Applying an Effects Test Under s 46 of the Competition and Consumer Act

By Professor Stephen Corones

In its Final Report released in March 2015, the Competition Policy Review Committee (Harper Review Committee) made some radical recommendations for the reform of Competition and Consumer Act 2010 (Cth) (CCA), and none more so than Recommendation 30. Recommendation 30 is that s 46(1) should be amended to prohibit a corporation that has a substantial degree of market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition. [1]

Prior to the Federal election on 2 July 2016, the Turnbull Government announced that if returned to power, it would legislate to give effect to Recommendation 30. In its Media Release the Government said that s 46 in its current form was:

… not reliably enforceable and permits anti-competitive conduct. This slows the entry and expansion of new and innovative firms, delays the entry of new technologies into Australia and impedes economic growth in the long run .[2]

It is claimed that these amendments will make it easier for the ACCC or a private party to challenge unilateral anti-competitive conduct.[3] It also stated that the incorporation of an effects test in s 46 was ‘…one of the many actions the Government is taking to protect small businesses’. Whether the adoption of an effects test in s 46 will be easier to satisfy than the current test, and whether it will provide additional protection for small businesses, are two claims that I will return to at the conclusion of my paper.

By way of background and context, I will consider the following questions:

• What are the proposed amendments to s 46?
• How has the effects test been applied in the context of ss 45, 47 and 50 of the CCA?
• What role does economic efficiency play in applying the effects test?
• How has the effects test been applied in the European Union?
• In what circumstances will authorisation be available for s 46 conduct?

What are the proposed amendments to s 46?

There is a degree of speculation involved as to the precise wording that will be adopted to incorporate an effects test in s 46. In its Media Release the Government stated that while it will consult on the Exposure Draft legislation before introducing it to Parliament later this year, it proposes to implement the Recommendation 30 in full. The Harper Review Committee set out its preferred wording of the new s 46 prohibition in Appendix A of its Report. Under the proposed wording s 46(1) will provide:

A corporation that has a substantial degree of power in a market shall not engage in conduct if the conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in that or any other market.

How does this wording differ from the existing prohibition? The first change to note is that the ‘taking advantage element’ in the existing s 46(1) prohibition has been deleted. The ‘taking advantage’ element requires the Court to consider whether the conduct at issue is conduct that only a corporation with market power could have undertaken. In other words, there must be a connection or causal link between the impugned conduct and the respondent’s market power, in the sense that the respondent can only engage in that conduct because it possesses substantial market power. The need for this causal link will no longer apply under the new s 46.

The second change to note is the removal of the mandatory subjective anti-competitive purpose element from the existing s 46(1). Under the existing s 46(1) it is necessary to consider the subjective purpose of the officers and employees of the corporation responsible for the impugned conduct. ‘Purpose’ in this context means: ‘the effect which it is sought to achieve — the end in view’.[4] While the courts have been prepared to infer such a purpose from documentary evidence, proof of this element has proven difficult in the past, especially in the face of evidence given by witnesses in Court.[5] Under the new s 46(1) a subjective anti-competitive purpose is only one of three possible tests. In the absence of evidence of purpose, it will be possible to satisfy the prohibition by proving that the effect or likely effect of the conduct is a substantial lessening of competition.

The third change to note is contained in the proposed s 46(2) which states that:

in determining whether conduct has the purpose, or would have or be likely to have the effect, of substantially lessening competition in a market, the court must have regard to the extent to which the conduct has the purpose, or would have or be likely to have the effect of increasing competition in the market including by enhancing efficiency … (emphasis added).

Importantly, the direction will make clear that any enhancement of economic efficiency is only relevant to the extent that it leads to an increase in competition.

The fourth change to note is making authorisation available for conduct that would otherwise infringe s 46.[6] Authorisation is not currently available for conduct that might contravene s 46(1).

Market Structure and the Effects Test

With these speculative questions about the precise wording of the amendments in mind, let us look back and consider how the effects test has evolved over the past 40 years. What do we know already about the effects test from how it has been applied in the context of the other provisions of the CCA? How much clarity has emerged from the past 40 years’ jurisprudence surrounding the effects test?[7]

A. Re QCMA

Chronologically, the starting point is the seminal determination of the Tribunal in 1975, Re Queensland Co-operative Milling Association Ltd and Defiance Holdings (Re QCMA). Somewhat surprisingly, the fundamental concept of ‘competition’ for the purposes of the Act is not defined. I n QCMA, the Tribunal adopted the economic concept of ‘workable competition’ as the concept of competition which the Act seeks to promote. The Tribunal stated: ‘Competition expresses itself as rivalrous market behaviour’.[8] Rivalry is a nebulous concept. It is difficult to measure directly. Whether firms engage in rivalry depends largely on the structure of markets. ‘Market structure’ refers to ‘…those conditions external to the firm which are relatively permanent or which change only slowly, and which affect, if they do not determine, the way the firm operates’.[9]

In Re QCMA the Tribunal adopted a structural analysis to determine the competitive impact of the impugned conduct. This approach requires first that the relevant market be defined; then the existing structural features of the market are identified; and finally the future effect of the impugned conduct on the structure of the market is assessed. The Tribunal identified five elements of market structure that need to be considered as part of the effects test. [10] Let me say a few words about each of them.

