The limitations of the \'taking advantage\' test in section 46 of Consumer and Competition Act 2010 PDF

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This essay discusses the limitations of the ‘taking advantage’ test in section 46 of the Consumer and Competition Act 2010 (‘CCA’) and the effect of its removal on the competitive process and suggests that the removal does not deter firms with market power to engage in legitimate business conduct. ...

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This essay discusses the limitations of the ‘taking advantage’ test in section 46 of the Consumer and Competition Act 2010 (‘CCA’) and the effect of its removal on the competitive process and suggests that the removal does not deter firms with market power to engage in legitimate business conduct. Section 46 of the CCA focuses on the effect of business conduct on individual competitors rather than the competitive process in general. This makes firms of market power reluctant to engage in legitimate business conduct that inevitably results in an effect prohibited by section 46. Then, this essay demonstrates that the removal of defence as a result of the removal of ‘taking advantage’ test prevents firms with market power to rely on the defence to justify their anti-competitive conduct. This essay also addresses the difficulties in applying the ‘taking advantage’ limb as a test to distinguish between competitive conduct which is beneficial to the consumers and anti-competitive conduct by a firm with substantial market power that harm the competitive process and therefore, causes unpredictability in determining the legitimacy of a business conduct. It also discusses how the replacement of the ‘substantial lessening of competition’ as recommended by the Harper Review is a suitable alternative to improve the competitive process of the market. This essay recognises that both ‘taking advantage’ test and ‘substantial lessening of competition’ test are not adequate tests on their own and suggests that a hybrid approach should be adopted to incorporate ‘substantial lessening of competition’ into section 46 in order to efficiently capture anticompetitive conduct only and maintain a legitimate competitive process. The focus on the effect of business conduct on individual competitors worries the firms with market power Section 46 focuses on the effect of anti-competitive conduct on individual competitors instead of the competitive process. Damaging an individual competitor is prohibited by section 46 but it is an inevitable consequence of vigorous, legitimate competition. Therefore, if the ‘taking advantage’ test is applied, firms with market power are likely to be hesitant to engage in legitimate competitive conduct for fear of breaching section 46.1 For example, predatory pricing is a legitimate business conduct even though it results in putting a competitor out of business or preventing a new entrant into the market.

1 Commonwealth, ‘Options to strengthen the misuse of market power law’ (Treasury, Australian Government, December 2015) .

As the meaning of ‘taking advantage’ is not precise, there are inconsistencies in applying the test.2 It is not until the case of Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd that the case law has developed a clear interpretation of the ‘taking advantage’ test by considering whether a firm would behave in the same way in the absence of substantial market power.3 This leads to the current interpretation of section 46 that a firm can engage in anti-competitive conduct as long as they can show that a firm without substantial market power can undertake the same conduct. This also means that this approach is more focused on the effect that such conduct has on individual competitors rather than the competitive process in general.4 Therefore, with the removal of the ‘taking advantage’ test, firms with market power can legitimately undertake competitive conduct that enhance efficiency, creativity, product quality and price competitiveness without having to worry that such conduct may have the effect of kicking out competitors out of business. Removal of defence removes justification for anti-competitive conduct Removal of the ‘taking advantage’ test means that the court is still required to find that the firms have substantial market power and that they engage in anti-competitive conduct but it also results in the removal of the defence that a firm with market power can engage in a business conduct if it can prove that firms without market power can engage in the same conduct.5 This defence immunises a business conduct if it meets the threshold that firms without market power could also undertake the same conduct. This approach fails to recognise that the effects of conduct by a firm with substantial degree of market power can differ from the effect of the same conduct by a firm without market power. For example, conduct such as exclusive dealing, loss-leader pricing and cross-subsidisation may trigger healthy competition when undertaken by a firm without market power, but harmful to the competition process when undertaken by a firm with market power.6 With the removal of the defence, firm with market power cannot rely on the hypothetical scenario of the effects of firms without market power undertaking the same conduct which is a lower threshold to justify their anti-competitive conduct. This in turn will encourage a healthy, legitimate 2 Arien Duke, ‘The Need to Close the ‘Taking Advantage’ Gap in the Regulation of Unilateral Anti-Competitive Conduct’ (2008) University of Melbourne Law School Research Series 6. 3 [1989] HCA 6. 4 Wylie IS, “What is an Exclusionary Provision? Newspapers, Rugby League, Liquor and Beyond” (2007) 35 Australian Business Law Review 33. 5 Ibid. 6 International Competition Network Discussion Document, Competition Enforcement and Consumer Welfare (10th Annual Conference, The Hague, 17-20 May 2011) .

