Anti-competitive agreements

Overview

General prohibition on anti-competitive agreements

Section 45 prohibits making or giving effect to a contract, arrangement or understanding (or a provision of a contract, arrangement or understanding) if it has the purpose, or is likely to have the effect, of substantially lessening competition.

Unlike the cartel provisions, there is no requirement that parties be competitors. As a result, section 45 will capture both horizontal and vertical agreements that substantially lessen competition, subject to some exemptions and anti-overlap provisions.

In addition, since 6 November 2017, section 45 has also prohibited engaging in concerted practices that have the purpose, effect or likely effect of substantially lessening competition.

Cartels

Cartel conduct is defined and prohibited in Division 1 of Part IV of the Act. Conduct falling outside the scope of that definition, or which benefits from an exemption, may still be prohibited by the general prohibition in section 45. For further details see the cartel conduct page.

Dual listed company arrangements

Dual listed company arrangements which substantially lessen competition are separately prohibited by section 49 of the Act.

Telecommunications

A separate telecommunications regime applies in relation to anti-competitive conduct in that industry.

Exclusionary provisions (repealed)

Exclusionary provisions (primary boycotts) between competitors are separately prohibited by a combination of s 45 and 4D of the Act. There is considerable overlap between this prohibition and the cartel laws and, for this reason, the Harper Report recommended that it be repealed. This recommendation was accepted and legislation giving effect to it has commenced. Consequently there is now no separate prohibition on exclusionary provisions in s 45 (they may still be caught by the cartel provisions or s 45 if they involve an agreement which substantially lessens competition)

Price signalling conduct (repealed)

Until they were repealed on 6 November 2017 price signalling laws applied only to the banking industry and were subject to numerous exceptions. The provisions were never litigated and were always controversial. The Harper Report 2015 recommended that they be repealed and replaced with a concerted practices prohibition of general application. This recommendation was accepted and legislation giving effect to this recommendation commenced on 6 November 2017.

Anti-competitive agreements and concerted practices

See also Telecommunications and dual listed company agreements

Core provision

Section 45 prohibits anti-competitive agreements and concerted practices. Specifically, it prohibits:

(1) making a contract or arrangement, or arriving at an understanding, which has the purpose, effect or likely effect of substantially lessening competition

(2) giving effect to a provision of a contract or arrangement or understanding, if that provision has the purpose, effect or likely effect of substantially lessening competition; and

(3) engaging with one or more persons in a concerted practice that has the purpose, or has or is likely to have the effect, of substantially lessening competition.

Section 45 has the potential to overlap with a number of other provisions. In most cases those provisions are given priority via anti-overlap provisions; consequently, for example, conduct that constitutes resale price maintenance will be dealt with under s 48 and not s 45. However, there is no anti-overlap between s 45 and the cartel provisions with the result that cartel conduct might contravene both provisions.

Contract, arrangement or understanding

The first two forms of prohibited conduct in s 45(1) require demonstration of a 'contract, arrangement or understanding'. Mere parallel conduct or concerted practice is insufficient.

In ACCC v Leahy Petroleum Pty Ltd [2007] FCA 794 the Federal Court held that in order for a 'contract, arrangement or understanding' to exist, the following elements must be present:

• Communication

• Consensus

• Commitment

Communication may be express or implied; this requirement has not attracted much criticism. Similarly, it is not controversial that consent to engage in a course of action is required.

The final element, commitment, has proven controversial. Mere expectation or hope that another party will act (or refrain from acting) is insufficient).

Decisions in high profile petrol cases (Leahy and Apco), which failed because this element was not satisfied, led to a review of the 'meaning of understanding' and has featured in a number of other inquiries, most recently the Harper Review. To date, there has been no change in the law, save for the introduction of narrow, industry specific (banking), price signalling laws, which are likely to be repealed in the near future.

Concerted practices

The new concerted practices prohibition commenced on 6 November 2017.

