The ACCC dealt some body blows

Saturday, 01 March 2003


    The Australian Competition and Consumer Commission has not fared too well in court of late.

    Two recent decisions, one in the High Court and one in the Federal Court, have brought bad news to the Australian Competition and Consumer Commission and retiring chairman Allan Fels over the last two months. Just before Christmas O'Loughlin J held that the ACCC had failed to establish a price fixing breach of the Trade Practices Act (TPA) in relation to what appeared to be on the surface market sharing and other arrangements between some milk producers in the Northern Territory (ACCC v Pauls Ltd & Ors ((2002) FCA 1586). That decision is discussed briefly at the end of this note.

    However, more importantly, on 7 February the High Court of Australia delivered its long-awaited judgment in Boral Besser Masonry Ltd v ACCC (2003) HCA 5. This case, which was an appeal brought by the Boral companies (Boral) against a Full Federal Court decision, which held that the relevant company had breached section 46 of the TPA which prohibits the misuse of market power.

    Justice Peter Heerey at first instance had held that the ACCC had failed in its claims under section 46 against Boral which has engaged in alleged predatory pricing (pricing below cost) to meet and beat competition from a new venturer in the building industry. The Full Federal Court had overturned that decision and in doing so had laid down certain important guidelines as to how section 46 was to be interpreted in a case where alleged predatory pricing occurred (that is consistent below cost price cutting where competition was being met and challenged).

    At first instance Heerey J had ruled against the ACCC because in his view Boral (and the other companies associated with it in one form or another in the building industry) did not have the requisite market power and had not taken advantage of this power for establishing a breach of section 46.

    To establish a breach of section 46 of the TPA the ACCC, or a civil litigant (and the action is being used widely by civil litigants against others), have to show that the relevant corporation or corporations have a substantial degree of power in the relevant market, that they take advantage of that power (that is use it in an active fashion) for one of the prohibited purposes - to eliminate or substantially damage a competitor of the relevant company in the market or in any other market; to prevent the entry of a person into the relevant market or any other market; or to deter or prevent a person from engaging in competitive conduct in the relevant market or in any other market.

    The Full Federal Court, and in particular Justice Finkelstein, felt the fact that Boral was engaging in its aggressive conduct (in effect cutting the price of its product below cost so as to meet and beat the activities of the new entrant) could not be sustained in the context of US antitrust theory which he believed should be replicated in interpreting section 46 of the TPA.

    Gleeson CJ and Callinan J in overturning the Federal Court decision, stated in their judgment in the High Court:

    "There is no real controversy about what [Boral] did and why it behaved in that fashion. For 30 months [Boral] cut its prices for some of the goods it made and sold, in the expectation that one or more of its competitors would leave the market for those goods. But, in engaging in this pricing behaviour, did [Boral] act as a firm with a substantial degree of power in that market and take advantage of that power?" (para 27)

    They and other judges held the Full Court had erred by adopting an incorrect approach to the interpretation and application of section 46. The High Court did not itself decide the issue of the correct market definition, but rather accepted the narrower market as the relevant product market, rather than the broader market including "tilt-up and precast panels, plasterboard and clay bricks" for which Boral had argued, and which had been accepted at first instance as the relevant market. Even adopting a narrow market definition the majority found that Boral did not have a substantial degree of power in the market.

    The majority said that the question of whether a firm had market power, and whether it had taken advantage of that market power should not be treated as one question but rather as two questions - as stated in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1. In considering whether a firm has market power, the majority relied on the analysis of this issue in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 (Queensland Wire). In that case Mason CJ and Wilson J defined market power (at 189) as "the ability of a firm to raise prices above supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product". While other factors will be relevant, "pricing is ordinarily regarded as the critical test; and it is pricing behaviour which is the relevant conduct in the present case" (at para 136).

