The results of the Harper Committee’s wide-ranging review of Australia’s competition policy and laws – the first comprehensive review of Australia’s competition framework since 2003 – were released today. We explain the Committee’s key recommendations in this Alert.
The Harper Committee’s report includes recommendations for changing the structure of Australia’s competition law institutions as well as recommendations for changing some of Australia’s competition laws. For example, the Committee recommends:
- breaking up the Australian Competition and Consumer Commission into two regulators, one of which would be dedicated to pricing of regulated infrastructure, such as telecommunications, rail, ports, natural gas pipelines, electricity networks and telecommunications networks;
- changing the governance of the Commission by creating more part-time Commissioners including (possibly) the Chairperson;
- introducing a workable formal merger clearance process;
- introducing a new civil prohibition on concerted practices and simplifying cartel laws; and
- introducing block exemptions.
The Australian Federal Government has indicated it will spend the next 8 weeks consulting about the Committee’s recommendations before engaging with the States and Territories about its proposed response. Minister Billson has committed to developing a response action plan by the end of the year.
The lingering uncertainty about the leadership of the Federal Government and its deteriorating performance in opinion polls may result in the Government proposing a cautious response to the Committee’s recommendations.
Following the release of the Dawson Committee’s Report in 2003, it took between 2 and 6 years for the Government of the day to fully implement its response to the Report’s recommendation that cartel conduct be criminalised. If the past is a reliable indicator of the future, it may take several years before we see any material changes to Australia’s competition policy and laws resulting from the Harper Committee’s recommendations.
Interestingly, many of the Committee’s recommendations are based on laws and procedures that already exist in the European Union. However, the European competition regulator has power to make orders and impose fines for breaches of competition laws. In contrast, in Australia the ACCC does not have those powers and has a mixed track record in obtaining orders it seeks from the Federal Court of Australia.
Despite constitutional limitations to the grant of fining authority to the ACCC, a big ticket and often overlooked issue in this regard is the gradual shift towards administrative power, away from the courts.
Some of the key drivers for the Government’s decision to initiate Harper Committee’s Review were concerns about:
- concerns about the effects of increasing concentration in Australia’s retail sectors;
- increasing frustration about the way Australia’s competition laws have operated in practice, especially the misuse of market power provisions and parallel criminal and civil regimes for cartel laws. The existing cartel regime is badly drafted and unnecessarily increases the costs of compliance for all businesses.
The Harper Committee published its Draft Report in September 2014. At that time, we published an Alert which offers insights into the Draft Report.
While many welcomed the broad direction of the Draft Report and its focus upon revitalising Australia’s competition policy framework to meet the forces affecting Australia’s economy into the future, not everyone agreed with all of its recommendations.
For example, many disagreed with the recommendations in the Draft Report to amend the prohibition on misuse of market power so that it has an effects test; some (including the ACCC) disagreed with the recommendations to change the governance requirements of the ACCC by creating an advisory board to offer guidance to the Commission and to separate the ACCC’s pricing functions for regulated infrastructure into a new regulator; and others (including many patent holders and licensors) disagreed with the recommendations to repeal the limited exemption that exists for owners of IP.
When the Draft Report was published, Professor Harper (who chaired the Committee) said he expected the Final Report to closely mirror the Draft Report. This was largely true, with a limited number of differences between the Draft and Final Reports.
Key Recommendation – Breaking up the ACCC and Forming a New Pricing Regulator
The Committee recommends transferring the following regulatory functions from the ACCC and the National Competition Council to a new single national access and pricing regulator:
- powers given to the NCC and the ACCC under the National Access Regime;
- powers given to the NCC under the National Gas Law;
- functions undertaken by the Australian Energy Regulator under the National Electricity Law and the National Gas Law;
- telecommunications access and pricing; and
- price regulation and related advisory roles under the Water Act 2007 (Cth).
The Committee recommends the new pricing regulator have a five-member board, comprising two Australian Government-appointed members, two State and Territory-nominated members and an Australian Government-appointed Chair.
The Committee envisages that the new regulator would gain further functions as other sectors are transferred to national regimes and is encouraging a move to national regulation as national markets are established.
