LWB410 Competition Law CONTENTS WEEK 1: COMPETITION POLICY AND ECONOMIC THEORY.......................3 What is competition?.............................................. 3 What is economic efficiency?...................................... 3 What is market failure?........................................... 3 What is the objective of the CCA?................................. 3 WEEK 2: COMPETITION POLICY AND ECONOMIC THEORY.......................4 Overview of the CCA............................................... 4 Authorisation and notification.................................... 5 Field of Application.............................................. 6 WEEK 3: ECONOMIC CONCEPTS............................................ 7 Market Power...................................................... 7 Product Dimension................................................. 8 Geographic dimension.............................................. 9 Functional dimension.............................................. 9 Substantially Lessening Competition (SLC) TEST...................11 WEEK 4: SECTION 45 – CAU THAT SLC...................................13 Answer Plan – s 45............................................... 13 Arrangement or Understanding (looser than contract)..............14 Exclusionary Provision – s 45(2)(a)(i)...........................15 Market Sharing and Non-Competition Provisions....................17 Purpose, Effect or Likely Effect of SLC – s 45(2)(a)(i)..........17 WEEK 5: CARTELS..................................................... 19 Answer Plan...................................................... 19 Arrangement or Understanding..................................... 20 Cartel Provisions................................................ 21 Offences / Enforcement........................................... 22 WEEK 6 – JOINT VENTURES............................................. 23 Answer Plan .......................**Look out for cartels ‘pretending’ to be JVs ** 23 Joint Venture TYPES.............................................. 24 Ancillary Restraints............................................. 25 Authorisation.................................................... 25 Page 1 of 71
Transcript
LWB410 Competition Law
CONTENTS
WEEK 1: COMPETITION POLICY AND ECONOMIC THEORY...................................................................................3
What is competition?....................................................................................................................................................... 3
What is economic efficiency?....................................................................................................................................... 3
What is market failure?.................................................................................................................................................. 3
What is the objective of the CCA?...............................................................................................................................3
WEEK 2: COMPETITION POLICY AND ECONOMIC THEORY...................................................................................4
Overview of the CCA........................................................................................................................................................ 4
Authorisation and notification....................................................................................................................................5
Field of Application.......................................................................................................................................................... 6
WEEK 4: SECTION 45 – CAU THAT SLC......................................................................................................................... 13
Answer Plan – s 45......................................................................................................................................................... 13
Arrangement or Understanding (looser than contract)................................................................................14
Exclusionary Provision – s 45(2)(a)(i).................................................................................................................15
Market Sharing and Non-Competition Provisions...........................................................................................17
Purpose, Effect or Likely Effect of SLC – s 45(2)(a)(i)...................................................................................17
Arrangement or Understanding.............................................................................................................................. 20
Merger vs JV...................................................................................................................................................................... 27
Types of Mergers............................................................................................................................................................ 27
Elements of a s 50(1) Claim....................................................................................................................................... 29
Merger Clearance Procedures.................................................................................................................................. 31Page 1 of 55
Enforcement and remedies........................................................................................................................................ 32
WEEK 8 – MISUSE OF MARKET POWER........................................................................................................................33
Substantial Market Power (SMP)............................................................................................................................ 35
Characterising the Conduct........................................................................................................................................35
Exclusionary Practices – Refusal to Supply........................................................................................................35
Exclusionary Practices – Bundling and Tying....................................................................................................35
What is Exclusive Dealing........................................................................................................................................... 39
s 47........................................................................................................................................................................................ 40
Economic Aspects of Franchising............................................................................................................................50
Restrictions prohibited per se.................................................................................................................................. 50
Restrictions subject to an SLC test..........................................................................................................................51
Misuse of Market Power.............................................................................................................................................. 52
Authorisation and Notification.................................................................................................................................52
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WEEK 1: COMPETITION POLICY AND ECONOMIC THEORY
WHAT IS COMPETITION?
Competition as a market structure (opposite of monopoly)
Competition as a process of rivalry that promotes economic efficiency and consumer welfare through:
o Lower prices
o Higher quality
o Higher levels of service
o Greater variety of G&S
WHAT IS ECONOMIC EFFICIENCY?
Allocative efficiency : competition leads producing the G&S most highly valued by consumers
Productive efficiency : competition leads to firms producing G&S at least cost
Dynamic/Innovation efficiency : competition leads to firms investing in research, invention and innovation
Considered by Re QCMA
WHAT IS MARKET FAILURE?
Sub-optimal market structures:
o Monopoly : single firm is the sole producer of a GorS; no close substitutes
o Substantial market power ( SMP ) : single firm free from competitive constraints and has the ability individually to affect the market price or restrict output in the market
o Oligopoly : small number of sellers each has SMP
o Monopsony : demand side – a single buyer of GorS has power to force supply price down
Eg: large wine-maker, buys from small grape growers may have ability to influence price but doesn’t pass on savings to consumers = bad
Restrictive trade practices or anti-competitive conduct of firms:
o Anti-competitive eg. cartels, price-fixing etc = consumer harm
WHAT IS THE OBJECTIVE OF THE CCA?
‘To enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection’ (s 2 CCA)
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WEEK 2: COMPETITION POLICY AND ECONOMIC THEORY
OVERVIEW OF THE CCA
Per se prohibitions (Part IV) – red light category – no test, an absolute prohibition
o ‘Practices which Parliament has seen as so generally offensive to the competitive goals underlying the Act that they are to be condemned without consideration of any purpose or effect of [SLC] in a market’ (Rural Press v ACCC)
o Includes:
Horizontal price-fixing (cartels) (Wk 4)
Exclusionary provisions (horizontal boycotts) (Wk 5 – s 45)
Third line-forcing
Resale Price Maintenance (RPM) (Wk 10)
Competition test (Part IV) – yellow light category – requires an analysis
o Conduct has purpose/effect/likely effect of substantially lessening competition (SLC test)
o s 45 catch-all provision: Contracts, arrangements or understandings that restrict dealings or affect competition
o Includes:
Horizontal arrangements between competitors (other than price fixing) – JVs and other collaborations
Vertical arrangements – exclusive dealing (other than third-line forcing and RPM) eg. distribution and franchising
Mergers
^^ will only breach the CCA if have purpose/effect/likely effect of SLC
o Benchmark for comparison - what will happen without the conduct (counter-factual)
Compares two future hypothetical situations – the state of competition ‘with’ the conduct and the state ‘without’ it
Usually requires expert evidence from economist
Authorisations and notifications (Part VII) – green light
o Some anti-competitive conduct (per se and SLC) can be given a ‘green light’ by the ACCC/ACT if the applicant formally applies for authorisation or notification
Anti-competitive conduct telecommunications (Part XIB) creates an industry-specific regime for regulating anti-competitive conduct in the telecommunications industry. Operates in addition to Part IV of the CCA (because dominated by a monopolist – Telstra)
Generic Access Regime : mandatory access to services necessary to compete in dependent markets eg. electricity transmission, gas pipeline, ports, airports, railways
o Rationale: to prevent users being held hostage by vertically integrated monopolies [see Lect 2 Slides 13-15 for more info]
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AUTHORISATION AND NOTIFICATION
NOTIFICATION – PT VII DIV 1
Cost benefit analysis: what is the cost of the conduct vs public benefit
o Eg. prestige products – benefit may outweigh anti-competitive detriment
Exclusive dealing : s 93 notification available = immunity from legal proceedings from time details are lodged with ACCC
o ACCC may at any time give notice that it is withdrawing immunity (s 93(3))
Third-line forcing : immunity does not come into force until end of 14 days (s 93(7A))
Collective bargaining : notification for; must not exceed $3mil in 12 months (s 93AB(3), (4))
AUTHORISATION – PT VII DIV 1
ACCC can grant authorisation for:o CAU that SLCo Covenants affecting competitiono Exclusionary provisionso Secondary boycotts
o Exclusive dealing (including third-line forcing)
o RPMo Mergers that SLC
Three statutory authorisation tests
o Net benefit test : does benefit outweigh detriment constituting by lessening of competition (s 90(6) and (7))
o Conduct that is prohibited per se, consider any detriment to public, not just lessening of competition (s 90(8))
o Anti-competitive mergers : 3 specific benefits identified – increasing exports, import substitution, international competitiveness (s 90(9) and (9A))
Stat Tests
o First: what is likely public benefit
Court will give greater weight to benefits being passed on to consumers in more immediate fashion, but benefit might also be eg. re-investment in R&D (Qantas)
‘Public benefit’ is given wide ambit, ‘anything of value to the community generally’ (QCMA)
Efficiency and progress assessed from perspective of society as a whole: the best use of society’s resources encompasses allocative, production and dynamic efficiency (Re 7-Eleven Stores)
Economic public benefit : economic efficiency, eg. savings from economies of scale
Non-Eco public benefit : promoting sport, public safety, improve work conditions
Welfare standard applicable – total welfare standard; ‘does not require that efficiencies generated by a merger or [CAU] necessarily be passed on to consumers…
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gains that flow through only to a limited number of members in the community will carry less weight’ (Qantas/Air NZ)
Quantification of public benefit : best through modelling; assumptions upon which the model is based clearly spelt out; estimates subject to rigorous sensitivity analysis (Qantas/Air NZ)
When quantification not possible, benefits claimed in qualitative terms
o Second: what is likely public detriment – main focus on lessening of competition – the likely effect on competition in future with and without conduct in question
Proper question: ‘not what is the current position, but what is it anticipated will be the position under… factual or counter-factual scenario over the next five years’ (Qantas/Air NZ)
ACCC must make comparison between two hypothetical future situations, one ‘with’ the proposed arrangements and one ‘without’ – the focus is on likely future competitive effects and the public detriments likely to result
o An understanding of functioning of relevant markets with and without conduct
FIELD OF APPLICATION
CCA is drafted in reliance on the ‘corporations power’ of the Cth
o CCA applies to the Crown in right of the Cth in so far as it carries on a business (s 2A)
o Pt IV applies to the Crown in right of each of the states and territories in so far as it carries on a business (s 2B)
States and territories legislated to mirror Cth leg
Indicia of carrying on business :
o Business: regular, systematic, repetition
o Business includes a business not carried on for profit (s 4(1))
o Nature of the activities: public or regulatory as opposed to private or commercial
o Repetition, system, regularity
o Exemptions: granting licences to supply goods or services (s 2C)
Indirect application to persons :
o Act extends to natural persons
o s 150H avoids double jeopardy
o Actions brought under Competition Code (State application legislation) involving medical practitioners:
WA anaesthetists admitted price fixing allegations: WA Code
Adelaide cardiothoracic surgeons: exclusionary provision and misuse of market power: SA Code
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Abalone growers: Vic code
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WEEK 3: ECONOMIC CONCEPTS
MARKET POWER
‘In identifying the relevant market… 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…’ (Qld Wire)
What is market power?
s 46(3) : The court shall have regard to the extent to which the conduct of the body corporate is constrained by the conduct of:
o (a) Competitors or potential competitors; or
o (b) Persons to whom the body corporate supplies [customers] or the person from whom the body corporate acquires [suppliers]
Ability to raise prices profitably above the competitive level comes from an absence of competitive constraints (Boral Case)
Ability to withhold supply or to dictate supply terms and conditions (Boral Case)
What is a market?
