Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd

[2008] FCAFC 141

FEDERAL COURT OF AUSTRALIA

Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2008] FCAFC 141

TRACE PRACTICES – section 46 – tendering for supply of sterile fluids and PD fluids to State Purchasing Authorities – separate Australia wide markets for sterile fluids and PD fluids – whether tenderer has substantial degree of market power in sterile fluids market – whether “alternative offer strategy” by item-by-item pricing and much cheaper bundled tender for sole supply of sterile fluids and PD fluids taking advantage of market power – whether tenderer’s purpose fell within s 46(1)(a) or s 46(1)(c) – held that tenderer’s conduct contravened s 46(1)(c).

TRADE PRACTICES – section 47 – bundled sole supply tenders to supply sterile fluids and PD fluids to State Purchasing Authorities – whether such conduct had purpose or effect, or likely effect, of substantially lessening competition – consideration of the “competition” or “competitive process” referred to in s 47(10) – held that tenderer’s conduct contravened s 47.

Trade Practices Act 1974 (Cth), ss 46, 47 and 49
Therapeutic Goods Act 1989 (Cth)

Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2005] FCA 581, (2005) ATPR 42-066 related
Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd (2006) 153 FCR 574; [2006] FCAFC 128 related
Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd (2007) 237 ALR 512, (2007) 81 ALJR 1622 related and applied
Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374 applied
Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1 applied
Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 applied
Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53 applied
Rural Press Ltd v Australian Competition and Consumer Commission (2002) 118 FCR 236 cited
Re Queensland Co-operative Milling Associated Ltd (1975) 25 FLR 169 considered
Universal Music Australia Pty Ltd v Australian Competition and Consumer Commission (2003) 131 FCR 529 considered
Eastman Kodak Co v Image Technical Services Inc (1992) 504 US 451 cited
Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (2003) 129 FCR 339 cited
Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (1982) 64 FLR 238 considered
Outboard Marine Australia Pty Ltd v Hecar Investments (No 6) Pty Ltd (1982) 44 ALR 667 considered
ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) (1990) 27 FCR 460 considered
Stirling Harbour Services Pty Ltd v Bunbury Port Authority (2000) ATPR 41-752 considered
O’Brien Glass Industries Ltd v Cool & Sons Pty Ltd (1983) 48 ALR 625 discussed
NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 cited

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v BAXTER HEALTHCARE PTY LTD, THE STATE OF WESTERN AUSTRALIA, THE STATE OF SOUTH AUSTRALIA and THE STATE OF NEW SOUTH WALES

NSD 1008 OF 2005

MANSFIELD, DOWSETT AND GYLES JJ
11 AUGUST 2008
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1008 OF 2005

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
Appellant

AND:

BAXTER HEALTHCARE PTY LTD
First Respondent

THE STATE OF WESTERN AUSTRALIA
Second Respondent

THE STATE OF SOUTH AUSTRALIA
Third Respondent

THE STATE OF NEW SOUTH WALES
Fourth Respondent

JUDGES:	MANSFIELD, DOWSETT AND GYLES JJ
DATE:	11 AUGUST 2008
PLACE:	SYDNEY

THE COURT ORDERS THAT:

The appeal stand over to a date to be fixed. 

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The text of entered orders can be located using eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1008 OF 2005

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
Appellant

AND:

BAXTER HEALTHCARE PTY LTD
First Respondent

THE STATE OF WESTERN AUSTRALIA
Second Respondent

THE STATE OF SOUTH AUSTRALIA
Third Respondent

THE STATE OF NEW SOUTH WALES
Fourth Respondent

JUDGES:	MANSFIELD, DOWSETT AND GYLES JJ
DATE:	11 AUGUST 2008
PLACE:	SYDNEY

INDEX

MANSFIELD J........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[1]
INTRODUCTION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[1]
THE DECISION AT FIRST INSTANCE AND THE APPEAL........ ........ ........ ........ .......	[8]
BACKGROUND........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[14]
THE CONCLUSIONS OF THE PRIMARY JUDGE........ ........ ........ ........ ........ ........ .......	[66]
THE AMENDED NOTICE OF APPEAL AND THE NOTICE OF CONTENTION......	[73]
DID BAXTER HAVE A SUBSTANTIAL DEGREE OF POWER IN THE AUSTRALIA-WIDE STERILE FLUIDS MARKET?........ ........ ........ ........ ........ ........ .......	[82]
DID BAXTER TAKE ADVANTAGE OF ITS MARKET POWER?........ ........ ........ .......	[115]
DID BAXTER TAKE ADVANTAGE OF ITS MARKET POWER IN RELATION TO OFFER 1A IN SOUTH AUSTRALIA........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[156]
WHETHER BAXTER’S PURPOSE WAS FOR THE PURPOSE SPECIFIED IN S 46(1)(a) OF THE ACT........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[163]
WHETHER BAXTER’S PURPOSE WAS FOR THE PURPOSE SPECIFIED IN S 46(1)(c) OF THE ACT........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[175]
THE APPEAL AND THE NOTICE OF CONTENTION CONCERNING SECTION 47........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[190]
CONCLUSION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[254]
DOWSETT J........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[259]
SECTION 46........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[260]
Markets........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[261]
Sterile fluids market........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[262]
PD fluids market........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[263]
Impugned conduct........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[265]
Market power........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[279]
Taking advantage of market power........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[289]
Purpose........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[301]
SECTION 47........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[328]
Competition in a market........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[335]
Substantially lessening competition in the tender process........ ........ ........ ........ ........ ...	[352]
Substantially lessening competition in a market........ ........ ........ ........ ........ ........ ........ ..	[363]
ORDERS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[376]
GYLES J........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[377]
SECTION 46........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[378]
SECTION 47........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[384]

REASONS FOR JUDGMENT

MANSFIELD J

INTRODUCTION

1. This appeal concerns the lawfulness of certain conduct of Baxter Healthcare Pty Ltd (Baxter), a manufacturer and supplier of sterile fluids and PD products and fluids (as explained in [17]-[22] below).

2. The Australian Competition and Consumer Commission (the ACCC) alleged that Baxter had variously contravened ss 46 and 47 of the Trade Practices Act 1974 (Cth) (the Act) by negotiating, tendering for, and entering into five long-term contracts between 1998 and 2001 with New South Wales, South Australia, Western Australia, Queensland and the Australian Capital Territory through their respective State Purchasing Authorities (SPAs).

3. The five contracts in issue (the impugned Agreements) were: 

   (1)the 1998 New South Wales Supply Agreement between Baxter and NSW made in June 1998 for the supply of its entire requirements of certain sterile fluids and 90 per cent of its requirements for PD fluids for the period 18 May 1998 to 30 April 2003 (the 1998 NSW Agreement);

   (2)the 2001 South Australian Supply Agreement between Baxter and SA made on or about 1 May 2001 for the supply of its entire requirements of certain sterile fluids and 90 per cent of its requirements for PD fluids for the period 1 April 2001 to 30 March 2006 (the 2001 SA Agreement);

   (3)the 2001 Western Australian Supply Agreement between Baxter and WA made on or about 2 May 2001 for the supply of its entire requirements of certain sterile fluids and 90 per cent of its requirements for PD fluids for the period 1 March 2001 to 28 February 2006 (the 2001 WA Agreement);

   (4)the 2001 Queensland Supply Agreement between Baxter and QLD made on or about 17 April 2001 for the supply of its entire requirements of sterile fluids (excluding PN fluids) and 92.5 per cent of its requirements for PD fluids for the period 1 June 2001 to 31 May 2004 (the 2001 QLD Agreement); and

   (5)the Australian Capital Territory Health Agreement between Baxter and the ACT made in or about March 1988 for the supply of its entire requirements of certain sterile fluids and 90 per cent of its requirements for PD fluids for the period March 1999 to April 2003 upon the terms of the 1998 NSW Agreement (the 1999 ACT Agreement).

4. In essence, at trial the ACCC alleged that sterile fluids other than PD fluids, and perhaps PN fluids, could be viewed as bulky water-based products, described as “high volume low value”, in which Baxter had an effective monopoly.  It was the only manufacturer in Australia of those products, as importation costs of carrying “water on water” made competition in relation to sterile fluids very difficult.  Although Baxter was also the main manufacturer in Australia of PD fluids, being fluids of lesser volume or bulk and of higher value, its PD fluids were exposed to real import competition.  The ACCC then claimed that the “bundling” of PD products with the “monopoly” sterile fluids by Baxter in its tenders eliminated from effective competition the rival PD fluids suppliers as they either did not wish to, or could not, compete with Baxter in the supply of sterile fluids.

5. The ACCC then alleged that Baxter had contravened s 46 of the Act by taking advantage of its substantial market power in the sterile fluids market for the purpose of harming competitors or preventing competition in the PD fluids market. It did so by negotiating and entering into the impugned Agreements with NSW, SA, WA, QLD and the ACT requiring each of those States and the ACT to acquire sterile fluids exclusively from Baxter and between 90 and 100 per cent of its PD fluids from Baxter. That was because Baxter offered prohibitively high item-by-item prices (the so-called “cherry pick” prices) as one of its bases for tender so as to compel the States to agree to exclusive supply contracts for the supply of sterile fluids, bundled with PD products, for lengthy periods. The “bundled” prices were significantly lower than the item-by-item tender, in effect for a sole supply agreement. That conduct, the ACCC alleged, took advantage of Baxter’s market power in the sterile fluids market or markets, because otherwise it would not or could not have been able, under competitive conditions, to force the States to take the bundled offer by threatening prohibitive prices for sterile fluids. That conduct, the ACCC also alleged, harmed both actual and potential competition in the PD fluids market, namely two foreign entities through their Australian subsidiaries Fresenius and Gambro (referred to in [31]-[33] below), because those companies were unable to compete in the market or markets for sterile fluids. Hence, it was alleged, Baxter sought to eliminate or substantially damage its competitors Fresenius and Gambro in the respective PD fluids market or markets, and to deter or prevent them and other potential competitors from engaging in competitive conduct in the respective PD fluids market or markets.

6. The ACCC presented a series of alternate markets to make out its claimed contraventions of s 46 of the Act. They included Baxter’s taking advantage of a substantial degree of power in the sterile fluids market or markets, by negotiating and entering into the impugned Agreements with a purpose or purposes contrary to s 46(1)(a) or s 46(1)(c) in relation to the PD fluids market or markets, either a national market or separate markets in NSW, SA, WA and QLD. As the findings of the primary judge about the relevant markets are no longer in issue, it is not necessary to refer to the other putative markets put forward by the ACCC.