The explanatory memorandum ot the Competition and Consumer (Competition Policy Reform) Act 2017 provides:

[Para 3.18] The concept of a ‘concerted practice’ under section 45 is to be distinguished from the concept of ‘acting in concert’ as it appears in section 45D. The concept of a ‘concerted practice’ is to be read and applied in the context of section 45 and with reference to the explanatory material that follows, and not in the context of section 45D or any case authority or explanatory material on section 45D. The following is intended to guide the interpretation of the term while retaining a flexible and principled application of the concept.

Characteristics of a concerted practice

[Para 3.19] A concerted practice is any form of cooperation between two or more firms (or people) or conduct that would be likely to establish such cooperation, where this conduct substitutes, or would be likely to substitute, cooperation in place of the uncertainty of competition.

[Para 3.20] It is not necessary that any (or all) of the parties to a concerted practice should act:

• in the same manner;

• in the same market; or

• at the same time.

[Para 3.21] It is intended that the concept of a ‘concerted practice’ should capture conduct that falls short of a contract, arrangement or understanding as the courts have interpreted each of those terms in section 45.

[Para 3.22] A concerted practice does not require, but may involve:

• the formality or legally enforceable obligations characteristic of a contract;

• the express communication characteristic of an arrangement. A concerted practice may be established in the absence of any direct contact between the firms, for example where firms communicate indirectly through an intermediary such as a peak industry body; or

• the commitment characteristic of an understanding. A concerted practice may exist even if none of the parties is obliged, either legally or morally, to act in any particular way.

Example 3.1 – Concerted practice

In a small country town, there are three petrol stations: X, Y and Z. Immediately before adjusting its prices, X sends an email to Y and Z with a price. After several emails, it becomes clear to Y and Z that immediately after sending the email with the price, X changes its price to match the email. Y and Z join in, and each emails their own proposed price adjustments to the other two. A practice develops so that, with a few exceptions, where one petrol station emails their prices, the three stations all change their prices to match the price in the email.

At no point do any of them expressly or implicitly agree to reciprocate the communication or to change their prices accordingly. On some occasions after one of the stations announces a price rise, one of the other stations chooses not to match the price, and thereby gains extra customers on that occasion by increasing their price by less than the other two stations and having the lowest price. There are no consequences of this occasional divergence from the usual practice.

X, Y and Z are each likely to have contravened section 45 by engaging in a concerted practice with the purpose, effect or likely effect of substantially lessening competition. Even though none of the parties committed to communicate or change their prices, and even though there were some occasions where a petrol station did not change its prices in accordance with the email, the effect of the overall practice was that the petrol stations could increase their prices safe in the knowledge that this would be unlikely to result in a loss of customers as the others would most likely reciprocate. This practice has substantially reduced price competition for petrol in the town.

[Para 3.23] A concerted practice may exist in addition to, or ancillary to, a contract, arrangement or understanding.

[Para 3.24] It is not necessary that a concerted practice have an anti-competitive ‘provision’, as it is the practice itself which has the anti-competitive purpose, effect or likely effect.

[Para 3.25] The concept of a concerted practice is not intended to capture mere innocent parallel conduct, for example where two firms who are determining their prices independently happen to charge similar prices for the same product (see Example 3.4).

[Para 3.26] Similarly, it is not intended to capture conduct such as the public disclosure of pricing information which facilitates price comparison by consumers, as this conduct will increase rather than substantially lessen competition.

[Para 3.27] The following examples illustrate that a concerted practice:

• does not necessarily involve regular or repeated conduct - a single instance of conduct may constitute a concerted practice (Example 3.2);

• will typically, but not necessarily, involve the communication of commercial information either by one party to another, or between the parties, generally to reduce or eliminate uncertainty as to the future conduct of the firm making the communication; and

• does not require that any (or all) of the parties to the practice reciprocate the actions of the first party or in any way change their conduct as a result of the first party’s actions – the actions of the first party will be sufficient to establish the concerted practice, and the culpability of each other party to the concerted practice will depend on the nature of their involvement and their subsequent action.

