01 Oct 2014

The Competition Policy Review releases its draft report

By Peter Sise

On 22 September 2014 the Competition Policy Review chaired by Professor Ian Harper released its draft report.  The draft report followed a consultation process that entailed almost 350 submissions and almost 100 meetings with stakeholders.  It considers not only competition laws but competition policy and institutions.  Given the wide ambit of the draft report, it is not surprising that it runs to over 300 pages and makes 52 draft recommendations.  This article will focus on the draft recommendations concerning Part IV of the Competition and Consumer Act 2010 (CCA).

Simplification of Part IV of the CCA

One of the first recommendations made by the panel of the Competition Policy Review (Panel) regarding the CCA is a general one:  the CCA should be simplified by removing overly specific provisions and redundant provisions.[1]  The Panel recommended that simplification be achieved through public consultation and in conjunction with implementing its other recommendations.  The desire for simplicity is understandable when one compares Part IV of the CCA to its equivalents in the European Union and the USA.  This was noted by Professor Allan Fels who described the length and complexity of the CCA as an 'embarrassment'[2] and made submissions to the Panel recommending its simplification.[3] 

The Panel recommended the following provisions be removed: s 45(1) (which concerns contracts made before 1977), ss 45B and 45C (which concern covenants affecting competition and prices), ss 46A and 46B (which concern misuse of market power in a trans-Tasman market), the price signalling provisions in Division 1A of Pt IV and the prohibition on ‘exclusionary provisions’.  The prohibition on ‘exclusionary provisions’ was said to be unnecessary because it overlaps with the cartel conduct provisions in Division 1 of Part IV.[4]  As for simplification, the Panel recommended that s 46, s 47 and the cartel conduct provision be redrafted in simpler terms.[5] 

Misuse of market power

Of all the issues being considered by the Panel, the one that has drawn the most comment from ACCC Commissioners and Chairs, past and present, is misuse of market power under s 46 of the CCA.[6]  The debate has largely focused on whether s 46 should prohibit conduct that has the effect or likely effect of substantially lessening competition—the introduction of an ‘effects test’.  The Panel recommended that s 46 be rewritten so that it prohibits any conduct by a corporation, with a substantial degree of power in a market, that has the purpose, effect or likely effect of substantially lessening competition.  The requirement that the defendant has taken advantage of its market power would be removed.  The Panel also recommended that s 46 include a defence protecting conduct that (a) ‘would be a rational business decision or strategy by a corporation that did not have a substantial degree of power in the market’ and (b) has the effect or likely effect of benefitting the ‘long-term interests of consumers’.  A defence of this kind was referred to in submissions to the Panel.  For example, a ‘public interest’ defence was suggested where the defendant must show that the contravening conduct is in the ‘best interests of consumers in the short term as well as the long term’[7] while an alternative defence based on use of market power was suggested where the defendant must show that the conduct ‘was not materially facilitated by the corporation’s substantial degree of power’.[8]

The Panel has sought submissions on the scope of the defence, particularly whether it is too broad.  Given the degree of interest in s 46 to date, a request for submissions was probably unnecessary!  Many questions spring to mind when confronted with this defence.  Here are just a few examples. 

  • Is removing the ‘take advantage’ element, but introducing a defence based on whether the impugned conduct would be rational for a corporation without a substantial degree of power, effectively placing the onus on the defendant to prove that it has not misused market power and if so, is this appropriate given the potential penalties? 
  • Since authorisation and notification consider public benefit, should the defence be premised on the long-term interests of consumers? 
  • Are any of the existing definitions of ‘consumer’ found in the CCA appropriate for this defence?[9] 
  • Do we only consider benefits to Australian consumers since the object of the CCA is to ‘enhance the welfare of Australians’?[10]  If so, the defence may be of limited use to businesses that focus on exports.
  • Should the likely effect of benefitting the long-term interests of consumers require only a possibility of benefitting consumers that is not remote? 
  • How enduring must a benefit to the interests of consumers be in order to be regarded as ‘long-term’?
  • If s 46 is based on a substantial lessening of competition test, will it now be subject to authorisation and notification like other sections of the CCA? 

Perhaps the overarching question is whether the defence will adequately protect conduct that is considered legitimate?  In this regard, it is perhaps worth recalling the well-known case of Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd.[11]  Hypothetically, what if the supplier in that case had refused to supply the purchaser because it did not pay invoices on time and was considered a credit risk?  This conduct would almost certainly fulfil the first limb of the proposed defence but  there may be a risk of open-ended debate as to whether it satisfies the second (that is, whether it benefits the long-term interests of consumers).  All of these issues and many more will no doubt be dealt with in further submissions.

