Focus: Competition Law – August 2003
ACCC v Safeway: Round two to the ACCC
In brief: The majority of the Full Court of the Federal Court recently held that Safeway had misused its market power by refusing to stock bread made by manufacturers that were supplying independent retailers at low prices. The Full Court also unanimously held that Safeway had engaged in price-fixing with a bread manufacturer. Senior Associate Beth Griggs and Lawyer Frances Gordon examine the Full Court's decision.
The majority of the Full Court held that1, in four incidents, Australian Safeway Stores Pty Limited (Safeway) had misused its market power by refusing to stock bread made by certain bread manufacturers, referred to as 'plant bakers' (Buttercup, Tip Top and Sunicrust), in response to the fact that these plant bakers were supplying bread to independent retailers competing with Safeway on terms that enabled those independent retailers to undercut Safeway on the price of certain loaves.
The Full Court also unanimously held that Safeway had engaged in price-fixing with Tip Top for the prices charged by Tip Top at its Preston Market stall.
The Australian Competition and Consumer Commission (ACCC) and Safeway have each indicated that they will seek leave to appeal from the Full Court's decision.
Misuse of market power
Conduct involving the independent retailers
The court found that, in the relevant incidents, the following events had occurred:
- an independent retailer in competition with Safeway sold discounted bread supplied by one of the three plant bakers;
- in response to this, Safeway ceased to stock some or all of the bread products manufactured by that plant baker. This conduct was referred to as a 'deletion'; and
- Safeway's purpose was to deter the plant baker from selling bread to the independent retailer on terms that allowed them to undercut Safeway.
First instance decision
The trial judge, Justice Goldberg, held that the relevant market was the market in Victoria for the supply on a wholesale basis of bread to retailers (the wholesale market). His Honour found that Safeway had a substantial degree of power in that market but that it had not taken advantage of that power.
The relevant market
On appeal, Safeway argued that the relevant market was the total bread market at wholesale and retail levels because of the impact of the retail market on the wholesale market. The Full Court upheld the trial judge's decision that there were separate markets for wholesale and retail, and agreed that the relevant market was confined to the wholesale market.
Market power
The majority of the Full Court upheld Justice Goldberg's finding that Safeway had a substantial degree of market power, with Justice Emmett dissenting. The majority confirmed that the essence of market power is 'the absence of constraint', and said that, in the case of a purchaser of goods in a market, such as Safeway, market power may be demonstrated by its ability to secure more favourable terms of trade than those available to other purchasers, as well as by influencing the output of, or prices charged by, suppliers.
What this finding as to 'market power' means
This finding is of interest because Safeway's share of the wholesale market was low (Safeway purchased 20-25 per cent of the output of plant bakers, but only 16 per cent of the entire wholesale market), and Safeway did not have the ability to dictate prices to the suppliers, but merely to negotiate favourable terms across a significant portion of the market. However, the majority of the Full Court relied on certain elements of the wholesale market, which may serve to distinguish it from other markets, namely:
- there was excess capacity on the part of the suppliers (plant bakers);
- the relevant product (bread) was undifferentiated, such that Safeway did not need to sell a particular brand of bread – it could maintain its sales by acquiring the product of any plant baker;
- bread is a perishable product, which means that the deletion by Safeway translated into a lost opportunity to secure a sale.
Taking advantage of market power
The majority of the Full Court overturned the trial judge's finding that Safeway had not taken advantage of its market power. The majority applied the test for taking advantage as articulated in Queensland Wire and in Melway – would the corporation have acted the same way in the absence of market power?
The trial judge concluded that Safeway had not taken advantage of its market power on the grounds that Safeway would have engaged in the same conduct in the absence of market power. In other words, it would still have tried to impose its terms of trade and the deletion policy on the plant bakers, even if, in the absence of market power, these attempts would not have been successful.
The majority of the Full Court rejected the reasoning of the trial judge on the basis that it ignored the question of why Safeway engaged in the impugned conduct. The majority said that the business rationale of a corporation is critical to the question of taking advantage as well as purpose. The majority concluded that a firm without market power would not have acted in this manner in a competitive market because to do so would have only inflicted harm on itself and achieved no benefit.
What this finding of 'taking advantage' means
This decision again reinforces that the business rationale of a firm is critical to determining whether it is in danger of misusing its market power. A firm that may have a substantial degree of market power needs to examine its reasons for taking a particular course of conduct – if the firm has a legitimate business rationale, then it won't be misusing its market power. The majority of the Full Court used examples of where a firm refuses to acquire, or refuses to supply for reasons such as the creditworthiness of the buyer, or refuses to acquire for quality or reliability issues associated with the supplier, as instances where a firm would not be considered to be misusing its market power.
