Broad markets give less room to move – Coles’ proposed acquisition of Supabarn

This article first appeared in Lexis Nexis Competition and Consumer Law News (2016) Vol 21, No 7, pp. 88-92

Introduction

In June 2015, Coles announced its intention to buy eight of Supabarn’s grocery stores in the ACT and NSW and one supermarket site in the ACT which is currently under development.[1]  The ACCC is set to announce its decision in relation to the proposed acquisition on 10 September 2015.[2]

Coles and Supabarn competitors have made known their views about the proposed acquisition.  The Master Grocers of Australia have been reported as saying that they are strongly against the sale, as the Canberra market is already dominated by Coles and Woolworths.[3]

Jos de Bruin, the CEO of the Master Grocers Australia, has stated that:

Any acquisition of an independent supermarket group small, medium or large will have a detrimental effect on the independent supermarket industry, on its health and its future longevity.[4]

The sale of most of Supabarn’s grocery assets to Coles is likely to create an uncomfortable situation for the Australian Competition and Consumer Commission (ACCC). While the ACCC may want to prevent Supabarn stores from getting into the hands of Coles, it will face an uphill battle to prevent the acquisition.

Ironically, the greatest obstacle to the ACCC blocking the Coles acquisition could very well be a number of the key findings made by Justice Emmett in the ACCC v Metcash case[5], largely in response to Metcash’s submissions in that case.

Background[6]

Coles has announced its intention to acquire the Supabarn stores in Civic, Wanniassa, Kaleen and Crace in the ACT and the stores in Five Dock, Sutherland, Sans Souci and Annandale in NSW. In addition, Coles is seeking to purchase the undeveloped Casey site in the ACT.

Supabarn’s Gymea store in NSW and a development site in Kingston in the ACT are not part of the sale to Coles.

Coles and Supabarn applied to the ACCC for informal clearance of the proposed acquisition in June 2015 and the ACCC commenced its market enquires shortly after. 

The ACCC is expected to announce its initial decision on 10 September 2015.  At that time the ACCC may decide to either clear the proposed acquisition or issue a Statement of Issues.  The ACCC issues a Statement of Issues or SOI when it believes that a merger raises competition concerns which require further investigation.

Interestingly, the ACCC also decided to hold a consumer forum on the proposed acquisition in the ACT on 3 August 2015.  The purpose of this forum was to hear directly from consumers about their views on the proposed acquisition and any effect it would have on competition.[7]

Competition issues

The ACCC has signalled the main competition issues it will be focusing on in its consideration of this matter.  As stated by ACCC Chairman, Rod Sims:

Given Supabarn’s position as a significant independent supermarket chain, an important focus of the ACCC’s review will be whether its removal as a competitor would substantially lessen competition between supermarket chains.  The review will also examine each of the individual local markets in which the Supabarn stores operate, and any effect on grocery wholesaling and supply markets.[8]

Sims also provided an insight into the factors which the ACCC will and will not be taking into consideration in its assessment of the proposed acquisition:

The main indicator of a substantial lessening of competition is whether the acquisition would enable firms in the market to raise or reduce product quality (including service and choice) or innovation following the acquisition. Section 50 does not allow the ACCC to consider factors other than those related to competition. In particular, the ACCC cannot oppose a proposed acquisition because of its potential to impact on the character of a local new area.[9]

In the ACCC’s market enquiry letters it provided further detail about the issues it will be focusing on, namely:[10]

·     the proximity of competition between Coles, Supabarn and other supermarket operators;

·      the potential impact of the proposed acquisition on factors such as prices, specials, product quality, service levels or range of products; and

·      the potential impact of the proposed acquisition on wholesale procurement and supply markets.

In relation to final issue above, the ACCC has sought specific comment on the impact of the proposed acquisition on “Metcash’s scale” and whether the acquisition:

…would affect Metcash’s ability to supply goods to supermarket and/or liquor retailers at prices that allow those retailers to compete closely with supermarket chains.[11]

Local markets

The first issue that the ACCC will be considering is whether Coles’ acquisition of the eight Supabarn stores would be likely to substantially lessen competition in local markets for the supply of groceries to consumers.

The ACCC has previously defined local grocery markets as extending to an area of between 3km and 5km surrounding each relevant store. As pointed out by the ACCC, this is a general rule of thumb which may be deviated from depending on specific market conditions.

