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. Your publication: If you would prefer to receive our publications in electronic format, please email: Tania.Brown@aar.com.au www.aar.com.au VISIT OUR WEB SITE TO READ ALL FOCUS EDITIONS 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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