ACCC v Metcash Trading Limited
 FCA 967 (25 August 2011);  FCAFC 151 (appeal)
Note: The Full Federal Court rejected the ACCC's appeal against Justice Emmett's decision on 30 November 2011. The ACCC did not seek leave to appeal to the High Court.
Note highlights = my emphasis
July 2010 - Metcash applied to the ACCC for informal clearance to acquire share in Franklins (commenced 29 July)
22 September 2010 - ACCC issued Statement of Issues
17 November 2010 - ACCC announced it would oppose the proposed acquisition
23 November 2010 - Metcash announced it would proceed with the acquisition, despite the ACCC's opposition
27 November 2010 - Metcash agrees not to proceed with proposed takeover of Franklins until the matter is resolved in Court.
9 December 2010 - The ACCC initiated proceedings against Metcash, seeking an injunction from the Federal Court against the proposed Franklins acquisition
2 March 2011 - the Senate Economics Reference Committee released its final report on the proposed acquisition of the Franklins supermarket business, by Metcash, essentially concluding that the matter should be considered by the Court and not the Senate!
15 March 2011 - Trial begins before Justice Arthur Emmett
25 August 2011 - Decision handed down
9 September 2011 - ACCC announces it will appeal the decision
13 September 2011 - ACCC applied to the Federal Court for an interim injunction restraining the proposed acquisition by Metcash of the Franklins supermarket business
20 September 2011 - application for interim injunction denied by Justice Peter Jacobson
30 September 2011 - Metcash concludes takeover of Franklins
24-26 October 2011 - Metcash appeal heard by full Federal Court (Justices Finn, Buchanan and Yates), NSW Registry (Court 1, Level 21)
30 November 2011 - Full Federal Court Rejects the ACCC's appeal.
5 December 2011 - ACCC announces it will not seek leave to appeal to the High Court.
Briefly, Metcash proposed acquisition of Franklins and the ACCC indicated it considered the proposed acquisition would contravene s 50 and therefore announced they would oppose the merger. Metcash announced it would proceed despite the ACCC's concerns
The ACCC alleged that the acquisition would substantially lessen competition in the 'Independent Wholesale Grocery Market', defined as being a market in NSW and the ACT in which [from reasons of Yates J, para 95]:
'(a) the suppliers were Metcash, Franklins and SPAR Australia Limited (SPAR);
(b) the acquirers were Independent Supermarket Retailers, as defined by the Commission; and
(c) the products were a range of Wholesale Packaged Groceries, as defined by the Commission.'
Justice Emmett did not accept this market definition and the Commission's case failed on that basis. However, he went on to find that, even if there was such a market, there acquisition would nevertheless not contravene s 50.
To understand the issues regarding market definition and counterfactual claims, it is necessary to understand something about the complex market that was involved in the case. Justice Yates summarised the background and market conditions (drawing from the more detailed discussion in Justice Emmett's reasons):
Overall distribution arrangements
[para 108] Manufacturers and primary suppliers (who, generally speaking, are either nationally-based or State-based) supply products to self-supplying supermarket chains (relevantly, Woolworths, Coles, Aldi and Franklins), or wholesalers who in turn supply independent retailers. Metcash is one of those wholesalers. It is Australia's largest grocery wholesale distribution and marketing company. ... Franklins also operated as a wholesaler and supplied independent retailers, ....
 The self-supplying supermarket chains and independent retailers supply grocery items to consumers. The self-supplying supermarket chains undertake several stages in that process. They negotiate with and acquire products from manufacturers and primary suppliers, including fresh produce from farms. They deliver the products to their retail stores, price those products, and sell them to consumers. On the other hand, independent retailers acquire their products from wholesalers or, less often, directly from manufacturers and primary suppliers. They are, generally speaking, responsible for pricing the products and selling them to consumers.
 Wholesalers negotiate with and acquire products from manufacturers and primary suppliers, including fresh produce from farms, and supply these products to independent retailers. ....
 Independent retailers operate under different formats. Stores with a floor space greater than 1,200 square metres are commonly described in the trade as "supermarkets", .... At the other end of the spectrum, stores with a floor space of less than 350 square metres are commonly described as "convenience stores". Stores that lie in between and are neither supermarkets nor convenience stores are often described as "top-up stores". ...
 Stores of a similar size and character, and which are supplied by the same wholesaler, usually operate under a common "banner", and thus are part of a "banner group". Members of banner groups adopt a common public brand, reflected in a store's trading name, get-up and appearance. Such stores are generally offered a range of retail services by their wholesaler. They are encouraged to follow common stocking and discount policies. They have access to shared funds for promotional programs.
 The primary judge noted that this approach to retailing simulates, to a degree, the pattern of business employed successfully by self-supplying supermarket chains, while retaining independence of action for the individual retailer, particularly on pricing.
 Nevertheless, operating under a banner does require the individual retailer to accept a degree of subordination to the larger commercial strategy of the banner group, so as to present a common face to the consuming public, ....
 The primary judge noted that the existence of banner groups, where the wholesaler controls the banner name and group members have an obligation to conform to certain styles and standards, is central to a wholesaler's commercial performance and prospects: if "banner discipline" is poor, there will be a loss of competitiveness.
 The primary judge noted that competition amongst all retailers of grocery items is reflected in both price and non-price factors. The non-price factors include location, range of merchandise, store layout and presentation, check-out facilities, hours of trading, and personal service.
 The primary judge found (at ) as follows:
The grocery industry in Australia is a highly competitive industry characterised by high volumes and low margins. The operators of self-supplying supermarket chains are extremely disciplined and endeavour to standardise their offerings at any one time. Nevertheless, those offerings are not static, but shift as the chain operators explore market opportunities and develop new strategies. On the other hand, the products offered by independent retailers exhibit greater diversity than those of the chains in areas such as, for instance, size and location. Independent retailers may choose, or be forced, to rely upon factors other than price to attract customers.
Metcash and the IGA banner group
 Metcash operates, Australia-wide, several business units or divisions, including the IGA-Distribution division and the IGA-Fresh division. IGA-Distribution is the largest division. It has seven distribution centres in New South Wales. Metcash supplies various grocery products to independent retailers of various sizes, ranging from convenience stores to large format supermarket stores. These retailers are independent of the self-supplying supermarket chains.
 The IGA banner is Metcash's "public face". Metcash provides branding and other support services, as well as grocery products, to independent retailers comprising the IGA banner group.
 The IGA banner group has three tiers: Supa IGA, IGA and IGA X-press.
 Supa IGA stores are supermarket stores with floor sizes from about 1,200 square metres. These stores account for about 40% of sales by the IGA-Distribution division.
 IGA stores are top-up stores, with floor sizes between about 350 square metres and 1,200 square metres. These stores account for about 30% of sales by the IGA-Distribution division.
 IGA X-press stores are convenience stores, with floor sizes up to about 350 square metres. These stores account for about 2 - 3% of sales by the IGA-Distribution division.
 Not all independent retailers supplied by Metcash are members of the IGA banner group. Moreover, some independent retailers supplied by Metcash do not obtain all their grocery products from Metcash.
 Metcash has no control over the prices that independent retailers charge consumers, save in relation to promotions where a "ceiling price" may be fixed. Thus, in general terms, the retailers it supplies are free to set their own retail prices.
 Nevertheless, given that independent retailers must compete with major supermarket chains in their vicinities, particularly Woolworths and Coles stores, Metcash encourages the independent retailers it supplies to "benchmark" their standard shelf prices according to the standard shelf prices charged by Woolworths or Coles, particularly in relation to "key value items" that represent particular products whose prices are known and used by consumers to assess the value on offer from a particular store.
 ... competing with Woolworths and Coles at the retail level is essential for the success of the independent grocery network as a whole. This led Metcash to establish a retail pricing service for independent retailers, called the Mix & Match system, by which Metcash carries out the task of gathering and monitoring standard shelf prices for between 1,200 and 1,500 grocery items every week (and for other items less frequently) in Woolworths and Coles stores. The derived data is allocated to categories of products, such as breakfast cereals, canned vegetables and baby products, and then used to generate different pricing zones. As Woolworths has been the traditional price leader, its prices provide the benchmark for independent grocery pricing, although Metcash checks against Coles' prices as well. The information Metcash provides in its Mix & Match system then enables the retailer to select how far above or below Woolworths' standard shelf prices the retailer wishes to price its products.
 The discretion available to independent retailers to price above "zone 60" prices was an important aspect of the Commission's case as it related to the question of market definition. ...
 The Franklins grocery business, under Pick n Pay's economic ownership, was carried on in New South Wales. It involved both wholesale and retail activities.
 Franklins operated 80 retail stores in its own right (the Franklins corporate stores) and franchised a further 10 stores that also operated under the Franklins banner (the Franklins franchise stores). It operated as a self-supplying supermarket chain in respect of the corporate stores and as a wholesaler in relation to the franchise stores. In each case the products it supplied included packaged groceries, health, beauty and cosmetic products, general merchandise and fresh produce.
 Pick n Pay is a South African corporation. It is a member of the Pick n Pay group of companies. ...
 Pick n Pay acquired its interest in Franklins in 2001. Its initial investment was approximately $133.7 million. Over the years its investment had grown to approximately $289.4 million. However, Franklins had made losses in seven of the 10 years that it had operated under Pick n Pay's ownership. As at 31 August 2010, Pick n Pay had accumulated losses of $105.1 million from its original investment. There is evidence to the effect that, as at the end of October 2010, Franklins was losing $2 million a month and that, were it not for Pick n Pay's support, Franklins would have been in voluntary administration. There is also evidence to the effect that Franklins' distribution centre was operating at only 60% capacity and that, in order to achieve scale efficiency, it required "another 20 good stores".