‘A market in Australia and, when used in relation to any GorS, includes a market for those GorS and any other GorS that are substitutable for, or otherwise competitive with, the first mentioned GorS.’ (s 4E)
In the economic sense, a market is ‘an area or space of economic activity whose dimensions are function, product and geography.’ (Aus Gas Light v ACCC (No 3))
‘The area of close competition between firms or… the field of rivalry Within the bounds of a market there is substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive’ (Re QCMA )
Purposive approach : ‘… markets are not defined in the abstract, but for the processes of competition relevant to the allegations of anti-competitive conduct made in the particular case’ (Seven Network v News Ltd)
o What is the conduct at issue?o Who is alleged to have engaged in the conduct?o What goods or services do they supply?o Which of those goods or services are relevant to the conduct at issue?o Do those goods or services form a discrete market or part of a wider market?
Market : parameters or boundaries within which to assess the impact of the conduct at issue on competitive rivalry
o Examines structure (determines conduct in the market – structure conduct performance paradigm); concentration; barriers to entry which determine conduct of firms; ability to engage in competitive rivalry in market
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PRODUCT DIMENSION
SSNIP TEST
The price incentive test – hypothetical monopolist test; cross-elasticity of supply and demand
Requires one to infer what the response on the demand side and the supply side would be to a Small but Significant (5-10%) Non-transitory (over 12 months) Increase in Price (SSNIP); a “thought experiment” to identify close substitutes on the demand and supply side
‘Put simply, we assume that all current producers of electric toothbrushes merge into one (or otherwise act as one) and ask whether the "hypothetical monopolist" could profitably increase or maintain prices above the competitive level by a "small but significant" amount for a sustained period of time. If so, then electric toothbrushes are a proper product market.
We can ask not only how many consumers of electric tooth brushes would over time switch to manual toothbrushes (cross-elasticity of demand) but also the extent to which producers of related products (such as electric drills) could and would (in response to the assumed higher prices for electric toothbrushes) convert some or all of their facilities to the manufacture of electric toothbrushes and would succeed in making sales (cross-elasticity of supply).
PRODUCT DIMENSION
Cross-elasticity of supply :
o Would a doctor switch from one specialty to another in response to a 5-10% price increase?
No = separate service markets for each specialty (AMA (WA) Case)
Cross-elasticity of demand :
o Would business travellers (time sensitive) switch to economy class in response to 5-10% increase in price?
Yes = business and leisure travellers (price sensitive) in same market (Qantas/Air NZ)
o ‘No doubt there are many people who sometimes drink tea and, at other times, coffee...The fact is that tea and coffee are distinct beverages, for each of which there is a distinct demand.’ (Arnotts Case)
o Rugby league, rugby union, Australian rules football, basketball, soccer (and possibly horse racing) all part of a “sports entertainment market” But, are they close substitutes? Market gerrymandering (News Ltd v Australian Rugby League Football Ltd)
Controversial at the time
Were loyalty agreements that ARL got their clubs to sign SLC?
The relevant market was deemed to be the market for spectator sports
SSNIP test – if ARL increased ticket prices by 5% would you expect people to go to another sport – no!
o Each sport is distinct and has a recognised identity because it has its own special characteristics, appealing to its own audience of players and fans. The fact that some players and some fans may play or follow other sports is beside the point. (Aus Rugby Union v Hospitality Group)
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Can a brand name constitute a product market?
o Applicant contended that the relevant product market the ‘Salomon’ ski boot (Mark Lyons) – too narrow
o Applicant contended that the relevant product market was the “Carmen Santiago” software program (Broderbund Software)
o The more narrowly defined the market, the greater the impact on competition
o The more diluted the market, the less impact on competition
GEOGRAPHIC DIMENSION
Same SSNIP test: ‘price elevation’ or hypothetical monopolist test
AMH Case : Would cattle growers in far North Qld transport cattle to Brisbane in response to a 5-10% increase?
o Theoretically possible to transport cattle from any part of Queensland for slaughter in any other part of Queensland, but the practical ‘field of rivalry’ was more limited
o Held: market confined to Northern Queensland – industry evidence that cattle producers did not like to truck cattle far away
o Held re markets: ‘A market is the field of activity in which buyers and sellers interact, and the identification of market boundaries requires consideration of both the demand and supply side. The ideal definition of a market must take into account substitution possibilities in both consumption and production. The existence of price differentials between different products, reflecting differences in quality or other characteristics of the products, does not by itself place the products in different markets. The test of whether or not there are different markets is based on what happens (or would happen) on either the demand or the supply side in response to a change in relative price.'
AMA (WA) Case : 5-10% price increase in Perth would not induce specialists from other regions to move to Perth
AGL Case : ACCC argued geographic market Vic, but Vic interconnected with National Electricity Market – so market was national
o Held: parties didn’t have market power because market was national, if had just been Victoria, would have SLC and merger would not have been allowed
FUNCTIONAL DIMENSION
Concerned with market as a whole (not sub-market)
o Sub-market : part or segment of market which is characterised by specific characteristics eg. women’s shoes
o Market share and barriers to entry should only be used in connection with ‘market’ not sub-market
Firms within the same industry may not be competitors in the same market
Terms ‘upstream’ and ‘downstream’ denote different functional levelso Upstream : refers to market for factor inputs, raw materialso Downstream : refers to markets for commercial exploitation
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SUBSTANTIALLY LESSENING COMPETITION (SLC) TEST
CONSTRAINTS ON MARKET POWER
SLC test looks at constraints on market power by four sources:
Constraints by actual competitors
o Measures of concentration – who is in the market (small no of competitors or many)
o Total value of sales in the market
o Calculate the market share of each competitor (total value of sales x market share of each competitor)
o Absolute and relative size important but not determinative
o CR4: What is the total market share of the 4 largest competitors
If four largest players have 75% or more market share = lots of power
o Rough rule of thumb
Constraints by potential competitors (barriers to entry)
o Market shares – static analysis, a snapshot at particular point
o BUT: dynamic analysis of changes across time is more revealing
o Ability to enter market in response to price change 5-10% depends on barriers to entry
o Barriers to entry :
‘Burdens or limitations’ facing any firm not presently operating in market from participating therein
Statutory restrictions: need to obtain IP licences; economies of scale or scope; sunk costs; natural monopoly infrastructure
Eg. solicitors – have to get practising certificate = barrier to entry
Constraints by large buyers or customers
o Eg. Boral Case: construction downturn, over-supply of concrete masonry blocks
Customers of Boral (block layers and builders) were able to force Boral to lower its prices if it wanted to win tenders
Constraints by large suppliers
o Suppliers may be able to control essential raw materials or factor inputs eg. sand and gravel supplier may constrain ability of ready mix concrete supplier to produce
o Agreements to restrict supply between NRL and Clubs prevented News Ltd entering market as a rugby league competition organiser (News Ltd v Aus Rugby League)
SLC TEST
Once market defined, test the effect of the conduct on competition in the market by counter-factual test:
o Looking into future, will there be more competitive rivalry with the conduct (the factual) or without the conduct (the counter-factual)?
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Eg. merger – factual = fewer players in the market, less competitive rivalry
‘SUBSTANTIAL’ LESSENING OF COMPETITION
‘Substantial’ :
o ‘…whether the effect of the arrangement was substantial in the sense of being meaningful or relevant to the competitive process, and whether the purpose of the arrangement was to achieve an effect of that kind.’ (Rural Press)
WP made minor incursions in area; its sales amounted to only 180-200 newspapers. Argued no significant competition in area at time River News withdrew, so could not be said that the lessening of competition was “substantial”.
Held: was substantial – was material to the competitive process (Rural Press)
Individual competitors v competition :
o The purpose of the CCA is to promote competition, not protect individual competitors (Melway Publishing)
o So: if the position in the market of an individual seller is being adversely affected by the conduct of a competitor, it is unlikely the conduct will SLC in the market as a whole.
SUBSTANTIAL MARKET POWER STANDARD
‘…the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time.’ (Qld Wire)
Responding to pressure to reduce prices indicates a lack of market power (Boral Case)
‘Pricing may not be the only aspect of market behaviour that manifests power. Other aspects may be the capacity to withhold supply, or to decide the terms and conditions, apart from price, upon which supply will take place.’ (Boral Case)
Duration :
o Market power is assessed over the long run – does the firm have persistent market power (cf temporary market power) (Universal Music)
Property rights :
o s 46 (Misuse of market power) can apply to IP rights which suggests it can apply to market power derived from other property rights (NT Power)
Financial strength : is not market power although ‘if a firm has market power, its financial resources might be part of the explanation of that power’ (Boral Case)
Monopsony power (buying power) : power as a supplier or acquirer of GorS in a market (s 46(4)(c); ACCC v Aus Safeway Stores) – where buyer has ability to force prices down
Meaning of ‘substantial’ re market power ‘…a significant or large or big degree of power in the designated market….Any notion… that the only corporations addressed by the section are those that enjoy monopoly or near monopoly power has now been abandoned.’ (Boral Case)
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WEEK 4: SECTION 45 – CAU THAT SLC
ANSWER PLAN – S 45
Section 45(2) prohibits corporations from making or giving effect to a CAU if:
the CAU contains an exclusionary provision (EP) (as per s 4D and prohibited per se); or
a provision of the CAU has purpose/effect/likely effect of SLC
1. Is there a CAU?
o To establish a CAU, there must be more than a mere hope or expectation as to what might happen (Stationers Supply Case). There must be a consensus or meeting of the minds (ACCC v Mobil; Rural Press Ltd v ACCC); a representation communicated with the intention to induce, and that does induce, the other party to commit to act in a certain way (Top Performance Motors; Apco).
Note : Mere price sharing is insufficient (Re TPC v Email Ltd) as is price leading and price signalling (signalling price increase) – although price signalling will be regulated by new legislation currently before Parliament.
Insufficient because no obligation on others to raise prices also, just a hope
o There is no need for reciprocity (ACCC v CC (NSW)).
o Here…
2. Does the CAU contain an EP?
o An EP is (s 4D(1)):
a CAU between competitors (as per s 4D(2));
a provision of which has the purpose of preventing/restricting/limiting the supply to (or acquisition of) goods (or services) from particular persons/class of persons
Purpose: In the South Sydney Case, the HC held that the trial judge had not erred in applying a subjective test of purpose, gleaned from the agreement as a whole.
o Purpose can be one among others as long as substantial (s 4F(b))
Persons/Class: It is preferable to speak of the purpose of the provision being ‘directed toward’ a particular person/class, rather than targeted at that person/class, and no hostile intent is required (South Sydney Case HC).
o Here…
3. Does a CAU have purpose/effect/likely effect of SLC?
Purpose:
o It is the subjective purpose that is relevant, although objective circumstances will be taken into account.
