Chapter 4 - Issues relating to subsections 46(1), 46(3A-3C), 46(4A) & 51AC
4.1
This chapter examines the three issues on which the committee received
the majority of comment in relation to the bill—the threshold test and the
issue of predatory pricing in section 46, and the proposed amendments to section
51AC on 'unconscionable conduct'. The bill's section 46 amendments in
particular elicited a range of support and criticism from submitters and
witnesses. The committee recognises that these viewpoints are part of the wider
polemic in competition law concerning the balance between promoting competition
through the market and regulating anti-competitive behaviour.
The threshold test (subsections 46(1), 46(3A), 46(3B) and 46(3C))
4.2
In its submission to the inquiry, the Law Council of Australia (LCA) supported
the bill's amendment to subsection 46(1) for removing any doubt that
substantial market power and the conduct which takes advantage of it need not
occur in the same market.[1]
The LCA also supported the amendments to sections 46(3A), (3B) and (3C),
although it expressed concern that past judicial interpretation of the word
'control' may undermine new subsection 46(3C).
4.3
Boral Limited, the defendant in the 2003 High Court test case on
predatory pricing, agreed with the Law Council's position on the threshold
test. Its submission acknowledged that the government is not amending the basic
structure of section 46 and that the bill preserves the prerequisite for a firm
to have 'market power'. It argued that this threshold 'retains necessary
tension between the underlying desire to promote competition and the need to
regulate anti-competitive behaviour'.[2]
4.4
The National Farmers' Federation (NFF) supported the bill's measures to
broaden the definition of market power. It argued that strengthening the
provisions of section 46 was crucial to retaining competition and choice in
fuel distribution, retailing and transport suppliers. More pointedly, the NFF's
submission stated that '...it is vital that situations such as that highlighted
by the Boral case are not allowed to occur into the future'.[3]
It noted that the High Court had found that Boral Masonry Limited did not have
substantial market power in the wider market for walling and paving products,
rather than the market for concrete masonry products in Melbourne.
4.5
A contrary view was put by the Business Council of Australia (BCA). The
BCA emphasised that 'it is not possible to enshrine every judicial decision
into legislation' and argued that the bill's amendments to section 46 'are not
required and would indeed be detrimental'. In particular, the BCA argued that
the proposed amendment to subsection 46(3C) is overly prescriptive and that the
reference to 'absolute' freedom from constraint is ambiguous and may even lower
the threshold test. It also claimed that the inclusion of the specific
constraints mentioned in the new subsection:
...risks ascribing those particular factors an importance over and
above other important considerations...which are relevant to the assessment of
substantial market power – such as the level of imports and the height of
barriers to entry.[4]
Ms Melinda Cilento, Deputy Chief Executive of the BCA, told
the committee that codifying these factors creates uncertainty which may have
the unintended effect of lowering the section 46 threshold. She argued that the
TPA in its current form is effective.[5]
4.6
The BCA argued that in the absence of a body of case law which
interprets subsection 46(3C), there is a risk that the subsection will be
overly prescriptive. It requested that the government clarify in the EM that
the intention of the proposed changes is not to lower the threshold of what
constitutes a substantial degree of power in the market. In addition, it
suggested subsection 46(3B) contain the following clarification:
Subsections (3), (3A) and (3C) do
not, by implication, limit the matters to which the Court may have regard in
determining, for the purposes of this section, the degree of power that a body
corporate or bodies corporate has or have in a market.[6]
4.7
The LCA also noted that the addition of subsections 46(3C)(b)(i) and
(ii):
...may have the limiting effect of 'elevating' those particular
constraints above other factors which also form part of an assessment of
substantial market power, such as the height of barriers to entry. We suggest
that this deficiency be addressed.[7]
4.8
The committee notes the concerns of the BCA and the LCA. It agrees that
section 46(3C) should not limit the matters to which courts may have regard in
determining a corporation's market power. However, the courts currently
consider other factors—such as recoupment—which are not explicitly mentioned in
section 46 of the Act. The committee suggests that the government further
consider the BCA's proposed clarification to the EM regarding the intention of
new subsection 46(3C).
