Article by Chris Jose and Lawrence Baker
On 16 April 2003, the Federal Government released the Dawson Committee's (Committee) report on the competition provisions of the Trade Practices Act 1974 (Cth) (Act). The report can be accessed here.
The Committee, chaired by former High Court Justice Sir Daryl Dawson, prepared its report over a period of almost 18 months and balanced a divergent mix of views as expressed in the 212 submissions received by Committee. The Committee made 43 recommendations in relation to the Act's substantive provisions and its overall administration. The Government's response, which largely agrees with all the recommendations, can be found here.
Though it remains to be seen which of the recommendations are legislated in the coming months, companies may wish to consider whether any of the recommendations would affect current or future conduct or arrangements.
Generally, the Committee noted that the Act has served Australia very well overall, comparing favourably with equivalent legislation in other countries. In addition to the broad tick given to the Act, two main themes emerge from the recommendations namely:
- the powers of the Australian Competition and Consumer Commission (ACCC) require greater refinement
- the Act is intended to protect competition as a whole rather than individual competitors.
The latter has received mixed reaction with small business criticising the Committee for neglecting its interests.
This article outlines the principal recommendations (though not all the recommendations) of the Committee and briefly discusses the general public and Government response to the Committee's Report. It is arranged by the issues of:
- mergers and acquisitions
- misuse of market power
- collective bargaining
- exclusionary provisions
- third line forcing
- joint ventures
- penalties and remedies
- functions and powers of the accc.
The article ends with a brief summary of the report.
Mergers and acquisitions
Section 50 renders unlawful mergers or acquisitions that have the effect or likely effect of substantially lessening competition. The Committee recommended no change to the section and in so doing rejected submissions supporting amendments such as the introduction of an 'economic efficiency' test and specific measures to address competitive concerns arising out of creeping acquisitions. It felt that an efficiency test, given its complexity, is appropriately assessed within an authorisation application, and that creeping acquisitions can properly be dealt with under the current wording.
However, the Committee made some significant recommendations to the merger clearance and authorisation processes.
Current avenues available
At present, there are three options available to parties contemplating a merger:
1. Parties may take the view that the merger will not contravene the Act and accordingly proceed without approaching the ACCC.
2. Parties may elect to approach the ACCC for an informal clearance of the merger (based upon competition issues only and not efficiency benefits). The ACCC has considerable discretion under this avenue and if it rejects an informal clearance application there are no express review mechanisms and no reasons need be given. For the majority of proposals, the process provides a relatively streamlined and efficient process and sufficient comfort despite its limitations. At times, however, the informal clearance avenue provides insufficient certainty to firms contemplating a merger and concerns have been expressed about absence of reasons by the ACCC.
3. Parties may apply for formal authorisation through the ACCC. In its determination, the ACCC may consider whether any public benefits flowing from the merger will outweigh its anti-competitive detriments. Parties may offer undertakings to address competition concerns. Formal authorisation is a lengthy and uncertain process and consequently unsuitable for many merger proposals that are time-critical. Current rights to apply for review to the Australian Competition Tribunal (Tribunal) from an ACCC determination compound the uncertainty.
The Committee recommended changes to the existing avenues as well as the introduction of an additional avenue, a new formal voluntary clearance process.
The changes are outlined below.
Reasons to be provided in the informal clearance process
The Committee considered that the current informal clearance process is efficient, inexpensive and effective. However, it noted that the informality of the process also exposed its weaknesses with there being no review of an ACCC decision and the ACCC not being obliged to give reasons. Accordingly, in order to reduce the potential for regulatory error, the Committee recommended that the ACCC should, upon request of the parties, provide reasons where it has rejected a merger or accepted undertakings.
New voluntary formal clearance process
The Committee recommended the introduction of a voluntary formal clearance process, which would operate in addition to the current informal clearance process. The new formal process should contain the following principal features:
- the process would be voluntary and would co-exist with the informal clearance process
- the ACCC would be required to determine the issue within 40 days (if a determination is not provided within that timeframe, approval should be deemed to be refused)
- decisions would be legally binding
- the ACCC could grant conditional approval and monitor the applicant/s compliance with those conditions
- applicants would have immunity from proceedings by other parties while complying with any conditions specified by the ACCC
- applicants refused clearance (and not third parties) may apply for review on the merits to the Australian Competition Tribunal within 14 days. The Tribunal should hear the matter only on the material before the ACCC and should make a determination within 30 days
- both the ACCC and the Tribunal should give reasons for their decisions.
