Misuse of market power bill introduced

On the last sitting day of Parliament 2016, and while I was snoozing half way around the world thinking the Parliamentary year had ended without any sign of the Harper Reforms, Treasurer Scott Morrison introduced the Misuse of Market Power bill (or the more mundane Competition and Consumer Amendment (Misuse of Market Power) Bill 2016)

I’m afraid this will be a lengthy post (that was unintended … it got a bit out of control) – the short version is:

• The Bill proposes to give effect to the Harper Recommendation on s 46 in full
• This will replace the existing purpose based test, which includes the problematic ‘take advantage’ requirement, with a simpler test – has the corporation with substantial market power engaged in conduct having the purpose or effect of substantially lessening competition (with guidance provided that the Court must take into account pro-competitive effects (including efficiencies) as well as anti-competitive effects when making this assessment)
• The change should be welcomed; the current provision is not consistent with sound competition policy (focussing on purpose of harming competitors and constrained by a narrowly interpreted take advantage requirement)and concerns about the proposed provision’s over-reach are over-stated
• Nobody seems to want to discuss s 47; significant parallel recommendations were made by the Harper Review in relation to this, which have close connections with s 46 (in essence, if you change s 46 then s 47 is not needed and should be repealed)
• Another bill dealing with the other Harper reforms will be introduced early in the new year

The Bill

This bill is intended to give effect to the recommendation made in the Harper Panel’s final report, released in March 2015, and accepted by the Government a year later (March 2016).  This was accompanied by a press release from the Minister, claiming:

These reforms represent an important step towards ensuring Australia’s competition laws are fit for purpose and support competition in a dynamic economy. They are a key part of the Government’s response to the Harper Review, which is all about increasing choice and delivering better services and outcomes for Australian consumers.

Amending the law will provide another important tool to ensure Australian businesses can flourish. It will help to create a better environment under which new and innovative firms will be able to enter new markets, aid the introduction of new technologies into Australia and encourage availability of the best quality products at the lowest price for consumers.

Although the press release contained a degree of predictable hyperbole, the general sentiment is sound and the changes, if passed, will constitute an improvement on the current misuse of market power prohibition. It will also see the departure of the separate predatory pricing law which was misconceived and has never been utilised.

The bill and related explanatory memorandum can be viewed on the Parliamentary of Australia website. As anticipated, the bill providing for misuse of market power reform has been introduced separately from other proposed Harper reforms that have been accepted by the government and formed part of its Exposure Draft Bill released in September (non-confidential responses to that draft are now available for viewing).  The Treasurer has indicated that the other proposed changes will be introduced early next year.

Changes from Harper and Exposure draft

Although the substance of the bill is consistent with Harper and the Exposure Draft legislation, in typical Treasury style it is now longer and more convoluted.  Why use one word when you can use 100?

This was the exposure draft version of sub-section (1):

(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.

This is the proposed version:

(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:

(a) that market; or

(b) any other market in which that corporation, or a body corporate that is related to that corporation:

(i) supplies goods or services, or is likely to supply goods or services; or

(ii) supplies goods or services, or is likely to supply goods or services, indirectly through one or more other persons; or

(c) any other market in which that corporation, or a body corporate that is related to that corporation:

(i) acquires goods or services, or is likely to acquire goods or services; or

(ii) acquires goods or services, or is likely to acquire goods or services, indirectly through one or more other persons.

There is an explanation (of sorts) for this provided in the EM – essentially it involved the Government reacting to concerns by some stakeholders that the reference to SLC in ‘any’ market may be just too broad! (para 1.40-1.40)

The Harper Review recommended reframing section 46 to prohibit a firm with a substantial degree of power in a market from engaging in conduct with the purpose, effect or likely effect of substantially lessening competition in any market. However, extensive consultation with stakeholders revealed a concern that the reference to ‘any market’ made section 46 excessively broad in scope.