[Para 3.28] Once conduct has been found to be a concerted practice, the central issue, and the determinant of whether the relevant conduct is prohibited under section 45, is whether the concerted practice has the purpose, effect or likely effect of substantially lessening competition.

Example 3.2 – Concerted practice as a single instance of conduct

Salmon fishers in a small geographic region form an industry association that meets regularly, usually to discuss general industry issues. At one meeting, one fisher (X) states that they will restrict their output to a certain quantity for the next three months, in order to increase the price of salmon in the region. X shares this information in the hope that the other fishers will similarly restrict their output, so that X can adopt the strategy without fearing it will lose customers to the other fishers.

X has shared commercially sensitive information which reduces uncertainty as to X’s likely output over the next three months. X is likely to have contravened section 45, by engaging in a concerted practice with the purpose or likely effect of substantially lessening competition, even if X was unable to convince all of the other salmon fishers to adopt a similar strategy and even some or all of the others did not adopt such a strategy (that is, even if the ultimate effect was not a substantial lessening of competition).

Example 3.3 – Concerted practice as communication of commercial information, reciprocity not required

Bank X and Bank Y are two competing banks. A week before banks are expected to announce their respective interest rates for the next quarter, X sends Y a document setting out the interest rate it will announce the following week. Y did not ask for this information, and does not act on this information by either reciprocating with information about its own intended interest rate or changing its strategy to match X’s interest rate.

The different actions of X and Y will have different implications under section 45.

X is likely to have contravened section 45, by engaging in a concerted practice with the purpose or likely effect of substantially lessening competition, even if this was not the actual effect because Y did not act on the information.

X’s communication to Y has made Y a party to a concerted practice. However, Y is not likely to have contravened section 45, as Y did not use the information to inform a decision or change strategy, and this conduct did not have the purpose, effect or likely effect of substantially lessening competition. Y could further ensure it did not breach section 45 by expressly rejecting X’s approaches and requesting that X not communicate any further information of this nature.

Example 3.4 – Mere parallel conduct

Company X manufactures and distributes the most popular budget television, which is stocked by all major television retailers and two smaller retailers. X supplies the televisions to large retailers for $300 each, and charges the smaller retailers $320 each due to the lower quantity ordered.

The major retailers are able to sell the televisions for $320 and make a commercial profit. However, the two smaller retailers independently determine that they cannot sell the televisions for any less than $340 and still make a commercial profit.

The conduct of the two smaller retailers is unlikely to constitute a concerted practice. The two smaller retailers have a similar cost base, and have taken this cost base into account in independently determining the prices they will charge for the television. This is merely innocent parallel conduct, which the concerted practices prohibition in section 45 is not intended to capture.

The ACCC has also released guidance on the concept of concerted practices.

Purpose or effect of substantially lessening competition

The Competition and Consumer (Competition Policy Reform) Act 2017 introduces a new definition of competition for purposes of s 45 (effective 6 November 2017):

(3) For the purposes of this section, competition means:

(a) in relation to a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding—competition in any market in which:

(i) a corporation that is a party to the contract, arrangement or understanding, or would be a party to the proposed contract, arrangement or understanding; or

(ii) any body corporate related to such a corporation;

supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the provision, supply or acquire, or be likely to supply or acquire, goods or services; or

(b) in relation to a concerted practice—competition in any market in which:

(i) a corporation that is a party to the practice; or

(ii) any body corporate related to such a corporation;

supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the practice, supply or acquire, or be likely to supply or acquire, goods or services.

The explanatory memorandum to the Competition and Consumer (Competition Policy Reform) Act 2017 states:

[Para 3.36] Subsection 45(3) contains a specific definition of ‘competition’ for the purposes of section 45, which focuses on the relevant markets in which competition is to be considered. When considering whether conduct substantially lessens competition for the purposes of section 45, the appropriate markets in which competition is to be assessed include any market in which a corporation (or related body corporate) that is party to the contract, arrangement or understanding containing the prohibited provision supplies or acquires goods or services (or would supply or acquire goods or services, but for the anti-competitive provision).

