1.1 What authorities or agencies investigate and enforce the laws governing vertical agreements and dominant firm conduct?
The Australian Competition & Consumer Commission (ACCC) is an independent statutory authority that has the role of investigating and enforcing laws relating to vertical agreements and dominant firm conduct under the Competition and Consumer Act 2010 (Cth) (Act). Whilst there is no single ‘vertical agreements’ prohibition in the Act, the Act regulates vertical agreements and vertical conduct through the following prohibitions:
■ anti-competitive agreements;
■ misuse of market power;
■ exclusive dealing conduct and third line forcing; and
■ resale price maintenance (RPM).
The Act also regulates dominant firm conduct through the misuse of market power and exclusive dealing prohibitions. These prohibitions are explained in more detail in sections 2 and 3.
1.2 What investigative powers do the responsible competition authorities have?
The ACCC has compulsory information-gathering powers under section 155 of the Act that enable it to obtain information, documents and evidence to determine whether a party’s conduct contravenes the Act.
The ACCC also has search warrant and seizure powers under the Act to gather evidentiary material.
Under a search warrant, the ACCC can seize goods or documents, inspect, handle and measure goods and equipment, take samples of the goods and make copies or extracts of documents. The ACCC inspector pursuant to a search warrant may also require any person on the premises to answer questions and produce documents that relate to the reasons for the entry to the premises.
Usually, the ACCC also requests parties to provide information and documents to it voluntarily, in response to an investigation.
1.3 Describe the steps in the process from the opening of an investigation to its resolution.
After the ACCC commences an investigation, it will ordinarily request (by voluntary means) or require (by compulsory notices under section 155 of the Act) the relevant party to provide information and documents relating to the alleged conduct. Such requests can be made more than once and the ACCC can also require individuals to provide evidence under oath or affirmation.
Once the ACCC has gathered sufficient information, it will determine whether to take enforcement action and if so, what type of action to take. If the ACCC decides not to take any enforcement action, it will inform the relevant party that the investigation has closed. If the ACCC decides to take some type of enforcement action, the next steps in the process will depend upon the action taken (i.e. the process will be different for administrative resolutions, court enforceable undertaking and legal proceedings).
1.4 What remedies (e.g., fines, damages, injunctions, etc.) are available to enforcers?
The ACCC has the ability to accept an administrative resolution from a party that it considers is likely to be in contravention of the Act. An administrative resolution is a written undertaking from a party setting out detailed terms and conditions of the resolution and may include agreeing to stop the conduct, compensate those who have suffered a detriment because of it and/or take other measures to ensure that the conduct does not recur.
The ACCC can also resolve contraventions of the Act by accepting court enforceable undertakings from a party under section 87B of the Act. In these undertakings, which are on the public record, a party generally agrees to remedy the harm caused by the conduct, accept responsibility for its actions and/or establish or improve its trade practices compliance programs and culture.
There are also a number of remedies and penalties available to the ACCC by way of court order including declarations, injunctions, pecuniary penalties and other remedial orders.
1.5 How are those remedies determined and/or calculated?
Whether the ACCC will accept an administrative resolution or court-enforceable undertakings from a party or pursue more serious enforcement action in declarations, remedies and penalties through court action will depend on a number of factors including whether the relevant conduct is of significant public interest or concern, whether the conduct results in a substantial consumer or small business detriment and/or whether the ACCC action will have a deterrent effect or clarify aspects of the law.
In general, the more serious the conduct, the more likely the ACCC will seek declarations, remedies or penalties through court proceedings.
The maximum penalties for contraventions of the vertical agreement or dominant firm conduct provisions of the Act are the greater of: (for corporations) AUD $10 million, three times the gain derived from the illegal conduct (if calculable) or 10% of annual turnover in the 12 months preceding the conduct; and (for individuals) AUD $500,000.
A number of factors are taken into account by the court in calculating the appropriate level of penalty for a contravention including the nature and extent of the contravening conduct, the amount of loss or damage caused, the circumstances in which the conduct took place, the financial size and market power of the contravening party, the deliberateness of the contravention, the period over which it extended, whether the contravention arose out of the conduct of senior management, whether the party has a corporate culture conducive to compliance with the Act and whether the party has cooperated with the ACCC.
