Australia: Big Players In A Market Need To Be Wary Of New Changes To Section 46

A new package of reforms to the Trade Practices Act's section 46, which deals with misuse of market power, has just been unveiled by the Federal Government.

Behind these changes is a perception that the current section 46 doesn't work, particularly after the high-profile failure of the ACCC's cases against Boral and Rural Press, so the section is being amended to make these types of cases more likely to succeed in the future.

At the same time, the Government will allow the Federal Magistrates' Court to hear section 46 cases; the Government hopes that the lower costs of this Court will encourage smaller players to bring actions.

In effect, the barriers to entry to section 46 litigation will be lowered by these amendments. As a result, businesses will need to be more wary about even their legitimate pricing strategies and competitive behaviour. It is likely the ACCC will re-commence investigations based on section 46, an area it effectively abandoned after losing the Boral and Rural Press cases.

In this Alert we'll set out the main changes.

Taking advantage - a new test for section 46

Following the High Court's Rural Press decision, says the Assistant Treasurer, the interpretation of "take advantage" has been "unduly narrowed", because the Court said that if it is possible for a firm to engage in the relevant conduct without having market power, it will be held not to have taken advantage of its market power.

To remedy this, section 46 will say that in determining whether a corporation has taken advantage of its market power under section 46, the court may have regard to whether the corporation's conduct was:

  • materially facilitated by its substantial degree of market power
  • engaged in, in reliance on its substantial degree of market power
  • likely to have been engaged in if the corporation lacked a substantial degree of market power; or
  • otherwise related to its substantial degree of market power.

Predatory pricing - the Birdsville amendment dropped

The so-called Birdsville amendment prohibits a corporation with a substantial share of a market from engaging in sustained below-cost pricing for a prohibited purpose. The amendment from October last year will not survive its first birthday in its current form.

The Birdsville amendment caused problems as it introduced a two-track process into section 46 cases with two different concepts: market share and market power. Almost no one apart from the previous Government - not even the ACCC - supported the Birdsville amendment and no one was sure how it would work in practice. It has not been tested in court.

The TPA will be amended to eliminate the market share concept and introduce some familiar terminology: a corporation with a substantial degree of power in a market will be prohibited from taking advantage of that power in any market by supplying, or offering to supply, goods or services for a sustained period below cost, where the conduct is engaged in for one or more of the anti-competitive purposes presently prescribed in section 46(1AA).

Recoupment no longer necessary in low pricing cases

In classic cases of predatory pricing, a supplier cuts price in the expectation that competitors will exit and it will later be able to increase prices to recover any losses made during the period of price cuts. Since 2003's Boral decision in the High Court, its been understood that this recoupment is a relevant factual matter but is not a necessary condition of providing a predatory pricing case. That recognition meant Australian law was in line with the laws in the United States and the United Kingdom in their treatment of predatory pricing cases, which also count an expectation of recoupment of loss as a major factor.

The Federal Government however has decided to go one step further by specifying that proof that recoupment is achievable is not required. The Assistant Treasurer says that this will make section 46 infringements significantly easier to prove, as the courts will no longer need to look into the future in this way.

Whether this amendment is needed to achieve the Government's desire is another question. Section 46(4A) was amended last year to require the court to have regard to any below cost pricing for a "sustained period" at a price below "relevant cost". Notice that there's no mention of recoupment. In fact, the 2007 Explanatory Memorandum stated that recoupment was not a necessary element of a section 46 infringement arising form low cost pricing. That is, sustained below cost pricing by itself might be enough to infringe section 46 as it currently stands.

"Unfair commercial conduct" - From $10 million to the sky's the limit

While the TPA prohibits "unconscionable conduct" in business transactions via section 51AC, it limits that prohibition to transactions of $10 million or under. That limit will be removed by the Federal Government, meaning that a greater number of transactions will be subject to the section.

The real issue with section 51AC is the meaning of "unconscionable " conduct. Very few commercial and franchise cases have succeeded under section 51AC, with the courts slow to allow small business to escape from contracts and other arrangements on this basis.

ACCC investigations - the ACCC's power to obtain information, documents and evidence broadened

The ACCC already has significant powers to compel the production of information, documents or evidence - and it's not just limited to suspected wrongdoers. It extends to any person the ACCC thinks has that information.

The Federal Government will extend the time in which the ACCC can use those powers; it will now be able to use them up until the substantive part of a court action begins. This is to address some recent challenges to ACCC investigations which have argued that the ACCC powers to demand information from a person or corporation cannot be used once the Commission has commenced or decided to commence legal proceedings against the person/corporation.

What's next?

The Assistant Treasurer has also flagged further action soon on two hot topics in competition law: the criminal cartel bill and creeping acquisitions.

The draft cartel bill which we last saw as an exposure draft is being further considered by the Government.

As for creeping acquisitions, the Government is planning to review the effectiveness of section 50 in dealing with them. A consultation process is being developed and will be released soon.

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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