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10/10/14

Competition Policy Review - Replacing the Price Signalling Laws with Concerted Practices - fit for purpose or a foreign concept?

Summary

The Harper Review’s draft report (Draft Report) considers that the price signalling provisions set out in Division 1A of the Competition and Consumer Act 2010 (CCA), which currently apply only to the banking sector are not “fit for purpose” and should be repealed.  In their place, the Draft Report recommends that the general prohibition on anticompetitive agreements in section 45 of the CCA should be extended to cover “concerted practices” which have the purpose, or have or would be likely to have the effect, of substantially lessening competition. 

While the removal of the price signalling legislation will simplify the CCA, it will be interesting to see how this particular recommendation is received.  In contrast to the current price signalling legislation, this recommendation has the potential to reach companies in a wide range of other industries who engage in a variety of conduct that may be perfectly legitimate and pro-competitive.  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 45 overview 

Section 45 of the CCA prohibits corporations from making or giving effect to a contract or arrangement, or arriving at an understanding, if a provision of that contract, arrangement or understanding has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.

There has been some debate in recent years as to whether the current section 45 captures all relevant anti-competitive conduct involving two or more parties.  Although an understanding is a looser, less formal concept than a contract or even an arrangement, the courts have nevertheless required there to be evidence of commitment to act in a certain way; a mere hope or expectation that the parties will act in a certain way is insufficient to constitute an understanding.1  In Apco, the Court noted that parallel conduct, even where conscious, lay outside the scope of an understanding, and that there needed to be evidence of a commitment in the sense of a “moral obligation” to act in accordance with the arrangement or understanding.  However, in ACCC v TF Woollam & Son Pty Ltd [2011] FCA 974, the Court left open the question of whether mutual commitment was required to breach the prohibition and in Norcast S.ar.L v Bradken Limited (No 2) [2013] FCA 235, the Courts held that an arrangement was established even though it was informal and unenforceable with the parties free to withdraw from, or act inconsistently with it, notwithstanding their adoption of it.

The ACCC has expressed concerns that court decisions have, over time, narrowed the type of conduct that is caught by the term “understanding” in the CCA2 and failed to prevent anti-competitive information exchanges between competitors where there is no commitment to act.

In 2009, the Treasury released a discussion paper inviting submissions regarding the adequacy of the current interpretation of the term “understanding”.3   No changes were made to section 45 in response to these submissions.  However, in 2011 specific price signalling and information laws were introduced which applied only to the banking sector.

Price signalling provisions overview

The controversial price signalling laws under the CCA prohibit:

(a) private disclosures of pricing information to competitors that are not within the ordinary course of business (s 44ZZW) (private disclosure prohibition), and

(b) public disclosures of pricing, strategy or capacity information that have the purpose of substantially lessening competition (s 44ZZX) (general disclosure prohibition).

Price signalling was described in the Explanatory Memorandum as “communications between competitors which facilitate prices above the competitive level [which] can lead to inefficient outcomes for the economy and reduce wellbeing for consumers.”  Unlike other prohibitions in the CCA that apply across the economy, the price signalling laws only apply to certain borrowing and lending activities of banks.

At the time of introduction, there were significant concerns around the unintended consequences of these potentially far reaching provisions, directed at the banking sector.  Consequently, a large raft of exceptions were introduced, to address concerns of overreach in that sector.  As a result, the price signalling provisions are not well suited to more expansive application.

Questions have been raised about the effectiveness of these provisions.  However, the courts have not yet heard any cases relating to price signalling conduct since the introduction of these laws, so the effectiveness of the new section has not yet been tested.

The Draft Report

Importantly, the Draft Report finds that the prohibitions against price signalling do not strike the right balance of distinguishing between pro- and anti-competitive behaviour and should be removed.  The Panel specifically notes that public price disclosure is generally unlikely to raise significant competition concerns as it assists consumers in making informed choices.  However, private price disclosure to a competitor has more potential to harm competition and facilitate collusion.

Consequently, in a proposal borrowing from the current European approach, the Panel recommends extending the current prohibition on anti-competitive contracts, arrangements and understandings to cover “concerted practices” – that is, a regular practice undertaken by two or more firms that has the purpose or likely effect of substantially lessening competition.

The Panel is of the view that such a provision would capture the regular disclosure or exchange of price information between two firms, whether or not it is possible to show that the firms had reached an understanding about the disclosure or exchange.   But precisely where the Panel considers the boundaries should lie between parallel, but unilateral conduct and unlawful coordinated conduct is unclear.

How do European and US laws inform the meaning of concerted practices?

While “concerted practices” is unknown under Australia law, European jurisprudence addressing the same concept is instructive.

Within Europe, certain information disclosures and exchanges are caught by Article 101(1) of the Treaty of the Functioning of the European Union (EU Treaty), which prohibits agreements and concerted practices which have as their object or effect the prevention, restriction or distortion of competition – except where pro-competitive benefits produced by that agreement outweigh the restrictive effects on competition.  These general prohibitions and exceptions are elaborated upon in guidelines published by the European Commission,4  and the meaning of “concerted practices” has been the subject of much judicial consideration.

According to the Court of Justice of the European Union, the concept of a concerted practice refers to “a form of coordination between undertakings which, without having been taken to the stage where an agreement properly so-called has been concluded, knowingly substitutes for the risks of competition practical cooperation between them.”5   Importantly, there is no requirement for any meeting of the minds or commitment.

