Exclusive Dealings PDF

Preview

Summary

Summary of Exclusive Dealings ...

Description

Week 7: SECTION 47: EXCLUSIVE DEALING

In this session we will discuss exclusive dealing, prohibited by section 47 of the CCA. We will also consider the differences between section 45 and section 47. Exclusive dealing is typically concerned with “vertical transactions” (transactions occurring between traders operating at different levels in the distribution chain). Section 47 of the CCA prohibits various forms of exclusive dealing. Broadly, it captures two types of anti-competitive vertical transactions: (1) the conditional supply (or acquisition) of goods or services (conditions may relate to the ability to re-supply, exclusivity, limits on ability to acquire from competitors etc) (2) refusing to supply for specified reasons (eg, because purchaser refuses to agree to a conditional supply). Exclusive dealings can cover the following forms of conduct: • • •

• •

supplying on terms that the purchaser will not purchase from a third party; supplying on terms that the purchaser will not resupply particular customers, or in particular locations; supplying on terms that the purchaser will also acquire other goods or services from the supplier (“full line forcing”) or giving discounts for also purchasing other goods or services (“bundling”); supplying on terms that the purchaser must acquire goods or services from third parties (“third line forcing”); supplying on the condition that a purchaser will acquire a minimum quantity of goods or services.

Most exclusive dealings require an anti-competitive purpose. However, “third line forcing” is a per se offence.1 S 47(10): most exclusive dealings will only be unlawful if there is an anticompetitive purpose and if it substantially lessens competition (substantially lessening competition test). Exclusive dealings are able to be authorised. So, we will also discuss the process for notifying or authorising certain kinds of exclusive dealings. Harper Review: recommends removing per se prohibition of third line forcing conduct Remove per se ban on third line forcing (recommendation 27) Reduce complexity by prohibiting two categories of vertical restriction concerning supply of goods and services (recommendation 28):

1 Third line forcing is a form of exclusive dealing involving the supply of goods or services on the condition that the purchaser buys goods or services from a particular third party, or a refusal to supply because the purchaser will not agree to that condition.





‘supplying goods or services to a person, or doing so at a particular price or with a particular discount, allowance, rebate or credit, subject to a condition imposed on the person that has t he purpose, or has or is likely to have the effect, of substantially lessening competition; and refusing to supply goods or services to a person, or at a particular price or with a particular di scount, allowance, rebate or credit, for the reason that the person has not agreed to a conditi on imposed on the person that has the purpose, or has or is likely to have the effect, of subst antially lessening competition.’

Reciprocal provisions to apply in relation to the acquisition of goods and services (Rationale: s 47 is difficult for a business person to read and understand and it does not address ev ery form of vertical restriction) ACCC examples Third line forcing:   

AVBC will offer franchise agreements on condition that proposed franchisees only buy their ingredients from XYZ Ltd Finance Corp Ltd will offer a discount on financial services products on condition consumers also buy an insurance product from Insurance Pty Ltd Petrol station owners provide a four cent per litre discount on the price of petrol on condition that customers spend more than $30 at Supermarket Ptd Ltd.

Other kinds of exclusive dealing: 

Beauty Product Limited is a company that produces skincare products. Company will only supply its skincare products to beauty salons on condition that the beauty salons will not acquire any other type of skincare products from other suppliers.

Outline of S 47 S 47(1): subject to this section, a corporation shall not, in trade or commerce, engage in the practice of exclusive dealing. ‘Exclusive dealing’ defined in s 47(2) – (9). Sections are qualified by s 47(10): with exception of third line forcing, prohibition only applies where the exclusive dealing has the effect or is likely to have the effect of substantially lessening competition. Elements of a section 47 claim:   

Conduct must be in trade or commerce Conduct falls within a ‘practise of exclusive dealing’ [s 47(2) – 47(9)] It must have the purpose or have, or be likely to have the effect of substantially lessening competition (except for third line forcing which is de facto prohibited)

Substantially lessening competition test: Identify relevant market then: Is there a purpose of substantially lessen competition?  Test to determine lessening of competition:  Whether the conduct has or has not already occurred:  If conduct has occurred: ‘but for’ test Dandy Power test.

If the conduct has not yet occurred, courts apply the future with and without test (Stirling Harbour test): consider the likely state of the future market, with and without the conduct and determine if there was anti competitive effect (nature of the market with the arrangement and the nature of the market without the arrangement). o Rural Press: the market does not have to be substantial for there to be competition and an effect of substantially lessening competition. The market became competitive after the substantial advertising by River News. o Seven News: markets included: AFL audience etc. The court tried to find the broadest market which was the retail pay TV market as Optus and Fox Sports provided this.  Court agreed with Trial J’s finding that there was no substantial lessening of competition.  As a general guide, the more exclusive the product and the more powerful the supplier, the more likely it is that the competition will be affected. 

