(Cite as: 167 CLR 177)
Toohey J.
Queensland Wire Industries Pty. Ltd. v Broken Hill Proprietary Co. Ltd.
Queensland Wire Industries Proprietary Limited
Applicant, Appellant;
and
The Broken Hill Proprietary Company Limited
and Another Respondents
Respondents.
On appeal from the Federal Court of Australia.
29 June 1988, 30 June 1988. Brisbane
8 February 1989. Canberra
Mason
C.J., Wilson , Deane , Dawson
and Toohey JJ.
Trade Practices - Monopolization - Substantial control - Substantial degree of
market power - Misuse of market power - Refusal to supply - Market definition Taking advantage of market power - Whether hostile intent required - Trade Practices
Act 1974 (Cth), s. 46(1)(b), (c).
B.H.P. produced about 97 per cent of the steel made in Australia and supplied
about 85 per cent of the country's requirements for steel and steel products. Of
the various shapes of steel products made at B.H.P.'s Newcastle rolling mill, the
only one not offered for general sale was a product known as "Y-bar". Y-bar was
used in the manufacture by quite a simple process of "star picket posts". Star
picket posts were by far the most popular kind of rural fencing in Australia. Only
1 per cent of star picket posts used in Australia was imported. Apart from
exporting some Y-bar to a wholly-owned subsidiary in New Zealand and to a New
Guinea corporation in which it had a 40 per cent interest, B.H.P. sold Y-bar only
to A.W.I. which had been its wholly-owned subsidiary since 1925. Both B.H.P. and
A.W.I. made star picket posts from Y-bar and supplied those posts and wire made by
B.H.P. to merchants and end-users of rural fencing. Q.W.I.'s main business was the
supply of rural fencing in Queensland and northern New South Wales where it
competed with B.H.P. and A.W.I. Q.W.I. made fencing wire from steel products which
it bought from B.H.P. Q.W.I. sought supplies of Y-bar from B.H.P. and A.W.I. so
that it could make star picket posts for sale in the course of its business. At
first they refused to supply Q.W.I. with Y-bar, but they later offered supplies to
it at what was, in comparison with other B.H.P. products, a very high price.
Solicitors for B.H.P. and A.W.I. wrote to Q.W.I.'s solicitors, in the course of
interlocutory proceedings, stating that "A.W.I.'s policy ... was either to refuse
supply of steel Y-bar or to offer to supply steel Y-bar at an uncompetitive price
because it wished to preserve the business of the manufacture and wholesale sale
of fence posts conducted by it in association with B.H.P., there being no market
for the supply for any purpose of steel Y-bar to other manufacturers".*178
Held, that B.H.P. was in a position "substantially to control" (the relevant
degree of market power stipulated by s. 46 of the Trade Practices Act 1974 before
1 June 1986) and had "a substantial degree of power" (the relevant degree of
market power stipulated by s. 46, as amended, from 1 June 1986) in the market for
steel products. It was only because B.H.P. held those respective degrees of market
power, involving the absence of competitors, that it could afford to withhold
supplies of Y-bar. In those circumstances, by such refusal, B.H.P. was using that
market power for the purpose of preventing the entry of Q.W.I. into the star
picket post market or (per Mason C.J., Wilson, Deane and Dawson JJ.) the rural
fencing market or of preventing Q.W.I. from engaging in competitive conduct in the
rural fencing market. B.H.P. thus had contravened s. 46(1)(b) and (c) of the Trade
Practices Act. The words "take advantage" in sub- s. (1) did not require any proof
of hostile intent or use of power which was morally or socially undesirable but
meant "use".
Per Deane, Dawson and Toohey JJ. A market may exist if there are potential
buyers for a product even if no sales have taken place.
Per Dawson and Toohey JJ. Market definition requires consideration of
substitutability both on the demand and on the supply side.
Per Deane and Dawson JJ. The fact that A.W.I. was a wholly-owned subsidiary of
B.H.P. did not require sales of Y-bar by B.H.P. to A.W.I. to be treated for the
purposes of market identification as if they did not exist as sales or purchases.
Decision of the Federal Court of Australia (Full Court): Queensland Wire
Industries Pty. Ltd. v. Broken Hill Proprietary Co. Ltd. (1987), 17 F.C.R. 211,
reversed.
APPEAL from the Federal Court of Australia.
In November 1984, Queensland Wire Industries Pty. Ltd. ("Q.W.I.") sued the
Broken Hill Proprietary Co. Ltd. ("B.H.P.") and B.H.P.'s wholly-owned subsidiary,
Australian Wire Industries Pty. Ltd. ("A.W.I.") in the Federal Court of Australia
for an injunction and damages. Q.W.I. claimed that B.H.P. and A.W.I. had misused
their market power in contravention of s. 46 of the Trade Practices Act 1974 (Cth)
by effectively refusing to sell to it a steel product known as Y-bar. Pincus J.
held that, although Q.W.I. had established every other element of its claim, it
had not established that B.H.P. and A.W.I. had "take(n) advantage" of their market
power in so doing, because their conduct could not be regarded as being predatory
or unfair, and accordingly dismissed the application (1). Q.W.I. appealed to the
Full Court of the Federal Court (Bowen C.J., Morling and Gummow JJ.) which
dismissed the appeal on the ground that, because there had been no sales of Y-bar
other than between B.H.P. and A.W.I., there was no market for Y-bar to attract the
operation of s. 46 (2). From that decision, Q.W.I. appealed, by special leave to
the High Court.*179
A. H. Goldberg Q.C. (with him D. Shavin), for the Trade Practices Commission,
applied for leave to intervene.The appeal involves two important matters, relating
to the proper interpretation of s. 46 of the Trade Practices Act 1974, market
definition and the taking advantage of market power. The Commission is charged
with the administration of the Act and is vitally concerned with its proper
interpretation. Because of its experience and its investigative activities which
can lead to proceedings to restrain breaches of s. 46, it has an interest in
putting to the Court the manner in which it submits the section should be
interpreted. Although the appellant has not sought a declaration, one would have
been made if it had been successful at the trial. The situation effectively is
that contemplated by s. 163A(3) and, on that basis, the Commission should be
allowed to intervene. Alternatively, it should be allowed to make submissions as
amicus curiae because of its experience in trade practices matters. As the appeal
may result in a judgment which will become the definitive judgment about market
definition, the Commission wishes to place before the Court matters for its
consideration which the parties do not appear to have placed before the courts
below. In particular, if the finding of the Full Court of the Federal Court that
there has never been a market for Y-bar is allowed to stand, there will be little
scope for the control of any abuse of market power by vertically-integrated
companies within the scope of s. 46 and, accordingly, it would be narrowed
substantially.
A. M. Gleeson Q.C. (with him J. H. Byrne Q.C. and P. A. Keane), for the
respondents.The Commission seeks to put a matter of fact (that the respondents'
decision to consume all the Y-bar which B.H.P. produces is an exercise of B.H.P.'s
power in the market for steel and steel products) on a different basis from which
the case was put by the appellant at either level in the Federal Court. There is
no evidence or finding to support that proposition. Section 163A(3) does not apply
since a declaration was not claimed.
MASON C.J. It may be convenient to stand the application for leave to intervene
down until the conclusion of the appellant's argument. At that stage, the Court
will appreciate the issues and you may renew your opposition then.
D. P. Drummond Q.C. (with him D. R. Gore Q.C.), for the appellant.Pincus J. held
that the A.W.I. had proved every element of its claim except that the respondents
had "taken advantage" of its power in the two markets which he found to exist,
namely, the market for steel products and the market for Y-bar fencing *180
materials. The Full Court did not reverse the findings that the respondents were
in a position substantially to control both markets. In those circumstances, it
was irrelevant for the Full Court to examine whether a market for Y-bar existed.
We adopt the Commission's submission that s. 46 does not require that the trade in
the product the subject of the impugned conduct should itself constitute a market.
The appellant must succeed if it proves that, by refusing supply of Y-bar, the
respondents were taking advantage of their power in either of the two wider
markets. Although Pincus J. did not expressly find that such refusal amounted to
an exercise of the respondents' power, his findings were tantamount to an express
finding to that effect. One factor that contributes to the respondents' possessing
dominant power in the rural fencing material market in Australia is that the
respondents are the sole domestic source of Y-bar feed which is required to make
star pickets, and star pickets are the essential component in the posts which are
an important component in turn in rural fencing materials. The respondents'
refusal of feed to the appellant, as a competitor in the rural fencing materials
market, was an exercise of their power in that market. Alternatively, if proof of
a Y-bar market is necessary, there was such a market. A market is the field of
actual potential transactions between buyers and sellers: Re Queensland
Co-operative Milling Association Ltd.(3); Trade Practices Commission v. Ansett
Transport Industries (Operations) Pty. Ltd.(4). The evidence of the economists was
that, if there were a genuine buyer and a producer of the product, the producer's
refusal to supply did not prevent there being a market, in the economists' sense,
for a product. "Market" in ordinary speech, may mean something other than an area
of actual trafficking in goods. [He referred to the Macquarie Dictionary and the
Shorter Oxford English Dictionary.] Y-bar is a product in perfectly saleable form
which the respondents have sold to related companies. They have offered to sell it
to the appellant at prices that would not enable it to compete. As there were no
real substitutional possibilities in relation to Y-bar, on either the demand or
the supply side, it formed a discrete market. If actual sales are required for a
market, there were such sales. The words "take advantage" do not involve any
additional element of misuse. They require only proof that the conduct complained
of involves a use by the corporation of its market power: Victorian Egg Board v.
Parkwood Eggs Pty. Ltd.(5); Macquarie Dictionary; Shorter Oxford English
Dictionary. *181 The respondents used their market power to impair the appellant's
ability to compete in the fencing materials market. Only in such a situation can a
business be compelled to deal with customers with whom it does not wish to deal.
Alternatively, if additional misuse of power has to be shown, there was such
misuse. Y-bar is the only partly-processed product that the respondent does not
supply to other processers. The respondent can refuse to supply Y-bar to the
appellant in the knowledge that there is no alternative source of supply. [He also
referred to Otter Tail Power Co. v. United States(6) and Korah, Competition Law of
Britain and the Common Market (1975), pp. 227-228.]
A. M. Gleeson Q.C. (with him J. H. Byrne Q.C. and P. A. Keane), for the
respondents.The Commission seeks to make a case significantly different from the
appellant's case. It should not be permitted to intervene for the purpose of
recasting the form of the proceedings. The appellant's object is to have the
respondent make over to it part of its business of manufacturing steel fence
posts. At present, the respondent uses all the Y-bar it produces. Is it supposed
to produce more Y-bar than it needs in order to assist the appellant to go into
the business of manufacturing fence posts and take a profit at that level of the
business? The problem arises from forcing a vertically-integrated manufacturer to
supply intermediate product to a would-be competitor.
