Competition and Market Regulation Update May 2009

Rudd Government forges ahead with legislative changes

Chris Bowen, the Minister for Competition Policy and Consumer Affairs, has recently released two discussion papers in relation to proposed legislative changes.

Creeping acquisitions

A discussion paper has been released calling for public comment on the best way to address the issue of creeping acquisitions. This is the second discussion paper on this issue and builds on submissions made in response to the first discussion paper released in September 2008.

The term creeping acquisitions refers to the acquisition of a number of individual assets or businesses which individually are unlikely to contravene section 50 of the Trade Practices Act 1974 (Cth) (Trade Practices Act) but over time, may collectively raise competition concerns.

The government has now asked for submissions on two proposed options which could be used to regulate creeping acquisitions:

1. legislative amendments that would prevent mergers and acquisitions that would enhance a corporation’s substantial market power, and
2. legislative amendments that would grant the Minister power to ‘declare’ certain corporations or product/service markets. This declaration would prevent the declared corporation or corporations in a declared product/service market from making mergers and acquisitions that would enhance substantial market power. As part of this declaration process, the Minister could be granted with the power to impose appropriate thresholds for the mandatory notification of acquisitions to the ACCC in the case of declared corporations or corporations in declared product/service markets.

The discussion paper acknowledges that intervention by government may have unintended effects and requests submissions on the following:

• the potential unintended consequences of a creeping acquisitions law that targets enhancements to a corporation’s substantial market power
• the potential unintended consequences of a creeping acquisitions law that targets ‘declared’ corporations or product/service markets
• measures by which any potential unintended consequences could be addressed or minimised, and
• the costs and benefits associated with the option of including a mandatory notification requirement, as determined by the Minister.

Submissions are due by Friday 12 June 2009.

Unfair contract terms

As reported in our March 2009 update,¹ the Federal Government plans to fast track the introduction of a new national consumer law which will be known as the Australian Consumer Law. A key feature of the new law will be the introduction of a prohibition against unfair contract terms.

Minister Bowen has released a consultation paper on the Rudd Government's draft national unfair contract terms provisions for public comment. The consultation paper includes an exposure draft of unfair contract terms provisions to be added to the Trade Practices Act. Similar provisions will also be added to The Australian Securities and Investment Commission Act 2001 (Cth) in relation to the supply of financial services.

The provisions will make void any unfair terms in a standard form contract.

The proposed legislation states that a term of a standard form contract will be unfair if:

• it would cause a significant imbalance in the parties’ rights and obligations arising under the contract, and
• it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.

These proposals are not limited in their application to consumer contracts. Instead, they apply to any ‘standard form contract’. Business-to-business standard form contracts are therefore affected by the proposed legislation.

The legislation will be introduced into Parliament in June 2009. It is currently proposed that the legislation will apply to any contract entered into on or after 1 January 2010. The legislation will be administered and enforced under a shared enforcement model, with enforcement undertaken by ASIC, the ACCC and the state and territory offices of fair trading.

If the legislation is passed in this form, businesses may need to re-evaluate their standard form contracts and make an assessment of how a court would view the fairness of the deal as recorded in the contract. The consultation paper invites submissions by Friday 22 May 2009 (only the 9th business day after release of the consultation paper).

Amendments to the Cartel Bill announced

In our March 2009 update,² we outlined some of the limitations of the proposed joint venture defence associated with the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (Cartel Bill). The Cartel Bill will introduce parallel criminal and civil penalties relating to cartel conduct.

Some in the business community were concerned with the limited nature of the new joint venture defence. In particular, the proposed defence only applies to joint venture activities undertaken pursuant to a contract (which can be written, oral or implied). The concern is that joint venture activity often extends and develops over time and these activities are not always fully captured in written contracts. Under the Cartel Bill, the joint venturers will bear an evidential burden to prove the defence in proceedings and this burden is likely to be difficult to discharge where no written contract exists. This creates considerable uncertainty and is likely to increase compliance costs. Another equally important limitation is that the proposed joint venture defence does not explicitly apply to joint ventures involved in the acquisition of good or services.

In response to these concerns, the government has recently proposed changes to the Cartel Bill that extend the joint venture defence. Under the proposed changes, the joint venture defence will now also apply to arrangements or understandings containing a cartel provision where each party intended the arrangement or understanding to be a contract and reasonably believed that the arrangement or understanding was a contract. Furthermore, examples of the types of joint venture activity that is intended to be protected by the defence are now included in the Explanatory Memorandum. These amendments provide some additional protection for legitimate joint ventures, but do not fully address the concerns that have been raised.

On 25 May it will all become clear

The Trade Practices Amendment (Clarity in Pricing) Bill 2008 will come into effect on 25 May 2009. Changes to the Trade Practices Act will require that where a ‘component price’ is used in consumer advertising, a prominent single (total) price must be included. For example, a car dealer advertising a price of a vehicle ‘plus on-road costs’ would potentially fall within the scope of this prohibition.

