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Misuse of market power

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Overview

Australia's misuse of market power laws prohibit a corporation with substantial market power from engaging in conduct having the purpose or effect of substantially lessening competition.

Changes to the law

Until 6 November 2017 Australia's competition laws prohibited firms with a substantial degree of market power from taking advantage of that market power for a prohibited purpose. The prohibited purposes included:

(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

The Harper reform recommended repealing this provision and replacing it with an effects based test. Legislation giving effect to this change commenced on 6 November 2017.

 

The legislation

Australia's competition laws are contained in the Competition and Consumer Act 2010 (Cth). The key provision in relation to misuse of market power is section 46. In addition, section 46A prohibits the misuse of market power by a corporation with a substantial degree of power in a trans-Tasman market.

Key provisions

ParliamentSelect provision for full details, including the provision and related commentary and history

46 Misuse of market power
This includes legislative history

46A Misuse of market power—corporation with substantial degree of power in trans Tasman market

46B No immunity from jurisdiction in relation to certain New Zealand laws

86(1A) Jurisdiction of the Courts
(Sub-section 86(1A) provides: "(1A) Jurisdiction is conferred on the Federal Circuit Court in any matter arising under section 46 or Part IVB in respect of which a civil proceeding is instituted by a person other than the Minister." This additional jurisdiction, which operates concurrently with Federal Court jurisdiction, was introduced by the Trade Practices Legislation Amendment Act 2008 on the theory that it might provide more accessible to small business. No case has been brought before the Federal Circuit Court or its pre-decessor, the Federal Magistrate's Court.

 

Prohibited conduct

Section 46(1) currently prohibits firms with a substantial degree of market power from engaging in conduct having the purpose, effect or likely effect of substantially lessening competition in that market or any other market in which the corporation (or related corporation) supplies or acquires goods or services.

Note
The only element surviving from the previous test (which operated until 6 November 2017) is the requirement that a corporation have a substantial degree of market power/

Substantial market power

Power PlayA 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

Note: The Harper amendments removed this element; it is retained for historical reference and because it will continue to apply to conduct pre-dating the commencement of the new provision on 6 November 2017.

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.

NewspaperThe 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

Note: The Harper amendments removed this element; it is retained for historical reference and because it will continue to apply to conduct pre-dating the commencement of the new provision on 6 November 2017. It is possible to contravene the new provision based on the 'purpose' of conduct, but the releant purpose is a substantial lessening of competition.

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

Note: The Harper amendments removed this separate prohibition; it is retained for historical reference and because it will continue to apply to conduct pre-dating the commencement of the new provision on 6 November 2017.

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

 

Guidance

Image of whiteboard guide

On 25 October 2017 the ACCC issued 'interim' guidelines addressing the changes to section 46.

Interim guidelines on section 46 reforms

The interm guidelines follow 'draft frameworks' released in October 2016 for consultation.

The section 46 document has been re-ordered a bit, but it is otherwise remarkably similar to the 2016 draft framework. The key change is the addition of 'restricting access to an essential input' and 'loyalty rebates' as types of conduct likely to have a greater potential to involve mmp. Concentration levels in some of the examples have changed and, in the section detailing the ACCC's approach to investigating alleged MMP, consideration of the 'nature and extent of competitive constraints' has moved from being listed as the fourth factor to the first factor.

The ACCC also separately released Guidelines relating to authorisation; from 6 November 2017 parties proposing to engage in conduct that they are concerned may contravene s 46 will be able to apply for authorisation of that conduct.

Guidelines and interim forms for merger and non-merger authorisations

 

Cases

Please note that the cases referred to below relate to the pre-Harper test. Those considering whether a corporation has substantial market power remain relevant; those relating to the take advantage or purpose element will not be relevant to the assessment of the new test.

High Court cases

Queensland Wire Industries v BHP (1989) 167 CLR 177 (High Court) (refusal to deal)
Leveraging market power - refusal to deal (breach of s 46 established)

The Court held that BHP had substantial market power and its purpose, in refusing to supply Y-Bar to Qld Ware, was to prevent Qld Wire competing as a manufacturer and wholesaler of star pickets. The refusal was also found to satisfy the 'take advantage' element:

'In effectively refusing to supply Y-bar to the appellant, BHP is taking advantage of its substantial market power. It is only by virtue of its control of the market and the absence of other suppliers that BHP can afford, in a commercial sense, to withhold Y-bar from the appellant. If BHP lacked that market power - in other words, if it were operating in a competitive market - it is highly unlikely that it would stand by, without any effort to compete, and allow the appellant to secure its supply of Y-bar from a competitor.' (Mason CJ and Wilson, para 28)

The High Court equated 'take advantage' with 'use' and noted that this requirement carried with it no moral overtones: 'The words 'take advantage of' do not have moral overtones in the context of s. 46' (Justice Dawson para 9). In making this finding the High Court unanimously rejected the view of Justice Pincus that the phrase 'take advantage' required some pejorative behaviour.

 

Melway Publishing Pty Ltd v Robert Hicks Pty Ltd [2001] HCA 13 (High Court) (refusal to deal)
Refusal to deal, 'taking advantage' (no breach)

Take advantage element not satisfied (evidence suggested market power and anti-competitive purpose elements were satisfied, but there was a 'business justification' for the conduct)

 

Masonry

Boral Besser Masonry Limited v ACCC [2003] HCA 5 (High Court) (predatory pricing)
Predatory pricing (market power) (no breach)

BBM did not have substantial market power and, even if it did, it did not take advantage of that power.

 

Newspapers

Rural Press Ltd v ACCC [2003] HCA 75 (High Court) (threat to compete if competitor did not withdraw)
Threats if competition not withdrawn - not taking advantage of market power (no breach of s 46)

Substantial market power and requisite purpose by not taking advantage of market power (taking advantage of 'financial' power)

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." (Justices Gummow, Hayne and Heydon)

What gave those threats significance was something distinct from market power, namely their material and organisational assets (Justices Gummow, Hayne and Heydon)

 

Electricity

NT Power Generation v Power and Water Authority [2004] HCA 48; 219 CLR 90 (High Court)
Access (breach of s 46 established)

Federal Court (Full bench) (chronological)

TV

Seven Network Ltd v News Limited [2007] FCA 1062; [2009] FCAFC 166 (the C7 case)
Anti-competitive agreements; misuse of market power; market definition

 

compact discs

Universal Music Australia Pty Ltd v ACCC [2003] FCAFC 193 (Full Federal Court)
Misuse of market power; exclusive dealing, purpose or effect of SLC (no breach of s 46)

 

Supermarket trolly

External linkACCC v Australian Safeway Stores Pty Limited [2003] FCAFC 149 (Full Federal Court)
Misuse of market power, exclusive dealing, price fixing (breach of s 46 established)

 

Singapore Airlines plane

Singapore Airlines Ltd v Taprobane Tours WA Pty Ltd (1991) 33 FCR 158 (Federal Court (Full Court))
Misuse of market power, Market definition

 

Ski boots

Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd (1987) ATPR 40-809; [1987] FCA 282
Sole distributor of a brand of ski boots had substantial market power in Australian ski boot market

 

Recycle paper

External linkWilliams and Vajili Pty Ltd v Papersave Pty Ltd [1987] FCA 351 (Full Federal Court)
Appeal dismissed
"Here we simply have a corporation which handled 60 per cent of the collection and treatment of waste computer paper, seeking to take a lease with no added special features, except a knowledge that a potential competitor also wanted the lease." (para 24)

Appeal from: External linkWilliams & Anor v Papersave Pty Ltd (1987) ATPR 40-818; [1987] FCA 162 (Sheppard J)
Substantial market power and prohibited purpose existed, but not the taking advantage element; taking advantage of information, not taking advantage of market power

