Drilling Into Misuse of Market Power: Novel case scrutinises Bunnings' plans for expansion

The decision offers important guidance on how the new "no adverse costs order" (NACO) provisions operate and shines a spotlight on what the amended misuse of market power prohibition may mean for the expansion of dominant competitors into local markets.

The dispute: a hardware heavyweight moves in next door

Woodman Beenleigh Pty Ltd (Woodman) is a family-owned operator of two Mitre 10 branded hardware stores near Brisbane, including a smaller-format store in the outer-Brisbane suburb of Jimboomba. Bunnings Group Limited, owned by Wesfarmers and operator of more than 300 stores nationally, has been progressing plans to open a 15,000 m² Bunnings Warehouse on the same street as, and adjacent to, Mitre 10 Jimboomba since August 2019.

Woodman alleges that, given Bunnings’ substantial degree of market power in the acquisition of hardware products in the national wholesale market, the opening of the store is likely to have the effect of substantially lessening competition in the local retail market for the supply of hardware products, in contravention of section 46 of the Competition and Consumer Act 2010 (Cth) (CCA).

Woodman's case is that Bunnings’ development plans have already deterred it from carrying out a planned expansion of its Mitre 10 Jimboomba store, and that if the new store opens as planned, it will cause Mitre 10 Jimboomba to exit the market altogether through a form of predatory overcapacity - that is, by introducing more retail capacity than the local market can sustain.

Levelling the playing field: The first judicial assessment of the "no adverse costs order" regime

The "no adverse costs order" regime in section 82 of the CCA was introduced to address the significant barriers to small businesses taking private enforcement action.

Where a NACO is granted, the applicant is not liable for the respondent's costs regardless of the outcome of the case. The Court may only make a NACO if it is satisfied of three criteria:

(a)                   the case raises a reasonable issue for trial;

(b)                   the case raises an issue which may be significant for other parties; and

(c)                   the disparity between the financial positions of the applicant and respondent is such that the possibility of an adverse costs order might deter the applicant from pursuing the case.

In finding that Woodman should not be liable for Bunnings' costs, the Court found:

• Woodman has a reasonable point of contention about its issues and no proof of having reasonable prospects of success is necessary.

• The case against Bunnings has significance for others: The Court found that Woodman's claim raises issues potentially significant including for other independent hardware retailers facing competition from dominant national chains.

• The disparity between the parties was "undeniably enormous". The Court was also satisfied that the possibility of an adverse costs order could deter Woodman from pursuing its case.

Broader implications: what Woodman v Bunnings means for expansion strategy, small and big business, and future CCA claims

Despite being in force for almost nine years, the "new" section 46 provision has received limited judicial attention.

For large businesses

The Woodman/Bunnings case is a reminder that, following the 2017 reforms, good or competitive intentions are not a shield. Conduct undertaken without any anticompetitive purpose — including what may look like ordinary competitive expansion — may still be scrutinised under the effects test. The boundaries of section 46 have yet to be tested. For example, it is unclear whether the provision can apply to expansion by a large, efficient firm in markets with only a small number of competitors.

Bunnings regards its move into Jimboomba as competition on the merits, but Bromwich J’s acceptance that Woodman’s case raises a reasonable point of contention shows that courts are prepared to consider arguments about whether expansion by a firm with substantial market power could substantially lessen competition, even where the firm involved sees its activities as increasing (not lessening) competition in the local area.

For small businesses

The decision demonstrates that the NACO regime can operate as Parliament intended: to reduce the costs barrier for private litigants bringing novel and important competition claims against significantly larger opponents.

Bromwich J found that the proceeding “raises issues that might well be significant for independent hardware retailers contending with Bunnings in a way that imperils their commercial viability”, and that such retailers “will have the benefit of a determination as to whether Bunnings has substantial market power in the national wholesale market, and some exposition as to how the effects test in section 46 can, or cannot, operate to constrain conduct of this kind”. This case may encourage other small businesses to test the boundaries of section 46.

Small businesses even outside the hardware sector should watch this space closely, as the Woodman/Bunnings decision may offer relevant insights for businesses competing against dominant players with substantial market power in other markets.

If the case proceeds, it will also test the theory that market expansion by a major firm could, in certain circumstances, be ruled anticompetitive, if the expansion is shown to threaten the viability of smaller competitors. The ACCC adopted a similar theory of harm in its recent rejection of Coles' plans to develop a new supermarket in Kalgoorlie, which is to be reviewed before the Australian Competition Tribunal later this year.