Re Arnotts Limited; Arnotts Biscuits Limited; Fledspac Limited and the Dickens Corporation Pty Limited v Trade Practices Commission
On 24 November 1988 Arnotts and Fledspac entered into an agreement whereby Fledspac granted Arnotts an option to purchase Fledspac's shares in Dickens (wholly owned subsidiary of Fledspac; Dickens owned all shares in Cereal Foods Ltd (formally Nabisco)) and Arnotts granted Fledspac an option to require Arnotts to purchase those shares.
The TPC brought a proceeding to restrain the share acquisition, claiming it would contravene s 50.
The trial judge held that (by virtue of s 4(4)(a)), the grant of an option to acquire shares amounted to an acquisition and that acquisition contravened s 50. In reaching this decision his Honour held that the the relevant market was the Australian biscuit market, that Arnotts was dominant in that market and that the effect of the acquisition would be substantially to strengthen its market power. The Full Court agreed and dismissed the appeal.
Merger provision - section 50
Section 50 was not in its present form. At the relevant time the provision relevantly provided as follows:
"50(1) A corporation shall not acquire, directly or indirectly, any shares in the capital, or any assets, of a body corporate if -
(a) as a result of the acquisition, the corporation would be, or be likely to be, in a position to dominate a market for goods or services; or
(b) in a case where the corporation is in a position to dominate a market for goods or services -
(i) the body corporate or another body corporate that is related to that body corporate is, or is likely to be, a competitor of the corporation or of a body corporate that is related to the corporation; and
(ii) the acquisition would, or would be likely to, substantially strengthen the power of the corporation to control or dominate that market. ...
(3) In this section -
(a) a reference to a market for goods or services shall be construed as a reference to a substantial market for goods or services in Australia in a State or Territory; and
(b) a reference to dominating a market for goods or services shall be construed as a reference to dominating such a market either as a supplier or as an acquirer of goods or services in that market."
Definition of market
At the relevant time section 4E provided:
For the purposes of this Act, 'market' means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services.
Definition of competition
Section 4(1) contains a number of definitions, including 'competition'. At the relevant time section 4(1) defined competition as including:
"Competition from imported goods or from services rendered by persons not resident or not carrying on business in Australia."
- The grant of the option to Arnotts to acquire the shares was an acquisition (s 4(4)(a) TPA - reference to the acquisition of shares shall be construed as a reference to an acquisition of any legal or equitable interest in shares).
- The acquisition contravened s 50(1)(b)
- Fledspac and Dickens were involved in the contravention (s 75B).
- Expert evidence given by Dr Phillip Williams for the appellants was deemed inadmissible: see Re Trade Practices Commission v Arnotts Limited; Arnotts Biscuits Limited; Fledspac Pty Limited and the Dickens Corporation Pty Limited  FCA 11 (31 January 1990)
These conclusions were set out in detail from para 164 [note, in the original published decision portions of these conclusions were redacted as 'confidential'. The following represented the full version reproduced in the Full Courts decisions (para 35) following their revocation of the confidentiality order. Emphasis is mine.
1. There is a national biscuit industry of which the clear leader is Arnotts. It is, by far, the largest manufacturer, its products are of the highest quality and it is the only manufacturer to produce the whole range of biscuits available. Arnotts manufactures the best selling product in each of the groups which constitute the range of biscuits marketed in Australia. Weston and Nabisco are also large manufacturers of biscuits in terms of volume, but the size of the operations of Weston and Nabisco, relative to Arnotts, is small. From time to time, Weston, Nabisco, Cadbury, Players, Paradise and generic biscuits (or 'house brands' of some of the large retail chains) have offered competition to Arnotts in certain areas in the short term. But no competitor has even sought to compete with Arnotts over its whole range and, even when competition is offered in a particular product category, Arnotts is usually able to move to 'contain' the competition. As Weston's management recognised, Arnotts is able 'to influence market situations at will'.
2. Arnotts' major brand in all trading areas is the 'Arnott' brand. Arnotts has succeeded in marketing this brand so as 'to equate products with a certain standard of quality in consumers' minds'. Arnotts aims to give, and, it seems, has given, 'meticulous' attention to the 'Arnott' brand so as to 'ensure competitive advantage in performance, function and value'.
