Competition Law in Australia: An Introduction
Found in: Blog
Found in: Blog
Australian competition law regulates how companies and people do business in Australia. The governing legislation is the Competition and Consumer Act 2010 (Cth) (Act), which contains rules proscribing certain anti-competitive conduct between competitors, suppliers and customers.
Australian competition law is predicated on the economic theory that competition ensures that resources are allocated efficiently in a market, which in turn enhances consumer welfare. Competition law in Australia is therefore concerned with protecting the integrity of the competitive process rather than the private interests of a particular person or group. Consumer welfare is the end sought to be achieved and, while competition is a primary means to achieve that end, the Act also recognises that there are other pathways to enhance consumer welfare. For that reason, the Act also provides for limited exemptions to particular prohibitions, including procedures by which parties may notify or receive authorisation from the Australian Competition and Consumer Commission (ACCC) for conduct which satisfies a public interest test and would otherwise breach a prohibition.
The ACCC administers the Act and has extensive powers to investigate, regulate and prosecute breaches of competition law. For instance, the ACCC may compel a person to produce documents, provide information, or appear before the Commission to give evidence.
The key competition law prohibitions are contained in Part IV of the Act, entitled ‘Restrictive Trade Practices’. The Part IV prohibitions can be categorised broadly as rules targeting anticompetitive conduct:
(a) between competitors (“horizontal arrangements”);
(b) between customers and suppliers (“vertical arrangements”);
(c) between any parties, regardless of their respective market levels, if the conduct has a proscribed anticompetitive purpose or likely effect (“catch-all provisions”); and
(d) undertaken by individual parties (“unilateral conduct”).
The Act reflects the economic view that particular types of conduct are intrinsically anti-competitive. Such conduct is subject to ‘per se’ liability, meaning that the conduct is deemed to be anti-competitive regardless of whether it actually had an anti-competitive or even a pro-competitive effect on the market in question. Other prohibitions impose liability only if the impugned conduct has the purpose of, or is likely to have the effect of, ‘substantially lessening competition’.
‘Competition’ is not defined in the Act, and the term has been the subject of much judicial comment. Generally, competition requires both that prices should be flexible, reflecting the forces of supply and demand, and that there should be independent rivalry in all dimensions of the prices, products and services offered to or acquired by consumers and customers. Parties are competitors if they are rivals or constrain each other’s behaviour in the market.
Whether parties compete depends on the structure of the market. As such, a first step to identify potential competition law issues is to identify the relevant market. The Act defines “market” as a market in Australia and, where the term is used in relation to goods or services, it extends to any goods and services which are substitutable for, or otherwise competitive with, the relevant goods or services. The effect which a change in the price of goods or services may have on the price of other goods and services can be relevant to determine whether they are substitutable. Further, it is relevant to consider the maximum range of business activities and the widest geographical area within which there will be cross-elasticity of demand and supply.
Once the relevant market is identified, its structure will assist to determine if parties are competitors within it. Factors to be considered include:
(a) the number and size of independent sellers, and market concentration;
(b) the nature and extent of any barriers to entry into the market by new participants;
(c) the extent to which the products of the industry are characterised by extreme product differentiation and sales promotions;
(d) the nature of any formal, stable and fundamental arrangements between companies within the market which restrict their independence; and
(e) the character of vertical relationships with customers and suppliers, and the extend of any vertical integration.
The task of determining whether parties are competitors can be complex; depending on the structure of the market, parties can be both competitors and suppliers or customers to each other. For instance, Company A manufactures both an end product and an input item required for the manufacture of that product. Company A supplies the input item to Company B, which Company B uses to manufacture a similar product which competes with Company A’s end product. In that case, Company A is likely to be both a supplier and a competitor to Company B. The nature of such relationships between parties is critical to identifying any competition law issues arising from their conduct, as it determines which prohibitions can potentially apply.
‘Substantially lessening competition’ is a re-occurring concept in competition law. The concept arises in relation to prohibitions on vertical arrangements, unilateral conduct, as an element of the catch-all provisions, and as a condition on the availability of certain exemptions to cartel conduct.
‘Substantially lessening competition’ extends to conduct which prevents or hinders competition. The question of whether conduct has the purpose or likely effect of ‘substantially lessening competition’ involves a comparison of the level of competition in the market if the conduct proceeded against the level of competition in the market if it didn’t. Whether any lessening in competition is ‘substantial’ is a matter of degree; it is sufficient if the effect of the conduct is meaningful or relevant to the competitive process. In short, the conduct should be of such seriousness as to adversely affect competition in the marketplace, particularly with consumers in mind.
Whether conduct is for the ‘purpose’ of substantially lessening competition depends on the parties’ subjective intention to achieve that result. A party may have multiple purposes; however, it is sufficient if a substantial purpose is to substantially lessen competition. Conduct will also be captured if its ‘likely effect’ is to substantially lessen competition. This requires only that there is a real and not remote possibility that the proscribed effect will result from the impugned conduct.
