14 Nov 2014

Competitive business beneficial for all

by Michael Corrigan, Sian-lee Ooi

The Harper Review's proposed rewrite of the misuse of market power provision seems to throw a much wider net than the current law.

Since its introduction in its current form in the 1980s, the misuse of market power provision – section 46 of the Competition and Consumer Act 2010 – has been the subject of intense debate and numerous reviews and inquiries.

Now we have a concrete reform proposal from the Harper Review of competition policy intended to make the law "fit for purpose". Will it be a step in the right direction?

This law is aimed at preventing companies with a powerful market position from deliberately using their power to stamp out their competition. Currently the law requires the courts to consider three key factors to determine whether a company has misused its power.

A critical factor is whether the conduct is "ordinary competition on the merits", as distinct from behaviour which only a powerful company would be likely to pursue. Did the company actively seek to use its position of power for a prohibited purpose, which includes eliminating or substantial ly damaging a competitor? The complexity inherent in this test has been much criticised.

Under the Harper Review proposal, section 46 would be redrafted so that a corporation that has a substantial degree of power in a market will be prohibited from engaging in any conduct if the proposed conduct has the purpose, or would have or be likely to have the effect of substantially lessening competition in that or any other market. This seems a much simpler test and omits the question of whether the company has used its market power altogether.

The merits of adding an "effects" test have long been debated. The draft recommendation is consistent with the regulator's argument that market misuse is currently is "wrongly conceived" in focusing on behaviour that intends to damage an individual competitor rather than behaviour that has the effect of substantially lessening competition.

But the new proposal seems to throw a much wider net than the current law.

For example, a market participant with substantial market power may be deterred from engaging in conduct or employing business strategies because one of the possible effects might be to reduce competition in some way or at least in the short term. Forecasting those effects will not be easy and the new law could be invoked if the conduct will increase competition in one market, but might reduce it elsewhere.

Also contentious is the draft recommendation to include a proposed two-step defence. This defence will be available firstly, if the conduct amounts to a rational business decision or strategy by a corporation that does not have a substantial degree of power in the market. Secondly, the firm involved will have to prove that the effect or likely effect of its conduct is to benefit the long-term interests of consumers.

This second limb of the defence, and the way it would need to be applied in practice, could be problematic. Take for instance a company with substantial market power. The company decides to refuse to deal with a particular supplier for a legitimate business reason. That refusal to deal may have the effect of substantially lessening competition in a particular market or at least reducing competition in the short term. It may also be a completely rational business decision that would also have been taken by a corporation that does not have a substantial degree of power in the market. However, it may be difficult to show the likely effect of the conduct is to benefit the long-term interests of consumers. How would that be demonstrated? In such a case the firm could well be advised to refrain from the conduct altogether.

There is a risk that the new test may be no more "fit for purpose" and possibly inferior to what we have today.

If we genuinely want to improve productivity and foster innovation in Australia, the last thing we want to do is discourage legitimate competitive practices.

This article was first published in the Australian Financial Review, 14 November 2014 

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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.