Melway Publishing Pty Ltd. v. Robert Hicks Pty Ltd.

• Jurisdiction: Australia
• Date: 01 December 2001
• Author: Williams, Philip L.

I INTRODUCTION

The decision of the High Court of Australia in Melway (1) was handed down on 15 March 2001. It is only the second decision of the High Court in a substantive market-centred case under Part IV of the Trade Practices Act 1974 (Cth). The first was Queensland Wire Industries Pty Ltd v Broken Hill Co Ltd (2) which also concerned s 46 of the Trade Practices Act 1974 (Cth). (3) Although the decision of the majority in Melway was firmly based on Queensland Wire, it provided the High Court with an opportunity to elaborate on the meaning of the key phrase in s 46 -- `take advantage' -- and, in particular, the relationship between the phrase `take advantage' and the purpose that is proscribed in the section.

The private litigation in Melway arose from a decision by a producer of street directories not to supply its directories to a wholesale distributor. (4) From modest beginnings in 1966, Melway Publishing Pty Ltd (`Melway') had become, by the early 1980s, the producer of by far the largest selling street directory in Melbourne. At first instance, Merkel J found that Melway directories held in excess of 80 to 90 per cent of the retail market share in Melbourne street directories. (5) Barriers to entry were substantial. (6)

For many years, Melway had divided the retailers who were selling its directories into a number of segments. The segments were, respectively: newsagents and bookshops; service stations; retail outlets for automotive parts; office stationers; and over-the-counter sales by the wholesaler and sales to authorised car dealers. One company was appointed the exclusive wholesale distributor to each of these segments -- except for the service station segment for which there were two.

In 1986, Robert Hicks Pty Ltd (`Robert Hicks') was appointed exclusive wholesale distributor for suppliers of automotive parts. Robert Hicks was jointly controlled by two men -- Messrs Pawsey and Nagel. In 1993, Mr Pawsey acquired Mr Nagel's shareholding in Robert Hicks and Mr Nagel started a rival business. Melway decided that it preferred Mr Nagel and terminated its agreement with Robert Hicks with effect from 30 June 1995. Melway refused to sell to Robert Hicks any of the 30 000 to 50 000 directories that it wished to acquire.

Robert Hicks issued proceedings claiming that Melway's refusal to supply the directories infringed s 46 of the Trade Practices Act 1974 (Cth). To make out its claim under s 46, Robert Hicks had to establish each of three propositions:

* that Melway had a substantial degree of power in a market;

* that its refusal to supply the directories represented a `taking advantage' of that power; and

* that the `taking advantage' was for one of the purposes proscribed in s 46. In this case, the alleged purpose was to deter or prevent Robert Hicks from engaging in competitive conduct in a market.

Robert Hicks succeeded at the trial before Merkel J. This decision was upheld by Sundberg and Finkelstein JJ (Heerey J dissenting) in the Full Court of the Federal Court, (7) but was overturned in a split decision of the High Court. The majority was Gleeson CJ, Gummow, Hayne and Callinan JJ. The minority was Kirby J.

The decision of the High Court focuses on a narrow issue -- but one that is of critical importance to litigation under s 46. The issue is the `taking advantage' of market power and, in particular, the relationship between proof of `taking advantage' and proof of the proscribed purpose. The majority accepted the findings of the trial judge as to market definition, market power and purpose. But the majority found that the Federal Court had erred in finding that Melway's refusal to supply the directories constituted a `taking advantage' of its power in a market.

This case note is arranged into four substantive sections. Part II examines the issue of market definition. Part III considers what the decision has to say as to the relationship between `taking advantage' and purpose. Part IV analyses why the majority of the High Court came to disagree with three of the four judges of the Federal Court and with Kirby J. Part V discusses the impact and significance of the decision for business and for future litigation.

II THE RELEVANT MARKETS

The number of markets relevant to a consideration of the competition and monopoly issues in s 46 litigation depends on the character of the behaviour that is at issue. When the allegation is predatory pricing, (8) it is common for only one market to be relevant. However, when the allegation is that a person who has a substantial degree of market power is using that power for the purpose of damaging a person who is not in competition with the first person, the second person is generally a supplier to or a purchaser from the first person. Economics generally classifies such conduct as affecting vertically related persons. The vertical metaphor is used extensively: the supplier in the vertical chain is generally said to be upstream from the purchaser. (9)

In the case of vertical conduct that falls under s 46, the economic analysis of the issues is generally facilitated by defining two markets. The field of endeavour in which the respondent has the market power is generally said to be the primary market, and the field of endeavour in which the plaintiff operates is said to be the secondary market. On the face of the facts in Melway, this would have been the most obvious procedure to adopt. That is, the primary market would have been the market in which Melbourne street directories are published and sold, and the wholesale activity would have been a separate market. One remarkable feature of the five judgments in the Melway cases is that no judge opts for this most natural classificatory schema.

This schema was, however, adopted by all judges in Queensland Wire. (10) That case involved vertical conduct: Broken Hill Pty Co Ltd (`BHP') was alleged to have constructively refused to supply Y-bar to Queensland Wire Industries Pty Ltd (`QWI'). Although the judgments of the High Court in Queensland Wire did not agree on how the relevant markets were best defined for the analysis of the economic issues of that litigation, (11) they did agree on one thing: that it was appropriate to define two distinct markets -- a primary market from whose structure BHP derived its market power and a secondary market in which QWI was attempting to compete. (12)

The facts of Queensland Wire led to the interesting question of whether the circumstances of BHP's operations both in steel production and in the making of star picket fence posts suggested that these two activities should be classified as occurring within a single market. This issue seemed not to have been extensively argued, possibly because the facts at trial suggested that these two activities were organised by BHP quite separately. (13) Nevertheless, it was an issue on which Mason CJ and Wilson J made some interesting remarks:

The analysis of a s 46 claim necessarily begins with a description of the market in which the defendant is thought to have a substantial degree of power. In identifying the relevant market, it must be borne in mind that the object is to discover the degree of the defendant's market power. Defining the market and evaluating the degree of power in that market are part of the same process, and it is for the sake of simplicity of analysis that the two are separated. Accordingly, if the defendant is vertically integrated, the relevant market for determining degree of market power will be at the product level which is the source of that power. (14) There was much discussion in Pincus J's trial judgment and in the judgments in the High Court as to the range of activities that should be included in the primary market. (15) The principal issue was whether the primary market should cover all the steel and steel products that were produced by BHP's...