FEDERAL COURT OF AUSTRALIA

Melway Publishing Pty Ltd v Robert Hicks Pty Ltd [1999] FCA 664

TRADE AND COMMERCE – restrictive trade practices – misuse of market power – manufacturer of street directories – distribution through wholesalers – wholesale distribution systems divided retail market into segments – distributors had exclusive rights to distribute in their segment – manufacturer refused to supply directories to a person who was not a distributor – whether manufacturer had a substantial degree of market power – whether manufacturer used market power for proscribed purpose – significance of legitimate business reason for refusal to supply

Trade Practices Act 1974 (Cth) s 46(1)

Aspen Skiing Company v Aspen Highlands Skiing Corporation 472 US 585 (1985) cited

Byars v Bluff City News Co 609 F 2d 843 (1979) cited

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

Hall v Busst (1960) 104 CLR 206 applied

Natwest Australia Bank Ltd v Boral Jarrard Strapping Systems Pty Ltd (1992) ATPR 41-196 applied

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

MELWAY PUBLISHING PTY LTD v ROBERT HICKS PTY LTD (TRADING AS AUTO FASHIONS AUSTRALIA)

NO. VG 638 of 1998

HEEREY, SUNDBERG AND FINKELSTEIN JJ

20 MAY 1999

MELBOURNE

THE COURT ORDERS THAT:

1. The appellant be granted leave to appeal.

2. The appeal be dismissed with costs, including reserved costs.

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

REASONS FOR JUDGMENT

HEEREY J:

1                     The appellant Melway Publishing Pty Ltd (Melway) has for some 30 years published the Melway street directory for the Melbourne Metropolitan area. The product has been extremely successful. It has achieved some 80 to 90 per cent of the retail market for Melbourne street directories. Its only significant rivals, UBD and Gregory, have something of the order of 5 per cent each.

2                     Except for a 16 month period in 1989-90, Melway has always distributed the Melway directory through wholesalers who each deal with a particular segment of the retail market. Broadly speaking these segments are:

·          newsagents and bookshops;

·          service stations;

·          office stationers;

·          authorised car dealers; and

·          automotive parts retailers.

3                     The respondent, Robert Hicks Pty Ltd, trading as Auto Fashions Australia (Auto Fashions), was the distributor for the last mentioned segment.

4                     On 2 February 1995 Melway gave notice of termination of Auto Fashions’ distributorship, effective 30 June 1995. Prior to the termination notice the proprietors of Auto Fashions, Mr Ray Pawsey and Mr William Nagel, had a falling out. Mr Nagel left to commence his own business. The trial judge found that the dominant reason for replacing Auto Fashions was Melway’s belief that Mr Nagel’s new company Beyond Auto Pty Ltd could “do a better job”.

5                     In March 1995 Auto Fashions offered to acquire 30,000 to 50,000 Melway directories per annum on the basis that it would sell to any retailers, irrespective of segment. Melway declined to supply.

6                     The learned trial judge (Merkel J) held that the conduct of Melway in refusing to supply Auto Fashions contravened s 46(1) of the Trade Practices Act 1974 (Cth) (the Act). That section provides:

“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

(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.”

The judgment below

7                     His Honour’s judgment is now reported at (1999) 42 IPR 627. After referring to evidence of Melway’s Marketing Manager, Mr Brian Lane, and a director, Mr Murray Godfrey, his Honour made the following findings (at 635):

“(1) Melway believed that its current wholesale distribution system provided for an appropriately regulated, orderly marketing and distribution of Melway street directories. In particular, Melway believed that the appointment of distributors as exclusive distributors in respect of particular segments of the market for Melbourne street directories enabled it to maximise sales of its street directories.

(2) It is difficult to ascertain the basis for Melway’s belief other than that its experience was that its system had worked well for it. In substance, Melway’s view was that freedom from competition in each allocated segment offered a necessary incentive to the distributor to exploit the segment to maximise its sales. That factor, plus the alleged expertise of distributors in relation to their segment, was said by Melway to have resulted in maximising overall sales of the Melway directory.

(3) There was considerable uncertainty as to the consequences that might follow if Melway’s current distribution system was dismantled. Melway was of the view that replacement of the present system by a different system in which appointed distributors competed generally for retailers’ business in the wholesale market for Melway street directories would be harmful to its business and ought to be resisted.

(4) The evidence does not enable me to form any view as to whether the dismantling of the current system would be likely to be harmful or beneficial to Melway’s business. If it be relevant, I do accept that Melway’s resistance to changing the existing system was because it was satisfied that that system constituted a reasonable commercial regulation of its distribution system in order to maximise sales of its directories.

(5) Although Melway requested Auto Fashions to supply it with information in relation to the quantity and terms on which it wished to obtain supply of the Melway directories, Melway did not intend to supply directories to Auto Fashions after the termination of its distributorship.

(6) Godfrey and Lane, who were involved in Melway’s decision to refuse supply, appreciated that it was the intention of Auto Fashions to sell any directories supplied by Melway to existing retail customers of Auto Fashions and new retail customers without regard to the market segment in which the retailers operated. They also appreciated that the supply of directories to Auto Fashions on that basis would be inconsistent with the maintenance of the distribution system established by Melway which protected the distributors from competition from other distributors within their allocated market segments.

(7) A reason proffered by Godfrey and Lane for the refusal of supply to Auto Fashions was that Auto Fashions was no longer an appointed distributor of Melway street directories as Beyond Auto Pty Ltd had replaced it as a distributor in the automotive parts market segment. However, Godfrey conceded that there were no reasons in his mind for refusing supply to Auto Fashions other than that he did not want competition on the part of Auto Fashions for the customers of existing distributors. Godfrey also said that he refused to supply Melway street directories to Auto Fashions as the supply would be basically dismantling the existing wholesale distribution system. Lane was not prepared to concede that either concession represented his view which was that the ‘prime reason’ for the refusal was that he was satisfied with the existing distribution system.

(8) The order by Auto Fashions for 30,000 to 50,000 directories was acknowledged by Lane to be a ‘big order’ for Melway. It is unlikely that supply would have been refused if Auto Fashions had agreed not to compete with the current Melway distributors by only selling directories to retailers which were not in any of the segments allocated to those distributors. Lane conceded that he would be delighted to sell 50,000 directories to a person who would not be competing with his existing distributors.

