Competition and Market Regulation Update November 2008

In this month’s Competition and Market Regulation Update we explore the following:

New Bill introduces criminal sanctions for cartel conduct

Airlines to face court over alleged price-fixing cartel

Bank merger update

EC releases revised guidelines for merger control

ACCC consults on digital radio service undertakings

Treasurer declares Pilbara railway lines

New Bill introduces criminal sanctions for cartel conduct

The Federal Government’s new Bill, which it plans to introduce to parliament before the end of the year, creates a new regime imposing criminal sanctions for serious cartel conduct. The Bill, if passed, will bring Australian law in this area into line with a number of other jurisdictions which have criminal sanctions for similar conduct.

The proposed legislation is, in a number of respects, quite different to the exposure draft released by the government earlier this year (as discussed in our February update).¹

Key elements

The key elements of the Bill are as follows:

• Cartel participants may face jail sentences of up to 10 years.
• Criminal liability will not be dependent on proof that the person has acted ‘dishonestly’. Rather the prosecution will only need to show that the person has acted with the knowledge or belief that the contract, arrangement or understanding involves cartel conduct.
• The Bill does not focus only on criminal sanctions. It also creates new civil offences that mirror the criminal offences. The key distinctions are that criminal liability:
  • must be proven beyond a reasonable doubt, and
  • can only arise if the party is shown to have the requisite knowledge or belief noted above.
• The ACCC will have the power to ask the Federal Police to intercept telephone communications (after obtaining a warrant to do so).

Prohibited conduct

The proposed offences prohibit the making, or giving effect to, a contract, arrangement or understanding (CAU) with a competitor (or potential competitor) to fix prices, restrict output, allocate customers, suppliers or territories or rig bids.

Protection against liability is available in instances where:

• a collective bargaining notice, or authorisation, is in force, or the conduct is conditional on ACCC authorisation
• the CAU is between related parties, or
• the CAU is between joint venture parties and was entered into for the purposes of the joint venture.

Price fixing

In the case of price fixing (in contrast to other types of cartel conduct), liability may arise if a CAU has the effect, or is likely to have the effect, of fixing prices regardless of whether it was the party’s intention to do so. Specifying a recommended retail price however (where the retailer concerned is free to decide whether or not to charge that price) will continue to be legitimate conduct. 

Airlines face court over alleged price-fixing cartel

The ACCC has instituted proceedings against Qantas and British Airways in relation to an alleged price-fixing cartel involving fuel surcharges for the carriage of air cargo on international routes.

Both airlines have reached an agreement with the ACCC in relation to the orders that the ACCC will seek from the court after the airlines admitted to conduct contravening the Act and provided information to ACCC investigators under the ACCC’s Cooperation Policy.

The orders sought against British Airways include:

• an injunction restraining British Airways from engaging in prohibited price-fixing in relation to air cargo services for a period of five years, and
• pecuniary penalties of $5 million.

The orders sought against Qantas include:

• an injunction restraining Qantas from engaging in prohibited price-fixing in relation to air cargo services for a period of three years, and
• pecuniary penalties of $20 million.

The decision as to the appropriate level of penalties will, however, ultimately rest with the court.

Further proceedings against other international airlines allegedly involved in the cartel are expected to be initiated by the ACCC at a later time.

The ACCC has not instituted proceedings against individual executives of the airlines.

Bank merger update

Westpac’s acquisition of St George Bank, which will result in Westpac becoming Australia’s largest mortgage provider, has now received the Federal Government approval required under both the Financial Sector (Shareholdings) Act 1998 (Cth) and the Banking Act 1959 (Cth).

The Federal Government’s approval is subject to certain conditions aimed at minimising any detriment to stakeholders, such as consumers and employees, that might result from the merger, including that the banks must:

• maintain their existing number of branches and ATMs (the presence of which was identified by the ACCC as an important determinant for consumer choice for retail banking products)
• retain all current retail banking brands (including Bank SA), and
• maintain dedicated management teams for each bank’s retail banking activities.

The ACCC provided informal clearance for the merger in August this year when it concluded that the merger was unlikely to result in a substantial lessening of competition in any relevant market.

In the meantime, the ACCC is undertaking market inquiries relating to Commonwealth Bank’s (CBA) proposed acquisition of BankWest and St Andrews Australia from United Kingdom bank Halifax and Bank of Scotland (HBOS).

