Misuse of Market Power: What Do the Changes Mean?

Lately, it seems that everyone has an opinion on the proposed changes to section 46 of the Competition and Consumer Act 2010 (CCA). Most agree that we need a law preventing large, powerful businesses from damaging competition, but there is no shortage of debate amongst regulators, small and large businesses about how that law should be framed.

The Australian Government has just released its Exposure Draft of amendments to the CCA, explaining that it wants to ‘fix’ competition policy by making amendments proposed by the Harper Review. One high-profile proposed change is the rewriting of the prohibition on the misuse of market power. Now is a good time to reflect on the problems the Government is trying to fix, and speculate on how effective the changes will be.

What has been proposed?

Adopting the Harper Review recommendations, the exposure draft amends section 46. The section is a key prohibition under Part IV of the CCA. Most of the Part deals with arrangements between two or more businesses which have an anti-competitive purpose or effect. Section 46 is the only one targeting unilateral conduct, where a business acts alone.

The exposure draft would amend section 46 so that it prohibits a corporation with substantial market power from engaging in conduct which has the purpose, effect, or likely effect, of substantially lessening competition in that or any other market, having regard to the extent to which the conduct has the purpose, effect or likely effect of:

  • increasing competition in the market, including by enhancing efficiency, innovation, product quality or price competitiveness; and
  • lessening competition in the market, including by preventing, restricting or deterring the potential for competitive conduct in the market or new entry into the market.

This is a change from the existing section 46, which prohibits a corporation with substantial market power from taking advantage of that power for one of three proscribed purposes:

  • 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.

The new provision will capture any conduct which has the relevant purpose or effect. There will be no need to prove that the business has ‘taken advantage’ of its market power, or that it had one of the three existing proscribed purposes. So, the removal of the ‘take advantage’ requirement may be said to be the real step change from the current drafting, despite the public preoccupation with the distinction between an ‘effects’ or ‘purpose’ test.

Rationale for the changes

The Harper Review came to the conclusion that the current law is deficient in two ways. The ‘take advantage’ test is not a useful one for identifying anti-competitive unilateral conduct; and the ‘purpose’ test is directed at conduct which has the purpose of harming competitors rather than competition, which is inconsistent with policy and out of step with international approaches.

‘Take advantage’ is not the right measure

The ACCC has called the take advantage test a ‘failed’ one. Many of the s. 46 cases which the ACCC has lost have turned on its failure to prove the ‘take advantage’ element, rather than the ‘purpose’ element. Over time, the ‘take advantage’ test has had to do some heavy lifting as courts have made efforts to articulate a measurable and objective test for determining whether a large, powerful company’s conduct in a specific industry falls foul of the law.

Since the 1980s, courts have been faced with a variety of factual situations involving s. 46 allegations in different markets: the production of fertiliser, steel products, beer, street directories, recorded music… The conduct has ranged from refusing to supply products or withholding access to infrastructure, to terminating distribution arrangements, threatening to enter new regional areas, and setting higher prices for bundled goods. Courts have used the ‘take advantage’ test to determine whether there was a ‘causal connection’ between the company’s conduct and market power allegedly ‘used’.

After much debate and some legislative intervention, the current test is to ask whether a corporation would have been likely to behave in that way in a competitive market and without a substantial degree of market power. In some cases, courts have found that any business, even one which was smaller, or did not enjoy the same market position or special advantages, could have profitably behaved in the same way – so the ‘take advantage’ test has not been met.

The Harper Panel recognised that the test is, or has become, misdirected: a business with substantial market power should not be excused from damaging competition just because a firm without market power could profitably have behaved in the same way. However, simply counting cases lost by the ACCC is not evidence that the law has failed. Cases can be won, lost or settled on countless factors – not least the defendant’s appetite to continue lengthy and costly proceedings. It is better to ask whether there are instances of misuse of market power which harm competition and so should be captured, but would be impossible to prosecute under the current law.

Proscribed purposes are misdirected

Secondly, the Harper Panel concluded that the second test, which requires proof of one of three anti-competitive purposes, is misdirected. The Panel thought that instead of focusing on whether the firm’s purpose was to damage a particular competitor, the section should focus on whether the conduct had the purpose or effect of damaging the process of competition itself.

As courts have recognised, vigorous competition can be tough and unpleasant, and it is the essence of competition that companies jostle to beat weaker rivals. From that perspective, reframing the ‘purpose’ test is more in line with the overriding policy objective of the CCA which is to enhance the welfare of Australians through the promotion of competition and fair trading, and provision for consumer protection.

In fact, courts have consistently interpreted the s.46 purposes in light of the CCA objective of promoting competition, not protecting competitors. For example, the Federal Court found that Foxtel denying a competing bidder a perceived advantage in bidding for AFL pay TV rights was ‘commercially rational’ and did not breach the prohibition1. In Boral2, the High Court recognised the distinction between ‘beneficial aggressive competition’ and ‘attempted monopolisation’.