    Gleeson CJ and Callinan J said that while lowering prices may reflect the existence of market power where a firm expected to eliminate a competitor and then raise prices later in the absence of competitive constraint, generally market power "in a supplier ordinarily meant the ability to put prices up, not down" (para 138). They discussed the difficulty of distinguishing between vigorous competitive behaviour and unfair anti-competitive behaviour, relying on an interesting US statement in AA Poultry Farms Inc v Rose Acre Farms Inc. The Court said:

    "Firms 'intend' to do all the business they can, to crush their rivals if they can ... Entrepreneurs who work hardest to cut their prices will do the most damage to their rivals, and they will see good in it ... Almost all evidence bearing on 'intent' tends to show both greed-driven desire to succeed and glee at a rival's predicament ... [T]ake [a witness'] statement that [his firm's] prices were unrelated to its costs. Plaintiffs treat this as a smoking gun. Far from it, such a statement reveals [the firm] to be a price taker. In perfect competition, firms must sell at the going price, no matter what their own costs are. High costs do not translate to the ability to collect a high price; someone else will sell for less. Monopolists set price by reference to their costs ...; competitors set price by reference to the market." (Boral at para 88)

    Gaudron, Gummow and Hayne JJ agreed with the analysis of Gleeson CJ and Callinan J and stated:

    "there was significant restriction upon the freedom of [Boral] in its pricing behaviour by reason of the conduct of customers in driving down prices for large contracts" (para 189).

    While the court considered at length the implications of the fact that Boral was frequently forced to quote prices below 'avoidable cost', the evidence only supported the finding that Boral had competed vigorously to secure tenders. Gleeson CJ and Callinan J said that Heerey J at first instance had

    "regarded the evidence of pricing on major projects as the best evidence of [Boral's] pricing behaviour between April 1994 and October 1996, and the Full Court did not disagree with that. When the detail of that evidence is considered, it is difficult to reconcile with the case the ACCC seeks to establish" (at para 67).

    The majority judgments in this case re-stated principles established in Queensland Wire. Gleeson CJ and Callinan J said that 'the necessary consequence of intensive price competition' is that 'one or more [of Boral's] competitors would be damaged'. 'In that sense, the purpose of competitive conduct is to damage a competitor' (at para 86). They said, citing Queensland Wire, that the 'purpose of the Act is to promote competition, not to protect the private interests of particular persons or corporations' (at para 87).

    McHugh J agreed with the two majority judgments. Kirby J predictably held that Full Federal Court were reading the section too narrowly. The decision has been met with cries of anguish from various small business groups and others in the community who believe that section 46 of the TPA needs to be strengthened. Readers may recall that this is one of the areas which the Dawson Committee which has delivered its report to the Federal Parliament was to review. The Dawson Committee had reported to the Federal Treasurer at the end of January before the decision in the High Court in Boral was handed down. Many persons, however, had anticipated that the High Court would overturn the Full Federal Court decision because they were concerned that the Full Federal Court had rejected the evidence that had been found by the trial judge on issues of market power and furthermore the Full Federal Court had not given enough weight to the words "take advantage of" which are one of the three elements of establishing a breach of section 46.

    Treasurer, Peter Costello will now have an interesting task in reconciling the recommendations of the Dawson Committee (which are anticipated not to favour the widening of section 46 ' this is a bold prediction but believed to be justified) with the calls for strengthening the TPA.

    The ACCC and others who want the Act to be strengthened will gather further support because of the very narrow interpretation of the price fixing provisions given by Justice O'Loughlin in the Paul's case. This case was a price fixing allegation brought against Pauls Limited and a number of other companies in the dairy industry. The background of the case was that in 1995 Pauls carried on business in Darwin and operated a milk processing plant and a packaging facility for the processed product. It distributed its packaged milk as a wholesaler throughout the Northern Territory. Another company owned and operated a milk processing plant in Northern Queensland. At one stage the Katherine dairy was the only source of raw milk in the Northern Territory. As its output of processed milk was apparently insufficient to meet demands for the Territory, Pauls brought in supplies of raw milk from South Australia and Queensland. Malanda was the only other principal source of milk in the particular area but it was suggested that perhaps the arrangements that were in place led to Katherine dairy being the main source of product for the Northern Territory. The ACCC alleged that the distribution of milk in the Northern Territory was arranged through an arrangement between Pauls, Malanda and others, for the processing and supply of milk to the Northern Territory. The fact there had been merger negotiations between two milk processing companies added a flavour to the arrangements. A number of meetings took place at which various discussions in relation to the merger and the processing of milk the ACCC had argued had taken place during a course of a period of time in the mid 1990s.

