Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd
[2005] FCA 581
•16 MAY 2005 (CORRIGENDUM 2 JUNE 2005)
FEDERAL COURT OF AUSTRALIA
Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2005] FCA 581
AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v BAXTER HEALTHCARE PTY LTD AND ORS
N 1153 of 2002ALLSOP J
16 MAY 2005 (CORRIGENDUM 2 JUNE 2005)
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NSD 1153 of 2002
BETWEEN:
AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
APPLICANTAND:
BAXTER HEALTHCARE PTY LTD
FIRST RESPONDENTTHE STATE OF WESTERN AUSTRALIA
SECOND RESPONDENTTHE STATE OF SOUTH AUSTRALIA
THIRD RESPONDENTTHE STATE OF NEW SOUTH WALES
FOURTH RESPONDENTJUDGE:
ALLSOP J
DATE OF ORDER:
16 MAY 2005 (CORRIGENDUM 2 JUNE 2005)
WHERE MADE:
SYDNEY
CORRIGENDUM
1. After paragraph 629 there be inserted a paragraph 629A, which is to read:
To conclude that the interference with the State tender process substantially affects or is likely to affect competition is not to undermine my earlier conclusion that the PD market is an Australia wide one. Rather, though the States are of varying sizes, to affect each State tender process was, in my view, to lessen competition or be likely to do so in a meaningful way for the Australian market. This can be seen either by reference to the meaningful number of PD patients in each State (including in South Australia, though not a huge number there) or as affecting tender processes in sovereign States within the Australian market.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N 1153 of 2002
BETWEEN:
AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
APPLICANTAND:
BAXTER HEALTHCARE PTY LTD
FIRST RESPONDENTTHE STATE OF WESTERN AUSTRALIA
SECOND RESPONDENTTHE STATE OF SOUTH AUSTRALIA
THIRD RESPONDENTTHE STATE OF NEW SOUTH WALES
FOURTH RESPONDENT
JUDGE:
ALLSOP J
DATE:
6 MAY 2005 (CORRIGENDUM 2 JUNE 2005)
PLACE:
SYDNEY
REASONS FOR CORRIGENDUM
Since handing down my reasons in this proceeding on 16 May 2005 I realised that I overlooked inserting in the final draft a paragraph, which I had intended for some time to include. During the final preparation of the reasons for judgment and the proofing, which took some time, I overlooked the inclusion of this paragraph. The paragraph can probably be recognised as implicit in my reasons in any event. Nevertheless, I think it important to explain to the parties the fact that I neglected to include the paragraph.
This explains the nature of the corrigendum today.
I certify that the preceding two (2) numbered paragraphs are a true copy of the Reasons for Corrigendum herein of the Honourable Justice Allsop. Associate:
Dated: 2 June 2005
Counsel for the Applicant: Mr A I Tonking Solicitor for the Applicant: Australian Government Solicitor Counsel for the First Respondent: Mr I S Wylie Solicitor for the First Respondent: Blake Dawson Waldron Counsel for the Fourth Respondent: Ms K Kerr (Slr) Solicitor for the Fourth Respondent: NSW Crown Solicitor Date of Corrigendum: 2 June 2005 FEDERAL COURT OF AUSTRALIA
Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2005] FCA 581
TRADE PRACTICES – ss 46 and 47 – tendering for supply of sterile fluids for State and Territory health facilities
STATUTORY CONSTRUCTION – CROWN IMMUNITY – extending to protect conduct of third party (first respondent) with respective State and Territory executive governments
Trade Practices Act 1974 (Cth) Part IV ss 46, 47, 76, 80, 83
ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) (1990) 27 FCR 460 referred to
Australian Gas Light Company v ACCC [2003] ATPR 41-966 referred to
Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334 referred to
Boral Besser Masonry Ltd v ACCC (2003) 215 CLR 374609 referred to
Bradken Consolidated Ltd v BHP (1979) 145 CLR 107 applied
Bropho v Western Australia (1990) 171 CLR 1 referred to
Burgundy Royale Investments Pty Ltd v Westpac Banking Corporation (1987) 18 FCR 212 referred to
China Ocean Shipping Co v South Australia (1979) 145 CLR 172 referred to
Commonwealth v Rhind (1960) 119 CLR 584 referred to
Davis v Commonwealth (1980) 166 CLR 79 referred to
Dowling v Dalgety Australia Limited (1992) 34 FCR 109 referred to
Doyle v Edwards (1898) 16 NZLR 572 referred to
Lower Hutt City v Attorney-General [1965] NZLR 65 referred to
Eastern Express Ltd v General Newspapers (1992) 35 FCR 43 referred to
Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1 referred to
Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia (2002) 122 FCR 110 referred to
NT Power Generation Pty Ltd v Power and Water Authority (2004) 210 ALR 312 discussed and applied
Queensland Co-operative Milling Association (1976) ATPR 40-012 referred to
Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 referred to
Re Telephone Apparatus Manufacturers’ Application [1963] 1 WLR 463 discussed
Rural Press Ltd v ACCC (2003) 216 CLR 53 203 ALR 217 referred to
Stirling Harbour Services Pty Ltd v Bunbury Port Authority (2000) ATPR 41-752 referred to
Tillmanns Butcheries Pty Limited v Australasian Meat Industry Employee’s Unionand others (1979) 42 FLR 331 referred to
Universal Music Australia Pty Ltd v ACCC (2003) 131 FCR 529 referred to and applied
Wellington City Corporation v Victoria University of Wellington [1975] 2 NZLR 301 referred to
Wynyard Investments Pty Ltd v Commissioner of Railways (NSW) (1955) 93 CLR 376 discussed
Nalebuff, B (2000) “Competing against bundles” in Incentives, Organisation, and Public Economics; Peter Hammond & Gareth Myles, eds, Oxford University Press.)
Seddon Government Contracts: Federal State and Local (3rd Edn)
AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v BAXTER HEALTHCARE PTY LTD AND ORS
N 1153 of 2002ALLSOP J
16 MAY 2005
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N 1153 of 2002
BETWEEN:
AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
APPLICANTAND:
BAXTER HEALTHCARE PTY LTD
FIRST RESPONDENTTHE STATE OF WESTERN AUSTRALIA
SECOND RESPONDENTTHE STATE OF SOUTH AUSTRALIA
THIRD RESPONDENTTHE STATE OF NEW SOUTH WALES
FOURTH RESPONDENTJUDGE:
ALLSOP J
DATE OF ORDER:
22 JUNE 2005
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.the reasons published on 16 May 2005 no longer be or remain confidential and may be distributed.
THE COURT NOTES THAT:
2.the effect of orders made on 2 June 2004 was that the terms of reasons for judgment made on 16 May 2005 no longer remain confidential from 6 June 2005.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N 1153 of 2002
BETWEEN:
AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
APPLICANTAND:
BAXTER HEALTHCARE PTY LTD
FIRST RESPONDENTTHE STATE OF WESTERN AUSTRALIA
SECOND RESPONDENTTHE STATE OF SOUTH AUSTRALIA
THIRD RESPONDENTTHE STATE OF NEW SOUTH WALES
FOURTH RESPONDENTJUDGE:
ALLSOP J
DATE OF ORDER:
16 MAY 2005
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The application be dismissed.
2.Until further order [79] to [546] of the reasons published today be and remain confidential to the applicant and counsel and solicitors for the applicant and for the respondents.
3.As soon as is reasonably practicable, the applicant and its solicitors, in consultation with the solicitors for the respondents, and any person with an apparent interest in the maintenance of the confidence and the beneficiary of any presently existing confidentiality order, identify to the Court which parts of [79] to [546] are truly confidential and why.
4.Stand the proceeding over to a date to be fixed for any argument as to and for the making of orders in respect of costs and for any argument regarding confidentiality and for any argument as to amendment of the form of these reasons consequent upon the need for the maintenance of any confidentiality.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N 1153 of 2002
BETWEEN:
AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
APPLICANTAND:
BAXTER HEALTHCARE PTY LTD
FIRST RESPONDENTTHE STATE OF WESTERN AUSTRALIA
SECOND RESPONDENTTHE STATE OF SOUTH AUSTRALIA
THIRD RESPONDENTTHE STATE OF NEW SOUTH WALES
FOURTH RESPONDENT
JUDGE:
ALLSOP J
DATE:
16 MAY 2005
PLACE:
SYDNEY
REASONS FOR JUDGMENT
Index
Introduction and summary of my conclusions [1] – [5]
Background facts [6] – [36]
The ACCC claims [37] – [78]- s 46 claims [40] – [72]
- s 47 claims [73] – [78]
Further factual background [79] – [133]
- relevant participants [79] – [105]
- the manufacturing process involved and the
history of production in Australia by Baxter [106] – [120]
- capital costs associated with manufacture [121] – [122]
- the distribution of sterile fluids and PD products [123] – [125]
- market shares [126] – [133]
The history of State contracts for the supply of LVP, PN
and PD fluids and IS up to the impugned conduct [134] – [206]- Queensland 1987 and 1990 [137] – [142]
- South Australia 1991 [143]
- Western Australia 1991 [144] – [148]
- NSW 1992 and 1993 [149] – [176]
- monitoring the 1993 NSW Agreement [177] – [179]
- South Australia 1993 [180] – [184]
- Queensland 1993 [185] – [186]
- Western Australia 1994 [187] – [192]
- South Australia 1995 [193] – [200]
- Queensland 1997 [201] – [206]
The history of State contracts for the supply of LVP, PN
and PD Fluids and IS (the impugned conduct). [207] – [284]- the negotiation of the 1998 NSW Agreement [207] – [224]
- South Australia 1998 [225] – [226]
- ACT transaction (1998 onwards) [227] – [233]
- QLD transaction (2000 onwards) [234] – [248]
- Western Australian transaction (2000) [249] – [263]
- South Australian transaction (2000 onwards) [264] – [279]
- NSW & Vic Agreement 2003 [280] – [284]
Evidence of Baxter’s competitors [285] – [332]
Regulatory barriers to entry: TGA approval [333] – [336]
Evidence of clinicians [337] – [383]
Evidence of Baxter’s employees [384] – [496]- Evidence relating to cost saving if Baxter
ceased supply of PD to NSW [385] – [392]
- Evidence relating to Baxter’s manufacturing and
feasibility of another local PD plant: Mr Bragg [393] – [399]- Evidence relating to Baxter’s purpose and the
calculation of its prices [400] – [496]
The expert economic evidence [497] – [546]
- Market definition [498] – [502]
- Market power [503] – [511]
- Testing taking advantage and the effect of
the conduct [512] – [546]
The case under s 46 of the Act [547] – [616]
- The law [547] – [549]
- Market definition [550] – [561]
- Market power [562] – [580]
- Taking advantage of market power [581] – [598]
- Proscribed purpose [599] – [616]
The s 47 claim [617] – [641]
Summary of my views as to the operation of the Act
(subject to the “Crown Immunity” point) [643] – [644]
Crown Immunity [645] – [705]
Introduction and summary of my conclusions
The Australian Competition and Consumer Commission (the “ACCC”) has brought an application under Part IV of the Trade Practices Act 1974 (Cth) (“the Act”) against Baxter Healthcare Pty Ltd (“Baxter”), a manufacturer and supplier of sterile fluids. It seeks declarations that there have been various contraventions by Baxter of ss 46 and 47 of the Act, It also seeks injunctions under s 80 of the Act, pecuniary penalties under s 76 of the Act and an order that there be findings of fact pursuant to, and for the purposes of, s 83 of the Act.
