Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2004-2005-2006-2007
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TRADE PRACTICES LEGISLATION AMENDMENT BILL (No. 1) 2007
EXPLANATORY MEMORANDUM
(Circulated by authority of the Treasurer,
the Hon Peter Costello, MP)
TABLE OF CONTENTS
TABLE OF CONTENTS...................................................................................................................1
OUTLINE ...........................................................................................................................................3
REGULATION IMPACT STATEMENT AND FINANCIAL IMPACT STATEMENT ..........5
REGULATION IMPACT STATEMENT....................................................................................................5
FINANCIAL IMPACT STATEMENT .....................................................................................................24
NOTES ON INDIVIDUAL CLAUSES ..........................................................................................25
SCHEDULE 1 - DEPUTY CHAIRPERSONS ..........................................................................................25
SCHEDULE 2 - MISUSE OF MARKET POWER .....................................................................................26
SCHEDULE 3 - UNCONSCIONABLE CONDUCT ..................................................................................30
Trade Practices Legislation Amendment Bill (No. 1) 2007 1
Outline
1
OUTLINE
1.1 The Trade Practices Legislation Amendment Bill (No 1) 2007 (`the Bill') makes
amendments to the Trade Practices Act 1974 and the Australian Securities and Investments
Commission Act 2001 that implement the Government's response to the March 2004 Senate
Economic References Committee report on `The effectiveness of the Trade Practices Act 1974 in
protecting small business' (`the Senate report').
1.2 Background to the Senate report, and the recommendations accepted by the Government,
can be found in the Regulation Impact Statement, in Chapter 2 of this memorandum. The Bill will
also implement the Prime Minister's announcement of 6 July 2004 that the Government will
establish an additional Deputy Chairperson position at the Australian Competition and Consumer
Commission (`the ACCC').
1.3 In brief, the Bill will:
· provide for the creation of a second Deputy Chairperson position for the ACCC, and allow
for the effective operation of the ACCC with that additional position;
· amend section 46 of the Trade Practices Act to provide that a corporation must not take
advantage of a substantial degree of market power, either in the market in which the power
is held or in any other market;
· amend section 46 to provide that, for the purposes of determining the degree of power that a
corporation has in a market, the Court may have regard to any market power the corporation
has that results from contracts, arrangements or understandings with others, or results from
covenants that the corporations is bound by or entitled to the benefit of;
· amend section 46 to provide that courts may take into consideration the supply of goods or
services for a sustained period at a price less than the relevant cost to the corporation, and
the reasons for that conduct, when determining whether a corporation has misused its
market power.
· amend section 46 to provide that, without limiting the matters to which the Court may have
regard, a body corporate may have a substantial degree of market power even though, it
does not substantially control the market, or does not have absolute freedom from constraint
by the conduct of its competitors or persons to or from whom it supplies goods or services;
· amend section 46 to provide that more than one corporation may have a substantial degree
of power in a market;
· make amendments to ensure the continued consistency between sections 151AJ and 46, in
relation to leveraging of market power, coordinated market power, and predatory pricing;
Trade Practices Legislation Amendment Bill (No. 1) 2007 3
Outline
· make amendments to the version of section 46 found in Part 1 of the Schedule to the Trade
Practices Act, which is the version of the Trade Practices Act that applies in the States and
Territories by virtue of application legislation in those jurisdictions, to correspond to the
changes in the Bill;
· amend section 51AC of the Act to extend the non-exhaustive list of factors in
subsections 51AC(3) and 51AC(4) to provide that the Court may also consider whether a
party has a contractual right to vary unilaterally a term or condition of a contract between a
supplier and a business consumer, or between an acquirer and a small business supplier;
· amend subsections 51AC(9) and 51AC(10) of the Act to raise the price limitations relating
to the supply or acquisition of goods or services from $3 million to $10 million ; and
· make amendments to section 12CC of the Australian Securities and Investments
Commission Act 2001, which applies the unconscionable conduct rules of section 51AC of
the Trade Practices Act to the supply and acquisition of financial services, to duplicate the
changes made by the Bill to section 51AC.
4 Trade Practices Legislation Amendment Bill (No. 1) 2007
Regulation Impact Statement and Financial Impact Statement
2
REGULATION IMPACT STATEMENT AND FINANCIAL IMPACT
STATEMENT
2.1 This Regulation Impact Statement addresses changes to legislation and regulations resulting
from the Government response to the recommendations of the Senate Economics References
Committee inquiry and report into The effectiveness of the Trade Practices Act 1974 in protecting
small business.
2.2 Since the preparation of this Statement, the Government has made additional changes to
section 46 following extensive consultations with stakeholders in 2006 and 2007. The details of
these, and the original, changes are outlined in the following section, "Notes on Individual
Clauses".
REGULATION IMPACT STATEMENT
Scope of the Regulation Impact Statement
2.3 The Government response accepts, in part or full, recommendations 3, 5, 6, 8, 9 and 17 of
the Senate report. The Government response to these recommendations suggests changes to
legislation or regulations affecting business. Hence, these changes are addressed in this Regulation
Impact Statement.
2.4 Although the Government response does not accept recommendation 7, it does propose
changes to legislation or regulations affecting business and is therefore also addressed in this
Regulation Impact Statement.
2.5 Lastly, the Government response accepts, in whole or part, recommendations 11 and 16.
However, these recommendations are not addressed in this Regulation Impact Statement because, in
the case of recommendation 11, the change to legislation has been addressed previously and, in the
case of recommendation 16, no change to legislation is required.
Senate Inquiry
2.6 On 25 June 2003, the Senate passed a motion requiring the Economics References
Committee to inquire into and report on `whether the Trade Practices Act 1974 adequately protects
small businesses from anti-competitive or unfair conduct'.
2.7 The Senate Committee's terms of reference required it to consider the misuse of market
power, unconscionable conduct in business transactions and industry code provisions of the Trade
Practices Act 1974.
2.8 The Senate Committee's report was tabled on 1 March 2004 and made 17 recommendations.
Government Senators provided a minority report, in which they indicated their support (or
otherwise) for those 17 recommendations.
Trade Practices Legislation Amendment Bill (No. 1) 2007 5
Regulation Impact Statement and Financial Impact Statement
The economic benefits of small business
2.9 Small businesses are important to the Australian economy. During 2000-01, there were
1.1 million private sector non agricultural small businesses in Australia employing almost
3.3 million people. During the past 10 years the number of small businesses has grown by an
average 3.5 per cent each year and the small business sector contributes 30 per cent of Australia's
1
gross domestic product.
Promoting competition and fair trading
2.10 The object of the Trade Practices Act 1974 (the Act) is to enhance the welfare of
Australians through the promotion of competition and fair trading and provision for consumer
protection.
2.11 Competitive markets are an important mechanism for achieving the advances in efficiency
and productivity that enhance economic welfare. Maximising the competitiveness of a market will
usually maximise efficiency and lead to the greatest enhancement in economic welfare.
2.12 Effective competition can be reduced through changes to the market structure or by firms
behaving, either independently or with other firms, in ways that reduce rivalry in the market, or
prevent or deter the entry of new firms. The competition laws in Part IV of the Act promote
competition by prohibiting conduct that may lessen competition.
2.13 The provisions in Part IVA of the Act promote fair trading by prohibiting unconscionable
conduct, including unconscionable conduct in business transactions. The provisions of Part IVB
also promote fair trading in specific industries by prohibiting breaches of prescribed industry codes.
The Dawson Review and subsequent case experience
2.14 The Review of the Competition Provisions of the Trade Practices Act (the Dawson Review)
reported to Government in January 2003. At that time, the Dawson Review concluded that there
was no need to amend section 46 of the Act, which prohibits the misuse of market power. The
Government accepted this recommendation when it announced its response to the Dawson Review
on 16 April 2003.
2.15 The Dawson Review did not consider, in detail, the unconscionable conduct in business
transaction provisions of the Act. This is because those provisions fell outside the terms of
reference for the Dawson Review.
2.16 Since the Dawson Review provided its report to Government, several important Trade
Practices Act cases have been considered by the courts, particularly in relation to the misuse of
market power. These cases have raised questions about the operation of the Act.
2.17 The High Court has considered the application and interpretation of section 46 on two
occasions, in Boral Besser Masonry Ltd v ACCC [2003] HCA 5 (Boral) and in Rural Press Ltd v
ACCC [2003] HCA 75 (Rural Press).
2.18 The Full Federal Court has also considered section 46 on two occasions, in Universal Music
Australia Pty Ltd v ACCC [2003] FCAFC 193 and in ACCC v Australian Safeway Stores Pty Ltd
[2003] FCAFC 149.
1
See www.industry.gov.au, entry under "Small Business".
