Canterbury Law Review
There is little doubt that s46 of the Australian Trade Practices Act 1974 covering misuse of market power is the section of current greatest interest to lawyers, academics, businesspersons and also, it appears, the Australian Competition and Consumer Commission ("ACCC").
The interest of lawyers in the section is in advising clients in an area in which court views seem to gyrate crazily and in which predicting the legal outcome from any set of facts is an exceptionally hazardous task.
Academics are interested because the section is one where economic theory should have a prime place of influence on the law. More than academic lawyers are thus involved. All those academic economists also feel they have much to contribute to the debate. Predicting how judges will apply, or not apply, economic theory or whether they will, or will not, even understand the theory, is thus a topic for endless academic discourse.
Businesspersons are interested because virtually any decision taken by an entity having a substantial degree of market power can credibly, even if not ultimately successfully, be argued under s46. Thus all pricing and restrictive dealing decisions made by such entities must be taken with s46 in mind. sadly for businesspersons, there are not yet any bright line rules of conduct and s46 is at the heart of the Trade Practices Act fog. To date businesspersons have not even a buoy, let alone a beacon, to assist them in their navigation.
The ACCC becomes more interested in s46 each day. I believe that this is because bringing price fixing cases has become a little boring and passe. Further, the credibility of the Trade Practices Act in this area is, by now, firmly established. The ACCC wishes to become more involved in what one might categorise as "interesting" cases, to expand the frontiers of the Act, and, of course, to expand its own regulatory influence on business decision making. There is also an inherent factor in s46 which necessarily attracts competition law enforcers. The section is a David versus Goliath section. There is frequently also an almost axiomatic belief that David is virtuous and needs protection from an overbearing Goliath. Often enough, I think, it is simply morally assumed that the powerful entity is wrong and that "something" must be done to give "justice" and "fairness" to an entity which is necessarily the weaker in the market struggle.
There is also a lot of theorising in s46 concepts. As one United States commentator put it:
Nearly all antitrust has taken place at a blackboard. Academic commentary and actual policy have both relied upon a mixture of theory, rhetoric, anecdote, supposition and case study. The sorely missing ingredient has been cold, hard, systematic fact.
The result of all this is that the ACCC will, undoubtedly, bring more s46 cases in the future even if the harm caused by monopoly restraints may, by and large, be quite small. There is little doubt, if American experience is any guide, that many of these cases will be founded on somewhat specious reasoning and upon visions, from time to time, as to what is the current evil of the month.
There is, in s46, considerable doubt even as to the most fundamental standards to be applied. The section itself leaves open a vast possibility for the application of different sets of values. Perhaps the main problem is whether courts should apply standards of "fairness", the traditional way in which lawyers see problems, or whether the courts should apply objective criteria of efficiency which is the traditional approach of the economist. In the simple case of the termination of a dealer, for example, the economist will say that the hardship caused to that dealer does not matter. If it is more efficient to terminate the dealer in question, the dealer should go. The lawyer may well feel this is "unfair" to a dealer who has done a faithful job during his dealership. Such a dealer can, the lawyer may argue, be terminated only because he is the weaker party. This is unjust, the lawyer may believe, and the law should offer its protection. Which evaluative criteria are the correct ones to apply? I doubt if we have really even squarely faced this issue, let alone solved it, in interpreting s46.
The cases which we will here discuss are the recent Australian High Court decision in Melway (dealing with restrictive distributorships and refusal to deal), the recent Australian Full Federal Court decision in Boral (dealing with market definition and predatory pricing) and the 1989 Australian High Court decision in Queensland Wire (dealing with misuse of market power by a refusal to deal).
Section 46 of the Trade Practices Act 1974 is aimed at preventing big business exploiting the small. Its provisions are well known. The conduct required in order for there to be a breach of the section can be summarised as follows:
A corporation must have a substantial degree of power in a market.
If a corporation has the requisite degree of market power, it shall not take advantage of that power for the purpose of:
eliminating or substantially damaging a competitor;
preventing market entry; or
deterring or preventing a person from engaging in competitive conduct.
The "damage", the "deterring" or the "preventing" involved may occur in the market in which the corporation has a substantial degree of market power or in any other market.
The points of greatest controversy for purposes of the present discussion involve what is "taking advantage" of market power and what is involved in evaluating "purpose". Our discussion is primarily concerned with these questions. It is relevant at this stage to note that "purpose" is defined in s4F of the Act. The "purpose" of conduct need not be its sole purpose so long as it is or was a substantial purpose. Further, a proscribed "purpose" can be found even if ascertainable only by inference from conduct or other relevant circumstances.
It is trite to say that misuse of market power must occur in "a market". Under the Trade Practices Act a "market" means a market in Australia and includes, in relation to a market for goods and services, a market for goods and services that are substitutable for, or otherwise competitive with, other goods or services. 
It is important, prior to discussing the more esoteric aspects of s46, to note the obvious i.e. that cases can be won or lost on the issue of market definition. The plaintiff party under s46 will always attempt to narrow the market definition because, if a narrower definition can be sustained, the defendant's market power position will be stronger and the likelihood of the defendant being in sin correspondingly increased. Conversely, of course, a wider market definition reduces the market power of the defendant with the consequence that the likelihood of its transgression of the law is correspondingly reduced.
If the Federal Court is now interpreting the market more widely or narrowly than in the past, the impact of this interpretation on the scope of s46 will be highly significant. The first important point about the recent Full Federal Court decision in Boral, in my view is that the Federal Court is adopting a narrower market definitional approach than previously.
Boral involved various wall building products. One issue was whether the relevant market was a "wider" one which included tilt up, clay brick and plasterboard as well as concrete block. Justice Heerey, the trial judge had no doubts at all and found for a wider market. His Honour held that: 
a wall is a wall, whether it is made of concrete blocks or tilt up or concrete bricks or clay bricks. The only need of the builder is to have a wall which will perform as a wall and for the lowest possible cost.
The evidence was all one way. This is not a case where the Court has to
prognosticate or hypothesise as to the likely behaviour of suppliers or consumers. There was abundant evidence of actual substitution, rising and falling as factors such as price, labour costs, aesthetics and building fashions waxed and waned. This is hardly surprising given the basic fact that substitutable products were readily available in Melbourne and physically performed the same function.
Despite the definitiveness with which Justice Heerey expressed his market definition conclusions, the Full Federal Court would have none of his views. The Full Federal Court was constituted by Justices Beaumont, Merkel and Finkelstein. Justices Finkelstein and Beaumont in separate judgments, concurring in result, considered the market definition issue.
Justice Finkelstein found that each of concrete blocks, tilt up, concrete bricks and clay bricks had various uses. These uses varied in accordance with architectural and safety requirements. Each wall product, therefore, had its own characteristics which made it more or less capable of satisfying a particular requirement. His Honour thus concluded, contrary to the trial judge, that "quite clearly ...a wall is not a wall". He concluded that the relevant market was that for concrete masonry products. In reaching this conclusion, his Honour stated, contrary to all previous Australian case law concerning market definition and contrary to all economic theory on the point, that supply and demand substitutability was not the only defining feature of a market. His Honour concluded that the borders of the market had to be determined by what he characterised as "practical considerations".
Justice Beaumont stressed that market definition required an assessment of the area of close competition between products, the word "close" being emphasised by bold print several times in his Honour's judgment. He thought the test of the market was whether products could or could not be "sufficiently differentiated" and whether or not one product could be "singled out" as having "special characteristics". On this analysis he concluded that there was a distinct demand for various products in accordance with the particular applications for which they were suited. A narrower market definition was thus appropriate and there was, therefore, a separate market for concrete masonry products.
Market definition issues were crucial to the decision in Boral. The trial judge had no doubts at all, the market definition question in his view involving no prognostication or hypothesising. On this basis, he found a wide market definition was appropriate and, because of this wide market definition, BBM (the relevant Boral Group company involved in the case) did not have a substantial degree of market power. On no point were all judges in the Full Federal Court more diametrically opposed to the trial judge's conclusion, they finding a narrower market definition in light of the specific uses to which various building products could be put.
The market definition adopted by the Full Federal Court appears to be unduly narrow. The emphasis of the Court on what appear to be quite narrow product use factors sits, for example, somewhat uncomfortably with the view of the Trade Practices Tribunal in Re Tooth. In that case the Tribunal said that the market should comprehend:
The maximum range of business activities and the widest geographic area within which, if given sufficient economic incentive, buyers can switch to a substantial extent from one source of supply to another and sellers can switch to a substantial extent from one production plan to another.
Even accepting the differences in the various building industry products involved, it is difficult to see how Re Tooth would not result in a wider product market than that found by the Full Federal Court.
The lesson from the Boral Case seems to be that the Court has found, and in future may well continue to find, separate markets on the basis of differences of product use rather than on the wider basis of whether "given sufficient economic incentive" buyers and sellers "can switch to a substantial extent" from one source of supply to another or from one production plan to another.
The trial judge put the issue in terms of the Trade Practices Tribunal's QCMA decision saying as follows: 
The matter can be tested simply. Could manufacturers of concrete masonry block have significantly increased prices without any fear that there would be, in the words of QCMA, 'much of a reaction' from tilt up? Plainly not.
In Boral, the Full Federal Court does not seem to have embraced the economic criteria of market analysis expounded by the Tribunal in Re Tooth and QCMA. Instead it appears to have applied a subjective empirical view resting upon differences of product use. This market analysis, if followed, must give s46 a wider future impact than that which it would have had under Court and Tribunal decisions to date.
