Arnotts Ltd v Trade Practices Commission

Justice Lockhart
Justice Wilcox
Justice Gummow

[1990] FCA 473; 97 ALR 555 

Federal Court of Australia (Full Court)

Overview

Issues on appeal

• Whether the acquisition contravened s 50; in particular

  • the relevant market (Australian biscuit market)

  • whether Arnotts was dominant

  • whether the acquisition would substantially strengthen Arnotts' market power

• Whether evidence given by Dr Phillip Williams should have been deemed inadmissible.

Justice Beaumont's finding that the grant of the option created an equitable interest in shares and therefore constituted an 'acquisition' was not challenged on appeal

Result

Appeal dismissed. Their Honours were satisfied that 'Beaumont J was correct in each of the three principal findings' (para 14)

On the nature of the proceedings (in particular claims of confidentiality)

Before turning to the substantive issues the Court commented on some concerning aspects of the trail (para's 7-). In particular, they were concerned with the duration and cost of the trial. Their Honours noted:

[para 8] 'The investigation of these practical questions of fact involved a trial occupying 110 hearing days, spread over nine months. The hearing generated some 6,500 pages of transcript and 292 exhibits. Most of the exhibits were lengthy documents. Many occupied one or more large ring-bound folders. Stacked side-by-side in folders, the exhibits extend for some five metres. In total, they contain tens of thousands of pages. The trial Judge found it necessary to refer in his reasons for judgment to only a handful of those documents, although no doubt he read them all. ... before us, the appellants attacked his Honour's findings on almost every significant factual issue and many of his evidentiary rulings, and although both parties supplied us with extensive written submissions supplemented by seven days of addresses, counsel found it necessary to refer us to only a tiny proportion of the oral and documentary evidence; perhaps no more than two per cent of it. We acknowledge that it is usually unnecessary on appeal for counsel to refer to the whole of the evidence led, and properly led, at the trial. We also acknowledge that material which itself has no evidentiary value is sometimes properly tendered in order to provide a context for other material. However, making these allowances, the comparison just made raises immediate doubts about the utility of much of the evidence tendered at the trial. Those doubts are abundantly confirmed by examination of the material itself.

Their Honours also noted the extensive claims of confidentiality which led the trial judge to make orders limiting access (normally to lawyers and independent experts). This meant that ' counsel and witnesses were inhibited in their references to the contents of documents unless the Court was closed to the public, as it frequently was.' (para 9). Their Honours noted that the trial judge 'relied heavily upon these documents for his conclusions that the relevant market was properly to be described as "the Australian biscuit market" and that Arnotts already enjoyed a dominant position in that market.' This resulted in an unexpurgated version of his judgment being 'made available only to a limited number of people' and 'an expurgated version of his reasons, for a general audience, from which all citations from the "confidential" documents were omitted. That version lacked both basic information and intelligibility' and it 'is not until one reads the unexpurgated version that one can gain any real understanding of his Honour's findings of fact or processes of reasoning.' (para 9)

Their Honours noted that while some documents are 'truly confidential' (para 11) and where those documents 'become involved in litigation, the disadvantages of restricting access may have to be accepted in order to avoid injustice to their owners or authors', but noted that few of the documents for which such claims were made in this case could be said to be 'truly confidential'. As a result the Full Court revoked the confidentiality orders made by the trial judge 'insofar as it related to any material set out in the unexpurgated reasons' (para 11). Their Honours further noted that the confidentiality claims in this case were unacceptable and neither 'the Court nor the litigants should have to contend with the constraints imposed by unnecessarily wide confidentiality orders' or 'be burdened with the consequences of a mountain of seemingly unnecessary evidence.' (para 12)

[para 13] There appears to be an assumption abroad today about commercial litigation: that, when big issues are at stake, there must inevitably be a long and complicated hearing. This assumption must be discarded. No matter how much is at stake, in dollar terms, there is no justification for irrelevant or unuseful evidence. Moreover, it is in the interests of the parties to analyse properly the cases which they wish to make and to restrict themselves to helpful material; and not only because of savings in costs. The devotion of excessive attention to peripheral matters, rather than the main issues, causes the parties to lose sight of the real issues and to devote insufficient attention to them. The result may be to leave the Court with insufficient or unsatisfactory material upon principal factual issues. The essence of counsel's function is the identification of, and concentration upon, the critical issues in the case.

