The impact of change

Professor Bob Baxt shares his views on the proposed changes to competition law and policy as put forward in the recent draft report by the Harper Review panel.

In what many would regard as a Herculean effort by the Harper Review Panel, the draft report published in late September contains many sweeping recommended changes to both competition policy and the competition law of this country, not just to the legislation that is currently in place. Both sets of recommendations will need to be approved, not only by the federal government, but also by the state and, perhaps in passing, territory governments, which have a parallel and vital role to play in the overseeing and administration of our competition law and policy. While it is true that the federal government was able to enact the Trade Practices Act in 1974, which operated in many ways without the need for parallel state legislation, the introduction of Competition Codes in the mid-1990s, and a national competition policy protocol, ensured that the legislation, and the policy behind it, achieved a far better overall result.

So, it was with considerable interest that the community read the large report of the Review Panel in which sweeping changes to both competition policy and the Competition and Consumer Act (the Act) were proposed. It is not possible in this article, to comment on each of the major recommendations of the Review Panel. However, I would like to deal with two “sets” of recommendations. One is a general comment on the sweeping changes to competition policy proposed. The second is to deal with what has turned out to be a key feature of the current legislation — a provision which has, in the eyes of many, been the “inspiration” for Minister Bruce Billson’s push for a root and branch review of competition policy and competition law.

There is little doubt that there are many areas of our economy where state governments still “enjoy” an iron grip on the way in which commerce and our lives are regulated. Exceptions and exemptions from the operation of the Act (which replaced the Trade Practices Act in the mid-1990s) play a vital, and many would regard a deleterious, role in ensuring that we do not have truly national and uniform competition laws and policies in this country.

True to his very encouraging acceptance of the task in chairing this root and branch review, and in line with preliminary statements made by him, Professor Ian Harper foreshadowed sweeping changes to the current regulatory arrangements that are currently in place.

If the Review Panel’s recommendations are accepted by the federal and state governments, significant areas of economic importance in Australia, such as the regulation of the pharmacy industry, the continued state regulation of electricity, gas and other essential services, and the operation of taxis, will no longer remain outside the scope of the Act.

It is proposed that some of the protection (or exemptions) that these industries currently enjoy from the operation of the legislation will also be removed. These areas represented extraordinary examples of how special interests often receive unacceptable protection from the reach of sensible commercial laws. The “protection” enjoyed by overseas cargo shipping (now the subject of a special exempting set of provisions in the legislation — Part X of the Act) will be removed. Special exemptions or protection contained in provisions of the Act in relation to intellectual property will also be removed (although this is not an area in which the state governments have any real influence).

In the draft report, the Review Panel discusses briefly the work undertaken in Victoria in relation to the taxi industry, a set of initiatives that have been copied in other states and which has brought considerable agitation and some discomfort to members of the taxi industry. The further opening up of the taxi-like services, through the operation of the Uber network (which makes available the possibility of private persons operating safe and clean cars for transport at very much lower prices than offered under the taxi industry) has led to lively debate, agitation, and the promise of the many interesting discussions and possible “rear guard actions” to come.

The pharmacy industry has been particularly able to influence the federal government over the years to ensure that the industry remains subject to special state regulation. This arguably provided the relevant operators in the industry a special position in so far as competition law is concerned. Other areas where state government regulation is paramount also enjoy this same special treatment.

In order for the federal government to adopt a policy that would allow for the introduction of sweeping federal legislation that would “trump” state legislation in this area, the federal government will need to gain support from a number of the states. Majority rules do apply in this context. However, I would assume from what has happened in the past, unless there are areas where the particular policies are not regarded as crucial, even a majority vote would not be sufficient to lead to the sweeping change to the regulatory regime that has been proposed. The federal government would want nothing less than uniform approach to this area.

A special problem that the federal government faces in Australia if it wishes to regulate commercial (business) life through a uniform national approach is that the constitution, when enacted in 1901, divided the powers between the Commonwealth and the states in such a way as to limit the Commonwealth’s ability to regulate areas such as corporate law, taxation law (where the states enjoy parallel powers in many respects), and, arguably, a number of areas that impact on commercial business law, such as competition. This dilemma is one which our law makers will need to grapple with, assuming the Review Panel’s draft recommendations are retained in its final report due in April/May 2015.

The most single significant proposed change to the Act in the draft report deals with the festering problem of the apparent inability of the Australian Competition and Consumer Commission (ACCC) to tackle what is known as “misuse of market power”. This is described in the US Sherman Act as “monopolisation”. In Europe, it is described more starkly as “abuse of the monopoly power”.

