Competition and Market Regulation Update March 2009

In this month’s Competition and Market Regulation Update we explore the following:

Airlines price-fixing cartel saga continues
ACCC rejects Air Canada and Air New Zealand cooperation
The global financial crisis and the ‘failing firm’ defence
Too chicken to merge?
New national consumer law targets unfair contract terms
Is your Joint Venture about to become illegal?

Airlines price-fixing cartel saga continues

The domestic and international fallout from the price-fixing air-freight cartel continues. The Competition and Market Regulation Update November 2008¹ examined the proceedings brought by the ACCC against Qantas and British Airways in relation to the alleged cartel, which involved up to 60 international airlines reaching an understanding with respect to imposing fuel surcharges for the carriage of air cargo on international routes. The conduct was uncovered following coordinated international raids on airline premises in Europe and the United States of America.

Both Qantas and British Airways admitted to giving effect to an understanding with other airlines with respect to fuel surcharges and received a penalty of $20 million and $5 million respectively from the Federal Court. Justice Lindgren held that the penalties would have been much higher had the airlines not cooperated with the ACCC. Qantas has already been subject to a $US61 million criminal fine in the United States of America, and one of its former United States executives was sentenced to six months jail and fined $US20,000 for his part in the cartel.  The New Zealand competition regulator, the Commerce Commission, has filed proceedings against Qantas in the New Zealand High Court. The cartel participants, including Qantas, also face substantial penalties in Europe and a possible $80 million class action from Australian freight companies and exporters.

In further ACCC litigation against cartel participants, on 10 February 2009 the ACCC instituted proceedings in the Federal Court against an additional four airlines for their involvement in the cartel. These airlines were Société Air France (Air France), Koninklijke Luchtvaart Maatschappij NV (KLM), Martinair Holland NV (Martinair) and Cargolux International Airlines S.A. (Cargolux). Each of the airlines made admissions and consented to the orders sought by the ACCC from the court. The orders granted include penalties of $5 million each for Cargolux and Martinair and $3 million each for Air France and KLM. Justice Lindgren also made orders restraining these airlines from engaging in similar conduct for five years.

Meanwhile, Singapore Airlines has indicated that it will defend proceedings brought by the ACCC on 22nd December 2008 in the Federal Court in relation to its alleged involvement in the cartel.

The ACCC’s investigations are continuing and further proceedings against other international airlines allegedly involved in the cartel could be initiated by the ACCC over the next few months.

ACCC rejects Air Canada and Air New Zealand cooperation

The ACCC has rejected an application for authorisation to give effect to a Cooperation Agreement between Air Canada and Air New Zealand (airlines).

The Cooperation Agreement would have created a joint venture between the airlines in relation to the coordination, sale and marketing of Air Canada’s non-stop direct services between Sydney and Vancouver and Air New Zealand’s non-stop direct services between Auckland and Vancouver. The airlines would 'sell without preference' and share revenue from the flights.

The ACCC considered that the airlines were two of the leading carriers on the route and a lessening of competition would result from the Cooperation Agreement. The ACCC noted that 80 per cent of traffic on the route came from leisure passengers or passengers visiting friends and relatives who were prepared to take cheaper, indirect flights. While the ACCC believed that the leisure nature of the market would constrain the ability of the airlines to raise prices above competitive levels, the Cooperation Agreement was also likely to reduce the incentive on Air New Zealand to price its indirect service so as to compete aggressively with the Air Canada direct flight.

In relation to public benefits, the airlines argued that the daily direct services would benefit consumers by providing increased choice and convenience for passengers. The airlines suggested that without the Cooperation Agreement there would be insufficient demand to support daily direct services on the route and that the Cooperation Agreement would better ensure the success and financial viability of the routes by allowing the parties to share revenue and risks.

However, the ACCC was not convinced that the absence of the Cooperation Agreement would be the sole or primary reason for a reduction or withdrawal of direct services as the flights had been in operation since late 2007. The ACCC considered that the main risk to the direct flights was a fall in overall demand. Therefore, the public benefits argued were not linked to the Cooperation Agreement.