In its market enquiry letters, the ACCC included the following table to show the level of direct competition which currently exists between Coles and Supabarn in each of the relevant local markets:[12]

Table 1: details of the target stores and nearby Coles 
supermarkets

Store location	Size (approx. sqm)	Nearby Coles supermarkets
Canberra Centre – ACT	2,950	Manuka – 4.7km Dickson (proposed) – 3.2km
Kaleen – ACT	1,730	Belconnen – 4km Jamison – 4.8km Gungahlin – 4.8km Dickson (proposed) – 4.7km
Wanniassa – ACT	1,924	Tuggeranong – 3.4km
Crace – ACT	1,302	Gungahlin – 3.1km
Five Dock – NSW	2,159	Burwood – 2.3km Ashfield – 2.4km Concord – 2.7km
Annandale – NSW	768	Leichhardt – 1.6km Broadway – 1.8km Pyrmont – 2.5km World Square – 2.9km
Sutherland – NSW	1,531	Kareela – 2.8km Miranda – 4.1km Illawong – 4.2km Kirrawee (proposed) – 1.4km Miranda (proposed) – 4.1km
Sans Souci – NSW	2,086	Ramsgate – 1.5km Sylvania – 3.3km Hurstville Station – 3.8km Hurstville – 3.9km Brighton Le Sands – 4.2km
Casey – ACT (under construction)	2,960	Gungahlin – 3.8km Amaroo (proposed) – 3.4km

The above table shows quite clearly that Coles and Supabarn are direct competitors in all of the relevant local markets, with the exception of Casey, where Supabarn is in the process of building a grocery store.  However, the important issue which the above table does not show is the existence and number of other competing Woolworths, ALDI, IGA and Costco grocery stores in each geographic location. Indeed, it is likely there will be multiple Woolworths, ALDI and IGA grocery stores in each of relevant local market.

Ultimately it is highly unlikely that the ACCC will identify any competition issues in any of the above local markets, given the competitive constraints which will be exerted on the merged entity by Woolworths, ALDI and IGA grocery stores in each of the local markets.

State or Territory markets?

The ACCC has also foreshadowed in its market enquiry letters that it will be looking at the effect of the proposed acquisition on competition in a broader geographic market.  The ACCC asks market participants to comment on:[13]

Whether the proposed acquisition would substantially lessen competition between supermarket chains (over broader geographic areas such as the ACT).

The approach seems quite controversial given the ACCC’s focus on local markets when assessing grocery store acquisitions.  It is difficult to see how the ACCC could possibly define a broader geographic market in relation to the proposed acquisition, given its earlier insistence on local market definitions in the Metcash case as well as in numerous ACCC clearances.

Wholesale markets

The issue of more interest and complexity relates to the ACCC’s consideration of the impact of the proposed competition on wholesale markets. As stated above, the ACCC has specifically sought views from market participants about the potential impact of the proposed acquisition on Metcash’s scale and its ability to supply goods to supermarket and/or liquor retailers at prices that allow those retailers to compete closely with supermarket chains.

Often when one business proposes to acquire a competitor, the ACCC is concerned that the merged firm will gain a substantial degree of market power in terms of both the sale of goods or services to consumers and in the acquisition of goods and services from suppliers. This latter type of market power, which is called monopsony power, is a legitimate concern of competition regulators, as this could potentially result in the merged entity being able to force the prices of inputs below competitive levels.

However, monopsony power is unlikely to be a concern in relation to Coles’ proposed acquisition of Supabarn because Coles and Supabarn obtain their grocery products from different sources.  Coles sources products from its own internal wholesale operations, whilst Supabarn sources a large proportion of its groceries from Metcash.

Therefore, if the proposed acquisition goes ahead the current grocery purchases made by Supabarn from Metcash will effectively be transferred from Metcash to Coles’ internal wholesale operations.  In other words, Metcash will lose these wholesale grocery sales to Coles.

It appears that the ACCC is particularly concerned about the negative competitive effects that this loss of wholesale volume may have on Metcash.  The potential concern is whether Metcash will lose economies of scale as a result of its loss of Supabarn stores. 

The concept of economies of scale has been defined as follows:[14]

The cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are shared over a larger number of goods. Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies. 

While the above quote relates to economies of scale in manufacturing, similar principles apply in relation to the wholesaling of grocery products. Metcash is likely to derive significant cost advantages from higher levels of wholesale output. This is because Metcash would be able to spread its fixed costs over larger wholesale volumes of groceries which it supplies to independent grocers.