(9) Melway did not intend, and refused to supply Auto Fashions with Melway street directories after the termination of its distributorship, as it did not want Auto Fashions to compete for customers with its appointed distributors in their allocated market segments.”

8                     After referring to the definition of market in s 4E of the Act and a number of authorities his Honour made the following finding (at 638):

“In my view, the relevant market in the present case is a market for street directories. The wholesale and retail activities in that market are closely linked; retail prices have tended to influence wholesale prices and whether publishers sell to wholesale distributors or directly to retailers is a matter of choice. Further, some wholesalers also sell directories by retail and the barriers between the wholesale and retail activities are minimal. In reality, there is no retail market for directories as such; they are sold in diverse retail segments as an integral part of a more general product range in each segment. In these circumstances, the relevant functional market for the purposes of s 46 is the wholesale and retail market for street directories.”

9                     Although market definition was the subject of considerable controversy at trial, his Honour’s finding on this issue was not challenged on appeal.

10                  His Honour then noted that if the relevant market was the market he had found, Melway accepted that it had a substantial degree of power in that market. His Honour also found that Melway had the ability to set and maintain its wholesale prices in a manner not based on supply or cost efficiency and not constrained by the conduct of actual or potential competitors: s 46(3)(a). His Honour further found that Melway was able to establish and maintain a distributorship system under which it was able to require commitment and loyalty from wholesalers whilst retaining unto itself contractual freedom to terminate the appointment of a wholesaler at will, fix and alter wholesale prices as it deemed fit and to allocate and reallocate the retail segments within which wholesalers were free to sell. Further, retailers have had little influence upon Melway’s ability to fix its wholesale prices or to segment the wholesale market. Thus Melway was not significantly constrained by the conduct of those to whom its product was supplied: s 46(3)(b).

11                  His Honour then turned to the question whether Melway, in refusing to supply, had taken advantage of its market power. His Honour referred to the decision of the High Court in Queensland Wire Industries Pty Ltd v The Broken Hill Pty Co Ltd (1989) 167 CLR 177 and noted that in the context of that case all members of the High Court concluded that a refusal to supply can amount to taking advantage of market power. His Honour remarked (at 640) that the theme running through the judgments in Queensland Wire was that

“taking advantage of market power involves a corporation using power in a manner made possible by the absence of competitive conditions.”

His Honour found support for that proposition in the judgments of Mason CJ and Wilson J at 192, Deane J at 198, Dawson J at 202-203 and Toohey J at 216.

12                  After briefly summarising the facts of Queensland Wire his Honour quoted the following passage from the joint judgment of Mason CJ and Wilson J at 192:

“‘In effectively refusing to supply Y-bar to the appellant, B.H.P. is taking advantage of its substantial market power. It is only by virtue of its control of the market and the absence of other suppliers that B.H.P. can afford, in a commercial sense, to withhold Y-bar from the appellant. If B.H.P. lacked that market power – in other words, if it were operating in a competitive market – it is highly unlikely that it would stand by, without any effort to compete, and allow the appellant to secure its supply of Y-bar from a competitor.’”

His Honour then said (at 641):

“A similar analysis can be applied in the present case. It is only by virtue of its dominant position in the Melbourne directory market and the absence of a competitive market that Melway can afford, in a commercial sense, to withhold from supplying 30,000-50,000 directories at its usual wholesale price and terms to Auto Fashions. If Melway lacked substantial market power – in other words, if it were operating in a competitive market – it is highly unlikely that it would stand by, without any effort to compete, and allow Auto Fashions to secure its significant supply of directories from a competitor. Put another way, one would not expect to observe a refusal to supply 30,000-50,000 directories in a competitive market. Accordingly, in refusing supply Melway has taken advantage of its market power.”

13                  The next issue for consideration was whether the refusal to supply was for a proscribed purpose, in this case the deterring or preventing a person from engaging in competitive conduct in the market in which Melway has a substantial degree of power, or any other market: s 46(1)(c). His Honour referred to what was said by Lockhart and Gummow JJ in Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43 at 66:

“‘Purpose’ in s 46 is not concerned directly with the effect of conduct, but with purpose in the sense of motivation and reason …”

14                  Further, in General Newspapers Pty Ltd v Telstra Corp (1993) 45 FCR 164, Davies and Einfeld JJ (at 187) regarded “purpose” in s 46 as relating to the effect which is sought to be achieved, the end in view or the result aimed at.

His Honour said (at 642):

“In my view, whether expressed in terms of Melway’s motivation for the refusal or the end sought to be achieved by the refusal, the purpose of Melway in refusing to supply was to prevent Auto Fashions from engaging in competitive conduct in respect of Melway directories with existing Melway distributors. Of particular significance in that regard is the evidence given by Godfrey, the Melway director responsible for the decision to refuse to supply, that there were no reasons in his mind for refusing supply other than that he did not want competition with customers of existing distributors (T 400-1). Although Lane was not prepared to make that concession, I am satisfied that the same consideration motivated him in his agreement with the decision of Godfrey to refuse supply to Auto Fashions.”

15                  After referring to some other incidents said to show anti-competitive conduct, His Honour said (at 643):

“It could be accepted that the objective to be achieved was also the maintenance of the existing distribution system and to that extent that end was also a purpose. In my view that purpose is indistinguishable from the purpose of preventing competition by a new distributor with existing wholesalers. Put colloquially, it is the reverse side of the same coin. However, if and to the extent that it is a different purpose to the anti-competitive purpose, that does not result in the anti-competitive purpose falling outside s 46(1)(c) as I am satisfied that:

·           the two purposes are closely related;

·           the refusal to supply was the means by which both purposes were to be achieved simultaneously;

·           the anti-competitive purpose was a substantial purpose within the meaning of s 4F(1).

It follows from the foregoing that Auto Fashions has established that the purpose of the refusal to supply by Melway was to prevent Auto Fashions from engaging in competitive conduct in the market for Melbourne directories.”

