Thursday, 2 April 2015

Competitive Tension - Harper Review Final Report recommends some real change

The Commonwealth Government has been conducting a review of Australia’s competition laws to see if they are fit for purpose.  (Click here to see what we had to say about the draft recommendations last October).  The Minister for Small Business released the Final Report of the Competition Policy Review Panel on Tuesday (31 March 2015).  While a number of the draft recommendations have made it into the Final Report, there are also some significant new changes.  Some will fundamentally change the competition law landscape in Australia…if they eventually get into the legislation.

Government procurement

The Panel has recommended that all Government Procurement processes should be subject to competition law and promote competition.  At the moment, competition law only applies to Government when it carries on a business.  The Panel wants competition law to apply to Government whenever they are undertaking activity in trade or commerce.  This will capture one-off transactions, and in particular, Government buying practices.  For example, a contract with Government that contained anti-competitive exclusivity clauses would expose the parties to huge penalties if this change were made to the law.

Technology and disruption

The Panel has acknowledged that technology has often done more than competition laws and regulators to bring about competition in industries.  A new killer app or device can completely up-end the competitive landscape, even in industries with market leaders who until then have had substantial market power.

In relation to the taxi industry in particular, the Panel endorsed the disruption caused by companies like Uber and essentially called for more of the same, rather than industry protection from disruption.

Misuse of market power

One of the Panel’s most controversial recommendations, insofar as Australians are concerned, has been to recommend the replacement of section 46 (misuse of market power) with a new effects based test  that prohibits anti-competitive conduct by companies with substantial market power.  Currently, a company with substantial market power has to be shown to be ‘taking advantage’ of that market power (which the courts interpret as doing something it could not and would not do if it did not have market power).  And on top of that, the company has to be doing it with a purpose of excluding or damaging a competitor or preventing someone from engaging in competitive conduct.

The proposed new provision will simply make it illegal for a company with substantial market power to engage in conduct that has the purpose, effect or likely effect of substantially lessen competition.

Section 46 has a chequered history in Australia.  The ‘take advantage’ element has been very difficult to prove and a number of cases have gone all the way to the High Court only to lose on this aspect.  If a business can point to a legitimate business rationale for its conduct, or that other businesses without market power engage in the same conduct, it is near impossible to prove that there has been a ‘taking advantage’ of market power.

Because of those losses, the section has been amended and tweaked many times, and every new failed prosecution leads to further calls for changes to the section so that the judges get it right the next time.

Sometimes, those criticisms have been misplaced.  Competition law here and around the world is built on economic principles that the law should not protect individual competitors, but consumers, as the way to achieve better consumer outcomes (lower prices, better service, and more innovation).  Small, inefficient firms going out of business because they cannot compete with large, efficient businesses is competition at work, just like small, efficient firms taking market share from large, inefficient firms is competition at work.  There is no prohibition on having a strong market position.

Many view the work of section 46 being to protect small businesses from the stronger competitive position of big businesses.  That is why they have been disappointed so often by the failure of the ACCC to win significant section 46 cases.

The Panel’s recommendation is not necessarily going to please small business owners who want to shelter their businesses from competition.  The Panel’s proposed new section 46 is aimed directly at attacking conduct that lessens competition, but will do nothing about conduct that is just competition at work.  The underlying economics have not changed.

But what is truly radical about the Panel’s new section 46 is that it does not require a ‘taking advantage’ of market power and introduces an ‘effects’ test.  Under the new section 46, once a company has substantial market power, it cannot do anything that has the effect or likely effect of substantially lessening competition.

Many commentators have been arguing about whether there should be an ‘effects’ test, but few anticipated the removal of the ‘taking advantage’ requirement (or a ‘legitimate business rationale’ exception).

This would bring Australia’s competition law much closer to the European equivalent provisions, for example.  In the European Union, similar provisions have led the European courts to consider that businesses with substantial market power have a special duty not to engage in conduct that might damage competition.  The experience in Europe is that large, powerful businesses have to be particularly careful about any of their conduct that could have an impact on competition (whether about who they choose to deal with, the price they charge, the restrictions they place on access to their product and whether they give favourable treatment to some but not all).  The European experience would suggest that companies readily take account of their obligations in conducting their businesses and it is unlikely to chill truly competitive conduct.

If this new section 46 becomes law in Australia, it could lead to much stricter operating conditions on large, market leaders across the Australian economy.  It would see substantially more prosecutions of conduct (that today the ACCC must try and attack as ‘unconscionable conduct’) and we think it will lead to a renewed interest in taking private action by the companies that are victims of this unilateral anti-competitive conduct by companies with market power.

We expect there will be substantial political will to accept and pass this recommendation.


The Panel has essentially recommended that the ACCC continue with its current informal merger clearance process.  It has not recommended any additional requirements on this process, despite many requesting that it be subject to more transparency and rigour.

The Panel has made a number of important recommendations about the formal clearance process (which has never been used) and the option of going directly to the Australian Competition Tribunal for authorisation of a merger (which has only been used twice and is seen as something of an Armageddon option).

The Panel has suggested some key changes to the formal process so that it is more attractive as an alternative to the informal process.  It also recommends scrapping the option of going directly to the Tribunal for an authorisation.  Instead, the ACCC would make a decision in the formal process that includes the authorisation criteria (so, not just is the merger likely to be anti-competitive, but also are there good public benefit reasons to let it go ahead anyway).  There could then be an appeal to the Tribunal (but mostly only on the material that was before the ACCC, not a full rehearing or merits review).

