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Final Report of Australian ‘Root and Branch’ competition review released: A blueprint for NZ’s ‘bonsai’ review of the Commerce Act?

Home Insights Final Report of Australian ‘Root and Branch’ competition review released: A blueprint for NZ’s ‘bonsai’ review of the Commerce Act?

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Contributed by: Sarah Keene, Craig Shrive, Troy Pilkington and Christopher Graf

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Published on: April 01, 2015

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A year in the making, the Final Report of the Australian Competition Policy Review1 was released yesterday afternoon. The Review was tasked with examining whether Australia’s competition policy, laws and institutions remain fit for purpose in the face of changing circumstances, such as the rise of Asia and other emerging economies, an ageing population and the emergence of new technologies.

The Final Report (available here), which follows the release of draft findings in September 2014,2 contains 56 recommendations, spread across 539 pages. The Review Panel’s recommendations are wide ranging, covering areas as diverse as market restrictions on taxis, restrictive shop trading hours, access to monopoly infrastructure and reform of Australia's competition laws.

With the NZ Ministry of Business Innovation and Employment (MBIE) having signalled an intention to conduct a smaller scale review (more a trimming and shaping ‘bonsai’ endeavour than a ‘root and branch’ review) of the Commerce Act in 2015, certain of the Final Report’s recommendations are likely to be influential in that context. 

Competition law reform

The Final Report recommends arguably the most significant changes to Australian competition laws since the Hilmer Review of the early 1990s. The recommendations of the Final Report that should be on the radar of NZ businesses are as follows:

Misuse of market power

Significant changes to Australia’s misuse of market power prohibition (equivalent to New Zealand’s prohibition in s36 Commerce Act) were proposed in the draft report. The draft recommendation was that the existing requirement for a causal link between the market power and the conduct in question (the “taking advantage” requirement also found in s36) be removed and replaced with an “effects” test. The regulator would be required to prove that the conduct has or is likely to have the effect of substantially lessening competition. The draft report also proposed a defence, if the defendant could show that the conduct was that of a rational business without market power, and would benefit the long term interests of consumers.

The draft recommendations sparked a range of criticism from regulators, practitioners, and business. However, the Final Report’s recommendation differs from the draft report only to the extent that it has dropped the defence, which the ACCC and NZCC had criticised. It has been replaced with legislative guidance to direct courts to have regard to a range of matters, including whether the conduct would result in enhanced efficiency, innovation, product quality or price competitiveness, when assessing whether conduct by a firm with market power has the purpose, effect or likely effect of substantially lessening competition.

By way of quick summary on the net effect of this:

  • Ultimately the recommendation still removes the requirement to prove any causal connection between the market power and the alleged anti-competitive conduct. To use the standard analogy:3 the monopolist that burns down a competitor’s factory technically breaches the prohibition if the loss of the factory lessens competition in the market.
  • An effects based prohibition also makes it more difficult for a firm with market power to determine ex ante whether its conduct is lawful. It requires the firm to assess the likely effect of its conduct where it cannot have full information about the likely competitive options of other market participants. This can have the undesirable, and potentially chilling effect of uncertainty, leading to inaction.
  • A firm’s conduct can have effects in downstream or upstream markets it is not active in. Here, the firm has even less of the information required to undertake the necessary effects assessment. 

MBIE has indicated that the bonsai review will include New Zealand’s current misuse of market power prohibition (s36 Commerce Act).4 This, coupled with the Commerce Commission’s firm view that an amendment to s36 is required for it to be enforced5 and the increasing trans-Tasman harmonisation of competition laws, means that the Final Report's recommendation is likely to be examined carefully in the NZ bonsai review.

Concerted practices

The Final Report adopts the draft report’s recommendation that Australia’s general competition prohibition of contracts, arrangements or understandings that have the purpose, effect or likely effect of substantially lessening competition (equivalent to s27 Commerce Act) be extended to include “concerted practices”. This concept, borrowed from EU competition law, captures a wide range of oligopoly conduct including conduct driven off information sharing, for example through industry associations. The point of the proposal is to capture parallel behaviour by competitors where no arrangement or understanding can be proven.

The Review Panel has recommended that such conduct be illegal only if it can be shown that it has the purpose, effect or likely effect of substantially lessening competition. It rejects (sensibly in our view) the more extreme view that concerted practices be included in the per se cartel prohibitions. However, the proposal still casts the net of competition enforcement significantly wider than it is today. In New Zealand’s highly concentrated markets this prohibition would place a considerable regulatory burden on businesses, given the lack of compliance trigger; in practice, the existence of an agreement or understanding can provide in-house legal teams with a helpful brightline test for when the business needs to seek legal advice.

