Competition and Market Regulation Update April 2009

In this month’s Competition and Market Regulation Update we explore the following:

• Full Federal Court confirms Cadbury’s right to access proofs of evidence disclosed in ACCC proceedings against Visy
• Emirates and Singapore Airlines lose document production challenge in ACCC’s air cargo investigation
• ACCC gives the all clear to Chinalco to acquire interests in Rio Tinto
• Australian boat manufacturer sunk
• Competition Appeals Tribunal upholds Tesco objection to ‘competition test’
• United States: Longest jail sentence ever imposed for a single antitrust charge
  

Full Federal Court confirms Cadbury’s right to access proofs of evidence disclosed in ACCC proceedings against Visy

The Full Court of the Federal Court (court) has upheld Justice Gordon’s ruling (discussed in our March 2008 update) that 111 finalised proofs of evidence (proofs) filed and served on Visy Industries (Visy) during court proceedings in 2007 were not protected by litigation privilege from discovery in a subsequent private action. In so ruling, the court has provided important clarification on the ACCC’s ability to protect information provided by immunity applicants from subsequent disclosure to third-party litigants.

Potential immunity applicants should consider the consequences of this decision when deciding whether to seek immunity from the ACCC for cartel conduct as such immunity, if granted, does not extend to private actions by customers or suppliers.

Background

The proofs in question were filed and served on Visy in accordance with a court order during legal proceedings against Visy for its part in an illegal cartel in the cardboard packaging industry. The case was ultimately decided on the basis of an agreed statement of facts with Visy admitting to its participation.

Cadbury subsequently initiated proceedings against both Visy and Amcor (the immunity applicant in the ACCC’s case against Visy) seeking damages. During the proceedings, Cadbury obtained orders for the discovery of the proofs in Visy’s possession. The ACCC unsuccessfully appealed these orders.

The Full Court’s decision

In brief, the Full Court ruled that when a document is created with the intention that it will be provided to the opposing party in litigation, that document does not attract litigation privilege. It reasoned that extending litigation privilege to such documents was inconsistent with the rationale for such privilege, which rests on the basis that parties are generally free to decide for themselves what evidence they will adduce at trial. Likewise, the Full Court affirmed Justice Gordon’s ruling that if litigation privilege did exist in the documents, their filing and service on Visy acted as a full waiver of that privilege.

Emirates and Singapore Airlines lose document production challenge in ACCC’s air cargo investigation

The Federal Court has dismissed applications by Singapore Airlines Pte Ltd, Singapore Airlines Cargo Pte Ltd and Emirates challenging the production of documents to the ACCC in relation to an air cargo price-fixing investigation.

The ACCC is investigating whether Singapore Airlines and Emirates (along with other airlines) were participants in a cartel to fix prices for international air cargo services. In 2007 and 2008, the ACCC issued notices under section 155 of the Trade Practices Act 1974 (Cth) (TPA) requiring Emirates and Singapore Airlines to produce documents in relation to the alleged cartel. The two airlines brought proceedings contesting the validity of the notices.

Counsel for Emirates argued that the notices were invalid as they failed to identify the market in Australia in which the alleged conduct occurred. It was argued that all transactions and negotiations occurred on foreign soil, and therefore the competition, which takes place at the point of origin of the cargo, was not within the Australian market. Justice Middleton dismissed this argument, stating that the evidence did not conclusively justify a finding that no marketing or negotiating occurs in Australia in respect of all international air cargo services. His Honour concluded that the notices referred to the supply of air cargo services (both inbound and outbound) and, in context, refer to those services being supplied in a market in Australia. Accordingly, the market was sufficiently defined for the purposes of the notices.

Emirates and Singapore Airlines also challenged the notices on the basis that the notices imposed a severe burden on the parties if they were to comply. Justice Middleton noted that although the burden on the airlines to produce the documents was great, the notices were not unreasonably issued, and without this element of unreasonableness or oppressiveness the notices were valid.

This case is the latest to arise out of an international regulatory investigation into the air-freight industry with successful actions having been brought against airlines in the United States, United Kingdom as well as in Australia (see our March 2009 update). Over 30 airlines have been investigated, and 11 have admitted their involvement in the cartel. The ACCC has sued six other airlines in this investigation, including the Australian provider Qantas Airways, with penalties to date totalling A$41 million.

ACCC gives the all clear to Chinalco to acquire interests in Rio Tinto

The Aluminium Corporation of China (Chinalco) has proposed a US$19.5 billion acquisition of interests in Rio Tinto Ltd and Rio Tinto plc. This includes US$12.3 billion for stakes in Rio Tinto’s iron ore, bauxite, alumina, aluminium and copper assets, as well as a US$7.2 billion investment in convertible bonds to increase Chinalco’s equity interest in the Rio Tinto parent company to 18 per cent. ACCC public review of this proposal commenced on 18 February 2009.

The ACCC has announced that it will not oppose the proposed acquisition of these interests. The ACCC concluded that such an acquisition was not likely to result in a substantial lessening of competition in any relevant Australian market. Following the announcement Rio Shares jumped 1.1 per cent to A$53.93.