Therefore, one issue which the ACCC will be considering is whether the loss of Supabarn as a wholesale customer to Metcash is likely to adversely impact Metcash’s economies of scale to such an extent that the proposed acquisition could be said to result in a substantial lessening of competition.  If Metcash loses significant scale, which in turn raises its per-unit fixed costs, this could result in a rise in its wholesale prices to independent grocers.  Such a rise in wholesale prices will increase independent grocers’ operating costs, which may make their retail pricing to consumers less competitive as compared to vertically integrated grocery retailers.

Ultimately, the ACCC will be concerned if the proposed sale of the Supabarn business to Coles will result in a reduction in Metcash’s ability to compete at the wholesale level, which in turn will adversely impact the ability of independent IGAs to compete against Coles, Woolworths, ALDI and Costco stores. The ACCC will be keen to prevent IGA grocery stores from becoming uncompetitive and potentially going out of business if they are unable to compete with vertically integrated grocery retailers.

We cannot know with any certainty whether the proposed acquisition will significantly damage Metcash and IGA stores. Clearly a great deal would depend on the evidence which Metcash provides to the ACCC on a confidential basis about the impact of the proposed acquisition on their scale and pricing.

It is also arguable that any attempt by the ACCC to base its decision on a substantial lessening of competition in a wholesale grocery market may run counter to Justice Emmett’s decision on market definition in the Metcash case.

Metcash case[15]

In early 2011, the ACCC took legal action against Metcash to prevent its proposed acquisition of the share capital of Franklins for $215 million.  The ACCC took its action because it formed the view that the acquisition would lead to a substantial lessening of competition in the market for the wholesale supply of packaged groceries to independent supermarkets.[16]

The ACCC argued for a narrow market definition – namely a market for the wholesale supply of packaged groceries to independent supermarkets in NSW and the ACT.  Metcash on the other hand argued that there was a national market for the supply of packaged groceries, which included both retail and wholesale functional levels.[17]

Justice Emmett, who handed down his decision in August 2011, agreed with Metcash’s market definition. 

There is clearly vigorous competition at the retail level. It may be that there is a market for the supply of grocery products generally by retail. As I have said, Metcash and Pick n Pay contend for a national market for the supply of packaged groceries, fresh products, general merchandise and health, beauty and cosmetic products to the consuming public by way of integrated retail chains and independent wholesalers supplying independent grocery retailers. The participants in that market would include the major supermarket chains, Franklins in respect of the 80 Franklins Corporate Stores, the operators of the Franklins Franchise Stores, the semi-integrated arrangements involving Metcash and the IGA bannered stores and the semi-integrated arrangements involving SPAR and the SPAR and 5 Star bannered stores. However, the Commission has not suggested that the proposed acquisition of Franklins by Metcash would be likely to have the effect of lessening competition in such a market.[18]

I am not persuaded that there is a separate market for the wholesale supply to independent supermarket retailers of packaged groceries, as the Commission defines those terms in the Statement of Claim. The Commission has based its case solely on there being a separate market for the wholesale supply to independent retailers of packaged groceries, as defined. The Commission’s pleaded case as to market definition has not been made out. It follows that the proceeding must fail.[19]

In other words, Emmett J supported the view that the market for the supply of groceries was a national market which encompasses both retail and wholesale functional levels. As a consequence of this finding, which was not disturbed by the Full Federal Court on appeal,[20] Coles’ acquisition of Supabarn would have to be assessed in terms of a national market for the supply of groceries, rather than:

·     a NSW and ACT geographic market for the wholesale supply of packaged groceries ; or

·     separate wholesale and retail functional markets for the wholesale supply of packaged groceries; or

·    a separate wholesale market for the supply of packaged groceries to independent supermarket retailers, as argued by the ACCC in the Metcash case. 

The broader market definition will clearly dilute the competitive impacts of the Supabarn acquisition both in geographic terms and also at the wholesale level.  Furthermore, on the basis of Metcash there is also no legal basis for seeking to argue a separate wholesale market for the supply of packaged groceries to independent supermarket retailers.