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o Dissuading retailers to restrict intrabrand competition is sufficient (Universal Music).
Effect/Likely effect:
o Effect/likely effect is examined through the counter-factual test.
[looking into future, will there be more competitive rivalry with the conduct (the factual) or without the conduct (the counter-factual)?]
o Likely effect means a real chance; not necessarily over 50% (Universal Music)
Substantial:
o Substantial in relation to SLC means ‘in the sense of being meaningful or relevant to the competitive process’ (Rural Press v ACCC)
ARRANGEMENT OR UNDERSTANDING (LOOSER THAN CONTRACT)
Must establish a consensus; a meeting of minds :
o one party makes a representation as to his future conduct with the intention that it will operate as an inducement to the other to act in a particular way;
o the representation is communicated to the other party; and
o it operates as an inducement to the other to act in a particular way.
(Top Performance Motors)
o Rural Press v ACCC :
RP threatened Waikerie Printing that if it did not withdraw from the Mannum area RP would compete with WP in the Riverland area;
WP gave a “mild assurance” that it would withdraw; WP decided to withdraw and this decision was communicated to RP; WP did, in fact, withdraw from the Mannum area; and RP took no further action to compete with WP in the Riverland area= A or U; a consensus between the two companies
No need for reciprocity of obligation :
o ‘The cases require that at least one party ‘assume an obligation’ or give an ‘assurance’ or ‘undertaking’ that it will act in a certain way.’ (ACCC v CC (NSW)).
Proving a consensus exists : can a common purpose be established?
o News Ltd v Aus Rugby Football League :
Agreements in substantially identical form; Executed within a short time of each other; Context in which the agreements were executed: Leagues’ officials communicated
with the clubs’ officials; Knowledge of all the clubs that each was being offered and was entering into
substantially identical contracts and thereby the clubs were consenting…to carry out a common purpose. They were not merely hoping that the other clubs would join in
Role played by Arthurson and Quayle as “the hub of the wheel, the spokes leading to each of the clubs
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[Continued over page – TPC v David Jones ]
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o TPC v David Jones : evidence of wholesaler could be admitted against retailers IF a common purpose was established by:
incentive to agree to increase their prices (margins were low = incentive);
opportunity to fix prices (meeting had occurred = opportunity);
subsequent concurrent acts which indicated an understanding to fix prices (prices were in fact increased); and
no alternative explanation (no alternative explanation was given)
ARRANGEMENT OR UNDERSTANDING – GRANT OF AUTHORITY
‘To support that finding [of an understanding] the evidence must show, …that the third party (hub) was sufficiently authorised by the alleged contravener (spokes) to the extent that the third party’s conduct …makes that conduct the conduct of that person.’ (AMA (WA) Case)
EXCLUSIONARY PROVISION – S 45(2)(A)(I)
A corporation must not make a CAU if CAU contains an exclusionary provision (EP), as per s 4D (s 45(2)(a)(i)).
An EP is a provision (s 4D):
o Made between competitors (as per s 4D(2)) (the horizontal element);
Identify product first, then whether or not competitors
News Ltd Case :
Clubs competitive with each other in the relevant sense; relevant provision of required the clubs not to acquire the services of News as a competition organiser
Clubs competed with each other to acquire the services of the NSW Rugby League and ARL as competition organisers; and
Clubs were in competition to acquire the services of News as an alternative competition organiser.
o that has purpose of preventing/restricting/limiting the supply to (or acquisition of) GorS from particular persons or classes of persons (the purpose element).
Purpose :
HC in South Sydney Case held that the trial judge had not erred in applying a subjective test of purpose, gleaned from the agreement as a whole.
Didn’t have purpose of exclud South Sydney – had option to amalgamate
Irrelevant whether hostile or not
At trial:
Finn J: the effect of the 14 team term was that the NRL would not supply organisation services to a number of clubs and would not acquire team services from them;
But purpose was to be found in the subjective reasons of the parties.
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NRL officials gave evidence that 14-team competition could be achieved without excluding any teams by means of mergers and joint ventures;
Finn J had regard to agreement as a whole, not just the provision itself.
On appeal to Full Court:
Majority held that Finn J erred by considering purpose in the context of the agreement as a whole, rather than in isolation from the remainder of the agreement; s 4D(1) requires that the focus of the inquiry be on the provision in question.
Purpose can be one among others so long as a substantial purpose (s 4F(b))
Persons/Classes of persons :
In HC:
preferable to speak of the purpose of the provision being ‘directed toward’ a particular person or class rather than ‘aimed at’ or ‘targeted at ’ that person or class and no antagonistic or hostile intent inquiry is required (South Sydney Case HC )
At trial:
‘There is a significant difference being merely an unsuccessful contender for selection…and being a target for exclusion in a selection process designed to that end.’ (South Sydney Case at trial)
‘For the class to have significance for s 4D purposes it must be the intended object of the discrimination envisaged by the section. If it is not so ‘aimed at’ specifically the members of the alleged class do not constitute a ‘particular class’ for s 4D(1) purposes…’ (South Sydney Case at trial)
Rural Press:
the purpose of the provision was ‘directed towards’ the readers and advertisers in the Mannum area through causing the circulation of the River News to cease.
Class could be defined with sufficient particularity by reference to that geographical area
Liquorland Case:
Liquorland had retail outlets in vicinity of 5 applicants for liquor licences
Liquorland lodged objections
Deeds of settlement subject to restrictions relating to type or quantity of take away liquor
Held: for the purpose of preventing supply of future goods to people in geographic areas
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MARKET SHARING AND NON-COMPETITION PROVISIONS
MARKET SHARING
An agreement between competitors not to compete
Parties allocate to themselves partial monopolies eg. ‘Not to sell to customers in particular territories’ or ‘not to sell to particular customers’
RESTRAINT OF TRADE CLAUSE
Vendor can agree not to solicit orders in particular territory but cannot agree not to sell to customers in a particular territory
NON-COMPETITION PROVISIONS
Visy Paper :o Two corporations (Visy and NPP) competitors in the collection of waste paper. NPP
agreed not to collect waste paper from existing and prospective customers of Visy
o Held: an exclusionary provision within s 4D(1), prohibited per se under s 45(2)(a)(i)
Victorian Farmers Case :
o Processors substantial buying power
o Growers significant sunk costs
o Situation “with” authorisation: growers would be given countervailing bargaining power
o Tribunal not convinced that growers would use boycott power solely to obtain efficient outcomes. Two wrongs do not make a right (competitive market outcome)
PURPOSE, EFFECT OR LIKELY EFFECT OF SLC – S 45(2)(A)(I)
EFFECT OF SUBSTANTIALLY LESSENING COMPETITION
WP made minor incursions in area; its sales amounted to only 180-200 newspapers. Argued no significant competition in area at time River News withdrew, so could not be said that the lessening of competition was “substantial”.
o Held: was substantial – was material to the competitive process (Rural Press)
‘LIKELY’ EFFECT OF SUBSTANTIAL LESSENING OF COMPETITION
‘… we do not think it legitimate to decide the cases upon the basis of future conduct, even if that future conduct is no more than a continuation of an existing policy. Once one takes away the effect of any future conduct, it becomes difficult to say that the exclusive dealing conduct of either of the appellants was likely to have the effect of [SLC] in the market’ (Universal Music CLR)
‘PURPOSE’ OF SUBSTANTIALLY LESSENING COMPETITION
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Held: conduct did have the proscribed purpose of SCL. By dissuading retailers from purchasing imported stock they were able to restrict intrabrand competition in relation to their own CD titles (Universal Music FCAFC)
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WEEK 5: CARTELS
ANSWER PLAN
The CCA contains parallel offences and civil penalty provisions relating to cartel conduct, with the offences requiring fault elements (s 44ZZRF-RG; s 44ZZRJ-RK);
A corporation must not make or give effect to, a CAU that contains a cartel provision (s 44ZZRA). Cartel provisions prohibited per se include (s 44ZZRA; s 44ZZRD):
o price-fixing;
o output restriction;
o market allocation; or
o bid-rigging,
by competitors (or would-be competitors).
1. Is there a CAU? [if already talked about in same question ‘see previous discussion on CAU’]
o To establish a CAU, there must be more than a mere hope or expectation as to what might happen (Stationers Supply Case). There must be a consensus or meeting of the minds (ACCC v Mobil; Rural Press Ltd v ACCC); a representation communicated with the intention to induce, and that does induce, the other party to commit to act in a certain way (Top Performance Motors; Apco).
Note : Mere price sharing is insufficient (Re TPC v Email Ltd) as is price leading and price signalling (signalling price increase) – although price signalling will be regulated by new legislation currently before Parliament.
Insufficient because no obligation on others to raise prices also, just a hope
o There is no need for reciprocity (ACCC v CC (NSW)).
o Here…
2. Is there a cartel provision?
Price-fixing:
o A provision of a CAU is a cartel provisions if it satisfies the purpose/effect condition ( s 44ZZRD(1)). This condition is satisfied if the provisions has the purpose, effect or likely effect, directly or indirectly, of, or providing for, the fixing, controlling or maintaining of the price for GorS supplied or acquired, or likely to be supplied or acquired (s 44ZZRD(2)).
Purpose: Subjective purpose is relevant (Pont Data; AMA (WA) Case cf Pauls Case).
Effect:
Indirect effect on price: restrictions on advertising; restrictions on opening hours
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Overlap with s 45(2) and s 4D [if considering cartels also consider s 45 CAU that SLC]
Direct effect on price: over-supply threatens general collapse in prices – so agreement to reduce surplus reduction (ACCC v Tas Salmon)
Fix/Control/Maintain bear ordinary meanings, ‘make fast, firm or stable’ (Apco)
To ‘fix’ a price, parties to the CAU must accept an obligation to give up the freedom that would otherwise exist to set prices (Apco).
There are degrees of control (CC (NSW) Case)
Output restriction:
o A roster system for taxi shifts where each taxi operator agreed to operate their taxis only during allotted shifts and not at other times. Held: restricted output of taxi services (ACCC v White Top Taxis; s 45(2)(a)/(b)(i) ; s 44ZZRD(3)(a) ).
Market Allocation:
o Truck dealers admitted their employees had entered into arrangement not to compete for sales to customers in each other’s primary areas (ACCC v Vanderfield; s 45(2)(a)/(b)(i) ; s 44ZZRD(3)(b)).
Bid Rigging:
o Cover pricing - a form of bid rigging. Company A seeks a tender price from company B during a tender process. Both companies understand that the cover price will be high enough to ensure that company A will not win the bid (ACCC v TF Woollams; s 45(2)(a)/(b)(i) ; s 44ZZRD(3)(c) ).
