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Marshall, Brenda --- "The Relevance of a Legitimate Business Rationale under Section 46 of the Trade Practices Act" [2003] DeakinLawRw 3; (2003) 8(1) Deakin Law Review 49

THE RELEVANCE OF A LEGITIMATE BUSINESS RATIONALE UNDER SECTION 46 OF THE TRADE PRACTICES ACT



Brenda Marshall[*]



I INTRODUCTION

The terms of s 46 of the Trade Practices Act 1974 (Cth)[1] now appear embedded in Australian competition law, following the recent recommendation of the Trade Practices Act Review Committee (Dawson Committee) that the provision not be amended in any way.[2] Those terms disclose three elements that must be satisfied before a contravention of s 46 will be established:[3] (i) a corporation with a substantial degree of power in a market; (ii) must take advantage of that power; (iii) for a purpose proscribed by s 46(1)(a), (b) or (c).[4]

A growing body of case law surrounds the interpretation of the elements of s 46, including three expositions by the High Court thus far: Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd[5] in 1989; Melway Publishing Pty Ltd v Robert Hicks Pty Ltd[6] in 2001; and Boral Besser Masonry Ltd v ACCC[7] in 2003.

The recent Boral decision provides a useful reminder of the primacy of the ‘market power’ element in establishing a breach of s 46.[8] However, this article focuses on the ‘take advantage’ and ‘purpose’ elements of the provision,[9] elucidated in the High Court’s earlier judgments in Queensland Wire and Melway.

Those judgments indicate that there will be no contravention of s 46 – because either the ‘purpose’ element or the ‘take advantage’ element of the provision is not satisfied – where the respondent corporation is able to explain its actions by reference to some legitimate business rationale.[10] Therein lies the genesis of this article. The primary contention put forward here is that critics who assert a ‘lack of certainty’[11] in the application of s 46[12] have overlooked the significance of legitimate business reasons offered (or omitted) by the respondent corporation in justification of its conduct.[13] Indeed, on this basis, the outcomes in Queensland Wire[14] and Melway[15] can be seen to turn on BHP’s failure to offer any legitimate business reason for its behaviour, and Melway’s provision of a legitimate business rationale, respectively.

The remainder of the article is structured as follows. The next part re-examines the seminal principles articulated by the High Court in respect of the ‘take advantage’ and ‘purpose’ elements of s 46. This discussion leads logically to the comprehensive analysis, in Part III of the article, of the impact of a corporation’s legitimate business rationale on both of those elements. Final conclusions are presented in Part IV.

II THE MISUSE OF MARKET POWER

A corporation ‘misuses’[16] its market power when it takes advantage of that power for one of the proscribed purposes in s 46(1). As mentioned previously, the High Court’s decisions in Queensland Wire and Melway determine the current interpretation of the ‘take advantage’ and ‘purpose’ elements of s 46. Brief recitals of the facts of each case provide contextual background to the discussion of those elements that follows in this part of the article.

Queensland Wire
BHP, responsible for approximately 97 per cent of Australia’s steel output, produced Y-bar,[17] which it sold exclusively to its wholly owned subsidiary Australian Wire Industries (AWI). AWI produced fence posts from the Y-bar and sold these as a producer. Queensland Wire Industries (QWI) sought supply of the Y-bar produced by BHP in order to produce fence posts and compete against AWI in the rural fencing market. BHP offered to supply the Y-bar at prices which were so high that its conduct amounted to a constructive refusal to supply.[18] Before the High Court, QWI successfully claimed that BHP had misused its market power in contravention of s 46 of the Trade Practices Act. The parties then settled their dispute out of court in confidential negotiations.

Melway
Melway published a street directory for the Melbourne metropolitan area and had captured 80-90 per cent of the local street directory market. The company attributed its success, in part, to its wholesale distribution system, under which it supplied directories to a limited number of distributors who were authorised to sell those directories only in the particular market segments allocated exclusively to them. Auto Fashions had been the appointed distributor for the automotive parts segment of the market for a number of years when Melway terminated its distributorship. On being informed by Auto Fashions that it nevertheless wished to obtain copies of the directory (30,000-50,000 per annum) for sale to the retail market, Melway refused supply. On appeal to the High Court, Melway was found not to have breached s 46 of the Trade Practices Act.

A Taking advantage of market power

1 Competitive market test

In Queensland Wire at first instance, Pincus J held that for a corporation to ‘take advantage’ of its power in a market, there must be some misuse of that power in an unfair or predatory manner.[19] In his Honour’s view, a proper construction of the section required those words to be read in a pejorative sense.[20] On final appeal to the High Court, however, it was unanimously held that ‘take advantage’ is a neutral concept, meaning nothing materially different to ‘use’, and so does not require proof of hostile intent.[21]

As to whether market power has been ‘used’, the test discernible from the High Court judgments in Queensland Wire is that a corporation’s conduct will amount to a use, or taking advantage, of market power when that conduct is possible, in a commercial sense, only because of its market power.[22] In other words, a firm should be regarded as having taken advantage of market power when it has behaved differently from the manner in which it would be likely to behave if it were operating in a competitive market.[23] This approach may conveniently be described as the ‘competitive market’ test, to borrow from the judgment of Mason CJ and Wilson J in Queensland Wire. In applying the test in that case, their Honours stated:

It is only by virtue of its control of the market and the absence of other suppliers that BHP can afford, in a commercial sense, to withhold Y-bar from the appellant. If BHP lacked that market power – in other words, if it were operating in a competitive market – it is highly unlikely that it would stand by, without any effort to compete, and allow the appellant to secure its supply of Y-bar from a competitor.[24]

In drawing the inference that BHP had taken advantage of its market power, the High Court took account of the following factors: BHP supplied Y-bar to AWI but not QWI; BHP made available for general sale at competitive prices all the other steel products from its rolling mills, so that BHP’s conduct with respect to Y-bar was not in accordance with the general terms of its commercial behaviour; in every other steel product line in which BHP experienced some competition, it supplied that product.[25]

As the High Court’s decision in Queensland Wire demonstrates, the practical application of the competitive market test generally involves an examination of the counter-factual. That is to say, whether a corporation has taken advantage of its market power is determined by asking whether the corporation would be likely to engage in the same conduct in a competitive market. The corollary is to ask whether the conduct depends on the possession of market power and is an exercise of that market power. Which ever way the question is phrased, the inquiry seeks to ascertain whether the conduct at issue is attributable to market power.[26] In Natwest Australia Bank Ltd v Boral Gerrard Strapping Systems Pty Ltd,[27] French J explained very clearly the need for a causal nexus between a corporation’s market power and its conduct:

If a corporation with substantial market power were to engage an arsonist to burn down its competitor’s factory and thus deter or prevent its competitor from engaging in competitive activity, it would not thereby contravene s 46. There must be a causal connection between the conduct alleged and the market power pleaded such that it can be said that the conduct is a use of that power.[28]

This requirement has been reinforced by the High Court’s recent decision in Melway. In a joint majority judgment, Gleeson CJ, Gummow, Hayne and Callinan JJ[29] pointed out that s 46 requires ‘not merely the co-existence of market power, conduct, and proscribed purpose, but a connection such that the firm whose conduct is in question can be said to be taking advantage of its power.’[30] The lack of any causal link between Melway’s dominant market position and its refusal to supply Auto Fashions provides the basis for the majority’s conclusion that Melway had not taken advantage of its market power.[31]

In affirming the competitive market test from Queensland Wire, the High Court majority in Melway said:

To ask how a firm would behave if it lacked a substantial degree of power in a market, for the purpose of making a judgment as to whether it is taking advantage of its market power, involves a process of economic analysis which ... is consistent with the purpose of s 46.[32]

However, their Honours clarified the nature of the hypothetical market underlying this test[33] by observing that the absence of a substantial degree of market power does not mean the presence of ‘an economist’s theoretical model of perfect competition’.[34] All that is required is a sufficient level of competition ‘to deny a substantial degree of power to any competitor in the market’.[35] In the majority’s view, this qualification was necessary because:

It is one thing to compare what it [the respondent] has done with what it might be thought it would do if it lacked market power. It is a different thing to compare what it has done with what it would do in circumstances that are completely divorced from the reality of the market.[36]

Their Honours explained that the lower courts had fallen into the latter trap in the Melway case by failing to consider the nature of the wholesale distribution arrangements, both of Melway and its competitors, that would exist in a competitive market.[37]

