Allens

Competition Law

Focus: Fines for anti-competitive bundling practices

8 September 2010

In brief: The Full Federal Court has handed down fines of nearly five million dollars for breaches of sections 46 and 47 of the Trade Practices Act 1974 in a long-running action by the Australian Competition and Consumer Commission. Partner Jacqueline Downes (view CV) and Lawyer Rachel Chua report.

How does it affect you?

  • Courts are more likely to award greater penalties where the nature of the contravention is egregious and the extent is substantial.
  • Penalties will also be greater where the conduct is continuous and deliberate.

The facts

Baxter Healthcare Pty Ltd manufactures and supplies sterile fluids and peritoneal dialysis fluids (PD fluids).  It operates an effective monopoly in the PD fluids market.  In 1998 and 2001, Baxter successfully tendered for the supply of sterile fluids and PD fluids to state purchasing authorities in, relevantly, New South Wales, South Australia, Western Australia and Queensland. Three of these tenders were won in 2001.  The tenders were structured so that the products were sold either individually at inflated prices or as a bundle at a significantly lower price, conditional on Baxter being the sole supplier of both sterile fluids and PD fluids.

The Australian Competition and Consumer Commission (the ACCC) commenced proceedings against Baxter in November 2002, alleging misuse of market power (s46) and exclusive dealing (s47).  In August 2007, the High Court held that Baxter was not subject to Crown immunity, and in August 2008, a majority of the Full Federal Court found that Baxter had contravened the Act, but did not make a ruling as to the appropriate penalty.

The ACCC sought pecuniary penalties of $27.3 million on the basis that, at the time of the contraventions, the maximum for each penalty was $10 million; the conduct extended over a lengthy period of time; and Baxter had effectively 'snuffed out' competition in the PD fluids market for the duration of the agreements.1 The ACCC also sought costs, including reserved costs of the trial at first instance and a three-year injunction prohibiting Baxter from engaging in similar conduct.

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The decision

Justice Mansfield ordered Baxter pay $4.9 million in penalties, less than 20 per cent of that claimed by the ACCC.  His Honour originally calculated the penalties to be $5.5 million being:

  • $2 million for the 1998 NSW agreement;
  • $1.5 million for the 2001 Queensland agreement;
  • $1 million for the 2001 WA agreement; and
  • $1 million for the 2001 SA agreement.

However, the three agreements entered into in 2001 were reduced by $200,000 each on the basis that they were relatively contemporaneous and should therefore be treated as if they were part of the same conduct, in which case, only one penalty would apply.2

Baxter was also ordered to pay the costs of the current proceedings, the proceedings at first instance and on appeal, though no costs orders were made as against the states.  His Honour rejected the ACCC's application for a three-year injunction, stating that it was unlikely that Baxter would engage in similar conduct in the future. 

In arriving at his decision, Justice Mansfield took into account the factors outlined in s76 of the Act, including:

  • the nature and extent of the contraventions;
  • the deliberateness of the contraventions;
  • whether Baxter had previously been found to have engaged in similar conduct;
  • its degree of market power; and
  • whether there was a corporate culture of compliance with the Act. 

His Honour also emphasised that the appropriate penalty should be a deterrent but by no means oppressive.

Justice Mansfield stated that the fact that Baxter knowingly and deliberately contravened the Act on multiple occasions in 1998 and 2001, and the nature and extent of the contraventions weighed heavily on his decision.  However, his Honour also stated that Baxter's cooperation or lack thereof, its lack of contrition and its past similar conduct in tender processes did not adversely affect his decision.  In relation to the latter, Justice Mansfield reasoned that, although it was common knowledge that Baxter had engaged in tender processes in a similar manner, it had never previously been found to have breached the Act.  Further, his Honour did not believe that Baxter's unsatisfactory culture of compliance warranted greater pecuniary penalties. 

The ACCC is currently reviewing the decision.

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Conclusion

This case demonstrates that the assessment of penalties is not an exact science and there are some differences between the views of the ACCC and the courts on the appropriate penalty.  This is interesting in the light of ACCC Chairman, Graeme Samuel's comments earlier this year that 'the financial penalties in Australia [do not] reflect the true damage done by anti-competitive conduct'.3 Mr Samuel also called for a 'cultural change'.  It will be interesting to monitor the approach of the ACCC and the courts to penalties in the light of Mr Samuel's comments and this decision.

Footnotes
  1. ACCC v Baxter Healthcare Pty Limited [2010] FCA 929.
  2. Section 76(3) of the TPA.
  3. Graeme Samuel, 'Current issues on the ACCC's radar' (Competition Law Conference 2010, Sydney, 29 May 2010).

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