$6 million not enough? Higher penalties for consumer law claims are coming

A key priority of the ACCC in 2016 was higher penalties for beaches of the Australian Consumer Law (ACL). This priority will continue this year, as clearly set out by ACCC Chairman Rod Sims in his announcement of the ACCC’s Enforcement Priorities for 2017.

Delivering his annual address to the Committee for Economic Development of Australia, Mr Sims stated:

“…One issue that continually emerges is whether the penalties against large businesses are enough of a deterrent and more than just the cost of doing business.

We see companies breaching the Act, or coming very close to it, and too often not, in our view, understanding the seriousness of the issues involved. We believe the current low civil penalties contribute to this.

We are seeking to change this, and we are seeing encouraging signs from the courts to assist us.

Following an appeal lodged by the ACCC last year, Reckitt Benckiser was forced to pay a revised penalty of $6 million for making misleading representations to consumers.

The original penalty was $1.7 million.

We believed, and the Full Court agreed, that $1.7 million was manifestly inadequate given the need for deterrence and the impact of Reckitt Benckiser’s conduct on consumers.

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The ACCC welcomes the message from these Federal Court judges that we must work to ensure that penalties are sufficiently high to deter large companies from contravening the law.

In 2017 we will be making concerted efforts to ensure that the penalties we seek make larger companies and individuals who work in them consider their business practices, and how their business practices meet their obligations under competition and consumer law.”

This approach is consistent with the ACCC’s public push for higher legislative penalties for breaches of the ACL. In particular, the ACCC’s position is that fines under the ACL should be equal to those available in relation to breaches of the competition provisions of the Competition and Consumer Act 2010 (the Act).

The ACCC’s crusade appears to be succeeding.

Draft reports published by both Consumer Affairs Australia and New Zealand (CAANZ) and the Productivity Commission have now recommended increasing the maximum penalties for beaches of the ACL, and in particular, aligning them with the higher penalties for breaches of the competition provisions in the Act.

As Mr Sims noted,  at the end of 2016, the Full Federal Court allowed an appeal by the ACCC against the first instance penalty decision in ACCC v Reckitt Benckiser (Australia) Pty Ltd. In allowing the appeal, the Full Court increased the penalty imposed against the manufacturer of Nurofen in relation to misrepresentations about its Nurofen Specific Pain Range (NSPR) products from $1.7 million to $6 million.

$6 million is the highest ever penalty for misleading conduct under the ACL. However, if the government adopts recommendations by the Productivity Commission, companies could soon face penalties in excess of $10 million for similar contraventions.

This post considers both the Federal Court judgement in ACCC v Reckitt Benckiser and the recent draft reports published by CAANZ and the Productivty Commission.

ACCC v Reckitt Benckiser 

In December 2015, Reckitt Benckiser admitted breaching sections 18 and 33 of the ACL in relation to the marketing and sale of its NSPR products. In particular, Reckitt Benckiser admitted making representations on its website and product packaging that these products were each specifically formulated to treat a particular type of pain (migraine, tension headache, period pain and back pack), when in fact each of the products were the same.

In April 2016, following a contested penalty hearing, Justice Edelman of the Federal Court imposed a pecuniary penalty of $1.7 million.  The ACCC, which had sought a penalty of at least $6 million, appealed this decision to the Full Federal Court.

The Full Federal Court allowed the ACCC’s appeal on multiple grounds. In its judgment, the Full Court identified a number of specific errors of reasoning by the primary judge, including errors relating to:

• the proper role and application of the “courses of conduct” principle;
• the characterisation of the contravention as “innocent” in circumstances where the ACCC had not specifically pleaded that the contravention was deliberate or reckless;
• a failure to sufficiently take into account the amount of consumer harm resulting from the contravention.

The Full Court also concluded that the penalty of $1.7 million was so “manifestly inadequate”, having regard to the need to achieve the primary object of a pecuniary penalty, namely deterrence, that it was not reasonably open on the facts that such a penalty could be imposed.

 Courses of conduct principle

Currently, the maximum penalty for a beach of Part 3-1 of the ACL is $1.1 million per contravention.  In a case where the packaging of a product is found to be misleading a contravention occurs each time a product in the relevant packaging is sold. In this case, it was agreed that Reckitt Benckiser had sold 5.9 million units of the NSPR products in the relevant period. Therefore, as noted by the Full Federal Court, “in a practical sense, the overall maximum penalty was so great that there was no maximum penalty.”