6 Trade Practices Legislation Amendment Bill (No. 1) 2007
Regulation Impact Statement and Financial Impact Statement
Misuse of market power
2.19 Section 46 of the Act prohibits corporations with a substantial degree of market power from
taking advantage of that power for a proscribed purpose. That is, for the purpose of eliminating or
substantially damaging a competitor, preventing the entry of a competitor, or deterring or
preventing a person from engaging in competitive conduct.
2.20 Only firms with a substantial degree of market power are prohibited from taking advantage
of that power for a proscribed purpose. This is because firms that lack substantial market power are
rarely, if ever, able to unilaterally harm competition in an enduring way. The prohibition therefore
applies only to firms that meet the threshold requirement of possessing substantial market power.
2.21 The section focuses on the purpose of the firm's conduct because this is considered to be the
best way of distinguishing between pro-competitive and anti-competitive behaviour. Purpose may
be inferred from a firm's behaviour or from relevant circumstances. A firm's purpose must be
substantial but it need not be the sole or dominant purpose for engaging in the conduct. The section
does not look to the effect of the firm's behaviour. If it did, there is a serious risk that
pro-competitive conduct by firms with substantial market power would be deterred, with
consequentially reduced gains in efficiency and productivity and hence economic welfare.
2.22 The section was amended in 1986 to lower the threshold from a requirement that a
corporation be `in a position substantially to control a market' to a requirement that a corporation
have `a substantial degree of power in a market'. The type of power being referred to is `market
power'.
2.23 Market power was discussed in Queensland Wire Industries Pty Ltd v Broken Hill
Proprietary Co Ltd (1989) 167 CLR 177 (Queensland Wire). In that case, alternative, but
complementary, definitions of market power were provided. Thus, market power is the ability to
behave persistently in a manner different from the behaviour that a competitive market would
enforce on a firm. Alternatively, it involves the ability of a firm to raise prices above the supply
cost without rivals taking away customers in due time, the supply cost being the minimum costs an
efficient firm would incur in producing the product or service.
2.24 The change to the lower threshold in 1986 was motivated by a concern that the previous
threshold caught conduct only by a monopolist or monopsonist, and that a lower threshold was
necessary to capture corporations with a sufficient degree of market power to seriously harm
competition. As the Second Reading Speech noted, the threshold was thus intended to capture not
only monopolists, but also major participants in oligopolistic markets and, in some cases, leading
firms in less concentrated markets.
2.25 There have been 33 cases in which section 46 has been argued and there has been a final
judgement. The results are provided in the following table:
Applicant Breach of section 46 No breach of section 46
ACCC / TPC 1* 3
Private 4 25
Total 5 28
*This case is Safeway. An application for leave to appeal to the High Court was made by Safeway
challenging the Federal Court's finding on misuse of market power, but the application was refused on
10 September 2004.
Trade Practices Legislation Amendment Bill (No. 1) 2007 7
Regulation Impact Statement and Financial Impact Statement
Source: Alexandra Merrett, `The court speaks for itself: What Australian decisions say about assessing
market power for the purposes of s 46 of the TPA' (2004) 11 CCLJ 330 at Annexure 1.
2.26 These statistics may understate the success that applicants have had in using section 46
because they do not include interlocutory decisions, some of which have resulted in settlements to
the benefit of the applicant.
Unconscionable conduct in business transactions
2.27 Section 51AC prohibits corporations from engaging in unconscionable conduct in their
dealings with business consumers, usually small business.
2.28 Voluntary transactions between firms of equivalent bargaining power who are both well
informed are likely to be efficient. This is especially the case where the transactions are frequent
and the costs of making a mistake are not high. In such cases, the costs of the transaction are likely
to be comparatively low.
2.29 However, transaction costs are increased if there are significant information asymmetries or
a significant imbalance of bargaining power between the firms.
2.30 The 1997 report Finding a balance - Towards fair trading in Australia, prepared by the
House of Representatives Standing Committee on Industry, Science and Technology, recognised
that information asymmetries and imbalances in the bargaining power of the parties were critical
factors that allowed firms to engage in unfair conduct.
2.31 The section 51AC prohibition of unconscionable conduct in business transactions was
introduced into Part IVA as a consequence of this report.
2.32 The notion of `unconscionable conduct' incorporated in section 51AC is based on, but not
restricted to, the common law equitable doctrine of unconscionable conduct. The common law
doctrine recognises that a transaction (and the contract that facilitated it) may not have been entered
into voluntarily where there is unequal bargaining power between parties to a commercial
transaction.
2.33 A fundamental objective of section 51AC is to ensure that there is fairness in the
commercial relationships between larger and smaller businesses. Section 51AC therefore
establishes a legal foundation for smaller businesses to seek legal remedies when they are subjected
to unconscionable conduct.
2.34 The protection against unconscionable conduct can only be enforced by smaller businesses.
The section does not apply to dealings with publicly listed companies (subsections 51AC(1)
and 51AC(2)) or where the price of the dealing is in excess of $3 million (subsections 51AC(9)
2
and 51AC(10)).
2.35 The Court can have regard to a non-exhaustive list of factors (subsections 51AC(3)
and 51AC(4)) to determine if a corporation has engaged in unconscionable conduct. These factors
include any relative imbalance in bargaining power and the ability of the smaller business to
understand the terms of the transaction.
2
Raised from $1 million in 2001.
8 Trade Practices Legislation Amendment Bill (No. 1) 2007
Regulation Impact Statement and Financial Impact Statement
General Problem
Misuse of market power
2.36 In light of recent court decisions, such as Boral, there is some uncertainty about the ability
of section 46 to effectively address the misuse of market power. This is especially evident with
respect to predatory pricing.
2.37 Section 46 applies to the full range of business structures across the Australian economy. If
the uncertainty about the ability of section 46 to effectively address unilateral anti-competitive
conduct were to remain unresolved, both existing firms and potential new entrants may be deterred
from competing as vigorously in Australian markets. This, in turn, may lead to a reduction in
economic growth, employment and innovation, with consequent impacts on economic welfare.
Unconscionable conduct in business transactions
2.38 Although it is acknowledged to be too soon to make a determination about the effectiveness
of section 51AC in protecting small business, it is evident that the section is more restrictive in its
application than may be appropriate and is, in some respects, contributing to the uncertainty of the
scope and application of the provision.
2.39 A failure to address these issues in relation to section 51AC may contribute to a loss of
business confidence. This loss of confidence would occur as smaller businesses lose confidence in
their ability to engage in fair commercial transactions without fear of exploitation. This may also
lead to less variation in commercial transactions and reduced consumer choice as some smaller
firms choose to leave or not enter a range of markets.
General objectives of the competition and unconscionable conduct provisions
2.40 The objective of Part IV of the Act is to enhance welfare through the promotion of
competition. To that end, section 46 protects the competitive process by prohibiting firms with
substantial market power from taking advantage of that power for an anti-competitive purpose.
2.41 The objective of Part IVA of the Act is to enhance welfare through the promotion of fair
trading and provision for consumer protection. To that end, section 51AC protects business
consumers from unconscionable conduct in business transactions.
Recommendation 3: predatory pricing
Issue
2.42 In a competitive market, rival firms vie for customers by offering different product-price-
quality packages. Firms sometimes seek greater market share by setting a price for their goods or
services at a level that is sufficiently low to prevent their rivals from making an adequate return.
Pricing in this way may drive competitors out of the market, or prevent new firms from entering the
market. When firms set their prices in this way, they do so either intending to harm their rivals or,
at the very least, in the knowledge that their competitors will be harmed.
2.43 This behaviour may ultimately benefit consumers because less efficient firms are driven out
of the market, ensuring prices for goods and services are set at a level equivalent to the costs of
supply for an efficient firm. Even if there is only a small number of remaining firms in the market,
prices are likely to be kept at an efficient level because of rivalry between the remaining firms and
the threat of new firms entering the market.
Trade Practices Legislation Amendment Bill (No. 1) 2007 9
Regulation Impact Statement and Financial Impact Statement
2.44 In contrast, consumers will be harmed if efficient firms are driven out of, or prevented from
entering, the market, thus weakening competition. This result could be achieved through predatory
pricing. Predatory pricing is where a firm abuses its market power by lowering its prices far
enough and for long enough to drive away or deter its rivals. The firm is then left with greater
market power, enabling it to earn supra-competitive profits by reducing output and raising prices.
The supra-competitive profits allow the short term losses to be recovered or recouped.
2.45 Section 46 prohibits predatory pricing where, for example, a corporation with substantial
market power takes advantage of that power to institute price cuts to deter others from engaging in
competitive conduct.
2.46 The Boral case was the first opportunity for the High Court to consider the issue of
predatory pricing under section 46. In light of the High Court's decision, some submissions were
made to the Senate Committee expressing concern about the ability of section 46 to address
predatory pricing.
