Martin & Anor v Individual Homes & Anor
[2000] HCATrans 414
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Melbourne No M1 of 2000
B e t w e e n -
MELWAY PUBLISHING PTY LTD
Appellant
and
ROBERT HICKS PTY LTD (Trading as AUTO FASHIONS AUSTRALIA)
Respondent
GLEESON CJ
GUMMOW J
KIRBY J
HAYNE J
CALLINAN J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON WEDNESDAY, 2 AUGUST 2000, AT 12.02 PM
Copyright in the High Court of Australia
MR D.K. CATTERNS, QC: May it please the Court, I appear with my learned friend, MR C.D. GOLVAN, for the appellant. (instructed by Marshalls & Dent)
MR G.A.A. NETTLE, QC: May it please the Court, I appear with my learned friends, MS S.L. HINCHEY, and MR P. ZAPPIA, for the respondent. (instructed by Freehills)
MR J.W.K. BURNSIDE, QC: May it please the Court, I appear with my learned friend MR M.J. CRENNAN, on behalf of the Australian Competition and Consumer Commission on an application for leave to intervene. (instructed by the Australian Government Solicitor)
GLEESON CJ: What is your attitude to this application, Mr Catterns?
MR CATTERNS: We oppose it, with respect, your Honour.
GLEESON CJ: And your application ‑ ‑ ‑
MR NETTLE: We have nothing to say in opposition to that, your Honour.
GLEESON CJ: All right, well, then perhaps you can tell us the basis of the application and we will hear Mr Catterns and rule on it, Mr Burnside.
MR BURNSIDE: Your Honour, the test for intervention is well enough known, it is set out in Levy. We have provided a written outline of our application to intervene as well as the submission we wish to make.
GLEESON CJ: If my memory serves me right, there was actually an intervention by the Trade Practices Commission in Queensland Wire, was there not?
MR BURNSIDE: There was an application which was ultimately refused, although the submissions, I apprehend, were heard.
GUMMOW J: They appear in this report in the Commonwealth Law Reports, do they?
MR BURNSIDE: They appear in the report but I think the reports stand for the proposition that leave was ultimately refused, although the assistance was accepted.
GLEESON CJ: Yes. I remember sharing your apprehension at the time.
KIRBY J: Is there a statutory provision that is relevant? Do you have some statutory function and statutory power that is relevant?
MR BURNSIDE: We have no statutory right to intervene, although I understand that is shortly to change, but at present we have no statutory right to intervene. The basis on which we would seek to intervene is first that the interests of the ACCC are affected both in its capacity as frequent litigant present and future in matters under section 46 and its role as regulator of the Act, including section 46, is immediately affected by the decision that may be made in this case. The ACCC orders its affairs and administers the Act on the basis that Queensland Wire states the test. The conduct of the ACCC as regulator has been predicated on the correctness of Queensland Wire and it is apparent from the submissions that have been filed that there is some difference between the contentions of the respondent and those contentions which the ACCC would wish to make.
GLEESON CJ: We will hear what Mr Catterns has to say, Mr Burnside.
MR BURNSIDE: May I add one thing which is not in the motion, and that is if the Court is against us on leave to intervene, we would seek on the same basis to be heard as amicus on the same grounds because we would hope to assist, and we would give an assurance to be brief in any event.
GLEESON CJ: Thank you. Yes, Mr Catterns.
MR CATTERNS: May it please the Court. Your Honours, I will be brief too. In our respectful submission, our friend’s client’s interests are not affected in the sense explained by his Honour Chief Justice Brennan in Levy v Victoria. His Honour’s phrase there was “an indirect affection of legal interests”. With respect to that, his Honour said the assumption is that the Court will determine the law correctly. Our submission is that the ACCC can, and no doubt will, apply the law as best it can as determined by this Court.
Your Honours, we do not seek to challenge the correctness of Queensland Wire and I do not believe our written submissions support any assertion that we do, and we respectfully submit that our learned friend the respondent can adequately put such arguments as are needed to tease out further the ratio of Queensland Wire. Of course, your Honours, finally we would respectfully submit our learned friends ought not on any view be permitted to descend into the factual aspects of the case. May it please the Court.
KIRBY J: Assume that the case would have finished today and it goes over to tomorrow by reason of the intervention. I suppose you would expect that you would be paid for any marginal increase in the time in the event that they ‑ ‑ ‑
MR CATTERNS: Yes, your Honour, on a “but for” basis, as we have heard earlier this morning. That was done in Lange and Levy.
GLEESON CJ: Yes, you have that leave, Mr Burnside. Mr Catterns, Mr Nettle and Mr Burnside, I am afraid Justice Callinan is indisposed, and I wonder if counsel would consent to his participating in this matter by reading the transcript and giving his decision in the case on the basis of the transcript of argument.
MR CATTERNS: I am sure we would, your Honour, but if I may, I will just – we do consent, your Honour.
MR NETTLE: We have no objection to that course, your Honour.
MR BURNSIDE: We have no objection and I think I am suffering from the same complaint and fully understand.
GLEESON CJ: Thank you, Mr Burnside.
CALLINAN J: Yes, thank you, gentlemen.
GLEESON CJ: Yes, Mr Catterns.
MR CATTERNS: May it please the Court, your Honours, I was going to deal very briefly with some of the factual matters first just to remind your Honours of a couple of the matters that arise from his Honour Justice Merkel’s decision at first instance. The appellant had a substantial degree of power in the Melbourne market for street directories. Its street directory was called Melway in Melbourne and Sydway ‑ ‑ ‑
GUMMOW J: Are you talking about a wholesale market or a retail market or what?
MR CATTERNS: There was some debate about that, your Honour, but certainly at least the wholesale market. We do not challenge that. It probably also had power in the retail market because of its market share. It did not directly participate in the retail market but the source of its market power, I suppose, was its superior product, although there were rival directories, UBD and Gregory’s, who had maps, so there was not a copyright barrier to entry.
It seems clear on all sides that it was a superior product. The word “icon” was used by various people in describing it. So they are a very powerful brand and it was a superior product, hence, as his Honour held, and we do not challenge it, a substantial degree of power in that market. The two questions are, your Honours, whether or not we took advantage of that power, and that is really the crucial question; secondly, for one of the prescribed purposes, the one in paragraph (c). Now, your Honours, 46(1) ‑ ‑ ‑
GUMMOW J: It is preventing your entry?
MR CATTERNS: Your Honour, that was abandoned expressly.
GUMMOW J: I see; “deterring”?
MR CATTERNS:
or preventing a person from engaging in competitive conduct in that or any other market.
(b) was pleaded, your Honour, but abandoned in running.
GUMMOW J: Yes. So deterring or preventing, which one?
MR CATTERNS: I think preventing, your Honour.
GUMMOW J: Your client from engaging ‑ ‑ ‑
MR CATTERNS: No, your Honour, we, Melways, held that our purpose was to prevent our friends who were called Auto Fashions ‑ ‑ ‑
GUMMOW J: Yes, I am sorry, Mr Nettle’s client.
MR CATTERNS: Yes.
GUMMOW J: From what?
MR CATTERNS: That is something we did raise in our written submissions, “from what”. No particular competitive conduct was identified and, as I say, entry was not persisted with. As we point out in our written outline, you have got to identify, we submit, some form of conduct, whether it be price cutting or discounts or other terms of trade. It really seems to us that an entry case has been shoehorned into a competitive conduct case.
GUMMOW J: Competitive conduct with whom?
MR CATTERNS: With our distributors, your Honour. So, the argument is, and there is a piece of evidence I will take your Honours to, that in a sense what is called the other side of the coin of our intention to preserve our distribution system was that as a consequence of that, we say, or an effect of that, an extra distributor who would have competed with the other distributors was kept out or prevented from doing so.
GUMMOW J: I am just trying to fit it into the words the of the section, that is all. That is what we have to attend to.
MR CATTERNS: I respectfully submit that there are some difficulties in doing so.
GUMMOW J: Well, if so, you have to tell me.
MR CATTERNS: This is it, your Honour: we have submitted and continue to submit that no competitive conduct in particular was identified that we were stopping our friends from engaging in.
KIRBY J: Is that quite right? The respondent wanted to alter the system of distribution and the evidence was, as I understand it, that once you sold it to the distributor the prices that were charged to the purchaser were left to the market and, therefore, by inference, the suggestion is that they would have engaged in a competitive price competition.
MR CATTERNS: I suppose so, your Honour, by inference.
KIRBY J: Well, that is a pretty good argument, is it not? I mean, if you invade a market which at the moment is limited to those whom you choose, with somebody who robustly wants to sell it to others who may compete, then the likelihood is that prices will go down. That is, as I understand it, one of the purposes of this section.
MR CATTERNS: Yes, your Honour, but, with respect, that is probably better characterised as conduct under (1)(b) that entry from which it is may be inferred or assumed that various things might occur, whereas here, as I say, that was abandoned and what was held was (c).
KIRBY J: Yes, but the theory is that it is preventing a person, namely the respondent, from engaging in competitive conduct, namely selling in a different mode of selling, “in that or any other market”. So, given the purposes of the Act and of the section, one can at least see an argument for (c). I will say no more at this stage of the case.
MR CATTERNS: Your Honour, with respect, I see the force of that. As your Honours know, our principal attack here is on the question of taking advantage. It is that holding that we ‑ ‑ ‑
KIRBY J: But at this stage we were talking about whether (c) bites, and I just do not see a problem. Anyway, that may be because I do not fully understand the facts or the arguments at this stage.
MR CATTERNS: It is a point by no means in the forefront of our submissions. I was really responding to what his Honour Justice Gummow said.
GUMMOW J: Yes, and I would like you to continue to do so. Engaging in competitive conduct, competitive conduct between whom? Between Mr Nettle’s client and other distributors?
MR CATTERNS: Yes, your Honour.
GUMMOW J: By doing what?
MR CATTERNS: Presumably by entering into the market and trying to win sales from them.
GUMMOW J: By not observing the divisions that seem to apply as to which retailers you dealt with.
MR CATTERNS: Yes, your Honour, indeed, they not having been allocated a territory because they were replaced as a distributor for their particular territory, or for their particular segment. They would be proposing to sell to first, and principally, their existing customers or the people who had previously been their customers, and then, arguably, to other people.
GUMMOW J: And the words are “in that market or any other market”.
MR CATTERNS: Yes.
GUMMOW J: Is there any other market involved or is it just what you identified as the wholesale market?
MR CATTERNS: We sold in the wholesale market – sorry, we sold to wholesalers and the distributors sold to retailers. I think it is the other market, it is the market in which the distributors sold to retailers.
GUMMOW J: So it is “another market”.
MR CATTERNS: I think so, yes, your Honour, we submit so. But, of course, that does not help us.
HAYNE J: And in the other market, the product market being street directories generally?
MR CATTERNS: Yes, in Melbourne, your Honour.
HAYNE J: Yes.
MR CATTERNS: Yes, that is right, your Honour. Submissions on our part that there was a national market, and/or that the market was broader than that particular product, street directories, were rejected and we do not seek to agitate that.
GLEESON CJ: It is not hard to think of a market in which it is more appropriate to limit it geographically than a market for street directories.
MR CATTERNS: Yes, your Honour, with respect.
GLEESON CJ: A Gregorys is not much use to you in Melbourne.
MR CATTERNS: No, your Honour. There is an important piece of evidence relied upon by his Honour Justice Merkel and referred to by their Honours on appeal which is that the question was asked of our Mr Lane, “What would happen if you were given an offer for 50,000 Melways in Sydney?” and he said, “Oh, yes, I would be delighted” as you would if somebody from Liechtenstein offered to buy it. That is a piece of evidence that took the case nowhere, we would respectfully submit. It said nothing about the rationality of our maintaining an exclusive distribution network in Melbourne for Melways.
Just a couple of other background facts, if I may, if that is convenient. Melways have always sold – I use the word “always” because I think that was common ground and we give a reference to that – that Melways had, from the beginning, sold this product with an exclusive distribution network. There were times when the definition of “segments” changed. There was little bit of overlap, for example, a couple of people sold to service stations and so on, but to put it shortly, there were segments such as newsagents and bookshops, service stations, office stationers, automotive parts and car dealers and, without taking your Honours to it, that is in the judgment in 42 IPR 631 or in volume 5 of the appeal books at 1293.
As your Honours know, the respondent had been a distributor trading as Auto Fashions. The current directory around at the time of termination of the distributorship in 1995 sold almost 500,000 copies, which was a large percentage of the Australian directory market. As it happens, it provided about 9 per cent of our friend’s gross profit in the then current period. The partners, to use it in a lay sense, in Auto Fashions, our friend’s client, split up with some acrimony in 1993 and Mr Nagel, who had been one of the partners or shareholders, went his own way. The trouble occurred in 1995 when we replaced Auto Fashions, Mr Pawsey’s company, with Beyond Auto, Mr Nagel’s company, as distributor for the auto parts side of the market.
KIRBY J: They were never a party to the proceedings. Are they contingently affected by the outcome of the proceedings?
MR CATTERNS: Only in the very slightest way, I would say, your Honours, in that they would face competition, upon our friend’s thesis. His Honour Justice Merkel, to the extent that it is relevant, rejected arguments put to him by our colleagues below that the termination was capricious. There were two elements of it. The first is that our friend’s client, the respondent, pulled out of its distributorship in Sydney. Just as others have an uphill struggle in Melbourne against Melway, Sydway was having an uphill struggle in Sydney against Gregorys and UBD and Mr Pawsey said, “I do not want to be your Sydway distributor” and Mr Nagel took over that job, following which we then appointed Mr Nagel as the distributor in Melbourne.
The other matter that his Honour accepts is that we thought Nagel could do a better job. That is not to criticise our friend’s client. But, so, your Honours, there is no question of that in the case, and, again, without taking your Honours to it, those references are in the Intellectual Property Reports at 633 to 634 and in volume 5 at 1297 to 1298, that is in his Honour’s reasons.
Then, your Honours, I should take your Honours briefly to the correspondence.
GUMMOW J: You complain about the form of injunction, do you not?
MR CATTERNS: I do, your Honour.
GUMMOW J: At 1318?
MR CATTERNS: Yes, your Honour.
GUMMOW J: I must say at the moment I have never quite seen an injunction like that.
MR CATTERNS: No, your Honour. It, in some ways, points up this is a difficult area to frame injunctions.
GUMMOW J: It is difficult to frame relief in section 46 cases.
MR CATTERNS: It is, your Honour, and, indeed, it may be ‑ ‑ ‑
GUMMOW J: It is a fairly sophisticated exercises.
MR CATTERNS: And, indeed, enforcement, of course, your Honour, involves at least a mini-trial of issues of purpose and why not taking advantage.