Price signalling

The Panel recommended that the price signalling provisions in Division 1A of Part IV of the CCA be repealed, but s 45 be extended to include ‘concerted practices’ which have the purpose, effect or likely effect of substantially lessening competition.[12]  A ‘concerted practice’ would be any ‘regular and deliberate activity undertaken by two or more firms’ and would include ‘the regular disclosure or exchange of price information between two firms, whether or not it is possible to show that the two firms had reached an understanding about the disclosure or exchange.’[13]  While the price signalling provisions are currently confined to the banking industry, s 45 applies to all industries.  The Panel said that addressing price signalling through an extension of s 45 will meet the aims of simplifying the CCA and ensuring that the Act applies equally through the economy.[14]

The Panel has not specifically said whether the CCA should include a definition of ‘concerted practice’ or whether the term should be left to the courts to define.  The phrase is currently found in competition laws of the European Union.[15]  It has been described by European courts as ‘a form of coordination between undertakings which, without having reached the stage where an agreement … has been concluded, knowingly substitutes practical cooperation between them for the risks of competition.’[16]  European courts have said that there is an inherent concept in European competition law that each firm must independently determine its strategy.  This concept does not forbid firms from adapting ‘intelligently to the existing and anticipated conduct of their competitors’, but ‘strictly precludes any direct or indirect contact between such operators with the object or effect either to influence the conduct … of an actual or potential competitor or to disclose to such a competitor the course of conduct which they themselves have decided to adopt or contemplate adopting’.[17]  Further submissions may address whether the CCA should define ‘concerted practice’ and whether the notification regime should be extended to ‘concerted practices’ under s 45 since notification currently applies to part of the price signalling provisions.

Cartel conduct

As noted above, the Panel recommended that the cartel conduct provisions be simplified.  The Panel described the current provisions as ‘overly complex’ and not providing business with sufficient clarity and certainty.[18]  Further, it said that proposed amendments to the New Zealand cartel conduct provisions contained in the Commerce (Cartels and Other Materials) Amendments Bill 2014 (NZ Bill) should be noted as these are ‘a useful illustration of how the law might be simplified in Australia.’[19]  The NZ Bill addresses price fixing, restricting output and market allocation, but does not contain an express prohibition on bid rigging as this was considered unnecessary.[20] 

In addition to recommending simplification, the Panel made four additional draft recommendations regarding the cartel conduct provisions.[21]  First, it recommended that the provisions only apply to conduct that affects the supply or acquisition of goods or services in Australian markets.  At present, the provisions are not expressly limited to conduct affecting competition in Australian markets and have been interpreted as not having such a limitation.[22] 

Secondly, the Panel recommended that two firms should not be treated as being in competition, for the purposes of the cartel conduct provisions, unless it is more likely than not that they are in competition.  This recommendation addressed the conclusion reached in Norcast S.ar.L v Bradken (No 2) that there only need be a possibility of competition that is not remote.[23]  

Thirdly, the Panel recommended that the current joint venture defence to cartel conduct be broadened so that it includes acquisition arrangements as well as supply and production arrangements, which both currently fall within the defence.  It noted that a joint venture will always be subject to the prohibition in s 45 and hence it is more appropriate that joint ventures be assessed against a substantial lessening of competition test rather than under the cartel conduct provisions.[24]  The Panel noted the joint venture exemption in the NZ Bill, but said it may be too broad.[25]

Finally, the Panel recommended that a broader exemption be included to ensure that vertical supply restrictions are assessed under a competition test rather than being a per se prohibition.  The Panel noted the exemption for vertical conduct in the NZ Bill.[26]

Vertical restraints

The Panel recommended that s 47 be redrafted so that it prohibits:

  • the supply of goods or services (including the supply at a particular price or with a particular discount, allowance, rebate or credit) on a condition imposed on the purchaser that has the purpose, effect or likely effect of substantially lessening competition; and
  • refusing to supply goods or services (including refusing to supply at a particular price or with a particular discount, allowance, rebate or credit) for the reason that the purchaser has not agreed to a condition that has the purpose, effect or likely effect of substantially lessening competition.

