Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2010] FCA 929 (26 August 2010)

Last Updated: 27 August 2010

FEDERAL COURT OF AUSTRALIA

Australian Competition and Consumer Commission v Baxter

Healthcare Pty Ltd [2010] FCA 929

Citation:		Australian Competition and Consumer Commission v Baxter [2010] FCA 929
Parties:		AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v BAXTER HEALTHCARE PTY LTD, STATE OF WESTERN AUSTRALIA, STATE OF SOUTH AUSTRALIA and STATE OF NEW SOUTH WALES
File number:		NSD 1153/2002
Judge:		MANSFIELD J
Date of judgment:		26 August 2010
Catchwords:		TRADE PRACTICES – penalty – corporation contravened ss 46(1)(c) and 47(1) of the Trade Practices Act 1974 – whether pecuniary penalties should be imposed – conduct involved dealing with State purchasing authorities and improper bundling of products – level of pecuniary penalties – whether injunctive orders should be made
Legislation:		Trade Practices Act 1974 (Cth) ss 46(1)(c), s 47(1)
Cases cited:		Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2007] HCA 38; (2007) 232 CLR 1 Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2008] FCAFC 141; (2008) 170 FCR 16 Trade Practices Commission v CSR Limited (1991) ATPR 41-076 NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission [1996] FCA 1134; (1996) 71 FCR 285 Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd (in liquidation) [2007] FCAFC 146; (2007) 161 FCR 513 Australian Competition and Consumer Commission v NSW Frozen Foods Pty Ltd (1996) ATPR 41-515 Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 3) [2005] FCA 265; (2005) 215 ALR 301 Trade Practices Commission v TNT Australia Pty Ltd (1995) ATPR 41-375 Johnson v The Queen [2004] HCA 15; (2004) 205 ALR 346 Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (1997) 75 FCR 238
Date of hearing:	3 and 4 September 2009
Date of last submissions:	18 September 2009
Place:	Adelaide (via video link with Sydney and Perth)
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	74
Counsel for the Applicant:	A I Tonking SC and J Gleeson
Solicitor for the Applicant:	Australian Government Solicitor
Counsel for the First Respondent:	D M Yates SC and I Wylie
Solicitor for the First Respondent:	Blake Dawson
Counsel for the Second, Third and Fourth Respondents:	J K Kirk and D Healey
Solicitors for the Second, Third and Fourth Respondents:	NSW Crown Solicitors Office

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 1153/2002

BETWEEN:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant
AND:	BAXTER HEALTHCARE PTY LTD First Respondent STATE OF WESTERN AUSTRALIA Second Respondent STATE OF SOUTH AUSTRALIA Third Respondent STATE OF NEW SOUTH WALES Fourth Respondent

JUDGE:	MANSFIELD J
DATE OF ORDER:	26 AUGUST 2010
WHERE MADE:	ADELAIDE (VIA VIDEO LINK WITH SYDNEY AND PERTH)

THE COURT ORDERS THAT:

1. Baxter Healthcare Pty Ltd pay to the Commonwealth of Australia a pecuniary penalty in respect of contraventions of:

1.1 ss 46(1)(c) and 47(1) of the Trade Practices Act 1974 (Cth) (the Act) declared in paragraphs 1 and 5 of the orders made in this proceeding on 14 August 2008 in the sum of $2,000,000;

1.2 ss 46(1)(c) and 47(1) of the Act declared in paragraphs 2 and 6 of the orders made in this proceeding on 14 August 2008 in the sum of $800,000;

1.3 ss 46(1)(c) and 47(1) of the Act declared in paragraphs 3 and 7 of the orders made in this proceeding on 14 August 2008 in the sum of $1,300,000;

1.4 ss 46(1)(c) and 47(1) of the Act declared in paragraphs 4 and 8 of the orders made in this proceeding on 14 August 2008 in the sum of $800,000.

2. Baxter Healthcare Pty Ltd pay to the Australian Competition and Consumer Commission its costs of these proceedings at first instance and on appeal to the Full Court, other than the costs of the hearing as to whether pecuniary penalties should be imposed, and if so in what amount, and as to other orders by way of relief, which costs are reserved.
3. As to the costs of the hearing on whether pecuniary penalties should be imposed and if so in what amount, and as to other orders by way of relief:

3.1 Baxter Healthcare Pty Ltd is given leave to file and serve such written submissions as to the costs of that hearing as it may be advised within 14 days;

3.2 Australian Competition and Consumer Commission is given leave to file and serve such written submissions as to the costs of that hearing as it may be advised within a further 14 days;

3.3 Baxter Healthcare Pty Ltd is given leave to file and serve by way of reply such further written submissions in response to the submissions of the Australian Competition and Consumer Commission as it may be advised within a further period of 7 days;

to the intent that the Court will then make an order on the costs of that hearing after consideration of those submissions.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 1153/2002

BETWEEN:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant
AND:	BAXTER HEALTHCARE PTY LTD First Respondent STATE OF WESTERN AUSTRALIA Second Respondent STATE OF SOUTH AUSTRALIA Third Respondent STATE OF NEW SOUTH WALES Fourth Respondent

JUDGE:	MANSFIELD J
DATE:	26 AUGUST 2010
PLACE:	ADELAIDE (VIA VIDEO LINK WITH SYDNEY AND PERTH)