GUMMOW J: Exactly.
KIRBY J: The case was said to be interlocutory by some judges and other said not in the Court of Appeal. Was the issue of the scope of the injunction argued in the Court of Appeal?
MR CATTERNS: Yes, it was, your Honour.
GUMMOW J: It is a final injunction. It was interlocutory because damages were to be assessed and this Court said in the Apple Computer, which seems to have been ignored by the majority in the Full Court of the Federal Court that that is interlocutory. That is why you do not get here ‑ ‑ ‑
KIRBY J: I think it was Justice Heerey who thought it was interlocutory, and that leave was required and he gave them leave and said that there would be no objection to leave being granted.
MR CATTERNS: Yes.
GUMMOW J: In the light of Apple Computer which bound them, Justice Heerey was clearly right.
MR CATTERNS: I respectfully agree, your Honour. Your Honours, may I delay my attack on the ‑ ‑ ‑
GUMMOW J: It is by the by for the moment. The point is this is a final injunction.
MR CATTERNS: Yes, your Honour, certainly, and as your Honour ‑ ‑ ‑
GUMMOW J: Any damages are in the future to be assessed.
MR CATTERNS: Yes, your Honour, yes. Your Honours, just quickly the secret of the documents in relation to the termination begin in volume 5, 1171.
KIRBY J: Could I just follow up that last line of questioning. Are we to be concerned with the form of injunctions, or if you failed here, is that a matter that we have to sort out, or not?
MR CATTERNS: If we fail here, it would be a matter for the Court whether the Court thought it better to frame or perhaps even, in its discretion, refuse to make an injunction, leaving damages as the only remedy, or whether to remit it, your Honour.
KIRBY J: No doubt, you will deal with that some time, after we have the issues clearer.
MR CATTERNS: Yes, if that is convenient, your Honour. We hope we never get there, because we say we should win and the order should be set aside.
Your Honours, in the context of the termination of the distributorship and some toing-and-froing about that, threats of breach of contract, argument about whether or not we were entitled to give an announcement to the trade and so on, Mr Pawsey wrote to us at page 1171 in volume 5, saying:
Leaving those issues aside –
the termination of the distributorship –
I would wish to seek wholesale supplies…..for onsale to the retail market.
Please advise the terms and conditions –
requesting a reply within four days. Then, your Honours, the rest of the correspondence - some of it is there, but if your Honours would not mind going to volume 3.
KIRBY J: Did that follow the conversations which suggested he was not going to get it? Otherwise, it is a somewhat peremptory letter between business people seeking to ‑ ‑ ‑
MR CATTERNS: Your Honour, the conversations were earlier, and the letter, which I will come to which, as your Honour says, is fairly peremptory I will come to also.
KIRBY J: There would be a lawyer behind this.
MR CATTERNS: I think on both sides, your Honour.
KIRBY J: Probably.
MR CATTERNS: Your Honour, at 758, perhaps playing for time, in volume 3, we said:
In relation to your query regarding seeking wholesale supplies.....more information would be needed regarding volumes, frequency of orders etc. If you wish further consideration, full details should be supplied.
Your Honours, at 760, Mr Pawsey answered and said:
We would require 30,000 – 50,000 Melways per annum. The orders would be provided on a monthly basis –
et cetera. Now, your Honours, nothing turns on this, I do not think, but this is not quite an order which we refused but, as his Honour Justice Kirby says, the peremptory letter I am about to come to made it clear that we did not want to have any business dealings with him, but there is no formal order of 30,000 to 50,000 that we knocked back, to use his Honour Justice Sundberg’s phrase. Your Honours, a small point that is perhaps relevant shortly is in the Freehill’s letter on behalf of the respondent to us at 762, just following where we have been, which paraphrases the communications on the first page and then in the last paragraph, your Honours, says:
We understand that our client expects to be in a position to continue selling Melways to many of its old customers. In addition, it hopes to acquire new customers.
And this is not determinative but an important fact relied upon or assumed by their Honours is that we were somehow giving up 30,000 to 50,000 new or additional sales and that impacts upon the rationality of this conduct when tested against what we could have done in a competitive market. Your Honours, first, factually we submit that is not right and there was no proof that we knocked back - square brackets - as we could not have done without our market power, an order for 30,000 to 50,000 additional customers.
Shortly I will take your Honours to the cross‑examination of both Mr Pawsey and our Mr Godfrey where it becomes pretty clear that at least initially this was all about competing, as your Honour Justice Kirby says, for existing customers and it is not a question of new sales overall.
KIRBY J: But the experience of the market is, one would think, an inference that one would draw is there would be some cross‑competition with existing sales but the tendency of markets when free is to serve more people than would be served by rigid markets.
MR CATTERNS: Yes, your Honour, and, indeed, the nub of this case is that our submission that even in a case of a competitive market where you do not have market power what your Honour has just said may well be the case and that is a rational matter to take into account, but it is also rational to take into account the benefits of a distribution system and I will probably say it several more times, not too many I hope, but that is really what the case is about. It is not axiomatic that to refuse additional sales in the way your Honour has just put to me is irrational.
KIRBY J: Benefits to the community or benefits to you?
MR CATTERNS: Benefits to us, your Honour, but the American jurisprudence shows in many cases it also has benefits to the community. When the American judges analyse these cases on the rule of reason they find that there are competitive justifications as well as the selfish and, of course, permissibly selfish rationale of the rational corporation. So, your Honours, that is why I said before I mentioned this it is by no means determinative that these were not all additional sales, but their Honours rather tended to take it the other way against us.
Your Honours, the next letter is the rather terse one – just skipping a few over, your Honours, where there is further toing‑and‑froing about the distributorship, there is the letter at 772 which brought the matter to a head where we say at line 15:
Your client’s position as Official Distributor has been terminated and our client has appointed another Distributor.
Then the last paragraph:
After the cessation of the Official Distribution, our client does not propose to have any further business dealings with Auto Fashions.
So, whether or not there was a refusal to meet a firm order of 30 to 50,000, pretty clearly, we were refusing to deal with these people.
KIRBY J: If one analyses what I understand, at least at the moment, the reason behind that, it would be that the marginal utility to your client of some increased sales by having another distribution would be offset by the marginal cost of disturbing the distribution system that you had in place and from which you had had great success and made a lot of money.
MR CATTERNS: Precisely, your Honour. That kind of analysis applied to us when we did have market power and it would apply, unless proven otherwise, if we did not. Ergo, to apply Queensland Wire, we did not take advantage of market power.
GUMMOW J: Sorry, say that again, Mr Catterns.
MR CATTERNS: His Honour’s analysis was a rational analysis weighing up marginal cost of loss of some new sales, on the one side, with the loss we would otherwise have to the damage to our distribution network. A rational business person can weigh that up, we submit, as ours did here when they had market power but, crucially, if they did not.
GLEESON CJ: What difference would it make if the decision was irrational?
MR CATTERNS: Well, your Honour, that, we think, comes from Queensland Wire which your Honour remembers. The argument that was put was whether the corporation could or would act the same way without the power. It seems, your Honours, that if “could” just means “you can physically do this” then, of course, any corporation can physically hold back supply. So, we do take from the High Court’s analysis in Queensland Wire, when their Honours say “could” or, in some cases, “would”, that their Honours mean you can only rationally do this.
GLEESON CJ: But the fact that a decision can be explained rationally might be an evidentiary reason why you would more readily accept that something was the basis of the decision.
MR CATTERNS: Yes, yes, so far, your Honour.
GLEESON CJ: But business people are entitled to take irrational decisions, are they not?
MR CATTERNS: Your Honour, as we read Queensland Wire, the idea of market power, of course, is the ability to make with impunity or without constraint. Ultimately, a corporation can, as your Honour puts to me, act irrationally and in that sense it is not constrained by its competitors.
GLEESON CJ: I am just wondering what is the legal significance of drawing a conclusion that not only was there an explanation for the conduct engaged in here of the kind advanced by your client but that, in addition, that was a rational explanation.
MR CATTERNS: Two things, your Honour. First is not a defence, as it almost is in the American cases. If the Queensland Wire test is right, or if we understand it correctly, the question is: could the corporation have engaged in this conduct in the different circumstance, absence of market power? We say that the fact that there is a rational explanation for this when it did have market power, suggests that it may well be rational conduct that it could engage in – and I mean, conduct that it could rationally engage in without market power. Your Honours, we do not need to go very far on that because we say their Honours treated it as axiomatic, that it was not rational.
KIRBY J: Is the thought lying behind it that with the arrogance of market domination you can act just as you like, whereas the market, a competitive market such as we are supposed to have in Australia, assumes that you will rationally pursue your own interests and thereby serve the increase in profits and thereby serve the majority of consumers, and that therefore the rationality is posited to properly competitive conduct, whereas irrationality and arrogance are the domain of those who dominate markets?
MR CATTERNS: I think so, with respect, your Honour, via s46(3) and the idea of constraint, because constraint must mean – the legislature cannot mean the sort of thing your Honour has in mind. Then in rationally constrained in s46(3) ‑ ‑ ‑
GLEESON CJ: But your clients were not suggesting that they were forced by competition to do what they did, were they?
MR CATTERNS: No, your Honour.
GLEESON CJ: You are approaching this subject on the assumption that your clients had substantial power in this market.
MR CATTERNS: Yes, your Honour.
GLEESON CJ: So there is no suggestion that they were constrained by competitive pressures to decline to supply product to Mr Nettle’s client.
MR CATTERNS: That is right, your Honour.
KIRBY J: But the assumption of the Act is, is it not, that markets will be competitive and to the extent that they are not, the Act will move in to ensure that they are.
MR CATTERNS: Given purpose of the other ingredients, your Honour. Answering both your Honours, we take Queensland Wire, in part accepting the submissions that were put to it, as holding that to test whether somebody is taking advantage of market power, you ask, “Could they have done this if they did not have the market power?” When we think about that, we think of course physically or arrogantly you could do anything you like and you just ride roughshod over the constraints, but it seems to us that both their Honours’ reasoning ‑ ‑ ‑
GUMMOW J: Where does this two-step idea come from, that you sever the phrase “to take advantage for the purpose”?
MR CATTERNS: Your Honour, it is clear that it is a single phrase, it is a composite concept.
GUMMOW J: It is an attempt to spell out what is meant by “monopolise” in the Sherman Act in section 2.
MR CATTERNS: Yes, but we submit that ‑ ‑ ‑
GUMMOW J: We are assisted by the American decisions in the 70 years that elapsed.
MR CATTERNS: Yes, your Honour, but you could write the section, “shall not engage in conduct for the purpose of” (a), (b) or (c). Instead of saying “shall not engage in conduct”, the legislature said both times – by that I mean before and after the 1986 amendments – the concept of taking advantage has been there and each of the five Justices in Queensland Wire say this has to be something that you could or would – one has to look at whether you could or would ‑ ‑ ‑
GUMMOW J: But this is a particular form of engagement in conduct. I do not quite see what you are saying.
MR CATTERNS: The first question is: do you have the substantial degree of market power? Let us jump to the third: do we have the purpose? Assume that is there too. So the middle question is, we submit – and it is a different question: have you taken advantage of the power for that purpose? To take advantage of the power, yes, of course it means “use”, as is said in the Queensland Wire Case, and there is nothing pejorative about it, as held by Justice Pincus. But it means, as held in Queensland Wire, something you can do – the power enables you to do something that you otherwise would not be able to do. So, your Honours, we would respectfully submit to that extent, although it is a composite phrase, fair enough. There are two separate ideas in it, each of which has to be found.
Some of the cases, we would accept, in the Federal Court, have rather skipped over it but it was a crucial matter in Queensland Wire, both legally, and I will come to it, factually. Their Honours did not treat it as axiomatic. People might say, “Well, it was rather slim”. With respect, their Honour’s analysis of why the conduct in the instant case did constitute taking advantage, but there was a factual element of it. Our short submissions here is that our friends did not prove it here. They did not prove that we could not have engaged in this conduct without the market power.
GUMMOW J: Did they have that evidentiary burden or is it a legal burden?
MR CATTERNS: Both, yes, your Honour.
GUMMOW J: A legal burden.
MR CATTERNS: Both, your Honour, yes. It is an ingredient of a very serious contravention, including offence - not in the presence case, of course – which they had the burden to prove, and far from proving it, we submit they did not attempt to and their Honours, Justices Merkel, Sundberg and Finkelstein, far from holding that it had been proved, held that it was axiomatic. From my discussion with his Honour Justice Kirby, we submit that it is not axiomatic. There may be marginal utility either way. But, your Honour, just finishing ‑ ‑ ‑
HAYNE J: But was your proposition that they had the legal burden to show that Melway could not have done it had it not the market power?
MR CATTERNS: Yes, your Honour.
HAYNE J: If the asserted taking advantage is a withholding of supply, that necessarily is available, is it not, to any participant in a market whether or not they have market power? Have you not thereby taken out of the reach of 46 any case where the conduct complained of is a withholding of supply?
MR CATTERNS: No, your Honour, because as the High Court approached it in Queensland Wire, of course you can physically refuse supply. You own the physical goods and you can say “I will not give them to you.” So, that is why, perhaps, our idea of rational, picking up what his Honour the Chief Justice raised with me, is important. It depends. There may be some cases, as held in Queensland Wire – we will not argue about whether rightly or not, with respect – where it is not. The fact in Queensland Wire that I read, that their Honours relied upon, is that this was the only product that BHP did not sell to all-comers. And, your Honours, that is why there was a case, to answer your Honour, where, assuming the facts are enough, that fact was held by the High Court in Queensland Wire to be sufficient to keep us within the reach of section 46, postulating the right question, because their Honours held that BHP could not rationally have refused it in light of the fact – their Honours inferred that – that BHP supplied to all-comers.
Now, your Honours, we know that there were facts put to the contrary of that, and his Honour the Chief Justice might remember there was a memo internally of BHP that canvassed the very question: “What if Smorgons offered a supply? Can we then [rationally] refuse that?” Answer: “We will wait and see. It depends.” So, the facts can go either way. To put our submission another way, your Honours, this is a factual matter, susceptible of proof, not proved. I see the time, your Honours.
GLEESON CJ: We will adjourn until 2.15 pm.
AT 12.46 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.15 PM:
GLEESON CJ: Yes, Mr Catterns.
MR CATTERNS: May it please the Court. If I could just add two short points to my answer to his Honour Justice Hayne’s question before lunch. To put it shortly, is it a consequence of our submissions that the teeth are taken out of section 46 at least perhaps so far as refusals to deal go. Our submission is, first, no, and Queensland Wire is an example which fits with our submissions. Second, of course, there is a great deal of other section 46 conduct than refusal to deal, of course. This section has a much broader ambit than that.
