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Anti-competitive arrangements or understandings Do you have a deal? Carolyn Oddie & Leah McKeown Allens Arthur Robinson 27 February 2003 Trade Practices in 2003 and a spotlight on the Dawson Inquiry Anti-competitive arrangements or understandings - do you have a deal? Carolyn Oddie, Partner and Leah McKeown, Lawyer Allens Arthur Robinson 27 February 2003

In practice, clients often negotiate the basic elements of a commercial agreement and may even go so far as to conclude a memorandum of understanding, before they speak to their lawyers. As a result, it is quite common for a lawyer to be asked to vet and formally document the terms of an 'in principle' agreement between commercial parties. When doing so, they need to be conscious of the fact that if the agreement contains a provision that is in breach of the Trade Practices Act 1974 (Cth) (TPA), it may be unenforceable, or expose the parties to penalties. Commercial deals, particularly those involving competitors or potential competitors, need to be carefully vetted, to ensure that they don't involve:

• an exclusionary provision; • an agreement that has the purpose, effect or likely effect of substantially lessening competition; • price pricing; or • full line or third line forcing. Lawyers need to be particularly vigilant when considering the potential application of the per se provisions in the TPA: exclusionary provisions (section 4D), price fixing (section 45A) and third line forcing (section 47(6) and (7)), as such conduct is prohibited regardless of its effect on competition. Although the recent Dawson Review of the TPA has created a great deal of debate about the future of these three per se prohibitions, as the law currently stands, it is critical that lawyers consider their implications when vetting agreements - even agreements which do not, on their face, appear anti-competitive. Joint ventures are increasingly common commercial vehicles, particularly in innovative and developing areas of the economy. In addition, because they often involve competitor collaboration, they often raise the kinds of competitive issues that lawyers need to be alert to when vetting commercial deals. We will be using the following hypothetical scenario to illustrate these issues:

PaperCorp and GlueCorp are two growing Australian companies. PaperCorp manufactures a range of paper and cardboard products and GlueCorp manufactures adhesives. They want to create an unincorporated joint venture (StickyCo) to develop a new self-adhesive notepad to compete with 3M, who manufacture the Post-it Note.

qems S0111063589v3 203297041 6.3.2003 Page 2 1. Joint ventures and competitor collaborations

1.1 What is a joint venture? The concept of a joint venture or competitor collaboration encompasses a wide range of arrangements. For example, joint ventures may be purely contractual in nature (eg: information exchange) or may involve the joint operation of existing assets. Alternatively, a joint venture may involve the establishment of a separate legal entity that operates as a new entrant in a particular market. The TPA recognises two forms of joint ventures - incorporated and unincorporated. We will be primarily concerned with the kinds of issues that often arise in the context of unincorporated joint ventures, which are defined in section 4J as activities in trade or commerce that are carried on jointly by two or more persons, whether or not in partnership. This definition is based on the traditional model of a resources-based joint venture, in which the parties pool resources to jointly produce and supply a product. Newly emerging forms of collaboration will not necessarily involve either a pooling of resources or a joint supply, however, like traditional joint venture arrangements, they generally make a pro- competitive contribution to the Australian economy. Indeed, from a commercial perspective, these arrangements will often be the only vehicle through which new products or services can be developed, or companies can expand into new markets.

1.2 Competitive impact: the regulator’s perspective Assessing the competitive effect of a joint venture will not necessarily be simple. Often it is parties who have already made an investment and are established in a market who are alert to the opportunities for new products and developments. This quite often means that joint ventures into new areas of endeavour involve competitor collaboration. While the ACCC recognises that joint ventures are attractive vehicles for commercial parties, particularly in “highly dynamic industries such as energy, health, information technology and financial services”, 1 it is conscious of the competitive risk involved in such competitor collaboration. ACCC Chairman, Allan Fels has stated:

“Collaborating firms may use joint ventures to diminish competition, increase price, reduce product quality, or reduce innovation incentives”.2 These competitive concerns are compounded where (as is commonly the case) the parties feel that it is important to the success of the venture for certain restraints to be imposed, for instance, for each of the shareholders to provide assurances that they will not compete against the joint venture. However, even where there are significant restrictions involved, joint ventures can be pro-competitive, particularly where, but for the joint venture, the activity would not be undertaken in the first place. Sometimes to avoid breaching the TPA,

1 Mark Pearson, Joint ventures and assessment under the TPA, ACCC Journal No 32

2 Allan Fels, Collaborative Commerce, 21 August 2002 qems S0111063589v3 203297041 6.3.2003 Page 3 even in these circumstances, it may be necessary to apply for authorisation of the joint venture. 3

2. Joint ventures and exclusionary provisions4

2.1 What is an exclusionary provision? An exclusionary provision is defined in section 4D(1) of the TPA as a provision of a contract, arrangement or understanding, between persons, any two or more of whom are competitive with each other, which has the purpose of preventing, restricting or limiting supply to or acquisition from particular persons or classes of persons by all or any of the parties to the contract, arrangement or understanding. Exclusionary provisions are prohibited per se, which means that they breach the TPA regardless of whether they have any effect on competition. A number of recent decisions in this area, including South Sydney Rugby League Football Club Ltd v News Ltd (Souths)5 and Rural Press v Australian Competition and Consumer Commission (Rural Press)6 have left the law in relation to exclusionary provisions in a state of uncertainty. This is exacerbated by the fact that previous decisions, including ASX Operations Pty Ltd v Pont Data (Pont Data)7 had also interpreted the provision broadly. As the law currently stands, if the parties to an arrangement or understanding are competitors or potential competitors, and they want to impose a restriction on acquisition or supply (like the kind of non-compete clauses that are common in joint venture agreements) they need to be alert to two key issues:

(a) whether the understanding has the relevant purpose of preventing, restricting or limiting supply; and (b) whether that purpose is directed at a particular class.