REASONS FOR JUDGMENT

1. This matter has a long history. The Australian Competition and Consumer Commission (the ACCC) alleged that Baxter Healthcare Pty Ltd (Baxter) in tendering to various State Purchasing Authorities for the supply of sterile fluids (SF) and peritoneal dialysis (PD) fluids, principally for use in public hospitals, and by contracts between Baxter and the three States who are the second to fourth respondents, and the State of Queensland (the States) as a result of those tenders, contravened ss 46 and 47 of the Trade Practices Act 1974 (Cth) (the TP Act).
2. Initially, Baxter and the States (the State of Queensland did not become a party to the proceeding, but it is convenient hereafter to refer to the Second to Fourth Respondents collectively as the States) claimed that the conduct of Baxter which was the subject of the proceeding was immune from the operation of the TP Act by reason of derivative Crown immunity. That issue was resolved by the High Court adversely to Baxter and to the States: see Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2007] HCA 38; (2007) 232 CLR 1.
3. Subsequently, the Full Court of this Court gave judgment on an appeal from the orders of Allsop J at first instance. The Full Court found that Baxter had contravened ss 46 and 47 of the TP Act: Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2008] FCAFC 141; (2008) 170 FCR 16 (the Full Court decision). The earlier decisions in this matter are referred to in the Full Court decision at [8]-[13].
4. When the Full Court decision was given, on 14 August 2008, the Court made declarations that Baxter had contravened those provisions of the TP Act. There were eight contraventions of the Act reflected in those declaratory orders. It is not necessary to recite them. In essence, it was declared that Baxter:

(a) contravened s 46(1)(c) of the TP Act by responding to a request for tender and negotiating a contract for the supply of various SF products and PD products by a strategy of offering to supply for a term of years either the SF products on an item by item basis at a very high price, or the SF products at a considerably lower price on the condition that the relevant State acquire all or substantially all of its requirements for SF products and PD products from Baxter.

Those contraventions occurred because Baxter thereby took advantage of its substantial degree of market power in the Australia-wide market for the supply of SF products for the purpose of deterring or preventing two other corporations from engaging in competitive conduct in the Australia-wide market for PD products. They concerned:

(i) the dealings in 1998 with NSW,

(ii) the dealings in 2001 with Western Australia;

(iii) the dealings in 2001 with Queensland;

(iv) the dealings in 2001 with South Australia, and in this instance also offering to supply exclusively SF products at a price that was greater than the tendered price to supply exclusively both SF products and PD products and by refusing to offer or negotiate any reduction in price by way of discount for volume in the supply of SF products; and

(b) contravened s 47(1) of the TP Act by its conduct in responding to a request for tender, negotiating and entering into the supply agreement with the respective States by that strategy for the substantial purpose, and with the effect or likely effect, of substantially lessening competition in the PD products market in relation to:

(i) the 1998 NSW Supply Agreement for the period 18 May 1998 to 30 April 2003,

(ii) the 2001 SA Supply Agreement for the period 1 April 2001 to 30 March 2006,

(iii) the 2001 WA Supply Agreement for the period 1 March 2001 to 28 February 2006,

(iv) the 2001 Queensland Supply Agreement for the period 1 June 2001 to 31 May 2004.

5. The ACCC accepts that the contraventions of ss 46 and 47 arising from the dealings with each of the States severally are the same conduct, so that s 76(3) of the TP Act operates and Baxter is not liable to more than one pecuniary penalty in respect of each of the pairs of contraventions of ss 46 and 47 in relation to the four States.
6. The ACCC seeks that very significant pecuniary penalties be imposed on Baxter for each of the four sets of contraventions ranging across the four States referred to. It does so on the basis that, at the time of the contraventions, the maximum total penalty for the contraventions was each $10m, and because the conduct concerned extended over such a lengthy period (a matter with which Baxter expressly disagrees) and because during that period Baxter effectively “snuffed out” competition in the PD products market (a term used by Gyles J in the Full Court decision at [391]).
7. Before turning to its detailed submissions, it is both convenient and appropriate to refer to some background facts. That is because it is plain, on all the authorities, that it is important in determining appropriate pecuniary penalties to have regard to the nature and extent of the contravening conduct, and the circumstances in which it occurred. It is the more appropriate and convenient to do so on the question of appropriate pecuniary penalties because Baxter, for its part, ultimately submitted that no pecuniary penalty should be imposed upon it in respect of any of the contraventions, having regard to the circumstances in which the contraventions occurred.
8. The ACCC also seeks injunctive orders against Baxter to restrain for a period of three years conduct similar to that which constituted the contraventions. Baxter also opposes the making of any injunctive orders against it.
9. Finally, the ACCC generally seeks costs of the proceedings from Baxter and from each of the States both at first instance and on the appeal to the Full Court. Its proposed order against the States is limited to the costs of the derivative Crown immunity issue. The States dispute that any order for costs should be made against them, and alternatively that a minimal order for costs should be made against them. For reasons which appear below, Baxter too contests that an order for costs should be made against it in the terms sought by the ACCC.

