ACCC Chair Rod Sims delivers his annual address to the Law Council of Australia's Competition and Consumer Workshop. Mr Sims discusses key competition cases and the ACCC's recent record on merger reviews. He also reports that market studies are now a core part of the ACCC's work.
Check against delivery
I gave my first major address as ACCC Chair at this workshop in 2011 where I said the ACCC’s role is pivotal to the proper functioning of a market economy; and a proper functioning market economy achieves the best outcomes for our society. Five years on and my philosophy is unchanged.
I often come across those who argue for maximum competition but appear to oppose any application of our competition and consumer laws. In my view, you cannot have one without the other. Adam Smith in the Wealth of Nations over 200 years ago taught us that the profit motive works for the public good when there is robust competition and that ensuring robust competition is a key role of government.
Strong and visible enforcement of the Competition and Consumer Act 2010 (the Act) creates a multiplier effect, as others take notice, word gets around and people know and respect what can and cannot be done.
This annual workshop is always a great opportunity to reflect and share our thoughts. Today, I want to discuss:
- the considerable activity in competition enforcement
- our recent overall record on merger reviews, which we are pleased with and
- that market studies are now a core part of our work.
Much going on in competition enforcement; much more to come
There is, of course, much happening in terms of consumer enforcement. From recent litigation in relation to Medibank and Heinz, to the recent finding by the Federal Court that Woolworths Limited engaged in misleading and deceptive conduct concerning the safety of five house-brand products.
Today, however, I want to use the time available to focus on the considerable activity in competition enforcement.
After a long gestation and some false starts, Australia has its first criminal cartel case. On 14 July, the Commonwealth Director of Public Prosecutions laid charges against Nippon Yusen Kabushiki Kaisha (NYK), a global shipping company based in Japan.
We are unapologetic for a cautious start in taking action under the criminal cartel provisions. We want to lay strong foundations for a continuing program of cases.
Indeed, we have 10-12 in-depth criminal investigations and we are aiming for a steady stream of one to two criminal cases per year.
Hopefully this will send a clearer signal on cartel conduct; there is too much of it occurring in Australia today to the considerable detriment of the Australian economy.
It has been a busy year in the courts for our key competition law cases.
We have resolved our laundry detergents cartel litigation against Colgate Palmolive with an $18 million penalty and Woolworths with a $9 million penalty. The Court’s decision on our case against PZ Cussons Australia has been reserved.
Since I spoke to you last, the Federal Court found Yazaki Corporation engaged in collusive conduct in supplying wire harnesses to Toyota Australia. We now await the penalty judgment.
We have also recently commenced proceedings against three companies alleging they were involved in cartel conduct relating to the supply of polycarbonate roofing.
Finally, last month, the Federal Court found an Italian corporation, Prysmian Cavi E Sistemi S.R.L, engaged in cartel conduct in supplying high voltage land cables in Australia. The case now moves to a penalty hearing. Our proceedings against Nexans SA in relation to this conduct were dismissed.
Cases of fundamental importance
We have many important cases and appeals before the courts to help determine some fundamental issues.
In the Flight Centre case which was argued before the High Court last week, we allege Flight Centre attempted to induce three international airlines to enter into price fixing arrangements in breach of the Act. This case raises important issues for the application of competition laws in Australia in the context of agency relationships. The decision by the Full Federal Court that Flight Centre was not in competition with the airlines is a problem for the ACCC and consumers. This is because Flight Centre's behaviour had the potential to reduce price competition for tickets, and would have been to the detriment of consumers. Analysing market behaviour using traditional agency concepts doesn't seem to reflect commercial reality in many situations, particularly online sales. We keenly await the High Court's decision.
We are also awaiting judgment from the Full Federal Court following a decision by the Federal Court that Pfizer did not misuse its substantial market power or engage in exclusive dealing when making particular offers to supply its cholesterol lowering product Lipitor in 2012. It is important the ACCC seeks clarity from the courts on issues of market power and anti-competitive purpose.
