FEDERAL COURT OF AUSTRALIA

UNIVERSAL MUSIC AUSTRALIA PTY LTD

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

[2003] FCAFC 193

SUMMARY

What follows is a summary of the conclusions reached in this case. It does not form part of the Reasons for Judgment.

On 30 July 1998, important amendments to the Copyright Act 1968 (Cth) came into operation. The effect of the amendments was that Australian wholesalers and retailers of compact disc recordings and other sound recordings could import stock from other countries provided the manufacture of that stock overseas had not infringed copyright law in the source country and had been carried out with the consent of the copyright owner. Previously the importation of sound recordings had been prohibited without the consent of Australian copyright owners or licensees. The changes meant that retailers of recorded music and, in particular, CDs were no longer limited to purchasing their CDs from Australian sources.

Two major Australian distributors, Universal Music Australia Pty Ltd (formerly Polygram Pty Ltd) (‘Universal’) and Warner Music Australia Pty Ltd (‘Warner’), made it known that they might not supply retailers who exercised their right to import CDs from overseas and that, in any event, they would or might review the terms upon which they dealt with such retailers. In certain cases, and for a short time, they ceased to supply some retailers who imported CDs from overseas.

The Australian Competition and Consumer Commission (‘ACCC’) instituted proceedings in this Court asserting that the conduct of Universal and Warner contravened the competition law set out in the Trade Practices Act 1974 (Cth) and in particular ss 45, 46 and 47 of the Act.

Hill J found on 14 December 2001 that both distributors contravened ss 46 and 47 of the Act by engaging in abuse of their market power and exclusive dealing conduct. He also found that certain of their executives were knowingly involved in those contraventions. He dismissed the ACCC case based on s 45, which is to do with anti-competitive agreements or arrangements. His Honour delivered a supplementary judgment on 6 March 2002 in which he made declarations and granted injunctions and imposed pecuniary penalties. He imposed penalties of $450,000 on each of Universal and Warner. He also imposed penalties on two Universal executives, Mr Handley and Mr Dickson, of $45,000 and $50,000 respectively. He imposed penalties of $45,000 on each of two Warner executives, Mr Smerdon and Mr Maksimovic. He ordered Universal and Mr Dickson to pay 75% of the ACCC’s costs in the proceedings against them and Mr Handley to pay 70% of the ACCC’s costs in the proceedings against him. In the proceedings against Warner and its executives, all three were ordered to pay 75% of the ACCC’s costs.

Universal and Warner and their executives have appealed against his Honour’s findings relating to abuse of market power and exclusive dealing. The ACCC has appealed against the penalties imposed on Universal and Warner.

In our opinion the appeal against his Honour’s decision in relation to the contravention of s 46, abuse of market power, should be allowed. In order to make out a contravention of s 46 it is necessary to show that the corporation said to be contravening it has ‘a substantial degree of power in a market’. After the primary decision in this case, the High Court of Australia clarified that concept by its decision in the case of Boral Ltd v ACCC. In this case, the relevant market was the market for wholesale recorded music in Australia. However in our opinion it could not be said that the degree of power held by either Universal or Warner in that market immediately after 30 July 1998 was so significant as to warrant the description ‘substantial’ within the meaning of s 46 as explained by the High Court in Boral.

On that basis we are of the opinion that no contravention of s 46 was proven.

However we agree with Hill J that both Universal and Warner contravened s 47 of the Trade Practices Act by engaging in exclusive dealing and that their executives were knowingly concerned in their respective contraventions. These contraventions arose out of the refusal of the companies to supply certain retailers for a time and their imposition of conditions upon supply. The retailers whose accounts were closed were small traders. The cessation of supply to them of itself could have had no significant effect on competition in the market. However, that cessation fortified a general warning to all retailers against acquiring Universal or Warner titles other than through Universal or Warner in Australia. We agree with Hill J that the purpose of Universal and Warner was to discourage retailers from importing or acquiring non-infringing CDs of titles in the Universal and Warner catalogues respectively. If that purpose had been achieved, it would have had a substantial effect upon competition in the market. The fact that the purpose was not achieved is no defence.

We also agree with the conclusion reached by his Honour that the Universal and Warner executives were accessories in the contravening conduct of their companies.

In relation to penalty, we are of the opinion that the penalty imposed upon Universal and Warner was inadequate even allowing for the fact that, on appeal, the finding of a contravention of s 46 has not been sustained. In our opinion, the appropriate penalty in relation to the exclusive dealing conduct engaged in by Universal and Warner is $1 million each. The penalties imposed on the executives will not be changed except that the penalty imposed upon Mr Dickson should be reduced from $50,000 to $45,000 as his Honour made a factual error in respect of Mr Dickson’s involvement in one of the closures.

The Court has also on appeal modified the declarations and injunctions to reflect its conclusions about the s 46 contravention. The costs orders have been altered so that in each case the relevant corporation and its officers are to pay one half of the ACCC’s costs of the trial and of the appeals.

Wilcox, French and Gyles JJ

22 August 2003

FEDERAL COURT OF AUSTRALIA

Universal Music Australia Pty Ltd v Australian Competition & Consumer Commission [2003] FCAFC 193

TRADE PRACTICES - wholesale market for recorded music - legalisation of parallel importation of recorded music - cessation of supply to parallel importing retailers - alleged misuse of market power – alleged exclusive dealing – whether appellants had a substantial degree of power in the market – whether appellants took advantage of their market power – purpose, effect or likely effect of substantially lessening competition - whether inter-brand and intra-brand competition promoted.

Copyright Act 1968 (Cth) ss 44D, 112D, 130A

Trade Practices Act 1974 (Cth) ss 4, 4E, 4F, 4G, 46, 47

Boral Besser Masonry Ltd v Australian Competition & Consumer Commission (2003) HCA 5; 195 ALR 609 applied

Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (1982) 64 FLR 238; 44 ALR 173 discussed

Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43 cited

Hecar Investments (No 6) Pty Ltd v Outboard Marine Australia Pty Ltd (1982) 62 FLR 159 cited

Monroe Topple v The Institute of Chartered Accountants in Australia (2001) ATPR 46-212 cited

Newton v Federal Commissioner of Taxation (1958) 98 CLR 1 cited

NW Frozen Foods Pty Ltd v Australian Competition & Consumer Commission [1996] FCA 1134; 71 FCR 285 cited

Outboard Marine Australia Pty Limited v Hecar Investments (No 6) Pty Ltd (1982) 44 ALR 667 cited

Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177 cited

Rural Press Ltd v Australian Competition & Consumer Commission [2002] FCAFC 213; 118 FCR 236 cited

J Lahore, Copyright and Designs, Butterworths para 34,595

Prices Surveillance Authority, Inquiry into the Prices of Sound Recordings, Report No 35 at 160

Report on Copyright Amendment Bill (No 2) 1997, Canberra, 1997 at para 5.29

Professor Steven Salop, ‘The First Principles Approach to Anti-trust, Kodak and Anti-trust at the Millennium’, Anti-Trust Law Journal vol 68, 2002 at 187-202

UNIVERSAL MUSIC AUSTRALIA PTY LTD V AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

N232 of 2002

CRAIG HANDLEY and PAUL DICKSON v AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

N236 of 2002

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v UNIVERSAL MUSIC AUSTRALIA PTY LTD (FORMERLY POLYGRAM PTY LTD)

N240 of 2002

WARNER MUSIC AUSTRALIA PTY LTD, GARY SMERDON, GREGORY MAKSIMOVIC v AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

N238 of 2002

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v WARNER MUSIC AUSTRALIA PTY LTD

N239 of 2002

WILCOX, FRENCH AND GYLES JJ

22 AUGUST 2003

SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT

	N 232 of 2002
BETWEEN:	UNIVERSAL MUSIC AUSTRALIA PTY LTD APPELLANT
AND:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION RESPONDENT
	N 236 of 2002
BETWEEN:	CRAIG HANDLEY and PAUL DICKSON APPELLANTS
AND:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION RESPONDENT
	N 240 of 2002
BETWEEN:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION APPELLANT
	UNIVERSAL MUSIC AUSTRALIA PTY LTD (FORMERLY POLYGRAM PTY LTD) RESPONDENT

JUDGES:	WILCOX, FRENCH AND GYLES JJ
DATE OF ORDER:	22 AUGUST 2003
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The appeals be allowed to the extent that the orders made by Hill J in matter N925 of 1999 on 6 March 2002 be varied by:

(a) omitting declaration 1;

(b) varying declaration 2 to read as follows:

‘2. In July-September 1998, and in contravention of s 47(1) of the Trade Practices Act 1974 (Cth), the first respondent, Universal Music Australia Pty Limited (then known as PolyGram Pty Limited), engaged in the practice of exclusive dealing with the purpose of substantially lessening competition in the Australian market for recorded music.”

(c) varying each of declarations 3 and 4 by omitting ‘contraventions by the first respondent of sections 46 and 47’ and substituting ‘contravention by the first respondent of section 47’;

(d) omitting from order 6 the figure ‘$450,000’ and substituting ‘$1,000,000’;

(e) omitting from order 8 the figure ‘$50,000’ and substituting ‘$45,000’;

(f) varying order 9 to read as follows:

‘9.The first respondent be restrained, whether by itself, its servants or agents or otherwise from engaging in the practice of exclusive dealing with the purpose of substantially lessening competition in the Australian market for recorded music.’

(g) varying order 10 to substitute the figure ‘50%’ for each of ‘75%’ and ‘70%’.

2. Appeals N232 of 2002 and N236 of 2002 otherwise be dismissed.

3. Universal Music Australia Pty Limited pay one-half of the costs incurred by Australian Competition and Consumer Commission in respect of these appeals.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT

N 238 of 2002

BETWEEN:

WARNER MUSIC AUSTRALIA PTY LTD

GARY SMERDON

GREGORY MAKSIMOVIC

APPELLANTS

AND:

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

RESPONDENT

N 239 of 2002

BETWEEN:

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

APPELLANT

AND:

WARNER MUSIC AUSTRALIA PTY LTD

RESPONDENT

JUDGES:	WILCOX, FRENCH AND GYLES JJ
DATE OF ORDER:	22 AUGUST 2003
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The appeals be allowed to the extent that the orders made by Hill J in matter N924 of 1999 on 6 March 2002 be varied by:

(a) omitting declaration 1;

(b) varying declaration 2 to read as follows:

‘2. In July-September 1998, and in contravention of s 47(1) of the Trade Practices Act 1974 (Cth), the first respondent, Warner Music Australia Pty Limited, engaged in the practice of exclusive dealing with the purpose of substantially lessening competition in the Australian market for recorded music.’

(c) varying each of declarations 3 and 4 by omitting ‘contraventions by the first respondent of sections 46 and 47’ and substituting ‘contravention by the first respondent of section 47’;

(d) omitting from order 6 the figure ‘$450,000’ and substituting ‘$1,000,000’;

(e) varying order 9 to read as follows:

(f) varying order 10 to substitute the figure ‘50%’ for ‘75%’.

2. Appeal N238 of 2002 otherwise be dismissed.

3. Warner Music Australia Pty Limited pay one-half of the costs incurred by Australian Competition and Consumer Commission in respect of these appeals.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT

	N 232 of 2002
BETWEEN:	UNIVERSAL MUSIC AUSTRALIA PTY LTD APPELLANT
AND:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION RESPONDENT
	N 236 of 2002
BETWEEN:	CRAIG HANDLEY and PAUL DICKSON APPELLANTS
AND:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION RESPONDENT
	N 238 of 2002
BETWEEN:	WARNER MUSIC AUSTRALIA PTY LTD GARY SMERDON GREGORY MAKSIMOVIC APPELLANTS
AND:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION RESPONDENT
	N 239 of 2002
BETWEEN:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION APPELLANT
AND:	WARNER MUSIC AUSTRALIA PTY LTD RESPONDENT
	N 240 of 2002
BETWEEN:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION APPELLANT
AND:	UNIVERSAL MUSIC AUSTRALIA PTY LTD (FORMERLY POLYGRAM PTY LTD) RESPONDENT
JUDGES:	WILCOX, FRENCH AND GYLES JJ
DATE OF ORDER:	22 AUGUST 2003
WHERE MADE:	SYDNEY

REASONS FOR JUDGMENT

Introduction paras 1 - 4

The legislative background

(i) The position before 30 July 1998 paras 5 – 13

(ii) The 1998 amendments paras 14 – 19

The market

(i) Participants in the wholesale and

retail recorded music markets paras 20 – 30

(ii) Products paras 31 – 33

(iii) Definition: function and geography paras 34 – 35

(iv) Substitutability, concentration and

barriers to entry paras 36 – 42

(v) Competitive activity paras 43 – 49

(vi) Pricing conduct paras 50 – 52

(vii) Market power paras 53 – 57

The conduct of PolyGram

(i) Reservation of right to review

trading terms paras 58 – 66

(ii) The ‘PolyGram Policy’ paras 67 – 68

(iii) Compact City paras 69 – 72

(iv) Wests and Ultimate paras 73 – 76

(v) Indonesian conduct paras 77 – 79

The conduct of Warner

(i) The warning letter paras 80 – 82

(ii) Raiders Music paras 83 – 92

Parallel importation after 30 July 1998 paras 93 – 94

The trial judge’s reasoning

(i) Misuse of market power paras 95 – 101

(ii) Exclusive dealing paras 102 – 120

(iii) The s 45 case para 121

(iv) Accessorial liability para 122

The notices of appeal paras 123 – 126

Section 46

(i) The statutory provisions paras 127 – 128

(ii) The existence of substantial market

power paras 129 – 164

Section 47

(i) The statutory provisions paras 165 – 166

(ii) The decision of Hill J paras 167 – 182

(iii) Submissions of Universal paras 183 – 198

(iv) Submissions of Warner paras 199 – 205

(v) Submissions of ACCC paras 206 – 212

(vi) The references to ‘signalling’ paras 213 – 224

(vii) Conclusions paras 225 – 274

Accessorial liability

(i) PolyGram executives paras 275- 286

(ii) Warner executives paras 287 - 296

ACCC’s appeals on penalty

(i) Background paras 297 – 299

(ii) Arguments on appeal paras 300 – 301

(iii) Conclusions paras 302 – 312

Disposition paras 313 - 320

THE COURT:

Introduction

1 On 30 July 1998, amendments to the Copyright Act 1968 (Cth) (‘the Copyright Act’) came into effect. They removed the previous prohibition on the importation of sound recordings without the consent of Australian copyright owners or licensees. The effect of the amendments was that Australian wholesalers and retailers of compact disc recordings (‘CDs’), and other sound recordings, could thereafter acquire stock from other countries; but only provided the manufacture of that stock did not infringe copyright law in the source country and had been carried out with the consent of the copyright owner.

2 The legislative amendments had major ramifications for the Australian record industry; retailers were no longer limited to purchasing CDs from Australian sources.

3 Two Australian distributors, PolyGram Pty Ltd (now Universal Music Australia Pty Ltd (‘Universal’)) and Warner Music Australia Pty Ltd (‘Warner’), ceased to supply certain retailers who imported CDs from overseas. They also made it known they might not supply other retailers who took that course. The Australian Competition and Consumer Commission (‘ACCC’) brought proceedings in this Court asserting the conduct of Universal and Warner contravened ss 45, 46 and 47 of the Trade Practices Act 1974 (Cth) (‘the Act’).

4 After a lengthy trial, Hill J found on 14 December 2001 that both distributors had contravened ss 46 and 47 of the Act. He also found certain of their executives had been knowingly involved in those contraventions. He dismissed ACCC’s s 45 cases: see Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd [2001] FCA 1800; 115 FCR 442. On 6 March 2002, his Honour delivered a supplementary judgment in which he made declaratory orders, granted injunctive relief and imposed pecuniary penalties: see Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd (No 2) [2002] FCA 192. Universal, Warner and their executives now appeal against those orders. ACCC appeals against the amount of the penalties imposed on Universal and Warner.

The legislative background

(i) The position before 30 July 1998

5 The evolution of statutory copyright law, and of provisions relating to the importation of copyright works, extends from the sixteenth century to the present day: see Appendix D to the Report of the Copyright Law Review Committee on the Importation Provisions of the Copyright Act, AGPS, Canberra, 1988. A landmark in that evolution was codification of United Kingdom law in the Copyright Act 1911 (UK). That Act restricted importation of copyright works.

6 Before Federation, the Australian colonies had their own copyright laws. They were modelled on United Kingdom statutes and included provisions about importation similar to those which appeared in the United Kingdom statutes. Following the coming into existence of the Commonwealth of Australia, with constitutional power to make laws with respect to copyright (Constitution s 51(xviii)), the Copyright Act 1905 (Cth) was enacted. It preserved existing rights under what had been Colonial, and were now State, laws. It contained a prohibition against the importation of ‘pirated’ books or artistic works, but did not make clear whether this extended to works reproduced lawfully in another country.

7 The Copyright Act 1912 (Cth) repealed the Copyright Act 1905 (Cth) and adopted the 1911 United Kingdom Act, by providing the latter Act would be enforced in the Commonwealth from 1 July 1912. This adoption picked up the importation restrictions of the 1911 United Kingdom Act.

8 The 1911 Act was repealed in the United Kingdom by the Copyright Act 1956 (UK). The 1956 Act modified the prohibition against importation by exempting importation of works for the private and domestic use of the importer. It made the copyright owner’s licence a necessary condition of importation in that event.

9 The 1911 Act remained in force in Australia until 1 May 1969, when the Copyright Act came into operation. This statute was enacted following the 1959 Report of the Copyright Law Review Committee (‘the Spicer Report’) which had regard to the 1956 United Kingdom Act in reviewing copyright law in Australia.

10 The primary importation provisions of the Copyright Act are s 37, which defines infringement of copyright in literary, dramatic, musical and artistic works by reference to their importation for sale and related purposes, and s 102, which deals with subject matter other than works. Sections 38 and 103 deal with infringement by sale of, and related commercial dealings in, works including imported works. Section 132 sets out offences attracting criminal penalties. One offence is the importation of articles into Australia for the purpose of selling etc where the person knew, or ought reasonably to have known, the article to be an infringing copy of a work in which copyright subsisted: see para (d).

11 The 1988 report of the Copyright Law Review Committee recommended the provisions of the Copyright Act relating to parallel imports should continue, subject to qualifications which allowed, inter alia, importation of articles unavailable in Australia. The report recommended against criminal penalties for unauthorised parallel importation.

12 The report was followed in 1989 by an inquiry into book prices by the Prices Surveillance Authority. The Authority recommended the repeal of the importation provisions of the Copyright Act, save for pirate editions and the works of Australian resident authors with separate Australian publishing contracts. Thereafter the Copyright Amendment Act 1991 (Cth) amended the importation provisions of the Copyright Act to introduce what has been described as ‘a qualified closed market for books’: see J Lahore, Copyright and Designs, Butterworths para 34,595.

13 In 1990 the Prices Surveillance Authority conducted an inquiry into prices of sound recordings. It concluded that prices paid by Australian consumers were too high. The high prices were underpinned by three interrelated factors: price inelastic demand, the absence of domestic price competition and the restriction on competition arising from the importation provisions of the Copyright Act. It recommended that ss 37, 38, 102 and 103 of the Copyright Act be repealed in relation to parallel imports from countries providing comparable levels of protection over the reproduction of musical works and sound recordings: see Prices Surveillance Authority, Inquiry into the Prices of Sound Recordings, Report No 35, 1990 at 160.

(ii) The 1998 amendments

14 In 1997 the Government introduced the Copyright Amendment Bill (No 2) 1997 (Cth). This Bill was intended to amend the Copyright Act to give effect to the recommendations of the Prices Surveillance Authority. In his Second Reading Speech, the Attorney General explained the operation of the Bill thus:

‘The Bill will exempt the importation of non-pirate copies of a sound recording from infringement of copyright in either the sound recording or the works recorded on the recording. It will thereby remove the ability of copyright owners to control the market for each imported copy of a sound recording.’ (Parl Deb H of R 20 November 1997 p 10972)

15 The Bill was designed to achieve its effect through excluding action for unauthorised importation against ‘non-infringing copies’ of sound recordings. A ‘non-infringing copy’ was defined as one that had been made:

(i) without infringing any law of the country in which it was made that protected copyright in any musical or other work used in the sound recording; and

(ii) with the consent of the producer of the original sound recording, or other person who was the copyright owner.

If the country in which the copy was made did not protect sound recordings, the law of the country where the original recording was made would be applied (Parl Deb H of R 20 November 1997 p 10972-10973).

16 The Bill, having passed the House of Representatives, was referred to the Senate Legal and Constitutional Legislation Committee, which reported in April 1998. The Committee recommended the Bill be passed: see Senate Legal and Constitutional Committee, Report on Copyright Amendment Bill (No 2) 1997, Canberra, 1997 at para 5.29. Subject to amendments introduced in the Senate, the Bill was passed as the Copyright Amendment Act (No 2) 1998 (Cth) (‘the Copyright Amendment Act’). It commenced operation on 30 July 1998.

17 As a result of these amendments, the Copyright Act now exempts, from its provisions relating to infringement, the importation of ‘non-infringing copies’ of sound recordings. It does not permit the importation of pirated copies of sound recordings. Moreover, it places on the importer or seller the burden to establish, if challenged, that the imported stock is not pirated.

18 The Copyright Amendment Act introduced a new section 10AA into the Copyright Act, defining ‘non-infringing copy’ along the lines indicated above. New sections 44D and 112D were inserted. They exempt, from the application of ss 37, 38, 102 and 103, the importation for sale and related purposes of, and the sale of, and related commercial dealings with, non-infringing copies of sound recordings of literary, dramatic or musical works or in the sound recordings themselves. The new burden of proof provision is s 130A, which provides:

‘In an action for infringement of copyright described in section 37, 38, 102 or 103 by an act involving an article that is a copy of a sound recording, it must be presumed that the copy is not a non-infringing copy unless the defendant proves that the copy is a non-infringing copy.’

19 It was the allegedly anti-competitive conduct of the appellants, in anticipation of, and response to, these changes to the Copyright Act, that gave rise to the proceedings which led to these appeals. Before turning to the trial judge’s conclusions about that conduct, it is desirable for us to set out the effect of his findings as to the relevant market.

The market

(i) Participants in the wholesale and retail recorded music markets

20 Universal and Warner are major Australian distributors of recorded music. At the time with which these appeals are concerned, CDs dominated the product market for recorded music (at least 90%). Cassette tapes and vinyl records formed only a small segment of the market. The parties have treated them as irrelevant to these cases, which are essentially about CDs.

21 In 1998, Universal was known as PolyGram Pty Ltd (‘PolyGram’). The company changed its name in March or April 1999 as a result of a merger with another company, then known as Universal Music Australia, which had a 6% market share in Australia and subsequently ceased trading. Following the practice adopted in the judgment of Hill J, we will refer to the appellant company as ‘PolyGram’ in respect of events up to the merger and as ‘Universal’ thereafter, or when references are made to its position as a party to these proceedings. The original Universal (Universal Music Australia) is designated as ‘6% Universal’, reflecting its pre-merger market share.

