TWENTIETH ANNUAL WORKSHOP OF
THE COMPETITION LAW AND POLICY INSTITUTE OF
NEW ZEALAND

The Trade Practices Legislation Amendment Act 2008 (Cth) and s 46 of the
Trade Practices Act 1974 (Cth) – will anything really change?

Presented by:
the Honourable Justice John Middleton
Justice of the Federal Court of Australia
8 August 2009
A.	INTRODUCTION
1	The Trade Practices Legislation Amendment Act 2008 (Cth) substantively amended s 46 of the Trade Practices Act 1974 (Cth) (‘the TPA’).  The two most significant changes were the introduction of ss 46(1AAA) and (6A). 
Section 46(1AAA)
2	This section has two effects.  First, it aligns ‘predatory pricing’ practices with s 46(1), making it clear that such practices are intended to be caught by s 46(1).  Second, it clarifies the legal relevance of the recoupment factor in predatory pricing cases.  The section reads as follows:
If a corporation supplies goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying the goods or services, the corporation may contravene subsection (1) even if the corporation cannot, and might not ever be able to, recoup losses incurred by supplying the goods or services.
Section 46(6A)
3	This section provides a non-exhaustive list of factors that the court may take into account when it is determining whether a corporation has ‘taken advantage’ of its market power.  The section reads as follows:
In determining for the purposes of this section whether, by engaging in conduct, a corporation has taken advantage of its substantial degree of power in a market, the court may have regard to any or all of the following:

(a) whether the conduct was materially facilitated by the corporation’s substantial degree of power in the market;

(b) whether the corporation engaged in the conduct in reliance on its substantial degree of power in the market;

(c) whether it is likely that the corporation would have engaged in the conduct if it did not have a substantial degree of power in the market;

(d) whether the conduct is otherwise related to the corporation’s substantial degree of power in the market.

This subsection does not limit the matters to which the court may have regard. 
B.	THE NEED FOR CHANGE
2	The changes to s 46 were made in response to perceived problems with the law in its previous form, and in particular the changes intended to address certain interpretations of the TPA by the courts.  In his second reading speech to the House of Representatives on 26 June 2008, Mr Chris Bowen the then Minister for Competition Policy and Consumer Affairs and Assistant Treasurer indicated that it was ‘the government’s belief that a series of court decisions have undermined the operation of the act, s 46 in particular’.
3	The TPA was the subject of a Senate inquiry in 2003, and the resulting report (issued in 2004) contained several recommendations, including recommendations that s 46 be amended to clarify the legal relevance of the recoupment factor in predatory pricing cases and to clarify and broaden the meaning of ‘take advantage’.  However, for a number of reasons, these recommendations were not implemented in the Trade Practices Legislation Amendment Act 2007 (Cth) amendments.  Thus the 2008 amendments took up the recommendations regarding s 46 and completed the work of the 2003 inquiry. 
C.	THE NEED FOR CLARIFICATION ON THE LEGAL RELEVANCE OF RECOUPMENT
4	Predatory pricing is one of the anti-competitive activities which s 46 targets, though it is not specifically mentioned or defined in the Act.  Predatory pricing is essentially the practice described in ss 46(1AAA) and (1AA) – that of supplying goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying the goods or services, and for one of the proscribed purposes. 
5	Recoupment refers to the ability of the corporation to be able to recover the losses incurred as a result of predatory pricing behaviour, at some later date when a competitor has been forced out of the market.  Even prior to the 2008 amendments, s 46(1AA) prohibited predatory pricing under a separate provision, where a corporation has a ‘substantial share’ of a market.  The introduction of s 46(1AAA) makes it clear, however, that predatory pricing is also ‘taking advantage’ of market power and a contravention of s 46(1). 
6	There has been some debate about how a court should take the recoupment factor into account when determining whether below cost pricing is predatory or, rather, merely aggressive competition.  The ability to recoup losses after a competitor has been forced out of the market has been said to indicate a use of market power.
7	It was suggested that an amendment was necessary regarding recoupment because the High Court of Australia had decided that the ability to recoup losses incurred from below cost pricing was a necessary precondition in establishing a breach of s 46.  However, this was not a hurdle the High Court put in place for a successful application, and no such precondition was ever dictated.
8	Undoubtedly, the courts have placed some emphasis on recoupment in recent years, in accordance with the views of some economic theorists and the trend in US jurisprudence. 
9	In Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374 (‘Boral’), Gleeson CJ and Callinan J indicated that while the possibility of recoupment is not legally essential to a finding of prohibited pricing behaviour, it may be of factual importance.  Their Honours said (at 422): 
If one begins with the fact that a firm is a monopolist, or is in a controlling or dominant position in a market, then, by hypothesis, such a firm has an ability to raise prices without fear of losing business. If such a firm reduces its prices, especially if it reduces them below variable cost, then it may be easy to attribute to the firm an anti-competitive objective, and to characterise its behaviour as predatory. But if one finds a firm that is operating in an intensely competitive environment, and a close examination of its pricing behaviour shows that it is responding to competitive pressure, then its conduct will bear a different character. That is the present case.

