I remember my first trip to Austria, not just for the scenery and history but for the T-Shirts.

“There are no kangaroos in Austria” was the slogan.

Well I fell into the same trap today of reading a headline about changes to the competition laws in Australia … err, no, Austria.

But it was serendipitous. Austria is changing its competition law exceptions. Cartel laws in Austria currently ‘carve out’ exceptions for small businesses (referred to as small ‘undertakings’).

At present, the cartel prohibition does not apply to restrictive agreements where the undertakings involved hold a combined market share of no more than 5% on the domestic market and a share of no more than 25% on a local submarket.

The law is changing to:

  1. Remove the exemption for ‘hard core’ cartel offenses like price fixing; and
  2. Changing the exemption thresholds.

The details are not really important. What is interesting are the alternative ways to deal with competition law exemptions. In general, there are three approaches:

  • Formal exemptions built into legislations, like in Austria;
  • An informal approach that allows an exemption if the Court or Authority is convinced there is some potential offsetting benefit that needs to be taken into account. This is the US ‘rule of reason’ approach; and
  • A formal authorisation approach where an Authority can consider submissions from relevant parties and give exemptions if the benefits from the exemption outweigh the detriment.

The first (European) approach has the problem that the exemptions are not nuanced. They are set in legislation in crude terms such as market shares. This leads to arguments on market definition and how to measure market share. It means some things that should be exempt will not be (a ‘false positive’ for anti-competitive behaviour or type-I error) and some things that should not be exempt will be (a ‘false negative’ or type-II error). The thresholds tend to be conservative to avoid ‘false negatives’ and the associated political risk.

The second (US) approach is vague and depends on the vagaries of regulators and Courts. The approach to taking ‘offsetting factors’ into account is vague and the approach, while allowing lots of discretion, can seem somewhat arbitrary.

The third (Australian) approach sets out clear rules and standards for exemptions. The relevant companies can apply for authorisation and there is a clear public process of evaluation. The risk with this, however, is that the nature of the exemption must be codified in terms broad enough to allow regulatory discretion but tight enough to guide the regulator. If the terms for authorisation are too vague then we are just back in a ‘rule of reason’ approach. If the terms are too tight then we are back in the Austrian approach.

In Australia, we are currently in a ‘good place’ for authorisation. Following the Australian Competition Tribunal’s ruling in the Qantas-Air NZ joint venture application in the mid-2000s, it is clear that we use a test based on traditional economic welfare analysis. This is referred to as a total welfare standard. So the ACCC, when considering an authorisation, can take a good hard look at the economic costs and benefits of the relevant conduct before it is authorised. Importantly, simple transfers between parties (where one loses $1 and the other gains $1) are given no weight. The process is public so dubious arguments can be disputed. Dubious claims made for political reasons or to support vested interests can be dismissed as irrelevant (even if they make good theatre in the public hearings).

However, the approach does rest on the regulator and the Courts getting the ‘right’ interpretation of what will necessarily be an ambiguous set of legislated standards for exemption. In South Africa, there is a similar ability to exempt mergers which, despite reducing competition  have offsetting public benefits. But Court decisions there have led to a ‘bastardized’ approach. In a case involving Wal-Mart and a local retailer Massmart, the Court recognised that the merger did not raise competition concerns (so should have been legal under competition laws) but did raise a range of ‘other’ concerns that, if not met, meant that the competition laws could be used to prevent the merger proceeding! These concerns were brought by the relevant unions and meant the merger could only proceed if it resulted in no retrenchments for 2 years; the firms favoured previously retrenched workers for any new jobs; the firms did not challenge the Union’s position; and the merged firm favoured South African suppliers.

The South African approach has meant that the authorisation test has been turned on its head. An exemption test should exempt firms if they would otherwise breach competition laws. The South African approach has meant that firms’ actions can be stopped, even if they would not cause any competitive harm, if they otherwise involve changes that are against the South African interest. It appears that South Africa’s interest involves unions, suppliers but not consumers.

So all three approaches are fragile. I think the Australian authorisation approach is a good middle ground but, as the South African experience shows, it can become a tool of vested interests if not carefully handled. But the US approach is just too vague – it lacks certainty and rigour.

So, not only are there no kangaroos in Austria, there is also no ‘public authorisation’ approach to competition law exemptions. I doubt that they want kangaroos but, if carefully drafted, they could do a lot worse than to import the exemption approach from Australia.

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