22 In 1998, PolyGram had 17.6% and Warner about 16% of the market share for wholesale recorded music. As noted above, 6% Universal had approximately 6%. Other wholesalers of recorded music in Australia at that time were Sony Music with 25% to 27%, EMI Music Australia Pty Ltd with about 17% and BMG Australia Ltd with about 7% to 8% of the market share. These six companies were the major Australian record companies. The learned primary judge found they accounted for ‘over 90 per cent of sales in 1998 and 1999’. His Honour also found each of the five major record companies, as they became after the merger of 6% Universal and PolyGram, was part of a world-wide group. Each Australian company had a name similar to its international affiliates and exclusive rights, within a designated territory, to distribute (and in some cases also to manufacture) the whole, or part, of the range of recorded music that was referred to as the international company’s ‘catalogue’. The ‘Australian catalogue’ was that part of the range for which the relevant Australian company had exclusive rights in Australia.

23 The activities of PolyGram and its affiliates were described by Hill J at para 295 as globally encompassing:

‘… the development, production, manufacture, marketing, promotion, sales and distribution of recorded music and exploitation of copyrights in sound recordings embodying recorded music through a network of Universal subsidiaries, joint ventures and third party licensees in 40 countries or territories around the world. Universal affiliates in each territory sign artists under agreements which typically included an assignment in perpetuity of the worldwide copyright in sound recordings produced by the artist’.

24 The major record companies did not sell CDs directly to consumers, but to retail sellers of recorded music. Other wholesalers, in addition to the majors, included:

(i) Much More Music Pty Ltd;

(ii) Tempo International Pty Ltd, a wholesaler of recorded music in Australia and New Zealand, headquartered in Perth. It had its own record label with 12 artists ‘signed’ to it. It had licences to distribute music of 170 artists in the areas of classical, folk, jazz and blues. The company established an Indonesian subsidiary, Tempo International Pty Ltd Indonesia, shortly before parallel importation became available;

(iii) Volandu Pty Ltd, which imported recorded music from Indonesia from December 1998 to August 2000. It acted as buying agent for Colonel Clints Crazy Bargains Pty Ltd (‘Clints’) and five other discount stores. By the time of trial, it had become a wholly owned subsidiary of Clints;

(iv) Jive Zomba;

(v) The Festival/Mushroom Group;

(vi) Shock; and

(vii) Village Road Show.

25 Hill J said three of these companies ‘stand out’: Mushroom, which began as an independent manufacturer but was taken over by Festival Records (a division of News Ltd), Festival itself and Shock.

26 Small local wholesalers included: Siren Pty Ltd, Stomp Pty Ltd, Riot Pty Ltd, Bruce Ingram and Associates Pty Ltd and Sound Wave. The local wholesalers were unable to supply the volume required by large retailers. They were not a substitute source of supply for retailers wishing to stock ‘chart music’: see para 31 below.

27 Even before 30 July 1998, some overseas wholesalers sold internationally available titles to Australian purchasers. Following that date, they could sell to Australian retailers. These overseas wholesalers were called ‘one stops’.

28 The major Australian retailers were:

(i) Sanity – a national chain of specialist music stores owned ultimately by Brazin Ltd. Sanity was the largest specialised recorded music retailer in Australia. It had some 210 stores and represented about 15% to 25% of retail sales. It had its own warehousing and distribution system;

(ii) Three divisions of the Coles Myer Group of companies:

(a) Kmart – a budget department store chain operated by Kmart Australia Ltd, representing 8% to 12% of retail sales;

(b) Target – a budget department store chain operated by Target Australia Pty Ltd, representing 4% to 6% of retail sales; and

(iii) Big W – a budget department store operated by Woolworths Ltd, and representing 4% to 6% of retail sales. At the relevant time it operated 87 stores around Australia. Dick Smith and Crazy Prices were other divisions of Woolworths which retailed recorded music. The primary judge said at para 308:

‘Next to Coles Myer Big W was Australia’s other retail giant and serious supplier of recorded music in Australia.’

(iv) HMV Australia Pty Ltd, trading as HMV, a wholly owned subsidiary of HMV Media Plc – a chain of 29 specialist music stores in east coast metropolitan areas, representing 6% to 8% of retail sales and a retail turnover of $100 million. HMV Media Plc was, until March 1998, a wholly owned subsidiary of EMI Plc, one of the largest international record companies. In March 1998, as a result of a management buyout, EMI’s interest in HMV was reduced to 45%. However, it retained a director on the HMV board;

(iv) Vox Retail Group Ltd – a national electronics goods retailer with a specialist music section, representing about 4% to 6% of retail sales; and

(vi) Leading Edge Music Group Pty Ltd, trading as Leading Edge – a co-operative buying group of about 200 independently owned specialist music stores, representing 12% to 14% of retail sales.

29 Smaller, locally based, retailers included:

(i) Fish Records – a specialist retailer with about seven stores in Sydney, representing about 1% of retail sales;

(ii) Gaslight Records - a specialist retailer in Melbourne, representing approximately 1.9% of retail sales;

(iii) JB HiFi Pty Ltd – a specialist music retailer with 10 stores in Victoria, two in New South Wales and one in Queensland, representing about 4% of retail sales;

(iv) CC Records – representing approximately 2% of retail sales. It may have been part of the Sanity Group;

(v) Salgara Pty Ltd, trading as Angel Music or Angel Entertainment, representing about 0.5% of retail sales;

(vi) Trevan Enterprises Pty Ltd, trading as Bullcreek Compact City (‘Compact City’), in Bullcreek in Western Australia; and

(vii) Wests (Burwood) Pty Ltd, trading as Wests Sound Bar (‘Wests’) and Ultimate Music Pty Ltd (‘Ultimate’), related retailers operated by Mr and Mrs Delaney.

30 After 30 July 1998, a number of discount variety retailers emerged. At the date of trial, their combined retail sales accounted for only a small percentage, on value, of sales of recorded music in Australia. They included:

(i) Clints – a discount variety store chain with some 70 stores throughout Australia;

(ii) Crazy Clarks – a discount variety store based in Queensland;

(iii) The Reject Shop;

(iv) Silly Solly’s – a discount variety chain, operating mainly in Queensland;

(v) Chicken Feed – a discount variety chain, operating mainly in Tasmania; and

(vi) Strathfield Car Radio – a discount electronic equipment retailer.

These retailers appear to fall within the primary judge’s reference to ‘non-traditional retailers’ which operated as $2 stores, discount or budget chains. He said they were beginning to emerge towards the end of 1998, as a result of the availability of parallel imports.

(ii) Products

31 Hill J used a number of industry terms to identify relevant categories of recorded music. They include:

(i) ‘chart music’ which refers to the top selling records in a designated period, as indicated by their inclusion in sales charts; in particular, the ‘Top 50’ chart published weekly by the Australian Record Industry Association (‘ARIA’). This chart is based on sales figures collected from retailers throughout Australia. From time to time, other charts are published by ARIA and retailers. Most retailers stock chart music. At any given time, each major record company (including the corporate appellants) has, on the charts, a number of the titles it is distributing. Small distributors have titles on the charts only sporadically;

(ii) ‘catalogue music’. Upon release, an album or single is advertised intensively for 90 to 120 days. This period of ‘front line advertising’ may be extended, depending on the success of the marketing. After first line advertising ends, a title is described as ‘catalogue’. It is subject to less costly advertising, but may be marketed more heavily for such events as anniversaries of the birth or death of the artist or a tour by the artist; and

(iii) ‘back catalogue music’. It is not clear to what extent this category, which was not defined in the judgment, overlaps with ‘catalogue music’. It appears to apply to titles which have been released for a substantial period of time and do not appear on the charts.

32 Retailers may select stock for purchase from new releases of chart music and from the catalogue of distributors. The learned primary judge found:

‘… it was commercially imperative for most retailers to stock or have immediate or timely access to the Australian catalogues, including chart (and for some specialist music retailers, to the whole or part of the back catalogue), of each of the majors.’

33 There was reference in some evidence to a chart music sub-market. However, Hill J thought that, for the purposes of the Act, it was necessary to identify only the relevant market. He treated the concept of sub-market as only a tool to assist in determining the relevant market: see the discussion in Singapore Airlines Ltd v Taprobane Tours WA Pty Ltd (1991) 33 FCR 158.

(iii) Definition: function and geography

34 There was no real dispute at trial about the definition of the relevant market. It was the wholesale market for recorded music in Australia. Although Mr Henry Ergas, an economist called on behalf of ACCC, suggested separate retail markets could be defined for small towns and cities, his Honour accepted that the appropriate retail market was Australia-wide, perhaps with regional differences in its operation.

35 An important characteristic of the market was that, at the relevant time, more than 70% of recorded music sold in Australia originated overseas. Therefore, at para 297 his Honour found:

‘… it is important for the Australian major record companies to have access to a worldwide catalogue. Conversely, access to the Australian market by each of the majors was not unimportant, given that Australia is one of the 10 largest markets in the world for sales of recorded music.’

(iv) Substitutability, concentration and barriers to entry

36 It was accepted on all sides that no CD title is a perfect substitute for another. But the extent of substitutability, and its significance for market power, was a point of difference between the experts. Mr Ergas distinguished the record industry from other industries in relation to product differentiation. In the record industry, he said, there was a rapid turnover of titles in the charts and a need for a variety of titles. Professor Jerry Hausman, called to give evidence on behalf of Universal and Warner, compared the record industry to the American film and breakfast cereal industries, both of which he said were characterised by rapid turnover in brands and consequent temporary monopolies. He contended that, even if 50% or 60% of customers would not shift from one product to another, that fact did not exclude price restraint. Mr Ergas, on the other hand, contended the cases required a comparison of the participants’ positions before and after parallel importation was legalised; the question for any distributor that was considering withdrawing supply was whether the relevant retailer could carry on without access to that distributor’s range of product.

37 Hill J accepted that more than half the persons seeking a particular title will not purchase a substitute, although some can be persuaded to do so. At para 385, he characterised the debate between Mr Ergas and Professor Hausman as being ‘no more than a reflection of the difference in views between whether market power relates only to the power to increase price or whether it is not necessarily related to such power’.

38 His Honour considered the extent of market concentration. He referred to Mr Ergas’ evidence that the existence of a small group of major record companies, which had dominated sales for many years, was relevant to market power. High levels of concentration could facilitate what his Honour called ‘a monopolistic outcome’.

39 Against the background of the debate about product differentiation and market concentration, his Honour turned to the evidence about barriers to entry. Again, there were two views from the economists. Mr Ergas identified a number of factors that he regarded as barriers to entry:

(i) copyright;

(ii) contractual tying of talent to record companies;

(iii) economies of scale especially in relation to distribution; and

(iv) high advertising and promotional costs, at least 12% of overall sales.

Mr Ergas said it was unusual for fringe firms to progress to the core of the market. Professor Hausman, on the other hand, considered barriers to entry to be low, evidenced by a history of independent record companies entering and leaving the market. He cited Mushroom and Festival as examples of independents that had emerged as significant record companies.

40 Hill J identified the ‘essential and distinguishing feature’ of the industry as the continued need for new product, which was as much a problem for the major companies as for new entrants. He held there was no significant general barrier to entry into the record industry, as demonstrated by the growth of independents. New entrants competed with incumbents for artists. They had no less chance of recognising a likely ‘hit’ than incumbents. New artists might be more ready than established artists to contract with new entrants. CD production costs were relatively low. Publicity and promotion costs were high, in comparison with other costs, but not more expensive for new entrants. Radio, television and print media were no less accessible to them. On the other hand, new entrants would require time to build up a large repertoire of products. Importantly, it would be very difficult for a new entrant to put on to the market the constant stream of hits which constitute chart music.

41 At para 424 of his reasons, Hill J said:

‘The real question that arises in the present case is whether, having regard to the structure of the recorded music market and the significance which hit music has in that market, barriers to entry should be considered by reference to the overall flow of recordings in the market for recorded music generally, where they are not high, or whether regard should be had to the monopoly which is afforded to each record company in respect of such CDs as feature on the chart at a particular point of time as a result of the Copyright laws. Clearly enough, new firms can not enter the market of producing titles covered by copyright protection held by a particular record company. Absent any exclusive dealing conduct on the part of particular record companies directed at importers coming into the market, there would be no barrier for entry for them either. It must be added, however, that the drafting of the law permitting parallel importation, casting as it does the onus upon the importer to show each record imported was produced with the licence of the copyright holder in its place of manufacture, may in many cases make it almost impossible for an importer to avoid legal action by a determined record company wishing to impede competition.’

42 Hill J’s findings about barriers to entry were not unequivocal. But, subject to the qualifications mentioned, they amounted to a finding that barriers to entry were not high. This was demonstrated, historically, by the entry of new companies into the market and the growth of some of them. It was a conclusion supported by his Honour’s findings about the cost of production, access to new talent, the cost of promotion and advertising and access to advertising media. His Honour did not suggest entry into the market, or expansion within the market, was cost free. But, overall, his findings tended to the conclusion that barriers to entry were not a factor that supported the market power of incumbents.

(v) Competitive activity

43 The primary judge described a number of aspects of competitive activity in the wholesale market including:

(i) price and trading terms;

(ii) discounts and allowances;

(iii) non-price competition;

(iv) marketing and promotion; and

(v) artist and repertoire investment.

44 Prior to the changes in the Copyright Act, CDs sold in three price categories in both the wholesale and retail markets: full price, mid price and budget price. The highest sales by value were in the full price category. A new release would typically be full price whilst on the chart, and subsequently move to mid price and then to budget price. The wholesale list price, the published price to the dealer (‘PPD’), remained relatively constant prior to 30 July 1998. However, the PPD was subject to discounts and allowances given to retailers by both PolyGram and Warner; so it gave little indication of the true wholesale price. The applicable 1998 PPDs and recommended retail prices (‘RRP’) were found by his Honour to have been:

. full price $18.40 (PPD), $29.95 (RRP)

. mid price $12.17 (PPD), $19.95 (RRP)

. budget price $8.99 (PPD), $14.95 (RRP)

45 Volume of purchases was a significant factor in the level of discounts given by the majors to retailers. Other factors included the turnover of the retailer, general market conditions, the skill of the negotiators and the level of support given by the retailer to the record company and the reverse. Record companies offered both file, or flat, discounts, guaranteed irrespective of turnover, and volume discounts. Discount incentives were offered to enable particular titles to be sold at a lower price and thereby increase sales. This applied to new releases, chart music and ‘evergreens’ on the back catalogues.

46 Other allowances and trading terms identified by the learned primary judge included:

(i) rebates – incentives for increasing the volume of business with a particular supplier;

(ii) privileges returns/returns allowances – a negotiated percentage of returns;

(iii) sale or return and sale or exchange arrangements;

(iv) cooperative advertising – eg financial contributions by the record company to the cost of the retailer’s promotional materials;

(v) free stock as an incentive for more volume on other titles;

(vi) additional price terms; and

(v) credit terms.

47 Non-price competition between the major record companies included competition to engage artists, to obtain distribution rights for records, to poach well performing staff from each other, and to take over successful independent record companies. A successful record by one company often stimulated release of a similar product by others. The companies competed for radio station airplay for their titles. They promoted their titles through television advertising and in-store promotion. Specific product placement by large retailers could sometimes be negotiated by the record companies offering financial incentives. In all, the major record companies, at the relevant time, were expending 12% to 15% of their turnover on marketing and promotion.

48 Hill J found the major record companies also incurred expenditure in finding and developing Australian artists. Some of this expenditure could be recouped out of royalties payable to a successful artist. On average, however, 50% of this expenditure was not recouped.

49 Most retailers stocked chart music.

(vi) Pricing conduct

50 The major record companies kept CD list prices at roughly similar levels. There was evidence of an attempt by Warner, unilaterally, to increase prices of ‘premium price’ CDs to retailers in or about 1996. The increase was less than a dollar. Notwithstanding that, Sanity reacted by ceasing to order Warner titles for several weeks and placing Warner product at the back of the store. Sales of Warner titles in Sanity stores declined. Ultimately, however, Sanity concluded it had to purchase from Warner. Mr Agostinelli of Sanity tried to get Warner to cancel its price increase, but without success. For some time, Sanity absorbed Warner’s price increase. Later, however, it increased its retail price. This led to consumer confusion and some resistance. Of Sanity customers who came to buy Warner titles selling at the increased price, only 70% did so. Of the remaining 30%, half purchased other titles and the remainder none at all.

51 Evidence about the Warner price increase was given by representatives of other market participants. Target absorbed the price increase and did not pass it on to customers. JB HiFi did likewise, while HMV passed on the increase. Kmart absorbed the increase, and so sold the Warner product at a lower margin than product of other record companies.

52 In considering the consequences of a hypothetical price increase by the record companies, his Honour had regard to evidence given in cross-examination by Mr Hazell of HMV and Mr Holman of Big W. HMV’s reaction would be to negotiate to stop the increase; if this failed, HMV would try to pass on the increase to its customers. Big W would also try to negotiate; if unsuccessful, it might not be able to pass on the increase.

(vii) Market power

53 The concept of a ‘market’ is a metaphor used to describe a range of competitive activities by reference to function, product and geography. The application of the metaphor may be informed by economic analysis, provided it is rooted in commercial realities. However, whether or not a particular corporation has market power, within the meaning of a provision such as s 46 of the Act, is not a matter to be resolved by debates between expert witnesses; the issue is raised by statutory words of ordinary English meaning which are to be construed and applied by the Court. His Honour acknowledged this at para 410:

‘… ultimately the question whether market power in the relevant sense exists will not be determined by economists or the way economists may use the words in economic texts but by the court informed, nevertheless, by the evidence of economists derived from their study of market behaviour, and having regard to the factual matrix from which the conclusion must be drawn.’

54 Hill J considered whether market power should be determined only by reference to the ability to raise prices or by some wider criterion. He identified three positions, from the evidence before him. The first was that of Professor Hausman. He defined market power as ‘the ability of a firm to charge a price significantly above the competitive level for a non-transitory period of time’. That ability is sometimes described as the ability ‘to give less and charge more’. Professor Hausman concluded that, as neither Universal nor Warner could raise its prices for CDs above the competitive level, neither Universal nor Warner had market power.

55 The second position was that of Mr Ergas who saw market power as ‘the ability of a firm to act persistently in a manner unconstrained by competition’. He did not confine it to the ability to raise prices. A firm able to act in a manner that is designed to restrict competition, by refusing supply or imposing restraints which it would not be able to impose in a fully competitive market, would have market power irrespective of its ability to raise prices.

56 A third position was identified in an article by Professor Steven Salop, ‘The First Principles Approach to Anti-trust, Kodak and Anti-trust at the Millennium’, Anti-Trust Law Journal, vol 68, 2002 at 187-202. Professor Salop’s proposition, as characterised by his Honour, was that it is impossible to evaluate market power accurately without understanding the anti-competitive conduct and anti-competitive effect claims at issue and analysing market power in the context of those claims. Professor Salop said market power was ‘the power profitably to raise or maintain price above the competitive benchmark price, which is the price that would prevail in the absence of the alleged anticompetitive restraint’. Hill J noted at para 357 that this approach does not discard price as a relevant matter altogether, but requires ‘a greater focus on the factual (and legal) context in which the question arises’.

57 His Honour found Professor Salop’s view persuasive. He accepted the standard test of market power, as used by economists, was the ability to raise prices over the firm’s marginal cost. The question he posed for himself was whether it was possible for a firm to have a substantial degree of market power, for the purposes of s 46 of the Act, notwithstanding that it cannot raise existing prices as a result of competitive constraint; but where the firm can act in a way unconstrained by competitive forces to bring about a result of the kind contemplated by s 46. His Honour said at para 360:

‘Ordinarily, at least, to act in a manner unconstrained by competition in one area, say by engaging in the conduct of exclusive dealing or by imposing vertical restraints will be unlikely to be successful in a situation where the firm is unable to charge higher prices because of constraints imposed upon it by competition.’

The conduct of PolyGram

(i) Reservation of right to review trading terms

58 As previously mentioned, the amendments to the Copyright Act made by the Copyright Amendment Act took effect on 30 July 1998. Hill J found at para 35 that the prospective amendments ‘were the subject of concern to the record industry and the executives of Universal’. On 15 July 1998, Mr Craig Handley, PolyGram’s General Sales Manager (and third respondent in matter N925 of 1999), contacted a number of retailers to inform them of PolyGram’s position. The persons he contacted included Mr Gavin Ward of Leading Edge, the co-operative buying group to which belonged Wests and Ultimate. As Universal subsequently admitted, Mr Handley told Mr Ward that PolyGram ‘reserved its right to review the terms and conditions of its trading relationship with Leading Edge if it chose to parallel import PolyGram recordings’. It seems Mr Ward responded that Leading Edge reserved its right to parallel import but would continue to obtain PolyGram titles from PolyGram and would inform it if it proposed to parallel import PolyGram recordings.

59 Hill J found that, on the same day, there was a meeting of officers of PolyGram designated the ‘parallel importing brainstorming session’. PolyGram officers, Mr Paul Dickson (Group Managing Director and the fourth respondent in matter N925 of 1999), Mr Handley and others, discussed the most likely outcome of parallel importation of CDs. Indonesia, Malaysia and Thailand were identified as possible sources. The threat from imports was seen to be primarily in the area of chart records, big name acts and a small proportion of classics.

60 In assessing the likely future behaviour of major retailers, HMV was identified as a ‘major threat’, this company being large enough to withstand pressure and to import for itself. Mr Handley proposed discontinuance of an existing 2% discount on advertising for HMV. Sanity, Central Station and Soundwaves were thought likely to import. The view of the meeting was that Big W did not intend to import.

61 Most of the discussion was directed to the question whether discounts could be given to retailers to allow them to reduce their prices. A decision was made to mark Australian CDs ‘Made in Australia’ and to include an extra bar code to enable Australian products to be recognised.

62 The following day, 16 July 1998, Mr Dickson and Mr Handley met Mr Agostinelli of Sanity in Melbourne. They told Mr Agostinelli they reserved the right to review the terms and conditions of PolyGram’s trading relationship with Sanity if Sanity were to parallel import PolyGram recordings. Although Mr Agostinelli recalled the meeting, in evidence he made no reference to this reservation. However, PolyGram admitted the reservation in its response to a s 155 notice from ACCC. A week later, in further negotiations about trading terms, Mr Handley and Mr Dickson told Mr Agostinelli that, if Sanity were to go offshore, it might lose its current trading terms. Mr Agostinelli understood this to be a reference to such advantages as sale or return and other benefits. He told Mr Handley and Mr Dickson that, if the market became competitive, Sanity would have no choice but to obtain products from overseas.

63 On 21 July, PolyGram executives, Mr Handley, Mr Dickson, Ms Cohen and Ms Allen, variously contacted Fish Records, Centrey Music Pty Ltd (trading as Mall Music Centre) and JB HiFi. They told each of these retailers that PolyGram would review their terms of trade and might cease to trade with them if they were to parallel import PolyGram records. Mr Nemeth of Fish Records told Mr Handley and Ms Allen, who spoke to him, not to threaten him. He reserved his rights. Mr Bonouvrie of More Music said the same to Mr Dickson, who contacted him, as did Mr Durrant of JB HiFi to Mr Handley.

64 There was evidence of similar communications by PolyGram to other retailers, involving possible review of the terms of the PolyGram trading relationship and/or cessation of supply. These communications were directed to Hockey Enterprises Pty Ltd trading as Record Market, Chatminister Pty Ltd trading as Toombul Music Centre, Vox Retail Group Ltd, Woolworths Ltd trading as Big W, Target Australia Pty Ltd, K-mart Australia Ltd trading as K-mart and One Stop Entertainment Pty Ltd.

