Chairman Rod Sims outlines the ACCC's new approach to information gathering in merger analysis, and how an increase in resources for cartel investigations over the past three years resulted in this week's once-in-a-century conviction for cartel conduct.
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This, as you all know, is an event I value greatly. Not only do I enjoy, and learn from, the many interesting sessions; I also value the chance to convey some of our thinking at this evening session, and then discuss this over the weekend.
We have a lot on at the moment, which I think illustrates well the benefit of a multi sector agency with a wide range of responsibilities.
Taking most of my time recently, for example, is the Takata air bag issue, which you all do, or should, know about. As many will know the Department of Infrastructure and Regional Development (DIRD) handles the monitoring of motor vehicle recalls; indeed they handle more recalls in motor vehicles than we do across all the sectors we have responsibility for.
However, when there are good reasons for ACCC intervention, we will get involved. We have very recently assembled a 7 person taskforce of product safety and enforcement staff, supported by our legal team and DIRD staff with technical expertise to carry out an escalated investigation into the safety risks associated with the Takata airbag recall, and recommend any additional action.
I do not think a standalone product safety or even consumer regulator could put the focus on this issue that we have now.
Today, my usual three topics are as follows, and have nothing to do with product safety.
I will first discuss how we are more and more changing industry behaviour by taking a carefully planned mix of compliance and enforcement actions.
I will then discuss how our very large investment in a criminal cartel unit is now paying off, and hitting full stride.
I will explain that we have heard very clearly the court’s view that in merger cases we are theoretical and lacking in commercial reality, and how we plan to respond.
Shifting industries by taking a strategic approach
We believe the ACCC has a strong record with its enforcement work, which involves identifying important problems and undertaking targeted investigations with a view to maximising both the direct impact of our work, and indirectly deterring others in the industry and beyond.
This model is the lifeblood of an economy wide regulator that must make difficult decisions about the harm it identifies and seeks to address with necessarily limited resources.
But reliance on strong enforcement alone is neither effective nor, in fact, our approach to delivering compliance across the economy. Critics of our reliance on strong enforcement probably miss that our approach is far more nuanced and balanced than I think we are given credit for.
Our work a few years ago in relation to the door to door sales of energy products is a good example. Stakeholder and consumer referrals demonstrated a clear issue. Reports consistently identified representations from those turning up at the doors of consumers that they were not there to sell anything; that they were from their existing supplier; that they were just there to check the consumer was getting the right deal; and in some cases that they were from or linked to government.
Coupled with reports of high pressure sales tactics there was clearly an industry wide problem ultimately driven in our view by commission based incentives and very poor compliance.
The ACCC response was much deeper than enforcement. We placed industry on notice very early through speeches, correspondence, phone calls and public references. We undertook research and publicly reported the results. Only in the face of continuing conduct did we take a variety of enforcement actions including five Federal Court proceedings and a number of undertakings. While at the blunter end of our compliance initiatives, the court actions were themselves strategically designed to deliver different compliance outcomes.
Some focussed on the representations whereas others addressed concerns of unconscionable behaviour. Some aspects were resolved by consent with others being contested establishing market changing precedent such as obtaining a court ruling that a failure to heed a ‘do not knock sticker’ could amount to a failure to leave when requested.
This integrated approach has changed behaviour in this industry, but it has also stretched to other parts of the economy. Our insights on commission based incentives formed in these interventions are informing our approach to behaviour in other industries; indeed they led to a prioritised area of focus in our 2017 compliance and enforcement policy.
The precedent delivered in relation to ‘do not knock stickers’ has underwritten our work with Queensland Fair Trading and the Indigenous Consumer Advisory Network (ICAN) in rolling out a do not knock town initiative in partnership with Indigenous communities initially in Wujal Wujal, recently in Yarrabah and hopefully more to come.
Private health insurance is another good example of a more strategic approach than commentators often appreciate. Charged with the role of delivering annual reports to the Senate on the sector, recent reports have identified issues of transparency, complexity and disclosure when it comes to policies and consumer participation in the market. These reports have informed the policy debate generally as well as our compliance and enforcement activity and have both signalled and reinforced our interventions.
Current proceedings against Medibank and NIB illustrate our concerns, and there will be further intervention. In areas such as these, our work also clearly informs policy options for government. Where education, compliance and enforcement take us so far, advocacy can take the issues a step further.
These examples involving large industries and numerous interventions constitute a significant investment of ACCC effort and resources. But not all examples of strategic and integrated activity are the same size, with three recent examples demonstrating this.