In his first instance decision, Edelman J considered that although, in theory, “the statutory maximum penalty is many, many millions of dollars”, in practice, considerations of proportionality, along with the application of the “courses of conduct” principle, operated as a constraint on the penalty to be imposed.

Edelman J found that the most accurate characterisation of Reckitt Benckiser’s conduct was as two distinct courses of conduct, with the packaging representations making one course of conduct and the website representations another. His Honour stated that although the characterisation of multiple contraventions as falling into one or more “courses of conduct” does not require the court to limit the maximum penalty for each course of conduct to $1.1 million, the courses of conduct principle should be applied to “ensure proportionality between the contravening conduct and the penalty imposed.”

On appeal, the ACCC argued that Edelman J misapplied the courses of conduct principle in various ways, including by characterising the conduct as involving only two courses of conduct rather than six (one for each of the four separate packaging representations and each of the two relevant web pages), giving inappropriate weight to a “notional maximum penalty” of $2.2 million, focusing only upon the initial acts causing the contraventions rather than the contraventions continuing over nearly five years, and applying the principle in a manner that meant the overall penalty did not reflect the nature and extent of the conduct.

The Full Court did not disturb the primary’s judge finding that there were two rather than six courses of conduct. However, the Full Court did criticise the way Edelman J had applied the courses of conduct principle to limit the maximum penalty in the case.  In this regard, the Full Court considered that, despite his Honour’s insistence that the application of the courses of conduct principle did not automatically limit the maximum penalty to $2.2 million, the fact that the penalty of $1.7 million fell within this range suggested that, in practice, the “notional maximum” did in fact influence Edelman J’s thinking.

On the question of proportionality, the Full Court noted that in circumstances where the relevant conduct continued for nearly five years and involved the sale of 5.9 million packages of product, the characterisation of the contraventions as involving only two courses of conduct could not be a determinative factor in limiting the appropriate penalty to be awarded in all the circumstances of the case.

Profit and consumer harm

Another factor in the success of the ACCC on appeal was the different approaches taken by the primary judge and the Full Federal Court to the question of quantifying the amount of consumer harm caused by the contravening conduct.

In this regard, it should be noted that the ACCC’s case at first instance focused more on Reckitt Benckiser’s alleged profit as a result of the contravening conduct, while on appeal, the ACCC’s arguments changed to focus on quantifying consumer loss. At first instance, Reckitt Benckiser submitted that its profits from the sale of the NSPR products during the relevant period were irrelevant unless the ACCC could prove, on a “but for” basis, that these profits resulted from the contravening conduct. In other words, the ACCC needed to prove that the sales only occurred due to the relevant misrepresentations and were not also the result of other factors, such as customers’ preference for the packaging of the NSPR products or the convenience afforded by the reference to each specific pain condition.

Ultimately, Edelman J accepted the submission by Reckitt Benckiser that any attempt to quantify profits caused by the contravening conduct on a but for basis would be either an “impossible task” or “so speculative as to be useless”. For similar reasons, His Honour also concluded that it was neither necessary nor appropriate to attempt to quantify the amount of loss to consumers (or competitors) as a result of the contravening conduct. On appeal, the ACCC argued that Edelman J had erred in concluding that any attempt to quantify profits caused by Reckitt Benckiser’s contravening conduct and losses suffered by consumers as a result of that conduct would be impossible, so speculative as to be useless, of no assistance and neither necessary nor appropriate and thereby failed to take into account or give adequate weight to the statutory mandatory consideration of losses suffered by consumers as provided in s 224(2)(a) of the ACL.

The ACCC also argued that Edelman J should have concluded that the contravening conduct was the primary contributing cause of consumers choosing to purchase the more expensive NSPR products instead of the standard Nurofen product, with the consequence that a reasonable estimate of the loss suffered was an amount of about half of the retail sales revenue during the contravening period (the NSPR products were approximately double the price of standard Nurofen). Applying this methodology would result in an approximation of the loss suffered by consumers of $26.25 million. The Full Court upheld this ground of appeal, concluding that, despite the ACCC’s focus on profits before his Honour, Edelman J’s approach to consumer loss was in error and this error was material to his decision on the penalty imposed.

