In brief
On 13 August 2003 the High Court handed down its first decision on exclusionary provisions in News Limited & Ors v South Sydney District Rugby League Football Club Limited & Ors [2003] HCA 45 (News v Souths).
The High Court overturned the Full Federal Court's decision in finding that the agreement between News Limited (News) and Australian Rugby Football League Limited (ARL) did not contain an exclusionary provision in breach of the Trade Practices Act 1974 (Cth) (TPA).
A 4:1 majority of the High Court (Justice Kirby dissenting) found that News did not have a purpose of excluding any particular club or clubs. In making this finding, the Court sought to clarify the purpose requirement under section 4D and the scope of exclusionary provisions.
- The Court upheld a subjective purpose requirement, but emphasised the relevance of the parties' reasons and the circumstances of the case.
- The exclusionary purpose must be 'directed toward' a particular person or class of persons.
- The particular person or class of persons must be identifiable at the time of making the arrangement.
- Expect more changes and clarification on section 4D in the coming months.
Summary of the facts
The South Sydney litigation arose in the aftermath of the Super League 'war'. As part of the peace treaty between the ARL and News, a new 17 franchise premier rugby league competition, the National Rugby League (NRL), was formed in 1998. A fundamental part of this agreement was that the NRL was to be reduced to a 14 franchise competition by 2000 through a selection process that ranked the teams in order of suitability (14-team term). In late 1999, the South Sydney Football Club (Souths) was ranked 15th and last on this list and was not offered a franchise renewal.
Souths in litigation
Souths in the Federal Court
Souths commenced proceedings in the Federal Court seeking an interlocutory injunction that would have the effect of requiring ARL and News to allow it to participate in the 2000 NRL competition. The application was dismissed by Justice Hely. The substantive trial was held before Justice Finn in 2000. Souths argued that the 14-team term was an exclusionary provision and therefore per se illegal under section 45 of the TPA. Justice Finn dismissed the application on the grounds that the term did not have the requisite purpose.
Souths appealed to the Full Federal Court. A 2:1 majority of Justices Moore and Merkel held that the 14-team term was an exclusionary provision.
Souths in the High Court
News appealed to the High Court on the question of whether the 14-team term was an exclusionary provision within the meaning of section 4D.
The High Court's decision turned on whether the parties who entered into the 14-team term had the requisite purpose of 'preventing, restricting or limiting' their services to Souths or a 'class of persons' that included Souths. Accordingly, the judgment of the High Court focuses on the element of purpose under section 4D.
A majority of the High Court (comprising Chief Justice Gleeson and Justices McHugh, Gummow and Callinan) found that the parties to the agreement did not have a subjective purpose of excluding a person or particular persons and hence the 14-team term was not an exclusionary provision under section 4D.
What is an 'exclusionary provision'?
'Exclusionary provision' is defined in section 4D of the TPA. Section 4D(1) applies to provisions of a contract, arrangement or understanding, and contains two primary elements:
- there must exist a state of competition in relation to the supply or acquisition of the relevant goods or services between two or more parties to the contract, arrangement or understanding; and
- there must be the purpose of preventing, restricting or limiting the supply to, or acquisition of goods or services from, particular persons or classes of persons.
The first element was not addressed by the Court in News v Souths. Although the Australian Competition and Consumer Commission (ACCC), as intervener, questioned whether the parties to the contract were indeed in competition with each other at the relevant time, the High Court chose not to consider the ACCC's arguments on this point.
The High Court's discussion of the second element is set out below. Chief Justice Gleeson noted that, while addressing sequentially the issues of purpose and particularity may be a convenient method of analysis, it should be remembered that the second element is in fact a compound concept.
Subjective or objective purpose
The High Court seemingly confirmed that the relevant 'purpose' in section 4D is a subjective one, rather than an objective purpose that is determined without reference to the mental states of the parties.
However, both Justices McHugh and Kirby would, absent other authority, have rejected subjective purpose, and argued strongly that both statutory construction and the objects of the TPA favour an objective approach.
Justices Gummow and Callinan each adopted the approach of Justice Finn, who focused on the subjective reasons of the parties.