The conduct of Baxter was at all times undertaken with New South Wales, Queensland, South Australia, Western Australia and the Australian Capital Territory in connection with the supply to the health authorities of those States and that Territory of fluids and products for use in hospitals. I have come to the view that the Act does not apply to, or operate in respect of, the conduct complained of. The reasons for this conclusion, which are set out later in these reasons, are that (to use a convenient shorthand) the principles of Crown immunity or derivative Crown immunity mandate that result.
I have otherwise dealt with the matter on the assumption that I am wrong in that conclusion. Approaching the matter on that basis, I would find that there has been one contravention of s 46 of the Act, and that there have been a number of contraventions of s 47 of the Act.
A significant amount of the evidence in the proceeding was said to be confidential. Given the extensive evidence of contract negotiation and bid assessment, that was readily understandable. In order that the hearing might proceed with some despatch, in making orders under s 50 of the Federal Court of Australia Act 1976 (Cth), I relied, in significant part, on the careful and commonsense treatment of confidentiality claims by the practitioners involved. It became impractical to express my reasons without dealing expressly with confidential documents. I propose to allow the ACCC and the legal advisers of the parties some time to examine the relevant parts of my reasons and identify any parts that should be placed in a confidential part of the reasons or which can be expressed differently to convey the same idea or fact. This is the explanation for orders 3, 4 and 5 made today.
From time to time in these reasons in recounting factual material, I have used the present tense. I have generally done so because of the terms or context of admissions or evidence. Where this appears, unless the context makes the contrary clear, it should be taken as relevant to the period in question, 1998 to 2001.
Background facts
Baxter was incorporated as Travenol Laboratories Pty Limited on 26 April 1962 and changed its name to Baxter Healthcare Pty Limited on 18 November 1987. It is the Australian operating subsidiary, and, effectively, the Australian division, of Baxter International Inc (“BI Inc”), a global medical products and services company incorporated in the United States of America (the “US”), which specialises in critical therapies for life threatening conditions. BI Inc has three divisions, namely, BioScience (products related to blood), Renal (dialysis products) and Medication Delivery (intravenous products), and Baxter supplies products for each of these divisions in Australia.
Although BI Inc has manufacturing plants in over 20 countries, Baxter manufactures the majority of its Australian products at a plant in Toongabbie, New South Wales. According to Mr Brian Lee (Baxter’s former Managing Director), that plant commenced producing intravenous (“IV”) solutions in 1973 and peritoneal dialysis (“PD”) solutions in 1980. Baxter began its compounding centre (pharmacy) at the Toongabbie plant in the early 1980s and since that time has manufactured parenteral nutrition (“PN”) products there. Compounding centres have also been established at St Vincent’s Hospital (1994), in Brisbane (1997/1998) and in Melbourne (1998). In the past, Baxter also produced blood bags and blood and solution sets, but these are now generally imported. I will explain the nature of these products shortly.
The conduct complained of in these proceedings is connected with Baxter’s negotiation of, entering into, and giving effect to, five long-term contracts between 1998 and 2001 with State and Territory authorities concerned with the organisation and conduct of purchasing commodities. The authorities which are variously named, but were described generically in the proceedings as State Purchasing Authorities (“SPAs”). The authorities with whom Baxter contracted were within New South Wales (“NSW”), the Australian Capital Territory (“ACT”), Western Australia (“WA”), South Australia (“SA”) and Queensland (“QLD”). Each was part of the executive arm of government of the respective polity. I will refer to these contracts by their State or Territory. The contracts with NSW, ACT, SA and WA provided, in substance, for the supply of the entire requirements of each for certain sterile fluids and 90 per cent of their PD fluids, for the periods 18 May 1998 to 30 April 2003, March 1999 to April 2003, 1 April 2001 to 30 March 2006 and 1 March 2001 to 28 February 2006, respectively. The contract with QLD provided for the supply of the State’s entire requirements for certain sterile fluids (excluding PN fluids) and 92.5 per cent of its PD fluids for the period 1 June 2001 to 31 May 2004.
The context in which the alleged conduct took place involved State-wide tenders issued by each of NSW, QLD, WA and SA (but not the ACT) for the supply of certain sterile fluids to public hospitals. Baxter ostensibly had a similar response to each State tender request. It was said that Baxter would make an offer to supply tender items on an item-by-item basis at so-called high “cherry pick” prices, and it would also make an offer to supply the same items on an exclusive sole supply basis for substantially lower prices. This sole supply included PD products.
The products that were affected by the various State contracts were irrigating solutions (“IS”), large volume parenteral (“LVP”) fluids, PN fluids and PD fluids and products. The nature and function of the first three products were set out in the uncontested affidavit evidence of Dr David McWilliam, the Director of Intensive Care at the Royal Prince Alfred Hospital in Sydney. Similarly, the nature and function of PD and haemodialysis and related treatments (“HD”) were set out in the uncontested affidavit evidence of Dr Jeremy Chapman, the Director of the Renal Unit at Westmead Hospital and of Mr Trevor Garland, who was formerly a Clinical Nurse Consultant at St Vincent’s Hospital in Sydney and who is now a consultant with Fresenius. Dr Ashley Irish, the Director of the Renal Unit at the Royal Perth Hospital, also gave some evidence about PD and HD, and although he was cross-examined, he was not questioned on the evidence that he gave in this regard. There was no relevant issue litigated concerning the nature of the products and fluids.
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 in human patients. They are typically solutions of water, electrolytes and dextrose, and are divided into crystalloid and colloid solutions. Colloid solutions contain larger molecules which will not pass through semi-permeable cell membranes. Crystalloid solutions are those that contain smaller molecules, which can pass through semi-permeable cell membranes for the maintenance of patient daily fluid requirements. LVP fluids are used where the amount of fluid required is greater than 250 ml. LVP fluids 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.
LVP fluids are to be distinguished from small volume parenteral fluids (“SVP fluids”), which are fluids used to perform or facilitate injections and reconstitute pharmaceuticals. SVP fluids are stored in volumes of 250 ml or less in vials, ampoules and small bags. They are administered intravenously, but not by slow infusion therapy.
There is, and was at all relevant times, an established and entrenched demand for LVP fluids from public hospitals, clinics and other facilities funded by the States and Territories (to which I will refer as “Health facilities”, being a phrase also used in the semi-capitalised form in the evidence), private hospitals, medical practices and ambulance services.
At all relevant times, the largest purchasers of LVP fluids were the relevant SPAs on behalf of their respective Health facilities.
The demand for LVP fluids has not increased rapidly since January 1997, and is unlikely to do so.
The various types or categories of LVP fluids used in Health facilities are used in different volumes. Some are heavily used, some are not.
PN involves the provision of nutrition by intravenous sterile solutions formulated to provide all or part of a patient’s nutritional requirements, in circumstances where the patient is unable to digest food. PN fluids are produced by dissolving water soluble ingredients such as amino acids, salt or glucose in water, and then placing the solutions in containers. There are approximately 30 types of PN fluid used by hospitals (public and private) and nursing homes. PN differs from enteral nutrition (“EN”), which is the provision of food to the patient via the digestive tract, either by mouth, or by a tube inserted into the stomach or small bowel. PN and EN fluids are produced in separate facilities so as to avoid cross-contamination due to their different properties. EN is less expensive than PN, and is also safer because there is less risk of infection. EN also maintains the nutrition of the gut mucosa better than PN and as a result, PN is only utilised where 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 all relevant times, the largest purchasers of PN fluids were the relevant SPAs on behalf of their respective Health facilities.
IS are aqueous based-products that are used generally in hospitals for a number of purposes, including washing or cleaning wounds or in surgery. Although they are sterile, they are not suitable to perform the function of LVP fluids. As a result, they cannot be substituted for LVP fluids. It might be possible to use an LVP as an IS although it would not be optimal because the packaging is not designed for easy pouring. In that sense, LVP fluids are also not properly substitutable for IS. On the pleadings, it was admitted by Baxter that 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 (public and private), medical practices and ambulance services. At all relevant times the largest purchasers of IS were the relevant SPAs on behalf of their respective Health facilities. The demand for IS has not increased rapidly since January 1997, and is not likely to do so.
PD is a form of dialysis treatment for chronic renal failure. Renal failure can also be treated with HD or a kidney transplant. PD removes waste products from the blood by osmosis using the peritoneum, which is the membrane covering the intestinal organs located 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 by patients at home. There are two kinds of PD treatment: continuous ambulatory PD (“CAPD”) and automated PD (“APD”), which can operate while the patient sleeps. CAPD does not require a machine, APD does.
“PD products” is a phrase used in the evidence and can be taken as a reference to PD fluids and ancillary PD products used to perform PD, such as APD machines, lines for fluid connection, locks for the connectors and bags for fluids.
HD treatment involves the patient’s blood flowing outside the body through disposable bloodlines into a specially designed filter: the dialyser. The dialyser assumes the function of an artificial kidney and the dialysis solution carries away waste products. The whole process is controlled by an HD machine and is usually required by a patient three times per week. Whilst it is unnecessary to canvas in any detail, there are a number of different types of excorporeal dialysis treatments. HD, itself, does not involve the use of sterile fluids. The dialysis fluid passes on the other side of a membrane within the dialyser. Treatments related to haemodialysis proper, haemofiltration and hameodiafiltration, do involve some intravenous introduction of sterile fluids. It is sufficient for present purposes, however, simply to use the initials “HD” to cover all these treatments.
PD and HD, subject to certain medical conditions on the part of the patient, are not mutually exclusive and as a result, some, but not all, patients have a choice of treatment. Patients who have had extensive abdominal operations or who have a colostomy, or who are incapable of strict hygiene are not suitable for PD. Patients who have vascular problems or diabetes are usually not suitable for HD, because the removal of blood during the HD process places a strain upon the heart. The advantage of PD is that it is portable and easily administered at the patient’s home or workplace. PD is often recommended for patients who have residual renal function because it maintains that function for a longer period than HD. The disadvantage of PD is that it can only be used in a patient who has a functioning peritoneal membrane. There is also a risk of infection (peritonitis) by the use of PD. Indeed, patients are often forced to move from PD to HD because of infection or the failure of the peritoneal membrane, which failure will eventually occur after about five to eight years through the undertaking of the PD process. Unless contra-indications appear, and unless peritonitis develops, PD patients can thus remain on PD for five to eight years.