The Full Court emphasised the fact that, in their view, there was no relevant difference between the NSPR products and standard Nurofen. Therefore, the “obvious and expected consequence” of the contravening conduct was to cause consumers to purchase the more expensive NSPR products when they would otherwise have purchased one of the standard Nurofen products, or indeed a general pain relief product sold by one of Reckitt Benckiser’s competitors.

Rejecting the approach taken by Edelman J at first instance the Full Court stated that “the mandatory consideration of consumer loss did not require precise causation or mathematical precision.  It never required evidence from consumers on a “but for” basis or expert evidence.”  Rather, the Court emphasised that all that was necessary was to apply a “common sense” approach to causation of consumer loss which “requires no more than that the act or event in question should have materially contributed to the loss or injury suffered”.

Interestingly, although the ACCC did not make this argument, the Full Court also suggested that, given its view that enticing consumers from standard Nurofen to the more expensive NSPR products was the “ordinary and predictable consequence” of the conduct, the amount of consumer loss was not a circumstance of aggravation which the ACCC had to prove.  Rather, the Court suggested, if Reckitt Benckiser wished the Court to conclude that any of the 5.9 million sales were not materially influenced by the contravening conduct, the argument was one of mitigation which Reckitt Benckiser had to prove.

 Intentionality

In his Honour’s reasons for judgment, Justice Edelman expressly stated that one reason why he imposed a fine of $1.7 million rather than a “far greater” figure was the absence of any pleading or submission by the ACCC that the conduct by Reckitt Benckiser involved an intentional or a reckless contravention.  In an earlier judgment on a discovery application relating to the proceedings, Edelman J had held that if the ACCC wanted to rely on intentionality as a relevant factor in penalty, then the ACCC had to specifically refer to the relevant state of mind it was alleging against Reckitt Benckiser in its pleadings.  Because the ACCC did not specifically plead that Reckitt Benckiser’s contraventions were deliberate in the sense that it either knew or “courted the risk” that the representations were in contravention of the ACL, Edelman J did not take this into account in assessing penalty.

On appeal, the Full Court stated that Edelman J had erred in concluding that the ACCC was required to plead that the conduct was deliberate in order for the court to consider Reckitt Benckiser’s state of mind as a factor relevant to penalty. In contrast to Edelman J’s approach in the discovery application, the Full Court held that Reckitt Benckiser was fairly on notice that its state of mind was potentially in issue even without the issue being specifically pleaded.  This was because, “the deliberateness of the contraventions has always been a matter relevant to penalty for contraventions of consumer protection laws.  As such, it is not possible to accept that procedural fairness required the ACCC in the present case to specifically plead that the contravening conduct involved any particular state of mind of Reckitt Benckiser.”  In the circumstances, the Full Court considered that it was not reasonably open to the primary judge to assess penalty, as his Honour appeared to do, on the basis that Reckitt Benckiser’s conduct was “innocent”.

The Full Court considered that if Reckitt Benckiser wanted the Court to impose a penalty on the basis that its conduct had been “innocent” then this was a circumstance of mitigation for Reckitt Benckiser to prove. On the other hand, if the ACCC wanted the Court to impose a penalty on the basis that the relevant state of mind was more than “neutral”, but in fact either “deliberate” or “reckless”, then this was a state of aggravation for the ACCC to prove.   The Full Court ultimately held that the ACCC was able to show that in all of the circumstances Reckitt Benckiser had “courted the risk” of the contraventions, in the sense that it was objectively reckless that the conduct may breach the ACL.  Therefore, the requisite degree of aggravation was established.

Deterrence

Both the primary judge and the Full Court emphasised that, along with most civil penalties, the primary purpose of a pecuniary penalty under the CCA is deterrence.  However, while the primary judge considered a penalty of $1.7 million sufficient to achieve the objects of both specific and general deterrence, in the Full Court’s view this amount could not be viewed as sufficiently substantial in the circumstances.  On the contrary, the Full Court expressed its concern that “the penalty would reinforce a view that the price to be paid for the contraventions was an acceptable business strategy, and was no more than a cost of doing business.”