 

Copyright symbol

External linkWarman International & Ors v Envirotech Australia Pty Ltd & Ors (1986) ATPR 40-714 (Wilcox J)
Enforcing copyright not taking advantage of market power - taking advantage of legal right

 

Eggs

Victorian Egg Marketing Board v Parkwood Eggs Pty Ltd (1978) 33 FLR 294; 20 ALR 129; [1978] ATPR 40-081

Federal Court (chronological)

ACCC v Pfizer Australia Pty Ltd [2015] FCA 113 [on appeal]
Misuse of market power (purpose not established), exclusive dealing

 

ACCC v Cement Australia [2013] FCA 909 (10 September 2013) (Federal Court)
No misuse of market power (taking advantage element not satisfied)

 

ACCC v Ticketek Pty Ltd [2011] FCA 1489 (22 December 2011) (Federal Court)
By consent - refusal to deal

 

Newspaper

External linkEastern Express Pty Ltd v General Newspapers Pty Ltd (1991) 30 FCR 385 (Wilcox J)
Predatory pricing

 

Leather belt

External linkBerlaz Pty Ltd v Fine Leather Care Products Limited [1991] FCA 163; (1991) 13 ATPR 41-118 (Interlocutory proceedings)

'A distinction has to be drawn between purpose and consequence. The clear impression I have gained from the evidence is that FLC's purpose in acting as it did was not to get rid of or damage Berlaz as a competitor, although no doubt FLC knew that terminating the distributorship would be likely to have one or both of those results.' [Pincus J para 25]

 

History of the provision

There have been several reviews into the operation of the misuse of market power provision. Details of the history of the provision and the various reviews which have considered its operation can be found on the section 46 page and the reports tab respectively.

History in brief

HistoryOriginal provision: Monopolisation

The original section 46 was headed ‘Monopolisation’ and proscribed certain conduct by a corporation in a position substantially to control a market taken against existing or potential competitors. In its original form it made no reference to ‘for the purpose of’.

Introduction of purpose element

This changed in 1977 following recommendations of the Swanson Committee in 1976 which expressed concern that the section could capture 'normal' behaviour if interpreted to refer to the effect of the conduct against individual existing or potential competitor. The section was therefore amended to add the words 'for the purpose of' before the list of proscribed activity

From 'substantial control' to 'substantial degree of market power'

In 1984, a Green Paper questioned the effectiveness of the provision on the ground that the 'substantial control' requirement was too high and subsequent amendments in 1986 reduced this threshold to 'substantial degree of power in a market' and changed the heading of the section from ‘Monopolisation’ to ‘Misuse of market power’.

Minor amendments

In 1992 an amendment (adding ss (1A)) made clear that references to 'competitor' and 'person' in s 46(1) included references to competitors/persons generally or particular classes of competitors/person and very minor amendments were made to subsection (6) in 2006.

Predatory pricing: including the Birdsville Amendment

However, the section remained largely unaltered until 2007 when the phrase 'in that or any other market' was added to s 46(1), the 'Birdsville Amendment' was added to proscribed sustained below cost pricing by a corporation with substantial market share for a proscribed purpose and various other sub-sections were added in an attempt to assist the court in determining whether a firm has substantial market power (ss 3A-3D and 4A).

Most recently, in 2008, the Act was amended to include a provision making clear that in predatory pricing cases recoupment is not a necessary element (ss 1AAA) and inserting a new subsection 46(6A) designed to a assist the court in determining whether a corporation has 'taken advantage' of its market power when engaging in conduct.

Effects test

In 2015 the Harper Panel recommended the introduction of an effects test for s.46. This was accepted by the Government and legislation was passed in 2017 giving effect to that recommendation. The change will come into operation in April 2018.

 

* This section adapted from the Dawson Report's overview of the history of the provision

For an excellent examination of the development of Australia's misuse of market power laws (to 2014) see Katharine Kemp, 'Uncovering the roots of Australia’s misuse of market power provision: Is it time to reconsider?' (2014) 42 ABLR 329.

Original provision: Monopolisation

When first enacted (in 1974) the provision read:

Section 46 Monopolisation
(1) A corporation that is in a position substantially to control a market for goods or services shall not take advantage of the power in relation to that market that it has by virtue of being in that position-

(a) to eliminate or substantially to damage a competitor in that market or in another market;

(b) to prevent the entry of a person into that market or into another market; or

(c) to deter or prevent a person from engaging in competitive behaviour in that market or in another market.

(2) For the purposes of this section, a corporation shall be deemed to be in a position substantially to control a market for goods or services if that corporation and any related corporation or related corporations are together in a position substantially to control that market.

(3) For the purposes of this section, a reference to a corporation being in a position substantially to control a market for goods or services includes a reference to a corporation which, by reason of its share of the market, or of its share of the market combined with availability of technical knowledge, raw materials or capital, has the power to determine the prices, or control the production or distribution, of a substantial part of the goods or services in that market.

(4) This section does not prevent a corporation from-

(a)  engaging, during the period of 4 months immediately following the date fixed under sub-section 2 (3), in conduct that is of a kind referred to in sub-section 45 (2) or 47 (1) but to which that sub-section does not apply by reason of the fact that the conduct is engaged in before the expiration of that period; or

(b)  engaging, after the expiration of that period, in conduct that does not constitute a contravention of any of the following sections, namely, sections 45, 47 and 50, by reason that an authorization is in force in respect of the conduct or by reason of the operation of section 92, 93 or 94.

Explanatory Memorandum (original)

The Explanatory Memo introducing the Trade Practices Bill 1974 was highly descriptive in relation to the Monopolization provision and gives little indication of its purpose (para's 24-26). The second reading speech, delivered by Mr Enderby (then Minister for Manufacturing Industry) on 16 July 1974 (House Hansard p 226),* indicated purpose of the Bill was stated as 'to control restrictive trade practices and monopolisation and to protect consumers from unfair commercial practices'. In relation to monopolisation Mr Enderby states:

[p 229] Monopolisation is defined in clause 46, which has been re-drafted since the earlier Bill was before this House. The clause covers various forms of conduct by a monopolist against his competitors or would-be competitors. A monopolist for this purpose is a person who substantially controls a market. The application of this provision will be a matter for the court. An arithmetical test such as one third of the market-a s in the existing legislation-is , we believe, unsatisfactory. The certainty which it appears to give is illusory.

Clause 46 as now drafted makes it clear that it does not prevent normal competition by enterprises that are big by, for example, their taking advantage of economies of scale or making full use of such skills as they have; the provision will prohibit an enterprise which is in a position to control a market from taking advantage of its market power to eliminate or injure its competitors.

The provision will not apply merely because a person who is in a position to control a market engages in conduct within one of the classes set out in the clause. It will be necessary for the application of the clause that, in engaging in such conduct, the person concerned is taking advantage of the power that he has by virtue of being in a position to control the market. For example, a person in a position to control a market might use his power as a dominant purchaser of goods to cause a supplier of those goods to refuse to supply them to a competitor of the first mentioned person - thereby excluding him from competing effectively. In such circumstances the dominant person has improperly taken advantage of his power.

In the Senate the Second Reading Speech was delivered by Senator Lionel Murphy on 30 July 1974 and was in substantially the same form.

* Note, the original second reading speech to the almost identical Trade Practices Bill 1973 was delivered by then Attorney-General, Senator Murphy ('the Murphy bill) - the re-introduction came about as a result of the double dissolution of Parliament and the re-introduced bill incorporated some previously circulated amendments. Murphy's second reading speech was delivered on 27 September 1973.

Aim/purpose of law

There have been several judicial attempts to define the aim or purpose of the law:

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.’

