The recently released Harper Review’s Final Report is the result of the most significant review of Australia’s competition laws and policy the country has seen in the last 20 years. It is wide-ranging and substantial. The Report sets out 56 key recommendations following intense consultation and engagement with a wide cross-section of the Australian community and from participants in all sectors of the economy. It is now up to the federal government and parliament to consider whether to adopt any or all of Harper’s recommendations, which will be no small challenge in the current hostile political environment.
While the review encompasses issues ranging from intellectual property rights, to pharmacies, taxis and traffic congestion, this article considers the key recommendations concerning misuse of market power, cartel conduct, exclusive dealing, resale price maintenance and mergers. This article also comments on a number of proposed tweaks that could have a significant impact on the scope of the Competition and Consumer Act (2010) (Cth) (CCA). Overall, the recommendations, if enacted, would introduce some much needed harmony to the prohibitions in the CCA and take steps to simplify what is an overly complex piece of legislation. The question is, however, at what price will such simplification come?
The Big Ticket Items
Misuse Of Market Power – Introducing An “Effects” Test
The Report recommends introducing an ‘effects test’ into the prohibition on misuse of market power contained in section 46, to capture conduct by a company with a substantial degree of market power that has the purpose, effect, or likely effect, of substantially lessening competition. It removes the need to establish that the company ‘took advantage’ of its substantial market power and acted with one of the currently proscribed ‘anticompetitive purposes’. It brings the test in line with that used for other prohibitions concerning anti-competitive arrangements, exclusive dealing and mergers.
The proposed changes also include a list of factors to be taken into account by a Court when determining whether the conduct has the purpose, effect, or likely effect, of substantially lessening competition. The driver behind this is to mitigate concerns that the newly formulated prohibition brings within its ambit pro-competitive conduct and to give companies some comfort over how the new prohibition would be applied. It also recommends authorisation be made available to exempt conduct from the prohibition in section 46.
If the effects test is implemented it would be a radical change to Australian law, but from an international perspective, it is not an unprecedented or novel approach to regulating anticompetitive unilateral conduct.
There has been, and continues to be, intense resistance to introducing an effects based test. Any proposed legislation will be strongly opposed by big business but campaigned for by both the Australian Competition and Consumer Commission (ACCC) (which has consistently had difficulty in establishing misuse of market power under the current test) and small business. Of the 11 reviews conducted since 1976, only one recommended introducing an effects based test, with the others resisting calls for one on the basis that introducing such a test would bring with it uncertainty, difficulties and the fear of over-reaching and bringing within its ambit legitimate competitive conduct.
A change of this scale would no doubt increase compliance costs for companies in the short term and Courts will need to build a whole new body of jurisprudence, which should not be underestimated. The change will likely embolden the ACCC to pursue more big businesses for anti-competitive conduct but may also bring it unwantedly into daily battles between the big and small. It is a long road ahead before we will know whether this recommendation will result in legislative change (it took 6 years before the proposed criminal sanctions for cartel conduct were legislatively implemented) and much longer before we have a body of jurisprudence which will establish whether the simplification will result in clarification of the law or just greater uncertainty and room for argument.
Cartels – Simplifying And Narrowing
The current cartel provisions are overly complex compared to international standards. The Report recommends simplifying and narrowing the cartel laws as well as adopting a specific set of outright prohibitions for serious cartel conduct. It proposes:
- redefining the territorial scope of the prohibition, that is, the conduct must involve persons who compete to supply or acquire goods or services to or from persons resident in or carrying on business within Australia (more on this below);
- confining the prohibition to firms that are actual or “likely” competitors, where likely means on the balance of probabilities;
- broadening the joint venture exemption and exempting certain vertical restrictions (noting that both will continue to be assessed under section 45 and the substantial lessening of competition test); and
- removing the prohibition on exclusionary provisions and amending the cartel provisions to address any resulting gap.
Simplifying the cartel prohibitions and narrowing their scope is a welcome recommendation which should reduce uncertainty and unnecessary costs for businesses.
Concerted Practices – A New Civil Prohibition
As foreshadowed in the draft report, the Report recommends introducing new civil prohibitions on concerted practices subject to a competition test, and repealing the unpopular and untested price-signalling prohibitions.
The introduction of concerted practices is an attempt to bring Australian competition laws into line with the UK and EU. Currently Australian law does not prohibit two or more competitors from engaging in a coordinated practice (such as the disclosure of pricing information) where that practice can be shown to substantially lessen competition but where no understanding has been reached between the parties. The Report does not propose including a legislative definition of a concerted practice but describes it as a practice which is “jointly arranged or carried out or co-ordinated” between two or more firms. It requires something more than unilateral or parallel conduct.
This recommendation is significant for those operating in highly concentrated industries such as airlines, supermarkets and banks. Care will need to be taken when structuring commercial dealings involving competitors to avoid crossing the line.