In reaching the view that the $1.7 million penalty would not have a sufficient deterrent effect, the Full Court placed particular emphasis on the amount of loss incurred by consumers as a result of the contraventions. The Court considered this to be “the single most important numerical benchmark or yardstick for the civil penalty to be imposed” on Reckitt Benckiser.  Given that the loss incurred by consumers was estimated to be in the range of around $25 million, the Full Court considered that even the $6 million penalty sought by the ACCC was “at the bottom of the appropriate range for the contraventions” and that sitting as trial judges, they would have been entitled to impose an even higher penalty.  However, the Full Court recognised that exercising discretion on appeal calls for a measure of restraint, and therefore limited itself to replacing the first instance penalty of $1.7 million with a revised penalty of $6 million/

The revised penalty is the highest penalty ever imposed in relation to misleading conduct under the ACL. Previously, the highest penalty was $3.61 million against Optus for misleading conduct in relation the marketing of high-speed broadband packages. Therefore, the Full Court’s comment that the penalty was at the “bottom end of the appropriate range” may be considered surprising, as well as a warning of the risk of higher penalties in relation to similar cases in the future.

Recommendations to increase penalties

In the last couple of years, the ACCC has been vocally advocating for higher maximum penalties in relation to contraventions of the ACL.

Following the Full Court’s judgement in the Nurofen case, ACCC Chairman Rod Sims stated that the ACCC will continue to advocate for higher penalties for breaches of the ACL, to ensure that they “act as an effective deterrent and are not simply viewed as a cost of doing business“.

In this regard, the ACCC will welcome the recommendations contained in the Productivity Commission’s Draft Report on Consumer Law Enforcement and Administration (the Draft Report) that maximum penalties under the ACL should be increased. The Draft Report, published on 8 December 2016, emphasises the need for higher penalties for contraventions of the consumer law, noting that the current maximum penalties for breach of the ACL are likely to be inadequate in many cases.

In particular, the Draft Report recommended that the government should consider the option suggested earlier this year as part of CAANZ’s  Australian Consumer Law Review that the maximum penalties under the ACL could be aligned with those for breaches of the competition provisions under the Competition and Consumer Act 2010. This would mean that companies could incur the greater of:

• $10 million;
• three times the value of the benefit the company received from the breach; or
• 10 per cent of annual turnover in the preceding 12 months if the benefit cannot be determined.

The maximum penalty for individuals would be $500,000.

It will be interesting to see how the government responds to these recommendations.

In any case, given that the ACCC has clearly been encouraged by its recent success in the courts relating to penalties, publicly warning that it will continue to push for higher penalties in the courts in 2017, it is clear that the days of small penalties for  breaches of the consumer laws will soon be over.

Does competition law need an update for the digital era?

First thoughts: Its been almost exactly 1 year since my last blog post, which is disappointing. There have been a few ideas gestating in my head, but so far none have made it to (metaphorical) paper. Now that I’ve finally settled down to write something, I’m finding it difficult.  While the topic – how to protect and promote competition in digital industries – is fascinating, I don’t think there is a clear answer. It’s also tricky to say anything “new” because, partly due to my own procrastination, I’m not the first to write about this issue. Over the last year I’ve read a number of interesting articles, some of which I will draw on below. Links to the original sources can be found on my “Further Reading” page. 

Digital platforms are going viral. Is this a problem?

Historians looking back on the second decade of the second millennium will surely be struck by a few things. The backlash in the Western world against globalisation, manifested in the “Donald Trump phenomenon” and the UK’s unexpected vote for “Brexit”; the Arab Spring, the tragedy in Syria, and the Middle East, North African and European refugee crisis. And, less dramatically, but perhaps as importantly, the rise of digital platforms and their reshaping of developed economies.

It’s difficult to believe that Uber – so ubiquitous that “To Uber” is now as much as a verb as “To Google” – didn’t exist until 2009 and most people in Australia hadn’t heard about it until 2014. Other new digital platforms, including, Airbnb, Airtasker and Deliveroo, not to mention the more established giants Google and Facebook, continue to fundamentally reshape the way we travel, work, eat, socialise and, quite simply, live.

Most people (taxi drivers and hotel owners excluded) think of these innovations as largely a good thing. This is particularly so amongst the young, professional, metropolitan class to which I somewhat awkwardly acknowledge I belong. I still revel in (but also shiver at)  the almost grotesque convenience of catching an Uber home, while ordering dinner from Deliveroo en route.  I’m not the only person who feels guilty  about using these “on demand” apps, especially when one considers that the relatively affordable luxury they provide must be coming at a cost to someone – possibly the person waiting for you to press the “deliver now” button. This is despite the fact that  economic research claims to show that in 2015, UberX delivered almost $7 billion in consumer surplus (i.e. the app is providing consumers with services at prices lower than those they would be willing to pay).

