Competition and Market Regulation Update November 2007
13 November 2007In this month's Competition and Market Regulation Update we explore the following developments:
- Federal election 2007 – competition preview
- Record fines for Visy and its executives – private actions to follow
- ‘Birdsville’ amendment – the aftermath
- Full Federal Court dismisses BHP appeal on access to two railway lines
- ACCC opposes Woolworths’ proposed acquisition of Kmart
- Real estate agent convicted for providing false information to the ACCC
- Several world regulators investigate potential freight forwarding cartel
- Mergers and acquisitions update
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Federal election 2007 – competition preview
With a date now set, the outcome of the 2007 federal election could well deliver significant developments in political policy and reforms in competition law.
Whether criminal sanctions should be imposed for serious cartel conduct has emerged as a central issue. Its significance has been heightened following the admission of guilt for cartel behaviour by Visy and a number of its senior executives (discussed in a separate article below).
In late 2003, the Review of the Competition Provisions of the Trade Practices Act (Dawson Review) recommended the criminalisation of serious, hardcore cartel conduct in order to deter such conduct. The Federal Government announced in February 2005 that it would implement the recommendation of the Dawson Review and had listed the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill (Bill) on the 2007 Spring Bills list. To date, the Bill has not been brought before parliament, the Treasurer citing the difficulty and necessary care required when formulating such provisions. The Labor Party has supported implementation of the reform, so it would seem that criminal sanctions will be introduced for cartel conduct, regardless of the election’s outcome.
Despite this public bipartisan support for introducing reform, commentators have suggested that the enacted provisions may face difficulty with implementation and enforcement by stakeholders. Although the Australian Competition and Consumer Commission (ACCC) is undoubtedly the strongest proponent for the proposed reform, the reform’s success will depend on the government’s provision of resources for enforcement and the judiciary’s favourable interpretation and willingness to impose severe penalties.
On other fronts, concerns over rising costs of living may impact policy with respect to high petrol and grocery prices. As noted in the Competition and Market Regulation Update October 2007 the petrol inquiry has been extended until after the election with the ACCC’s report expected in mid-December. Should it come into power, the Labor Party has committed to providing more powers for the ACCC in monitoring petrol prices, and to appointing a Petrol Commissioner to oversee petrol price issues. Likewise, the Labor Party has indicated that it would strengthen the role of the ACCC in monitoring grocery pricing, and direct the ACCC to conduct a National Grocery Pricing Inquiry.
All in all, policy issues surrounding market competition and regulation are likely to be of significant interest as voters head to the polls.
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Record fines for Visy and its executives – private actions to follow
After much comment, speculation and some spin, the ACCC’s action against Visy has now reached conclusion. In early October, Visy admitted to a significant number of contraventions of the Trade Practices Act 1974 (Act) involving price fixing and bid rigging, and three of its senior executives admitted to being knowingly concerned in the contraventions. In accordance with the settlement agreement reached between the ACCC and Visy, Justice Heerey of the Federal Court ordered Visy to pay a record $36 million (imposed for 37 contraventions)— Mr Debney (Visy CEO) to personally pay $1.5 million in penalties (for 14 contraventions) and Mr Carroll (Visy General Manager) to pay $500,000 in penalties (for 49 contraventions). (For background on the Visy/Amcor matter, see our previous newsletters Competition Law Update February 2006, Competition and Market Regulation Update February 2007 and Competition and Market Regulation Update April 2007).
Cartels continue to be a high priority area for the ACCC and the high penalties reflect the seriousness of the contraventions. Recent amendments to the Act (arising from the Dawson reforms) have increased the potential penalties for price fixing and bid rigging. The judgment has spurred further calls for the government to proceed with criminalising cartels which would further heighten the risk for individuals.
Although the ACCC’s action has now come to fruition, the story does not end here for Visy and Amcor. They now face private litigants in the form of customers seeking damages for distorted prices paid as a result of the cartel.
