Professor Bob Baxt considers whether an effects test will adequately protect small business and enhance the competitive process in Australia.

    The change of Australian Prime Minister in September, and the change in the minister responsible for pursuing the Harper Report, has once again thrown into sharp focus the likely conclusions to be reached on the current section 46 of the Competition and Consumer Act (the Act), which prohibits a misuse of market power. It is at the heart of a major debate being vigorously pursued. Large and small business groups are taking sides in the assessment of this particular question, “aided” by lawyers and other advisers.

    Claims that the current section has been ineffective have led many to seek an extension of its language. The Harper Panel proposed significant changes to section 46. The amended version would allow courts to assess whether companies (and others) with significant market power have misused their market power by assessing, not only the purpose of particular conduct (the current test), but also the effect or likely effect of the particular conduct of the company, where the company enjoys relevant market power. The words “taking advantage of the relevant market power” will be deleted: the court will be asked to assess the purpose, effect or likely effect of the relevant conduct by reference to the question – will it lead to, or has it led to, a substantial lessening of competition.

    The expression “substantial lessening of competition” is used in many sections of the Act and is assumed to be a safe test. The drafting of the section is yet to be finalised but in the meantime the Business Council of Australia, the Competition Law Committee of the Business Law Section of the Law Council of Australia, and other business organisations, have challenged the need to change the section. These bodies and individuals have queried the validity of the approach proposed by the Harper Panel. Many commentators, including Rod Sims, chairman of the Australian Competition and Consumer Commission (ACCC), have, incorrectly in my view, suggested that the current section 46 targets conduct by reference to individual companies and competitors rather than competition generally. This is not reflected in the decisions of the courts. As the High Court noted in the leading case on section 46, Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177, the object of the section is to “protect the interests of consumers, the operation of the section being predicated on the assumption that competition is a means to that end”. The High Court added that competition was by its very nature deliberate and ruthless. Competitors would jockey for sales with the more effective competitors injuring the less effective competitors by taking their sales away. It noted that competitors would always try to injure each other in this way. There have been many other cases in which a similar approach has been adopted. Relatively few cases have highlighted the section; litigants, including the ACCC, have been bitterly disappointed in the results. The leading cases of Rural Press Limited v ACCC (2002) 193 ALR 399, Boral Besser Masonry Ltd v ACCC (2003) 215 CLR 374 (both cases brought by the ACCC), and Melway Publishing Pty Ltd v Robert Hicks Pty Ltd [2001] HCA 13, have all been decided against the regulator/plaintiff. The most recent decision, ACCC v Cement Australia [2013] FCA 909 saw the ACCC fail in its claim under section 46 (although it was successful in establishing a breach of section 45 of the Act against the company). It is suggested that the problem lies in the way the courts have interpreted the words “taking advantage of”. They have ruled that, if a company with market power is more efficient and effective in conducting its business, and takes advantage of this efficiency to achieve vigorous and effective campaigns which impact on the operations of other competitors, this does not amount to a misuse of market power.

    Unconscionable conduct

    In the 1990s, the Federal Government of Australia decided to introduce a law, which banned “unconscionable conduct” impacting on small businesses. The premise was that companies with market power were taking ruthless and other actions against smaller players. While the concept of unconscionability was reasonably well understood in the common law, our courts have struggled in trying to provide an adequate evaluation of the operation of these provisions. Most recently, the ACCC has been successful in bringing litigation under this provision against the Coles Group of companies in relation to certain business practices engaged in by that group, which were alleged as being unconscionable. The Coles Group decided to settle the case and a significant penalty was imposed by Justice Gordon in the Federal Court (by consent) (see ACCC v Coles Supermarkets Australia Pty Ltd (2014) FCA 1405. This success has somehow been translated into a belief that the proposed changes to section 46 will achieve a similar result.

    Unfortunately, the cases that the ACCC has run in reliance on section 46 of the Act have not always been conducted in a way that highlighted the critical issues that needed to be addressed. There have been some errors, in my view, in the decisions of the court – the decision in the Cement Australia case referred to earlier is a case in point.

    Furthermore the proposed amendments, which will require the concept of the substantial lessening of competition to be assessed by the courts, raises other problems. The relevant market impacted by the alleged anti-competitive conduct has to be defined. Next, the plaintiff will have to establish that the defendant has the necessary market power. The question of whether the purpose, effect or likely effect of the conduct has led to a substantial lessening of competition or will lead to that result, is much more difficult to establish.

    In two recent cases dealing with simpler statutory provisions than the proposed new section 46, the ACCC had to establish whether certain anti-competitive price fixing conduct had occurred. In both the ACCC v ANZ Banking Group Limited [2015] FCAFC 103, and in Flight Centre Limited v ACCC [2015] FCAFC, the Full Federal Court (which is likely to be the court to decide most of the cases that may be brought under section 46), criticised the manner in which the ACCC tried to establish that the alleged breaches had substantially lessened competition. The judgments in both the cases criticised the artificial nature of the ACCC’s evaluations of both the relevant market and the question of whether competition had been substantially lessened.

    That criticism is very disappointing but not surprising. The Federal Court in the recent merger litigation by the ACCC against the Melway Group (see Justice Emmett in ACCC v Metcash Trading Limited [2011] FCA 967, and the Full Federal Court in the ACCC v Metcash Trading Limited [2011] FCAFC 151), criticised the failure of the ACCC to adequately address questions relating to the appropriate market and the evaluation of whether there had been a substantial lessening of competition.

    The ACCC has nearly always found it difficult to establish that there was a substantial lessening of competition in the relevant market. The proposed amendment to section 46 will pose similar difficulties.

    The previous Minister for Consumer Affairs and Small Business, the Honourable Bruce Billson, repeated on many occasions that the proposed changes of section 46 are not an attempt to try to improve the position of small business.

    Nevertheless, small business continues to support the proposed changes, believing that the change to section 46 will significantly improve its broad chances to compete more effectively in the marketplace. I doubt very much that the proposed changes to the law, once finally drafted and in place, will lead to any greater comfort for small business. Unless the ACCC is able to show that it has learnt from past failures to gain major successes in showing how competition has been substantially lessening: simply including an effects test as part of the way section 46 is to be assessed in future may just be wishful thinking. But the cost to business in obtaining advice on a new law may have very few redeeming features.

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