Where a patient is physically able to have either PD or HD treatment there are various factors that may influence the decision as to the choice between PD or HD treatment. These include age, health, residual renal function, convenience, the desire for more intermittent treatment (in HD), body image, diet and other lifestyle factors.
In Australia in 2001, there were approximately 5,000 HD patients and 1,915 PD patients. The location of the PD patients was as follows:
§NSW/ACT 700
§Victoria 380
§QLD 520
§WA 175
§SA 80
§Tasmania 30
§Northern Territory 30
As at 2002, the annual treatment cost for PD was between $20,000 and $25,000 per patient, and for HD was between $24,000 and $55,000 per patient.
There is an established and entrenched demand for PD products. The purchasers of these products are the Health facilities (in the States and Territory dealt with in these proceedings, through the SPAs) and a very small number of private hospitals. From the nature of the treatment involved, the demand for PD is generated by patients with chronic renal failure caused by kidney disease. Kidney disease in Australia is increasing at a rate of 6-7 per cent per annum. The number of patients requiring dialysis is increasing by about 7-10 per cent per annum. The major cause of these increases is the rise in the number of patients with diabetes and hypertension. The demand for PD products is increasing for these reasons.
At all relevant times, the largest purchasers of PD products were the relevant SPAs on behalf of their respective Health facilities. Historically, PD has been provided to patients through the public hospital system.
Though PD can be, and is, administered by the patient otherwise than in hospital, the PD patient requires regular appointments and monitoring by trained nursing and medical staff, which is only available at major public hospitals with renal units.
Patients with kidney disease are usually treated within their State or Territory of residence.
In relation to the States and Territory dealt with in these proceedings, decisions about the purchasing of PD products are made by the SPAs in relation to the total needs of all PD patients within the State. PD products are purchased separately by each State to treat the number of patients in the State. The prices paid for PD products vary between States.
Historically, in Australia PD products have generally been provided by Health facilities.
In the early 1980s, PD first became available for home-based patients. From then, and until Gambro commenced supplying PD products in 1990, Baxter was the only supplier of PD fluids in Australia.
Subject to patients in the ACT not infrequently being treated in NSW and NSW patients not infrequently being treated in the ACT, it was common ground on the pleadings that patients with kidney disease are usually treated within their State or Territory of residence. This is so for two reasons, it was agreed. The first was that funding for Health facilities is State or Territory based and consequently it is more difficult for patients to gain access to treatment out of the State or Territory in which they are resident. Secondly, a patient undergoing PD treatment requires regular appointments and monitoring, which is only available at major public hospitals with renal units.
One matter of terminology which should be noted at this point relates to the expression “sterile fluids”. The phrase could be used to refer to LVP fluids, IS, PN fluids and PD fluids. All are required to be sterile. However, the ACCC conducted the case using the phrase to mean only LVP fluids, IS and PN fluids. There is an issue as to markets to which this question might relate. In order that terminology not confuse substantive issues, I will use the phrase in a manner not to be taken as a reference to PD fluids, unless the context makes clear the contrary.
The ACCC claims
I will deal in more detail with the products, their manufacturing and distribution and market shares in due course. At this point, however, it is convenient, with the above background, to examine the claims of the ACCC.
The ACCC submitted that, broadly speaking, the sterile fluids other than PD, and perhaps PN, fluids can be viewed as bulky water-based items in respect of which Baxter has the only manufacturing plant in Australia. The products could also be described as “high volume low value” and were to be compared to PD products which were of lower volume and higher value. Thus, it was said, Baxter has a significant competitive advantage in the manufacture and sale of these “high-volume-low-value” sterile fluids. Importation costs of carrying “water on water” made import competition in relation to sterile fluids very difficult. The ACCC’s case was that, effectively, a monopoly existed for sterile fluids. PD fluids, on the other hand, were of lesser volume or bulk and of higher value than sterile fluids. Taken as an individual group of products, the local manufacture by Baxter of PD did not give it as significant an advantage as it enjoyed in respect of sterile fluids. Import competition was real in relation to PD products.
The impugned approach of Baxter was said to be the “bundling” of the PD products with the “monopoly” sterile fluid products, thereby eliminating, it was said, the effectiveness of any competition from rival PD suppliers who could not, and in most cases did not want to, compete with Baxter in the supply of sterile fluids.
Section 46 claims
The ACCC, in its s 46 claims, says that Baxter took advantage of what was said to be its substantial market power in the sterile fluids market or markets for the purpose of harming competitors or preventing competitive conduct in the PD products market. Such claims have been characterised in the US as antitrust violations under s 2 of the Sherman Act and s 3 of the Clayton Act are known as “monopoly leveraging” or “exclusionary bundling”: Smith Kline v Eli-Lily 575 F 2d 1056 (1978); Ortho Diagnostic Systems v Abbott Laboratories 920 F Supp 455 (2003); Le Page Inc v 3M 324 F 3d 141 (1996); and North Pacific Railway v United States 356 US 1 (1958).
In essence, the complaint was that Baxter offered prohibitively high item-by-item prices (the so-called “cherry pick” prices) so as to compel the States to agree to exclusive supply contracts for the supply of sterile fluids (being products over which it has a monopoly and being products which constitute a market or markets in which it allegedly has substantial power), bundled with PD products, for lengthy periods. This arrangement allegedly took advantage of Baxter’s market power in the sterile fluids market or markets, because 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. This arrangement also allegedly harmed both actual and potential competition in the PD products market, namely two foreign concerns through their Australian subsidiaries, to which I will generally refer without any greater specification of corporate form, except where necessary, as Fresenius and Gambro, because these companies were unable to compete in the markets for LVP, PN and IS fluids.
To be successful, the ACCC had to demonstrate that Baxter had substantial power in the relevant sterile fluids market or markets, that Baxter took advantage of that power and that Baxter had the requisite subjective purpose.
The ACCC pleaded a number of alternative contraventions under s 46.
The alleged contraventions of s 46 were put in eight alternative ways depending on the definition of the market in which Baxter was said to have a substantial degree of power and of the market to which the relevant purposes were said to be directed. In all cases the relevant purposes were said to be the same. Those purposes were:
(a)eliminating or substantially damaging its competitors, Fresenius and Gambro (being the two relevant Australian subsidiaries of the German and Swedish groups) in the respective PD markets (s 46(1)(a)); and
(b)deterring or preventing Fresenius and Gambro and other potential competitors from engaging in competitive conduct in the respective PD markets (s 46(1)(c)).
The first market (being the market in which Baxter was said to have a substantial degree of power) was said, alternatively, to have been:
(a)separate national wholesale markets for LVP fluids, PN fluids and IS fluids, or
(b)a combined national wholesale sterile fluids market.
The second market (being the market to which the relevant purposes were said to be directed) was said, alternatively, to have been:
(a)separate State-based geographic markets for PD products, or
(b)a combined national PD products market.
In each case, the conduct said to be the taking advantage of the relevant power was in negotiating and entering into five agreements with NSW, ACT, SA, WA and QLD requiring the relevant State or Territory to require LVP fluids, PN fluids (except in QLD) and IS exclusively from Baxter and between 90 to 100 per cent of its PD products, on the basis that the prices under those agreements would be significantly lower than they would be in the absence of the effective sole supply requirement. Thus, it was said, to obtain the significantly lower price for sterile fluids the SPA was required to buy all products exclusively from Baxter. This, it was said, tied or bundled PD products to sterile fluids and their significantly lower prices.
A tabular break up of the s 46 claims is as follows:
Paragraphs of application
Asserted market where Baxter is said to have taken advantage of substantial degree of power
Conduct (taking advantage)
Market(s) to which purpose directed
[1]
Wholesale LVP Fluids
Negotiating and entering into supply agreements with NSW, ACT, SA, WA & QLD
NSW, SA WA & QLD PD Products
[2] (Alternative to [1])
Wholesale LVP Fluids
Negotiating and entering into supply agreements with NSW, ACT, SA, WA & QLD
National PD Products
[3] (Alternative to [1] – [2])
Wholesale PN Fluids
Negotiating and entering into supply agreements with NSW, ACT, SA & WA
NSW, SA & WA PD Products
[4] (Alternative to [1] – [3])
Wholesale PN Fluids
Negotiating and entering into supply agreements with NSW, ACT, SA & WA
National PD Products
[5] (Alternative to [1] – [4])
Wholesale IS
Negotiating and entering into supply agreements with NSW, ACT, SA, WA & QLD
NSW, SA WA & QLD PD Products
[6] (Alternative to [1] – [5])
Wholesale IS
Negotiating and entering into supply agreements with NSW, ACT, SA, WA & QLD
National PD Products
[7] (Alternative to [1] – [6])
Wholesale Sterile Fluids (LVP, PN & IS)
Negotiating and entering into supply agreements with NSW, ACT, SA, WA & QLD
NSW, SA WA & QLD PD Products
[8] (Alternative to [1] – [7])
Wholesale Sterile Fluids (LVP, PN & IS)
Negotiating and entering into supply agreements with NSW, ACT, SA, WA & QLD
National PD Products
Australia-wide wholesale LVP market
The first and second claims posit an Australia-wide market for the supply at wholesale level of LVP fluids to, amongst others, public hospitals, private hospitals, medical practices and ambulance services. This market was denied.
Asserted market power of Baxter in the wholesale LVP market
It was claimed (and was not in dispute) that since at least January 1997 Baxter manufactured a full range of LVP products and supplied almost 100 per cent of the LVP fluids at a wholesale level to public and private hospitals, medical practices and ambulance services in Australia.
It was claimed that since at least January 1997, 90 to 100 per cent (and it was admitted as to 80 per cent) of the LVP fluids supplied by Baxter to Health facilities in NSW, QLD, SA and WA have been supplied under contracts which provide for the supply of LVP fluids, together with PN fluids (except QLD), IS and PD products.
It was claimed that, at least since January 1997, there were significant barriers to entry into the wholesale LVP market or expanding supply if it were entered. These matters were said to be:
(a)the necessity to register and the time and expense in registering LVP fluids with the Therapeutic Goods Administration (“TGA”);
(b)the requirements of States in the analysis of tenders, in particular in relation to quality assurance and local purchasing preference schemes;
(c)difficulties and costs associated with importing LVP fluids, in particular based on the asserted low margins and high water volume;
(d)the existence of long term exclusive supply contracts with Baxter;
(e)the need for significant investment to manufacture and distribute LVP fluids in Australia;
(f)the reasonably stable demand for LVP fluids;
(g)the costs to Health facilities in changing supplier, because of requirement to implement new systems and new equipment; and
(h)the demand from customers other than Health facilities, that is, private hospitals, medical practices and ambulance services, is insufficient to support a minimum efficient scale of production of LVP fluids in the market.
