Saturday, 19 May 2012

ACCC’s investigation of Woolworths and Coles: A Blueprint for Action


This article first appeared in the CCH Competition and Consumer Law Tracker, Issue 4, April 2012

Introduction
Recently, there has been a great deal of media attention about the power of the two major supermarket operators – Coles and Woolworths. In particular, there have been claims that these two companies have been using their market power to bully their suppliers and engage in unconscionable conduct.[1] That these two companies have a substantial degree of market power in various product markets as a buyer of goods and services is without question. However, the more difficult questions are (1) what exactly have these two companies been doing in the market which has been causing so much concern and (2) assuming that their conduct has been illegal, how can such conduct be stopped. A good starting place in answering the first question is to look at the history of these companies in terms of illegally interfering with suppliers and competitors.  The answer to the second question is considerably more complex.

History
The best starting place in seeking to understand the types of conduct which Coles and Woolworths may be engaging in at the present time, is to look at the anti-trust history of both of these companies.  As stated above, both companies have been found to have engaged in illegal bullying-type conduct in the past.

Safeway case
The first relevant case involved Safeway Stores Pty Limited, a subsidiary of Woolworths, which was decided in 2003. In this case,[2] the ACCC took action against Safeway for alleged contraventions of section 45, 46 and 47 of the then Trade Practices Act 1974 (TPA).  Specifically the ACCC alleged that Safeway had misused its market power by ceasing to sell George Weston’s bread because a number of Safeway’s competitors had commenced selling this plant baker’s branded bread at discounted prices.  In other words, Safeway had decided to punish George Weston because it was selling cheap bread to Safeway’s competitors.

That Safeway was seeking to punish George Weston in relation to its supply of discounted bread was clear when it emerged that Safeway had deleted more George Weston bread brands than had been discounted by Safeway’s competitors. As explained by the Full Federal Court:

in each of the nine incidents there were "over-deletions" by Safeway; that is to say, Safeway deleted a wide range of the plant bakers' bread and related products and not just the same kind of bread as the independent stores had been discounting.[3]

Ultimately, the Court found that Safeway’s purpose in deleting the plant baker’s products had been to:

deter the bakers concerned from engaging in competitive conduct by supplying cheap generic bread to the independent retailers.[4]

In other words, Safeway’s purpose in deleting these bread products was not to ensure that it obtained the lowest prices from its suppliers, but rather to try to stop suppliers from selling “cheap generic bread” so as to keep market prices up.

Safeway was fined a total of $8.9 million, including approximately $2 million for each of four separate contraventions of section 46.[5]

Liquor case
In 2003, the ACCC commenced legal action against both Woolworths and Liquorland Australia Limited, a subsidiary of Coles, in relation to a number of restrictive agreements with potential competitors the NSW liquor industry.[6] 

The ACCC alleged that Woolworths and Liquorland had engaged in anti-competitive conduct in breach of section 45 of the TPA by entering into alleged restrictive agreements with a number of operators of licensed premises in New South Wales. The ACCC claimed that Woolworths and Coles had entered into these agreements for the purpose of restricting or preventing the supply of packaged takeaway liquor to retail consumers in various local markets.[7]

The way in which Woolworths and Liquorland did this was by lodging objections to virtually all new liquor licence applications in NSW and then seeking to force the applicants to agree to restrictive terms.  The restrictive terms were aimed at preventing the applicants from engaging in the following competitive conduct:
  • selling packaged takeaway liquor from their premises 
  • opening a dedicated bottleshop 
  • establishing a separate drive-through bottleshop 
  • advertising or conducting promotions for the sale of packaged takeaway liquor over the counter to consumers 
  • being able to offer home delivery services for packaged takeaway liquor to consumers, for parties, functions or home consumption 
  • increasing the size of their licensed premises to meet potential increased consumer demand 
  • holding particular volumes of packaged takeaway liquor on their premises in order to meet consumer demand.
The ACCC had been unable to attack this conduct under section 46 of the TPA, as Woolworths were not using market power but rather their legal rights of objection and also their “deep pockets” to prolong litigation in the Liquor Licensing Court. Accordingly, the ACCC used section 45 of the TPA to allege that the relevant agreements constituted both:

·  an illegal cartel due to the existence of exclusionary provisions; and
·  an agreement which had the purpose of substantially lessening competition in a local market.

