Australia: Government Moves To Toughen Misuse Of Market Power Laws

Last Updated: 13 August 2007
Article by Michael Corrigan

After a considerable gestation period since the Senate Economics References Committee Report of March 2004 into the "Effectiveness of the Trade Practices Act in protecting small business", Treasurer Peter Costello has released a Bill to amend the misuse of market power and unconscionability provisions of the Trade Practices Act.

The proposed changes

In response to claims from the ACCC and others that there were problems with the existing provision after the ACCC lost the Boral and Rural Press cases, the Government will amend the legislation to provide that:

  • under section 46, one or more companies can have substantial power in the market
  • a company does not need to be shown to be able to control the market for it to be found to have substantial market power
  • to possess substantial market power does not mean a company needs to be shown to be free of absolute freedom from constraint from competitors, suppliers or customers; and
  • the Federal Court may have regard to any sustained selling goods or services below the "relevant cost" for supply, and the reasons.

The Government will also amend the Act to make clear that:

  • section 46 can apply to conduct in a different market from the market in which the company possesses substantial market power;
  • the courts can consider coordinated market power that arises from agreements or arrangements with third parties or competitors; and
  • the unconscionable conduct provisions of the Act (and the equivalent section of the ASIC Act in relation to financial services) will be expanded to cover conduct to a value of $10M (up from the current $3m).

Equivalent amendments are proposed to the telecommunications market power provisions in Part XIB.

What does this mean for business?

Several of the proposals flagged by the Government are designed to remove doubt and to reinforce what many, including this firm, believe to be the accepted interpretation of section 46.

For example, the recent Safeway case shows that under the current provision a company can be found to have substantial market power in circumstances where its market share is no higher than 16 percent and where it has a number of significant rivals in the market in question.

The Safeway decision (in which this firm acted) was controversial because Safeway was clearly not at any time in a position to "control" the market for bread products in which the conduct arose. Nonetheless the Treasurer's amendments as announced this week will clarify that such "control" need not be shown.

The Bill provides that sustained below cost selling and the reasons for doing so are factors which a court may take into account. The measure of "relevant cost" will be at the court's discretion having regard to the circumstances of the case - though the Explanatory Memorandum suggests that avoidable cost or variable cost could be an appropriate measure of cost. Below cost selling has not been outlawed per se as suggested by some of the more extreme proposals from small business lobbyists. This should be welcomed. Predatory pricing cases remain a difficult area, where the term is often used but few agree on what it really means and low prices may well be of benefit to consumers and be the result of "competitive, commercial reasons" (from the Explanatory Memorandum).

The Government has decided to stay away from explicitly imposing a "recoupment" test in the law as a necessary condition or as a factor in determining misuse of market power. (In some other jurisdictions such as the US, the courts do not generally accept predatory pricing has been proven unless there is evidence that the defendant believed it had a reasonable prospect of "recoupment" of the losses sustained through below cost pricing, as a result of driving a competitor out of the market.) As a result, the current High Court decision in Boral prevails which is that recoupment can be a factor but is not a necessary condition of providing a section 46 case.

It is useful to see the law clarified on these aspects, and this may see the ACCC adopt a more active role in pursuit of section 46 matters which have been noticeably quiet since it lost the Boral and Rural Press cases in 2004.

The changes are of general application across the economy. Moreover, with the increased penalties applicable since 1 January 2007 of up to the higher of 10 percent of Australian group turnover, or three times the gain derived from conduct in breach, the strengthening of section 46 reinforces to corporate Australia the need for compliance and for careful consideration of the reach of the newly expanded section 46.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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