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Part 17 – The Settlement – Continued
Introduction
As outlined in the Part 16 of The Untold Story, in July and August 1998 the ACCC was being heavily criticised by all of the players involved in the Waterfront Dispute for refusing to settle its case by simply walking away. Indeed, it was quite a remarkable achievement of the ACCC to have unified all the warring parties against it in this way.
Quandary
Amongst all the criticism, there was some support for the ACCC’s position from an unlikely quarter – namely, Terry McCrann.
McCrann was almost alone in expressing his understanding of, and support for, the ACCC's position. In an opinion piece in the Herald Sun on 5 August 1998, entitled “Fels and the law get in the way of the peace deal”,[1] McCrann insightfully described the dilemma facing the ACCC.
Trustbuster Allan Fels has become the embarrassing uninvited guest at the waterfront party that everyone is trying to pretend it really isn't there.
It's not because he spiked the punch, then immediately polished it off, and is now behaving like an all-round hoon.
In fact the exact opposite. It's like he's just - politely – reminded the partygoers that smoking pot is still illegal. And, well, the law must be enforced.
McCrann continued:
But we ended up with a classic IR ‘deal’ to settle the dispute, and the MUA agreed to abandon its conspiracy action against its two opponents.
The only problem was that Fels and his ACCC had initiated separate actions under the Trade Practices Act against the MUA for its actions during the dispute.
Not unreasonably – in IR terms – the MUA wants this action called off as part of the overall ‘deal’. If it abandons its legal action against Patrick/government, so should actions against it (be abandoned).
This would also be perfectly reasonable in ordinary legal terms, if the action was being taken by Patrick and/or the government. You scratch my back and I'll tickle yours.
Trouble is, the action is by a quite independent party, charged with enforcing the law. It can't – and most definitely should not – simply back off to facilitate the ‘deal’.
Fels spelt this out in crystal clear terms last night, when he said quite simply the ACCC could not just turn a blind eye to substantial, very public breaches of the law.
Further, to do so would open a Pandora's Box. It would set the precedent to every other transgressor to plead a similar argument.
It would only destroy the credibility of the ACCC and Fels himself…
Imagine if the police turned a blind eye to crimes when they could be persuaded it ‘suited’ various parties.
Fels is seeking two things. That the MUA offer a settlement for the damage caused innocent third parties during the dispute as a result of its allegedly illegal behaviour.
And that it promise not to engage in those allegedly illegal acts again.
The second might be easy, except that in IR terms it would amount to the MUA unilaterally disarming itself for future fights. On pain of very heavy penalties.
While the first is much harder, because Fels is talking big dollars. A figure of $10 million has been tossed around.
Such a settlement would have to come from the MUA, and it is unlikely to pay that sort of money willingly, as it feels its members were hard done by the dispute.
And after all, it’s given up its options for suing the government/Patrick.
In practice, some or all of the money should come from Patrick, as part of the price of settling the dispute.
McCrann concluded with the following:
In short, there is no easy way to get Fels off the MUA’s back. And it hasn't helped that the MUA has tried to pretend that the ACCC wasn't there.
On the one hand, the MUA told the ACCC in mid-June that it would come back with a settlement proposal. It never has.
And on the other, MUA secretary John Coombs just blusters in public, saying that Fels should join the deal and abandon the litigation like everyone else.
It's a completely false argument. Fels has to enforce the law. He can agree a settlement, but he just can't ignore the damage the MUA did.
The most interesting aspect of McCrann's article was a suggestion that Patrick should contribute to compensating parties for the financial damages caused by the MUA. At that time, I thought that his suggestion that Patrick pay the MUA’s damages bill was pretty outlandish. However, that is exactly what ended up happening.
MUA digs in
McCrann's references to John Coombs, blustering in the media was a reference to the following types of statements which he was making at that time:[2]
I'll tell you something now: if Fels doesn't drop off, the whole peace deal is over. Why would I withdraw my rights to take [the Minister for Workplace Relations] Mr Peter Reith and Patrick to trial to face conspiracy allegations and leave myself exposed to Fels handful of exporters or importers with its $10 to $20 million worth of damages? Jesus Christ… I have lost my senses and I'm not about to.
Greg Combet was also adamant that the MUA would not pay any damages:
It’s in the public interest that the ACCC should drop off and they have an obligation under their Act to have regard to the public interest.[3]
Combet described the ACCC’s demands that the MUA would have to pay damages for their illegal conduct as “just fantasy”.