Practise of exclusive dealing Restricting acquisition or supply of goods or services to competitors or class of persons: s 47(2) 



Cool & Sons Pty Ltd v O’Brien Glass Industries o O Brien’ was involved in the business of providing replacement windscreens for motor vehicles and it had 40% of the market share in NSW. Cool had a retail business in Wagga. O’Brien gave a discount of 45-50% to retailers on the condition that the majority of the windscreens they acquired would be from O’Brien. Cool thought that this was anti-competitive o Full Federal Court: s 47(2)(a) and (b): corporation engages in the practise of exclusive dealing if the corp supplies or offers to supply goods and services at a particular price o Relevant market: replacement windscreen in Wagga and a wholesale market focussed on Wagga o Court held that there was a purpose to coerce dealers into dealing with O’Brien and accordingly there was a purpose of substantially lessening competition which hindered the entry into that market of new market players. ACCC v Baxter Healthcare Pty Ltd (bundling of services) o Full Federal Court and appealed to High Court but appeal was based on Crown Immunity. o Baxter was a Australian subsidiary of a global medical produicts company which manufactured and produced medical machines, dialysis things and IV fluid. o ACCC claimed that Baxter had a substantial market power in a specifc region and attempted to bundle its services in that region. Baxter tried to bundle its products into contracts: there was a reqiorement that States and Territories specifically acquire strile fluids from Baxater and Dialysis fluids from Baxter and it made the prices of sterile fluids extremely high: if the States wanted one product, they had to purchase all of Baxter’s products o Held: Baxter’s conduct constituted exclusive dealing and it fell within s 47(2). o The majority of the Full Federal Court held that Baxter had contravened s 47; in particular, it had the purpose and effect of substantially lessening competition.

Full line forcing/tying also falls within s 47(2).

Customer restrictions: s 47 (2)(f)(i) and (3)(f)(i) (f) in the case where the corporation supplies or would supply goods or services, will not re-supply the goods or services to any person, or will not, or will not except to a limited extent, re-supply the goods or services: (i) to particular persons or classes of persons or to persons other than particular persons or classes of persons; or Territorial restrictions- s 47(2)(f)(ii), (3)(f)(ii)  (f)(ii) in particular places or classes of places or in places other than particular places or classes of places. Requirements agreement: descriptions of agreements where suppliers impose conditions that restricts a resellers’ ability to obtain goods/services from other suppliers. Suppliers refusal to deal: s 47(3): Universal Music Australia Pty Ltd v ACCC: On 30 July 1998, amendments to the Copyright Act 1968 (Cth) (‘the Copyright Act’) came into effect. They removed the previous prohibition on the importation of sound recordings without the consent of Australian copyright owners or licensees2. The effect of the amendments was that Australian wholesalers and retailers of compact disc recordings (‘CDs’), and other sound recordings, could thereafter acquire stock from other countries; but only provided the manufacture of that stock did not infringe copyright law in the source country and had been carried out with the consent of the copyright owner. [2] … retailers were no longer limited to purchasing CDs from Australian sources. [3] Two Australian distributors, PolyGram Pty Ltd (now Universal Music Australia Pty Ltd (‘Universal’)) and Warner Music Australia Pty Ltd (‘Warner’), ceased to supply certain retailers who imported CDs from overseas. They also made it known they might not supply other retailers who took that course. The Australian Competition and Consumer Commission (‘ACCC’) brought proceedings in this Court asserting the conduct of Universal and Warner contravened ss 45, 46 and 47 of the Trade Practices Act 1974 (Cth) (‘the Act’). [4] After a lengthy trial, Hill J found on 14 December 2001 that both distributors had contravened ss 46 and 47 of the Act. … Issue: what was the relevant market? Was it the Australian CD Market? ACCC could not clear the first hurdle of identifying the relevant market as the two record distributors did not have enough market share. Issue: whether Universal or Warner supplied or offered to supply goods (ie CDs) or services (ie aspects of its trading terms) on the condition that the acquirer would not acquire non-infringing copies of titles marketed by Universal or Warner as the case may be in Australia for resale from a competitor. Did their conduct substantially lessen or reduce competition in the relevant market? The purpose was to lessen acquisition of CDs from overseas suppliers.