But what if, as well as changing the way we live and work, these digital platforms are also changing the structure of the economy? And what if these structural changes do not benefit consumers, but rather, benefit the increasingly large companies who dominate the new digital markets?

A blog post on the Financial Times entitled “Do digital industries break capitalism”?  raises the question of what happens when network effects lead to dominance of digital markets by a few online platforms – dominance not only over the economy but also, potentially, over information and culture. Meanwhile, as part of a Special Report into the global economy, an article in this week’s issue of the Economist notes that the economic ills currently being blamed on too much globalisation (including income inequality)  may in fact result from not enough competition, particularly in new, digital industries characterised by network effects.

Network effects

“Network effects” are the self-perpetuating economic force driving the growth of most digital platforms, particularly those operating in two-sided markets, including Uber and Airbnb. The more drivers Uber has on the road, the more people will download its app, and vice-versa.

These markets are characterised by brief , early periods of brutal “competition for the market”. The stakes are high because in these markets “winner takes most”. Consumers benefit as competitors invest all their financial resources in providing low prices, discounts, and even free services, in order to attract consumers to their platforms. A fascinating long-read article in the Guardian on “How Uber Conquered London”  describes the tactics used by Uber in its early days in the city. Until recently, Uber was engaged in a vicious price war to gain market share in China, before capitulating to its Chinese rival Didi Chuxing.

The issue is what happens when the battle for the market has been won. What we see today in many digital markets is a few large firms whose platforms have become the only way to gain access to the market. If, as is often argued, digital markets are characterised as much by disruptive innovation as they are by network effects, temporary monopoly by dominant firms is not a cause for concern. Soon enough technology will move on, the incumbent giant will become irrelevant and everyone will be interested in the “next big thing”. Competition for the market will begin again, this time for a market that no one could have predicted would even exist a few years before.

And yet…there is increasing evidence that the current technology giants (Facebook, Google, Amazon etc) are using their market power to shape the direction of such innovation themselves. In so doing they are assisted not only by vast reserves of capital but also other resources such as “Big Data”.

A couple of weeks ago, another Special Report in the Economist focused on the emergence of giant “superstar firms”, with an article  stating:

The age of entrepreneurialism that started in the early 1980s is giving way to a new age of corporatism. This has been particularly true in the world’s most advanced economy, America, and in the world’s most knowledge-intensive industries. Big companies have been getting bigger and putting down deeper roots. In the technology industry a handful of companies have grown into giants in a couple of decades and are now making sure they stay on top, hoovering up talent, buying up patents and investing in research. At the same time the rate of small-business creation is at its lowest level since the 1970s.

Meanwhile, economists such as Maurice Stucke and Ariel Ezrachi have theorised that the combined impact of network effects and Big Data is allowing technology firms to raise barriers to entry and engage in anti-competitive behaviours including collusion and price discrimination. For example, algorithms may allow competitors to detect and respond to each others pricing  patterns, while also using vast troves of consumers data to target prices directly and precisely at individual customers – all this taking place entirely in the realm of computers and artificial intelligence. The “invisible hand” is replaced by the “digitised hand”.

In the words of Mr Ezrachi:

 The new market dynamic, new technologies, and start-ups have captivated our attention and created a welfare mirage—the fantasy of intensified competition. Yet, behind the mirage, there operates an increasingly well-oiled machine that can defy the free competitive forces we rely on. What appears to be a competitive environment may not be the welfare-enhancing competition that we know. New technologies changed the dynamics of competition as we know it and gave rise to a new environment, which may display the characteristics of competitive markets but is driven by different forces.

A software update for competition law

The above discussion leads to one important question. Are our current laws equipped to deal with market concentration caused by network effects, tacit collusion via algorithms and the utilisation of Big Data to shape and then respond to consumer demand? Or does competition law itself – developed in the age of factories, shop floors and boardroom meetings – need a software update to make it relevant in a world where widgets have been replaced by digits?