When analysing Boral, it is, of course, important to discuss the subtleties of predatory pricing as this is where the case broke new ground. In doing this, however, we must not lightly pass over the point that the case does, at least in my view, indicate a new approach to market definition and, if this is so, it may be this finding in the case which is in future of greatest s46 impact.
The facts of Queensland Wire, Boral and Melway should be briefly stated prior to our proceeding further. Necessarily these facts are here somewhat truncated.
In Queensland Wire, BHP produced Y-bar rod, all of which it utilised itself. Y-bar rod was then crimped, cut into lengths and had holes inserted into it to make a Y-bar fence post, a very popular rural fence post. BHP sold these fence posts by retail to farmers and graziers. Queensland Wire also sold fence posts by retail. It wanted BHP to supply it with Y-bar rod so that it (Queensland Wire) could do what BHP itself did i.e. convert the rod into posts. Queensland Wire then wanted to sell these posts at retail in competition with BHP. BHP had never previously supplied Y-bar rod outside its own company group. It refused supply to Queensland Wire. Queensland Wire sued under s46. The trial judge and the Full Federal Court held for BHP but in the High Court BHP was found to be in breach of s46 by its refusal to supply Y-bar rod to Queensland Wire. There was no dispute that BHP had a substantial degree of market power. The case essentially involved the issue of whether there was, or was not, a freedom to refuse supply to a party with which there had been no prior dealings.
In Melway, Melway held 90 per cent of the Melbourne street directory market. This was the agreed market and there was no dispute that Melway had a substantial degree of market power in it. Melway had adopted a selective distribution system for its street directories. It had appointed sole distributors in various market segments because it believed that this system was efficient and maximised sales. It had utilised such a distribution since its first entry into Melbourne and also utilised such a system in the Sydney market in which it had but a 10 per cent market share. Robert Hicks Pty Ltd requested 30,000-50,000 street directories which it intended to sell without respecting the Melway segmented distribution system. Melway refused supply. It saw any additional sales which Robert Hicks Pty Ltd might make as being sales at the expense of Melway's existing distributors and not as being additional sales overall. Robert Hicks Pty Ltd took proceedings under s46, relying on the High Court Queensland Wire precedent. Robert Hicks was successful at trial  and before the Full Federal Court but failed in the High Court. The case was essentially about the freedom to appoint selected distribution channels. The High Court, whilst not overruling Queensland Wire, applied the tests in that case to give a significantly different interpretation to it. So different was this interpretation that Justice Kirby in dissent in the High Court proclaimed that the Court's Melway decision did not overrule the approach taken in Queensland Wire:
.... but with dark hints of factual errors in it and seemingly grudging acceptance of its holding, a result is achieved that effectively, but not explicitly ... overturns (that case).
The facts in Boral are more complex but I shall attempt to simplify them, possibly at the risk of some generality and lack of total accuracy. We have previously discussed the market definitional issues involved in the case. We here discuss the relevant pricing and marketing issues.
Boral Besser Masonry ("BBM"), was a member of the Boral Group of companies. It was the pricing practices of this company with which the case was concerned.
BBM experienced a considerable drop in its market share for concrete masonry products (the relevant market as found by the Full Federal Court) from 30 per cent to 16-18 per cent over a five year period. There were four concrete masonry product manufacturers - BBM, Besser Pioneer Pty Ltd (a member of the large Australian Pioneer Group of companies); Rocla (a member of the large Australian group, BTR Nylex) and Budget (an independent which subsequently became insolvent). There was also an independent new entrant, C&M.
Concrete masonry products were uniform in size and shape. The only real competitive tool was price. BBM determined to recover its market share by aggressive pricing and successfully did so. However, it did this at considerable cost.
The Boral Group was also involved in the mining of raw materials for concrete blocks and their manufacture as well as their sale. Product was transferred inter-company at arm's length prices. The result was that the Boral Group as a whole traded profitably in relation to the Group's concrete masonry products activities but, on the prices at which product was transferred to BBM, BBM sold concrete blocks, its largest selling product, at below cost prices.
Important to the consideration of the case were various internal BBM "smoking gun" memoranda upon which the Court relied. For example, one memorandum said that BBM viewed C&M as "a major frightening threat" and an instruction was given to "knock off C&M at any price". The case essentially involved the question of whether the conduct of BBM was predatory pricing within s46, that is whether BBM had the purpose, by its pricing strategy, of eliminating or substantially damaging a competitor or of preventing market entry. Certainly Budget became insolvent and C&M confined its business to market segments which BBM did not "go after" to the same extent as it did for concrete masonry product business. Pioneer stayed in the market. Rocla decided to quit.
The case was brought by the ACCC. It was unsuccessful at trial but was successful before the Full Federal Court, all judges, in separate judgments, upholding the ACCC's appeal. In point of time the Full Court's decision in Boral was 16 days prior to the High Court's decision in Melway but the Boral Decision has to be interpreted in accordance with, and subject to, the latter decision of the High Court, the High Court being the superior tribunal.
Assuming market issues can be satisfactorily resolved, there are two vexed questions which plague the interpreter of s46. These are:
what is "taking advantage" of market power?; and
what are the criteria for determining whether or not there is a proscribed "purpose"?
Considerable light, and variation of that light, is thrown on the first of these questions from Melway in particular. But in order to analyse Melway, it is first necessary to consider Queensland Wire - the first High Court decision on the point.
The facts in Queensland Wire have been canvassed. The High Court found BHP's non-supply to breach s46 as BHP would have supplied Queensland Wire in a "competitive market". There was no analysis of what constituted a competitive market. There was no evidence from BHP as to what it might have done in the Court's hypothetically constructed market. The Court simply concluded that BHP would have been forced to supply if it had been in a competitive market. The main Court holdings were:
1. "taking advantage" of market power involved no concept of "commercial reprehensibility".
2. an entity takes advantage of its market power if it "uses" that power.
3. an entity "uses" market power if it refuses to supply a competitor it would be forced to supply if it were in a "competitive market".
4. an entity "uses" market power if it supplies at other than a "reasonable price" as it would have to supply at a reasonable price in a competitive market.
There are many problems flowing from this case. The major ones are listed below.
1. What is a "competitive market"?
The High Court said nothing on the point. In economic terms the only market in which an entity is compelled to supply is a perfectly competitive market. A "perfectly competitive market" is, however, an economist's abstraction which does not, in reality, exist. As noted American economist, Paul Samuelson, has quipped:
a cynic might say of perfect competition what Bernard Shaw said of Christianity: the only trouble with it is that it has never been tried.
As a matter of common knowledge, producers in any number of industries which, in common parlance, would be called "competitive", exercise considerable discretion as to whom they supply goods and services. The High Court in Queensland Wire effectively made supply obligations subject to the test of an economist's abstraction which does not, in reality, exist.
2. Should a legitimate business purpose for non supply be recognised?
This point was simply ignored.
3. What is a reasonable supply price? How is it calculated?
This point was also ignored. "Supply" does not exist in the ether and "supply" is not only a matter of price. Matters such as credit terms, quantity, quality, period of supply and the like are all highly relevant. Given the above, how does one frame a Court order for supply? The trial judge said that he could not do so. The High Court remitted the matter back to him to do so with no guidance on how it should be done.
I have always regarded the High Court decision in Queensland Wire as one which created huge administrative and commercial problems. Not the least of these problems is the regulatory impetus which the decision brings to market place decisions. His Honour, Justice Pincus at trial in Queensland Wire foresaw these difficulties. He noted the possibility of judicial regulation if BHP were required to supply Queensland Wire. His Honour noted: 
It would seem to be absurd to enjoin BHP to supply the applicant in accordance with s.46, leaving it to be decided in contempt proceedings whether any offer of supply should be held to comply with the injunction as to price, quantity and other terms.
His Honour, Justice Pincus at trial in Queensland Wire, also noted that, if Queensland Wire succeeded in obtaining supply, others may be able to force supply also. If this were so, how was available Y-bar to be rationed? If demand were raised, should the Court force BHP to produce more and, if so, how much? Problems of the same sort, his Honour noted, also underlay a damages award. For these reasons, amongst others, his Honour believed that no mandatory supply order should be made. In his view, it was not the role of the Federal Court to regulate the Australian steel industry.
Somewhat unforgivably, in my view, the High Court said nothing to address these problems merely referring the issue back to Justice Pincus to formulate an appropriate order. The matter was settled by the parties on terms not to be disclosed. It is for another day to determine what the High Court's attitude to the above immensely practical problems will be.
The interpretation of s46 as determined by Queensland Wire changed dramatically as a result of the High Court decision in Melway.
The Full Federal Court in Melway held, on the authority of Queensland Wire, that had Melway been in a competitive market, it would have had to supply directories to Robert Hicks Pty Ltd. As Justice Finkelstein put it:
Could (Melway) have refused to supply a competitor of a distributor when it had only a small share of the market? Commonsense says it could not.
Melway, therefore, breached s46 by its refusal to supply Robert Hicks & Co.
There was no evidence from which his Honour could draw the conclusion which he (and Justice Sundberg in a separate judgment) did. Their Honours, as did the High Court before them in Queensland Wire, simply assumed this result. Indeed, the evidence was that Melway was anxious to maintain its system because it thought it efficient and supplying outside it would not generate more sales overall to Melway. It is of interest to note that Melway established to the Court that its system was instituted for marketing efficiency reasons and worked well. Melway believed that the system maximised sales. The Court was unable to form a view as to whether the dismantling of the system would be likely to be harmful or beneficial to Melway's business.
