Legislation and case law
51 Section 47(1) of the TPA provides that:
Subject to this section, a corporation shall not, in trade or commerce, engage in the practice of exclusive dealing.
52 Subsections (2) to (9) describe different ways in which a corporation engages in exclusive dealing. Section 47(6) deals with a form of exclusive dealing known as third line forcing. Section 47(6) was amended in 2007: Sch 7, Pt 2, cl 30, Trade Practices Legislation Amendment Act (No 1) 2006 (Cth). Prior to 1 January 2007, s 47(6) was in the following terms:
A corporation also engages in the practice of exclusive dealing if the corporation:
(a) supplies, or offers to supply, goods or services;
(b) supplies, or offers to supply goods or services at a particular price; or
(c) gives or allows, or offers to give or allow, a discount, allowance, rebate or credit in relation to the supply or proposed supply of goods or services by the corporation,
on the condition that the person to whom the corporation supplies or offers or proposes to supply the goods or services or, if that person is a body corporate, a body corporate related to that body corporate will acquire goods or services of a particular kind or description directly or indirectly from another person.
53 By reason of the 2007 amendments, the phrase "not being a body corporate related to the corporation" was added to the end of s 47(6): Sch 7, Pt 2, cl 30, Trade Practices Legislation Amendment Act (No 1) 2006 (Cth). That amended form of s 47(6) applies to conduct engaged in after the commencement of the Part: Sch 7, Pt 2, cl 33, Trade Practices Legislation Amendment Act (No 1) 2006 (Cth). The Part commenced on 1 January 2007. Contrary to the submissions of the ACCC, these proceedings concern s 47(6) in both its original and amended form. Even though for present purposes the amendment does not alter the operation of the section in this proceeding, the fact that s 47(6) has been amended cannot be ignored.
54 Before turning to the legal analysis, something should be said about the amendments to ss 47(6) and (7). The amendments incorporated only some of the recommendations arising from the Review of the Competition Provisions of the Trade Practices Act ("the Dawson Review"). The only substantive amendment adopted was to ensure that related companies were treated as a single entity for the purposes of s 47(6): Explanatory Memorandum, Trade Practices Legislation Amendment Bill (No 1) 2005 (Cth), Sch 7, Item 30, para 67.
55 The Dawson Review "considered that third line forcing is often beneficial and pro-competitive, and recommended that third line forcing should instead be subject to a substantial lessening of competition test, consistent with other forms of exclusive dealing:" Explanatory Memorandum, Trade Practices Legislation Amendment Bill (No 1) 2005 Cth), Sch 7, Pt 1, para 2. Initially, the amendments proposed by the draft bill and the accompanying explanatory memorandum implemented that recommendation to bring the treatment of third line forcing into line with other forms of exclusive dealing by requiring that third line forcing be subject to a competition test: Explanatory Memorandum, Trade Practices Legislation Amendment Bill (No 1) 2005 (Cth), Sch 7, Pt 1, para 3. However, the draft bill was substantially amended in the Senate and the status quo was restored - a per se prohibition on third line forcing conduct: Supplementary Explanatory Memorandum, Trade Practices Legislation Amendment Bill (No 1) 2005 (Cth), Outline, para 6.1 (sic) and Notes on Amendments, paras 1.140 - 1.147; Australia, Senate, Debates (2006) Vol S 244, p 127 - 128. No doubt the decision to restore the status quo was, in large part, driven by pragmatic considerations. Any corporation concerned about its supply arrangements could, and can still, seek authorisation from the ACCC and the ACCC apparently opposes very few of the hundreds of third line forcing notifications: Explanatory Memorandum, Trade Practices Legislation Amendment Bill (No 1) 2005 (Cth), Sch 7, Pt 1, para 2 and Committee of Inquiry into the Competition Provisions of the Trade Practices Act 1974 (Cth), Review of the Competition Provisions of the Trade Practices Act, (Commonwealth of Australia, Canberra, 2003), p 129, http://tpareview.treasury.gov.au/content/report.asp. However, the fact remains that the per se prohibition on third line forcing conduct precludes any examination of the competitive nature of the conduct by a Court with the result that unless authorisation was sought or the conduct notified to the ACCC, the third line forcing conduct contravenes the provision regardless of its effect on competition. That is unsatisfactory.
56 Finally, in considering s 47(6) in both its original and amended form, reference must also be made to s 47(13)(a) of the TPA which provides:
In this section:
(a) a reference to a condition shall be read as a reference to any condition, whether direct or indirect and whether having legal or equitable force or not, and includes a reference to a condition the existence or nature of which is ascertainable only by inference from the conduct of persons or from other relevant circumstances;
…
57 Third line forcing has been considered by a number of Australian Courts: see for example Castlemaine Tooheys Ltd v Williams and Hodgson Transport Pty Ltd (1986) 162 CLR 395; The Paul Dainty Corporation Pty Ltd v The National Tennis Centre Trust (1990) 22 FCR 495; Australian Competition & Consumer Commission v IMB Group Pty Ltd (ACN 050 411 946) (in liq) [2002] FCA 402. The applicable principles may be summarised as follows:
1. third line forcing has been the subject of per se prohibition since its enactment. There is no requirement that the conduct complained of be done for the purpose or effect or likely effect of substantially lessening competition: IMB Group [2002] FCA 402 at [56];
2. third line forcing requires two discrete products or services with the supply of the first being conditional on the purchaser acquiring another product or service directly or indirectly from a third person: IMB Group [2002] FCA 402 at [72];
3. however, where two products or services manufactured or supplied by different entities, are bundled and supplied as a bundled package by the lead supplier, exclusive dealing is not made out because the purchaser could have made separate arrangements for the acquisition of the different components of the package: IMB Group [2002] FCA 402 at [72].
