Melway Publishing Pty Ltd v Robert Hicks Pty Ltd

[1999] HCATrans 464

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M62 of 1999

B e t w e e n -

MELWAY PUBLISHING PTY LTD

Applicant

and

ROBERT HICKS PTY LTD (Trading as AUTO FASHIONS AUSTRALIA)

Respondent

Application for special leave to appeal

GLEESON CJ
McHUGH J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 10 DECEMBER 1999, AT 10.00 AM

Copyright in the High Court of Australia

MR A.C. ARCHIBALD, QC:   If it please the Court, I appear with my learned friend, MR C.D. GOLVAN, for the applicant.  (instructed by Marshalls & Dent)

MR R.M. GARRATT, QC:   If it please the Court, I appear with my learned friend, MS S.L. HINCHEY, for the respondent.  (instructed by Freehill, Hollingdale & Page)

GLEESON CJ:   Yes, Mr Archibald. 

MR ARCHIBALD:   In our submission, Justice Heerey, who was in the minority below, was right to conclude, as he did, that Melway had a sound business reason for declining to supply the respondent and that that reason demonstrated an ability and justification for refusing to supply that was independent of market power.

GLEESON CJ:   What exactly was the point of departure between Justice Heerey and the majority?

MR ARCHIBALD:   There seemed to be two points of departure.  The majority seemed to have proceeded upon the footing that once it was demonstrated that there was market power, that a refusal to supply where additional sales or further sales were available necessarily, either as a matter of principle or logic or common sense, as it was put, must have involved an exercise of market power.  The predicate seemed to be, on the part of the majority, that a party lacking market power would inevitably and inexorably accept further sales and that, as we submit, is not dictated by principle, is not dictated by any concept of economic policy or principle, not dictated by business logic and was contrary to the evidence before the court.

McHUGH J:   But it was a question of fact, was it not, Mr Archibald?

MR ARCHIBALD:   We submit, no, your Honour, because the way in which the majority approached the matter elevated the proposition to a matter of necessity, incapability of there being any other justification.  Part of that process of reasoning seems to have involved the majority concluding that the existence of a sound business reasoning for declining to supply was relevant only to the existence or absence of a proscribed purpose and was incapable of applying to the issue as to whether there was or was not taking advantage.

GLEESON CJ:   But a desire to suppress competition will often be a very sound business motive.

MR ARCHIBALD:   Yes, but the business reason as identified was not to suppress competition but to protect and preserve a distribution system which the trial judge accepted was regarded by Melway as maximising sales was the secret of its business success.

McHUGH J:   That may be but the point, was it, so far as the issue of taking advantage of market power, was whether Melway was able to refuse to supply street directors to Auto Fashions because it had no other effective competitor who could supply them with street directories.  I mean, you had 85 per cent of the market share.

MR ARCHIBALD:   We had 85 per cent of the market share but the reason and justification identified was that the further sale, on the evidence, would not be incremental because it would only take away sales from the existing comprehensive distributor network and it would undermine and destroy, effectively, the existence of that distribution system. 

McHUGH J:   That point was debatable about whether or not it would only take away from the existing network.

MR ARCHIBALD:   But it would not matter whether it did or did not.  We say the evidence shows very clearly that it would have taken away, largely, if not entirely, but assuming that it did not, for the moment, the business determination to preserve and protect the distribution system which was the secret of the maximisation of sales, the pro‑competitive rather than the anti‑competitive notion, was of the foundation of the attitude that was adopted.  The majority excised that factor and consideration from their analysis of taking advantage.  That, we submit, flies in the face of both Queensland Wire with the notion of affordable commercial reasoning.  It is inconsistent with Justice French in Gerrard, looking for the causal link between the impugned conduct and the exercise of market power.  It is contrary to the decisions on section 2 of the Sherman Act, the Aspen rule,  that one will not be found to have been guilty of monopolisation if there is a valid business reason for the decision, and it is, if it matters, contrary to the view taken by the Trade Practices Commission in their background paper which was extracted in Justice Heerey’s reasons at page 51, line 5:

that it is not reasonable to expect a corporation with a substantial degree of market power to supply each and every existing or new wholesale or retail outlet if it is apparent that it would not be to its commercial advantage to do so.