Thirdly, if my answer to your Honour’s question is yes, in part section 46 does not bite on refusal to deal or only bites on some, there is nothing wrong with that because, even if you have market power, a refusal can be held to be pro‑competitive in the US context - I know that is not the question here, your Honour – and our submission is that the thread running through the US cases is that this is a matter of freedom of choice for a manufacturer and it can be pro‑competitive unless there is something additional such as a horizontal conspiracy or tying – tying in another product and so on.
So, it would be neither surprising nor contrary to that policy for section 46 only to have the impact upon refusal to deal that we submit it has.
KIRBY J: Mr Catterns, you are speaking a little bit cryptically for me. Do not assume that I am familiar with the United States authority except what I have seen in the submissions. I mean, if it is important for us to know more than the reference to Justice Stephens’ decision or the history of the Sherman Act or how our provision came in, whether there are linguistic differences, whether it was intended to achieve the same things, do not assume I know that. I do not.
MR CATTERNS: I am grateful to your Honour. I think all I would need to do is take your Honours briefly to two cases which I think will make good my proposition, although there are many others that one can go to. I think the broad propositions that we are seeking can be drawn from the two Supreme Court cases, your Honour. If I may come to that later, your Honour. As I submitted before lunch, we submit that these 30,000 to 50,000 copies were by no means all, if any, additional sales and I have submitted that that is not a complete answer to the case, but we would like to take your Honours to a couple of references on that.
First of all, his Honour Justice Merkel did not find that they were new sales or all going to be additional sales. Of course this impacts upon what you could or would have done in the absence of power. Your Honours, may I inquire whether it is more convenient for me to cite his Honour’s reasons in volume 5 or in the Intellectual Property Reports?
KIRBY J: I thought what you were doing, speaking for myself, was helpful, that you give both.
MR CATTERNS: I can continue to do so, if that is convenient to your Honour. Your Honours in 42 IPR 635 and in volume 5 of the appeal book at 1299 his Honour Justice Merkel made nine findings in relation to the refusal. Of course, that is not the sole findings that his Honour made in the case, but, your Honours, 1, 2, 3 and 4 are important from our point of view in relation to whether or not Melway had a legitimate purpose. Your Honours see the belief in 1 that it:
provided for an appropriately regulated, orderly marketing and distribution –
2. It is difficult to ascertain the basis for Melway’s belief other than that its experience was that its system had worked well for it.
Well, with great respect, your Honours, it is fair enough for the person in the position who is running or selling this product in the market for nearly 30 years to hold that view, and his Honour does not hold it is irrational. Your Honours see ‑ ‑ ‑
KIRBY J: It is fair enough, but it was not really very well explained. I mean, you could say the proof of the pudding is in the eating and it has turned out to be a very profitable venture, but, I mean, it is not self-evident that extending up to 30,000 copies elsewhere would not be to the interests of your client in the sense that it is not as if there was any value added by any of the people who got the volume. They simply sold it at particular outlets.
MR CATTERNS: Your Honour, I respectfully agree with part of what your Honour says. I do not agree with the last part, and I will take your Honours to the evidence which I submit is to the contrary of that. Your Honour, it is not self-evident either way, which takes us back to simple questions of onus of proof. It is neither axiomatic that it is rational or that it is not, and it was for our friends to prove, and they did not, that it was not.
HAYNE J: At some point in your submissions, Mr Catterns, I will be assisted by knowing exactly what is encompassed by rational. The sort of problem that is underlying it, so that you may understand it is that the fundamental obligation of a company director is to look after the interests of the company as a whole, though commonly that is expressed in terms of being a good corporate citizen and other such phrases, making a profit ought to be up there very high.
MR CATTERNS: Yes, your Honour.
MR CATTERNS: Yes, your Honour.
HAYNE J: It can be a reasonable course of conduct to maximise your profits.
MR CATTERNS: Yes, your Honour, that is what I had in mind.
HAYNE J: So anything that maximises profits is fair go, seems to be where that argument is taking you. That seems to me to be just a tad broad.
MR CATTERNS: Well, I do not really want to go so far as to say everything is fair go, but in testing whether you are taking advantage of your market power or using it in doing the conduct that you do, we submit that the ratio of Queensland Wire is that you test that by saying, “Could you have done this if you did not have the market power?”. That is a way of testing whether or not you are taking advantage.
HAYNE J: Could you and would you reasonably, or rationally, would you have rationally done it without the market power? Is that what you say?
MR CATTERNS: I prefer “could” rationally, your Honour, rather than predicting how particular people would behave. But why do I bring in “rationally”, and his Honour the Chief Justice asked me that this morning? It seems to us that this is all a question of constraint as section 46(3) suggests. You, it says, in determining market power, amongst other things, have regard to the effect that you can act with impunity or you are constrained by others. But, your Honour, in our submission, that must be you can rationally act, you are rationally constrained, because it impacts upon your maximisation of profit or perhaps other legitimate commercial objective.
GLEESON CJ: Would it have made any difference to your argument if there had been a finding by Justice Merkel that the belief entertained by Melway was misguided?
MR CATTERNS: I think so, your Honour, because we feel driven to the rational reading of Queensland Wire by both the provisions of 46(3) and the judgments there and if it were – to…..rational means if one is postulating – I beg your pardon – if one says this was irrational in the case where you had market power ‑ ‑ ‑
GLEESON CJ: Do you take the words “irrational” and “wrong” to be synonyms?
MR CATTERNS: No, I take “irrational” a little in the way his Honour Justice Hayne put to me.
GLEESON CJ: The question I asked you was: suppose that included amongst these findings of fact by Mr Justice Merkel was a conclusion that he thought Melway was in error in this belief that it entertained, would that have made a difference to your argument?
MR CATTERNS: It would be something we would have to face up to, your Honour, because we say that the fact that it was a rational thing to do in the instant case where we had market power suggests, but does not establish completely, that it may well have been rational in the case where we did not have market power, which is the case where, as we read it, told by Queensland Wire to consider. It would not be, as I say, determinative because we could still say, “This was irrational. Now let’s look at that postulated circumstance”, which is the question, as your Honour remembers, for example, Chief Justice Mason and Justice Wilson put.
KIRBY J: I thought it was of the essence of Justice Heerey’s dissent that really judges are not the best people to be judging rationality and that sometimes what might seem to a judge sitting there in his chambers with his books as irrational might be just that sort of hunch that business people have that is sort of to be left to them, subject to the requirements of the Act.
MR CATTERNS: I would respectfully agree that that is part of his Honour’s reasoning but we would submit that his Honour also goes further and says it is something you have got to prove that you could not have done this without the power. Of course, standing here, it might be attractive for us to say, “Well, rational or not we will embrace it” although one is always cautious but it just seems to us that it is at the heart of this concept of constraint because in looking at being constrained by the other party it means you do this certain act and other people will enter the market, other people will meet you on price and so on. That is the idea of market power and constraint. And, so, it is a rational analysis, this usual sort of economist’s rational analysis, we think, that has been called for.
That is why the passages I am about to go to which show that they are not new sales, or only to a very small extent new sales, are not determinative. That is part of my answer to your Honour the Chief Justice. We do not have to prove that but it did seem to loom large in the analysis of the three justices against us. They regard it as axiomatic that you would not refuse 30,000 to 50,000 sales, skilled new sales. So, some of these findings are not relevant to that precise point but to save coming back to it and perhaps picking up his Honour the Chief Justice’s point to me, there was considerable uncertainty as to the consequences that might follow, and I remind your Honours about point on onus. The evidence does not enable me to form any view as to whether the dismantling would be harmful or beneficial. If it be relevant I do accept that Melway’s resistance was because it was satisfied that that system constituted a reasonable commercial regulation.
May I come back to 6 and 7 later because they relate to the question of purpose? The particular reason I was at this section is in paragraph 8 of his Honour’s findings where I am making good, I hope, the proposition that his Honour Justice Merkel did not find that these were new sales.
The order…..was acknowledged by Lane to be a “big order” for Melway.
I point out it was not precisely an order.
It is unlikely that supply would have been refused if Auto Fashions had agreed not to compete –
In a sense, his Honour is distinguishing the order, so-called, with the case where they would be 50,000 new sales, which is the case here, because they were only selling directories to the retailers which were not in any of the segments allocated to those distributors.
KIRBY J: Is there a flaw in your logic that after all the respondent did offer to take or did indicate that it was thinking of taking 30,000 to 50,000? The fact that it might not have been able to sell those or to put them into places where they would be sold would be their problem. From your point of view, you had the potential of a client, of a customer, who was saying, “We are thinking of taking all this”.
MR CATTERNS: But, your Honour, it was not cream like the example which his Honour goes on to, which was the selling Melway in Sydney. That is pure cream. Our fear was not that these people would buy 50,000 and keep them in the warehouse and give us the money, thank you very much. It was that they would sell them against our distributors ‑ ‑ ‑
GLEESON CJ: Sell them to their previous customers.
MR CATTERNS: Precisely, your Honour.
GLEESON CJ: These people were the previous distributor in a particular segment.
MR CATTERNS: Yes, your Honour.
KIRBY J: Except that they were going to break your system. They were not going to hold themselves bound to follow your particular system of distribution.
MR CATTERNS: Yes, your Honour, but I am about to establish, I hope, that what his Honour the Chief Justice put to me was right and that they were only going to sell them, or at least initially or principally, to people who were already buying them via the other distributor. So they were not additional sales in that sense. It was not a piece of cream like the Melway in Sydney example.
KIRBY J: It is a piece of yoghurt because they were promising that they might – well, they were suggesting that they might make some extra sales. It is hard to think that it is going to be absolutely exactly the same.
MR CATTERNS: Your Honour, as I say, this is not a critical plank in our argument but it appears to have been a very important part in the argument against us in saying that there is only one answer to an offer like that, says his Honour Justice Sundberg. Well, I submit there is another answer, which is, “Well, thank you very much, but I am already selling that same 30,000 via a different distributor, or bulk of them, to the same shops, auto parts shops.” I will try and make that good right now, your Honours, if I may.
In volume 1 Mr Pawsey’s cross‑examination at page 103, and we have given your Honours a fuller reference. It goes over a section of about 10 pages where Mr Pawsey valiantly strove to show that he could go elsewhere, such as chemists and so on, but the highlights from our point of view, your Honours, is at 103, first question line 6, is there anything in the papers of:
plans or intentions with regard to the sale of the 30,000 to 50,000?
There is an answer relating to chemists and so on. Then the question is repeated at line 21, answer:
I don’t think I documented it.
Then the next passage – as I say, your Honours, it goes on. There is a discussion to and fro where he is saying what he could and could not do, but then really the bottom line, if I can use that phrase, at 106 line 24 is:
So breaking open this anti‑competitive structure that you speak of, you have no idea, I put it to you, Mr Pawsey, whether in fact that now stated objective –
that is of selling to other people –
could be achieved at all?‑‑‑You don’t know till you do it. You don’t know till you try. You honestly, you know – it would be untruthful for me to say that the proposals you put forward are going to be accepted but you would think it’s unlikely that none of them would be accepted.
And at the bottom of 107, your Honours, he is asked at line 41:
you want Melway to sell you copies on the strength of some sort of proposal which you hadn’t even researched?‑‑‑The proposal I put to Melway is for the supply of 30,000 to 50,000 books was on my understanding of the market.....
HIS HONOUR: Is that proposal based upon your previous market, not any new market?‑‑‑That’s correct, yes.
Your Honours, in volume 3 page 417 ‑ ‑ ‑
GUMMOW J: What is this anti-competitive structure that is being spoken of?
MR CATTERNS: The exclusive distribution set up.
GUMMOW J: What was it that restrained the members of the other companies from going outside the structure?
MR CATTERNS: In effect, a handshake agreement; there was no written contract about it, your Honour, but the fear that we would remove them as distributors if they did not stick within that.
GUMMOW J: Well, on page 1294, at line 8 it is said:
Melway’s appointment of wholesalers from time to time…..is on the basis that the distributorships are confined to an allocated market segment and are terminable at will.
MR CATTERNS: Yes, your Honour.
GUMMOW J: That “basis”, what, arises out of some conversation that is had with them or some ‑ ‑ ‑
MR CATTERNS: Yes, I think in one case there is a letter and so on. But I think what your Honour just put to me is consistent with what I just put to his Honour. Because it was terminable at will, if they went outside the basis then they risked ‑ ‑ ‑
GUMMOW J: There is no section 45 or 47 problem with any of that?
MR CATTERNS: Not pleaded here, your Honour. As to the question of the new sales, I have taken your Honours to, I accept, selections of what Mr Pawsey said on that. But Mr Godfrey, at page 417 in volume 2, is asked about the letter that I took your Honours to where Freehill said “some old customers, some new”. That question is at the bottom of page 417, line 45, “You say it?”, “Yes”. Then at page 418, Mr Godfrey says, what I submit, in effect, is “There was no extra market niche that I am aware of”. That is at line 5 and at line 19:
As I understand, the Melway is sold everywhere as far as we can get it in, so I couldn’t see where a new area could be.
So the new customers would have to have been, would they, in your view at the time you read that letter customers of other distributors?‑‑‑Yes.
Then at line 27:
That’s right, you didn’t want him supplying to customers of other distributors?---No.
Your Honours, later on in that page, there is a passage relied on on the question of purpose which I should come back to later, if I may.
KIRBY J: Of course it may be a fair comment that until you break up this line of distribution that you worked out and done very well with, you really would not know. You would not know until you had the energy of the market whether or not you would conceive of new outlets. You might sell it to the Law Book Company, all sorts of places.
MR CATTERNS: That is right, and it is a matter for the business person to weigh up whether that possible marginal utility outweighs the loss of the value added – I think is a phrase your Honour used – from the distribution service.
KIRBY J: It is unusual, is it not, for a publisher to completely control the distribution of a publication? Normally publishers publish and then there are all sorts of places where they are sold.
MR CATTERNS: I do not know about that, your Honour. I would not be surprised if the Law Book Company either, via itself or through others, distributed to bookshops with person A and that nice gentleman, Mr Gunn, who used to come round to our chambers, looked like he had the franchise for the Law Book Company and barristers at least.
KIRBY J: You are talking of days before the Trade Practices Act, I suspect.
MR CATTERNS: That begs the question, with ‑ ‑ ‑
HAYNE J: My recollection may be quite faulty, but I thought that that is what the Books Case under the Restrictive Trade Practices Act of Britain was all about, but that is a diversion.
MR CATTERNS: Your Honour, I think that was the famous British traditional market agreement where the British publishers agreed amongst themselves that they would not buy the rights in an American book unless they got the rights to a schedule of countries which included Australia and Tasmania.