From the above decision, Melway appealed to the High Court. On appeal to the High Court, Melway argued, in essence, that:
it had a regulated, orderly marketing distribution system;
its distribution system gave appropriate incentive to distributors to maximise sales in their various market segments;
the rationale of the system, as established by the evidence was, irrespective of market power, that: wholesalers deal with customers and a market they know and understand; the above ingredients maximise Melway sales overall;
wholesalers have a good understanding of customer requirements;
wholesalers in such a system have confidence to invest in marketing and customer development. The product was promotionally driven;
wholesalers are committed to maximise customer service and needs, including promotion;
wholesalers are able to commit to purchases of substantial stock;
wholesalers are able to serve public need for product including small accounts.
supplying Robert Hicks & Co would basically amount to dismantling the Melway distribution system.
supplying Robert Hicks & Co would not result in increased Melway street directory sales overall. The sales effected by Robert Hicks & Co. would only be sales at the expense of Melway's distributors. There would be no new market opened up by Robert Hicks & Co. There was thus no logical reason why Melway would want to supply Robert Hicks & Co.
Melway adopted the same arrangements in Sydney (where it had only a 10 per cent market share) and in prior times in Melbourne when it had but a small market share.
even in a competitive market, therefore, Melway would seek to retain its exclusivity. It had done this when it had, in fact, had a small market share.
The injunction issued at trial, and affirmed by the Full Federal Court, was inappropriate. The trial judge specifically held that Robert Hicks Pty Ltd was not entitled to an unconditional supply order. The injunction granted was thus framed in terms that Melway was not to supply except in situations where an improper purpose was involved. Melway argued that each case of non-supply would involve a re-arguing of all issues in dispute - the very thing that injunctions are aimed at preventing. Melway argued that, if the proscribed conduct could not be described with clarity, it should not be proscribed at all. Melway's Notice of Appeal argued in relation to the form of the injunction that the injunction was "vague and uncertain in its scope and application" and should, for this reason, be set aside.
Robert Hicks Pty Ltd argued that an entity with a substantial degree of market power necessarily took advantage of that power when it refused to supply. Hence Melway was axiomatically condemned if the Robert Hicks argument were accepted.
The ACCC, intervening in the High Court by leave, argued that a substantial degree of market power was taken advantage of if the conduct in question was facilitated by the relevant market power. Melway was condemned, argued the ACCC if it was easier for it to do what it did because it had a substantial degree of market power. The ACCC also argued that it was unnecessary to look for a business rationale in determining whether a company took advantage of its market power. There was, argued the ACCC, no reason to read any "business rationale" into the section.
The majority decision in Melway was a joint judgment of Chief Justice Gleeson and Justices Gummow, Hayne and Callinan. Justice Kirby dissented.
What the Court did in Melway was to affirm the basic principles of Queensland Wire that:
"taking advantage" of market power involved no concept of "reprehensibility";
an entity "takes advantage" of its market power if it "uses" that power; and
an entity "uses" market power if it refuses to supply a competitor it would be forced to supply if it were in a competitive market.
The real change in interpretation in Melway from that in Queensland Wire lies in the concept of what constitutes a "competitive market". A re- evaluation of this issue, in my view, makes Melway an entirely different decision from that in Queensland Wire. In Melway, the Court noted that the type of competitive market which might exist in a real world had simply not been addressed in Queensland Wire. The Court in Melway said, in relation to the hypothetical competitive market constructed in Queensland Wire: 
Exactly how competitive such a market might be, and the assumed structure of such a market were open questions (in Queensland Wire).
So, said the Court:
Why, for example, might there not be a competitive market for Melbourne street directories in which Melway and/or its rivals supplied direct to retailers, or in which each operated through an exclusive distributor, or a fixed number of distributors? In such a case, a refusal to supply Melway directories to a wholesaler, or to another wholesaler, might be regarded as unlikely to result in any reduction in total Melway sales. In a competitive market, a manufacturer does not necessarily increase total sales by selling to everyone who seeks wholesale supply, or lose market share by selling only to a small number of wholesalers or, for that matter, selling all its product direct to retailers.
Given this, the Court in Melway noted an important point which threw considerable doubt upon Queensland Wire because of the evidentiary basis on which that decision had been reached. In Queensland Wire, the Court concluded that it was only because of BHP's market power that it could afford to refuse supply. In Melway, the Court said that the evidentiary basis for that conclusion in Queensland Wire was not clear and pointed out that it was not a finding of Pincus J at trial nor of the Full Federal Court on Appeal. The Court in Melway added: 
Not everyone would agree that, as a proposition of fact, it is self evidently correct.
In my view, it is patently clear that the High Court drew conclusions in Queensland Wire which were far from self evident. This is one of the real weaknesses of the Queensland Wire decision - perhaps its Achilles heel. The Court in Melway is quite right to point out that, in a real world "competitive" market, the mandatory supply proposition that was assumed in Queensland Wire is by no means self evident. It appears to the writer that the High Court in Melway has found a market conduct evaluation test in significantly similar terms to that found by the Privy Council in NZ Telecom v Clear and that, by doing this, it has overcome a major inadequacy of its reasoning in Queensland Wire.
From these different starting points, it is not surprising that different principles were propounded and different conclusions were reached in Melway from those in Queensland Wire. The Court noted that there were two relevant aspects of s46 under consideration, these being the question of "taking advantage" of market power and the question of "purpose". The Court said that, although there are two aspects of (the) prohibition, they are inter-related. The practical significance of that relationship may vary according to the circumstances of particular cases, or classes of case. The issue in the case was primarily whether or not there had been a "taking advantage" of market power as this was what had divided the Federal Court. The High Court held:
What was characterised in argument as a "refusal to supply" could equally well have been characterised as the termination of a distributorship. To describe Melway's conduct as a refusal to supply involved an element of over simplification. Section 46 aims to promote overall competition, not to promote the private interests of particular persons or corporations. If Melway was otherwise entitled to maintain its distribution system without contravention of the Act, it was not the purpose of s46 to dictate to Melway how to choose its distributors.
The Court embraced the reasoning of the United States Fifth Circuit Court of Appeals in Burdett Sound v Altec Corporation. The High Court cited with approval the views expressed in that case where the Fifth Circuit Court of Appeals stated: 
We reiterate that it is simply not an antitrust violation for a manufacturer to contract with a new distributor, and as a consequence, to terminate his relationship with a former distributor, even if the effect of the new contract is to seriously damage the ormer distributor's business.
Melway had no obligation to have any wholesale distributors at all. It could have chosen to supply direct or it could have supplied the retail market through a single wholesale distributor. It had a basic right to choose this distributor.
Distributorship arrangements may restrict intrabrand competition but promote interbrand competition. Restrictions on intrabrand competition may, depending upon the interbrand market structure, either enhance or diminish competition overall, and hence consumer welfare.
There were a number of defects in simply applying Queensland Wire to reach a conclusion that Melway would necessarily have supplied in a competitive market because in such a market it could not, by non-supply, have stood by and lost sales. The difficulties were:
it assumed lost sales to Melway by non-supply. In fact, sales by Robert Hicks would have been primarily sales at the expense of Melway's existing distributors;
the reasoning failed to address the question of the nature of the wholesale distribution arrangements. This market could be one in which Melway or its rivals supplied direct to retailers or operated through an exclusive distributor or a fixed number of distributors. In such a case, a refusal to supply another wholesale distributor might not reduce overall Melway sales and supply to another wholesale distributor might be regarded by Melway as unlikely to increase its overall sales. In a competitive market, a manufacturer does not necessarily increase sales by selling to everyone who seeks wholesale supply or lose market share by selling to only a small number of wholesalers or, for that matter, by selling all its product direct to retailers;
• the real question was whether, without market power, Melway could have maintained its distribution system. In evaluating this question, a realistic competitive market, rather than one divorced from reality, had to be assumed. The fact that Melway had adopted a segmented distribution system before it had any significant market power plus the fact that, in refusing to supply to Ronald Hicks it was losing no sales, indicated that, in a competitive market, Melway would maintain its restricted distribution system.
The Court rejected the argument put by Robert Hicks that it was neither necessary nor relevant, in establishing whether there was a "taking advantage" of market power to consider if a corporation would or would not have refused supply if it lacked market power. The Court said that such an argument, if accepted, would mean that the Court could never consider how a company would have acted without the relevant market power. The case was not one where a refusal to supply was self evidently an exercise of Melway's market power. The fact that Melway's restricted distribution system had been created at a time when Melway did not have market power showed that decisions made under it did not necessarily constitute an exercise of market power.
The question of relief was an important argument raised by Melway. Possibly seeing the problems that drafting a relevant injunction might involve, Senior Counsel for Robert Hicks, at the commencement of the second day of argument in the High Court, stated to the Court that: 
Because of events which have occurred, the respondent considers it is unlikely that an injunction will any longer be of utility. For that reason, it wishes not to trouble the Court unnecessarily with considerations which will in all probability need not necessarily be decided. In the circumstances, if it assists in a determination of the true issues in the case, it would consent to an order that the injunction be dissolved.
