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Middleton, Justice John --- "The Trade Practices Legislation Amendment Act 2008 (Cth) and s 46 of the Trade Practices Act 1974 (Cth) - will anything really change?" (FCA) [2009] FedJSchol 43
TWENTIETH ANNUAL WORKSHOP OF
THE COMPETITION LAW
AND POLICY INSTITUTE OF
NEW ZEALAND
The Trade Practices Legislation Amendment Act 2008
(Cth) and s 46 of the
Trade Practices Act 1974 (Cth)
– will anything really change?
Presented by:
the Honourable Justice John
Middleton
Justice of the Federal Court of Australia
8 August
2009
A. INTRODUCTION
- The
Trade Practices Legislation Amendment Act 2008 (Cth) substantively
amended s 46 of the Trade Practices Act 1974 (Cth) (‘the
TPA’). The two most significant changes were the introduction of
ss 46(1AAA) and (6A).
Section 46(1AAA)
- This
section has two effects. First, it aligns ‘predatory pricing’
practices with s 46(1), making it clear that such practices are intended to
be caught by s 46(1). Second, it clarifies the legal relevance of the
recoupment factor in predatory pricing cases. The section reads as
follows:
If a corporation supplies goods or services for a sustained period at a price
that is less than the relevant cost to the corporation
of supplying the goods or
services, the corporation may contravene subsection (1) even if the corporation
cannot, and might not ever
be able to, recoup losses incurred by supplying the
goods or services.
Section 46(6A)
- This
section provides a non-exhaustive list of factors that the court may take into
account when it is determining whether a corporation
has ‘taken
advantage’ of its market power. The section reads as
follows:
In determining for the purposes of this section whether, by engaging in
conduct, a corporation has taken advantage of its substantial
degree of power in
a market, the court may have regard to any or all of the
following:
(a) whether the conduct was materially facilitated by the corporation’s
substantial degree of power in the
market;
(b) whether the corporation engaged in the conduct in reliance on its
substantial degree of power in the
market;
(c) whether it is likely that the corporation would have engaged in the
conduct if it did not have a substantial degree of power in
the
market;
(d) whether the conduct is otherwise related to the corporation’s
substantial degree of power in the
market.
This subsection does not limit the matters to which the court may have
regard.
B. THE NEED FOR CHANGE
- The
changes to s 46 were made in response to perceived problems with the law in
its previous form, and in particular the changes intended to address
certain
interpretations of the TPA by the courts. In his second reading speech to the
House of Representatives on 26 June 2008,
Mr Chris Bowen the then
Minister for Competition Policy and Consumer Affairs and Assistant Treasurer
indicated that it was ‘the
government’s belief that a series of
court decisions have undermined the operation of the act, s 46 in
particular’[1].
- The
TPA was the subject of a Senate inquiry in 2003, and the resulting report
(issued in 2004) contained several recommendations,
including recommendations
that s 46 be amended to clarify the legal relevance of the recoupment
factor in predatory pricing cases and to clarify and broaden the meaning
of
‘take advantage’. However, for a number of reasons, these
recommendations were not implemented in the Trade Practices Legislation
Amendment Act 2007 (Cth) amendments. Thus the 2008 amendments took up the
recommendations regarding s 46 and completed the work of the 2003 inquiry.
C. THE NEED FOR CLARIFICATION ON THE LEGAL RELEVANCE OF RECOUPMENT
- Predatory
pricing is one of the anti-competitive activities which s 46 targets,
though it is not specifically mentioned or defined
in the Act. Predatory
pricing is essentially the practice described in ss 46(1AAA) and (1AA)
– that of supplying goods or
services for a sustained period at a price
that is less than the relevant cost to the corporation of supplying the goods or
services,
and for one of the proscribed purposes.
- Recoupment
refers to the ability of the corporation to be able to recover the losses
incurred as a result of predatory pricing behaviour,
at some later date when a
competitor has been forced out of the market. Even prior to the 2008
amendments, s 46(1AA) prohibited
predatory pricing under a separate
provision, where a corporation has a ‘substantial share’ of a
market. The introduction
of s 46(1AAA) makes it clear, however, that
predatory pricing is also ‘taking advantage’ of market power and a
contravention
of s 46(1).
- There
has been some debate about how a court should take the recoupment factor into
account when determining whether below cost pricing
is predatory or, rather,
merely aggressive competition. The ability to recoup losses after a competitor
has been forced out of the
market has been said to indicate a use of market
power.
