Federal Court of Australia

Arrotex Pharmaceuticals Pty Limited v Minister for Health and Aged Care [2025] FCAFC 22

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    There be no order as to costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

1    On 17 May 2024, the primary judge published reasons and made orders that the originating application of Arrotex Pharmaceuticals Pty Ltd, Apotex Pty Ltd and Arrow Pharma Pty Ltd (now the appellants) be dismissed and ordered the appellants to pay the costs of the Minister for Health and Aged Care: Arrotex Pharmaceuticals Pty Limited v Minister for Health and Aged Care [2024] FCA 522 (PJ).

2    The issue before the primary judge concerned the proper construction of s 99ADH(6) of the National Health Act 1953 (Cth) (the Act). In these reasons, each reference to a statutory provision is to the Act, unless otherwise stated. The specific issue was how the average unadjusted price reduction test prescribed by s 99ADH(6) operates. The appellants are each pharmaceutical wholesalers who supply generic brand medicines and are entitled to receive subsidies pursuant to the Pharmaceutical Benefits Scheme (PBS). The purpose of the PBS is to reduce the cost to consumers for particular medicines.

3    Section 99ADH(6) is one component of the legislative framework by which the approved price of an item listed on the PBS, and accordingly the subsidy paid by the Commonwealth in relation to that item, is reduced where there is a sufficient discrepancy between the approved price and the prices paid by pharmacists or other dispensers of medicines.

4    The primary judge summarised the construction issue at PJ [2]-[6]:

The specific question is whether the fact that a price reduction took effect for 84 pharmaceutical items (Relevant Items) on 1 October 2022 means that the “12.5% average unadjusted price reduction test” (12.5% test) set out in s 99ADH(6) of the Act was not satisfied at 1 April 2024. That question turns on construing what is meant by the phrase in s 99ADH(6)(b) “this section did not apply to the brand of the pharmaceutical item in relation to any of those data collection periods”.

That question must be understood in the context of the price disclosure regime in Div 3B of Pt VII of the Act. The purpose of the price disclosure regime in the Act is to provide for mandatory price reductions to the cost of medicines which is aimed at ensuring that the subsidy paid by the Commonwealth under the pharmaceutical benefits scheme (PBS) for a particular medicine more closely reflects the price actually paid for a medicine by a pharmacist or other dispenser. The operation of the scheme and the relevant terms will be defined below.

Put simply, a price reduction can be made pursuant to the 12.5% test in s 99ADH(6) if there have been three consecutive data collection periods, with each collection period being six months, where the “weighted average disclosure price” (WADP) for an item has been at least 12.5%. The data collection periods occur on a rolling basis each year from 1 April to 30 September and 1 October to 31 March. The price reduction can only be made on 1 April or 1 October, or another prescribed day: s 99ADH(2). However, there is a time lag (around two to three months) between the three consecutive data collection periods and the date on which the price reduction can be made because it takes time for the Commonwealth to analyse the data collected from the last collection period and determine the WADP for that period.

The applicants are related companies that supply generic brand medicines that are included on the PBS to wholesaler suppliers of medicine. On the applicants’ construction, s 99ADH “applies” within the meaning of subs (6)(b) to the immediately preceding data collection period before a price reduction was made even if the data from that collection period did not form part of the calculation for that price reduction. The applicants contend that because a price reduction was made on 1 October 2022, a price reduction could not be validly made on 1 April 2024 because there had not been three data collection periods immediately prior to 1 April 2024 where s 99ADH did not apply (ie, a price reduction had not been made). The applicants commenced this proceeding seeking a declaration to that effect.

The respondent (Minister) rejects that construction and contends that the 12.5% test was satisfied on 1 April 2024, notwithstanding the price reduction on 1 October 2022. On the applicants’ case, the next date on which a price reduction could be made if the 12.5% test is satisfied, is 1 October 2024.

5    Her Honour upheld the Minister’s construction.

6    The appellants filed a Notice of Appeal on 30 May 2024. We heard the appeal on 8 August 2024 and reserved our decision. On 23 September 2024, the Court was advised by the legal representatives of the parties that the point of the appeal would be rendered moot on commencement of the National Health Amendment (Technical Changes to Averaging Price Disclosure Threshold and Other Matters) Act 2024 (Cth) (Amendment Act), which Parliament passed on 19 September 2024. The Amendment Act commenced on 26 September 2024. It has retrospective effect from 1 July 2022. The Amendment Act confirms the Minister’s construction of the provisions that had been in issue. In consequence the substantive appeal issue has been rendered moot. The only matter now in issue is the question of costs.

