Insights

03/10/14

Cutting through the “Harper Review” draft report – what does it mean for you?

On 22 September 2014, the Competition Policy Review Panel chaired by Professor Ian Harper (the ‘Harper Review’) released its much anticipated Draft Report.

In this update, we have tried to cut through the 300-page Draft Report and the Panel’s 52 recommendations, to identify those key proposals that, if accepted, are most likely to impact you and your business or industry.

The Draft Report represents the first deliverable to emerge from the most complete and ambitious program of competition policy reform in two decades.  The Panel is due to release its final report in March 2015 and a number of the recommendations may require considerable political conviction (and State-Federal coordination) to be achievable.  

So what is likely to happen from here, and what does it mean for you?

Proposed changes to Australian competition law of importance to everyone

Price signalling rules would be replaced with a new and broad “concerted practices” concept

One of the most significant proposed changes to the CCA involves the replacement of the price signalling provisions with a new prohibition for “concerted practices” – which is a legal concept with its roots in European antitrust law.

The price signalling provisions were introduced in 2011 to respond to concerns from the ACCC that it considered it was too difficult to establish an ‘arrangement or understanding’ between competitors in cases involving the sharing of price information.  Currently, the price signalling rules apply only to the banking sector (although there is scope for them to be extended by regulation).

Nobody will miss the price signalling provisions, which are complex and unwieldy. However, while the Review Panel does not seem convinced that the ACCC’s concerns with the CCA are well-founded, they have nonetheless recommended a new “concerted practices” provision be introduced. 

The concept of “concerted practices” is taken from European antitrust and has been shaped by decades of case law.  Our concern is that it may not be a concept that is 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 if adopted could easily apply to a wide range of actions, including many innocent or necessary ordinary course of information disclosures between industry participants.

Some welcome and sensible improvements to our overly-complex cartel and anti-competitive conduct provisions

The Draft Report makes a number of recommendations to simplify the CCA and move it closer to the position that only hard-core cartel conduct – horizontal arrangements between competitors that amount to price-fixing, market-sharing, bid-rigging or output restrictions – should be prohibited outright, with most other arrangements subject to a competition test.

The key improvements are:

  •  The Panel has proposed a number of changes to simplify the bundling and tying rules (exclusive dealing).  They have also suggested amendments that would make clear that vertical arrangements should be exempt from the cartel provisions – changes aimed at resolving the current uncertainty that surrounds dual distribution models and highlighted in recent Federal Court price fixing allegation cases involving ‘dealer’ or ‘broker’ models.
  •  To introduce a competition test for third line forcing (where a supplier makes its supply of a product or service conditional on the customer acquiring a good or service from someone else).  This rule has long been an anachronism and the reform was recommended by previous reviews and getting rid of it would bring a common and sensible competition test to all forms of bundling by suppliers.  This would also remove the minor but widespread administrative burden of having to notify the ACCC of arrangements that seldom raise any issues.
  •  A new and faster notification process would be used for minimum resale price maintenance (RPM).  While this does not go as far as many wanted (which would make RPM subject only to a competition test), it will at least reduce the administrative burden associated with pricing strategies often used by manufacturers, distributors and others to manage their distribution channels and branding.
  •  To (finally) fix the narrow and cumbersome, but very important, exemption from cartel conduct for joint ventures – by extending it to a wider set of collaborative arrangements.  This follows similar steps taken recently in New Zealand.
  •  To remove the remaining prohibition on ‘collective boycotts’ – which largely duplicates the more recent cartel rules governing market sharing and production quotas/capacity restrictions.

We see these as all welcome and sensible proposals, even if the Review Panel could perhaps have been more ambitious in places.

Authorisations, notifications and block exemptions

The Review Panel has proposed streamlining the authorisation and notification processes.  Any improvement here will be welcomed by business – which today faces up to 6-month delays and considerable expense in obtaining authorisation.

There is also a proposal to allow the ACCC power to issue “block exemptions” or safe harbours for particular kinds of conduct in particular industries.  This is again a concept imported from Europe and is an intriguing one, but there are serious doubts about the extent to which it will be able to be implemented.

So what does it mean for you?