First, the number and relative size of sellers (their market shares) over time is recognised as a major element of market structure. A market structure consisting of one dominant firm whose market share has remained constant over time, with a few small suppliers would suggest the presence of market power. On the other hand, a larger number of firms with no relatively large firms, and frequent changes in market shares would suggest the absence of market power.

While a firm with market power will usually has a large market share, market share alone is not a reliable indicator of market power. If there are no, or low, barriers to entry, a firm with a large market share will not be able to raise its price above competitive levels for fear of attracting new entry. Such markets are said to be contestable. One important barrier to entry arises where there are economies of scale in production and the minimum efficient scale (MES), that is the optimum least cost scale of the plant and firm, is very large relative to the size market as a whole.

The third element of market structure is product differentiation. Product differentiation, as the name suggests, refers to the ways in which firms seek to distinguish their products from those of their competitors in order to establish customer loyalty. This can include product variation and expenditure on advertising and marketing. If product differentiation is effective it will operate as a kind of barrier to entry, but is treated separately under the Re QCMA structural analysis.

The fourth element of market structure is the character of vertical relationships with customers and suppliers. Vertical relationships refer to those between a seller and other firms in different functional markets either upstream, (with suppliers of factor inputs), or downstream, (with distributors and buyers). For example, where all or most of the distribution outlets for a particular product are tied to some existing firms by exclusive agreements, this will act as a kind barrier to new entry, but is treated separately under the Re QCMA structural analysis.

The fifth element of market structure is the character of horizontal relationships between existing sellers. These may include price leadership, market sharing arrangements, and trade association reporting arrangements and other conduct which indicates a lack of independent-decision making by sellers in the market.

One final piece of guidance from Re QCMA : the Tribunal stated: “…there should be independent rivalry in all dimensions of the price-product-service packages offered to consumers and customers”.[11] An effects test requires an assessment not just of the effect or likely effect of the conduct on the price of the product (whether it will increase), but also the effect on output, quality and service (whether they will decrease).

B. Outboard Marine Australia v Hecar

The Re QCMA structural analysis for determining the effect of conduct on competition in a market has been adopted many times by the Federal Court.[12] Early judicial guidance came in 1982 with the decision of the Full Federal Court in Outboard Marine Australia Pty Ltd v Hecar Investments (No 6) Pty Ltd.[13]

The Court held that the state of competitive rivalry depended on the structure of the market and that a substantial lessening of competition involved a change in the structure of the market. The test for determining the effect of conduct on competitive rivalry is to consider: what is the likely structure in the future with the conduct at issue is compared with what is the likely structure in the future without the conduct. The counterfactual analysis begins with market definition and then an analysis of structure, with the main focus being on barriers to entry rather than market concentration. The structure will determine the conduct of the firms and the level of competitive rivalry between them.[14]

It is necessary to ask: will the conduct at issue change the structure of the market? Is it harming the competitive process? Will it continually deter new entry? The proper question to ask is: looking into the future, will the conduct reduce competitive rivalry that would otherwise have existed in the market but for the conduct in question?[15]

The test is a difficult one for lawyers to apply in practice. Lawyers are accustomed to gathering evidence (facts) about past conduct rather than making predictions about the likely economic effect of future conduct. The effects test requires them to make predictions and judgments deduced from facts about what is likely to occur in the future as regards existing competitors and potential new entrants.

C. Section 50(3) of the CCA

In 1992, the first statutory guidance as to the meaning and content of the effects test was provided when the standard for assessing mergers was changed from a dominance standard to an effects-based standard. As a part of those reforms, s 50(3) was inserted into the Act. Section 50(3) of the CCA sets out the structural elements a court must take into account in determining whether an acquisition would have, or be likely to have the effect of substantially lessening competition in a market. It is not an exhaustive list. The matters largely follow the structural ‘checklist’ of factors identified by the Tribunal in the Re QCMA case and adopted in subsequent cases involving mergers.[16]

Section 50(3) provides:

Without limiting the matters that may be taken into account for the purposes of subsections (1) and (2) in determining whether the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in a market, the following matters must be taken into account:

(a) the actual and potential level of import competition in the market;

(b) the height of barriers to entry to the market;

(c) the level of concentration in the market;

(d) the degree of countervailing power in the market;

(e) the likelihood that the acquisition would result in the acquirer being able to significantly and substantially increase prices or profit margins;

(f) the extent to which substitutes are available in the market or are likely to be available in the market;

(g) the dynamic characteristics of the market, including growth, innovation and product differentiation;

(h) the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor;

(i) the nature and extent of vertical integration in the market.

An important point to note about this list of factors is that there is no mention of efficiency as a factor that the court must consider in applying the effects test.

