03 Apr 2014

Should price signalling laws be extended?

by Michael Corrigan

It's questionable whether the shareholder's comments could have breached price signalling laws.

ACCC Chair Rod Sims recently suggested that public statements by a shareholder in Virgin Australia and by the CEO of Qantas would have risked breaching Australian price signalling laws, if those laws applied across the economy, instead of being confined to the banking sector.

Would they have? More importantly, should price signalling laws be extended?

The shareholder's comments on the Australian airline sector

The statements which Rod Sims apparently took exception to were attributed to Mr James Hogan, the CEO of Etihad Airways, which is a major shareholder in Virgin. He was reported as questioning the capacity war, saying he would like "to see the market correct" and his opinion was there is a "market where both the airlines should be profitable".

The statements attributed to Mr Joyce of Qantas were that "for every extra seat that Virgin added to its routes, Qantas would add two to maintain the airline's 65% market share".

How do price signalling laws work?

Australian price signalling law is currently limited to the banking sector. Currently it prohibits two main types of conduct:

  • any and all "private disclosures" of pricing information, if given to any competitor (unless an exception applies), or
  • any other disclosure of pricing or strategic or supply information, if it was made for a purpose of substantially lessening competition.

There are exceptions for disclosures made in the ordinary course of business and in a range of other circumstances which are viewed as legitimate, such as joint ventures, mergers and acquisitions, consortium projects, bank workouts.

In judging whether a disclosure was made for a purpose of substantially lessening competition the law could catch a disclosure intended to reduce competition, if that was merely one of the reasons for the statement.

To disclose information "for a purpose of substantially lessening competition" means the disclosure was something that was otherwise confidential and which was communicated partly for a purpose of interfering with competition in some way. The extent of the intended interference in competition must be "meaningful or relevant" to the normal workings of the market.

The law also requires some consideration of the nature of the statement, whether it was public or private:

  • How specific was the information?
  • Was it about future activities;
  • Was the information available to the public and was it part of a pattern of similar disclosures.

In the light of all of this, its seems questionable that these comments would have been a risk if the price signalling laws had applied to the aviation sector. It is difficult to see how Mr Hogan's statements could be said to be made for the purpose of substantially lessening the competition. Any shareholder would be concerned at the value of their investment and questioning why it is not possible for that company and the industry to be more profitable. The comments did not involve any invitation and gave no specific invitation to achieve any level of capacity or pricing with Qantas.

In addition, the ACCC's guideline on the law indicates that "Statements that genuinely describe market reality are unlikely to raise concerns under the general prohibition", which presumably would cover My Joyce's comments.

Should price signalling laws be extended?

  • Perhaps the ACCC's comments should rather be interpreted as looking to provoke a debate about extending the reach of the price signalling laws, in the upcoming "root and branch" review of the Competition legislation.

If the ACCC were to be given a broader mandate and obtain more power over price signalling across the economy, the bankcentric provisions of the current law would need a thorough revision before they could apply more generally.

It's got to be remembered, however, the law is complicated and untested, and has numerous exceptions and qualifications. No one in the banking sector has been found to have breached the laws, and many doubt anyone will be in the foreseeable future.

It seems to us that, rather than being extended, the price signalling laws should be rethought and redrafted, with the current version consigned to the bin under one of the current Government's repeal days, aimed at unnecessary red tape.

If the law was to be applied generally, one wonders why they couldn’t be simplified and confined to signalling which:

  • is likely to involve a purpose; or
  • alternatively, has when combined with other signals, comments or other conduct a likely effect of substantially reducing competition.

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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 communication. Persons listed may not be admitted in all States and Territories.