7. The allegations of the ACCC concerning contravention of s 47 of the Act were based largely upon the same factual matters. In addition to its tendering conduct, the ACCC claimed that from 18 May 1998, 1 April 2001 and 1 March 2001 Baxter had supplied sterile fluids and PD fluids to NSW, SA and WA respectively under the 1998 NSW Agreement, the 2001 SA Agreement and the 2001 WA Agreement, and from 1 June 2001 it had supplied sterile fluids and PD fluids to QLD under the 2001 QLD Agreement. The conduct was said to be offering to supply, or the supply, of those products, or their supply at a particular price, on the condition that the State would not, or would only to a limited extent, acquire such PD fluids from a competitor of Baxter. Thus exclusive dealing as described in s 47(2) of the Act was said to be satisfied. The various claims under s 47 were also made in a framework of a range of alternative markets, by reference to markets variously for PD fluids, LVP fluids, PN fluids, IS and more broadly sterile fluids (as those terms are explained in [17]-[22] below. The conduct was the negotiating, entering into and supplying pursuant to each of the impugned Agreements. The wrongful substantial purpose alleged was to substantially prevent, hinder or lessen competition in one of the four following markets: separate State-bound geographic markets for PD fluids; a combined national market for PD fluids; a separate national wholesale market for LVP fluids, PN fluids and IS; or a combined national wholesale sterile fluids market. Additionally, and alternatively to the purpose alleged, it was said that the conduct had the effect or likely effect of substantially preventing, hindering or lessening competition in those markets.

   THE DECISION AT FIRST INSTANCE AND THE APPEAL

8. The primary judge determined that the Act, in the circumstances, did not apply to, or operate in respect of, the conduct of Baxter complained of by the ACCC (Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2005] FCA 581, (2005) ATPR 42-066). The reason for that conclusion was that the States and the ACT were entitled to Crown immunity in respect of their conduct in negotiating and entering into the impugned Agreements. The States and the ACT were not carrying on business in calling for tenders, negotiating or entering into the impugned Agreements: see s 2B of the Act. No relief was sought directly against them. The primary judge then concluded that Baxter, as the counterparty to the impugned Agreements, was entitled to derivative Crown immunity in respect of the conduct complained of.

9. Consequently, the proceedings were dismissed. 

10. The primary judge, however, considered the outcome if the Act had applied to Baxter’s conduct notwithstanding that the Act did not, in the circumstances, apply to the conduct of the SPAs of each of the States and the ACT. His Honour would have found that only one contravention of s 46 of the Act had been made out. That was the contravention of s 46 by entering into the 2001 SA Agreement by reason of what is called Offer 1A made by Baxter to SA (the Offer 1A Contravention).

11. His Honour would also have concluded that Baxter contravened s 47 of the Act by its conduct in its tenders for, and negotiations in relation to, each of the impugned Agreements, but not by entering into the impugned Agreements themselves.

12. The ACCC appealed from that decision.  Baxter by Notice of Contention challenged the conclusions of the primary judge which were adverse to it.  The Full Court dismissed the appeal:  Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd (2006) 153 FCR 574; [2006] FCAFC 128. The Full Court’s conclusion was that, as the primary judge had found, the provisions of the Act did not apply to, or operate in respect of, the conduct of Baxter in negotiating and entering into and supplying under the impugned Agreements with the SPAs of the States and the ACT.

13. The High Court reversed that decision:  Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd (2007) 81 ALJR 1622. The High Court remitted the matter to the Full Court to consider the other issues raised on the appeal from the first instance decision. They include matters raised by the ACCC and matters raised by Baxter in its Notice of Contention.

    BACKGROUND

14. The hearing at first instance was prolonged and the evidence complex.  The primary judge made carefully considered findings on a range of issues relevant to the principal matters in contention.  Most of his Honour’s findings on background matters were not challenged on appeal.  The following background is taken very largely from the reasons for judgment of the primary judge.  Where there is a factual finding challenged on appeal which is significant to the outcome of the appeal, it is discussed when considering the grounds of appeal.

15. Baxter is the Australian operating subsidiary of Baxter International Inc (BI Inc), a global medical products and services company incorporated in the United States.  BI Inc has three divisions, namely BioScience (products relating to blood), Renal (dialysis products) and Medication Delivery (intravenous products).  Baxter supplies in Australia products of each of those divisions.  Baxter in fact manufactures in Australia the majority of the products it supplies in Australia.  Relevantly, it manufactures and supplies intravenous (IV) solutions, peritoneal dialysis (PD) fluids and parenteral nutrition (PN) products. 

1. The alleged conduct took place in the context of State-wide tender invitations issued by each of NSW, SA, WA and QLD for the supply of certain sterile fluids to public hospitals, clinics and other facilities funded by the States and Territories.  (As the judge at first instance did, I shall call them “Health facilities”).  Baxter tendered, in each instance, by offering to supply tender items on an item-by-item basis (at so-called high “cherry-pick” prices), and alternatively to supply the same items on an exclusive sole supply basis for a lengthy period and for substantially lower prices.  The sole supply included PD fluids.

2. The invitations to tender, in each instance, concerned irrigating solutions (IS), large volume parenteral (LVP) fluids, PN fluids and PD fluids and products.  LVP fluids are sterile fluids that are administered intravenously by slow infusion therapy for the purpose of re-hydration, the administration of drugs, resuscitation, and fluid and electrolyte replacement.  LVP fluids are used when the amount of fluid required is greater than 250 ml and are used to treat approximately 80 per cent of all patients admitted to hospital.  There are no products that are substitutable for any or all LVP fluids.  At all relevant times, the largest purchasers of LVP fluids were the relevant SPAs on behalf of Health facilities.  And, at all relevant times, there was an established and entrenched demand for LVP fluids by Health facilities, private hospitals, medical practices and ambulance services. 

3. Small volume parenteral fluids (SVP fluids) are used to perform or facilitate injections and reconstitute pharmaceuticals.  They are stored in volumes of 250 mls or less in vials, ampoules and small bags.  They are administered intravenously, but not by slow infusion therapy. 

4. PN involves the provision of nutrition by intravenous sterile solutions to provide all or part of a patient’s nutritional requirements where the patient is unable to digest food.  PN fluids are produced by dissolving water soluble ingredients such as amino acids, glucose or salt in water, and then placing the solutions in containers.  There are about 30 types of PN fluid used by hospitals and nursing homes.  Enteral nutrition (EN) involves the provision of food to a patient via the digestive tract, either by mouth or by tube inserted into the stomach or small bowel.  PN and EN fluids are produced in separate facilities to avoid cross-contamination due to their different qualities.  EN is less expensive than PN, and is safer because of a lower risk of infection.  EN also maintains the nutrition of the gut mucosa better than PN as PN is only utilised when EN is not feasible.  PN and EN are substitutable, unless the patient’s gastro-intestinal tract is not functioning.  There is an established and entrenched demand for PN fluids.  At relevant times, the largest purchasers of PN fluids were the relevant SPAs on behalf of their respective Health facilities.

5. IS are aqueous based products used generally in hospitals for a range of purposes, including washing or cleaning wounds or in surgery.  They are sterile, but are not suitable to perform the function of LVP fluids, so they cannot be substituted for LVP fluids.  There are no products substitutable for IS.  There is an established and entrenched demand for IS.  They are used in almost every operation or surgical procedure.  They are used by hospitals, medical practices and ambulance services.  At relevant times the largest purchasers of IS were the relevant SPAs on behalf of their respective Health facilities.

6. PD is a form of dialysis treatment for chronic renal failure.  Renal failure can also be treated with haemodialysis and related treatments (HD) or by kidney transplant.  PD removes waste products from the blood by osmosis using the peritoneum, that is the membrane covering the intestinal organs in the abdominal cavity, as a filter.  The process involves using a surgically implanted catheter and a sterile dialysis solution which is introduced into, and removed from, the patient’s peritoneal cavity several times a day.  Most PD treatments are self-administered.  PD treatment can be administered whilst ambulatory, or during sleep.  I shall use the term “PD fluids” to include PD fluids and ancillary PD products such as lines for fluid connection, locks for the connections and bags for fluids, simply for the purpose of consistency. 

7. HD treatment involves the patient’s blood flowing outside the body through disposable bloodlines into a specially designated filter:  the dialyser.  The dialyser assumes the function of an artificial kidney and the dialysis solution carries away waste products.  The process is controlled by an HD machine, and is usually required by a patient about three times a week.  HD itself does not involve the use of sterile fluids, although some related treatments do so.  As did the trial judge, we shall use the term HD to cover all those treatments. 

8. Subject to certain medical conditions, PD and HD are not mutually exclusive.  Some patients have a choice of treatment.  The advantage of PD is that it is portable and easily administered at home or in the workplace.  It is often recommended for patients with some residual renal function as it maintains that function for a longer period than HD.  PD however can only be used by a patient with a functioning peritoneal membrane, and it carries a risk of infection, so patients are often forced to move from PD to HD.  Eligible patients may remain on PD for five to eight years before the peritoneal membrane fails.

9. A range of factors influences choice about using PD or HD:  age, health, residual renal function, convenience, the desire for the more intermittent HD treatment, diet and others.  In Australia in 2001, there were about 5,000 HD patients and about 1,915 PD patients.  In 2002, the annual treatment cost for PD was $20,000 to $25,000 per patient and for HD was $24,000 to $55,000 per patient.

10. There is an established and entrenched demand for PD fluids.  The purchasers of PD fluids are the Health facilities and a very small number of private hospitals.  As kidney disease in Australia is increasing, so too is the number of patients requiring dialysis.  At relevant times, the largest purchasers of PD fluids were the relevant SPAs on behalf of their respective Health facilities.  Historically, PD has been provided to patients through the public hospital system.  Each SPA purchases the total needs of PD patients within the State.  The prices paid for PD fluids vary between States.  PD patients, even though self-administering, require regular trained monitoring, generally only available at major public hospitals with renal units. 

11. The primary judge concluded that there was an Australia-wide sterile fluids market, which included LVP, IS and PN fluids, and a separate Australia-wide PD fluids and products market (which, again for ease of reference, I shall call the PD fluids market).  Those conclusions were not challenged on appeal.  Consequently, beyond the above descriptions of the functions of the various products, it is not generally necessary to separately refer to the particular fluids or products in these reasons beyond the categories of sterile fluids and PD fluids.  Nor is it generally necessary to refer further to the evidence and findings directed to identifying the relevant markets.  Those issues, alive at trial, are no longer contentious.  In general terms, the sterile fluids market was a broad one comprising a range of sterile fluids for the purposes described, but excluding dialysis products, and the PD fluids market was a separate market for the supply of dialysis products (excluding HD).

