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Key impact
The case confirms that a mere expectation that a person will act in a particular manner is insufficient to constitute an “understanding” in contravention of section 45 of the TPA. The case provides some scope for a corporation, which is aware of a price-fixing arrangement within the market, to increase its prices based on its own commercial interests. However, the ability to do so must be seen in light of the fact that, in this case, Apco's managing director never solicited price information, was non-committal about whether he would increase Apco's prices in response to telephone calls from competitors, and did in fact only increase prices on 29 of 69 relevant occasions, thereby acting inconsistently with the collusive group in the majority of instances. The ACCC has sought leave to appeal the decision to the High Court.
The Full Federal Court took a strict approach to defining the type of conduct which constitutes price fixing by overturning Merkel J's decision that one of a group of Ballarat petrol retailers and its managing director had engaged in price fixing conduct in contravention of the Trade Practices Act 1974 (TPA).1 The Full Federal Court's decision was delivered just over a week before the Australian Competition & Consumer Commission (ACCC) released its immunity policy for cartel conduct. The policy attempts to encourage cartel participants to become informants in return for immunity from trade practices liability.
The Full Federal Court's decision was delivered within months of the ACCC obtaining significant civil penalties against a number of Ballarat petrol retailers. In the proceedings before Merkel J, the ACCC alleged that a group of retail petrol companies (retailers) contravened section 45(2) of the TPA by regularly telephoning each other to instigate and maintain price increases in the Ballarat retail petrol market.
In December 2004, Merkel J found that Apco Stations Pty Ltd (Apco), its managing director and others had engaged in a price-fixing arrangement with retail petrol companies in the Ballarat region, in contravention of section 45(2) of the TPA.2 His Honour found that the managing director was knowingly concerned in and a party to Apco's contraventions under section 75B(c) of the TPA. Penalties of $3 million and $200,000 were imposed on Apco and its managing director respectively.
Decision of the primary judge
The evidence before Merkel J indicated that Apco's managing director never solicited price information and was non-committal about whether he would increase Apco's prices in response to calls from the Retailers. Merkel J acknowledged that none of the Retailers had an expectation that Apco's preparedness to receive telephone calls meant that it would substantially match the increased prices. Some witnesses went no further than stating that it was their “hope” that Apco would increase its prices. In the majority of instances Apco's managing director did not increase Apco's prices when the Retailers raised their prices.
Merkel J accepted that the evidence suggested that Apco's managing director made his own decisions to raise Apco's petrol price based on commercial interests. However, His Honour found that Apco's managing director aroused an expectation on the part of the Retailers that he would receive the calls and continue to act upon the calls by closely monitoring the prices of the Retailers before deciding whether to increase prices. Merkel J also found that the managing director expected that the Retailers would maintain price increases whilst he was deciding whether to raise Apco's prices.
Ultimately, Merkel J found that these matters constituted the requisite meeting of minds required to demonstrate that Apco had participated in the price-fixing understanding.
Apco and Apco's managing director were just two of the 16 corporate or individual respondents to the proceedings before Merkel J. Some of the respondents contested the allegations and proceeded to trial. Other respondents made admissions and proceeded to a penalty hearing. All of the respondents were initially found to have breached the TPA and were ordered to pay penalties totalling $23.305 million. The penalties ordered against the other respondents were as follows:
Decision of the Full Federal Court
Apco and its managing director appealed to the Full Federal Court (Heerey, Hely and Gyles JJ), which upheld the appeal in August 2005.
The decision of the Full Federal Court turned on what constitutes an "understanding" to "fix" prices. The Court found that although Apco received information about price increases from the Retailers, it set its prices on the basis of its own commercial interests (in full knowledge of the information supplied by its competitors) rather than as a consequence of a commitment to the Retailers. Hence, Apco's price increases were set independently of a collusive arrangement between the Retailers.
Similarly, the managing director's expectation that the Retailers would maintain increased prices whilst he was deciding whether to match the increase was merely a factual expectation and could not be elevated to the level of an "understanding" between Apco and the Retailers.
