The most significant changes to Australian competition law in 20 years are soon to commence.
On 18 October 2017, a number of amendments to Australia’s Competition and Consumer Act 2010 (CCA) passed through Parliament. The changes follow recommendations arising from the ‘root and branch review’ of competition law and policy commenced by the Federal Government in 2015 (commonly known as the ‘Harper Review’). This follows the passage of changes to the misuse of market power provisions of the CCA (also recommended by the Harper Review), which passed on 23 August 2017.
The commencement date for the changes has not yet been confirmed but is likely to be early in 2018. (The amending Acts provide for the amendments to commence on a date to be proclaimed, or otherwise 6 months from the date on which the Acts receive Royal Assent.)
This Alert summarises the key reforms and their likely impact on firms conducting business in Australia.
Abolition of the per se prohibition against ‘Third Line Forcing’
Section 47 of the CCA sets out provisions against a number of different forms of restrictive supply or acquisition arrangements. Most forms of exclusive dealing are only illegal if they have the purpose, effect or likely effect of substantially lessening competition in a relevant market. However, four forms of exclusive dealing (commonly known as ‘third line forcing’) are currently prohibited, irrespective of their effect on competition. These are arrangements under which a supplier will only supply goods or services, or give a particular price or discount, on the condition that the purchaser additionally buys goods or services from a particular third party.
While all third line forcing is currently illegal, there is a simple ‘notification’ process which enables such arrangements to obtain administrative exemption from the ACCC. The notification regime is simple and inexpensive, but it has long been criticised as an unnecessary administrative burden, given that the overwhelming majority of third line forcing arrangements engaged in by business will have no significant effect on competition.
To address this, the CCA will now be amended to remove the per se prohibition against third line forcing. This means that all forms of exclusive dealing (i.e. including third line forcing) will only be illegal if they have the purpose, effect or likely effect of substantially lessening competition in a relevant market.
This is a significant reform that will be welcome relief for many sectors of the economy – particularly those who operate franchise or distribution networks, or operate loyalty programs, where such arrangements are commonplace. However, it is important for businesses to assess the competition effect of such arrangements to determine if notification is still necessary.
One important administrative effect of the change will be in relation to the current notification regime. While existing third line forcing notifications will not be affected, once the new laws commence it will no longer be possible to utilise the discounted third line forcing notification process. Notification of third line forcing arrangements currently involve payment of a fee of just $100, while other forms of exclusive dealing the fee is $2,500. It is expected that all notifications will now incur the higher fee of $2,500.
New notification process for ‘Resale Price Maintenance’ arrangements
Resale price maintenance is the practice where a supplier of goods or services restricts a re-seller of those goods or services from discounting the price at which they are re-sold.
Under section 48 of the CCA, resale price maintenance is illegal in Australia, irrespective of its effect on competition. This will not change. However, there is increasing recognition that there can be legitimate reasons for a supplier to want to restrict the ability of its re-sellers to discount their prices.
Currently, the only way to obtain an exemption from the prohibition against resale price maintenance is to obtain an ‘authorisation’ from the ACCC. The process to obtain an authorisation is expensive (the application fee alone is $7,500) and time consuming (taking at least 6 months). As a result, the authorisation has only been used once to authorise a resale price maintenance arrangement.
Under the reforms now passed, the process to obtain an exemption which will allow conduct that constitutes resale price maintenance is to be significantly simplified by the introduction of a new notification regime. Under the new regime, notified conduct will be automatically exempt unless objected to by the ACCC within 60 days of lodgement of the notification. This is similar to the process that currently applies in relation to third line forcing arrangements.
Resale price maintenance notifications will need to set out the benefits of the arrangement, and compare those to the likely detriment of the arrangement to competition. If the notification demonstrates that the public benefit of the conduct outweighs any public detriment, a limited exemption will be provided to allow the conduct.
While it remains to be seen how notifications are assessed by the ACCC in practice, this will at the very provide businesses with a low cost, administrative process to seek exemption of resale price maintenance conduct.
This reform is likely to be particularly well received by distribution networks through which products can be sold entirely online. There are often good public benefit reasons for wanting resellers to maintain a physical presence, such as for the provision of value-add service, such as customer support or product selection advice. However, such services can be difficult to maintain when competing against online sellers of the same goods or services who do not incur such overheads. One means of addressing this imbalance would be through conduct amounting to resale price maintenance, where discounting of prices of such products is limited or prevented. It is likely that these kinds of arrangements will be the first to seek exemption under the new notification regime.
New prohibition against ‘Concerted Practices’
Currently, section 45 of the CCA prohibits ‘agreements, arrangements or understandings’ which have the purpose, effect or likely effect of substantially lessening competition in a relevant market.
There has been criticism of this prohibition as being too restrictive. In particular, concerns have been raised that the prohibition does not extend to conduct by competitors which might influence each other’s behaviour without rising to the level of a contract, arrangement or understanding.
To address this, the government initially introduced a prohibition against ‘price signalling’ in 2012. The prohibitions were limited to the banking sector, and only in relation to the taking of money on deposit and making advances of money or loans. The provisions aimed to prevent banks from signalling through public statements what they intended to do (with interest rates, for example) in a way that would enable other competitors to follow suit.