Taking advantage of market power

16                  In the words of Mason CJ and Wilson J in Queensland Wire (at 191), Auto Fashions had to establish not only that Melway had a substantial degree of market power, but had “used that power for a purpose proscribed in the section”. As French J said in Natwest Australia Bank Ltd v Boral Jarrard Strapping Systems Pty Ltd (1992) ATPR 41-196 at 40,644:

“It is not sufficient to show that a corporation with market power has engaged in conduct for the purpose of preventing entry of another person into a market or deterring or preventing a person from engaging in competitive conduct in that or any other market.”

17                  French J goes on to illustrate this need for causal connection between market power and the conduct complained of. His Honour gives the striking example of the monopolist who engages an arsonist to burn down his competitor’s factory. While obviously a breach of the criminal law, this would not be taking advantage of market power.

18                  In my opinion, the evidence does not establish that Melway took advantage of its substantial degree of market power when it declined to supply Auto Fashions. As has already been mentioned, Melway had adopted its segmented distribution system when it commenced publishing the Melway directory in 1968 and, except for the brief period when Gordon and Gotch became the sole distributor in 1989-90, has used the same system ever since. Although there was no direct evidence of the historical progress of the Melway directory, the inescapable inference is that in 1968 Melway commenced with zero share of the market and over the next thirty years built up its share to the present 80-90 per cent. At some point in this period it achieved a substantial degree of market power. Obviously there must have been an earlier period in which it did not have such power. Thus the operation of its segmented market system was not dependant on the possession of market power. Put another way, the same activity, the maintenance of the segmented distribution system, cannot change its nature simply because a substantial degree of market power has been achieved.

19                  In recent years Melway has published a Sydney directory called Sydway. So far it has not proved as successful as Melway. The market share position is the reverse: Sydway has about 10 per cent of the Sydney market and UBD and Gregory the remainder. Melway has adopted the same distribution system in Sydney, because Melway thinks it an efficient way of distributing its particular product. A court should be very reluctant to tell the operators of businesses how to make commercial decisions, and indeed the learned trial judge accepted this.

20                  It is not to the point that there was no evidence of a similar refusal to supply prior to the refusal of Auto Fashions. It was implicit in the way Melway conducted its business, and something that would have been apparent to anybody making trade enquiries, that the segmented market was the way Melway organised its distribution and that Melway would not agree to supply a wholesaler who wanted to sell in a different way.

21                  I would respectfully disagree with his Honour’s conclusion that Melway’s conduct can be analysed in the same way as BHP’s in Queensland Wire (see par 12 above). There, the hypothesis was that BHP would not have (constructively) refused QWI’s offer to buy Y-bar had there been another supplier to whom QWI could have turned. In such event, BHP would not have allowed those sales to be lost forever. In the present case, however, the relevant commodity, the Melway directory, is not something which the would-be purchaser could obtain from a hypothetical alternative supplier. One cannot hypothesise the Melway directory being obtained from anyone but Melway. Moreover, the directories which Melway refused to supply to Auto Fashions were not in reality additional sales. While Auto Fashions had in mind some new outlets, such as pharmacies, its substantial purpose was to sell to existing retailers across the divisions of Melway’s existing segmented market. The evidence did not support a hypothesis that in a more competitive market Melway would have necessarily supplied 30,000 to 50,000 directories to Auto Fashions because it (Melway) would otherwise have lost those sales. So in refusing to supply Auto Fashions, Melway was not denying itself sales which it would have been commercially compelled to make in a more competitive market. Absent some dramatic expansion of the total market – an eventuality not suggested by the evidence – Melway would have made substantially the same sales.

22                  Another way of looking at the question is suggested by Hanks and Williams in their article “Implications of the Decision of the High Court in Queensland Wire” (1990) 17 Melbourne University Law Review 437. The learned authors point out that the concept of taking advantage of market power has to be seen in terms of efficiency. If the conduct complained of would have been engaged in irrespective of degree of market power but rather to conduct the corporation’s business more efficiently, there will be no taking advantage of market power. The learned authors cite (at 445) an example discussed at first instance in Queensland Wire. Assume a monopolist producer of glass bottles is asked to supply molten glass. If the costs of the whole process would increase if one were to break the process of production at that stage, then economists would predict that firms in a competitive industry would not break the process to sell at the point molten glass is produced. If the extra cost of producing bottles from molten glass is less than the difference between the prices obtainable for bottles and molten glass respectively, one would expect any rational producer to retain the molten glass. The refusal to supply molten glass would be attributable to business efficiency and not to taking advantage of market power.

23                  The learned authors point out, as did counsel for Melway in the present case, that in Queensland Wire BHP made no attempt to justify its constructive refusal to supply. Mason CJ and Wilson J observed (at 193) that BHP

“.. did not offer a legitimate reason for the effective refusal to sell”.

24                  At an earlier stage of their joint judgment (at 184) their Honours quoted from a letter in which BHP frankly stated that its policy was to refuse supply

“… because it wished to preserve the business of the manufacture and wholesale sale of fence posts conducted by it.”

25                  It is true that their Honours made their observation about BHP’s lack of legitimate reason in the immediate context of considering the proscribed purpose issue. But nevertheless the point remains that the existence of a legitimate business reason which would explain the impugned conduct irrespective of the degree of market power necessarily points against a conclusion that such conduct in fact involved taking advantage of that power.

26                  The absence of a legitimate business reason for refusal to supply was determinative in the United States Supreme Court’s decision in Aspen Skiing Company v Aspen Highlands Skiing Corporation 472 US 585 (1985). The defendant, the operator of three ski resorts in the Aspen area, refused to continue a long-standing marketing arrangement for the sale of ski tickets valid for its own resorts and a fourth resort which was operated by the plaintiff. The Court held this to be a violation of s 2 of the Sherman Act. In giving the unanimous opinion of the Court Stevens J said (at 608):

“Perhaps most significant however, is the evidence relating to [the defendant] itself, for [the defendant] did not persuade the jury that its conduct was justified by any normal business purpose.”

27                  His Honour noted (ibid) the defendant’s “failure to offer any efficiency justification whatsoever for its pattern of conduct”. His Honour had earlier observed (at 604) that at first instance

“… the jury was unambiguously instructed that [the defendant’s] refusal to deal with [the plaintiff] does not violate section 2 if valid business reasons exist for that refusal.”