ACCC chairman Graeme Samuel has stated that these changes will benefit both businesses and consumers, by ensuring that consumers have access to advertised prices in an unambiguous way, while also allowing businesses to compete on a more even playing field with respect to the prices represented.

Further detail with regards to the application and effect of these rules can be found in the December edition of this newsletter.³

Access regime reform

The Minister for Competition Policy and Consumer affairs, Chris Bowen, has begun inquiries into streamlining the National Access Regime in Part IIIA of the Trade Practices Act. Minister Bowen outlined concerns that the current regime is hindering investment in essential infrastructure. The reforms will aim to make decisions and arbitration faster, streamline administrative arrangements and provide infrastructure owners with greater certainty.

Minister Bowen emphasised that the changes would not strengthen or weaken the criteria for application of the regime. Rather, they would aim to strike a balance between the rights of infrastructure owners and the need for an effective access regime to promote market competition.

The reforms will implement the Council of Australian Governments’ Competition and Infrastructure Reform Agreement commitments, streamline Part IIIA decision making criteria and processes, and make amendments to the National Competition Council, the ACCC and the Australian Competition Tribunal processes.

Specifically, the reforms are aimed at:

• imposing binding time limits and limited merits review to expedite proceedings
• increasing regulatory certainty, and
• improving regulatory process to promote the timeliness of outcomes.

Minister Bowen intends to introduce amending legislation into Parliament in mid-2009 following consultation with the states and territories.

Air-cargo investigation gathers speed

Further developments have arisen in the international air-cargo price fixing investigation as reported on in our March 2009 update.⁴

On 30 April 2009, the ACCC instituted proceedings against Cathay Pacific Airways Ltd seeking declarations, injunctive relief, pecuniary penalties and costs. This is the eighth proceeding to be brought by the ACCC, which to date has resulted in the imposition of pecuniary penalties totalling AUD$41 million.

Overseas, prosecutions and investigations are also continuing. Cargolux Airlines International S.A (Luxembourg), Nippon Cargo Airlines Co Ltd (Japan) and Asiana Airlines Inc (Korea) will plead guilty in the United States for conspiring to fix prices. The airlines have agreed to pay penalties of US$119 million, US$45 million and US$50 million respectively, however, these agreements are subject to Court approval.

The penalty for Cargolux comes on top of an AUD$5 million court approved agreed penalty arising from Federal Court proceedings earlier this year.

Intel hit with record fine from European regulators

The European Commission (Commission) has issued its largest ever fine for an abuse of dominance. The world’s largest semiconductor producer, Intel, was fined €1.06 billion for abusing its dominant market position and excluding competitors from the market for computer chips.

The Commission summarised Intel’s breaches of the EC Treaty antitrust rules as follows:

• Intel gave major computer manufacturers rebates on the condition that they purchase only Intel chips, or a fixed proportion of Intel chips, and
• Intel made payments to computer manufacturers on the condition that they postpone, cancel or restrict distribution of a competitor’s products.

The Commission found that these actions had the effect of preventing competing products from coming to the market thereby reducing consumer choice and impairing the ability of rival manufacturers to compete and innovate.

This hefty fine reflects the tough stance being adopted by the European Commission and may pave the way for civil suits brought by competitors and consumers.

The fine comes as the United States Federal Trade Commission continues its antitrust investigation against Intel. The United States might also be expected to take strong measures against Intel following recent statements by the Obama administration.

Overseas regulators step up to the task

The global financial crisis has led to assertions in some quarters that the enforcement of competition laws should be relaxed to protect jobs or to benefit national champion companies. Enforcement agencies have largely rejected these calls arguing that protecting the long term benefits of competition is essential.

In the United States, the Federal Trade Commission and the Department of Justice (DoJ) is set to respond to the Obama administration’s policy to increase the level of antitrust enforcement. Christine Varney, the new head of the DoJ’s antitrust division, has announced that under the Obama administration the DoJ will be more aggressive in cracking down on companies that abuse their market power.

The United Kingdom antitrust agency, the Office of Fair Trading (OFT) has indicated that it is monitoring changes in market dynamics that have occurred as a result of the crisis. In the context of merger analysis it is paying specific attention to the impact of the crisis on the ability of imports to place competitive pressure on a merged entity and the availability of financing for potential competitors. Peter Freeman, the Chairman of the UK Competition Commission recently stated that competition advocacy is ‘doubly important in the current economic crisis’.

The European Commission's Directorate-General for Competition, the agency responsible for the enforcement of competition rules on antitrust, mergers, and State infringements in the EU, is also playing an active role in investigating state aid decisions that are designed to bail out banks and other institutions.

