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ACCC v Baxter Healthcare

[2005] FCA 581 (16 May 2005) (first instance)
[2006] FCAFC 128 (24 August 2006) (on derivative immunity)
[2007] HCA 38 (29 August 2007) (on derivative immunity)
[2008] FCAFC 141 (11 August 2008) (on sections 46 and 47)
[2010] FCA 929 (26 August 2010) (on penalties)

Overview | First Instance | Full Federal Court | High Court | Full Federal Court (again) | Federal Court - penalty
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Overview

This case involved supply by Baxter Healthcare Pty Ltd to a number of State purchasing authorities of sterile fluids used for dialysis treatment. Baxter manufactures and supplies intravenous (IV) solutions, peritoneal dialysis (PD) fluids and parenteral nutrition (PN) products. It has an effective monopoly in relation to sterile fluids but faced real competition in relation to PD fluids. During the relevant time Baxter tendered for the supply of sterile and PD fluids to State Purchasing Authorities (SPA's). If offered products either as (prohibitively) high item-by-item prices or 'bundled' at significantly lower prices. The 'bundled' price was only available on condition Baxter was the sole supplier of both sterile and PD fluids to the SPA's.

Allegation

The ACCC alleged that Baxter had contravened the exclusive dealing and misuse of market power provisions of the Act by using the market power it enjoyed in relation to sterile fluids to effectively compel the SPAs to enter into exclusive supply contracts including the PD products

Application of the Act (derivative Crown immunity)

It was conceded by the ACCC that the SPAs were not ‘carrying on a business’ for purposes of the Act and therefore had Crown immunity from Part IV.  The issue then became whether Baxter benefited from ‘derivative’ Crown immunity in its dealings with these authorities.  At first instance and on appeal to the Full Court, it was held that they did benefit from derivative immunity (based on the earlier High Court decision in Bradken v Broken Hill Proprietary Co Ltd (1979) 145 CLR 107)The majority of the High Court held that parties did not benefit from derivative Crown immunity when dealing with Crown authorities.

Exclusive dealing

The majority of the Full Federal Court held that Baxter had contravened s 47; in particular, it had the purpose and effect of substantially lessening competition.

Misuse of market power

The Full Court unanimously held that Baxter had substantial market power in relation to sterile fluids and that it had taken advantage of this power. The majority (Dowsett J dissenting) also held that Baxter had a prohibited purpose (s 46(1)(c)) and therefore contravened s 46.

Overview of the various decisions

  1. The matter first came before Justice Allsop in the Federal Court. His Honour held that:
    • The Act did not apply to Baxter's conduct because they had the benefit of derivative Crown immunity
    • If the Act did apply to Baxter their conduct:
      • contravened s 46 in relation to one of the transactions involved
      • contravened s 47 in relation to all transactions involved
  2. The ACCC appealed to the Full Federal Court.
    • The Court dismissed the appeal, agreeing with the Primary Judge that Baxter benefited from derivative Crown immunity. The Court did not consider the other grounds of appeal (the ss 46 and 47 claims)
  3. The ACCC appealed to the High Court on the issue of immunity
    • The majority of the High Court (Justice Callinan dissenting) upheld the appeal, finding Baxter did not benefit from derivative Crown immunity. They remitted the matter to the Full Federal Court to consider the ss 46 and 47 claims.
  4. The Full Federal Court then considered the ss 46 and 47 claims
    • On misuse of market power the Court unanimously held that Baxter had substantial market power and had taken advantage of this power. The majority (Dowsett J dissenting) also held that Baxter had a prohibited purpose (s 46(1)(c)) and therefore contravened s 46.
    • On exclusive dealing the majority (Dowsett J dissenting) found that the various 'bundled' contracts contravened s 47; in particular, they had the purpose and effect or likely effect of substantially lessening competition
  5. The issue of penalties was subsequently considered by Justice Mansfield. His Honour ordered pecuniary penalties totaling $4.9million against Baxter as well as imposing cost orders.

 

Federal Court (First Instance; Justice Allsop)

Justice Allsop held that Baxter benefited from derivative Crown immunity and that, as a result, the Act did not apply to their conduct.

Justice Allsop did consider the position in the event the Act did apply and concluded that there would have been one contravention of s 46 and a number of contraventions of s 47 if the Act applied.

Misuse or market power

Market and market power

On purpose Justice Allsop noted the purposive approach to market definition employed by Mrs Smith:

[498] The market definition must facilitate analysis of the competitive process. It is necessary to define a market in relation to the particular issue to be examined so that it provides the best possible representation of the competition issues.

His Honour considered the expert evidence (see para's 498-511), both in relation to market power and the taking advantage of that power (in particular, when bundling should be classified as exclusionary - see para's 512-546)

His Honour then concluded that the appropriate market definition was 'an Australia-wide PD market separate from an overall Australian sterile fluids market' [para 551] and noted that in arriving at this conclusion he was significantly persuaded by the analysis of Mrs Smith.

