A significant penalty figure, imposed by the Federal Court in its recent judgment in the long-running matter of ACCC v Baxter Healthcare Pty Limited  FCA 929, sends a clear warning to all businesses undertaking procurement activities to be observant of the anti-competitive provisions in the Trade Practices Act 1974 (TPA).
Baxter Healthcare Pty Ltd (Baxter) was a manufacturer of different types of sterile fluids (SF) and peritoneal dialysis (PD) fluids commonly used in hospitals. Baxter was effectively the sole manufacturer and supplier of SF and had a market share in Australia of the PD products market in excess of 90 per cent.
After a period of tendering and negotiations, Baxter entered into long-term contracts with the relevant state purchasing authorities in Western Australia, South Australia, NSW and Queensland for the supply of SF and PD products to public hospitals. Baxter was the preferred tenderer after offering substantial discounts on the supply of SF products if they were to be awarded the sole supplier contract for both SF and PD products. The degree of discounting of the SF products was such that the government would receive a financial benefit if the Baxter offer was selected.
The ACCC alleged that Baxter, in tendering to various state purchasing authorities for the supply of SF and PD fluids, and by contracts between Baxter and the states as a result of those tenders, contravened ss.46 and 47 of the TPA, which deal with abuses of market power and exclusive dealing.
Initially, Baxter and the states (with the exception of Queensland which did not become a party to the proceedings) claimed that the conduct of Baxter which was the subject of the proceeding was immune from the operation of the TPA by reason of derivative Crown immunity. The issue was whether, upon the true construction of the Act, ss.46 and 47 applied to the conduct of a trading corporation in, or in connection with, negotiations for, entry into, or performance of, a contract with a state or territory government where the government's conduct is not in the course of carrying on a business. That issue was resolved by the High Court adversely to Baxter and to the states, with the court holding that it would be wrong to conclude that ss.46 and 47 had no application to Baxter's conduct in relation to its dealings with government authorities (Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd  HCA 38).
Subsequently, the full court of the Federal Court held that Baxter had contravened ss.46 and 47 by responding to a request for tender and negotiating a contract for the supply of various SF and PD products by a strategy of offering to supply for a term of years either the SF products on an item-by-item basis at a very high price, or the SF products at a considerably lower price on the condition that the relevant state acquire all or substantially all of its requirements for SF products and PD products from Baxter (Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd  170 FCR 16).
The full court found that Baxter took advantage of its substantial degree of market power in the Australia-wide market for the supply of SF products for the purpose of deterring or preventing two other corporations from engaging in competitive conduct in the Australia-wide market for PD products.
In the 2010 proceedings, the court considered the appropriate penalty in respect of the contravention of ss.46 and 47.
Justice Mansfield of the Federal Court ordered that Baxter pay a penalty of $4.9 million for contraventions of ss.46 and 47, and the company was also ordered to pay the ACCC's legal costs.
His Honour determined the penalty having regard to the nature and extent of the contravening conduct, and the circumstances in which it occurred. The nature includes consideration of the extent of deliberateness with which the conduct was engaged in, the period over which the conduct was undertaken, the extent to which senior management in Baxter was involved in the contravention, and whether or not the conduct was systematic or covert.
Similarly, the consequences of the contravening conduct should be assessed not simply having regard to the loss or damage caused, but also the degree of market power of Baxter, and its size, and the extent to which it profited or may have profited from the contravening conduct.
His Honour found that it was plain that Baxter's relatively high item-by-item bids were intended to secure acceptance of their bundled bids for SF products and PD products. They were meant to convey the message that favourable prices for SF products in the bundled bids were conditional upon acceptance of the bundled proposal, and that it would be uneconomic for any of the states separately to acquire the SF products from Baxter.
The effect of the contravening conduct was to put other competitors in the PD products market out of the opportunity to fully participate in that market, or to secure any significant share of that market, during the period of the respective contracts (ranging from four years to six years). While his Honour did accept that Baxter's purpose in engaging in the impugned conduct was not directly to cause any of its competitors to drop out of the PD products market, or to prevent or hinder those competitors from tendering for the contracts, its purpose was to engage in the contravening conduct to secure agreements for a lengthy period of time for the almost exclusive supply of PD products to the states and so to hold and secure its market share.
His Honour ordered Baxter to pay $4.9 million, both as a significant signal to the community that those engaging in such conduct as has been found against Baxter will be vulnerable to very significant pecuniary penalties, and to impress upon Baxter the consequences of its contravening conduct, so that it is discouraged from engaging in that conduct in the future.
This matter highlights a number of issues relating to both private sector and government procurement, particularly in relation to the potential for anti-competitive conduct in a tender process to amount to a breach of the TPA. This can be done, as it was here, by bundling, but other possible examples may include market sharing, price-fixing agreements, exclusive dealing, collusive conduct, third-line forcing and bid rigging. As seen in this case, this can have considerable financial consequences on the contravening party.
As the doctrine of derivative Crown immunity has been substantially qualified by this case, businesses engaging in procurement activities with government entities need to be vigilant to ensure compliance with the TPA (and equivalent state Fair Trading Acts) and, in particular, businesses should give careful consideration to the implications of offering discounts for the supply of products on an exclusive basis.
© DLA Phillips Fox
DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com
This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.