Hecar Investments No. 6 Pty Ltd v Outboard Marine Australia Pty Ltd

[1982] FCA 114

Re: HECAR INVESTMENTS No. 6 PTY. LTD.
And: OUTBOARD MARINE AUSTRALIA PTY. LTD. (1982) 62 FLR 159
No. G9 of 1982
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Franki J.(1)

CATCHWORDS

Trade Practices - Exclusive Dealing - refusal to supply goods - market - competition - whether conduct likely to have effect of substantially lessening competition.

Trade Practices Act, 1974 ss. 47(1), 47(3)(a)(d), 47(10)(a), 47(13)(b)

Trade Practices - Exclusive dealing - Expert economic evidence of economist - Meaning of "competition", "substantially" - Trade Practices Act 1974 (Cth), s. 47.

HEADNOTE

The applicant carried on the business of supplying two brands of outboard motors. One brand was manufactured by the respondent and the other by a competitor. The respondent refused to supply its motors to the applicant or appoint it a distributor of such motors but it did not attempt to interfere with the supply of its motors to the applicant by other dealers.

The applicant sought injunctions under the Trade Practices Act 1974 s. 80 based on alleged contraventions of the exclusive dealing provisions of s. 47. Section 47(10) provides, inter alia, that the practice of exclusive dealing constituted by conduct referred to in s. 47(3) is not proscribed by s. 47(1) unless the conduct has the purpose or is likely to have the effect of substantially lessening competition in any relevant market.

Held: (1) The respondent had engaged in the practice of exclusive dealing constituted by conduct of a kind referred to in s. 47(3).

(2) The word "substantially" in s. 47(10) refers to an effect on competition which is at least "real" or "of substance" or "of significance".

Peter Williamson Pty. Ltd. v. Capitol Motors Ltd. (1982) 61 FLR 257: Cool and Sons Pty. Ltd. v. O'Brien Glass Industries Ltd. (1981) 35 ALR 445, referred to.

(3) Assuming that the meaning of the word "competition" in a business setting differs from its meaning in an economic setting, then, since the Trade Practices Act 1974 is directed towards business situations, the word "competition" in s. 47 should be given the ordinary meaning it bears in such business situations. Accordingly, expert evidence of an economist of the meaning of "competition" in economics is not of assistance.

(4) Whilst the respondent's conduct did not have the effect of substantially lessening or hindering competition, the applicant had established that the refusal to supply was likely to have the effect of substantially lessening or substantially hindering competition.

(5) Injunction granted.

HEARING

Sydney, 1982, January 19, 27; March 24-26; April 19-22, 27-30;

June 25. #DATE 25:6:1982

APPLICATION.

The applicant sought an injunction under the Trade Practices Act 1974 s. 80 based on alleged contraventions of the exclusive dealing provisions of s. 47.

J.M.N. Rolfe Q.C. and D.A. Cowdroy, for the applicant.

P.W. Young Q.C., R.S. Hulme and J.D. Heydon for the respondent.

Cur. adv. vult.

Solicitors for the applicant: Momsen Eager & Co.

Solicitors for the respondent: Clayton Utz.

H.W. FRASER

ORDER

1. The respondent by its servants and agents be restrained in trade or commerce from engaging in the practice of exclusive dealing by refusing to supply Evinrude engines, spare parts or accessories to the applicant in contravention of s.47 of the Trade Practices Act, 1974

2. The respondent pay the applicant's costs.

3. Either party may apply to relist the matter for further consideration of the precise form of the order until 5pm. on 8 July 1982.

JUDGE1

The applicant, Hecar Investments No. 6 Pty. Limited ("Hecar"), carries on business under the name "Powercraft Marine" at Belmont near Newcastle in the State of New South Wales, inter alia, supplying outboard motors, parts and service for Evinrude motors. The respondent, Outboard Marine Australia Pty. Limited ("OMA"), is a company which manufactures in Australia and sells, inter alia, outboard motors and parts. The motors are sold under the name Evinrude and Johnson and an Evinrude motor does not differ from a Johnson motor. Hecar seeks an injunction under s.80 of the Trade Practices Act, 1974 ("the Act"), based on an alleged contavention of the provisions of s.47 of the Act which deals with exclusive dealing.