While the possibility of recoupment is not legally essential to a finding of pricing behaviour in contravention of s 46, it may be of factual importance.  The fact…that BBM had no expectation of being in a position to charge supra-competitive prices even if Rocla and Budget left the market, leaving it facing Pioneer and C & M, was material to an evaluation of its conduct. The inability to raise prices above competitive levels reflected a lack of market strength. A finding that BBM expected to be in a position, at the end of the price war, to recoup its losses by charging prices above a competitive level may have assisted a conclusion that it had a substantial degree of market power, depending on the other evidence. But no such finding was made.
10	Justices Gaudron, Gummow and Hayne agreed that recoupment analysis can be appropriate ‘at least at an evidentiary level’: see Boral at [191].
11	Justice McHugh seemed to go further.  Justice McHugh stated (at [278]):
A firm does not possess “substantial market power” if it does not have the power to recoup all or a substantial part of the losses caused by price-cutting by later charging supra-competitive prices. If it cannot successfully raise prices to supra-competitive levels after deterring or damaging or attempting to deter or damage competitors by price-cutting, the conclusion is irresistible that it did not have substantial market power at the time it engaged in price-cutting.  
12	Justice McHugh repeated the point that if it cannot be established that the alleged predator would have had substantial market power and prospects of recouping losses ex post, then it follows that the alleged predator could not have had substantial market power at the time it engaged in the price-cutting behaviour: (see Boral at [319]).  His Honour also said (at [291]):
Reducing prices does not per se establish any degree of market power. That is true whether the supplier is pricing at marginal cost or below average variable costs. Price reductions are beneficial to consumers unless the quid pro quo is higher prices at a later date. If prices merely rise back to the levels that existed before the price-cutting began, consumers have had the benefit of the reduced prices for the duration of the price-cutting. They are no worse off at the conclusion of the price war when the market returns to its long-run equilibrium. Detriment to consumers arises only where competitors are removed and prices rise above the competitive equilibrium to levels that allow those remaining to earn supra-competitive profits that enable them to recoup the losses sustained during the price war. Thus, it is the predator's ability to recoup losses because its price-cutting has removed competition and allowed it and perhaps others to charge supra-competitive prices that harms consumers. Even the removal of competitors is unlikely to have long-term effects on the competition process if the barriers to entry are low. Supra-competitive prices will bring in other suppliers resulting in competition which will force prices down to competitive levels.
13	In dissent, Kirby J agreed that recoupment analysis ‘might be helpful in determining whether a corporation took advantage of its substantial market power in violation of s 46 where the offending conduct involves the charging of low prices’: see Boral at [409].
14	Therefore, whilst the position under Australian law has been said by some to be unclear following the Boral case, it seems to me that the majority of the Justices said nothing more than that a consideration of recoupment would be of varying importance depending on the facts of any particular case. 
15	In any event, the addition of s 46(1AAA) now clarifies that a corporation may engage in predatory pricing and contravene s 46(1) even if the corporation can never recoup its losses.  This can be contrasted with US law, where the importance of proving the possibility for recoupment has become firmly established and seems to have made predatory pricing cases difficult to prove under US anti-trust law.  
16	Given the US experience, the Australian amendments to s 46 may be seen as a welcomed development which will allow our law to deal with predatory pricing more effectively.  Nevertheless, the possibility for recoupment will continue to be a factor that the court may consider, and it is still likely to play an important part in any judicial analysis in predatory pricing cases.  In any given case, a court may still need to consider whether a corporation has a rational expectation of recoupment — which may take different forms over a varying period of time.
17	Of course, in misuse of market power cases not based on predatory pricing, s 46(1AAA) has no application.  Therefore, in those cases, the position as outlined by the High Court in the Boral case would assist in any analysis required to be undertaken in considering whether there was a breach of s 46(1).
D.	THE NEED TO BROADEN THE MEANING OF ‘TAKE ADVANTAGE’
18	Section 46(1) provides that a corporation that has a substantial degree of power in a market must not take advantage of that power in that market or any other market for one of the proscribed anti-competitive purposes.  
19	The prohibition directs attention to three concepts — whether the corporation has a substantial degree of market power, whether the corporation by its conduct is taking advantage of that power, and whether the conduct was undertaken for one or more of the anti-competitive purposes.  Each needs to be considered separately, but they are interrelated.  For present purposes, I am focussing on the casual connection required of the relevant conduct and the corporation’s substantial market power.
