02 Apr 2015

Harper Review of competition law recommends broader reach of cartel and misuse of market power laws

by Michael Corrigan

Broader reach of cartel and misuse of market power laws would be the result, if the Harper Review recommendations are adopted.

If they're adopted, the recommendations in the final report of the Harper Review of the competition laws and policies in Australia, released on Tuesday, will have wide-ranging impact on the activities of Government and private sector entities alike.

While it remains to be seen whether the Federal Government will accept these recommendations and to introduce legislation to amend the Competition and Consumer Act, the Government is now inviting comment by Tuesday, 26 May 2015, and given the implications of the recommendations discussed below, we certainly urge you to consider doing so.

Misuse of market power

As widely expected, and strongly advocated by the ACCC (but opposed by many others), section 46 will be rewritten to abolish the "purpose" and "taking advantage of power" tests and to prohibit a company which has substantial market power from engaging in any conduct where the purpose or the likely effect is to substantially lessen competition in any market.

Noting concerns the new law might inadvertently capture pro-competitive conduct by powerful firms, the Review proposes a new defence for conduct which the respondent shows has the purpose or effect of increasing competition in the market, such as by enhancing efficiency, innovation, product quality or price competitiveness. The concept of "taking advantage" of market power would be removed.

Implication The ACCC has long campaigned for this change to increase its powers given its mixed results with the current law – which most people agree is very complex and difficult to apply. Will this new test achieve better rates of success in genuine market abuse cases? Certainly, major companies will need to carefully consider the effects of their conduct and market strategies more broadly – the new law may for the first time prohibit charging higher monopoly prices, and other strategies which raise entry barriers for rivals.

There will certainly be a long settling-in period of uncertainty if this new law is adopted. Questions will remain – for example, if conduct reduces competition in one market but increases it in another, can the court "net off" or balance the differences? The proposed new defence seems only to allow this balancing if the benefits and detriment occurs in the same market, not across different markets. That could be a real concern.

An example might be a dominant supplier of consumer electronics which changed its design to arguably improve performance for consumers (improving competition in the consumer market). In doing so, however, it eliminated small competitors' ability to supply accessories for the device, which compete against the dominant firm's own accessories (reducing competition in the accessory market for the device). Would the new market abuse law apply to this situation?

Admissions to the ACCC would be usable in subsequent class actions

Class action plaintiffs will be greatly encouraged by recommendations that admissions made by respondents in settling ACCC penalty proceedings will be available on a prima facie basis to be used by "follow on" plaintiffs for damages actions based on the same conduct. Most cartel cases are resolved by agreed admissions. Under this proposal, no longer will plaintiffs always have to "prove again" the facts admitted by the defendants. Assuming the respondent does not seek to reopen the admissions in the damages action by fresh evidence, the plaintiffs can simply move to proving causation and loss based on the admissions made in the ACCC settlement. This will strengthen the hand of plaintiffs in negotiating settlements of class actions in cartel matters.

The Harper Review has dismissed concerns that this change might discourage companies from reporting cartel conduct to the ACCC or settling cases with ACCC because of the wider exposure to private damages actions that this reform will bring, concluding respondents will still have incentives to settle.

Class action plaintiffs will also be fortified by the removal of a need to obtain the consent of the Minister in taking action against parties for conduct outside Australia.

Implication Expect to see more class actions following settlements of ACCC investigations.

Extending the offshore reach of the Australian act to international cartels

The Review also recommends that firms which engage in conduct outside Australia in offshore markets be at risk of legal action, including fines and investigation under the Act, if their conduct merely "relates to" trade within Australia or with Australia, irrespective of their location or whether they have any Australian presence or not. To date the ACCC has had to show that a company engaging in unlawful offshore conduct carried on business in Australia.

So, for example, price fixing by exporters taking place in Asia which affected the price of products supplied in Australia would be unlawful even if the price fixers had no place of business or presence in Australia.

Implication This change will be welcomed by the ACCC and would significantly expand the reach of international cartel investigations as well as follow on class actions.

More legal compliance risk for government, both Federal and State

Governments will have an increased risk profile under the Competition and Consumer Act if the Act is amended to render them liable for any actions they take in trade or commerce which may affect competition.

This will broaden the reach of the Act which currently only applies to Government activities which amount to "carrying on business".

Implication If this reform is adopted, many government activities taking place in markets for goods or services could be made subject to the Act even if the Government concerned is not running a business but merely engaged in procurement or community service programs or health or education. We expect many government agencies may vigorously oppose this part of the reforms.

Concerted practices to replace price signalling

The price signalling provisions introduced to apply to the banking industry in 2012 should be repealed, but the Act should be broadened or applied to all businesses generally to prohibit concerted practices which have the purpose or effect, or likely effect, of substantially lessening competition.

Concerted practices is a concept recognised under European and UK competition law and includes various co-operative arrangements between firms in a market which falls short of an agreement, arrangement or understanding. The most common example is where competitors share information on a regular basis which allows them to co-ordinate their market conduct or avoid lossmaking competition, but without reaching any agreements on how they will behave.

Implication If this law comes into force it will require all companies in Australia engaging in any kind of information exchange within their industries to consider whether the exchange should cease. Industry associations, sales volume reporting schemes, price exchange reporting and similar would all need to be reviewed.

Mergers test unchanged

There will be no change to the substantive merger law test of substantially lessening of competition and there is widespread support for retaining the current informal merger review process conducted by the ACCC. However, the formal merger clearance system should be overhauled and combined with the authorisation system.

Importantly, however, the Review recommends repealing the existing direct right of access to the Australian Competition Tribunal for authorisation of mergers and requiring applicants to apply first to the ACCC and then to have a review right to the Tribunal. This change would have prevented AGL applying directly to the Tribunal in 2014 for authorisation to acquire Macquarie Generation, bypassing the ACCC. On review, the Tribunal's role would be limited in scope, and largely confined to the material that was before the ACCC, so as to streamline the process. The ACCC will welcome this as it deals them directly back into the centre of merger clearances.

General competition issues

Joint ventures should be given more liberal treatment and made not subject to cartel prohibitions.

Third line forcing should no longer be per se illegal and should be made subject to a test of whether it has the purpose, effect or likely effect of substantially lessening competition.

Vertical restraints: Section 47 should be repealed and vertical restrictions addressed under the horizontal provisions in sections 45 and 46.

Resale price maintenance: The law will be maintained on a per se basis but exceptions will be more easily obtained through a notification process, allowing companies to notify the ACCC of proposed resale price maintenance and seek exemptions.

Secondary boycotts: The prohibitions in the Competition and Consumer Act should be maintained and enforced.

Intellectual property

Section 51(3) to the current exemption should be repealed and a new approach adopted to protect intellectual property rights.

Responding to ACCC investigations

Noting concerns at the high cost of electronic search in responding to ACCC investigatory notices, the Review says that section 155 should be amended to provide that a recipient of a "investigation notice" has a reasonable defence to an alleged failure to comply if it can show that a "reasonable search" was undertaken in order to comply with the notice. This is a welcome reform and long overdue.

Conversely the ACCC will be given powers to seek court orders requiring a recipient of a section 155 notice to comply with the notice; and penalties for non-compliance will be sharply increased.

For further information about these or any other of the 56 recommendations of the Harper Review, please contact us.

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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.