Hecar purchased the business from a Mr. and Mrs. Nicol in December 1981. At that time the business had been run for some years by James Nicol, a son of Mr. and Mrs. Nicol. For some 16 years Powercraft Marine had marketed Evinrude engines and, at the date of the sale, a dealer agreement existed between Powercraft Marine and OMA in relation to Evinrude outboard motors.

OMA distributes its Evinrude motors in Australia through dealers and the evidence was that it was not possible to purchase an Evinrude motor other than from such a dealer. On 29 October 1981 a meeting took place between Mr. James Nicol, Mr. Roberts, a director of Hecar, Mr. Rodley, the regional manager for OMA and Mr. Yeats, a sales representative of OMA, when a discussion took place concerning the sale of the business and the question of Hecar continuing to market Evinrude products. By letter of 24 November 1981 Hecar made a formal application that the arrangements then existing between the vendor of the business and OMA would continue under the new ownership.

On 14 December 1981 this application for what was described in a letter of that date as "the Evinrude Outboard Motor and Associated Equipment Franchise" was refused. The solicitors for Hecar wrote to OMA on 17 December 1981 and again on 22 December 1981 alleging that the regional manager had made the express statement to Hecar that the policy of OMA was not to appoint a dealer if the dealer carried another brand of engine as well as engines of OMA. The letter asked for advice whether the alleged refusal of supply was for this reason and, if not, what were the reasons for which supply had been declined and upon what terms and conditions was OMA prepared to supply goods to Hecar. No reply was received to this letter. On the same day Hecar received a telegram from OMA in the following terms:

"We confirm OMC (sic) replacement service parts are procurable through the following local outlets Lambton Marine 21 Morehead Street Lambton NSW Hirecraft Marine Pty. Ltd. 1 Wharf Rd. Toronto NSW. Rodley"

On 19 January 1982 Hecar commenced these proceedings.

The matter came before the Court on 27 January 1982 when it was noted that there was an understanding between Hecar and OMA "that the respondent will do nothing to interfere with the existing supply of spare parts for Evinrude engines and Evinrude engines available to the applicant through Lambton Marine and Hirecraft Marine until further order".

Hecar has based its case upon the provisions of s.47(1) and (3)(a)(d) of the Act. Section 47(10) and (13)(b) are also of significance. These sections provide:

"47(1) Subject to this section, a corporation shall not, in trade or commerce, engage in the practice of exclusive dealing.

. . .

(3) A corporation also engages in the practice of exclusive dealing if the corporation refuses -

(a) to supply goods or services to a person;
. . .

for the reason that the person . . .

(d) has acquired, or has not agreed not to acquire, goods or services, or goods or services of a particular kind or description, directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation;

. . .
(10) Sub-section (1) does not apply to the practice of exclusive dealing constituted by a corporation engaging in conduct of a kind referred to in sub-section. . . (3) . . . unless -

(a) the engaging by the corporation in that conduct has the purpose, or has or is likely to have the effect, of substantially lessening competition; or

(b) the engaging by the corporation in that conduct, and the engaging by the corporation, . . . in other conduct of the same or a similar kind, together have or are likely to have the effect of substantially lessening competition.

. . .

(13) In this section -

. . .
(b) a reference to competition, in relation to conduct to which a provision of this section other than sub-section (8) or (9) applies, shall be read as a reference to competition in any market in which -

(i) the corporation engaging in the conduct or any body corporate related to that corporation; or
(ii) any person whose business dealings are restricted, limited or otherwise circumscribed by the conduct or, if that person is a body corporate, any body corporate related to that body corporate,

supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the conduct, supply or acquire, or be likely to supply or acquire goods or services; and . . . "

Section 4 contains a definition of supply and s.4F(b) provides, so far as is relevant, that a person shall be deemed to engage in conduct for a particular purpose or a particular reason if the person engages in conduct for purposes or reasons which include that purpose or reason, and that purpose or reason is a substantial reason.