Objective
2.47 The objective of any amendment is to clarify the application of section 46 to predatory
pricing by identifying factors that are relevant to an assessment as to whether a corporation has
misused its market power.
Recommendation 3
2.48 The Senate Committee sought to address concerns about the ability of section 46 to address
predatory pricing by making two proposals for change, relating to below cost pricing and
recoupment.
Below cost pricing
2.49 The Senate Committee recommended that the Act be amended to provide that, in
determining whether a corporation has breached section 46, the courts may have regard to the
capacity of the corporation to sell a good or service below its variable cost.
Recoupment
2.50 The Senate Committee also recommended that the Act be amended to state that, in predatory
pricing cases, it is not necessary to demonstrate a capacity to subsequently recoup the losses
experienced as a result of that predatory pricing strategy.
Options in response to recommendation 3
2.51 Five options have been considered in response to recommendation 3. Aside from no
change, there are then four options for change, two associated with below cost pricing and two
associated with recoupment.
Option 1: status quo.
Below cost pricing
Option 2: amending the Act so that a Court may consider a corporation's capacity to price below
variable cost in a predatory pricing case under section 46.
10 Trade Practices Legislation Amendment Bill (No. 1) 2007
Regulation Impact Statement and Financial Impact Statement
Option 3: amending the Act so that a Court may consider whether a corporation has priced below
cost in a predatory pricing case under section 46.
Recoupment
Option 4: amending the Act so that it is not necessary to demonstrate a capacity to subsequently
recoup losses experienced as part of a predatory pricing strategy.
Option 5: amending the Act so that a Court may consider recoupment in a predatory pricing case
under section 46.
Groups affected by these options
2.52 The groups that would be directly affected by these options are larger businesses that
potentially have substantial market power and who may be subject to an accusation of predatory
pricing, smaller businesses and the ACCC. Consumers would be indirectly affected by these
options because of the impact on competition.
Analysis of option 1
2.53 Option 1 proposes no change to the law.
2.54 Boral is one of the very few examples of a predatory pricing case under section 46 where a
final judgement has been entered.
2.55 It has been 18 years since section 46 was amended to broaden the scope of the section. It
seems doubtful that no predatory pricing, potentially falling within the scope of section 46, has
occurred in Australia during that time.
2.56 In light of the above, it is unsurprising that smaller businesses have lost a degree of
confidence in the ability of section 46 to address predatory behaviour, including predatory pricing.
If this lack of confidence leads smaller businesses to exit particular markets or deters others from
entering, the level of competition in those markets will be reduced.
2.57 Any reduction in competition may lead to reduced choice and higher prices for consumers.
It may also lead to smaller gains in efficiency and productivity, less innovation and fewer
employment opportunities. This may result in smaller enhancements to economic welfare which, in
turn, may flow through to lower taxation revenue for government.
2.58 To the extent that there are larger businesses that engage in predatory pricing, those
businesses would benefit from the existing uncertainty surrounding the application of section 46 to
predatory conduct. This is because both the ACCC and private litigants will be unwilling to pursue
litigation while the uncertainty about section 46 persists.
Analysis of option 2
2.59 Option 2 proposed that the Act be amended so that a Court may consider a corporation's
capacity to price below variable cost in a predatory pricing case under section 46.
2.60 The risk of firms being wrongly penalised would be increased if a provision focussing on a
capacity to price below a simple measure of variable costs were introduced.
Trade Practices Legislation Amendment Bill (No. 1) 2007 11
Regulation Impact Statement and Financial Impact Statement
2.61 All corporations are capable of pricing below variable cost; however, having the capacity to
behave in this way does not indicate whether the corporation is actually pricing below variable cost
(a more relevant factor for determining whether price lowering is anti-competitive).
2.62 Economists disagree about what costs are variable. A simple variable costs measure may be
inappropriate for some circumstances. This is because a simple measure of variable cost may not
acknowledge that pricing below cost in one business may yield net benefits for a corporate group.
(In Boral, it was possible for the group as a whole to be profitable even though one business was
experiencing losses due to its price lowering conduct.) A simple measure of variable costs also
does not take account of the transaction costs associated with ceasing a business. (A business that
is not recovering its variable costs may rationally choose to continue operating for a period of time
if it considers that those short term losses are going to be less than the expected costs of ceasing
trading and restarting again at a later time.) Thus, a corporation that persistently priced under a
simple measure of variable costs may not be engaging in commercially irrational conduct.
2.63 Wrongly penalising firms may lead to detrimental impacts on competition, potentially
leading to reduced choice and higher prices for consumers. Wrongly penalised firms may either
withdraw from the market or reduce their competitive effort. Other firms in the market may also
alter their behaviour to prevent themselves being penalised.
2.64 There is also likely to be increased compliance costs for business. This is because few
businesses have an ability to calculate their variable costs from their existing accounting systems.
2.65 There would also be additional costs imposed on the ACCC. This is because the ACCC
would be required to examine the cost structures of a number of the firms in the market, so as to
enable the Court to compare each firm's comparative capacity to price below variable costs.
2.66 Government would face transitional costs associated with amending the Act. Businesses
would face transitional costs associated with understanding and applying the new law.
2.67 The benefits from the proposed amendment are likely to be negligible.
Analysis of option 3
2.68 Option 3 proposes that the Act be amended so that a Court may consider whether a
corporation has priced below cost in a predatory pricing case under section 46. The relevant cost
measure would be at the discretion of the Court.
2.69 Government would face transitional costs associated with amending the Act. Businesses
would face transitional costs associated with understanding and applying the new law.
2.70 Both smaller and larger businesses would benefit from the clarification that it is appropriate
to examine below cost pricing by corporations in the context of section 46. Although price
lowering behaviour can be both pro- and anti-competitive, the depth and persistence of that conduct
is likely to be factually important to a predatory pricing case. Of course, below cost pricing is not
the only matter of relevance to an allegation of predatory pricing under section 46.
2.71 Amending the Act in accordance with Option 3 will strengthen businesses understanding of
some of the important factors that assist in determining whether price lowering is either
pro-competitive or anti-competitive. Consequently, it will assist business to understand when price
lowering behaviour is appropriately proscribed by section 46.
12 Trade Practices Legislation Amendment Bill (No. 1) 2007
Regulation Impact Statement and Financial Impact Statement
Analysis of option 4
2.72 Option 4 proposes that the Act be amended so that it is not necessary to demonstrate a
capacity to subsequently recoup losses experienced as part of a predatory pricing strategy.
2.73 The risk of firms being wrongly penalised would be increased if a Court was discouraged
from considering whether a firm had a rational expectation of being able to recoup the losses from
the price-lowering strategy. Although recoupment should not be a legal necessity for a breach of
section 46, the presence or otherwise of an expectation of recoupment is likely to be factually
important to a predatory pricing case. Making losses by persistently pricing below cost is irrational
if the firm has no expectation of being able to recoup those losses.
2.74 Wrongly penalising firms may lead to detrimental impacts on competition, potentially
leading to reduced choice and higher prices for consumers. These firms may either withdraw from
the market or reduce their competitive effort. Other firms in the market may also alter their
behaviour to prevent themselves being penalised.
2.75 Government would face transitional costs associated with amending the Act. Businesses
would face transitional costs associated with understanding and applying the new law.
2.76 The benefits from the proposed amendment are likely to be negligible.
Analysis of option 5
2.77 Option 5 proposes amending the Act so that a Court may consider recoupment in a
predatory pricing case under section 46.
2.78 Government would face transitional costs associated with amending the Act. Businesses
would face transitional costs associated with understanding and applying the new law.
2.79 Both smaller and larger businesses would benefit from the clarification that it is appropriate
to examine whether a firm had an expectation of recoupment. Although price lowering behaviour
by a firm with substantial market power can be both pro- and anti-competitive, if there is evidence
of deep and persistent pricing below cost and an expectation of recoupment, the chances of the
conduct being pro-competitive is remote.
Conclusion for recommendation 3
2.80 The costs of Options 1, 2 and 4 significantly outweigh their benefits.
2.81 Option 3 would clarify for business that it is appropriate for the Court to examine, in a
factual sense, below cost pricing in a predatory pricing case under section 46. Although Option 3
proposes that the cost measure be determined by the Court, any uncertainty generated by this option
is preferable to the increased potential for wrongly penalising a corporation under Option 2.
2.82 Option 5 would clarify for business that it is appropriate for the Court to examine, in a
factual sense, recoupment or the expectation of recoupment in a predatory pricing case under
section 46.
2.83 Options 3 and 5 would focus the Court's attention on factual questions that are usually
essential in assessing whether price lowering behaviour is pro- or anti-competitive.