Introducing ‘effects’ as another ground for breach is also more in line with the position in other jurisdictions including the USA and the European Union. In particular, it echoes the European Union approach whereby corporations in a position of ‘dominance’ are said to have a ‘special responsibility’ to take care that their conduct does not damage competition.

The essence of an abuse of dominance law is that corporations in a position of market power are held to a different standard – but it is challenging to write a law which clearly identifies the boundaries of acceptable behaviour. There are inherent limitations in drafting a law which lists the conduct which they must avoid. Some jurisdictions, like China and South Korea, take that approach, specifying certain behaviours like tying products or imposing unreasonable trading conditions. Canada takes a middle road, capturing particular behaviour only where it also has the likely effect of substantially lessening competition. Of course, the list of conduct is theoretically only bounded by businesses’ ingenuity. Harper’s drafting, focusing on the effects, sensibly avoids the spectre of scrambling to keep up by adding new conduct to an ever-growing legislative list.

What will it all mean?

The Government has said that the proposed changes are designed to reduce uncertainty. The new drafting uses existing concepts familiar from other provisions of the competition law, including ‘substantially lessening competition’.

Familiar phrases may seem reassuring, but using them does not eliminate uncertainty and may in fact increase it. Many expressions used throughout Part IV – ‘purpose’, ‘effect’, ‘likely’ and of course ‘substantial lessening of competition’ – are terms of art in competition law, their meaning honed in case law and practice.

In particular, importing the ‘substantial lessening of competition’ test may introduce new difficulties of interpretation. In other Part IV proceedings, to prove that there has been a lessening of competition, litigants must establish what the state of competition would likely look like ‘with’ the relevant conduct, then compare it to a hypothetical world where the conduct never occurred. In other contexts, these ‘with’ and ‘without’ analyses depend on fine distinctions of fact and economic conjecture supported by extensive evidence. You might even say it’s not too different to the conjecture involved in assessing whether a company ‘could have’ behaved in the same way in a hypothetical world where it didn’t have market power.

Some concrete guidance

Commentators have raised many ‘grey areas’. One is whether pursuing legitimate legal avenues could breach the new section. If a firm with market power runs the only retail store of a certain kind in a small town, and vigorously objects on planning or licensing grounds to a potential new entrant’s development plans nearby, would that risk breaching the new test? The question for a court would be whether there is likely to be a meaningful adverse impact on the competitive process in that market as a whole, not just on an individual competitor.

The ACCC has now released a draft ‘framework’ for guidelines on the proposed new s. 463. It shares some simplified examples of the types of conduct it thinks would involve a misuse of market power, including:

  • refusals to deal – refusing to supply a key input to competitors in a downstream market without a legitimate commercial reason;
  • predatory pricing – reducing prices below cost for a sustained period with the aim of causing competitors to exit the market, damaging competitors for competing aggressively, or discouraging potential competitors from entering;
  • tying and bundling – a firm with market power using ‘tying’ (selling one good on the condition that the purchaser also buys another good) or ‘bundling’ (offering a lower price only when the two products are purchased together) to leverage its power into another market; and
  • margin/price squeeze – charging competitors in downstream markets such a high price for key inputs that they cannot offer a competitive price downstream.

Interestingly, it is not clear that any of those examples would have been problematic under the existing s. 46. The ‘proscribed purposes’ have come in for criticism because they are too focused on harm to a competitor rather than the ‘process of competition’, but in practice, damage to a competitor is sometimes a good sign that there has been damage to the process – as the ACCC’s examples illustrate.

Earlier this year, ACCC Chairman Rod Sims quashed concerns raised by John Durkan, Managing Director of Coles, that large retailers would be barred from legitimate commercial strategies. Durkan suggested that selling essentials like bread, milk and nappies at the same price throughout regional and metropolitan Australia would risk breaching the section, for example if it drove a competitor in a regional town out of business. Sims clarified that ‘if you outcompete your competition and put them out of business’, there can be no breach of the section. Similarly, Sims rejected any suggestion that opening a new store could breach the prohibition.

It is helpful to have the ACCC’s guidance, although of course the courts will have the final word – and anyone can bring an action under the CCA, not just the ACCC. The truth is that no single phrase will ever capture all unilateral anti-competitive conduct while excluding ‘good’ or pro-competitive conduct. In this age of innovation, the law needs to be flexible enough to apply to novel types of business conduct in various contexts.

Sources:
1 Seven Network Ltd v News Ltd (2009) 262 ALR 160, [2009] FCAFC 166 – see comments at [996]-[1001].
2 Boral Besser Masonry Ltd v ACCC (2003) 215 CLR 374.
3 See the draft available at the Australian Competition & Consumer Commission website

Subscribe to Legal Insight

Discover best practice and keep up-to-date with insights on the latest industry trends.