 

Reports

Tabular Summary of MMP Reports in Australia

1976 Swanson Committee
Trade Practices Review Committee
 

Recommended that the word 'to' in the original provision be replaced by a reference to 'purpose' (implemented by Trade Practices Amendment Act 1977).

1979 Blunt Review
Trade Practices consultative Committee
 

Recommended lower threshold of 'substantial degree of market power' (to replace substantial control) (see also 1984 Green paper) (implemented by Trade Practices Revision Act 1986 (Act 17 of 1986))

1984 Green Paper
The Trade Practices Act - Proposals for Change
 

Threshold test of control should be lowered to substantial degree of market power (para 26) (implemented 1986). Also noted difficulties arising from the term 'purpose' and recommended adding words 'or that has or is likely to have the effect' to ss 46(1) 'to give litigants an alternative method of establishing a contravention by proving the effect or likely effect of the corporation's conduct rather than having to establish a predatory purpose' (para 30) (not implemented)

1989 Griffiths Committee
Mergers, Takeovers and Monopolies: Profiting from Competition?
Report of the House of Representatives Standing Committee on Legal and Constitutional Affairs
 

Extensive discussion of s 46 and the decision in Qld Wire. Considered several proposals for reform, including introduction of substantial lessening of competition test. Considered Qld Wire decision resolve d 'the debate about the interpretation of the take advantage provision [and that the] neutral interpretation adopted by the High Court should make it easier for aggrieved parties to establish a breach' (para 4.6.26). Considered insufficient evidence presented to support need for major redraft

1991 Cooney Committee
Mergers, Monopolies and Acquisitions
Senate Standing Committee on Legal and Constitutional Affairs
 

Recommend that where Commission has brought forward evidence making it as likely or not that a breach has occurred 'then one will be taken to have occurred unless the corporation in question shows otherwise' (para 5.67) (not implemented).

Recommended that s 46 'be amended to provide that where persons engaged in conduct for the purpose of eliminating from or harming a class of persons in a market they shall be taken to be doing so in respect of a specific member of it' (rec 5.74)

Recomended against an effect test - an effects test would 'unduly widen the operation of the prohibition', forcing 'corporations to evaluate the potential effect for their every action ...' (para 5.64).

Recommended against introducing divestiture remedy - structural remedy not appropriate for s 46 contraventions

1993 Hilmer Committee
National Competition Policy
Independent Committee of Inquiry into Competition Policy in Australia
 

Favoured maintaining current rule 'to avoid dampening desirable competitive vigour and to avoid further uncertainty in an extremely difficult area' (p 62)

1999 Baird Committee
Joint Select Committee on the Retailing Sector
 

Recommended against 'reverse onus test' for section 46 'at this time'. Did not recommend effects test ( 'such far reaching changes to the law may create much uncertainty in issues dealing with misuse of market power' (para 6.32). Recommended against market cap and against divestiture as a s 46 remedy.

2001 Hawker Committee
House of Representatives Standing Committee on Economics, Finance and Public Administration
 

No effects test - await outcome of further cases before considering change to the law.

2002 McKiernan Committee
Senate Legal and Constitutional References Committee Inquiry into section 46 and section 50 of the Trade Practices Act 1974
 

No recommendation - referred to Dawson Review

2003 Dawson Review
Trade Practices Act Review Committee
 

Recommended against instroduction of effects test - would make it more difficult to distinguish between pro-competitive and anti-competitive behaviour.

2004 Senate Inquiry into the Effectiveness of the Trade Practices Act 1974 in protecting small business  

Did not recommend effects test.

2008 Inquiry by Senate Economics Committee into the Trade Practices Legislation Amendment Bill 2008 [external link]  

Recommended retaining market share test Birdsville amendment and introduction of non-exhaustive factors for taking advantage. Recommended amendment to make clear recoupment not required in predatory pricing cases. Confer power on Federal Magistrates Court in s 46 matters.

2014-2015 Inquiry by Senate Economics Legislation Committee into the Competition and Consumer Amendment (Misuse of Market Power) Bill 2014  

Recommended against introduction of divestiture powers for contraventions of section 46.

2014-2015 Harper Review
Final report released March 2015
 

Final report recommends effects test and introduction of authorisation option for s 46

2015-2016 Treasury Consultation on Options to Strengthen the Misuse of Market Power Laws (following Harper Report recommendations)  

Government announced it would adopt an effects test for s 46.

2016-2017 Senate Economics Committee Inquiry into Competition and Consumer Amendment (Misuse of Market Power) Bill 2016  

Recommend passage of bill (introducing effects test) subject to removal of mandatory factors

 

Blunt Review

In 1979 the Blunt Review (Chapter 9) recommended that the ambit of s 46 be extended to apply to firms that have a 'substantial degree of market power' (not just those that substantially control markets). (see 1986 amendments)

The Blunt Review also recommended that, to help ensure legitimate aggressive market behaviour was not put at risk, a provision should be inserted to remove from the ambit of the provision 'conduct of firms with comparable market power' (this recommendation was not implemented).

Green Paper 1984

Green paperThreshold test of control should be lowered to substantial degree of market power (para 26) (implemented 1986). Also noted difficulties arising from the term 'purpose' and recommended adding words 'or that has or is likely to have the effect' to ss 46(1) 'to give litigants an alternative method of establishing a contravention by proving the effect or likely effect of the corporation's conduct rather than having to establish a predatory purpose' (para 30) (not implemented). See Green Paper page.

The Trade Practices Revision Act 1986 (Act 17 of 1986) made this change. That Act also added a new s 46(7) which provided as follows:

"(7) Without in any way limiting the manner in which the purpose of a person may be established for the purposes of any other provision of this Act, a corporation may be taken to have taken advantage of its power for a purpose referred to in sub-section (1) notwithstanding that, after all the evidence has been considered, the existence of that purpose is ascertainable only by inference from the conduct of the corporation or of any other person or from other relevant circumstances.".

In his second reading speech, when introducing the 1986 Act, the Attorney-General, Mr Lionel Bowen, stated:

A competitive economy requires an appropriate mix of efficient businesses, both large and small. Whilst large enterprises may frequently have advantages of economies of scale, there are many occasions when large size does not of itself mean greater efficiency. However, a large enterprise may be able to exercise enormous market power, either as buyer or seller, to the detriment of its competitors and the competitive process. Accordingly an effective provision controlling misuse of market power is most important to ensure that small businesses are given a measure of protection from the predatory actions of powerful competitors. Unfortunately, section 46 as presently drafted has proved of quite limited effectiveness in achieving that result, principally because the section applies only to monopolists or those with overwhelming market dominance. Even in those cases, it has been extremely difficult for a plaintiff to establish the requisite predatory purpose on the part of the defendant corporation.

The amendments proposed in clause 17 address these two problems and are designed to make section 46 much more effective. The test for the application of the section is to be reduced from that of a corporation being in a position substantially to control a market to a test of whether a corporation has a substantial degree of market power. As well as monopolists, section 46 will now apply to major participants in an oligopolistic market and in some cases, to a leading firm in a less concentrated market. The amendment will also make it clear that the court can infer the requisite predatory purpose from the conduct of the corporation or from the surrounding circumstances. Section 46 in its proposed form, which will be described as misuse of market power rather than monopolisation, is not aimed at size or at competitive behaviour as such of strong businesses. What is being aimed at is the misuse by a business of its market power. Examples of misuse of market power may include in certain circumstances, predatory pricing or refusal to supply.

The Explanatory Memo noted that clause 17 (the change to s 46) was the most significant amendment in the bill and that it would (para 3):

'... lower the threshold of s 46, to apply the provision to those corporations which have a substantial degree of market power and improve the effectiveness of s 46 in other respects. ...'

...