HAYNE J: I am diverting you. Just apropos of the distribution scheme, can I take you back to 1299 and point 1 of Justice Merkel’s numbered findings. What do you say is the content that ought to be given to the expressions “appropriately regulated” and “orderly” in the second line of that numbered paragraph?
MR CATTERNS: Your Honour, in our paragraph 46 of our written submissions, which I will not take your Honour back to now, we list a number of what one might call conventional benefits, or the benefits that are conventionally ascribed to exclusive distribution systems, such as the people you deal with become specialists in a given market. If I can just give your Honours these now. The fact that instead of having 20 people knocking at the door of K Mart to sell one particular product, there is only one. People like K Mart prefer only to deal with one supplier, they said. The distributors want to invest in stock promotion, advertising, training. Your Honour, even expertise in the product – I know these are not MRI machines where you have to train somebody how to use them, but at page 715 – I will not take your Honours to it – in our letter appointing, I think, Mr Pawsey, we say, “We had better come and have a sleeves‑up meeting with you to tell you about this product because, even though it’s an icon” – that is my word here – “people don’t fully understand it, what its features are”, those sort of things.
The fact that distributors – what K Mart like – and there is evidence about this which we refer to in our 46 – people like K Mart do not like to have to play round with the shelves themselves. Suppliers go in there and notice that 35 books have gone, restock 35 books and do whatever is needed to get the computer systems right, those sort of things, your Honour.
GUMMOW J: I know, but this is all designed to support the structure, is it, to give rationality to this structure?
MR CATTERNS: Yes, your Honour.
GLEESON CJ: If a business preference for orderly marketing for a justification for conduct that otherwise would contravene the Trade Practices Act, the ACCC might as well put down its shutters.
MR CATTERNS: Your Honour, that is why I gave his Honour Justice Hayne a lengthy answer, and I submit that the phrase “orderly marketing” which is often used as a sort of euphemism for market control, section ‑ ‑ ‑
GUMMOW J: Yes, that is right.
GLEESON CJ: It is….. a phrase that comes quickly to the lips of counsel appearing for people trying to justify themselves.
HAYNE J: It does not look…..material.
MR CATTERNS: Your Honour knows how quickly I move to give my six or seven matters. Your Honour, I submit that is what his Honour meant. His Honour meant a system about which there was ample evidence – and I will take your Honours to a bit of it – where you had expert, specialist, loyal and so on distributors.
GUMMOW J: Well, because they were scared.
GLEESON CJ: Well, tell us about loyalty agreements.
MR CATTERNS: Solvent. I will take your Honours in a minute to Professor Officer, our friends’ economist, who said – leaving aside pejorative phrases, your Honours – these are often intelligent things, that is why people have distributors. In competitive markets, as we drive around the streets every day, we see dozens of franchisees and so on ‑ ‑ ‑
GUMMOW J: Yes, there is whole lot of exclusionary provisions out there.
HAYNE J: But intelligent for whom? Intelligent for the company wanting to maximise its profit?
MR CATTERNS: Yes, your Honour.
HAYNE J: Intelligent at some other level?
MR CATTERNS: No, your Honour, precisely that, that is what I mean.
HAYNE J: Maximisation of profit and the Trade Practices Act do not necessarily march in lock step.
MR CATTERNS: No, your Honour, but they do not necessarily conflict. What we want is rational business people trying to maximise their profit in a competitive market regulated by Part IV, not contravening Part IV. Your Honour, all of this only arises in the Queensland Wire question.
GLEESON CJ: Does all this come down to the proposition that we have a good reason for doing this? We would do it whether or we had the market power which we happen to enjoy. Therefore, we are not taking advantage of our market power when we do it.
MR CATTERNS: If your Honour would allow me to say “could do it” if we had it without market power, then I say yes, your Honour, that is precisely. Your Honour, that was the submission that we note in the submissions in the Queensland Wire decided in particular by his Honour Justice Toohey and, we submit, accepted as a legal submission in Queensland Wire, although BHP lost on the facts and we adopt it here.
GUMMOW J: Let us just go back, for example, to the time when your client was in the fold. What would have happened if it had decided to resell outside its ‑ ‑ ‑
MR CATTERNS: Your Honour means my friends’ client, sorry, yes?
GUMMOW J: Sorry, yes, Mr Nettle’s clients within the fold.
MR CATTERNS: Yes.
GUMMOW J: What would have happened if they had said, “We are going to sell in this suburb, not that suburb”, or “We are going to sell to the service stations, not newsagents”, or “We are going to sell to both”?
MR CATTERNS: Your Honour, there are two examples that are used against us, a case of Repco and a case of K Mart ‑ ‑ ‑
GUMMOW J: You would then, under this arrangement, be able to terminate their connection with you?
MR CATTERNS: Yes, your Honour, or - let us assume some reasonable notice ‑ ‑ ‑
GUMMOW J: Why would they not retaliate and say that is an exclusionary provision you are seeking to enforce and enjoin you from terminating it? In this case, it is just a similar situation with one step down the road.
MR CATTERNS: We would like to fight one case at a time, of course, your Honour, but ‑ ‑ ‑
GUMMOW J: It is just your indication of rationality seems to me to have pitfalls at all stages of this relationship.
MR CATTERNS: But if your Honour is right then every single manufacturer who appoints distributors breaches ‑ ‑ ‑
GUMMOW J: If it is an exclusionary provision, it has to have a purpose.
MR CATTERNS: Yes. Your Honour, this is not an exclusionary provision. This is not conspiring with – an agreement between two people to agree not to supply a particular person in terms of 4D. There is no “arrangement or understanding” et cetera under 45 deemed via 4D to exclude. That is what has happened. That is what goes wrong in these cases in America, your Honour. If we conspire horizontally to oust our friend, maybe we breach 45 or 4D. And if it is an exclusive dealing, section 47, then we have the questions of its impact upon competition which would bring us into the American cases, by analogy, and our friends would be fighting an uphill struggle because in many cases it has been held – I am sorry, it has been held in the US that this is not a per se breach, it does not go without saying that it is anti‑competitive and it may well be, case by case, that it does not have a bad impact on competition.
That is another way of answering his Honour Justice Kirby’s question about utility. There may be a net utility in terms of competition or in terms of the benefit of a company in having distribution systems. That is why there is a world of them out there and sometimes, when somebody gets kicked out of a franchise, they sue in various ways, section 52 amongst others. But, it does not go without saying that it is going to breach other sections of the Act. That is why we harp on rationality ‑ ‑ ‑
GLEESON CJ: Except that, as I understand it, a view that found favour with the majority judges in the Federal Court is that what you advanced as the good reason for doing what you did, that is, maintaining the existing distribution system, is only another way of saying, “The reason you did what you did was to prevent competitive behaviour”.
MR CATTERNS: Yes, your Honour, that is purpose. On purpose that is what their Honours said. Their Honours said it was the opposite side of the coin. Well, I have to face up to that on purpose, your Honour, and on that I say that confuses purpose with effect. But on taking advantage, your Honour – with respect that does not deal with the question of taking advantage. Nobody has put forward a better test than the High Court one in Queensland Wire, “Could you have done without the market power?” and that is why we get into the question of the factual justification for our present system and the theoretical justification for maintaining a distribution system, absent market power, and it does not go without saying that you could not refuse supply, absent market power.
It did not go without saying, in the case of BHP, but their Honours inferred from the fact that BHP refused nobody else, I mean with no other products, that it was able to do this only by virtue of its market power – “only” their Honours all say.
So, your Honours, we submit that section 46 cases of this kind are about that. They are about the applicant below proving that we could not have knocked back somebody who wanted to distribute our product or sell our product across the market contrary to our desires about distribution, that we could not have done that if we did not dominate the market, and there is no evidence where some professor says, “Well, let us postulate UBD 50 per cent of the market, products which fight each other uphill and down dale and 5 cents makes the difference. Could you there in that context knock back an order for 50,000?”
It would be new sales because nobody has ever thought of selling to law offices or chemists. Then against that we say, “No, but we still say the benefits of a distribution service on the other hand make it worthwhile, even in that case, when I have got 50 per cent to maintain my distribution system.”
GLEESON CJ: Do you mean by that that if this had been a very competitive market and if Melway did not have the market power it enjoys Melway might have decided, could have decided ‑ ‑ ‑
MR CATTERNS: Could.
GLEESON CJ: ‑ ‑ ‑ that the best way to advance its own competitive position in this market was to do all its business through a sole exclusive distributor?
MR CATTERNS: Of course, your Honour. Yes, that is exactly our submission. If the sole exclusive distributor was Angus and Robertson say who had a foot in every camp so far as retailers go, a distribution network and sales staff second to none, it is just a factual question, your Honour, in a given case and not proved.
GLEESON CJ: So that if Melway had taken a business decision in a competitive environment to conduct its business through an exclusive single distributor and had declined to supply Mr Nettle’s client for that reason, section 46 would have had nothing to say to the matter?
MR CATTERNS: Yes, your Honour, that is our submission, your Honour.
GLEESON CJ: And Melway’s position in that regard is not worse because the market is not competitive and because it has market power?
MR CATTERNS: Except that, of course, your Honour, if the market were competitive and it did not have the market power, we would not be here at all because the first limb of 46 would not be attracted, but subject to that, that is right, your Honour. Your Honour, an important fact, again, not conclusive, was that, as his Honour Justice Heerey points out, we used this system long before we had market power, from day one in Melbourne and in Sydney we used it, where we are fighting an uphill struggle.
We still have distributors in Sydney because we think that is the best way to do it, even if we have only got 5 per cent or whatever our market size is in Sydney. Your Honours, on that his Honour Justice Sundberg says, “Well, that does not advance the case because you have not proved that you have ever knocked back orders.” But we did and if I could take your Honours to that. That is in volume 4. Your Honours, at 942 Mr Godfrey says at paragraph 28:
Over the years the Respondent has received many requests from persons wishing to become wholesalers. We are very reluctant to make changes to the wholesale system, and have hardly ever done so. We place great importance on the selection of wholesalers.
Your Honours, while I am there may I go back to a couple of other aspects of Mr Godfrey’s evidence. It perhaps also answers a question his Honour Justice Gummow put to me as well as the one I am trying to deal with from your Honour. His evidence about the system begins at page 938 paragraph 19. It is a small company that is good at making maps and they do not want to do this distribution themselves. They do not want to have to deal with 50 or 5,000 separate accounts. They want to put it out of their hands. For one year they gave it to Gordon & Gotch to do the lot. That was the example your Honour put to me. That was 1989.
That is mentioned in 21. Never any formal contracts, answering your Honour Justice Gummow. There has been a little bit of overlap, he says in 21. They have not had to threaten people, he says. Then, also answering his Honour Justice Hayne’s question, in 24:
The rationale in the selection by the Respondent of wholesale distributors is to select companies which service retail outlets of a kind…..the distribution of the product…..is a highly specialised undertaking…..wholesalers which know their markets…..strong knowledge of and commitment to the Melway product…..promote themselves to us as specialists in their markets…..obvious efficiencies for both the Respondent and the wholesalers in the wholesalers selling Melway into their dedicated markets. The practice of selling through market specialists –
helps us.
Another important fact, also the subject of a finding by his Honour, is at 942 paragraph 30, just while I am there, your Honours, that we do not oppose discounting by the wholesalers. There was strong competition at the intra‑brand level, to use the American jargon. Although UBD held not to pose such a great threat, we have sufficient market power. Of course there is competition, including price competition, at the intra‑brand level. If K Mart sells a Melways for less than the service station, different distributors, then I will choose to buy it at the K Mart, all things being equal. This is important, your Honours:
Wholesalers determine their own prices and terms of trade. During all relevant times concerned with this proceeding, all wholesalers purchased Melway directories from the Respondent at the same price.
That was the subject of a finding by his Honour.
HAYNE J: Can I just try to tie this back again a moment to the Act. Can I take you back to 46(1)(c):
deterring or preventing a person from engaging in competitive conduct in that or any other market.
We have earlier agreed, have we not, that it is another market that is at issue. That is the market the participants in which are the wholesalers or distributors, is that right?
MR CATTERNS: Yes, selling to the retailers.
HAYNE J: As the market is presently structured by Melway, there is no rivalry, no competitive conduct between those wholesalers; they act in segmented areas.
MR CATTERNS: Except for a little bit of overlap, that is right, your Honour, except in the way I was putting about intra-product competition. They do compete, in this sense. They do not both walk up to the same service station and say, compete, but they do compete because the price at which they sell it to the service station as opposed to the price at which the other guy sells it to K Mart or the newsagent, et cetera, et cetera, there is competition at that level, your Honour.
KIRBY J: Is that not what the Trade Practices Act is designed to do to the benefit of consumers? That is to say, you say in paragraph 28, I think it is, that you deny absolutely you have anything to do with the fixing of the price, no resale price maintenance.
MR CATTERNS: Yes, your Honour.
KIRBY J: As far as you are concerned, once you sell at the wholesale price, it is over to them.
MR CATTERNS: Yes.
KIRBY J: Now, is not the purpose of these provisions, this part of the Act, to facilitate and promote competition in the marketplace because experience teaches that that leads to competition in price and then that is to the advantage of consumers?
MR CATTERNS: Yes, but two propositions: one, price competition is not the only competition fostered by this Act – service, delivery, quality, et cetera, such as, including efficiency of distribution. They are also matters which this Act ‑ ‑ ‑
KIRBY J: But it is the same old book and if a retailer is not successful and efficient, then they will not be used.
MR CATTERNS: That is right, hence, our distribution system, in so far as it promotes good distribution, et cetera, promotes competition.
GLEESON CJ: How do the publishers of newspapers maintain their distribution system through newsagencies?
MR CATTERNS: They had a ‑ ‑ ‑
HAYNE J: With difficulty.
MR CATTERNS: They are no longer allowed to do it, your Honour. They previously had a long standing authorisation, I believe, under the Trade Practices Act where they promised, in effect, only to deliver through newsagents and there were debates about sub-distributors, and so on.
GLEESON CJ: That is, I should have thought, a fairly simple and well‑known example of publishers maintaining a highly structured distribution system.
MR CATTERNS: Yes. Let us assume for the moment that there is enough competition among newspaper proprietors that they do not have a substantial degree of power. If so, then that is another example of why it does not go without saying that you will always supply all comers when you do not have market power. That is really the question in the case, as we would see it, your Honours.
KIRBY J: That was a trade off against obligations to get up very early in the morning to deliver to all sorts of crazy people who are constantly making complaints and to do it on every day of the year except Christmas and Easter Friday.
MR CATTERNS: But that is a perfect example, let us say a better example ‑ ‑ ‑
KIRBY J: And it is gone, as you say.
