13 Nov 2014

Cartel case founders on lack of connection to Australian market

by Michael Corrigan

Cartel conduct must have occurred within a market which, at least partly, was an Australian market.

In a decision that could have implications for future cross-border cartel cases, the Federal Court of Australia has dismissed the ACCC's case for contraventions of the Competition and Consumer Act against Air New Zealand and Garuda, two airlines who refused to compromise the long-running cargo investigation in Australia (Australian Competition and Consumer Commission v Air New Zealand Limited [2014] FCA 1157).

Cartel conduct must occur within an Australian market

At the heart of the Court's decision was its finding that the ACCC failed to prove that the conduct alleged occurred in an Australian market. Without this proof, the conduct fell outside the Australian Act.

The conduct identified by the ACCC case were arrangements to adopt various fuel and other surcharges for the provision of air cargo services for inbound freight into Australia. Justice Perram held that the relevant conduct occurred outside of Australia at the port of origin where the customers, shippers and freight forwarders accepted the rates and surcharges of the various airlines carrying cargo into Australia.

Although the airlines' services were delivered or provided both at the port of origin and at port of destination (within Australia through cargo handling and ground handling services on arrival ), Justice Perram held that the relevant area of competition over rates and surcharges was confined to the port of origin, and beyond the reach of Australian law.

In this sense the Competition and Consumer Act requires more than an "effects test" – that is, showing cartel conduct merely had an effect on an Australian market or prices won't be enough. The conduct must have occurred within a market which, at least partly, was an Australian market.

Justice Perram also rejected the ACCC's alternative argument that inflating the cost of air cargo in Australia had flow-on effects to increase the cost of good in downstream markets for the goods in Australia. That case was not sufficiently supported on the evidence before the Court to bring the conduct within an Australian market.

In other respects Justice Perram made clear that, had he found there was a relevant market in Australia affected by the conduct before him, the ACCC would have succeeded.

Cartel conduct outside Australia can still be within an Australian market

This does not mean that overseas cartel conduct can never be a breach of the Competition and Consumer Act.

The Court's finding can be contrasted with other cases where parties engaged in cartel conduct outside Australia but this directly had an effect on prices or competitive conduct (eg. bidding) within Australian domestic markets.

But conduct in a foreign market will not be enough. For example, imagine cartel conduct which occurred offshore and inflated the price of TV screens made in Asia, which were then fitted into televisions and imported into Australia as finished goods. The Court's finding suggests that that conduct could not be pursued under Australian law – even if the collusion affecting the screen components meant that Australian buyers ultimately paid more for the finished goods.

Where does this leave cartel enforcement?

Since 2009, the ACCC has recovered fines of more than A$98 million from many other airlines through various settlements. Most airlines chose not to contest allegations for collusion over fuel surcharges and other charges for transporting air cargo into Australia dating back to 2006 or earlier.

Airlines who agreed to pay these significant fines have no scope to reopen those settlements. Unfortunately, the high stakes involved in major cartel investigations, and uncertainty in the law, will always make the decision whether or not to settle a very difficult one.

Assuming the decision is not overturned on any appeal, the next question is whether the ACCC will support amending the Competition and Consumer Act's focus on Australian markets.

The Harper Review's recent draft report has recommended that the Competition and Consumer Act should apply to all conduct outside Australia that affects or harms competition in an Australian market. That proposal is not inconsistent with the Court's decision in this case, as it found the conduct only harmed competition in a foreign market. So far, the ACCC has not made more than initial comments on the Review's detailed recommendations, so watch this space.

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