. di ; ifdqment no. 413... CATCHWORDS TRADE PRACTICES - alleged abuse of monopoly power - whether necessary to prove unfairness or predatoriness - use of foreign authorities - definition of market - whether use of extraneous legal right a defence - meaning of taking advantage for purposes of s.46. Trade Practices Act ss. 4E, 4F, 46 Queensland Wire Industries Pty. Ltd. v. The Broken Hill Proprietary Company Limited & Anor. Qld G125 of 1984 PINCUS J. SYDNEY 2 SEPTEMBER 1987 e ~ 2 SEP i987 FED, AL Cour AUSTRALIA OF IN THE FEDERAL COURT OF AUSTRALIA ) QUEENSLAND DISTRICT REGISTRY ) QLD G125 of 1984 GENERAL DIVISION ) BETWEEN: QUEENSLAND WIRE INDUSTRIES PTY. LTD. Applicant AND: THE BROKEN HILL PROPRIETARY COMPANY LIMITED First Respondent AND: AUSTRALIAN WIRE INDUSTRIES PROPRIETARY LIMITED Second Respondent MINUTES OF ORDER JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 2 SEPTEMBER 1987 WHERE MADE: SYDNEY THE COURT ORDERS THAT: The application be dismissed. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN _THE FEDERAL COURT OF AUSTRALIA ) QUEENSLAND DISTRICT REGISTRY ) QLD G125 of 1984 GENERAL DIVISION ) BETWEEN: QUEENSLAND WIRE INDUSTRIES PTY. LTD. Applicant AND: THE BROKEN HILL PROPRIETARY COMPANY LIMITED First Respondent AND: AUSTRALIAN WIRE INDUSTRIES PROPRIETARY LIMITED Second Respondent PINCUS J. 2 SEPTEMBER 1987 REASONS FOR JUDGMENT This is an application under s.46 of the Trade Practices Act 1974, made by a small company against B.H.P. The applicant's complaint is, in brief, that B.H.P. has misused its power in the market in steel fence posts, and in particular that in the most popular sort of steel fence post, the "star picket". It says that B.H.P., which is of course the dominant Australian steel company, has wrongfully withheld from it the wherewithal to make these fence posts, for the purpose of preserving B.H.P.'s monopoly in them. I have, despite the very able arguments advanced for the applicant, decided that B.H.P.'s conduct does not infringe s.46. ve N The claim is brought under 3.46 of the Trade Practices Act and seeks damages of over $3 million, together with an injunction. There are two respondents, the Broken Hill Proprietary Company Limited and Australian Wire Industries Proprietary Limited ("A.W.I."), the latter being a wholly-owned subsidiary of the former. In the course of argument, counsel for the respondents put forward the view that for most purposes of s.46 the two respondents should be considered as one. There is no need to reach a conclusion on that point, but it is convenient generally to use the expression "B.H.P." to refer to the respondents, although for some purposes it is necessary to discriminate between them. In the eastern States, B.H.P.'s fence post are sold by A.W.I. The B.H.P. steel fence post ("star picket") is by far the most popular sort of rural fencing post, and its sale produces for B.H.P. substantial profits. As the sole domestic producer of star pickets, with no significant import competition, B.H.P. is in a strong position. The applicant competes with B.H.P. principally in Queensland and northern New South Wales in the rural fencing market. That competition is, however, made significantly more difficult by the applicant's inability to gain access to the "Y-bar", the particular shape of product of the rolling mills from which the fence posts are made. An important advantage of B.H.P.'s star picket monopoly is that it is able to offer to its distributors a full range of rural fencing products. Preservation of that advantage is one of the reasons for 1ts refusal, subject to some exceptions I shall mention, to sell anyone Y-bar. ve It will be necessary to deal with the facts in some detail, but one fact which should in fairness be given prominence is that there is no evidence that any product of B.H.P.'s rolling mills other than Y-bar is unavailable for sale. B.H.P.'s conduct in withholding supplies of Y-bar is not in accordance with the general pattern of its commercial behaviour. Another matter of special importance is that, although there was plainly evidence from which inferences could be drawn adverse to B.H.P., as to the intention with which it withheld supply of Y-bar, there was called neither any person who participated in the decision to do so, nor any other witness with personal knowledge of B.H.P.'s management's intention in relevant respects; nor was the absence of such witnesses explained. One such witness whose absence should he noted was Mr. Bruce Robinson, the author of important B.H.P. reports made in 1982 and referred to below. The Issues Section 46 was substantially amended by Act No. 17 of 1986, the Trade Practices Revision Act 1986, the relevant part of which commenced on 1 June 1986. That date fell between the commencement of this application, 2 November 1984, and the commencement of the hearing, 3 August 1987. The damages claimed relate to the period from January 1984 to June 1987, so that' the right to them depends in part on the former provision and in part on the new. The right to an injunction depends entirely upon demonstrating infringement of the current provision. The general effect of both provisions is to prohibit a corporation's taking advantage of its market power to hurt competitors or prevent competition. Few applications have been brought under s.46 and no final relief has ever been granted to an applicant; it seems likely that the manifest lack of enthusiasm for the provision is due in part to its vagueness. Before the 1986 amendment mentioned, s.46 read in part as follows: "(1) A corporation that is in a position substantially to control a market for goods or services shall not take advantage of the power in relation to that market that it has by virtue of being in that position for the purpose of - (a) eliminating or substantially damaging a person, being a competitor in that market or in any other market of the corporation or of a body corporate related to the corporation; (b) preventing the entry of a person into that market or into any other market; or (c)} deterring or preventing a person from engaging in competitive conduct in that market or in any other market. (6) This scction does not prevent a corporation from engaging in conduct that does not constitute a contravention of any of the following sections, namely, sections 45, 45B, 47 and 50, by reason that an authorization is in force or by reason of the operation of section 93." The 1986 amendment substituted for the introductory part of sub-s.(1) the following: "A corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of - ". It also made changes in each of the paragraphs (a), (b) and (c) but they are of no present consequence. The new s.46 has a sub-section (6) identical with the former provision. I have set out sub-s.(6) because it seems to be of particular importance in the present case; it suggests the possibility that action or inaction proscribed by sub-s.(1) may include making or giving effect to contracts, arrangements or understandings, giving and attempting to secure compliance with covenants in restraint of trade, supplying goods or services on certain conditions, as well as refusing to supply goods or services for certain reasons, and taking over other companies. It is true that sub-s.(6) has an exempting effect only, but it gives an indication of the wide range of acts and refusals to act which, in the legislature's contemplation, might conceivably fall within the description of taking advantage of power, within the meaning of sub-s.