MR CATTERNS: But not because of section 46, your Honour. That is an example of why ‑ ‑ ‑
KIRBY J: It is gone because of the philos. of the Act, is it not? I mean, the exemption from the operation of the Act, where the exemption from the ‑ ‑ ‑
MR CATTERNS: The ACCC, I think, has revoked the authorisation. But home delivery is a perfect example of why it is sometimes rational and in the interests of a competitive market too, to have an exclusive distribution service because the newsagent, given the exclusive right, or the exclusive access to your newspapers, will walk around the streets at 5.00 am in the morning, or pay a kid to do so.
We are not precisely as good as that, of course, but those matters of somebody who has the exclusive franchise to a particular territory, working it harder in one way or the other, is why all over commerce there are any number of exclusive distribution deals, limited by geography if it is McDonalds, I assume, or by market segment, like, for example, medical equipment or drugs. No doubt, hospitals expert A does, pharmacists expert B does, doctors, and so on.
KIRBY J: Well, there have been studies that I dimly recollect from my economic days that if you sell high priced cosmetics in cheap stores then you are going to lose a section of your market; that you do better to stick to exclusive stores and that is the type of product you are selling.
MR CATTERNS: Well, your Honour, that is precisely another example of why it is not axiomatic – even answering a question your Honour put to me earlier. If somebody says, “Look, I am cheap price perfume ‑” Chanel or whoever is fashionable nowadays – “and would you like to sell into my store? I am 50,000 new bottles of perfume you would never sell because I will mark it up only 2 per cent or sell it as loss leader or whatever I want to do.” And Chanel can quite rationally, maximising profit in the long term, say no. It just does not go without saying. Really, your Honours, that is all we are saying here. You have to prove this. It might be. It might not be. In the instant ‑ ‑ ‑
KIRBY J: But do you not have a problem on that because, after all, you are here on appeal. You have to show error.
MR CATTERNS: Yes.
KIRBY J: The respondent did prove it to the satisfaction of the judges below.
MR CATTERNS: No, your Honour, with respect. I will take your Honours to that. Each of their Honours held it in a sentence was axiomatic. That goes without saying. There is only one answer. It is impossible to ‑ ‑ ‑
GLEESON CJ: Perhaps you should take us directly to that because you have put that proposition on a number of occasions, that what really went wrong here in the courts below was that they assumed something that had to be proved.
MR CATTERNS: Yes, your Honour. I will make that good now. Your Honours, his Honour Justice Merkel did this at page 641 of the 42 IPR or 1308 volume 5. Your Honours, his Honour Justice Merkel’s reasoning begins on taking advantage at 640 in the IPRs, 1306 in the appeal books, and there is a discussion of Queensland Wire and that basically goes through the whole of page 640. Then at the top of 641, which is at the bottom of 1307, his Honour quotes the well‑known passage at page 192 of the CLR, “Could you have done this without the power?”, and then in the passage that I submit is his Honour’s only passage of reasoning his Honour says, line 10 on 641:
A similar analysis can be applied in the present case. It is only by virtue of its dominant position in the Melbourne directory market and the absence of a competitive market that Melway can afford, in a commercial sense, to withhold from supplying 30,000‑50,000 directories at its usual wholesale price and terms to Auto Fashions. If Melway lacked substantial market power –
which is the question the High Court tells us to ask in Queensland Wire, in other words “competitive market” -
it is highly unlikely that it would stand by, without any effort to compete, and allow Auto Fashions to secure its significant supply of directories from a competitor.
Let us say UBD.
GLEESON CJ: Well, pausing there, is it your submission that if Melway lacked substantial market power, if it were operating in a competitive market, it is entirely possible that it would operate through an exclusive distributor?
MR CATTERNS: Yes, your Honour, precisely. That is the nub of the case and we say our friends did not prove to the contrary and his Honour - he does not use the word “axiomatic”, but I submit his Honour is treating it as axiomatic.
KIRBY J: Is that where rationality comes in because to get it axiomatic their Honours have reasoned that you will be acting rationally in your own best interests and that acting rationally in your own best interests, if you have got a distributor who says, “I will pay you your ordinary price for 30,000 to 50,000 directories,” it is not rational for you to refuse that?
MR CATTERNS: Yes, your Honour. I think their Honours are applying what I read from Queensland Wire but my submission is it is not axiomatic. There is another rational answer in the way I have attempted to submit otherwise, the Chanel example. You may or may not accept the $30,000 or $50,000, depending. Put another way, one would not expect to observe a refusal to supply $30,000 to 50,000 directories in a competitive market, accordingly. Now, our submissions are, first, it is not axiomatic and, second, the evidence was all the other way, including our learned friend’s experts.
GUMMOW J: Evidence that what?
MR CATTERNS: Addressed to the hypothetical point of what Melway could have done without its market power and I build that up about some opinion evidence and also the evidence, such as I have already gone to, of Mr Godfrey, about what the rational benefits are of a distribution system.
GLEESON CJ: Is another way of putting your proposition that maintaining a rigid structured distribution system was not an exercise of market power?
MR CATTERNS: Yes, precisely, your Honour. Precisely. Exactly.
GUMMOW J: Why?
MR CATTERNS: Because a sensible business person without market power can do just that.
GUMMOW J: It seems to me all this comes from truncating the phrase in the statute, I am afraid.
MR CATTERNS: Yes, but it has got to be given some work to do, I submit. For the purpose of all this ‑ ‑ ‑
GUMMOW J: You asked whether they had market power and you asked whether they used it for a purpose.
MR CATTERNS: Yes. Well, we had a purpose, let us assume for the moment – I will come back to that, if I may – of deterring competitive conduct but it does not just say, as I submitted before lunch and I cannot do any better than that, really – it does not just say “shall not engage in conduct for the purpose”, it says “shall not take advantage of its power” and the High Court in Queensland Wire ‑ ‑ ‑
GUMMOW J: That would be the problem because Queensland Wire was all about refusing to deal and ‑ ‑ ‑
MR CATTERNS: Precisely, your Honour.
GUMMOW J: The theory was that that was not taking advantage of the power for a purpose because there was nothing dispositive happening and that was rejected.
MR CATTERNS: Yes.
GUMMOW J: But that seems to have given rise to these exotic growths that seems to be spreading through - - -
MR CATTERNS: I would respectfully submit it is not all that exotic but in Queensland Wire their Honours dealt with three discrete issues. It is a composite phrase, yes, but they are three discrete issues: first, market definition and power – not relevant here – secondly, taking advantage. First of all their Honours overturned ‑ ‑ ‑
GUMMOW J: You do not just say, “Oh, I’m taking advantage”. It does not exist out there.
MR CATTERNS: No, but you have this concept in the Act of market power - we are assisted by 46(3) - and the question is, “Is it your market power that lets you do this?” It might be the fact that you own a patent that lets you do this and there has been a bit of a debate about whether to sue on a copyright or to take advantage of contractual rights or to sue on a patent is taking advantage of market power or just taking advantage of the patent itself. Your Honour will remember writing an article about that years ago.
GUMMOW J: I am taking you off your course. You have taken us, in response to the Chief Justice’s inquiry, firstly to Justice Merkel.
MR CATTERNS: Yes, your Honour, thank you. Then, your Honours, the Full Court is in (1999) 90 FCR 128 and their Honours’ reasons, I was going to take your Honours in volume 5 to 1344, if that is more convenient.
GUMMOW J: Where is the paragraph in the Federal Court Report?
MR CATTERNS: It is paragraph 40, your Honour, on 1344.
GUMMOW J: Paragraph 40 of the judgment?
MR CATTERNS: I am sorry, your Honour? This is Justice Sundberg.
GUMMOW J: Yes.
MR CATTERNS: On page 139 of the Federal Court Reports, and in paragraph 40, his Honour says:
Melway accounts for approximately 85 per cent –
et cetera –
To use the language of Mason CJ and Wilson J in that case, if the appellant were operating in a competitive market, would it have refused to supply the respondent, or would it have tried to secure the deal itself?
GUMMOW J: How could one know?
MR CATTERNS: Because it is just a matter of weighing up evidence, your Honour. It is hard case where the courts are getting into business decisions, I will grant you, with respect.
GUMMOW J: Hypothetical business decisions.
MR CATTERNS: But, your Honour, how else does that concept have any possible meaning, I ask rhetorically, of taking advantage of the power? It must have some meaning and it was held to have and was applied in Queensland Wire, and would it have tried to secure the deal itself? To that question there can be only one answer.
GUMMOW J: Why? Why, beyond assertion?
MR CATTERNS: That is my submission, your Honour, that is our submission in the case. That is precisely the submission in the case, and that is what our friends did not prove.
GUMMOW J: This is where these rational actors enter the stage, do they?
MR CATTERNS: The rational act comes in in understanding ‑ ‑ ‑
GUMMOW J: That is why you are able to deal in this hypothesis, because you are assuming these rational actors, is that right?
MR CATTERNS: Yes. I think so, your Honour, yes. As I say, I am tempted to abandon the rational idea and just say, could you or could you not, but ‑ ‑ ‑
GLEESON CJ: One of the problems about pinning it all to rationality is that, as I recollect, the very first Commissioner of Trade Practice is pointing out, I should have thought pointing out rightly, underlying a lot of these orderly marketing arrangements was a desire for a quiet life.
MR CATTERNS: Well, your Honour, if one can elevate this to that as being a rational business principle, as opposed to his Honour Justice Hayne’s profit maximisation, it is in the same territory. A quiet life means distributors who you can trust, who pay their bills, et cetera. You are dealing with six of them and not ‑ ‑ ‑
HAYNE J: A quite life means becoming a judge, Mr Catterns.
MR CATTERNS: I beg your pardon, your Honour?
GLEESON CJ: Unfortunately, the fundamental object of the Trade Practices Act is to disrupt the quiet life.
MR CATTERNS: In certain circumstances, your Honour.
HAYNE J: Get out there and compete, but above all else, do not succeed in the competition too well.
MR CATTERNS: Well, your Honours, that is what, of course, all the commentators say about this case. They say there comes some moment which no business person will ever know when they are perfectly sensible, happy distribution system that has been having its competitive and commercial benefits all along. Suddenly a whistle blows and they are no longer allowed to do it because they have achieved market power. It was a fine thing to do and they maintained their distribution service because the kids went around and delivered the papers or because David Jones dealt with their perfume in an attractive way, et cetera, et cetera, or because Bursons sold this, well, to whichever one of these markets they sold to and so on. But, your Honours ‑ ‑ ‑
GUMMOW J: So that is the paragraph, paragraph 40? Is there another one?
MR CATTERNS: Yes, your Honour, there is one more of Justice Sundberg, my proposition being that their Honours treated it as axiomatic, in 42. Looking at Queensland Wire, which I will have to come to shortly, your Honours:
For counsel said that a corporation ought not be held to “take advantage” of market power if it would be likely –
and I prefer, with respect, your Honours, “could” –
is it likely that if it were operating in a competitive market the appellant would allow…..but to return a different answer. Once it is accepted that that is the right question, it seems to me to be impossible to answer it except in the manner I have indicated.
Again, we respectfully submit, treating it as axiomatic. Justice Finkelstein, at paragraph 63 at page 144 in 1353 of the appeal books, asks the question of Queensland Wire in paragraph 60 a little earlier; as it were paraphrases the question in terms of the instant case in 61. In 62 he says:
To answer the question posed it is necessary to hypothesise what would have occurred had Melway received an offer to purchase 30,000 to 50,000 –
who would have bought them from an effective competitor:
The answer…..is abundantly clear. In the supposed circumstances Melway could not rationally refuse to supply its product. If it did it would run the risk of losing market share. The only reason Melway was able to deny supply to Auto Fashion was because Auto Fashion could not look to a competitor of Melway to supply it –
So, your Honours, with respect, his Honour again treats it as axiomatic that this is the only rational thing you can do.
KIRBY J: I am beginning to understand why perhaps that is done, because the key words in the statute are “for the purpose of” and in order to judge the purpose, that being very difficult to ascertain, or in some cases really, in the absence of some admissions or confessions, you have to go on the assumption of rational conduct in the best interests of the corporation that is charged with a breach of the Act.
MR CATTERNS: Yes, your Honour, but, with respect, that is on purpose and his Honour is not yet dealing with purpose. His Honour there is dealing with taking advantage and draws a conclusion of it in 64 and deals with another argument, our argument that we have been doing this all along, and then at 67 his Honour goes to purpose. The structure is the same in each of the other two judgments I have taken your Honours to.
KIRBY J: Is that not also the explanation of this “assume away” or “hypothesise away” which is said to be derived from Queensland Wire? I mean, if you look at the statute simply as somebody who has not lived in this particular area, it requires starting from the fact that the corporation has a substantial degree of power in a market. Therefore, you start from that proposition. You do not assume it away, and it is because experienced – apparently convincing to the Parliament was such that corporations with substantial degrees of power in the market have sometimes misused that power, that you do not assume it away. You start from that proposition and the so-called test of assuming it away is simply a method of checking what appears to be the case on the basis of the facts. It is not a substitution and cannot be a substitution for the Act. The Act asks you to start from the point that the corporation has a substantial degree of market power.
MR CATTERNS: Yes, your Honour, that is the starting point and, if I may say so, the third point is: did you have the proscribed purpose? But the second point is: did you take advantage of that power? Those words must mean something because one could easily draft, as I put to his Honour Justice Gummow in answer to a question of his Honour – you could say a corporation that has a substantial degree of power in a market shall not engage in conduct in that market or in any other market for the purpose of. But there is this concept and it is a concept which was in the Act when dominant power was the precondition pre-1986 and it survives the amendments, and there is discussion of that in Queensland Wire, and the concept of taking advantage is still there. Our submission is it is a factual matter that has to be proved, like the other two.
KIRBY J: You mentioned some commentators on the case. Are they somewhere in your written submissions? Are they referred to?
MR CATTERNS: Yes, your Honour, there is a list of – I beg your pardon. No, your Honour. In our list of authorities we listed a number of commentators on the case and we have been asked by the library to provide copies of one of them, which we will do.
KIRBY J: Thank you.
