Federal Court of Australia|1991-12-13|Before: Mr J

Re Trade Practices Commission v Penfolds Wines Pty Ltd; James Llewellyn Williams and George Keys [1991] FCA 631; (1992) 14 Atpr 41-163 (1991) 104 ALR 601 (13 December 1991)

And: PENFOLDS WINES PTY LTD; JAMES LLEWELLYN WILLIAMS and GEORGE KEYS

Trade Practices - resale price maintenance - supplier of wines to wholesalers and retailers - wholesaler buying excess stock at superseded prices - undercutting supplier - pressure from supplier to increase prices - whether specific price below which wholesaler should not sell - trading terms offered by supplier consistent with some continued undercutting - no resale price maintenance - conclusion fairly open upon the evidence - specified price - approximation - criteria for determining tolerance which amounts to mere approximation - relevance of competitive significance of variance.

BP Australia Ltd v. Trade Practices Commission (1986) 12 FCR 118

Trade Practices Commission v. Bata Shoe Co. of Australia Pty Ltd (No.2) [1980] FCA 18; (1979) 44 FLR 149

Peter Williamson Pty Ltd v. Capitol Motors Pty Ltd (1982) 61 FLR 257

Counsel for the Appellant: Mr D.R. Williams QC and Dr C.J. Carr

Solicitors for the Appellant: Australian Government Solicitor

Counsel for the Respondents: Mr J.D. Heydon QC and Mr A.J.L. Bannon

Solicitors for the Respondents: Blake Dawson Waldron

NOTE: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.

Penfolds Wines Pty Ltd ("Penfolds") supplies wines to retailers throughout Australia. It also supplies wholesalers. One of these is Foodland Associated Limited ("FAL"), which is a major wholesale supplier of wines in Western Australia. FAL is in this sense part of a vertical distribution chain of Penfolds' products but also competes with Penfolds at the wholesale sales level. Penfolds sometimes changes its prices to wholesalers and retailers from one month to the next. In 1988 it was FAL's practice when it became aware that such a change was imminent, to buy excess stocks of products which it could then resell to retailers in the following month for a price less than the new Penfolds' price to retailers. In June, July and August 1988, Penfolds threatened to withdraw the benefits of certain allowances and discounts for FAL unless it brought its prices "into line" with those charged by Penfolds. The allowances and discounts were subsequently withdrawn. This conduct was said by the Trade Practices Commission to constitute resale price maintenance in contravention of s.48 of the Trade Practices Act 1974. An application was instituted in this Court by the Commission on 19 October 1989 claiming against Penfolds and two of its officers pecuniary penalties and injunctive relief in respect of the alleged contraventions.

2. The application came on for hearing before a Judge of this Court on 30 July 1990. After a trial extending over five days, his Honour reserved his decision and on 21 December 1990 dismissed the application and ordered that the Commission pay Penfolds' costs. The Commission now appeals against that dismissal. The respondents filed a notice of contention seeking to support the orders made on other grounds which they said were erroneously decided against them. That notice was abandoned at the hearing of the appeal.

3. On the appeal, it was contended for the Commission among other things, that his Honour had erred in holding that because Penfolds was prepared to tolerate a deviation by FAL from its own wholesale prices, it had not specified a resale price and therefore was not guilty of resale price maintenance. Penfolds argued that the Commission had only pleaded and advanced its case upon the basis that the price had been specified with precision. No "approximation" case had been run. In the light of these contentions and having regard to the other submissions made in the case, it is desirable to refer to the amended statement of claim in some detail.

4. It was not in issue on the pleadings that Penfolds, as alleged in the amended statement of claim, carries on business as a supplier throughout Australia of wines and at all material times supplied wines to retailers at prices set out in lists called "direct deal" price lists (para.2). Mr James Williams was employed by the company as its Director of Trading Operations and Mr George Keys as its State Manager for Western Australia responsible to and subject to instructions from Mr Williams (paras 3 and 4). FAL incorporated in Western Australia carries on business as a wholesale supplier of wine (para.5). At the time relevant to these proceedings, Wayne Hastings Carew-Reid was its Divisional Manager - Liquor and Norman Bennett was its Liquor Buyer (paras. 6 and 7).

5. The Commission alleged first that on 29 June 1988 Keys made statements to Carew-Reid, the general tenor of which was that FAL should resell wines supplied to it by Penfolds at not less than the wholesale price being charged by Penfolds from month to month. If this were not done certain allowances would not be passed on to FAL. The precise statements pleaded were set out in para.8(a) in the following terms:

"8. On or about 29 June 1988 Keys on behalf of

Penfolds attended upon Carew-Reid at the premises of

FAL at 55 Hector Street, Osborne Park and-

(a) said to Carew-Reid to the effect that

(sic)-

(i) Penfolds has a problem when FAL does not

increase its price during the same month

as Penfolds does for wines supplied by

Penfolds to FAL.