Conclusion

While it is not possible to know at this time whether the ACCC will attempt to block the Coles proposed acquisition of Supabarn, there would appear to be some major obstacles to the ACCC pursuing this option.   It is inevitable that the competitive impacts of the proposed acquisition at the wholesale level will be significantly diluted if the acquisition is considered in the context of a broader national grocery market that includes independent and integrated grocers and does not distinguish between the retail and wholesale supply of groceries. The main obstacle to the ACCC even contemplating action to protect Metcash from the potentially devastating loss of sales volume appears to be Emmett J’s conclusions regarding market definition from the Metcash case - ironically, conclusions which were based largely on submissions forcefully and successfully put to the Federal Court by Metcash itself.

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[1] Australian Competition and Consumer Commission (ACCC), Public Register: Coles – proposed acquisition of 9 Supabarn supermarkets at http://registers.accc.gov.au/content/index.phtml/itemId/1187175

[2] ACCC, Q&A: Coles proposed acquisition of Sup barn supermarkets, 3 July 2015 at https://www.accc.gov.au/update/q-a-coles-proposed-acquisition-of-supabarn-supermarkets

[3] Australian Broadcasting Corporation, Sale of Supabarn to Coles should be blocked by ACCC, Master Grocers Australia Say, 15 July 2015 at http://www.abc.net.au/news/2015-07-15/sale-of-supabarn-to-coles-should-be-blocked-by-accc-mga-says/6621414

[4] Above, n 3.

[5] ACCC v Metcash Trading Limited [2011] FCA 967.

[6] Above, n 2.

[7] ACCC, ACCC to hold Canberra consumer forum on Coles’ proposed acquisition of ACT Supabarn supermarkets, 17 July 2015 at https://www.accc.gov.au/update/accc-to-hold-canberra-consumer-forum-on-coles-proposed-acquisition-of-act-supabarn-supermarkets

[8] ACCC, ACCC will review Coles’ proposed acquisition of Supabarn supermarkets, 19 June 2015 at https://www.accc.gov.au/media-release/accc-will-review-coles%E2%80%99-proposed-acquisition-of-supabarn-supermarkets

[9] Above, n 8.

[10] Above, n 1.

[11] Ibid.

[12] Ibid.

[13] Ibid.

[14] Investopedia, Economies of Scale at http://www.investopedia.com/terms/e/economiesofscale.aspn

[15] The author acted for a party who was involved as a witness for the ACCC in the Metcash case.

[16] Above, n 5, at [1-2].

[17] Ibid.

[18] Above, n 5, at [341]

[19] Ibid at [342]

[20] ACCC v Metcash Trading Limited [2011] FCAFC 151.

The Full Monty: A closer look at the new look section 46

The Turnbull announcement on 16 March 2016 that it would legislate to introduce the Harper Review’s proposed amendments to section 46 caught many observers by surprise.[1] Whilst the Government had remained remarkably non-committal about its intentions in relation to section 46 of the Competition and Consumer Act 2010 (CCA), the general expectation had been that the Government would decide on a middle path, somewhere between the existing law and the Harper proposal. [2] What few expected was the Government would go the "full monty" [3] and adopt the Harper recommendation concerning section 46 in its entirety.

In this article, I will explain how the current section 46 operates and identify its main weaknesses. I will then outline Harper’s proposed section 46 and how it differs from the existing provision. This will be followed by a discussion of the various objections to the proposed provision, as most vociferously expressed by the Business Council of Australia (BCA). Finally, I will discuss the likely effect of the new section 46 on business activity. 

Section 46 as it is now

The current section 46 provides as follows:

(1)     A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of:

(a)  eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;

(b)  preventing the entry of a person into that or any other market; or

(c)  deterring or preventing a person from engaging in competitive conduct in that or any other market.

The purpose of section 46 was outlined in 1974 by the then Attorney-General, Senator Murphy in Second Reading Speech who stated:[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.

The first limitation on the operation of the provision is that it only applies to corporation which possess a substantial degree of market power.  A corporation is considered to have a substantial degree of market power when it able to insulate itself largely, but not completely, from competition from other firms in the market.

The second limitation is that the corporation with a substantial degree of market power must take advantage of that market power for a proscribed purpose. In other words, there must be a causal nexus between the existence of a substantial degree of market power.  I will return to this issue below.

Finally, the firm with a substantial degree of market power must be shown to have used that market power for one of the proscribed purposes.   The most notable aspect of the three proscribed purposes is how often they are misunderstood not only by legal practitioners but also ostensibly by the Australian Competition and Consumer Commission (ACCC) itself.

