Competition and Market Regulation Update October 2007

09 October 2007

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

• Controversial below cost pricing ‘Birdsville amendment’ takes effect
• EU court rejects Microsoft appeal and upholds €497 million in fines
• ACCC homes in on the petrol industry
• ACCC investigates Google’s proposed $3.1 billion acquisition of DoubleClick
• Mergers in media, retail and home entertainment keep the ACCC busy
• In brief

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Controversial below cost pricing ‘Birdsville amendment’ takes effect

The Trade Practices Legislation Amendment Act (No.1) 2007 (Act) came into force on 25 September 2007. The Act makes a number of amendments to the Trade Practices Act 1974, intended to enhance the protections available to small businesses under the misuse of market power and unconscionable conduct provisions of the Trade Practices Act. (See Small business reforms to the Trade Practices Act for a discussion of these amendments.)

In addition, the Act includes the controversial amendment proposed by Senator Barnaby Joyce, intended to specifically target predatory pricing by introducing a new prohibition on ‘below cost pricing’.

The new section 46(1AA) prohibits a corporation which has a substantial share of a market from supplying goods or services for a sustained period at a price less than the cost to the corporation of supplying such goods or services for the purpose of:

• eliminating or substantially damaging a competitor
• preventing the entry of a person into a market, or
• deterring or preventing a person from engaging in competitive conduct in a market.

Until now, predatory pricing behaviour was examined under the general prohibition in section 46(1) on corporations with a ‘substantial degree of power in a market’ from taking advantage of that power for a proscribed purpose.

Key elements of the new prohibition

The new ‘below cost pricing’ prohibition introduces several new concepts into the Act.

Substantial share of a market

The amendment applies to corporations with a ‘substantial share of a market’. This differs from section 46(1), whose operation is contingent on a corporation having a ‘substantial degree of power in a market’.

The distinction between market share and market power is an important one, with the latter involving an analysis of a range of factors relevant to an assessment of the corporation’s position in the market. In addition to the corporation’s market share, these include factors such as barriers to entry and vertical integration.

The precise meaning of ‘substantial share of a market’ in section 46(1AA) is unclear, although section 46(1AB) provides that courts may have regard to the number and size of the competitors of the corporation in the market.

‘Sustained period’ and ‘relevant cost’

The concepts of ‘sustained period’ and ‘relevant cost’ are both new, undefined, additions to the Act.

Taking advantage requirement eliminated

The new section 46(1AA) prohibition does not require a connection between the corporation’s substantial market share and the relevant pricing conduct. For example, unlike the existing prohibition on the misuse of market power, there is no requirement that a corporation has ‘taken advantage’ of its position. It will be sufficient that it has a substantial market share and that it engaged in the relevant conduct with one of the proscribed purposes.

Recoupment not required

The Explanatory Memorandum to the Act makes it clear that a firm can breach the new prohibition without having a reasonable prospect, expectation, or intention of being able to recover the losses incurred as a result of the below cost pricing (although this can provide evidence of a breach).

The same is made clear in relation to the existing general prohibition on the misuse of market power in section 46(1).

This is meant to address the uncertainty created out of the High Court’s 2003 decision in Boral Besser Masonry v ACCC.

Future outlook

While Senator Joyce has announced that the Birdsville amendment will be ‘good for competition, small business and consumers’, it has been the subject of lively debate by commentators to date.

The precise scope of the new prohibition and the way it will operate are uncertain. This is partly due to the newness of the prohibition and also because new concepts such as ‘substantial share of a market’, ‘sustained period’ and ‘relevant cost’ to the corporation are undefined in the Act and will be open to interpretation by both the ACCC in enforcing the new prohibition and the courts.

If you are unsure of whether your business is at risk under the new Act, seek legal advice.

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EU court rejects Microsoft appeal and upholds €497 million in fines

The European Court of First Instance (court) has recently upheld the European Commission’s decision that Microsoft abused its dominant position by:

• bundling its Windows Media Player with the Windows PC operating system, and
• refusing to supply competitors with ‘interoperability information’ which would allow other manufacturers’ servers to communicate with Microsoft machines in workgroups.

As a result, Microsoft must:

• pay €497 million in fines
• offer an unbundled option for consumers (Windows PC operating system without Windows Media Player), and
• share ‘interoperability information’ with competitors.

Microsoft may appeal this decision to the European Court of Justice, Europe’s highest court of appeal.

The court did annul the European Commission’s decision to create an independent trustee to monitor Microsoft’s compliance. The court also denied that the European Commission could make Microsoft bear the costs of such monitoring.

