Introduction
The
Harper Committee recommendation has simultaneously raised the hopes of small
business groups and the ire of big business groups. Many small businesses have high expectations
of the proposed section 46, whilst big businesses claim that the new provision will
have dire impacts on competitiveness and innovation. Given the strong emotions which the Harper
Committee proposal has invoked, and the fact that the Government’s response to
this recommendation is imminent, it is an opportune time to revisit Sims’
speech to explore the great divide between supporters and opponents of changes
to section 46.
A Myriad of
Myths
A
primary focus of Sims’ speech were his attempts to dispel the myriad myths
surrounding section 46.
The
first myth which Sims’ sought to address related to what he described as the
“insider / outsider divide” as to what section 46 actually prohibits. He described this divide as follows:[2]
On its face
the wording of the section is directed at the impact of the conduct on
individual competitors rather than the impact of the conduct on the competitive
process in the market.
Yet, I have
also heard many times since arriving at the ACCC –well, we know the words say
“substantially damage a competitor” but we all know that the law really means
“do not damage the competitive process”.
So there are
these two very different view of s46. There is, on the one hand, an exclusive
club, with members of the club knowing that section 46 means ‘ avoid damage to
the competitive process’.
On the other
hand, those not in the club, the vast majority of the population, aren’t privy
to this insight.
Sims
then goes on to make the following claim:[3]
Insiders may
well feel special, indeed clever, but this divide between common interpretation
and true meaning is bad public policy.
Unfortunately,
rather than demystifying one of the myths surrounding section 46, Sims has further
entrenched a common myth about section 46 – namely, that its true purpose is to
only protect the competitive process and not individual competitors.
As
every first year law student knows the first step in statutory interpretation
is to look at the words of the provision and then to work out what those words
mean. You do not look behind the words
of the statute unless the meaning of the words is unclear.
Therefore
the first step in understanding section 46 is it to look at the actual words
used in the provision:
(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.
When
one looks at the actual words of the first prohibition in section 46 - namely
section 46(1)(a) – it is abundantly clear that the purpose of this provision is
to prevent a corporation with a substantial degree of market power from using that
market power for the purpose of:
eliminating or
substantially damaging a competitor of the corporation.
There
are no words in section 46(1)(a) to suggest that it is concerned with the
competitive process. Rather the plain and ordinary meaning of the provision is
that its purpose is to prevent corporations with a substantial degree of market
power from using that power to eliminate or damage their competitors.
There
is also no basis for seeking to impute into section 46(1)(a) some additional requirement
that the provision only applies where the conduct is likely to have the effect
of undermining the competitive process.
However,
that is not the end of the story. It is
equally apparent that the clear purposes of the second and third prohibitions
in section 46 is to protect the competitive process. Sections 46(1)(b) and (c) show that the
legislature also wanted to prevent corporations with a substantial degree of
market power from using that market power for the purpose of damaging the competitive
process - ie conduct which prevents new entry to markets and conduct which
otherwise deters or prevents competitive conduct.
That
section 46 has these dual purposes is also consistent with the broader
objectives of the CCA as set out in section 5:
The object of
this Act is to enhance the welfare of Australians through the promotion of
competition and fair trading and provision for consumer protection.
Section
46 is directed to achieving the goals of both promoting competition (sections
46(1)(b) and (c)), as well as the promotion of fair trading (section 46(1)(a)).
Senator Murphy’s
Second Reading Speech also appears to provide greater support for the first of
the two purposes identified above – namely to protect competitors from the use
of market power by their larger competitors:[4]
The clause [46] covers various forms of conduct by
a monopolist against his competitors or would-be competitors. A monopolist for
this purpose is a person who substantially controls a market. The application
of this provision will be a matter for the Court. An arithmetical test such as
one third of the market- as in the existing legislation- is unsatisfactory. The
certainty which it appears to give is illusory.
Clause 46 as now drafted makes it clear that it
does not prevent normal competition by enterprises that are big by, for
example, their taking advantage of economies of scale or making full use of
such skills as they have; the provision will prohibit an enterprise which is in
a position to control a market from taking advantage of its market power to
eliminate or injure its competitors.
Unfortunately
both Sims’ and other knowledgeable insiders appear to have constructed a false
dichotomy in the operation of section 46. It is not an either / or scenario
between the protection of competitors and the protection of the competitive
process. Rather section 46 was intended to protect (and was drafted to protect)
both competitors and the competitive process from the illegal conduct of
corporations which possessed a substantial degree of market power.
Given
the apparently faulty “insider” view held by the ACCC as to the scope of
section 46, one can only speculate as to whether the ACCC’s understanding may
have resulted in it failing to pursue meritorious cases which fell under the
terms of section 46(1)(a). It seems probable that the ACCC may have declined to
take cases which involved large corporations using their market power to
eliminate and damage their smaller competitors because there was no demonstrable
harm to the competitive process.
Existing myths
There
are a myriad of myths concerning the meaning and operation of the current section
46. Three of the most common myths are
that:
2. the ACCC usually loses section 46 cases because it fails to prove a proscribed purpose; and
3. section 46 cases are hard fought by the respondents.