For example, ACCC Chairman Mr Rod Sims' stated in a speech at the Hodgekiss Competition Law Conference in Sydney in May 2015 entitled “Section 46: The Great Divide”[5] the following view:

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.

Insiders may well feel special, indeed clever, but this divide between common interpretation and true meaning is bad public policy.

Sims’ observations about the common understanding of section 46 are largely correct.  There is a common perception that whilst the actual words of the provision state that its purpose is to protect competitors from competition, the proper application of the section is to protect the competitive process.

However, a close reading of the proscribed purposes, as well as Senator Murphy’s comments above, show that the provision in fact has dual purposes.  Subsection 46(1)(a) is quite clearly directed to protecting competitors from the misuse of market power by another corporation which possesses a substantial degree of market power. Such conduct may or may not have a deleterious effect on the overall level of competition in a market.

Subsection 46(1)(b) and (c) are also quite clearly directed to protecting the competitive process – ie prohibiting firms with a substantial degree of market power from preventing new entry to markets and actions which deter persons from engaging in competitive conduct.

Section 46 as interpreted by the Courts

Despite the clear words of the provision and the guidance provided by Senator Murphy, the Courts appear to have taken a different approach to the interpretation of section 46.  This divergence was identified by The Treasury in its Discussion Paper concerning Options to Strengthen Section 46, where it stated:[6]

The current provision outlines specific examples of conduct that are prohibited, including “eliminating or substantially damaging a competitor”. However, in practice the courts have interpreted the provision to protect the process of competition, and not individual competitors.

That the Courts have interpreted section 46 to protect the process of competition, rather than individual competitors, is beyond doubt. The more important question (which unfortunately is beyond the scope of this article) is why did the Court’s take such approach?

The other key issue which the Courts have had a decisive influence in shaping the meaning of the taking advantage test. Historically, the ACCC’s position on “taking advantage” was that the term meant no more than “use”.[7]  In other words, in the ACCC’s view, the taking advantage element did no more than import a causal requirement between the substantial degree of market power of the corporation and the relevant conduct.

However, in a series of cases, the High Court has 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.  The issue has been succinctly summarised by The Treasury in its Discussion Paper as follows:[8]

The ‘take advantage’ test allows firms with substantial market power to engage in particular business conduct if firms without market power can also commercially engage in that conduct.

In effect, the Court has required the application of a counterfactual analysis.  If the answer to the question of whether a corporation without a substantial degree of market power could engage in particular conduct is “yes”, then the courts have concluded that section 46 was not contravened because the taking advantage limb had not been established. 

Whilst there are different views as to whether the High Court’s interpretation of the taking advantage element is a positive or negative development in terms of the enforcement of section 46, there is little doubt in Justice Kirby’s mind that this interpretation has had high negative impacts. As stated in his dissenting judgment in Rural Press:[9]

In my view, the approach taken by the majority is insufficiently attentive to the object of the Act to protect and uphold market competition.  It is unduly protective of the depredations of the corporations concerned.  It is unrealistic, bordering on ethereal, when the corporate conduct is viewed in its commercial and practical setting.  The outcome cripples the effectiveness of s 46 of the Act.  It undermines this Court's earlier and more realistic decision in Queensland Wire.  The victims are Australian consumers and the competitors who seek to engage in competitive conduct in a naive faith in the protection of the Act.  Section 46 might just as well not have been enacted for cases like these where its operation is sorely needed to achieve the purposes of the Act.  Judicial lightning strikes thrice.  A novel doctrine of innocent coincidence prevails.  Effective anti-competitive threats can be made without the redress which s 46 appears to promise.  Once again I dissent.

The ACCC has also expressed similar views to Justice Kirby about the utility of section 46, particularly in relation to the application of the taking advantage test.  As stated by the ACCC in its initial submission to the Harper Review:[10]

The ACCC considers that, as currently drafted and interpreted, the provision is of limited utility in prohibiting conduct by firms with substantial market power which has a detrimental impact on competition.

The ACCC considers that the provision is deficient in two respects: first, due to its failure to capture unilateral conduct which has a deleterious effect on competition; and second, due to the way in which the ‘take advantage’ limb of the test is currently being applied.

ACCC’s enforcement of section 46

Prior to analysing the new section 46, it may be worthwhile taking a closer look at the ACCC’s record in terms of enforcing the current section 46.

