Small business wins on the effects test: What it means for you

The much-debated effects test is one step closer to reforming Australian competition law after the release of the Harper competition review yesterday – although small business can expect a watered down version from the originally proposed reform, if it even makes it to Parliament at all.

The panel recommended the laws which prohibit companies with substantial market power from misusing that power should be revised or expanded to include an ‘effects test’, rather than the current ‘purpose test’. 

The current test used by the Australian Competition and Consumer Commission considers the purpose of a company’s conduct. The conduct is only illegal if its purpose is to eliminate a competitor or stop a new competitor coming into the market.

The new test will mean the watchdog will consider the effects of conduct, as well as their purpose to misuse market power.

The review panel, led by Ian Harper, proposed two possible defences to the effects test.

Firstly, the conduct would be legal if it was in the long-term interest of consumers. For example, if the large supermarkets dropped their prices on certain items, they would not have to seek legal advice to do so.

Secondly, the conduct would be legal if the same action would be rational by any other business, such as a small business competitor.

Peter McDonald, competition law expert and partner at Allen & Overy, told SmartCompany the recommendations are broadly consistent with laws in Europe and the US.

“I personally don’t think it’s all that controversial to look at the impact on competition,” says McDonald.

“Purpose can sometimes be hard to determine, so it is often relevant to have a look at the effect.”

Peter Strong, chief executive of the Council of Small Business of Australia, says the new test, while welcomed by small business, may be too technical for small business and favour “the big end of town.”

Strong had called for an effects test with muscle to defend small business against larger competitors and create a “level playing field”.

Big business groups haves strongly lobbied against the introduction of a new test, claiming it will discourage innovation.

“There was absolute panic from the Business Council of Australia and Coles and Woolies, it was like the end of the world,” says Strong.

“Is their business model built that much around their capacity to destroy and conquer that they will go belly up if it’s taken away?”

McDonald says the panel have tried to reach a “middle ground” and will now place its focus on determining the defence which is intended to permit ordinary discounting and other legitimate conduct.

“If they get the defence right, I think the proposed new law can work. The debate will then be whether the current laws are sufficiently broken, so there would be no need to make a change.”

But Strong says he believes it will be unlikely the test will make it past the Treasury, let alone pass the Senate.

“Coles and Woolworths and their representatives have the recourses to harass and harass members of Parliament.”

“It might not even get into the lower house.”