65 On 23 July, Mr Dickson and Mr Handley spoke to Mr Hazell, of HMV. They advised him that PolyGram reserved the right to review its terms of trading with HMV and to cease supplying HMV if it engaged in parallel importation of PolyGram labels. Mr Dickson said PolyGram had legal advice that it could withdraw supply of its product to any retailer who parallel imported, as they did not have a dominant share in the industry. During the course of discussion about the likely attitude of other retailers, Mr Dickson told Mr Hazell that PolyGram would have no hesitation in ceasing to supply Big W, or any other retailers that chose to parallel import, particularly if it did not see the retailer as contributing to the industry. Mr Hazell told Mr Dickson that HMV would purchase locally, unless the commercial benefits of parallel importing became attractive or HMV felt it was becoming uncompetitive. Mr Hazell said he would not wish to jeopardise the mutual support that characterised their relationship for the sake of importing one or two products; however, if HMV were exposed, he would have no hesitation in exercising his legal right to import.

66 The findings set out above establish the communications by PolyGram that were pleaded by ACCC. These communications were said to have constituted offers to supply goods and services to retailers on condition that they agreed not to acquire goods of a particular kind or description, namely imports consisting of non-infringing copies (alternatively, of non-infringing copies and infringing copies), directly or indirectly from a competitor of PolyGram.

(ii) The ‘PolyGram Policy’

67 His Honour found that, as alleged in ACCC’s statement of claim, a policy known as the ‘PolyGram Policy’ was agreed on 22 July 1998 at a meeting attended by Mr Handley, Mr Dickson and Ms Cohen. The policy was described by PolyGram, in its response to a s 155 notice, in the following terms:

‘. PolyGram would be prepared to review the terms of its trading relationship with those retailers with whom PolyGram had an existing trading relationship who chose not to parallel import PolyGram recordings;

. The commercial matters in respect of which PolyGram may be prepared to review its trading relationship would include:

(a) advertising subsidies to be provided by PolyGram to retailers,

(b) the allowances which would be provided by PolyGram for returns of unsold PolyGram Australia recorded music,

(d) the time within which PolyGram Australia recorded music must be paid for by the retailer,

. PolyGram may also review the terms of its trading relationship with those retailers who chose to parallel import PolyGram recordings.

. PolyGram may cease to have a trading relationship with those retailers with whom PolyGram who [sic] chose to parallel import PolyGram recordings.’

68 Hill J found this policy was implemented, by way of cessation of supply, as pleaded ie on 21 August 1998 with respect to Compact City and on 25 August 1998 with respect to Wests and Ultimate.

(iii) Compact City

69 Mr Howson, the Store Manager of Compact City, placed an order with a Canadian supplier for copies of an album then on the chart which he had endeavoured unsuccessfully to obtain from PolyGram. The order was placed before 30 July 1998, but it is not clear when it was met. If the order was met before 30 July 1998, importation would have constituted a breach of copyright, if not made with the licence of the Australian copyright owner. Hill J found the sale could have been before or after 30 July 1998. He accepted Mr Howson’s evidence that he believed what he had done was legitimate, because the title was unavailable to him in Australia. He had previously imported titles that were not released in Australia. He had done so without the consent of the Australian licensee and without any complaint. However, on 21 August 1998, Mr Handley sent him a fax advising that PolyGram had undertaken a trap purchase of the title. The fax advised that, while PolyGram was aware that parallel importation was permissible, it had decided not to supply his store until further notice.

70 When Mr Howson contacted Mr Handley, Mr Handley said PolyGram had a right not to supply his store and ‘this’ was happening all around Australia. His Honour found the reference to ‘this’ was probably a reference to trap purchases. He accepted Mr Howson’s evidence that he had not told Mr Handley the title had been imported before the change in copyright law. He also accepted Mr Howson’s evidence that Mr Handley had not told him the importation was illegal.

71 Mr Howson wrote to Mr Handley on 22 August 1998 and subsequently telephoned Mr Young, PolyGram’s Sales Manager in Western Australia. Mr Young suggested that Mr Howson write a brief letter indicating he would not parallel import again and would adhere to PolyGram’s terms and conditions. Mr Howson wrote to Mr Young on 28 August. He applied formally for reinstatement of the account. He said he had not knowingly parallel imported; he was under the impression the CD in question was unavailable in Australia. He offered his word that the situation would not arise again. The account was reopened on about 11 September 1998.

72 On or about 19 October 1998, PolyGram sent its new trading conditions to Mr Howson. The trading terms stated that PolyGram reserved the right to change any trading terms, including discounts or rebates, or not to supply the dealer at all, where the dealer imported, or proposed to import, a substantial quantity of goods from the PolyGram repertoire, rather than obtaining them directly from PolyGram. The decision was to be at the discretion of PolyGram and subject to compliance with its obligations under the Act and any other relevant legislation. PolyGram reserved the right to suspend or discontinue supplying goods, or to refuse to deal with a dealer which engaged in activities in breach of, or inconsistent with, the trading terms.

(iv) Wests and Ultimate

73 Wests was operated by Mrs Delaney. She controlled the company; her husband was not a director. However, he was a director of Ultimate, a company of which Mrs Delaney was also a director and shareholder.

74 On 25 August 1998, Ms Allen of PolyGram phoned Mrs Delaney to inform her of the closure of Wests’ account, and also the account of Ultimate. On the preceding Saturday, Ms Allen had discovered (by a trap purchase of two titles) that Wests had sold some imported CDs. Ms Allen told Mrs Delaney that PolyGram had taken a stance to support those who supported Australian products and manufacturers; it was Mrs Delaney’s choice to purchase the imported CDs but PolyGram had made a decision. Mrs Delaney complained the sale of the imported titles had nothing to do with the store operated by Ultimate. However Ms Allen told her both accounts would close, because she was a director of both companies. There was no suggestion that the imported titles were infringing copies. Mrs Delaney subsequently contacted the credit manager of PolyGram. He refused to reopen the account, on the basis that PolyGram did not have to supply anyone any more; Ultimate could source its product elsewhere.

75 Mr Delaney complained to ACCC. He told PolyGram he had done so. Mr Dickson then raised, for the first time, a suggestion of copyright infringement. Hill J thought this suggestion was prompted by ACCC’s intervention. On 2 September 1998, Mr Delaney spoke to Mr Ward, the General Manager of Leading Edge. He said he was tired of being pushed around, when he had done nothing wrong, and was contemplating legal proceedings against PolyGram. Twenty minutes after that conversation, Mr Ward rang back to tell Mr Delaney that Ultimate’s account had been reinstated. The reinstatement was on condition that Ultimate did not sell any imported stock and that it did not supply Wests with PolyGram stock. Wests’ account was never reopened and the store closed on 27 September 1998. Mrs Delaney made no attempt to get any more stock from PolyGram.

76 ACCC pleaded that PolyGram’s conduct in respect of Compact City, Wests and Ultimate was a refusal to supply them with goods because they had acquired goods of a particular kind or description, directly or indirectly, from a competitor.

(v) Indonesian conduct

77 In addition to PolyGram’s conduct within Australia, his Honour found, in effect, that Ms Cohen prevailed upon the Managing Director of PT PolyGram Indonesia, Mr Shih, to block the supply of PolyGram CDs into the Australian market by an Indonesian distributor, Central Hiburan. On 14 August 1998, Mr Shih (who was also the Indonesian Chairman of Sony Music, Warner, BMG and EMI) sent a fax to Mr Gani of Central Hiburan in which he said:

‘May I once again point out to you that products purchased from the 5 major recording companies are only for sales within the Indonesian market, and all products are clearly marked either “Manufactured in Indonesia for Indonesian Market Only”, or “Special Asian Edition”. Your attempt to export such products to a foreign company is blantantly [sic] in violation of this rule.’

The fax went on to inform Mr Gani that, with immediate effect, the joint decision of the five major recording companies was to limit supplies to his company to a maximum of 20 copies of any single CD title and 50 copies of any single music cassette title. The fax said:

‘This decision will remain effective until we find that you have ceased all activities in exporting our products to Australia or any other foreign country.’

78 The threat succeeded. Mr Gani wrote to Mr Shih, apologised to the five major record companies and said he had faxed another letter to retailers cancelling and recalling any offers he had previously made. He guaranteed no transaction had been, or would be, conducted outside Indonesia.

79 Hill J found this conduct constituted an arrangement or understanding with the Indonesian record companies. The letter to Central Hiburan was said to be an aspect of the arrangement that had the purpose, or the effect or likely effect, of substantially lessening competition in the wholesale market and/or the retail market. However, as noted below, Hill J was not satisfied that either of the Australian companies, PolyGram and Warner, was a party to the arrangement or undertaking.

The conduct of Warner

(i) The warning letter

80 Hill J found Warner had long felt threatened by the proposed change in copyright law to permit parallel imports. However, when the amending legislation was passed, Mr Smerdon of Warner sent an email to company staff stating that prices and trading terms would, for the moment, remain the same. He said that, given the low Australian dollar, retailers were not going to ‘run out and import products’. He added:

‘Retailers will also have to weigh up the cost of losing product return right privileges, rebate incentives and various promotional support before they consider alternative sources of supply.’

81 On 20 July 1998, the Chairman of Warner, Mr Harris, sent a letter to all retailers referring to the recent change in the law. He referred to the benefits, to retailers, of Warner’s support of sales: promotion teams, cooperative advertising, return privileges, favourable credit terms, provision of point of sale material, television, print and radio advertising and promotional visits. The letter stated:

‘With our market now further exposed to the threat of piracy, it is important you be aware of not only our future intentions, but also the large downside should you wish to alter your source of supply. Such a move will result in us being unable to provide any of the aforementioned trading benefits and will also result in a substantially reduced marketing and advertising spends [sic].’

82 None of the retail witnesses who were cross-examined about the letter suggested it affected their behaviour. No ACCC witness said retailers were deterred, by the letter, from importing Warner titles themselves or purchasing them from others who had imported non-infringing copies.

(ii) Raiders Music

83 Raiders Music Pty Ltd (‘Raiders’) operated retail record stores at Northgate Shopping Centre, Hornsby, and Westfield Shoppingtown, Liverpool. It had temporary clearance stores in four other locations. Mrs Knazko was Retail Manager of Raiders. Raiders had an account with the Entertainment Distribution Company Pty Ltd (‘EDC’), an agent for Sony, EMI and Warner. Between April 1996 and June 1999, Raiders purchased more than $100 million worth of recorded music through EDC.

84 In mid September 1998, Mrs Knazko placed orders for 300 imported CDs from the Australian wholesaler, Much More Music Pty Ltd. The order included thirty copies of each of three Warner titles. Each CD cost $14. Each displayed on its cover the name ‘Warner Music Indonesia’.

85 On 29 September 1998, Mrs Knazko was informed by her Hornsby store manager that he had been told their Warner’s EDC account had been closed. On the following day, Mrs Knazko rang the New South Wales State Manager of Warner, Mr Maksimovic. He told her the account had been closed because Raiders was parallel importing; Raider’s decision to use another supplier was against the Warner terms of trade. Mrs Knazko told Mr Maksimovic she had started buying imports because she could get them cheaper than through Warner in Australia. Mr Maksimovic said, if that was what she wanted to do, Warner would not supply Raiders. He said Warner had advice that it was under no obligation to supply if it did not wish to do so. When she asked what she had to do to have the account reopened, Mr Maksimovic said:

‘You have to deal with us exclusively. Stop parallel importing and deal with us only… [Y]ou have to buy them (ie Warner CDs)from Australia only … We have to protect ourselves.’

Mrs Knazko said to Mr Maksimovic:

‘Okay Greg, I just want to make sure that I understand you. I’ve written all this down, so I just want to double-check my notes. Basically what you’re saying is that I’m not allowed to buy your product from any wholesaler other than you exclusively, and the only way I’ll get my account re-opened is if I buy Warner products from Warner Music Australia exclusively.’

Mr Maksimovic confirmed this was correct.

86 When Mrs Knazko spoke with Ms Dickie, the Credit Manager of EDC, seeking confirmation that the account had been closed, she was told that it was not EDC that closed the account but Warner.

87 On 1 October, Mrs Knazko spoke with Mr Smerdon, the Finance and Business Affairs Director of Warner. He repeated that the account had been closed because Raiders had been parallel importing, and that the purchase of Warner product from an alternative source was in contravention of Warner’s trading terms. He told her Warner could not afford the market to be bastardised by imports when it spent money on television; the way to reopen the account was for Raiders to deal exclusively with Warner for Warner products. If Raiders wanted the account reopened, it would have to satisfy Warner it would not parallel import Warner products.

88 In order to satisfy demands from her customers for popular Warner titles, Mrs Knazko was forced to purchase Warner products from other retailers, at retail prices. She also purchased a small number of imported CDs through Much More Music Pty Ltd. She suffered a substantial loss of sales and contacted ACCC.

89 On 9 October 1998, Raiders’ solicitor wrote to Mr Maksimovic demanding the account be reopened and Warner recommence supply. Warner’s solicitors responded on 16 October stating the relevant persons at Warner were away; accordingly, Warner had not been able to look into the matter. In fact Mr Smerdon was at his office. The solicitors’ letter said Warner had agreed to restore supply of stock, pending consideration of the issues raised.

90 However, Warner’s sales representatives did not recommence visiting Raiders’ stores. Mrs Knazko received no in-store merchandising displays and could not find out about new releases. She was denied support by Warner.

91 Hill J found Warner thought it could make an example of Raiders, for being involved in parallel importation, by closing its account; Raiders was ‘somewhat of a scapegoat’. His Honour rejected a suggestion made by Warner, in its response to the s 155 notice served on it, that its primary reason for closing the account was that it considered Raiders to be a credit risk.

92 ACCC pleaded that Warner’s conduct in relation to its retailers, particularly Raiders, constituted contraventions of ss 46 and 47 of the Act. ACCC also relied on Warner’s involvement in the Indonesian arrangement, which was said to contravene s 45(2)(a)(ii) of the Act.

Parallel importation after 30 July 1998

93 The learned trial judge gave detailed consideration to evidence about the extent to which wholesalers and retailers resorted to parallel importation after 30 July 1998. This evidence was said to be relevant to the extent to which parallel importation actually affected competition in the relevant market.

94 We do not find it necessary to refer to this evidence in any detail. However, it is useful to set out Hill J’s summary of the position, at paras 328-331 of his reasons:

‘The legalisation of parallel importation removed the statutory monopoly (at least in theory) which the record companies had as a result of the copyright laws which prevented importation without the licence of the holder of the Australian copyrights. Since approximately 80% of the sales of retailers were derived from some 20% of titles, it was obvious that importers would target those titles. The record companies took seriously what they perceived to be a threat to their business by the opening up of the Australian market to imported product. There was an increase in the level of imports from South East Asia in the last four months of 1998. However the overall level of imported CDs increased dramatically only in January 1999. Most of the imports were from Indonesia, a country which offered at that time the dual benefit of cheap prices and weak currency.

Existing or new wholesalers, including Much More Music and Volandu, imported popular titles. Tower Records of Hong Kong was prepared to supply chart music to retailers from Hong Kong and back catalogue from Singapore. It was, however, logistically easier for Australian companies, even such a large organisation as Big W, to deal with Australian importers rather than with Tower Records.

The supply of imports to non-traditional retailers, which began in late 1998 started to have an impact on the retail market by February 1999 when chart CDs began to be sold in discount stores at retail prices of $19.95 or lower. The number of non-traditional stores which stocked imported titles was by that time estimated by Sony to be over 200 stores. As earlier noted, product was available to be imported from one stop companies from the catalogues of all major record companies, although local titles not released overseas would present difficulties. The economics of purchasing titles from overseas depended on matters such as exchange fluctuations and transportation costs. Delay between order and delivery was a significant factor in whether a retailer would choose to import. So too there were difficulties in obtaining from overseas large quantities of popular titles. There was some evidence that in mid-1998 product could be purchased from Canadian one stop suppliers and be in store within 4 to 5 days. At that time the exchange rate of the Australian dollar to the Canadian dollar was 1:1. It can be inferred that this source of supply was financially impractical later as Canada was not substantially used to source parallel imported titles later that year or in 1999. However, the evidence as a whole suggested that one stop suppliers were not a satisfactory substitute for purchasing directly from the Australian supplier.

Non-infringing copies from the Australian catalogues of the major record companies, at least if released internationally, were available to be imported from various overseas suppliers once parallel importation became legal. It seems at that time that prices in the US, Canada and the UK were comparable to Australian prices and hence importation from these countries was not financially viable. However, CDs could be imported from a number of South East Asian countries at a landed price well below the prevailing wholesale price in Australia. As already noted, at that time Indonesia was the most attractive source of supply.’

The trial judge’s reasoning

(i) Misuse of market power

95 In considering the application of s 46 to the appellants’ conduct, Hill J acknowledged that the object of the section is to promote competition and thereby protect the interests of consumers: Melway Publishing Pty Ltd v Robert Hicks Pty Ltd [2001] HCA 13; 205 CLR 1 at paras 17-20; Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (‘Queensland Wire’) (1989) 167 CLR 177 at 191. His Honour also accepted that the section is concerned with the protection of competition, rather than the protection of particular competitors in the market. He held that s 46 will be satisfied where:

(i) there is a corporation with power in a market;

(ii) the corporation has that power to a substantial degree;

(iii) the corporation takes advantage of that power; and

(iv) the corporation has requisite purpose; here, preventing the entry of a person into a market or, perhaps, preventing a person from engaging in competitive conduct in a market.

96 His Honour found both PolyGram and Warner had market power, in the sense in which that expression is used in s 46 of the Act, and their market power was substantial.

97 He then turned to consider whether their conduct constituted taking advantage of that power. He acknowledged the danger in proceeding too quickly from a finding of requisite purpose to a conclusion about taking advantage of market power. However, having decided that PolyGram and Warner each had a substantial degree of market power, by virtue of having hits or back catalogue music which it was essential for retailers to access, Hill J considered no other conclusion open but that they had exercised that market power by threatening to refuse, and thereafter refusing, supply to retailers who imported non-infringing copies of PolyGram or Warner titles. He thought the PolyGram policy of threatening retailers with withdrawal of supply or reconsideration of their trading terms if they dealt in imported titles would not itself be a breach of s 46. It was the implementation of the policy, by the actual refusal of supply, which constituted the breach.

98 Hill J then turned to the purpose of the conduct in each case. On the evidence, he had no difficulty inferring that the refusal by PolyGram and Warner to supply was motivated by their intention to ensure that persons would not import recordings into Australia, whether those persons were wholesalers, who carried on the business of importing, or retailers, who purchased their requirements from overseas.

99 His Honour rejected an argument that the purpose of the conduct was to prevent ‘free riding’; that is, retailers obtaining the benefits of promotion and advertising of chart music in Australia, without paying a price that reflected the costs of providing those benefits. Professor Hausman had argued there was an economic incentive for record companies to prevent free riding and that, in a competitive market, they would impose a vertical restraint to do so. According to Professor Hausman, free riding decreased the incentive for record companies to invest in inter-brand (that is, inter-title) competition. He thought that, if it was allowed to continue, there would ultimately be less promotion, fewer new artists and fewer new products; accordingly, the elimination or reduction of free riding was pro-competitive. However, Hill J found that, since the advent of parallel importation, predictions of reduced promotion, reduced production and market failure had not been fulfilled. The evidence showed a continued increase in titles, promotion and production, along with lower prices.

100 Hill J also rejected a contention by Universal that its action was taken in order to prevent piracy. Although he accepted that piracy was a matter of some concern, he thought it was not the principal matter of concern. As to that, he said at para 444:

‘What was of principal concern was the bringing into Australia of non-infringing copies at a price cheaper than that prevailing in Australia and with the result of adversely affecting the bottom line profit of the respondent companies.’

101 In relation to purpose, Hill J concluded at para 445:

‘In my opinion, not only did each of Universal and Warner take advantage of the substantial market power it had, but also each did so to prevent the entry into the wholesale market of persons who would sell imported recordings under Universal or Warner labels by wholesale or wholesalers from overseas with access to non-infringing copies who wished to export to Australia.’

(ii) Exclusive dealing

102 At para 447 of his reasons, Hill J identified ‘three issues which need to be resolved before an offence under s 47 is made out’. They were:

‘• Whether Universal or Warner supplied or offered to supply goods (ie CDs) or services (ie aspects of its trading terms) on the condition that the acquirer would not acquire non-infringing copies of titles marketed by Universal or Warner as the case may be in Australia for resale from a competitor.

• Whether the words “a competitor” in s 47(2)(d) and 47(3)(d) require there to be a specific identified competitor at the time of imposition of a condition.

• Whether the conduct pleaded had the purpose, effect or likely effect of substantially lessening competition in a relevant market.’

103 On the first issue, his Honour found PolyGram had indicated to a number of retailers that it would review the terms of its trading relationship with those who chose to parallel import and reserved its right to cease supplying them with PolyGram recordings. He thought the threats made to Big W and HMV ‘came close to being able to be interpreted as more than that’; although neither company was likely to be intimidated, the threats would have had some impact.

104 However, the only evidence about PolyGram withholding supply, or offering to supply goods on condition of non-acquisition from a competitor, was that relating to Compact City, Wests and Ultimate. His Honour said at para 451:

‘In each case there is to be found in the conversations following closure of accounts an offer to supply only if parallel imported product were not acquired for resale in the future. In each of these cases I would find the requirement of an offer on condition satisfied.’

105 In relation to Warner, his Honour referred to the letter of 20 July 1998 which Mr Harris sent to retailers. His Honour said at para 454:

‘I think that the evidence makes clear that there was also an offer by Warner to supply services (relating to retailers’ accounts) on condition that parallel imported titles not be acquired for resale. The evidence relating to Raiders likewise makes it clear that there was an offer by Warner to Raiders to supply goods but on condition that Raiders did not acquire imported Warner titles.’

106 Hill J did not think the printed trading terms of either PolyGram or Warner satisfied s 47’s requirement of an offer subject to a relevant condition.

107 His Honour also found that PolyGram knew closure of Wests’ account, and the related account of Ultimate, would have a signalling effect and send a ‘ripple’ through the industry, as he found it did. It was not so clear to him that PolyGram intended to have the Compact City incident made public knowledge. However, he thought the possibility that it would become public knowledge was sufficiently likely to make it ‘possible to infer on the balance of probabilities that it likewise knew that it would and what the consequence of that would be’.

108 In relation to Warner’s closure of Raiders’ account, Hill J said the absence of any relevant Warner witness allowed him more comfortably to draw the inference that Warner knew that the conduct would become public knowledge and have a signalling effect on the retail industry.

109 In relation to the second issue, Hill J rejected a submission by Universal that there was a need, under s 47, to show that a specific competitor was the subject of the relevant non-acquisition condition. His Honour distinguished two earlier decisions, SWB Family Credit Union Ltd v Parramatta Tourist Services Pty Ltd (1980) 48 FLR 445 (Smithers J) and Trade Practices Commission v Tepeda Pty Ltd (T/A Metro Motor Market) (1994) ATPR 41-319 (Davies J). Hill J observed that a condition that an acquirer of goods or services not deal with any competitor is, potentially, at least as anti-competitive as one preventing dealing with a particular competitor.

110 Hill J then turned to the third issue he had identified: whether the conduct had the purpose or effect of substantially lessening competition. He referred to s 4G of the Act, which includes the idea of ‘preventing or hindering competition’ in the concept of ‘lessening of competition’. As to the requirement that the lessening be substantial, his Honour adopted, as the test, a requirement of substantial interference with competitive trading in the market, albeit as a matter of likelihood. This test was derived from observations of Smithers J in Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (‘Dandy Power’) (1982) 64 FLR 238 at 259-260; 44 ALR 173 at 191-192.

