Options to Strengthen the Misuse of Market Power Laws

On 16 March 2016 Prime Minister Malcolm Turnbull announced that the Government would adopt an effects test for section 46:

• See Government media release.

The discussion paper begins by providing an overview of the purpose of the Act and of section 46 and summarises the recommendations and findings of the Harper Panel (full findings are also extracted as an appendix to the paper).

The Discussion Paper then sets out the issues for consideration. Seventeen questions are then set out (in bold, below) (all shaded portions are quotes from the report, beginning page 7):

The Government would like to hear the full range of views on options available to strengthen the misuse of market power provision and the costs and benefits of amending certain elements of the provision.

1. What are examples of business conduct that are detrimental and economically damaging to competition (as opposed to competitors) that would be difficult to bring action against under the current provision?

2. What are examples of conduct that may be pro-competitive that could be captured under the Harper Panel’s proposed provision?

The Government recognises that decisions on individual elements of an alternative provision (to the existing provision and the Harper Panel’s proposal) are interrelated. Hence, it is willing to receive submissions on integrated approaches to amending the existing provision.

The paper then sets out specific elements about which it seeks views:

Take advantage

Removing the take advantage limb would remove the requirement for a causal connection between the market power of a firm and the exclusionary conduct. Firms would still be required both to have market power and engage in the conduct, but would no longer be protected by the defence that a firm without market power could commercially engage in the same behaviour.

3. Would removing the take advantage limb from the provision improve the ability of the law to restrict behaviour by firms that would be economically damaging to competition?

4. Is there economically beneficial behaviour that would be restricted as a result of this change? If so, should the scope of proscribed conduct be narrowed to certain ‘exclusionary’ conduct if the ‘take advantage’ limb is removed?

5. Are there alternatives to removing the take advantage limb that would better restrict economically damaging behaviour without restricting economically beneficial behaviour?

Purpose or effect (or likely effect)

The purpose of a firm’s actions can be difficult to infer. The current provision (subsection 46(7)) directs that courts may infer purpose from the conduct of the corporation or of any other person, or from other relevant circumstances. A focus on purpose can increase the importance of documentary evidence and reduce the emphasis on demonstrating detrimental economic effects and consumer disadvantage created by the conduct. The proposed move to include an effects test has been the most contentious aspect of the changes to section 46 proposed in the Harper Review.

6. Would including ‘purpose, effect or likely effect’ in the provision better target behaviour that causes significant consumer detriment?

7. Alternatively could retaining ‘purpose’ alone while amending other elements of the provision be a sufficient test to achieve the policy objectives of reform outlined by the Harper Panel?

Substantial lessening competition

The current provision outlines specific examples of conduct that are prohibited, including ‘eliminating or substantially damaging a competitor’. However, in practice courts have interpreted the provision to protect the process of competition, and not individual competitors (for example, see the High Court passage quoted in the Introduction above). In other provisions of Part IV, including sections 45, 47 and 50, a more general framing that focuses on substantially lessening competition is used.

8. Given the understanding of the term ‘substantially lessening competition’ that has developed from case law, would this better focus the provision on conduct that is anti-competitive rather than using specific behaviour, and therefore avoid restricting genuinely pro-competitive conduct?

9. Should specific examples of prohibited behaviours or conduct be retained or included?

The effect or likely effect of substantially lessening competition currently applies to most key provisions of the competition law. Despite this, some concerns have been expressed about applying it to section 46.

10. An alternative to applying a ‘purpose, effect or likely effect’ test could be to limit the test to ‘purpose of substantial lessening competition’. What would be the advantages and disadvantages of such an approach?

Mandatory factors

The inclusion of factors which courts must consider, but are not limited to, would provide guidance to the courts on the interpretation of the provision. On the other hand, they may distinguish the concept of substantially lessening competition in section 46 from its application in other sections.

11. Would establishing mandatory factors the courts must consider (such as the pro- and anti-competitive effects of the conduct) reduce uncertainty for business?

12. If mandatory factors were adopted, what should those factors be?

Authorisations

Part VII of the CCA provides for a range of exceptions to the operation of certain provisions (via notification, authorisation or clearance). This allows firms to engage in particular types of prohibited conduct if that conduct is considered to be unlikely to substantially lessen competition, or the conduct would be likely to have a net public benefit (the benefit of the conduct would outweigh any detriments).