The fact that Merkel J had found that there was no expectation that Apco would match the price increases unavoidably led to the conclusion that Apco was not party to any understanding to fix prices. As the Court pointed out, "(u)nilaterally taking advantage of a commercial opportunity presented is not to arrive at or give effect to an understanding in breach of the Act".
Further, the Full Court held that Apco and Anderson were not a party to an understanding to fix prices (that is to make prices "fast, firm or stable") but rather that Apco reserved to itself the decision whether to follow the prices supplied to it by other retailers.
The Full Court held that the circumstantial evidence, such as the telephone traffic on the days on which prices were increased, was consistent with its finding that Apco and its managing director were not party to an understanding to fix prices. While there was evidence of increased telephone traffic on such days for the Retailers, there was a slight decrease in calls for Apco. On some days when prices were increased, there was no evidence of calls between Apco and its competitors.
On 8 September 2005, the ACCC sought leave to appeal the Full Federal Court's decision to the High Court. We will keep you informed of the progress of the ACCC's special leave application in future updates.
Postscript: penalties and insolvency
One of the respondents to the proceedings before Merkel J, Leahy Petroleum-Retail Pty Ltd (Leahy), became insolvent after a pecuniary penalty of $2.5 million as well as costs exceeding $60,000 were imposed. The directors of Leahy placed the corporation into administration within weeks of being ordered to pay the penalties.
The creditors subsequently resolved that Leahy execute a deed of company arrangement, which provided that all of the corporation's creditors (other than the Commonwealth) were paid in full from the corporation's assets with the surplus divided equally between the Commonwealth (in composition of its debt) and the sole shareholder, Leahy Family Holdings Pty Ltd. The deed had the effect of approximately halving the amount otherwise recoverable by the Commonwealth.
The Commonwealth sought to have the deed terminated on the grounds that it unfairly discriminated against it. The Federal Court agreed with the Commonwealth, holding that the deed did unfairly discriminate against the Commonwealth and that the chairman exercised his casting vote on the basis of a mistaken view of the law.3
The ACCC has supported the decision, stating that "a company is not able to avoid pecuniary penalties on the basis of insolvency where the penalty is the reason it is insolvent."
Footnotes
1 Apco Service Stations Pty Limited v Australian Competition and Consumer Commission [2005] FCAFC 161
2 Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (2004) 141 FCR 183
3 Commonwealth v Leahy Petroleum - Retail Pty Ltd (subject to a deed of company arrangement) [2005] FCA 1422
Summary
On 2 September 2005, Lander J of the Federal Court handed down his decision in ACCC v Chaste Corporation Pty Ltd (in liq)1. His Honour imposed record penalties of more than $1 million for resale price maintenance against Chaste Corporation and four individuals who were knowingly concerned in the contravention.
The decision in ACCC v Chaste provides clear guidance as to the seriousness with which the courts will view deliberate conduct by corporations and their senior management which is found to contravene the TPA. It also emphasises the importance of developing and enforcing a culture of TPA compliance within organisations.
Resale price maintenance
Section 48 of the TPA states that: "A corporation or other person shall not engage in the practice of resale price maintenance."
Resale price maintenance occurs when a corporation specifies a minimum price below which its goods may not be resold by third parties. The prohibition against resale price maintenance applies regardless of its effect on competition.
Background facts
From 5 October 1999 until 3 December 2001, Chaste manufactured a weight loss tablet called TRIMit. Chaste entered into agreements for the supply of TRIMit to third parties referred to below as area managers, for resale to retailers.
Chaste provided a document titled "We Answer Your Questions" to area managers which included the following:
"15. Who determines the price at which I sell my stock?"
The company will set the recommended retail price and wholesale price that must be adhered to by all Area Managers. There must be no discounting or price cutting without the written permission of the company. This ensures everyone is protected from unnecessary price wars.'
The Chaste Area Management Proposal also contained the following statement:
"It is most important that a regulated price policy be adhered to in the interest of all parties involved.