If you are the ACCC

For the ACCC – there is a considerable amount not to like in the Draft Report.

The Review Panel recognises that internationally no other competition body or regulator has a remit as broad as the ACCC.  In fact, the Panel finds that the remit is probably too broad.  It recommends that both higher level policy development, and access regulation, both be carved out to other bodies to allow the ACCC to focus on its core function: enforcement of competition and consumer laws.

The Panel proposes two new institutions:

  •  A new national competition body, the Australian Council for Competition Policy or ACCP, which would act as an advocate and educator of competition policy and would be the body responsible for conducting market studies. The ACCP would be similar in some respects to the Australian Energy Market Commission, which has a dual role of making rules for the energy market and advising all levels of governments on particular policies.
  •  A new national access and pricing regulator, which would take over responsibility for access and pricing issues currently within the ambit of the ACCC (e.g. telecommunications), the AER as well as the water sector.  There would remain a role for State and Territory regulators but some of their functions may over time be moved to the new national body.

The Panel also recommends measures allowing for greater oversight of the ACCC, including requiring the ACCC to appear regularly before a broadly-based Parliamentary Committee. 

Most controversially, the Panel has recommended that the ACCC adopt a board structure – which would mean ACCC decisions are made (or overseen) by a board, including representatives from the economic, business and academic community that do not have a day-to-day role at the ACCC.  This would be a significant change to the ACCC’s structure and operations and may be difficult to implement.  The alternative recommendation of an advisory board without decision-making powers would be easier to achieve but may not deliver the benefits intended by the Panel.

Other recommendations designed to improve the ACCC’s existing procedures include:

  •  a recommendation to adopt a media code of conduct, to limit the ACCC’s comments on active investigations and prevent the ACCC from advocating positions in the media ahead of formal decisions being made; and
  •  a recommendation to frame formal information requests (which can be used to compel the production of documents) as narrowly as possible and provide that only a reasonable search is required given the number of documents involved and the ease and cost of retrieving documents.

Both changes would be welcome. 

If you are involved in M&A

Currently, there are three processes available to parties seeking a competition clearance for a proposed asset or share sale – an informal clearance by the ACCC, a formal clearance by the ACCC or authorisation by the Australian Competition Tribunal (Tribunal).

The Panel considers that the informal clearance process is operating well, but that there should be further consultation between the ACCC and business representatives to achieve more timely decisions.  It recommends that the formal clearance and authorisation processes be combined into a single formal process. Under this process:

  •  the ACCC would be the decision-maker at first instance;
  •  the ACCC would decide to approve a merger if satisfied that it would not substantially lessen competition or that it would lead to a net public benefit (currently, the ACCC’s informal process does not allow it to take into account the public interests associated with a transaction); and
  •  decisions of the ACCC would be subject to review by the Tribunal.

The proposal to simplify the information requirements of the formal processes is a welcome one, and the combination of the two alternatives makes sense.  However, over the past year – and particularly since AGL’s acquisition of Macquarie Generation – merger parties have increasingly considered direct application to the Tribunal to be a viable alternative to informal clearance, and removing this option may remove a useful discipline on the ACCC’s processes.

Suggestions that the merger provisions be further amended to deal with “creeping acquisitions” have not been embraced by the Panel, and this seems the most appropriate position since there is little hard evidence of a problem in this area.

If you are big (or have big suppliers or competitiors)

The Harper Review has unfortunately been characterised from the beginning as a contest between small business and the big end of town, despite the efforts of the Panel to present a wider perspective.  The Draft Report largely avoids taking sides, but its biggest surprise will nonetheless have the largest impact on the biggest businesses.

A new ‘effects test’ for the misuse of market power provisions

The first recommendation of the Draft Report to make headlines was the proposed overhaul of the ‘misuse of market power’ provisions in section 46.  In addition to adding an “effects” test, the Panel recommends the “take advantage” element be removed.  These changes would remove two of the tools used to help distinguish legitimate competition from anti-competitive conduct. 

To address concerns about “over-capture”, the Panel suggests a two-limbed defence which would apply where the conduct:

  •  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 or promoting the long-term interests of consumers.