We have also appealed the decision by the Federal Court dismissing our allegations that Australian Egg Corporation Limited attempted to induce egg producers to enter into an arrangement or understanding to restrict or limit the production or supply of eggs. Again, it is important we seek clarity from the courts on issues of what will and will not constitute an attempt to induce cartel conduct, particularly in the context of conduct by a trade association interacting with its members.
The ACCC is continuing with its case against the CFMEU in relation to allegations it engaged in secondary boycott conduct in connection with the supply of concrete to Grocon. The CFMEU unsuccessfully tried to stop the trial proceeding in September, following criminal charges being laid by the Victorian Police against the individual respondents. With the overlapping allegations having been stayed, the Full Court has ruled that the hearing of the remaining allegations can proceed. Secondary boycotts are anti-competitive practices that can cause significant detriment in the economy. We have a number of important continuing investigations in this area, some of which are being conducted with partner agencies.
Commercially relevant penalties
As mentioned previously Yazaki will be an important penalty decision when it is handed down.
We have recently appealed the penalties imposed by the trial judge in the long-running Cement Australia case. We will argue to the Full Court that the $17.1 million penalty imposed against Cement Australia is manifestly inadequate, and not of appropriate deterrent value; we had submitted penalties of more than $90 million were appropriate.
We have also appealed the penalty decision in the Nurofen case.
More broadly, we continue to advocate for increased penalties so obligations under the Act are front of mind for Australian businesses.
Penalties must be commercially relevant: they must be high enough for businesses not to see them as merely an acceptable risk of doing business.
It goes back to my point about strong and visible enforcement. Commercially relevant sanctions must show boards and the public that competition and consumer laws matter and businesses must take compliance seriously.
Making best use of undertakings
Taking enforcement action and obtaining commercially relevant penalties is important, but we also get results in other ways. In appropriate cases, we resolve competition concerns and problems by using administrative resolutions or court enforceable undertakings under section 87B.
These methods tend to achieve more timely outcomes than litigation and are often effective in resolving concerns. We have a couple of recent good examples:
The first involves petrol prices. Late last year the ACCC accepted undertakings from Informed Sources and four petrol retailers in resolving court proceedings instituted in 2014. The undertakings will achieve a key objective of the ACCC; that is, open and transparent markets. Enabling consumers to access data and information, previously only available to Informed Sources subscribers, will enable informed decisions and increased competition.
The second example involves the taxi industry. Last year, the ACCC accepted undertakings from Cabcharge Australia Limited which have opened up the market to further competition by providing third parties with the ability to process Cabcharge cards on their own in-taxi payment terminals.
We are currently negotiating undertakings in a number of other important matters to both avoid litigation and achieve our objectives in more effective ways. We will soon know whether these negotiations are successful.
The ACCC is pleased with its recent work on merger reviews
Turning to our merger review regime, it has been another packed year with many significant and challenging transactions.
The ACCC considered 319 mergers and conducted 31 public reviews during 2015/16.
Significantly, and in accordance with our stated objectives, we cleared 90 per cent of mergers without the need for a public review. We believe we are getting the right balance in ensuring our focus is on the more complex or contentious end of the merger spectrum while non-contentious mergers are cleared expeditiously.
I will outline some of our more significant public merger reviews and the key lessons learned. I will also discuss the recent Australian Competition Tribunal decision on Sea Swift.
Reversing a completed acquisition
The first of these involves Primary Health Care’s acquisition of Healthscope’s pathology assets in Queensland.
In terms of enforcement outcomes, this may be the first time the ACCC has largely reversed a completed acquisition without taking court action.
Primary and Healthscope completed the transaction without notifying us, despite being clearly on notice that we would have serious concerns about the transaction. We were very surprised and disappointed by this approach.
While litigation preparations were well advanced, we decided not to pursue court action against Primary and Healthscope. We took the view it was better, on balance, to restore a competitive market structure in Queensland as quickly as possible, and the undertakings given by Primary and Healthscope were the most effective way to achieve this.
The process and the outcome no doubt came at a significant cost to the parties. Hopefully, this will serve as an important reminder about the risks of completing clearly problematic acquisitions without seeking ACCC clearance beforehand.
