Trade Practices Legislation Amendment Bill (No.1) 2007

Date introduced: 20 June 2007

House: House of Representatives

Portfolio: Treasury

Commencement: On Royal Assent.

Links: The relevant links to the Bill, Explanatory Memorandum and second reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/. When Bills have been passed they can be found at ComLaw, which is at http://www.comlaw.gov.au/.

Purpose

The Trade Practices Legislation Amendment Bill (No.1) 2007 (the Bill) makes subtle, but arguably significant, pro-competition changes to existing misuse of market power and unconscionable conduct provisions of the Trade Practices Act 1974 (the TPA).

It also allows for the creation of a second deputy chairperson within the Australian Competition and Consumer Commission (ACCC).

Background

In May 2002, the Government announced an inquiry into the operation and administration of the competition provisions (Part IV) of the Trade Practices Act 1974. [1] A particular focus of inquiry of the Dawson Review [2] named after the Chair, former High Court Justice, Sir Daryl Dawson - was the misuse of market power provisions in section 46 of TPA, (which is one of the two main themes of the Bill). The Government s response to many of the other areas covered by the Dawson Review was implemented through Trade Practices Legislation Amendment Act (No. 1) 2006. [3] The Dawson Review took the law as it stood at the time which was prior to two cases which disturbed the prevailing understanding of the reach of those provisions.

Misuse of market power

Section 46 prohibits a company with substantial degree of power in a market from taking advantage of that power for any of the following purposes:

With respect to the misuse of market power provisions, the Dawson Review recommended against amending section 46 on the basis that: [4]

The major cases referred to above include Boral v the Australian Competition and Consumer Commission (2003) 215 CLR 374 [5] and Australian Competition and Consumer Commission v Rural Press (2003) 216 CLR 53. [6]

The Boral case concerned the activities of Boral during a price-war in the concrete masonry brick market in Melbourne during the mid 1990 s. The ACCC alleged that Boral used its market power to engage in predatory pricing for the purpose of driving at least one of its competitors out of the market. Whilst it was not disputed that driving competitors out of the market was a corporate objective of Boral s, the Court found that it did not have substantial market power during the relevant period. This was because there were low barriers to entry into the market, plus Boral did have strong competitors at the time, even after two companies exited the relevant market in 1995 and 1996. The three separate majority judgments also made observations regarding the concept of recoupment , which is the ability to compensate for losses (say those incurred by selling products at a loss) by subsequently raising prices to much higher levels after a competitor or competitors have been damaged or driven out of the market.

The Rural Press case involved a small publisher expanding the geographical coverage of an existing newspaper (the River News) into a new region where the large Rural Press company already had an established paper. Rural Press responded by telling the small publisher that they would consider launching a rival newspaper in the region originally covered by the River News. The publisher subsequently ceased covering the expanded area, pulling the River News back to its original circulation area. The Court found that taking advantage of market power in one market for anti-competitive purposes in a second market was not prohibited by section 46. It also found that, even if a company has the requisite market power, if it takes advantage of other forms of power such as financial strength or logistical capabilities this would also not be prohibited by section 46.

The Government released the Dawson review, and its response to it on 16 April 2003. [7] It supported the Review s recommendation that no change be made to section 46. In part the response said: [8]

Unconscionable conduct

Historically, the concept of unconscionable conduct allows a court to disallow or set aside an otherwise legally binding transaction, contract or other arrangement in cases: [9]

Both the TPA and the Australian Securities and Investment Commission Act 2001 (the ASIC Act) have provisions prohibiting unconscionable conduct. Both have three separate offence provisions of which two, at sections 12CB-CC and 51AB-AC respectively, are relevant to this Bill. The ASIC Act applies to dealings in financial services, whereas the TPA also applies to goods and other services. Both the ASIC Act and TPA provisions include a list of matters to which the Courts may have regard in determining whether a company has acted unconscionably.

Sections 12CC and 51AC also have various limitations as to their application. Notably, they do not apply where the complainant is a publicly listed company or where the services involved are priced at more than $3 million. [10]

The 2004 Senate Committee report and subsequent Bills

On 25 June 2003, on the motion of ALP Senator Stephen Conroy, the Senate initiated an inquiry by the Senate Economics References Committee into whether the Trade Practices Act 1974 adequately protects small businesses from anti-competitive or unfair conduct . The terms of reference of the inquiry particularly required the committee to examine:

The March 2004 report of the Committee made six recommendations in relation to section 46 and three in relation to unconscionable conduct.

Of the six section 46 recommendations, some related to suggested clarifications of the meaning, or application, of key terms and concepts. Others were intended to widen the range of activities that might breach section 46.

Both the minority report of the Committee, authored by Government Senators, and the subsequent formal Government response to the majority report rejected three of the majority recommendations, and partially or accepted fully the remaining three. The Bill implements the Government s legislative response to these later three recommendations. Specifically, the three recommendations related to:

Regarding the three recommendations with respect to unconscionable conduct, two were accepted by Government and one rejected. The Government proposed an alternative response to the one it rejected. Thus, the Bill introduces two unconscionable conduct amendments resulting from the 2004 Senate Committee inquiry.