Hecar must show that the conduct of which complaint is made falls within s.47(3)(a) and (d) because, for example, OMA refuses to supply outboard motors to Hecar for the reason that Hecar has acquired, or has not agreed not to acquire, Suzuki outboard motors. It is clear that the supplier of Suzuki motors and OMA are competitors.

The effect of ss.47(13)(b) and 47(10)(a), when read with ss.4E and 4G, is that Hecar must also show that the conduct of OMA of which complaint is made (i) has the purpose or (ii) has or is likely to have the effect of substantially lessening or substantially preventing or substantially hindering competition in any market in which OMA supplies outboard motors or Hecar acquires outboard motors. It was submitted by Hecar that OMA's refusal to supply (1) has the purpose or effect of substantially lessening competition by making it impossible for Hecar to obtain supplies from OMA of Evinrude products thus depriving prospective purchasers of the opportunity of purchasing a Suzuki outboard engine from the same floor in preference to Evinrude;

(2) has the purpose or effect of substantially lessening competition by making it substantially very difficult for Hecar to obtain supply of Evinrude products for resale to the public with the consequence of depriving prospective purchasers of the opportunity of purchasing a Suzuki outboard engines from the same floor in preference to Evinrude.

There is no definition of competition in the Act which is of any assistance. The definition in s.4 and the provisions of s.4G do not help.

It seems clear that Suzuki outboard motors and Evinrude outboard motors are both competitive with and substitutable for one another. Section 47(13) does not refer to one market only but the word "any" is used. The parties do not dispute the limits of the relevant area of the geographic market and one product market accepted by both parties as a relevant product market is that for outboard motors.

It seems clear that a relevant market falling within the words "any market" in s.47(13) is the market for outboard motors in an appropriate area which I will call the central coast of New South Wales. Another possible market could be a market in "leisure goods or services" or in "outboard and inboard motors". Each of these would be a less favourable market to consider for Hecar. Another possible market would be a market in Evinrude outboard motors alone. This market might be more favourable for Hecar. I will consider the market for outboard motors on the central coast. In view of the findings I will make it is unnecessary to consider any other market.

It is first necessary to consider whether OMA has refused to supply Evinrude motors to Hecar.

I consider it is irrelevant that OMA has not attempted to interfere with the supply by other dealers of Evinrude engines to Hecar. It seems clear that OMA will not itself supply Evinrude motors to Hecar. Certainly the original request to OMA by Hecar was that the relationship of dealer and supplier should exist between them. However, the reality of the situation is that there has been a refusal to supply Hecar with Evinrude motors.

Engines were supplied to Mr. and Mrs. Nicol under an arrangement called a 'floor plan' whereby the engines were ordered from OMA but apparently paid for in the first instance by the company which operated the floor plan. However, I consider that the refusal to supply was not limited to engines provided under any such arrangement.

The first critical issue is whether the refusal of supply was for the reason that Hecar proposed to sell both Suzuki and Evinrude motors.

It is clear that the decision to refuse supply was made by Mr. Rodley. Mr. Mash, the General Manager, had the power to override Mr. Rodley but he did not disagree with Mr. Rodley's decision.

Mr. Rodley, in an affidavit, advanced a number of reasons which he said he took into account in refusing supply. They were said to be (1) Mr. Roberts would not be involved in the day to day management of the business; (2) Mr. Roberts had no experience in power boat or other retailing; (3) Hecar was a "$2 company" and had no experience in power boat retailing; (4) Mr. Nicol was to manage the business; (5) Mr. Roberts intended to relocate the business and change its nature; (6) OMA was considering the appointment of other dealers in the area and (7) "the fact that Mr. Roberts proposed to sell another brand in addition to that of the respondent".

The last factor Mr. Rodley said "was insignificant in the process of the decision made by me to refuse the application". Considerable oral evidence was directed to an examination of their reasons. No useful purpose would be served by dealing in any detail with any but the last.

Whilst some of these reasons except the last may have had some bearing on the decision to refuse supply, I do not consider that any of them were of any real significance. Mr. Rodley in the affidavit said that he had said to Mr. Nicol at the meeting on 29 October 1981 that "We make it a policy of not appointing a new dealer and giving him a franchise if he carries another brand of engine". In oral evidence some effort was made by Mr. Rodley to establish that this policy was no more than a preference. I do not accept that and I find that OMA had such a policy with new dealers. It did have a number of dealers in various places who sold two brand of motors, but I consider the evidence established that OMA would avoid this if possible with new dealers. I make no finding in relation to other than new dealers. In my opinion the main reason why supply was refused was because Hecar proposed to continue its relationship with Suzuki.