D. AGL v ACCC (No 3)

The next significant step in the evolution of the effects test came in 2003, with the decision of French J in Australian Gas Light Co Ltd v ACCC (No 3).[17] Two important points emerge from this case. First, French J stressed the need to consider the longer term effect of the conduct at issue, rather than short-term phenomena. His Honour concluded that the existence of substantial lessening of competition needs to be assessed over a period of years rather than months, and certainly not the half-hourly price spikes which the ACCC argued demonstrated the exercise of market power. The Court found that the barriers to entry to the wholesale electricity market were not such as to ‘significantly support or contribute to market power on the part of any of the market participants’.[18] Over the longer term (two years), French J found[19] that barriers to entry into electricity generation were relatively low and that gas turbines are able to be commissioned in ‘under two years’.[20]

The second important finding in this case relates to the meaning of ‘likely’ in the phrase ‘likely effect of substantially lessening competition’. French J stated:

In my opinion, having regard to the statutory context provided by the other sections of Pt IV, the correct construction is that “likely” refers to a significant finite probability, or “a real chance” rather than “more probable than not”.[21]

E. Rural Press Ltd v ACCC

Also in 2003, the High Court considered the meaning of the word ‘substantial’ in the effects test. There is a de minimis or threshold test that has to be met under the effects test. The effect or likely effect on competition must be ‘substantial’. In Rural Press Ltd v ACCC, [22] the High Court majority confirmed the findings made by the primary judge, Mansfield J, that there had been a contravention of s 45(2) of the CCA in that the parties had made and given effect to an arrangement having the purpose or effect of substantially lessening competition. The majority stated that the word ‘substantial’ was used ‘in the sense of being meaningful or relevant to the competitive process’.[23]

What does ‘meaningful or relevant’ mean in practice? How are we to measure the anti-competitive impact of the impugned conduct? It is necessary to consider its impact on all aspects of the price — product —service package. Will it result in an increase in prices? Will it result in a restriction in output? Will it result in a decline in quality or service levels?

F. ACCC v MetcashTrading

The standard of proof to be applied under the effects test was at issue in the 2011 decision of the Full Federal Court in ACCC v Metcash Trading Limited. As you know, the inquiry under the effects test involves two steps. The first step is identifying the most likely counterfactual, that is, what would happen in the future without the impugned conduct. The second step is determining whether the likely effect of the impugned conduct is to substantially lessen competition.

The primary judge, Emmett J, in ACCC v Metcash Trading Limited,[24] stated that in relation to the second step:

The better view is that likely signifies a real chance rather than a greater probability than not .[25]

However, Emmett J held that the ‘real chance’ test does not apply in relation to the first step, identifying the most likely counterfactual. His Honour held that the test to be applied in relation to the first step is the civil standard on the balance of probabilities.

Emmett J held:

…the Commission must satisfy the Court that its counterfactual is more probable than any competing hypothesis advanced to suggest that there is no real chance of competition being substantially lessened as a result of the acquisition.[26]

On appeal, ACCC v Metcash Trading Limited,[27] Buchanan J agreed with Emmett J that the balance of probabilities test should be applied to the first step of the inquiry. His Honour stated:

If the ACCC was correct about its two stage applications of the “real chance” test, the case would have to be decided upon a position where speculation was heaped upon speculation … Further, in my view, application of the “real chance” test even at the second stage also presents problems. The circumstances of the present case, with its concentration on comparisons which are all in the future, provide an illustration of the danger of descending into the realm of conjecture.[28]

Finn and Yates JJ declined to express a concluded view on the proper standard of proof to be applied in relation to identifying the counterfactual.

In summary, the counterfactual will in some cases be the status quo or current state of competitive rivalry without the conduct at issue; however, if the status quo is about to change, the counterfactual should reflect that change. The applicant bears the onus of proof as to what is the appropriate counterfactual, but it is unclear whether the applicant must satisfy the court that its proposed counterfactual is the most likely one ‘on the balance of probabilities’, or merely that there is a ‘real chance’ of it occurring. According to Emmett and Buchanan JJ, the balance of probabilities standard is to be applied in assessing the first step, identifying the counterfactual. However, in relation to the second step, (determining whether the conduct is ‘likely’ to substantially lessen competition), the weight of authority is to apply the ‘real chance’ test, rather than the balance of probabilities standard.

What role does economic efficiency play in applying the effects test?

How is efficiency to be integrated into the effects test? If ‘competition’ in Pt IV of the CCA means ‘rivalry’ there is little scope for efficiency considerations. However, in some cases it is not possible to partition ‘competition’ and ‘efficiencies’ as two separate concepts, because the long-term competitive structure of markets can be determined by efficiencies.