The Bill was introduced into Parliament on 20 June 2007. Two days earlier, a related Bill, the Trade Practices Amendment (Predatory Pricing) Bill 2007 was introduced into the Senate by Family First Senator, Steve Fielding. Senator Fielding s Bill proposes to amend the TPA to prohibit predatory pricing in three areas:

Senator Fielding s Bill also amends the TPA to give more explicit guidance on what constitutes predatory pricing, and also extends its potential application to situations including where a company has substantial financial power rather than substantial market power.

Both Senator Fielding s Bill and this Bill were the subject of inquiry by the Senate Economics Committee. The Committee reported on both Bills on 1 August 2007 following public hearings on 27 July 2007.

In the relevant report, Coalition, ALP and Democrat Senators recommended against supporting Senator Fielding s Bill.

Whilst supporting the Government Bill, ALP and Democrat Senators foreshadowed in that report that they would move amendments to it. National Party Senator Barnaby Joyce also criticised the Bill in a dissenting report, although he stated: [11]

Financial implications

The Explanatory Memorandum states that the Bill is not expected to have any significant impact on commonwealth expenditure or revenue. [12]

Key issues

Market power

In the Boral case, the High Court found that Boral did not have substantial market power because there were low barriers to entry into the relevant market and it faced strong competitors. Many of the submissions to the 2004 Senate Committee and the more recent Senate inquiry into this Bill appear to take the view that the Court should have found Boral did have substantial market power. Whilst the proposed new subsection 46(3C) (item 2 in Schedule 2) does not require that a company substantially control the market or have absolute freedom from constraint by the conduct of competitors in order to have substantial market power, it is doubtful this provision would have brought about a different finding in Boral. From this perspective, it is arguable the threshold what constitutes substantial market power will remain fairly high.

Financial power

One of the recommendations of the majority report of the 2004 Senate Committee was that: [13]

The Government rejected that recommendation in its response to the report, citing that such an amendment would considerably extend the scope of section 46 to a degree that is both uncertain and undesirable . [14]

A number of submissions to the Senate inquiry into the Bill urged the recommendation be implemented, as did ALP and Democrat Senators, but there was little substantive analysis or discussion of the issue in the recent Senate Committee report.

Predatory pricing

The object of the TPA is not to protect businesses, small or large, but to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection . [15] The line between vigorous and healthy competition and anti-competitive conduct can be hard to draw. This is particularly so in relation to a particular kind of anti-competitive conduct, predatory pricing.

The reason it is difficult to assess whether predatory pricing is occurring in a particular instance is that the main sign of it reduced prices can be indication of both of the operation of good competitive forces and of anti-competitive predatory pricing. Other factors must therefore be taken into consideration in determining whether the requisite anti-competitive purpose exists and so on which side of the line particular conduct falls.

There has been a considerable amount of discussion in the Senate inquiries as well as in the decided cases and by commentators about the factors that a Court should have regard to in determining whether below-cost selling is unlawful predatory pricing in the circumstances of the case. In particular, there is an issue about whether a finding of predatory pricing requires that the offending firm recoup its losses after it has driven competitors from the market with sustained below cost pricing. Section 46 is silent about recoupment and it has arisen as a requirement in Australia only as a judicial gloss on the provision. The requirement sets the bar quite high for a finding of predatory pricing under section 46.

Calls have been made to clarify the position with regard to the recoupment test that is for the legislation to say that recoupment either is or is not necessarily required for a finding of predatory pricing. The 2004 Senate Committee took the latter approach in recommendation 3 of its report. A middle position is that the legislation should provide that recoupment is a factor that the Courts may examine when considering allegations of predatory pricing - a position also seemingly taken by the Committee although not in a recommendation. Given the high cost of overstepping the mark and making unlawful what is really healthy competition, such an incremental approach to tightening the test is warranted.

In this Bill, the Government has taken an even smaller step by leaving the TPA silent about recoupment and merely requiring the Court to have regard to any below cost pricing and the reasons for that conduct. It is not clear whether this adds anything to the law given that, wherever predatory pricing is alleged, this is the natural inquiry that the Court would undertake.

Main provisions

Schedule 1 Trade Practices Act 1974 and a Second deputy chairperson of the ACCC

Items 1-13 amend the TPA to enable the creation of a second deputy chairperson position in the ACCC. This was first announced by the Prime Minister in July 2004, when releasing the Government s Committed to Small Business Statement. According to the seond reading speech, it is intended that the position be filled by a person experienced in small business matters . [16] The Bill does not list any required qualifications or experience, although the Commonwealth is required to confer with the States and Territories about any potential candidate. [17]

Schedule 2 Trade Practices Act 1974 and the misuse of market power

Item 1 implements the legislative response to the 2004 Senate Committee s recommendation on leveraging market power in one market to restrict competition in a second market. It amends subsection 46(1) to prohibit a company that has a substantial degree of market power in one market from taking advantage of that power in another market.