The majority viewed the refusal to supply Auto Fashions as a manifestation of Melway’s distribution system, so that the ‘real question’[38] in the case was whether, without its market power, Melway could have maintained that system.[39] Their Honours noted that Melway had adopted its segmented distribution system before it secured its position of market dominance, and there was no reason to believe it would not have been both willing and able to continue that system in a competitive market.[40] They reasoned that the creation and maintenance of the distribution system by Melway ‘at a time when it did not have a substantial degree of market power, shows that its maintenance, when the appellant had market power, was not necessarily an exercise of that power.’[41] Thus, the majority concluded:

... it does not follow that because a firm in fact enjoys freedom from competitive constraint, and in fact refuses to supply a particular person, there is a relevant connection between the freedom and the refusal. Presence of competitive constraint might be compatible with a similar refusal, especially if it is done to secure business advantages which would exist in a competitive environment.[42]

These comments reinforce the view that the decision in Melway is simply another way of saying that that there must be a causal connection between a corporation’s market power and its impugned conduct.[43]

On the question of how high the threshold of causation is under the competitive market test, the High Court majority in Melway said, albeit by way of obiter comments:

... in a given case, it may be proper to conclude that a firm is taking advantage of market power where it does something that is materially facilitated by the existence of the power, even though it may not have been absolutely impossible without the power.[44]

That a corporation’s market power has ‘materially facilitated’ its conduct implies a lower threshold of causation than does the present requirement that the conduct is only possible because the corporation possesses substantial market power.[45] In the author’s view, lowering the threshold of causation in respect of the ‘take advantage’ element will do little to increase certainty in the application of s 46. As Corones notes, ‘materially’ is a relative concept and its application to particular fact situations ‘is bound to produce a divergence of views’.[46] Moreover, to the extent that it broadens the scope of s 46, the lower threshold may indirectly lead to the error of focusing on the sources of a corporation’s market power, rather than its conduct. This misapplication of the competitive market test of taking advantage is discussed immediately below.

2 Market power or other power?

There is a series of Federal Court judgments in which conduct characterised as resulting from a corporation’s exercise of extraneous sources of power (such as contractual, property, statutory or other legal rights) has been excluded from the ambit of s 46.[47] The proposition accepted in these judgments is that if a corporation with substantial market power exercises, for example, a contractual or statutory right, it necessarily takes advantage of power it has by virtue of the contract or statute, and not by virtue of its control of a market.[48]

However, the High Court’s reasoning in Melway establishes that it is erroneous to focus on the source of market power in determining whether market power has been taken advantage of.[49] Correctly applied, the competitive market test involves a comparative assessment of the corporation’s behaviour in the presence or absence of competitive conditions – with a change in conduct suggesting that the test has been satisfied[50] – not a classification of its sources of market power. The two should not be confused.[51] The point may have been implicit in the High Court’s decision in Queensland Wire, but only Dawson J directly touched on the issue in that case.[52] His Honour acknowledged that although there is a need to distinguish between monopolistic practices and vigorous competition, it was not helpful ‘to categorise conduct ... by determining whether it is the exercise of some contractual or other right.’[53]

Earlier cases in which such categorisation occurred include Top Performance Motors Pty Ltd v Ira Berk (Qld) Pty Ltd,[54] Warman International v Envirotech Australia Pty Ltd[55] and Williams v Papersave Pty Ltd.[56] While the specific factual matrix varied, each case involved a corporation with a substantial degree of market power[57] engaging in conduct allegedly in breach of s 46. However, in each instance the contravention was not established, as the conduct was held by the Federal Court to result not from the exercise of corporation’s market power, but from the exercise of some other power or right.

In the Ira Berk case, for example, Joske J decided that the exercise by a corporation with substantial market power of a contractual right to terminate a contract amounted to the corporation taking advantage of the terms of the relevant contract and not taking advantage of its market power.[58] This reasoning was relied on by Wilcox J in Warman, where his Honour concluded that, ‘To exercise in good faith an extraneous legal right, though the effect may be to lessen, or even eliminate, competition, is to take advantage of that right, not of market power.’[59] Similarly, in Williams v Papersave Pty Ltd, it was accepted by Sheppard J that the respondent corporation was merely taking advantage of certain commercial information it had received and not its market power.[60]

In the aftermath of Queensland Wire, the Full Federal Court indicated, in Australasian Performing Rights Association Ltd v Ceridale Pty Ltd,[61] that it was no answer to an alleged contravention of s 46 for a market-dominant supplier to assert that it was merely exercising an ‘extraneous legal right’.[62] Similarly, in John Hayes and Associates Pty Ltd v Kimberley-Clark Australia Pty Ltd,[63] Hill J opined that ‘there is no necessary incompatibility between a party exercising a right available to it and that conduct constituting a breach of s 46.[64]

Yet, in Dowling v Dalgety Australia Ltd,[65] Lockhart J demonstrated divergent reasoning. In this case, the applicant was refused permission to auction at the Goondiwindi sale yards owned by three pastoral companies, Dalgety, Elders and Primac. Although finding that the threshold requirement of a substantial degree of market power was not established on the facts,[66] Lockhart J proceeded to consider the application of s 46. Ostensibly adhering to the test formulated by the High Court in Queensland Wire, his Honour asked whether any of the corporations had exercised a right it would be unlikely to exercise in a competitive market.[67] However, in reverting to the approach of categorising the source of the power enabling the conduct, Lockhart J took the view that, in declining to make available to a competitor a valuable asset, the respondents were exercising rights flowing from the ownership of property, which could not be construed as conduct in which they would not engage in a competitive market.[68]

Lockhart J’s approach in Dowling v Dalgety Australia Ltd was cited with approval by Lee J in NT Power Generation v Power & Water Authority.[69] Although Lee J agreed with Branson J that s 46 had no application in this case, since PAWA’s refusal to make its infrastructure available for use by NT Power was not conduct by PAWA in the course of carrying on its business,[70] their Honours would have applied s 46 very differently, had the provision been relevant. Despite having the benefit of the High Court’s decision in Melway, Lee J relied on Lockhart J’s reasoning in Dowling to conclude that the ‘take advantage’ element of s 46 would not have been satisfied in the instant case, since the section ‘does not purport to interfere with the due rights of property per se’.[71] Conversely, Branson J’s view, shared by Finkelstein J, was that PAWA clearly had taken advantage of its market power to prevent NT Power from becoming a supplier of electricity.[72] Their Honours dismissed the suggestion that, in refusing access to its infrastructure, PAWA was merely exercising a regulatory function or its ownership rights.[73] Expressing particular incredulity at the latter claim, Finkelstein J said:

It would ... be an extraordinary result if a monopolist could successfully defeat a s 46 claim with the proposition that the monopolist’s ownership of the property in question entitles it to do as it pleases, even if its conduct is anti-competitive or predatory.[74]

Nevertheless, the preoccupation of Lockhart J in Dowling v Dalgety Australia Ltd, and Lee J in NT Power, with categorising the source of the corporation’s power suggests an ongoing measure of judicial uncertainty in the application of the competitive market test, even post-Melway. In particular, whenever ‘extraneous powers’ are raised in relation to the question of whether a corporation has taken advantage of its market power, the risk of confused reasoning appears to increase.

