Australian Competition & Consumer Commission v Qantas Airways Ltd [2003] FCA 125

FEDERAL COURT OF AUSTRALIA

Australian Competition & Consumer Commission v Qantas Airways Ltd

[2003] FCA 125 PRACTICE AND PROCEDURE – striking out or summary dismissal TRADE PRACTICES – striking out a s 46 claim Trade Practices Act 1974 (Cth) s 46 Federal Court Rules O11 r 16, O 20 r 2 Boral Besser Masonry Ltd (now Boral Masonry Ltd) v Australian Competition & Consumer Commission [2003] HCA 5 considered Dey v Victorian Railways Commissioners (1949) 78 CLR 62 applied General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 applied Wickstead v Browne (1992) 30 NSWLR 1 applied Wickstead v Browne (1993) 10 Leg Rep SL 2 applied Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 referred to Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334 at 357-359 referred to AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v QANTAS AIRWAYS LIMITED (ACN 009 661 901) N 408 OF 2002 GYLES J SYDNEY 28 FEBRUARY 2003

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY N 408 OF 2002

BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

APPLICANT

AND: QANTAS AIRWAYS LIMITED (ACN 009 661 901)

RESPONDENT

JUDGE: GYLES J

DATE OF ORDER: 28 FEBRUARY 2003

WHERE MADE: SYDNEY

THE COURT ORDERS THAT: The motion 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

NEW SOUTH WALES DISTRICT REGISTRY N 408 OF 2002

BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

APPLICANT

AND: QANTAS AIRWAYS LIMITED (ACN 009 661 901)

