Mythbusting: Bridging the Great Section 46 Divide

Introduction

In May this year, ACCC Chairman Mr Rod Sims' gave a speech at the Hodgekiss Competition Law Conference in Sydney entitled “Section 46: The Great Divide”.[1] In his speech, Sims sought to explore and illuminate many of the common misconceptions about section 46 of the Competition and Consumer Act 2010 (CCA), better known as the misuse of market power provisions. Sims also sought to argue in favour of the proposed amendments to section 46 put forward by the Harper Committee which, if passed into law, will see the removal of the requirement for the Australian Competition and Consumer Commission (ACCC) to prove taking advantage, as well as the introduction of the effects test.

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:

1. the ACCC usually loses section 46 cases in court;

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

Putting Theory into Practice: Principled Negotiation with the ACCC

Introduction

Principled (interest based) negotiation is not a new concept, having been around for over thirty years. Since the creation of the Harvard Negotiation Project in 1979 and the initial publication of “Getting to Yes”[1] in 1981, the process of principled negotiation has been developed and refined to the stage were it now forms the basis of many Alternative Dispute Resolution (ADR) techniques. For example, principled negotiation is arguably the dominant approach used by mediators in Australia who seek to focus the parties on their interests rather than their (legal) positions. We also see principled negotiation being used extensively by businesses in commercial disputes. However, there remains one significant area of dispute where principled negotiation appears to be the exception rather than the rule – namely in negotiations with regulators. The question is why are some regulators apparently so resistant to employ principled negotiation techniques in their disputes?

In the following, I will explore the main influences and constraints on the way in which Commonwealth regulators negotiate – namely, the Model Litigant Policy,[2] the Civil Dispute Resolution Act 2011 (CDR Act) and a likely future requirement to develop and implement Dispute Resolution Plans (DMP). I will then examine how one well known Commonwealth regulator, the Australian Competition and Consumer Commission (ACCC) approaches its negotiations in the light of these various influences and constraints.

Finally, I will examine the feasibility of parties using principled negotiation techniques in negotiations with the ACCC and how this approach may result in parties achieving better outcomes. I will argue that the use of Principled Negotiation in settlement discussions with the ACCC is likely to generate better outcomes than adopting a more traditional adversarial approach.

What is Principled (Interest Based) Negotiation?

In the following, I will provide a very brief outline of the main features of principled negotiation.

Principled negotiation is, at its simplest, a technique of negotiation which seeks to focus on the parties’ interests. The benefits of focusing on interests rather than positions has been explained in “Getting to Yes” in the following terms:

When negotiators bargain over positions, they tend to lock themselves into those positions. The more you clarify your position and defend it against attack, the more committed you become to it. The more you try to convince the other side of the impossibility of changing your opening position, the more difficult it becomes to do so. Your ego becomes identified with your position. You now have a new interest in “saving face” – in reconciling future action with past positions – making it less and less likely that any agreement will wisely reconcile the parties’ original interests.[3]

Not only is positional (or adversarial) bargaining likely to produce unwise outcomes, but it is seen as both inefficient and likely to endanger ongoing relationships.

The alternative is to engage in principled negotiation, which can be “boiled down” to the following four points:[4]

People: Separate the people from the problem

Interests: Focus on interests, not positions.

Options: Invent multiple options looking for mutual gains before deciding what to do.

Criteria: Insist that the result be based on some objective standard.

Advocates of principled negotiation argue that if the parties focus on their basic interests, mutually satisfying options and fair standards they will be able to achieve “wise agreements”. In addition, the parties will be able to “reach a gradual consensus on a joint decision efficiently”, whilst achieving an “amicable outcome”.[5]

Principled negotiation is a radically different approach to the traditional adversarial approach to negotiation. It is aimed at taking a less aggressive and hostile approach, whilst being more creative in generating options. In short, principled negotiators believe that if parties focus on their interests and are creative, they can achieve “win-win” outcomes.

How do Commonwealth Regulators negotiate?

Commonwealth regulators are not properly characterised as purely adversarial negotiators. Rather, Commonwealth regulators are subject to a range of influences and constraints on how they negotiate

One of the most significant constraints on how Commonwealth regulator’s negotiate is the Model Litigant Policy (Policy). Under this Policy, Commonwealth regulators are required “to act with complete propriety, fairly and in accordance with the highest professional standards”.[6]

For example, the Policy creates the following specific obligations on all Commonwealth agencies and regulators:

• to deal with claims promptly and not to causing unnecessary delay in the handling of claims and litigation;
• to pay legitimate claims without litigation where it is clear that liability is at least as much as the amount to be paid;
• to act consistently in the handling of claims and litigation;
• not to require the other party to prove a matter which the Commonwealth knows to be true; and
• not to take advantage of a claimant who lacks the resources to litigate a legitimate claim.

The effect of the Policy is to establish a set of principles which govern the way in which Commonwealth agencies and regulators conduct litigation. These principles also affect the way regulators approach their negotiations.

The Policy creates obligations on Commonwealth regulators to give serious consideration to the use of ADR to resolve disputes. For example, paragraph 2 states that Commonwealth regulators will meet their model litigant obligations by:[7]

(d) endeavouring to avoid, prevent and limit the scope of legal proceedings, wherever possible, including by giving consideration in all cases to alternative dispute resolution before initiating legal proceedings and by participating in alternative dispute resolution processes were appropriate.

Paragraph 2(e)(iii) imposes a further obligation on Commonwealth regulators to continue exploring ADR after they have commenced litigation.[8]

Furthermore, in 2008 an additional section dealing specifically with ADR was inserted into the Policy:[9]

5.1 The Commonwealth or an agency is only to start court proceedings if it has considered other methods of dispute resolution (eg alternative dispute resolution or settlement negotiations).