Coombs continued his assault on the ACCC with the following letter to the editor which I will quote at length:[4]
Your [AFR’s] leader writer describes the waterfront dispute as a punch-up between “two drunks”, the MUA and Patrick, in the front bar (“Fels stands up to Coombs”, AFR editorial, August 5). Everyone else, you claimed, was an innocent bystander.
Well, there were more than two in the ring a bit punch drunk during the great docks fight. The fight broke all the rules of fair play, with “promoter” Reith forever claiming the MUA was down when we were still well and truly on our feet.
Ten out of the 11 judges agreed the union had a case and that evidence suggested Patrick and others had conspired to have the workforce illegally sacked for being members of the union. The referee, in this case the High Court, ended the contest with the MUA winning on points.
Isn't it, then, a bit below the belt for your leader writer to now egg on the pugnacious Professor Fels, challenging the union to pay out $10 million in damages when we have not been found guilty of anything?
Now the brawl is over, the ACCC wants to pick a fight with the union, while turning a blind eye to those really responsible for any bruising that business suffered.
The hypocrisy of the ACCC tenaciously pursuing the union, while ignoring other complaints, is well documented. Not so long ago the ACCC failed to take on foreign shipowners over alleged price-fixing collusion.
The ACCC declined to assist importers in 1995 – 1996, despite requests from the Australian importers and despite legal advice that the price increases on freight could have been in breach of the Trade Practices Act.
The price hikes are estimated to have cost the Australian community between $45 million and $90 million over the past three years – costs which have been passed onto Australian consumers in the prices of the imported goods they buy and which far exceed the $10 million in damages allegedly caused by the waterfront dispute.
Well, if Professor Fels wants to take on the MUA, so be it. But if he continues with the ACCC legal action the matter could well end up back in the courts as early as next week. The implementation of the Deed of Settlement depends on the condition precedent that ACCC litigation “be discontinued, settled or dealt with to the reasonable satisfaction of the MUA”. It is worth noting that Mr Reith, if not Professor Fels, is a signatory to the deed.
These comments from Coombs provoked a swift response from Professor Fels who immediately issued the following news release:
ACCC not 'soft' on applying Trade Practices Act[5]
The Maritime Union of Australia is claiming that the ACCC is soft in applying the Trade Practices Act 1974 to business, Australian Competition and Consumer Commission Chairman, Professor Allan Fels, said today.
In fact the ACCC is widely acknowledged to have been extremely vigorous in applying the Trade Practices Act to break up price-fixing and other cartel agreements; the abuse of market power by monopolists; anticompetitive mergers; misleading and deceptive conduct; and unconscionable conduct affecting small business and consumers. It has applied the law without fear or favour to the biggest and most powerful corporations and interests in the land.
The MUA has cited a particular 1995/96 decision not to pursue a price increase by some importers. The key point is that there is a major exemption to prices by shippers written into Part X of the Act. This has been strongly supported by the MUA. The ACCC has strongly opposed this exemption for many years and has tried to get it lifted.
It was essentially because of the Part X exemption that the 1995/96 price rise was not pursued to litigation. Every enforcement agency, no matter whether vigorous or lax, has marginal cases. The 1995/96 price rise was marginal to negative in the ACCC's assessment. A very selective quotation has been taken from an ACCC letter to the industry at the time - even that letter makes it clear that the matter was at most marginal.
What is not said is that as a result of the ACCC's preliminary investigations the price increase was withdrawn (although later some of the increases may have found their way into unambiguously exempt freight charges).
More generally the ACCC has been vigorous in applying the law to the waterfront. It vigorously opposed with success the attempt by P&O to take over the bulk of Port Adelaide some years ago. As a result a new entrant, Sealand, entered the Australian market. It recently opposed Adsteam tugboat mergers in Sydney in court (even though it effectively lost that case). This is not to say that there are not limitations on the effectiveness of the Act in relation to the waterfront. The Act can foster competition, it cannot force it in certain industry structures.
The MUA's claims cannot be taken seriously. They are simply a crude attempt to discredit an independent regulator doing its job properly and to divert attention from issues affecting parties to the recent dispute on the waterfront.
On that same day, the ACCC issued a second news release following comments attributed to Patrick about its future pricing strategies:[6]
ACCC asks Patrick to explain pricing comments
The Australian Competition and Consumer Commission has asked Patrick Stevedore to explain its pricing policies after the resolution of the waterfront dispute. The request follows claims made in the Australian Financial Review where it is reported:
'While Patrick has said publicly it is reviewing pricing, it is understood the company - while promising improved efficiencies and reliability - will resist prices reductions'.
