No need for ‘substantial’ markets for mergers?

Out of the blue, the Government today announced it proposed to change the definition of market for purposes of merger review. The current definition of market refers to a ‘substantial market for goods or services’ and the proposal involves removal of the word ‘substantial’.

In his press release, competition minister Craig Emerson claims that this change is intended to fulfill the Government’s election promise to deal with ‘creeping acquisitions’.  It is tough to see how it will do this.  Former chair of the ACCC’s Merger Review Committee, Prof Stephen King has made this observation in relation to the proposed change:

Markets are based on substitution. If properly defined, an economic market for merger analysis captures the relevant level of competition. A market might be nationwide or even international. Or it may simply cover a single town or even part of a town … The key issues are – what is the nature of competition and what will the merger or acquisition do to this competition. If the merger substantially lessens competition in a properly defined economic market then it will harm consumers and the economy. The merger should be opposed. Requiring that the market is also ‘substantial’ is redundant. So if Durie’s speculation is correct, the government will be getting rid of a redundant but confusing adjective!

It is also unclear how this proposal fits with other proposals directed toward creeping acquisitions, including the Government’s own Creeping Acquisition Discussion Paper No 2 (for which submissions closed on 10 July 2009 and the proposed ‘Richmond Amendment‘, currently under review in the Senate.  The press release is light on detail in this respect.

The Conduct Code Agreement 1995 now requires the Government to consult with state and territory governments in relation to the proposed amendments (full details of which are not yet available) before their implementation.  Hopefully more details will emerge in the coming weeks.

The papers

News of the proposal was reported in the following papers this morning:

• David Crowe, ‘ACCC gets tough on creeping giants’ Australian Fin Review, p 5.
• John Durie, ‘Competition Minister takes aim at creep for control’, The Australian
• John Durie, ‘Craig Emerson plans changes to the law to stop creeping takeovers’, The Australian
  Some notes on this item: it claims that ‘markets such as the US and the EC rely more on turnover tests than market share in determining whether a deal should be stopped.’ Actually, no they don’t.  The US and EU (we’re not allowed to call it the European Community anymore, post Lisbon Treaty) rely on turnover tests to determine whether parties MUST notify their mergers to relevant authorities; they impose a mandatory pre-merger notification obligation on mergers meeting certain threshold and jurisdictional tests.  Turnover itself is not part of the competition assessment in any of those jurisdictions.  In addition, the change to notification thresholds in the US from approx $65m to $63m (referred to in the article as evidence of the US ‘widening its net’) reflects an annual adjustment designed to account for changing levels of gross national product – it is designed to keep the ‘net’ steady, rather than to increase or reduce it.

Market definition in Australia

Earlier this month (on 2 October 2009) the Full Federal Court dismissed Singapore Airlines’ appeal against a decision of Justice Middleton which challenged ACCC investigation powers under s 155. A key issue was whether ‘routes between two points wholly outside Australia could be within a “market in Australia”.’ In rejecting the appeal, the Full Federal Court held that ‘prices fixed for legs of a journey which take place wholly outside Australia may ultimately affect competition in a market in Australia’. ACCC Chairman, Mr Graeme Samuel, noted that the decision was crucial in that it

‘confirms that the Act is able to reach cartels formed outside Australia affecting Australians. The Full Federal Court has also confirmed that the ACCC is fully able to investigate conduct occurring overseas. Here we are investigating a worldwide market for air cargo services.’  See ACCC Press Release.

The decision is a positive one. The definition of market in s 4E of the Trade Practices Act as one within Australia is artificial and distorting in cases where the reality is that the market is global or, at least, transnational.  It is not a problem that appears to arise in other jurisdictions which more sensibly focus on local effect on competition without the artificial market restriction.  Confirmation that a global market might be classified as a ‘market in Australia’, even where relevant conduct occurs entirely outside Australia is a positive step – and consistent with foreign approaches to the application of competition laws to conduct occurring abroad – but it is not a complete panacea for the problems generated by our restrictive market definition.

The last time this was officially reviewed was during the course of the Dawson Review of the competition law provisions of the Act which addressed it very briefly in the context of mergers (in which the definition of market is defined as a substantial market for goods or services in Australia, a State, a Territory or a Region of Australia: s 50(6)).  The Report concluded that this definition is not too restrictive and that it allows regard to be paid to foreign competition.  However it entirely glossed over the point that a market which is transnational cannot be.  I briefly discussed this in ‘The Dawson Report and Merger Regulation’ (2003) 8 Deakin Law Review (pages 59-61).   See also submission by Dr Maureen Brunt – ‘Market Definition in the Trade Practices Act: the Challenge of Globalization’.

The issue has arisen in a number of cases recently, with judges taking vastly different approaches to the meaning of market in the TPA.  The importance of defining market in a realistic, rather than artificial, way has increased with the globalisation of markets and will continue to do so as more conduct occurring outside our territorial shores impacts on our domestic competitive environment.  It is time to revisit the issue of market definition for purposes of the competition law provisions of the TPA.