The appellant's construction of s. 46 would require a person who owes his
monopoly to a patent to be obliged to license a would-be competitor to use that
patent. [He referred to s. 51(3).] The sales from B.H.P. to its subsidiary were
irrelevant: Copperweld Corp. v. Independence Tube Corp.(7). It is not sufficient
to show that there is a market in some commodity; the market must be defined in a
manner that is relevant to the analysis of the problem at hand. The definition
involves product definition (the degree of particularity with which the relevant
product is identified), the level of commercial activity (whether it is the
wholesale or the retail market) and geographical definition. It is not easy to
understand how there could be any purpose to prevent entry into a market. The only
market found by Pincus J. was the rural fencing market. The appellant was already
in it. It engages in competitive conduct in that market. To define the market as
"the star picket market" is impossibly narrow. Market power is freedom from
constraint in business decisions taken in that market. It is never absolute but it
is relative. A person cannot be held to use or take advantage of market power
unless the conduct *182 in which he is engaging is something in which he would
not, or could not, engage but for the absence of constraint. There is no finding
on that issue. The respondent's decision to consume all the Y-bar it produces has
not been shown or held to be a consequence of freedom from constraint. [He also
referred to Areeda and Hovenkamp, Antitrust Analysis (1981), p. 578; Aspen Skiing
Co. v. Aspen Highlands Skiing Corp.(8); Olympia Equipment Leasing Co. v. Western
Union Telegraph Co.(9); Report of the Trade Practices Act Review Committee to the
Minister for Business and Consumer Affairs (Swanson Committee) (1976); Report of
the Trade Practices Consultative Committee on Small Business and the Trade
Practices Act (Blunt Committee) (1979); and Midland Milk Pty. Ltd. v. Victorian
Dairy Industry Authority(10).]
D. P. Drummond Q.C., in reply,referred to Fishman v. Wirtz(11).
D. Shavin, for the Trade Practices Commission.It is unnecessary to have direct
evidence but it is sufficient if there is strong circumstantial evidence from
which inferences can be drawn. [He referred to the Trade Practices Act 1974, s.
46(7).]
Cur. adv. vult.
The following written judgments were delivered:-
167 CLR 177
1989 WL 649333 (HCA), [1989] 3 C.M.L.R. 169, [1990] F.S.R. 23, 63 ALJR 181, [1989]
ATPR 0, [1989] ATPR 50,000, 83 AR 577
(Cite as: 167 CLR 177)
1989, Feb. 8
Mason
C.J. and
Wilson
J.
This case presents important questions arising under s. 46 of the Trade Practices
Act 1974 (Cth) ("the Act"). The appellant, Queensland Wire Industries Pty. Ltd.,
made an application under the Act against the first respondent, The Broken Hill
Proprietary Co. Ltd. ("B.H.P."), and the second respondent, Australian Wire
Industries Pty. Ltd. ("A.W.I."), claiming that the respondents misused their
substantial degree of market power in violation of s. 46 by effectively refusing to
sell to it a steel product known as Y-bar. The Federal Court of Australia (Pincus
J.) dismissed the application on the ground that, although the appellant had
established every other element of its claim, the respondents had not "take[n]
advantage" of their market power within the meaning of s. 46(1)(12). The Full Court
of the Federal Court (Bowen C.J., Morling and Gummow JJ.) dismissed the *183 appeal
from the judgment of Pincus J., but based its decision on a different ground (13).
The Full Court held that because Y-bar had never been sold, there had never been a
market for Y-bar so as to attract the operation of s. 46. The appellant has appealed
from the decision of the Full Court to this Court.
B.H.P. wholly owns A.W.I., and, given the extent of B.H.P.'s control of A.W.I., we
refer to the two respondents as B.H.P. According to an affidavit of a B.H.P.
officer, B.H.P. is responsible for about 97 per cent of Australia's steel output and
supplies about 85 per cent of the country's demand for steel and steel products.
B.H.P.'s only substantial domestic competitor in the supply of steel and steel
products is Smorgon Consolidated Industries Pty. Ltd. ("Smorgon"), which supplies
about 3 per cent of the market for steel and steel products. Since 1983 Smorgon has
produced and sold reinforcing bar and merchant bar, the bar which is usually sold to
steel merchants, but this does not seem to have affected the price structure of the
market because Smorgon appears to have been content to follow B.H.P.'s price
changes. Also, as Pincus J. found, "[t]here are significant barriers to the entry of
a new domestic rod and bar manufacturer, including the very high cost of setting up
a rod and bar mill".
Since the 1920s B.H.P. has manufactured Y-bar, a product which acquires its name
from the appearance of its cross-section. B.H.P. is the only manufacturer of Y-bar
in Australia and no significant quantities have been imported. Of the shapes of
steel products which B.H.P. makes at its Newcastle rolling mill (the mill producing
the Y-bar the appellant seeks to buy), only the Y-bar is not for general sale.
B.H.P. has, however, exported Y-bar. It has sent some Y-bar to a wholly-owned B.H.P.
subsidiary in New Zealand and small amounts have been exported to a New Guinea
corporation in which B.H.P. has a 40 per cent interest.
Y-bar is used in the manufacture of "star picket posts". The manufacturing process
is quite simple. It involves cutting the Y-bar at fence post lengths, putting in
holes through which wire will ultimately pass, trimming one end of the post to a
point so that the post can be hammered into the ground, and coating the posts with
an anti-corrosive. These posts are then used in what is by far the most popular kind
of rural fencing in Australia. Other rural fencing is available, such as that
incorporating posts with an "X" cross-section, but these types of fencing are much
less popular.
Only 1 per cent of star picket posts used in Australia is imported. The rest is made
by B.H.P. from its Y-bar. B.H.P. places great *184 importance on the fact that it is
the only source that can supply "the total package of products". In its advertising
it emphasizes that it can supply "every part of the fence - not just the wire" and
it sends complete truckloads of assembled fencing incorporating star picket posts
directly to end users. In the 1986-87 year, more than forty-one per cent of the
total tonnage of rural fencing sold by B.H.P. consisted of such combined loads. In
an internal memorandum dated February 1982 a B.H.P. officer stated: "The major
advantages of [B.H.P.] in rural areas are in our distribution and marketing
strengths. The full product range supply position and our large volume are critical
factors in these strengths." And B.H.P.'s national sales manager wrote to another
executive in April 1983 with respect to Smorgon's interest in producing Y-bar:
"[B.H.P.] are very concerned to the extent that Y-Bar as a product, although of low
margin, provides a basic connection for substantial wire sales." Smorgon does not
produce Y-bar.
The appellant began operations twenty years ago with the production of barbed wire.
Since then, the appellant has expanded its product range and now three- quarters of
its business is rural fencing. In June 1987 the appellant opened a new wire plant.
Before then it made wire products from bulk galvanized wire bought from B.H.P. In
the new plant it makes its own wire from rods obtained from B.H.P. The appellant and
B.H.P. are now the only manufacturers of galvanized wire in Australia and the
appellant has competed fairly effectively with B.H.P. in the market for that product
in Queensland and northern New South Wales.
Between them, B.H.P. and the appellant supply nearly all of the rural steel fencing
in Queensland, with the appellant having about 28 per cent of that market and the
respondents almost all of the rest. B.H.P. supplies most of the rural fencing in the
rest of Australia, with the exception of South Australia, and draws from rural
fencing sales a gross income of about $80 million a year. About $33 million of that
gross income comes from the sale of fence posts, about $4 million of which is
profit. But B.H.P.'s participation in the rural steel fencing market is even greater
than those figures suggest - it also supplies bulk wire to the appellant and another
smaller competitor.
The appellant does not make the star picket post. It cannot obtain the necessary
"feed", Y-bar, from B.H.P. at a reasonable price. During the course of interlocutory
proceedings, B.H.P. wrote to the appellant, stating:
"[B.H.P.'s] policy ... was either to refuse supply of steel Y-bar or to offer to
supply steel Y-bar at an uncompetitive price because it wished to preserve the
business of the manufacture *185 and wholesale sale of fence posts conducted by it
..., there being no market for the supply for any purpose of steel Y-bar to other
manufacturers."
In 1984 B.H.P. informed the appellant that it would sell Y-bar to the appellant, but
this was at an excessively high price relative to other B.H.P. products. B.H.P.
makes star picket posts at its Newcastle plant out of Y-bar from its rod and bar
mill there. As noted above, Y-bar is the only product of that rolling mill
unavailable for sale. The appellant can, however, buy the star picket posts from
B.H.P. in accordance with B.H.P.'s published price list.
In November 1984 the appellant filed its claim alleging that B.H.P. had violated s.
46 of the Act by refusing to sell the appellant Y-bar. In the Federal Court Pincus
J. said:
"The [appellant] has ... satisfied me of the presence of all elements of its claim
except taking advantage, in the sense in which I have construed that concept."
Specifically, his Honour found that there were barriers to entry in the market for
steel and steel products, that B.H.P. was in a position to control and had a
substantial degree of power in that market, and that B.H.P. constructively refused
to sell Y-bar to the appellant for the proscribed purpose of preventing the
appellant from entering the market for star picket posts: see s. 46(1)(b). With
regard to the construction of "take advantage", his Honour said:
"B.H.P. has not in this case used its monopoly in a way which would ordinarily be
regarded as reprehensible; in particular, its refusal to supply a competitor with
Y-bar to enable the latter to compete more effectively would not, I think, be
regarded in commerce as deserving of criticism.
I have regarded the whole of the circumstances set out above as relevant to
the 'taking advantage point' ... But the presence of these factors is not quite
enough, in my view, to enable one to describe B.H.P.'s policy of turning nearly
all of a particular product it makes into another product, rather than selling
the former product, as predatory or unfair."
Finding that the refusal to sell was "not ... reprehensible" and thus did not
constitute taking advantage, Pincus J. dismissed the proceedings.
On appeal, the Full Court of the Federal Court noted that B.H.P. acted with the
purpose of preventing the appellant from competing with it in the market for the
star picket fencing by refusing to sell the appellant Y-bar. That Court stated that
the question was "whether, in so denying supply, B.H.P. was taking advantage of
power in relation to a market in the Y-bar". The Full Court went on to rule that
"there has never been a market for Y-bar so as to attract s. 46 of the Act" in that
there had been no "trade or traffic *186 between buyers and sellers ... of Y-bar as
an article of commerce". The Full Court was unconvinced that a "potential" market
was adequate for the terms of the Act.
Before turning to the appellant's claims, it is necessary to say something about the
Act. As at July 1977, s. 46 of the Act provided:
"(1) A corporation that is in a position substantially to control a market for
goods or services shall not take advantage of the power in relation to that
market that it has by virtue of being in that position for the purpose of-
(a) eliminating or substantially damaging a person, being a competitor
in that market or in any other market of the corporation or of a body
corporate related to the corporation;
(b) preventing the entry of a person into that market or into any other
market; or
(c) deterring or preventing a person from engaging in competitive
conduct in that market or in any other market.
(2) If-
(a) a body corporate that is related to a corporation is, or two or more
bodies corporate each of which is related to the one corporation together
are, in a position substantially to control a market for goods or services;
or
(b) a corporation, and a body corporate that is, or two or more bodies
corporate each of which is, related to that corporation, together are in a
position substantially to control a market for goods or services,
the corporation shall be deemed for the purposes of this section to be in a
position substantially to control that market.
..."
