Sims needs to fix ACCC Enforcement

Introduction

The ACCC’s enforcement capabilities have significantly declined over the last eight years during the reign of the previous Chairman. The new Chairman of the ACCC, Rod Sims must take urgent and decisive action to arrest this decline in enforcement standards. I doubt I am alone in my assessment of the ACCC’s enforcement area. Most practitioners who deal with the ACCC regularly are likely to share my view that the ACCC’s enforcement standards have declined.

In this article, I will be presenting a number of first hand examples which I believe are symptomatic of the significant deterioration in the ACCC’s enforcement practice over the last eight years. I will seek to identify the causes of this deterioration and then propose a number of solutions which may go some way to arresting this decline.

Background

My comments on the ACCC’s enforcement activities is based on my 15 years employment with the ACCC. During that time, I worked as a Director in a number of different areas, including enforcement. I also ran the ACCC’s Waterfront investigation and litigation teams during the 1998 Waterfront dispute and was the ACCC’s National GST Enforcement Coordinator during the GST implementation.

For the last four years, I have run my own sole practice, specialising in Competition and Consumer Law. During that time, I have had numerous interactions with the ACCC. I will be drawing on these interactions with the ACCC in this article.

Case Study 1

I was retained by a sole trader to provide him with Compliance Training pursuant to court order following ACCC legal action. From having worked at the ACCC, I understood that the ACCC almost always requires a person or company which has engaged in the illegal conduct to undertake three years of compliance training in the relevant provisions of the Competition and Consumer Act 2010 (CCA).

You can imagine my surprise when I discovered that this particular micro business had been required to undertake six years of Compliance Training – twice as much as is usually required.

When I queried my client about why he had been required to undertake six years of compliance training, he was entirely unaware that six years was twice the usual requirement.

I asked the client whether his lawyer during the court case had advised him about this issue. He said that whilst he had started the litigation against the ACCC with a lawyer, he had not been able to afford to keep paying the legal expenses. Therefore, by the time of the settlement he was unrepresented.

Was it appropriate for the ACCC to demand that an unrepresented litigant agree to six years Compliance Training rather than the usual three years?

Case Study 2

The ACCC is currently investigating one of my clients for the country of origin claims he places on goods which he is exporting to Europe. I have drawn the ACCC’s attention to the relevant provisions of the Explanatory Memorandum when the country of origin amendments were introduced into the TPA in 1998 which states:

Item 2 ensures that this extra-territorial element of the Act is not applied to the new Division, as to do so may subject Australian manufacturers to both the Trade Practices Act 1974 requirements and the labelling requirements of the country in which they are selling their goods. By explicitly excluding any extra-territorial reach, the new provision is limited to goods sold or made available for retail sale in Australia (at 17).

It is clear from the above extract that Parliament intended that Australian exporters should not be subject to Australian country of origin laws but only to the laws which apply in the country where they are exporting their products and where those products will be sold. This is a significant issue as the laws in relation to country of origin differ considerably between jurisdictions.

The complication arises from the way in which the Parliamentary drafters sought to give effect to the clear Parliamentary intention. The actual amendment to the CCA which was supposed to exempt Australian exporters from Australian country of origin laws was done incorrectly. Rather than exempting Australian exporters from these laws, the amendment actually “removed” the defences contained in Part 5-3 of the ACL for Australian exporters. Accordingly, Australian exporters are now in the remarkable situation, based on the ACCC’s interpretation, of having no statutory defences to an ACCC country of origin case.

Even thought I have pointed out the clear contradiction between the intent of Parliament as expressed in the relevant Explanatory Memorandum and the terms of section 5(1)(c) of the CCA to the ACCC, the ACCC has been unmoved.

They have claimed that that because the words of section 5(1)(c) are clear there is no need to look at the intent of Parliament as expressed in the Explanatory Memorandum.

Why is the ACCC ignoring the clear intent of Parliament in relation to Australian country of origin laws and the activities of Australian exporters?

Case Study 3

I assisted a client in a case against a large multinational corporation. Prior to my involvement, his then lawyer had written to the ACCC to seek their assistance in his matter. Given he was a very small business and his opponent was a large multinational company with annual revenues of $35 billion, it seemed sensible to try to get the ACCC to help him.

The ACCC, in their letter back to the client, said they could not assist him because:

• many of the relevant issues appear to be issues of contract between the client and the large multinational corporation. The ACCC claimed that the issues fell outside the TPA and that accordingly, the ACCC did not have jurisdiction to intervene; and 

• there was insufficient evidence to suggest that the alleged conduct by the large multinational corporation constituted unconscionable conduct within the meaning of sections 51AA or 51AB of the TPA. In reality, the alleged conduct was a very straightforward section 52 case – hardly an issue which fell outside the TPA. 

The client’s then lawyer had also made a slight error in their letter to the ACCC by referring to sections 51AA and 51AB instead of section 51AC. Section 51AC would have been the appropriate provision as the conduct involved commercial unconscionability rather than consumer unconscionability. Strangely, the ACCC did not even consider the relevance of section 51AC even though it was clearly available on the facts.

The client ended up pursuing their own private legal action against the large multinational company in the NSW Supreme Court. The client was successful in their case under section 52 of the TPA and was awarded over $1.1 million in damages.

Should the ACCC have advised this small business that they did not have jurisdiction under the TPA to consider a run of the mill misrepresentation case?

Case Study 4

I was retained by a client to provide Compliance Training. This client explained to me the various allegations raised against his company by the ACCC. One of the allegations related to a claim that he had attempted to switch products. In other words, the ACCC alleged that his company had advised a customer that they would be supplying that customer with one particular product but that they had subsequently attempted to supply that customer a different product. The client actually received section 155 notices containing this particular allegation.

However, when I looked into the allegation it was absolutely clear from even a cursory investigation that the proposed replacement product was a much superior product to the product which had been originally promised to the customer. Furthermore, the replacement product was worth approximately $40,000 more than the initial product. Even the most rudimentary ACCC investigation would have shown that there was no substance to this allegation as product switching allegations require some detriment arising from the fact that the customer has been supplied an inferior and cheaper product to the one represented.

Did the ACCC conduct even a basic investigation of this allegation prior to issuing section 155 notices to the company?

Case Study 5

The ACCC decided to settle a large number of matters involving Coles and Woolworths concerning restrictive shopping centre leases by way of section 87B undertakings. This was in circumstances where one of the companies – Woolworths - had considerable prior form for contravening the competition provisions of the CCA. Indeed, both Coles and Woolworths had been pursued by the ACCC fairly recently for entering into restrictive agreements in the NSW liquor industry and fined millions of dollars.

When queried about why the ACCC had not taken legal action against these companies, Mr Samuel responded by saying that most of the agreements were not in fact contraventions of the CCA.

This is a strange response given that even one contravention of the competition provisions of the CCA carries a maximum fine of either $10 million, 10% of the annual turnover of the contravening company or three times the gain arising from the contravention.

Should the ACCC be letting off large publicly listed companies with a mere section 87B undertaking for serious Part IV breaches in circumstances where they have contravened these same provisions in the past?

In addition, why is the ACCC ostensibly seeking section 87B undertakings for some conduct which it knows does not contravene the CCA?

Case Study 6

I was retained by a client to assist them in complying with a number of court orders. The client had been taken to court by the ACCC because he was not complying with the Franchising Code of Conduct.

After speaking to the client, it became apparent that he had previously retained a lawyer to draft his agreements on the specific condition that they not be franchise agreements. The client had specifically wanted licence agreements so that he would not have to comply with the Franchising Code of Conduct. Unfortunately, the lawyer had not drafted the agreements in the way requested by the client. The agreements he had drafted were clearly Franchise Agreements.

I asked the client whether the ACCC had been aware of these facts prior to commencing legal action against him. He said that he had told the ACCC that he had asked a lawyer to draft up licence agreements and that he had relied on this lawyer’s advice that they were in fact licence agreements. Unfortunately, this very relevant fact made no difference to the ACCC’s decision to take legal action against this small business.

However, there was some good news. I assisted this client in taking legal action for negligence against the lawyer who had failed to draft the licence agreement properly in the first place. The respondent solicitor called in LawCover almost immediately and LawCover settled the negligence claim soon afterwards.

Should the ACCC be taking legal action against small businesses who have obtained incorrect legal advice and acted on that advice in good faith?