'While the purpose of a provision may be evidenced in the effects it produces, the purpose for its inclusion in a contract etc is not to be determined necessarily by, or simply by reference to, its effects. What is to be ascertained is the reason (or reasons) for its inclusion. And that reason, or those reasons, can be determined by ascertaining the effect or effects the parties subjectively sought to achieve through the inclusion of the provision in the understanding, etc.'
Chief Justice Gleeson chose to draw a distinction between purpose and motive, noting that the effect of a provision may indeed be the clearest indication of its purpose. Justices McHugh and Callinan also emphasised that the application of a subjective test does not exclude a consideration of the circumstances surrounding the reaching of the understanding and, by considering the circumstances, the Court will be using objective considerations to determine whether the parties held the subjective purpose they claim.
The judgments in this case, and the Court's emphasis on the circumstances of the case – a 'new' competition for which the parties need to define the scope - suggest that the High Court is in fact moving closer to an objective test. This can be seen as a continuation of the business rationale test expounded by the Full Federal Court recently in ACCC v Safeway.
Justice Gummow rejected the ACCC's submission, as intervener, that both the subjective and objective purpose are relevant.
How particular is 'particular'?
The particularity of the persons or classes of persons who are the objects of the purpose defined by section 4D is essential to the concept of an exclusionary provision. Members of the High Court clarified the requirement that there be a purpose of excluding a particular person or class of persons as follows:
- there must be an identifiable person, or class of persons at whom the purpose is directed toward at the time of the making of the agreement or arrangement;
- the particular person or class must be identifiable at the time of making the arrangement
- the class must have a defining characteristic distinguishing it from others, and marking out its members as the object of it. However, there may be a 'particular class' notwithstanding that at any one time the identity of all its members is not readily ascertainable;
- in a case that is concerned with the prevention of supply, a class cannot be defined by the mere fact of non-supply or exclusion;
- section 4D is not limited to situations in which the traditional concept of a collective boycott would apply, for example where two or more competitors exclude or restrict the supply of goods or services to a rival competitor;
- no hostility or antagonism towards the excluded parties is necessary or relevant to a decision to exclude.
In News v Souths, determining the number of clubs to be admitted was a necessary part of the definition of the new business venture. The specification of the basic objective criteria and the possibility and encouragement of club mergers had the consequence that there was no way of knowing those that would come to fail to satisfy them. There was a randomness about the identity of the participants, which is a concept remote from particularity of identity.
'Restricting or limiting'
Finally, while acknowledging that the construction of 'restricting or limiting' had no effect on the outcome of the case, Justice Callinan approved the view of Justice Moore in the Federal Court that 'the words "restricting or limiting" ought not to be confined to situations in which there is a partial supply, in the sense that all previous recipients or providers continue to acquire or supply the goods or services but in a reduced amount'. In Justice Callinan's view, contrary to Justice Heerey, 'restricting or limiting' includes the supply or acquisition of services to or from some only of the particular persons.
So what does all this mean?
The High Court accepts there is a commercial need to define the scope of a business venture. In doing so, it appears to be permissible to:
- set limits on the scope of your business if there is a commercial reason for doing so, ie there is no obligation to service everyone, and
- apply a non-discriminatory means of setting those limits, in terms of selecting suppliers to use and customers to service.
It is not permissible to identify a particular customer or supplier or a particular group of customers or suppliers to whom you will restrict or exclude your services.
However, the law on exclusionary provisions is expected to further develop in the coming months and may change significantly with the possible introduction of new legislation.
Still to come
More changes to the law on exclusionary provisions have been recommended by the Dawson Committee in their review of the Trade Practices Act. These are set out in our online article 'Recommendations of the Dawson Committee'. As yet there is no draft legislation on section 4D.
In addition, the High Court has two more decisions pending that may affect the interpretation of section 4D (Visy Paper v ACCC and ACCC v Rural Press), and in both cases judgment has been reserved.
The interpretation of section 4D therefore remains uncertain at this time and advice should be taken when contemplating a potentially restrictive arrangement, particularly where that arrangement is with a competitor.
for more information, please contact: Donald Robertson
donald.robertson@freehills.com, 03 9288 1465
