Express law No. 35

22 March 2006

Misuse of market power and price fixing

The recent judgment of Goldberg J brings to an end
one of the largest trade practices cases in Australia,
with a history extending over 10 years.

The ACCC has been successful in obtaining pecuniary
penalty orders against a large corporation following
a contested trial and appeal. In all prior cases the
penalties imposed have either been jointly agreed sums1 or
the orders have been set aside on appeal.2

The penalties imposed are substantial and in line with
other recent Federal Court decisions in which significant
penalties were imposed for anti-competitive conduct.3

The case highlights the need for people in managerial
positions or those in positions involving communications
with competitors or suppliers to be aware of the provisions
of the Trade Practices Act.

This issue of Express law consolidates previous notes
AGS has published on this case and reports on the finalisation
of the proceedings.

Australian Competition and Consumer Commission v Australian
Safeway Stores Pty Ltd and Mark Jones

Full Federal Court, 30 June 2003, (2003) 129 FCR 339;
[2003] FCAFC 149

Federal Court, 31 January 2006, [2006] FCA 21

The Australian Competition and Consumer Commission (ACCC)
has been successful in obtaining orders:

  • finding breaches of the misuse of market power and
    price-fixing provisions of the Trade Practices Act ('TPA'),
    and (in a precedent)
  • imposing pecuniary penalties for misuse of market
    power provisions following a trial and an appeal.

The judgments of the Federal Court are important for their
consideration of:

  • the application of the misuse of market power provisions
    in the context of a buyer of products from wholesale
    suppliers
  • what constitutes a taking advantage of market power
  • the evidence and circumstances sufficient to prove
    a price-fixing arrangement
  • the appropriate pecuniary penalties for contraventions
    of ss 45 and 46 of the TPA.

Background to the litigation

The ACCC sued the following parties:

  • Australian Safeway Stores Pty Ltd ('Safeway'),
    a subsidiary of Woolworths Ltd, with 130 supermarkets
    throughout Victoria in 1994 and 1995
  • George Weston Foods Pty Ltd ('Tip Top'),
    a large plant baker of bread products
  • Bernie Brookes ('Brookes'), Safeway's
    Victorian Merchandise Manager, with responsibility for
    formulating policies and strategies for sale for products
  • Mark Jones ('Jones'), the Bread Category
    Manager with Safeway who implemented policies devised
    by others, including those formulated by Brookes.

Tip Top had at an early stage in the litigation admitted
contravening the TPA. Tip Top was ordered to pay pecuniary
penalties totalling $1.2m in respect of a number of contraventions,
including its part in agreeing with Safeway to fix the
retail price of bread for sale at its Preston Market stall:
ACCC v Australian Safeway Stores (1997) 75 FCR 238.

In the course of the preparation of the proceeding for
hearing, Goldberg J considered the issue of at what point
in the course of the investigation was litigation in contemplation
for the purposes of legal professional privilege and conduct
amounting to a waiver of privilege: ACCC v Australian
Safeway Stores (1998) 81 FCR 526.

Safeway, Brookes and Jones defended the allegations made
by the ACCC. The trial was a substantial one, lasting 92
days, heard over nine months, with 70 people being called
to give evidence, including economic and marketing experts.

During the trial, the ACCC consented to an order dismissing
the proceeding against Mr Brookes.

Goldberg J found in favour of Safeway and Jones and dismissed
the application of the ACCC: ACCC v Australian Safeway
Stores (No. 2) (2001) 119 FCR 1; [2001] FCA 1861.

His Honour handed down a further decision in respect of
costs, that considered the admissibility of 'without
prejudice' communications and dismissed an application
by Safeway for indemnity costs: ACCC v Australian Safeway
Stores (No. 3) (2002) ATPR 41-901.

The ACCC appealed to the Full Federal Court (Heerey, Sackville
and Emmett JJ). The Full Court substantially upheld the
appeal.

The summary set out below is a brief overview of complex
facts, legal claims and defences and detailed decisions
of the trial judge and the Full Federal Court.

Facts

The litigation concerned events that took place in 1994
and 1995 in Victoria. Bread was produced by three major
plant bakers, Tip Top, Buttercup and Sunicrust ('the
plant bakers'). They supplied 80 per cent of all
plant baked bread for retail sale. Safeway was the largest
purchaser in Victoria. Bread was also manufactured by independent
bakers and hot bread shops for retail sale. Bread was found
to be a significant product for a supermarket, being not
only a staple food, but also indicative of a retailer's
general price competitiveness.

There were different categories of bread made by the plant
bakers. Proprietary bread, sold under a brand name and
heavily promoted, and secondary bread, sold with little
or no advertising.