36. The amendments to s.46 are designed to lower the threshold test for determining whether the section is applicable to the conduct of a corporation. The amendments also address the mode of proof. The new marginal note ‘misuse of market power’ is a more accurate characterisation of’ conduct of the kind to which s.46 is directed than ‘monopolisation’ as used in the Act now.

37. The amendment to sub-s.46(l), substituting the words ‘a corporation that has a substantial degree of’ power in a market shall not take advantage of that power for the purpose of’ is a composite provision. It should therefore, in the final analysis, be construed as a single provision even if particular words or expressions need to be looked at separately in the first instance.

Threshhold test

38. The test of whether a corporation has ‘a substantial degree of power in a market’ is substituted for the previous test of’ a corporation ‘being in a position substantially to control a market’. The new test is intended to provide a lower threshold for the operation of s.46. The section may be invoked in relation to a corporation that has a lesser degree of market power than is required under the present provision.

39. The expression ‘power’ is synonymous with ‘market power’ (see new sub-section 46(4)). 40. ‘Market power’ is a recognised economic concept which has been subject to considerable analysis in economic literature.

41. The use of’ the word ‘degree’ in the expression ‘degree of power in a market’ reflects the fact that ‘market power’ is a relative concept. All participants in a market possess a degree of’ market power which may range from negligible to very great.

42. The word “substantial” is used in several different contexts in the Act, and its meaning may change according to the context. Thus in Tillmanns Butcheries Pty Ltd v The Australasian Meat Industry Employees’ Union and Ors (1979) ATPR 40-138 at page 18,500, in the context of ‘substantial loss or damage’ , Deane J. preferred a meaning for ‘substantial’ of’ ‘real or of substance as distinct from ephemeral or nominal’ to the alternative ‘large or weighty’. However, in the context of s.46, ‘substantial’ is intended to signify ‘large or weighty’ or ‘considerable, solid or big’ (Palser v Grinling [1948] A.C. 291 at page 317).

43. The word imports ‘a greater rather than less’ degree of power, per Smithers J. in Dandy Power Equipment Pty Ltd & Anor v Mercury Marine Pty Ltd (1982) ATPR 40-315 at p.43,888. At the same time, ‘substantial’ in this context is not intended to require the high degree of market power connoted by the reference in existing s.46(l) to being in a position substantially to control a market, or by the reference in existing s.46(3) to the power to determine the prices of a substantial part of the goods in a market.

44. New sub-section (3) provides a guide to the way in which ‘market power’ is to be determined. It requires that consideration be given to the extent to which the conduct of’ a firm is or is not constrained by competition on the part of other participants in the market, potential entrants to the market, suppliers or purchasers.

45. The circumstances which give rise to absence of’ competitive constraint upon a corporation are diverse. They are not confined to size or market share in relation to competitors, or to those matters combined with technical knowledge, raw materials or capital. Other matters such as easier access to supplies or government controls on the market are relevant if’ they bear upon the extent to which the corporation can act without being constrained by competition.

46. A corporation having a ‘substantial degree of market power’ may have a lesser degree of market power than that of a corporation which ‘would be, or be likely to be, in a position to ... dominate a market’ as provided in s.50. ‘Dominance’ connotes a greater degree of independence from the constraints of’ competition than is required by a ‘substantial degree of market power’. Whatever the position in regard to ‘dominance’, more than one firm may have a ‘substantial degree of power’ in a particular market.

47. In Europemballage and Continental Can v. Commission /1973/ CMLR 199; United Brands v. Commission /1978/ 1 CMLR 429 and Hoffman La Roche v. Commission /1979/ 3 CMLR 211 the court had to determine the degree of market power in order to decide the question of dominance. Although the test of dominance is higher than that applying in the case of a substantial degree of market power, these cases adopt a similar approach to that envisaged by new sub-section 46(3) for the purpose of’ determining the degree of market power.

Prohibited conduct

48. A corporation having the requisite degree of market power is not prohibited from engaging in any conduct directed to one or other of the objectives set out in paras.46(l)(a), (b) and (c). Such a prohibition would unduly inhibit competitive activity in the market-place. The section is not directed at size as such, nor at competitive behaviour as such. What is prohibited, rather, is the misuse by a corporation of’ its market power.

49. A corporation which satisfies the threshold test by reason of its market power is not permitted by s.46(l) to take advantaqe of that power for the purpose of’ one or other of the objectives set out in paras.(a), (b) and (c). Those paragraphs describe various ways in which competition may be impaired in a market.

50. The term take advantage in this context indicates that the corporation is able, by reason of its market power, to engage more readily or effectively in conduct directed to one or other of the objectives in paragraphs (a), (b) and (c). It is better able, by reason of its market power, to engage in that conduct. Its market power gives it leverage which it is able to exploit and this power is deployed so as to ‘take advantage of’ the relative weakness of other participants or potential participants in the market. Whether this is so in a particular case is a matter to be inferred from all the circumstances.

51. Likewise, the reference to purpose in this context indicates that the conduct of the corporation, by which it takes advantage of its market power, must be directed to impairing competition in a market in one of’ the ways set out in paras. (a), (b) and (c).

52. Sub-section (7) makes it clear that whether a corporation has taken advantage of its power for a particular purpose is a matter which may be ascertained by inference from conduct or other relevant circumstances. While explicit statements if proved may establish the necessary purpose, direct evidence of’ that kind is not essential. The court may draw the necessary inference from conduct or other circumstances without the need for direct evidence. The ability to draw such an inference does not of course change the onus of proof. Proof of particular conduct or other circumstances may however give rise to a need for the other party to adduce evidence in order to rebut an inference which might otherwise be drawn.

53. By virtue of s.4F(b), it is sufficient if a requisite purpose (ie directed to s.46(l)(a), (b) or (c)) is one among other purposes of the corporation provided that the requisite purpose was a substantial one. In this context, ‘substantial’ is intended to signify a purpose which has substance or significance - as distinct from one which is ephemeral or nominal - rather than a purpose which is large, weighty or big.

54. Kinds of conduct which in certain circumstances could be in breach of the provision would include inducing price discrimination, refusal to supply and predatory pricing. These instances are indicative only and, in each case, it would be necessary to establish the requisite degree of’ market power and that advantage had been taken of the power for one of the specified purposes.

55. In regard to predatory pricing, in Victorian Egg Marketing Board v. Parkwood Eggs Pty Ltd (1978) ATPR 40-081, Bowen C.J. left open the question ‘whether in the ordinary course a monopolist can engage in predatory price cutting only if the price is below some particular cost, and not where the price set, although it may deter competitors, is one which merely does not rnaximise the monopolist’s profit’ (at p.17,789). It is not the intention of s.46 that pricing, in order to be predatory, must fall below some particular cost. The prohibition in the section may be satisfied ‘notwithstanding that it is not below marginal or average variable cost and does not result in a loss being incurred’ (at p.17,789). Nevertheless where a corporation with the requisite market power is, in the absence of countervailing evidence that its pricing was not aimed at destroying actual or potential competition, selling at below average cost there may be grounds for inferring that it is taking advantage of its power for a proscribed purpose.

56. On the other hand, a corporation which is able to price its goods very competitively by reason, for example, of’ economies of’ scale or the acquisition of new efficient production facilities, would not be inhibited from so doing by reason of the fact that it enjoys a substantial degree of market power. By reflecting in its pricing policy its efficiency it would not, without more, be taking advantage of its market power notwithstanding any effect of its pricing on its competitors.

[note: a supplementary EM was issued with the same content in relation to clause 17 but paragraph number differed - they start at 36 (not 36)]

Griffiths Committee 1989

Griffiths reportIn 1989 the Griffiths Committee considered the provision and noted difficulty in proving a corporation has taken advantage' of its market power.