The following table shows all of the section 46 cases commenced by the ACCC over the last 43 years:

Table: ACCC and TPC Section 46 cases – 1974 to 2016[11]

The above data shows that the ACCC (and the TPC before it) has commenced 21 section 46 cases in the 43 years since the section was enacted. Of the 21 section 46 cases run by the ACCC over the last 43 years it has been successful in relation to the section 46 element of their case on eleven occasions.  In other words, the ACCC has won eleven of the 20 section 46 cases it has pursued for a success rate of 53%.   

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 figures are substantially different. Of the 21 cases taken by the ACCC, it has won eleven, dropped the section 46 allegations in four cases and lost the remaining six cases.  Therefore, the ACCC has only lost six cases out of the 21 section 46 cases it has commenced, which represents a failure rate of only 31%.  

The other important observation about the six section 46 cases lost by the ACCC are the grounds on which the ACCC failed to establish its section 46 case in Court.  With the exception of the Pfizer case, the ACCC has been successful in establishing a proscribed purpose in every one of its contested cases.

In the five other section 46 defeats, the ACCC failed to establish taking advantage in three cases (ie CSBP Farmers, Rural Press, and Cement Australia) and failed to establish a substantial degree of market power in two cases (ie Boral and Universal).

Interestingly, 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.

While it would be possible to argue on the basis of the above statistics that the ACCC’s record in relation to section 46 cases is quite respectable, the reality is that a most ACCC section investigations never make it to litigation due to the complications inherent in section 46.  Indeed, based on my own experience as a former ACCC Director of Enforcement for a number of years, by far the largest impediment to a successful section 46 case are the difficulties associated with establishing the taking advantage element.  Often, this issue would involve interminable debates about whether a firm without market power would or could have engaged in the allegedly illegal conduct.

Harper Recommendation

The Harper Committee’s proposed new section 46 is as follows:[12]

(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.

Harper’s proposed amendment makes three main changes to section 46:

·      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 the crucial change.

As argued above, there was a strong body of opinion which saw the taking advantage element, as interpreted by the High Court, as crippling the effectiveness of section 46.  Therefore, the removal of this requirement will permit the provision to be used in a much wider range of cases. 

Most significantly under the new section 46 there is no longer a requirement on the ACCC or a private litigant to prove that the conduct being engaged in by the firm with a substantial degree of market power was causally related to their market power. In other words, any firm which possesses a substantial degree of market power in a market may be taken to court for their conduct regardless of whether it can be shown that they are using their market power to achieve a particular outcome.

The second reason why it was appropriate in the ACCC’s view to remove the taking advantage element from section 46 was because it was an anomaly when compared to how almost every other competition law and anti-trust jurisdictions currently deals with the problem of monopolisation. As stated by Sims:[13]

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.

Concerns about the new section 46

The most vocal opponents of the new section 46 have been large business groups, such as the BCA. 

For example, a recurring argument put forward by the business groups has been that the new section 46, rather than promoting competitive markets, will have the opposite effect of reducing competition and innovation. Indeed, there have been claims 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.[14]

This claim would have some credibility 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.  Under the proposed section 46, the Court will have to be satisfied of 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, it will have to be proved that the corporation 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 complaints about the new section 46 which have been made by the BCA include the following:[15]

·        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, ie false negatives.

It appears that businesses have effectively claimed 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.  However, firms are already liable for the effect of their conduct under section 45, 47 and 50 of the Competition and Consumer Act 2010 (CCA). It appears that this particular argument failed to gain absolutely any traction with the Government.

The claim that the new provisions will introduce major uncertainty has also fallen on deaf ears. Indeed, the Government seems to have accepted the reverse in relation to this argument – namely, that the new provision should generate considerably less uncertainty given that it will be replacing the taking advantage test with the much better known and more often applied substantial lessening of competition test.  As stated by the Government:[16]

Conscious of the needs of business, the change is deliberately designed to reduce the uncertainty associated with amending a law. It uses existing legal concepts from within the competition law – such as ‘substantially lessening competition’ – and ensures the focus of the provision remains only on those firms that have substantial market power.

Whether the new provision is likely to result in over capture is not clear. However, what seems clear is that the Government accepted the arguments put to it by the ACCC and small business groups that the current section 46 was ineffective and likely to have resulted in significant under-capture of anti-competitive behaviours. As stated by the Government:[17]

This reform represents a commercially and legally robust law, preventing firms with market power engaging in behaviour that harms the competitive process. It places Australia’s competition law on the right footing to encourage economic growth and innovation.