28                  As Hanks and Williams observe (at 449):

“The types of economic efficiencies which may justify conduct under s 46 are even more varied than the types of conduct which that section may catch.”

29                  United States courts have given deference to the business judgment of the business operator. As the Sixth Circuit Court of Appeals said in Byars v Bluff City News Co 609 F 2d 843 (1979) at 862:

“A finding of anti-trust liability in a case of a refusal to deal should not be made without examining reasons which might justify the refusal to deal. The rationale for this is that since we tolerate the existence of some monopolists,

we must give them some leeway in making business decisions.”

30                  In its background paper “Misuse of Market Power” (1990), par 17, the Trade Practices Commission noted that:

“… many marketing decisions involving product distribution or the appointment of dealerships would not contravene s 46. It is understandable that suppliers would take an interest in the circumstances and types of outlets in which their products are resold by distributors. The particular characteristics of some products may require a policy that restricts distribution to a limited number of outlets. For example, the technically sophisticated nature of some products now require technical skills and facilities of pre sales and post sales servicing. In other words the Commission accepts that it is not reasonable to expect a corporation with a substantial degree of market power to supply each and every existing or new wholesale or retail outlet if it is apparent that it would not be to its commercial advantage to do so.”

Likewise Dr S G Corones in his work “Restrictive Trade Practices Law” (Law Book Co Ltd, 1994) says (at 214):

“Generally, suppliers are not obliged to supply everyone who orders their goods. Economic efficiency is enhanced if suppliers are allowed the freedom to decide by whom and under what conditions their products will be sold.”

31                  Although expressed in perhaps guarded terms, the learned trial judge did accept that Melway was satisfied that its system constituted “a reasonable commercial regulation of its distribution system in order to maximise sales of its directories”. Melway tendered a body of evidence as to the reasons for adopting its system. Wholesalers were dealing with customers in a market they knew as specialists. The wholesalers had a good understanding of customer requirements and an ability to sell different types of products to customers, giving supply and selling efficiencies. Major retailers like McEwans preferred “distributors of substance” who could service the product adequately. Wholesalers were given confidence to invest in marketing and customer development and especially promotion which was a critical element for Melway’s success. The wholesalers were permitted to maximise customer service and the meeting of customer needs including promotion. The wholesalers were able to service the public need for the product, including unprofitable small accounts.

32                  All of this seems rational and not inherently improbable. And, importantly, Melway’s system worked. It may be that the selling of the Melway directory (as distinct from its production) was not a high technology operation. But obviously enough the considerations which might amount to a legitimate business reason, in the present context of a book distribution system, are not limited to technology factors. Distribution involved intangible matters of fine commercial judgment, which the learned trial judge accepted as being genuinely made. The spectacular success of the Melway directory was unlikely to have been achieved without some contribution by the particular distribution system adopted. Melway was entitled to believe that, however good its particular mousetrap, the world was not going to beat a path to its door.

33                  In making the decision to refuse supply to Auto Fashions, Melway did not in my opinion take advantage of its substantial degree of market power.

Purpose

34                  However, if the taking advantage of market power issue be resolved against Melway then I agree with the other members of the Court that his Honour was correct in his finding on the s 46(1)(c) purpose issue. I do not think any metaphysical analysis is called for. As his Honour said (at 643), preserving the existing distribution system and preventing competition by a would-be distributor against existing distributors are two sides of the same coin. But any distribution system necessarily involves such deterrence or prevention of competition. If the majority view is correct, the achieving of a substantial degree of market power brings a new peril to any firm which operates a distribution system, be it market-segmental, geographical, or on any other basis.

Orders

35                  Leave to appeal is necessary. The respondent did not oppose the grant of leave. There should be an order that Melway have leave to appeal. The appeal should be allowed and the order of the trial judge set aside. In lieu thereof it should be ordered that the application be dismissed. Auto Fashions should pay Melway’s costs of the appeal and the trial.

Associate:

Dated: 20 May 1999

On Appeal from a single Justice of the Federal Court

REASONS FOR JUDGMENT

SUNDBERG J:

BACKGROUND

36                  The appellant began publishing its Melway street directory in 1966. The directory proved very popular, and now accounts for about 85 per cent of all street directories sold in Melbourne. The only other Melbourne street directories, UBD and Gregory, account for about 5 per cent each. Except for a sixteen month period in 1989‑1990 the appellant has always distributed Melway through wholesalers, each of which is allocated one segment of the retail market. The segments are newsagents and bookshops, service stations, office stationers, authorised car dealers, and automotive parts retailers. Each distributor is directed to sell only to retailers in its segment. In 1986 the respondent was appointed distributor to automotive parts retailers. In February 1995 its appointment was terminated. In March the respondent requested the appellant to supply it with 30,000 to 50,000 Melways per annum. It proposed to sell them to its existing retail customers and new retail customers without regard to the market segment in which the retailers operated. The appellant refused to supply the directories, and the respondent commenced proceedings claiming that the refusal contravened s 46 of the Trade Practices Act 1974.

THE ISSUES FOR DECISION

37                  The primary judge held that

·               the relevant market is a market for street directories

·               the appellant had a substantial degree of power in that market

·               the appellant had taken advantage of that power by refusing to supply Melway directories to the respondent

·               the appellant had done so for the purpose of preventing the respondent competing with existing distributors in the market for Melway directories.

The first finding is not challenged on appeal. At trial the appellant accepted that if the relevant market was that found, it had a substantial degree of power in that market. Thus the two issues on the appeal are whether the appellant took advantage of that power by refusing supply to the respondent, and if so, whether it did so for the purpose of preventing the respondent competing with existing distributors in the market for Melway directories.

TAKING ADVANTAGE OF MARKET POWER

38                  Section 46(1) prohibits a corporation which has a substantial degree of power in a market from taking advantage of that power for the purpose, amongst others, of deterring or preventing a person from engaging in competitive conduct in that or any other market. In Queensland Wire Industries Pty Ltd v The Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 at 191 Mason CJ and Wilson J, having rejected the notion that the phrase “take advantage” requires that the defendant be doing something reprehensible, said:

“The question is simply whether a firm with a substantial degree of market power has used that power for a purpose proscribed in the section, thereby undermining competition ….”