The concession, no doubt, was a useful tactical one. However, the Court noted that it may be convenient, but it is unsatisfactory, to treat the question of the form of relief as inconsequential. The Court thought the injunction issued by the Federal Court left the form of injuncted conduct unclear and begged the major question in issue in the case. This, thought the Court, was inappropriate. The question of remedy was bound up with the whole question of the meaning and effect of the legislation.
The Court did not rule on the ACCC's submission that there was a breach of s46 if the market power which a corporation had made it easier to act as it did saying:
That was not the case that was made below and the findings of fact necessary to support such an argument were not sought or made. The case should be disposed of on the basis on which it was argued by the parties in the Federal Court and this Court.
The Court did comment, however, (clearly obiter in light of the above) that, in a given case, it may be proper to conclude that an entity may be taking advantage of market power even though the conduct involved may not be absolutely impossible without the relevant market power. Only "to that extent" did the Court accept the ACCC's submission that s46 was breached if market power facilitated the conduct.
The following issues arise for decision makers from the Melway decision.
1. Can restrictions which might previously have been abandoned or considered doubtful now be justified in light of the High Court decision in Melway?
Clearly enough, in order for restraints now to be condemned, it must be demonstrated that they would not survive in an actual, not a theoretical, competitive market. The High Court has clearly indicated that an actual competitive market place may well have restrictions on dealing in it. In order for an infringement of s46 to occur, the party bringing proceedings will have to demonstrate that restrictions on dealing would not occur in the competitive market it alleges. This will be a difficult task in a substantial number of cases as such restrictions are common methods of trading and are present in many highly competitive markets.
2. In particular, if a supplier can demonstrate that it will not gain sales by selling outside its distribution chain, there will be justification for a restricted distribution system.
3. As a matter of reality, an entity imposing restrictions will obviously be in a better position to do so if it has imposed such restrictions prior to acquiring a substantial degree of market power.
This will demonstrate that the entity is sincere in asserting that it could maintain a restricted system in a competitive market. An entity already having a substantial degree of market power and wishing to impose a restrictive system de novo should obviously think through the rationale for what it is doing prior to implementing any such arrangements.
4. In all cases, refusal to supply because of a wholesale distribution system will be more justifiable than refusals to supply an end user to whom sales would not otherwise be made. In the latter case, lost sales are additional sales. In the former case, overall sales will not be increased. It was a fundamental point in Melway that Melway, even in a competitive market, would not have increased its sales by supplying outside its distribution system.
5. It is apparent from the discussion earlier in relation to the market definition principles expounded in Boral that the Federal Court is defining markets more narrowly than it has previously done. This means that market participants will have to look at their conduct within narrower bounds. A narrow market definition means that the effect of an entity's conduct in that market is magnified.
Melway, however, does not clarify all issues. The essence of Melway was that it was rational for Melway not to supply Robert Hicks because such supply would disrupt the Melway distribution system without the likelihood of additional sales. Melway says nothing about a simple refusal to deal when this may result in lost sales and the decision not to deal is taken notwithstanding this. In these circumstances, the Court may well take the view that, in a competitive market, no matter how constructed, a rational manufacturer would not, absent legitimate business reason not itself restrictive of competition, refuse to deal. This holding, if it is reached, does, of course, revisit Queensland Wire problems. If there is no prior course of dealing between the parties and no market trading of the goods or services in question, how does the Court set the price and terms of supply? It is not intended here to discuss this problem. Suffice it to say that the Court's track record in relation to setting the "reasonable supply price" in these circumstances does little to give litigants any degree of confidence either in the capacity of the Courts or in relation to the predictability of any litigious outcome.
The Boral Full Federal Court decision was made 16 days before the High Court decision in Melway but has to be interpreted in light of the High Court's reasoning.
A major point made in the Boral decision is that there is no room for a "business rationale", "legitimate purpose" or "commercial judgment" test in assessing whether or not there has been a "taking advantage" of market power. The ACCC submitted on this point that:
the adoption ... of a 'rational business decision' criterion as an exculpatory consideration is, in truth, an attempt to introduce into s46 an ingredient of moral reprehensibility - a notion specifically rejected by both Deane J and Dawson J in Queensland Wire.
Justice Beaumont held on this point that once there had been a "use" of market power, "it adds nothing to consider motive" and that there was no scope in the operation of s46 for an absolute exemption from s46 of activities that were "rational" or "commercial in nature" . Justices Merkel and Finkelstein fundamentally agreed with this view in evaluating the predatory pricing principles which were the essence of the case.
Justice Heerey in Boral at trial dismissed the ACCC's case.
This was on the basis of market definition and also on the basis that Boral had not "taken advantage" of market power. However, his Honour did find that there was evidence that BBM, the relevant Boral subsidiary in question, had the relevant proscribed purpose. He drew this conclusion from various internal BBM memoranda which stated, for example, that:
Our aim through 1996/97 and 1997/98 is to drive at least one competitor out of the market. The new plant gives us the ability to do this.
Part of our plan has been realised with Rocla and BTR Nylex withdrawing from the market by the end of September 1995.
Each judge of the Full Federal Court embraced Justice Heerey's findings at trial. To the extent that legitimate business purpose was discussed, it was regarded as not being a relevant defence to a s46 infringement.
Legitimate business purpose cannot, however, be lightly set aside in light of the High Court's Melway decision. Indeed, all judges in Melway believed that there are legitimate business purposes which excuse non-supply. At trial, whilst holding against Melway, Justice Merkel specifically found that a party having a substantial degree of market power may, nonetheless, require criteria to be met by distributors of products in relation to skills or facilities relating to sales or servicing. Justice Kirby in dissent in the High Court, holding against Melway, nonetheless concluded that supply could be refused if it were adjudged that the purchaser was unable to handle a dangerous product, that it had a poor credit record or unacceptable business ethics; that it was unqualified to offer essential after sales service; that it was liable to damage the reputation of the supplier; that it was unable to maintain accurate records; that it was prone to engage in deceptive or unfair practices; or if it were likely to breach the reasonable terms of a distribution agreement.
Even those arguing most vehemently that non-supply should not be justifiable for "business reasons" have thus accepted that valid "business reasons" for non-supply do, in fact, exist. All of the justifications set out above are "business reasons" for non-supply.
The reason for denying the relevance of a "legitimate business test" for non-supply lies in the belief that such a test opens the way for a consideration of "commercial reprehensibility" (ruled not a valid consideration in Queensland Wire) by the back door. I do not believe that this is the case. Surely the business reason for which one engages in conduct is relevant to "purpose", whether or not moral reprehensibility is involved in the interpretation of s46. A rational business reason for doing something at a minimum shows that the purpose of conduct is not wholly one of the proscribed purposes under s.46. A rational business reason for conduct surely prevents a proscribed purpose being drawn from conduct alone. A legitimate business purpose clearly can show that a party has a purpose other than a purpose which involves detriment to another. Even if there are detrimental effects on others, surely a rational business purpose can at least show, on balance, that it was not a substantial purpose to produce those detrimental effects.
The High Court in Melway says much which supports the above view. It upholds the right of a supplier to choose its own distributors - at least in cases where no sales will be lost if restricted distribution is involved. In addition, in Melway:
the Court held that "taking advantage" of market power and ascertaining the "purpose" of conduct are interrelated questions. The High Court discussed the "taking advantage" of market power question because, as the case was argued, it was this question, not that of the relevant "purpose", which was before it for adjudication.
the Court found that Melway had "a number of legitimate commercial reasons for desiring to maintain its wholesale distribution system".
the Court found that the adoption of a distribution system involving vertical restraints did not necessarily manifest anticompetitive purpose. There may be explanations of the arrangements which justify the conclusion that restricting competition was no part, or no substantial part of the purpose of the manufacturer.
The Court noted that:
Where distributorship arrangements are concerned, an intent to give a particular distributor exclusivity may constitute a very insecure basis for concluding that there had been a taking advantage of market power.
In the view of the Court, the fact that competition was restricted between distributors:
did not make the findings as to proscribed purpose inevitable, but having been made in the Federal Court, it is difficult to disturb them at this stage.
The Court here seems to be hinting broadly, without directly saying, that it would not have taken the same view as did the Federal Court in relation to Melway's "purpose" in not supplying Robert Hicks Pty Ltd.
The above observations of the Court are important. The Court did not overrule the trial judge's findings on purpose as the way in which the case was argued before it did not readily permit this course of action. However, the Court in analysing the concept of "taking advantage" of market power clearly embraces the view that legitimate business purposes for conduct may be looked at along with other purposes. These observations are highly relevant to, and significantly underpinned, the Court's examination of whether Melway had, or had not, taken advantage of its market power.
To the extent that Boral indicates that motive for conduct, and the business justification for conduct are irrelevant considerations, Boral must now be considered to be doubtful law.
Predatory pricing was the issue in Boral. A major question was whether or not an entity had to have the expectation of recouping losses by charging excessive prices once it had forced an entity from the market.
Justices Merkel and Finkelstein discussed the issue of predatory pricing in detail. Justice Beaumont did not discuss the issue in depth but concluded that recoupment was not a relevant factor in predatory pricing infringements. The essence of the judgments of Justice Merkel and Finkelstein is set out below.
BBM had submitted that selling at a loss, or below avoidable cost, could lead to two possibilities. one possibility would be a legitimate business purpose. The other possibility would be that there was an anticompetitive proscribed purpose. Anticompetitive purpose, submitted BBM, could be concluded only if the firm had engaged in conduct so that competitors would exit the market in due course and because of this exit, the firm would readily enjoy the advantage of market power by recouping its losses. Only such conduct is taking advantage of market power, submitted BBM, because only a firm with market power can elect to price lower knowing it is a worthwhile outlay. It is worthwhile incurring the relevant losses because the firm can recoup them later.