Market studies

The Final Report also adopts the draft recommendation for a new competition body, the Australian Council for Competition Policy (ACCP), to be given a power to undertake market studies and make recommendations to the government for changes to regulation and/or to the ACCC for investigation of potential breaches of competition law. It is recommended that the ACCP should have compulsory information gathering powers but, unlike the UK’s markets regime, not have remedial powers. 

The addition of a market studies regime constitutes a significant addition to the competition enforcement landscape. These studies allow regulators to carry out wide-ranging investigations of a sector or industry without any suspected breaches of competition laws, typically at great expense to the businesses involved. 

Given the Productivity Commission’s 2014 recommendation that the NZCC be given market study powers,6 the Draft Report’s recommendation may find favour in some quarters in New Zealand. In our view, the case for a market studies regime in New Zealand is far from clear-cut and legislators in both Australia and New Zealand ought to carefully weigh the pros and cons of such regimes before committing to include them in their respective enforcement landscapes.

Resale price maintenance (RPM)

The Final Report maintains the earlier draft recommendation to retain the per se nature of the prohibition on resale price maintenance (ie no competitive effects assessment is necessary for there to be a breach), on account of concerns around the potential use of RPM in online sales. However, the Review Panel also recommends that RPM be capable of exemption via the ACCC’s quicker and less expensive notification process (as opposed to authorisation).

Intellectual property exemption

An overarching review of intellectual property in Australia by an independent body was recommended in the Draft Report and continues to be supported in the Final Report. Specifically, the Review Panel has maintained its recommendation for repeal of the IP exemption, which precludes the application of competition laws, other than the misuse of market power prohibition, to conditions in IP licences or assignments, similar to the exemption in s45 Commerce Act.

National access regime

The Review Panel has also considered the fitness for purpose of Australia’s National Access Regime, which exists to enable third-party access to identified “bottleneck” infrastructure (such as gas pipelines and airports).  The changes recommended in the Final Report are limited to:

  • amending the access criteria to ensure that third-party access is mandated only when it is in the public interest (ie the benefits of competition outweigh the costs of regulated third-party access); and
  • empowering the Australian Competition Tribunal to undertake a merits review of access decisions, providing a greater intensity of review than is currently available.

Separate advocacy and pricing regulators

In addition to recommending changes to competition laws, the Root and Branch review has considered changes to Australia’s competition institutions to improve their performance and drive the broader reforms proposed. To this end, the Final Report maintains the Review Panel’s draft recommendations for:

  • the existing National Competition Council (NCC) to be replaced by a new Australian Council for Competition Policy (ACCP), with the ACCP’s mandate to act as an advocate and educator in competition policy, including, as noted above, the power to undertake market studies;
  • the creation of a new access and pricing regulator, with responsibility for the ACCC, Australian Energy Regulator and NCC’s existing access and pricing regulatory functions in sectors including electricity, gas, telecommunications and water; and
  • the ACCC to retain its existing competition and consumer protection functions.

Interestingly, the Final Report’s recommendations in this area appear to have disregarded concerns expressed about the administrative inefficiencies in splitting access and pricing functions across two regulators. Indeed, the Review Panel considered the Australian Government’s policy of not establishing further regulatory bodies but concluded that the case for a new body was sufficiently compelling to override this general principle.

Next steps

The recommendations of the Review Panel are just that – recommendations to the Minister for Small Business, Bruce Billson, to consider; although, the Final Report also includes an extensive discussion on implementation, including who should do it and which proposals should be prioritised. The Minister has stated that he will now consult on the Final Report’s recommendations, with submissions due by 26 May 2015.

With the NZ review of the Commerce Act in the pipeline, the above recommendations of the Review Panel, and how the Australian Government responds to these recommendations, are no doubt being closely followed by those who will be carrying out the NZ review.

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FOOTNOTES

  1. Also known as the ‘Harper Review’ on account of its Chair, Australian economist Professor Ian Harper.
  2. Russell McVeagh Competition Alert, 23 September 2014.
  3. Coined by French J in Natwest Australia Bank v Boral Gerrard Strapping Systems Pty Ltd (1992) ATPR 41-196.
  4. MBIE, Commerce and Consumer Affairs Portfolio, Briefing for the Incoming Minister, 7 October 2014, and see also Russell McVeagh Competition Alert, June 2014.
  5. New Zealand Productivity Commission, “Boosting Productivity in the services sector”, (May 2014), at 130.
  6. New Zealand Productivity Commission, “Boosting Productivity in the services sector’, (May 2014), at 146.

This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.

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