To address this issue, the scope of section 46 is limited to those markets in which the corporation’s conduct is most likely to have a purpose, effect or likely effect of competition concern. In practice, it is unlikely that a corporation’s conduct will have a purpose, effect or likely effect of substantially lessening competition in an unrelated market without also having that purpose, effect or likely effect in one of the markets described in subsection 46(1). The provisions within subsection 46(1) limit the scope of section 46 to situations where there is an actual or likely supply or acquisition of goods or services, by the corporation or another prescribed entity.

There are a few more paragraphs explaining this in the Explanatory Memorandum.  It would, however, appear to be an unnecessary change introducing further unnecessary complexity into the Act.

A brief MMP history lesson

When originally introduced, section 46 the Trade Practices Act 1974 prohibited Monopolisation; in particular, it prohibited a corporation ‘in a position substantially to control a market for goods or services’ from ‘taking advantage of the power’ to eliminate or damage a competitor, prevent or deter entry or deter or prevent competitive behaviour (these three prohibited forms of conduct have not changed in a significant way since 1974).

In 1977 ‘purpose’ was expressly added as a connector between taking advantage and the prohibited behaviour; this was not intended to change the law in any way, as the Swanson Committee (whose report led to the change) considered that the provision already imported an element of intent, but wanted to place the issue beyond doubt (Swanson Committee Report para 6.9).  It was no accident that ‘purpose’ was chosen; in particular, the Committee expressly rejected the need or desire for proof of effect, noting ‘the rationale of the section would be largely negated if a contravention required proof’ of the prohibited effects, because it ‘is hardly appropriate to allow the conduct to be checked only after the damage has occurred’.  They also intended ‘purpose’ to be interpreted broadly, expressly rejecting submissions that suggested the word ‘wilfully’ be adopted instead because, because they considered it ‘would or could lead to a narrower interpretation of the element of intent than the Committee considers desirable’.

Purpose has remained a necessary element of the provision since; the only report (prior to Harper) to have recommended change to this was the 1984 Green Paper which noted difficulties with the inclusion of a ‘highly subjective element into the operation of the provision’ and the failure, as a result, to capture circumstances where a corporation takes advantage of market power to ‘produce immediate and severe anticompetitive consequences’.  However, it did not propose the same sort of effects test as that now before parliament; rather, it suggested simply that ‘or that has or is likely to have the effect’ be added to the existing provision.  Although the critique of purpose was sound, the proposed change could have unduly extended the operation of the provision by capturing conduct having the effect of injuring a ‘competitor’ without having an effect on the competitive process.

The next – and more significant – change came in 1986, following a recommendation in the 1984 Green Paper that the ‘substantial control’ threshold be lowered.  As a result, the threshold was lowered to ‘substantial degree of power in the market’ and the heading of the provision changed from ‘Monopolisation’ to ‘Misuse of Market Power’.  This has remained the threshold, but additional guidance as to when substantial market power might be found to exist has been incorporated into the provision.

The take advantage element has not changed, although its interpretation has evolved (or devolved) over time and separate interpretation provisions have been added designed to clarify or tweak the meaning of the phrase.

Current provision and interpretation

The current provision prohibits a corporation with substantial market power from taking advantage of that power for one of three prescribed anti-competitive purposes:

(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.

These are essentially the same as those introduced in 1974.

The substantial market power threshold is sound; typically a firm lacking substantial market power will lack the ability to unilaterally cause anti-competitive harm.  That threshold is therefore not contentious.  The same cannot be said of take advantage or purpose.

Take advantage

Take advantage was designed to provide some connection between substantial market power (originally market control) and the prohibited conduct (now purposes). Senator Murphy, when introducing the bill, noted that it ensured that in order to contravene the provision the prohibited conduct (ie, eliminating substantially damaging a competitor) must have been in some way connected to the market power held.

It was interpreted in this relatively neutral way in the first High Court decision on s 46, Qld Wire.  However, subsequent decisions have defined the requirement in a more restrictive way.  In particular, it is generally considered that the prevailing case law requires demonstration that a the conduct engaged in by the firm with market power could not have been engaged in with a firm without market power.  The corollary of this is that if a firm lacking market power can engage in the conduct, so can a firm with it, even if the conduct only makes commercial sense when accompanied by market power.