5.2 When participating in alternative dispute resolution, the Commonwealth and its agencies are to ensure that the representatives:

(a) participate fully and effectively, and

(b) subject to paragraph 2(e)(iv), have authority to settle the matter so as to facilitate appropriate and timely resolution of a dispute

The above directive provides further encouragement to Commonwealth regulators to explore ADR prior to the commencement of litigation and to continue exploring opportunities for using ADR after they have commenced litigation.

Another important constraint on the way in which Commonwealth regulators negotiate arises under the Civil Dispute Resolution Act 2011 (CDR Act). The three main objectives of the CDR Act are to:[10]

• ensure that, as far as possible, people take genuine steps to resolve disputes before certain civil proceedings are instituted 
• promote a move away from an adversarial approach to litigation 
• improve access to justice by encouraging early dispute resolution. 

The CDR Act applies to all civil litigants in the Federal Court and Federal Circuit Court, including Commonwealth regulators. Relevantly, the Act requires Commonwealth regulators to file a genuine steps statement explaining either:

(1) what steps they have taken to resolve the dispute; or

(2) why they have not taken any such steps.[11]

The main benefit of the CDR Act is that it has made Commonwealth regulators more accountable in terms of demonstrating to the Court and ultimately the Government, that they have taken genuine steps to avoid litigation, including genuinely exploring the feasibility of using ADR.

However, the main flaw in the CDR Act is the wide range of exclusions, most notably the exclusion of all civil penalty proceedings initiated by Commonwealth regulators.[12] Due to this exclusion, the ACCC is not required under the CDR Act to take any genuine steps in the vast majority of cases to try to resolve disputes prior to litigation.

The final important constraint on the way Commonwealth regulators negotiate is the expectation that they develop DMPs. The purpose of DMPs is to force Commonwealth agencies and regulators to clearly identify the steps which they are proposing to take for the avoidance and management of disputes. These plans should include an evaluation of the effectiveness of existing mechanisms and processes of dispute management and seek to identify new strategies to improve dispute resolution processes.[13]

The Australian Law Reform Commission (ALRC) first recommended that every Commonwealth agency be required to develop and implement its own DMP in its 2000 report, Managing Justice.[14] Unfortunately, no action was taken to implement this recommendation.

The idea of Commonwealth agencies developing their own DMPs was revisited by NADRAC in its 2009 report, The Resolve to Resolve.[15] After considering the issue, NADRAC made the following three recommendations:[16]

Recommendation 8.4

The Attorney-General amend the LSDs (Legal Services Directions) to require agencies, unless an exemption is obtained, to develop and regularly review dispute management plans that require appropriate use of ADR. 

Recommendation 8.5

The Attorney-General ask NADRAC, in consultation with OLSC, to prepare a model dispute management plan that could be used to assist agencies to comply with their obligations under the LSD.

Recommendation 8.6

The Attorney-General amend the LSDs to require agencies to include in their reports to OLSC details of their dispute management plans.

Whilst Recommendation 8.5 was actioned, the Government did not action the other two recommendations. The relevant LSL has not been amended to require agencies to develop and regularly review DMP’s. Rather the Attorney-General has issued a guidance note in which agencies are strongly encouraged to “adopt a strategic approach to dispute management…”[17]

As noted in the Productivity Commission report into Access to Justice Arrangements, as at April 2014 only three Commonwealth Government agencies had implemented DMPs – namely, the ACCC, the Australian Energy Regulator and the ATO.[18]

One could conclude that whilst the Commonwealth claims to be committed to requiring its agencies and regulators to make better use of ADR, this commitment has not materialised in two important respects. Exempting government litigation from the requirements of the CDR Act where a civil pecuniary penalty is being sought means that much Commonwealth litigation is proceeding to Court without any genuine steps being taken to avoid litigation. Furthermore, the absence of an obligation on Commonwealth agencies to develop DMPs means that there is no proper accountability in terms of assessing whether ADR is being seriously considered by regulators to resolve disputes and improve dispute resolution practice.

Negotiating with the ACCC

The ACCC has always been renowned for being a tough no-nonsense adversarial negotiator. Furthermore, at least in historical terms, the ACCC was not known as a strong supporter of ADR.

Important insights into the way in which the ACCC negotiates are provided by the Parker and Nielsen’s research into business perceptions of the ACCC.[19] As part of their work, Parker and Neilsen conducted extensive qualitative and quantitative research through surveys of Australian businesses and interviews with stakeholders.[20]

One of the most significant findings reached by Parker and Neilsen related to whether the ACCC was dogmatic:[21]

The survey respondents are most negative about how undogmatic the ACCC is…

But with the undogmatic measure the focus is not so much on respondents’ normative assessment of the procedural and substantive justice of the ACCC, but rather on their perceptions of the way the ACCC relates to business. The focus is on the flexibility or intractability of the ACCC’s opinion of, and enforcement strategy in relation to, businesses.

Our measure of the dogmatism of the ACCC, however, relates to the rigidity and legalism of the ACCC’s enforcement reaction to those who it sees as breaching the law and not cooperating with it.

Parker and Neilsen’s qualitative interviews also suggested that the ACCC was not accommodating in negotiating settlements:[22]

In our qualitative interviews, many lawyers who were experienced in acting for clients against the ACCC report cases where they felt that the ACCC had not been sufficiently accommodating: a number of lawyers interviewed cite cases where they believed that the ACCC had barely cooperated at all with alleged offenders in trying to reach a settlement. Rather, it is said that the ACCC preferred to institute proceedings immediately if the alleged offender did not accede to all the ACCC’s demands.

