The misuse of market power provisions in section 46 of the Competition and Consumer Act 2010 (Cth) could be up for review.
Further debate is likely about perceived inadequacies in the misuse of market power provisions in section 46 of the Competition and Consumer Act 2010 (Cth) ("CCA") following the ACCC's failure to establish that Cement Australia and its related companies misused their market power when buying up large volumes of fly ash for use in the construction sector (Australian Competition and Consumer Commission v Cement Australia Pty Ltd  FCA 909).
However properly understood, the Cement Australia decision is not cause for major concerns over reform of section 46, because it was considered under the older form of the legislation that has since been significantly amended to capture a wider scope of conduct.
As such, the Cement Australia case may be little more than a legacy decision which says nothing about the current form of section 46 and whether it is striking the right balance today between outlawing abusive market conduct and encouraging companies to compete aggressively but lawfully.
That question will be a key concern for small business in the Federal Government's proposed root and branch review of the CCA, which is likely to be announced soon and possibly by the end of 2013.
In the case itself the ACCC succeeded on other issues in proving that the fly ash arrangements amounted to anti-competitive conduct contravening section 45 of the CCA.
Facts and fly ash
In September 2013, the Federal Court found that Cement Australia Pty Ltd and other respondents to the proceedings had not misused their market power when they entered into contracts for the purchase of fly ash. The judgment only became publicly available in mid-November after a preliminary review by the parties for any confidentiality concerns.
Fly ash is a waste product generated from power stations, which is costly to dispose of and can be used in certain proportions as an economical alternative to cement in ready-mix concrete.
Cement Australia and its related companies entered into contracts with various power stations in south-east Queensland under which Cement Australia acquired or was entitled to acquire all or virtually all of the concrete-grade fly ash that was available from time to time.
The ACCC claimed (amongst other things) that Cement Australia did not need the fly ash from Millmerran Power Station to meet the demand of its customers or potential customers, as the fly ash it acquired from other power stations, substantially exceeded the demand of its customers or potential customers for concrete-grade fly ash.
On the ACCC's view, Cement Australia had no commercial need for the quantity of fly ash acquired from Millmerran Power Station, and by purchasing the fly ash it took advantage of its market power for the purpose of preventing entry of any competing acquirer of fly ash in breach of section 46 of the CCA.
In essence, the ACCC's section 46 case against Cement Australia was that it engaged in "predatory bidding" in order to "corner the fly ash market" and prevent competitors getting access to the resource.
The Court's approach to finding "taking advantage of market power"
In order to breach section 46 of the CCA, a company must:
- have a substantial degree of power in a market; and
- take advantage of that power;
- for the purpose of 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.
Justice Greenwood, in a judgment of nearly 1000 pages, found Cement Australia enjoyed a substantial degree of power in the concrete grade fly ash market in the south-east Queensland region.
However, he found that Cement Australia did not take advantage of its market power in entering the sourcing contracts, because another corporation in Cement Australia's position, but in a workably competitive market, could have entered into the contract on those same terms and conditions
By focusing on whether the same conduct "could" have been engaged in, by a company lacking substantial market power, Justice Greenwood applied previous High Court authority on section 46. He did not need to consider the changes made to the law in 2008, which make it easier to infer a "taking advantage" of market power.
The 2008 amendments make it easier to prove market power was "used" because they were intended to capture conduct which even a small company could have engaged in. A small company would be unlikely to pursue such conduct, whereas a powerful company is much more likely to behave in that way.
So it is possible the section 46 part of the Cement Australia case might have turned out differently if the 2008 amendments had applied because in determining now if a powerful corporation is "taking advantage" of its market power, the court can also consider whether:
- the corporation's market power made it easier to engage in the conduct;
- whether the corporation relied on its market power in any way;
- whether the corporation "would" as opposed to "could" have engaged in the same conduct if it has little market power; and
- any other links between its market power and the conduct in question
In contrast, the ACCC failed on the section 46 case because Justice Greenwood inferred it was not impossible for any company to have done the same thing: "The question, put simply, is whether a firm profitably could have engaged in the conduct in question in the absence of a substantial degree of power in the relevant market."
Justice Greenwood noted further: "If it can be demonstrated that Pozzolanic [a related company of Cement Australia] as a profit maximising firm operating in a workably competitive market could in a commercial sense profitably engage in the conduct in question having regard to the ordinary business rationale identified, it follows that the corporation has not used its market power in a manner made possible only by the absence of competitive conditions".
Justice Greenwood was not satisfied that Cement Australia's entry into the relevant contract was only made possible by the use of its market power. Accordingly the ACCC failed on section 46.
Will section 46 be on the agenda of the root and branch review?
The Federal Government has indicated that it will be conducting a root and branch review of competition laws and that the misuse of market power provisions will be firmly on the review agenda. It is likely that the review of section 46 will involve consideration of whether Australia should move to an effects-based test, as used in other jurisdictions around the world, or whether we should stick to the current purpose-based test.
We query whether, in this case, amendment of section 46 to an effects-based test would have made any difference to the end result. After all, Justice Greenwood was not be satisfied that Cement Australia had "taken advantage" of its market power, regardless of its purpose.
ACCC Chairman Rod Sims recently commented at an RBB Economics conference on 29 November 2013 that he did not see how adding an effects test to the section would be "inconsistent with the competitive process". The ACCC has not yet publicly outlined its views on this issue but will do so once the review is underway. Rod Sims has indicated that he is "looking forward to a wide ranging debate" ... and so are we!
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.