RESPONDENT

JUDGE: GYLES J

DATE: 28 FEBRUARY 2003

PLACE: SYDNEY

REASONS FOR JUDGMENT 1 This is a notice of motion by the respondent Qantas Airways Limited ("Qantas") for orders that: 1. The proceeding be stayed or dismissed pursuant to O 20 r 2 of the Federal Court Rules. 2. In the alternative to order 1, the statement of claim be struck out in whole or in part pursuant to O 11 r 16 of the Federal Court Rules. 2 The motion included orders concerning particulars. It originally came on for hearing before Beaumont J and argument ensued on several occasions about the form of the pleading and about particulars, in the course of which Beaumont J made various rulings. The result is that there were amendments to the statement of claim, so that it is now the second amended statement of claim, and further particulars were supplied. 3 The proceeding is for alleged contravention of s 46 of the Trade Practices Act 1974 (Cth). Qantas has always contended that there were fatal defects in the pleading and submits that the decision of the High Court in Boral Besser Masonry Ltd (now Boral Masonry Ltd) v Australian Competition & Consumer Commission [2003] HCA 5 ("Boral"), delivered on 7 February 2003, supports its contention. The applicant in the proceeding, Australian Competition and Consumer Commission ("ACCC"), has not sought to make any further amendment to the statement of claim following the submissions concerning that decision, despite having had the opportunity of doing so. 4 The principles governing striking out the whole of a statement of claim or otherwise summarily dismissing a case are well known and need no rehearsal (Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91; General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129-130; per Kirby P in Wickstead v Browne (1992) 30 NSWLR 1 at 5-7 (approved on appeal, Wickstead v Browne (1993) 10 Leg Rep SL 2)). As I have decided that the relief sought will not be granted, and as I must go on to hear the case, I will say no more than is necessary to dispose of the motion. 5 The written submissions for Qantas run to fifty-three paragraphs and the motion is supported by two extensive affidavits. A number of criticisms are levelled at the statement of claim. The response on behalf of the ACCC runs to sixty-nine paragraphs. Oral argument took the best part of a day. All of that casts some doubt on the process being undertaken. In my opinion, the only issue which requires close consideration is the argument that there are no material facts alleged in the statement of claim which could amount to Qantas taking advantage of its alleged market power. I am satisfied that the issues which are covered by paragraphs 31 and onwards of the submissions for Qantas are adequately answered (for present purposes only) by the written and oral responses by counsel for ACCC, which are duly recorded. 6 At the risk of some over-simplification, I will attempt to encapsulate the pleaded case and the essence of the attack made upon it. This is subject, of course, to the detailed arguments of both parties. The backdrop can be seen from paragraphs 8 and 9 of the second amended statement of claim: "8. In the premises: (a) there is a market for Australian airline services ("the Australian airline market"), the geographic extent of which is Australia; or alternatively (b) there is a market for Adelaide–Brisbane services, which market includes both direct services and indirect services (being services which are offered to the public as Adelaide–Brisbane services via Sydney, Melbourne or Canberra) ("the Adelaide – Brisbane market"), the geographic extent of which is Australia or, alternatively, Adelaide and Brisbane. 9. Between 1 June 1999 and 14 September 2001, the demand for Australian airline services was met by the following airlines, in competition with each other: (a) Qantas and its subsidiaries Airlink, Eastern Australia Airlines, Southern Australia Airlines and Sunstate Airlines; (b) Ansett and its subsidiaries Aeropelican Air Services, Hazelton Airlines, Kendell Airlines and Skywest Airlines; (c) from 31 August 2000 Virgin; (d) until 14 May 2001, when it leased all its aircraft to Qantas, Impulse Airlines Pty Ltd ("Impulse"); and (e) various regional airlines, which do not primarily or substantially operate between capital cities in Australia." 7 The Adelaide-Brisbane services consisted of direct services each way and what were described as indirect services which travelled via Sydney, Melbourne or Canberra, with only Qantas and Ansett providing those services. 8 The immediate factual background which is alleged sufficiently appears from the following paragraphs: "61. Virgin entered the Australian airline market and commenced offering services between Brisbane and Sydney on 31 August 2000. 62. On 9 September 2000 Virgin announced it would commence two daily direct services each way between Adelaide and Brisbane by 1 February 2001. 63. At the time of that announcement, Qantas operated approximately thirteen direct services per week from Adelaide to Brisbane and approximately ten direct services per week from Brisbane to Adelaide, as well as indirect services via Sydney, Melbourne and/or Canberra. Ansett offered one daily direct service each way as well as indirect services via Sydney, Melbourne and/or Canberra. 64. By about 1 November 2000 Qantas had added a further three direct services per week from Brisbane to Adelaide, thereby offering a double daily direct service each way on that route, in addition to indirect services via Sydney, Melbourne and/or Canberra. 65. On or about 2 November 2000 Virgin announced that it would move its commencement of two daily direct services each way between Adelaide and Brisbane forward to 15 December 2000. It also announced that the highest fare to be offered by Virgin for Adelaide-Brisbane services was $598.00 return. 66. As at 2 November 2000, the full economy fare offered by both Qantas and Ansett for travel between Adelaide and Brisbane was $1,104.40 return. 67. On 7 December 2000 Virgin commenced operations between Adelaide and Brisbane with a single daily direct service each way. 68. On 15 December 2000 Virgin commenced operating a double daily direct service each way between Adelaide and Brisbane. 69. On or about 19 December 2000, the Executive Committee of Qantas (which included from time to time Qantas' Chief Executive Officer, Deputy Chief Executive Officer, Chief Financial Officer, Deputy Chief Financial Officer and the Executive General Managers of each of Qantas' operational branches) considered a report and recommendations to it concerning possible responses to Virgin and Impulse entering into the Australian airline market. 