(ii) The problem is that in those circumstances

wines supplied by Penfolds to FAL are

purchased by retailers from FAL and that

is not what Penfolds wants.

(iii) We must have control on our

own price point in the market place. If

you keep holding prices down for the month

then we lose that control.

(iv) Of course FAL and Penfolds would have to

increase prices at the same time otherwise

the system won't work.

(v) We must agree on you moving your book

prices up in line with our direct deal

prices for August, otherwise we cannot

pass on these allowances.

(vi) No, we don't want you to be cheaper than

us, you will have to sell at the same

price as we do, otherwise the system won't

work.

(vii) No, you cannot be below Penfolds' price."

It was common ground that at the same time Keys handed Carew-Reid a letter from Penfolds dated 23 June 1988 together with four documents relating to direct deal price lists for August 1988, promotional and advertising allowances, promotional trading terms and rebates applicable to August 1988 (para.8(b)).

6. In a second group of conversations a month later on 28 July 1988 pleaded at para.10, Keys, on behalf of Penfolds, was alleged to have:

(a) informed Bennett by telephone to the

effect that - as FAL had not increased its

prices for wines supplied by Penfolds to

FAL, Penfolds has cancelled all

promotional allowances and quantity

rebates to FAL.

(b) informed Carew-Reid and Bennett by a

facsimile transmission of 28 July 1988 to

the effect that - Penfolds has withdrawn

from FAL until further notice all

promotional allowances, advertising

allowances and quantity rebates as

outlined in Penfolds' August deal sheets.

A third conversation set out in para.12 was said to have taken place on 2 August 1988 when Keys, on behalf of Penfolds, informed Carew-Reid by telephone that:

"(a) The reason Penfolds has withdrawn its

rebates to FAL is because of FAL's low

prices for August 1988 for wines supplied

by Penfolds to FAL for August 1988.

(b) You are undermining our moves to increase

prices.

(c) I can't stand back and let you sell our

casks at these low prices at our expense.

You cannot undermine us.

(d) To rectify the situation you must work out

your pricing so it aligns with ours, that

is, to use your normal mark up formula

based on our August price submission.

(e) If FAL increases its prices in accordance

with Penfolds' August direct deal prices,

Penfolds will reinstate the rebates and

allowances."

By doing the things set out in paras. 8, 10 and 12 of the Amended Statement of Claim, Keys, on behalf of Penfolds, was said to have intended to induce FAL not to advertise, offer for sale or sell any wines which Penfolds had supplied to FAL that were listed in the direct deal price lists for August 1988 at prices less than the direct deal prices for August 1988 (paras. 9, 11 and 13).

7. In early August 1988, Keys was said to have informed Williams by a memorandum dated 2 August 1988 of each of the matters pleaded in paras. 10, 11, 12 and 13 (para.14(a)). On receipt of that memorandum Williams, it was said, assented to the withdrawal from FAL of all promotional allowances and quantity rebates (para.14(b)).

8. Communications relating to the September prices were said to have taken place on 11 and 12 August between Penfolds' employees, Christine Robertson and Patrick Cullen on the one hand, acting on instructions from Keys, and Bennett and Carew-Reid of FAL on the other. Robertson was said to have informed Bennett that FAL would be granted September rebates on wines supplied by Penfolds provided that FAL complied with Penfolds' September prices (para.15). By so instructing Robertson, Keys intended to induce FAL not to advertise, offer for sale or sell, any wines which Penfolds had supplied or might supply to FAL that were listed in the direct deal price lists for September 1988 at prices less than the direct deal price for September 1988 (para.16).

9. Cullen, it was alleged, told Carew-Reid that FAL must use Penfolds' September price structure and that its prices for wines supplied by Penfolds must not be below the direct deal prices for those wines for September. Quantity buy rebates and promotional allowances would only be available if FAL did not cut the prices of Penfolds' products (para.17). By instructing Cullen to make these statements, Keys was said to have intended on behalf of Penfolds to induce FAL not to advertise, offer for sale or sell any wine which Penfolds had supplied or might supply to FAL that was listed in the direct deal price lists for September 1988 at prices less than the direct deal price lists for September 1988 (para.18).

10. By reason of the matters set out in paras. 8, 9, 10, 11, 12 and 13 Penfolds was said to have engaged in resale price maintenance as defined in ss.96(3)(b), 96(3)(c) and 96(3)(f) of the Act. Williams and Keys were said to share accessorial liability for these contraventions by reason of their knowing involvement in them.

"48. A corporation or other person shall not engage in

the practice of resale price maintenance."