Australia-wide wholesale PN fluids market
The third and fourth claims assert (and Baxter denies) an Australia-wide PN fluid market at wholesale levels to, amongst others, public and private hospitals and nursing homes.
Asserted market power of Baxter in the PN fluids market
It was asserted that since at least January 1997 Baxter manufactured a full range of PN fluids in NSW and supplied between 80 per cent and 90 per cent of the PN fluids in the PN fluids market. The only substantial competition being an importer, Fresenius-Kabi AG which has supplied up to 10 per cent of the market. (Aspects of these assertions were denied.)
It was asserted (and admitted) that since January 1997 approximately 90 to 100 per cent of PN fluids supplied by Baxter to Health facilities in NSW, WA, QLD and SA have been supplied through contracts which provide for the supply of PN fluids, together with LVP fluids, IS and PD products.
It was claimed that since January 1997 there have existed significant barriers to entry in the PN fluids market or expanding supply if it were entered. These matters were said to be of a character the same as matters [52(a)] to [52(f)] above.
Australia-wide wholesale IS market
The fifth and sixth claims assert (and Baxter denies) an Australia-wide market for the supply at a wholesale level of IS to, amongst others, public and private hospitals, medical practices and ambulance services.
Asserted market power of Baxter in the IS market
This was put in similar fashion to the earlier asserted markets: that since January 1997 Baxter has manufactured in NSW a full range of IS products, that it supplied between 70 per cent and 80 per cent of the IS supplied in the IS market, that it was the only supplier able to supply IS products that are sold in large volumes and that its competition Pharmacia Australia Pty Ltd (“Pharmacia”), Astra Zeneca Pty Ltd (“Astra Zeneca”) and Briemar Nominees Pty Ltd (“Briemar”) have only supplied “specialist” IS products from their approximate 25 per cent of the market.
The asserted barriers to entry since January 1997 were matters said to be of a character the same as the matters referred to at [52(a)] to [52(f)] above and that there were significant costs and perceived risks in Health facilities changing suppliers because, it was said, of the need for new systems and equipment and the untested quality and reliability of competitors.
Australia-wide sterile fluids market and asserted market power theories
The seventh and eighth claims assert a combined Australia-wide market for sterile fluids being LVP fluids, PN fluids and IS to, amongst others, public and private hospitals, nursing homes, medical practices and ambulance services.
The asserted market power in this market was by reference to the previous allegations.
The PD markets claims
The affected market in each of the claims was the PD market. It was asserted to be either State based or Australia-wide. The following wholesale supply markets were pleaded:
(a)NSW PD products (including the ACT);
(b)QLD PD products;
(c)SA PD products;
(d)WA PD products; or
(e)National PD products.
It was claimed that since at least 1997 Baxter has manufactured a full range of PD products and supplied them in each PD market; that the Australian subsidiary of the German group, Fresenius Medical Corp Australia Pty Ltd (“Fresenius”) and the Australian subsidiary of the Swedish group, Gambro Pty Ltd (“Gambro”) have supplied or sought to supply PD products in each of the PD markets; that Baxter has supplied between 90 per cent and 95 per cent of PD products in each of the PD markets; between 90 per cent and 100 per cent of those products were purchased at wholesale level pursuant to contracts with State authorities providing for supply of PD products, together with LVP fluids, PN fluids (except QLD) and IS.
It was also asserted that the demand of PD products from private hospitals, medical practices and ambulance services (that is, other than Health facilities) is insufficient to support a minimum efficient scale of production of PD products in any of the PD markets.
The asserted “strategy” of Baxter for supply arrangements
The ACCC asserted that since about 1990 Baxter employed various practices in dealing with the purchasing authorities for NSW, ACT, QLD, WA and SA. Those “practices” (identified in paragraph 45 of the statement of claim) were:
(a)to seek to enter supply agreements which had the following characteristics:
(i)at least a two year term;
(ii)sole or substantially sole supply of Health facility requirements of sterile fluids and PD products;
(iii)at prices representing a substantial discount in the price of sterile fluids (especially LVP fluids) when compared with offers on an item-by-item supply basis without the two year exclusive supply characteristics of (i) and (ii);
(b)to tender on the basis of two or more alternative offers at least one of which had the characteristics of (a)(i) to (a)(iii) above and at least one of which included item-by-item prices;
The particulars to these allegations were that this had occurred on the following occasions:
·NSW tenders 1992 and 1997
·QLD tenders 1991, 1997 and 2001
·WA tenders 1991, 1995 and 2001
·SA tenders 1992, 1995 and 2001
The asserted relevant contraventions in respect of which relief was sought were, however, more narrowly framed in time. The asserted relevant contraventions were in respect the negotiations and entering into the following agreements:
·the 1998 NSW Supply Agreement between Baxter and the State Contracts Control Board on behalf of NSW made in June 1998 for the period 18 May 1998 to 30 April 2003 (the “1998 NSW Agreement”)
·the ACT Health Agreement between Baxter and the Department of Health and Community Care of the ACT made on or about March 1999 that the terms of the NSW Agreement would apply (the “ACT Agreement”)
·the 2001 South Australia Supply Agreement between Baxter and SA made on or about 1 May 2001 for the period 1 April 2001 to 30 March 2006 (the “2001 SA Agreement”)
·the 2001 Western Australia Supply Agreement between Baxter and WA made on or about 2 May 2001 for the period 1 March 2001 to 28 February 2006 (the “2001 WA Agreement”)
·the 2001 Queensland Supply Agreement between Baxter and Qld made on or about 17 April 2001 for the period 1 June 2001 to 31 May 2004 (the “2001 QLD Agreement”)
The 1998 NSW Agreement
The relevant conduct was said to be constituted by the submission by Baxter on 30 October 1997 of its tender response to the invitation to tender by the State of New South Wales on 8 October 1997 and its revision thereof in February and March 1998, for the supply from 1 April 1998 to 31 March 2000 of a range of LVP fluids, PN fluids, IS and PD products for use in NSW by Health facilities; and the entry into the agreement with the State Contracts Control Board on behalf of the State of New South Wales in June 1998.
The ACT Agreement
The relevant conduct was said to be constituted by the agreement between Baxter and the Department of Health and Community Care of the ACT (“ACT Health”) that the term of the 1998 NSW Supply Agreement would apply to the ACT. In June 2001, Baxter alleged that ACT Health was in breach of its agreement and in July 2001 it purported to amend its prices higher than existed under the exclusive arrangement.
The 2001 SA Agreement
The relevant conduct was said to be constituted by the submission by Baxter on 1 September and 24 November 2000, including variations thereafter, of a response to the invitation to tender by SA for the supply for a two year period (with an option to extend for one year) of a range of LVP fluids, PN fluids, IS and PD products; and by the entry into a contract from 1 May 2001 for the supply of LVP and PN fluids, IS and PD products from Baxter for five years from 1 April 2001 to 30 March 2006.
The 2001 WA Agreement
The relevant conduct was also said to be constituted by the submission by Baxter and subsequent variation in response to an invitation to tender in October 1999 from WA for the supply for five years from 1 October 2000 to 30 September 2005 for a range of LVP fluids, PN fluids, IS and PD products for use by Health facilities in WA; and by the entry into a contract in May 2001 with WA for the supply of LVP and PN fluids, IS and PD products by Baxter for five years from 1 March 2001 to 28 February 2006.
The 2001 QLD Agreement
The relevant conduct was also said to be constituted by the submissions by Baxter and subsequent variation in response to an invitation to tender in January 2000 from QLD for the supply for three years of a range of LVP fluids, IS, PD and haemodialysis products (not PN fluids) for use in QLD by Health facilities; and by the entry into a contract from 17 April 2001 with QLD for the supply of substantially all LVP fluids, PD products and IS from 1 June 2001 to 31 May 2004.
Section 47 claims
The substantially identical body of conduct (with one additional aspect) is said to give rise to contraventions of s 47 of the Act. The additional aspect of conduct relied upon is that from 18 May 1998, 1 April 2001 and 1 March 2001, Baxter has supplied LVP fluids, PN fluids, IS and PD products to NSW, SA and WA, respectively, under the relevant agreements and that from 1 June 2001 Baxter has supplied LVP fluids, IS and PD products to QLD under the relevant agreement. This conduct was said to be, the offering to supply, or the supply, of goods (LVP fluids, IS, PN fluids (except for QLD) and PD products) or the supply of those at a particular price on condition that the State or the ACT will not, or will not to a limited extent, acquire such goods from a competitor of Baxter, thereby satisfying s 47(2) of the Act.
The various claims under s 47 of the Act were framed in the alternative by reference to various markets for PD products LVP fluids, PN fluids, IS and sterile fluids. In each case the underlying conduct was the same: negotiating, entering into and supplying pursuant to each of the five impugned agreements.
The above conduct by reference to the five impugned agreements was said to be for the purpose, being a substantial purpose, of substantially preventing, hindering or lessening of competition in:
(a)the separate State-bound geographic markets for PD products,
(b)a combined national PD products market,
(c)the separate national wholesale market for LVP fluids, PN fluids and IS fluids, or
(d)a combined national wholesale sterile fluids market.
The above conduct by reference to the five impugned agreements was also said to have had the effect or likely effect of substantially preventing, hindering or lessening competition in those markets.
The above conduct by reference to two or more of the impugned agreements was said to have been done for the above purpose and with the above effect or likely effect in relation to the above markets.
