Competition and Market Regulation Update August 2007
08 August 2007Contents
In this month's Competition and Market Regulation Update we explore the following developments:
- The ACCC attacks Google in court
- Cartel crackdown continues — $9.1 million penalties for air-conditioning cartel
- South Australian surgeons receive $110,000 in penalties
- How will the ACCC and ACMA analyse deals that involve both regulators?
- ACCC determination in Sydney water access dispute — first of its kind
- In brief
The ACCC attacks Google in court
In a move that has attracted widespread attention and commentary, the Australian Competition and Consumer Commission (ACCC) has instituted legal proceedings in the Federal Court against Google and Trading Post for alleged misleading and deceptive conduct in relation to sponsored links on the Google website. This action could prove to be a test case for the ACCC with implications not just for Google, but for all search engines.
The ACCC claims that in 2005, sponsored links titled ‘Kloster Ford’ and ‘Charlestown Toyota’ allegedly directed users to Trading Post’s website. (‘Kloster Ford’ and ‘Charlestown Toyota’ are competitors of Trading Post.) The ACCC alleges that Trading Post, by paying for the sponsored links, and Google by publishing the links, engaged in misleading and deceptive conduct in breach of the Trade Practices Act 1974 (TPA).
The case against Google will revolve around ‘dynamic keyword insertion’, a Google tool that automatically inserts an advertiser’s chosen keywords into its ads. In other words, if an advertiser chooses a competitor’s name as one of its keywords, that competitor’s name may automatically appear in the advertiser’s sponsored link (when a web user searches for that keyword). The ACCC believes that this type of conduct misleads consumers by implying an association that does not exist between a company and its competitors. If Google loses this case, it may have to change its operating model or have to police millions of keywords.
The ACCC also claims that Google does not adequately distinguish between sponsored links from ‘organic’ search results. Sponsored links on Google appear in a coloured box across the top of the page, and in a column along the right-hand side of a search results page, each with the heading ‘sponsored links’. In 2002, the US Federal Trade Commission (FTC) conducted a year-long investigation of the use of sponsored links in various search engines. Although recommending clearer disclosure of the use of paid inclusion in search results, the FTC ultimately took no formal action.
The ACCC action came as a surprise to the industry, and the Internet Industry Association expressed disappointment that the regulator resorted to legal action against one participant, ‘rather than consulting more broadly on an issue that affects the entire industry’. Google Australia’s spokesperson also responded vehemently, stating that ‘Google Australia believes that these claims are without merit and we will defend against them vigorously. They represent an attack on all search engines and the Australian businesses, large and small, who use them to connect with customers throughout the world.’
The ACCC appears to be the first regulator in the world to attack Google’s conduct from a trade practices perspective through court action. The more common course is for competitors to defend intellectual property rights in their branding to undermine others’ attempts to free-ride in this way (ie use keywords invoking a competitor).The outcome of this case may have a significant impact on all search engines in the future.
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Cartel crackdown continues — $9.1 million penalties for air-conditioning cartel
The Federal Court imposed more than $9.1 million in penalties on 11 companies and 18 individuals for bid-rigging and price fixing in the commercial air-conditioning industry in an Australian Competition and Consumer Commission (ACCC) action.
Between 1991 and 2003, companies agreed on who would submit the lowest price for particular jobs in tendering for commercial air conditioning and mechanical services projects in Western Australia. According to ACCC Chairman, Graeme Samuel, the companies involved ‘represented nearly every major commercial mechanical services contractor in WA.’
The individuals subjected to penalties were directors or senior managers who represented their companies in making the illegal agreements.
Many of the arrangements were made through industry meetings of the Air-conditioning and Mechanical Contractors Association which discussed upcoming tenders for the supply of commercial and industrial air conditioning services. This case underscores the need to be extremely careful whenever you meet with a competitor, including industry association meetings.
The ACCC crack-down on cartels and the new era of competition penalties in Australia are coming to fruition. This result is welcome news to the ACCC, who just recently lost a cartel action in the Federal Court (see The Leahy petrol pricing decision). However, in this case the ACCC never had to prove its claims, as each of the respondents (aside from one in liquidation) admitted their involvement in the anti-competitive conduct and cooperated with the ACCC.
South Australian surgeons penalised $110,000
In the March 2007 edition of the Competition and Market Regulation Update we noted the action brought by the Australian Competition and Consumer Commission (ACCC) against two South Australian cardiothoracic surgeons accused of forming and giving effect to anti-competitive agreements. The Federal Court has now handed down its judgment and imposed total penalties of $110,000.
The surgeons had been accused of entering into an arrangement to hinder and prevent a newly qualified surgeon from entering or supplying his services in South Australia.
In addition, one of the surgeons had made an attempt to enter a non-compete arrangement with the aim of not competing for surgical work across two hospitals in South Australia.
The Federal Court noted that the surgeons had made admissions regarding the facts and agreed with the ACCC an appropriate penalty to be imposed.
The ACCC’s success in this matter is a timely reminder of the applicability of competition laws to individuals and professionals. It also highlights the difficulties associated with markets such as those for surgical work in which a great deal of reliance is placed on the recommendations of surgeons and in which trainee-surgeons under-study their eventual competitors. Given the significance of the penalties for individuals, considerable care must be taken.
How will the ACCC and ACMA analyse deals that involve both regulators?
Following the Federal Government’s changes to media ownership laws in November 2006, the increased merger activity and consolidation taking place has raised an interesting issue of the respective roles of the Australian Competition and Consumer Commission (ACCC) and the Australian Communications and Media Authority (ACMA) and how the two will interact.