[Para 3.37] With the introduction of the concept of a concerted practice, the definition of competition is further extended, for the purposes of section 45, in relation to a concerted practice. This ensures that there is a consistent approach to determining the markets for analysis of any potential anti-competitive effects. ...

In addition, section 45(4) provides that a provision of a contract, arrangement or understanding will be deemed to substantially lessen competition if that provision, combined with other provisions of that contract, arrangement or understanding or provisions of any other contract, arrangement or understanding to which the corporation is party, would together have or be likely to have that effect.

Anti-competitive conduct in the telecommunications industry is regulated by Part XIB CCA in addition to Part IV.  Section 151AJ(2) provides:

‘A carrier or carriage service provider engages in anti-competitive conduct if the carrier or carriage service provider:

(a) has a substantial degree of power in a telecommunications market; and

(b) either

(i) takes advantage of that power with the effect, or likely effect, of substantially lessening competition in that or any other telecommunications market; or

(ii) takes advantage of that power, and engages in other conduct on one or more occasions, with the combined effect, or likely combined effect, of substantially lessening competition in that or any other telecommunications market'.

Pursuant to s 151AJ(3) a carrier or carriage service provider also engages in anti-competitive conduct if they engage in conduct in contravention of ss 45, 47 or 48 and the conduct relates to a telecommunications market.

Section 151AK contains the 'competition rule', providing that a 'carrier or carriage service provider must not engage in anti-competitive conduct.'

This Part allows the ACCC to issue a 'competition notice' stating that a carrier or carriage service provider is engaging in anti-competitive conduct or that they have contravened the competition rule. Where a notice is given by the ACCC stating that a carrier or provider has contravened or is contravening the rule, that notice is prima facie evidence of the matters described in the notice. The ACCC may also provide exemptions from the definition of anti-competitive conduct for certain conduct.

Until 2006 the conduct of dual listed companies was assessed under s 45. As a result of legislation introduced in 2006 dual listed companies are now assessed under s 49 which prohibits parties making (or giving effect to) a dual listed company arrangement if a provision of the proposed arrangement would have the purpose, effect or likely effect of substantially lessening competition.

Section 49

The key provision in relation to dual listed company arrangements (DLC) is section 49.  It provides that a corporation must not make (or give effect to) a DLC arrangement if a provision of that arrangement has the purpose, effect or likely effect of substantially lessening competition.   An exception is then provided by s 49(2) which states that the making (but not giving effect to) such a provision will not contravene s 49 if:

• The provision will not come into operation unless/until authorisation is granted; and

• Authorisation is sought within 14 days of the making of the provision.

Competition is defined for purposes of this section as competition in any market in which ‘a corporation that is a party to the arrangement or would be a party to the proposed arrangement’ or any related corporate body, ‘supplies or acquires, or is likely to supply or acquire, goods or services or would, apart from the provision, supply or acquire, or be likely to supply or acquire, goods or services.’

A provision will be taken to substantially lessen competition if it would have this effect when combined with other provisions of the arrangement or any other contract, arrangement or understanding (or proposed contract, arrangement or understanding) to which a party to the DLC (or related corporation) is or would be a party.

In August 2018 the ACCC released Guidelines on Concerted Practices.

See ACCC Guidelines on Concerted Practices

History

On 25 October 2017 the ACCC issued 'interim' guidelines addressing the introduction of a prohibition on concerted practices.

See Interim guidelines on concerted practices. These follow a draft framework released in October 2016 for consultation.

The concerted practices guidance has had a significant overhaul since the release of the draft framework. There is more detail (beyond just examples) of what might constitute a concerted practice and 'engaging in a concerted practice'. There's also more information and what might constitute having the purpose, effect or likely effect of substantially lessening competition.' Some of the 'examples' of risky conduct from the framework remain, but there are also new examples. The 'priority' factors for ACCC investigation and enforcement are the same, but some additional guidance about issues that may impact on the likelihood of enforcement action have been inserted; they include concerted practices 'considered as part of broader ACCC investigations', evidence 'beyond independent behaviour' and the information recipient's 'response to the receipt of information'.