The trial judge accepted the above view. Justice Merkel, however, rejected it. In his view, such an interpretation would necessarily limit s46 to the case of a dominant monopolist. This was the pre-1986 law. But, in his Honour's view, such a test would render nugatory the lowering of the threshold test of s46 in 1986 to one of "a substantial degree of market power". Section 46, said his Honour, specifies the various components for its breach. Therefore, he said, there is no need to superimpose on those requirements a further requirement of below cost pricing or recoupment. It is a question of whether or not there is a taking advantage of market power and, if there is, there is a breach of s46.
His Honour said, however, that the question of recoupment was not irrelevant to s46. But recoupment is only a relevant factor in determining whether a proscribed purpose may be inferred and in determining whether a firm has taken advantage of its market power.
His Honour then considered what was required for predatory pricing to contravene s46. He concluded from the evidence that BBM wanted to "drive at least one competitor out of the market" and that its strategy was "to reduce the number of masonry manufacturers in Victoria". Much of the factual background for these conclusions was contained in internal executive memoranda of BBM executives. BBM ensured that its plan for increasing capacity was made known to its rivals in order to signal BBM's strength and long term commitment to remaining in the market. BBM's ability to persist in its pricing policy was due to its financial and production capacity and because of the vertical integration of the Boral Group. BBM saw as its objective the rationalisation of the Melbourne market and the obtaining of higher returns after this had occurred. His Honour concluded from this that: 
BBM elected to price lower in the expectation that it would be a worthwhile outlay as there would be some recoupment later by reason of higher prices profitability, although this recoupment would not amount to a monopoly rent. It is significant that BBM which operated a relatively inefficient concrete block making plant, expected prices and profits to rise after the elimination of some of its rivals.
His Honour found that "better prices and profits were expected than were able to be extracted ... in a highly competitive market". Applying this finding to the case, he has, it seems, effectively concluded that predation exists if one expects profits to rise if and when a rival exits the market.
His Honour found that BBM's power was used:
for the purpose of eliminating or substantially damaging BBM's competitors; and
to prevent C & M obtaining a foothold (the equivalent of entry) in the Melbourne market for concrete masonry products.
The purposes of BBM were thus proscribed purposes. These purposes were achievable by use of market power that was substantial in the sense of being considerable or large.
His Honour concluded his judgment by saying: 
I acknowledge that the above conclusions, and the reasoning that sustains them, may not sit comfortably with the principles that have provided the underpinning for the European and United States case law on predatory pricing. However, the departure from those principles in the Australian context does not arise as a result of their rejection by the Court. Rather, it results from the 1986 amendments which, as stated in the Second Reading Speech, lowered the s46 threshold to 'ensure that small businesses are given a measure of protection from the predatory actions of powerful competitors' who include 'major participants in an oligopolistic market and in some cases... a leading firm in a less concentrated market'.
Justice Finkelstein conducted a learned analysis of the United States law on predatory pricing. His Honour noted that he carried out this study because of his view that economics rather than law dominates United States antitrust litigation. It is not possible here to replicate his Honour's study of the United States holdings on predatory pricing. One must, however, comment that any person interested in this subject could well use his Honour's judgment as a most useful reference. His Honour concluded that the US law is that held by the US Supreme Court in the Liggett Group Tobacco Litigation. In order for a party to be engaged in predatory pricing in the United States, it must be demonstrated that it had a reasonable prospect, or under s2 of the Sherman Act a dangerous probability of recouping its investment in below cost prices.
Recoupment, said the US Supreme Court, is the ultimate object of unlawful predatory pricing schemes. Recoupment represents the profits from predation. Without recoupment, parties compete and consumer welfare is enhanced. Unsuccessful predation is, in general, a boon to consumers.
His Honour noted that there were critics of this Supreme Court holding and then went on to consider whether, in Australia, it was necessary to show below cost selling plus the likelihood of recoupment by supra competitive pricing in order for unlawful predatory pricing under s46 to be engaged in.
He concluded that recoupment was not a necessary factor in order for s46 to be infringed. He reached this conclusion for the following reasons:
1. There is no universally accepted meaning of predatory pricing.
2. If recoupment were a component part of illegal predatory pricing, as in the USA, it would be almost impossible successfully to bring a predatory pricing case other than against a monopolist.
3. To adopt the US test would frustrate the objectives of s46. Section 46 is aimed not only to control the monopolist but also to control entities possessing a substantial degree of market power. His Honour referred to the Explanatory Memorandum to the 1986 Bill amending the s.46 threshold (stating that the predation under s46 required no particular level of pricing relative to cost) and to prior case law as the basis of his reasoning.
4. A different position applied in Europe to that in the United States. In Europe prices below average total costs (i.e. fixed costs plus variable costs) will be regarded as abusive if they are determined as part of a plan for eliminating a competitor. Pricing on such a basis can drive from the market undertakings which are perhaps as efficient as the dominant undertaking but which, because of their smaller financial resources, are incapable of withstanding the competition waged against them.
5. There is no cost below which there must be a per se finding of predatory pricing. However, persistent sales below average total cost could lead to an inference of predatory intent. This inference would be stronger if sales were below average variable costs. In the latter case, it would be for the firm to show that there was a legitimate purpose for its conduct.
Justice Beaumont did not deal with predatory pricing and recoupment of losses in any detail. His Honour, however, simply stated that there is "(No) basis for implying a recoupment theory into the working of s.46". This followed from his Honour's analysis of the section concluding that there was no necessary exemption from s46 for activities which might be seen as "rational" or "commercial" in character.
The Court noted that BBM was assisted in its predatory pricing by the fact that it was a member of a well resourced corporate group.
The group transferred product between corporate members on arm's length basis. In fact, the group as a whole made a profit from concrete masonry products when its mining and manufacturing activities were taken into account. However, BBM itself made a loss. The Court rejected the view that overall group activities should be considered in determining whether or not sales were made at a loss. Only BBM was relevant and its activities had to be evaluated on the product transfer prices at which it acquired concrete masonry product from the other Boral Group company which produced that product. Comment is made on this aspect of the Court's decision below.
It should be formally noted that the proceedings brought by the ACCC against BBM's parent company, Boral Limited, were not pressed by the ACCC on appeal. Therefore, the finding of the trial judge that Boral had not breached s46 stood. The case against BBM was remitted to the trial judge for further hearing and determination of relief in accordance with the judgment of the Full Court.
There is little doubt that "purpose" was ascertained initially from internal BBM Memoranda. The trial judge held that purpose in s46 involves an actual subjective purpose. BBM failed to explain away the content of its internal memoranda and these were not accepted as mere sales hype. The Full Federal Court accepted the trial judge's findings.
The initial lesson from the case appears to be that sales memoranda should be couched in both objective and non-aggressive terms. There is a very real opening for company memorandum writers who can combine the hype of a sales executive with the non-exclusionary intent required by Courts.
Had the relevant memoranda not been found by the ACCC pursuant to its statutory powers under s155, it may be that this case would not have succeeded. It may perhaps not even have been brought.
The decision sends mixed signals on the question of predatory pricing. It declines to follow the American jurisprudence because, in their Honours' view, to do so would mean that s46 could be used only against monopolists rather than against parties having a substantial degree of market power.
The American jurisprudence is that pricing is not predatory unless such pricing is below cost and engaged in with the reasonable prospect of recouping investment losses after a competitor's exit from the market. This is at least a sensible economic position which spells out certainty for business.
In the various judgments, the Court did seem to regard recoupment of at least some of BBM's below cost pricing as an important factor in its infringement of s46 even though it was not prepared to embrace the higher American recoupment threshold. Given the facts of the case, the Court may well have regarded recoupment to be an important ingredient of predatory pricing though finding that a lesser degree of recoupment is required in Australia than in the USA. Unfortunately, the judgments, however, seem to state fairly definitively that recoupment has very little or no place as a component of illegal predatory pricing. Certainly no degree of recoupment was set out as giving any overall guidance. Justice Beaumont rejected outright the need to consider recoupment as an element of predatory pricing. Justice Merkel also found recoupment as irrelevant but, having done so, accepts that the likelihood of recoupment is a factor to be taken into account noting BBM's expectation of some recoupment. Justice Finkelstein rejected the concept of recoupment.
"Below cost" pricing is also differently treated. Justice Beaumont refers to the concept without explaining what he means by the term "cost". Justice Merkel suggests selling "below cost" is a relevant factor but does not specify any specific level of cost. Justice Finkelstein thought that predatory pricing should not be determined in accordance with any precise formula or definition. His Honour said that it did not matter that the price charged might exceed either average total costs or average variable costs. In the circumstances of a particular case, either of these above cost prices may be a predatory price. His Honour's conclusion is that: 
... Predatory pricing is no more than a price set at a level designed to eliminate a competitor or keep a potential competitor from the market.
Coupled with the statement in the 1986 Explanatory Memorandum to the Trade Practices Bill  that predatory pricing can still exist even though no loss is incurred, the difference between competitive pricing and predatory pricing will, in many circumstances, be unable to be seen with any degree of certainty. Regrettably, predation may well in future be inferred from factors such as:
expressing a wish to see a competitor leave the market;
making one's aggressive plans known; and
being in a strong financial position or being part of an integrated group.