Case Study 7

I was retained by a company which had unfortunately been the subject of two ACCC search warrants. During the course of search, ACCC staff removed two hard disks from the premises and returned them within 72 hours as required by section 154GA.

Unfortunately, the ACCC did not appear to comply with the requirements of section 154GA(2) of the TPA which requires the ACCC to:

• advise the recipient of the search warrant when they were proposing to examine or process the information on the hard disks; and 

• allow that person to attend when the hard disks were being examined or processed by the ACCC, either in person or through a legal representative. When I queried the ACCC about this apparent failure to comply with the section 154GA(2) of the CCA, they blithely responded that they had not moved the hard disks pursuant to section 154GA but rather had seized them pursuant to section 154H.

Did the ACCC really seize these hard disks or were they in fact moved pursuant to section 154GA?

Case Study 8

I acted for a client who had been the subject of legal action by the ACCC. I looked into the case as part of my task of preparing compliance training. While the client had decided to settle the ACCC’s litigation by consent, prior to settlement the ACCC had filed a draft witness list.

The ACCC was proposing to call six non-ACCC witnesses. I was surprised to see that five of the proposed witnesses were employed by current competitors of my client. Of these five witnesses, two had been former employees of the client who had been dismissed by the client for performance issues. One of these two witnesses had been the subject of an AVO by the client for allegedly making death threats against the client.

This was not a cartel case where the five competitor witnesses were giving evidence pursuant to an immunity agreement. Rather this was a run of the mill misleading and deceptive conduct case.

Should the ACCC be more cautious in their selection of potential witnesses?

Case Study 9

I acted for a client who submitted an FOI request to the ACCC. The FOI request captured 54 documents, totalling 623 pages, and 160 video recordings.

The ACCC decided to release only two of the 54 documents or approximately 0.03% of all folios requested. It also decided not to release any of the video recordings which related to the execution of two search warrants at the client’s premises.

The two documents released by the ACCC were already in the possession of the client and had not actually been requested by the client pursuant to his FOI request.

The ACCC made absolutely no effort to redact any documents, nor did they provide any statement, as required under the legislation, as to why they had not tried to redact confidential information in any of the documents.

The ACCC also provided the client with a schedule of the documents as required under the legislation. The following is a list of the deficiencies in the schedule:

• 42 of the 54 documents had no addressee recorded; 

• 4 documents had inadequate identification of the addressee; 

• in other words, 46 of the 54 documents or 85% of the documents, had no addressees recorded, or inadequate identification of the addressees; 

• 45 of the 54 documents or 81% of the documents had no date recorded; 

• 20 of the 54 documents had no description recorded; 

• 32 of the 54 documents had incomplete descriptions; 

• in other words, 52 of the 54 documents, or 96% of the documents, had no description, or an incomplete description of the documents. 

When we queried the sparseness of the information provided in the schedule, the ACCC claimed that they had invoked section 26(2) of the Freedom of Information Act 1982 which states:

(2) A notice under this section is not required to contain any matter that is of such a nature that its inclusion in a document of an agency would cause that document to be an exempt document.

In other words, the ACCC invoked this exceptional provision in the FOI Act 73 times in relation to 54 documents.

Interestingly, the schedule provided to the client did not contain the word “Redacted” anywhere in the document. However, it is the ACCC’s usual practice when “Redacting” information in FOI Schedules to insert the word “Redacted” where they have redacted information.

Is the ACCC being transparent and accountable in the way it deals with inconvenient FOI requests?

Case Study 10

A client received a letter from the ACCC on 15 December 2010 asking it for detailed information about its operations. The due date for a response was 5 January 2011.

While I believed that it was appropriate for the client to ask the ACCC for an extension of time to provide a response, the client preferred to get the response submitted to the ACCC by the due date. Accordingly, we worked over the Christmas and New Year to finalise the letter. The ACCC’s investigation related to a quite complex area of law – exclusion clauses in relation to recreational services.

On 25 May 2011, or 140 days after the client had submitted their response, the client received a response from the ACCC. The ACCC had considered the client’s response and required further information. After taking 140 days to consider the client’s response the ACCC required a response from the client in nine days time.

The client again wanted to comply by the due date, so we did.

Is it appropriate for the ACCC to take an excessively long time to consider responses from a company under investigation and then demand responses from that company in very short time frames?

Summary of the problems

The above 10 case examples give some flavour of the current state of ACCC enforcement. In my view, the ACCC’s enforcement practices are currently characterised by a tendency to:

• take harsh and aggressive action against small and medium sized businesses; 

• treat some larger businesses too leniently, particularly Coles and Woolworths; 

• take excessively long times to respond to letters from companies while demanding responses from these same companies in very short time frames; 

• be oblivious to the competitive dynamics which may be motivating companies and individuals to complain or give evidence about their competitors; 

• not give appropriate weight to valid excuses or explanations from small to medium sized businesses for their illegal conduct; and 

• taking a highly legalistic and obstructionist approach to FOI requests. 

Other typical practices of ACCC enforcement in their correspondence includes:

• simply ignoring inconvenient questions - I recall many instances where I have written to the ACCC and asked them a valid but admittedly difficult question. The response from the ACCC in most cases has been to simply ignore the difficult question which I have asked; 

• providing “cute” answers to difficult questions – where the ACCC does in fact try to respond to a difficult question, it often chooses to provide a clever but ultimately elusive answer; 

• being highly defensive when responding to criticism – the ACCC does not welcome criticism despite its statements to the contrary; 

• being dismissive of complaints by not providing reasons or valid reasons for dismissing a legitimate complaint – the ACCC is failing to pursue many promising cases due to its poor complaints assessment processes; 

• misstating the law – I have often been queried by clients about particular parts of ACCC letters which they have not understood. On more than one occasion, I have had to explain to the client that the relevant section of the ACCC letter was simply an incorrect statement of the law. What are the causes of the problem?

I believe that the main causes of the problem in ACCC enforcement can be traced back to the influence of the former Chairman, Graeme Samuel.

First, the former Chairman was not a strong believer in priorities for the ACCC, with the possible exception of cartels. This resulted in staff being very unclear as to what types of matters they should be pursuing.

Second, the former Chairman was also very unpredictable which added to staff confusion as to which types of matters to pursue. Staff would often look for any signs from the former Chairman as to the types of matters which he considered to be important. These signs were often conflicting and changed from day to day.

Third, the former Chairman also placed a great deal of emphasis on getting quick results. An unintended result of this focus on quick results was to create a disincentive amongst enforcement staff to pursue longer and more complex cases, particularly: 

• franchise cases, 

• unconscionable conduct cases and 

• misuse of market power cases 

Another major cause of the problems which are besetting ACCC enforcement at the moment is the absence of any proper investigatory training for staff. When I started at the ACCC, I attended a one-week orientation / investigation training course. That was the extent of my investigatory training. The rest of the investigatory skills which I acquired was obtained from on the job training. Fortunately, I was able to work with some excellent investigators from whom I gained invaluable skills and experience.

I understand that ACCC investigators still do not receive a great deal of investigatory training, particularly in such crucial areas as conducting formal interviews and executing search warrants.

It is absolutely essential for ACCC investigators to get more and better investigatory training given that they will now be investigating criminal cartels. The investigatory skills required to obtain evidence to prove a criminal cartel are much more sophisticated than those required to prove a civil contravention. In a criminal cartel investigation, ACCC investigators will have to have the skills to:

• properly execute search warrants; 

• caution potential defendants prior to interviewing them; 

• conduct formal interviews with potential defendants rather than using section 155 powers; 

• maintain a proper chain of evidence; and 

• properly analyse recordings of telephone intercepts. 

How to fix the problems?

The first step in fixing the problems in ACCC enforcement is to set out some clear priorities. The new Chairman Rod Sims has already gone some way to addressing this problem in his first few speeches, where he has sought to clearly articulate the ACCC’s enforcement priorities.

The ACCC should also review the ACCC’s case selection processes. The processes which are currently applied are much too ad-hoc. They rely significantly on the personal preferences and workloads of individual officers and regional directors. Regional Directors should be meeting regularly to discuss their case loads to make sure they are focusing on the correct areas as identified in the ACCC priority statement.