Public statements by Patrick that it is not intending to pass on cost savings in the form of reduced prices, prior to the conclusion of contract negotiations, may be construed as a sign of a lack of competition, ACCC Chairman, Professor Allan Fels, said today.
It is also difficult in most industries to predict what a firm's own prices will be without knowing what other firms in the industry will charge. The ACCC has asked Patrick about this aspect, that is, is their prediction based on a knowledge of the price of their competition?
The ACCC has sought information about whether any comments have been made by Patrick management or employees, since the agreement with the Maritime Union of Australia was announced on 25 June, that it is not intending to pass on any cost savings in the form of reduced prices for stevedoring.
Further, the ACCC has asked Patrick if it is its present intention to pass on savings achieved as a result of the agreement with the MUA.
The ACCC was concerned that Patrick may be engaging in price signaling – effectively, seeking to signal its future pricing intentions to its major stevedoring competitor, P&O Ports. There is little doubt that P&O was concerned that Patrick may use its lower cost structures to drop stevedoring prices in order to win business. However, P&O responded to this threat by seeking a similar outcome to Patrick. It entered into negotiations with the government and the MUA to reduce its MUA workforce. It was also able to avoid having to pay its redundancy liabilities out of its own resources because it was able to access the special stevedoring levy introduced by the government to fund MUA redundancies.
Settlement
While the recriminations kept flying between Professor Fels and John Coombs in the media, there had actually been some significant progress behind the scenes in terms of settling the ACCC’s litigation. The break came when Chris Corrigan agreed to make a contribution towards compensating the small businesses which had been damaged by the MUA’s conduct.
I must admit that, to this day, I do not know who had the idea to get Patrick to pay the compensation on behalf of the MUA. While the idea had been first raised by Terry McCrann in his article quoted above, I do not know who internally at the ACCC came up with the idea.
However, I understood why Patrick had agreed to paying compensation. Patrick was quite desperate to settle the dispute so they could get back to work with their new streamlined MUA workforce. It was apparent to us that with the loss of a few hundred MUA workers and the fact that these redundancies were to be paid for, not by Patrick, but through an industry levy, that Patrick would become a very profitable company very quickly.
Despite not knowing where the idea came from, I saw the logic of this approach to the settlement. It was clear in my mind that Patrick’s actions had triggered the entire dispute and as such they could and should be held to account for the damages.
On 1 September 1998, with most of the details of settlement worked out, the ACCC was confident enough to issue a news release announcing the details of the settlement:
Waterfront dispute case settled[7]
A settlement has been reached in relation to the Australian Competition and Consumer Commission litigation concerning the waterfront.
The settlement has been endorsed today by the Federal Court of Australia.
The settlement provides that a damages fund of up to $7.5 million, funded by Patrick Stevedore Holdings Pty Ltd, will be available for small businesses damaged by the boycotts during the dispute.
Also, the Maritime Union of Australia has provided a formal undertaking to the Federal Court not to repeat boycotts alleged to be unlawful by the ACCC during the dispute.
The damages fund will be administered by a trustee and payments will be subject to proof of losses arising from the waterfront dispute.
Small businesses which do not have an alternative claim for compensation, such as insurance, will be given priority over other claimants on the fund. A limit will be set on individual claims.
The undertaking is for two years.
There is an associated dispute settlement procedure.
The undertaking does not apply to normal industrial relations actions protected under the TPA or Workplace Relations Act 1996. It also does not apply to lawful conduct to ensure compliance with relevant occupational health and safety legislation nor for the protection of international seafarers through the MUA's flags of convenience campaign.
The ACCC is satisfied with the outcome, ACCC Chairman, Professor Allan Fels, said today. Its objectives were:
- compensation to small business damaged by the dispute; and
- an appropriate undertaking to the Court by the MUA, as is usual in TPA cases, not to repeat similar behaviour.
These objects have been met and the ACCC has agreed to settle the case.
We also decided to add the following comments in a “Background” section to the news release to fully explain the ACCC’s position in pressing for this settlement:
Background
In 1996 Federal Parliament greatly strengthened the secondary boycott provisions of the Trade Practices Act 1974.
The ACCC is responsible for seeking compliance with the Act. The ACCC did not take sides in the waterfront dispute but it was concerned to ensure that there were no breaches of the law during that dispute.