In relation to perceptions of procedural and substantive justice, Parker and Neilsen stated that:[23]

In our qualitative interviews, lawyers also criticise the ACCC for being ‘unreasonable’ and therefore ‘unfair’ in its approach to enforcement by refusing to settle matters without the alleged offender admitting that they had breached the law in the ways alleged by the ACCC; demanding ‘over the top’ conditions in settlement agreements; inappropriately issuing court proceedings when the alleged offender and their lawyer believed a cooperative resolution without court action should be possible; and a generally uncooperative or demanding manner in discussing resolutions of enforcement action with alleged offenders.

The above research supports the view that the ACCC is an aggressive, adversarial negotiator with a strong preference for litigated outcomes.

That ACCC was not a supporter of ADR is well demonstrated by a number of cases in which it strongly resisted the referral of any of its cases to mediation pursuant to section 53 of the Federal Court Act 1976 (FCA).

The most notable example of the ACCC’s then position in relation to mediation was the Lux case,[24] where the ACCC argued that the matter should not be referred to mediation for three reasons:[25]

(1) Because the conduct related to conduct affecting a vulnerable person (ie intellectual disability) mediation was inappropriate;

(2) That there was a public interest in allowing the Court to exercise its judicial functions and determine whether the alleged breaches had occurred; and

(3) Mediation is singularly inappropriate for matters involving many disputed facts and where the issues have negligible prospects of being resolved through mediation.

The Court dealt with the first submission quite swiftly. Justice Nicholson observed that mediation was likely to be a more appropriate approach if it resulted in the vulnerable person not being required to give evidence and avoiding the pressure of participating in court proceedings.[26]

Nicholson J then noted that mediation had a broader role than simply trying to settle the entire dispute between the parties. Rather, mediation would be productive if it were successful in helping the parties to make some progress towards resolving some of the matters in dispute or clarifying the issues.[27]

The approach taken by the ACCC towards mediation in the Lux case is consistent with Parker and Nielsen’s findings about the ACCC’s dogmatic and unaccommodating approach to settlement negotiations. In the Lux case, it appears that the ACCC did not see any benefit in mediation unless it involved the respondent capitulating on every substantive point.

Based on a review of more recent ACCC cases, it appears that the ACCC no longer takes such a strong position in resisting court-ordered mediation. Indeed, a review of ACCC cases over the last few years suggests that its cases are often settled following court ordered mediation.[28]

There are further encouraging signs that the ACCC is becoming more open to the use of ADR as evidenced by the release of its first DMP.[29]

In its DMP, the ACCC identifies the key principles for its dispute management framework:[30] 

•  to resolve disputes as early as possible and by the simplest and most cost effective means that will achieve the best possible outcome for the communit
• where a process is prescribed by legislation, to act in accordance with our statutory obligations
• to take genuine steps to resolve or clarify disputes both before and throughout any court or tribunal proceedings
• to manage disputes in a transparent, fair and consistent manner.

The ACCC states that they have committed to promoting their plan both internally and externally, to implement staff training to build awareness of dispute resolution mechanisms and to strengthen their staff’s negotiation and influencing skills.

Principled Negotiation with the ACCC

When engaged in settlement discussions with the ACCC it is important to focus your attention on how you are approaching these discussions. Many law firms and businesses take a highly unstructured and ultimately unprincipled approach to their negotiations. As a result, the outcomes which they achieve are often much less advantageous than would have been the case had they applied Principled Negotiation strategies.

Interests

The first issue to focus on is your client’s underlying interests, rather than its legal position. Often clients will identify the following underlying interests: 

• to have the case finalised as soon as possible;
• to agree to as low a pecuniary penalty as possible;
• to convince the ACCC that their conduct was not intentional, but had come about due to their inattention to, or ignorance of, relevant laws; and
• for the ACCC to change its apparent view of the client that they are disreputable or dishonest.

Often the ACCC will take an aggressive approach during the investigation and litigation phase because they have formed a highly negative view your client. Therefore, it should be your primary concern to convince the ACCC that their initial impressions of your client is incorrect.

It is relatively easy to identify the ACCC’s interests in most cases.

The first issue to consider is whether the case against your client falls into one of the ACCC’s stated priority areas for the current year. If it does, you can be quite certain that the ACCC see the case as important, and one to which it is willing to devote considerable resources.

Second, the ACCC has an interest in achieving both specific and general deterrence by obtaining the largest pecuniary penalty possible.

Best Alternative to a Negotiated Agreement (BATNA)

The next step is to consider your client’s Best Alternative to a Negotiated Agreement or BATNA. In the vast majority of ACCC cases, it is unlikely that your client will have very strong of BATNA. This is because the ACCC often pursues cases where the evidence is strong, based on an in-depth and thorough investigation.

The ACCC also commits significant legal resources to all of their cases. The ACCC’s very high success rates in litigation, which has exceeded 90% for many years, is testament to their ability to select strong cases and to generally run their litigation very professionally.

Many businesses which have gone to trial against the ACCC have found that the ACCC has been successful in establishing most of its allegations. While there are a few notable losses, such as the Metcash, Pfizer, Air Cargo Cartel, and Fly Ash cases, these high profile losses remain the exception.

Having said that, you should not commit your client entirely to achieving a successful negotiated settlement. If you take such an approach and the settlement fails, your client will be entirely unprepared for the litigation. Therefore, it is still vitally important for you to take steps in the litigation to improve your client’s BATNA to enhance their negotiating position.