The ACCC should also change its enforcement focus so that it commences more investigations into the conduct of larger corporations rather than the conduct of smaller businesses. The ACCC is taking formal action against too many small businesses who are first time offenders. The ACCC should also look at issuing more warnings to such small businesses rather than requiring them to enter into section 87B’s.

The ACCC needs to introduce some internal review processes to make sure that the cases it is pursuing are appropriate and being conducted properly. For example, there should be a senior person, somewhat akin to an Internal Ombudsman, within the ACCC to whom businesses can complain directly if they believe that some aspect of the investigation or litigation against them is not being carried out appropriately.

Currently, businesses can complaint to a senior manager or the CEO about such conduct. However, the complaint will invariably be referred back to the primary case officer for a response. This results in the responses to complaints being highly defensive and unfortunately, in some cases, quite evasive. The ACCC should set itself much higher standards in terms of complaints handling in relation to complaints about the ACCC. These standards should be similar to the standards that the ACCC itself sets for the companies which it has pursued for breaches of the CCA.

The ACCC must ensure that it does not take advantage of businesses who do not understand the law because they are without legal representation. I have been retained by many small businesses after they have entered into an s87B undertaking who had absolutely no understanding of what they had just agreed to. It is not adequate for the ACCC to say that such businesses should have obtained their own legal advice. Rather I believe it is incumbent on the ACCC to fully explain to these businesses what they are signing and what they are agreeing to do.

The ACCC needs to change its entire approach to responding to FOI requests. The ACCC is currently very legalistic and obstructionist in the way it responds to FOI requests. This approach is at entirely odds with current Commonwealth Government policy which is encouraging agencies to be more transparent and to release more information.

ACCC enforcement staff who are involved in investigations need to gain appropriate investigatory training. For example, in the US cartel investigations are carried out exclusively by the FBI. The FBI will be involved in interviewing potential defendants, obtaining information from members of the public about a particular cartel, chasing up investigatory leads, analysing documents provided by the defendant and giving expert evidence in court or before the grand jury. The FBI will also execute the search warrants.

An FBI agent receives 20 weeks of intensive basic training at the FBI Academy before becoming an agent. This training focuses on four core skills areas, two of which are interviewing and interrogation. FBI agents must then complete further training on a regular basis.

While I am not suggesting that ACCC investigators receive a similar level of training as FBI agents, the level of training which ACCC investigators receive has to be significantly increased and enhanced.

Finally, the ACCC enforcement area has to start using a great deal more common sense in the way it approaches its work. Unfortunately, I have found that ACCC enforcement staff often apply a decided lack of commonsense in the way they approach investigations and litigation. Generally, I have found that ACCC enforcement staff have either pursued relatively unimportant enforcement matters much too vigorously and aggressively or alternatively been much too casual and offhand in their approach to potentially significant matters.

Whilst there are examples of the ACCC getting the balance just right, these examples are unfortunately few and far between. The ACCC must be getting it right more often than not.

Conclusions

ACCC enforcement capabilities have declined considerably over the last eight years. Ironically, I have been able to discern the decline in standards much more vividly since I left the ACCC and started working as a private practitioner.

Unfortunately, I have rarely found myself in a position in the last four years of wishing to praise the ACCC’s enforcement efforts in particular cases. Rather, in almost every case in which I have been involved I have found significant mistakes, a lack of attention and a lack of commonsense. In some matters, I have found a decided lack of candour.

Sims now has an excellent opportunity to take decisive steps to try to fix the problems in ACCC enforcement. No time can be lost in implementing the necessary changes. Enforcement has always been the ACCC’s core area in terms of generating outcomes which consumers can understand and find meaningful. If the ACCC does not get enforcement right, it will rapidly lose relevance with its core constituent – the Australian consumer.

Carbon tax price gouging – understanding the pitfalls

This article first appeared in the October 2011 edition of the NSW Law Society Journal, Vol. 49, No. 9, pp. 68-71.

Introduction

On 13 July 2011, the Prime Minister, Julia Gillard and the Treasurer, Wayne Swan announced that the ACCC would be given responsibility to police how businesses pass on the carbon tax.[1] The ACCC will be responsible to ensure that businesses do not engage in price gouging by using the tax as an excuse to increase prices beyond the actual price effect of the carbon tax.

If the introduction of the GST is any guide, the carbon tax is likely to result in a great deal of investigatory activity by the ACCC.[2] The ACCC received over 35,000 GST related complaints in the first 18 months of the tax, and conducted more than 3000 formal investigations into alleged price exploitation and misleading and deceptive conduct. [3]

Practitioners need to be prepared for the introduction of the carbon tax so that they can assist their clients:

• to implement proactive strategies to minimise the risk of gaining unwanted attention from the ACCC; and 

• dealing with the ACCC, if they do become the unfortunate subject of an investigation.

ACCC’s role

The ACCC’s role will be to prevent price gouging during the introduction of the carbon tax. This role will be limited to investigating alleged misrepresentations by businesses about their pricing rather than investigating all price rises. The ACCC will not be able to investigate price rises if the business has made no mention of the carbon tax.

This contrasts to the situation during the introduction if the GST, when the ACCC was given new powers to prevent price exploitation.

In order to fulfil this new role, the ACCC has been given additional funding of $12.8 million over four years. The ACCC will use this funding to hire 20 additional staff who will be engaged in education, liaison, investigations and litigation.

What will the ACCC are looking for?

The ACCC will be looking for four main types of conduct as part of its carbon tax-policing role, both before and after the introduction of the carbon tax on 1 July 2012.

Pre-1 July 2012 conduct

The ACCC is on the lookout for businesses which may attribute price increases to the carbon tax even before the tax is introduced. As remarkable as it sounds, there has already been a report of an Australia Post employee allegedly attributing an increase in the price of posting a parcel to the carbon tax.[4]

Sections 18 and 29(1)(c) of Australian Consumer Law (ACL)[5] will be the ACCC’s primary weapons against carbon tax price gouging.

Section 18:

A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

Section 29(1)(i):

A person must not, in trade or commerce, in connection with the supply or possible supply of goods or services or in connection with the promotion by any means of the supply or use of goods or services:

(i) make a false or misleading representation with respect to the price of goods or services…

The above sections are very broad in their scope. They capture both misleading representations and representations which are likely to be misleading. These sections apply to all businesses regardless of their size, including unincorporated sole traders.

Representations that price rises prior to the introduction of the carbon tax are due to the carbon tax are likely to be viewed very seriously by the ACCC, because of their apparent blatancy. The ACCC is likely to pursue such cases very vigorously.

The second category of cases prior to 1 July 2012 will be future representations by businesses about the likely impact of the carbon tax on their prices. Both ss.18 and 29(1)(i) apply to future representations as well as to current representations.

Under s.4(1) of the ACL if a person makes a representation with respect to a future matter without reasonable grounds the representation will be taken to be misleading. Accordingly, a business may breach the ACL if it makes a forward estimate of the likely effect of the carbon tax on their pricing without having properly worked out the pricing impacts beforehand.

The ACCC will no doubt be guided by Treasury estimates of the likely price effects of the carbon tax. Where there is a significant difference between Treasury estimates and the business’s own forward estimates, the ACCC is likely to demand all costings to determine whether the business had a reasonable basis for its future representations.

Post 1 July 2012 conduct

The third type of conduct which the ACCC will be on the lookout after 1 July 2012 is businesses which overstate the impact of the carbon tax on their pricing. For example, a contravention will arise where a company claims that its prices have increased by, say $100 due to the carbon tax when the true impact of the tax was only $50. The ACCC’s investigations of these types of matters will be fairly complex as they will require detailed information about the business’s costs.

The ACCC’s task will be further complicated if the relevant business is receiving compensation payments from the Federal Government to offset the impact of the carbon tax. Such businesses will be expected to offset their price increases by the level of any compensation received.

The final type of conduct relates to representations by businesses that a price rise is due to the carbon tax when no part of the price increase can be attributed to the carbon tax. While this is likely to involve a relatively small number of matters, it will mainly arise in relation to businesses and products which are exempt from the carbon tax. For example, the carbon tax does not apply to petrol or diesel for passenger cars or other light on-road vehicles. However, if a service station operator claimed that the price of fuel had increased due to the carbon tax, this representation will breach the ACL.

How will the ACCC do its job?

The ACCC is likely to take an aggressive approach to its role in seeking to prevent carbon tax price gouging. Not only has the Federal Government made it quite clear that it expects the ACCC to be the “tough cop on the beat”, but the ACCC knows from hindsight that the aggressive approach which it took during the GST implementation was remarkably successful.

