What the effects test means for business

Published On 17/03/2016 | By Jessica Waters | Enforcement, Reform

On 16 March 2016, the Federal Government announced that it supports “in full” the changes to section 46 recommended by the Harper Review Panel.

See our alert which explains the details here.


The changes mean that section 46 will be amended to:

  • remove the ‘take advantage’ element;
  • replace the current purpose test with a test of whether the conduct has the ‘purpose, effect or likely effect of substantially lessening competition’; and
  • introduce mandatory factors to which a court must have regard in determining whether there has been a breach.

While the precise wording has not been released, we expect that it will be along the lines of “a corporation that has a substantial degree of power in a market shall not engage in conduct that has the purpose, or would have or be likely to have the effect, of substantially lessening competition in that or any other market.”

So what?

This will be a major change for businesses and means they will be subject to a much lower bar than is currently the case under section 46.

Unlike the current test, the new prohibition will not have the ‘take advantage’ requirement, which has been a very important element of the provision in the past. Previously, a business would have been able to be confident that it did not risk a breach of section 46 where its unilateral conduct was a form of rational business conduct that would be engaged in by companies without market power. Once the ‘take advantage’ limb is removed, businesses can no longer rely on this as a protection.

A business will need to assess the likely effects of its day to day unilateral business conduct on competition, even when acting for legitimate business reasons, and even where others in the market are or could do the same thing. Examples of conduct that are acceptable under the current provision, but that may be problematic under the new provision include:

  • price matching – currently, any price matching strategy by a business is unlikely to involve a breach of section 46, because competitors without market power can and do engage in similar conduct. With the proposed change, businesses would need to instead consider the competitive effects of any price matching strategy, and tread very cautiously if they could harm competitors or make it more difficult for them to compete.
  • leveraging into new market segments – currently, a business may be relatively confident that using its existing strength or capabilities in core markets to enter or grow in new market segments is not a breach of section 46, where other competitors are using or able to use their core capabilities in similar ways. With the proposed change, a business would need to instead consider the competitive effects of any such levering or entry strategies.

Now what?

The Government has said that it will consult on Exposure Draft legislation before introducing it to Parliament later in 2016. Given that both the Coalition and the Greens support the change, we think it is likely to be passed by Parliament with its current composition, notwithstanding opposition from the Labor party. However, what is obviously unknown is the timing of the election and the introduction of any amending Bill.

The Exposure Draft process will give industry and business an opportunity to comment on aspects such as the mandatory factors, but it will not be an opportunity to argue against the policy change itself.

Businesses and their legal teams should seek to educate their commercial personnel as to the implications of this change, and the types of conduct that may now be captured and that will need to be subject to additional legal review and advice.

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About The Author

Jessica Waters is a Senior Associate in the Competition Law and Regulatory Group at King & Wood Mallesons where she advises on a range of competition and regulatory issues. Jessica is also an ad hoc sports journalist and her travels have led her to practice competition and EU law in London and Brussels, with fleeting stints in Canada and the USA.

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