Late last year we engaged with three large domestic airlines on the issue of pre-selection of optional extras such as seat selection or travel insurance. We had a real concern the ‘opt out’ model had seen a number of consumers unintentionally pay for ‘pre-ticked’ extras. We investigated and engaged with the airlines and, in the space of three days from first announcement, we reached a position with each that they would move away from the practice. This has now spread to other airlines.
Earlier this year we published a small report, only four pages, into issues we were concerned about in the supply of hearing aids in Australia. In particular, our concerns were that commission based sales incentives may be influencing poor sales practices, often involving vulnerable consumers. The concerns were sparked by early media references but were then supported by leads we received and responses to our public invitation for consumer and industry experiences. That public invitation saw around 100 responses that supported our interest and concern but didn’t point to a clear enforcement intervention.
Our report was the next step in drawing attention to the issues, and was packaged with advice to consumers. The strong public interest reinforced our messages. This interest also generated referrals for the ACCC to consider; we are now doing so.
A similar approach was taken late last year to addressing issues raised in relation to success claims used by IVF clinics. We reviewed website content from all major Australian IVF clinics and found that some made success-rate comparisons without adequate disclosure about, or qualification of, the nature of the data or graphics used to make the claim.
Several major IVF clinics made changes to claims published on their websites about success rates following our intervention. Our public disclosure of this work has generated further attention and informed consumers.
There is often conflicting criticism that comes from industry and practitioners to some of these approaches. Some call for more opportunity to engage and rectify issues identified by the ACCC; they criticise our willingness to take court action.
Others though criticise our approach to public references of concerns and resolution of matters without the benefit of a court ruling.
We are working hard to deliver an appropriate balance of a regulator willing and prepared to take strong enforcement action, and also a regulator that is willing to resolve or progress outcomes absent court action, but with the appropriate public reference that is necessary to deliver our compliance responsibilities.
Our court action against Ford can be contrasted with yesterday’s announcement in relation to Holden to further illustrate this approach.
Progress on cartels
Yesterday was an historic day in Australian legal history. For the first time in over one hundred years a cartelist was convicted, sentenced and fined for a breach of the criminal law. NYK, a Japanese shipping line with a substantial business in Australia, was fined $25 million.
Despite NYK pleading guilty and cooperating with the prosecution the fine imposed on NYK was also the second largest monetary sanction ever imposed under the Australian Competition and Consumer Act. Indeed, but for this cooperation, the Court made it clear the fine would have been $50 million.
NYK is the first CCA prosecution but another prosecution is already in Court. That case also involves a Japanese shipping company, K-line. A committal proceedings is listed in the Local Court in Sydney on 19 and 20 October.
Criminal cartel investigations
We have, over the last three years, built a substantial team of specialist criminal cartel investigators lead by Rob Ghali. This has been a huge investment by the ACCC. We now have a strong capacity to conduct careful and thorough criminal investigations.
Indeed, we have now provided briefs of evidence to the CDPP on a number of matters. We look forward to them assessing those matters and determining whether there is a basis for commencing prosecutions against any of the parties we have identified.
To put all this another way our criminal cartel machine is now built, and running at its appropriate capacity. You will now see its continuing output.
Although we do have major investigations that have been instigated without an immunity applicant, our cartel immunity and cooperation policy is critical to the continuing success of our criminal enforcement program. The majority of investigations involve an immunity applicant.
While we have regularly reviewed our immunity policy, given our recent experience with criminal cartel investigations it is timely that the policy is again considered, and I can announce that we are again conducting a review of that policy. The review will particularly focus on maximising the benefits and incentives for parties to provide full and continuing co-operation to our investigations and enforcement cases. A number of our counterpart agencies overseas are also looking at these issues, and we are working closely with them.
We will listen carefully to the views of practitioners about how we can adjust the policy to ensure it continues to achieve its goals.
Air New Zealand, Garuda and Flight Centre
Our work on criminal cartels has necessarily taken time to gain momentum, but as you know we have been active in tackling cartels and anti-competitive conduct for many years. This year has also seen two significant High Court judgments in favour of the ACCC; the Flight Centre case, and the Air Cargo case involving Air New Zealand Ltd (Air NZ) and PT Garuda Indonesia Ltd (Garuda).
The High Court found that price fixing agreements entered into between Air NZ, Garuda, and other international airlines, which occurred between 2002 and 2006, breached the cartel laws.