MR CATTERNS: So, your Honours, we submit that those three judges each treated it as axiomatic that you could not knock back this order if you did not have the market power, therefore, it was to take advantage of market power to do so. While I am there, your Honours, his Honour Justice Heerey disagreed and it is at page 134 in 94 FCR or 1336 in the appeal books, paragraph 21. In 21, about halfway through it, his Honour says, after reference to Queensland Wire:
Moreover, the directories which Melway refused to supply to Auto Fashions were not in reality additional sales ‑
I have made that submission -
its substantial purpose was to sell to existing retailers across the divisions.....The evidence did not support –
as a matter of evidence –
a hypothesis that in a more competitive market Melway would have necessarily supplied 30,000 to 50,000 directories –
Well, they are the two points of views, your Honours. Either it is axiomatic that you must do so, that there is only one answer, or it is something you have got to prove, and we respectfully submit the latter must be right otherwise those words in the Act are doing no job. Then his Honour goes on:
So in refusing to supply Auto Fashions, Melway was not denying itself sales ‑ ‑ ‑
KIRBY J: Well, you say you have got to prove it but I rather took some of the passages that Justice Finkelstein extracted in his reasons as the cross‑examination of your manager, your witness, as being the attempt by the respondent to prove it and apparently to the satisfaction of the judge and you say that is all directed at purpose?
MR CATTERNS: Yes, your Honour. If your Honour looks at – no, I will not take – yes, your Honour, it is clearly that, I submit, looking at the structure of his Honour’s reasons. Your Honours, I do not want to, needless to say, read this at length but we would respectfully submit that his Honour’s reasoning, Justice Heerey’s, from paragraph 22 onwards is right. In paragraph 25, his Honour, referring to Queensland Wire, about lack of legitimate reason – and it is right that their Honours the Chief Justice and Justice Wilson do mention BHP’s purpose or lack of, they said, in that context, but his Honour says:
the existence of a legitimate business reason which would explain the impugned conduct irrespective of the degree of market power necessarily points against a conclusion that such conduct in fact involved taking advantage of that power.
And that is the submission we have made at length, your Honours.
KIRBY J: Is “legitimate” there used as equivalent to ‑ ‑ ‑
MR CATTERNS: Rational.
KIRBY J: ‑ ‑ ‑ legitimate consonant with the policy of this Act ‑ ‑ ‑
MR CATTERNS: No, your Honour.
KIRBY J: ‑ ‑ ‑ to protect consumers and to promote competition?
MR CATTERNS: Rational, which includes – I am sorry, your Honour, the whole idea of competition is that rational business people trying to maximise their profits, competing, will be to the benefit of consumers. But legitimate damage is, in the sense of rational that I would put it, with no connotation of compliance with the law.
GLEESON CJ: Well, does it get back to the proposition that I think was put to you earlier this morning, then, that the significance of a view as to what is or is not rational is a significance relevant to fact finding?
MR CATTERNS: Yes, exactly.
GLEESON CJ: It is predictive, if I can use that expression.
MR CATTERNS: Exactly, it is not a defence, it is predictive. I respectfully agree with that.
HAYNE J: If that is so, can I just follow out a little the rivalry question that I was earlier flagging with you? Rivalry in the market, the participants in which are participants at the wholesale level. The rivalries, you say, that exist under current arrangements is price rivalry.
MR CATTERNS: And I suppose service, too, your Honour.
HAYNE J: Well, service ‑ ‑ ‑
MR CATTERNS: But, with respect, I see your Honour’s point, yes.
HAYNE J: If, however, you inject a new participant and break down the segmentation of the market, the rivalry may take other forms.
MR CATTERNS: Absolutely, your Honour.
HAYNE J: Price, service. At the moment, however, given Melway’s position, product rivalry would not loom large, perhaps not loom at all.
MR CATTERNS: Yes, that is right.
HAYNE J: If then we accept, for the purposes of argument, that the relevant inquiry is, “Could you and would you rationally have done this without market power?”, that invites attention to what would be the consequences of injection of extra aspects of rivalry by the breakdown of segmentation in circumstances where there would be product rivalry as well as price and service.
MR CATTERNS: Yes, your Honour, 50 per cent UBD.
HAYNE J: And, thus, may it not be open in those circumstances to find that the vendor, faced with that set of circumstances could, perhaps would – let us leave aside degree of probabilities for the moment – conclude that overall sales will necessarily increase if there is rivalry?
MR CATTERNS: Absolutely. That is a matter which is theoretically possible. That is why I respectfully submit that section 46 has work to do on our construction.
HAYNE J: Is that the reasoning that underpins the reasoning of the majority of the Full Court?
MR CATTERNS: I submit not, your Honour. I submit their Honours assumed it, whereas the way your Honour put it was it might or it might not, depending upon the facts.
KIRBY J: So, in your theory, this is not a case about the Trade Practices Act at all, still less about section 46; it is about onus of proof and factual matters ‑ ‑ ‑
MR CATTERNS: Well, to put it shortly, your Honour.
KIRBY J: And judicial reasoning.
MR CATTERNS: In part, your Honour, with respect, it is.
HAYNE J: But nothing more being known than the bare facts I have described, why is it not open to a tribunal to conclude that the more probable outcome is increase in sales in the hypothesised case?
MR CATTERNS: It is open for a tribunal to do so.
HAYNE J: If that is so, where lies your appeal?
MR CATTERNS: It lies, in my submission, that that is not what their Honours did. Their Honours did not consider the case the way your Honour is putting it to me. I do not want to repeat myself too many more times but the paragraphs I have taken your Honours to ‑ ‑ ‑
HAYNE J: You say it is treated as axiomatic, QED, and that is insufficient.
MR CATTERNS: And, in a minute I am going to – well, perhaps now – I will try and make good my submission that the evidence was all the other way. There are two pieces of evidence ‑ ‑ ‑
HAYNE J: The evidence being that Melways had preferred the quiet life throughout its life.
MR CATTERNS: Yes, your Honour, but I have got much better than that.
HAYNE J: Yes.
MR CATTERNS: I can understand that that that is not the best point in our favour but there was only two pieces of evidence against us. The first is the answer to the silly question, with great respect, “What would you have done if you got an order for 50,000 Melways in Sydney?” That should be put aside. The only other fact that I read in their Honour’s reasons is Justice Sundberg saying, “You did not prove that you have knocked back orders”. That gets the onus the wrong way around, and, I submit, it was contrary to the passage I read out from Mr Godfrey. But, there is no other references to evidence here and we submit that this is a proper appeal where the reasoning does not display – I am sorry, it is not that their Honours says, “For many reasons which I do not bother to set out here” for example, as discussed by Lord Hoffmann in Biogen v Medeva about the judicial process of reasoning and one does not express every last nuance, of course. It is not that. Their Honours have treated it as going without saying.
KIRBY J: But does it not follow from your argument, now, now that we have refined it to what it really is, that the best that you could hope for would be that that error would be exposed and the matter would be sent back to the Full Court to determine the matter on a proper analysis concentrating on that second phrase in section 46.
MR CATTERNS: I submit not, your Honour, although I would have to accept that that is a possible outcome. I submit not because this Court is fully seized of it. The facts are few. If I am right about the ‑ ‑ ‑
KIRBY J: Yes, but there are all these volumes of material. We do not have time to be ploughing through all those and reaching our own conclusions on the facts.
MR CATTERNS: Well, our learned friends have not, in their written submissions, that we can see, put forward a number of facts to say that they proved what we say they failed to prove.
GLEESON CJ: Mr Catterns, the whole of your argument to date, as I understand it, has addressed the approach taken by the Federal Court to this problem which in turn seems to have been based upon the approach taken by Chief Justice Mason and Justice Wilson in Queensland Wire 167 CLR at page 192, six-tenths of the way down the page.
MR CATTERNS: Yes, your Honour.
GLEESON CJ: I wonder if you have an argument to address to us as to what the outcome of this case would be if instead of that you adopted the approach taken by Justice Deane in Queensland Wire Industries at 197 to 198?
MR CATTERNS: Your Honour, hitherto I had rather thought that his Honour’s reasoning was very similar because ‑ ‑ ‑
GLEESON CJ: Well, what he said was – he treated this concept of taking advantage for a purpose as a composite idea, as I understand it.
MR CATTERNS: Yes.
GLEESON CJ: And he said:
Its refusal to supply Y‑bar to QWI otherwise than at an unrealistic price was for the purpose of preventing QWI from becoming a manufacturer or wholesaler of star pickets. That purpose could only be, and has only been, achieved by such a refusal of supply by virtue of BHP’s substantial power in all sections of the Australian steel market –
and then he said:
In refusing supply in order to achieve that purpose, BHP has clearly taken advantage of that substantial power in that market.
MR CATTERNS: Yes, your Honour.
GLEESON CJ: Now, what is the answer to that proposition in its application to the present case? If you applied that to the present case, you would say Melway had a purpose of preventing Mr Nettle’s client from becoming a wholesale distributor of Melway business directories. That purpose could only be achieved by a combination of the circumstances that Melway was the only publisher of Melway business directories and had 85 per cent or 90 per cent or whatever it was of the market in business directories generally. So Melway was using, ie taking advantage of, its market dominance for the purpose – and if the Trade Practices Act had not existed one might have added “for the perfectly understandable purpose” – of preventing Mr Nettle’s client becoming a wholesale distributor.
MR CATTERNS: Yes, your Honour, but my answer to that is that even if Melway did not have a substantial degree of market power it could have still engaged in the same conduct, namely refusal to supply the respondent, for the same purpose, namely stopping it from being a distributor.
GLEESON CJ: That is only another way of saying though, if you look at it at this level, that market power in the context of the practical application of the Trade Practices Act brings with it responsibilities and inhibitions that might not exist absent market power.
MR CATTERNS: Well, that is so but, with respect – and I cannot do much better than that – if the Act wanted to say just that, there would not be this concept of taking advantage. It would be just saying, “A person with market power shall not engage in conduct in the relevant markets for the purpose”, but it says, “You shall not take advantage of that power which ‑” and then it says in 46(3) in determining whether you have got market power you look at the extent to which you are constrained by the action of the customers or potential competitors.
So, your Honours, the way the High Court ‑ as I read it, his Honour Justice Deane, with respect, certainly combined the concepts in the one sentence, as it were, but his Honour still has in mind what you can do with the market power; can you still do this without the market – I beg your pardon – what you did with the market power, can you still do it without the market power.
GLEESON CJ: I am just not sure it is safe to assume that Justice Deane decided Queensland Wire Industries on the same basis as some of the other members of the Court.
MR CATTERNS: With respect, I see the force of what your Honour says in terms of the – perhaps I should go to that now while your Honours have that there.
KIRBY J: I see Justice Dawson agreed with Justice Deane except for the additional words that he added. Justice Dawson said he agreed with Justice Deane.
MR CATTERNS: Yes, your Honour, and Justice Toohey’s in similar terms in his reasons. Perhaps if I could start at the beginning. I will not remind your Honours of the facts, of course. May I note that the submission that your Honours will see at the top of page 182, because this is a submission that their Honours are meeting.
KIRBY J: It starts at the bottom of page 181.
MR CATTERNS: Thank you.
Market power is freedom from constraint…..A person cannot be held to use or take advantage of market power unless the conduct in which he is engaging is something in which he would not, or could not, engage but for the absence of constraint. There is no finding on that issue. The respondent’s decision to consume all the Y-bar it produces has not been shown or held to be a consequence of freedom from constraint.
That is our submission, here, preferring “could” to “would”.
KIRBY J: The appeal was upheld, so was that submission accepted?
MR CATTERNS: It was rejected as a matter of fact and accepted as a matter of law, in my submission, your Honour.
GLEESON CJ: I am not sure it was accepted by Justice Deane.
MR CATTERNS: That is what I am happy to confront in a moment.
GUMMOW J: Or perhaps by Justice Dawson at page 202, the paragraph beginning “For the reasons given by Deane J”.
MR CATTERNS: Yes, your Honour. I would read that as very similar to what their Honours, Justices Wilson and the Chief Justice say. He gets rid of the idea of moral overtones:
there can be no real doubt that BHP took advantage of its market power in this case. It used the power in a manner made possible only by the absence of competitive conditions. Inferences in this regard can be drawn from the fact that BHP could not have refused to supply Y-bar to QWI if it had been subject to competition –
So, perhaps he is not saying that is the only test, but we would regard that as something you can draw an inference from. The fact that caused BHP to lose was the following fact:
BHP supplies all its other steel products without restriction and its practice with regard to Y-bar was not in accordance with its normal behaviour. If there had been a competitor supplying Y-bar, BHP’s refusal to supply it to QWI would have eroded its position in the steel products market without protecting AWI’s position –
that was the subsidiary. If I could just go back quickly to their Honours, the Chief Justice and Justice Wilson, at page 183. That is the fact, at point 6 – only manufacturer:
Of the shapes of steel products which BHP makes at its Newcastle rolling mill…..only the Y-bar is not for general sale. BHP has, however, exported Y-bar –
to a small extent. Then there is a discussion of the market, as your Honours remember. Your Honours can see a definition of market power at the bottom of page 188:
After the market has been delimited…..as the ability to raise prices –
Your Honours can see that is a rational consideration. Then the crucial passage begins at 191 where their Honours reject the construction put on it by his Honour Justice Pincus of being reprehensible. Then at 192 their Honours say:
In effectively refusing to supply Y-bar to the appellant, BHP is taking advantage of its substantial market power. It is only by virtue of its control of the market and the absence of other suppliers that BHP can afford, in a commercial sense –
and that is what I mean by rational, your Honours –
to withhold Y-bar from the appellant. If BHP lacked that market power – in other words, if it were operating in a competitive market – it is highly unlikely that it would stand by –
Your Honours, I accept that there is not a great deal of reasoning there as to why it would be highly unlikely to stand by. Their Honours have previously mentioned the matter of – this is the only product where it does so ‑ but that is a matter, if I may say so, going to the result in the instant case, not any principle against us. Then their Honours go on to “taking advantage”. Again, their Honours refer again to what they say was BHP did not offer a legitimate reason, and your Honours know there has been criticism of that in the literature, and the evidence that the Y-bar was the only product not offered for sale.
If I could go back to his Honour Justice Deane at 197, in the few lines earlier than the one his Honour the Chief Justice took me to, his Honour relies on the fact again that:
BHP is prepared to sell to outsiders any of the products from its rolling mills with the exception of Y-bar.
There is the purpose, then his Honour says:
That purpose could only be…..achieved…..by virtue of BHP’s substantial power –
So one thing is for sure ‑ ‑ ‑
GLEESON CJ: It did not treat Y-bar as a product for sale. It treated Y‑bar as an intermediate product in a vertically integrated marketing operation….. ‑ ‑ ‑
MR CATTERNS: Your Honour, that was the legitimate reason that BHP had. It said, “Well, I don’t want to interrupt my manufacturing process, in effect, and sell you an intermediate product”, but, with respect, that is not accepted by the judgments here. One thing for sure in that paragraph of Justice Deane’s reasons is that his Honour is giving the concept of “taking advantage” work to do.
GUMMOW J: Justice Toohey employs the term in the sense of use of the position or exercise, is he not, if you look at 216.
