Monday, 22 September 2008

Is the Birdsville amendment a dud?


Introduction
The Birdsville amendment (or section 46(1AA) of the Trade Practices Act) has been subject to widespread criticism. Most recently, Allan Fels, the former Chairman of the ACCC, in an article co-authored with Fred Brenchley, made the following statement[1]

Let’s be clear on two aspects of Birdsville. It is bad law. Why? Because it junks the market power and taking advantage concepts that have been the bulwark of competition policy.

The current Chairman of the ACCC, Graeme Samuel has also been critical of the Birdsville amendment[2]
…the last minute inclusion of the so-called Birdsville amendment introduced a number of complexities and legally untested terms that would potentially take years for the courts to clarify – a case of one step forward but perhaps a couple backward.
The Birdsville amendment established a dual track process, whereby a business could potentially have been found guilty of predatory pricing under one part of the Act, yet not under the other, divergent track. While well intentioned, this change was ill conceived and created more problems than it solved by increasing complexity rather than removing it.

Are these criticisms of the Birdsville amendment valid? Has it introduced greater complexity?

Background
The Birdsville Amendment was introduced to the TPA by Senator Barnaby Joyce as a way of providing small businesses with greater protection from predatory pricing. There is a clear relationship between Birdsville and the High Court decision in the Boral section 46 case.[3] In the Boral case the ACCC was successful in proving every element of section 46(1) of the TPA except for market power and taking advantage. In drafting the Birdsville Amendment, it appears that there was an intention to remove the two stumbling blocks identified in Boral to successfully proving a section 46(1) case – ie market power and taking advantage.

Since its introduction to the TPA, the ACCC has not commenced any litigation under section 46(1AA). This is probably not surprising given that in the quotation above, the Chairman of the ACCC was already referring to section 46(1AA) in the past tense as early as June 2008.

More recently the Labor Government introduced a range of amendments to the TPA which would have effectively have repealed the Birdsville amendment and replaced it with a number of changes which it claims would produce greater protection for small businesses. In particular, these amendments would have clarified what constitutes taking advantage for the purposes of section 46, as well as clarifying that the ACCC need not show recoupment to succeed in a predatory pricing case.

The Opposition and independents voted down these proposed amendments in the Senate on 16 September 2008. This ensured that at least for the moment the Birdsville amendment remains on the statute books.

Legislation
Before considering whether the criticisms of section 46(1AA) are valid it is important to set out the relevant legislation and identify the elements of both section 46(1) and 46(1AA).

Section 46(1) provides –
(1) A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of: 
(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market; 
(b) preventing the entry of a person into that or any other market; or
(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.
The elements of section 46(1) are as follows –
  1. Corporation 
  2. Market 
  3. Substantial degree of market power in a market 
  4. Take Advantage of market power 
  5. Purpose to achieve either (a), (b) or (c) 
The first element which has to be proven in a section 46(1) case is that a corporation has engaged in relevant conduct. Natural persons and unincorporated entities may also be caught under section 46(1) through use of the state Competition Policy Reform Acts, which extend the operation of Part IV of the TPA to these groups.

The second element is to define the market in which the relevant firm operates. One cannot seek to establish whether a firm has a substantial degree of market power unless one has first defined the market. To do this recourse would be had to the analytical framework for defining markets provided by the ACCC in its Merger Guidelines.

The third element is to prove that the firm’s position in the relevant market gives it a substantial degree of market power. The ACCC’s Merger Guidelines suggest that the relevant firm would need to have a market share of at least 40% to satisfy this requirement. However, in a number of section 46 cases, the ACCC has been successful in establishing a corporation had a substantial degree of market power even though its market share was less than 40%.[4]

The ACCC would decide whether a firm had market power by considering the extent to which the market was characterised by high barriers to entry, low levels of actual and potential import competition, and the absence of countervailing power.

The fourth element is that the corporation has taken advantage of its market power to achieve one of the proscribed purposes. This is the element of section 46(1) which raises the most difficulty. On first glance one would simply assume that taking advantage requires that there be a causal nexus between the market power and the proscribed conduct. This seems a sensible approach because if it were not the case any firm which has market power could be liable for conduct which had the purpose of damaging a competitor. For example a firm with market power may be liable under section 46(1) for damaging its competitor by simply taking legal proceedings against it for breaching its intellectual property rights.

The issue of taking advantage is the source of most of the confusion and complexity in applying section 46(1).