A qualification to the preceding comment relates to ‘regulatory power’, now acknowledged appropriately as a different type of power to market power. In the NT Power case, PAWA’s claim that it was exercising a regulatory function was dismissed on the basis that its conduct was ‘not designed to achieve by regulation any specific public purpose of the legislature’.[75] This contrasts with the genuinely regulatory nature of the licensing power at issue in Plume v Federal Airport Corp[76] and Stirling Harbour Services Pty Ltd v Bunbury Port Authority.[77]

In Plume, the applicant, an operator of a shuttle bus service, applied to the Federal Airports Corporation (FAC) for a licence to operate such a service between Alice Springs airport and the city centre. The FAC refused and the applicant alleged that the refusal contravened s 46. O’Loughlin J held that the exercise of the power to grant a licence could not be described as the exercise of an economic market power.[78] Rather, it was the use of a regulatory power designed for the benefit of the members of the public who used the facilities of the airport.[79]

Similarly, in Stirling, French J distinguished between the exercise of a statutory power in the public interest (not a use of market power) and the exercise of market power derived from a statutory monopoly (potentially a use of that power).[80] His Honour acknowledged that Bunbury Port Authority (BPA) had exclusive control over the Port of Bunbury pursuant to the Port Authorities Act 1999 (WA).[81] However, in granting a licence for the provision of towage services in that port, French J held that BPA was discharging a regulatory function under an express power granted by Parliament and was not exercising market power.[82]

Leaving regulatory function to one side (on the ground that it is distinguishable from market power), the principle remains that if a corporation with market power claims merely to have exercised an ‘extraneous right’, this will not remove its conduct from the purview of s 46. Any misapprehension of this point, in the courts or elsewhere, would be remedied by a closer reading of the High Court’s decision in Melway. As the majority explained in that case, market power means the freedom to act without competitive constraint.[83] Accordingly, in assessing whether a corporation has taken advantage of its market power, the competitive market test dictates that the only pertinent question to ask is whether the corporation would be likely to engage in the conduct in the presence of competitive constraint.[84] Categorising the particular sources of a corporation’s market power is not the answer to that inquiry. What will be relevant, though, is whether the corporation can advance a ‘legitimate business rationale’ in respect of its conduct. This matter, contended earlier in this article to be the linchpin of s 46 analysis is discussed in Part III below.

B Anti-competitive purpose

Although the High Court in Queensland Wire eliminated any notion that the concept of ‘taking advantage’ requires conscious predatory activity, it is nevertheless necessary for the party seeking to establish a contravention of s 46 to prove that one or more of the proscribed purposes in s 46(1) is present on the facts of the case.[85] As Mason CJ and Wilson J explained:

... it is significant that s 46(1) already contains an anti-competitive purpose element. It stipulates that an infringement may be found only where the market power is taken advantage of for a purpose proscribed in par (a), (b) or (c). It is these purpose provisions which define what uses of market power constitute misuses.[86]

An unavoidable element of intention is thereby incorporated into the section, in the sense that s 46(1) requires purposive action undertaken with the express aim of: (a) eliminating or substantially damaging a competitor; (b) preventing the entry of a person into a market; or (c) deterring or preventing a person from engaging in competitive conduct in a market.

McMahon has complained that the proscribed purposes in s 46(1) are ‘widely drawn and ill-defined’,[87] and deal exclusively with injury to competitors which is the very nature of competitive conduct.[88] Certainly, the section is expressed in terms of protecting firms who wish to compete with the dominant corporation, rather than in terms of protecting competition itself or the interests of consumers.[89]

However, on the question of whether s 46 requires proof of an anti-competitive purpose or mere injury to a competitor, the High Court in Queensland Wire denied that the protection of individual competitors is an objective of s 46. Mason CJ and Wilson J said:

... the object of s 46 is to protect the interests of consumers, the operation of the section being predicated on the assumption that competition is a means to that end. Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away ... and these injuries are the inevitable consequence of the competition s 46 is designed to foster.[90]

Although it is not entirely clear what the ‘interests of consumers’ means when used in relation to s 46, it may be argued that because the consumer is primarily concerned with obtaining goods and services at the lowest possible price, the welfare of consumers depends on a competitive market in which corporations compete against each other in order to produce goods and services as cheaply and efficiently as possible. Section 46 is aimed therefore at preventing corporations with substantial market power from using this power to deter or prevent competition.[91]

In Queensland Wire, Deane J certainly spoke of s 46 in terms which suggest he was of the view that it is designed to protect and advance competition per se. His Honour stated that the objective of s 46 is ‘the protection and advancement of a competitive environment and competitive conduct’.[92] Toohey J similarly noted that the objective of Part IV of the Trade Practices Act (in which s 46 appears) is ‘to promote and preserve competition’.[93] This approach was confirmed in Melway, where the High Court majority was emphatic that s 46 ‘aims to promote competition, not the private interests of particular persons or corporations’.[94]

This author endorses the High Court’s view of the policy objective of s 46. That view is supported by s 2 of the Trade Practices Act, inserted in 1995, which provides: ‘The object of this Act is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection.’[95]

The challenge of ascertaining whether the respondent corporation was motivated by an anti-competitive purpose under s 46 is no greater than that inherent in establishing a party’s purpose in any other context. Arguably less so, in fact. While the relevant ‘purpose’ in s 46 proceedings is the subjective purpose of the respondent corporation,[96] this purpose is determined objectively.[97] Accordingly, primary consideration should be given to an analysis of the impugned conduct and the inferences which can be drawn from that conduct.[98] Robertson makes the point neatly:

The ultimate issue for determination when a court is assessing purpose is: What is the economic actor really trying to do in commercial or economic terms? ... In asking this question we are asking for an explanation of commercial conduct – to make the best sense we can of the conduct – not a psychological analysis of the minds of the economic agents.[99]

It follows, therefore, that to refute a claim that its conduct was motivated by one of the proscribed purposes in s 46(1), the respondent corporation will seek to adduce evidence of a legitimate business reason that objectively justifies the conduct. This issue is examined in the next part of the article.

III LEGITIMATE BUSINESS RATIONALE

A Significance

In Photo-Continental Pty Ltd v Sony (Aust) Pty Ltd,[100] Kiefel J remarked that a finding of a breach of s 46 should be ‘subject to other explanations offered or appearing from the circumstances’.[101] Her Honour’s statement highlights the critical role of legitimate business reasons in countering an allegation of misuse of market power,[102] a perspective now widely supported in the academic literature on s 46.[103]

Three points of possible confusion regarding legitimate business reasons should be clarified immediately. First, is there any difference between a ‘legitimate’ (or ‘rational’ or ‘proper’ or ‘valid’) business ‘reason’ or ‘explanation’ or ‘justification’ or ‘criterion’ or ‘rationale’? The author submits that whichever combination of terms is preferred, the concept remains the same – and that is, that there is some reasonable excuse for the corporation’s conduct.

Second, are legitimate business reasons relevant to the ‘purpose’ element or to the ‘take advantage’ element of s 46? It is a matter of record that in the 12 year period between the final decisions in Queensland Wire and Melway, s 46 judgments treated legitimate business reasons as going to ‘purpose’ rather than anything else.[104] However, the clear implication of the High Court’s ruling in Melway is that the notion of legitimate conduct applies to the ‘take advantage’ element of s 46 just as much as it does to the ‘purpose’ element of that provision.[105]

In the author’s view, neither the ‘take advantage’ element nor the ‘purpose’ element has exclusive claim to the ameliorating effect of legitimate business reasons. Thus, depending on the circumstances, a corporation may seek to justify its conduct under either or both elements.[106] ACCC v Universal Music Australia Pty Ltd[107] exemplifies this new approach. There, where the allegation against the respondent company was that it had threatened to withdraw supplies from retailers who stocked parallel imports of its products, Universal sought to show that its conduct was guided by the legitimate business justification of preventing ‘free-riding’.[108] Hill J indicated his willingness to consider this ‘business rationale’ in relation to both the ‘take advantage’ and the ‘purpose’ element of s 46,[109] but did not proceed to do so on finding that there was no evidence to support the claimed rationale.[110]

However, the author further submits that since the ‘take advantage’ and ‘purpose’ elements of s 46 raise different inquiries, legitimate business reasons proffered in connection with the ‘take advantage’ element should be based on ‘efficiency’ arguments, while a broader range of justifications (somewhat difficult to classify, but most conveniently described as ‘quality control/consumer welfare’ and/or ‘reputation/bottom-line’ considerations)[111] are potentially relevant to the ‘purpose’ element. On this basis, the business justification put forward in the Universal Music case,[112] for example, should have been considered only in connection with the ‘purpose’ element of s 46.