3. Arnotts' 'Sunshine' brand is used on products designed to 'contain', and it appears do contain, 'low price, private label and generic competition in defence of the major brand in each trading area.'
4. The 'Premiere' brand is used for products specially imported to fill 'market gaps' ('niches') in the 'exclusive type market' where potential volume does not warrant capital expenditure for manufacturing equipment.
5. Arnotts' 'product mix' policies, which are concerned only with the 'biscuit market', adopt the following product group definition for its biscuits, based on production characteristics and historical measurement: Dry crackers, flavoured snacks, crispbread, plain assorted, plain non-assorted, fancy assorted, fancy non- assorted, cookies, shortbread, and chocolate coated. The biscuit industry adopts a similar approach. In addition, Arnotts has a 'dietary' group and a 'miscellaneous' group, neither of which appear to be significant for present purposes.
6. An important object of Arnotts' style of packaging is to enable 'prompt discovery and identification' of the Arnotts' brand.
7. Arnotts' pricing policy is to ensure that any price increases to offset rising costs are 'limited to ensure that products always represent good value to the consumer, make it difficult for competitors to offer comparative value and offer the retailer a better profit/volume relationship than most grocery store items.' Arnotts' aim to stabilise prices and margins'. When 'pricing to contain competition, whilst (Arnotts) do not aim to be 'cheaper' than competitors, (Arnotts') pricing strategy is always to ensure that we do not price our major products to present a significant threat to our share/volume/profit position through non-competitive pricing.' The size and historical position (over 120 years) of Arnotts in the industry puts it in the position of 'price leaders', a situation in which 'competitors generally follow any deviation in price, especially upward.' Arnotts' ability to maintain a 'price leader' policy is reinforced by its 'strong consumer franchise, consistent advertising, volume production and technological leadership.'
8. Arnotts' basic principle is that its trading terms and conditions are the same for every retailer and prices and discounts are 'arranged to enable any retailer of reasonable size to trade to maximum margins.'
9. Because of its position as 'market leader', Arnotts makes a 'substantial investment' in marketing.
10. Arnotts' national biscuit marketing objectives for 1987/1988 were:
(1) To maintain a profitable growth in total kilogram sales.
(2) To 'maintain a dominant market position'. The aim was to achieve and maintain 'a market share of not less than 70% of the total Australian biscuit market.' (It is not clear whether the 70% objective was to be measured by volume or by sales value. Arnotts' achieved approximately 65% by volume and rather more if measured by the value of sales.) A second aim was to achieve and maintain a 'market share of not less than 75% as measured in the B.I.S. figures for Total Biscuits Sales.' (This was achieved.)
(3) To establish and maintain 'profitable leadership' in each product group. The first objective was to have 'more than a 60% market share in any single group'. (This was substantially achieved. Taking the B.I.S. national figures for 1988, the only product group of Arnotts with less than 60% were crispbreads - extruded (57.83%) and crispbreads - non-extruded (53.63%)). The second objective was to have the best selling product in each group. (This objective was achieved).
(4) To introduce new products to
(a) add variety to Arnotts' product range (this was achieved);
(b) 'overcome competitive activity where competitive new products are seen to represent a long term threat in present and new markets' (it appears that this was achieved);
(c) fill gaps in Arnotts' range: created by deletions (variety and brands), 'emerging competitive strengths' or new market development (it appears that this was achieved).
11. The biscuit industry markets a very high proportion of its biscuits through the major retail supermarket chains or through the large grocery wholesales. Biscuits are usually grouped together in 'biscuit bars' in which Arnotts' biscuits are first in the traffic flow and occupy about 50% of the bar. This confers a considerable marketing advantage upon Arnotts. It is very difficult, and very expensive, for a new entrant to the biscuit industry to obtain access to 'facings', or shelf space, in biscuit bars in supermarkets. There are suggestions in the evidence that, on occasions, the retail chains have indicated interest in encouraging a new entrant (e.g. Players, Paradise) to provide competition to Arnotts, but Arnotts has been able, generally speaking, to maintain its position of first in the traffic flow, and occupying 50% of the biscuit bar. The strength of Arnotts' position in this respect has provided a considerable barrier to any new entrant to the biscuit industry.