And here the evidence before the court demonstrated, as we would contend, was ignored by the majority, that it would not be to the commercial advantage of Melway whether or not it possessed market power to make a sale outside its comprehensive distribution system.

McHUGH J:   Yes, but the argument that it put against you is that if Melway had had any real competition, it would not have been refusing an order for 30,000 to 40,000 directories.

MR ARCHIBALD:   That is the proposition, your Honour, but, first, there was no evidence to support that proposition.  It is approached by the majority as a matter of concept, principle, logic or common sense, not as a matter of evidence.  No economic theory or proposition to support it.  Secondly, it is in defiance of the evidence, we would submit, which demonstrated that distribution system of the kind applied by Melway when it did have market power had been in place throughout its life, including the period of time when it lacked market power, and was the source of business advantage quite independently of the existence or absence of market power.

It is also contrary to the evidence or, rather, the majority, in particular Justice Finkelstein, misunderstood the evidence that was alighted upon as supposedly justifying the position adopted by the majority.  Justice Finkelstein, at page 65, line 23, having asserted that common sense indicated that there could not have been a refusal to accept a further sale in the absence of market power, said:

The evidence points to the same conclusion.

And the only item of evidence that his Honour pointed to, and the only evidence that could be pointed to, was the evidence that if there had been an for 50,000 Melway directories for sale in Sydney, Melway would have been delighted to accept that order and understandably and undeniably so, because a sale of Melway directories rather than Sydway directories in Sydney would not be inconsistent with the distribution system, would not erode the distribution process or interfere with the comprehensive distribution system.  What is the critical integer that Justice Finkelstein omits from the proposition about the sale of 50,000 Melway products in Sydney was the item identified by the trial judge and extracted by Justice Heerey in his Honour’s reasons at page 44, line 3, namely, that such a sale would be:

to a person who would not be competing with his existing distributors.

And the trial judge plainly found that unlike that example, the only item of evidence on that point, the sale, the proposed or postulated sale to the terminated distributor, Auto Fashions, would compete with the existing distributors, would undermine the existing distribution system. 

So that his Honour appears to have misunderstood the only item of evidence or has failed to appreciate the critical integer identified by the trial judge that that sale, unlike the sale to Auto Fashions, would not interfere with the existing distribution system and, that, really, is the point of departure in that respect.

CALLINAN J:   What do you say about the passage on page 66 in Justice Sundberg’s reasons, beginning at line 70, the paragraph there, the purpose and effect were the same?

MR ARCHIBALD:   Purpose and effect probably are the same.  His Honour is there dealing with proscribed purpose.  Although we consequentially rely upon elements of proscribed purpose, our main submission in relation to special leave points is concerned with the separate and discrete “taking advantage” point and it really does emphasise, that passage, how his Honour erroneously, in our submission, has marked off from the consideration of the “taking advantage” aspects the elements of sound business reasons - - -

McHUGH J:   In this case I do not think you can really isolate the two elements one from each other, but in some ways that tends to be against you, does it not?  I mean, given Godfrey’s admission that he refused to supply Melway and that there were no reasons in his mind for refusing to supply them other than he did not want competition on the part of Auto Fashions for the customers of existing distributors.

MR ARCHIBALD:   But what he did not want to do was to make a sale that would undermine the system which maximised sales and gave a good reason, independently of any anti-competitive effect.  The one ingredient that is entirely lacking in this whole case is what is the anti-competitive effect that would flow from this conduct because what section 46 protects is competition, the process of competition.  It does not protect particular individuals who would seek to participate in the market.  Here, sales depend ultimately on what happens at the retail level.  The way in which the product is distributed to the retailers will not impact upon or affect in any way the level of retail sales.