Third, are legitimate business reasons only arguable in cases where a corporation with substantial market power has refused to supply? Certainly, both Queensland Wire and Melway concerned that type of conduct. Nevertheless, the author submits that legitimate business reasons are potentially germane whenever a contravention of s 46 is alleged, and should not be confined to refusal to supply cases. This view is borne out by the recent Boral case. There, where the conduct at issue was predatory pricing, the High Court again noted the relevance of a corporation’s legitimate business rationale in establishing that there had been no misuse of market power.[113]

B Legitimate business purpose, not a proscribed purpose

As mentioned previously, it is in seeking to refute the finding of an anti-competitive purpose under s 46 that a corporation typically offers a legitimate business explanation for its conduct.[114] Thus, in Queensland Wire, Mason CJ and Wilson J held that their conclusion that ‘the effective refusal to sell was for an impermissible purpose was supported by the fact that BHP did not offer a legitimate reason for the effective refusal to sell.’[115] No doubt their Honours were cognisant of the wide range of legitimate purposes that may motivate a refusal to deal.[116] Past unsatisfactory dealings with a customer, a customer’s poor credit record, a lack of confidence in a customer’s business ethics, a customer’s inability to maintain accurate records or propensity to engage in deceptive advertising or unfair practices, concerns about the quality of a customer’s after-sales service or other matters affecting the commercial reputation of the supplier, are all factors which may impact upon the decision.[117]

In Australasian Performing Rights Association v Ceridale Pty Ltd,[118] it was accepted that APRA’s real purpose in refusing to grant a licence to Ceridale was to prevent the unauthorised use of its material and to maintain the integrity of its licensing system.[119] In a similar vein, a supplier’s genuine interest in maintaining and enhancing the prestige of its products was identified in Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd[120] as a potentially legitimate business reason justifying a refusal to deal.[121]

In John S Hayes & Associates Pty Ltd v Kimberley-Clark Australia Pty Ltd,[122] it was held that the respondent’s termination of the applicant’s distributorship agreement was not conduct which involved the respondent ‘taking advantage of its market power for a purpose of the kind referred to in s 46’.[123] Although no express reasons were given for the decision, presumably it was due to the applicant’s persistent breaches of the terms of the agreement.[124] Unsatisfactory performance by the applicant was specifically recognised in Top Performance Motors Pty Ltd v Ira Berk (Qld) Pty Ltd,[125] J Ah Toy Pty Ltd v Thiess Toyota Pty Ltd [126] and Regents Pty Ltd v Subaru (Aust) Pty Ltd[127] as providing sufficient justification for the respondent’s termination of its dealership agreement with the applicant.[128] Similarly, in Petty v Penfold Wines Pty Ltd,[129] it was accepted that the respondent’s refusal to supply was reasonably based on the applicant’s poor payment history and was not motivated by the applicant’s practice of excessive price discounting.[130]

More recently, in Stirling Harbour Services Pty Ltd v Bunbury Port Authority,[131] BPA’s proposal to grant an exclusive licence for towing services in the Port of Bunbury for five years was held by French J to be an exercise of regulatory power and not market power.[132] Nevertheless, had it been necessary to consider s 46 further, his Honour would have decided that BPA was not acting with one of the proscribed purposes in s 46(1), but was endeavouring to encourage a range of competitive responses from tenderers who would otherwise be reluctant to enter the market.[133]

Similar reasoning is evident in ACCC v Australian Safeway Stores Pty Ltd.[134] There, the ACCC alleged that Safeway had misused its market power in nine separate incidents by refusing to deal with wholesale bakers who had supplied bread to independent grocers at prices which enabled those grocers to sell bread for less than Safeway. In dismissing each of the s 46 claims at first instance, Goldberg J agreed with the respondent that the purpose of its ‘bread policy’ was to ensure that it remained competitive on the price of bread, rather than to punish bakers and prevent or deter competition.[135] In reaching this conclusion, his Honour relied heavily on evidence that Safeway usually sought, before refusing to stock the products of a particular wholesale baker, a ‘case deal’ from that baker allowing it to sell bread at prices which competed with those of the independent grocers.[136] On appeal, a majority of the Full Federal Court affirmed Goldberg J’s decision in respect of five of the nine incidents in which Safeway had sought a case deal from the wholesaler concerned.[137] However, in the other four incidents, where a case deal had not been requested, the majority found that Safeway had contravened s 46.[138]

Some commentators claim that it cannot be said that the mere existence of an explanation consistent with a legitimate commercial purpose establishes that the conduct was actually engaged in for that purpose.[139] The response to this is simply to issue a reminder that the ‘purpose’ element of s 46 requires an objective test.[140] If business reasons are advanced by the respondent corporation to explain the motivation for its conduct, the court must determine, objectively, whether such reasons are valid, or ‘legitimate’, in the circumstances of the case.[141] However, even if the reasons are accepted as valid,[142] it will always be impossible to know whether the corporation has succeeded in masking a hidden or secret anti-competitive purpose. On the other hand, an objective test means that proffered business reasons will not be upheld merely because the corporation’s conduct was motivated, subjectively, by such reasons.

C Legitimate business conduct, not taking advantage of market power

Current willingness to consider legitimate business reasons in connection with the ‘take advantage’ element of s 46, in addition to the ‘purpose’ element, owes much to Heerey J’s dissenting judgment in Melway in the Full Federal Court.[143] There, his Honour said:

... the existence of a legitimate business reason which would explain the impugned conduct irrespective of the degree of market power necessarily points against a conclusion that such conduct in fact involved taking advantage of that power.[144]

In the course of his judgment, Heerey J closely examined Melway’s business rationale for adopting its segmented distribution system, concluding that system constituted ‘a reasonable commercial regulation ... in order to maximise sales of its directories’.[145]

In the High Court, the majority justices did not expressly embrace a business rationale approach. Nevertheless, it is apparent that their Honours were concerned to understand ‘what options were available to Melway in terms of a distribution strategy and ... the rationale for adopting the chosen strategy.’[146] The majority observed that there was no legal obligation on Melway to have any wholesale distribution system at all; if Melway had chosen to do so, it could have supplied retailers directly itself, or it could have supplied the retail market through a single wholesale distributor.[147] Their Honours also accepted that the appointment of exclusive distributors in respect of particular segments of the market for Melbourne street directories enabled Melway to maximise sales of its street directories.[148]

Given this ‘rational business explanation’ for Melway’s wholesale distribution system, it was logical for the High Court majority to infer that the company would have adopted the same system in a competitive market as well.[149] In other words, since Melway’s adoption of the distribution system did not depend on its dominant position, it could not be said that the company had taken advantage of its market power. The clear implication of the High Court’s reasoning in Melway is that in assessing whether a corporation’s conduct amounts to a taking advantage of its market power, it is helpful to consider whether a legitimate business rationale objectively justifies the conduct.[150]

As with the ‘purpose’ element of s 46, the relevant test here is again an objective one, but pertaining this time to efficiency considerations.[151] Thus, even if the corporation genuinely believes in its reason, the court must assess whether, objectively, that reason represents a valid efficiency (that is, cost-minimising/profit-maximising)[152] argument, on the basis of economic theory and/or ‘best’ business practice.[153] If the efficiency explanation is found to be valid,[154] then it is reasonable for the court to infer that the corporation would have engaged in the same conduct without market power, and, therefore, that the corporation has not taken advantage of its market power.[155] Obviously, the converse applies as well.

The decision in General Newspapers Pty Ltd v Telstra Corp[156] provides an early example of this line of reasoning. The appellant in that case operated a printing business and approached the respondent to express interest in printing the respondent’s telephone directories. After telling the appellant it had been placed on a tender list, but never calling for tenders, the respondent awarded contracts for the printing of its White and Yellow Pages to its two existing printers. These contracts included clauses requiring that the relevant printing equipment not be used for other work, except in limited circumstances and with the respondent’s approval. In dismissing the appellant’s allegation that the terms of the contracts disclosed a misuse by the respondent of its market power, the Full Federal Court held that the ‘dedication clauses’ were justified by reference to a legitimate commercial explanation.[157] Specifically, Davies and Einfeld JJ accepted the respondent’s evidence that ‘dedicated’ printing equipment was necessary for the efficient printing of the telephone directories given time, scale and configuration considerations.[158]

In ACCC v Boral Ltd,[159] Heerey J, as the trial judge, followed the approach he had advocated in Melway in the Full Federal Court. This time the allegation was that Boral Besser Masonry Ltd (BBM) had misused its market power by engaging in predatory pricing.[160] Once again, Heerey J closely examined the corporation’s business reasons for its conduct as part of the ‘take advantage’ element of s 46. His Honour said:

If the impugned conduct has a business rationale, that is a factor pointing against any finding that the conduct constitutes a taking advantage of market power. If a firm with no substantial degree of market power would engage in certain conduct as a matter of commercial judgment, it would ordinarily follow that a firm with market power which engages in the same conduct is not taking advantage of its power.[161]