7    Procedural orders were made for the determination of any costs application on the papers. The times were extended on multiple occasions at the request of the parties. The parties have now filed:

(a)    A Statement of Agreed facts dated 8 November 2024;

(b)    Appellants’ submissions dated 22 November 2024;

(c)    Minister’s submissions dated 6 December 2024; and

(d)    Appellants’ reply submissions dated 19 December 2024.

The costs application and parties’ submissions

8    Expressed simply, the appellants seek orders to set aside the costs decision of the primary judge and to require the Minister to pay the costs of both the proceeding before the primary judge and the appeal on an indemnity basis. Understandably, the Minister resists and submits that the appeal should be dismissed with no order as to costs.

9    The appellants make four submissions.

10    First, they would have succeeded in the appeal on their construction argument as to the meaning and effect of s 99ADH(6) but for the Amendment Act. The Amendment Act retrospectively inserted an example to s 99ADH(6) to clarify its meaning, and added subs (8) and (9) as avoidance of doubt provisions “validating the Minister’s construction of subs (6)”.

11    Second, in any event, it need not be found that the appellants would have succeeded in the appeal. The Minister acted unreasonably by failing to disclose to the appellants the intention of the Government to amend the Act to validate the Minister’s construction. As a matter of timing, the appellants filed their originating application on 3 April 2024 and requested an expedited hearing. The request was granted, and the primary judge heard the application on 2 May 2024. Her Honour delivered judgment on 17 May 2024. What was not then known to the appellants was that the Minister’s Department made an internal decision on 17 April 2024 to seek approval to develop an amendment to clarify the meaning of the provision in issue. Had that fact been disclosed, the submission is that “no rational person in the appellants’ position would have incurred the substantial costs of futile proceedings knowing that the government was always going to reverse any success they might have had”.

12    Third, and relatedly to the second submission, whilst the appellants acknowledge that the general rule is that no order for costs is made in cases where a government litigant secures an alteration to the law during the conduct of the proceeding, that general rule is, and should in this case be, displaced when a government litigant acts unreasonably. Primary reliance is placed on Australians For Sustainable Development Inc v Minister for Planning (No 2) [2011] NSWLEC 70.

13    The submission continues that the Minister in this case did not comply with the obligation to act as a model litigant as set out in Appendix B to the Legal Services Directions 2017, as made pursuant to s 55ZF of the Judiciary Act 1903 (Cth). Specifically, the submission is that the Minister did not conduct the proceeding and the appeal by endeavouring to avoid, prevent and limit the scope of legal proceedings wherever possible and by keeping the costs to a minimum: cl 2(d) and (e) of the Legal Services Directions. The Minister has not explained why the National Health Amendment (Technical Changes to Averaging Price Disclosure Threshold and Other Matters) Bill 2024 (Cth) (Amending Bill) “could not have been introduced before the appellants incurred the legal costs of the hearing on 8 August 2024”. Had the effect of the proposed amendments been disclosed, the appellants could, and would, have “reconsidered their position” before the substantial costs of the appeal were incurred.

14    Fourth, the last submission extends to the costs of the proceeding before the primary judge.

15    In opposing the costs applications, the Minister submits that first, the purpose of the Amendment Act was to clarify, not alter, the operation of the law. Second, whilst acknowledging that the passing of legislation during the course of the appeal “is an unusual circumstance”, it is not one that attracts a costs order. Rather, this is a case where the prosecution of the appeal became futile with the consequence that, absent a finding of unreasonable conduct, no order for costs should be made: Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6;(1997) 186 CLR 622, McHugh J.

16    Third, there is no proper basis to conclude that the appellants would have succeeded in the appeal.

17    Fourth, the Minister acted reasonably. The Amendment Act was not, as characterised by the appellants, a “practical inevitability” from 17 April 2024 or alternatively from 14 or 29 May 2024. There is no basis to infer that any amending bill would have been drafted by 29 May 2024, or that if drafted it would be introduced to Parliament or that it would ultimately have been enacted. If judgment in the appeal had been given prior to 21 August 2024, that may have changed the calculus of the proposed amendments.

18    Fifth, the unreasonableness submissions of the appellants overlook the fact that the Minister, and his Department, were obliged to maintain the confidentiality of new policy proposals and draft legislation. Acceptance of the appellants’ disclosure submissions “could have extraordinary and far-reaching consequences” for the confidentiality of the legislative process.