- It
was suggested that an amendment was necessary regarding recoupment because the
High Court of Australia had decided that the ability
to recoup losses incurred
from below cost pricing was a necessary precondition in establishing a breach of
s 46. However, this was
not a hurdle the High Court put in place for a
successful application, and no such precondition was ever dictated.
- Undoubtedly,
the courts have placed some emphasis on recoupment in recent years, in
accordance with the views of some economic theorists
and the trend in US
jurisprudence.
- In
Boral Besser Masonry Ltd v Australian Competition and Consumer Commission
[2003] HCA 10; (2003) 215 CLR 374 (‘Boral’), Gleeson CJ and
Callinan J indicated that while the possibility of recoupment is not
legally essential to a finding of prohibited
pricing behaviour, it may be of
factual importance. Their Honours said (at 422):
If one begins with the fact that a firm is a monopolist, or is in a
controlling or dominant position in a market, then, by hypothesis,
such a firm
has an ability to raise prices without fear of losing business. If such a firm
reduces its prices, especially if it reduces
them below variable cost, then it
may be easy to attribute to the firm an anti-competitive objective, and to
characterise its behaviour
as predatory. But if one finds a firm that is
operating in an intensely competitive environment, and a close examination of
its pricing
behaviour shows that it is responding to competitive pressure, then
its conduct will bear a different character. That is the present
case.
While the possibility of recoupment is not legally essential to a finding of
pricing behaviour in contravention of s 46, it may be
of factual importance.
The fact...that BBM had no expectation of being in a position to charge
supra-competitive prices even if
Rocla and Budget left the market, leaving it
facing Pioneer and C & M, was material to an evaluation of its conduct. The
inability
to raise prices above competitive levels reflected a lack of market
strength. A finding that BBM expected to be in a position, at
the end of the
price war, to recoup its losses by charging prices above a competitive level may
have assisted a conclusion that it
had a substantial degree of market power,
depending on the other evidence. But no such finding was
made.
- Justices
Gaudron, Gummow and Hayne agreed that recoupment analysis can be appropriate
‘at least at an evidentiary level’:
see Boral at [191].
- Justice
McHugh seemed to go further. Justice McHugh stated (at
[278]):
A firm does not possess “substantial market power” if it does not
have the power to recoup all or a substantial part of
the losses caused by
price-cutting by later charging supra-competitive prices. If it cannot
successfully raise prices to supra-competitive
levels after deterring or
damaging or attempting to deter or damage competitors by price-cutting, the
conclusion is irresistible
that it did not have substantial market power at the
time it engaged in price-cutting.
- Justice
McHugh repeated the point that if it cannot be established that the alleged
predator would have had substantial market power
and prospects of recouping
losses ex post, then it follows that the alleged predator could not have had
substantial market power
at the time it engaged in the price-cutting behaviour:
(see Boral at [319]). His Honour also said (at
[291]):
Reducing prices does not per se establish any degree of market power. That is
true whether the supplier is pricing at marginal cost
or below average variable
costs. Price reductions are beneficial to consumers unless the quid pro quo is
higher prices at a later
date. If prices merely rise back to the levels that
existed before the price-cutting began, consumers have had the benefit of the
reduced prices for the duration of the price-cutting. They are no worse off at
the conclusion of the price war when the market returns
to its long-run
equilibrium. Detriment to consumers arises only where competitors are removed
and prices rise above the competitive equilibrium to levels that allow
those remaining to earn supra-competitive profits that enable
them to recoup the
losses sustained during the price war. Thus, it is the predator's ability to
recoup losses because its price-cutting
has removed competition and allowed it
and perhaps others to charge supra-competitive prices that harms consumers. Even
the removal
of competitors is unlikely to have long-term effects on the
competition process if the barriers to entry are low. Supra-competitive
prices
will bring in other suppliers resulting in competition which will force prices
down to competitive levels.
- In
dissent, Kirby J agreed that recoupment analysis ‘might be helpful in
determining whether a corporation took advantage of
its substantial market power
in violation of s 46 where the offending conduct involves the charging of
low prices’: see Boral at [409].
- Therefore,
whilst the position under Australian law has been said by some to be unclear
following the Boral case, it seems to me that the majority of the
Justices said nothing more than that a consideration of recoupment would be of
varying
importance depending on the facts of any particular case.
- In
any event, the addition of s 46(1AAA) now clarifies that a corporation may
engage in predatory pricing and contravene s 46(1) even
if the corporation
can never recoup its losses. This can be contrasted with US law, where the
importance of proving the possibility
for recoupment has become firmly
established and seems to have made predatory pricing cases difficult to prove
under US anti-trust
law.