MR CATTERNS: Yes, your Honour. May I go to the whole of that. If I could go just a little bit earlier to 215, your Honours see that the submission of then counsel was noted and says you have to find – the submission was, as our submission is here, that you have to find:
as a fact that the conduct in which the person is engaging is something in which he would not or could not engage but for the absence of constraint.
May I remind your Honours that his Honour at point 4 refers to the finding that this is the only product where BHP acted that way and your Honours can see that is crucial to the finding of taking advantage. Then QWI says even if that test is right, it has been satisfied. Again, the holding of Justice Pincus is noted. BHP supplied to others all the other products. Then they go on – this is noting the answering submission:
the reason why BHP can refuse to supply QWI with Y-bar is that BHP has power in the market for steel products resulting from there being no relevant competitor with BHP in that market.
There is a reference to “dominant power”, which was the old wording, your Honours. Then his Honour says:
In my view the answer is correct. The only way BHP is ‑ ‑ ‑
GUMMOW J: The question posed is:
Is BHP refusing to supply Y-bar because of its dominant power (due to the absence of competitors)…..?
MR CATTERNS: That is counsel’s question, your Honour.
GUMMOW J: That is right. His Honour says “the answer is correct”.
MR CATTERNS: Yes, but, with respect, his Honour puts it better than counsel because he does not go back to “because” and his Honour says:
The only reason why BHP is able –
which is the test put by BHP –
to withhold Y-bar (while at the same time supplying all the other products from its rolling mills) is that it has no other competitor…..absence of constraint. It is exercising the power which it has when it refused to supply QWI;
purpose. So, your Honours, two things are clear, we would respectfully submit: the first is that those words “taking advantage of the power” mean something; second, that the Court in the case of Queensland Wire accepted the submission that you exercise market power if you engage in conduct which you could not engage in but for the absence of constraint, or but for the market power. Now, whether or not – and, your Honours, no one has ever put, that we can see, put forward another way of working out whether or not you could have engaged in that conduct without the market power, that being different from the facts of the instant case, other than coming up with some sort of a hypothesis.
So, your Honours, we respectfully submit that what you have to do to apply this is to put the case that his Honour Justice Hayne put to me, assume UBD has 50 per cent and could Melway rationally have knocked back an offer from somebody who wanted to break down the distribution system or do acts which would constitute the breaking down of the distribution system. Answer: sometimes yes, sometimes no, and as submitted in BHP, it has to be proved as a fact and as held, I would respectfully accept or submit, pretty slenderly was proved as a fact there because of the fact that this was the only product that BHP behaved this way about. So their Honours did in each case, we submit, not treat it as axiomatic, but treat it as a matter of proof; and, your Honours, that is what we respectfully submit has gone wrong here and it has not been proved.
Your Honours, may I take your Honours to a few of the pieces of evidence on this question. First, our Mr Godfrey in volume 4, page 938 – I beg your pardon, I have taken your Honours to those paragraphs already where he gave his own rationale for the distribution system. Then, your Honours, our friends’ expert, Professor Officer, in volume 4, at page 1017, it is a statement of evidence, begins at 1005, looking at market and so on. Then he asks at 1016, is Melway in a position to exert market power? At 1017, this is the best evidence our friends put forward, said:
how do we test for an abuse?
in 39 –
In general, when a firm behaves in a manner that would not be possible for a firm to behave in a competitive market, there is a presumption of an abuse of market power.
That is a way of putting forward what we just said, what we submitted about Queensland Wire. He believes that is Queensland Wire, looking at paragraph 40. He says in 41:
The issue in the current matter is to decide whether the actions of Melway are consistent with the action of a firm in a competitive market or could only be expected from a firm with market power.
Then he says in 42, and we submit, an important paragraph:
There is no question that firms in competitive markets companies “hire and fire” distributors, set distribution regions and even apply resale price maintenance when they wish competition to be reflected in services rather than price – all practices which may have been adopted at times by Melway Publishing. However, companies in competitive markets could not afford…..capriciously firing an efficient distributor –
and I remind your Honours, held, not capricious –
Maintaining inefficient distributors or inefficient distributional practices is a cost that will be borne…..by the customers –
so it is a question of efficiency there. He goes on and says:
I have not seen a full set of reasons nor supporting evidence for the termination…..Therefore, I am not in a position to give an opinion as to whether the termination or subsequent refusal to supply may or may not reflect the use of Melways’ market power for a proscribed purpose.
At 1032 he says ‑ ‑ ‑
KIRBY J: Did that statement there about the presumption – I think he used the expression that there is a presumption that if you have the market power and you do something and you have done it by reason of or to take advantage of the market power, now, is that orthodoxy, because I understood your submission to be that the obligation to show that breach of the Act falls on the complainant.
MR CATTERNS: The word “presumption”, I submit, is really saying that that is the law. When a firm behaves in a manner that would not be possible, so, you do not assume it was not possible, you have to prove it was not possible. If you prove it was not possible Queensland Wire would say you have taken advantage of your market power. The word “presumption” there does not apply to proof that it was not possible, it is, the law is broken when you have proved that. That is his 39, your Honour.
GUMMOW J: Is evidence in the form of paragraph 20 par for the course these days in the Federal Court in this sort of litigation.
HAYNE J: I take it it is tendered quickly, is it?
MR CATTERNS: I am in the happy position of not having failed to object, not having been there, but, as your Honours know, there is a sort of practice developed in the court about expert opinion evidence from economists in what has been laughingly called “the hot tub” where they are cross-examined – where they both sit together at either end of the bar table or somewhere convenient in the court and they are asked questions in a sort of ‑ ‑ ‑
GLEESON CJ: Some…..a cold tub.
MR CATTERNS: I think his Honour Justice Lockhart invented the phrase when his Honour was the chairman of the tribunal, but, yes, that is what occurred here, in the attempt to get the experts to narrow down as much of the economic disagreement.
GLEESON CJ: I think Justice Merkel ultimately concluded that no controversial issue in the case turned – or the resolution of no controversial issue turned upon the opinion of the experts.
MR CATTERNS: That is right, your Honour.
GLEESON CJ: He said in the concluding parts of his judgment that they ultimately agreed on most issues that had originally existed between them and he did not base his decision upon their opinion in relation to any controversial matter.
MR CATTERNS: That is right, and I submit that because his Honour, to repeat myself, treated this as axiomatic, he did not go to this evidence where the witness is saying it is not axiomatic, sometimes it is sensible to maintain a distribution system like this. In 1032, paragraph 20, he says the same sort of thing. He adds:
if the Respondent’s refusal…..was for some legitimate business purpose (eg. that the Applicant did not adequately service its customers –
that is our friend’s client:
then that may not amount to a purpose proscribed…..If, however, the Respondent refused –
for that purpose:
then in my opinion, that would amount to a purpose proscribed by the Act.
It would prevent the applicant from a purpose proscribed, your Honours, not taking advantage. He is cross-examined about this, your Honours. I am sorry, I should take your Honours to one more passage. This is our expert, Professor Norman, where he,in paragraph 15 in economist’s jargon, describes – 15 and 16 – the benefits you can get from having a distribution system and the phrase he uses is, paragraph 16, “there is considerable value added activity”. In other words, both from the point of view of the public and from the point of view of Melway there are benefits gained from the distribution system.
These gentlemen are cross-examined in the famous hot tub in volume 3 but in particular at 549 where, at line 40, Professor Officer is asked whether he agrees with the passage I have just referred your Honours to from Professor Norman, is there:
value, addition –
There is a comma that should not be there:
to the standing of the Melway product through it having – that’s Melway – an effective and well managed distribution system?
PROF OFFICER: Yes.
Then there is discussions of those sort of benefits at 550 in the four longer passages in the middle from about line 8 to line 36. Then at 551 his Honour puts a hypothetical question of the kind that we see in Queensland Wire and then it is rephrased by his Honour at 552. I am sorry, there is an answer by our Professor Norman saying, in answer to what – the same question that your Honour Justice Hayne asked me – at line 8 on 552. He says:
His Honour has set up some fact circumstances that increase the probability that there would be such a finding, but on an economic analysis, you could still find, despite that system –
that is with competition –
that the distributor – that is, the initial supplier – had thought through an efficient distribution system.....it may still perform a sufficiently competitive role.
And then Professor Officer was asked a question:
does your answer to that question change on that additional hypothesis assumption, namely, that the distribution network had on reasonable grounds been established to try and make the market for the productive competitive?
And on that assumption Officer agrees with Norman. So, your Honours, we submit that the evidence on that is that it is just a question of fact and, if anything, the evidence on that was our way.
Your Honours, our paragraph 46 of our written submissions, which I will not go to, lists a number of rational benefits from having this kind of distribution system. Our friends in their paragraph 59 accept that in principle there can be such benefits. The ACCC and our learned friends appear to regard it as axiomatic that you will go broke appointing exclusive distributors and we respectfully disagree.
May I remind your Honours that, of course, this sort of system is not set in concrete. A single person might come along or 10 new people might come along with market niches. It just depends. Your Honours, that is why we respectfully submit that their Honours erred in treating it as axiomatic and our respectful submission is that the evidence was, when one got beyond that, that it may well have been rational in a competitive market to act precisely the same way.
Your Honours, that drives our friends, as we understand their submissions, to try and overcome Queensland Wire, what they call the usual construction of Queensland Wire, which we think we have propounded, with some new test that does not require facts and we respectfully submit that would be contrary to Queensland Wire and contrary to the idea that you ought to prove a serious matter such as this. Your Honours, the two United States cases that we wanted to refer to ‑ ‑ ‑
KIRBY J: Do we have any access here to the second reading speeches both on the original form of section 46 and on the amendment that is referred to in Queensland Wire or the explanatory memorandum?
MR CATTERNS: Your Honours, our learned friends the ACCC have, I think, supplied those.
KIRBY J: I see.
MR CATTERNS: At least the latter ones. The explanatory memorandum on the 1986 amendments, your Honour, which touches upon it to some extent.
KIRBY J: And does it refer to the Sherman Act and can we take it that the analogy of the US statutory provision is apt for our purposes?
MR CATTERNS: Your Honour, the provision is different and I do not want to put it too high.
GUMMOW J: It is about 30 times longer.
MR CATTERNS: That is why I was not going to go to the cases in detail unless your Honour thought that would be helpful. The two cases I wanted to refer to are the Aspen Skiing one and the Continental TV one. I will give your Honours a reference in a second, if I may. Your Honours, the crucial difference in the US law and why I do not want to take too much time on going to these cases is there is no question of taking advantage. That concept ‑ ‑ ‑
GUMMOW J: It just uses the phrase, as I said this morning, “to monopolise”.
MR CATTERNS: Yes, your Honour, and, for example, as their Honours pointed out in the Full Court in Queensland Wire, that has led to a jurisprudence where conduct is regarded as either per se anti‑competitive or you inspect the conduct under a so‑called rule of reason to see whether it is competitive or not and, your Honour, so that is a different question, we readily accept, from this question of “taking advantage” but ‑ ‑ ‑
GUMMOW J: There is some reference to the significance of the US decisions in Eastern Express 35 FCR 43 at 69 to 71. No need to take it to us now.
MR CATTERNS: No, thank you, your Honour. As I say, the Full Court in Queensland Wire also, your Honours, looked at that. So, your Honours, really all I wanted to get from it is in a sense almost a factual matter which I have got from the passages that I have attempted to take the Court to, which is that it is far from axiomatic that this is anti‑competitive or irrational conduct. It may or may not be and, in particular, in a number of the cases our friends refer to, they refer to cases where it has been held to be anti‑competitive, properly looked at ‑ ‑ ‑
GUMMOW J: And the relevant text of the Sherman Act is set out in footnote 1 in Aspen.
MR CATTERNS: Yes, thank you, your Honour.
GUMMOW J: 472 US at 587 footnote 1.
MR CATTERNS: Thank you, your Honour. The gravamen of those cases, to put it shortly, is it may or may not be anti‑competitive to set up a distribution structure or to refuse to deal. It depends upon the facts and many of the cases our friends refer to are cases of tying or horizontal conspiracies but, your Honours, if I could go perhaps to – if your Honours do not mind going to the Continental TV Case 433 US 36 before the Aspen Case.
Your Honours can see at pages 38 and 39 in the opinion of the court that the facts were that Sylvania cut down the number of distributors because it thought it would end up getting better distribution. They wanted a smaller number of expert distributors and, indeed, it seemed to work. Their market share went up to approximately 5 per cent.
GUMMOW J: This is a section 1 case. This is a section 45 case in our language.
MR CATTERNS: Yes, your Honour, precisely.
GUMMOW J: Which is why I raised section 45 earlier this afternoon with a view to your reliance on it in another guise in Continental.
MR CATTERNS: Fair enough, your Honour. But if we were in section 45 of course, there would be a competition test unless it were section 4D or price fixing.
An important issue in the case was whether the ruling United States v Arnold, Schwinn & Co., 388 US 365, which held that this was a per se breach, not susceptible to a rule of reason analysis, should be followed.
GUMMOW J: Per se breaches are like exclusionary purposes, are they not?
MR CATTERNS: Yes, that is an example of one, 4D. Conduct that is so anti‑competitive that one does not even bother to look at – one takes that for granted. If I may skip past that analysis of whether or not to follow Schwinn, to page 57, their Honours go to an earlier case, which was Northern Pacific, and in the paragraph in the middle of the page, “revert to that standard”, and say:
for determining whether vertical restrictions must be “conclusively presumed to be unreasonable –
that is, per se.
Such restrictions –
that is vertical restrictions of the kind we have here, your Honours –
in varying forms, are widely used in our free market economy. As indicated above, there is substantial scholarly and judicial authority supporting their economic utility. There is relatively little authority to the contrary. Certainly –
and we apply that here, in a different context –
there has been no showing in this case, either generally or with respect to Sylvania’s agreements, that vertical restrictions have or are likely to have a “pernicious effect on competition”…..In so holding we do not foreclose the possibility that particular applications of vertical restrictions might justify per se prohibition…..clear that departure from the rule-of-reason standard must be based upon demonstrable economic effect rather than – as in Schwinn – upon formalistic line drawing.
The formalistic line drawing related to the question of whether property had passed in the goods, your Honours.
GUMMOW J: Now, you want to introduce some rule of reason idea under section 46, do you not?
MR CATTERNS: Not really, your Honour.
GUMMOW J: Is that not the substance of what you are trying to do?
MR CATTERNS: No, your Honour. All I am trying to say is that it is a corporation ‑ ‑ ‑
GUMMOW J: It is not there. Section 46 is not a rule of reason under this section.