The recommendation that an application be deemed refused after the lapse of the 40-day timeframe goes against the trend of administrative decision-making that usually deems silence on a matter to be acceptance. Whist this may leave open a degree of uncertainty for the parties, the new formal clearance avenue should, over time, offer a greater degree of predictability than informal clearance while remaining more expedient than authorisation.
Changes to the merger authorisation process
Currently, authorisation applications are made to the ACCC with a right of appeal to the Tribunal. The Committee considered the current process to be time-consuming and commercially unrealistic. It recommended substantial changes to the authorisation provisions:
- merger authorisation applications would be made directly to the Tribunal rather than to the ACCC (the ACCC 'should appear to assist the Tribunal' by using its resources to place before the Tribunal the materials necessary to consider its decision)
- the Tribunal would be required to make a decision within three months and there would be no right of review on the merits of the decision
- the Tribunal would be able to remit to the ACCC matters that are to be determined solely on competition issues (under section 50) rather than on the question of public benefits (under section 90(9) of the Act).
These recommendations have received mixed responses. Although the time limit would be a significant improvement on the current process, some commentators have voiced criticism that the recommended changes would give the Tribunal an inquisitorial role that is uncharacteristic for a quasi-judicial body, and that may compromise its role as independent adjudicator. In addition, with the ACCC 'assisting' the Tribunal, the Tribunal may appear partisan in favour of the ACCC's views. There is also a critical issue of whether the Tribunal will be adequately resourced to perform its new function.
Misuse of market power
Section 46 of the Act prohibits a corporation with substantial market power from taking advantage of that power for one or more of the following purposes:
- eliminating or substantially damaging a competitor
- preventing entry of a person into a market, or
- deterring or preventing a person from engaging in competitive conduct in a market.
A number of submissions, including that of the ACCC, argued that the test should be broadened into a 'purpose or effect' rather than merely a 'purpose' test in order to catch a wider range of conduct. The ACCC argued that a finding of purpose required production of 'smoking gun' evidence and was onerous to prove.
The Committee recommended that there be no change to section 46. Principally, it considered that the introduction of an 'effects' test would blur the distinction between vigorous competitive conduct and abusive anticompetitive conduct. It felt that the purpose test did not create an unreasonably high burden of proof.
Instead the Committee recommended that the ACCC should produce guidelines highlighting its approach to section 46 (and Part IVA generally). The Committee also rejected submissions to permit authorisation of conduct that would otherwise contravene section 46 the Committee noted that misuse of market power would seldom if ever be in the public interest.
In response to pressure from small business, the Federal Government asked the Committee to re-examine its findings in light of Boral Besser Masonry Limited v ACCC (2003) 195 ALR 609 handed down by the High Court in February 2003. The majority of the High Court found that conduct of a member of the Boral Group that priced below avoidable cost during a price war, with the consequence that a smaller competitor was driven out, was legitimate pro-competitive behaviour. The small business community cited the Boral decision as an illustration of the section's failure to protect small businesses from larger players with economies of scale and more substantial market share.
The Committee's findings remained unchanged following the High Court's decision. Small business has criticised the Committee's handling of the section arguing that its submissions were ignored and that the Committee failed to appreciate the inherent vulnerability of small business when endeavouring to compete in a market with large corporations.
The ACCC also expressed disappointment with the Committee's decision not to recommend changes to a section that, the ACCC notes, has had only one finding of contravention since 1990 despite active ACCC litigation on the provision. There is likely to be ongoing debate on section 46 despite the Government's acceptance of the Dawson recommendations (see, for example, the Senate Economics Reference Committee terms of reference, dated 25 June 2003).
In a move to level the playing field and increase economic efficiency, the Committee, in response to numerous submissions from small business, recommended that a notification process be implemented to allow small business to more readily obtain exemptions to bargain collectively with larger players. The Committee recommended that the new notification process contain the following elements:
- the process will be available to 'small business' defined using a transaction value approach of $3 million (variable by regulation)
- immunity should come into effect after 14 days
- provision should be made for third parties making a collective bargaining notification on behalf of a small group of businesses.
The exact application of the process still requires fine-tuning to deal with potential difficulties. For instance, the process would be likely to cover transactions by many large businesses. The Report suggests that the ACCC could screen for these cases. Perhaps more important is that individual businesses are unlikely to know whether they will transact more or less than $3 million in the year and this may lose immunity part-way through a bargaining process. Despite these and other issues, the recommendation appears to have been generally well-received.