These issues are discussed in detail below.

2.2 Restrictions in joint venture agreements There are a range of legitimate commercial reasons why parties may want to include restrictions in joint venture agreements which potentially amount to exclusionary provisions (in the current analysis).

3 Pursuant to s88 of the TPA, the ACCC can authorise corporations to enter into contrac ts, even if they involve anti- competitive conduct such as exclusionary provisions, arrangements that substantially lessen competition or involve exclusive dealing, if it considers that there are public benefits which outweigh the anti-competitive detriment. Authorisation may only be granted after an assessment that involves public consultation. 4 This section is based on the following article published by the authors in the Competition and Consumer Law Journal: "Joint Ventures and Exclusionary Provisions: Carolyn Oddie and Leah McKeown, "Anti-competitive purpose or unintended effects?" (2002) 10 CCLJ 192

5 (2001) 181 ALR 188 6 [2002] FCAFC 213

7 (1990) 97 ALR 513 qems S0111063589v3 203297041 6.3.2003 Page 4 For instance, when competitors form a joint venture, to develop a new product, or enter into a new region, they often find that it is necessary for each of the shareholders to provide assurances that they will not compete against the joint venture to:

• allow the joint venture to build up plant and facilities, trade secrets, customer lists and competitive initiatives, so that it is able to compete vigorously; or

• create sufficient confidence in the joint venture to induce the investment required for its establishment from the parties themselves and other third parties.

Alternatively, parties sometimes find it necessary to agree not to supply goods or services produced by the joint venture to a particular person because, for example, that person: • has not invested in the joint venture facility; • has not agreed to pay a price the joint venturers regarded as adequate; or • following a competitive tender for the sale of the joint venture’s output in which the particular person was unsuccessful.

2.3 What are the key 4D issues for joint ventures? As the recent case law discussed in detail below illustrates, on a strict application of section 4D of the TPA, non-compete clauses may amount to exclusionary provisions whenever it can be shown that:

• the parties were competitive with each other at the relevant time (or would have been competitive with each other, but for the restriction);

• the non-compete clause had the relevant purpose of preventing, restricting or limiting the supply of goods or services, or the acquisition of goods or services; and

• that purpose was directed at “particular persons” or “classes of persons”.

2.4 Are the parties competitive? Determining whether a joint venture arrangement meets the first criteria for an exclusionary provision, that is, whether the parties are competitive with each other will not always be clear cut. Section 4D(2) of the TPA deems firms to be competitive with each other if but for the provision, they would have been competitive with each other or would have been likely to be competitive with each other in relation to the supply or acquisition of all or any of the goods or services to which the relevant provision relates. In Eastern Express Pty Ltd v General Newspapers Pty Ltd,8 the full Federal Court held that this meant that the area of competition had to coincide with the area of contractual restriction. The relevant time for determining whether the parties are competitive with each other is the time at which they enter into the contract, arrangement or understanding. However, where it is alleged that parties have attempted to enter into a contract, arrangement or understanding containing an exclusionary provision, the full Federal Court in ACCC v Visy have confirmed that the relevant time is the time of the offer. 9

8 (1991) ATPR 41-128

9 (2001) ATPR 41-835 qems S0111063589v3 203297041 6.3.2003 Page 5 As the law currently stands, it may be possible to bring joint venture parties within the terms of section 4D(2) merely by showing that the parties operated in the same industry, and sold similar goods or services, regardless of whether they would have been able to embark on the joint venture project independently.

3. Purpose

3.1 South Sydney Rugby League Football Club Ltd v News Ltd This case arose in the context of a split in the NSW Rugby League competition, following which, News Ltd (News) sponsored a rival competition to that conducted by the Australian Rugby League (ARL), known as “Super League”. The existence of the 2 competitions had an adverse effect on both the participants and the game generally. As a result, in December 1997, the ARL and News entered into an Understanding to create a unified National Rugby League (NRL) competition, in which applicants would be granted licences to participate provided that they satisfied the licence criteria, and only 14 teams would be licensed to play in the year 2000. In 2000, there were 15 teams who applied, and following its exclusion from the competition, South Sydney District Rugby League Football Club brought proceedings against the ARL, NRL and News, alleging among other things that the “14 team term” was an exclusionary provision.

At first instance, Finn J found that Souths had failed to prove that the respondents had the purpose of preventing, restricting or limiting the supply of goods or services, or the acquisition of goods or services when they agreed to a “14 team term”. He stated that: “There is a significant difference between being merely an unsuccessful contender for selection in a process not designed to preordain that particular outcome and being a target for exclusion in a selection process designed to that end. The latter, but not the former, if otherwise the product of a section 4D understanding, is capable of being found to be an exclusionary provision.”10 Finn J held that in this case, the purpose of the “14 team term” was to achieve a range of objectives, in particular, to create a financially viable national competition.

However, on appeal before the full Federal Court, both Moore and Merkel JJ in the majority, concluded that the ARL, NRL and News had been motivated by a proscribed purpose when they agreed on the “14 team term”. However, they reached this conclusion on the basis of findings of two entirely different (and inconsistent) purposes. In perhaps the most worrying judgement from the perspective of joint ventures, Merkel J held that although the ultimate purpose of the term (the end) was the achievement of a viable and sustainable national competition, its immediate purpose (the means) was to exclude any clubs in excess of the 14 selected to participate in the 2000 competition11. With respect, this seems to confuse the purpose of the provision with its effect.

