In this month’s Competition and Market Regulation Update we explore the following developments:
As we go to press, the Productivity Commission has released a much-awaited draft report on its review of Australia’s consumer policy framework. While highlighting the considerable strengths of the existing framework, the draft report notes that parts of the framework require an overhaul in order to meet the future needs of consumers, businesses and the community.
In particular, the report highlights the need for consistency in consumer laws across Australia, including the removal of unnecessary industry-specific consumer regulation, and the enhancement of consumer’s access to remedies for breaches of consumer law.
The Productivity Commission invites comment on its draft report—a copy of which can be downloaded from the Productivity Commission website. A draft report into the market for retail tenancy leases in Australia has also been released, which we consider in the ‘In brief’ section.
With the new Australian Labor Party (ALP) Government elected on 24 November 2007 there is likely to be significant change to the competition law. Some of the key proposals are outlined below.
‘Taking advantage’ under section 46
One of the most significant proposals has been for the reform of section 46 of the Trade Practices Act 1974 (Cth) (TPA) which prohibits a misuse of market power. This initiative arises out of the need for greater clarity with respect to the concept of ‘taking advantage’ under that section. The decision of the Australian High Court in Rural Press Ltd v ACCC [2003] HCA 75 had uncovered some difficulties with the concept. It is expected that the reforms will set out a number of factors a court should take into account when determining if a company has taken advantage of its power, including whether the market power materially facilitated the conduct, and whether the conduct was engaged in reliance of the market power.
The Australian Competition and Consumer Commission (ACCC) has provided its support for the changes and is optimistic that the reform will help in future cases and provide greater certainty for both the ACCC and the business community.
Evidence gathering powers
The ACCC’s evidence gathering powers under section 155 of the TPA are also likely to be strengthened by the ALP Government, allowing section 155 notices to be issued after proceedings have been commenced if their purpose was to seek urgent interlocutory relief. Under the current section once proceedings are commenced formal information gathering powers cannot be used by the ACCC. As the ACCC is very supportive of having additional powers, it has previously lobbied the former Coalition Government for these changes, though they were not implemented.
Creeping acquisitions
While in opposition, the ALP indicated its support for amending section 50 of the TPA to give the ACCC the ability to stop so called creeping acquisitions that substantially lessen competition. Creeping acquisitions refer to the situation in which a number of acquisitions of either individual assets, businesses or shares have a cumulative effect upon market share. As a general proposition the ACCC is not currently able to prevent the impact of such creeping acquisitions on competition in the relevant markets notwithstanding that individually the small scale acquisitions may not substantially lessen competition, but taken collectively, they may have such an effect.
Infrastructure bottlenecks – export facilities
The ALP, while in opposition, criticised the Part IIIA access regime under the TPA and its operation on shipping ports and other export facilities, claiming it stifles development of much needed infrastructure. Martin Ferguson of the ALP has recommended that a discretionary power (subject to a national interest test) be afforded to exempt export facilities from the scope of the access regime.
Jail sentences for price fixing and collusion
Since its election, the ALP has committed to a firm stance against anti-competitive behaviour by announcing plans to amend the TPA to provide criminal sanctions for executives involved in price fixing and collusion. Under the proposed changes (which are anticipated to be introduced into parliament by the middle of 2008) executives could be sentenced to jail terms of up to five years. Unlike proposals previously considered by the Coalition, the proposed legislation will not require proof that the executive has acted dishonestly.
The High Court has heard an important constitutional challenge brought by Telstra in relation to government regulated access to its broadband network. The action centres on Telstra’s claim that, in breach of section 51(xxxi) of the Australian Constitution, the Commonwealth Government has acquired its property otherwise than on just terms. The ACCC and 11 telecommunications companies are attempting to oppose that claim.
Over the two-day hearing, much of the focus of argument was centred on the determination of whether the terms determined under Part XIC of the TPA could constitute ‘just terms’. Telstra’s primary argument was that under section 152AR of the TPA the owner of a declared service is obliged to provide access and the property is acquired without terms of access being determined by the ACCC under s 152AY. In Telstra’s view this means that the property is accessed without just compensation in return. Counsel for Telstra also argued that the criteria in s 152CR, which is to be used by the ACCC to make a determination on terms of access, fails to provide an assurance that the property will be accessed on just terms.
