Melway Publishing Pty Ltd v Robert Hicks Pty Ltd
(2001) 205 CLR 1
Publishers of the Melway street directory terminated its dealings with a distributor (Robert Hicks Pty Ltd – T/A Auto Fashions). At the time of trial Melway had 80-90% of the market, that being for street directories of Melbourne, a dominance it had acquired between 1966 and the early 1980’s. Melway appointed exclusive distributors to particular market segments; eg newsagents, petrol stations, mega-retailers such as K-Mart, Target and Big-W, dealers in auto-accessories etc. These distributorships were terminable at will. This system of marketing eliminated intra-brand competition between Melway’s distributors. Large retail outlets such as Target and K-Mart had tried to get distributors to compete by tender to supply them copies of the Melway directory at a discount but Melway had insisted on maintaining its “orderly marketing” system. By the time of trial inter-brand competition was minimal - the UBD and Gregory’s market share hovering around 5% or so each.
Melway terminated the distributorship of Auto Fashions following a split between the partners of that entity. One of the partners, Nagel, left Auto Fashions, and started his own business. Melway then terminated Auto Fashions’ distributorship and appointed Nagel as its sole distributor in that market segment. Auto Fashions then placed an order for between 30,000 and 50,000 copies of the Melway directory. Melway refused to supply and Auto Fashions commenced proceedings alleging a breach of s 46.
Trial Judge (Merkel J)
Market was defined as the market for Melbourne street directories. It followed that Melway’s large market share, combined with high barriers to entry, meant that it had a substantial degree of market power. The critical issue then became whether or not it had taken advantage of that market power for a proscribed purpose. Applying the hypothetical test established in QWI - would a firm in a competitive market have refused such a large order - Merkel J held that a firm facing competitive restraints would not refuse a 30,000 plus order. Thus, Merkel J found that Melway had taken advantage of (ie used) its market power. His Honour’s finding was strengthened by the admission from Melway that it would fill such an order for its Sydway street directory as it had only some 10% of the market for Sydney street directories.
The final hurdle was establishing a proscribed purpose. In Sydney, Melway used an exclusive distributor so the issue of maintaining its segmented system of distributorships did not arise. As for Melbourne, Melway maintained it would have been prepared to fill an order that would have increased its overall sales but not one that would just lead to intra-brand competition by challenging its orderly marketing system. Referring to previous occasions when Melway had acted to protect its segment based distribution system, Merkel J held that Melway’s refusal to supply Auto Fashions was to protect its distributors and thus prevent competition in the wholesale market-a proscribed purpose –s46 (1).(c). Melway was ordered to pay damages and to refrain from refusing to supply Auto Fashions where its purpose was to prevent Auto Fashions from engaging in competitive conduct.
See the full judgment of Justice Merkel:
Robert Hicks Pty Ltd (trading as Auto Fashions Australia) v Melway Publishing Pty Ltd  FCA 1379 (30 October 1998)
Full Federal Court (Sundberg and Finkelstein JJ, Heerey J in dissent)
The majority in the Full Court in separate judgements, upheld the trial judge’s decision. Sundberg J applied the QWI commercial conduct test and did not accept Melway’s business justification argument. That argument was that as Melway, with a brief exception, had used a system of exclusive distributors to different segments of the wholesale market from the time it commenced publication, it was not taking advantage of its market power but merely continuing with a particular way of doing business that had started well before it had any market power. His Honour held that it was open to the trial judge to find that it was unlikely that Melway would have refused such a large order at a time when it lacked market power. The critical paragraph in his honour’s judgment, it is submitted, is where he stated:
"It is whether there is a link between its market power and the refusal of supply. When the appellant had only 10 per cent of the market, its capacity to knock back an order for 30,000 to 50,000 directories was limited. But with 85 per cent of the market, the capacity was there. While the needle on the market power monitor was creeping up, so was the appellant's capacity to engage in the proscribed conduct. There is no evidence that while it was a small player the appellant ever refused supply to someone who wanted to compete with one of its distributors. The proper inferences to draw are that with a 10 per cent market share the appellant would have supplied the directories, and that its refusal to supply at a time when it had an 85 percent share was because it was able to do so for want of any competitor who could effect the supply." (my emphasis)
Finkelstein J, citing Melway’s own admissions about the Sydney street directory market, likewise held that had Melway received an order for between 30,000 and 50,000 directories when it lacked market power, commercial reality would have undermined the tenacity of its commitment to its system of distributors.
Heerey J, while agreeing that Melway had a substantial degree of market power, held that it had not taken advantage of that power in refusing to supply Auto Fashions. In coming to this conclusion he discussed QIW, explaining that BHP would have agreed to supply its Y-bar had there been another competitor because it would then have made extra sales. In the Melway context, however, market penetration had already reached saturation point. Consequently supplying the Auto Fashions order would not have led to significant extra sales but merely endangered the existing, successful system of distribution. Heerey J was also impressed that, in contrast to BHP, Melway did have a plausible, legitimate business reason for its refusal to supply. This was the fact that its marketing system preceded any possibility of market power. Admittedly, held Heerey J, this involved a proscribed purpose under section 46(c) - preventing competition between distributors at the wholesale level, but questions of proscribed purpose only arose if Melway had taken advantage of its market power. Rather than taking advantage of its market power, Melway just wanted to continue with the distributional system that had contributed to its success. In His Honour’s words
"… Melway's system worked. It may be that the selling of the Melway directory (as distinct from its production) was not a high technology operation. But obviously enough the considerations which might amount to a legitimate business reason, in the present context of a book distribution system, are not limited to technology factors. Distribution involved intangible matters of fine commercial judgment, which the learned trial judge accepted as being genuinely made. The spectacular success of the Melway directory was unlikely to have been achieved without some contribution by the particular distribution system adopted. Melway was entitled to believe that, however good its particular mousetrap, the world was not going to beat a path to its door."
