The Senate Economics Committee today recommended passage of the Competition and Consumer Amendment (Misuse of Market Power) Bill 2016 which will introduce the Harper Recommendations (frequently abbreviated as the ‘effects test’).

I’ve previously posted about the content and merit of the bill and won’t repeat myself here, instead focusing on what the Committee majority and the dissenting Labor Senators, as well as Nick Xenophon (who sort of agrees but wants more to be done) had to say about it.

Briefly the bill:

• Repeals the existing s 46 which prohibits a corporation with substantial market power taking advantage of that power for one of three prohibited purposes (largely directed toward harming or deterring particular competitors)
• Replaces it with a new s 46 which prohibits a corporation that has a substantial degree of power from engaging in conduct having the purpose, effect, or likely effect of substantially lessening competition in a relevant market

It also deals separately with Telco provisions. Full details of the existing and proposed provision can be found on my legislation page.

Majority senators

General views

After setting out the background to the introduction of the bill, the majority set out the various views about the bill expressed in the submissions to the Committee.  This included statements of support and opposition and covered all aspects of the bill before going on to set out its view (from p 22).

The majority agreed that s 46 was currently unfit for purpose.  It had not, the majority claimed, provided ‘adequate protection for non-dominant firms from the destructive actions of firms with substantial market power’.  It considered that the the new provision would ‘provide a more equitable market’, but also made clear that the amendments ‘do not represent an argument for small versus big; rather they represent support for open and fair markets that allow all businesses to participate and compete on their merits’.

Concerns that lack of certainty could risk chilling vigorous competition were acknowledged, but the majority considered those concerns overstated, noting in particular that the concept of purpose or effect of SLC was not a new one to Australian competition law.

The majority also rejected the appeal by some to incorporate some elements of the ACCC’s Guidance into the legislation.  Instead, it accepted concerns that the proposed mandatory factors that the courts must consider when assessing whether competition has been lessened (including efficiencies and innovation etc) were unnecessary and might increase uncertainty.  They therefore recommended that they be removed.

Finally they accepted recommendations by some that there be a comprehensive post-implementation review to assess the impact and outcomes of the reforms.

Recommendations

The Committee (by majority) made the following recommendations

• Recommendation 1: The committee recommends that the proposed mandatory factors, as drafted in subsection 46(2) of the bill, be removed.
• Recommendation 2: The committee recommends that the government undertake a post-implementation review of the reforms to section 46 at least five years after commencement.
• Recommendation 3: The committee recommends that the bill be passed.

 

Minority senators

It did not come as any particular surprise, given stated party position on the effects test, that the two ALP senators (Senators Chris Ketter, Jenny McAllister) penned a dissenting report arguing that the proposed law was ‘dangerous’

General opposition: ‘dangerous economic policy’

The minority ALP senators indicated that they opposed the effects test, claiming it represented ‘particularly dangerous economic policy’.  There are three (sort-of) reasons provided for their objection to the bill:

• That by ‘holding companies accountable for their effect on competition, rather than examining the purpose of their conduct, competition between businesses could be dulled’ (para 1.4).  However, the same argument could be used for all the other provisions in the competition laws which prohibit conduct having the purpose or effect of substantially lessening competition (and there are many).  As a general rule in Australia – and elsewhere – we are concerned with the effect of conduct on competition and not merely it’s purpose; given the law is about protecting competition this is not surprising, especially as the concept of purpose is always a fraught one when it is the purpose of a ‘corporation’ which one is trying to discern.
• That the effects test was ‘worded in such a way that makes it subject to numerous legal challenges’.  It is not at all clear what they meant by this – there was no elaboration about what wording was problematic and why.
• That previous reviews have rejected calls for an effects test.  This is, of course, not a rationale for rejecting the current proposal and it should also be noted that the nature of the ‘effects test’ considered in previous reviews was not always in the same form as that currently proposed.  At times, for example, it was proposed effects simply be added to the existing provision (for an overview of previous reports see my MMP reports page).

The dissenting report then sets out some select public comments and comments from written submissions on the effects test (only those supporting its view) before going on to address ‘specific measures’.  Here they warn that consumers will lose because there will be a legal risk to business every time it wants to lower prices for customers (?!#!), that it doesn’t address the problem of adverse cost orders and delay operating as a barrier to private litigants (which is true, but is also true of the current provision) and that the changes will ‘deter job-creating investment in Australia by adding to the new layers of red tape …’ (this is not explained).

Misstatement

Early in their dissent the ALP Senators stated that the effects test would operate in addition to the current purpose test (para 1.2).  No, it would not. This is a troubling statement in a very brief dissenting report and  suggests that certain members on a committee, tasked with reviewing the proposed legislation and its implications, didn’t comprehend the difference between the existing law and the proposed new provision.

The existing purpose test refers requires it to be demonstrated that a corporation with substantial market power ‘take advantage’ of that power for one of three prohibited purposes (largely relating to competitors).  The ‘take advantage’ requirement and those three proscribed prohibited purposes will be repealed and will not be re-introduced.  The new law will contain a prohibition on conduct having an anti-competitive purpose in addition to anti-competitive effect, but that is a fundamentally different ‘purpose’ test to the one that currently exists.