(1). Although none of the other sub-sections of each version of the section has been set out here. all of them have to a greater or lesser degree relevance in the present case and require to be considered: they are omitted here merely for the sake of brevity. Under s.4F(b): te an "For the purposes of this Act - (b) a person shall be deemed to have engaged or to engage in conduct for a particular purpose or a particular reason if - (i) the person engaged or engages in the conduct for purposes that included or include that purpose or for reasons that included or include that reason, as the case may be; and (ii) that purpose or reason was or is a substantial purpose or reason." The case was argued on the assumption that s.4F(b) applies in considering whether the necessary purpose exists in a 8.46 case. The question whether s.4F(b) applies to s.48 of the same Act was considered by the Full Court in Heating Centre Pty. Ltd. v. Trade Practices Commission (1986) 65 A.L.R. 429 and an affirmative answer was given: pp.430, 442, 443. With one exception, the reasons given for that holding also apply to s.46 and, following that case, I proceed on the view, which I. think correct, that the provisions of s.4F(b) are relevant here. That is, the question then becomes whether a corporation with the requisite power or control in a market has taken advantage of that power for purposes that include, as a substantial purpose, one or more of the purposes set out in paras.(a), (b) and (c) of s.46(1). Of the three elements, market power, taking advantage and purpose, it appeared that the B.H.P. attack was concentrated on the second. B.H.P.'s main point was that there was no conduct oe taking advantage within the meaning of the section because, whatever the result might be if one applied a literal construction to it, sub-s.(1) properly construed introduced a notion of fairness and reasonableness; counsel argued, of course, that B.H.P.'s refusal to supply Y-bar was not unfair. In supporting his legal contention, counsel relied heavily, as I understood the argument, on historical considerations, and in particular on the construction adopted in the United States with respect to corresponding legislation in that nation. To come now to a more detailed analysis of the issues as derived from the pleadings, the applicant alleged the existence of six markets, each of them for the supply of particular goods. In setting them out I shall use the word "steel" for "steel and steel products". The markets alleged relate to the supply of - (a) steel to manufacturers for use in making wire; (b) steel to manufacturers for use in making fence posts; (c) Y-bar to manufacturers for use in making fence posts; (d) steel wire and steel fence posts by wholesalers to retailers; (e) steel wire by wholesalers to retailers; (f£) steel fence posts by wholesalers to retailers. It should be added that geographical limits of these markets were alleged: the first three were said to be markets in Australia and the last three in Queensland and New South Wales. In its defence. B.H.P. admitted the existence of markets (e) and (f), but denied the rest. In opening B.H.P.'s case, counsel said that its principal contention would be that the Markets to be considered were, firstly, that for the supply of steel and steel products in Australia, and, secondly, for the supply of rural fencing materials in Australia. By my direction, the defence was amended to set up that case and the applicant then amended its statement of claim, alleging breaches of s.46 in relation to each of those markets also. The statement of claim alleged that B.H.P. was in a position substantially to control each of the markets: that was not admitted. The applicant also pleaded that the second respondent refused to supply the applicant with Y-bar to make fence posts except at a price at which it is impossible for the applicant to compete effectively with A.W.I. in two of the markets mentioned above, namely (dad) (supply of steel wire and fence posts by wholesalers to retailers) and (f) (supply of steel fence posts by wholesalers to retailers). The respondents' defence, in substance, admitted that allegation. As to purpose, the applicant pleaded that the respondents' purpose included, as a substantial purpose, preventing the applicant's entry (or alternatively that of any competitor) into the markets (d) and (f), deterring or preventing the applicant (or alternatively any competitor) from engaging in competitive conduct in the markets (dd), (e) and (f) and substantially damaging the applicant. Those allegations were denied in the defence. Reference should be made to the relief sought. No very detailed analysis was made at the hearing of the form of injunction which would be appropriate if the applicant succeeded, and I intimated that I would be inclined, in that event, to make a declaration and determine the form of injunction in a_ subsequent hearing. However, counsel for B.H.P. argued that the form of injunction was inextricably bound up with the central question of whether B.H.P. had breached s.46. The point is discussed below. Facts - General As mentioned above, B.H.P. (while not withdrawing its admissions set out above) contended for a wide definition of market, being either the supply of steel and steel products in Australia, or the supply of rural fencing materials in Australia. As to the former, not as much information as I would have liked was available. That was due, I should think, substantially to the course the pleadings took. The markets which, according to B.H.P.'s case, were those to be considered, were not pleaded until the end of the applicant's case, and presumably were not investigated in the discovery process. The principal document relating to the market for steel and steel products in Australia is an affidavit by Mr. P.J. Laver of B.H.P., filed in other proceedings in this Court in February 1986. According to that affidavit, Australia's iron and steel industry, from the extraction of raw materials through to the marketing of iron and steel products, is largely in the control of B.H.P. It accounts for about 97% of Australia's total steel output, and supplies about 85% of our requirements for steel and steel products. The only substantial domestic competitor is Smorgon Consolidated Industries Pty. Ltd. which supplies about 3% of the nation's requirements for steel and steel products. Most of the steel and steel products sold in this country (about 70%) is acquired by steel processors, and the rest is acquired by people who make use of the products in "end use applications". Since 1983, Smorgon has competed with B.H.P. in the production of reinforcing bar and merchant bar - i.e. steel bar ordinarily sold by steel merchants. In the B.H.P. organisation, such bar is made by the Rod and Bar Products Division. Smorgon does not constrain B.H.P.'s pricing policy; it is content to follow B.H.P.'s price changes. There are significant barriers to the entry of a new domestic rod and bar manufacturer, including the very high cost of setting up a rod and bar mill. In 1983 the Federal Government announced a Steel Industry Plan, which came into effect on 1 January 1984. The Government's main contribution to the plan was an agreement to provide bounty payments on a selected range of steel products, with an annual ceiling of $71.6 million, adjustable annually in accordance with movements of steel prices. Mr. Laver's affidavit says: "The aim of these bounty payments was to ensure that the share of the market for steel products' in Australia held by Australian producers did not fall below 80%. Further, assistance from the Government would be reviewed if the local industry's share of the domestic market rose above 90%. The Government " undertook to establish specialised anti-dumping procedures." In the first financial year of the Plan, being the year ended 30 June 1985. bounty payments amounted to $53.6 million, but thereafter