The best way to improve your BATNA is to invest the time required to prepare a detailed response to the ACCC’s Statement of Claim or Fast-track Statement. By continuing your litigation preparation, you will make it clear to the ACCC that if the settlement negotiations fail, you “appear to” have a credible BATNA – namely, to run the litigation.

Communications strategy

You also need to discuss and devise a specific communications strategy.

The first aspect of your communications strategy should be convey to all relevant parties that you are seeking to work with the ACCC to address their concerns. Many businesses make the odd decision, when they get sued, to state that there is absolutely no merit in the ACCC’s case and that they are proposing to fight the case “vigorously”. I fail to see any good reason for making these types of statements.

First, such statements often prove to be entirely incorrect, as the business ends up deciding to settle the case a few months later. Second, such ill advised comments often come back to haunt the client when the case reaches its conclusion and the Court is considering the appropriate penalty. The ACCC is likely to draw the Court’s attention to these statements as evidence that your client did not cooperate and admit the error of its ways at the earliest possible opportunity.

Furthermore, such inflammatory comments are likely to fuel media interest in the case. The better approach is to downplay the significance of the case, while at the same time suggesting that the litigation has arisen due to a misunderstanding or miscommunication.

The second aspect of your communications strategy should be to take the initiative to prepare a detailed settlement submission prior to any settlement meeting. This settlement submission will form the basis of any subsequent settlement meetings with ACCC. This is a sound strategy for a number of reasons.

First, you should avoid a situation where the ACCC sets the agenda for any settlement meeting. By taking the initiative to prepare a detailed settlement submission, you have the opportunity to set the agenda for future negotiation discussions.

Second, if you prepare an initial settlement submission you can also set the approach which will be taken in the subsequent settlement discussions. If you present your arguments by reference to principled negotiation strategies, techniques, and concepts, it is likely that the settlement negotiations will proceed in that way. In other words, if you set out a principled negotiation approach in your settlement submission, it is likely that the ACCC will also adopt a similar approach. In most cases, your client will achieve a better outcome if they adopt a principled negotiation approach.

For example, in one case the respondents wanted to ensure that an assessment of the appropriate penalty considered all of the relevant ACCC penalty cases within the previous 12-month period, cross-referenced against each respondent’s annual sales turnover. By presenting the submission in this way, the respondent put the ACCC in the position of having to explain to why this approach was incorrect or inappropriate.

Further, the respondents wanted to ensure this external measure excluded particular ACCC penalty outcomes which were not objectively valid – namely, the exceptionally large penalties which the ACCC routinely obtains against companies in liquidation. The view was taken that these penalties are not valid as there was no contradictor to argue that such large penalties were disproportionate in terms of both the nature of the conduct and the size of the contravener.

Worsening the ACCC’s BATNA

Another purpose of the initial settlement submission is to use the submission to try to weaken the ACCC’s BATNA. The ACCC can sometimes become over-confident about the strengths of their case. Therefore, the challenge is to first identify problems with their case and then to draw attention to these problems in your settlement submission in order to undermine their confidence.

One strategy to weaken the ACCC’s BATNA is to draw the ACCC’s attention to other businesses in the market which your client believes either are engaging in more blatant conduct than your client or alternatively, while engaging in the same conduct, are either much larger companies or have “form” for engaging in similar conduct. Your purpose in drawing attention to these other businesses is to make it clear to the ACCC that in any trial you are going to force the ACCC to explain to the Court, both during the trial and at the penalty phase, why they decided to pursue your client rather than some other business which was a more appropriate enforcement target.

Another strategy is to draw attention in your settlement submission to any procedural failures by the ACCC during either its investigation or litigation.

The first issue to focus on is whether the ACCC has acted consistently with the Model Litigant Policy. For example, did the ACCC give your client an opportunity to accede to all of the ACCC’s demands prior to commencing litigation, or rather did the ACCC commence litigation without providing your client with that opportunity?

Another interesting issue is whether the ACCC has commenced litigation against a small business which did not have sufficient financial resourced to fight the case. It seems to me on my reading of the Model Litigant Policy, that such conduct could contravene the ACCC’s obligations under that Policy.

The second issue to raise is whether the ACCC made an inappropriate statements at the commencement of legal proceedings in its media release or in other media comment. The ACCC has developed an apparent practice over the last few years of making highly damaging sub-judice statements about its cases. Accordingly, you should draw attention to any such statements in your submission so that the ACCC will know that this conduct will become an issue at the trial. In particular, the ACCC will be concerned that the trial judge may comment negatively about these statements in his/her judgement.

Making the first offer

Finally, and most controversially, it is highly advisable for your client to propose a serious of remedies, including a specific penalty figure, to the ACCC in its initial settlement submission. It is important to do this before the ACCC proposes specific remedies and a specific penalty figure.

It is very common for the respondents not to want to propose a settlement figure to the ACCC, preferring instead to let the ACCC make the first move. Respondents are then often quite shocked at the size of the pecuniary penalty proposed by the ACCC. You should avoid making this mistake.

You will find that your client will be very reluctant to take this approach, as it seems somewhat counterintuitive to make the first offer. However, once you explain the following strategy to your client, they are more likely to agree:

(1) any initial settlement figure which you propose would be at the lower end of the permissible range; 

(2) by proposing a figure, you will put the ACCC in the position of having to explain why your proposed penalty figure should be increased, by reference to the objective external measures which you have proposed; and 

(3) it is much more difficult to “talk the ACCC down” from a higher settlement figure, than it is to argue against the ACCC seeking to ratchet up your proposed settlement figure without the ACCC providing objectively valid reasons for doing so.