58 As the second principle provides, the supply of the first must be conditional on the purchaser acquiring another product or service directly or indirectly from a third person. Section 47(6) uses the phrase "on the condition". What that phrase in the context of s 47(6) actually means has not been fully explored. That is unsurprising.
59 Some early decisions of the Full Court of the Federal Court considered whether it was necessary to prove an element of "compulsion" in s 47(6): Re Ku-ring-gai Co-operative Building Society (No. 12) Ltd (1978) 36 FLR 134 and S.W.B. Family Credit Union Ltd v Parramatta Tourist Services Pty Ltd (1980) 48 FLR 445. In the first, Re Ku-ring-gai 36 FLR 134, Brennan J concurred with Deane J. Bowen CJ dissented. Deane J dealt with the issue in the following terms at 167-168:
(b) Is the condition or requirement that the member insure with a particular nominated insurer within the scope of s. 47(6)?
The applicants argued that the condition or requirement that the member insure with a particular nominated insurer was not within the scope of s. 47(6) for the reason that the condition was not a condition imposed by the applicant and was not, in any event, a condition that the member "acquire services" within the meaning of the subsection.
…
The practice of exclusive dealing does not necessarily involve the imposition of any condition. It involves supply upon a condition. The condition may well have been suggested by the recipient of supply. It may have been imposed by some third party. It may arise, by implication, from all the circumstances in which the goods or services were supplied. Even if the relevant condition upon which a loan was made was that contained in the rules of the applicants, a loan by an applicant to one of its members would, if that condition were applicable to it, be, for the purposes of s. 47 of the TPA, a supply of services upon that condition. The section does not look to the origin of the condition upon which there is a supply of services. The section looks to the supply of services upon that condition.
(Emphasis added).
60 Two years later in S.W.B. 48 FLR 445, a Full Court comprised of Smithers, Northrop and Sheppard JJ revisited s 47(6). In that case, it was alleged that dealings between a
co-operative society and its members contravened s 47(6) of the TPA. Smithers J quoted and applied Deane J's test in Ku-ring-gai 36 FLR 134: see S.W.B. 48 FLR 445 at 453. Northrop J dealt with the issue in the different terms at 464 - 465:
It does not matter whether the condition is legally binding or not, see s. 47 (13) (a) of the [TPA], but in my opinion the condition must have some attributes of compulsion and futurity. This can be expressed in the form "If we do this, you will (must) do that". A condition in the nature of an obligation must be imposed upon the person dealing with the corporation. The condition to be complied with by that person must result from something done or to be done by the corporation imposing the condition.
… This is illustrated by Re Ku-ring-gai Co-operative Building Society (No. 12) Ltd. (1978) 36 F.L.R. 134 and Trade Practices Commission v. Legion Cabs (Trading) Co-operative Society Ltd. (1978) 35 FLR 372. In the former case the building society required members to whom it lent moneys on the security of an interest in real estate to insure that interest with a person nominated or approved by the society. In the second case, the co-operative society required members who received the benefit of radio services provided by it to purchase petrol and oil from designated service stations. In each case the requirement by the societies imposed an obligation upon the persons to whom they supplied a service to acquire goods or services from other persons designated or approved by the society and to the exclusion of persons carrying on similar businesses to those designated or approved by the society. In each case the arrangement was in the form "If the society does this (supplies the service or offers to supply the service) then you will (must) do that (acquire services from a nominated insurer or acquire goods from nominated service stations)". In each case the requirement can be said to be a condition which has attributes of compulsion and futurity. In each case persons competing with the nominated insurer or the nominated service station were affected adversely since the person upon whom the obligation was imposed was not free to acquire services or goods from them.
In the present case, the alleged condition or obligation has neither of the attributes of compulsion or futurity. Persons competing with Alliance are not affected adversely in the requisite sense. A member of the credit union desirous of acquiring travel services is free to deal with any person engaging in the travel agency business. He is not required to perform a series of acts over an extended period. He is not required by a condition or obligation to acquire the services of Alliance and Alliance only. If he does acquire the services of Alliance he need not disclose his membership of the credit union. If he does acquire the services of Alliance and discloses that he is a member of the credit union, then upon him paying the full costs of the travel services, and upon him entering on his travels, Alliance is required under its arrangement with the credit union to make a commission rebate to the credit union and the credit union then supplies its services to the member. This arrangement is in the form: "If you do that we will (must) do this." No condition in the nature of an obligation is imposed upon the person dealing with the corporation. At no time is that person under any obligation to perform or observe the alleged condition. Any obligation that may arise is imposed upon the corporation. This conduct does not come within the conduct described by s. 47(6) of the [TPA]. It is not to be analysed in the same form as in the society cases.