Currently, section 4D of the Act imposes a blanket prohibition upon exclusionary provisions ie they are prohibited regardless of their impact on competition. Exclusionary provisions, or, primary collective boycotts arise when two or more competitors enter into an agreement to prevent, limit or restrict:
- the supply of goods or services to a particular person or class of persons, or
- the acquisition of goods or services from a particular person or class of persons
The Committee considered that the provision as currently drafted may also catch legitimate pro-competitive conduct. Consequently, it made the following recommendations:
- only exclusionary provisions that are targeted at an actual or potential competitor should be prohibited (consistent with the law in New Zealand)
- it should be a defence if the provision did not have the purpose, effect or likely effect of substantially lessening competition.
The proposed change would significantly curtail the application of section 4D as it would only capture situations where the targetted person is up/downstream of the boycotting parties but is part of a group that competes at those up/downstream functional levels. In addition, it would appear that most instances of market sharing (where competitors agree to divide up markets among themselves) would no longer be caught by the Act unless they are found to contravene the more general substantial lessening of competition test in section 45 or involve price fixing within section 45A.
As with the other recommendations, the Government agreed with this proposal. Despite this, there continues to be ongoing debate and it remains to be seen whether the proposal will be implemented and, if so, in what form.
Third line forcing
Third line forcing arises where one party supplies goods or services to another party on the condition that the second party acquire goods or services from a third party (even if the third party is a related company to the first). Currently, third line forcing is prohibited by section 47 per se (ie: regardless of its impact on competition). Consistent with a number of earlier TPA reviews, the Committee acknowledged that the practice does not always have an anticompetitive effect and, accordingly, recommended that:
- third line forcing should only be prohibited where it results in a substantial lessening of competition
- related companies should be treated as a single entity for the purposes of section 47.
Although third line forcing can be notified to the ACCC at relatively low cost, which ensures immunity from the provision unless the ACCC withdraws it, the provision is capturing innocuous, often innovative, arrangements, such as loyalty programs that were never intended to be caught. Although similar recommendations by previous reviews have not lead to a change in the law, the weight of opinion against the provision suggests that this time section 47 will get the amendment it deserves.
Currently, section 45A prohibits price fixing between competitors outright except in relation to certain joint ventures. At present though, the joint venture exception is regarded as too narrow—for instance the exception is limited in part to the supply of goods jointly produced (the exact ambit of the current exception need not be detailed within this brief newsletter). Accordingly, the Committee recommended that the exception be amended so that section 45A would not apply to a contract, arrangement or understanding:
- that is for the purpose of a joint venture
- does not substantially lessen competition.
However, the recommendations may arguably lead to different problems to those currently experienced. For instance, the proposed definition of joint venture has been left so open-ended that it may create another layer of uncertainty about the application of the provision. The reverse onus of proof with respect to the competition test will not help. It may even encourage corporations to create arrangements that on the face of it circumvent the provisions, but that would nevertheless be caught by the substantial lessening of competition limb. It will be interesting to see how this recommendation is dealt with in Parliament.
Penalties and remedies
Under section 78 of the Act, criminal penalties cannot be imposed upon a person in contravention of any of the provisions of Part IV. The only means of enforcement is through civil penalties. Currently, the maximum penalties for a breach of the competition provisions of the Act (per contravention) are: $10 million for corporations and $500,000 for individuals. The Committee recommended that the maximum penalty should be raised to the greater of:
- $10 million, or
- three times the gain from the contravention, or
- 10 per cent of the turnover of a body corporate and all of its interconnected bodies corporate (where the gain cannot readily be ascertained).
Additionally, the Committee recommended that the court be given power to prohibit implicated individuals from being directors of a company or having a management role in the company. Finally, it recommended that corporations should not be able to indemnify individuals for any pecuniary penalties they may incur.
The recommendations would significantly increase the exposure of some corporations. In particular, 10 per cent of turnover could be a crippling penalty for some organisations. However, the recommendations are in line with other jurisdictions, such as the USA and the EU, where monetary penalties have been substantial.
A number of submissions proposed the creation of criminal offences for serious cartel behaviour, which was defined broadly by the Organisation for Economic Co-operation and Development (OECD) as:
'… an anti-competitive agreement, anti-competitive concerted practice, or anti-competitive arrangement by competitors to fix prices, make rigged bids (collusive tenders), establish output restrictions or quotas, or share or divide markets by allocating customers, suppliers, territories or lines of commerce.'