Counsel for the ACCC contended that, in determining how to implement the requirement of just terms there is a measure of latitude for the legislator, and in these circumstances it had opted for a ‘fair process’ for making the determination.
In a sign that ignorance of the competition law will not be accepted as an excuse, the Federal Court has handed down total penalties of $927,500 against 10 individuals and nine companies for price-fixing in the Victorian abalone market.
The ACCC’s action in the Federal Court was based on the defendants’ (holders of abalone quotas) practice of refusing supply to abalone processors unless they agreed to pay a premium on top of the average market price. In addition the quota holders agreed not to supply to customers other than those nominated by the group.
In handing down his decision, Justice Weinberg acknowledged that the cartel conduct in this case was unusual, given that the arrangements were employed without any secrecy and were fully documented by the parties. More remarkable for Justice Weinberg was the fact that various legal advisers and accountants had looked at the proposal documents as well as the draft documents for the arrangement without any of them raising competition concerns or the prospect of liability under the TPA.
In their defence the quota holders had claimed ignorance of the law, but Justice Weinberg held that the parties had a duty to ensure they knew the competition law and that the law was being obeyed.
Justice Weinberg also strengthened calls for the criminalisation of cartel conduct, building on Justice Heerey’s comments in Visy:
'In appropriate cases imprisonment should be available as a sentencing options. Pecuniary penalties may be seen as simply part of the price of doing business.’
The decision is evidence of the critical need for companies to consider and seek specialist legal advice in relation to the competition dimensions of proposed commercial ventures, particularly with actual or potential competitors.
Qantas has agreed to pay $61 million in fines to the United States Department of Judgment (DOJ) for its role in an alleged international cargo cartel.
After securing $300million against each of British Airways Plc and Korean Air Lines Co Ltd (discussed in the Competition and Market Regulation Update September 2007) the DOJ has now successfully secured a guilty plea from Qantas. However, the fine has yet to be approved by the United States District Court for the District of Columbia. The cartel was uncovered after Lufthansa and Virgin Atlantic made use of the DOJ’s leniency program.
Qantas’ admission is expected to influence the ACCC, which is also investigating the matter in Australia. Qantas is also currently awaiting judgment in a Federal Court class action brought by plaintiffs affected by the alleged price-fixing. In that case Qantas has attempted to counter arguments of price-fixing by showing that Australia’s price-fixing laws only apply to conduct in Australia. The ACCC has intervened in this matter, as it is concerned that such a precedent might weaken its powers and allow parties to circumvent the ability of the ACCC to enforce the TPA by entering agreements off-shore that affect competition in Australian markets.
Following the successful Federal Court action brought by the ACCC, Visy and its senior executives will have to prepare themselves for another showdown with a competition regulator. Within days of Justice Peter Heerey’s judgment (considered in detail in the Competition and Market Regulation Law Update November 2007), the New Zealand Commerce Commission (NZCC) has filed a civil proceeding against the packaging company.
The proceedings are being brought against Visy’s New Zealand subsidiary as well as its Australian parent and four executives. The action was again made possible after Amcor’s application for immunity, this time with the NZCC.
The High Court of New Zealand has delivered a blow to the NZCC and overturned its decision declining the applications for clearance of mergers involving The Warehouse Group Ltd by Foodstuffs co-operatives and Woolworths Ltd.
Originally the NZCC had held that both the application of Foodstuffs and Woolworths in relation to The Warehouse would lead to a substantial lessening of competition in the local markets for grocery retailing. The Warehouse predominantly focuses on general merchandising but also operates three The Warehouse Extra outlets which bring general merchandise and groceries under the same roof. These were a cause for concern for the NZCC which decided an acquisition by Foodstuffs or Woolworths would substantially lessen competition in the local markets in which The Warehouse Extra outlets operated. The NZCC had identified The Warehouse as a new and effective competitor in a concentrated market defined by high barriers to entry including a lack of locations for stores.
