FEDERAL COURT OF AUSTRALIA

Australian Competition and Consumer Commission v Cement Australia Pty Ltd (No. 2) [2014] FCA 689

THE COURT ORDERS THAT:

1.    Pursuant to s 17 and s 23 of the Federal Court of Australia Act 1976 and r 1.32 of the Federal Court Rules 2011, these orders are made in Chambers and published and pronounced from Chambers together with reasons for judgment in support of the orders, without further convening the parties.

2.    The application for relief sought by para 1 of the interlocutory application filed by the first to fifth respondents on 16 May 2014 is dismissed.

3.    The costs of the application are reserved.

4.    The proceeding is set down for hearing in relation to the remaining questions to be determined in the proceeding for five days commencing on Monday, 15 December 2014.

5.    The parties are to submit within seven days a final draft timetable for consideration by the Court for the completion of all interlocutory steps leading to a five day hearing of the remaining questions in the proceeding commencing on 15 December 2014.

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

REASONS FOR JUDGMENT

1        On 20 May 2014, two interlocutory applications in the proceeding were called on for hearing. One application was filed by the first to fifth respondents on 16 May 2014. The other application was filed by the applicant. The questions in issue raised by each application were resolved but for one aspect of the application filed by the first to fifth respondents which, at the completion of oral argument on 20 May 2014, was reserved for further consideration and determination.

2        By Order 1 of the application made by the first to fifth respondents, they seek an order that the documents constituting Annexures CMS-17, CMS-18, CMS-19 and CMS-20 to the affidavit of Christopher Michael Steger affirmed on 17 April 2014 not be admitted into evidence in the proceeding.

3        The remaining matter to be addressed in the principal proceeding is the assessment of a pecuniary penalty to be imposed upon the relevant respondents in relation to conduct found in the proceeding to involve contraventions of the Trade Practices Act 1974 (Cth) (the “Act”). The Australian Competition and Consumer Commission (the “Commission”) seeks to rely upon the affidavit of Mr Steger as part of its case on the penalty question.

4        The respondents seek to determine by this application the admissibility of the four annexures as a preliminary question.

5        First, they contend that the material is not relevant to the question in issue, namely, the determination of a pecuniary penalty referable to the particular conduct contraventions as found.

6        Second, they say that receiving the material into evidence represents an attempt by the Commission to reopen the question of the effects or likely effects of the contravening conduct upon the process of competition (and the market share and EBIT earnings of particular respondents) in the relevant markets, in circumstances where the Court has already made rulings about those matters.

7        Third, they say that should the material be received into evidence, the relevant respondents would wish to deal with it by conducting further enquiries and adducing substantial evidence relevant to the matters raised by the particular documents.

8        I will say something about the four annexures shortly.

9        The primary judgment in the proceeding is a substantial judgment which deals with a wide range of complex matters. I do not propose to synthesise in these reasons, for the purposes of dealing with the present application, all of the elements of the findings in the primary judgment.

10        It seems to me that ultimately the question as to the admissibility of the material now in question reduces to a number of relatively short points.

11        Put simply, and relevantly for present purposes, the Court found (using the terms adopted in the principal reasons) that Pozzolanic [Enterprises] had contravened s 45(2)(a)(ii) of the Act by entering into the Millmerran Contract on 30 September 2002 as buyer, with MPP as seller, because the contract contained provisions (which came to be included in the Millmerran Contract in the way described in the principal reasons) which had the substantial purpose of preventing a rival of Pozzolanic from securing access to unprocessed flyash in the SEQ unprocessed flyash market, and preventing a rival of QCL from entering the SEQ concrete grade flyash market (a market for fine grade concrete grade flyash), and those purposes were the expression of a purpose of substantially lessening competition in each market. Apart from that matter, the Millmerran Contract was found to contain provisions which had the likely effect of substantially lessening competition in the way described and also had the effect of substantially lessening competition in the way described. However, as to the effects question, the Court found that, put simply, the anti-competitive likely effect and effect had dissipated by 31 December 2003 for the reasons extensively set out in the principal judgment.

12        Other findings concerned the conduct of QCL in funding Pozzolanic’s entry into the contract and Pozzolanic’s giving effect to the provisions of the contract in the period from 30 September 2002 to 31 December 2003. Findings were also made in relation to the conduct of QCL in continuing to give effect to the provisions and conduct on the part of Pozzolanic Industries.