The Committee considered that there was a weight of evidence from overseas jurisdictions to suggest that criminal sanctions are effective in deterring hardcore cartel behaviour. However, as there is currently no satisfactory definition of 'serious' or 'hardcore' cartel behaviour in Australia and a workable method of combining an amnesty policy with a criminal regime, the Committee recommended that those issues be clarified prior to any formal inclusion of criminal sections in the Act.
Clearly much work still need to be done in this arena before criminal sanctions are introduced. Their recent introduction in the United Kingdom and their frequent application in the United States suggests that it is just a matter of time before Australian competition law follows suit.
Functions and powers of the ACCC
While the Committee did not consider that a fundamental change to the structure and administration of the ACCC is currently required, it received a number of submissions that complained of the manner in which the ACCC had handled complaints. In an effort to increase the ACCC's accountability, the Committee suggested:
- the establishment of a joint parliamentary committee to oversee the ACCC's administration of the Act
- the establishment of a consultative committee to provide the ACCC with feedback in relation to its administration of the Act (the committee would report to Parliament in the ACCC's annual report)
- the appointment of an associate commissioner who would receive and respond to individual complaints concerning the administration of the Act.
The extent to which a parliamentary or consultative committee would change the administration of the Act in practice is unclear at this stage. One would expect that a complaints commissioner would at least facilitate a greater degree of transparency of complaints handling than is currently available.
Use of the media
The ACCC's use of the media was one of the most frequently raised issues with the Committee. Submissions raised concerns that the ACCC's media releases lacked partiality and potentially denied corporations or individuals procedural fairness.
In response, the Committee recommended that the ACCC develop a media code of conduct that would include:
- provision of information in relation to the aims of the Act and the role of the ACCC
- accurate balanced reporting of court proceedings that afford procedural fairness while ensuring public understanding of the proceedings
- declining to comment on the substance of investigations unless there are exceptional surrounding circumstances.
Although these recommendations are widely accepted, it serves to remember that the ACCC is not an impartial participant in administering the Act. It is an enforcer of the legislation and a repeat and sophisticated litigant. Corporations should not expect the recommendations to in any way diminish the rigour with which the ACCC seeks to ensure compliance with the Act.
Currently, section 155 of the Act empowers the ACCC to obtain information, documents and evidence in order to investigate alleged contraventions of the Act. Many submissions raised concerns that the ACCC uses its powers too extensively, without adequate safeguards and without proper regard to the financial burden that businesses face when required to comply. The Committee recommended that:
- the ACCC should continue to give careful consideration to the financial implications of the request
- the ACCC must seek a warrant from Federal or Magistrate's Court in order to enter premises and seize documents
- it should be made explicit in the Act that section 155 does not require the production of documents to which legal professional privilege attaches.
In addition, the Committee recommended that the ACCC's investigative powers should be extended to cover circumstances where it is considering revoking authorisation, but should not be extended to apply after the commencement of judicial proceedings.
Cease and desist powers
The Committee rejected calls from the ACCC and some consumer groups to recommend that the ACCC be granted a power to issue 'stop notices' or 'cease and desist' powers to firms suspected of engaging in anticompetitive conduct. There is little to comment about this recommendation other than to note that the Committee rightly held that such a power, generally confined to the jurisdiction of the courts, would likely be unconstitutional.
Many commentators regard the Committee's Report as being a balanced, though cautious, review of the Act. For the most part, the Committee left substantive provisions of the Act intact, focusing more upon the Act's administration and the powers of the ACCC. Its recommendations are very much fine-tuning in specific areas, rather than wholesale changes to competition law. Indeed, some commentators believe the Committee has missed an opportunity to recommend more extensive reform than it did.
The Government has accepted virtually all the recommendations but will further investigate details of proposed criminal sanctions, increases in penalties and a consultative committee to the ACCC. Both the Committee and the Government took the opportunity to restate some competition 'items of faith':
- that the Act should be applied as broadly and uniformly as possible
- that competition law is not an instrument of industry or social policy
- that the law should 'protect competition, not competitors'.
Some members of Parliament have clearly voiced their intention to oppose changes to the merger authorisation process allowing parties to go straight to the Tribunal. Others have echoed the dissatisfaction of small business in losing out on some key areas of the review: Section 46 is still very much a live issue and it is possible that the Government will face pressure to amend it notwithstanding Dawson's recommendations.
Clearly, there will be extensive trading in Parliament over the Dawson recommendations and we should not necessarily consider that all of the recommendations will eventually be implemented by changes to the Act. However, given the extensive reach of the Act, companies should consider whether the proposed changes could affect their current and proposed dealings.
 OECD Council 1998 Recommendation of the Council concerning Effective Action against Hard Core Cartels.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.