On 5 September 2016, the Federal Government released for consultation exposure draft legislation to make a range of substantive amendments to the Competition and Consumer Act 2010 (CCA), including introducing an “effects test” into the prohibition against misuse of market power. The widely anticipated Competition and Consumer Amendment (Competition Policy Review) Bill 2016 (Bill) adopts the recommendations of the Harper Competition Policy Review in full – a move the Federal Government announced on 16 March 2016.
The ACCC has also released its draft framework for proposed guidelines on the new misuse of market power prohibition as well as the proposed new prohibition against concerted practices.
In this alert, we provide an overview of the changes to misuse of market power and some initial observations on the ACCC’s draft framework guidelines, as well a brief summary of the other proposed changes which will be introduced by the Bill.
Changes to misuse of market power
The current prohibition against misuse of market power in section 46 of the CCA prohibits a corporation with a substantial degree of market power from taking advantage of that market power for a proscribed anti-competitive purpose.
The Bill introduces a revised section 46 that:
- removes the requirement that a corporation ‘take advantage’ of its substantial market power;
- replaces the current ‘purpose test’ with a new test that prohibits a corporation with substantial market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition; and
- provides mandatory but non-exhaustive factors which must be considered in determining when conduct amounts to misuse of market power, as set out below.
The primary provisions of the new section 46 are as follows:
(1) A corporation that has a substantial degree of power in a market must not engage in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition in that or any other market.
(2) Without limiting the matters to which regard may be had in determining for the purposes of subsection (1) whether conduct has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market, regard must be had to the extent to which:
(a) the conduct has the purpose of, or has or would be likely to have the effect of, increasing competition in the market, including by enhancing efficiency, innovation, product quality or price competiveness in the market; and
(b) the conduct has the purpose of, or has or would 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.
Objective of the new section 46
As noted in the explanatory material to the Bill, the purpose of the new section 46 is to strengthen the current prohibition on misuse of market power to better target anti-competitive unilateral conduct.
The amended section 46 means the ACCC will not have to solely rely on proving purpose to demonstrate misuse of market power, but can also rely on the effect, or likely effect, of the conduct to address anti-competitive conduct. It is also thought that removing the ‘taking advantage’ requirement, which has proved difficult for the ACCC to establish in a number of cases, will also make it easier to establish a misuse of market power.
It remains to be seen what the impact, if any, will be of this new test on the competitive conduct of companies which may have market power, and competition more broadly. To the extent that the conduct in question is the making or giving effect to a provision of a contract, arrangement or understanding it is already captured by the general prohibition in section 45 of the CCA. As such, the new section 46 is only likely to have a noticeable impact in relation to truly unilateral conduct.
Concerns have been expressed that the new section 46 could stifle competition, including by requiring companies with market power to second guess the impact of their conduct on competition in the future, which is inherently difficult.
The mandatory factors included in the new section 46(2) were proposed by the Harper Review Panel to provide greater comfort that the balance between pro-competitive and anti-competitive conduct will continue to be appropriately struck by the new law. Questions remain as to whether these factors, which are not currently part of the CCA, will in fact provide greater comfort or lead to further uncertainty. Such factors are more typically considered in the context of an authorisation application when assessing the public benefits of proposed conduct.
In conjunction with the release of the Bill, the ACCC has released its draft framework for misuse of market power guidelines (Draft Guideline) reflecting its proposed approach to breaches of the amended misuse of market power prohibition, should the Bill be enacted.
The Draft Guideline indicates that the ACCC does not propose to change its approach to the concepts of market definition, market power or substantial lessening of competition, which are concepts that have been applied under the CCA for some time. The ACCC also provided some examples of circumstances in which it considers the new section 46 would be likely to apply, including to forms of conduct that may raise issues under the existing prohibition such as refusal to deal, predatory pricing and bundling.
In addition, the ACCC has identified circumstances in which it does not consider that the new section 46 would apply, including some of those raised in the Harper Review process in the context of concerns regarding uncertainty that would be created by the introduction of an effects test.
For instance, the ACCC has stated that it is unlikely that the new section 46 would apply to circumstances in which a large retail chain that has an established practice of offering standardised or national pricing then applies that approach to a new store in a new area. It is not clear whether variations on this scenario would also be unproblematic and submissions on the Draft Guidelines are likely to request further details of the ACCC’s assessment.
The ACCC has said that a price war is unlikely to be problematic under the new law in circumstances where the firms engaging in the price war remain profitable during the price war, notwithstanding that some smaller, fringe firms do not remain profitable and exit the market.
Finally, the ACCC has noted that the Bill will provide for authorisations to be granted for conduct likely to breach the new section 46. Under the Bill, there is a revised authorisation test where the ACCC will grant authorisations if the conduct is either unlikely to substantially lessen competition, or is likely to result in a net public benefit.
Other amendments to the CCA
Other key amendments in the Bill include:
- Concerted practices: a new prohibition against concerted practices that have the purpose, effect or likely effect of substantially lessen competition will be introduced, while the price signalling provisions (which only applied to the banking sector) will be deleted.
- Cartel conduct: the cartel conduct provisions have been confined to conduct affecting Australian markets, and the exceptions for joint ventures and vertical trading restrictions have been expanded.
- Third line forcing: third line forcing will only be prohibited where it has the purpose, effect or likely effect of substantially lessening competition.
- Resale price maintenance: a notification process will be introduced for parties engaging in resale price maintenance.
- Merger review process: the formal merger notification process will be removed and replaced with a single authorisation process (which will apply to both merger and non-merger authorisations).
- Authorisation: as noted above, a single authorisation process will be introduced. It will be subject to a new test whereby the ACCC must grant authorisation if it is satisfied that the conduct is unlikely to substantially lessen competition or is likely to result in a net public benefit.
- Class exemptions: the ACCC will be given the power to make ‘class exemptions’ for certain kinds of conduct if it is satisfied that the conduct is unlikely to substantially lessen competition or is likely to result in a net public benefit. The ACCC may limit the application of the class exemption by reference to the persons to which is applies, circumstances in which it applies or conditions in which it applies.
- Penalties for secondary boycotts: the maximum penalty applying to breaches of the secondary boycott provisions has been increased to better align with other penalties in the CCA.
- Access declaration criteria: the declaration criteria forming part of the National Access Regime has been simplified, and includes amendments such as ensuring third party access is only mandated when it is in the public interest.
Next steps in consultation process
The Government is seeking feedback on the exposure Bill, with submissions due by 5pm Friday 30 September 2016 and the ACCC is seeking feedback on the guidelines, with submissions due by 5pm Monday 3 October 2016.