Proposed changes to laws covering predatory pricing mean businesses will have to exercise caution in their pricing strategies.
Predatory pricing occurs when a corporation sets its prices at a low level to damage or force competitors to withdraw from the market so it can then raise its prices and exploit consumers. Price cutting, or underselling competitors, is not necessarily predatory pricing. Larger corporations that are able to use their size legitimately to reduce their costs and the prices of their products are not necessarily engaging in predatory pricing.
Predatory pricing is unlawful under the general provision in section 46(1) of the Trade Practices Act 1974 (the Act) and more specifically under section 46(1AA) of the Act.
Section 46(1) of the Act prohibits a corporation with a substantial degree of power in a market from taking advantage of that power for one of the specified “anti-competitive purposes”, including:
a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;
b) preventing the entry of a person into that or any other market; or
c) deterring or preventing a person from engaging in competitive conduct in that or any other market.
Section 46(1AA) of the Act prohibits a corporation that has a substantial share of a market from supplying, or offering to supply, goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying such goods or services. Like section 46(1), it must be for an anti-competitive purpose. This section only applies to business conduct on or after 25 September 2007.
On the 28 April 2008, the Rudd government proposed reforms to the misuse of market power provisions of the Act aimed at protecting small business from the anti-competitive conduct of larger corporations. There are four main proposed changes.
The recoupment requirement (Boral)
Under the proposed amendments, a corporation can be liable under section 46(1) although there is no proof that the corporation is able, or will be able, to recoup losses incurred from their below-cost pricing strategy. The ability to recoup losses will be an indicator of predatory pricing, but it will no longer be a requirement to show that recoupment would have occurred. These amendments were proposed in response to the controversial High Court decision in Boral Besser Masonry Limited v ACCC (2003), which requires the victim of predatory pricing to prove the alleged predator has the ability to recoup losses to establish a breach of section 46(1).
The proposed reforms amend section 46(1AA) by removing the phrase “substantial share of a market” and replacing it with “substantial degree of power in a market”, the same phrase used in section 46(1). As a result, the amendments remove the inconsistent and uncertain dual prohibitions on predatory pricing. Under the current law, the requirement that a corporation has a “substantial share in a market” under section 46(1AA) is a lower threshold than the requirement of “substantial degree of power in a market” under section 46(1) since ‘market power’ would require an additional assessment of factors, including the concentration market participants, actual and potential import competition and barriers to entry. In addition, the reforms alter the force of the predatory pricing provisions under section 46(1) from a mere factor that may be taken into account in determining whether a corporation has taken advantage of a substantial degree of market power to a specific prohibition under section 46(1AA).
The government also proposed amendments to the general misuse of market power provision in section 46(1) to address the uncertainty and difficulty in proving misuse of market power created by judicial interpretation of the phrase “taking advantage”. The reform identifies factors a court may consider to determine whether a corporation has taken advantage of its market power, including whether the conduct was:
a) materially facilitated by the corporation’s substantial degree of market power;
b) engaged in, in reliance on the corporation’s substantial degree of market power;
c) likely to have been engaged in if the corporation lacked a substantial degree of market power; or
d) otherwise related to its substantial degree of market power.
The proposed changes will allow the Australian Competition and Consumer Commission (ACCC) to use, or continue to use, its powers under section 155 of the Act, after applying for an injunction to stop suspected breaches. As well as strengthening the ACCC’s investigation powers, the reforms allow the ACCC to use its investigative powers until it commences substantive proceedings, an area clouded with uncertainty under the current law.
The proposed changes also amend section 86 of the Act, granting jurisdiction to the Federal Magistrates Court to hear matters arising under section 46 to increase the ability of small businesses to enforce their rights by reducing costs of litigation in the Federal Court.
The changes to section 46(1AA) are likely to be welcomed by larger corporations and the ACCC which have criticised it for creating duality and uncertainty. Small business will gain some confidence from the amendments to the recoupment requirement in Boral, making it easier to prove predatory pricing under section 46(1). (The perceived benefits to small business of the changes to section 86 of the Act remain to be seen because cases concerning breach of section 46(1) traditionally involve complex legal issues and it is likely they will not be suited to the Federal Magistrates Court).
The Federal Government will need the support of all states and territories before the proposed amendments are introduced to Parliament towards the end of the year. In the meantime, businesses with large market shares are encouraged to exercise caution in their approach to below-cost pricing strategies or conduct that could constitute predatory pricing.
If you require any more information regarding these proposed changes, please contact John Hutchings on +61 3 9608 2245 or j.hutchings@cornwalls.com.au
