In brief 9 min read
In his recent address to the RBB Economics Forum, ACCC Chairman Rod Sims identified a number of key focus areas for the regulator. The Chairman offered valuable insight into potential future developments in the competition and consumer law space, including the ACCC's approach to mergers, the possible introduction of a prohibition against unfair trading practices, and further scrutiny of the agricultural sector. We explore the impact of the ACCC's agenda on the food and beverage sector.
The Chairman's comments provide useful insight into the ACCC's areas of focus, and its position on emerging competition and consumer law issues. In particular, the address signals:
- a continued tougher stance on mergers. Businesses can expect the ACCC to carefully analyse proposed mergers in already concentrated markets, with a heavy focus on the likely impact of the proposed merger on commercial incentives;
- the potential introduction of a prohibition against unfair trading practices; and
- increased investigation into, and regulation of, the agricultural sector, particularly in markets where there is a lack of price transparency and unequal bargaining power.
Concerns about the under-enforcement of merger laws
Following recent difficulties in proving that some mergers would breach Australian competition laws, the ACCC has expressed concerns that merger law in Australia is not meeting its objective, which is to prevent anti-competitive acquisitions before they occur.
In his speech, the Chairman communicated the ACCC's two main concerns regarding the current state of Australian merger law.
- Greater recognition of anti-competitive mergers
First, the Chairman said there should be greater recognition of the significant economic damage that can result from anti-competitive mergers. He focused on the competition risks that can arise from mergers that significantly increase concentration in markets that are already highly concentrated, and mergers that provide a competitor with monopoly control over an essential input. While factors such as closeness of competition, market shares and the likelihood of new entry are important considerations in the merger clearance process, the Chairman said that the inquiry should start by understanding what competition will be lost from the merger.
- Insufficient weight placed on commercial incentives
Second, the Chairman expressed concern that insufficient weight is placed on the commercial incentives that the merger is likely to affect. Arguments based on commercial incentives, which the ACCC often poses in contested merger cases, have been criticised for being too theoretical and not commercially realistic. The Chairman noted that courts are instead placing greater weight on the testimony of executives of merged firms, which may be influenced by their focus on getting the deal through.
The ACCC has raised a number of options for consideration, which are informed by overseas approaches. These include changing the onus of proof, introducing structural presumptions about certain mergers, or even the introduction of a more formal merger clearance regime.
Recent merger assessments in the food law sector
B&J City Kitchen's proposed acquisition of Jewel Fine Foods
On 5 September 2019, the ACCC opposed the proposed acquisition of Jewel Fine Foods by B&J Kitchen. B&J City Kitchen and Jewel Fine Foods are the two largest producers of chilled ready meals in Australia.
One of the ACCC's key concerns was that the proposed acquisition would combine the two largest suppliers in the chilled ready meals manufacturing market. the ACCC considered that the level of constraint currently imposed by alternative suppliers is relatively low because these suppliers are untested in their ability to produce the volume, range and quality, and supply at prices the major retailers require. For those reasons, the ACCC considered that the proposed merger was likely to substantially reduce competition.
This decision illustrates the potential difficulties in obtaining clearance for mergers in already concentrated markets.
Saputo Dairy's proposed acquisition of Lion Dairy and Drinks' cheese business
On 26 September 2019, the ACCC announced it would not oppose Saputo Dairy Australia's proposed acquisition of Lion Dairy & Drinks' Tasmanian based cheese business. The focus of the ACCC's assessment was the impact of the proposed acquisition on the market for the acquisition of raw milk in Tasmania.
In its assessment, the ACCC raised preliminary concerns that the proposed merger would combine the processing plants of the second and third biggest raw milk buyers in Tasmania. It was also concerned that the proposed acquisition could decrease the intensity of competition for raw milk, resulting in lower farmgate milk prices or less advantageous terms of supply being offered to farmers.
Ultimately, however, the ACCC concluded that the proposed acquisition was not likely to substantially lessen competition. This was because Saputo and Lion were not considered close competitors. Furthermore, the ACCC determined that post-acquisition Saputo was likely to have the incentive to offer competitive terms to maintain raw milk intake and production in Tasmania. Market feedback informed this conclusion, with most farmers indicating that they did not have strong concerns about the transaction.
In its media release, the ACCC made a comment about the significant degree of concentration in the Tasmanian dairy sector. It stated that '[a]ny further consolidation of dairy processors would cause significant concern', illustrating the ACCC's focus on existing levels of market concentration in merger assessments.