This is problematic and too easily dismissed by those criticising removal of this requirement (below). The most recent example is the Cement Australia case.  The case involved Cement Australia’s (via subsidiaries including Pozzolanic) exclusive contracts with power stations to purchase flyash which exceeded Cement Australia’s actual and forecast demand.  Justice Greenward (in a 940 page judgment) held that the agreements had the effect of substantially lessening competition and had contravened s 45. However, his Honour found that they did not contravene s 46.  While accepting the corporations had substantial market power and a prohibited purpose, the ‘take advantage’ element was not satisfied.  His Honour asked the following question:

[1902] … whether a firm profitably could have engaged in the conduct in question in the absence of a substantial degree of power in the relevant market.

[1904] …  If it can be demonstrated that Pozzolanic as a profit maximising firm operating in a workably competitive market could in a commercial sense profitably engage in the conduct in question having regard to the ordinary business rationale identified, it follows that the corporation has not used its market power in a manner made possible only by the absence of competitive conditions.  …

After applying these tests Justice Greenwood concluded that Cement Australia had not taken advantage of market power because he was not satisfied the relevant conduct was made possible only by virtue of its market power.

[See article by Caroline Coops – ‘A fly in the ointment for the ACCC? Implications of the Cement Australia decision for the interpretation of section 46’ for an excellent discussion of this case and its implications for the operation of s 46; more generally see Duke – The Need to Close the ‘Take Advantage’ Gap in the Regulation of Unilateral Anti-Competitive Conduct].

Purpose

Purpose may be demonstrated directly or indirectly and can be established by inference alone.  The relevant purpose is not one relating to the competitive process, but rather in relation to harming or deterring competitors or potential competitors.

Despite the possibility of interring purpose from conduct, the threshold for establishing this can also be high and a number of cases have faltered on this; most recently Pfizer (appeal judgment is pending).  In this case take advantage was satisfied (at least during the periods of time in which the Court accepted Pfizer had substantial market power) but not purpose; in a separate exclusive dealing claim the purpose element was similarly found not be satisfied, but in that context the relevant purpose was one of ‘substantially lessening competition’.

The case involved various forms of conduct, including rebates and discounts, designed to minimise the impact of generics when Pfizer’s highly successful Lipitor cholesterol drug came off patent.  In finding no prohibited purpose, his Honour relied heavily on expert testimony over documentary evidence, noting that the relevant purpose was the subjective purpose of the decision-maker and that the documentary evidence was not necessarily produced by the decision-maker.  For example, his Honour considered testimony given at the trial adequately explained the following documentary statements regarding Pfizer’s strategy [from para 230]:

“Second brands will be sold into pharmacy in bulk to ‘block’ other generic offers in the market.”

“Second brands will be launched before LOE on key molecules to allow them to gain maximum market-share before other generic brands enter the market.”

“It is possible to sell in over 6 months worth of stock into a pharmacy. They will accept this.”

And in a PowerPoint by the Steering Committee in relation to the strategy:

“Leverage discount on patent products to support exposed brands post LOE.”

“[g]reater chance of locking in market-share when second brands are launched before LOE.”

And further

“The benefit of this scenario is we delay market share loss for year one and this benefit carries through the subsequent years as we are starting from a higher market share. We can look at strategies for year 2 and beyond down the track”

Essentially his Honour found that conduct engaged in by Pfizer was simply in defence to anticipated intense generic competition and not for the prescribed purpose of harming competitors, deterring entry etc.  Considerable focus seems to have been given to this being the ‘launch phase’ of a new product, without sufficient consideration to the extent to which Pfizer was advantaged by its ability to leverage its existing reputation and power in relation to Lipitor in order to gain advantages in the new generics market.

It is possible this result could be overturned on appeal, but it is a useful counter to the any claim that ‘purpose’ is an easy element to satisfy.