The ACCC believes that there were substantial, very public breaches of the boycott provisions of the Act which damaged small business and exporters. It issued several warnings to the MUA which were ignored. It had no option then but to take court action. It did not seek penalties. Its actions were directed to obtaining compensation for small businesses damaged by unlawful boycott behaviour and securing of appropriate court orders or undertakings to the Court by the MUA not to repeat similar unlawful behaviour in the future (a standard Trade Practices Act resolution).
The parties to the dispute approached the ACCC in mid-June about a settlement. The ACCC made it clear that it was prepared to settle and advised the parties of the parameters of a possible settlement. These included a compensation fund and a consent court order or an undertaking to the Court which had a similar effect.
Regarding the funding of the compensation payment the ACCC indicated at all times that it had no views as to who paid as it was not involved in taking sides in the rights and wrongs of the waterfront dispute. Its concern was merely the protection of the legitimate interests of small businesses damaged by unlawful actions that occurred during the dispute. There was no effective response by the parties to these proposals until last week. Claims by the MUA that the ACCC was delaying completion of the total agreement on the waterfront were without foundation. Claims that the total resolution of the waterfront dispute would 'come undone' unless the ACCC withdrew its case always lacked foundation and were merely an attempt to avoid compliance with the ACCC's reasonable proposals for settlement.
The ACCC is continuing to investigate a number of matters on the product market side of the waterfront.
The ACCC has perceived it as important to the integrity of the Act that it should have sought to uphold the law during the dispute.
As stated above, the settlement consisted of two parts.
First, there was an agreement by Patrick to pay up to $7.5 million into a trust fund to compensate small businesses who had suffered loss or damage as a result of the Waterfront Dispute. The reason the amount was expressed as “up to $7.5 million” was because the amount which Patrick ultimately had to contribute to the fund depended on particular conditions being met. As it turned out these conditions were not met, so Patrick only ever had to contribute a total amount of $5 million to the fund.
Second, the MUA consented to a range of injunctions in relation to their future conduct and an alternative dispute resolution procedure.
I will discuss the elements of the settlement in more detail in the next post.
Hiccup
Unfortunately, we did experience one strange hiccup in the last stages of the settlement which caused us considerable anxiety.
As stated in the ACCC’s news release a settlement had been “endorsed by the Federal Court” on 1 September 1998. This statement was true when we made it.
Once we had reached a settlement with the MUA and Patrick and agreed the proposed orders and undertakings with the MUA, we approached Justice North to have the orders made. Unfortunately, Justice North was unavailable to make the orders on 1 September 1998.
Accordingly, in the interests of settling the case sooner rather than later, we decided to approach Justice Beaumont (who was after all the judge hearing the larger and more significant of the two ACCC cases), to make the orders. Justice Beaumont made the orders in chambers and the ACCC issued its news release announcing the settlement later than day.
However, after we had obtained the orders and issued the media release, we received advice from the Federal Court that Justice Beaumont had withdrawn his orders and that the orders would now be made by Justice North on 3 September 1998. While we never knew the precise reasons for this strange development, I have my own personal theory about what happened.
Justice North decided to hold a hearing to make the orders. After some fanfare Justice North, made the requested orders finally settling the dispute on 3 September 1998.
Justice North obviously liked some aspects of the settlement as he went so far as to congratulate the parties:
I congratulate the parties upon resolution of a most difficult dispute in a way which appears to be creative and innovative.
Justice North’s orders were followed shortly thereafter by Justice Beaumont remaking his earlier orders.
[1] Terry McCrann, Fels
and the law get in the way of a peace deal, Herald Sun, 5 August 1998, pp. 29, 31.
[2] Peace deal docks but stays on hold, Financial
Review, 5 August 1998,
p. 5.
[3] Dispute casts pall
over docks deal, Financial Review, 6 August 1998, p. 5.
[4] Docks jibe takes wrong
tack, Financial Review, 7 August 1998, p. 36.
This article first appeared in the CCH Australian Competition & Consumer Law Tracker, Issue 5, May 2012.
Introduction
The US Department of Justice’s (DOJ) announcement of its legal proceedings against Apple Inc (Apple) and a number of major publishers was accompanied by a great deal of fanfare. For example, Attorney General Eric Holder stated at the press conference which was held to announce the legal action that “[T]oday’s action sends a clear message that the Department’s Antitrust Division continues to be open for business – and that we will not hesitate to do what is necessary to protect American consumers.”[1]
Despite the rhetoric, the DOJ’s case against Apple is far from being an antitrust success story. This is because the DOJ has decided to yet again take civil proceedings against Apple for engaging in a naked price fixing arrangement in breach of section 1 of the Sherman Act. It is difficult to understand why the DOJ commenced civil proceedings against Apple and the five major publishers given that the parties were involved in a blatant high-level cartel which, according to some estimates, may have cost US consumers alone more than $100 million. [2]
The DOJ’s decision to take civil proceedings against Apple is even harder to understand given that it is only a year since the DOJ decided to settle yet another serious cartel investigation into Apple on a civil basis.[3] Ultimately, the DOJ’s approach to Apple’s serious antitrust indiscretions will achieve little unless it starts seeking the imposition of criminal sanctions. Indeed, it is only through the imposition of criminal sanctions that Apple may start thinking differently about antitrust laws.