Heerey J concluded that the threshold requirement for the application of s 46 was not satisfied in this case, as BBM did not have a substantial degree of market power in Melbourne’s concrete masonry products market.[162] However, even if BBM had possessed market power, his Honour would have found that the respondent had not taken advantage of that power because, in the circumstances of the case, its conduct in pricing below variable cost represented a ‘rational’ business decision.[163]

The Full Federal Court disagreed with Heerey J on both issues,[164] but on further appeal, the High Court effectively reinstated the decision of the trial judge. Six of the seven members of the High Court upheld Heerey J’s conclusion that BBM lacked market power,[165] thereby disposing of the possibility of any s 46 contravention on the company’s part. Nevertheless, hypothesising that BBM had possessed market power, these justices also expressed agreement with Heerey J as to the importance of a legitimate business rationale in deciding whether the company had taken advantage of such power. Gleeson CJ and Callinan J observed that the reasoning of Heerey J on the question of taking advantage of market power was correct,[166] quoting his Honour’s opinion at first instance that BBM’s conduct was based on ‘sound business reasons’;[167] Gaudron, Gummow and Hayne JJ cited with approval the passage quoted above from Heerey J’s judgment at trial;[168] and McHugh J accepted that the ‘commercial reasons’[169] for BBM’s conduct would have been a relevant factor in determining whether the company had taken advantage of market power.[170] By these obiter comments, the High Court has confirmed the relevance of legitimate business reasons in mitigating against a finding that a corporation’s conduct constitutes a taking advantage of its market power, while simultaneously accepting that such reasons extend beyond the domain of refusal to supply cases.

IV CONCLUSION

The concept ‘misuse of market power’ represents the combined effect, legally and economically, of the elements of s 46.[171] Under the statute, the corporation must first possess market power; second, because of this market power, it must act in a way in which it would not be likely to act under competitive conditions; and, third, its conduct must be directed towards achieving one of the proscribed anti-competitive purposes. Impinging on the second and third elements is the additional factor, distilled from s 46 jurisprudence, that the corporation’s conduct is not excused by legitimate business reasons.

Not surprisingly, in the years since the High Court’s decision in Queensland Wire, actions brought under s 46 have met with limited success.[172] Repeatedly, this has been due to firms advancing various legitimate business reasons in justification of their conduct.[173]

Although such reasons have been offered mainly in connection with the ‘purpose’ element of s 46, they are regarded, post-Melway, as being equally relevant to the ‘take advantage’ element of the provision. Of course, there is no obligation on the respondent corporation to advance a legitimate business justification in respect of either element.[174] However, since the answer to the question whether the respondent’s conduct constitutes a breach of s 46 is likely to turn on whether the conduct is justified, it is most advisable for the respondent to do so.[175] To briefly summarise:

In respect of the ‘purpose’ element (assuming market power and a taking advantage of that power): if the conduct of the respondent corporation has a legitimate business justification (drawn from the ‘quality control/consumer welfare’ and/or ‘reputation/bottom-line’ categories), it is reasonable to conclude that the conduct was not motivated by one of the anti-competitive purposes in s 46(1) and, therefore, that there is no breach of s 46.
In respect of the ‘take advantage’ element (assuming market power, but irrespective of the existence of a proscribed purpose): if the respondent’s conduct has a legitimate business rationale (which must be efficiency-based), it is reasonable to infer that the conduct does not constitute a taking advantage of market power and, therefore, that there is no contravention of s 46.

In light of the discussion in this article, there can be little doubt that a breach of s 46 remains ‘always ... difficult to prove’.[176] However, this outcome should be welcomed as a manifestation of judicial concern to distinguish between a powerful corporation ‘misusing’ its market power and engaging in ‘legitimate’ commercial conduct.


[*] Lecturer in Law, University of Queensland.

[1] All references in this article to ‘s 46’ are to s 46 of the Trade Practices Act.

[2] Trade Practices Act Review Committee, Review of the Competition Provisions of the Trade Practices Act (Commonwealth of Australia, report dated 31 January 2003, released 16 April 2003) Recommendation 3.1.

[3] The elements should be appraised sequentially. If the first element is not satisfied, there is no need to examine the other two. Likewise, if the first element is satisfied, but the second not, it is unnecessary to consider the third. Of course, a hypothetical assessment of any element is always permissible.

[4] These purposes are: (a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market; (b) preventing the entry of a person into that or any other market; or (c) deterring or preventing a person from engaging in competitive conduct in that or any other market.

[5] [1989] HCA 6; (1989) 167 CLR 177. The Full Federal Court’s decision is Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1988] ATPR 40-841; and the Federal Court’s is Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1987] ATPR 40-810. (Hereinafter, ‘Queensland Wire’.)

[6] [2001] ATPR 41-805. The Full Federal Court’s decision is Melway Publishing Pty Ltd v Robert Hicks Pty Ltd [1999] FCA 664; [1999] ATPR 41-693; and the Federal Court’s is Robert Hicks Pty Ltd v Melway Publishing Pty Ltd [1999] ATPR 41-668. (Hereinafter, ‘Melway’.) Note that Robert Hicks Pty Ltd traded as Auto Fashions Australia.

[7] [2003] HCA 10; [2003] ATPR 41-915. The Full Federal Court’s decision is ACCC v Boral Ltd [2001] ATPR 41-803; and the Federal Court’s is ACCC v Boral Ltd [1999] FCA 1318; [1999] ATPR 41-715. (Hereinafter, ‘Boral’.)

[8] The appellant’s successful appeal turned on the finding, by 6 of the 7 High Court justices, that the company did not have a substantial degree of market power in Melbourne’s concrete masonry products market: [2003] HCA 10; [2003] ATPR 41-915, 46,686 (Gleeson CJ and Callinan J); 46,695 (Gaudron, Gummow and Hayne JJ); 46,717 (McHugh J); Kirby J dissenting.

[9] In effect, the article presumes that the threshold requirement to the operation of s 46, that a corporation must possess ‘a substantial degree of power in a market’, has been satisfied.

[10] Boral sustains this theme, although, strictly speaking, it was unnecessary for the High Court to proceed beyond the ‘market power’ element of s 46 in that case. See the discussion of Boral in Part III(C) of the article.

[11] Daniel Clough, ‘Misuse of Market Power – “Would” or “Could” in a Competitive Market?’ (2001) 29 Australian Business Law Review 311, 312.

[12] See Michael O’Bryan, ‘Section 46: Law or Economics?’ (1993) 1 Competition & Consumer Law Journal 64, 64 (‘unpredictable outcomes’); Kathryn McMahon, ‘Refusals to Supply by Corporations with Substantial Market Power’ (1994) 22 Australian Business Law Review 7, 19 (no ‘coherent framework’); Weeliem Seah, ‘Fair Competition or Unfair Predation: Identifying the Misuse of Market Power under Section 46(2001) 9 Trade Practices Law Journal 236, 267 (‘practical difficulties’); Warren Pengilley, ‘Misuse of Market Power: The Unbearable Uncertainties Facing Australian Management’ (2000) 8 Trade Practices Law Journal 56, 56 (it is ‘impossible ... to make managerial decisions in certain conformity with the law’); and David Meltz, ‘“Market Entry – See Adjoining Map”: Melway and the Right Not To Supply’ (2002) 10 Trade Practices Law Journal 96, 109 (‘the hoped for clarity ... has not transpired’). Pengilly has even gone so far as to nominate Queensland Wire as one of Australia’s ten worst trade practices decisions: Warren Pengilley, ‘The Ten Most Disastrous Decisions made Relating to the Trade Practices Act(2002) 30 Australian Business Law Review 331, 339. Cf Sandra Welsman, ‘In Queensland Wire, The High Court has Provided an Elegant Backstop to “Use” of Market Power’ (1995) 2 Competition & Consumer Law Journal 280, 312 (there are ‘evidence outcome “certainties”’); and Rhonda Smith and David Round, ‘The Puberty Blues of Competition Analysis: Section 46(2001) 9 Competition & Consumer Law Journal 189, 192 (firms ‘do have certainty given the legal framework and existing precedent’).

[13] The author expressed a similar view, pre-Melway, in Brenda Marshall, ‘Refusals to Supply under Section 46 of the Trade Practices Act: Misuse of Market Power or Legitimate Business Conduct?’ (1996) 8 Bond Law Review 182.

