In brief
On 7 February 2003 the High Court handed down its first decision on predatory pricing in Boral Besser Masonry Limited v Australian Competition and Consumer Commission [2003] HCA 5 (7 February 2003) (Boral v ACCC). The High Court overturned the Full Federal Court's decision to find that Boral Besser Masonry Limited (BBM) had not taken advantage of market power in breach of section 46 of the Trade Practices Act 1974 (Cth) (TPA). A 6:1 majority (Justice Kirby dissenting) of the High Court found that BBM did not have a substantial degree of power in the relevant market and that BBM did not, in any case, 'take advantage' of market power.
In summary:
- A firm which must act in response to market forces lacks a substantial degree of market power.
- A 'legitimate business reason' will assist in negating a claim of taking advantage of market power.
- A proscribed purpose is often inherent in competitive conduct. Courts must not find a breach of section 46 merely because a firm has power and a proscribed purpose; there must always be a 'taking advantage' of that market power.
The case against BBM
In March 1998 the Australian Competition and Consumer Commission (ACCC) instituted proceedings against BBM and its parent company, Boral Limited (Boral), alleging that BBM (and Boral) had breached section 46 of the TPA by reducing its prices to a level below its avoidable cost of production for the purpose of driving out a competitor, C & M Brick (C&M). BBM's attempt to purchase C&M's plant, and BBM's increase of its own plant capacity, were also alleged to indicate misuse of market power. The case against the parent company was subsequently not pursued.
The ACCC submitted that BBM had a substantial degree of power in the market for concrete masonry products in the metropolitan area of Melbourne. Evidence showed that during the relevant period, this market was characterised by three main players—BBM, Pioneer and Rocla—each of which had approximately equal market share, and two smaller players—Budget and C&M, a new entrant.
First instance
Justice Heerey dismissed the application by the ACCC, finding the relevant market to be that in which builders acquired materials for use in the construction of walls and paving. There was no evidence that BBM had a substantial degree of power in this market.
Justice Heerey went on to find that even if BBM had market power, BBM had not taken advantage of its market power as it was unable to recoup its losses by charging supra-normal prices, given the presence of another strong competitor, Pioneer, and the low barriers to entry to the market. Justice Heerey supported the US view that the ability to recoup (ie to recover the losses from below cost pricing through later higher prices) is an essential requirement of predatory pricing. His Honour also made some obiter comments in relation to selling below manufacturing cost, noting that below cost pricing can be a rational business decision and not necessarily 'taking advantage of market power'.
Evidence indicated that one of BBM's aims was 'to drive at least one competitor out of the market' to stabilise the market. Justice Heerey found that BBM's conduct was for a proscribed purpose.
Full Federal Court
The ACCC appealed to the Full Federal Court. The appeal was heard by Justices Finkelstein, Merkel and Beaumont, who unanimously overturned the decision of Justice Heerey. The Full Federal Court found that the relevant market was the Melbourne market for concrete masonry products and that BBM had a substantial degree of power in this market. The Court analysed the conduct in terms of section 46 as a whole and, accepting Justice Heerey's trial finding that BBM acted with a proscribed purpose, held that BBM had contravened section 46.
BBM appealed the decision of the Full Federal Court.
High Court
While unanimously adopting the narrow market definition alleged by the ACCC, the majority judges held that BBM did not have a substantial degree of power in that market. The majority of the High Court also went on to find that BBM had not taken advantage of any market power it had.
The High Court's decision ultimately turned on Justice Heerey's conclusions on market power:
'The low barriers to entry and the existence of strong competitors, in particular Pioneer and, as time passed, C&M, meant that BBM did not have power to behave independently of competition and of competitive forces, either in the market I have found or in the narrower market for which the ACCC contended.'
While the following section draws out some lessons which may be learned from Boral v ACCC about the application of section 46, the facts of each case will always be the pivotal factor.
Lessons from Boral
Market power—or lack thereof
A firm comes within the application of section 46 only if it has a substantial degree of power in a market. The Court reinforced its earlier statements on market power: 'The essence of … market power ... is absence of constraint from the conduct of competitors or customers.'
The majority of the High Court based their decision on BBM's lack of market power. In reaching this conclusion, the High Court clarified some issues to consider in assessing the degree of market power.
In particular, the majority reasoned that BBM's conduct was merely a response to market forces.
BBM had lowered its prices to enable it to compete during a period in which the market was 'intensely competitive' and in response to the dictates of its customers. A firm which is subject to market forces is not one which has a substantial degree of market power.
The High Court's discussion of market power raises additional points of interest:
- The High Court dismissed the possibility that financial strength or 'deep pockets' can be a source of market power. Justice Kirby took a slightly different approach and found that while financial strength alone is not a source of market power, the financial strength offered by vertical integration can be.
- The existence of strategic barriers to entry is a relevant consideration in assessing market power. Strategic barriers to entry include matters such as economies of scale, pricing policies and the expansion of plant to generate excess capacity, but only where these factors do not merely make entry difficult because of a firm's superior efficiency.
- Contrary to the Full Federal Court, the High Court expressed a clear view that recoupment is relevant in assessing the degree of market power in predatory pricing cases. However, a majority of the justices stopped short of holding that it was legally essential to a finding of predatory pricing.
Legitimate business reasons
Given that the case was ultimately decided on market power, the High Court's consideration of the remaining elements of section 46 was merely in obiter. Nevertheless, the High Court took the opportunity to indicate that it may be open to arguments relating to 'legitimate business reasons' in defence to an allegation of 'taking advantage' of market power.
Justice Heerey had observed:
'If the impugned conduct has a business rationale, that is a factor pointing against any finding that conduct constitutes a taking advantage of market power. If a firm with no substantial degree of market power would engage in certain conduct as a matter of commercial judgment, it would ordinarily follow that a firm with market power which engages in the same conduct is not taking advantage of its power.'
BBM's 'legitimate business reasons' included its decision to stay in an intensely competitive market and compete aggressively itself. Chief Justice Gleeson and Justice Callinan also describe BBM's decision to upgrade its Deer Park plant (a decision which the ACCC alleged to be an impermissible increase in capacity) as 'rational, and explicable by reference to a desire to become more efficient.'
The majority agreed that BBM's business rationale countered any 'sinister' implications that might otherwise be drawn about its conduct.
From power to purpose
There was little consideration of purpose in the High Court's decision as it was generally accepted that Justice Heerey, having had all the evidence before him at trial, was in the better position to conclude as to purpose.
The High Court did, however, reiterate its criticism of the Full Federal Court for reasoning inferentially from purpose to impermissible conduct. The High Court had previously warned against this process of reasoning in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd, noting the danger in proceeding too quickly from a finding about purpose to a conclusion about taking advantage.
The High Court observed that where the conduct alleged to contravene section 46 is competitive pricing, the purpose will ordinarily be to take business away from, and hence to damage or even eliminate, competitors. Evidence of a proscribed purpose should not, therefore, be given undue weight as it is inherent in the competitive process that successful competition may cause damage to some competitors.
The future of predatory pricing
Boral v ACCC was touted as being 'the big predatory pricing case'. In the end, however, the case turned on the High Court's findings on market power, which were decided on the facts of the case.
The High Court nevertheless indicated a desire to protect efficient conduct from the reach of section 46, demonstrating a commercially and economically sound approach to its application of the Act. Accordingly, while Boral v ACCC has not progressed the law in Australia on predatory pricing to any great degree, it may help to shape the direction that future section 46 cases may take.
July, 2003
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