20	The first case to consider the meaning of ‘take advantage’ in depth was Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177 (‘Queensland Wire’).  In Queensland Wire the High Court held that ‘taking advantage’ of market power did not require any sinister or morally reprehensible purpose.  Rather, it was held that the expression simply meant to ‘use’ that power: per Mason CJ and Wilson J at 191. 
21	The meaning of ‘take advantage’ in s 46 has been the subject of considerable (and sometimes inconsistent) judicial examination since Queensland Wire, though this case is still considered to be good law and the starting point for a s 46 analysis. 
22	Ms Margaret Brock describes two broad analytical approaches that have been taken in formulating ‘taking advantage’ tests which I have found to be very useful: a ‘high’ threshold test and a ‘low’ threshold test.  
23	The high/low distinction refers to the level of connection or causation that is required between the conduct engaged in and the market power.  Aptly named, the high threshold test requires a higher level of connection between the impugned conduct and the market power.  An example of a higher threshold approach can be found in Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53 (‘Rural Press’). 
24	In contrast, an example of the lower threshold approach can be found in the case of Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1 (‘Melway’).  In Melway Gleeson CJ, Gummow, Hayne and Callinan JJ stated that s 46 requires a causal relationship between the market power and the conduct engaged in (at [44]):
Section 46 … requires, not merely the co-existence of market power, conduct, and proscribed purpose, but a connection such that the firm whose conduct is in question can be said to be taking advantage of its power.
25	The impugned conduct must be assisted or made easier by the market power, but does not need to have been impossible without it.  
26	Queensland Wire would also be characterised most accurately as applying a low threshold test, although I think it is correct to say that only Mason CJ and Wilson J specifically took a ‘would approach’ in applying the counterfactual test.
27	The meaning of ‘taking advantage’ has been considered in two other High Court cases: Boral and NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 (‘PAWA’).  Boral seemed to endorse the use of the ‘rational business explanation’ test.  I think there are conceptual difficulties surrounding the use of this test, discussion of which is beyond the scope of this paper.  Generally, however, Boral is consistent with a higher threshold approach.  PAWA seemed to move back towards a lower threshold test, requiring an analysis of what would have occurred in a competitive market, and applying Queensland Wire reasoning.
28	Ms Margaret Brock said that:
[o]f the five High Court decisions that have considered misuse of market power not one has had a consistent finding in regard to “taking advantage” at each of the Federal, Full Federal and High Court levels. 
29	I would tend to agree.  I think it would be fair to say that on this question the High Court has not given clear direction as to what level of connection is required.  What can be said is that the High Court has been consistent in requiring some degree of connection between the impugned conduct and the market power. 
30	Given this need for direction, the predatory pricing regime was arguably ripe for reform.  It was the decision in Rural Press that was the stated catalyst for reform in the form of s 46(6A).  In Rural Press the Court reiterated the importance of establishing a causal relationship between the market power and the conduct, and warned of the danger in confounding market power with purpose.  Justices Gummow, Hayne and Heydon said that there is a need to show that the conduct was connected to the market power, not just that a proscribed purpose coincided with conduct (at 76): 
The words “take advantage of” do not extend to any kind of connection at all between market power and the prohibited purposes described in s 46(1). Those words do not encompass conduct which has the purpose of protecting market power, but has no other connection with that market power. Section 46(1) distinguishes between “taking advantage” and “purpose”. The conduct of “taking advantage of” a thing is not identical with the conduct of protecting that thing. To reason that Rural Press and Bridge took advantage of market power because they would have been unlikely to have engaged in the conduct without the “commercial rationale” — the purpose — of protecting their market power is to confound purpose and taking advantage. If a firm with market power has a purpose of protecting it, and a choice of methods by which to do so, one of which involves power distinct from the market power and one of which does not, choice of the method distinct from the market power will prevent a contravention of s 46(1) from occurring even if choice of the other method will entail it.
…
The Commission failed to show that the conduct of Rural Press and Bridge was materially facilitated by the market power in giving the threats a significance they would not have had without it. What gave those threats significance was something distinct from market power, namely their material and organisational assets. 
These Justices applied the test from Melway (at 76).  
31	The 2003 Senate Inquiry expressed concern that the Rural Press decision took the wrong approach: 
[it] focuses on a corporation’s physical or business capacity to engage in conduct rather than its rationale or intent for doing so…the test appeared to result in a situation where corporations may use their market power to engage in proscribed conduct with impunity, so long as they could also engage in that conduct in the absence of market power.  