Each of the functions which may be transferred from the ACCC to a new regulator are directly related to improving competition in markets, or ameliorating perceived competitive detriments arising from bottleneck infrastructure.
We query the benefits of creating another regulator and suspect it will lead to inefficiencies and inconsistencies in approach, including because the ACCC will retain its prices surveillance role. It would likely result in a loss of the broader perspective of the ACCC on the dynamics of competition.
Notably, the Chairman of the ACCC, Mr Rod Sims, cited the importance of a coordinated approach to the administration and enforcement of competition laws in his maiden speech, in 2011.
Key Recommendation – Changing the ACCC’s Governance
The Committee recommends changes to the governance structure of the ACCC to establish a greater chain of accountability.
In particular, the Committee recommends:
- half of the ACCC’s Commissioners should be appointed on part-time basis, with the Chair being appointed on either a full-time or part-time basis;
- abolishing the positions of Deputy Chair;
- removing some obligations on the Minister, in making appointments to the ACCC, to be satisfied about the Commissioner’s experience of small business and consumer protection; and
- the ACCC reporting on a regular basis to a Parliamentary committee.
The Committee’s recommendation to change the ACCC’s governance is driven by a desire to strengthen the checks and balances on the ACCC’s internal decision-making by taking external perspectives into account and to strengthen the accountability of the ACCC’s executive to the broader community.
In our view, the ACCC is already held to a high degree of account for its decisions, through Senate Estimates Committees, constant attention by the Australian media, its annual report, and the information it produces and shares with the public. Further, the Commissioners and the Chairman of the ACCC have substantial and diverse experience in academia, business, consumer related areas and the public service.
It is unclear whether adopting the recommendations would result in any measurable improvement to the administration and enforcement of Australia’s competition laws. We query the practicality and desirability of appointing a part-time Chair to the Commission.
Key Recommendation – Establishing New Council for Competition Policy and Creating a Power to Conduct Market Studies
The Committee recommends dissolving the National Competition Council, and establishing an Australian Council for Competition Policy as the leader for implementing the competition policy agenda.
The ACCP would not be a Commonwealth agency, but a truly national one, made up of a representative from each of Australia’s States and Territories as well as the Commonwealth.
A newly established ACCP would be responsible for advocacy and education in competition policy, monitoring and reporting on agreed reforms and progress, identifying new areas for reform, making recommendations to government on market design and regulatory issues (including privatisations) and researching developments domestically and internationally.
The ACCP will have power to undertake market studies. The Committee proposes that the ACCP would have compulsory information gathering powers to assist in its market studies.
This recommendation acknowledges that advocacy for competition policy has drifted in recent times, and has (if it exists) fallen to the ACCC. In the Committee’s view, the ACCC, as a regulator and an enforcer, is not an appropriate body to drive competition reform or policy objectives. The ACCC cannot hold Government accountable for reform and policy objectives.
The power to conduct market studies could be an important power. It is already held by competition regulators in the United Kingdom and European Union (referred to as sector inquiries at the European Union level). For example, in the United Kingdom, the Office of Fair Trading (now the Competition and Markets Authority), following public consultation, referred the supermarket industry for investigation to the Competition Commission. The process, from commencement of the initial inquiry by the OFT to the conclusion of the Competition Commission’s investigation took around 3 years and comprised extensive requests for confidential and highly sensitive data from participants in the supermarket industry.
At the end of the study, the Competition Commission found there were aspects of the market that gave rise to adverse effects on competition and made orders to rectify them.
The orders obliged large supermarket chains to use best endeavours to release land owners from restrictive covenants preventing competition from smaller supermarkets, and to comply with a code of practice about dealings with suppliers. The code of practice provided for terms that must be included in supplier contracts.
The power to conduct market studies in the United Kingdom most certainly increased the costs of compliance for business. However, the power is coupled with a power to make orders, which the Committee has not proposed for the ACCP in Australia.
As a practical matter, the publicity that could result from the conduct of a market study could operate as a de facto power to make orders, by naming and shaming companies to change their business practices.
The Committee proposes that the ACCP would use its compulsory information gathering powers only sparingly, in the manner of the Productivity Commission. In the context of conduct investigations by the ACCC, market participants have been reluctant to voluntarily provide sensitive information.
