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Universal Music v ACCC

In brief
On 22 August 2003 the Full Federal Court handed down its unanimous decision on the appeal brought by Universal Music Australia (Universal) and Warner Music Australia (Warner) in Universal Music & Ors v Australian Competition and Consumer Commission [2003] FCAFC 193 (Universal v ACCC).

In light of the High Court's recent decision in Boral v ACCC1, the Full Federal Court found that neither Universal nor Warner had a substantial degree of power in the relevant market and allowed the appeal in respect of section 46 of the Trade Practices Act 1974 (Cth) (TPA).

The Full Federal Court found that the companies engaged in exclusive dealing for the purpose of substantially lessening competition in breach of section 47 of the TPA.

The Court allowed the ACCC's appeal on penalties, ordering each company to pay $1 million in penalties and half of the ACCC's costs of appeal.

In 1998, amendments to the Copyright Act 1968 (Cth) made it legally possible to import into Australia 'non-infringing' CDs from other countries. In the period shortly after the amendments were introduced, Universal and Warner ceased to supply certain retailers who imported CDs from overseas and made it known they might not supply other retailers who took that course.

The ACCC brought proceedings against Universal and Warner and certain senior executives of each company for breach of sections 45, 46 and 47 of the TPA.

Universal and Warner are major Australian distributors of recorded music. At the relevant time, Polygram (now Universal) had 17.6 per cent and Warner had 16 per cent of the wholesale market for recorded music in Australia. Other major wholesalers of recorded music in Australia at that time were Sony, EMI Music Australia Pty Ltd and BMG Australia Ltd, with market shares of approximately 25–27 per cent, 17 per cent and 7–8 per cent respectively. The wholesalers did not sell CDs directly to consumers, but to retail sellers of recorded music.

Justice Hill in the Federal Court found that Universal and Warner each had a substantial degree of market power and that they each had taken advantage of market power in breach of section 46. His Honour also found that Universal and Warner had engaged in exclusive dealing in breach of section 47 of the TPA. The section 45 case was dismissed. The Universal and Warner executives involved in the conduct were found to have been knowingly involved and fined.

Universal and Warner appealed to the Full Federal Court.

Misuse of market power post-Boral
The Full Court's decision on section 46 turned on whether Universal or Warner had a substantial degree of market power, in light of the High Court's decision in Boral v ACCC.

Market power
The Full Federal Court adopted a step-by-step approach to section 46, the threshold question being whether the relevant corporation has a substantial degree of power in the relevant market.

In determining the degree of market power each firm had, the Full Court gave weight to the High Court's use of subsection 46(3).2 This requires a court to have regard to the extent to which the firm's conduct in the market is constrained by the conduct of its competitors, potential competitors and customers.

The Full Court held that the relevant 'conduct' is the firm's general conduct in the market as a whole, not its conduct in relation to particular participants.3 The fact that a corporation has acted towards a competitor or customer in a particular manner (which may be considered arbitrary or high-handed) is relevant only as evidence of the corporation's degree of power in the relevant market; it does not itself establish the corporation has a substantial degree of market power.4
    'Almost all participants in a market have a degree of power, which may on occasions be abused. The power of the abuser may or may not be substantial, within the meaning of s 46(1).'5
It is not legitimate for a court to base a finding of substantial market power simply upon incidents of abuse of power in that market.

The Full Court noted that Justice Hill, in finding that the firms had a substantial degree of market power, acted consistently with the law as it stood prior to the High Court's decision.6 However, the Full Court's application of Boral v ACCC led it to conclude that neither firm had the requisite degree of market power. This suggests that the Court has interpreted Boral v ACCC as raising the level of market power required for a firm to pass the threshold test in section 46 of having a 'substantial' degree of market power. The result may be that in an oligopoly market, where a number of firms have a degree of market power, no single firm will have sufficient market power to fall within the scope of section 46.

Time is of the essence
ACCC v Universal7 attracted interest for its consideration of the temporal dimension of the market, with the ACCC arguing that a single album could be a market. Justice Hill considered there to be a sub-market of chart music, which allowed short-run effects to be noted, but cautioned that it could be misleading if used uncritically to assess long term effects.8

The Full Court supported a longer term view of the market and market power in making its findings.

The Court stated that the concept of 'temporary monopolies' does not define a market. Temporary monopolies illustrate only the working of competition in the market, as popularity and market demand rise and fall. No distinction should be drawn between markets for differentiated goods and markets for homogenous goods.9

In addition, a company's 'temporary monopoly power' over certain market products is not a sufficient factor to sustain a finding that the power of each company is 'substantial'.10 Market power is to be judged by reference to persistent rather than temporary conditions.11

These findings were critical to the Full Court's decision that neither Universal nor Warner had a substantial degree of market power.

Time was also referred to by the Full Court in relation to section 47, with the Court noting that a short term effect readily corrected by market processes is unlikely to be substantial.12

Exclusive dealing
Justice Hill's finding that the appellants had engaged in exclusive dealing in respect of a small number of retailers was not seriously challenged on appeal. Rather, the appeal on section 47 focused primarily on whether the exclusive conduct had the purpose, effect or likely effect of substantially lessening competition.

