would occur by prescribing specific goods and services in regulations. The Coalition Bill would apply generally across the economy.
Two prohibitions proposed in the Government Bill
There are two substantive prohibitions contained in the Government Bill in relation to price signalling.
A diagram of the price signalling prohibitions is set out at the end of this publication.
Private disclosures A corporation is prohibited from disclosing pricing information to its competitors (including discounts, allowances, rebates or credits) in relation to prescribed goods and services that the corporation supplies or acquires. This includes disclosure to competitors through third-party intermediaries.
Disclosures for the purpose of substantially lessening competition (General Prohibition) A corporation is prohibited from disclosing information with the purpose of substantially lessen competition in a market. The scope of information caught is broader than the private disclosure prohibition by including information relating to:
- prices (including discounts, allowances, rebates or credits);
- the capacity of the corporation to supply or acquire goods or services, and
- the commercial strategy in relation to such goods or services.
The table below shows how the scope and evidentiary threshold between the two prohibitions proposed in the Government Bill differ.
Disclosures through third-party intermediaries
A disclosure would occur even where the information is disclosed to competitors through third-party intermediaries and where the disclosure to the intermediary is for the purpose of that intermediary disclosing it to a competitor.
Evidence of purpose of substantially lessening competition
A court may take into account the following factors in determining whether a disclosure was made with the purpose of substantially lessening competition:
- whether disclosure was a private disclosure to competitors;
- the degree of specificity of the information;
- whether the information relates to past, current or future activities;
- how readily available the information is to the public; and
- whether the disclosure is part of a pattern of similar disclosures by the corporation.
Further, a court may infer a purpose of substantially lessening competition from the conduct or any other relevant circumstances. The Government has indicated that the “proposed law will be clear that a court can make up its own mind as to what it thinks the real purpose was, based on the surrounding circumstances – so there is no need for a ‘smoking gun’”.8
The proposed prohibitions would not apply to disclosures which are:
- accidental, the default of a person other than the corporation or some other cause beyond the control of the corporation;
- authorised by or under a law of the Commonwealth, State or Territory where the disclosure occurs before the end of 10 years after the day on which the Bill receives the Royal Assent; or
- made only to one or more related bodies corporate of the corporation.
There are additional exceptions that only apply to the prohibition in relation to private disclosures to competitors where the disclosure is made:
- for the purpose of re-supply;
- to unknown competitors;
- participants of joint ventures; and
- acquisitions of shares or assets.
Although a number of exceptions are available under the Government Bill, they may be insufficient to cover the range of day-to-day business activities that involve legitimate disclosures. The most cited example amongst submissions to Treasury of a legitimate business practice that may risk liability under the Government Bill is the continuous disclosure obligations as required by the Australian Securities Exchange. Although the Government has said that the laws will not prevent publicly listed companies from fully complying with their continuous disclosure obligations, there is no specific exception that adequately targets disclosures made pursuant to these obligations.9 The exception for disclosures “authorised by law” would not appear to capture all disclosures made for the purposes of complying with a law. The submissions to Treasury call for a legitimate business justification defence, which would go a long way in curing the shortcomings and gaps in the current draft of the exceptions, in their attempted codification of legitimate business practices, which inevitably fails to address every instance of legitimate business conduct.
Prospective authorisation of conduct
The Government Bill provides that conduct which would otherwise contravene the prohibitions may be authorised by the ACCC prospectively – that is, disclosures must not have occurred prior to the ACCC making a determination on the matter. The ACCC must be satisfied that the disclosure results in such public benefit that the proposed disclosure should be allowed to be made, and that such a benefit outweighs any lessening of competition that would result.
However, the Government has indicated that there are only “limited circumstances where price signalling may be legitimately providing overall net public benefits.”10
Breaching the proposed prohibitions can attract maximum civil penalties of (whichever is the greatest):
- $10 million;
- where the court can determine of the total value of the benefits that have been obtained from the contravention, 3 times the benefits from the contravention; or
- where the court cannot determine the total value of those benefits, 10% of the annual turnover of the body corporate and its related bodies.
Key concerns raised by the Government Bill
Submissions to Treasury outline a range of concerns in relation to the Government Bill, both as a matter of principal and in relation to the drafting of the proposed measures. We consider a few of these concerns below.
Unilateral prohibitions without precedent in other major competition law jurisdictions
Both the Government Bill and Coalition Bill address wholly “unilateral” disclosures – that is, they do not require any showing of reciprocity, mutuality or concerted action with a competitor receiving the information disclosed. The law would focus solely on the unilateral conduct of the person making the disclosure. Ironically, the law would not catch the conduct of the petrol station operator in Apco who repeatedly receives information.