10 (2000) 177 ALR 611 at 675

11 above note 2 at 254 qems S0111063589v3 203297041 6.3.2003 Page 6 Following an entirely different line of reasoning, Moore J agreed that the ’14-team term’ had been adopted for a relevant purpose. However, he adopted very different reasoning, arguing that supply could be restricted or limited in both a qualitative, as well as a quantitative sense, and stated that in this case, supply had been restricted in a qualitative sense because:

“It may be accepted that under the 19 December Understanding any club, including Souths, would, at the least, be able to continue to provide a team by merging or forming a joint venture. However the provision of a team of this character was not the provision of the same services that had been provided, and correspondingly acquired, before the adoption and implementation of the fourteen team term. It would not be a team of that club but a hybrid team of two or more clubs.”12

3.2 Rural Press v Australian Competition and Consumer Commission The recent decision of the full Federal Court in Rural Press on the issue of purpose is encouraging for joint venture parties insofar as it confirms the approach of Finn J at first instance in Souths, and Heerey J in the minority on appeal. This case concerned the actions of Rural Press and Bridge Printing, owners of the Murray Valley Standard, in pressuring Waikerie Printing, owner of The River News , to stay out of Bridge Printing’s territory. Waikerie Printing had begun to source advertising and news in Mannum, an area normally serviced by the Standard. Following telephone calls, discussions, correspondence and threats by Rural Press to start publishing a new rival newspaper in the Riverland in direct competition with the River News , Waikerie Printing agreed not to service Mannum and revert to its prime circulation area, which stopped 40km north of the town. In considering whether this amounted to an exclusionary provision, the Full Federal Court recognised that the approach adopted by Merkel J in Souths focused on the effect of the provision rather than its purpose, and in declining to follow this reasoning, supported the dissenting minority views of Heerey J. The Full Federal Court stated that:

“It is of course, obvious that the provision for geographic zoning would limit the ability of persons in the area to have access to a second local newspaper. But that is the effect of the arrangement rather than its purpose. The potential customers suffered what, in other contexts, is called collateral damage.”13

3.3 High Court clarification? Souths is currently on appeal to the High Court. Hopefully the High Court will not follow the views of either Merkel or Moore JJ on purpose, however comments made during the course of the recent High Court hearing about an “objective purpose” mean that it is not at all clear what direction the High Court will take.

At the High Court hearing, there was some discussion of the difficulties involved in searching for the “subjective motivations, wishes, desires of corporate executives” and the need to “look at the object, rather than what was going through the minds, at a particular

12 above note 2 at 231

13 above note 3 at 37 qems S0111063589v3 203297041 6.3.2003 Page 7 time, of particular executives”. 14 In addition, Gleeson CJ commented that in tax cases, he thought the Privy Council had said “you find the purpose of a contract in its effect”.15 If the High Court were to decide that “purpose” as it applies in section 4D should be assessed objectively, there will be a real risk that courts will look predominantly at the effect of the arrangement in making a decision about purpose, and the potential application of the law on exclusionary provisions may be further expanded.

3.4 In summary In the majority in Souths, Merkel J made a critical differentiation between the ultimate purpose of an provision (the ends) and the immediate purpose of a provision (the means). Based on this reasoning, he was able to conclude that although the ultimate purpose was to create a viable competition, the immediate purpose was to restrict supply within the meaning of section 4D. This reasoning raises serious issues for parties wanting to include restrictions in a joint venture arrangement. Strictly applied, it may mean that provisions which are entered into with the primary (or end) aim of sustaining a viable joint venture may also involve what could be regarded as an immediate exclusionary effect (the means in Merkel J’s reasoning), which may be interpreted as providing the relevant purpose.

4. Classes of persons

The requirement in s4D that a restriction be directed at “particular persons” or “classes of persons” has also caused significant difficulties for lawyers advising on particular contractual arrangements, because of the broad way in which it has been interpreted.

This broad interpretation stems from the decision of the Full Federal Court in Pont Data, where the Court held that the class of persons was “identified…by the characteristic that they may not be supplied with the information in question, unless they accept and become bound by the restraints imposed by the dynamic agreement. Such persons come within a particular category or description defined by a collective formula….They ordinarily would be treated as constituting a particular class, even though at any one time the identity of all the members of the class might not readily be ascertainable. What distinguishes the class and makes it particular is that its members are objects of an anti-competitive purpose, with which section 4D is concerned.”16

As a result of this reasoning in Pont Data, there has been considerable uncertainty as to whether a “particular class of persons” may include a class of persons who can be defined by the fact of exclusion only. Although some subsequent decisions have sought to limit the application of Pont Data, there has been little consistency, and lawyers called upon to assess whether a particular arrangement may involve an exclusionary provision

14 News Ltd v South Sydney District Rugby League Football Club Ltd, S34/2002, 6 August 2002, High Court transcript at 13 15 above note 12 at 14

16 above note 4 at 540 qems S0111063589v3 203297041 6.3.2003 Page 8 are often forced to take a conservative view wherever criteria for supply or acquisition are agreed.