The source of this confusion can be traced to the majority decisions in Melway[5] where the High Court elevated the market power test established by Kaysen and Turner to a test for proving taking advantage. Kaysen and Turner stated[6] -
A firm possesses market power when it can behave persistently in a manner different from the behavior that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions.
The Melway majority translated this into a test for proving taking advantage as follows[7]
To ask how a firm would behave if it lacked a substantial degree of power in a market, for the purpose of making a judgment as to whether it is taking advantage of its market power, involves a process of economic analysis which, if it can be undertaken with sufficient cogency, is consistent with the purpose of s 46.
In other words, to determine whether a firm had engaged in a taking advantage of its market power one should be guided by how a firm without a substantial degree of market power would behave in the market. This is a very odd approach which is not based on any accepted economic theory.

The problem with the approach taken by the High Court in Melway is that it did not define the characteristics of the market in which its hypothetical firm without a substantial degree of market power operates. It appears that what the High Court did in Melway was conclude that because Melway was able to operate an exclusive distribution system when it did not have a substantial degree of market power, that the decision by Melway to retain this system once it acquired a substantial degree of market power could not be considered to be taking advantage.

While the Melway decision may have been correct on the facts of the case, the approach adopted is not capable of broad application, particularly in circumstances where the firm with a substantial degree of market power has implemented exclusive dealing or tying arrangements after it has acquired a substantial degree of market power. Clearly, the Melway test has no application to allegations of predatory pricing by a firm with a substantial degree of market power as pricing below avoidable cost is by definition irrational unless the firm intends to drive out its competitors.

One must conclude that the High Court in Melway erred in effectively elevating the Kaysen and Turner test for determining whether market power exists into a test for taking advantage. Taking advantage in section 46(1) was never intended to do anything more than require a causal nexus between the market power and the proscribed conduct.

The High Court in Melway does not appear to have taken much notice of the US case law, despite citing some of the relevant cases. These cases provide a helpful conceptual framework for assessing market power cases. As stated by Scalia J in Eastman Kodak Co v Image Technical Services Inc[8] -
Where a defendant maintains substantial market power, his activities are examined through a special lens: Behaviour that might otherwise not be of concern to the antitrust laws – or that might even be viewed as pro-competitive – can take on exclusionary connotations when practiced by a monopolist.
The US approach does not assess the conduct of a firm with a substantial degree of market power by reference to what a firm without a substantial degree of market power can do. Rather it takes into account the fact that certain conduct may be offensive to competition because the relevant firm has market power.

The fifth element in proving a section 46(1) case is to show that the corporation had engaged in conduct with the purpose of achieving one of the prescribed purposes. Therefore, even if a firm with a substantial degree of market power used its market power to extract exclusive long term contracts from customers, there would still be a need to show that the firm’s purpose was to eliminate, damage or prevent the entry of a competitor. The Courts are willing to infer purpose from conduct. The classic inference being that predatory pricing (defined as making sales at below avoidable cost) must be for a proscribed purpose as it is otherwise irrational to sell goods or services below avoidable cost.

Section 46(1AA)
Section 46(1AA) provides –

(1AA) A corporation that has a substantial share of a market must not supply, or offer to supply, goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying such goods or services, for the purpose of:
(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market; or
(b) preventing the entry of a person into that or any other market; or
(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.

The elements of section 46(1AA) are as follows – 
  1. Corporation 
  2. Market 
  3. Substantial share of the market
  4. Supply or offer to supply goods or services 
  5. Sustained period 
  6. Price 
Less than relevant price to corporation of supplying good or service
Purpose to achieve either (a), (b) or (c) It is immediately apparent that in order to establish a contravention of section 46(1AA) three more elements have to be proven than need to be proved to establish a contravention of section 46(1). There are also five elements in section 46(1AA) which are not found in section 46(1) – namely elements (3), (4), (5), (6) and (7). Elements (1), (2) and (8) are mirrored in section 46(1).

Turning to the third element, namely a substantial share of the market, it is apparent that once the market has been defined, it would be quite easy for the ACCC to work out the respective market shares of the firms in that market. Contrary to the substantial degree of market power test in section 46(1), this test appears to be quite straightforward. The term substantial has been considered in numerous cases with the most relevant definition being Lockhart J in Dowling v Dalgety Australia Ltd[9] in which he found that substantial in the context of section 46(1) means “large” or “considerable”.

The fourth element is to show that the corporation has engaged in the supply of goods or services. This also involves a very simple evidentiary burden that could be proved by sales invoices which show that goods or services have been sold.