Section 96 of the Act sets out acts which constitute resale price maintenance and, in the relevant parts, provides:

"96(1) Subject to this Part, a corporation (in this

section called "the supplier") engages in the practice

of resale price maintenance if that corporation does

an act referred to in any of the paragraphs of sub-section

(3).

.

.

.

(3) The acts referred to in sub-sections (1) and

(2) are the following:

.

.

.

(b) the supplier inducing, or attempting to

induce, a second person not to sell, at a

price less than a price specified by the

supplier, goods supplied to the second

person by the supplier or by a third

person who, directly or indirectly, has

obtained the goods from the supplier;

(c) the supplier entering into an agreement,

or offering to enter into an agreement,

for the supply of goods to a second

person, being an agreement one of the

terms of which is, or would be, that the

second person will not sell the goods at a

price less than a price specified, or that

would be specified, by the supplier;

.

.

.

(f) the supplier using, in relation to any

goods supplied, or that may be supplied,

by the supplier to a second person, a

statement of a price that is likely to be

understood by that person as the price

below which the goods are not to be sold.

.

.

.

(4) For the purposes of sub-s.(3) -

.

.

.

(c) where a formula is specified by or on

behalf of the supplier and a price may be

ascertained by calculation from, or by

reference to, that formula, that price

shall be deemed to have been specified by

the supplier;

(5) In sub-section (4), "formula" includes a set

form or method."

The term "price" is defined in s.4(1) to include "a charge of any description".

12. Before turning to the findings of the learned trial judge, some reference should be made to the kinds of allowances and rebates offered by Penfolds to FAL and other wholesalers and retailers with whom Penfolds dealt directly. These were conveniently summarised in a guide prepared by the Commission and handed up at the hearing of the appeal. What follows is based upon that guide and unless otherwise stated also reflects the findings made at trial. Trading terms offered by Penfolds to FAL and by FAL to its retailer customers are also referred to.

13. Penfolds' trading terms to FAL specified a wholesale price and certain allowances. The allowances for July were:

1. 6% Warehouse Allowance

This, according to Keys, was a volume discount

automatically deducted off invoice to FAL at time of

purchase. It was also available to retailers at 3% for

65 cases up to 128, and 6% for 128 cases. The trial

judge accepted that it was a credit allowed to

wholesalers and that an equivalent discount was allowed

to retailers although not separately identified on the

"direct deal" price sheets prepared by Penfolds for its

retailer customers.

2. Distribution Allowance

This was an allowance to FAL at the time of purchase

described by both Keys and Carew-Reid as compensation for

warehousing and distribution services. His Honour

accepted it as a credit to wholesalers. It was 2% on all

products other than casks and flagons for which it was

4%. There was no equivalent allowance for retailers who

purchased direct from Penfolds. His Honour found that

the net invoice price charged to wholesalers by Penfolds

was about 2% less than that charged to retailers when

retail display allowances and quantity buy rebates were

disregarded. In that sense the difference could be

accounted for by the distribution allowance.

3. Promotional Allowance

A flat "promotional allowance" so called, was deducted

off the invoice price for both wholesalers and retailers

with whom Penfolds dealt directly. The rationale for it

offered by Keys was the listing of the product in the

wholesalers' price books and the display of the product

in the retailers' stores. His Honour called it "a

standard promotional allowance credited against price".

4(a) Quantity Buy Rebate

This was a discount allowed by Penfolds to wholesalers.

The amount of the discount depended upon the number of

cases of a particular wine ordered. According to Keys,

wholesalers would claim the rebate according to their

monthly sales. FAL allowed these rebates to its retailer

customers and recouped the amount from Penfolds.

(b) Retail Display Allowance

Penfolds allowed a discount for quantity to retailers

also. It was called the retail display allowance, but

was identical to the quantity buy rebate given to

wholesalers. His Honour so held, but also found that a

retailer received a retail display allowance on more

selected products than a wholesaler received quantity buy

rebates. In respect of products for which it was able to

pass on its quantity buy rebates to retailers, FAL was in

that respect dealing with its customers on the same

footing as Penfolds dealt with its retailers.

5. Co-Operative Allowance

Penfolds offered to FAL and other wholesalers and

retailers an additional allowance known as a co-operative

allowance or co-operative advertising allowance if the

wholesaler or retailer undertook an advertising programme

in respect of specified Penfolds' products. It could be

claimed by FAL at the end of a trading month on proof of

advertising and volume of sales to franchise members.

FAL, as his Honour found, saw little advantage in this

allowance. It considered that the promotion of products

resulted in retailers ordering them directly from

Penfolds. In FAL's view, this allowance barely met the

cost of advertising.