The key ‘per se’ prohibitions on horizontal arrangements relate to cartels. Cartel conduct arises where competitors in a market enter into a contract, arrangement or understanding which contains a provision which:
(a) has the purpose or likely effect of fixing, controlling or maintaining the price for the supply or acquisition of goods or services in a market (Price Fixing);
(b) has the purpose of enabling parties to collude in their responses to a call for bids, including by withdrawing or suppressing competing bids, submitting cover bids or setting up bid rotation schemes (Bid Rigging). Bid Rigging often overlaps with Price Fixing, as a likely effect of collusion is to fix the price of the successful bid;
(c) has the purpose of restricting one or more parties’ output or production of goods or services, or restricting a party’s capacity to supply goods or services in a market (Restricting Production). The aim of such provisions is often to create scarcity in order to increase prices, counter falling prices, or protect inefficient suppliers; and
(d) has the purpose of allocating between the parties the persons or classes of persons likely to supply or acquire goods or services from them, including by geographical area (Market Allocation).
Parties avoid liability for cartel conduct if they can establish one of the exemptions under the Act. As mentioned above, these exemptions recognise that, in some circumstances, consumer welfare or efficiency can be promoted otherwise than through competition. An exemption may apply where the cartel conduct was for the purpose of a joint venture, or the collective acquisition of goods or services by the parties to the contract, arrangement or understanding. Collective acquisitions can arise where small parties join a buyers’ collective in order to increase their bargaining power and secure better terms for the purchase goods or services from a large supplier.
Mergers and acquisitions between competitors can also constitute anticompetitive horizontal arrangements, although are not subject to per se liability. Section 50 of the Act prohibits an acquisition of the shares or assets of a corporation if the acquisition would have the effect, or would be likely to have the effect, of ‘substantially lessening competition’. In answering this question, a court is required to consider various factors relating to the market structure.
The key prohibitions on vertical arrangements relate to exclusive dealing, third line forcing, and resale price maintenance.
Exclusive dealing targets conduct which attaches anti-competitive conditions to supply or purchase agreements. For example, parties should be wary of supplying goods or services on condition that the purchaser does not acquire goods or services from a competitor, or refusing to supply goods or services on the basis that the customer has previously dealt with a competitor.
Third line forcing occurs where a company agrees to supply goods or services to consumers on condition that they also purchase a third party’s goods or services.
Resale price maintenance occurs where a party tries to set a minimum price at which a customer can re-sell that party’s goods or services. Resale price maintenance is a ‘per se’ offence, however liability can be avoided if the party has validly notified the ACCC of the conduct.
Even if a party’s conduct is not captured by a specific prohibition, it may still be prohibited under section 45. Section 45 is a catch-all provision which applies to a contract, arrangement or understanding or a concerted practice containing a provision which has the purpose or likely effect of substantially lessening competition. Parties do not need to be competitors in order to breach section 45.
In 2017, section 45 was extended to apply to ‘concerted practices’. According to the ACCC, ‘concerted practice’ involves a lower threshold than a ‘contract, arrangement or understanding’ and applies to any form of cooperation between parties, potentially including information exchanges. While ‘concerted practices’ could conceivably capture all forms of communication, information exchanges or cooperation between participants in a market, and communications between competitors may be more likely to ‘substantially lessen competition’. As such, parties should seek advice as to the potential competition law issues arising from communications or informal cooperation with their competitors.
Competition law imposes restrictions on parties holding ‘substantial market power’ to prevent them from using that power in an anticompetitive manner. Whether a firm has market power is determined by examining the extent to which the conduct of the corporation is constrained by the activities of actual or potential competitors, suppliers or customers.
Formerly, a party was prohibited from ‘taking advantage’ of its substantial market power in order to damage competition or eliminate competitors, prevent new competitors from entering the market, or preventing a person from competing in any market. The requirement that the party ‘take advantage’ of its market power involved a causal enquiry into whether the company would have engaged in the conduct if it did not have market power. However, this was enquiry was removed by the 2017 amendments; the prohibition has now been extended to any conduct by a party with substantial market power which has the purpose or likely effect of substantially lessening competition.
Contravention of the Act can lead to significant penalties and adverse court orders. Fines for contraventions can be up to $500,000 per contravention for individuals. For companies, the applicable fine per contravention can be up to the greater of $10 million, or 3 times the benefit gained from the contravention, or 10% of the corporate group’s annual turnover. Contravention of the criminal offences can result in a jail sentence of up to 10 years.
The court can also make a range of orders, including declaring void the whole or any part of the impugned transaction or ordering a party to pay compensation. There is also the risk that people who have suffered damage may take legal action.
Australian competition law aims to enhance the welfare of Australian consumers by promoting of competition. To that end, the Act imposes a range of prohibitions on anticompetitive conduct which can occur horizontally, vertically or unilaterally between different levels of a market. The application of competition law can be complex, and parties run the risk of incurring significant penalties if not properly advised.
This article was authored by Lucy Mengler - Associate, Grondal Bruining. The material is provided only for general information. It does not constitute legal or other advice.
Contact Grondal Bruining on +61 8 6500 4300 for advice specific to your circumstances.