 Franklins had not always carried on self-supplying or wholesaling activities. Those activities were of significantly more recent origin.
 On 14 September 2001 Franklins entered into an agreement with Metcash for the wholesale supply of groceries to Franklins supermarkets. Under this agreement Metcash provided warehouse services to Franklins for a price and agreed to maintain specified levels of service. It also agreed to pass on to Franklins all discounts, rebates and allowances associated with the products that Franklins purchased from it.
 However, in late 2002, Franklins became aware that Metcash was not passing on certain discounts, allowances and rebates, in accordance with the agreement. This experience led to an assessment by Franklins that wholesale supply by Metcash did not leave it with sufficient margin.
 In April 2003 Franklins began exploring alternatives to supply by Metcash, including self-supply. 138 In early 2004 Franklins decided to invest in wholesale operations for the establishment of a self-supply function for Franklins. It thereafter terminated its agreement with Metcash and commenced self-supply operations in early 2005.
 Once Franklins had put in place its self-supply arrangements, it turned to consider whether it would expand and improve the performance of its business through franchising.
 The evidence shows that Metcash reacted to this development. In this connection the Commission relied on the efforts of Metcash to protect its business by activities under the name Project Energise. The Commission also relied on Project Ling Chi (also dubbed Project Death By A Thousand Cuts), which was a response by Metcash to an announcement by Franklins that it would be expanding its wholesale operations. These activities by Metcash were also an important aspect of the Commission's case as it related to the question of market definition. Once again, they are matters to which I will return.
1 The evidence at trial was that, despite all of Franklins' activities over more than five years to promote and attract independent supermarket operators to join its franchise system, it had only attracted five franchisees operating 10 franchise stores. Two of those stores were formerly Franklins corporate stores that had been purchased by Franklins managers and converted into Franklins franchise stores. Furthermore, in order to induce one of the five franchisees to convert from the IGA banner group, Franklins had to sell two of its better performing corporate stores.
 Apart from its "Franklins" and "No Frills" brands, and assets that were specific to its retail activities (leaseholds, and management and franchise agreements) Franklins' business assets included agreements with various information technology licensors, logistics providers, manufacturers and other suppliers (under which Franklins acquired groceries and supplied them to the 90 corporate and franchise stores) and various intangible assets, including pricing systems and expertise in promotions and advice, which assisted Franklins in acquiring groceries and supplying them to retail stores.
 SPAR's principal activities are the procurement, storage and distribution of fast moving consumer goods, liquor warehousing, and the provision of marketing and retail support services for SPAR bannered franchisee stores, retailer training programs, and retail property development.
 As at December 2010, SPAR supplied 153 stores in Queensland, 65 stores in New South Wales, 14 stores in the Australian Capital Territory, and six stores in the Northern Territory.
 SPAR has a distribution centre in Acacia Ridge, Brisbane. It supplies around 13,000 lines of fast moving consumer goods. It does not have the infrastructure or the facilities necessary to operate a distribution centre for perishable products such as fruit and vegetables.
 Some of the stores that SPAR supplies in New South Wales and the Australian Capital Territory only buy products every two or three weeks on an ad hoc basis. Stores north of Port Macquarie are supplied by SPAR directly from the Acacia Ridge distribution centre. The retailers operating those stores organise for the pick-up and delivery of goods from the distribution centre to the stores. They pay the cost of freight to those stores.
 SPAR supplies stores located south of Port Macquarie from cross-docking depots in Sydney and Canberra. These depots allow for a large delivery truck to unload goods transported from Brisbane. Retailers obtaining supply through the cross-docking depots are required to organise the delivery of the products they purchase and bear the costs of freight between the cross-docking depot and their stores.
Justice Emmett identified three broad issues for determination:
Proceedings dismissed following finding that the proposed acquisition would not substantially lessen competition in contravention of s 50.
Briefly, Justice Emmett rejected the ACCC's market definition and the proceedings failed on that basis. However, his Honour went on to consider the counterfactuals and SLC claims and concluded that there was insufficient evidence of the alleged counterfactual and that in any event it would not substantially lessen competition. On the burden of proof, his Honour split the assessment into two parts, finding:
- counterfactual must be proved on the balance of probabilities (more likely than not)
- effect or likely effect of substantial lessening of competition must be proved on the 'real chance' test (following AGL)
There was controversy surrounding the ACCC's formulation of market, but Emmett J observed [at 126] that "the Commission in its final submissions appeared to accept that it contended only for a market for the wholesale supply of goods consisting of packaged groceries, as defined, albeit not exhaustively and only inclusively."
 Metcash contends ... that there is a national market for the supply of packaged groceries, fresh products, general merchandise and health, beauty and cosmetic products to the consuming public by way of integrated retail chains and independent wholesalers supplying independent grocery retailers. Metcash says that the suppliers in that market include Woolworths, Coles and Aldi, as well as Franklins, Metcash and SPAR. Metcash says, in the alternative, that there is a market approximately within the geographical region comprising NSW and the ACT for the supply of such grocery products to the consuming public by way of integrated retail chains and independent wholesalers supplying independent grocery retailers. Pick n Pay postulates a market in terms substantially similar to the terms of the market postulated by Metcash.
 ... The first issue [for determination in the proceeding] is the definition of the relevant market. The critical elements that determine the characteristics and, therefore, the boundaries, of a market are:
- a product for which there is a demand;
- a source of supply for the product; and
- strong substitution between the actual and the potential sources of supply for buyers or sellers, if they are given a sufficient price incentive.
Each of those elements requires consideration.
 ... An entity may be included within a relevant market even if it does not presently supply that market, if it is such a close supply-side substitute as to be able readily to supply the market, and to do so quickly and without the need for significant new investment. ...
[more extracts to come here]
Conclusion as to market
 Metcash is not simply a wholesaler. Metcash is closely involved in the retail process, partly through ownership but mainly through contract. The IGA banner or brand is a significant element in the rivalry between IGA retailers and the major supermarket chains. That banner or brand provides opportunities for IGA retailers to promote their stores. Consumers come to know and trust the brand, which helps to attract custom to all of the IGA stores. The IGA brand is owned and controlled by Metcash. Metcash promotes programmes that are designed to advance and promote the IGA brand. Thus, Metcash is intimately involved in the retail activities of the IGA stores, and those activities cannot be divorced from the other relevant activities undertaken by Metcash. Accordingly, the separation of Metcash’s wholesale activities from its activities at the retail level involves a significant degree of artificiality.
 On the other hand, Franklins is essentially a supermarket retailing business. Franklins owns the Franklins Corporate Stores. Its warehouse and distribution operations are largely carried out by separate firms under contract. If the acquisition of Franklins by Metcash proceeds, Metcash intends, over time, to shut down those activities. Thus, Metcash is not acquiring Franklins to acquire wholesale assets. Rather, it is buying retail stores, albeit with the hope of expanding the volume of its wholesale sales. It would be illogical, in those circumstances, to exclude the retail level from the analysis of the relevant market.
 The grocery industry is characterised by a high degree of vertical integration in the distribution supply chain. The major supermarket chains are wholly vertically integrated. Metcash and Franklins are vertically integrated to a lesser, but still significant, extent. Metcash has extensive integration downstream, at the retail level, by way of contracts, and Franklins has extensive integration upstream, at the wholesale level, also by way of contracts. Accordingly, constraints arising from competition at the retail level between independent retailers supplied by Metcash and supermarkets operated by the major supermarket chains are highly relevant in defining the market for the purposes of the application of s 50 of the Competition Act.
 Wholesalers, such as Metcash, SPAR, and Franklins insofar as it supplies the Franklins Franchise Stores, supply retailers with goods together with ancillary services. In applying the hypothetical monopolist test, it is unrealistic to speak in terms of an increase in the margin added on by wholesalers to their cost of acquiring goods from manufacturers and primary suppliers. It is meaningful, as I have indicated above, only to speak in terms of an increase in the price charged by wholesalers to their customers, the retailers. The position of the major supermarket chains, particularly Coles and Woolworths, is such that there is a very significant constraint on the capacity of independent retailers to increase price or decrease other services without the likely loss of business. That constraint also constrains the capacity of the wholesaler to increase its prices to independent retailers. I am not persuaded that an increase of between five and ten percent in the price at which goods are supplied by Metcash to independent retailers could be sustained without a resultant significant loss of business.
 There is clearly vigorous competition at the retail level. It may be that there is a market for the supply of grocery products generally by retail. As I have said, Metcash and Pick n Pay contend for a national market for the supply of packaged groceries, fresh products, general merchandise and health, beauty and cosmetic products to the consuming public by way of integrated retail chains and independent wholesalers supplying independent grocery retailers. The participants in that market would include the major supermarket chains, Franklins in respect of the 80 Franklins Corporate Stores, the operators of the Franklins Franchise Stores, the semi-integrated arrangements involving Metcash and the IGA bannered stores and the semi-integrated arrangements involving SPAR and the SPAR and 5 Star bannered stores. However, the Commission has not suggested that the proposed acquisition of Franklins by Metcash would be likely to have the effect of lessening competition in such a market.
 I am not persuaded that there is a separate market for the wholesale supply to independent supermarket retailers of packaged groceries, as the Commission defines those terms in the Statement of Claim. The Commission has based its case solely on there being a separate market for the wholesale supply to independent retailers of packaged groceries, as defined. The Commission’s pleaded case as to market definition has not been made out. It follows that the proceeding must fail.
