Upcoming Mallesons seminarsOrganisations who are likely to have substantial market power, or substantial share of a market, or those dealing with such organisations.
What do you need to do?Ensure that you and your organisation are aware of your obligations under the Act. We can help with this.
Lisa Huett
Partner
Lisa Huett
Partner
T +61 3 9643 4163
Sydney
Vishal Ahuja
Sharon Henrick
Trish Henry
Dave Poddar
Luke Waterson
Melbourne
Amanda Bodger
Caroline Coops
Lisa Huett
Andrew Monotti
The Federal Government has approved further amendments to section 46 of the Trade Practices Act 1974 (Cth) (TPA) which will introduce a new prohibition in Part IV of the TPA, aimed at targeting predatory, below-cost pricing by corporations with substantial market share. It will be important for corporations to take this new change into account, given the substantial penalties in the TPA for breach of this section.
If the new law is enacted, companies will need to assess whether any ongoing below-cost pricing conduct which does not currently contravene section 46, could now contravene this new prohibition. You should contact your legal advisor if in doubt.
This last minute amendment (which was introduced without industry consultation or Senate Economics Committee review) will significantly change the operation of the misuse of market power law in Australia, and introduce considerable uncertainty as to the reach of section 46. The new test ignores the fundamental competition law principle that market share is not determinative of market power and risks deterring corporations from engaging in legitimate competitive conduct.
Below-cost pricing
New section 46 (1AA) will prohibit a corporation with a “substantial share of a market” from being involved in anti-competitive, below-cost pricing for a sustained period.
For the purposes of determining whether a corporation has a “substantial share of a market”, the Court may have regard to the number and size of the competitors of the corporation in the market (new section 46AB). In consideration of other parts of the TPA this could be as low as a 20% share of the market. A market could be a State, Territory, region or smaller locality.
The effect of this new test will be significant for the following reasons:
- The concepts of “substantial power in a market” and “taking advantage” of market power are absent from the new test. A corporation without market power now risks breaching section 46 where it engages in below-cost pricing.
- The Bill does not define the term “relevant cost” nor the term “a sustained period” so it is unclear how the courts will approach these issues. This lack of definition may potentially deter corporations from legitimately meeting competition, for example matching low cost imports or new entrants with more cost-efficient, innovative processes and products.
- The Bill does not require a corporation to have the intention or ability to recoup its losses after the period of below-cost pricing. This further signifies that the corporation can breach this provision without possessing or using any market power.
Until there is judicial authority on this proposed new section, it is likely to create considerable uncertainty for companies with a substantial market share. For example, an incumbent airline heavily discounting to match the cost of a new entrant or a mobile phone company launching a new technology product at below cost to obtain start up sales could both risk contravening the new section. Companies facing such uncertainty may choose not to engage in discounting (despite its obvious consumer benefits) for fear of contravening the new test.
As outlined in our previous Alert (Amendments to Trade Practices Act introduced into Parliament), the TPA will also been amended as follows.
Misuse of market power
The existing misuse of market power provisions in section 46 and the telecommunications provisions in Part XIB of the Act will be amended:
Leveraging market power
The Bill clarifies that a corporation must not take advantage of its market power in any market (ie not just the particular market in which the corporation has substantial market power).
The following factors may be taken into account in determining whether a corporation has a substantial degree of market power:
- courts will look at all contracts, arrangements, understandings or covenants that the company has with other companies;
- a corporation can have a substantial degree of market power even if they do not substantially control the market or have absolute freedom from constraint by the conduct of actual or potential competitors, suppliers or customers; and
- more than one corporation may have a substantial degree of market power in a market.
Unconscionable conduct
The unconscionable conduct provisions in the TPA are also to be amended as follows:
- In determining whether a corporation has engaged in unconscionable conduct, one of the factors that a court may take into account is whether the relevant contract contains a right for the corporation to unilaterally vary a term or condition of a contract.
- The Bill raises the threshold limit for transactions which fall within the scope of the unconscionable conduct provisions from $3 million to $10 million.
Other changes to the TPA
Finally, the Bill creates a second Deputy Chairperson position at the ACCC, which the Government has said will be filled by a person who is experienced in small business matters.