A tabular break up of the s 47 claims is as follows:
Paragraphs of application
Exclusive dealing
Effect/Purpose
Affected market
[9]
By negotiating, entering into and supplying under each of the agreements with NSW, ACT, SA, WA & QLD
Purpose of
NSW, SA WA & QLD PD Products
[10] (Alternative to [9])
By negotiating, entering into and supplying under each of the agreements with NSW, ACT, SA, WA & QLD
Purpose of
National PD Products
[11]
By negotiating, entering into and supplying under each of the agreements with NSW, ACT, SA, WA & QLD
Effect or likely effect of
NSW, SA WA & QLD PD Products
[12] (Alternative to [11])
By negotiating, entering into and supplying under each of the agreements with NSW, ACT, SA, WA & QLD
Effect or likely effect of
National PD Products
[13]
By negotiating, entering into and supplying under 2 or more of the agreements with NSW, ACT, SA, WA & QLD taken together
Effect or likely effect of
NSW, SA WA & QLD PD Products
[14] (Alternative to [13])
By negotiating, entering into and supplying under 2 or more of the agreements with NSW, ACT, SA, WA & QLD taken together
Effect or likely effect of
National PD Products
[15]
By negotiating, entering into and supplying under each of the agreements with NSW, ACT, SA, WA & QLD
Purpose of
LVP Fluids, PN Fluids and IS markets
[16] (Alternative to [15])
By negotiating, entering into and supplying under each of the agreements with NSW, ACT, SA, WA & QLD
Purpose of
Sterile Fluids market (LVP, PN & IS)
[17]
By negotiating, entering into and supplying under each of the agreements with NSW, ACT, SA, WA & QLD
Effect or likely effect of
LVP Fluids, PN Fluids and IS markets
[18] (Alternative to [17])
By negotiating, entering into and supplying under each of the agreements with NSW, ACT, SA, WA & QLD
Effect or likely effect of
Sterile Fluids market (LVP, PN & IS)
[19]
By negotiating, entering into and supplying under 2 or more of the agreements with NSW, ACT, SA, WA & QLD taken together
Effect or likely effect of
LVP Fluids, PN Fluids and IS markets
[20] (Alternative to [19])
By negotiating, entering into and supplying under 2 or more of the agreements with NSW, ACT, SA, WA & QLD taken together
Effect or likely effect of
Sterile Fluids market (LVP, PN & IS)
Further factual background
Relevant Participants
A number of companies other than Baxter participate, and have participated in the past, in the manufacture, importation and selling of products in and into Australia which bear upon the issues in these proceedings. The major competitors or potential competitors of Baxter in the sale of sterile fluids in Australia are Gambro, Fresenius, B. Braun AG and Abbott Laboratories.
Gambro
Gambro is the Australian subsidiary of Gambro AB, a Swedish company. Since its inception in 1964, Gambro AB has been involved in renal dialysis. Its three major corporate arms (Gambro, Cobe and Hospal) are concerned with dialysis, blood component technology, the cardiovascular area, and acute therapy and critical care. To a significant degree, and certainly in Australia, Gambro is a specialist renal and dialysis company. Gambro commenced business in Australia and New Zealand in 1975.
Gambro considers Baxter and Fresenius to be its two main competitors in the global dialysis industry. The worldwide market shares of Gambro, Baxter and Fresenius for HD products were in 1998-2001 in the order of 20 per cent, 7 per cent and 30 per cent, respectively. For PD products they were 2 per cent, 70 per cent and 17 per cent, respectively, and for Renal Intensive Care they were 54 per cent, 14 per cent and 12 per cent, respectively.
Gambro manufactured haemofiltration fluids in Australia from 1985, initially through the manufacturing plant of a company called Delta West (up to 1987) and then at a plant of another company, Kendall-McGraw (up to 1989). Gambro began selling imported HD fluids in Australia in 1986. In 1990 Gambro purchased the Kendall-McGraw sterile fluids plant in Dandenong. From 1990, Gambro began manufacturing PD fluids and haemofiltration fluids at this plant. In 1991, this plant also commenced producing HD fluids.
Mr Stokoe, the managing director of Gambro in Australia, gave evidence that the acquisition of the Dandenong plant was part of an overall strategy to expand Gambro into new product areas. From the evidence, including Confidential Exhibit JTKS-2, it is apparent that in the early to mid-1990s Gambro was making a concerted effort to gain HD and PD business in Australia.
Today, Gambro supplies, and provides support for, renal equipment, owns and operates dialysis clinics, and manufactures HD concentrates and solutions for PD and haemofiltration. Renal related products constitute 93 per cent of its Australian business.
As to HD products, Gambro offers complete HD systems, including dialysis machines, dialysers, blood lines, powder concentrate, concentrate solutions, catheters and needles, water treatment systems, machine disinfection products and technical and educational support. Gambro manufactures its HD and HF equipment overseas. Only its sterile and non-sterile dialysis fluids are produced in Gambro’s Australian plant at Dandenong.
In mid-1991 a major dialysis clinic in Sydney, the Sydney Dialysis Centre (the “SDC”) began to use Gambro PD products. By 1992, the SDC was using Gambro PD products for 150 of its 460 PD patients and by 1993 Gambro PD products had become well received in other major hospitals such as St Vincents in Sydney.
Fresenius
Fresenius AG is a publicly listed German company which in 2001 (through its various subsidiaries) employed more than 60,000 people worldwide, with a turnover in excess of USD 4.2 billion. There are three corporate divisions of the group – Fresenius Medical Care specialising in dialysis products and services and related treatments; Fresenius Kabi specialising in intravenous products, including infusion therapy, PN, EN and related treatments; and Fresenius ProServe GMBH which is involved in the ownership of health care facilities and the construction of production facilities.
Fresenius Medical Care is the largest of the three divisions and is the only division which operates in Australia. In 2002, the Australian subsidiary had 102 employees and sales of $43 million. Fresenius Medical Care is a worldwide specialist dialysis group whose products treat more than 100,000 patients in more than 1,400 clinics around the world. It has 30 manufacturing plants in 15 countries, each plant manufacturing different products. For example, an Australian plant and a UK plant produce only HD fluids, a Spanish plant produces PD fluids only, a German plant produces a full range of PD products.
Fresenius Kabi manufactures (though not in Australia) a comprehensive range of LVP fluids and PN and EN fluids. It does not supply, and has not supplied, LVP fluids and EN fluids in Australia, but does supply some PN fluids through a supply arrangement with Baxter. In 1998, Fresenius Kabi acquired the PD fluids business of two companies and Baxter began distributing those PN fluids for Fresenius Kabi. In 2000, Fresenius Kabi PN fluids constituted 18 per cent of PN fluids sold in Australia.
Fresenius sought to enter the HD and PD markets in Australia in about 1995. In 1996, Fresenius Medical Care set up its headquarters for the South East Asia region in Sydney. In 1996, Fresenius began offering HD and PD products around Australia. In 1996, Fresenius purchased a production plant in Smithfield in Sydney from Ajax Chemicals at which it commenced to manufacture HD fluids. The plant did not, and does not, make PD fluids.
Mr Mechtersheimer, the Vice-President, South Asia Pacific of Fresenius Medical Care, said that in Australia in 1996, Gambro was the dominant HD supplier with a small share of the PD market and Baxter was the dominant PD supplier with a small share of the HD market. Since entry into the Australian market, it would appear that Fresenius has increased its market share of HD products to over 50 per cent; though its share of the PD market has not risen above 5 per cent. Fresenius’ turnover in Australia had increased from $7 million in 1996 to $30 million by 1 January 2002.
Fresenius imports its HD equipment, though it produces HD fluids at its Smithfield plant. It also imports its PD products including fluids. Fresenius largely contracts out the distribution of its products, with the exception of NSW where it has its own warehouse, staff and trucks for the performance of this function.
The ACCC’s case was that the inability of either Gambro or Fresenius to make headway in the PD market was a result of the impugned agreements and their predecessors.
Abbott
Abbott Laboratories is a US health care products and services company. Worldwide it operates 54 offices, sells in more than 130 countries and employs over 70,000 employees. Its sales in 2002 exceeded USD 17.6 billion. Abbott Laboratories, through a subsidiary company, Abbott Australasia Pty Ltd (“Abbott”), has been in Australia since 1937. In 1970, Abbott acquired intravenous fluid manufacturing plants in Sydney, Adelaide and Perth. The Perth plant was closed in 1980. A new plant was built in Adelaide. Up until 1992 (when the Adelaide plant closed), Abbott manufactured and supplied LVP in Australia. Abbott continues to supply EN feeds and products. They are manufactured overseas. Abbott, however, no longer manufactures and supplies LVP fluids in Australia, having left the market in circumstances to which I will come.
Abbott supplied PN fluids manufactured in the US to Australia in 1987 for 1 year, but discontinued that supply because of the complexities of TGA registration. Mr Baker, who is a Program Manager Class A and Demand Manager with Abbott, said that Abbott does not consider the supply of PN fluids in Australia to be in its strategic objectives, because the number of patients is static and the capital cost of building a compounding plant are prohibitive.
From 1985 to 1992 Abbott’s share nationally of the LVP market fluctuated from 10 per cent (to Baxter’s 90 per cent) to 44 per cent (to Baxter’s 56 per cent). This fluctuation was, to a significant degree, a result of the success or otherwise of these companies in winning large scale State tenders.
B. Braun
B. Braun Melsungen AG (“B. Braun AG”) is a multinational health care organisation based in Germany. It has a turnover of EUR 2.6 billion, employs over 28,000 employees and operates in almost 50 countries. B. Braun AG supplies approximately 40 per cent of each of the North American and German IV fluids markets. B. Braun AG provides all products utilised in intravenous therapy, as well as critical care products. It has manufacturing facilities in 25 countries.
B. Braun Australia Pty Ltd (“B. Braun”) was established in Australia in 1982 and employs 70 employees. It supplies a certain intravenous therapy, a colloidal volume replacement and surgical instruments.
B. Braun AG does not manufacture any products in Australia. It manufactures sterile fluids and PD fluids in Germany and Malaysia. B. Braun currently has a full range of IV products, haemodialysis products and some PD products registered with the TGA. It spends approximately $15,000 per year to maintain these registrations and has approximately 80 per cent of LVP fluids required by NSW registered. B. Braun has registered with the TGA 80 per cent of the LVP fluids that were sought in the 1997 NSW request for tenders to supply IV fluids and IS. However, it does not have any PN products registered in Australia. At one time, it did have PD products registered, but it did not sell them in Australia. It should be noted at this point that registration of a company’s product with the TGA does not mean that company can sell product which may be imported or manufactured in Australia. In either case, the manufacturing plant in Australia or overseas must meet specified requirements.
Other companies
Other companies participate and have participated in Australia in the selling of relevant or cognate products. Tyco Healthcare Australia Pty Limited (“Tyco Healthcare”) is a subsidiary of Tyco International which is a diversified manufacturing and service company that operates in over 100 countries. Tyco Healthcare’s business includes medical, surgical, respiratory, imaging, pharmaceutical and retail products. It sells saline solutions in Australia largely to pharmacies, and in the main they are utilised as lens cleaners. Its Gelflex Normal Saline holds a 40 per cent market share within the normal Saline category.
Whilst Tyco Healthcare’s saline solutions could be utilised as IS, Tyco Healthcare does not market its products under that banner. Tyco Healthcare has decided not to market a full range of saline solutions to hospitals because it perceives the margins to be too low and it believes the business not to be profitable. Tyco Healthcare is a pure sales organisation in Australia. It does not manufacture any products here.
Other companies manufacture or sell IS in small quantities: Pharmacia Australia, Promedica, Briemar, Orion and De Fries. Delta West was a significant local manufacturer of IS, at least in the late 1980s and early 1990s.