BACKGROUND

10. Baxter established a manufacturing facility in Toongabbie in 1973, and since that time has manufactured SF products. From 1980, it also produced PD products and other like products. PD products are used to treat renal failure.
11. Baxter was the only supplier of PD products in Australia until 1990 when another company Gambro commenced supply. Gambro ceased local production of PD products in 2000, and subsequently acquired PD products from Baxter by contract and on-supplied those products. Fresenius commenced supplying in Australia imported PD products from 1996.
12. Both prior to the contravening conduct, and during the performance of the contracts which were entered into in contravention of the TP Act, Baxter had, and continued to have, a market share in Australia of the PD products market in excess of 90%. Fresenius and Gambro each had 5% or less of that market.
13. Each of Baxter, Fresenius and Gambro are part of large world-wide manufacturers of SF products, PD products and like products.
14. From at least the early 1990s, each of the SF products market and the PD products market were characterised by long-term exclusive or near exclusive supply arrangements between each of the States (through their respective State Purchasing Authorities) and Baxter.
15. Each of the States was able to decide the way in which its tender processes were constructed. Each of the States had the power to combine with other States to set tender process terms, to invite tenders, and to invite or condone the bundling of product groups in tenders. Each of the States had control as to the times at which and the terms on which tenders were called.
16. The conduct of Baxter contravening the TP Act in relation to the particular contracts referred to, and its prior tender bids, in respect of earlier periods, were structured in a way which conformed with what was requested by the States. There is no suggestion that its bid structures were other than permitted and perhaps encouraged by the States during the 1990s. That position appears to have extended generally in respect of the particular contracts giving rise to its contravening conduct. Each relevant request for tender in respect of the tenders, and contracts, giving rise to the contravening conduct specifically envisaged and allowed the submission of bundled offers. Each of the States, through their State Purchasing Authorities, generally were of the view that sole supply arrangements were in their interest, and each was a willing party to the bundled tender conduct.
17. As noted briefly above, the contraventions arose out of Baxter’s conduct in responding to requests for tender for, and subsequently negotiating and entering into, four long term contracts with the States and including Queensland. The four contracts were:

(a) the 1998 New South Wales Supply Agreement between Baxter and that State, made in June 1998, for the supply of its entire requirements of certain SF products and 90% of its requirements for PD products for the period 18 May 1998 to 31 October 2003;

(b) the 2001 South Australian Supply Agreement between Baxter and that State, made on or about 1 May 2001, for the supply of its entire requirements of certain SF products and 90% of its requirements for PD products for the period 1 April 2001 to 30 March 2006;

(c) the 2001 Western Australian Supply Agreement between Baxter and that State, made on or about 2 May 2001, for the supply of its entire requirements of certain SF products and 90% of its requirements for PD products for the period 1 March 2001 to 30 June 2007; and

(d) the 2001 Queensland Supply Agreement between Baxter and that State, made on or about 17 April 2001, for the supply of its entire requirements of certain SF products (excluding PN fluids) and 92.5% of its requirements for PD products for the period 1 June 2001 to 31 December 2005.

As is apparent from that brief description, the contravening conduct involved offers and contracts which allowed for up to 10% for competitive products in respect of the supply of PD products, except for Queensland which allowed for 7.5% of competitive PD products to be acquired by Queensland.

THE PRINCIPLES

18. Section 76 of the TPA sets out matters to which the Court should have regard in determining the appropriate level of penalty. Those matters were discussed by French J in Trade Practices Commission v CSR Limited (1991) ATPR 41-076 at 52, 152-3. They are:

(a) the nature and extent of the contravening conduct;

(b) the nature and extent of any loss or damage caused;

(c) the circumstances in which the conduct took place;

(d) whether the contravener has previously been found to have engaged in any similar conduct;

(e) the size of the contravening company;

(f) the degree of power it has, as evidenced by its market share and ease of entry into the market;

(g) the deliberateness of the contravention and the period over which it extended;

(h) whether the contravention arose out of the conduct of senior management or at a lower level;

(i) whether the company has a corporate culture conducive to compliance with the TP Act, as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention; and

(j) whether the company has shown a disposition to cooperate with the authorities responsible for the enforcement of the TP Act in relation to the contravention.

19. That approach was endorsed by the Full Court in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission [1996] FCA 1134; (1996) 71 FCR 285 at 292 (per Burchett, Kiefel and Carr JJ). See also Australian Competition and Consumer Commission v Dataline.Net.Au (in liquidation) [2007] FCAFC 146; (2007) 161 FCR 513 at [58] per Moore, Dowsett and Greenwood JJ.
20. At first instance in that matter: Australian Competition and Consumer Commission v NSW Frozen Foods Pty Ltd (1996) ATPR 41-515, Heerey J at 42, 444-445 added reference to:

(k) similar conduct in the past;

(l) the financial position of the contravening party; and

(m) the deterrent effect of the proposed penalty.

I am not sure that those matters were not already encompassed in the factors mentioned in the preceding paragraph.

21. Underlying each of those matters is the proposition that fundamentally a pecuniary penalty should be imposed where it has an appropriate deterrent effect, and to the extent and only to the extent that it will have a deterrent effect, both on the particular contravenor of the TP Act, and upon those who may be disposed to engage in conduct of a similar kind prohibited by the TP Act. So much is plain from Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd (in liquidation) [2007] FCAFC 146; (2007) 161 FCR 513, and the cases there referred to. The penalty should not be so high as to be oppressive, but should be sufficient to achieve the object of both particular and general deterrence. In Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 3) [2005] FCA 265; (2005) 215 ALR 301 at [39] Goldberg J said:

The penalty imposed must be substantial enough that the party realises the seriousness of its conduct and is not inclined to repeat such conduct. Obviously the sum required to achieve the subject will be larger where the court is setting a penalty for a company with vast resources. However, as specific deterrence is only one element and general deterrence must also be achieved, consideration of the party’s capacity to pay must be weighed against the need to impose a sum which members of the public will recognise as significant and proportionate to the seriousness of the contravention.

