Is selling at below cost a necessary element of s 46?
24 For the purposes of the summary judgment application only, Garmin acknowledged that the market as alleged by B&K existed, and it had "a substantial degree of power" in that market. The only question which remained was whether it had engaged in conduct that had the purpose of, or was likely to have the effect of, substantially lessening competition. Garmin submitted that, in shortened terms, the question was whether Garmin had engaged in what was referred to as "predatory conduct".
25 Ms Higgins SC for Garmin placed substantial foundation upon the decision of the High Court in Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374. In that matter the ACCC had alleged that Boral Besser Masonry (Boral) had reduced the price at which it supplied and sold concrete products in Melbourne to levels which were at or below its cost of manufacturing and supplying those products by increasing its production capacity at one of its plants. That conduct was identified by the ACCC as taking advantage of substantial market power for the purpose of eliminating or damaging a competitor and preventing entry into the identified market. The ACCC had submitted that Boral's supply of its products at below "avoidable costs" established, to some degree, that Boral had taken advantage of its substantial degree of power in the market. At first instance it was determined that the selling of product by Boral at below avoidable cost was a rational business decision in the prevailing market conditions, despite the fact that it continued for a prolonged period. That being so, the pricing behaviour and expansion of production capacity was found not to amount to taking advantage of market power. Rather, it was found to be a rational response to the conditions of intense competition. That decision was overturned in the Full Court (Beaumont, Merkel and Finkelstein JJ), which found that Boral had contravened s 46.
26 The majority of the High Court upheld Boral's appeal. The primary ground was that Boral did not have a substantial degree of power in the relevant market as the ACCC had alleged. There was strong competition in the market and low barriers to entry, which had the consequence that it did not have the power to behave independently of competition or of competitive forces.
27 Despite the first determination that Boral did not have a substantial market power, the members of the Court also considered whether the conduct amounted to a misuse of market power and, in particular, whether predatory pricing was involved.
28 Garmin's main argument on the s 46 case was that B&K's reformulated case could not succeed as a matter of law. B&K had abandoned its allegation that Garmin had sold its products at below cost price and adopted an allegation that Garmin had reduced its price to a level below which B&K might acquire them from suppliers outside of Australia. From that, the two main arguments emerged. The first was that the effect of B&K's complaint was that the market was being made more competitive, and all that was occurring as a result of Garmin's conduct was that B&K, as a competitor, was suffering even though the consumers benefited as a result. It submitted that the relief sought by B&K did not seek to protect competition, but to protect one competitor. It was also said that if this relief were allowed, it would cause prices to increase such that the conduct cannot amount to a substantial lessening of competition, as competition is, so it was submitted, a "mechanism" for discovering and enforcing the supply of goods and services in "the cheapest possible way": Re Queensland Co-operative Milling Association Ltd (1976) 25 FLR 169, 187-188. The second argument was that "a substantial lessening of competition requires a meaningful or relevant adverse impact on the competitive process, which plainly cannot be constituted by competitive, above-cost pricing."
29 The submission that if the effect of the cessation of the alleged contravening conduct is that prices for the commodity in question will increase then the conduct cannot be a breach of s 46 because it is the antithesis of competition cannot be accepted. Were it to be so, predatory pricing would be permissible under the CCA, and that is obviously not the case. If a business with substantial market power utilises it for the purposes of substantially lessening competition by engaging in below cost pricing, the mere fact that the cessation of that conduct will cause prices to increase does not immunise the conduct. Of course, if the analysis was between the status quo ante and the consequence of preventing a continuance of contravening conduct, different considerations would apply. That, however, is not asserted to be the case here and nor is it apparent that such would be the case.
30 It was also submitted that the relief which would be granted to B&K if it succeeded on its allegation in paragraph 18 of the proposed Amended Statement of Claim would be, "in effect, [an] order that Garmin must in the future increase its prices to at least a level of B&K's cost of acquisition", which would allow them to compete. It is said that this defeats the objects of the CCA because it reduces competition and causes prices to increase. It was also submitted that the relief would require Garmin to constantly inquire of B&K as to the price for which Garmin products could be acquired by it and to set its prices accordingly. That, however, is to set up something of a "straw man" of an argument. The relief sought by B&K in relation to the s 46 claim is not to require Garmin to sell at specific prices in the future. It is for damages for loss caused by contravening conduct. Even if the remediation of the alleged contravention is in practical terms similar to that identified, it may not be that the alteration to Garmin's pricing conduct would necessarily require it to sell its products at the price at which they can be acquired from overseas suppliers. Whether a price adjustment of that nature is required, and to what extent, is not possible to determine at this point in the litigation. No doubt it might be a matter which might be properly explored at trial but, at present, it is not an issue on which any definitive determination might be made.