 The second issue concerns a comparison between the circumstances that will prevail in the future if the acquisition by Metcash does not proceed with the circumstances that will prevail if the acquisition does proceed. Such scenarios are often referred to as the “future without” and “future with” scenarios, and the exercise to be conducted by the Court is often referred to as the counterfactual analysis. In these reasons, I use the term counterfactual to mean a pleaded scenario that will come to pass in the future without the proposed acquisition. ...
Commission's counterfactual argument
 The Commission also alleges that there are high barriers to entry into the pleaded independent wholesale grocery market, by reason of the following matters:
- Capital investment of approximately $30 million, a significant proportion of which is sunk cost, is likely to be required to set up the necessary physical assets to supply the pleaded market, including warehousing, stock, and information technology and logistics infrastructure.
- Relationships would need to be established with manufacturers and primary suppliers to allow buying at competitive prices.
- The volume of wholesale sales to independent supermarket retailers would need to be at a sufficient level to achieve a return on the capital investment required.
- Securing such a volume of sales would require a significant number of independent supermarket retailers to commit to acquiring packaged groceries from any new entrant in the pleaded market.
- Most independent supermarket retailers would be unlikely to commit to a new entrant in the pleaded market that did not offer retail support services, including store branding, promotions and a pricing system, in addition to the supply of groceries.
- Many independent supermarket retailers would be unlikely to be able to commit to a new entrant in the pleaded market because a significant number of them have exclusive supply arrangements with Metcash, which holds equity in a number of the companies operating stores under the IGA banner, and which is the landlord in respect of a number of stores operated under the IGA banner.
- Many independent supermarket retailers would be likely to be unwilling to commit to a new entrant in the pleaded market unless they were satisfied that the new entrant would have long term viability, that the quality of the store branding and retail support would be adequate, that the range offered by the new entrant would be sufficient to meet requirements, that deliveries would be sufficiently reliable and frequent to meet their requirements, and that they would be able to secure suitable generic branded products from the new entrant.
 The Commission then alleges that the acquisition of Franklins by Metcash would have, or be likely to have, the following effects:
- Franklins would cease to operate under the agreements by which it acquires and supplies packaged groceries by wholesale, and would cease operating its retail support assets and its associated assets that assist it in acquiring and supplying packaged groceries.
- Franklins would cease to offer wholesale supply to franchisees.
- Most, if not all, of the 80 Franklins Corporate Stores would be sold to persons who would operate them as stores under the IGA banner, supplied by Metcash through its IGA-Distribution division.
- The operators of those stores would then acquire packaged groceries from Metcash.
- The number of wholesalers capable of supplying large format independent supermarkets would be reduced to one.
- Franklins, which is Metcash’s closest competitor for the wholesale supply of packaged groceries to independent supermarket retailers operating large supermarket stores, would be shut down.
- New entry into, or expansion by an existing competitor within, the alleged wholesale grocery market would be unlikely, because barriers to entry would remain high.
 The Commission alleges that, if the acquisition of Franklins by Metcash does not proceed, it is likely that the 80 Franklins Corporate Stores will be acquired by a third party or third parties, who would procure the wholesale supply of packaged groceries by acquiring and continuing to operate the Franklins assets, by establishing their own wholesale operations in NSW and the ACT, or by using the volume of sales generated by the 80 Franklins Corporate Stores to sponsor the establishment of a third party wholesaling operation for the purpose of supplying those stores and other independent supermarkets not committed to taking supply from Metcash.
 Alternatively, the Commission alleges that, if the acquisition of Franklins by Metcash does not proceed, a significant majority of the 80 Franklins Corporate Stores is likely to be acquired by a third party or third parties, who would be likely to procure the wholesale supply of packaged groceries by acquiring and continuing to operate the Franklins assets, by establishing their own wholesale operations, or by using the volume of sales generated by the stores acquired to sponsor the establishment of a third party wholesaling operation for the purpose of supplying those stores and other independent supermarket stores not committed to taking supply from Metcash.
 The Commission originally contended that SPAR was a viable third party acquirer of the Franklins business. The Commission has now abandoned that contention. Accordingly, the only third party put forward by the Commission as an acquirer of all or a significant majority of the Franklins Corporate Stores is a consortium of independent retailers based in NSW and the ACT. ...
Metcash's counterfactual argument
 ... Metcash and Pick n Pay, on the other hand, say that, if the acquisition of Franklins by Metcash does not proceed, each of the 80 Franklins Corporate Stores will be sold to one of the major supermarket chains, or sold to an independent grocery retailer, or closed. They say that Metcash will supply grocery products to the independent grocery retailers who acquire the stores.
[Note, emphasis in the original except for highlights]
 The third issue concerns the likely effect of the acquisition on competition in the relevant market. That issue is the ultimate issue, and is dependent upon the first two issues, in that it can only be determined having regard to both market definition and the counterfactual analysis. The Commission contends that the acquisition of Franklins by Metcash is likely to have the effect of substantially lessening competition in the relevant market, and so contravene s 50 of the Competition Act. Metcash and Pick n Pay contend, on the other hand, that the acquisition is likely to have little effect on competition in the relevant market.
 [Section 50] has two limbs. On the one hand, the Court might be satisfied that an acquisition would have the necessary effect. On the other hand, the Court might not be able to reach that conclusion but, nevertheless, might be able to conclude that the acquisition in question would be likely to have the necessary effect.
 In a sense, it may be otiose to enquire as to whether a particular acquisition would have the necessary effect, since it is difficult, if not impossible, to conceive of circumstances where an acquisition would have a particular effect but would not be likely to have that effect. ... Thus, it seems that the only enquiry that needs to be made is as to whether an impugned acquisition would be likely to have the necessary effect.
 ... The phrase would be likely to have may be capable of bearing two meanings. One is that it is more probable than not that the acquisition will have the necessary effect. The other is that there is a sufficiently high finite probability that the acquisition will have the necessary effect. The latter meaning may be expressed by saying that there is a real chance of the relevant effect eventuating [citing AGL at 342]
 The better view is that likely signifies a real chance rather than a greater probability than not (see AGL at ). If likely simply meant more probable than not, it would be difficult to distinguish the application of the second limb of s 50 from the application of the first limb, which, having regard to the onus of proof applicable in proceedings under Part IV, could be established on the balance of probabilities (see AGL at ).
 However, a real chance or possibility does not encompass mere possibility. The provision in s 76 of the Competition Act for substantial pecuniary penalties for contravention of s 50 of the Competition Act suggests that the phrase would be likely to refers to a relatively higher degree of probability than may. The phrase offers no quantitative guidance, but requires a qualitative judgment about the effect of an acquisition or proposed acquisition. The bar must not be set so high as effectively to expose an acquiring corporation to a finding of contravention simply on the basis of possibilities, however plausible they may seem, generated by economic theory alone. On the other hand, the bar must not be set so low as effectively to allow all acquisitions to proceed, save those with the most obvious, direct and dramatic effect upon competition. Section 50 gives effect to a kind of competition risk management policy that must be applied in the real world. The assessment of the risk, or real chance, of a substantial lessening of competition cannot rest upon speculation or theory. The Court is concerned with commercial likelihoods relevant to the proposed acquisition. The application of the word likely, and the assessment of the substantial lessening of competition, must both be carried out at a level that is commercially relevant or meaningful (see AGL at ).
 Section 50 also calls for an enquiry as to whether there would, or would likely, be a substantial lessening of competition, were the proposed acquisition to proceed. That enquiry also requires a qualitative judgment to be made. It applies to a lessening that encompasses the hindrance or prevention of competition. In order to meet the threshold, the effect of the acquisition must be meaningful or relevant to the competitive process. Little weight should be given to short-term effects readily corrected by market processes (see AGL at ). As I have indicated above, in determining whether there is likely to be a substantial lessening of competition, it is necessary to consider the counterfactuals (see AGL at ).
 Further questions arise in the present case when considering precisely how the real chance test is to be applied to the future state of the relevant market, both with and without the proposed acquisition. The issue is whether the real chance test applies in relation to the identification of counterfactuals, or only in relation to the consequences of counterfactuals that are proved on the balance of probabilities. For instance, the Commission may be required to show that:
- there is a real chance that a particular counterfactual will come to pass, and that, compared to the scenario in which that counterfactual comes to pass, there is a real chance that the proposed acquisition would result in a substantial lessening of competition;
- there is a real chance that a particular counterfactual will come to pass, and that, compared to the scenario in which that counterfactual comes to pass, it is more probable than not that the proposed acquisition would result in a substantial lessening of competition; or
- it is more probable than not that a particular counterfactual will come to pass, and that, compared to the scenario in which that counterfactual comes to pass, there is a real chance that the proposed acquisition would result in a substantial lessening of competition.
The existence of multiple or alternative counterfactuals adds a further complication.
 The Commission contends that the proper approach is to ask whether or not the counterfactual propounded by it is sufficiently credible to be more than a mere possibility, and to assess the likelihood of a substantial lessening of competition on the basis of that counterfactual. ...
 A distinction may be drawn between proof of historical facts, on the one hand, and proof of future possibilities and past hypothetical situations, on the other hand. The civil standard of proof applies to the first category but not to the second, particularly when it is necessary to determine future possibilities and past hypothetical situations for the purpose of assessing damages ...