[14] BHP was found to have contravened s 46 in this case.

[15] Here, there was no contravention of s 46 by Melway.

[16] This term is not used in s 46 itself, but is found in the marginal note to the section.

[17] Y-bar is used to produce star picket posts by cutting the Y-shaped steel into fence post lengths and drilling holes through which wire will pass. Star picket fencing is the most popular form of rural fencing in Australia.

[18] The High Court’s decision in Queensland Wire [1989] HCA 6; (1989) 167 CLR 177 confirms that supply on unreasonable or restrictive terms amounts to constructive refusal to supply. According to Mason CJ and Wilson J (185), the offer by BHP was at ‘an excessively high price relative to other BHP products’; Deane J (197) described it as an ‘unrealistically high’ price; and Toohey J (204) identified a refusal to supply at a ‘competitive’ price.

[19] [1987] ATPR 40-810, 48,819.

[20] Ibid.

[21] Queensland Wire [1989] HCA 6; (1989) 167 CLR 177, 191(Mason CJ and Wilson J); 194 (Deane J); 202 (Dawson J); and 213 (Toohey J). This point was expressly confirmed by the High Court in Melway [2001] ATPR 41-805, 42,754 (Gleeson CJ, Gummow, Hayne and Callinan JJ).

[22] Queensland Wire [1989] HCA 6; (1989) 167 CLR 177, 192 (Mason CJ and Wilson J); 197-198 (Deane J), 202-203 (Dawson J); and 216 (Toohey J).

[23] Ibid.

[24] Queensland Wire [1989] HCA 6; (1989) 167 CLR 177, 192 (emphasis added). Similar views were expressed by Dawson J (202) and Toohey J (216).

[25] Ibid 192 (Mason CJ and Wilson J); 197-198 (Deane J); 202-203 (Dawson J); and 216 (Toohey J).

[26] Section 46(4)(a) provides that the reference to ‘power’ in s 46(1) is a reference to market power. Thus, the power taken advantage of by the respondent corporation must in fact be market power.

[27] [1992] FCA 511; [1992] ATPR 41-196, where French J held that there was no evidence of a use of ‘market power’ (40,644).

[28] Ibid (emphasis added). French J’s approach in Natwest was expressly applied by Wilcox J in General Newspapers Pty Ltd v Australian and Overseas Telecommunications Corp Ltd [1993] ATPR 41-215, 40,956 to conclude that, even without substantial market power, the respondent company would have acted in the same way. For similar reasoning, see, more recently: Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia [2001] FCA 1056; [2001] ATPR (Digest) 46-212; Rural Press Ltd v ACCC [2002] FCAFC 213; [2002] ATPR 41-883; and ACCC v Australian Safeway Stores Pty Ltd (No 2) [2001] FCA 1861; [2002] ATPR (Digest) 46-215.

[29] Kirby J dissented.

[30] [2001] ATPR 41-805, 42,757 (emphasis added).

[31] The majority did not disturb the finding of the trial judge, Merkel J, that the refusal to supply the respondent was for a prohibited purpose, namely, to deter or prevent competition at the wholesale level, but warned of the danger of proceeding ‘too quickly from a finding about proscribed purpose to a conclusion about taking advantage’: ibid 42,755.

[32] Ibid 42,758. In dissent, Kirby J maintained that Queensland Wire stood for the proposition that to ‘take advantage’ of market power for a proscribed purpose, a corporation must simply ‘use’ that power (eg, by refusing supply) for a prohibited reason, and that it ‘was unnecessary to pose hypothetical questions (sometimes difficult to resolve) as to whether such corporation could or would, acting rationally, have engaged in the forbidden conduct if it were subject to effective competition’: ibid 42,769. With respect, Kirby J’s view is directly contrary to the competitive market test espoused by the High Court in Queensland Wire.

[33] Prompted perhaps by Pengilley’s criticism of using a perfectly competitive market as the benchmark for comparison: Warren Pengilley, ‘Misuse of Market Power: Present Difficulties – Future Problems’ (1994) 2 Trade Practices Law Journal 27, 41; and Pengilley, above n 12, 60. Featherston and Edwards share the view that it should not be incumbent on firms with market power to behave as if they were constrained by forces that operate in a perfectly competitive market: Roger Featherston and Geoff Edwards, ‘Recent Developments in Misuse of Market Power’ (2000) 8 Trade Practice Law Journal 79, 90.

[34] [2001] ATPR 41-805, 42,758.

[35] Ibid.

[36] Ibid 42,759. Steinwall describes this as a ‘qualification’ to the competitive market test: Ray Steinwall, ‘Melway and Monopolisation – Some Observations on the High Court’s Decision’ (2001) 9 Competition & Consumer Law Journal 93, 98.

[37] [2001] ATPR 41-805, 42,759. The point is that a competitive market may just as easily support exclusive distribution arrangements of the kind that Melway had in place as direct sales to retailers.

[38] [2001] ATPR 41-805, 42,760.

[39] Ibid. Note that here their Honours are asking the ‘corollary’ question under the competitive market test.

[40] Ibid, citing with approval Heerey J’s dissenting judgment in Melway in the Full Federal Court.

[41] Ibid 42,761 (emphasis in original).

[42] Ibid (emphasis added).

[43] See also Seah, above n 12, 243; and Steinwall, above n 36, 100.

[44] [2001] ATPR 41-805, 42,758 (emphasis added).

[45] See also Stephen Corones, ‘The Characterisation of Conduct under Section 46 of the Trade Practices Act(2002) 30 Australian Business Law Review 409, 420.

[46] Ibid.

[47] For background discussion, see Larelle Law and Brenda Marshall, ‘Misuse of Market Power: The Degree of “Causal Connection” Required under Australian and European Law’ (1997) 3 International Trade and Business Law Annual 197.

[48] In discussing these judgments, it is not suggested that the conclusion in respect of the ‘take advantage’ element is ‘wrong’ in every instance, merely that the underlying process of reasoning is flawed.

[49] See also Michael O’Bryan, ‘Section 46: Legal and Economic Principles and Reasoning in Melway and Boral’ (2001) 8 Competition & Consumer Law Journal 203, 211.

[50] See also Meltz, above n 12, 109.

[51] See also O’Bryan , above n 49, 212.

[52] Although Pincus J at first instance in Queensland Wire [1987] ATPR 40-810, 48,818-48,819 had also said, ‘I cannot (with respect) accept that characterising the acts complained of as merely an exercise of legal rights, whether contractual or otherwise, can be an answer to a claim based on s 46.

[53] [1989] HCA 6; (1989) 167 CLR 177, 202.

[54] [1975] ATPR 40-004.

[55] [1986] ATPR 40-714.

[56] [1987] ATPR 40-781.

[57] Noting that, prior to 1986, s 46 required a corporation to be in a position ‘substantially to control a market’.

[58] [1975] ATPR 40-004, 17,115. Smithers and Hely JJ concurred in separate judgments.

[59] [1986] ATPR 40-714, 47,827.

[60] [1987] ATPR 40-781, 48,525. Confirmed by the Full Federal Court on appeal: Williams v Papersave Pty Ltd [1987] ATPR 40-818.

[61] [1990] ATPR 41-042.

[62] Ibid 52,129 (Wilcox, Spender and Pincus JJ).

[63] [1994] FCA 1096; [1994] ATPR 41-318.

[64] Ibid 42,236. Although, subsequently, in Helicruise Air Services Pty Ltd v Rotorway Australia Pty Ltd [1996] ATPR 41-510, 42,399, Hill J described the question of whether the exercise of a contractual right could constitute a contravention of s 46 as an ‘open one’.

[65] [1992] FCA 35; [1992] ATPR 41-165.

[66] Ibid 40,276.

[67] Ibid 40,277.

[68] Ibid 40,278. In criticising Lockhart J’s reasoning in this case, Pengilley has said, ‘If this is the trend of the law, it seems as if access to facilities owned by others will rarely be ordered in Australia ... In respect of the denial of access by the owner of the facility, the owner’s argument is always that he is merely exploiting what he owns’: Warren Pengilley, ‘Denying a Competitor Access to Facilities’ (1992) 8 Australian & New Zealand Trade Practices Law Bulletin 11, 14. For similar criticism, see Peter Prince, ‘Queensland Wire and Efficiency – What Can Australia Learn from US and New Zealand Refusal to Deal Cases?’ (1998) 5 Competition & Consumer Law Journal 237, 251.

