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Metcash: ACCC takes on more cases where the outcome is less certain

The Australian Competition and Consumer Commission has appealed to the Full Court of the Federal Court to overturn Justice Emmett’s decision in the Metcash case.

The Metcash case is one of a small number of contested merger cases to reach the Federal Court. 

We see the Commission’s decision to appeal as a reflection of one of Rod Sims’, the new Chairman of the ACCC, priorities for his initial term at the Commission.  The priority is to “take on more cases where the outcome is less certain.”

The ACCC’s 3 grounds of appeal

The ACCC’s application for review is based on 3 grounds of appeal, namely:

  • Justice Emmett erred when he found that there is not a separate market for the wholesale supply of groceries to independent supermarkets in New South Wales and the Australian Capital Territory
  • Justice Emmett erred when he found that there were no viable, alternative bidders for Franklins that were acceptable to Pick’nPay, the owner of Franklins, and
  • Justice Emmett erred when he found that Metcash’s acquisition of Franklins would not be likely to have the effect of substantially lessening competition in a market.

Timing

We suspect the Full Court of the Federal Court will hear the appeal on an expedited basis, handing down its decision before or during the first quarter of 2012.

If the ACCC wins the appeal, Metcash may seek leave to appeal to the High Court of Australia.  Should that occur, and provided the High Court grants the leave to appeal, the case may not be finalised until towards the end of the fourth quarter of 2012 or possibly during the first quarter of 2013.

Opportunity for the ACCC to further refine its merger clearance process

Irrespective of the outcome of the case, we see it as an opportunity for the ACCC to further refine its merger clearance process, including by creating greater transparency around the evidence on which it intends to rely when it proposes to oppose a merger.  In other jurisdictions, including the European Union, competition law agencies allow the merger parties to access the file so they can assess first hand the evidence against them.

Challenges for the ACCC

It will be challenging for the ACCC to overturn Justice Emmett’s findings because:

  • there is a line of judicial authority that supports Justice Emmett’s finding that the market is probably the national market for the retail supply of groceries which includes the vertically integrated supermarket chains, and
  • the ACCC’s view of the counterfactual seems contrary to the fact that no alternative bidders for Franklins emerged during the 9 months the case was before Justice Emmett.

Importantly, the Full Court must consider the facts as they were presented to Justice Emmett.  Even if an alternative bidder for Franklins does emerge in the coming weeks or months, the critical question will be whether the ACCC put sufficient evidence about that bidder before Justice Emmett.

No new evidence can be admitted during the appeal

During the appeal to Full Court of the Federal Court, it will not be possible for the Commission to place any evidence before the Court.  The Court’s review will be based only on the evidence placed before Justice Emmett.

Market definition

The ACCC alleges that Justice Emmett should have found that the pricing differential between independent retailers supplied by Metcash and the major supermarket chains was sufficient to give a degree of pricing freedom to Metcash. 

That, in turn, is alleged by the ACCC to mean that the supermarket chains did not impose a sufficiently close constraint on Metcash’s wholesale pricing decisions for Metcash to be classified as competing in the same market as the supermarket chains

If the ACCC is correct, Metcash’s merger with Franklins would be a merger to monopoly or near monopoly.

We query whether the ACCC is placing too much emphasis on price competition as the basis for defining markets.  While price competition is a critical factor in defining the boundaries of markets, there are other important factors which must be taken into account, including the nature of the products being supplied, the nature of the end-users of the products, branding, promotional activity and strategy. 

It could be, for example, that Metcash’s competitive strategy has been directly responsive to the supermarket chains’ competitive strategies and that, in order to provide a viable alternative for retail customers to the supermarket chains, it has been necessary for Metcash to behave differently to the chains when it sells the same types of products as the supermarket chains and when the end-users of those products are the same or substantially similar. 

The counterfactual

When the ACCC assesses whether a proposed merger would be likely to have the effect of substantially lessening competition in a market, it is necessary for the ACCC to look into the future and compare:

  • the likely state of competition (in the foreseeable future) with the merger with
  • the likely state of competition (in the foreseeable future) without the merger. 

If, when it undertakes the comparison, the state of competition with the merger is likely to be substantially less than the state of competition without the merger, the ACCC will oppose the merger.

The second scenario, the scenario in the foreseeable future without the merger, is what competition lawyers call the counterfactual. 

Defining the counterfactual is challenging - it requires the construction of a hypothetical which is based on the absence of a concrete proposal (the merger proposal before the ACCC).  

According to some commentators (and the ACCC), the counterfactual may not necessarily involve the status quo and may, for example, involve alternative proposals for consolidation in an industry, or new entry, or new technologies, or different regulation, or a combination of all or some of those factors.

The ACCC’s allegations about the counterfactual

In its application for review, the ACCC alleges that Justice Emmett should have found that it was not pure speculation that a group of IGA supermarket owners might have formed a consortium to make a binding offer to buy some of Franklins’ assets in a way which would have been acceptable to Franklins.

The ACCC also alleges that Justice Emmett applied the wrong legal test when he assessed the likelihood of alternative bidders actually existing. 

Rather than the ACCC needing to establish that “it was more probable than not that one of its counterfactuals would occur”, the ACCC alleges that Justice Emmett should have asked whether “there was a real but not remote chance” of one of the ACCC’s counterfactuals occurring.

It may be that the Full Court will find that the counterfactuals proposed by the ACCC were pure speculation, but will provide clarity around the standard of proof for the ACCC to apply when it constructs the counterfactual.

In our view, the standard of proof is a standard based on a probability such that the counterfactual needs to be what will probably occur without the merger.

Substantial lessening of competition

The ACCC alleges that Justice Emmett should have found that there were high barriers to entry to the narrow market for the wholesale supply of groceries to independent retailers in New South Wales and the Australian Capital Territory and that, with the merger, Metcash would be a monopolist.

The ACCC also alleges that Justice Emmett should not have found that independent grocers in New South Wales and the Australian Capital Territory would be more vigorous and effective competitors if Metcash acquired Franklins.

In our view, if the ACCC fails to overturn Justice Emmett’s findings on market definition, it will be especially challenging for the ACCC to overturn this finding.

 

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