 If those principles are analogous to those that apply to the assessment, for the purposes of s 50 of the Competition Act, of future events that are part of the counterfactual analysis for the purposes of deciding whether a substantial lessening of competition is likely, then there is no need for an adjustment of the outcome to reflect the degree of probability, because the whole test for the purposes of s 50 is circumscribed by the expression real chance. On the other hand, that conclusion may itself be a justification for rejecting the analogy of assessment of damages. ...
 ... The Commission says that it only needs to establish a real chance of a substantial lessening of competition. It is not required to exclude all realistic possibilities that there will not be a substantial lessening of competition, which would be a fundamentally different exercise.
 Although I do not consider that the Commission is required to show that, if the proposed acquisition proceeds, a substantial lessening of competition is more probable than not, I consider that the Commission must establish, on the balance of probabilities, what the future state of the market will be, both with and without the proposed acquisition. That is, the Commission must satisfy the Court that its counterfactual is more probable than any competing hypothesis advanced to suggest that there is no real chance of competition being substantially lessened as a result of the acquisition (see for example AGL at )
 In the present case, multiple counterfactuals are contended for by the Commission. Accordingly, the Commission is not entitled to succeed unless the Court concludes:
- that it is more probable than not that one of the Commission’s counterfactuals will come to pass if the proposed acquisition does not proceed; and
- that there is a real chance that, if the proposed acquisition does proceed, that would result in a substantial lessening of competition compared to the scenario in which one of those counterfactuals comes to pass.
Justice Emmett set out the relevant economic principles at 147-342, referring to the Pleatsikas Report, relied upon by the Commission, and Prof George Hay's report, relied upon by Metcash. His Honour noted that there was 'little difference between the contents of their respective reports as to the relevant economic principles.' (at 149). However, his Honour stated that he 'did not find helpful the application by the witnesses of those principles to the specific circumstances of the present case' and admitted those only as 'submissions from the parties' tendering the reports.
Drawing from the reports, His Honour then set out the key economic principles surrounding market definition, counterfactuals, the substantial lessening of competition.
After discussing market definition with a particular focus on the functional market, his Honour notes
 Competitive rivalry involves aggressive behaviour: competitors in a market do not provide assistance to one another. Further, larger competitors do not step aside so that smaller competitors may gain a foothold in the market. Rather, competitors, as rivals, continuously seek to gain advantage in the market place. Such behaviour generally enhances efficiency and, ultimately, consumers benefit from unrestricted and vigorous competition. The separation of aggressive but efficient behaviour from behaviour that is inefficient because it undermines competition is an important object of competition analysis.
His Honour discussed market definition at length and observed/concluded:
 ... for present purposes, the geographic dimension of the relevant market for the wholesale supply of packaged groceries is NSW and the ACT. ...
 ... the Commission contends that the relevant product for the purpose of market definition is a range of packaged groceries, including branded and generic items, such as breakfast cereal, canned food, biscuits, flour, tea, coffee, soft drinks, nappies, cleaning products, personal hygiene products and frozen food, but not including fresh items such as fresh fruit and vegetables, meat, delicatessen items and bakery items. ...
 The Commission sometimes describes the product that Metcash supplies to retailers as a service. It contends that, for the purpose of applying the hypothetical monopolist test, the relevant price is the margin that Metcash makes for providing that service, not the total price that it charges for the packaged groceries that it supplies to the retailers. Metcash, on the other hand, contends that the relevant product for the purposes of market definition is the goods and associated services that it supplies and that the relevant price is the total price paid by retailers for the goods and associated services, net of all relevant allowances and rebates.
 ... I do not accept that there is a separate product market limited in the way contended for by the Commission. ...
 Having regard to the constraint imposed by the major supermarket chains, to which reference is made below, if Metcash were to increase the price of the range of packaged groceries supplied by it by five per cent, or even something less than five per cent, independent retailers would lose customers to the major supermarket chains. Metcash would suffer and the major supermarket chains would benefit.
 The hypothetical monopolist test should be applied to the wholesale price of packaged groceries. The magnitude of the hypothetical increase in price would need, in order to satisfy the test, to be such as to cause an increase in the price of packaged groceries at the retail level by a real or noticeable amount. When applying the hypothetical monopolist test in the present case the major supermarket chains must be taken into account. There is no evidence that a hypothetical monopolist wholesaler of packaged groceries could increase prices profitably, such that the price of groceries at the retail level would increase by a significant amount.
 The Commission’s case has been propounded on the basis that there is a separate market for the wholesale supply of packaged groceries, as defined by the Commission. ... I do not consider that the delineation of the market should be limited by reference to packaged groceries ... Nor do I consider that it is appropriate to apply the hypothetical monopolist test to the margin made by Metcash on the supply of packaged groceries, so defined, rather than to the wholesale price charged by Metcash for the supply of packaged groceries or any other goods supplied by it to retailers. ...
Conclusions on market in this case
 I am not persuaded that there is a separate market for the wholesale supply to independent supermarket retailers of packaged groceries, as the Commission defines those terms in the Statement of Claim. The Commission has based its case solely on there being a separate market for the wholesale supply to independent retailers of packaged groceries, as defined. The Commission’s pleaded case as to market definition has not been made out. It follows that the proceeding must fail. However, I propose to deal with the issue as to the counterfactuals propounded by the Commission.
[many of the Justice Emmett's findings in respect of the market in this case are discussed in more detail in the judgments on appeal, set out below]
Justice Finn agreed with the reasons of Justice Yates but also noted that:
it is unnecessary for the reasons given by Yates J to express a concluded view on the proper construction of, and standard of proof that is to be applied in cases coming under, s 50(1) of the Competition and Consumer Act 2010 (Cth). I refrain from doing so.
Justice Buchanan agreed the appeal should be dismissed, but also made a number of comments about the relevant burdens of proof in s 50 cases. His Honour noted that the ACCC claimed that they were entitled to succeed if:
(i) it could show that there was a "real chance" of the occurrence of an hypothesis advanced by it about what would happen if the proposed acquisition was blocked; and
(ii) on that hypothesis (i.e. as a "real chance" of it occurring even if not probable) there was a "real chance" that there would be a substantial lessening of competition (i.e. as compared with what would (presumably) happen if the acquisition proceeded).
His Honour noted that the Justice Emmett accepted the 'real chance' test at the second stage but not the first.
Justice Buchanan, however, considered that the real chance test was inappropriate at both stages; rather the 'more likely than not' or balance of probabilities test should apply at both stages. His Honour provided extensive reasons for his views (emphasis added):
[para 6] The circumstances of the present case are such as to call into question the soundness of the authorities relied on by the ACCC. In any event, they do not go so far as to support the application of a "real chance" test at the first stage proposed by the ACCC. If the ACCC was correct about its two stage application of the "real chance" test, the case would have to be decided upon a position where speculation was heaped on speculation. That outcome would not, in my view, be consistent with the application of a proper judicial method. Nor is it required by statute. Further, in my view, application of the "real chance" test even at the second stage also presents problems. The circumstances of the present case, with its concentration on comparisons which are all in the future, provide an illustration of the danger of descending into the realm of conjecture. That seems to me to provide a reason to question the correctness of the statutory construction which lies behind the adoption of the test in some cases and it should be revisited.
Assumptions and economic theory
[para 8] The ACCC's case theory seemed to me to incorporate the following broad assumptions:
1. Monopolies lead to abuse of market power;
2. Profits higher than "normal" are uncompetitive because they illustrate that an abuse of market power has occurred, or at least that there is an absence of desirable levels of competition;
3. The possibility that a profit higher than "normal" might be made is sufficient proof of an absence of desirable levels of competition;
4. The possibility that existing levels of profit might increase to be higher than "normal" is sufficient proof of likely lessening of competition.
[para 9] However useful assumptions of this kind (and the economic theories on which they are based) may be as the foundation for an economic model from which to begin examination of a particular factual situation (or hypothesis) as a matter of theory, great care must be taken that such assumptions do not become embedded in the application of statutory or other legal tests as a substitute for the fact finding and analysis required by a proper application of the judicial method.
[para 10] In the present case, the statutory tests to be applied are set out in s 50 of the Competition and Consumer Act 2010 (Cth) ("Competition Act"). The case against Metcash was obliged to satisfy those tests, rather than some more theoretical position. In that context, "market" is defined. It means "a substantial market for goods or services" (s 50(6)). The task of examining whether a substantial lessening of competition is likely in given circumstances obviously requires that a sufficiently relevant market be identified. Clearly, having regard to the statutory context, that is intended to reflect commercial reality, rather than be driven by economic theory. In the present case, there was little reason to depart very far from a consideration of the actual commercial environment in which the competing possibilities would play themselves out.
The market in the present case
Justice Buchanan observed (at para 11) that the ACCC 'proposed a market in which the major retailers were absent and most of Franklins' own operators were excluded' (and was limited in other ways) and concluded that this approach 'represented a distraction from the real questions for attention'. His Honour observed that the market was not 'identified by reference to the dynamics and constraints really at work' and that the ACCC's postulated market did not satisfactorily identify the 'market forces operating as a constraint upon Metcash', (para 12) which included reference to retail operations and sales. On this basis, his Honour concluded that the market definition postulated should be rejected and the appeal should fail on that basis.