6. Additional Promotional Allowance

This was an allowance offered to FAL by Penfolds in a

letter dated 23 June 1988 (Exhibit W). It was described

in the letter as follows:

"In an effort to increase turnover and promotional

activity through wholesalers we have modified our terms

to overcome pricing disparity for products on promotion.

We have introduced an additional promotional allowance to

be used in price calculations which is designed to bring

book prices in line with our direct deal sheets for

products on promotion only and return an acceptable

margin to wholesalers.

This allowance is claimable on the following conditions:

(1) It is put into price for products on promotion

only, i.e. Hallmark and Cheap Liquor (Pub Mart and

Woolworths) and is only available to these members and

not for general publication.

(2) Claims must be supported by an appropriate

printout clearly defining customer, amount purchased and

period of promotion.

The co-operative advertising allowance is to be

claimed the same way."

His Honour found that this proposition required FAL to

engage in promotional activity in respect of specified

Penfolds' lines to be able to claim the further rebate.

It was not payable on stock sold to retailers who were

not members of FAL's franchise groups.

14. The trading terms called "promotional trading terms" offered to FAL by Penfolds for July 1988 were set out in tabular form. Some selected entries show the layout of the proposed prices and establish a basis of comparison with prices in subsequent months.

PROMOTIONAL TRADING TERMS

JULY 1988

L E S S

Penfolds Wholesale 6% Promotional 2% Net 750ml Price Warehouse Allowance Distribution Invoice

Fortifieds 750 ml 23.74 1.42 1.00 0.43 20.89 Club Port 56.11 3.37 5.00 0.95 46.79 Ten Year Old Port 90.21 5.41 3.00 1.64 80.16

Wynns Table Wine Casks 5.20 0.31 0.95 0.16 3.78 Wynns Fortified Casks 6.14 0.37 0.75 0.20 4.82 These may be compared with the equivalent trading terms for August 1988.

PROMOTIONAL TRADING TERMS

AUGUST 1988

L E S S

Penfolds Wholesale 6% Promotional 2% Net 750ml Price Warehouse Allowance Distribution Invoice

Fortifieds 750ml 26.93 1.62 1.00 0.49 23.83 Club Port 56.11 3.37 5.00 0.95 46.79 Ten Year Old Port 93.56 5.61 - 1.76 86.19

Wynns Tablewine Casks 5.41 0.32 0.50 0.18 4.41 Wynns Fortified Casks 7.12 0.43 0.75 0.24 5.70

15. FAL would prepare a price book for its own retailer customers for each trading month. It placed its customers in categories designated by letters of the alphabet according to their average yearly purchases from FAL. Buyers in category A comprised those whose monthly average purchases over 12 months was $10,000 or more. Category B comprised those with monthly purchases between $5,000 and $9,999, Category C, $2,000 to $4,999, Category D, $1,000 to $1,999 and Category E, $0 to $999. The July book contained columns of figures setting out recommended retail prices, a percentage gross profit, the normal wholesale price and wholesale prices to each of the buyer categories. FAL's prices for 12 bottles of Penfolds Club Port and Penfolds Ten Year Old Port respectively for the period 26 June 1988 to 25 July 1988 were as follows:

Recd % Normal Cat Cat Cat Cat Cat Retail G/P Wholesale A B C D E 7.20 25 56.11 47.30 47.54 47.65 47.77 48.01 12.87 25 90.21 84.57 84.99 85.20 85.42 85.84 For the period 26 July 1988 to 25 August 1988 the same products were offered at the same prices, although the Penfolds' price of Ten Year Old Port to wholesalers had increased along with the prices of other products.

16. Penfolds' direct deal trading terms for its retailer customers in August 1988 were also set out in tabular form, the prices for Club Port and Ten Year Old Port being as follows:

PENFOLDS: DIRECT DEALS AUGUST 1988 Item W/Sale Qty.Buy Promotion Retail Net

($/case) Club Port 56.11 1 5.00 - 47.74 Ten Year Old Port 93.56 1 - - 87.95 On this basis, FAL was undercutting Penfolds on its normal wholesale price for Ten Year Old Port in August 1988.

17. Against this overview of the pricing systems adopted by FAL and Penfolds in their dealings with each other and their retailer customers, it is appropriate to turn to his Honour's findings and the criticisms of those findings made on behalf of the Commission.