22. Where there are multiple contraventions, it is also appropriate to have regard to the totality principle. In Trade Practices Commission v TNT Australia Pty Ltd (1995) ATPR 41-375 at 40, 169 Burchett J applied the totality principle, so that the total penalty for related offences did not exceed what was proper for the entire contravening conduct involved. That principle is well recognised in criminal sentencing law, recently reaffirmed and explained by the High Court in Johnson v The Queen [2004] HCA 15; (2004) 205 ALR 346. It has been applied, for instance, in Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (1997) 75 FCR 238 at 243. That is, it has been applied in relation to the imposition of pecuniary penalties under s 76 of the TPA.
23. In addressing the matters relevant to determination of the appropriate pecuniary penalties, if any, there is obviously an overlap in some instances between the material relating to each of the several matters referred to in [18] and [20] above.
24. The nature and extent of the contravening conduct is best judged in the light of the circumstances in which that conduct took place. Its nature includes consideration of the extent of deliberateness with which the conduct was engaged in, the period over which the conduct was undertaken, the extent to which senior management in Baxter was involved in the contravention, and whether or not the conduct was systematic or covert.
25. Similarly, the consequences of the contravening conduct should be assessed not simply having regard to the loss or damage caused, but the degree of market power of Baxter, and its size, and the extent to which it profited or may have profited from the contravening conduct.

THE EVIDENCE

26. Apart from submissions based upon the findings as recorded in the Full Court judgment and in the first instance judgment, additional evidence was adduced on the hearing of the question of the appropriate orders to be made following the decision of the Full Court.
27. That material included an amended statement of agreed facts as to financial circumstances, obviously relating to Baxter. It included an affidavit of Francis Inge affirmed on 14 July 2009, an affidavit of a senior lawyer employed by the Australian Government Solicitor responsible for the day to day conduct of this matter for the ACCC and providing material in part sourced from the respondent’s material and recording some information provided in conversations which took place in the course of the investigation by the ACCC. There is no reason not to accept Ms Inge’s evidence.
28. The further evidentiary material also included an extensive reference bundle of documents provided by the ACCC and an extensive reference bundle of documents provided by Baxter, and two affidavits of evidence adduced on behalf of Baxter.
29. One affidavit was that of Jeremy Levy sworn on 9 July 2009, corporate counsel of Baxter, dealing largely with the trade practices compliance programs and policies of Baxter, both nationally and internationally. There were some objections to the affidavit of Mr Levy, and to certain exhibits to his affidavit. I have considered those objections. In respect of the material to which objection has been taken I have not placed weight upon that material. I do not think it detracts from the picture which he presented as to Baxter’s culture in relation to complying with legislation such as the TP Act. I do not otherwise need to deal with those objections. Mr Levy was cross-examined by senior counsel on behalf of the ACCC. I accept his evidence. It is relevant, inter alia, because one of the submissions made by the ACCC relevant to penalty is that Baxter did not at the time of the contravening conduct have an adequate culture of compliance with the TP Act, and is not contrite for having engaged in the contravening conduct. It is sufficient for me to indicate that, on the basis of Mr Levy’s evidence, I accept that Baxter, as part of a large international corporation, had and has an extensive culture of compliance with anti-monopoly legislation in the various jurisdictions in which the parent company or its subsidiaries operates. I do not accept that Baxter was indifferent to its obligations under the TP Act. In my view, there was both at a national and international level a significant set of procedures designed, reviewed, and enforced with a view to avoiding its contravening both the TP Act within Australia and like legislation in other jurisdictions where the parent company or its subsidiaries carry on business. Nevertheless, it must be accepted that the contravening conduct occurred, notwithstanding those structures and processes. It occurred with the support of the then Chief Executive Officer of Baxter, as well as its senior management. However, I do not put in the scales in favour of greater pecuniary penalties than would otherwise be appropriate that Baxter did not have a culture of complying with the TP Act. I shall refer to that aspect below.
30. The other affidavit which was adduced on Baxter’s behalf was the affidavit of Rosano Zaurrini, a solicitor employed by the solicitors acting for Baxter. His affidavit was directed to the assertion by the ACCC that Baxter had not cooperated in the ACCC investigations, and had generally taken an inappropriate approach to the conduct of the proceedings. There is no reason not to accept his evidence. It was also directed to the issue of costs in a way to which I will refer in due course. Mr Zaurrini was not required for cross-examination.
31. Finally, there were some short documents tendered, including an extract from the Reserve Bank of Australia website showing the cash target rate from time to time, and a bundle of materials handed up on behalf of the States relevant to their contentions as to costs.
32. I turn to consider the particular submissions on the matters to which I should have regard, as identified by the parties, relevant to the determination of the appropriate pecuniary penalties, if any.