The ACCC stated that even if they had found that the public benefits were linked to the Cooperation Agreement, this would not be sufficient to overcome the public detriment resulting from its anti-competitive effect.

The global financial crisis and the ‘failing firm’ defence

In the current economic climate, distressed companies may be targeted by competitors. A potential argument that might be put forward in this situation is the ‘failing firm’ argument—that is, as the company is going out of business, the competitor should be able to save it by acquiring it.

When considering a merger, the ACCC compares two hypothetical future situations, the future with the acquisition (the factual) and without the acquisition (the counterfactual). The question with a ‘failing firm’ argument will be whether the likely failure of the firm should be incorporated into the counterfactual, and what its impact on competition would be.

In February, both the ACCC and the New Zealand Commerce Commission considered, and accepted, a ‘failing firm’ argument.

ACCC accepts failing firm defence

The ACCC accepted a failing firm argument in relation to the proposed acquisition of certain assets of Hans Continental Smallgoods Pty Ltd (Hans) by P&M Quality Smallgoods Pty Ltd (Primo).

Following an unsuccessful sales process, Hans was placed into voluntary administration in late 2008, following which the Administrator commenced another sales process. The Commission recognised that given there were no alternative bids, unless acquired by Primo, Hans would go into liquidation.

Chairman Graeme Samuel said that if Hans had not been a failing firm, the ACCC would have considered that substantial lessening of competition would result from the acquisition by Primo.

However, in its analysis, the ACCC compared the competitive effects that would result if the Administrator auctioned the assets with the competitive effects resulting from an acquisition by Primo.

Given the limited interest in the assets and a likelihood that assets purchased through auction might not remain in the industry, the ACCC determined that the competitive effect of both outcomes would be more or less similar.

Therefore, while the sale to Primo was likely to result in a reduction in competition, the ACCC considered that there was no alternative positive outcome for competition.
While the decision shows that the ACCC will consider a failing firm argument in its counterfactual, companies will still need to satisfy an evidentiary burden. When announcing the decision, Chairman Graeme Samuel said that ‘the ACCC will assess any failing firm argument rigorously and will require clear information to show both that the target is likely to fail without the acquisition, and that this is not a better outcome for competition than an acquisition by a competitor’.

New Zealand regulator accepts failing firm defence

The New Zealand Commerce Commission (Commerce Commission) has cleared Fletcher Building's (Fletcher) acquisition of Stevenson Group's Whangarei and Auckland masonry businesses (Stevenson).

The Commerce Commission determined that if the acquisition did not proceed, Stevenson would have to exit the market. The Commerce Commission accepted that there was no real prospect of a third party acquiring the business as a going concern, or acquiring the assets on closure and using them to compete in the relevant markets.

The Commerce Commission has not yet published its decision but has announced that it will release guidelines to parties considering applications for clearance based on a failing firm argument.

Too chicken to merge?

Two of the three main suppliers of processed chicken meat in Australia have encountered opposition from the ACCC in their efforts to merge. The ACCC announced its intention to oppose the proposed acquisition of the second-largest processor of chicken meat in Australia and the owner of ‘Steggles’, Barterr Enterprises Pty Ltd (Barterr), by Australia’s third-largest processor of chicken meat, Baiada Poultry Pty Ltd (Baiada). The merged entity would have supplanted Inghams as the largest processor of chicken meat in Australia.

The ACCC concluded that the proposed merger would likely result in a substantial lessening of competition in the market for the supply of processed chicken meat to fast food restaurants. However, the ACCC found that fast food restaurants comprise a large group of customers that are heavily reliant upon the three national processors for the supply of high volumes of processed chicken meat. It was the ACCC’s view that high barriers to entry prevent potential new suppliers of processed chicken meat from entering the fast food market and high barriers to expansion prevent smaller suppliers from expanding their levels of production.