Under the existing effects test in s 50 of the CCA the courts have sent mixed messages about the role played by efficiency. A firm’s ability to achieve economies of scale or scope enhances its ability to compete more vigorously. These efficiencies will have a bearing on the future state of competition as a process of rivalry, and must be taken into account in any assessment of the competitive effects of conduct.[29] This was recognised by Emmett J in ACCC v Metcash Trading Ltd , who stated:

If the proposed acquisition has the potential to create significant economies of scale or scope for the merged firm, it may be desirable to assess whether the potential reduction in competition from the reduced number of participants in the relevant market might be offset by the fact that the merged entity will be a more efficient and aggressive competitor.[30]

However, others have expressed the view that efficiency plays no part at all under the effects test. In Davids Holdings Pty Ltd v Attorney-General of the Commonwealth,[31] Drummond J stated:

Provisions such as s 50 are not tools designed to enable the Court to strike a balance between the economic advantages that might flow from the economies of scale and other efficiencies resulting from a particular merger, on the one hand, and the economic detriments of the merger, such as increased prices that consumers may have to pay, on the other.[32]

In any event, doubts about the role of efficiency in any effects test under the proposed s 46(1) will be removed by the direction in the proposed s46(2).

A. Efficiency and purpose

Let me make a few observations about text of the proposed amendment. The wording of the proposed amendment states that efficiency has a role to play in relation to the ‘purpose’ limb of the slc test in s 46(1). In relation to the ‘purpose’ limb, it may be possible to argue that the purpose of a provision in a contract, or the purpose of those responsible for giving effect to the impugned conduct, was to achieve efficiencies.[33]

The issue arose in relation to s 27 of the Commerce Act 1986 (NZ) in Clear Communications Ltd v Sky Network Television Ltd .[139] Section 27 of the Commerce Act 1986 (NZ) prohibits provisions in contracts, arrangements or understandings that have the purpose, effect or likely effect of substantially lessening competition in a market. In that case the dominant telecommunications carrier in New Zealand (Telecom) wished to enter the pay TV market. Telecom acquired an interest in Sky Network Television and entered into a proposed programme agreement with it. Clear Communications was Telecom’s main rival in telecommunications, but Clear Communications was not in the pay TV market.

It was claimed that s 27 of the Commerce Act 1986 (NZ) would be breached if Telecom were to enter the pay TV market. Counsel for Clear Communications invited the New Zealand High Court to ‘disregard any positive contribution that efficiencies make to the competitive process’.[34] The Court rejected the submission. In applying the two limbs of s 27 ‘purpose’ and ‘effect’ of a provision the Court noted:

Section 27 is couched in terms of both “purpose” and “effect”. Where the effect of Telecom’s expansion into Pay TV may well be the achievement of economies of scale and scope, that in itself can simply be viewed as an element in a long run dynamic competitive process. Clear’s propositions were largely in terms of “effect”, but also as to “purpose”, if Telecom’s purpose is to expand its business into complementary products, achieving in the process economies of scale and scope, it cannot be said to be pursuing an anti-competitive purpose….[35]

B. Efficiency and effect on competition

My second observation about the wording of the proposed s 46(2) is that efficiency also has a role to play in relation to the ‘effect’ limb of the effects test in s 46(1), but it is only relevant to the extent that it increases competitive rivalry.

Production efficiencies that result in lower costs arising from economies of scale and economies of scope may allow firms with substantial market power to compete more vigorously on price. Such efficiencies may allow them to undercut smaller competitors. Such conduct has neither the purpose, nor the effect of substantially lessening competition; rather, it is a function of the long-run dynamic competitive process. It will not contravene s 46(1) under an effects test.

Dynamic efficiencies in the form of innovation will also be relevant to a firm’s ability to compete more effectively. If a firm invests in research and development leading to new processes, products or marketing techniques that reduce costs, this will allow the firm to compete more effectively. It will not contravene s 46(1) under an effects test even though it harms individual competitors. It is a function of the long-run dynamic competitive process.

Relevant questions here are:

• Does the conduct facilitate investment in services, quality and innovation?
• Does it facilitate entry and expansion?
• Does it reduce free-riding which may affect the dynamics of investment and competition?
• Does it reduce the risk of hold-up or other forms of opportunistic behaviour associated with long-term investments?
• Does it reduce transaction costs by avoiding the need for constant negotiation of contracts?
• Does it reduce search costs for consumers by providing access to information that would not otherwise be available?
• Does it reduce switching costs?

These questions will be especially relevant in electronic market places that make use of the internet. As Roth J observed in in Streetmap EU Limited v Google Inc:

… the internet has had a profound effect in changing the way in which many traditional goods and services are offered to the public and in enabling the introduction of new kinds of products altogether. It has developed rapidly since about the mid-1990s, both as regards technical innovation and in the spread of internet usage. This development presents a challenge for competition law.[36]

Where conduct makes customers better informed, it enhances their ability to switch to suppliers offering more favourable price-product-service packages. This increased mobility of customers enhances competitive rivalry between suppliers.

C. Offsetting a reduction in competition by efficiency gains

The direction in s 46(2) to have regard to economic efficiency when assessing the effect or likely effect of conduct on competition will require a balancing exercise in some cases. For example, where a firm with substantial market power appoints exclusive distributors for each State or Territory, this may reduce competition for its brand since there will be only one source of supply for the brand. The Tribunal In re Tooth & Co Ltd; In re Tooheys Ltd ,[37] noted that exclusive dealing provisions in contracts that cover a large proportion of distributors and last a long period of time, may have the effect of foreclosing the possibility of entry to the market.