All these factors were clearly relevant in the Full Federal Court's evaluation of what BBM was doing. It may be in the future that these factors will be seen as evidence of predation even though a market player may not see itself as ever recouping any profits from its keen pricing and even though such entity may, in fact, not be selling at a loss.
The case throws up the problem of pricing and corporate groups. Let us assume a corporate group of three companies engage respectively in mining, processing and selling a single product. For internal costing reasons, the product is transferred between groups at market value. The group's costing and profit figures may be as set out in Table 1.
CORPORATE GROUP OF THREE COMPANIES WITH INTERNAL TRANSFERS AT MARKET PRICES
Cost of Transferred Product
Cost of Production, Manufacture or Sales
Total Cost to Company
Price at which Transferred or Sold
Profit to Company
COMPANY A (Mining)
200 (transfer price)
COMPANY B (Manufacturing)
500 (transfer price)
COMPANY C (Selling)
450 (sale price)
TOTAL COST OF PRODUCTION OR SALES
The group, overall, has made a profit of $200 by its ultimate sale at a price of $450. Because, there are three companies, however, the selling company (Company C) has incurred a loss of $150 - largely by virtue of internal transfers and mark ups charged to it on product acquisition. Should Company C be seen as involved in predatory pricing if it sold for a considerable period on the above price and cost structure?
The point was put to the trial judge in Boral that the transfer prices for raw materials purchased from within the Boral Group should be adjusted by removing from BBM's cost of production the profits recovered by other wholly owned Boral companies on those purchases. This, of course, produces a lower cost and makes it easier for Company C in the above example to contend that it was not selling at below cost.
One might well believe, as a matter of economic logic, that the corporate group as a whole must be allowed to continue to trade at a product sale price of $450. If Company C is singled out for predatory pricing treatment and cannot sell at this price (a loss to it but not to the group), then the group as a whole loses the opportunity to trade profitably.
In the United States, in relation to s1 of the Sherman Act, the United States Supreme Court said in Copperweld:
... a parent and its wholly owned subsidiary must be viewed as that of a single enterprise under s1 of the Sherman Act. Their objectives are common, not disparate, their general corporate actions are guided or determined not by two corporate consciousnesses but one .
The elimination of inter-group transfer prices did not, however, receive the U.S. "Copperweld treatment" in Boral. The trial judge held, and the Full Federal Court did not disturb the finding, that such an adjustment was not appropriate. What was, in fact, paid by BBM were transfer prices at arms length market levels. Section 46, said all Justices, was concerned with the actual subjective purpose which a firm had when it engaged in the impugned conduct. A retrospective re-working of costs which were not in consideration at the time of product transfer was held in Boral to be inconsistent with the function of s46.
This holding imposes an artificiality in the concept of group pricing. It can mean that:
a profitable group can be in breach of s46 because one company is making a loss on sales;
company groups which choose to have independent entities for taxation, cost or efficiency reasons can be penalised. It is impossible to see how the costing figures set out in Table 1 above could lead to the conclusion that there was under cost selling if only one overall corporate entity were involved. This overall entity made a profit of $200 on its trading. Only if separate entities are formed can there be any suggestion of under cost selling;
in future, predatory pricing cases may well depend upon the artificiality of what company structure is involved.
It is submitted that, at least in the case of wholly owned companies in a company group, profits on inter-group transfer prices should be disregarded. To hold otherwise simply on the basis that s46 involves a subjective intent merely creates artificiality. In fact, the position of the Boral Group was that:
Boral Ltd, the ultimate holding company (made) a net profit out of concrete masonry products during the relevant period notwithstanding the losses incurred by BBM (which acquired raw materials from the group at arm's length prices) in conducting the war.
Instead of concluding that this was a valid reason for not finding predatory pricing, integration was regarded as contributing more sin. This was because the vertical integration of the Boral Group enabled BBM to engage in a price war by virtue of the group's financial and production capacity.
One cannot help but think that the Boral Group was in a "no win" situation as regards its activities. The fact that BBM was a member of a corporate group was a factor in finding it was involved in predatory pricing. This was because the group had access to raw materials and had financial strength. Yet the Court would not allow the group to demonstrate group costs as a defence to an allegation of predatory pricing. Consistency would surely demand that, if group membership is a factor in predation, group costs must be taken into account in assessing the extent of such predation or whether, indeed, there has been any predation at all.
Australian business now has a real problem in distinguishing between keen pricing and predatory pricing. No clear overall principles are established. Australian marketers are perhaps now more in the trade practices fog than previously when many thought that the US recoupment theory distinguished legal from illegal pricing policies.
How does the ACCC view all of this?
It must be noted that the ACCC in its Melway arguments changed tack somewhat from the Trade Practices Commission's view of s46 immediately after Queensland Wire. In its February 1990 Background Paper explaining s46 of the Trade Practices Act the Trade Practices Commission said that, in applying s46, it would look at whether the conduct in question could be explained "by good business justification such as efficiency or the desire to engage in genuine competitive activity". In Melway, there was no finding at any stage that the distribution practices of Melway were other than aimed at efficiency and genuine competitive conduct. In Melway the ACCC argued that "business justification" was no part of an evaluation of s46.
in its 1990 Background Paper the Trade Practices Commission said that the true test of a s46 infringement: 
... was to ask whether the corporation in question would have behaved differently if it were operating in a competitive market i.e. whether its conduct was possible only by the absence of competitive conditions.
This very argument, put by Melway, was, as we have seen above, argued by the ACCC to be wrong.
It is also of interest to note other aspects of the Trade Practices Commission's February 1990 Background Paper as they relate to the ACCC's Melway pleadings. In 1990, the Commission condemned a number of practices engaged in by companies with a substantial degree of market power. These included predatory pricing and exclusive dealing arrangements. Relevantly for what was to come in Melway a decade later, the Trade Practices Commission said in its Paper that: 
the particular characteristics of some products may require a policy that restricts distribution to a limited number of outlets. For example, the technically sophisticated nature of some products may require technical skills and facilities for pre-sales and post-sales servicing. In other words, the Commission accepts that it is not reasonable to expect a corporation with a substantial degree of market power to supply each and every existing or new wholesale or retail outlet if it is apparent that it would not be to its commercial advantage to do so.
The ACCC put none of this philosophy to the High Court a decade later in Melway. Perhaps the ACCC did not regard street directories as requiring technical skills and pre-sales and post-sales servicing, though the experience of Melway would indicate the contrary. Presumably, however, it was more basic than this. The ACCC in 2000 simply did not hold the same views on selective distribution as did the Trade Practices Commission a decade earlier. For whatever reason, the ACCC in Melway vehemently argued against what the Trade Practices Commission had articulated as its view in 1990.
One might well have concluded that the ACCC's arguments were rejected in their entirety by the High Court and that the ACCC obtained no comfort from the decision. Not so, according to the ACCC publicity machine. On 15 March 2001, the day of the Melway decision, the ACCC issued a Press Release headed:
HIGH COURT CONFIRMS AND ENHANCES CURRENT APPROACH TO MISUSE OF MARKET POWER
In this Press Release, the Chairman of the ACCC, Professor Allan Fels "welcomed" the "landmark decision of the High Court" in Melway. The Press Release stated that "All judges confirmed the approach taken by the Court in the Queensland Wire Industries decision". The Press Release set out at length that the ACCC had been given leave to intervene "to provide a perspective which may assist the Court to see this matter in a larger context than that which the parties were willing or able to offer". The Press Release also talked about how the recent Federal Court decisions in Boral and Rural Press had provided assistance to small business. It then admonished firms with market power that they should not take advantage of it.
Of present relevance is the statement in the Press Release as to the reception given by the High Court in Melway to the basic thrust of the ACCC's submission. The ACCC's Press Release may be literally correct in what it says. But it ignores the finding of the High Court majority in the context of the ACCC's overall arguments and the fact that what the Court said in relation to the ACCC's submission was, in any event, obiter.
The ACCC had argued for a far lower threshold of s46 than the High Court accepted. As the case was decided in favour of Melway against contrary arguments vehemently put by the ACCC that Melway should lose, axiomatically it would seem that the ACCC could hardly rejoice at the decision - or even "welcome" it. Further, even though the High Court did not overrule Queensland Wire, it certainly radically reconceptualized that decision. By no stretch of the imagination did the High Court "enhance" the Queensland Wire approach to s46. Justice Kirby regarded Queensland Wire as de facto overruled. I agree with him - at least insofar as its application to restrictive dealerships is concerned.
One cannot help but be impressed with the ability of the ACCC to lose arguments before the Court, both on a factual and a theoretical basis, yet rise Phoenix-like from the ashes of defeat and proclaim that its submission had been accepted in principle and that the law in Queensland Wire (which was radically restricted in its operation against the submissions of the ACCC) had, in fact, been "confirmed" and "enhanced". This seems, to say the least, to be drawing a very long bow - perhaps one which can be drawn only by a person having the qualities of both archer and spin doctor.
It must be said, however, that the Melway decision is in significant accord with the views on selective distributorships expressed by the Trade Practices Commission in its 1990 Guideline on Misuse of Market Power. The Commission, had the Melway case been brought in 1990, may well have found some sympathy with the Melway view of restricted distributorship. Obviously, however, there has been a significant change of attitude in this regard over the last decade.