CONSIDERATION

33. I have referred above to the general nature of the contravening conduct.
34. In an immediate sense, it is plain that Baxter’s relatively high item-by-item bids were intended to secure acceptance of their bundled bids for SF products and PD products. They were meant to convey the message that favourable prices for SF products in the bundled bids were conditional upon acceptance of the bundled proposal, and that it would be uneconomic for any of the States separately to acquire the SF products from Baxter. There was a very significant difference between the item-by-item prices and the bundled prices. The evidence is that, in respect of SF products, the item-by-item prices offered were those which routinely Baxter offered in small quantities to individuals or entities requiring such products. That is not to the point. It is the contravening conduct which is significant in the present circumstances. The contravening conduct was the alternative offer strategy as described in more detail in the Full Court judgment.
35. I accept that the contravening conduct took place in circumstances to some real degree under the control of the several States. But it related in part to the supply of a significant part of the market for PD products. That was a market in which Baxter had a significant share. The effect of the contravening conduct was to put other competitors in the PD products market out of the opportunity to fully participate in that market, or to secure any significant share of that market, during the period of the respective contracts. Whilst I accept that Baxter’s purpose in engaging in the impugned conduct was not directly to cause any of its competitors to drop out of the PD products market, or to prevent or hinder those competitors from tendering for the contracts, its purpose was to engage in the contravening conduct to secure agreements for a lengthy period of time for the almost exclusive supply of PD products to the States and so to hold and secure its market share. It may well have wished to do so to ensure that its production facilities were fully utilised. It may well have wished to do so to maintain and maximise its share in the PD products market. But it did so in a way which contravened ss 46 and 47 as explained in the Full Court decision, taking advantage of its position in the SF products market improperly by the alternative offer strategy.
36. I do not think it is necessary to analyse in detail the individual conduct in relation to each of the sets of contraventions in relation to the several States. The detail of that conduct does not, in my view, enlighten in a relevant way the assessment of the nature and extent of the contravening conduct or the circumstances in which it occurred.
37. There are a few particular matters which are necessary to mention.
38. Firstly, so it is seen that I have not overlooked it, the conduct took place not simply with the States being in essence agreeable to the form of tender, including the bundled tenders, which Baxter put forward, but in circumstances where they had a capacity to decide upon the form of tenders and the timing of tenders. Their tenders included the opportunity for bundling products because, ultimately, they sought to achieve the best economic result for the hospitals which would make use of both the SF products and the PD products, as well as the other products the subject of the tenders. Each of the States, either individually but more realistically collectively, had some control over Baxter’s pricing. Each had the opportunity, if Baxter’s tenders were unacceptable, to negotiate with one or other of the other tenderers and longer term to encourage one or other of the other tenderers, or some further entity to come into Australia and start to supply PD products in competition with Baxter. The States were not in a position where they were unable to negotiate to some degree with Baxter about its bundled offers. The States themselves exchanged information as to Baxter’s tenders, and explored the negotiation of prices and composition of the tender terms with Baxter.
39. Secondly, in my view, it is not shown that ultimately the price at which Baxter tendered in its bundled tenders was other than an “appropriate” price. There is insufficient data to determine with any precision the extent of Baxter’s mark-up on its individual products, including SF products and PD products, compared to its costs of production. Nor, I suspect, would it be helpful to undertake that analysis in the present circumstances. I use the word “appropriate” simply to exclude the suggestion of any price gouging on the part of Baxter in engaging in the conduct which contravened the TP Act. The consumers, that is the States, were not the victims of price gouging by Baxter. Beyond that, it is not necessary to make any finding. There was some suggestion that Baxter was, by securing the opportunity to supply a significant part of the PD products market for some years, able to defer research and expenditure on product improvement to the detriment of consumers. I do not think the evidence enables such a conclusion to be drawn. As I have noted, Baxter’s item-by-item prices were based upon its general hospital price list as charged to smaller customers in its routine business. The item-by-item prices were considerably higher than the prices for SF products or PD products as identified in the bundled tenders which ultimately were accepted by the States.
40. Thirdly, whilst the effect of the contravening conduct was to exclude Gambro and Fresenius, and indeed any other supplier of PD products, from being able to supply those products to each of the States during the course of the several contracts, there is nothing to suggest that those entities did not remain in the market for the supply of PD products within Australia, or subsequently were in any worse position than they had been at the time of the contravening conduct to participate in subsequent tenders for the supply of PD products to any of the States. The conduct which was found to contravene the TP Act, by the presentation of tenders and entering into the contracts referred to, enabled Baxter to hold its position in the market against that competition on a basis which the TP Act proscribes. Obviously, to that extent, competitors in the PD products market were unable to compete equally with Baxter because it was able by bundling and the alternative offer strategy to carry the threat to the States of significantly higher prices for SF products if the bundled tenders were not accepted. There was, in that way a significant effect upon competition.
41. It is common ground that Baxter has not previously been found to have engaged in similar contravening conduct of the TP Act. The ACCC submits, nevertheless, that a relevant consideration weighing in favour of higher penalties is that Baxter had been using the alternative offer strategy at least since the early 1990s. The findings of the primary judge at first instance appear to bear out that fact. However, in my view, it is not appropriate to take it into account so as to increase the pecuniary penalties which might otherwise be imposed upon Baxter. The ACCC has put forward certain reasons why it may have chosen not to, or have been unable to, seek to impose pecuniary penalties upon Baxter in respect of that earlier conduct: see for example s 77(2) of the TP Act. Whatever the reason, in my view, the Court should impose pecuniary penalties only for the contravening conduct, and should not increase the pecuniary penalties otherwise appropriate because of conduct engaged in prior to the particular contraventions of the TP Act which have been found. Quite apart from the matter of principle, there is insufficient information to determine with precision the nature and extent of any prior conduct in the earlier tendering processes, including the participants in those tenders or the tenderers, and the awareness or otherwise of the ACCC of that earlier conduct.
42. It is, in my view, a significant factor in the imposition of penalty that Baxter deliberately engaged in the contravening conduct, and did so at least on the four separate occasions or periods over which the tendering process and contracting took place in relation to the States severally. It did so in essence by the same strategy on each occasion. It did so for the purpose of securing and maintaining its share of the PD products market against its competitors, and in circumstances where it was able to do so by taking advantage of its substantial degree of power in the SF products market by the bundling of one tender option, in accordance with the alternative offer strategy. It did so to the detriment of its competitors.
43. I accept that it did not do so with the conscious awareness that its conduct contravened the TP Act. It may well have thought that it would not be contravening the TP Act because of the derivative Crown immunity, a matter it raised in its defence. It was at the time clearly an arguable defence. It may have done so on the basis of legal advice. If it did so, the legal advice has not been adduced in evidence. I am not satisfied that that advice addressed specifically the question of whether Baxter’s conduct risked contravening the TP Act, putting aside the question of any derivative Crown immunity. The issue of the legality of its conduct under the TP Act was raised, at least in the course of negotiations with South Australia, but dismissed by Baxter. As I have said, I accept that Baxter did not deliberately intend to contravene the TP Act. However, I am not prepared to accept that it was, or was entitled to be, confident that its conduct did not contravene the TP Act.
44. In the circumstances, I proceed on the basis that it engaged deliberately in the conduct which constituted the contraventions. It did so in circumstances involving the alternative offer strategy, involving higher item by item prices in particular for SF products and the alternative bundled pricing. It was aware that it was taking advantage of its significant degree of power in the SF products market to procure and maintain its hold in the PD products market. It intended to do so. In other words, in my view, after making due allowance for the fact that it may have had a foundation for believing that its conduct would not contravene the TP Act because of derivative Crown immunity, its conduct nevertheless was a quite conscious and deliberate, and directed to achieving an outcome in the PD products market by taking advantage of its power in the SF products market, and by effectively insisting that its bundled offers would thereby be accepted.
45. Moreover, as is common ground, both Baxter’s Chief Executive Officer at the time and a senior manager at the time participated in the contravening conduct.
46. However, I do not accept (as the ACCC contended) that the contravening conduct extended over the length of the impugned contracts themselves, as distinct from the time during which the tenders were made and the contravening contracts were entered into between 1998 and 2001. Nevertheless, the effects of that contravening conduct persevered during the period of those contracts.
47. I have made a general finding about the culture of compliance with the TP Act on the part of Baxter. Obviously, there has been a very significant change in its compliance programs, particularly within Australia, from about 2007 onwards. However, prior to that time, and at the time of its contravening conduct, I find that there was a corporate culture of compliance with the TP Act. It was nowhere near as extensive as its present compliance program. It has since been significantly expanded both in scope and operation. As a factor in the scales as to appropriate pecuniary penalties, I do not put this topic in the scales adverse to Baxter as the ACCC contended I should.
48. As noted above, there was evidence both from the ACCC and from Baxter as to the degree of cooperation or lack of cooperation by Baxter in relation to the ACCC investigation, and in relation to the conduct of the proceedings. I have considered that evidence carefully.
49. In the light of all that evidence, I do not propose to take into account adversely to Baxter the way in which it addressed the inquiries from the ACCC during the course of its investigation or the way in which it conducted the proceedings. There were particular features of Baxter’s conduct, namely the fact that it was dealing with largely compliant States in relation to the tender process, and the fact that it was itself simply dealing with States and circumstances where derivative Crown immunity may have been perceived to have been available which, to my mind, suggest that I should not weigh in the scales adversely to Baxter its dealings with the ACCC leading up to the institution of the proceedings. Nor do I propose to take into account adversely to Baxter its conduct of the proceedings. As the decision at first instance indicates, the issues at trial were complex and required detailed and careful evidence. The findings made by the primary judge were only made after very careful and thorough analysis of all the evidence. His Honour’s conclusions similarly were reached only after a careful consideration of that detailed evidence and the submissions. Baxter was entitled in the circumstances in which it found itself to resist the application of the ACCC in the way in which it did.
50. Nor do I propose to take into account adversely to Baxter in determining the amount of any pecuniary penalties the asserted lack of contrition which the ACCC says is demonstrated by Baxter’s conduct prior to the proceedings, during the proceedings, and indeed up to the present time. Baxter throughout asserted that it did not contravene the TP Act. It was entitled to do so. In the light of the adverse findings, it has confronted those findings and taken significant steps to improve the nature of its compliance program in relation to matters arising under the TP Act. Whilst a positive expression of contrition, genuinely expressed, may be taken into account in determining the appropriate level of any pecuniary penalties, by reducing what might otherwise be appropriate, in the present circumstances I do not propose on the other hand to weigh in the scales adversely to Baxter the absence of any expression directly and immediately of contrition on its part.
51. It is then necessary to turn from identifying and considering those individual factors to the broader question of determining the appropriate pecuniary penalties (if any) to achieve both general and specific deterrence.
52. In my view this is not a matter where no pecuniary penalties should be imposed. The deliberate nature of the conduct, the fact that it was engaged in on the several occasions referred to between 1998 and 2001, and the significance of the conduct in excluding, from a very substantial part of the PD products market, its competitors from the opportunity of participating in that market in relation to the supply of PD products to the States by conduct which contravened the TP Act, leads me to the view that such a determination would be inappropriate.
53. Those same considerations in my view indicate that a significant pecuniary penalty should be imposed in respect of each of the contraventions of ss 46 and 47 in relation to each of the States, treating as one contravention for the purposes of determining the appropriate pecuniary penalties the conduct of Baxter in relation to each of the States severally. They are fortified by an understanding of the value of the contracts which the contravening conduct procured or assisted in procuring with the States. The amounts involved were very substantial.
54. I also have regard to the level of gross and net profit of Baxter for the calendar years 1998 to 2001, and indeed extending for a few years after that time. Its Australian business comprised Renal, BioScience, Medication Delivery and Pharmacy Compounding Divisions. Its net profit over each of those years as reported was significant, in excess of $28m in each of those years. It is also clear that the SF products and the PD products divisions or elements of its business contributed substantially to those outcomes. I have also had regard to the confidential information as to its total sales revenue derived from each of the contracts in respect of which a contravention was found to exist. Obviously, the total sales revenue from each contract was more or less proportionate to the size of the respective States, and to the numbers of PD patients in each of the States. Baxter’s gross and net profit from sales effected under each of the contracts was also very significant, and more or less proportional to the size of each of the States. Similarly, its gross and net profit under each of the contracts from the sale and provision of SF products and PD products was also significant. Both the sales of SF products and PD products contributed to a very substantial degree both to the gross and net profit, and to the sales levels under those contracts. It is significant that the PD products sales did contribute so greatly in each of those respects, although there were a relatively smaller number of PD patients in each of the States. The demand for SF products is much greater, but the evidence indicates that it was a high-volume low-margin product, notwithstanding that Baxter had a substantial degree of market power in the Australia-wide market for the supply of SF products.