The ACCC will be aiming to conduct a number of high profile investigations into alleged carbon tax price gouging at an early stage in its policing role.

Early on in the GST period, the ACCC was able to conduct an extremely high profile investigation into Franklins Supermarkets for price exploitation.[6] The ACCC discovered that Franklins was charging GST on a number of GST-free food and beverage products. As a result, Franklins was forced to offer a discount on the products for three weeks, conduct national corrective advertising and to carry out a number of other corrective measures.

The Franklins outcome not only raised the ACCC’s GST enforcement profile enormously but contributed greatly to achieving general deterrence. More than one business said to the ACCC after the Franklins case that they were willing to do anything to avoid a Franklins-type situation.

In conducting an investigation, the ACCC is likely to allege contraventions of both ss.18 and 29(1)(i) of the ACL. This is because s.29(1)(i) carries significant pecuniary penalties, whilst s,18 does not. Under s.29(1)(i) the maximum pecuniary penalty is $1.1 million for a corporation and $220,000 for an individual per contravention.

The ACCC will commence an investigation either by writing to a business to ask it to explain its representations or by issuing a substantiation notice. A substantiation notice requires a business to substantiate their representations, including representations about the price effect of the carbon tax . A person has 21 days to comply with a substantiation notice or face a fine.

The ACCC may also commence an investigation by issuing s.155 notices to compel the production of information and documents. However, s.155 notices are only used in more serious cases and usually not as first step in an investigation.

Finally, the ACCC could also decide to commence an investigation by executing a search warrant. This is the ACCC’s most intrusive investigatory power and one which it has shown a great reluctance to use.[7] If the ACCC wishes to take a very aggressive approach to investigating allegations of carbon tax price gouging, it may decide to use its search warrant powers extensively

Once the ACCC has commenced its investigation and has satisfied itself that the business has engaged in a breach of the ACL, it will then have to decide how to resolve the matter. In this regard, the ACCC has a wide range of options.

First, it may decide to resolve the matter administratively without a fine or court proceedings. This option is likely only in the least serious cases, such as unauthorised misrepresentations by junior employees.

Alternatively, the ACCC may also decide to issue an infringement notice to a business which it believes has misrepresented the price effect of the carbon tax. The maximum amount which can be levied under an infringement notice for one breach of the ACL is $66,000 for a listed corporation, $6600 for an unlisted company and $3300 for an individual. The recipient of the infringement notice must pay the notice within 28 days or contest the notice.

The ACCC has used its infringement notice powers quite extensively since it received the power in April 2010. The ACCC has also shown a propensity to issue multiple infringement notices to a company in relation to related contraventions. For example, the ACCC issued 27 infringement notices totalling $178,000 to Optus concerning its “max cap” advertising campaign.[8]

The ACCC may also issue a public warning about a business which it believes is misrepresenting the price effects of the carbon tax. The ACCC can issue a public warning if it believes that: 

• there has been a contravention of the ACL; 

• one or more persons has, or is likely to, suffer detriment; and 

• it is in the public interest to issue the notice. 

However, the ACCC is only likely to issue a public warning where it believes that conduct poses a serious and irreversible risk to consumers.

It is would make sense for the ACCC to use its public warning powers where it believes it has identified a blatant cases of carbon tax price gouging in order to warn consumers about the conduct.

The ACCC may seek to resolve an investigation by either obtaining an s.87B undertaking or commencing legal proceedings. Section 87B undertakings are court enforceable agreements between the ACCC and a business whereby the business agrees to carry out remedial steps, which usually include: 

• an admission that the business has breached the ACL / CCA; 

• injunctive undertakings; 

• an agreement to undertake corrective action, such as advertisements; and 

• implementation of a compliance program. 

Section 87B undertakings can include some informal mechanism for providing consumers with financial redress.

The ACCC cannot obtain pecuniary penalties, disqualification orders or non-party redress through the use of s.87B undertakings. These remedies can only be obtained by the ACCC taking legal action.

The ACCC may take legal action where it considers conduct to be blatant, where it wants to achieve general deterrence or where it wishes to obtain a pecuniary penalty, to disqualify a director or manager or obtain non-party redress. Under s.248 of the ACL the ACCC can seek an order from a Court to disqualify a person from managing a corporation if they believe the person has contravened the ACL. Non-party redress is financial compensation for consumers.

How to respond to the ACCC 

If one of your clients becomes the subject of an ACCC investigation into carbon tax price gouging, the first thing to do is to impress on your client the need to take the investigation very seriously. The ACCC is under a considerable amount of pressure to get results in its carbon tax enforcement role. Your client should not treat a letter from the ACCC about carbon tax pricing as simply a routine matter.

The other important issue to keep in mind is to be proactive during the ACCC investigation. Do not wait for the ACCC to direct your client to carry out particular remedial steps if it has breached the ACL, as the ACCC may well propose a more formal resolution, such as an s.87B undertaking.

If your client has made a mistake, it should immediately implement remedial steps to fix the problem. This may involve posting a corrective notice on its website, providing consumers with refunds or retraining front line staff. The more corrective steps your client implements of its own volition and before an ACCC demand, the more likely your client will be able to avoid the matter escalating into an in-depth investigation, s.87B undertaking or even litigation.

Prevention is better than cure

Legal practitioners should also be thinking of ways to help their clients to avoid getting a letter from the ACCC in the first place. The best way to avoid such unwanted attention is to start a conversation with your clients now about how they are preparing for the implementation of the carbon tax.

For example, legal practitioners should be asking their clients the following questions:

• Is your business going to absorb the impact of the carbon tax on its prices or is it proposing to pass the cost on to customers? 

• Has your business prepared estimates of the likely impact of the carbon tax on its prices? 

• How do these estimates compare to the estimates prepared by Treasury? 

• Does your company wish to advise customers that price increases are due to the effect of the carbon tax or do they wish to remain silent on this point? 

• Will your forward estimates of the likely impact of the carbon tax on your prices stand up to ACCC scrutiny? 

• Have all your front line staff been briefed on what to say to customers if asked about the impact of the carbon tax on their prices? 

Conclusions

While the simplest ways of avoiding unwanted attention from the ACCC in relation to carbon tax pricing issues is either to absorb the effect of the carbon tax or to make no mention of the carbon tax in relation to your price rises, these approaches are not good business. Businesses have a right to pass on the impact of the carbon tax in the form of high prices and should do so.

Accordingly, the most sensible approach for businesses is to spend the time now to calculate the likely price effect of the carbon tax on their prices and then to advise customers in clear and unambiguous terms what that price effect is.

While the introduction of the carbon tax is unlikely to have the same impact in terms of ACCC enforcement as the introduction of the GST, the potential for businesses to suffer significant reputation damage by being the subject of an ACCC investigation is still great. Businesses and their legal advisers must start preparing for the introduction of the carbon tax now, in order to minimise the chances of receiving unwanted attention in the future from the ACCC.

[1] “New funding for ACCC to crack down on misleading carbon price claims”, Media Release by Julia Gillard, dated 15 July 2011 - http://www.pm.gov.au/press-office/new-funding-accc-crack-down-misleading-carbon-price-claims
[2] Michael Terceiro was the National GST Enforcement Coordinator at the Australian Competition and Consumer Commission during the introduction of the GST - he was responsible for coordinating the ACCC’s GST enforcement and running GST investigations and litigation.
[3] “GST Compliance”, ACCC Media Release, dated 20 December 2000, http://www.accc.gov.au/content/index.phtml/itemId/87603/fromItemId/378010
[4] “Man told mail price rise due to carbon tax”, Ninemsn, 6 July 2011 - http://news.ninemsn.com.au/national/8269824/man-told-mail-price-rise-due-to-carbon-tax
[5] The Australian Consumer Law is contained in Schedule 2 of the Competition and Consumer Act 2010 which has replaced the Trade Practices Act 1974 (TPA). Section 18 of the ACL is effectively the same as section 52 of the TPA, while section 29(1)(i) is section 53(1)(e) of the TPA.
[6] “Franklins to provide three week discount to consumers for GST errors”, ACCC News Release, dated 24 July 2000 - http://www.accc.gov.au/content/index.phtml/itemId/87435/fromItemId/378010
[7] Since the introduction of the search warrant power in 2006 until June 2010, the ACCC had only executed six search warrants – source ACCC Annual Reports.
[8] “Optus pays for max cap advertising”, ACCC Media Release dated 18 May 2011 - http://www.accc.gov.au/content/index.phtml/itemId/988219

ACCC search warrants —plan for the worst

This article first appeared in Keeping good companies, Journal of Chartered Secretaries Australia Ltd, September 2011, Volume 63 No. 8, pp. 484-487.

