In one of the largest shakeups of competition law in Australia, the controversial and highly anticipated ‘effects test’ for determining misuse of market power is set to come into operation in coming weeks. This follows the passing of wider reforms to the Competition and Consumer Act 2010 (Cth) (“the Act”) in October.
Under the new laws, the conduct of a business with substantial market power will be considered to be a misuse of market power where the ‘purpose, effect, or likely effect’ of the conduct would be to ‘substantially lessen competition’. Previously a business must have ‘taken advantage’ of its market power for the purpose of preventing or deterring competition in a market, which was a significantly higher threshold to prove. In addition, the new laws will establish a system for businesses to seek formal authorisation from the ACCC to engage in conduct that may be considered a misuse of market power.
Last week, the ACCC released its Interim Guidelines on how it will interpret the new test and its general approach to investigating contraventions of the new provisions.
In this competition law update, Moulis Legal senior associate, Emily Jennings, explains the new effects test, and provides insights into how businesses may avoid unwanted investigations and prosecutions.
Fixing a broken system
It is not often that such significant and fundamental changes are made to key legal principles and tests in competition law. However, the Harper review into competition law in Australia identified issues that required attention and section 46 of the Act, which governs misuse of market power, was a clear priority.
In the past, the bar has arguably been set too high, with the ACCC and private claimants having to prove that a business had ‘taken advantage’ of its market power for the ‘purpose’ of harming competition. This threshold was often not reached resulting in only a handful of actions succeeding. A change in the law was necessary to identify, address and take meaningful action against businesses that misuse their market power. Otherwise, competitors would continue to suffer harm and detriment and the impact of a lack of genuine competition would be felt across industries. Ultimately, it is always consumers who suffer the most from a lack of competition.
These issues prompted the Harper review to recommend an overhaul of section 46 of the Act and, in particular, how to determine whether a business had misused its market power.
A new era in tackling misuse of market power begins
In August this year, the ‘effects test’ was passed in Parliament following a lengthy period of consultation, discussion and debate. The new law is due to come into effect in the coming weeks and follows wider competition law reforms that passed through Parliament last month.
Under the new test, conduct will be considered to be a misuse of market power where the ‘purpose, effect, or likely effect’ of the conduct would be to ‘substantially lessen competition’. This lowers the threshold significantly but some important hurdles remain in bringing a successful action for misuse of market power.
The conduct must substantially lessen competition for it to be considered a misuse of market power – it is not sufficient that the conduct reduces or otherwise impacts competition. The concept of substantially lessening competition is common in competition law and is applied in other anti-competitive conduct provisions in the Act. For example, section 50 does not allow mergers and acquisitions that have the effect of substantially lessening competition. The extension of this concept to misuse of market power will help ensure that not all conduct that affects competition will be caught by the new provisions.
Business can now seek authorisation to misuse market power
For the first time, the ACCC may authorise conduct that is considered a misuse of market power to occur. Under the new laws, businesses will be able to seek formal authorisation from the ACCC before engaging in such conduct, thereby avoiding unwanted investigations or prosecution.
The power to authorise the misuse of market power may be granted where the ACCC is satisfied that:
- the conduct would not have the effect, or likely effect, of substantially lessening competition; or
- the conduct would result in, or be likely to result in, a public benefit which would outweigh the public detriment that would result, or be likely to result, from the conduct.
The ACCC’s power to authorise conduct is only prospective, and cannot be applied to conduct that was occurring before the ACCC granted its authorisation.
The application process and requirements for conduct authorisations by the ACCC is the same as that for a merger authorisation. For more information on this see our earlier article.
ACCC provides Interim Guidelines on the new section 46
The ACCC has recently released its Interim Guidelines on how it will approach and interpret the new misuse of market power provisions and how it will investigate contraventions.
The ACCC will take a range of considerations into account when investigating allegations of misuse of market power, including the nature and extent of competitive constraints on the business and the likely market outcomes, like what would happen if the conduct did not occur.
Examples of conduct that the ACCC may consider as constituting a misuse of market power include:
- refusal to deal;
- restricting access to an essential input;
- predatory pricing;
- loyalty rebates;
- margin/price squeezing; and
- tying and bundling.
Examples of conduct that the ACCC has said it is unlikely to view as a misuse of market power include:
- innovation, regardless of how ‘big’ the firm is;
- efficient conduct designed to drive down costs;
- responding to price competition with matching or more competitive (above cost) price offers; and
- responding efficiently to other forms of competition in the market such as product offerings and terms of supply.
While these guidelines are not a definitive guide to how the provisions will be applied they are a useful tool until a case comes before the Court, which may take some time. The guidelines are due to be finalised following public consultation by the ACCC.
The ‘effects test’ story is not over yet
The introduction of the new ‘effects test’ signals a new era in the fight against anti-competitive conduct by businesses with substantial market power. These changes have been designed to ease the burden in proving misuse of market power in prosecutions and private actions. They also intend to address the conduct of those who misuse the market power they hold in their industry to the detriment of competition.
The business and legal worlds alike now eagerly await the first case that will give the Court the opportunity to interpret the new provisions and open up the next chapter in the ‘effects test’ story.
Moulis Legal’s dispute resolution team guides businesses across Australia and Asia in the management and resolution of cross-border and domestic commercial disputes in a way that is commercially focused and business-centric. We represent Australian and international organisations in various domestic and international jurisdictions on matters including contractual disputes, cross-border intellectual property disputes, competition law issues and managing and responding to regulatory investigations.
For more information, please contact Emily Jennings on +61 7 3367 6900 or emily.jennings@moulislegal.com.
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.
© Moulis Legal 2017
