ACCC wins a major court victory in competition case.
The Australian Competition and Consumer Commission certainly has a high profile. Because of its rather unique position in evaluating mergers that might lessen competition, the ACCC is sometimes asked to "clear" mergers before they occur and, while its decisions have no legal impact they have a significant practical impact. However, it is not widely known that it has rarely had success in the courts in what are known as competition cases. Competition cases are those in which a court is asked to evaluate whether alleged anti-competitive behaviour or agreements actually lessen competition. The penalties imposed by the courts as a result of ACCC intervention are generally what are known as price-fixing cases where the ACCC actually finds itself in the luxurious position of not having to prove the facts relating to the contravention, but rather only having to argue before the court what penalty may be imposed. The parties generally agree to plead "guilty" to the contravention and the court is given the task of assessing what penalties should be imposed. Occasionally there is some slight disagreement on the facts; on more occasions than not the parties – that is the ACCC and the defendant – actually agree on the penalties that the court is asked to "endorse". The court of course carries out its own independent assessment of the penalties that may be imposed but will on most occasions agree with the evaluation made by the ACCC (in consultation with the relevant party).
But the ACCC has not had very much success in cases where it has had to prove that competition has been substantially lessened as a result of an agreement or conduct such as an allegation that persons have misused market power in breach of section 46 of the Trade Practices Act. Recently, the ACCC has had success in two cases – the Rural Press case (about which we may write in a future issue) and more importantly in the Boral case which is a decision of the Full Federal Court (the Rural Press decision is a decision of a single judge). In Australian Competition and Consumer Commission v Boral Besser Masonry Ltd & Ors ( FCA 30) the Full Federal Court unanimously reversed the decision of Heerey J who had ruled that the ACCC failed in its section 46 action because it had not established that Boral had the relevant market power to trigger a breach of section 46. In order to establish such a breach it is necessary to show that a corporation has a substantial degree of power in a market and has taken advantage of this power for one of three anti-competitive purposes, namely:
(i) to eliminate or to substantially damage a competitor in the relevant market;
(ii) to prevent the entry of a person into a relevant market; or
(iii) to deter or prevent a person from engaging in competitive conduct in a relevant market.
The market in which the corporation holds power does not have to be the same market as the market to which the relevant corporation with power has directed its attention to prevent competitive conduct occurring although normally they are the same markets. The facts of the Boral case are quite important and therefore we go into them in a little detail. It was alleged by the ACCC that between April 1994 and October 1996 Boral, which was one of a number of manufacturers of building products (the relevant product) used its power in the Melbourne market for that product for the purpose of damaging the business of C&M, a new entrant into the relevant field. When C&M entered the market. building a state-of-the-art factory to produce the relevant product. the Victorian building industry was in recession. The demand for both the relevant product and other building products had declined. The industry was described in both decisions as an industry with substantial excess capacity. Boral, like a number of its major competitors – Pioneer and Rocla – was part of a national, vertically integrated building products group. It purchased its relevant raw materials from related companies and had significant market share in all parts of Australia. C&M, a private company, had been established in Bendigo in 1993. Its entry into the market was viewed with some suspicion because of the excess capacity. In May, Boral apparently had reckoned that if it could buy out C&M this would alleviate some of the excess capacity.
Market shares at the time were quite interesting. Boral was not the biggest player in 1992 but by 1994 it had become so. slightly edging out both Rocla and Pioneer. Each of these companies had over 25 percent of the market; C&M's share was only 11 percent. The allegation was that Boral had cut price significantly over time to drive C&M out of the market or to prevent it from competing in the market. The ACCC alleged that Boral was able to subsidise its pricing for the relevant product by piggy-backing on its strength in other relevant markets. It was alleged that the companies were engaged in a price war. As noted earlier, to establish that there was a breach of section 46 it is necessary to show that the relevant company has market power. Heerey J, at first instance, had ruled that Boral did not have market power because he assessed the relevant market as building products in general. In his view concrete masonry products competed with other products. In other words he held that customers could switch their choice from concrete masonry products to other products. Even if Boral was engaging in price cutting, because it did not have market power in the relevant building products market its conduct could not be seen as a breach of section 46.
