Author:	Weeliem Seah LLB (Hons), BComm, GDLP Murdoch University School of Law
Subjects:	Restraint of Trade - Australia (Other articles) Trade practices -- Australia (Other articles) Trade Practices Act 1974 Australia (Other articles)
Issue:	Volume 8, Number 4 (December 2001)
Category:	Current Developments

Contents:

• Facts
• Federal Court Judgments
• High Court
• Majority Judgment
• Justice Kirby's Dissent
• Implications For Future Business Conduct
• Notes

1. The decision in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (t/as Auto Fashions Australia)[1] was only the High Court of Australia's second opportunity to examine the substantive elements of section 46 of the Trade Practices Act 1974 (Cth). The decision provides a further exposition on the section's requirement that a corporation "take advantage" of its substantial market power.[2]

   Facts

2. The appellant Melway published the most popular street directory for the metropolitan Melbourne area. It operated a selective distribution system by which the retail market was divided into segments, each segment being exclusively served by a selected wholesale distributor. The evidence showed that this system served Melway well and had been, apart from a relatively short period, the way in which Melway operated since it first started trading. The respondent Robert Hicks, trading as Auto Fashions Australia, had been the exclusive wholesale distributor in the automotive parts segment of the market for a number of years when Melway terminated its distributorship. This occurred after a falling out between the principals of Auto Fashions. One of the principals sold his interest to the other and set up another distribution business. Melway developed a preference for this other distributor and decided to appoint it as the sole distributor to retailers of automotive parts and to terminate the arrangements with Auto Fashions. Auto Fashions requested further supplies of between 30,000 and 50,000 Melway directories per year for retail sale, notwithstanding that its distribution arrangements had been terminated. Melway refused and Auto Fashions commenced proceedings in the Federal Court alleging breach of section 46.

   Federal Court Judgments

3. At first instance,[3] Melway was found to have a substantial degree of market power in both the wholesale and retail markets for street directories in Melbourne.[4] Justice Merkel further held that Melway had the proscribed purpose of preventing Auto Fashions from engaging in competitive conduct.[5] As to the element of 'take advantage', Justice Merkel held that it was satisfied by Melway's conduct. His Honour adopted the language of Chief Justice Mason and Justice Wilson in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd,[6] and said:

   'It is only by virtue of its dominant position in the Melbourne directory market and the absence of a competitive market that Melway can afford, in a commercial sense, to withhold from supplying Auto Fashions. If Melway lacked substantial market power - in other words, if it were operating in a competitive market - it is highly unlikely that it would stand by, without any effort to compete, and allow Auto Fashions to secure its significant supply of directories from a competitor ... Accordingly, in refusing supply Melway has taken advantage of its market power.'[7]

4. The trial judgment was affirmed on appeal[8] by a Full Federal Court majority consisting of Justices Sundberg and Finkelstein.[9] Each member of the Full Court agreed that the refusal to supply was for a proscribed purpose.[10] However, the Full Court was not unanimous in finding that Melway had taken advantage of its market power. The High Court had held in Queensland Wire that 'take advantage' meant no more than 'use' and was established whenever the corporation in question engaged in conduct that it would not likely have or could not, in a commercial sense, have undertaken in a competitive market. Justices Sundberg and Finkelstein held in separate judgments that Melway had taken advantage of its market power.[11]

5. Justice Heerey dissented, observing that Melway had adopted the selective distribution system when it commenced publishing the directory and had effectively kept that distribution system ever since. This supported the proposition that the maintenance of the distribution system that was achieved by Melway's refusal to supply was independent of its market power.[12] Further, the intention of Auto Fashions was to sell the directories across all retail segments without regard to the existing system. Auto Fashions would therefore have been in competition with the existing distributors which meant that in refusing supply, Melway was not denying itself sales that it could have been commercially compelled to make in a more competitive environment.[13] Justice Heerey concluded that the 'taking advantage' element was not satisfied.[14]

   High Court

   Majority Judgment

6. Justice Heerey's reasoning was preferred by a majority of the High Court consisting of Chief Justice Gleeson and Justices Gummow, Hayne and Callinan.[15] In a joint judgment, their Honours viewed Melway's refusal to deal as being incidental to the distributorship system it sought to maintain,[16] and 'the real question was whether, without its market power, Melway could have maintained its distributorship system, or at least that part of it that gave distributors exclusive rights in relation to specified segments of the retail market.'[17] Their Honours concluded that because Melway had created and maintained the distribution system 'at a time when it did not have a substantial degree of market power ... its maintenance, when the appellant had market power, was not necessarily an exercise of that power.'[18]

7. The majority judgment clarified the uncertainty surrounding the character of the hypothetical competitive market in respect of which the corporation's likely conduct would be compared with its actual conduct. It was made clear that the hypothetical competitive market did not mean the theoretical notion of 'perfect competition':

   'An absence of a substantial degree of market power does not mean the presence of an economist's theoretical model of perfect competition. It only requires a sufficient level of competition to deny a substantial degree of power to any competitor in the market.'[19]

8. It was partly on this basis that the majority had found the trial and majority Full Federal Court judgments to have erred.[20] The previous decisions had not had proper regard to the market conditions in which Melway was operating and assumed that the 30,000 to 50,000 directories would be lost sales:[21]

   'The only purpose of the hypothesis is to seek to test whether Melway has taken advantage of its degree of market power. It is one thing to compare what it has done with what it might be thought it would do if it lacked that power. It is a different thing to compare what it has done with what it would do in circumstances that are completely divorced from the reality of the market.'[22]

9. While the majority judgment rejected the reasoning of the previous decisions, it did not reject the Queensland Wire test of taking advantage:

   'To ask how a firm would behave if it lacked a substantial degree of power in a market, for the purpose of making a judgment as to whether it is taking advantage of its market power, involves a process of economic analysis which, if it can be undertaken with sufficient cogency, is consistent with the purpose of s 46.'[23]

10. What the majority therefore held was that the Queensland Wire test was an appropriate test, but that it had not been properly applied in the prior judgments, with the exception of Justice Heerey. The majority judgment also contained what is arguably another method of establishing a taking advantage:

    'In some cases, a process of inference, based upon economic analysis, may be unnecessary. Direct observation may lead to the correct conclusion. Deane J thought that Queensland Wire was such a case.'[24]

11. Earlier in the majority judgment, their Honours explained their understanding of Justice Deane's judgment:

    'Deane J saw the case as one in which the identification of the purpose for which BHP was refusing to supply QWI led directly to the conclusion that BHP was taking advantage of its market power. That was because the nature of the purpose was such that, in the circumstances of that case, it could not have been achieved by the conduct impugned (a refusal to supply) had it not been for the existence of the market power. In a competitive market, a refusal to supply QWI with Y-bar would not have prevented QWI from becoming a manufacturer or wholesaler of star pickets. QWI could have obtained supplies from some other manufacturer of Y-bar. It was only BHP's market power which meant that its refusal to supply was capable of achieving what was found to be its purpose. Refusing supply, unconstrained by the possibility that supply could be obtained from a competitor, for the purpose of preventing QWI from becoming a manufacturer or wholesaler of star pickets was an exercise of market power. In the circumstances of the case, Deane J held that the finding as to purpose, once made, meant that the finding as to taking advantage of market power was virtually inevitable.'[25]

    Justice Kirby's Dissent

12. Justice Kirby considered that it was unnecessary to pose hypothetical questions about whether the corporation would have engaged in the forbidden conduct if it were subject to effective competition:

    'There is nothing in the language of the section itself that obliges the ascertainment of an answer to a hypothetical question. If, as was held in Queensland Wire, "take advantage of" means no more than "use", that presents a purely factual question to be answered. In short, if the supplier enjoys a substantial degree of market power, the grant or refusal of supply is necessarily, as a matter of fact, taking advantage of ... such market power. It is doing so because the power to grant, or refuse, supply is part of the power substantially to control the market.'[26]

13. Later, His Honour said:

    'The application of a test expressed in hypothetical terms may sometimes be useful. But it is not essential. As I read Queensland Wire, it was not part of this court's holding.'[27]

    Even if a hypothetical test was applied, Justice Kirby would have disagreed with the majority, saying that it was

    'certainly open to the majority judges in the Federal Court to conclude that the impugned conduct on the part of the appellant involved its taking advantage of its market power, in the sense that, acting rationally, it would and could not (but for that power) have acted as it did. Specifically, it would and could not have refused the respondent's offer to purchase between 30,000 and 50,000 copies of the Melbourne directory each year.'[28]

    Implications For Future Business Conduct

14. The decision in Melways represents a clarification of some uncertainty surrounding section 46 left by the High Court in Queensland Wire. It confirms that the Queensland Wire test for taking advantage does not necessarily incorporate the concept of "perfect competition", the hypothetical competitive market being the market in which the corporation under scrutiny trades, absent the substantial degree of market power it was found to have.

15. Melways also draws attention to the question whether the conduct under scrutiny is conduct that the corporation did in fact engage in prior to the acquisition of a substantial degree of market power. The creation and maintenance of the distribution system when Melway did not have the requisite degree of market power did not make its maintenance, when Melway had market power, 'necessarily an exercise of that power'. However, the case does not support the proposition that because the conduct had been undertaken by the corporation when it did not have substantial market power, the same conduct when the corporation does have substantial market power cannot therefore be a use of market power. Changed market conditions between the time of the conduct in question and the prior occasion, may make conduct once commercially possible in the absence of substantial market power now commercially irrational without it. Melways emphasises that a court is required to take into account market realities. It is likely to be for this reason that the creation and maintenance by Melway of its distribution system prior to obtaining the requisite degree of market power was found by the High Court majority as not necessarily evidencing a taking advantage, rather than evidencing that there was no taking advantage. It would still be open for an applicant to establish a taking advantage by showing that the corporation would have acted differently under the relevant market conditions without its substantial degree of market power.

16. Melways is also a striking example of the significant role that section 4F of the Trade Practices Act plays in section 46 litigation and also of the fact that a legitimate commercial justification, so far as the element of purpose is concerned, will not necessarily operate as a defence. Section 4F(1)(b) provides that in seeking to establish a proscribed purpose, there is no need to prove that the purpose was the sole purpose motivating the conduct and only a "substantial" purpose is required. In Melways, the respondent was found to have had legitimate commercial justifications for its conduct. However, Melway was also found to have a substantial purpose of preventing competitive conduct between its wholesalers.

17. The lesson for businesses is that evidence of a legitimate commercial purpose will not invariably lead to a court finding that no relevant proscribed purpose existed. This forces decision-makers to carefully consider the purposes behind their intended course of conduct, the objective appearance of their behaviour, and what a court might infer from it. Melways also provides relief for operators of exclusive distribution systems. There had been some uncertainty about their legitimacy following the trial and Full Federal Court judgments, in particular the comments of Merkel J and Heerey J that the maintenance of distribution systems and the purpose of restricting competition at a wholesale level were two sides of the same coin. The High Court majority held that the maintenance of the wholesale distribution system, involving a restriction on competition as it did, "did not make the findings as to proscribed purpose inevitable".[29]