The comments made by Justice Allsop of the Federal Court provide the best explanation of Woolworths and Liquorland’s purpose in engaging in the conduct:

A substantial purpose of the [Woolworths] objections and of the provisions was to prevent the licence being or becoming the platform or vehicle for a market entrant without restriction on its licence… It was a purpose to ensure, as far as was possible by the provisions, that the licence to be granted could not in the future be available as a scarce and potent item to be used by an entrant to the business of selling takeaway liquor in the local area where Woolworths had, or would shortly have, a liquor outlet.[8]

Lying at the heart of the Act is the competitive process. A subjective purpose of a substantial commercial entity of substantially affecting competition is of the utmost seriousness. This is especially so when experienced senior officers undertook such conduct deliberately to ensure that licences did not become any form of competitive platform or threat. Whilst no particular effect was proved, I should approach the matter on the basis that the conduct was seen as relevantly important to protect Woolworths' interest by ensuring the absence of a competitive platform. It was of relevant commercial significance to Woolworths and should be viewed in that light.[9]

In other words, the ACCC’s case succeeded because it was able to prove that Woolworths and Liquorland’s purpose in entering into these deeds had been to substantially lessen competition in a number of local packaged takeaway liquor markets.

The Federal Court ultimately imposed total penalties of $11.75 million, consisting of $7 million against Woolworths and $4.75 million against Liquorland.[10]

Restrictive leases
In 2009, the ACCC announced that it had achieved a “major breakthrough for grocery competition in Australia”.[11] The “breakthrough” referred to a deal brokered by the ACCC which saw Woolworths and Coles agreeing not to enforce restrictive provisions in over 700 of their leases with supermarket landlords around Australia (Settlement). Dr Craig Emerson, the relevant Minister at the time, described the Settlement as “pro-competitive”.[12]

The Settlement was contained in two separate section 87B undertakings (Undertakings) from Woolworths and Coles to the ACCC. The Undertakings stated that in the course of the ACCC’s investigations, it had identified the existence of a wide range of restrictive provisions in lease agreements which could prevent the entry of supermarket operators into shopping centres.

The ACCC identified provisions in these agreements which had the effect of:[13]

·  prohibiting the lessor from granting a lease agreement to, or allowing the entry of, another supermarket operator in the shopping centre in which the relevant (Woolworths and Coles) supermarket is located;
·  imposing a penalty upon the lessor if the lessor granted a lease agreement to, or allowed the entry of, another supermarket operator in the shopping centre in which the relevant (Woolworths and Coles) supermarket is located;
·  prohibiting the lessor from granting a lease agreement to another supermarket operator, or to another supermarket operator over a certain floor size, in which the relevant (Woolworths and Coles) supermarket is located.

The Undertakings also stated the ACCC’s belief that the restrictive provisions may have had the purpose, effect or likely effect of lessening competition in various retail grocery markets. In addition, the ACCC was concerned that the restrictive provisions may have had the effect of preventing and/or hindering other supermarket operators from entering and competing in various retail grocery markets.

The Undertakings then set out what Woolworths and Coles had agreed not to do as part of the Settlement – namely:[14]
(a) not to give effect to, or threaten to give effect to, a restrictive provision contained in a lease agreement that is in operation as at the commencement of this Undertaking, after a period of five years from the date at which the relevant (Woolworths or Coles) supermarket commenced trading; or

(b) not to enter into a lease agreement that includes one or more restrictive provisions.
Lessons from history
The above three matters involving Woolworths and Coles tell us a great deal about the types of anti-competitive conduct which these companies have engaged in the past and may be engaging in at the current time.

First, Woolworths and Coles have a history of pressuring suppliers not to supply products and services (such as shopping centre space) to their competitors, either at all or at discounted prices. While the strategies implemented in the cases discussed above were blatant, it is likely that Woolworths are Coles are achieving the same type of outcomes now, albeit through more subtle means. For example, a likely strategy would be the inclusion of most-favoured nation clauses in their contracts with suppliers, which would have the effect of preventing suppliers from selling discounted product to their competitors.

Second, Woolworths and Coles will no doubt be continuing to use their legal rights of objection to oppose applications by their competitors for licences and planning permissions. As was shown in the liquor case, the fact that Woolworths and Coles may be exercising legal rights conferred upon them by legislation may not protect them from Competition and Consumer Act 2010 (CCA) if the ACCC can show that they are engaging in such conduct for an anti-competitive purpose.

