Abstract
In the only predatory pricing case in Australia to reach the High Court, the ideas and recommendations contained in the 1975 Harvard Law Review article by Phillip Areeda and Donald Turner were at the heart of the case. That case, the Boral case, decided by the High Court in 2003, raised a number of interesting issues with regard to whether and how the test that was proposed by Areeda and Turner should be employed to deal with price cuts by large firms that are aimed at competitors. Equally important, the case raised some fundamental questions about whether there was a serious “gap” in the Australian equivalent of Section 2 of the Sherman Act—Section 46 of the Competition and Consumer Act 2010, formerly the Trade Practices Act 1974 (TPA)—which made it difficult to challenge predatory conduct. Boral led immediately to some radical changes in the TPA; but, even today, more than 10 years after Boral, Australians are still struggling to develop the right statutory framework to deal with predatory pricing. This paper will describe the Boral case, discuss how the Australian courts, including the High Court, attempted to apply the A–T test to the facts of the case, and survey and comment on the ongoing legislative turmoil that followed from High Court’s decision.
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Notes
When we refer to the Areeda and Turner “test” (A–T) we mean essentially their twin proposition that:
(a) A price at or above reasonably anticipated average variable cost should be conclusively presumed lawful.
(b) A price below reasonably anticipated average variable cost should be conclusively presumed unlawful (Areeda and Turner 1975, p. 733). This is the conventional understanding of their proposal. Herbert Hovenkamp, in one of the papers prepared for this conference, has argued that A–T envisioned the need for the plaintiff also to show a reasonable likelihood of the monopolist’s recouping any short-run losses (a complementary test) as eventually implemented by the Supreme Court in the Brooke case. While we agree that A–T recognized that, as an economics matter, successful predation would require recoupment, we disagree that it was envisioned that, as a part of the test, the plaintiff would have to demonstrate the likelihood of recoupment. Indeed, we think their view would have been that, when a rational profit-maximizing firm prices below average variable cost in the short-run, that tells us that recoupment is likely. But our differences on this historical issue are not critical. When courts refer to the A–T test, they almost inevitably are referring to their price–cost test. Indeed, at the heart of Boral was whether Australia should adopt the “recoupment test” as a supplement to the A–T cost test when price is below average variable cost.
Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2002) 195 ALR 609 at par 273.
Australia has the English rule (loser pays) for attorney’s fees, which can have a dampening effect on the incentive of private litigants—especially small ones—as compared to the U.S. scheme where the winning plaintiff collects from the losing defendant but the losing plaintiff pays only its own fees. In addition, class actions are much rarer in Australia, though that might not matter so much for predatory pricing cases.
In the landmark Alcoa case, Judge Learned Hand made some effort to explain the difference between simply being a monopolist (not in itself illegal) and “monopolization”. However, courts since then rarely devote any significant portion of an opinion to parsing the words of the statute. See United States v. Aluminum Co. of Am., 148 F.2d 416, 421 (2d Cir. 1945).
Prior to 1986, the threshold was “control a market” rather than “possess substantial power.” The change was intended to reduce the burden on plaintiffs.
A more extensive summary of the Australian cases in this time window and an analysis of the statutory basis for predatory pricing claims in Australia can be found in Nagarajan (1990, p. 312).
In Australia, antitrust cases are typically tried to a single Federal Court judge. Appeals go to the Full Court and are typically heard by a three-judge panel. Unlike the U.S. Courts of Appeals, there is no separate stable of appellate judges. The three-judge panel consists of Federal Court judges not including the original trial judge.
“I leave open the question whether in the ordinary course a monopolist can engage in predatory price-cutting only if the price is below some particular cost, and not where the price set, although it may deter competitors, is one which merely does not maximize the monopolist’s profit. It may be that where one can infer the requisite purpose from other evidence, price-cutting may be predatory in the sense referred to and a ‘taking advantage’ of power derived from the substantial control of a market, notwithstanding that it is not below marginal or average variable cost and does not result in a loss being incurred.” Victorian Egg Marketing Board v. Parkwood Eggs Pty Ltd. (1978) ATPR 40-081 at par. 17,789.
T.P.C. v. C.S.B.P and Farmers Ltd (1980) ATPR 40-151.
Ibid. par. 42,165.
Eastern Express Pty Ltd v General Newspapers Pty Ltd et al. (1991) 103 ALR 41 [hereinafter Eastern Express Federal Court Decision]; on appeal (1992) 106 ALR 297 [hereinafter Eastern Express Full Court Decision].
Eastern Express Federal Court Decision, supra note 10 at par. 70.
See Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (U.S. 1993).
See Cargill v. Monfort, 479 U.S. 104 (1986).
Eastern Express Federal Court Decision, supra note 10 at par. 83.
Ibid. at par. 98.
Ibid. at par. 84.
Eastern Express Full Court Decision, supra note 10 at par. 104.
Ibid. at par. 111.
There were also allegations (admitted by BBM) that BBM offered to buy the plant of a competitor and that it increased capacity at its existing plant. These allegations did not play a prominent role as the case unfolded.
The need first to define a market is viewed in Australia as a statutory requirement. There has been little enthusiasm for the proposition occasionally expressed in the U.S. that one should be able to show market power (or its absence) directly, without first defining a market and then (at least as the next step) measuring market shares. See Kaplow (2010, p. 517). But see also Werden (2013).
Natwest Australia Bank Ltd v Boral Gerrard Strapping Systems Pty Ltd (1992) ATPR 41-196 at 40,644.
There may be situations where, in the current state of competition, a firm can earn some degree of supra-competitive profits but wants to be able to earn even more. That was certainly not the case in Boral.
In practice, even before Brooke (discussed below), courts have been prepared to dismiss claims of attempted monopolization where the defendant’s initial market share was below some threshold, but that threshold was far less than the market share (say, 60 % or more) that is usually associated with actual monopolization cases. Since Brooke, with its recoupment requirement, where the defendant has an initial market share of, say, less than 50 %, the plaintiff might have a great deal of difficulty in the establishment of a reasonable likelihood of recoupment.
A possible ambiguity in the original A–T article was whether there were limits to the circumstances under which the test could/should be applied. The article repeatedly refers to predatory pricing by “a monopolist.” Of course, if the firm had 100 % of a market, there would be no other firm to predate on, so something less than 100 % must be contemplated. But A–T do not offer any lower bound on the share that would trigger the application of their test, indicating merely that there are respects in which non-monopoly firms should have wider latitude. The example given is that of promotional pricing by a new entrant. So it is unclear from the text of the article whether the bright-line test would ever be applied to a firm with only 30 % of the market. This question became largely superfluous when the requirement to show reasonable likelihood of recoupment became part of the law following Brooke.
In Brooke, the defendant had a market share of only 12 %. Therefore, after Brooke, it was an open question whether the Supreme Court had intended the recoupment requirement to apply more broadly. This question was answered later (after Boral had been decided by the High Court) in the Weyerhaeuser case, which indicated that a showing of likely recoupment was a prerequisite in all predatory pricing cases. Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 549 U.S. 312 (2007).
There is nothing in the language of a traditional interpretation of Section 2 that enshrines that distinction either; rather it is the common law evolution of the application of a traditional interpretation of Section 2 that has led to the emphasis on “pricing below some measure of costs”.
A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396, 1397 (7th Cir. 1989).
As mentioned earlier, in the U.S. the correct measure of average variable or avoidable costs would typically reflect some of BBM’s concerns, such as the profit to the parent from sales of materials to the subsidiary or the extra costs associated with a temporary shutdown and restart of the plant.
Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2002) 195 ALR 609 at par 273.
Id. at par. 278.
The High Court might not require a showing of the likelihood of recoupment if the defendant started with a dominant share in a market with high barriers to entry because the structural evidence would suggest market power in the traditional sense (the power to charge prices substantially above the competitive level). But it is precisely in such a case that showing the likelihood of recoupment is relatively straightforward.
Many besides Pleatsikas were critical of the Full Court decision. For example, Smith and Round (2002, p. 212) suggest the Full Court’s decision lacks clarity and guidance as to what large firms can do to protect market share when entry occurs or is threatened, without breaching s.46. See also Wright and Painter (2001, pp. 108, 111): “The Boral decision might be seen as an example of what can go awry when purpose is allowed to swamp the other elements of s 46” and “If the Full Court’s judgment is correct, s 46 may prove to be an instrument for the suppression of competitive pricing conduct in many Australian markets”. See also Edwards (2002, pp. 177–182), who strongly favors recoupment and states (p. 180) that the Full Court’s “conclusion that recoupment is not required is … fundamentally flawed.” He also criticizes the Full Court for not separating out the assessment of market power from the taking advantage element. See also Griggs and Hardy (2001, pp. 201, 212): “The Full Federal Court applied the wrong competitive test in determining whether there was a breach of s46”; and “Our criticism with the decision in Boral likes not so much in the result, but in the unqualified application of a test of what the entity would do in a perfectly competitive environment. The test cannot be that. Corporations are surely entitled to possess market power…”.
The Senate Standing Committee on Economics Report on the Trade Practices Legislation Amendment Bill 2008, at para 2.23. Griggs (2003) states that “predatory pricing actions will continue to be an elusive holy grail for private litigants or the regulator” and worries that the regulator might be “so dispirited by the latest losses to discontinue funding cases seeking to test the boundaries of the law.” See also the discussion in Reid (2010, pp. 46–47).
The original a traditional interpretation of Section 46 was re-titled 46(1).
March 2004, set out at para 2.28.
46(1AA) was enacted by the Trade Practices Legislation Amendment Act 2007, effective 25 September 2007.
So named because they were drafted at the Birdsville pub by the Queensland National Senator, Barnaby Joyce.
Senator Joyce’s press release, 11 September 2007, cited in CCH’s Australian Trade Practices Reporter, ¶5-570] at 3,911.
Presumably there would also have to be barriers to new entry: either structural or strategic.
We read the High Court as open to the possibility that, even if after the predation, the predator does not itself achieve a large share of the market, recoupment would come about through oligopolistic supra-competitive pricing, so long as this is a likely outcome rather than a mere possibility. We read the U.S. Supreme Court in Brooke as open to this as a theoretical possibility, though skeptical of how frequently it will occur, and very skeptical that it would have occurred in the specific situation that the cigarette companies found themselves in.
In Eurong Beach Resort, the Respondent admitted that it had misused its market power in the supply of passenger and vehicle ferry services to drive out a competitor, offering prices lower than the cost of wages and fuel. ACCC v Eurong Beach Resort Ltd (2006) ATPR 42-098, [2005] FCA 1900. In ACCC v Cabcharge (2010) FCA 1261, the ACCC alleged Cabcharge engaged in predatory pricing by selling meters below cost to: (1) eliminate or substantially damage a competitor in the processing market and two competitors in the meter market; (2) prevent the entry of competitors into the meter market; and (3) deter or prevent competitors from engaging in competitive conduct in the processing and meter markets. Cabcharge supplied meters for free (obviously below cost) and free meter updates and funded its losses from profits that it made from its payment processing systems. Cabcharge conceded that it engaged in predatory pricing and that its power in the processing market materially affected its ability to do so. A $3 million penalty was imposed; this was the largest predatory pricing penalty in Australia.
The media release of March 27, 2014, from the Honorable Bruce Bilson MP (perhaps ominously, the Minister for Small Business), announced a competition review panel indicating:
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Today I am announcing the final terms of reference for the Government’s ‘root and branch’ review of competition law and the appointment of three members and a chair to serve on the review panel.
All Australians stand to benefit from a review of this kind: a comprehensive examination of Australia’s competition framework.
An agenda of microeconomic reform has been identified by this Government as a key driver of innovation, productivity and jobs growth in the economy.
For the consumer, it will provide a pathway to ensure we all pay a fair price at the check-out in the longer term for the goods and service we purchase.
In business it means having competition based on merit, not on muscle, creating a more level playing field and supporting a competitive environment where efficient businesses – big and small – have the opportunity to thrive and prosper.
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The Draft Report and related materials can be found at http://competitionpolicyreview.gov.au/draft-report/. The Final Report can be found at http://competitionpolicyreview.gov.au/files/2015/03/Competition-policy-review-report_online.pdf.
McGahee v. Northern Propane Gas Co., 858 F. 2d 1487, 1495 (11th Cir. 1988).
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Acknowledgments
The authors are grateful to John Ren for research assistance and to Stephen Corones and to the participants in the Workshop, especially Stephen Martin, for helpful comments.
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Hay, D.L., Hay, G.A. Areeda–Turner “Down Under”: Predatory Pricing in Australia Before and After Boral. Rev Ind Organ 46, 269–286 (2015). https://doi.org/10.1007/s11151-015-9461-4
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DOI: https://doi.org/10.1007/s11151-015-9461-4