12. His Honour’s reasons for the conclusion that there were two relevant markets, should be briefly noted.  Although warehousing and distribution of product is necessarily local, the conduct complained of was alleged to have its effect in preventing competition in the one non-substitutable product market for PD fluids.  That market would be supplied by importation or by local manufacture.  The ability of a competitor to compete with Baxter depended upon the competitor getting a sufficient share of PD sales nationally to make it worthwhile to sustain the cost of the proposed competitive activity in, or into, Australia in relation to PD.  That would be so whether PD fluids were imported or manufactured locally.  Baxter manufactures within Australia at one plant and supplies PD fluids to all States of Australia, to New Zealand and to the Pacific Islands.

13. The structure of the industry, involving specialist renal companies, assisted in recognising the important difference in function between sterile fluids (LVP, IS and PN) on the one hand and PD fluids on the other.  The sterile fluids products and PD fluids are functionally quite separate, and are non-substitutable.  They attract separate and distinct patient bases.  PD is the product foundation for specialist renal companies.  Because imported PD fluids is a viable option compared to local manufacture, the fact that it may be uneconomic to manufacture only PD fluids in Australia and the fact that Baxter could manufacture PD fluids in Australia in the same plant and with the same equipment as it produces sterile fluids, did not point to one only sterile fluids (including PD fluids) market in Australia.  There were therefore separate Australia-wide markets for sterile fluids and for PD fluids.

14. The primary judge concluded that PD fluids have a separate importance to Baxter as a high value product, “sufficiently segregated and distinct” to be viewed separately from sterile fluids. 

15. There were four entities identified as competitors or potential competitors of Baxter in the sale of sterile fluids and PD fluids in Australia.  They are Gambro (Gambro), a subsidiary of Gambro AB, a Swedish company, Fresenius AG (Fresenius), a publicly listed German company, B Braun Australia Pty Ltd (B Braun), a subsidiary of B Braun Melsungen AG (B Braun AG), a German based multinational health care organisation, and Abbott Australasia Pty Ltd (Abbott), a subsidiary of the US health care products and services company Abbott Laboratories. 

16. Gambro AB has been involved in renal dialysis for many years.  It commenced business in Australia in 1975.  It is a specialist renal and dialysis company.  It has manufactured haemofiltration fluids in Australia from 1985 and has been selling imported HD fluids in Australia since 1986.  Since 1991 it has been manufacturing HD fluids in Australia.  It has manufactured PD fluids in Australia since 1990.  From a time well before the impugned Agreements, it was making a concerted effort to gain HD and PD business in Australia.  It supplies, and provides support for, renal equipment and it owns and operates dialysis clinics.  It manufactures HD concentrates and solutions for PD and haemofiltration.  It offers the full range of HD products.  Its PD products are extensively used in the Sydney Dialysis Centre and in other major hospitals.

17. Frensenius is also a worldwide company.  One of its three divisions, Fresenius Medical Care, operates in Australia.  It is a worldwide specialist dialysis group.  From 1996, Fresenius began offering HD and PD fluids in Australia, and it manufactures HD fluids in Australia and imports other HD products.  It imports PD fluids.  Through another of its divisions, it has supplied PN fluids in Australia through Baxter.

18. Each of Gambro, Fresenius and Baxter regard themselves as competitors in the global dialysis industry.  In Australia, Fresenius regarded Gambro as the dominant HD supplier in 1996 but with a small share of the PD fluids market, and it regarded Baxter as the dominant PD supplier but with a small share of the HD market.  Fresenius by the hearing claimed to have some 50 per cent of the HD products market, but less than 5 per cent of the PD fluids market.

19. The ACCC claimed that the impugned Agreements and their predecessors, and the conduct leading up to them, had prevented both Gambro and Fresenius from making any headway in the PD fluids market.

20. Abbott at material times imported and supplied in Australia EN fluids and products.  Until 1992 it manufactured and supplied LVP in Australia but it no longer does so.  It also imported and supplied PN fluids in Australia in 1987 only.

21. B Braun AG supplies some 40 per cent of each of the North American and German markets for IV fluids.  It manufactures sterile fluids and PD fluids, but not in Australia.  In Australia B Braun supplies certain intravenous therapy, a colloidal volume replacement and surgical instruments.  Although B Braun has a full range of IV products, haemodialysis products and some PD fluids registered under the Therapeutic Goods Act 1989 (Cth) (the TGA), including about 80 per cent of the LVP fluids called for in the 1997 NSW request for tenders, it did not sell them in Australia at the relevant time. It did not have any PN fluids registered in Australia.

22. The primary judge noted that certain other companies participate and have participated in Australia in the selling of “relevant or cognate” products.  Tyes Healthcare Australia Pty Ltd sells saline solutions in Australia, largely to pharmacies, as lens cleaners; it does not market that product as IS.  It does not intend to market a full range of saline solutions.  Five other companies were noted as manufacturing or selling IS in small quantities.  Astra Zeneca, an Australian subsidiary of a British based multinational group and one of Australia’s leading suppliers of pharmaceuticals, used to manufacture IS but has ceased to do so, and also does not intend to manufacture LVP fluids although it has a plant capable of doing so. 

23. It is also convenient to note certain other findings made by the primary judge which were not, or are no longer, contentious.  They concern the history of State contracts, prior to the impugned Agreements, for the supply of sterile fluids and PD fluids.  His Honour accepted that Baxter’s conduct in relation to the contracts in issue should be evaluated in the context of what had occurred before the impugned conduct:  Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374 at [34] and [273].

24. Until the mid 1980s, no company had an exclusive supply agreement for the supply of sterile fluids or PD fluids.  In about 1983 Baxter successfully tendered to QLD for a sole supply agreement for the supply of IV and PD fluids and IS for a 2 year period.  Soon after, NSW awarded an exclusive supply agreement for IV fluids to Abbott.  In 1985, NSW contracted with both Abbott and Baxter for the supply of IV fluids, and between 1985 and 1992 Baxter met some 85 per cent of NSW’s requirements for IV fluids.  A change to Commonwealth State funding arrangements in about 1990 led to States commencing to purchase PD fluids in their own right. 

25. In tender processes in 1987 and in 1990 in QLD, Baxter made alternative offers on the basis of item-by-item prices for all products covered by the tender, and on the basis of guaranteed sole supply of all items.  The exclusive supply prices were significantly lower.  Baxter won the bid on a sole supply basis.  The 1990 contract was for three years.  In 1993, QLD entered into a further three year exclusive supply agreement with Baxter for IV, IS and PD fluids.  In negotiations QLD declined to extend the exclusive supply agreement to five years, or to extend it to PN fluids.  It also secured assurances from Baxter about service standards, local manufacture and technological developments.

26. Between 1991 and 1993, Baxter also had a sole supply agreement with SA in relation to sterile fluids and PD fluids, having tendered on a sole supply price and alternatively on higher item-by-item prices.  A further sole supply agreement was entered into on 18 May 1993.  It ran to 28 February 1996. 

27. In 1995, SA called for tenders for pharmaceutical supplies to its Health facilities including LVP and PN fluids and IS, and separately for dialysis fluids.  Baxter tendered both on an item-by-item basis and a sole supply basis to supply the pharmaceutical supplies, the latter with an offer of sole supply of dialysis fluids.  Baxter also tendered to supply PD fluids and HD products, on an item-by-item basis and bundled, in response to the dialysis fluids tender.  Gambro and Fresenius also tendered to supply PD fluids and HD products in response to the dialysis fluids tender.  Baxter won both tenders on price.

28. In 1997, QLD issued a combined tender for PD, HD, IV and IS fluids.  It did not cover PN fluids.  Baxter’s tenders followed a similar pattern.  Its three-year bundled bid on a sole supplier basis was accepted, based on price and product quality.  The contract included a negotiated five per cent allowance for the trialling of PD fluids from other PD companies. 

29. In 1991, Baxter contracted with WA for the sole supply of IV fluids, IS, PN and PD fluids, having tendered on an item-by-item basis and on a sole supply bundled basis at lower prices.  In 1994, a fresh exclusive supply agreement for five years for the supply of IV, IS, PN and PD fluids was made, operative from 31 January 2005.  The bundled tender of Baxter was accepted in preference to its item-by-item pricing.  The term was selected by WA, in the light of its understanding that Fresenius would soon be selling PD fluids and that B Braun within two years was to enter the market for sterile fluids and PD fluids. 

30. In 1992, other suppliers had expressed concern to NSW (in the context of tendering as a consortium) about the way tender processes were constructed by NSW.  Those concerns did not lead to a restructuring of the tender processes.  During the 1992 tendering process, Abbott decided to close its Australian manufacturing plant for IV fluids.  Baxter then became the sole local manufacturer of sterile fluids.  NSW invited it to tender on an exclusive supply basis for a range of periods covering both sterile fluids and PD fluids.  In October 1992, Baxter submitted to NSW an item-by-item offer, an offer to supply for five years based on its current market share, and an exclusive supply offer for five years.  The item-by-item pricing proposal was seen by NSW as “excessive” price escalation.  In January 1993, NSW formally invited tenders for the supply of IV, IS, PN and PD fluids.  There were a number of tenderers, but all but Baxter related to some only of the products.  Baxter tendered on an item-by-item basis and a bundled offer for exclusive supply, the latter (after negotiation) at a significantly lower cost.  On 29 April 1993, NSW contracted with Baxter for the exclusive supply of sterile fluids and PD fluids for five years.  In the course of negotiations, NSW through its relevant officers was aware of, and referred to, the option of acquiring sterile fluids from overseas;  it extracted from Baxter a commitment to continue to manufacture locally during the term of the agreement, as well as a series of service commitments.  The service commitments were monitored during the course of the contract.

31. That was the scene to the time of the impugned conduct. 

32. As the primary judge pointed out, up to that time the structure of the tenders was established by the States, and in various respects they had negotiated successfully with Baxter as to particular terms of the contracts ultimately entered into.

33. The primary judge then addressed the history of tendering, negotiating and entering into the impugned Agreements.  As his Honour did, I shall call that “the impugned conduct”. 