[69] [2002] FCAFC 302; [2003] ATPR 41-909, 46,549. The respondent in this case, PAWA, was a statutory authority established as a body corporate by the Power and Water Authority Act 1987 (NT).

[70] [2002] FCAFC 302; [2003] ATPR 41-909, 46,549 (Lee J); and 46,562 (Branson J); Finkelstein J dissenting. The case turned on the interpretation of s 2B of the Trade Practices Act, which states that the provisions of Part IV of the Act (including s 46) bind the Crown ‘so far as the Crown carries on a business’.

[71] [2002] FCAFC 302; [2003] ATPR 41-909, 46,549.

[72] Ibid 46,566 (Branson J); and 46,586 (Finkelstein J).

[73] Ibid.

[74] Ibid 46,582.

[75] [2002] FCAFC 302; [2003] ATPR 41-909, 46,582 (Finkelstein J). See also the judgment of Branson J: ibid 46,566.

[76] [1997] ATPR 41-589.

[77] [2000] FCA 38; [2000] ATPR 41-752.

[78] [1997] ATPR 41-589, 44,132.

[79] Ibid.

[80] [2000] FCA 38; [2000] ATPR 41-752, 40,734.

[81] Ibid 40,699.

[82] Ibid 40,734. Confirmed by the Full Federal Court on appeal: Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 1381; [2000] ATPR 41-783.

[83] [2001] ATPR 41-805, 42,761.

[84] See also O’Bryan, above n 49, 209.

[85] In fact, a proscribed purpose need only be one of the purposes motivating the respondent corporation, provided it is a ‘substantial’ purpose: s 4F of the Trade Practices Act.

[86] [1989] HCA 6; (1989) 167 CLR 177, 191.

[87] McMahon ,above n 12, 18.

[88] Ibid. Cf Alexiadis’ claim that conduct fulfilling the requirements of s 46(1)(a), (b) or (c) cannot be anything but predatory: Peter Alexiadis, ‘Refusal to Deal and Misuse of Market Power under Australia’s Competition Law’ (1989) 10 European Competition Law Review 436, 452.

[89] Clarke and Corones maintain that the immediate effect of s 46 is ‘to protect individual (and in practice, small) firms from the predatory conduct of large firms, rather than to protect competition as such’: Philip Clarke and Stephen Corones, Competition Law & Policy: Cases and Materials (1st edition, 1999) 110.

[90] [1989] HCA 6; (1989) 167 CLR 177, 191 (emphasis added).

[91] See also Vijaya Nagarajan, ‘The Regulation of Competition by Section 46 of the Trade Practices Act(1993) 1 Competition & Consumer Law Journal 127, 128.

[92] [1989] HCA 6; (1989) 167 CLR 177, 194. Dawson J (198) noted his general agreement with the judgment of Deane J.

[93] Ibid 213.

[94] [2001] ATPR 41-805, 42,752 (Gleeson CJ, Gummow, Hayne and Callinan JJ).

[95] Emphasis added. The author adopts a macroeconomic perspective in interpreting s 2, equating the ‘welfare of Australians’ to ‘economic growth in Australia’. Competition is the means to this end, as economists widely agree that competition enhances efficiency, efficiency promotes productivity, and productivity drives the rate of economic growth: see, eg, Tony Makin, ‘Prioritising Policies for Prosperity’ (1999) 15 Policy 19, 20; and Dean Parham, ‘A More Productive Australian Economy’ (2000) 7 Agenda 3, 13.

[96] ASX Operations Pty Ltd v Pont Data Australia Pty Ltd [1991] ATPR 41-069, 52,222.

[97] General Newspapers Pty Ltd v Telstra Corp [1993] FCA 473; [1993] ATPR 41-274, 41,697.

[98] Pursuant to s 46(7) of the Trade Practices Act, the existence of a purpose proscribed by s 46(1) may be inferred from the conduct of the respondent corporation.

[99] Donald Robertson, ‘The Primacy of “Purpose” in Competition Law – Part 1(2001) 9 Competition & Consumer Law Journal 101, 121-122 (emphasis in original).

[100] [1995] ATPR 41-372.

[101] Ibid 40,123.

[102] This view reflects the ‘business justification’ defence available in the United States and European Union. See, eg, United States v Aluminum Co of America 148 F 2d 416 (1945); and Commercial Solvents Corp v Commission of the European Communities [1974] 1 CMLR 309.

[103] See, eg, Welsman, above n 12, 312-313 (‘if a legitimate reason substantially explains the conduct, then an entity is not misusing its substantial market power); Prince, above n 68, 243 (‘the key factor ... [is] whether the corporation’s actions were for a legitimate business purpose’); Peter Shafron, ‘QWI v BHP: A Flash in the Section 46 Pan?’ (1998) 72 Australian Law Journal 53, 60 (‘the focus is ... on the reasons behind the refusal to supply’); Christopher Hodgekiss, ‘Section 46 – Some Recent Developments’, Paper presented at Competition Law and Regulation Symposium, University of New South Wales, Sydney, 24-25 August 2000, 1 (‘the answer ... revolves around the reasons for the refusal to supply’); Seah, above n 12, 256-257 (‘the existence or otherwise of a legitimate commercial justification for the conduct under scrutiny, is highly probative’); and Warren Pengilley, ‘Misuse of Market Power: Australia Post, Melway and Boral (2002) 9 Competition & Consumer Law Journal 201, 225 (‘the business purpose or reason for which conduct in engaged in is highly relevant’).

[104] As Clough has similarly observed, in the post-Queensland Wire cases, ‘the focus has been on addressing the legitimacy of the conduct under the purpose test’: above n 11, 319.

[105] See also Meltz, above n 12, 109.

[106] Cf Corones’ preference for a corporation’s business rationale to be considered as part of the ‘take advantage’ element of s 46: above n 45, 415. Cf also, Kirby J’s remarks in dissent in Melway that it is in identifying the ‘purpose’ of the respondent corporation, ‘and not in characterising the acts as “tak[ing] advantage”, that the debates about proscribed, or permissible, conduct by a dominant market player arise’: [2001] ATPR 41-805, 42,768.

[107] [2002] ATPR 41-855.

[108] Universal’s argument was that in the ‘hit-driven’ music industry, large amounts of money are spent by record companies on the promotion of titles, only a few of which will actually become ‘hits’. Persons importing titles from overseas are more likely to import hit recordings than non-hit recordings, thereby ‘free-riding’ on the investment of the record companies: ibid 44,685.

[109] Ibid.

[110] Ibid.

[111] Cf Patrick Ahern, ‘Refusals to Deal after Aspen’ (1994) 63 Antitrust Law Journal 155, 173-182.

[112] Free-riding represents a loss on investment made, and reduces the incentive for further investment, with negative implications for a firm’s ‘bottom-line’.

[113] Boral is discussed in Part III(C) below.

[114] The objective will be achieved if the legitimate business reason substantially explains the corporation’s ostensibly anti-competitive conduct. As mentioned previously, pursuant to s 4F of the Trade Practices Act, it is sufficient to constitute a breach of s 46 if a proscribed purpose in s 46(1) was one among other purposes, so long as the proscribed purpose was a ‘substantial’ one. It follows, therefore, that if a corporation can establish that it was motivated substantially by some ‘legitimate’ purpose, there will be no contravention of s 46.

[115] [1989] HCA 6; (1989) 167 CLR 177, 193 (emphasis added).

[116] For discussion, see Stephen Corones, ‘The Proposed Amendments to Section 46 of the Trade Practices Act: Some Problems of Interpretation and Application’ (1985) 13 Australian Business Law Review 138, 149; McMahon, above n 12, 11-12; Welsman, above n 12, 303; and Meltz, above n 12, 104-108.

[117] Ibid. All these factors fall into the ‘quality control/consumer welfare’ and/or ‘reputation/bottom-line’ categories identified previously.

[118] [1990] ATPR 41-042.

[119] Ibid 52,129.

[120] [1987] ATPR 40-809, 48,800. Although, in this case, the respondent’s contention that it was refusing supply because the applicant’s conduct could bring the product into market disrepute was rejected on the facts.

[121] See also Berlaz Pty Ltd v Fine Leather Care Products Ltd [1991] ATPR 41-118.