12. Biscuits are marketed separately from other processed foods such as snack foods, confectionery and bread. From time to time, the management of the biscuit industry has noted the possibility of threats from, or opportunities in, the snack food industry, the confectionery industry and the bread industry. But these threats, or opportunities, are unusual and, when they occur, they are confined to a specific category of biscuit, e.g. chocolate biscuits, and do not involve biscuits generally. As the Arnotts' management approach to 'Tim Tams' and the discussion of the introduction of sales tax on chocolate biscuits in 1985 show, even in the case of chocolate biscuits, the biscuit industry recognises, and acts upon the recognition, that the biscuit industry should be distinguished from the confectionery industry. Hence the need to package and market a biscuit differently if it is to be sold as confectionery. The general position is that the biscuit industry is self- contained. Generally speaking, as the 'competitive activity' reports indicate, the members of the industry confine their attention, and their conduct, to the biscuit marketing efforts of other biscuit manufacturers. By and large, biscuit producers do not concern themselves with the activities of the manufacturers of other kinds of processed foods. I say 'by and large' because, as Deane J. (with the general agreement of Dawson J.) pointed out in Queensland Wire ((1989)  HCA 6; 167 CLR 177, at 196), the 'outer' limited of a market are likely to be 'blurred'.
13. The B.I.S. figures deal, for instance in the cracker and savoury segment, with approximately 90% in volume and approximately 95% 'in dollar terms' of biscuit sales in Australia. This explains why the management of Arnotts, Weston and Nabisco place considerable, even if not exclusive, reliance upon these statistics. It also explains why Arnotts' management devotes so much effort to the process of monitoring the trading activities of Weston and Nabisco.
14. Weston's management recognised that Weston's performance was hindered by, inter alia, the following:
(1) Weston does not compete in the cracker, flavoured snacks segment ('23% of the total market').
(2) Arnotts and their other brands have a 'stranglehold on the domestic market in relation to range, price structure and advertising/promotional activities.'
(3) The advent of generics has weakened its image as the 'value for money' manufacturer.
(4) The 1985 sales tax has 'narrowed' the 'differential' between a packet of chocolate biscuits and a block of chocolate. Biscuit sales have 'slowed' in 'almost every segment but particularly in the high priced chocolate range'.
(5) Chain store 'dominance' of the trade is a 'cause for concern' to all food manufacturers. Their 'dictatorial' attitude in relation to promotional funding and trading terms places 'great strain' on the relationship between manufacturer and retailer. Independent retailers are losing their share of the market as chain store sales increase in volume.
15. Although the retail chains are a cause for concern for Weston, it appears that, on the whole, relations between Arnotts and the chains are mutually satisfactory. The history of the relationship between Arnotts and each of the chains, generally speaking, is consistent with an attitude of co-operation between them. Whatever power the chains may exercise over the smaller players, including Weston and Nabisco, the evidence indicates a recognition by Arnotts and by the chains that they need each other. There is no evidence that the chains have a 'dictatorial' attitude towards Arnotts. This is consistent with their recognition of Arnotts' position as the clear leader of the biscuit industry. The management of one of the major retailers, Coles New World, actually described Arnotts as a 'dominant market leader'.
16. Nabisco's management recognised, and acted upon the recognition, that Arnotts have a 'dominant' share of the 'total biscuit market'.
17. Over the three years ended March 1986, 1987 and 1988, the 'Arnott' brand share remained stable, irrespective of what happened in the case of the 'Sunshine' brand, Weston, Nabisco, imports and generics. "
His Honour concluded there was (see para 36 appeal)
- an area of 'close competition' in the supply of biscuits
- there is a product 'market' for biscuits;
- the market is a substantial one;
- the geographic market is Australia.
On the meaning of dominance his Honour stated:
[para 18] An enterprise will be in a position to dominate a market when there is a probability that the other enterprise or enterprises in the market will act in a way calculated not to affect adversely the dominant concern's short term interests. Dominance, unlike control, is not primarily concerned with the formal relationship between entities but rather with their conduct towards each other within a particular market environment. If the size or strength of a particular entity is such that, in practice, other entities are unable or unwilling actively to compete with it in a particular market, that entity is dominant in that market. The dominant position relates to a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained in the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers. Such a position does not preclude some competition but enables the undertaking which profits by it, if not to determine, at least to have an appreciable influence on, the conditions under which the competition will develop and, in any case, to act largely in disregard of it so long as such conduct does not operate to its detriment ...