1.6 Describe the process of negotiating commitments or other forms of voluntary resolution.
Unless the ACCC has decided that it will not accept administrative resolutions or court-enforceable undertakings from a party because it otherwise wishes to pursue court action against the party, either the ACCC or the party can seek to resolve the matter by administrative resolution or court-enforceable undertakings.
There is no formal process for such negotiations – ordinarily, a party will offer a proposed resolution and if the ACCC does not wish to take legal action, it will consider the proposal and may seek amendments to the proposal. For the proposal to be accepted by the ACCC, the party would need to commit to the relevant resolution in writing to the ACCC. In some instances, the ACCC will inform a party that a matter can be resolved by giving a certain written administrative resolution or court-enforceable undertaking. The party may seek to negotiate the form of the resolution with the ACCC.
1.7 Does the enforcer have to defend its claims in front of a legal tribunal or in other judicial proceedings? If so, what is the legal standard that applies to justify an enforcement action?
If the ACCC wishes to seek declarations, remedies or penalties against a party for contravention of the Act, it is required to prove its case before the courts.
The ACCC will take into account a number of factors in deciding whether to pursue litigation including whether the relevant conduct is of significant public interest or concern and whether ACCC action will have a deterrent effect or clarify aspects of the law. The ACCC is more likely to proceed to litigation in circumstances where the conduct is particularly egregious, where there is reason to be concerned about future behaviour or where the party involved is unwilling to provide a satisfactory resolution.
The legal standard of proof for contraventions of the vertical agreement and dominant firm conduct provisions is the balance of probabilities.
1.8 What is the appeals process?
The ACCC and/or the relevant party can appeal a decision of the court on liability and/or penalty within 21 days.
For an appeal to succeed, a party must convince the appeal court that there was an error of law and that the error was of such significance that the decision should be overturned.
The court hearing the appeal does not consider any new evidence or information that was not presented in the original case (except in special circumstances) and does not call witnesses to give evidence. The appeal court, however, will review all the relevant documents filed by the parties for the original case and listen to legal argument from both parties to the appeal.
The appeal court’s decisions can further be appealed to the High Court by either party within 28 days through a two-step process. First, the ACCC or party will need to apply for and be granted special leave to appeal to the High Court. The High Court will grant special leave to appeal for questions of law that are of public importance, where there are differences of opinion between courts or if the case is in the interests of the administration of justice. Once leave is granted, an appeal hearing is conducted to hear the matter. The High Court’s decision is final.
1.9 Are private rights of action available and, if so, how do they differ from government enforcement actions?
Legal actions for contravention of the vertical agreement, vertical conduct and/or dominant firm conduct provisions of the Act are available to private parties, but they are very rare. Any individual or corporation that has suffered loss may bring a damages claim for the actual loss or damage suffered as a result of the contravention. Punitive damages are not available.
Private legal actions differ to ACCC actions largely in two respects. Firstly, the private party does not have the benefit of obtaining information and documents through an investigative process like the ACCC before commencing legal proceedings. Secondly, the private party cannot seek penalties.
1.10 Describe any immunities, exemptions, or safe harbors that apply.
The Act contains the following general exceptions that may apply to certain vertical agreements, vertical conduct and/or dominant firm conduct that would otherwise contravene the Act:
■ where the conduct is specifically authorised by law;
■ acts or provisions of a contract relating to employment conditions;
■ restraints of trade during or after the termination of employment;
■ compliance with particular standards;
■ partnership conditions between individuals;
■ contracts for the sale of a business or shares of a company with respect to the protection of goodwill;
■ exclusivity conditions on the export of goods or services from Australia; and
■ acts done in concert by ultimate users or consumers of goods or services against the supplier of those goods or services.
Exclusive dealing (supply or acquisition of goods or services on restrictive conditions) and anti-competitive agreements are subject to:
■ a competition test; and
■ a related body corporate exemption.
A party may also seek immunity for vertical agreements or vertical conduct if it can show that the public benefits from the conduct would outweigh any public detriments. Immunity is not currently available for misuse of market power conduct.
