Small business reforms to the Trade Practices Act

A Bill to amend the Trade Practices Act 1974 (TPA) was tabled in the House of Representatives today. The legislation, if passed, will amend sections 46 and 51AC (among other provisions) of the TPA to enhance the protection of small businesses from misuse of market power and unconscionable conduct in business dealings. It will also provide for a Deputy Chairperson position for the ACCC concerned with small business matters.

Section 46 (misuse of market power)

Section 46 of the TPA prohibits a corporation from taking advantage of a ‘substantial degree’ of market power for anti-competitive purposes. Small businesses have expressed concerns that the High Court’s decision in Boral v ACCC¹  made it difficult for plaintiffs to bring successful claims under section 46. This Bill is meant to address some of those concerns.

As previewed in the June 2007 Competition and Market Regulation Update, the section 46 amendments attempt to address predatory pricing, leveraging, and the meaning of ‘substantial degree’ of power in a market.

Substantial degree of power

In relation to establishing whether a firm has a substantial degree of power in a market, the Bill clarifies that:

1. more than one corporation may have a substantial degree of power in a market
2. a body corporate may have a substantial degree of power in a market even though the body corporate does not substantially control the market
3. a body corporate may have a substantial degree of market power even though the body corporate does not have absolute freedom from constraint by the conduct of:
   1. competitors or potential competitors, or
   2. others to whom or from whom the body corporate supplies or acquires goods or services in that market
4. courts ‘may’ have regard to the power that results from:
   1. any contracts, arrangements or understandings that the body corporate has with another party, and
   2. any covenants that the body corporate is bound by or entitled to the benefit of.

Whether these provisions result in any substantive change, rather than clarification of existing law, is a matter for debate. The language added with respect to (a)–(c) seems simply to elaborate without obviously altering the existing mandatory considerations in subsection 46(3), while (d) includes almost self-evident considerations.

Section 46(3) currently lists factors that courts ‘shall’ have regard to in determining the degree of power that a body corporate has in a market. Interestingly, the Bill adds factors that courts ‘may’ have regard to in determining the degree of power that a body corporate has in a market, and indicates that these factors are non-exhaustive. Whether these permissive considerations will have any impact on courts is far from certain.

Furthermore, the language of the provisions uses the word ‘control’. The Federal Court of Australia in considering a previous version of section 50 of the TPA (which relied on dominance) suggested that the words ‘dominate’ and ‘dominant’ involved a lower level of ‘competitive pressure’ than the word ‘control’.²  Whilst these comments arose in the context of the case under section 50 of the TPA, courts may refer to their previous interpretations of this term in analysing the new provisions, which could further muddy the already muddy waters. The language of ‘control’ is not used in the existing subsection 46(3) which simply refers to the assessment of the degree of power held in a market.

Predatory pricing

The Bill permits courts to consider whether a corporation has priced goods or services below ‘relevant cost’ for a sustained period and the reasons for such conduct (in determining whether a corporation has misused its market power). This provision is meant to address predatory pricing.

The Bill however does not insert a reference to a reasonable prospect or expectation of recovering losses incurred by below-cost pricing, but includes a more general reference to the corporation’s ‘reasons’ for the conduct. The Explanatory Memorandum notes that two other options had been considered: amending the TPA so that it is not necessary to demonstrate a capacity to recoup losses, or amending the TPA so that courts may consider the capacity to recoup losses. The Bill, by including no reference to recouping losses, arguably does not provide courts with much guidance about whether it is a necessary factor, a factor to consider, or whether it should be considered at all.

Furthermore, the Bill does not define ‘relevant cost’. It leaves courts to determine what ‘cost’ (long run marginal cost, average cost, short run marginal cost or some other cost) is relevant.

This amendment does not limit the matters that courts may consider in determining whether a corporation has misused its market power. Arguably, this provision does little more than give courts the power they already have.

Leveraging across different markets

The Bill aims to prevent leveraging of market power across different markets, by providing that a corporation must not take advantage of a substantial degree of market power ‘in that or any other market’ for one of the anti-competitive purposes in the section.

This amendment probably does little more than expressly state what is already embedded in section 46.

Section 51AC (unconscionable conduct in business transactions)

Section 51AC of the TPA prevents unconscionable conduct in certain business transactions. The section does not apply if the price of the transaction is in excess of a certain threshold, and may not be enforced by publicly listed companies. The Bill:

• permits courts to consider whether a party has a contractual right to unilaterally vary a term or condition of a contact in determining whether conduct is unconscionable,³ and
• increases the transaction limitation of the section from $3 million⁴ to $10 million, thereby protecting a greater range of transactions entered into by small businesses.

As mentioned, section 51AC may be enforced by companies that are not publicly listed. Although the section is meant to protect small businesses, it arguably still may be enforced by large companies provided they are not publicly listed. Query whether the amendments should have addressed this peculiarity.

We also note that the recent amendment to the TPA—section 93AB—addresses notification of collective bargaining agreements to the ACCC, and applies a threshold limitation of $3 million (except for selected industries). It may be argued that the threshold limitation should similarly be raised to $10 million (as the Bill will do to the threshold limitation of 51AC).

Deputy Chairperson

The Bill also provides for a second Deputy Chairperson position for the ACCC, to be filled by a person who is experienced in small business matters.

The Deputy Chairperson is an important role within the ACCC. If this person does bring an increased focus on enforcing provisions of the TPA in favour of small businesses, this could prove to be a more substantive change than the other proposed amendments to the TPA.

Implications

The government and legislators expect that the amendments will protect small businesses by making it easier to establish misuse of market power and unconscionable conduct by their competitors.

Certainly, more transactions are potentially protected from unconscionable conduct by the increase in the transaction limitation from $3 million to $10 million. In addition, the creation of a Deputy Chairperson position focussing on small business arguably will increase the enforcement of provisions protecting small business.

However, some of the provisions permit courts to consider factors they already had the power to consider (ie unilateral variation of contract terms in relation to unconscionable conduct, and below-cost pricing in relation to misuse of market power). Other provisions use ambiguous language (ie the terms ‘control’ in relation to misuse of market power, and ‘relevant costs’ in relation to predatory pricing). And, other provisions arguably provide courts minimal direction (ie the impact of recouping losses in predatory pricing).

Thus the suggested changes may have the unintended consequence of giving lawyers and courts more text to debate, without necessarily clarifying the underlying principles and perceived difficulties.

Footnotes

1. (2003) 195 ALR 609
2. Trade Practices Commission v Ansett Transport Industries (Operations) Pty Ltd (1978) 20 ALR 31
3. Section 51AC does not limit the factors that courts may consider in determining whether conduct is unconscionable
4. For a recent case applying the $3 million transaction limitation, see Ford Motor Company v Jefferson Ford Pty Ltd [2007] FCA 870

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