13. Should authorisation be available for conduct that might otherwise be captured by section 46?

Other issues

In responding to these questions, the Government is also interested to understand:

14. If quantitative data on the regulatory impact of alternative options on stakeholders (including the methodologies used) can be provided.

15. Are there any other alternative amendments to the Harper Panel’s proposed provision that would be more effective than those canvassed in the Panel’s proposal?

Specific options

The specific options are then discussed (I've listed these separately, below) and the paper asks which are to be preferred, or if other shoudl be considered:

16. Which of options A through F [set out below] is preferred? What are the relative strengths and weaknesses of each option? What information can you provide regarding the regulatory impact of each option on businesses?

17. Are there any other options (not outlined above) that should be considered?

The paper then sets out specific options to amend the misuse of market power provision (more discussion on each option is included in the discussion paper):

Option A - Making no amendment to the current provision

Option B - Amend the existing provision by removing the words ‘take advantage’

The new provision would prohibit corporations that have a substantial degree of power in a market from engaging in conduct for the purpose of eliminating or substantially damaging a competitor, preventing the entry of a person into a market, or deterring or preventing a person from engaging in competitive conduct.

Option C - Amend the existing provision by removing the words ‘take advantage’, including a ‘purpose of substantially lessening competition’ test, making authorisation available, and the ACCC issuing guidelines regarding its approach to the amended provision

The new provision would prohibit corporations that have a substantial degree of power in a market from engaging in conduct for the purpose of substantially lessening competition in that or any other market. It would also include making authorisation available, and the ACCC issuing guidelines regarding its approach to the provision.

Option D - Amend the existing provision by removing the words ‘take advantage’, including a ‘purpose of substantially lessening competition’ test, including mandatory factors for the courts’ consideration, making authorisation available, and the ACCC issuing guidelines regarding its approach to the amended provision

The new provision would prohibit corporations that have a substantial degree of power in a market from engaging in conduct for the purpose of substantially lessening competition in that or any other market. It would also include establishing mandatory factors for the courts’ consideration, making authorisation available, and the ACCC issuing guidelines regarding its approach to the provision.

Option E – Amend the existing provision by removing the words ‘take advantage’, including a ‘purpose, effect or likely effect of substantially lessening competition’ test, making authorisation available, and the ACCC issuing guidelines regarding its approach to the amended provision

The new provision would prohibit corporations that have a substantial degree of power in a market from engaging in conduct that has the purpose, or would have the effect, or likely effect, of substantially lessening competition in that or any other market. It would also include making authorisation available, and the ACCC issuing guidelines regarding its approach to the provision.

Option F – Amend the existing provision by adopting the full set of changes recommended by the Harper Panel

This option involves adopting all changes recommended by the Harper Panel, the elements of which are discussed above (see The Harper Panel’s Findings).

View discussion paper online (PDF).

Public submissions were open until 12 February 2016. Seventy submissions were received; seven of these were confidential.

Non-confidential submissions have now been published on the Treasury website:

• Treasury submission page

I have also provided an overview of the submissions on my submissions page.

The sixty-three* non-confidental submissions published on 16 February 2016 can be broadly categorised as follows:

• 36 submissions supported Options E, F or an effects test generally
  Option E = effects test (almost full Harper recommendation) and Option F = full Harper recommendation
• 15 submissions supported Option A
  (no change to current law)
• 13 submissions did not support a specific option
  These ranged from submissions that either proposed an alternative option or made general observations without identifying a preferred reform option.

* Note, this amounts to 64 submissions; the Law Council of Australia submission incorporated submissions by both the Competition and Consumer Committee of the Business Law Section and the SME Business Law Committee of the Business Law Section; as each committee supported a different option I've listed them separately.

 (1) A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of:

(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;

(b) preventing the entry of a person into that or any other market; or

(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.

(1AAA) If a corporation supplies goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying the goods or services, the corporation may contravene subsection (1) even if the corporation cannot, and might not ever be able to, recoup losses incurred by supplying the goods or services.

(1AA) A corporation that has a substantial share of a market must not supply, or offer to supply, goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying such goods or services, for the purpose of:

(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market; or

(b) preventing the entry of a person into that or any other market; or

(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.

(1AB) For the purposes of subsection (1AA), without limiting the matters to which the Court may have regard for the purpose of determining whether a corporation has a substantial share of a market, the Court may have regard to the number and size of the competitors of the corporation in the market.