His Honour noted that a further problem with the ACCC's hypothesis was that it depended 'on the proposition that Franklins' 'wholesale assets' would be acquired by a third party if Metcash was prevented from acquiring them; his Honour observed that the nature of the assets identified meant that it was inaccurate to describe them as 'wholesale assets', as they were deployed to service corporate stores (which had been excluded from the ACCC's market definition) and franchise stores (para 14-15). The ACCC claimed that a significant majority of Franklins' 80 corporate stores would be acquired by a third party or parties absent the Metcash acquisition; a proposition Justice Buchanan observed was difficult to establish (para 16). His Honour concluded that there was 'no adequate foundation for the supposition that a new wholesale business, of a kind not earlier existing, would come into existence, based somehow on the acquisition of the "wholesale assets"'.
The hypothetical purchaser
His Honour then went on to consider the ACCC's suggested 'hypothetical' purchaser, noting the various possibilities identified by the ACCC. Of those suggested, only Bidco (KKKL consortium) was pursued. This consortium 'consisted of proprietors and ultimate owners of retail business' and was rejected by the trial judge (para 19). This hypothesis was, nevertheless, pursued by the ACCC on appeal, arguing there was a 'real chance' of that hypothesis 'coming to fruition' (para 19). Although his Honour rejected this contention based on the trial judge's findings of fact (para 20), he went on to consider the real chance test relied upon by the ACCC.
The standard of proof
After setting out the relevant provisions, his Honour referred to the approach taken by the trial judge, who (para 24):
accepted that whether a suggested effect on competition was “likely” was to be tested by asking whether there was a "real chance" of it occurring. However, his Honour took the view that the factual foundation upon which such a question should be answered would first need to be established on the balance of probabilities. Applying that approach to the issues in the present case, his Honour applied a "balance of probabilities" test to the ACCC’s hypothesis about likely competitors to Metcash if the acquisition did not proceed, and a "real chance" test to the question whether, if the hypothesis was accepted, it was likely that substantially lessened competition would be the result.
His Honour then rejected the ACCC's argument that the real chance should apply to all aspects of the question arising under s 50 (at para 25):
... the ACCC argued that the “real chance” test should be applied to all aspects of the question arising under s 50, including whether it had made good the hypothetical factual foundation upon which to then ask whether it was likely that substantial lessening of competition would occur. In my view, this argument should not be accepted. Indeed, I do not agree that the 'real chance' test should be applied at all to the application of s 50.
His Honour observed that there was nothing in the Act which alters the general rule in s 140 of the Evidence Act 1995 that in 'civil proceedings, the court must find the case of a party provided if it is satisfied that the case has been proved on the balance of probabilities'. (para 27)
The ACCC had argued that the factual foundation upon which the s 50 test should be applied need not be established to the balance of probabilities standard, but that a 'real chance' test should suffice for this purpose:
[para 29] I follows from this approach that the ACCC argued that the Court would enforce the statutory prohibition in s 50 even if satisfied that it was more likely than not that the hypothesis advanced by the ACCC would not come to pass. That seems a very unsure foundation for the enforcement of a statutory prohibition having serious commercial consequences. It amounts to a suggestion that the authority of the Court would be used to prevent an acquisition when the Court assessed that the hypothetical facts used as a foundation to suggest a likely substantial lessening of competition would, in all likelihood, not be in place. That, indeed, was the effect of the factual findings in the present case. That would impose an almost inescapable obstacle to a very wide range of potential acquisitions. The application of a "real chance" test to the assessment required by s 50 concerning a likely effect on competition has similar consequences. ...
At para 30 his Honour observed that 'where prediction about the future is involved, the whole process of predicting future facts involves inference from otherwise demonstrated circumstances. Inferential reasoning, in a legal context, must take place by reference to the standard of proof which is involved.''
His Honour went on to observe that inference 'does not mean conjecture' and may fall short of certainty, but (quoting from various authorities) 'must be more than an inference of equal degree of probability with other inferences, so as to avoid guess or conjecture'. His Honour continued: 'A court is not authorised to choose between guesses, even on the ground that one guess seems more likely than another or others.' (para 31)
[para 32] These strictures applied, in my view, to the establishment of the factual foundation upon which the ACCC wished to contend that the acquisition by Metcash of the Franklins’ assets would be likely to have the effect of substantially lessening competition in a market. Even if assessment of that contention could (let me accept it is so for this purpose) proceed by reference to whether there was a "real chance" that those factual circumstances would have the effect of substantially lessening competition in a market, that would not, in my view, authorise a process of fact finding which departed from the necessity to find or infer facts to the ordinary civil standard. The "real chance" test, if it applies, does not reach backwards to affect or reduce the discipline or level of proof required in establishing a proper factual foundation from which to argue for ultimate conclusions to sustain a cause of action. It follows that I agree with the approach taken by the trial judge to this issue. Any other approach amounts to saying that the civil standard of proof of factual matters has been abandoned with respect to s 50 ... so that the serious (and sometimes commercially damaging) restraints imposed by the Competition Act may be activated at the election of a regulator upon the basis of hypotheses and suppositions which reach only a level of respectability ... as opposed to the application of the ordinary judicial method.
His Honour observed (at 33) that in many cases a proposed acquisition will 'present for consideration a well defined factual consequence', such as where one duopolist seeks to merge with the other. But that was not the case here.
[para 34] Independently of any acquisition by Metcash, Franklins was leaving the market, whatever it was ... because its business was unprofitable and was failing. That was the commercial reality. ... Upon Franklins’ exit from the market any competition which it offered would cease. It was not the possibility of acquisition by Metcash which would have any initial effect on competition. This was not a takeover case. It was not a case where the status quo might be retained if the acquisition did not proceed.
There was, therefore, no 'status quo available for comparisons - all comparisons 'were with future possibilities' which all required predictions. To make those predictions on the basis of a 'real chance' of 'something happening, unmistakably invites speculation' (para 35). His Honour concluded on this point:
In my view, it was necessary to establish, on the balance of probabilities, what would happen if the acquisition proceeded and, importantly for the present case, if it did not proceed. Only then could the test in s 50 be applied. The application of a 'real chance' test, even at this (second) point, also has the consequence, so far as s 50 is concerned, that the Court may be required to find the statutory prohibition operative when, in all likelihood, the suggested possible effect on competition will not occur. That also seems a strange, and unsatisfactory, result.
The meaning of likely
His Honour referred (at para 37) to Miller's Annotated Act (33rd edn at 717) which states:
The word 'likely' has various shades of meaning. It may mean 'probable' in the sense of 'more probable than not', 'more than a 50 per cent chance'. It may mean 'material risk' as seen by a reasonable man 'such as might happen'. It may mean 'some possibility' more than a remote or bare chance or it may mean that the conduct engaged in is inherently of such a character that it would ordinarily cause the effect specified ...
For the purpose of s 50, Miller suggests that the meaning of likely has not been settled, but that in sections 45-47 it appears to mean 'real chance or possibility' rather than 'more likely than not' (para 38).
His Honour notes (at para 40) that there are two ways of referring to predictions 'about something not then manifest' - by stating that something 'would have the effect' (as in s 50) or that it 'would be likely to have the effect'. He observes (at para 40) that at times the different ways of expressing the test 'has led to the conclusion that the first must be established on the balance of probabilities and (as a result) the second by reference to some lesser standard, often referred to as the 'real chance' test.' His Honour considers that this 'is an 'error of analysis and an incorrect approach to the issue of construction' and continues:
(para 40) The first limb of the test allows a prediction of probable (therefore likely) consequence, without account being taken of, or allowance needed for, other contingencies. The second limb concentrates on the quality of the circumstances, and the probable consequence, without permitting falsification of that probability by proof of the actual occurrence of some inherently less probable result. In other words, establishing a probable consequence will suffice, even if in fact it did not occur. ... Both limbs of the test, as found for example in s 50, in my view require the same standard of proof (balance of probabilities) and they should probably be regarded as constituent elements of a compound conception. As a matter of ordinary language I see no tension or inconsistency between them. As a matter of ordinary language I see no adequate foundation for concluding that the second limb of such a test imports and applies, at any stage of the process, a departure from the ordinary civil standard of proof on the balance of probabilities.
His Honour noted that the authorities 'against' this proposition are currently more influential (para 41) and that the 'real chance' test was also followed by the trial judge.
His Honour then went on to discuss some authorities on this point. In the context of s 50 his Honour referred to Trade Practices Commission v Ansett Transport Industries (Operations) Pty Ltd  FCA 21; (1978) 32 FLR 305. Although s 50 then applied a dominance test, it still made reference to 'would be or be likely to be'. His Honour further observed that in the original formulation of s 50 'the only test was whether an acquisition would be 'likely to' have a particular effect' (para 47), with the change being made in 1977 to refer to both actual and likely circumstances. In Ansett, Northrop J applied the balance of probabilities standard to the phrase 'would be likely to be' (see para's 47-48). Justice Buchanan considered this to be a 'straightforward and conventional approach' to the standard of proof issue.
His Honour referred to a number of other judgments; in particular, the judgment of Deane J in Tillmanns Butcheries, which he did agree with and did not consider applied to s 50 in any event. His Honour also considered the judgment of Franki J in Trade Practices Commission v TNT Management Pty Ltd (1985) 6 FCR 1 (at para 75), who expressed the view that 'likely to have' in the context of s 45 at the time, 'need not be restricted to a situation where the odds are greater rather than equally balanced or somewhat less than equally balanced, the probability must be something not very far short of "more probably than not", except in unusual circumstances'. Justice Buchanan did not consider this approach 'completely satisfactory'. His Honour also considered Monroe Topple (at para 79), Universal Music (at 80) and Seven Network (at 81). He concluded (at 83) that none of these provided 'sufficiently persuasive support for the application of the "real chance" test when assessing whether something is likely to happen.'
