Insights

24/09/14

Competition Policy Review – big business, small business and market power

Following intense debate on Australia’s existing law on misuse of market power, the Harper Review’s draft report has recommended an entirely new section 46 of the Competition and Consumer Act.

  •  The new section would prohibit a big business from engaging in any conduct that has the purpose, effect or likely effect of substantially lessening competition – unless it can show that a smaller business would rationally act the same way and consumers would benefit in the long term.
  •  While the ACCC has welcomed the proposal, the new test presents significant risk and uncertainty for big businesses, particularly because it is unclear how the proposed defence would work in practice.
  •  Consultation on the proposal continues and the opportunity to make further submissions is open until 17 November 2014. The Government will consider the recommendations of the final report due in March 2015

Section 46 overview

The Draft Report will do little to calm this controversy.  The days before its release were marked by media reports that there would be no substantial changes to section 46, that the issue had been put “on hold” as a distraction to Professor Harper’s ambitions for the review.  Then came the Draft Report.

Section 46 currently provides that:

A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of:

  •  eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;
  •  preventing the entry of a person into that or any other market; or
  •  deterring or preventing a person from engaging in competitive conduct in that or any other market.

Section 46 is the main provision of Australia’s competition law that deals with the unilateral conduct of a single business.  While multilateral conduct such as mergers or collusion among competitors may often raise at least prima facie competition issues, unilateral conduct is the essence of competition and should only be interfered with under specific circumstances. 

Competition or antitrust laws throughout the world recognise the unique position of unilateral conduct and the need to protect vigorous competition for the benefit of consumers while also regulating the conduct of businesses with market power that may be destructive of competition.  These laws apply various filters to make this distinction, whether by looking for a predatory intent, focusing on particular forms of exclusionary conduct, or providing defences relating to efficiency or business justification.

Critics of the section 46 test have argued that the test is too difficult to prove and may result in some anti-competitive behaviour going unpunished.  Criticism has been levelled at every aspect of section 46, but has recently been focused on the “purpose” and the “take advantage” elements.

The "purpose" element

Historically, criticisms of section 46 have focused on perceived difficulties in proving one of the three proscribed purposes, leading to suggestions that the effect rather than the purpose of the conduct should be examined.

Various formulations of an “effects” test have been proposed to every significant review of the competition law including the Hilmer Review of 1993 and the Dawson Review of 2003, and have been rejected on the basis that they would risk capturing legitimate competitive behaviour and that this risk would chill competition to the detriment of consumers.

Concerns about the difficulty in proving purpose have been recognised as overstated.  The ACCC acknowledges that it has never lost a section 46 case on the basis of purpose, though it claims that it has chosen not to take certain cases because it did not feel it could establish a relevant purpose.  Legislative amendments have made it clear that the proscribed purpose only needs to be a substantialpurpose and not the only purpose; and that the required purpose may be inferred from conduct.

More recent objections to the section 46 “purpose” element appear to be on the basis of principle, arguing for example that:

  •  the section 46 purpose requirement is inconsistent with the principle that competition policy should be fundamentally concerned with the effect of market behaviour on consumer welfare, rather than the intentions of market participants; and
  •  the section 46 proscribed purposes, which include eliminating or damaging a competitor or preventing or deterring a person from entering or competing in a market, are inconsistent with the principle that competition policy should be concerned with the protection of competition rather than with individual competitors.

These arguments from principle seem to have gained more currency as arguments about the practical difficulties of proving purpose have been answered to a greater or lesser degree.

The "take advantage" element

To “take advantage” of market power simply means to use that market power.  The courts have suggested a number of tests to judge whether or not a business has taken advantage of its market power, which come down to whether a business without substantial market power would have, or profitably could have, engaged in the conduct in question.  

The “take advantage” element has proved difficult to apply in practice.  There have been slightly inconsistent court decisions about the precise test to apply, with the 2003 Rural Press case in particular interpreted by some commentators to suggest that a business would not be found to take advantage of its market power if there were any imaginable circumstances in which a business without market powercould have engaged in the same conduct.  

Following that case, on the ACCC’s recommendation a new section 46(6A) was introduced to clarify the “take advantage” element and lower the evidentiary threshold by allowing the Court to consider:

  •  whether the conduct was materially facilitated by the corporation’s substantial degree of power in the market;
  •  whether the corporation engaged in the conduct in reliance on its substantial degree of power in the market;
  •  whether it is likely that the corporation would have engaged in the conduct if it did not have a substantial degree of power in the market; and
  •  whether the conduct is otherwise related to the corporation’s substantial degree of power in the market.