111 The trial judge found the purpose of both PolyGram and Warner was the discouragement of retailers from acquiring, whether by import or purchase, non-infringing copies of titles which were within their respective catalogues. Consistently with the view he had expressed in connection with s 46, his Honour did not think the elimination of ‘free riding’ constituted the purpose of the relevant conduct.

112 Having regard to the brief period of time during which PolyGram and Warner maintained their refusal to supply, his Honour held it could not be suggested the conduct of either of them, of itself, had any real effect on competition. The issue requiring consideration was whether, if the conduct had not been cut short by ACCC intervention, and having regard to the impact of ‘signalling’, there was likely to have been a substantial effect on competition. Alternatively, the question was whether a substantial effect on competition was the purpose of the conduct.

113 Hill J referred to submissions that it was not open to ACCC to rely on ‘signalling’. He said that, although signalling had not been particularised in ACCC’s pleadings, it was made clear from the time ACCC opened its case that it relied upon signalling; evidence of the significance of signalling to ACCC’s case was emphasised throughout the evidence. He said it was not suggested there was prejudice to either Universal or Warner in allowing ACCC to rely on signalling as part of its case. His Honour then referred to the evidence on this topic. He mentioned publicity given to the closures both in a trade journal, Inside Retailing, and the Sydney Morning Herald.

114 Hill J considered whether the ‘purpose’ referred to in s 47 was subjective or objective. He did not express a concluded view on this issue, probably because it was not strongly suggested to him that the controversy made any difference to the outcome. He said at para 469:

‘While no doubt there is a difference between subjective and objective purpose, in most cases, the best evidence of subjective purpose will be objective effect.’

115 His Honour rejected a submission, on behalf of Universal, that it would be perverse to find its conduct in respect of Wests, Ultimate or Compact City could affect competition. This submission emphasised that Wests was about to close; it was said that a message to retailers would require selection of more substantial retailers than any of these three. At para 475,his Honour said:

‘I do not think such a finding in the present circumstances perverse. I have no doubt that the intention of those controlling PolyGram in Australia was to take such action as could be taken to prevent parallel importation and the steps it took were not necessarily the only steps which would have been taken but for the intervention of the ACCC. The same can be said of the steps taken by Warner.’

116 Hill J considered the more difficult question to be whether the conduct engaged in by PolyGram or Warner, including what might have been undertaken had ACCC not intervened, was capable of being characterised as substantially lessening competition. His Honour found at para 478 that:

‘What the conduct of each company was designed to achieve and which was likely to have been achieved had it continued was to deter at least the small retailers or a substantial majority of them at least, and having regard to the inconvenience and costs of the large retailers, them also, from acquiring non-infringing copies of CDs for sale. Those CDs could either be imported directly by the retailer or by an Australian wholesaler or be exported to Australia for sale by an overseas wholesaler. It is thus not difficult to infer that the consequence of the continued conduct would be to prevent wholesalers operating in the market. That in turn would have the consequence of ensuring, in respect of Warner titles, that Warner had a monopoly of them in the wholesale market. It would in respect of Universal titles ensure that Universal had a monopoly of them in the wholesale market.’

117 Hill J thought that, having regard to the conclusion he had already reached in respect of the s 46 case, both PolyGram and Warner had market power in the wholesale market and took advantage of it to prevent a competitor coming into that market. He stated ‘… it must follow that there would be an impact upon competition by force of their conduct.’ The question whether that impact was likely to be substantial was a matter of degree.

118 In determining the issue of substantial lessening of competition, his Honour accepted that none of the five major record companies dominated the market. However, the monopoly which each company had with respect to its own CDs could not be ignored. Generally, their Australian products were indistinguishable from the same titles imported from overseas, apart from the label statement about country of origin. His Honour then said at para 480:

‘In my view and in these circumstances a requirement that retailers buy all Universal labelled product from Universal and all Warner labelled product from Warner would be likely to have a substantial effect on competition in the wholesale market. Indeed, the result of free importation of CDs from overseas appears to have been some increase in the discounts available to retailers and in consequence an overall reduction in the wholesale net price to dealers. This supports the view that the freeing up of importation of non-infringing copies has improved competition in the market and enables an inference to be drawn that deterring such importation by the threat of refusal to supply and subsequent select refusal would, had it been continued, have had the consequence of reducing competition and to a substantial degree.’ (Emphasis added)

119 His Honour considered whether refusal to supply small retailers would or could give rise to a lessening of competition in the retail market. However, he did not consider there was enough evidence before him to determine, one way or the other, whether what was done would have been likely to substantially lessen competition in the retail market.

120 At paras 484 and 485, Hill J concluded his analysis of the s 47 issues by saying:

‘Given that I would find that the likely effect of the conduct of Universal and Warner with which this part of the case has been concerned would be a substantial lessening of competition in the wholesale market, it would follow that if the test of purpose were objective the ACCC would have made out objective purpose. From that a subjective purpose would likewise be inferred.

For these reasons I am of the view that the ACCC has made out its case that each of Universal and Warner contravened s 47 of the Act.’

(iii) The s 45 case

121 ACCC’s s 45 case depended upon the proposition that PolyGram and Warner entered into an understanding or arrangement, with each of the other companies for whom Mr Shih spoke in his fax of 14 August 1998 to Mr Gani (see para 77 above), to the effect that they would assist in preventing or minimising the export of non-infringing copies from Indonesia to Australia. The evidence did not enable the trial judge to infer that either PolyGram or Warner was party to any such understanding or arrangement.

(iv) Accessorial liability

122 Hill J found Mr Handley and Mr Dickson, of Universal, were both knowingly involved in Universal’s contraventions of ss 46 and 47 of the Act. The case against Ms Cohen was dismissed. In relation to the Warner executives, Mr Smerdon and Mr Maksimovic, his Honour held that his findings in relation to Raiders’ account closures showed each was knowingly concerned in that conduct by Warner. Accordingly, each was knowingly concerned in Warner’s contraventions of ss 46 and 47 of the Act.

The notices of appeal

123 Universal’s notice of appeal (N232 of 2002) against the trial judge’s decision sets out 51 grounds of appeal. Its officers, Mr Handley and Mr Dickson, also appeal (N236 of 2002). Their notice of appeal adopts all the grounds of appeal set out in the Universal notice and adds a further 23 grounds. Warner and its officers, Mr Smerdon and Mr Maksimovic, appeal in N238 of 2002. Warner raises 78 grounds. In addition to adopting the Warner grounds, Mr Smerdon and Mr Maksimovic each raise an additional five grounds.

124 ACCC appeals, in N239 of 2002, against the penalty of $450,000 imposed by his Honour on Warner and, in N240 of 2002, against the similar penalty imposed on Universal.

125 The large number of grounds of appeal in the notices filed by Universal and Warner render those notices almost useless, as a means of informing the Court and the other parties what the appeal is about. Prolixity of this order is unacceptable. It is not too much for the Court to expect lawyers who prepare a notice of appeal to subject the case, and the trial judge’s reasons, to a degree of analysis and to identify the issues critical to a successful appeal. We deplore the practice, which seems to be becoming increasingly common, of lawyers drafting notices of appeal that challenge virtually every observation of the trial judge, whether or not that observation played any part in the judge’s conclusion. The capacity to identify the critical elements of a case, and persuasively to address them, is the mark of a good advocate.

126 Having regard to the defects in their notices of appeal, it is preferable for us to identify the issues raised by Universal and Warner when dealing with their counsels’ submissions.

Section 46

(i) The statutory provisions

127 The relevant parts of s 46 are as follows:

‘(1) A corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of:

(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;

(b) preventing the entry of a person into that or any other market; or

(1A) For the purposes of subsection (1):

(a) the reference in paragraph (1)(a) to a competitor includes a reference to competitors generally, or to a particular class or classes of competitors; and

(b) the reference in paragraph (1)(b) and (c) to a person includes a reference to persons generally, or to a particular class or classes of persons.

…

(3) In determining for the purposes of this section the degree of power that a body corporate or bodies corporate has or have in a market, the Court shall have regard to the extent to which the conduct of the body corporate or any of those bodies corporate in that market is constrained by the conduct of:

(a) competitors, or potential competitors, of the body corporate or of any of those bodies corporate in that market; or

(b) persons to whom or from whom the body corporate or any of those bodies corporate supplies or acquires goods or services in that market.

(4) In this section:

(a) a reference to power is a reference to market power;

(b) a reference to a market is a reference to a market for goods or services; and

(c) a reference to power in relation to, or to conduct in, a market is a reference to power, or to conduct, in that market either as a supplier or as an acquirer of goods or services in that market.

…

(7) Without in any way limiting the manner in which the purpose of a person may be established for the purposes of any other provision of this Act, a corporation may be taken to have taken advantage of its power for a purpose referred to in subsection (1) notwithstanding that, after all the evidence has been considered, the existence of that purpose is ascertainable only by inference from the conduct of the corporation or of any other person or from other relevant circumstances.’

128 In construing s 46, reference should be made to some definitions. Section 4 provides:

‘competition includes competition from imported goods or from services rendered by persons not resident or not carrying on business in Australia.’ (Original highlighting)

Section 4E defines ‘market’ as follows:

‘For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services.’ (Original highlighting)

Section 4F(1)(b) provides in relation to ‘purpose’:

‘a person shall be deemed to have engaged or to engage in conduct for a particular purpose or a particular reason if:

(i) the person engaged or engages in the conduct for purposes that included or include that purpose or for reasons that included or include that reason, as the case may be; and

(ii) that purpose or reason was or is a substantial purpose or reason.’

Lessening of competition is covered in s 4G:

‘For the purposes of this Act, references to the lessening of competition shall be read as including references to preventing or hindering competition.’

(ii) The existence of substantial market power

129 The primary decision was given at a time when the trial judge was bound by the decision of the Full Court of this Court in Australian Competition & Consumer Commission v Boral Ltd (‘ACCC v Boral’) [2001] FCA 30; 106 FCR 328 as to the construction and operation of s 46. After the oral argument in these appeals, that decision was reversed by the High Court of Australia: Boral Besser Masonry Ltd v Australian Competition & Consumer Commission (‘Boral’) (2003) HCA 5; 195 ALR 609. The majority in the High Court differed, in important respects, from the members of the Full Court. Kirby J, who was in the minority in the High Court, referred with approval to Hill J’s judgment in these cases; the other members of the Court did not do so.

130 Having regard to the fact that, in Boral, the High Court overruled the Full Court decision on which Hill J had relied, we invited written submissions from the present parties as to the application of Boral to these cases. Written submissions were provided. We have given them close attention.

131 In dealing with the s 46 issue, we do not think it is necessary for us to refer to all the earlier authorities concerning that section or to all the submissions put to us by counsel for the present parties. In our view, Boral compels the issue to be determined adversely to ACCC, upon the threshold issue of whether either Universal or Warner was a corporation that, at the relevant time, had ‘a substantial degree of power in a market’.

132 As indicated, Hill J found the relevant market was the wholesale market for recorded music, Australia-wide. As that finding was not challenged before us, we take it as the starting-point in considering the s 46 issue. It is necessary to determine whether either PolyGram or Warner had a substantial degree of power in that market. In that connection, it is necessary to have regard to s 46(3). In Boral, the High Court emphasised that this subsection, which is mandatory in terms, is central to a determination about the existence of substantial market power. It refers to determining the degree of power in a market and requires regard to be given to the extent to which the conduct of the party in that market is constrained by the conduct of competitors, potential competitors and customers in that market.

133 Hill J made a number of factual findings relevant to the application of s 46(3). None of them was challenged before us. They were:

(a) at the relevant time, PolyGram and Warner each had relatively small market shares: PolyGram 17.6%, Warner about 16%. Market shares varied over time;

(b) PolyGram and Warner competed with each other and with other record companies, including the three other major companies;

(d) there was competition from wholesalers, importers and overseas exporters. This was stronger after the introduction of parallel importation;

(e) barriers to entry were not high. New entrants had emerged and succeeded;

(f) none of the major record companies (including PolyGram and Warner) had demonstrated an ability to raise prices and maintain them above the level of other suppliers (large or small) even for hits; and

(g) large retailers had, and exercised, countervailing market power.

134 In addition to these findings, it is relevant to note the absence of any finding by Hill J that competition in the market was ever successfully excluded, or of vertical integration or super profits.

135 Having regard to the factual findings, there was an obvious difficulty in ACCC maintaining that either PolyGram or Warner, at the relevant time, had a substantial degree of power in the market. However, taking its cue from some observations made in ACCC v Boral, ACCC argued it was open to Hill J to determine this issue favourably to ACCC, by reference to the impugned conduct of PolyGram and Warner. That conduct was summarised as refusal to deal with any retailer who sought to buy a parallel imported product. ACCC argued that, notwithstanding their relatively small market shares and the competitive nature of the market, PolyGram and Warner each had substantial market power because each of them was in a monopolistic position in relation to the products marketed under the label of the international consortium of which they were a part; the commercial reality was that no other distributor could provide retailers with an equivalent range of product. If they denied supply to the retailer, the retailer would have an incomplete inventory of stock. This would be commercially intolerable, especially in relation to chart music. Therefore, in a practical sense, retailers had no option but to yield to the demands of PolyGram and Warner that they deal only with PolyGram and Warner in respect of titles bearing their groups’ labels.

136 In contrast, Universal and Warner submitted that the reference to ‘conduct’ (of the party concerned, competitors and customers), in s 46(3), is general conduct in the identified market. The matter of degree raised by the subsection is power in the whole market; that is to be judged by conduct in the market generally, not conduct in relation to particular participants. They said s 46(4) confirms that approach.

137 The issue to which we have referred was described by Hill J, at para 388 and in the context of discussing the expert witnesses, in this way:

‘In summary, the significant difference between the witnesses was that for Professor Hausman market power could only be present where there was the ability to raise prices. For Mr Ergas the question in the present case was a different one. It was whether Warner and Universal had the power that Jive Zomba may or may not have had, to use the threat of a refusal to supply so as to impose a unilateral vertical restriction that had anti-competitive effect. Ultimately, as I have said, that raises a very important question of construction of s 46.’

138 There were factual findings that provided a basis for ACCC’s argument. Hill J found it was regarded as essential that a retailer, who wished to service the market in general, should be able to offer products from each of the major suppliers; more than 50% of buyers of chart music looking for a particular hit would go elsewhere if they were not able to purchase the desired CD. That was, of course, only a perception. However, the existence of the perception meant that a major distributor had leverage over such a retailer. The perception was acknowledged by Universal and Warner, although they submitted the evidence in these cases about the retailer reaction to the impugned conduct illustrates any leverage was weak and ineffective.

139 Hill J was persuaded by ACCC’s argument. His Honour put the matter pithily at para 26 of his supplementary judgment when he said:

‘Here the degree of market power each company had, looked at by reference to the overall music (or compact disc) market was relatively small. The substantial market power each respondent had came from the significance of particular hits, in respect of which each had a quasi monopoly.’

140 However, whatever the legitimacy of this approach before Boral, it is shut out by the High Court’s decision in that case. It is apparent from that decision that s 46(3) is to be understood in accordance with the submissions for Universal and Warner. That does not mean conduct in relation to an individual market participant is irrelevant to the issue of market power. If proved, particular conduct may throw light, perhaps considerable light, on the corporation’s degree of power in the relevant market. But the particular conduct is relevant only for this evidentiary value; the fact that a corporation has conducted itself towards a competitor or customer (or a number of competitors or customers) in a manner that might be considered arbitrary or high-handed, does not itself establish the corporation has a substantial degree of market power.

141 Hill J was influenced to accept ACCC’s s 46 argument by the judgment of Finkelstein J in ACCC v Boral. At paras 413 and 416, Hill J said:

‘The historical background of s 46 makes it clear that the section extends beyond monopoly power, the context in which in the US regard is had to market share. The background is discussed in some detail in the illuminating judgment of Finkelstein J in Boral, even if some part of that judgment, at least so far as it relies on the decision of this Court in Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (1999) 90 FCR 128, must be treated with caution, having regard to the later decision of the High Court to which reference has already been made.

…

What is important is that Finkelstein J approached the question of market power by reference to the conduct that was proscribed (at least by implication) by s 46(3). He said that it was the exclusionary conduct that established market power and not the reverse. His Honour’s approach was not markedly different on this aspect of the case from that taken by Merkel J, see at 388.’

142 Hill J was referring to the following statement by Finkelstein J, at para 331 in ACCC v Boral:

‘Generally, an analysis of abuse of market power involves a two-stage process: first, it is necessary to determine whether a firm has market power, second it is necessary to examine whether that power has been abused. However, when the existence of market power is defined by reference to a firm’s ability to exclude competition, the two step investigation is not appropriate. The evaluation of market power and the abuse of that power is part of one analysis. The existence of market power based on this approach cannot be examined independent of the alleged exclusionary conduct. It is the exclusionary conduct that establishes market power, not the reverse.’

143 Unfortunately for ACCC’s argument, this reasoning cannot survive the High Court’s decision in Boral. It is inconsistent with the reasoning of Gleeson CJ and Callinan J. At para 132, their Honours said the questions whether the appellant had a substantial degree of power in a market at the relevant time and whether its behaviour, during that period, ‘involved taking advantage of, that is, using, that power, are closely related’. But, their Honours said, ‘they are two questions, not one’.

144 At para 180, Gaudron, Gummow and Hayne JJ quoted the statement of Finkelstein J set out at para 142 above. They acknowledged its genesis in writings by American economists but noted there was a range of opinion in the ranks of those economists. At para 184, their Honours said:

‘In any event, as s 46 is framed and has been interpreted in this court, what is required first is an assessment of whether the firm in question possessed a substantial degree of market power, having regard to considerations such as those referred to by Heerey J [the Boral trial judge] and, if so, then asking whether the firm has taken advantage of that power for a proscribed purpose and in that way abused the power.’

145 The approach taken by Finkelstein J in ACCC v Boral is also inconsistent with that later taken by McHugh J in that case. In Boral at para 262, his Honour said:

‘Section 46 of the Act poses four issues for determination. First, the court must identify the relevant market in which the conduct occurred. Second, the court must determine whether the alleged offender had a substantial degree of market power. Third, the court must determine whether the alleged offender has taken advantage of that market power. Finally, the alleged offender must have engaged in the conduct for one of the proscribed purposes. This is the way in which s 46 is structured, and that is the way courts should apply it.’

See also paras 283, 293 and 320.

146 Although Kirby J, in dissent, embraced the general approach of the primary judge in these cases, he added an important rider. At para 379 Kirby J said:

‘Market “power” may be manifested by practices directed at excluding competition. Essentially such power involves the capacity of an impugned corporation, over a sustained period, to do any of the things mentioned in s 46(1) for perceived long-term benefits even if, in the short term, the conduct may appear irrational and contrary to the corporate duty to act reasonably so as to maximise profits for the shareholders.’ (Emphasis added)

147 It would be unfair to Hill J to suggest that, in determining that each of the corporate appellants had substantial power in the relevant market, his Honour looked only at their impugned conduct. As we have indicated, Hill J went to some pains to make detailed findings about the market. We think he was also cognisant of the difference between a static situation where a market participant has a relatively small market share, but is in a position to monopolise a limited number of key products, and the active exploitation of that position. As we read Boral, it is permissible to take into account the first of those alternatives, in conjunction with all other relevant items of evidence, in determining whether the participant has substantial power in the market. However, it is not legitimate to reason directly from the fact of the second alternative, although this may have some evidentiary value.

148 At para 425 of his reasons, Hill J described the first alternative. He said:

‘I find the issue of market power and its related issue of barriers to entry extremely difficult to decide. It is really at the heart of the controversy between the parties. The case of a firm operating in an oligopolistic market with only 15% market share and unable to fix prices in the overall market above the competitive level but which has, as a result of a temporary monopoly power over a limited number of products in that market, substantial power to exclude competitors is not one which has been the subject of any authority in Australia or, so far as my researches indicate, in any other country.’

149 However, Hill J did not undertake an assessment of the case he identified in the third sentence of that passage. In the following paragraph, he immediately turned to the issue of ‘what kind of power was Universal (or Warner) seeking to exercise when it set out to deter retailers from parallel importation by the conduct which it engaged in’. It might be said, in his Honour’s defence, that, in taking that course, he was acting consistently with the approach taken in ACCC v Boral. However, that approach has now been declared erroneous. In that situation, we have no option but to examine for ourselves the issue of existence of substantial market power, approaching it in the manner indicated in Boral.

150 As we see the position, in the light of Boral, it is necessary for a court considering a case brought under s 46 of the Act to determine, as a threshold point, whether the relevant corporation has a substantial degree of power in the relevant market. This requires attention to the whole of the evidence relating to the market and the conduct of its participants. It is not legitimate for a court to base a finding of substantial market power simply upon incidents of abuse of power in that market. Almost all participants in a market have a degree of power, which may on occasions be abused. The power of the abuser may or may not be substantial, within the meaning of s 46(1).

151 At para 415 of his reasons, Hill J referred to the Explanatory Memorandum to the 1986 Bill, which introduced the present form of s 46 into the Act. That document said the word ‘substantial’ in s 46, was intended to signify ‘large or weighty’ or ‘considerable, solid or big’. That interpretation was adopted by Lockhart and Gummow JJ in Eastern Express Pty Ltd v General Newspapers Pty Ltd (‘Eastern Express’) (1992) 35 FCR 43 at 63. Their Honours stated:

‘For a corporation to have a substantial degree of market power it must have a considerable or large degree of such power. The difficulty lies not in defining the word “substantial” but in applying the concept of a substantial degree of market power to the circumstances of each case and in identifying whether the requisite degree of market power exists. This is a relative concept.’

152 We adopt the approach to ‘substantial’ taken in Eastern Express. Doing so, it seems obvious that, but for one factor, it could not possibly be determined that, at the relevant time, either PolyGram or Warner had a substantial degree of power in the Australian wholesale recorded music market. The one factor, of course, is what Hill J called each company’s ‘temporary monopoly power’ over those market products that bore the labels of its group. Is that additional factor sufficient to sustain a finding that the power of each company in the market was large or weighty, considerable, solid or big? We think not.

153 We accept the findings of Hill J that it was ‘commercially imperative’ for retailers to stock, or have access to, the Australian catalogue of each of the major distributors, including PolyGram and Warner. We also accept that for any of those distributors to withdraw or refuse supply of their product to a retailer would be likely to cause the retailer at least significant inconvenience and possibly loss of sales and profits. We appreciate these consequences would cause annoyance, even dismay, to the affected retailer. Depending on the circumstances, the retailer might be justified in feeling unfairly treated or victimised. However, that is not enough to demonstrate the existence of substantial market power. The consequences to which we refer would apply only to the range of products distributed by that distributor; that is, about one-sixth of the CDs sold in Australia. More importantly, after 30 July 1998, the retailer was not left without remedy; as the trial judge’s findings make clear, it was possible for retailers to obtain the products elsewhere. Any intuitive belief that this would be the case is confirmed by Hill J’s findings as to the extent of parallel importation that occurred after 30 July 1998: see para 94 above.

154 At para 427 Hill J said:

‘… I am conscious that the definition of the market requires that a common sense approach be taken so as not to concentrate on what is but a snapshot of the market at a particular point of time. I accept that the definition of market focuses in a case such as the present upon the continuous flow of product over time in a process where new albums displace old so as to compete for the attention of the public. But I do not think that acceptance of this definition of market requires me to ignore the way that the market operates in considering the issue of market power. The fact is that chart music in particular has a significance in the market which can not be ignored. It is this significance which would empower a participant in the market such as Universal or Warner to take steps to prevent the entry of a person seeking to import non-infringing copies into the market.’