Background
The commencement of legal proceedings against Apple and the five publishers was highly anticipated. This is because the enforcement action followed the commencement of a number of private class actions against both Apple and the publishers in the US during 2011. There had also been a number of rumours that the DOJ, the European Commission and other regulators were investigating the conduct of Apple and its alleged co-conspirators.
The DOJ’s action against Apple and five different book publishers – Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster was for allegedly entering into an illegal cartel to force up the prices of e-books. In response to the allegations, three of these publishers – Hachette, HarperCollins and Simon & Schuster agreed to settle. These proposed settlements will be discussed in more detail below.
In general terms, the DOJ alleged that senior executives at each of the publishers worked together in an elaborate plan to eliminate competition among stores selling e-books, ultimately increasing prices for consumers. The focus of their plan was to eliminate the “wretched $9.99 price point” for new releases and bestsellers introduced to the e-book market by Amazon.
As explained in the DOJ’s Complaint,[4] the publishers had long feared that the lower retail prices for e-books would eventually lead to lower wholesale prices for all books. However, whilst senior executives met regularly to bemoan this particular development, they also recognised that individually they were unable to do anything about Amazon’s discounting activities.
The publishers understood that if any of them decided to unilaterally cease supplying books to Amazon because of their $9.99 price point for new release and bestseller e-books, they were likely to lose a large volume of sales which would make the decision highly unprofitable. As stated by one of the executives of the publishing companies:
…we’ve always known that unless other publishers follow us there is no chance of success in getting Amazon to change its pricing practices…without a critical mass behind us Amazon won’t negotiate, so we need to be more confident of how our fellow publishers will act.[5]
The publishers were not only worried about Amazon’s low prices for e-books, but also that Amazon may decide to establish its own digital publishing business in competition with the publishers. This would have meant that Amazon would be in a position to sell its own e-books rather than having to rely on supply from the major publishers.
The major publishers had some legitimate cause for concern about this development. As stated in the DOJ’s complaint, Amazon had in fact taken the first steps in establishing its own digital publishing business. On 18 January 2010, Amazon had a meeting with a number of prominent authors and agents in New York to explain its plan to become a digital publisher. Amazon advised its audience that in future authors would be able to take their books directly to Amazon to be digitally published and sold through Amazon’s online bookstore. In return, Amazon would pay royalties of up to 70% which was far in excess of the royalties which traditional book publishers paid authors. When the major publishers heard about this particular meeting, they became incensed.[6]
Unlawful conduct
According to the DOJ, the publisher’s alleged unlawful conduct started in late 2008. At this time, the senior executives of the major publishers started discussing ways of dealing with the “Amazon problem”. There were a series of meetings and telephone discussions between these executives to work out a strategy to counter Amazon’s pricing strategy.
The DOJ alleged that all five publishers had agreed by 2009, at the latest, to act collectively to try to raise retail prices above the $9.99 price point for the most popular e-books. However, even though the publishers had agreed on the outcome which they wanted to achieve, they could not decide on a mechanism to achieve that outcome.
As stated by an executive of one of the publishing companies at that time:
In the USA and the UK, but also in Spain and France to a lesser degree, the ‘top publishers’ are in discussions to create an alternative platform to Amazon for e-books. The goal is less to compete with Amazon as to force it to accept a price level higher than 9.99…I am in NY this week to promote these ideas and the movement is positive with [the other publishers].[7]
The initial approach contemplated by the publishers was to establish a number of “sham” joint ventures. As stated by John Makinson, CEO of the Penguin Group:
Competition for the attention of readers will be most intense from digital companies whose objectives may be to disintermediate traditional publishers altogether. This is not a new threat but we do appear to be on a collision course with Amazon, and possibly Google as well. It will not be possible for any individual publisher to mount an effective response, because of both the resources necessary and the risk of retribution, so the industry needs to develop a common strategy. This is the context for the development of Project Z [joint ventures] in London and New York.[8]
In late 2009, the publishers changed their approach. They decided that a more effective way of getting Amazon to “return to acceptable sales practices” would be to move away from a wholesale model to an agency model.
