The Leahy petrol pricing decision: The curious incident of the dog in the night-time (with apologies to Conan Doyle)

On 29 May 2007 the Federal Court dismissed the Australian Competition and Consumer Commission’s (ACCC’s) prosecution of eight Geelong petrol retailers for fixing petrol prices: ACCC v Leahy Petroleum. The press have suggested this decision is a massive blow to the Commission’s ability to police cartel conduct.

This decision, together with the recent United States Supreme Court decision referred to below, highlights the importance of having a cogent, rational business explanation for otherwise aberrant or unusual market conduct.

The Commission’s interest in petrol pricing

The Commission’s interest in pricing behaviour among petrol retailers has been evident since at least 2000 with its investigation into petrol price fixing in Ballarat.

In December 2001, the Commission published a report on petrol pricing (Reducing Fuel Price Variability) in which it observed that petrol is an homogenous product, that retailers compete on price, and that petrol prices are readily observable. The Commission reported that pricing in the retail petrol market exhibits a ‘sawtooth price pattern’, and observed that, generally speaking, there is a cycle of discounting petrol prices until the prices become unsustainable, at which time a retailer significantly raises its petrol price with others following suit. According to the Commission, the sawtooth price pattern has multiple causes that include international factors, taxes, and fluctuating demand.

The Commission’s case against the Geelong petrol retailers

The Commission commenced its proceedings against the Geelong retailers in 2003, and alleged that during 1999 and 2000 the sawtooth pattern of petrol prices in Geelong was explained by eight interlocking bilateral and trilateral arrangements or understandings between Geelong petrol retailers that fixed the price of petrol.

The Commission’s case theory was that the petrol retailers would communicate by telephone both proposed price increases and the timing of the increases. They would also agree to influence other retailers to increase their petrol price at the same time through subsequent telephone calls.

The Commission’s case relied upon three distinct categories of evidence:

• Oral evidence from twelve individuals: four of whom were respondents who had filed defences admitting the Commission’s allegations pursuant to leniency agreements, and the rest of whom were persons who were not respondents because they had cooperated with the Commission before the proceedings were commenced.
• Circumstantial evidence: correlation of telephone calls between retailers with price increases in the Geelong petrol market.
• Admissions in statements, pleadings and transcripts of interviews pursuant to section 155 of the Trade Practices Act.

This evidence, however, did not satisfy the Federal Court that there was an arrangement or understanding among Geelong petrol retailers to fix petrol prices.

The court’s findings

The oral evidence established that, although Geelong petrol retailers passed information concerning petrol prices between themselves, those communications were usually of the fact that one retailer had already decided to increase the price at a particular time. The court said that ‘advance notice of the proposed implementation of a decision already made to increase prices … cannot itself be indicative of the existence of an arrangement or understanding containing a provision to fix prices.’

The evidence also established that although Geelong petrol retailers had substantial incentive to increase their prices when the price cycle reached the low point, retailers found it difficult to raise prices without reassurance that the market would move with them. In the court’s view, that reassurance could come from a number of sources, including price-fixing arrangements, information that other Geelong retailers had increased their price (or had decided to do so at a particular time), or that Melbourne petrol prices had increased coupled with past experience that this precipitated price rises in Geelong.

The Commission’s circumstantial evidence, however, was not sufficient to show that price rises could have resulted only from price-fixing, because:

• prices in the Geelong petrol market often rose without telephone calls between competitors
• there were often innocent explanations for price rises (for example, the withdrawal of price support by the oil companies, or the fact that petrol prices in Melbourne had increased), and
• the length of time between telephone calls and price increases was not consistent with the oral evidence that telephone calls would be followed by price increases within two hours.

Finally, and most importantly, the oral evidence of all witnesses confirmed that there was no commitment or moral obligation on the part of any alleged participant in the alleged arrangements or understandings to in fact increase their prices at a particular time. The evidence demonstrated that each party in the Geelong retail petrol market was ‘free to do as it wished on every occasion when information about a prospective price increase was passed to it’. In that light, after reviewing a number of previous decisions, the court concluded that an arrangement without any form of mutual commitment is a ‘creature unknown to section 45(2) of the Trade Practices Act.’ The court therefore held that there was no arrangement or understanding amongst Geelong petrol retailers to fix prices during 1999 and 2000.

The court made these findings even though many of the respondents had made admissions, either in their pleadings or in statements, that they had entered into arrangements or understandings to fix prices in the Geelong retail petrol market. The court decided not to rely on the admissions, either because it was unclear whether the admissions actually admitted there was a commitment in the arrangement or the understanding, or because they were ‘so far inconsistent with the evidence … that it would be necessary to decide the case without relying on them.’

Significance of the decision

One troubling aspect of this decision is the way in which the court has approached the issue of onus of proof. For example, the United States Supreme Court recently struck out an antitrust suit because the plaintiff’s pleading did not exclude the possibility of an independent rationale for the conduct: Bell Atlantic Group v William Twombly. What we can learn from that particular US case is that in circumstances where a regulator is able to show that a market displays irrational or aberrant pricing behaviour, the onus of proof ought to shift to the respondent to demonstrate a rational, independent justification for the relevant conduct.

The Federal Court here, however, does not appear to have positively found that the petrol retailers had cogent independent reasons for increasing prices at identical times. It has dismissed the Commission’s case largely on the basis of oral evidence that petrol retailers were never obliged or committed to increasing prices following receipt of price information. However, oral evidence of this kind without proper rational justification for aberrant conduct, does not necessarily give a sufficient basis for dismissing a case such as this one. Indeed, the Commission may appeal the decision on this point.

What this means is that you still need a cogent, rational business explanation for otherwise aberrant or unusual market conduct.

Despite this caveat, the decision confirms the long held view that a mere expectation that another party will act in a certain way, or information exchange without any assumption of obligation to increase price, does not amount to an arrangement or understanding for the purpose of section 45 of the Trade Practices Act.

The decision also makes it clear that the court will treat cautiously the evidence of persons who have signed immunity agreements or leniency agreements with the Commission, because those persons have an incentive to point to someone else as being the ringleader. In particular, the court refused to rely upon admissions contradicted by direct oral evidence. The court also preferred the evidence of witnesses when expressed in their own words, as opposed to evidence in statements drafted with words ‘negotiated between his lawyers and those acting for the ACCC’ to satisfy an obligation under a leniency agreement.

We can expect that the Commission will be reviewing its use of immunity agreements and leniency agreements very carefully in the future in the light of these findings.

So, what was the ‘curious incident in the night-time’ in this case? In our view, it was the absence of any cogent, rational business explanation actively proffered by the respondents for the price increases that followed round robin phone calls. Although the court found explanations, one would have expected the respondents to have offered them in the first place. Indeed, both the Commission and the court might have insisted that the respondents bear the onus of providing these explanations.

This article was written by Peter Strickland, Solicitor of the Sydney Litigation group.

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