The fifth element is that the supply of goods or services be for a sustained period. While the term “sustained period” is not defined in the TPA, it is not a difficult concept. The emphasis has to be on a period of time that is not intermittent but continuing for a longer period of time. It would exclude short term sales such as when large firms offer loss leader products. In defining the term, it is likely that consideration would have to be given to the usual sales patterns in the relevant market. For example, if sales occur on a daily basis such as in food retailing, a sustained period is likely to be a shorter period. However if sales are lumpy, occurring every few weeks or months, then a sustained period would be a longer period of time.

The sixth element is to prove the price at which the goods or services have been sold. This could easily be shown by documentary evidence such as the relevant tax invoice provided to the customer.

The seventh element to prove is that the price at which the good or service was sold (ie the figure identified at element six above) was below the relevant price to the corporation of supplying the good or service. On first glance, it seems that any sale of a product below total cost would be caught by section 46(1AA). However a more likely construction is that this element would require proof that the selling price was below avoidable cost.

There can be many problems working out whether a good or service is being sold below avoidable cost mainly because of cost allocation debates. Firms will often argue that costs that have been classified as avoidable should be considered fixed costs, for example labour costs. The fundamental point is that it is no harder to prove below avoidable cost pricing under section 46(1AA) than it would be under section 46(1). Section 46(1AA) has not introduced any added complexity by referring to this below cost pricing test.

In summary, while there are more and different elements to prove to establish a breach of section 46(1AA) than to establish a contravention of section 46(1), it cannot be said that section 46(1AA) is any more complex to prove than section 46(1). In actual fact, by not requiring proof of market power and taking advantage, section 46(1AA) is considerably easier to prove than section 46(1).

Criticisms
The introduction of the Birdsville amendment has not introduced a “number of complexities” or led to “increasing complexity” in terms of pursuing a monopolisation case. Rather it has removed the two main complexities from establishing a monopolisation case and replaced them with concepts which are easier to prove. Section 46(1AA) will be considerably easier to prove than section 46(1).

The criticism voiced by the former Chairman of the ACCC, Professor Fels is also misplaced. Professor Fels claims that the concepts of “market power” and taking advantage” are the “bulwark of competition policy”. However even a cursory review of the anti-competitive provisions of Part IV of the TPA demonstrate that this claim is not correct. Neither of the concepts of “market power” or “taking advantage” appear in any other provision of Part IV. Only section 50 is partly concerned with preventing a firm from obtaining a substantial degree of market power through mergers and acquisitions. However, section 50 is equally concerned with the preventing of concentrated markets on the principle that concentrated markets are more likely to lead to collusion.

Far from being a bulwark of competition policy, the concept of taking advantage is an anomaly, not just in terms of the TPA but also in antitrust law around the world.

Conclusion
In conclusion, the Birdsville amendment should not be considered “bad law”. Rather the section provides the ACCC with a more straightforward method of pursuing predatory pricing cases. It would be also be open to the ACCC to plead section 46(1AA) as the alternative to a predatory pricing case taken under section 46(1). The provisions are not mutually exclusive.

The ACCC has been sitting on its hands long enough in relation to the Birdsville amendment. It is time that it stopped complaining about section 46(1AA) (and stopped talking about the section in the past tense!), and started enforcing it. After all the section was enacted by the Australian Parliament and, until it is repealed, (which is not likely to happen in the near future) constitutes a law of Australia over which the ACCC has jurisdiction. The ACCC has an obligation to enforce the Birdsville amendment. Small business also have a right to expect the ACCC will at least attempt to fulfil its statutory duty by enforcing Birdsville to protect them from predatory pricing in the market.



[1] A Fels and F Brenchley, “Big business led up the Birdsville track”, The Age Online, 20 September 2008 - http://business.theage.com.au/business/big-business-led-up-birdsville-track-20080919-4kay.html
[2] Graeme Samuel, “Delivering for Australian Consumers: making a good Act better”, ACCC Website, 28 June 2008, p. 5 - http://www.accc.gov.au/content/index.phtml/itemId/833067/fromItemId/8973
[3] Boral Besser Masonry v ACCC [2003] HCA 5 - http://www.austlii.edu.au/au/cases/cth/HCA/2003/5.html
[4] For example ACCC v Safeway Stores Pty Limited [2003] FCAFC 149 – approximately 20% market share - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCAFC/2003/149.html?query=^safeway
[5] Melway Publishing Pty Ltd v Robert Hicks Pty Ltd [2001] HCA 13 - http://www.austlii.edu.au/au/cases/cth/HCA/2001/13.html
[6] Kaysen and Turner, Antitrust Policy (1959) cited by the majority in Melway at para. 42.
[7] Melway, at para. 52.
[8] Cited by the Melway majority at para. 29.
[9] Dowling v Dalgety [1992] FCA 35 at para. 127.

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