Seven deadly sins of joint ventures under competition law
Joint ventures in the energy and resources sectors.
The principles underpinning competition / antitrust laws are global and as such, the competition implications of transactions, commercial dealings and even unilateral decisions, in addition to the effect of representations made to consumers, are far reaching. The Pharmaceutical, Healthcare and Life Sciences (PHL) sector is one of a number that is a priority for the Australian competition regulator – the Australian Competition and Consumer Commission (ACCC).
We take a look at the investigations, actions and outcomes of competition / antitrust law in Australia in 2018 and provide some insights into the points of exposure for the industries in the PHL sector in 2019.
The nature of products, often being subject to patent, exposes an originator (in particular) to additional scrutiny in its business dealings. Under a regulatory regime that calls into question every decision made, and the effect of that decision on competition, in circumstances where a company holds market power, competition compliance must be at the forefront of an originator or patent holder’s strategy.
Outside the scope of originator products, market power can be held across any one or more markets in the PHL sector. A market share of greater than 30 percent calls into question the extent of constraint that a business is subject to. Knowing the markets in which you operate, who your competitors are, and their positions in the market is more than just good business, it is a pre-requisite for identifying competition law risk and ensuring ongoing compliance.
Beyond the ambit of market power are further prohibitions, which consider the purpose of engaging in certain conduct or its effect on competition. The latest prohibition in the competition regulator’s armoury is concerted practices.1 Information and data shared, without reciprocity, may be in contravention of the Competition and Consumer Act 2010 (Cth) (CCA) - where the reason for disclosing competitively sensitive information, or the effect of such disclosure is anti-competitive. In an industry where data is provided through the conduit that is healthcare professionals, retail outlets, wholesalers and third party analysts, participants in PHL markets should consider the subject matter and granularity of data disclosed, the reason for disclosure and consideration of whether the information will have an anti-competitive effect.
Representations, in particular to consumers, are always an area of risk. Ensuring the accuracy of product descriptions, relying on product studies to promote benefits, and putting this to a consumer in a way that does not mislead, deceive or falsely present any aspect of the product is a continuing challenge.
In the face of these major points of exposure, in addition to scrutiny over unfair contract terms in both consumer and small business transactions, the industry currently is and will remain a priority for the ACCC in the coming year.
Mergers and acquisitions in Australia are not subject to a mandatory notification regime. However, the ACCC continues to be an active regulator and notification to the ACCC, where the merger parties will hold greater than 20 percent market share in any relevant market, is recommended.
Two transactions were reviewed under the informal clearance process in 20182 public assessment process: (i) Arrow Pharmaceuticals Pty Ltd3 merger with Apotex Pharmaceuticals Pty Ltd ; and (ii) Bayer AG acquisition of Monsanto Corporation4.
In the Arrow/Apotex merger, consolidation at the generic level of the market did not raise serious concerns for the ACCC, notwithstanding that the combined entities would supply around half of all generic prescriptions pharmaceuticals to pharmacies in Australia. The effective constraint was a number of smaller competitors, that the ACCC considered have the ability to grow and expand their portfolio of generic products.
The Bayer/Monsanto consolidation was a global transaction with an assessment of the competitive effects being undertaken by global regulators. The European Competition Commission sought remedies to address competition concerns, which the ACCC was of the view also alleviated the competition concerns surrounding weed management systems for canola and the supply of vegetable seeds. Beyond global concerns that also affected Australia, the ACCC also considered the effect of the consolidation on cotton seed treatments, before concluding that the foreclosure risk would be unlikely to result in a substantial lessening of competition.
These mergers highlight that both local and international mergers will be caught by Australian law. Where the Australian clearance regime is not compulsory, it is important to be mindful of the local effects on competition. Notwithstanding the non-mandatory notification regime, it is still a breach of the law to acquire shares or assets where the effect is likely to be a substantial lessening of competition. In this way, the starting point for notifying a transaction in Australia should never be that it is not required. Consideration must be given to the effect of the merger and the implications, especially for global transactions, where the ACCC may unilaterally seek to review a transaction and potentially disrupt the completion timeline, comfort from the regulator is worth seeking
The ACCC is an active regulator and its focus on PHL is well known. As an industry of stated priority, in addition to the ACCC’s continuing focus on ensuring that large companies are held accountable for their actions, there will undoubtedly be a number of actions each year in this sector.
