The Full Federal Court’s recent appeal decision in ACCC v Baxter Healthcare Pty Ltd  FCAFC 28 has implications for businesses dealing with government entities and for the general derivative Crown immunity doctrine. This update discusses the issues raised as a result of this appeal for businesses dealing with government entities and evaluating whether their conduct may be subject to the Trade Practices Act 1974 (Cth) (Act).
On 24 August 2006, the Full Federal Court affirmed the doctrine of derivative Crown immunity, under which businesses contracting with the Crown benefit from Crown immunity from Part IV of the Act.
The Full Federal Court dismissed the ACCC’s appeal against the initial Federal Court decision of Justice Allsop. It dismissed the appeal as it agreed with the decision of Justice Allsop that, although Baxter Healthcare Pty Ltd (Baxter Healthcare) had engaged in exclusive dealing and misuse of market power, the company was protected from Part IV of the Act by the Crown immunity of the state health purchasing authorities (SPAs) with which it contracted.
The SPAs have immunity from the Act because they represent the Crown and they are not carrying on a business. The SPAs’ immunity was found to extend to Baxter Healthcare, shielding it from the operation of the Act.
The ACCC alleged that Baxter Healthcare breached sections 46 and 47 of the Act, in the sale and supply of sterile fluids and peritoneal dialysis products (PD Products), which are used to treat patients with kidney failure, to SPAs in NSW, SA, WA, QLD and ACT.
Section 46 of the Act prohibits a corporation with a substantial degree of market power from taking advantage of that power for the purpose of:
- eliminating or substantially damaging a competitor of the corporation in that or any other market;
- preventing the entry of a person into that or any other market; or
- deterring or preventing a person from engaging in competitive conduct in that or any other market.
Section 47 of the Act prohibits the practice of exclusive dealing. The form of exclusive dealing alleged by the ACCC was the supply of goods on condition that the acquirer will not, or will not except to a limited extent, acquire goods from a competitor of the supplier. This form of exclusive dealing only contravenes the Act where it has the purpose, or likely effect, of substantially lessening competition.
The conduct in question arose through Baxter Healthcare’s negotiation of, entering into and giving effect to, long-term exclusive contracts with SPAs in NSW, SA, WA, Qld and ACT for the bundled supply of sterile fluids and PD Products at significantly reduced prices. Alternatively, SPAs could purchase Baxter Healthcare’s products on an item-by-item basis, at significantly higherprices.
The ACCC argued that, although Baxter Healthcare faced competition in the market for its PD Products, it had a monopoly on the supply in Australia of sterile fluids. Baxter Healthcare is, broadly speaking, the only manufacturer in Australia of sterile fluids and the importation costs of ‘water on water’ limited competition from imports.
Baxter Healthcare was said to have used its market power in sterile fluids to harm competitors, or prevent competition, in the supply of PD Products, by:
- offering SPAs either bundled supply of the sterile fluids together with PD Products, or prohibitively high item-by-item prices for the separate supply of sterile fluids and PD Products; and
- thus, compelling the SPAs to agree to exclusive long-term supply contracts for the supply of sterile fluids bundled with PD Products.
The ACCC argued that Baxter Healthcare also engaged in exclusive dealing by supplying sterile fluids and PD Products under the relevant supply contracts at a particular price. The pricing was on condition that the SPAs would not, or would only to a limited extent, acquire sterile fluids or PD Products from its competitors.
The legislation establishing each of the SPAs provides that they represent the Crown. The Act provides that Part IV applies to the Crown, or a Crown authority, only if it is carrying on a business. It was accepted by all parties that the SPAs, with which Baxter Healthcare contracted, were not carrying on a business and were therefore, immune from Part IV of the Act.
Baxter Healthcare relied on the doctrine of derivative Crown immunity to contend that sections 46 and 47 of the Act did not apply to its conduct in negotiating, and entering into, the long-term contracts with the SPAs for the bundled supply of sterile fluids and PD Products.
What Is ‘Derivative Crown Immunity’?
The High Court decisions of Bradken Consolidated Ltd v Broken Hill Pty Co Ltd (979) 45 CLR 07 (Bradken) and NT Power Generation Pty Ltd v Power and Water Authority (2004) 29 CLR 90 establish the following principles:
- The Crown is immune from the Act, if it is not carrying on a business, such that there is no impairment of the existing legal situation of the Crown by the Act in these circumstances.
- If the Crown has immunity from the Act, a non-government party contracting with the Crown is also conferred with immunity, referred to as derivative Crown immunity, but only if this is necessary to ensure that the Crown’s proprietary, contractual and other legal rights and interests are unaffected by the Act.
Baxter Healthcare argued that these decisions also established that, if the Act does not inhibit the manner in which the Crown acquires supplies, it cannot affect those with whom the Crown has dealings in the course of acquiring those supplies. The Crown’s immunity can only be effective, Baxter Healthcare argued, if those with whom it negotiates and contracts are also free from the restraints of the Act.
