In this month’s Competition and Market Regulation Update we explore the following:
Full Court rules against Baxter Healthcare in bundling case
In a long awaited decision, the Full Court of the Federal Court has upheld the Australian Competition and Consumer Commission’s (ACCC) appeal, finding that Baxter Healthcare (Baxter) breached sections 46 and 47 of the Trade Practices Act 1974 (Cth) (Act) in relation to tenders to, and negotiations with, State Purchasing Authorities (SPAs) for the supply of sterile and peritoneal dialysis (PD) fluids.
While this is an important decision, it is based on a fairly unique set of circumstances and should not deter the vast majority of businesses from engaging in product bundling as part of their usual competitive strategy.
The decision considers both the exclusive dealing (section 47) and misuse of market power (section 46) provisions of the Act. However, it is the section 46 analysis and conclusions that are particularly interesting, given the criticism that has been made of this section and the reforms that have been proposed by the Federal Government (an overview of these reforms were provided in last month’s update).
Background
The ACCC instituted proceedings against Baxter Healthcare alleging that it had contravened sections 46 and 47 of the Act in relation to the supply of sterile and PD fluids to a number of SPAs during the late 1990s. The conduct complained of related to the tenders that Baxter submitted to the SPAs whereby Baxter offered:
- item-by-item prices for sterile and PD fluids where those prices were substantially higher than what the SPA was currently paying, and
- a bundled offer whereby a discount was provided if the SPA agreed to Baxter supplying both its sterile fluid needs and its PD fluid needs.
At first instance, Justice Allsop decided that Baxter’s conduct was protected by Crown immunity (full details of this decision were provided in our July 2005 update). However, he also found that if Crown immunity had not applied, the conduct would have contravened section 46 of the Act insofar as it related to the South Australian tender, and section 47 of the Act in relation to the New South Wales, South Australian, Western Australian and Queensland tenders. The primary difference in South Australia was that in that case, Baxter had refused a request from the SPA for a discounted price for volume supply of sterile fluids with no corresponding obligation to purchase PD fluids from Baxter.
The case was appealed on a number of grounds, not all of which were addressed by the Full Court after the Full Court upheld Justice Allsop’s finding that Crown immunity applied. The High Court reversed this decision, remitting the matter to the Full Court to consider the remaining grounds of appeal.
Misuse of market power
Of the three judges in the Full Court, Justice Dowsett was alone in finding that Baxter’s conduct did not contravene the Act. Interestingly in relation to section 46 (where the ACCC has claimed that the court’s approach in recent cases to ‘taking advantage’ has made the law unworkable) the judges unanimously agreed that Baxter had in fact taken advantage of its market power in the sterile fluids market. Justice Dowsett was however critical of the approach taken by the primary judge, and the majority, in relation to ascertaining Baxter’s purpose.
Section 46(1)(c) prohibits a corporation with substantial market power from taking advantage of that power for the purpose of ‘deterring or preventing a person from engaging in competitive conduct in that or any other market’.
Both Justice Mansfield and Justice Gyles went further than the primary judge in finding that Baxter had taken advantage of its market power for a prohibited purpose, not just in relation to the South Australian tender process, but in relation to the pricing strategy it used throughout the relevant period. In making this finding, Justice Mansfield and Justice Gyles found that Baxter’s purpose in adopting the pricing structure was to shut out its competitors from ‘being able to put forward bids for the supply of PD fluids which could be accepted by the SPAs except at a significant cost penalty’.
Importantly Justice Mansfield and Justice Gyles acknowledged that Baxter did not attempt to prevent its competitors from bidding, it simply prevented them from being able to make bids that were ‘realistically competitive’. Justice Dowsett’s criticism of that approach was that he was ‘unable to discern the difference between trying to win a tender and trying to prevent competitors from winning.’
Justice Dowsett ultimately disagreed with the majority and found that there had been no contravention of the Act. However, even between those judges that agreed on the ultimate finding, there were notable differences in the approaches taken to both the facts and the law. This is perhaps indicative of the complexity of the concepts to be applied in these types of cases.
The ACCC has announced that it will not oppose Westpac’s acquisition of St George.
The Federal Treasurer, Mr Wayne Swan (whose approval for a merger between financial institutions is required under section 63 of the Banking Act 1959 (Cth)), is yet to make his decision. Unlike the ACCC, whose focus is solely on the implications of the merger on competition, the Treasurer must decide whether the merger is in the national interest.
The ACCC found that the proposed acquisition was not likely to result in a substantial lessening of competition in any of the relevant markets (of which there were many) which were broadly grouped as retail (personal and business) banking, corporate and institutional banking, wealth management and insurance.
