8 October 2007

Radical last-minute changes to amendments to the Trade Practices Act 1974 (“the Act”) present new risks for foreign companies exporting products to Australia at below cost prices, and significant opportunities for Australian industries facing such “dumping”.

Under new Section 46(1AA) of the Act, companies which have suffered from anti-competitive below cost pricing by their competitors, over sustained periods, now have more specific rights to obtain compensation through the courts.

The new laws, intended to protect small business from predatory pricing, could have the even more powerful consequence of increasing import prices, and of enabling Australian industries to obtain damages for dumping by foreign exporters.

Predatory pricing under the Trade Practices Act                

Australia’s competition laws have always allowed the Australian Consumer and Competition Commission (“ACCC”) and affected companies to take action against so-called “predatory pricing”, which is the practice of intentionally dropping prices to injure a competitor. The traditionally relevant provision, Section 46(1), deals with “misuse of market power”. Although it does not specifically refer to below cost pricing, it is well-accepted that this is one means by which a company can take advantage of its market power for the specific anti-competitive purposes referred to in the Section.

However this “misuse of market power” provision can only be activated if a number of technical conditions are met. Furthermore, court decisions had placed a number of obstacles in the way of companies trying to establish a case of price-based predation.

These conditions and qualifications have included:

  • the difficulty of establishing that the offending company has a substantial degree of power in the market; and
  • the need to prove that the offending company would recoup its losses after the period of below cost pricing (“recoupment”).

The difficulty of establishing such a case is reflected in court statistics. In 33 cases in which Section 46(1) has been litigated, a breach of Section 46 has been established in only five. Moreover, the frequency of cases has been diminishing.

New provision to deal with below cost pricing               

Section 46(1), which continues to apply, has now been joined by a new provision which directly attacks “below cost pricing”. If a company:

  • has a substantial share of a market; and
  • supplies or offers to supply goods at a price which is less than their relevant cost, over a sustained period; and
  • has the purpose of substantially damaging its competitor, preventing market entry or deterring competitive conduct by others,

then a breach of new Section 46(1AA) may be established against that company. Depending on whether the prosecuting party is the ACCC or an injured competitor, penalties can include fines, injunctions and damages.

Replacing market power with market share               

The replacement of the substantial degree of power test with a substantial market share test will massively increase the legal exposure of companies engaging in discounting and in other “special offer” practices, such as rebates and bundling. “Substantiality” in this context can be expected to be quite low, and it is certainly not unreasonable to contend that a market share of 20% and upwards will meet this threshold, depending on the circumstances.

An anti-competitive purpose will still need to be established. Internal email communications will no doubt continue to be a lively source of evidence. However the new law says nothing about recoupment, either by way of entrenching it as an element which must be proven to establish an anti-competitive purpose, or to exclude it as such an element. Certainly the primary proponent of the new law, Senator Barnaby Joyce, believes that recoupment is not a relevant consideration, and he moved an amendment to the Explanatory Amendment for the new law, hoping to make that clear.

Anti-dumping perspectives                

Dumping is the practice of exporting goods to a country at a price which is less than the exporter’s price in its home market, or less than the exporter’s cost of producing the goods. If it is established, in an investigation by the government of the importing country, that this has occurred and has caused material injury to an industry in the importing country which produces the same goods, the government may apply a special duty on future importations of the goods. This “dumping duty” is meant to increase the price of the imports at least to a level of full cost recovery.

Unlike anti-dumping laws, the Section 46 provisions require proof of an anti-competitive purpose. Nonetheless it is not unusual for anti-dumping duty investigations to uncover evidence of the intentions of foreign exporters to increase market share or to dominate their competitors in particular regions, in the form of media statements and communications with customers.

It is unusual in a dumping context to find a foreign exporter with a substantial degree of power in the Australian market. More usually, foreign exporters are trying to build market share, sometimes from a low position. However relatively low market share might still be considered to be substantial under the new law. Thus, while a foreign exporter who “dumps” into Australia will rarely contravene the traditional “misuse of market power” rule of Section 46(1), which relies on market power, it will more usually be in a position to contravene new Section 46(1AA), which relies on market share.

If an Australian industry can couch a complaint of dumping in the terms of Section 46(1AA), it will enjoy the prospect of an award of damages. This remedy may be more attractive to an injured competitor than the imposition of duties on imports. Damages coupled with duties would be an extremely effective remedy.

Excitement or concern about the potential reach of Section 46(1AA) must however be tempered by a realistic appraisal of some of the shortcomings of the new law. A trade lawyer knows only too well that policy considerations, technical rules and accounting concepts impact on determinations of below cost pricing, and there are pages and pages of anti-dumping law which are needed to regulate that issue. In contrast, Section 46(1AA) gives no definitional guidance about its key concepts. The sustained periodover which the below cost pricing must be measured, and the words relevant cost, are not explained.

In fact the Explanatory Memorandum states that the appropriate measure of the relevant cost is to be determined by courts on a case-by-case basis. Accordingly, a court will need to consider issues such as start-up costs, cost amortization and, ironically, recoupment. Whilst this discretion might in some cases make it more difficult to establish that sales are below cost, in others it might allow a court to require costs to fully “flow through” a supply chain. For example, a court might decide that the price paid by a related company importer is not the relevant cost to that importer, where the exporter has sold the product to that importer at less than the exporter’s fully absorbed cost. Indeed, such a finding would be an essential element in any case in which the exporter is not itself the corporation with the substantial share of the relevant market.

Concluding comments          

The new reach of the Act’s predatory pricing provisions was driven by a strong concern that small businesses, such as corner stores, bakeries, bottle shops, and independent petrol stations, lacked meaningful protection from powerful corporations. But small business might not be the main beneficiary of the new law. Big business now has a new resource to combat low pricing by competitors, including dumping by foreign exporters.

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 2007