[122] [1994] FCA 1096; [1994] ATPR 41-318.

[123] Ibid 42,236 (Hill J).

[124] Hodgekiss has said of this case that it ‘illustrates that so much depends upon whether the court is satisfied with the explanation as to the purposes of the respondent engaging in the particular conduct’: above n 103, 27.

[125] [1975] ATPR 40-004.

[126] [1980] ATPR 40-155.

[127] [1996] ATPR 41-463.

[128] Unsatisfactory performance was also the legitimate business reason relied on in Venning v Suburban Taxi Services Pty Ltd [1996] ATPR 41-468.

[129] [1993] FCA 427; [1993] ATPR 41-263.

[130] Ibid 41,553. Confirmed by the Full Federal Court on appeal: Petty v Penfold Wines Pty Ltd [1994] FCA 1095; [1994] ATPR 41-320. See also Natwest Australia Bank Ltd v Boral Gerrard Strapping Systems Pty Ltd [1992] FCA 511; [1992] ATPR 41-196, where the respondent’s legitimate business justification for refusing supply was to secure payment of a debt.

[131] [2000] FCA 38; [2000] ATPR 41-752.

[132] Ibid 40,734.

[133] Ibid. Confirmed by the Full Federal Court on appeal: Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 1381; [2000] ATPR 41-783.

[134] [2003] FCAFC 149; [2003] ATPR 41-935.

[135] ACCC v Australian Safeway Stores Pty Ltd (No 2) [2001] FCA 1861; [2002] ATPR (Digest) 46-215, 53,363.

[136] Ibid 53,346-53,347. Goldberg J’s judgment is discussed at length in John Carmichael, ‘Tip Top Result Goes Stale: ACCC v Australian Safeway Stores Pty Ltd (No 2)’ [2002] DeakinLawRw 19; (2002) 7 Deakin Law Review 387.

[137] [2003] FCAFC 149; [2003] ATPR 41-935, 47,034 (Heerey and Sackville JJ). Emmett J’s dissent was based on his Honour’s conclusion that Safeway lacked a substantial degree of power in the relevant market: ibid 47,064.

[138] Ibid 47,034-47,035.

[139] See, eg, Seah, above n 12, 257; and Tristan Gilbertson, ‘New Zealand’s Commerce Act Reforms: An Australian and International Perspective’ (2002) 10 Trade Practices Law Journal 150, 156, where it is contended that ‘anti-competitive purpose can easily be concealed by a strategically created trail of documents designed to show legitimate business reasons for conduct actually engaged in for an anti-competitive purpose.’

[140] Refer to Robertson’s comments on establishing ‘purpose’: see text accompanying n 99 above.

[141] Whether, in the particular circumstances, the conduct is a ‘normal’ response, or consistent with industry practice, would be a relevant consideration: see, further, Corones, above n 45, 417.

[142] Such as those explained in the text accompanying n 117 above.

[143] [1999] FCA 664; [1999] ATPR 41-693.

[144] Ibid 42,863 (emphasis added). Quoting from the judgment of the Court of Appeals (6th Cir) in Byars v Bluff City News 609 F 2d 843 (1979) 862, Heerey J also stated that ‘[a] finding of antitrust liability in a case of a refusal to deal should not be made without examining reasons which justify the refusal to deal’: ibid.

[145] [1999] FCA 664; [1999] ATPR 41-693, 42,863. Commenting on the Full Federal Court’s decision in Melway, Robertson said that, in contrast to Heerey J, the majority judges (Sundberg and Finkelstein JJ) failed to appreciate ‘the economic and commercial reasons for efficient distribution networks’: above n 99, 126. For further criticism of Melway in the lower courts, see Warren Pengilley, ‘Can an Entity with Substantial Market Power Change its Distributor?’ (1999) 14 Australian & New Zealand Trade Practices Law Bulletin 139.

[146] Corones, above n 45, 414.

[147] [2001] ATPR 41-805, 42,752.

[148] Ibid 42,753.

[149] Ibid 42,761. As O’Bryan points out, once the High Court accepted that Melway’s distribution system maximised its sales, it was ‘relatively straightforward to reach the conclusion that the corporation would be likely to engage in the same conduct in a competitive market’: above n 49, 229.

[150] See also Corones, above n 45, 417.

[151] In his dissenting judgment in Melway in the Full Federal Court, Heerey J reasoned that ‘the concept of taking advantage of market power has to be seen in terms of efficiency. If the conduct complained of would have been engaged in irrespective of degree of market power but rather to conduct the corporation’s business more efficiently, there will be no taking advantage of market power’: [1999] FCA 664; [1999] ATPR 41-693, 42,862 (emphasis added). His Honour credits Frances Hanks and Philip Williams, ‘Implications of the Decision of the High Court in Queensland Wire’ [1990] MelbULawRw 4; (1990) 17 Melbourne University Law Review 437, 445 with the genesis of this view. The paramountcy of efficiency arguments in assessing the ‘take advantage’ element of s 46 was also recognised, pre-Melway, in O’Bryan, above n 12, 84.

[152] This is productive efficiency.

[153] See Corones, above n 45, 419. According to Corones, the question to ask is, ‘Would a rational actor acting under competitive conditions engage in the same conduct?’: ibid.

[154] Eg, Edwards applies a transaction cost economics framework to the High Court’s decision in Melway [2001] ATPR 41-805 and concludes that ‘efficiency arguments ... support Melway’s desire to maintain its exclusive distribution system’: Geoff Edwards, ‘Melway – a TCE Perspective’ (2002) 10 Trade Practices Law Journal 77, 84. Edwards explains that in order ‘to encourage distributors to specialise and devote optimal effort to distributing the manufacturer’s product, it may be of benefit for the manufacturer to provide distributors with some protection from erosion of their geographic or customer segments by the activities of other distributors’: ibid 83. For similar ‘economic’ analysis of the Melway case, see Daniel Clough, ‘Law and Economics of Vertical Restraints in Australia’ (2001) 25 Melbourne University Law Review 20.

[155] Refer to O’Bryan’s comments above, n 147.

[156] [1993] FCA 473; [1993] ATPR 41-274.

[157] Ibid 41,701.

[158] Ibid 41,700.

[159] [1999] FCA 1318; [1999] ATPR 41-715.

[160] The ACCC instituted proceedings against BBM and its holding company, Boral Ltd. However, the trial judgment focuses on BBM, and the subsequent appeals were pressed only in relation to that company.

[161] [1999] FCA 1318; [1999] ATPR 41-715, 43,231.

[162] Ibid.

[163] Ibid 43,234. Even though, in his Honour’s view, BBM did have the proscribed purpose of driving at least one competitor out of the market: ibid 43,236. Corones has criticised Heerey J for not attempting to ‘weigh or rationalise the interplay between legitimate business reason and the proscribed purpose’: above n 45, 412. However, as mentioned previously, and reiterated now in Heerey J’s defence, the elements of s 46 require sequential analysis. Thus, having found that the ‘take advantage’ element was not satisfied, there strictly was no need for his Honour to consider the ‘purpose’ element at all.

[164] See ACCC v Boral Ltd [2001] ATPR 41-803.

[165] See above n 8.

[166] Boral Besser Masonry Ltd v ACCC [2003] HCA 10; [2003] ATPR 41-915, 46,687.

[167] Ibid 46,678.

[168] Ibid 46,691.

[169] Ibid 46,717.

[170] Ibid.

[171] See McMahon, above n 12, 28.

[172] Indeed, in the aftermath of Queensland Wire, Lee warned of the difficulty of establishing a contravention of s 46 in cases ‘where the hallmarks of sporadic and discriminatory conduct are absent, where there are no damaging admissions and where relevant witnesses are prepared to testify as to some legitimate commercial reason for their conduct’: Sandra Lee, ‘Queensland Wire Industries: A Breath of Fresh Air’ (1990) 18 Federal Law Review 212, 227.

[173] See, eg, the cases discussed in Part III of the article.

[174] See also Corones, above n 45, 419.

[175] As failure to give such evidence will entitle the court to assume that the evidence would not have helped the respondent corporation: TPC v Nicholas Enterprises Pty Ltd [1979] ATPR 40-126. Refer, eg, to the comments of Mason CJ and Wilson J in Queensland Wire: see text accompanying n 115 above.

[176] Alexiadis, above n 88, 467 (emphasis in original).


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