A bit of case history

Some argue that the provision is not as difficult as sometimes suggested, on the basis that the ACCC has a decent success rate in misuse of market power cases.  However (leaving aside actions not initiated because of risk of failure under current criteria) if we remove consent cases and focus on recent actions a different picture emerges.

Leaving aside matters not proceeding the judgment, prior to 2000 the ACCC brought six misuse of market power cases (CSBF Farmers (1980); CUB (1990); CSR (1990); Pioneer Concrete (1994); Darwin Radio Taxi (1997); Garden City Cabs (1997)); all but one were successful, but of those all one was consent based (Pioneer Concrete).  Post 2000 there have been ten actions (Safeway (2003), Boral (2003), Rural Press (2003), Universal Music (2003), Eurong Beach (2005), Baxter Healthcare (2008), Cabcharge (2010), Ticketek (2011), Cement Aus (2013) and Pfizer (2015)).  It has a 50/50 track record on these.  Safeway was a success but there were significant High Court losses in Boral and Rural Press (the latter almost universally condemned) and they also lost the Universal Music case that year.  Of the four remaining victories only Baxter was contested in the end.  More recently there have been two significant losses – Cement Aus and Pfizer.  Although Cement Aus succeeded on a s 45 claim, mitigating the pain a little, it still represented a significant s 46 loss and highlighted again the limitations of the current provision.  Pfizer was appealed and the full Federal Court has reserved judgment (a year ago …).

If we look to private actions the success rate is (not surprisingly) worse; Qld Wire and NT Power were significant High Court victories, but Qld Wire was in 1989 and NT Power, while more recent, turned on unique facts.  Other than NT Power there have been no private victories in a s 46 claim since 1990 (please someone let me know if I’m missing something) but there have been several losses, including most notably the Melway case.

The proposal and its critics

The proposal is to repeal the existing prohibition and replace it with a prohibition on corporations with substantial market power engaging in conduct having the purpose or effect of substantially lessening competition. Some relevant interpretative provisions remain.  The Birdsville Amendment on predatory pricing is removed – sensibly (nobody appears to be complaining about that so I won’t mention it further).

Removing take advantage

The take advantage element is arguably more important where the conduct prohibited (including damaging a competitor) is the sort of thing that might happen incidentally as a result of normal competition.  It is (arguably) less important where the focus of the prohibition is substantially lessening competition.

It is this change, however, that has critics of the bill most concerned.  It is claimed that the removal of this link will stifle innovation and deter pro-competitive conduct because normal competitive activity might incidentally lessen competition.  It is suggested that this concern is overstated.  Under the reframed law – which focusses on harm to the competitive process and not harm to competitors – pro-competitive conduct is unlikely to be found to substantially lessen competition.

As observed in the RBB Economics submission to the Draft Report (pages 3-4), this is not likely to be a genuine concern and whether it is depends on how the ‘effects’ part of the prohibition is interpreted.  It is acknowledged that if interpreted as meaning any competitive success by a corporation with market power which enables them to win share from rivals is captured then that is, of course, a problem.  But that is not how effects-based tests are typically interpreted.

The take advantage element presently creates an effective safe harbour for conduct which is capable of being rationally engaged in by firms lacking market power.  Taking rebates and bundling as a simple examples, of course firms lacking market power can and do enter into rebate and bundling schemes, but when they do so they do not normally produce anti-competitive effects.  Conversely, the same type of conduct engaged in by firms with market power can have significant anti-competitive effects in appropriate circumstances.  These should not be protected on the basis that firms lacking market power can rationally do the same thing (without the associated competitive harm).

From purpose of harm to competitors to purpose or effect of substantially lessening competition

The current references to purpose of harming competitors or potential competitors are removed and replaced with a prohibition on conduct having the purpose or effect of substantially lessening competition.  If we accept that the objective of section 46 as set out in the Explanatory Memorandum (para 1.13):

is to prevent firms from engaging in unilateral conduct that harms the competitive process. This requires distinguishing between vigorous competitive activity which is desirable, and economically inefficient monopolistic practices that may exclude rivals and harm the competitive process

then it is clear that proposed test focussing on purpose or effect of harming competition, is more consistent with this objective than the current focus on purpose of harming competitors.