155 With respect to Hill J, the evidence does not support the conclusion expressed in the last sentence of this passage. There is no evidence that the policies or conduct of PolyGram or Warner, whether individually or cumulatively, prevented the entry into the market of a person seeking to import non-infringing copies. There was evidence of entrants to the market after 30 July 1998. Having regard to the ability of any new entrant to acquire stock by parallel importation, the statement in the last sentence appears to us inherently improbable.

156 The concept of temporary monopolies in relation to particular CDs may help to illuminate the dynamics of the market. But it does not define a market. Once the market is defined as it has been here, those temporary monopolies may be recognised as illustrating the working of competition in that market, as popularity and market demand rise and fall. It is no answer to suggest, as it was on behalf of ACCC, that a market for differentiated goods differs from a market for goods that are undifferentiated or homogeneous. That is no doubt true for some purposes. However, a market includes those goods that are substitutable for, or are otherwise competitive with, the particular goods (s 4E). Provided that differentiated goods are in the same market (as here), then s 46(3) applies. Hill J seems to have appreciated that point. At paras 350-351 he said:

‘The concept of a sub-market of chart music, particularly in the present case, allows short-run effects to be noted, and may be helpful in clarifying how competition works, although it may be misleading if used uncritically to assess long term competition effects …

I have little doubt that those in the record industry, and for that matter, consumers, have no difficulty in understanding the concept of “chart music”, even if, as the evidence shows, there do exist different charts which do not correlate absolutely and that a distinction is drawn between particular titles that are such that they appear on one or more of the “charts” and titles that do not. However, I approach the present case in the same way as the New Zealand Court of Appeal approached the matter in Tru Tone Ltd v Festival Records Retail Marketing Ltd [‘Tru Tone’] [1988] 2 NZLR 352 at 360, namely, that commercial reality demands that one identify the market as involving a flow of product, some of which will, in the short term have distinctive characteristics (reflected in the popularity of chart ratings) and others of which will not and that to analyse dominance by reference to short lived advantage ignores commercial realities, focusing on “a snapshot rather than a moving picture of continuing commercial activity”.’

157 Because of Hill J’s reference to the concept of temporary monopoly, it is worth reproducing the context of the passage from Tru-Tone to which he referred. That was a decision of the New Zealand Court of Appeal (on appeal from the High Court of New Zealand) concerning an alleged breach of s 36 of the Commerce Act 1986 (NZ) due to misuse of a dominant position in the market. The principal issue concerned definition of the relevant market. The context, set out at 359-361, was as follows:

‘The first inquiry is what is the relevant market – leading on to the question whether RML is dominant in it. The first part of s 36(1) is directed to a market in which the person challenged, here RML, has a position. The case for the plaintiffs here as in the High Court was that each album which gets on to the charts constitutes a separate and unique market and, further, that there are two successive markets affecting an album: one when the album is in the distribution market and the other when it is in the retail market. The case for RML was that the relevant market was not confined to single albums and that distribution and retail aspects could not be viewed separately in watertight compartments: the relevant market in which RML operates is the New Zealand album market.

The Court concluded “as a matter of fact and commercial commonsense” against the plaintiffs. It accepted the evidence called for the plaintiffs that when an album is charting well a sizeable percentage of popular album purchasers will want that product and will not be prepared to substitute it for some other. But, the Court continued:

“… in view of the short average time that such an album remains popular we see the albums which displace it in the chart ratings as clear substitutes. And it is clear from the evidence that at any one time when an album is enjoying popularity, promotion of another is gathering momentum. In our view the places at the top of the charts are a constant battleground in which rivalrous conduct abounds.

Another reason why we cannot see justification for divorcing the retail from the distribution market is the fact that the promotion which propels an album to a top place in the chart and therefore creates its demand is generated by the distributor who, at that initial stage, conducts his campaign over the head of the retailer as it were, seeking to create demand directly through television, radio and other publicity among the consumers. Furthermore we accept the evidence of Dr Williams and the submission of Mr Hansen that in reality no distributor or retailer could run a business on the basis of a market confined to one unique album”.

Referring to the argument for the plaintiffs that customers wishing to buy chart records were insensitive to price, the Court noted that there was no proper survey of customer attitudes. Important in its assessment of the plaintiffs’ argument under this head was the evidence of widespread price competition in the form of discounts, coupons, product pointing and multiple sales.

These findings are amply supported in the evidence and in the analysis of Dr Williams whose evidence the Court expressly accepted. It is sufficient to refer quite briefly to the structure of the market and behaviour within the market. Viewed in relation to product and time the single album definition of market ignores commercial realities. It focuses on short run phenomena. It presents a snapshot rather than a moving picture of continuing commercial activity. Supply to distributors is not acquired on an album by album basis, but by licensors giving rights to any album produced by the artist or label. In arranging supply the distributor achieves economies of scope in what is a continuing activity. And retailers and consumers along with distributors are dependent on a flow of new albums to join and, in part, to displace existing albums – a process recognised and encouraged in the promotional and pricing arrangements. Promotion is undertaken in accordance with normal competitive practice for the purpose of differentiating one album from a whole range of possible substitutes and the evidence of promotion of particular albums by retailers emphasising price concessions belies the argument that purchasers of albums are not price sensitive. The emphasis on product differentiation arises precisely because there is a range of products competing for the consumer’s attention. And the movement of albums in and out of the charts and their constantly shifting positions are clear evidence of the manner in which, and the extent to which substitution takes place.

…

Dominance

We turn next to the question of dominance. On its findings as to the relevant market the High Court had little difficulty in concluding that RML did not have a dominant position in the New Zealand album market. The plaintiffs had advanced their case on the basis of numerous single album markets in each of which the distributor was dominant and on the argument of the appeal acknowledged that in any wider market the resulting market share and structural factors were unlikely to indicate dominance. We are satisfied this concession was properly made. With only a modest share of the overall album market (6%) and a greater but still small share of the chart market and abundant evidence of rivalrous behaviour on the part of the distributors with major impacts on both the distribution and retail segments, any question of dominance in the position of RML in a wider market was rightly rejected by the High Court.’

158 The parallel between the market structure and operation found in this industry in New Zealand and that found by the primary judge in Australia, generally and in relation to chart music in particular, is obvious and unsurprising, despite the fact that the dominance test is not the same as the substantial degree of market power test. Hill J was correct in accepting that the analysis in Tru Tone was correct and applicable to the Australian market. However, that analysis is inconsistent with the use that his Honour later made of the concept of temporary monopoly. Market power is judged by reference to persistent rather than temporary conditions: see Dawson J in Queensland Wire at 200, Boral per McHugh J at paras 287 and 293 and Kirby J at para 379.

159 If it had been established that the relevant market was properly to be defined as the wholesale market for recorded music sold to small retailers in a particular geographic area, it might have been possible for it to be concluded that each of the major suppliers had a substantial degree of power in that market, although none was dominant. We do not have to decide that question. Such a market was neither pleaded nor proved in these cases. The High Court emphasised in Boral that s 46 is for the benefit of consumers, through the operation of competition in a market; not for the protection of any participant in the market, large or small. Insofar as the present cases are concerned, the inhibiting of parallel importation by particular small retailers, even a number of them, would do little to prevent the availability of parallel imports to the consumer through other outlets in the market.

160 The primary judge appears to have brought the concept of oligopoly into play in relation both to his understanding of ACCC v Boral (see para 409 of his reasons) and to the instant cases (see para 425). However, oligopoly was neither pleaded nor argued. The impugned conduct, according to the case for ACCC, was aimed at inhibiting parallel import competition in relation to the titles of the relevant distributor, rather than the titles of other distributors. The latter situation may have indicated the operation of an oligopoly, but not the former.

161 In our opinion, it is not necessary in these cases to grapple with the difference between market dominance (the test before the 1986 amendments) and substantial power in the market (the current test) (cf McHugh J in Boral at paras 285, 286 and 289-290, Australian Competition & Consumer Commission v Australian Safeway Stores Pty Limited [2003] FCAFC 149 at para 301). Nor is it necessary to deal with ACCC’s argument that pricing power alone is not decisive.

162 As was pointed out in Eastern Express, the concept of substantiality underlying s 46 of the Act is a relative one. An exercise of judgment is required. In our opinion it cannot be said the degree of power held by either PolyGram or Warner in the Australian wholesale recorded music market immediately after 30 July 1998 was so significant as to warrant the description ‘substantial’, within the meaning of s 46.

163 In concluding our findings in relation to s 46, something should be said about the use of expert economic evidence in cases such as the present. The primary judge referred to the evidence of witnesses called in the cases, to writings on the topic by economists and lawyers, and to the discussion of economic theory in other judgments. The primary task of the Court, however, is to apply the words of the Act to the facts found on the evidence before it. These words involve some economic concepts and the application of the Act to the facts of a particular case may be informed by economic evidence or argument. But it is the language of the Act which defines the task that the legislature has set for the Court. To the extent that the statutory language conflicts with economic theory, the Court is bound to apply the Act.

164 In our opinion, the evidence did not establish that either PolyGram or Warner had a substantial degree of power in the wholesale market for recorded music in Australia. Consequently, no breach of s 46 was proved.

Section 47

(i) The statutory provisions

165 Section 47 of the Act concerns exclusive dealing. Relevantly to the argument in these cases, it provides:

‘(1) Subject to this section, a corporation shall not, in trade or commerce, engage in the practice of exclusive dealing.

(2) A corporation engages in the practice of exclusive dealing if the corporation:

(a) supplies, or offers to supply, goods or services;

(b) supplies, or offers to supply, goods or services at a particular price; or

(c) gives or allows, or offers to give or allow, a discount, allowance, rebate or credit in relation to the supply or proposed supply of goods or services by the corporation;

on the condition that the person to whom the corporation supplies, or offers or proposes to supply, the goods or services or, if that person is a body corporate, a body corporate related to that body corporate:

(d) will not, or will not except to a limited extent, acquire goods or services, or goods or services of a particular kind or description, directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation;

(e) will not, or will not except to a limited extent, re-supply goods or services, or goods or services of a particular kind or description, acquired directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation; or

(f) in the case where the corporation supplies or would supply goods or services, will not re-supply the goods or services to any person, or will not, or will not except to a limited extent, re-supply the goods or services:

(i) to particular persons or classes of persons or to persons other than particular persons or classes of persons; or

(ii) in particular places or classes of places or in places other than particular places or classes of places.

(3) A corporation also engages in the practice of exclusive dealing if the corporation refuses:

(a) to supply goods or services to a person;

(b) to supply goods or services to a person at a particular price; or

(c) to give or allow a discount, allowance, rebate or credit in relation to the supply or proposed supply of goods or services to a person;

for the reason that the person or, if the person is a body corporate, a body corporate related to that body corporate:

(d) has acquired, or has not agreed not to acquire, goods or services, or goods or services of a particular kind or description, directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation;

(e) has re-supplied, or has not agreed not to re-supply, goods or services, or goods or services of a particular kind or description, acquired directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation; or

(f) has re-supplied, or has not agreed not to re-supply, goods or services, or goods or services of a particular kind or description, acquired from the corporation to any person, or has re-supplied, or has not agreed not to re-supply, goods or services, or goods or services of a particular kind or description, acquired from the corporation:

(i) to particular persons or classes of persons or to persons other than particular persons or classes of persons; or

(ii) in particular places or classes of places or in places other than particular places or classes of places.

…

(10) Subsection (1) does not apply to the practice of exclusive dealing constituted by a corporation engaging in conduct of a kind referred to in subsection (2), (3), (4) or (5) or paragraph (8)(a) or (b) or (9)(a), (b) or (c) unless:

(a) the engaging by the corporation in that conduct has the purpose, or has or is likely to have the effect, of substantially lessening competition; or

(b) the engaging by the corporation in that conduct, and the engaging by the corporation, or by a body corporate related to the corporation, in other conduct of the same or a similar kind, together have or are likely to have the effect of substantially lessening competition.

…

(13) In this section:

(a) a reference to a condition shall be read as a reference to any condition, whether direct or indirect and whether having legal or equitable force or not, and includes a reference to a condition the existence or nature of which is ascertainable only by inference from the conduct of persons or from other relevant circumstances;

(b) a reference to competition, in relation to conduct to which a provision of this section other than subsection (8) or (9) applies, shall be read as a reference to competition in any market in which:

(i) the corporation engaging in the conduct or any body corporate related to that corporation; or

(ii) any person whose business dealings are restricted, limited or otherwise circumscribed by the conduct or, if that person is a body corporate, any body corporate related to that body corporate;

supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the conduct, supply or acquire, or be likely to supply or acquire, goods or services; ’

166 As previously noted, the term ‘lessening competition’, used in s 47(10), includes ‘preventing or hindering competition’: see s 4G of the Act.

(ii) The decision of Hill J

167 Hill J held that each of the corporate appellants had breached s 47(1) of the Act, that Mr Handley and Mr Dickson were knowingly concerned in PolyGram’s infringement and that Mr Smerdon and Mr Maksimovic were knowingly concerned in Warner’s breach. His Honour made declarations to that effect in the course of which he identified the particular breaches of each of the corporate appellants.

168 In Universal’s case, Hill J declared it had contravened s 47(1) in that PolyGram:

‘(a) between July and September 1998 offered to supply goods, being compact discs containing recorded music, to retailers in Australia on condition that the retailers would not acquire non-infringing copies from a competitor of [PolyGram]; and

(b) in August and September 1998 refused to supply goods, being compact discs containing recorded music, to particular retailers in Australia being:

(i) West’s (Burwood) Pty Ltd, trading as “West’s Sound Bar”;

(ii) Ultimate Music Pty Ltd, trading as Ultimate Music; and

(iii) Trevan Enterprises Pty Ltd, trading as “Bull Creek Compact City”;

for the reason that those persons had acquired non-infringing copies from competitors of [PolyGram].’

169 Hill J declared that Warner contravened s 47(1):

‘(a) by letter dated 20 July 1998 offered to supply goods, being compact discs containing recorded music, and services, being trading terms, to retailers in Australia on condition that the retailers would not acquire non-infringing copies from a competitor of [Warner]; and

(b) in September and October 1998 refused to supply a particular retailer being Raiders Music Pty Ltd for the reason that it had acquired non-infringing copies from competitors of [Warner].’

170 At para 447 of his reasons, Hill J noted the three issues set out at para 102 above. He went on, in para 448, to note the way in which ACCC put its case against each corporate appellant:

‘In its case against Universal the ACCC claims that each communication of the PolyGram Policy to a retailer constituted an offer to that retailer to supply either recorded goods or services being continued trading benefits on condition that the retailer agreed not to acquire product within the Australian catalogue of PolyGram from a competitor of PolyGram. In addition, or cumulatively, the ACCC relies upon the conduct of Universal towards each of Wests, Ultimate Music and Compact City as involving a breach of the section. In its case against Warner it is alleged that the letter of 20 July 1998 … constituted an offer to retailers to supply services (continued trading benefits) on condition that the retailers agreed not to acquire products within the Australian catalogue of Warner from a competitor. In addition, or cumulatively, the ACCC relies upon the conduct of Warner towards Raiders as involving a breach of the section.’

171 The trial judge found at para 450 that PolyGram communicated with a number of retailers ‘to the effect that it would be prepared to review the terms of its trading relationship with those retailers who chose to parallel import and that it reserved its right to cease supplying such retailers with PolyGram recordings’. He thought the threats made to Big W and HMV ‘went close to suggesting that the preparedness to review the trading terms could be interpreted as more than that’, although neither of those companies was likely to be intimidated by such threats because of its size. Hill J stated that ‘(n)evertheless, the threats would not have been without any impact, given that the need to import all titles would be both inconvenient, and, if warehousing and distribution arrangements had to be put into place, expensive.’

172 At para 451, Hill J went on:

‘The evidence concerning the Delaneys … and Compact City … goes much further. In each case there is to be found in the conversations following closure of accounts an offer to supply only if parallel imported product were not acquired for resale in the future. In each of these cases I would find the requirement of an offer on condition satisfied.’

173 His Honour noted that, in relation to Warner, ACCC relied on the letter of 20 July 1998 from Mr Harris to retailers: see para 81 above. He said at paras 453-454:

‘There is some, although not much, evidence that the letter found its way to retailers. The evidence that it did was the evidence of Mr and Mrs Delaney of Ultimate Music and Wests, Mr Hazell of HMV, Mr van Wessem of Kmart and Mr Holman of Big W. However, I have no reason to believe that it was not sent to all retailers and would infer that it was. There seems no reason to draw an inference adverse to the ACCC in failing to call retailers who would say they received the letter and were intimidated by it when receipt of what on its face was a circular letter intended for all retailers was hardly a matter fundamentally in dispute.

I think that the evidence makes clear that there was also an offer by Warner to supply services (relating to retailers’ accounts) on condition that parallel imported titles not be acquired for resale. The evidence relating to Raiders likewise makes it clear that there was an offer by Warner to Raiders to supply goods but on condition that Raiders did not acquire imported Warner titles.’

174 Hill J then dealt with the matter of ‘signalling’: the ‘ripple effect’ of the appellants’ communications to particular retailers. At paras 456-457, he said:

‘I would find, notwithstanding a submission to the contrary, that PolyGram knew that the closure of the account of Wests and the related account of Ultimate Music would most likely become quickly known in the industry and would have a signalling effect and would send a “ripple” through the industry, as I would find it did. It is not so clear to me that PolyGram intended to have the Compact City incident made public knowledge, although the possibility that it would was sufficiently likely that it is possible to infer on the balance of probabilities that it likewise knew that it would and what the consequence of that would be. The absence of any Warner witness involved in the Raiders incident allows me more comfortably to draw this inference. I accordingly accept the submission on behalf of the ACCC that because there was no reason to think that a Warner closure would be any less publicised than a Universal closure it was highly likely that Warner’s temporary closure of the Raiders account did come to the notice of retailers.

I would find, despite submissions to the contrary, that the actions of the ACCC in intervening quickly brought the failure to supply either goods or services to the affected retailers by both Universal and Warner to an end. It was not, I think, the action of the ACCC serving notices under s 155 which necessarily had this effect, at least with Universal. Each of Universal and Warner were aware that complaints had been made to the ACCC by the retailers whose ability to purchase product had been terminated before the service of the notices under s 155, although the service of the notices clearly underlined the ACCC involvement. In this regard, the failure of each of Warner or Universal to call relevant witnesses as to each account being reinstated makes the inference which arises that it was the intervention of the ACCC which precipitated reinstatement easier to draw.’

175 Accordingly, Hill J resolved the first issue identified by him (see para 102 above) favourably to ACCC.

176 Hill J also resolved in ACCC’s favour the second issue: whether the words ‘a competitor’ require identification of a specific identified competitor at the time of imposition of a condition. None of the appellants challenged his Honour’s decision on that point.

177 Upon turning to the third issue, Hill J first considered the import of the word ‘substantially’, in s 47(10). He accepted the test adopted in Dandy Power. Speaking in relation to s 47, Smithers J said:

‘“Substantially” is a word the meaning of which in the circumstances in which it is applied must, to some extent, be of uncertain incidence and a matter of judgment. There is no precise scale by which to measure what is substantial. I think in the context, particularly the penalty and other remedies for contraventions of the Act, and the nature of trade which is the subject of the Act, the word is used in a sense importing a greater rather than a less degree of lessening. Accordingly in my opinion competition in a market is substantially lessened if the extent of competition in the market which has been lost, is seen by those competent to judge to be a substantial lessening of competition. Has competitive trading in the market been substantially interfered with? It is then that the public as such will suffer.’

178 Hill J went on at paras 462-463:

‘The purpose in question of the action taken by both Warner and Universal is not difficult to find, as the ACCC submits. It is to discourage retailers from acquiring, whether by import or purchase, non-infringing copies of titles which were within the respective catalogues of Universal or Warner. For reasons dealt with earlier … so far as free riding is relied upon as constituting a purpose different from that proscribed by the section, I do not think it provides the answer. The purpose of preventing free riding is only able to be carried out if there is also the purpose of preventing the acquisition of non-infringing copies. In any event such purpose as there may have been in preventing free riding was not the substantial purpose for the conduct of either Universal or Warner.

In both the case brought against Universal and the case brought against Warner the amount of time during which the refusal to supply continued was brief. This is so, albeit that the conduct came to an end, as I have held, as a result of the intervention of the ACCC. It can not rationally be suggested that on its own that conduct whether of Universal or of Warner could have any real effect on competition. The issue requiring consideration is thus whether, if the conduct had not been cut short by virtue of the intervention of the ACCC and having regard to the impact of signalling, there would likely have been a substantial effect on competition. Alternatively there is the question whether a substantial effect on competition was the purpose of the conduct.’

179 His Honour then dealt with the question whether it was open to ACCC to rely upon the matter of signalling ‘as contributing to the likely effect on competition’. He held it was. That conclusion was challenged on appeal. We will return to it.

180 Hill J discussed whether a reference to ‘purpose’ in s 47 refers to subjective purpose or objective purpose, although he thought this made no difference to the outcome in these cases. He said at paras 473-475:

‘ … the question still remains whether the evidence as a whole shows on the balance of probabilities that the purpose (objective or subjective and whether of the record company acting through its decision making body or of the conduct engaged in by the record company) was substantially to lessen competition or whether the effect of the conduct was likely to substantially lessen competition. That in turn reduces to a question whether if the refusal to deal with the various stores (other than Wests, which was due to close anyway) had not been reversed as a result of the ACCC intervention there would likely have been a substantial lessening of competition, that being relevantly, competition in the market in which the record companies engaged (the wholesale market) or, in the alternative, in the retail market. It is in this sense that objective and subjective purpose coincide.

It is submitted on behalf of Universal that a finding that Universal’s conduct in respect of Wests, Ultimate Music or Compact City could affect competition would be perverse. Wests was about to close. The conduct may have been an over-reaction, punitive or even unconscionable, but this, so it is said, is irrelevant. The question was rather whether there was the relevant purpose or effect of substantially lessening competition. To send a message to retailers would require, it was submitted, a selection of some more substantial retailer [sic] than any of those in fact selected.

There is much to be said for the submission if the conduct against these retailers is looked at on its own and without regard to the threats which had already been made to review trading terms and to the possibility that there would be refusal to supply other firms as it was established that they had in fact acquired non-infringing imported titles. I do not think such a finding in the present circumstances perverse. I have no doubt that the intention of those controlling PolyGram in Australia was to take such action as could be taken to prevent parallel importation and the steps it took were not necessarily the only steps which would have been taken but for the intervention of the ACCC. The same can be said of the steps taken by Warner.’

181 The trial judge thought the ‘more difficult question’ was not the purpose or effect of the conduct of Universal or Warner but ‘whether such conduct as was engaged in (including such conduct as may have been undertaken had ACCC not intervened) was capable of being characterised as substantially lessening competition’. At paras 478-480, he said:

‘What the conduct of each company was designed to achieve and which was likely to have been achieved had it continued was to deter at least the small retailers or a substantial majority of them at least, and having regard to the inconvenience and cost to the large retailers, them also, from acquiring non-infringing copies of CDs for sale. Those CDs could either be imported directly by the retailer or by an Australian wholesaler or be exported to Australia for sale by an overseas wholesaler. It is thus not difficult to infer that the consequence of the continued conduct would be to prevent wholesalers operating in the market. That in turn would have the consequence of ensuring, in respect of Warner titles, that Warner had a monopoly of them in the wholesale market. It would in respect of Universal titles ensure that Universal had a monopoly of them in the wholesale market.