The ACCC considered the potential impact of vertical integration of Rio Tinto’s iron ore operations and Chinese steel makers, due to the fact that many such steel makers and Chinalco are subsidiaries of the same parent entity. If the vertical integration would allow Chinalco to influence Rio Tinto to push down the price of iron ore below competitive levels for the benefit of Chinese steel makers, there could be a substantial lessening of competition in the market. In a statement, the ACCC concluded that ‘Chinalco and Rio Tinto would be unlikely to have the ability to unilaterally decrease global iron ore prices below competitive levels’. It stated that any decreases in iron ore prices would come from a capacity expansion by Rio Tinto, and this was likely to have a minor effect and be transitory in nature. Price effects from increased supply by Rio would be mitigated by a decrease in supply by other producers in a bid to keep global prices stable.

The ACCC noted that Chinalco and Rio Tinto do have a ‘limited direct overlap’ of operations in the Australian bauxite, alumina and copper sectors, however this was not enough to pose a threat to competition in the market.

This proposal remains subject to shareholder and government approval. The Foreign Investment Review Board (FIRB) is reviewing this proposal and will recommend to the government whether in their view, this foreign investment by Chinalco would be contrary to Australia’s national interest. The decision of the FIRB is due in late June. If Treasurer Wayne Swan approves the deal, Rio plans to ask shareholders to vote in an ordinary resolution which requires a simple majority to pass.

Australian boat manufacturer sunk

The Federal Court has imposed large penalties on Australia’s largest aluminium boat manufacturer for engaging in resale price maintenance. The fines were imposed against  Queensland company Telwater and its director Paul Phelan, after the ACCC brought action in the Federal Court.

Telewater makes and distributes the Quintrex and Stacer brands. The ACCC had alleged that Telewater made it known to its dealers that they could not advertise Quinterx or Stacer boating packages below a specified ‘brochure price’. The ACCC also alleged that one of Telewater’s directors was knowingly concerned in the conduct.
The Trade Practices Act 1974 (Cth) (TPA) does not prevent manufacturers from recommending a retail price to their distributors, but imposition of a minimum price is forbidden. The object of this prohibition is to ensure that competition in the market is unfettered by price restraints that are imposed on retailers.

On 5 March 2009, the Federal Court of Australia took the wind out of Telwater’s sails by imposing a fine of A$210,000, and a further A$28,000 against Mr Phelan. The penalty took into account cooperation offered by Telwater and Mr Phelan in voluntarily stopping the illegal conduct and initiating a trade practices law compliance program in their organisation.

Competition Appeals Tribunal upholds Tesco objection to ‘competition test’

The United Kingdom’s Competition Appeals Tribunal (CAT) has stalled a plan by the United Kingdom’s Competition Commission (commission) to introduce a ‘competition test’ in the retail planning approval processes for large supermarkets. The test would have prevented planning approval being granted for development of a new supermarket, where the local market has few large participants and the applicant has, or would have, a market share greater than 60 per cent.

The competition test was one of a suite of recommendations to arise from a two-year industry inquiry into the United Kingdom groceries market and would have allowed councils to stop a dominant supermarket from opening new branches

The CAT found that the commission had failed to effectively weigh the costs and benefits of the proposed test and, in particular, the potential for consumer detriment. The commission had argued that the potential negative effects were accommodated firstly by the 60 per cent threshold and secondly, by unconstrained competitors soaking up excess demand. The CAT found that there is no guarantee that if one supermarket was banned from opening a new store another would want to replace it or that they would do so in a timely manner. The decision was the first time the CAT has found against the commission in a United Kingdom market investigation.

This decision does not preclude the commission from implementing a revised version of the competition test in some form in the future and the commission has indicated that it may attempt to do so, stating in a media release following the CAT’s judgment, ‘[the decision] has not challenged the rationale for a competition test to tackle local supermarket monopolies or its design’.   

United States: Longest jail sentence ever imposed for a single antitrust charge

The United States District Court in Jacksonville, Florida has sentenced Peter Baci, a former high-level shipping executive to a 48-month jail term and ordered him to pay a fine of US$20,000 for his role in a six-year antitrust conspiracy. Although below the 10-year maximum available, this is the longest jail sentence ever imposed for a single antitrust charge. The Acting Assistant Attorney General in charge of the Department of Justice’s Antitrust Division said that ‘[the] sentencing should make clear that individuals who violate the antitrust laws will be prosecuted to the fullest extent of the law’.

Peter Baci was employed by a large United States company which provides freight shipping services between the United States and Puerto Rico. Baci was charged with engaging in a conspiracy to suppress and eliminate competition. From at least May 2003 until as late as April 2008, Baci agreed to allocate customers, rig bids submitted to government and commercial buyers and fix the price of rates, surcharges and other fees charged to customers. Three other executives still face charges for their involvement and a fourth executive faces an obstruction of justice charge. 

As discussed in our November 2008 update, participants in cartel activity in Australia may also face criminal sanctions for cartel conduct in the future. The Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008  is expected to become law this year. The legislation will bring Australian law in this area in line with a number of other jurisdictions, including the United States, with courts able to impose maximum jail sentences of 10 years for cartel activity.