Predatory pricing (subsection 46(4A))
4.9
The committee received several submissions commenting on new subsection
46(4A). Some supported this amendment but had concerns about the absence of a
method to determine either the price or cost for the goods and services (see
paragraph 3.7). Other submitters viewed the subsection as unnecessary, and even
counterproductive. The underlying theme of submitters' comment—whether they
favoured or opposed the subsection—was the difficulty distinguishing between
predatory pricing and strong competition.[8]
4.10
Woolworths Limited, for example, supported the inclusion of subsection
46(4A) provided that key competition principles are preserved. One of these
principles is the ability of some companies to capitalise on their lower net
variable costs and operational efficiencies. Companies selling at prices that
reflect their lower cost structure should not be subject to the predatory
pricing clause. Woolworths also argued that this clause should not apply to a company
that reduces its prices to match those of a competitor, or to a company that
reduces its prices in some locations to meet localised competition.[9]
As for the interpretation of a 'sustained period', Woolworths emphasised that the
courts must allow 'normal competitive activity including discounting, clearance
sales and other stock clearance activities'.[10]
4.11
The Law Council's submission broadly supported the new subsection, but criticised
the vagueness of the term 'relevant cost'. It argued that this oversight 'has
the potential to lead to protracted litigation and raises the prospect...that the
amendments...will lead to increased regulatory costs...'[11]
The Law Council did not believe that the bill—in its present form—needed to
include any reference to recoupment of costs. It also stated that sustained
below-cost pricing ought not to be determinative of misuse of market power, but
a consideration 'in the context of all of the surrounding facts and
circumstances'.[12]
The Council did suggest that the new subsection 46(4A) should broaden the definition
of predatory pricing conduct by inserting the words 'offering to supply'.[13]
4.12
The Fair Trading Coalition's (FTC) submission to the committee also welcomed
the insertion of subsection 46(4A). It supported the exclusion of a reference
to recoupment, which it believed would be a barrier to a successful 'misuse of
market power' case.[14]
However, it noted that a number of the FTC's members supported strengthening
this provision. The FTC submission did not elaborate on how this subsection
might be strengthened.
4.13
The committee did receive a recommendation on this issue from the Pharmacy
Guild of Australia, a member of the FTC. The Guild praised the inclusion of a
clause on predatory pricing, but proposed an alternative wording—'supplying
goods or services for a sustained period at a price that was less than
avoidable cost to the corporation of supplying such goods or services'.[15]
The Guild also suggested that after subsection 46(4A), the term 'avoidable
cost' is defined:
For the purposes of Subsection 46(4A), a corporation is taken to
have priced goods or services below avoidable cost if the revenues it obtains,
or could reasonably expect to obtain, from the supply of those goods or
services is less than the costs it could have saved, or could reasonably have
expected to save, had it not supplied those goods or services.[16]
Criticism of new subsection 46(4A)
4.14
The committee received various critiques of the proposed subsection
46(4A). These ranged from claims that the section is redundant, to fears that
less competition and higher prices will result, to concern over the high
threshold of 'substantial market power'.
4.15
Associate Professor Frank Zumbo, appearing in a private capacity, argued
that the proposed subsection 46(4A) is 'cosmetic'. He claimed that courts
already have regard to the question of sustained below cost pricing and the
reasons for such pricing, and the amendment therefore 'does not in any way
alter the current judicial position regarding predatory pricing'.[17]
Associate Professor Zumbo told the committee that the bill needed to clarify
the threshold test of 'substantial market power', which at present was
preventing the ACCC from bringing section 46 cases to court.[18]
He believed that the Act needed greater definition to establish that a
corporation may meet the threshold even though it does not have the ability to
raise its prices without losing business to rivals.[19]
4.16
The law firm, Addisons, identified that the problem with predatory
pricing 'lies...in determining when, in fact pricing crosses the line between
legitimate, but hard or aggressive competition and becomes illegitimate and
predatory conduct'.[20]
It argued that with or without the new subsection, it is difficult to
successfully prosecute a case of predatory pricing under the TPA. Unlike Associate
Professor Zumbo, Addisons viewed the lack of successful predatory pricing
cases as proof that the law was working as it should—to protect competition.
