16 March 2016

Australian Government adopts effects test for misuse of market power

The Federal Government has today announced it will support the controversial proposal to introduce an effects test for misuse of market power.

The proposal emerged early last year from the Harper Committee’s Competition Policy Review (Harper Review), which broke with the recommendations of 10 previous reviews conducted over a 40 year period in advancing the contentious new provision.

If passed, the provision will have far-reaching consequences for Australian businesses and can be expected to generate significant legal uncertainty in the short to medium term.

The current law

Under s 46 of the Competition and Consumer Act 2010 (Cth) (CCA), businesses with a substantial degree of market power are prohibited from taking advantage of that power for the purpose of:

  • eliminating or substantially damaging a competitor;
  • preventing the entry of a business into a market; or
  • deterring or preventing a business from engaging in competitive conduct.

The proposed change

The Harper Review’s proposal (which the Government has adopted in full) retains the requirement that the business in question have a significant degree of market power but:

  • removes the requirement that the business ‘take advantage’ of that power in an anti-competitive way; and
  • removes the current purpose test, and replaces it with the requirement that the conduct in question have the purpose, effect or likely effect of substantially lessening competition in a market.

In an attempt to temper some of the uncertainty resulting from this significant shift, the Harper Review proposed two factors to which courts will be required to have regard in deciding whether conduct has the required anti-competitive purpose or effect:

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

The presence of these factors will not be determinative and in many cases there will likely be relevant considerations on both sides of the ledger.

The consequences

If the proposed provision is passed by the Parliament, it could be expected to have at least three key consequences:

  • First, by removing the need for a separate causal link between market power and anti-competitive purpose or effect (which is currently required by the ‘take advantage’ limb), there is a risk that a wider range of robust commercial unilateral behaviour (including instances of heavy discounting, refusing to supply other businesses, or exercising legal rights to the disadvantage of other businesses) will be prohibited.
  • Secondly, by adding an ‘effects’ limb, some conduct which was previously outside the scope of the law (because it was clearly undertaken for legitimate commercial purposes) will be caught by the provision because of its likely competitive effects.
  • Thirdly, businesses with substantial power in any market (including small or localised markets) will be required to engage in a more detailed assessment of the potential competitive consequences of significant strategic and commercial decisions before they are made.

The outlook

Any significant shift in general economic regulation will generate legal uncertainty for business. In the case of s 46, that uncertainty is compounded because the law can apply to the unilateral actions of any business with a significant degree of market power.

In adopting the Harper Review’s proposal, the Government was quick to emphasise that it had sought to ‘reduce the uncertainty associated with amending the law’ by using ‘existing legal concepts from within competition law’. This assessment is optimistic:

  • First, the concept of ‘substantially lessening competition’ which it is proposing to add to s 46 is notoriously difficult to apply — in most contested cases, complex evidence from expert economists is required to prove the likely economic outcomes of particular business decisions. If the proposal passes, businesses will have to pre-empt this kind of analysis in deciding whether to pursue particular strategies or commercial arrangements.
  • Secondly, although the words ‘substantially lessening competition’ appear in many parts of the CCA, in most contexts the concept relates to non-unilateral conduct and takes on a different role based on the function it is performing. This means there is considerable uncertainty about how the concept will work when it is applied to unilateral behaviour.
  • Thirdly, it will take courts years to develop and articulate the principles which govern the way the test is applied. The present test in section 46 has been applied by the High Court and Federal Court in a number of significant decisions over the course of many years. Concepts such as ‘taking advantage’ have been fleshed out in those decisions. Cases dealing with the new test will likely need some time to work their way through the courts. In the interim businesses will be left to apply an uncertain test to a diverse range of decisions.

Next steps

The Government has indicated the change will make its way to the House of Representatives in the normal manner. It plans to consult on Exposure Draft legislation before introducing it to Parliament later in 2016, suggesting that a vote may not take place until after the election.

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