Boral Besser Masonry Ltd (now Boral Masonry Ltd) v ACCC M27/2001 [2001] HCATrans 648 (14 December 2001)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M27 of 2001

B e t w e e n -

BORAL BESSER MASONRY LTD (now Boral Masonry Ltd)

Applicant

and

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

Respondent

Application for special leave to appeal

McHUGH J

GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 14 DECEMBER 2001, AT 9.32 AM

Copyright in the High Court of Australia

MR A.C. ARCHIBALD, QC: If it please the Court, I appear with my learned friends, MR C.M. MAXWELL, QC and MR I.B. STEWART, for the applicant. (instructed by Blake Dawson Waldron)

MR N.J. YOUNG, QC: May it please the Court, I appear with my learned friends, MR D. SHAVIN, QC and MR M.J. CRENNAN, SC, for the respondent. (instructed by Australian Government Solicitor)

McHUGH J: Do not sit down, Mr Young, we might hear from you first.

MR YOUNG: If your Honour please. The respondent proposes the grant of special leave. It is our essential submission that the Full Court applied orthodox principle to the facts of the case and in the result, their decision turned on their findings of fact.

McHUGH J: I appreciate that, but the decision has been subjected to some academic criticism, has it not? It has been said that if the Full Court decision is correct, section 46 may prove to be an instrument for the suppression of competitive pricing conduct in many Australian markets.

MR YOUNG: We would say that is not a correct view of it. The alternative view is open, too. That is, if one is to implant into the section the requirement of recoupment, the section is rendered unworkable and its intended operation is negated.

GUMMOW J: This Court has never looked at this recoupment principle, has it?

MR YOUNG: No, but in QWI, and again in Melway, the Court held that there is not to be implanted into the section some additional standard of uncertain dimension. There it was an attempt to implant into the section a requirement that the conduct be predatory, or reprehensible, or anti-competitive. This is essentially the same process. There is an attempt, by recourse to US doctrine, to implant into the section - - -

McHUGH J: Is that quite right? Justice Heerey's reasoning was very close, or certainly was reminiscent of the recoupment theory of predatory pricing, but it was not quite that, was it?

MR YOUNG: Well, with respect, your Honour, it was pretty much exactly that. If the Court goes to 173 in Justice Heerey's judgment, he sums up his findings concerning recoupment.

GUMMOW J: Paragraph - - -?

MR YOUNG: Paragraph 173 at page 52. This is the core of the applicant's submission and it is the nub of his Honour's reasoning. In the second sentence, his Honour says:

To recapitulate, selling below cost plus recoupment by supra-competitive - - -

McHUGH J: I am sorry, I have missed this - 173?

MR YOUNG: Paragraph 173 in Justice Heerey's judgment.

McHUGH J: I am sorry, it is paragraph.

MR YOUNG: I thought your Honour asked me about the trial judge's key reasoning.

McHUGH J: Yes, I did.

MR YOUNG: I was reading from the second sentence at paragraph 173 at page 52:

To recapitulate, selling below cost plus recoupment by supra-competitive pricing equals predatory pricing. Absent the second element -

that is recoupment -

or at least the hope or expectation thereof, there is no more than ruthless competitive conduct, something which the TPA does not forbid, but rather promotes.

Now, can I break down that requirement? First, his Honour required, in the alternative, either actual recoupment or the hope or expectation thereof. Actual recoupment would mean, as his Honour has expressed it, 100 per cent recovery of all the moneys lost through the two-and-a-half year campaign of pricing below avoidable cost; 100 per cent recoupment because, of course, the members of the Full Court found that there was an intention of returning the market to stability with a lesser number of players and a return to normal profits which would be above the level of profits experienced in a multi-player market.

McHUGH J: But one of the points that is argued for the applicant, is it not, is that the Full Court's approach wrongly ascribes to section 46 the primary function of protecting competitors rather than protecting the process of competition.

MR YOUNG: Well, with respect, no, your Honour. The Full Court's approach gives full effect to the language of the section. In the language of Sir Anthony Mason in QWI - I will not bother the Court in going to the passage, but his Honour said, "these purpose provisions which define what uses of market power constitute misuses". That is at page 190 to 191 of QWI. But that is exactly what the Full Court did. They applied the purpose provisions to define what constituted a misuse. What the trial judge did is to seek to overlay on the purpose provisions, and the words "taking advantage" which this Court has now twice held simply means "use", an additional superfluous standard of recoupment.