Astra Zeneca is the Australian subsidiary in a British based multinational group. It is one of Australia’s leading suppliers of pharmaceuticals. Its product range has in the past included SVP fluids and IS. It has a manufacturing plant at North Ryde where a range of products, including SVP (but not IS) are made. It ceased manufacturing of sterile fluids by 1999.
Even though Astra Zeneca has dedicated machinery for the manufacture of SVP fluids, this equipment cannot be utilised for producing LVP fluids because of added complexities and unsatisfactory results. As a result if Astra Zeneca were to produce LVP fluids, an investment of approximately $10 million in suitable equipment would be required. However, since this would only permit a modest production of LVP fluids and a low return on investment, LVP fluids are not strategically important to Astra Zeneca, and for these reasons, Astra Zeneca does not intend to enter the LVP market in Australia.
As to IS, Astra Zeneca discontinued all such production, with the exception of one particular product, by 1997. Production of this product ceased in 1999.
The manufacturing processes involved and the history of production in Australia by Baxter
The General Operations Manager of Baxter, Mr John Bragg, gave evidence which included descriptions of the manufacturing processes of LVP fluids, PN fluids, IS and PD fluids and of the history of production by Baxter in Australia. He was not cross-examined on these matters. I was able to observe Mr Bragg in court when he was cross-examined on other aspects of his evidence. He gave evidence in a straightforward and open fashion. He appeared to answer questions put to him without prevarication. I found him to be attempting to be of assistance.
After commencing operation in 1963 in a joint venture with a local company, manufacturing a small range of products, Baxter, in 1973, in its own right, established a manufacturing facility in Toongabbie, in Western Sydney. In 1980, Baxter produced various products at the Toongabbie plant: IV fluids, PN fluids, PD fluids, IS, blood collection packs and some associated components. At this stage PD was in its infancy in Australia.
The Toongabbie plant was expanded in 1982 to include a new compounding facility in which PN fluids and other drugs could be mixed.
In 1985, through a takeover of a corporation in the US (American Hospital Supply Corporation (“AHS”)) by BI Inc, manufacturing operations were acquired at Balgowlah in Northern Sydney, and in New Zealand. The Balgowlah operations were incorporated into the Toongabbie plant and the plant at Balgowlah was closed. After a time, the New Zealand plant was also closed and supply was made to New Zealand from the Toongabbie plant.
In the mid 1990s, Baxter launched major PD products in Australia which had been developed in Europe and the US: “Freeline Solo” (for CAPD) and “HomeChoice” (for APD).
Baxter has invested not insignificant amounts of capital in the Toongabbie plant.
During the relevant period, the operation of the Toongabbie plant can be described as follows. It has five fluid manufacturing lines: two are for high volume IV and PD and are highly automated, two are for smaller volume IV, PN and PD fluids and are more manually run, and one line is for IS and various glass bottle products which may be PN and IV fluids.
Finished goods are produced on a batch basis. Fluid bags, tubes and wrappers are made. Chemicals are weighed according to the type of fluid to be produced. Chemicals are mixed in the mixing facility using high grade water. The same stainless steel vats are used for the production of all fluids. After testing the fluid is released to the filling lines for filtration and pumping. The bags are labelled, filled, sealed and placed into a pouch. The pouch is sealed, steam sterilised and placed into cartons.
The production process is the same for IV, PD and PN fluids and IS with the following qualifications:
(a)obviously each has a different chemical formulation;
(b)different tubing lengths and types of connecting apparatuses are used for PD and IV fluid bags;
(c)IS are contained in plastic bottles not PVC bags;
(d)the machine used to assemble bags for the Freeline Solo PD product is a dedicated machine; and
(e)some IS and PN fluids use glass bottles.
Though the fluids are sterile, this is because of the need for the solution container system to be sterile. The production is in a clean, but not sterile, environment in accordance with the relevant Australian manufacturing code and guide adopted by the TGA.
Dedicated production facilities are not required for the manufacture of PD and PN fluids.
Since 2003, the Toongabbie plant has also produced HD fluids.
Appropriate scheduling of production enables minimisation of down-time in the production of different types of fluid. It takes approximately 20 to 40 minutes to clean and flush equipment for the next solution and to set up different labelling.
Output and capacity are flexible to meet demand.
The evidence disclosed that in other countries where the market volume may be greater than in Australia, specific plants often specialise in a more limited range of these fluids.
Capital costs associated with manufacture
The investment required to develop, plan and construct a sterile fluid plant in Australia was estimated variously by witnesses as $10 million to set up a PD plant in Darwin (Mr Mechtersheimer); $20 million and two years to complete as a manufacturer in the IS market (Mr Anderson); $40 million to set up a plant such as Baxter’s plant in Toongabbie (Mr Stokoe); $40 million to set up a medium size PN and LVP manufacturing plant (Mr Bhargava). I need not decide this issue, save to say that building such a plant would involve the likely expenditure of millions of dollars in the order of amounts identified by these witnesses.
The evidence as to capital expenditure by Baxter on the Toongabbie plant was not clear, but it is a fair inference that since 1992 some millions of dollars have been invested in capital equipment and the plant.
The distribution of sterile fluids and PD products
The shelf-life of different products varies. LVP fluids and IS have a shelf life of around two years. Standard PN fluids with amino acids and fat emulsions last 18 to 24 months, others up to five years. Some customised PN products may only last a few days. PD products have a shelf-life of about 18 months to two years.
The supply of sterile fluids requires local or State warehouses to support distribution which can originate from one production facility (such as Baxter’s at Toongabbie) or from one port of entry if importation were to be undertaken (say by B. Braun). Head office facilities would not need to be duplicated and transport would be subcontracted.
The supply of PD products requires not just a local or state warehouse but also locally based support staff to assist patients and hospitals. For the home administration of PD products, distribution systems are required which take fluids and product not just to the renal units at hospitals, but also to patients at their homes. Fresenius, for instance, operates warehouses in WA, QLD, SA, NSW and Victoria, employing local drivers on contract to service patients at home, several nurses in each state and a PD therapy manager. (See generally Mr Hand’s affidavit.) Baxter has similar arrangements.
Market shares
Since at least January 1997, Baxter has supplied almost 100 per cent of LVP fluids at the wholesale level to public hospitals, private hospitals, medical practices and ambulance services in Australia. B. Braun supplied in the relevant period one “niche” LVP product into Australia. Baxter was the only local manufacturer of LVP fluids since 1993.
There are numerous local producers and suppliers of SVP fluids. Given their nature and use SVPs can be seen to be in a different market to LVP fluids.
Baxter was during the relevant period the largest supplier of IS – about 95 per cent of sales.
Baxter was the only local manufacturer of PN fluids, though it distributes Fresenius Kabi product.
The market shares of PD were described by Mr Stokoe and Mr Hand in evidence that was not seriously challenged. Mr Stokoe set out Gambro’s worldwide shares of HD and PD markets as at March 2002 as follows:
Region HD PD Worldwide 19% 2% Europe 39% 4% United States of America 15% 0% Asia excluding Japan 20% 6% Canada 41% 0% France 49% 7% Germany 33% 6% Korea 45% 10% Australia 33% 1-2%
Mr Stokoe set out Baxter’s PD market shares as follows:
Region 1996 1998 2000 Worldwide 78% 76% 77% Europe 73% 71% 74% USA 79% 79% 76% Asia (excluding Japan) 78% 76% 77% Australia <90% <90% <90%
Mr Hand set out Fresenius’ HD and PD market shares as at December 2001 as follows:
Region Haemodialysis Peritoneal Dialysis Worldwide 30% + 16% New Zealand 30% 20% Australia 58% 5%
Mr Leyland, a senior executive of BI Inc, confirmed the accuracy of the worldwide market shares table in Mr Stokoe’s affidavit, with the exception of Baxter’s market share for PD, which he says is 5% - 6% higher. He also agreed with tables setting out Gambro’s market shares and Baxter’s market shares that appear in Mr Stokoe’s affidavit, as well as a table that sets out Fresenius’ market shares in the affidavit of Mr Hand.
The history of State contracts for the supply of LVP, PN and PD fluids and IS (up to the impugned conduct)
Baxter submitted, correctly, that its conduct between 1998 and 2001 which is impugned by the ACCC must be evaluated in the context of what occurred before, and, if probative, after, such conduct: Boral Besser Masonry Ltd v ACCC (2003) 215 CLR 374at [34] and [273].
This background is particularly important in understanding the extent to which the impugned conduct of Baxter can be characterised as the reasonably anticipated response to invitations by the respective States and Territory in the conduct of their affairs. As will be seen in due course this is important for the application of the principle of construction which can be referred to by shorthand as “Crown immunity” or “derivative Crown immunity”.
During the 1980s, there were four manufacturers of IV solutions in Australia, namely Baxter, Delta West, Kendall and Abbott. By the late 1980s, Kendall had closed its manufacturing facility, and in 1990, Gambro purchased Kendall’s plant at Dandenong. Gambro has never sought to manufacture sterile fluids at that plant (which is possible) because it purchased the plant for the purpose of manufacturing PD solutions. Delta West continued to manufacture some IV fluids (mainly minibags and IS) until 1993 and sold them until 1996. As discussed earlier, Abbott manufactured sterile fluids in Australia until it closed its Adelaide plant in 1992.
Until the mid-1980s, no company had an exclusive supply agreement with any of the States. In about 1983, Baxter successfully tendered for a sole supply agreement with Queensland for the supply of IV and PD fluids and IS for hospitals for a two year period. Shortly after this, NSW awarded a sole supply contract to Abbott for IV fluids. In 1985, NSW entered into contracts with both Abbott and Baxter for the supply of IV fluids, and between 1985 and 1992, Baxter supplied 85 per cent of the volume of these fluids.
Prior to about 1990, by reason of Commonwealth State funding arrangements, not a great deal of PD products, including fluids, was sold directly to the States. A change to funding arrangements in about 1990 saw States funded by the Commonwealth purchase PD products in their own right.
Queensland 1987 and 1990
In 1987, Baxter made various bids to the Queensland State Supply Board for a tender covering IV, IS and PD solutions. Four offers were made – two on the basis of item-by-item prices for all products covered by the tender, and two based on guaranteed sole supply for all items covered by the tender. The prices in the latter two offers were significantly below the first two. No analysis was made in the proceedings of these prices or of the comparison between them. There is a similarity between this tender and the impugned tender. But it is important to recall the limited purchasing of PD products by the States at this time. Baxter won the bid on a sole supply basis to Queensland.
In 1990, Baxter once again made bids on a Queensland tender which had an item-by-item offer, and two sole supply offers (one for two years and one for three). The third offer, for three years sole supply, was accepted. Again, there was no analysis in these proceedings of the comparative prices in respect of the tender. Indeed, the prices in the tenders were not in evidence.
