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Queensland Wire Industries v BHP

(1989) 167 CLR 177

 

In Brief

Qld Wire succeeded in its claim that BHP had engaged in a misuse of market power by refusing to supply it with Y-Bar necessary to make star picket fencing.

The High Court overturned the decision of Pincus J at First Instance and the Full Court of the Federal Court (Bowen CJ, Morling and Gummow). Pincus J at trial considered that the phrase 'take advantage' imported a pejorative element; this view was unanimously rejected by the High Court which interpreted the 'take advantage' element in a neutral way.

 

Facts

There were two relevant markets: (1) steel products including Y-bar; (2) downstream market for rural fencing (including star picket fence posts).  The Court held that BHP had substantial market power in the first of these markets and ‘leveraged’ it into the second market.  By refusing to supply Y-bar to QWI, BHP was able to prevent QWI making star picket fences with the consequence that it was unable to compete with QWI's subsidiary for the major fencing customers.

Note: BHP would sell Y-bar to QWI, but set its prices so high as to constitute a ‘constructive refusal’.

BHP and AWI (BHP's wholly own subsidiary which manufactured and supplied star picket fencing) claimed their policy to refuse supply, or offer it an uncompetitive price, was to preserve the business of the manufacture and wholesale of fence posts constructed by it in association with each other.

 

Mason CJ and Wilson J

Taking advantage of market power

The take advantage element does not require moral reprehensibility.

[22] Once it is established that a firm has a substantial degree of market power, the issue is whether it has "take(n) advantage" of that power for the purpose of "substantially damaging a competitor", "preventing the entry" of a competitor into a market, or "preventing a person from engaging in competitive conduct" in a market: s.46(1)(a), (b) and (c). Pincus J. suggested that the phrase "take advantage" requires that the defendant be doing something "reprehensible". His Honour also used the phrases "(competition) deserving of criticism" and "predatory or unfair", apparently as equivalents for "reprehensible". It is unclear precisely what the phrases are supposed to mean, but they suggest some notion of hostile intent. For our part, we have difficulty in seeing why an additional, unexpressed and ill-defined standard should be implanted in the section. The phrase "take advantage" in s.46(1) does not require a hostile intent inquiry - nowhere is such standard specified. And it is significant that s.46(1) already contains an anti-competitive purpose element. It stipulates that an infringement may be found only where the market power is taken advantage of for a purpose proscribed in par (a), (b) or (c). It is these purpose provisions which define what uses of market power constitute misuses.'

[24] ... the object of s.46 is to protect the interests of consumers, the operation of the section being predicated on the assumption that competition is a means to that end. Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away. Competitors almost always try to "injure" each other in this way. This competition has never been a tort ... and these injuries are the inevitable consequence of the competition s.46 is designed to foster. In fact, the purpose provisions in s.46(1) are cast in such a way as to prohibit conduct designed to threaten that competition - for example, s.46(1)(c) prohibits a firm with a substantial degree of market power from using that power to deter or prevent a rival from competing in a market. The question is simply whether a firm with a substantial degree of market power has used that power for a purpose proscribed in the section, thereby undermining competition, and the addition of a hostile intent inquiry would be superfluous and confusing. [emphasis added]

[28] ‘In effectively refusing to supply Y-bar to the appellant, BHP is taking advantage of its substantial market power.  It is only by virtue of its control of the market and the absence of other suppliers that BHP can afford, in a commercial sense, to withhold Y-bar from the appellant.  If BHP lacked that market power … if it were operating in a competitive market – it is highly unlikely that it would standby, without any effort to compete, and allow the appellant to secure its supply of Y-bar from a competitor.’

Market power

On the issue of market power generally (particularly, on the difference between market power and market share):

[at 189-190] 'A large market share may be evidence of market power ... but the ease with which competitors would be able to enter the market must also be considered. It is only when for some reason it is not rational or possible for new entrants to participate in the market that a firm can have market power. ... Barriers to entry may be legal barriers—patent rights, exclusive government licences and tariffs for example. Barriers to entry may also be a result of large ‘economies of scale’. Where the economies of scale in a market are such that the minimum size for an efficient firm is very large relative to the size of the market, it may be that potential competitors will be dissuaded from entering the market by the apprehension that only one firm would survive.'