Some further protection on the meaning of ‘effect of substantially lessening competition’, which should mitigate concern that it would be interpreted in the narrow way identified above, is the guidance provided in the proposed sub-section (2) that the court be required to have regard 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 that market, including by enhancing efficiency, innovation, product quality or price competiveness in that market; and

(b)  the conduct has the purpose of, or has or would be likely to have the effect of, lessening competition in that market, including by preventing, restricting, or deterring the potential for competitive conduct or new entry into that market.

This should help to ensure that competition in this context is viewed in a broad, economic, sense and not narrowly so as to protect competitors per se.

Authorisation

The Harper Report recommended authorisation be made available for misuse of market power; currently it is the only prohibition in Part IV of the Act that can’t be authorised and, while that may have made sense when the provision was wholly ‘purpose’ based, authorisation is appropriate as an option where it is also effects based.

Curiously, provision for authorisation of misuse of market power does not appear in the current bill. The change does appear in the Exposure Draft bill (as a change to s 88 of the Act), so I can only assume it is intended to be introduced with the balance of the Harper reforms in the new year.

The ACCC’s Guidance

In its report (page 345) the Harper Panel recommended, in an endeavour to mitigate any ‘residual concerns about business uncertainty’ that the ACCC issue guidelines on its approach to s 46 enforcement, to be prepared in consultation with stakeholders and issued ahead of the revised prohibition. The ACCC released draft guidance on MMP at the same time the draft legislation as released.  They conducted consultation but submissions are not yet available for viewing and nothing further has been heard. As this post is already too long, discussion on that can await another day …

Let’s not forget exclusive dealing

Let’s take a moment to remember that we already have a separate exclusive dealing provision, the reform of which has been completely lost in the debate over s 46.  Section 47, although labelled exclusive dealing, captures much more than that, including much of the sort of conduct that would, in other jurisdictions, be considered under abuse of power laws.  Exclusive dealing, bundling, conditional rebates and discounting etc, area all provided for under s 47 (and can also be considered under s 46 because there’s no anti-overlap provision).  Where considered under this provision then (other than third line forcing which is currently (but probably not for long) per se prohibited) conduct is only prohibited if a purpose or effect of substantially lessening competition can be demonstrated.

Although the exposure draft bill incorporates the recommendation that the per se prohibition on third line forcing be removed, it ignores virtually all other recommendations.  In part, I assume, this is because the recommendation depended (in part) on what changes were made to s 46; however, in essence, Harper said that s 47 should be repealed if s 46 is changed in the way proposed (rec 33).  This is because all the conduct caught under s 47 could be caught under the new s 46 or, where it involved agreement, s 45.*  That seems perfectly sensible and would simplify the law.

* Although section 47 does not contain a substantial market power threshold, and consideration of the conduct under s 46 would require demonstration of such power, as it’s generally accepted the forms of exclusive dealing covered in s 47 will not harm competition in the absence of market power, this would not appear to be a significant problem.

Will it pass?

It is likely the bill will pass.  Big business doesn’t like it and the Labor party has said it will oppose it.  But it is backed by the Nationals, Nick Xenophon and the Greens.

Bottom line

The proposed amendment is sound and a significant improvement on the existing provision.  It is more aligned with the object of the Act, assuming that is to ‘… enhance the welfare of Australians through the promotion of competition …’.

The concerns about over-reach are overstated (as are purported benefits for small business).

It would, however, be nice if Parliament could revisit the recommendations made in relation to exclusive dealing as well; maybe that will come if and when the MMP passes.

More commentary

For some more commentary on this see, for example:

• John Durie, Section 46 changes minor but politically charged (The Australian, 1 December 2016)
• Colin Brinsden, Competition law change to help small firms (news.com.au, 1 December 2016)