His Honour then considered whether Baxter had power in this market. He noted that the 'essence of power is the absence or degree of absence of constraint' (para 563) and that 'large market share may or may not give or reflect the existence of market power' (para 564). 'Substantial' in this context means 'considerable or large' (quoting Eastern Express at 63). His Honour considered countervailing power and barriers to entry and also the 'temporal aspect' noting that:

[para 579] At the relevant times of the impugned transactions Baxter had been the sole domestic manufacturer and dominant (nearly exclusive) supplier for between six and nine years. The last local competitor had left in 1992, unable, it said, to justify the maintenance of its plant in Australia, without a guaranteed share and a price increase. No competitor since then had sought to challenge Baxter in relation to sterile fluids. The products were price inelastic. They were essential. There were constraints, but not such as to deny to the Baxter executives the confident expectation that Baxter would be successful in its sterile fluids tenders.

His Honour concluded that Baxter had substantial market power in the sterile fluids market.

Taking advantage of market power

His Honour noted that:

[581] The separate operation of the element of taking advantage of the substantial degree of market power has been stressed by the High Court.

[582] The words connote a body of human behaviour which would not or could not be done in other circumstances where the substantial power did not exist. It also requires the answer to the factual question whether the impugned conduct was the taking advantage of the power. ...

In this case

[582] ... The relevant offers were not made in circumstances in which it can be seen that advantage was being extracted from the position of power by obtaining something from the SPAs which was resisted. Other than SA in Offer 1A, no SPA asked for a volume discount for sterile fluids on an exclusive basis, detached from PD.

[583] The history of the tenders recounted earlier reveals that the SPAs were willing parties to the acceptance of these bundled contracts. This willing participation and indeed in some respects the calling for this kind of structured bid, is an essential background to the assertion that Baxter took advantage of its substantial degree of market power.

...

[591] The item-by-item prices were not intended to be accepted.

His Honour concluded:

[594] Set in the context of the history of the various tenders, I cannot conclude that in respect of any of the bids (leaving aside Offer 1A in SA) there was a relevant taking advantage. The tender structures either permitted, or in some cases expressly encouraged, exclusive supply tenders over all products.

[595] When one appreciates that there was no attempt to analyse the item-by-item prices by reference to costs (by either Baxter or the ACCC), or by reference to what might be a monopoly pricing or otherwise, beyond the difference between the bundled prices and the item-by-item prices, it is difficult to draw specific and particular conclusions about the item-by-item costs. Against a background of some evidence of the low margins for sterile fluids, it is therefore difficult to conclude that those prices could not have been offered as an alternative in circumstances where Baxter did not have a substantial degree of power in the sterile fluid market prices.

[596] Offer 1A in the SA bid is more problematic. It was an isolated event in dealing with one buyer in the national PD market. If Mr Browne had had any real concern about there being workable competition in the sterile fluids market at that time in SA I do not think that he would have displayed what was a fairly high-handed approach. ... he would not have so acted if he had not had the confidence that he undoubtedly did have in Baxter’s position in the sterile fluids market at that time in SA.

[597] I am prepared to conclude that that point blank refusal to give a discount for volume in Offer 1A on sterile fluids was a taking advantage by Baxter of its substantial degree of market power.

His Honour therefore concluded that there was a taking advantage in respect of one bid only.

Purpose

The relevant purposes alleged in this case involved eliminating or substantially damaging a competitor in the sterile fluids or PD market (s 46(1)(a)) and deterring or preventing a person engaging in competitive conduct in the sterile fluids or PD market (s 46(1)(c))

His Honour noted that purpose was the 'subjective purpose viewed in the context of all the surrounding circumstances' [para 601; emphasis added]

His Honour accepted that there was 'clear and defensible reason for the otherwise commercially understandable desire to obtain as much business as possible and to maintain maximum throughput through the plant' [para 602] but also observed that:

[605] It should be recognised that one could have the benign aim of maximising throughput, by having a purpose (by way of a substantial purpose as one of the purposes: s 4F(1)(b) of the Act) found in s 46(1)(a) and (c). That is, there may be a finding that a party had a proscribed s 46(1) purpose as the means of ensuring the "legitimate" commercial aim of having a vulnerable factory maximise its throughput and lower its marginal costs.

Applied here:

[606] The Baxter documents ... reflected a recognition at the senior corporate level in Baxter ... that Baxter was employing a technique or strategy of 'bundling' or 'leveraging' of dialysis products with sterile fluids, in part because it was being permitted, or tacitly encouraged, to do so. It seems to me tolerably plain that ... Baxter ... recognised that by tying or bundling PD to sterile fluids in the context of a credibly framed item-by-item alternative the consequence would be to make the bids of competitors in respect of PD ... unlikely to be acceptable. One does not need the sophistication of the analysis of [economic experts] to appreciate the significant additional cost of the item-by-item approach as the price of taking a competitor’s PD products. ... That consequence was plainly appreciated by the SPAs and intended by Baxter.

[608] Thus, it seems to me clear that the purpose involved, as a substantial purpose, was to frame a bid structure involving a credible item-by-item alternative to maximise the chances of bringing about circumstances in which the bids of competitors with substantially equivalent products could only be accepted at a significant cost penalty.

...

[609] This was not a purpose within s 46(1)(a).

