Jurisdiction - Australia
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ACCC Loses Metcash Appeal.

16 December, 2011

 

 

In brief: 

 

The Full Federal Court has dismissed all grounds of the Australian Competition and Consumer Commission's appeal in the Metcash case. 

 

The facts

 

On 1 July 2010, Metcash entered into an agreement with Pick n Pay to acquire Franklins for $215 million.

 

At that time, Franklins was a wholly owned subsidiary of Pick n Pay and operated a grocery business in NSW involving both wholesale and retail activities. It owned and operated 80 supermarkets, and had 10 supermarkets that operated under franchise. Through its distribution business, Franklins supplied wholesale grocery products to Franklins-branded supermarkets.

 

Metcash is Australia's largest wholesaler and distributor of grocery products servicing independent supermarkets throughout Australia. Metcash also provides branding and other support services to independent supermarkets that operate under the IGA brand, which is owned by Metcash.

 

On 17 November 2010, the Australian Competition and Consumer Commission (the ACCC) announced it would oppose the acquisition. On 8 December 2010, the ACCC commenced proceedings in the Federal Court, seeking a final injunction to prevent Metcash from completing the acquisition.

 

On 25 August 2011, Justice Emmett delivered his decision dismissing the ACCC's application for an injunction to prevent Metcash from acquiring Franklins.

 

The acquisition proceeded to completion on 30 September 2011.

 

The ACCC appealed Justice Emmett's decision, seeking a declaration of contravention and, if successful, stated its intention to commence divesture proceedings.

 

Key findings

 

Market definition

 

The ACCC argued that the relevant market was the wholesale supply of groceries to independent supermarkets in NSW and ACT, in which the major supermarkets do not participate, and that the acquisition would substantially lessen competition in this market. At trial, Justice Emmett rejected this argument and found that Metcash was not simply a wholesaler but was also closely involved in the retail activities of IGA stores (see earlier article on this judgment). Participants in the market would include, among others, Coles, Woolworths, Franklins-branded stores and IGA-branded stores, and the acquisition would not substantially lessen competition in this market but, rather, strengthen the capacity of independent retailers operating under the IGA banner to compete more vigorously with the major supermarket chains.

 

On appeal, the Full Court upheld Justice Emmett's decision and again rejected the ACCC's narrow market for the wholesale supply of groceries to independent supermarkets in NSW and the ACT. The Full Court supported the trial judge's finding that it was not possible to determine the competition consequences of Metcash's acquisition without taking into account the constraint from the major supermarket chains as market participants. In doing so, the Full Court emphasised that the concept of a market must be applied 'in a practical way to accommodate the concerns of the Act with those of business and commerce.*

 

Justice Buchanan labelled the ACCC's approach to its market definition as 'a distraction from the real questions for attention' where 'the market was not identified by reference to the dynamics and constraints really at work, but by reference to the need to supply a foundation for the hypothesis which the ACCC wished to offer about the future state of the "market".**

 

The counterfactual

 

At first instance and on appeal, the ACCC's position was that it was likely, in the sense of a 'real chance', that, absent the acquisition of Franklins by Metcash, a consortium of buyers would be a credible alternative purchaser and would be able to establish a wholesaling operation to independent retailers in competition with Metcash.

 

Metcash submitted that the 'real chance' test did not apply, as the standard of proof in relation to the identification of counterfactuals; rather, the civil standard of 'balance of probabilities' did. At first instance Justice Emmett accepted this position and concluded that the ACCC had to show that it is more probable than not the ACCC's counterfactual would come to pass. Ultimately, Justice Emmett was not persuaded that it was more probable than not (nor even a real chance) that a consortium of buyers would acquire Franklins.

 

On appeal, Justice Yates (with Justice Finn in agreement) declined to come to a final view on the appropriate standard of proof when identifying counterfactuals. Rather, his Honour noted that even if the ACCC was only required to establish a 'real chance' that its counterfactual case would come to pass absent the Metcash acquisition, the ACCC still failed that standard:***

 

"The primary judge was called upon to make a 'real world' assessment based on matters that were commercially relevant and meaningful. The primary judge did so. His Honour was not required to move on mere possibilities, let alone speculative possibilities."

 

However, Justice Buchanan did offer a view as to the appropriate test when identifying counterfactuals. His Honour stated that the ACCC's counterfactual scenario was 'full of difficulties'**** and that using 'a real chance' as a standard of proof invites and endorses 'speculation and conjecture'.***** He noted at [6]:

 

"The circumstances of the present case are such as to call into question the soundness of the authorities relied on by the ACCC… If the ACCC was correct about its two stage application of the 'real chance' test, the case would have to be decided upon a position where speculation was heaped on speculation [emphasis added]. That outcome would not, in my view, be consistent with the application of a proper judicial method."

 

 

Similar to Justice Emmett, Justice Buchanan's view was that 'the balance of probabilities' proof should be applied when identifying counterfactuals. In addition, his Honour found that, in his view, the most suitable standard of proof when determining if it is 'likely' that competition would be lessened should not be 'a real chance' but, rather, 'the balance of probabilities.' However, Justice Buchanan recognised that the weight of current law is to assess a substantial lessening of competition under section 50 of the Competition and Consumer Act 2010 (Cth) using a 'real chance' standard.

 

Having rejected the ACCC's market definition and counterfactual cases, the Full Court upheld Justice Emmett's finding that Metcash's acquisition of Franklins would not be likely to have the effect of substantial lessening competition in the market the ACCC propounded.

 

Significance of the decision

 

It is now clear that the standard of proof for establishing a counterfactual is the 'balance of probabilities' and not a 'real chance' as contended for by the ACCC. Once the counterfactual is established, for the ACCC to block a merger it must be satisfied that there is a 'real chance' that it will substantially lessen competition. However, there remains a question whether it is appropriate to use the 'balance of probabilities' standard for both limbs under a s50 assessment. The ACCC will have to look carefully at its approach to merger analysis as a result.

 

Footnotes

 

*ACCC v Metcash Trading Limited [2011] FCAFC 151, per Justice Yates at [382].

**At [12].

***At [235].

****At [16].

*****At [88].

 

 

For further information, please contact:

 

Jacqueline Downes, Allens Arthur Robinson

jacqueline.downes@aar.com.au

 

Nicholas Mendoza-Jones, Allens Arthur Robinson

nicholas.mendoza-jones@aar.com.au

 

 

 

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