In this matter, I do not assume that, absent the contravening conduct, Baxter would not in any event have achieved much the same outcome as it achieved with the benefit of the impugned contracts. It may have succeeded in having its tenders accepted, even if it had not engaged in the contravening conduct. Also, as I have noted above, there is no evidence to suggest that it was price gouging. The States are not shown to have paid too much. I have discussed above the ways in which the contravening conduct would have affected the market for the sale and supply of PD products, and the way in which that contravening conduct affected competitors in that market. It is not a matter where, in my judgment, it is appropriate to endeavour to estimate the gross or net profit achieved by Baxter by the contravening conduct. That is because, in essence, the benefit from the contravening conduct was to exclude competitors from being able to realistically compete in the market for the supply of PD products at around the time of, and in respect of, the structured tenders which were part of the contravening conduct and to the impugned contracts which were also part of the contravening conduct. It is not, in my view, possible to put any precise figure upon the value of that benefit to Baxter, save to say that it clearly had a value to Baxter, both in terms of maintaining and sustaining its revenue stream, its high production levels from its production facilities within Australia, so as to ensure continuing efficiencies, by ensuring the opportunity to continue to supply to the States PD products at what was obviously a profitable level over the period of the impugned contracts. An indication of the significance of the benefits is given by the gross and net sales of SF products and PD products, and more specifically of PD products, under the impugned contracts. It is not a matter of saying that, but for the contravening conduct, those sales would not have been effected. They may well have been achieved in any event. But they give an indication of what was in play in the tender processes with the States.