competitive process in the market. Moreover, without having to rely on hypothetical scenario which provides unpredictable results, the firms can be more certain in predicting whether their conduct constitute a contravention by having regard to the likely effect of that conduct as suggested by the ‘substantially lessening competition’ test. However, it can be argued that removal of the ‘taking advantage’ test expands the reach of prohibition and therefore, discourages firms from engaging in legitimate business conduct. The possession of substantial market power is an appropriate incentive to encourage firms to achieve superior performance and innovation.7 It is also acceptable for firms to maintain or increase their market power which ultimately benefits the consumers. The self-correcting nature of the market accepts such conduct as legitimate.8 This is because dominant firms will be prevented from exploiting consumers for long term because monopoly tends to attract rivals. On the other hand, conduct that disrupt the self-correcting nature of the market and harmful to consumers is prohibited by the law, specifically in section 46. Section 46 aims to govern the unilateral conduct of a firm with substantial market power that is likely to impact competition. To achieve so, the ‘taking advantage’ test seeks to distinguish between aggressive, legitimate competitive conduct and anti-competitive conduct. This test requires proof of the causal connection between market power and the conduct itself. It does not capture all conduct undertaken by firm with market power, but only conduct that is linked to the firm’s market power.9 With the removal of the test, a firm with market power can be found to have breached section 46 because of the effect of its conduct on the competitive process, even though the conduct can be justified by legitimate commercial purposes. ‘Taking advantage’ of a substantial market power means using that power. Without the ‘taking advantage’ limb, section 46 can apply in circumstances where there is no use of market power and the existence of market power is irrelevant to the impugned conduct.

Uncertainties of the test make it difficult for firms to predict the legitimacy of their business conduct The ‘taking advantage’ test is not clear in its interpretation and fails to perform its filtering role to make distinction between firms with substantial market power acting in a monopolistic manner to restrict competition and firms with or without substantial market 7 Suzanne Scotchmer, Innovation And Incentives (Massachusetts Institute of Technology, 2004). 8 Reid B, “Section 46-A new approach” (2010) 38 Australian Business Law Review 41. 9 Ibid.

power competing vigorously through making superior offers, even though this will hurt their competitors.10 This discourages large firms from engaging in competitive conduct as the test does not provide predictable results that they can rely on to predict if their conduct are likely to constitute a breach of section 46.11 The ‘substantial lessening competition’ test seeks to rectify this limitation and includes mandatory factors that direct the court to consider the extent to which the conduct has the purpose or likely effect of increasing or decreasing competition in relation to efficiency, innovation, product quality or price competitiveness.12 However, it may be argued that despite the ambiguity of the meaning of ‘taking advantage’, the case law has developed a clear interpretation of the term and does not hinder the operation of section 46.13 The test is also well understood as evidenced by the number of decided cases over the decade. As the ‘taking advantage’ test does not prohibit all conduct undertaken by firms with market power but only conduct that is connected to the firm’s market power, it allows firms to engage in legitimate competitive conduct. 14 Nevertheless, there are instances such as the Rural and Boral cases where taking advantage element is hard to be determined from the cases and instead, the courts opt to decide on substantial lessening competition. The meaning of ‘take advantage’ is difficult to be determined. Although Queensland Wire has developed an interpretation of the test, subsequent cases have met difficulties in applying the test.15 In Rural Press Ltd v ACCC,16 it is held that Rural Press’ conduct of making threat that unless Waikerie Printing withdrew from the Mannum areas, Rural Press would introduce rival newspaper to the Riverland market, does not constitute taking advantage of market power but rather, the conduct has resulted in substantial lessening of competition.

Replacement with ‘Substantially lessening of competition’ test encourages legitimate competition

10 Rod Sims, ‘ Section 46: The great divide’ ( Speech delivered at the Hodgekiss Competition Law Conference, 30 May 2015) . 11 Ibid. 12 Simon Uthmeyer and Nicole Breschkin, ‘Misuse of market power: How proposed changes to the law will affect the private health sector’ (06 April 2016) . 13 Wylie, above n 4. 14 Sims, above n 10. 15 Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177. 16 [2003] HCA 75.