An effective misuse of market power provision is an important and necessary part of competition law, particularly for Australia’s more than two million small businesses which make up more than 97 per cent of all businesses.

The changes the Government has announced will more effectively focus on the long-term interests of both small businesses and consumers, improving the law’s clarity, effectiveness and force.

It seems apparent, based on the Government’s announcement, that it has rejected all of the arguments put forward by both big business groups and many members of the legal profession about the dangers of the new section 46.  Furthermore, the Government has very high hopes for the new provision, seeing it as a means of ensuring that Australia has the “best possible competition framework to support innovation and boost economic growth and jobs.”[18]

Conclusions

The Government’s decision to accept the full Harper recommendation concerning its proposed amendments to section 46 is a very significant change. There is no doubt that the amendment will have a significant impact on many of the business decisions made by a relatively small number of Australian firms, namely those firms with a substantial degree of market power in a market. The amendments will place an obligation on these firms to carefully consider whether the purpose and/or effect of their business decisions is to substantially lessen competition in a market. 

However, the new law will not prevent price discounting which falls short of predatory pricing, the introduction of innovative products to markets or even the establishment of a new store in a geographic market.  This is for the simple reason that such conduct is, by definition, procompetitive and as such will not result in a substantial lessening competition.  Rather, firms with a substantial degree of market power will now be held to account for both the purpose and effect of anti-competitive strategies which damage the competitive process. For example, the new section 46 should capture such strategies as buying up development sites to prevent new entry, taking steps to prevent competitors from gaining access to raw materials, other inputs and the infrastructure needed for the manufacture and sale of their products or actions aimed at preventing competitors from gaining access to standard essential patents.  In other words, the new provision will able to capture many of the damaging anticompetitive behaviours which currently fall outside the ambit of the Australian’s existing monopolisation provision.

[1] Joint Media Statement of the Prime Minister of Australia, Treasure and Assistant Treasurer, Fixing Competition to Drive Economic Growth and Jobs, dated 16 March 2016 at http://www.pm.gov.au/media/2016-03-16/joint-media-statement-fixing-competition-policy-drive-economic-growth-and-jobs [2] Joint Media Statement of the Prime Minister of Australia, Treasure and Assistant Treasurer, Fixing Competition to Drive Economic Growth and Jobs, dated 16 March 2016 at http://www.pm.gov.au/media/2016-03-16/joint-media-statement-fixing-competition-policy-drive-economic-growth-and-jobs. These are also the author’s personal observations based on his attendance at one of the two Roundtables on Section 46 convened by The Hon Kelly O’Dwyer MP, Assistant Treasurer in January 2016. The author attended the Melbourne Roundtable as the representative of the Small and Medium Enterprise Committee, Business Law Section of the Law Council of Australia.
[3] Definition of the Full Monty - the whole thing; everything that is wanted or needed - Dictionary.com at http://www.dictionary.com [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] Rod Sims, “Section 46: The Great Divide” at https://www.accc.gov.au/speech/section-46-the-great-divide [6] The Treasury, “Discussion Paper - Options to Strength the Misuse of Market Power Law”, dated December 2015 at http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2015/Options-to-strengthen-the-misuse-of-market-power-law
[7] 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
[8] The Treasury, above n6.
[9] Rural Press v ACCC (2003) 216 CLR 53, para. 139.
[10] ACCC, “Reinvigorating Australia’s Competition Policy - Submission to the Competition Policy Review”, dated 25 June 2014, pp. 76-77 at http://www.accc.gov.au/system/files/Letter%20and%20Competition%20Policy%20Review%20Submission%20to%20Treasury.pdf
[11] Michael Terceiro, “Mythbusting: Bridging the Great Section 46 Divide”, Competition and Consumer Protection Law blog at http://competitionandconsumerprotectionlaw.blogspot.com.au/2015/11/mythbusting-bridging-great-section-46.html
[12] Harper Committee, Final Report – March 2015 at http://competitionpolicyreview.gov.au/files/2015/03/Competition-policy-review-report_online.pdf
[13] Sims, above n4.
[14] 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 [15] Ibid.
[16] Joint Media Statement of the Prime Minister of Australia, Treasure and Assistant Treasurer, above n1. [17] Ibid.
[18] Ibid.