Client Update

Refusal to supply as a misuse of market power – The Melway decision upheld on appeal.

• Decision has serious ramifications for distribution structures
• Does it blur having market power with taking advantage of that power for an anti-competitive purpose?

Introduction

The Full Federal Court recently upheld by a majority, the finding in Melway Publishing that Melway had contravened the misuse of market power provisions in section 46 of the Trade Practices Act in refusing to supply Robert Hicks Pty Limited (‘Auto Fashions’). Auto Fashions was a company seeking to distribute the well known Melways Street Directory which had an 80-90% share of sales of Melbourne street directories. The appeal in Melway was heard by Justices Sundberg, Finkelstein and Heerey. The Melway case has important ramifications for companies which establish their own distribution structures as it examines the relationship between the misuse of market power provisions in the Trade Practices Act and distributorships. On appeal the questions were whether Melway took advantage of its market power and if so, did it take advantage for a prohibited purpose under section 46 of the Trade Practices Act.

The appeal

On appeal Melway did not take issue with the market definition or that it had a substantial degree of market power.

Justice Heerey disagreed with the majority judges. In disagreeing with the majority, Justice Heerey found that the evidence did not establish that Melway took advantage of its market power when it declined to supply Auto Fashions. His Honour held that the operation of Melway’s exclusive distributorship was not dependent on Melway’s market power because Melway had adopted its exclusive distribution system when it commenced operations at a time when Melway’s market share was zero and it could not have had any market power. Justice Heerey reasoned that because Melway had a legitimate business reason for the adoption and maintenance of its exclusive distribution system, Melway’s refusal to engage in conduct which would effectively dismantle the distribution system, was not a ‘taking advantage’ of its market power.

In contrast, the majority, Justices Sundberg and Finkelstein, focused on Melway’s reason for refusing to supply, as opposed to the reason for the existence of Melway’s exclusive distribution system.

The majority Judges found that there was no evidence to suggest that Melway ever refused to supply someone who wanted to compete with its distributors when Melway was a small player. The majority Judges relied on this lack of evidence to draw an inference that Melway would have supplied someone in competition with its distributors, when it was a small player. Having drawn such an inference, the majority held that the only reason Melway was able to refuse to supply at the time in question was because the person who sought supply could not look to a competitor of Melway to supply it with an effective competing product. The majority found that the refusal to supply was a use of its market power and therefore a ‘taking advantage’ of Melway’s market power.

As well as possessing a substantial degree of market power and ‘taking advantage’ of that market power, an organisation must also engage in the conduct for an anti-competitive purpose before it will contravene the misuse of market power provisions in section 46 of the Trade Practices Act. All three Judges found that Melway’s purpose in refusing to supply Auto Fashions was for an anti-competitive purpose – to prevent competition. The Court held that where supply is refused in order to maintain a distribution system, there will be no difference between the purpose for that refusal and its effect. That is, where both the purpose and effect of the refusal will be to prevent competition, they are effectively two sides of the same coin. However, in dissent, Justice Heerey noted that any distribution system necessarily involves such deterrence or prevention of competition.

Legitimate business purpose issue

It is clear from the reasoning of all three Judges that it is possible for an organisation with a substantial degree of market power to refuse to supply its products for a legitimate business purpose without contravening the misuse of market power provisions. If, for example, the refusal to supply is solely to improve efficiency, to lower costs, to overcome a lacklustre sales history, to correct a declining market share or to provide appropriately trained suppliers, the misuse of market power provisions should not be contravened. The danger with this decision (see conclusion below) is that as with purpose, establishing an exclusive distribution system is often the result of a decision to improve efficiency, lower costs and improve customer service by appropriately qualified and professional distributors.

Conclusion

The decision is a dangerous decision for Australian companies as it is at odds with commercial practice and indeed arguably, the ACCC’s own views on the matter. The ACCC, in its 1990 background paper on ‘Misuse of Market Power’ noted at paragraph 17, that

‘... many marketing decisions involving product distribution or the appointment of dealerships would not contravene s 46. It is understandable that suppliers would take an interest in the circumstances and types of outlets in which their products are resold by distributors. The particular characteristics of some products may require a policy that restricts distribution to a limited number of outlets. For example, the technically sophisticated nature of some products now require technical skills and facilities of pre sales and post sales servicing. In other words the Commission accepts that it is not reasonable to expect a corporation with a substantial degree of market power to supply each and every existing or new wholesale or retail outlet if it is apparent that it would not be to its commercial advantage to do so.’

Appeal lodged

Melways have sought special leave to appeal to the High Court. The special leave application is anticipated to be heard in December this year.

Dave Poddar
Partner
Tel (61 2) 9296 2281
dave.poddar@msj.com.au