Antitrust Alert: Australia Court Broadens "Market" Definition in Australia

Companies doing business with Australia are cautioned that the reach of the Australian competition law has grown considerably in recent years, particularly in relation to price fixing cartels. In a split decision, the Full Federal Court has upheld an appeal brought by the Australian Competition Commission (ACCC), finding that Air New Zealand and Garuda engaged in price fixing conduct within a "market in Australia" even though the market was also in another country.

This latest decision is evidence of the ACCC's continuing aggressive enforcement of the law in a global context. This decision highlights that companies should consider very carefully whether their conduct might fall within the jurisdiction of the ACCC and that a detailed examination of the dimension of the relevant markets is necessary to undertake such an assessment. Market definition is a key element in many of the Australia's competition laws and an incorrect analysis may fail to inform a business of its exposures putting it a serious risk of an aggressive enforcement action by the ACCC.

Background

As noted in our prior antitrust alert, the ACCC alleged that Air New Zealand and Garuda and other carriers fixed prices and fuel surcharges for air cargo services, in violation of the Trade Practices Act 1975 (Cth), now the Competition and Consumer Act 2010 (Cth). The ACCC already had settled with thirteen other airlines, who collectively paid approximately AUD$98 million in penalties for the imposition of air cargo surcharges on cargo sent to Australia from Hong Kong, Singapore, and Indonesia.

Before the introduction of the new cartel provisions in 2009, the competition law required that the conduct occur in a market "in Australia." The primary judge in the Federal Court of Australia found that there was no breach because the markets for airborne cargo out of Hong Kong, Singapore, and Indonesia were not markets "in Australia" within the meaning of the Act. The court held that the market in question was located at the point at which the passenger's choice of airline (a "switching decision") took effect, that is, the place where the surcharges were actually imposed and collected. That decision was not made in Australia, but overseas.

On appeal

The main issue for the appeal court was whether the alleged contravening conduct occurred in a market in Australia. The ACCC argued that the trial judge had erred by restricting his definition of the market to the geographic location where customers made the decision to switch between air cargo carriers, despite accepting evidence that significant components of the "suite of services" offered by the carriers occurred in Australia.

The majority of the appeal court rejected a narrow approach focused on one aspect of the market, in this case, the location of the supplier and likely substitutes. The majority instead considered that the proper approach to this question involves the evaluation of two related steps: (1) identification of the relevant market, which involves the consideration of likely substitutable goods or services; and (2) characterizing whether the identified relevant market is in Australia. The appeal court noted that it would be wrong to identify the geographic market focusing only on the physical location; other dimensions may be relevant.

The appeal court stressed that the reference to a market in the Act is an abstract concept that is not limited to a physical location. When defining the market, each of the "dimensions" is relevant: product, geographic, and functional. In characterizing whether the defined market is "in Australia," the majority considered that, in many cases, the geographical dimension will be sufficient. However, the question itself is not whether the geographic dimension of the market is in Australia, nor is it whether the effect of a switching decision is in Australia (as was found at first instance).

In concluding that the correct characterization of whether the Hong Kong-to-Australia port markets for the air cargo services were markets "in Australia," the majority reasoned:

1. A market can be "in Australia" even if the market is also in another country, as was the case here.
2. The relevant provisions do not preclude the consideration of factors such as the presence of customers in Australia to whom the services were marketed or the fact that the services involved performance in Australia.
3. A significant and important part of the services being provided was in Australia: the cargo was transported to Australia, ground handling services were provided in Australia, and there were inquiry services in Australia (related to tracing shipments and delayed or damaged shipments).
4. The suite of services provided by the airlines involved barriers to entry in Australia, including the availability of landing slots, licenses to operate, permission to use facilities, and permission to operate additional flights.
5. The services were marketed in Australia to customers of the airlines, that is, the airlines competed for business in Australia.
6. The legislative purpose of the Act is "enhancing the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection" supports the appeal court's conclusion.
7. The conclusion that the market is "in Australia" is consistent with the approaches of New Zealand and Europe.

The dissenting judgment held that the finding that none of the relevant markets were located in Australia had been correct, basing this conclusion on the location of the "field of actual and potential transactions between buyers and sellers." The dissent emphasized distinction between the transactions, which occurred overseas, and the product itself, being the service which was provided in part in Australia.

Implications

This ruling demonstrates that a company's conduct offshore can still potentially open it to scrutiny by Australia authorities, where the conduct affects Australian importers and consumers, and even where the primary effect is offshore. Importantly, it shows that anticompetitive agreements may still be held to have occurred in a market "in Australia" even where the agreements themselves are entered into and given effect overseas, because the geographic element of an arrangement is not of itself determinative of the location of the market.

The court's decision would bring the Australian position closer to decisions in other jurisdictions, including the United States, New Zealand and Europe. But given the divergence in reasoning among the three judges and the uniqueness of the question (not to mention the significant penalty at stake for Air New Zealand and Garuda), this still may be appealed to the High Court. The conduct in this case is now caught by the new cartel laws (since 2011) under the Australian Competition Statute, which do not have the same requirement that the market be located "in Australia." Therefore the reasoning on appeal will have only indirect application to future cartel cases: numerous other provisions of the Australian Competition Law are assessed by reference to a market in Australia including those regulating agreements and also mergers. Companies should be cautious when engaged in conduct or transactions that may have a competitive effect in Australia or on Australian consumers, even if indirect and not immediate.

Lawyer Contacts 

For more information, please contact your principal Jones Day representative or either of the lawyers listed below.

Nicolas Taylor
Sydney
+61.2.8272.0715
njtaylor@jonesday.com

Prudence Smith  
Sydney
+61.2.8272.0593
prudencesmith@jonesday.com

Jones Day prepares summaries of significant antitrust enforcement, litigation, and policy events as a service to clients and interested readers, to provide timely insight on antitrust and competition law developments relevant to business, but not as legal advice on any specific matter.  Please visit our Publication Request form  to add your name to our distribution list.