The ACCC alleged that Safeway had a policy that if secondary
branded bread of a plant baker was sold at discounted price
at an independent retailer (other than Coles or Franklins)
in the vicinity of a Safeway store, at a price less than
Safeway, then Safeway would remove all that plant baker's
bread from sale while that product was on special at the
retailer's store ('the bread policy').
The bread policy was implemented in nine incidents ('the
nine incidents') for the purpose of deterring a plant
baker from supplying cheap secondary bread to independent
retailers.

A further incident ('the Preston Market incident')
concerned an allegation that Safeway, through Jones, had
made an arrangement with Tip Top as to the prices to be
charged and the type of bread to be sold by Tip Top at
its Preston Market stall.

Contraventions

Nine incidents

In the nine incidents, the Commission alleged that Safeway
had (or alternatively, attempted to):

  • made an arrangement with the plant bakers that the
    bakers cease supplying cheap secondary bread to independent
    retailers with the purpose of lessening competition:
    contravention of s 45
  • taken advantage of its market power in the wholesale
    market for the acquisition of bread with the purpose
    of imposing a term of trade on plant bakers that they
    would not supply cheap secondary bread to independent
    retailers, and to deny the retailers access to cheap
    secondary bread, thereby preventing them undercutting
    Safeway: contravention of s 46
  • engaged in exclusive dealing: contravention of s 47
  • induced the plant bakers to engage in retail price
    maintenance ('RPM'): contravention of s 48.

Preston Market incident

It was alleged that the Respondents had made, and given
effect to, an arrangement regarding the prices Tip Top
would charge for its secondary bread at the Preston Market
stall, that substantially lessened competition: contravention
of s 45(2). Section 45A deems price-fixing arrangements
to substantially lessen competition. It was also alleged
that the arrangement included an exclusionary provision,
that proprietary bread not be sold at the stall: contravention
of s 45(2).

The conduct was further alleged to constitute exclusive
dealing, in contravention of s 47.

Safeway's defences

Safeway and Jones defended the allegations made by ACCC.

The principal defences were:

  • that the bread policy alleged by ACCC was incorrect
    and that Safeway's true bread policy, as formulated
    by Mr Brookes, was intended to place Safeway in a competitive
    position, and involved making a request for a case deal
    (i.e. provision of bread at a discount) prior to a deletion
    of bread occurring, in order to be price competitive
    with independent retailers ('the Brookes bread
    policy')
  • Safeway contested the ACCC's market definition
    and denied it had market power
  • that no anti-competitive arrangements were made.

This note concentrates on the decisions of the Court in
respect of price fixing (s 45) and misuse of market power
(s 46).

Decision of the trial judge

Nine incidents

Goldberg J dismissed the claims of the ACCC that the conduct
in respect of the nine incidents constituted price fixing,
misuse of market power, exclusive dealing and RPM.

Price-fixing arrangement (Section 45)

Goldberg J stated that in order for there to be a price-fixing
arrangement there had to be a meeting of minds of the parties.
Jones's requests for a case deal were a unilateral
act, which if declined resulted in the deletion of a plant
baker's products. The evidence did not support the
conclusion that there had been a meeting of minds between
Safeway and any of the plant bakers.

Misuse of Market Power (Section 46)

Market definition

Goldberg J upheld the ACCC's contention that the
relevant market in which Safeway had a substantial degree
of market power was the wholesale market for the acquisition
of bread in Victoria. Safeway had submitted that the relevant
market was the total bread market at both wholesale and
retail levels, which included hot bread shops and independent
bakers.

Market power

The High Court has held in Queensland Wire4 and
Melway5 that 'market power' exists
where a firm can behave persistently in a manner different
from how it would be forced to act in a competitive market
(i.e. unconstrained by the conduct of competitors).

Goldberg J held that Safeway possessed market power as
an acquirer of bread at the wholesale level from plant
bakers in Victoria, by reason of the following considerations:

  • Safeway had the ability to influence the terms of
    trade on which plant bakers dealt with it to an extent
    it could not do so in a competitive market. The evidence
    was that Safeway always bought at the best price.
  • Safeway was the largest purchaser of bread products
    from the plant bakers.
  • Safeway was not constrained by barriers to entry.
  • The plant bakers had excess production capacity.
  • If Safeway significantly reduced its purchases of
    bread from plant bakers, the plant bakers had no alternative
    large-scale purchasers of bread.
  • Hot bread shops were in the retail market and did
    not constrain Safeway's power in the wholesale
    market.
  • Independent bakers were not a viable alternative source
    of supply for independent retailers seeking cheap bread.