1.11 Does enforcement vary between industries or businesses?
While the ACCC generally takes the same approach to enforcing the Act across different industries and businesses, it will take a more vigorous enforcement approach where:
■ the conduct is in an industry involving essential goods or services;
■ the conduct is in a concentrated industry and has a serious impact on consumers or small business;
■ the conduct is in a significant new or emerging industry;
■ the conduct is industry-wide or is likely to become widespread if the ACCC does not intervene; or
■ the conduct is engaged in by a larger or well-known company.
In addition, each year the ACCC outlines its enforcement priorities which may target particular industries or businesses. This year the ACCC has indicated that its enforcement action for vertical agreements and dominant firm conduct will focus on the agriculture sector, the commercial construction sector and the grocery sector.
1.12 How do enforcers and courts take into consideration an industry’s regulatory context when assessing competition concerns?
The ACCC and the courts will take into account all the relevant circumstances including an industry’s regulatory context in determining whether a party’s conduct is in contravention of the vertical agreement or dominant firm conduct provisions of the Act.
1.13 Describe how your jurisdiction’s political environment may or may not affect antitrust enforcement.
While the ACCC is a statutory authority that is independent of the government, its enforcement priorities are usually influenced by the political environment.
For example, in recent years, the conduct of banks, supermarkets and petrol companies have all come under the political spotlight. As a result, the ACCC has been given increased powers to deal with conduct by market participants in these sectors and the ACCC has investigated and enforced the Act where appropriate.
1.14 What are the current enforcement trends and priorities in your jurisdiction?
The ACCC’s priorities for 2017 include:
■ seeking higher penalties through the courts for breaches of the Act;
■ prosecuting cartel conduct including criminal cartels; and
■ anti-competitive conduct in the health, energy, construction and agricultural sectors.
1.15 Describe any notable case law developments in the past year.
The most significant dominant firm conduct case in recent years is ACCC v Pfizer. The ACCC alleged that Pfizer misused its market power and engaged in exclusive dealing conduct for the purpose of substantially lessening competition by offering significant discounts off its patented brands, requiring minimum purchase values of its generic brands and requiring that stores limit supply of competing generic products.
The court dismissed the ACCC’s case on the grounds that the ACCC failed to establish that Pfizer pursued its conduct for the proscribed purpose of preventing competitors from engaging in competitive conduct or for substantially lessening competition. The court also held that Pfizer did not have substantial market power at the time it was engaged in the conduct. The ACCC appealed the decision and judgment is pending.
In relation to vertical conduct, the ACCC’s prosecution against Flight Centre concerning pricing in dual distribution models is significant. This is because the ACCC claimed that the relevant conduct was ‘horizontal’ rather than ‘vertical’ even though the parties under scrutiny were held to be in a principal-agent relationship. The decision has required suppliers with dual distribution models to rethink their conduct with parties ordinarily considered to be a customer or agent.
2.1 At a high level, what is the level of concern over, and scrutiny given to, vertical agreements?
Other than RPM and third line forcing, a vertical agreement or vertical conduct is prohibited by the Act if it has the purpose, effect or likely effect of substantially lessening competition in a market. Accordingly, while vertical agreements and vertical conduct in contravention of the Act can attract significant penalties, they are not considered to be as serious as horizontal agreements (which are per se contraventions under the Act and can attract criminal sanctions).
RPM and third line forcing, however, are types of vertical conduct that are per se contraventions.
2.2 What is the analysis to determine (a) whether there is an agreement, and (b) whether that agreement is vertical?
Vertical “agreements” must take the form of a contract, arrangement or understanding which includes a legally binding contract, an informal agreement whereby the parties accept mutual rights and obligations or a meeting of minds to proceed in a particular way.
An agreement will be considered vertical if none of the parties to the agreement is or is likely to be in competition with each other in respect of the goods or services which are the subject of the alleged conduct. If they are in competition, but the conduct falls under both horizontal or vertical agreement or conduct laws, there is a ‘carve out’ provision that requires the conduct to be assessed under the vertical agreement or conduct laws (i.e. subject to a competition test).
2.3 What are the laws governing vertical agreements?
There are four types of laws governing vertical agreements or vertical conduct – exclusive dealing, general anti-competitive agreements, third line forcing and RPM.