Key Recommendation - Misuse of Market Power
The Committee recommends adopting the ACCC’s position of supplementing the current purpose-based test with an effects test, for the prohibition on misuse of substantial market power. If adopted, this recommendation would prohibit a corporation with a substantial degree of market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition in a market.
The Committee also recommends removing the “take advantage” limb from the prohibition on misuse of substantial market power. The "take advantage" limb requires the company with substantial market power to “take advantage” of that power for one of three anti-competitive purposes (or objects).
The Committee moved away from the recommendation in its Draft Report for the the introduction of a new complete defence which would apply where the conduct in question would be a rational business decision or strategy by a corporation that did not have a substantial degree of power in the market and the effect or likely effect of the conduct is to benefit the long-term interests of consumers.
The Committee recommends removing amendments to the prohibition on misuse of market power which have been made since 2007 in respect of predatory pricing.
Australia’s prohibition on misuse of market power has been the subject of numerous reviews.
The ACCC has a mixed track record in misuse of market power cases, mostly recently losing the trial at first instance against Pfizer in a case where the ACCC alleged that Pfizer had substantial power in the market for the supply of Atorvastatin and took advantage of that power to hinder the entry of generic suppliers.
Removing the “take advantage” limb from the current prohibition on misuse of substantial market power is a major departure from the existing approach, although it would arguably take Australia closer to the approaches of the United States and the European Union.
We welcome the Committee’s recommendation to remove the amendments about predatory pricing. The amendments have not been effective.
Key Recommendations - Merger Control
More consultation to deliver more timely and transparent outcomes for informal merger reviews: The Committee considers that the ACCC should consult with business to deliver more timely and transparent decisions in informal merger reviews.
Informal merger review is the review process that applies to the majority of mergers in Australia, or which have an Australian aspect.
Making the formal merger clearance process work: The Committee recommends combining and reforming Australia’s formal merger process and its merger authorisation process. The formal merger clearance process has never been used since it took effect on 1 January 2007. The process is highly inflexible and is frequently described as unworkable. The merger authorisation process has been used only twice since it was amended in 2007:
- in AGL’s proposal to acquire Macquarie Generation from the State of New South Wales, which was authorized by the Australian Competition Tribunal after the ACCC declined to informally clear it.
- in Murray Goulburn’s proposal to acquire Warrnambool Cheese and Butter, which did not proceed to hearing.
The Committee recommends the ACCC be the first instance decision maker for the new, combined formal clearance process. The Tribunal would have power to review decisions of the ACCC.
Under the new combined process, the ACCC would have power to approve direct and indirect acquisitions of shares or assets if it satisfied that the acquisition would not be likely to substantially lessen competition in Australia, or would be likely to result in a net public benefit.
The new combined process would not be subject to prescriptive information requirements, although the ACCC would be able to rely on its existing powers compel persons to furnish information, provide documents or to appear for examination under oath.
The new combined process would be subject to strict timelines. The timelines could only be extended with the parties’ consent.
The current informal merger clearance process works well for the majority of merger matters, but tends to under-perform in complex cases, especially in terms of transparency.
In our experience, the ACCC works hard to deliver timeliness and although it will not give access to its file, does outline the general nature of any complaints from businesses which may be affected by a merger, without disclosing the identity of those businesses.
The ACCC can also be flexible around global deals. For example, in an Australian first, we recently convinced the ACCC to accept an undertaking to allow a non-Australian company to close a global deal subject to a hold separate arrangement for the Australian businesses while the ACCC continues its review of the Australian part of the deal.
Notwithstanding this, Australia’s current merger control regime lacks the overall transparency of other jurisdictions, particularly in acquisitions raising complex competition issues. We believe that both the informal clearance process, and the proposed new formal clearance process, would benefit from greater disclosure of the ACCC’s concerns, and the evidence upon which those concerns are based.
Key recommendations - Cartel Conduct
The Committee recommends simplifying the cartel laws and to narrow them as follows:
- the provisions should apply to cartel conduct involving the supply or acquisition of goods or services to or from persons resident in or carrying on business in Australia (a slight change from the concept of “Australian markets” in the Draft Report);
- the threshold for when corporations are “likely” to be competitors should be higher than a “mere possibility” of competition, applying a balance of probabilities assessment (i.e. more likely than not);
- the prohibition on exclusionary provisions should be removed, with an amendment to the cartel provisions to address any resulting gap;
- there should be broader exemptions for joint ventures; and
- certain vertical restrictions should be exempted from the cartel laws.