CALLINAN J:   Well, Mr Godfrey said, and it is quoted at the foot of page 67:

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, he was really saying, as I read that, that there was competition and that there was as much saturation of the market as could be achieved.

MR ARCHIBALD:   Yes, through the distribution system and that achieved the maximum.  There was intra-brand competition, to some extent, and there was inter-brand competition because there were two other producers and suppliers of street directories in the Melbourne market. 

CALLINAN J:   The majority, really, said that the wholesale and the retail market were, effectively, one, did they not?  They said there was little division between a wholesale and a retail market in these directories.

MR ARCHIBALD:   Well, we - - -

CALLINAN J:   I think that helps you, in fact, but that it what they said.

MR ARCHIBALD:   I am not sure that I can necessarily embrace what your Honour puts though, but - - -

CALLINAN J:   Well, they did.

MR ARCHIBALD:   The material plainly shows that the installation and maintenance of a segmented distribution system in which particular distributors were given particular areas of retail activity to concentrate on was bona fide regarded by Melways as the source of its commercial success.

McHUGH J:   Just satisfy my curiosity.  Your client had 85 per cent market share and UBD and Gregory had 5 per cent.

MR ARCHIBALD:   We had 85, your Honour.

McHUGH J:   You had 85, yes.  UBD had 5 and Gregory had 5.  Where was the other 5 per cent?

MR ARCHIBALD:   The evidence, as often happens in these matters is one uses approximations.  At some point we are said to have 85 to 90, and I think the two lots of 5 build on the assumption that our share is at the higher end.

McHUGH J:   I see.

MR ARCHIBALD:   Sales move about a bit because new editions seems to trigger a surge of sales and, accordingly, market shares vary a little bit from time to time.

So, the important questions which we say arise in the matter are twofold:  first, we say, there arises the important question as to whether section 46 forces a distributor with market power to sell outside its distribution system.  The decision of the majority effectively compel such a sale notwithstanding the presence, we would say, of sound business reasons.  And the second point which we say arises is whether the existence of a sound business reason is a matter which goes only to proscribe purpose or whether, as we contend, is conformable with authority.  That consideration also goes to the question of taking advantage.  So, does the Aspen rule apply in Australia?

GLEESON CJ:   Justice Callinan directed your attention to line 70 on page 66.  What do you say about what appears in paragraph 71 on page 66 and following on page 67?

MR ARCHIBALD:   All of that evidence from Mr Godfrey shows a concern that the putative activity of Auto Fashions would involve endeavours by Auto Fashions to effect sales which were at odds with the maintenance of the well-established and successful distribution system.  He was anxious that there should not be competition afforded by Auto Fashions with that distribution system plainly conveying, as all the evidence showed, that that competition was insidious to the effective maintenance of the distribution system which was the source of success.  So, it is not a concern with competition in an anti-competitive sense but a concern with the erosion of the business methodology which was the author of that businesses success.

If the proposition accepted by the majority is sound law, it must mean that any business which has a substantial degree of market power and uses a distribution system is obliged to sell to all comers. 

GLEESON CJ:   Queensland Wire went further.  Queensland Wire held that they were actually obliged to manufacture more product.  When it is said in these judgments that there was no justification offered by BHP for what they did in Queensland Wire, they said, “We sell all the product we produce ourselves.”

MR ARCHIBALD:   Queensland Wire, of course, involved leveraging, involving the anti-competitive activity of leveraging from one market into another.  The compulsion there was in the context where there was no business justification or reason advanced nor capable of being advanced.

GLEESON CJ:   Well, they did not need to.  They said, “We sell all the product we make.  Are you suggesting you can make us manufacture more product?”  Unfortunately, that argument did not succeed.