Some evidence was admitted of the termination by OMA of other companies as dealers in circumstances submitted by Hecar to support a conclusion that OMA required dealers to sell only one brand. I do not place any reliance on this evidence because there seemed to be other relevant factors in each case.

Section 4F(b) makes it clear that it is only necessary to show that the reason proscribed by s.47(3) was only one of the reasons for engaging in that conduct if that reason was a substantial reason.

As far back as 1975 the then General Manager of OMA had issued a letter to dealers pointing out the advantages for selling and servicing one brand only. This letter contained the following passage: "We have, ever since our inception, operated on the principle of exclusive dealing". The following passage appeared in a memorandum from Mr. Mash to Mr. Rodley in August 1980; "Our first concern is that other brands be not seen in any of our dealerships, on the showroom floor". Towards the end of 1981, Mr. Yeats, on Mr. Rodley's instructions, visited several dealers and tried to pursuade them not to sell any brand of outboard engine other than Evinrude. Mr. Yeats tried to pursuade Mr. Roberts to get rid of the Suzuki franchise on 14 December 1981 when he handed Mr. Roberts the letter of 14 December 1981.

I am quite satisfied that a substantial reason for refusing supply is that Hecar had not agreed not to acquire Suzuki outboard motors.

Another critical issue is whether the refusal of O.M.A. to supply outboard motors to Hecar has the purpose or has, or is likely to have, the effect of substantially lessening or substantially hindering competition in any relevant market.

I have identified the "market" and I next have to decide what meaning is to be given to the words "competition", "likely" and "substantilly".

This has to be done in the setting of a civil action where the conduct under consideration can, in appropriate proceedings, be visited with a penalty of up to $250,000 (s.76 of the Act) and also a claim for damages. I have considered the question of the standard of proof in cases under Part IV of the Act recently in Peter Williamson Pty. Ltd. v. Capitol Motors Ltd. (20 May 1982).

Dr. Norman, an economist, gave evidence. He has outstanding academic and professional qualifications as an economist. He expressed the view that there was frequently a difference between the meaning and the use of the word "competition" in business and economics. He said that in economics competition refers, inter alia, to the capacity and ability of the market (once defined) to adopt new techniques of production and distribution, to respond to variations in the needs and requirements of the buyers, to avoid excessive profits or selling costs, and to distribute goods and services efficiently.

If, as Dr. Norman said, the meaning of "competition" in a business setting differs from its meaning in an economic setting, then, since the Act is directed to business situations, the word should be given the ordinary meaning it bears in such business situations. For this reason I do not find Dr. Norman's evidence of assistance.

What then does "competition" mean in a business setting? Has competition been substantially lessened or substantially hindered by OMA not supplying outboard motors to Hecar?

Senior counsel for Hecar has tied its case to an allegation that the refusal to supply Hecar has had the consequence of depriving prospective purchasers of the opportunity of purchasing Suzuki outboard engines in preference to Evinrude engines from the same sales floor. Ultimately no issue was made of any effect on the competitive position of Hecar or OMA although early in the case some reference was made to the financial disadvantage Hecar suffered by obtaining supplies from Lambton Marine.

In Trade Practices Commission v. Tooth & Co. Ltd. (1979) 142 C.L.R. 397 it was said that a feature of s.47 was that it was not concerned with the price at which goods are supplied unless that price was fixed so as to attain the prohibited objective of exclusive dealing. (Stephen J. at pp.417-418, Mason J. at pp.430-431 and to some extent Gibbs J., as he then was, at pp.406-409.) In my opinion I do not have to consider now the question of the price at which OMA might supply Hecar with outboard motors. This case has been argued wholly on the provisions of s.47(3)(a) and (d) of the Act. No question of the terms of supply by OMA was argued.