The Committee recommends adopting a specific set of per se (outright) prohibitions for serious cartel conduct.
The Committee’s proposals will refocus attention on whether cartel conduct damages competition in a market in Australia. This is to be achieved by:
- removing the current requirement that an unregistered foreign company “carry on business” in Australia before its conduct is subject to Australian competition law (if not domiciled in Australia).
- by making all conduct by a foreign company that is in trade or commerce within Australia or between Australia and places outside Australia subject to the cartel laws, thereby making it easier for the ACCC and private plaintiffs to pursue companies engaging in global cartel conduct; and
- abolishing the requirement that a plaintiff seeking to rely on overseas conduct first obtain the consent of the Minister before seeking damages or other relief. The Committee’s recommendation has already been adopted by the Government, which introduced proposed amendments to this effect last week (see our alert here).
The Report is accompanied by a redraft of the cartel provisions (and other provisions) as “model legislation” to give effect to the recommendations, which is expected to act as guidance to the parliamentary drafting team should the Government accept the recommendations.
Australia’s cartel laws are unnecessarily lengthy and complex. They cause substantial uncertainty and unnecessarily increase the costs of doing business in Australia. For that reason simplification is welcome and should be pursued.
There have been no criminal prosecutions in Australia for cartel conduct to date. This is likely due to the higher standard of proof in criminal cases and the ACCC and the Commonwealth Director of Public Prosecutions not wishing to lose the first case.
Simplifying Australia’s cartel laws may give the ACCC and the Commonwealth Director of Public Prosecutions greater confidence to bring a criminal case.
Key Recommendation – New Civil Prohibition on Concerted Practices
The Committee recommends introducing new civil prohibitions on "concerted practices" and repealing the prohibitions on price signaling by banks. The prohibition on concerted practices would only be breached by a firm where the concerted practice has the purpose or has the effect or likely effect of substantially lessening competition.
A concerted practice is not defined in the model legislation, but is described in the Final Report as a practice which is “jointly arranged or carried out or co-ordinated” between two or more firms. It conveys something more than unilateral or merely parallel conduct (such as two participants selling at the same price). It is not proposed that the term would be defined by legislation.
The prohibitions on price signaling by banks have never been tested and are unworkable.
The Committee’s recommendation to introduce a new prohibition on concerted practices would bring Australia’s competition laws into line with laws that exist in the United Kingdom and the European Union and is an outworking, in part, of the loss the ACCC sustained in its actions against a number of petrol stations in Victoria for price fixing through regularly exchanging price information.
In the United Kingdom and the European Union, a concerted practice is conduct that knowingly substitutes practical co-operation for the risks of competition between firms. For example, in the Dyestuffs case, the European Commission found that suppliers of dyestuffs had engaged in price fixing through concerted practices evidenced by parallel pricing and informal contact between the firms.
The new prohibition will be particularly relevant for those sectors of the Australian economy which are relatively concentrated with two or three larger suppliers. It is likely to mean greater care will need to be taken around contracts (whether structured or unstructured) between competitors.
Key Recommendation – No separate prohibition of exclusive dealing conduct
In a key change from the Draft Report, the Committee has proposed that the prohibition on exclusive dealing conduct be repealed rather than simplified. The Committee proposes that vertical restrictions (including third line forcing) should be captured by the general prohibition on anti-competitive contracts, arrangements and understandings in section 45 and by the amended prohibition on misuse of market power.
If its recommendations regarding changes to the prohibition on misuse of market power are not followed, the Committee has proposed that the prohibition of exclusive dealing be retained but simplified.
Adapting either of the Committee's recommendations would result in the removal of the prohibition on third line forcing. This is a welcome development.
Key Recommendation – Simplification of Exemptions and Introduction of Block Exemptions
The Committee recommends simplifying the authorisation and notification provisions in Australia’s competition laws to provide for a single procedure that would empower the ACCC to grant an exemption if it is satisfied that the proposed conduct would be unlikely to substantially lessen competition, or likely to result in a net public benefit.