3. Are the parties competitors or would-be competitors?
[Also go through s 45 – CAU that has the purpose/effect/likely effect of SLC also ^^]
ARRANGEMENT OR UNDERSTANDING
Mere price sharing between two competitors, combined with the hope that one competitor will follow the other’s prices, is not an arrangement (Re TPC v Email Ltd)
Parallel pricing (eg. monitoring prices of different petrol stations and reporting back) is insufficient – the result of monitoring and tracking rather than a prior arrangement (ACCC v Mobil)
In Leahy Petroleum, ACCC relied on circumstantial evidence of details telephone records which showed increased petrol prices after phone call made.
o Held: no evidence that others had agreed to follow – must be an agreement; providing a process for fixing/controlling prices, rather than directly fixing/controlling prices
In Re TPC v Email Ltd Email made available price lists and hoped that WF would follow its prices, but it was under no obligation (legal or moral) to do so. By making its price lists available to WF, Email was merely ensuring that price leadership would occur more quickly.
[‘Cartel Provisions – Price-Fixing’ over page ]
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CARTEL PROVISIONS
PRICE-FIXING
A provision of a CAU is a cartel provisions if it satisfied the purpose/effect condition (s 44ZZRD(1)). This condition is satisfied if the provisions has the purpose, effect or likely effect, directly or indirectly, of, or providing for, the fixing, controlling or maintaining of the price for GorS supplied or acquired, or likely to be supplied or acquired (s 44ZZRD(2)).
Purpose – subjective test :
o Pont Data Case : subjective purpose of those engaging in the relevant conduct.
o AMA (WA) Case : Carr J considered himself bound to apply the subjective test.
o Cf: Pauls Case: O’Loughlin J expressed the view that the very nature of s45A, as a deeming provision, required ‘…a dispassionate onlooker to stand back and make an objective assessment of all relevant facts and circumstances.’
Indirect effect on price :
o Restrictions on advertising : denies consumers information about prices; may reduce price competition
o Restrictions on opening hours : may reduce price competition by denying consumers the opportunity to make comparisons.
o Nicholas Enterprises Case
Provision to reduce the number of bottles in a notional ‘dozen’ from 15 to 14, while price for the notional dozen would remain unchanged.
Held: two hotels, 12 kilometres apart, were in competition with each other; it was at least indirectly a means whereby an increased price was fixed.
Direct effect on price : over-supply threatens a general collapse in prices agree to reduce surplus production
o ACCC v Tasmanian Salmon Growers Association Ltd
Oversupply of Atlantic salmon being produced which might cause a drop in prices; Board adopted a formal resolution that growers would cull 10% Atlantic salmon stocks by 31 July 2002
Held: the resolution was a price fixing provision
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Fix/Control/Maintain :
o Apco in Fed Court : ‘fixing, controlling and maintaining’ are not used in any technical sense. They bear their ordinary dictionary definitions; “to make fast, firm or stable”. ‘
To ‘fix’ a price one or more parties must accept an obligation to give up the freedom that would otherwise exist to set prices .
o CC (NSW) Case : ‘The word ‘control’ is not defined in the Act…There are degrees of control and there may be control although the ‘restraint’ or ‘direction’ is not total. An arrangement or understanding has the effect of ‘controlling price’ if it restrains a freedom that would otherwise exist as to a price to be charged.’
Four construction contractors had understanding: successful tenderer for a particular project, would pay the unsuccessful tenderers an “unsuccessful tenderers fee” (UTF) of $750,000 each.
Held: Controlled the price in that the successful tenderer was likely to pay the UTF out of the proceeds for the job and would include the UTF in calculating the tender price.
OFFENCES / ENFORCEMENT
See lecture slides
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WEEK 6 – JOINT VENTURES
ANSWER PLAN **Look out for cartels ‘pretending’ to be JVs**
A joint venture (JV) is an arrangement between two or more actual or potential competitors for the purpose of undertaking a specific business project involving joint activity.
o Courts look to substance over form
o Price-fixing cartels: Where prices are fixed/output is restricted for products two firms have separately produced – may be a disguised price-fixing cartel (if mere business decision; no economic integration or joint activity) s 45(2) and s 44ZZRD(1)(a)(i)
1. Is there a JV and, if so, what type is it?
Types of JVs include:
o Concentrative JVs which are essentially mergers, as they are permanent, eliminate competition and participants do not compete with the JV once formed (prohibited by s 50(1)). Eg:
Firm A purchases 50% of Firm B’s existing assets; or
Firms A and B establish a joint subsidiary in which they own 50% each
Note : In ^^ s 45(7) states s 45(2) does not apply – but rather s 50(1)
o Co-operative JVs which are true JVs with economic integration that is partial and temporary and falls short of a merger. They include business functions, not merely business decisions.
A JV is an activity in trade or commerce (s 4J(1)(a)):
Carried on jointly by two or more persons; or
Carried on by a body corporate formed by two or more persons to enable those persons to carry on that activity jointly
2. Does the JV have the purpose/effect/likely effect of SLC?
o Structuralist test :
What is the relevant market? [Define]
The test requires an analysis of the structure to determine the likely state of competition in the future “with” the JV, as compared “without” the JV. Discuss:
Market shares of participants Level of concentration in market Barriers to entry
[Apply] Here the likely state of competition in future with & without JV…
o Formation of the JV: Inherent Effect:
Where participants are actual/potential competitors in the field of activity of the JV, forming a JV restricts competition. However, if neither participant able to enter field of the JV, there is no inherent effect of restricting competition; the JV will be pro-competitive.
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Are the parties actual/potential competitors in the field of the JV?
Does the investment involved substantially exceed each participant’s financing capacity?
Does each participant have the necessary know-how and input access?
Is each participant familiar with the process technology?
Does each participant have access to the necessary production facilities?
Does each participant have access to the necessary distribution facilities?
Could each participant alone bear the cost and risk associated with the joint venture?
[Apply the relevant ones to the facts] Here…
3. Should ancillary restraints on competition be assessed apart from inherent effect?
o To be ancillary, an agreement eliminating competition must be subordinate and collateral to a separate legitimate transaction. If it is so broad that part of the restraint supresses competition without creating efficiency, it is not ancillary (Rothery Storage).
o Analysis :
Here, the legitimate commercial objective (economic efficiency) is…
Is the restraint subordinate to, and reasonably necessary to further, the legitimate purpose?
[see below for specific examples]
4. Can the JV be authorised?
o If only one of the JV parents is potential competitor, the formation of the JV will not have the inherent effect of restricting competition (Hydrocarbon Products)
5. Do any defences apply?
o Regarding a contravention of s 45(2), it is a defence if the parties can establish that an exclusionary provision:
is for the purposes of a JV; and
does not have the purpose/effect/likely effect of SLC (s 76C)
JOINT VENTURE TYPES
CONCENTRATIVE JV
A JV by actual or potential competitors should be analysed as a horizontal merger if it is permanent, eliminates all actual or potential competition among the participants and the participants do not compete with the JV after it is formed.
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CO-OPERATIVE JV
Economic integration such as product development, production, distribution or marketing that is partial and temporary and falls short of a merger. Joint supply of GorS jointly produced.
ANCILLARY RESTRAINTS
Re AGL Cooper Basin : Would a less restrictive provision have done the job? Held: no
PRODUCTION JV
o Commercial objective: lower costs
o Ancillary restraint: Participants buy exclusively from JV – reasonably necessary to ensure that the JV plant and equipment are of a sufficient size to realise economies of scale.
o Ancillary restraint: Exclusive sales territory – reasonably necessary to share benefits of the JV.
MARKETING JV
o Commercial objective: joint sales agent to market new product marketing efficiency – Output of each not large enough to justify paying a full-time sales agent, but the three operating together could send an agent, each paying one third of the cost.
o Ancillary restraint: price fixing – if products identical (not differentiated) reasonably necessary to share of the benefits of the JV
R&D JV
o Commercial objective: to develop and market new word processing software
o Ancillary restraint: restricts the parties from engaging in R&D outside the scope of JV,
o Ancillary restraint: restricts each party from selling its old software after new jointly developed product is ready for sale
reasonably necessary to achieve efficiencies
o Commercial objective: invention or innovation beyond the capability of each partner acting alone
If the two research teams are in a position individually to conduct the research and perform necessary tests, then exchange of results may be anti-competitive
AUTHORISATION
AUTHORISATION – PRODUCTION JVs
Hydrocarbon Products:
If only one of the JV parents is potential competitor, the formation of the JV will not have the inherent effect of restricting competition (Hydrocarbon Products)
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o ‘There is no competition with its [Monsanto’s] new partner BHP [(/Hematite)]… that is likely to be foreclosed by the fact of the joint venture’ (Hydrocarbon Products)
Ancillary restraint : JV agreed to purchase all benzene produced by Hematite, the effect of which would be to deny another producer access to Hematite as a supplier of benzene
o ‘The tying up by [the joint venture] of the present major Australian source for benzene has concerned the Commission, but it accepts it as an essential part of the whole project, whose benefits would not be available without it’
o ‘Security of supply is essential to the investment and BHP in giving the security takes a share in the project as a joint venturer’ (Hydrocarbon Products)
2 nd ancillary restraint : Monsanto had the right to satisfy 100% requirements for styrene and to sell any surplus on the open market to other styrene users as an agent on behalf of the JV
o ‘It is difficult to see why Monsanto should not have the right to satisfy its own requirements from the company of which it is half-owner … Satisfying its own needs must be a major purpose of Monsanto’s participation in the JV, and other styrene users would be drawing styrene from it, that they would not be able to get locally without the JV. …
o ‘There seems to the Commission no way of removing the objection [that Monsanto would learn about its downstream competitor’s business] which is inseparable from the JV arrangement…The uneasiness of the styrene users has to be accepted as part of the price for the JV, from which they will after all draw some benefits in terms of local supplies that would not otherwise be available’ (Hydrocarbon Products)
Electric Lamp Manufacturers
Participants formed separate entity (ELMA) to manufacture requirements for certain lamps and sell to the JV parties at prices determined by the board of ELMA. JV parties would market lamps independently
o Held: JV’s inherent effect to eliminate competition between parties at production level. Satisfied that joint production would result in economies of scale which could not be achieved if each of the parties independently operated separate but smaller plants.
