Australia: Uncertain effects: An update on proposed competition law amendments

Last Updated: 23 February 2016
Article by Michael Corrigan and Sunita Kenny

Most Read Contributor in Australia, August 2016

Key Points:

The Government's decision on the future shape of the misuse of market power provisions is expected by the end of March.

Readers may be familiar with the most controversial recommendation of last year's Harper Review ? to broaden the misuse of market power provisions in section 46 of the Competition and Consumer Act 2010 (Cth) to capture conduct which has not only the purpose, but also the effect or likely effect of substantially lessening competition in a market.

The case for change to a broader definition has been made by some concerned stakeholders, and led with vigour by the ACCC. Reform proponents argue the current section 46 provisions do not effectively prevent anti-competitive behaviour, are too complex and out of step with other jurisdictions, and that a new, broader test is needed which lowers the effective threshold required to establish a misuse of market power. As early as 2013 there was sympathy for this position from the Government, with the (then) Small Business Minister Bruce Billson contending that the introduction of an effects test would address "some deficiencies in the existing law".

Since that time, the debate over of the section 46 amendments has been a stop/start affair. In March 2015 the Harper Review recommended change to introduce an "effects test", brushing aside objections from the BCA and a range of other commentators.

The Federal Government's response to the Harper's recommendations was not released until November 2015. Issues emerged as early as September, when the proposal reportedly split Cabinet, amid concerns that the changes were not needed and doubts that any proposal would get through the Senate. So, off to a Treasury Committee the proposal went.

In December 2015, the Department of Treasury released a discussion paper titled "Options to strengthen the misuse of market power law" which sets out six options that range from the "no change" option, through four stages of varying amendments. These options would remove the "take advantage" element and include specific reference to the "purpose" and effect of the conduct of the firm with substantial market power as a criterion for assessing the firm's conduct as competitive or anticompetitive. The sixth and final recommendation is to adopt the full set of changes recommended by the Harper Review.

In addition to proposing a range of recommendations, the Discussion Paper invited the views of interested parties on options to strengthen the misuse of marker power provision, and commenced a schedule of community consultation meetings, most recently in Tamworth, NSW (which political observers may note is the seat of Barnaby Joyce, Nationals Party Leader, newly appointed Deputy Prime Minister, vocal representative of agricultural stakeholders and keen supporter of section 46 amendments).

An effects test - lessons from overseas

The ACCC supports the full suite of Harper amendments, but questions remain as to how an effects test will work in practice. What conduct will it catch? Will it be too broad, or not broad enough?

In broad terms, the EU approach prohibits abusive conduct by companies that have a dominant position in a particular market. The European Commission first considers whether or not a company can be said to hold such a dominant position, and then assesses whether the company has engaged in conduct which has the effect of hindering the degree of competition in the market. The concept of "abuse" in EU law is an objective, evidentiary inquiry into the effects of the claimed abuse; hence the shorthand term of "effects test" for the approach to these cases under EU law. Recent investigations provide some guidance on the European Commission's approach in such cases.

Since 2010 the European Commission has been investigating Google over Google's use of comparison shopping products in its general search term pages. (Comparison shopping products allow consumers to search online for goods and to compare prices between selected online shopping vendors). The European Commission claims that by showing its own comparison shopping product ("Google Shopping") above other search results, Google's conduct has the potential effect of preventing consumers from viewing all relevant shopping results that appear in response to a user's search terms.

As such, the EC's preliminary view was that Google should treat Google Shopping and its competitors' products in the same way to avoid stifling competition and causing potential harm to consumers. It contends that Google's systematic prioritisation of its own product amounts to an abuse of its dominant position in the market, while on the other hand Google maintains that consumers have more choice than ever before. Google now waits for the EC's response to its defence. If Google is unsuccessful in convincing the EC that it does not have a duty to supply its own rivals, it could be fined up to 10% of its previous year's turnover.

A broad effects test might catch a range of other scenarios. Imagine an established and powerful business that regularly poaches the senior staff of its competitors. Or a powerful corporation with an eye for prime and scarce commercial sites for new retail stores, that manages repeatedly to secure the sites over its competitors which blocks their entry. Imagine an airline that continually extends seat capacity and aggressive sales on airline tickets on routes which its competitors decide to enter. Or a grocery store that offers all customers generous discounts on purchases above a certain value as soon as a new entrant opens a rival store in the area. It is hard to say with certainty whether these hypothetical scenarios might constitute the types of "abuses" intended to be captured by an amended section 46.

Another example, drawn from a recent UK case, might involve a pharmaceutical company holding a patent over PBS listed drugs. Assume the patent holder legally challenged two generic pharmaceutical companies each of which proposed to launch competing generics, alleging that their generic products would infringe its patents, and commenced patent litigation proceedings against the generics.

If, before that litigation went to trial, the two generic companies entered into agreements with the patent holder to compromise the infringement case, which included terms prohibiting their independent entry into the Australian market for a further two year period and payment of substantial costs to them by the patent holder, would that be an abuse under an effects test? The potential impact of a broader effects test on a matter like this would require careful examination. Similar facts in the UK recently attracted a UK £45m fine.

It is unclear if Australia would adopt the European approach. However, we consider it likely that the Harper consultation process will result in some broadening of the existing law, while retaining some elements of the existing framework, including reference to "purpose" as an important, but not determinative, criterion.

How would reform of misuse of market power play out in Australia?

Competition by definition should be vigorous, and the difficulty arises in drafting legislation which catches conduct that has the effect of lessening competition while not stifling the ordinary rigours of commerce. Changes of the scope of the section 46 provisions are likely to have a significant and practical impact on firms that have, or might be considered to have, market power in Australia.

The Harper Review acknowledges the uncertain impact of new legislation, but considers that any uncertainty would be outweighed by the benefit of a more effective prohibition on unilateral anti-competitive conduct.

The effect on business of an amended section 46 will depend heavily on which model is accepted by the Government and on any additional measures that are introduced. For example, Harper suggests that the initiatives such as the following may address industry concerns:

  • allowing ACCC authorisation where the conduct generates a net public benefit;
  • asking the ACCC to issue guidance material on its approach to enforcement of an amended section 46; and
  • thorough consultation on the form and wording of draft consultation.

The next stage in the process

The issue still has a way to run, with the Government's decision expected by the end of March. In the meantime a broad range of stakeholders is busy making their varied views known, and senior members of our team will be taking every opportunity to engage in the consultation process.

Our advice to clients is to continue to follow the discussion closely, to carefully consider business interactions and of course to speak with us if you have any queries.

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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.

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