Referred to the Papersave and Warman decisions as indicating possible limitations - noting that they:

'... are apparent authority for the notion that there is no contravention of section 46 if the conduct complained of can be categorised as taking advantage of a particular right, such as a legal or contractual right, or could have been performed regardless of market power. At issue is whether such conduct was intended to be or should be permitted under the Act. Also at issue is how to differentiate between legitimate business conduct and predatory behaviour'. The non-specific nature of section 46 reflects the difficulty in defining precisely the nature of predatory purpose.' [para 4.3.6]

The Report then refers in detail to the Qld Wire case. Much of the debate prior to the release of the report had centred around the first instance decision of Justice Pincus in that case - the High Court case, which overturned the decision of Pincus J therefore followed most of the early debate and submissions before the Committee:

... the High Court was unanimous in overturning the decision of Pincus J, in which he held that, in order to demonstrate a violation of section 46, it must be shown that a company has used its market power in some reprehensible way, rather than simply in a way which resulted in damage to a would-be competitor. Instead, the High Court adopted a neutral interpretation of the meaning of take advantage. ...[para 4.5.9]

Despite concerns expressed throughout the review, the Committee concluded:

[4.6.26] ... the Committee welcomes the High Court decision in the Queensland Wire Industries case for the degree of clarification which it has provided in relation to the various elements of section 46 of the Act. The judgement resolves the difficulties relating to market definition arising from the Full Federal Court's decision in the case. The decision also resolves the debate about the interpretation of the take advantage provision. It is the view of the Committee that the neutral interpretation adopted by the High Court should make it easier for aggrieved parties to establish a breach of section 46.

[4.6.27] ... The Committee is aware of concerns that the decision has not resolved all areas of uncertainty in relation to section 46. For example, there are concerns about the possibility of legitimate competitive behaviour being caught as a result of the neutral interpretation of take advantage, and concerns about the circumstances in which a refusal to supply will contravene the section.

[4.6.29] ... insufficient evidence has been presented to support the need for a major redrafting of section 46. ... the bulk of the evidence suggests that no change to the section is required, and that sufficient opportunity should be provided through the evolution of case law for the resolution of any potential difficulties in the section. Given that the High Court has now provided significant clarification of the existing wording of the section, the Committee is of the view that any major changes to the wording would at this time be a retrograde step which could lead to renewed uncertainty if new and untested prov1stons were substituted. In particular, the major proposals for reform suggested during the inquiry would not contribute to the achievement of any greater certainty in the law.

The Committee therefore recommended that s 46 be retained in its existing form.

Cooney Report 1991

Cooney reportOnly two years later the matter was considered again by the Cooney Committee. The Committee considered three specific proposals

  1. incorporation of an 'effects' test
  2. addition of further conduct to that currently prohibited; and
  3. extension of the range of remedies (including the possibility of divestiture)

Effects test

In relation to an effects test, the Committee noted concerns about the difficulty in proving purpose, including citing Justice Wilcox in External linkEastern Express, who observed:

... the outward manifestation of a decision to engage in predatory pricing is a lowering of prices, an action which, on its face, is pro-competitive. The factor which turns mere price cutting into predatory pricing is the purpose for which it is undertaken. That will often be difficult to prove. Traders rarely admit the existence of a proscribed purpose. [para 70]

The Committee noted that an effects test was considered and rejected by the Swanson Committee and in the Blunt Report and was not adopted in the 1986 amendments - however, they also noted s 46(7) was added in 1986 to facilitate proof of purpose by inference from conduct and other circumstances (para 5.19)

In favour of an effects test, the Committee referred to submissions from Prof Baxt, noting that an effects test would be consistent with the approach taken in other sections of the Act. They also noted the TPC's proposal to insert a new provision (in addition to the existing provision) which would 'subject to the conduct having the purpose or effect of substantially lessening competition, prevent a corporation with a substantial degree of market power from engaging in certain defined conduct', which would direct the section at competition rather than competitors (para 5.22). Treasury opposed that approach, suggesting 'a more direct approach would be tot urn section 46 into an effects rather than purpose related provision' (para 5.26).

Those opposed to an effects test included the AG Department, BCA, LCA, Dr Pengilley and Mr McComas. The BCA expressed concern was expressed that it might have 'unintended anti-competitive results' (BCA, para 5.28); the Law Council considered purpose a critical element of the contravention, prohibiting conduct which exploited a dominant position in a way harmful to the competitive process, and than an effects test would 'destroy this distinction and, in the process, act as a strong disincentive to healthy competitive conduct' (quoted para 5.30)

On this point the Committee concluded:

[para 5.62] The Committee accepted that 'establishment of purpose will continue to present difficulties of proof for litigants relying on section 46.

[para 5.63] Proposals to change the section by adopting an effects test would encourage greater use of the section by litigants, and have the virtue of consistency with the Act's other restrictive trade practices provisions.

[para 5.64] However, the Committee accepts that in a provision directed explicitly at misuse of market power it is appropriate that a distinction between purpose and consequence be retained. The Committee accepts that purpose is an essential element of the contravention. To prohibit the taking advantage of market power where this has or is likely to have the effect of, for example, preventing a person from engaging in competitive conduct would unduly widen the operation of the prohibition. It would force corporations to evaluate the potential effect of their every action on their competitors and potential competitors. [emphasis added]

[para 5.65] ... the process of effective competition involves engaging in conduct the potential effect of which is to produce the very ends proscribed in section 46, and considers that prohibiting such conduct by reference to its effect may challenge the competitive process itself. [fn omitted]

[para 5.66] If the difficulty with section 46 is proof of purpose, the Committee considers that this would best be dealt with by requiring a corporation, once the TPC, has established that it is as likely as not that an offence has occurred, to bring forward evidence showing that.it did not have a proscribed purpose .

[para 5.57] The Committee recommends that section 46 be amended by adding a further subsection to provide that, although the Trade Practices Commission has the overall onus of proving a breach of that section, when it has brought forward evidence which makes it as likely as not that one has occurred then one will be taken to have occurred unless the corporation in question shows otherwise.

This recommendation was not implemented

Further conduct

The Committee noted some proposals for additional coverage (from 5.32).This included discussion of s 46's application to excessive pricing (TPC arguing s 46 may need to be amended to cover this; Dr Pengilley strongly opposed) and discussion about whether s 46 should capture conduct likely to cause significant injury to consumers.

In relation to other conduct the Committee concluded that excessive pricing is better dealt with under the Prices Surveillance Act (para 5.69) and that misuse of market power affecting consumers 'is adequately dealt withunder the existing consumper protection provisions' (para 5.70). However, the Committee did consider that doubt existed as to s 46's application to conduct affecting the competitive process (and not merely competitors) and recommended:

[para 5.74] that section 46 be amended to provide that where persons engaged in conduct for the purpose of eliminating from or harming a class of persons in a market they shall be taken to be doing so in respect of a specific member of it.

Remedies

In relation to divestiture the Committee noted that this was considered by the Griffiths Committee which recommended against divestiture power for s 46 contraventions. They noted submissions in support of such a power (inc Prof Baxt, AFCO and NCAAC) and those opposed (inc VECCI, CAI, McComas, BCA). Other possible remedies were also discused.

In relation to divestiture the Committee noted that it is essentially a structural remedy and misuse of market power is essentially a matter of conduct (para 5.77). They recommended that divestiture not be made available as a remedy (para 5.80).

Hilmer Report 1993

Hilmer reportThe Hilmer Committee did not recommend any change to s 46:

The Committee sees a need to strike a balance between deterring undesirable unilateral conduct, encouraging business certainty and minimising the regulatory interference in daily business decisions. The Committee is not satisfied that any perceived difficulties with the current operation of s.46 are sufficient to warrant an amendment that would create additional uncertainty and thus potentially deter vigorous competitive activity. The Committee recommends that the current misuse of market power provision should be included in the conduct rules of a national competition policy.