The ACCC in a press release on 28 February 2001 hailed the Boral decision stating that the Full Federal Court had condemned pricing below manufacturing costs. The decision was said to be one which clarified the law and protected efficient small businesses from the abuses of well financed players.
The ACCC cannot be denied the spoils of war. Its interpretation of the judgment and the effects of it may not, in the long run, however, be as joyous as it claims in the euphoria of victory. Whether the law has been clarified may well be doubtful in view of the divergent statements made in the decision as to the level of acceptable pricing in relation to costs. One must also wonder long term whether it is sensible policy for a profit making corporate group to be prevented from doing business because, by virtue of inter-corporate transfer pricing decisions, one group member is making a loss. It seems strange that a competition authority should be joyous at this result. Judicial views in New Zealand, the United States and Australia should be heeded in that: 
A monopolist is entitled, like everybody else, to compete with its competitors: if it is not permitted to do so it 'would be holding an umbrella over inefficient competitors'.
The ACCC's victory in Boral may well be at the cost of holding an umbrella over inefficient competitors.
The conclusions one reaches from the cases discussed are that there is no clear standard applicable to s46. Encapsulating complex reasoning into single concepts is far from simple and always involves the criticism that it ignores the subtler nuances of judicial reasoning. That said, it seems to me that the standards of lawyers and economists differ and each has been applied to s46. There is, it seems, no way of knowing in advance which particular standard will triumph.
Queensland Wire may well be regarded as a "fairness" case. It was "unfair" that a smaller company, Queensland Wire, could not obtain supply from the BHP behemoth. Marketing considerations such as supply price, period of supply, quantities, credit terms and the like were simply unaddressed, and were, apparently, irrelevant to the Court's decision. A theoretically competitive market, non-existent in the real world, was constructed so that the "fairness" concept could be implemented.
In Melway, the approach was quite different. There the Court reached conclusions through an economic market analysis. Actual markets, actual practices and actual justifications for those practices were considered. Given this, economic considerations triumphed over fairness.
Boral must be looked at as a "fairness" case. The Court found against BBM because its tactics resulted in the exit of companies from the market. it was not "fair" that entities should be subjected to the financial muscle of large corporate groups. This conclusion was reached even though the Boral corporate group as a whole was making a profit, not a loss, on its concrete masonry product activities. The demise of a profit making corporate group was held to be the appropriate s46 result. In reaching this conclusion, "fairness" principles clearly triumphed over those of economics. In Boral the Court seemed to be at home in utilising economic concepts to define markets and market power. The Court, however, could not take the issue to its logical economic conclusion i.e. that entities will consistently price below cost only if there is a high likelihood that forsaken profits will be recouped after the exit of a competitor from the market. In its wish to implement concepts of "fairness", the Court could not settle on any particular level of cost as controlling (so, it appears that illegal predatory pricing can exist even if a profit is being made). More particularly, the Court did not adopt the economic logic of recoupment as the appropriate, and logical, basis of assessment. The rationale for the Court's conclusion, perhaps reached subliminally, must be that BBM was not acting "fairly" towards its competitors.
In s46, it does help to have economics on your side and it is essential that any analysis be based on economic concepts and verbiage. But a pack of tarot cards and a lot of righteous indignation may well be the key to ultimate success.
[*] Professor of Commercial Law, University of Newcastle; Special Counsel to Deacons, Sydney. This paper, written as at 30 June 2001, was prepared as a Background Paper for a Seminar conducted by The Centre for Accounting, Governance and Taxation Research at Victoria University of Wellington and held at Wellington, New Zealand on 2 August 2001.
 G Bittingmayer "The Antitrust Vision Thing: How did Bush Measure Up?" (2000) 45 Antitrust Bulletin 291 at 304. See also DJ Gifford & McGowan "A Microsoft Dialogue" (1999) 44 Antitrust Bulletin 673. In each of these articles numerous cases are instanced of where antitrust cases were initiated which had no redeeming social or economic benefit.
 See commentaries cited at footnotes 39, 40 and 41 in W J Pengilley "Competition Policy in Australia: A discussion of a spider web and its weaving" (2000) CCLJ 225 at 275.
 See Bittmayer, op cit n 1. Bittmayer notes that the harm caused by monopoly restraints is, by and large, quite small. He also notes that enforcers often have an incentive to bring "interesting cases" and "engage in dubious campaigns" against practices such as reciprocity, shared monopoly and conglomerate mergers.
 Melway Publishing Pty Ltd v Robert Hicks Pty Ltd  HCA 13 (15 March 2001). [High Court of Australia: Joint majority judgment of Gleeson, CJ; Gummow, Wayne and Callinan JJ; Kirby J dissenting.]
 Australian Competition & Consumer Commission v Boral Ltd  FAC 30 (27 February 2001). [Full Federal Court: Beaumont, Merkel and Finkelstein JJ]
 Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co. Ltd  HCA 6; (1989) 167 CLR 177 (High Court).
 Section 46(1) of the Trade Practices_Act 1974 (Cth) reads: "A corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of:
(a) eliminating or substantially damaging a competitor of the corporation or of a bod corporate that is related to the corporation in that or any other market;
(b) preventing the entry of a person into that or any other market; or
(c) deterring or preventing a person from engaging in competitive conduct in that or an other market."
Other subsections of the Act provide:
- that a reference to a competitor or a person includes a general reference or a reference to ; particular class of competitors or persons (s46(1A));
- that the power of related corporations can be aggregated for purposes of determining th degree of market power possessed by a corporation (s46(2));
- that in determining the degree of market power that a corporation has in the market, the cour is to have regard to the extent that the conduct of the corporation is constrained by its competitor: or by suppliers to, or acquirers from, it of goods or services (s46(3));
- that, after all matters have been considered, a breach of the section may be found if "th existence of the proscribed purposes" is ascertainable only by inference from the conduct of th corporation or any other person or from other relevant circumstances" (s46(7));
 section 4F(1) of the Act reads: "For the purposes of this Act:
(a) . . .
(b) a person shall be deemed to have engaged or to engage in conduct for a particular purpos or a particular reason if: (i) the person engaged or engages in the conduct for purposes tha included or include that purpose or for reasons that included or include that reason, as th case may be; and (ii) that purpose or reason was or is a substantial purpose or reason."
 see s46(7) set out, as far as here relevant, op cit n 7.
 Section 4 E Trade Practices Act 1974.
 Op cit n 5.
 ACCC v Boral Ltd  FCA 1318 (Heerey J).
 Op cit n 12, at para 122.
 Op cit n 5, at para 311.
 Op cit n 5, at para 304.
 Re Tooth (1979) ATPR f 40-013 (Trade Practices Tribunal).
 Ibid at 18190.
 Re Queensland Co-operative Milling Association (1976) ATPR f 40-012.
 Op cit n 12, at para 132.
 Op cit n 16.
 Op cit n 18.
 Op cit n 5.
 Op cit n 6.
 Op cit n 5.
 Op cit n 4.
 Queensland Wire Industries v BHP (1987) ATPR f 40-810 (Pincus J at trial).
 Queensland Wire Industries v BHP (1987) ATPR f 40-841 (Full Federal Court).
 Op cit n 6.
 Robert Hicks Pty Ltd v Melway Publishing Pty Ltd  1379 FCA (30 October 1998) [Federal Court of Australia: Merkel J at trial].
 Melway Publishing Pty Ltd v Robert Hicks Pty Ltd  FCA 664 (20 May 1999) [Federal Court of Australia: Sundberg and Finkelstein JJ; Heerey J dissenting].
 Op cit n 4.
 Op cit n 4, at para 89 (Kirby J in dissent).
 Australian Competition & Consumer Commission v Boral Ltd  FCA 1318 (22 September 1999) [Federal Court of Australia: Heerey J at trial].
 Op cit n 5.
 P Samuelson Economics (New York, McGraw-Hill, 6 ed, 1964), p39.
 The writer has written a number of articles on this issue. The major ones are WJ Pengilley: "Misuse of Market Power: Present Difficulties - Future Problems" (1994) 2 Trade Practices Law Journal 27 and WJ Pengilley "Misuse of Market Power: The Unbearable Uncertainties Facing Australian Management" (2000) 8 TPLJ 56.
 Op cit n 26.
 Op cit n 26, at 48, 820.
 Op cit n 4.
 Op cit n 30.
 Op cit n 30, at para 66.
 Op cit n 6, at para 50.
 Op cit n 6, at para 57.
 Op cit n 6, at para 47.
 In discussing the unanswered questions arising from Queensland Wire, the writer said:
"Is the Court correct when it says that BHP would necessarily supply in a "competitive" environment? Are there not many producers in extremely competitive environments which choose not to supply outside their group? There was no evidence on the point. Was the Court engaging in conjecture? If so, does its conclusion show that it is commercially naive?" WJ Pengilley, (1994) 2 TPLJ 27 at 41 (op cit n 36). The Privy Council in Telecom Corp of NZ v Clear Communications Ltd /1995] 1 NZLR 385 said that a person in a dominant position (the then New Zealand test) cannot be said to "use" that position for the purposes of s36 (misuse of market power) if he " acts in a way which a person not in a dominant position but otherwise in the same circumstances would have acted" (present writer's emphasis).
  USCA5 1218; 515 F 2d 1245, 1249 (1975). This case is one frequently cited by the writer in articles urging court recognition of the freedom of suppliers to choose their own distributors - see, for example, articles cited at n 36; see also WJ Pengilley: "A Marketing Disaster: What the Full Federal Court says about exclusive_distributorships and Misuse of Market Power", Australian & New Zealand Trade Practices Law Bulletin (June 1999) Vol 15 No 2.