- Given
the US experience, the Australian amendments to s 46 may be seen as a
welcomed development which will allow our law to deal
with predatory pricing
more effectively. Nevertheless, the possibility for recoupment will continue to
be a factor that the court
may consider, and it is still likely to play an
important part in any judicial analysis in predatory pricing cases. In any
given
case, a court may still need to consider whether a corporation has a
rational expectation of recoupment — which may take different
forms over a
varying period of time.
- Of
course, in misuse of market power cases not based on predatory pricing,
s 46(1AAA) has no application. Therefore, in those cases,
the position as
outlined by the High Court in the Boral case would assist in any analysis
required to be undertaken in considering whether there was a breach of
s 46(1).
D. THE NEED TO BROADEN THE MEANING OF ‘TAKE ADVANTAGE’
- Section
46(1) provides that a corporation that has a substantial degree of power in a
market must not take advantage of that power
in that market or any other market
for one of the proscribed anti-competitive purposes.
- The
prohibition directs attention to three concepts — whether the corporation
has a substantial degree of market power, whether
the corporation by its conduct
is taking advantage of that power, and whether the conduct was undertaken for
one or more of the anti-competitive
purposes. Each needs to be considered
separately, but they are interrelated. For present purposes, I am focussing on
the casual
connection required of the relevant conduct and the
corporation’s substantial market power.
- The
first case to consider the meaning of ‘take advantage’ in depth was
Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd [1989] HCA 6; (1989) 167
CLR 177 (‘Queensland Wire’). In Queensland Wire the
High Court held that ‘taking advantage’ of market power did not
require any sinister or morally reprehensible purpose.
Rather, it was held that
the expression simply meant to ‘use’ that power: per Mason CJ
and Wilson J at 191.
- The
meaning of ‘take advantage’ in s 46 has been the subject of
considerable (and sometimes inconsistent) judicial examination
since
Queensland Wire, though this case is still considered to be good law and
the starting point for a s 46 analysis.
- Ms
Margaret Brock describes two broad analytical approaches that have been taken in
formulating ‘taking advantage’ tests
which I have found to be very
useful: a ‘high’ threshold test and a ‘low’ threshold
test.[2]
- The
high/low distinction refers to the level of connection or causation that is
required between the conduct engaged in and the market
power. Aptly named, the
high threshold test requires a higher level of connection between the impugned
conduct and the market power.
An example of a higher threshold approach can be
found in Rural Press Ltd v Australian Competition and Consumer Commission
[2003] HCA 75; (2003) 216 CLR 53 (‘Rural Press’).
- In
contrast, an example of the lower threshold approach can be found in the case of
Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1
(‘Melway’). In Melway Gleeson CJ, Gummow, Hayne
and Callinan JJ stated that s 46 requires a causal relationship
between the market power and the conduct
engaged in (at
[44]):
Section 46 ... requires, not merely the co-existence of market power,
conduct, and proscribed purpose, but a connection such that
the firm whose
conduct is in question can be said to be taking advantage of its
power.
- The
impugned conduct must be assisted or made easier by the market power, but does
not need to have been impossible without it.
- Queensland
Wire would also be characterised most accurately as applying a low threshold
test, although I think it is correct to say that only Mason
CJ and
Wilson J specifically took a ‘would approach’ in applying the
counterfactual test.
- The
meaning of ‘taking advantage’ has been considered in two other High
Court cases: Boral and NT Power Generation Pty Ltd v Power and Water
Authority (2004) 219 CLR 90 (‘PAWA’). Boral
seemed to endorse the use of the ‘rational business explanation’
test. I think there are conceptual difficulties surrounding
the use of this
test, discussion of which is beyond the scope of this paper. Generally,
however, Boral is consistent with a higher threshold approach.
PAWA seemed to move back towards a lower threshold test, requiring an
analysis of what would have occurred in a competitive market, and
applying
Queensland Wire reasoning.
- Ms Margaret
Brock said that:
[o]f the five High Court decisions that have considered misuse of market
power not one has had a consistent finding in regard to “taking
advantage” at each of the Federal, Full Federal and High Court levels.
- I
would tend to agree. I think it would be fair to say that on this question the
High Court has not given clear direction as to what
level of connection is
required. What can be said is that the High Court has been consistent in
requiring some degree of connection
between the impugned conduct and the market
power.
