Mending or just amending competition law? The legislative changes recommended by the Harper Review
Competition law eBulletin - 1 October 2014
The well-publicised Draft Report of the Competition Policy Review Panel has lived up to its "Root and Branch Review" nickname, comprehensively examining the efficacy of Australia's competition policies, laws and institutions.
In our previous eBulletin, we provided a broad overview of the Harper Review's key findings and draft recommendations in respect of competition policy and institutions. In this eBulletin, we look in more detail at the key changes to substantive and procedural law put forward by the Panel in its draft recommendations.
- Misuse of market power
- Simplification of cartel provisions
- Price signalling
- Supply chain restrictions
- Resale price maintenance
- Employment-related matters
- Exemption processes and enforcement
- Private enforcement
- Intellectual property
- Other recommendations
- Next steps
- Further information
The Draft Report considers the current merger provisions to be appropriate and sufficiently flexible. However, while it does not recommend changes to the substantive law, the Panel does suggest that improvements can be made to the administrative and procedural aspects of merger review.
While some submissions to the Panel raised issues with the market definition applied in merger assessment (including that it does not give proper consideration to global markets), the Panel maintains that the current definition of ‘market’ as a market in Australia is appropriate, and that it is a well understood concept. Notwithstanding this, the Panel does suggest that the definition of ‘competition’ could be strengthened to clarify that competition from potential, not just actual, imports is encompassed.
Informal and formal review processes
The Panel's view is that the informal merger process is generally effective and, although there is scope for greater consultation, there should be no attempt to further formalise it. The panel does recommend, however, that the formal approval processes (ie formal merger review and authorisation) be combined and reformed to make them more user-friendly. It goes on to outline a general framework for such a regime, containing the following elements:
- The first instance decision maker should be the ACCC, subject to review by the Australian Competition Tribunal.
- The ACCC should be empowered to approve a merger if it is satisfied that the merger does not substantially lessen competition or that it results in net public benefits.
- The process should have no prescriptive information requirements, but the ACCC should be empowered to require the production of business and market information.
- The review process should be subject to strict timelines that cannot be extended except by consent of the merger parties.
The current formal review and authorisation processes are widely accepted as being unduly onerous, expensive, and commercially unrealistic.
In our view, any reform that will provide regulatory certainty in a timely fashion without imposing unnecessary bureaucratic and legal burdens on merger parties is to be welcomed.
There has been a great deal of public debate about the effectiveness of the prohibition against companies misusing their market power. To date, much of that debate has centred on whether the attention of section 46 on the purpose of impugned conduct is appropriate. A number of submissions - including that of the ACCC - argue that regard should more properly be had to the effect of the conduct. A related question is whether the law should (as it does currently) prohibit the use of market power to harm individual market participants, or whether the proper focus ought to be potential harm to the competitive process as a whole.
The Panel's view is that the current prohibition in section 46 should be modified and refocused on its policy intent and long-term consumer interests. The Draft Report recommends inclusion of an 'effects test' to sit alongside the current 'purpose test'. Importantly, however, the Panel advocates a requirement that the relevant purpose or likely effect be a substantial lessening of competition, rather than harm to any particular individual or business.
The Panel also recommends removal of the problematic element of the corporation "taking advantage" of its market power, meaning the reframed provision would be along the lines of:
A corporation that has a substantial degree of power in a market shall not engage in conduct if the conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in that or any other market.
Potential overreach caused by removal of the 'take advantage' element would be avoided by the introduction of a 'procompetitive and rational business strategy' defence. This would require proof that the conduct in question would be a rational business strategy of a corporation without a substantial degree of power in the market, and that the likely effect of the conduct will be to benefit consumers in the long-term. The onus of proving this defence would be on the corporation seeking to rely on it.
While the Panel is seeking submissions on the scope of the proposed defence, we consider that much will turn on its precise formulation. In our view, however, this shifting of the onus of proof could in some circumstances chill competitive conduct as businesses compete less aggressively in order to avoid an investigation and possible court action.