BankWest’s parent company, HBOS has been hit hard by the global credit downturn, resulting in plans for the sale of HBOS to Lloyds TSB plc, most likely to take place in the early part of 2009. The United Kingdom government has been instrumental in ensuring this transaction goes ahead including by:

• issuing an Intervention Notice allowing the transaction to be cleared by the Secretary of State (rather than be subject to the normal two stage competition regime) if public interest considerations over-ride any competition concerns identified by the OFT
• approving an order which effectively allows the Secretary of State to consider the ‘stability of the financial system’ as a relevant public interest in clearing the merger, and
• injecting a combined total of £17 billion in capital (subject to certain conditions) into the two banks, giving the government a significant degree of control over the banks’ futures with a 43.5 per cent shareholding in the merged entity.

EC releases revised guidelines for merger control

As the ACCC continues its work in finalising its draft Merger Guidelines (guidelines), international developments on merger control may inform developments. The European Commission’s (EC) revised guidelines on remedies have been released this month—providing greater certainty to merging parties in the European context as to the type and content of remedies the EC is likely to accept to resolve competition concerns arising from a transaction.

The guidelines follow a 2005 study which found that only 57 per cent of all remedies analysed succeeded in ensuring that effective competition was maintained after the merger.

Like the ACCC in its draft guidelines, the EC has noted that structural undertakings such as divestitures are generally preferable insofar as the divestiture will result in a stand-alone business that is immediately viable in the hands of a suitable purchaser. Such a divestiture can prevent potential competition concerns arising from the outset and does not require on-going monitoring to ensure its effectiveness.

As well as noting a clear preference for divestitures, the EC sets out specific concerns it has with such other remedies falling short of divestiture (for example, licensing of IP rights or brands). The guidelines do however provide specific guidance on the circumstances in which remedies falling short of divestiture might be acceptable. The guidelines thereby enable merging parties to formulate remedies so as to adequately address those issues and allow sufficient certainty that a merger that is subject to those commitments will not impede competition.

While the content of the guidelines has been criticised by some as leaning towards over-inclusion or creating a risk of disproportionate remedies, the detail provided on the EC’s views means that the guidelines will be a valuable resource to merging parties and their advisers. A similar initiative by the ACCC would be of assistance for merging parties in Australia.

ACCC consults on digital radio service undertakings

From early 2009 digital radio services will be rolled out across metropolitan Australia. Thirteen digital radio multiplex transmitter licences will be granted by the Australian Communications and Media Authority (ACMA), eight of which are to be allocated to joint venture companies representing commercial and community broadcasters. The joint venturers will multiplex separate streams of content received from individual broadcasters and transmit that combined stream of content to end users in each licence area.
In each metropolitan area, only one or two licences will be granted. This creates the potential for an imbalance in the bargaining power of the licence holders on the one hand and the individual broadcasters operating in those areas on the other. To address this concern, an access regime similar to that found in Parts IIIA and XIC of the Trade Practices Act 1974 (Cth) has been created. Under the regime, ACCC approval for access undertakings submitted by the licence holders is required before the roll out can commence in each area. The undertakings would specify proposed terms and conditions of access, including terms dealing with price and quality of service, that will apply to all access seekers without discrimination.

Identical draft access undertakings have already been submitted to the ACCC by each joint venture company. The ACCC is currently engaging in public consultation before deciding whether or not to approve the draft undertakings. Once approved, the undertakings will be binding and can be enforced in the Federal Court.

Interested parties can make submissions to the ACCC on the content of the undertakings before 21 November 2008.

Treasurer declares Pilbara railway lines

Following an application by Fortescue Metals Group, the Federal Treasurer, the Hon. Wayne Swan, has ‘declared’ services associated with three railway lines in the Pilbara region of Western Australia under the access regime in Part IIIA of the Trade Practices Act 1974 (Cth).

‘Declaring’ a service does not mean that access is a fait accompli. Rather, declaration is just the first step in a two-step process by which access may be granted (this process, consisting of ‘declaration’ followed by negotiation/arbitration on terms of access, was described in our recent update on the High Court’s decision in BHP Billiton v National Competition Council).²

Importantly, in the event of arbitration on the terms of access the ACCC may ultimately decide not to allow Fortescue access to the railway lines.

Both the decision to declare the services and any subsequent arbitration decisions can, and in this case are most likely to, be appealed by the parties to the Australian Competition Tribunal. Such strategies mean that a final resolution of this matter is unlikely to occur in the near future.

Endnotes

1. Competition and Market Regulation Update February 2008
2. High Court assesses access to railways in the Pilbara