The Visy matter highlights four important points:
Individual liability
The ACCC sought individual accountability through naming senior executives as respondents and agreeing to record penalties for an individual. Besides facing penalties, individuals also risk job security and, maybe most importantly, a loss of reputation and credibility. Mr Debney recently resigned from Visy and Mr Carroll (head of Visy’s cardboard division) was dismissed in 2005. Mr Pratt has publicly taken a degree of responsibility for the comments he made to Amcor’s CEO Russell Jones, and admitted to have been knowingly concerned in the contraventions. As agreed with the ACCC, no pecuniary penalty was ordered against him because, as owner of Visy, the burden of the company’s penalty will fall to him. However, as a result of the contraventions, there may be pressure on Mr Pratt to step down as Carlton Football Club president.
Corporate penalties and damage control
In addition to agreeing to large financial penalties (more than twice the previous record fine), Visy has had to proactively manage its reputation in the market. After the admissions, Mr Pratt released an open letter to customers seeking to reassure them that they were not disadvantaged. The judgment however contains negative comments relating to Visy’s corporate culture vis-à-vis its trade practices obligations, suggesting that it was ‘non-existent’ and that the compliance manual ‘might have been written in Sanskrit for all the notice anybody took of it’. This judgment once again highlights that a genuine culture of compliance is critical.
Seek immunity promptly
Where appropriate, it remains important to seek immunity promptly under the ACCC’s immunity policy. Amcor obtained immunity by only one day and was therefore not pursued by the ACCC. The ACCC’s policy was successful in providing an incentive for a ‘whistleblower’ to come forward.
Increasing class actions
There is an increasing tendency for class actions to be commenced, and this matter is no exception. While seeking immunity or agreeing to a settlement reduces the burden of time-consuming and costly litigation against the ACCC, it does not avoid private litigation for Amcor and Visy. The class action is seeking damages reported to be about $200 to $300 million. Amcor and Visy are also defending individual proceedings taken by Cadbury Schweppes, who is seeking damages of up to $120 million. In addition to the possible financial impact, there is also the possibility of considerable reputational damage.
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‘Birdsville’ amendment – the aftermath
The so-called ‘Birdsville’ amendment considered in the Competition and Market Regulation Update October 2007 has been the subject of vigorous debate following its implementation on 25 September 2007. The central cause of anxiety has been the uncertainty the new law introduces in relation to discounting, particularly where it is potentially below ‘cost’. To assist our clients through the maze, we have prepared the information sheet ‘The ‘Birdsville’ amendment – getting back on track’.
Meanwhile, the Canadian Competition Bureau has recently developed and sought comments in relation to its revised Predatory Pricing Enforcement Guidelines (guidelines). The guidelines cover in detail the circumstances in which the Canadian regulator will pursue potential contraveners. The ACCC is likely to watch the Canadian approach closely when developing its own views on the Australian prohibition.
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Full Federal Court dismisses BHP appeal on access to two railway lines
The Full Federal Court has dismissed an appeal by BHP Billiton Iron Ore (BHP), in relation to an application for access by Fortescue Metals Group Ltd (Fortescue) to two of BHP’s railway lines in the Pilbara region of Western Australia. (See the Competition and Market Regulation Update February 2007 for a discussion of the primary judge’s decision.)
Part IIIA of the Trade Practices Act 1974 (Act) allows certain essential services to be ‘declared’, enabling third parties to gain access. The Full Federal Court affirmed that BHP’s railway lines could be declared as a ‘service’ under Part IIIA of the Act, because they were not part of the production process. BHP has sought special leave to appeal to the High Court.
The Australian Competition Tribunal will still have to determine the broader question of whether the rail lines should be declared open to third party access. If the rail lines are declared open, applicants may seek access either through an agreement negotiated with BHP or, in the absence of an agreement, through arbitration by the ACCC.