Put in another way, given the conclusion I have reached that both Universal and Warner had market power in the wholesale market in which they operated and that they took advantage of that power to prevent a competitor coming into that market, it must follow that there would be an impact upon competition by force of their conduct. Whether that impact was likely to be substantial is again a matter of degree. It is also a matter of judgment.

It is true that the evidence established that there was already competition in the overall wholesale market for recorded music comprising the continuous flow of CDs for sale to the public. In the overall market, chart hits would vary from week to week, although on average it would be expected that each major record company would have at least one recording on the chart each week. It is true that no one of the five major record companies dominated that market. But to ignore the monopoly each record company had with respect to its own CDs is to ignore the way the market in fact operated. Each recording with a Universal or a Warner label imported from overseas was virtually identical to the recording manufactured in Australia. Depending upon the country of source there could be a difference in the quality of printing on the packaging. Depending upon the country of source there could, at least in a particular case, have been a difference in the quality of the recording. Generally, however, they were indistinguishable but for the label pronouncing the country of origin. In my view and in these circumstances a requirement that retailers buy all Universal labelled product from Universal and all Warner labelled product from Warner would be likely to have a substantial effect on competition in the wholesale market. Indeed, the result of free importation of CDs from overseas appears to have been some increase in the discounts available to retailers and in consequence an overall reduction in the wholesale net price to dealers. This supports the view that the freeing up of importation of non-infringing copies has improved competition in the market and enables an inference to be drawn that the deterring [sic] such importation by the threat of refusal to supply and subsequent select refusal would, had it been continued, have had the consequence of reducing competition and to a substantial degree.’

182 Hill J discussed the issue whether there was also a lessening of competition at the retail level. But he rested his conclusion on the wholesale market. His Honour said at paras 484-485:

For these reasons I am of the view that the ACCC has made out its case that each of Universal and Warner contravened s 47 of the Act.’

(iii) Submissions of Universal

183 Counsel for Universal contend ACCC succeeded under s 47 against their client only in respect of its dealings with Compact City, Wests and Ultimate. Hill J found at para 450 that PolyGram communicated ‘with a number of retailers to the effect that it would be prepared to review the terms of its trading relationship with those retailers who chose to parallel import and that it reserved its right to cease supplying such retailers with PolyGram recordings’. He thought these threats ‘would not have been without any impact’. Nonetheless, counsel say, it was only in relation to the Delaneys (Wests and Ultimate) and Compact City that the evidence went further. In relation to those retailers, and only those retailers, ‘there is to be found in the conversations following closure of accounts an offer to supply only if parallel imported product were not acquired for resale in the future’. Only in those cases did Hill J find the existence of ‘an offer on condition’. As counsel observe in their written outline of submissions:

‘It is implicit that the judge also found, in the case of those three retailers, a refusal of supply for a reason within s.47, namely, that the retailers had acquired non-infringing copies from a competitor of Universal.’

184 Counsel refer to a comment of Hill J, at para 477, that ‘[e]conomists instruct us that lessening competition is but the other side of taking advantage of market power under s 46’. They say this is the key to Hill J’s findings about substantially lessening competition; his ‘findings under s 46 and s 47 are inextricably linked’; so, if the s 46 case against the appellants fails, the s 47 case must also fail.

185 The main thrust of counsel’s attack upon Hill J’s s 47 conclusion is the use his Honour made of prospective continuation of that conduct (if ACCC had not intervened) and its ‘signalling effect’: see para 179 above. Counsel say the errors in his Honour’s approach are:

‘(i) it applies the wrong test, namely whether other exclusive dealing conduct in which Universal might have engaged in the future, but had not engaged in, would have the effect or likely effect of substantially lessening competition and/or would have that purpose …

(ii) it elevates the unpleaded evidence of signalling to a determinative role in deciding questions both of purpose and effect under s.47 …

(iii) it fails to address the statutory test under s.47(10), namely whether the pleaded conduct had the relevant effect or likely effect on competition, or whether engaging in the pleaded conduct had the relevant purpose’

186 As to the first matter, counsel say s 47(1) refers to particular conduct; the effect of the subsection is that ‘s 47 only applies when engaging in that conduct has the purpose, effect or likely effect of substantially lessening competition’ (original emphasis). The relevant conduct is expressed in the present tense (in s 47(2)) ‘and must be subject to an existing (and not hypothetical) condition’. Counsel argue that Hill J decided the s 47 case adversely to their client, not on the basis of the conduct in which it had already engaged, or was currently engaged, but on the basis of the conduct in which it would have engaged absent ACCC intervention.

187 Counsel for Universal submit it was not appropriate to take account of what may have happened, without ACCC intervention, in judging purpose or effect. In any event, they say, Hill J’s factual finding that ACCC intervention brought their client’s conduct to a premature halt was flawed by his misunderstanding of the chronology of events, in particular as to the date upon which the s 155 notice was served upon Universal.

188 In relation to their second point, counsel for Universal note that Hill J, at para 464 of his reasons, agreed that ‘signalling was not particularised in the ACCC pleadings’. His Honour went on to say:

‘However from the time when the ACCC opened its case it made clear that signalling was relied upon in its case. On a number of occasions when objections on the grounds of relevance were taken by Universal, the admissibility of the evidence was put on the basis that PolyGram signalled to the industry the consequence to retailers of importing. Throughout the evidence the significance of signalling to the ACCC case was emphasised. It is not suggested that there was any prejudice to either Universal or Warner in permitting the ACCC to rely on signalling as part of its case under s 47.’

189 In their written outline of submissions, counsel criticise this observation. They say:

‘His Honour had clearly forgotten that when the matter was debated at length in the evidentiary context, objection had been taken by both Universal and Warner to the newspaper articles and other materials being used for an unpleaded “signalling” case, inter alia, because the publicity was not, on the evidence, attributable to anything Universal did.’

190 Counsel submit that signalling, or ‘the knock-on effect of publicity’ (as it was called during argument), which was neither pleaded against, nor attributable to, a particular respondent, could not be regarded as conduct for the purposes of the section and aggregated with the infringing conduct found against it. Nor could the individual instances of infringement be aggregated.

191 Counsel also argue that the findings made by the trial judge as to the news of refusal to supply spreading like wildfire, when coupled with the lack of any evidence of real effect on other retailers, tends against, rather than for, a conclusion that refusal had a substantial effect upon competition.

192 In relation to their third point, Hill J’s alleged failure to address the test stated by s 47(10), counsel refer to Outboard Marine Australia Pty Ltd v Hecar Investments (No 6) Pty Ltd (1982) 44 ALR 667. They say the Full Court there distinguished between the competitive position of a particular retailer and competition in the market generally. At 671 Bowen CJ and Fisher J said:

‘The market in question is geographically wide. There seems to be no evidence that OMA’s refusal to supply Hecar had, or would be likely to have, the result of altering the market structure so as to produce an anti-competitive effect: for example, there is no evidence that the barriers to entry have been raised, nor that price competition has been reduced. Although the competitive position of Hecar as an individual retailer may be affected in the future, it is unlikely that this would have such a dramatic effect as to lessen substantially competition in the retail market which extends from Forster to Umina.’

193 Fitzgerald J said at 679-680:

‘It would, I think, be an unusual and exceptional case in which it could be shown that competition in a generally competitive market was or was likely to be substantially lessened by a refusal to supply one of a number of competitive retailers in the market with a product otherwise freely available and competitively marketed. Further, where there is a market which is generally competitive, it plainly does not follow that conduct which affects the balance of competition by advantaging or disadvantaging a particular dealer or dealers or a particular product or product [sic] necessarily lessens the competition in the market.’

194 Counsel say:

‘His Honour never asks the question which the Full Court posed in Hecar, namely, whether in a generally competitive market (as his Honour found existed) competition was or was likely to substantially lessened [sic] by a refusal to supply one of a number of competitive retailers in the market with a product otherwise freely available from other retailers and competitively marketed.’ (Original emphasis)

195 Counsel go on to note Hill J’s comment in para 463 that, as the relevant period of time was so brief, it ‘can not rationally be suggested that on its own’ the conduct of PolyGram (or Warner) in refusing supply ‘could have any real effect on competition’. They say this is a critical finding:

‘as it is submitted the judge erred in inferring a purpose of substantially lessening competition from conduct engaged in by a corporation where that conduct could not rationally be regarded as having any such effect. If purpose denotes intention to achieve a result, it is perverse to attribute an intention to achieve a result to conduct that could not conceivably have that result’.

196 Counsel say that, to reach his conclusion, Hill J relied on other conduct of PolyGram from which he inferred an intention ‘to take such action as could be taken to prevent parallel importation’; but it was not open to the Court to infer a purpose in relation to particular conduct ‘from other conduct that does not constitute exclusive dealing or otherwise contravene the Act’.

197 Counsel complain that Hill J did not adequately deal with the argument that restraints on intra-brand competition (that is, competition in respect of the sale of a particular title) may increase inter-brand competition (that is competition between titles) particularly in relation to the prevention of ‘free riding’ upon its goodwill.

198 It is submitted that, even if the findings as to the purpose and effect, or likely effect, of the conduct being to protect the whole of the catalogue of the particular respondent are correct, there is no substantial effect upon competition unless there is an effect upon the alternative sources of supply, for reasons similar to those discussed in relation to s 46.

(iv) Submissions of Warner

199 The submissions made by counsel for Warner are substantially similar to those of Universal. There are differences in emphasis. Warner puts at the forefront of its argument the proposition that his Honour should have found that Warner’s purpose was ‘to preserve the competitiveness of Warner’s business by seeking to maintain a system of substantially exclusive supply arrangements which had the effect of minimising the impact of “free riding”.’

200 Moreover, counsel say, the conduct did not have the requisite effect or likely effect because:

‘(a) the conduct was a part, but only a part, of a competitive response to the presence of parallel imports brought into the market by wholesalers, retailers and other importers; and,

(b) any lessening of intrabrand competition which might have arisen was likely to have been more than outweighed in the circumstances by the maintenance of vigorous interbrand competition in the market.’

201 Counsel refer to Professor Hausman’s evidence that vertical restraints in the form of exclusive distribution arrangements by individual record companies (including provision for refusal to supply some or all products or services if exclusivity was breached) promote inter-brand competition to the benefit of consumers. If that evidence is not accepted, counsel argue, it is necessary to consider the conduct of Warner found by Hill J.

202 Counsel submit the circular letter of 20 July 1998 was not expressed in terms of a threat. It proceeded on the assumption that the recipient was already a Warner customer and would remain so. Counsel refer to the finding of Hill J that, of all the retailers who gave evidence, only Mrs Delaney regarded the circular letter as a threat, but it did not deter her from purchasing imported titles. No witness claimed to have been deterred by the letter from importing stock.

203 Counsel contend that Hill J erred in finding the refusal to supply Raiders only came to an end because of the intervention of ACCC. They pointed out that, although ACCC sent to Warner a notice under s 155 of the Act on 7 October 1998, Raiders’ solicitors sent a letter of demand on 9 October 1998. That letter drew Warner’s attention to s 47 of the Act. It stated that, unless supply was restored by 14 October, Raiders would report Warner to ACCC. On 16 October, Warner’s solicitors informed Raiders’ solicitors that their client would restore supply.

204 All of the objections to the use of signalling taken by Universal were supported, with the additional submission that no signalling case was argued against Warner and that, in any event, the evidence relied upon for the inference was admissible only against Universal. Counsel submitted that there was a vacuum in relation to Warner. Furthermore, none of the retailers who were called corroborated the grapevine or wildfire allegations.

205 Counsel submit that the only relevant conduct was the three week refusal to supply Raiders. They say:

‘This conduct could not rationally be suggested to have had the effect of substantially lessening competition as Hill J found … This provides a sound basis to infer that substantially lessening competition was also not its purpose or its likely effect.’

(v) Submissions of ACCC

206 In their written outline of submissions, counsel for ACCC note four points highlighted by Mr Ergas:

(i) the embryonic nature of the competition from imported non-infringing copies. Such competition was only possible from 30 July 1998. The conduct occurred at an early and critical stage;

(ii) the signalling effect that the conduct would materially have on Australian retailers. Counsel referred to evidence given by Mr Rodney Cameron, sales director of Universal, that parallel importation was ‘a pretty hot topic in September 1998’, ‘a lot of people were talking about it’, ‘gossip’ between the sales representatives and that ‘word about Wests’ account and Ultimate’s account being closed because they stocked parallel imports got around like wildfire’;

(iii) ACCC moved quickly in issuing s 155 notices, thus cutting short both the conduct and its signalling effect. The likely effect of the conduct must be judged as at the date it occurred and in the absence of ACCC intervention; and

(iv) even if the effect of the impugned conduct was only to delay competitive responses to the importation of non-infringing copies, for example by price competition, that is an effect that involves substantially hindering competition.

207 In their submission, counsel say:

‘The conduct of Universal and Warner consisted of general conduct designed to discourage retailers from stocking and selling parallel imported product and specific punitive conduct in respect of particular retailers who had, in fact, stocked and sold parallel imported product. In the case of Universal, the general conduct was the widespread communication to retailers of the “PolyGram Policy” and the specific conduct was the refusal to supply Wests, Ultimate and Compact City. In the case of Warner the general conduct was the sending of the letter dated 20 July 1998 to all retailers and the specific conduct was the refusal to supply Raiders.’

208 Counsel say both aspects of the conduct – that is, the general conduct of policy communication and the action against specific retailers – were pleaded from the outset and relied on in evidence, including that of Mr Ergas.

209 Counsel then turn to the critical issue in relation to ACCC’s s 47 case: whether the conduct (general and specific) had the purpose or the actual or likely effect of substantially lessening competition. They cite the finding of Hill J at para 457 (reproduced at para 174 above) that ‘the actions of the ACCC in intervening quickly brought the failure to supply either goods or services to the affected retailers by both Universal and Warner to an end’. They also refer to his finding at para 480 that ‘the threat of refusal to supply and subsequent select refusal would, had it been continued, have had the consequence of reducing competition and to a substantial degree’. Counsel comment:

‘It would be paradoxical if the speedy intervention of the ACCC meant there was no contravention by either of the corporate appellants. It is precisely for circumstances such as this that there is a “likely” limb to the substantial lessening of competition test in section 47.’

210 It is submitted that the purpose of the conduct was to prevent people from buying from parallel importers and thereby to hinder or prevent parallel importers from becoming a competitive force in the market. The purpose was to stop parallel importers from getting a foothold in the market. It was an attempt to snuff out a new and feared competitor.

211 ACCC contends the anticipated and actual effect of parallel importation would be, and was, to bring prices down and so introduce price competition in relation to the portfolios of the major suppliers and so to the market generally. The internal memoranda of the appellants made clear this was their common concern. Once price competition was introduced in relation to the portfolio of one major supplier, it would create potential price competition with the other portfolios.

212 Counsel for ACCC submit that each major supplier would have, and be perceived by the other major suppliers to have, a similar interest in preventing competition from parallel imports, and in generally resisting the introduction of price competition as far and for as long as possible. A good illustration of this community of interest was that a letter was written on behalf of all five of the major suppliers to an Indonesian agent threatening action against a potential Indonesian parallel exporter to Australia. Given that community of interest, failure in the endeavour to hinder or prevent parallel importation was far from clear. It was submitted that this is consistent with evidence that Universal was still planning, in May 1999, to endeavour to maintain both margins and volume, and with the evidence that the impact of parallel importation upon discounting of prices increased after that time. That was many months after legalisation. Delaying the introduction of significant price competition in a market is substantially lessening or hindering competition.

(vi) The references to ‘signalling’

213 Because of the prominence given to the topic during submissions, it is convenient immediately to address the topic of ‘signalling’.

214 It seems that, on 12 April 2001, Hill J was considering objections taken to an affidavit, dated 25 June 1999, made by Mrs Delaney. After setting out an account of her conversation with Ms Allen of PolyGram on 25 August 1998, in which she was told PolyGram had closed Wests’ and Ultimate’s accounts, Mrs Delaney referred to an exhibit to her affidavit, being a photocopy of a front page story in the Sydney Morning Herald (date not shown) in which the closure was mentioned. Mrs Delaney also exhibited a copy of a report of the closure that was published in Inside Retailing on 21 September 1998. Hill J asked Mr J Burnside QC, senior counsel for ACCC, how he sought to get the reports into evidence. Mr Burnside said he relied on the articles, not to prove the truth of their contents but to prove publication. He said this mattered. The discussion went on:

‘MR BURNSIDE: Because the fact of publication is an important way in which the word gets around. It is the signalling effect. It is the most powerful and obvious.

HIS HONOUR: Signalling would have to be by the record company. You have to tie it up with the record company for that.

MR BURNSIDE: With respect, no. The fact we seek to prove by that and other bits of evidence is that the word got around in the industry, about accounts being closed because people had parallel imported.

HIS HONOUR: There is a relevance question. Subject to hearing what Mr Hilton has to say, I certainly wouldn’t admit it as proof of anything said in the article. It could only be admitted as proof there was such an article.

MR BURNSIDE: That is all it is tendered for.’

215 Mr J Hilton SC, senior counsel for Universal, said he objected on the ground of relevance. ‘There is nothing in the statement of claim about signalling. Not a word. Signalling involves, we would submit, something that we did’.

216 During discussion, Hill J suggested ‘in deciding whether there was an exercise of market power it might not be irrelevant … to see it against a background of what was going on, which would include the newspaper’. Mr Burnside responded: ‘That is one aspect. It goes further, to the effect in the marketplace of the conduct we complain about’. Mr Burnside summarised his position in this way:

‘There are two stages. The first is by letting people, retailers know that they reserve the right, to put it neutrally, to withhold supply. If the word then gets around there have been a couple of actual account terminations because of parallel importing, then that fact adds great force to the rather more polite conduct of warning. That is a possibility. Nothing like a public execution to galvanise the mind.’

217 The discussion went on:

‘HIS HONOUR: I don’t know about that. That is why I put it in the way I did, that it might, in respect of conduct after its time, make it easier to infer the relevant purpose, if that is what you seek to use it for. But you keep saying words which, to me, suggest that in some way or other PolyGram is letting it be known.

MR BURNSIDE: No.

HIS HONOUR: That is obviously not the case.

MR BURNSIDE: No. I am not suggesting the publication of the article is PolyGram or Warner conduct. It is a fact about information in the marketplace against which subsequent conduct must be judged.

HIS HONOUR: Yes. I think that is the only basis I can see for it going in which is, no doubt, more elegantly put than I put it.

MR BURNSIDE: I think the difficulty has arisen this way: We are using signalling as a significant catch phrase differently.

HIS HONOUR: It is nothing to do with signalling. It can’t be.

MR BURNSIDE: I will stop calling it signalling and refer to it as market information.’

218 Notwithstanding that promise, Mr D Hammerschlag SC, senior counsel for Warner at the trial, complained there was no reference to ‘signalling’ in the statement of claim. He added:

‘So the record makes it clear, we come here to meet the case pleaded. We are not in a position to meet any other case other than the one that is pleaded. I intend to hold Mr Burnside to the case he pleaded. If he wants to make another case he ought make an application.’

Hill J agreed with that comment.

219 Mr Hilton then said that, on any basis, he objected to the Sydney Morning Herald article, whose date was unknown. His Honour indicated he would reject it ‘unless there is conduct which is relied upon after the date of the article’.

220 It subsequently emerged that the article was published on 9 September 1998; that is, after the conversation between Ms Allen and Mrs Delaney. Nonetheless, Mr Burnside pressed the tender. He pointed out that paras 40 and 44 of the statement of claim alleged other incidents after 9 September 1998. Mr Hilton reiterated his objection, pointing out that his client was not responsible for what appeared in the newspapers. His Honour said:

‘I understand that. But, you see, assuming the newspaper said “anybody who imports will be shot”, then clearly, sorry, “who is found by the record companies to be parallel importing would be shot”, clearly the effect, whether true or not, the effect of such a publication would magnify, I suppose, what thereafter may happen. This is an extreme example of the thing.’

221 Ultimately, his Honour admitted the Sydney Morning Herald article subject to later submissions about its relevance.

222 It seems to us that the newspaper articles were clearly admissible; not to prove the truth of their contents, as Mr Burnside accepted, but to indicate the effect, or likely effect, in the market of the appellants’ conduct. We accept there was no evidence that any appellant was responsible for the appearance of either article. We also accept that ACCC’s statement of claim made no specific reference to the publications. However, neither of those matters is material. One trigger for the operation of s 47(1) is that the impugned conduct ‘has the effect’ of substantially lessening competition. Another trigger is that the conduct ‘is likely to have’ that effect. Whether particular conduct has the effect, or likely effect, of substantially lessening competition may well depend upon the extent to which the conduct becomes known, or is likely to become known, in the market. It was always part of ACCC’s case, against each corporate appellant and their associated executives, that the impugned conduct ‘had or was likely to have the effect of discouraging retailers from stocking and/or acquiring non-infringing copies and thereby had or was likely to have the effect of substantially lessening competition in the wholesale and/or retail market’: see para 59 of the statement of claim against Universal and para 48 of that against Warner. The newspaper articles were relevant to that issue.

223 At one point in the argument before Hill J, Mr Burnside accepted that ‘signalling’ was an unfortunate term. He explained all that was meant was that it was likely word of an account closure would quickly get about and might tend to intimidate other retailers. This approach seems unexceptional. A party in the position of ACCC must be entitled to rely upon any ‘educative’ effect of a refusal of supply to one retailer in aid of an argument concerning the purpose or actual or likely effect of that refusal upon competition in the industry.

224 We make clear that we see the question as one of relevance (and so admissibility) of evidence to the pleaded issues, not as involving any change to those issues.

(vii) Conclusions

225 Section 47(1) of the Act refers to conduct by a corporation in trade or commerce. It is common ground that the relevant conduct of both PolyGram and Warner met that requirement.

226 The next issue, between ACCC and each of the corporate appellants, is whether that conduct amounts to ‘the practice of exclusive dealing’, as that term is explained in subss (2) to (9) of s 47. As indicated, ACCC relies on subss (2) (conditional supply) and (3) (refusal to supply).

227 Hill J found against the appellants in relation to s 47(3), although only in respect of a small number of retailers; in the case of Universal, Compact City, Wests and Ultimate; in the case of Warner, Raiders. These findings were not subjected to serious challenge before us.

228 Counsel for Warner submitted his Honour’s findings in relation to Raiders are ‘not entirely clear’. However, they are clear enough to support the characterisation of Warner’s conduct in relation to Raiders as exclusive dealing in two respects:

(i) refusal to supply because Raiders had parallel imported Warner CDs; and

(ii) offer to supply, in the future, on condition that Raiders not thereafter acquire CDs from a competitor of Warner.

229 Hill J found conduct by both corporate appellants that fell within s 47(2). There is no doubt that both corporate appellants made offers falling within s 47(2) to the retailers whose accounts they had closed. However, his Honour went further, as appears from the declarations made by him.

230 In the case of Warner, the declaration was:

‘[Warner] in contravention of s 47(1) of the Act:

(a) by letter dated 20 July 1998 offered to supply goods, being compact discs containing recorded music, and services, being trading terms, to retailers in Australia on condition that the retailers would not acquire non-infringing copies from a competitor of [Warner].’

It is submitted by Warner that the letter in question does not bear that meaning.

231 In relation to Universal, Hill J declared that:

‘[Universal] in contravention of s 47(1) of the Act:

(a) between July and September 1998 offered to supply goods, being compact discs containing recorded music, to retailers in Australia on condition that the retailers would not acquire non-infringing copies from a competitor of [Universal].’