ACCC v Pfizer
2018 saw the long fought case between the ACCC and Pfizer come to a close. Pfizer’s actions were called into question by the ACCC when the cholesterol drug, known as Atorvastatin, came off patent in 2012, with allegations of Pfizer misusing its market power and engaging in exclusive dealing in contravention of the CCA.
The ACCC’s case did not succeed as the Federal Court and Full Federal Court were not convinced that Pfizer had the requisite anti-competitive purpose required for a misuse of market power. Pfizer was also able to defend what it did to secure market share for Lipitor and its own generic product as an astute commercial strategy, rather than one that had a substantial anti-competitive purpose. The ACCC sought leave to appeal the Full Federal Court’s decision to the High Court, but leave was not granted. The final curtain close on this case is that Pfizer’s commercial strategy was sound and its course of action was not in contravention of the CCA.
ACCC v Medibank
In 2014, Medibank brought its contracts with some diagnostic service providers to an end. Those contracts had provided for payments to be made in excess of the government’s Medical Benefits Schedule fee, and restricted providers from charging an out of pocket cost. For Medibank members who subsequently received in-hospital diagnostic services from those providers, Medibank only paid the minimum medical benefit set by the government, and the provider was free to charge an out of pocket cost to the member if it chose. The ACCC alleged Medibank made false, misleading or deceptive representations and engaged in unconscionable conduct in relation to its failure to notify Medibank’s members of its decision to limit benefits for these services, despite representing in its communication and marketing materials that it would.
Medibank argued that at no point did it represent to members that it would cover all costs associated with in-hospital diagnostic services, which was agreed by the Federal Court. In relation to the unconscionable conduct allegations, the Court found that Medibank’s business judgement could not amount to unconscionable conduct. The ACCC was unsuccessful in appealing the decision and on 20 December 2018, the Full Federal Court dismissed the proceedings.
ACCC enforcement against GAIA
In June 2018, GAIA Skin Naturals paid $37,800 in penalties for alleged false or misleading representations after the ACCC issued three infringement notices. GAIA described its Natural Baby Bath & Body Wash, Baby Shampoo and Baby Moisturiser as “Pure ★ Natural ★ Organic”. However, these products contain two synthetic chemical preservatives.
This enforcement outcome with GAIA forms part of broader work by the ACCC relating to organic representations. The ACCC has been taking action on the use of organic claims across a range of businesses and products.5
What constitutes ‘Australian Made’ for complementary healthcare products
The ACCC intervened in proceedings between Nature’s Care’s and the Australian Made Campaign Limited with respect to its use of the ‘Made in Australia’ kangaroo logo for certain of its products.6
Australia’s country of origin labelling framework requires that products that are manufactured in Australia using imported ingredients must be at least ‘substantially transformed’ in Australia to have the benefit of the Australian Consumer Law’s ‘made in’ safe harbour defence. The safe harbour serves as an automatic defence from court action on the basis that the country of origin claim is false, misleading or deceptive. In March 2018, the ACCC published a guide on how the country of origin labelling laws applied to complementary healthcare products – this is the ACCC’s interpretation of the new laws which were passed on 1 July 2016 and became mandatory on 1 July 2018.
The Court determined, in line with the ACCC’s position, that the product was not ‘Made in Australia’, as it was not considered a ‘substantial transformation’ of the imported ingredients. This is the first determination under the new law to provide manufacturers and sponsors of complementary healthcare products with guidance on how the law will be applied.7
Legislation was passed in August 2018 that increased the penalties for a breach of the ACL. Penalties have been raised from $1.1 million for companies to the greater of $10 million, three times the value of the benefit received, or where the benefit cannot be calculated, 10 per cent of annual turnover in the preceding 12 months. Penalties against individuals under the ACL will also increase from $220,000 to $500,000 per breach.