[para 14] A remarkable feature of the present case is that, when the smoke all clears away, most of the critical facts stand clear and uncontroversial.

Background

Their Honours first set out some details about Arnotts' business, noting its initial establishment in 1850, subsequent acquisitions and a 'degree of vertical integration and product diversification' (para 16). They noted that by the time of the trial

[para 17] 'the Arnott commercial empire involved assets of approximately $800m and a share capital of $7m. The parent company, Arnotts Limited, has a large number of subsidiaries in Australia and abroad. The operating revenue of the group for the year ended 30 June 1988 was $709m. The principal activities of the group are the manufacture and distribution of biscuits, formula dietary foods, snack products, cakes, pet foods, confectionery, bread, jam, nuts, packaging materials, containers, flour milling and engineering. Arnotts itself is a major Australian manufacturer of food products; including biscuits, cakes and confectionery. Biscuits represent the major part of Arnotts' business.

[para 18] The biscuits manufactured and sold by Arnotts include a number of well established brand names. The "Milk Arrowroot" biscuits made their appearance in about 1880. "Sao", "Assorted Creams", "Family Assorted", "Scotch Finger", "Gingernut" and "Shredded Wheatmeal" biscuits have all been marketed since at least 1906. "Monte Carlo" and "Spicy Fruit Roll" were introduced in the 1920's. The dry cracker biscuits known as "Jatz" and "Salada" were introduced more than 25 years ago. The evidence indicates, on the part of consumers, strong recognition of Arnotts' brand, which is displayed on distinctive packaging. Arnotts' biscuits are perceived by consumers as the best quality biscuits, but as more expensive than other brands.

Nabisco commenced operations in Australia approximately 20 years before the trial. In addition to biscuits it manufactured breakfast cereals and processed nuts. These included cereals under the trade mark "Uncle Tobys". In relation to biscuits, 'the Nabisco strength is dry crackers, flavoured snacks and chocolate biscuits', 'Weston is strong in assortments, cookies and chocolate biscuits' and 'Arnotts covers the entire range of products' (para 28)

Market and market definition

The Trial Judge held that there was a national market for the supply of biscuits to wholesalers and retailers. His Honour:

[para 20] '... found that there was a "market", within the meaning of ss. 4E and 50 of the Act, being a national market for the supply of biscuits to wholesalers and retailers, and that there were two principal players therein, in addition to Arnotts, namely Nabisco and Weston. About 90% of biscuits supplied by the participants in this market are supplied to the major retail supermarket chains or to large grocery wholesalers. The four principal purchasers of Arnotts' biscuits are the supermarket chains conducted by Coles Myer Limited (the "New World" supermarkets), Franklins Ltd, Woolworths Ltd, and the buyers comprised in Amalgamated Australian Wholesalers Ltd. ...

[para 21] Over the three years ending 30 June 1988, Arnotts supplied approximately 65% of the biscuits consumed in Australia, Weston 13% and Nabisco 8%. The balance, approximately 14%, was divided between imported biscuits (excluding biscuits imported by Arnotts and marketed under the name "Premiere") and the product of other Australian manufacturers.

[para 22] In 1988, the total Australian biscuit market had gross wholesale sales of about $600m. The total volume in 1985/86, 1986/87 and 1987/88 was 135,720,900 kgs, 135,545,900 kgs and 137,946,000 kgs respectively. There are approximately 26 manufacturers and importers of biscuits, in addition to Arnotts, Nabisco and Weston. They include Cadbury Schweppes Pty Limited, which in 1987 successfully launched a range of chocolate biscuits. But none of these other manufacturers has offered a product range comparable to that of Arnotts, Nabisco and Weston.