19    Finally, Sustainable Development is readily distinguishable on factual and legal grounds.

Resolution

20    We reject the first submission that the appellants would have succeeded in the appeal. By the end of the appeal hearing, we had concluded that the primary judge correctly construed the provisions in issue at PJ [47]-[55]. This appeal does not raise the difficulty of hypothetical speculation as to the outcome: cf Lai Qin at 624. The reasons why may be shortly explained.

21    The Commonwealth subsidises pharmaceuticals by making payments to pharmacists for dispensing items listed on the PBS. These payments are regulated by the Act, together with the National Health (Pharmaceutical Benefits) Regulations 2017 (Cth) (the Regulations).

22    Before amendment, s 99ADH relevantly provided:

99ADH Price reduction based on information provided under the price disclosure requirements

When this section applies

(1)     This section applies if:

(a)    under section 99ADB, the Minister determines the weighted average disclosed price of a brand of a pharmaceutical item (the WADP brand) in respect of a data collection period for the brand; and

(aa)    the Minister, by legislative instrument, determines a day (the reduction day) for the purposes of this section in relation to the brand of the pharmaceutical item; and

(b)    a price agreement or price determination is in force in relation to the brand of the pharmaceutical item on the reduction day; and

(c)    the unadjusted price reduction for the brand of the pharmaceutical item is:

(i)    if section 99ADHC does not apply to the brand of the pharmaceutical item—at least 10%; or

(ii)    subject to subparagraph (iii), if section 99ADHC applies to the brand of the pharmaceutical item and the approved ex-manufacturer price of the brand of the pharmaceutical item is more than $4—at least 30%; or

(iii)    if section 99ADHC applies to the brand of the pharmaceutical item, the approved ex-manufacturer price of the brand of the pharmaceutical item is more than $4, and the brand of the pharmaceutical item has passed the 12.5% average unadjusted price reduction test set out in subsection (6) of this section—at least 10%.

(2)     For the purposes of paragraph (1)(aa), the reduction day must be:

(a)    1 April or 1 October in any year; or

(b)    another prescribed day.

Price reduction

(3)    If, on the reduction day, the approved ex-manufacturer price of the brand of the pharmaceutical item would, apart from this section, be higher than the adjusted approved ex-manufacturer price of the brand of the pharmaceutical item, then, on the reduction day, the amount of the approved ex-manufacturer price is taken to be reduced to the amount of the adjusted approved ex-manufacturer price for the purposes of the price agreement or price determination.

…

12.5% average unadjusted price reduction test

(6)    For the purposes of this section, a brand of a pharmaceutical item passes the 12.5% average unadjusted price reduction test if there have been 3 consecutive data collection periods in respect of which a weighted average disclosed price has been determined for any brand of the pharmaceutical item, where:

(a)    the percentage obtained by dividing the total of the unadjusted price reductions for a brand of the pharmaceutical item in respect of each of those data collection periods by 3 is at least 12.5%; and

(b)    this section did not apply to the brand of the pharmaceutical item in relation to any of those data collection periods; and

(c)    those data collection periods include the data collection period mentioned in paragraph (1)(a).

23    The Amendment Act inserted:

1    At the end of subsection 99ADH(6)

Add:

Example:  The 12.5% average unadjusted price reduction test was passed using data from the data collection periods ending on 30 September 2022, 31 March 2023 and 30 September 2023. A price reduction occurred on 1 April 2024. The next reduction day for which the 12.5% average unadjusted price reduction test could be passed would be 1 October 2025, using data from the data collection periods ending on 31 March 2024, 30 September 2024 and 31 March 2025.

2    At the end of section 99ADH

Add:

(8)    For the purposes of paragraph (6)(b), this section did not apply to the brand of the pharmaceutical item in relation to any of those data collection periods if the approved ex - manufacturer price of the brand of the pharmaceutical item had not been reduced under subsection (3) as a result of calculations using data from any of those 3 data collection periods.

(9)    Subsection (8) is included to avoid doubt.

24    Each brand of a pharmaceutical item listed on the PBS has an approved ex-manufacturer price, being the appropriate maximum price under either a price agreement between the Minister and the responsible person, or a price determination made by the Minister: ss 84(1), 85AD, 85B. Subsidy payments made by the Commonwealth to pharmacists for dispensing a pharmaceutical item are determined by, among other things, the approved ex-manufacturer price of that item. The legislative scheme contains mechanisms by which the approved ex-manufacturer price may be reduced. Section 99ADH is one such mechanism, operating to reduce the approved ex-manufacturer price based on information provided under the price disclosure requirements. The price disclosure requirements are governed by ss 99ADC and 99ADD and reg 85. In essence, these provisions impose an obligation on the responsible person to provide various price and sales data in relation to the supply of a brand of a pharmaceutical item in each data collection period.