- Given
this need for direction, the predatory pricing regime was arguably ripe for
reform. It was the decision in Rural Press that was the stated catalyst
for reform in the form of s 46(6A). In Rural Press the Court
reiterated the importance of establishing a causal relationship between the
market power and the conduct, and warned of
the danger in confounding market
power with purpose. Justices Gummow, Hayne and Heydon said that there is a need
to show that the
conduct was connected to the market power, not just that a
proscribed purpose coincided with conduct (at 76):
The words “take advantage of” do not extend to any kind of
connection at all between market power and the prohibited purposes
described in
s 46(1). Those words do not encompass conduct which has the purpose of
protecting market power, but has no other connection
with that market power.
Section 46(1) distinguishes between “taking advantage” and
“purpose”. The conduct
of “taking advantage of” a thing
is not identical with the conduct of protecting that thing. To reason that Rural
Press
and Bridge took advantage of market power because they would have been
unlikely to have engaged in the conduct without the “commercial
rationale” — the purpose — of protecting their market power is
to confound purpose and taking advantage. If a firm
with market power has a
purpose of protecting it, and a choice of methods by which to do so, one of
which involves power distinct
from the market power and one of which does not,
choice of the method distinct from the market power will prevent a contravention
of s 46(1) from occurring even if choice of the other method will entail
it.
...
The Commission failed to show that the conduct of Rural Press and Bridge was
materially facilitated by the market power in giving
the threats a significance
they would not have had without it. What gave those threats significance was
something distinct from market
power, namely their material and organisational
assets.
These Justices applied the test from
Melway (at 76).
- The
2003 Senate Inquiry expressed concern that the Rural Press decision took
the wrong approach:
[it] focuses on a corporation’s physical or business capacity to engage
in conduct rather than its rationale or intent for doing
so...the test appeared
to result in a situation where corporations may use their market power to engage
in proscribed conduct with
impunity, so long as they could also engage in that
conduct in the absence of market
power.[3]
- The
Australian Competition and Consumer Commission (‘ACCC’) shared these
concerns about developments in the case law,
and was keen to see the TPA amended
to clarify the factors that could be taken into account when determining whether
a corporation
has taken advantage of its market
power.[4]
- Prior
to the 2008 amendments, there was plenty of case law offering guidance on the
interpretation of ‘taking advantage’.
Unfortunately, the case
law’s guidance was somewhat inconsistent and at times obscure. Rural
Press was, arguably, merely another example of the inconsistency. What
seems to have caused such misgivings on the part of the ACCC and
the Federal
Government was that Rural Press had moved towards the higher threshold
approach, which would make it more difficult to prosecute s 46 cases.
E. EVALUATION
- Has
s 46(6A) clarified the position? It makes it clear that the
‘higher’ threshold connection is not required, and sets
out a
variety of factors which the court may consider, synthesising strands of
analysis from the previous case law. For example,
the language of
s 46(6A)(a), whether the conduct was ‘materially facilitated’
by the market power is an expression used
in Melway, and considered
(though not always applied) in each of the other four relevant High Court cases.
- Given
the complexity of this area of law, and the varied factual matrixes which are
presented by s 46 cases, s 46(6A) could never
(nor does it purport to)
provide an exhaustive list of the factors which may denote the requisite causal
relationship between the
impugned conduct and the corporation’s market
power. Nevertheless, the factors set out in s 46(6A) provide some much
needed
clarification to this area of competition law.
- The
changes came into effect on 21 November 2008. So it is to be expected that
the new elements of s 46 of the TPA are yet to be
judicially considered.
As such it remains to be seen whether, in practice, the changes will have the
desired effects, or indeed
whether they will have any effect at all. As I
mentioned earlier, the changes pursued in the form of s 46(1AAA), as a
result of
the Boral case, did not change the actual position at law as
enunciated by the majority of the High Court in that case. Rather, they
clarified
and perhaps pre-empted any firm shift in the approach to be taken to
recoupment.
- Similarly,
while the changes inserted in the form of s 46(6A) clarified which factors
may be taken into account when interpreting
‘taking advantage’, they
did not represent a fundamental overall shift in the existing approaches but
rather clarified,
synthesised and codified some earlier approaches to make the
way forward more certain in the identification of principle.
F. WOULD BORAL HAVE BEEN DECIDED DIFFERENTLY IN LIGHT OF S 46(1AAA)?
- Boral
Besser Masonry (‘BBM’), a subsidiary of Boral Ltd, manufactured
concrete masonry blocks, bricks and pavers for the
Melbourne market. BBM had
priced its products below the avoidable cost of production during a time of
economic recession that had
particularly affected the building industry.