Removal of the IP exception
The CCA currently includes an exception for certain prohibitions on anti-competitive conduct for intellectual property owners with respect to the licensing or assignment of specified IP rights, including patents, registered designs, copyright or eligible circuit layout rights. Conditions imposed on the licence or assignment of a right are exempt “to the extent that the condition relates to” the IP rights in question.8 In this way, IP owners have been in a position to impose restrictions on the use of their IP that may ultimately be anti-competitive.
Parliament is due to consider these amendments when it returns in February 2019. Once the amendments to the legislation have passed, the law will come into effect 6 months from the date of royal assent. In preparation, companies should be considering any market restrictive conditions in existing IP licensing/assignment arrangements now to ensure that they are in a position to comply with all anti-competitive conduct provisions in the near future.
Treasury released a discussion paper in November 2018 seeking feedback from stakeholders on the impact of the extension of the unfair contract terms protections to small business that were introduced in 2016 and whether the objective set for the original reform has been met.9 It is also seeking views about whether any changes are required to improve the current framework. If, following consideration of the review findings, the Government considers that legislative amendments are required, it will seek agreement from states and territories to make those amendments before introducing relevant bills to the Australian Parliament.
The ACCC is pushing for unfair contract terms to be a breach of the law, rather than a court declaring the offending term void. By making unfair contract terms illegal, the ACCC would be able to seek pecuniary penalties and issue infringement notices.10
The ACCC will remain an active regulator in 2019. With a recent $35 million boost in funding to support an increase in investigators in the cartels and anti-competitive conduct branches, the ACCC expects that these resources will allow it to take at least two more cases each year.11 Beyond this, the ACCC will continue to be active in using its infringement notice powers to issue fines for conduct it is of the view is misleading, deceptive or false and take court action for alleged contraventions of the ACL.
The number of market studies and inquiries undertaken by the ACCC increased in 2018 and will continue into 2019. Its annual report into the private health insurance industry, continues to call for regulatory change in the sector and off the back of the Aged Care Royal Commission, we predict that the ACCC will undertake a “health check” of the industry from a competition compliance perspective.
Big data and a consumer’s access to its data is a focus of the ACCC, and with many businesses in the PHL sector holders of big data, it will not be immune from consideration on how that data is used or a consumer’s ability to access it into the future. The push for increased access to data, while maintaining privacy, will be considered through a competition and consumer lens.
With a number of legislative changes imminent, the industry can be assured that the ACCC will be watching how “big business” conduct themselves. Where the penalties for breaches of the ACL now match those of the competition provisions, the armoury of the ACCC has been increased and it is in the position to use it.
The ACCC will be watching carefully the actions of IP owners upon the removal of the long standing exceptions to the CCA. Existing assignment and licencing agreements should be considered carefully to determine whether they are anti-competitive.
The nature of the PHL sector’s engagement with consumers and small businesses is often on a standard form basis. The unfair contracts prohibitions are more easily enforced by the ACCC and an investigation is often initiated off the back of a consumer complaint. Careful consideration should be given to the terms of any standard form contract to ensure compliance.
Consolidation in the sector will continue. The ACCC will monitor mergers and acquisitions, and commence its own investigations where it believes it is warranted or as a result of market concerns. Where global consolidation will have an effect on the Australian market, notwithstanding the non-mandatory nature of the notification regime, considering the effect on Australia is key to a smooth road to completion.
As we move into 2019, day-to-day business engagement with licence holders, assignees, small businesses and consumers should be given a health check – the competitive environment can shift in the time since an agreement was entered into – creating a point of exposure. In industries already subject to significant amounts of regulatory compliance, competition and antitrust risk should be diagnosed early to mitigate any enforcement risk.
Joint ventures in the energy and resources sectors.