Explanatory note

This Supplementary Order Paper proposes a new section 36 for the Commerce Act 1986.

Section 36 of the Commerce Act is intended to prevent firms with market power from interfering with workably effective competition. As currently drafted, section 36 targets firms with market power who take advantage of that market power for one or more of three prescribed anti-competitive purposes.

There are two significant gaps in this market power protection:

• There is an exclusive focus on purpose, rather than effect. A focus on purpose can make violations of section 36 difficult to prove in practice. Multiple purposes, some involving legitimate business rationales, can obscure an anti-competitive purpose. Further, actions that manifestly impact on competition in a market can remain unaddressed if the purpose element is not satisfied.

• There is no special recognition of the greater potential market impact from the actions of a monopolist. A firm with market power can impact on the effectiveness of competition in a market where firms with smaller market share cannot. When section 36 was drafted there was a concern that taking the monopolist’s special position into account would protect inefficient competitors, but it is now widely recognised as a matter of competition law policy that the extra risk associated with monopoly power needs to be specifically addressed.

A focus on effects, rather than exclusively on purpose, addresses both these concerns. It allows the courts to examine the actual impact on a monopolist’s conduct on the level and nature of competition in a market. Where a substantial lessening of competition can be attributed to the monopolist’s conduct, section 36 will be breached. Accordingly, the proposed amendments add an effects-based test to the existing test of anti-competitive purpose (set out in subsection (3)(a)). This test is based on the substantial lessening of competition test, which is already familiar to the courts and businesses (see Commerce Act 1986, ss 27 and 47).

In addition, the application of the counterfactual test by the courts has limited the ambit of the market power protection under section 36. The counterfactual test offers a degree of certainty to a monopolist, but is widely viewed as an overly conservative test that returns too many false negatives. Because of a need to link causally an anti-competitive purpose or effect to the conduct of a monopolist, the courts are likely to continue to apply the counterfactual test in a conservative manner.

The proposed amendments address this issue but stating expressly a number of grounds that the court may rely on to assess ‘taking advantage’ of market power (subsection (4)). In particular, the ‘materially facilitated’ standard (subsection (4)(a)) has been used in Australia and is recognised as lowering the threshold of the standard counterfactual test for causation. Finally, subsection (5) clarifies that inferences drawn from market conduct can be used as proof of abuse of market power, which clarifies the nature of the new causation test in light of the new focus on market effects.