Purpose & effect - when is market power misused?

The Commonwealth Parliament passed the Competition and Consumer Amendment (Misuse of Market Power) Bill 2017 on 15 August 2017. The Bill replaces section 46 of the Competition and Consumer Act 2010, which prohibits misuse of market power, and implements the Harper Review recommendation to replace the existing ‘take advantage’ test with an ‘effects test’.

The changes to section 46 will not commence until commencement of Schedule 1 of the Competition and Consumer Amendment (Competition Policy Review) Bill 2017 (Competition Policy Bill). The Competition Policy Bill was passed by the Commonwealth Parliament on 18 October 2017 and is expected to commence in the coming weeks.

Background

The Harper Review was conducted in 2014 as a ‘root and branch’ review of competition law in Australia. A key focus of the review was the operation of section 46 of the Competition and Consumer Act.

The review concluded that the section was not fit for purpose and was unnecessarily complex. It recommended that a purpose & effects test be applied. Although this recommendation was not immediately accepted by the Commonwealth Government, following further consultation, it was adopted in March 2016.

The Explanatory Memorandum to the Competition and Consumer Amendment (Misuse of Market Power) Bill states that the objective of section 46 is to protect competition, rather than any individual competitor. The Harper Review noted that the existing section 46 is inconsistent with that objective and seeks to prohibit damage to a particular competitor, rather than competition.

The new section 46 focuses on the effect of behaviour on competition. It is not designed to shield inefficient competitors from strong competition.

What will change?

The threshold test of substantial market power will not change under the new section 46. The guidance set out in subsections 46(3) to (8) are simplified parallels of the previous subsections, but are not intended to effect a change in meaning. As such, existing case law about when a corporation will have a substantial degree of market power will continue to apply.

What will change is the test applied to determine whether a breach of the section has occurred. The current section 46 prohibits a corporation with a substantial degree of market power from taking advantage of that power for the purpose of eliminating or damaging competitors, preventing entry into the market or preventing a person from engaging in competitive conduct.

The new provision introduces a ‘purpose & effects test’ as a precondition of establishing a breach. It states that a corporation with a substantial degree of market power must not engage in conduct that has the purpose, or is likely to have the effect, of substantially lessening competition in a relevant market.

The purpose & effects test is found in other parts of Part IV of the Competition and Consumer Act – including sections 45 (arrangements affecting competition) and 45D and 45DA (secondary boycotts). The Explanatory Memorandum provides some guidance on the application of the purpose & effects test under the new section 46. It states that:

This concept already exists in a number of provisions in Part IV of the Act, and it is intended that the existing jurisprudence will inform the application of this concept in the context of section 46.

While undoubtedly previous cases on the application of this type of test will be relevant, it remains to be seen how courts will approach this new provision.

^{The information in this publication is provided for general purposes only. It is not to be relied on as a substitute for legal advice. Crown Law and the Department of Justice and Attorney-General accept no liability for losses caused by reliance on the material in this publication. Formal legal advice should be obtained for particular matters.}