34. On 27 June 1997, NSW issued a Request for Expressions of Interest for the supply of sterile fluids and PD fluids.  Baxter, Fresenius, Gambro and B Braun responded.  Gambro and Fresenius expressed interest restricted to PD fluids.  B Braun stated a capacity to supply IV, PN and PD fluids and IS.  That was followed by a Request for Tenders issued on 8 October 1997 for the supply of LVP, PD and PN fluids and products and IS for a two year period.  The Request for Tenders also asked for tenders for a one year period, and permitted alternative tenders specifically including bundled offers on a sole supplier basis.  The same four entities tendered:  Gambro and Fresenius to supply PD fluids; B Braun to supply LVP, PN and PD fluids and products and IS (though not covering some lower volume products); and Baxter.  Baxter submitted five tenders covering all products:  item-by-item bids, for one or two years;  an item-by-item bid for two years limited to IS, PN and PD;  and bids for all products on a bundled, exclusive supply basis for two or five years. 

1. The primary judge noted Baxter’s then understanding of whether B Braun had the capacity at this time to compete in respect of IV fluids, as an importer.  His Honour found that Baxter regarded B Braun as a competitive threat, though it anticipated winning the sterile fluids contract. 

2. There was a substantial difference between Baxter’s item-by-item prices and its pricing of its bundled offers; the latter was less than two-thirds of the former.  The item-by-item prices were also nearly 80 per cent higher than the then current prices.  Hence, Baxter understood that, unless B Braun was to take the bulk of the sterile fluids contract (and to do so it would have to import them), the financial pressure on NSW to take Baxter’s PD fluids and products was “enormous”.  The internal analysis of the bids by the NSW Contract Management Subcommittee recognised that the potential cost of accepting the limited offer of another supplier and then taking Baxter’s item-by-item pricing for other items including sterile fluids would be “unacceptable”.  It first preferred to accept Baxter’s two year bundled bid, to give some encouragement to alternative suppliers such as Fresenius and B Braun to stay in the Australian market.  After further negotiations with Baxter, to secure concessions permitting some PD fluids to be sourced from other suppliers, NSW decided on 28 April 1998 to enter into the 1998 NSW Agreement.  It was a five year bundled contract with Baxter, on a sole supply basis, allowing for 10 per cent of PD products to be sourced from other suppliers.

3. Baxter was invited by SA to negotiate directly for a new contract.  Baxter on 18 May 1998 made two bundled offers for IV fluids, IS, PN and PD fluids for different terms but they were not taken up.  Its existing contract in the meantime rolled over on a monthly basis from its nominal expiry date on 30 April 1998, ultimately until 2001.

4. In mid 2000, SA invited new tenders for pharmaceutical products, including LVP, PD and PN fluids and IS, for a two year period with a one year option.  The tender offered the option to supply both or either IV fluids and PD fluids, and to extend the tender to all renal fluids including HD fluids.  It also allowed for a bundled exclusive supply bid.

5. Tenders were received from Baxter, Gambro and Fresenius.  Gambro and Fresenius tendered for dialysis products and Baxter for all products.  Baxter made two offers:  an item-by-item offer for two years with two one year options, and a bundled bid on an exclusive basis for five years.

6. Baxter was then invited to make a further offer on a five year term, excluding those renal items the subject of a supplementary tender, that is PD fluids.  In essence, SA sought a volume discount for the exclusive supply of sterile fluids.  Baxter on 11 December 2000 made a further offer (Offer 1A) for the sole and exclusive supply of sterile fluids excluding PD fluids.  Baxter in Offer 1A offered no discount from its item-by-item prices for sterile fluids in its first offer.  It was appreciated by SA that there was no competitive tenderer for non-renal fluids.  Baxter’s bundled offer for both sterile fluids and PD fluids was almost 25 per cent less than its item-by-item offer.  It was also cheaper than its item-by-item offer for sterile fluids alone and cheaper than its Offer 1A for exclusive supply of sterile fluids alone.  Baxter’s Offer 1A exposed that it would not give a discount for exclusivity on sterile fluids unless it also was given exclusivity for PD fluids.  It was then decided by the State Supply Board of SA to accept Baxter’s five year exclusive bundled offer, with a negotiated allowance to purchase PD fluids from other suppliers.  The evidence indicated that the decision was taken because the cost premium of the other options was not acceptable.

7. Until 1998, Baxter had supplied sterile fluids to the ACT exclusively and Baxter and Gambro supplied its PD fluids.  On 2 November 1998, Baxter proposed an exclusive sole supply of sterile fluids and PD fluids.  That proposal was accepted on 7 March 1999, although the ACT may have had a different view as to the extent of the exclusivity.  Following a request for proposals to supply dialysis fluids to Canberra Hospital for both PD fluids and HD, on 24 May 2001 Fresenius was awarded that contract so Baxter was no longer the exclusive supplier of PD fluids.  Baxter claimed that arrangement was in breach of the agreement of 7 March 1999.  Baxter later in September 2001 asserted the right, in the circumstances, to be paid for its supply in accordance with its new price list.  Until the hearing, however, it was paid only the former price which followed the NSW contract price, so despite its legal stance Baxter appears to have taken no firm action to enforce its claim.

8. On 3 May 2000, QLD issued a tender request for sterile fluids (excluding PN fluids), for a period of one year with two further one year extensions.  The tender provided for 7.5 per cent of dialysis products to be procured from alternative PD suppliers.  Baxter’s three tenders were on an item-by-item basis for the proposed term; an exclusive supply agreement for all specified products for the proposed term; and an exclusive supply agreement for all specified products and PN fluids for three years.  Fresenius and Gambro tendered for the supply of HD and PD fluids, although not for all PD fluids.  The tenders were evaluated on an unbundled basis.  Baxter was the selected tenderer for all products, subject to negotiation as to price.  The primary judge concluded that Baxter’s bundled tenders thus had no effect on the decision to award the contract to Baxter.  Baxter was then on 1 May 2001 contracted to supply for three years all products on a sole supply basis, except for 7.5 per cent of PD products, for three years in accordance with its bundled pricing offer.  The decision was taken as Baxter was regarded as providing the best quality and service.  The evidence was that QLD did not, in the circumstances, see itself as having a lack of bargaining power because the contract terms were relatively short and the volume was not high.

9. The Health Supply Services Division (HSS) is the relevant administrative arm of WA.  Through the HSS, WA had contracted with Baxter for the supply of sterile fluids and PD products in 1991 and again in 1995, the latter contract being for five years.

10. On 26 May 2000, HSS issued a request for tender for sterile fluids and PD fluids.  It contemplated a sole supplier system, and specified a five year term.  Baxter made three offers:  an item-by-item priced bid for the five year term, and combined bids for all items with a volume discount for three year and five year terms.  The price differences in the three offers were substantial.  Comparing the two offers for five years, the bundled offer for sterile products was about two-thirds of the item-by-item cost; and the bundled offer for all sterile fluids and PD fluids was about three quarters of the item-by-item cost.  The item-by-item offer was some 65 per cent over the then current cost.  Both Fresenius and Gambro also tendered in relation to PD fluids.  The primary judge said it was plain to the HSS that the cost or “price” of not taking a Baxter sole supply arrangement for all products was huge, unless sterile fluids could be sourced elsewhere.  After negotiations, Baxter agreed that its bundled offer for five years should allow 10 per cent of PD fluids to be sourced from other suppliers.  On that basis, the bundled exclusive supply offer of Baxter was accepted for sterile fluids and PD fluids for the five year term.

11. The primary judge also made findings about conduct subsequent to the impugned conduct.

12. In May 2003, NSW and Victoria together invited tenders for the supply of IV, PD and PN solutions and IS for a period of one year, to be submitted on an item-by-item basis.  Baxter tendered on that basis, but was informed its prices were not acceptable.  It then raised the possibility of a volume discount contract, and submitted a more favourable pricing structure based upon volume discounts for total supply of IV and PN solutions and IS, and not less than 80 per cent of PD fluids.  That offer was accepted, but on the basis that NSW and Victoria would not guarantee a minimum share of 80 per cent of the PD fluids market.  Baxter acceded to that, rather than expose itself to PD fluids being fully sourced from Fresenius and/or Gambro.  Hence, Baxter thereafter no longer had a guaranteed exclusive supply agreement in relation to PD fluids with NSW.

13. His Honour also considered the extent of competition in the sterile fluids market.  He concluded that, at the time of the impugned Agreements and to the hearing, none of the competitors of Baxter was likely to enter the sterile fluids market (for LVP and PN fluids and IS) because of the costly and time consuming TGA registration process; secondly, because of high freight importation costs for such bulky items as IS; and, thirdly, because of the high entry cost of establishing a manufacturing plant in Australia relative to the size of the market.

14. He explained that the procedures for registration, and maintaining registration, under the TGA, require time and expense.  The distribution of products of the kind under consideration are permitted only if registered.  However, his Honour said that, whilst that may impede rapid entry to the market or markets, the TGA registration process itself was not a barrier to entry to the relevant markets of any real magnitude.

15. It is also significant to note that his Honour did not place weight on the evidence of clinicians as to the relative product quality, technological innovation, and servicing by Baxter and its actual or potential competitors, or the desirability of clinical choice.  Such matters, depending upon factual findings, might have informed the assessment of the extent of Baxter’s market power if the facts might have demonstrated that Baxter secured and held its position in the market despite superior quality products, technological innovation, or service.  But his Honour found the evidence directed to these topics was inconclusive.

16. The primary judge also noted that no attempt had been made by Baxter to analyse the “cherry pick” prices by reference to the cost base or the increased marginal cost of production, positing any given reduction in volume throughput of its plant. 

    THE CONCLUSIONS OF THE PRIMARY JUDGE

17. The primary judge, after considering all the evidence and recording his findings on primary factual matters, considered the case of the ACCC separately under ss 46 and 47 of the Act.

18. As to the case under s 46, his Honour first observed that there was no dispute as to the principles applicable under s 46 derived from the decisions of the High Court in Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374 (Boral Besser); Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1 (Melway); and Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 (Queensland Wire).  Those cases, and Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53 (Rural Press) dictated consideration of each of the following elements: market definition; whether Baxter had a substantial degree of power in a relevant market or markets; whether Baxter had taken advantage of that market power; and whether Baxter had a proscribed purpose when doing so. Those elements must be considered sequentially, and must all co-exist and be connected for a contravention of s 46 to be made out.

19. The primary judge then concluded that:

    (1)       There is an Australia wide –

    (a)sterile fluids market (it was not necessary to decide if that included PN fluids, or to decide whether the geographical sterile fluids market was broken into separate LVP, IS and PN fluids); and separately

    (b)PD fluids market.