ELMA required to purchase all machines, equipment and materials from Philips and GEC, two JV parties
o Held: requirement had adverse effect on competition as restricted opportunity for competitors of Philips/GEC to supply ELMA; not reasonably necessary to give effect to JV
ELMA not to sell to third parties unless Philips and GEC agreed
o Held: subordinate to and reasonably necessary to achieve efficiencies generated by JV
AUTHORISATION – MARKETING JVs
Qantas/Air NZ strategic alliance
o Qantas argued expected counterfactual would be “war of attrition” which Air NZ would lose, exiting the market
o ACCC argued counterfactual would be measured growth with both airlines remaining in the market competing against each other keeping prices low; thus JV highly anti-completive leading to increased prices and reduced capacity and quality
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o Held: favoured airlines BUT fact set changed once reached tribunal – more airlines servicing routes
WEEK 7 - MERGERS
ANSWER PLAN
Define the type of merger
Work through the elements
o Any issues with :
Acquisition
Assets
Shares
Directly or indirectly
o Work through SLC elements
MERGER VS JV
JV: looking into future, what is the likely effect on prices if one more competitor in market
Merger: looking into future, what is likely effect on prices if one less competitor in market
TYPES OF MERGERS
HORIZONTAL MERGER
Firms in same market merge
One less competitor may increase prices through:
o Unilateral effects : will the merged firm have sufficient market power to raise prices unilaterally?
o Co-ordinated effects : is reduction in the number of competitors likely to result in the remaining firms being able to coordinate prices through tacit price collusion?
Have greatest potential to be anti-competitive
VERTICAL MERGER
Firms at different functional levels merge (different but related markets)
May have effect on prices by:
o Preventing access to customers or distribution outlets
o Restricting access to essential raw materials or key bottleneck infrastructure facilities that are essential for competition to occur in upstream/downstream markets
CONGLOMERATE MERGER
Firms in different but related markets, such as complimentary products, merge
May increase prices by tying or bundling complimentary products (‘portfolio effects’)Page 29 of 55
o Eg. CocaCola wanted to use power to leverage into related markets (fruit juices); ACCC rejected (CocaCola/Berri)
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ELEMENTS OF A S 50(1) CLAIM
A corporation;
acquiring directly or indirectly shares or assets in a body corporate; and
has effect/likely effect of SLC
WHAT ARE ASSETS?
Not defined in the CCA but likely to include any form of property
o ‘acquire assets’: a reference to the acquisition of assets of a person shall be construed as a reference to an acquisition, whether alone or jointly with another person, of any legal or equitable interest in such assets but does not include a reference to an acquisition by way of charge only or an acquisition in the ordinary course of business (s 4(4)(b))
WHAT ARE SHARES?
‘acquire shares’: a reference to an acquisition, whether alone or jointly with another person, of any legal or equitable interest in such shares (s 4(4)(a))
Interest must be proprietary not possessory
Granting an option over shares was an acquisition for the purposes of s 50 (created an equitable interest in those shares) (Arnotts Case)
ACQUIRE ‘DIRECTLY OR INDIRECTLY’
interposing wholly-owned subsidiary between the acquiring corporation and the target body corporate may fall within s 50, but only where the subsidiary acts as agent or otherwise for and on behalf of the corporation as principal.
Holding company does not own the assets of its subsidiary (Australian Iron & Steel Case)
‘EFFECT/LIKELY EFFECT’ OF ‘SUBSTANTIAL LESSENING OF COMPETITION (SLC)’
Regarding likely effect, ‘the correct construction is that ‘likely’… refers to a significant finite probability, or ‘a real chance’ rather than ‘more probably than not’’ (AGL Case)
The following must be taken into account, in relation to the market, in determining SLC (s 50(3)) [mention all, but only apply relevant ones]:
(a) the actual and potential level of import competition in the market
concerned with imports from outside Australia (not ‘imports’ from other regions within Australia into the relevant geographic market) (AGL Case)
consider market share and price competitiveness of imported products; ability of importers to establish adequate distribution channels, to provide adequate ‘after-care’ service and to compete with brand loyalty (Email/Southcorp)
(b) the height of barriers to entry to the market
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Is it difficult for new entrant to enter market? (In AGL Case it wasn’t – evidence of significant increase of new entrants into market)
(c) the level of concentration in the market
Important to define market – Because Vic connected with all of Aus in National Electricity Market, LYA only had 5.3% of total NEM generating capacity, less than half generating capacity of largest generator Macquarie (12.4%) (AGL Case)
(d) the degree of countervailing power (offset effect of) in the market
In AGL ACCC argued absence of countervailing power of consumers and retails; inelastic demand for electricity, particularly in short term.
Held: ‘in an economic sense there is not a high degree of countervailing consumer power but… high electricity prices can very quickly become a political or regulatory issue. While countervailing power may not be exercised economically it can be exercised politically or by the regulator’
(e) the likelihood that acquisition would result in the acquirer being able to significantly and substantially increase prices or profit margins
Requires consideration of the likelihood that the acquisition would result in the acquirer being able to significantly and sustainably raise prices.
In AGL, was vertical merger. AGL was acquirer. The analysis of the competitive effects of the merger focused on the target’s (LYA’s) ability to increase prices.
High prices persisting in short to medium term NOT evidence of market power; long term view (AGL)
(f) the extent to which substitutes are available or are likely to be available in the market
Would customer switch to frozen vegetables instead of fresh?
Cite Wattyl/Dulux
(g) the dynamic characteristics of the market, including growth, innovation and product differentiation
Innovation by competitors will tend to reduce any market power resulting from a merger
Markets being dynamic in the sense that demand for products may increase or decrease over time with changes in taste, quality and incomes (Expl Memo)
(h) the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor
ACCC looks closely at target of merger, do they generate much rivalry?
Requires an assessment of the actual conduct of the firm pre-merger and the likely future conduct ‘with’ and ‘without the merger (counter-factual test)
ACCC may consider ‘failing firm’ defence as part of this factor
(i) the nature and extent of vertical integration in the market (re: vertical merger)
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Prior to merger, might have a firm with higher market power up further in chain, that can exploit in downstream market – but vertical integration not necessarily indicative of market power
MERGER CLEARANCE PROCEDURES
INFORMAL MERGER CLEARANCE PROCEDURES
Stage 1: market definition
Stage 2: structural test as filter - if merger results in four largest firms (CR4) having a market share of 75% or more and the merged firm having a market share over 15%, or if the merged firm will have 40% or more, the ACCC will examine conduct effects (competition)
Stage 3: import competition (if significant and >5% market), ACCC will usually allow merger)
Stage 4: barriers to entry (if low, ACCC usually allow because possibility of new competitors)
Stage 5: other structural and behavioural market features.
FORMAL MERGER CLEARANCE PROCEDURES
Pt VII, Div 3
o Parties will can apply to the ACCC for a formal clearance
o If formal clearance not provided within 40 days clearance deemed to be refused
o Appeal to Tribunal who may only have regard to (s 116):
information given to the ACCC,
information referred to in the ACCC's statement of reasons and
information the Tribunal requests.
o Ensure information provided to the ACCC sufficient for Tribunal to grant clearance
o Tribunal determination within 30 days (can be extended by further 60 days) (s 118)
Advantages of formal process (over informal)
o Certainty of legislated time limits
o ACCC must give reasons for its determination
o ACCC’s determination subject to merits review by the Tribunal
o If a formal clearance is granted by the ACCC, then s 50 does not prevent merger
AUTHORISATION
ACCC cannot grant authorisation for acquisition of capital that would contravene s50 (s 88(9))
Tribunal may grant an authorisation to acquire shares or assets that would otherwise contravene s 50 (s 95AT)
Test to be applied ‘…in all the circumstances the proposed acquisition would result, or be likely to result, in such a benefit that the acquisition should be allowed to occur’ (s 95AZH(1))
o Public benefit ( s 95AZH(1) ) :
Significant benefit in real value of exportsPage 33 of 55
Significant substitution of domestic products for imported products
All other matters relating to the international competitiveness of any Aus industry
ENFORCEMENT AND REMEDIES
Majority settled administratively pursuant to s 87B undertakings
o Breach of s 87B undertaking actionable in court; s 87B(4) orders:
Comply;
Refund any financial benefit;
Compensate others;
Any other order appropriate
If ACCC refuses to grant clearance:
o Parties may proceed with merger; ACCC may commence proceedings for divestiture and penalties
o Parties that do not proceed with merger may seek declaration from Fed Court that merger will not breach s 50
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WEEK 8 – MISUSE OF MARKET POWER
ANSWER PLAN
There are 3 elements to be satisfied before a breach of s 46(1) can be established:
Substantial market power (SMP);
Taking advantage; and
Proscribed purpose.
1. DOES [FIRM] HAVE SUBSTANTIAL MARKET POWER (s 46(3C))?
[Firm] may have SMP even though:
o They don’t substantially control the market; or
o They are not free from constraint by competitors OR suppliers or buyers
Here [firm] does/does not substantially control the market AND/OR is/is not free from constraint by competitors because…
Note : s 46 does not catch conduct by a firm that does not possess SMP at the time when it engages it the conduct even though the conduct may result in the firm achieving a position of SMP.
2. HAS THE FIRM TAKEN ADVANTAGE (s 46(3C))?
‘s 46 requires not merely the co-existence of market power, conduct and proscribed purpose, but a connection such that the firm whose conduct is in question can be said to be taking advantage of its market power.’ (Melway)
The test is an objective (Melway; Qld Wire) and counterfactual one; if the corporation were operating in a competitive market could it, and would it be likely to, engage in the conduct (Melway; Qld Wire)?
o ‘Competitive market’ means a reasonable degree of competitive pressure.
o [Would the firm act the same in a competitive market???]
Characterising the conduct
Refusal to supply is misuse of market power where leveraging power in market where had monopoly into downstream market – no efficiency explanation (Qld Wire)
A firm may be taking advantage where it does something materially facilitated by the existence of the power (Melway)
In determining ‘taking advantage’ the court may have regard to (s 46(6A)):
o was conduct materially facilitated by SMP;
o did corp engage in the conduct based on its SMP;
o is it likely the corporation would have engaged in the conduct if it did not have SMP;
o is conduct otherwise related to corp’s SMP.
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Note : There must be a causal relationship between conduct alleged and SMP (Natwest)
o If a corp with SMP engaged arsonist to burn down competitor’s factory, it would not contravene s 46 (Natwest)
Here…
Is there an economic efficiency justification?
Does [the firm’s] conduct give rise to efficiencies? [Could include:]
o Economies of scale
o Bundling / integrating products
o May harm competitors but cost savings passed on to consumers (objective of s 46 to promote competition, not protect competitors! (Melway; Boral)
3. PROSCRIBED PURPOSE
The proscribed purposes include (s 46(1)):
o Eliminating/damaging a competitor (of corp OR related body corporate);
o Preventing entry of person in any market; or
o Deterring/preventing person from engaging in competitive conduct (in any market)
This element is determined subjectively (News Ltd; Pont Data), and is concerned with whether the conduct was aimed at competitors, rather than competition (s 46(1)(a)-(c)).