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ACCC opposes Woolworths’ proposed acquisition of Kmart
On 17 October 2007 the ACCC announced that it would oppose Woolworths’ proposed acquisition of Kmart and Officeworks (commented on in the Competition and Market Regulation Update October 2007).
According to the ACCC, the acquisition of Kmart would likely have the effect of substantially lessening competition, given the fact that Woolworths currently owns Big W, Kmart’s closest competitor in a range of markets.
The ACCC analysed the competition effects in the national markets for the retail and wholesale supply of various categories of products, as well as the leasing of floor space in retail shopping centres.
Most interestingly, the ACCC defined separate retail markets with respect to the types of products sold (eg basic footwear) rather than by store format (eg discount department stores). Despite the close competition between discount department store chains, the ACCC did not exclude other retailers from the market. However, the ACCC found that the other retailers exercise a limited constraint on Kmart and Big W in the relevant markets, and would be unlikely to prevent a significant and sustained increase the combined entity’s prices or profit margins.
The ACCC found that a Woolworths acquisition of Officeworks on its own would not substantially lessen competition in any relevant market. However, because the ACCC decided to oppose the acquisition of Kmart, it also decided to oppose the combined acquisition of Kmart and Officeworks.
After the ACCC’s decision to oppose the Kmart and Officeworks acquisition, Woolworths withdrew its application for review of its proposed acquisition of Target and Officeworks.
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Real estate agent convicted for providing false information to the ACCC
A real estate agent pleaded guilty in the Federal Court to providing false or misleading evidence in the course of an ACCC investigation into collusive activity between a group of real estate agents.
The agent was convicted, fined $2,160 and ordered to perform 200 hours of community service. His offences carried a maximum fine of $4,400 ($2,200 per offence) or up to 24 months imprisonment (12 months per offence). The Federal Court justice decided against a term of imprisonment because the agent was 63 years old, had no prior convictions, and was unlikely to re-offend.
As mentioned in the Competition and Market Regulation Update June 2007, this case shows a commitment by the ACCC to pursue those who fail to take their responsibilities seriously.
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Several world regulators investigate potential freight forwarding cartel
On 10 October 2007 in an investigation highlighting the increasing cooperation between the world’s competition authorities, the European Commission, the United States Department of Justice and the South African Competition Commission simultaneously conducted unannounced inspections of various international freight forwarding companies.
The regulators initiated the raids because they have ‘reason to believe’ that major players within the industry may be part of an international cartel.
If the trend of other cartel investigations is mirrored in this matter, multinational leniency applications and third party actions are sure to follow.
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Mergers and acquisitions update
ACCC does not oppose Google’s proposed acquisition of DoubleClick
On 30 October 2007 the ACCC cleared Google’s proposed acquisition of DoubleClick (commented on in the Competition and Market Regulation Update October 2007). The ACCC found that Google and DoubleClick were not close competitors in ad serving (enabling the display of advertisements onto websites). In addition, the ACCC noted that the presence of other competitors in the market would likely constrain the merged entity.
Meanwhile, the United States Federal Trade Commission and European Commission are still evaluating the deal. The European Commission just extended the deadline for its inquiry from 26 October 2007 to 13 November 2007.
Macquarie Media gives undertakings to secure approval
The ACCC has cleared Macquarie Media Group’s acquisition and partial spin-off of Southern Cross Broadcasting assets (commented on in the Competition and Market Regulation Update October 2007).
The decision comes after Macquarie gave undertakings to divest radio stations in Bundaberg, Port Lincoln, Spencer Gulf, Launceston, Queenstown, Scottsdale, Burnie and Devonport. In addition, if the spin-off to Fairfax does not occur, Macquarie is required to sell those assets to an independent party.
ACCC clears Rio Tinto’s proposed acquisition of Alcan
In early October, the ACCC announced that it would not oppose Rio Tinto’s proposed acquisition of Alcan. The ACCC examined the potential for competition concerns arising from the aggregation of assets in aluminium, alumina and bauxite production.
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