02 Oct 2014

Harper Competition Policy Review Draft Report released: a warning shot to big business?

by Adrian Kuti, Sophia Haq

Of the Harper Review's 52 draft recommendations, the big ticket items seemingly aimed at big business are bound to receive the most attention.

On 22 September 2014, the Harper Panel released a draft report summarising its findings and draft recommendations for priority areas of reform. The Harper Review is the first comprehensive review of Australia's competition laws and policy in more than 20 years, and its report follows the Panel's consideration of almost 350 submissions, and close to 100 meetings with stakeholders.

The Panel has reviewed the current competition policy, laws and institutional framework through the lens of "fitness for purpose", and has made 52 wide-ranging recommendations. Of those 52 recommendations, some of the bigger ticket items that are likely to have a significant impact on businesses in Australia, particularly those operating within already concentrated industries, are: 

Misuse of market power

Lowering the bar with the introduction of an "effects" test

Concerted practices

Replacement of price signalling laws with a general prohibition on informal anticompetitive information exchanges

Merger review process

Overhaul of formal clearance and authorisation processes with the ACCC to take on a first-instance decision-making role

Section 155 notices

Obligation to produce documents limited to conducting "reasonable searches" having regard to document quantities, search costs and IT issues

Third line forcing

Replacement of the per se prohibition with a substantial lessening of competition test

Exclusive dealing

All forms of vertical conduct to be covered

Cartel provisions

Simplifying the prohibitions and exemptions, including narrowing the scope of the prohibitions to conduct involving actual competitors only

Authorisations and notifications

Simplifying the processes to require only a single authorisation or notification for any single business transaction or arrangement.

This article is a brief snapshot of some of the issues at stake in respect of the misuse of market power, concerted practices and merger review process recommendations in particular. The issues identified here are, of course, merely the tip of the iceberg.

Misuse of market power – introduction of an "effects test"

One of the most controversial aspects of the draft report is the recommendation that an effects test be introduced into the section 46 prohibition on misuse of market power.

Currently, section 46 prevents a company with a substantial degree of market power from taking advantage of that market power for a proscribed anti-competitive purpose. The Panel has recommended that the prohibition be reframed to prohibit such companies from engaging in conduct if it has the purpose, or would have or be likely to have the effect, of substantially lessening competition. This may significantly lower the bar for making out a misuse of market power allegation. The High Court has previously expressed the view that an arrangement would have a "substantial" effect on competition if that effect could be said to be "meaningful or relevant to the competitive process" (Rural Press v ACCC [2003] HCA 75).

To counter the argument that pro-competitive conduct may inadvertently be caught by such an effects-based misuse of market power prohibition, the Panel proposes a defence. Conduct will not be caught if it:

  • would be a rational business decision or strategy by a corporation that did not have a substantial degree of power in the market; and
  • the effect or likely effect of the conduct is to benefit the long-term interests of consumers.

Opponents of the move to an effects test of this kind point out that it may lead to businesses being held liable for conduct that ultimately results in unintended and inadvertent effects on competition. An oft-cited practical example is the case of price reductions offered by large businesses that could simultaneously be in the interests of consumers and yet ultimately force smaller competitors who are unable to match those price reductions out of the market.

Where this effect on competition results, and an accusation of misuse of market power is levelled at the business, the onus of proving that the decision to cut prices was rational irrespective of market power, and that the conduct will benefit consumers in the long term, lies with the business itself. This raises questions as to what degree and likelihood of consumer benefit will be necessary for the defence to be successfully made out and how, in practice, businesses will be able to prove these elements in court.

The extent to which the above-mentioned carve-out to the effects-based prohibition can address these concerns will be a key issue in the ongoing debate in respect of this recommendation.

Concerted practices: Extension of section 45 to cover anti-competitive disclosure of information

The Panel has recommended that the price signalling provisions in Division 1A be removed, on the basis that they are not "fit for purpose". The Panel considers that there is no reason to prohibit public price disclosure (in the banking industry or more generally) on the basis that it can help consumers to make informed decisions.

However, the Panel recommends that section 45 should be extended to cover "concerted practices" which have the purpose, or would have or be likely to have the effect, of substantially lessening competition. To date, Australian courts have been reluctant to find a breach of section 45 based on circumstantial evidence of private exchanges of price or other strategic information between competitors. The recommendation is directed at capturing precisely this kind of conduct, without requiring competitors to have come to an "understanding".

Consolidation of merger review processes

The timeliness and transparency of the ACCC's informal merger review process has been a significant issue for businesses for some time.

Having reviewed the ACCC's existing informal merger clearance process, the Panel is in favour of retaining it in its current form, but recommends further consultation between the ACCC and businesses, with the objective of delivering more timely decisions.

This contrasts to the Panel's views of the existing formal merger clearance and authorisation processes under the Act, to which it recommended significant change. In the Panel's view, these processes should be combined and reformed to remove unnecessary restrictions and requirements that may have deterred businesses from using them. It recommended that specific features of the review process be decided through consultation between the ACCC and businesses.

Most significantly, the Panel has proposed that the ACCC should be the first instance decision-maker, with the Australian Competition Tribunal having an appellate or review role. While most would welcome a streamlining of the formal merger review mechanisms under the Act, many are likely to question the desirability of creating a potentially prolonged two-step process and removing the straight-to-Tribunal avenue tested recently by AGL in its acquisition of Macquarie Generation and by Murray Goulburn in its attempted acquisition of WCB.

Next steps

The Panel has invited interested parties to participate in the debate by lodging submissions in response to the draft recommendations by Monday 17 November 2014. The Final Report will subsequently be submitted to the Australian Government by March 2015.

The Panel has specifically requested submissions on the scope of the misuse of market power defence, and whether there are other ways to ensure that anti-competitive conduct is caught by the provision and not exempted by a defence.

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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.