The recently announced acquisition of Southern Cross Broadcasting by Macquarie Media Group, with a spin off to Fairfax Media, is one such example. The proposed $1.3 billion deal involves a carve-up in which Macquarie will hold on to Southern Cross’s regional television assets, but spin off Southern Cross’s radio assets to Fairfax, including the 3AW and 2UE radio stations.
While the ACCC is still considering the deal, ACMA has already given its approval. ACMA’s analysis revolves around the Broadcasting Services Act 1992 (BSA) under which the regulator may provide its prior approval for any breach that may take place. The Macquarie deal would have temporarily breached the media diversity rules in the BSA until the radio assets were divested to Fairfax. ACMA has approved the temporary breaches subject to a number of undertakings involving divestment of the offending assets within a strict timetable.
The ACCC, in continuing its investigation, has expressed its preference for completing the market analysis of media asset acquisitions simultaneously with ACMA’s assessment. In this case, ACMA gave approval to Macquarie before the ACCC had all the necessary information or undertaken full market inquiries.
The ACCC has cited the efficiency benefits of a concurrent analysis by the regulators as the main reason for its preference. The analysis conducted by the respective regulators is significantly different. ACMA approval has little bearing on the ACCC’s determination in its market analysis. However, a concern arises in the giving of undertakings, where there could be potential conflict between the possible undertakings, suggesting there is a need for coordination between the regulators.
The comments from the ACCC may be an important consideration for participants in the merger review process when deciding how to approach achieving clearance.
ACCC determination in Sydney water access dispute — first of its kind
The Australian Competition and Consumer Commission (ACCC) made a determination in relation to its arbitration of an access dispute between Services Sydney and Sydney Water Corporation, releasing its arbitration report on 19 July 2007. The access dispute related to the pricing methodology to be used to determine access prices to be paid by Services Sydney for certain declared services. This ACCC determination is the first application of access pricing to the water industry in Australia.The ACCC determination is just one battle in the long war of Services Sydney to gain access to services provided by Sydney Water. Back in March 2004 Services Sydney applied to the National Competition Council (NCC) for a recommendation under Part IIIA of the Trade Practices Act 1974 to declare Sydney Water’s sewage transmission and interconnection services. Although the NCC recommended that certain services be declared, the New South Wales minister did not do so. Consequently, Services Sydney applied to the Australian Competition Tribunal (tribunal) for a review of the New South Wales minister’s decision.
On 21 December 2005, the tribunal set aside the minister’s decision and declared Sydney Water’s sewage transmission and interconnection services for 50 years. (For a more detailed discussion of the tribunal decision, see Declaration of Sydney Water’s sewage and interconnection services). Once the services were declared, Services Sydney had the right to negotiate terms and conditions of access with Sydney Water. As the parties were unable to agree on access arrangements, Services Sydney requested the ACCC to arbitrate in November 2006.
The war is not yet over. Services Sydney has applied to the tribunal for review of the ACCC’s determination. Furthermore, while the ACCC has arbitrated the pricing methodology to be used, the parties must still negotiate actual final prices, terms and conditions for access. Services Sydney remains concerned that Sydney Water lacks commercial incentives to negotiate these final terms and conditions. If the parties are unable to agree, they may have to again request that the ACCC determine the price through arbitration.
Meanwhile, in November 2006, the New South Wales government introduced legislation, representing the country’s first access regime for water companies wanting to compete with state-owned utilities. The legislation has yet to come into force.
The ACCC determination on pricing, the earlier tribunal decision to declare Sydney Water’s sewage transmission and interconnection services, and the New South Wales access regime are landmarks for the Australian water industry. They are paving the way for similar applications by third parties seeking access to other water infrastructure, as well as the adoption of access regimes in the water industry throughout Australia.
In brief
Opposition promises an ACCC grocery price review
The Leader of the Opposition, the Hon Mr Kevin Rudd, has announced that if the Opposition were to gain power in the upcoming election the Australian Competition and Consumer Commission (ACCC) would be given extra powers to monitor prices and publish regular surveys of grocery costs. The proposed National Grocery Pricing Inquiry will be targeted to determine the cause of significant increases in grocery prices and the role played by the market power of the major players in price determination.
Rio Tinto’s tilt at Alcan
Rio Tinto’s acquisition of Alcan remains subject to regulatory approval in several countries, including Australia. The ACCC is currently undertaking an informal review of the proposed acquisition, investigating the merger’s effect on the market for aluminium and its base products bauxite and alumina. The combined entity is expected to have production capacity in bauxite and alumina production accounting for approximately 33 per cent of total market output in Australia and close to 41 per cent for aluminium.
ACCC — Commerce Commission cooperation agreement
The ACCC and New Zealand’s Commerce Commission have signed another cooperation agreement, ‘that will make it easier for the two commissions to coordinate activities.’ The Cooperation Agreement replaces the 1994 Memorandum of Understanding that existed between the two regulators.
Jetstar turns tiger on phantom airfares
Jetstar has accused incoming rival Tiger of advertising phantom fares, after the company claimed it had its staff search Tiger’s website but could only find a number of advertised discounted airfares actually available for purchase. Jetstar has threatened to make a complaint to the ACCC. In the meantime, Jetstar has had to defend its decision not to match Tiger’s $59 airfares on the Melbourne to Perth route despite claiming it would match any competing fare advertised.
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