[610] Whether or not this is a purpose within s 46(1)(c) is more problematic. If s 46(1)(c) is directed to deterring or preventing Fresenius or Gambro or anyone else from engaging in conduct at any time in the PD market, I do not think Mr Lee or anyone else at Baxter had such a purpose. Fresenius and Gambro ... were large worldwide concerns. Just as Baxter did not have a purpose to damage or eliminate them, it did not have a purpose to deter or prevent them from trying to gain sales in Australia by undertaking conduct in Australia, such as by submitting competing tenders. Baxter’s purpose was to bid in such a way as would prevent rival bids in the PD market being "competitive", that is likely to succeed over Baxter’s bid. The purpose in so constructing the bids in question was, it seems to me, plainly to meet the developing competition for PD fluids in Australia from Fresenius and Gambro. That the approach was encouraged or tacitly or expressly approved by the SPAs is not to the point. Baxter could have structured its bids otherwise. It did not. It offered a tie or bundle at, largely, historical prices, and a credible threat of an alternative with much higher prices. The purpose was to make rival PD bids uncompetitive in the sense of unacceptable, because of the credible cost alternative of Baxter’s item-by-item offer. [emphasis added]

[611] I have no doubt that that was the purpose (in the sense of a substantial purpose) of Baxter. The question is whether that satisfies s 46(1)(c).

[612] The notion of 'competitive conduct' should be understood in a practical business sense conformable with the subject, scope and purpose of the legislation, including the objects stated in s 2 ... This involves the welfare and protection of consumers through the preservation of the competitive process: ...

[613] The proposition put forward by Baxter is that the purpose of Baxter was not directed to the competitive process in that Baxter’s purpose was not to deter or prevent Fresenius or Gambro from engaging in conduct in Australia ..... Expressed at that level of generality, I agree. However, the competitive process involves not merely the existence of an ability to put forward a rival offer, it involves the existence of circumstances which make it likely or, at the very least, feasible, that the rival offer might be successful and so might compete in a real and practical sense. The phrase 'competitive conduct' can be taken to mean conduct that is competitive in a real and not nominal sense: here, not just the ability to submit paper that can be seen to be a bid of a rival, but that bid having some prospect of success, of being 'competitive'. Looked at in that way I have no doubt that ... the ... senior executives concerned at Baxter, and thus Baxter, had a substantial purpose in structuring the bids in a way to prevent rival bidders (Fresenius and Gambro) for PD products from being able to put forward bids that were realistically competitive by the existence of credible alternative high item-by-item pricing. In the tender bidding system prevailing, albeit structured and dictated by the buyers (the SPAs), the purpose was to create circumstances in which Fresenius and Gambro could not put forward realistically competitive bids and so prevent them engaging in conduct that was, in a real sense, competitive. True the act of Baxter did not impinge directly on Gambro or Fresenius doing anything. Rather, it was directed to affecting the environment in which their actions (their bids) would be judged. Bearing in mind the aim and purpose of the legislation that, it seems to me, is to prevent Fresenius and Gambro from engaging in relevant conduct, because of the controlling or focal role for the adjective 'competitive'. [emphasis added]

[614] Of course, many traders will attempt to make their rivals’ bids uncompetitive. They may do so by cost reduction, quality, service or other attribute of their product or service. Here, however, the posited circumstance is that a trader has taken advantage of a substantial degree of market power with the purpose in question.
...

[616] ... The purpose of the bid and its structure was to foreclose the likelihood or restrict the possibility of a competitor’s bid having any realistic prospect of success. The stubbornness of Mr Browne’s attitude to the request for Offer 1A in SA in 2001 reflects the reality of the purpose of the structure of the bids. To give a genuine discount for volume would be to make Fresenius’ and Gambro’s PD bids ones that had realistic prospects of success. It was that that was to be prevented, thereby protecting the PD revenue stream.

[617] ... My findings as to a proscribed purpose therefore should be seen as distinct from and in no way negating my findings as to whether Baxter took advantage of its market power.

Exclusive dealing

There was no real issue that the conduct fell within the definition of exclusive dealing and was prohibited if it substantially lessened competition (s 47(10)). His Honour noted that 'lessening competition' includes 'preventing or hindering' competition (s 4G). His Honour further observed that:

[620] The preventing or hindering of competition must be of the competitive process: Stirling Harbour ... ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) (1990) 27 FCR 460 at 478; and Universal Music ... at [242] and [266]. Competition or the competitive process is the means of protecting the interests of consumers: Queensland Wire at 191.

...

[621] The identification of the competitive process and thus competition which may be affected requires a temporal reference point. The relevant time period in which to judge or assess the competitive process will depend on all the circumstances of the case, including the structure of the industry and the asserted anti-competitive conduct.

[622] Here, one can examine Baxter’s conduct and purpose at a relatively high level of generality and long range time period: Was the purpose to affect the viability of entry of competitors into the Australian market? Was the effect to prevent same? Was Fresenius dissuaded from building a competitive factory in Australia? Were Fresenius and Gambro so affected by the loss of the tenders in 1998-2001 as not to be able to bid competitively in later years, for example because of the development of incumbency advantages in Baxter?

