The recent amendments to the
Trade Practices Act 1974 (Cth) (TPA) will require businesses to review their pricing strategies and bargaining position. The amendments are designed to ensure that competition remains at the forefront of the marketplace and increases the usefulness of the TPA to the Australian Competition and Consumer Commission (ACCC) in bringing prosecutions, particularly against larger corporations.
Three significant changes have been made that:
- widen the reach of the ‘misuse of market power’ provisions
- make some pricing behaviours unlawful, and
- increase the monetary threshold for unconscionable conduct claims.
Misuse of Market Power
Since 2003, the provisions of s.46(1) of the TPA have been virtually useless to the ACCC. In Boral Besser Masonry Ltd v Australian Competition and Consumer Commission [2003] 215 CLR 374 (Boral), the High Court gave a definition of “substantial degree of power in a market” that was, by any measure, a very high hurdle for the ACCC to get over. The effect of Boral was that prosecutions under section 46(1) would only be successful if the ACCC could prove that a corporation had a monopoly, or near monopoly, in a market and could act unconstrained by its competitors. That hurdle proved to be so high that the ACCC withdrew all of its then current prosecutions under s.46(1) and has rarely commenced proceedings under that section since then.
Market Power test
The amendments significantly increase the number of businesses to whom the relevant section applies for predatory pricing. The test for a corporation has changed from “a substantial degree of power in a market” to “a substantial share of a market”. This is a very significant shift which means that the standard set by the High Court’s interpretation of the TPA in Boral no longer applies.
The amendments have made it clear that a corporation can have a “substantial degree of power in a market”, even if it does not have absolute freedom from constraint. In addition, the changes mean several unrelated corporations in the same market may each have a “substantial degree of power in a market”. The changes will require further judicial interpretation before there is certainty in identifying those caught by the changes, and in what circumstances, but it is clear that many corporations that were previously not caught by section 46 will now have to manage their way through its provisions.
Conduct in other markets is relevant
Additions to the TPA also not only broaden the scope of the prohibition to include conduct in a relevant market, but substantially widen it to include ‘other markets’. This means that an offence can be committed, for example, by a corporation misusing market power in relation to a product or service in order to damage competitor performance in an unrelated market. This is a very important shift in the legislation that business will need to understand to avoid prosecution by the ACCC.
Pricing at ‘less than the relevant cost’
The changes have also made certain some of the matters to which the Court can have regard in determining the nature and extent of market power. Courts can consider conduct of corporations and reasons for such conduct in deciding offences under s.46(1), including the basis of pricing and reasons for such pricing. The Court may also have regard to selling of products or services at less than the ‘relevant cost’.
However, many of the terms in the changed sections are not clearly defined, and until some cases have been brought before the courts, a cautious approach to this section of the TPA seems prudent. The changes will certainly prevent some conduct that has previously been lawful under the previous provisions of the TPA but, in particular, it is not yet clear what the Courts will allow in determining ‘relevant cost’. Parliament has not given specific guidance as to the meaning of the term ‘relevant cost’, and it seems that the lack of clarity that can be found across US cases is likely to be repeated in Australia.
The provisions only apply to corporations that have a significant share of a market, so it will still be open to some businesses to pursue below-relevant cost strategies as a way to gain market share or reputation.
Unconscionable conduct
Corporations are currently prohibited from engaging in conduct that is, in all the circumstances, unconscionable in transactions for goods or services more than $3,000,000. The amendments raise the threshold from $3,000,000 to $10,000,000 (under section 51AC(9) and 51AC(10)). That amendment attempts to bring the threshold in line with community expectations and makes allowance for inflationary pressure since the $3,000,000 threshold was implemented in 2001.
The changes also make it clear that unilateral variation of contracts is a factor that can be taken into account in considering unconscionable conduct. This is in addition to the list of other, non-exhaustive factors contained in sections 12CC(2) and 12CC(3) of the Australian Securities and Investments Commission Act 2001 and sections 51AC(3) and 51AC(4) of the TPA. This amendment attempts to address a concern that large corporations, who often have a better appreciation of risk and significantly greater bargaining power, use contractual provisions to unfairly shift risk to smaller parties.
More careful analysis of unilateral variations will be required to navigate these changes.
How to respond to the changes
Businesses will need to consider their market share, market position, pricing strategies and relative bargaining positions in order to accommodate the changes to the TPA.
Misuse of market power
Business should respond to the ‘market power’ changes by ensuring that managers, including line managers and executives, clearly understand the prohibited and legitimate reasons for which they can supply or offer goods or services at less than the relevant cost. The prohibited reasons are:
eliminating or substantially damaging a competitor
preventing entry into a market, or
deterring or preventing competitive conduct.
While the ‘legitimate’ purposes are not specifically laid out by the changes, presumably the following reasons will be acceptable (provided that the prohibited purpose is not present):
- creating a market
- creating market niches
- increasing profit, and
- encouraging competition.
It needs to be clear to everyone involved in pricing decisions that some reasons for pricing that were previously acceptable are now caught by the TPA and that some pricing behaviours are now unacceptable. Businesses that have formal pricing policies should review their policies to ensure compliance with the changes.
Conduct in other markets
Pricing strategies will also need to be framed by reference to the relevant markets and care needs to be taken to show that such strategies have not been framed to leverage power in one market to damage a competitor in another market.
Unconscionable conduct
Corporations that make use of unilateral variation in contracts should review that practice to ensure they its use is not unconscionable. In particular, it may be prudent to consider modifying unilateral variation provisions in contracts to avoid allegations of unconscionable conduct. One way to do that is to modify variation provisions of a contract to make unilateral variations conditional upon the reasonableness of those variations.
Other changes may be necessary, depending on the particular circumstances of your business.
The authors gratefully acknowledge the contribution of James Shen to this article.
For further information, please contact your usual PricewaterhouseCoopers Legal adviser, Michael Daniel or Dwayne Baraka.