    (2)Baxter held a substantial degree of market power in the Australia-wide sterile fluids market at relevant times, that is between 1998 and 2001; and 

    (a)Baxter did not generally, that is by its conduct leading to all the impugned Agreements, take advantage of its substantial market power in that market by tendering separately by an item-by-item priced tender and a considerably lower bundled price for sterile fluids and PD fluids on an exclusive supply basis; but

    (b)Baxter did take advantage of its substantial market power in that market in its presentation of Offer 1A to SA by its “point blank refusal to give a discount for volume” on sterile fluids.

    (3)Baxter’s purpose in its tendering strategy –

    (a)was not to eliminate or substantially damage competitors in the sterile fluids market or the PD market – relevantly the competitors were Fresenius and Gambro in the PD market. His Honour found that Baxter’s substantial purpose was to frame a bid structure involving a credible item-by-item price offer and the alternative bundled offer to “maximise the chances of bringing about circumstances in which the bids of competitors with substantially equivalent [PD] products could only be accepted at a significant cost penalty”, and that such a purpose did not come within s 46(1)(a) of the Act;

    (b)was to make the rival PD fluids bids of Fresenius and Gambro uncompetitive in the sense of being unacceptable, because of the credible cost alternative of Baxter’s item-by-item offer. It was to meet the developing competition in Australia to supply PD fluids. It was substantially to prevent rival bidders for PD fluids and products from being able to put forward bids that were realistically competitive by the existence of credible alternative high item-by-item pricing. It was therefore to deter or prevent Fresenius and Gambro from engaging in competitive conduct in the PD fluids market, contrary to s 46(1)(c) of the Act. It was to foreclose the likelihood or restrict the possibility of a competitor’s bid having any realistic prospect of success.

    (4)Subject to the derivative Crown immunity issue, Baxter had contravened s 46 of the Act by making Offer 1A in SA, with the purpose prohibited by s 46(1)(c); but had not otherwise contravened s 46 of the Act.

20. The primary judge’s conclusions concerning s 47 of the Act started by pointing out that there was no real dispute that the pleaded impugned conduct was conduct which fell within s 47(2), and so also fell within s 47(1) of the Act, if s 47(10) were satisfied. Hence, his Honour identified the contravention of s 47 turned upon whether Baxter’s impugned conduct either had the purpose of substantially lessening competition, or had or was likely to have the effect of substantially lessening competition, within the meaning of s 47(10)(a) or (b). Section 4G says that “lessening competition” includes “preventing or hindering competition”.

21. His Honour concluded that Baxter’s conduct in responding to the request for tenders, and in negotiating the impugned Agreements with NSW, SA, WA and QLD, contravened s 47 of the Act because that conduct had the purpose of substantially lessening competition, and because it was to ensure, as far as possible, that the competitive process in tendering would not bring about realistically competitive bids for PD fluids by bundling or tying PD fluids to sterile fluids, and by providing a credible alternative which would make a choice of any rival’s PD tender financially damaging to the State. It had the effect of substantially lessening competition in the same way.

22. If the competitive process were viewed more expansively, beyond the operation of the tender process, the primary judge would not have concluded that Baxter had the purpose referred to in s 47(10)(a) or that its conduct had or was likely to have had the effect of substantially lessening competition as referred to in s 47(10)(b). Hence, his Honour’s conclusion in respect of s 47 (subject to the derivative Crown immunity issue) was dependent upon his identification of the relevant competitive process.

23. As I noted above, as the primary judge then concluded that the Act did not apply to the impugned conduct of Baxter in any event because of derivative Crown immunity.  In the result, the proceeding was dismissed. 

    THE AMENDED NOTICE OF APPEAL AND THE NOTICE OF CONTENTION

24. There were 26 grounds of appeal in the Amended Notice of Appeal concerning the conclusions of the primary judge about the application of s 46 of the Act to the impugned conduct, and two grounds of appeal concerning the application of s 47 of the Act to the impugned conduct.

25. The ACCC did not contend that his Honour had erred in his understanding of the relevant legal principles, but that he had erred in properly applying s 46 to the facts and so had erroneously concluded that, apart from the Offer 1A Contravention, Baxter had not contravened s 46. The grounds of appeal challenged the general conclusions, as well as identifying particular conclusions which were said to be wrong, and particular factual findings which were said to be wrong.

26. The grounds of appeal concerning s 47 are only generally expressed, no doubt because the only reason why the primary judge did not find contraventions of s 47 was his conclusion that Baxter enjoyed derivative Crown immunity.

27. In essence, the ACCC on appeal first attacked the primary judge’s conclusions that Baxter did not take advantage of its substantial degree of market power in the sterile fluids market (except by making Offer 1A to South Australia). Then it attacked the conclusion that Baxter’s purpose in taking advantage of that market power was not caught within the net of s 46(1)(a). It therefore sought to have substituted declarations that Baxter’s impugned conduct generally contravened s 46 of the Act (not limited to its conduct in relation to Offer 1A to South Australia).

28. Baxter, by its Notice of Contention, firstly attacked the conclusion that it had substantial market power in the Australia-wide sterile fluids market. Secondly, it sought to sustain the conclusion that it did not take advantage of its market power in that market. In that regard it contended that the primary judge made certain findings adversely to it which should be corrected and would also support the conclusion of the primary judge. Thirdly, it contended that the primary judge’s conclusion that it had taken advantage of its market power in that market in relation to Offer 1A to SA was erroneous, and should be set aside. Fourthly, whilst seeking to maintain the conclusion that it did not in any event have the purpose proscribed by s 46(1)(a), it contended also that there were other findings on that topic which were erroneously made and should be corrected, so that the conclusion should be maintained in any event. Fifthly, Baxter contended that the conclusion that it had the purpose proscribed by s 46(1)(c) was erroneous and should be set aside.

29. As with the ACCC’s contentions, the 19 grounds in the Notice of Contention identified comprised allegedly erroneous factual findings, allegedly erroneously legal conclusions by misapplication of the relevant legal principles, and additional contentions about findings which should have been made, or about how certain evidence should have been used, or not used, to demonstrate further error on the principal issues ventilated.

30. It is convenient to address the grounds of appeal and Baxter’s grounds of contention together as they deal separately with:

    (1)whether Baxter had a substantial degree of power in the Australia-wide sterile fluids market;

    (2)whether Baxter took advantage of its power in that market by engaging in the impugned conduct;

    (3)whether Baxter took advantage of its power in that market by its conduct in relation to Offer 1A in South Australia;

    (4)whether Baxter had the purpose proscribed by s 46(1)(a) in engaging in the impugned conduct;

    (5)whether Baxter had the purpose proscribed by s 46(1)(c) in engaging in the impugned conduct.

1. I shall then address Baxter’s Notice of Contention concerning the conclusion adverse to it that, but for the existence of derivative Crown immunity, it had contravened s 47 of the Act.

2. Each of the grounds in the Amended Notice of Appeal, and in the Notice of Contention, were identified either in those documents or in the course of oral submissions as related to one or other of those five principal issues.  They will each be addressed within that general structure.

   DID BAXTER HAVE A SUBSTANTIAL DEGREE OF POWER IN THE AUSTRALIA-WIDE STERILE FLUIDS MARKET?

3. Before dealing with the contentious elements of s 46, it is convenient to set out its relevant provisions. Section 46(1) provides:

   A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of –

   (a)eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;

   (b)       preventing the entry of a person into that or any other market; or

   (c)deterring or preventing a person from engaging in competitive conduct in that or any other market.

4. It was not contended by Baxter that the primary judge had misunderstood the concept of a substantial degree of market power, or had misconceived the decisions explaining that concept.  Indeed, its written submissions substantially replicate his Honour’s recital of what those cases illustrate.

5. Baxter contended that market power can only be determined by examining what it was capable of doing over a reasonable or appreciable period of time.  It further submitted that the evaluation of the degree of market power must be made within the “wider area of rivalry”, by which it meant the strength of Fresenius and Gambro in relation to HD, and the countervailing power of the SPAs to “dictate the structure of the markets” and to facilitate entry of others to the two markets found to exist.  It also submitted that it could not successfully raise its prices to “supra-competitive” levels so as to deter or damage its competitors and to recoup “losses” caused by price cutting, so it could not have had a substantial degree of market power at the time of the impugned conduct.

6. The primary judge decided that Baxter had a substantial degree of power in the Australia-wide sterile fluids market in the relevant period of 1998-2001 for a combination of reasons.  First, his Honour found that Baxter was the only local manufacturer of a broad range of sterile fluids, although an importer such as B Braun might over time have entered the market as a competitor, so as to impose “a degree of restraint” on Baxter as to how it behaved.  Baxter understood itself to have a dominant market share in sterile fluids and that it was likely to maintain it; that it was likely to win the sterile fluid tenders; and that to a degree Baxter could charge what it liked for sterile fluids even though it knew there was potential import competition. 

7. Baxter had been the sole and dominant manufacturer in Australia of sterile fluids for 6-9 years; no competitor had sought to challenge Baxter in that market since the exit of Abbott in 1992 as the last local competitor.  And the products were price inelastic and essential, and the constraints did not deny Baxter a confident expectation that it would be successful in sterile fluids tenders.

8. His Honour also noted that there was a body of countervailing State power, because Baxter was dealing with government agencies.  There was also a real capacity in the SPAs to set the tender terms, such as not tying products or permitting the tying of products in tenders.  Potentially Baxter stood to lose large parts of its market share by a small number of decisions by buying SPAs, and that competitors could be sponsored by the States if Baxter’s behaviour sufficiently motivated them to do so.  Behaviour sufficient to provoke such a backlash was unlikely.  Hence, although he found that Baxter could not act as if unconstrained entirely, it had considerable room to behave as a sole supplier in the market.  Although Baxter had a real degree of flexibility over what it charged, as confirmed by its own witnesses, the capacity for the States to control the shape and operation of the markets was demonstrated when they denied the opportunity to tie products together, as shown by events in NSW and Victoria in 2003, and by the ACT refusal to pay the prices apparently specified under the 1998 ACT Agreement, so that Gambro and Fresenius were able to make greater inroads into Baxter’s market share in the PD fluids market.

9. His Honour also noted the conflicting evidence of officers of the SPAs of QLD and NSW that they did not believe there was an imbalance of bargaining power between them and Baxter, and on the other hand the evidence of officers of the SPAs of WA and SA that they lacked bargaining power.