Trade Practices Legislation Amendment Bill (No. 1) 2007 13
Regulation Impact Statement and Financial Impact Statement
Recommendation 5: leveraging market power
Issue
2.84 A firm with substantial market power in one market may be able to leverage that market
power to restrict competition or prevent the entry of new firms in a second market. For example, a
firm that has substantial market power in the manufacture of a good may be able to prevent the
entry of a firm into the retail market for that good.
2.85 Section 46 does not explicitly state whether the market in which substantial market power is
misused must be the same as the market in which substantial market power is established.
However, prior to Rural Press, it was considered that section 46 did cover such a scenario.
2.86 However, in its consideration of the Rural Press case, the Full Federal Court implied that
section 46 requires the establishment of substantial market power, and its misuse, to occur in the
same market. This matter was not commented upon in the High Court appeal which upheld the Full
Federal Court's decision on section 46.
2.87 Some submissions to the Senate Committee raised concerns that lower courts would
consider themselves bound by the High Court decision. This situation would prevent courts from
addressing situations where a firm with substantial market power in one market sought to leverage
that power to restrict competition in a second market.
Objective
2.88 The objective of any amendment is to clarify the application of section 46 to a corporation
that leverages its market power to restrict competition or prevent the entry of new firms in a second
market.
Recommendation 5
2.89 The Senate Committee sought to address the concern by recommending that section 46 be
amended to state that a corporation which has a substantial degree of power in a market shall not
take advantage of that power, in that or any other market, for any proscribed purpose in relation to
that or any other market.
Options in response to recommendation 5
2.90 Two options have been considered in response to recommendation 5:
Option 1: status quo.
Option 2: amending section 46 so that a corporation which has a substantial degree of power in
a market shall not take advantage of that power, in that or any other market, for any proscribed
purpose in relation to that or any other market.
Groups affected
2.91 The groups that would be directly affected by these options are larger businesses that
potentially have substantial market power, smaller businesses and the ACCC. Consumers would be
indirectly affected by these options because of the impact on competition.
14 Trade Practices Legislation Amendment Bill (No. 1) 2007
Regulation Impact Statement and Financial Impact Statement
Analysis of Option 1
2.92 If there was no change to the law to ensure that section 46 addressed leveraging of market
power, there would be circumstances where a firm with substantial market power in one market
could take advantage of that power to restrict competition in a second market.
2.93 Any reduction in competition may lead to reduced choice and higher prices for consumers.
Australian markets may become progressively concentrated. This detrimental impact on
competition may lead to smaller gains in efficiency and productivity, less innovation and fewer
employment opportunities.
Analysis of Option 2
2.94 Government would face transitional costs associated with amending the Act. Businesses
would face comparatively small transitional costs associated with understanding and applying the
new law, because until Rural Press it had been widely understood that section 46 applied to
leveraging of market power.
2.95 Both smaller and larger businesses would benefit from the clarification that it is detrimental
to competition for a firm with substantial market power to leverage that power to restrict
competition in a second market. For example, larger businesses with potential substantial market
power would be in a better position to understand what conduct is considered anti-competitive
when they were contemplating activities in a second market. Smaller businesses would benefit
from the greater certainty that the leveraging of market power was unlawful, reducing the risk that
they would be subject to such behaviour.
Conclusion for recommendation 5
2.96 The costs of Option 1 are potentially significant. Option 2 is therefore the preferred option.
Recommendation 6: co-ordinated market power
Issue
2.97 Section 46 prohibits corporations with a substantial degree of power in a market from taking
advantage of that power for a proscribed purpose.
2.98 A Court may assess a firm's market power, regardless of where that market power comes
from. To this end, subsection 46(2) enables the market power of firms that are related to each other
(either as subsidiaries or holding companies) to be assessed as if they are a single economic entity.
2.99 However, some submissions to the Senate Committee questioned the Court's ability to take
account of market power derived from other types of interactions between different firms in a
market.
Objective
2.100 The objective of any amendment is to further clarify the assessment of substantial market
power derived from interactions with other firms.
Recommendation 6
2.101 The Senate Committee recommended that section 46 be amended to clarify that a
corporation may be considered to have obtained a substantial degree of market power by virtue of
Trade Practices Legislation Amendment Bill (No. 1) 2007 15
Regulation Impact Statement and Financial Impact Statement
its ability to act in concert (whether as a result of a formal agreement or understanding, or
otherwise) with another corporation.
Options in response to recommendation 6
2.102 Three options have been considered in response to recommendation 6:
Option 1: status quo
Option 2: amending section 46 so that, in assessing whether a corporation has substantial market
power, a Court may take account of the ability of the corporation to act in concert with
others, whether as a result of contracts, arrangements or understandings or as a result of
parallel conduct by firms in an oligopolistic market.
Option 3: amending section 46 so that, in assessing whether a corporation has substantial market
power, a Court may take account of any market power the corporation has that is
derived from contracts arrangements or understandings with others.
Groups affected by options
2.103 The groups that would be directly affected by these options are larger businesses that
potentially have substantial market power, smaller businesses and the ACCC. Consumers would be
indirectly affected by these options because of the impact on competition.
Analysis of option 1
2.104 Case law already recognises that it is appropriate for courts, when assessing whether a
corporation has substantial market power, to take into account market power derived from
contracts, arrangements or understandings made by the corporation. This was the principal
established by a decision of a single judge in the Federal Court, that is, Justice Lockhart in
Dowling v Dalgety Australia Limited and Others (1992) 34 FCR 109 (Dowling v Dalgety). It may
be noted that Justice Lockhart adopted the wording of the Act by referring to `contracts,
arrangements or understandings'. This is significant because a contract, arrangement or
understanding requires at least a `meeting of minds'. Thus, there must be some form of
communication between the parties through which a consensus is formed as to what is to be done
(rather than a mere hope or expectation as to what is to happen).
2.105 There are also comments from several judges of the High Court in Boral indicating that an
assessment of market power could take account of market power derived `conscious parallelism',
that is, parallel conduct by firms in an oligopolistic market. However, these comments are not
legally binding on lower courts and the judges concerned provided no guidance as to how parallel
conduct could be proved.
2.106 If there was no change to the law, there is a risk that the important principle established in
Dowling v Dalgety could be overturned by a Full Federal Court decision. This would hamper the
assessment of market power in some cases and may result in some firms wrongly escaping liability
under section 46.
2.107 If a firm that misused its market power wrongly escaped liability under section 46 it would
mean that there were markets in which competition had been restricted. The reduced competition in
those markets may lead to less choice and higher prices for consumers.
2.108 The benefit of this option is that courts may provide further guidance on these issues,
without the need for government intervention. However, there is no way of knowing when the
16 Trade Practices Legislation Amendment Bill (No. 1) 2007
Regulation Impact Statement and Financial Impact Statement
courts may be able to provide additional guidance, given that courts have no control over when a
matter will arise that requires resolution.
Analysis of option 2
2.109 Option 2 proposed amending section 46 so that, in assessing whether a corporation has
substantial market power, a Court may take account of the ability of the corporation to act in
concert with others, whether as a result of contracts, arrangements or understandings or as a result
of parallel conduct by firms in an oligopolistic market.
2.110 The risk of firms being wrongly penalised would be increased if a provision focussing on
the ability to act in concert with others were introduced.
2.111 All firms have an ability to act in concert with others. By necessity firms have contracts,
arrangements and understandings with other firms. However, the contracts, arrangements and
understandings are only significant for section 46 if the firm has derived market power from them.
2.112 The risk of firms being wrongly penalised may also increase because the amendment
proposes to address parallel conduct by firms in an oligopolistic market. While it is economically
appropriate for such conduct to be considered in the assessment of a firm's market power, there
may be significant practical difficulties in ensuring a Court correctly identifies such conduct.
2.113 It may be difficult for courts to correctly identify parallel conduct by firms in an
oligopolistic market because the outward manifestations of such conduct may be similar to a market
with effective competition.
2.114 For example, firms can often anticipate or quickly match a competitor's change in the
product-price-quality package. However, in the absence of specific market characteristics -- such
as high barriers to entry, market concentration, market transparency, and product homogeneity --
parallel conduct cannot provide a firm with market power.
2.115 Wrongly penalising firms may lead to detrimental impacts on competition, potentially
leading to reduced choice and higher prices for consumers. These firms may either withdraw from
the market or reduce their competitive effort. Other firms in the market may also alter their
behaviour to prevent themselves being penalised.
2.116 There may also be additional costs imposed on the ACCC, especially if the ACCC is
required to examine the ability of a number of firms in the market to act in concert to enable the
Court to compare each firm's comparative ability to act in concert.
2.117 Government would face transitional costs associated with amending the Act. Businesses
would face transitional costs associated with understanding and applying the new law.