The two reciprocal categories of conduct relating to acquisitions would also be prohibited.  The result of this overhaul is that s 47 would be simplified and the per se prohibition on ‘third-line forcing’ would be removed.[27]

The Panel recommended that resale price maintenance remain as a per se prohibition but be subject to the notification regime and be exempt if conducted between related bodies corporate, as is the case for ss 45 and 47.[28]

Definition of ‘competition’ and ‘market’

The Panel recommended that the definition of ‘competition’ in the CCA ‘be strengthened so that there can be no doubt that it includes competition from potential imports of goods and services, not just actual imports.’[29]  To this end, the Panel recommended that the definition of ‘competition’ in s 4 be redrafted to ensure that it includes goods capable of being imported into Australia and services capable of being supplied from outside Australia to persons located in Australia.[30]  The Panel recommended that no change be made to the definition of ‘market’ in s 4E.  The change to the definition of ‘competition’ appears to be motivated by the fact that Australians consumers are now more than ever able to use the internet to purchase goods and services from overseas suppliers.  As a result, Australian markets are frequently exposed to global competition.[31]   

What next?

The Panel will accept submissions until 17 November 2014.  It will then present a final report in March 2015.  As noted above, this article is only a summary of aspects of the draft report dealing with Part IV of the CCA.  The draft report deals with other competition laws as well as competition policy in great detail.  If time permits, a review of the ‘findings and draft recommendations’ section of the draft report may be useful and interesting. 

This article was first published in (2014) 30(8&9) Competition and Consumer Law News 110.

[1] Draft recommendation 18.Back to article

[2] Interview on The Business (ABC Television) on 1 September 2014.Back to article

[3] See the submission dated 9 September 2014 of Professor Fels, Nick Taylor and Prudence Smith and the submission dated 25 June 2014 of Professor Fels.Back to article

[4] Draft recommendation 23.Back to article

[5] Draft recommendations 25, 28 and 22, respectively. Back to article

[6] For example, see Stephen King & Graeme Samuel, 'The effect of the ACCC’s ambitions is dangerous', The Australian Financial Review, 12 August 2014; Roger Featherstone & Jill Walker, 'ACCC’s section 46 change is not anti-competitive’, The Australian Financial Review, 14 August 2014; Rod Sims, 'The ACCC wants to keep the playing field open as well as level', The Australian Financial Review, 12 September 2014; Michael Smith, 'Rod Sims: don't let me be misunderstood', The Australian Financial Review, 12 September 2014; Graeme Samuel, 'Much to debate in Harper, but beware vested interests', The Australian Financial Review, 24 September 2014.Back to article

[7] Submission dated 10 June 2014 of Dr Marina Nehme and James Laman, 7. Back to article

[8] Submission dated 27 June 2014 of the Queensland Law Society, 8.Back to article

[9] Sections 4B and 51ACA(1) of the CCA and s 3 of schedule 2 of the CCA.Back to article

[10] Section 2 of the CCA.Back to article

[11] (1989) 167 CLR 177.Back to article

[12] Draft recommendation 24.Back to article

[13] Draft report, 42.Back to article

[14] Draft report, 229.Back to article

[15] See article 101 of the Treaty on the Functioning of the European Union which prohibits, among other things, 'concerted practices … which have as their object or effect the prevention, restriction or distortion of competition'.Back to article

[16] Imperial Chemical Industries Ltd v Commission of the European Communities [1972] ECR 619, [64], followed in Züchner v Bayerische Vereinsbank AG [1981] ECR 2021, [12] (Züchner) and Limburgse Vinyl Maatschappij & Ors v Commission of the European Communities [1999] ECR II-931, [720] (Limburgse).Back to article

[17] Limburgse, [720]; Züchner, [13]-[14]; Coöperatieve Vereniging "Suiker Unie" UA & Ors v Commission of the European Communities [1975] ECR 1663, [173]-[174].Back to article

[18] Draft report, 222.Back to article

[19] Draft report, 222.Back to article

[20] See page 4 of the commentary contained in the NZ Bill.Back to article

[21] Draft recommendation 22.Back to article

[22] Norcast S.ar.L v Bradken (No 2) (2013) 219 FCR 14, [261].Back to article

[23] (2013) 219 FCR 14, [259].  Back to article

[24] Draft report, 224.Back to article

[25] Draft report, 224.  Section 31 of the NZ Bill exempts cartel conduct provisions that are ‘reasonably necessary for the purpose of a collaborative activity’.  A ‘collaborative activity’ is an activity ‘carried on in co-operation by 2 or more persons’ that is ‘not carried on for the dominant purpose of lessening competition between any 2 or more of the parties.’Back to article

[26] Draft report, 225.  Section 32 of the NZ Bill exempts vertical arrangements that do ‘not have the dominant purpose of lessening competition between any 2 or more of the parties to the contract.’Back to article

[27] Draft recommendations 27 and 28.Back to article

[28] Draft recommendation 29.Back to article

[29] Draft report, 40 (original emphasis).Back to article

[30] Draft recommendation 20.Back to article

[31] Draft report, 39.Back to article

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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.