It is submitted by Universal that no conduct on its part answered that description.

232 In order to evaluate these submissions, it is necessary to refer back to Hill J’s findings of fact.

233 The terms of Warner’s letter of 20 July 1998 are referred to at para 81 above. It is convenient to restate the critical part of the letter:

234 Two observations should be made about the terms of this letter. First, during discussion of the PolyGram Policy, Hill J made the point that there is a distinction between a statement that, if another person takes particular action, the speaker will take counter-action, on the one hand, and, on the other hand, that the speaker will consider whether to take counter-action. The letter written by Mr Harris, on behalf of Warner, falls into the first of these categories: ‘will result in us being unable to provide any of the aforementioned trading benefits’.

235 Second, the letter does not, in terms, contain any offer to supply services. Rather it is expressed in terms of a threat to withdraw existing services. In the context of s 47 of the Act, we do not think that matters. It is necessary to have regard to s 47(13)(a). That paragraph includes in the definition of ‘condition’ any condition ‘whether direct or indirect and whether having legal or equitable force or not’ and ‘a condition the existence or nature of which is ascertainable only by inference from the conduct of persons or from other relevant circumstances’. The letter referred to ‘the large downside’ of retailers altering their source of supply: cessation of the trading benefits listed earlier in the letter and reduced spending on marketing and advertising. The letter clearly conveyed an intimation that supporting services would be available only to those who purchased relevant products exclusively from Warner. Having regard to the extended concept of ‘condition’ in s 47(13)(a), we think it was open to Hill J to find the letter constituted an offer to supply services (benefits associated with the supply of other goods), on condition that the addressee did not thereafter acquire goods from a competitor of Warner. His Honour was justified in reaching the conclusion expressed in his declaration concerning Warner noted in para 230.

236 The situation in relation to Universal is a little more complex. PolyGram’s warnings were conveyed orally. The company’s responses to s 155 notices conceded only conduct falling within the second category in para 234: ‘PolyGram would be prepared to review the terms of its trading relationship’, the relevant terms being identified. However, there was evidence that PolyGram executives went further than this; at least in conversations with some retailers. Thus, Hill J found that, on about 23 July 1998, Mr Dickson and Mr Handley told Mr Agostinelli of Sanity ‘that if Sanity were to go off-shore it might lose the current trading terms it had in place’. His Honour also accepted evidence from Mr Nemeth of Fish Records that Mr Handley said to him: if you parallel import, PolyGram ‘would also review its terms of trading’.

237 Against that background and bearing in mind s 47(13)(a), we think it was open to his Honour to reach the conclusion expressed in his declaration concerning Universal.

238 In our opinion, the factual findings made by Hill J amply support his conclusion that each of the corporate appellants engaged in the practice of exclusive dealing.

239 The more difficult question is the application of subs (10) of s 47 to these cases. ACCC places no reliance on para (b) of that subsection. Therefore, the question is whether it has established any of the alternatives provided by para (a). It is necessary to determine whether the exclusive dealing was engaged in for the purpose, or had, or was likely to have, the effect, of substantially lessening competition.

240 The purpose or effect or likely effect of the conduct must be a substantial lessening of competition in the market in question. The market in question is the Australian wholesale market for recorded music. Lessening of competition in this context includes a reference to preventing or hindering competition (s 4G).

241 We have already said something about the meaning of the word ‘substantial’ in s 46 of the Act. The meaning is similar in s 47: see Dandy Power. As Smithers J pointed out in that case, the word requires a greater, rather than a lesser, degree of lessening of competition, although his Honour doubted the wisdom of paraphrasing an ordinary English word. The difficulty lies in applying it in this context. Smithers J went on to say:

‘Has competitive trading in the market been substantially interfered with? It is then that the public as such will suffer. …

Although the words “substantially lessened in a market” refer generally to a market, it is the degree to which competition has been lessened which is critical, not the proportion of that lessening to the whole of the competition which exists in the total market. Thus a lessening in a significant section of the market, if a substantial lessening of otherwise active competition may, according to circumstances, be a substantial lessening of competition in a market.’

That latter passage was quoted with approval (albeit in a different context) by French J (with whom Spender and O’Loughlin JJ agreed) in Singapore Airlines Ltd v Taprobane Tours WA Pty Ltd (1991) 33 FCR 158 at 181, and again by the Full Court in Rural Press Ltd v Australian Competition and Consumer Commission (‘Rural Press’) [2002] FCAFC 213; 118 FCR 236 at para 131 (in relation to the same phrase in s 45) (cf Monroe Topple & Associates Pty Ltd v The Institute of Chartered Accountants (‘Monroe Topple’) [2002] FCAFC 197; (2002) 1 ATPR 41-879 per Heerey J at para 97).

242 Competition is a process and the effect upon competition is not to be equated with the effect upon competitors, although the latter may be relevant to the former. Competition is a means to the end of protecting the interests of consumers rather than competitors in the market (Queensland Wire per Mason CJ and Wilson J at 191). Competition is defined to include competition from imported goods (s 4). The Court has to make a qualitative judgment about the impact of the impugned conduct on the competitive process. For example, a short term effect readily corrected by market processes is unlikely to be substantial. The lessening of competition must be adjudged to be of such seriousness as to adversely affect competition in the market place, particularly with consumers in mind. It must be ‘meaningful or relevant to the competitive process’: Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 38; (2000) ATPR 41-752 at para 114.

243 In his analysis of the effect, or likely effect, of the exclusive dealing conduct of PolyGram and Warner, Hill J accepted that, if considered in isolation, the completed conduct of neither of them had, or would have been likely to have had, any real effect on competition. However, his Honour thought it necessary to view the conduct in conjunction with two other circumstances: first, the impact of knowledge of the account closures upon other retailers; and, second, the fact that the conduct was discontinued only because of the intervention of ACCC.

244 As to the first matter, we agree with the finding of Hill J that it was always inherently likely that word of the account closures would quickly spread through the industry. The amendments to the Copyright Act were widely known and extremely controversial. It can be assumed that everybody engaged in the Australian wholesale recorded music industry would have been aware of the amendments and the opportunity for parallel importation. Both PolyGram and Warner had taken steps to draw the attention of their retail account-holders to the changed situation. They had each made clear their desire for retailers not to avail themselves of their new right of parallel importation. There was some direct evidence that news travelled fast about market activities. Given that many retailers were banded together in buying co-operatives, it would have been difficult to prevent disclosure of an account closure, even if the distributor wished to do so. Any disclosure would be likely to find its way into printed publications, such as a trade journal or even a general newspaper such as the Sydney Morning Herald. In assessing the effect or likely effect of the conduct, Hill J was entitled to take into account the fact or probability of other retailers becoming aware of it.

245 As to the second matter, the effect, or likely effect, of the appellants’ conduct on competition in the market is not to be assessed on the assumption that it would extend indefinitely. As counsel for the appellants point out, such an assumption might cause a court to determine an allegation about past conduct by reference to assumptions about the future. However, in evaluating past conduct, it is legitimate to consider how long that conduct continued and, if it ceased before institution of legal action, the circumstances surrounding cessation.

246 Whatever the intentions of the relevant PolyGram and Warner executives, their actions did not, as we know from the trial judge’s findings, in fact have the effect of substantially lessening competition in the market. This might have been because the conduct was ‘nipped in the bud’ by ACCC; it might have been because retailers exhibited more fortitude than PolyGram and Warner expected. Some may have been intimidated by the threats made by one or both companies, although there seems to be no direct evidence of this, but plainly many were not. The evidence establishes that, after a slow start, many retailers purchased non-infringing copies of PolyGram and Warner CDs, either by direct importation or by purchasing stock imported by others. Within a few months, there was a thriving trade in imported stock.

247 The making of a finding about likelihood presents greater difficulty. The question is whether, as at the date of the impugned conduct, it was likely, having regard to existing circumstances, that the conduct would effect a substantial lessening of competition in the market (Trade Practices Commission v TNT Management Pty Ltd (1985) 6 FCR 1 at 50). We must put aside the hindsight knowledge that it did not, save that this illustrates one potential outcome. We are prepared to assume, for the purposes of argument, that likely does not mean more likely than not, but rather that there is a real chance or possibility that a substantial lessening will occur (Monroe Topple per Heerey J at para 111.

248 It is possible that an objective observer, with knowledge of the industry, might have concluded, at the time of the relevant conduct, that it would be likely to effect a substantial lessening of competition in the market. But we are uneasy about deciding the s 47 issue on that basis. Hill J did not make a finding about that specific question. The finding of his Honour, at para 478 of his reasons, included the element ‘had it [the exclusive dealing conduct] continued’. The addition of that element was consistent with Hill J’s view that the exclusive dealing would have continued indefinitely, but for ACCC intervention. However, as we have explained, we do not think it is legitimate to decide the cases upon the basis of future conduct, even if that future conduct is no more than a continuation of an existing policy. Once one takes away the effect of any future conduct, it becomes difficult to say that the exclusive dealing conduct of either of the appellants was likely to have the effect of substantially lessening competition in the market.

249 We turn to the subject of purpose. A person may have the purpose of securing a result which it is, in fact, impossible for that person to achieve. That no doubt explains the reference to purpose, in para (a) of s 47(10) of the Act, as an alternative to effect and likely effect. The paragraph is satisfied if the relevant corporation has the requisite purpose, regardless of whether or not that purpose has been, or was or is likely to be, achieved. It may conceivably be satisfied even in a case where the Court finds the purpose could never in fact have been achieved; although that finding would be relevant in determining whether to infer the proscribed purpose.

250 There was debate about whether the test for the relevant purpose is objective or subjective. Universal submitted the test is objective.

251 Section 47 is directed at the conduct of corporations, although it has an extended application to natural persons in circumstances mentioned in ss 5 and 6 of the Act. The debate about subjective and objective purposes has an air of unreality in connection with corporate conduct. The purpose of a corporation is a legal fiction. A corporation has no mind and can have no purpose, in the usual sense of that word. Its activities will necessarily reflect the purposes of the individuals who make the decisions which control those activities. In the case of most corporations, this will be a group rather than a single individual. Their minds are the mind of the corporation: see Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 at 370 (Gibbs CJ) and 384 (Mason J). The members of the group will often have differing reasons for arriving at a decision, some spoken and some unspoken. Necessarily, therefore, a finding about the purpose of a corporation is a legal conclusion expressed as an attributed state of mind. The distinction between subjective and objective purpose will ordinarily be blurred; although, where there is a single directing mind, the subjective purpose of that mind may conceivably differ from the objective purpose inferable from conduct and its predictable outcomes.

252 Authority bearing on the nature of the purpose to be demonstrated pursuant to Pt IV of the Act is mixed. This can be partly explained by differences in wording between the sections. In s 4D and s 45 the phrase is ‘provision … has the purpose’. In s 45D (and related sections), the phrase is ‘conduct … that is engaged in for the purpose’. In s 45E the phrase is ‘provision … included for the purpose’. In s 46 and s 46A the phrase is ‘not take advantage of that power for the purpose of’. In s 47(10) the phrase is ‘the engaging in that conduct has the purpose’. In relation to ss 4D, 45 and 45D of the Act, the requisite purposes have been held to be subjective: see News Limited v South Sydney District Rugby League Football Club Limited (‘News Limited’) [2003] HCA 45 at paras 18, 31-45 and 212; Tillmanns Butcheries Pty Ltd v The Australian Meat Industry Employees Union (1979) 42 FLR 331 at 348 (Deane J); Hughes v Western Australian Cricket Association (Inc) (1986) 19 FCR 10 at 38 (Toohey J); ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) (1990) 27 FCR 460 at 476-477. The purpose in s 46 is the actual subjective purpose of the corporation in question. What is to be ascertained is the ‘intent of the corporation engaging in the relevant conduct’ (Eastern Express at 66).

253 The purpose to which s 47(10) refers has been said to involve ‘subjective’ considerations: see O’Brien Glass Industries Ltd v Cool and Sons Pty Ltd (1983) 48 ALR 625 (Fox J, Sheppard J agreeing). But in that case there was no express evidence of subjective purpose; purpose had to be inferred by resort to objective evidence including the natural consequences and ‘effect’ of the conduct.

254 In Hecar Investments (No 6) Pty Ltd v Outboard Marine Australia Pty Ltd (1982) 62 FLR 159 at 160, Franki J observed, obiter, that the purpose contemplated by s 47(10)(a) might depend on the subjective purpose of a manager of the corporation involved. On the other hand, in Dandy Power, Smithers J gave extended consideration to the issue and observed at FCR 276; ALR 206-207:

‘… there is a real question as to whether the purpose referred to in s 47(10) is the purpose in the mind of the person who engaged in the relevant conduct or is the purpose attributed to the act of engaging in that conduct and to be ascertained from the nature of that act of engaging in that conduct. The purpose to be identified is the purpose which the engaging in the relevant conduct “has”. This is a form of words hardly apt to refer to the subjective purpose of the person performing the relevant act …’

Smithers J drew an analogy with the similar language of s 260 of the Income Tax Assessment Act 1936 (Cth), which requires demonstration of an objective purpose: see Slutzkin v Federal Commissioner of Taxation (1977) 140 CLR 314 at 329. Recently in Monroe Topple v The Institute of Chartered Accountants in Australia (2001) ATPR 46-212, Lindgren J questioned whether the parties in that case were correct in treating the concept of purpose, in s 47(10) of the Act, as subjective and referred to Dandy Power. This aspect was not discussed on appeal, although it was accepted that ‘purpose’ in s 46 is subjective in the sense discussed (Monroe Topple per Heerey J at para 91).

255 In our opinion, the language of s 47(10), taken together with s 4F and the weight of authority, establish that what needs to be proved is the actual purpose of the relevant respondent. We think this view is consistent with what was said by members of the High Court in News Limited. With respect to Smithers J, the analogy with s 260 is apt to mislead. That section related to ‘Every contract … so far as it has … the purpose or effect of’. There was no equivalent of s 4F. It is not surprising, therefore, that the Privy Council held in Newton v Federal Commissioner of Taxation (1958) 98 CLR 1 at 8 that:

‘In applying the section you must, by the very words of it, look at the arrangement itself and see which is its effect – which it does – irrespective of the motives of the persons who made it. Williams Jput it well when he said “The purpose of a contract, agreement or arrangement must be what it is intended to effect and that intention must be ascertained from its terms. These terms may be oral or written or may have to be inferred from the circumstances but, when they have been ascertained, their purpose must be what they effect”. In order to bring the arrangement within the section you must be able to predicate – by looking at the overt acts by which it was implemented – that it was implemented in that particular way so as to avoid tax.’

The concept was carried into Pt IVA of the Income Tax Assessment Act, by the anti-avoidance provisions which, in effect, superseded s 260 in 1981 (see s 177D). In such a case, the actual intentions of any persons involved are irrelevant.

256 Ascertaining the purpose for which conduct is engaged in by a party stands on quite a different footing. It would make no sense to consider that issue without paying regard to the direct and indirect evidence as to the actual intentions and purposes of the party. Of course, proof of the required purpose is not limited to direct evidence as to those purposes. Further, the Court is not bound to accept such evidence. Indeed, it will normally be critically scrutinised; it is often ex post facto and self-serving. In these cases, no such evidence has been led, either against the respondents (by way of direct admission) or for them from the relevant decision-makers. Thus, a finding of purpose is an inference to be drawn from all of the circumstances on the balance of probabilities. That inference, however, is as to the purpose of the particular respondent, not of some hypothetical bystander. That said, the objective circumstances will be of considerable (often critical) probative value in assessing whether to draw the inference.

257 Hill J found the purpose of each of Universal and Warner was to discourage retailers from acquiring, whether by importation or purchase, non-infringing copies of titles within their respective catalogues. His Honour did not consider anything turned on whether that purpose was subjective or objective. Such indications of subjective purpose as were available, in the absence of evidence from any of the executives of Universal or Warner, were inconclusive in any event: see paras 469-472 of Hill J’s reasons. At para 473, Hill J reduced the question of purpose to the following:

‘… whether if the refusal to deal with the various stores (other than Wests, which was due to close anyway) had not been reversed as a result of the ACCC intervention there would likely have been a substantial lessening of competition, that being relevantly, competition in the market in which the record companies engaged (the wholesale market) or, in the alternative, in the retail market. It is in this sense that objective and subjective purpose coincide.’ (Emphasis added)

258 At para 445 of his reasons, Hill J found that PolyGram and Warner each took advantage of its market power ‘to prevent the entry into the wholesale market of persons who would sell imported recordings under Universal or Warner labels by wholesale or wholesalers from overseas with access to non-infringing copies who wished to export to Australia’. That finding was made in the context of his Honour’s consideration of s 46 of the Act, and his view that each company had substantial market power, within the meaning of that section. However, the circumstances in which the finding was made do not derogate from its importance as a factual finding concerning the purpose of PolyGram and Warner in undertaking the impugned conduct.

259 His Honour’s finding is unsurprising. It is clearly pointed to by a body of evidence, including internal memoranda, referred to by Hill J. Neither of the corporate appellants called evidence from those of its executives who were involved in the decision to communicate with retailers or the decision(s) to close the account, or accounts, of retailers who obtained products elsewhere. So there is no direct admission of the unlawful purpose. However, there is evidence from which purpose may be inferred.

260 It is clear that both PolyGram and Warner opposed the legalisation of parallel importation and were seriously concerned about its effect on their businesses. Hitherto, each corporate appellant had enjoyed a monopoly in the supply of their group’s labels to the Australian market. They now faced the prospect of imports from other countries, possibly at prices below their own. Before either of them had any evidence of retailers engaging in parallel importation, each of them devised a pre-emptive strategy to deter retailers from doing so. The strategy was devised at the highest level, in each company. It involved communication with retailers in terms designed to dissuade them from having anything to do with imported stock. Each company threatened to withdraw supporting services from retailers who purchased stock elsewhere. When it discovered a retailer had done so, each corporate appellant came down hard on that retailer. Not only did it withdraw supporting services; it denied supply of all product. The evidence suggests, and the trial judge found, that the corporate appellants’ course of conduct ceased only because of the intervention, or anticipated intervention, of ACCC.

261 The fact that some of the contravening conduct took place some time after the strategy was decided upon, in the case of each respondent, is not to the point. Nor does it matter that the formation of the strategy, and perhaps some steps taken in accordance with it, were not, themselves, contraventions of s 47. The question is the purpose for which the contravening conduct took place. The answer is that, in each case, the conduct was carried out in order to implement a wider strategy or plan. The purpose of the strategy or plan was the purpose of the particular contravening conduct.

262 In argument, much was made of the fact that all the retailers whose accounts were closed were small traders. It was said their sales volume was miniscule; therefore, the cessation of supply to them could have no significant effect on competition in the market. We agree. Insofar as it is relevant to comment on factual arguments, those very facts make us wonder why the appellants thought it necessary to close the retailers’ accounts, unless for the purpose of making an example of them. How better to fortify a general warning to all retailers than to deny supply to one or more small retailers, whose purchase value was, in any event, insignificant, ‘pour encourager les antres’.

263 It was submitted that it was extremely unlikely that unilateral action by one supplier of CDs in relation to particular retailers could have prevented, or even seriously hindered, competition from parallel imports in relation to its own titles. Counsel likened such action to holding back the tide or putting a finger in the hole in a dyke; it was therefore inherently unlikely to have been the purpose of either respondent. This is a factual argument which was taken into account by the primary judge. It is not compelling. Given the strong economic interest of each respondent to deter the new competition, there was every incentive to try and achieve that objective, even if against the odds. The commercial downside of the contravening conduct was not great. It is of particular significance that the appellants’ conduct was a response to the first indication of parallel importation. This development opened the possibility of intra-brand competition in price and quality and so on. The appellants’ objective was to snuff out that competition before it gained a foothold. The objective would justify commercial actions and risks which might not be attempted in an established market situation. Nipping incipient small-scale competition in the bud was held to substantially lessen competition in Rural Press at paras 129 to 133. This is applicable by analogy to the potential intra-brand competition here. Furthermore, as we have said, if the other major suppliers had independently taken the same position – a far from fanciful circumstance – success in whole or part was by no means out of the question. A new and very disturbing element of competition was about to enter the market, of which there was no real experience. It would be expected that drastic defensive measures may be attempted by the incumbents, which may seem naïve in retrospect.

264 The inference was open to Hill J, looking at the whole of the evidence, that the purpose of each corporate appellant was to deter all its retail account-holders from purchasing parallel imports. The inference may more readily be drawn in the absence of evidence on purpose from any of the appellants. In our opinion, Hill J was entitled to draw it.

265 If it be accepted that the purpose of each corporate appellant was to dissuade retailers from purchasing imported stock, the question arises as to whether that involved the purpose of ‘substantially lessening competition’ within the meaning of s 47(1)(a) of the Act. It certainly involved a purpose of substantially lessening (if not altogether eliminating) competition with PolyGram and Warner, as the case may be, in respect of their own labels. But the competition contemplated by s 47(10)(a) is competition in the relevant market, considered as a whole; not competition with a particular market participant.

266 Whether the purpose of lessening competition with a particular market participant amounts also to the purpose of substantially lessening competition in the market must depend upon the facts of the particular case; a matter of major importance being that participant’s market share. A question of degree arises, about which a judgment must be made. Even elimination of competition with a minor market participant might have no more than a trivial effect on competition in the market, whereas only reduction of competition with a major participant might dramatically lessen competition.

267 The primary judge had no difficulty in making the necessary finding, because of his view that each corporate appellant had substantial market power. In our opinion, that conclusion is not correct. Therefore, we must look at the question of substantial lessening of competition ourselves, in the light of the findings of primary fact.

268 It was submitted by reference to some texts that, absent collusion or parallelism, exclusive dealing can only be effective if the ‘excluder’ has substantial market power. That is not the premise upon which s 47 is framed. It does not refer to market power and provides other criteria. Even if correct, it would relate directly to effect rather than purpose.

269 At para 22 above, we recorded that, in 1998, PolyGram had 17.6% and Warner about 16% of the market share for wholesale recorded music. In other words, each of the corporate appellants wholesaled about one-sixth of all CDs sold on the Australian market. However, the issue cannot be concluded as simply as that. In the case of a true commodity, such as wheat, elimination of competition from a supplier holding one-sixth of the market might have little effect on competition in that market; the customers might simply transfer their business to the remaining five suppliers in the market, who might compete fiercely for that business. However, CD titles are not an homogeneous commodity. Each is unique. Each appeals to a different audience, although audiences overlap. If intra-brand competition is eliminated, there is no direct price competition or any direct competition in relation to the aggregation of unique titles. Of course, each title is in competition with the titles of other suppliers in the same market and that, over time, would impose some competitive pressure. However, if a major supplier could hold the line against intra-brand competition from imports, it could determine in its own time whether to respond to competition from other suppliers and, if so, how to do this. We are satisfied this comfortable situation would apply to a significant proportion of the available titles, and amount to a substantial lessening of competition in the market. Further, the introduction of intra-brand price competition would flow through to inter-brand price competition and so affect the whole market. This was the substance of the reasoning of Hill J, when the question of market power is left out of account.

270 Universal argues that encouragement of retailers to deal exclusively with it, or discouragement of them from dealing in imported products, would:

(a) maximise Universal’s output, enabling it to achieve the sales revenues required to recoup its existing investment in finding, developing, promoting and marketing its titles;

(b) maintain the economies of scale in its distribution networks;

(d) enable Universal to continue investing in new products; and

(e) discourage retailers from dealing in infringing or pirate imports.