The Committee also recommends introducing a block exemption framework similar to that which exists in the United Kingdom and the European Union.
The power to grant block exemptions would supplement the authorisation and notification frameworks.
In the United Kingdom and the European Union, block exemptions create safe harbors for categories of agreements to which the general prohibition on anti-competitive agreements will not apply.
Generally, to benefit from an exemption, the agreement cannot contain specified hardcore restrictions (e.g. resale price maintenance in the context of vertical agreements or price fixing in the context of horizontal agreements) and the parties must not have market shares above certain levels.
As well as providing immunity, the block exemptions provide certainty for business about when legitimate business activity will not give rise to competition law risk.
Block exemptions exist in Europe for categories of agreement such as vertical agreements, research and development agreements and technology transfer agreements, as well as for certain agreements involving cooperation between competitors.
We consider the power to grant block exemptions will be particularly useful, including in the case of agreements that have both vertical and horizontal elements, such as agreements between competitors for the supply of goods or services and agreements that give rise to double agency issues.
Key Recommendation – Application of competition laws to Governments
The Committee recommends that competition laws apply to the Crown (including local Governments) if the Crown is undertaking activity in trade or commerce.
Currently, Australia’s competition laws only apply to the Crown if it is carrying on a business. Carrying on business is narrower concept than undertaking an activity in trade or commerce.
If adopted, widening the application of competition laws to the Crown would mean that the act of privatising Government-owned enterprises would be subject to competition laws.
This could have implications for the way Commonwealth, State and Territory Governments privatize assets, especially the way they may offer comfort to bidders that other Government-owned assets will not compete away value.
Key Recommendation – Changes to the extra-territorial reach of Australia’s competition laws
The Committee recommends the current extra-territorial reach of Australia’s competition laws be extended by removing the requirement for the foreign firm to have a connection with Australia through residence, incorporation or place of business.
The recommendation to extend the extra-territorial reach of Australia’s competition law is consistent with the reach of competition laws in other countries, including the United States.
If accepted by the Government, it is likely to play an important role in follow-on cases, including class actions, for damages for cartel conduct.
Key Recommendation - Green Light for Private Enforcement
The Committee is encouraging private parties to pursue action for damages by some key suggestions to reduce impediments, including:
- no longer requiring Ministerial consent prior to commencing proceedings for conduct engaged in overseas;
- making unincorporated foreign corporations subject to enforcement and litigation if they compete in the supply or acquisition of goods or services to or from persons resident in, or carrying on business in, Australia; and
- extending existing provisions to allow both findings of fact made by the court and admissions of fact made by the person against whom the proceedings are brought to be taken as prima facie evidence of the facts in follow-on actions for damages.
Private competition litigation, and particularly follow-on class actions for civil damages, has increased in Australia. These private actions are most common following the grant of immunity for and prosecutions of cartel conduct by the ACCC, with a lower level of private enforcement independent of regulatory enforcement than seen in the United States, Canada and Europe.
The recommendations, if adopted, will remove practical impediments to private enforcement action, whether independent of, or in tandem with, ACCC prosecutions.
They are likely to increase the number of follow-on actions for damages, including class actions, by removing some of the existing evidentiary hurdles to those actions. The plaintiffs' bar and litigation funders are likely to welcome this recommendation.
Key Recommendation – Two reviews and repealing the exemption for IP rights
The Committee recommends:
- repealing the exception for IP rights;
- the Government tasks the Productivity Commission to undertake an overarching review focusing on competition policy issues in IP arising from new developments in technology and markets, and the principles underpinning the inclusion of IP provisions in international trade agreements; and
- establishing a separate independent review to assess Government processes for establishing negotiating mandates to incorporate IP provisions in international trade agreements.
We believe that IP rights are intended to encourage innovation. The exercise of the exclusive rights conferred on IP owners should not result in breaches of competition laws as long as the exclusivity is directly related to the IP and not ancillary to it.
A review of the interaction between IP rights and competition law is a welcome development. Government processes for negotiating IP commitments as part of international trade agreements should be transparent and would benefit from review.
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