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Misuse of Market Power: Prohibition

 

Core prohibition

Section 46(1) currently prohibit firms with a substantial degree of market power from taking advantage of that market power for a prohibited purpose. The prohibited purposes include:

(a) Eliminating or substantially damaging a competitor … in that or any other market

(b) Preventing entry of a person into that or any other market

(c) Deterring or preventing a person from engaging in competitive conduct in that or any other market

Substantial market power

A number of additional sub-sections assist in determining whether a company has substantial market power and make clear that it is possible for more than one corporation to have substantial market power.

Until 1986 the threshold was whether or not a corporation was in a position to substantially control a market. The current 'market power' test is less onerous than the 'substantial control' test. See, for example, ACCC v Baxter Healthcare Pty Ltd [2008] FCAFC 141 per Justice Gyles who noted [at 378] 'A substantial degree of power in a market is not the equivalent of monopoly power.  Indeed, the Act was deliberately amended in 1986 to lower the threshold.'

Additional guidance for determining when a corporation has market power was added by Trade Practices Legislation Amendment Act (No 1) 2007, which inserted sections (3A)-(3D) and also ss (4A) which allows sustained below cost pricing to be considered. See the provision.

Take advantage

Overview

Section 46(1) requires that a corporation 'take advantage' of their market power for a prohibited purpose. The majority of s 46 cases that have failed have done so as a result of failing to prove this element.

The courts have treated it as a separate and distinct requirement and, where a corporation with market power would (or perhaps could) have engaged in the same conduct absent its market power, they have refused to find the element satisfied (eg, Melway) even where purpose has been clearly established (eg, Rural Press).

In response to some of these decisions the Trade Practices Legislation Amendment Act 2008 provided some guidance on the 'taking advantage' requirement designed to make it easier to prove; however, it is generally considered that the (relatively) new subsection (6A) merely re-states existing case law.

Detail

The 'taking advantage' element has proved one of the most controversial. In Qld Wire the element was essentially interpreted to mean 'use', with Dawson J observing that 'The words "take advantage of" do not have moral overtones in the context of s. 46' and that BHP took advantage of MP because 'It used power in a manner made possible only by the absence of competitive conditions'. If the market was competitive the refusal would have ‘eroded its position in the steel products market'

Subsequent cases have taken a stricter approach. There is currently some debate over whether a 'could' or 'would' test now applies in relation to s 46. The 'could' test provides that if the corporation COULD have acted in the manner it did without substantial market power then it cannot be said to be 'taking advantage' of market power by acting in that way. The 'would' test provides that if the corporation WOULD not have acted in the manner it did in the absence of substantial market power then it will be held to have taken advantage of that power. Consequently, the 'would' test is more inclusive than the 'could' test as it takes into consideration rational business practice.

In Melway the majority of the High Court appeared to apply the 'could' test:

bearing in mind that the refusal to supply the respondent was only a manifestation of Melway's distributorship system, the real question was whether, without its market power, Melway could have maintained its distributorship system, or at least that part of it that gave distributors exclusive rights in relation to specified segments of the retail market. (my emphasis) 

Justice Kirby dissented on this point, noting:

... in Queensland Wire, whatever else was agreed or disagreed, this Court unanimously held that the proper legal construction of s 46 of the Act was that "take advantage of" simply means "use". ... … To the extent that this Court now retreats from its holding in Queensland Wire that the phrase connotes no more than "use" of market position, it will encourage the restoration of a point of distinction which will weaken the effectiveness of s 46. …

This issue came up for consideration again in Rural Press. The Court again applied the 'could' test, finding no contravention of s 46. In this case the Full Federal Court concluded there was no taking advantage of market power because:

... though [Rural Press and Bridge] had the necessary market power and the necessary purpose, they had not taken advantage of their power in the Murray Bridge regional newspaper market but rather had taken advantage of their access to a printing press in Murray Bridge and to the necessary administrative and professional structure to publish a competing newspaper. Rural Press and Bridge could have credibly threatened to enter the Riverland market, and could have actually entered it, regardless of whether they had a substantial degree of power in the Murray Bridge regional newspaper market.

The majority of the High Court held, on this point:

Gummow, Hayne and Heydon JJ: The conduct of "taking advantage of" a thing is not identical with the conduct of protecting that thing. To reason that Rural Press and Bridge took advantage of market power because they would have been unlikely to have engaged in the conduct without the "commercial rationale" – the purpose – of protecting their market power is to confound purpose and taking advantage. If a firm with market power has a purpose of protecting it, and a choice of methods by which to do so, one of which involves power distinct from the market power and one of which does not, choice of the method distinct from the market power will prevent a contravention of s 46(1) from occurring even if choice of the other method will entail it.

The Commission's criticism of the Full Federal Court for asking whether Rural Press and Bridge "could" engage in the same conduct in the absence of market power must be rejected. ... 

The Commission failed to show that the conduct of Rural Press and Bridge was materially facilitated by the market power in giving the threats a significance they would not have had without it.  What gave those threats significance was something distinct from market power, namely their material and organisational assets[emphasis added]

Justice Kirby dissented again, noting:

The suggestion that the application by Rural Press and Bridge of their "market power" was causally irrelevant to the swift retreat of Waikerie seems, with every respect, to border on the fanciful. ...