His Honour concluded that Arnotts was in a position to dominate the market; it held a very large market share and did not experience much competition in the supply of biscuits. Its size and strength meant that others were unable or unwilling to offer significant competition, but tended to try to find 'gaps' or 'niches' in the market - this indicated Arnotts held a 'commanding influence' in the market (para 38 appeal judgment)
[para 222 trial] ... in my opinion, Arnotts is, in the sense explained in the authorities, in a position to "dominate" that market. Arnotts has had, for many years, a very large market share. True, Arnotts has some competition in the supply of biscuits, but not much. The evidence shows that the members of the biscuit industry and the members of the grocery trade, being the "players" in the market, act upon the belief that Arnotts is in a position to exercise, and does exercise, from time to time, a commanding influence in the market. The evidence establishes that the size and strength of Arnotts is such that, in practice, other entities are unable or unwilling to offer any significant competition to Arnotts in the biscuit market in the medium or long term. Even in the short term, there is an obvious reluctance to meet Arnotts "head-on" or directly. Instead, other suppliers of biscuits seek to find "gaps" or "niches" in the market. All of this conduct is an indication that Arnotts holds a commanding influence in the market.
On the meaning of market his Honour referred to the judgment of Mason CJ and Wilson J in Qld Wire, noting that
[para 19] '... after identifying the appropriate product level, it is necessary to describe accurately the parameters of the market in which the defendant's product competes: too narrow a description of the market will create the appearance of more market power than in fact exists; too broad a description will create the appearance of less market power than there is. Referring to the notion of substitution mentioned in s. 4E, Mason C.J. and Wilson J. said that this process of defining a market by substitution involves both including products which compete with the defendant's and excluding those which because of differentiating characteristics do not compete.'
Referring to Justice Deane in the same case he noted his Honour's observations that 'market' 'should be understood in the sense of an area of potential close competition in particular goods and/or services and their substitutes' and that
'the economy is not divided into an identifiable number of discrete markets into one or other of which all trading activities can be neatly fitted. One overall market may overlap other markets and contain more narrowly defined markets which may, in their turn, overlap, the one with one or more others. The outer limits of a particular market are likely to be blurred: their definition will commonly involve assessment of the relative weight to be given to competing considerations in relation to questions such as the extent of product substitutability and the significance of competition between traders at different stages of distribution. While actual competition must exist and be assessed in the context of a market, a market can exist if there be the potential for close competition even though none in fact exists.' (para 20)
His Honour also referred to comments of the Tribunal in Re John Dee (Export) Pty Ltd (1989) ATPR 40-938, that '... 'the market' is an instrumental concept, designed to assist in the analysis of processes of competition and sources of market power.' (para 25)
His Honour considered this suggested a degree of strengthening of power that is 'real or of substance and not insubstantial or nominal' (para 39 appeal) and concluded the Arnotts' acquisition of Nabisco 'would, or would be likely to, substantially strengthen Arnotts' power to dominate the national biscuit market' (para 40 appeal) His Honour noted that in relation to dry crackers and flavoured snacks Nabisco was Arnotts' only competitors and these were 'vitally important' segments. In addition, Arnotts 'would gain economies of scale from an acquisition of this size' (para 41 appeal)
Issues on appeal
- Whether the acquisition contravened s 50; in particular
- the relevant market (Australian biscuit market)
- whether Arnotts was dominant
- whether the acquisition would substantially strengthen Arnotts' market power
- Whether evidence given by Dr Phillip Williams should have been deemed inadmissible.