But could I finish my point about breaking down what recoupment means? To take his Honour's first element, actual recoupment, that means 100 per cent recovery. At the time of the offence, or the contravention, you will never know whether there has been actual recoupment. It lies in the future. The section strikes at purposive conduct and the contravention is complete when that conduct is engaged in regardless of whether there is, in the future, actual recoupment or not. So his Honour's first element of actual recoupment must be foreign to the section.

Then his Honour, in the alternative, overlays "the hope or expectation" of 100 per cent recoupment. Now that is a mental element, an additional mental element. Why should that be engrafted onto the section to supplant or oust the purposes prescribed by the section? That is exactly contrary to what this Court held in QWI, namely that the purpose provisions defined "what uses of market power constitute misuses". Our learned friends, the applicants, recognise the difficulty in this formula because they shift away from Justice Heerey's conclusion. They substitute for his finding that there must be actual recoupment or "the hope or expectation thereof", a different test - subjective intention to recoup and/or objective likelihood.

There has been no cross-appeal, no cross-contention, but recognising the difficulties in the trial judge's conclusion, they argue for a different test altogether. Now, there are further reasons why it does not work. It emerges from US jurisprudence which is based upon the Sherman Act and the Robinson-Patman Act, both of which are predicated on preventing monopoly power being exerted. That is why you have a concept of recoupment by, and I quote, "supra-competitive pricing", that is to say, monopoly pricing. The threshold in our Act is, of course, a substantial degree of market power, nothing like monopoly - - -

McHUGH J: Well, dealing with the question of market power, what do you say to the point that rather than examining the applicant's market power in the context of the market as a whole, the Full Court seems to have based its conclusion as to market power primarily on the applicant's behaviour?

MR YOUNG: We say that is not correct. Can I take the Court to passages in the judgment that indicate that? The Full Court's analysis of market power was a conventional one that relied upon, not just conduct, but structural matters such as vertical integration, its size, its market share, the possession of established relationships with customers, and so forth. Could I take the Court to - - -

McHUGH J: But the court did rely on behaviour or market conduct, did it not, as an indicator of market power?

MR YOUNG: As a manifestation of market power and as an indicator, yes, your Honour, but that is entirely consistent with this Court's decision in QWI and Melway. Can I remind the Court of a passage in Justice Dawson's judgment where it was said that market power is manifested by conduct including "predatory pricing", "exclusive dealing", and so forth. His Honour then referred to the definition of Kaysen and Turner. Both those aspects were the definitional aspects of market power that were picked up and relied upon by this Court in Melway. In Melway, at paragraph 41 and 42, in explaining the concept of market power, the majority turned, first, to Justice Dawson's passage in Queensland Wire, where his Honour said this:

market power has aspects other than influence upon the market price. It may be manifested by practices directed at excluding competition such as exclusive dealing, tying arrangements, predatory pricing or refusal to deal . . . The ability to engage persistently in these practices may be as indicative of market power as the ability to influence prices."

Then their Honours referred to Kaysen and Turner:

"A firm possesses market power when it can behave persistently in a manner different from the behavior that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions."

The case here was not simply of predatory pricing cuts. It was that over a period of almost three years Boral engaged in a practice pricing substantially below its competitors and below avoidable cost, and avoidable cost meant they were losing money on every item they produced. Whilst doing that, they substantially expanded their production capacity and their production, so that with the enhanced production, every further unit they sold made great loss.

Now that was engaged in over a period of virtually three years for the avowed purpose of driving competitors out of the market. So the conduct was not simply predatory pricing, it was combined conduct of predatory pricing coupled with expansion of production capacity, needlessly, and expansion of production, all for the prescribed purpose. Now, in our respectful submission, there is no such thing as a required or mandatory linear analysis that proceeds from market definition to market power, to taking advantage and then to prescribe purpose. That is their argument.

This Court has said, on a number of occasions, "there is a single sentence and it is an interrelated inquiry". Of course, conduct for a prescribed purpose and the nature and depth of the price cutting will reflect on whether it is a use of market power. If you ask the hypothetical question in QWI, "Would a company, absent market power, engage in this campaign of below avoidable cost pricing and expansion of production over a very lengthy period of time?", the answer is, "It would not".