13        By putting these findings in these terms, it ought to go without saying, obviously enough, that the precise content and detail of all of the substantial factual matters and findings need to be thoroughly examined and properly understood. The reasons in the principal judgment should be read in conjunction with these brief reasons.

14        Apart from these matters, the Court made findings in relation to the Amended Millmerran Contract as well.

15        More relevantly for present purposes, the Court found that Pozzolanic, by entering into the Tarong Contract on 26 February 2003, contravened s 45(2)(a)(ii) of the Act because that contract contained provisions (which came to be included in the Tarong Contract in the way described in the principal reasons) which had a substantial purpose of preventing a rival of Pozzolanic from securing access to unprocessed flyash in the SEQ unprocessed flyash market, and preventing a rival of QCL from entering the SEQ concrete grade flyash market, and those purposes were the expression of a purpose of substantially lessening competition in each market.

16        Apart from that matter, the relevant provisions of the Tarong Contract were found to have the likely effect of substantially lessening competition in the way described and also the effect of substantially lessening competition in the way described.

17        Thus, contraventions of s 45(2)(a)(ii) arose on the effects limbs of the section.

18        Apart from those matters, findings were made in relation to the conduct of QCL, Pozzolanic and Cement Australia in relation to further aspects of s 45(2)(a)(ii) and more particularly s 45(2)(b)(ii), in terms of the relevant parties continuing to give effect to the impugned provisions.

19        Findings were also made in relation to the matters in issue concerning the Swanbank Contract and the role and engagement of Mr White in respect of particular matters.

20        In reaching findings as to contraventions of the Act predicated upon findings of fact about all matters in issue going to the integers of ss 45(2)(a)(ii) and 45(2)(b)(ii), the Court found that the relevant respondents (taken as a group) enjoyed a very substantial degree of market share (and also market power) in the relevant markets amounting to dominance of those markets largely by reason of their control of the Tarong and Tarong North sources of ash and the arrangements at least up to 30 June 2005 with respect to Swanbank (and no ash was available from Millmerran for the reasons discussed in the principal judgment). The Millmerran flyash did not enter either market in the period in issue in the proceedings. On the evidence, that result arose by reason of the compromised quality of the ash and the sequence of investigative steps undertaken to come to grips with the causes of colour variation in the ash and its commercial and practical suitability or utility for use as a partial substitute for cement in the making of concrete. Nevertheless, the impugned provisions of the Millmerran Contract were found to have had the relevant effect and likely effect from 30 September 2002 until 31 December 2003.

21        Ultimately, on 20 October 2006, Pozzolanic and MPP entered into an agreement providing for the terms upon which the Millmerran Contract would come to an end.

22        On 15 February 2007, MPP entered into an Ash Purchase Agreement with IFB.

23        As to the Tarong provisions (and Tarong North), the Court found that the future face of rivalry in the relevant markets with the provisions in place was diminished as compared with the future face of rivalry without the provisions because, without the provisions, entry of a rival would have occurred and would have provoked rivalrous responses from Pozzolanic and Cement Australia with heightened contestability in the product/service offering which would have been expressed in contestable pricing, reduced margins enjoyed by Pozzolanic/Cement Australia and a loss of market share.

24        In the principal reasons, extensive observations are made about the documents produced by senior executives of the relevant respondents concerning the market share of the respondents in the relevant markets, projections as to the volume of sales up to 2008, projections as to the likely threats to Pozzolanic’s position as the dominant supplier in the SEQ concrete grade flyash market, strategic responses to those threats and perceptions as to the conduct and likely conduct of third parties in the market for the supply of concrete grade flyash either transactionally or on some more enduring basis. A great deal of material of this kind was examined in the principal reasons including in the course of cross-examination of Mr White. The effect upon rivalry and the competitive process of the provisions was found to be significant and substantial having regard to the importance entry would have played in markets where the relevant respondents enjoyed a very significant market share and one properly characterised, for all practical purposes, as dominance. The inability of a rival to secure continuity of access to unprocessed flyash from Tarong and Tarong North in the SEQ unprocessed flyash market throughout the life of the contract and enter the SEQ concrete grade flyash market with processed or classified Tarong (TN) ash, for all the reasons identified in the principal judgment, led to the findings on effect and likely effect so far as those findings relate to the Tarong (TN) Contract.

