Boral High Court decision – 10 February 2003
In brief: In a landmark judgment handed down on 7 February 2003, the High Court of Australia held that building and construction materials supplier Boral had not contravened the Trade Practices Act in relation to the Act's misuse of market power provisions. Partner Carolyn Oddie and Senior Associate Sabiene Heindl report.
In Boral Besser Masonry Limited (now Boral Masonry Ltd) v Australian Competition and Consumer Commission, six of the seven Justices of the High Court held that Boral did not have a substantial degree of market power and therefore had not contravened section 46 of the Trade Practices Act 1974 (TPA). Boral's appeal was upheld and the decision of the Full Federal Court (comprising Justices Beaumont, Merkel and Finkelstein) was overturned. Justice Kirby dissented.
Boral Besser Masonry Limited (Boral) manufactured concrete masonry products such as concrete blocks, bricks and pavers. In the 1990s, a price war broke out between the manufacturers of masonry products, including Boral, Pioneer and C&M, all of whom tendered for orders to supply concrete masonry products at below cost price. In 1994, Boral offered to purchase the highly efficient 'Hess' plant of one of its competitors (this never eventuated). In 1996, as the price war came to an end, Boral announced its intention to upgrade its facilities at Deer Park, Victoria. The Australian Competition and Consumer Commission (ACCC) issued proceedings against Boral in March 1998, alleging that Boral had contravened s46 of the TPA by engaging in predatory pricing.
Despite confirming a narrow market definition for concrete masonry products in Melbourne (which did not include walling or paving products, despite the fact that they were substitutable to some extent), the majority of the High Court held that Boral did not have a substantial degree of power in this market. The court confirmed that financial strength (or 'deep pockets') is not of itself market power, although financial resources may be part of an explanation for market power.
This decision follows the Melway case1 in reversing the disturbing trend in Federal Court decisions in which judges have jumped from finding a 'purpose of eliminating or damaging a competitor' (ie through 'smoking gun' memos) to readily inferring that the firm involved must have 'taken advantage' of its market power. Such decisions have made it difficult for large firms to continue to pursue competitive strategies that have helped them to achieve that market position, free from the concern that they can be challenged for anti-competitive behaviour.
The decision will be welcomed by firms that have a significant market position or are financially well resourced, as further clarifying where the line should be drawn. The High Court confirmed that if the impugned conduct has a legitimate business rationale, this mitigates against a finding that the conduct constitutes a taking advantage of market power. If a firm without market power would engage in this conduct as a matter of commercial judgment, it will ordinarily follow that a firm with market power that engages in the same conduct is not 'taking advantage' of its power.
The court also confirmed that price cutting to meet competition must be distinguished from predatory pricing. The cutting of prices in response to changed market conditions, for example, a drop in customer demand that requires a new strategy if the firm in question is to survive, should be lawful because it is a competitive response, not an anti-competitive one.
The United States recoupment test was considered a useful tool in determining whether in any particular case 'predatory pricing' indicates that the 'predator' has market power and has taken advantage of it. Under the US test, predatory pricing is not illegal unless the party engaging in it has a prospect of recouping the losses by charging supra-competitive prices after engaging in the predatory pricing.
This decision should be welcomed by Australian business as judicial recognition of the difference between anti-competitive conduct and the realistic need for competitive responses by firms in intensely competitive environments.
Reference
- Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1
For further information, please contact:
- Patrick RyanConsultant,
Melbourne
Ph: +61 3 9613 8824
Patrick.Ryan@aar.com.au - Carolyn OddiePartner,
Sydney
Ph: +61 2 9230 4203
Carolyn.Oddie@aar.com.au