25    The data collection periods are generally 1 April to 30 September and 1 October to 31 March each year: reg 85(9). A responsible person must provide the data within six weeks of the end of the collection period. The data from a collection period (DCP 1) will be analysed in the collection period following that from which it was collected (DCP 2) and may subsequently have price reduction consequences in the period following that (DCP 3).

26    Against that background, the primary judge construed the statutory scheme at PJ [48]-[63] as follows:

Subs (6)(b) provides that the 12.5% test is satisfied “if there have been 3 consecutive data collection periods” where the WADP has been determined and, critically, “this section did not apply to the brand of the pharmaceutical item in relation to any of those data collection periods”. Section 99ADH will have applied to a data collection period if a price reduction has been made in relation to that period. I consider that the section will have applied “in relation to” a data collection period if the data from that collection period was used to form part of the calculation of the 12.5% test that led to the price reduction.

I accept the Minister’s explanation of the differences in meaning between “in respect of” and “in relation to”. The test in s 99ADH(6) is not a specific calculation “in respect of” a specific data collection period; rather, it asks whether the section applied to the preceding data collection periods. That is a slightly different and broader question than a simple calculation in respect of a certain period. That understanding of how “in relation to” is used in s 99ADH(6) is consistent with its use in other parts of the Act such as ss 85(2), 85(5), 90A(1), 99ABC(5), 99ACB(2) and 99ACD(1A). For example, s 85(2) provides that “[t]he drugs and medicinal preparations in relation to which this Part applies are drugs and medicinal preparations that are declared by the Minister”. Section 90A(1) similarly provides “[t]his section applies in relation to a decision of the Secretary under section 90...”. I give this slight difference in meaning only some weight in construing s 99ADH(6)(b). However, it explains the difference in language whilst otherwise maintaining fidelity to the operation of the section (which the applicants’ explanation of the difference in meaning does not).

“Data collection period” is defined in s 99ADBA(4) such that there are two data collection periods: one period is from 1 April to 30 September, the other period is from 1 October to 31 March. Section 99ADBA does not refer to “Price Disclosure Cycles” or a data collections period’s “associated calculation period”.

The price reduction at issue in this proceeding was made on 1 April 2024. The data collection period immediately prior to 1 April 2024, DCP 7, could not be included as one of the three data collection periods as the data from DCP 7 had not by 1 April 2024 been analysed to calculate the WADP for that period. There is no dispute that s 99ADH did not apply to DCP 5 or DCP 6 as no price reduction was made in relation to either of those periods. In my view, s 99ADH also did not apply to DCP 4.

The price reduction on 1 October 2022, the last price reduction before the impugned reduction on 1 April 2024, was made in relation to DCP 1, DCP 2 and DCP 3. The price reduction could not have been made “in respect of” data collected from DCP 4 because, on 1 October 2022, the data from DCP 4 had not yet been analysed. Therefore, no price reduction was made based on the data from DCP 4 and therefore s 99ADH did not apply “in relation to” that period. That construction of s 99ADH(6)(b) is consistent with the text of the provision, when considering its context and purpose.

The applicants’ reliance on the definition of “Price Disclosure Cycles” in the Strategic Agreements is the clearest support of their construction that a price reduction under s 99ADH(6) can only occur if there have been “3 consecutive data collection periods” and a further associated calculation period in which there was no price reduction (and therefore a minimum of two years between price reductions). There are a number of problems with that approach.

First, not only does the text of the Act not say that price reductions must be at least two years apart, but nor does the Explanatory Memorandum to the Amendment Act explicitly say this.

The language of “Price Disclosure Cycles” is also not language picked up by the Act. The applicants’ construction replaces the statutory words “data collection periods”, which are six months each, with “Price Disclosure Cycles” which are 12 months each. That is how on the applicants’ construction the price reduction on 1 October 2022 fell within DCP 4: DCP 4 does not simply run from 1 April 2022 to 30 September 2022 but runs from 1 April 2022 to 1 April 2023 when taking into account the associated calculation period (and thus, perhaps, would be more aptly named “Price Disclosure Cycle 4” instead of “DCP 4”).

I consider that the applicants’ construction is inconsistent with the text of s 99ADH(6). Their construction essentially seeks to add the following bolded words into that provision:

a brand of a pharmaceutical item passes the 12.5% average unadjusted price reduction test if there have been 3 consecutive data collection periods plus their associated calculation periods in respect of which a weighted average disclosed price has been determined for any brand of the pharmaceutical item, where:

Such a construction based on implication should be rejected.