4.1 South Sydney Rugby League Football Club Ltd v News Ltd In Souths, Heerey J, who delivered the minority judgment, was critical of Pont Data, and stated:

“A boycott necessarily involves a target, a person or persons “aimed at specifically” (quoting News). It is hard to see how this notion can apply to a class not defined in advance but only defined in an essential respect by the fact of exclusion, if and when it happens…if a particular class can be defined by the fact of exclusion, in effect the “class” becomes the whole world, because anybody has the potential to be excluded… So there has to be an identified and defined class of persons in the minds of the alleged contravenors at the time the exclusionary provision is included in the contract etc. The class must then be aimed at specifically”.17

In the majority, Merkel J agreed that the particular class which was the subject of the exclusionary purpose had to have “a distinguishing or identifying characteristic in addition to the mere fact of exclusion”. 18 However, in applying this he found that the distinguishing characteristic was that the top level rugby league clubs eligible to participate by meeting the basic criteria, but which did not achieve the requisite level in the selection criteria, would not be supplied with the services.19 Moore J held that the requirement, that the provision target particular “persons” or “classes of persons”, meant that:

“[T]he provision would be an exclusionary provision if it was to operate on identified or identifiable persons but it would not be if it was to operate only on the generality of persons.”20 The inconsistency between the judgments of Merkel and Moore JJ is again illustrated by the fact that they each concluded that different “persons” or “classes of persons” had been targeted, with Moore J finding that the restriction had operated with respect to “particular persons”, being all of the clubs who had fielded a team in either of the two 1997 competitions.

4.2 Rural Press v Australian Competition and Consumer Commission The Full Federal Court in Rural Press recently supported the minority view of Heerey J (and Finn J at first instance) in Souths on the issue of classes of persons, stating: “For the class to have significance for section 4D purposes it must be the intended object of the discrimination envisaged by the section. If it is not so ‘aimed at’ specifically…the members of the alleged class do not constitute a ‘particular class’ for section 4D(1)

17 above note 2 at 207-208

18 above note 2 at 259 19 above note 2 at 259

20 above note 2 at 234 qems S0111063589v3 203297041 6.3.2003 Page 9 purposes though they may otherwise be said to constitute a class because they happen to share some differentiating characteristic be this the fact of exclusion of otherwise.”21

4.3 High Court clarification? Certainly, the conclusion which may be reached from a reading of Pont Data, that a class can be defined by the mere fact of exclusion, appears too broad. The judgement of Heerey J must be correct in its statement that if a class of persons is defined by exclusion alone, the ‘class’ in effect becomes the whole world. However, unless this issue is clarified by the High Court in Souths, it is very difficult to be certain that any restriction in a joint venture agreement between two competitors or potential competitors that specifies some criteria will not be taken to affect a ‘class’ of persons.

4.4 In summary In the context of many joint ventures, it will be arguable that the restriction is not an exclusionary provision because it is not directed at any particular persons or classes of persons. For instance, it could be argued that a provision which prevents the parties to a joint venture agreement from supplying the joint venture product outside the joint venture restricts supply to the whole world, rather than any particular class of persons. In Pont Data however, the full Federal Court suggested that a "class of persons" could be defined by the mere fact of exclusion. As Heerey J who delivered the minority judgment in Souths pointed out, if a broad interpretation of “class” is adopted, and it is accepted that a class of persons can be defined by exclusion alone, the consequence, in the context of joint ventures would be that: “competitors who enter into a partnership and agree to provide a lesser range of goods or services (or deal with a narrower range of customers) will have contravened section 45(2). Nothing in the stated object of the TPA (“to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection”) would suggest such a startling result.”22

4.5 StickyCo - Why is this broad interpretation such a problem for joint ventures?

Consider the position if PaperCorp and GlueCorp were each already manufacturing self- adhesive notepads, under the names P-Notes and G-Notes. However, neither of these products were able to compete successfully with the Post-it note, because of the competitive strength of the Post-it product and the fact that PaperCorp specialised in paper and GlueCorp specialised in glue. PaperCorp and GlueCorp decide to join forces to create StickyCo to jointly manufacture a superior replacement product, using new technology, and to include a non-compete clause to prevent either party from manufacturing or selling P- Notes, G-Notes or any other competing products outside the joint venture for the term of the joint venture.

21 above note 3 at 35

22 above note 2 at 208 qems S0111063589v3 203297041 6.3.2003 Page 10 On these facts, there would be a strong argument that, but for the provision, the parties would have been likely to be in competition with each other, as they were manufacturing relevantly competitive products, at the time they entered into the provision. Further, the area of competition appears to coincide with the area of restriction.

Prior to Souths it could have been concluded that this arrangement did not amount to an exclusionary provision on the basis that the purpose of the non-compete clause was to maximise the returns to the joint venture, and its chances of commercial success, rather than to limit or restrict supply as required by section 4D, and that it was not directed at particular persons. However, applying the reasoning in Souths (especially the approach adopted by Merkel J), it could be argued that the immediate purpose of this provision is to prevent, restrict or limit supply to a class of persons comprising customers of both GlueCorp and PaperCorp, as they will only be able to purchase the relevant products through StickyCo. This class may be sufficiently particular to be a “class of persons” for the purposes of section 4D.

Submissions to the Dawson review of the TPA have confirmed that business consider the current interpretation of the law on exclusionary provisions problematic. For instance, the Australian Bankers’ Association considered the potential application of the reasoning of Merkel J in relation to the credit card interchange arrangements between Visa, MasterCard and Bankcard (“the Schemes”), and stated: “[I]t might be argued that even if the ultimate purpose of the Schemes’ membership criteria is to protect the financial security of each Scheme, the membership criteria also have the immediate purpose of excluding a particular class of persons. ABA considers that there are strong legal arguments that could be successfully made in response to such an allegation. However, Justice Merkel’s analysis has created uncertainty regarding the circumstances in which joint venturers, who are also competitors, are entitled to limit the parties who may participate in their joint ventures.”23

5. Anti-competitive arrangements or understandings

Even if you have established that none of the provisions in a proposed agreement amount to an exclusionary provision, it is still important to ensure that none of the provisions contravene the general prohibition in s45 on contracts, arrangements or understandings that have the purpose, effect or likely effect of substantially lessening competition. To the extent that a joint venture involves co-operation between competitors, or people who could potentially be competitors, it is necessary to consider whether making or giving effect to the agreement may be construed as having an anti-competitive purpose, effect or likely effect.