The ACCC accepted that Bradken establishes that relief for a breach of the Act by a non-government party cannot be granted, if it results in the Crown losing the benefit of the contract. This will be so even if that contract is entered into in breach of the Act. The ACCC aimed to frame the relief sought so as not to infringe this principle.
However, the ACCC argued, in reply, that:
- the mere fact that the Act does not bind the Crown does not authorise unlawful conduct by others; and
- either Bradken does not establish the principle relied on by Baxter Healthcare or, alternatively, the principle established in Bradken should not be followed in the event the case reaches the High Court.
Findings Of Allsop J At First Instance
On 6 May 2005, Justice Allsop found that:
- Baxter Healthcare had considerable market power in the Australian sterile fluids market and breached section 46 of the Act. Baxter Healthcare took advantage of its market power in South Australia (but not in the other States), for the purpose of preventing its competitors from engaging in competitive conduct in the supply of PD Products; and
- Baxter Healthcare had breached section 47 of the Act. Its conduct in the tendering process of structuring its offer to induce the SPAs to enter into exclusive long-term contracts for bundled supply, had the purpose of ‘preventing or hindering competition’, which constitutes a ‘lessening of competition’ under the Act.
Despite Justice Allsop’s finding of breaches of both sections 46 and 47, his Honour dismissed the ACCC’s application on the basis of Crown immunity. The Crown immunity which protected the SPAs was found to extend to Baxter Healthcare, shielding it from the operation of the Act, in respect of both entry into the supply contracts and its negotiation of those contracts.
Findings Of The Full Federal Court
On 24 August 2006, the Full Federal Court dismissed the ACCC’s appeal against the decision by Justice Allsop.
The Full Court agreed with the findings of Justice Allsop that derivative Crown immunity shielded Baxter Healthcare from the application of Part IV of the Act in its contractual and pre-contractual dealings with the SPAs. The Full Federal Court was not prepared to deliberately confine the effect of Bradken, as it was invited to do by the ACCC.
However, the Full Federal Court first expressed its concern regarding the consequences of the protection afforded to Baxter Healthcare, and other non-government parties, in their dealings with the Government. The Court referred to the ‘anomalous result’ that the Government would be denied the protection afforded to it by the Act in those dealings (at ). A third party would not be liable for a breach of the Act in contractual or pre-contractual dealings with the Government, and a contract entered into as a result of a breach of the Act could not be set aside, even where the Government was adversely affected. The Court concluded in respect of the consequences of the argument accepted in its decision:
‘The consequences of the argument for the States on this point are significant. ... It is one thing to exempt the executive government from legislative prohibition as to conduct... It is another to have a substantial area of commerce in which restrictive practices can be carried on by all those dealing with a government, perhaps to the disadvantage of the public purchasing authority, but also to the detriment of other suppliers and consumers. It seems odd, for example, that a contract entered into as a result of misleading or deceptive conduct by a supplier corporation, which conduct would otherwise be contrary to s 52 of the Act but fell short of deceit, could not be set aside by the misled purchaser, or that a contract entered into as part of a collusive bidding arrangement, whether with or without the knowledge of the public instrumentality, should be immune from attack under the Act’.
The Court also warned that the High Court may reach a different view on the effect of Bradken. It observed that:
‘...the effect of Bradken might be confined or even reviewed by the High Court when it falls for consideration by that Court. As Murphy J pointed out in Bradken, the Act in terms prohibits conduct by a corporation and the fact that the Act might not bind the Crown does not mean that it has no application to conduct of others in relation to the Crown’ (at ).
However, because of the political and constitutional issues raised by the effect of Commonwealth legislation on the activities of the States, it was:
‘...not persuaded that an intermediate appellate court should now deliberately confine the effect of Bradken as we have been invited to by the ACCC’ (at ).
Thus, the Court’s decision is far from a ringing endorsement of the proposition that those with whom the Government negotiates and contracts should be free from the restraints of the Act. While the Court concluded that Baxter Healthcare was not subject to Part IV of the Act, it did so in terms that left the spectre of an appeal to the High Court and a different decision on appeal.
Implications Of The Decision
The Full Federal Court decision represents a setback to the ACCC’s attempts to confine the derivative Crown immunity doctrine. The decision affirms that non-government businesses are protected from the operation of Part IV of the Act in their contractual and pre-contractual dealings with Government (provided the Government is not carrying on a business). However, non-government businesses dealing with the Crown should not get too comfortable.
Not surprisingly, given the Full Federal Court’s veiled invitation to appeal its decision, the ACCC has sought special leave to appeal to the High Court on the derivative crown immunity issue. As foreshadowed by the Full Federal Court, an appeal to the High Court may yield a different result. The High Court will not have the same qualms as the Full Federal Court about deliberately confining the earlier High Court decision in Bradken, or the political and constitutional issues raised by the effect of Commonwealth legislation on the activities of the States.
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 and no liability will be accepted for any losses incurred by those relying solely on this publication.