By Sharon Henrick, King & Wood Mallesons’ Sydney Office
Australia’s competition policy framework and laws are currently undergoing a wide-ranging review – the first comprehensive independent review of Australia’s competition framework since 2003. We explain the key developments and recommendations to date.
In its 2013 election campaign, the Coalition of Australia’s Liberal and National political parties proposed a ‘root and branch’ review of competition laws in Australia within its first 100 days of government.
After winning the right to govern Australia, in December 2013, the Coalition released draft terms of reference for the wide ranging review of competition laws in Australia. In March 2014, the Coalition released the final terms of reference for the review and announced the members of the review panel.
The Panel is chaired by Professor Ian Harper, a Partner at Deloitte Tousche Tohmatsu, the Director of Deloitte Access Economics Pty Ltd and an Emeritus Professor of the University of Melbourne. The other members of the Panel are Mr Peter Anderson – a national business leader and public policy specialist; Ms Su McCluskey, the Chief Executive Officer of the Regional Australia Institute, an independent policy think tank and research organisation; and Mr Michael O’Bryan, a Queen’s Counsel at the Victorian Bar specialising in competition law.
The Panel published its Draft Report in September 2014 on the effectiveness of Australia’s current competition policy and laws, and its draft recommendations for promoting competition across the economy.
The Draft Report evaluates whether Australia’s laws continue to be ‘fit or purpose’ for the current and emerging economy.
The Panel received almost 350 submissions: around 50% from peak and advocacy bodies, 30% from business, 17% from individuals and the remainder from Government bodies. The top five issues were competition laws, competitive neutrality, misuse of market power (abuse of dominance), small business concerns and the national regulator’s (Australian Competition and Consumer Commission (“ACCC”)) operations.
In the Draft Report, the Panel identified three major forces affecting the Australian economy:
- the rise of Asia and other emerging economies, requiring greater agility and innovation to meet changing preferences in emerging economies;
- Australia’s aging population and increasing demand for health and aged care services, leading to a need to extend competition in government provision of human services; and
- new technologies, which requires policymakers and regulators to capture the benefits to competition that ‘digital disruption’ can bring, whilst protecting consumers.
Aims of Competition Policy
The Draft Report indicates that the Panel considers the objectives of competition policy (and the ‘fitness for purpose’ test) as being to:
- make markets work in the long-term interests of consumers;
- foster diversity, choice and responsiveness in government services;
- encourage innovation, entrepreneurship and the entry of new players;
- promote efficient investment in and use of infrastructure and natural resources;
- establish competition laws and regulations that are clear, predictable and reliable; and
- secure necessary standards of access and equity.
We support these principles.
The Panel reaffirmed that the objectives of competition policy are to enhance consumer welfare and to protect the competitive process and competitiveness of markets as a whole, not individual businesses or competitors.
We also support the Panel’s proposition that market regulation should be as ‘light touch’ as possible, allowing market-driven factors to determine success, rather than enacting laws that support competitors of a particular size or nature, or which are driven by special (and usually transient) interests.
The Panel wishes to ensure competition laws embrace the opportunities created by innovation to stimulate the entry of new and novel players into established markets.
Simplify Existing Competition Laws
The Panel recognises the undue complexity of Australia’s existing competition laws, and recommends simplifying the Competition and Consumer Act (“CCA”), which is the key statute containing Australia’s competition laws, by removing overly prescriptive provisions and redundant laws.
The Panel also recommends that:
- competition laws apply to the Crown (including local government) if the Crown is undertaking activity in trade or commerce. Currently, Australia’s competition laws only apply to the Crown if it is carrying on a business, a narrower concept than undertaking an activity in trade or commerce. If adopted, this recommendation would mean that the act of privatizing Government owned enterprises would be subject to competition laws;
- the current definition of ‘market’ be amended to include competition from imports and services supplied outside of Australia into Australia. This recommendation reflects Australia’s place in the global economy, as well as Australia’s declining manufacturing base; and
- the CCA applies to conduct outside Australia, if it has a competition impact or harms consumers in Australia. This recommendation, which would extend the extra-territorial reach of Australia’s competition laws is consistent with the reach of competition laws in other countries, including the United States.
Misuse of Market Power– it’s All About the Effect
The Draft Report accepts the threshold test of substantial market power but recommends adopting the ACCC’s position of supplementing the current purpose-based test with an effects test.
If adopted, this recommendation would prohibit a corporation with a substantial degree of market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition in a market.
It would also remove the current requirement that a corporation “take advantage” of its market power, and arguably “minimise unintended consequences … including the possibility of inadvertently capturing pro-competitive conduct”.
The Panel proposes a new defence for rational business decisions or strategies by a corporation without market power, where the likely effect of the conduct is to benefit the long term interests of consumers. The corporation with substantial power in a market would bear the onus of establishing the defence.
Removing the ‘take advantage’ limb is a major departure from the existing approach, although it would arguably take Australia closer to the international approach of the United States and the European Union. Without the ‘take advantage’ limb, a defence along the lines proposed by the Panel, but slightly broader, would be essential.
We would prefer the defence to be split into 2 separate defences so that one defence would be if the conduct would not be rational for corporation without substantial market power and another, separate, defence would be if the conduct would be likely to benefit consumers. We consider that restricting the benefits to consumers to the ‘long term’, as proposed by the Panel, is likely to give rise to unworkable evidentiary challenges. As John Maynard Keynes famously said: “We are all dead in the long term.”
We query whether the corporation with substantial market power should bear the burden of proof for what is, in essence, a key part of the prohibition. We consider it should be incumbent on the prosecution to show that the conduct would not be rational for a corporation without substantial market power and would not benefit the interests of consumers.
