Contracting with government purchasing authorities and the Trade Practices Act.
In August 2007, the High Court decided, in ACCC v Baxter Health Care Pty Ltd  HCA 38, that the doctrine of derivative Crown immunity did not protect Baxter Health Care from Part IV of the Trade Practices Act 1974 (Cth) (TPA) in its dealings with State purchasing authorities. The case received a lot of publicity at the time, but its impact is still not well understood across the health and aged care sector. This article provides a succinct summary.
Crown immunity and derivative Crown immunity
Because of Crown immunity, legislation does not apply to the Crown, whether in the right of the Commonwealth, the States or the Territories, unless the legislation expressly or by implication indicates an intention to bind the Crown. 'Derivative Crown immunity' refers to a doctrine under which parties dealing with the Crown also enjoy the same immunity as the Crown if the application of legislation to them would interfere with the proprietary, contractual or other legal interests of the Crown. The High Court upheld the doctrine of derivative Crown immunity in 1979 in Bradken Consolidated Ltd v Broken Hill Co. Ltd (1979) 145 CLR 107. In Baxter, the High Court limited the scope of the doctrine.
The Baxter case raised the issue of whether the conduct of Baxter in tendering for contracts to supply State purchasing authorities contravened provisions of Part IV of the TPA. The TPA expressly provides that it applies to the Crown so far as the Crown carries on a business either directly or by an authority of the Commonwealth, a State or a Territory. In this case, the ACCC conceded that State purchasing authorities did not carry on business so, as they were part of the executive arm of Government, the TPA did not apply to them. The issue was whether, in such circumstances, the TPA would apply to a party dealing with them such as Baxter or whether, as Baxter (and the States) argued, it was protected by derivative Crown immunity.
Baxter was the only Australian manufacturer of 'sterile fluids' used for re-hydration and administration of drugs and other purposes in all hospitals in Australia. These products are high volume, low value items but are essential for every hospital in Australia. Because the fluids are bulky and involve relatively high transportation costs, there is little or no scope for import competition. In these circumstances, Baxter was held to have substantial market power in the market for sterile fluids.
Baxter also supplied a range of low volume, high value fluid products used for the treatment of renal failure (contestable products). Baxter was the major supplier of these products in Australia but faced competition from other suppliers. The products, having a higher unit value than sterile fluids, did not enjoy the same natural protection from imports. Although Baxter was clearly the market leader, the market was contestable.
Between 1998 and 2001, Baxter responded to a series of requests from State and Territory Health purchasing authorities to tender for the supply of sterile and other fluids for use in hospitals. When tendering, Baxter typically offered to supply its products at lower prices if the purchasing authority purchased all its requirements of sterile fluids and other fluids on an exclusive basis (bundled offer) and higher prices if the purchaser chose to purchase the various products separately (unbundled offer). On all but one occasion, the relevant requests to tender actually requested bundled as well as unbundled offers.
One tender request required Baxter to submit an unbundled offer, but Baxter made a separate nonconforming bundled offer as well. The relevant authority then asked Baxter to reduce the prices set out in the unbundled offer to match its bundled offer prices, but Baxter refused to do so.
It was argued by suppliers of the contestable products, who could not compete in the supply of sterile fluids, that Baxter's bundled offers effectively excluded them from supplying any products.
In the Federal Court at first instance the trial judge held that:
- By refusing to amend its pricing in response to the direct request that the unbundled prices match the bundled prices, Baxter had taken advantage of its market power for the purpose of harming its competitors and preventing competition in the market for the contestable products in contravention of section 46 of the TPA (misuse of market power).
- By making its exclusive bundled offer, Baxter had ensured that the bids of rivals to supply the contestable products would be unacceptable and had thereby brought about a substantial lessening of competition in the market for competitive products in contravention of section 47 (exclusive dealing).
However, the trial judge considered that the circumstances were sufficiently similar to the 1979 High Court decision in Bradken to protect Baxter by derivative Crown immunity. On appeal the Full Court of a Federal Court upheld the decision of the trial judge.
The High Court, by a majority of six to one, concluded that the doctrine of derivative Crown immunity did not apply to protect Baxter. The majority held that Bradken overstated the doctrine. The question of whether legislation interferes with the legal interests of the Crown must be determined in the context of the particular statute and its purpose. In particular:
- A contract may be enforceable, even where performance of the contract contravenes the TPA and a corporation is liable for sanctions, as severance of the offending provisions of the contract may be possible.
- Baxter's contraventions concerned conduct in making exclusive bundled offers - that is, conduct before Baxter entered into contracts with government purchasing authorities. The Bradken decision did not compel the trial judge or the Full Court to reach the decision they did.
- The remedies available in connection with precontractual contraventions do not interfere with or restrict the interests of governments.
Businesses must take care when dealing with government authorities or departments to ensure that their conduct does not offend the TPA. The fact that the relevant authority or department is protected from the TPA by Crown immunity is unlikely to protect the other party. This is the case even if a business engages in particular conduct in response to a specific request from the government body. Also, in many cases a government authority will be carrying on business within the meaning of the TPA, so it will be subject to the TPA in any event.
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