We have therefore established the following as the costing structure to be applied in all markets…"
Decision
Lander J declared that Chaste engaged in resale price maintenance by:
- including a term in its agreements with area managers for the supply of TRIMit, which restricted area managers from selling TRIMit below a price specified by Chaste, and
- using statements about prices that were likely to be understood by area managers as the prices below which goods were not to be sold.
Chaste was also found to have:
- made various misleading statements to area managers and retailers in breach of the TPA, and
- contravened the Franchising Code of Conduct in breach of section 51AD of the TPA.
Penalties imposed
Lander J considered the following factors relevant to the assessment of the appropriate penalty:
- the nature and extent of the contravening conduct - Chaste entered into resale price maintenance arrangements with 74 area managers over a two year period
- the amount of loss or damage caused - Chaste's conduct had the effect of artificially inflating the price of TRIMit at $49.95, well above the wholesale price of $19.95
- the circumstances in which the conduct took place - Chaste's ultimate purpose was to distribute to the individuals controlling the company the maximum possible gross income, without regard for the long term viability of the company
- the size of the contravening company and its market power - Chaste only sold TRIMit and between December 1999 and November 2001, Chaste's revenue was approximately $3.9 million
- the deliberateness of the contravention and the period over which it extended - Chaste's conduct was deliberate and persisted for two years
- whether the contravention arose out of the conduct of senior management or at a lower level and whether the company had a corporate culture conducive to compliance with the TPA - Chaste's senior management devised and implemented the resale price maintenance arrangements, and
- whether the company cooperated with the authorities responsible for the enforcement of the TPA in relation to the contravention - Chaste's sole director and its consultant did not cooperate with the ACCC or acknowledge their contraventions.
Lander J imposed a number of injunctions and the following record penalties for resale price maintenance:
- Chaste was penalised $600,000 for its contraventions of section 48 of the TPA (despite being in liquidation) to show the Court's disapproval of the conduct and to deter others
- Penalties of $150,000 each were imposed on the sole director and the consultant to Chaste for being knowingly concerned in the resale price maintenance
- The legal advisor and one-time Chief Executive Officer for Chaste was penalised $100,000 for also being knowingly concerned in Chaste's conduct, and
- A penalty of $30,000 was imposed on Chaste's director of sales for aiding and abetting Chaste in its conduct.
If you would like more information about resale price maintenance, please contact one of our Competition group specialists listed.
Footnote
New Zealand Commerce Commission declines Fletcher acquisition application
The New Zealand Commerce Commission (NZCC) has declined to grant clearance for Fletcher Concrete and Infrastructure Limited to acquire certain business assets that comprise the Stevensons Building Product Division of W Stevenson and Sons Limited.
The NZCC was satisfied that the proposed acquisition would not have, or would not be likely to have, the effect of substantially lessening competition in either the Auckland precast and readymix concrete markets or the markets for masonry products in Northland, Auckland and Christchurch.
However the NZCC needed to consider the effect on competition in all of the relevant markets. In the New Zealand market for cement, the NZCC was not satisfied that the acquisition would not be likely to substantially lessen competition and therefore the acquisition as a whole could not be cleared.
Antitrust ruling imminent on Microsoft in South Korea
Microsoft is facing an imminent and crucial ruling from South Korea's competition regulator, the Fair Trade Commission, on the allegation that Microsoft violated South Korea's fair trade rules.
In 2001, Daum Communications Corp, which operates one of South Korea's most popular internet portals, lodged a complaint with the Commission accusing Microsoft of illegally incorporating its instant messaging software, MSN Messenger, into the Windows operating system.
RealNetworks, producer of RealPlayer audio-visual software, joined the suit in 2004 complaining of Microsoft's linking of Media Player with Windows. On 11 October 2005, Microsoft agreed to pay RealNetworks Inc. US$761 million to settle antitrust suits brought against Microsoft by RealNetworks. As part of the settlement, RealNetworks is to withdraw from antitrust cases in Europe and Korea.