The Committee stated that (page 69):

The central conundrum in addressing the problem of misuse of market power is that the problem is not well defined nor apparently amenable to clear definition. There is considerable debate about what sorts of conduct should be prohibited. Even if particular types of conduct can be named it does not seem possible to define them, or the circumstances in which they should be treated as objectionable, with any great precision. For example, it may be possible to say that "predatory pricing" is undesirable, but it does not seem possible to give a clear definition of what will amount to predatory pricing in all circumstances.

Faced with this problem, but recognising that there are clearly some cases which do go beyond the limits of vigorous competitive conduct and extend into the realm of conduct by which firms damage the competitive process, the challenge is to provide a system which can distinguish between desirable and undesirable activity while providing an acceptable level of business certainty. In this respect it is important to stress that uncertainty over the bounds of legally acceptable behaviour may deter efficient and socially useful competitive behaviour.

In addressing this challenge, the Committee starts from the position that there is already in place a regime which provides a basis for making the appropriate distinctions, that the regime is broadly consistent with approaches in comparable overseas jurisdictions, and that it has been sufficiently interpreted by the High Court to provide a reasonable degree of business certainty as to the limits of acceptable conduct. Moreover, none of the submissions presented to the Inquiry gave practical examples of any particular behaviour that was not proscribed by the current law and yet was clearly unacceptable. The Committee thus considers that proposals for alternative mechanisms for dealing with misuse of market power should offer a demonstrable improvement over the current regime to justify introducing further uncertainty in this difficult area.

The Committee went on to consider a number of proposals, including:

  • that a administrative investigation should replace legal prohibition
    Committee not satisfied deficiencies in current law warranted 'so bold a departure in approach' (page 70)
  • that an effects test replace the purpose test
    Committee did not consider that an 'effect of SLC' test woudl 'constitute an improvement on the current test' noting that it 'does not address the central issue of how to distinguish between socially detrimental and socially beneficial conduct'. The Committee noted that

    ... the very essence of the competitive process is conduct which is aimed at injuring competitors. A firm that succeeds in aggressive competitive conduct may drive other firms from the market and achieve a position of pre-eminence for an extended period. It does not necessarily follow, however, that the competitive process will be damaged by the conduct or that the potential for competition will be diminished, even if the immediate manifestations of the successful competitive conduct may suggest it. Firms should be encouraged to compete aggressively by taking advantage of new and superior products, greater efficiency and innovation. There is a serious risk of deterring such conduct by too broad a prohibition of unilateral conduct. The Committee takes the view that an effects test is too broad in this regard. ...' (page 70)

  • Modification to existing purpose test
    Committee considered various suggestions including that burden of proof be reversed in 'specific circumstances' by rebuttable presumption of prexribed purpose. The Committee noted that there was difficulty in determining what those 'specific circumstances' might be. None of the considered proposals for modification of the existing test were accepted.
  • Authorisation
    The Committee considered whether there would be capacity to authorise misuse of market power, but was not 'persuaded of the need for or desirability of authorisation in misuse of market power situations' noting that conduct contraventioning other sections can be authorised and, while so authorised, will not be taken to contravene s 46 (page 73)
  • Refusal to Deal
    The Committee was 'not convinced that alternative proposals for a generally applicable duty to deal are capable of being sufficiently specific in their application to ensure they would not themselves lead to inefficient results' (page 73)

The Committee concluded that 'any perceived difficulties with the current operation of s.46 are sufficient to warrant an amendment that would create additional uncertainty and thus potentially deter vigorous competitive activity.' (page 74)

Baird Report 1999

The Baird Committee (Joint Select Committee on the Retailing Sector)

The Committee considered merits of replacing purpose test with a 'reverse onus of proof' test, but was not convinced such a measure would be appropriate 'at this stage', but may be appropriate 'should the core recommendations prove to be ineffective in preventing predatory conduct'. (page ix)

Chapter 5 of the Report considered these issues in more detail (in the context of the retailing sector0:

  • Market cap
    Committee opposed market cap - 'based on figures, not on competition' and 'would be extremely interventionist, unworkable and detrimental to consumers' (para 5.26)
  • Divestiture
    Break up of economies of scale and scope to divest stores 'would lead to an unpredictable result, and may undermine the benefits and efficiencies brought about by vertical integration' (para 5.31)
  • Creeping acquisitions and mandatory pre-merger notification
    The Committee considered that 'mandatory notification may expose more clearly whether a major chain is implementing a deliberate strategy of creeping acquisitions.' (para 5.50)
  • Ombudsman and Code of Conduct
    The Committee was concerned that small retailers were 'fearful of commercial retribution from big business if they were to raise their concerns in pubic' and recommended 'Retail Industry Ombudsman and a mandatory Code of Conduct be established to deal with this recurring problem' (para 5.91)
  • Primary producers and supply contracts
    The Committee was of the view that 'power of individual growers in the market place is limited, and believes that a mandatory Code of Conduct will address the problems raised' (para 5.106)

Chapter 6 considered the issue of misuse of market power in the context of allegations of predatory pricing. It noted a 'significant amount of anecdotal evidence alleged instances of predatory pricing' (para 6.1)

The Committee also considered a 'reverse onus test' and an 'effects test' for s 46 and more generally, it considered the possibility of giving the ACCC powers to bring representative actions on behalf of small business to enforce Part IV provisions.

The Committee agreed the ACCC should have power to bring representative actions. However, it did not consider that a reverse onus of proof was appropriate at this time, nor did it recommend the introduction of an effects test (expressing the view that 'such far reaching changes to the law may create much uncertainty in issues dealing with misuse of market power' (para 6.32)

Hawker Report 2001

The Hawker Committee (House of Representatives Standing Committee on Economics, Finance and Public Administration) considered whether an effects test should be introduced into s 46. The specific proposal was that the word effect be added to purpose [see p 49]:

Section 46 would then prohibit a corporation that has a substantial degree of power in a market from taking advantage of that power for the purpose or effect of:

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;

preventing the entry of a person into that or any other market; or

deterring or preventing a person from engaging in competitive conduct in that or any other market.

The Committee discussed the three decisions in Melway, Boral and Rural Press and concluded:

[para 4.31] Given these breakthroughs in the interpretation of section 46 and the repeated concerns expressed by various inquiries about the move to an effects test, the committee’s preference is to await the outcome of further cases on section 46 before considering any change to the law.

McKiernan Committee 2002

The McKiernan Committee (Senate Legal and Constitutional References Committee Inquiry into section 46 and section 50 of the Trade Practices Act 1974) - discussion but no recommendation because Dawson Committee Review had been announced - referred evidence to Dawson Committee.

The Committee considered the following proposed amendment (proposed s 46(8)):

(8) In an action brought against a corporation by the ACCC under subsection (1), if the ACCC can show that the corporation:

(a) has a substantial degree of market power; and

(b) has taken advantage of that power;

the onus rests with the corporation to show that the corporation has not taken advantage of its power for a purpose referred to in subsection (1).

The Committee noted that a reverse onus test, if implemented, was likely to achieve only limited benefits and instead considered in more detail submissions that the purpose test ought to be changed; in particular it considered whether an effects test should be introduced.

However, ultimately they concluded that:

it may be premature to make recommendations on these amendments while other reviews of the Trade Practices Act 1974 are proceeding, most notably the review of the competition provisions of the Act [Dawson Review] ... The Committee proposes to refer the public submissions, the transcript of the public hearing and this report to the review committee. [para's 3.76-3.77]

Dawson Report 2003

The Dawson Report recommended no change to s 46.

