Misuse of market power – prosecution priorities and million-dollar penalties

15 December 2010

Actions for misuse of market power contrary to section 46 of the Trade Practices Act 1974 (TPA) have been notoriously difficult to formulate, and even more difficult to successfully prosecute. However recent record penalties, and the ACCC's announcement that the investigation and enforcement of misuse of market power is a priority in its 2010-11 corporate plan, have drawn the potential application of this prohibition back into the spotlight.

So what are the strategic and compliance risks presented by the misuse of market power prohibition? Where do corporations with significant presences in their markets need to exercise care?

Background – misuse of market power under section 46

Section 46 of the TPA prohibits corporations with a substantial degree of power in a market from taking advantage of that power for a proscribed anti-competitive purpose. These purposes include eliminating or substantially damaging a competitor, preventing entry into any market, or deterring or preventing competitive conduct in any market. There is also a specific prohibition on corporations with a substantial share of a particular market selling goods or services below cost for a proscribed purpose.

In recent years, the ACCC has commenced relatively few proceedings for misuse of market power. To establish a breach, an applicant must show not only that the respondent has a substantial degree of power in a market (which has essentially been interpreted as a freedom from competitive constraint), but also that the respondent took advantage of that power (acted in a manner that it would not have acted were it subject to competitive pressures), and that the conduct had one of the proscribed anti-competitive purposes.

Despite the statutory and evidential hurdles involved in establishing a breach, there are certain categories of behaviour that raise the spectre of s46 for corporations who have a significant market presence. These include:

  • predatory pricing (pricing below avoidable cost)
  • exclusive dealing (including exclusive buying or selling requirements, and tying or bundling multiple goods or services)
  • price or service quality discrimination not based on commercial criteria (particularly to competitors), and
  • refusals to supply to competitors.

These areas are reflected in three recent misuse of market power cases – one for tying (bundling), one for refusal to supply and pricing below cost, and one relating to the acquisition of an essential input.

Baxter

On 26 August 2010 the Federal Court imposed a pecuniary penalty of $4.9 million on Baxter for misuse of market power (and exclusive dealing conduct) in its responses to tenders issued by State purchasing authorities (ACCC v Baxter Healthcare Pty Ltd [2010] FCA 929). The penalty represents the latest stage of a long-running series of decisions in this matter, commenced by the ACCC in 2002 (the ACCC sought an even greater penalty - $27.3 million). Following a series of hearings and appeals regarding whether Baxter was immune from prosecution under the doctrine of derivative Crown immunity, in 2008 the Full Federal Court determined that Baxter had contravened the TPA.

In short, it held that Baxter had power (and indeed an effective monopoly) in the market for the supply of sterile fluids, but faced real competition in the market for the supply of peritoneal dialysis (PD) fluids. It took advantage of that power for the purpose of deterring or preventing competitive conduct in the PD fluids market (in the words of Gyles J in the Full Court, effectively 'snuffing out' competition in the PD products market) by offering unrealistically high item-by-item prices, but a competitive price if the purchasing authorities agreed to purchase both the sterile and PD fluids.

The Full Court held that if Baxter has been subject to any serious competition in the sterile fluids market, it would not have rationally offered such unrealistically high prices. Baxter sought special leave to appeal to the High Court, which was refused pending the determination of the appropriate penalty by the Federal Court.

This is a significant example of a case in which bundling or tying practices have been found to contravene the misuse of market power prohibition, manifesting itself in a constructive refusal to supply.

Cement Australia

Usually, a misuse of market power relates to the supply of particular goods or services. However, a misuse of market power relates to the acquisition of goods or services, for example where a monopsonist or oligopsonist limits the ability of other corporations to effectively compete by tying up limited supplies of an essential input.

Proceedings remain on foot in the Federal Court against companies in the Cement Australia group,alleging misuse of market power through its acquisition of flyash. Flyash is a by-product of the combustion of coal produced by coal-fired electric power stations, certain grades of which can be used as a substitute for a limited quantity of general purpose cement in the production of concrete. Cement Australia is a leading producer of cement in Australia, representing more than half of the cement supplied on the east coast (including Queensland). One company, Pozzolanic, processes and distributes flyash from Queensland-based power stations to cement and concrete producers. It is ultimately controlled by Cement Australia.

In short, the ACCC has alleged that Pozzolanic and Cement Australia took advantage of their power in the market for concrete-grade flyash in South-East Queensland by contracting to acquire flyash from the Millmerran power station in volumes substantially in excess of those required for their own use or re-supply. It alleges that this conduct had the purpose of preventing the entry of any competing acquirer, and of deterring or preventing any person from engaging in competitive conduct in the respective markets for unprocessed flyash and concrete-grade flyash in the region. The hearing has been set down for late September to late November 2010.

The Cement Australia case has significance far beyond the cement and concrete industries, as a claim for misuse of power in the acquisition of goods or services. It also demonstrates the ACCC's view that volume-based requirements contracts, in addition to percentage-based requirements contracts, can give rise to competition concerns under the exclusive dealing and misuse of market power prohibitions. As a consequence, businesses with large market shares would be well advised to be cautious in their approach to raw material acquisitions, as well as those dealing with their distributors, customers and competitors.

Cabcharge

Cabcharge is a leading supplier of products to the taxi industry, including the provision of Cabcharge payment products, processing services for non-cash taxi fare payments (which are alleged to be used in 95% of taxis in Australia), taxi meters, and dispatch and network services.

On 24 September 2010, the Federal Court penalised Cabcharge more than $14 million (plus costs) – the highest pecuniary penalty imposed for misuse of market power in Australia (ACCC v Cabcharge Australia Ltd [2010] FCA 1261).

Cabcharge admitted that it had used its market power in the provision of non-cash taxi fare payment processing services and taxi specific payment products to refuse to enter into agreements with competing suppliers of processing services that would have allowed Cabcharge's payment products to be processed through alternative EFTPOS terminals. Cabcharge also admitted that it had used its market power to supply a significant number of taxi meters and fare schedule updates either free of charge, or (around 40%) below cost for anti-competitive purposes in relation to taxi meters and processing services.

Refusals to supply (or acquire) are not prohibited per se under the TPA. However, the Cabcharge case highlights the risks for corporations with a significant market presence in refusing to supply their actual or potential competitors, and in leveraging their power to price below avoidable cost.

Conclusion

There is no doubt that the threshold for breach of the misuse of market power prohibition is high. However with the ACCC emphasising its enforcement priority for 2010-11, corporations with a significant presence in their markets would be well advised to exercise caution when engaging in conduct such as tying/bundling, pricing below cost, or actual or constructive refusals to supply.

This article is from our December 2010 edition of Competition & Regulation newsletter.

Author(s) Sarah Barker