The Microsoft case continued in South Korea without RealNetworks. On 11 November 2005, Microsoft and Daum announced that they had reached a US$30 million settlement. Despite the settlement, the Commission announced that it would continue its investigation. This will be the first antitrust ruling which Microsoft has faced in Asia, Microsoft's emerging market.
Japan has increased penalties under its Antimonopoly Act
Japan has revised its Antimonopoly Act, introducing tougher penalties for violation of its provisions. The revised law will take effect from 4 January 2006.
The revisions increase the penalty surcharges to be applied to the sale of products where bid rigging or cartels are found. In addition, the revised law introduces a leniency program, exempting from punitive surcharges the first company to admit to illegal activity before the Japan Fair Trade Commission (JFTC). Surcharges will also be cut by 50% for the second company that comes forward in the same case and by 30% for the third.
Under the revised law, the JFTC will also be given the authority to conduct investigations and obtain court-issued warrants to conduct raids to seize goods and property.
EU industrial thread makers fined for operating price-fixing cartels
On 14 September 2005 the European Commission fined European industrial thread makers, including one of the world's largest manufacturers, Coats Ltd, €43.5 million for operating price-fixing cartels in violation of Article 81 of the EC Treaty. Article 81 targets behaviour which prevents, restricts or distorts competition within the common market.
The European Commission found a total of three cartels in the industrial thread market. In each of these cases, the European Commission found that the thread manufacturers took part in regular meetings and had contacts who agreed on price increases and targets, exchanged sensitive information on the prices given to individual customers and avoided undercutting prices with a view to allocating customers between cartel members.
European Commission fines Peugeot for obstructing new car exports from the Netherlands
The European Commission has imposed a fine of €49.5 million on car manufacturer Automobiles Peugeot SA and its wholly owned subsidiary Peugeot Nederland NV (together Peugeot) for obstructing exports of new cars from the Netherlands to consumers living in other Member States. In determining the level of the fine, the European Commission took into account the very serious nature and relatively long duration of the infringement.
The European Commission found that from January 1997 to September 2003, Peugeot implemented a strategy designed to prevent Dutch Peugeot dealers from selling cars to consumers in other Member States so as to restrict exports by the Dutch dealers. Cars in the Netherlands are generally substantially cheaper (before taxes) than in other Member States such as France and Germany.
Peugeot's strategy included refusing performance bonuses if Dutch dealers sold cars to non-Dutch citizens, and exerting direct pressure on those dealers who were identified as having developed a significant export activity, for example by threatening to reduce the number of cars supplied to them. By preventing these exports of new cars, the companies violated Article 81 of the EC Treaty, which targets behaviour which prevents, restricts or distorts competition within the common market.
US District Court allows iTunes antitrust claims to proceed
Apple Computer Inc. faces several federal and state antitrust claims arising from the operation of its iTunes® online music store and the sale of its iPod® digital music players. The claims include allegations that Apple possesses monopoly power and has coerced customers into purchasing both iPods® and iTunes® files.
Hurricane Katrina expedites antitrust procedures in the US
Hurricanes Katrina and Rita disrupted or destroyed many vital production and distribution facilities and impacted upon numerous other business sectors, including telecommunications, health care, housing, and retail. In recognition of the overwhelming national need to rebuild these industries, the Antitrust Division of the Department of Justice and the Federal Trade Commission have introduced a process to provide expedited antitrust guidance on the legality of proposed conduct to businesses who seek to engage in joint ventures or other collaborative efforts which assist affected communities to recover from the devastation.
Under the expedited process, joint efforts of limited duration by businesses to restore these sectors more quickly and effectively will receive antitrust guidance within five working days of submitting their request for review. This is in contrast to the normal 90 day review process required by the agencies.
The Department of Justice and Federal Trade Commission have stated that US antitrust laws do accommodate pro-competitive collaborations among competitors but that, in assessing proposed collaborative efforts, they will not tolerate any attempt by competing businesses to undertake blatant price fixing or market allocation agreements to the detriment of consumers affected by the hurricanes.
