Australia: ACCC v Liquorland (Australia) Pty Ltd & Woolworths Limited

Recent judgment of the Federal Court exposes some important points to consider when objecting to new competitor developments.

ACCC proceedings against Liquorland and Woolworths alleging that between 1997 and 2000 they entered and gave effect to anticompetitive agreements with liquor licence applicants. ACCC alleged 8 episodes contravened the Trade Practices Act 1974 (‘the Act’) – all involving Liquorland and 4 involving Woolworths. Liquorland settled in 2005. The judgment concerned the ACCC’s claims against Woolworths.

The Court had to decide whether the agreements entered into between Woolworths and pending new entrants:

• had the purpose of substantially lessening competition (in contravention of s45 of the Act); or

• contained ‘exclusionary provisions’ (defined in s4D and prohibited by s45 of the Act).

• How far can you go in protecting your business? Businesses may employ a range of strategies to effectively compete in a market, even strategies that are ruthless and may damage competitors. But, the distinction between acceptable and unacceptable conduct is whether the conduct harms the competitive process itself. The distinction may not always be clear and will depend on the facts of each case.

• The rise of local market definition: ACCC has increasingly analysed competition cases in localised geographical areas. In this case the Court accepted the ACCC’s narrow approach to the geographical market.

• When is a potential new entrant ‘likely’ to be in competition with an incumbent? Not every new entrant proposal will succeed. The case raises the interesting (and potentially challenging) question as to whether the Court must, in effect, determine the likely outcome of the licence/planning application in assessing whether there was a ‘real chance or possibility’ of the entrant being a competitor.

• Relevance to other industries: the decision is important for analogous situations of ‘blocking action’ taken by competitors through, for example, objections to planning applications. The case does not focus on the objection conduct itself but on the terms of settlement. It highlights the risks associated with cooperative commercial agreements between competitors or potential competitors that restrict competition.

• The importance of trade practices compliance. The impugned agreements in this case were apparently common and even encouraged by the NSW Licensing Court. The case serves as a reminder of the need to consider ramifications under the Act even in such circumstances.

1. The proceedings¹

The Australian Competition and Consumer Commission (‘ACCC’) brought its case against both against Liquorland (Australia) Pty Ltd (‘Liquorland’) and Woolworths Limited (‘Woolworths’).

Liquorland settled prior to trial.

The proceedings between the ACCC and Woolworths proceeded to trial and on 30 June 2006 Justice Allsop handed down judgment. He found the agreements:

• contained ‘exclusionary provisions’, in relation to 2 of the 4 episodes; and

• had the purpose of substantially lessening competition, in all 4 episodes.

A hearing to determine penalty is currently scheduled for 15 December 2006.

The 4 episodes alleged against Woolworths related to premises located at Campbelltown (Ettamogah Pub), Arncliffe/Rockdale (Jin Ro) and two instances at Tweed Heads (Global Beer Importers and Palms Shopping Village).

In each episode Woolworths, who had or was going to have a takeaway liquor outlet in the vicinity, objected or threatened to object to the grant of a third party’s application for a liquor licence. The objections were settled on the basis that the third party agreed to restrictions being placed on its liquor licence and therefore its business.

Each liquor licence applicant was seeking to establish a relatively unique business: Ettamogah Pub wanted to sell Ettamogah-themed takeaway liquor; Jin Ro planned to sell Korean (and non-Korean) takeaway liquor; Palms Shopping Village expected to sell takeaway liquor primarily to residents of the nearby Palms Village relocatable homes park; and Global Beer Importers set up a mail order club for imported boutique beers.

There was no dispute that Woolworths made a ’contract, arrangement or understanding‘ (‘Arrangement’) by entering a deed in relation to each episode and gave effect to it by withdrawing its objection (or threatened objection) to the liquor licence application.

It is critical in the definition of exclusionary provision in the Act that 2 or more of the parties are competitive with each other in the supply (or acquisition) of the goods or services to which the provision relates. In this case as both Woolworths and Liquorland were parties to each of the deeds and were competitive with each other, the Court did not have to decide if Woolworths was competitive with the potential new entrants.

Allsop J found Woolworths contravened the Act in 2 different ways:

• the agreements contained ‘exclusionary provisions’ (which generally focuses on customers); and

• the agreements had the purpose of substantially lessening competition (which focuses on the competitive process, not competitors).

An exclusionary provision is a provision within an Arrangement which is made between 2 or more persons who were competitive with each other, and the provision has the purpose of preventing, restricting or limiting the supply (or acquisition) of goods to (or from) particular persons or classes of persons. Exclusionary provisions are illegal per se – regardless of their impact on competition.

On the facts Allsop J found exclusionary provisions in 2 of the 4 episodes. He held:

• Woolworths was trying to protect its business in the Campbelltown area from potential competition and from a reduction of sales – it had a purpose to remove or neutralise any competitive threat (at [188]-[189]). Woolworths’ purpose was also to prevent supply (other than of themed liquor) to future customers of Ettamogah Pub, and those who might otherwise buy from Woolworths stores in the area (at [816]); and

• in relation to Global Beer Importers, Woolworths had the purpose of preventing sales of certain competitive lines of beer by Mr Dixon to his customers, with the commercial aim of protecting Woolworths’ business in the area from losing custom to GBI, ’even if the fear was less than acute’ (at [822]).

Allsop J therefore concluded that the purpose of the provisions of the deed in relation to the Ettamogah and Global Beer Importers episodes was to prevent, restrict or limit the supply of takeaway packaged liquor to future customers, in contravention of the Act.