32	The Australian Competition and Consumer Commission (‘ACCC’) shared these concerns about developments in the case law, and was keen to see the TPA amended to clarify the factors that could be taken into account when determining whether a corporation has taken advantage of its market power.  
33	Prior to the 2008 amendments, there was plenty of case law offering guidance on the interpretation of ‘taking advantage’.  Unfortunately, the case law’s guidance was somewhat inconsistent and at times obscure.  Rural Press was, arguably, merely another example of the inconsistency.  What seems to have caused such misgivings on the part of the ACCC and the Federal Government was that Rural Press had moved towards the higher threshold approach, which would make it more difficult to prosecute s 46 cases.  
E.	EVALUATION
34	Has s 46(6A) clarified the position?  It makes it clear that the ‘higher’ threshold connection is not required, and sets out a variety of factors which the court may consider, synthesising strands of analysis from the previous case law.  For example, the language of s 46(6A)(a), whether the conduct was ‘materially facilitated’ by the market power is an expression used in Melway, and considered (though not always applied) in each of the other four relevant High Court cases. 
35	Given the complexity of this area of law, and the varied factual matrixes which are presented by s 46 cases, s 46(6A) could never (nor does it purport to) provide an exhaustive list of the factors which may denote the requisite causal relationship between the impugned conduct and the corporation’s market power.  Nevertheless, the factors set out in s 46(6A) provide some much needed clarification to this area of competition law. 
36	The changes came into effect on 21 November 2008.  So it is to be expected that the new elements of s 46 of the TPA are yet to be judicially considered.  As such it remains to be seen whether, in practice, the changes will have the desired effects, or indeed whether they will have any effect at all.  As I mentioned earlier, the changes pursued in the form of s 46(1AAA), as a result of the Boral case, did not change the actual position at law as enunciated by the majority of the High Court in that case.  Rather, they clarified and perhaps pre-empted any firm shift in the approach to be taken to recoupment. 
37	Similarly, while the changes inserted in the form of s 46(6A) clarified which factors may be taken into account when interpreting ‘taking advantage’, they did not represent a fundamental overall shift in the existing approaches but rather clarified, synthesised and codified some earlier approaches to make the way forward more certain in the identification of principle. 
F.	WOULD BORAL HAVE BEEN DECIDED DIFFERENTLY IN LIGHT OF S 46(1AAA)?
38	Boral Besser Masonry (‘BBM’), a subsidiary of Boral Ltd, manufactured concrete masonry blocks, bricks and pavers for the Melbourne market.  BBM had priced its products below the avoidable cost of production during a time of economic recession that had particularly affected the building industry. 
39	The relevant issue was whether the alleged behaviour was ‘predatory pricing’ (and thus ‘taking advantage’ under s 46).  Was the firm’s ability to recoup its losses a factor in determining whether the behaviour was predatory pricing or merely aggressive competitive behaviour? 
40	The High Court indicated that had Boral been able to recoup its losses, this may have led to the conclusion that Boral had market power and thus that it was taking advantage of that market power.  The fact that BBM had no expectation of recoupment even if other competitors left the market was material to an evaluation of its conduct and the finding that Boral had no such market power.  As already stated, the recoupment test was used as an analytical tool in Boral but it was not suggested by the majority of the Justices that recoupment needed to be proven in order to make out a predatory pricing claim. 
41	Would s 46(1AAA) have affected the Boral decision?  On the particular factual circumstances of Boral, the recoupment analysis was important to the finding that BBM did not have the requisite level of market power.  However, s 46(1AAA) would not have disturbed such a finding.  It was found that BBM was operating in an intensely competitive environment and that its pricing behaviour was a result of that competition.  The recoupment test was used as a tool but not in any decisive way. 
G.	WOULD RURAL PRESS HAVE BEEN DECIDED DIFFERENTLY IN LIGHT OF SECTION 46(6A)? 
42	Bridge, a wholly owned subsidiary of Rural Press, published a regional newspaper in the Murray Bridge area.  Bridge and Rural Press threatened to publish a free newspaper in a neighbouring territory if the rival publisher, Waikerie, did not withdraw circulation of its newspaper from parts of the Murray Bridge area.  
43	The relevant issue was whether Rural Press and Bridge had taken advantage of their market power in making the threats.
44	In Rural Press, the majority of the High Court held that Rural Press and Bridge had not taken advantage of market power as it was possible to make those threats without market power.  
45	Would s 6A have affected the Rural Press decision?  As stated earlier, the majority seemed to favour a higher threshold test in Rural Press.  Would the list of factors in s 46(6A) have affected the outcome of Rural Press?  Probably, yes.  I will look at each factor briefly:
(a)	whether the conduct was materially facilitated by the corporation’s substantial degree 	of power in the market
	The court did already consider this in a sort of hybrid test. 

