Upcoming Mallesons seminarsCorporations with substantial market share that engage in below cost pricing and corporations who bundle. This includes those who license, or acquire licenses to, intellectual property.
What do you need to do?Exercise great care before implementing below cost pricing or bundling strategies. Check that your internal compliance policies are up to date. When in doubt, seek advice.
Sharon Henrick
Partner
T +61 2 9296 2294
Sydney
Patrick Gunning
Kim O'Connell
Melbourne
Courts, regulators and governments alike are showing increasing vigilance towards certain business practices of corporations with a strong market position.
Notably, there have been three developments over the last month that may impact your business. The cumulative effect of these developments is that the pricing and bundling strategies of many corporations may need to be revisited and, in some cases, substantially revised.
These developments are:
- predatory pricing amendments to the Trade Practices Act 1974 (Cth) (TPA) that took effect on 25 September 2007
- the European Court of First Instance’s decision in Microsoft v European Commission that Microsoft had abused its dominant position by bundling Windows Media Player with the Windows PC operating system and refusing to supply competitors with interoperability information, and
- the Australian High Court’s decision in ACCC v Baxter Healthcare Pty Ltd that derivative Crown immunity did not extend to Baxter’s conduct in bundling products supplied to State purchasing authorities.
Predatory pricing amendments to the TPA
Last month the Australian Parliament has passed amendments to the prohibition against taking advantage of market power in section 46 of the TPA.
The amendments include a prohibition on a corporation with a substantial market share from pricing below cost for a sustained period for a purpose of deterring competitive conduct or of causing substantial damage to a competitor.
These amendments are a marked departure from the current elements of section 46 as the amendments do not require market power nor any taking advantage of that power.
The amendments fail to recognise that below cost pricing is:
- common
- may stimulate competition, and
- in the absence of market power, invariably results in consumer benefits.
The amendments may result in corporations which engage in discounting facing prosecution even if they do not possess market power and may result in higher prices for consumers. Even though section 46 will only be breached if a corporation has an anti-competitive purpose, some corporations that have a substantial share of a market might not wish to take the risk and might choose not to discount heavily to match low prices of a new entrant or lower priced imports.
A further discussion of the amendments can be found here.
European Court decision in Microsoft v European Commission (17 September 2007)
In September, the European Court of First Instance released its decision in the long running Microsoft v European Commission case. The Court substantially upheld the EC’s finding that Microsoft had abused its dominant position in breach of Article 82 of the European Commission Treaty by:
- refusing to supply its competitors with sufficient ‘interoperability information’ to enable their software to interoperate seamlessly with computers using Windows software, and
- bundling Windows Media Player with the Windows PC operating system.
The Court upheld the Commission’s order that Microsoft pay a fine of €497 million.
The Court found that Microsoft’s refusal to supply the “interoperability information” could not be justified on the basis of its intellectual property rights. This confirms existing European law that a refusal by an entity with a substantial degree of power in a market to license intellectual property rights held by that entity may be open to challenge at least where the following three factors are present.
- The refusal to license relates to a product or service indispensable to the exercise of a particular activity on a relevant market.
- The refusal is of such a kind as to exclude effective competition in the relevant market.
- The refusal prevents the appearance of a new product for which there is potential consumer demand.
The Court made the following observations in its Article 82 assessment of the bundling of Windows Media Player with the Windows PC operating system.
- It was not disputed that Microsoft had a dominant position in the client PC operating systems market.
- Windows Media Player is a separate product to the Windows operating system. There are separate independent corporations which supply competing media products independently of other operating systems and, despite the bundling, a not insignificant number of consumers continue to acquire competing media players separately.
- It was immaterial to the Court’s consideration that Microsoft did not charge customers for Windows Media Player and that customers were free to acquire other media players.
- By bundling, Microsoft created a significant risk of foreclosing the market for media players to effective competition.
The Court observed that Microsoft retained the right to offer the bundled product but was required to make it possible for consumers to obtain the Windows PC operating system without Windows Media Player. However, our understanding is that sales of the Windows PC operating system without Windows Media Player have been negligible.
The Court noted that under European law, in exceptional circumstances the public interest in the maintenance of intellectual property rights must give way to fostering competition.
The key concern is whether this decision is too aggressive. Commentators throughout the world have observed that it will be some time before the full impact of the decision is known. Thomas O Barnett, Assistant Attorney General for the US Department of Justice, noted that aggressive restraints on dominant corporations could harm consumers by chilling innovation and discouraging competition.
In Australia, similar conduct may be unlawful if it results in a substantial lessening of competition or a misuse of market power, which are less likely to be present where a vigorously competitive corporation adds features to popular products or licenses intellectual property to rivals.
In any event, it is clear that the decision will provide the EC, and other regulators, with increased confidence in challenging bundling conduct of corporations with powerful market positions. Corporations should carefully consider the legal implications of business strategies that include refusing to supply and bundling and, on the other hand, they should also remain alert to opportunities to complain to regulatory authorities when they fall foul of the same conduct.
Microsoft has 2 months to lodge an appeal from the Court’s decision.
Australian High Court decision in ACCC v Baxter (29 August 2007)
Baxter is the only manufacturer of large volume sterile fluids in Australia and is one of a number of other local manufacturers and importers of peritoneal dialysis (PD) fluids, which are used in a form of dialysis treatment for chronic renal failure.
Between 1998 and 2001, Baxter responded to requests for tender from five State purchasing authorities and subsequently negotiated for, entered into and gave effect to long-term contracts with each of these authorities. In each of its tender responses, Baxter made two offers:
- an offer for the bundled supply of the requirements of the State for certain sterile fluids and PD fluid requirements, and
- an offer for the stand-alone supply of sterile fluids, PD fluids and other products on an item-by-item basis at higher prices than those included in the bundled offer.
Baxter refused a request by one of the State purchasing authorities to give it a volume discount on the item-by-item prices for sterile fluids.
At the end of August, the majority of the High Court concluded that Crown immunity does not extend to Baxter’s conduct in supplying State purchasing authorities. Instead, Baxter was bound by the TPA in its dealings with State purchasing authorities. The effect of this decision is that a corporation dealing with governments should no longer assume that its conduct will be protected by derivative Crown immunity.
At first instance, Justice Allsop concluded that elements of Baxter’s conduct would breach both exclusive dealing and misuse of market power prohibitions, but held that this conduct was immune from legal action as Baxter benefited from derivative Crown immunity in supplying State purchasing authorities. The matter has now been remitted to the full Federal Court to decide Baxter’s appeal against Justice Allsop’s findings that its conduct in offering bundled tenders and refusing discounts on unbundled items constitutes a misuse of market power or an exclusive dealing in breach of the TPA.
A further discussion of the Baxter case can be found here.