The
attached table shows all of the section 46 cases commenced by the ACCC over the
last 42 years:
Table: ACCC
and TPC Section 46 cases – 1974 to 2015
The
data from the above table clearly dispels the first common myth about section
46 which is that the ACCC almost always loses such cases. Of the 20 section 46 cases run by the ACCC
over the last 42 years it has won on eleven occasions. In other words, the ACCC has won eleven of
the 20 cases it has pursued for a success rate of 55%.
However,
if one looks at the data from the perspective of the number of section 46 cases
which the ACCC has actually lost in court, the myth is entirely “busted”. Of the 20 cases taken by the ACCC, it has won
eleven, dropped the section 46 allegations in three cases and lost the remaining
six cases. Therefore, the ACCC has only lost
6 cases out of 20 section 46 cases it has commenced, which represents a failure
rate of only 30%.
The
above table also debunks the myth that the ACCC generally loses section 46
cases because it fails to establish a prescribed purpose. Prior to the Pfizer case in 2015, the ACCC
had never lost a section 46 on the grounds that it had failed to establish a
prescribed purpose. Rather the ACCC most
often loses section 46 cases because it fails to prove the taking advantage
element.
Finally,
there is no evidence to support the view that section 46 cases are generally “hard
fought” by respondents. Eight of the
eleven successful section 46 cases taken by the ACCC were not contested, as the
respondents in these cases either consented to a finding that they had breached
section 46 or did not contest that finding.
In other words, 72% of the section 46 cases won by the ACCC were not
contested by the respondents.
Harper
Recommendation
The Harper Committee’s proposed new section 46 is as
follows:[5]
(1)
A corporation that has a substantial degree of power in a market shall not
engage in conduct if the conduct has the purpose, or would have or be likely to
have the effect, of substantially lessening competition in that or any other
market.
Sims
in his speech identified three main changes which the Harper Committee proposal
will make to section 46 – namely to:[6]
·
remove the take advantage test;
·
add an effects test; and
·
add a substantial lessening of competition test.
The proposal to remove the taking advantage test is an
important change.
First, the taking advantage test is the element of the
existing section 46 which is most often misapplied by the Courts. As stated by
Sims, the take advantage element:[7]
…is meant to provide the filter for distinguishing pro-competitive from
anti-competitive conduct.
Sims’ claim is only half correct. While it is true
that the taking advantage test has been applied by the courts as a filter for
distinguishing pro-competitive from anti-competitive conduct, it is not correct
to suggest that Parliament ever intended the taking advantage element to act as
a filter. Rather, as argued above, Parliament’s intention was for section
46(1)(a) to be used to protect businesses from other businesses which possessed
a substantial degree of market power, while sections 46(1)(b) and (c) were
directed to protecting the competitive process.
The Courts have interpreted taking advantage as
requiring a consideration of whether the corporation would be able to engage in
the particular conduct under examination if they did not have market power. In
effect, the Court has applied a counterfactual analysis. If the answer to the posited question is “yes”,
then the courts have concluded that section 46 was not breached because the
taking advantage limb had not been established.
The Court’s interpretation of the taking advantage
test is an inappropriate gloss on the meaning of taking advantage.
Unfortunately, this interpretation has had the effect of rendering section 46 largely
ineffectual, as demonstrated by the fact that the ACCC has only taken 20 such
cases in 42 years.
The ACCC’s position on “taking advantage” is that the
term means no more than “use”.[8]
In other words, the taking advantage element does no more than import a causal
requirement between the substantial degree of market power of the corporation and
their relevant conduct.
The second reason why it is appropriate to remove the
taking advantage element from section 46 is because it is an aberration in the
context of the approach taken in every other industrialised nation to dealing
with the problem of monopolisation. As
stated by Sims:[9]
Most jurisdictions do not require proof of the nexus between market
power and the conduct itself (the taking advantage).
Sims specifically refers to section 2 of the US
Sherman Act and Article 102 of the Treaty in the Functioning of the European
Union, neither of which contain a taking advantage element.
Emerging
myths
Unfortunately, one can also discern a number of newly emerging
myths about the Harper Committee’s proposed section 46. The main originators of
these myths appear to be large business groups, particularly the Business
Council of Australia.
The first of these emerging myths relates to the
alleged anti-competitive impacts of the proposed effects test. Sims identifies the supermarket sector as the
primary source of this emerging myth:[10]
The supermarket sector in particular has dominated the section 46 debate
and, amazingly, the two major supermarkets have argued that, were the proposed
changes implemented, they risk breaching the law if they were to open a supermarket
in a market where they do not currently operate.
The large supermarket chains are claiming that the
mere act of opening a new store in a market is likely to breach the new section
46 because such conduct will have the likely effect of damaging competition.
This claim would have some cogency but for the fact
that the Harper Committee has also proposed the introduction of a substantially
lessening competition test, which limits the application of the effects
test. As explained by Sims:[11]
I find it curious that the main opponents of the Harper s46 change are
suggesting that larger companies would be stopped from opening a new store in a
new market. How can such a move be said
to substantially lessen competition?
