Competition and Market Regulation Update October 2009

Developments in relation to the air cargo cartel

Thai Airways—Latest prosecution in relation to the ACCC air cargo investigation

The ACCC has brought proceedings in the Federal Court against Thai Airways International Public Company Limited for alleged price-fixing. These proceedings are the latest in a series of proceedings brought by the ACCC in relation to the alleged air freight cargo cartel.

The Federal Court has already ordered a total of A$41 million in penalties against other airlines including Qantas Airways (A$20 million) and British Airways (A$5 million) on 11 December 2008, and Société Air France (A$3 million), Koninklijke Luchtvaart Maatschappij (KLM) (A$3 million), Martinair Holland (A$5 million), and Cargolux International Airlines (A$5 million) on 16 February 2009. Existing proceedings continue against four airlines, Cathay Pacific Airways, Emirates, Garuda Indonesia and Singapore Airlines. This latest action is in addition to other investigations and court cases involving air freight surcharge collusion occurring worldwide.

In the latest prosecution against Thai Airways, the ACCC alleges that between 2001 and 2006, Thai Airways colluded with other international air cargo carriers to fix the price of fuel surcharges and security surcharges applied to air cargo in contravention of the Trade Practices Act 1974 (Cth) (TPA). The ACCC is seeking declarations, injunctive relief, pecuniary penalties and costs.

Full Federal Court upholds the validity of notices served on Singapore Airlines

The Full Federal Court has upheld the validity of five notices requiring the production of documents issued by the ACCC to Singapore Airlines Ltd and Singapore Airlines Cargo Pte Ltd as part of the ACCC’s investigations into an alleged price-fixing cartel in the air cargo industry. The notices were issued in 2007 and 2008 by the ACCC exercising its powers under section 155 of the TPA.

Section 155 allows the ACCC to issue a notice to a person if the ACCC has reason to believe that the person is capable of furnishing information, producing documents or giving evidence relating to a matter that constitutes, or may constitute, a contravention of the TPA.

In the appeal from the decision of Middleton J at first instance, Singapore Airlines argued that the scope of the notices was overly broad and related to matters incapable of amounting to a contravention of the TPA and having no connection with any Australian market.

The Full Court dismissed Singapore Airlines’ appeal.

As to whether the market for the relevant services was ‘a market in Australia’, the Full Court stated that it was not ‘idle speculation’ or an ‘improbable circumstance’ that the relevant competition occurred in a market in Australia, or at least as part of such a market. It found that ‘prices fixed for legs of a journey which take place wholly outside Australia may ultimately affect competition in a market in Australia.’ It gave as an example the situation where cargo is shipped between two foreign points as a section of a journey from Australia to the cargo’s ultimate destination or from the point of the cargo’s origin to Australia. 

Singapore Airlines had also appealed on the ground that two of the notices sought information and documents without disclosing any necessary connection to the relevant matters identified in the notices. In rejecting this submission, the Full Court relied on previous authorities which establish that the scope of the ACCC’s power in section 155 extends to ascertaining facts which may lead to a train of enquiry.

The ACCC Chairman, Graeme Samuel, has welcomed the decision, stating that it confirms that the TPA is able to reach cartels formed outside Australia affecting Australians and that the ACCC is able fully to investigate conduct occurring overseas.

Productivity Commission draft report on gambling

On 21 October 2009 the Productivity Commission released its draft report on gambling.

The draft report calls for a more coherent and effective policy approach to the gambling industry. It focuses on appropriate policies for gaming machines and identifies a particular need for targeted harm minimisation policies that can effectively address the high rate of problem gambling among regular gaming machine players. Australia’s ban on online gaming is also examined.

Of particular interest is the Productivity Commission’s proposed overhaul of wagering regulations that is intended to promote competition and lower prices for punters while sustaining funding of the racing industry.

At present, the racing industry is funded in a variety of ways which differ from state to state. The Productivity Commission has proposed a new national funding model for the racing industry, which would be a single levy universally paid by wagering operators on a gross revenue basis. This levy would replace all other product fees currently paid by the wagering industry. The new funding model would be underpinned by national legislation and would replace existing state- and territory-based arrangements.

The Productivity Commission also made the following additional draft findings and recommendations in relation to the wagering and racing industries:

• There are grounds for state and territory governments to cooperate when setting taxes on wagering revenue, in order to avoid destructive tax competition. However, the increased capacity for competition from lowly-taxed offshore online suppliers will increasingly limit the capacity to tax wagering activity.
• Bet types which are referenced to the dividends paid by various state totalisators (tote-odds betting) should not be prohibited.
• Offering inducements to wager through discounted prices is not necessarily harmful, and may primarily serve to reduce switching costs between incumbent wagering operators and new entrants. The risks of such inducements should be assessed and a nationally consistent approach would be warranted.
• The arguments for retaining TAB retail exclusivity are not compelling.
• The Australian Government should request that the ACCC examine any adverse implications for competition associated with Tabcorp’s ownership arrangements for the Sky Channel racing broadcaster.