In this section we note some recent alert and article publications by our Competition group. The alerts can be found in their entirety on our competition publications page
ACCC issues immunity policy for cartel conduct to replace leniency policy
Our Competition law alert of 31 August 2005 examines the ACCC's new policy which provides for immunity from civil prosecution for cartel conduct. The alert also explains the eligibility requirements for such immunity.
In-house privilege and Vance v McCormack - a privilege or a right?
Our Dispute resolution alert of 24 August 2005 provides an important post-script to the "5 things you need to know…" article on legal professional privilege in our May 2005 Competition law update. In that article we referred to the decision of Vance v McCormack. The alert explains that the judgment was appealed to the ACT Court of Appeal, which appeared to favour the view that under the common law, the holding of a practising certificate is not definitive regarding legal professional privilege. For more information on this judgment see the In Brief section of this update.
If you would like copies of any of the following articles, please contact jacki.cremer@mallesons.com
Merger regulatory strategy in a post-Dawson merger system
This article summarises the key changes proposed in the 2005 Dawson Bill. It explains the range of regulatory alternatives under the proposed new system and suggests the appropriate courses for complex and less complex matters with both high and low risk of ACCC objection.
Telecoms: lessons from the Australian experience
This article outlines the historic reforms to the Australian telecommunications sector and notes that with the August 2005 regulatory package, the Government appears to be moving towards a more heavy-handed regulatory approach notwithstanding international deregulatory trends.
New cartel immunity policy: a rush to the gate and first in, best confessed
These articles describe the ACCC's new immunity policy for cartel conduct. They detail the main features of the new policy, including the single level immunity, "marker" policy, hypothetical approaches to the ACCC and explain the concept that there is only one guaranteed immunity from the threat of an action for cartel conduct.
Merger control worldwide
This new two volume work by Cambridge University Press contains a comprehensive overview of the competition regulation of mergers in 64 jurisdictions around the world. Mallesons was involved in writing the Australian and New Zealand chapters of this work.
Third line forcing occurs when a supplier places a condition on the supply of its goods or services that the customer must acquire goods or services of a particular type from a third person nominated by the supplier. This practice is a form of exclusive dealing that is prohibited outright by section 47 of the TPA. This means that it will be illegal regardless of the supplier's purpose or its effect on competition.
In its review of the TPA, the Dawson Committee recommended that third line forcing be made subject to a “substantial lessening of competition” test in line with other forms of exclusive dealing.
This recommendation was initially incorporated in the Dawson Bill, however the Federal Government recently withdrew the proposed amendment and indicated that third line forcing will remain prohibited outright.
It is therefore timely to examine common types of third line forcing conduct and possible ways to avoid contravening the prohibition.
1. Typical third line forcing scenarios
The classic third line forcing scenario occurs where a supplier forces the purchase of a second product or service from a nominated supplier. For example, where a lender of finance insists that a borrower use a particular insurance company to insure a loan or where a car dealer selling a car requires the purchaser to obtain finance from a nominated finance company. Third line forcing also commonly arises where several suppliers of products or services participate in a co-promotion (for example, supermarket discounted petrol promotions) or a membership or loyalty program (for example, a credit card rewards program that offers reward points when members make purchases from nominated suppliers).
2. The element of compulsion and/or futurity
The courts have generally accepted that third line forcing conduct requires some element of compulsion and/or futurity. This means that it will not be third line forcing where a customer chooses (rather than undertakes) to acquire goods or services from another supplier, or where a supplier supplies goods or services to a customer as a benefit or reward for having already acquired goods or services from the third party supplier. In this way, it may be possible to restructure offers or supply arrangements to fall outside the third line forcing provisions.