they fell substantially, as a consequence of foreign exchange movements and market growth. There is no evidence before me as to the current position, but I was invited by counsel on both sides to proceed on the assumption that Mr. Laver's affidavit sufficiently depicted it. Compared with B.H.P., the applicant is a tiny company. It appears from its accounts that it is a trustee. In the last four financial years, its gross profit, by which is meant gross sales less opening stock, cost of purchases, power and factory wages, has been about $1 million per year. Its net profit in the Most recent year was less than $300,000. Despite its size, it has, however, competed fairly effectively with B.H.P. in relation to wire sales, principally in Queensland and northern New South Wales. Until recently, it made wire products from raw material (bulk galvanised wire) supplied by B.H.P., but in mid-June opened a new mill, in which it makes its own wire from rods supplied by B.H.P. The larger distributors of B.H.P. fencing participate ina national scheme which has allowed a special 2% rebate on purchases, since 1982. The principal business of the applicant, to the extent of about three-quarters of its turnover, is rural fencing. It roy does not make fence posts because, of course, it cannot get the feed from B.H.P. Although B.H.P. is much better established and bigger, the applicant has obtained a significant part of the market for rural steel fencing in Queensland - between 27% and 28%. Nearly all the rest of the market is B.H.P.'s; that is, nearly all the rural steel fencing in Queensiand is made by either B.H.P. or the applicant. B.H.P. also makes most of the rural fencing in all the other States, except South Australia. B.H.P. rural fencing sales turnover is about $80 million a year, of which about $33 million is received from the sale of fence posts. About $4 million per annum, not taking into account administrative overheads, is derived by B.H.P. as its profit from the sale of fence posts. B.H.P.'s return from rural fences is not confined to the $80 million mentioned above, because it also participates in that Market by supplying bulk wire to the applicant and to Boral Cyclone Ltd. (which makes a full range of fencing products). That company sells both its own fence posts, which have a different cross-section, and those made by B.H.P. The latter are by far the more popular; the Boral Cyclone post has only about 1% of the rural fence post market. Some star picket posts are imported, but they have only 1% of the market. B.H.P. makes its fence posts at Kwinana in Western Australia, at Newcastle and at Brisbane. The feed for the posts made in Brisbane comes from Newcastle. In Newcastle, the facility which makes the fence posts from the Y-bar - a fairly simple operation - is adjacent to the rod and bar mill. That mill makes many shapes: various shapes of flat steel, rods of different diameters, angle-iron, reinforcing steel and so forth. Of the shapes made, there is only one which is, according to B.H.P., not for general sale: Y-bar. Market and Market Power The definition of market did not loom very large in this case, largely, I think, because it must have seemed improbable that the relevant market could be so defined as to lead to a conclusion that B.H.P.'s position was not dominant in it. Since there was no consensus on the point, however, it is necessary to deal with it. The definition of "market" in 3.4E is as follows: "For the purposes of this Act, 'market' means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services." It will be noted that the idea of substitutable competing goods and services is adopted as a criterion. In some contexts, economists speak of "markets" without reference to competition: e.g. Sharkey: "The Theory of Natural Monopoly" (1982) p.l. 14. Expert evidence was given for B.H.P. that. in the practice of economics, the limits of a market are sometimes determined by reference to substitutability at the supply end as well as at the demand end. If this is applied to s.4E, then some odd consequences may ensue. Suppose a factory is making diecast toys exclusively, but could, with little expense, be devoted to the making of diecast machine gun parts or many other articles of different types. No doubt the possibility of changing the range of articles produced may influence the factory owner's prices: if he cannot get a good price for his toys, he may be able to abandon that line and change to manufacturing something else, rather than drop his price. Yet machine-guns and toys would not ordinarily be regarded by practical business people as competing in the same market. Section 4E suggests to me that it is not that sort of substitutability which the legislature had in mind. It is only if one adopts the wider notion of substitutability just rejected that it is possible to accept B.H.P.'s first contention as to the market - that it is that for steel and steel products in Australia. It appears to me that the second view propounded on behalf of B.H.P., that the market is one for the supply of rural fencing materials in this country, better accords with commercial ideas of the meaning of the word "market". But on either view the applicant must succeed on the first issue raised by s.46; B.H.P. was, as I find, at all times material to this suit, in a position substantially to control each of those markets and had a substantial degree of power in each of those markets. In arriving at the conclusion I have expressed as to the rural fencing market, I have taken into account that the vast bulk 15. of such fencing is steel rather than timber, fibreglass or any other material. I have also considered the percentages mentioned in the preceding section of these reasons. Advantage of being Sole Supplier Mr. Drummond Q.C., who appeared with Mr. Gore for the applicant, argued that the evidence showed that there are great advantages accruing to B.H.P. as a participant in the rural fencing market, by virtue of its being the sole domestic supplier of star pickets. Those advantages, said Mr. Drummond, extend well beyond being relatively free from price competition in selling star pickets. I accept these submissions. Both internal B.H.P. documents and material issued by it to buyers and distributors emphasise B.H.P.'s unique ability to supply to distributors the full range of steel fencing products of the kind most widely used on Australian farms and grazing properties. B.H.P. sells its rural fencing as "Waratah - the complete fencing system" and emphasises, in its advertising, its ability to sell "every part of the fence - not just the wire". Another advertisement includes the text: "Best of all, Waratah is a complete fencing system - not just part of the components required". In exhibit 76, a brochure issued to retailers, the transport advantages of B.H.P.'s full range, are emphasised. The brochure says "B.H.P. Wire Products, because of its FULL range of fencing products can offer carriers, the tonnage to offer an extremely quick delivery service". It was explained in the 3 16. evidence that B.H.P. commonly assembles complete truck-loads of fencing material, including of course posts, and sends' them directly to end users. The applicant cannot do that. These mixed loads are shown by the evidence to be a substantial part of the total sales; for example, in the 1986/87 year, more than 41% of the total tonnage of rural fencing sold by B.H.P. consisted in combined loads. Reference to internal B.H.P. material demonstrates that its officers think its position as the only supplier of the full range of the steel fencing most commonly used is an essential part of its marketing power. A memorandum prepared in February 1982 proposing