Other markets, such as supermarkets who purchase the largest volumes of processed chicken meat, would have been less affected by the merger because they are able to source their supply from a number of different processors. Compared to fast food restaurants, supermarkets are prepared to accept a standardised product that can be supplied by more producers and are able to keep the product on the shelf for longer.

New national consumer law targets unfair contract terms

Consumer Affairs Minister, Chris Bowen has announced that the Federal Government will fast track the introduction of a new national consumer law. The national consumer law, to be called the ‘Australian Consumer Law’, will implement a Productivity Commission recommendation made in May 2008 and may come into effect as early as January 2010.

A key feature of the proposed legislation is the inclusion of provisions directed at ‘unfair terms’ in consumer contracts. An unfair term will be a term in a consumer contract which causes a significant imbalance in the rights and obligations of the parties to the contract, and which is not reasonably necessary to protect the legitimate interest of the supplier. The consumer provisions in the new legislation will apply to non-negotiated standard form contracts and will apply to both businesses and consumers which enter the contracts.

Victoria is the only state which currently provides protection to consumers from unfair contract terms. This is done through the Fair Trading Act 1999 in which unfair terms are treated as void and unenforceable. The Victorian legislation is modelled on the United Kingdom legislation: the Unfair Terms in Consumer Contract Regulations 1999 (UK Unfair Terms Regulations).

The Australian Consumer Law will also provide the ACCC with additional enforcement powers and will allow the courts to impose fines of up to $1 million for breach of the consumer provisions. Minister Bowen has also proposed that the Trade Practices Act 1974 (Cth) (TPA) be renamed the Competition and Consumer Act to better reflect the protection that the legislation provides consumers.

The introduction of the national consumer law is an important development for companies that use standard form contracts such as those used for mobile phones, gym memberships and bank accounts.

Is your Joint Venture about to become illegal?

The Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (Cth) (Cartel Bill) is on track to be introduced into law without the much needed changes that would have extended the defence for joint ventures.

Under the current draft of the Bill, a corporation must not make, or give effect to, a contract, arrangement or understanding that contains a cartel provision. A cartel provision is a provision agreed by parties that compete, or might but for the agreement be competitors, that involves:

• price fixing
• restricting output in the production and supply chain
• allocating customers, suppliers or territories, or
• bid rigging.

Joint Venturers engage in arrangements to produce goods and services and in doing so may enter into arrangements that on the face of it, appear to involve a number of these types of activities. They may be in breach of the Trade Practices Act 1974 (Cth) (TPA) if they are not subject to the joint venture defence provided for in the Act.

When the legislation was passed by the House of Representatives, it was immediately referred to the Senate Economics Committee for consideration. The committee has released its report into the Cartel Bill and has rejected arguments that proposed to change the Bill to extend the joint venture defence in the Bill to better protect joint ventures.

A major problem for joint ventures is that the Cartel Bill, if passed in its current form, changes the current law to provide that:

• the joint venture defence (exception) will only apply to JV’s that are created through contracts and does not apply to either JV’s that are created through mere agreements or understandings, or looser arrangements that extend from or arise out of a joint venture contract, and
• the joint venture defence (exception) only applies to the production and/or supply of goods or services by JV’s and does not include acquisitions of goods or services by a JV. That is, any joint acquisition of goods or services by JV’s may be in contravention of the TPA when this Bill becomes law.

Under the current Act, similar offences, if found to exist, result in civil penalties but under the proposed Act, civil penalties and criminal penalties apply. That is, people found guilty of a cartel offence face a maximum of 10 years jail and/or a maximum fine of $220,000. Corporations are subject to a maximum penalty of $10 million or three times the gain obtained from the cartel behavior or 10 per cent annual turnover.

Efforts to persuade the Federal Government to adopt amendments that will better protect JV’s are still being vigorously pursued. We will keep you informed, through future editions of this newsletter, of any late amendments to the Bill before it becomes law.

Endnotes

1. Competition and Market Regulation Update November 2008

More information

For information regarding possible implications for your business, contact the Competition & Market Regulation Partners.