The conditional threat from Rural Press and Bridge extinguished any chance of competition. It adversely affected consumers and the competitive process in terms of availability of choice, as it forced the withdrawal of a competitor and its product from the market. Rural Press and Bridge did not, as they were entitled to do, compete in the market on the basis of the price or quality of their product. Rather, they threatened to retaliate in a way that was a clear contravention of s 46. With respect, the result of the analysis in the joint reasons in this Court does not protect or promote competition or the competitive process. It stifles it.

A trilogy and the doctrine of innocent coincidence:
This is the third recent decision of this Court (Melway and Boral Besser Masonry Ltd ... being the other two) in which a majority has adopted an unduly narrow view of s 46 of the Act. In effect, it has held, in each case, that the established large degree of market power enjoyed by the impugned corporation was merely incidental or coincidental to the anti-competitive consequences found to have occurred. Notwithstanding the proof of market power, the Court has held that the impugned corporations did not directly or indirectly "take advantage" of that power to the disadvantage of competition in the market.

In my view, the approach taken by the majority is insufficiently attentive to the object of the Act to protect and uphold market competition. It is unduly protective of the depredations of the corporations concerned. It is unrealistic, bordering on ethereal, when the corporate conduct is viewed in its commercial and practical setting. The outcome cripples the effectiveness of s 46 of the Act. It undermines this Court's earlier and more realistic decision in Queensland Wire. The victims are Australian consumers and the competitors who seek to engage in competitive conduct in a naive faith in the protection of the Act. Section 46 might just as well not have been enacted for cases like these where its operation is sorely needed to achieve the purposes of the Act. Judicial lightning strikes thrice. A novel doctrine of innocent coincidence prevails. Effective anti-competitive threats can be made without the redress which s 46 appears to promise. Once again I dissent."

In 2008 amendments were made to s 46 by the Trade Practices Legislation Amendment Act 2008 which appear to make it easier to establish the 'taking advantage' element (although some suggest it is just intended to codify existing legislative developments). Section 46(6A) now provides that the court may consider:

(a) whether conduct was materially facilitated by the market power [this appears to favour a 'would' over a 'could' approach

(b) whether the corporation relied on the market power when engaging in the conduct

(c) whether it was likely the corporation would have engaged in the conduct if they did not have SMP [again, this appears a direct response to the 'could' test adopted in Melway and appears to prefer a 'would' approach]

(d) whether the conduct is otherwise related to the SMP

Prohibited purpose

Although it has proven controversial, the purpose element has generally not been difficult to establish in the litigated cases, although the ACCC has argued that difficulties in proving purpose has meant that it has not brought some cases before the courts. Sub-section 46(7) allows the court to infer purpose from surrounding circumstances. Pursuant to s 4F the purpose need not be the sole or dominant purpose but must be a substantial purpose.

 

Predatory pricing: Birdsville amendment

The general prohibition on misuse of market power contained in section 46(1) is capable of capturing predatory pricing conduct in appropriate circumstances. Nevertheless, as a result of some concerns regarding its operation in predatory pricing (particularly following the ACCC's loss in Boral Besser Masonry Limited v ACCC [2003] HCA 5), a new provision was introduced in 2007 directed specifically at predatory pricing conduct. This 'Birdsville amendment' (Trade Practices Legislation Amendment Act 2007 (Act 159 of 2007)) has not yet given rise to any case law and remains controversial. In 2015 the Harper Report recommended that it be repealed; the Government has supported that recommendation.

Section 46(1AA) now prohibits predatory pricing, defined as a corporation having substantial market share supplying goods or services below cost for a sustained period for one of the three prohibited purposes (the same prohibited purposes as for s 46(1).

The OECD Review of Regulatory Reform - Australia (2009) stated (at p 61):

It is questionable whether there is sufficient evidence to support a view that the general prohibition under Section 46 does not cater adequately for predatory pricing cases. In its current form, the new dedicated prohibition risks causing undue and unproductive uncertainty in the business sector about pricing decisions and may even have a 'chilling' effect on competitive behaviour; in particular in light of the replacement of the 'power' element with a 'share' element in the predatory pricing prohibition. The current government has been thwarted in the Parliament in its attempts to address these concerns. In light of this, the government should monitor this area and take advantage of future opportunities to remove at least the market share aspect of the Birdsville amendment when they arise.

 

Misuse of Trans-Tasman Market Power

Section 46A prohibits the misuse of market power by a corporation with substantial degree of power in trans Tasman market. It provides (in part):

(2) A corporation that has a substantial degree of market power in a trans‑Tasman market must not take advantage of that

(a) eliminating or substantially damaging a competitor of the corporation, or of a body corporate that is related to the

(b) preventing the entry of a person into an

(c) deterring or preventing a person from engaging

Aim of the provision

In Queensland Wire the High Court suggested that the purpose of the provision was to protect the competitive process rather than particular competitors. This reasoning has been followed in subsequent decisions.

In Melway, the majority of the High Court stated: ‘Section 46 aims to promote competition, not the private interest of particular persons or corporations.’

 

Harper reforms

The recent Harper Review Final Report recommended significant changes to this provision. For details of the changes see my misuse of market power overview.The Government response to the report indicated it would consult further before amending s 46 and, to this end, on 11 December 2015, the Government released a discussion paper calling for submissions on 'options to strengthen the misuse of market power provision'. Submissions were due by 12 Feb 2016 and have now been published. On 16 March 2016 the Government announced it would adopt an effects test for section 46. See consultation page.