25        Thus, there was a finding of a substantial lessening of competition. However, up to the end of calendar year 2006, rival third party entry into the relevant markets had not occurred in any systemic way having regard, fundamentally, to the operation of the impugned provisions of the Tarong Contract and Pozzolanic’s position at Swanbank, for all the reasons discussed in the principal judgment. Up to this time, questions concerning the quality of the Millmerran ash remained to be resolved.

26        The precise measure therefore of the likely diminution in the market share of the relevant respondents in percentage terms, the way in which contestable pricing may have actually played out in circumstances of rival third party entry and the precise measureable effect of rivalry upon margins and EBIT earnings of the relevant respondents was not the subject of particular findings in the principal proceeding (as in substance, in any enduring way, third party entry had not occurred). In the principal judgment, a finding was made that that result was brought about by operation of the impugned provisions of the Tarong Contract, in part at least.

27        There is now to be a hearing in relation to questions of penalty and it seems to me relevant to understand and admit into evidence documents which contain the views of the respondents (or at least the view of Pozzolanic) about the estimated effect, in measurable percentage terms, upon their market share, of entry into the relevant markets by new entrants once contestable conduct actually emerged. This is especially so in the context of statements made by the respondents about their understanding of the state of rivalry in the sale of fine grade concrete grade flyash in South East Queensland, in light of a proposed new agreement with the Tarong Power Station in the period immediately after the expiration of the Tarong Contract in suit in the proceedings. This is also true having regard to the evidence in the principal proceeding in relation to the role of Sunstate and others.

28        The documents sought to be excluded are these.

29        First, CMS-17 comprises a letter from Gilbert & Tobin to the Commission dated 12 April 2011 attaching a confidential “Attachment A” which sets out information in the form of a further response to an information request from the Commission dated 18 February 2011. Those documents concern an application made by Pozzolanic Enterprises Pty Ltd to the Commission for authorisation of the proposed agreement with Tarong Energy Corporation Limited (“TEC”) and Tarong North Pty Ltd (“TN”). The attachment seeks to describe the differences between the 2003 agreement in suit and the proposed new agreement. In the course of that document, a considerable body of information is set out in tables relating to the volume of flyash taken, yields, total tonnes (distributed between TEC and TN), total payments and other matters for the years 2008 to 2011. Other statistics are provided for the years 2012 and 2013. There is also another version of the same document with all the statistical information removed for reasons of confidentiality.

30        Second, CMS-18 is a letter dated 5 May 2011 to the Commission by Gilbert & Tobin setting out submissions in relation to the Commission’s draft determination. In that letter, Pozzolanic says, by its lawyers, this:

30.    The Commission’s draft determination fails to take into consideration the competitive landscape which has fundamentally altered since the 2003 Agreement was entered into.

31.    Since the 2003 Agreement was entered into the following has occurred:

(a)    Independent Flyash Brokers (IFB) (a joint venture between various concrete producers) has, since 2008, been supplying fine grade fly ash from Millmerran Power station (with whom it has an agreement) at significant volumes;

(b)    Sunstate (traditionally a cement company) has, since early 2007, been supplying fine grade fly ash from Tarong North Power Station (with whom it has an agreement) at significant volumes;

(c)    Nucrush (a concrete producer) has bid for and been awarded an agreement to obtain guaranteed quantities of fly ash from Tarong Power Station (with whom it has an Option which it has not yet taken up).

32.    Pozzolanic estimates that as a result of these developments, its market share for fine grade fly ash being supplied into south east Queensland (including northern New South Wales) has reduced by [a nominated figure] since 2006. Moreover, since 2003, a new power station, Kogan Creek has become operational, which, as the Commission notes “is a potential source of fly ash for use in concrete”.

…

                                [footnotes omitted]

31        It is not clear whether the extent of the reduction in Pozzolanic’s market share recited in the letter is a public matter in the authorisation process or, at least for the present, remains a confidential matter. I will not recite the measure of the reduction in these reasons. However, the measure of the reduction is a substantial percentage figure.

32        Third, CMS-19 is made up of slides from a Pozzolanic PowerPoint presentation made to the Commission on about 12 May 2011 in connection with the authorisation application and CMS-20 is a further letter from Gilbert & Tobin dated 30 May 2011 in connection with the authorisation application.