Take advantage of market power

The expression 'take advantage of' means to 'use' the
market power involved: Queensland Wire. There is a use
of market power by a firm where it does something that
is materially facilitated by the existence of the power:
Melway. Goldberg J held that Safeway did not take advantage
of its market power in any of the nine incidents by deleting
bread, as it would have acted in the same manner in a competitive
market without market power.

Purpose

Goldberg J found that the policy that Safeway had was
in terms claimed by Safeway (the Brookes bread policy)
and not that alleged by the ACCC. The purpose of the Brookes
bread policy was to enable Safeway to be competitive and
was not intended to prevent or deter plant bakers from
engaging in competitive conduct with independent retailers.
There had been a request for a case deal before a deletion
occurred in five incidents. In two incidents, His Honour
could not make a finding. The making of a request for a
case deal was considered to be inconsistent with the purpose
to punish plant bakers. Accordingly, no proscribed purpose
existed in seven of the incidents.

In the remaining two incidents, Goldberg J found that
no requests for a case deal had been made prior to a deletion
taking place and that Safeway's purpose was to punish
the plant baker. However, no contravention occurred in
these two incidents, by reason of His Honour's ruling
that Safeway had not taken advantage of its market power.

Exclusive Dealing (Section 47)

Goldberg J held that sub-sections 47(4) and (5) do not
apply to conditions on the acquisition of goods that relate
to the price of goods.

Retail price maintenance (Section 48)

On the evidence, Brookes and Jones did not intend to have
the plant bakers engage in RPM and Safeway did not specify
a price or range of prices for there to be RPM.

Preston Market incident

Although there had been discussions between officers of
Safeway and Tip Top relating to Preston Market and prices
of bread, Goldberg J was not satisfied that an arrangement
had been entered into between persons with authority to
act on behalf of Safeway. Accordingly, Goldberg J dismissed
the case in respect of the Preston Market incident.

The ACCC appealed against the dismissal of the claims
made in respect of misuse of market power and the Preston
Market incident.

Full Federal Court decision on appeal

Misuse of market power in the nine incidents – Section
46

The Full Court was divided as to whether there had been
a contravention of s 46.

Heerey and Sackville JJ

Market definition

Heerey and Sackville JJ upheld Goldberg J's rulings
in respect of market definition. Competition in the retail
market for bread did not constrain Safeway's ability
to impose terms of trade on suppliers in the wholesale
market. The wholesale and retail markets for bread products
were separate markets.

Market power

This is the first case to consider s 46 in the context
of a buyer. The Full Court held that s 46 can apply to
a purchaser, and is concerned with the extent a purchaser's
conduct is constrained by competitors, suppliers and customers.
Market power on the part of a buyer may be evidenced by
the buyer's ability to extract terms relating to
price or terms of trade that are more favourable to itself
than it could extract in a competitive market.

Safeway was found to have market power by reason of the
following factors:

  • the excess capacity of the plant bakers, combined
    with Safeway's substantial market share and its
    importance to the three plant bakers
  • Safeway's conduct in deleting a plant baker's
    entire range of bread
  • barriers to entry were high, requiring entry on a
    state-wide basis
  • Safeway was successful in having Tip Top cease supplying
    cheap bread
  • Safeway procured an increase in its rival's
    costs of supply of bread
  • Buttercup and Sunicrust suffered loss of sales from
    having products deleted.

Take advantage of market power

Their Honours found that Goldberg J was in error in his
interpretation and application of the legal principles
concerning the term 'take advantage' of market
power.

The rationale for the conduct is critical. … A
firm without market power would not have pursued a policy
of deletion because to do so would have produced harm
for itself without any countervailing benefit.

Heerey and Sackville JJ held that in the four incidents
where no requests for a case deal were made, Safeway had
taken advantage of its market power in the wholesale market.
There was no business rationale for the conduct. It was
only explicable as the use of market power to deter the
plant baker from supplying independent retailers with cheap
secondary bread.

Their Honours also stated that the deletions may have
constituted a taking advantage of market power for a proscribed
purpose, despite requests for case deals. They did not
agree with the trial judge's view that requests were
inconsistent with a proscribed purpose. However, having
regard to the way the case was pleaded and conducted at
trial, the Court would not consider the matter on this
basis.

Purpose

Purpose is to be analysed by reference to Safeway's
conduct and inferences from that conduct, not by ascertaining
Mr Brooke's policy. The deletions in the four incidents
could not have occurred by accident. The deletions in those
incidents were for the purpose of deterring both the plant
bakers and independent retailers from engaging in competitive
conduct.

Emmett J

Emmett J agreed with the decision of Heerey and Sackville
JJ, except on the issue of market power. His Honour held
that he was not persuaded that Safeway had a substantial
degree of power as an acquirer of bread market in the wholesale
market. The factors that the trial judge relied on did
not establish that Safeway had market power in the wholesale
market. For instance, Safeway was not able to obtain terms
of trade better than other market participants and barriers
to entry were low, being at the local supermarket level.

