Misuse of market power: How proposed changes to the law will affect the private health sector

Competition and Market Regulation Update

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The Turnbull Government recently announced that it will adopt the Harper Review's recommendation to amend section 46 of the Competition and Consumer Act. The Government expects to introduce the relevant legislation into Parliament later in 2016.

What has happened so far

In 2015, the Competition Policy Review Panel chaired by Professor Ian Harper (Harper Review) completed the most comprehensive review of Australia's competition and consumer laws, policy and institutions in more than 20 years. The Panel made 56 wide-ranging recommendations reflecting its broad terms of reference. One of these recommendations was to amend section 46 of the Competition and Consumer Act, which currently prohibits the misuse of market power. The Harper Review found that the current section 46 was not fit for purpose, not reliably enforceable and permitted conduct that undermined the competitive process.

The Harper Review recommended subjecting unilateral conduct by firms with market power to a 'substantial lessening of competition' (SLC) test and removing the 'take advantage' limb (Proposed s46). If implemented, these amendments would extend section 46 beyond a 'misuse of market power' and would make it easier to prove a contravention. The key implications of these changes are:

  • Expanded reach: The Proposed s46 does not include the current 'take advantage limb', thereby removing the nexus between the conduct and the market power, a key mechanism that has been used to distinguish between competitive and anti-competitive conduct by firms with substantial market power. The removal of this limb would expand the reach of the prohibition and place significant importance on the interpretation of the substantial lessening of competition test, which the Harper Review recommended be inserted in place of the existing proscribed anti-competitive purposes.
  • Contraventions easier to prove: As a practical matter, proving an anti-competitive effect is often easier (albeit more expensive) than proving an anti-competitive subjective purpose. Although Courts are entitled to draw inferences as to purpose in a number of circumstances, commercial decisions are typically driven by a large number of considerations. Further, as a matter of practicality, it is the subjective purpose of employees or officers that is relevant, as they are the directing mind of a corporation. Demonstrating that such individuals had a substantial subjective anti-competitive purpose has proven difficult. The ACCC has long advocated for the addition of an effects test for this reason. As such, although it is costly to prove that conduct has the effect of substantially lessening competition, the introduction of an effects test will in our view make it easier to prove that a contravention has occurred.
  • Transitional Uncertainty: The Proposed s46 relies almost exclusively on the SLC test to determine the legality of conduct. It would prohibit conduct by a corporation with 'substantial market power' that has the purpose, or likely effect, of substantially lessening competition. Although the SLC test is already used in the CCA, its application in the context of section 46 may differ from existing jurisprudence. For example:
    • Different conduct: Unilateral conduct by a firm with substantial market power is likely to impact competition very differently from an arrangement between competitors. For example, a unilateral decision by a monopolist to increase its prices is unlikely to lessen competition while a joint decision by two competitors to increase their prices may well lessen competition.
    • New element: The proposed section includes a 'direction' requiring the Court to consider the extent to which the conduct has the purpose or likely effect or increasing, or decreasing, competition, including in relation to efficiency, innovation, product quality or price competitiveness. Prima facie, such a direction should have no impact as Courts have always had the ability to balance the pro-competitive and anti-competitive impacts of conduct. However, the inclusion of this 'direction' creates uncertainty because it has not previously been considered by Courts and because the factors listed do not always have the suggested effect on competition, particularly in the circumstances of a firm with substantial market power. For example, the proposed section requires the Court to consider the increase in competition arising from 'enhanced price competitiveness'. In past cases, discounting by a monopolist has been characterised as reducing competition. Further, although the indicative factors listed in the 'direction' could be relevant to a net public benefits test, the 'direction' is expressly concerned with effects on competition. 

The Harper Review recommended making authorisation available to exempt conduct from section 46 if the conduct satisfies a public benefit test. Authorisation is not currently permitted for such conduct. However, the time, cost and public consultation associated with an authorisation application is likely to make it commercially impractical in many instances. For example, a firm seeking to introduce an innovative new product would be unlikely to seek authorisation to ensure that initially selling the product below cost price did not breach the Proposed s46. Further, the dynamic nature of many markets makes it difficult for firms to engage in the forward planning and investment necessary when relying on authorisation as a means to avoid breaching the Proposed s46.

The Government's decision

Having considered the Harper Panel's recommended changes to section 46, the Government engaged in a consultation period with industry, consumers and other levels of government on the recommendation. During this consultation period, the Government considered retaining the current section 46, adopting the Harper recommendation in full or adopting an in-between option. The in-between options considered were removing the 'take advantage' element, introducing a 'purpose of substantially lessening competition' test (but not an effects test) in place of the current proscribed purposes test and/or introducing mandatory factors for the Court to consider in section 46 cases.

After finishing its consultation period, the Government has decided to accept the recommendation by the Harper Review in full. It will now introduce legislation into Parliament which repeals the current section 46 and replaces it the new recommended form.

Next steps

The Turnbull Government has indicated that it will prepare draft legislation which makes the changes to section 46 recommended by the Harper Review. The Government plans to consult on the draft legislation prior to introducing it to Parliament later in 2016. At this stage, there are still a number of unknowns, including the precise wording of the new section 46 and how the reforms will be affected by the timing for the upcoming federal election.

In the meantime, if you would like assistance in understanding the potential implications of the planned amendments to section 46 for your business, please contact us.