The EC maintains that a strong role in enforcing competition law is necessary amidst the global financial crisis. Deputy Director General of the European Commission's Directorate of Competition, Nadia Calvino has said ‘We cannot just let the jungle reign’. He said, ‘It's not time to hide beneath the table. It is time to be present’.

Failing firm defence successful in United Kingdom

In our March 2009 update⁵ we outlined the ‘failing firm’ defence used by some firms to achieve regulator approval of an acquisition of a firm which would otherwise go out of business. The question raised was whether regulators would be more lenient in applying a ‘failing firm’ defence during the global financial crisis, or would they take a longer term view of preserving market competition?

The United Kingdom’s Office of Fair Trading (OFT) published its approach to the failing firm defence in December 2008. It has indicated that an increase in applications will not soften the competition standard which firms must meet. The OFT stated that the defence would be available where it could be demonstrated that competition in the market would have been lessened in the absence of the merger by the exit of a market player.

The defence was considered in the acquisition of 15 Zavvi stores by HMV plc in the United Kingdom entertainment product industry. Zavvi went into administration late last year.

The OFT approved the merger, finding the ‘failing firm’ claim to be meritorious. It found that:

• without the merger the Zavvi stores would inevitably have exited the entertainment retail market, and
• there was no less anti-competitive alternative to the merger in the overlap areas.

This case is the fifth time that the OFT has cleared an acquisition on the basis of a failing firm argument. A notable successful use of the defence in Australia was Qantas’ acquisition of Impulse Airlines in 2001, where the ACCC concluded that a merger would be more beneficial to the public than the departure of Impulse Airlines from the market.

Pratt case raises questions about value of civil settlements

The recent case of Australian Competition and Consumer Commission v Pratt (No 3) [2009] FCA 407 brought to light the implications involved in negotiating a settlement with the ACCC.

The facts of the case have been well publicised. In short, Visy and its Director, Richard Pratt, reached a settlement with the ACCC in 2007 over their involvement in price-fixing. Certain statements were made by Pratt during the settlement which the ACCC believed contradicted earlier statements Pratt had made under oath during an ACCC investigation. After settlement, the ACCC presented their view to the DPP that Pratt had committed perjury during his earlier examination by the ACCC. It wanted to evidence this allegation by relying upon admissions made in the ‘agreed statement of facts’ that was used to settle the civil proceedings. This possibility that had not been raised during the mediation which led to the settlement.

The DPP brought criminal proceedings against Pratt for perjury. Evidence of statements made during settlement negotiations set out in the ‘agreed statement of facts’ were adduced before Justice Ryan to contradict statements made by Pratt under oath.

The relevant statements made in the ‘agreed statement of facts’ were deemed to be inadmissible by the court. Justice Ryan held that the statements were not admissions as they did not amount to a positive assertion or acknowledgment of a representation of fact. Justice Ryan stated that the definition of ‘agreed fact’ in section 191 of the Evidence Act, is not limited to a fact which is true or which the parties believe to be true. An ‘agreed fact’ includes a matter on which the parties agree, for the purposes of the proceeding, is not to be disputed. It followed for Justice Ryan, that the inclusion of a statement in an agreed statement of facts is no more than a representation by each party to the proceeding that he, she or it will not dispute the asserted fact in that proceeding.

However, this approach will not apply to all admissions made in settlement proceedings. In some cases, a court could reach the conclusion that a particular admission was made to represent the truth, rather than being made as a concession for the purposes of settlement.

Some of the issues raised by the Pratt case are as follows:

• many factors are taken into account when trying to achieve settlement which may influence how a party responds. For example, a party may be driven by a wish to avoid costs in contested litigation, or knowledge that conceding one point may make a favourable outcome on another point more likely. Not disputing a point raised in negotiations may be due to these considerations, rather than indicating an acknowledgement of the veracity of the statement.
• as a result of the Pratt case, defendants may be more reluctant to negotiate settlements if there is any risk of future criminal proceedings.
• statements made in negotiations, in press releases and to ACCC staff will have to be carefully considered with a view to future incrimination.

As outlined in our November 2008 update,⁶ participants in cartel activity in Australia may also face criminal sanctions for cartel conduct in the future, which will further impact on the way in which negotiations are handled. It remains to be seen how parties respond to the new laws, and how the ACCC and DPP handle settlement proceedings.

Endnotes

1. ‘New national consumer law targets unfair contract terms’
2. ‘Is your Joint Venture about to become illegal?’
3. ‘Amendments bring clarity to pricing for consumers’ 
4. ‘Airlines price-fixing cartel saga continues’ 
5. ‘The global financial crisis and the ‘failing firm’ defence’ 
6. ‘New Bill introduces criminal sanctions for cartel conduct’ 

More information

For information regarding possible implications for your business, contact a member of the Competition & Market Regulation team.