Third, it would appear that both Woolworths and Coles have recognised that there is little point amassing a great degree of market power unless they can also take steps to entrench this market power by preventing new entry. Both Woolworths and Coles have sought to do this by entering into restrictive agreements with landlords and competitors for the purpose of keeping new entrants out of their markets. 

What should the ACCC’s approach be?
The ACCC has a very difficult task in trying to reign in the substantial degree of market of Woolworths and Coles. This is because competitive conditions in the relevant markets have deteriorated very significantly over the last 10 years, since the collapse of Franklins as a competitive force in grocery retailing.

The first challenge facing the ACCC will be to establish the appropriate internal structures to properly investigate any alleged misconduct by Woolworths and Coles. The ACCC will need to establish a dedicated supermarket investigation team, which is staffed by experienced and capable investigators.  The ACCC should avoid the temptation of putting lawyers in charge of this investigation, as lawyers generally do not have the investigatory skills needed to conduct major investigations

The second challenge facing the ACCC will be to gain the trust of suppliers. Unless the ACCC can win the trust of suppliers, the ACCC will not be able to obtain the information it will need for its investigations nor the evidence it will require to win its court cases. This will be a major challenge for the ACCC as it has limited ability to protect witnesses from retribution.  The only avenue which the ACCC may have in this regard is to make it clear that it will not hesitate to pursue actions under section 162A of the CCA in relation to any suspected retribution against any supplier witnesses.  Section 162A of the CCA states:

A person who:

(a)  threatens, intimidates or coerces another person; or
 (b) causes or procures damage, loss or disadvantage to another person;

for or on account of that other person proposing to furnish or having furnished information, or proposing to produce or having produced documents, to the Commission…is guilty of an offence punishable on conviction by a fine not exceeding 20 penalty units or imprisonment for 12 months.

The third challenge for the ACCC will be to complete its investigation in a timely manner.   If the ACCC casts its net too widely, it is going to struggle to complete its investigation in a reasonable period of time, which may result in evidence getting stale or potential witnesses changing their mind about assisting the ACCC.  The ACCC needs to focus its attentions on allegations which are both less complicated and which raise significant market issues. The ACCC must then focus its resources on bringing these cases to trial.  The ACCC must avoid the temptation of either

  • pursuing simple cases because they will have little market impact; or
  • trying to pursue complex cases with great market impact because such cases will take a long time to prepare and be difficult to win.
Where should the ACCC focus its attention
The ACCC should obviously focus its attention on allegations of conduct which are similar to the types of illegal conduct which Woolworths and Coles have been found to have engaged in previously (as outlined above).  The benefit of focusing on such conduct will be that if the ACCC is successful in its litigation against Woolworths and Coles, it will have a strong basis for asking the court to impose significant penalties because of their status as repeat offenders.

Since 1 January 2007, the maximum penalties for anti-competitive conduct, including contraventions of section 46 of the CCA, have been the higher of:

·  $10 million; or
·  three times the gain from the illegal conduct; or
·  10% of the offender’s annual turnover (if the gain cannot be calculated).

Therefore, under the CCA both Woolworths and Coles could now be liable for a maximum civil pecuniary penalty equivalent to 10% of their annual revenues for a competition law breach. To put that in context if we use Woolworths’ 2011 annual revenue figures,[15] this would equate to a maximum pecuniary penalty of almost $5 billion.  While it is unthinkable that an Australian court would ever impose a fine of such magnitude, there is a clear statutory intention that civil pecuniary penalties for anti-competitive conduct must rise significantly and far beyond the levels which have traditionally been sought by the ACCC and imposed by the Federal Court in relation to competition cases.

The ACCC can no longer fail to seek a penalty at all, as it did in relation to the restrictive shopping centre agreements entered into by Woolworths and Coles, or ask the court for an insignificant penalty, as it did in the Ticketek case,[16] where it sought a total penalty of $2.5 million for four deliberate contraventions of section 46. Rather the ACCC has to start asking the court for penalties which will have a significant financial impact on the offending company.  I doubt that a civil pecuniary penalty of anything less than $50 million would have a profound and enduring effect on large publicly listed companies such as Woolworths and Coles.