the 2% rebate scheme referred to above, and prepared by Mr. Robinson (who was, as I have mentioned, not called) discusses the alarming consequences of expected competition from an overseas manufacturer: ..» unless we move now to protect our market, we will face not only reduced profitability but major loss of volume. The major advantage of AWI in the rural areas are in our distribution and marketing strengths. The full product range supply position and our large volume are critical factors in these strengths." A report by Mr. Robinson, prepared at the same time, is also consistent with the notion that he regarded postulated Korean imports as theatening not only the fence post business, but "AWI's total sales of rural fencing products". The report went on: "The loss of the fence post market would seriously effect Csicl wire sales across the broad range of our rural products. The fence posts are a very important part of the package we currently offer 17. the customers and the result of loss of this product will make our package on wire products significantly less attractive." Again, on 26 April 1983 the national sales manager, Mr. Parker, wrote to another executive with respect to a proposal by Smorgon to produce Y-bar. He explained A.W.I.'s fear: "A.W.I. are very concerned to the extent that Y-Bar as a product, although of low margin, provides a basic connection for substantial wire sales." The evidence of the history of the threats to B.H.P.''s monopoly is scrappy and incomplete, largely, I should think, because B.H.P. officials with the requisite knowledge were not called. But such material as was produced displays B.H.P.''s anxiety about the possibility of competition and its likely results. An example is a letter of 21 April 1982 written by Mr. H. Neil, the marketing manager of A.W.I., to the applicant, which refers to the possibility of competition from imported fence posts and says: "On substantiated advice from our customers that we are losing business, we will move immediately to ensure our customers in that area are able to offer a competitive A.W.I. product." In other words, they would cut the price to meet any competition. The 1982 memoranda referred to above discuss the possibility of another means of defence, namely tariff protection. However, B.H.P.'s weapons in its fight to prevent competition in the manufacture of fence posts do not appear to be seen by it as all-powerful. The 1982 memoranda proposing the 2% rebate suggested that a condition would be that the customer not import any product currently supplied by A.W.I. But the offer made to Elders Smith Goldsborough Mort Ltd. on 24 February 1982 by Mr. Robinson, confirming the 2% rebate arrangement, imposed no such condition, presumably because it was thought that that company would not accept it. It should be added that although mention was made of the fence posts being a low profit item in the above material and elsewhere, there is no reason to doubt that B.H.P. could drop its prices substantially. The figures given by Mr. Forster are set out above, and it appears from the 1982 memorandum written by Mr. Robinson that profits then were also substantial; that document contemplated the making of a 15% price reduction to meet the threat of the importation of Korean fence posts. In the end, it is not really very clear by what means B.H.P. has managed to preserve its monopoly for such a long period of time. It appears that there has been no lack of interest on the part of those wishing to compete. For example, in April 1984 it was recorded by Mr. Robinson that: "It is now generally recognised that Smorgon will manufacture a Y-section and supply either Y-bar or fence posts to the market." 19. That has not happened yet, and there is no suggestion in the evidence that it is about to. No explanation was given. Whatever be the reason, the evidence suggests that B.H.P. has successfully discouraged competition in fence post supply, reaping over the years millions of dollars in profits which would otherwise (insofar as farmers and graziers did not benefit from price reductions) have been shared with another or others. Experience of other Participants Considerable light was thrown upon the practical workings of the rural fencing markets by evidence given by a number of witnesses not associated with either party, but with relevant practical experience; some of this evidence is discussed in this section. The general impression created was that B.H.P.'s market power in respect of rural fencing is considerable, but not such as to enable it absolutely to dictate to its customers. The evidence disclosed that for some considerable time, B.H.P. has had an official list of distributors through which its fencing products are distributed: one of the witnesses spoke of those on the list as having a ""franchise". When Combined Rural Traders Limited, a substantial vendor of rural fencing, got its "franchise", apparently in recent years, it initially bought 100% of its wire purchases from B.H.P. More recently, the applicant has attracted about 25% of its orders, apparently because Combined Rural Traders Limited felt that, as a Queensland business, it should support the applicant. There are, however, indications in the evidence concerning Combined Rural Traders Limited that it felt obliged carefully to consider B.H.P.'s wishes. At some 20. unspecified but recent time, B.H.P. told the company that it must maintain a particular level of purchases from B.H.P. In 1986, it said through Mr. Robinson that it was not satisfied with the level of Combined Rural Traders Limited purchases in Queensland and supplied a written list of figures to be attained. Although the Combined Rural Traders Limited Queensland manager (Mr. Buttfield) altered the percentages suggested, B.H.P.'s conduct is at least consistent with its having considerable strength in the rural fencing market; few vendors would feel free to tell purchasers how much of a particular product the latter should buy. There was also evidence as to B.H.P.'s relationship with Dalgetys, a major pastoral house and distributor of fencing, but such evidence covered only a period of 18 months, ending in May 1983. That period included the time of the making of the arrangement for the 2% rebate mentioned above. From Dalgetys' point of view, it appeared that the 2% rebate arrangement was a direct outcome of its drawing attention to the possibility of obtaining steel fence posts at good prices from Korea. The outcome of that, it appeared, was what Dalgetys regarded as the handsome offer of a rebate on national purchases. However, the B.H.P. documents which were discovered and tendered show that it had information on the subject from sources other than Daigetys and that it reacted to the threat with considerable concern. Dalgetys had a good relationship with B.H.P. (through A.W.I.), which it did not wish to imperil, and so bought its fencing almost exclusively from B.H.P., but there were other reasons impelling it in that direction: 21. (a) There were administrative advantages, in the view of Dalgetys, in having only one supplier. (b>) B.H.P. was able, at attractive freight rates, to deliver big orders direct to farms and these were a significant part of Dalgetys' rural fencing business. {c) B.H.P. was able to deliver a full range of fencing. Substantial buyers, however, are apparently able to buy in quantity from both the applicant and B.H.P., without suffering any considerable adverse effects. An example is Tubemakers of Australia Limited, whose Brisbane branch now buys about equal quantities of rural fencing from each supplier. Tubemakers used buy a much larger proportion of these goods from B.H.P. than it presently does and was then on the