These proceedings began in November 1984 and the appellant claimed damages in
respect of a period beginning in January 1984 and sought injunctive relief. Between
the filing of the appellant's application and the commencement of the hearing on 3
August 1987, s. 46 was amended by the Trade Practices Revision Act 1986 (Cth), the
relevant provisions of which came into force on 1 June 1986. Consequently, the
appellant's claim for damages is governed by both versions of the Act, but its
entitlement to an injunction is controlled by the Act as it presently stands: see
Trade Practices Commission v. Milreis Pty. Ltd. [No. 2] (14). Section 46, so far as
material, now provides:
"(1) A corporation that has a substantial degree of power in a market shall
not take advantage of that power for the purpose of-*187
(a) eliminating or substantially damaging a competitor of the
corporation or of a body corporate that is related to the corporation in
that or any other market;
(b) preventing the entry of a person into that or any other market; or
(c) deterring or preventing a person from engaging in competitive
conduct in that or any other market.
(2) If-
(a) a body corporate that is related to a corporation has, or 2 or more
bodies corporate each of which is related to the one corporation together
have, a substantial degree of power in a market; or
(b) a corporation and a body corporate that is, or a corporation and 2
or more bodies corporate each of which is, related to that corporation,
together have a substantial degree of power in a market,
the corporation shall be taken for the purposes of this section to have a
substantial degree of power in that market.
(3) In determining for the purposes of this section the degree of power that a
body corporate or bodies corporate has or have in a market, the Court shall have
regard to the extent to which the conduct of the body corporate or of any of
those bodies corporate in that market is constrained by the conduct of-
(a) competitors, or potential competitors, of the body corporate or of
any of those bodies corporate in that market; or
(b) persons to whom or from whom the body corporate or any of those
bodies corporate supplies or acquires goods or services in that market."
Section 46 must be read with s. 4E, which provides:
"For the purposes of this Act, 'market' means a market in Australia and, when used
in relation to any goods or services, includes a market for those goods or services
and other goods or services that are substitutable for, or otherwise competitive
with, the first-mentioned goods or services."
The analysis of a s. 46 claim necessarily begins with a description of the market in
which the defendant is thought to have a substantial degree of power. In identifying
the relevant market, it must be borne in mind that the object is to discover the
degree of the defendant's market power. Defining the market and evaluating the
degree of power in that market are part of the same process, and it is for the sake
of simplicity of analysis that the two are separated. Accordingly, if the defendant
is vertically integrated, the relevant market for determining degree of market power
will be at the product level which is the source of that power: see the discussion
of market power below. After identifying the appropriate product level, it is
necessary to describe accurately the parameters of the market in which the
defendant's product competes: too narrow a *188 description of the market will
create the appearance of more market power than in fact exists; too broad a
description will create the appearance of less market power than there is.
Section 4E directs that a market is to be described to include not just the
defendant's product but also those which are "substitutable for, or otherwise
competitive with", the defendant's product. This process of defining a market by
substitution involves both including products which compete with the defendant's and
excluding those which because of differentiating characteristics do not compete. In
Hoffmann-La Roche v. Commission ("Roche") (15) the Court of Justice of the European
Communities said (16):
"The concept of the relevant market ... implies that there can be effective
competition between the products which form part of it and this presupposes that
there is a sufficient degree of interchangeability between all the products forming
part of the same market in so far as a specific use of such products is concerned."
Conversely, in determining in United Brands v. Commission ("United Brands") (17)
whether other fruits should be excluded from the market which bananas served, the
European Court said (18):
"For the banana to be regarded as forming a market which is sufficiently
differentiated from other fruit markets it must be possible for it to be singled out
by such special features distinguishing it from other fruits that it is only to a
limited extent interchangeable with them and is only exposed to their competition in
a way that is hardly perceptible."
See also Re Queensland Co-operative Milling Association Ltd.(19) (explaining that
the defining feature of a market is substitution).
After the market has been delimited, the question is whether the defendant has
"a
substantial degree of power" within that market. Market power can be defined as the
ability of a firm to raise prices above the 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: see Fuller, "Article 86 E.E.C.: Economic Analysis of
the Existence of a Dominant Position", European Law Reports, vol. 4 (1979) 423, at
p. 428. Section 46(3), which was added in 1986 by the Trade Practices Revision Act,
provides that in determining the degree of market power a court should consider "the
extent to which the conduct of [the defendant] *189 in that market is constrained by
the conduct of ... competitors, or potential competitors ...".
The Explanatory Memorandum accompanying the Trade Practices Revision Act stated
(par. 46) that s. 46(3) was designed to achieve an approach similar to that adopted
by the European Court in determining market power for purposes of Art. 86 of the
E.E.C. Treaty. The Memorandum mentioned Europemballage and Continental Can v.
Commission ("Continental Can")(20), United Brands and Roche, the last two being
cases to which we have already referred. In Continental Can the European Court
recognized (21) the necessity of considering potential competition in determining
the degree of market power:
"a dominant position in the market for light metal containers for canned meat and
fish cannot be decisive, in so far as it is not proved that competitors in other
fields of the market for light metal containers cannot by a mere adaptation, enter
this market, with sufficient strength to form a serious counter-weight."
Courts have often looked to market share to determine degree of market power: see,
e.g., American Tobacco Co. v. United States(22); United States v. Grinnell Corp.(23)
("The existence of such [monopoly] power ordinarily may be inferred from the
predominant share of the market."); United States v. Aluminium Co. of America(24)
per Judge Learned Hand. But as s. 46(3) and the passage from Continental Can which
we just quoted suggest, a large market share does not necessarily mean that there is
a substantial degree of market power. To borrow the words from Reed J.'s opinion for
the Court in United States v. Columbia Steel Co.(25), "[t]he relative effect of
percentage command of a market varies with the setting in which that factor is
placed."
A large market share may well be evidence of market power (see Roche(26)), but the
ease with which competitors would be able to enter the market must also be
considered. It is only when for some reason it is not rational or possible for new
entrants to participate in the market that a firm can have market power: see
Continental Can(27). There must be barriers to entry. As Professor F. M. Scherer has
written, "significant entry barriers are the sine qua non of monopoly and oligopoly,
for ... sellers have little or no enduring *190 power over price when entry barriers
are nonexistent": Scherer, Industrial Market Structure and Economic Performance, 2nd
ed. (1980), p. 11. Barriers to entry may be legal barriers - patent rights,
exclusive government licences and tariffs for example. Barriers to entry may also be
a result of large "economies of scale". Where the economies of scale in a market are
such that the minimum size for an efficient firm is very large relative to the size
of the market, it may be that potential competitors will be dissuaded from entering
the market by the apprehension that only one firm would survive.
Another indicator of market power suggested by the European Court which is relevant
to the case at hand is vertical integration: United Brands(28). It is true enough
that vertical integration sometimes accompanies a substantial degree of market
power, but its presence does not necessarily mean that a substantial degree of power
exists. There may be legitimate reasons for a firm vertically integrating - quality
control of raw materials for example. Nevertheless, Fuller observes, "[v]ertical
integration nearly always accompanies monopoly, not because it raises barriers to
entry, but because it gives the monopolist greater power to extract more favourable
prices from its customers" (p. 440). The reason for this is that vertical
integration may help a monopolist distinguish between customers whose demand is less
and more elastic. Where consumers are able to trade amongst themselves, the
monopolist cannot discriminate. By integrating vertically it may be possible for a
monopolist to prevent this inter-trading. For example, power companies usually own
distribution systems. This enables them to discriminate in pricing between
residential and commercial users. Therefore, although vertical integration does not
by itself mean that a firm has a substantial degree of market power, it may well be
the means by which the firm capitalizes on that market power.
Once it is established that a firm has a substantial degree of market power, the
issue is whether it has "take[n] advantage" of that power for the purpose of
"substantially damaging a competitor", "preventing the entry" of a competitor into a
market, or "preventing a person from engaging in competitive conduct" in a market:
s. 46(1)(a), (b) and (c). Pincus J. suggested that the phrase "take advantage"
requires that the defendant be doing something "reprehensible". His Honour also used
the phrases "[competition] deserving of criticism" and "predatory or unfair",
apparently as *191 equivalents for "reprehensible". It is unclear precisely what the
phrases are supposed to mean, but they suggest some notion of hostile intent. For
our part, we have difficulty in seeing why an additional, unexpressed and
ill-defined standard should be implanted in the section. The phrase "take advantage"
in s. 46(1) does not require a hostile intent inquiry - nowhere is such standard
specified. And it is significant that s. 46(1) already contains an anti-competitive
purpose element. It stipulates that an infringement may be found only where the
market power is taken advantage of for a purpose proscribed in par. (a), (b) or (c).
It is these purpose provisions which define what uses of market power constitute
misuses.
It is perhaps not surprising that lawyers would be tempted to incorporate an element
of intent into the statutory tort of a s. 46 infringement given the importance of
intent in tort law. But there is a fundamental difference between the usual tort and
a s. 46 violation. In the ordinary tort case, a tortfeasor's intent may well be
relevant to his dangerousness - if he intends to hurt another he is more likely to
cause injury than if he is not trying to hurt the other. If the purpose of s. 46
were the economic well-being of competitors, then a similar implication of intent
might well be appropriate: see Olympia Equipment Leasing v. Western Union Telegraph
(29).
But the object of s. 46 is to protect the interests of consumers, the operation of
the section being predicated on the assumption that competition is a means to that
end. Competition by its very nature is deliberate and ruthless. Competitors jockey
for sales, the more effective competitors injuring the less effective by taking
sales away. Competitors almost always try to "injure" each other in this way. This
competition has never been a tort (see Keeble v. Hickeringill(30)) and these
injuries are the inevitable consequence of the competition s. 46 is designed to
foster. In fact, the purpose provisions in s. 46(1) are cast in such a way as to
prohibit conduct designed to threaten that competition - for example, s. 46(1)(c)
prohibits a firm with a substantial degree of market power from using that power to
deter or prevent a rival from competing in a market. The question is simply whether
a firm with a substantial degree of market power has used that power for a purpose
proscribed in the section, thereby undermining competition, and the addition of a
hostile intent inquiry would be superfluous and confusing.
The Full Court held that the relevant market for establishing *192 market power was
the market for Y-bar and, as none had been sold, there was no such market. But the
issue whether there is a market for Y-bar is of little significance in determining
the degree of B.H.P.'s power. Pincus J. found that once a rolling mill is in
operation it is relatively easy to convert production from one shape of steel to
another. Consequently, any market power B.H.P. has with regard to Y-bar would be
dependent on power in the market for steel and steel products.
Pincus J. found that B.H.P. is in a position to control and has a substantial degree
of power in the steel and steel product market. B.H.P. is one of Australia's two
steel producers, and, as Pincus J. found, there are significant barriers to entry.
Pincus J. did not identify what those barriers to entry were except to note that
among them was the high cost of setting up a rolling mill. Economists, with their
faith in the efficiency of capital markets and the rational behaviour of
businessmen, would question the conclusion that high capital costs could constitute
a barrier to entry. But it may be that the high capital costs of the steel industry,
the presence of an established and overwhelmingly large producer in a protected
market, and large economies of scale may together be sufficient to constitute
effective barriers to entry.