Note : purpose can be misleading; competitive rivalry is naturally deliberate and ruthless
4. ARE ANY EXCLUSIONARY PRACTICES PRESENT?
Pricing Practices:
Monopoly pricing (not covered by s 46)
Predatory Pricing (Boral): s 46(1AA)) prohibits a firm with substantial market share supplying goods for a sustained period at a below-cost price for certain proscribed purposes.
o Does [the firm] have substantial market share?
o Are they supplying at below (average variable) cost price?
o For sustained period?
o Purpose elements [refer to discussion above]?
If corp fulfils ^^, may contravene s 46(1) even if the corp cannot recoup losses (s 46(1AAA))
Predatory pricing is distinguished from defensive price-cutting in response to changed market circumstances (eg. drop in demand) (Boral)
Non-Pricing Practices:
Refusal to supply (Qld Wire; Melway): Leveraging market power from one market to another, vertical integration, upstream market (steel) downstream market (fences) (Qld Wire)
Exclusive dealing: Bundling and Tying (Baxter Healthcare): Providing 2 products at highly favourable price, if only want one, much higher price – if cost savings however, demonstrates and efficiency
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SUBSTANTIAL MARKET POWER (SMP)
‘In cyclical industries such as construction and building materials, firms may have no substantial degree of market power at the bottom of the economic cycle when competition is fierce and margins slender. As demand increases, however, some firms may acquire a substantial degree of market power.’ (Boral Case)
CHARACTERISING THE CONDUCT
Melway : different to Qld Wire, not trying to foreclose Melbourne market, nor could it; there was a legitimate business purpose for ending distributor agreement
Safeway : if major bread manufacturers sold bread to Safeway’s competitors at a price less than Safeway’s price, they must offer Safeway the same price. If they refused, Safeway would not display their bread in its stores and would stop purchasing further supplies.
o ‘Safeway’s conduct was therefore materially facilitated by the existence of its market power even though that same conduct would not have been “absolutely impossible” without that power.’
EXCLUSIONARY PRACTICES – REFUSAL TO SUPPLY
‘PAWA did take advantage of market power, because it was only by virtue of its control of the market or markets for the supply of services for the transport of electricity along its infrastructure, including its transmission and distribution network, and the absence of other suppliers, that PAWA could…withhold access to its infrastructure; if PAWA had been operating in a competitive market for the supply of access services, it would be very unlikely that it would have been able to stand by and allow a competitor to supply access services ’ (NT Power)
EXCLUSIONARY PRACTICES – BUNDLING AND TYING
Baxter
Baxter monopoly in S fluids; competition in relation to PD fluids
“carrot and stick” approach
“Carrot”: exclusive supply of S fluids bundled with PD fluids; substantial discount (say $15)
“Stick”: prohibitively high item-by-item prices (say PD fluids alone $20)
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WEEK 9 – EXCLUSIVE DEALING
ANSWER PLAN
Exclusive dealing, as prohibited by s 47(1), is where vertical restraints exist between a supplier and a buyer. There are 5 main types:
o product exclusivity;
o customer exclusivity;
o territorial exclusivity;
o third-line forcing; and
o exclusivity in leases
1. WHAT IS THE RELEVANT CONDUCT?
Product exclusivity:
Supplying/giving a discount on the condition the recipient will not acquire similar goods from a competitor (s 47 (2)(a) and (d))
o Refusal to supply/give a discount because recipient has acquired from a competitor (s 47(3))
Examples :
o Total or Partial Requirements Obligation (e.g. A will purchase 80% of its requirements of petrol from X)
o Minimum Quantity Obligation (e.g. A will purchase a minimum of 800,000 litres of petrol from X) – probably caught IF requirement essentially fulfils all of buyer’s needs
o Fidelity or Loyalty Discounts (e.g. If A purchases all or most of its requirements from X, will receive a 10% discount)
o Take-or-pay Provision (e.g. A will offer its monthly tonnage of iron ore for transport. If less coal than the monthly tonnage is offered A must pay higher freight rate).
o Acquisition Restriction (e.g. A will acquire bread form B on condition that B will not supply bread to A’s competitor C).
Tying (a form of product exclusivity) :
o Where two distinct products and tying product supplied on condition that tied product also acquired
o Market power in tying product
o Substantial lessening of competition in market for tied product
Customer exclusivity:
Supplying/giving a discount on the condition the recipient will not re-supply goods to particular person/class (s 47(2)(a) and (f)(i))
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Territorial exclusivity:
Supplying/giving a discount on the condition the recipient will not re-supply goods in particular places (s 47(2)(a) and (f)(ii))
Third-line forcing:
Supplying/giving a discount on the condition the recipient will acquire certain goods from a specific person (s 47(6))
o Refusal to supply because has not acquired… (s 47(7))
Can be pro-competitive – Coles 4% discount on petrol – consumer shares benefit
Can be anti-competitive – secret kick-backs – consumer does not share benefit
Castlemaine Tooheys : Condition was that Castlemaine deliver beer at the retailer’s premises; one contract for the supply of delivered beer (beer plus transport); no requirement that the retailer should acquire services of Railfast Express
Exclusivity in leasing:
Grants/renews lease on condition (s 47(8)); refuses to grant/renew… (s 47(9))
Acquiring on condition:
Acquiring on the condition that the supplier will not supply similar goods to any person (s 47(4)) - refusal to acquire… (s 47(5))
2. SLC TEST
What is likely to happen in the future with the condition (the factual) and without the condition (the counter-factual) (Outboard Marine; Stirling Harbour)
o Eg. will obligation reduce competition that would other have existed but for the cond?
Options : to reduce duration of the contract (to avoid SLC); reduce requirements obligation
[Notification next page ]
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3. NOTIFICATION
Notifications provide immunity from legal proceedings from the date when the details are validly lodged with the ACCC (s 93).
Third-line forcing : the immunity does not come into force until the end of a prescribed period -14 days following lodgement (s 93(7A)).
ACCC will assess notification in accordance with the public interest test outlined in s 93(3), that ACCC may ‘at any time’ give notice in writing to the firm that the conduct constitutes a SLC and does not result in public benefit that outweighs the anti-competitive detriment.
Southern Cross Beverages : leasing of soft drink vending equipment to shopkeepers on the condition that it would be used solely for storing the product of the particular company. Tribunal:
o ‘Looked at in terms of the particular route trade outlet, it follows that a tie requiring that the only glass-doored merchandiser be devoted solely to the product of a particular manufacturer will significantly restrict competition between the products of competing manufacturers supplying that particular outlet.”
4. AUTHORISATION
Tied petrol sales: Shell
Tied beer sales: Tooth and Tooheys
Naked restraints: significant foreclosure effect
AGL
o ‘A distinction can be drawn between those long-term investments that are necessary to sustain substantial long-lived sunk investments… and those that create no such social utility, but are, rather, an instrument of foreclosure’
WHAT IS EXCLUSIVE DEALING
Vertical restraints that exist between a supplier and a buyer.
Vertical non-price restraints:
o Exclusive dealing arrangements typically involve restrictions on buyers not to purchase from any other suppliers; or
o Restrictions on suppliers agreeing to supply only certain buyers; or
o Tying arrangements whereby a supplier of one product requires buyers to acquire other products of the supplier.
Anti-competitive where:
o Restricts intra-brand competition; restricts price competition between distributors of the same brand
o Foreclosure effect: restricts the ability of suppliers of competing products to get access to distribution outlets or customers
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o Tying allows firms to leverage market power from one market (tying product) to another market (tied product)
Can be pro-competitive because:
o Provides an incentive for distributors to invest in show rooms , fit out special facilities and staff training to provide pre-sale services (advertising, display, demonstration) and after-sale services that consumers value
o Necessary to prevent free riding
Without exclusivity, Distributor B can take a ‘free ride’ on the investment made in the provision of pre-sale and after-sale services by Distributor A; Distributor A will cease to provide these services: market failure; loss of consumer welfare)
o Restricts intra- brand competition but promotes inter-brand competition
o Melway : vertical restraints on distributors may restrict intra-brand competition but through efficiencies enhance inter-brand competition
S 47
s 47(1): prohibition
s 47(2)-(9): define the practice of exclusive dealing
s 47(10): SLC test
s 47(13)(b) requires that the effect of exclusive dealing on competition must be assessed in supplier’s market and buyer’s market
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SECTION 47
47 Exclusive dealing
(1) Subject to this section, a corporation shall not, in trade or commerce, engage in the practice of exclusive dealing.
(2) A corporation engages in the practice of exclusive dealing if the corporation:(a) supplies, or offers to supply, goods or services;(b) supplies, or offers to supply, goods or services at a particular price; or(c) gives or allows, or offers to give or allow, a discount, allowance, rebate or credit in relation
to the supply or proposed supply of goods or services by the corporation;on the condition that the person to whom the corporation supplies, or offers or proposes to supply, the goods or services or, if that person is a body corporate, a body corporate related to that body corporate:
(d) will not, or will not except to a limited extent, acquire goods or services, or goods or services of a particular kind or description, directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation;
(e) will not, or will not except to a limited extent, re-supply goods or services, or goods or services of a particular kind or description, acquired directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation; or
(f) in the case where the corporation supplies or would supply goods or services, will not re-supply the goods or services to any person, or will not, or will not except to a limited extent, re-supply the goods or services:
(i) to particular persons or classes of persons or to persons other than particular persons or classes of persons; or
(ii) in particular places or classes of places or in places other than particular places or classes of places.
(3) A corporation also engages in the practice of exclusive dealing if the corporation refuses:(a) to supply goods or services to a person;(b) to supply goods or services to a person at a particular price; or(c) to give or allow a discount, allowance, rebate or credit in relation to the supply or proposed
supply of goods or services to a person;for the reason that the person or, if the person is a body corporate, a body corporate related to that body corporate:
(d) has acquired, or has not agreed not to acquire, goods or services, or goods or services of a particular kind or description, directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation;
(e) has re-supplied, or has not agreed not to re-supply, goods or services, or goods or services of a particular kind or description, acquired directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation; or
(f) has re-supplied, or has not agreed not to re-supply, goods or services, or goods or services of a particular kind or description, acquired from the corporation to any person, or has re-supplied, or has not agreed not to re-supply, goods or services, or goods or services of a particular kind or description, acquired from the corporation:
(i) to particular persons or classes of persons or to persons other than particular persons or classes of persons; or
(ii) in particular places or classes of places or in places other than particular places or classes of places.
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(4) A corporation also engages in the practice of exclusive dealing if the corporation:(a) acquires, or offers to acquire, goods or services; or(b) acquires, or offers to acquire, goods or services at a particular price;
on the condition that the person from whom the corporation acquires or offers to acquire the goods or services or, if that person is a body corporate, a body corporate related to that body corporate will not supply goods or services, or goods or services of a particular kind or description, to any person, or will not, or will not except to a limited extent, supply goods or services, or goods or services of a particular kind or description:
(c) to particular persons or classes of persons or to persons other than particular persons or classes of persons; or
(d) in particular places or classes of places or in places other than particular places or classes of places.