The traditional way that books are sold is through a wholesale model. Under this model, publishers sell books to retailers at wholesale prices and leave it up to the retailer to set their own retail prices.
However, under the agency model it is the publisher that retains control over retail pricing by retaining property or ownership of the books until they are sold to the end customer. A publisher appoints a retailer as its agent who must then sell the e-books at the price determined by the publishers.
It was at about this time, in late 2009, that Apple became involved. Apple had long been contemplating entering the e-book market, but the low prices were proving to be a disincentive. As stated in the complaint:
Apple had long believed that it would be able to “trounce Amazon by opening up [its] own ebook stores, but the intense price competition that prevailed among e-book retailers in late 2009 had driven the retail price of popular e-books to $9.99 and had reduced retailer margins on ebooks to levels that Apple found unattractive.[9]
Interestingly, the first alternative which Apple considered when deciding how to enter the e-book market was whether it should enter into a global cartel with Amazon to carve up the market. As stated in the DOJ’s complaint, the first strategy that Apple considered was to enter into a cartel with Amazon to illegally divide “the digital content world” allowing each to “own the category of its choice – audio-visual to Apple and e-books to Amazon.”[10]
It appears that Apple abandoned its plans to enter into a cartel with Amazon in favour of facilitating a cartel between the five major publishers.
Towards the end of 2009, Apple started actively pursuing its plan to enter the ebook market – a plan which it described in internal documents as its “aikido move”.[11]
In early December 2009, Eddie Cue, Apple’s Vice President of Internet Services telephoned each of the publishers to schedule exploratory meetings in mid December 2009 in New York.
After receiving these calls from Cue, the senior executives from HarperCollins and Hachette contacted each other to discuss their preferred strategy. They agreed that the way forward was to move to an agency model.
Over the next couple of weeks, all of the publishers advised Apple of their intention of moving to an agency model.
A second round of meetings between Apple and the publishers occurred during the week commencing 21 December 2009. During these meetings Apple proposed that each of the publishers force all of their retailers, not just Amazon, to move to an agency model. As stated in the complaint, this proposal appealed to the publishers because “wresting pricing control from Amazon and other e-book retailers would advance their collusive plan to raise retail e-book prices”.[12]
After these meetings, Cue reported to the late Mr Steve Jobs, the CEO of Apple, that the publishers saw the “plus” of working with Apple to “solve the Amazon problem”. However, he added that the publishers did not like Apple’s proposed pricing of $12.99 for new release and bestseller e-books, which they believed was too low.
Apple realised that it had considerable leverage with the publishers who were desperate to solve the Amazon problem. Accordingly, Apple demanded a commission of 30% on the sale of every e-book sold through its iBookstore. The publishers were even more reluctant to agree to this level of commission given Apple’s proposed pricing of $12.99 for new release and bestseller ebooks.
Negotiations between Apple and the publishers continued throughout late December 2009 and January 2010. Apple became the go-between for the publishers, keeping each publisher informed of the progress of negotiations with the other publishers. Apple also assured each publisher that its proposals to each of the publishers were the same – ie that it was not planning to cheat on the cartel by doing a more favourable deal with any of the publishers.
In early January 2010, Cue emailed a proposal to all the publishers which contained the following features:
- the publishers would become the principals and Apple the agent for e-book sales;
- the publishers would introduce an agency model for all other e-book retailers;
- Apple would receive a 30% commission on each e-book sale; and
- each publisher would have identical pricing tiers for e-books sold through Apple’s iBookstore.
On 11 January 2010, Apple emailed a formal e-book distribution agreement to all the publishers. This formal agreement contained three significant changes to the earlier proposal – namely Apple:
- demanded that the publishers provide Apple with their complete e-book catalogs;
- demanded that the publishers not delay the electronic release of any title behind its print release; and
- introduced a most favoured nation clause (MFN).
The way the MFN clause operated was to require that each publisher guarantee that it would lower the retail price of each book in Apple’s iBookstore to match the lowest price offered by any other retailer, even if the publisher did not control that other retailer's ultimate retail price.
While the DOJ described this MFN clause in the complaint as being “unusual”, this is not entirely correct in the context of an agency model. Because the publishers were proposing to set the retail prices for all e-books, there was no point having a traditional MFN forcing publishers to reduce their wholesale e-book prices to match the lowest wholesale prices in the market. Rather what Apple needed was some assurance that the publishers would not be able to offer e-books through other retailers at prices which were below the prices which Apple was selling the same e-books. As is apparent the practical effect of the MFN was to fix the retail prices for e-books.