distributor list to which I have referred. It then obtained a rebate over the whole range of its purchases, but does not presently get one. The evidence of Tubemakers' position illustrates the practicability of a distributor's buying its fence posts from B.H.P. and its wire mainly from the applicant. Tubemakers 15S, however, not one of the largest distributors of rural fencing. Imports Although precise figures have not been placed before me, 1t seems likely that the fall in the value of the Australian 22. dollar must have been a considerable deterrent to those who recently might have been minded to import feed or star pickets to compete with the respondents in this profitable business. The explanation for absence of competition from imports before the recent currency realignments must lie, at least in large part, in the respondents' market strength. As I have mentioned, Dalgetys raised with B.H.P. (in 1982) the possibility of its obtaining fence posts at good prices from Korea. There was evidence, also, that Tubemakers were approached with offers of fence posts from China and Korea. Some twelve months ago Tubemakers were offered imported posts, about the same price as those supplied by B.H.P., but flimsier. Although the evidence to which I shall refer and that just mentioned shows that the possibility of import competition is a constraint as far as B.H.P. is concerned, the hard fact is that there has never been any substantial importation of star pickets. B.H.P. has always had the market very largely to itself. Two witnesses were calied who had experience of attempting to arrange that B.H.P. should face competition from imports in its star picket business. One, Mr. T.J. Davis, was for some years until 1985 with New Zealand Wire Industries, and during that period tried to establish an operation in Australia selling New Zealand wire products, particularly in the rural market. He found his task difficult because he said his employer could not supply "the total package of products". He tried to fill the gap 23. - star pickets - with New Zealand posts but they proved to be too expensive. New Zealand Wire Industries investigated setting up an Australian marketing operation to compete with B.H.P. but: "... the end result was that we believed that there would be so much repercussion by B.H.P. and A.W.I. in the marketplace in Australia that we decided not to go ahead with that." New Zealand Wire discussed its plans with B.H.P. and was told by Mr. Robinson that his company's policy was that of wanting 100% of the total market for wire products in Australia. In 1985, Mr. Davis went to work with Ausminco Pty. Ltd., an international trading company importing steel and wire products. He was involved in attempts to import posts from South Korea but that came to nothing. Ausminco also tried to interest manufacturers in Brazil (which has a large steel industry) and Argentina, but those manufacturers were apparently either unwilling or unable to supply posts at a satisfactory price. A reason given by Mr. Davis for both his employers having attempted to provide fence posts as part of their range was that he formed the opinion that potential buyers were concerned "that there would be some retaliation from B.H.P." I held, during the hearing, that evidence of that opinion was admissible, based as it was on extensive inquiries in the market place. 24. The second witness in this category was Mr. V.W. McCarthy who tried to set up a business importing fence posts from South Korea at a favourable price. The principal result of his efforts was that, as mentioned elsewhere in these reasons, in February 1982 8.H.P. introduced its system of a 2% rebate in favour of the large distributors. Mr. McCarthy had a number of problems establishing his business, one of which was that it was necessary for him to give firm orders for large quantities; he could not do that, partly because the major distributors were unwilling to commit themselves, but also because he had difficulties personal to himself. The Applicant and _B.H.P. Some details of this topic have been given in the introductory section of these reasons. The applicant started in business about 20 years ago making barbed wire and has, from time to time, expanded the range of products made, as well as the volume of business done. As I have mentioned, its most recent move in that direction was the opening of a new wire-making plant in the middle of June 1987; it has become the only manufacturer of galvanised wire in Australia, apart from B.H.P. The applicant has sold fencing mainly to Combined Rural Traders and Tubemakers, mentioned above, to Primac, an important pastoral house, and to smaller companies. 25. It is able to buy steel fence posts from B.H.P. in accordance with the published price list, but cannot sell those posts to the major distributors - such as Dalgetys and Elders - profitably. It cannot offer fence posts at a price which competes. The applicant's view is that its inability to do so has affected its wire sales and I find this to be so; in particular, it cannot sell wire to Dalgetys, for the reasons discussed above. There is no dispute that there has been a constructive refusal on the part of B.H.P. to sell the applicant Y-bar. I use the expression "constructive refusal" as descriptive of an offer to sell at an uncompetitive price; B.H.P. is prepared to sell to the applicant at a price which, relatively to 8B.H.P.'s other rolled products, is excessively high. I find that it is designed to be so; that is, the offer made by B.H.P. was pitched at a level which B.H.P. knew would make it impossible of acceptance, because the applicant could not manufacture star picket from Y-bar purchased at that price and sell it competitively. It was made clear on behalf of the applicant by its witness, Mr. M. Dart, that the applicant's purpose in these proceedings is to obtain Y-bar, not fence posts. No doubt it would in reality be satisfied if it were sold fence posts cheaply enough, but it is, I am satisfied, quite genuine in its desire to set up in business manufacturing fence posts, using B.H.P. Y-bar as feed, to compete more effectively with B.H.P. In my view, B.H.P.'s refusal to sell Y-bar to the applicant does not involve discriminating against it in any substantial sense. I say this, although B.H.P. has from time to time (presumably for reasons thought to be related to compliance with the Trade Practices Act) described A.W.I. as its distributor of Y-bar. That is merely its formal position. It has, in truth, sold only relatively small quantities of Y-bar; for example, some 120-180 tonnes per year has been supplied to Papua New Guinea. [ft also exports Y-bar to a B.H.P. subsidiary in New Zealand. Although B.H.P. speaks of its "distribution policy in respect of Y-bar" - for example in a letter to Boral Steel Limited dated 13 February 1984 - its policy is in essence that it does not distribute it domestically, but uses the material itself. Legal Questions Although no formal concession was made, the first of the three elements identified above was not seriously in question, and I find that B.H.P. has, and has had at all material times, a subtantial degree of power in the relevant markets, and that it has been in a position substantially to control the relevant markets. The main dispute was as to taking advantage. Mr. Gleeson Q.C., who appeared with Messrs. Byrne Q.C. and Keane for B.H.P., urged in his reply the view that the central issue in the case is one relating to the construction of s.46, and submitted that B.H.P. should succeed for the reason mentioned above - that one has to read into s.46(1) an element of reasonableness. It was contended that the expression "take advantage of" is not used ina neutral sense. 