Exclusive dealing is a vertical agreement or conduct that contains some type of restriction on acquisition, supply or resupply of goods of services where the restriction has the purpose, effect or likely effect of substantially lessening competition in a market. Vertical agreements can also contravene the law if they have the purpose, effect or likely effect of substantially lessening competition in a market regardless of any vertical restriction. As at the time of writing, third line forcing is a form of vertical agreement or conduct involving supply of goods or services on the condition that the purchaser acquire goods or services from a nominated third party. This conduct is outright illegal but there is a proposal which is likely to be passed into law in late 2017 that will make third line forcing subject to a substantial lessening of competition test. Finally, RPM can be a vertical agreement or conduct that involves conduct by the supplier of goods or services imposing minimum resupply prices on re-suppliers of these goods or services.
2.4 Are there any type of vertical agreements or restraints that are absolutely (“per se”) protected?
As mentioned above, RPM and third line forcing are per se contraventions.
2.5 What is the analytical framework for assessing vertical agreements?
For vertical conduct that is a per se contravention (RPM and third line forcing), the analysis is determining whether the relevant conduct falls under the particular provisions of the Act. There is no competition analysis involved.
For vertical conduct or agreements that only contravene the Act if they have the purpose, effect or likely effect of substantially lessening competition in a market, the first step in the analysis is to determine whether the conduct falls under the relevant provisions of the Act. This may include ascertaining whether a contract, arrangement or understanding exists. Once it has been determined that the relevant vertical conduct or agreement falls within the relevant provision, the next question is whether the conduct or agreement has the purpose, effect or likely effect of substantially lessening competition in a market.
Purpose is a subjective test but objective circumstances can be taken into account. The effect or likely effect of a vertical agreement or conduct starts with identifying the relevant market in which the agreement or conduct has or is likely to have an impact and then undertaking a counterfactual analysis to determine the state of competition in the market with and without the relevant agreement or conduct. Where there is a substantial lessening of competition between the factual and counterfactual worlds, the Act is contravened.
2.6 What is the analytical framework for defining a market in vertical agreement cases?
Where the competition test is applicable, market definition is the first step in determining whether there is a substantial lessening of competition. In defining a market, it is necessary to look at the product, geographic, functional and temporal aspects of a market in the context of substitution possibilities.
2.7 How are vertical agreements analysed when one of the parties is vertically integrated into the same level as the other party (so called “dual distribution”)? Are these treated as vertical or horizontal agreements?
Whether an agreement or conduct is considered to be vertical or horizontal will depend on the circumstances of each case. Where the relevant agreement or conduct is clearly between supplier and customer, the law will treat such an agreement or conduct as vertical. However, where the facts exhibit some form of competitor-competitor conduct, the relevant agreement or conduct may be characterised as horizontal. There is a ‘carve out’ provision for agreements or conduct that fall within both horizontal and vertical agreement or conduct laws, for the agreement or conduct to be examined under the vertical agreement or conduct laws (i.e. subject to a competition test).
2.8 What is the role of market share in reviewing a vertical agreement?
Market share is not a relevant consideration to the application of the per se prohibitions of third line forcing or RPM.
Market share is also not directly relevant to the assessment of either vertical agreements or vertical conduct provision but it may be taken into account when considering whether a firm has market power in assessing the vertical agreement’s or conduct’s effect on competition.
2.9 What is the role of economic analysis in assessing vertical agreements?
Economic analysis is often used in determining whether a vertical agreement or vertical conduct substantially lessens competition. This includes market definition issues, market power issues and the state of competition in the market with and without the relevant agreement or conduct.
2.10 What is the role of efficiencies in analysing vertical agreements?
Efficiencies may be taken into account in assessing whether a vertical agreement or vertical conduct has the effect or likely effect of substantially lessening competition in a market. For instance, if the vertical agreement of conduct enhances a firm’s efficiency leading to more competitive outcomes in the market, the agreement or conduct is unlikely to contravene the Act. Efficiencies will also be considered if a party is seeking authorisation or notification (immunity) from the ACCC for a vertical agreement or conduct.
2.11 Are there any special rules for vertical agreements relating to intellectual property and, if so, how does the analysis of such rules differ?