The ACCC should also urgently reconsider the Settlement it reached in 2009 with Woolworths and Coles in relation to the restrictive shopping centre agreements. One aspect of the Settlement which did not get a great deal of attention in the media at the time was the fact that the Settlement did not apply to restrictive provisions in leases which had been in operation for less than 5 years from the date that the relevant Woolworths or Coles supermarket commenced trading.[17]  In other words, the ACCC effectively permitted Woolworths and Coles to continue enjoying the benefits of the restrictive provisions in 148 agreements for a period of up to five years or up until 2014.

It is not clear why the ACCC agreed to this exception - either the restrictive provisions in the lease agreements were illegal and should be prohibited or they were not – there is no middle ground.  Furthermore, the Undertakings contain no explanation of the reasons for this "carve out”. 

The ACCC’s agreement to exempt 148 restrictive agreements for up to five years is even more puzzling when one considers the clear statement made by the ACCC in the Undertakings about the potentially anticompetitive effects of these restrictive provisions.  In the Undertakings, the ACCC stated that it was concerned that these restrictive provisions:

  • may have substantially lessened competition in retail grocery markets; and
  • may have prevented and hindered other supermarkets from entering retail grocery markets. 
Accordingly, given the ACCC’s serious concerns about the restrictive provisions, it is difficult to understand why it agreed to allow Coles and Woolworths to continue conduct for a period of up to five years in 148 different markets throughout Australia which may have the purpose and/or effect of:

(1)  substantially lessening competition;
(2)  excluding competitors from markets and
(3)  leading to higher grocery prices for consumers.

The ACCC should urgently review this Settlement and if necessary undo its anticompetitive effects.  The ACCC’s justification for undoing this settlement would simply be that it should not have entered into a Settlement with such an obvious anticompetitive effect in the first place.

The ACCC should also focus its attention on the existence of restrictive agreements between Woolworths and Coles and shopping centre owners in relation to bottleshops.  There have been numerous anecdotal reports that Woolworths and Coles have also entered into restrictive agreements with shopping centre owners in relation to their bottleshops. If this is the case, the ACCC should ensure that it investigates this allegation immediately and pursues a litigated outcome, with significant civil pecuniary penalties.

What needs to change?
The ACCC has the ability to punish Woolworths and Coles severely for its anticompetitive conduct. As stated above, the ACCC can seek civil pecuniary penalties of up to 10% of their annual revenues for contraventions of the competition provisions of the CCA. The ACCC can also seek civil pecuniary penalties of $1.1 million for each contravention of the unconscionable conduct provisions of the Australian Consumer Law.

However, ultimately there is limited utility in the court simply imposing large civil pecuniary penalties against Woolworths or Coles, without trying to pursue some additional remedy which may reduce the degree of market power which these companies enjoy in the market.

Some commentators have suggested that a possible solution would be to create a Supermarket Ombudsman.[18] However, it is hard to see how such an Ombudsman could be effective in curbing the power of Woolworths and Coles, unless the Ombudsman was given substantially more power than the ACCC, which is unlikely. 

A more sensible, but admittedly highly controversial, proposal which has been made[19] would be to amend the CCA to give the ACCC the power to seek divestiture of assets in circumstances where it has proven that Woolworths or Coles have misused their market power to damage competition.

In the United States, divestiture has long been recognised as one of the remedies which can be sought in relation to monopolisation cases under antitrust laws.  Whilst this remedy has only been sought on rare occasions, there are two notable examples.[20] 

The first divestiture in US antitrust history in relation to a monopolisation case occurred in 1911 when the US Supreme Court ordered the dissolution of the Standard Oil Trust into 34 separate companies after the company had gained almost monopoly power in the US fuel industry.[21] The other significant divestiture case occurred in 1982 when AT&T consented to being broken up into seven regional service companies or “Baby bells” after becoming a virtual monopoly in the provision of telephony services.[22] 

These cases show that a divestiture remedy is both feasible and appropriate in situations where a company has amassed a substantial degree of market power and has used that market power to damage competition.

A divestiture remedy is also a remedy which could be applied quite effectively in the supermarket industry. For example, the ACCC would be able to seek an order from the court that Woolworths or Coles be required to sell a particular store or stores to its competitors to enhance competition in the market. 

Conclusions
The ACCC has a very difficult task ahead of it in seeking to properly investigate the various complaints which is it receiving from suppliers about the alleged illegal conduct of Woolworths and Coles.  However, history would suggest that the ACCC should focus its attention on three main areas (1) conduct which is similar to the illegal conduct engaged in by Woolworths and Coles in the past, (2) the terms of the 2009 settlement with Woolworths and Coles in relation to restrictive leases, and (3) the possible existence of restrictive agreements in the liquor industry.