Using principled negotiation with the ACCC

Using principled negotiation with the ACCC has to potential to achieve more favourable or, in the language of Getting to Yes, “wiser” settlements for respondents. While the ACCC is likely to appear quite uncomfortable and confused by such a negotiating approach, it is likely to respond quite positively to principled negotiation.

Principled negotiation techniques are also likely to be beneficial for respondents in achieving more favourable outcomes in ACCC matters, because of what may be described as a “me-too” effect. In my experience, the ACCC usually wishes to position itself, in both litigious and non-litigious matters, as the more “procedurally reasonable” of the two parties involved in the dispute. Therefore, when faced with an respondent who was applying the principled negotiation approach, it is likely that the ACCC will also decide to adopt a more principled negotiation stance, largely in its desire to appear more “procedurally reasonable” than the respondent.

The main obstacle to the ACCC using principled negotiation is that the majority of ACCC staff do not have any training in negotiation, let alone principled negotiation. Therefore, it is encouraging that the ACCC has stated in its DMP that providing negotiation training to ACCC staff is a priority.

Conclusions

Principled negotiation appears to be the exception rather than the rule when negotiating with Commonwealth regulators. Despite numerous reviews over the last 20 years recommending that all Commonwealth agencies and regulators implement detailed DMP’s, to-date only three agencies have done so. Only when it becomes mandatory for all Commonwealth agencies and regulators to implement DMPs are we likely to see the widespread adoption of ADR and principled negotiation. Changes to the CDR Act are also needed to ensure that genuine steps are taken in most Commonwealth disputes to avoid litigation.

The ACCC has a well-earned reputation as a hard-nosed and uncompromising negotiator. However, there are a number of positive signs that the ACCC is recognising the advantages of taking a more strategic and nuanced approach to dispute resolution. The release of its first DMP in 2013 evidences the ACCC’s newfound commitment to more effective dispute management.

It is hoped that in the context of the ACCC’s new focus on improving its dispute resolution capabilities, that it will recognise the importance of adopting principled negotiation. While the ACCC may not have a great deal of exposure to principled negotiation, I believe that when faced with an opponent who has chosen to utilise this approach, the ACCC is likely to embrace a principled negotiation stance. Whether the ACCC’s decision to adopt this particular negotiation position arises out of a misplaced competitive desire to out-do its opponent in the reasonableness stakes does not matter, as long as their approach results in fairer, more reasonable and wiser negotiated outcomes.

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[1] Roger Fisher, William Ury and Bruce Patton, Getting to Yes: Negotiating Agreement Without Giving In (Penguin Books, 2011).

[2] Commonwealth Model Litigant Rules, Appendix B, Legal Service Directions, 2005 made under section 55ZF of the Judiciary Act 1903, Office of Parliamentary Counsel, Canberra.

[3] Fisher, et al, above n 1, 4-5.

[4] Ibid  11.

[5] Ibid 14-15.

[6] Model Litigant Policy, above n 2, 23.

[7] Ibid.

[8] Ibid.

[9] Ibid 25.

[10] Commonwealth Attorney-General, Civil Dispute Resolution Act 2011 at http://www.ag.gov.au/legalsystem/alternatedisputeresolution/pages/civildisputeresolutionact2011.aspx

[11] ss.6 and 7, CDR Act.

[12] ss15(a) and (b), CDR Act.

[13] Commonwealth Attorney-General, Dispute management in Australian Government agencies at http://www.ag.gov.au/LegalSystem/AlternateDisputeResolution/Pages/DisputemanagementinAustralianGovernmentagencies.aspx

[14] ALRC, Managing Justice: A Review of the Federal Justice System, January 2000, 40.

[15] NADRAC, The Resolve to Resolve: Embracing ADR to Improve Access to Justice in the Federal Jurisdiction, September 2009.

[16] Ibid 13.

[17] Commonwealth Attorney-General, Use of Alternative Dispute Resolution – Guidance Note 12, 2 at  http://www.ag.gov.au/LegalSystem/LegalServicesCoordination/Documents/Use%20of%20Alternative%20Dispute%20Resolution%20ADR.pdf

[18] Productivity Commission, Access to Justice Arrangements, Draft Report, April 2014, 262

[19] Christine Parker and Vibeke Lehmann Nielsen, ‘What Do Australian Businesses Really Think of the ACCC, and Does it Matter?’ (2007) 35 Federal Law Review 187.

[20] Ibid 196-7.

[21] Ibid 212-3.

[22] Ibid 205.

[23] Ibid 210.

[24] ACCC v Lux Pty Ltd [2001] FCA 600.

[25] Ibid [13-15].

[26] Ibid [13].

[27] Ibid [30].

[28] Review of ACCC cases reported on Austlii in the period from 2000 to 2014 – Austlii website accessed on 1 September 2013.

[29] ACCC, Dispute Management Policy, June 2013 at http://www.accc.gov.au/about-us/australian-competition-consumer-commission/accountability/dispute-management-policy

[30] Ibid.

You can go to jail for breaching the Australian Consumer Law!

Introduction

A little known fact about the operation of the Australian Consumer Law 2010 (ACL) is that it is in fact possible for an individual to go to jail for up to three years  for breaching particular provisions.  The realisation that individuals can actually go to jail for engaging in a contravention of consumer protection laws will no doubt make many company officers and employees sit up and take notice.

Sorensen case

In February 2015, the NSW Fair Trading Minister, the Hon. Matthew Mason-Cox announced that serial conman Mr Peter Noel Anthony Sorensen had been jailed for a period of 15 months for contravening the ACL.

