A warning for SMEs – the “effects test” will apply to your market power too
In what is the biggest shake up of competition law in Australia for many years, the Australian Government has announced that it will amend the legal test to determine whether a business has misused its market power. If the proposed changes are passed, the scope of activities constituting a misuse of market power will be significantly broadened. The proposed changes have attracted attention from big and small business alike. Whilst the changes could shift greater power to smaller industry players, those looking for a more level playing field should be careful what they wish for – the changes could impact more than just big business.
In this Litigation Monitor, Moulis Legal senior lawyers Lisa Eldridge and Emily Murphy examine the proposed changes to the misuse of market power laws and what direct and indirect impacts the changes could have for small and medium businesses.
Current test consistently underachieves
Healthy competition amongst businesses has always been strongly advocated as it encourages innovation and leads to economic growth through improved products and services.
Competition law in Australia currently prohibits a business with a substantial degree of market power from misusing its market power to the detriment of its competitors. The test to determine whether a business has misused its market power is whether that business has taken advantage of its market power for the purpose of:
- eliminating or substantially damaging a competitor;
- preventing an organisation from entering into a market; or
- deterring or preventing an organisation from engaging in competitive conduct.
This is known as the ”purpose test” and is a high bar to reach because it requires an assessment of the intentions of the business.
The current laws also expressly prohibit businesses with a substantial share of a market (as opposed to having substantial market power) from providing goods or services at less than cost price for a sustained period for one of the above purposes.
In 2014 the Harper Panel Review analysed Australia’s competition laws and recommended that the current test for misuse of market power be changed as it was difficult to enforce and was not effective in capturing all types of behaviour involving misuse of market power. Part of the difficulty in enforcement stems from the high threshold caused by the need for a business to have “taken advantage” of substantial market power.1 The phrase “taken advantage of” has frequently been a difficult notion for Courts and regulators to define which has caused there to be a lacklustre record of prosecution.
In response to the recommendation for change, the Australian Government released a discussion paper outlining six proposals for changing the current test.2
The Government received 85 responses to this discussion paper, 78 of which are publicly available. The responses came from a mixture of large and small-medium businesses, and from industry associations. Of the 78 public submissions, around 70% of respondents supported some form of change to the current test. By far the most popular proposal was to adopt all of the changes recommended by the Harper Review – approximately 42% of submissions supported this option.
Government goes “full Harper” in proposed new test
On 16 March 2016, the Government announced its intention to adopt all of the changes to the test for misuse of market power as suggested by the Harper Review. The Government intends to amend the Competition and Consumer Act 2010 (“the Act”) to:
- prohibit conduct that has the purpose, or would have or be likely to have the effect, of substantially lessening competition by a corporation with a substantial degree of market power;
- remove the requirement that the corporation must seek to “take advantage” of its substantial market power;
- stipulate some mandatory criteria which the Court must consider when determining whether there has been a misuse of market power; and
- allow an organisation to apply to the Australian Competition and Consumer Commission for authorisation to engage in conduct that would potentially be a breach of the new laws.3
The proposed new test is a significant change from the current scenario as it removes the requirement that a business must have “taken advantage” of its substantial market power. Instead, the cornerstone of the new test is the requirement that the conduct has the likely “effect” of lessening competition.
Referred to as the “effects test”, the focus on the effect of the conduct, rather than the purpose of the conduct as in the current test, would see an expansion of the types of competitive behaviour which could be considered a breach of competition law.
Businesses beware – unexpected consequences of the effects test
The decision to adopt the “effects test” has been praised by the small business community who see the expansion of behaviour likely to be considered a misuse of market power as a way to help level the playing field. By capturing a wider range of behaviours as “anti-competitive”, it is hoped that this will cause bigger businesses to review and reconsider their approach to competition within their industry – even if they are only motivated by fear of investigation by the ACCC.
Ultimately the aim of the “effects test” appears to be to help small and medium businesses (no matter the size of their business) become better competitors within their industry.
However, those who are able to become better competitors and increase their market power need to be wary of the indirect effects of their success. Both the current test and the proposed new “effects test” apply to businesses that have a “substantial degree of market power” which can sometimes be a relatively low threshold to meet.
The term “substantial degree of market power” usually has a subjective meaning for a particular industry although there are some common traits which Courts consider as indicators of market power including:
- whether competitors can freely enter the market;
- whether the business can operate freely with little regard to other competitors;
- the market share of the business (although a dominant market share does not necessarily mean a business has substantial market power); and
- whether that market power is attributable to something other than the market i.e. the market power comes from statutory power or financial power.
If the proposed new effects test does become law, businesses who perform better as a result of the new test (particularly those who are on the cusp of becoming a major industry player) need to ensure that they do not find themselves with a newfound “substantial degree of market power”. That new success could put their own competitive behaviours on the wrong side of the competition law pendulum.
All talk no action?
There is currently no legislation before Parliament to implement the proposed new effects test, and the upcoming federal election means that it is unclear if and when the proposed new effects test will become law.
Regardless of when the new effects test is implemented, it will take some time for businesses and Courts to adjust to and interpret this new test. Only time will tell whether the changes will achieve the goals of competition law – goals which are often viewed differently by businesses, by consumers and by governments.
Moulis Legal’s dispute resolution team represents Australian and international organisations across domestic and international jurisdictions in various matters, including advising and representing in competition law issues; managing and responding to regulatory investigations; and advising on contractual disputes.
This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.
 Professor Ian Harper, Peter Anderson, Su McCluskey and Michael O’Bryan QC, Competition Policy Review Final Report, March 2015 at page 61
 Australian Government, Options to strengthen the misuse of market power law Discussion Paper, December 2015
 If this amendment is adopted, it has also been recommended that the ACCC publish guidelines detailing the criteria the ACCC would consider when deciding whether to authorise the conduct