2.118 The benefits from the proposed amendment are likely to be negligible.
Analysis of option 3
2.119 Option 3 proposed amending section 46 so that, in assessing whether a corporation has
substantial market power, a Court may take account of any market power the corporation has that is
derived from contracts arrangements or understandings with others.
2.120 Government would face transitional costs associated with amending the Act. Businesses
would face comparatively small transitional costs in understanding and applying the new law, as the
amended law would reflect current case law.
Trade Practices Legislation Amendment Bill (No. 1) 2007 17
Regulation Impact Statement and Financial Impact Statement
2.121 Both smaller and larger businesses would benefit from the clarification in the section that
contracts, arrangements or understandings are relevant to a Court's assessment as to whether a firm
has substantial market power.
2.122 The risk of regulatory error would be minimal because the amendment would amount to a
statutory restatement of the principle set out by Justice Lockhart in Dowling v Dalgety.
2.123 Further, the amendment would not prevent the Court from examining whether the firm
obtained market power from parallel conduct in an oligopolistic market. A Court, in an appropriate
case, could take expert economic evidence to develop its understanding of how to correctly identify
such conduct.
Conclusion for recommendation 6
2.124 Given the risk with Option 1 that the important principle in Dowling v Dalgety may be
overturned at some point in time, it is appropriate to codify that principle in section 46. This could
be achieved by pursuing Option 3. The costs of Option 2 outweigh its benefits.
2.125 The additional clarity provided by amending section 46 in accordance with Option 3 may
then assist businesses to regain confidence in the ability of the section to address abuses of market
power.
Recommendation 7: $3 million threshold
Issue
2.126 Parliament intended section 51AC to provide protection from unconscionable conduct to
smaller businesses. This protection was achieved by excluding publicly listed companies from
access to the provision and limiting its applicability to business transactions of less than $3 million.
2.127 Some submissions to the Senate Committee argued that some smaller businesses were being
excluded from accessing the provision because the price threshold is too low. There were other
submissions to the Senate Committee that suggested that the price threshold should be removed.
Objective
2.128 The objective of any amendment is to improve access to section 51AC, thus providing
certainty for a wider range of smaller businesses as to whether they might potentially benefit from
the protection provided by the section.
Recommendation 7
2.129 The Senate Committee recommended that the transaction requirement for section 51AC be
removed by repealing subsections 51AC(9) and 51AC(10).
Options in response to recommendation 7
2.130 Three options have been considered in response to recommendation 7:
Option 1: status quo.
Option 2: raising the price threshold to $10 million.
Option 3: repealing the price threshold.
18 Trade Practices Legislation Amendment Bill (No. 1) 2007
Regulation Impact Statement and Financial Impact Statement
Groups affected by options
2.131 Smaller businesses and the ACCC would be directly affected by these options. There will
be an indirect impact on larger businesses if they alter their conduct in their dealings with smaller
businesses and consumers who will benefit from increased competition.
Analysis of option 1
2.132 Maintaining the status quo would have a cost for smaller businesses. As prices continue to
rise (and hence the transaction value rises above $3 million), smaller business will increasingly be
excluded from accessing the provision. As firms are progressively excluded from the provision,
they may lose confidence in their ability to successfully engage in business transactions, without
fear of exploitation. This may result in a decrease in business confidence and a decrease in
competition. This could limit consumer choice.
2.133 If section 51AC were not changed it would still provide benefits to (decreasing) numbers of
smaller businesses.
Analysis of option 2
2.134 The price threshold could be changed from $3 million to $10 million, either by amending
subsections 51AC(9) and 51AC(10), or by regulation. This change would be consistent with the
views of Government Senators in their minority report.
2.135 The higher price threshold may impose costs on some businesses and government, if other
businesses use threatened legal action under section 51AC strategically, even though the business is
not the victim of unconscionable conduct. For example, businesses who just come under a
$10 million price threshold (and who might not ordinarily be considered `small' businesses), might
take strategic legal action in an attempt to extract better terms from other businesses. Of course, if
there is no actual unconscionable conduct then there will be no breach of the Act. However, the
businesses threatened with legal action may still face the legal costs associated with considering the
claim. Government may face the costs of additional litigation as court case loads increase.
2.136 Government would face transitional costs associated with amending the Act. Businesses
would face transitional costs in understanding the new law.
2.137 Smaller businesses would continue to benefit from section 51AC if the price threshold were
raised to $10 million. A price for goods that exceeds $3 million does not necessarily imply that the
business supplying or acquiring those goods is going to receive a high margin of profit from the
transaction nor does it prevent the business from being considered `small' according to some
measures. Often small businesses may not be able to gain high margins because they operate in a
competitive area of the market. The transaction price may be higher because the goods in question
are either customarily sold in large volumes (for example, petrol) or because the goods themselves
are highly value added or elaborately transformed (for example, computers or whitegoods).
2.138 Increasing the price threshold is likely to further prevent larger businesses from engaging in
unconscionable conduct without limiting small business confidence to enter into higher value
transactions. Maintaining the confidence of smaller businesses may result in increased economic
activity and competition, improving consumer choice.
Analysis of option 3
2.139 The third option is to completely remove the price threshold while maintaining the
exclusion on public companies. This is the recommendation made by the Senate Committee on
Trade Practices Legislation Amendment Bill (No. 1) 2007 19
Regulation Impact Statement and Financial Impact Statement
advice from the ACCC. All businesses that are not publicly listed companies would therefore have
access to the protections in the provision.
2.140 There would be increased costs to business and government from a broad range of firms
using threatened legal action under section 51AC strategically.
2.141 Of course, if there is no actual unconscionable conduct then there will be no breach of the
law. Although this may not prevent some businesses from being exposed to legal costs in
responding to a potential claim. Government may also face the cost of additional litigation.
2.142 Government would face transitional costs associated with amending the Act. Businesses
would face transitional costs associated with understanding and applying the new law.
2.143 Removing the price threshold completely would benefit a range of businesses that are not
listed companies. However, a distinction based on whether a business is listed on the Australian
Stock Exchange (ASX) could be perceived to be at least as arbitrary as any price threshold. There
are many unlisted companies that are larger than some of those listed on the ASX.
Conclusion for recommendation 7
2.144 Option 1 should not be pursued because the costs to smaller businesses will eventually
outweigh the benefits to other businesses and consumers of maintaining the status quo.
2.145 Option 2 is preferred over Option 3 because it retains the protection offered by
section 51AC for smaller businesses. This was Parliament's intention. The costs to business
generally of Option 3 are also larger than the costs of Option 2, because Option 3 would allow a
wider array of businesses to inappropriately use section 51AC strategically.
2.146 The Office of Small Business supports raising the price threshold to $10 million. This
change would eliminate the uncertainty for the majority of smaller businesses as to whether the
price threshold applies, without opening the section to abuse by larger businesses.
Recommendation 8: unilateral variation of contracts
Issue
2.147 Some contracts contain clauses that enable one of the parties to unilaterally vary part of the
contract.
2.148 Unilateral variation clauses may sometimes be beneficial to consumers and businesses, as is
the case with loan contracts where the interest rate can be varied in accordance with movements in
official interest rates. If the interest rate could not be changed unilaterally, either the loan contract
would need to be renegotiated (resulting in higher transaction costs) or the interest rate would need
to be set based on predicted movements in official interest rates (resulting in the borrower being
required to bear a proportion of the risk that official interest rates would rise).
2.149 However, unilateral variation clauses might also be used by larger businesses with
significantly greater bargaining power or better knowledge of intended future variations to the
contract to unfairly shift risk to a smaller business. Such changes might substantially alter the effect
of the contract.
2.150 Section 51AC enables the Court to refer to a non-exhaustive list of factors when considering
whether unconscionable conduct has occurred.
20 Trade Practices Legislation Amendment Bill (No. 1) 2007
Regulation Impact Statement and Financial Impact Statement
2.151 The non-exhaustive list of factors are provided in subsections 51AC(3) and 51AC(4) and
include factors such as the relative bargaining positions of the parties; whether the conduct was
reasonable in the circumstances; whether undue pressure was exerted, and the degree to which it
was exerted; as well as the circumstances in which, the smaller businesses could have entered into
the transaction with another party. The list of factors makes no reference to contracts that enable
the unilateral variation of contract clauses.
2.152 Some submissions were made to the Senate Committee expressing concern that it was
uncertain that courts would consider the use of unilateral variation of contract clauses in
determining whether a business transaction was unconscionable. Other submissions proposed that
unilateral variation terms in business contracts should be prohibited, as has occurred in the United
Kingdom.
Objective
2.153 The objective of any amendment is to create certainty about the status of unilateral variation
terms in commercial transactions.
