Competition and Market Regulation Update July 2007

11 July 2007

Contents

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

• Trade Practices Act reforms intended to improve protections for small business
• ACCC ‘appeals’ to the government for changes to TPA cartel provisions
• Petrol prices — ACCC inquiry underway
• Symbion takeover — next stage for ACCC inquiries
• Anti-dumping undertakings in OneSteel/Smorgon merger
• Landmark decision — minimum resale price maintenance no longer illegal per se in the US!

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Trade Practices Act reforms intended to improve protections for small business

The Federal Government has announced reforms to the Trade Practices Act 1974 (TPA) designed to improve protections for small business.

The Trade Practices Legislation Amendment Bill (No 1) 2007 was tabled in the House of Representatives on 20 June 2007. If passed, it will amend the TPA provisions related to misuse of market power and unconscionable conduct in business dealings. It will also establish a second Deputy Chairperson position for the Australian Competition and Consumer Commission (ACCC), with a focus on small business.

The proposed amendments to the misuse of market power provisions in section 46 of the TPA are intended to:

• clarify the meaning of ‘substantial degree of power in a market’
• tackle predatory pricing, by permitting courts to consider whether a corporation has priced goods or services below ‘relevant cost’ for a sustained period, and the reasons for such conduct
• prevent leveraging of market power across different markets, and
• take account of coordinated market power, by allowing courts to consider any market power the corporation has that results from any agreements it has with parties outside its corporate group.

The proposed amendments to the small business unconscionable conduct provisions in section 51AC would:

• increase the price of transactions to which the section will apply from $3 million to $10 million, thereby protecting a greater range of transactions entered into by small businesses, and
• permit courts to consider whether a party has a contractual right to unilaterally vary a term or condition of a contract in determining whether conduct is unconscionable.

The amendments are intended to improve the protections available to small businesses under the TPA. Whether they will be successful in achieving this end in a practical sense is a matter for debate. For a more detailed assessment of these provisions, see our recent publication, Small business reforms to the Trade Practices Act.

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ACCC ‘appeals’ to the government for changes to TPA cartel provisions

The ACCC has announced its decision not to mount a Federal Court appeal against the court’s decision to dismiss the ACCC’s price fixing action against eight Geelong petrol retailers, but has decided to seek legislative reform instead (for a discussion of the decision in the Leahy case, see our recent publication, The Leahy petrol pricing decision: The curious incident of the dog in the night-time).

Following the court’s decision, Chairman of the ACCC, Graeme Samuel, voiced his concern about the increasing level of difficulty associated with prosecuting cases of price fixing. He has written to the Treasurer seeking changes to the section of the TPA under which price fixing actions are taken, section 45.

In particular, Mr Samuel believes changes are necessary to the ‘contract, arrangement or undertaking’ requirement under section 45 so as to clarify that it represents three distinct levels of collusion with decreasing levels of formality. He also believes that changes are needed to address the evidentiary issues highlighted in the Leahy petrol price decision, including greater acceptance of sworn admissions and more favourable treatment of circumstantial evidence that points to collusion.

Mr Samuel’s apparent concession of the difficulties facing the regulator under section 45 (seemingly in response to a single Federal Court decision) is interesting in the context of the ACCC’s continuing emphasis on the evils of cartels and recently renewed call for criminal sanctions for cartel conduct. Reaction to Mr Samuel’s call for reform has been mixed and Freehills’ Bob Baxt, as quoted in the Australian Financial Review (22 June 2007), has recommended that care be taken to avoid knee-jerk reform on the basis of one decision.

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Petrol prices — ACCC inquiry underway

The Treasurer has directed the ACCC to launch an inquiry into petrol pricing, following months of consumer distress over high price levels.

The inquiry comes after the ACCC’s monitoring of petrol prices revealed digressions between the prices charged by local retailers and the Singapore benchmark price (which is usually referred to as the benchmark for petrol prices in the region).

Although the inquiry will be the 46th governmental inquiry into petrol prices, the present reincarnation may produce a more substantive outcome (at least in terms of understanding how competition in the industry works and where the roadblocks exist). The ACCC has wide-ranging information gathering powers as part of the inquiry, and in particular, it intends to question witnesses of interest under oath, including executives and employees of the major petrol companies. We expect that questions on matters such as whether the Singapore benchmark is appropriate and why prices sometimes digress from the benchmark will be asked.

Primarily, the inquiry is designed to determine whether there is any anti-competitive behaviour in the industry. Readers should note that ‘price-following’, the practice in which no agreement is entered into between competitors, but competitors follow the price levels set by others, does not of itself contravene the TPA.

There is also no prohibition of so-called ‘price gouging’ (charging a high price in peak demand periods) under the TPA. Consequently, there may be little action that the ACCC can ultimately take, even if it finds that prices are sometimes higher than the appropriate benchmark.

