On 30 November 2011, the full bench of the Federal Court dismissed the ACCC's appeal against the primary judge's ruling that the acquisition of Franklins by Metcash will not result in a substantial lessening of competition in contravention of section 50 of the CCA, and ordered the ACCC to pay the legal costs incurred by Metcash and the vendor, Pick n Pay.
The appeal was dismissed on the basis that the ACCC's counterfactual was not made out, namely that - without the Metcash acquisition - there was a real chance that a binding offer would be made by the KKKL consortium to acquire the whole, or a significant majority, of the Franklins assets which would be accepted by Pick n Pay. The Court accepted the primary judge's conclusion that the ACCC's counterfactual was a "matter of pure speculation".
For this reason alone, the ACCC's case failed and it was not necessary for the Court to embark upon a further analysis of the likely effects on competition of Metcash's acquisition. However, in their separate judgments, Justice Yates and Justice Buchanan made some important observations about the legal standard under section 50 of the CCA and market definition.
The primary judge held that where multiple counterfactuals are contended for by the ACCC, the ACCC must establish that:
Justice Yates, noting that it is not necessary to come to a final view on the requisite legal standard, expressed serious doubts about the appropriateness of the primary judge's 'two-step' test. Justice Yates pointed out that a counterfactual was no more than an element of the competition assessment and that it was difficult to see why a different legal standard should apply to a counterfactual "which has no separate existence or purpose … other than as an aid to detect the existence and extent of change in the process of competition".
Justice Buchanan, in contrast, called into question the correctness of the "real chance" test as the requisite standard of proof under section 50 of the CCA. In his view, there is nothing in section 50 of the CCA which alters the general rule in section 140 of the Evidence Act requiring a case for relief in the Federal Court to be established on the balance of probabilities. Accordingly, Justice Buchanan not only agreed with the primary judge's view that the 'balance of probabilities' test is the appropriate test to establish the counterfactual (as part of the factual foundation for the ACCC's case), but advocates that this test (rather than the 'real chance' test) should also be applied when determining whether or not a merger has the likely effect of substantially lessening of competition in a market - without finding much support for the latter view in the existing case law.
Justice Yates embraced the primary judge's approach that, in defining the relevant market, one has to take account of commercial reality, not simply economic theory. Justice Yates found that, while a case could be made, on the evidence, that there is a separate wholesale market for the supply of packaged grocery products, with the major supermarket chains (only) providing an indirect constraint on the participants in that market, the primary judge did not err in rejecting the existence of a separate wholesale market.
The primary judge reasoned that if Franklins is in the relevant market with Metcash (as the ACCC contended) the major supermarket chains must be included in that market because they impose a closer constraint on Metcash than Franklins. Justice Yates found that the "inevitable consequence" of this reasoning was that the definition of the market must accommodate multiple functional levels given that the supermarkets were vertically integrated and the competitive constraint on Metcash was ultimately imposed by the fierce competition among grocery retailers.
Justice Buchanan criticised the ACCC for not identifying the market by reference to the dynamics and constraints really at work, but by reference to the need to supply foundation for a hypothesis which the ACCC wished to offer about the future state of the market. Justice Buchanan found that the competitive forces were at work in a broader context that necessarily included reference to retail operations and retail sales. Once the narrow market suggested by the ACCC was rejected, Justice Buchanan concluded, its case could not succeed.
While it was not necessary for the Court to express a concluded view on the proper construction of, and standard of proof that is to be applied under, section 50 of the CCA, it is unfortunate that the Court's judgment has increased the uncertainty about the requisite legal standard to be applied in merger cases, rather than providing some clarity about it. Not only are there two diametrically opposing views about the evidentiary standard that the ACCC needs to satisfy when contending a particular counterfactual, but Justice Buchanan cast doubt on the future of the 'real chance' test in merger control, if not the entire CCA.
The ACCC has recently stated that it is closely examining the judgment before commenting further - it has a lot to ponder about.
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