Justice Beaumont's finding that the grant of the option created an equitable interest in shares and therefore constituted an 'acquisition' was not challenged on appeal
Appeal dismissed. Their Honours were satisfied that 'Beaumont J was correct in each of the three principal findings' (para 14)
On the nature of the proceedings (in particular claims of confidentiality)
Before turning to the substantive issues the Court commented on some concerning aspects of the trail (para's 7-). In particular, they were concerned with the duration and cost of the trial. Their Honours noted:
[para 8] 'The investigation of these practical questions of fact involved a trial occupying 110 hearing days, spread over nine months. The hearing generated some 6,500 pages of transcript and 292 exhibits. Most of the exhibits were lengthy documents. Many occupied one or more large ring-bound folders. Stacked side-by-side in folders, the exhibits extend for some five metres. In total, they contain tens of thousands of pages. The trial Judge found it necessary to refer in his reasons for judgment to only a handful of those documents, although no doubt he read them all. ... before us, the appellants attacked his Honour's findings on almost every significant factual issue and many of his evidentiary rulings, and although both parties supplied us with extensive written submissions supplemented by seven days of addresses, counsel found it necessary to refer us to only a tiny proportion of the oral and documentary evidence; perhaps no more than two per cent of it. We acknowledge that it is usually unnecessary on appeal for counsel to refer to the whole of the evidence led, and properly led, at the trial. We also acknowledge that material which itself has no evidentiary value is sometimes properly tendered in order to provide a context for other material. However, making these allowances, the comparison just made raises immediate doubts about the utility of much of the evidence tendered at the trial. Those doubts are abundantly confirmed by examination of the material itself.
Their Honours also noted the extensive claims of confidentiality which led the trial judge to make orders limiting access (normally to lawyers and independent experts). This meant that ' counsel and witnesses were inhibited in their references to the contents of documents unless the Court was closed to the public, as it frequently was.' (para 9). Their Honours noted that the trial judge 'relied heavily upon these documents for his conclusions that the relevant market was properly to be described as "the Australian biscuit market" and that Arnotts already enjoyed a dominant position in that market.' This resulted in an unexpurgated version of his judgment being 'made available only to a limited number of people' and 'an expurgated version of his reasons, for a general audience, from which all citations from the "confidential" documents were omitted. That version lacked both basic information and intelligibility' and it 'is not until one reads the unexpurgated version that one can gain any real understanding of his Honour's findings of fact or processes of reasoning.' (para 9)
Their Honours noted that while some documents are 'truly confidential' (para 11) and where those documents 'become involved in litigation, the disadvantages of restricting access may have to be accepted in order to avoid injustice to their owners or authors', but noted that few of the documents for which such claims were made in this case could be said to be 'truly confidential'. As a result the Full Court revoked the confidentiality orders made by the trial judge 'insofar as it related to any material set out in the unexpurgated reasons' (para 11). Their Honours further noted that the confidentiality claims in this case were unacceptable and neither 'the Court nor the litigants should have to contend with the constraints imposed by unnecessarily wide confidentiality orders' or 'be burdened with the consequences of a mountain of seemingly unnecessary evidence.' (para 12)
[para 13] There appears to be an assumption abroad today about commercial litigation: that, when big issues are at stake, there must inevitably be a long and complicated hearing. This assumption must be discarded. No matter how much is at stake, in dollar terms, there is no justification for irrelevant or unuseful evidence. Moreover, it is in the interests of the parties to analyse properly the cases which they wish to make and to restrict themselves to helpful material; and not only because of savings in costs. The devotion of excessive attention to peripheral matters, rather than the main issues, causes the parties to lose sight of the real issues and to devote insufficient attention to them. The result may be to leave the Court with insufficient or unsatisfactory material upon principal factual issues. The essence of counsel's function is the identification of, and concentration upon, the critical issues in the case.
[para 14] A remarkable feature of the present case is that, when the smoke all clears away, most of the critical facts stand clear and uncontroversial.
Their Honours first set out some details about Arnotts' business, noting its initial establishment in 1850, subsequent acquisitions and a 'degree of vertical integration and product diversification' (para 16). They noted that by the time of the trial
[para 17] 'the Arnott commercial empire involved assets of approximately $800m and a share capital of $7m. The parent company, Arnotts Limited, has a large number of subsidiaries in Australia and abroad. The operating revenue of the group for the year ended 30 June 1988 was $709m. The principal activities of the group are the manufacture and distribution of biscuits, formula dietary foods, snack products, cakes, pet foods, confectionery, bread, jam, nuts, packaging materials, containers, flour milling and engineering. Arnotts itself is a major Australian manufacturer of food products; including biscuits, cakes and confectionery. Biscuits represent the major part of Arnotts' business.
