Skip Ribbon Commands
Skip to main content

Metcrash: ACCC loses appeal

​As we predicted, the Full Court of the Federal Court today dismissed all three grounds of the Australian Competition and Consumer Commission’s appeal in the Metcash case and ordered the Commission to pay Metcash’s legal costs.

 

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

The Commission has 21 days to seek leave to appeal to the High Court of Australia.  Even if the Commission does seek leave to appeal the decision of the Full Court of the Federal Court, the High Court may decline to hear the appeal.

The case provides clarity around how grocery markets should be defined, and confirms that markets may be defined based on multiple functional levels, where one functional level constrains another functional level.

The case also confirms that the standard of proof for assessment of the counterfactual is the ordinary civil standard of the balance of probabilities.

The case may also lend support for calls for the Commission to give acquirers greater transparency about the evidence the Commission intends to rely on to oppose their acquisitions, before any litigation, consistent with the practice in other jurisdictions.

The ACCC’s three grounds of appeal

 

The ACCC’s appeal was based on three grounds of appeal, namely:

  • whether there is a separate market for the wholesale supply of groceries to independent supermarkets in New South Wales and the Australian Capital Territory, in which the major supermarkets do not participate;
  • the standard of proof required to show that there was a viable, alternative bidder to Metcash for Franklins; and
  • whether Metcash’s acquisition of Franklins would not be likely to have the effect of substantially lessening competition in a market.

The Full Court’s Decision - market definition

 

The Full Court upheld the trial judge’s finding that Metcash and Franklins compete in a national market for the supply of groceries to retail customers, together with the major supermarkets.

In upholding this finding, the appeal court rejected the Commission’s contention that Metcash and Franklins compete in a narrow market for the wholesale supply of groceries to independent supermarkets in New South Wales and the Australian Capital Territory, which excludes the major supermarkets.

One judge described the Commission’s narrow approach to market definition as “a distraction from the real questions.”

The effect of the Full Court’s decision is that a market may be defined by reference to multiple functional levels (for example, by reference to wholesale and retail levels) where downstream activities constrain upstream behaviour (for example, where retail activities constrain wholesale activities).

The Full Court’s Decision - the counterfactual

 

The Full Court was asked to adjudicate on the standard of proof for the counterfactual scenario (the counterfactual scenario is the scenario that would have been likely to develop if Metcash did not acquire Franklins).

In this regard, the Commission contended that:

  • the trial judge 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;
  • when the trial judge assessed the likelihood of the existence of alternative bidders, the trial judge should have merely asked whether there was a real chance that an alternative bidder existed rather than asking whether an alternative bidder was likely to exist on the balance of probabilities.

The Full Court rejected both of the Commission’s contentions, with one judge observing that:

“there was no adequate foundation for the supposition that a new wholesale business, of a kind not earlier existing, would come into existence based on the acquisition of [Franklins’] wholesale assets.  If it did, it would not reflect what had been done by Franklins.  Franklins had failed.  Any competition it represented was at an end, independently of anything Metcash did.”

The Full Court’s Decision - likely effect on competition

 

The Full Court upheld the trial judge’s finding that Metcash’s acquisition of Franklins would not be likely to have the effect of substantially lessening competition. 

This finding flowed inexorably from the Court’s rejection of the Commission’s narrow market, which excluded the major supermarkets.  Once the Court accepted that Metcash was constrained by the major supermarkets, it would be very difficult (and likely impossible) for the Court to find that Metcash’s acquisition of a relatively small, failing firm (Franklins) would be likely to substantially lessen competition in any market.

The outcome of the Court’s decision seems to be that a lower standard of proof than the ordinary civil standard of proof applies when the Commission assesses whether a proposed merger would be likely to substantially lessen competition.  If the Commission is assessing whether a merger would be “likely” to substantially lessen competition, and not assessing whether a merger “would” substantially lessen competition, the Commission must merely be satisfied that there is “a real chance” that the merger would substantially lessen competition.

While we accept that there may be eminent authority to support the Court’s decision in this regard, we believe that the standard of proof should be the same irrespective of whether the Commission is assessing a likelihood or a certainty and that the standard should be one based on the balance of probabilities.  Our reasons are:

  • there are two widely accepted standards of proof in Australia’s legal system - the standard of beyond reasonable doubt in criminal cases and the standard of on the balance of probabilities in civil cases;
  • the mergers provisions in the Competition and Consumer Act are civil in nature and do not contain any words that expressly oust the civil standard of proof;
  • we believe that it should be possible to prove a “likely” outcome on the balance of probabilities.  We also believe that it should also be possible to prove an outcome which is certain on the balance of probabilities.  The nature of the evidence would be different in each case;
  • for example, if there are only 2 suppliers in a market and no alternative bidders, the Commission should be able to prove, on the balance of probabilies, that the merger would lead to a monopoly.  The evidence relied on by the Commission might include evidence that someone is considering entry into the market (which would mean that the merger would not result in a monopoly) but there may be doubt about whether, or not, the person will actually be able to enter the market because, for instance, credit markets are tight.  Alternatively, the Commission should be able to prove on the balance of probabilities that the merger would be likely to lead to a monopoly (as opposed to would result in a monopoly) if the evidence about the likelihood of new entry more strongly indicates that new entry will probably not occur.

Footnotes

[1] Buchanan J at para 12 of the Court’s reasons for decision.

[2] See paragraph 266 of the Yates J’s Reasons for Judgment.

[3] Buchanan J at para 17.

Author(s)

 

 Key contact(s)

 
 

 Local Contact(s)