TTRRAADDEE PPRRAACCTTIICCEESS IINN 22000033 && AA SSPPOOTTLLIIGGHHTT OONN TTHHEE DDAAWWSSOONN IINNQQUUIIRRYY 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