The applicants’ focus on the relevant “reduction day” as the basis for assessing whether “this section did not apply” pursuant to subs (6)(b) is also not supported by the text of s 99ADH. Subs (1)(aa) refers to “reduction day”. However, subs (6)(b) does not pick up this language of “reduction day”. Subsection (6)(b) describes the relevant relationship for the purposes of the 12.5% test as between the section and the data collection periods, not between the section and reduction days.

Second, the applicants’ heavy reliance on the Strategic Agreements is misplaced. The Strategic Agreements are contractual documents that, although as the Explanatory Memorandum notes they are sought to be implemented by the Amendment Act, cannot prevail over the language of the text of the statute to the extent of any inconsistency. The Minister also pointed to parts of the Strategic Agreements that support his construction. In my view, the Strategic Agreements have crumbs for both sides to latch onto: the reference to “(1.5 years)” for the Minister or the definition of “Price Disclosure Cycles” including the “associated calculation period” for the applicants. The Strategic Agreements do not unambiguously support one parties’ construction over the other and ultimately the Minister’s construction, unlike the applicants’ construction, is not dependent on the Strategic Agreements.

Third, the applicants’ reliance on purpose does not assist their construction. The parties seemed to agree that the purpose of subs (6)(b) was to ensure the security of supply and prevent price reductions occurring too frequently. However, that purpose is neutral as to which construction should be preferred. It is not apparent from the text or context of the Act why 18 months is too short to secure supply but two years is an appropriate amount of time.

A further issue with the applicants’ construction is that it is inconsistent with the rolling, cyclical nature of price reductions contemplated by s 99ADH(6).

On the applicants’ construction of s 99ADH(6)(b), the data from the data collection period immediately preceding a price reduction could never be used to form part of the 12.5% test and contribute to a price reduction. Such data from these collections periods therefore becomes irrelevant or, in Senior Counsel for the Minister’s words, a “zombie period”. The Minister submits that companies may be able to “game” the system if a certain data collection period will never be included in the 12.5% test by deliberately selling large amounts of medicines during this period at a steep discount without such discounting leading to a price reduction under s 99ADH(1)(c)(iii). The gaming argument really goes nowhere as there was no evidence that it was even possible for companies to game the system in the way proposed by the Minister. It is unnecessary to address that argument any further as I accept the Minister’s construction for other reasons.

It is an unusual result of the applicants’ construction that the data from some data collection periods are irrelevant and cannot form part of the 12.5% test. There is no explicable or good reason for that result. The purpose of these provisions is to ensure that the subsidised price of medicine is aligned with the market price. That purpose is served by the data from every data collection period being utilised for the 12.5% test because it ensures that there is no distortion in the data by ignoring one data collection period, whether that distortion is caused by “gaming” or any other factor. The applicants’ construction interrupts the rolling, cyclical approach to price reductions that is set up by s 99ADH where every data collection period can be used to inform the 12.5% test. This unusual consequence is not, on its own, a reason to reject the applicants’ construction. However, it is another reason to prefer the Minister’s construction which is harmonious with the rolling data collection and price reduction scheme.

27    The appellants’ notice of appeal comprised a single ground to the effect that the primary judge erred in that construction of s 99ADH(6). As developed in written submissions, the argument was that s 99AH applied “in relation to” DCP 4 because:

[T]he calculation of the UPR for DCP 4 uses the applicable AEMP prevailing in the calculation period for DCP 4 (which is DCP 5). The applicable AEMP during DCP 5 was affected by price disclosure reduction; that is s 99ADH applied (DCP 5) to reduce the applicable AEMP relevant to the calculation of the UPR (for DCP 4), which is an input to the 12.5 % test.

28    Without the need to decipher the initialisms, this devolves into a question about the meaning of the phrase “in relation to” in s 99ADH(6)(b). More particularly, it raises the question whether the phrase has a different meaning from the phrase “in respect of” in s 99ADH(1)(a) and (6)?

29    In our view, it does not and the primary judge reached the correct conclusion.

30    The process by which the data disclosed under the price disclosure requirements is utilised to determine whether a reduction to the approved ex-manufacturer price will occur is somewhat convoluted, but may be concisely expressed as follows:

(a)    The initial price is the approved ex-manufacturer price (s 84) which is adjusted in accordance with other provisions, including s 99ADH.