This concept is not intended to deprive companies of the right to adapt themselves intelligently to the existing or anticipated conduct of their competitors.  It does however “strictly preclude any direct or indirect contact between such operators, the object or effect whereof is either to influence the conduct on the market of an actual or potential competitor or to disclose to such a competitor the course of conduct which they themselves have decided to adopt or contemplate adopting on the market”.6  Moreover, receipt of certain types of information (e.g. future pricing information) is presumed unlawful, unless the recipient responds with a clear statement that it does not wish to receive such data.7  However, the EC Guidelines have considered that certain other information exchanges would not be unlawful, including a website posting current prices and other terms of all competitor travel fares and an aggregated publication of competitors prices by location.

In contrast, jurisprudence in the United States in relation to section 1 of the Sherman Act (prohibiting “contracts, combinations …. or conspiracy”) requires the establishment of an agreement, involving “a conscious commitment to a common scheme designed to achieve an unlawful objective.”8   Mere receipt of information, without more, would not be unlawful under the Sherman Act; there must be a “meeting of the minds.” 9  While such a “meeting of the minds” may be inferred in certain circumstances, mere parallel conduct is insufficient.10   While the US Federal Trade Commission (FTC) has sought to rely on section 5 of the Federal Trade Commission Act (FTC Act) (prohibiting unfair methods of competition) in circumstances where it has not been able to establish an agreement under section 1, no Court has ever found a breach of section 5 of the FTC Act in such circumstances.  The FTC’s attempt in the Ethyl Corpcase to prosecute alleged price signalling under the provision failed.  The US Federal Court in the Second Circuit rejected the FTC’s allegations considering that the FTC’s principle of liability failed to “discriminate between normally acceptable business behaviour and conduct that is unreasonable or unacceptable,” E I Du Pont De Nemours & Co v FTC, 729 F.2d 128, 139-142 (2d Cir. 1984).

Notably, in the United States, an attempt to reach an agreement that would be unlawful under section 1 of the Sherman Act is not in itself unlawful, in stark contrast with the position in Australia, whereby an attempt to reach a contract, arrangement or understanding may be prosecuted.  Thus, US case law does not support a concept as broad as the European concept of “concerted practices.”

Response to the recommendation

The recommendation for the removal of the price signalling provisions, which are complex and unwieldy, is a positive move by the Panel.  However, the introduction of a concerted practices concept should be undertaken with care.

The concept of “concerted practices” is taken from European antitrust and has been shaped by decades of case law and administrative guidance.   It includes nuanced concepts of burden shifting and an ability to weigh the effects with the benefits of the concerted practice.  Our concern is that it may not be readily transferable to an Australian context.  The definition provided in the Draft Report – of “a regular and deliberate activity undertaken by two or more firms” – does not quite seem to capture the European nuance, and we are concerned that if adopted it could easily apply to a wide range of actions, including many innocent or necessary information disclosures between industry participants, and other behaviours that merely reflect firms intelligently adapting themselves to the existing or anticipated conduct of their competitors.  Any attempt to prohibit such conduct could strike at the heart of the competitive process, so needs to be carefully considered before such a concept is codified as part of Australian law.

If Australia wishes to follow the European approach in this area of law, it may be necessary to consider procedural issues of interpretation.  In Australian courts, the approach has tended to be very textual in its focus on interpreting specific words in the CCA.  By way of contrast, the European teleological tradition has enabled the courts to make fact-specific decisions in line with the broader objectives of the EU Treaty.

In these circumstances it may be preferable for the judiciary to continue to interpret the meaning of “understanding.”  More recent judicial considerations in Woollam and Bradken, suggest that the high water mark of the arguably rigid approach adapted in the Petrol cases have now retreated.

We expect there will be continued vigorous debate of these issues.

Submissions on the Draft Report are due by 17 November 2014 and the Final Report is due in March 2015.

 

 

 1    Apco Service Stations Pty Limited v Australian Competition and Consumer Commission [2005] FCAFC 161.

 2   Petrol Prices and Australian Consumers, Report of the ACCC Inquiry into the Price of Unleaded Petrol, December 2007.

 3   Treasury Discussion Paper, Meaning of ‘Understanding’ in the Trade Practices Act 1974.

 4   European Commission, Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, C11/1 (with effect from 24 January 2011).

 5   Joined Cases C-89/85, C-104/85, C-114/85, C-116/85, C-117/85 andC-125/85 to C-129/85,Ahlström Osakeyhtiö and Others v Commission [1993] ECR I-1307, [2]. 

 6   C-40/73 Suiker Unie and Others v Commission [1975] ECR 1663, [174].

 7   See Case C-199/92 P, Hüls AG v Commission of the European Communities,[1999] ECR I-4287, [162]; Case C-49/92 P, Commission v AnicPartezipazioni [1999] ECR I-4125, [121].

 8   Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 768 (1984).

 9   Am. Tobacco Co. v. United States, 328 U.S. 78I, 8I0 (1946)(circumstances must reveal "a unity of purpose or a common design” andunderstanding, or a meeting of minds in an unlawful arrangement").

 10  Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 768 (I984);Matsushita Electric Industrial Co. v. Zenith Radio Corp. 475 U.S. 574,588 (1986).

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