Competition law in for a revamp

Professor Bob Baxt outlines what he expects and would like to see covered in the first “root and branch” review of Australia’s competition law in more than 20 years.

The new Coalition government recently announced that two major reviews are to be conducted in 2014. 
One is the so-called “son” (or, as some might prefer, “daughter”) of Wallis – a review of the banking and financial sector under recently published Terms of Reference (T of R).

The second is a panel review (the membership of which is yet to be established) of Australia’s competition law and policy. This panel’s draft T of R have been published and are being reviewed by the states and territories.

They will potentially have a major impact on an area of our law which has a significant effect on companies and their directors and officers.

The Australian Competition and Consumer Commission (ACCC) is the major regulator of the Competition and Consumer Act 2010 (CCA) and this area of the law.

Once they are pursued by the panel early in the New Year, the draft T of R have the potential to significantly change some of our current regulatory regimes.

In addition to this review, there is likely to be pressure for the government to reflect on some of our company law regulations as contained in the Corporations Act 2001.

Australian competition policy – which was basically established by the reforms introduced by the national competition policy review (the Hilmer report) in 1993 – is vital for the continued success of the Australian economy.

The Hilmer report led to, among other developments, the establishment of competition codes of conduct, the replication of the then Trade Practices Act 1974 (the predecessor to the current legislation, the CCA), the creation of the National Competition Counsel (NCC) and the successful implementation of competition policy by the states and territories.

One way chosen to encourage the states to adopt such a policy was to eradicate or remove legislation which created anti-competitive detriments affecting the operation of potentially competitive business behaviour.

In the late 1990s and early 2000s, the NCC recommended that the Commonwealth grant special funding to states that removed legislation containing barriers to competitive behaviour.

All governments were also asked to introduce a regime where any new legislation or regulation (and the removal of such legislation and regulation) was assessed under a cost/benefit analysis. The responsibility for this was vested in a senior government department.

This particular practice has been largely ignored in the past few years, but Prime Minister Tony Abbott recently indicated that he would take on this responsibility.

Indeed, a special Parliamentary Secretary (Josh Frydenberg) has been vested with the responsibility of ensuring that the Commonwealth, state and territory governments go through a rigorous and vigorous process of reviewing legislation and regulation.

The draft T of R announced by Abbott and the Minister for Competition Law, Bruce Billson, are unlikely to be changed.

They call for a very tight timetable – 12 months in total – for the re-examination of many of the principles underpinning the CCA and competition policy.

Importantly, the T of R also require a re-examination of the competition principles that are influential in “driving” our legislative and administrative framework in this context.

So, for example, the panel is asked to review whether certain “carve outs” in the CCA should remain. It will also examine whether there should be a set of new carve outs to reflect that our competitive environment has changed.

The Productivity Commission recently completed its report on the Access Regime (Part IIIA of the CCA) and the panel is asked to consider whether its conclusions should be accepted or revised.

The panel is also directed to review whether other previous reports or recommendations for legislative change have been effectively adopted or have somehow disappeared – for example, whether a report by the Ergas Committee on the interaction between competition legislation and intellectual property protection legislation is properly “recognised” in the CCA or has been ignored.

The T of R also require the panel to ensure that Australia adopts the most effective and efficient way to administer and regulate competition legislation.

The panel is asked to reflect on whether the CCA, and any relevant parallel legislation, is delivering the best possible avenues for the operation of our legislation.

This may require changes to the fundamental principles guiding the way the legislation is drafted and the way our regulatory bodies operate, as well as an investigation into whether they are established under the best regime.

So, for example, the panel may suggest simplifying and expediting the examination of practices and agreements that seek protection from the legislation (known as authorisation).

Currently in the CCA there is a provision being tested for the first time in a merger/takeover involving the dairy industry (the Murray Goulbourn proposed acquisition of Warrnambool Cheese) where Murray Goulbourn is seeking authorisation (ie. exemption) under the CCA from the Australian Competition Tribunal rather than from the ACCC (which was responsible under the previous process). If parties wish to have a merger authorised, they go directly to the Tribunal, with the ACCC acting basically as “amicus curiae” to assist the Tribunal in assessing whether the merger, while anti-competitive, may nevertheless produce public benefits which outweigh the detriments.

It will be interesting to see whether the Murray Goulbourn/Warrnambool Cheese transaction will be assessed in an effective and efficient way.