23 Australian Bankers’ Association, Submission to the Review of the Trade Practices TPA (Dawson Review), July 2002, at 50 qems S0111063589v3 203297041 6.3.2003 Page 11 5.1 PaperCorp and GlueCorp – what is the competitive effect? In looking at the effect or likely effect of the agreement on competition, there are a number of factors that would need to be taken into account, such as:

• the degree of market concentration; • the height of barriers to entry, that is, the ease with which new firms may enter and secure a viable market;

• the extent to which the products of the industry are characterised by extreme product differentiation and sales promotion; • the extent of vertical integration; • the nature of any formal, stable and fundamental arrangements between firms that restrict their ability to function as independent entities (the QCMA factors). 24

However, there are some pointers that suggest that the agreement between PaperCorp and GlueCorp may not substantially lessen competition. PaperCorp and GlueCorp are still exposed to competition from other manufacturers of substitutable products, like Post-it notes. Moreover, the fact that PaperCorp and GlueCorp need to combine resources to be able to manufacture a product that will successfully compete with the Post-it note, indicates that the agreement is in fact creating a strong competitor to balance the competitive strength of the Post-it note, and improve competition in the market.

6. Price fixing

Even if, after an analysis of the markets affected by the joint venture, you conclude that the agreement does not have the purpose, effect or likely effect of substantially lessening competition, it is important to consider whether it may nonetheless be deemed to have that purpose of effect by virtue of the fact that it falls within the per se prohibition on price fixing in section 45A of the TPA.

Section 45A of the TPA means that a provision of an agreement that has the purpose, effect or likely effect of fixing, controlling or maintaining the price of goods or services supplied or acquired by parties to the agreement are deemed to substantially lessen competition, and to breach section 45 of the TPA.

6.1 What is price fixing? (a) Vitamins Cartel: Local implementation of international arrangements The type of conduct that is classically characterised as price fixing is illustrated by the recent Vitamins Cartel proceedings, in which record penalties of $26 million were imposed against three animal vitamin suppliers. Proceedings were brought by the ACCC after an investigation by the US Justice Department exposed an international vitamin cartel. The conduct of the Australian companies was essentially a manifestation of the market sharing and price fixing arrangements entered into by their overseas parent companies about:

24 Queensland Co-op Milling Assn Ltd and Defiance Holdings Ltd (1976) 8 ALR 481 at 516; ATPR 40-012 at 17,246. qems S0111063589v3 203297041 6.3.2003 Page 12 • the prices at which they would sell animal vitamins; and • the method and terms upon which they would tender for vitamin supply contracts. In this case, the conduct was considered particularly serious because it involved local companies giving effect to global arrangements made by multi-national corporate groups. Evidence given by a senior manager of the Australian subsidiary demonstrates the way to which Australian markets were affected by these international arrangements:

"I was directed by Mr. Kevin Hall (the Asia-Pacific Manager) as to the prices to quote to particular customers. Mr Hall provided these directives at least on a quarterly basis. Sometimes he would telephone me from France and later Singapore…Mr Hall told me that the purpose of his directions was to either secure or forfeit business as necessary for Rhone-Poulenc Animal Nutrition SA to meet its globally allocated market share of vitamins sales in Australia…

As a new employee at Rhone-Poulenc Animal Nutrition Pty Ltd I was eager to increase the company's market share...To this end, I secured one of Uncle Ben's yearly contracts. This put Rhone-Poulenc Animal Nutrition Pty Ltd over its target sales volume…Mr Hall telephoned me from Singapore and told me that I had upset the regional management and they required a meeting in Australia…At that meeting I was castigated for exceeding market share. It was agreed that market allocation would be adhered to in the future and my conduct would not be repeated. 25 Although this is an extreme example, it highlights the fact that local subsidiaries cannot simply carry out the instructions of their overseas parent companies without considering whether the conduct in Australia would involve a breach of the TPA.

(b) Fire sprinklers – what level of involvement is sufficient? In ACCC v Tyco Australia Pty Ltd (2000) ATPR 41-745, the ACCC brought proceedings alleging that a long-standing anti-competitive arrangement existed in the markets for the installation of fire protection systems in and around Brisbane. The conduct, which was described by Justice Drummond as “highly organised and deliberate” involved attendance at meetings between a large number of former competitors at which complex arrangements for the allocation of contracts and cover pricing to hide collusive tendering arrangements were agreed. The ACCC successfully brought proceedings against 18 companies and 38 individuals, and penalties totalling $5 million were imposed on the 6 principal respondents, including penalties of $300,000 against the executives involved. In a series of further decisions, penalties totalling a further $6 million were imposed on other respondents.

This case is significant due to both the number of respondents and the fact that many of the individual respondents were only involved in a limited way. To some extent, the Court was willing to take into account both their capacity to pay and their degree of involvement in the cartel in determining penalties. With respect to one individual respondent, the Court imposed a penalty lower than that imposed on other respondents in comparable senior

25 Bray v Hoffmann LaRoche Ltd (2002) ATPR 41-865 at 44,832 qems S0111063589v3 203297041 6.3.2003 Page 13 positions after having regard to the fact that he was a “most reluctant participant in the cartel activities” and “felt a degree of what might be called pressure from his national superiors”.26 However, ensuring that penalties imposed on respondents reflected their degree of culpability was a key consideration.

(c) ACCC v CC(NSW)– is setting an input price enough?