Mr William Kelly, who was the Manager of Queensland State Stores Board (“QSSB”) between 1988 and 1996 and then the Director of Queensland Health Services Purchasing & Logistics Group (“QHSPLG”) between 1996 and 2002, was called by the first respondent to give evidence in this proceeding. He was forthright and straightforward, highly experienced and down to earth. I accept his evidence in full in relation to all tenders. Mr Kelly noted that between 1996 and 2002, he was responsible for the operation of approximately 90 different standing offer arrangements. The applicant called a Mr William Stewart (Manager of QHSPLG) to give evidence, and his affidavit was not contested.
Mr Kelly recalled that in or about August or September 1991, he and his staff held discussions in relation to consolidating the 330 separate period contracts that were then in existence for the supply of pharmaceuticals and other medical products to the State of Queensland. In Mr Kelly’s view, this number of contracts had become too time consuming and cumbersome to administer. As a result, IV fluids and IS were at that time consolidated into the one contract. HD and PD fluids, however were not part of this contract because of perceived different organisational requirements related to the negotiations in respect of these two products (i.e. in terms of the clinical consultation required).
South Australia 1991
From May 1991 to April 1993, Baxter had a sole supply agreement with SA in relation to sterile fluids and PD fluids. Mr Horstmann, a former employee of “Supply SA”, gave evidence that before 1995 (and it can be inferred, as early as 1991) LVP, PN and PD fluids and IS were linked both in supply by Baxter and in the same contract. He recalled that Baxter tenders before 1995 generally included a higher item-by-item price compared to a sole supply price.
Western Australia 1991
In October 1991, Baxter made five separate and contemporaneous offers in respect of a proposed contract with the State Supply Commission of Western Australia for products which included IV fluids, IS, PN and PD fluids. The structure of the offers was made clear in evidence. Offer 1 was an item-by-item bid for two years with a CPI adjustment after one year. All other four bids were sole supply bundled arrangements: two years, two years with a one year option, five years for all but PD fluids and two years plus a one year option for PD fluids, and five years.
The bid letter stressed the importance of total volume through the facility.
Though individual pricing was not in evidence, the bid letter did contain the relevant savings said to be made. The evidence does not permit a comparative analysis to assess the cost of acceptance of an item-by-item offer for all but PD and another supplier’s PD products. But it is fair to say that the saving over five years between the item-by-item offer and the five year exclusive bundled offer was not insignificant: in the order of $2.25 million, based on an expenditure over five years in the bundled offer of $12.9 million.
It should be noted that at a time when Abbott was a domestic manufacturer of IV fluids Baxter did not put forward a bid for sole supply of LVP fluids and PN fluids, separating out PD fluids.
The two year offer with a one year option was accepted and the contract was extended to November 1994.
New South Wales 1992 and 1993
Before the process for the establishment of what became contract no. 938/904, the NSW Department of Health (“NSW Health”) received pre-tender submissions, first (on 16 March 1992) from a consortium of Abbott, Delta West and Gambro, and later (on 7 April 1992) from Baxter.
The submission of the consortium was expressed as an attempt to provide competition to Baxter over all the relevant market “segments” (being the term used in the submission) which were identified in the covering letter to the submissions on Abbott letterhead as, broadly, LVP fluids, IS, PN and PD fluids (though these four categories were broken up into seven segments). The submission noted that in the 12 to 18 months prior to March 1992 SA, WA, Tasmania and QLD had accepted tenders from Baxter. It stated that the tenders were constructed to favour the supplier with the broadest range of product. The submission pointed out what were seen to be the anti-competitive consequences of such exclusive tenders. The submission also made the point that the cost structures of high volume LVP products were particularly sensitive to volume throughput. The letter also stated:
…We are penalised by:
1.Bidding practices and tender construction which encourage bundling and a sole supplier situation.
2.Artificially low prices in competitive areas of the market, compared to world parity.
3.Resulting lower volume which drives unit costs up versus competition.
Failure to gain an assured unit volume at realistic prices raises the dilemma of whether to discontinue operations as there is a disproportionate rise in costs for small-run production.
The explication of “arrangements and understandings” was then dealt with by the analysis of Gasgo’s arguments. The first of those arguments was that Gasgo’s participation was at the behest of the government, and so, it was said, must be seen to be part of an arrangement or understanding involving the government. It was said that the reasons of Mason J and Jacobs J in Bradken supported this argument. This argument was rejected by the majority in NT Power by reference to the fact that in Bradken the arrangement or understanding was one to which the Commissioner of Railways was a party.
The second argument was by reference to the affectation of PAWA’s financial interests, otherwise than by the affectation of contractual or property rights. It was argued that there was no logic to limiting the relevant interference to categories based on direct legal rights. This argument was rejected as too wide and as without legitimate support: at [173]. The majority then analysed and rejected the matters said to have supported this argument. The first asserted support was the wider expression of the principle by Gibbs ACJ in Bradken who (at 124) used the phrases “prejudicial to the interests of the Crown” and “affect prejudicially the interests of the Crown” as the expression of the relevant principle to dispose of the matter before him. In pointing out that these expressions should not be taken beyond the problem that was there before the Court, the majority pointed out (at 174) that the Commissioner had entered into a contract, arrangement or understanding with BHP contrary, it was said, to ss 45 and 47 and where the actual decision was:
[W]here the Commissioner was not bound by ss 45 or 47, the Act could not apply to BHP either. That was because application of the Act would affect the government’s enjoyment of a direct consensual relationship between itself and a non-governmental party …
The majority at [175] recognised that if PAWA had had the agreement with the suppliers “it would have fallen within the four corners of the decision in Bradken” (subject, of course, to s 2B). (Stopping at this point of the analysis of NT Power, there is nothing thusfar in the reasons of the majority to throw doubt upon the decision of Bradken insofar as it extends to protecting the non-governmental party to a contract with the Crown. Thus, here, unless the balance of NT Power demands the contrary Bradken would appear to require that Baxter be protected from any allegation that the entry into and supply pursuant to the impugned contracts contravened ss 46 and 47 on the basis that it fits four square within Bradken.)
The majority then dealt (from [176]) with an argument put forward by the Solicitor-General for South Australia that the immunity principle extended to protecting a non-government party to a contract with another non-government party if the interference with that contract affected the ability of one of those non-government parties to fulfil its contractual obligation either with the government or with another non-governmental entity which affected a governmental interest. In either case, the interest of the government was removed from the direct legal relationship affected. Reliance was placed on Re Telephone Apparatus Manufacturers’ Application [1963] 1 WLR 463. The analysis by the majority of Re Telephone Apparatus illuminates the content of the principle expressed in NT Power.
In Re Telephone Apparatus, there were two agreements. The first was between eight manufacturers of telephones and the Postmaster-General and provided for the terms of supply by the former to the latter. The second was between the manufacturers and dealt with the allocation of orders made under the first agreement. It was held that there was no need to register the second agreement under the Restrictive Trade Practices Act 1956 (UK) because that legislation did not apply to the second agreement. This was so by reason of the application of the Crown immunity principle.
The majority in NT Power identified two ways of analysing Re Telephone Apparatus – one in accordance with the principle as expressed by them, one not. The narrow basis of the decision in Re Telephone Apparatus which “should be treated by Australian courts as the true ground of the decision” ( at [183]) was that the two agreements were in truth one composite agreement to which the government (through the Postmaster-General) was a party. Viewed thus, the case was similar to Bradken.
The wider basis of the decision in Re Telephone Apparatus treated the two agreements as distinct. On this basis, the second agreement between the telephone companies was not within the reach of the legislation because the Postmaster-General’s “interest” or “rights and interest” would be prejudicially affected. These interests were only commercial because its legal position was unimpaired. In a passage important to the resolution of the this matter the majority said the following at [181]:
…Willmer LJ said that the Postmaster-General’s “interests” would be prejudicially affected by the invalidity of the TAM agreement, and Upjohn LJ said that the Crown’s “rights and interests” would be prejudiced. But the interests were only commercial interests: the legal position of the Postmaster-General was unimpaired. Harman LJ said that to interfere with the TAM agreement was “to frustrate in whole or in part the Crown agreement, and thus to interfere with the freedom of contract of the Crown”. That “freedom” was not a legal right: the Crown and the manufacturers could have included within the Crown agreement any term of the TAM agreement they wished, but they chose not to.
The above passage, and in particular the last sentence, must be read in its context. It is not authority for the proposition that was asserted by the ACCC that the freedom of the Crown to contract in such terms as it wishes is not a legal right or part of the “legal situation” of the Crown (see Kitto J in Wynyard Investments, referred to by the majority at [170]). Rather, it was a statement that what truly was being interfered with was the commercial consequences of another legal right (the second contract between manufacturers) and not the legal right of the Postmaster-General. That legal right was unimpaired and free since any term the parties desired could have been placed in the first contract. Thus, I do not see this passage to stand for the proposition asserted by the ACCC that all conduct prior to the formation of a legal right, relevantly here a contract with a State, can only affect the commercial interests of the State, as opposed to the legal rights, or legal situation, of the State.
The majority in NT Power then noted that in Bradken only Stephen J could be taken to have expressed himself in terms wide enough to be seen to give approval to the wider basis in Re Telephone Apparatus. That statement of Stephen J was obiter and also to be seen in the context of the argument put forward in Bradken, where Re Telephone Apparatus was only relied upon for the proposition underlying the narrow basis of the case, that the immunity of the Crown “extends to contracts arrangements or understandings made by the Crown with others”: see Bradken at 109 and the majority in NT Power at [185].
Finally, the majority (at [188]) referred to some New Zealand cases (Doyle v Edwards (1898) 16 NZLR 572; Lower Hutt City v Attorney-General [1965] NZLR 65 at 75, 77-8 and 81; and Wellington City Corporation v Victoria University of Wellington [1975] 2 NZLR 301 at 305) referred to without disapproval in Bradken that might be seen to be broader than the interference with the legal rights of the Crown. Two were analysed as capable of falling within Bradken; the third was not central to the reasoning in Bradken and its place in Bradken should not be seen to widen the principle there found.
Thus, the following can be taken from the reasons of the majority in NT Power, in particular from its dealings with Bradken and Wynyard Investments:
(1)Properly understood the authority of Bradken remains unimpaired, though, of course, now within the framework of s 2B of the Act.
(2)The principle applies to proprietary, contractual and other legal rights and interests such that it can be said that there is an impairment of the existing legal situation of the Crown.
(3)The principle does not extend to circumstances in which the legal situation of the Crown remains unaffected, but its commercial interests are affected.
(4)If a State or Territory has a contract with a non-government party, the Act is to be construed as not applying to that contract such that the State or Territory and non-government party is not bound by the terms of the Act in relation to the entry into and performance of that contract.