Recommendation 8
2.154 The Senate Committee recommended amending subsections 51AC(3) and 51AC(4) to
include unilateral variation terms as a factor the Court can consider in identifying unconscionable
conduct.
Options in response to recommendation 8
2.155 There are three options that have been considered in response to recommendation 8:
Option 1: status quo.
Option 2: amend section 51AC so that courts may consider unilateral variation terms as a factor
that may indicate unconscionable conduct.
Option 3: amend the Act to prohibit the use of unilateral variation terms.
Groups affected by options
2.156 These options would directly affect larger and smaller businesses in their contractual
dealings with each other. Consumers would be indirectly affected by these options because of the
impact on competition.
Analysis of option 1
2.157 There may be costs to smaller businesses from maintaining the status quo. Theoretically a
Court can consider any factor it regards to be relevant to determine unconscionable conduct as the
list of factors in subsections 51AC(3) and 51AC(4) is not exhaustive. However, there is uncertainty
as to whether a Court would decide that it can consider unilateral variation terms to be relevant to
determining unconscionable conduct. This uncertainty makes it more difficult for smaller
businesses to resist the imposition of unilateral variation terms, even where they may well be
unconscionable.
2.158 Smaller businesses may therefore continue to be subjected to unconscionable conduct as a
result of the use of unilateral variation terms. Alternatively, smaller business may refuse to enter
into contracts containing unilateral variation terms out of concern that they would not have
Trade Practices Legislation Amendment Bill (No. 1) 2007 21
Regulation Impact Statement and Financial Impact Statement
appropriate redress if an arrangement was used in circumstances of unequal bargaining power.
Either of these outcomes could lead to decreased competition and decreased choice for consumers.
2.159 There are benefits to consumers and businesses in unilateral variation terms in some types of
contracts. Maintaining the status quo would ensure there is little risk that these beneficial unilateral
variation terms could be challenged.
Analysis of option 2
2.160 Option 2 proposed that section 51AC be amended so that courts may consider unilateral
variation terms as a factor that may indicate unconscionable conduct.
2.161 There is a small risk that including unilateral variation terms in a list of factors may result in
the Court giving these terms undue weight in determining whether unconscionable conduct has
occurred. This consideration is particularly relevant in light of some commentary that courts may
not be best placed to determine whether a unilateral variation term is being used in circumstances
that are genuinely unconscionable. Some businesses may be adversely affected if business becomes
wary of using unilateral variation terms to appropriately lower transaction costs.
2.162 Government would face transitional costs associated with amending the Act. Businesses
would face transitional costs associated with understanding and applying the new law. For
example, the cost of obtaining legal advice to see how the amended law might apply in the specific
circumstances.
2.163 Including unilateral variation terms as a factor that courts can consider facilitates
competitive processes and other beneficial uses of these terms.
2.164 Smaller businesses would benefit from the inclusion of unilateral variation terms as an
explicit factor to be considered by courts. It would provide a clear signal to businesses that a Court
will carefully consider the use of such terms in all cases. The confidence of smaller businesses to
enter into a range of contracts would be improved, thereby increasing competition, leading to more
competitive prices and greater consumer choice.
Analysis of option 3
2.165 Option 3 proposed that the Act be amended to prohibit the use of unilateral variation terms
in business transactions.
2.166 Prohibiting unilateral variation terms in all business transactions could impose significant
costs on business. It would impose higher transaction costs on many businesses. It would also
increase interest costs for businesses because financial institutions would require businesses to bear
a proportion of the risk that official interest rates would rise across the period of the loan.
Businesses would also lose the benefits of any reduction in interest costs when official interest rates
are reduced.
2.167 Costs to government would be increased. There would need to be vigorous enforcement of
the law. Government may face higher costs due to the increased scrutiny by the ACCC and the
courts. Government would also face transitional costs associated with amending the Act.
2.168 Some smaller businesses may benefit from prohibiting unilateral variation terms. This may
lead to some increases in competition and lower costs for consumers.
22 Trade Practices Legislation Amendment Bill (No. 1) 2007
Regulation Impact Statement and Financial Impact Statement
Conclusion for recommendation 8
2.169 Clarifying the use of unilateral variation terms has benefits for smaller businesses and
consumers. Smaller businesses would be able to more confidently enter into a range of business
transactions, increasing competition. Consumers would benefit from increased choice and more
competitive pricing.
2.170 The costs to business and consumers of prohibiting all unilateral variation terms in business
transactions could be significant. Transaction and debt costs will increase significantly for
business, leading to adverse impacts on competition and consumers.
2.171 Having regard to these concerns, the preferred option, is to make it explicit in section 51AC
that use of unilateral variation terms will be a factor considered by courts in determining whether
unconscionable conduct has occurred.
Consultation
2.172 The Senate Committee's inquiry was conducted over nine months and provided extensive
opportunity for public consideration of the issues falling within its terms of reference. Fifty five
submissions were received and hearings were held on five different days enabling 29 different
organisations to give evidence.
2.173 Representatives of smaller and larger businesses from a range of industry sectors including
retail, building and construction, agriculture, manufacturing and telecommunications made
submissions and gave evidence. Others to contribute to the inquiry included legal practitioners
experienced in Trade Practices Act matters and the ACCC and the National Competition Council.
2.174 Since the Senate Committee tabled its report on 1 March 2004, Treasury has met with
and/or considered several submissions made by organisations in response to the recommendations
of the Senate Committee. These submissions represented the views of smaller and larger businesses
and the ACCC.
2.175 Treasury has also consulted with the Department of Industry, Tourism and Resources
(including the Office of Small Business), the Attorney-General's Department, the Department of
Communications and the Arts and the Department of Prime Minister and Cabinet.
Implementation and review
Changes to the Trade Practices Act
2.176 The changes to the Act will need to be implemented by passing amending legislation
through the Commonwealth Parliament.
2.177 Under the terms of the Commonwealth-State Conduct Code Agreement, the Commonwealth
must provide States and Territories with a period of three months in which they can offer comment
on the proposed changes to section 46. At least three States and Territories must then vote in favour
(or be deemed to vote in favour) of the proposed amendments to section 46 during a 35 day voting
period before they can be introduced into the Commonwealth Parliament.
Enforcement
2.178 The ACCC would have responsibility for enforcing the amended Act. Penalties for a breach
of section 46 currently include pecuniary penalties for corporations of up to $10 million for each
contravention.
Trade Practices Legislation Amendment Bill (No. 1) 2007 23
Regulation Impact Statement and Financial Impact Statement
2.179 In addition, a range of orders can be made against a corporation that contravene section 46
or provision of Part IVA or Part IVB, including injunctions (section 80), community service orders,
probation orders (enabling compliance programs to be established and internal processes to be
revised), disclosure orders and publications orders (section 86C). Where a pecuniary penalty has
been imposed, the Court may also impose an adverse publicity order (section 87D). A range of
other orders may also be made, including orders for compensation (section 87).
Review
2.180 The effectiveness of the proposed amendments would be informally reviewed by Treasury
after a sufficient period of time had elapsed.
FINANCIAL IMPACT STATEMENT
2.181 The amendments are not expected to have any significant impact on Commonwealth
expenditure or revenue.
24 Trade Practices Legislation Amendment Bill (No. 1) 2007
Notes on individual clauses
3
NOTES ON INDIVIDUAL CLAUSES
Clause 1 Short Title
3.1 Clause 1 provides for the citation of the Trade Practices Legislation Amendment Act
(No. 2) 2005.
Clause 2 Commencement
3.2 The items in the Schedules to the Bill commence on the day after it receives Royal Assent.
Clause 3 Schedule(s)
3.3 Clause 3 provides that the items set out in the Schedules to the Bill amend or repeal the
specified Acts in the Bill. Any other provisions in the Schedules have effect according to their
terms.
SCHEDULE 1 - DEPUTY CHAIRPERSONS
3.4 The Trade Practices Act establishes the ACCC (section 6A), comprising a Chairperson and
other members appointed under the Act (section 7) for a period not exceeding 5 years (section 8).
A Deputy Chairperson (defined in section 4) may also be appointed (section 10), who will act as
Chairperson when the Chairperson is absent from duty or from Australia (section 11). The Trade
Practices Act currently provides for there to be one Deputy Chairperson.
3.5 Schedule 1 of the Bill provides for the creation of a second Deputy Chairperson position for
the ACCC, and allows for the effective operation of the ACCC with that additional position.
Trade Practices Act 1974
Item 1 Subsection 4(1) (definition of Deputy Chairperson)
3.6 Item 1 replaces the definite article in the current definition of Deputy Chairperson with the
indefinite article, allowing the definition to refer to more than one Deputy Chairperson.