31 However, Garmin reverted to its principal submission that if its pricing conduct is not "below-cost pricing" then, on its face, it does nothing to offend the CCA (ts18(12-14)). It was submitted that "if you're not pricing below your own cost, then on its face, that's competition, unless there's anything to suggest otherwise". In support of this main argument, Garmin relied heavily on the decision in Boral. Special emphasis was placed upon the joint judgment of Gaudron, Gummow and Hayne JJ for the propositions (at [160]) that Part IV of the CCA was concerned with the protection of competition and not consumers; that an act by one competitor to another, even with pure malice, does not, without more, contravene its provisions; and that:
it is in the interest of competition to permit firms with substantial degrees of power in the market (or, in the United States, a dominant position) to engage in vigorous price competition and that it would be a perverse result to render illegal the cutting of prices in order to maintain or increase market share.
32 With respect to predatory pricing being generally described as the practice of supplying goods below "avoidable costs", Garmin relied upon paragraph [162] of their Honours' reasons to the following effect:
In the modern predatory pricing cases, reference is made by the United States Supreme Court to pricing "above predatory levels", and to "competition on the merits"; the court has said that low prices benefit consumers and do not threaten competition "so long as they are above predatory levels". Again, in Brooke Group, the Supreme Court stated:
As a general rule, the exclusionary effect of prices above a relevant measure of cost either reflects the lower cost structure of the alleged predator, and so represents competition on the merits, or is beyond the practical ability of a judicial tribunal to control without courting intolerable risks of chilling legitimate price cutting.
Further, in Brooke Group, it was determined that price-cutting would be "predatory" if (a) the complainant seeking recovery proved that the prices complained of were below "an appropriate measure of its rival's costs" and (b) the competitor had a reasonable prospect (under the Robinson-Patman Act) or a dangerous probability (under the Sherman Act) of recovering the losses suffered by later monopoly profits, recoupment being the ultimate object of an unlawful predatory pricing scheme.
(footnotes omitted).
33 In reliance on that paragraph, it was submitted that as paragraph 18 of the proposed Amended Statement of Claim does not allege that Garmin made its product available at below cost price, the alleged price cutting was not predatory. Ms Higgins SC submitted:
It's not said to be below Garmin's own costs. It's not predatory. There is clear High Court authority that price cutting that is not predatory is competition on the merits. It is not a misuse of market power. It is competition at work, and it is perverse to seek to utilise the Act to prevent that.
34 Ms Higgins SC also relied upon the reasons of McHugh J in Boral, and particularly at paragraphs [268] to [273] and [280]. In that part of his Honour's reasons he considered the concept of "predatory pricing" and how it fitted within the terms of s 46. He concluded that the structure of s 46 is not well suited for dealing with claims of predatory pricing. He observed (at [270]) that:
On the other hand, on the ACCC's arguments, pricing below marginal or average variable cost with the intention of taking business from competitors is caught by the section even though it makes economic and business sense to do so.
And later at [272] - [273]:
[272] Richard A Posner, a judge and former Chief Judge of the United States Court of Appeals for the Seventh Circuit, has said that there are two conventional approaches to the identification of "predatory pricing", one through intent and the other through costs, neither of which is adequate. To forbid pricing targeted at weakening or destroying a competitor forbids too much. That is because even if a seller wants to remove a competitor from the market, there is no rational antitrust objection to such conduct if the seller is able to undersell by reason of its lower costs. But too little may be forbidden also because intent may be impossible to prove and inadvertent below-cost pricing may be as damaging as intentional below-cost pricing. Posner defined "predatory pricing" as "pricing at a level calculated to exclude from the market an equally or more efficient competitor".
[273] In my view, what is required is not a bright line rule about costs but a more sophisticated analysis of the firm, its conduct, the firm's competitors, and the structure of the market not only at the time in which the firm has engaged in conduct allegedly in breach of the Act but also before and after that conduct.
35 There is much force in the above dicta of McHugh J and his subsequent comments at [280] especially in relation to the difficulties inherent in the precise delineation of the concept of predatory pricing and its functional inconsistencies with s 46. That said, whilst it is not entirely useful in the disposition of the matter before the Court, the statements in paragraph [273] tend to suggest that the question is substantially more complex than merely identifying that a party is supplying goods at prices below their avoidable costs.
