Caltex proposes acquisition of Mobil service station sites

Caltex has announced that it has entered into an agreement to acquire 302 Mobil service station sites. The media is buzzing and politicians are having a field day, with usual suspects Barnaby Joyce (‘It’s going to reduce competition. This is ridiculous. We keep on centralising back our market place, we keep losing an opportunity for the Australian family to go into the business‘) and Nick Xenephon (”It will put motorists literally under the pump” and ”It’s anyone’s guess how high prices could go up, but several cents a litre wouldn’t be out of the question” (has he made these figures up?)) hitting the airways.

Caltex claims the acquisition will increase retail petrol price competition with Woolworths and Coles.  Most consumers and consumer advocates believe the opposite is true. Former ACCC Chairman, Allan Fels, has weighed into the debate suggesting that this acquisition may be ‘one too many’ in the retail petrol market (of course Fels has an almost notorious history with Caltex as a result of the infamous Caltex raid to investigate possible price-fixing claims several years ago).

Of course the ACCC, not the politicians or popular media commentators, will determine whether or not the merger will substantially lessen competition with the law or, if challenged, ultimately the courts. The parties have not yet made a clearance submission to the ACCC but have indicated they will do so and the ACCC will commence informal review once they are received.  It will almost certainly involve an extended inquiry and it will be interesting to watch the drama unfold …

Senate to resume debate on Criminal Cartel Bill (postponed)

The Senate is due to continue second reading debate on the Criminal Cartel Bill today (of course they do seem to be running behind schedule)  – see Senate Dynamic Red for Progress.

See also Bill Home Page.

UPDATE: As predicted, the Senate adjourned before debate resumed on the cartel bill – it has been re-listed for debate today (Thursday 14 May)

ANOTHER UPDATE: Although it appeared on the Senate Order of Business until about 1.30pm, the Cartel Bill debate has now been removed from the Senate Order of Business for today.  The Senate next sits on 15 June.

US DOJ – ‘Vigorous Antitrust Enforcement in this Challenging Era’

Following her withdrawal of the single firm conduct report, Christine Varney (Assistant AG, Antitrust Division, DOJ), yesterday made a speech entitled ‘Vigorous Antitrust Enforcement in this Challenging Era‘.  The speech, in part, draws from historical examples of economic distress and concludes that there are two key lessons to learn:

‘First, there is no adequate substitute for a competitive market, particularly during times of economic distress. Second, vigorous antitrust enforcement must play a significant role in the Government’s response to economic crises to ensure that markets remain competitive.’

She goes on to criticise the theory, which has dominated antitrust enforcement in the US in the last decade, that markets will ‘self-police’ and ‘self-correct’, observing that this self-correction has not occurred and instead we see ‘numerous markets distorted’.  She states that the DOJ will take a much greater enforcement role in the future, particularly by ensuring vigorous enforcement action under Section 2 of the Sherman Act as part of the Antitrust Divisions response to the current market conditions.  Although most of the speech is devoted to Section 2, Varney notes that continued ‘criminal and civil enforcement under Section 1 of the Sherman Act will also be an important part of the Antitrust Division’s response to the distressed economy’.  She also notes the need for increased cooperation between the DOJ(AD) and the FTC and the need to maintain cooperation with foreign antitrust agencies.

Varney concludes by saying that: ‘Antitrust must be among the frontline issues in the Government’s broader response to the distressed conomy.  Antitrust authorities … will therefore need to be prepared to take action.  The Antitrust Division will be ready to take a lead role in this effort.’

US DOJ Philosophy Shift on Single Firm Conduct

The new Assistant Attorney General in charge of the DOJ’s Antitrust Division, Christine A Varney, has announced withdrawal of the Department’s 2008 Report ‘Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act‘, stating it no longer represents DOJ(AD) Policy.  The Report, Varney claimed, ‘raised too many hurdles to government antitrust enforcement and favored extreme caution and the development of safe harbors for certain conduct within the reach of Section 2’.

This announcement signals a ‘shift in philosophy’ at the DOJ and clearly announces the AG’s intent to aggressively pursue ‘cases where monopolists try to use their dominance in the marketplace to stifle competition and harm consumers’.

In particular, Varney noted that the theory that underpinned the approach of the former administration, that monopoly markets ‘are generally self-correcting’ had been upset by recent developments in the market which ‘make it clear that we can no longer rely upon the marketplace alone to ensure that competition and consumers will be protected’.

Creeping towards creepy ‘creeping acquisition’ laws

The government today released a second discussion paper relating to the introduction of creeping acquisition laws in Australia.  It is disappointing to say the least.  In the first discussion paper the government put forward two possible models; the ‘aggregation model’ (which would be consistent with the policy underlying our current merger prohibition) and the ‘substantial market power model’ (SMP) which, in prohibiting mergers by firms having substantial market power which would have ANY effect on competition, would represent a serious departure from existing merger policy.