Under the proposed section 46, the Court will have to
be satisfied about two requirements before a corporation can be found to have
breached the provision. First, the
corporation will have to be shown to have a substantial degree of market power
in a market. Second the corporation will have to have engaged in conduct for
the purpose or with the effect or likely effect of substantially lessening
competition.
It is clear that the opening of a new store in a
market will not have the effect of substantially lessening competition - rather
such conduct will have the opposite effect of substantially increasing
competition in the market.
Other emerging myths being perpetuated by opponents of
the proposed change are:[12]
· because businesses cannot know the effects of their actions on markets, they cannot be held liable for the unintended consequences of their actions;
· that the introduction of an effects test will introduce major uncertainty; and
· the new provision will result in over capture or false negatives.
It is quite surprising that business groups are
arguing that they should not be liable under the proposed section 46 effects
test because they cannot know the likely consequences of their actions on
markets. Businesses are effectively claiming that their knowledge and understanding
of the markets in which they operate is so deficient that they cannot predict
with any certainty the consequences of their actions. If this were truly the
case, it is difficult to see how these businesses would be capable of making
even rudimentary pricing and output decisions.
In reality businesses are the entities in our
economies which possess the best knowledge and understanding of the markets in
which they operate. Businesses also have the best knowledge and understanding
of how their business decisions will impact on both the market and the
participants within those markets.
One should also note that corporations are already
liable for the effects of their conduct under section 45, 47 and 50 of the
CCA. Despite this fact, these businesses
have not been calling for the repeal of these other provisions or at the very
least the removal of the effects tests from these sections.
The claim that the new provisions will introduce major
uncertainty is misplaced. Rather, the
new provision is likely to reduce uncertainty because it will remove the major
source of uncertainty in relation to section 46, namely the taking advantage
element.
The new provision will no doubt capture more conduct
than its predecessor, but there is no reason for believing that the provision
will result in over capture. Rather, the
new provision will reverse the under-capture which has characterised the
enforcement of the existing section 46 over the last 42 years.
It is unfortunate that a number of the emerging myths
being propounded by business groups appear to have gained some traction at the
political level. That these concerns are
myths is beyond serious debate. The more
puzzling question is why political parties, which should be able to understand
the legal and economic logic underpinning Harper’s recommendation, appear to be
supporting the status quo on the basis of these demonstrably false myths.
Conclusions
Sims’ speech “Section 46: The great divide” is a
valuable contribution to the perennial debate about the scope and utility of
section 46. While Sims comprehensively
“busts” a number of the emerging myths concerning Harper’s proposed section 46,
unfortunately he also perpetuates an existing and longstanding myth about the
provision. While we may agree that
section 46 should be directed exclusively to protecting the competitive process, that is not to say that it
is currently drafted to achieve that outcome alone. Furthermore, there is no evidence to suggest
that section 46 was ever intended by Parliament (or The Hon Lionel Murphy for
that matter) to achieve the narrow goal of protecting the competitive process,
to the exclusion of an equally important goal – namely to protect small
businesses from bigger businesses which are abusing their substantial degree of market power
Harper’s proposed section 46 should be embraced by
everybody:
· Who values competition in markets;
· Who accepts that there is a clear need for governments to curb the conduct of corporations which possess a substantial degree of market power,
· Who recognises that the existing section 46 is all but unworkable and has resulted in significant under-capture over the last 42 years; and
· Who recognises that corporations in Australia with a substantial degree of market power should be held liable for the effects of their unilateral conduct, as they are in every other leading industrialised nation.
Now that the myths about section 46, both existing and
emerging, have been “busted”, there can be no legitimate basis for standing in
the way of this essential and long overdue change to Australian competition
laws. It is also time to end the great
Australia/international divide between our unique and largely ineffective monopolisation
prohibition and the economically sound and largely effective monopolisation
provisions which exist in every other leading industrialised nation.
[1] Rod Sims, “Section 46: The Great Divide” at https://www.accc.gov.au/speech/section-46-the-great-divide
[2] Ibid.
[3] Ibid.
[4] The Hon.
Senator Murphy, Second
Reading Speech re Trade Practices Bill, 30
July 1974 at http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22hansard80%2Fhansards80%2F1974-07-30%2F0175%22
[5] Harper Committee, Final Report – March 2015 at http://competitionpolicyreview.gov.au/files/2015/03/Competition-policy-review-report_online.pdf
[6] Sims, above n1.
[7] Ibid.
[8] ACCC, “High Court
Confirms and enhances current approach to ‘misuse of market power’” ACCC Media Release, dated 16 March
2001 – at https://www.accc.gov.au/media-release/high-court-confirms-and-enhances-current-approach-to-misuse-of-market-power
[9] Sims, above n1.
[10] Ibid.
[11] Ibid.
[12] Business Council of
Australia, Submission to the Department of Treasury on the Final Report of the
Competition Policy Review”, May 2015 2014 – at file:///C:/Documents%20and%20Settings/Michael/My%20Documents/Downloads/BCA_Submission_on_the_Final_Report_of_the_Competition_Policy_Review_FINAL%20(1).pdf
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