Key Points
- The misuse of market power provisions are alive and kicking and capable of successful prosecution by the ACCC.
- Companies which plan to engage in the bundled supply of goods or services need to be careful when competitors can't match the bundled offer or can't match the bundled offer at a competitive price.
Despite recent grumblings by the Australian Competition and Consumer Commission (ACCC) and the small business lobby that the traditional misuse of market power provision in section 46(1) of the Trade Practices Act (TPA) is dead, or at least limited in its application after the High Court's decisions in Boral and Rural Press, the ACCC has successfully prosecuted Baxter for breach of that provision as well as for exclusive dealing in breach of section 47 of the TPA.
Background
On 27 August 2007, the High Court ruled that "derivative" Crown immunity did not extend to Baxter's conduct in supplying various State Purchasing Authorities.
This meant Baxter was exposed to the TPA when bidding for State (and Territory) government contracts. The case therefore turned on whether Baxter's "bundling" proposals represented a use of its powerful market position.
The practical effect of the High Court's decision is that companies are subject to the TPA, irrespective of whether the TPA applies to the other party to the arrangement. Companies should therefore be aware that they will not receive the protection of any "derivative" Crown immunity when dealing with Commonwealth, State and Territory bodies which are not "carrying on a business" for the purposes of the TPA.
The question of whether Baxter had actually breached the misuse of market power (section 46) and exclusive dealing (section 47) provisions of the TPA in the manner found at first instance was remitted back to the Full Federal Court.
Baxter's bundling
Baxter supplied sterile fluid products (used for re-hydration and cleaning wounds) and peritoneal dialysis products (used to treat chronic renal failure) (PD products). Both sterile fluids and PD products are essential for hospitals and health facilities.
Baxter had market share of over 90 percent in sterile fluids and was the only manufacturer of such products in Australia. Due to high importation costs, competition in relation to the market for the supply of sterile fluids was very difficult. Baxter was also the main manufacturer of PD products in Australia but as they are lesser volume, higher value products, Baxter was exposed to very real import competition from Fresenius and Gambro in this market.
Between 1998 and 2001, Baxter responded to requests for tender from five State Purchasing Authorities, each of which it won. It subsequently entered into and gave effect to long-term contracts with each Authority for the supply of sterile fluids and PD products.
Baxter made two alternative offers:
- to supply the sterile fluids and PD products separately on an item by item basis at high (inflated) prices;
- to exclusively supply the PD products bundled together with the sterile fluids at heavily discounted prices on the basis of a long-term supply agreement.
The ACCC contended that the tenders were structured in a way that made it difficult for the Authorities to refuse their tender offers, and for competitors in PD products, to compete, because the bundling allowed Baxter to offer the PD products at prices competitors could not match.
Decision
The Full Federal Court was called upon to determine whether Baxter had in fact contravened the misuse of market power (section 46) and exclusive dealing (section 47) provisions of the TPA. At first instance, Justice Allsop had found that Baxter had breached section 46 in relation only to its dealings with the Authority in South Australia and exclusive dealing under section 47(2).
The Full Federal Court found that Baxter's tender offers were deliberately designed and structured to remove any realistic prospect of success for competitors competing against Baxter to supply the same products at the prices offered by Baxter. By making the tender offers in the way it did, Baxter had taken advantage of its substantial market power in the national market for sterile fluids and breached section 46 in relation to its dealings with the Authority in each State and the ACT. Justice Mansfield noted:
Baxter had also breached the exclusive dealing provisions in section 47 by offering to supply sterile fluids and PD products on condition that the relevant Authority would not acquire, or would acquire only to a limited extent, PD products from Baxter's competitors in the national PD products market. This was done for the purpose, or with the likely effect, of substantially lessening competition in the market for PD products. In each case, Baxter relied upon its market power in the market for sterile fluids to bring about an exclusive or near exclusive arrangement in relation to PD Products. Justice Gyles noted:
The Court is yet to consider penalties against Baxter Healthcare.
An alternative approach?
The Full Federal Court's approach can be contrasted with the more economic approach taken by the US Court of Appeal (Ninth Circuit) in Cascade Health Solutions v PeaceHealth (4 September 2007).
In that case, the Court recognised that bundled discounts are typically pro-competitive but acknowledged that, in limited circumstances, a bundled discount could be anti-competitive (eg. where one product in the bundle is sold in a competitive market, while the other is not).
To determine whether a bundle is anti-competitive, the Court adopted a "discount attribution" standard under which the amount of the discount given by the defendant on all bundled products is solely allocated to the products facing competition - in Baxter's case, the PD products. If this allocation shows the net price of the competitive product in the bundle is below the company's average variable cost of supplying that product, the bundle will be regarded as anti-competitive or "predatory", and monopolisation for the purposes of the US Sherman Act.
This "discount attribution" approach has been met with considerable comment and debate in antitrust circles in the United States. It remains to be seen whether it will be adopted in Australia, and it is unclear from the judgment in Baxter whether Baxter's tender offers would have survived scrutiny on such a test.
Implications of the Full Federal Court's decision
The Baxter decision confirms that bundling conduct is unlikely to be a problem unless the bundle is particularly attractive to customers, or the supplier of the bundle is the only person who can supply it (or supply at that price). Companies need to be careful when bundling the supply of their products where the reason for the bundling is to seek an advantage over their competitors, and competitors are unable to match the bundled offer by a competitive competing bundle.
The ACCC's successful prosecution of Baxter also highlights that the misuse of market power provision in section 46(1) remains alive and well.
The Baxter decision also puts into perspective the September 2007 "Birdsville" amendments to section 46, which were inserted into the TPA to make predatory pricing cases easier to prove. Since its introduction, no prosecution has been brought by the ACCC under the new provision.
This month, the Rudd Government faced defeat in the Senate on its proposals to repeal the "Birdsville" amendments and replace them with a range of other measures to assist small business to bring section 46 claims.
As a result, the "old" form of section 46 may still have some life in it for the time being.
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