(5) A corporation also engages in the practice of exclusive dealing if the corporation refuses:(a) to acquire goods or services from a person; or(b) to acquire goods or services at a particular price from a person;
for the reason that the person or, if the person is a body corporate, a body corporate related to that body corporate has supplied, or has not agreed not to supply, goods or services, or goods or services of a particular kind or description:
(c) to particular persons or classes of persons or to persons other than particular persons or classes of persons; or
(d) in particular places or classes of places or in places other than particular places or classes of places.
(6) A corporation also engages in the practice of exclusive dealing if the corporation:(a) supplies, or offers to supply, goods or services;(b) supplies, or offers to supply, goods or services at a particular price; or(c) gives or allows, or offers to give or allow, a discount, allowance, rebate or credit in relation
to the supply or proposed supply of goods or services by the corporation;on the condition that the person to whom the corporation supplies or offers or proposes to supply the goods or services or, if that person is a body corporate, a body corporate related to that body corporate will acquire goods or services of a particular kind or description directly or indirectly from another person not being a body corporate related to the corporation.
(7) A corporation also engages in the practice of exclusive dealing if the corporation refuses:(a) to supply goods or services to a person;(b) to supply goods or services at a particular price to a person; or(c) to give or allow a discount, allowance, rebate or credit in relation to the supply of goods or
services to a person;for the reason that the person or, if the person is a body corporate, a body corporate related to that body corporate has not acquired, or has not agreed to acquire, goods or services of a particular kind or description directly or indirectly from another person not being a body corporate related to the corporation.
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(8) A corporation also engages in the practice of exclusive dealing if the corporation grants or renews, or makes it known that it will not exercise a power or right to terminate, a lease of, or a licence in respect of, land or a building or part of a building on the condition that another party to the lease or licence or, if that other party is a body corporate, a body corporate related to that body corporate:
(a) will not, or will not except to a limited extent:(i) acquire goods or services, or goods or services of a particular kind or description,
directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation; or
(ii) re-supply goods or services, or goods or services of a particular kind or description, acquired directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation;
(b) will not supply goods or services, or goods or services of a particular kind or description, to any person, or will not, or will not except to a limited extent, supply goods or services, or goods or services of a particular kind or description:
(i) to particular persons or classes of persons or to persons other than particular persons or classes of persons; or
(ii) in particular places or classes of places or in places other than particular places or classes of places; or
(c) will acquire goods or services of a particular kind or description directly or indirectly from another person not being a body corporate related to the corporation.
(9) A corporation also engages in the practice of exclusive dealing if the corporation refuses to grant or renew, or exercises a power or right to terminate, a lease of, or a licence in respect of, land or a building or part of a building for the reason that another party to the lease or licence or, if that other party is a body corporate, a body corporate related to that body corporate:
(a) has acquired, or has not agreed not to acquire, goods or services, or goods or services of a particular kind or description, directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation;
(b) has re-supplied, or has not agreed not to re-supply, goods or services, or goods or services of a particular kind or description, acquired directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation;
(c) has supplied goods or services, or goods or services of a particular kind or description:(i) to particular persons or classes of persons or to persons other than particular persons
or classes of persons; or(ii) in particular places or classes of places or in places other than particular places or
classes of places; or(d) has not acquired, or has not agreed to acquire, goods or services of a particular kind or
description directly or indirectly from another person not being a body corporate related to the corporation.
(10) Subsection (1) does not apply to the practice of exclusive dealing constituted by a corporation engaging in conduct of a kind referred to in subsection (2), (3), (4) or (5) or paragraph (8)(a) or (b) or (9)(a), (b) or (c) unless:
(a) the engaging by the corporation in that conduct has the purpose, or has or is likely to have the effect, of substantially lessening competition; or
(b) the engaging by the corporation in that conduct, and the engaging by the corporation, or by a body corporate related to the corporation, in other conduct of the same or a similar kind, together have or are likely to have the effect of substantially lessening competition.
(10A) Subsection (1) does not apply to a corporation engaging in conduct described in subsection (6) or (7) or paragraph (8)(c) or (9)(d) if:
(a) the corporation has given the Commission a notice under subsection 93(1) describing the conduct; and
(b) the notice is in force under section 93.Page 45 of 55
(11) Subsections (8) and (9) do not apply with respect to:(a) conduct engaged in by, or by a trustee for, a religious, charitable or public benevolent
institution, being conduct engaged in for or in accordance with the purposes or objects of that institution; or
(b) conduct engaged in in pursuance of a legally enforceable requirement made by, or by a trustee for, a religious, charitable or public benevolent institution, being a requirement made for or in accordance with the purposes or objects of that institution.
(12) Subsection (1) does not apply with respect to any conduct engaged in by a body corporate by way of restricting dealings by another body corporate if those bodies corporate are related to each other.
(13) In this section:(a) a reference to a condition shall be read as a reference to any condition, whether direct or
indirect and whether having legal or equitable force or not, and includes a reference to a condition the existence or nature of which is ascertainable only by inference from the conduct of persons or from other relevant circumstances;
(b) a reference to competition, in relation to conduct to which a provision of this section other than subsection (8) or (9) applies, shall be read as a reference to competition in any market in which:
(i) the corporation engaging in the conduct or any body corporate related to that corporation; or
(ii) any person whose business dealings are restricted, limited or otherwise circumscribed by the conduct or, if that person is a body corporate, any body corporate related to that body corporate;
supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the conduct, supply or acquire, or be likely to supply or acquire, goods or services; and
(c) a reference to competition, in relation to conduct to which subsection (8) or (9) applies, shall be read as a reference to competition in any market in which the corporation engaging in the conduct or any other corporation the business dealings of which are restricted, limited or otherwise circumscribed by the conduct, or any body corporate related to either of those corporations, supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the conduct, supply or acquire, or be likely to supply or acquire, goods or services.
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WEEK 10 – RESALE PRICE MAINTENANCE (RPM)
ANSWER PLAN
RPM is a vertical price restraint that seeks to ensure a buyer will re-sell goods at a minimum price specified by the supplier (s 96; s 96A if services)
1. IS THERE A PRICE SPECIFIED BY A SUPPLIER?
S 96(3)(d)(i) covers withholding of supply because the second person has sold goods below a specified price, and withholding because the second person is likely to do so (TPC v Sony)
Can be within a range: ‘The fact that a price is stated to be within a range of a particular figure, or that otherwise an element of approximation is introduced, does not detract from the true character of the price as being a specified price’ (TPC v Beta Shoe Co)
Evidence that Penfolds was putting pressure on Foodland to narrow the gap between Foodland’s prices and its own, but no evidence of the criteria to be applied for identifying the range within which Foodland was to re-sell (TPC v Penfolds)
2. SPECIFIC SECTIONS – WORK THROUGH AS RELEVANT
s 96(3)(a) : supplier making it known to someone that the supplier will not supply goods to them unless they agree not to sell those goods below a specified price
o ‘making it known’: ‘it is not necessary to show that the supplier intended to carry through with the threat. The supplier might make the threat even though it knew it was impossible or highly unlikely that it would act upon the threat’ (Dermalogica)
s 96(3)(b) : supplier inducing/attempting to induce someone not to sell goods below a specified price
o Attempt to induce : not necessary that the attempt succeeds, but must prove subjective mental element
o Induce : no mental element required (Mobil Oil)
o The supplier is not inducing or attempting to induce a person by reason only that ‘recommended price’ is provided (s 97)
BUT if an RRP is provided and its actually a mandatory price, won’t have protection of s 97 (TPC v Commodore Business)
Where dealers discouraged from advertising at ‘$X off the recommended retail price’ of discounting without the approval of the advertising committee ‘… designed to inhibit the initiation of negotiation of, or bargaining for, lesser prices and erosion of profit margins’ (TPC v Prestige Motors)
s 96(3)(c) : supplier entering into an agreement for the supply of goods to someone that they will not sell the goods below a specified price
s 96(3)(f) : supplier using a statement of a price likely to be understood as a price below which the goods are not to be sold
o Objective test: ‘The phrase ‘likely to be understood’ requires an objective test. The test does not look to the intention of the supplier in making the statement but is measured by its likely effect on ‘the second person’’ (BP v TPC)
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s 96(3)(d) : supplier withholding the supply of goods to a second person for the reason that the second person
o (i) has not agreed as mentioned in paragraph (a); or
o (ii) has sold/is likely to sell goods supplied to him by the supplier at a price less than that specified by the supplier
o In Hodgson v Westco Motors, respondent had adequate commercial reasons for terminating the dealership in question, but also terminated for a reason which included ‘as a substantial and operative reason, the reason that the applicant had sold or was likely to sell… Mazda vehicles at a price less than that specified’ = RPM
Loss-Leading Exception ( s 98(2) ) : s 96(3)(d) does not apply to withholding supply to a person who, within the preceding year, has sold the goods at less than their cost price:
for the purpose of attracting persons likely to purchase other goods OR for the purpose of promoting the business of the buyer
o For the purposes of s 98(2) a genuine clearance sale will be disregarded as will the sale of goods that took place with the consent of the supplier (s 98(3))
s 96(3)(e) (additional person included in supply chain) supplier withholding supply to someone for the reason that a third person has obtained goods from that someone —
o (i) has not agreed not to sell those goods at less than the specified price; or
o (ii) has sold/is likely to sell goods supplied to him by the second person, at a price less than that specified by the supplier
3. Deeming provision
s 98(1) for s 96(3)(d) or (e) supplier deemed to withhold supply if:
o supplier refuses or fails to supply those goods to other person;
o the supplier refuses to supply except on terms disadvantageous to the other person;
o the supplier treats that person less favourably, whether in respect of time, method or place of delivery or otherwise, than the supplier treats other persons it supplies to
o the supplier causes a person to withhold the supply of goods to the other person as mentioned in paragraph (a), (b) or (c) of this subsection
4. Rebuttable presumption (s 100)
If the plaintiff establishes that: [elements]
o defendant has withheld supplies;
o in the immediately preceding period the def had been supplying the plaintiff; and
o within six months of withholding supply, the def became aware of the pl’s discounting
it shall be presumed that the reason was that the pl would not sell at the price specified
5. Authorisation for RPM
Test: …in all the circumstances the proposed contract would be likely to result in such a benefit to the public that the contract should be allowed to be made (s 90(8)(a)(iv))
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Possible public benefits: limit free-riding on services provided by retailers; as a means of facilitating market entry; to protect ‘prestige’ goods or services; and to achieve an optimal number of retail outlets
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SECTION 96; 98
96 Acts constituting engaging in resale price maintenance
(1) Subject to this Part, a corporation (in this section called the supplier) engages in the practice of resale price maintenance if that corporation does an act referred to in any of the paragraphs of subsection (3).
(2) Subject to this Part, a person (not being a corporation and also in this section called the supplier) engages in the practice of resale price maintenance if that person does an act referred to in any of the paragraphs of subsection (3) where the second person mentioned in that paragraph is a corporation.