Unfortunately, the second discussion paper retains an emphasis on a market power model.  It suggests abandoning the reference to ‘any lessening of competition’ (although not because this is inconsistent with current economic or competition theory, but rather because it might result in ‘ambiguity and risk reinterpretation by the Courts of the “substantial lessening of competition” test in the existing prohibtion in section 50’ – why this would be the case remains a mystery) and replacing it with a model built around increases in market power (are we to return to a partial dominance test for mergers in Australia?).  The suggested format of the prohibition is set out in para 12 as follows:

(1) A corporation that has a substantial degree of power in a market must not directly or indirectly:

(a) acquire share in the capital of a body corporate; or

(b) acquire any assets of a person;

if the acquisition would have the effect, or be likely to have the effect, of enhancing that corporation’s substantial market power in that market.’

In effect, this is not significantly different from the first flawed proposal to ban all mergers by corporations having substantial market power where the merger would have any effect on competition.  At least where the merger is horizontal, any firm with market power that mergers is likely to enhance their market power (and simultaneously lessen competition) even if only to an insignificant level.  I have previously outlined the problems with this approach.

Another approach suggested was to allow the Minister to unilaterally ‘declare’ a corporation or product/service sector where he/she has concerns about potental harm from creeping acquisitions and to give the Minister power to require notification of certain acquisitions by declared corporations etc (there is currently no mandatory notification regime for mergers in Australia).  The test set out above would then apply to those notified transaction.

The discussion paper at least acknowledges there is a ‘fine balance to be struck’ when regulating creeping acquisitions and seeks views on:

1. The potential unintended consequences of a creeping acquisitions law that targets enhancements to a corporation’s substantial market power …

2. The potential unintended consequences of a creeping acquisitions law that targets ‘declared’ corporations or product/service markets.

3. how many potential unintended consequences may be addressed or minimised, particularly in the design of the law

4. the costs and benefits associated with the option of including a mandatory notification requirement, using thresholds unique to each particular declaration, determined by the Minister.

Two questions are asked (each of which contain multiple questions … who wrote this thing?): (1) What are your views on the two regulatory options mentioned above? What potential unintended consequences need to be considered? How might these unintended consequences be addressed?  (2) Are there alternative regulatory or non-regulatory options …? How might these work in practice? what are the costs and benefits?

The models suggested are seriously flawed; both are simply adaptations of the SMP model.  The more appropriate (though not perfect) aggregation model appears to have been dismissed without much serious consideration – the discussion paper says only that the ‘aggregation model was deemed impractical by many’ without further explanation – although the focus seems to have been on the ACCC’s submission which claimed this approach might prove unworkable in practice.

In releasing this discussion paper (which comes 7 months after submissions for the first discussion paper closed), Chris Bowen stated ‘The release of this discussion paper reflects the Government’s election commitment to implement sensible reform in relation to creeping acquisitions.’  Unfortunately there is little that  is ‘sensible’ about this discussion paper. Chris Bowen’s Press Release also defines creeping acquisitions as: ‘the acquisition of a number of individual assets or businesses over time that may collectively raise competition concerns, but when considered in isolation, are unlikely to be captured by the existing mergers and acquisitions test under section 50 …’.  I can only suggest the Government reflect on their own definition when formulating an appropriate test – the SMP test is far broader than the conduct referred to in this definition.

Submissions on this discussion paper are due by 12 June. It seems I have some writing to do …

Farewell to the Federal Magistrates Court

The Federal Magistrates Court will be scrapped in a bid to save time and money.  All federal matters will now be heard by the Federal Court. Why is this relevant to competition law?  Late last year the Government, in its infinite wisdom, decided to give the Federal Magistrates Court the power to hear matters relating to s 46 (misuse of market power) where brought by a corporation or private person (see Trade Practices Legislation Amendment Act 2008); in all other competition law matters the Federal Court has exclusive jurisdiction.

Misuse of market power is, of course, one of the most complex areas of competition law and policy and, although the Government claimed this amendment was designed to make access to ‘justice’ quicker and easier, it was always doomed to failure.  Leaving aside the fact that the Federal Magistrates Court has no expertise in complex s 46 (or any competition law) matters and that by their very nature (requiring economic evidence etc) these matters are costly pursuits, the abolition of the FMC has been contemplated for some time.  No s 46 case has been brought under s 46 in the FMC and never will be.

Ironically, while the conferral of power on the FMC for certain s 46 cases was said to be needed to provide greater access to justice for small business, the AG now claims abolishing the Court will provide greater access to justice.

The newly structured Federal Court will, however, operate in two tiers, with appeals ‘and other complex work’ generally being heard in the first tier by Federal Court judges and less complex matters being heard at the second tier, which will be operated by the Magistrates currently working in the Federal Magistrates Court (who will still be called Magistrates).  It is unclear whether competition law matters will be capable of being heard at both tiers or (more appropriately) just in the first tier.

See Press Release from the Attorney General.

Follow up – magistrates may thwart attempts to completely abolish the Court