I don’t have the answer to that question. Its one that I want to consider and explore going forward. However, here are some  brief thoughts:

• In theory, merger review is based on a consideration of “the future with” and “the future without” the merger. However, in most cases the counterfactual which regulators use to consider the competitive impact post-merger is the status quo. Arguably such an approach does not give sufficient consideration to the dynamics of competition in innovative digital industries. For example, where a large company such as Facebook is looking to purchase a smaller rival such as WhatsApp the focus should be not only on what competitive restraint WhatsApp places on Facebook today, but what sort of restraint it may place in 5 years time. Similarly, market share guidelines may need to be rethought. A small but promising start up with only 5% market share may grow to 20 – 50% in a few years time if it is not defensively acquired by one of the large incumbents. Such acquisitions should face greater scrutiny. Obviously, predicting the future is difficult and many decisions will be controversial – but the cost of ignoring such dynamics and continuing with conservative analysis may be greater than the cost of a few wrong decisions.
• When considering whether firms are abusing their market power, the analysis of what constitutes “market power” also needs some imaginative rethinking. Market share is important but is not everything. Competition authorities are already aware of the importance of network effects, but greater thought needs to be given to the power of data and algorithms, as well as financial power and strategic barriers to entry. Again – these are all controversial topics, but increasingly relevant in the digital world.
• In the future, cartels may not be formed intentionally by individuals but rather tacitly by computers with algorithms and AI. Such collusion is not currently covered by competition law and its not clear how the law could be amended to capture this conduct. It might be necessary to engage in greater ex ante regulation rather than rely purely on ex post enforcement in order to avoid such collusion from being possible in the first place. More discussion on this topic  by  Maurice Stucke and Ariel Ezrachi can be found here.
• Finally, as well as using competition law to avoid the emergence and abuse of concentrated markets we may also be able to use consumer protection law and laws against unfair trading to protect smaller players. For example, an interesting question is whether the law against unconscionable conduct, both in relation to business-to-consumer transactions and business-to-business transactions may be able to deal with firms using Big Data to manipulate transactions.

Some governments, particularly in Europe are already beginning to think about these issues.

In May of this year, the European Commission released a Communication entitled “Online Platforms and the Digital Single Market: Opportunities and Challenges for Europe”. This document was focused primarily on discussing how Europe could compete more effectively with the US in regard to the development of online platforms, as well as considering the most appropriate regulatory framework to ensure consumer protection and promote fairness between businesses. Policy suggestions included the development of common standards for data transfers between platforms, and the promotion of a general principle of portability or transferability of consumer data. The Communication concluded:

Online platforms play a key role in innovation and growth in the Digital Single Market. They have revolutionised access to information and have made many markets more efficient by better connecting buyers and sellers of services and goods. While there are some online platforms that reach historic numbers of users across the world, and that expand continuously into new areas of the economy, there are also still many opportunities for competitive European platforms to emerge. Effectively stimulating innovation in these areas, while adequately protecting the legitimate interests of consumers and other users, is perhaps the most important challenge the EU faces today in terms of securing its future competitiveness in the world.

…

In this respect, this Communication underlines the need to adopt policy and regulatory approaches that respond directly to the challenges, and which are flexible and future-proof.

Similarly, the European Union Committee of the UK House of Lords released a report on 20 April entitled “Online Platforms and the Digital Single Market“. The 109 page report is well worth reading as it includes detailed analysis on most of the issues raised in the blog post.

Interestingly, the report identifies the downgrading of privacy standards by online platforms as a potential abuse of dominance. The report also notes that  “There is a widespread lack of transparency in how platforms rank and present information to their users. We recommend that existing regulation be altered to require online platforms clearly to communicate the basis on which they rank results, and also to inform consumers when ‘personalised pricing’ is taking place.”

However, ultimately the House of Lords concluded that “despite the challenges competition authorities face when dealing with online platforms, we find that the flexibility of competition law means that it should be well-suited to addressing the subtle and complex abuses of dominance that may arise.”

It will be interesting to see just how flexible competition law can be.

 

 

 

 

 

Section 46 “effects” test debate loses sight of law’s true purpose

It is an axiomatic principle of Australian competition law that the fundamental purpose of Part IV of the Competition and Consumer Act 2010, which prohibits anti-competitive conduct, is to promote consumer welfare. The law is not designed to protect small businesses from the threat of rigorous competition by larger competitors. It is not even intended to protect them from unfair competition (this is done elsewhere, for example, through prohibitions on unconscionable conduct and unfair contracts).  It is simply intended to ensure that consumers obtain the full benefit of a properly functioning competitive market, including through lower prices and higher quality goods and services. However, much of the commentary surrounding the proposed “effects test for the section 46 seems to forget consumers entirely and instead focus on the “war” between big and small business.