The NSW Office of Fair Trading alleged that Mr Sorensen had been engaging in a blowing scam. OFT alleged that Mr Sorensen had been engaged in a scam whereby he sent a large number of mining companies invoices for advertisements which he claimed had appeared in a trade publication.  These claims for payment were false as the advertisements had never actually appeared in any of the publications. Furthermore, the mining companies had never entered into a contract with Mr Sorensen for the publication of these advertisements.

OFT alleged that Mr Sorensen received nearly $124,500 from the mining companies involved.

Mr Sorensen had previously been convicted in October 2013 of a similar offence, again involving the false invoicing of mining companies for advertisements which had never appeared and which they had not wanted. On that earlier occasion, Mr Sorensen was ordered to pay fines and penalties of $43,200 and compensation of $96,000.

When considering the issue of the appropriate penalty, the Court considered a range of issues. Most notably the Court placed weight on the fact that it was Mr Sorensen’s second offence for similar conduct and that he had failed to comply with the earlier compensation order.  At the time of sentencing, Mr Sorensen had paid compensation of only $2,200 rather than the full amount of $96,000.

Legislation

Mr Sorensen was sentenced to 15 months imprisonment pursuant to section 64 of the NSW Fair Trading Act 1987 (FTA) which states:

1. A person who is convicted of a second or subsequent offence against Division 1, 2 or 5 of Part 4-1 of the ACL is, in addition to, or as an alternative to, any monetary penalty, that may be imposed in relation to the offence, liable to imprisonment for a term not exceeding 3 years.
2. However, the maximum term of imprisonment that the Local court may impose for any such second or subsequent offence is 2 years

As is apparent from the above, the Court may decide to imprison an individual for a second or subsequent conviction for a contravention of Divisions 1, 2 or 5 of the Part 4-1 of the ACL.  In other words, jail time may imposed for a second or subsequent conviction of the following specific provisions:

False or misleading representations – Division 1

Section 151  False or misleading representations about goods or services

Section 152  False or misleading representations about sale of land

Section 153  Misleading conduct relating to employment

Section 154  Offering rebates, gifts, prizes.

Section 155  Misleading conduct as to the nature of goods

Section 156  Misleading conduct as to the nature of services

Section 157  Bait advertising

Section 158  Wrongly accepting payment

Section 159  Misleading representations about certain business activities

Unsolicited supplies – Division 2

Section 161  Unsolicited cards etc.

Section 162  Assertion of right to payment for unsolicited goods or services

Section 163  Assertion of right to payment for unauthorised entries or advertisements

Other unfair practices – Division 5

Section 167  Referral selling

Section 168  Harassment and coercion

Individuals can therefore be sentenced to a period of imprisonment for a contravention of the above provisions of the ACL, if it is that individual's second or subsequent criminal conviction.

A second or subsequent civil contravention of the ACL cannot result in an individual being sentenced to a term of imprisonment.

Conclusions

The main take out from the Sorensen case is that it is possible for an individual to be sentenced to a period of imprisonment of up to three years for a contravention of the ACL.  The two conditions which would need to be satisfied for this to occur is that:

(1)      that the individual has been convicted of an earlier criminal offence under the ACL and

(2)      that individual has been convicted of a second or subsequent criminal offence under the ACL.

The second offence does not have to be of a similar nature to the first offence. Rather it appears that an individual could in fact engage in very different contraventions of the ACL but still be imprisoned for a period of up to 3 years.

In reality, the Court is much more likely to imprison a person who has been proven to have engaged in repeat offences of an identical or similar nature, as was the case with Mr Sorensen.

Accordingly, individuals and their legal advisers must think twice about deciding to plead guilty to  criminal charges under the ACL, as opposed to contesting the charges, on the basis that it may be more expedient and/or cheaper to do so.   Any guilty plea to a criminal offence under the ACL could potentially expose that individual to imprisonment for a period of up to three years in the event that they are convicted of a second offence under the relevant provisions of Part 4.1 of the ACL.

(1) Fraudster sentenced to 15 months jail - http://www.fairtrading.nsw.gov.au/ftw/About_us/News_and_events/Media_releases/2015_media_releases/20150217_fraudster_sentenced_to.page

A Damp Squib – A Short Note on the Harper Review Draft Report

Introduction[1]

The recommendations contained in the Harper Review’s Draft Report have not received a great deal of support from either competition law specialists or the general community. Indeed, a brief review of the 200 plus submissions lodged in response to the Draft Report show a great deal of dissatisfaction with many of the recommendations. Particular areas of concern relate to the recommendations concerning proposed changes to section 46, retail trading hours and road pricing. However, the most serious weakness of the Draft Report is its failure to put forward any meaningful recommendations to assist the small business sector. This is despite Harper’s earlier claims that he would not let small business down.

In many respects, the Draft Report demonstrates the extent to which the Harper Review is out of touch with the small business sector. This lack of understanding is amply demonstrated by the claims in the Draft Report that particular recommendations will assist small business, when in reality most of these recommendations will have the opposite effect – ie they will further damage and disadvantage small businesses in their ability to compete with larger businesses.

Competition not competitors

The Harper Review claims throughout its Draft Report that the Competition and Consumer Act 2010 (CCA) should be aimed at protecting competition and not competitors. Indeed, this statement has become the catchcry of many groups seeking to make the CCA more big business friendly.

The first concern about this claim is that it is not a correct statement of the actual objects of the CCA. Section 2 of the CCA states:

The object of this Act is to enhance the welfare of Australian through the promotion of competition and fair trading and the provision of consumer protection.

The CCA is aimed at the promotion of both competition and fair trading. It is implicit in the term “fair trading” that the CCA is aimed at preventing firms from engaging in unfair trading practices towards both consumers and their competitors. The unconscionable conduct provisions are the clearest example of this legislative intent.