[623] At another level, focussing more on the tender process as the chosen competitive process, different questions arise. They do not involve directly any examination of long term effects on entry, incumbency advantages and the like, though these matters may flow from the discussion. Rather, they involve an examination of the purpose and effect of the conduct on the operation of the tender process as the mechanism that had been chosen by the SPAs as buyers for them to buy goods in the market.

[624] Each of the SPAs and the State governments which put in place a tender process intended that the operation of that process would produce real competition for the products the subject of the tender process. The purpose of Baxter was, as I have said, to structure the bids made by it in a way to prevent rival bidders for PD products from being able to put forward bids that were realistically competitive, by the existence of credible alternative high item-by-item pricing. The purpose was to ensure, as far as possible, that the competitive process of the tender process would not bring about realistically competitive bids for PD products by tying or bundling PD products to sterile fluids, and by providing a credible alternative which would make a choice of any likely rival PD product financially damaging to the State. [emphasis added]

[625] Is that a purpose of "lessening competition"? In my view it is. The competitive process here was the tender system used by the States. Suppliers in the relevant field were asked to bid on an hypothesis that each would be competing in a process that would be conducted in such a way as would enable each, subject to price and quality considerations, to have a realistic prospect of success. That is the nature of a tender process. Of course, if the quality of a rival’s product is inferior, or its price too high, its prospects of success will be low. However, if there are rivals with equivalent products and there is no reason to think that they are any less efficient than each other, conduct, which enables one rival to ensure that the others’ bids cannot be realistically competitive in the process, requires examination. If this effect on the prospects of success by rivals is a result of some competitive edge (a new process, a new invention, a radically reduced cost base) one can conclude that the other rivals’ bids are not competitive by reason only of the success of the competitive process. Here, however, one may conclude that the rivals’ bids are not competitive by reason of the realistic consequences that will occur to the buyer if the condition imposed by one rival on its offer to supply is not complied with. In those circumstances, it is the perceived consequences of not accepting the offer of bundled supply, that is, of not accepting the offer amounting to exclusive dealing within s 47(2), which hinders the effective operation of the tender process in relation to PD products. That plainly was the purpose of the bundled bids. That purpose, in my view, is one directed to hindering the competitive process of the tender bids and so hindering competition. [emphasis added]

[626] This approach to the conduct and the purpose of Baxter concentrates upon that part of the conduct which was an offer to supply on the stated conditions up to the entry into each contract. The entry into each agreement and the supply of products under each agreement cannot be said to have been for the purpose of hindering the competitive process in the form of the tender process since that process was complete. This conduct must be examined for Baxter’s purpose and its effect at a higher level of generality and in a wider temporal framework.

His Honour then considered the meaning of the word 'substantially' in s 47(10):

[628] The word "substantial" has the sense of being meaningful or relevant to the "competitive process": Rural Press v ACCC at 229, 220 and 249 ,[41], [2] and [108]; citing French J in Stirling at 40,732. See also Rural Press v ACCC at [41] and ftnt 26 for the proposition that it is not sufficient for liability merely because the relevant effect was quantitatively more than insignificant or not insubstantial.

[629] Viewed from the perspective of the effect on the tender process, the purpose was substantially to hinder the competitive process and so substantially to affect competition. Viewed from the same perspective, the likely effect on the competitive process was as was intended by Baxter. ... the likely effect at the time of the offering to supply (see Universal Music at [247]) was to hinder substantially the tender process of PD products in the way that I have identified in dealing with purpose. ...

His Honour then considered the meaning of the word 'likely', concluding that the balance of authority favoured construing likely to mean 'real chance or possibility' [para 633] and not a 'mere possibility'.

His Honour went on to discuss submissions made by Baxter and some of the relevant market conditions.

His Honour concluded that the conduct of Baxter in 'responding to requests for tenders and in negotiating the contracts in question [amounted] to a contravention of s 47 of the Act' [para 643]

Crown Immunity

His Honour concluded that Act did not apply to Baxter's conduct based on principles of derivative Crown Immunity

 

Full Federal Court

The Full Federal Court agreed with the primary Judge that Baxter benefited from derivative Crown immunity and therefore did not consider the substance of the s 46 and s 47 claims (see below the Court's discussion following remission from High Court)

 

High Court

The issue for the High Court was whether Baxter benefited from derivative crown immunity; in particular, whether ss 46 and 47 applied to their dealings with a State or Territory government where the government's conduct was not in the course of carrying on a business and was therefore not subject to the Act (s 2B). The appeal was allowed and the matter remitted to the Full Court of the Federal Court

Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ

The majority held that the Federal Court erred in finding that derivative Crown immunity protected Baxter in this case and upheld the appeal. In particular, they concluded that, in dealing with state purchasing authorities, Baxter was bound by ss 46 and 47.

Kirby J

Agreed with the majority that the appeal should be upheld.

Callinan J

Justice Callinan dissented, holding that Bradken remained as authority covering this case with the result that he would have dismissed the appeal.

 

Full Federal Court (on remission from High Court)

Justice Mansfield

Justice Mansfield agreed with the conclusions of Justice Allsop at First Instance; in particular, there was a misuse of market power contravening s 46 and exclusive dealing conduct which contravened s 47 of the Act.

