Unilateral conduct: The historic and international context

Unilateral conductThe historical and international context

Dr Martyn TaylorPartner

The famous 1904 Standard Oil octopus with a grip on everything within its reach

November 2013

Monopolies as restraint on individual liberty

• Initially, the concerns involved unwarranted intervention by the State…

• Historical concerns arose in the era of Queen Elizabeth I, in which crown grants of monopolies were much abused.

• Darcy v Allen in 1603 – playing card monopoly granted by the Queen was struck down for violating the Magna Carta of 1215.

• Court reasoned the evils of monopoly were (1) price increases; (2) quality decreases; and (3) tendency for monopolists to be lazy.

• In 1624, the English Parliament enacted a Statute of Monopolies to outlaw monopoly grants by the crown.

• Key policy mischief in the 1600s: Certain business practices, such as monopolies, could be an unreasonable restraint on the individual liberty of tradespeople to carry on their livelihoods.

Unilateral conduct – The historic and international context2

Rise of the giant industrial conglomerates


• Second phase of industrial revolution (1840-1870) focussed on the mass production of steel, use of machinery and rollout of railways.

• From 1840s, companies could be incorporated privately without legislation. By the 1890s, we had giant industrial corporations, including US Steel, General Electric and Standard Oil.

• Public concern arose over ‘robber barons’ (businessmen who used exploitative practices to amass wealth) resulted in a dozen US states enacting intra-state antitrust legislation before 1890.

• By 1888, public discontent in the United States lead to antitrust becoming a federal election issue in the presidential elections.

• Senator Sherman of the republican party was particularly aggrieved that his presidential nomination had been blocked by the powerful Diamond Match Company (a near-monopoly formed by merging 12 match manufacturing companies throughout the US).

‘Fair’ vs ‘unfair’ achievement of power


• By 1890, significant public concerns arose in the US over the growing power and political influence of large industrial corporations - as well as the concentration of wealth and power in a few individuals.

• Also, public and political recognition that corporations could manipulate resources to ‘unfairly’ harm their competitors to achieve such power.

• Section 2 of Sherman Antitrust Act of 1890 prohibited “monopolisation”. However, debate on the Bill at the time drew a clear distinction between ‘fair’ and ‘unfair’ achievement of monopoly power.

• Senator Hoar (1890): a person who by superior skill wins all of the business is not a monopolist; but if they do so by preventing others from competing then they are a monopolist.

• Key elements: (1) possession of monopoly power;

(2) intentional acquisition or maintenance of that monopoly power through unfair means (i.e., not by merit).

Australia’s version of the Sherman Act


• Australian Federation from 1 Jan 1901 under the Constitution Act 1900. At that time, farmers and small businesses expressed concern at increasing concentration of economic power in large corporations.

• Australian Industries Preservation Act 1906 (Cth) - sections 7 and 8 of that Act mirrored section 2 of the Sherman Act of 1890.

• Included: Imprisonment for one year. Private actions for treble damages.

• Constitutional challenge in Huddart Parker. High Court restricted application of corporations power. Prohibition limited to inter-State trade.

• Various States subsequently prohibited monopolisation on an intra-State basis: NSW (1923), SA (1924), QLD (1948).

“Any corporation, which monopolizes… any part of trade or commerce... with intent to control, to the detriment of the public, the supply or price of any service, merchandise, or commodity, is guilty of an offence.”

…and subsequent refinements to 1965


“Any person, who monopolises… any part of trade or commerce… among the Stateswithin the Commonwealth with intent to control, to the detriment of the public, the supply or price of any service, merchandise, or commodity, is guilty of an indictable offence.”

• Comptroller General could require production of documents (1908)

• Civil proceedings for recovery of penalties in a court without a jury (1909)

• Constitutional limitation to inter-State and foreign trade (1909)

• Penalties expressed as aggregating on a daily basis (1910)

• Removal of requirements of intention and detriment to the public (1910)

“Any person who monopolises… any part of trade or commerce… among the States… is guilty of an indictable offence.”

We tried a more prescriptive approach…


• UK enacted its Restrictive Trade Practices Act in 1956. A 1963 report recommended that Australia update its laws given high market concentration in sectors such as banking, chemicals, glass, and steel.