Exclusive Dealing – No Separate Prohibition
One of the most surprising recommendations in the Report is its suggestion to do away with the technical exclusive dealing prohibitions altogether, relying on the other prohibitions in their proposed amended form to do the work of section 47. Alternatively, the Report recommends that the overly complex provisions should be simplified.
Regardless, the Report recommends the outright prohibition against third line forcing be removed and such conduct be subject to a competition test like the rest of section 47. This is unsurprising at it brings Australian law in line with that of the US, Canada, the EU and New Zealand, all of which apply a competition test. It also brings the law into line with practice as the ACCC very rarely takes action against third line forcing notifications. Removing the outright prohibition will be welcomed as it will reduce unnecessary regulatory costs on businesses.
Resale Price Maintenance – A More Palatable Prohibition
Whether resale price maintenance (RPM) should be subject to a per se or competition test is routinely debated. The Report has opted to maintain the status quo but, in the age of digital retailing, acknowledges that a per se prohibition against RPM may become unnecessary as online retailing becomes more commonplace.
In the meantime, the Report has suggested two improvements that will be welcomed by businesses. First, it proposes extending the notification procedure to RPM conduct. This will provide a quicker and less expensive option for exemption compared to the authorisation procedure. Businesses would be able to seek a faster exemption for minimum resale prices when launching new products, allowing them to do so in a timely fashion and ahead of their competitors. The second recommendation proposes to exempt conduct between related bodies corporate. This will harmonise the prohibition against RPM with other prohibitions in the CCA.
Some Of The Finer Details
Reformulating The Extra-Territorial Reach Of The Law
As the law currently stands, overseas conduct will be subject to the CCA if the conduct is engaged in by a firm that is incorporated or carrying on a business in Australia. The mere presence of imports, the price of which has been affected by offshore cartel conduct, does not operate to bring the conduct within the ambit of the CCA.
The Report proposes removing the ‘carrying on business in Australia’ limitation as it considers offshore cartel conduct that harms competition in an Australian market should be captured. It proposes doing so by bringing within the CCA conduct that ‘relates to trade or commerce’ in Australia.
This change will extend the jurisdictional reach of the CCA and the ACCC will have a greater ability to investigate global cartels. Companies that are authorised to engage in cartel conduct in their home countries who subsequently export the goods to Australia would need to seek similar authorisation in Australia.
Strengthening The Meaning Of ‘Competition’
The Report has proposed strengthening the meaning of ‘competition’ so that there is no doubt it includes competition from potential imports that pose a credible threat and that these are treated as a relevant component of a competition analysis. This change will leave no doubt that forces of competition from outside of Australia must be considered.
Tinkering With And Finessing Procsses That Exempt Conduct From The CCA
Mergers – Must Seek Approval From The ACCC First Before Going To The Tribunal
The Report proposes significant changes to the merger approval process, recommending combining the formal merger clearance process and authorisation process into a single formal process accompanied by strict timetables. This is sensible and cuts red tape. But it comes at a cost as applicants can no longer seek authorisation directly from the Tribunal.
The ACCC would become the decision-maker at first instance with a right of appeal to the Tribunal. It empowers the ACCC to approve the merger on the basis that it does not substantially lessen competition or it results in a net public benefit. The Report also proposes easing the burden of information requirements that currently deter use of the formal clearance process. Notably, the formal process has not yet been used since its introduction in 2007, and the authorisation process has been used twice only recently (by Murray Goulburn, although withdrawn, and then successfully by AGL).
The Report has not recommended any changes to the substantive law as it has found the current merger provisions are working effectively.
Simplifying Exemptions And Introducing A Block Exemption Regime
The Report proposes introducing a single procedure in place of the current authorisation and notification regime and empowering the ACCC to exempt conduct if satisfied that the proposed conduct would be unlikely to substantially lessen competition, or likely to result in a net public benefit. The substantial lessening of competition test would not be available for the per se prohibitions like cartel conduct or resale price maintenance, and this conduct will continue to be assessed under the net public benefit test.
The Report proposes introducing a block exemption regime to empower the ACCC to create ‘safe harbours’ which identifies conduct or categories of conduct that are unlikely to raise concerns. The block exemption will give businesses certainty that conduct falling within the block exemption will not give rise to competition law risk, easing the regulatory burden of the CCA. Again, this recommendation brings Australian law in line with other competition law regimes globally.
Is The Price Of Simplification Worth It?
There is no doubt that simplification of Australian competition laws is a generally welcome event. The majority of the Report’s recommendation referred to above fall into this welcome category. This is particularly the case with the cartel conduct provisions which are unduly cumbersome and complex. However, the simplification of the misuse of market power provisions by removal of the ‘taking advantage’ test and the requirement for engagement in proscribed anti-competitive conduct may well come at the cost of increased uncertainty and the stifling of legitimate pro-competitive conduct. The proof, as they say, will be in the pudding and we are not yet certain what the recipe for that pudding will be.
For further information, please contact:
Kathryn Edghill, Partner, Bird & Bird
kathryn.edghill@twobirds.com
Cicely Snow, Partner, Bird & Bird
cicely.sylow@twobirds.com