To be taken in conjunction with the finding of significant barriers to entry is the
evidence already mentioned of B.H.P.'s market share in the production of steel and
steel products. Pincus J.'s holding that B.H.P. was in a position to control and
that it possesses a substantial degree of power in the market for steel and steel
products is clearly supported by the evidence.
In effectively refusing to supply Y-bar to the appellant, B.H.P. is taking advantage
of its substantial market power. It is only by virtue of its control of the market
and the absence of other suppliers that B.H.P. can afford, in a commercial sense, to
withhold Y-bar from the appellant. If B.H.P. lacked that market power - in other
words, if it were operating in a competitive market - it is highly unlikely that it
would stand by, without any effort to compete, and allow the appellant to secure its
supply of Y-bar from a competitor.
The question remains whether B.H.P., in taking advantage of its substantial market
power, has done so for a purpose described in par. (a), (b) or (c) of s. 46. Pincus
J. held that it did. His Honour found that B.H.P.'s refusal to supply Y-bar to the
appellant was for the purpose of preventing the latter's entry into a market: see s.
46(1)(b). By this his Honour must be taken to have referred to the respondents'
preventing the appellant from entering the market for star picket fence posts. This
conclusion that the effective refusal to sell was for an impermissible purpose was
supported by the fact that *193 B.H.P. did not offer a legitimate reason for the
effective refusal to sell and the evidence that the Y-bar was the only product of
B.H.P.'s rolling mills not offered for sale. Pincus J. referred to the fact that in
every steel product line where B.H.P. experienced some competition, it sold that
product, but in the case of Y-bar, a product which it alone produced, it refused to
sell.
Although Pincus J.'s finding of an impermissible purpose with regard to excluding
the appellant from the star picket post market is adequate to support the finding of
an infringement of the section, that market is not the most informative one on which
to focus. Pincus J. accepted that "there are great advantages accruing to B.H.P. as
a participant in the rural fencing market, by virtue of its being the sole domestic
supplier of star pickets" and that "[t]hose advantages ... extend well beyond being
relatively free from price competition in selling star pickets". The evidence
regarding the importance to B.H.P. of being the only supplier of the full range of
rural fencing products indicates that it is in the market for rural fencing products
where those advantages lie and where B.H.P.'s market power is being extended. Pincus
J.'s finding of an impermissible purpose remains applicable, however, because star
picket posts are a constituent element of the product which competes in the rural
fencing market. So, although it is sufficient to describe the infringement in terms
of s. 46(1)(b), preventing the entry of a rival into a market, it would be more apt
to describe that purpose in terms of s. 46(1)(c), "deterring or preventing a person
from engaging in competitive conduct" in a market. The appellant has made out each
element of its claim against B.H.P.
It remains to be mentioned that the Trade Practices Commission appeared by counsel
on the hearing of the appeal and sought to intervene. The Court reserved its
decision on that application. For the reasons given by Toohey J. we would refuse the
application.
For the foregoing reasons we would allow the appeal and remit the matter to the
Federal Court for a determination of the appellant's entitlement to damages and
injunctive relief.
Deane
J.
The background of this appeal, the detailed facts and the directly relevant
provisions of the Trade Practices Act 1974 (Cth) ("the Act") are set out in other
judgments. I turn at once to the first of the questions which arise for
consideration in this Court. That question is one of statutory construction. It is
whether the words "take advantage of ... power" in s. 46(1) of the Act (in the forms
which that section has taken since 1977) not only designate the use (whether active
or passive) of power or a position of power but also import an additional element to
the effect that there will be *194 no contravention of the sub-section unless the
particular use of power (for one or other of the proscribed purposes) is
reprehensible or unfair.
The starting point of a consideration of that first question is the fact that the
essential notions with which s. 46 is concerned and the objective which the section
is designed to achieve are economic and not moral ones. The notions are those of
markets, market power, competitors in a market and competition. The objective is the
protection and advancement of a competitive environment and competitive conduct by
precluding advantage being taken of "a substantial degree of power in a market" for
any of the proscribed purposes. If the substantial degree of market power exists and
is "take[n] advantage of" for one or other of those purposes, it is not to the point
that that degree of market power was acquired by praiseworthy means (e.g. hard work,
efficiency, product quality and service) or that the anti-competitive purpose is
inspired by altruistic or even patriotic motives (e.g. to avoid the consequences to
the small trader of irrational and extreme price competition or to protect local
standards and employment). That is, of course, unless the words "take advantage of
... power" introduce a need for some distinct examination of the morality or social
acceptability of the conduct involved. In my view, they do not.
It is true that the words "take advantage of" can be used with an adverse moral
implication. This is particularly the case where the words are used with another
person as their object. Of themselves, however, the words "take advantage of ...
power" are morally indifferent. As a matter of language, a Parliament can "take
advantage" of its legislative power to make good laws; a government can "take
advantage" of its executive power to protect and benefit the community; a trading
corporation can "take advantage" of its trading power to advance trade and
competition to the benefit of its shareholders, its employees and those with whom it
deals; an ordinary person can "take advantage" of such power as he possesses to
achieve objectives which are praiseworthy and socially desirable. Read in context,
the words "take advantage of ... power" are simply inadequate to superimpose upon
the economic notions and objectives which s. 46(1) reflects some indefinite moral or
public purpose qualification requiring circumstances where the active or passive use
of the relevant market power for one or other of the designated anti-competitive
purposes is morally or socially undesirable.
The second question involved in the appeal is a kaleidoscope of law and fact: the
effect of the relevant statutory provisions and the *195 inferences to be drawn from
largely uncontested facts. Plainly enough, the first respondent ("B.H.P.") has a
substantial degree of power in a number of possibly relevant markets. The question
is whether it has "take[n] advantage of [its] power" in any such market for any of
the anti-competitive purposes specified in s. 46(1). The purposes which are of
particular relevance are "preventing the entry of a person into that or any other
market" (s. 46(1)(b)) and "deterring or preventing a person from engaging in
competitive conduct in that or any other market" (s. 46(1)(c)).
In the case of an alleged contravention of the provisions of s. 46(1), there will
ordinarily be little point in attempting to define relevant markets without first
identifying precisely what it is that is said to have been done in contravention of
the section. The present case, with its variety of arguable markets, is no
exception. Here, B.H.P. has refused, otherwise than at an unrealistically high
price, to supply the appellant ("Q.W.I.") with a steel product ("Y-bar") produced by
B.H.P.'s rolling mills. Ordinarily, B.H.P. sells the various products from those
mills to any manufacturer who desires to purchase them. Y-bar is the only exception.
The explanation of B.H.P.'s effective refusal to supply Y-bar to Q.W.I. is that
there is no other local producer or wholesaler of Y-bar and B.H.P. desires to
prevent Q.W.I. from manufacturing and selling star picket fencing posts (produced
from Y-bar) in competition with the second respondent ("A.W.I."), which is a wholly
owned subsidiary of B.H.P.
Section 4E confines "market" for the purposes of the Act to "a market in Australia"
and provides that, when the word "market" is used in relation to any goods or
services, it "includes a market for those goods or services and other goods or
services that are substitutable for, or otherwise competitive with, the
first-mentioned goods or services". Section 46(4) provides that a reference in s. 46
to a market is a reference to a market for goods or services. The Act does not
otherwise seek to define what is meant by the word "market". That is not surprising
since the word is not susceptible of precise comprehensive definition when used as
an abstract noun in an economic context. The most that can be said is that "market"
should, in the context of the Act, be understood in the sense of an area of
potential close competition in particular goods and/or services and their
substitutes (cf. Re G. & M. Stephens Cartage Contractors Pty. Ltd.(31)).
The identification of relevant markets and the definition of *196 market structures
and boundaries for the purposes of determining whether B.H.P.'s refusal to supply
Y-bar to Q.W.I. contravened s. 46(1) involves value judgments about which there is
some room for legitimate differences of opinion. The economy is not divided into an
identifiable number of discrete markets into one or other of which all trading
activities can be neatly fitted. One overall market may overlap other markets and
contain more narrowly defined markets which may, in their turn, overlap, the one
with one or more others. The outer limits (including geographic confines) of a
particular market are likely to be blurred: their definition will commonly involve
assessment of the relative weight to be given to competing considerations in
relation to questions such as the extent of product substitutability and the
significance of competition between traders at different stages of distribution.
While actual competition must exist and be assessed in the context of a market, a
market can exist if there be the potential for close competition even though none in
fact exists. A market will continue to exist even though dealings in it be
temporarily dormant or suspended. Indeed, for the purposes of the Act, a market may
exist for particular existing goods at a particular level if there exists a demand
for (and the potential for competition between traders in) such goods at that level,
notwithstanding that there is no supplier of, nor trade in, those goods at a given
time - because, for example, one party is unwilling to enter any transaction at the
price or on the conditions set by the other. It is, however, unnecessary to pursue
that question for the purposes of the present appeal.
As has been indicated, there are various arguable "markets" which, if they be found
to exist, might be relevant for the purposes of the present case. The Full Court of
the Federal Court concluded that one of those arguable markets, the market for raw
Y-bar, did not exist in this country. I do not agree with that conclusion.
Notwithstanding some expert economic evidence on the hearing, I am unable to accept
the proposition that the fact that A.W.I. is a wholly owned subsidiary of B.H.P.
means that sales of Y-bar by B.H.P. to A.W.I. must, for the purposes of market
identification and definition, be treated as if they simply did not exist as sales
or purchases. B.H.P.'s ownership of the issued shares in the capital of A.W.I. may
mean that actual competition in the market for Y-bar is effectively stifled. The two
companies are, however, separate entities with different employees, distinct
obligations and responsibilities (e.g. to creditors and employees) and, to some
extent, varying objectives. Notwithstanding the economist's tendency to see them as
part of one "firm", it would be as unreal to completely disregard the distinction
between them for the purposes of market *197 identification as it would be to treat
them as independent. Be that as it may, the evidence establishes a local market for
Y- bar in the relevant sense even if the distinction between B.H.P. and A.W.I. be
ignored. While B.H.P. does not sell to other than A.W.I., it is a potential seller
to purchasers other than A.W.I. in that market in that it is prepared to sell Y-bar
albeit at an excessive price. That being so, there is a local market for Y-bar in
the relevant sense in that there is an arm's length potential purchaser (Q.W.I.) and
potential vendor. The fact that there are no local arm's length sales is only
because the potential vendor's price is unrealistically high.
It was, however, forcefully submitted on behalf of B.H.P. that this Court should not
rely upon the separate identity of B.H.P. and A.W.I. as a basis for concluding that
there was a market for Y-bar. No reliance had been placed on the separate identity
of the two companies at first instance and evidence was led and the case was
conducted on the basis that the two companies should properly be treated as one.
Since I have come to the conclusion that the question whether B.H.P.'s conduct
contravened s. 46(1) of the Act must be answered in the affirmative regardless of
whether a distinct market for Y-bar is identified as a relevant market, the
preferable course is, in the light of that submission, to disregard the market for
Y-bar. If that be done, the relevant markets to which regard should primarily be
paid are, in my view, the market in which producers sell steel and steel products
from the rolling mills ("the steel market") and the market in which manufacturers
sell star picket fence posts.