It may, however, increase competition by providing an incentive for the distributor appointed to make investments in specialist equipment, showrooms and training staff that create distribution efficiencies. This will increase inter-brand competition. In analysing the effect of the exclusivity provision on competition it is necessary to have counterfactual market structure in mind. Without the exclusivity provision the distributor might not make the investment for fear of other distributors in the territory taking a free ride on its investment. The High Court in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd,[38] stated that the ‘overall effect on competition of such restraints is not necessarily negative and may be positive’.

To take another example, a take-or-pay provision in a long-term contract for the use of a gas pipeline may reduce competition because the user will be unlikely to use the services of another supplier for the duration of the contract. This will foreclose other suppliers of pipeline services from the market. However, in analysing the effect of the take-or-pay provision on competition it is necessary to have a counterfactual market structure in mind. Without the take-or-pay provision, the investment in the gas pipeline may not have occurred because of the risk of hold-up or other forms of opportunistic behaviour by users of the gas pipeline. The Tribunal has recognised that by facilitating investment take-or-pay provisions can in some cases be seen, on balance, as pro-competitive rather than an instrument of foreclosure.[39]

Any claim of efficiency enhancing competition in s 46 will put some of the burden of proof on the respondent.[40] The respondent will be obliged to come forward and explain what it was seeking to achieve by pursuing the conduct at issue — how the conduct at issue would increase competitive rivalry. It is likely that seeking to prove or disprove the effect of any claimed efficiency on the competitive process will result in a considerable growth in the complexity of the evidence which the Court will need to control.

Section 46 cases tend to be long and complex and will generally be subject to a case management regime. Expert economic evidence is commonplace in cases brought under Pt IV of the CCA. The Federal Court Rules 2011 empower the Court to order that there are no more than a specified number of expert witnesses; requiring experts who are to give reports to meet for the purpose of identifying and addressing the issues in dispute between them; and requiring the attendance by parties at a case management conference to consider the most economic and efficient means of bringing the proceeding to trial and of conducting the trial. [41]

Streetmap.EU Limited v Google Inc

A counterfactual assessment as part of an effects test under the proposed s 46 is similar to the way abusive exclusionary conduct is examined under the misuse of market power provisions of the EU and the UK. The relevant equivalent provisions are Article 102 of the Treaty on the Functioning of the European Union (TFEU) and s 18(1) prohibition under the Competition Act 1998 (UK).

In 2009, the European Commission issued Guidance on its enforcement priorities in applying Article 82 of the EC Treaty (now Article 102 of the TFEU) to abusive exclusionary conduct by dominant undertakings.[42] At para [20] the Commission sets out a list of structural factors that it will take into account in assessing whether conduct is likely to lead to anti-competitive foreclosure. Paragraphs 21 and 22 then explain the circumstances in which it will apply the counterfactual:

21. When pursuing a case the Commission will develop the analysis of the general factors mentioned in paragraph 20, together with the more specific factors described in the sections dealing with certain types of exclusionary conduct, and any other factors which it may consider to be appropriate. This assessment will usually be made by comparing the actual or likely future situation in the relevant market (with the dominant undertaking’s conduct in place) with an appropriate counterfactual, such as the simple absence of the conduct in question or with another realistic alternative scenario, having regard to established business practices.

22. There may be circumstances where it is not necessary for the Commission to carry out a detailed assessment before concluding that the conduct in question is likely to result in consumer harm. If it appears that the conduct can only raise obstacles to competition and that it creates no efficiencies, its anti-competitive effect may be inferred. This could be the case, for instance, if the dominant undertaking prevents its customers from testing the products of competitors or provides financial incentives to its customers on condition that they do not test such products, or pays a distributor or a customer to delay the introduction of a competitor’s product.

The England and Wales High Court (Chancery Division) recently applied the counterfactual approach in Streetmap EU Limited v Google Inc.[43] The essential facts of this case were that Streetmap carried on business in the market for online mapping services. Google carried on business in the market for online general search engines. In 2005 Google launched an online mapping product called ‘Google Maps’.