27. The literal application of the section, on the basis that the expression is to be read neutrally, could lead to strange results. Suppose a powerful firm has a whole market to itself, but is apprehensive about the entrance of a competitor. It might decide that, in its own interests, it should lower prices substantially, with the intention of making it impracticable for the prospective competitor to enter the market. That would seem to fall within the description of taking advantage of its market power for the purpose of preventing the entry of a person into the market, if "taking advantage" has not a pejorative sense. Yet, at least if the lessening of prices is genuine and permanent, i1t would seem odd that such conduct should be treated as illegal, or that a court should enjoin the monopolist to raise its price. Suppose B.H.P., to make it impractical for others to enter the star picket market, decided to galvanise all its fence posts at no extra cost, raising the quality while keeping the price steady. It is improbable that the legislature could have intended to make such a step, greatly to the benefit of the users of the pickets, unlawful. One way of avoiding such results is to read the expression "take advantage of that power" so as to exclude raising or lowering prices, on the basis that in doing so the monopolist is not taking advantage of its market power, but of its financial strength and its efficiency. I do not think that is a satisfactory solution, because it is unlikely that predatory pricing, a classic method of abuse of monopoly power, was intended to be excluded from the operation of s.46. 28. However, that approach may be thought to gain indirect support from the decisions in Top Performance Motors Pty. Ltd v. Ira Berk (Queensland) Pty. Ltd. (1975) 5 A.L.R. 465, Ah Toy J. Pty. Ltd. v. Thiess Toyota Pty. Ltd. (1980) 30 A.L.R. 271 and Warman International Ltd. v. Envirotech Australia Pty. Ltd. (1986) 67 A.L.R. 253. Since those cases point towards an easy solution of the present, some analysis of them is necessary. As s.46(3) of the former provision illustrates, a firm has market power, not only because it has a certain percentage of the market, but because of its assets, physical and intellectual - "technical knowledge, raw materials or capital". Those assets include, in my view, rights under contracts it has with others in the market, such as distributors. In the present case, an aspect of B.H.P.'s market power consists in its arrangements with the major distributors such as Elders, Dalgetys and Primac. There is nothing in the wording or history of s.46 to suggest that it was intended that a charge of monopolisation could be met by the accused firm's demonstrating that its actions would, apart from s.46, have been a lawful use of power. If a monopolist acquires, under contracts, complete control of all the manufacturing facilities or all the raw material or all the distributors in a market, its exercise of its legal rights under guch contracts so as to preserve and enhance its monopoly may, apart from s.46, be unobjectionable. If one were to exclude from the concept of taking advantage of market power the use of rights which are available 29. under the general law, there would not be much left of the section. It is my respectful view that, while in some circumstances establishing that the monopolist had no right under the general law to do that of which complaint is made might assist in establishing a case under s.46, in general such illegality is simply irrelevant. It is not necessarily an answer on the part of the monopolist to say, in such a case as the present: under the general law, I am the proprietor of these goods and may do with them as I please. Insofar as B.H.P. relied on that simple contention before me, I reject it. Top Performance Motors Pty. Ltd. (1975) 5 A.L.R. 465 concerned the termination of a dealership; the dealer sued under s.46 of the Trade Practices Act. Joske J. held (p.468) that "the respondent genuinely considered that it should terminate the agreement for the sake of and in order to protect its legitimate trade and business interests" and that "exercise of its contractual right to terminate a contract for the genuine purpose of protecting legitimate trade and business interests is not taking advantage of a power of controlling a market within the meaning of s.46..." Smithers J. (at p.472) agreed with the reasons of Joske J. and added: "So far as it is the termination of the dealership agreement which is attacked under s.46, it is to be observed that whether that agreement should be terminated or continued for any period depended not upon the respondent's control of the market but upon the terms of the agreement. It appears to me that in terminating the agreement on 30 days notice according to its terms, the respondent was taking advantage of those terms. In relation to that action it did not require to take advantage of any power that it had by virtue of its control of the market, and cannot be said to have done so. For the purpose in hand that control was irrelevant." More generally, these arguments would support the wider proposition that any separate action which a firm takes in a market, in buying and selling, or making or terminating contracts or other arrangements, may be said not to require taking advantage of "any power that it had by virtue of its control of the market". In Ah Toy J. Pty. Ltd. v. Thiess Toyota Pty. Ltd. (1980) 30 A.L.R. 271 and in Warman International Ltd. v. Envirotech Australia Pty. Ltd. 67 A.L.R. 253 an approach similar to that in the Top Performance Case was taken. Wilcox J., who decided the latter case, dealt with an argument that s.46 was infringed by a suit brought for breach of copyright. U.S. authorities were relied on, but his Honour held them inapplicable to the construction of s.46 saying: "Section 46 strikes only at the conduct defined and that conduct is limited to the taking advantage of the market power and the relevant corporation. To exercise in good faith an extraneous legal right, though the effect may be to lessen, or even eliminate, competition is to take advantage of that right, not of market power ..." Another view of these dicta is that they are authority for the proposition that there is no taking advantage of market power if the alleged monopolist could have done that of which complaint was made, market power or no. Reading the provision naturally, it has to be conceded that there is much to be said for that. If it be correct, however, many of the practices which surely were intended to be covered by s.46 would escape. If a manufacturer ties up all the distributors in long-term contracts to shut out his competitors, it may not be possible to show, as to any individual contract, that it would not have come about but for the manufacturer's market power. Yet it is difficult to accept that the Parliament did not intend to catch such conduct. In my opinion, the expression "take advantage of", although loose, was probably not intended to require that what has been done was purely an exercise of power in the market place, as opposed to an exercise of the power of an owner qua owner or a contracting party qua contracting party. Powers of these kinds are components of market power. In my opinion the words rather have the bearing suggested by Donald and Heydon in their work on Trade Practices Law at p.224: "Since the words are inserted, they must do some work, and must refer to something more than causing or achieving a result. They must refer to abuse of position, to something unusual, predatory, forceful or deceitful. A seducer takes advantage of his victim; Hitler took advantage of the disunity and