33        I am satisfied that these documents ought not be excluded as a preliminary matter.

34        The documents are to be admitted for the purposes of the penalty proceedings and the question of their probative weight can be determined in the proceedings. Some of the documents give context to the particular passages quoted upon which the Commission seeks to rely. Argument will no doubt take place in the proceeding about whether the contended reduction in market share reflects any measureable approximation of what might have occurred in a forward-looking way in the relevant market without the Tarong Contract provisions in place. Argument will no doubt take place about the relevance of IFB’s entry at the moment in time of entry having regard to the finding that the Millmerran Contract provisions ceased to have an effect or likely effect in terms of the section by 31 December 2003.

35        I am not satisfied that the documents are irrelevant to the questions in the penalty proceeding. Nor am I satisfied that seeking to admit documents which, on their face, go to the respondents’ own assessment of the measure of the diminution in their market share as a consequence of new entrant rivalry, having regard to the existing finding as to the substantiality of the effects and likely effects, is an attempt to reopen the case on effects and likely effects.

36        On the issue of penalty, evidence of the precise measure of the effect as found is relevant and admissible. Plainly, the penalty question was to be determined as a separate question after determination of the question of contravention. The integer, on the contravention question, of whether the provisions had the effect or likely effect was made out on the evidence. The evidence now in issue, as to admissibility, goes to a more precise understanding of the measure of that effect subject to questions as to the ultimate probative value of the assessment by Pozzolanic (by its lawyers) of the diminution in its market share by reference to the identified factors.

37        The respondents say that admitting these documents into evidence in the proceeding will necessarily trigger a very large forensic enquiry with substantial responsive evidence which seeks to demonstrate that the representations put to the Commission by Pozzolanic on 5 May 2011 (that it had suffered a substantial reduction in its market share by reference to the IFB, Sunstate and Nucrush factors) are not a proxy for, in effect, the measure of the advantage Pozzolanic preserved for itself by operation of the impugned provisions.

38        I am not persuaded that it is necessary for the respondents to put on the substantial body of evidence described by Ms Carver at para 19 of her affidavit sworn 16 May 2014. I accept that the respondents might wish to know the precise volume of concrete grade flyash that Sunstate has been supplying into the market since early 2007 when it entered the market, and probably the volume supplied into the market by IFB from Millmerran. It seems that Nucrush has not actually supplied any concrete grade flyash into the market.

39        Pozzolanic would be in a position to know in precise detail the volume of concrete grade flyash sold by it every year and the reduction in its sales volume each year and especially in the period from early 2007. It would also know the impact upon its revenues and margins in respect of sales in the South East Queensland geographic market as found.

40        The respondents may wish to know whether Kogan Creek has supplied unprocessed flyash to a market participant who has used it to supply concrete grade flyash into the SEQ concrete grade flyash market although that event seems not to have occurred as at 5 May 2011. These factors seem to be the informing factors selected by Pozzolanic as the ones material to the face of competition at the time of the 5 May 2011 letter and related material.

41        It might be necessary to consider making orders for third party production of documents from the relevant third parties and I would be willing to entertain such an application. However, that seems to me to be about the sensible scope of it in responsively dealing with the present issue raised by the documents upon which the Commission seeks to rely. Again, I observe that the probative value of the four annexures is very much a matter for argument in the penalty hearing, contextualised in the way in which the respondents might seek to deal with the matter.

42        Accordingly, that part of the interlocutory application of 16 May 2014 which seeks the exclusion of Annexures CMS-17, CMS-18, CMS-19 and CMS-20 is dismissed.

43        The costs of the interlocutory application are reserved.

44        The remaining matter to be addressed is the allocation of dates for the hearing of the pecuniary penalty question and any other outstanding matters. For some time now, the Court has been in discussions with the representatives of the parties to try and identify any dates in September or October for a hearing of these remaining matters. Five days are to be allocated for the hearing. Very unfortunately, the parties have not been able to identify common dates when counsel involved in the principal proceeding can be available for the further hearing. If the matter cannot be dealt with in September or October because diaries do not align for that purpose (which seems to be the position) the only available dates after September and October are five days commencing on Monday, 15 December 2014.

45        The matter must be heard this year.

46        Accordingly, the further hearing is set down for five days commencing on Monday, 15 December 2014.

47        The parties will need to revise the draft timetable to accommodate a sequence of interlocutory steps leading to a five day hearing commencing on 15 December 2014.

Associate:

Dated:    27 June 2014