Australia: The ´Birdsville Amendment´ – A New Prohibition On Below-Cost Pricing

On 18 September 2007, the Senate passed amendments to section 46 of the Trade Practices Act 1974 (Cth). The most significant and most controversial element of the amendments - a new section 46(1AA) prohibiting anti-competitive below-cost pricing - was added at the last minute. The application of the new prohibition is clouded by uncertainty and potentially has significant implications for some businesses.

The existing predatory pricing provision in section 46 prohibited corporations with a substantial degree of power in a market from taking advantage of that power for a proscribed anti-competitive purpose.

Concerns had been raised about the effectiveness of section 46 in addressing predatory pricing and the uncertainty surrounding the court's interpretation of its application. In response, the original bill introduced by the Government had proposed a number of amendments to section 46 of the Act to:

• extend the prohibition to apply to a corporation taking advantage of (or 'leveraging') its market power in other markets;

• allow the court to consider the market power of a corporation acting in concert with other parties;

• explicitly state that more than one corporation can have a substantial degree of power in the market

• provide that a corporation may have a substantial degree of power in the market even though it does not substantially control the market, or does not have absolute freedom of constraint by competitors, suppliers or customers; and
• allow the court to take into account sustained below-cost supplying and the reasons for that conduct.

The 'Birdsville Amendment'

An additional amendment was added to the bill shortly before its passage, creating a new prohibition on below-cost pricing. The amendment , proposed by Nationals Senator Barnaby Joyce, has become colloquially known as the 'Birdsville Amendment' (the Senator purportedly conceived the amendment while at the Birdsville Pub). To the surprise of many, and in what the Shadow Minister for Revenue and Competition Policy described as 'the mother of all backflips', on 11 September 2007 the Government agreed to adopt the amendment.

The new section 46(1AA) provides:

A corporation that has a substantial share of a market must not supply, or offer to supply, goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying such goods or services, 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.

Aside from the new section 46(1AB), which provides that the court may consider the number and size of a corporation's competitors in the market, the Act offers no guidance as to what constitutes a 'substantial share of a market', what will amount to a 'sustained period', or how to determine whether a price is 'less than the relevant cost to the corporation'.

The requirement of a substantial market share is likely to be more easily satisfied than that of substantial market power. Presumably, one effect of the new test will be to increase the importance of the 'purpose' of below-cost pricing in determining whether a company has engaged in unlawful predatory pricing.

In considering whether a corporation has a substantial market share, there will be less scope for the courts to consider market factors like barriers to entry. However, as the Australian Competition and Consumers Commission's Chairman, Graeme Samuel, has acknowledged, until the test case is interpreted by the courts, predicting how it might be applied is difficult to determine. Even then, the test case is unlikely to be governed by universal rules and its application may vary depending on the nature of the market concerned.

However, the amendments do clarify one uncertainty in the application of section 46 – the relevance of the 'recoupment test'. The explanatory memorandum states that there is no legal requirement for a finding that the corporation had recouped, or intended to recoup its losses arising, from its below-cost pricing (though an expectation of recoupment might provide evidence that helps establish a breach).

Implications for Businesses

Proponents of the amendment have cast it as a victory for small business. On the other hand, major retailers have cried foul. Woolworths CEO, Michael Luscombe, said that Woolworths would now 'need an army of lawyers to work out whether we can mark down the bread at the end of the day.'

Under the new provisions, the potential targets include major supermarket chains and petrol retailers (including the supermarkets' petrol discount arrangements). Graeme Samuel has indicated that the petrol pricing inquiry is likely to include some analysis of the new prohibition and the ACCC will be vigilant in prosecuting the appropriate test cases.

But the risks may not be quite as dramatic as some are predicting. (To take Luscombe's example, marking down bread at the end of the day will almost certainly fall outside the prohibition, as the purpose of the below-cost pricing is very likely to be explained by the need to clear excess stock, rather than damage to actual or potential competitors. It is also unlikely it would amount to below-cost pricing for a 'sustained period'.) However, businesses with large market shares would be well advised to be cautious in their approach to below-cost pricing, at least until the contours of the new provisions become a little clearer. As no business is likely to relish at the prospect of being the ACCC's test case for engaging in unlawful predatory pricing activities in breach of section 46(1AA).

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