Both sides of this war are engaged in intense lobbying for and against the proposed amendments, with most of the debate centered on whether the section sufficiently protects small businesses (and farmers) from unfair practices by large companies (such as Coles and Woolworths), or whether introducing a new “effects” test will subject big business to uncertainty and unjustified restrictions on pro-competitive conduct. Meanwhile, no one, with the exception of the ACCC and its Chairman Rod Sims, is doing much lobbying on how to best protect the interests of consumers.

Section 46 is certainly in need of reform. The prohibition on misuse of market power has been described as one of the “three pillars” of competition law, along with merger regulation and the prohibition on cartels. However, there has not been a successful use of section 46 by either the ACCC or a civil litigant in any full contested case in recent years. Due to the significant difficulties in proving a breach of section 46, the ACCC has declined to bring a number of cases. Section 46 is a serious provision with serious consequences for breach. Cases should not be bought lightly. However, there is clearly a danger that caution is being exercised too greatly, to the detriment of consumers.

The difficulty in proving a section 46 case can be attributed to a number of factors, but chief among them is the legally formalistic approach the courts have taken to the section, based on the need to separately and sequentially prove the three elements of “market power”, “taking advantage”, and “purpose”. This has prevented proper economic analysis under the section.  In a number of powerful dissents, Justice Kirby has criticized the High Court’s approach as of separating the three elements as a “scissor attack” on section 46 which has prevented the provision from achieving its purposes. In Rural Press v ACCC (2003) 216 CLR 53 at [139] His Honour expressed his frustration stating:

The victims are Australian consumers and the competitors who seek to engage in competitive conduct in a naive faith in the protection of the Act. Section 46 might just as well not have been enacted for cases like these where its operation is sorely needed to achieve the purposes of the Act. Judicial lightning strikes thrice. A novel doctrine of innocent coincidence prevails…Once again I dissent.

Former Chairman of the ACCC, Allan Fels, has called for a simplification of Australia’s competition laws, stating that the Act is too prescriptive by global standards and had been further complicated by amendments.  He was written that “court determinations too often revolve around legal technicalities, distracting from the core economic issue of whether the behaviour in question has substantially lessened competition and harmed the economy.”  In both the United States and Europe, the relevant legislation is drafted broadly and is significantly less complex.  Section 46 has been amended multiple times, contains 7 subsections and totals 1299 words. In contrast, the United States prohibition against monopolization in section 2 of the Sherman Act is a brief 82 words and Article 102 of the Treaty of the Function of the European Union (TFEU), which prohibits abuse of a dominant position, is slightly longer at 128 words. Although there is complex jurisprudence surrounding both of these provisions, the basic meaning and purpose of each is clear.

Introducing an “effects test” into section 46 would not remedy the mischief of section 46’s unnecessary verbosity and complexity, nor entirely overcome the difficulty in establishing each element of the section sequentially. The “taking advantage” element has proved fatal to a number of cases, including Rural Press, which provoked Justice Kirby’s spirited dissent extracted above. However, allowing the effect of conduct to be considered rather than requiring the court to determine the subjective purpose of a large corporation made up of many different individuals would at least allow for the a more economic approach to the section. This is in keeping with international practice and to be welcomed in an environment where there are global concerted efforts to achieve greater harmonization of competition law across borders.

At present there is lack of consistency within Part IV of the Act. While other prohibitions regulate conduct by reference to a general anti-competitive purpose or effect, section 46 applies only where a firm takes advantage of its market power for certain proscribed  purposes. There does not appear to be any reason in principle why a firm which engages in unilateral conduct with the effect of substantially lessening competition should be treated differently from a firm that enters into or gives effect to a contract, arrangement or understanding with the same purpose or effect. More importantly, it is the effect of a firm’s conduct on the proper functioning of the market which directly impacts on consumers. An invidious purpose is not relevant to consumer welfare.

The introduction of an effects test, if combined with a judicial approach which focuses more on economic outcomes and less on legal formalism, may or may not benefit small businesses but this should not be a reason either for or against reform. Similarly, it may be true that at present, the highly codified law gives businesses a high degree of certainty. However, if this comes at expense of achieving the law’s purpose it is not in interests of consumers or the wider economy.

The government should consider the ultimate stakeholders – individual consumers –  not lobbyists from the big or small end of town when deciding whether to amend section 46.