Read the Full Federal Court judgment: Melway Publishing Pty Ltd v Robert Hicks Pty Ltd  FCA 664 (20 May 1999)
Majority [Gleeson CJ, Gummow, Hayne and Callinan JJ]
The majority endorsed the judgement of Heerey J. The majority noted the longevity of Melway’s system of distribution and its vigilance in protecting it against other threats. Relying, as had Heerey J, on American authority, the majority found that limiting intra-brand competition could actually help rather than harm competition. Unlike the situation with Y-bar posts in Queensland Wire, Melway was not trying to foreclose the market for Melbourne street directories, nor could it do so. The respondent remained free to seek supply of and sell rival directories. What Melway had done was to prevent the respondent dealing with its own directory, something it could have done without market power. The majority considered that Melway’s refusal should be characterised as a legitimate termination of a distributorship agreement. It may have been a taking advantage of market power if the refusal would have denied Melway extra sales. As this was not the case a legitimate business purpose for the refusal was to be preferred to one that found the refusal was for a purpose proscribed under s46. The gist of the majority judgment can be found in the following passage.
"… there are cases in which it is dangerous to proceed too quickly from a finding about purpose to a conclusion about taking advantage. That is especially so when, in a context such as the present, the purpose as referred to in s 46 is relatively narrow. The purpose presently in question is that of deterring a person from engaging in competitive conduct in a market. If a manufacturer supplies to a single distributor, or a limited number of distributors, then, from one point of view, turning down an application from a person who wishes to become an additional distributor will have the effect of preventing that person from engaging in competitive conduct. Purpose, in this connection, involves intention to achieve a result. Where distributorship arrangements are concerned, an intent to give a particular distributor exclusivity may constitute a very insecure basis for concluding that there had been a taking advantage of market power."
They also noted (at ): "Bearing in mind that the refusal to supply the respondent was only a manifestation of Melway's distributorship system, the real question was whether, without its market power, Melway could have maintained its distributorship system, or at least that part of it that gave distributors exclusive rights in relation to specified segments of the retail market."
Kirby J (dissent)
Kirby J upheld the decision of the trail judge and the majority in the Full Court. Following the determination of what “taking advantage of” means in Queensland Wire, he said, the critical issue is whether or not Melway, a virtual monopolist, had used its market power. Noting that it was the respondent that had first identified its market segment to Melway as one to be fostered, Kirby J suggested the present distribution system was too rigid and that consumers were paying the price for limited inter-brand and intra-brand competition. Kirby J felt that the purpose and policy of the TPA in general and the purpose of s46 in particular was to prevent market sharing arrangements such as that in question. Kirby J conceded that there might be legitimate reasons for refusal to supply-incompetence or unethical business practices, a poor credit rating or inability to provide satisfactory after sales service. None of these were in issue here, though, and the refusal of what should have been an attractive order was for the purpose of preventing competition in the wholesale distribution market. For Kirby J, then, Melways “... was simply engaging, as monopolists commonly seek to do, in a market strategy designed to "take advantage" of its dominant market position. It was doing so to the disadvantage of competitors, of healthy competition and, ultimately, of the interests of consumers.”
"… The appellant was undoubtedly a "corporation". It had a "substantial degree of power" in the given "market", namely, the wholesale and retail sale of street directories in Melbourne. It was found, and unanimously confirmed in the Full Court, that the appellant's "purpose", in refusing to supply the product to the respondent, was the proscribed "purpose" of preventing the respondent from engaging in competitive conduct in the specified market. This Court has accepted that that finding must stand."
"… the only remaining contention which would take the appellant outside the statutory proscription is that the appellant did not "take advantage" of its monopoly power to achieve its "purpose". In short, the existence of that "power" was merely coincidental. It was legally irrelevant. There did not exist the causal link between the "power" and forbidden "purpose". Findings to the contrary were wrong."
"The mere statement of the foregoing facts indicates how unrealistic such a conclusion appears to be. It contradicts the conclusion of the primary judge who received evidence and heard argument over nine days of trial; conclusions which would ordinarily be taken to enjoy certain advantages over an appellate court, including this Court. …"
"The contention that the appellant adhered to its system of distribution because it had found it specially useful and profitable in marketing the kind of product it sold was not supported by the evidence when regard was had to what happened after the launch by the appellant of a Sydney equivalent to the Melbourne directory. [Evidence relating to the Sydney market] given at a time when the appellant's sales of its Sydney directories constituted only 10% of the market, suggests an understandable willingness to embrace a different distribution system where the appellant's product did not dominate the relevant market. It tends to confirm the impression to which the primary judge and the majority in the Full Court gave effect. In insisting on its closed distribution system in Melbourne, the appellant was not pursuing some universal philosophy of efficient market distribution, found to have worked for a product with unique or particular needs. It was simply engaging, as monopolists commonly seek to do, in a market strategy designed to "take advantage" of its dominant market position. It was doing so to the disadvantage of competitors, of healthy competition and, ultimately, of the interests of consumers. …"
His Honour spoke at length about the 'take advantage' element, which may be of less relevance now given the 2008 changes to s 46 which provide some guidance on the meaning of this phrase.
[my emphasis throughout]