(3) The acts referred to in subsections (1) and (2) are the following:(a) the supplier making it known to a second person that the supplier will not supply goods to
the second person unless the second person agrees not to sell those goods at a price less than a price specified by the supplier;
(b) the supplier inducing, or attempting to induce, a second person not to sell, at a price less than a price specified by the supplier, goods supplied to the second person by the supplier or by a third person who, directly or indirectly, has obtained the goods from the supplier;
(c) the supplier entering into an agreement, or offering to enter into an agreement, for the supply of goods to a second person, being an agreement one of the terms of which is, or would be, that the second person will not sell the goods at a price less than a price specified, or that would be specified, by the supplier;
(d) the supplier withholding the supply of goods to a second person for the reason that the second person:
(i) has not agreed as mentioned in paragraph (a); or(ii) has sold, or is likely to sell, goods supplied to him or her by the supplier, or goods
supplied to him or her by a third person who, directly or indirectly, has obtained the goods from the supplier, at a price less than a price specified by the supplier as the price below which the goods are not to be sold;
(e) the supplier withholding the supply of goods to a second person for the reason that a third person who, directly or indirectly, has obtained, or wishes to obtain, goods from the second person:
(i) has not agreed not to sell those goods at a price less than a price specified by the supplier; or
(ii) has sold, or is likely to sell, goods supplied to him or her, or to be supplied to him or her, by the second person, at a price less than a price specified by the supplier as the price below which the goods are not to be sold; and
(f) the supplier using, in relation to any goods supplied, or that may be supplied, by the supplier to a second person, a statement of a price that is likely to be understood by that person as the price below which the goods are not to be sold.
(4) For the purposes of subsection (3):(a) where a price is specified by another person on behalf of the supplier, it shall be deemed to
have been specified by the supplier;(b) where the supplier makes it known, in respect of goods, that the price below which those
goods are not to be sold is a price specified by another person in respect of those goods, or in respect of goods of a like description, that price shall be deemed to have been specified, in respect of the first-mentioned goods, by the supplier;
(c) where a formula is specified by or on behalf of the supplier and a price may be ascertained by calculation from, or by reference to, that formula, that price shall be deemed to have been specified by the supplier; and
(d) where the supplier makes it known, in respect of goods, that the price below which those goods are not to be sold is a price ascertained by calculation from, or by reference to, a
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formula specified by another person in respect of those goods or in respect of goods of a like description, that price shall be deemed to have been specified, in respect of the first-mentioned goods, by the supplier.
(5) In subsection (4), formula includes a set form or method.
(6) For the purposes of subsection (3), anything done by a person acting on behalf of, or by arrangement with, the supplier shall be deemed to have been done by the supplier.
(7) A reference in any of paragraphs (3)(a) to (e), inclusive, including a reference in negative form, to the selling of goods at a price less than a price specified by the supplier shall be construed as including references to:
(a) the advertising of goods for sale at a price less than a price specified by the supplier as the price below which the goods are not to be advertised for sale;
(b) the displaying of goods for sale at a price less than a price specified by the supplier as the price below which the goods are not to be displayed for sale; and
(c) the offering of goods for sale at a price less than a price specified by the supplier as the price below which the goods are not to be offered for sale;
and a reference in paragraph (3)(d), (e) or (f) to a price below which the goods are not to be sold shall be construed as including a reference to the price below which the goods are not to be advertised for sale, to the price below which the goods are not to be displayed for sale and to the price below which the goods are not to be offered for sale.
98 Withholding the supply of goods
(1) For the purposes of paragraph 96(3)(d) or (e), the supplier shall be deemed to withhold the supply of goods to another person if:
(a) the supplier refuses or fails to supply those goods to, or as requested by, the other person;(b) the supplier refuses to supply those goods except on terms that are disadvantageous to the
other person;(c) in supplying goods to the other person, the supplier treats that person less favourably,
whether in respect of time, method or place of delivery or otherwise, than the supplier treats other persons to whom the supplier supplies the same or similar goods; or
(d) the supplier causes or procures a person to withhold the supply of goods to the other person as mentioned in paragraph (a), (b) or (c) of this subsection.
(2) Paragraph 96(3)(d) does not apply in relation to the withholding by the supplier of the supply of goods to another person who, within the preceding year, has sold goods obtained, directly or indirectly, from the supplier at less than their cost to that other person:
(a) for the purpose of attracting to the establishment at which the goods were sold persons likely to purchase other goods; or
(b) otherwise for the purpose of promoting the business of that other person.
(3) For the purposes of subsection (2), there shall be disregarded:(a) a genuine seasonal or clearance sale of goods that were not acquired for the purpose of
being sold at that sale; or(b) a sale of goods that took place with the consent of the supplier.
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WEEK 11 – FRANCHISING
TYPES OF FRANCHISES [look out for tying, misuse of market power etc]
Product Franchise : exclusive rights to sell or distribute product
Processing or manufacturing franchise : essential ingredient eg. CocaCola
System franchise/Business format franchise : confidential information; method of doing business; trade mark licence and control by franchisor – eg. fast food (true franchise)
o More than distribution rights
o Distribution rights + TM licence + confidential know-how (trade secrets)
o Broadly pro-competitive – facilitate entry into market and
Reduce risk of small business failure
Franchisees participate in product with established goodwill
More products = more competition
RELEVANT MARKETS
Product at issue AND economic substitutes for the product (s 4E)
2 Markets:
Market for franchise opportunities; AND
o Where pre-disclosed restraints – the market is for franchise opportunities
Queen City Pizza : charging up to 40% more for pizza dough, alleged two products – tying product (Dominos franchise) and tied product (pizza dough)
Held : tie was pre-disclosed to prospective franchisees SO relevant market = market for franchise opps or fast food franchises – Dominos had no market power so NOT tying
o Eg. one franchise (KFC) unlikely to constitute a separate product market – if KFC were to increase ‘price’ for franchise by 5-10%, prospective franchisee would buy another franchise (Pizza Hut) or move to another sector (hire cars)
Market for the franchise ingredients
o Where restraints imposed after franchises locked in by contract = market for single brand franchise and franchise ingredients (Eastman Kodak)
Relevant Markets:
Newcall :
o While market power could not in the ordinary case arise solely from contractual rights, there was an exception in the case where customers did not knowingly and voluntarily give the contractual rights that created the market power.
o Contractual terms alleged to have been changed by the defendant after the customers were locked in by an initial contract, economic market power may exist
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Relevant market may be a single brand
No market power arising solely from contractual rights where franchisee knowingly and voluntarily accepted restrictions
In deciding whether Eastman Kodak category economic market power or Queen city Pizza category of contractually created market power consider whether franchisees knew they were agreeing to commitment
ECONOMIC ASPECTS OF FRANCHISING
Different views on impact of vertical restraints on competition
o ‘The overall effect on competition of such restraints is not necessarily negative; it may be positive’ (Melway)
o If there is inter-brand competition, intra-brand vertical restraints may not matter.
Territorial protection for franchisees may be necessary to take advantage of distribution efficiencies and prevent free-riding; tying may be an efficient ‘policing’ device to ensure that quality inputs are used to maintain the franchisor’s reputation and goodwill in the TM
RESTRICTIONS PROHIBITED PER SE
High degree of price uniformity in fast food franchising:
Horizontal price fixing (cartels) ( s 44ZZRA)
Franchisor may specify a maximum price with each franchisee (bilateral and vertical), but ‘hub and spoke’?
o Note : because franchisees are competitors
RPM (s 96)
Franchisor may specify a minimum price for resale of goods not supplied by franchisor
RPM prevents cost-effective franchisees from passing on cost-savings to consumers, that is, it prevents intra-brand competition
It may prevent franchisees from putting pressure on their franchisors to reduce prices when the franchisees are faced with lower prices for competing brands, that is, it can also prevent inter-brand competition
Third-line forcing (s 47(6))
Pizza Hut will grant a franchise on condition that franchisee will purchase all of its requirements of mozzarella cheese from X
[next page – ‘Restrictions subject to an SLC test’ ]
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RESTRICTIONS SUBJECT TO AN SLC TEST
Tying (s 47(6) tying franchise (the tying) with another product (the tied)
Pizza Hut will grant a franchise on condition that franchisee will purchase all of its requirements of mozzarella cheese from Pizza Hut
Two distinct products: tying product supplied on condition that tied product also acquired
o Market power in tying product (ie. franchise)
o Substantial lessening of competition in market for tied product (ie. ingredient)
Principe v McDonalds
o Format system franchise: trade mark (TM) and method of doing business, alleged two products:
Tying product – franchise ( TM and method of doing business);
Tied product – lease
o Held : one integrated product (TM + method + lease) – site selection vita to success
Non-compete clause
Prohibition on franchisee opening, for the duration of the franchise or for a reasonable period after its termination, another shop in competition with other members of the network
Restriction on inter-brand competition, but no franchise system without it; promotes inter-brand competition in market for franchise opportunities
Other restrictions
franchisee not to sell the business without the franchisor’s prior approval;
franchisee to use the commercial methods developed by the franchisor and to utilise the know-how provided by the franchisor;
franchisee to decorate the premises according to the franchisor’s specifications and not to transfer the location of the shop without consent;
franchisee not to assign the contract without consent; and
franchisee to obtain the franchisor’s prior approval for all advertising
SLC Test
Is there is likely to be more inter-brand competition “with” the franchise, than “without” the franchise?
o If so, ancillary restrictions necessary to induce franchisor to enter into the franchise and reduce the risk of doing so should not be condemned
o Generally arrive at the view that restrictions are pro-competitive
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MISUSE OF MARKET POWER
Conduct : exercising a pre-disclosed contractual right
Element 1 :
o Did the franchisor possess substantial market power in upstream wholesale market for franchise opportunities
Element 2: ‘Taking advantage ’: apply the counter-factual test:
o Could/would franchisor be likely to engage in conduct under competitive conditions, or
o Is the conduct facilitated by the use of franchisor’s market power?
o Justification : Is there some rational business explanation for the conduct? would be engaged in under competitive conditions
Application :
o Product tie requiring franchisees to purchase ingredients from the franchisor; necessary for quality control to protect franchisor’s goodwill in trade mark.
o Counter-factual: would franchisor without market power be likely to impose a restraint for quality control purposes?
Melway :
o The case suggests many vertical non-price restraints are efficiency enhancing.
o Conduct that enhances distribution efficiency is the sort of conduct that a firm would engage in under competitive conditions; unlikely to constitute taking advantage of market power
AUTHORISATION AND NOTIFICATION
Farm Pride Food :
o ACCC denied application for authorisation for product distribution franchise
o Exclusive TM licence in relation to eggs obtained from producer authorised by franchisor
o Claimed public benefit quality control, but eggs already subject to quality control under industry Code; no additional public benefit to support tie