However, beyond any allegations of price-fixing (which seem unlikely to be proven at this stage), the government is hoping that the ACCC will be able to uncover whether significant competitive bottlenecks exist in the petrol market. The scope of the inquiry will include focus on the structure of the industry, the extent of upstream competition and other impediments to efficient petrol pricing. If analysis of these issues highlights competitive restraints, the market may receive greater ACCC and governmental scrutiny, and at the extreme, legislative reform to tackle the issues.

The ACCC has released an issues paper on matters relevant to the inquiry and is seeking views in both written submissions and through public hearings commencing in August 2007. 

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Symbion takeover — next stage for ACCC inquiries

The ACCC has released a statement of issues raising concerns about Healthscope’s proposed acquisition of Symbion Health Limited’s pathology business.

Healthscope proposes to acquire all of Symbion Health but to subsequently divest the pharmacy and consumer businesses to private equity investors, Ironbridge Capital and Archer Capital. Healthscope proposes to retain Symbion’s pathology, medical centre and diagnostic imaging businesses. The ACCC indicated in the statement of issues that it does not consider Healthscope’s acquisition of the medical centre and diagnostic imaging businesses as likely to raise concerns.

The ACCC’s concerns about the pathology acquisition centre around the effect of the acquisition on the Victorian pathology services market and the likely increased ability and incentive for coordinated conduct in Victoria, Queensland and Western Australia following the acquisition.

Symbion, operating under the names Dorevitch Pathology and Gippsland Pathology Services, is currently the largest pathology provider in Victoria. Healthscope, operating as Gribbles Pathology, is the second largest. According to figures provided by Healthscope to the ACCC, the combined entity will hold close to 54 per cent of the market in Victoria, which the ACCC considers to be characterised by high barriers to entry and expansion and few substitute pathology service providers.

Additionally there is concern that the smaller, niche operators in the market are unlikely to provide sufficient competitive constraints.

The ACCC has sought comments and submissions from interested parties by 11 July 2007, with a view to making a final decision on whether or not to grant informal clearance to the proposed merger on 25 July 2007.

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Anti-dumping undertakings in OneSteel/Smorgon merger

After a long process, the ACCC has decided not to intervene in the proposed acquisition of Smorgon Steel by OneSteel after accepting court enforceable undertakings limiting OneSteel’s ability to make ‘speculative or strategic’ anti-dumping applications.

When an importer sells a product in Australia at a lower price than the price charged in its home market, that importer engages in a form of price differentiation known as ‘dumping’. Domestic manufacturers can seek remedies, by submitting ‘anti-dumping’ applications to the Australian Customs Service, but such remedies will only be granted where the dumping causes or threatens to cause material injury to an Australian industry.

OneSteel and Smorgon both manufacture and distribute steel long products, including structural beams, rod, bar, wire, reinforcing products and pipe and tube.

Although they are the only Australian manufacturers of most of these products, they face competition from imports. The ACCC believes that anti-dumping applications can have a chilling effect on this competition because they create uncertainty and can lead to shortages in the availability of imports while the Australian Customs Service examines the applications.

Therefore, to maintain the level of competition the merged entity will face, the ACCC accepted a five year undertaking from OneSteel, which requires OneSteel to compensate importers who have incurred expenses or losses as a result of unsuccessful anti-dumping applications. Time will tell whether the undertaking operates as enough of a financial disincentive to the merged entity in making speculative anti-dumping applications.

The ACCC also decided not to intervene in the proposed acquisition of Smorgon's distribution assets by BlueScope because independent distributors could competitively constrain the merged entity.

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Landmark decision — minimum resale price maintenance no longer illegal per se in the US!

In a landmark decision, the United States Supreme Court has reversed its long established rule that it is per se illegal for a manufacturer to agree with its distributor to set the minimum price the distributor can charge for the manufacturer’s goods (ie minimum resale price maintenance).

The per se rule treats certain categories of restraints as necessarily illegal, eliminating the need to study the reasonableness of a particular restraint. It is reserved for those restraints that are almost always anti-competitive. Because minimum resale price maintenance can have potential pro-competitive benefits, the court deemed its use inappropriate.

Minimum resale price maintenance will now be evaluated under the ‘rule of reason’, which involves a case-by-case analysis of a restraint’s anti-competitive and pro-competitive effects. On this approach, a minimum price restraint imposed by a manufacturer on its distributor will only be illegal if the anti-competitive effects of the restraint outweigh the potential benefits in the particular case.

Whether Australia will follow suit will be a question for parliament. Unlike the United States’ primary antitrust law, section 48 of the TPA specifically makes minimum resale price maintenance illegal per se. Given the more pervasive use of per se rules in Australia, including for such innocuous practices as third-line forcing, it will likely be some time before any change is effected.

It is interesting to note that on the very same day of the United States decision, the Australian Competition and Consumer Commission was busy enforcing the prohibition against minimum resale price maintenance. It instituted legal proceedings in the Federal Court against TEAC alleging the company engaged in resale price maintenance in relation to TEAC branded electronic goods including televisions, digital set-top boxes and portable music devices.

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