Introduction 

One could be forgiven for being unaware that the Australian Competition and Consumer Commission (ACCC) has the power to obtain a search warrant to investigate alleged breaches of the Competition and Consumer Act 2010 (CCA) (formerly the Trade Practices Act 1974).

The ACCC has used its search warrant powers sparingly since the power was introduced in 2006. Up to June 2011, the ACCC had only executed ten search warrants.

However, it just a matter of time before the ACCC starts utilising its search warrant powers more regularly. Virtually every other major overseas competition law enforcement agency uses search warrants extensively, particularly in relation to cartels.

Therefore, it is important for businesses to understand how to respond to an ACCC search warrant. Businesses should also consider developing their own action plan so they know what to do in the event that the ACCC turns up unannounced with a search warrant.

Legislation

The ACCC’s search and seizure powers are contained in Pt XID of the CCA.

The ACCC can apply to a magistrate for a search warrant if it satisfies s 154X. This section states that a magistrate may issue a warrant if they are satisfied that there are reasonable grounds for suspecting that there is evidential material on premises or there will be evidential material on premises within the next 72 hours. To be valid, the search warrant must contain particular information.

Evidential material is defined as a document or thing which may afford evidence of a contravention of the CCA.[i]

Powers and obligations of the ACCC 

Prior to approaching a magistrate for a search warrant, the ACCC’s Chairperson must appoint an inspector and issue the inspector with an identity card (s 154B). The inspector must carry the identity card during the execution of the search warrant and produce the identity card on request (s 154C).

The search warrant must be executed within one week of being issued by the magistrate.

Division 4 governs entry to premises under a search warrant. Under s 154G(1), a search warrant authorises the executing officer (or inspector) to:

(a) enter the premises

(b) search the premises for the evidential material, and seize evidential material

(c) make copies of evidential material

(d) operate electronic equipment to access evidential material and

(e) take and use equipment at the premises for the above purposes.

Section 154G(1A) permits the ACCC to take photographs, or make video recordings, of the premises or of anything at the premises for a purpose incidental to the execution of a search warrant or with the occupier’s consent.

Moving items to other locations

Section 154GA permits the ACCC to move anything found at the premises to another place for examination or processing to determine whether it may be seized. This section may be used by the ACCC to remove hard disks if it is unsure whether they contain evidential material.

If the ACCC removes hard disks under s 154GA, it has a number of obligations. Under s 154GA(2), it must inform the occupier of the place and time when the ACCC will be examining or processing the information and must also allow the occupier or their representative to be present. Under s 154GA(3), the ACCC can only keep the thing for 72 hours, unless it obtains an extension from a magistrate.

Section 154H states that if the executing officer believes on reasonable grounds that data accessed by operating electronic equipment at the premises might constitute evidential material, they may do only one of three things:

• seize the equipment and any disk, tape or other device 

• operate equipment at the premises to put the data into documentary form and remove the documents or 

• operate the equipment to transfer the data to a disk, tape or other storage device. 

The difference between ss. 154GA and 154H is that under the former, the thing is not being seized by the ACCC pursuant to the warrant but rather is being moved to another place to be examined or processed to determine whether it contains evidential material which can be seized under the warrant.

To invoke s 154H, the ACCC must first form the reasonable belief that any electronic equipment (that is, a computer or server) ‘might’ contain evidential material. The inspector must also be satisfied that the requirements of s 154H(5) are met; that is, that data cannot be printed out or copied.

Section 154K allows the executing officer to authorise Australian Federal Police agents to attend the execution of the search warrant. Section 154L permits the executing officer or AFP agents to use force to execute the search warrant.

Section 154M requires the ACCC to announce its entry and to give the occupier an opportunity to allow entry. Under s 154N, the ACCC must make a copy of the search warrant available to the occupier.

Rights and responsibilities of occupiers

The occupier also has a number of rights and responsibilities. Under s 154P, the occupier is entitled to observe the search, as long as they do not impede the search. The occupier must provide the ACCC with reasonable facilities and assistance during the execution of the search warrant, such as access to photocopiers.

Under s 154R, the executing officer has the right to ask occupiers questions and to request that occupiers produce evidential material. The occupier must answer questions put to them by ACCC officers. The maximum penalty for failing to answer questions or to provide material is $3,300 or 12 months’ imprisonment. The occupier does not have any privilege against self-incrimination, except in relation to subsequent criminal proceedings.

Under s 154S, the ACCC must give copies of seized material to the occupier on request. The ACCC is also required to give a receipt for any evidential material seized or anything moved under s 154GA(1). Any evidential material which has been seized has to be returned to the occupier when the material is no longer needed or after 120 days.

When will the ACCC use a search warrant?

Despite a great deal of rhetoric around the time of the introduction of the search warrant power that it was needed to assist the ACCC in its fight against cartels, this has not played out in practice. Most of the search warrants have been issued in relation to consumer protection investigations.

The ACCC is more likely to use search warrants where it has received ‘inside’ information from an informant, such as a former employee, who has detailed knowledge of potentially incriminating documents, and their locations within the company’s premises.

Another significant consideration will be the logistical complexity of executing a search warrant. For example, it will be much more difficult to execute search warrants at numerous premises or premises with multiple entry and exit points.

Another area where the ACCC may seek to utilise its powers in the future is to prevent carbon tax price gouging, as it did in trying to prevent price exploitation during the introduction of the GST.

Execution of a warrant

The ACCC will undertake a great deal of planning prior to executing a search warrant. Not only must the ACCC identify the documents which they wish to seize, but they must also work out the locations of the relevant documents. The ACCC will endeavour to obtain information about the layout of the premises from former employees.

The ACCC will usually have between ten to 40 people in attendance during the execution of a search warrant, including at least two AFP agents and a number of forensic IT personnel, whose role it will be to copy hard drives.

On arrival, the ACCC inspector must identify who they are and give the occupier the opportunity to allow access. The occupier should permit access or risk being arrested.

Some legal advisers suggest that occupiers should ask the ACCC to wait until the occupier’s legal advisers arrive. There is no harm asking the ACCC to do this although the ACCC does not have to agree to wait. Indeed, it is very unlikely that the ACCC will agree to any delay which may provide occupiers an opportunity to destroy evidentiary material.

Once the ACCC has gained access, the occupier should ask to see the search warrant and the inspector’s identity card. If the inspector is unable to show the occupier their identify card, the occupier can ask the inspector to leave.

The occupier should then check the search warrant to ensure that it complies with s 154X to include:

(a) a description of the premises

(b) details of the kind of evidential material to be searched for under the warrant (including stating the alleged contraventions)

(c) the name of the inspector who is responsible for executing the warrant

(d) whether the warrant may be executed at any time or during specified hours and

(e) the day (not more than one week after the issue of the warrant) on which the warrant ceases to have effect.

The occupier should check that the name on the search warrant is the same as the name on the identity card. If the names are different, the occupier can ask the inspector to leave.

The occupier should check that the search warrant is being executed within one week of the issue date and within any stipulated hours. Again, if not, the occupier can ask the inspector to leave. The occupier should then contact their lawyer to ask them to attend the premises.

Most occupiers make the mistake of directing their employees to leave search areas or send them home. This is a mistake because the occupier’s lawyers will most likely be unable to observe the entire search because it is being conducted in multiple locations simultaneously.

A better approach is for the occupier to try to organise their staff into teams and task them to observing all aspects of the search. The occupier should assemble employees and advise them that they: 

• must answer questions put to them by ACCC officers 

• are likely to be video recorded while answering questions put to them by ACCC officers 

• have a right to observe the execution of the search warrant but must not impede the search

• should stop doing their usual work, such as using their computers and particularly using shredders, because ACCC staff will be concerned that staff may delete evidentiary material. 

Employees should be asked to pay particular attention to whether ACCC staff are searching any files which may contain legal advice or any other communications with legal advisers.