Later, in the course of examining the facts of the case, their Honours said (at 192):

“In effectively refusing to supply Y‑bar to the appellant, B.H.P. is taking advantage of its substantial market power. It is only by virtue of its control of the market and the absence of other suppliers that B.H.P. can afford, in a commercial sense, to withhold Y‑bar from the appellant. If B.H.P. lacked that market power – in other words, if it were operating in a competitive market – it is highly unlikely that it would stand by, without any effort to compete, and allow the appellant to secure its supply of Y‑bar from a competitor.”

Deane J said (at 195):

“B.H.P. has refused, otherwise than at an unrealistically high price, to supply the appellant (‘Q.W.I.’) with a steel product (‘Y‑bar’) produced by B.H.P.’s rolling mills. Ordinarily, B.H.P. sells the various products from those mills to any manufacturer who desires to purchase them. Y‑bar is the only exception. The explanation of B.H.P.’s effective refusal to supply Y‑bar to Q.W.I. is that there is no other local producer or wholesaler of Y‑bar and B.H.P. desires to prevent Q.W.I. from manufacturing and selling star picket fencing posts (produced from Y‑bar) in competition with the second respondent … which is a wholly owned subsidiary of B.H.P.”

Dawson J said (at 202):

“there can be no real doubt that B.H.P. took advantage of its market power in this case. It used that power in a manner made possible only by the absence of competitive conditions. Inferences in this regard can be drawn from the fact that B.H.P. could not have refused to supply Y‑bar to Q.W.I. if it had been subject to competition in the supply of that product. B.H.P. supplies all its other steel products without restriction and its practice with regard to Y‑bar was not in accordance with its normal behaviour. If there had been a competitor supplying Y‑bar, B.H.P.’s refusal to supply it to Q.W.I. would have eroded its position in the steel products market without protecting A.W.I.’s position in the fencing materials market.”

Toohey J, having said that a corporation “takes advantage of” market power if it “uses” or “avails itself” of that power, added at 216:

“The only reason why B.H.P. is able to withhold Y‑bar (while at the same time supplying all other products from its rolling mills) is that it has no other competitor in the steel product market who can supply Y‑bar. It has dominant power in the steel products market due to the absence of constraint. It is exercising the power which it has when it refuses to supply Q.W.I. with Y‑bar at competitive prices ….”

39                  In Natwest Australia Bank Ltd v Boral Gerrard Strapping Systems Ltd (1992) ATPR 41‑196 at 40,644 French J, after referring to Queensland Wire, said:

“It is … an essential element of a cause of action based upon s 46 that the alleged contravener is said to have used its market power. The conduct must either by necessary implication from its very nature or by reference to other pleaded facts and circumstances constitute a use of that power. It is not sufficient to show that a corporation with market power has engaged in conduct for the purpose of preventing entry of another person into a market or deterring or preventing a person from engaging in competitive conduct in that or any other market. An extreme example illustrates the point. If a corporation with substantial market power were to engage an arsonist to burn down its competitor’s factory and thus deter or prevent its competitor from engaging in competitive activity, it would not thereby contravene s 46. There must be a causal connection between the conduct alleged and the market power pleaded such that it can be said that the conduct is a use of that power. In many cases the connection may be demonstrated by showing a reliance by the contravener upon its market power to insulate it from the sanctions that competition would ordinarily visit upon its conduct.”

40                  Melway accounts for approximately 85 per cent of all street directories sold in Melbourne. UBD and Gregory account for about 5 per cent each. They can be put aside as effective competitors in the same way that Smorgon was put aside as a real competitor in Queensland Wire. To use the language of Mason CJ and Wilson J in that case, if the appellant were operating in a competitive market, would it have refused to supply the respondent, or would it have tried to secure the deal itself? To that question there can be only one answer. In a competitive market for street directories, the appellant would not have refused supply, thereby voluntarily losing market share to a competitor. In the real world it was able to refuse supply only because it had no effective competitor who could provide a street directory that lots of people wanted to buy. In my view, in refusing to supply directories to the respondent, the appellant used or availed itself of its market power, and thus took advantage of it.

41                  The primary judge correctly identified the question for decision and correctly answered it when he said:

“It is only by virtue of its dominant position in the Melbourne directory market and the absence of a competitive market that Melway can afford, in a commercial sense, to withhold from supplying 30,000‑50,000 directories at its usual wholesale price and terms to Auto Fashions. If Melway lacked substantial market power – in other words, if it were operating in a competitive market – it is highly unlikely that it would stand by, without any effort to compete, and allow Auto Fashions to secure its significant supply of directories from a competitor. Put another way, one would not expect to observe a refusal to supply 30,000‑50,000 directories in a competitive market. Accordingly, in refusing supply Melway has taken advantage of its market power.”

42                  In their written submissions counsel for the appellant appeared to accept that the primary judge had properly identified the hypothesis required by s 46 and Queensland Wire. For counsel said that a corporation ought not be held to “take advantage” of market power if it would be likely to act in the same way in a competitive market. It seems, therefore, that the Court was being invited to ask the same question as that posed by the primary judge ‑–is it likely that if it were operating in a competitive market the appellant would allow the respondent to secure a large supply of directories from a competitor? – but to return a different answer. Once it is accepted that that is the right question, it seems to me to be impossible to answer it except in the manner I have indicated. In their oral submissions, however, counsel were critical of the primary judge for having used the language of Mason CJ and Wilson J to construct the hypothesis, when Queensland Wire differed so obviously from the facts of the present case. It was pointed out that in Queensland Wire BHP had made no attempt to justify its constructive refusal to supply. In the present case, the appellant had justified its refusal by reference to its long‑standing distribution system, which the primary judge accepted as bona fide. When Mason CJ and Wilson J made the observations set out above, which the primary judge used to pose the hypothesis, they were stating a test of general application, not restricted to a case such as that before them where the party refusing supply had not attempted to justify its conduct. Furthermore, their Honours attached importance to the absence of any attempt by BHP to justify its stand only in connection with the “purpose” limb, and not the “taking advantage” limb, of s 46. See Queensland Wire at 192‑193. No other member of the Court referred to the absence of justification.