It is unnecessary to seek to identify the precise structure and boundaries of what
should be seen, for the purposes of the present case, as what I have described as
"the steel market". Regardless of the more precise definition of that market, B.H.P.
has a substantial degree of power in it. It is responsible for the production of 97
per cent of the steel produced in Australia and supplies 85 per cent of the domestic
market for steel and steel products. There is no present threat from imports. The
only other Australian producer of steel is Smorgon which is responsible for only 3
per cent of local production and which represents no real threat to B.H.P.'s
dominance of the entire local trade in steel and steel products. As has been said,
B.H.P. is prepared to sell to outsiders any of the products from its rolling mills
with the exception of Y- bar. It has, on some occasions in the past, sold Y-bar to
overseas purchasers. Its refusal to supply Y-bar to Q.W.I. otherwise than at an
unrealistic price was for the purpose of preventing Q.W.I. from becoming a
manufacturer or wholesaler of star pickets. That purpose could only be, and has only
been, achieved by such a refusal of supply by virtue of B.H.P.'s *198 substantial
power in all sections of the Australian steel market as the dominant supplier of
steel and steel products. In refusing supply in order to achieve that purpose,
B.H.P. has clearly taken advantage of that substantial power in that market. If that
purpose be one of those specified in s. 46(1) of the Act, B.H.P.'s conduct
constituted a contravention of that sub-section.
As has been said, B.H.P.'s purpose in refusing supply to Q.W.I. was to prevent
Q.W.I. competing with A.W.I. as a manufacturer and wholesaler of star pickets. That
purpose was a substantial one: see s. 4F of the Act. Regardless of how one defines
the market in which manufacturers of star pickets sell their products, that was a s.
46(1) proscribed purpose. If that market be very narrowly defined as the market in
which producers sell star picket fence posts, B.H.P.'s purpose in refusing supply
was, in the words of s. 46(1)(b), that of "preventing the entry of [Q.W.I.] into"
that market. On any other acceptable definition of that market (e.g. the market for
metal post and wire fences or the market for rural fencing), the purpose of B.H.P.'s
refusal was, in the words of s. 46(1)(c), that of "deterring or preventing [Q.W.I.]
from engaging in competitive conduct in" that market. That being so, the evidence
established that B.H.P.'s conduct in effectively refusing to sell Y-bar to Q.W.I. in
the period after the 1986 amendments to s. 46 of the Act contravened the provisions
of the present s. 46(1). Since B.H.P. was, at all relevant times, "in a position
substantially to control" the Australian steel market, its effective refusal of
supply prior to those 1986 amendments contravened the provisions of s. 46(1) in its
then form.
The Trade Practices Commission has effectively drawn the Court's attention to the
matters which it considered should be raised. That being so, no real point would be
served by granting it leave to intervene at this stage.
I agree with the orders proposed by the Chief Justice and Wilson J.
Dawson
J.
I agree generally with the reasons for judgment of Deane J. and would add the
following comments.
Section 46 of the Trade Practices Act 1974 (Cth) in its present form prohibits a
corporation that has a substantial degree of market power in a market for goods or
services from taking advantage of that market power for certain purposes. The
section throws up two basic questions. The first asks what degree of market power is
required. The second asks what constitutes taking advantage of market power.
Lying behind both of those questions is the concept of the *199 market, a concept
which is sometimes dealt with in a more complex manner than is necessary. A market
is an area in which the exchange of goods or services between buyer and seller is
negotiated. It is sometimes referred to as the sphere within which price is
determined and that serves to focus attention upon the way in which the market
facilitates exchange by employing price as the mechanism to reconcile competing
demands for resources: see Stigler and Sherwin, The Extent of the Market, Journal of
Law and Economics, vol. 28 (1985) 555, at p. 555. In setting the limits of a market
the emphasis has historically been placed upon what is referred to as the "demand
side", but more recently the "supply side" has also come to be regarded as
significant. The basic test involves the ascertainment of the cross-elasticities of
both supply and demand, that is to say, the extent to which the supply of or demand
for a product responds to a change in the price of another product. Crosselasticities of supply and demand reveal the degree to which one product may be
substituted for another, an important consideration in any definition of a market.
This is reflected in s. 4E of the Trade Practices Act which provides:
"For the purposes of this Act, 'market' means a market in Australia and, when used
in relation to any goods or services, includes a market for those goods or services
and other goods or services that are substitutable for, or otherwise competitive
with, the first-mentioned goods or services. (My emphasis.)"
Important as they are, elasticities and the notion of substitution provide no
complete solution to the definition of a market. A question of degree is involved at what point do different goods become closely enough linked in supply or demand to
be included in the one market - which precludes any dogmatic answer: see
Times-Picayune v. United States(32). The process is an inexact one as may be
illustrated by reference to the concept of a sub-market which has been employed from
time to time. In Re Queensland Co-operative Milling Association Ltd.(33), the Trade
Practices Tribunal observed:
"The distinction between markets and sub-markets can be merely one of degree.
Sub-markets are the more narrowly defined, typically registering some discontinuity
in substitution possibilities. Where the defining feature of a market is the
existence of close substitutes (whether in demand or supply), the defining feature
of a sub-market is the existence of still closer and more immediate substitutes.
Sub-markets may be *200 especially useful in registering the short-run effects of
change; but they may be misleading if used uncritically to assess long run
competitive effects."
Too rigid an approach in defining a market is apt to lead to unrealistic results. In
this case the submission was made that, Australian Wire Industries Pty. Ltd.
("A.W.I.") and The Broken Hill Proprietary Co. Ltd. ("B.H.P.") being treated as one,
there was no market for Y-bar. But the existence or non- existence of sales of a
product cannot conclude whether a market exists or not. It must be sufficient to
constitute a market that there is a product for exchange, regardless of whether
exchange or negotiation for exchange has actually taken place.
In truth, the need to define the relevant market arises only because the extent of
market power cannot be assessed otherwise than by reference to a market. The term
"market power" is ordinarily taken to be a reference to the power to raise price by
restricting output in a sustainable manner. See Landes and Posner, Market Power in
Antitrust Cases, Harvard Law Review, vol. 94 (1981) 937, at p. 937; Sullivan,
Antitrust (1977), p. 30; Areeda and Turner, Antitrust Law (1978), vol. II, p. 322;
Easterbrook, The Limitsof Antitrust, Texas Law Review, vol. 63 (1984) 1, at p. 20;
Fuller, Article 86 E.E.C.: Economic Analysis of the Existence of a Dominant
Position, European Law Reports, vol. 4 (1979) 423, at p. 428. But 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: see Standard Oil Co. v. United
States(34); United States v. E. I. Du Pont De Nemours & Co.(35); 54 Am. Jur. 2d,
Monopolies, <section>35. The ability to engage persistently in these practices may
be as indicative of market power as the ability to influence prices. Thus Kaysen and
Turner define market power as follows:
"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 cost and demand conditions. (Kaysen and Turner, Antitrust Policy
(1959), p. 75)"
See also Re Queensland Co-operative Milling Association Ltd.(36). Market power is
thus the advantage which flows from monopoly or near monopoly and consistently with
that notion s. 46(3) of the Trade Practices Act provides:*201
"In determining for the purposes of this section the degree of power that a body
corporate or bodies corporate has or have in a market, the Court shall have regard
to the extent to which the conduct of the body corporate or of any of those bodies
corporate in that market is constrained by the conduct of-
(a) competitors, or potential competitors, of the body corporate or of any of
those bodies corporate in that market; or
(b) persons to whom or from whom the body corporate or any of those bodies
corporate supplies or acquires goods or services in that market."
In this case the definition of the relevant market poses no great problem because
B.H.P. clearly has a substantial degree of market power however widely the market is
drawn. Even if the relevant market be the market in steel products, B.H.P. has only
one competitor in Australia, Smorgon Consolidated Industries Pty. Ltd., which has a
mere 3 per cent of the market and, according to the evidence, tends to adopt prices
at the level set by B.H.P. The evidence at first instance did not establish that
there was any real threat from imports. Moreover, the learned trial judge, Pincus
J., found that "[t]here are significant barriers to the entry of a new domestic rod
and bar manufacturer, including the very high cost of setting up a rod and bar
mill".
The existence of barriers to entry may be conclusive in determining the relevant
market and the degree of market power in it. In the context of s. 46, the existence
of significant barriers to entry into a market carries with it market power on the
part of those operating within the market. Market power follows as a natural
consequence of barriers to entry which are also a prerequisite to the establishment
and maintenance of a monopoly: see Nicholson, Microeconomic Theory, 3rd ed. (1985),
p. 417; Robinson, Monopoly (1941), pp. 40 et seq.; Varian, Microeconomic Analysis,
2nd ed. (1984), p. 91; Scherer, Industrial Market Structure and Economic
Performance, 2nd ed. (1980), pp. 11, 252. The identification of barriers to entry
helps both to define the relevant market and to establish the existence of market
power. There is, of course, vigorous debate in economic circles about what
constitutes a barrier to entry into a market. There are those who would and those
who would not accept that the high costof entry constitutes a barrier. Compare Bain,
Barriers to New Competition (1956); Bain, Industrial Organization, 2nd ed. (1968),
with Stigler, The Organization of Industry (1968). However, it is less important to
arrive at a precise meaning than to recognize the assistance given by the
identification of conditions, in the nature of barriers to entry, for the purpose of
defining the relevant market, measuring the *202 extent of market power and
determining whether that power has been exercised.
The difficulty in determining what conduct constitutes taking advantage of market
power and what conduct does not, stems inevitably from the need to distinguish
between monopolistic practices, which are prohibited, and vigorous competition,
which is not. Both here and in the United States the search continues for a
satisfactory basis upon which to make the distinction. For the most part, all that
emerges are synonyms which are not particularly helpful. Words such as "normal
methods of industrial development", "honestly industrial", "anti-competitive",
"predatory" or "exclusionary conduct" merely beg the question: see Standard Oil Co.
v. United States; United States v. Aluminium Co. of America(37); United States v.
United Shoe Machinery Corporation(38); Aspen Skiing Co. v. Aspen Highlands Skiing
Corp.(39); Areeda, Monopolization, Mergers and Markets: A Century Past and the
Future, California Law Review, vol. 75 (1987) 959, at pp. 961-963. Nor is it helpful
to categorize conduct, as has been done, by determining whether it is the exercise
of some contractual or other right: see Top Performance Motors Pty. Ltd. v. Ira Berk
(Queensland) Pty. Ltd.(40); Ah Toy J. Pty. Ltd. v. Thiess Toyota Pty. Ltd.(41); see
also Warman International Ltd. v. Envirotech Australia Pty. Ltd.(42); Williams v.
Papersave Pty. Ltd.(43). The fact that action is taken pursuant to the terms of a
contract has no necessary bearing upon whether it is the exercise of market power in
contravention of s. 46.
For the reasons given by Deane J. I am of the view that the words "take advantage
of" do not have moral overtones in the context of s. 46. That being so, there can be
no real doubt that B.H.P. took advantage of its market power in this case. It used
that power in a manner made possible only by the absence of competitive conditions.