The price signalling provisions are now being repealed, and replaced with a broad prohibition against ‘concerted practices’. Because the CCA will not define ‘concerted practices’, there is considerable uncertainty as to what it will extend to in practice. To assist businesses to understand the reach of the new prohibition, the ACCC has issued draft guidelines which define a concerted practice as:
“a form of coordination between competing businesses by which, without them having entered a contract, arrangement or understanding, practical cooperation between them is substituted for the risks of competition”.
This change is particularly relevant for concentrated industries where there is limited effective competition. The changes also bring Australia in line with the law in the European Union.
New ‘effects test’ prohibition against ‘Misuse of Market Power’
Perhaps the most widely publicised change to the CCA is the change to the prohibition against misuse of market power under section 46.
In summary, under the current provision, a person who has a substantial degree of power in a market must not take advantage of that power for the purpose of:
- eliminating or substantially damaging a competitor
- preventing the entry of a person into that or any other market; or
- deterring or preventing a person from engaging in competitive conduct.
Under the new provision, a person who has a substantial degree of power in a market must not engage in conduct which has the purpose, effect, or likely effect of substantially lessening competition in that market, or in any market in which the corporation or a related body supplies or acquires goods or services or is likely to do so.
As such, the test will fundamentally change. Rather than focusing on whether conduct of a firm with market power has an anticompetitive purpose, the focus of the new prohibition is on whether such conduct has the purpose, effect or likely effect of substantially lessening competition in a relevant market.
For businesses that have ‘market power’, this will effectively require that they do not engage in conduct which would be perfectly legal if engaged in by their competitors who do not have market power. It is likely to be particularly relevant to businesses that have significant market share (although market share does not automatically equate to market power), who control key inputs in a production process or who hold significant advantages over their competitors (including because they hold intellectual property rights, for example, which competitors cannot access).
Changes to the ‘Cartel Conduct’ prohibition and defences
A number of significant, common sense changes have been made to the provisions of the CCA relating to ‘cartel provisions’.
The prohibition against ‘exclusionary provisions’, under which competitors were prevented from agreement not to deal with specified third parties (often referred to as ‘boycotts’), are being repealed. Conduct which would have amounted to an exclusionary provision will remain prohibited, but as a form of cartel conduct.
The defence available for ‘joint ventures’ to the cartel provision prohibition has also been significantly expanded. Currently, the defence only applies to a limited range of joint ventures, where:
- the cartel provision is in a contract; and
- the joint venture is for the joint production or supply of goods or services.
Under the new defence, this will be expanded to apply to joint ventures where:
- the cartel provision is in a contract, arrangement or understanding; and
- the joint venture is for the joint production, supply or acquisition of goods or services.
Importantly, the defence will also now be subject to two new restrictions. It must be reasonably necessary for undertaking the joint venture, and will not be available where the joint venture is carried on for the purpose of substantially lessening competition. Parties seeking to rely on the defence will also now face a higher standard of proof to demonstrate that the defence is available.
These changes will be extremely welcome for parties engaged in genuine joint ventures with competitors (particularly joint ventures under which goods are both acquired and then re-supplied). However, it will present new practical issues that must be assessed in determining what the purpose of the cartel provision is, and whether it is reasonably necessary for the purpose of the joint venture.
New authorisation regime, including new provisions for class exemptions
The various authorisation provisions currently applicable under the CCA have been consolidated into a single authorisation process (including for merger authorisations).
Additionally, a new form of exemption will now be available to authorise conduct that would otherwise be prohibited under the competition provisions of the CCA.
The ACCC will now have the power to grant ‘class exemptions’ for such conduct, which will be similar to class orders issued by ASIC and the block exemption power which is available in Europe. This will supplement the existing authorisation and notification frameworks and enable the ACCC to provide certainty on a class-wide basis, by creating ‘safe harbours’ where greater certainty is needed about the ability of businesses to engage in particular types of commercial activity.
Other changes to the CCA not covered by this alert
While this alert captures most substantive changes made to the CCA, there are a number of other important changes that will be made. These include:
- Changes to the National Access Regime set out in Part IIIA of the CCA, including amending and clarifying the declaration criteria used by the Council and designated Minister.
- Amending the definition of ‘competition’ to clarify that competition includes competition from goods and services that are capable of importation, in addition to those actually imported.
- Amending the definitions of ‘contract’ and ‘party’ to expressly include ‘covenants’, while removing provisions referring to covenants which are now redundant.
- Extending the ACCC’s powers to obtain information, documents and evidence under section 155 of the CCA, including in relation to investigation of compliance with s.87B enforceable undertakings and in connection with merger authorisation determinations.
- Introducing an express ‘reasonable search’ defence to failure to comply with a section 155 request for information, documents and evidence.
- Extending the scope of section 83 of the CCA, in order to allow parties bringing private proceedings to rely on admissions of fact made by a person, or findings of fact made by a Court, in certain separate proceedings against that person.
- Making the ACCC the decision maker on merger authorisation applications at first instance, with the ACCC’s decisions reviewable by the Australian Competition Tribunal on appeal.
- Repealing the current formal clearance process (which has never been used). The existing informal clearance process will continue unaffected.