Bills Digest no. 13 2007–08
Trade Practices Legislation Amendment
Bill (No.1) 2007
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Key issues
Main provisions
Conclusion
Endnotes
Contact officer & copyright details
Passage history
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/.
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.
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:
-
eliminating or substantially damaging a
competitor
-
preventing market entry, or
-
deterring or preventing competitive
conduct.
With respect to the misuse of market power
provisions, the Dawson Review recommended against amending section
46 on the basis that: [4]
-
Existing case law on section 46 does not
substantiate the view that purpose is an unnecessarily
onerous hurdle to prove.
-
The addition of an effects test (in
addition to a purpose test) would increase the risk of
regulatory error and render purpose ineffective as a means
of distinguishing between pro-competitive and anti-competitive
behaviour.
-
Overseas experience, so far as it is of
assistance, does not indicate that the introduction of an effects
test would be appropriate.
-
Cases presently before the Courts provide an
opportunity for the section to be further clarified and it would
not be in the interests of consumers or competition to change the
section at this stage.
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]
In March 2003, the Committee reaffirmed its
recommendations in light of the High Court decision in Boral v
ACCC, maintaining that no amendment should be made to section
46, although the position could be reviewed after a number of other
cases are determined, such as Safeway, Rural
Press and Universal Music. The Committee noted and
endorsed observations by the High Court in the Boral case
that the purpose of section 46 is to promote competition and that
successful competition is bound to cause damage to some
competitors.
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]
where one party to a transaction is at a special
disadvantage in dealing with the other party because of illness,
ignorance, inexperience, impaired faculties, financial need or
other circumstances affecting his ability to conserve his own
interests, and the other party unconscientiously takes advantage of
the opportunity thus placed in his hands.
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]
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:
-
whether section 46 of the Act deals effectively
with abuses of market power by big businesses, and, if not, the
implications of the inadequacy of section 46 for small businesses,
consumers and the competitive process, and
-
whether Part IVA of the Act deals effectively
with unconscionable or unfair conduct in business
transactions.
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:
-
predatory pricing
-
leveraging market power in one market to
restrict competition in a second market, and
-
obtaining market power by acting in concert
with another company.
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]
I feel there will be nothing gained voting
against the bill. However, I am disappointed it does not offer a
substantial remedy to the predatory pricing and other issues
discussed which are currently encountered by the small business
operator in a shopping mall near you.
The Explanatory Memorandum states that the
Bill is not expected to have any significant impact on commonwealth
expenditure or revenue. [12]
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.
One of the recommendations of the majority
report of the 2004 Senate Committee was that: [13]
The Committee recommends that s.46 of the Act be
amended to state that, in determining whether or not a corporation
has a substantial degree of power in a market for the purpose of
s.46(1), the court may have regard to whether the corporation has
substantial financial power.
Financial power should be defined in terms of
access to financial, technical and business resources.
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.
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.
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]
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:
including the benefit to the firm s wider
corporate group of continuing to supply the item, the willingness
of a firm to bear short-term losses in the hope that market
conditions will improve, costs that would be incurred by the firm
in withdrawing from the market, and accounting for the firm s sunk
costs of investing in the industry in the first place.
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.
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.
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
[1]. The inquiry had
been foreshadowed by the Government during the 2001 Federal
election.
[2]. Review of
the Competition Provisions of the Trade Practices Act, January
2003.
[4]. Dawson Review,
p. 88.
[5]. This was decided
by the High Court on 7 February 2003, only a matter of days after
the Dawson Review was handed to the Government.
[6]. This was decided
by the High Court on 11 December 2003.
[9]. Blomley
v Ryan (1956) 99 CLR 362 at 415
[10]. Depending on
the circumstances, sections 12CB or 51AB may still apply.
[11]. Senate Economics Committee, Report into the
provisions of the Trade Practices Legislation Amendment
Bill (No. 1) 2007,
Dissenting report by Senator Barnaby Joyce, at p.
36.
[12].
Explanatory Memorandum, p. 24.
[16]. The Hon. Peter Costello, House of Representatives
Debates, 20 June 2007, p. 7.
Angus Martyn
Law and Bills Digest Section
Jonathon Chowns
Economics Section
6 August 2007
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