Justice Buchanan then turned (at para 86) to the judgment of French J in Australian Gas Light Company v Australian Competition and Consumer Commission  FCA 1525; (2003) 137 FCR 317 (AGL), which was applied by the trial judge in this case. In that case, Justice French (as he then was) stated [at para 347-348 of that judgment]:
 The collocation 'would have the effect, or be likely to have the effect, of substantially lessening competition' appears in similar and identical versions in other provisions of Pt IV. It appears in ss 45, 45A, 45B, 45C, 47(10) and 50A. In my opinion that formulation is intended to have the same construction throughout Pt IV. Neither language nor policy mandates a variation in its construction from section to section. In any event as a matter of construction if 'likely' simply meant more probable than not, it would be difficult to distinguish the application of that limb of the formula from the application of the first limb which, having regard to the onus of proof applicable in proceedings under Pt IV, could be established on the balance of probabilities.
 The meaning of 'likely' reflecting a 'real chance or possibility' does not encompass a mere possibility. The word can offer no quantitative guidance but requires a qualitative judgment about the effects of an acquisition or proposed acquisition. The judgment it requires must not set the bar so high as effectively to expose acquiring corporations to a finding of contravention simply on the basis of possibilities, however plausible they may seem, generated by economic theory alone. On the other hand it must not set the bar so low as effectively to allow all acquisitions to proceed save those with the most obvious, direct and dramatic effects upon competition. By the language it adopts and the function thereby cast upon the Court and the regulator in their consideration of acquisitions s 50 gives effect to a kind of competition risk management policy. The application of that policy, reflected in judgments about the application of the section, must operate in the real world. The assessment of the risk or real chance of a substantial lessening of competition cannot rest upon speculation or theory. ... the Court is concerned with 'commercial likelihoods relevant to the proposed merger'. The word 'likely' has to be applied at a level which is commercially relevant or meaningful as must be the assessment of the substantial lessening of competition under consideration ...
Justice Buchanan noted (at para 88) that 'the conclusion that the "assessment of the risk or real chance of a substantial lessening of competition cannot rest upon speculation or theory" must be accepted as compelling', but that 'it does not seem to me ... to be accurate to postulate that the ordinary requirement to prove a case (including this element of a case) to the usual civil standard would "set the bar so low as effectively to allow all acquisitions to proceed save those with the most obvious, direct and dramatic effects upon competition". ... Asking whether there is a "real chance" of something occurring seems to me, with respect, to invite and endorse speculation and conjecture. The range of possibilities (greater than "mere possibility") existing below a more than equal chance or possibility seems potentially so extensive as to create great uncertainty. ...
His Honour then observed that (at para 89), had he been sitting at first instance, he would have felt obliged to follow the 'real chance' approach as set out in AGL. However, as a member of the Full Court he felt 'at liberty to express reservations about the matter' and expressed the view that 'the "real chance" test should not be applied to s 50 of the Act.'
His Honour noted, however, that even if the 'real chance' test did apply in this case, his view as to the outcome of the appeal would not have changed and concluded (at para 91) that the appeal should be dismissed.
His Honour set out the background to the case (para's 92-147) and then noted the ACCC's counterfactual case (from para 148), observing that 'correct identification of the relevant market' was central to the determination of the counterfactual.
The counterfactual case
On the issue of the counterfactual, his Honour noted that the ACCC's counterfactual case 'came to be distilled in the proposition that it was likely, in the sense of a real chance, that, absent the acquisition by Metcash, a particular consortium of buyers, described in the appeal as the KKKL consortium, would be an alternative acquirer of Franklins’ assets, or at least a substantial majority of those assets, and would be able to establish a wholesaling operation to independent retailers, in competition with Metcash' (para 149)
His Honour observed (at para 150) that establishing this likely counterfactual was essential to establishing that the merger would substantially lessen competition given that Franklins would otherwise exist the market:
[para 153] In the absence of a real chance of someone other than Metcash taking up the Franklins wholesale assets and continuing Franklins wholesaling activities, the field of grocery wholesaling in the defined territory would be left, substantially, and by default, to Metcash simply by reason of Pick n Pay’s decision to cease its Australian operations. In that counterfactual world, it could not be said that the share acquisition by Metcash would, itself, be likely to substantially lessen competition in the defined market and thus engage the prohibition of s 50(1) of the Act.
The future with the share acquisition by Metcash
The trial judge concluded that if Metcash were permitted to make the share acquisition, Metcash would close-down Franklins' wholesale supply arrangements, sell most or all Franklins corporate stores to independent retailers and require those retailers to enter supply arrangements with it (para 155).
The future without the share acquisition by Metcash
Franklins had already set up a sale process which required prospective purchasers to make an indicative offer, as a result of which 43 parties made non-binding offers for one or more stores, including Woolworths, Coles, Metcash, Franklins staff and independent retailers, with a number of overlapping offers. (para's 158-159)
In addition, TMT Partners Consortium Pty Limited (TMT Consortium) had made a 'non-binding indicative offer (the TMT Consortium offer) to acquire the Franklins corporate stores, the “Franklins” brand, the “No Frills” brand, and the rights and obligations relating to the Franklins distribution centre' (para 160). [His Honour then set out full details of this offer and its relationship to the KKKT consortium proposed by the ACCC]
His Honour then considered the KKKL consortium (from para 177) comprising interests representing the Koundouris, Krnc, Karellas and Lionis families; Mr Koundouris, a director of Supabarn, had been the 'moving party' behind the TMT Consortium offer (para 161). His Honour then described the interests of the other members of the proposed KKKL consortium (para's 177-182)
His Honour then noted the primary judge's conclusion that the KKKL consortium 'could not succeed in an offer along the lines foreshadowed by the TMT Consortium offer' and that it was unlikely Pick n Pay would accept such an offer (para 184). He went on to set out in more detail the findings that supported those conclusions, then noted the trial judge's conclusions that:
[para 209] The primary judge also concluded:
 If the Metcash transaction does not proceed, the likelihood is that the Franklins stores will be sold in groups or individually to purchasers including Ritchies, Coles, Woolworths and independent retailers. In relation to the stores that are sold to independent retailers, it is likely that those retailers would obtain supply of packaged groceries from Metcash. The Commission has identified no other likely source of supply. Further, the intention of the seller in these circumstances is critical. I am satisfied that it is unlikely that Pick n Pay would enter into any transaction with the proposed consortium.
[para 210] Ultimately the primary judge concluded that, on the basis of the evidence before the Court, he was not persuaded that it was more likely than not that the KKKL consortium would make an offer to acquire the whole, or a significant majority, of the Franklins assets, that would be accepted by Pick n Pay. Indeed, the primary judge was not persuaded that there was a real chance that that would happen.
His Honour then discussed the Commission's grounds of appeal and the submissions made on appeal. The ACCC submitted, inter alia, that the 'primary judge erred in finding that it was a matter of pure speculation whether a binding offer might ever be made by the KKKL consortium for the Franklins assets or that Pick n Pay would ever accept any binding offer from the KKKL consortium for those assets. It contended that the primary judge also erred in finding that the establishment by the KKKL consortium of a viable business for the wholesale supply of packaged groceries to independent retailers in New South Wales and the Australian Capital Territory must be regarded as entirely speculative' [at para 211] and that the primary judge applied an incorrect standard in drawing his conclusions [at para 215]
His Honour then discussed the primary judge's approach to the phrase 'be likely to have' (para's 216-217) and observed that the parties on appeal proceeded on the basis that 'likely' meant 'a real chance' (para 218). He continued:
[para 219] The issue that divided the parties was the primary judge’s conclusion (at ) that the Commission must establish, on the balance of probabilities, what the future state of the market will be, both with and without the proposed acquisition. In other words, the Commission had to establish that its counterfactual case - the future without the share acquisition by Metcash - was more probable than any competing hypothesis. Specifically, the Commission had to establish that it was more likely than not that, if the Metcash share acquisition did not proceed to completion, the KKKL consortium would make an offer to acquire the whole, or a significant majority of, the Franklins assets that would be accepted by Pick n Pay, and that the consortium as a wholesaler would commence to supply packaged groceries, as defined by the Commission, to independent retailers in the defined territory.
The Commission submitted that a requirement to establish the counterfactual on the balance of probabilities was inconsistent with the proper application of the real chance limb of s 50(1) [para 221], claiming that a balance of probabilities approach was particularly problematic where there are multiple counterfactuals each having a real chance of occurring (para 222).
His Honour then considered the arguments of the Commission, Metcash and Pick n Pay on the relevant test to be applied (para's 226-237). He noted that the question of standard of proof in the context of determining 'likely state of competition' was difficult and in some respects perplexing (para 226) and noted:
[para 277] If one accepts that the starting point is to draw a distinction between circumstances where an acquisition would have the effect of substantially lessening competition, established on the balance of probabilities, and circumstances where an acquisition would be likely to have that effect, established on the basis that there is a real chance that that would be so, it can be seen that s 50(1) itself imposes its own differential standards of proof, at least so far as the determination of competitive effect is concerned. The utility of imposing differential standards, as a matter of legislative policy, is not at all clear, given that contravention will always be established on the lowest threshold being satisfied. Nevertheless, if one is to proceed on that basis in the present case, then one question involving one evaluative judgment emerges: would the acquisition be likely to substantially lessen competition in the relevant market?