(b)    The calculated weighted average disclosed price for a pharmaceutical item within a data period is compared to the applicable approved ex-manufacturer price. This occurs on a ‘reduction day’. A reduction day is generally 1 April or 1 October in a given year: s 99ADH(1)(aa) and (2).

(c)    The applicable approved ex-manufacturer price is the approved ex-manufacturer price on the day immediately after a collection period (the ‘relevant day’) as opposed to the prevailing approved ex-manufacturer price during the relevant collection period. For example, following a data collection period running from 1 April to 30 September the applicable approved ex-manufacturer price is the approved ex-manufacturer price on 1 October, while the data feeding into the weighted average is that from 1 April to 30 September. The applicable approved ex-manufacturer price may be less than the prevailing approved ex-manufacturer price during the relevant collection period if a price reduction has occurred as a result of data from previous collection periods.

(d)    As the approved ex-manufacturer price sets the price ceiling, the weighted average disclosed price will not be higher than the applicable approved ex-manufacturer price, but may be lower.

(e)    The comparison of the applicable approved ex-manufacturer price and the weighted average disclosed price allows the unadjusted price reduction to be obtained. This is expressed as a percentage. To illustrate, if the applicable approved ex-manufacturer price is $100 and the weighted average disclosed price is $80, the unadjusted price reduction is 20%.

(f)    The unadjusted price reduction is then applied to the test set out in s 99ADH(1) to determine if a price reduction should occur. If the reduction is to take place, this will occur on the reduction day as outlined at B above.

31    Section 99ADH(1)(c) sets out three conditions for a price reduction to be made under s 99ADH.

32    First, by operation of subs (1)(c)(i), if s 99ADHC does not apply to the brand of the pharmaceutical item and the unadjusted price reduction is at least 10%.

33    Second, by operation of subs (1)(c)(ii) (subject to subs (1)(c)(iii)) if s 99ADHC applies to the brand of the pharmaceutical item, the approved ex-manufacturer price of the brand of the pharmaceutical item is more than $4 and the unadjusted price reduction is at least 30%. The price reductions under subs (1)(c)(i) and (ii) may occur on a rolling basis every six months if the respective 10% or 30% threshold is met.

34    The third condition (in subs (1)(c)(iii)) is that the unadjusted price reduction is at least 10%; s 99ADHC applies to the brand of the pharmaceutical item; the approved ex-manufacturer price of the brand of the pharmaceutical item is more than $4; and the brand of the pharmaceutical item has passed the 12.5% average unadjusted price reduction test set out in s 99ADH(6).

35    The fate of the appeal turned on the proper construction of s 99ADH(6), and specifically the meaning of the phrase “this section did not apply to the brand of the pharmaceutical item in relation to any of those data collection periods” in s 99ADH(6)(b).

36    It is apparent that s 99ADH applies if the Minister has determined the weighted average disclosed price of a brand in respect of a data collection period for the brand: s 99ADH(1). The appeal raised no issues about the matters required by s 99ADH(1)(aa) or (b). Section 99ADH(1)(c) is one of the requirements for the section to operate.

37    The first condition (in s 99ADH(c)(i)) had no application to the appeal.

38    The second, in s 99ADH(c)(ii), has a number of moving parts. The first moving part is that the approved ex-manufacturer price must have been more than $4. We emphasise that the unadjusted price reduction compares the difference between the applicable approved ex-manufacturer price being the approved ex-manufacturer price of the brand on the relevant day and the weighted average disclosed price of the brand of the pharmaceutical item.

39    By way of example, if the approved ex-manufacturer price of a drug as at 30 September 2022 is $120 (and therefore greater than $4), the applicable approved ex-manufacturer price on 1 October 2022 is $100 and the weighted average disclosed price determined during a data collection period ending on 30 September 2022 is $50, then the unadjusted price reduction expressed as a percentage is $50 of $100 therefore 50%. Under those circumstances the second scenario in s 99ADH(1)(c)(ii) operates so that the section applies.

40    Relevant to this second scenario is that it applies to the weighted average disclosed price which has been ascertained during a single data collection period (i.e. six months).

41    The third condition, in s 99ADJ(c)(iii), is where the approved ex-manufacturer price is more than $4, and the brand passes the 12.5% average unadjusted price reduction test set out in subs (6) and the unadjusted price reduction is at least 10%. The reference to the 12.5% average unadjusted price reduction test necessarily involves the totalling of unadjusted price reductions for a brand over three periods and then dividing the total by the number of periods to give an average. That is what we see in subs (6).