Carving out a proposed acquisition from a larger international transaction
Another matter, Iron Mountain’s acquisition of Recall Holdings, involved a similar resolution, but significantly, this was not a completed transaction having been notified to us in advance in the normal way.
The merger parties were the two largest providers of physical document management services in Australia, and the transaction was part of a broader cross-border merger.
Our review identified significant concerns in Australia, and with the parties we went on a considerable journey in terms of engagement following our red light Statement of issues.
Iron Mountain ultimately undertook to divest its entire Australian business, other than its local records management customers in the Northern Territory and its data protection business. In effect, this undertaking unwound the proposed acquisition in the markets of concern in Australia.
Increasing cooperation between agencies
I would have to categorise Halliburton’s proposed acquisition of Baker Hughes as optimistic and in some ways baffling. In the end, it was abandoned in light of the competition concerns raised by regulators around the world.
Halliburton and Baker Hughes are the second and third largest oilfield services providers, both globally and in Australia. The proposed global transaction was valued at $US34.6B when it was announced and included a break fee of a staggering $US3.5B.
The ACCC expressed strong concerns the transaction would substantially lessen competition in Australia. We were particularly concerned about the impact on competition for complex and high-risk projects, such as off-shore drilling projects.
In this review we worked closely with the US Department of Justice and the European Commission and had discussions with the Brazilian CADE and the Competition Commission of India.
With the US taking legal action to stop the merger and significant concerns raised both by the EC and ACCC, the parties elected to terminate the transaction.
This review is indicative of the increasing level of cooperation and coordination between overseas agencies in large multi-regional reviews.
There was a valuable exchange of analysis and intelligence with agencies discussing the nature and extent of remedies being offered as well as timing and other process issues.
Other mergers withdrawn late in the process
Significantly during 2015/16, there have been six mergers withdrawn during the review period. A number of these were abandoned following a red light statement of issues.
Most recently, in late July, DSI decided to terminate its proposed acquisition of Jennmar Australia, the day before the ACCC was due to announce a final decision. The merger would have resulted in a ‘two to one’ between the largest Australian suppliers of rock bolts to soft rock mines.
Increased engagement goes both ways
There is an important lesson for merger parties and their advisors reflecting our experience with some recent reviews.
We provide merger parties with an increased level of engagement and transparency throughout the merger review process.
This means not long after a statement of issues is released parties are fully appraised of the nature and extent of the ACCC’s competition concerns.
This increased level of engagement is resource intensive for us but we believe it improves the process and assists us in getting to the right answer.
Engagement, however, is a two way street. We expect that, in return, merger parties will move quickly to address unresolved concerns and not leave attempts to address competition issues to the last minute.
Providing ill thought through or ambit claim remedies at the last minute is not productive.
Besides being inefficient, it drags out the review and gives ammunition to commentators, and importantly often even the very parties and advisors that have sought the delay, to criticise the ACCC for taking too long.
In those circumstances we will increasingly say that we are proceeding to a final decision and if the merger parties wish to restructure the transaction or offer a substantial remedy then they have the option to withdraw their proposal and resubmit the revised application for clearance.
Merger reviews on the home front
While the reviews mentioned have been at the more contentious side of things, we have recently cleared some other significant transactions.
These include the Qube/Brookfield acquisition of Asciano, which came about when the Qube and Brookfield consortia abandoned their separate bids and combined to present a joint restructured bid to overcome a range of vertical integration concerns identified by the ACCC; and Metcash’s proposed acquisition of Home Timber & Hardware Group which was cleared subject to undertakings.
In addition, a number of mergers focussed on significant consumer issues. In the past year, as part of our Coles/Superbarn and TPG/iinet reviews, we held public forums to hear directly from consumers about how the proposed merger would affect them.
Sea Swift decision
We have expressed our disappointment with the Australian Competition Tribunal’s decision to allow Sea Swift’s acquisition of the Northern Territory and Far North Queensland marine freight assets of Toll Marine Logistics Australia.
The ACCC remains of the view that the acquisition is likely to have significant implications for future competition in, and the prices paid for, scheduled marine freight services in the Northern Territory and far north Queensland, ultimately to the detriment of the communities reliant on these services.
