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 appeal was based on three grounds of appeal, namely:
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 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 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 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:
 Buchanan J at para 12 of the Court’s reasons for decision.
 See paragraph 266 of the Yates J’s Reasons for Judgment.
 Buchanan J at para 17.