Although the Government and Coalition have both stated that their proposed measures increase the ACCC’s powers to match those available to competition or antitrust enforcers in the EU, UK and US, they in fact reach far beyond the scope of prohibitions on price signalling in those countries because of their purely unilateral nature.
The consequence of prohibiting entirely unilateral information disclosures is likely to deter companies from making many competitively benign and, in fact, pro-competitive disclosures for fear of falling on the wrong side of the law or in any event putting themselves at risk of investigation.
Per se liability standard inappropriate given pro-competitive or benign nature of many disclosures
The Government Bill would impose automatic or per se liability on unilateral information disclosures that are considered “private” under its terms, subject only to limited exceptions. Per se prohibitions are generally reserved for conduct that is so plainly or manifestly anticompetitive that no evidence of anticompetitive purpose or effect is necessary.11
Nevertheless, many information disclosures are pro-competitive and legitimate. Indeed, the Explanatory Note and Regulatory Impact Statement (RIS) to the Government Bill acknowledge this, stating:
Information disclosures play a vital role in the economy; they increase transparency in the market to the benefit of consumers and the competitive process… In general, such communications are perfectly legitimate, pro-competitive and efficiency-enhancing.12
The RIS and Explanatory Note go on to state that given such pro-competitive effects, any proposed legislation would need to “carefully balance” prohibited conduct with “legitimate information exchanges.”13
A per se prohibition would however be directly contrary to any such careful balancing. As the scope of the per se private disclosure prohibition is extremely broad, many legitimate business practices could be considered per se illegal, potentially including:
- benchmarking of competitor pricing based on aggregated and historic data of competitors;
- one-off disclosures made by employees with no authority or capacity to determine pricing;
- disclosures of information already within the public domain; and
- disclosures to distributors acting as agents who also may act as competitors.
Application to specific sectors is unjustified
Perhaps indicative of the Government’s reservations in applying such prohibitions broadly across the entire economy is the sector-specific application of the Government Bill, only applying to classes of goods and services that are prescribed by the Minister in regulations. The Government Bill also provides neither the criteria nor the consultation process involved in determining the basis for which classes of goods or services should be prescribed.
The Government has publicly stated that the measures “will apply initially to banks, with the capacity for other sectors to be specified in future…”.14 Reports suggest that the ACCC is likely to recommend that the petrol and grocery retailing sectors also be subject to the proposed measures.15
Echoing the general consensus amongst submissions to the Treasury, the ACCC Chairman Graeme Samuel indicated in evidence before the Senate that he considers sectoral application of the proposed measures unjustified and that any process of regulation should go through both Houses of Parliament.16
Scope of information caught casts net too wide
Both prohibitions contained in the Government Bill capture price-related information which includes discounts, allowances, rebates, or credits in relation to prescribed goods and services. Significantly, this expressly includes price-related information already in the public domain. The Government Bill also does not appear to distinguish historical from current or prospective information, or raw from aggregated data.
The General Prohibition also prohibits disclosures of information on a corporation’s capacity to supply or acquire goods and services as well as its commercial strategy in relation to such goods and services, without any requirement that such information be competitively sensitive to fall within the scope of the prohibition.
Comparison to the Coalition Bill
The following provides a summary comparing the Coalition Bill against the Government Bill. Notably, the Coalition Bill similarly prohibits unilateral conduct and also reaches far beyond the conduct generally prohibited in the EU or US.
Notable elements of the Coalition Bill include that:
- there is no per se prohibition and instead a prohibition subject to satisfying both purpose and effects elements; and
- the prohibition only relates to communications of price related information.
A key concern with the Coalition Bill includes the lack of clarity surrounding the purpose element of the prohibition, which is met if the disclosure is made for the purpose of inducing or encouraging a price variation (which is not limited to price increases).
Please click here to view the table.
The Coalition Bill defines purpose to mean “substantial purpose,” so announcements made with multiple purposes could be prohibited. Price announcements to customers in the ordinary course of business that are made for the purpose of giving customers notice of changes in pricing could also be considered to be have been made with a purpose of expecting competitors to vary their prices. As competitor reaction on announcements of price changes is legitimate competitive behaviour, we would consider it more appropriate to define purpose to mean “principal purpose”.
What’s next on the agenda?
The Government Bill was anticipated to be introduced into the House of Representatives for a first reading during the first sitting of Parliament on 8 February 2011. However, it is not currently listed in the House Bills List nor is it currently listed for the Autumn sitting schedule.
Key dates coming up are:
- 31 March 2011: The Senate Economics Committee releases its report on its inquiry into competition in the banking sector; and
- 30 May 2011: The House of Representatives Standing Committee on Economics releases its report on the Competition and Consumer Price Signalling Amendment Bill 2010 introduced by the Coalition
It currently remains unclear when the Government Bill will be introduced into the House of Representatives.
We’ll keep you posted.