(1A) For the purposes of subsections (1) and (1AA):

(a) the reference in paragraphs (1)(a) and (1AA)(a) to a competitor includes a reference to competitors generally, or to a particular class or classes of competitors; and

(b) the reference in paragraphs (1)(b) and (c) and (1AA)(b) and (c) to a person includes a reference to persons generally, or to a particular class or classes of persons.

(2) If:

(a) a body corporate that is related to a corporation has, or 2 or more bodies corporate each of which is related to the one corporation together have, a substantial degree of power in a market; or

(b) a corporation and a body corporate that is, or a corporation and 2 or more bodies corporate each of which is, related to that corporation, together have a substantial degree of power in a market;

the corporation shall be taken for the purposes of this section to have a substantial degree of power in that market.

(3) In determining for the purposes of this section the degree of power that a body corporate or bodies corporate has or have in a market, the court shall have regard to the extent to which the conduct of the body corporate or of any of those bodies corporate in that market is constrained by the conduct of:

(a) competitors, or potential competitors, of the body corporate or of any of those bodies corporate in that market; or

(b) persons to whom or from whom the body corporate or any of those bodies corporate supplies or acquires goods or services in that market.

(3A) In determining for the purposes of this section the degree of power that a body corporate or bodies corporate has or have in a market, the court may have regard to the power the body corporate or bodies corporate has or have in that market that results from:

(a) any contracts, arrangements or understandings, or proposed contracts, arrangements or understandings, that the body corporate or bodies corporate has or have, or may have, with another party or other parties; and

(b) any covenants, or proposed covenants, that the body corporate or bodies corporate is or are, or would be, bound by or entitled to the benefit of.

(3B) Subsections (3) and (3A) do not, by implication, limit the matters to which regard may be had in determining, for the purposes of this section, the degree of power that a body corporate or bodies corporate has or have in a market.

(3C) For the purposes of this section, without limiting the matters to which the court may have regard for the purpose of determining whether a body corporate has a substantial degree of power in a market, a body corporate may have a substantial degree of power in a market even though:

(a) the body corporate does not substantially control the market; or

(b) the body corporate does not have absolute freedom from constraint by the conduct of:

(i) competitors, or potential competitors, of the body corporate in that market; or

(ii) persons to whom or from whom the body corporate supplies or acquires goods or services in that market.

(3D) To avoid doubt, for the purposes of this section, more than 1 corporation may have a substantial degree of power in a market.

(4) In this section:

(a) a reference to power is a reference to market power;

(b) a reference to a market is a reference to a market for goods or services; and

(c) a reference to power in relation to, or to conduct in, a market is a reference to power, or to conduct, in that market either as a supplier or as an acquirer of goods or services in that market.

(4A) Without limiting the matters to which the court may have regard for the purpose of determining whether a corporation has contravened subsection (1), the court may have regard to:

(a) any conduct of the corporation that consisted of supplying goods or services for a sustained period at a price that was less than the relevant cost to the corporation of supplying such goods or services; and

(b) the reasons for that conduct.

(5) Without extending by implication the meaning of subsection (1), a corporation shall not be taken to contravene that subsection by reason only that it acquires plant or equipment.

(6) This section does not prevent a corporation from engaging in conduct that does not constitute a contravention of any of the following sections, namely, sections 45, 45B, 47, 49 and 50, by reason that an authorization or clearance is in force or by reason of the operation of subsection 45(8A) or section 93.

(6A) In determining for the purposes of this section whether, by engaging in conduct, a corporation has taken advantage of its substantial degree of power in a market, the court may have regard to any or all of the following:

(a) whether the conduct was materially facilitated by the corporation’s substantial degree of power in the market;

(b) whether the corporation engaged in the conduct in reliance on its substantial degree of power in the market;

(c) whether it is likely that the corporation would have engaged in the conduct if it did not have a substantial degree of power in the market;

(d) whether the conduct is otherwise related to the corporation’s substantial degree of power in the market.

This subsection does not limit the matters to which the court may have regard.

(7) Without in any way limiting the manner in which the purpose of a person may be established for the purposes of any other provision of this Act, a corporation may be taken to have taken advantage of its power for a purpose referred to in subsection (1) notwithstanding that, after all the evidence has been considered, the existence of that purpose is ascertainable only by inference from the conduct of the corporation or of any other person or from other relevant circumstances.