36 A significant element of Garmin's submissions on this point was the assertion that the object of the anti-competition provisions is to protect the interests of consumers and not competitors. Reference was made to Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177, 191 where Mason CJ and Wilson J held:
But the object of s 46 is to protect the interests of consumers, the operation of the section being predicated on the assumption that competition is a means to that end. Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away. Competitors almost always try to "injure" each other in this way. This competition has never been a tort (see Keeble v Hickeringill (1809) 11 East 574; 103 ER 1127) and these injuries are the inevitable consequence of the competition s 46 is designed to foster. In fact, the purpose provisions in s 46(1) are cast in such a way as to prohibit conduct designed to threaten that competition - for example, s 46(1)(c) prohibits a firm with a substantial degree of market power from using that power to deter or prevent a rival from competing in a market. The question is simply whether a firm with a substantial degree of market power has used that power for a purpose proscribed in the section, thereby undermining competition, and the addition of a hostile intent inquiry would be superfluous and confusing.
37 The following passage from the reasons of Toohey J at 213 was also relied upon:
These distinctions have been drawn because Pt IV of the Act, which is designed to promote and preserve competition, must confront the problem caused by a competitor who is so successful as to eliminate rivals and thus defeat the legislative aim of promoting competition. If success is due to no more than superior skill and efficiency, little criticism can be made of the conduct involved. Not so, if there has been unfair business practice. And so constraints have been placed on competition. The nature of those constraints has been influenced by this distinction between predatory conduct and conventional business practice.
38 From the above, it was submitted that it was quite clear that a claim based on s 46 could not be maintained because it relied upon competition on the merits rather than pricing below cost, and that was not apt to lessen competition. In this respect, Garmin was prepared to put its application for summary judgment on the s 46 case solely on the basis that the conduct alleged in paragraph 18 of the proposed Amended Statement of Claim could not disclose a cause of action under that section (ts 23(43 - 45)).
39 Mr Martin QC for B&K submitted that the decision in Boral did not support the proposition that, where price reduction activity is relied upon as the relevant contravening conduct, a contravention of s 46 can only exist if the conduct amounts to below cost pricing. In support of that, he relied upon the observations of Gleeson CJ and Callinan J in Boral at [125] - [129]. In reply, Ms Higgins SC submitted that this passage supported rather than diminished Garmin's argument to the effect that even below cost supplying may well not amount to a contravention of s 46.
40 It is true that in their joint reasons Gleeson CJ and Callinan J accepted that Boral's actions in keeping prices down in an attempt to "hang on" in the market in the expectation that other suppliers would exit was a rational commercial response to a severe, albeit temporary, difficulty. That, their Honours said (at [44]), was "different from forcing prices down in order to damage or eliminate some competitors".
41 Garmin submitted that paragraphs [125] - [129] of Gleeson CJ and Callinan J's reasons support its proposition that, in order for there to be predatory pricing, the supplier must sell its products below their "avoidable cost" or "variable cost", and that even if pricing at that level occurs, a firm may well not be engaging in "predatory pricing". Whilst the latter proposition can be derived from the paragraphs cited, the former does not. The observations of Gleeson CJ and Callinan J in [125] - [129] occurred in the course of a discussion about the pricing behaviour of businesses in competitive markets. Their Honours recognised that price cutting will always damage competitors, and that is part of successful competition, and that whilst damaging competitors is conduct which s 46 proscribes, that prohibition is only in the context of taking advantage of a substantial market power. The expressions "predatory pricing" or "recoupment" were identified as not being terms used in s 46 and, whilst they may be useful tools in any analysis, care needs to be exercised in their importation from different legislative contexts (at [124]). In that context, it needs to be recognised that in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177, the High Court had rejected the proposition that "the concept of 'taking advantage' in s 46 involves some form of predatory behaviour or abuse of power going beyond that which follows from the terms of the statute itself" (at [124]-[125]). In Boral, Gleeson CJ and Callinan J emphasised (at [128]) there was nothing in s 46 which required a distinction to be drawn between pricing below or above "variable" or "avoidable" cost. Indeed, in the case before the Court it was apparent that the below cost pricing by Boral was the consequence of strong competition in difficult economic times. That being so, the mere supply of goods at below "variable" or "avoidable" cost did not necessarily mean that the supplier was engaging in conduct in contravention of s 46 or in predatory pricing. However, their Honours did not exclude the obverse, being that it was not necessary to establish below cost pricing for conduct to fall within the scope of s 46.