The visual display of Google’s search results is referred to as the ‘Search Engine Results Page’ or ‘SERP’. The SERP includes links to relevant websites or webpages. The user can click on the link to get direct access to the site or page. Under the old Maps OneBox Google listed other British online mapping providers including Streetmap. Under the new Maps OneBox Google displayed a clickable thumbnail map from Google Maps, and no other online maps. The essence of Streemap’s claim of a contravention of Article 102 of the Treaty on the Functioning of the European Union (TFEU) and s 18(1) prohibition under the Competition Act 1998 (UK) was that this was a form of discrimination. It was alleged that Goggle was using its dominant position in the general search engine market to foreclose competitors of Google Maps in the market for on-line maps. Streetmap’s claim was not that Google should not have displayed a clickable thumb map on its SERP, since this was clearly a benefit to consumers. Rather, it argued that Google should have provided a link to Streetmap and other mapping providers as well as Google Maps in the search results to enable them to get access to customers.[44]

Roth J stated:

I have concluded that introduction of the new-style Maps OneBox was intended to improve Google’s offering in the market for general search …The unusual and challenging feature of this case is that conduct which was pro-competitive in the market in which the undertaking is dominant is alleged to be abusive on the grounds of an alleged anti-competitive effect in a distinct market in which it is not dominant.[45]

Streetmap alleged that Google’s purpose in introducing the new Maps OneBox was to foreclose competition from Google Maps’ competitors in the online mapping market. Roth J concluded that Google’s main purpose in introducing the new Maps OneBox was to improve its general search engine by remedying its perceived deficiencies when compared with its competitors in the general search market.[46]

In considering the effect or likely effect of the new Maps OneBox on competition Roth J applied the counterfactual approach:

In addressing the effect of particular conduct, it is necessary to have in mind the alternative position against which that effect falls to be assessed: i.e. what is usually referred to as the counterfactual. Both sides’ economic experts approached this on the basis that the relevant counterfactual is the situation which prevailed before the new-style Maps OneBox was introduced. That was the old-style Maps OneBox, which did not contain any thumbnail map… There was no suggestion by Streetmap that this old-style Maps OneBox gave rise to an abuse.[47]

Roth J concluded on a consideration of all the evidence that the introduction the new Maps OneBox did not have an appreciable effect in taking custom away from Streetmap, and that it was unlikely to give rise to anti-competitive foreclosure.[48] The market for online maps in the UK was growing significantly and steadily over the period 2000-2010 . His Honour observed:

The main providers competing with Google Maps in 2007 were Streetmap and MultiMap. But the fact that Google Maps gained market share compared to Streetmap and MultiMap does not in itself indicate, let alone establish, that the new-style Maps OneBox was the cause, or even a contributory cause. Any relative success of Google Maps is equally explicable on the basis of features of Google Maps that attracted users: i.e., competition on the merits.[49]

Google Maps had adopted many new product developments such as ‘natural language’ searching which allowed a user to type in a request for a destination such as the British Museum, without a street address. There was significant evidence that ‘Streetmap was deficient or lagging behind as regards many of these functional developments’.[50]

Roth J noted:

It is axiomatic, as I remarked earlier, that competition by a dominant company is to be encouraged. Where — as here — its conduct is pro-competitive on the market where it is dominant, it would to my mind be perverse to find that it contravenes competition law because it may have a non-appreciable effect on a related market where competition is not otherwise weakened.[51]

This case demonstrates that harm to individual competitors is not to be equated with harm to competition as a process, and that a firm with substantial market power should not be precluded from competing vigorously on the merits through product innovation by competition law.

Authorisation for s 46 conduct

Finally, I would like to consider very briefly the circumstances in which authorisation might be available for s 46 conduct? The test for authorisation in relation to other Part IV conduct subject to an effects test is limited to a consideration of the detriment arising from a lessening of competition. For example s 90(6) of the CCA provides that the ACCC must not grant authorisation for proposed provisions and provisions in existing agreements that might substantially lessen competition unless the ACCC is satisfied that the ‘benefit [to the public] would outweigh the detriment to the public constituted by any lessening of competition that would result, or be likely to result if the proposed conduct were engaged in’. This is sometimes referred to as the ‘net benefit test’. Given that the applicant for authorisation of s 46 conduct already has substantial market power, the ACCC is likely to scrutinise the conduct at issue carefully before being convinced that it gives rise to a net public benefit.

Cross subsidisation is an example of s 46 conduct that may be eligible for authorisation after the changes take effect. Cross subsidisation may be a form of predatory pricing. Where a firm allocates disproportionately high costs to one product or geographic market where it faces little or no competition in order to charge very low prices for another product or geographic market where it faces strong competition, this may harm competition in the latter market. However, where cross subsidisation is practised by a corporation with substantial market power to enable it to subsidise services to remote communities, reasoning of that kind might be relevant as a public benefit in an application for authorisation.[52]

Conclusion

Against this background are the two claims made by the government for s 46 with an effects test, namely that it will be easier to satisfy than the existing s 46 and that it will provide a greater level of protection for small businesses, likely to be satisfied.