Misuse of market power

Substantial market power

Justice Mansfield agreed with the primary judge's conclusion on the issue of market power - in particular, that Baxter did have a substantial degree of power in the Australia-wide sterile fluids market.

Taking advantage of market power

Both the ACCC and Baxter appealed on this point; the former because Justice Allsop concluded that only one of the agreements satisfied this element. His Honour noted that he did not:

[para 133] consider that the absence of analysis of Baxter’s item-by-item prices as monopoly prices is, in the circumstances of this case, an evidential impediment to concluding that Baxter, by its alternative offer strategy, took advantage of its substantial degree of power in that market.

His Honour concluded that Baxter had taken advantage of its market power.

[149] [Baxter] … had been using that strategy [of alternative tenders; item by item or bundled] for the best part of a decade, if not longer.  As a general proposition, Baxter could have made alternative item-by-item tenders and exclusive supply bundled tenders even if it did not have market power:  see e.g. per Gummow, Hayne and Heydon JJ in Rural Press at [52].  However, it is not merely the fact of alternative tenders which is significant.  It is that the item-by-item prices were relatively so high compared to the alternative bundled offer, and were also so much higher than had previously been paid by any relevant SPA that Baxter did not regard those prices as "serious". [emphasis added]

[150] In my view, that feature of the item-by-item pricing tends to indicate that Baxter was taking advantage of its market power.  Had there been any serious competitor in the sterile fluids market, Baxter could not rationally have made what appears to have been an unrealistically high item-by-item price for sterile fluids.  It would have been constrained from doing so by the competition in the market.  … [emphasis added]

[152] … in my view the pricing structure of the item-by-item bids as part of Baxter’s alternative offer strategy involved it taking advantage of its substantial degree of market power in the sterile fluids market.  On the evidence, it created that dramatic price differential without reference to its costs of production.  It suggested no economic foundation for its item-by-item pricing.  Its item-by-item prices or "cherry pick" prices … were always substantially above what the particular SPA was then paying, in some instances or items by more than 100 per cent.  None of the itemised prices had ever been paid by any of the Hospital facilities of the States or the ACT.  Baxter did not expect any of the SPAs to seriously consider accepting those prices; only that they be seen as credible.  It was not merely its general economic status which enabled it to engage in the impugned conduct.  It was able to do so because it had no real competitors in the sterile fluids market. [emphasis added]

[153] In my view, Baxter therefore took advantage of its substantial degree of market power in the sterile fluids market by engaging in its alternative offer strategy, including in particular by its pricing level for sterile fluids in its item-by-item bids.

Prohibited purpose

His Honour considered that the trail judges findings should be upheld; in particular, his Honour's 'conclusion that Baxter’s purpose was not within s 46(1)(a) should be upheld' [para 174] and 'Baxter’s purpose in engaging in the impugned conduct fell within s 46(1)(c), so that it contravened s 46(1) of the Act.'

Exclusive dealing

His Honour noted that there was

[at 193] ‘no dispute that Baxter’s impugned conduct amounted to conduct that fell within s 47(2).  That is quite clear:  its alternative offer strategy included offering to supply sterile fluids and PD fluids on the condition that the relevant SPAs would not acquire, or would acquire only to a limited extent, PD fluids from any competitor of Baxter in the PD fluids market.

[194] Consequently, its impugned conduct contravened s 47(1) provided it also came within s 47(10).’

His Honour agreed with the primary judge's approach

[241] In my judgment, the primary judge was correct to look at the purpose and effect of Baxter’s conduct by reference to the tender process or processes and their potential or actual outcomes.  The focus of s 47(2) relates to particular transactional behaviour by a participant in a market.  It is accepted that, by engaging in its alternative offer strategy, Baxter did engage in the practice of exclusive dealing.  Section 47(10) then directs attention to the purpose or effect of the exclusive dealing:  does it have the purpose or effect of substantially lessening competition?  By reason of s 4G, that means asking whether it has the purpose or effect of preventing or hindering competition.  Then s 47(13)(b) makes it clear that the reference to "competition" is a reference to competition in any market in which either Baxter or any person whose business dealings are limited or restricted by the conduct participates.  Relevantly, that is principally the PD fluids market.

[242] Those provisions direct attention to the purpose or effect of the impugned conduct upon competition in the market for the supply of PD fluids.  That market, at the times of the impugned conduct, included the market for the supply of PD fluids to the several SPAs.  In fact, it is clear that the supply of PD fluids to the SPAs represented a significant part of the market.  By its impugned conduct, Baxter sought to cut its competitors in that market out of the opportunity to supply PD fluids to the SPAs.  That is, Baxter sought, by engaging in exclusive dealing, to prevent or hinder its competitors competing to supply PD fluids to that part of the market.  The proscription of exclusive dealing is precisely to prevent that from happening which did happen, provided s 47(10) is satisfied.  The immediate competition in the market for the supply of PD fluids at the time of the proscribed conduct was for the opportunity to supply PD fluids to the relevant SPA.  That competition was affected by Baxter’s exclusive dealing.  It was Baxter’s purpose to do so:  it wanted to win that competition in the market by exclusive dealing, that is by making its competitors’ tenders for the supply of PD fluids realistically unacceptable to the SPAs by bundling its tenders and by its alternative offer strategy.