Fixing some things that are badly broken

The Panel has generally recommended some substantial rewriting of the current law, particularly the sections that deal with cartel conduct, because they are overly complex and difficult to apply.  To that we say amen!

The Panel has also made some key recommendations to fix some parts of the law that simply do not work the way they should.

It has recommended completely removing the prohibition of exclusive dealing and third line forcing.  Instead, these will just be dealt with under the general prohibition on making or performing contracts that are anti-competitive.  Third line forcing has long been broken because it is treated as illegal in all cases, even though in 99% of cases it is completely innocuous conduct.  The current law allows businesses to fill in a form and pay the ACCC A$100 to get immunity for that innocuous third-line forcing conduct, but that is an unnecessary regulatory burden.  Even the broader prohibitions on exclusive dealing that are only illegal when they are anti-competitive are too narrowly drafted to be useful.  The reason they are ‘broken’ is because there is an exemption from the cartel laws if you fall within the exclusive dealing wording.  But it is too narrow to be useful in most situations where the cartel laws should not apply.

It has recommended completely rewriting the cartel laws so they are less complex and easier to enforce and understand.

It has also recommended fixing the exemption from the cartel laws for joint ventures.  This exemption is currently very narrow but should apply to a much broader class of collaborative arrangements.  At the moment, the steps to ensure a joint venture is not technically a cartel are very restrictive and uncertain.  The Panel’s recommendations would improve this by exempting a broader range of joint ventures and joint venture restrictions from technically being cartels.  The Panel has also recommended raising the bar for when two parties will be considered ‘potential competitors’.  They are suggesting that it has to be more likely than not that the two parties might start buying or selling the same goods or services, whereas the current law will apply to two parties where it is barely more than a remote possibility that they will at some point in the future buy or sell the same product.

The Panel also recommends a much broader exemption from the cartel laws for supplier-customer arrangements.  Under the current laws, if a dominant wholesaler also competes at the retail level against its own customers, any agreement between them about the price one or both will sell the product at is technically a price-fixing cartel.  In practice, that means the wholesaler has to be very careful not to try and put any restriction on the customer’s freedom to price.  But, really, setting the wholesale price has the effect of keeping the retail price above a certain level the parties have agreed.  In any other context, an agreement like that between competitors would be an illegal cartel.  But, when you want the wholesaler to supply to its retail competitors (so there is some retail competition at least), that agreement should not be treated as a cartel.  The current exemption only works where there is some sort of exclusivity element of the supply agreement.  If there is no exclusivity, the exemption does not apply, and you are still in a cartel, hoping the ACCC agrees you should not be prosecuted.  The Panel’s recommendation will make sure that this is fixed.

Concerted practices and price signalling

The Panel has kept its recommendation to get rid of the price signalling provisions (which only apply to banks at the moment).  Instead, it wants there to be a new offence of engaging in ‘concerted practices’ with others with the purpose, effect or likely effect of substantially lessening competition.

This will also be a major change to Australian competition law if it finds its way into the legislation.

There are a number of cases that have fallen down because the courts were not satisfied that there was an agreement or arrangement between the parties.  For example, the ACCC lost some high profile petrol price fixing cases because the court was not satisfied that the calls the petrol stations were making to each other were to agree on what they would each put the price up to (even though the prices often went up after they had been on the phone to each other).  There was not enough evidence that there was an agreement to price the same way.

A ‘concerted practices’ provision will mean that it may not be necessary to prove that there was an agreement, but they were acting in a concerted way together.  Whether this would capture what has been called ‘parallel conduct’ in Australia in the past is not clear.  For example, if one petrol station puts up its price and the others all independently decide to do the same thing, this might not be enough to be a ‘concerted practice’.  But, maybe, evidence of having a phone call with each other and then all putting up the price might be.

Secondary boycotts

The Panel has decided that the competition law should still prohibit secondary boycotts (where third parties such as unions agree to boycott a business).  But, interestingly, it has told the ACCC to focus as much on enforcing this contravention as the rest of the competition law, and has suggested the penalties should be much higher.

New regulatory bodies

The Panel has pushed ahead with its recommendation that the ACCC lose its advocacy role for competition law.  So the ACCC would enforce the law, and another body would advocate for changes to competition policy.

The Panel has also pushed ahead with its recommendation to strip the ACCC of all its price-setting regulatory powers in telecommunications, gas, electricity and water.  This would be handled by a new pricing regulator.

The Panel has also recommended that half the ACCC Commissioners (who, along with the Chairman, are the decision makers at the ACCC) should be part-time so that they continue to have other roles outside the ACCC (in business, consulting or academia) and bring that external focus and knowledge to their role as ACCC Commissioners.  This is instead of the draft recommendation to have a Board sitting over the top of the Chairman and Commissioners.

Other recommendations

The Panel also made a number of other recommendations about Competition Policy (including in specific sectors like roads, pharmacies and human services), other changes to the competition laws and other changes to competition agencies.

What’s next?

The first step is that the Minister for Small Business has started consultation on the Panel’s recommendations.

If the Panel’s recommendations are accepted by the Government, amending legislation will need to pass through the Senate (which may be difficult) and any legislative changes will need to be approved by each State and Territory Government.

These recommendations have a long way to go yet before they become law, and past reviews might leave us pessimistic that some of them will ever be implemented, even the most sensible ones. 

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