Of the numerous criticisms of the cartel conduct provisions introduced in 2009, the most frequent is their undue complexity and wordiness. The Panel generally supports the intent of the existing cartel conduct prohibitions and criminal sanctions, but identifies significant deficiencies and excessive complexity in the current framework. It agrees with various submissions that simplification is required, and recommends the following:
- the provisions should only apply to cartel conduct affecting goods or services supplied or acquired in Australian markets;
- the provisions should be confined to conduct involving actual competitors, not firms for whom competition is a mere possibility, with the threshold to be changed to apply a 'more likely than not' or balance of probabilities assessment;
- removal of the prohibition against exclusionary provisions in 45(2)(a)(i) and (b)(ii);
- broader exemptions for joint ventures and other similar business collaborations, recognising that such conduct will be caught by the section 45 anti-competitive provisions if it has the purpose, effect or likely effect of substantially lessening competition; and
- exemptions for trading restrictions imposed by one firm on another in connection with the supply or acquisition of goods or services, recognising that this conduct will be prohibited by the section 47 prohibition on such supply chain restrictions.
The Panel cited New Zealand's current proposed approach to cartel provisions as an illustration of how simplification might work with respect to the Competition and Consumer Act 2010 (CCA).
We consider such reforms are necessary to lend greater clarity and certainty to this vitally important area of law and to overcome some arguably problematic outcomes in recent court decisions.
The Draft Report strongly states that the 'price signalling' prohibitions in Division 1A of the CCA should be repealed because they are inappropriately confined to the banking industry, are not fit for purpose and do not find the right balance between anti- and pro-competitive conduct. In lieu, section 45 should be extended to capture anti-competitive price disclosure or other 'concerted practices' that meet the competition test.
The Draft Report acknowledges that third-line forcing is a common business practice and should not be prohibited per se, but treated consistently with other forms of exclusive dealing; that is, made subject to a 'substantial lessening of competition' effects test.
The Panel also recommends amending section 47 to apply to all forms of supply chain restraints rather than just specified types. The revised provisions would prohibit the following:
- supplying or acquiring goods or services subject to a condition that has the purpose or likely effect of substantially lessening competition; and
- refusing to supply goods or services to, or acquire goods or services from, a person for the reason that the person has not agreed to a condition that has the purpose or likely effect of substantially lessening competition.
We would welcome a less prescriptive and more simply structured prohibition on exclusive dealing arrangements, and one that focusses on those that are actually anticompetitive. We note, however, that a number of calls have been made over the years for the per se prohibition on third line forcing to be abolished. Most recently, the recommendation of the Dawson Inquiry was rejected by the Federal Government. It will be interesting to see how this latest recommendation is received.
The Draft Report recommends retaining the prohibition on resale price maintenance (RPM) as a per se prohibition and not subject to a competition-based test. It does note, however, that it would be appropriate to allow businesses to seek exemptions more easily. For this reason, the Panel suggests that the notification process be extended to RPM (being a quicker and cheaper option for businesses than authorisation).
The Panel also recommends that the prohibition be amended to include an exemption for RPM conduct between related bodies corporate, to align with current sections 45 and 47 and reflect the principle that companies within a corporate group are a single economic entity.
While some overseas jurisdictions have moved away from a per se prohibition of RPM conduct in recent years, views about the practice's effect on competition remain divided. While the US Supreme Court's 2007 decision in Leegin made RPM subject to a "rule of reason" or competitive effects test, a significant number of States have legislated against that ruling, reverting to a per se prohibition. While notification of RPM conduct may be relatively straightforward procedurally, some guidance from the ACCC about its attitude to the practice will be necessary before knowing whether such notifications will be allowed to stand.
The Draft Report addresses secondary boycotts and trading restrictions in industrial agreements. These categories of employment-related conduct are not within the general exclusion from CCA provisions of the negotiation of employment terms and conditions.
