15 July 2005
Key Points:
The narrow view of "market" taken by the Court has serious implications for bundling products.
Facts
The ACCC brought proceedings against Baxter Healthcare Pty Ltd ("Baxter") for contraventions of the misuse of market power and exclusive dealing provisions of the Trade Practices Act 1974 ("TPA").
The allegations related to contracts between Baxter and State and Territory Purchasing Authorities ("SPAs") in New South Wales, the Australian Capital Territory, Western Australia, South Australia and Queensland, for the supply of sterile fluids and peritoneal dialysis ("PD") fluids to public hospitals. The supply contracts were awarded to Baxter following state-wide requests for tender by the SPAs. SPAs were a part of the executive arm of government of the relevant state or territory.
The ACCC argued that Baxter had market power in respect of the market for sterile fluids and that by structuring supply contracts so as to offer the PD fluids together with sterile fluids as a bundle at a price that was substantially discounted against the combined price of acquiring the products separately, Baxter had leveraged its market power and this had an anti-competitive purpose and effect in breach of the TPA. The ACCC further alleged that the exclusive supply element of Baxter's bids had the purpose or effect of substantially lessening competition in contravention of the TPA.
The Court's decision
Although the Court concluded that the TPA did not apply to the conduct complained of because the principles of crown immunity or derivative crown immunity applied, it was of the view that if Crown immunity did not apply, it would have found one contravention of the misuse of market power prohibition and a number of contraventions of the exclusive dealing prohibitions of the TPA (ss.46 and 47 respectively).
Misuse of market power claim - section 46
To be successful in its misuse of market power claim, the ACCC needed to demonstrate that Baxter had a substantial degree of power in a market and that it took advantage of that power for one of the anti-competitive purposes set out in section 46.
The Court found that there was an Australia wide PD fluids market separate from an overall Australian sterile fluids market.
The Court concluded that Baxter had a substantial degree of market power in the Australian sterile fluids market. In coming to this view, the Court noted that given the nature of the product as a "high-volume-low-value" product, there was limited prospects of import competition. In addition, the barriers to entry to competitors establishing plants in Australia were not insignificant. Further, Baxter had been the sole manufacturer and near exclusive supplier of sterile fluids in Australia for a significant period of time (6 to 9 years). The Court recognised the possibility that SPAs could wield sufficient countervailing power so as to constrain Baxter's market power but concluded that the threat of retaliatory action by the SPAs was not usually exercised. As such, Baxter was "still left some considerable room to behave as a sole supplier in the market" and had a "real degree of flexibility in how much it charged."
On the issue of taking advantage, the Court concluded that Baxter had not taken advantage of its market power other than in respect of "Offer 1A" in South Australia. In all other cases, there was no resistance from the SPAs to Baxter structuring its bids in the manner that it did and there was no further requests by the SPAs for discounting of the sterile fluids. Baxter's bids were structured in a way that conformed with the SPA's requests for tender and the SPAs controlled the bid processes. The situation was different in respect of Offer 1A. The Court concluded that Baxter had taken advantage of its market power in that instance as Baxter had refused point blank to negotiate with the South Australian SPA to give a discount on the sterile fluids as was sought by the SPA.
In assessing whether there has been a taking advantage of market power, Courts have often considered whether a firm would have engaged in the impugned conduct if it did not have market power. In other words, was there legitimate commercial justification for the conduct not associated with an exploitation of market power? In this case, the Court noted that Baxter had a "clear and defensible reason" to obtain as much business as possible and to maintain maximum throughput of product at its production plant. However, the Court further noted that Baxter had not put forward any evidence to relate the item by item prices to the increased marginal cost of production should any particular volume be lost. In other words, Baxter had not sought to justify the reduced bundle price in terms of reduced costs in providing the bundled product.
The Court further concluded that the substantial purpose of Baxter's conduct in structuring the bids in the bundled fashion was to do so in such a way that would prevent rival bids in the PD market being competitive or a feasible or real alternative to Baxter's bid. This amounted to the purpose of deterring or preventing a person engaging in competitive conduct in the sterile fluids market or the PD market and contravened section 46(1)(c).
In short, while Baxter was found to have misused its market power in breach of the TPA only in respect of the Offer 1A in South Australia as that was the only instance in which Baxter had taken advantage of its market power, the bundling in respect of all of the supply contracts was found to have had an anti-competitive purpose.
Exclusive dealing - Section 47 claim
The Court concluded that the exclusive supply of the bundled sterile and PD fluids by Baxter contravened the exclusive dealing provisions of the TPA because it had the purpose or was likely to have the effect of substantially lessening competition (s.47(2)).
The Court took the view that each tender process was a competitive process and the purpose and effect of Baxter's bids on those competitive processes was considered. On this narrow market basis, the Court concluded that as Baxter had a substantial purpose of structuring its bids so as to remove any realistic prospect of success for competitors supplying PD fluids, that the substantial purpose was to substantially lessen competition in breach of the TPA. The Court drew a distinction between the structure of Baxter's bids and bids which were structured so as to reflect a competitive edge or particular productive efficiency such as new technology or a reduced cost base. In this latter case, there would have been no purpose or effect of substantially lessening competition.
The Court did, however, go on to consider whether the ACCC's claim could be established on an approach to competition that was broader than merely focusing on specific tender processes. The Court concluded that Baxter's conduct did not have the effect of shutting out PD fluid competitors for the period of Baxter's exclusive supply contracts and that there was nothing preventing competitors from building a sterile fluids plant to challenge Baxter in Australia or to participate in subsequent tenders. If this broader view of the competitive process had been adopted by the Court, there would have been no substantial lessening of competition.
Crown Immunity
The Court accepted Baxter's argument that the TPA did not apply to its conduct because Crown immunity and derivative Crown immunity applied to the SPAs and Baxter.
The Court noted that the SPAs were a part of the executive arm of government. The SPAs had specified in their invitations to tender and had entered into agreements for the supply of the relevant products on a bundled basis. In structuring its supply offer in the way it did, Baxter had conformed with what the SPAs sought. Applying the High Court's reasoning in the NT Power v Power and Water case, the Court held that the State and Territory governments and Baxter were immune from the TPA. As the Court put it,
"Each was unconstrained by the Act in that regard. Each could ask for an offer which, in terms, and in the context of the relevant markets, offended section 47." [at para 691]
The ACCC has subsequently made it clear that it will appeal the Baxter decision largely on the basis of the Court's findings on crown immunity.
For further information, please contact Bruce Lloyd.