43                  It was argued for the appellant that there was no causal link between its dominant market position and the conduct complained of. It was said that the appellant had adopted its segmented distribution system when it commenced publishing the directory, at a time when it presumably had no market share. The primary judge found that the appellant believed that its system provided for an appropriately regulated, orderly marketing and distribution of directories. In particular it believed that the appointment of distributors as exclusive distributors for particular segments of the market enabled it to maximise its sales. In the course of time the appellant’s share of the market grew, and at some stage became a dominant share. It was submitted that an orderly distribution system established for a reason unconnected with market power cannot overnight, because of the acquisition of a dominant share, come to have market power as its raison d’etre. It was said to be nonsensical to conclude that the justification for the system changes simply because of the acquisition of substantial market power.

44                  The submission concentrates on the reason behind the existence of the distribution system. It identifies its historical justification, and asserts that that justification, born when the appellant had no or no significant market share, does not change merely because of the acquisition of a substantial degree of power. But the submission appears to me to lack the specific focus required by s 46 and Queensland Wire. The question for decision is not whether there is a causal link between the appellant’s market power and the maintenance of its distribution system. It is whether there is a link between its market power and the refusal of supply. When the appellant had only 10 per cent of the market, its capacity to knock back an order for 30,000 to 50,000 directories was limited. But with 85 per cent of the market, the capacity was there. While the needle on the market power monitor was creeping up, so was the appellant’s capacity to engage in the proscribed conduct. There is no evidence that while it was a small player the appellant ever refused supply to someone who wanted to compete with one of its distributors. The proper inferences to draw are that with a 10 per cent market share the appellant would have supplied the directories, and that its refusal to supply at a time when it had an 85 per cent share was because it was able to do so for want of any competitor who could effect the supply.

45                  It was contended for the appellant that with respect to its related Sydway product it engaged in the same “customer‑type” management of its distribution as it did with its Melway product notwithstanding that it enjoyed only a 10 per cent share of the Sydney market (approximately the same share as that of its competitors in Melbourne). This was said to show that the implementation of a managed distribution system was not predicated upon a use of market power. Again the submission lacks the required focus. The existence of the same system in Sydney does not show that in refusing supply to the respondent, the appellant was not taking advantage of its market power. There is no evidence that the appellant has refused to supply Sydway directories to anyone wishing to compete with any of its Sydway distributors. The proper inference to draw is that it would not refuse supply.

PROSCRIBED PURPOSE

46                  The second issue is whether the appellant took advantage of its market power for the purpose of preventing the respondent from competing with existing Melway distributors. A s 46 purpose can be inferred: sub‑s (7). A corporation is deemed to have engaged in conduct for a particular purpose if it engaged in conduct for purposes that included that purpose, and that purpose is a substantial purpose: s 4F(b). In Eastern Express Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43 at 66 Lockhart and Gummow JJ said:

“The determination of purpose for the operation of s 46 is to be ascertained subjectively, in the sense that what is to be ascertained is the intent of the corporation engaging in the relevant conduct …. ‘Purpose’ in s 46 is not concerned directly with the effect of conduct, but with ‘purpose’ in the sense of motivation and reason, although, as mentioned earlier, purpose may be inferred from conduct ….”

See also General Newspapers Pty Ltd v Telstra Corporation (1993) ATPR 41‑274 at 41,698 per Lockhart and Einfeld JJ.

47                  The primary judge found that the appellant’s purpose in refusing to supply was to prevent the respondent competing with existing Melway distributors in the market for Melway directories. This finding was based on the evidence of Mr Godfrey, the director responsible for the appellant’s decision to refuse to supply. In the course of cross‑examination Mr Godfrey accepted that he didn’t want the respondent supplying to customers of other distributors, and that that was part of the reason why he refused supply. He was asked whether there were any reasons for refusing supply other than that he did not want competition with customers of existing distributors. His answer was “Yes”, but the surrounding context shows that this is an occasion on which “Yes” means “No”. The primary judge noted that the other director who gave evidence, Mr Lane, did not concede that the reason for the refusal was that the appellant did not want competition with existing distributors. But his Honour was satisfied that the same consideration motivated Mr Lane when he agreed with Mr Godfrey to refuse supply. His Honour’s finding of purpose was a finding of fact. It was open to him on the basis of Mr Godfrey’s evidence. He had the advantage of seeing and hearing Mr Lane, and although Mr Lane did not make the same concession as Mr Godfrey, his Honour was entitled to find that in agreeing with Mr Godfrey to refuse supply to the respondent, his motivation was the same as Mr Godfrey’s.

CONCLUSION

48                  No error has been shown in the conclusions reached by the primary judge, and the appeal should be dismissed.

Associate:

Dated: 20 May 1999

On Appeal from a single Justice of the Federal Court

REASONS FOR JUDGMENT

FINKELSTEIN J:

49                  Two questions arise on this appeal. First, did the appellant, Melway Publishing Pty Ltd (Melway), “take advantage of” its substantial power in the wholesale market for Melbourne street directories by refusing to supply directories to the respondent, Robert Hicks Pty Ltd, trading as Auto Fashions Australia (Auto Fashions)? Second, if the first question is answered affirmatively, did Melway take advantage of that power for a purpose proscribed by s 46 of the Trade Practices Act 1974 (Cth)?

50                  The relevant facts may be stated briefly. Either they are not in dispute or were found by the trial judge. Melway has been publishing street directories since 1966. It produces the most popular street directory for the Melbourne metropolitan area, a directory that a director of Melway described as “something of a Melbourne institution”. So popular is this street directory that it accounts for approximately 85 per cent of all street directories sold in Melbourne.

51                  Melway sells its Melbourne street directory to six wholesalers which it refers to as “distributors” or “official distributors”. For commercial reasons, Melway has divided the retail market for street directories into six broad groups: newsagents and bookshops, two categories of service stations, office stationers, automotive parts suppliers and authorised car dealers. Each distributor is “allocated” one of these groups and is instructed to sell Melway street directories only to retailers in that group. Occasionally a distributor will compete for business outside its allocated group, but then only when there has been some long standing arrangement in place between the distributor and a particular retailer.