Should we have, for example, changes to the law that allow parties to seek authorisation directly from the Tribunal for other anti-competitive agreements or practices which do not deal with mergers but relate to other important transactions in the marketplace? Can the ACCC act as “amicus curiae” in each of these scenarios? Should this be a matter of choice for the parties – that is, can they seek to go direct to the Tribunal rather than the ACCC and then possibly face a review by the Tribunal?

Insofar as the public is concerned, one of the most troublesome questions in evaluating whether the legislation and the ACCC are working effectively concerns the effect of powerful players in very concentrated markets such as the dairy, petroleum, telecommunications and other industries.

It has been suggested that some of the powerful players in these areas may misuse their market power in such a way as to detract from the effective and proper operation of small businesses.

The ACCC continually asks whether section 46 of the CCA (which prohibits the misuse of market power) should be amended or whether the legislative regime introduced to prevent the occurrence of unconscionable conduct should be strengthened.

Should there be other changes made to the legislation to regulate unfair conduct? Will such changes, assuming they are recommended for introduction, lead to more efficient and effective ways for both the ACCC and private parties to challenge the alleged misuse of market power? Or are the current rules in operation, as interpreted by our courts, effective in dealing with these areas?

While these are not the direct questions raised by the T of R, they reflect the underpinning issues that will govern much of the work of the panel.

Another question is whether the remedies currently available under the legislation are sufficient to deal with so called anti-competitive practices or agreements. There has been a consistent call by various sectors o f the community for the vesting of power enabling the ACCC to breakup organisations that misuse market power.

Should such a power to order a breakup of a monopoly (and we have a number of quasi monopolies, if not pure monopolies, in this country) be introduced more generally in certain circumstances?

As an aside, let me indicate that it is my opinion that the introduction of such a power into our law would be counterproductive – these powers are rarely used overseas and most of the examples of them being used have shown them to be ineffectual.

The panel is asked to assess whether there are impediments to the conduct of effective and aggressive competitive behaviour that is in the public interest.

Principles to guide the panel in its considerations include the principle that no market should be conducted or operated to allow the engagement in anti-competitive conduct by the players; that productivity is a key initiative that should be pursued to encourage stronger wage growth and higher standards of living; that the government should ensure it does not interfere with the effective and competitive operations of the private sector; and that any unnecessary regulatory burdens are removed (or are seen to be justified).

Furthermore, the panel is asked to ensure that the Australian legislation and its implementation are continually open to innovation and creativity and measure up to the world’s best practice.

Australia operates in a global economy and our markets and social structures, as well as our regulatory regimes, should ensure that both the legislation and the regulators can operate effectively in this context.

These are just some of the criteria the panel will have to reflect on and assess in a 12-month period.

It will call for submissions and these are likely to be numerous, challenging and sometimes controversial.

The panel is expected to  publish an issues paper towards the end of February or early March 2014.

A draft report is expected in September or October and a final report is due by early December.

This is an ambitious, but welcome, initiative from the Coalition government.

At the same time, however, it should not be forgotten that for some time the operation of the basic provisions of the Corporations Act setting down the rules directors are asked to comply with in carrying out their obligations and exercising their duties have been seen to be very demanding.

In addition to those provisions which replicate rules in the common law (that is, the general law), we have many other provisions in the legislation which regulate matters such as continuous disclosure (which prohibits certain market practices including insider trading and market manipulation), the potential financial penalising of directors who engage in what is described as insolvent trading (where directors try desperately to save companies that might be in financial difficulties but fail to do so) and similar provisions covering certain other areas. Of course, high on the list will be the removal of reverse onus of proof legislation and strict liability regimes.

The existence of rules governing corporate social responsibility, which are not backed by legislation, also create burdens and difficulties for directors and can lead to inconsistencies between the operation of the strict legal rules set out in the Corporations Act and the high hopes and expectations the community has of directors and senior business leaders.

The Australian law, however, does require companies to have in place effective risk-management and compliance committees and to have a culture of compliance.

Indeed, the failure to ensure that this occurs may lead to criminal sanctions being imposed under the Commonwealth Criminal Code.

Some rationalisation in the context of the interaction between these sets of rules is required.

In addition, it is important that our laws provide directors with a basic safe harbour if they try in good faith, and with no conflict of interests involved, to rescue companies that are in financial difficulties.

These rescue operations are usually conducted to save jobs and allow companies to continue operating, leading to greater prosperity for all concerned.

Hopefully, these root and branch reviews – both those announced and perhaps those yet to be established – will lead to a more effective and efficient economy and a better set of rules governing the behaviour of the leaders of our business enterprises whether large or small.

We will follow with interest the work of the specialist panels and committees which have been asked to undertake these significant and onerous tasks.