Preston Market incident, price-fixing arrangement – Section
45

The Full Court unanimously held that on the facts as found
by Goldberg J, it was satisfied that Jones, who held the
requisite authority to bind Safeway, was involved in giving
instructions regarding meetings with officers of Tip Top
and approved the outcomes. There was a meeting of minds
between the participants involved in this incident. The
trial judge was in error by applying the Briginshaw standard
too rigorously. The ACCC made out its case that Safeway
engaged in price fixing by making an arrangement having
the purpose or effect of substantially lessening competition.

Orders of the Full Federal Court

In a further judgment,6 the Full Court made
declaratory orders that Safeway had taken advantage of
its market power in contravention of s 46 in respect of
the four incidents and made a price-fixing arrangement
with Tip Top in breach of s 45 in respect of the Preston
Market incident. The proceeding was remitted to the trial
judge for determination of the issues of injunctions, penalties,
costs and the liability of Mr Jones.

High Court special leave applications

Applications for special leave to appeal were filed by
both ACCC and Safeway and Mr Jones. The High Court refused
to grant special leave, as the proceeding was not considered
to be a suitable matter for consideration of any questions
of principles that may arise, and it would not be in the
interests of justice to further delay the determination
of the proceeding. Consequently, the orders of the Full
Federal Court represent the final position in regard to
issues of liability for contraventions of the TPA.

Remittal to the trial judge

The ACCC did not seek injunctive relief or cost orders
in respect of either Safeway or Mr Jones.

Safeway

ACCC and Safeway were in dispute as to the appropriate
pecuniary penalty to be imposed in respect of the four
incidents. The ACCC sought penalties totalling $15.5m ($3.5m
for each of the four incidents and $1.5m for the Preston
Market incident).

Safeway submitted that the penalties proposed were excessive
and that it should not be penalised more than the total
imposed on Tip Top. Goldberg J rejected this submission,
as the sections alleged to be contravened were different.
No allegations of a breach of s 46 were made against Tip
Top. Safeway's conduct was found to be more serious,
because it involved a misuse of market power, and because
Safeway had brought about the contraventions.

Goldberg J imposed pecuniary penalties totalling $8m in
respect of the four incidents for contraventions of s 46
and $900,000 for the Preston Market price-fixing arrangement.
Relevant factors were that the conduct was serious, deliberate,
of a recurring nature, it affected the competitive process,
and the need for general deterrence.

Mr Jones

Mr Jones's liability in respect of the four incidents
for contravention of s 46 was not pursued by ACCC.

Mr Jones accepted accessorial liability for involvement
in the Preston Market incident and agreed to a declaratory
order being made. The parties jointly submitted that the
appropriate penalty was $30,000. Goldberg J considered
that such a sum was not within the permissible range, being
too light a penalty in the circumstances. A higher penalty
was appropriate having regard to considerations of general
deterrence, that persons in managerial positions comply
with the TPA, that Mr Jones was in a position of authority
and responsibility and that his conduct was deliberate
and serious. A penalty of $50,000 was imposed on Mr Jones.

Text of the decisions is available at:

Full Federal Court, 30 June 2003, [2003] FCAFC 149
Federal Court, 31 January 2006, [2006] FCA 21

AGS acted on behalf of the Australian Competition and
Consumer Commission in conduct of the proceedings.

For further information please contact:

Graham Thorley
Senior Executive Lawyer
T 03 9242 1244 F 03 9242 1278
graham.thorley@ags.gov.au

Notes

1TPC v Carlton United Breweries Ltd (1990)
24 FCR 532; TPC v CSR (1991) ATPR 41-076; ACCC
v Fila Sport Oceania P/L (2004) ATPR 41-983 ($3m for
ss 46 and 47 breaches); ACCC v Eurong Beach Resort [2005]
FCA 1900 ($900,000).
2ACCC v Rural Press (2002) 118 FCR 236; Universal
Music v ACCC (2003) 131 FCR 529.
3ACCC v Leahy Petroleum (No. 2) (2005)
215 ALR 281 and (No. 3) (2005) 215 ALR 301.
4Queensland Wire Industries v BHP Ltd (1989)
167 CLR 177.
5Melway Publishing v Robert Hicks (2001)
205 CLR 1.
6(No. 2) [2003] FCAFC 811 (1 August
2003).

Important: The material in Express law is
provided to clients as an early, interim view for general
information only, and further analysis on the matter
may be prepared by AGS. The material should not be
relied upon for the purpose of a particular matter.
Please contact AGS before any action or decision is
taken on the basis of any of the material in this message.