• Restrictive Trade Practices Act 1965 (Cth) sought to define monopolisation:


Genesis of the market power threshold

Market power threshold


Genesis of the taking advantage test

Concept of taking advantage


Genesis of the purpose test

Concept of an anti-competitive purpose

…and ultimately section 46 was enacted


• Further High Court constitutional challenge in 1971 in the Strickland case.

• High Court overruled Huddart Parker and gave the Commonwealth greater scope to legislate within the scope of the corporations power.

• The Restrictive Trade Practices Act 1971 (Cth) was enacted.

• Consolidated legislation was then drafted within the scope of the corporations power in the form of the Trade Practices Bill.

• Explanatory Memorandum to the Bill:

• Ultimately enacted as the Trade Practices Act 1974 (Cth).

“The bill prohibits monopolisation.”

“Clause 46 prohibits conduct that a monopolist… may engage in against competitors”.

• Some have described achieving global convergence in the regulation of unilateral conduct as attempting “the Mount Everest of antitrust”.

• The International Competition Network (ICN) established a Unilateral Conduct Working Group in 2006 to identify global best practice.

• Has the ICN conquered Everest ?

Fast forward to 2013 – global best practice


Market power thresholds – high degree of consensus


• The consensus is that unilateral conduct provisions should adopt a concept of dominance or substantial market power (SMP) as a filter for regulatory intervention.

• Implicitly, firms without dominance/SMP are already subject to the disciplines of market competition.

Recommendations:

• Agencies should use a sound analytical framework firmly grounded in economic principles in determining whether dominance/SMP exists.

• A firm should not be found to possess dominance/SMP without a comprehensive consideration of factors affecting competitive conditions in the market under investigation.

Differentiating legitimate and illegitimate competition


• The consensus is that unilateral conduct laws address specific conduct and its anticompetitive effects, rather than the mere possession of dominance/SMP or its creation through competition on the merits.

• The consensus is that the goal of enforcement is to identify and act against conduct that is anticompetitive.

• However… different jurisdictions adopt difficult analytical approaches in distinguishing between pro- and anti-competitive unilateral conduct.

• Most jurisdictions agree that exclusionary conduct should be illegal, namely conduct that supresses competition.

• Disagreement arises as to whether exploitative conduct should also be illegal, namely using market power to price discriminate or overcharge.

• Different jurisdictions also have different tests and methodologies for identifying whether certain types of exclusionary conduct are illegal (e.g., refusals to supply, raising rival’s costs, predatory pricing).

We may still have some way to go…


Possible results of tinkering with section 46


Amendment Consequence Result

No requirement for a proscribed anti-competitive purpose in s46

Unintended breachesImmaterial breaches

Deter competitive conduct

No requirement for taking advantage in s46

Legitimate competition may breach s46

Deter competitive conduct

Purpose or effect of damaging competitors*

Unintended breaches Deter competitive conduct

Effect of substantially lessening competition (effects test – 151AJ)

Unintended breaches Deter competitive conduct

Defence of objective justification (EU approach)

No change – arguably already covered by taking advantage

Confusion

Sole counterfactual test for taking advantage (NZ approach)

Inflexible and artificialInsufficient judicial discretion

Permit anti-competitive conduct

* To some extent can already infer purpose from effect

Insights and conclusions


1. Unilateral conduct provisions have traditionally been driven by public and political fears of abuses by big business and unfair conduct.

2. However, courts have also recognised efficiency reasons for not tolerating monopolies. The first reported case in 1603 did so.

3. The central issue has always been differentiating between legitimate and illegitimate competitive conduct, even in 1890.

4. Australia experimented with both the US ‘simple’ approach and the UK ‘prescriptive’ approach, but ultimately drafted a unique hybrid solution.

5. We currently have an international consensus that unilateral conduct provisions should only apply to firms with threshold market power.

6. We do not yet have a clear international consensus on the analytical means to differentiate between legitimate and illegitimate competitive conduct, but this work is currently occurring.

7. Tinkering with section 46 does involve some risks.

18 Unilateral conduct – The historic and international context

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Unilateral conduct: The historic and international context

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