Shortly after the decision’s release, the United States Department of Justice, who settled a similar case with Microsoft in 2002, criticised the EU’s approach:

'We are … concerned that the standard applied to unilateral conduct by the [Court], rather than helping consumers, may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition'.

The United States has treated software bundling somewhat differently than it treats traditional bundling, allowing consideration of potential pro-competitive effects.

Although the recent decision only applies within Europe, it may encourage regulators in other countries to investigate or bring actions against Microsoft.

The Australian Competition and Consumer Commission (ACCC) has yet to take any action against Microsoft with respect to bundling arrangements. Back in 2000, the ACCC indicated that it would monitor the outcome of the proceedings against Microsoft in the United States, with former Chairman Allan Fels noting: ‘It is likely that the US outcome will be applicable to, and followed, in Australia.’ However, that statement followed a harsher United States lower court decision since modified by the United States appellate court.

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ACCC homes in on the petrol industry

As highlighted in the Competition and Market Regulation Update July 2007, the ACCC’s petrol price inquiry is now in full swing, with the completion of public hearings throughout the nation’s capital cities and a number of regional centres. In addition, the ACCC has been steadily calling witnesses from major petrol retailers and suppliers.

As part of its inquiry the ACCC has also examined shopper docket loyalty schemes, a topic that has caused significant debate during the inquiry. A number of submissions made to the ACCC raise the concern that cross-subsidisation may be taking place in which the cost of discounts under the scheme are subsidised by grocery price increases.

The Federal Treasurer, the Hon Peter Costello, has now agreed to the ACCC’s request to extend the inquiry’s deadline until mid December. The postponement will mean that Government will not have to deal with reform in the midst of the election, and the ACCC will be given more time to assess competition in the industry.

The Labor Party has already promised that it will provide the ACCC with additional investigative powers and appoint a Petrol Commissioner to investigate collusion, should it win the election.

Meanwhile, the ACCC recently commenced criminal proceedings in the Federal Court against a Ballina petrol distributor alleging that the distributor made false representations about the quality and composition of petrol sold at 12 BP-branded service stations in Northern New South Wales.

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ACCC investigates Google’s proposed $3.1 billion acquisition of DoubleClick

On 22 August 2007 the ACCC commenced an informal review of Google Inc’s proposed acquisition of DoubleClick Inc. In a letter sent to industry participants, the ACCC sought comment on 10 issues regarding the effect that the takeover would have on the Australian market.

Both Google and DoubleClick operate in Australia, providing internet advertising-related services to advertisers and web publishers. Whilst Google primarily produces small text ads related to searches, DoubleClick produces banners, videos and other display ads intended more to promote brands rather than generate immediate sales. DoubleClick also provides software to manage the ads and measure their impact on target audiences.

The ACCC’s review is considering such issues as whether separate markets exist within online advertising, whether the merger would be likely to lead to increased prices and whether it could send rival advertising companies out of business. The ACCC has indicated that it will announce its decision on 16 October 2007.

The ACCC review adds to the existing international scrutiny for the Google/DoubleClick merger, which is already being investigated by the United States Federal Trade Commission and European regulators.

Furthermore, as mentioned in Competition and Market Regulation Update August 2007, Google has also recently attracted the ACCC’s attention in a separate Federal Court case, alleging that sponsored advertising links on Google’s website amounted to misleading and deceptive conduct. Note that on 4 October 2007, the ACCC dropped its prosecution of Google's Australian and Irish subsidiaries, but the case against the United States-based parent is still going ahead.

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Mergers in media, retail and home entertainment keep the ACCC busy

Blockbuster/Video Ezy marriage accepted

Video Ezy’s proposed acquisition of Blockbuster Australia, (reported in the Competition and Market Regulation Update June 2007), has received the all clear from the ACCC, subject to an undertaking from Video Ezy.

The undertaking includes restrictions on Video Ezy purchasing new release DVD titles on an exclusive basis in the rental or retail markets for the next five years. This was designed to ease concern regarding the combined entity’s upstream buying power. Video Ezy is also required to implement a comprehensive compliance training program for staff and franchisees. The merged group will have 65 per cent of the home entertainment rental market in Australia.

Riverina acquisition approved for Fairfax

Following its review of Rural Press’s acquisition of Riverina Media Group, which was assessed in light of Fairfax’s subsequent acquisition of Rural Press (commented on in the Competition and Market Regulation Update September 2007), the ACCC has decided not to oppose the merger. The ACCC’s decision was based on its finding that small and medium sized competitors would sufficiently constrain advertising prices in the southern New South Wales region.