42 There is force in Garmin's submission that, where the only activity engaged in by a market participant is price discounting, the relevant conduct may not necessarily contravene s 46 unless it involved the supplying of goods at below "variable" or "avoidable" cost. There is also force in the submission that such activity alone will not constitute a contravention. However, such propositions do not clearly emerge from the decision in Boral. The circumstances in that case involved price discounting by Boral in the circumstances of a highly competitive market in an industry which was experiencing difficult economic times. The reasons for judgment of all members of the Court stressed the relevance of the economic conditions and particular circumstances in which the impugned conduct occurred in determining the propriety of the conduct. At paragraph [129], Gleeson CJ and Callinan J observed:
If one begins with the fact that a firm is a monopolist, or is in a controlling or dominant position in a market, then, by hypothesis, such a firm has an ability to raise prices without fear of losing business. If such a firm reduces its prices, especially if it reduces them below variable cost, then it may be easy to attribute to the firm an anti-competitive objective, and to characterise its behaviour as predatory. But if one finds a firm that is operating in an intensely competitive environment, and a close examination of its pricing behaviour shows that it is responding to competitive pressure, then its conduct will bear a different character. That is the present case.
43 The second sentence in that paragraph leaves open the possibility that contravening conduct might occur even when the price discounting activity does not amount to supplying products at below their variable cost. It is true that the observations in paragraphs [160] - [162] of the reasons of Gaudron, Gummow, and Hayne JJ tend to suggest that predatory pricing occurs where goods are supplied below their variable cost. However, even there, the principles are not stated in a way which would exclude the possibility that price discounting in some circumstances may be predatory even though the discounting was not to below cost levels. That being so, it is not possible, on an application for summary judgment, to accept the principal submission advanced by Garmin.
44 Moreover, a significant difficulty is that, even if it is the case that, in all circumstances, in order for price discounting to amount to predatory pricing it must be below avoidable cost levels that is not conclusive of the operation of s 46. As McHugh J in Boral emphasised in his reasons, the concept of predatory pricing does not fit well within the wording of s 46. That was a view also reflected in the reasons of the other members of the Court. At [125], Gleeson CJ and Callinan J rejected the proposition that the expression "taking advantage" in s 46 involves some form of predatory behaviour or abuse of power going beyond the words used in the section. As was submitted by B&K, the terms of s 46 do not, in themselves, suggest that the section can only be contravened if the impugned pricing behaviour involves reducing prices below avoidable cost. The question to be determined is whether a business with a substantial degree of market power has used that power for a purpose proscribed in s 46.
45 That being so, even if one were to accept Garmin's principal submission, it would be insufficient to warrant the granting of summary relief under s 31A of the FCA.
46 To some extent, Garmin's principal submission was founded on the assumption that B&K's case under s 46 was based only on the allegation of the price reductions which Garmin introduced in November 2017. An analysis of B&K's submissions reveals that is not so. The plea at paragraph 32 of the Statement of Claim shows that one of the claims under s 46, in part, relied upon Garmin's failure to enter into a further distribution agreement with B&K, its refusal to supply goods to B&K, and its determination to supply them to retailers and retail customers despite B&K having been the largest supplier of Garmin products in Australia for some time. Whilst there exists a further claim pursuant to s 46 in paragraphs 34 and 35 of the pleading which appears to be reliant on Garmin's price discounting, those allegations need to be read in the context of the pleading as a whole, including the allegations in paragraphs 23 to 31, which raise as important issues the market conditions and particular circumstances of the parties. In his address to the Court, Mr Martin QC relied upon a number of circumstantial matters as supporting the allegation that the price discounting conduct was designed to injure B&K and substantially lessen competition in the market. He referred to the background of the erstwhile business relationship between the parties and Garmin's attempts to require B&K to transfer customers to it, which led to earlier proceedings in this Court, a settlement and extension of the exclusive dealership, a reduction in prices by Garmin in 2017 to a deliberate amount which effectively undercut B&K's margins, and the existence of a buoyant market for Garmin's products in which it had overwhelming market share and no economic justification for the price reduction. Mr Martin QC emphasised that from 2014 to 2017 there had been a number of new entrants into market for GPS-enhanced watches and bike computers, and that neither the entry of each of those entities or their combined effect had caused Garmin to decrease its prices in response.