The ‘take advantage’ limb has been particularly problematic for the ACCC to prove in previous cases. The ACCC will likely view the proposed changes as a positive step that may enable it to prosecute more misuse of market power cases.
Mergers and ACCC Processes
The Draft Report supports the current mergers test, which prohibits direct and indirect acquisitions of shares or assets that would have the effect, or likely effect, of substantially lessening competition in a market in a State, Territory, or region of Australia. The Panel considers the current test sufficiently flexible for issues such as creeping acquisitions, national champions and import competition to be properly considered.
The Panel has reached a draft conclusion that the current ACCC informal merger clearance processes generally work well, but recognises the pitfalls of the formal merger clearance process, which has never been used even though it was introduced as a result of the last review of how the ACCC administers Australia’s competition laws.
The Panel is encouraging the ACCC to consult with business to deliver more timely and transparent decisions in informal reviews because it is not sensible to regulate an informal, non-statutory process.
The Draft Report recommends combining and reforming the unused formal merger process and the merger authorisation process to remove unnecessary restrictions. Without giving specifics, it recommends the combined process be settled between the ACCC, business and competition law experts, and reflect the following principles:
- the ACCC should be the first instance decision-maker, with the Australian Competition Tribunal being better suited to an appellate or review role;
- the ACCC should approve mergers if satisfied that the merger would not substantially lessen competition or result in public benefits that outweigh the anti-competitive detriments;
- no prescriptive information requirements, but the ACCC should be able to compulsorily require business and market information to be produced. The ACCC can already compulsorily require that information and does exercise its power to do so;
- strict timelines should apply. They should only be able to be extended with the merger parties’ consent; and
- the ACCC’s decisions should be reviewable by the Tribunal under a process with strict timelines.
We see a tension between the benefits of an informal, relatively quick merger process for simple mergers and the lack of timelines and transparency for complex cases.
In our experience, the ACCC works hard to deliver timeliness and although it will not give access to its file, does outline the nature of any complaints from businesses which may be affected by a merger, without disclosing the identity of those businesses. The ACCC can also be flexible around global deals. For example, in an Australian first, we recently convinced the ACCC to accept an undertaking to allow a non-Australian company to close a global subject to a hold separate arrangement for the Australian businesses while the ACCC continues its review of the Australian part of the deal.
However, we have also found that Australia’s current merger control regime to be increasingly fragile and out of step with merger control regimes of other countries, which tend to be mandatory, suspensory on closing, subject to statutory timelines, subject to minimum turnover thresholds and which allow access to the agencies’ files subject to certain protections.
If the Panel’s draft recommendations become its final recommendations and are adopted by the Australian Government, it may be that they function more like a band aid than a long term fix.
Cartel Conduct – Keep It Simple
The Panel supports a specific set of per se (outright) prohibitions in the CCA for serious cartel conduct. However, it agreed with submissions that the cartel provisions are overly complex and should be simplified for clarity and certainty. The Panel’s draft recommendations to narrow the cartel laws may be described as follows:
- the provisions should only apply to cartel conduct affecting goods or services supplied or acquired in Australian markets;
- the threshold for when corporations are “likely” to be competitors should be lifted to apply a balance of probabilities assessment (i.e. more likely than not);
- the prohibition on exclusionary provisions should be removed;
- there should be broader exemptions for joint ventures and other business collaborations; and
- certain trading restrictions on the supply or acquisition of goods or services should be exempt, as other sections of the CCA deal with anti-competitive vertical restrictions.
Interestingly, the Panel is proposing broadening the CCA to capture conduct by unregistered foreign companies which damages competition in a market in Australia. This would remove the current requirement for the unregistered foreign company to carry on business in Australia, or to be domiciled in Australia, making it easier for the ACCC to pursue companies engaging in global cartel conduct.
Green Light for Private Enforcement
Private competition enforcement litigation, and particularly follow-on class actions for civil damages, has increased in Australia following the grant of immunity for and prosecutions of cartel conduct by the ACCC. However, the Panel is encouraging those seeking remedies with some key suggestions to reduce impediments, including:
- no longer requiring ministerial consent prior to commencing proceedings for conduct engaged in overseas; and
- allowing unincorporated foreign corporations carrying on business in Australia to be subject to enforcement and litigation, if their conduct damages competition in an Australian market.
New market Studies Powers – But Not For the ACCC
The Panel has made a draft recommendation to dissolve the National Competition Council, and to establish an Australian Council for Competition Policy (“ACCP”) as the leader for implementing the competition policy agenda. The ACCP would not be a Commonwealth agency, but a truly national one, made up of representatives from each of Australia’s States and Territories as well as the Commonwealth.
This draft recommendation acknowledges that advocacy for competition policy has drifted in recent times, and has (if it exists) fallen to the ACCC. In the Panel’s view, the ACCC, as a regulator, is not an appropriate body to drive competition reform or policy objectives, which prevent it from holding government accountable for reform and policy objectives.
A newly established ACCP would be responsible for advocacy and education in competition policy, monitoring and reporting on agreed reforms and progress, identifying new areas for reform, making recommendations to government on market design and regulatory issues (including privatisations) and researching developments domestically and internationally.
The ACCP could undertake market studies and recommend regulatory changes or potential breaches of competition law to government. However, whether it would have compulsory information gathering powers remains undecided, with the Panel seeking comments on this.
The Draft Report lays out a sensible path for going forward and forks in the road where the way is less clear. Following further public consultation, the Panel will deliver its final report and recommendations to the Federal Government in March 2015.
We hope that the momentum continues with submissions on the Draft Report, and that the Government’s eventual response will bear fruit for the Australian economy.
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