Item 2 Subsection 10(1)
Item 3 Subsection 10(1A)
3.7 As for item 1, these changes allow the provisions to refer to more than one Deputy
Chairperson.
Trade Practices Legislation Amendment Bill (No. 1) 2007 25
Notes on individual clauses
Item 4 No effect on existing appointment
3.8 Item 4 provides for the continuing validity of an existing appointment of a Deputy
Chairperson of the ACCC in the face of changes made to section 10, which provides for the
appointment of more than one Deputy Chairperson.
Item 5 Subsection 10(4)
3.9 As for item 1, this change allows the provision to refer to more than one Deputy
Chairperson.
Item 6 At the end of section 10
3.10 This item limits the number of concurrent appointments to the position of Deputy
Chairperson of the ACCC to two.
Item 7 Paragraphs 11(2)(a) and (b)
3.11 Subsection 11(2) of the Trade Practices Act provides for the appointment of the Deputy
Chairperson as acting Chairperson where the Chairperson is absent from duty or from Australia.
3.12 Item 7 provides that, in the event that there are two Deputy Chairpersons available to act as
Chairperson, the Minister may appoint one of them to act as Chairperson. In the event that there is
only one Deputy Chairperson, or none, the situation is unchanged from the current provisions of the
Trade Practices Act.
Item 8 Subsection 18(4)
3.13 Section 18 of the Trade Practices Act deals with meetings of the Commission of the ACCC.
Subsection 18(4) currently provides that the Deputy Chairperson shall preside at meetings of the
Commission in the absence of the Chairperson.
3.14 Item 8 amends subsection 18(4) to allow the Chairperson to nominate one Deputy
Chairperson to preside at a meeting of the Commission, in the event that the Chairperson is absent
from the meeting and there are two Deputy Chairpersons appointed to the ACCC.
Item 9 Paragraph 18(6)(a)
Item 10 Subsection 19(5)
Item 11 Paragraph 154D(1)(a)
Item 12 Subsection 155(1)
3.15 As for item 1, items 9 to 12 of Schedule 1 allow the provisions to which they relate to refer
to more than one Deputy Chairperson.
SCHEDULE 2 - MISUSE OF MARKET POWER
3.16 Schedule 2 of the Bill amends section 46 of the Trade Practices Act, which prohibits
corporations with a substantial degree of market power from using that power for certain purposes
proscribed under subsection 46(1).
3.17 The amendments in Schedule 2 of the Bill implement part of the Government's response to
the Senate report. Schedule 2 also makes amendments to Part XIB of the Act, to ensure continued
consistency between section 46 as amended by the Bill and the relevant provisions of Part XIB, and
26 Trade Practices Legislation Amendment Bill (No. 1) 2007
Notes on individual clauses
to the version of section 46 found in Part 1 of the Schedule to the Trade Practices Act, which
applies throughout the States and Territories.
Part 1 - Amendment of the Trade Practices Act 1974
Item 1 Subsection 46(1)
3.18 Section 46 does not explicitly state whether the conduct of a corporation that `takes
advantage' of its substantial market power must be done in the same market in which the substantial
market power accrued. As a result, it could be implied that section 46 requires the establishment of
substantial market power, and its misuse, to occur in the same market.
3.19 The Government considers that it is appropriate for section 46 to proscribe the leveraging of
substantial market power from one market into another. Accordingly, Item 1 amends
subsection 46(1) to provide that a corporation must not take advantage of a substantial degree of
market power, either in the market in which the power is held or in any other market.
Item 2 After subsection 46(3)
3.20 The Trade Practices Act recognises that corporations may obtain market power either in
their own right or as a consequence of their interactions with other corporations in the market. For
example, subsection 46(2) of the Act provides that the market power of a corporation should not be
assessed in isolation from any related bodies corporate.
3.21 The Senate report recommended that section 46 be amended to clarify that a corporation
may be considered to have obtained a substantial degree of market power by virtue of its ability to
act in concert (whether as a result of a formal agreement or understanding, or otherwise) with others
(that is, without the need for the corporation to be related to the other party).
3.22 The Government accepted this recommendation in part. Accordingly, item 2 amends
section 46 to provide that, for the purposes of determining the degree of power that a body
corporate has in a market, the Court may have regard to any market power it has that results from
contracts, arrangements or understandings with others, or results from covenants that the body
corporate is bound by or entitled to the benefit of.
3.23 New subsection 46(3B) makes it clear that the matters listed in subsections 46(3) and (3A)
do not limit the matters to which the Court may have regard in determining the degree of market
power held by a body corporate.
3.24 The Senate report recommended that section 46 be amended to clarify that the threshold of
`a substantial degree of power in a market' is not a threshold of substantial control. In 1986,
section 46 was amended by the Trade Practices Revision Act 1986 to change the threshold from `a
corporation in a position to substantially control a market for goods or services' to the current
threshold of `a corporation that has a substantial degree of power in a market'. New
subsection 46(3C) clarifies that the threshold of `a substantial degree of power in a market' can be
satisfied even though the body corporate does not substantially control the market.
3.25 Subsection 46(3C) also clarifies that a body corporate can have `a substantial degree of
power in a market' even though it does not have absolute freedom from constraint by the conduct of
its competitors or persons to or from whom it supplies goods or service. This does not preclude the
Court from taking into account other market constraints, as subsection 46(3C) does not limit the
matters to which the Court may have regard for the purpose of determining the degree of market
power held.
Trade Practices Legislation Amendment Bill (No. 1) 2007 27
Notes on individual clauses
3.26 New subsection 46(3D) makes it clear that more than one corporation may have a
substantial degree of power in a market. A corporation does not need to be a monopolist or near
monopolist to satisfy the threshold for section 46 to apply. Instead, there may be instances where
several corporations operating in the same market power each have a substantial degree of power in
that market.
Item 3 After subsection 46(4)
3.27 In response to the Senate report, the Government has decided to amend section 46 to
emphasise that courts may take into consideration a sustained period of below-cost pricing when
determining whether a corporation has misused its market power.
3.28 Item 3 inserts new subsection 46(4A) which includes two elements that the Court may
consider when determining whether a corporation has contravened subsection 46(1):
(a) conduct of the corporation that involved selling goods or services for a sustained period at a
price that is below cost; and
(b) the corporation's reasons for engaging in below-cost pricing.
3.29 Courts have in the past been able to examine below-cost pricing when determining whether
a corporation has misused its market power under section 46. The amendments in item 3 clarify
that existing ability. Furthermore, item 3 does not direct that a Court must have regard to
below-cost pricing, nor does it limit the Court to considering this matter when determining whether
a corporation with a substantial degree of market power has misused that power.
3.30 In accordance with High Court reasoning on the issue, the appropriate measure of the
`relevant cost to the corporation' is to be determined by the Court in each case. One such measure
of costs could be the avoidable or variable costs of production for a firm. On its face, a sale of an
item at less than its variable cost makes no contribution to the firm's fixed costs, and it could be
concluded that the item's selling price is predatory.
3.31 However, as the High Court majority noted in Boral Besser Masonry Limited v ACCC,3
such an analysis may fail to account for many legitimate business considerations, including the
benefit to the firm's wider corporate group of continuing to supply the item, the willingness of a
firm to bear short-term losses in the hope that market conditions will improve, costs that would be
incurred by the firm in withdrawing from the market, and accounting for the firm's `sunk costs' of
investing in the industry in the first place.
3.32 As a result, the amendments to section 46 do not specify a particular method of determining
either price or cost for the goods or services, as the appropriate method may vary depending on the
facts.
3.33 Under the amendment, the below-cost pricing is to be carried out for `a sustained period'.
Price reductions that occur for a short period of time may be a consequence of lawful, competitive
behaviour rather than a misuse of market power for the purpose of eliminating or substantially
damaging a competitor.
3.34 The corporation's reasons for engaging in below-cost pricing may indicate whether the
corporation had one of the prohibited purposes in section 46(1). They may also indicate that the
3
[2003] HCA 5
28 Trade Practices Legislation Amendment Bill (No. 1) 2007
Notes on individual clauses
corporation has not taken advantage of its market power. For example, the corporation may have
reduced prices for competitive, commercial reasons which would have motivated the corporation to
reduce prices even in the absence of a substantial degree of market power.
3.35 The amendment makes it clear that the below-cost factors do not limit the other matters to
which the Court may have regard when considering a contravention of subsection 46(1).
Item 4 After subsection 151AH(5)
3.36 Section 151AK provides a telecommunications-specific prohibition on the misuse of market
power. It prohibits a telecommunications carrier or carriage service provider engaging in
anti-competitive conduct. This prohibition is referred to in Part XIB of the Trade Practices Act as
the competition rule (section 151AB).