[para 18] The biscuits manufactured and sold by Arnotts include a number of well established brand names. The "Milk Arrowroot" biscuits made their appearance in about 1880. "Sao", "Assorted Creams", "Family Assorted", "Scotch Finger", "Gingernut" and "Shredded Wheatmeal" biscuits have all been marketed since at least 1906. "Monte Carlo" and "Spicy Fruit Roll" were introduced in the 1920's. The dry cracker biscuits known as "Jatz" and "Salada" were introduced more than 25 years ago. The evidence indicates, on the part of consumers, strong recognition of Arnotts' brand, which is displayed on distinctive packaging. Arnotts' biscuits are perceived by consumers as the best quality biscuits, but as more expensive than other brands.
Nabisco commenced operations in Australia approximately 20 years before the trial. In addition to biscuits it manufactured breakfast cereals and processed nuts. These included cereals under the trade mark "Uncle Tobys". In relation to biscuits, 'the Nabisco strength is dry crackers, flavoured snacks and chocolate biscuits', 'Weston is strong in assortments, cookies and chocolate biscuits' and 'Arnotts covers the entire range of products' (para 28)
Market and market definition
The Trial Judge held that there was a national market for the supply of biscuits to wholesalers and retailers. His Honour:
[para 20] '... found that there was a "market", within the meaning of ss. 4E and 50 of the Act, being a national market for the supply of biscuits to wholesalers and retailers, and that there were two principal players therein, in addition to Arnotts, namely Nabisco and Weston. About 90% of biscuits supplied by the participants in this market are supplied to the major retail supermarket chains or to large grocery wholesalers. The four principal purchasers of Arnotts' biscuits are the supermarket chains conducted by Coles Myer Limited (the "New World" supermarkets), Franklins Ltd, Woolworths Ltd, and the buyers comprised in Amalgamated Australian Wholesalers Ltd. ...
[para 21] Over the three years ending 30 June 1988, Arnotts supplied approximately 65% of the biscuits consumed in Australia, Weston 13% and Nabisco 8%. The balance, approximately 14%, was divided between imported biscuits (excluding biscuits imported by Arnotts and marketed under the name "Premiere") and the product of other Australian manufacturers.
[para 22] In 1988, the total Australian biscuit market had gross wholesale sales of about $600m. The total volume in 1985/86, 1986/87 and 1987/88 was 135,720,900 kgs, 135,545,900 kgs and 137,946,000 kgs respectively. There are approximately 26 manufacturers and importers of biscuits, in addition to Arnotts, Nabisco and Weston. They include Cadbury Schweppes Pty Limited, which in 1987 successfully launched a range of chocolate biscuits. But none of these other manufacturers has offered a product range comparable to that of Arnotts, Nabisco and Weston.
Their Honours set out some further details about the market in Australia and noted some of the 'difficulties confronting a new biscuit manufacturer' (para 24)
They noted that Part IV of the Act was 'designed to foster competition' and that the 'role of s.50 is to maintain competitive markets by restraining monopolisation and prohibiting mergers that will produce a non-competitive market.' (para 46) Their Honours referred to the Qld Wire case, observing that the 'identification of the relevant market and the assessment of dominance, in the sense of market power, cannot be separated' (para 47). Their Honours further observed that it is 'impossible to provide an absolute definition of "market"' (para 48), referring to the following passage Maureen Brunt's Market Definition article at page 126:
"It must be constantly borne in mind that market definition is but a tool to facilitate a proper orientation for the analysis of market power and competitive processes - and should be taken only a sufficient distance to achieve the legal decision. There may be more than one relevant market for a particular case in the sense of markets that would attract liability."
Additional case references were made to emphasis essentially the same point. Their Honours noted that the concept of substitutability was relied on heavily in this case.
