APRIL 2004

COMPETITION LAW

Exclusive dealing in the Inside: spotlight

A recent Federal Court decision in a case concerning a selective The ACCC is actively distribution policy has brought into sharp focus the need for such focusing on the policies to be implemented with caution. Partner David Brewster enforcement of and articled clerk Peter Haig examine the implications. section 47 of the In the case, ACCC v Fila Sport Oceania Pty Ltd, the Federal Court found that Fila Sport Oceania Pty Ltd (Fila) had misused its market power and engaged in exclusive dealing Trade Practices Act in contravention of sections 46 and 47 of the Trade Practices Act 1974 (TPA). Justice Heerey ordered that Fila pay a $3 million penalty. Background The Australian Football League (AFL) licensed various companies to supply apparel to AFL teams and their supporters. There were two types of apparel licensed by the AFL:

• ‘on fi eld’ apparel – products identical to those worn by AFL players, such as football jumpers. A small number of companies, including Fila, Adidas and Puma, were granted exclusive licences to supply ‘on fi eld’ apparel of particular AFL teams; and • ‘team spirit’ apparel – products not worn by AFL players, such as T-shirts, but which Your publication: feature AFL team colours and designs. A large number of companies, including all ‘on fi eld’ licensees, were licensed to supply ‘team spirit’ apparel. If you would prefer to receive In 1999, the AFL announced that it would restructure the licence system from 2002. our publications in electronic In response, Fila implemented a Selective Distribution Policy (SDP), under which Fila format, please email: would not supply retailers with licensed apparel (either ‘on fi eld’ or ‘team spirit’) if a [email protected] retailer stocked ‘team spirit’ apparel for any Fila-sponsored team that was manufactured by another licensee. www.aar.com.au The Australian Competition and Consumer Commission (ACCC) alleged that Fila’s VISIT OUR WEB SITE conduct contravened sections 46 and 47 of the TPA. Fila initially contested the TO READ ALL FOCUS EDITIONS allegations before withdrawing its defence, making admissions and not contesting the penalty range submitted by the ACCC to the Federal Court. APRIL 2004

Exclusive dealing Although his Honour’s fi ndings in relation to market defi nition must be viewed in the context of Fila Section 47 of the TPA prohibits the practice of withdrawing its defence, his comments do involve exclusive dealing if it has the purpose, effect or likely the acceptance of very narrow markets (at least in effect of substantially lessening competition. A common product terms). In this respect, the Fila decision is the form of exclusive dealing is where a corporation latest in a number of recent trade practices judgments, supplying or offering to supply goods on the condition including the Rural Press decision, in which the courts that the person to whom the corporation offers to have accepted what appear to be narrowly defi ned supply does not acquire goods of a particular kind from product or geographic markets. Generally, a narrow a competitor of the corporation. market defi nition will magnify the effect of an of Justice Heerey held that the purpose of the SDP exclusive dealing arrangement. was anti-competitive. In reaching this view, his Implications for business Honour referred to an internal Fila memorandum that It is clear that the ACCC is actively focusing on contained a clear instruction to staff that Fila would not the enforcement of s47. ACCC chairman Graeme supply ‘on fi eld’ apparel to retailers unless they agreed Samuel stated that the decision ‘establishes a clear not to stock competitors’ ‘team spirit’ apparel. precedent that selective dealing along the lines that Section 47 prohibits conduct that has the purpose of Fila engaged in will result in multi-million dollar fi nes’. substantially lessening competition. In this respect, s47 The Fila decision comes shortly after the decision of is quite different in its terms to s46, which proscribes the Full Federal Court in ACCC v Universal Music, in conduct that has the purpose of eliminating or which various record companies were found to have damaging competitors or preventing market entry. His contravened s47. That case involved similar exclusive Honour did not analyse Fila’s purpose in terms of the dealing conduct and is notable because the conduct tests in s46 or 47, and simply made a broad statement was found to contravene s47, notwithstanding that that there was no doubt that an anti-competitive only a small percentage of retailers were affected. The purpose existed, as exemplifi ed in the memorandum. ACCC has also recently instituted proceedings against However, he did not consider whether Fila’s purpose in Baxter Healthcare in relation to an exclusive dealing implementing an exclusive supply arrangement was to arrangement it alleges contravenes s47. substantially lessen competition in any relevant market Exclusive dealing clauses are extremely common in commercial agreements. In light of recent cases, it is Justice Heerey also noted that Fila’s conduct had an essential that businesses ensure that any exclusive Australia-wide effect. He found that it severely affected dealing agreements do not give rise to issues under Fila’s competitors, as well as more than 400 retailers. s47. In particular: His Honour stated that ‘the fact that the conduct contravened s47 would have been obvious to any • Carefully review exclusive dealing arrangements reasonably competent business person’, and that it before they are implemented and at regular intervals was ‘a serious, blatant contravention’ of the TPA. afterwards, to assess their purpose and their effect on competition, particularly where they involve Market defi nition restraints on a large number of customers or a signifi cant proportion of a market. Decisions like Fila The ACCC, in effect, had pleaded that there were and Universal mean that care must be taken where a series of single product markets, being separate the arrangement may have an impact in narrow markets at the wholesale and retail levels for the sale product markets or where the arrangement is being of licensed apparel for each AFL team. Justice Heerey put in place by a corporation with a substantial did not discuss market defi nition in any detail and degree of power in the market. adopted the markets pleaded by the ACCC. Somewhat surprisingly, given the limited nature of these markets, • Avoid the use of loose language regarding exclusive his Honour stated that the fact that the apparel of one supply arrangements in internal documents. When team would not be regarded (either at the wholesale presented in a court years later, statements that or retail level) as a substitute for the apparel of another are often designed to motivate sales staff, such as team was a proposition that ‘did not need the support ‘we are the market leader’ or ‘we must wipe out of expert economic evidence’. our competition’, may be found as evidence of an anti-competitive purpose in the supply arrangement, which was not intended when originally written. APRIL 2004

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