GUMMOW J: Well, these arguments may well ultimately be right, Mr Young, seem to be suggesting there are special leave points - - -

MR YOUNG: No, your Honour, I am endeavouring to answer - - -

GUMMOW J: Or are you trying to demonstrate that it is also clear that it is not worth worrying about?

MR YOUNG: Well, the proposition that there were errors raising issues of principle is, in our submission, one that does not withstand analysis. One only needs to look at the judgment to see that what the judges did is to apply QWI and Melway.

McHUGH J: The fact that the court regarded the exit of Rocla and Budget as conclusive of Boral's market power, itself seems to raise some interesting questions.

MR YOUNG: With respect, your Honour, we again would take issue as to whether that is the correct reading of the judgment. There was no doubt, on the evidence, and it is really undeniable - - -

McHUGH J: Both Justice Merkel and Justice Finkelstein took Justice Heerey's findings to purpose as to their starting point, that is where they began.

MR YOUNG: With respect, no, your Honour. Justice Merkel started with a conventional analysis of the structure of the market. Can I take you, your Honours, to the passage where he summed up the elements of market power, dealing firstly with - - -

McHUGH J: They characterised the applicant's conduct as exclusionary and then declared, "It is the exclusionary conduct that established the market power". Did they not say that in terms?

MR YOUNG: No, your Honour, no, we disagree. Can I take your Honour to Justice Merkel at page 160 and 161, running from paragraph 217 to 219, your Honours. Paragraph 217:

BBM's ability to persist in its price war was due to its financial and production capacity and because of the vertical integration within the Boral group that enabled Boral Ltd, the ultimate holding company, to make a net profit out of concrete masonry products during the relevant period notwithstanding the losses -

paragraph 218, "an objective of" returning profits to "normal", some recoupment; 219, Justice Merkel then sums it up:

The "power" used by BBM . . . included four inter-related elements:

. BBM's financial and production capacity to persistently engage in its price war by selling at below avoidable cost . . .

. the upgrade of BBM's Deer Park plant to a capacity in excess of its requirements . . .

. BBM's capacity within a vertically integrated group to persist in selling its important products below avoidable cost . . .

. BBM's election to price lower in the expectation that it was a worthwhile outlay as there would be some recoupment later by reason of better prices and profitability -

Now, that is a mix of structural and conduct elements. His Honour went on, on the next page, 162, quite rightly, we say, and conformably with authority, in paragraph 222, to say that:

the existence of its market power cannot be determined independently of the exclusionary conduct, which can itself indicate market power.

citing Justice Dawson in QWI; and 224, the conclusion is correctly drawn that an:

ability to persistently engage in predatory pricing to exclude competition is an indicate of its market power.

Then his Honour turned to "barrier to entry", and again, that is a structural aspect of the market. He refers, finally, in 226 and 227, to his overall assessment. In 226:

indications of BBM's market power were its capacity to persistently drive down and maintain prices at below avoidable cost to drive rivals out of the market; an expectation of some recoupment . . . ; a capacity to supply the increased market share; placing pressure on rivals . . . ; and doing so in circumstances where a net profit was still being made by the group.

That has singled Boral out from amongst the players.

McHUGH J: But what do you say about the passage in 197 in the judgment of Justice Finkelstein?

MR YOUNG: Paragraph 197, your Honour?

McHUGH J: Yes, sorry, page 197, paragraph 331, line 20:

The existence of market power based on this approach cannot be examined independent of the alleged exclusionary conduct. It is the exclusionary conduct that established market power, not the reverse.

That was the passage I had in mind.

MR YOUNG: The first of those sentences is entirely consistent with the previous passage from QWI. The next sentence, your Honour, can be criticised as an overstatement, but that is not the process of reasoning that Justice Finkelstein engaged in because he looked at structural features, including vertical integration, financial resources, market share, as well as the conduct elements and barriers to entry. So it is an overstatement, your Honour, that might be criticised in isolation from a proper reading of the entirety of the judgment.

McHUGH J: Well, it reads like an anachronism that is likely to find its way into quite a number of judgments in the future.