It is not possible to give an easy answer to the first claim. Much will depend on the conduct at issue and the markets affected. The removal of the taking advantage element should make it easier for the ACCC or a private party to challenge unilateral anti-competitive conduct. In addition, the removal of the need to prove a subjective anti-competitive purpose may ease the applicant’s evidentiary burden. The need to prove that the impugned conduct will have an adverse effect on the structure of the market requires the applicant to prove the most likely counterfactual on the balance of probabilities (the intermediate issue). This may be easier in relation to past conduct, where the most likely counterfactual could well be the situation that prevailed before the impugned conduct took effect. However, it is likely to be more problematic if the impugned conduct is being challenged prospectively. As regards the ultimate issue, it may be easier to prove a substantial lessening of competition where the conduct has its effect in the market where the respondent has substantial market power. If the respondent incumbent is a monopolist seeking to deter new entry the threshold could be quite low as demonstrated by the Rural Press case. This is because the very presence of a powerful single firm in that market will mean that competitive constraints are weak. Any new injection of competition is likely to enhance competitive rivalry, and any attempt to stop it likely to be a substantial lessening of competition. However, where the impugned conduct has its anti-competitive effect in a market other than the one in which the respondent has substantial market power, it may be more difficult to prove a substantial lessening of competition. Finally, the need to off-set any lessening of competition with the pro-competitive effects of enhanced efficiencies adds a layer of complexity to the new s 46 effects test. While the burden of demonstrating that the impugned conduct was necessary to facilitate investment which increases competition will rest on the respondent, the applicant will bear the burden of having to refute the claim.

Similarly, it is not possible to give an easy answer to the second claim that s 46 will provide additional protection for small businesses. A common fallacy is to equate harm to individual competitors with harm to competition. The object of the new s 46(1) is to protect competition as a process of rivalry, not to protect a class of competitors such as small businesses. Protecting competition will generate efficiency for the benefit of consumers; it will not generate fairness for small business competitors. Where corporations, such as the large supermarket chains, are undercutting small retailers by relying on lower costs associated with economies of scale and scope, such conduct has neither the purpose, nor the effect of substantially lessening competition. Rather, it is a function of the long-run dynamic competitive process. Supermarkets will only be at risk under the new s 46(1) if they engage in conduct that erects artificial barriers leading to long-run actual or potential foreclosure, for example, by entering into exclusivity arrangements with the owners of shopping centres that deny other retailers access to them. As Roth J indicated in the Streetmap case, it is axiomatic that firms with substantial market power should be able to compete on the merits. If they innovate and introduce new functional developments, their smaller competitors may be harmed but an effects test under s 46 will not be of assistance to them in forcing their larger rival to lend them a helping hand. The direction to the Court in the proposed s 46(2) to take efficiency into account in so far as it increases competitive rivalry may mean that small businesses will not obtain an increased level of protection they are hoping for from the proposed s 46(1).

Stephen Corones

Professor of Law, Queensland University of Technology

[1] Final Report of the Competition Policy Review Committee, March 2015, at 348. Available at: http://competitionpolicyreview.gov.au/final-report/

[2] The Hon Scott Morrison, “Fixing competition policy to drive economic growth and jobs” Media Release, 16 March 2016 available at http://sjm.ministers.treasury.gov.au/media-release/030-2016/?utm_source=wysija&utm_medium=email&utm_campaign=Media+Release+-+Fixing+competition+policy+to+drive+economic+growth+and+jobs.

[3] R Sims, “A new section 46 will boost competition — not kill it” Australian Financial Review (22 March 2016), 47.

[4] General Newspapers Pty Ltd v Telstra Corporation (1993) 45 FCR 164 at 187 (Davies and Einfeld JJ).

[5] See, e.g. ACCC v Pfizer Australia Pty Ltd [2015] FCA 113 (Flick J).

[6] Final Report of the Competition Policy Review Committee, March 2015, at 348.

[7] For a more detailed examination of this question see P Armitage, ‘The evolution of the substantial lessening of competition test — a review of the case law’ (2016) 44(2) Australian Business Law Review 74.

[8] Re Queensland Co-operative Milling Association Ltd and Defiance Holdings (1976) 25 FLR 169 at 188. For recent commentary on the continued relevance of this Tribunal determination see P. Williams, “QCMA, forty years on” The 2016 Bannerman Lecture, 11 February 2016 available at http://www.accc.gov.au/system/files/Bannerman%20Competition%20Lecture%202016%20-%20Dr%20Philip%20Williams%20%20lecture%20paper.pdf.

[9] C Kaysen and D Turner, Antitrust Policy (Harvard University Press, Cambridge, 1965) 59.

[10] Re Queensland Co-operative Milling Association Ltd and Defiance Holdings (1976) 25 FLR 169 at 188-189.

[11] Re Queensland Co-operative Milling Association Ltd and Defiance Holdings (1976) 25 FLR 169 at 188.

[12] See, for example, Outboard Marine Australia Pty Ltd v Hecar Investments No 6 Pty Ltd (1982) 66 FLR 120 at 123 (Bowen CJ and Fisher J); Arnotts Limited v Trade Practices Commission (1990) 24 FCR 313 at 336 (Lockhart, Wilcox and Gummow JJ); and Seven Network Limited v News Limited (2009) 182 FCR 160 at 282-3 [582] (Dowsett and Lander JJ).

[13] Outboard Marine Australia Pty Ltd v Hecar Investments (No 6) Pty Ltd (1982) 66 FLR 120.