A full copy of the draft report is available from the Productivity Commission’s website.¹

Submissions on the draft report

Written submissions regarding the draft report will be accepted until Friday 18 December 2009. The final report will be forwarded to the Government by 26 February 2010.

ACCC comments on the anti-siphoning scheme

The ACCC has commented in the current debate between free-to-air and pay TV operators over the coverage of important events.

On 20 August 2009 the Minister for Broadband, Communications and the Digital Economy, Senator Stephen Conroy, released a discussion paper titled Sport on television: A review of the anti-siphoning scheme in the contemporary digital environment.

The anti-siphoning scheme was established in 1994 to ensure that the Australian public would continue to have access to important events on free-to-air TV. To this end, the scheme seeks to prevent listed events from being ‘siphoned’ by pay TV broadcasters. To date, the scheme has focused on major sporting events, but also applies to events of national and cultural significance.

The purpose of this discussion paper was to encourage debate about the scheme and inform the Australian Government's considerations of the scheme’s effectiveness and appropriateness in the current environment. Members of the public were encouraged to comment and over 300 submissions were received.

In its submission, the ACCC stated that it was concerned that the scheme reduces competition between pay TV and free-to-air broadcasters and has the potential to reduce the amount of premium content that is made available to the Australian public. It also stated that it is important the costs associated with the scheme for content producers and sporting bodies should be considered in an assessment of the merits of the scheme.

To address its concerns, the ACCC made a number of recommendations, including the following:

• The number of events on the anti-siphoning list should be substantially shortened in a way that still meets the objectives of the scheme.
• The ‘use it or lose it’ guidelines should be strengthened and formalised in legislation. These guidelines provide for events to be progressively removed from the anti-siphoning list if they are not given adequate coverage by free-to-air broadcasters.
• The anti-siphoning scheme should not be extended to new media, such as by the delivery of content over broadband or to mobile handsets, to ensure that regulation does not stifle innovation in the new media sector.

These recommendations reflect the ACCC’s view that competition (in the broadcasting industry or otherwise) is important to promote efficient pricing and consumer choice, and that distortions to competition arising from government regulation should be minimised.

The submissions received will help the government form its views going forward as it considers the issues relevant to the future operation of the anti-siphoning scheme. No date has been set for the release of the government’s findings.

Recent mergers approved in the pharmaceutical industry

The ACCC has announced that it will not oppose two proposed acquisitions in the pharmaceutical sector:

• the proposed acquisition of Wyeth Corp by Pfizer Inc, and 
• the proposed acquisition of Merck & Co Inc by Schering-Plough Corporation.

These two transactions involve global pharmaceutical companies. The ACCC is increasingly reviewing transactions of such an international nature which often involve cooperation with other competition regulators internationally.

In Australia, Pfizer and Wyeth, operating under the name Fort Dodge Australia, compete in both human and animal health markets. After consulting a range of market participants, the ACCC concluded that divestitures in the animal health markets were required to address its competition concerns about the acquisition. Pfizer has offered a court enforceable undertaking that will see certain Fort Dodge assets sold after the completion of the acquisition. On this basis, the ACCC is satisfied that the acquisition is unlikely to substantially lessen competition.

Schering-Plough and Merck also compete in a number of human and animal health markets in Australia. The ACCC had expressed concerns in relation to the overlap in the animal health market prior to Merck’s sale of its interest in animal health company Merial Limited to its joint venture partner, Sanofi-Aventis. Following this sale and after consultation with market participants, the ACCC concluded that there was minimal overlap between the parties’ human health products and that the merged entity would continue to be constrained by its existing competitors.

As part of this process, Schering-Plough and Merck have given an undertaking that they will not complete a call option transaction which gives Sanofi-Aventis the option to combine Merial with Schering-Plough’s animal health business until the ACCC is satisfied that the transaction will not raise competition concerns in Australia and informs the parties that it will not intervene.

This newsletter was prepared by Lydia McKenzie, Solicitor, Jennifer Sing Key, Solicitor, Gillian McKenzie, Solicitor, and Mia Threnoworth, Solicitor.

Endnotes

1. Productivity Commission website

More information

For information regarding possible implications for your business, contact a member of the Competition & Market Regulation team.