In relation to retail banking the ACCC found that the impact of the merger on competition in the sector was unlikely to be substantial for three main reasons:
- the level of aggregation resulting from the merger is relatively low: the merged entity will have between 12–21 per cent share of the relevant markets in each state/territory
- there will continue to be substantial competition post merger: from the three other major banks, regional banks, foreign banks, building societies and credit unions, and
- while St George is competitive on price and customer service, it was not considered to be a vigorous competitor on either.
Similar conclusions were reached in relation to other relevant markets.
Sonny Bill Williams’ surprise departure from the Bulldogs Rugby League Club (Bulldogs) to play rugby union for the French team (Toulonnais SA) shocked Australia’s rugby community and drew an immediate reaction from both the club and the National Rugby League (NRL). The matter has since been settled out of court, after the Bulldogs agreed to allow Williams to play in France subject to various conditions and the payment of a significant amount in compensation. Nonetheless, it is interesting to note the legal arguments raised by this event.
The Bulldogs and the NRL responded to Williams’ departure by filing an application in the New South Wales Supreme Court for an interlocutory injunction preventing Williams playing rugby union for his new club. The allegation was that by playing for Toulonnais SA, Williams was in breach of a five year contract he signed with the Bulldogs in May 2007 where he agreed not to play for any other NRL club or to play any other code of football without permission from the Bulldogs.
Justice Austin granted the injunction sought in order to protect the status quo until the final hearing of the dispute. In finding that there was a serious question to be tried as to whether the Bulldogs was entitled to relief, Justice Austin considered whether the restraint contained in that contract might be an invalid restraint of trade under the common law or pursuant to the New South Wales Restraints of Trade Act 1976 (NSW).
While it was not necessary at this interlocutory stage to make a final finding on the issue, Justice Austin considered that there were a number of considerations supporting the validity of the restraint. Under both the common law and the statute the restraint will be valid if it goes no further than is reasonably necessary to protect the Bulldogs’ interests. In particular, Justice Austin noted that the restraint applied only for the duration of Williams’ contract with the Bulldogs and while in France Williams would be unable to meet his contractual obligation to play for that team. Additionally, Justice Austin was satisfied that the loss of Williams as a ‘star attraction’ was likely to damage the club because of the importance of securing Williams as a player to the club’s recruitment strategy and marketing activities.
The New Zealand Court of Appeal has overturned the High Court’s decision to allow the acquisition of the Warehouse Group by Woolworths or Foodstuffs on the basis that the proposed merger is likely to result in a substantial lessening of competition (the High Court’s decision was discussed in our December 2007 update).
In arriving at its decision, the Court of Appeal took a different view to the High Court on two key issues.
First, it noted that the correct approach to merger clearance applications under the New Zealand statutory regime is that the commission (and thus the court) should grant a clearance only if satisfied that a substantial lessening of competition is not likely. The High Court had taken the approach that clearance should be granted unless it was satisfied that it would be likely to result in a substantial lessening of competition.
Second, it found that there was a real and substantial chance that, in the absence of a merger, the performance of the existing Warehouse Extra stores would improve to the point where expansion of the Warehouse Extra concept was commercially feasible and the chain would become a greater competitive constraint on Woolworths and Foodstuffs. In arriving at this conclusion, the Court of Appeal took into account the Warehouse Extra’s improved performance since the date of the High Court’s decision and the business’s revised management strategy for the future.
In New Zealand the relevant regulator, the Commerce Commission, investigates clearance applications in much the same way as the ACCC does, in Australia, under the ACCC’s informal process. The difference in New Zealand is that clearance, once granted, provides protection for the merger parties from legal challenge by either the regulator or from private parties. Such protection is only available in Australia under the formal clearance process, which as yet, has not been used.
MCCA agrees to adopt national consumer law
The Ministerial Council on Consumer Affairs (MCCA) have agreed to implement national consumer protection laws based largely on the consumer protection provisions of the Trade Practices Act 1974 (Cth). The move to uniform consumer protection laws is expected to reduce the compliance costs for businesses that result from current requirements where businesses operating nationally must comply with nine separate regimes.
A report commissioned by the Productivity Commission during its inquiry into Australia’s Consumer Policy Framework showed that there currently exists a large number of material differences between the various regimes.
It is anticipated that the new laws will be fully implemented by 2011. In the meantime there is likely to be ongoing debate as to the form that the final law will take, especially in relation to those more controversial variations in state laws such as the unfair terms prohibitions present in the Victorian legislation.
More information
For information regarding possible implications for your business, contact the Competition & Market Regulation Partners.