The ACCC will take a significant number of video recordings during the search, including recordings of conversations with occupiers. The ACCC will not provide copies of these video recordings to occupiers on request, nor will it release copies of these videos under freedom of information legislation.

Finally, the ACCC has the right to prevent any persons removing items from the premises, such as laptop computers or files. Accordingly, if a staff member has to leave the premises, the ACCC will request that they do not remove any items which may contain evidential material.

The ACCC also has the right to search any bags or briefcases which a staff member may be removing from the premises to determine whether they contain evidential material.

What can the ACCC take during a search warrant?

The ACCC can seize evidential material, which is material which discloses, or may be relevant to, the contraventions alleged in the search warrant.

The ACCC can choose to:

• take the actual documents or items 

• make copies of documents 

• download data onto electronic storage devices such as memory sticks or hard disk drives or 

• remove electronic storage devices, such as hard disk drives from the premises. 

Legal professional privilege

The main issue which arises during a search is whether the ACCC wishes to seize any documents which may be subject to a claim of legal professional privilege (LPP). If the occupier believes that particular documents may be subject to LPP, they should ask the inspector to place the documents in a sealed envelope pending resolution of the LPP claim. The occupier should insist that any potentially privileged documents are kept away from the investigatory team until the LPP issue is resolved.

The occupier should also ask the inspector to explain what information is being copied from computers. If the inspector refuses to provide an explanation, the occupier should immediately request copies of all seized material. The inspector has an obligation to provide copies of all seized material as soon as practicable after seizure.

As soon as the occupier finds out what information has been seized, they should review the material for relevance and LPP. If the occupier believes the ACCC has seized any material which may be privileged, it should immediately raise these concerns with the ACCC and ask that the investigatory team have no further access to these documents until the LPP issue is resolved.

Recent experience — moved versus seized

Last year I acted for a client who had received two ACCC search warrants. During the searches, the ACCC removed a number of hard disks. We assumed that these hard disks had been moved pursuant to s 154GA because the ACCC had conducted only a cursory examination of the hard disks before removal and the hard disks had been returned within 72 hours, as required by s 154GA.

Because we believed that the hard disks had been moved, we became very concerned that the ACCC had apparently not complied with the safeguards in s 154GA. The ACCC responded to our concerns by simply stating that the hard disks had not been moved pursuant to s 154GA but seized pursuant to s 154H.

This raises concerns about the utility of s 154GA. It seems that the ACCC can avoid the safeguards in s 154GA by simply claiming, in every case, that it has decided to seize electronic equipment under s 154H. It is quite clear from s 154H that seizure of such things as hard disks is an exceptional step. Under s 154H, the ACCC can keep the hard disks in its exclusive control for up to 120 days. This contrasts with s 154GA where the ACCC has supervised access to hard disks for 72 hours.

If the ACCC seeks to remove hard disks from premises under a search warrant, the occupier should clarify whether the inspector is utilising s 154GA or s 154H. If the inspector claims the hard disks are being seized, the occupier should challenge the inspector about whether they have satisfied the requirements of s 154H:

• that they believe on reasonable grounds that the hard disks contain data which might constitute evidential material and 

• that it is not practicable to print or copy the data at the premises. 

Conclusions

It is likely that the ACCC will increase the use of its search warrant powers once it gains more experience and confidence using the power. Accordingly, businesses must know how to respond appropriately to an ACCC search warrant. The main challenge facing businesses is not to panic by having a clear plan to implement when faced with an ACCC search warrant.

Therefore, businesses should spend some time developing their own ACCC search warrant action plan. Once you have developed your plan you should go the next step and conduct a mock search to assess how your plan works in practice.

[i] As well as Pt 20 Telecommunications Act 1997, Pt 9 Telecommunications (Consumer Protection and Service Standards) Act 1999 or specific provisions of the Commonwealth Criminal Code.

Sims in the hot seat with the Foxtel / Austar merger following Metcash loss

Introduction

The ACCC’s recent Statement of Issues concerning the proposed merger between Foxtel and Austar was met with a great deal of consternation. The most strident criticism of the ACCC’s analysis came from Foxtel chief, Kim Williams, who labelled the ACCC decision as lacking any evidentiary basis and an example of “extravagant technology romanticism.”

In many respects, the criticism of the ACCC’s Statement of Issues was quite puzzling when one appreciates that it was entirely consistent with the ACCC’s published policy for the assessment of mergers, as set out in the Merger Guidelines. Accordingly, the ACCC’s views could not have come as a surprise to Foxtel, given that it must be familiar with the ACCC’s analytical approach to defining markets and analysing the competitive effect of mergers.

One is left wondering whether Foxtel’s strident criticisms of the ACCC Statement of Issues may have been motivated less by genuine puzzlement by the ACCC’s decision and more by a desire by Foxtel to pressure the new Chairman of the ACCC, Mr Rod Sims, into allowing the proposed merger to proceed.

There is no doubt that Sims will now be under even greater pressure to let the Foxtel – Austar merger through after the ACCC’s apparently comprehensive defeat in the Metcash case.

ACCC’s decision

The ACCC defined a number of separate markets in its Statement of Issues:

• the national market for the supply of subscription television services to consumers; 

• the national market for the acquisition of audio visual content; 

• the national market for the supply of advertising opportunities to advertisers; and 

• various telecommunications markets. 

The most controversial market defined by the ACCC was the national market for the supply of subscription television services to consumers. In relation to this market, the ACCC stated:

The ACCC’s preliminary view is that there is a national market for the supply of subscription television services to consumers. Other sources of supply of audio visual content to consumers, including FTA (Free to Air) television, mobile TV and internet content, are not sufficiently close substitutes to be considered in the same market.[1]

While the ACCC acknowledged that FTA operators compete to some extent with subscription television providers for the supply of audio visual content to consumers, in its view this has not developed to an extent where they could be considered to be close substitutes.

The ACCC’s statement appears to be a reference to actions by FTA providers to sell content to consumers through such relatively new technology as mobile TV, YouTube and Apple TC/iTunes.

Accordingly, the ACCC concluded that FTA would not act as a constraint on the pricing decisions of subscription television providers such as Foxtel and Austar.

In relation to the market for the acquisition of audio visual content, the ACCC largely accepted that there was close competition between FTA providers and subscription television providers. For example, FTA providers provided strong competition in relation to the acquisition of individual entertainment programs and sporting rights.

However, the ACCC noted that there were noticeable variations in the level of competition between FTA and subscription television providers depending on the types of audio visual content.

The ACCC also appears to have accepted that FTA television advertising is likely to be a sufficiently close substitute to subscription television advertising.

ACCC Concerns

The ACCC identified a number of issues of concern about the proposed Foxtel Austar merger.

The ACCC stated the preliminary view that the proposed acquisition was likely to substantially lessen competition in the national market for the supply of subscription television services. This conclusion was based on:

• the narrow market definition which excluded FTA providers from the market and 

• the belief that Foxtel and Austar would have the ability and incentive to compete directly following the rollout of the NBN.

In relation to the latter point, the ACCC stated:

As a result of programming arrangements entered into in the 1990s, agreements between FOXTEL, Austar and various content providers in effect currently divide the national subscription television market into two significant market segments; the metropolitan regions which are serviced by FOXTEL, and regional and rural Australia which is serviced by Austar. Further, the costs of expansion associated with distribution via traditional distribution platforms may have acted to maintain this geographic division. However, with the technological changes expected in the industry in the near future, it appears that FOXTEL or Austar (or both) will have the ability and incentive to expand beyond their current geographic footprints in the foreseeable future.

In other words, the ACCC believed that historical factors had lead to the market for the supply of subscription television services being segmented with Foxtel operating in the metropolitan areas and Austar operating in the regional areas.

The ACCC also believed that this historical and quite artificial lack of competition between Foxtel and Austar in geographic terms was likely to end with the roll out of the NBN. As stated by the ACCC:

To date, Foxtel and Austar have focused on growing their businesses in their existing geographic footprints as subscribers have continued to take up subscription television services. Over time, the incentives for FOXTEL and Austar to look to new opportunities for business growth, which may include geographic expansion of their existing operations, are likely to increase.

Expressed another way, the ACCC believed that both Foxtel and Austar had not sought to enter the other’s geographic territories in the past because they were more focused on winning customers within their existing geographic territories.