Object

[24] ... the object of s.46 is to protect the interests of consumers, the operation of the section being predicated on the assumption that competition is a means to that end.

 

Deane J

‘Ordinarily, BHP sells the various products from [its rolling mills] to any manufacturer who desires to purchase them.  Y-bar is the only exception.  The explanation of BHP’s effective refusal to supply Y-bar to QWI is that there is no other local producer or wholesaler of Y-bar and BHP desires to prevent QWI from manufacturing and selling star picket fencing posts (produced from Y-bar) in competition with the second respondent ‘AWI’, which is a wholly owned subsidiary of BHP. …’

In relation to market definition generally (in particular, potential markets):

[at 196] 'While actual competition must exist and be assessed in the context of a market, a market can exist if there be the potential for close competition even though none in fact exists. A market will continue to exist even though dealings in it be temporarily dormant or suspended.

Indeed, for the purposes of the Act, a market may exist for particular existing goods at a particular level if there exists a demand for (and the potential for competition between traders in) such goods at that level, notwithstanding that there is no supplier of, nor trade in, those goods at a given time—because, for example, one party is unwilling to enter any transaction at the price or on the conditions set by the other.'

 

Dawson J

Take advantage

‘The words ‘take advantage of’ do not have moral overtones in the context of s. 46’.  BHP took advantage of MP. It used power 'in a manner made possible only by the absence of competitive conditions’.  If the market for Y-bar was competitive then the refusal would have ‘eroded its position in the steel products market without protecting AWI’s position in the fencing materials market.’  Noted also barriers to entry influenced BHP in its actions.

Market and market power

In relation to market definition generally (in particular, potential markets):

[at 200] '… the existence or non-existence of sales of a product cannot conclude whether a market exists or not. It must be sufficient to constitute a market that there is a product for exchange, regardless of whether exchange or negotiation for exchange has actually taken place'

In relation to market power generally:

'Market power has aspects other than influence upon market price. It may be maintained by practices directed at excluding competition such as exclusive dealing, tying arrangements, predatory pricing or refusal to deal. The ability to engage persistently in these practices may be as indicative of market power as the ability to influence prices'.

 

Toohey J

BHP claimed refusal not a result of no competitors but rather as a result of being vertically integrated and would have been made regardless of whether there were competitors.  QWI claimed BHP only refused to supply Y-bar because of its dominant power in the steel products market.  Toohey J agreed with QWI.

 

Commentary

Stephen R Corones, 'Identifying a Misuse of Market Power in Relation to s 46 of the Trade Practices Act' (1989) 17 ABLR 164

externallinkFrances Hanks and Philip L Williams, 'Implications of the decision of the High Court in Queensland Wire' [1990] 17(3) Melbourne University Law Review 437

Abstract: The decision in Queensland Wire is the jirst decision of the High Court on the substantive economic issues of the Trade Practices Act. The decision makes it clear that: (i) the dejinition of market power under the Act should be object-oriented; (ii) power in a market under the Act is the economists' notion of market power; and (iii) to take advantage of power in a market is to engage in conduct that one could not undertake in a competitive market. The authors argue that the decision brings economic efliciency to the forefront of litigation under the Act. They discuss the implications of the decision for refusing to deal, dealings in intellectual property and investment strategy

externallinkGeorge A Hay and Kathryn McMahon, 'The 'Duty to Deal' under Section 46: Panacea or Pandora's Box?' [1994] UNSWLawJl 3; (1994) 17(1) University of New South Wales Law Journal 54

externallinkStephen Lee, 'Queensland Wire Industries: A Breath of Fresh Air' (1989) 18 Federal Law Review 212

externallinkRay Steinwall, "Competition Policy - A Stocktake" [1995] UNSWLawJI 26; (1995) 18(2) University of New South Wales Law Journal 493

'The decision is significant among other things because it confirms that the taking advantage of market power equates with the use of that power in a neutral sense without any moral implication' [p 496]

See also Griffiths Report

 

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