47 In the result, Garmin's application in relation to s 46 fails. It cannot be concluded, with the confidence necessary to grant relief under s 31A of the FCA, that B&K has no reasonable prospects of succeeding at trial on this cause of action. Its action is not based solely on the price cutting activities of Garmin. It is based upon a range of conduct by Garmin, of which price cutting is a dominant integer, which support a more than arguable case that Garmin used its substantial market power for the purpose of substantially reducing competition or the use of that market power was likely to have that effect. To the extent that an alternative claim is based upon Garmin's price cutting activities alone, it is not clear from the decision in Boral that such conduct can only contravene s 46 where the supply of goods is at a price below the supplier's avoidable cost of production. The indication in the reasons for judgment in Boral suggests that is not the case. The mere fact that the conduct might not amount to predatory pricing is not conclusive of the absence of a failure to comply with s 46.
48 This conclusion does not necessitate any accompanying determination that B&K's case is strong. Indeed, there is much force in the submissions advanced by Garmin that even if its conduct was entered into for the purposes of removing B&K from the market, it does not follow that any contravention of s 46 has occurred. Nevertheless, the questions of the intent and rationale for the price reduction by Garmin require the trial process to provide an answer.
49 Given the manner in which Garmin was prepared to advance its submissions in relation to the s 46 cause of action, there is no need to consider the other grounds relied upon by it in its written submissions. That said, it is appropriate to note that its invitation for the Court to determine that there was insufficient evidence to establish an effect of a substantial lessening of competition would have involved the Court in an element of speculation as to what will be the state of the evidence at trial. Whilst it can be accepted that, in accordance with the directions made in the action to date, B&K's evidence on this matter ought to have been filed already, the possibility of supplementary affidavits cannot be discounted. Garmin's submissions on this point were also founded upon submissions to the effect that the evidence presently filed is not admissible or not wholly admissible. Submissions of this type may advance an argument to the effect that B&K have not presently adduced sufficient evidence to establish its causes of action. However, the question on this application is whether B&K has reasonable prospects of establishing its claims at trial: RB Lease Pty Ltd v Heron [2013] QCA 181, [14].
50 Garmin submitted that the evidence of Mr Brkic, a director of B&K, to the effect that his company was the only significant competitor to Garmin, is of insufficient weight to sustain that assertion. Why that is so is not immediately apparent if, as seems to be the case, that is the only evidence which has presently been adduced on the topic. It may be relatively slight evidence, but if it is the only evidence, the Court may act on it.
51 It was also submitted that B&K had presently failed to file sufficient evidence to establish that, in the absence of the alleged contravening conduct, it would be able to secure a reliable source of Garmin products from overseas sources at prices which would permit it to compete with Garmin. In support of that submission, it relied on the current price at which Garmin sells to retailers or wholesalers and the current price at which B&K might obtain stock from overseas. It follows, so the argument goes, that B&K will not be able to establish that, absent the conduct of Garmin, it could have operated as a competitive wholesaler. At this point there appears to be a slight disconnect between the submissions made by the parties. B&K's submissions acknowledge that it is not able to compete with Garmin by acquiring stock from overseas. Indeed, it relied upon Garmin's present pricing regime as evidence of Garmin's market power and of its acts designed to force B&K out of the market. B&K's submission is that whilst the anti-competitive conduct continued it is not able to compete in the market, and will be forced out if the conduct continues.
52 It can be accepted that B&K's evidence as to what the position would be if the allegedly contravening conduct ceased is somewhat sparse. That said, its written submissions proceed on the basis that it was able to compete prior to Garmin's price reductions. It might be supposed, in the absence of any other evidence, that the Court will be asked to consider the matter on the basis that Garmin will return its pricing of the relevant goods to the pre-conduct levels. There is a level of complexity in this issue which perhaps renders it inappropriate for determination on a summary judgment application. Nevertheless, it does not appear clear that B&K has no reasonable prospects of establishing that the counterfactual position would be it being able to compete in the market.
53 Although it is not an issue which is necessary to decide on this application, one might question the proposition that it is essential for an applicant in the position of B&K to establish the existence of a counterfactual from which past or future damage is ascertainable. It may well be that the CCA operates in a manner that an applicant is entitled to recover damage caused by a contravention of s 46 even though, had the respondent acted differently and in compliance with the CCA, it might have legitimately inflicted the same losses on the applicant.