However, the illegal conduct did not end there. The publishers were still concerned about Apple’s proposed $12.99 pricing point, particularly if they were going to have to pay Apple 30% commission. In response to the publisher’s concerns, Apple agreed to modify the agreement.
On 16 January 2010, Apple sent a revised agreement to all the publishers which included two significant concessions to the publishers:
- the addition of new maximum pricing tiers for e-books of either $16.99 or $19.99 depending on the books hardcover list price; and
- a carve out for e-book versions of books on the New York Times fiction and non-fiction bestseller list – namely a maximum e-book price of $12.99 for bestsellers with a hardcover price which was $30 or less and a maximum e-book price of $14.99 for bestsellers with a hardcover price between $30 and $35.
Between 24 January 2010 and 26 January 2010, all of the publishers signed the distribution agreements with Apple. The Apple Agency agreements took effect simultaneously on 3 April 2010 with the release of Apple’s new iPad.
Once the agency agreements took effect, the publishers raised e-book prices at all retail outlets to the maximum level permitted under the agreements.
Steve Jobs’ involvement
It is also apparent from the DOJ’s complaint that Steve Jobs was heavily involved in the events. The Complaint records the following statement allegedly made by Jobs to publishers about Apple’s e-book strategy:
We go to an agency model, where you [the publishers] set the price, and we get our 30% and yes, the customer pays a little bit more, but that’s what you [the publishers] want anyway.[13]
The Complaint also refers to a report in the Wall Street Journal following the 27 January 2010 iPad unveiling event. A journalist apparently asked Jobs why customers would buy an e-book from Apple at $14.99 when they could get the same book from Amazon for $9.99. Jobs apparently responded by saying “…that won’t be the case…the prices will be the same”.[14]
Finally, the Complaint recounts how Jobs personally intervened to try to get a publisher who had not agreed to sign an agency agreement to change their mind. Apparently, Jobs called the CEO of the “holdout” publisher,[15] at the behest of the respondent publishers, to advise that Apple would refuse to sell any of its e-books unless it agreed to enter into an agency agreement.[16]
Settlements
As stated above, three of the five publishers, namely Hachette, HarperCollins and Simon & Schuster, have agreed with the DOJ to a proposed settlement. Under the settlement, these publishers will be required to:
- grant retailers the freedom to reduce the prices of their e-book titles; and
- terminate their anticompetitive most-favored-nation agreements with Apple and other e-books retilers.
The settlement also includes injunctions prohibiting the publishers from placing constraints on retailers’ ability to offer discounts to consumers and from conspiring or sharing competitively sensitive information with their competitors.
Violations Alleged
The DOJ has alleged that the conduct of Apple and the publishers constituted a conspiracy and agreement in unreasonable restraint of interstate trade and commerce in violation of Section 1 of the Sherman Act. In particular, the defendants are alleged to have conspired:
- to raise, fix and stabilise retail e-book prices;
- to end price competition among e-book retailers; and
- · to limit retail price competition among publishers by fixing retail e-book prices.
The DOJ stated that the conduct had resulted in obvious and demonstrable anticompetitive effects on consumers in the trade e-books market by depriving consumers of the benefits of competition among e-book retailers. As stated above, one estimate has placed the total loss arising from the illegal cartel at $100 million in relation to US consumers alone.
Discussion
The question arises as to why, given the seriousness of the conduct, the DOJ decided to take a civil action against Apple and the publishers rather than commence a criminal prosecution. In deciding whether to pursue cartel conduct through a criminal prosecution, an antirust agency would generally consider a range of factors including:
- the anticompetitive effect of the cartel conduct;
- whether the conduct had been blatant;
- whether senior executives had been involved in the cartel conduct;
- whether the members of the cartel had taken any steps to conceal their conduct
- the level of remorse and contrition shown by the cartel members once they have been discovered;
- the duration of the cartel; and
- whether the participants in the cartel had previously been found to have engaged in similar cartel conduct.
It seems that even on a cursory consideration of the above factors, the DOJ should have pursued a criminal prosecution against Apple and the publishers. First, it appears that the alleged illegal anticompetitive conduct has created a great deal of consumer detriment, up to a $100 million overcharge in relation to US consumers alone. Second, the conduct appears to have been quite blatant with senior executives of each company, including the late Steve Jobs, being instrumental in creation of the cartel. Third, the Complaint also states that steps were taken by the publishers to conceal their illegal conduct. Finally, half of the participants in the alleged cartel have shown no apparent remorse or contrition, vowing the fight the case to the end.