Item 2 inserts new subsections 46(3A)-(3B) to implement the legislative response to the 2004 Senate Committee s recommendation concerning companies obtaining market power by acting in concert with another company. There is an issue whether a company has to have some agreement or understanding with another company or whether parallel conduct is sufficient. Parallel conduct may occur, for example, where price changes by one company are quickly mimicked by another company, but without any collusion between the two. New subsections 46(3A)-(3B) somewhat hedges its bets in that it does not restrict the Court from considering whether parallel conduct between companies could result in a company having or obtaining a substantial degree of market power.

Item 2 also inserts new section 46(3C). This deals with a recommendation of the 2004 Senate Committe that initially seems to have been rejected by the Govrnment in its 2004 response. That recommendation covered a number of matters, one of which was that section 46 be amended to include a declaratory provision that substantial degree of market power does not require a company to have absolute freedom from constraint it is sufficient if the company is not constrianed to a significant extent by competitors or those to or from whom it supplies or acquires goods and service in that market. In its response, the Government said such an amendment would likely to generate further complexity and uncertainty to the interpretation of section 46 . However, new section 46(3C) appears to make that change, even though again it is expressed only as a consideration to which the Court may have regard .

Item 3 inserts new subsection 46(4A) to implement the legislative response to the recommendation on predatory pricing. Specifically, it deals with whether a company has taken advantge of its market power for one or more of the prohibited purposes in section 46(1). Under new subsection 46(4A), the Court may to have regard to:

The amendment appears to leave a maximum amout of discretion in the hands of the Court to decide whether a company s actions in selling goods or services at less than cost for a sustained period is predatory pricing after taking all of the particular circumstances into account. Indeed, as already suggested, this appears to add little if anything to the position as it is currently dealt with by the Courts.

As noted in the Explantory Memorandum, there may be a wide of range of reasons for below-cost selling that not would constitute predatory pricing:

Notably, new subsection 46(4A) says nothing about whether to Court should have regard to the concept of recoupment , which is the ability to compensate for losses (those incurred by selling products at a loss) by subsequently raising prices to much higher levels after a competitor or competitors have been damaged or driven out of the market.

Part XIB of the TPA contains provisions on anti-competitive conduct in the telecommunications industry. Existing sections 151AH-AJ contain similar provisions to those in section 46 discussed earlier in this Digest. Items 4-8 make the same amendments as items 1-3, but applying them to sections 151AH and 151AJ.

Items 9-11 amend section 46 of the Schedule to the TPA. The Schedule largely replicates Parts IV and VB of the TPA, including section 46 for the purpose of allowing the States and Territories to implement mirror legislation in their own jurisdiction. The difference is that the Schedule applies to natural persons, whereas for constitutional reasons Parts IV and VB of the TPA proper apply to companies. Items 9-11 amend section 46 in the Schedule in exactly the same way as items 1-3 amend section 46 in the TPA proper.

Item 12 provides that the amendments made by items 1-11 only apply to activities that occur after the commencement of those items that is, the amendments are not retrospective.

Schedule 3 Unconsciable conduct and the Australian Securities and Investment Commission Act 2001 and Trade Practices Act 1974

As noted earlier in this Digest, section 12CC of the ASIC Act and 51AC of the TPA have various limitations as to their application. Notably, they do not apply where the complainant is a publicly listed company or where the services involved are priced at more than $3 million. The 2004 Senate Committee report recommended that the $3 million threshold be removed. This was rejected by Government Senators who instead recommdended the threhold be lifted to $10 million. Items 3-4 and 7-8 make this change to the threshold in sections 12CC and 51AC respectively.

Sections 12CC and 51AC contain a list of matters that the Court may take into account in determining whether a company or person has engaged in unconscionable conduct. Both Government and non-Government Senators recommended in the 2004 Committee inquiry that the ability of one party to the relevant contract to unilaterally amend a term or condition of that contract should be added to this list. Items 1-2 and 5-6 implement this with respect to section 12CC and 51AC respectively.

Item 9 provides that the amendments in items 1-8 only apply to activities that occur after the commencement of those items that is, the amendments are not retrospective.

Conclusion

The point has been made earlier that the object of the TPA is not to protect businesses, small or large, but to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection . [18] Calls for greater protection of small business through competition policy (rather than industry policy) are misdirected and tend to lead to calls for amendments to the Act which go too far so as to be not in the interests of the welfare of Australians.

However, the interpretation given to the existing provisions by the Courts has rendered them less effective than was originally envisaged and some amendments are clearly necessary. But, given the regulatory risk of overstepping the mark and making unlawful conduct which is no more than vigorous competition (a risk particularly apparent in the case of predatory pricing), an incremental approach is warranted. In this regard, the amendments proposed in this Bill are, with the possible exception of those concerning predatory pricing which appear to add little to the law, a step in the right direction.

It is may be hoped that these amendments will be tested by the ACCC and that in the absence of any such actions - or of any successful actions - in the next couple of years, the Government will conduct a further review with the aim of tightening these provisions further if required in the interest of consumers.

Endnotes