 High Court Transcript of Proceedings; Melway v Hicks 3 August 2000 p.1.
 Op cit n 4, at para 69.
 Op cit n 4, at para 51.
 The following cases illustrate the problem:
1. ASX v Pont Data
At trial (1990) ATPR f 41-007; (1990) ATPR f 41-038
This case involved the supply of stock exchange information. The direct question in the case (which the High Court managed to avoid in Queensland Wire v BHP) was the setting of a fair supply price by the Court. This, in a competitive market, was cost of production plus profit margin normally obtained. However, there was not a competitive market in existence so this method of price setting was not available. Given this, the Court found that the proper price to be charged was the marginal cost of connection to the stock exchange signal computer. This price was $100 per year. Pont Data thought the cargo cult had come to town.
On appeal (1991) ATPR f 41-069; (1991) APTR f 41-109
On appeal the appropriate supply price was held to be a price "designed to obtain broad and substantial justice between the parties". This was held to be the pre-litigation negotiated price of $1.45 million per annum. It could not be varied for indexation. Neither would the Court consider that the pre-litigation supply price was probably set in the same circumstances as those about which Pont Data was complaining in the litigation itself. The case shows the Courts hardly give great certainty to decision makers who have to decide at the time of supply what price will subsequently be acceptable to the Courts. Somewhere between $100 and $1.45 million is the benchmark!
The Privy Council was unable to determine the appropriate price of interconnection of Clear to the N.Z. Telecom network. However, it did record with approbation the fact that "the parties indicated that their negotiating positions are now coming closer together." Each protagonist at that time had spent $NZ8-10 million on the litigation. Did they get good value? Did they get any value? (New Zealand does not have industry specific telecommunications legislation. The case was brought under s36 of the New Zealand Commerce Act 1986 which, for all present relevant purposes, is the equivalent of s46 of the Trade Practices Act.)
 Op cit n 5, at para 124 ( per Beaumont J).
 Op cit n 5, at paras 145 and 154.
 Op cit n 33.
 Cited from the judgment of Heerey J at trial: op cit n 33 at paras 190-192.
 Op cit nn 51 and 52 and related text.
 Op cit n 29, at 18.
 Op cit n 4, at para 105 (Kirby J dissenting). His Honour thought, however, that none of these considerations applied to Melway.
 Op cit n 4, at para 31.
 Op cit n 4, at para 38. The Court noted that "Melway sought to persuade the Federal Court that this was the case but failed to do so".
 Op cit n 4, at para 31.
 Op cit n 5, at para 36.
 Op cit n 5, at para 218.
 Op cit n 62..
 Op cit n 5, at para 234.
 Brooke Group Ltd v Brown & Williamson Tobacco  USSC 105; 509 US 209 (1993); 1993-1 Trade Cases 70-277. [Brooke Group Inc. was formerly known as Liggett and was so referred to in the case and in the Court's judgment]. In the Liggett litigation, the Supreme Court of the United States said:
"(A) prerequisite to holding a competitor liable under the antitrust laws for charging low prices is a demonstration that the competitor had a reasonable prospect, or, under s2 of the Sherman Act, a dangerous probability, of recouping its investment in below-cost prices. ... Recoupment is the ultimate object of an unlawful predatory pricing scheme; it is the means by which a predator profits from predation. Without it, predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced. Although unsuccessful predatory pricing may encourage some inefficient substitution toward the product being sold at less than its cost, unsuccessful predation is in general a boon to consumers. That below- cost pricing may impose painful losses on its target is no moment to the antitrust laws if competition is not injured: It is axiomatic that the antitrust laws were passed for 'the protection of competition, not competitors'. ... we (have) held in the Sherman Act s2 context that it was not enough to inquire 'whether the defendant has engaged in 'unfair' or 'predatory' tactics'; rather, we insisted that the plaintiff prove 'a dangerous probability that [the defendant] would monopolize a particular market'. Even an act of pure malice by one business competitor against another does not, without more, state a claim under the federal antitrust laws; those laws do not create a federal law or unfair competition or 'purport to afford remedies for all torts committed by or against persons engaged in interstate commerce'. .. If circumstances indicate that below-cost pricing could likely produce its intended effect on the target, there is still the further question whether it would likely injure competition in the relevant market. The plaintiff must demonstrate that there is a likelihood that the predatory scheme alleged would cause a rise in prices above a competitive level that would be sufficient to compensate for the amounts expended on the predation, including the time value of the money invested in it. As we have observed on a prior occasion, '[I]n order to recoup their losses, [predators] must obtain enough market power to set higher than competitive prices, and then must sustain those prices long enough to earn in excess profits what they earlier gave up in below-cost prices.' . These prerequisites to recovery are not easy to establish, but they are not artificial obstacles to recovery; rather, they are essential components of real market injury. As we have said in the Sherman Act context, 'predatory pricing schemes are rarely tried, and even more rarely successful,' and the costs of an erroneous finding of liability are high. '[T]he mechanism by which a firm engages in predatory pricing - lowering prices - is the same mechanism by which a firm stimulates competition; because 'cutting prices in order to increase business often is the very essence of competition .[;] mistaken inferences . are especially costly, because they chill the very conduct the antirust laws are designed to protect.' It would be ironic indeed if the standards for predatory pricing liability were so low that antitrust suits themselves became a tool for keeping prices high." (1993-1 Trade Cases pp 70,383-70,384 [case citations omitted].)
 "It is not the intention of s46 that pricing, in order to be predatory, must fall below some particular cost. The prohibition in the section may be satisfied notwithstanding that it is not below marginal or average variable cost and does not result in a loss being incurred". Explanatory Memorandum to Trade Practices Revision Bill 1986 par 54]
 Cost analysis played an important part in the opinions of the various Justices. The concept of "fixed", "variable" and "avoidable" costs was usefully encapsulated by Justice Beaumont in the following terms (at para 88):
"His Honour (the trial judge) made a number of findings as to BBM's "variable" costs of manufacture and supply, which was taken as a reference to the concept of "avoidable" cost; and which were illustrated by the following example: assume a cost of raw materials of $6.00 and fixed costs of $4.00; any sale over $10.00 will return a profit; a sale at $8.00 will incur a loss but the cost of raw materials will be recovered, and a contribution will be made towards fixed costs; however, unless a price of at least $6.00 is achieved, it would be better not to make the article, that is, this cost ($6.00 for raw materials) will be avoided by not making the product (i.e. "avoidable" or, for present purposes, "variable" cost)." As Finkelstein J points out (at para 248)
"Fixed costs are those that are incurred regardless of the level of production e.g. rent, the cost of plant and machinery, and taxes. Variable costs will increase with output e.g. materials and direct labour costs. The average variable cost of a firm is the sum of its variable costs divided by output."
 Op cit n 5, at para 154.
 Op cit n 5, at para 266.
 Op cit n 66.
 1984-2 Trade Cases 66,065 (US Supreme Court).
 Op cit n 5, at para 217 (Merkel J).
 Trade Practices Commission: Misuse of Market Power: Section 46 of the Trade Practices Act: Background Paper" February 1990, p36.
 Ibid at 33.
 Ibid at 36.
 Op cit n 5.
 ACCC v Rural Press (2001) ATPR f 41-804 (Mansfield J).
 In this regard the ACCC's Press Release states the following:
"The ACCC was granted leave to intervene and its submissions focussed upon what it means for a firm with market power to 'take advantage' of that power. The ACCC submitted that conduct may 'take advantage' of a substantial degree of market power within the meaning of s.46 where the conduct is facilitated or made easier by that market power. The ACCC submission on this issue was accepted in principle by the Court and, in doing so, the Court enhanced and extended the law as set down in the Court's Queensland Wire Industries decision. In their joint judgment the majority judges state that ... 'in a given case, it may be proper to conclude that a firm is taking advantage of market power where it does something that is materially facilitated by the existence of the power, even though it may not have been absolutely impossible without the power. To that extent, one may accept the submission made on behalf of the ACCC, intervening in the present case, that s.46 would be contravened if the market power which a corporation had made it easier for the corporation to act for the proscribed purpose than otherwise would be the case'."
 Op cit nn 48 and 49 and related text.
 Senior Counsel for the ACCC opened his argument with the assertion that "the respondent (Robert Hicks) wins . for the reasons given by Mr Justice Merkel and by the Full Court" (High Court Transcript of proceedings in Melway v Hicks 8 August 2000, p11).
 Op cit n 32 and related text.
 Op cit nn 73 to 76 and related text.
 ACCC Press Release 28 February 2001 headed "Court upholds Predatory Pricing Appeal against Boral Besser Masonry Ltd - Important Case about Misuse of Market Power".
 Telecom Corp of NZ Ltd v Clear Communications  1 NZLR 385 at 402 (PC) citing Olympia Leasing Co v Western Union Telegraph Co  USCA7 794; 797 F.2d 370 (1986); Union Shipping NZ Ltd v Port Nelson Ltd  2 NZLR 66; 2 at 761; New Zealand Magic Millions Ltd v Wrightson Bloodstock Ltd  NZHC 887;  1 NZLR 731 at 761; Queensland Wire Industries Pty Ltd v BHP  HCA 6; (1989) 167 CLR 177 at 191.