The anti-competitive effects test that small business is hoping for

In describing the inevitability of a disastrous ending to the insertion of an effects test into the competition laws, it is wise to be mindful of George Orwell’s advice never to use a cliché that commonly appears in print. But he didn’t say not to mangle two clichés into one, so here goes: the effects test is the elephant in the trainwreck. A Coalition government, knowing the effects test will not live up to the promises made to small business supporters, will amend it when it fails to protect them from competition. But it will take a decade for this trainwreck to come to its screeching end.

In lobbying for an effects test, small business organisations have sought to protect their members from ‘unfair competition’ from large rivals. Competition is rarely fair, knocking out hardworking business owners who lack the technology, logistical support or cost-reducing scale of bigger businesses. Since some small businesses cannot make a living at these lower prices they understandably consider the competition ‘unfair’.

But the objective of competition laws should be to protect the competitive process not competitors. Indeed, the stated object of the Competition and Consumer Act 2010 is to enhance the welfare of Australians by promoting competition. While section 46 of the Act refers to protecting competitors, the courts have interpreted this to mean protecting competition, consistent with the Act’s object.

Small business organisations have welcomed the Turnbull Government’s effects test, which prohibits a corporation with substantial market power from engaging in conduct that has or is likely to have the effect of substantially lessening competition.

Yet chairman of the Australian Competition and Consumer Commission (ACCC), Rod Sims, has described the effects test as a distraction. The ACCC’s quest for amendments to section 46 is actually about another test – the so-called ‘take advantage’ limb. This requires the ACCC to prove that in engaging in anti-competitive conduct a big business with substantial market power has taken advantage of that power; that it has engaged in conduct that a small business in the same position would not be able to do.

When the ‘take-advantage’ limb was drafted into section 46 it was just a connecting sentence, saying that a firm with substantial market power couldn’t take advantage of that market power with the purpose of damaging a competitor or the competitive process. But the ‘take-advantage’ limb has developed a life of its own, the courts applying it in judgments against the ACCC.

The Turnbull government’s exposure draft removes the ‘take-advantage’ limb, which is mainly why the ACCC supports it. But the effects test, far from being the distraction the ACCC claims, will be the part of the amended section 46 that the Nationals and many Liberals will expect to do the heavy lifting (sorry, George). They demanded of Turnbull that he agree to an effects test, not that he agree to the removal of the ‘take-advantage’ limb.

The Nationals know the ACCC does not intend to apply the effects test to protect their small business constituents from competition, but have assured farmers the new law will help them in dealings with supermarkets. Section 46 is entirely irrelevant to such vertical relationships, which are covered by the unconscionable conduct provisions of the consumer law.

As for small business stores in country towns and cities, the ACCC has explained that it would act against exclusionary conduct where, for example, a supermarket bought up all the retail sites. But small businesses expect the effects test to prevent supermarkets from charging lower prices than theirs.

If the elephant in the room is the lack of candour between the Nationals and the small business community, the trainwreck starts when, after a couple of years, the ACCC has failed to meet the expectations of small business organisations. At that time, close to an election, small business organisations will demand section 46 be amended to prohibit conduct by firms with substantial market power that damages competitors – not just the competitive process.

The Nationals, claiming to have been misled by the ACCC, will do the bidding of small business organisations and insist on the amendments, leaving not only the elephant but also Australian consumers the casualties in the train wreck.