The Second Reading Speech for the Trade Practices Act also made it clear that the policy objectives of the CCA involved a wider range of considerations than suggested in the Draft Report. As stated by the Hon. Senator Murphy on 30 July 1974:

The purpose of the Bill is to control restrictive trade practices and monopolisation and to protect consumers from unfair commercial practices. The Bill will replace the existing Restrictive Trade Practices Act, which has proved to be one of the most ineffectual pieces of legislation ever passed by this Parliament. The Bill will also provide on a national basis long overdue protection for consumers against a wide range of unfair practices. Restrictive trade practices have long been rife in Australia. Most of them are undesirable and have served the interests of the parties engaged in them, irrespective of whether those interests coincide with the interests of Australians generally. These practices cause prices to be maintained at artificially high levels. They enable particular enterprises or groups of enterprises to attain positions of economic dominance which are then susceptible to abuse; they interfere with the interplay of competitive forces which are the foundation of any market economy; they allow discriminatory action against small businesses, exploitation of consumers and feather-bedding of industries.

The policy objectives of the TPA/CCA are much broader than the promotion of competition, but rather extend to the removal of unfair practices including the prevention of discriminatory action against small businesses.

Similarly, Senator Murphy noted the policy objectives behind section 46 in his Second Reading speech:

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.

The provision will not apply merely because a person who is in a position to control a market engages in conduct within one of the classes set out in the clause. It will be necessary for the application of the clause that, in engaging in such conduct, the person concerned is taking advantage of the power that he has by virtue of being in a position to control the market. For example, a person in a position to control a market might use his power as a dominant purchaser of goods to cause a supplier of those goods to refuse to supply them to a competitor of the first mentioned person- thereby excluding him from competing effectively. In such circumstances the dominant person has improperly taken advantage of his power.

Again, the policy objective behind section 46 was and is to prevent firms with market power from engaging in conduct which will eliminate or injure their competitors.

Senator Murphy recognised that competition does not occur in a vacuum, but rather manifests itself in a practical sense through rivalrous behaviour between competing firms. In other words, the legislative intention behind the TPA and the CCA was that competition was best safeguarded by preventing unfair trading between competitors.

The reality is that Part IV of the CCA has long been applied in a way which has the practical effect of protecting competition. Indeed, very few of these provisions could be applied in ways which would protect competitors whilst not at the same time protecting competition.

Section 45 prohibits agreements between firms which have the purpose and or effect of substantially lessening competition. Most of the provisions of section 47 are also subject to a requirement that the prohibited conduct must substantially lessen competition.

Even section 46 states that a firm with a substantial degree of market power must not use that power for the purpose of either eliminating or substantially damaging a competitor, preventing entry or preventing competitive conduct.

It is apparent that under section 46 conduct by a firm with market power which has the purpose of eliminating or substantially damaging its competitor will also inevitably have the effect of further entrenching that firm’s market power, which in turn will substantially lessen competition.

In addition, conduct by a firm with market power which is aimed at preventing entry by another firm will have a profoundly negative effect on competition. Indeed, successfully preventing new entry will permit the firm with market power to continue charging high prices.

The final proscribed purpose in section 46 is the clearest example of a prohibition on conduct which damages competition. This proscribed purpose is aimed at preventing firms with market power from engaging in conduct which deters or prevents competitive conduct.

As is apparent, each of the prohibitions contained in section 46 is aimed at protecting the competitive process by protecting competitors. All the provision does is recognise the practical reality that businesses with market power will seek to achieve the goal of substantially lessening competition by taking steps to damage their competitors.

Given the vigor with which various commentators claim that section 46 needs to be changed so to protect competition rather than competitors, one would think that section 46 litigation is replete with examples of the section being used to protect competitors and not competition. This is not the case. It is clear that all successful section 46 cases have shown damage to competition through actions aimed at damaging competitors.

Small Business concerns

The Harper Review’s failure to make meaningful recommendations in relation to small business can be traced back to a more fundamental failure – namely, a failure to gain a proper understanding of small business concerns. It is quite apparent from reading the Draft Report that the Harper Review does not understand small business or small business issues. This is disappointing as it is not particularly difficult to identify the main concerns facing small businesses.

One of the major concerns of small business is that they are often unable to buy goods from their suppliers at the wholesale level at prices which are lower than the prices at which their larger competitors are selling the same products at the retail level. For example, small businesses are often concerned that they are paying their supplier, say, $10 for an item at the wholesale level, whilst their major competitor is selling the same product to consumers at, say, $8.

As is apparent, small businesses find it hard to understand how such a situation can arise. Is it a case of their suppliers selling goods to their larger competitors at extremely low prices or is it rather that their larger competitors are engaging in predatory pricing?

Small businesses will often challenge their suppliers about these pricing disparities, only to be told by their suppliers that they are in fact paying similar wholesale prices to their major competitors. However, what is often not made clear to small businesses is that their suppliers are also providing these large competitors with a wide range of additional discounts and rebates which significantly reduce their final wholesale unit price.

Small businesses also have some difficulty differentiating whether their large competitors pricing is loss leader pricing or predatory pricing. This is understandable given that it is often very difficult to distinguish between loss leader pricing and predatory pricing.

From an economic perspective, the whole concept of loss leader pricing is irrational. Consumers should not form the view based on loss leader pricing on a small number of goods that a particular retailer is generally cheaper and as a consequence make a decision to purchase a number of other higher priced items from that retailer. Indeed, the entire concept of loss leader pricing relies on the consumer making irrational decisions, based largely on customer inertia.

The Harper Review has not demonstrated that it has gained any understanding of the above issues. Nor has the Review spent any time investigating the reasons for such large pricing discrepancies or the distinctions between loss leader pricing and predatory pricing.