This was also the judgement of Justices Gleeson and Callinan in Boral,
which Addisons' submission cited at length.[21]
4.17
The majority judgement in Boral observed that the TPA in its
current form does not spell out the concepts that it seeks to uphold. Ms Kathryn
Edghill, a partner at Addisons, told the committee that this was one of the strengths
of the section.[22]
Addisons' submission argued that the bill threatened this flexibility,
particularly its reference to 'relevant cost'.[23]
It noted that a contradiction may arise where competition law prohibits
information sharing among competitors, and yet an allegation under the proposed
section 46(4A) can only be established by actual knowledge of a competitor's
costs. Further, the submission argued that where the ACCC uses its powers under
section 155 of the TPA to investigate a company, it is unlikely that the
company will have analysed its costs on a variable basis to the extent that may
be necessary to establish or defend a claim of predatory pricing. Given this
difficulty, Addisons raised the possibility that a section 155 notice may
become a tool for companies seeking to damage their cost-cutting competitors.[24]
4.18
The Australian National Retailers Association (ANRA) argued in its
submission that new subsection 46(4) on predatory pricing is unnecessary and
liable to result in increased uncertainty and more litigation. It also
foreshadowed the possibility of higher prices as businesses 'become fearful of
reducing prices lest they become embroiled in a predatory pricing
investigation'.[25]
ANRA maintained that the current Act ably protects businesses from predatory
pricing conduct, and that the proposed amendments codify the courts' current
interpretation. Moreover, it argued that there are many legitimate factors that
impact on a company's ability to price at low levels, which should not always
be visible to competitors. These are the 'operational efficiencies' referred to
by Woolworths, including the cost of rent, labour and efficiencies from
economies of scale.[26]
4.19
Another perspective was offered by the Southern Sydney Retailers
Association. Its submission argued that section 46 in relation to
predatory pricing 'is currently written back to front'. It explained:
A successful Predatory Pricing...strategy does not require market
power when the Predator commences to engage in Predatory conduct.
The only thing needed by the predator at the start is deeper
pockets than that of the competition they are attempting to drive to ruin and
bankruptcy or the ability to leverage profits from non-competitive territory.[27]
Unconscionable conduct (section 51AC)
4.20
Several submitters supported the bill's amendments to section 51AC. The
NFF, for example, welcomed the greater scrutiny of contract clauses. It argued
that many contract clauses in the past have allowed buyers to 'opt out' of
their contractual obligations with farmers. The NFF also supported the increase
in the transaction threshold from $3 million to $10 million. It argued that
many farmers have high turnovers and small margins, often with an increasingly
limited number of buyers for their produce. As a consequence, many farmers have
increased their exposure to the $3 million threshold.[28]
4.21
Associate Professor Zumbo observed that the test of unconscionable
conduct is difficult to satisfy because it is not clear. He suggested that the
current interpretation is too restrictive and could be remedied if the following
non-exhaustive definition of unconscionable conduct was included under section
51AC:
...any action in relation to a contract or to the terms of a
contract that is unfair, unreasonable, harsh or oppressive, or is contrary to
the concepts of fair dealing, fair-trading, fair play, good faith and good
conscience.[29]
4.22
The committee does not support this proposal. It reiterates the position
put in both the majority and minority March 2004 Senate reports which rejected any
rewriting of definitions in section 51AC. The Government Senators' report put
the argument in the following terms:
Government Senators welcome the fact that the Majority Report
makes no recommendation for the introduction of vague new statutory language
into s.51AC (‘harsh’, ‘unfair’ etc.). It is our belief that the consequence of
doing so would make the meaning of the section so open to a variety of
different interpretations that it would be inimical to the development of a