271 Universal argues its defence of its market position reflected a purpose of competing effectively in the new environment, notwithstanding the result would damage or even eliminate free riding competitors. PolyGram’s conduct, it is submitted, promoted inter-brand competition, albeit at the possible cost of reducing intra-brand competition, each title being regarded as a brand for the purpose of that analysis. Warner adopts the same argument.

272 A difficulty about that argument, for our purposes, is that it is a factual argument unsupported by any finding of the trial judge and is inconsistent with the findings which are made. Universal failed to call any witness who could speak about its objectives, policies and activities. In the absence of such evidence, it is not open to an appellate court to make the findings sought. A similar observation applies to Warner.

273 Furthermore, s 47 does not contain any ‘rule of reason’, or any scope to permit a substantial lessening of competition because it is balanced by claimed pro-competitive effects elsewhere. The policy is to let competition work. It may be there is a risk that this will mean fewer recordings by Australian artists, reduced product quality, less advertising, fewer displays and promotions and the like. If the consumer is driven by price considerations, a no frills industry may emerge. If such consequences ensue, or are thought likely, these may be matters for Parliament. They do not affect the application of s 47 as it stands.

274 In our opinion, Hill J was right to find that s 47(10) was satisfied in each case and that there was thus a contravention by each corporate appellant of s 47(1) of the Act; however, only by reference to the purpose of that appellant, not the effect or likely effect of its conduct.

Accessorial liability

(i) PolyGram executives

275 Hill J held that Mr Handley and Mr Dickson were each knowingly concerned in PolyGram’s contraventions of s 46 and s 47 of the Act. He ordered each of them to pay a pecuniary penalty, in the sums of $45,000 and $50,000 respectively.

276 Both men appeal against his Honour’s order. They contend there was no contravention of either section, for the reasons advanced in argument by Universal. It follows from what we have already said that we accept that submission in relation to s 46, but not in relation to s 47.

277 Mr Handley and Mr Dickson were both intimately involved in the course of conduct upon which PolyGram embarked in July 1998. They were both senior executives of the company. Mr Handley was General Manager, Sales and Mr Dickson was Group Managing Director, Music Operations. Both were present at the ‘parallel importing brainstorming session’ of PolyGram personnel held on 15 July 1998 at which there was discussion about the likely reaction of retailers to the legalisation of parallel importation. Both men were heavily involved in the conversations with retailers which followed that meeting, including the conversation with Mr Agostinelli noted in para 236 above. However, only Mr Handley was present at the conversation with Mr Nemeth noted in that paragraph.

278 There is nothing in the findings of Hill J to suggest that either Mr Handley or Mr Dickson was initially involved in the Wests/Ultimate incident. However, his Honour found, from the evidence of Mr and Mrs Delaney, that the PolyGram Credit Manager with whom they were involved reported to Mr Handley. He inferred this officer ‘was directed by Mr Handley (and, of course, Mr Dickson)’.

279 Whether or not Mr Dickson was involved in the decision to close the accounts of Wests and Ultimate, he quickly became involved in the issue. On the day following the closures, 26 August 1998, Mr Delaney faxed a letter to Mr Dickson. Mr Dickson responded on the following day with a letter defending the account closures and implying copyright infringement. The letter ended with an assertion ‘we have no obligation to supply anyone’ and telling Mr Delaney that he had an alternative: ‘You can stop importing PolyGram repertoire from those suppliers’.

280 As tests ultimately demonstrated, the ‘trap purchase’ CD imported by Ultimate was not an infringing copy. Nonetheless, it was a further week before Ultimate’s account was re-opened.

281 It seems Mr Handley, but not Mr Dickson, was involved in the closure of Compact City’s account. Mr Handley informed Mr Howson of Compact City that PolyGram had decided not to supply his store until further notice. When Mr Howson complained that he had not been asked to explain why he imported the ‘trap purchase’ title before the account was closed, Mr Handley replied this ‘was happening all around Australia and that there was no time to ask people for reasons’. Even though Mr Howson immediately wrote an apologetic letter promising never again to import stock, it was a further ten days (with a further apologetic letter) before his account was re-opened.

282 In discussing the amount of penalty to be imposed on Mr Dickson and Mr Handley, in his supplementary judgment, Hill J said ‘the penalty to be imposed upon Mr Handley should be $45,000, and against Mr Dickson $50,000 to reflect his involvement additionally to Mr Handley in the Compact City matter’.

283 Counsel for Universal, and Mr Handley and Mr Dickson, say Hill J was mistaken in thinking that Mr Dickson was involved in the Compact City closure. That comment seems to be correct.

284 We see no rational basis for distinguishing between Mr Handley and Mr Dickson in terms of penalty. As we have said, both were senior executives of PolyGram, both were deeply involved in the conduct commenced by their employer in July 1998 and continued their involvement until ACCC intervention. Both were actively involved in imposing PolyGram’s wishes upon retailers with the purpose of substantially lessening competition in the market.

285 ACCC has not appealed against the amount of penalty imposed on either Mr Handley or Mr Dickson. There is therefore no question of either penalty being increased. We do not think the penalties were manifestly excessive. Normally, therefore, we would leave them to stand. However, it appears that Hill J acted under a misapprehension in imposing a slightly higher penalty on Mr Dickson. We should correct that error and reduce the penalty imposed on him to $45,000, the same amount as the penalty imposed on Mr Handley.

286 The declarations made by Hill J in relation to Mr Handley and Mr Dickson should be varied by omitting any reference to s 46 of the Act. The pecuniary penalty imposed on Mr Dickson should be reduced to $45,000. Otherwise, the appeals by those two persons should be dismissed.

(ii) Warner executives

287 Hill J imposed pecuniary penalties of $45,000 upon each of two Warner executives, Mr Smerdon (Finance and Business Affairs Manager) and Mr Maksimovic (New South Wales State Manager). Both of these persons appeal, contending there can be no accessorial liability because Warner did not contravene the Act. As with the Universal executives, we accept that submission in relation to the claimed contravention of s 46 of the Act, but we reject it in relation to s 47.

288 Counsel for Warner, and Mr Smerdon and Mr Maksimovic, submit that, even if Warner contravened s 46 and s 47, ‘Smerdon and Maksimovic, not having knowledge of each of the essential elements of the relevant contraventions, should not have been found to be accessorially liable’. They submit there is no evidence that either executive was aware of Mr Harris’ circular letter to retailers of 20 July 1998 or that either of them had any knowledge of the relevant proscribed purpose.

289 Hill J noted that Mr Smerdon had expressed concern about the prospective legalisation of parallel importation as early as October 1996. After the legislation was enacted, he sent an email to his staff in which he mentioned the need for retailers ‘to weigh up the cost of losing product return right privileges, rebate incentives and various promotional support before they consider alternative sources of supply’. It was after that letter that Mr Harris sent his circular letter to retailers, making a threat about loss of trading benefits.

290 It is clear from Hill J’s findings that both Mr Smerdon and Mr Maksimovic were heavily involved in the closure of Raiders’ account. Mrs Knazko of Raiders rang Mr Maksimovic on 30 September 1998 to ask why her account had been closed. He replied this was because Raiders was parallel importing. He told her this was against Warner’s terms of trade and she had to deal exclusively with Warner. Mr Smerdon became involved in the matter on the following day. He repeated to Mrs Knazko what she had already been told by Mr Maksimovic. It was a further two weeks before Raiders’ account was re-opened, and then only after both ACCC intervention and a letter to Warner from Raiders’ solicitors.

291 Hill J said at para 135:

‘I accept the suggestion that Warner thought it could make an example of Raiders for being involved in parallel importing by closing its account and that in this Raiders were something of a scapegoat.’

292 Given their intimate involvement in the Raiders incident, the thought attributed by Hill J to Warner must also be attributed to Mr Smerdon and Mr Maksimovic, especially in the absence of evidence from either of them about the matter.

293 In dealing with the penalty to be imposed on Mr Smerdon and Mr Maksimovic, Hill J said at para 45 of his supplementary judgment:

‘In the case of Mr Smerdon and Mr Maksimovic both were involved in the Warner conduct in breach of ss 46 and 47 of the Act. I see no reason to distinguish between them. Neither was directly involved in the letter written by Mr Harris, even if, as I have found, both may be inferred to have been aware of it. In all the circumstances, I think the appropriate penalty to be imposed on each should be $45,000. Neither is likely to reoffend.’

We see no error in these conclusions, except in so far as they refer to a breach of s 46.

294 As is apparent from the Raiders incident, both executives were concerned to protect Warner from competition by parallel imports, if necessary by refusing to supply ‘offending’ retailers. This is enough to show their knowledge of the elements in Warner’s contravention of s 47 of the Act.

295 We also think it was open to Hill J to infer, and that he was correct to do so, especially in the absence of evidence to the contrary, that both executives were aware of the contents of Mr Harris’ letter of 20 July 1998. In the case of Mr Smerdon, the inference is irresistible. It is perhaps more debatable in the case of Mr Maksimovic, though it seems to us inherently unlikely that the New South Wales State Manager would not have been aware of a letter from the Chairman of his company to the retailers with whom he dealt, especially on a subject of such importance to the company.

296 The declarations made in relation to Mr Smerdon and Mr Maksimovic should be amended by deleting the references to s 46 of the Act. Otherwise their appeals should be dismissed.

ACCC’s appeals on penalty

(i) Background

297 A penalty of $450,000 was imposed on each of Universal and Warner. ACCC had sought imposition upon each of them of a penalty of $8,000,000, that being 80% of the maximum penalty.

298 In fixing the penalty, Hill J was guided by the considerations referred to in s 76 of the Act and the matters identified by French J in Trade Practices Commission v CSR Ltd (1991) ATPR 41-076. Hill J took into account the increase in maximum penalties which had taken place after French J’s decision, together with results in other cases, whilst recognising their differing circumstances. Factors considered by his Honour were:

(i) the nature and extent of the contravening conduct;

(ii) the amount of loss or damage caused;

(iii) the circumstances in which the conduct took place;

(iv) previous contraventions;

(v) the respective sizes of the contravening companies;

(vi) the degree of power market share and ease of entry;

(vii) deliberateness of conduct and the period over which contravention extended;

(viii) whether the conduct arose out of conduct of senior management or at a lower level;

(ix) educational programmes or corrective measures;

(x) co-operation;

(xi) deterrence;

(xii) parity.

299 At paras 40 and 41 of his supplementary judgment, Hill J said:

‘As is apparent from the above discussion there are features of the present cases which point in both directions in setting a penalty which is both an appropriate deterrent on the one hand, yet fair and not crushing on the other. I do not think that the fact that the maximum penalties were increased by statute, while relevant, really requires that the maximum amount in the range should be imposed, or for that matter, that the penalty imposed should be in the order of over 80% of that maximum figure. In one sense the increase in the maximum penalty not only increased the maximum penalty which could be imposed, but also increased the range of penalties which could be imposed up to that maximum.

I am of the view that the penalty to be imposed on both Universal and Warner should be $450,000, which, while clearly at the bottom of the range for an offence of the present kind, is arrived at in this case where the operation of the law to the conduct engaged in was properly to be regarded as uncertain and having regard to the other matters discussed above.’ (Emphasis added)

(ii) Arguments on appeal

300 It is submitted on behalf of ACCC that Hill J failed to give proper weight to the element of general deterrence in fixing the penalty; in addition, and alternatively, the penalty imposed was so manifestly inadequate as to demonstrate that the discretion had miscarried. Counsel make particular reference to an unquantified discount which was given by his Honour on account of the complexity of the cases, the previous uncertainty of the law and legal advice obtained by Universal. Counsel recognise that the judge referred to deterrence as a significant factor to be taken into account, but they say this was only mentioned as one of a number of factors; it was not given primacy and this is illustrated by the result. Counsel submit that, although most of the factors identified by the judge pointed to a high range penalty, the result was only 4.5% of the maximum; this was inappropriate and manifestly inadequate.

301 Counsel for Universal and Warner submit that the primary judge adverted to the relevant principles, including the need for deterrence; therefore it is not possible to challenge the discretionary judgment which he exercised. They submit the complexity of the cases, the uncertainty of the law prior to the decision and the legal advice which had been obtained were not irrelevant factors; it was a matter for the judge to accord such weight to them as he considered appropriate. Counsel suggest $450,000 is a considerable sum of money. It cannot be properly described as manifestly inadequate, bearing in mind the various considerations to be taken into account, particularly the short duration and minimal effect of the contravening conduct. They submit that mathematical relativity with the maximum penalty is not an appropriate way of judging the adequacy or otherwise of the penalty.

(iii) Conclusions

302 Notwithstanding that Hill J’s decision on penalty was discretionary in nature, it must be set aside. It seems to us that his Honour did misdirect himself in giving the weight that he did to what he described as the complexity of the cases and uncertainty of the law prior to the present decision. In any event, the penalty imposed on each respondent was manifestly inadequate. The starting point for consideration is the following finding of Hill J at para 15 of his supplementary judgment:

‘It must be accepted that the conduct engaged in here was serious. It was a deliberate attempt to subvert the consequences of legislation designed to permit parallel imports of non-infringing copies of compact discs. One consequence of the legislation was to increase the competition in compact discs available in Australia. Subverting the legislation inevitably had the consequence of reducing the competition for discs in the catalogue of each respondent corporation to the extent that they were available for purchase overseas and subsequent sale in Australia. Universal and Warner engaged in the conduct they did with the deliberate purpose of preventing parallel importation of non-infringing copies and for the purpose of affecting competition in the market in Australia.’

303 Each corporation is substantial. The findings, at paras 23 and 24 of the supplementary judgment, are as follows:

‘In the 2000 financial year the merged Universal/Polygram company had a turnover of $112 million. Profit after tax in 1998 of Polygram was $7.1 million. Profit of Universal after tax in the financial year ended June 30, 2000 was $2.5 million.

Although the financial results of Warner for the years ending 30 November 2000 and 30 November 2001, in evidence in the present proceedings were unaudited (a matter of criticism on the part of the ACCC) and were merely presented in summary form for the purposes of the penalty proceeding, the evidence showed a substantial pre-tax profit in those years. The figures are the subject of confidentiality orders. A criticism that no detail was given of interest or other expenses paid to the parent companies does not appear to me to be to the point, absent any suggestion that such interest or other expenses as there were, were other than legitimate business expenses.’

304 His Honour disregarded the fact that each corporation was a wholly owned subsidiary of a substantial multi-national company conducting significant overseas operations. We doubt it was correct to do so. But we say no more. The matter was not argued. It is enough to say that Universal and Warner were each substantial participants in a significant industry in Australia. The scale of the industry and the market share of each is indicated above. Hill J found that, in each case, the contravention arose from the conduct of senior management. Neither respondent was entitled to any discount for co-operation, apology or remorse. Neither is entitled to any discount simply because the conduct ceased after ACCC intervention. Each is only to be penalised for the conduct which did take place. Although short-lived, the purpose of that conduct was to snuff out the emergence of a form of competition opened up in the interests of consumers by the amendments to the Copyright Act. On any view, these factors would indicate the need for a substantial penalty to be assessed, bearing in mind the maximum of $10,000,000.

305 Hill J’s choice of amount, which he himself thought to be at the bottom end of the range, is explained only by para 41 of his supplementary judgment, which is set out above. This refers back to the following statement, at para 33 of his supplementary judgment:

‘While the penalty I would propose is reduced to take into account the complexity of the case and the uncertainty of the law prior to the present decision (a factor which here I see as a special consideration) and other matters referred to above, subsequent deliberate conduct of the kind here in question would, far from attracting a discount of this kind, of necessity, give rise to a penalty in a high amount …’ (Emphasis added)

306 Because of its importance to the reasoning of the judge, we set out what he had earlier said, at paras 19 and 20 of the supplementary judgment, relevant to this consideration:

‘Senior counsel for Universal submitted that it was relevant under this heading to note that Universal had obtained legal advice from its solicitors to the effect that it would not be a contravention of the Act to withhold supply (or refuse discounts) to retailers who sold non-infringing copies and that advice was (subject to the acceptance by Universal that the relevant market was the market for CDs generally) to the effect that it was “most unlikely” that PolyGram (as Universal was then called) had a substantial degree of market power. It was submitted by senior counsel for the ACCC that the advice was qualified in that it suggested that it would be dangerous for PolyGram to tell a retailer that it was unwilling to supply or to supply at a higher discount unless the retailer agreed not to sell parallel imported CDs produced by other manufacturers or by manufacturers generally. The letter makes it clear that the ground for this part of the advice was the possibility of the conduct being seen as a “group boycott”. This was not the conduct complained of and I accept the submission of senior counsel for Universal that relevantly the advice was unqualified, save for the fact that the advisers assumed (correctly) that the relevant market was a market for CDs rather than particular CDs.

I should repeat, here, that it is also relevant in determining the penalty that the question whether the conduct in question contravened the Act was a most difficult one on which minds could differ and a question which had not been previously agitated in a Court. In other words this was not a case (as many are) where the conduct in question was not merely deliberate, but such that, if discovered, it constituted a clear contravention. On the other side of the argument, however, is that it is a truism that ignorance of the law is no excuse and it may be said neither is the fact that the contravener (or his legal adviser) believed that the conduct did not contravene the relevant statutory prohibition. However, the existence of the advice obtained by Universal is clearly relevant to the penalty to be imposed upon it, so far as it makes clear that Universal did not deliberately engage in conduct it knew to be an offence. There is also nothing in the evidence which suggests that Warner knew the conduct to be an offence and I am prepared to assume that it did not, particularly having regard to the complexity of the question whether it indeed was.’

307 It appears these factors were either wholly or substantially responsible for Hill J’s decision to discount a ‘penalty in a high amount’ to a penalty ‘clearly at the bottom of the range’. If these factors were relevant at all, we agree with ACCC’s submission that they are entitled to minimal weight.

308 As we have said, the contravening conduct was plainly and deliberately anti-competitive in its intent. It was conduct which, at least, ran a serious risk of being in breach of the Act. If this was appreciated, then the fact that the risk came home against expectations does not entitle the perpetrator to a discount. If the existence of the risk was not appreciated, then the company concerned misunderstood the law applicable to an important area of commerce and would not be entitled to any discount.

309 The fact that legal advice was obtained by one of the parties is also of little consequence. It illustrates that risk was appreciated. However, legal advice is obtained for the benefit of the company and only for the benefit of the company. It is not a discounting factor. If legal advice is wrong, that is a matter between the company and the legal adviser.

310 In our opinion, to give a substantial discount for these factors sends the wrong signal to the commercial community. It will encourage risk-taking and pushing the boundaries of anti-competitive conduct. If, nonetheless, a proceeding is instituted, it will encourage the most vigorous possible defence, in an endeavour to demonstrate the supposed complexity and uncertainty of the law. Many cases of contravening conduct can be described as complex and uncertain as to result. As submitted for ACCC, the Court has recognised in many cases that the difficulty of detecting and proving contraventions of Pt IV of the Act requires adequate penalties to be imposed when contravening conduct is detected and established (Trade Practices Commission v Carlton & United Breweries Ltd (1990) ATPR 41-037 at 51,54; J McPhee & Son (Australia) Pty Ltd v ACCC [2000] FCA 365; 172 ALR 532 at paras 184-185; and ACCC v Simsmetal Ltd [2000] FCA 818; (2000) ATPR 41-764 at paras 16-21). If a company ‘takes the odds’, it must expect serious consequences if it miscalculates. As was said by the Full Court in NW Frozen Foods Pty Ltd v ACCC 71 FCR 285 at 294-295:

‘The Court should not leave room for any impression of weakness in its resolve to impose penalties sufficient to ensure the deterrence, not only of the parties actually before it, but also of others who might be tempted to think that contravention would pay …’

311 For these reasons, the penalties imposed on the two corporations must be set aside. It is appropriate, in the circumstances of these cases, that we fix the appropriate amount. We have the benefit of a comprehensive judgment about penalties, together with submissions from each side. The only new factor is that no contravention of s 46 has been found. However, we note that his Honour treated the contraventions under ss 46 and 47 as a single offence, not separate offences, arising from the same conduct.

312 In imposing the penalty, we shall have regard only to the contravention of s 47. We have already indicated the factors which demand a penalty of a significant amount. In our opinion, any amount less than $1,000,000 in each case is insufficient to mark the seriousness of the conduct and deter these corporations and others from similar conduct in the future. The amount would have been significantly greater if the conduct had occurred over a longer period and/or had a greater actual effect.

Disposition

313 Each of Universal and Warner complain about the form of the orders made. Some adjustments need to be made. The declared contraventions must be limited to breach of s 47 of the Act. Also, it is necessary to change the form of the declarations as to contravention.

314 The principal complaint was directed to the injunction. It was submitted that, if justified at all, it was framed far too widely; it would inhibit lawful bargaining with retailers, amongst whom are some of Australia’s largest companies. In particular, threatening to refuse supply is not a breach of the Act. We agree that the form of the injunction should be modified to follow the form of the declaration of contravention.

315 No argument was put to us concerning costs. In matter N925 of 1999, Hill J ordered Universal and Mr Dickson to pay 75% of ACCC’s costs. Mr Handley was ordered to pay 70%. Presumably, the distinction between Mr Dickson and Mr Handley reflected his Honour’s error concerning Mr Dickson’s involvement in the Compact City incident. No distinction ought to be drawn between the two executives.

316 In matter N924 of 1999, all three respondents were ordered to pay 75% of ACCC’s costs.

317 There is a question about the effect on costs of our conclusion that ACCC has not proved contravention of s 46 of the Act. On one view of the cases, the whole of the evidence concerned a single course of conduct by each corporation. In Hill J’s opinion, that course of conduct contravened both s 46 and s 47 of the Act; in our opinion, only s 47. Nonetheless, it might be said, this would have made little difference to the course of the trial or to preparation for it.

318 There is substance in that view. However, s 46 constituted a major focus of concern at the trial. It must have involved the respondents’ counsel and solicitors doing work that would not have been necessary if they had been confronted only with a case under s 47 of the Act. In order to reflect that circumstance, we think the proportion of costs selected by Hill J should be reduced to 50% and made uniform over all respondents.

319 The parties have sustained mixed fortunes in relation to the appeals. The corporations, and their officers, have succeeded in overturning the finding against them of contraventions of s 46 of the Act. On the other hand, they have failed in relation to s 47. And the penalties imposed on the two corporations have been substantially increased.

320 Taking all these factors into account, we think it would be fair, in each case, to order the relevant corporation and its officers, to pay one-half of the costs incurred by ACCC in respect of the appeals concerning that corporation.

I certify that the preceding three hundred and twenty (320) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Associate:

Dated: 22 August 2003

Counsel for Universal Australia Pty Ltd:	Mr J S Hilton SC Mr A J Payne

Solicitor for Universal Australia Pty Ltd:	Gilbert and Tobin

Counsel for Craig Handley and Paul Dickson:	Mr J S Hilton SC Mr A J Payne

Solicitor for Craig Handley and Paul Dickson:	Gilbert and Tobin

Counsel for Warner Music Australia Pty Ltd, Gary Smerdon and Gregory Maksimovic:	Mr A C Archibald QC Mr R J Wright SC

Solicitor for Warner Music Australia Pty Ltd, Gary Smerdon and Gregory Maksimovic:	Blake Dawson Waldron

Counsel for Australian Competition and Consumer Commission:	Mr J W K Burnside QC Mr S Gageler SC Mr P Renehan

Solicitor for Australian Competition and Consumer Commission:	Australian Government Solicitor

Dates of Hearing:	25, 26 and 27 November 2002

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