05 September 2016

Section 46 changes to crack down on misuse of market power in Australian competition law

The re-framing of section 46 represents one of the most substantial, and potentially significant, changes to the CCA.

Section 46 will retain the requirement for a corporation to have a substantial degree of power in any market in Australia, but the proposed amendments:

  • remove the “take advantage” element, and the provisions attempting to explain the meaning of that element; and
  • convert the “purpose” test to a prohibition upon the corporation engaging in conduct that:
    • has the purpose; or
    • has, or is likely to have, the effect,
    of substantially lessening competition in any market in Australia.

By adopting the recommendations of the Harper Panel, the Government has accepted the principal concerns expressed by the Panel; namely:

  • the “taking advantage” element has “given rise to substantial difficulties of interpretation” and is not “a useful test by which to distinguish competitive from anti-competitive unilateral conduct”; and
  • the current purpose test is directed towards harm to individual competitors, whereas competition law relates to the competitive process.

Structure of the new section 46

The amended section 46 is drafted almost identically to the model legislation contained in Appendix A to the Harper Panel’s final report.

This means the provisions in current subsections 46(2) – 46(4) that assist in determining whether a corporation has market power have been re-organised (for example, to take account of the amendment to the definition of “contract” in subsection 4(1) to include a covenant) but largely retained, with the remaining provisions of the current section 46 removed.

As expected, the Government has also adopted the recommendations of the Harper Panel regarding the repeal of the “predatory pricing” prohibitions in section 46, including the so-called “Birdsville” amendments that were introduced in 2007.

Construction of the new section 46

The Harper Panel observed that “[t]he proposed test of ‘substantial lessening of competition’ is the same as that found in section 45 …, section 47 … and section 50… of the CCA, and the test is well accepted within those sections”. The Exposure Draft Explanatory Materials note that “the existing jurisprudence will inform the meaning of this concept as it applies to section 46”.

The new substantial lessening of competition’ test in section 46 can apply to both:

  • the market in which the corporation has a substantial degree of power; and
  • any other market in Australia (such as an upstream or downstream market).

The new test raises an interesting question of construction in the context of the market in which a corporation has a substantial degree of market power. In that market, the corporation has the existing ability to behave persistently in a manner different from the behaviour that would be enforced on it in a workably competitive market. If the corporation is not subject to competitive discipline in that market, it remains to be seen how a Court would determine that the conduct of the corporation has the subjective purpose, or has the effect or likely effect (under a “future with” and “future without” analysis in which the “future without” is a continuation of the existing absence of constraint), of substantially lessening competition in such a market.

In this respect it is also curious that the Exposure Draft Explanatory Materials also distinguish between “vigorous competitive activity” and “monopolistic practices”, given that the operation of section 46 has not been limited to “monopolistic practices”.

Legislative guidance

The Government has adopted the Harper Panel’s recommendation that “legislative guidance” be provided to the Court in its determination of whether conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in a market.

Accordingly, under the proposed legislation, the Court must have regard to:

  • the extent to which the conduct has the purpose, or would have or be likely to have the effect, of increasing competition in the market including by enhancing efficiency, innovation, product quality or price competitiveness in the market; and
  • the extent to which the conduct has the purpose, or would have or be likely to have the effect, of lessening competition in the market including by preventing, restricting or deterring the potential for competitive conduct or new entry into the market.

These do not limit the matters that may be taken into account by a Court, and may in fact reflect matters which would be taken into account anyway (noting that similar “legislative guidelines” are not used in section 45 or section 47).

Further, given their breadth and generality, it is not hard to envisage a Court being presented with a significant volume of evidence from the parties across a wide and uncertain range of economic theories and principles in support of their respective positions and arguments.

As a matter of practice, it may be prudent for a corporation with a substantial degree of market power that is proposing to engage in particular conduct to prepare its evidence in support of the conduct being pro-competitive in order to respond to the “legislative guidelines” in the event the conduct is challenged at a later date.

Impact

The removal of the requirement for a causal connection between market power and taking advantage of (or using) that market power means that the prohibition in section 46 may well extend to a broader range of commercial behaviour by the corporation (and its related bodies corporate).

In particular, the section will not be limited to the question of whether the corporation would have engaged in the conduct if it didn’t have market power. In future, conduct that might be acceptable for a corporation without market power may be challenged as “competitively harmful” under section 46, where the corporation does have that power.

Similarly, a corporation with market power could be found to have contravened section 46 because of the effect of its conduct upon competition, notwithstanding that the conduct can be explained by commercial objectives that would otherwise be considered legitimate.

Authorisation

In accordance with the Harper Panel’s recommendation, Part VII will be amended to permit a corporation to apply to the ACCC for an authorisation which, if granted, would exempt the corporation from any liability for conduct that may otherwise contravene section 46.

As part of the general simplification of section 88 of the CCA, the ACCC may grant an authorisation if it is satisfied that the proposed conduct:

  • would not have the effect, or be likely to have the effect, of substantially lessening competition; or
  • would result, or be likely to result in a public benefit that outweighs the detriment to the public.

While the Harper Panel noted that this amendment would “mitigate” concerns about “business uncertainty”, the public nature, complexity of, and the time involved in pursuing the statutory authorisation process are all matters that will need to be weighed in the balance in determining whether to make an application for authorisation.

Framework for ACCC guidelines

The Harper Panel recommended that the ACCC should issue guidelines on its approach to the enforcement of section 46. Today, the ACCC has published a draft “framework” that is intended to be a summary of the proposed content of these guidelines, if the amendments to section 46 are enacted as law.

The framework contains a brief discussion of some of the principal legal concepts that will be relevant to the approach of the ACCC to enforcement of the new section 46. The framework acknowledges that any assessment of any corporation’s conduct under the new section 46 will include an enquiry as to whether “there are legitimate business reasons for engaging in the conduct”.

The framework includes “highly simplified and stylised” examples of conduct that the ACCC considers would and would not be likely to contravene the new section 46.

The ACCC identifies a “refusal to deal”, “predatory pricing”, “tying and bundling” and “margin/price squeeze” as conduct as “having greater potential to involve the misuse of market power.” However, under the new test, such conduct must be assessed in the context of a substantial lessening of competition in a market; not as isolated conduct.

The ACCC will need to take into account that section 46 will apply to a corporation that has a substantial degree of market power at the time it engages in the relevant conduct.

The ACCC has invited comment on the draft framework, with submissions (which will be public, subject to the ACCC’s standard confidentiality process) due by 3 October 2016.

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