Both Foodstuffs and Woolworths successfully appealed the decision and are now entitled to make an offer for The Warehouse. The High Court of New Zealand stated that the relevant test of whether a proposed merger is likely to substantially lessen competition should be based on the real prospects of a material lessening of competition occurring rather than on the basis of remote possibilities. The court noted that while it is entitled to apply economic theory in its assessment, the theory must be applied with reference to the particular facts. In allowing the present appeal, the court noted that the primary competitors in the local grocery retailing market are Foodstuffs co-operatives and Woolworths Ltd and that either of the proposed mergers with The Warehouse is unlikely to alter the level of competition that currently exists between those two major retailers.
Productivity Commission on retail tenancy leases
The Productivity Commission has released a draft report on the market for retail tenancy leases in Australia. Among its findings, the Productivity Commission has noted the highly prescriptive nature of legislation in relation to retail tenancies, some of which has lowered productivity and increased administrative costs. In addition it highlighted growing and significant differences between jurisdictions in this area. It’s draft recommendations suggest reducing the prescriptiveness and working towards a nationally consistent framework for retail and commercial leasing. Furthermore, it recommends continuing improvement of transparency, disclosure and dispute resolution, so as to reduce the imbalance between tenants and landlords. Comments have been invited and the Productivity Commission is expected to release a final report in March 2008.
Resale price maintenance: TEAC $190,000 penalty
The Federal Court has handed down a $175,000 penalty against TEAC and $15,000 against its National Sales Manager, Mr Warren Alison, after TEAC admitted to contraventions of the resale price maintenance prohibition. Alison was held to have been knowingly concerned in the resale price maintenance. The chairman of the ACCC has used the opportunity to reinforce the message that suppliers have very limited right to influence their customers’ selling price.
ACCC releases container stevedoring report with duopoly concerns
The ACCC has expressed its concern regarding the structure of container stevedoring services supplied throughout Australia. Of particular concern are the continued duopolies at the major shipping ports involving Patrick and DP World. The long-term lease between port managers and the stevedores has again been highlighted as a barrier to entry. In addition there had been comparatively high returns on assets despite significant increases in the asset bases and only minor decreases in the costs bases. It was noted that the returns earned by the stevedores could only be achieved because price competition could be largely avoided.
BUPA-MBF cleared by the ACCC
After a comprehensive review of a merger between BUPA Australia and MBF Australia Ltd, the ACCC has decided that it would not intervene. Particular attention had been given to the consumer health insurance market in South Australia given BUPA’s strong position in that market and the bargaining power of a merged entity in negotiations with private hospitals. Ultimately, it was decided that continued competition from rivals was likely to constrain the ability of the merged entity in exercising any market power.
Appeal comes down in 3M’s favour
The United States Court of Appeal has handed down its judgment in the case of NicSand Inc. v 3M Company. The case had been brought by NicSand for alleged anti-competitive conduct in the market for do-it-yourself automotive sandpaper. In that market the practice was for the six large retailers carrying this product to offer their shelf space to companies for one year at a time. 3M offered longer term exclusive contracts as well as larger discounts. The court held by a majority of 10:4 that 3M was merely competing on terms that had already been established by the market. The Court of Appeal emphasised that antitrust laws protect competition not competitors.
Double-take on DoubleClick
The European Commission (EC) will conduct a second phase investigation into the proposed merger between Google and DoubleClick. This second phase involves a more thorough and in-depth competition assessment. The review comes after the EC expressed concern that the proposed merger raised competition issues in the market for intermediation and ad-serving for online advertising. The provisional deadline for the EC is now expected to be in early April 2008, a year after the deal was first announced. Readers will recall from the Competition and Market Regulation Update November 2007 that the ACCC had already decided it will not intervene with the deal under its informal merger review program. The United States Federal Trade Commission is also analysing the deal.
More information
For information regarding possible implications for your business, contact a member of the Competition & Market Regulation team.