70. On 22 December 2000 Qantas gave effect to a decision, in response to the commencement of airline services by Virgin between Adelaide and Brisbane, to implement a third daily direct service each way between Adelaide and Brisbane from 1 February 2001 by announcing the third daily direct service to the public and travel agents and accepting bookings for those flights. 71. On or about 1 February 2001, Qantas increased its own direct capacity between Adelaide and Brisbane by approximately 50% by adding a further daily direct service each way between Adelaide and Brisbane and thereby from 1 February 2001 operated a triple daily direct service each way on that route. 72. Since at least 30 August 2000 and until at least 14 September 2001, Qantas adopted and implemented a policy of matching the lowest fare offered by Virgin from time to time for Australian airline services, apart from possibly Virgin's very low introductory fares, notwithstanding that it continued to operate as and offer the benefits and additional services of, a full service airline and that Virgin was, and operated as, a low cost airline. 73. Since at least 3 November 2000 and until at least 14 September 2001, Qantas adopted and implemented a policy of matching the lowest fare offered by Virgin from time to time for Adelaide-Brisbane services, notwithstanding that it continued to operate as, and offer the benefits and additional services of, a full service airline, and that Virgin was, and operated as, a lost cost airline. … 74. Moreover, from time to time between 3 November 2000 and 14 September 2001 Qantas offered fares for Adelaide-Brisbane services that were lower than Virgin's lowest fares for Adelaide-Brisbane services, while continuing to offer the benefits and additional services of a full service airline. … 75. Moreover, from 3 November 2000 Qantas reduced its fares for Adelaide-Brisbane services for travel after 7 December 2000 (the date that Virgin commenced offering Adelaide-Brisbane services) from its fares offered for those services prior to 3 November 2000 such that Qantas' average fare on that route substantially reduced and remained at that substantially reduced level until about 14 September 2001. This conduct is subsequently referred to as "reducing fares"." 9 In short, Qantas' response to the proposed, and then actual, participation by Virgin on the Brisbane-Adelaide route was to increase capacity significantly and reduce price significantly. It is also alleged that, as a result of the way in which the yield management systems utilised by the airlines operate, the effect of increased capacity would exaggerate or increase the effect of the lowering of fares because more cheap seats would be sold. 10 Counsel for Qantas submits that the basis of the complaint is predatory pricing, as the extra capacity would have no impact unless it had an effect upon price. Counsel for ACCC submits this is too simplistic as, for example, the ability to move planes at short notice and to take advantage of existing infrastructure with existing sunk costs were aspects of market power which were utilised according to the pleaded case. The submission for Qantas can be accepted for the purposes of argument. The next step is that it is submitted that it is established by the decision in Boral that market power is not taken advantage of (or may not exist) unless the profits foregone or losses sustained in a price war are to be recouped when (as in this case) the new entrant withdraws from the market. This is said to involve the proposition that Qantas could, and would, make what counsel described as supra-competitive profits once Virgin departed the scene. It is submitted that this essential matter is not pleaded. It is also submitted that it is not pleaded that the Qantas prices were below avoidable, variable or marginal cost. 11 Counsel for ACCC has two responses – the first is that the significance of recoupment, the making of supra-competitive profits, avoidable, variable and marginal costs may be relevant to be considered at an evidentiary level, but do not have to be pleaded. The second is that, insofar as it is necessary, material facts are pleaded. 12 In relation to the first point, he refers to the judgment of Gleeson CJ and Callinan J in Boral at [130]: "While the possibility of recoupment is not legally essential to a finding of pricing behaviour in contravention of s 46, it may be of factual importance." and at [190]-[191] where Gaudron, Gummow and Hayne JJ say: "190.Beaumont J also referred to the increase by BBM in its market share as an indicator of the exercise of its economic strength. That strength, to his Honour, was attributable not only to the capacity of BBM but also "to its willingness to forego profits in the short or even medium term, in the expectation that other players (albeit not Pioneer) would probably decide to depart". 191. On that view of the matter, it would, at least at an evidentiary level, be appropriate to consider what in the United States decisions is treated as "recoupment". …" 13 Reference can also be made to the following from Gleeson CJ and Callinan J in Boral: "124.Section 46 does not refer specifically to predatory pricing, or recoupment, or selling below variable or avoidable cost. These are concepts that may, or may not, be useful tools of analysis in a particular case where pricing behaviour is alleged to contravene s 46. Care needs to be exercised in their importation from different legislative contexts. … 128. It may equally be said that there is nothing in s 46 that, as a matter of law, requires a distinction to be drawn between pricing below or above variable or avoidable costs. As has already been observed, the distinction is in some respects unsatisfactory. Furthermore, in the present case it is of limited utility. …" 14 In relation to the second point, counsel refers to a number of paragraphs of the second amended statement of claim, including the following: "35. Between about 30 October 1993 when Southern Cross Airlines Pty Ltd, trading as Compass, ceased competing in the Australian airline market and about 5 June 2000 when Impulse expanded its services onto routes between capital cities in Australia in competition with Qantas and Ansett, each of Qantas and Ansett had generally offered fares in the Australian airline market at the same levels and on the same conditions. Those fares were overall substantially above the cost of providing the services including in the case of Adelaide-Brisbane services. 