52                  All distributors purchase their Melway street directories at a common price. However, distributors are free to sell the directories at whatever price they choose, although there was evidence at the trial to the effect that distributors are instructed not to sell directories below a specified price. Each distributor has a substantial degree of discretion in setting its prices because there is little, if any, competition for the sale of street directories within each group.

53                  Auto Fashions was appointed as a distributor to sell Melway street directories to automotive parts suppliers in 1986. In early 1995 that appointment was terminated. According to Melway the reason for the termination was that Auto Fashions was not a competent or able distributor of its product notwithstanding the fact that Auto Fashions derived a profit of approximately $400,000 per annum from the sale of directories.

54                  On 30 March 1995 Auto Fashions requested Melway to supply it with 30,000 to 50,000 street directories per annum. The reason Auto Fashions wished to acquire Melway directories was to sell the product in competition with existing distributors as well as to expand the market for street directories. The response, provided by Melway’s solicitors, was that Melway “does not propose to have any further business dealings with Auto Fashions”.

55                  Auto Fashions instituted this action alleging that the refusal by Melway to supply it with street directories contravened s 46 of the Trade Practices Act 1974 (Cth). That section relevantly provides:

“(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

(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.”

56                  According to the reasons for judgment of the trial judge, the matters in issue at trial were:

·                                  The definition of the relevant market;

·                                  Whether Melway has a substantial degree of power in that market;

·                                  Whether Melway, in refusing to supply street directories to Auto Fashions, had taken advantage of its power in that market;

·                                  Whether any refusal to supply was for a proscribed purpose; and

·                                  The relief (if any) that should be granted.

57                  With regard to the first and second issue, the trial judge found that there is a market for street directories in Melbourne and that Melway has a substantial degree of power in that market. Those findings are not challenged on appeal.

58                  It is in relation to the findings made by the trial judge in relation to the third and fourth issues with which this appeal is concerned. Those findings were as follows. In refusing to supply street directories to Auto Fashions, Melway had taken advantage of its power in the Melbourne market for street directories. The purpose for refusing to supply street directories was to prevent Auto Fashions from competing with existing Melway distributors in the wholesale market.

59                  Melway challenges each of these findings. The attack on the third is based on the proposition that there was no causal nexus between Melway’s predominate market power and its refusal to supply street directories to Auto Fashions. The fourth finding is challenged on the ground that the learned trial judge misunderstood the distinction between the purpose for the refusal to supply street directories to Auto Fashions and the effect of that refusal. The purpose was stated to be the maintenance by Melway of its current distribution system which it regards as an orderly and appropriately regulated system for maximising the sale of its directories. It was argued that this was a legitimate (that is, not a proscribed) purpose. Giving effect to this purpose meant that Melway distributors were protected from competition, but it was said that s 46 is only concerned with the purpose of particular conduct and not with its effect. Accordingly, so it was argued, provided the purpose for engaging in conduct is not proscribed, the fact that the effect of that conduct might be anti-competitive does not result in an infringement of s 46.

60                  A corporation will “take advantage” of its power in a market if it is able to and does engage in conduct or refuse to engage in conduct in that market because of the absence of competition. To put the matter another way, if conduct could be engaged in a highly competitive market, engaging in that conduct could not be characterised as taking advantage of market power: see generally Queensland Wire Industries Pty Ltd v The Broken Hill Pty Co Ltd (1989) 167 CLR 177 at 192 per Mason CJ and Wilson J, at 202-203 per Dawson J and at 216 per Toohey J.

61                  Applying these principles to the facts of the case under appeal the question that must be answered is: “Was Melway able to refuse to supply street directories to Auto Fashions because it had no other effective competitor who could supply Auto Fashions with street directories?” It will be noticed that in formulating the relevant question this way I have referred to the absence of effective competition. The facts show that there is some competition in the Melbourne street directory market. But as the trial judge found, “consumers have demonstrated a strong sense of brand loyalty to Melway” in consequence of which “Melway has been able to maintain its dominant share of the market for Melbourne street directories despite the extensive efforts of [its competitors] to make in-roads on that share.” Accordingly, whatever competition does exist is not effective competition in the sense that it does not constrain the ability of Melway to act in a way that it might be required to behave in the face of competition: Kayson and Turner “Antitrust Policy” (1959) at 75. That is to say, although Melway does not have a monopoly it has a near monopoly.

62                  To answer the question posed it is necessary to hypothesise what would have occurred had Melway received an offer to purchase 30,000 to 50,000 street directories from a person who, if supply had been withheld, could have purchased that number of street directories from another supplier who was an effective competitor of Melway.

63                  The answer to the question, so it seems to me, is abundantly clear. In the supposed circumstances Melway could not rationally refuse to supply its product. If it did it would run the risk of losing market share. The only reason Melway was able to deny supply to Auto Fashion was because Auto Fashion could not look to a competitor of Melway to supply it with an effective competing product.

64                  Accordingly it is my view, as the trial judge found, that Melway took advantage of its market power in refusing to sell street directories to Auto Fashions.

65                  The only factor upon which Melway relied to avoid this conclusion is that since it commenced operations in 1966 it has maintained its preferred system of marketing its product and has been able to do so notwithstanding the fact that for some period (the evidence does not show for what period) it would not have been dominate in the market in which it operates. Melway says that this demonstrates the lack of connection between its market power and its refusal to supply street directories to persons other than its existing distributors.

66                  In my view the argument has no logical foundation. It is of course true that Melway has maintained its distribution network for many years. But the factors that enabled it to do so have no necessary connection with the refusal to supply a substantial quantity of street directories to a non distributor. That is to say, there is no evidence that Melway refused to supply street directories to a person wishing to compete with its distributor whilst Melway was in the process of reaching the position where it had a substantial degree of power in the Melbourne street directory market. Could it have done so when it only had a small share of the market? Common sense says that it could not. The evidence points to the same conclusion. Melway also competes in the Sydney market for street directories. There it has only a small share of the market, estimated to be of the order of ten per cent. Mr Brian Lane, the marketing manager of Melway, was asked whether he would accept an order for 50,000 Melway directories if there was a demand for them in Sydney. He answered, “Well, we sure would [be delighted] if they took 50,000 Melways in Sydney.” I have no doubt that Mr Lane would have been equally delighted to receive such an order in Melbourne at a time when Melway’s share of the Melbourne market was also around ten per cent.