In the other two episodes the ACCC was unsuccessful in establishing exclusionary provisions. Allsop J held that Woolworths did not have a purpose to prevent the businesses doing what they wanted to do. It was not sufficient, in his Honour’s view, that:

• Woolworths had the purpose of preventing the licence being or becoming a competitive threat in the future as this is not sufficiently directed to the prevention of supply of takeaway liquor to a class of people (at [818]); and

• Woolworths had a purpose to ensure the licence could not be redefined or relocated where it had no purpose of preventing customers at the Dry Dock bottle shop being sold any particular liquor (at [820]).

The Act prohibits the making of, and giving effect to, agreements which have the purpose of substantially lessening competition in a market.²

(a) The relevant markets

Allsop J agreed with the ACCC, that in each episode the relevant market was a local market for packaged takeaway liquor (retail). The markets were defined as an area of close competition of about 2 to 5 kilometres around the relevant Woolworths store (see [432]). The main issue in contention was the geographical size of the market and there was detailed judicial consideration of this issue. The finding of local markets was based upon the following (at [783]-[798]):

• the conduct was directed towards the local area;

• liquor store catchment areas were primarily local³;

• Woolworths’ own documents and research material placed importance on the local area in which they operated (eg, people travelled less than 5km to buy liquor, convenience was a central consideration, and day-to-day/social drinking represented the overwhelming occasions for purchase);

• price perception was important and if stores were not within a given price range (usually on particular ‘core products’) the shop was regarded as uncompetitive;

• a significant number of people were unlikely to go outside the local area to avoid a 5 to 10% price increase in the local area. Although many consumers were price conscious, not all would actually go to another store to pay a lower price;

• convenience was an important factor. People are less likely to travel far before the inconvenience of having to travel exceeds the inconvenience of the higher price;

• there was a degree of constraint on all local stores because customers were informed of prices through widespread advertising; and

• his Honour considered the argument that there is a ‘ripple effect’ of ’the knitting together of local geographic markets leading inexorably to a blanket or quilt’ as wide as the state or metropolitan Sydney to be unpersuasive.

(b) Purpose of substantially lessening competition

Allsop J held that a ’substantial purpose of the objections [to liquor licence applications] and of the provisions was to prevent the licence being or becoming the platform or vehicle for a market entrant without restriction on its licence’ either now or in the future (at [831]). In his Honour’s view the fact the purpose could have been legitimately pursued (through rights arising under the Liquor Act) is not the point, nor that Woolworths could have won these cases, or that the Court may have imposed some of these restrictions. The purpose was held to substantially lessen competition, as it was directed to the competitive process in a meaningful or relevant way, and the purpose sought to achieve such an effect (at [829]).

4. Implications

Businesses may employ a range of strategies competing in a market. It can range from strategies involving competitive conduct (eg holding seasonal sales), which the Act promotes, to strategies which are inherently anticompetitive (eg price fixing). Competition is often ruthless and may damage competitors. However, the distinction between acceptable and unacceptable conduct is whether the conduct harms the competitive process itself. The distinction may not always be clear and will depend on the facts of each case.

Factors such as state-wide pricing, advertising and business operations were insufficient to avoid a finding of local markets. The decision focuses on consumer habits and preferences, although it also considers that Woolworths’ conduct was directed at the local area around its store, or proposed store. As consumers continue to be generally time-poor and convenience-driven, small or local geographic markets are more likely to be established. This is notwithstanding the fact that consumers are relatively well informed through, amongst other things, the prevalence of internet access.

This decision of local markets is likely to have an impact in the context of mergers. The decision supports the ACCC’s position in recent mergers where local markets were defined. For example, the ACCC found a 3 to 5 kilometre geographic market definition in relation to a supermarket acquisition, and a 5 to 10 kilometre geographic market definition in relation to an acquisition of child care centres. A narrow market definition may lead to fewer relevant competitors within that market. This means a proposed acquisition of a competitor may constitute a substantial lessening of competition in that market, contrary to the Act.

As noted above, it was not necessary for Allsop J to decide if the potential new entrants were competitive with Woolworths. In other situations the question of whether the potential new entrant is ‘competitive with’ the incumbent is likely to be more significant. This raises interesting (and potentially challenging) questions as to whether the Court must, in effect, determine the likely outcome of the licence/planning application. For example, his Honour expressed the view that only one of the liquor licence applicants (Palms Shopping Village) was likely to be in competition with Woolworths, because there was a ‘real chance or possibility’ that Palms Shopping Village would otherwise have been granted an unrestricted or conditional liquor licence: [see 322].

The decision is clearly important to liquor industry participants, notwithstanding the recent amendments to the Liquor Act 1982 (NSW) and changes to the market, such as the increase in destination stores, mail order and internet sales since 2000.

However, the decision is also important for analogous situations of ‘blocking action’ taken by competitors through, for example, seeking enforcement of local council planning law requirements. It was not Woolworths’ exercise of a right to object which was of concern in this case, but rather the terms upon which a settlement was reached with competitors. This highlights the risks associated with cooperative commercial agreements between competitors or potential competitors which have the purpose or effect of restraining competition.

The decision serves as a timely reminder of the importance of Trade Practices compliance and positive regulator relations. Woolworths’ penalty is yet to be determined, however each contravention carries a maximum penalty of $10 million.

It is interesting to note that the liquor licence applicants assisted the ACCC and were granted immunity from prosecution. None of the parties to the Arrangements have immunity in relation to third party initiated litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.