In Australia, after some initial jousting in the context of cases brought by the regulator in this area, the High Court of Australia (with the assistance through intervention of the then Trade Practices Commission) handed down a vital and landmark decision on misuse of market power in Queensland Wire Industries Limited v BHP Limited. In what many would regard as the most telling and important decision in competition law in Australia, the High Court of Australia had no difficulty in ruling that there had been a misuse of market power and that the refusal of BHP Limited to supply Y-Bar to the plaintiff company breached section 46 of the then legislation.

Since that decision, the courts have continued to embrace the principles set down in the Queensland Wire case, but the ACCC (and before it the Trade Practices Commission) has also failed to establish its case in a number of other high profile cases.

Recently, Justice Greenwood in the Cement Australia case (ACCC vs Cement Australia Pty Ltd (FCA) 909), while ruling that the ACCC had established that the relevant defendant companies had breached provisions of the Act relating to contracts and arrangements that were anti-competitive, dismissed the claim that the defendants had breached section 46 of the Act.

The minister responsible for the introduction of the root and branch review has consistently championed the position of small business in Australia, which he argues is inadequately protected by the provisions of the Act. In particular, he has targeted the failure of the courts to interpret section 46 of the legislation (which has had a number of additional subsections added to it to try to capture alleged misuse of market power conduct), and the unconscionable conduct provisions of the Act as the main problems.
As the High Court noted in the Queensland Wire case, the provisions of the competition law in the Act are aimed at protecting the competitive process, not individual competitors. While the unconscionable conduct provisions of our legislation do provide, in theory at least, potential protection for small business when there appears to be somewhat unfair behaviour (although “unconscionable” does not extend to unfairness in the eyes of the court) on the part of large players, it does not protect small business if they cannot compete in the marketplace.

The High Court emphasised in the Queensland Wire case that competition is ruthless and businesses may get hurt as a result of the willingness and ability of other businesses to look after their own interests — a view that has been embraced by many courts.

Much debate has occurred over how the legislation could be improved, however attempts at improving it in the past have proved futile. Many have said, perhaps unfairly, that the ACCC has not chosen the right cases to run in this area and has not necessarily been able to put together the best evidentiary backdrop in relevant cases.

To address this, the Review Panel wishes to replace the current provision, which relies on establishing that an organisation that has significant market power and which takes advantage of the market power for the purpose of damaging the competitive process, with an arguably broader provision.

As described in the draft report, this is aimed at enabling the ACCC and civil litigants to establish that an organisation with significant market power that acts with either the purpose or the effect of substantially lessening competition in the relevant market, will be in breach of the law. This will remove the concept of “taking advantage of” from the current legislation. Instead, it requires the plaintiffs (the regulator or civil plaintiff) to show that there has been a substantial lessening of competition, to be proved either by reference to the purpose of the actions or the effects of those actions. In response to pleas of business and others to the Review Panel, the proposal also suggests that important defences be introduced into the legislation.  Specifically, the defendant will avoid liability if it can establish that the particular activity can be explained by reference to a defensible and believable business plan, and that the interests of the public are enhanced as a result of the activity.

There are a number of problems with the proposal (although we have not yet seen the language of the section and the Review Panel is asking for further submissions). The ACCC and civil litigants have had great difficulty in establishing in our courts that particular activities have resulted in a “substantial lessening of competition in the relevant market”.

Indeed the ACCC’s record in running such cases is one that many would say is almost “woeful”. It appears very reluctant to bring cases requiring it to prove a substantial lessening of competition; and regrettably its success rate is reflected in the less than satisfactory decisions which have considered these concepts.

The second element of the proposed defence, as I understand it, will require the court to assess economic concepts in a way that is usually left to the Australian Competition Tribunal (the Tribunal) to evaluate. While it will be relatively simple, in my respectful view, for any business to establish that it is undertaking a particular course of conduct for a proper business purpose, on the evidence of cases in the 40-year history of the Act (and its predecessor), the ACCC (or civil litigants) will face difficulties in evaluating the public benefit issues.

The Tribunal, in which a federal court judge sits with the assistance of an economist and a businessperson, is very experienced in assessing these issues. The New Zealand High Court (the equivalent of our federal court) is able to appoint economists/businesspersons to assist the judge in evaluating these issues. The difficulty lies in the fact that our constitution prevents federal courts to exercise the same approach and this will hamper, in my view, the court satisfactorily evaluating such a defence.