42    It is immediately apparent therefore that there are, at least for the purposes of this exercise, two entirely separate regimes being those in s 99ADH(1)(c)(ii) and (c)(iii). It may well be that in principle (on the mathematics) the requirements of both those regimes are met, however subs (6)(b) is such that (in the circumstances of this matter), if s 99ADH(1)(c)(ii) applies to the brand in relation to any of the data collection periods the subject of s 99ADH(1)(c)(iii), then the 12.5% average unadjusted price reduction test does not apply. That means that if s 99ADH(1)(c)(ii) applies, there is no room for the 12.5% average unadjusted price reduction test to apply.

43    Turning to the 12.5% average unadjusted price reduction test itself, this requires the following steps to be undertaken:

(1)    determining a weighted average disclosed price for three consecutive data collection periods, which involves calculating the weighted average disclosed price of the brand for each of the three data collection periods, adding them up and dividing the total by three to give an average;

(2)    determining the difference between the weighted average disclosed price obtained in step one with the applicable approved ex-manufacturer price to arrive at the unadjusted price reduction;

(3)    calculating the unadjusted price reduction as a percentage of the applicable approved ex-manufacturer price (subs (6)(a));

(4)    determining whether the figure calculated in the third step is at least 12.5% (subs (6)(a));

(5)    ensuring the section did not apply to the brand in relation to any of those data collection periods (subs (6)(b)); and

(6)    lastly, ensuring that at least one of the data collection periods being considered includes the data collection period in s 99ADH(1)(a) and in which the Minister has determined the weighted average disclosed price of a brand (which is the brand in question).

44    Against that background, there is no difference between the expressions “in respect of” and “in relation to”. With respect, the appellants’ arguments sought to unnecessarily complicate the construction question by making much of the difference between the use of “in respect of each of those data collection periods” in subs (6)(a) or “in respect of a data collection for the brand” in subs (7) and “in relation to any of those data collection periods” subs (6)(c).

45    Looking at the text, it is clear that in subs (6)(a) the clause is requiring the addition of the unadjusted price reductions over three data collection periods and then a division by three. The subsection is not ambiguous.

46    So too, looking at the text, it is clear that in subs (6)(b), the carveout is that s 99ADH has not applied to the brand in relation to any of those three data collection periods. Again, the subsection is not ambiguous. The same may be said for subs (7).

47    The context is easily enough ascertained from the section and indeed the remainder of the Act dealing with pricing in the sense that it is aimed at ensuring that the subsidy which is paid to pharmacists by the Commonwealth under the PBS does not result in a windfall to those pharmacists in circumstances where the price of the drug being provided by the relevant person has been reduced from the applicable approved ex-manufacturer price by way of discount or incentive.

48    We also note the observations of Emeritus Professor Pearce in the most recent edition of his text, Statutory Interpretation in Australia (10th ed, LexisNexis, 2024), at [12.7] that connecting phrases like “in respect of’, ‘in relation to’, ‘relating to’, ‘related to’ and ‘with respect to’” do not seem to have been interpreted differently in the case law. Professor Pearce noted that Toohey J in Smith v Federal Commissioner of Taxation [1987] HCA 48; (1987) 164 CLR 513 at 533 “queried, without pursuing further” whether the phrases were synonymous, but that was the only instance he could find of any expression of doubt. Moreover, he considered it was “unlikely” that a court would hold that there was any substantive difference in meaning between the various phrases.

49    One further point should be made. The appellants emphasised before us the strategic agreements between the industry representatives and the Minister. The short answer is that the agreements are background material which assist in understanding the scheme; they do not determine the meaning of statutory text, where in truth the asserted ambiguity in the text does not exist.

50    It follows that the Amendment Act did not alter the law and, at least for the disposition of this proceeding, was unnecessary. Absent the Amendment Act, the appeal would have been dismissed with the usual event costs order.

51    The second and third submissions of the appellants reduce to a contention that it was unreasonable at the time for the Minister to not disclose after 17 April 2024, that the Department had internally decided to develop a potential amendment to clarify the effect and operation of s 99ADH(6), which deprived the appellants the opportunity of reconsidering their position.

52    What is not exposed by that submission is that the appellants from the outset contended for a wrong construction of the statutory scheme; one preferable to the advancement of their own economic interests. The Minister had, before the filing of the originating application, made plain the Department’s interpretation of the provisions. On 8 June 2022, the Department published an updated version of the PBS price disclosure guidelines, including guidance as to the amendments that were to take effect on 1 July 2022. On 19 December 2023, the National Health (Weighted Average Disclosure Price – April 2024 Reduction Day) Determination 2023 (Cth) was issued in relation to the relevant items enabling a price disclosure reduction on 1 April 2024. On 11 January 2024, the appellants lodged a dispute with the Department regarding the 1 April 2024 price disclosure reduction for the relevant items. On 29 February 2024, the Department notified the appellants of the outcome of the dispute; adverse to their claims. Throughout the proceedings before the primary judge and the appeal, the Department’s position did not alter. The purpose of the amendments was expressed to be “for the avoidance of doubt”, and properly so.