The difference in the approach between the trial judge and the majority judges highlights the inherent problem in trying to determine what a firm would have done in a hypothetical, competitive market. In a market where several factors are considered to give rise to market power, how does the court determine which of the factors should be considered absent in the hypothetical market? The trial judge and the Full Court took different approaches:
- The trial judge considered the key feature of the hypothetical market to be one in which plant bakers could resist Safeway's attempts to impose terms of trade, but still viewed the market as one in which Safeway would have no difficulty in sourcing a replacement supply of bread.
- The majority of the Full Court appear to have considered the hypothetical market to be one in which plant bakers do not have excess capacity, are able to replace their sales to Safeway with sales to another purchaser, and there is a higher level of product differentiation, such that a refusal by Safeway to purchase products of one plant baker would result in lost sales for Safeway and no hardship for the plant bakers.
The majority's view of the hypothetical market appears to be more appropriate, as it focuses on what would happen if Safeway had to compete with other purchasers to acquire bread. The trial judge's hypothetical competitive market seems to be one in which the plant bakers would all still compete to supply Safeway, and Safeway would not have to compete for their product. What this illustrates is that there are real difficulties associated with defining the appropriate features of the hypothetical market in order to apply the test.
Purpose
The Full Court agreed with the trial judge that Safeway had the substantial purpose of deterring or preventing the plant bakers and independent bakers from engaging in competitive conduct. The Full Court emphasised that the appropriate way of determining a company's purpose is to analyse its conduct and draw inferences from that conduct, rather than relying on the subjective intention of its officers.
Price fixing
The Preston Market incident
Although its main business in Victoria was the manufacture and supply of bread to retailers, Tip Top ran a retail bread stall at Preston Market, a short distance from the Safeway Preston store.
Justice Goldberg at first instance found that:
- in response to Tip Top selling bread at a discounted price at the Preston Market, Safeway deleted the Tip Top range of bread from Safeway Preston;
- The Safeway Preston store manager, Mr Feldgen, had been told when he started working in that position that he did not have the authority to discuss prices with Tip Top;
- Mr Feldgen had met the Tip Top area manager twice to discuss the price at which Tip Top should sell bread at the Preston Market;
- Mr Feldgen had met with the Tip Top area manager at the direction of someone within Safeway. The trial judge was not prepared to conclude that this was Mr Jones, the Safeway Bread Category Manager, who was also a respondent in the proceedings;
- Mr Feldgen had reported the first meeting to his superior at Safeway, Mr Jones;
- following the second meeting, Mr Jones gave approval for Tip Top to resume deliveries to Safeway Preston.
The trial judge found that Safeway had not entered into an agreement with Tip Top regarding the price of bread, on the basis that Mr Feldgen did not have authority to enter into such an agreement. This was because, applying the relevant standards of proof, it was not proved that Mr Jones had instructed Mr Feldgen to enter into a price-fixing agreement.
On appeal
The Full Court unanimously held that the proper inference to be drawn from the facts available was that Mr Jones, or someone at Mr Jones' instruction, had instructed Mr Feldgen to enter into the price-fixing agreement. Therefore, the court held that Mr Feldgen did have the requisite authority to bind Safeway and, consequently, Safeway had been a party to the price-fixing agreement.
What it means
The Full Court's decision turned on the inferences to be drawn from the facts as determined by the trial judge, and is therefore of limited use in respect to some broader questions that arose out of the trial judge's decision.
Justice Goldberg's decision in relation to the absence of authority on the part of Mr Felgen to enter into a price fixing arrangement suggested that it would be possible for a company to limit its liability for price-fixing conduct engaged in by its employees by making it clear that no employee had the authority to enter into a price-fixing agreement. The Full Court's decision does not address this possible interpretation and instead turns on the authority of Mr Jones, who the Full Court concluded had instructed Mr Felgen to meet with Tip Top and, consequently, had authorised Mr Felgen to reach an arrangement with Tip Top.
The issue of whether such conduct is within the scope of the authority of an employee who has been instructed not to contravene the Trade Practices Act remains to be considered.
References
- Australian Competition & Consumer Commission v Australian Safeway Stores Pty Limited [2003] FCAFC 149
For further information, please contact:
- Ken MacDonaldConsultant,
Brisbane
Ph: +61 7 3334 3328
Ken.MacDonald@aar.com.au