10. There was, his Honour also found, no sufficient evidence to conclude as to the margins for sterile fluids.

11. However, the overall picture led the primary judge to conclude that during the period 1998-2001 Baxter had a substantial degree of power in the sterile fluids market.  As noted, it had been the sole Australian manufacturer of sterile fluids since 1992 and the dominant, and nearly exclusive, supplier of sterile fluids since that time.  Sterile fluids were an essential product.  The price was inelastic.  There were significant barriers to entry into the market.  The other local manufacturer had ceased production in 1992, when it could not justify maintaining its plant without a guaranteed market share and a price increase.  Since then, no supplier of sterile fluids had sought to challenge Baxter in that market.  Import competition faced significant barriers by the costs of importation and, to a lesser degree, by the TGA registration period and costs.  Baxter confidently expected to be successful in its sterile fluids tenders, and short of sufficiently provocative behaviour on its part, it was unlikely that the SPAs would financially sponsor another entrant into the market.  And, his Honour found, Baxter had a real degree of discretionary freedom as to its pricing for sterile fluids.

12. Obviously, Baxter’s Notice of Contention primarily requires consideration at this point.  Before dealing with it, it is convenient to consider the separate matter raised by the ACCC in its Amended Notice of Appeal relating to the issue of market power.

13. The ACCC submitted that the primary judge erred in failing to find that Baxter was slow to introduce improved products as an illustration of, or as a consequence of, it having a substantial degree of market power in the sterile fluids market. I have referred to his Honour’s view on that topic at [64] above, namely that the evidence did not enable a conclusion to be drawn one way or another.

14. It may be accepted that conduct beyond mere pricing may indicate a substantial degree of market power.  Re Queensland Co-operative Milling v Defiance Holdings Ltd (1975) 25 FLR 169 at 188-189 (QCMA) says that quality and innovation are important dimensions of the “price-product-service packages offered to consumers and customers”, within which there should be independent rivalry.  QCMA was referred to by the High Court in Boral Besser without any adverse comment on that particular element of its reasoning.  In Boral Besser, there is no express reference to quality and innovation being important dimensions of the “price-product-service packages”, but it is noteworthy that McHugh J in Boral Besser at [288] commented:

    Market power also includes the power to sell less in terms of quality or quantity at the same price or to sell products on terms and conditions which a firm without market power would not be able to enforce – this being an element of market power that arises in conduct other than "predatory pricing".  But market power is not equivalent to the mere cutting of prices.

    Also, as a general observation, a lack of competitive pressure may give rise to the expectation that innovation will be delayed. 

15. There was certainly evidence which supported the factual contention of the ACCC.  It included evidence concerning Baxter’s decision not to introduce the Luer lock system for connecting patients on dialysis to PD bags until the late 1990s, even though the earlier “spike” system was considered inferior because it gave rise to a greater risk of infection.  The ACCC also submitted that Baxter had bargained for longer term exclusive bundled supply contracts as the “price” for introducing new technological advances.  The ACCC referred to the evidence of the witnesses who addressed that topic, some of which was not challenged in cross-examination, including that of Dr Chapman, the Director of the Renal Unit at Westmead Hospital, and Mr Garland who was between July 2001 and February 2003 employed by Fresenius and before then from 1980 had been a Clinical Nurse Consultant at St Vincent’s Hospital.

16. Mr Garland said that the NSW agreements, including the 1998 NSW Agreement, “reduced the ability of clinicians to treat their patients with what they thought were appropriate products [ie- non-Baxter products]”.  In his opinion, Baxter was only releasing new PD products into the market when convenient, instead of in response to user need, whereas Gambro and Fresenius had superior products and were trialling new products and techniques.  However, as the primary judge pointed out, despite Mr Garland’s claim that the St Vincent’s PD Clinic was being held “to ransom” by Baxter, staff at the Clinic continued to place new patients on Gambro products in the period up to the 1998 NSW Agreement, and thereafter.

17. Some evidence which could have supported Baxter’s use of technological advances as a bartering factor to secure long term exclusive supply contracts was given by Mr Kemp of NSW Supply concerning the negotiations in 1998 leading up to the 1998 NSW Agreement, including his perception of Baxter’s motives and as to what was said by Baxter in those negotiations.  That evidence is by no means conclusive in support of the ACCC’s proposition.  Also, there was evidence to the contrary from Baxter officers to the effect that Baxter preferred or required long term contracts so as to be able to recoup the significant expenditure required to produce innovations such as Freeline Solo (a twin bag system) rather than as the “price” for innovation.  That evidence was given by Messrs Bragg, Lee and Wallace on behalf of Baxter.  There was also evidence from clinicians that the price of the Freeline Solo system was expensive, and that Baxter had proposed the higher price to support the significant capital expenditure required to offset the cost of production of the Freeline Solo system, and so to make it more readily accessible in terms of price.  In other words, Baxter had delayed introducing that product option because the price to justify the capital expense of plant improvements to produce it more cheaply was not attractive to its customers.  The primary judge made no specific finding on those matters.  In my view, the state of the evidence as identified in the course of submissions does not point firmly either to the conclusion that Baxter sought long term contracts as the “price” for product development, or on the other hand that it did so to make product development economically warranted. 

18. The only specific product development said by the ACCC to be delayed by Baxter to secure longer term contracts was the Luer lock system.  Baxter’s evidence explained that delay as a management decision, made by an assessment of whether Australian users would pay the additional cost of the newer and admittedly better technology, and that it was introduced at the request of the NSW SPA when negotiating the 1998 NSW Agreement.  The primary judge did not expressly address that evidence.  It is not inherently improbable, or for any particular reason unreliable.  It fits in with his Honour’s overall conclusions on this general topic.  So too in other ways does the evidence of Dr Irish and Mr Kinkade, both independent of Baxter, as well as that of the Baxter employees whose evidence is recited in his reasons, as to why that product improvement was not introduced by Baxter earlier than 1998.

19. I have considered all that material.  I am not persuaded that Baxter delayed the introduction of new technology or product improvements because it had substantial market power in the sterile fluids market, so that its conduct evidences the existence of that market power.  I consider that, overall, the evidence on the topic is inconclusive.  That accords with the conclusion of the primary judge on that topic.

20. I turn to the matters raised by Baxter’s Notice of Contention.

21. Baxter contended that the conclusion of the primary judge that it had substantial market power in the sterile fluids market should not have been reached if the observations of the High Court in Boral Besser at [121] and [188] had been properly applied.

22. In particular, Baxter pointed to the evidence of the strong countervailing power of the States; their control and dictation of the tendering process which allowed for rapid gains and losses in market share; Baxter’s low margins; its lack of significant pricing discretion (inconsistent with an express finding of the primary judge to the contrary); and its inability to recoup any losses by selling at prices below the marginal cost of production.

23. The ACCC submitted in response that, notwithstanding his conclusion, the primary judge in fact gave too much weight to the evidence of the States’ control of the tendering processes.  It also contended that the capacity of the SPAs to freely share information and to work collaboratively in the tender processes enabled, or led to, a form of “signalling” by Baxter that the SPAs may suffer significant economic detriment by not accepting the bundled bids.  The ACCC sought to draw some comparison with the circumstances involving perceived threats of enforcement made in Universal Music Australia Pty Ltd v ACCC (2003) 131 FCR 529 at [222] (Universal Music). 

24. The evidence about the extent of Baxter’s market share in the sterile fluids market was carefully considered by the primary judge.  His Honour found Baxter was the dominant supplier of sterile fluids in Australia.  That is, of course, only an indicator of market power: see Boral Besser at [121] and [188]. As those passages in Boral Besser point out, where pricing behaviour is in issue, regard should be had to the extent to which the impugned conduct was constrained by Baxter’s competitors, both actual and potential in that market, or was constrained by those acquiring its products in that market: s 46(3) of the Act. The primary judge approached the issue in that light.

25. Clearly the SPAs decided the mechanism by which suppliers were selected, and ultimately the terms upon which tenders were accepted.  They also had the ultimate resource of sponsoring or otherwise facilitating a competitor into the Australia-wide sterile fluids market.  A threat to do so had been made by NSW in the context of earlier negotiations.  Baxter was vulnerable to the SPAs making such a threat.  And, if Baxter by its tenders or its negotiations behaved in such a way as to provoke an SPA or several SPAs to expend public resources on funding or facilitating a competitor into the sterile fluids market (presumably including the support of a local manufacturing facility), Baxter would be vulnerable to a very significant loss of market share.  Indeed, the “all or nothing” foundation in the tenders, at least as one of their options, meant that, if Baxter were unsuccessful, it stood to lose a significant market share of either the sterile fluids market or the PD fluids market or both by the decisions of a small number of SPAs.  That would follow from the actual extent of its market shares in each of those markets before the impugned conduct.  The primary judge recognised those matters, and had regard to them in deciding whether Baxter had a substantial degree of power in that market.  Baxter, for its part, did not go so far as to contend that, necessarily, the existence of those factors meant that it did not have substantial power in that market.

26. Baxter submitted that two incidents illustrated the extent of the constraints upon it in the sterile fluids market, and hence that it did not have the degree of market power as found by the primary judge.

27. One incident concerned the conduct of the ACT by entering into a contract with Fresenius on 24 May 2001 for the supply of dialysis fluids, when Baxter claimed to have an exclusive supply agreement with the ACT under the 1998 ACT Agreement, and then the ACT in effect thumbing its nose at Baxter’s claim that, if it were no longer the sole supplier, it was entitled to be paid at its item-by-item prices.  As I noted above at [56], the ACT simply continued to pay Baxter at the same prices as applicable under the 1998 NSW Agreement.  In its submission, Baxter said the ACT was able to act with impunity in the way it restructured its arrangements for exclusive supply of PD fluids and HD and related treatments, despite having an existing supply obligation to Baxter in relation to PD, and that such conduct was strong evidence that Baxter did not have a substantial degree of power in the sterile fluids market.

28. The second incident referred to by Baxter was the outcome of the negotiations in 2003 by which Victoria and NSW were able to secure prices tendered on an exclusive supply basis but without any commitment to exclusive supply.  It is referred to in [61] above.

29. I am not persuaded that those two matters lead to the conclusion, in all the circumstances, that Baxter did not have a substantial degree of power in the Australia-wide sterile fluids market at material times.  Nor do they demonstrate error on the part of the primary judge.  The assessment of the existence of a substantial degree of power in a market is one of fact.  It requires a consideration of all the circumstances.  That is what the primary judge did.  His Honour took into account each of the particular incidents referred to above.