[para 228] The answer to that question points to, and depends on, the interrelationship of all the facts, matters and circumstances which, in combination, define the future state of affairs that is characterised as being 'likely'. If, for the purpose of satisfying the requisite legal standard, 'likely' is taken to have the meaning of 'a real chance', then it is difficult to see why that standard should not apply to determine the existence and interrelationship of all those facts, matters and circumstances. If not, the possibility exists that different legal standards will intrude into inseparable elements of the calculus employed to detect change to the state of competition. As I have noted, a counterfactual is no more than an element of that calculus. Conceptually, it has no separate existence or purpose in the present context, other than as an aid to detect the existence and extent of change in the process of competition.
[para 229] Moreover, in the continuum of fact-finding, there may not be a bright line between those facts that determine the future state of a market and those facts that determine the future state of competition in that market. Indeed, one can envision examples where the facts that show the likely future state of the market will be the very facts that are determinative of a finding about the likely future state of competition in that market. In those cases, can fact-finding be regulated by two different standards of proof? To require, in those cases, the adoption, if that be conceptually possible, of a higher standard for one purpose (to determine the state of the market) would be to obliterate the threshold to which the second limb of s 50(1) has subjected the impugned conduct.
His Honour noted, however, that it was not necessary to come to a final view on the matter because the trial judge concluded that even if the lower 'real chance' test applied to its counterfactual case it would still not have been satisfied (para 230).
His Honour then (at para 234) referred to Justice French's observations on the meaning of likely in AGL (at 348), which he considered apposite in this case. The trial judge, he considered, made a real world assessment 'based on matters that were commercially relevant and meaningful' (para 235) and did not move on 'mere possibilities' or 'speculative possibilities'. His Honour concluded that the trial judge had not made any appealable error in respect of his evaluation and conclusions on the Commission's counterfactual case. On this basis, the appeal failed.
Notwithstanding his Honour's conclusion that the appeal failed on the basis of the counterfactual findings, his Honour considered (in some detail) the ACCC's argument that the trial judge erred in his definition of the relevant market.
The trial judge had accepted that (para 239) the geographic dimension of any market for the wholesale supply of packaged groceries would be New South Wales and the Australian Capital Territory' but 'did not accept that the product dimension of the market should be delineated by reference to packaged groceries' as argued by the Commission. In particular (para 241):
'... the primary judge reasoned (at  and ) that, if Franklins is in the relevant market with Metcash (as the Commission contended), the major supermarket chains, particularly Woolworths and Coles, must be included in that market. This was because, on the primary judge’s findings, the major supermarket chains imposed a closer (in the sense of greater) competitive constraint than Franklins on Metcash. The inevitable consequence of that reasoning for the present case was that the definition of the market must accommodate multiple functional levels given that the major supermarket chains were and remain vertically integrated and the constraint that the primary judge found was one that was ultimately imposed on Metcash because of fierce competition among grocery retailers.
The primary judge had also observed that it did not matter much whether the major supermarkets were considered part of the relevant market, or merely a constraint on Metcash - either way, it was clear they 'constrained Metcash closely and would continue to do so' (para 242).
His Honour then set out in some detail the process and purpose of market definition, referring to a number of key competition cases (para 244-246). His Honour then referred to the SNNIP/hypothetical monopolist test:
[para 247] This test involves determining whether a hypothetical monopolist supplier could profitably impose a small but significant non-transitory increase in price (most commonly, but not necessarily, between 5 and 10%) for the supply of a relevant product. Starting with the firm and product in issue, the market boundaries are expanded to include all sources of close substitutes that would defeat the increase. The smallest area, generally in terms of product identification and geographic space, over which the hypothetical monopolist can profitably impose the increase, shows the boundaries of the market.
[para 248 ]The hypothetical monopolist test is predicated on the availability of data on variables, such as costs, prices, revenue and sales, over a sufficiently long period of time to enable a mathematical determination to be made about how changes by a firm to its prices affect its own demand. In competition law, however, the test is not always applied in that way. Sometimes it is applied without data as a 'thought experiment' to make a qualitative assessment about the product and geographic dimensions of the market:...
[para 249] It is apparent that, when the hypothetical monopolist test is applied in this fashion, conclusions can be reached about the boundaries of a market on which reasonable minds might differ. It follows from this realisation that a difference in opinion in the identification of market boundaries does not necessarily signify the presence of error in the evaluative process.
[para 250] It is also apparent that, when the test is applied in this fashion, considerations other than price (the ability to 'give less') can be accommodated in the evaluative process. In Seven Network Ltd v News Ltd  FCAFC 166; (2009) 182 FCR 160 at  Dowsett and Lander JJ remarked:
We do not treat the SSNIP test as being irrelevant to the question of market identification. However a qualitative application of the test requires identification of its purpose. As we understand it, the test looks to the actual or likely effect of competitive conduct, or potential competitive conduct, upon price and other conditions of supply, including quality of the product. However competitive conduct may not have an immediate and obvious effect upon those matters. Particularly in a relatively new industry, competitors may be looking for longer term, rather than shorter term, advantages. The 'richness' of the concept of competition referred to in Re Queensland Co-operative Milling Association Ltd 25 FLR 169 means that competition may take many forms. Its effects may be immediate or delayed. The SSNIP test addresses the effects of competition, but it does not define the way in which it occurs.
[para 251] The hypothetical monopolist test says little about the functional dimensions of the market. While substitution provides a basis for defining product and geographic markets, it does not provide a meaningful basis for determining the functional dimensions of a market. As Smith and Walker explain [in 'Part IIIA Efficiency and Functional Markets' (1998) 5 Competition & Consumer Law Journal 183]...
What point is there in asking how “substitutable” is one stage of production or distribution for another, when each is a complementary part of the process, like a link in a chain? We can meaningfully ask if one garment is substitutable for another garment, in the minds and intention of the provider or the buyer; but there is no point in asking whether the materials from which either garment is made are substitutable for the garment itself!
[para 252] And yet, the behaviour of participants at one functional level may have a substantial constraining effect on the behaviour of participants at another functional level that is sufficient to warrant the inclusion of all those activities in the market the subject of attention. This can arise, for example, where the chains of distribution exhibit a sufficient degree of vertical integration. As Smith and Walker explain, the relevant issue for the delineation of functional markets is not whether there is substitution between the functional levels, but whether substitution between products or geographic sources of supply at another functional level constrains the behaviour of market participants at the initial functional stage: Smith and Walker at 9. The authors go on to explain (at 11):
This would seem to be consistent with the application of the SSNIP test: if the initial functional market delineation does not incorporate all the relevant competitive constraints, it would not be possible for a hypothetical monopolist at that functional stage to impose a SSNIP. It would be necessary to expand the functional market and incorporate those constraints.
His Honour then considered the approach taken in the Davids Holdings case:
[para 253] In Davids Holdings the relevant market for the purpose of the application of s 50 of the Act was found to be the market for the supply of grocery products by independent wholesalers to independent retailers in Queensland and northern New South Wales. Davids Holdings Pty Ltd (Davids) was the holding company of a group of companies whose principal activities were the wholesaling and distribution of a range of grocery products and liquor in Victoria, New South Wales and Queensland. QIW Retailers Limited (QIW) was the holding company of a group of companies whose principal activities were the wholesaling and distribution of a similar range of grocery products in Queensland and northern New South Wales. Davids and QIW competed fiercely for the business of independent retailers in Queensland and northern New South Wales. Although the major activity of QIW was this wholesaling activity, it also had not insignificant retailing activities. Davids proposed to take over the shares in QIW. In that case the trial judge found that, based on the market definition to which I have referred, a merged Davids-QIW entity would, or would be likely to, dominate the market, in contravention of s 50 of the Act (in its then form).
[para 254] On appeal, Davids challenged the identification of the relevant market. It contended that the definition was too narrow and propounded a market for the supply and distribution of grocery products to consumers in Australia, or alternatively in the geographic area consisting of the eastern mainland States of Australia. This market would have included both the wholesale and retail functional levels of activity. On appeal it was submitted that the trial judge had made a fundamental error in failing to find that independent retailers were in competition in the same market with the chain stores, providing an upstream constraint on wholesalers. In considering that matter, von Doussa J (with whom O’Loughlin J agreed) noted (at 227-228) that the market identified by the trial judge followed essentially from findings of fact that had been made.
His Honour then set out passages from the judgments of von Doussa and Drummond JJ in that case and then went on to consider the Tribunal's assessment in Re QIW Ltd (1995) 132 ALR 225 and the Full Court's decision in Singapore Airlines Limited v Taprobane Tours WA Pty Ltd  FCA 621; (1991) 33 FCR 158. He also referred to Justice French's decision in AGL (at 378) where his Honour stated:
The concept of market describes, in a metaphorical way, an area or space of economic activity whose dimensions are function, product and geography. A market may be defined functionally by reference to wholesale or retail activities or a combination of both ...
His Honour then discussed the Tribunal's treatment of the functional dimension of market definition in Re Fortescue Metals Group (para's 1040-1042).
His Honour concluded that the authorities show that [para 266] 'as a matter of principle, there is no reason why, for competition law purposes, a market cannot be defined by reference to multiple functional levels. They illustrate that it might be appropriate to do so where downstream activities function to constrain upstream behaviour. Whether that is so depends on the facts presented for consideration and the evaluation of those facts by the relevant decision-maker.'
His Honour also observed that s 50(3)(i) of the Act requires consideration to be given to the extent of vertical integration when considering the competition test.