In refusing to allow the appeal on section 47, the Full Court affirmed much of Justice Hill's judgment. The main points of argument and the Court's findings are set out below.
  • The appellants challenged the ACCC's arguments on 'signalling' and a 'ripple effect': that even if the immediate conduct affects only a few people, news of the example could have a more widespread effect.13 The Full Court agreed with Justice Hill that even though the exclusive dealing conduct viewed in isolation would not have had any real effect on competition,14 the Court was entitled to take into account the fact or probability of other retailers becoming aware of it, particularly in light of evidence regarding the dissemination of information in the industry.15
  • The argument of subjective versus objective purpose was again raised;16 the Full Court recognising that the distinction between the two is blurred and often irrelevant. This is particularly so where the purpose is that of a corporation, rather than an individual, as purpose must necessarily be inferred.17
  • The Full Court found that the exclusive conduct was engaged in with the purpose of substantially lessening competition, despite finding that neither firm had market power.18 It remains arguable whether (absent collusion or parallelism) exclusive dealing can have the effect of substantially lessening competition if the 'excluder' does not have substantial market power.19
  • Justice Hill drew an important distinction, upheld by the Full Court, between a statement that, if another person takes particular action, the speaker will take counter-action on the one hand; and, on the other hand, that the speaker will consider whether to take counter-action. The former is a 'condition' for the purposes of section 47; the latter is something less.20
The Full Federal Court's decision that a firm which does not have a substantial degree of market power can nevertheless substantially lessen competition in breach of section 47 appears incongruous. This is of particular concern if the Full Court's approach applies to effect as well as to purpose, as it opens the possibility for logical gaps in the coverage of the TPA.

Additional points
The Full Court upheld the ACCC's appeal in respect of penalties, finding that the penalties imposed at trial were manifestly inadequate. In increasing the fines imposed on each company from $450,000 to $1,000,000, the Court noted the following:
  • Weight should not have been given to the complexity of the cases and uncertainty of the law prior to the decision.21
  • Each corporation is substantial. Moreover, Justice Hill should have taken into account the fact that each corporation was a wholly-owned subsidiary of a substantial multi-national company conducting significant overseas operations.22
  • No discount should be applied for the company's cooperation, apology or remorse, nor for ceasing the conduct after ACCC intervention.23
  • Failure to understand the risk of breaching the TPA, and obtaining legal advice in respect of that risk, is not a discounting factor in imposing penalties.24
Economic evidence
The Full Court made some observations on expert economic evidence, which had been used extensively during the trial. The Court noted that the words of the TPA involve some economic concepts and that the application of the TPA to the facts of a particular case may be informed by economic evidence or argument. Nevertheless, it is the language of the Act which the Court is required to consider: 'To the extent that the statutory language conflicts with economic theory, the Court is bound to apply the Act.'25

The Full Court's application of Boral v ACCC may have clouded, rather than clarified, the application of section 46.

While it may now be harder to show that a firm in an oligopoly market has a substantial degree of market power, the decision will not provide great comfort to oligopolists, as what is 'substantial' is said to be an exercise of judgment for the court in each case.26

Firms unsure of whether they will fall within the purview of section 46, and indeed any firm, should always take care to ensure that their conduct can be justified on sound commercial grounds.27

1 Boral Besser Masonry Limited (now Boral Masonry Ltd) v Australian Competition and Consumer Commission [2003] HCA 5 (7 February 2003).
2 Paragraph 132.
3 Paragraph 136.
4 Paragraph 140.
5 Paragraph 150.
6 Paragraph 149.
7 Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd [2001] FCA 1800; 115 FCR 442.
8 Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd [2001] FCA 1800 at paragraph 351.
9 Paragraph 156.
10 Paragraph 152, approving the interpretation of 'substantial' adopted by Justices Lockhart and Gummow in Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43 at 63.
11 Paragraph 158, citing Justice Dawson in Queensland Wire at 200, Boral per Justice McHugh at paragraphs 287 and 293 and Justice Kirby at paragraph 379.
12 Paragraph 242.
13 Paragraph 174.
14 Paragraphs 243–244.
15 Paragraph 248.
16 The subjective versus objective purpose debate was raised in the context of section 4D of the TPA by members of the High Court in News Limited & Ors v South Sydney District Rugby League Football Club Limited & Ors [2003] HCA 45. See 'The High Court clarifies exclusionary provisions: News Limited v South Sydney'' article for a discussion.
17 Paragraph 251.
18 This had not been an issue for  Justice Hill, who based his conclusion of substantial lessening of competition on his earlier finding that the firms had market power: Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd [2001] FCA 1800 at paragraphs 478–480. Justice Hill proceeded at paragraphs 484–485 to reason that, given his finding the likely effect was a substantial lessening of competition, the ACCC would have made out an objective purpose to substantially lessen competition and from that a subjective purpose would be inferred.
19 Paragraph 268. The Full Court held at paragraph 246 that the conduct did not substantially lessen competition, based on the trial judge's findings of fact.
20 Paragraph 235.
21 Paragraph 302.
22 This argument was not raised on appeal: paragraph 304.
23 Paragraph 304.
24 Paragraphs 308–309.
25 Paragraph 163.
26 Paragraph 162.
27 See the discussion on legitimate business reasons in 'The importance of a legitimate business reason: ACCC v Safeway'.

This article was written by Sophie Rigby, Solicitor.

For more information please contact

Donald Robertson
61 2 9225 5523

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