36. Since at least 19 December 2000, Qantas believed, by reason of the matters pleaded in paragraphs 25, 26, 29, 34, 35, 40, 41, 42 and 45, that if Virgin and Impulse could be deterred from supplying airline services on a particular route within the Australian airline market, then the average fare on that route (that is, the total fare revenue from all passengers on the route divided by the total number of passengers) would remain at, or return to, the level or substantially the level of average fare attained by it prior to Virgin's entry into, or Impulse's expansion in, the Australian airline market because Ansett would not act, or alternatively was unlikely to act, to restrain Qantas from attaining that level of average fare. … 77. From at least 15 December 2000 it was the fact, and from that time, or alternatively from a time prior to July 2001, Qantas knew that: … (j) Qantas had the financial resources and strength to sustain losses on the route longer than its competitors; (k) the likely effect of its conduct would be to cause one or more [of] the competitors to withdraw capacity or withdraw entirely from providing Adelaide-Brisbane services if it continued to maintain the additional daily direct flight each way; (l) if Virgin withdrew entirely from offering Adelaide-Brisbane services, the fares it could then charge would return substantially to the levels obtaining prior to Virgin commencing services and that Ansett would not adopt any course to prevent this happening; …" 15 To these might be added: "34. By reason of the matters pleaded in paragraphs 26(b), (c), (d), (e), (f), (g), (l), (m), (n), (o), (p), (q), (v), (z) and (ff) and 31-33, at no material time in the period 1 June 1999 to 14 September 2001 was Ansett financially able to sustain a prolonged price war with Qantas in the Australian airline market or the Adelaide-Brisbane market. … 37. By reason of the matters pleaded in paragraphs 25, 26 and 29-36, at all material times in the period 1 June 1999 to 14 September 2001 Ansett had insufficient power to materially constrain Qantas in the Australian airline market or in the Adelaide-Brisbane market. 38. By reason of the matters pleaded in paragraphs 25, 27, 28 and 30, at all material times in the period 1 June 1999 to 14 September 2001 Virgin and Impulse had insufficient power to materially constrain Qantas in the Australian airline market or in the Adelaide-Brisbane market." 16 I have already set out a number of the paragraphs dealing with pricing. There are also a number of paragraphs which plead facts which would support the likelihood that custom would stay with Qantas after Virgin was eliminated, even after prices rose again. 17 In my opinion, there is no defect in the pleading which is clear enough to strike it out or otherwise stay or dismiss the proceeding. There is no doubt that the decision in Boral, taken together with Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1, has clarified a number of aspects of the operation of s 46. Those decisions have not, however, dealt with the operation of s 46 where there is what is sometimes called an oligopoly (or, in the present case, a duopoly) or the related question as to the precise difference in operation between the earlier form of s 46, which spoke of a corporation that was in a position "substantially to control a market", compared with the present description "that has a substantial degree of power in a market". There is no doubt that the 1986 amendment was intended to lower the threshold and to give s 46 work to do in situations short of dominance or control. 18 Concepts such as avoidable cost, marginal cost, supra-competitive profits, recoupment and predatory pricing are all glosses on the statute which may well prove important, or even decisive, at the evidentiary level. In my opinion, the second amended statement of claim would accommodate a case that the stronger member of an effective duopoly which is earning good (but not necessarily excessive) profits suffered the short-term pain of a price war in order to see off a new entrant which threatened to disturb the duopoly (or, indeed, monopoly if the weaker party to the duopoly failed) so that the previous level of profit would at least be maintained. See, for example, the following from the judgment of McHugh J in Boral: "285. ... In a market left with two or three oligopolists after price-cutting has forced some firms from the market, the price-cutter may be able to charge supra-competitive prices and recoup its losses because its rivals are content to allow itdo so. This can be done without collusion between the oligopolists. The phenomenon of oligopolists charging supra-competitive prices without collusion is not as rare as Merkel J seems to have thought. In his article on "predatory pricing" that criticises this part of the reasoning of their Honours, Mr Geoff Edwards correctly points out: "[F]irms with less than the pricing discretion of a pure monopolist can also achieve prices well above competitive levels, and even if not a pure monopoly, any firm with a substantial degree of market power certainly would have such an ability." 286. I would have thought that there was an arguable case that once most of BBM's rivals were driven from the market, Pioneer and BBM would have been able to charge supra-competitive prices. This is particularly so, if the benchmark for supra-competitive prices was a more efficient producer than Pioneer and BBM were, as C&M appears to have been in certain areas of production. However, Heerey J found that BBM would not be able to recover its losses. Given the evidence and the way that the case was conducted in this Court, it would not be proper to reverse this finding of Heerey J, a finding that the Full Court did not seek to overturn." 19 In the present unsettled state of the law, I would not be prepared to conclude that such a case would not involve taking advantage of market power without regard to the detailed facts which emerge. The High Court has indicated on more than one occasion that it may be undesirable to attempt to decide a controversial matter of principle without regard to all the relevant facts (Wickstead v Browne (1993) 10 Leg Rep SL 2; Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 533-534; Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334 at 357-359). 20 If the arguments now presented by Qantas prevail in the long run, it may be that a special order for costs might be made, but I do not prejudge that issue. 21 The relief sought in the mention will be refused. I will hear argument about the costs of the motion.