67                  In considering whether Melway had refused to supply street directories to Auto Fashions for a proscribed purpose, the trial judge was concerned to ascertain the reason for that refusal and not the effect of that refusal: Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43 at 66 per Lockhart and Gummow JJ. That is to say, the enquiry that was required to be, and was in fact, undertaken was to ascertain a fact, namely what was the subjective intention of Melway in engaging in the conduct about which the complaint had been made?

68                  Melway says that it acted for the purpose of preserving its successful distribution system and that this is not a proscribed purpose. The trial judge did find that “Melway’s resistance to changing the existing [distribution] system was because it was satisfied that that system constituted a reasonable commercial regulation of its distribution system in order to maximise sales of its directories.” The submission was that having made this finding it was incumbent upon the trial judge to hold that the decision to withhold supply was not for a proscribed purpose.

69                  Here it is necessary to say a little more about this so-called “successful distribution system”. The system involves having a small number of distributors who would not compete with one another in the wholesale market. The requirement that there be no competition between distributors was enforced by Melway. In his reasons for judgment the trial judge instanced two occasions when this occurred. The central feature of the distribution system is the absence of competitive conduct between distributors. No doubt it is this absence of competition that enables Melway to charge a common price to its distributors. Further, the absence of the competition leaves the distributors with a degree of discretion in fixing the price at which directories are sold to retailers.

70                  One way, perhaps the only way, in which such a system can be maintained is by refusing to supply directories to any person who intends to compete with the distributors. It follows that, if supply is refused in order to maintain the system, there can be no difference between the purpose for that refusal and its effect. That is, both the purpose and effect of the refusal will be to prevent competition.

71                  In any event, as I have mentioned, the decision of the trial judge on this issue involved a finding of fact. In reaching his conclusion that the refusal of supply was for the purpose of preventing competitive conduct, the learned trial judge relied upon the evidence of Mr Murray Godfrey, the director of Melway who was responsible for the decision. That evidence, given in cross-examination, was as follows:

“Q: You saw this letter [requesting supply]… at about the time it was received by your solicitors, 30 March?

A: Yes.

Q: You saw in the last paragraph on that page that Mr Pawsey’s [Auto Fashions’] intention was to continue selling Melways to old customers and he hoped to acquire new customers?

A: Yes, I see that.

Q: You saw it at the time didn’t you?

A: Yes.

Q: So you knew that he would be competing with Mr Nagel [a distributor] if he supplied Melways as he indicated or his solicitors indicated, didn’t you?

A: Yes.

Q: You saw that he’d be supplying or intended to supply Melways to other people who might be customers also of other existing distributors?

A: Well, he wasn’t suggesting any new areas, any different areas than Melway is sold into, so - - -

Q: So at the time you read this letter you thought he was going to supply to his old automotive customers and to other new customers who might be customers not supplied by anyone else at this time. Is that it?

A: Say again?

Q: At the time you read this letter you saw that he was going to supply to his old automotive customers?

A: Yes.

Q: And intended to supply to new customers, and I’m asking you this: by his reference to selling to new customers did you take that to mean existing customers of other distributors or did you take that to mean customers not serviced by other distributors at that time?

A: As I understand, the Melway is sold everywhere as far as we can get it in, so I couldn’t see where a new area could be.

Q: So the new customers would have to have been, would they, in your view at the time you read that letter customers of other distributors?

A: Yes.

Q: You didn’t want him doing that either, did you?

A: Well, we thought we had the market happy, so - - -

Q: That’s right, you didn’t want him supplying to customers of other distributors?

A: No.

Q: That again was part of the reason why you refused supply, wasn’t it?

A: Yes.

. . .

Q: At that time indeed there were no reasons in your mind for refusing supply other than that you did not want competition with customers of existing distributors?

A: Yes.”

72                  Mr Lane was also involved in the decision to refuse supply. Although he was not prepared to make the concessions that were forthcoming from Mr Godfrey, the trial judge found, as a fact, that Mr Lane was motivated by the same considerations.

73                  Thus it can be seen that the finding by the trial judge that the refusal to supply was for a proscribed purpose was based on the direct testimony of Mr Godfrey and on the assessment by the trial judge of what motivated Mr Lane, an assessment that was based on the whole of his evidence on this aspect of the case. Having regard to the evidence of Mr Godfrey and the assessment made by the trial judge of what truly motivated Mr Lane, the finding under challenge was clearly open. Indeed, in view of the concessions made by Mr Godfrey, it might fairly be said that it was the only finding that was open.

74                  Accordingly, for the purposes of this appeal it has not been demonstrated that the finding involved any error. In particular, it is not a finding that is inconsistent with any facts incontrovertibly established by the evidence nor is it a finding that is glaringly improbable.

75                  Of course it is possible for an organisation such as Melway to refuse to supply its products in circumstances where that refusal would not result in a contravention of s 46. There may be legitimate business purposes for a refusal to supply, such as to improve efficiency, to lower costs, to overcome a lacklustre sales history, to correct for a declining market share, to provide appropriately skilled suppliers and so on. However, on the facts found by the trial judge, no such legitimate business purpose motivated Melway.

76                  In my opinion the appeal should be dismissed with costs.

77                  Finally, I should mention that the appellant did apply for leave to appeal in the event that leave was necessary. That application was made because the trial judge has not finally disposed of the case. He made a final declaration of rights and granted a permanent injunction restraining the appellant from refusing to supply Melway street directories to the respondent. He also entered interlocutory judgment for damages to be assessed. It seems that it was this last order that motivated the application for leave. I do not think that leave is necessary: see Hall v Busst (1960) 104 CLR 206 at 218; Licul v Corney (1976) 180 CLR 213; Carr v Finance Corporation of Australia Ltd (No 1) (1981) 147 CLR 246.

Associate:

Dated: 20 May 1999