While the parties successfully argued a ‘two to one’ merger would lead to a more efficient market structure, we believe this should instead have been determined by robust competition.
We also consider that the price control undertakings required by the Tribunal are unlikely to protect these communities into the future given real question marks about their efficacy and enforceability.
Down the track, the ACCC proposes to conduct a post-merger evaluation of the relevant markets and it will be instructive to see what happens to prices and service levels over time.
Our mergers record over the long run
Since 1974, there have only been 11 merger matters that have been decided after a substantive hearing by the Australian Competition Tribunal or the Federal Court, and the last 4 contested hearings (over the past 13 years) have gone against us.
To put matters in context, however, in the past decade there have been nearly 100 mergers either publicly opposed by the ACCC or cleared after undertakings were offered by merger parties in the face of ACCC opposition. In addition, more than 100 were withdrawn, with a number due to significant ACCC concerns being raised.
It is only the most marginal cases that end up being litigated and so it is only to be expected that some cases will go against us. We are dealing with assessments about future matters and this presents real challenges in terms of establishing the likely counterfactual against which the merger is compared. While the ACCC will continue to carefully reflect on merger decisions handed down by the Federal Courts and the Competition Tribunal we will not shy away from taking decisions we believe are correct, and we will continue to oppose acquisitions which we consider are likely to substantially lessen competition.
The ACCC experience of market studies
Market studies are now part of ‘business as usual’ for the ACCC.
We have had a very resource intensive market study into the east coast gas market, and we have had studies into petrol prices in Darwin and Launceston, with Armidale and Cairns to follow.
Interestingly, it seems focusing on particular markets during studies of itself can have a positive impact. For example, we noticed more gas sales and a major decline in retail fuel prices in Darwin during and after relevant studies.
We currently have market studies into the beef cattle sector as part of our work in the agriculture sector, and we have conducted workshops in the horticulture sector. We also have an important market study underway in relation to motor vehicle retailing and have completed a market study into the private health insurance industry which has triggered significant debate. Finally, this week, I announced a major market study into communications.
Market studies are useful when market concerns exist but there is no clear breach of the Act. It is not wise to imply, as some do, that where there is no clear breach, the market must always be working well. We think market studies can, in appropriate cases, be an important safety valve enabling the credible concerns of stakeholders to be examined.
Simply providing a forum for issues to be considered and concerns heard can be useful. However, market studies can also lead to policy recommendations; for example, our recommendations on the regulatory arrangements for gas pipelines and government policies on fuel card use, and the policy focus on the private health insurance industry.
Market studies can also lead to enforcement issues being identified. For example, we have a couple of investigations actively being pursued out of the gas inquiry and some matters have already arisen in the cattle market study.
Market studies also help us to identify whether there may be other tools to address market ‘failures’ such as information asymmetry concerns.
Finally, our market economy can benefit from market studies. This is because people can get annoyed when told a market is working well when it is not from their perspective, and inappropriate solutions can then be proposed and accepted which harm our market economy. An educated and informed market leads to better decisions. Market studies are an effective tool for the ACCC to obtain a deep understanding of the markets the subject of the studies and allow us to focus on the important issues of concern and identify any necessary reforms.
There is much going on and much to look forward to. We have just started a new chapter with our first criminal cartel case. We have many defining competition cases before the courts on appeal. We are using enforcement undertakings to get good outcomes and we have some interesting cases coming through.
In mergers, we have worked through some important matters. We also have some fascinating applications for authorisation before us, including in the financial sector.
We now are actively using our unique expertise to look at markets as a whole rather than the conduct of particular firms within them; market studies are a permanent feature of what we do.
The sum of these things is a better functioning market economy.
On top of all this, we will soon see implementation of the Harper recommendations, and the review of the Australian Consumer Law is now well underway.
I would like to finish by acknowledging the excellent recent engagement we have had with you and express my sincere thanks to the Law Council for your input on our many guidelines and processes. Whether it is the review of s155 guidelines, the draft media code, merger consultation guidelines or advice on collective bargaining and collective boycotts, we appreciate your constructive feedback.
As always, I look forward to the workshop and hearing your thoughts about the ACCC and developments in competition and consumer law. Thank you.