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02 Dec 2011

Crystal balls and implications of the Metcash case on future ACCC merger decisions

The widely reported decision of the Full Court of the Federal Court to dismiss the ACCC's appeal in the Metcash case represents a comprehensive rejection of the ACCC's analysis of the competition issues raised by Metcash's acquisition of Franklins.

We doubt, however, the decision heralds a major change in how the ACCC will go about its task of peering into the crystal ball in other merger cases.

The Court rejected all of the ACCC's appeal grounds and upheld the findings that:

  • there was no case against Metcash of a substantial lessening of competition; and
  • the transaction should be analysed within a broad market, defined as the national wholesale and retailing of grocery products to consumers – which includes the integrated supermarket chains along with Metcash; and
  • it was too speculative to assume that, if not sold to Metcash, Franklins would be sold to another bidder which would maintain Franklins' wholesaling activities and compete against Metcash.

The Court did not try to fundamentally change the way in which section 50 has been interpreted and applied to date.

What does the ACCC have to show?

Much of the debate rests on the burden of proof faced by the Commission in a merger case, which involves some crystal ball gazing:

  • must the ACCC show that a substantial lessening of competition from the merger was likely, meaning "more probable than not"; and
  • does the Commission bear an onus to prove what the future state of the market would look like, even without the acquisition, on a "more probable than not" basis?

While one judge viewed this as the preferred approach, the majority decided that it did not need to resolve this question. It was instead content to accept that even if the test is whether a substantial lessening in competition is a "real chance", if the merger proceeds, the Commission had failed to establish such a "real chance" would arise, on the Metcash acquisition of Franklins.

The Court was satisfied there was no alternative scenario shown to be likely or as having "a real chance", under which the Franklins business would remain intact, as a viable wholesaling operation, in competition with Metcash in supplying independent supermarkets.

The judgments also noted that:

  • the exercise for the ACCC and the Court is to make a "real world" assessment based on matters that are commercially relevant and meaningful, and not act on mere possibilities or speculative possibilities;
  • the appropriate market definition for a merger depends critically on the facts and circumstances at the time rather than in past cases; and
  • it was appropriate to accept the primary judge's finding of a national market for the supply of packaged groceries, fresh products, general merchandise and health, beauty and cosmetic products to the consuming public, by way of integrated retail chains and independent wholesalers supplying independent grocery retailers.

Concerns with the "real chance" burden of proof

Justice Buchanan had some concerns with the "real chance" burden of proof and favoured requiring the ACCC to bear a burden of proving a likely substantial lessening in competition was "more probable than not" as:

"Asking whether there is a "real chance" of something occurring seems to me, with respect, to invite and endorse speculation and conjecture. The range of possibilities (greater than "mere possibility") existing below a more than equal chance or possibility seems potentially so extensive as to create great uncertainty".

In Justice Buchanan's view the "real chance" test should not be applied to section 50 but, if it was applied to the facts of this case, he agreed the test had not been satisfied.

The ACCC will clearly be concerned that if the concerns raised by Justice Buchanan attract support, it will make the ACCC's task significantly more difficult in future cases. However we have some doubts whether his approach will be followed, given even he acknowledged it is contrary to a long established approach in other cases considering other provisions in the Act and is inconsistent with the reasons of Justice French (as he then was) in the AGL case.

The question of the relevant standard of proof where the allegation is that the merger or the conduct is "likely" to lead to a substantial lessening of competition is, as Justice Yates said, "in some respects perplexing" and we have not heard the last of it yet. The trouble for the ACCC in this case was it could not succeed on the facts even if it won that point as a matter of law.

Implications of the Metcash decision

The Metcash case is an important and rare example of the Court viewing the ACCC's administration of section 50. Ultimately the case turned on its own facts and given the "failing firm" features of the Franklins business, the facts are not likely to be often repeated in other matters.

The implications of the decision for other merger cases are therefore not likely to cause a major change in the way in which the ACCC approaches its task. However, the decision will give fodder to those who urge the Commission to inject greater elements of commercial judgment and commercial reality into merger assessments, rather than economic analysis.

The ACCC is currently studying the judgment and is yet to indicate whether or not it will seek special leave to appeal the decision to the High Court of Australia. Given the factual issues involved, it would seem an odd case for the ACCC to seek to take further.

 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.