Another very significant factor in deciding whether to pursue a cartel criminally is whether the company has been found to have engaged in illegal cartel conduct in the past. Therefore, a highly relevant factor for the DOJ should have been that just a year before, in May 2011, Apple settled a serious cartel investigation with the DOJ involving three illegal cartel agreements. These cartel agreements with Google, Adobe and Pixar had the purpose of prevented each of the companies from poaching the other’s technical staff.
The DOJ concluded that these particular agreements (as well as a number of similar agreements between Google, Intel, Intuit and LucasFilms) constituted naked restraints of trade in violation of section 1 of the Sherman Act. In particular, the DOJ described the competitive effects of these agreements as follows:
The effect of these agreements was to reduce Defendant’s competition for highly skilled technical employees (high tech employees), diminish potential employment opportunities for those same employees and interfere with the proper functioning of the price-setting mechanism that would otherwise have prevailed.[17]
For more details about this case see the previous post on this blog entitled Monsters Inc - No Headhunting Allowed, dated 4 August 2011 which can be found at: http://competitionandconsumerprotectionlaw.blogspot.com.au/2011/08/monsters-inc-no-headhunting-allowed.html
Despite these earlier blatant contraventions, the DOJ again decided to take civil proceedings against Apple in relation to a serious cartel allegation.The most likely explanation for the DOJ’s decision not to take criminal proceedings is due to a concern that they may not be able to prove their case to the criminal standard. This concern may arise from the fact that the agreements specify a maximum price, rather than a minimum price below which the publishers are not permitted to set their prices. Accordingly, the DOJ may have taken the view that because publishers retained at least the theoretical ability to set prices at levels which were lower than the maximum prices listed in the agreements, they had not technically agreed to fix prices.
However, it is hard to see how Apple or the publishers will be able to succeed with this argument, given the compelling evidence identified in the DOJ’s complaint. It is clear that the publisher’s goal was to eliminate Amazon’s $9.99 price point for new releases and best sellers. Furthermore, the evidence referred to in the Complaint shows that the publishers agreed to charge the maximum prices listed in the agreements, which is also what they ended up doing.
Conclusions
The DOJ has touted its case against Apple and the publishers as a significant achievement. Unfortunately, it is difficult to agree with the DOJ’s assessment of its case. Cartels of the type entered into by Apple and the publishers should, in all but the most exceptional cases, be punished with the imposition of criminal sanctions – they should not be resolved through civil proceedings.
Not only is it wrong as a matter of principle to resolve blatant cartel conduct engaged in by senior executives which has caused immense consumer detriment through civil proceedings, but civil such proceedings will not achieve either of the main goals of antitrust – namely, specific and general deterrence. Only through the imposition of criminal sanctions will large corporations, such as Apple, be deterred from engaging in illegal cartel conduct in the future.
Finally, it is hard to understand why Apple has again been subject to a civil proceeding for engaging in an apparently blatant cartel in relation to e-books given that only 12 months previously the DOJ settled an equally blatant cartel investigation against Apple on a civil basis. One thing is clear – it is only through the imposition of criminal sanctions that Apple may start thinking differently about antitrust laws.
[4] United States v.
Apple, Inc., Hachette Book Group, Inc., HarperCollins Publishers L.L.C.,
Verlagsgruppe Georg Von Holtzbrinck GmbH, Holtzbrinck Publishers, LLC d/b/a
Macmillan, The Penguin Group, A Division of Pearson PLC, Penguin Group (USA),
Inc., and Simon & Schuster, Inc.
[11] Ibid., p. 4. The description of Apples’ plan
as the aikido move seems quite ironic given the essence of aikido is a form of self-defence – ie to protect a person from
attack by using the attacker’s force against the attacker.
[15] It appears that the “holdout” publisher was Random
House.
I recently presented a paper at the Tonkin Corporation's Competition and Consumer Law Intensive held at the Grace Hotel in Sydney.
The title of my paper was Stocktake of the ACCC’s new powers and remedies under the Australian Consumer Law: the first 2 years.
My paper discusses how the ACCC has used its new powers and remedies under the Australian Consumer Law since their introduction in April 2010 until April 2012.
If you would like an electronic copy of my paper, please email me on michael@terceiro.com.au
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:
- 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.
[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.
[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.
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