61 The ACCC submitted that Northrop J should not be taken as having introduced a requirement that an element of compulsion must be shown to have been imposed on the consumer of the third line forcing obligation. Instead, the ACCC submitted the requirement was no more than that the condition must be one which imposed on the consumer the practical requirement (even if not legally enforceable) to contract with a third line forcing beneficiary. This latter formulation was, the ACCC submitted, consistent with the decision of Ryan J in Stationers Supply Pty Ltd v Victorian Authorised Newsagents Association Limited (1993) 44 FCR 35 at 61 in which he stated that:
Section 47 prohibits exclusive dealing. The question raised by the present application in the context of s 47(6) may be briefly stated. Has Newspower Victoria supplied promotional services to advertising members on the condition that those newsagents will purchase goods of a particular kind or description from VNS? The applicant identifies the goods as "promotional goods" or alternatively "general newsagent supplies". The two essential elements of the conduct struck at by s 47(6) are indicated by the phrases "on the condition that" and "will acquire goods or services". In SWB Family Credit Union Ltd v Parramatta Tourist Services Pty Ltd (1980) 48 FLR 445 the meaning of the words "will acquire" were considered by a Full Court of this Court. In the course of his judgment Northrop J observed at 381:
"It does not matter whether the condition is legally binding or not (see s. 47(13)(a) of the TPA) but, in my opinion, the condition must have some attributes of compulsion and futurity. This can be expressed in the form: "If we do this, you will [must] do that." A condition in the nature of an obligation must be imposed upon the person dealing with the corporation. The condition to be complied with by that person must result from something done or to be done by the corporation imposing the condition."
With one qualification, I respectfully agree with what was there said by his Honour. It is not, in my view, necessary that the supplying corporation impose the condition. The condition may be attached to the supply at the instigation of either party or, indeed, a third party; the essential requirement is the obligation on the recipient of the goods or services to acquire goods or services of a particular kind or description from another: see Re Ku-ring-gai Co-operative Building Society (No.12) Ltd (1978) 36 FLR 134 at 167 per Deane J. The applicant must, in my view, establish an element of compulsion, not necessarily one that is legally enforceable, but one which goes beyond creating a mere hope or expectation in the person for whose benefit the condition has been attached.
(Emphasis added, some citations abridged).
62 The ACCC contended that as a result of the development in the case law, the "so called compulsion" element need only rise higher than mere hope or expectation. I reject that contention. In my view, it not only ignores the words of s 47 (including ss 47(6) and (13)) but assumes (incorrectly) that all commercial arrangements must somehow fit into or match those which have gone before. They do not.
63 The starting point must be the words of the statute. Under s 47(6), a corporation engages in the practice of exclusive dealing if the corporation:
(a) supplies, or offers to supply, goods or services;
…
on the condition that the person to whom the corporation supplies … the goods or services … will acquire goods or services of a particular kind or description directly or indirectly from another person … .
(Emphasis added).
64 Whether arrangements between a supplier and a purchaser contravene s 47(6) are tested against the words of the statute. As the emphasised words make clear, there is an essential element - supply of goods or services to a purchaser "on the condition" that the purchaser will acquire goods or services of a particular kind or description from another. So for example, in SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516 at 527 (para [33]), Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ, in considering s 4L of the TPA (dealing with the question of severability) in the context of third line forcing, stated:
[T]he making of the loan contract … contravened the [TPA] by reason of the inclusion of the provision in the loan contract requiring AFS USA to direct certain work to the corporations that the lender directed. Making the contract with that condition constituted engaging in the practice of exclusive dealing. It was the inclusion of the condition obliging AFS USA to direct its work in that way that brought the lender's supply of services within s 47(6).
65 Of course, the "condition" need not be legally enforceable or direct (see s 47(13)(a)) and the imposition of the "condition" may, for example, be a conclusion the Court inferentially draws from "the entire factual matrix": Australian Competition & Consumer Commission v IMB Group Pty Ltd (ACN 050 411 946) (in liq) [2002] FCA 402 at [79]. It is therefore unsurprising that Courts have rejected the contention that infringement of s 47(6) of the TPA was determined by whether or not the supplier offered to enter into a single packaged contract with the purchaser or whether the arrangements involved the purchaser entering into separate contracts with the tying supplier and the tied supplier: IMB Group [2002] FCA 402 at [79], [84] and [95]; Castlemaine Tooheys Ltd v Williams & Hodgson Transport Pty Ltd (1986) 162 CLR 395 at 403; The Paul Dainty Corporation Pty Ltd v The National Tennis Centre Trust (1990) 22 FCR 495 at 515.
66 Whether in the present case the "the entire factual matrix" establishes the supply of goods or services to a purchaser "on the condition" that the purchaser acquire goods from another is an issue to which I shall now turn.