 

Nick Xenophon … Mr Consistent (at least on the effects test)

Senator Xenophon, while ‘broadly’ supporting the committee recommendations, offered some additional comments.  These are consistent with his comments on misuse of market power over a number of years.  They relate to access to justice, divestiture powers and complexity.

• Access to justice: Xenophon spends time expressing concerns about the problems with access to justice and, in particular, the concern of adverse costs orders for firms wishing to bring misuse of market power claims.  He claims the risk of the cost order is the ‘elephant in the room’ and recommends the option of a ‘cost waiver order’ in ‘market power abuse litigation cases’ Although this may provide a deterrent, the cost of litigating misuse of market power cases is likely to be prohibitive regardless of whether there was a risk of adverse cost orders.Leaving aside the policy issue associated with adverse cost orders (it’s not about to be solved in the context of competition law alone), Xenophon’s suggestion that the lack of these orders means that laws in other jurisdictions like the US or Europe go further to protect competition laws than do in current or proposed Australian laws is open to serious challenge.  In Europe, as with Australia, it is often the Commission that will investigate abuse of power complaints and, in the US, the lack of adverse cost orders is combined with the prospect of treble damages to encourage private litigation (yet another broad policy issue), but you still won’t find huge numbers of small versus big monopolisation success stories in the US.  The cases are inherently complex.

• Divestiture: Xenophon again recommends that divestiture be available for misuse of market power breaches, to operate like ‘the sword of Damocles’.  There are a multitude of problems with this proposal beyond the scope of this blog post – but the Harper panel has a bit to say about it in its report.  Again Xenophon refers to the position in the US, but the technical legal position to which he refers does not reflect the reality – the US DOJ or FTC are not in the habit of ordering divestiture.

• Effects test too narrow: Xenophon argues that the SLC test is ‘too hard to apply’ and suggests a ‘broader, less restrictive test’, although he does not set out what that would be. However, under this heading, he does recommend that the proposed defence which appeared in recommendation 25 of the Draft Report, be introduced.  It’s not clear why or how this relates to the effects test being too narrow (indeed it would make it narrower).

 

Long and winding road

Harper

The saga of the ‘effects test’ is a long one.  Leaving aside past reviews which have considered misuse of market power, the long and winding road leading up to the current bill began with the Liberal’s Party’s 2013 election promise to conduct a ‘root and branch’ review of competition policy.  Following their election success, draft terms of reference were released in December 2013 with final terms of reference following on 27 March 2014 along with the announcement of panel members, including its Chair, Prof Ian Harper (with the result that his name subsequently became the short-cut reference for the inquiry/report).  An issues paper was released on 14 April 2014 and almost 350 submissions were received by early June.  A draft report (exceeding 300 pages) followed on 22 September 2014 and a further consultation process began.  Almost 500 non-confidential submissions were received.  A final report was released on 31 March 2015.  The report recommended changes to the misuse of market power laws in substantially the same form as that contained in the Bill.

Post-Harper consultation

That was not the end of consultation though.  The same day the final report was released the Government commenced a further consultation.  Treasury received 140 submissions by 26 May 2015. All then went very quiet for a long time.  Than, on 24 November 2015 the Government published its response to the Harper Report.  The ‘effects’ test created political controversy, though, so there was a non-committal response (recommendation ‘noted’) and a call for – believe it or not – further consultation!  This came in the form of a Treasury consultation, commencing on 11 December 2015, relating to options for strengthening misuse of market power; 70 submissions were received.  After all of this, including more than 1,000 public submissions to reviews, the Government announced, on 16 March 2016, that it would adopt the Harper Recommendations on misuse of market power.

Draft legislation

Several months later the Government released an Exposure Draft Bill (on 5 September 2016) covering many of the Harper Recommendations, but then on 1 December 2016 extracted the misuse of market power proposal, with some modification, and introduced it as the Competition and Consumer Amendment (Misuse of Market Power) Bill 2016  on 1 December 2016.  This was then immediately sent to the Senate Economics Committee for further consultation and reporting and then today (16 February 2016) it reported – recommending passage of the bill with some modification relating to mandatory factors

End of the road … please just get on and pass the bill

There’s been enough consultation – it’s time to remove the road blocks and pass the bill.

The majority view is reasonably methodical.  I don’t accept the concerns expressed regarding the ‘mandatory factors’; given their significance in the context of the evolution of the Harper Recommendation on s 46 it is a pity more attention wasn’t given to this element of the proposed provision before the recommendation was repealed.  Aside from that, however, it identifies both sides of the argument and presents some – albeit sometimes brief – rationale for its recommendations.  The minority dissent, which could have presented some well reasoned and balanced arguments for retention for the current law, was unfortunately, overtly political – while some balanced arguments could have been made for retaining the current law, the dissenting report is entirely one sided and full of political hyperbole, with little explanation for the views expressed. Its credibility is also undermined by the fact that it contains some fundamental errors about the proposed law.

I’ve made my personal views on this proposal clear in previous posts and my submission.  In a concentrated economy like Australia, under-enforcement risks entrenching and enhancing market power to the detriment both of competitors and, more importantly for purposes of the competition laws, the consumer public.  The proposed law is better aligned with the goals of the law.  It should be passed.