The two main arguments relied on by the appellants in relation market definition were set out in para 53 as follows:
'first, that there are categories of biscuits which are not competitive with other categories of biscuits' and that this supported 'the conclusion that there is not one overall biscuit market but a series of biscuit markets';
'second, that there is competition between certain types of biscuits on the one hand and certain types of non-biscuit products on the other' with the result that 'the market is wider than biscuits themselves'
Their Honours noted that there was evidence each way on the first argument. (para 55)
In relation to the second matter the Commission conceded that the evidence established 'that retailers avoid the simultaneous promotion of two products within the same category', but they 'argued that this is but one factor amongst the many which should be considered in defining the relevant market.' (para 56)
After referring to the evidence and some other authorities discussing market definition, their Honours noted that 'the application of the concept of substitutability requires the making of a value judgment. The question of substitutability is not to be disposed of merely by showing that, upon some occasions, some people consume one product rather than another or that some products within a claimed market do not directly compete with some other products in that market; or do compete with some products outside that claimed market.' (para 62) In the present case, while on some occasions a consumer might select a non-biscuit product instead of a biscuit, this does not 'establish that the two products are "substitutable", so as to be within a single market. ... It is important to remember that the notion of substitutability adopted in s.4E is one which looks to the market itself, not to the habits of individual consumers...' (para 64)
Their Honours concluded that the trial Judge's definition of market was correct.
Justice Beaumont concluded that Arnotts was in a position to dominant the national biscuit market. Arnotts argued that there was fierce competition in the industry and that that was incompatible with dominance.
Although not defined in the Act, their Honours noted the natural and ordinary meaning of dominance was 'having a commanding influence on' and noted that a dominant firm has a high degree of 'market power', defined by Mason CJ and Wilson J in Qld Wire as 'the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product ..." ' (para 74) [their Honours also referred to several other definitions of 'market power].
Their Honours then referred to a 'useful list of criteria' given in QCMA for assessing 'whether a participant enjoys a dominant position in a market' (para 76):
[QCMA at 189] "Competition is a process rather than a situation. Nevertheless, whether firms compete is very much a matter of the structure of the markets in which they operate. The elements of market structure which we would stress as needing to be scanned in any cases are these:
(1) The number and size distribution of independent sellers, especially the degree of market concentration;
(2) The height of barriers to entry, that is the ease with which new firms may enter and secure a viable market;
(3) The extent to which the products of the industry are characterized by extreme product differentiation and sales promotion;
(4) The character of 'vertical relationships' with customers and with suppliers and the extent of vertical integration; and
(5) The nature of any formal, stable and fundamental arrangements between firms which restrict their ability to function as independent entities.
Of all of these elements of market structure, no doubt the most important is (2), the condition of entry. For it is the ease with which firms may enter which establishes the possibilities of market concentration over time; and it is the threat of the entry of a new firm or a new plant into a market which operates as the ultimate regulator of competitive conduct."
Their Honours also referred to a number of European authorities on this point.
Applied to this case their Honours noted that there were 'five potential barriers to entry: the difficulties facing a competitor by reason of Arnotts' position as market (65% share) and price leader; the capital cost which would be incurred by another organisation which sought to compete with Arnotts across a broad product range; the strength of brand loyalty enjoyed by Arnotts; the competitive advantage ensuing from Arnotts' economies of scale and range; and the difficulty which a competitor would face in obtaining sufficient supermarket shelf space to support an "across-the- range" operation.' (para 87)
In the present case, their Honours noted that others do compete with Arnotts, but also that they had been unsuccessful in reducing Arnotts' market share and were unable to compete across the full range of products (para 97).
Their Honours concluded (para 102) that 'there was sufficient evidence to support his Honour's conclusion that Arnotts already dominates the Australian biscuit market.'
Effect of the acquisition
Under the existing merger law, where a corporation was already in a dominant position, s 50 could only be contravened if the acquisition would, or would be likely to, substantially strengthen the power of that corporation to control or dominate that market.