The ACCC took action against Air NZ in 2009 and Garuda in 2010 alleging they colluded with other airlines on charges for fuel, security, insurance surcharges, and a customs fee, for the carriage of air freight from origin ports in Hong Kong (both airlines), Singapore (Air NZ) and Indonesia (Garuda) to destination ports in Australia. Under the law as it then stood, the ACCC was required to establish that the conduct occurred in a ‘market in Australia’.
The High Court unanimously dismissed appeals by each airline and held that all aspects of the market, including that the demand for the services came from Australia, the presence of customers in Australia, and the marketing of the services to companies in Australia, all need to be considered in deciding whether a market is ‘in Australia’.
The matters against Air NZ and Garuda have been remitted to the Federal Court for a hearing as to relief, including penalty. We expect that following the determination of penalty in these cases well over $100 million in penalties will have been paid by 15 airlines.
In Flight Centre, as you will recall, the High Court found the relevant market to be for the sale of international airline tickets, and importantly also found that Flight Centre and the airlines competed in that market. This was found to be the case notwithstanding that, in respect of the ultimate sale of the ticket to a customer, Flight Centre became the agent for the airline in respect of that sale.
The ACCC pursued this matter because we were concerned that Flight Centre’s conduct in this case had the potential to have a significant impact upon the competitive process. At the core of the matter was the legal question of whether Flight Centre and the airlines were competitors within the meaning of the CCA. The ACCC of course had always maintained that as a matter of commercial common sense they were clearly competing with one another when selling flights to consumers.
This decision will provide important guidance for the future application of competition law in Australia to other situations where competing offers are made directly to consumers by both agents and their principals. Of particular note, it is likely to be relevant when businesses make online sales in competition with their agents.
The High Court judgment in the Air Cargo case and the judgments of the plurality in Flight Centre each showed the High Court’s engagement with the evidence about the way commerce actually works in each of the markets concerned. The Court was not persuaded by theoretical or technical arguments but looked to the reality of the impact of the conduct upon competition in each case. We welcome this commercially robust approach to the determination of competition cases.
Indeed, this is a great segue to my next topic.
Increasing focus on evidence in merger cases
A key feature of our markets in Australia is that they are concentrated or are likely to become concentrated as firms pursue efficiencies from scale. In some markets there may not be ‘room’ for more than a few ‘efficiently-sized’ firms given our population of just 24 million concentrated in the capital cities but separated by vast distances.
While merger parties naturally argue that in their case increasing market concentration is not problematic, the wider business community often takes the opposite view. In my personal experience the main criticism of the ACCC from the wider business community is that we allow too many mergers. This is particularly the case from businesses that purchase products from the merging firms. They see the consequences of any increase in market power from the merger first hand.
By contrast, I am sure that some of you think that we are too tough on mergers in Australia, particularly when it relates to a matter where your client does not get clearance or doesn’t get it as easily as you expected.
While the expected Harper reforms, if the legislation is passed, will bring about some significant changes in terms of merger and non-merger authorisations, the informal merger clearance process to date has been the predominant avenue for clearance. The business community and their advisers like the flexibility and level of engagement with the ACCC.
In the past financial year, 288 mergers were assessed by the ACCC of which 88% were pre-assessed on the basis that the SLC risk was low. On the whole these have been dealt with expeditiously with 72% completed within 15 business days reflecting our objective to deal with non-contentious matters efficiently. This left a relatively small number of 33 that were subject to a public review.
In my time as the Chair of the ACCC the mergers that progress to public review have become increasingly more complex and, in many cases, more contentious. This is partly because of our much higher rate of pre-assessment, but also due to our changing world.
Of these, there are some reviews where the competition concerns are clear; for example, there is significant horizontal aggregation in markets with high barriers to entry. Those mergers that present significant and clear competition concerns are more likely to be resolved either by the parties negotiating a remedy or making the decision to abandon the transaction.
In the last financial year, there were two mergers cleared subject to remedies and eight were withdrawn following the ACCC releasing a statement of issues.
It is the more marginal cases that present the greatest challenge for us and the ones that are most likely to end up being litigated. As you know, our track record on opposing mergers in the Tribunal and Court has not been good. However this is not a recent trend; significantly, there have been no mergers blocked by the Tribunal or the Federal Court for at least the last 20 years.
I will not touch on the Tabcorp application for judicial review which you would be aware is underway before the Full Federal Court. The reasons for the decision to seek judicial review were clearly outlined publicly at the time.
