ISSUE 6 APRIL 2002
COMPETITION LAW
Inside:
Two landmark cases
on anti-competitive
conduct – and two
divergent results
Let the good terms
roll – when do terms
of trade have an anticompetitive effect?
In two landmark cases the Federal Court has reached
different conclusions on whether reliance on terms of trade
by firms with market power has an anti-competitive effect.
Both judgments agree on one thing however: market shares
of less than 30% can constitute market power.
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Why Safeway can toast
its slice of the market –
for now
Kylie Sturtz and Beth Griggs look at the proceedings brought by
the ACCC against Safeway, why they failed – and why it’s not
over yet.
The ACCC’s proceedings against Safeway claimed that the grocery chain had breached
the Trade Practices Act 1974 (TPA) in the way it traded with wholesale bakeries. Three
wholesale bakers, Tip Top, Buttercup and Sunicrust, supplied Safeway and independent
ISSUE 6 APRIL 2002
grocers with two types of bread, branded – under
brand names such as Sunblest or Wonder White –
and generic, sold under retailer-owned names such as
Home Brand or Black & Gold.
According to the ACCC, Safeway had a bread policy,
the substance of which was:
• Safeway expected to buy bread from wholesalers at
the baker’s best price;
• if an independent grocer was selling bread for less
than Safeway, the category manager would approach
the wholesale baker and try to get bread at the same
price as the independent store (known as a ‘case
deal’); and
• if the wholesale baker did not agree to a case deal,
the bread products concerned were removed from
the relevant Safeway store and not stocked until
further notice (the ‘deletion policy’).
The ACCC alleged that, by implementing this
policy, Safeway had contravened sections 45 (anticompetitive agreements), 46 (misuse of market power)
and 47 (exclusive dealing), and that it had sought
to induce bakers to engage in conduct in breach of
section 48 (resale price maintenance) of the TPA.
On 21 December 2001, Goldberg J found that the
ACCC had failed to establish that Safeway had
contravened any of these provisions of the TPA.
The anti-competitive
conduct claim
The ACCC contended that the company’s deletion
policy, when a case deal request was rejected by a
wholesale baker, had an anti-competitive purpose – to
deter the supply of cheap bread to its competitors – in
The ACCC alleged that Safeway
had contravened sections of
the Act dealing with
anti-competitive agreements,
misuse of market power,
exclusive dealing and resale
price maintenance
breach of section 45. It also alleged that Safeway and
Tip Top had engaged in price fixing by agreeing that Tip
Top would not sell bread at its Preston market stall for
less than Safeway charged at its store at Preston.
Goldberg J found that there was insufficient evidence
to infer a requisite “meeting of the minds” between
Safeway and bread wholesaler Tip Top, and therefore
no anti-competitive agreement existed.
The misuse of market
power claim
The ACCC also alleged that Safeway had misused
its market power by threatening to impose its deletion
policy if bread was supplied to an independent grocer
at a price which enabled it to sell for less than Safeway.
Goldberg J held that, although Safeway did have
market power, it had not taken advantage of that
power since Safeway would have imposed the bread
policy irrespective of its market power. He agreed with
Safeway’s submission that its bread policy was aimed
at ensuring that it remained competitive on the price
of bread, rather than to punish bakers and prevent or
deter competition.
The exclusive dealing claim
The ACCC claimed that Safeway had engaged in
exclusive dealing by offering to acquire bread products
on condition that the baker would not supply stores that
sold bread at lower prices than Safeway. Goldberg J
held that section 47 had not been breached, because
the restrictions on supply set out in the section did not
encompass restrictions on the price at which the goods
could be resupplied by the acquirer.
The resale price
maintenance claim
Finally, it was alleged that Safeway had induced
wholesale bakers to engage in resale price
maintenance by inducing them to ensure that
independent retailers did not sell bread at a more
competitive price than Safeway. The allegation of
resale price maintenance failed because the ACCC
failed to plead that Safeway had made known a
specified price below which bread was not to be
sold. Goldberg J also found that Safeway did not
possess the requisite intent to induce the bakers to
withdraw supplies of bread from independent stores
selling cheap bread.
When is a company
responsible for employees’
conduct?
Goldberg J also considered the extent to which the
acts of an employee, in this case the Safeway Preston
store manager, could be attributed to Safeway. This
was relevant to the allegations that the manager on
behalf of Safeway had entered into anti-competitive
agreements in breach of section 45 with Tip Top in
relation to supply terms and prices at Tip Top’s Preston
market stall.
Goldberg J considered the position at common law and
under section 84 of the TPA, which provides that the
conduct of a director, servant or agent engaged in on
behalf of the company, and within the scope of that
person’s actual or apparent authority, is deemed to
have been engaged in by the body corporate. Goldberg
J considered that, as it was established that it was not
within the scope of the store manager’s employment
to negotiate the terms on which bread would be
reintroduced into Safeway stores, his acts were
not attributable to the company. Consequently, the
ACCC’s allegations that Safeway had entered into
anti-competitive agreements, price fixing and exclusive
dealing arrangements at Preston were not made out.
Where does this take us?