Prohibitions on secondary boycotts are considered fit for purpose. However, the Panel recommends that the ACCC include in its annual report the number of complaints made to it in respect of secondary boycott conduct and the number of matters investigated and resolved during the relevant year, and that jurisdiction for secondary boycott proceedings be extended to state and territory Supreme Courts.
The Draft Report notes a potential conflict between the intended operation of sections 45E and 45EA regarding trading freedoms, and the regulation of awards and enterprise agreements under the Fair Work Act 2009. The panel recommends that the limitations in sections 45E and 45EA be removed so that the prohibitions do not only apply to restrictions affecting persons with whom an employer 'has been accustomed, or is under an obligation' to deal with.
The Draft Report expresses the view that authorisation and notification provisions have become overly complex and need to be simplified. To achieve this, the Panel recommends:
- ensuring that only a single authorisation application is required for a single business transaction or arrangement;
- empowering the ACCC to grant an exemption (including for per se prohibitions) if it is satisfied either that the proposed conduct is unlikely to substantially lessen competition or that it will result in a net public benefit; and
- empowering the ACCC to grant block exemptions for specified conduct in particular market conditions, a change which could be based on the UK and EU framework.
The Draft Report also targets the burden imposed by section 155 notices. It recommends that the current obligation to produce documents should be qualified to require a 'reasonable search'. This is a positive recommendation for all businesses in light of the regulatory burden caused by the extensive numbers of compulsory notices currently being issued.
The Panel's view is that the penalties for non-compliance with section 155 notices are inadequate, and it is seeking submissions on whether the penalties should be increased. This is consistent with the ACCC's submission.
The Draft Report expresses the view that impediments to private enforcement of competition laws should be reduced. The Panel recommends that admissions of fact made by a corporation, in addition to findings of fact made by a court, in one proceeding may be relied on in subsequent proceedings.
This recommendation is not without controversy. Many ACCC prosecutions are resolved without resort to a trial through the corporation admitting to certain facts and making a joint submission with the ACCC on the appropriate penalty. While the proposed changes will greatly assist private litigants affected by unlawful conduct to claim damages, this exposure may discourage corporations making admissions in order to resolve penalty proceedings.
The Panel supports an overarching review of existing intellectual property laws, most likely to be undertaken by the Productivity Commission, to better address the influences of new technology, market developments and international trade agreements.
The Draft Report also recommends the repeal of subsection 51(3) of the CCA, which provides a limited exception from competition law prohibitions for some transactions involving IP. The exemption of IP licences from the cartel conduct provisions would be retained. This position supports recent recommendations of the House of Representatives Standing Committee on Infrastructure and Communications and the Australian Law Reform Commission.
The tension between competition law and IP rights has received a great deal of academic attention over the years. It will be interesting to see the response to this recommendation from major IP rights holders, such as pharmaceutical and technology companies.
Other legislative reforms recommended by the Panel are:
- repeal of the liner shipping exemption under Part X, introduction of 'safe harbours' and empowerment of the ACCC to grant block exemptions for liner shipping agreements that meet a minimum standard of pro-competitive features;
- simplification of CCA provisions including the removal of subsections 45(1), 45B and 45C (relating to covenants) and 46A and 46B (concerning misuse of market power in a trans-Tasman market);
- competition law provisions to apply to the Crown (including local government) insofar as they undertake activity in trade or commerce;
- amendment of section 5 to remove extra-territorial requirements and allow the CCA to apply to conduct where the contravening firm does not have residence, incorporation or business presence in Australia;
- simplification of and greater flexibility in the notification process for collective bargaining by small businesses.
Reactions to the Draft Report have been quite varied, with some groups strongly opposing some of the more controversial recommendations (such as the reform of the misuse of market power provisions). Importantly, whatever recommendations are finally made by the Panel, they must be accepted by the government to be translated into actual reforms. Submissions on the Draft Report are encouraged and must be made by 17 November 2014.
All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.