However I would like to reflect on our track record and the criticisms directed to the ACCC’s approach in these cases, in particular that these decisions to oppose were theoretical and lacking in commercial reality. Put in my terms, our approach has been that if the merger is considered likely to change the competitive dynamics such that the merged entity would have the ability and incentive post acquisition to raise price and lower service, we would expect that they would act rationally and take advantage of this.
It is clear, however, that our current approach to merger review and litigation preparation is not resulting in adequately probative and persuasive evidence for the Tribunal or Federal Court of the likely anti-competitive effects of the proposed acquisitions. This is a point many of you have also made.
We have heard the message.
A particular challenge, however, is to find and present evidence that tests the claimed commercial views presented by the merger parties' executives at the time of the hearing. The merging firms’ executives will understandably claim they will not have the ability or incentive post acquisition to act in a way that will have anti-competitive effects when our inquiries indicate the opposite.
Although the views of these executives are generally based on qualitative arguments as to why this is the case, often without quantitative analysis or even corporate strategy documents supporting these claims, they nevertheless seem to have been very persuasive in the recent merger cases.
We have carefully considered how to respond to the message from the Tribunal and Court. It has caused us to turn to our fellow agencies overseas, where litigation success has been not just achievable but common place, to consider ways to improve our approach. We have recently had the benefit of our mergers team spending time with a senior US DOJ litigator to better understand their litigation preparation methods.
Plus with Jeanne Pratt having recently joined us from the Canadian Competition Bureau on exchange with Rami Greiss, we are gaining an even deeper understanding of the approaches taken by the other agencies.
While there are obvious differences between our regime and other jurisdictions, we think there are some lessons we can learn.
Our relatively light approach to document production by comparison with overseas agencies means that we rely heavily on the witness statements of industry stakeholders, such as customers and competitors, and industry and economic experts as evidence establishing the competitive harm. We think we can learn from the DOJ's use of company documents that pre-date the merger proposal, as well as data. This is supplemented by testimony from industry participants as well as cross examination of the merger parties’ senior executives.
Without any disrespect to the merger party executives, it appears that US courts usually place little weight on testimony of merger party executives unless it is supported by documentation that pre-dates the merger proposal.
The US of course also has the benefit of a rebuttable presumption which I have previously commented on in other speeches.
That is, where a merger is likely to result in a significant increase in concentration in a market, US courts adopt a “rebuttable presumption” that the merger is likely to SLC and therefore should be prevented from proceeding absent evidence to the contrary.
This indicates to me that the US Courts more readily accept the conventional economic wisdom that mergers resulting in high levels of concentration in markets will usually reduce competition and cause harm to consumers and our economy unless there is some off-setting factor such as low barriers to entry or countervailing power on the part of customers.
Taking on board the message from the Tribunal and Court regarding the sufficiency of our evidence, what will this mean for you as practitioners when seeking ACCC clearance for a merger?
It means that, for that small number of contentious mergers, we are necessarily moving towards an approach where we are gathering substantially more evidence so that, if required, we can better assist the Tribunal or Court in any proceeding. This will, of course, also assist our decision making, as we have more information revealed through more documents and data. This will result in an increase in the number of s155 notices, involving examinations under oath and significant document requests.
This definitely increases the burden on the merger parties and the ACCC. In most cases, however, we expect to consult with the merger parties prior to issuing notices, to ensure that we get the evidence we need from the most probative sources in the most efficient way possible.
This consultative approach was outlined in the ACCC’s revised section 155 guidelines issued late last year. While I don’t think we are yet heading towards formal notices that are as broad-reaching as the US second requests, which typically involve the production of millions of documents and access to nearly all relevant data the merger parties have, this approach is a change from past practice.
It is also important to emphasise that issuing s155 notices is not an indication the ACCC will oppose the matter. Indeed, and most important, often the response to the notices will provide the evidence that gives the Commissioners the confidence that there are not significant competition issues.
The other significant impact is on timing. It takes time to consult on and issue notices, for parties to respond, and for us to review the materials.
I think you will now see some lengthening of our timelines on contentious mergers, but we will continue to have regard to commercial timing pressures. By comparison with overseas regulators the ACCC has traditionally been very quick to assess mergers. So even with an extension to our timelines arising from greater use of s155 notices it is unlikely that our timelines will approach those overseas.
I must add also that gaining more evidence is what many of you have called for, and I am sure you understand the implications for timing.
Furthermore, parties can choose in certain circumstances to cut through potential delays by offering satisfactory remedies to deal with competition concerns early.