The Trial Judge's Findings and the Appellant's Contentions

18. FAL was, as his Honour found, a major wholesaler of liquor products in Western Australia in 1988. It supplied some 55 liquor stores operating under the business name "Hallmark Cellars" pursuant to franchise arrangements with FAL. A further 30 stores used the name "Cheap Liquor" also on franchise from FAL. In addition it supplied, from time to time, all other retail liquor stores in Western Australia and a number of taverns and hotels in addition to licensed clubs and restaurants. Its principal wholesale competitor was Westel Co-Operative Ltd, which operated a franchise arrangement using the name "Pub Mart" in which a number of hotels and taverns participated. In June 1988, wine sales constituted about 48% of the value of FAL's total sales and Penfolds' products amounted to 10% to 11% of the value of those wine sales. Penfolds received about 30% of the value of its wine sales in Western Australia from sales to wholesalers and 70% from sales to retailers. Penfolds sales to FAL were about 30% of its sales to wholesalers each month.

19. Each month FAL would distribute to its retail customers a catalogue of products it could supply and the prices it would charge. Its wine prices were calculated on a 5% or 5.5% margin of profit on cost. Discounts were offered at various levels according to the value of monthly orders placed. These were related to the quantity buy rebates offered by Penfolds and other suppliers from time to time. FAL would claim payment of the rebates at the end of each month by supplying details of its sales of the relevant products for that month. The rebates were paid by Penfolds in a cash sum. FAL adopted as its trading period the calendar month beginning on the 26th day of each month. Penfolds would supply monthly prices and trading terms on that basis in the first two weeks of each month. FAL calculated its wholesale price and distributed its price book to retailers before the 26th day in each case.

20. Where Penfolds gave notice of an intention to increase prices, FAL was able to gain a competitive advantage by ordering excess stocks of the relevant product in the preceding month and using those stocks to trade at lower wholesale prices than Penfolds itself in the month or months following the introduction of the price increase. In July 1988 FAL offered what it called "Best Deal" prices on thirteen items which were lower than the best prices offered by Penfolds to retailers. This was only able to be done because FAL was selling stock purchased from Penfolds before July and at lower cost than July prices.

21. As outlined in the previous section, Penfolds calculated its prices to wholesalers and retailers upon a common price base with variable allowances. His Honour's findings in relation to the allowances need not be repeated here. Disregarding "retail display allowances" and "quantity buy rebates", his Honour observed that the net invoice price charged to wholesalers by Penfolds was about 2% less than the net invoice price to retailers. A margin of 5% of the net invoice price would make FAL's wholesale price to retailers non-competitive with Penfolds' direct deal price. But if the proposed additional promotional allowance were applied to the wholesale price of the promoted products for August with a 5% margin, the discounted price would have been less than that payable by retailers to purchase the same product direct from Penfolds.

22. His Honour referred at some length to the meeting and conversation between Keys and Carew-Reid on 29 June 1988. It was at this meeting that Keys handed over the letter of 23 June 1988 offering the additional promotional allowance, the substance of which was to reduce FAL's price on promoted lines to alleviate the cause of FAL's complaint that it was unable to match the prices offered to retailers on those products by Penfolds. Carew-Reid said that Keys had made it clear that he did not want FAL to be cheaper then Penfolds, but agreed that Keys had not said the new allowance was conditional upon FAL "putting its price up" for August. He had nevertheless drawn that inference. Carew-Reid's evidence conflicted with that of Keys in this regard. Keys accepted that he had told Carew-Reid he thought there might be an opportunity for FAL to increase prices and enjoy a higher margin. Carew-Reid had responded that he wanted to keep prices down and have a better price than Penfolds. Keys said he told Carew-Reid that he was crazy, but it was up to FAL if it wanted to sell at lower prices. His Honour found that the conflict of evidence between these two was not surprising having regard to the passage of time since the meeting in question. He referred to the documents delivered to Carew-Reid at the meeting. He noted that it was not suggested that Keys wanted FAL to apply increased margins to stock purchased at increased wholesale prices, although Keys had acknowledged that he had wanted FAL to apply higher margins. The concern was with FAL's use of stock purchased at superseded prices and resold to retailers with the benefit of a differential between FAL's and Penfolds' prices after Penfolds' prices had been increased. But while this policy on the part of FAL led to a difference of opinion in discussion, it was unlikely, in his Honour's view, that Keys would suggest that the FAL price increases be not less than the "direct deal" prices charged by Penfolds to retailers for wines the subject of the additional promotional allowance. The clear implication of the relevant documentation was that stock purchased at August prices could be advertised by FAL to franchise members at prices less than the direct deal price if there were promotional activity in respect of those items.

23. Keys' conduct was capable of constituting some degree of encouragement to FAL to increase its prices on Penfolds' lines. But his Honour held that discussion designed to secure an increase in a retailer's price would not infringe the Act if it did not involve the supplier specifying a price at which the goods were to be sold. In this he was not strictly correct for the relevant practices covered by ss.96(3)(b), (c) and (f) relate to the specification of a price below which the purchaser will not sell. However, in the practical context of this case nothing turned on the inaccuracy, for it was in effect the Commission's case that Penfolds specified its direct deal price as the price below which FAL should not sell Penfolds' products. And for all intents and purposes on the Commission's case, it was not suggested that FAL might sell at any higher price.