Inferences in this regard can be drawn from the fact that B.H.P. could not have
refused to supply Y-bar to Q.W.I. if it had been subject to competition in the
supply of that product. B.H.P. supplies all its other steel products without
restriction and its practice with regard to Y-bar was not in accordance with its
normal behaviour. If there had been a competitor supplying Y-bar, B.H.P.'s refusal
to supply it to Q.W.I. would have eroded its position in the steel products market
without *203 protecting A.W.I.'s position in the fencing materials market. Moreover,
the existence of barriers to entry into the steel products market must inevitably,
upon the findings of the trial judge, have influenced B.H.P. in the course which it
took.
I would allow the appeal. I agree with the orders proposed by the Chief Justice and
Wilson J.
Toohey J.
The appellant, Queensland Wire Industries Pty. Ltd. ("Q.W.I."), made a claim against
the respondents, The Broken Hill Proprietary Co. Ltd. ("B.H.P.") and Australian Wire
Industries Pty. Ltd. ("A.W.I."), pursuant to provisions of the Trade Practices Act
1974 (Cth) ("the Act"). It alleged that they had contravened s. 46 of the Act, once
the "monopolization" and now the "misuse of market power" provision, by their
refusal to supply Y-bar, a steel product. It sought an injunction and damages, the
former pursuant to s. 80 of the Act and the latter pursuant to s. 82. Its claim was
dismissed by Pincus J. in the Federal Court (44); an appeal to the Full Court of the
Federal Court (Bowen C.J., Morling and Gummow JJ.) was in turn dismissed (45).
Section 46 was repealed and re-enacted by Act No. 81 of 1977 which came into force
on 1 July 1977. The section was later amended by Act No. 17 of 1986 which took
effect from 1 June 1986. The changes and their implications for the present appeal
are discussed later in these reasons. In considering whether there was a breach of
s. 46 sounding in damages, it is necessary to have regard to the section as it stood
before 1 June 1986 and as it stood thereafter, for damages are claimed in respect of
the period from January 1984 until June 1987. Both Pincus J. and the Full Court were
of the view that Q.W.I.'s entitlement to an injunction depended upon the operation
of s. 46 in its present form: see Trade Practices Commission v. Milreis Pty. Ltd.
[No. 2](46). That view was not challenged before us.
At the centre of the dispute is the steel star picket, the most popular form of
rural fence post in this country. Australia's iron and steel industry is largely in
the hands of B.H.P. The evidence before Pincus J. was that the company accounts for
about 97 per cent of Australia's total steel output and that it supplies about 85
per cent of the country's requirements for steel and steel products. B.H.P. is the
only domestic producer of star pickets and there is no significant importer to
compete with it. Q.W.I.'s principal business is the manufacture of rural fencing. It
competes with B.H.P. in the sale of *204 rural fencing, mainly in Queensland and in
northern New South Wales. The primary judge found that Q.W.I.'s ability to compete
with B.H.P. in that business is significantly limited by its inability to obtain
Y-bar which is a product of rolling mills and is the "feed" from which star pickets
are made. His Honour held: "An important advantage of B.H.P.'s star picket monopoly
is that it is able to offer to its distributors a full range of rural fencing
products. Preservation of that advantage is one of the reasons for its refusal,
subject to some exceptions ..., to sell anyone Y-bar."
B.H.P. has been manufacturing Y-bar since the 1920s. A.W.I. was incorporated in 1921
and since 1925 it has been a wholly owned subsidiary of B.H.P. A.W.I. manufactures
star pickets at Newcastle in New South Wales; B.H.P. does so at Hamilton in
Queensland. Both plants use Y-bar produced by B.H.P. at Newcastle. Some fence posts
made from B.H.P. Y-bar are produced at Kwinana in Western Australia, at the plant of
another wholly owned B.H.P. subsidiary. Y-bar has been exported to a wholly owned
B.H.P. subsidiary in New Zealand for the manufacture of fence posts. Small
quantities of Y-bar have also been exported to a Papua New Guinea corporation which
once was a wholly owned subsidiary of B.H.P. but in which B.H.P. now has a 40 per
cent interest.
Q.W.I. is able to buy steel fence posts from B.H.P. in accordance with that
company's published price list but it cannot sell those posts to major distributors
profitably. It cannot offer fence posts at a competitive price, particularly to the
major distributors. This in turn has affected its sales of wire. His Honour said
that there was no dispute that there had been a "constructive refusal" on the part
of B.H.P. to sell Y-bar to Q.W.I. He elaborated that comment in the following way:
"I use the expression 'constructive refusal' as descriptive of an offer to sell at
an uncompetitive price; B.H.P. is prepared to sell to [Q.W.I.] at a price which,
relatively to B.H.P.'s other rolled products, is excessively high. I find that it is
designed to be so; that is, the offer made by B.H.P. was pitched at a level which
B.H.P. knew would make it impossible of acceptance, because [Q.W.I.] could not
manufacture star picket from Y-bar purchased at that price and sell it
competitively."
Q.W.I.'s wish is to obtain Y-bar rather than fence posts and it is that wish which
prompted the making of the application which is the subject of this appeal. In the
course of interlocutory proceedings, the solicitors for B.H.P. and A.W.I. wrote to
the solicitors for Q.W.I. in these words:
"... A.W.I.'s policy throughout that period [a reference to 1981 *205 and subsequent
years] was either to refuse supply of steel Y-bar or to offer to supply steel Y-bar
at an uncompetitive price because it wished to preserve the business of the
manufacture and wholesale sale of fence posts conducted by it in association with
B.H.P., there being no market for the supply for any purpose of steel Y-bar to other
manufacturers."
Against this background it is necessary to consider s. 46 of the Act, both as first
enacted and as later amended. In its original form, s. 46(1) read:
"A corporation that is in a position substantially to control a market for goods or
services shall not take advantage of the power in relation to that market that it
has by virtue of being in that position-
(a) to eliminate or substantially to damage a competitor in that market or in
another market;
(b) to prevent the entry of a person into that market or into another market;
or
(c) to deter or prevent a person from engaging in competitive behaviour in
that market or in another market."
Section 46(1) as re-enacted in 1977 read:
"A corporation that is in a position substantially to control a market for goods or
services shall not take advantage of the power in relation to that market that it
has by virtue of being in that position for the purpose of-
(a) eliminating or substantially damaging a person, being a competitor in that
market or in any other market of the corporation or of a body corporate related
to the corporation;
(b) preventing the entry of a person into that market or into any other
market; or
(c) deterring or preventing a person from engaging in competitive conduct in
that market or in any other market."
Section 46(1), as amended in 1986, now reads:
"A corporation that has a substantial degree of power in a market shall not take
advantage of that power for the purpose of-
(a) eliminating or substantially damaging a competitor of the corporation or
of a body corporate that is related to the corporation in that or any other
market;
(b) preventing the entry of a person into that or any other market; or
(c) deterring or preventing a person from engaging in competitive conduct in
that or any other market."
It can be seen that, while the paragraphs of sub-s. (1) remain much the same, the
opening words of the sub-section have been altered. In 1977 the qualification "for
the purpose of" was introduced. In 1986 *206 reference to having "a substantial
degree of power in a market" replaced being "in a position substantially to control
a market".
Before this Court there was much debate as to the meaning of "market" in s. 46 and
the identification of that market in the present case. In its statement of claim
Q.W.I. alleged the existence of six markets, each for the supply of particular
goods. Pincus J. expressed those markets in the following way:
"In setting them out I shall use the word 'steel' for 'steel and steel products'.
The markets alleged relate to the supply of-
(a) steel to manufacturers for use in making wire;
(b) steel to manufacturers for use in making fence posts;
(c) Y-bar to manufacturers for use in making fence posts;
(d) steel wire and steel fence posts by wholesalers to retailers;
(e) steel wire by wholesalers to retailers;
(f) steel fence posts by wholesalers to retailers."
The first three markets were said to be markets in Australia, the last three to be
markets in Queensland and New South Wales.
B.H.P. admitted the existence of the markets particularized in pars (e) and (f) but
denied the existence of any other of those markets. In opening the present
respondents' case before Pincus J., their counsel formulated the relevant markets as
twofold - one for the supply of steel and steel products in Australia and the other
for the supply of rural fencing materials in Australia. By direction of the primary
judge, the pleadings were amended so that breaches of s. 46 were pleaded and denied
in relation to those markets also. At the end of his judgment Pincus J. summarized
his conclusions in these terms:
"(1) B.H.P. is dominant in the relevant markets.
(2) It is the sole domestic supplier of Y-bar.
(3) It has refused to supply Y-bar to the applicant, thereby preventing the
applicant from competing with it in the star picket market.
(4) Its refusal is not, in my opinion, an abuse of its market power."
His Honour did not, in this summary, identify the "relevant markets" with any
precision. In his reasons he said that it was the market for the supply of rural
fencing materials in Australia which "better accords with commercial ideas of the
meaning of the word 'market'". Notwithstanding the submission made to this Court by
counsel for Q.W.I., his Honour appears not to have accepted the notion of a market
for the supply of steel and steel products and for the reason that it was only
"substitutability at the supply end" that could justify finding such a market. His
Honour thought that this view of substitutability was not warranted by the
definition of "market" in the Act. By implication he rejected the markets *207
originally postulated by Q.W.I. in its statement of claim or at any rate treated
them as irrelevant. The reference in par. (3) of the summary to "the star picket
market" is rather puzzling for no market in those terms had been pleaded by Q.W.I.
Nevertheless his Honour had earlier commented that "there has never been any
substantial importation of star pickets", adding "B.H.P. has always had the market
very largely to itself". The use of the plural in par. (1) of the summary is by no
means clear. It may be taken as a reference to the market for the supply of rural
fencing materials and the market for star pickets. But his Honour appears to have
singled out the star picket market as the market in which B.H.P. had prevented
Q.W.I. from engaging in competitive conduct rather than the market in which it was
dominant. It may be that, while not accepting the first of the markets proffered by
B.H.P., his Honour nevertheless included it in his summary as one of the "relevant
markets" in which B.H.P. was dominant. I say this because, having dealt with both
markets proffered by B.H.P., he continued:
"But on either view the applicant must succeed on the first issue raised by s. 46;
B.H.P. was, as I find, at all times material to this suit, in a position
substantially to control each of those markets and had a substantial degree of power
in each of those markets."
The uncertainty stems from the fact that the definition of market did not "loom very
large" before Pincus J. because, he thought, "it must have seemed improbable that
the relevant market could be so defined as to lead to a conclusion that B.H.P.'s
position was not dominant in it". The basis for his dismissal of Q.W.I.'s claim lay
in the construction he placed upon the words "take advantage of" in s. 46. In effect
his Honour treated those words as requiring a misuse of power, something which he
said Q.W.I. had failed to establish.
The Full Court dismissed Q.W.I.'s appeal for rather different reasons than those
which led the primary judge to his conclusion. In the view of the Full Court, the
evidence showed that there was a market for star picket fencing and that B.H.P. had
acted with the purpose of preventing Q.W.I. competing with it in that market. It did
so by denying to Q.W.I. the feed for the manufacture of star picket fencing, namely
Y-bar. The Court added: "The question for the purposes of s. 46 then becomes
whether, in so denying supply, B.H.P. was taking advantage of power in relation to a
market in the Y-bar." But, said the Court, there had never been a market for Y-bar
which had been sold by B.H.P. only to its subsidiary A.W.I. Therefore there was
nothing to attract the operation of s. 46 of the Act. In consequence it was
unnecessary to deal with the construction placed by Pincus J. on the words "take
advantage of".*208
Because of the way in which the matter was argued before this Court, regard must be
had to the approach taken both by the primary judge and by the Full Court.