Purpose v effect

The committee focussed exclusively on submissions that the purpose test in s 46 be replaced or supplemented with an effects test. The main proposal in this repsect was to add 'effect' to the current prohibition, so that it would capture conduct by firms with substantial market power having the purpose or effect of, for example, excluding a single competitors. For example, the Committee noted (page 81):

Under an effects test the proscribed purposes in section 46 (substantially damaging a competitor; preventing entry to the market; deterring competitive conduct) would become proscribed effects. Normal competitive behaviour by a firm with substantial market power which injured a competitor would be likely to satisfy an effects test.

The Committee doubted the difficulty in proving purpose, noting to the ability to infer purpose from surrounding circumstances, the fact that it need only be proved to the civil standard and the fact that purpose need not be the sole or dominant purpose (p 77). The Committee was, therefore 'not persuaded that proving purpose is an unnecessarily onerous hurdle' (page 79). They also rejected the introduction of an effects test on the basis that the section is designed to pursue the objective of protecting and advancing 'a competitive environment and competitive process', rather than protecting individual competitors, that it does this by restraining 'misuse of market power' and that 'misuse' occurs when advantage is taken of market power for a proscribed purpose, regardless of actual effect.' (page 79) The Committee found international comparisons 'difficult and unhelpful' (para 79) and further considered that replacing the purpose test with an effects test would:

... render purpose ineffective as a means of distinguishing between legitimate (pro-competitive) and illegitimate (anti-competitive) behaviour. The section is aimed against anti-competitive monopolistic practices, not competition, even aggressive competition. ... An effects test, which would disregard purpose, would make it even more difficult to draw a distinction between pro-competitive and anti-competitive behaviour than is currently the position under section 46 where purpose may be called in aid. (page 80)

The Committee also briefly considered an alternative proposal, that section 46 be amended to prohibit a coproration having a substantial degree of market power from taking advantage of that power with the effect or likely effect of 'substantially lessening competition'. The Committee considered that this would 'exacerbate the difficulties' with s 46 cand change its focus from conduct with a proscribed purpose to that with proscribed effect and that this would be likely to catch pro-competitive as well as 'anti-competitive conduct.' (page 85)

Take advantage

The Committee did not separately consider the 'take advantage' element, other than as part of their consideration of the 'effects' test. However, they did observe that in their view current interpretations meant that this requirement 'means little, if anything, more than 'use' of its market power' with the ultimate test being whether 'the corporation's conduct was made possible by the absence of competitive conditions' (page 81) and further that:

‘take advantage of’ essentially means ‘use’ and a corporation with a substantial degree of market power can readily be seen to use that power by engaging in the competitive process (page 85)

It is notable, however, that several significant decisions were on appeal at the time the Dawson Committee released its report - including Rural Press, Australian Safeway Stores, ACCC v Universal Music and ACCC v Boral - and the Committee considered that those cases'should provide greater practical guidance in the application of section 46' (p 84) and further that:

... it would not be in the interests of competition or consumers to change section 46, given that the cases currently before the courts offer a real prospect of developing a better understanding of the true scope of section 46. The position can, of course, be reviewed when the cases have been decided and there has been an opportunity to appreciate the impact of the decisions. (page 84)

Senate Inquiry into the Effectiveness of the Trade Practices Act 1974 in protecting small business 2004 (post-Boral)

The terms of reference to this inquiry included:

(a) whether section 46 of the Act deals effectively with abuses of market power by big businesses, and, if not, the implications of the inadequacy of section 46 for small businesses, consumers and the competitive process

In relation to misuse of market power the Committee made 6 recommendations -

  1. Substantial market power - that the Act be amended to state that the 'substantial degree of power' threshold his lower than the former 'substantial control' threshold and include declaratory provision outlining matters that can be taken into account [not accepted by the Government]
  2. Taking advantage - that the Act include a declaratory provision outlining elements of 'take advantage' [not accepted by the Government]
  3. Predatory pricing - the Act be amended to provide that, in determining whether s 46 has been breached, courts may have regard to the capacity of a firm to sell below variable cost and to provide that recoupment of losses is not an essential element of a predatory pricing claim under s 46 [this was prompted by the Boral case] [accepted in part by the Government - could be amended to ensure courts may consider below cost pricing, but not its capacity to price below cost in isolation and that s 46 should make clear that whether a corporation has a reasonable prospect or expectation of recruitment is a relevant factor in assessing misuse of market power]
  4. Financial power - the Act be amended to state that, in determining whether a firm has substantial market power, the court may have regard to whether the corporation has substantial financial power [this was prompted by the Rural Press case] [not accepted by the Government - financial power not the same as market power]
  5. Leveraging market power - that s 46 be amended to state that a corporation which has a substantial degree of power in a market shall not take advantage of that power in that or any other market [accepted by the Government]
  6. Co-ordinated market power - that s 46 be amended to clarify that a company may have substantial market power by virtue of its ability to act in concert with another company (whether as a result of formal agreement or otherwise) [accepted by the Government in part - provisions hould be amended to ensure that when assessing marke tpower court may take acount of market power that results form agreements with others]

Subsequently the Trade Pactices Legislation Amendment (No 1) Act (2007) gave effect to the accepted recommendations. In particular, it included

  • a new (3A) which expressly provided that a court, when determining the degree of market power held, may have regard to power resulting from agreements or covenants (related to recommendation 6)
  • a new (3B) was introduced which made clear that the other sub-sections (inc 3A) did not limit, by implication, the mattes the court may have regard to when assessing market power
  • a new (3C) was introduced providing that a corporation may have a substantial market power even though it does not substantially control the market or have absolute freedom from constraint by the conduct of competitors or suppliers/customers (related to recommendation 1)
  • a new (3D) was introduced to make clear that more than one corporation may have a substantial degree of power in a market
  • a new (4A) was introduced to make clear that, when determining whether a contravention has occurred, the Court may have regard to sustained below cost pricing and the reasons for that conduct (related to recommendation 3).

One year later the Trade Practices Legislation Amendment Act 2008 introduced a new subsection (6A) which set out a list of factors the court may have regard to when assessing whether a corporation has 'taken advantage' of its substantial market power. They include:

(a)  whether the conduct was materially facilitated by the corporation's substantial degree of power in the market;

(b)  whether the corporation engaged in the conduct in reliance on its substantial degree of power in the market;

(c)  whether it is likely that the corporation would have engaged in the conduct if it did not have a substantial degree of power in the market;

(d)  whether the conduct is otherwise related to the corporation's substantial degree of power in the market.

This subsection does not limit the matters to which the court may have regard.

The 2008 Act also amended s 86(1A) to confer jurisdiction on the Federal Magistrate's Court (now the Federal Circuit Court) in any matter arising under s 46 instituted by a person other than the Minister or ACCC. This power has never been used.

Birdsville Amendment

The most infamous amendment to s 46 was also introduced by the Trade Practices Legislation Amendment (No 1) Act (2007). This amendment (referred to as the Birdsville amendment after the name of the pub in which it was supposedly conceived) introduced a new subsection dealing specifically with below cost pricing - the new section 46(1AA) prohibits 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). View more commentary on this amendment.

In 2008 the Trade Practices Legislation Amendment Act 2008 introduced a new sub-section (1AAA)  providing that:

If a corporation supplies goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying the goods or services, the corporation may contravene subsection (1) even if the corporation cannot, and might not ever be able to, recoup losses incurred by supplying the goods or services.

The Birdsville amendment remains controversial and has never been litigated. There have been numerous calls for it to be repealed.

Senate Report 2008

Inquiry by Senate Economics Committee into the Trade Practices Legislation Amendment Bill 200

The bill and report focused on predatory pricing.