His Honour then set out the findings the trial judge made which led him to reject the market definition proposed by the ACCC (from para 269-). Notably, the trial judge found that Woolworths and Coles 'have approximately 80% of the national grocery market share, and that independent retailers regard the major supermarket chains as their competitors.' (para 278). The trial judge did not accept the ACCC's contention that the major supermarket chains did not place a close constraint on Metcash's wholesale pricing, noting (para 257-260 of the trial judgment; reproduced at para 280 of Yates J's judgment)
(a) Independent retailers are unable to increase their prices in response to increases in wholesale prices without losing significant volume to the major supermarket chains. Thus, if independent supermarkets lose business, Metcash loses business.
(b) Metcash has adopted a strategy of assisting independent retailers supplied by it to compete against the major supermarket chains in terms of both price and non-price factors.
(c) The scale and intensity of retail competition is extreme and increasing.
(d) Volume is the key to success for major supermarket chains, independent retailers and Metcash alike. Both Metcash and the major supermarket chains are constantly looking for ways to improve volume.
(e) There is competition between Metcash and the major supermarket chains for volume.
Although the constraints imposed on Metcash by the major chains were partly indirect, they were 'powerful and imposed a much closer and more effective constraint on Metcash than the constraint that Franklins imposed' (para 281). As a result 'there was no scope for Metcash to raise its wholesale prices to derive monopoly profits' (para 283).
The trial judge also concluded that (para 285) 'the threat of sale by independent retailers to the major supermarket chains constrained Metcash’s wholesale pricing decisions' and that the competitive constraint imposed by Franklins was much less than that imposed by the major supermarket chains - these findings of the trial judge were set out by Yates J at para 297 as follows:
'(a) The competitive constraint imposed by Franklins upon Metcash’s wholesaling activities was far less significant than the constraint imposed by the major supermarket chains.
(b) The constraint imposed by Franklins had diminished over time. On the other hand the constraint imposed by the major supermarket chains was strong and increasing.
(c) Franklins did not regard itself as a wholesaler, and its franchise operations were not set up or conducted on the basis that it was a wholesaler.
(d) Direct demand-side substitution by consumers between supermarkets operated by independent retailers and supermarkets operated by the major supermarket chains imposed a substantial competitive constraint upon Metcash as a supplier of packaged groceries at the wholesale level.
(e) Direct demand-side substitution by consumers between supermarkets operated by independent retailers and supermarkets operated by Franklins did not impose any substantial constraint on Metcash.
(f) Franklins had weaker bargaining power with manufacturers and primary suppliers than Metcash and had not been able to obtain the same terms as Metcash.
(g) Franklins operated only in New South Wales, whereas Metcash operated throughout Australia. This enhanced Metcash’s relative bargaining power.
(h) The threat of independent retailers ceasing to take supply from Metcash and selling their stores to one of the major supermarket chains imposed a substantial competitive constraint on Metcash as a supplier of packaged groceries at the wholesale level.
(i) The threat of independent retailers switching to become a Franklins franchisee did not impose a meaningful constraint upon Metcash.'
On this basis the trial judge concluded that (para 298) 'if Franklins was in the relevant market with Metcash (as the Commission clearly contended), it must be the case that the major supermarket chains, which his Honour found to be a closer competitive constraint than Franklins, must be included in that market.' Further:
[para 301] The primary judge further found (at -) that the grocery industry was characterised by a high degree of vertical integration in the distribution supply chain. The major supermarket chains placed a very significant constraint on the capacity of independent retailers to increase price or decrease other services without the likely loss of business. That constraint also constrained the capacity of a wholesaler (specifically, Metcash) to increase its prices to independent retailers.
[para 303] Ultimately, the primary judge was not persuaded that there was a separate wholesale market, as defined by the Commission. That conclusion was, of itself, determinative against the Commission’s case for contravention of s 50(1) of the Act. ...
Grounds of appeal
His Honour then set out the Commission’s grounds of appeal (from para 304). He dismissed them all.
On the claim that the trial judge erred in the application of the hypothetical monopolist test, his Honour noted that in this case 'the hypothetical monopolist test was no more than an aid to arrive at the appropriate market definition. It was not an end in itself' (para 313) and rejected further claims that the trial judge had incorrectly applied the test for purposes of defining the market in this case.
His Honour then dealt with claims that the trial judge erred in his findings as to product and functional dimensions of the market (para's 331-342) and concluded the ACCC had not demonstrated error on the part of the trial judge.
His Honour then considered the Commission's claim that the trial judge erred in finding the major supermarket chains exerted a 'very significant' constraint on independent retailers (from para 344) and again found no error on the part of the trial judge.
His Honour then addressed the ACCC's submission that (para 362) ' the primary judge erred by failing to recognise that Metcash enjoyed a degree of pricing discretion and that that freedom demonstrated that it did not face close constraint from the major supermarket chains' and again concluded (at 375) that the 'primary judge’s assessment ... does not reflect error'.
His Honour concluded:
[para 382] In my view the Commission has not demonstrated that the primary judge proceeded on a wrong principle when considering the question of market definition in the present case. ... his Honour was seized of the relevant principles. Furthermore, the primary judge approached the task of defining the market by taking account of commercial reality, not simply economic theory. His Honour proceeded on the basis that the economic concept of a market must be applied in a practical way to accommodate the concerns of the Act with those of business and commerce. In my respectful view, this was the correct approach to take. ...
[para 384] Critical to the primary judge’s conclusions in this regard were his findings concerning the difference in the constraint imposed on Metcash by the major supermarket chains compared with Franklins. Based on the evidence before him, the primary judge considered that the major supermarket chains imposed a much more powerful constraint than Franklins on Metcash’s market behaviour. In light of that fact, and the significant degree of vertical integration in the supply of groceries, it was open to the primary judge to view the appropriate market, for the purposes of determining the s 50(1) question before him, as one incorporating the activities of the self-supplying chains.
[para 385] Having said this, a case could be made, on the evidence, that the market of interest was a wholesale market, with the major supermarket chains providing an indirect constraint on the participants in that market. ... the primary judge was alive to this possibility but rejected it. His Honour considered that, in the present case, the separation of wholesaling and retailing functions tended to confuse the analysis and that, in light of the more powerful constraint imposed by the major supermarket chains on Metcash, compared with the lesser constraint imposed by Franklins, it was not possible to determine the competition consequences of Metcash’s acquisition without taking into account the constraints from the major supermarket chains as market participants. I am not persuaded that, in the particular circumstances of the present case, his Honour erred in coming to that ultimate conclusion and, thus, in rejecting the existence of a separate wholesale market.
Effect on competition
As a result of the conclusion as to market definition and counterfactuals, it was not necessary to assess whether competition would be substantially lessened by the acquisition. Nevertheless, the trial judge addressed this issue and the Commission challenged his assessment in this respect. Justice Yates dealt with this issue from para 386, rejecting the Commission's challenge, stating:
[para 389] The primary judge was called upon to consider the case on the basis on which it was put to the Court, not on some hypothetical basis that was not advanced by any of the parties, and in particular by the Commission as the moving party. The only possible acquirer of the Franklins wholesale assets advanced by the Commission was the KKKL consortium. The primary judge rejected that possibility as speculative. Having done so, it was not incumbent on the primary judge to conjure other possibilities not advanced by the parties which, one can assume, could only stand as even more remote possibilities. The Commission’s recourse to the potential for close competition, in those circumstances, is illusory.
Journal Articles and Newsletters
George A Hay and E Jane Murdoch, 'A tale of two cities: From Davids Holdings to Metcash' (2013) 20 Competition & Consumer Law Journal 213
Case Associates (Cento Veljanovski), "Metcash, Market Power, and Counterfactuals - The standard of proof in Australian and New Zealand merger and competition laws" (paper given at the 20th Competition Law Conference, 5th May 2012, Sydney, Australia)
Hank Spier, 'Post "Metcash" – Should we reconsider the accc merger review processes?' (2012) 20 AJCCL 118
ACCC responds to Metcash decision
5 December 2011
ACCC considers Metcash judgment
30 November 2011
ACCC appeals Metcash judgment
9 September 2011
Metcash Franklins decision 'disappointing'
Press release on day of decision (25 August)
AAR: Client Update: ACCC loses Metcash Appeal
1 December 2011
AAR: Focus: The Metcash decision
25 August 2011
Freehills: ACCC theory and speculation yield to commercial reality
30 August 2011 (Note: Freehills represented Metcash)
Mallesons: Metcrash: ACCC loses appeal
30 November 2011
News and Media
Alex Boxsell, 'Metcash ruling calls for rething' (The Australian Financial Review, 2 December 2011, p 57)
Matthew Drummond, 'Judges bought idea' (The Australian Financial Review, 2 December 2011, pp 16-17)
John Durie, 'ACCC has raised the bar on takeovers for itself' (The Australian, 2 December 2011)
John Durie, ACCC is right to challenge Metcash ruling (The Australian, 9 September 2011)
Patrick Durkin, 'Uncertainty may force regulator to seek reform' (The Australian Financial Review, 2 December 2011, p 16)
Bryan Frith, 'The competition watchdog needs to get real in its merger outings in court' (The Australian, 7 December 2011)
Stephen King, 'Mergers and Metcash' (Blog at Core Economics, 5 December 2011)
Susannah Moran, 'ACCC accepts defeat on Metcash bid but keeps test' (The Australian, 6 December 2011)
Katie Ritchie, 'Beyond Metcash: analysis' (Video interview with Michael Corrigan, Clayton Utz)
Michael Terceiro, 'Messcash: a comedy of errors" (Australian Competition & Consumer Law News, Issue 636, 14 October 2011)
Metcash win a victory for Freehills
Lawyers Weekly, 25 August 2011