[243] In my view, it was appropriate for the primary judge to consider whether Baxter’s conduct had the purpose or effect of preventing or hindering Gambro and Fresenius from competing in the market for the supply of PD fluids to the SPAs.  Of course, it may have done so legitimately.  It may have done so by price, quality or service differentials in relation to PD fluids.  But it could not lawfully do so by engaging in exclusive dealing, if its conduct had the quality described in s 47(10).

[244] In answering that question, namely did Baxter’s conduct have the quality described in s 47(10), there is no reason to exclude the immediate effect of the impugned conduct from consideration of whether the purpose or effect of substantially lessening competition.  It would make no sense to do so, given s 47 proscribes exclusive dealing precisely because it may substantially lessen competition in a market in which the issue is the opportunity to supply to that market at that time.  … In the present circumstances, the real and immediate competition was (or included) the competition through the tender processes to supply PD fluids to the SPAs.  Indeed, I would take one step further than the primary judge.  The exclusive dealing did not come to an end by the making of the tenders.  It extended to the entering into each of the impugned Agreements (other than the 1999 ACT Agreement).  The entry into the sole supply agreements was the perfection of Baxter’s intention to secure that part of the market to itself by its exclusive dealing.

[245] The relevant control, in my view, is that imposed by s 47(10): the need for there to be a purpose or effect or likely effect of substantially lessening competition in a market.  Whether exclusive dealing does substantially lessen competition is a complex issue of fact to be decided in each case upon the whole of the evidence.  If a tender process is subverted by exclusive dealing, it may or may not have the specified quality depending upon a range of matters: the suppliers in the market and their relative positions and vulnerabilities; the acquirers in the market and their relative positions; the extent of the market on offer by the particular tender; and no doubt other matters.

[246] Once one moves then to consider that complex factual issue, in my view – provided it was legitimate to treat the impugned conduct in an aggregated way (as I think the primary judge may have done) – his Honour was clearly correct in the conclusion he reached.

[247] Baxter’s alternative offer strategy was to hinder or prevent Gambro and Fresenius from being able to compete in the tender processes of the SPAs and to secure that part of the market then on offer to itself.  Its purpose, to paraphrase in terms of s 47(10) and s 47(13), was to lessen the competition in the tender processes by making its rivals’ tenders unacceptable to the SPAs on economic grounds so as to restrict or limit the opportunity for Gambro and Fresenius to supply, or being likely to supply, PD fluids to the SPAs.  The effect or likely effect of Baxter’s conduct was that it would be awarded the contracts over the tenders of Gambro and Fresenius.  Its alternative offer strategy achieved its purpose and had that effect. … [emphasis added]

[252] It is clear that, in the market for the supply of PD fluids, the supply to the SPAs was an important component.  The evidence indicated that collectively that supply represented a very significant proportion of the market.  … because the opportunity to supply each SPA with sterile fluids did not occur simultaneously but occurred over a progressive period of time, each tender process represented an opportunity to supply to a significant acquirer of PD fluids in the Australia wide market.

[253] Consequently, even if for the purposes of s 47 each tender process should be viewed separately, in my view the primary judge could have decided, as he did, that the conduct of Baxter had the purpose or effect, or likely effect, of substantially lessening competition in the market for the supply of PD fluids.  I respectfully agree with the conclusion of the primary judge.

Justice Dowsett (dissenting)

Misuse of market power

Dowsett J dissented because he did not consider Baxter had the requisite prohibited purpose; however, his Honour generally agreed with Mansfield J on the issue of taking advantage [para 289].

On the issue of purpose his Honour agreed, for the reasons given by Mansfield J, that there was no purpose proscribed by s 46(1)(a). However, he also concluded there was no purpose proscribed by s 46(1)(c) - that of deterring or preventing competitive conduct. His Honour observed:

[305] I accept that there is a distinction between preventing competitors from tendering and preventing them from tendering so as to be successful. However I am unable to discern the difference between trying to win a tender and trying to prevent competitors from winning (or being "realistically competitive").

...

[324] If Baxter had such a proscribed purpose, one would have expected to be able to identify, at least in a generic way, the conduct which it proposed to deter or prevent. His Honour’s findings exclude the possibility that Baxter’s purpose was to deter or prevent its competitors from continuing to tender as and when tenders were called. As far as I can see, no other relevant conduct could have been the subject of such a purpose. Further, it is incorrect to describe Fresenius and Gambro’s bids as uncompetitive. Their bids may well have been competitive in that they influenced Baxter’s prices for PD fluids. The evidence indicates that local manufacture of PD fluids did not give Baxter a substantial advantage as to pricing. On at least one occasion Baxter’s bids for PD fluids were lower than a competitor’s but generally, the case seems to have been conducted on the basis that such bids were more or less comparable. Had the competitors’ bids been persistently and significantly lower than Baxter’s, the matter would have been rather more complicated than it seems to have been. In that sense competitors’ bids were "competitive" even if they did not succeed. Further, competitors would have been interested in the other sectors of the national PD fluids market to which I have referred.