weakness of his enemies; a monopoliser takes advantage of his market power." The views just expressed are consistent with the decision of the Full Court in Victorian Eqq Marketing Board v. Parkwood Eggs Pty. Ltd. (1978) 20 A.L.R. 129. There the Board, which had, of course, a dominant position in respect of the sale of eggs in Victoria, proposed to sell eggs very cheaply to Coles and Woolworths in the A.C.T., if they bought only from it. An interlocutory injunction was granted by Deane J. and upheld on appeal. It is true that Bowen C.J. said at p.137 that: "It is not necessary to determine here whether a corporation in substantial control of a market can contravene s.46 otherwise than by abusing its power by engaging in unfair, restrictive or predatory practices." But his Honour then drew attention to the fact that the offer ata low price was a "temporary expedient designed to retaliate against Cthe competitor''s] activities in the Victorian market". Although he said that it was "not necessary to decide whether without such evidence the conduct of the Board would infringe s.46", he added: "That evidence would permit the learned trial judge to draw the inference that the Board''s actions were temporary and designed for the purpose of substantially damaging Parkwood. The view has been expressed that the sporadic element, that is to say competition which is not intended to be permanent but is for a temporary purpose, is a hallmark of predatory practice and distinguishes it from legitimate competition ..." The reference to "predatory practice" suggests that a reading of the section as requiring misuse of power was, in his Honour's view, at least a possible one. Further, although nothing was said on the point whether it is necessary to show that the conduct complained of was such as could not have been engaged in without dominant market power, the result of the Parkwood Case is such as to imply a view in the negative. What the Board did - offering a large quantity of cheap eggs for sale - could have been done by anyone, whether involved ina market or not, who hada lot of eggs for sale. It was capable of being described as depending solely on the ownership of the eggs - cf. the remarks of Smithers J. quoted above. To return to the reasons of Bowen C.J., there is plainly Much room for argument about the meaning of the expressing "unfair, restrictive or predatory practices". A rather different formulation, tending in the same direction, is to be found in the judgment of Fisher J. in Trade Practices Commission v. C.S.B.P. & Farmers Ltd. £19801 A.T.P.R. 40-151. It is unnecessary to set out the facts, and enough to say that it was an application for relief under ss.45 and 46 of the Trade Practices Act. As to the latter, his Honour said: ",.. each counsel conceded that the concept of taking advantage must entail an element of conscious' predatory behaviour, though neither counsel discussed the precise meaning to attach to these words. Here where the behaviour of the defendant, which is challenged, is its reduction in price, I would see this as predatory behaviour if it be proved that the defendant charged an unreasonably low price with the intent to keep R.T.C. out of the urea industry in Western Australia (p.42,162). -.. there was nothing in the fixation of the new price at this time and at this figure which would justify a finding of predatory conduct. By predatory conduct I have in mind conduct other than in accordance with the established practices of the company engaged infor the purpose and with the concern of damaging R.T.C." (p. 42,166). Counsel for B.H.P. relied on these passages. There is no doubt that it is in accordance with the established practices of B.H.P., from one point of view, not to supply Y-bar to fence post manufacturers. On the other hand, its practice igs to sell the products of its rolling mills to steel processors, and in that sense the refusal to supply Y-bar is exceptional. I confess to some reservation about the usualness of conduct as a complete test of unfairness for the purposes of s.46. A practising surgeon who advertised his prices would be acting most unusually in competing with his fellows, but his conduct could hardly be thought predatory or anti-competitive. A dominant manufacturer may ordinarily engage in practices designed to suppress competition in an improper way. What all the cases referred to above have in common, in my opinion, is that they are consistent with a reading of "take advantage of" which is pejorative and not neutral. While I cannot (with respect) accept that characterising the acts complained of as merely an exercise of legal rights, whether contractual or otherwise, can be an answer to a claim based on s.46, it appears to me that the Australian cases tend to support the view that there is no taking advantage unless there is a misuse of power. Indeed, it was that reading of the Top Performance Case which restrained the Swanson Committee from recommending that' the section be amended so as to make the necessity of misuse of power explicit: see paras.6.5, 6.7 and 6.8 of the Committee's report - Parliamentary Papers 228/1976. It is therefore, in my opinion, unnecessary to resort to the history of interpretation of the Sherman Act and of later United States statutes to support the view that s.46 is directed only against misuse of market power. It should be added, however, that the American cases are generally consistent with the view expressed above; for example, in Aspen Skiing Co. v. Aspen Highlands Skiing Corp (June 18 1985) a Sherman Act case, the Supreme Court's judgment is replete with suggestions that some reprehensible behaviour directed against a competitor is mecessary. There, the court upheld a triple damages award where the jury was instructed that the defendant did not violate the Act if "valid business reasons" existed for its actions, and held that it was relevant to consider whether the defendant's conduct had "impaired competition in an unnecessarily restrictive way", where the words "valid" and "unnecessarily" imply a value judgment. New Customer I was referred to no authority in the United States or in Europe, in support of the view that under legislation of this sort a vendor of property may be forced to accept a new customer except where there was a history of trading enabling one to conclude that the would-be customer was being discriminated against. For the purpose of deciding this case, it is unnecessary to determine whether an injunction having that effect could ever be issued under s.46; however, this gap in the authorities tends to show that refusal of such a new customer is not, in general, regarded as misuse of power. It was pointed out on behalf of B.H.P. that if there is no history of previous trading to set a standard, it must be difficult to frame an order. It would seem to be absurd simply to 36. enjoin B.H.P. to supply the applicant in accordance with s.46, leaving it to be decided in contempt proceedings whether any offer of supply should be held to comply with the injunction as_ to price, quantity and other terms. In the United States, vertical integration has generally been attacked under the Sherman Act by orders requiring vertical separation: e.g. U.S. v. Reading Co. 253 U.S. 26, U.S. v. Lehigh Valley Railway Co. 254 U.S. 255. It does not appear that the American courts have ordinarily regarded it as an ""administrable solution" to regulate the vertically integrated monopolist's dealings. An exception relied on by Mr. Drummond is to be found in the case of Otter Tail Power Co. v. U.S. 410 U.S. 366 where (by a majority) an order was made forcing an electric power company to supply retailers; there the problem of terms was handled by