The first limb of this defence effectively reverses the burden of proof of the current “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 of this defence is likely to be problematic.  Not only is it unclear what is meant by “long-term interests”, it is even more unclear how this element should be assessed prospectively by businesses wanting to engage in particular behaviour.

In light of the controversy surrounding section 46 and the “effects” test more generally, with senior figures from both sides of politics weighing in, it is difficult to predict the government’s response to this recommendation or the prospects of its legislative passage. 

Unconscionable conduct

Despite the concerns expressed by small businesses about the conduct of big business, the Panel did not find any strong case to change the current unconscionable conduct provisions. 

If you are an infrastructure owern or utility

The Draft Report recognises the need to continue to balance infrastructure access and the introduction of competitive markets with the encouragement of investment in new and expanded infrastructure. 
The centrepiece for these changes would be the new, national access regulator to take over telecommunications and energy functions from the ACCC, as well as coordinating access regulation across other sectors (e.g. water).  We consider the prospect of a specialist, national infrastructure regulator to be a good, if somewhat overdue, development.

Also significant is a proposal to constrain the application of the general access regime in Part IIIA of the CCA to a limited and defined set of industries – given the economic cost of access regulation.  Given that the current regime was intended to apply generally across industries, this would mark a substantial shift in the legal framework. 

Other proposals likely to be welcomed by network owners include:

  •  The general deregulatory flavour of the Draft Report includes proposed reforms to planning and zoning processes that should help ease the time and complexity of new infrastructure projects.
  •  Some of the early idealism of the Hilmer era has been tempered with pragmatism.  For example, the Draft Report questions the need to pursue structural separation of rail freight operations on small branch lines.
  •  As expected, the Panel pushes continuing market reform in the energy and water sectors.
  •  Proposed amendments to the National Access Regime in Part IIIA of the CCA are also familiar from the Productivity Commission’s recent report, and the Panel has chosen the least disruptive alternative for the “uneconomic to duplicate” declaration criteria.  Full merits review of Part IIIA decisions by the Australian Competition Tribunal would be a valuable restoration. 

If you are in media or rely on IP rights

The Draft Report recommends yet another review of intellectual property, this time with a particular focus on negotiations for international trade agreements, which may bind Australia to make changes to IP laws without sufficient consultation.

In what we expect will be a hotly contested proposal, the Panel recommends the repeal of section 51(3) of the CCA, which generally exempts IP licensing agreements from the operation of the competition provisions. 

The publishing industry will object to the repeal of the remaining parallel import restrictions, which in practice are limited to books.  But as digital distribution of copyright material increases, geoblocking technologies are replacing legal restrictions on physical imports.  The Draft Report adopts several of the recommendations of the recent House of Representatives inquiry into IT Pricing, including the proposal that consumers should be legally entitled to circumvent geoblocks.  This may affect the Australian creators or licensees of rights to digital content that is available more cheaply overseas, at least at the margins.

If you are in goverment or deal with government 

The Draft Report shows a clear interest in exposing more government activity to competition and to the CCA. 

One minor but potentially far-reaching change is the provision that the CCA’s competition law provisions would apply to governments at all levels to the extent that they “undertake activity in trade or commerce”, which is broader than the current requirement that they “carry on a business”.  This change is particularly directed to government procurement.  The Baxter case found that the private party to an anti-competitive agreement with a state purchasing authority would be liable under the CCA, but not the state or government party to the agreement, and the Panel’s recommendation would put both parties in the same position.

Competitive neutrality is also a key focus of the Review Panel, which received a number of colourful submissions from businesses claiming unfair competition from local governments in areas such as waste collection and the provision of caravan parking.  The Draft Report contains valuable recommendations for increased transparency and accountability in the development and application of competitive neutrality policies, which to date have often lacked transparency and rigour.

Where to next?

For most of us there is much to like, and some things to be concerned about, in the Draft Report. For those wishing to make a submission – the consultation continues until 17 November 2014 with the Final Report due in March 2015. 

 

Our Experts
-
Partner
+61 3 8656 3312
+61 459 100 211

Categories

Areas of Expertise

Share This

AddThis: