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Competition & Consumer Law Quarterly

22 November 2010

In this edition: we look at the ACCC's 'tougher' approach on mergers; the first Public Warning Notice under the new Australian Consumer Law; two important cartel class actions decisions; the record penalty in the Cabcharge case; and some of the consumer reforms of the Australian Consumer Law.

Merger update

In September 2010, the Australian Consumer & Competition Commission (the ACCC) announced its decision to reject divestiture undertakings put forward by the National Australia Bank in its bid for the Australian and New Zealand business of AXA Asia Pacific. The ACCC had previously announced its decision to oppose the transaction in April 2010.

The ACCC opposed the transaction on the basis that it would result in a substantial lessening of competition in the market for retail investment platforms for investors with complex investment needs. These investors typically had investment account balances over $100,000 and financial advisers servicing these customers required the use of investment platforms known as full service wrap platforms. The ACCC found that NAB's Navigator platform was a strong competitor in this market and that AXA's North platform was an emerging, vigorous and effective competitor. The ACCC regarded the competitive threat from AXA as significantly greater than other full service wrap platform providers and that the merger would remove an important new source of competition.

NAB and AXA proposed to address the ACCC's concerns by offering undertakings to divest the North platform administration business to IOOF. The ACCC rejected these undertakings as it considered that the exclusion of the distribution network of financial planners and the underlying North products from the divestiture threatened the ongoing viability and competitiveness of the divestiture business. The ACCC also had concerns about certain behavioural aspects of the undertakings which it regarded as creating uncertainty and risk.

The NAB/AXA transaction was the 8th merger that the ACCC had blocked in an eight-month period. While the ACCC has rejected claims that these figures indicate that it is taking a much tougher line on mergers, in our experience there is no doubt that the ACCC's approach to merger investigations has become increasingly demanding. This includes a greater use of statutory powers to demand information and to conduct interviews of senior personnel, as well as the ACCC taking a more proactive approach towards obtaining third-party views during the market enquiries process.

ACCC issues first Public Warning Notice

The introduction of the Australian Consumer Law on 16 April 2010 has resulted in a widening of the ACCC's powers to issue public warnings about conduct that could contravene the Trade Practices Act 1974 (Cth) (the TPA). Previously, the ACCC's public warning powers could only be used for product safety matters; however, this has now been expanded to provide it with the ability to issue public warnings for potential contraventions of the unconscionable conduct and consumer protection provisions in the TPA.

The ACCC can now issue public warnings when:

  • on reasonable grounds, it suspects a contravention of the unconscionable conduct or consumer protection provisions in the TPA (important note: these provisions will be replaced by the new consolidated Australian Consumer Law effective 1 January 2011);
  • the ACCC is satisfied that someone is likely to suffer detriment from the conduct; and
  • it is in the public interest to issue the notice.

On 20 August 2010, the ACCC issued the first (and, to date, only) Public Warning Notice under its broader powers against three corporations suspected of making misleading claims about the income that can be derived from delivering 'Heartlink'-branded household products to independent supermarkets.

The public impact and potential detriment to a company of issuing a notice under these provisions is apparently not lost on the ACCC, which has indicated that it will use these powers only when absolutely necessary, in situations when the ACCC is reasonably satisfied that there is an imminent need to inform consumers so they can avoid suffering detriment. Whether the use of these new powers by the ACCC remains confined to such limited circumstances remains to be seen.

Class actions

Two recent court decisions have clarified a number of issues in relation to class actions involving international cartels. The decisions relate to the need to properly plead in court documents a relevant 'market in Australia', which is a key legal requirement in cases involving alleged cartel conduct.

The decisions arose out of appeals to the Full Federal Court from decisions of the trial judge in the air cargo and rubber chemicals class actions. The defendants to these class actions had sought to strike out the pleadings on the basis that the applicants had failed to properly plead a 'market in Australia' was affected by the alleged conduct. The Federal Court overturned the decision of the trial judge in the air cargo case but affirmed the decision of the trial judge in the rubber chemicals case. In doing so, the Full Federal Court:

  • confirmed that it is necessary for an applicant to identify in the pleading whether it alleges a global market (of which Australia forms a part) or a market in Australia in addition to a global market;
  • indicated that if an applicant were to allege that there was a global market of which an Australian market formed a part, it would need to establish that the firms were also in close competition in the market in Australia which formed part of that global market; and
  • overturned the trial judge's conclusion in the air cargo class action that it was necessary to establish both strong supply side and demand side substitutability in order to establish the existence of a market. The Full Federal Court held that (in relation to air cargo at least) it may be sufficient to establish close supply side substitutability.

In the air cargo class action, the trial judge struck out the pleaded market on the basis that it did not (among other things) allege facts which, if proved, would establish strong demand and supply side substitutability between the relevant airlines. The trial judge formed the view that in these circumstances, the pleadings were insufficient to establish the existence of a market in Australia.

In overturning the trial judge's decision the Full Federal Court held that:

  • even if there was limited demand-side substitutability (for example, because a customer would never substitute the transport of their cargo from Melbourne to Tokyo on one airline for the transport of their cargo from Melbourne to Boston on a different airline), it may nonetheless be possible to establish the existence of the relevant market if there was close supply-side substitutability (on the basis that suppliers would, given a sufficient price signal, switch from one route to the other);
  • it was not necessary for the applicant to plead that a carrier would, if presented with a sufficiently strong price incentive, make the substitution from one route to another. The Full Federal Court held that it was sufficient for the applicant to plead that a carrier could supply the services and make the substitution from one route to another. Further, that it was also sufficient for the applicant to plead as a primary fact that the market existed in Australia because it existed everywhere in the world.

In the rubber chemicals class action, the market pleadings alleged that the respondents were 'in competition with each other and with other persons from time to time in the Australian market, and throughout the world in relation to the supply of Rubber Chemicals'. The majority of the Full Federal Court upheld the trial judge's finding that this market pleading should be struck out on the basis that it did not enable the respondents to know whether the applicant was alleging that there was a global market (of which Australia forms a part) or a global market and a separate market in Australia.

Moreover, the majority held that if the applicant were in fact alleging a global market of which Australia forms a part, it would need to establish that the same firms were in close competition in both the global market and the Australian market which formed part of it. However, the applicants were granted leave to replead the relevant market or markets, because the court had overturned the trial judge's decision to strike out several other paragraphs of the statement of claim.

Record penalty for misuse of market power

The ACCC recently secured a record penalty against Cabcharge for breaches of the misuse of market power provision (section 46) of the TPA. The penalty of $14 million is highest penalty imposed in Australia for a breach of the misuse of market power provision.

Cabcharge supplies an electronic and voucher payment system to the Australian taxi industry. Cabcharge holds a very significant position in the industry, supplying 96 per cent of Australian taxis with its payment system. 

The ACCC commenced proceedings against Cabcharge in the Federal Court in June 2009, alleging that it had misused its market power for the supply of electronic payment systems and non-cash instruments for the payment of taxi fares by:

  • refusing to deal with competing suppliers of electronic payment systems to allow Cabcharge payments to be processed through electronic terminals operated by rival payment networks; and
  • supplying taxi meters and fare schedule updates below cost or free of charge, because taxis with an integrated Cabcharge payment system and taxi meter would be significantly less likely to deal with Cabcharge's competitors.

In settling the proceedings, Cabcharge agreed to pay a penalty of $14 million and costs of $1 million. The settlement avoids what was likely to have been a lengthy trial, in which the ACCC and Cabcharge proposed to call almost 80 witnesses. However, this may not be the end of the process for Cabcharge. Cabcharge now faces the prospect of third parties bringing legal actions for damages, no doubt encouraged by Cabcharge's preparedness to admit contraventions as part of the settlement. If this occurs, there may be further adverse financial consequences for Cabcharge.

In the past, the ACCC has struggled to win cases under s46, leading to criticism that the law was inadequate to prevent corporations from abusing market power. The Cabcharge case suggests that the ACCC is likely to be increasingly prepared to commence proceedings against corporations that misuse their market power, no doubt buoyed by the Federal Court's willingness to award significant penalties for such conduct.

Consumer Law

As part of the reforms coming into effect on 1 January 2011, the Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth) (the ACL) provides for a single set of consumer guarantees to replace the current system of implied warranties under the TPA. The guarantees are:

In relation to the supply of goods

  • a guarantee as to title;
  • a guarantee as to undisturbed possession;
  • a guarantee that the consumer will acquire the goods free from any security, charge or encumbrance that was not disclosed to the person before the sale;
  • a guarantee that the goods are of acceptable quality;
  • a guarantee that the goods are fit for a purpose disclosed, either expressly or by implication, by the consumer;
  • a guarantee that the goods supplied by a description, sample or model are the same as described, sampled or modelled;
  • a guarantee as to repairs and spare parts; and
  • a guarantee as to express warranties.

In relation to the supply of services

  • a guarantee as to due care and skill;
  • a guarantee that the service and any products relating to that service are fit for a particular purpose; and
  • a guarantee as to reasonable time for supply.

These guarantees cannot be excluded by contract, however, a failure to comply with a guarantee will not constitute a contravention of the ACL. Instead, the ACL provides for a number of specific remedies that may be sought against the supplier and/or manufacturer of goods or the supplier of services. In relation to actions against a supplier, the nature of the remedy will also depend on whether the failure to comply with the guarantee is a 'major failure'.

A major failure includes where:

  • a reasonable consumer would not have acquired the goods had he or she known about the nature and extent of the failure;
  • the goods are significantly different from the description, sample or model from that the consumer was supplied;
  • the goods are substantially unfit for the purpose for which the goods of the same kind are commonly supplied and cannot be easily remedied within a reasonable time; and
  • the goods are unsafe and are therefore not of acceptable quality.

Action against suppliers: where the failure is not a major failure and it can be remedied within a reasonable time, the consumer is entitled to require the supplier to remedy the breach. The form of that remedy (whether it be repair, replacement or refund) is at the discretion of the supplier.

Where, however, the supplier has failed or refused to remedy the breach within a reasonable time, the consumer is entitled to:

  • fund the cost of the repairs and bring an action against the supplier to recover all reasonable costs of repair;
  • subject to conditions, reject the goods. If the goods are rejected, the consumer then has the right to determine whether they would like the goods replaced or refunded; or
  • terminate the contract for the supply of services.

Where the failure is a major failure, subject to certain conditions, the consumer may:

  • reject the goods; or
  • bring an action against the supplier to recover compensation for any reduction in the value of the goods below the lesser of the price paid or payable for the goods by the consumer.

Further, a consumer can bring an action against a supplier to recover damages for any loss or damage suffered by the consumer because of a failure to comply with a guarantee if it is reasonably foreseeable that the consumer would have suffered the loss or damage as a result of the failure.

Action against manufacturers: where a manufacturer has breached a guarantee, a consumer may bring an action against the manufacturer to recover damages for:

  • any reduction in the value of the goods resulting from the failure to comply with the guarantee, being the lower of:
  • the price paid or payable by the consumer for the goods; or
  • the average retail price for the goods at the time of supply; or
  • any loss or damage suffered by an affected person (including, but not limited to, a consumer) as a result of the failure to comply, where it is reasonably foreseeable that the loss or damage would have occurred as a result of such a failure.

Where a consumer has, in accordance with an express warranty, required the manufacturer to repair or replace the goods for a breach of a guarantee in relation to acceptable quality, the supply of goods by description, repairs and spare parts, or express warranties, he or she is not allowed to bring an action for the recovery of loss or damage unless the manufacturer has failed to remedy the failure within a reasonable time.

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