ACCC continues to review Southern Cross, Macquarie and Fairfax transactions

In the related acquisitions whereby Macquarie acquires Southern Cross, sells certain Southern Cross metropolitan radio assets to Fairfax and acquires certain regional radio assets from Fairfax, the ACCC’s review continues.

On 13 September 2007 the ACCC indicated that it would not oppose the acquisition by Fairfax of the Southern Cross metropolitan assets, but the ACCC has released Statements of Issues for Macquarie’s proposed acquisitions of Southern Cross and Fairfax’s nine regional radio stations.

The ACCC expressed concerns about the potential competitive impact of Macquarie’s proposed acquisition of Southern Cross in the advertising market in 11 regions. As for Macquarie’s acquisition of Fairfax’s regional radio stations, the ACCC is consulting on its concerns relating to advertising supply in Bundaberg, Port Lincoln and Spencer Gulf. The ACCC has indicated that it will make a final decision on the proposed mergers on 10 October 2007.

Note that the Australian Communications and Media Authority (ACMA) is also currently considering Macquarie’s proposed acquisition of Fairfax’s radio assets in Port Lincoln and Spencer Gulf North. (Subject to agreed divestments, ACMA had already approved Macquarie’s proposed acquisition of Southern Cross in July 2007). (See also the Competition and Market Regulation Update August 2007.)

ACCC on potential Woolworths acquisition of Coles assets

The ACCC has released a Statement of Issues and sought comments regarding potential competition concerns if Woolworths were to acquire certain assets from rival Coles. The ACCC’s review in this case is unusual as the proposed acquisition consists of one of two possible transactions, that is, the acquisition of Officeworks and either Kmart or Target.

According to its preliminary views, the ACCC considers that an acquisition of this nature may substantially lessen competition in a number of product areas involving office supplies or discount department stores. The ACCC’s final decision was expected on 3 October 2007, however it has been delayed by two weeks and is now expected on 17 October 2007.

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In brief

New competition law for China

Significant legislative reform has taken place in the People’s Republic of China, with the passing of the long awaited Anti-Monopoly law which will come into effect on 1 August 2008.

The Anti-Monopoly law has been 14 years in the making and is designed to prohibit cartels, abuse of dominance and anti-competitive mergers. The most interesting aspect of the law for foreign investors is the state security review that they must undergo, in addition to an anti-monopoly review, when seeking to invest in local firms.

High Court overturns ACCC and Full Federal Court decision on access to the Moomba to Sydney Pipeline

On 27 September 2007, the High Court overturned a full Federal Court decision affirming the ACCC’s rejection of the access arrangement for the Moomba to Sydney Pipeline. The High Court found that the methodology used by the ACCC to establish the initial capital base for the pipeline was not made in accordance with the National Third Party Access Code for Natural Gas Pipeline Systems.

Secondary boycott arising out of union negotiations – $100,000 penalty

The Federal Court has imposed penalties in another case involving breaches of the secondary boycott provisions in sections 45E and 45EA of the Trade Practices Act. This follows the decision earlier this year to impose a $120,000 penalty on IPM Operation and Maintenance Loy Yang Pty Ltd in respect of similar conduct (discussed in the Competition and Market Regulation Update April 2007).

The present Federal Court case related to the termination of a contract for the acquisition of plasterboard services by Bovis Lend Lease. Bovis entered into and gave effect to an arrangement or understanding with the Construction Forestry Mining and Energy Union (CFMEU) that it would terminate the contract in order for the CFMEU to continue negotiations on a national enterprise agreement. Bovis cooperated extensively with the ACCC, admitting its contraventions, and was ordered to pay a $100,000 penalty, the ACCC’s costs and injunctions preventing it from engaging in similar contravening conduct for four years. The two cases highlight the need for businesses to take care not to breach competition laws during union negotiations.

Trade Practices (Creeping Acquisitions) Bill

A Bill to address ‘creeping acquisitions’ under section 50 of the Trade Practices Act was introduced into the Senate on 20 September 2002. Under the Bill, an acquisition by a corporation would be prohibited if the acquisition and any of the corporation’s acquisitions in the past six years would cumulatively have the effect or likely effect of substantially lessening competition in a market.

Using acquisitions by Coles and Woolworths as examples, Senator Fielding in the Second Reading Speech stated ‘[o]n its own, each acquisition might appear insignificant, but combined, over a period of time, they could create significant changes in a market.’

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