3.37 Section 151AJ sets out the circumstances in which a carrier or a carriage service provider is
said to engage in anti-competitive conduct for the purposes of Part XIB of the Trade Practices Act.
It does so in a manner that is consistent with section 46.
3.38 To ensure continued consistency between sections 151AJ and 46, the Bill makes
amendments to subsection 151AJ(2) that have the same effect as the amendments to section 46
proposed in relation to leveraging of market power, coordinated market power, and below-cost
pricing.
3.39 In line with new subsection 46(3A), item 4 includes new subsection 151AH(5A) to provide
that, in determining the degree of power that a person has in a telecommunications market for the
purposes of subsection 151AJ(2), the Court may have regard to any market power it has that results
from contracts, arrangements or understandings with others, or results from covenants that the
person is bound by or entitled to the benefit of.
Item 5 Subsection 151AH(6)
3.40 Item 5 amends subsection 151AH(6) to take account of the inclusion of new
subsection 151AH(5A) by item 4.
3.41 In line with new subsection 46(3C), item 6 includes new subsection 151AH(6A) to provide
that a person may have a substantial degree of power in a telecommunications market even though
the person does not substantially control the market or have absolute freedom from constraint by the
conduct of the person's competitors or persons to or from whom the person supplies or acquires
goods.
3.42 In line with new subsection 46(3D), item 6 includes new subsection 151AH(6B) to make it
clear that more than one person can have a substantial degree of power in a telecommunications
market.
Item 6 Subparagraphs 151AJ(2)(b)(i) and (ii)
3.43 As with subsection 46(1), subsection 151AJ(2) currently does not explicitly state whether
the conduct of a corporation that `takes advantage' of its substantial market power must be in the
same market as that in which the substantial market power was accrued.
3.44 Item 6 mirrors the change made by item 1, by amending subparagraphs 151AJ(2)(b)(i)
and (ii) to provide that a carrier or carriage service provider must not take advantage of a substantial
degree of market power, either in the market in which the power is held or in any other market.
Trade Practices Legislation Amendment Bill (No. 1) 2007 29
Notes on individual clauses
Item 7 Subparagraphs 151AJ(2)(b)(i) and (ii)
3.45 As with subsection 46(1), subsection 151AJ(2) currently does not explicitly state whether
the conduct of a corporation that `takes advantage' of its substantial market power must be in the
same market as that in which the substantial market power was accrued.
3.46 Item 7 mirrors the change made by item 1, by amending subparagraphs 151AJ(2)(b)(i)
and (ii) to provide that a carrier or carriage service provider must not take advantage of a substantial
degree of market power, either in the market in which the power is held or in any other market.
Item 8 After subsection 151AJ(2)
3.47 In order to reflect the proposed changes to section 46 in relation to predatory pricing, item 8
amends section 151AJ to include two elements that the Court may consider when determining
whether a carrier or carriage service provider has engaged in `anticompetitive conduct' under
section 151AJ(2):
(a) conduct of the carrier or carriage service provider that involved supplying goods or services
for a sustained period at a price that is below cost; and
(b) the reasons of the carrier or carriage provider for engaging in below-cost pricing.
3.48 As with section 46, section 151AJ does not specify a particular method of determining
either price or cost for the goods or services, as the appropriate method of calculation may vary
depending on the facts.
Item 9 Subsection 46(1) of the Schedule
Item 10 After subsection 46(3) of the Schedule
Item 11 After subsection 46(4) of the Schedule
3.49 Items 9 to 11 make identical amendments to the version of section 46 found in Part 1 of the
Schedule to the Trade Practices Act. This is the version of the Trade Practices Act that applies in
the States and Territories by virtue of application legislation.
Part 2 - Application provisions
Item 12 Application of amendments
3.50 Item 12 provides that the amendments contained in Schedule 2 of the Bill apply to
contraventions of the Trade Practices Act that occur after the commencement of the items in
Schedule 2.
SCHEDULE 3 - UNCONSCIONABLE CONDUCT
3.51 Part IVA of the Trade Practices Act prohibits corporations from engaging in unconscionable
conduct in their transactions with both consumers (section 51AB) and business consumers
(section 51AC). Section 51AC is duplicated in the Australian Securities and Investments
Commission Act 2001 (ASIC Act) in relation to financial services.
3.52 In response to the Senate report, the Government decided that section 51AC should be
amended to improve the protection it provides for small business suppliers and acquirers.
30 Trade Practices Legislation Amendment Bill (No. 1) 2007
Notes on individual clauses
Australian Securities and Investments Commission Act 2001
3.53 Section 12CC of the ASIC Act applies the unconscionable conduct rules of section 51AC of
the Trade Practices Act to the supply and acquisition of financial services. The following items
duplicate the changes to Part IVA of the Trade Practices Act to be made by the Bill, and are more
fully explained in the descriptions of the corresponding changes to the Trade Practices Act.
Item 1 After paragraph 12CC(2)(j)
3.54 Item 1 amends the non-exhaustive list of factors in subsection 12CC(2) to include that the
Court may also consider whether a party has imposed or utilised contract terms allowing the
unilateral variation of any contract between a supplier and a service recipient. This is more fully
explained in item 5 below.
Item 2 After paragraph 12CC(3)(j)
3.55 Item 2 extends the non-exhaustive list of factors in subsection 12CC(3) to include new
paragraph 12CC(3)(ja), which provides that the Court may also consider whether the acquirer of
financial services has a contractual right to vary unilaterally a term of condition of a contract
between a business supplier and the acquirer. Item 6 below explains the policy behind this change.
Item 3 Subsection 12CC(8)
3.56 Item 3 raises the price limitation set out in subsection 12CC(8) from $3 million to
$10 million. This is more fully explained in item 7 below.
Item 4 Subsection 12CC(9)
3.57 Item 4 raises the price limitation set out in subsection 12CC(9) from $3 million to
$10 million. This is more fully explained in item 8 below.
Trade Practices Act 1974
Item 5 After paragraph 51AC(3)(j)
3.58 When determining whether a corporation or person has engaged in unconscionable conduct
under section 51AC of the Trade Practices Act, the Court can have regard to a non-exhaustive list
of factors in that section. Subsections 51AC(3) and 51AC(4) are near-identical lists that apply to
business consumers that acquire, or small business suppliers that supply, the goods or services in
question.
3.59 The non-exhaustive list includes factors such as the relative strengths of the bargaining
positions of each party, whether any undue influence or pressure was applied and the extent to
which there was an opportunity to negotiate the terms and conditions of acquisition or supply.
3.60 The Senate Committee considered that the imposition or exercise of a unilateral variation
clause can be unconscionable, and recommended that the existence of the right to unilaterally vary
the terms or condition of a contract ought to be included in the list of factors. A unilateral variation
clause in a contract grants one party the right to vary some aspect of the contractual arrangement
without consulting the other party.
3.61 The Government accepted this recommendation. Accordingly, item 5 extends the
non-exhaustive list of factors in subsection 51AC(3) to provide that the Court may also consider
Trade Practices Legislation Amendment Bill (No. 1) 2007 31
Notes on individual clauses
whether a supplier has a contractual right to vary unilaterally a term or condition of a contract
between the supplier and a business consumer.
Item 6 After paragraph 51AC(4)(j)
3.62 Item 6 amends subsection 51AC(4) in relation to unilateral variation clauses in contracts, by
including paragraph 51AC(4)(ja) which provides that the Court may consider whether an acquirer
has a contractual right to vary unilaterally a term or condition of a contract between the acquirer and
a small business supplier.
Item 7 Subsection 51AC(9)
3.63 Section 51AC proscribes unconscionable conduct in connection with the supply of goods or
services to, or acquisition of goods or services from, a person. The protection offered by
section 51AC is subject to two limitations. Firstly, listed public companies are not protected by
section 51AC. Secondly, the section does not apply where the supply or acquisition of goods is at a
price greater than $3 million, as noted in subsections 51AC(9) and 51AC(10).
3.64 The Government has decided to raise the price limitation relating to the supply of goods or
services, set out in subsection 51AC(9), from $3 million to $10 million, thereby extending the
application of section 51AC to a broader range of transactions. Item 7 gives effect to this decision.
Item 8 Subsection 51AC(10)
3.65 Item 8 extends the application of section 51AC by increasing the price limit on the
acquisition or possible acquisition of goods or services, contained in subsection 51AC(10), from
$3 million to $10 million.
Item 9 Application of amendments
3.66 Item 9 makes it clear that the amendments made by Schedule 3 apply in relation to contracts
made before or after the commencement of Schedule 3, but only insofar as the relevant conduct is
engaged in after commencement for the Bill.
32 Trade Practices Legislation Amendment Bill (No. 1) 2007
Index]
[Search]
[Download]
[Bill]
[Help]