Since at all relevant times Hecar has obtained supplies of outboard motors I do not consider that OMA's conduct has, at present, the effect of substantially lessening or hindering competition in the way this case has been presented. But is it "likely" to have that effect? I consider that, if OMA do not supply outboard engines to Hecar, a purchaser may be less likely to be able to view and purchase a Suzuki motor from the premises of Hecar than if engines are readily obtainable by Hecar from OMA.

Does this lessen or hinder competition at all? In my opinion the ordinary purchaser would think that it does. But is the question to be answered by a consideration of the immediate future or must a broader view be taken? Will the viability of retail selling of outboard motors be affected? No evidence was presented of the likely course of conduct by OMA if Hecar succeeds in these proceedings. Indeed I doubt whether this could be predicted. I consider that the Court must take a practical and somewhat superficial view of the position.

The Trade Practices Tribunal, has expressed views on similar questions on at least two occasions. Although not decisions of a Court, they are decisions of a tribunal presided over by a Judge of this Court (s.42 of the Act),and I consider proper regard should be paid to them.

The first was in Ford Motor Company of Australia Ltd. and Ford Sales Company of Australia Ltd. (1977) 1 A.T.P.R. No.40-043. There the Tribunal, presided over by Keely J., reached the conclusion that a "mandatory solo franchising clause" in an agreement between the supplier and the retailer resulted in substantial lessening of competition. In Southern Cross Beverages Pty. Ltd. and Ors. (1981) 3 A.T.P.R. No. 40-200 the Tribunal, presided over by Deane J., had to consider (p.42,760) the prohibition by a supplier of the use by a retailer of upright glass door refrigerated cabinets for other than the goods of the supplier of the cabinet where the prohibition had the effect of excluding from the most suitable area in a retail outlet for selling and display of soft drinks the products other than those of the supplier of the cabinet. The tribunal accepted that this prohibition would significantly restrict competition between the products of competing manufacturers supplying that relevant outlet. This approach supports the argument of Hecar.

OMA called a Mr. Nettleship as an expert witness. He was a well qualified and experienced businessman. Mr. Nettleship expressed the view that "competition is the supplying of alternatives to satisfy a market".

I consider that a refusal to supply, which is likely to have the effect of lessening or hindering the opportunity of a purchaser to view two competing motors side by side, has an effect on competition. I say this at least in a situation where there are no Suzuki outboard motors on display in the close proximity to the premises of Hecar.

The next question is whether any effect on competition is likely to be substantial? I have considered recently the meaning of "substantial" in a different section of the Act in Peter Williamson Pty. Ltd. v. Capitol Motors Ltd., supra. I have paid due regard to the view of Keely J. in Cool and Sons Pty. Ltd. v. O'Brien Glass Industries Ltd. (1981) 3 A.T.P.R. No. 40-220. I consider that the word "substantially" refers to an effect on competition which is at least "real" or "of substance" or "of significance".

But the conduct has only to be "likely to have the effect of substantially lessening or hindering competition". On balance I consider that Hecar has established that the refusal to supply is likely to have the effect of substantially lessening or substantially hindering competition in a relevant manner in a relevant market. Because of my findings I do not propose to deal with the question whether OMA had a purpose within s.47(10)(a) because this may depend on the subjective purpose of Mr. Rodley who expressed a view that dealers selling only one brand produced a more efficient market.

The case proceeded without any distinction being drawn between engines and spare parts or accessories and the order I make will extend to engines, spare parts and accessories.

Senior counsel for OMA also alleged that Hecar should not succeed because it did not have 'clean hands'. I reject this defence as not having been established on the facts and, in any event, I doubt its real significance in this case.

I am satisfied that some order is called for. Should any difficulty appear likely to arise from the order I make, either party has liberty to apply to me to relist the matter for further consideration of the precise form of the order until 5pm on 8 July 1982.

The orders I make are:

1. The respondent by its servants and agents be restrained in trade or commerce from engaging in the practice of exclusive dealing by refusing to supply Evinrude engines, spare parts or accessories to the applicant in contravention of s.47 of the Trade Practices Act 1974;

2. The respondent pay the applicant's costs.

3. Either party may apply to relist the matter for further consideration of the precise form of the order until 5pm. on 8 July 1982.