The ACCC has recently filed a Notice of Appeal against
a number of Goldberg J’s findings. The appeal relates
to the supply of bread at Safeway’s Preston store
and the judge’s findings on section 45 as well
as section 46 (misuse of market power) and
section 47 (exclusive dealing). The ACCC has not
appealed against Goldberg J’s decision on resale price
maintenance.
In particular, Goldberg J’s finding that the acts of
Safeway’s staff were not attributable to the company
is most likely to form a significant part of the appeal.
If this aspect of the decision were to stand, it
could create important loopholes to the application of
sections 45 and 47 if companies can show positively,
in a particlular case, that an employee did not have
authority to engage in the contravening conduct.
In relation to the issue of whether Safeway took
advantage of its market power, Goldberg J applied
the test in Melway Publishing Pty Ltd v Robert Hicks
Pty Ltd [2001] HCA 13 (Melway) and stated that the
relevant question to be asked is: would Safeway have
acted in the same way, and had a deletion policy,
if it had been operating in a market where it was
constrained by its competitors in relation to the terms of
trade it could impose on its suppliers?
If this decision were to stand,
it could create an enormous
loophole...
Goldberg J’s finding that Safeway possessed market
power may form the basis of a cross-appeal by
Safeway. The judge found that Safeway did have
market power, despite the fact that its market share
was relatively low (approximately 16%). In addition,
although it was able to negotiate highly favourable
trading terms, Safeway was unable to dictate prices
to its suppliers. This part of Goldberg J’s decision will
have important ramifications for large retailers if it is
not appealed.
Universal and
Warner face
the music
In a recent landmark Federal Court decision, market shares of less than 30%
combined with other non-price factors
were found to have given two companies
a substantial degree of market power.
Misuse of this power resulted in penalties
for the record companies and their officers. Emma Marsh and Bashi Kumar
look at the implications.
In 1998, the ACCC commenced an investigation into
the conduct of Universal Music and Warner Music
after receiving complaints that they had threatened to
withdraw trading benefits from retailers who stocked
parallel imported CDs (including benefits such as
wholesale discounts, marketing subsidies, support of
sales and promotional teams, extensive point of sale
material, television, print and radio advertising and
promotional visits).
It was also alleged that the defendants had threatened
to withdraw supplies from retailers who stocked parallel
imports. Amendments to the Copyright Act 1968 had
been passed in 1998 to permit parallel importation
of CDs provided those CDs were manufactured with
the license of the copyright owner in the country of
manufacture.
Did the companies possess
market power?
Proceedings were commenced in September 1999.
ISSUE 6 APRIL 2002
The ACCC’s allegations included that the defendants
had breached section 46 of the TPA by taking
advantage of their market power to deter retailers from
engaging in competitive conduct.
The parties agreed that the relevant markets were the
wholesale and retail markets for recorded music, of
which CDs formed by far the greater segment. Whether
or not the defendants each had market power was
rigorously contested by the economic experts.
In a landmark decision Hill J held that a particular
record company could have a substantial degree of
market power even if its market share was less than
30%, and that this was not an industry in which market
share would be the sole determinant of market power.
Was there an abuse of
market power?
Hill J was prepared to accept the view of the ACCC’s
expert that the ability to act in a manner unconstrained
by competitors included conduct in relation to nonprice elements. For instance, his Honour said that the
statutory requirement of copyright proof prior to parallel
importation and the behaviour of incumbent firms could
constitute barriers to new entry.
Hill J also said that chart music (such as the “Top
40” list) has a significance in the market which could
empower the defendants to take steps to prevent
the entry into the market of third parties engaging in
parallel importing.
The defendants sought to show that their conduct was
guided by sound business justifications so as to negate
the finding of an anti-competitive purpose, that is, that
their actions were aimed at minimising piracy and freeriding. Hill J rejected these arguments, and found that
the conduct of the defendants would be regarded by
business people in Australia as involving both market
power and the exercise of that power, in breach of
section 46.
This was especially the case in relation to the small
retailers who lacked the countervailing power to import
effectively.
A hearing on appropriate orders as to penalties
was held on 1 February 2002. On 6 March 2002,
Universal and Warner were restrained from refusing
or threatening to refuse supply of CDs to Australian
retailers if a reason for the refusal is that the retailer
has stocked or proposes to stock non-pirated copies
of CDs from Universal or Warner’s catalogues from
an alternate source. Total penalties of more than $1
million were imposed on Universal, Warner and officers
of each company.
What does the future hold?
Hill J’s bold approach in elevating non-price elements
above market share factors mirrored to some extent
the position taken by Finkelstein J in ACCC v Boral
[2001] FCA 30. Boral is presently on appeal to the High
Court.
It will be interesting to see whether this approach is
followed by the High Court in the Boral appeal
and whether subsequent cases adopt the view that
non-price elements combined with a comparatively
low market share can lead to the possession of a
substantial degree of market power in any type of
market.
Companies in the marketing, entertainment or fast food
industries, especially those operating in markets for
highly differentiated products such as “Top 40” CDs, will
no doubt hope that Hill J’s approach is overturned.
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