[14] Outboard Marine Australia Pty Ltd v Hecar Investments (No 6) Pty Ltd (1982) 66 FLR 120 at 123-124 and the Stirling Harbour Services Pty Ltd v Bunbury Port Authority (2000) ATPR ¶ 41-783 at 41,267[12] and (Burchett and Hely JJ).

[15] Stirling Harbour Services Pty Ltd v Bunbury Port Authority (2000) ATPR ¶ 41-783 at [12] and [86].

[16] TPC v Ansett Transport Industries (Operations) Pty Ltd (1978) 32 FLR 305 at 325 (Northrop J); TPC v Australia Meat Holdings Pty Ltd (1988) ATPR ¶ 40-876 at 49,480 (Wilcox J); and Arnotts Limited v Trade Practices Commission (1990) 24 FCR 313 at 336 (Lockhart, Wilcox and Gummow JJ) .

[17] Australian Gas Light Co Ltd v ACCC (No 3) (2003) 137 FCR 317.

[18] Australian Gas Light Co Ltd v ACCC (No 3) (2003) 137 FCR 317 at [391].

[19] Australian Gas Light Co v ACCC (No 3) (2003) 137 FCR 317 at 430 [391].

[20] Australian Gas Light Co v ACCC (No 3) (2003) 137 FCR 317 at 457 [493].

[21] Australian Gas Light Co Ltd v ACCC (No 3) (2003) 137 FCR 317 at [343].

[22] Rural Press Ltd v ACCC (2003) 216 CLR 53.

[23] Rural Press Ltd v ACCC (2003) 216 CLR 53 at 71 [41] (Gummow, Hayne and Heydon JJ).

[24] ACCC v Metcash Trading Limited (2011) 282 ALR 464.

[25] ACCC v Metcash Trading Limited (2011) 282 ALR 464 at [134]-[135].

[26] ACCC v Metcash Trading Limited (2011) 282 ALR 464 at [145]-[146].

[27] ACCC v Metcash Trading Limited (2011) 198 FCR 297.

[28] ACCC v Metcash Trading Limited (2011) 198 FCR 297 at [6].

[29] M Brunt, Economic Essays on Australian and New Zealand Competition Law (Kluwer, Law Int’l, 2003), pp 332-336.

[30] ACCC v Metcash Trading Ltd [2011] FCA 967 at [168] (Emmett J).See P Williams and G Woodbridge, “ The Relation of Efficiencies to the Substantial Lessening of Competition Test for Mergers: Substitutes or Complements?” (2002) 30 Australian Business Law Review 435 at 442.

[31] Davids Holdings Pty Ltd v Attorney-General of the Commonwealth (1994) 49 FCR 211

[32] Davids Holdings Pty Ltd v Attorney-General of the Commonwealth (1994) 49 FCR 211 at 248.

[33] Brunt, Economic Essays on Australian and New Zealand Competition Law (Kluwer Law Int’l, 2003) pp 335-336.

139 Clear Communications Ltd v Sky Network Television Ltd (High Court of New Zealand, Wellington Registry CP 19/96, 1 August 1997, Gallen J and Dr M Brunt).

[34] Clear Communications Ltd v Sky Network Television Ltd (High Court of New Zealand, Wellington Registry CP 19/96, 1 August 1997, Gallen J and Dr M Brunt).

[35] Clear Communications Ltd v Sky Network Television Ltd (High Court of New Zealand, Wellington Registry CP 19/96, 1 August 1997, Gallen J and Dr M Brunt) at 68.

[36] Streetmap EU Limited v Google Inc [2016] EWHC 253 (Ch) at [2]-[3].

[37] Re Tooth & Co Ltd; Re Tooheys Ltd (1979) ATPR ¶ 40-113.

[38] Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1 at [20] (Gleeson CJ, Gummow, Hayne and Callinan JJ).

[39] Re AGL Cooper Basin Natural Gas Supply Arrangements (1997) ATPR 41-593 at 44,212-44,218.

[40] Final Report of the Competition Policy Review Committee, March 2015, at 344.

[41] Rule 5.04 of the Federal Court Rules 2011.

[42] Guidance on its enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings OJ 2009 C 45/7. Available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52009XC0224(01)&from=EN.

[43] Streetmap EU Limited v Google Inc [2016] EWHC 253 (Ch) (Roth J).

[44] Streetmap EU Limited v Google Inc [2016] EWHC 253 at [55] and [62]-[63].

[45] Streetmap EU Limited v Google Inc [2016] EWHC 253 at [84].

[46] Streetmap EU Limited v Google Inc [2016] EWHC 253 at [80].

[47] Streetmap EU Limited v Google Inc [2016] EWHC 253 at [100].

[48] Streetmap EU Limited v Google Inc [2016] EWHC 253 at [139].

[49] Streetmap EU Limited v Google Inc [2016] EWHC 253 at [116].

[50] Streetmap EU Limited v Google Inc [2016] EWHC 253 at [118].

[51] Streetmap EU Limited v Google Inc [2016] EWHC 253 at [98].

[52] NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 at 140 [137].