Will Rod Sims’ tougher approach pay off for the ACCC?

The ACCC has pledged to take more businesses to court over anti-competitive behaviour. Hacklock

When the appointment of Rod Sims as chairman of the competition watchdog was announced earlier this year, there was disquiet among some competition lawyers.

Would Sims, an economist, readily appreciate the value of litigation as a means of enforcing Australia’s competition laws and ultimately as a strategy for delivering welfare outcomes for consumers?

Sims addressed this question recently in a speech to one of the largest gatherings of competition lawyers in the country.

His answer was a resounding “yes”.

Not only did Sims express the view that the Australian Competition and Consumer Commission (ACCC) should litigate more frequently, but went further to state that it should take more cases where the outcome is unpredictable and ACCC success less assured.

The ACCC, he pointed out, has enjoyed a success rate in litigation at first instance of almost 100%. That rate is considerably higher than the commission’s international counterparts and suggests that the agency has been “too risk averse”.

The ACCC’s litigation strategy, Sims argued, should extend to testing the law in areas where its scope and application are uncertain.

It is difficult to imagine a message more likely to excite an audience of competition lawyers.

Not only does it promise an increased flow of the considerable legal fees associated with advising and defending clients subject to ACCC investigations and proceedings, but also a change in the win-loss ratio in favour of their clients.

Sims’ statements herald a potentially significant shift in enforcement thinking at the top of the ACCC.

The preference of his predecessor, Graeme Samuel AC, was to avoid litigation where it was seen as necessary – as in the majority of cartel cases, for example.

Samuel’s preference was for the negotiation of settlements that would see respondents rewarded for admitting liability by a significant discount in penalty.

There were at least two major effects of this approach. First, as identified by Sims, there are provisions in the law on which there is little if any jurisprudence.

Section 46 of the Competition and Consumer Act, singled out in Sims’ speech, is a case in point. This complex, and in some respects controversial, prohibition on misuse of market power has been frequently amended.

Many of the amendments, particularly those relating to so-called “predatory pricing”, were seen as having far-reaching implications for Australian businesses when they were enacted.

Yet case law that may have assisted businesses and advisors in working through the implications has remained sparse.

The ACCC opens numerous Section 46 investigations each year, only a tiny fraction of which are converted into legal proceedings.

Greater certainty in this area of the law would be welcomed by businesses, most of which are genuinely committed to being compliant.

Secondly, in the process of settlement negotiations, the “price” paid by the ACCC in agreeing to a jointly recommended penalty (invariably endorsed by the court in deference to the ACCC’s opinion) has arguably been too high.

Penalties for anti-competitive conduct have fallen way below the statutory maximum and are considerably short of international benchmarks.

Between 2000 and 2009, the median penalty for cartel conduct was $827,000 for corporations and $32,000 for individuals. The maximum for most of the period was $10 million for corporations and $500,000 for individuals.

The outcome in the Visy case, frequently pointed to by Graeme Samuel as the ACCC’s finest hour under his stewardship, highlights this point.

The corporate penalty in that case, settled by the ACCC in 2007, was $36 million. For 37 contraventions, that represents about a tenth of the maximum per contravention. Visy chief Richard Pratt escaped without personal penalty despite admitting to an important role in sustaining the cartel at the most senior levels of management.

In the United States or European Union, the corporate fine would have been in the hundreds of millions and Pratt could have faced time behind bars.

In Australia, the outcomes in such cases might well be justifiable in terms of savings to the public resources of the ACCC and the court system. But they must also be recognised as reducing overall the deterrence impact of the penalty regime and the ACCC’s enforcement efforts.

Sims did acknowledge that ACCC enforcement decision-making is essentially about making choices and that it was important to make “careful decisions about where to allocate limited resources.”

The ACCC will need to be strategic in ensuring that it selects cases where the conduct at issue poses the greatest threat to consumer detriment. This has always been the policy of the ACCC.

However, it needs to be acknowledged that such cases are not always the ones that present the clearest opportunities for testing the law.

More often those will be cases in which the impact of the conduct, in terms of competitive harm, falls in a grey area.

In these cases the ACCC will not be able to rely on the strict liability provisions of the Competition and Consumer Act, but will have to prove that the purposes or likely effects of the conduct are to substantially lessen competition.

Such assessments are invariably heavily contested and the outcomes of such contests are more often enhancements to the welfare of the lawyers and economists involved than to the welfare of consumers.

Given the major challenges posed by the limited litigation budget of the ACCC, it is important not to overlook the potentially significant contribution that may be made to the clarification of legal doctrine by private litigation.

Some of the most significant developments in judicial interpretation of the legislative provisions have taken place in the context of private actions brought by competitors and other market actors pursuing compensation for harm caused by breaches of the Act.

In recent years, some ACCC representatives have taken a fairly suspicious and less than supportive view of private litigation, particularly where it is seen to potentially undermine ACCC detection and investigation of cartel conduct.

With the arrival of the new broom, there is an important opportunity to review this outlook.

More litigation by private claimants would not only assist in testing the law but the prospects of sizeable damages payouts (against which ACCC penalties pale in significance) would boost the deterrence impact of enforcement action in this economically crucial area of the law.