24. After referring to the documentary evidence, his Honour concluded that it was contemplated by Penfolds that FAL's price to franchise members would be less than Penfolds' direct deal prices for items in respect of which the additional promotional allowance was to be paid. His Honour did an analysis based upon Penfolds' direct deal prices and the August trading terms to show that, on the terms being offered FAL could still undercut Penfolds. The analysis was set out in Schedule 2 to the judgment. Its content can be illustrated by reference to the pricing of Club Port. Penfolds' cost price to FAL for Club Port in August was $46.79. With FAL's 5% margin that became $49.13. Deducting the Additional Promotional Allowance offered by Penfolds reduced it to $47.38. Penfolds' single cask direct deal price for Club Port for August as shown in its Direct Deals Trading Terms to retailers for that month was $47.74. FAL's list price for August 1988 to a category A buyer was $47.30.

25. His Honour's use of the schedule was criticised by counsel for the Commission on the basis, inter alia, that it did not essay a comprehensive account of prices for all categories of buyer. Further, it was said, to assume the application of a 5% margin by FAL when, on the evidence, it could have applied 5.5%. Counsel also contended that his Honour had made a finding based upon his calculations that Penfolds must have known and must have contemplated that if FAL's additional promotional allowance were taken into account, its prices to retailers would be cheaper than FAL's prices to retailers. And this, it was submitted, is a conclusion that could not be drawn from that material.

26. At one point, as already noted, his Honour made what might be called the purely arithmetical point which he expressed thus:

"If the proposed promotional allowance or rebate were

applied to the wholesale price of the promoted

products for August with a 5 per cent margin, the

discounted price would have been less than the price

payable by retailers to purchase the same product

direct from Penfolds.

These calculations are set out in Schedule 2 attached

to these reasons."

That passage may be open to the criticism that on one reading it propounds a proposition applicable to all classes of FAL's retailer customers. But seen in the context of the whole judgment, Schedule 2 represented a way of exposing the possibility, open upon the very terms that Penfolds was putting, that FAL could undercut it. This possibility undermines the contention that Penfolds was trying to force FAL up specifically to its direct deal price. And as his Honour made clear in his judgment, documents upon which the calculation was based provided part of the context in which the discussion of 29 June took place and indicated matters likely to have been discussed. They also assisted assessment of the conflicting recollections of the conversation. To the extent that the Commission's submissions are based upon the inappropriateness of the calculations in Schedule 2, they are not sustained.

27. His Honour concluded after further consideration of the conversation at the meeting of 29 June, that there had been no contravention of s.48. That conclusion was attacked as inconsistent with various observations his Honour made in reviewing what had passed at that meeting. The statement by his Honour that "it is obvious that Penfolds attempted to induce Foodland to increase its price" was cited. But inducing a person to increase his price, is not the practice of resale price maintenance as described in any of the paragraphs of s.96(3) relied upon in this case.

28. His Honour concluded in relation to these discussions:

"I accept that the impression created by Keys in his

conversation with Carew-Reid was that Foodland was

required to increase its prices to "come into line"

with Penfolds for Foodland to receive the benefit of

cash reimbursements offered by Penfolds as additional

promotional allowances or quantity buy rebates.

I also accept, however, that "coming into line" did

not involve a specification of price below which

Foodland was not to sell Penfolds products but did

involve the specification of a base price to be used

by Foodland for the calculation of its prices in order

that Foodland's prices would approximate Penfolds'

prices to retailers."

The reference to the specification of a "base price" was also relied upon by the Commission in its submission, but that too must be read in the context of the passage which followed:

"A price may be understood to be in line with another

by being relative to, and less than, another price.

(see BP Australia Ltd v. Trade Practices Commission

(1986) 12 FCR 118 per Woodward J. at pp 119-120)."

29. Although, as his Honour found, it may have been contemplated by Penfolds that the difference in prices would be controlled and would not be large, it was not the fact that Penfolds specified that Foodland's prices were not to be less than Penfolds' "direct deal" prices. There was no reason, in his opinion, to conclude on Carew-Reid's evidence that the statement of price used by Penfolds in relation to its goods was likely to be understood by Foodland as a price below which the goods were not to be sold irrespective of Penfolds' intention in that regard. His Honour found that Carew-Reid clearly understood that FAL was to calculate a price having regard to current stock prices, the application of an unspecified margin of profit, and the application of the quantity buy rebates and promotional allowances offered by Penfolds. Those calculations could have produced prices which either exceeded or were less than prices charged by Penfolds as "direct deal" prices. The object of the calculation was to ensure that FAL's prices were not out of line with Penfolds' prices. His Honour said:

"Applying an objective test to the circumstances so

found which may include consideration of the fact that

Foodland had an understanding of a minimum price, it

cannot be said that Penfolds used a statement of price

that was likely to be understood by Foodland as a

price below which the Penfolds' goods were not to be

sold."