56. I also take into account that conduct similar to the contravening conduct is unlikely to occur again. That is partly because of the increased awareness of the States as to the vulnerability of those with whom they are dealing to contravene the TP Act in a manner similar to that of Baxter, and because Baxter since 2007 has significantly reinforced its TP Act compliance program in a vigorous way. Nevertheless, an appropriate level of pecuniary penalties must be fixed to deter Baxter from engaging in similar conduct and, as importantly, to operate as a general deterrent to the community.
57. My attention was drawn to a number of decisions in which penalties have been imposed for cartel behaviour. In my view, apart from reinforcing the general principles to which I have referred, those decisions do not provide any real guidance to the appropriate level of pecuniary penalties to be imposed in this matter because of the significant different circumstances in which the contravening conduct occurred, and because of the nature of the contravening conduct.
58. Having regard to the considerations to which my attention has been drawn in submissions and to the extensive and careful submissions of the parties, in my judgment an appropriate penalty in respect of the contravening conduct in 1998 leading to the 1998 NSW Supply Agreement should attract a pecuniary penalty of $2m. The contravening conduct in relation to the 2001 Queensland Supply Agreement should attract a pecuniary penalty of $1.5m. The contravening conduct in relation to each of the 2001 Western Australian Supply Agreement and the 2001 South Australian Supply Agreement should each attract a pecuniary penalty of $1m. There is no particular mathematical formula which I have applied in reaching those conclusions. Although the value of the South Australian contract was significantly less, having regard to the size of that State, the conduct in relation to that was in my view a little more egregious than that in relation to the other States. In the case of Queensland, the pecuniary penalty is somewhat higher simply because of its significantly higher population of PD patients and the consequential benefits under that contract. I propose to reduce the accumulation of those numbers by $200,000 each having regard to the fact that the contravening conduct was relatively contemporaneous. Whilst it was not the same conduct within the meaning of s 76(3) of the TP Act, because it occurred at different times and in relation to different States, it was almost identical conduct engaged in in a close temporal proximity.
59. Overall, therefore, and having regard to the need to impose a penalty both as a significant signal to the community that those engaging in such conduct as has been found against Baxter will be vulnerable to very significant pecuniary penalties, and to the need to impress upon Baxter the consequences of its contravening conduct so that it is discouraged from engaging in that conduct in the future, in my view, the appropriate pecuniary penalty overall to be imposed are as follows:
    
    1. in respect of the 1998 NSW Supply Agreement $2,000,000
    2. in respect of the 2001 Queensland Supply Agreement $1,300,000
    3. in respect of the 2001 WA Supply Agreement $ 800,000
    4. in respect of the 2001 SA Supply Agreement $ 800,000