The courts have not yet heard any section 46 cases relating to conduct since the introduction of section 46(6A), so the new section has not yet been tested.  The ACCC actions against Visa and Pfizer respectively are likely to be the first cases to consider the new subsection.

The Draft Report

The Draft Report recommends a substantial overhaul of section 461:

to prohibit a corporation that has a substantial degree of power in a market from engaging in conduct if the proposed conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in that or any other market.

This proposal adds an “effects” test, removing the requirement to prove an anticompetitive purpose, and also removes the “taking advantage” element.  Both of these elements have been used to help distinguish legitimate competition from anti-competitive conduct.  The Panel explains that2

The test of ‘substantially lessening competition’ would enable the courts to assess whether the conduct is harmful to the competitive process.  The application of that test will ordinarily make the ‘take advantage’ test redundant.

his echoes arguments put forward by the ACCC in its submission to the Review, which recommends a similar test.  However, it is not clear to us that the “substantially lessening competition” test would necessarily be applied by the ACCC and the courts to distinguish between competitive and anti-competitive behaviour with sufficient precision to replace the “take advantage” element.

The Draft Report proposes to address these concerns by introducing a defence providing that the primary prohibition would not apply if the conduct in question:

  •  would be a rational business decision by a corporation that did not have a substantial degree of power in a market; and
  •  would be likely to have the effect of advancing the long-term interests of consumers..

The first limb of this defence effectively reverses the burden of proof of the “take advantage” element, though its language does not correspond closely with any of the previous judicial or legislative explanations of that element and would need to be interpreted by the courts.  

The second limb would further require that the conduct would have the likely effect of “advancing the long-term interests of consumers”.  While promoting consumer welfare is a widely accepted goal of competition policy, it is unclear what is meant by “long-term interests” or how this element would be judicially interpreted or proved.  It is also not clear how a focus on the “long term” would align with any assessment of a substantial lessening of competition, where the relevant timeframe may depend on the circumstances.

By requiring both of these elements with their inherent uncertainties, it seems to us that this defence would be difficult to make out and does not adequately address concerns with the new prohibition.  If a business can show that it has not used its market power then it should not also be necessary to prove a long-term benefit to consumers.  On the other hand, an appropriate demonstration of public benefit could justifiably ground a complete defence as it does in many overseas jurisdictions.

Response to the recommendation

The Panel’s recommendation would remove two of the key mechanisms applied by the Australian courts to distinguish between competitive and anti-competitive unilateral conduct, replacing them with a difficult and uncertain defence.  

We would be concerned that both the new prohibition and the new defence would increase uncertainty as to the risk of ACCC investigation and legal action, and will result in less dynamic, less responsive and more conservative decisions by businesses that may be considered to have market power.

The far-reaching nature of the Panel’s recommendation suggests that the current section is largely dysfunctional and in need of a substantial overhaul.  In our view the history of section 46 cases does not support this conclusion.  Since the Queensland Wire case in 1989, the ACCC has taken eighteen cases under section 46, comparing favourably with the US Department of Justice’s ten.  The ACCC has been successful in almost 70% of these cases.  In several section 46 cases, it was successful under other provisions, bringing its success rate to almost 90%.

The Draft Report only invites comment on the proposed defence – and indeed only asks whether defence goes too far.  It does not ask for comment on the new prohibition and whether any perceived deficiencies in the existing test could be addressed by a more moderate amendment, for example by further clarifying the “take advantage” element or by reversing the burden of proof for that element while retaining the rest of the section – let alone whether any change is necessary. We hope that the Panel will remain open to these arguments.

If the discussion is to focus on the nature of the defence, we would expect strong arguments that each limb of the proposed defence should be a complete defence in itself, and that the novel formulations in each limb might be replaced by more familiar and tested concepts.  

For example, the first defence might be more effective if it simply reversed the onus of proof for the “take advantage” element without introducing new language; and the second defence could profit from the existing jurisprudence that has been built up around the similar concept of public benefit.  

The result would provide a defence where either:

  •  the corporation did not take advantage of its market power; or
  •  the conduct would result, or be likely to result, in a benefit to the public that would outweigh any lessening of competition that would result, or be likely to result, from the conduct.

We expect there will be strong and continued discussion of all of these issues.  Submissions on the Draft Report are due by 17 November 2014 and the Final Report is due in March 2015.

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