To be successful in its pursuit of this conduct, the ACCC will have to quickly focus its efforts on two or three promising cases, rather than casting its net too wide. In this way, it will maximise its chances of running a successful case. The ACCC must also make sure that it does not “drop the ball” once it has identified an appropriate case, by either not seeking a civil pecuniary penalty at all or seeking an entirely inadequate penalty. The ACCC’s ability to seek significant civil pecuniary penalties in misuse of market power cases should be supplemented by a divestiture power.

The ACCC has created a great deal of expectation that it will achieve a significant outcome in its investigations of Woolworths and Coles.  Indeed, the reputation and credibility of the ACCC and its Chairman will be made or lost depending on the outcome which the ACCC achieves in this investigation. If the ACCC is going to have any chance of delivering on this expectation, it must make sure that it does not ignore the lessons of history.



[1] For example Supermarket giants attacked for intimidation, Lateline, 21 March 2012 - http://www.abc.net.au/lateline/content/2012/s3460798.htm
[2] Australian Competition and Consumer Commission v Safeway Stores Pty Limited [2003] FCAFC 149 - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCAFC/2003/149.html?stem=0&synonyms=0&query=title(safeway%20)
[3] Ibid., para. 16.
[4] Ibid., para. 276.
[5] Australian Competition and Consumer Commission v Safeway Stores Pty Limited [No. 4] [2006] FCA 21- http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2006/21.html?stem=0&synonyms=0&query=title(safeway%20)
[6] The author was the Director in charge of the ACCC’s investigation and litigation against Woolworths and Liquorland. ACCC institutes legal proceedings against Woolworths, Liquorland alleging anti-competitive liquor deals, ACCC news release, dated 30 June 2003 - http://www.accc.gov.au/content/index.phtml/itemId/346179/fromItemId/378016
[7] Ibid.
[8] Australian Competition and Consumer Commission v Liquorland (Australia) Pty Ltd and Ors [2006] FCA 826 at para. 831 - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2006/826.html?stem=0&synonyms=0&query=title(liquorland%20)
[9] Australian Competition and Consumer Commission v Liquorland (Australia) Pty Ltd and Ors [2006] FCA 1799 at para. 15 - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2006/1799.html?stem=0&synonyms=0&query=title(liquorland%20)
[10] Ibid., para. 34.
[11] Supermarket agreement opens way for more competition, ACCC news release, dated 18 September 2009http://www.accc.gov.au/content/index.phtml/itemId/893478
[12] Competition barriers to major supermarkets being torn down, Media Release by The Hon Dr Craig Emerson, Minister for Innovation, Industry, Science and Research, dated 18 September 2009.
[13] Undertaking to the ACCC given for the purposes of section 87B by Coles Group Limited, dated 17 September 2009 -http://www.accc.gov.au/content/item.phtml?itemId=893471&nodeId=a2da716b9168b7809f0d8eb136328eb9&fn=Undertaking.PDF and
Undertaking to the ACCC given for the purposes of section 87B by Woolworths Limited, dated 17 September 2009 - http://www.accc.gov.au/content/item.phtml?itemId=893470&nodeId=09c305f68e7f97f331d7f32a15c7a31e&fn=Undertaking.PDF. 
[14]  Ibid.
[16] Ticketek Pty Ltd penalised $2.5 million for misusing its market power, ACCC news release, 22 December 2011 - http://www.accc.gov.au/content/index.phtml/itemId/1023878/fromItemId/966100
[17] Clause 15(a) of the Undertakings cited at footnote 14 above.
[18] For example, the Australian Good and Grocery Council, Choice and Associate Professor Frank Zumbo.
[19] Nick Xenephon quoted in Lateline article, op. cit footnote 1 above.
[20] The power of US courts to order divestiture in monopolization cases does not arise from a specific statutory provision but rather from the court’s equitable jurisdiction.
[21] Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911) - http://supreme.justia.com/cases/federal/us/221/1/case.html
[22] United States v. American Tel. and Tel. Co., 552 F. Supp. 131 - Dist. Court, Dist. of Columbia 1982 - http://scholar.google.com/scholar_case?case=12093892347857939076&q=552+F.+Supp.+131&hl=en&as_sdt=2002

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