In ACCC v CC(NSW) Pty Ltd (No 8)27, members of the Australian Federation of Construction Contractors agreed to pay an unsuccessful tenderers fee (UTF) of $750,000 to each of the three unsuccessful tenderers for a particular building project. Lindgren J found that this agreement was likely to have the effect of controlling the price to the client if, as a matter of fact, each tenderer was likely, if successful, to pay the UTFs out of the proceeds of the project and take this into account in calculating its tender price. Ultimately, this decision indicates that whenever parties to an agreement are competitors in relation to a downstream product, and agree on the price of an input, there is a risk that they may breach the TPA.

It has been argued that the implications of this decision can be seen in the proceedings commenced by the ACCC against the National Australia Bank in 2000. In these proceedings, the ACCC alleged that the NAB had engaged in price fixing as a result of an agreement with various financial institutions, as members of the credit card schemes, about the level of interchange fees. The ACCC alleged that this agreement had the effect or likely effect of controlling or maintaining the level of merchant service fees that these financial institutions charge to their merchant customers in exchange for supplying credit card transaction facilities. These proceedings were discontinued without any finding by the Court after the Reserve Bank 'designated' the credit card schemes,28 so this issue was never clarified by a Court, however the approach adopted by the ACCC indicates that supply agreements between parties that are competitive in a downstream market need to be carefully examined. Clearly, as a matter of commercial reality, input costs may influence the minimum price that a supplier is willing to receive in the long term for a product, particularly in circumstances where there is one main input, and in turn, a provision determining the cost of this input is likely to have an “effect” on the final price for the product. However, this interpretation potentially means that legitimate arrangements to obtain an input supply are in breach of section 45A merely because the parties are competitors in a downstream market. This would seem illogical, particularly where it is the input supply agreement that enables the purchaser to produce the downstream product and be a competitor. 29

26 ACCC v Tyco (2000) ATPR 41-760 at 40,962

27 (1999) 92 FCR 375; 165 ALR 468 (Concrete Constructions)

28 The Payment Systems (Regulation) Act 1998 allows the Reserve Bank to 'designate' a payment system where it considers it to be in the public interest. It can then impose an access regime and/or set standards, including arrangements for the setting of interchange fees.

29 See Aldo Nicotra and James O’Regan, “Dare to Deem – does section 45A Trade Practices TPA Prohibit “Pro- competitive” Price Fixing”, prepared for the BLS Trade Practices Workshop, 17-19 August 2001, Hyatt Hotel, Canberra qems S0111063589v3 203297041 6.3.2003 Page 14 6.2 Joint venture exemption In many joint venture arrangements, the parties each physically take production from the joint venture separately and sell that product separately. As a result, they need to be regarded as competitors for the purposes of section 45A, and any agreement between them about the price at which they will sell the output of the joint venture risks being a per se breach of section 45. There is a specific exemption for joint ventures from the per se prohibition on price fixing, in recognition of the fact that they will often involve only minimal restrictions on competition, and make a positive contribution to the Australian economy.30 However, the scope of this exemption may not be broad enough to cover all collaborative arrangements.

The current joint venture exemption is contained in s 45A(2), of the TPA. To ensure that a provision of a contract, arrangement or understanding falls within this exception: (a) the parties must bring themselves within the definition of a joint venture in section 4J of the TPA, being an activity in trade or commerce:

• carried on jointly by two or more persons, whether or not in partnership; or • carried on by a body corporate formed by two or more persons for the purpose of enabling those persons to carry on that activity jointly by means of their joint control, or by means of their ownership of shares in the capital, of that body corporate; and (b) ensure that the provision has been arrived at for the purposes of a joint venture to the extent the provision relates or would relate to:

• joint supply by two or more of the parties to the joint venture of goods jointly produced by all the parties in pursuance of the joint venture;

• supply by all the parties to the joint venture in proportion to their respective interest in the joint venture, of goods jointly produced by all the parties in pursuance of the joint venture;

• joint supply by two or more of the parties to the joint venture of services in pursuance of the joint venture;

• supply by all the parties to the joint venture in proportion to their respective interests in the joint venture of services in pursuance of, and made available as a result of, the joint venture; or • supply by a joint venture company of services other than services supplied on behalf of that company by one of its shareholders or a company related to a shareholder.

6.3 “For the purposes” limitation On a strict reading, there is a possibility that the requirement that the agreement on price be made “for the purposes of a joint venture … [and relate to] the joint supply by 2 or

30 n4 at page 4.71. qems S0111063589v3 203297041 6.3.2003 Page 15 more of the parties to the joint venture, or the supply by all the parties to the joint venture in proportion to their respective interests in the joint venture, of goods jointly produced by all the parties in pursuance of the joint venture” may limit the application of the exemption to many, if not all, standard joint venture agreements.

In many cases, a production joint venture agreement will not provide for joint marketing. Rather, sales and marketing activities will be carried out pursuant to a separate arrangement, possibly by a separate company, owned by the joint venture participants in the same proportions as their interests in the joint venture. That company may then either sell as the agent of the joint venture participants, or alternatively, as a principal. As the exemption is currently worded, it is not clear whether these sorts of sales and marketing arrangements can be said to have been made “for the purposes of” the production joint venture or relate to the sale of “goods jointly produced”.

Where the sales company is selling as principal not as agent, there is also an argument that the supply is not a supply by the parties to the joint venture as required by section 45A(2)(a).