The ACCC concluded that there was unlikely to be any constraint on the merged firm from alternative subscription television providers and also that there was unlikely to be any new entry to the market for the provision of the subscription television services due to the high barriers to entry.

Foxtel response to ACCC decision

Following the ACCC’s Statement of Issues, various newspapers reported that Foxtel was contemplating legal action in the event that the ACCC blocked its proposed merger with Austar.

In particular, Mr Kim Williams, the CEO of Foxtel, was quite strident in his criticism of the ACCC decision. He is reported to have said that the ACCC decision was short on fact and full of bald assertions:

While the ACCC has raised some high-level issues, it provides limited evidence to back up some of its assertions. On this basis we believe Foxtel/Austar would be well positioned to have some success should it ultimately choose to take the ACCC to court, although we would still see a negotiated outcome as preferable for all parties and is therefore still more likely.[2]

Mr Williams was also quoted as saying:

What we have in the commission's statement of issue is a recital of opinions which do not have recourse to any kind of evidence. Parts of the commission are entitled to have their own personal opinions, but fortunately our legal system doesn't operate that way.

The commission seems to be suggesting in its paper – to test market views I must emphasise – that anything but Foxtel is a satisfactory conclusion. Frankly that is not good enough.

The ACCC seems to ignore the technological change that is enabling a host of well-capitalised new entrants to come into the TV market, for example, Apple, Google and Facebook.

What would appear to be evident in the commission’s paper is extravagant technology romanticism with an absence of evidentiary fact.[3]

In particular, Foxtel appeared most concerned about the ACCC’s conclusions that it did not consider subscription television and FTA television to be in the same market and that the proposed merger would eliminate potential competition between Foxtel and Austar. 

In this regard, Mr Williams said:

We believe that some of the ACCC arguments would be difficult to defend in court. For example, the view that pay TV and FTA don’t really compete and Foxtel and Austar would move into each other’s markets under the NBN.

Mr Williams’ claimed that the suggestion that Foxtel and Austar may become direct competitors in the future would be “an act of economic folly”.

Validity of Foxtel’s criticisms

Foxtel’s criticisms of the ACCC’s decision have little merit. The ACCC has not gone off on a tangent in its analysis but rather it has applied its published Merger Guidelines faithfully and correctly.

The ACCC’s approach to assessing mergers is clearly set out in its Merger Guidelines.

The first step in the analysis of a merger is to define the relevant market. This commences with a consideration of the level of overlap between the parties to the proposed merger:

The ACCC’s starting point for delineating relevant markets to assess a merger under s. 50 of the Act is identifying the products and geographic regions actually or potentially supplied by the merger parties. The ACCC then focuses on defining markets in areas of activity where competitive harm could occur. This must be assessed on a case-by-case basis. Generally, the ACCC focuses on overlaps between the products or geographic regions supplied by the merger parties, or some other meaningful economic relationship—such as an actual or potential vertical relationship or where the products supplied by the merger parties are complementary in nature. It is not uncommon for more than one market to be identified in any particular merger review.[4]

In other words, the first step in defining the market in the Foxtel and Austar merger would be to identify the overlap in the products and services which Foxtel and Austar sell or acquire in the market – namely subscription television services, audio visual content and advertising space.

The next stage is to consider whether the dimensions of this initial market should be expanded in product, geographic or functional terms to include close substitutes.

The ACCC then considers what other products and geographic regions, if any, constitute relevant close substitutes in defining the market. Importantly, the ACCC defines markets by reference to products and regions not by reference to the firms actually supplying those products or regions at the time of the merger.

The ACCC has to work out whether there are other products which are close substitutes to the goods or services being supplied by the merger parties. This may include goods or services which a customer may switch to if given sufficient price incentives.

In practical terms, the way this operates is to effectively dilute the market share of the merger parties in the market.

For example, if the market was limited to the services provided by the merger parties their market share would be 100% and they would be a monopoly. However, if a supplier in another state with the same total output as the merged firm was able to offer a competitively price substitute product, they would be included in the relevant market. This would have the effect of diluting the merged firm’s market share from 100% to 50% once the other firm’s sales had been included in the market.

This approach to market definition is based on the application of two tests – the Hypothetical Monopolist Test and the SSNIP test (also known as the price elevation test). The ACCC explains the application of these tests in its Merger Guidelines as follows:

The HMT determines the smallest area in product and geographic space within which a hypothetical current and future profit-maximising monopolist could effectively exercise market power. In general, the exercise of market power by the hypothetical monopolist is characterised by the imposition of a small but significant and non-transitory increase in price (SSNIP) above the price level that would prevail without the merger, assuming the terms of sale of all other products are held constant.

The process of applying the HMT starts with one of the products and geographic areas supplied by one or both of the merger parties. If a hypothetical monopolist supplier of this product cannot profitably institute a SSNIP because of customers switching to alternative products, the next closest demand substitute is added. If a hypothetical monopolist supplier of this extended group of products cannot profitably institute such a price increase because of customers switching to alternative products, the next best substitute is added. The collection of products is expanded until a hypothetical monopoly supplier of all those products could profitably institute a SSNIP.

A SSNIP in the context of the HMT usually consists of a price rise for the foreseeable future of at least 5 per cent above the price level that would prevail without the merger.'

While the HMT is a useful tool for analysis, it is rarely strictly applied to factual circumstances in a merger review because of its onerous data requirement. Consequently, the ACCC will generally take a qualitative approach to market definition, using the HMT as an ‘intellectual aid to focus the exercise’.

This means that the ACCC will assume that the merged firm is in fact a monopolist (which makes sense given that it is only their sales which have been included in the market in the first step of the market definition process) and then apply the SSNIP test.

The SSNIP test involves the ACCC asking the question whether customers of the merger parties would switch to another product or source of supply in response to a small non-transitory increase in price by the hypothetical monopolist. This test is used to work out what products and sources of supply are close substitutes.

In the present case, the ACCC would have had to ask itself how existing customers of a hypothetical merged Foxtel and Austar company would react if the merged firm put up its prices by 5%. For example, would existing customers of Foxtel and Austar switch to another product or source of supply if the price of say the Family Package went up from $75 per month to $79.90 per month.

It is quite apparent that when one asks this specific question the conclusion has to be that subscription television services and FTA television services are in separate markets. It would not make any sense for an existing customer who is currently paying $75 per month for a Family Package to suddenly decide to cancel their subscription and switch to FTA in response to a $3.90 price rise. This consumer has already made a decision that the services they are receiving from Foxtel for $75 per month are worthwhile and superior to FTA television.

This is not to say FTA will not have some impact on the purchasing decisions of prospective consumers. There are likely to be many consumers who were previously considering whether to purchase a subscription television service, who will now decide against making that decision due to the relatively recent expansion of FTA channels.

However, do the decisions of these consumers not to buy a subscription television service because of the improved range of FTA channels constrain Foxtel or Austar’s pricing decisions in any meaningful way?

The answer is clearly no. Foxtel and Austar will retain considerable pricing discretion in relation to its existing customers because these customers are highly unlikely to switch to FTA television in response to a SSNIP.

The Hypothetical Monopolist Test and the SSNIP test are not novel or unique tests. Rather, these tests are applied by virtually every leading merger regulator in the world. These tests are also generally accepted analytical methods to defining the relevant market.

Foxtel’s other major criticism of the ACCC’s decision relates to the ACCC’s conclusion that Foxtel and Austar are likely move into each other’s markets under the NBN. Foxtel disputed the ACCC’s conclusion that Foxtel and Austar were likely become head-to-head competitors in the market once the NBN has been established.

The ACCC makes it very clear in its Merger Guidelines that it considers supply-side substitution in defining the relevant market. This means that the ACCC will look at the ability of other suppliers to, either, start manufacturing the same goods or services as the merged firm by diversifying, or commence the supply of the same goods or services as the merged firm from a more distant geographic location. The first type of supply-side substitution depends largely on whether the other firm’s manufacturing plant or distribution system can be adjusted quickly and relatively cheaply to provide the relevant product or service at a competitive price. The second type of supply side substitution depends primarily on freight differentials.

It is not clear whether Foxtel submitted to the ACCC that Foxtel and Austar are not in fact competitors because they operate in different geographic markets in the supply of subscription television services.