- The
relevant issue was whether the alleged behaviour was ‘predatory
pricing’ (and thus ‘taking advantage’
under s 46). Was
the firm’s ability to recoup its losses a factor in determining whether
the behaviour was predatory pricing
or merely aggressive competitive behaviour?
- The
High Court indicated that had Boral been able to recoup its losses, this
may have led to the conclusion that Boral had market power and thus that
it was taking advantage of that market power. The fact that BBM had no
expectation of recoupment
even if other competitors left the market was material
to an evaluation of its conduct and the finding that Boral had no such
market power. As already stated, the recoupment test was used as an analytical
tool in Boral but it was not suggested by the majority of the Justices
that recoupment needed to be proven in order to make out a predatory pricing
claim.
- Would
s 46(1AAA) have affected the Boral decision? On the particular
factual circumstances of Boral, the recoupment analysis was important to
the finding that BBM did not have the requisite level of market power. However,
s 46(1AAA)
would not have disturbed such a finding. It was found that BBM
was operating in an intensely competitive environment and that its
pricing
behaviour was a result of that competition. The recoupment test was used as a
tool but not in any decisive way.
G. WOULD RURAL PRESS HAVE BEEN DECIDED DIFFERENTLY IN LIGHT OF
SECTION 46(6A)?
- Bridge,
a wholly owned subsidiary of Rural Press, published a regional newspaper in the
Murray Bridge area. Bridge and Rural Press
threatened to publish a free
newspaper in a neighbouring territory if the rival publisher, Waikerie, did not
withdraw circulation
of its newspaper from parts of the Murray Bridge area.
- The
relevant issue was whether Rural Press and Bridge had taken advantage of their
market power in making the threats.
- In
Rural Press, the majority of the High Court held that Rural Press and
Bridge had not taken advantage of market power as it was possible to make
those
threats without market power.
- Would
s 6A have affected the Rural Press decision? As stated earlier, the
majority seemed to favour a higher threshold test in Rural Press. Would
the list of factors in s 46(6A) have affected the outcome of Rural
Press? Probably, yes. I will look at each factor
briefly:
(a) whether the conduct was materially facilitated by
the corporation’s substantial degree of power in the market
The
court did already consider this in a sort of hybrid test.
(b) whether the corporation engaged in the conduct in reliance on its
substantial degree of power in the market
The majority of the High Court
did actually consider this factor, albeit briefly.
(c) whether it is likely that the corporation would have engaged in the
conduct if it did not have a substantial degree of power in the
market
This factor may have changed the analysis of the majority and the weight to
be given to certain evidence. The majority explicitly
rejected the idea that
the word ‘would’ should be used instead of ‘could’. If
the High Court focused on
whether the corporation would have acted the way that
it did in the absence of market power, this may have arguably required a lesser
connection between the impugned conduct and the market power.
(d) whether the conduct is otherwise related to the corporation’s
substantial degree of power in the market
This may also have changed the outcome of Rural Press. It is a sort of
‘catch-all’ provision, and it signifies that the
court may take a
more general approach to finding the connection between the conduct and the
market power. In this case, for example,
it would have been arguable that Rural
Press’s ‘material and organisational assets’, which were found
to be what
gave the threats ‘cogency’, were indeed related, or
perhaps a direct result of, Rural Press’s substantial degree
of power in
the relevant market.
- It
seems then that had s 46(6A) been in force in 2003, Rural Press may
have been decided differently.
H. CONCLUSION
- The
amendments to s 46 will provide useful guidance for further development of
competition law. Undoubtedly, a level of flexibility
in applying economic
concepts within the confines of the statutory context has been preserved.
- Clarification
and sign-posting are important goals, which the amendments to s 46 have
provided.
- However,
in any given case, the court must consider the legitimacy of the alleged
conduct. This will always require a careful and
detailed consideration of the
evidence and economic concepts. This aspect of judicial decision making remains
constant, unaffected
by any statutory intervention or revamp of s 46.
I wish to acknowledge the very valuable assistance given to me
in preparing this paper by Ms Stephanie Otorepec, Research Assistant
with
the Federal Court of Australia.
[1] p 6030
Hansard.
[2]
Margaret Brock, ‘Section 46 of the Trade Practices Act – has the
High Court made a “u-turn” on “taking advantage”?’
(2005) 33 Australian Business Law Review 327,
327.
[3]
Trade Practices Legislation Amendment Bill 2008, Explanatory memorandum,
14.
[4] Graeme
Samuel, ‘Proposed reforms to s 46 of the Trade Practices Act’
in Inhouse Counsel 11(8) (2008) 96, 97.
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