Almost eight years after the ACCC commenced proceedings, the Federal Court has imposed a penalty of $4.9 million on Baxter Healthcare Pty Limited (Baxter) for contraventions of section 46 (taking advantage of market power) and section 47 (exclusive dealing) of the Trade Practices Act 1984 (Cth) (TPA).
While substantially below the penalty sought by the ACCC, the decision is significant as it is the first penalty decision handed down by the Courts in four years for a contravention of section 46 or section 47. The ACCC has stated that it is reviewing the judgment, and either party may appeal.
Key Points
The decision is one of only a handful of cases in recent years in which the ACCC has succeeded in establishing contraventions of section 46 or section 47 and obtaining a penalty. The other most recent decision was in 2006, and related to conduct by Safeway ($8.9 million - sections 45 and 46). Other previous penalty decisions include Fila Sport ($3 million - sections 46 and 47), Universal Music ($1 million - section 47) and Eurong ($500,000 - sections 45, 46 and 47).
The Court did not take into account adversely the lack of contrition which the ACCC asserted Baxter had demonstrated prior to, during and subsequent to the liability proceedings. Justice Mansfield concluded that Baxter was entitled to assert that it had not contravened the TPA and noted that "the absence of any expression directly and immediately of contrition on its part” should not impact penalty adversely for Baxter.
Although accepting that the conduct was unlikely to occur again, the Court stated that the penalty must be at a level to deter Baxter from engaging in similar conduct in the future and to operate as a general deterrent to the community. The Court concluded that a significant penalty was also warranted given the deliberate nature of the conduct, the involvement of senior Baxter management, Baxter’s purpose of securing and maintaining its market share and the significance of the effect of the conduct on competitors.
Background to the Baxter proceedings
The ACCC commenced proceedings against Baxter in 2002, in relation to tenders lodged and won by Baxter relating to the supply of sterile fluids and peritoneal dialysis (PD) products.
The ACCC alleged that Baxter’s conduct in bundling the supply of sterile fluids (the market for which was not competitive) with the supply of PD fluids (the market for which was competitive) in offers to State hospital purchasing authorities amounted to exclusive dealing under section 47 of the TPA, and a taking advantage of market power in breach of section 46. Our Alert on the first instance decision on liability is available here.
The proceedings included an appeal to the High Court on whether Baxter’s conduct was immune from legal action under the TPA on the basis of derivative Crown immunity. Our alert on the High Court’s decision, concluding that Crown immunity did not extend to Baxter’s conduct in supplying State purchasing authorities, can be read here. Following the High Court decision the matter was remitted back to the Full Federal Court to consider liability issues under the TPA.
Liability was determined by the Full Federal Court in August 2008 when it held that Baxter’s bundled offers were in breach of sections 46 and 47 of the TPA. This decision went further than the findings of anti-competitive conduct at first instance in 2005, as it concluded that Baxter’s bundling strategy alone (without a separate refusal to give a volume discount on item-by-item prices) was sufficient to found a breach of section 46.
The penalty judgment
In his judgment on 26 August 2010, ACCC v Baxter Healthcare Pty Ltd [2010] FCA 929, Justice Mansfield imposed penalties totalling $4.9 million on Baxter in respect of the following supply agreements:
$2 million - NSW government;
$1.3 million - Queensland government;
$800,000 - Western Australian government; and
$800,000 - South Australian government.
Each penalty related to contraventions of both section 46 and section 47 in respect of the negotiation and entering into each supply agreement.
The ACCC had sought $27.3 million in penalties. The most significant factors for Justice Mansfield in not imposing a higher level of penalties were that:
the form of the tenders and their timing were within the control of the States, which sought to achieve the best economic result for hospitals. The States were not “unable to negotiate to some degree with Baxter about its bundled offers”;
the ACCC did not show that the bundled prices were other than an “appropriate” price, as there was insufficient evidence of the extent of any mark-up and no evidence of price-gouging; and
while the effect of Baxter’s conduct was to exclude two other suppliers from being able to supply the States for the period of the relevant contracts, there was nothing to suggest the entities did not remain in the market or that they were subsequently in any worse position. Rather, the conduct enabled Baxter to hold onto its market position, albeit in a proscribed manner.
His Honour refused to make injunctive orders (sought by the ACCC) for reasons including that the States would be unlikely to allow such activities again, the conduct took place some time ago and Baxter had improved its TPA compliance program in the intervening period. He also observed that it would be extremely difficult to frame any injunction without impeding Baxter’s ability to legitimately bid in any tender, even where the bid would not contravene the TPA.
The parties have 28 days to appeal this decision to the Full Federal Court, and then possibly to the High Court, at which stage it could raise the substantive liability issues as determined in 2008 as well as issues on penalty and relief.
ACCC approach to penalties
ACCC Chairman Graeme Samuel has publicly stated that he does not consider that the financial penalties imposed in Australia to date reflect the true damage done by anti-competitive conduct. Further, he considers that a “cultural change” is now necessary, both in relation to the level of penalties that are sought by the ACCC and those awarded by the courts. Mr Samuel has referred to the $36 million penalty imposed on Visy for its participation in the cardboard box cartel as being far outweighed by the potential profits from the cartel, as public reports estimate damage at approximately $700 million. In the case of Baxter, the total penalty of $4.9 million represents less than 20 per cent of Baxter’s net profits for 2008 or 2009.
From 1 January 2007, the maximum pecuniary penalty for a breach of the competition provisions of the TPA has been the greater of:
(a) $10 million;
(b) three times the value of any benefit received by the company from the offending conduct; or
(c) 10 percent of the annual turnover of the company.
The ACCC has stated that it will “vigorously pursue high penalties” and that “corporate penalties are only going to go up”. It has warned that the ACCC will be pressing for any penalty to be calibrated against whatever might be “the maximum”, which will vary depending upon the circumstances of the case.