Market power in the balance

The High Court steadies the Section 46 ship – refusals to deal not necessarily breaches of the Trade Practices Act.

In last month's Law Reporter in discussing the Boral case we noted that the High Court had in the Melway case (Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) ATPR 41-805) provided a very important restraint on the way in which section 46 of the Trade Practices Act was to be interpreted. The High Court decision will be seen by many as frustrating the aims of the Australian Competition and Consumer Commission which after Boral felt that section 46 of the TPA had been given a new lease of life. Indeed, in many respects, the High Court has considerably dented the possible use of section 46 especially in the context of a company arranging its own distribution network or affairs, and the way in which it conducts its business. This decision is perhaps the most important decision on section 46 that we have seen in the past 10 years and it is discussed in some detail. The facts are taken from the CCH case report. The appellant (Melway) was the publisher of a well known street directory for Melbourne and its metropolitan area. The respondent (Robert Hicks), a wholesaler of motor vehicle parts and accessories, sought unsuccessfully to obtain supplies of directories from Melway.

Robert Hicks had been Melway's wholesale distributor for the portion of the retail market served by suppliers of automotive parts. Melway developed a preference for another distributor and decided to appoint that company as is sole distributor in that sector of the retail market and terminate the appointment of Robert Hicks. Following the termination of its appointment, Robert Hicks attempted to obtain supplies of street directories from Melway. It indicated that it would require 30,000-50,000 directories a year and that it expected to supply many of the retailers of automotive parts with whom it had previously dealt. In reply Melway advised that it did not propose to have any further dealings with Robert Hicks. In the trial at first instance, Merkel J (who was also one of the members of the appeal court in the Boral case) ruled that Melway would have been unlikely to have refused to supply Robert Hicks even if it had agreed not to compete with existing Melway distributors. The Full Court, in a majority decision (Finkelstein and Sundberg JJ, Heerey J dissenting), agreed with Merkel J that Melway did have market power, and that it had breached its market power by refusing to appoint Robert Hicks as a distributor.

In the High Court it was not disputed that Melway had a substantial degree of power in the relevant market – which was defined as the wholesale and retail market for street directories in Melbourne. This, by itself, was perhaps a surprising decision by the court. (The question of market will be a key in the Boral appeal). Nevertheless, on the basis of the market defined it was clear that Melway had between 80 and 90 percent of the retail market share for Melbourne street directories. For many years Melway had operated a system of distribution of its product which was based on a division of the retail market into a number of segments. A number of wholesale distributors were appointed – they were selected on the basis of various criteria – and they were assigned exclusively to defined territories. While it was common for retailers to compete, in relation to price, at the wholesale level there was little, if any, competition. The critical issue before the High Court was whether the refusal to supply Robert Hicks was a breach of section 46 of the TPA by virtue of Melway taking advantage of its market power for the purpose of preventing Robert Hicks from engaging in competitive conduct in the relevant market.

The High Court in a majority judgment (Gleeson CJ, Gummow, Hayne and Callinan JJ) held that the decisions of the two lower courts were wrong. This particular passage from the joint judgments is quite illuminating. "To describe the conduct of Melway simply as a refusal to supply [Robert Hicks] involves an element of oversimplification. Section 46 [of the TPA] aims to promote competition, not the private interests of particular persons or corporations. If Melway was otherwise entitled to maintain its distribution system without contravention of the [TPA] it is not the purpose of section 46 to dictate to Melway how to choose its distributors." (para 17) This, to the writer's point of view, was the clear point of this case. Melway had for a number of years arranged its distribution network to suit its particular needs and wishes. To require it to appoint any distributor who came along and said that it could provide additional sales, without there being any clear proof. That such additional sales would occur, would revolutionise section 46 of the TPA. It would potentially expose all companies which had market power and which wanted to organise their business affairs to the risk of a breach of section 46 if they did not provide all applicants for product with an opportunity to distribute those products. This would considerably undermine the confidence that had been built up by the particular company with its range of distributors over a period of time. To set up vertical distribution arrangements, in particular distribution arrangements which carry with them restraints on others being able to participate, is not a clear example of a misuse of market power. Indeed, the majority of the High Court indicated that when one had regard to the state of competition in the relevant market arrangements of this kind may actually be pro-competitive rather than anti-competitive.

The most critical aspect of the judgment, and one in respect of which the Boral case may actually fail at the High Court if leave to appeal is granted, is the critical linkage between the relevant elements of section 46. The majority of the High Court stated this had to be established before there was a breach of the TPA. After reviewing a number of decisions on section 46 and in particular the Queensland Wire decision (Queensland Wire Industries Pty Ltd v BHP Ltd decided in 1989 by the High Court) the majority of the High Court confirmed that in order to establish a breach of section 46 one had to show each of the following:

i) market power;

ii) the taking advantage of the market power; and

iii) an anti-competitive purpose.

In the court's view the process of reasoning by Merkel J, namely that the fact that Robert Hicks might have supplied an extra 50,000 copies of the Melway directories which might otherwise have been lost to Melway, was not an automatic assumption or conclusion. Indeed, Melway made a decision not to supply Robert Hicks because it would have been taking business away from its existing distributors. As the High Court noted, in a competitive market a manufacturer did not necessarily increase total sales by selling to everyone who sought wholesale supply. It was quite possible that the manufacturer would have taken into account the most effective way to ensure supply and this may have meant that only some persons who wished to be appointed would have been appointed. The High Court felt that the process of reasoning in the lower courts (with the exception of Heerey J) was wrong in reaching such a conclusion.

The result of this case is gratifying in many ways. In future there will be more emphasis at an examination of the market and how it works. What is clear from the decision, it would appear, is that the mere existence of what might appear on the surface to be exclusionary conduct – refusing to appoint or refusing to supply someone – does not necessarily infer the use of market power for an anti-competitive purpose. The conduct could well be explained by other rational reasons including the need to maintain an arrangement that the company had put in place for some time. Kirby J, who dissented, felt the decision of the majority would undermine the impact of section 46 and its ability to work as a pro-competition section in the TPA. His reasoning, which was supported by intervention on the part of the ACCC, would have meant that section 46 would have been far more interventionist and would have led to conclusions which many would have found considerably constraining. Many will see the decision as an extremely welcome one, clarifying the operation of section 46 of the TPA, but also showing that it will continue to have limited use without an effect test. Perhaps the next test will be the Boral case if leave is granted by the High Court.

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