The assumption that "direct deal" prices were to be equated with prices calculated on current stock prices plus a margin less rebates was not warranted. It was therefore not established by the Commission that Penfolds had offered to enter into an agreement for the supply of wines which included a term that FAL not advertise Penfolds' wines for sale at prices less than the Penfolds' direct deal prices. The agreement for the supply of wines was not conditioned by any such term.

30. The approach taken by his Honour is to be seen as an endeavour to assess out of substantially conflicting accounts of the meeting of 29 June, where the truth most probably lay. In doing this, he had regard to the documents and to his own arithmetical assessments to conclude that Penfolds was not specifying a price in any relevant sense for the purposes of s.48. His findings in that regard should not be disturbed.

31. It was another limb of the argument that on his Honour's calculation, the variance between the prices that could be charged by FAL and those charged by Penfolds was of the order of 1.4%. And that, it was submitted, was a level of tolerance consistent with the proposition that Penfolds was specifying its own direct deal prices as those below which FAL should not sell. Reliance was placed upon Trade Practices Commission v. Bata Shoe Co. of Australia Pty Ltd (No.2) [1980] FCA 18; (1979) 44 FLR 149 and Peter Williamson Pty Ltd v. Capitol Motors Pty Ltd (1982) 61 FLR 257. They are authorities for the proposition that the fact that a price is stated to be within a range of a particular figure or that otherwise an element of approximation is introduced, does not detract from the true character of the price as a specified price. And that proposition can be accepted without reservation. It does not, however, set out the criteria for identifying a mere approximation or the limits of the range within which a price may be said to be "specified". That was not the subject of any inquiry or evidence in this case. The onus was on the Commission, if there were a variance which was not obviously trivial between the direct deal prices and those which Penfolds was prepared to tolerate, to support by evidence the characterisation of the variance as mere approximation. The limits of the range of prices which may be treated as approximating a specified price will, no doubt, depend upon what is significant to competition in the relevant market.

32. Following the meeting of 29 June, Carew-Reid instructed Bennett to buy some 6 to 8 weeks supply of Penfolds' products for which increased prices would apply after 1 August. FAL's price book for the period 26 July to 25 August showed significant differentials between its price and Penfolds' price to retailers. As a result FAL made significantly increased sales for casks and flagons in the first three days of trading from and including 26 July. Its competitor, Westel, contacted Penfolds and asked Keys if some special deal had been done with FAL. It wanted the situation rectified immediately.

33. On 27 or 28 July, Keys telephoned Bennett and told him that quantity buy rebates would be withdrawn immediately. Bennett gave what his Honour described as "rather vague evidence" that the effect of the words used by Keys was that the allowances had been withdrawn because FAL's prices were less than Penfolds' direct prices. On 28 July, Penfolds sent FAL a fax confirming that all promotional allowances, advertising allowances and quantity buy rebates as outlined in the August deal sheets were withdrawn. His Honour rejected Keys' contention that the withdrawal of the rebate and trading terms was no more than a reflection of the actual trading terms agreed between FAL and Penfolds. He found that Penfolds had determined that it would not continue to assist FAL's highly competitive pricing by continuing to pay existing rebates. Withdrawal of the additional promotional allowances and a co-operative advertising allowance was not expected to have any effect on FAL's attitude. But Penfolds' intention in withdrawing the quantity buy rebate was to remove any assistance to price discounting by FAL. It stood alone as a step designed to effect that purpose. It was, his Honour found, not intended to induce FAL to advertise prices not less than Penfolds' direct deal prices. Rather it resulted from a combination of events:

1. Substantial pressure from Westel on Penfolds to take

action against FAL.

2. The widening gap between Penfolds' August direct deal

prices and FAL's advertised August prices for stock

purchased from Penfolds at the old prices.

3. Quantity buy rebates offered on the basis of the proposed

increased August prices had increased in favour of FAL

because of its greater sales.

34. His Honour was satisfied that Keys' conduct reflected Penfolds' desire to see an increase in FAL prices, but did not contain any necessary element of the practice of resale price maintenance:

"In short, the evidence adduced did not establish that

Penfolds specify the "direct deal" prices for August

as the price below which Foodland was not to advertise

or sell Penfolds products nor that Penfolds used a

statement of prices that was likely to be understood

by Foodland as the price below which Penfolds products

were not to be advertised or sold."