Removal of the ‘taking advantage’ test would place great emphasis on the application of the ‘substantial lessening of competition’ test. This proposed change relies exclusively on the ‘substantial lessening of competition’ test to determine the legality of business conduct. Unlike the ‘taking advantage’ test, the ‘substantial lessening of competition’ test does not require a connection between a firm’s market power and the business conduct but focuses solely on the effect or likely effect of the business conduct.17 This means that a breach of section 46 is easier to prove because the objective inquiry of the effect of conduct is easier to prove than the subjective purpose of the officers who are the directing mind of a corporation. As such, the ‘taking advantage’ test creates greater uncertainties as to the legality of the business conduct. On the other hand, with the application of the more simplified test of ‘substantial lessening of competition’, firms only have to consider, in the planning of their business course of action, the likely effect of their conduct instead of trying to discern whether the purpose of their conduct constitute a taking advantage of the market power which is a question more aptly decided in a courtroom than by a layperson. On the other hand, the ‘substantial lessening of competition’ test extends section 46 beyond ‘misuse of market power’ and would make it easier to prove a contravention. This makes the firms hesitant in engaging in legitimate business conduct. This is because a breach of section 46 occurs not only when a firm take advantage of its market power for the proscribed purpose but also when its conduct has such an effect.18 Although the Harper Review recommends making authorisation available to exempt conduct from s 46 if the conduct satisfies the public benefit test in order to prevent overreach of the prohibition, the cost and public consultation required to make an authorisation application is likely to make this defence impractical.19 Furthermore, the dynamic nature of many markets make it difficult for firms to engage in the advance planning necessary to apply for an authorisation.20 A conduct that is in breach of section 46 can also be exempted if the conduct is a rational business decision by a firm without substantial market power and can promote economic efficiency which means that it is beneficial to the long-term interests of the consumers can be exempted from the prohibition.21 This defence may result in prohibiting conduct that is not anti-competitive and complicates the litigation process. For example, in Melway Publishing

17 Uthmeyer and Breschkin,above n 12. 18 Duke, above n 2. 19 Ibid. 20 Ibid. 21 Phillip L Williams, ‘The counterfactual test in s 46’, (2013) 41 Australian Business Law Review 93.

Pty Ltd v Robert Hicks Pty Ltd,22 Melway was able to prove legitimate business reason in refusing to supply to Auto Fashion by pointing out the circumstances in which it undertakes similar conduct in markets where it did not have substantial market power. However, if the case is decided in light of the recommended s 46, although Melway can provide legitimate business reason for its behaviour, Melway would still have to prove that its exclusive distribution system encouraged economic efficiency.23 Such defences are also likely to restrict legitimate business conduct such as predatory pricing. For example, in Boral Besser Masonry Ltd v Australian Competition and Consumer Commission where a firm with market power was pricing below cost in order to eliminate a new entrant is found not to have substantial market power.24 It is also held that even if substantial market power is found, there must be a ‘taking advantage’ of that market power in order to constitute a breach of section 46. However, if ‘substantial lessening of competition’ test is to be applied, the court is only required to refer to the effects of the conduct. As such, the court would be likely to find Boral in breach of section 46 because aggressive pricing causes a substantial lessening of competition. It would also be difficult to establish the defence that the conduct is beneficial to the customers’ interests because predatory pricing lasts only a short period of time and is purposed to force a competitor out of the market.25 Conclusion In conclusion, the ‘taking advantage’ test has its limitations in maintaining a healthy competition in the market. Removal of the test is recommendable but it risks encouraging pro-competitive conduct by firms with market power that eliminates competitors. Therefore, the term ‘substantially lessening competition’ should be incorporated into section 46 to require that the conduct with a proscribed purpose must also be anti-competitive. This would help the courts to ensure only anti-competitive conduct is captured while maintaining legitimate competition.

Moreover, many jurisdictions adopt an approach that consider the conduct and its effect on competition when determining whether a contravention has been established.26 Such a change is more aligned with the international approach. 22 (2001) ATPR 41. 23 Uthmeyer and Breschkin, above n 19. 24 (2003) 195 ALR 609. 25 Wylie, above n 4. 26 Ibid....