53    The appellants’ litigation was commenced to advance their economic interests. They stood to gain substantially if they had succeeded. Without the Amendment Act, the appeal would have been dismissed and costs would have followed the event. In the events as they have occurred, the commencement of the Amendment Act has caused the Minister to offer the concession that the appeal be dismissed with no order as to costs. The appellants are therefore in a better position than they would otherwise have been in if the amendments had not been formulated and ultimately enacted.

54    While one may be concerned as to why the Minister’s Department did not alert the appellants to the likelihood that amendments may be formulated to confirm the Minister’s interpretation, there are two satisfactory answers.

55    One, as the Minister submitted, is that the outcome of the intended legislative clarification was uncertain until the Amending Bill was passed by Parliament on 19 September 2024, after the hearing of the appeal. We also accept the Minister’s submission that it was reasonable for the Minister to maintain the confidentiality of the proposed amendments until receipt of Cabinet approval to disclose or the first reading of the Amending Bill on 21 August 2024, which was also after the hearing of the appeal.

56    The other is that the contended failure does not in our view rise to the threshold level of unreasonable conduct by the Minister: “deserving of criticism and resulting in greater expense to the innocent party”: Clifton (liquidator) v Kerry J Investment Pty Ltd (No 2) [2020] FCAFC 112; (2020) 277 FCR 382 at [31] Besanko, Markovic and Banks-Smith JJ. The appellants’ arguments were wrong from the outset, the Minister’s interpretation was well-known before the commencement of the proceeding and the amendments did not alter the law. It was never suggested that the Minister’s opinion about the meaning and operation of the relevant provisions was not genuinely held.

57    The appellants’ reliance on the model litigant obligations does not advance the indemnity costs application. The asserted failure by the Minister to act in accordance with the obligation of the Commonwealth to act as a model litigant relies on no new factual matter and does not explain why the various obligations in Appendix B to the Legal Services Directions are separately engaged. The submissions do not address s 55ZG(2) and (3) of the Judiciary Act (compliance is not enforceable except by or upon application by the Attorney-General and the issue of non-compliance may not be raised in any proceeding except by or on behalf of the Commonwealth). Nor did the submissions address the reasoning of Gray J in Australian Competition & Consumer Commission v Leahy Petroleum Pty Ltd [2007] FCA 1844 at [25]:

There were some suggestions in argument that orders for indemnity costs against the ACCC might be appropriate because it had failed in some respects to act in accordance with the model litigant policy of the Commonwealth of Australia. In my view, considerations as to whether there has been compliance with that policy are irrelevant to questions of indemnity costs. The model litigant policy has been adopted by the Australian Government as a guide to the manner in which it and its agencies should conduct themselves in litigation, so as not to take advantage of the superiority of resources for litigation, which the Commonwealth often has when compared with those against whom it is litigating. The policy is of significant value to parties against whom the Commonwealth is involved in litigation, and to the courts in which that litigation is conducted. To use lapses in compliance with the policy as a ground for awarding indemnity costs against Commonwealth agencies might have the result that the Commonwealth abandoned the policy. This would be detrimental to the public good.

58    Ultimately, however, it is unnecessary for us to resolve whether non-compliance with the model litigant obligations may be considered in the exercise of the discretion to make an indemnity costs order, because we are not satisfied that the conduct relied on meets the required threshold in any event.

59    The appellants’ reliance on Sustainable Development does not support their application. As the Minister correctly submits, that case concerned the making of a ministerial planning instrument which changed the law and where, but for the change, the applicant would have succeeded: [9]. This caused Biscoe J to observe that the case was “unusual” and for that reason was to be distinguished from those where Parliament alters the law before a hearing: [9] and [11].

60    Taking all of these matters into account, we are not persuaded that, examined in the light of what was known at the time, the Minister acted unreasonably in not affording to the appellants the opportunity of reconsidering their position. The appellants were determined litigants with significant economic interests at stake and who, with respect, contended for an incorrect construction of the legislative provisions.

61    For these reasons, we refuse the appellants’ costs applications. The appropriate order in the circumstances is that sought by the Minister.

Associate:

Dated:    13 March 2025