35. Again the Commission pointed to a number of observations made in the course of his Honour's reasons. There had been a reference to the importance of the price differential in casks, the immediate trade response, Westel's pressure on Penfolds and Penfolds' intention in withdrawing the rebate which was to "remove any assistance to price discounting provided to Foodland by the rebate". To make all those observations is to say no doubt, that Penfolds wanted to see an increase in FAL's price. It is not necessary to say, as the Commission alleges in its pleading, that Penfolds intended to induce FAL not to advertise, offer for sale or sell any wines which Penfolds had supplied to FAL that were listed in the direct deal price lists for August 1988 at prices less than the direct deal prices for that month. No doubt such an outcome would have been satisfactory to Penfolds. But such notional satisfaction is not sufficient to establish resale price maintenance. His Honour's findings were open on the evidence which he was in the best position to assess having heard both Keys and Carew-Reid and the oral testimony of other witnesses. His finding in this respect should not be disturbed either.

36. The third pleaded conversation occurred when Carew-Reid contacted Keys on 2 August 1988. Keys told him that he had had no option but to cancel the rebates because FAL had attempted to ruin Penfolds' price point in the market place and would be well under Penfolds' prices during the whole of that month. Penfolds could not sit by and let FAL be cheaper than it. According to Carew-Reid, Keys said that to get its rebates back FAL would have to "realign" its prices and "bring them up in line with our direct price; in other words, use the August costings, obviously, plus our margin". But as his Honour observed, if the intention was that FAL should charge not less than direct deal prices, there would be little point in calculating a margin on the August costings for stock bought on July costings. His Honour held that Keys intended by his statement on 2 August 1988 to secure increases in FAL's prices. He concluded, however, that it was contemplated by Penfolds that the prices to be calculated by FAL might be lower than direct prices. In coming to this view, his Honour again had regard to the calculations set out in Schedule 2 to his judgment which applied FAL's usual margin to the August cost price of Penfolds' products and the additional promotional allowance. It was obvious that Penfolds contemplated, in the sense that it was open on their own trading terms, that FAL would be able to advertise the Penfolds' products at prices equivalent to those in the Schedule. It followed that quantity buy rebates would apply and be payable even though FAL did not intend to use the assistance of the additional promotional allowances. Penfolds had not therefore been shown to have engaged in resale price maintenance in respect of the conversation which took place between Carew-Reid and Keys on 2 August 1988. In the light of the views already expressed, there is no reason to suppose that his Honour erred in coming to this conclusion.

37. Finally his Honour turned to the conversations of 11 and 12 August 1988. He held that on 11 August 1988 there was a conversation between Keys and Bennett which prescribed no more than the letter dated 11 August in which Penfolds said:

"We wish to advise you that promotional allowances,

advertising allowances and quantity rebates as

outlined in the attached promotional trading terms

will be made available for the month of September 1988.

The rebates will be applicable upon the condition that

the Penfolds September pricing structures are strictly

adhered to as the basis for your calculations."

38. His Honour held that the import of Cullen's conversation with Carew-Reid on 12 August and of the letter of 11 August was that payment of an FAL claim for rebates and allowances would be subject to the condition that FAL use September cost prices to calculate its price in the September price book, notwithstanding the actual cost of the stock to FAL. Penfolds undoubtedly intended that the use of such a base would keep those prices within proximity of Penfolds' own price to retailers. If FAL's prices were less than Penfolds by reason of Penfolds' rebates and allowances, the stipulation of a September cost price as a base for FAL's prices would retain a sufficient relativity between FAL and Penfolds. That is not to say that his Honour was finding any formula from which a price could be ascertained in the sense contemplated by s.96(4). The finding in respect of the communications of 11 and 12 August reflects the consistent view that his Honour took of the evidence throughout. That is, that Penfolds was putting pressure on FAL to narrow the gap between FAL's prices and its own. It would no doubt have regarded as satisfactory an outcome in which FAL charged the same price as Penfolds. In the event, however, the documentary evidence indicated a tolerance that could not be dismissed as mere approximation without further inquiry. And his Honour was not prepared to find that a particular price had been specified in any of the ways contemplated in s.96 and pleaded by the Commission. His conclusions were based upon an assessment of all the evidence and were fairly open to him and his judgment should not be disturbed. For these reasons the appeal will be dismissed with costs.

Re Trade Practices Commission v Penfolds Wines Pty Ltd; James Llewellyn Williams and George Keys [1991] FCA 631;

At a glance

Court

Decision date

Before

Source

Judgment (84 paragraphs)

Re Trade Practices Commission v Penfolds Wines Pty Ltd; James Llewellyn Williams and George Keys [1991] FCA 631; (1992) 14 Atpr 41-163 (1991) 104 ALR 601 (13 December 1991)

Parties

Legislation Cited (1)

Cases Cited (4)