The Act includes an exemption for vertical arrangements and other general anti-competitive arrangements in relation to certain intellectual property rights (IPR) (such as patents, registered designs or copyrights) and only to the extent that the relevant condition relates to particular aspects of the IPR (for example, the invention to which the patent relates).
2.12 Does the enforcer have to demonstrate anticompetitive effects?
Yes, other than RPM and third line forcing, the vertical agreement and vertical conduct provisions under the Act require proof of a substantial lessening of competition in a market.
2.13 Will enforcers or legal tribunals weigh the harm against potential benefits or efficiencies?
The ACCC will only weigh public benefits including efficiencies against anti-competitive harm if the party proposing to enter the vertical agreement or engage in the vertical conduct seeks authorisation or notification from the ACCC. Authorisation or notification is a form of immunity granted to conduct otherwise in contravention of the Act where the public benefits from the relevant agreement or conduct outweigh the public detriments.
2.14 What other defences are available to allegations that a vertical agreement is anticompetitive?
A related bodies defence is available to allegations of anti-competitive vertical agreements. There is also a limited defence to RPM conduct that involves withholding supply from resuppliers.
2.15 Have the enforcement authorities issued any formal guidelines regarding vertical agreements?
No, they have not.
2.16 How is resale price maintenance treated under the law?
RPM is a per se contravention of the Act. Authorisation is available for RPM conduct, but there has only been one case to date where authorisation has been granted for RPM.
2.17 How do enforcers and courts examine exclusive dealing claims?
Exclusive dealing (other than third line forcing) is prohibited by the Act if it has the purpose, effect or likely effect of substantially lessening competition in a market. Third line forcing is currently a per se contravention but is likely to become subject to a competition test in late 2017. Exclusive dealing claims can also be considered under the dominant firm conduct provisions.
2.18 How do enforcers and courts examine tying/supplementary obligation claims?
Supplementary obligations that require a purchaser to acquire a good or service from a nominated third party is a per se contravention (third line forcing). Other particular tying or supplementary obligations are prohibited if they have the purpose, effect or likely effect of substantially lessening competition in a market. Tying and supplementary claims can also be considered under the dominant firm conduct provisions.
2.19 How do enforcers and courts examine price discrimination claims?
There is no specific prohibition against price discrimination. Such conduct would be prohibited if it fell within the elements of the vertical agreement/conduct or dominant firm conduct provisions of the Act.
2.20 How do enforcers and courts examine loyalty discount claims?
Loyalty discounts are prohibited if they fall within the vertical agreement/conduct or dominant firm conduct provisions of the Act.
2.21 How do enforcers and courts examine multi-product or “bundled” discount claims?
Multi-product or bundled discounts are prohibited if they fall within the vertical agreement/conduct or dominant firm conduct provisions of the Act.
2.22 What other types of vertical restraints are prohibited by the applicable laws?
Any type of vertical restraint that has the purpose, effect or likely effect of substantially lessening competition in a market is prohibited.
2.23 How are MFNs treated under the law?
The Act does not include a specific prohibition on MFN clauses. However, MFNs are prohibited if they fall within the vertical agreement/conduct or dominant firm conduct provisions of the Act.
3.1 At a high level, what is the level of concern over, and scrutiny given to, unilateral conduct (e.g., abuse of dominance)?
Unilateral conduct, called misuse of market power in Australia, is considered to be serious conduct by the ACCC. Although it is not a per se contravention and does not attract criminal sanctions, the penalties for engaging in a misuse of market power are significant (and the same for vertical agreements and vertical conduct).
3.2 What are the laws governing dominant firms?
A firm with a substantial degree of power in a market is prohibited from taking advantage of that power for the purpose of damaging or eliminating a competitor, preventing entry or deterring competitive conduct. Such firms are also prohibited from predatory pricing for the same purposes.
The current misuse of market power law is likely to be amended in late 2017 to prohibit firms with substantial market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition in a market. Additionally, the predatory pricing prohibition is likely to be repealed.