Q.W.I.'s attack on the judgment of the Full Court began with the argument that, in
view of the markets found by Pincus J., the Full Court erred in approaching the
matter by reference to the existence or non-existence of a market in Y-bar.
Alternatively, it was said, the Full Court erred in its view that there was no
market in Y-bar. As to the former, Q.W.I. submitted that Pincus J. having found one
or more relevant markets, it was enough for it to show that B.H.P. was denying Y-bar
to it for an anti-competitive purpose. This, it was said, warranted a conclusion
that B.H.P. was taking advantage of its power contrary to s. 46. As to the
alternative argument, Q.W.I.'s submission was that the Full Court misunderstood the
concept of market, it being sufficient that there was a potentiality for dealings in
Y-bar and that, at least on the demand side, there were no substitutional
possibilities for Y-bar.
The respondents' answer was in these terms. There was no evidence of misuse of power
on the part of B.H.P. or A.W.I. At all times B.H.P. supplied Q.W.I. with star picket
fencing. What Q.W.I. wanted was not merely cheaper fence posts but in effect for
B.H.P. to make available to it part of the latter's business of manufacturing steel
fence posts. The claim was in truth one for divestiture. There was, as Pincus J.
accepted, no discrimination against Q.W.I. in any "substantial sense" in B.H.P.'s
conduct for it had never sold Y-bar in Australia. It had always used Y-bar as a
feed-stock for the manufacture of its steel fence posts. The argument of
non-discrimination, it may be noted, assumes an identification between B.H.P. and
A.W.I.
While there were differences in the form of s. 46 before and after 1977, in each
case the section began with an injunction that a corporation, in a position
substantially to control a market for goods, "shall not take advantage of the power
in relation to that market that it has by virtue of being in that position" to do
certain things (pre-1977) or for the purpose of doing certain things (post-1977).
Whatever differences may have resulted from the reference to "to" on the one hand
and "for the purpose of" on the other, there was no contravention of s. 46 unless a
corporation took advantage of the power it had in a market. Taking advantage of
power remains crucial to s. 46(1) in its present form; at the same time, as s. 46(1)
has stood since its inception a contravention may occur through the exercise of
power in that market or in another market. In some cases the market will be the
same; however, *209 s. 46(1) expressly contemplates a corporation with the requisite
power using that power for a proscribed purpose in another market.
One difficulty facing Q.W.I. is that the case before Pincus J. was conducted on the
basis that there was no relevant distinction between B.H.P. and A.W.I. That is
certainly the way the relationship between those companies was viewed by the
economists called by the parties. Whether the opinion of economists necessarily
disposed of the matter is another question. But the conduct of the case is a
relevant consideration. Q.W.I. did not argue before Pincus J. that the sale of Y-bar
by B.H.P. to A.W.I. evidenced a market in Y-bar. Q.W.I. did contend before us that
there could be a market for Y-bar so long as there was someone eager to buy (as was
Q.W.I.), that a market for Y-bar was created by Q.W.I.'s demand for the product and
B.H.P.'s production of it. In other words, a potentiality for trade was in the
circumstances enough to constitute a market. And, arising from a discussion with
this Court, Q.W.I. sought to rely as well upon the separate identity of B.H.P. and
A.W.I. to justify an actual market.
The existence of a market is vital to anyone seeking to invoke s. 46. Unless a
corporation takes advantage of the power it holds in a market, there can be no
contravention of the section. In this regard there is a starting point in the
finding by Pincus J. of a market for rural fencing materials in Australia and, if
need be, in the finding of a star picket market. B.H.P. did not argue against the
existence of the former. Despite what was submitted by counsel for Q.W.I., both in
opening and in reply, Pincus J. did not expressly find that there was a market for
the supply of steel and steel products. His Honour was not prepared to make that
finding because of his views as to substitutability though, as suggested earlier in
these reasons, he seems to have assumed the existence of such a market in his
summary of conclusions. Nevertheless there can be little doubt that there is, in
terms of the Act, a market for steel and steel products. Of course the mere
existence of such a market advances Q.W.I.'s case only part of the way. But it may
mean that the identification by the Full Court of a market in Y-bar was unnecessary
and was misleading in that it diverted attention from what the trial judge had found
or ought to have found.
The reason why Pincus J. rejected a market for steel and steel products lay in his
interpretation of s. 4E of the Act. That section, introduced by Act No. 81 of 1977,
contains a definition of "market"; the definition is not exhaustive. The term
"market" means a market in Australia and, when used in relation to any goods,
"includes a market for those goods ... and other goods ... *210 that are
substitutable for, or otherwise competitive with, the first-mentioned goods ..."
The introduction of s. 4E followed a recommendation of the Swanson Committee that
the definition of "market" be extended so as to "require that, in the determination
of a 'market' for particular purposes, regard shall be had to substitute products,
being products which have a reasonable interchangeability of use and which have high
cross-elasticity of demand, i.e. where a small decrease in the price of a particular
product would cause a significant quantum of demand for a similar product to switch
to the product in question" (Trade Practices Act Review Committee (Swanson
Committee): Report to the Minister for Business and Consumer Affairs (1976), p. 17,
par. 4.22). This test of interchangeability of products on the demand side has been
widely recognized in other jurisdictions as relevant to market definition: see, for
instance, United States v. Du Pont & Co.(47); L'Oreal v. De Nieuwe AMCK(48). Indeed,
in delineating the scope of the product market demand substitutability has often
been emphasized at the expense of supply substitutability.
But this does not mean that supply substitutability is irrelevant to the task of
market definition: see Europemballage Corp. and Continental Can Co. Inc. v. E.C.
Commission(49). Rather, the definition of the relevant market requires a
consideration of substitutability both on the demand and on the supply side. This
has been recognized in Re Queensland Co-operative Milling Association Ltd; Re
Defiance Holdings Ltd.(50); Re Howard Smith Industries Pty. Ltd.(51), both decisions
adopted in Trade Practices Commission v. Ansett Transport Industries (Operations)
Pty. Ltd.(52); Re Tooth & Co. Ltd. and Tooheys Ltd. (53); Trade Practices Commission
v. T.N.T. Management Pty. Ltd.(54). See also B.A.K., The Role of Supply
Substitutability in Defining the Relevant Product Market, Virginia Law Review, vol.
65 (1979), p. 129; Hubbard, Potential Production: A Supply Side Approach for
Relevant Product Market Definitions, Fordham Law Review, vol. 48 (1980), p. 1199.
And see generally Wyatt and Dashwood, The Substantive Lawof the E.E.C., 2nd ed.
(1987), pp. 400-405; Hawk, European Economic Community and United States *211
Antitrust Law: Contrasts and Convergences, Australian Business Law Review, vol. 16
(1988) 282, at pp. 297-299.
In considering the question of substitutability, Pincus J. thought that regard
should only be had to the "demand end" and not to the "supply end". This was because
his Honour was of the view that if s. 4E were read to include the wider notion of
supply, "odd consequences may ensue". He mentioned by way of illustration a factory
making diecast toys which could, with little expense, make diecast machine-gun
parts. "Yet", his Honour said, "machine-guns and toys would not ordinarily be
regarded by practical business people as competing in the same market. Section 4E
suggests to me that it is not that sort of substitutability which the legislature
had in mind."
The notion of substitutability is of importance in the present case because it is
apparent that, had Pincus J. been prepared to have regard to substitution at the
supply end, he would have accepted the first market proffered by B.H.P., namely the
market for steel and steel products in Australia. The evidence left no doubt that
B.H.P. was in a position substantially to control that market, a fortiori that it
had a substantial degree of power therein. But the evidence sufficiently indicated
that there is a market in which steel and steel goods are sold and bought and in
which B.H.P. has the capacity to alter the range of those products. The same may be
said of others who are engaged in the manufacture of steel products but, as it
happens, B.H.P. is the substantial producer of steel in Australia. Nevertheless,
there is, in terms of s. 4E, a market for steel and steel products.
B.H.P. has taken advantage of the power it possesses in that market for the purpose
of preventing Q.W.I. from competing with it in the market for star pickets. The
amendments of 1986 introduced s. 46(7) which permits a finding that a corporation
has taken advantage of its power for a proscribed purpose "notwithstanding that,
after all the evidence has been considered, the existence of that purpose is
ascertainable only by inference from the conduct of the corporation or of any other
person or from other relevant circumstances". But even without such a provision it
is apparent from B.H.P.'s internal documents and its dealings with Q.W.I. that its
purpose has been to prevent the latter from competing in the market for star
pickets.
It is not necessary for Q.W.I. to establish that the relevant market is the Y- bar
market; by focusing on that market the Full Court was in error. But even if it was
necessary, the absence of existing buyers does not mean that there is no market for
Y-bar. It would be a curious consequence if the offering by B.H.P. of a limited
supply of *212 Y-bar established a market for that product but the withholding of
supply altogether meant that there was no market. In any event Pincus J. found that
B.H.P. was prepared to sell Y-bar to Q.W.I., though at a price that was "excessively
high". In those circumstances the failure by Q.W.I., in the courts below, to
challenge the identification of B.H.P. and A.W.I. is not fatal to the conclusion
that there is a market in Y-bar.
Pincus J. rejected Q.W.I.'s claim because he considered that B.H.P. had not taken
advantage of the power it undoubtedly possessed. His Honour's examination of s. 46,
including a consideration of relevant authorities, led him to the conclusion that
there can be no contravention of s. 46 without a misuse of power. He accepted as
appropriate the comments in Donald and Heydon, Trade Practices Law: Restrictive
Trade Practices, Deceptive Conduct and Consumer Protection (1978), vol. 1, p. 224:
"They [the words 'take advantage of'] must refer to abuse of position, to something
unusual, predatory, forceful, or deceitful. A seducer takes advantage of his victim;
Hitler took advantage of the disunity and weakness of his enemies; a monopoliser
takes advantage of his market power."
This is a matter to which the Full Court directed little attention, no doubt because
of its stand that Q.W.I. had not established a relevant market, Y-bar failing to
qualify in that regard. There is a deceptive simplicity in the words "take advantage
of", yet, as the Swanson Committee noted in 1976, "It could mean simply to use or it
could mean to misuse" (Swanson Committee Report, p. 39, par. 6.5). And as the
Committee observed in the same paragraph in relation to the word "to" which
introduced the paragraphs in s. 46(1) as it stood before 1977, "Similarly, the word
'to' could change its meaning according to whether one interpreted it as 'in order
to' or 'with the result that'."