[325] The learned primary Judge’s approach would mean that in any tendering process, a tenderer with market power would be obliged to ask, not only how it could give the most favourable price to a potential purchaser, consistent with its own desire to make a profit, but also whether or not such a bid might be seen as an intended discouragement to competitors. It is difficult to identify likely criteria for distinguishing between trying to win a tender and trying to make a competing bid uncompetitive. The primary Judge’s approach would affect suppliers other than monopolists or near monopolists. A supplier may not know whether it has market power in the relevant sense, or whether it is taking advantage of it. It is one thing to expect that a supplier who has the intention of deterring or preventing competition should look to the Act. It is quite another to expect a supplier, who wishes to bid so as to defeat a competitor’s tender, to ask whether it (the supplier) has market power and is exercising it in so bidding. It seems unlikely that Parliament had such an intention.

[326] I should make some other short points. ACCC sought to advance a case based upon an ongoing course of conduct over many years. I do not see justification for attributing greater significance to any aspect of Baxter’s conduct, when viewed as part of such a whole, than when examined separately, save as to questions concerning its perceptions and purposes. In my view his Honour’s findings excluded the possibility that Baxter had a proscribed purpose in any of the impugned transactions. It was open to the primary Judge to infer from Baxter’s conduct, including its repetition over time, that its purpose was to dissuade competitors from remaining in the market. As ACCC submitted, it is only a short step from finding that a commercial undertaking has acted repeatedly in a way which is capable of producing a particular result to finding that it has the purpose of producing that result. However his Honour did not reach that conclusion, ... my reasoning in connection with s 46(1)(c) applies in connection with all of the relevant agreements, including those entered into with Queensland, South Australia and the Australian Capital Territory.

[327] The evidence did not establish a purpose within s 46(1)(c). Although for different reasons, I consider that his Honour was correct to dismiss the s 46 case.

Exclusive dealing

His Honour did not consider that the requirements of s 47(10) had been satisfied in this case and would have set aside the primary Judge's finding on s 47.

[352] The primary Judge found that Baxter had the purpose of lessening, preventing or hindering competition in a relevant market, and that such conduct had that effect or likely effect. These findings were in no sense dependent upon a detailed examination of competition in any market as contemplated in the above authorities. They were based upon purpose and effect or likely effect in connection with competitors’ tenders in individual tender processes. His Honour found that Baxter’s purpose was to attract as much business as possible, not to lessen competition. However he also found that the states had selected the tender process as their method of awarding contracts. Bundling, with the purpose of defeating a competitor’s tender was, in his Honour’s view, for the purpose of ensuring "that the competitive process of the tender process would not bring about realistically competitive bids for PD products". His Honour concluded that such a purpose was proscribed by s 46(1)(c). His Honour also found that if bundling had the effect, or likely effect, of making a competitor’s tender uncompetitive, then it had the effect or likely effect of lessening competition in the relevant market. ...

[353] His Honour’s approach equates conduct with regard to one transaction in the relevant market (the tender process) with competition in that market. Yet, according to the decision in Dandy Power (at 259), competition in a market is "the sum of activity engaged in by persons in promoting the sale to potential buyers of the goods with which that market is concerned". The cases demonstrate that lessening of competition is to be determined by looking at the state of competition in the market before, and after, the relevant conduct or, in the case of proposed conduct, with and without it. In any event it is difficult to accept that hindering one transaction in a market necessarily involves hindering competition as a whole in that market. Baxter’s conduct may have produced the effect or likely effect that it won the tender and its competitors lost. However that did not necessarily lead to a finding that competition in the market was prevented or impeded.

[354] ... the primary Judge observed that potential suppliers tendered upon the hypothesis that the tender process would be conducted "in such a way as would enable each, subject to price and quality conditions, to have a realistic prospect of success". Whilst fairness may be expected in public tenders, the real purpose, as I understand it, is to obtain, with probity, goods upon the best available terms from the purchaser’s point of view. As I have previously observed tenderers generally aim to maximize market share by defeating all competitors. Section 47 is not designed to ensure fairness to competitors but to protect competition in the market. [emphasis added]

[355] His Honour held that bundling with the purpose of defeating a competitor’s bid was, itself, sufficient to satisfy the purpose requirement of subs 47(10). I doubt whether s 47 was designed to produce that effect. It is difficult to believe that a supplier would engage in bundling for any purpose other than to maximize market share at the expense of competitors. If the intention underlying s 47 had been to outlaw bundling with that purpose, there would have been no need to construct the complex inter-relationship between subss 47(1), (2), (10) and (13). It would have been necessary only to outlaw bundling for the purpose of gaining a trading advantage. The authorities to which I have referred do not support his Honour’s view of the section. Further, the primary Judge’s approach overlooks the difference in focus as between s 46 and s 47. Section 46 focuses on purpose in connection with competitors or potential competitors, although with the ultimate purpose of protecting competition. Section 47 focuses on purpose, effect or likely effect in connection with competition in a relevant market. His Honour’s approach is more appropriate to the focus of s 46 than to that of s 47. I see no warrant for treating these different focusses as being the same.