However, the fact that Foxtel and Austar compete head-to-head in the Gold Coast area undermines any claim that Foxtel may have made that they are in a different geographic market to Austar. The fact that Foxtel and Austar compete in Gold Coast proves that such head-to-head competition is clearly possible.

It seems, from the limited public information which is available that Foxtel must have accepted that Foxtel and Austar are in the same geographic market for the supply of subscription television services, but that there were economically rational reasons for the companies not to compete.

This argument must have been presented to the ACCC in terms of merger factor (f) which requires the ACCC to consider the availability of substitutes in the market – section 50(3)(f)

Section 50(3)(f) is probably the least well understood merger factor. Often it is presented to the ACCC in merger submissions as simply a rehash of market definition. However, this is not the correct approach to section 50(3)(f).

As stated above, the first step in the merger review process is to define the relevant market. Once this process has been completed, the ACCC will then prepare a market share table which shows all the competitors in the market and their respective market shares. For example:

If Company A and Company B are proposing to merge, then it would be important for the ACCC to assess the likely competitive responses of each of the remaining competitors in the market. The ACCC would have to determine whether the remaining competitors would be willing and/or able to compete with the merger firm or whether they would become price followers?

For example, if Company C is a new start up company which has proven to be highly innovative and aggressive in the market, it may be able to constrain the pricing decisions of the merged firm.

On the other hand, if Company C and D both have no excess capacity in their manufacturing plants, they may be unable to respond to prices increases by the merged firm by increasing their output.

This qualitative consideration of the relative strengths and weaknesses of the competitors in the market who provide close substitutes has to occur somewhere in the ACCC’s analysis. The appropriate place for this analysis to take place is in the ACCC consideration of merger factor (f).

Therefore, in the Foxtel - Austar matter it would appear that Foxtel accepted that Foxtel and Austar were in the same market, but then argued that they would not exercise a competitive restraint on each other’s pricing decisions for other reasons under the section 50(3)(f) merger factor.

There were some media reports that indicated that the merger parties had put the following argument to the ACCC. Namely, that Foxtel and Austar would not constrain each others pricing decisions because it would cost each of them more money to pursue customers in the other’s geographic territory than it would to keep focusing their efforts on trying to gain new customers in their existing geographic territory

In other words, Foxtel submitted to the ACCC that it would not make any sense for Foxtel to try to win an existing customer from Austar in a regional area, because they would be able to make a bigger margin by gaining a new customer in a metropolitan area.

These submissions are tantamount to Foxtel saying because it can generate a margin of say 20% from a metropolitan customer and only 5% from winning an Austar customer, it would be “economic folly” for it not to focus exclusively on winning new metropolitan customers.

Unfortunately, this argument makes absolutely no economic sense, particularly in relation to subscription television services. In a competitive market, companies will generally try to win customers from anywhere and from anybody as long that one additional customer is profitable for the company.

While there may be some rare situations where companies may not seek to win low margin customers, this is usually where the costs of winning a new customer are very high. A good example of this situation is in relation to large construction contracts where the costs of preparing a tender can be very significant.

However, the marketing costs incurred in trying to win new subscription television customers do not appear to be significant. Indeed, it seems that the primary marketing technique used by Foxtel to win new customers is to undertake regular letterbox drops of written advertising materials, which is hardly a high cost marketing technique.

Accordingly, the ACCC would be right to reject Foxtel’s argument as to why Foxtel and Austar currently do not try to compete more vigorously against each other in more geographic areas than simply the Gold Coast.

Whilst there may be other reasons why Foxtel and Austar do not compete head-to-head in every market in Australia with the exception of the Gold Coast and apparently, have no interest in competing head-to-head in these markets in the future, these reasons do not appear to be based on any rational economic theory.

Decision time for Rod Sims

Given the extreme nature of Foxtel’s comments about the ACCC’s decision, one could be forgiven for believing that the ACCC had applied novel and untried economic theories to its consideration of the Foxtel – Austar merger. However, this belief would be mistaken.

The reality is that the ACCC has faithfully and transparently applied the methodological framework outlined in its Merger Guidelines to the Foxtel - Austar merger and reached a number of quite predictable and analytically correct conclusions. The methodological framework outlined in the Merger Guidelines (which incidentally were first issued by the ACCC in 1999, over 10 years ago) are based on widely accepted economic principles that are utilised by virtually every other leading overseas merger regulator.

Therefore, questions arise as to: 

• why was Foxtel apparently so surprised by the ACCC’s preliminary views? 

• why was such a large and sophisticated company such as Foxtel so puzzled by the ACCC’s findings about the merger given that these findings were quite predictable for anyone with even a cursory understanding of the ACCC’s approach to merger analysis and its published Merger Guidelines? 

• why was Foxtel so surprised that FTA television services were not included in the market for subscription television services given that it must have know the way that the SSNIP test is applied by the ACCC to determine the existence of close substitutes? 

It is highly unlikely that Foxtel has been poorly advised in relation to the ACCC issues which were likely to arise in relation to the Foxtel – Austar proposed merger. Accordingly, there must be another explanation for Foxtel’s extreme position.

Is it the case that Foxtel’s comments may have been driven by strategic considerations?

It is well known that the Statement of Issues issued by the ACCC on 22 July 2011 was one of the last major decisions made by Graeme Samuel during his reign as ACCC Chairman. In fact, some commentators were very surprised that Mr Samuel went ahead and made such a significant decision so close to the end of his appointment given he would not be around to finalise the decision.

Indeed, many commentators expected Samuel to postpone the Statement of Issues in relation to the Foxtel - Austar merger so that it could be considered by the new ACCC Chairman, Mr Rod Sims, once he had taken up his new role.

However, now the responsibility of making a final decision on the Foxtel – Austar merger rests squarely on Rod Sims. Indeed, this is likely to be his first major merger decision during his term as the Chairman of the ACCC.

Accordingly, there may be some grounds for suspecting that Foxtel’s strident criticisms of the ACCC’s decision may have been made for the strategic purpose of trying to put maximum pressure on Rod Sims to let the deal through.

Foxtel may have come to the conclusion that Rod Sims will not want to start his role at the ACCC by embarking on major litigation against the combined might of Foxtel and Austar and their main financial backers, who include News Limited, Telstra and Consolidated Media Holdings.

Unfortunately, it now seems that Rod Sims is in the position of either standing by the ACCC’s previous Statement of Issues and opposing the Foxtel – Austar merger or abandoning the Statement of Issues and letting the merger through.

If Rod Sims opposes the Foxtel – Austar merger it is likely that litigation will ensue. This litigation is likely to be both very expensive and time consuming for the ACCC. Indeed, it would have the potential to bankrupt the ACCC, particularly when one factors in the enormous legal bill that the ACCC will be receiving from Metcash and Franklins unless it can overturn Justice Emmett’s decision to dismiss the ACCC’s case seeking to prevent that merger.

On the other hand, if Rod Sims lets the merger through it may appear that he has caved in to pressure from Foxtel. Such a perception would not auger well for his future role as the Chairman of the ACCC.

Unfortunately, for Rod Sims there does not appear to be a simple third option such as accepting the divestment of strategic assets in order to mitigate the potential anti-competitive effects of the proposed merger.

The only possible alternative for the ACCC may be to let the deal through with some form of behavioural undertaking from the merged firm. For example, a behavioural undertaking from the merged firm that they agree to make particular content available to fledgling providers of content on reasonable terms for a defined period of time may be the solution.

However, one thing is clear. It would have made Mr Sims’ initiation to the role of ACCC Chairman a great deal easier if the former ACCC Chairman of the ACCC had simply deferred the preliminary decision on the Foxtel Austar merger until after Rod Sims had taken over.

Sims’ decision has now been made a great deal harder in the light of the ACCC’s apparently comprehensive loss in the Metcash case which will no doubt raise significant questions over the ACCC’s methodology and approach to merger analysis .
[1] Statement of Issues – Foxtel – proposed acquisition of Austar United Communications Limited, dated 22 July 2011 - http://www.accc.gov.au/content/index.phtml/itemId/975742
[2] “Foxtel eyes legal action against ACCC if Austar acquisition is determined anticompetitive”, The Australian, 25 July 2011.
[3] “ACCC delivers hammer blow to Foxtel’s bid”, The Australian, 23 July 2011.
[4] ACCC Merger Guidelines, 2008 - http://www.accc.gov.au/content/index.phtml/itemId/809866