30. In the case of the ACT’s response to Baxter, as his Honour observed, there is (or at least was to the time of these proceedings) a dispute between the ACT and Baxter as to whether the 1999 ACT Agreement (by picking up the 1998 NSW Agreement) gave Baxter the exclusive right to supply PD products to the ACT.  The ACT asserted the right to, and did, call for tenders to supply PD fluids and HD fluids and products separate from sterile fluids, notwithstanding the 1999 ACT Agreement.  Its later conduct was in relation to the PD fluids market (and more generally dialysis products).  That was a market which, as the primary judge found, was a much more competitive market.  Baxter disputed that the ACT had that right.  The dispute was not apparently brought to resolution, at least so far as the evidence exposed.  Baxter also asserted the right, although it has not apparently enforced the right, to charge the ACT the higher item-by-item prices once the ACT commenced to source PD products from Fresenius.  As noted, for its part the ACT disputed that Baxter could do so and continued to pay the prices applicable under the 1998 NSW Agreement.  That dispute also was not resolved by the time of the hearing.  The incident does not, in my view, do much more than show Baxter’s commercial reaction to those circumstances.  Its reaction was also given at a time when it was aware of the ACCC’s general concerns about the impugned Agreements.  I do not think that this incident weighs much in the scale when all the evidence about the existence of Baxter’s market power in the sterile fluids market is considered.

31. The events in 2003 in relation to the NSW and Victorian tender demonstrate, as the primary judge indicated, a capacity in the SPAs to “control the shape and operation of the relevant markets”.  That was and is a factor to be taken into account.  The primary judge did so. 

1. To the extent that ACCC submits that the primary Judge should have found that Baxter had the purpose of lessening competition in a market by damaging competition, it faces the difficulties to which I have already referred.  His Honour found to the contrary, and that decision was substantially based upon a careful consideration of the credibility of Baxter’s witnesses, especially Mr Lee.  His Honour expressed the proposition in various ways but, in the end, he found that Baxter’s purpose was to maximize its market share by winning tenders.  That is not a proscribed purpose.  Of course the finding does not preclude another purpose which is proscribed, but the primary Judge declined to make any such finding.  No basis has been demonstrated for upsetting these findings.

2. In its initial written submissions, ACCC identified the following propositions in the primary Judge’s reasons as being of particular relevance:

   ·Gambro was unlikely to invest in production facilities whilst it was prevented from supplying PD products in excess of the stipulated percentages of 10%, in the case of SPAs other than Queensland, and 7.5% in the case of Queensland;

   ·Baxter’s conduct had not made it more difficult for Fresenius Kabi to establish a plant for IV and PN fluids or its ability to supply PN fluids;

   ·the existence of bundled contracts had not raised entry barriers in the PD products market;

   ·the correct analysis of competition in the market might be that competition is “for the market” rather than in it;

   ·it was vital to Baxter to ensure maximum throughput of product at its plant; and

   ·the evidence did not justify the inference that the market would operate in the same way in the absence of the impugned conduct so as to enable Baxter to win the PD business.

3. ACCC disputed the finding that the existence of bundled contracts had not raised entry barriers. In this regard it referred to its submissions in connection with the s 46 case at para 40 of its initial submissions. There, ACCC pointed out that Mr Bragg (an employee of Baxter) had said that the size of the PD products market meant that it would not be viable for a competitor to establish a plant in Australia to produce PD products alone. Although this was inconsistent with other evidence, ACCC submitted that it indicated Baxter’s attitude to the likelihood of competition. It then asserted that Baxter was able further to raise barriers to entry by making it impossible for a competitor to supply PD products alone. Such a competitor would have to offer the other sterile fluids in order to compete. As to competition “for the market”, ACCC submitted that the question did not arise, given the absence of any finding that there was a minimum efficient scale dictating that only one manufacturer should supply the Australian market with PD or sterile fluids. Finally, ACCC asserted that having regard to these various findings, “It is difficult to see how the trial judge reached the conclusion that he did.” This is an unsatisfactory basis for upsetting findings of fact.

4. At paras 37-52, in its submissions in answer to the notice of contention, ACCC took the matter somewhat further.  As I have previously observed, it did not completely abandon his Honour’s focus on the tender process, asserting that properly understood, it involved an assessment of competition in an identified market.  I have already rejected that argument.  However ACCC alternatively submitted that his Honour erred by focussing on the lack of impact on competitors.  I have some difficulty with this argument.  His Honour treated as critical the effect of Baxter’s conduct upon the tender process, including the effect upon competitors’ market shares.  Indeed, that is one of my concerns about his reasons.  At para 48, ACCC seems to have accepted that the primary Judge erred in seeking to distinguish between the tender process and the “broader framework” of the market, and that the “correct emphasis should have been on the competitive process as a whole”.  I accept that proposition.

5. At para 49, ACCC submitted that the primary Judge had departed from the “future with and without” test by looking to a market in which purchasers did not use the open tender process.  However I understand his Honour to have been saying nothing more than that as things were in the market, competitors could not match Baxter’s bundled bids.  At paras 49 and 50 ACCC submitted that references to “competition for the market” suggested error in the primary Judge’s reasons.  However I understand his Honour to have been observing that the Australian market was small, and that Baxter had an advantage, particularly in the sterile fluids market, given its existing capacity to manufacture locally.  ACCC submitted that if competition was “for the market”, this was as a result of the impugned conduct.  That submission implies that without such conduct the position would have been otherwise.  No evidence accepted by the primary Judge has been identified as supporting that proposition. 

6. ACCC submitted that “While his Honour accepted … that Baxter had an incentive to maintain a minimum throughput at its factory, there was no finding that a smaller scale or more efficient factory for PD or sterile fluids would not be viable …”.  This seems to assume a burden upon Baxter to justify its conduct.  It does little to identify error in his Honour’s conclusion that there was no lessening of competition in a relevant market. 

7. Finally, ACCC submitted that his Honour’s findings at [608] and [629]-[630] were sufficient to satisfy the requirements of “anti-competitive purpose because the impact of Baxter’s conduct on the tender process, being the system chosen by the States in the relevant period impeded or hindered the normal operation of the market sufficiently to amount to a substantial lessening of competition in the market …”.  One difficulty with that approach is that “normal operation of the market” is a term which has no clear meaning in this case.  The notion of “normal operation” is further undermined by the reference in para 52 to competition being already weakened by the departure of Abbott.  ACCC has not pointed to any respect in which competition in the market was lessened, or to any evidence which might establish such lessening.  I have previously questioned the relevance of the SPAs’ choice of procurement methods.  Again, there is the over-arching problem that the tender process is not the market.

8. ACCC submitted that Baxter’s conduct limited competition in the PD products market by preventing competitors obtaining greater shares of it.  It has pointed to no evidence to that effect.  In any event, that in the absence of Baxter’s conduct, competitors may have acquired larger market shares does not lead to the conclusion that competition would probably have been enhanced.  Each competitor was a large corporation with no demonstrated intention of leaving the PD products market.  That one or other of them may have increased its market share to more than 10% may not have affected competition at all.

9. As to proscribed effect or likely effect, at para 52 of its submissions in reply to the notice of contention, ACCC asserted that the evidence from Fresenius and Gambro demonstrated that Baxter’s conduct had been effective “to limit the competitive scope, even for major companies such as those, for so long as the conduct continued to be permitted.”  In support of this proposition, ACCC referred to paras 38 and 39 of its earlier submissions.  The evidence in question, from Mr Mechtersheimer, a senior officer of Fresenius, was that it had decided not to build a PD products plant in Darwin because of Baxter’s agreements with the SPAs.  At [328] and [635] the primary Judge rejected that evidence.  ACCC submitted that such rejection related only to the question of actual effect of Baxter’s conduct and not to Baxter’s purpose.  That may be so, but the evidence did not, in any event, go to Baxter’s purpose.  The relevant evidence from Gambro was that to have 5% of the PD products market was of no benefit, and that it continued in the market only in order to maintain its presence for long term, strategic reasons.  It may be that Gambro’s remaining in the market made it harder for ACCC to prove lessening of competition.  I can see no other significance in this evidence.

10. None of these matters is of any assistance to ACCC in seeking to demonstrate error in the primary Judge’s findings that Baxter had no purpose of lessening competition in any market, and that its conduct did not have that effect or likely effect.  In so far as concerns purpose, his Honour’s conclusion is too closely based on credibility to be upset on this appeal.  As to effect or likely effect upon a relevant market, his Honour considered that question in connection with both the PD products and sterile fluids markets and rejected ACCC’s case.  That conclusion was based on a detailed examination of a large volume of evidence and also, to some extent, involved findings as to credibility.  ACCC has not demonstrated a viable basis for upsetting such findings.

    ORDERS

11. I would dismiss the appeal. 

I certify that the preceding one hundred and eighteen (118) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett.

Associate:

Dated:        11 August 2008

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1008 of 2005

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
Appellant

AND:

BAXTER HEALTHCARE PTY LTD (ACN 000 392 781)
First Respondent

THE STATE OF WESTERN AUSTRALIA
Second Respondent

THE STATE OF SOUTH AUSTRALIA
Third Respondent

THE STATE OF NEW SOUTH WALES
Fourth Respondent

JUDGES:	MANSFIELD, DOWSETT AND GYLES JJ
DATE:	11 AUGUST 2008
PLACE:	SYDNEY

REASONS FOR JUDGMENT

GYLES J

1. I have had the opportunity of reading the reasons of Mansfield J in draft.  Those reasons set out the issues on appeal and how they arise.  These reasons should be read as supplemental to those.

   SECTION 46

2. I agree that the contention of the Australian Competition and Consumer Commission (the ACCC) that all of the impugned conduct was in breach of s 46(1)(c) of the Trade Practices Act 1974 (Cth) (the Act) should be upheld. The finding of the primary judge that Baxter Healthcare Pty Ltd (Baxter) had a substantial degree of power in the sterile fluids market is not open to any doubt. A substantial degree of power in a market is not the equivalent of monopoly power. Indeed, the Act was deliberately amended in 1986 to lower the threshold. Some of the cases and commentaries need to be read with caution with that in mind. The markets found are narrow in product scope. The finding that the impugned conduct was for the prohibited purpose is open to argument but, for the reasons given by Mansfield J, should not be disturbed.

