Australia: The need for reciprocity and commitment breaks egg cartel case

Last Updated: 22 February 2016
Article by Douglas Thompson and Elizabeth Richmond

Most Read Contributor in Australia, August 2016

Key Points:

The case against the Australian Egg Corporation Limited floundered on the lack of reciprocity or commitment in the context of a prescribed arrangement or understanding.

It's eggstraordinary, but the Australian Competition and Consumer Commission (ACCC) has recently failed in an action brought against the Australian Egg Corporation Limited (AECL), three directors and two egg companies, alleging an attempt to enter into an agreement or understanding to limit egg production (ACCC v Australian Egg Corporation Limited [2016] FCA 69).

The case concerned a perceived oversupply of eggs, coupled with a meeting of egg producers and the industry body, the AECL. While the ACCC demonstrated the participants at the so-called "crisis meeting" in January 2012 intended to take action to address the issue of an oversupply of eggs in the Australian market, the Federal Court found that the ACCC had not proved that the conduct was an attempt to make an agreement or understanding that involved reciprocal obligations.

This was despite one of the respondents, Mr Lendich, admitting the allegations in a settlement arranged with the ACCC pre-trial.

ACCC chairman Rod Sims has said the ACCC "will carefully consider the judgment" raising the possibility of the ACCC lodging an appeal against the decision.

Requirements for an arrangement or understanding

Section 44ZZRJ of the Competition and Consumer Act 2010 (Cth) (CCA) prohibits corporations from making arrangements or entering into understandings which contain a "cartel provision".

The concepts of "arrangement or understanding" are not defined in the CCA, but rather, established by case law. The courts have confirmed the following elements:

  • a communication between the parties as to the substance of the arrangement;
  • a meeting of the minds or consensus between two or more parties;
  • commitment (more than a mere hope or factual expectation); and
  • usually, but not universally, mutual obligations or reciprocity between the parties.

In the case of an attempt to reach an arrangement or understanding, what must be established is that the respondents took steps towards inducing others to reach an agreement or understanding. In this case, the alleged understanding was that that at least one or more egg producers would limit the production or supply of eggs. As such, the Court considered whether:

  • the conduct of each respondent constituted an attempt to induce the making of a prescribed arrangement?
  • each respondent had the purpose or intention to limit the production or supply of eggs?

The evidence: a circumstantial case

The ACCC presented a circumstantial case that was heavily reliant on fragmentary evidence.

While Justice White accepted significant parts of the ACCC's submission, for example, that AECL promoted "coordinated and consolidated" action by egg producers to reduce supply and that the convening of the "crisis meeting" went beyond the steps previously adopted by AECL in circumstances of oversupply, he thought the evidence presented about contravening conduct between the relevant parties was unconvincing. While one of the directors, Mr Kellaway, did do more than present information and options at the crisis meeting by actively encouraging those in attendance to take individual action to address the crisis, this was not enough.

The decision: the evidence did not amount to an inducement

Justice White acknowledged that there were sinister and innocent interpretations of the events at, and in the lead-up to the "crisis meeting", but ultimately found innocent explanations for the respondents' actions.

Justice White held that the evidence showed that AECL was making an appeal by reference not only to the interests of the industry as a whole, but to the interests of each individual egg producer. As such, there was insufficient evidence to warrant the conclusion that the options presented at the meeting as a form of collective action involved reciprocal obligations or understandings by the egg producers.

Similarly, with regards to Mr Kellaway, Justice White found that because he chose to highlight to the attendees of the meeting that some of their members were particularly responsible for the oversupply, it was inconsistent with him having had an intention to induce all of the attendees to agree upon a form of mutual and reciprocal action. As a whole, the evidence did not amount to an inducement to make a prescribed agreement, and accordingly, the ACCC's case failed.

This is not the first time in Australia that a case brought by the regulator has come unstuck by the requirement for reciprocity or commitment in the context of a prescribed arrangement or understanding.

Application of Competition and Consumer Act to agents or emanations of the Crown?

Justice White also dealt with an argument that the CCA did not apply to the conduct of AECL and Mr Kellaway on the basis that they were agents or emanations of the Crown. Section 2A of the CCA provides that the Act binds the Crown in right of the Commonwealth so far as the Crown (including its agents and emanations) carries on a business, whether directly or by an authority of the Commonwealth.

Ultimately, the Court was not required to consider whether the contravening conduct was itself the business in which AECL was engaged as Justice White held that AECL was not an agent or emanation of the Crown

Questions remain for Mr Lendich who admitted the allegations

The fourth respondent in the matter, Mr Lendich, admitted the allegations against him prior to trial.

The timing for a penalty hearing against him was the subject of some debate with Mr Lendich's preference that the matter against him be resolved before the other respondents. However, Justice White ruled that he would hear submissions after the completion of the trial against the other respondents. Justice White's rationale was that the Court would be in a better position to make an assessment once it had heard the evidence to be presented by the ACCC against the remaining respondents. The decision to hear submissions in relation to Mr Lendich after the finalisation of the case against other respondents stands in stark contrast to the approach taken in other cases where the case against an admitting respondent is referred to different judge for the hearing on penalty.

Justice White was also at pains to note that there is at least one instance of the Court declining to make the declarations agreed upon by some parties after hearing the evidence in the trial of the allegations against other parties.

This leaves open the possibility that any submissions concerning penalty based on Mr Lendich's admissions may not be accepted by the Court.

Given his comments, and the statement from the ACCC that it will be reviewing the decision of the Court, we will be watching this matter for further developments.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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