MR CATTERNS: No, your Honour. That is why I am careful, I hope, to distinguish these cases. All I get out of them is the proposition – they merely illustrate the proposition that it does not go without saying that a corporation cannot rationally refuse orders in a competitive market. Our submission is that is a question that may or may not be the case, and you have to prove it, and that did not happen here.
Your Honours, I will not take time going to Aspen Skiing. Your Honours, that is a case where it was held that there was anti-competitive conduct because, to put it very shortly, there was not appropriate business justification. That is at pages 608 and following. But your Honours, we do not wish to put them too high, but we say they are consistent with the evidence of the Professors I took your Honours to a minute ago.
HAYNE J: What kind of evidence could have been led if the tests you propound are right?
MR CATTERNS: A number of things, your Honour. Let us assume, couched in an admissible form, economic evidence. Secondly, our ‑ ‑ ‑
HAYNE J: That is what I do not understand, how an economist could give evidence admissibly of the kind for which you contend.
MR CATTERNS: Your Honour, it is opinion evidence where economists sometimes are held to have the relevant or acceptable amount of expertise.
HAYNE J: An opinion about likely business behaviour in a particular business?
MR CATTERNS: Yes, your Honour, they can say, “I’ve started this business and it is a business where” – they can examine ‑ ‑ ‑
HAYNE J: No doubt they do, Mr Catterns, but I am concerned about the admissibility of it. The point is not a captious point.
MR CATTERNS: No, of course not, your Honour, with respect. We put forward a justification and we say that we want to have exclusive distributors for the five or six reasons I have mentioned. An economist can say, as Professor Officer was asked to do and did not, “Well, when I look at that, that is not a rational reason for the following six reasons.” In the end, as your Honours remember, the Federal Court had power to take that sort of evidence in effect as submissions or to tender a 1(j), I think it is, and so on. So it gets in in one way or another. That has really rather been the approach lately in the Federal Court to say, “Let’s not waste time arguing about evidence. Regard these as glorified submissions”. But it is a science, your Honour.
GUMMOW J: Submissions about what? Submissions going to what issue? Submissions of fact?
MR CATTERNS: That anybody who engaged in that conduct, they could draw their graphs of supply and demand curves and so on, your Honour.
HAYNE J: But your central complaint is an absence of proof, an absence of evidence.
MR CATTERNS: Yes.
HAYNE J: My question is: what evidence?
MR CATTERNS: Including cross-examining our people to say, “That is nonsense. That reason you have given here is nonsense. In fact, retailers do not prefer to deal with a single distributor or a smaller number of suppliers. In fact, in your particular market, having specialist distributors is irrelevant. Anybody can sell to auto parts stores.” et cetera, et cetera.
Mr Pawsey from his point of view could say, as he did not, “Well, none of that mattered. So I am not saying it is easy, your Honour, and in BHP the proof was, as your Honours have seen, an inference from a single fact.
GLEESON CJ: Well, it was dealt with as a matter of inference without that fact having been found either at first instance or in the Full Court of the Federal Court. In that case the High Court drew an inference of fact.
MR CATTERNS: Yes, your Honour, from the primary fact found, which was supply to all comers of everything else. That is right, your Honour.
HAYNE J: And the difficulty with Melway is that for all practical purposes they are a single product producer. True it is you have got the Sydney product but essentially single product.
MR CATTERNS: Yes, your Honour, and we, being a little family company, think this is the most efficient way for us to distribute our business: while we deal with the maps, they deal with the distribution. Somebody could say, “Well, that is a nonsense. There is a completely different way of doing this” whatever that might be. So, your Honours, without accepting, with respect, that our case is limited to it, a lot of it is a matter of judicial reasoning and questions of proof.
GLEESON CJ: Yes.
MR CATTERNS: Yes. An additional matter would be our friends to prove what had and had not happened when we did not have market power. If they could prove, for example, that in Sydney we were taking on all comers, accepting every offer that came, that might be different, but, your Honours, it is a matter of proof. Your Honours, that concludes the question of “taking advantage”.
GLEESON CJ: You have said in relation to the matter of purpose, as I understand it, there is not much you want to argue about that.
MR CATTERNS: No, your Honour, but I do want to make four propositions. Your Honours, first, the presence of legitimate reasons is, we submit, relevant to the question of taking advantage and not confined to purpose, as I think our friends would have it, although I accept that their Honours Chief Justice Mason and Justice Wilson dealt with it in that context.
Your Honours, our short submission on purpose is this, that to say that the effect of our conduct will be to stop horizontal competition, is not the required purpose - it is to confuse purpose with effect. Your Honours, it is not right to say that is the opposite side of the coin argument. We had the purpose, we submit, of maintaining our distribution system. It had the effect, we accept, of limiting intra‑product, horizontal competition and, your Honours, we submit that their Honours erred in confusing purpose and effect in that way.
May I remind your Honours that in section 45, when the legislature wants to pick up purpose and effect, it does so, contracts that have the purpose or is likely to have the effect of lessening competition. So, your Honours, we respectfully submit their Honours erred in that. Your Honours, our learned friends and the trial judge rely upon some evidence about purpose - to save time - which I will just refer your Honours to which is pages 418 to 419.
Your Honours, in that passage Mr Godfrey was asked a question about competition. We have to face up to that on this purpose question, which is one of the reasons our submissions are short on it. But we respectfully submit that read in context, it was just another way of saying that it is an opposite side of the coin, namely, that in trying to preserve our distribution system will have the effect of affecting competition. So we respectfully submit that the court below also erred on the matter of purpose.
There are three other factual matters. First, our friends rely on an evidentiary reference at 1096 as somehow going against our submission that we did not interfere in price. That is a letter between Gordon & Gotch and Mr Pawsey to which we were not a party and, as I have submitted, his Honour Justice Merkel held that we sold at the same price. Secondly, there are two examples, Repco and K Mart. Repco in 1992 – they were relied on on purpose. They are irrelevant to taking advantage. They are just another incident of managing a distribution system and particularly in the case of the Repco example, that was an attempt to impose somebody else in between the distributor and the retailers as a further sub‑distributor and, although that is not the conduct we are brought here to answer, it is irrelevant. If it were relied on, it too would not constitute taking advantage of market power for the same reasons as the present conduct.
On the form of the injunction, I have made a brief submission about that. As his Honour Justice Heerey points out in a slightly different context, this is an example of the Court descending into the matter of business decisions. Your Honours know, as it were, the proviso to the injunction, which is at page 1318, says, “Don’t refuse supply for the prescribed purpose”. If it is held, as has been held, that the prescribed purpose is the opposite side of the coin of a purpose of maintaining our distribution system, that means we cannot refuse supply for the purpose of maintaining our distribution system.
GUMMOW J: There is some discussion about the framing of injunctions in section 46 cases, particularly by Justice Brennan in Parkwood Eggs 33 FLR 294 at 315 to 316. Is it your submission there should be no injunction at all?
MR CATTERNS: Well, your Honour, unless our friends come up with one which I cannot. We have tried hard to come up with a practical injunction. I submit not, your Honour.
GUMMOW J: If you are wrong about that and there has to be some form of injunction, is it your submission that this is an inadequate form?
MR CATTERNS: Yes, your Honour, because, in effect, it is a mandatory injunction to supply. But the problem is we cannot think of any other way of writing it that is anything other than an injunction to obey the law.
KIRBY J: But the Act contemplates that there will be injunctions, or may be injunctions, in this case. So it cannot be that you simply give up because it is difficult to write.
MR CATTERNS: Your Honour, first, if I may say, the spirit in which my learned friend and I have been trying to work out a better way of writing it ‑ ‑ ‑
GLEESON CJ: I do not know what was the actual order ultimately made in Queensland Wire but the argument was being put that what was sought there was a mandatory injunction to BHP to increase supply or increase production.
MR CATTERNS: Increase production, yes, your Honour. Perhaps one could put a proviso ‑ ‑ ‑
GLEESON CJ: What is sometimes called an unfunded mandate.
MR CATTERNS: Yes, your Honour. But, your Honours, here it is a mandatory injunction not to refuse supply.
GUMMOW J: Was the litigation eventually settled in Queensland Wire?
MR CATTERNS: I am told so, your Honour, yes.
GUMMOW J: It was remitted to work out the orders in the Full Court, the Federal Court.
MR CATTERNS: Yes.
GUMMOW J: Settlement may have intervened.
MR CATTERNS: It did, I am told, your Honour. I do not know personally.
GUMMOW J: Are there any examples of section 46 injunctions, final injunctions, as distinct from interlocutory ones in the reports. I do not suggest you ask it now but given the ample resources of everybody, someone should be able to find them.
MR CATTERNS: Your Honour, may we do that overnight?
GUMMOW J: In particular, Mr Burnside’s client should be able to.
KIRBY J: If the effect of the injunction was that you had to get those trucks ready and take all those 30,000 copies down, that would have the consequence that, in this particular case, the problem would be avoided. The Act would be upheld. The symbolism of the Act would be vindicated and you would not do it again. What is so wrong with that?
MR CATTERNS: Well, your Honour, with respect, that is a different injunction. That would be an injunction limited to the facts of the case and that may be a way around the difficulty, with respect.
KIRBY J: Well, that may be what was intended. It may not be what is expressed, that you not refuse to supply in response to the demand of the solicitor’s letter.
MR CATTERNS: Our concern, your Honour, is how do we know the purpose, especially if it is the opposite side of the coin, for whatever may come in the future in whatever factual circumstances but, with respect, the way your Honour puts it, limiting it to the facts in the case, is, with respect, at least a great improvement.
GUMMOW J: Well, there may be a new addition by now.
HAYNE J: Yes. Delivering of lots of edition 20 when we are up to about edition 30 is not going to be much chop.
MR CATTERNS: It might be like winning the lottery, your Honour.
HAYNE J: Yes.
MR CATTERNS: It might be the pie in the sky 30,000 to 50,000 that we have been dreaming of. Is that a convenient time?
GLEESON CJ: Yes. Well, that is a convenient time for you to finish your argument, yes, thank you.
MR CATTERNS: Yes, may it please the Court.
GLEESON CJ: Now, we thought it might be convenient to hear Mr Burnside before Mr Nettle just to avoid the possibility of Mr Nettle needing a reply to Mr Burnside.
MR NETTLE: If the Court pleases.
GLEESON CJ: Does that suit you? We will go to 4.30, Mr Burnside, and then we will adjourn until 9.30 in the morning if that suits everybody.
MR BURNSIDE: If the Court please, we do not propose to touch on any matters concerning evidence which have occupied some part of the day for obvious reasons. We would start by making the submission that the Commission would say there is a two‑step inquiry, not a single inquiry. The two steps are whether the person has taken advantage of their market power and whether they have done so for the proscribed purpose.
There must be, in our submission, a nexus between the impugned conduct and the fact that the person acting has got substantial market power. Otherwise, the Act would reach to such things as was postulated by Justice French where a person with substantial market power hired an arsonist to go and damage the production facility of a competitor in order to knock them out of the market. That would not be a use of market power in any possible sense and yet it would have a prohibited purpose. It would not appear to be conduct within the intended reach of section 46.
Furthermore, if it had been intended in section 46, that the impugned conduct could be independent of the fact of having market power, then one would have expected a neutral and more inclusive term such as “engage in conduct for the proscribed purpose”. Now, “engage in conduct” is a defined term in the Act. It is used frequently in the Act. It is as wide an expression to characterise activity as might be imagined. It can only be assumed that the Parliament has deliberately used a narrower and more specialised expression, one which so far as we are aware, does not appear elsewhere in the Act.
HAYNE J: Does it follow, then, from that submission, that if no such understanding is given to take advantage, otherwise unremarkable steps taken by the party having substantial market power will inevitably be caught by 46 simply because ordinary participation in the market is directed inevitably, in part, at rivals and would therefore be caught?
MR BURNSIDE: That may involve confusing purpose and effect. Of course, the effect of conduct intentionally as between competitors is to damage each other. The question is: what are the limits to a dominant player’s ability to exercise that power?
HAYNE J: But given that purpose includes mixed purposes, would any, for example, price setting by the dominant player in the market be set at a level which inevitably had the effect but part of the purpose of which would be to gather sales to itself, to the detriment of?
MR BURNSIDE: It would.
HAYNE J: Thereby everything that is done by the substantial player would potentially fall within the reach of 46?
MR BURNSIDE: There is a risk of that, although I would only qualify what your Honour has said by saying you need to look to purpose and not to effect. Effect may inform purpose. It is forensically relevant, but the real question is what is the purpose, or what is the substantial purpose? And if it is price setting, then it is easy to see depending on the level at which prices are being set. It is easy to see, for example, in predatory pricing that you may need your market power to get away with the predatory pricing for long enough to achieve the intended result, otherwise it is simply good competition practice to try and steal a march on the opposition.
In our submission, it is clearly necessary for there to be a causal nexus between the conduct and the fact of having substantial market power. The question then arises: what is the required nexus? The required nexus, in our submission, can be articulated a number of different ways but it is our submission that it simply requires that the conduct be facilitated, made easier, made commercially more agreeable or less disagreeable by virtue of having the market power.
The test on any view is not one of possibility or impossibility in an absolute sense because, as our learned friend said, that would sterilise the test. Almost any conduct is possible. It is just that it may be seen to be
suicidal. That would be a wholly unworkable test. It would sterilise section 46. The extent to which the holding of market power must facilitate the relevant conduct, in our submission, is that it must be more than de minimis but it need not be the dominant consideration which makes it possible.
So in a particular hypothetical case the question will be: given this conduct, was the effect on the person acting ameliorated by the fact that they have the substantial market power? If price cutting is the activity in question, was the fact that they have a dominant market position one of the things that made it more sustainable for them to cut their prices drastically for a long time?
GLEESON CJ: So you do not ask, to use an expression you used a little time ago: could they get away with this without their market power? You ask: would it be more difficult for them to do this but for their market power?
MR BURNSIDE: Yes, getting away with it as a colloquial way of expressing the same idea.
GLEESON CJ: It is not a bad way of doing it, though, in the context.
MR BURNSIDE: Yes.
GLEESON CJ: Is that a convenient time, Mr Burnside?
MR BURNSIDE: Yes, your Honour.
GLEESON CJ: I am asking this for the next case, how long do you think you will require?
MR BURNSIDE: I really only have, I think, three or four points to make. I doubt that I will be more than half an hour or three-quarters of an hour.
GLEESON CJ: Mr Nettle, what about you?
MR NETTLE: An hour and a half, your Honour.
GLEESON CJ: An hour and a half. We will adjourn until 9.30 and we will say the next case will be not taken before 11.15. We will adjourn until 9.30.
AT 4.31 PM THE MATTER WAS ADJOURNED
UNTIL THURSDAY, 3 AUGUST 2000
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Contract Law
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Appeal
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