Another concern which small business suppliers have relates to the rise of homebrands. The increase in homebrands amongst the two major retailers is having the effect of squeezing smaller brands off shelves. While there is little that can be done about decisions by the two major retailers to offer more and more homebrands, there is valid concern about the pricing of such homebrands.

The Chicago School has expressed a great deal of scepticism about the prevalence of predatory pricing. As a result, many commentators appear to have dismissed predatory pricing as a mere historical and theoretical curiosity. However, this is not to say that predatory pricing cannot and does not occur.

A particular area where predatory pricing is likely to be occurring is in relation to homebrands. As is apparent, both of the two major retailers are offering their homebrand products at very low prices.

The effect of this conduct is to drive smaller lower cost manufacturers out of business, as they are unable to secure shelf space and match the lower homebrand prices. This trend is likely to result, over time, in markets being populated by a lesser numbers of brands and suppliers. Indeed, it is likely that over time many markets will be characterised by a two or three higher priced or premium brands and two or three homebrand products.

It is inevitable in such narrow markets that the major retailers will decide increase the prices of their homebrand products so that they approach the prices of the higher priced premium brand products available in their stores. This conduct sounds like classical predatory pricing.

Third line forcing and RPM

The Harper Review recommendations in relation to third line forcing amply demonstrates its blasé attitude to small business concerns. In their draft report there is no consideration of the likely market effects of this recommendations on small business. Rather, the Harper Review limits its discussion to the following two paragraphs:

As a general principle, the CCA should not interfere with trading conditions agreed between buyers and sellers in connection with the acquisition and supply of goods and services unless those conditions have the purpose, or would have or be likely to have the effect, of substantially lessening competition.

Consistent with that principle, the Panel sees no need for third‑line forcing to be singled out from other forms of vertical trading conditions and prohibited per se. As notifications to the ACCC demonstrate, third‑line forcing is a common business practice and very infrequently has anti‑competitive effects.

It is quite staggering for the Harper Review to conclude that third line forcing “very infrequently has anti-competitive effects”, given that this conclusion is in direct contradiction to the finding reached by the Swanson Committee in 1976 on the same issue. As stated in the Swanson Committee report:

In the opinion of the Committee the practice of forcing another person's product may be justifiable in certain cases. However, the Committee is of the opinion that the practice will, in virtually all cases, have an anti-competitive effect and that it should accordingly, continue to be capable of justification upon the ground only of public benefit.

As correctly pointed out by the Swanson Committee, third line forcing will virtually always be anti-competitive. Such conduct is by its very nature anti-competitive as it involves one firm forcing another firm to purchase a product which it either does not wish to purchase from that particular firm or does not wish to purchase at all.

Furthermore, the practice of third line forcing offends another fundamental legal principle – namely, freedom of contract. As a general rule, a party should be able to choose the products it wishes to purchase, and to purchase such products from whomever it wishes.

The main concern about removing the per se prohibition on third line forcing is that it will no doubt result in an explosion of such arrangements. Furthermore, it is small businesses which will bear the brunt of any such explosion of third line forcing arrangements.

The Harper Review’s treatment of RPM was similarly cursory. The following is the extent of it discussion of this issue:

The appropriateness of a per se prohibition of resale price maintenance (RPM) has been debated for many years, both in Australia and overseas. When the per se prohibition was enacted in Australia in the mid‑1970s, it reflected the law in many comparable jurisdictions. However, over the last 20 years some countries — particularly the US and Canada — have moved away from the per se prohibition of resale price maintenance. Other countries, including Europe and New Zealand, have retained the per se prohibition.

The Panel considers that there is not a sufficient case at this time for changing the prohibition of RPM from a per se prohibition to a competition‑based test. It would be appropriate, though, to allow business to seek exemption from the prohibition more easily. This could be achieved through allowing RPM to be assessed through the notification process, which is quicker and less expensive for businesses than authorisation. This change would also have the advantage of allowing the ACCC to assess RPM trading strategies more frequently, and thereby provide better evidence as to the competitive effects of RPM in Australia.

Unfortunately, the Harper Review does not appear to have examined the issue of RPM in any depth. It noted that other jurisdictions have removed the per se prohibition, and then recommends the extension of the notification process to cover RPM. However, there is no discussion on whether the practice of RPM is anti-competitive or pro-competitive.

The idea that one firm should be permitted to force another firm to sell a good, which that second firm has purchased and has title in, at a higher price than they wish, is the very definition of anti-competitive conduct. Unfortunately, this very simple truth has been entirely lost in the debate, particularly in the US, which is dominated by esoteric and unrealistic arguments about free riding and intra-brand and inter-brand competition. As a result, the US Supreme Court has effectively concluded in Leegin that RPM is likely to be pro-competitive in most cases, despite the clear evidence showing the opposite effect.

Any relaxation of the rules in relation to RPM is again going to adversely affect small businesses, particularly small business discounters. As a result, small businesses will be prevented from engaging in vigorous price competition to both their own competitive detriment and the detriment of competition more generally.

Conclusion

The Harper Review’s Draft Report is a great disappointment. The Harper Review has failed to look deeply into many important issues, instead taking a cursory and simplistic approach. Of particular concern is the failure of the Harper Review to come to grips with the challenges facing small businesses, particularly in relation to significant pricing differentials and the rise of homebrand products. It is hoped that the Harper Review will spend more time listening to small business and trying to understand their concerns before finalising its deliberations.

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[1] A squib is a type of firework consisting of a small container filled with chemicals which explodes to produce bright lights and loud noises. However, damp or wet squib will not explode.