Their Honours set out some further details about the market in Australia and noted some of the 'difficulties confronting a new biscuit manufacturer' (para 24)

They noted that Part IV of the Act was 'designed to foster competition' and that the 'role of s.50 is to maintain competitive markets by restraining monopolisation and prohibiting mergers that will produce a non-competitive market.' (para 46) Their Honours referred to the Qld Wire case, observing that the 'identification of the relevant market and the assessment of dominance, in the sense of market power, cannot be separated' (para 47). Their Honours further observed that it is 'impossible to provide an absolute definition of "market"' (para 48), referring to the following passage Maureen Brunt's Market Definition article at page 126:

"It must be constantly borne in mind that market definition is but a tool to facilitate a proper orientation for the analysis of market power and competitive processes - and should be taken only a sufficient distance to achieve the legal decision. There may be more than one relevant market for a particular case in the sense of markets that would attract liability."

Additional case references were made to emphasis essentially the same point. Their Honours noted that the concept of substitutability was relied on heavily in this case.

The two main arguments relied on by the appellants in relation market definition were set out in para 53 as follows:

'first, that there are categories of biscuits which are not competitive with other categories of biscuits' and that this supported 'the conclusion that there is not one overall biscuit market but a series of biscuit markets';

'second, that there is competition between certain types of biscuits on the one hand and certain types of non-biscuit products on the other' with the result that 'the market is wider than biscuits themselves'

Their Honours noted that there was evidence each way on the first argument. (para 55)

In relation to the second matter the Commission conceded that the evidence established 'that retailers avoid the simultaneous promotion of two products within the same category', but they 'argued that this is but one factor amongst the many which should be considered in defining the relevant market.' (para 56)

After referring to the evidence and some other authorities discussing market definition, their Honours noted that 'the application of the concept of substitutability requires the making of a value judgment. The question of substitutability is not to be disposed of merely by showing that, upon some occasions, some people consume one product rather than another or that some products within a claimed market do not directly compete with some other products in that market; or do compete with some products outside that claimed market.' (para 62) In the present case, while on some occasions a consumer might select a non-biscuit product instead of a biscuit, this does not 'establish that the two products are "substitutable", so as to be within a single market. ... It is important to remember that the notion of substitutability adopted in s.4E is one which looks to the market itself, not to the habits of individual consumers...' (para 64)

Their Honours concluded that the trial Judge's definition of market was correct.

Dominance

Justice Beaumont concluded that Arnotts was in a position to dominant the national biscuit market. Arnotts argued that there was fierce competition in the industry and that that was incompatible with dominance.

Although not defined in the Act, their Honours noted the natural and ordinary meaning of dominance was 'having a commanding influence on' and noted that a dominant firm has a high degree of 'market power', defined by Mason CJ and Wilson J in Qld Wire as 'the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product ..." ' (para 74) [their Honours also referred to several other definitions of 'market power].

Their Honours then referred to a 'useful list of criteria' given in QCMA for assessing 'whether a participant enjoys a dominant position in a market' (para 76):

[QCMA at 189] "Competition is a process rather than a situation. Nevertheless, whether firms compete is very much a matter of the structure of the markets in which they operate. The elements of market structure which we would stress as needing to be scanned in any cases are these:

(1) The number and size distribution of independent sellers, especially the degree of market concentration;

(2) The height of barriers to entry, that is the ease with which new firms may enter and secure a viable market;

(3) The extent to which the products of the industry are characterized by extreme product differentiation and sales promotion;

(4) The character of 'vertical relationships' with customers and with suppliers and the extent of vertical integration; and

(5) The nature of any formal, stable and fundamental arrangements between firms which restrict their ability to function as independent entities.

Of all of these elements of market structure, no doubt the most important is (2), the condition of entry. For it is the ease with which firms may enter which establishes the possibilities of market concentration over time; and it is the threat of the entry of a new firm or a new plant into a market which operates as the ultimate regulator of competitive conduct."