3.3 What is the analytical framework for defining a market in dominant firm cases?
Market definition is necessary to determine whether a firm has a substantial degree of power in a market and whether the relevant conduct has the purpose of preventing entry or deterring competitive conduct in a particular market. Once the new misuse of market prohibition comes into operation, market definition will be assessed in determining whether conduct has the purpose, effect or likely effect of substantially lessening competition in a market.
3.4 What is the market share threshold for enforcers or a court to consider a firm as dominant or a monopolist?
There is no market share threshold that determines whether a firm is dominant or a monopolist.
3.5 In general, what are the consequences of being adjudged “dominant” or a “monopolist”? Is dominance or monopoly illegal per se (or subject to regulation), or are there specific types of conduct that are prohibited?
While parties with a dominant or monopolist position in a market are likely to receive closer scrutiny by the ACCC than other parties, being a dominant firm or monopolist is not of itself a contravention of the Act. It is the misuse of that position for anti-competitive purposes that is prohibited by the Act. There are various types of conduct that may constitute a misuse of market power including refusals to supply, bundling, predatory pricing, exclusivity arrangements and exclusionary conduct.
3.6 What is the role of economic analysis in assessing market dominance?
Economic analysis can be used to assess whether a firm has a substantial degree of market power in a market. It is also sometimes employed to demonstrate whether conduct has an anti-competitive purpose. Once the law is amended, economic analysis is likely to be used to determine whether conduct has the purpose, effect or likely effect of substantially lessening competition in a market.
3.7 What is the role of market share in assessing market dominance?
Although not determinative, market share is often taken into account in assessing whether a firm has a substantial degree of power in a market.
3.8 What defences are available to allegations that a firm is abusing its dominance or market power?
There are no legislative defences to a misuse of market power allegation. However, a corporation will not contravene the misuse of market power prohibition by reason that it acquires only plant or equipment.
3.9 What is the role of efficiencies in analysing dominant firm behaviour?
Efficiencies are often used by parties alleged to have engaged in a misuse of market power to show that the purpose of the conduct was legitimate rather than anti-competitive. Once the new law comes into effect, efficiencies may be used to show that relevant conduct would not have the purpose, effect or likely effect of substantially lessening competition in a market.
3.10 Do the governing laws apply to “collective” dominance?
The Act does not prohibit collective dominance by independent entities. In determining whether a corporation has ‘substantial market power’, the Act provides for the aggregation of power held by the corporation and its related bodies corporate.
3.11 How do the laws in your jurisdiction apply to dominant purchasers?
The misuse of market power laws apply equally to purchasers as well as suppliers.
3.12 What counts as abuse of dominance or exclusionary or anticompetitive conduct?
While there are no prescribed types of conduct that constitute misuse of market power, the following types of conduct are often claimed or held to be a misuse of market power: refusals to supply or acquire; bundling; predatory pricing; exclusivity arrangements; and exclusionary conduct.
3.13 What is the role of intellectual property in analysing dominant firm behaviour?
IPRs may be a source of market power. In each case, it will be necessary to assess whether the IPRs in question give rise to substantial market power and whether that conduct gives rise to a misuse of that power.
3.14 Do enforcers and/or legal tribunals consider “direct effects” evidence of market power?
Whilst not determinative to an analysis of whether a dominant firm has contravened the Act, the direct evidence of abusive behaviour, being the actual harm caused by the contravening conduct, is one of many factors that the ACCC will take into account when pursuing an action for misuse of market power.
3.15 How is “platform dominance” assessed in your jurisdiction?
The ACCC assesses a firm’s dominance in a particular platform in the same way it would assess any firm’s substantial market power in any market.
3.16 Under what circumstances are refusals to deal considered anticompetitive?
Refusals to deal are anti-competitive if engaged in by a firm with substantial market power and the firm is taking advantage of that power for the purpose of damaging or eliminating a competitor, precluding entry or deterring competitive conduct.
4.1 Please describe and comment on anything unique to your jurisdiction (or not covered above) with regards to vertical agreements and dominant firms.
Australia is one of the only jurisdictions in the world with specific exclusive dealing provisions. It is also unique for having a ‘take advantage’ and ‘purpose’ test for its dominant firm conduct law.
We anticipate that the latter will be amended to an ‘effects’ test rather than focusing solely on the purposes of the conduct in late 2017.