MR ARCHIBALD:   But the level of sale or the way in which the “Y-bar” produced was treated, of course, was in marked contradistinction with the

other products that were produced in which manufacturing levels were referable to the demand and the demand was referable to - - -

GLEESON CJ:   But that case is a very strong example of the fact that because the company had market power it was forced to behave in a certain way, contrary to its business interests.

MR ARCHIBALD:   And absent any legitimate business justification for taking the discriminatory stance that it took in respect of Y-bar compared to all its other steel products.  While the base principle in Queensland Wire is not controverted, the real difficulty in this case and many other of the streams of section 46 cases coming through the system is comprehending and understanding how that base principle is, in fact, to be implemented in the particular cases that emerge.  Here we have a distribution system case and we say the majority has misapprehended what Queensland Wire stays for and we say it has failed to embrace and understand the dichotomy - although they are related concepts - failed to understand the dichotomy between taking advantage and proscribed purpose.

So we say at the level of general importance, there are the two issues.  We say in the particular circumstances of this case, the administration of justice calls for the intervention of the Court to prevent the case going on a factual basis as adopted by the majority which is at odds with the only evidence that was in fact before the court, the majority having depended or founded their decisions on notions of what their Honours concede to be rational behaviour or common sense or logic, not upon the pragmatic and powerful business considerations which the evidence disclosed.

If the Court pleases, in our submission, special leave should be granted.

GLEESON CJ:   Thank you, Mr Archibald.  Yes, Mr Garratt.

MR GARRATT:   If the Court please.  The issue which divided Justice Heerey from Justices Sundberg and Finkelstein was how they applied Queensland Wire to the facts of the case.  There is not to be found in the majority judgments or in the judgment of the trial judge the points of public importance which my learned friend extracts.  My learned friend says, “Does section 46 force a distributor with market power to sell outside its distribution system?”  None of the judges below has said that.  They have said, “What does ‘taking advantage’ mean?”  The learning of Queensland Wire is that it means, “Could this company in a competitive market have behaved the same way?”  They then turn to the evidence here and say, “Well, if we imagine a competitive market, make that hypothesis, could an order for 30,000 directories, on the evidence of this case, have been refused?”, and they go to the evidence.  The evidence includes the evidence that such a sale would have been welcomed with delight.  The only reason for the refusal of supply in this case was to prevent competition.  So, in that factual context, they resolve, as a question of fact, whether Melway here took advantage of its market power.

The other question identified as of public importance, “Does a sound business reason go only to proscribed purpose?”, is again not a point which one will find anywhere discussed in that way at trial level or in either of the majority judgments.  It simply does not arise.  What we have here is the learning of the High Court expressed, essentially unanimously in Queensland Wire, although in different judgments, applied as a question of fact, making the right hypothesis, in the circumstances of this case.

Where Justice Heerey departed was that his Honour in fact declined to make the required hypothesis.  One sees that in his Honour’s reasons at page 48 of the application book, at line 17, where his Honour says:

One cannot hypothesise the Melway directory being obtained from anyone but Melway.

He refuses to make the hypothesis required.  He then goes on to say:

Moreover, the directories which Melway refused to supply to Auto Fashions were not in reality additional sales.

So, he does two things.  First, he will not make the hypothesis in the terms which need to be made and then he imposes a further hurdle which is, “You’ve got to be able to say as well that these refused sales would have been additional sales.”  Well, I have dealt with the question as to the hypothesis.  As to the question of it being necessarily a rejection of additional sales, that simply is not part of what Queensland Wire teaches.  Indeed, in Queensland Wire, on its facts, BHP, in selling to Queensland Wire, would not have been, in all likelihood, foregoing additional sales.  The fence post that Queensland Wire wished to sell was in direct competition with the subsidiary and, presumably, sales which could only have been made through the subsidiary would thereafter have been made by Queensland Wire.  There is no treatment in the High Court of a requirement that the refusal be of sales which would be additional sales.