Market power v market share

The Government proposed amending reference to market share in s 46(1AA) to market power, consistent with s 46(1) noting, amongst other things, that it is 'possible in a readily 'contestable' market for a firm to have a large market share but little market power' (para 2.10) and, conversely, that a 'firm may also have market power and the ability to engage in predatory pricing despite a modest market share if it has 'deep pockets'. (para 2.10)

The Committee, however, concluded that (page 8):

... the term 'market share', as currently legislated in section 46(1AA) of the TPA, is a better defined and more readily measurable term than 'market power'. Moreover, it is concerned that the High Court's definition of 'market power' in the Boral ruling has set the threshold for predatory pricing cases far too high. The best evidence of this is that the ACCC has not brought a predatory pricing case before the High Court since the Boral ruling.

It recommended (recommendation 1) that 'the government reconsider the implications of changing 'market share' to 'market power' in section 46(1AA).'

Predatory pricing and take advantage

The bill proposed to introduce non-exclusive factors to be considered when determining whether a corporation has taken advantage of market power. The Committee supported these proposed amendments

Predatory pricing and recoupment

The bill proposed inserting the following provision:

A corporation may contravene subsection (1AA) even if the corporation cannot, and might not ever be able to, recoup losses incurred by supplying the goods or services at a price less than the relevant cost to the corporation of the supply.

The Committee supported these proposed amendments

Federal Magistrates Court

The bill recommended conferring jurisdiction on Federal Magistrates Court in s 46 matters. The Committee recommended implementation of this recommendation.

Senate Economics Legislation Committee Inquiry 2014-2015

The Senate referred the Competition and Consumer Amendment (Misuse of Market Power) Bill 2014 (introduced by Independent Senator Nick Xenophon), to the Senate Economics Legislation Committee for inquiry and report in the first half of 2014. The Committee was originally due to report by 24 June 2014; after a number of extensions the final report was produced on 26 February 2015. The Committee recommended against passage of the bill.

The Bill would have provided the Court with the power to order a corporation to reduce its market share, where the corporation has been found to have contravened subsections 46(1) or 46(1AA) of the Act.

The Committee (Senator Xenophon dissenting) concluded:

2.43 ... the committee does not consider a convincing case has been made for the introduction of a divestiture power as a remedy for the misuse of market power. Evidence has not demonstrated that the potential advantages of such a power would outweigh the likely disadvantages. In particular, the evidence received by the committee was compelling in questioning the courts' ability to 'fix' perceived problems with a market by ordering that certain assets of a large, complex and unified business organisation be divested. The committee is concerned that court-ordered divestiture would risk significant disruption and economic damage, with unpredictable consequences for competition.

2.44 In the committee's view, the evidence available suggests that the debate about section 46 should be focused on whether the prohibitions contained in it are effective, not whether further penalties need to be available. The committee notes this is the approach that appears to have been taken by the current independent review of competition policy being chaired by Professor Ian Harper. The Harper Review provides an opportunity for a thorough and holistic examination of competition policy, and the committee awaits the Harper Review's final report with great interest.

Harper Report 2015

Harper ReportA major Competition Policy Review took place from 2014-2015 with a final report released in March 2015. The Independent Review Panel (Chaired by Prof Ian Harper) called for the introduction of an effects test for misuse of market power.

For details of the changes see my misuse of market power overview (PDF)

The substance of the recommendations were enacted with the passage of the Competition and Consumer Amendment (Misuse of Market Power) Act 2017.

The changes, which will come into operation in 2018, represent the most significant change to the provision since it was enacted in 1974.

Treasury Issues Paper 2015-2016

The initial government response deferred a decision on misuse of market power, instead referring it for a further Treasury consultation (Treasury Consultation on Options to Strengthen the Misuse of Market Power Laws). On 16 March 2016 Prime Minister Turnbull announced the Government would adopt the proposed effects test and issued the following press release:

In a Press Release issued on 16 March 2016, the Government indicated it would adopt the Harper Review's recommendations in relation to s 46.

'Joint Media Statement - Prime Minister, Treasurer and Assistant Treasurer - Competition Policy

The Turnbull Government will legislate to fix competition policy in Australia through implementation of the Harper Review’s recommendation to amend Section 46 of the Competition and Consumer Act - the misuse of market power provision.

The Harper Review into competition policy - an election commitment of the Coalition Government - found Australia’s current misuse of market power provision is not reliably enforceable and permits anti-competitive conduct. This slows the entry and expansion of new and innovative firms, delays the entry of new technologies into Australia and impedes economic growth in the long term.

The Harper Review recommended that Section 46 be replaced by a new provision, which is better able to deal with harm to competition in Australian markets.

Following the review, and understanding of the concerns about the operation of the misuse of market power provision as well as the need to ensure the provisions enhance rather than inhibit competition, the Government undertook extensive consultation with stakeholders to soberly work through the issue.

Following this rigorous process the Government has decided to repeal the current Section 46, and adopt the changes recommended by the Harper Review in full. This will result in a new provision that prevents firms with substantial market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition.

The Government is committed to fixing Australia’s competition policy and the amendment of Section 46 to deal with unilateral anti-competitive conduct is an important step to ensure Australia has the best possible competition framework to support innovation and boost economic growth and jobs.

Conscious of the needs of business, the change is deliberately designed to reduce the uncertainty associated with amending a law. It uses existing legal concepts from within the competition law – such as ‘substantially lessening competition’ – and ensures the focus of the provision remains only on those firms that have substantial market power.

This reform represents a commercially and legally robust law, preventing firms with market power engaging in behaviour that harms the competitive process. It places Australia’s competition law on the right footing to encourage economic growth and innovation.

An effective misuse of market power provision is an important and necessary part of competition law, particularly for Australia’s more than two million small businesses which make up more than 97 per cent of all businesses.

The changes the Government has announced will more effectively focus on the long-term interests of both small businesses and consumers, improving the law’s clarity, effectiveness and force.

The change to Section 46 will protect the competitive process and is just one of the many actions the Government is taking to support small businesses, including by extending protections against unfair contract terms to small businesses and introducing Australia’s first Small Business and Family Enterprise Ombudsman.

Today’s announcement adds to the benefits small businesses are receiving from the Government’s response to the Harper Review.

The Government’s response will directly benefit small businesses through:

  • access to remedies, with the Government supporting the Australian Competition and Consumer Commission to take steps to improve its communications with small business and to more actively connect small businesses to alternative dispute resolution schemes;
  • improving the collective bargaining regime under the competition law, to provide more flexibility and increased information for small businesses, to help improve their bargaining position;
  • encouraging state, territory and local governments to review their competitive neutrality guidelines, to ensure that their commercial operation do not negatively affect commercial businesses; and
  • reviewing the anti-competitive impact of regulations, including standards and licensing, freeing up trading restrictions that apply to many businesses.

Protecting the competitive process is unashamedly pro-competition and allows everyone to have a go.

The Government will consult on Exposure Draft legislation before introducing it to Parliament later in 2016.'

Reproduction of media release 'Joint Media Statement - Prime Minister, Treasurer and Assistant Treasurer - Competition Policy': Source: Licensed from the Commonwealth of Australia under a Creative Commons Attribution 3.0 Australia Licence. The Commonwealth of Australia does not necessarily endorse the content of this publication.

 

International and Supranational Reports and Guidance (select)

 

Other national reports (select)

 

Reading

Australia

View Australian articles relating to misuse of market power in the reading room.

For a good summary see Sarah Barker, 'Misuse of market power - prosecution priorities and million-dollar penalties' (Minter Ellison Lawyers, Competition & Regulation newsletter, 15 December 2010)

See also Michael Terceiro, 'ACCC v Ticketek - a non-event?' (2012) 64(3) Keeping Good Companies 158-161 (reproduced on his blog, Competition and Consumer Protection) providing a list of ACCC-initiated s 46 cases between 1974-2012.

Other Jurisdictions

For reading generally relating to abuse of dominance see global reading page.