3. Single supply of packaged product or service
The courts have also accepted that it will not be third line forcing where there is the supply of a single packaged product or service, rather than the supply of two distinct products or services. The most notable example of this approach is the High Court's decision in Castlemaine Tooheys Ltd v Williams & Hodgson Transport Pty Ltd (1986) 162 CLR 395. This case involved a brewery that was only prepared to sell beer to publicans on condition that the beer was delivered by a carrier engaged by the brewery. The High Court held that this was not third line forcing as the publicans were not obtaining two separate products from two separate suppliers. Rather, the brewery's arrangements for delivery of beer to the publicans amounted to the sale of one single composite product, namely “delivered beer”.
4. Utilising an agency relationship
Another way to avoid third line forcing is to use an agency relationship in supply arrangements. By entering into an agency agreement with the third party, a supplier can bundle together the products or services it supplies with those of the third party, as its agent. As the one supplier is providing both the first and second product or service, the third party is removed from the supply arrangements. This changes the conduct from “third line forcing” to another form of exclusive dealing known as full line forcing. The benefit of this structure is that full line forcing only breaches the TPA where it has the purpose, effect or likely effect of substantially lessening competition in a relevant market.
5. Notification of third line forcing conduct
If it is not possible to restructure the supply arrangements for practical or commercial reasons, it may be possible to gain statutory exemption from prosecution through the ACCC's notification procedure. Under this procedure, notifications are required to be in a prescribed form detailing the proposed conduct and the relevant participants. The cost of lodging a notification is $1000 for public companies and $100 for proprietary companies. The ACCC applies a "net public benefit" test to determine whether to allow immunity from prosecution. Immunity from prosecution is automatically granted 14 days from the date of lodgment unless, within the 14 day period, the ACCC notifies the parties otherwise. While the ACCC may remove the immunity at any time, it must provide notice to the parties and have a pre-decision conference before removing that immunity.
Mallesons has considerable experience and expertise in assisting clients with third line forcing issues.
Update on in-house legal privilege - Vance v McCormack
In our May update we highlighted the decision of Crispin J in Vance v McCormack who found it was essential for all in-house lawyers to hold current practising certificates if a claim for legal professional privilege over communications with these lawyers was to be sustained.
On 23 August 2005, that ACT Court of Appeal overturned that decision, finding that for privilege to attract there is no absolute requirement for an in-house lawyer to have a practising certificate as well as being admitted to practise law. The Court found that under the Evidence Act 1995 (Cth) holding a practising certificate is an important consideration, but is not determinative in relation to privilege.
While this appeal decision provides some comfort in relation to in-house counsel, the case is only authority for privilege under the Evidence Acts of the Commonwealth, New South Wales and Tasmania, which apply only to the adducing of evidence in hearings before a Federal, NSW, ACT or Tasmanian court. The case is not binding about privilege at common law, which applies more generally. Until there is an authoritative decision whether practising certificates are required under the common law, it would be prudent for in-house lawyers to hold a practising certificate.
Proposed section 77A of the TPA
Some company constitutions and other agreements under which a company indemnifies its officers may require amendment if the Trade Practices Act Amendment Bill (No 1) 2005 is enacted in its present form. It is currently not uncommon for these arrangements to indemnify officers against civil liabilities and legal costs arising from a breach of the anti-competitive conduct provisions in Part IV of the TPA.
However, under the proposed amendments, indemnities of this kind will be prohibited and void. Further, a breach of this prohibition will be an offence carrying a maximum penalty of $2750 for corporations and $550 for individuals.
C7 proceedings
Mallesons is acting for Telstra in the C7 trial, which began under extensive media coverage on 12 September 2005. The proceedings are arguably the largest with respect to competition law in Australian legal history, with 22 separate defendants and more than 50 witnesses expected to be called.
The proceedings are wide ranging and cover allegations including anti-competitive agreements and collusive bidding (section 45), misuse of market power (section 46 and Part XIB), exclusive dealing (section 47) and claims of the misuse of confidential information. Extensive lay witness evidence has been filed as well as more than 25 expert reports by economists and accountants. The trial is expected to run for a further six to nine months.
What’s happened to the Dawson Bill?
At the time of publication, the 2005 Dawson Bill has still not been passed by Parliament. We will keep you informed of any developments in our next update.