(b)	whether the corporation engaged in the conduct in reliance on its substantial degree of power in the market
	The majority of the High Court did actually consider this factor, albeit briefly.  

(c)	whether it is likely that the corporation would have engaged in the conduct if it did 	not have a substantial degree of power in the market
This factor may have changed the analysis of the majority and the weight to be given to certain evidence.  The majority explicitly rejected the idea that the word ‘would’ should be used instead of ‘could’.  If the High Court focused on whether the corporation would have acted the way that it did in the absence of market power, this may have arguably required a lesser connection between the impugned conduct and the market power. 

(d)	whether the conduct is otherwise related to the corporation’s substantial degree of 	power in the market
This may also have changed the outcome of Rural Press. It is a sort of ‘catch-all’ provision, and it signifies that the court may take a more general approach to finding the connection between the conduct and the market power. In this case, for example, it would have been arguable that Rural Press’s ‘material and organisational assets’, which were found to be what gave the threats ‘cogency’, were indeed related, or perhaps a direct result of, Rural Press’s substantial degree of power in the relevant market.
46	It seems then that had s 46(6A) been in force in 2003, Rural Press may have been decided differently.  
H.	CONCLUSION
47	The amendments to s 46 will provide useful guidance for further development of competition law.  Undoubtedly, a level of flexibility in applying economic concepts within the confines of the statutory context has been preserved.
48	Clarification and sign-posting are important goals, which the amendments to s 46 have provided.
49	However, in any given case, the court must consider the legitimacy of the alleged conduct.  This will always require a careful and detailed consideration of the evidence and economic concepts.  This aspect of judicial decision making remains constant, unaffected by any statutory intervention or revamp of s 46.

I wish to acknowledge the very valuable assistance given to me in preparing this paper by Ms Stephanie Otorepec, Research Assistant with the Federal Court of Australia.