The Full Court on market The Full Federal Court on appeal rejected his market definition. All three judges defined the relevant market by reference to the narrower market of concrete masonry products – the relevant product as we call it here. This evaluation of market is very interesting and very important. It is a key factor in nearly all competition cases. In order to show that competition has been lessened or that a company has market power, the ACCC or the plaintiff in a civil case has to establish what the relevant market is. Finkelstein J made these comments on market in the Full Court: "Cost is but one factor, albeit an important factor, that is taken into account in choosing the appropriate product. Structure requirements, aesthetic considerations, site requirements, performance characteristics and the like are also important factors. Very often there will be little choice in the selection of the appropriate material. The choice will be dictated by the requirements of a particular project." (at para 309)
Ultimately, in relation to the relevant market, Finkelstein J concluded (at para 320): "This scant evidence certainly does not support a finding that there was sufficient substitution of walling products to conclude that they share the same market. Indeed I am of the firm opinion that the evidence, especially the absence of evidence of substitution during the price war, established the opposite position. If confirmation of this conclusion is necessary I note that if products are in the same market one would expect to find that over a period of time the price movement of each product would correlate... Here the evidence does not show that the price of the building materials which the trial judge considered to be in the same market followed the same movement from 1992 through to the end of the price war." Having established that the market was for concrete masonry products, the next question was whether Boral had the necessary market power. You will have noted earlier that in describing section 46 I pointed out that one has to have a substantial degree of market power. In that context the members of the court referred to the Trade Practices Revision Bill in 1986 where the section was changed to introduce the concept of substantial. In the Explanatory Memorandum for the relevant Bill it was noted that
"'Substantial' ... is not intended to require the high degree of market power connoted by ... being in a position substantially to control a market [which was the previous test] or ... the power to determine the prices of a substantial part of the goods in a market." Two members of the Federal Court (Beaumont and Merkel JJ) adopted the language of Dawson J in the leading case on section 46, Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd ((1989) 167 CLR 165) where Dawson J noted (at page 200): "... market power has aspects other than influence upon the market price. It may be manifested by practices directed at excluding competition such as exclusive dealing, tying arrangements, predatory pricing or refusal to deal." Dawson J added (at page 200): "A firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a firm facing otherwise similar costs and demand conditions (quoting from Kaysen and Turner, Antitrust Policy, 1959, page 76)."
The Federal Court expressed surprise that C&M had entered the market for the manufacture of the relevant product at a time when there was excess capacity. (It was probably not rational to enter the market at this time.) Nevertheless, the attempt to drive it out was evidence of a misuse of that power. In the view of Merkel J in the Full Court Boral's capacity to persistently drive down and maintain prices at below what he called avoidable costs (marginal costs is another way of putting it) in order to drive a rival out of the market was clear evidence that he had take note of in the circumstances. The other members of the court found that Boral had a substantial degree of power in the market arising from its market share, its standing as a well funded national operation, the fact that it provided excellent service and that it had the capacity to engage in a price war for some considerable time without suffering too much damage.
Anti-competitive conduct The judges having established that market power existed then examined the relevant conduct. In a sense the decision is circular here because the same evidence that established market power was used as a basis for establishing the anti-competitive purpose. By and large, however, the court felt that the Australian law should not be unduly influenced by US cases in evaluating when predatory pricing might amount to a breach of section 46 of the Act. In this context the judgment of Finkelstein J is most interesting because he dealt with this issue in detail. He noted at para 262: "Our section is aimed at regulating a firm with a substantial degree of market power, which would include, but not be limited to, a monopolist. While a monopolist may have the ability to extract a monopoly rent and thus recoup its losses, a firm with only a substantial degree of power may never be in that position. Thus, the test proposed by the trial judge will, for all practical purposes, make it impossible to establish a case of predatory pricing scheme against a firm that is not a monopolist. Moreover, under section 46 there is no need to have recourse to a test such as 'selling below cost plus recoupment' because intent is at the heart of the offence. In my view the trial judge was in error in adopting recoupment as an element of predatory pricing."
Finkelstein J also found at para 263 that below-cost pricing was not an essential element of predatory pricing. His Honour concluded at para 266 that: "... the existence of predatory pricing should not be determined by reference to some precise formula or definition. Predatory pricing is no more than a price set at a level designed to eliminate a competitor or keep a potential competitor from the market." As indicated earlier, the other two judges did not deal with this particular issue in detail, rather relying on other aspects of the behaviour of Boral to conclude in favour of the ACCC. The decision has been seen by the ACCC as a major victory for it because it is the first competition case (as I like to refer to these cases) in which the ACCC has had success in the courts for some considerable time. The High Court has now delivered its decision in the Melway case in which the ACCC intervened. Melway is the case of a private action in which the Melway company (which produces Melbourne street directories – Melway has a significant market share in Melbourne, and Sydney street directories), successfully appealed against the decision of the Full Federal Court which by a majority had held that it had misused its market power. We will discuss the High Court's decision next month. It is also likely that the Boral decision will be appealed to the High Court by the Boral group (although of course an appeal to the High Court is not automatic – the parties must obtain leave to appeal).
We will be following these very important developments in this Law Reporter with some interest. Unlike the US antitrust law where one has to establish that the relevant company has monopoly power before a breach of the relevant provision of the Sherman Act occurs, as was established in the Microsoft case which is now under appeal, in Australia the benchmark that has to be established is lower. This will be particularly so if the narrow market definition which was accepted by the Full Federal Court in Boral is upheld on appeal. If the courts accept this approach then the ACCC (and indeed civil litigants) will have significant more armoury to use in future trade practices cases.
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