The last proposition ((4) above) is clear from Bradken and NT Power. The principle is not so much an immunity of the Crown as the application of a principle of the construction of a statute. By that principle, if the statute when construed is found not bind the Crown, that means that the statute will be taken not to have application to, or an operation to extend to, the Crown, or to circumstances or parties where to do so would interfere with proprietary, contractual and other legal rights and interests of the Crown: Wynyard Investments at 393; Commonwealth v Rhind (1960) 119 CLR 584 at 598-9; China Ocean Shipping Co v South Australia (1979) 145 CLR 172 at 187-8, 199, 221 and 240; Bradken at 121, 127 and 135.
The principle is not one whose operation depends upon the fashioning of terms of relief. It is one concerning the reach or the extent of operation of the statute. Plainly, no remedy can be given against the relevant States or the ACT here. That is not merely because the States and the ACT are immune from the remedy. It is because the Act’s operation does not extend to their legal rights found in the impugned contracts. It follows from that limitation on the operation of the Act (a limitation intended by the Commonwealth Parliament) that the other party to the contract is not affected by the operation of the Act. Thus, at least to enter into and give effect to (here by supplying pursuant to) the contract is not touched by the Act. To do so would be to make unlawful the performance of obligations or the taking advantages of rights bargained for or granted by the State or Territory in its contract. The legal rights of the Crown would be directly affected. Thus, in Bradken, the Act did not operate to entitle injunctive relief to restrain performance of the agreement.
The ACCC here seeks to avoid this consequence by including mandatory order 22A. By this, it was said, there was no prejudicial interference with the performance of the impugned contracts, because, although orders 21 and 22 restrain the giving effect to any of the impugned contracts still on foot, order 22A gives an equivalent benefit of the contract without the bundling restrictions.
The relief sought, however, has the following effect:
(a)making it unlawful to enter and give effect to the contract with the Crown;
(b)restraining the performance of the terms of the contract to do that which the Crown agreed;
(c)substituting another bundle of rights said by the ACCC and adjudged by the Court (on this hypothesis) to be non-prejudicial to the Crown; and
(d)subjecting a party who has entered into a contract with the Crown, for their perceived mutual interests, to penal sanctions.
These are affectations of the contractual and legal rights and interests of the Crown. To substitute the views of a litigant (here the executive authority of another polity) and or court (here a court exercising the judicial power of another polity) for those of the State and Territory as to what contractual rights and obligations it should enjoy or be prepared to bear in exchange for bargained rights and advantages is not an interference with commercial interests, but with legal interests. If the Crown is prepared to bargain for an arrangement with an exclusive supply or bundling condition, that may be because it perceives its financial, administrative and governmental interests to accord with that course. To deny the State and Territory the operation of the contract for which it bargained in favour of an alternative, perceived by others to be non-prejudicial, would be to deny it the contractual and legal embodiment of its self-perceived economic or political interests. That is to interfere with its legal rights.
Thus, even if all other matters had been made out by the ACCC, I would not make the declarations in paragraphs 1 to 20, or the injunctions in paragraphs 21 and 22 or order any penalty as sought in paragraphs 23 of the Application insofar as they concern the entering into or giving effect to (by supplying pursuant to) contracts made between Baxter and any State or the ACT.
This leaves the issue of whether the principle only prevents the application or operation of the Act to the entry into or giving effect to the impugned contracts once formed, as crystallised legal rights, or whether it extends to prevent the application or operation of the Act to the commercial negotiations leading up to the formation of the impugned contracts. If the former, then Baxter will have contravened s 46 of the Act by making Offer 1A in SA and and s 47 of the Act by negotiating, and making the offers it made leading up to the formation of, the impugned agreements. Not only will this have the consequences that declarations to that effect will be made and that Baxter will be liable to the imposition of penalties, but also, Baxter can be restrained from the repetition of such conduct in the future. This would thereby prevent or foreclose the State or the ACT from making a contract with Baxter by preventing its negotiation, notwithstanding that if such a contract were to be formed the Act would not extend to either Baxter or the State or the ACT as to its formation and performance.
The ACCC says that the interests of the State or the ACT thus affected would be commercial or financial or administrative only. The respondents say that legal rights and interests, including the Crown’s prerogative are directly affected.
Bradken was concerned with an existing agreement. NT Power was concerned with existing agreements. The majority in NT Power recognised and accepted that the relevant issue was to be expressed in terms used by Kitto J in Wynyard Investments at 393:
whether the operation of the provision upon the subject would mean some impairment of the existing legal situation of the sovereign
Once the impugned contracts were entered into, their existence and terms formed part of the legal situation of the States and the ACT. They obtained vested legal rights and obligations by reference to an accepted juridical source of private and public obligation and privilege justiciable and enforceable in the courts: the respective contracts.
Antecedent to the creation of this form of recognised juridical vessel of rights and obligations, the States and the ACT had legal situations which included the lawful capacity or authority to negotiate and enter into such contracts as were entered into. If no particular statute or delegated legislation touches the matter, the entitlement or lawful freedom or capacity of the executive government of the relevant polity to negotiate and enter into such a contract can be characterised as an aspect of the prerogative or as a mere capacity: Davis v Commonwealth (1980) 166 CLR 79 and Seddon Government Contracts: Federal State and Local (3rd Edn), chapter 2. Each of the executive governments concerned had the lawful capacity and entitlement to ask Baxter, whether by request for tender or otherwise, to provide it with offers for the supply of goods. Each was unconstrained by the Act in that regard. Each could ask for an offer which, in terms, and in the context of the relevant markets, offended s 47. It was unnecessary for there to be a statute or piece of delegated legislation that in terms proclaimed a “right” to do this. The right, or lawful capacity, was an attribute of each polity as a juristic person and the absence of binding contrary law. That was the “legal situation” of each government prior to its respective agreement.
Some of the respondents helpfully set out the particular legislative and regulatory regimes governing the tendering for the relevant contracts. It is unnecessary to descend to this level of detail. It is sufficient to identify the entitlement or capacity of the States and the ACT to call for tenders and negotiate offers leading up to the relevant impugned contracts as aspects of the legal situation of the States and ACT as legal (as opposed to financial or commercial) rights, interests or prerogatives of the kind recognised by the principle as enunciated in NT Power, Bradken, Bass and Wynyard Investments.
Does, then, the Act operate to make it unlawful for non-government parties to respond to such tenders or invitations or to participate in negotiation if a specified norm of conduct is contravened? If the answer to that were yes, it would follow (at least insofar as the response was such as to be within the contemplation of the request or invitation) that the legal rights, interests or prerogatives of the polity in question were qualified or impaired. Thus, the answer must be, no.
In some factual circumstances it may not be easy to discern whether a party is really responding to what a government has called for. For example, if a non-government party made an unsolicited offer to a government or made a response to an invitation which was so discordant with that invitation as to be characterised as an unsolicited offer, it may be more difficult to see how the operation of the Act to cover such offers and any conduct leading up to that point affects the legal situation of the Crown.
Thus, it is necessary to examine the circumstances here, as pleaded and as found, for the purpose of assessing whether the offers and negotiations fell within that called for by the States and ACT.
As to the 1998 NSW Agreement contract the pleaded case (paragraph 46 et seq of the Statement of Claim) was that the offers and revised offers were in response to the relevant invitation to tender. The history of the preceding tendering was such as to allow the comfortable conclusion that the form of the impugned offers and revised offers was reasonably within that which was called for by the invitation. None of the history of negotiations between Baxter and NSW grounds a proposition that the offers, insofar as the ACCC asserts a relevant contravention, were outside the responses being called for. Indeed clause 4.32 of the Request for Tender (see [209] above) specifically contemplated sole supplier bids over a range of, or all, products.
No negotiations were pleaded in relation to the ACT agreement (see paragraphs 52 to 55 of the Statement of Claim).
As to the 2001 SA Agreement, the pleaded case (paras 58 et seq of the Statement of Claim) was that the offers were responses to the invitation to tender. The history of preceding tendering and supply and of the negotiations makes clear that the sole exclusive supply offers were clearly within what was called for. The refusal, in Offer 1A, to give a discount for volume for sterile fluids, other than PD does not alter this conclusion. A bid was called for. One was given. It may have disappointed SA. But it was a response to the request.
As to the 2001 WA and QLD Agreements, once again, the pleaded cases (paragraphs 69 et seq and 77 et seq of the Statement of Claim) were that the offers were responses to the invitation to tender. The history of tendering and supply and the terms of the invitations make clear that the offers were within that which was called for.
Therefore, the Act does not apply to or operate upon the conduct of Baxter said to contravene ss 46 and 47 up to the entry into the impugned contracts. Thus, no declarations as to past conduct or penalties as to past conduct can be made. On this basis, it would also be inappropriate and without foundation to grant orders restraining any future conduct with the States or the ACT.
Some of the submissions of the ACCC were to the effect that to accept the submissions of the respondents and to conclude that the principle of Crown immunity has the result which, in my view, it does, would be to emaciate the operation of the Act and in some fashion undermine the operation of competition law in this country. Neither of these things are a result of the views that I have expressed.
The operation of the principle is one of statutory construction. It involves an issue that is, subject to any constitutional restraints, one for the Parliament. If the Parliament wishes to ensure that the Act is to be construed such that persons dealing with the governments of States or Territories are fully liable to the operation of the Act no matter what impact that may have on the legal situation of the States and Territories, it can say so. It has not.
Further, if States and Territories wish to subject parties dealing with them to an equivalent regime they may, again subject to any constitutional restraints.
For the above reasons the Act does not extend to Baxter’s conduct here. Therefore, the Application should be dismissed. I will hear the parties on the questions of costs.
I would like to express my gratitude for the careful assistance given to me by solicitors and counsel for all parties.
I certify that the preceding seven hundred and five (705) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop. Associate:
Dated: 16 May 2005
Counsel for the Applicant: Mr S Rushton SC
Mr A I TonkingSolicitor for the Applicant: Australian Government Solicitor Counsel for the First Respondent: Mr D M Yates SC
Mr M R SpeakmanSolicitor for the First Respondent: Blake Dawson Waldron Counsel for the Second Respondent: Ms J Pritchard Solicitor for the Second Respondent: State Solicitor for the State of Western Australia Counsel for the Third Respondent:
Mr C J Kourakis QC (Solicitor-General for South Australia) Mr G Cox and Mr V Stefano Solicitor for the Third Respondent: South Australian Crown Solicitor Counsel for the Fourth Respondent: Mr S Gageler SC
Ms N SharpSolicitor for the Fourth Respondent: NSW Crown Solicitor Dates of Hearing: 18, 19, 20, 21, 24, 25, 26, 27 and 31 May, 1, 2, 4, 7, 8, 15, 16, 17, 18, 21, 22 and 23 June and 5 and 6 July 2004. Last Submission received: 23 December 2004 Date of Judgment: 16 May 2005
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