Concerns about the effectiveness of existing consumer laws
The Chairman also reinforced the ACCC's calls to introduce a prohibition against 'unfair trading practices' that cause, or are likely to cause, significant commercial harm to consumers or small businesses.
The ACCC recommended the introduction of an 'unfair trading practices' prohibition in the Digital Platforms Inquiry final report and the Customer Loyalty Schemes final report. These reports found that there are a range of practices that are significantly detrimental to consumers, but may not neatly fit within the existing consumer laws. There are existing provisions in the Australian Consumer Law that protect consumers and/or businesses against unconscionable conduct, misleading or deceptive conduct, and unfair contract terms. The ACCC argues, however, that these prohibitions are limited in their ability to prevent harsh and unfair conduct. Eg:
- the prohibition against unconscionable conduct involves a high threshold test, therefore making it very difficult to enforce. On this point, the Chairman pointed to the decision in ACCC v Medibank. In that case, the ACCC alleged that Medibank engaged in unconscionable conduct by failing to notify its members of its decision to limit benefits for in-hospital pathology and radiology services, despite representing in a number of its communication and marketing materials that it would cover these services. The court found that Medibank had acted 'unfairly', but ultimately concluded that this was not enough to establish statutory unconscionability.
- the prohibition against unfair contract terms is limited to particular terms of regulated contracts. Furthermore, there is no penalty associated with a breach of the unfair contract terms regime; the terms are simply considered void and unenforceable.
In the light of the ACCC's consistent push for reform, the introduction of a prohibition against 'unfair trading practices' could be on the cards in the near future. This would follow a number of overseas jurisdictions, including the EU, UK, and US, which already have specific protections against unfair trading practices.
The ACCC has, however, recognised that such a prohibition would need to be sufficiently defined and targeted, with appropriate legal safeguards and guidance, so as to minimise uncertainty for businesses. In the final report for the Digital Platforms Inquiry, the ACCC indicated that its recommended reforms would not be 'an unrestrained prohibition on all unfair conduct.' Similarly, in his speech, the Chairman seemed to suggest that the proposed prohibition would not catch conduct that is deemed reasonably necessary to protect the firm's own interests.
Concerns about protections in the agricultural sector
The ACCC has expressed ongoing concerns about the economic consequences that can flow from the lack of price transparency and imbalance in bargaining power in markets. In his speech, the Chairman focused on how these issues can arise in the agricultural sector.
He was particularly concerned about the economic costs being imposed on farmers. The Chairman noted that farmers in most commodity sectors often have little bargaining power, limited access to proper dispute resolution, and limited protection against unfair contract terms or unfair practices in arrangements with processors. He indicated that this can expose farmers to unfair and commercially damaging practices: eg arrangements that force them to bear risks they cannot control.
The Chairman foreshadowed that more regulation may be on the horizon. This could include the introduction of mandatory industry codes and increased enforcement against unfair contract terms.
Recent inquiries in the agricultural sector
Wine Grape Market Study
In September 2019, the ACCC released its final report on the Wine Grape Market Study. The study examined competition and contracting dynamics in wine grape supply chains, focusing on three warm climate grape growing regions: Murray Valley, Riverina and Riverland.
The ACCC identified imbalances in bargaining power and information asymmetry between wine grape growers and large winemakers. It expressed concern about market practices that took advantage of these characteristics.
While Australia's competition and consumer laws are capable of addressing isolated behaviours that harm competition and efficiency in the industry, the ACCC noted that taking enforcement action under these laws is often not the most effective way to address these behaviours. Such behaviours may be better addressed through an industry code of conduct that provides mechanisms to address code breaches. There is currently a voluntary code of conduct – the Australian Wine Industry Code of Conduct – which attempts to address some of the issues identified in the market study. The ACCC has said that in the absence of major reform by the industry, it would consider making the Code mandatory. The ACCC is also investigating a range of contract terms between winemakers and winegrowers it believes may be unfair.
Similar findings were made in the ACCC's 2018 inquiry into the dairy industry, which examined the state of competition in the dairy supply chain in Australia. The ACCC found that there was an imbalance in bargaining power at each level of the dairy supply chain, as well as information asymmetry in farmer–processor relationships.
Similar to the recommendations made in the Wine Grape Market Study, the ACCC recommended that a mandatory industry code be established for the dairy industry – this recommendation has now been adopted. The ACCC has also been working with dairy processors to ensure that the terms offered to farmers comply with the unfair contract terms regime.