[356] On the primary Judge’s approach at the "lower" level, identification of effect or likely effect becomes a very easy exercise. It requires no examination of the state of competition in the market. It is necessary only to identify an aspect of such competition which has been hindered, or is likely to be hindered, by the relevant conduct. In the present case, the primary Judge seems to have assumed that Baxter’s tender strategy probably hindered or prevented competition simply because it was likely to succeed.

[357] In my view the primary Judge’s approach, based upon purpose, effect or likely effect with regard to each individual tender process was incorrect. The proper approach was to assess those matters with regard to the identified markets, primarily the PD fluids market. As much appears from the cases to which I have referred. In Dandy Power, the relevant conduct was refusal of supply to a retailer. Smithers J looked to effect on competition in the market as a whole, not to the mere fact that a competitor had been excluded. In Outboard Marine, the conduct was, again, refusal of supply to a retailer. The alleged lessening of competition was that the conduct would deprive potential purchasers of the opportunity to compare rival products side-by-side. The paragraph on 670, commencing with the words "The weight of the authorities ...", is particularly relevant for present purposes. That paragraph is set out above. It suggests that effect upon an individual competitor is not sufficient to engage s 47. It is necessary to look to effect in the market as a whole. Similarly, consumer convenience is not an important feature. Each SPA’s choice of a particular method of acquiring supply falls into the category of consumer convenience.

[His Honour then discussed some s 47 authorities]

[362] In the present case the primary Judge’s finding that Baxter’s conduct had a proscribed purpose, effect or likely effect was based upon a misinterpretation of ss 47(10) and (13) and 46. That finding must be set aside.

Justice Gyles

Misuse of market power

Market power

[378] A substantial degree of power in a market is not the equivalent of monopoly power.  Indeed, the Act was deliberately amended in 1986 to lower the threshold.

Taking advantage

His Honour agreed that there was a taking advantage:

[379] … the facts compel the conclusion that Baxter’s conduct was taking advantage of its substantial degree of power in the market for sterile fluids to endeavour to achieve the prohibited purpose in the PD market.  As Mansfield J points out, the gist of the case was not that bundling per se was a breach of s 46, but that bundling in conjunction with the alternative offer strategy was.  That alternative offer strategy could only succeed because of the substantial market power Baxter held in the sterile fluids market.  The existence of any real competition in that market would have constrained Baxter from making the high offers for sterile fluids. 

Purpose

[380] The fact that the purchasing authorities, whether by tender arrangements or otherwise, accepted or facilitated the anti-competitive arrangements is beside the point. Each was confronted with the situation in which Baxter had a substantial degree of market power in relation to sterile fluids and had to deal with that situation as best they could. None of the purchasing authorities had anything to do with the prices offered by Baxter as part of its alternative bid strategy. Those prices were kernel of the breach of s 46(1)(c).

His Honour did, however, consider that the purpose should be made out in relation to all the impugned conduct - not just in relation to the South Australian deal.

Exclusive dealing

His Honour held that the impugned contracts breached s 47 (para 397).

 

Federal Court (Penalty Decision)

Penalties were determined by Justice Mansfield as follows:

  • Pecuniary penalties in respect of four contraventions amounting to a total of $4.9 million
  • Costs - Baxter Healthcare to pay the ACCC costs of proceedings 'at first instance and on appeal to the Full Court, other than the costs of the hearing as to whether pecuniary penalties should be imposed' (for which submissions were to be made)

In determining the appropriate penalty his Honour considered the matters set out in section 76 and Justice French's discussion of those matters in Trade Practices Commission v CSR Limited (1991) ATPR 41-076 at 52, 152-3. His Honour then noted that:

[para 21] Underlying each of those matters is the proposition that fundamentally a pecuniary penalty should be imposed where it has an appropriate deterrent effect, and to the extent and only to the extent that it will have a deterrent effect, both on the particular contravenor of the TP Act, and upon those who may be disposed to engage in conduct of a similar kind prohibited by the TP Act. ... The penalty should not be so high as to be oppressive, but should be sufficient to achieve the object of both particular and general deterrence. In Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 3) (2005) 215 ALR 301 at [39] Goldberg J said:

The penalty imposed must be substantial enough that the party realises the seriousness of its conduct and is not inclined to repeat such conduct. Obviously the sum required to achieve the subject will be larger where the court is setting a penalty for a company with vast resources. However, as specific deterrence is only one element and general deterrence must also be achieved, consideration of the party’s capacity to pay must be weighed against the need to impose a sum which members of the public will recognise as significant and proportionate to the seriousness of the contravention.

[para 22] Where there are multiple contraventions, it is also appropriate to have regard to the totality principle. ...

[para 24] The nature and extent of the contravening conduct is best judged in the light of the circumstances in which that conduct took place. Its nature includes consideration of the extent of deliberateness with which the conduct was engaged in, the period over which the conduct was undertaken, the extent to which senior management in Baxter was involved in the contravention, and whether or not the conduct was systematic or covert.

[para 25] Similarly, the consequences of the contravening conduct should be assessed not simply having regard to the loss or damage caused, but the degree of market power of Baxter, and its size, and the extent to which it profited or may have profited from the contravening conduct.

 

Case links

 

Further reading