18 Mar 2016

Special effects or smoke and mirrors? The possible impact of an effects test for misuse of market power cases

By Michael Corrigan and Ian Reynolds

Businesses with large market positions must critically investigate their conduct and proactively address issues relating to market power before the ACCC does.

The Government has decided to implement a controversial effects test and expand the reach of the misuse of market power provisions to address small business concerns. This heralds a substantial change in focus for Australia's competition laws. It may bring a wider variety of conduct under the ACCC's microscope and embolden private claimants.

Current and proposed legislation

Currently, the misuse of market power provisions in the Competition and Consumer Act 2010 (Cth) (section 46) prohibit a business with a substantial degree of power from taking advantage of its market power for the specific purposes of eliminating or substantially damaging a competitor, deterring competitive activity or preventing a business from entering a market.

The recent Harper Review into competition laws and policy in Australia recommended that these provisions should be reframed to prohibit a corporation that has a substantial degree of power from engaging in conduct if it would have the purpose, or would have, or be likely to have, the effect of substantially lessening competition, along with other consequential amendments.

The Government has decided to adopt the changes recommended by the Harper Review in full.

Rationale for proposed change

In responding to the initial Harper proposals, the Government previously considered a number of options to strengthen the misuse of market power provision, acknowledging the concerns raised in submissions to the Harper Review about the operation of the misuse of market power provisions. The Government then released an options paper, which canvassed a range of options from doing nothing, to implementing the full suite of Harper-proposed reforms.

The Government said that "not extending the existing provision to capture the anti-competitive effects of conduct may risk not capturing conduct that has damaging economic effects on markets."

The Government has evidently heeded the Harper Review Panels' concerns that the current misuse of market power provision is currently "not reliably enforceable and permits anti-competitive conduct". The Government said that this inefficiency "slows the entry and expansion of new and innovative firms, delays the entry of new technologies into Australia and impedes economic growth in the long term."

That language is in keeping with the Prime Minister's key messaging since coming to power of the importance of "innovation" and "agility" in industry. Likewise, an important focus in implementing these changes (as set out in the press release announcing the reform) was the "two million small businesses which make up more than 97 per cent of all businesses", which the changes are said to be designed to support.

This focus on small business was an initial driver for the Harper Review. Recently, successive Governments and the ACCC have also supported small businesses by, inter alia, applying the unconscionable conduct provisions of the ACL to business- to-business conduct (eg. in ACCC proceedings against the two largest supermarkets) and by extending legislative protections against unfair contract terms to small businesses as well as consumers.

Lack of certainty and possible unintended consequences

This reform represents a bold shift in focus for an important element of the ACCC's enforcement toolbox, and is a change for which the ACCC has strongly lobbied for a number of years. The ACCC will be delighted by this development. However, larger Australian businesses, which have been strongly opposed to the proposed changes, fearing a chilling of competition through the uncertainty of the new law, will be unenthusiastic.

A significant amount of ink has been split about what the possible effects of this change might be. Particularly, uncertainty, chilling of new investment and increasing legal costs have been the main concerns. The Business Law Section of the Law Council has warned against the potential chilling effects of excessive regulation of the competitive process, which should continue to be red in tooth and claw in its view.

In order to assuage some concerns about over-regulation and lack of certainty through the changes, the Harper Review panel initially proposed that the legislation should direct the court, when determining whether a substantial lessening of competition has occurred to the extent to which the conduct:

  • enhances efficiency, innovation, product quality or price competitiveness; and
  • prevents, restricts or deters the potential for competitive conduct in the market or new entry into the market.

The Government in its recent Options Paper on the potential for reform itself admitted that substantial surgery to the prohibition "would be a significant change relative to the existing provision and would necessarily involve some uncertainty." Accordingly, the Government proposal supports these inclusions, which are likely to assist in ensuring precedent is not abandoned wholesale.

Impact on enforcement?

The new legal test is said to be easier to satisfy for the regulator or a private party because instead of having to prove a subjective proscribed "purpose" on the part of the firm with market power and that the firm "took advantage" of its market power to do something no other company could or would have done, the regulator or a private party will simply have to show a "likely effect" of the conduct being a substantial lessening of competition.

In our view, there is a real chance that the change will enable the ACCC to bring a wider range of actions. The "easier" legal test might also embolden private claimants, who may have previously considered the legal hurdles too significant to overcome to risk an action before the courts.

In the EU (where a relatively wider and more accommodative version of an effects test exists) a wider variety of actions have been brought and won by regulators before the national and supranational European courts. This has meant that the European Commission (to name one relevant European regulator) has a better record of success than the ACCC in enforcing against dominant companies ‒ to our knowledge having an almost unblemished record before the highest European courts in Luxembourg.

Specifically, the European Commission has been able to prevail in several pricing and other actions which would have been a major challenge for the ACCC to prove up under the current legislation, particularly various types of potentially anti-competitive pricing abuses. Examples include successful actions against:

  • exclusionary abuses (directed to competitors and indirectly negative for consumers/customers) like (predatory) such as conditional /volume or loyalty rebating practices. The European Commission has strong concerns with anti-competitive rebating strategies, while the ACCC has not had success in such a wide variety of actions; and
  • exploitative pricing abuses (directed to consumers/customers) such as actions against excessive pricing by dominant firms. Section 46 has never addressed "too high" pricing.

Additionally, (in the US) courts have examined so-called "sham litigation" abuses, in which incumbents use court challenges, planning and other objections processes to slow down or disrupt market entry proposals by new entrants.

Bringing the Australian provisions more in line with the EU laws could therefore be said to bring more potential cases under the ACCC's microscope.

Conclusions and next steps

At this stage, we do anticipate there may be relatively more actions using the new provisions over the next 5-10 years. However, it remains to be seen how the proposed legislation will be drafted and whether the mitigations to limit over-regulation will operate effectively in practice. We expect draft legislation from the Government later this year.

It will be important for businesses with large market positions to critically investigate their conduct and proactively address issues relating to market power before the ACCC does. Section 46 actions historically have been among the longest, most complex, most expensive and best reported of ACCC cases, so prevention is likely to be substantially better than cure.

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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.