2 Parallel importation restriction: music wholesalers cannot sell music stock from overseas without the consent of the copyright owner.

Third line forcing: s 47(6) and (7): There must be two contracts, and there must be a third party. There must also be some form of compulsion. Kam Nominees Pty Ltd v. Australian Guarantee Corporation Ltd (1994) 123 ALR 771. Woman selected a car and informed AGC but it refused funding of the car as Kam was not an accredited dealer. Argued by AGC: There was no third line forcing as there was no compulsion that the woman purchase her car from an accredited AGC dealer, only that AGC would not finance a purchase from an non-AGC accredited dealer. Held: there was compulsion as after AGC informed the woman of the limitations, she would have to purchase a car from an AGC accredited dealer in order to receive funding which constitutes a form of compulsion in ensuring that she purchased a car from an AGC accredited dealer. Castlemaine Tooheys Ltd v. Williams and Hodgson Transport Pty Ltd (1986) 162 CLR 395 Castlemaine Tooheys brewed beer in Brisbane. In North Queensland the appellant maintains regional depots at Rockhampton, Mackay, Townsville and Cairns. Retailers in the North Qld area had (subject to minor exceptions) a choice of two methods for acquiring CT's beer: 

take delivery from one of the regional depots; or



arrange for beer to be delivered to their premises from the brewery. If this method was chosen CT would engage the carrier and arrange transportation (this was arranged through CT's 'preferred carrier' (at the time, Queensland Railfast Express (QRX)). The buyer would be invoiced for a total price, although the invoice would list freight separately.

Subject to limited exceptions North Qld retailers were not permitted to take delivery directly from the brewery at Brisbane. The respondent (Williams) was a carrier who wished to carry CT's beer to North Qld. Williams claimed that CT's arrangements amounted to exclusive dealing contrary to s 47 of the Act. Williams argued that a retailer who bought beer to be delivered to its premises by QRX 'acquired' QRX's services because it received the benefit of those services. This was notwithstanding the absence of a contractual arrangement with QRX. Williams also argued that the services of QRX were 'forced' on the retailer because the commercial reality was that they had to accept the terms offered by CT. It was, therefore, argued that CT supplied beer 'on condition' that the retailer acquired services of QRX (third line forcing)

[there wasn’t two contracts, only one here] Held by the High Court: there was no third line forcing as there was no two separate contracts and the customer was a passive recipient of services. Section 47(6) applies only when there are two contracts or arrangements: “Here there is no contract or arrangement, whether direct or indirect, between a licensee who acquires delivered beer from the brewer and QRX pursuant to which the licensee acquires delivery services from QRX.” ACCC v Black & Whire Cabs Pty Ltd Authorisation and notification Exclusive dealing is a common commercial practise and firms can seek authorisation from ASIC for this sort of conduct or notify ACCC of this. Provided that there is an engagement with the process of authorisation and notification, the ACC may allow it if it is satisfied that the public benefit of such conduct outweighs the public detriment. Authorisation process can be quite lengthy and companies typically utilise the notification process instead. Third line forcing (is there a compulsion?) As it is a per se prohibition, there is no need to do a ‘substantially lessening competition’ test. But if the firm decides to apply to ACCC for authorisation or notify ACCC, it must justify that purpose which means utilising the lessening competition test and other ‘public benefit’ reasons. To notify the ACCC, the company must pay a fee and lodge a form describing the conduct and why it believes that it would be to the public benefit. The ACCC would then inform third parties and consider the public benefit test. Examples: TPC v. CSR (1991) ATPR 41-076. ACCC v Link Solutions Pty Ltd (No 3) [2012] FCA 348 Cool & Sons Pty Ltd v. O’Brien Glass Industries Ltd (1981) ATPR 40-220 (1983) 48 ALR 625 TPC v. Massey Ferguson (1983) ATPR 40-369 ACCC v Baxter Healthcare Pty Ltd [2005] FCA 581; BC200504213 – note appellate case [2006] FCAFC 128 only considered crown immunity issue *SWB Family Credit Union v. Parramatta Tourist Services Ltd (1980) 48 FLR 445 * Paul Dainty Corporation Pty Ltd v National Tennis Centre Trust (1990) 94 ALR 225 In Re Ku-ring-gai Co-operative Building Society (No. 12) Ltd and Anor. (1978) 36 FLR 134.

Questions

• • •

What are the different forms of exclusive dealing? What is the difference between notifying exclusive dealing conduct, and obtaining authorisation? What are the policy reasons for making third line forcing a per se offence? Are these reasons justified? Are there pro-competitive elements in typical third line forcing activities?...