6.4 Is the exemption broad enough to cover collaborative joint ventures? Particularly in areas of innovative growth, like e-commerce, it is becoming increasingly common for joint venture parties to adopt looser collaborative arrangements. However, the joint venture exemption continues to be based on the model of a traditional resources based joint venture, in which the parties pool resources to jointly produce and supply a product. Newly emerging forms of collaboration will not necessarily involve either a pooling of resources or a joint supply, however, in many instances, they make the same sort of positive contribution to the Australian economy as traditional joint ventures.

6.5 StickyCo – joint production/separate supply

PaperCorp and GlueCorp have decided that the new StickyCo product should be marketed both directly to retailers and businesses, as well as to wholesale suppliers. However, doing business with each of the two classes of purchasers would require a different distribution network and a separate marketing campaign.

As PaperCorp has an established direct distribution network to business and retailers, and GlueCorp has an established wholesale distribution network, the parties agree that they will each market the StickyCo product independently using their existing distribution networks. PaperCorp will only sell direct to business and retailers and GlueCorp will only sell to wholesalers. The participants agree on the price that they will each charge.

In our view, based on the current wording of section 45A, this arrangement is unlikely to come within the joint venture exemption, as there is no joint supply. Each of the parties to the joint venture will be taking product from the joint venture and supplying it separately. Accordingly, the agreement is likely to amount to price fixing, as it is likely that the effect of this provision will be to control or maintain the price of the StickyCo product. For the purposes of section 45A, it will not matter that the commercial rationale for this provision is to protect the interests of the joint venture.

qems S0111063589v3 203297041 6.3.2003 Page 16 7. Authorisation – is it the answer?

It has been argued that, if the provisions of a pro-competitive joint venture agreements are caught by a per se prohibition, the parties should seek and would be granted an authorisation. However, there are a number of disadvantages to the authorisation process which mean that it will often be an inappropriate and commercially unattractive option for reasons that include: • the authorisation process can take up to two years; • the process is vulnerable to appeals of a strategic and delaying nature by third parties;

• it is necessary to disclose at least the details of the proposed transaction and often related commercially and competitive sensitive material;

• when granted, authorisations are often for a limited period which substantially complicates the commercial arrangements for succession to the business or subject to other conditions, the content of which are highly uncertain at the time the transaction being conceived by the parties; and

• the process is costly. These issues can be particularly significant when (as will often be the case in competitor collaborations) the joint venture is to facilitate an innovative new product or process. In the context of many transactions, authorisation is simply impractical, and there is a real risk that potential joint venture parties will simply abandon the venture in favour of an easier investment option.

8. Exclusive dealing and third line forcing

8.1 Exclusive dealing Section 47 of the TPA prohibits a range of vertical arrangements defined in section 47(2) – section 47(9) as “exclusive dealing”. Most forms of exclusive dealing are only prohibited if they have the purpose, effect or likely effect of substantially lessening competition. These include:

• supplying goods or services, or supplying them at a discount on the condition that the purchaser will not acquire goods or services from a competitor or will accept some restriction on the right to resupply;

• refusing to supply goods or services, or refusing to supply them at a discount because the purchaser has dealt or refused to stop dealing with a competitor or refused to accept some restriction on the right to resupply;

• acquiring goods or services, or acquiring them at a particular price on the condition that the supplier accepts some restriction on the freedom to supply third parties; or

qems S0111063589v3 203297041 6.3.2003 Page 17 • refusing to acquire goods or services, or refusing to acquire them at a particular price because the supplier refuses to accept some restriction on the right to supply third parties. However, two specific forms of exclusive dealing known as third line forcing are prohibited per se, that is, regardless of the effect that they have on competition. These are:

• supplying goods or services, or supplying them at a discount on the condition that the purchaser will acquire goods or services of a particular kind or a particular description from a third party; or

• refusing to supply goods or services, or refusing to supply them at a discount because the purchaser has refused to acquire goods or services of a particular kind or a particular description from a third party.

8.2 Why is third line forcing prohibited per se? Per se third line forcing was originally introduced when it was a common practise among financial institutions, banks and building societies to make mortgage monies available to home owners on condition that the mortgagor take out home and contents insurance with an insurance company nominated by the financial institution. The banks would receive commissions or other benefits from the nominated insurance companies in return for insisting that their borrowers insure with these companies.

Today, there are many instances of pro-competitive third line forcing occurring which benefit consumers, including a number of the loyalty programmes. The fact that third line forcing can benefit consumers and in most instances does not have an anti-competitive effect is demonstrated by the fact that a large number of submissions to various government enquiries have argued for the repeal of the per se prohibition and its replacement with a competition test. It is possible that the current Dawson Review of the TPA may recommend a change to the provision, but in the meantime companies have to work within the current boundaries of the law and utilise the third line forcing notification procedure in section 93 of the TPA.31

8.3 Case law: protecting markets or promoting artificiality? As a result of the per se prohibition on third line forcing, parties have tried a number of different solutions to enable pro-competitive or competitively neutral third line forcing to take place without involving a breach of the TPA.

Judicial interpretation of the third line forcing provisions has enabled some third line forcing conduct to escape the prohibition simply by the way the arrangement is structured. In Castlemaine Tooheys 32 the High Court considered whether a brewery which insisted on selling its beer to publicans in Queensland on a CIF basis, delivered by a third party transport company nominated by the brewery, had engaged in third line forcing. The Court

31 Pursuant to section 93(1), a corporation that engages or proposes to engage in exclusive dealing (including third line forcing) may notify the ACCC of that conduct. Where a notification has been lodged, the corporation's conduct is deemed not to substantially lessen competition: section 93(7).

32 Castlemaine Tooheys v Williams & Hodgson Transport Pty Ltd (1986) 162 CLR 395. qems S0111063589v3 203297041 6.3.2003 Page 18 held that this conduct did not breach section 47(6), because it only involved the supply of a single product, "delivered beer", rather than the supply of beer on the condition that the publican also acquire delivery services from a third party (Queensland Rail).