    The ACCC alleged that on 23 April 1996 Pauls, Malanda and another company made an arrangement with respect of the supply, processing and packaging of milk in the Northern Territory. Under the alleged agreement, arrangements were made for Pauls and Malanda to process milk from all of the relevant sources. The long and the short of the arrangements, according to the ACCC, was that Malanda and the third group had agreed to deliver raw milk to Pauls for 52 cents per litre and that because of Pauls acquisition costs of 52 cents, and the arrangements that the ACCC said existed between Pauls and Malanda, this had a controlling effect on the wholesale price of milk. All of the evidence was in a sense circumstantial and the defendants argued that they had no case to answer. Justice O'Loughlin dismissed the case and said that there was no case to answer. In the view of the defendants the most the evidence "could possibly establish was that, at various times, some or all of the respondents reached some limited consensus as to a proposal that was to be considered or developed further .... at no time, so it was argued, was an arrangement or understanding made that involved [the three relevant companies] indicating a willingness to assume an obligation or give an assurance or undertaking [to behave in terms that might amount to a breach of the TPA]" (at para 103).

    The basic case for the ACCC was that Pauls and Malanda by entering into a relevant agreement had the effect of substantially lessening competition because of the price fixing arrangements that existed. But, the court said that before the ACCC to succeed in proving a case for price fixing they must establish that there was a particular provision in the contract which had the purpose or the effect of fixing the price for goods supplied or to be supplied. In dismissing the case against the ACCC the court held that the evidentiary onus on the ACCC was to prove the existence of the purpose or effect. This, in the Judge's view, had not been achieved but, there was a more compelling reason for dismissing the case: "Even if it could be said that the necessary purpose or the necessary likely effect that had been established, that will amount to naught because the purpose or likely effect must relate to the fixing the price for goods that are to be supplied by the parties to the contrary who are in competition with each other".

    The ACCC had failed to establish that because other persons that were involved in the processing of milk were not in competition with the main parties. The ACCC also argued that the provisions in the relevant contract that established the prices for all milk and processed packaged milk "had the purpose or the likely effect of controlling the price at which Pauls and Malanda could supply processed packaged milk in the Territory in competition with each other" . The court said, however, that the agreement showed no overt attempt on the part of the parties to fix the wholesale price of milk. The evidence pointed to the fact that they were free to charge what price they liked. The fact that the cost of raw milk was fixed at 52 cents per litre and that this was a substantial proportion of the cost of producing the milk for wholesaling and subsequent distribution was not sufficient in his view.

    In the judge's view there was a further flaw to the ACCC's case. Pauls was not a producer of raw milk; it was a processor. Malanda on the other hand was a producer not a processor of raw milk.

    "Different roles of the two companies coupled with Malanda's opportunity to enjoy profit from the sale of raw milk meant that when the companies competed at the wholesale level, Malanda had the opportunity to undercut Pauls to the extent of some (or all) of the profit that it enjoyed when it sold the raw milk. That background combined with the fact that there was no evidence that the parties agreed to fix the wholesale price of milk, destroys the proposition that Pauls and Malanda engaged in some form of fix in the wholesale price of milk. It likewise destroys the proposition "that one or either of them was controlling, or might be able to control, the wholesale price" (at para 126).

    The ACCC will clearly have to produce stronger evidence than this in future cases to when an allegation of price fixing. The decision will also make its argument for criminal sanctions in cases of this kind harder to establish.

    These two decisions, are being reviewed without the editor having any knowledge of what is contained in the Dawson Report. The fact that the report is being reviewed by the Federal Government before being released suggests that there are some interesting and important issues that will flow from it ' whether they are to strength or weaken the TPA and the role of the ACCC is of course a very interesting question!


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