coherent and relatively clear body of law. Furthermore, the transactional
uncertainty which the introduction of such language would produce would have
undesirable consequences for commerce, the social cost of which is difficult to
assess.[30]
4.23
On the proposal to increase the threshold for unconscionable conduct, Associate
Professor Zumbo argued that the monetary level is arbitrary and 'may not be
enough to cover all small businesses'. His preference was that the threshold be
removed altogether such that all businesses are covered by section 51AC. A
second-best option was to increase the level of the threshold beyond $10
million.[31]
4.24
The committee also disagrees with Associate Professor Zumbo's proposal
on the threshold. It supports the bill's amendment because it retains the
protection offered by section 51AC for smaller businesses. Abolishing the
threshold would allow a wider array of businesses to inappropriately use
section 51AC for their strategic advantage.[32]
This was not the Parliament's intention when the section was introduced in
1998.
Treasury's view of the bill
4.25
Ms H. K. Holdaway, Policy Manager of Treasury's Competition Framework
Unit, told the committee that the bill represents 'very careful' consideration
of the recommendations made in the March 2004 Senate Economics Committee
report. She argued that the bill achieves the fine balance between protecting
business from anti-competitive conduct while ensuring that consumers enjoy the
benefits of competition.[33]
The amendments help to clarify various issues without limiting the factors that
courts can take into account in assessing whether the section 46 threshold has
been met. Ms Holdaway also told the committee that the term 'relevant cost'
allowed greater flexibility for the courts than terms such as 'variable cost'. Further,
she noted that in the government's view, there was 'a reasonable level of
understanding' as to the term 'take advantage'.[34]
Accordingly, the bill proposes no amendment on this issue.
Conclusion
4.26
The committee supports the bill in its current form. Several submitters
to this inquiry have noted that it provides greater clarity for the courts in
relation to both the threshold test for the misuse of market power and
predatory pricing in section 46. It also extends courts' capacity under the
terms of section 51AC to protect a greater range of transactions entered into
by small businesses. The creation of a second Deputy Chairperson for the ACCC
is an important initiative and will elevate the status of, and attention to,
small business issues within the Commission.
4.27
The committee emphasises that the bill implements many of the
recommendations of a thorough and considered inquiry process into the Trade
Practices Act 1974. This process revealed public dissatisfaction with the
courts' interpretation of the 'misuse of market power' provisions. The bill's amendments
on the threshold test were recommended by the 2004 Senate Economics Committee's
majority and minority reports, and endorsed by the ACCC. The ACCC remains
strongly supportive of these amendments.[35]
On predatory pricing, the bill followed the Senate report's recommendation to include
reference to a company's capacity to sell below cost. On the issue of
unconscionable conduct, the bill implements the Senate report's recommendation on
the unilateral variation of contracts and Government Senators' recommendation
to increase the monetary threshold to $10 million.
4.28
The committee believes the bill's amendments are important to state expressly
the legal principles that have been established by the courts. It is immaterial
that some of the amendments permit courts to consider factors they already have
the power to consider. The committee also rejects claims that the bill's
amendments will create uncertainty as to the operation of the Act. On the
contrary, sections 46(3A), 46(4A) and 51AC(3)(j) and 51AC(4)(j) will draw courts'
attention to potential areas of contravention. The bill makes clear that the
amendments are not included to elevate the importance of these factors over
others. Rather, they are included to clarify and to guide, and the courts will
continue to rule according the facts and circumstances of the individual case
in question.
Recommendation 1
4.29
The committee recommends that the bill be passed.
Senator the Hon Michael
Ronaldson
Chair
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