That is the point of departure between Justice Heerey and Justices Sundberg and Finkelstein and, indeed, Justice Merkel at trial, on that question of fact:  how one, on the facts of this case, applies the learning of Queensland Wire.

It is interesting that at trial the applicant’s economist, Professor Norman, did not give evidence that in a competitive market

Melway would not have accepted an order for 30,000 directories.  As the trial judge observed in his reasons at application book page 28, line 23, the conclusions reached by the trial judge, affirmed by Justices Finkelstein and Sundberg, were arrived at on a basis substantially supported by both experts.  Perhaps I should take the Court to that page, page 28, line 23.  The Court will see, in fact, beginning at about line 21:

Thus, I found that the conclusions at which I have arrived in relation to the significant economic issues in the present case concerning the market, market power and the taking advantage of market power, in substance, were supported by the views expressed by each of the experts. 

So, what one has is essentially a question of fact resolved one way by the trial judge, resolved the same way by the majority judges on appeal, not involving these questions of public importance laterly extracted; not debated in those terms; not the subject of submissions in those terms.  What has been asked for in relation to this Court is that this Court should give guidance, so it is said in the summary of argument, to other companies with other distribution systems, where those companies have market power, as to the implication of section 46 for them.

That is not a proper role, in our submission, for this Court to undertake, to give, in effect, advice on hypothetical facts of other distribution systems.  The question here is, if I may say, whether this case demonstrates an issue of public importance in which a grant of special leave should be made.  The issues now raised as public importance issues have not been argued as such at trial, have been dealt with as questions of fact at trial, dealt with on appeal as questions of fact.  For those reasons, this is not a case for which special leave ought be granted.  If the Court pleases.

GLEESON CJ:   Thank you, Mr Garratt.  Yes, Mr Archibald.

MR ARCHIBALD:   We identified two matters as raising questions of importance.  My friend says they were not raised below.  The first question has been consistently raised, raised at trial and on appeal.  That it was raised at trial is evident from page 25, line 8, where two points are identified.  The first was the argument that section 46 operates or is said to operate, if the respondent is right, to:

prevent a corporation from appointing its own exclusive distributors and establishing its own distributorship system to the exclusion of others –

and the second point, to:

require a supplier to sell to all who can buy its products.

So that issue has been at the heart of the matter throughout the litigation.  As to the second point we identified, we say it arises squarely from Justice Sundberg’s reasons at application book, page 57, line 22, where his Honour said:

their Honours –

referring to Queensland Wire –

attached importance to the absence of any attempt by BHP to justify its stand only in connection with the “purpose” limb, and not the “taking advantage” limb, of s 46…..No other member of the Court referred to the absence of justification.

Justice Finkelstein, on the same point, treated the question of legitimate business justification as one confined to the proscribed purpose elements.  His Honour considered “taking advantage” from pages 64 to 65.  He commenced to consider “proscribed purpose” at page 66, and his sole consideration of “legitimate business purpose” is in the context of the “proscribed purpose” issue, paragraph 75, page 69, lines 1 to 8.  So, we say those two issues are there and were argued and their Honours, in the court below, have necessarily addressed those matters and their decisions are based upon them.

My friend referred to application book, page 28, lines 23 to 24, as to the position of the experts.  What his Honour was dealing with there was the economic issue, economic principles.  We say that the issues that we are addressing are not economic principles, they are identifying matters of business decision and legitimate business justification.  So, we say that the issues are there.  They are embodied both in the decision of the trial judge, in the court below and they are raised and fall properly for determination and should command the attention of this Court.  If the Court pleases.

GLEESON CJ:   Thank you, Mr Archibald.  We will adjourn for a short time to consider the course we will take.

AT 10.29 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.31 AM:

GLEESON CJ:   In this matter there will be a grant of special leave to appeal.

We will adjourn for a moment to reconstitute.

AT 10.31 AM THE MATTER WAS CONCLUDED