MR YOUNG: Well, if special leave is to be granted, it would be our submission that it should be confined to the market power issues. It should not extend to market definition, which was entirely a factual issue, a question of fact and degree to some of the other issues that are raised. The only question that approaches the question of principle of general importance is the recruitment issue as an aspect or coupled with market power issues. Otherwise this Court would be confronted with the need to review the very large amount of evidence that took many days before the Full Court, dealing with industry evidence concerning substitutability, and matters which, at the end of the day, are simply questions of fact and degree - - -

McHUGH J: In substance, Justice Heerey found that the relevant market was the Melbourne metropolitan area in which builders acquired materials for the construction of walls and pavings, was it not?

MR YOUNG: Yes.

McHUGH J: Did the Full Court amend that in any way?

MR YOUNG: Yes.

McHUGH J: Yes, they did.

MR YOUNG: Not geographically, your Honour, but they found that the relevant product market was the market for concrete masonry products, not all building materials used in walls and pavers. Likewise, we would submit that special leave ought not to be granted in respect of the findings concerning purpose. They were made by the trial judge, unsuccessfully - - -

McHUGH J: There seemed to be an abundance of evidence to support - - -

MR YOUNG: Absolutely, your Honour. I can see the red light is staring me in the face - - -

McHUGH J: Yes, your time is up. Yes, Mr Archibald, what do you say about confining the grounds of appeal, as your opponent suggests?

MR ARCHIBALD: Refining it?

McHUGH J: Confining it.

MR ARCHIBALD: We say it is unnecessary because, properly understood, the gulf between the approach taken by the Full Court and the approach taken by the trial judge is one of principle and each of the grounds which we have sought to raise in our draft notice addresses the point of principle which is well able to be dealt with by this Court were special leave to be granted. There are observations in the reasons for judgment of the Full Court to the effect that much of the factual material was uncontroversial.

It is useful to go to that material to find exemplifications and embodiment of the points of principle upon which we rely but, in our submission, there is no need for a confinement of grounds. An appeal, if special leave were to be granted, would not, as we would envisage it, detain this Court for a considerable period of time. It would not involve detailed excurses into evidentiary materials.

GUMMOW J: Looking at page 216 of the application book, which is the beginning of the draft notice of appeal, I think Mr Young is saying we should not get involved in (a), or (b) - - -

MR ARCHIBALD: The point about (a), in our submission, is that the Full Court adopted a wrong approach of principle to market, not that it formed a different view about factual features. The Full Court seems to have focused on what constitutes a sub-market and mistook that for the market itself, and that can be demonstrated in short compass, in our submission. The point of principle that arises in respect of market definition concerns the correct understanding and application of tests in QCMA and Tooth. Once one establishes the correct approach in principle, the facts really answer the question that is otherwise raised.

McHUGH J: Is this the close competition point?

MR ARCHIBALD: Yes, what flows from the observation about close competition and it is interesting, at paragraph 304 of his reasons, Justice Finkelstein set out a range of features which he said bore upon what constituted the market. Those words, although his Honour does not acknowledge them in terms, were taken from the passage at page 191 in QCMA, not about market but about some market, and one can perhaps see, in that passage, an insight into the error which we say has occurred. So this is a case in which we say it is proper for this Court to consider market definition issues.

McHUGH J: Yes, thank you, Mr Archibald. Do you want to say anything in reply to that, Mr Young?

MR YOUNG: Your Honour, we say there is no issue of principle. It was a factual issue and market definition always involves a question of analysing what extent of substitutability, what degree of substitutability, best defines the market for the purposes of the questions of market power in the case. There is no issue of principle about close competition. That has always been the approach that is adopted. The question is, "How is it to be applied to the facts?", and the case would necessarily involve canvassing extensive evidence, albeit much of it uncontested, about competitive conduct to determine market definition. On the appeal, that would be the sole issue. What does a review of all the factual material demonstrate is the relevant field of close competition, and there is no point of principle between us.

McHUGH J: Yes, thank you. There will be a general grant of appeal, a grant of special leave in this matter. Mr Archibald and Mr Young, I take it, it would take two days, this case?

MR YOUNG: We would think so.

McHUGH J: Yes.

MR ARCHIBALD: Yes, your Honour, but a full two days, I think.

McHUGH J: A full two days. Yes, very well, there will be a grant of special leave.

AT 9.59 AM THE MATTER WAS CONCLUDED