TOTAL $4,900,000

60. I turn now to the question of the injunctive relief.
61. The ACCC has proposed a form of injunctive orders which, so far as possible, is confined to restraining Baxter from engaging in conduct similar to its contravening conduct. It relates to the supply or offering to supply SF products to a government purchaser on the condition that it would not, or would not except to a limited extent, acquire PD products from a competitor of Baxter or that it would acquire all or any of its PD products from Baxter.
62. In my judgment, it is unnecessary to make such an injunctive order. For the reasons I have given, in dealings with the States in the future, such conduct is unlikely to be engaged in. I assume that the States would no longer be complicit in such conduct, and indeed would be active in resisting it (as South Australia appeared to be to a degree), and would report it to the ACCC. The conduct was engaged in now some years ago. It is apparent that Baxter appreciates the significance of its contravening conduct, and has taken steps by a much improved TP Act compliance program to avoid such conduct in the future. In addition, I am cautious about making an injunctive order in the terms proposed by the ACCC. The gravamen of the contravening conduct was Baxter’s taking advantage of its market power in the SF products market, and its bundling of SF products with PD products in the terms in which its bundling tenders were proposed. It is a significant step to prohibit Baxter from presenting a bundled tender at all, assuming there is no use of that market power, or assuming that the bundled tender is not likely to have such an effect on competition in a market as to contravene s 47. In other words, the injunction may prohibit conduct which is not itself in contravention of either s 46 or s 47 of the TP Act. It is difficult to express in precise terms an injunction which would only inhibit conduct which in fact contravenes the TP Act. It is on the other hand difficult to express an injunction which is so confined, but which will not leave the officers of Baxter with some uncertainty as to how they are or are not entitled to engage in the conduct of competitive tendering.
63. As to costs, the ACCC seeks its costs, including reserved costs, of the trial at first instance and of the appeal, and of this hearing on penalty against Baxter, and for an order that the States bear a proportion of its costs. The orders which the ACCC seeks is that the respondents pay its costs relating to the derivative Crown immunity issue, as argued before the Court at first instance on 16 June and 22 June 2004 and before the Full Court on 31 October and 1 November 2005, fixed at 10% of the applicant’s costs, such costs to be borne as between Baxter and each of the States in equal separate proportions. Subject to that order, the ACCC seeks an order that Baxter pay the ACCC’s costs of the proceedings at first instance and on appeal to the Full Court, and including these penalty proceedings. The consequence would be that such costs orders are to be taxed or agreed.
64. Baxter accepts that the proposed order, insofar as it affects the States, is appropriate. It urges that the existing costs order of the primary judge at first instance should not be disturbed by reason of its attempt to resolve the matter prior to litigation, and at an early stage of the proceedings, and by reason of the conduct of the proceedings respectively by the ACCC and itself, and by reason of its inability to extricate itself from proceedings brought by the ACCC in view of the attitude of the States, and because it is a “test case”, particularly in relation to the derivative Crown immunity issue.
65. I have carefully considered the respective submissions. Baxter pleaded the derivative Crown immunity defence. Subsequently, the States became joined to the proceedings as parties. They participated in respect of that issue only. The way in which the ACCC has proposed to confine the extent of the Crown immunity proceedings, at first instance, namely 10% of its costs is a not unrealistic broadbrush approach to assessing the extent to which that issue occupied the time of the trial and of the appeal on the derivative Crown immunity issue, notwithstanding the detailed analysis made by the States.
66. However, it does not follow that, because the derivative Crown immunity issue occupied as a rough estimate some 10% of the hearing, that that part of the hearing should be attributed as costs solely against the States or against the States at all.
67. Upon the material before me, I am not persuaded that the States materially added to the length or cost of the proceedings. The derivative Crown immunity defence was pleaded by Baxter before the States were joined as parties to the proceedings. Evidence, to the extent it was adduced on the topic would have been necessary in any event. Submissions similarly would have been necessary in any event. I am not persuaded that the involvement of the States extended the time, and therefore the cost, in the conduct of that aspect of the proceedings.
68. Accordingly, whilst that aspect of the proceedings did occupy a period of the hearing, in my view, it has not been shown that the involvement of the States on the issue which was raised by Baxter by way of defence extended the hearing in any way. I do not, therefore, propose to make an order that the States pay any part of the costs otherwise payable by Baxter to the ACCC in respect of the proceeding.
69. I do not accept Baxter’s contentions in relation to the issue of costs generally.
70. I have considered the communications between Baxter and the ACCC both prior to and during the early stage of the conduct of the proceedings. There were communications by which Baxter proposed a resolution of the proceedings on terms which are different from the orders made by the Court. Baxter fully defended the proceedings, not simply on the derivative Crown immunity issue, but in all respects. It did not acknowledge the contravening conduct in the terms which have been found against it. The proceedings were hard fought. That is so both on the part of the ACCC and on the part of Baxter. However, I have not discerned from the material before me that either the ACCC or Baxter, in the conduct of the proceedings, acted inappropriately. I have also considered the submissions concerning the conduct of the proceedings both by the ACCC and Baxter. I am not persuaded that either party adduced evidence which was unnecessary or inappropriate, examined or cross-examined unnecessarily or inappropriately, or produced documents which were unnecessary or inappropriate. As is typical of some proceedings under ss 46 and 47 of the TP Act, this proceeding was complex both factually and legally. In my view, there is nothing on the part of the conduct of the ACCC that would disqualify it from an entitlement to costs which it would otherwise be entitled to in the normal course or, on the other hand, in the conduct of Baxter which also would not make the usual order as to costs appropriate.
71. Finally, I do not accept that by reason of the nature of the case the normal orders as to costs should not be made. Obviously, the decision of the High Court established an important principle relating to the asserted derivative Crown immunity in the proceedings. It decided one aspect of the boundaries of Crown immunity, and the application of the TP Act to entities contracting with the government. In that sense, it was of public interest, having a wider import than that simply between the parties. Nevertheless, it was an issue which came to be decided in a proceeding routinely brought by the ACCC for a contravention or contraventions of the TP Act. In that proceeding, that issue came to be resolved because it was pleaded as a defence by Baxter.
72. In my view, the appropriate order on costs is simply that Baxter should pay the ACCC’s costs of these proceedings at first instance and on appeal to the Full Court. Those costs will have to be taxed or agreed.
73. There will be no order as to costs against the States.
74. I make no order with respect to the costs of the proceedings as to penalty and other relief at present. The ACCC has asked for such an order. As Baxter opposed the imposition of any pecuniary penalties at all, at present I do not see why such an order should not be made. However, Baxter has specifically indicated that it wishes an opportunity to make submissions on that aspect of the matter. I will give it that opportunity by orders for the exchange of written submissions.
    

I certify that the preceding seventy-four (74) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Associate:

Dated: 26 August 2010