reference to the regulatory power of the Federal Power Commission. The decree provided (see the report at p.375): "The defendant shall not be compelled by the Judgment in this case to furnish wholesale electric service or wheeling service to a municipality except at rates which are compensatory and under terms and conditions which are filed with and subject to approval by the Federal Power Commission." In U.S. v. Aluminium Co. of America 148 F.2d. 416 complaint was made of the price of aluminium sheet and ingot, as produced by a monopolist. An order was to be made purporting to govern the vendor's price. See pp.436-438, 447 of the report; but Areeda and Turner in "Anti-Trust Law" (1978) convincingly argue at para.729 that such an order would burden the Court with a 37. "prohibitive administrative task". In this case, it is likely that if the applicant succeeds in forcing B.H.P. to supply Y-bar, another would-be manufacturer of fence posts, or other such manufacturers, may well be able to force supply also. Then, how is the available Y-bar to be distributed among the participants? B.H.P. has, according to the evidence, excess rolling capacity and could undoubtedly make sufficient Y-bar to satisfy all requirements, if demand increases because of competition; but is it to be forced by the Court to increase its production of Y-bar? If go, what quantities must it produce? Problems of the same sort underlie an award of damages. The carefully-presented damages evidence on behalf of the applicant is based on certain assumptions, the details of which need not be recounted, as to the way in which B.H.P. should have conducted itself so as not to infringe s.46. Awarding damages on the basis sought necessarily involves the Court in retrospectively fixing a proper price - i.e. one in conformity with the requirements of s.46 - as well as fixing a fair distribution of the Y-bar. It is true that examples may be able to be found of instances at which United States courts have elaborately fixed terms of supply in Sherman Act cases: see U.S. v. Sonoco Products Co. (190) Trade Cases 87,954. There a consent decree was made against a manufacturer of a certain sort of paper cone requiring it to sell cone-making machinery in defined quantities within a stipulated time by a stipulated method. It may be that, in some instances of refusal of supply falling within s.46, such an order may be appropriate, rather than one relating the price and terms to the monopolist's terms of supply to others than the applicant. At least until 1981, there was no decision of the Commission of the European Communities requiring a dominant firm to supply a new customer: see Korah "Competition Law of Britain and the Common Market" (3rd ed.) p.227. It is to be noted that the authors of the explanatory memorandum produced in relation to the 1986 amendment of s.46 of our Trade Practices Act appeared to assume that article 86 of the Treaty of Rome is directed to the same general purpose as s.46. The absence noted by Korah is, in my view, of interest, and of assistance to B.H.P. here. It appears right to me to notice the practice of other countries which have similar laws, as to forcing acceptance of a new customer, even if that practice is evidenced only in a negative way. Conclusion and Summary It should be added that there is little difficulty in finding that the necessary purpose existed. But for the absence from the witness box of the relevant B.H.P. witnesses, there might have been some room for argument, but in the circumstances it should be inferred that the purpose of B.H.P.'s refusal of supply fell at least within para.(b) of s.46(1) - prevention of entry into a market. Without elaborating, I hold that the prevention relates to a market within the meaning of the section. The applicant has in the end satisfied me of the presence of all ie 39. elements of its claim except taking advantage, in the sense in which I have construed that concept. The long continuation of B.H.P.'s monopoly in the manufacture of star pickets, while advantageous to it, has had disadvantages to others: presumably the rural community has paid more for star pickets than it would have done in conditions of free competition. By "free competition" I mean the situation which would have emerged if B.H.P. had treated Y-bar - one product of its rolling mills ~ like the other products, by making it available generally for sale. Putting this more simply, the harm caused has principally been to Australian farmers and graziers, but in the view I have taken of the section, it is not all anti-competitive conduct by a dominant party in a market which is proscribed. In particular, s.46 does not make it unlawful simply to have a monopoly, although a characteristic of a monopoly may well be to keep consumer prices up. B.H.P. has not in this case used its monopoly in a way which would ordinarily be regarded as reprehensible; in particular, its refusal to supply a competitor with Y-bar to enable the latter to compete more effectively would not, I think, be regarded in commerce as deserving of criticism. I have regarded the whole of the circumstances set out above as relevant to the "taking advantage point" including the protection available to B.H.P. under the Steel Industry Plan, the special advantages accruing to it as the sole domestic supplier and the fact that other products of its rolling mills are sold. But the presence of these factors is not quite enough, in my view, to enable one to describe B.H.P.'s policy of turning nearly all of 40. a particular product it makes into another product, rather than selling the former product, as predatory or unfair. The essence of the applicant's case is that B.H.P. should be ordered to abandon its monopoly. Section 46 does not say, as I read it, that to have a monopoly is unlawful, nor that it is necessarily unlawful to try to preserve a monopoly. Whether B.H.P.'s use of its market power is a misuse is a question on which different minds may well disagree. The central point which has impressed me is that it is doing no more than declining to sell a product it has not previously sold and which it desires to keep for further processing. It wants to sell only the completed posts, rather than the material from which it makes then. That does not appear to me to be proscribed by s.46, in the circumstances of this case, nor does the section necessarily appear to require - what might logically follow from acceptance of the applicant's case - that B.H.P. make a fair apportionment of its output of Y-bar among those desiring to make fence posts, including itself. B.H.P.'s declining to do so does not (whether or not such conduct could ever infringe s.46) here constitute an infringement, in the absence of some additional element of unfairness or predatoriness. In summary: 1. B.H.P. is dominant in the relevant markets. 2. It is the sole domestic supplier of Y-bar. 41. It has refused to supply Y-bar to the applicant, thereby preventing the applicant from competing with it in the star picket market. Its refusal is not, in my opinion, an abuse of its market power. The application will therefore be dismissed, but an opportunity will be afforded to the parties to address me on costs. { certify that this and the 4O preceding Pages are a true copy of the reasons for judgment herein of His Honour Mr. Justice Pincus m Associate Dated .2 Sep tember Re 7 Counsel for the Applicant: Mr. D.P. Drummond Q.C. Mr. D.R. Gore Solicitors for the Applicant: Messrs. Hawthorne Cuppaidge and Badgery Counsel for the Respondents: Mr. A.M. Gleeson Q.C. Mr. J.H. Byrne Q.C. Mr. P.A. Keane Solicitors for the Respondents: Messrs. Chambers McNab Tully and Wilson Dates of Hearing: 3,4,5,6,7,-10,11,13 August