3. In my respectful opinion, once those findings were made, the facts compel the conclusion that Baxter’s conduct was taking advantage of its substantial degree of power in the market for sterile fluids to endeavour to achieve the prohibited purpose in the PD market. As Mansfield J points out, the gist of the case was not that bundling per se was a breach of s 46, but that bundling in conjunction with the alternative offer strategy was. That alternative offer strategy could only succeed because of the substantial market power Baxter held in the sterile fluids market. The existence of any real competition in that market would have constrained Baxter from making the high offers for sterile fluids.

4. The fact that the purchasing authorities, whether by tender arrangements or otherwise, accepted or facilitated the anti-competitive arrangements is beside the point. Each was confronted with the situation in which Baxter had a substantial degree of market power in relation to sterile fluids and had to deal with that situation as best they could. None of the purchasing authorities had anything to do with the prices offered by Baxter as part of its alternative bid strategy. Those prices were kernel of the breach of s 46(1)(c).

5. Baxter contends that its aim was solely to win as much business as it could across the board and that its conduct was directed to achieving that result rather than harming competitors.  In my view, that confuses purpose with motive.  Baxter’s method of winning business in the PD market was to prevent its potential competitors from competing in a meaningful way in that market because of its leverage from the substantial degree of market power it held in the sterile fluids market.  The objective of maximising profit can only be achieved if there is compliance with the Act.  Since Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177, it has been recognised that the conduct of a party with substantial power in a market may be subject to restraints to which others without power are not (see NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 per McHugh ACJ, Gummow, Callinan and Heydon JJ at [72], [76], [85], [125] and [126]). Even if Baxter did have the purpose of winning as much business as possible, it also had the purpose of deterring or preventing others from engaging in competitive conduct in the PD market. The latter purpose was substantial (s 4F(1)(b)).

6. With respect to the primary judge, I cannot see any distinction in substance between the purpose of Baxter’s conduct in relation to South Australia and the purpose of the remainder of the impugned conduct.  The objective was the same and remained constant, only the medium was different. 

7. I would not disturb the primary judge’s finding that there was no breach of s 46(1)(a) for the reasons outlined by Mansfield J.

   SECTION 47

8. I would dismiss Baxter’s arguments against the finding of breach of s 47(1). I agree with the arguments of the ACCC concerning the breach of s 47(1) in relation to the Australian Capital Territory conduct and in relation to entering into and carrying out the supply contracts.

9. The impugned conduct was accepted to be exclusive dealing. That conduct included the alternative offer strategy. The offer at particular prices was central to that strategy (cf s 47(2)(b)). The purpose of that conduct, as found in relation to s 46, was, in effect, to ensure that no alternative supplier could succeed in winning a contract for the supply of PD fluids from a State or Territory purchasing authority – the dominant part of the market. Although the PD market was Australia-wide, the substantial acquirers of the goods were small in number and acquired on a periodic basis. The purchasing authorities of the States and Territories constituted the lion’s share of the market on the demand side. The opportunity to obtain a contract to supply PD fluids on a significant scale only occurred infrequently.

10. The purpose of excluding all competitors from effecting supply of goods in a market cannot be distinguished from a purpose of substantially lessening competition in the market for those goods. This is a case where the purpose found has the consequence that the same conduct is a breach of both s 46(1)(c) and s 47(1). Each negotiation – whether by tender or otherwise – was structured by Baxter in the same way – with reliance upon the market power in the sterile fluids market being used to bring about an exclusive or near exclusive arrangement in relation to PD fluids.

11. Furthermore, there was a realistic chance of succeeding in excluding competitors from the PD market contract by contract, so the conduct was likely to have the effect of substantially lessening competition in that market.  The primary judge was right to so find (see Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2005] FCA 581, (2005) ATPR 42-066 at [629]). Indeed, the fact is that competitors were unable to make any substantial inroads in the PD market during the period in question.

12. Baxter submitted that the primary judge looked at each tender separately from all others.  It followed, it was contended, that the result was wrong as no one tender would, or would be likely to, substantially affect competition in the Australia-wide PD market and that conduct connected with an individual tender would not have had that purpose. 

13. I do not agree that the primary judgment should be understood so narrowly.  Each tender was considered.  However, the context relevant to each was the structure of the market, with the dominant purchasers letting contracts periodically, usually by tender and usually covering various categories of fluids.  Each of the contracts on offer was significant in terms of volume and period.  Business on that scale only came along every so often.  It was important for the PD market that each such opportunity was subject to serious competition.  In this case, the working of the competitive process in that market was distorted by the exclusive dealing across markets that was made possible by the substantial market power held by Baxter in the sterile fluids market.  As his Honour said (ACCC v Baxter [2005] FCA 581, (2005) ATPR 42-066 at [625]):

    “The competitive process here was the tender system used by the States.”

14. If I have read the primary judgment wrongly, and the reasoning was solely based upon considering each tender as a self-contained process without regard to the structure of the market or markets and how it or they operated, then I respectfully disagree with that reasoning.  However, I would dismiss Baxter’s appeal as the same result would follow from a correct assessment of the conclusions to be drawn from the primary facts.

15. Substantially lessening competition is not the same as monopolising a market and is not to be judged only on a quantitative basis. Conduct which hindered (s 4G) competitors from making realistic offers to significant customers in the PD market was likely to substantially lessen competition in that market. In each negotiation, Baxter used its market power in the sterile fluids market to achieve exclusive dealing by means of bundling to endeavour to snuff out competition as it threatened in the PD fluids market. Viewed in context, interference in competition for each relevant contract by freezing out realistic competitive offers could be seen as being likely to substantially lessen competition in the PD market. That conclusion is assisted in relation to effect and likely effect by the application of s 47(10)(b). See the analysis in Rural Press Ltd v Australian Competition and Consumer Commission (2002) 118 FCR 236 at [122]–[133], and on appeal, Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53 at [36]–[46]. For relevant purposes, there is no distinction between s 45 and s 47 for the element of substantially lessening of competition. See also Universal Music Australia Pty Ltd v Australian Competition and Consumer Commission (2003) 131 FCR 529 at [256]–[274].

16. None of the foregoing should be confused with what the primary judge called the case at a high level of generality concentrating on long term structural effects on the market, apart from the operation of what the primary judge called the tender process.  The rejection of that aspect of the case has no consequences in relation to the case based upon conduct in relation to the successive procurements during the relevant period.

17. Whilst what the primary judge said about tenders and the tender process was correct as far as it went, it did not fully reflect the case pleaded by the ACCC which was not limited to tenders as such. The use of a variation of the alternative offer strategy in the context of a negotiated agreement is no different in principle from that strategy being used in the tender process, provided that exclusive dealing is involved. There is no difficulty in the judge having taken a narrower view of the contravening conduct than was pleaded, but to do so was not to give full force and effect to the case of the ACCC. If the primary judge had used the term “procurement process” rather than “tender process”, the scope of the ACCC’s case would have been picked up. In my opinion, the ACCC is correct in submitting that the essential features which cause the conduct in relation to the tenders to be in breach of s 47(1) were also present in the negotiations leading to, and the finalisation of, the Australian Capital Territory contract on the facts that were found by the primary judge as to that issue. Baxter insisted on a condition that it be sole supplier of all categories within the contract (exclusive dealing), and threatened to and purported to raise the prices for sterile fluids to achieve that result (s 47(2)(d)). The existence of a contractual dispute about the matter does not detract from that conclusion. That business was substantial in itself and was to be seen together with the other impugned conduct. The purpose, likely effect and effect of that conduct cannot be distinguished from that in relation to the impugned conduct as to procurement by the other State or Territory purchasing authorities.

1. Baxter again submitted in this context that its aim or purpose was solely to win as much business as it could across the board, that it structured its offers accordingly and that, in any event, it was responding to the structure proposed by the acquirers. Those arguments were rejected in relation to breach of s 46(1)(c) and should be rejected in this context. In the usual case, they might be an answer to a s 47 claim. There would normally be no problem in a purchaser – even a substantial purchaser – letting an exclusive requirements contract for a lengthy period, provided that the process is competitive. The problem here is that the process was not competitive for PD products – Baxter had a lock on the PD business because of the way the requirements contracts were negotiated and structured as far as price was concerned, achieved by reason of its power in the sterile fluids market. Further, these arguments go to the issue of purpose and are no answer to the finding by the primary judge that the conduct of Baxter was likely to have the effect of substantially lessening competition.

2. It was submitted for Baxter that it was not established that any exclusive dealing by Baxter caused any lessening of competition in the PD fluids market.  That conduct did not prevent or constrain any other party from making any offer for the supply of PD fluids that it chose.  That argument overlooks the constraining effect of the particular form of exclusive dealing (involving the sterile fluids market as well as the PD market and the particular prices offered) upon the purchasing authorities.  It would, in any event, not be an answer to the case based upon purpose, and would only be tangentially relevant to the case based upon likely effect.

3. Baxter objects to the use made by the primary judge of the evidence of Professor Nalebuff in considering s 47 as it was either inadmissible or of no probative value. The relevant passage in the primary judgment is as follows (ACCC v Baxter [2005] FCA 581, (2005) ATPR 42-066 at [629]):

   “Assisted by the exclusionary bundling test of Professor Nalebuff, the price squeeze test of Mr Ergas, the examples of contemporaneous analysis by the SPAs and by common sense, the likely effect at the time of the offering to supply (see Universal Music at [247]) was to hinder substantially the tender process of PD products in the way that I have identified in dealing with purpose.”

   It is clear enough that the same conclusion would have been reached without the evidence of Professor Nalebuff.

4. In my opinion, the ACCC is correct in submitting that, consistently with the reasoning of the primary judge, making and giving effect to the impugned contracts was a breach of s 47 and, perhaps, the primary breach. It is likely that his Honour would have so found were it not for the Bradken complication.  The reasons of Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ in the High Court in this case (Australian Competition and Consumer Commission (ACCC) v Baxter Healthcare Pty Ltd (2007) 237 ALR 512, (2007) 81 ALJR 1622 at [44]–[48] and [76]) effectively remove that complication and indicate that the fact that the other party to a contract is a State or Territory would not relieve Baxter from breach of the Act, although the question of relief would require consideration.

5. I agree that the parties should be heard as to the form of relief. 

I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles.

Associate: 

Dated:        11 August 2008

Counsel for the Appellant:	LJ Foster SC and AI Tonking
Solicitor for the Appellant:	Australian Government Solicitor
Counsel for the First Respondent:	DM Yates SC and IS Wylie
Solicitor for the First Respondent:	Blake Dawson Waldron

Date of Hearing:	Matter remitted from High Court of Australia
Date of Judgment:	11 August 2008