The pejorative interpretation applied by Pincus J. was accepted by Foster J. in
Midland Milk Pty. Ltd. v. Victorian Dairy Industry Authority(55). Otherwise there is
a dearth of authority on the point. It is true that Fisher J. in Trade Practices
Commission v. C.S.B.P. & Farmers Ltd.(56) concluded that in the circumstances of
that case there had been no "taking advantage" within the meaning of s. 46 because
there had been no "predatory conduct". But this approach was influenced by the
concession made by counsel "that the concept of taking advantage must entail an
element of conscious predatory behaviour ..." (57). The distinction between use and
*213 misuse of power has been commonly drawn by commentators on antitrust law. By
way of illustration, Donald and Heydon say, at p. 221:
"There is a stock distinction in discussing monopolisation legislation between
predation and competition; between unfair rivalry and fair rivalry; between relying
on one's market control and relying on one's efficiency; ... and between
deliberateness and the unexpected ..."
These distinctions have been drawn because Pt IV of the Act, which is designed to
promote and preserve competition, must confront the problem caused by a competitor
who is so successful as to eliminate rivals and thus defeat the legislative aim of
promoting competition. If success is due to no more than superior skill and
efficiency, little criticism can be made of the conduct involved. Not so, if there
has been unfair business practice. And so constraints have been placed on
competition. The nature of those constraints has been influenced by this distinction
between predatory conduct and conventional business practice.
Counsel for Q.W.I. accepted that s. 46, read as a whole, imports the notion of
misuse of power. But, he said, that notion is not to be derived just from the words
"take advantage of". The element of misuse is supplied by the requirement in s.
46(1), after the amendments of 1977, that the taking advantage of power must be for
a proscribed purpose. Counsel invited the Court to treat the words "shall not take
advantage of that power for the purpose of" as a composite expression involving two
elements. On this approach, it is unnecessary and unhelpful to employ expressions
such as "predatory". There is no breach of s. 46 unless there has been a use of
market power for one of the purposes proscribed by the section. But once it appears
that there hasbeen a use of market power for such a purpose, the section has been
contravened and it adds nothing to consider the motives of the corporation taking
advantage of the market power which it has.
The interpretation relied on by Q.W.I. is, in my view, the correct one. It gives
effect to the ordinary meaning of the expression "take advantage of" which the
Shorter Oxford English Dictionary (1973), vol.1, speaks of as "[t]o take, make one's
a.[dvantage] of a thing: to use any favourable condition it offers" and by the
Macquarie Dictionary (1981), as "to make use of: to take advantage of an
opportunity". That too was the opinion of the Blunt Committee which considered that
the words "take advantage of" mean "use market power", that is they are a reference
to the "overt deliberate exercise of market power" (Trade Practices Consultative
Committee (Blunt Committee): Small Business and the Trade Practices Act *214 (1979),
vol.1, p. 70, par. 9.27). The Blunt Committee recommended, in that same paragraph,
that the words "take advantage of" be replaced by "use" to avoid any confusion and
misunderstanding. That recommendation was not adopted. If there is a distinction
between those expressions, it perhaps lies in the notion that "use" carries a sense
of positive action while "take advantage of" may stem from mere passivity. But I
doubt that in truth there is any real distinction involved.
Section 46 looks to the situation of a corporation that has availed itself of the
circumstance of having a position of power in the market. To attain monopoly power
is not of itself a contravention of the section. There is no relevant misuse of
market power unless a corporation has one of the purposes proscribed by the
paragraphs of s. 46(1). Expressions such as "predatory" add nothing to an
understanding of the section though "predatory" conduct may evidence the existence
of a proscribed purpose.
This interpretation of the key expression in s. 46(1) gains some support from the
remarks of Fox J. and Burchett J. in Williams v. Papersave Pty. Ltd. (58).
There are three purposes identified in s. 46(1). The first may be put to one side,
it not being suggested that it has any application in the present case. Paragraph
(c) may be applicable, though, in the circumstances of the present case, it is
unlikely that Q.W.I. could fail to establish the purpose referred to in par. (b) yet
succeed in establishing that in par. (c). The purpose referred to in par. (b) is
that of "preventing the entry of a person into that or any other market". The
reference to "for the purpose of" carries with it the notion of an intent to achieve
the result spoken of in each of the paragraphs in s. 46(1).
In reaching his conclusion that the words "take advantage" require a misuse of
power, Pincus J. drew support from the comment of Donald and Heydon, p. 224,
referred to earlier in these reasons. The words, it was suggested by the authors,
"must refer to abuse of position, to something unusual, predatory, forceful, or
deceitful". Now, it may be that the authors' comment was valid in regard to s. 46(1)
as it originally stood. But, for reasons already given, the comment cannot hold good
in regard to the section in its amended form, carrying as it did (and does) a
reference to purpose. Indeed, this was recognized by Donald and Heydon in a later
passage not referred to by Pincus J. At p. 230 the authors considered the
consequences of the change between 1974 and 1977 *215 from "to" to "for the purpose
of". They suggested that the change had two consequences, "perhaps unforeseen". The
first of those changes is not relevant to the present discussion. As to the second,
involving the meaning of "take advantage", the authors said:
"Formerly it was necessary to construe these words as involving abusive or predatory
tactics in order to make s. 46 not applicable to an unduly huge range of Australian
firms. Now that the predatory element is partly covered by the words of purpose,
what work does 'take advantage' do? May not these words mean simply 'exercise' or
'use' in order to avoid redundancy with respect to 'for the purpose of'?"
Pincus J. also relied upon Victorian Egg Marketing Board v. Parkwood Eggs Pty. Ltd.
(59) and Top Performance Motors Pty. Ltd. v. Ira Berk (Queensland) Pty. Ltd.(60). As
to the first of those decisions, it is true that Bowen C.J. referred to predatory
practice but his Honour's conclusion that the Board was engaged in predatory pricing
was relevant only to the question of proscribed purpose; he did not treat it as
relevant to the question whether there had been a taking advantage. Bowen C.J.'s
view was that misuse of power was required, but this he found in the existence of a
proscribed purpose. It is also true that in Top Performance Motors Joske J. adopted
a view of s. 46 which required more than the mere exercise of power before it could
be said that a person had taken advantage of that power. But his Honour was
considering s. 46 in its original form and he was drawing a distinction between
exercise of market power and exercise of contractual rights. The applicant failed
before the Court, not because taking advantage did not mean using, but rather
because taking advantage of contractual rights was not taking advantage of market
power. Cf. Warman International Ltd. v. Envirotech Australia Pty. Ltd.(61), where
Wilcox J. held that "[t]o exercise in good faith an extraneous legal right ... is to
take advantage of that right, not of market power ...". Whether there is any real
difference between the judgments of Joske J. and Smithers J. in Top Performance
Motors as Forster C.J. suggested in Ah Toy v. Thiess Toyota(62), does not arise for
consideration in that case.
At the core of B.H.P.'s argument was the submission that the concept of market power
means absence of constraint. Mr. Gleeson, senior counsel for B.H.P., argued that one
can never find as a fact that a person is using or exercising, let alone taking
advantage of, *216 market power unless one finds as a fact that the conduct in which
the person is engaging is something in which he would not or could not engage but
for the absence of constraint. In other words, it was said that there can only be a
use of market power if what the corporation does it does only because of the absence
of a competitor. Elaborating this proposition, counsel submitted that while B.H.P.
had refused to supply Y-bar to Q.W.I. at competitive prices (a constructive refusal
of supply, as found by the primary judge), there had been no finding of fact by
Pincus J. or by the Full Court that B.H.P. had refused to supply Y-bar because there
were no other people supplying that product. B.H.P.'s decision to consume all its
intermediate product was due to it being a vertically integrated manufacturer. That
decision, it was argued, was made regardless of whether or not there were other
people who also supplied Y-bar. In this connexion, there may be noted the
observation of Pincus J. that "there is no evidence that any product of B.H.P.'s
rolling mills other than Y-bar is unavailable for sale. B.H.P.'s conduct in
withholding supplies of Y-bar is not in accordance with the general pattern of its
commercial behaviour".
Counsel for Q.W.I. responded that, even if the test suggested on behalf of B.H.P.
was correct, that test had been satisfied. This was so because it can be assumed
that the relevant market is a market for steel products; B.H.P. supplies Y-bar, one
of those steel products, to A.W.I. but not to Q.W.I.; B.H.P. supplies to others all
the other steel products of its rolling mills; B.H.P. will not supply Q.W.I. with
Y-bar in order to protect A.W.I. from competition in the manufacture of fence posts;
and the reason why B.H.P. can refuse to supply Q.W.I. with Y-bar is that B.H.P. has
power in the market for steel products resulting from there being no relevant
competitor with B.H.P. in that market. On that approach, the relevant question to
ask in determining whether there has been an infringement of s. 46 is this: Is
B.H.P. refusing to supply Y-bar because of its dominant power (due to the absence of
competitors) in the steel products market? The answer to that question, it is said,
must be yes.
In my view the answer is correct. The only reason why B.H.P. is able to withhold
Y-bar (while at the same time supplying all the other products from its rolling
mills) is that it has no other competitor in the steel product market who can supply
Y-bar. It has dominant power in the steel products market due to the absence of
constraint. It is exercising the power which it has when it refuses to supply Q.W.I.
with Y-bar at competitive prices; it is doing so to prevent the entry of Q.W.I. into
the star picket market; and it has been successful in that attempt. There has been a
contravention of *217 s. 46(1)(b) as it stood before the amendments of 1986 and as
it has stood since then.
For these reasons the appeal should be allowed. The question of the relief to which
Q.W.I. is entitled will be a matter for Pincus J. It will be for his Honour to
determine whether Q.W.I. is entitled to an injunction against B.H.P. and A.W.I. and
the form of that injunction, whether Q.W.I. is entitled to damages and, if so, the
assessment of those damages.
Before concluding it is necessary to say something of an application made by the
Trade Practices Commission to intervene on the hearing of this appeal. The
Commission did not seek to intervene before Pincus J. or the Full Court. Section
163A of the Act empowers the Commission to intervene in a proceeding instituted
under Pt IV (other than a matter arising under s. 48) where declaratory relief is
sought of the kind mentioned in s. 163A(1)(a). No such relief is sought by Q.W.I.
Counsel for B.H.P. and A.W.I. opposed the intervention of the Commission, largely on
the ground that submissions the Commission had indicated it wished to make were
based on factual arguments not urged in the courts below by Q.W.I. and not reflected
in findings of fact made by those courts. In my view leave to intervene should be
refused for two reasons. The first lies in the objection advanced by B.H.P. and
A.W.I. to which reference has just been made. The second is that submissions by the
Commission as to the proper construction and operation of the Act were largely taken
up by counsel for Q.W.I. and have been dealt with in these reasons. In the
circumstances, no particular purpose would be served by acceding to the Commission's
application.
Application of the Trade Practices Commission for leave to intervene refused.
Appeal allowed with costs.
Set aside the order of the Full Court of the Federal Court save in so far as it
dismisses the respondents' cross-appeal. In lieu thereof, order that the appellant's
appeal to the Full Court be allowed with costs and that the orders of Pincus J.
dated 2 September 1987 and 4 November 1987 be set aside.
Remit the matter to the Federal Court for further hearing and determination in
relation to the relief sought by the appellant, in accordance with the judgment of
this Court.*218
Reserve the costs of the original trial to the Federal Court.
Solicitors for the appellant, Seymour Nulty.
Solicitors for the respondents, Chambers McNab Tully & Wilson.
Solicitor for the intervener, Australian Government Solicitor.
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