Similarly, in the Paul Dainty case33 the Court held that parties wishing to use the Melbourne Tennis Centre could be required to use the booking service operated under contract to the Tennis Centre by a third party, because the Tennis Centre was providing a combined product of a fully ticketed venue rather than a venue supplied on condition that the third party ticketing service also be used. Although these cases indicate that Courts will be reluctant to apply the per se prohibition where an arrangement has no appreciable effect on competition, this leaves commercial parties with a degree of uncertainty.

8.4 What about supply or acquisition by related bodies corporate? The Swanson Committee, which recommended the introduction of the current form of section 47 of the TPA, also recommended that there should be a related party exception for third line forcing, so that requiring a customer to purchase a product from a company related to the supplier was merely exclusive dealing and not third line forcing. However, this exception was repealed in 1978, and as a result, businesses that operate through a corporate group in which divisions are run by different corporate entities are particularly vulnerable to third line forcing allegations.

8.5 Notification for third line forcing Notification is a statutory procedure that allows parties to obtain immunity from court action for third line forcing.

When an application for notification of third line forcing has been lodged with the ACCC, the ACCC undertake an investigation, which may involve seeking comments from people who might be affected by the arrangement. Unless the ACCC objects to the arrangement, immunity is automatically obtained 14 days after lodgment of the notification, and continues unless the ACCC removes the notification. The ACCC will object to the conduct or remove the immunity if it is not satisfied that there is any public benefit in the conduct, or if it does not consider that the public benefit outweighs the competitive detriment. There is a certain level of uncertainty involved in the notification process, because it remains open to the ACCC to issue a notice removing the immunity resulting from the notification if it decides that the public detriments of the conduct outweigh the public benefit. However, if the ACCC decides to withdraw a notification, it must offer a pre- decision conference before doing so, and give reasons for its decision in the form of a draft determination. 34

33 Paul Dainty Corporation Pty Ltd v National Tennis Centre Trust (1989) ATPR 40 – 951.

34 See sections 93(3A), (3B), (4) and 93A. qems S0111063589v3 203297041 6.3.2003 Page 19 8.6 StickyCo – can it offer a discount on a bundle?

Once established, StickyCo makes a range of self-adhesive notepads, in a number of different colours and sizes and supplies them to a range of wholesale and retail customers. If a customer buys the full range of StickyCo products, StickyCo wants to offer them a 10% discount.

In our view, this practice involves full line forcing. In practice, offering customers a discount on the condition that they acquire the full StickyCo range is likely to prevent the acquisition of goods or services from a competitor to at least some extent. It could therefore be argued that StickyCo was proposing to offer to supply customers at a discount on the condition that the customer would not acquire these kinds of products from a competitor.

Accordingly, it would be necessary to consider whether the provision had the purpose, effect or likely effect of substantially lessening competition. Once again this would need to be examined carefully, having regard to the sort of factors referred to in QCMA. However, provided that it could be shown that there were still a number of vibrant competitors in the market supplying substitutable products, and this restriction did not foreclose the market to entry by new competitors, then there would be a good argument that this provision did not have the necessary effect on competition.

The shareholders in StickyCo want the joint venture to embark on a new promotion, in which it offers customers packages of StickyCo, GlueCorp and PaperCorp products at a discount, as "Back to School" packs.

As the law currently stands, there is a danger that this may amount to third line forcing, on the basis that StickyCo was selling its products at a discount on the condition that the consumer also acquire products of GlueCorp and PaperCorp. In this case, the parties could not offer the "Back to School" deals unless they first notified the ACCC that they were going to do so, and the ACCC did not object to the arrangements.

It would not make any difference to this analysis if GlueCorp or PaperCorp were 'related' to StickyCo for the purposes of the TPA because, as discussed above, there is no related party exemption. The problem with the current per se prohibition is only further highlighted if we consider a slightly different fact scenario in which StickyCo structures the arrangement so that it buys each of the relevant products from GlueCorp and PaperCorp before putting together the packs. On these facts, it would be possible to argue that as StickyCo was merely putting together a package of products that it owned, the arrangement was only a full line force which would not be prohibited unless it substantially lessened competition.

9. Conclusion

Joint ventures and competitor collaborations are increasingly common commercial vehicles, particularly in areas of the economy that involve innovation and the development or exploitation of new technology. However, lawyers need to take care that when a client comes to them with a proposed arrangement, and asks them to vet and document it, they qems S0111063589v3 203297041 6.3.2003 Page 20 are not formalising a deal that is unenforceable or that exposes their client to the risk of penalties for breach of the TPA because it involves:

• an exclusionary provision; • an agreement that has the purpose, effect or likely effect of substantially lessening competition;

• price fixing; or • full line or third line forcing. Lawyers need to be particularly alert to potential issues that may arise in the application of the per se provisions, because these provisions may apply regardless of whether the agreement has any appreciable effect on competition. In particular, lawyers need to be aware of the recent interpretations of the prohibition on exclusionary provisions, as it means that the TPA may apply to a range of pro-competitive or competitively neutral agreements, in different ways than we would previously have thought. In addition, it is important to be aware of the limitations on the joint venture exemption on price fixing, especially in the context of the looser collaborative arrangements that are increasingly common in innovative areas like e-commerce. Finally, when reviewing contracts that involve supply by a joint venture or competitor collaboration, lawyers need to ensure that the arrangement does not amount to anti-competitive full line forcing or third line forcing.

qems S0111063589v3 203297041 6.3.2003 Page 21