New Amendments to Section 46 of the Trade Practices Act and Predatory Pricing

BACKGROUND

In response to concerns from small business, the Federal Government in June 2007 introduced a Bill to amend Section 46 of the Trade Practices Act. As it previously existed, Section 46 prohibited a corporation with substantial market power from taking advantage of its market power for an anti-competitive purpose.

One of the major intentions of Section 46 as it formerly existed, was to prevent a major player in a market engaging in “below cost pricing” with the intention of driving out a competitor - a practice known as “predatory pricing”. However, a string of unsuccessful court cases commenced by the ACCC (relying on Section 46) led to repeated calls by the small business lobby to give the Section more teeth and provide greater protection for small business operators.

The Federal Government was unable to pass its amending Bill without the support of Senator Barnaby Joyce who negotiated with the Government to bring about an amendment to Section 46 which has become known as the “Birdsville Amendment”.

AMENDMENT TO SECTION 46

The relevant amendment to Section 46 reads as follows:

“(1AA) A corporation that has a substantial share of a market must not supply, or offer 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, for the purpose of:

• (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; or
• (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.

(1AB) For the purposes of subsection (1AA), without limiting the matters to which the Court may have regard for the purpose of determining whether a corporation has a substantial share of a market, the Court may have regard to the number and size of the competitors of the corporation in the market”.

As a result of the “Birdsville Amendment”, the key elements which are required to be proved in any action alleging “predatory pricing” under Section 46 have been changed as follows:

EFFECT OF THE AMENDMENT

Certain commentators have made the point that because the new Section 46 does not define terms such as “relevant cost” and “sustained period”, one of the unintended consequences of the new law will be fresh uncertainty and this uncertainty will bring with it a cost to consumers - that cost being a lessening of competitive pricing. Only time will tell whether this is true or not, but from the explanatory memorandum and second reading speech accompanying the new amendment, it is reasonable to suggest the following:

• genuine efficiency pricing decisions such as clearance sales, using low prices to induce customers to try a new product or matching a competitor’s low prices will not be affected by the new law;
• pricing wars” which break out immediately upon the entry of a new player in a market will attract closer scrutiny from the ACCC and such behaviour may be harder to justify;
• the practice of “loss leader” selling products below cost over a long period of time with the intention of attracting people in the knowledge that they will often buy other products could be a problem under the new law, if that action can be linked to being directed at a particular competitor;
• the new element of a corporation holding “a substantial share of the market” will mean the Courts are now not bound to consider such factors as whether there are low barriers to entry or whether a corporation has “market power” in coming to a conclusion as to whether a corporation (whose behaviour is being complained of) does in fact have that share of the market, ie. the test will be much simpler; and
• while new Section 46 (1AB) states that a Court “may have regard to the number and size of the competitors of the corporation in the market” in determining whether a corporation has a substantial share of the market (ie. it is not mandatory), the reality is that in most industries the Court will have no choice but to look at the number and the size of the competitors in that market to see if that test is met.

In short, there can be no doubt that that there will be an increased focus by the Courts on the “purpose” element in any matter before it which alleges predatory pricing. This brings with it an increased risk for corporations who enjoy substantial market share (ie. medium to large market share) and regularly engage in discounting items below cost – especially in those markets where there are a number of smaller competitors or from time to time new entrants.

Corporations in this position are strongly advised to take greater care in documenting and recording an audit trail to detail the legitimate commercial reasons for it engaging in unusually low pricing conduct. More importantly, of course, is the need to ensure that the rationale for those pricing decisions is legitimate.

If you would like any further information in relation to these amendments, please do not hesitate to contact Kevin Elkington.