[para 104] Beaumont J held that "substantially", in the context of s.50(1)(b)(ii),"suggests a degree of strengthening of power that is 'real or of substance and not insubstantial or nominal'." His Honour concluded that Arnotts' acquisition of Nabisco would, or would be likely to, substantially strengthen Arnotts' power to dominate the national biscuit market. Beaumont J pointed to two matters as supporting this conclusion. First, he referred to Nabisco's 8% market share. In two important segments of the biscuit market (dry crackers and biscuit snacks) Nabisco is Arnotts' only competitor. His Honour regarded these segments of the market as vitally important because of their high volume and disproportionately large rate of growth. Secondly, Beaumont J concluded that Arnotts would gain further economies of scale from the acquisition of Nabisco. His Honour said that, viewed against the background of the failure by Arnotts and Nabisco to call any evidence from management, these considerations suggested that the acquisition of Nabisco would, or would be likely to, strengthen Arnotts' power to dominate the Australian biscuit market and would, or would be likely to, strengthen Arnotts' power to do so to a degree that was real and of substance and was not insubstantial or nominal.
The appellants submitted that Beaumont J misconstrued the word "substantially", referring to the test as applied in relation to authorisation cases ("a substantial benefit to the public") in which it had been defined as 'considerable', 'large' or 'weighty'. Their Honours rejected this argument, agreeing with Beaumont J that the word "substantially", where used in s.50(1)(b)(ii) of the Act, meant 'real or of substance; as distinct from nominal, insubstantial or ephemeral' (para 106)
[para 107] In the context of s.50(1)(b)(ii), "substantially" should not be construed in the sense of meaning large or weighty or considerable. The purpose of s.50 is to protect and advance competition by precluding mergers or acquisitions which are likely to have an adverse affect on competition. If a corporation is already in a dominant position in the relevant market before an acquisition, it would be odd if the threshold to be crossed before the section could operate to prohibit the merger is that the acquisition must be such as would give the corporation a large increase in its position of dominance. The legislative policy underlying the section is satisfied where the likely outcome of the acquisition would be a real or substantial strengthening of the market power of the acquiring corporation.
Their Honours were satisfied that there was evidence strongly supporting the Commission's submissions and agreed with the conclusions of the Trial Judge that 'Arnotts' acquisition of Nabisco would be likely substantially to strengthen its power to dominate the national biscuit market.' (para 112)
Rejection of expert evidence
The trial judge rejected evidence called by the appellants by their expert, Dr Phillip Williams. The rejection was not based on any lack of expertise, but rather rules of evidence - explained as follows by Justice Beaumont (reproduced para 125 appeal):
'... there is a rule of evidence at common law that, except in a straight-forward, uncomplicated case, where the facts are admitted and readily identified, the opinion of an expert is admissible only where the premises, that is to say, the facts, upon which his or her opinion is based, are expressly stated. It follows that, in a complex case, where facts are not readily identifiable, it is not permissible to put the whole of the transcript and documentary evidence to the witness en bloc. This is complex litigation and the facts in respect of which Dr. Williams purported to express his opinion were not admitted by the respondents. Indeed, the facts, and the proper inferences or conclusions to be drawn from the facts contended for by the Commission, were vigorously disputed by the respondents over the many months of this litigation. In those circumstances, it is impossible for the court to know what facts Dr. Williams had in mind when expressing his views. This objection to his evidence is not a mere technicality nor is it only a rule to be applied in jury trials. ... the rule is of general application. In complicated litigation, there are sound reasons of policy which support a rule that the premises considered by the expert should be expressly stated rather than left to speculation. It is preferable that these matters be clarified when the witness is examined in chief rather than leave room for argument later as to exactly what matters the expert had in his mind when expressing his conclusions ...'
Their Honours noted:
The events of this case underline the importance of the principle that an expert witness must identify the facts assumed in his or her opinion. After Dr Williams left the witness box, a considerable amount of other material, both oral and documentary, was admitted into evidence. Without knowledge of the basis of Dr Williams' conclusions, the trial Judge had no way of knowing whether that additional material would have affected Dr Williams' views.
Their Honours discussed a number of principles relating to expert witnesses and noted that the 'fundamental problem about his evidence is that he attempted to act as advocate without making his assumptions clear. He did not assume a set of identified facts, consistent with those contended for by the appellants. Rather, he told the Judge what facts he should accept.' (para 139)
Their Honours noted that there were fragments of Dr Williams' evidence which 'might properly be regarded as admissible' (para 143), but concluded that if any of that evidence were admitted, it would not have affected any of their conclusions and therefore found no basis for granting a new trial.