Their Honours also referred to a number of European authorities on this point.

Applied to this case their Honours noted that there were 'five potential barriers to entry: the difficulties facing a competitor by reason of Arnotts' position as market (65% share) and price leader; the capital cost which would be incurred by another organisation which sought to compete with Arnotts across a broad product range; the strength of brand loyalty enjoyed by Arnotts; the competitive advantage ensuing from Arnotts' economies of scale and range; and the difficulty which a competitor would face in obtaining sufficient supermarket shelf space to support an "across-the- range" operation.' (para 87)

In the present case, their Honours noted that others do compete with Arnotts, but also that they had been unsuccessful in reducing Arnotts' market share and were unable to compete across the full range of products (para 97).

Their Honours concluded (para 102) that 'there was sufficient evidence to support his Honour's conclusion that Arnotts already dominates the Australian biscuit market.'

Effect of the acquisition

Under the existing merger law, where a corporation was already in a dominant position, s 50 could only be contravened if the acquisition would, or would be likely to, substantially strengthen the power of that corporation to control or dominate that market.

[para 104] Beaumont J held that "substantially", in the context of s.50(1)(b)(ii),"suggests a degree of strengthening of power that is 'real or of substance and not insubstantial or nominal'." His Honour concluded that Arnotts' acquisition of Nabisco would, or would be likely to, substantially strengthen Arnotts' power to dominate the national biscuit market. Beaumont J pointed to two matters as supporting this conclusion. First, he referred to Nabisco's 8% market share. In two important segments of the biscuit market (dry crackers and biscuit snacks) Nabisco is Arnotts' only competitor. His Honour regarded these segments of the market as vitally important because of their high volume and disproportionately large rate of growth. Secondly, Beaumont J concluded that Arnotts would gain further economies of scale from the acquisition of Nabisco. His Honour said that, viewed against the background of the failure by Arnotts and Nabisco to call any evidence from management, these considerations suggested that the acquisition of Nabisco would, or would be likely to, strengthen Arnotts' power to dominate the Australian biscuit market and would, or would be likely to, strengthen Arnotts' power to do so to a degree that was real and of substance and was not insubstantial or nominal.

The appellants submitted that Beaumont J misconstrued the word "substantially", referring to the test as applied in relation to authorisation cases ("a substantial benefit to the public") in which it had been defined as 'considerable', 'large' or 'weighty'. Their Honours rejected this argument, agreeing with Beaumont J that the word "substantially", where used in s.50(1)(b)(ii) of the Act, meant 'real or of substance; as distinct from nominal, insubstantial or ephemeral' (para 106)

[para 107] In the context of s.50(1)(b)(ii), "substantially" should not be construed in the sense of meaning large or weighty or considerable. The purpose of s.50 is to protect and advance competition by precluding mergers or acquisitions which are likely to have an adverse affect on competition. If a corporation is already in a dominant position in the relevant market before an acquisition, it would be odd if the threshold to be crossed before the section could operate to prohibit the merger is that the acquisition must be such as would give the corporation a large increase in its position of dominance. The legislative policy underlying the section is satisfied where the likely outcome of the acquisition would be a real or substantial strengthening of the market power of the acquiring corporation.

Their Honours were satisfied that there was evidence strongly supporting the Commission's submissions and agreed with the conclusions of the Trial Judge that 'Arnotts' acquisition of Nabisco would be likely substantially to strengthen its power to dominate the national biscuit market.' (para 112)

Rejection of expert evidence

The trial judge rejected evidence called by the appellants by their expert, Dr Phillip Williams. The rejection was not based on any lack of expertise, but rather rules of evidence - explained as follows by Justice Beaumont (reproduced para 125 appeal):

'... there is a rule of evidence at common law that, except in a straight-forward, uncomplicated case, where the facts are admitted and readily identified, the opinion of an expert is admissible only where the premises, that is to say, the facts, upon which his or her opinion is based, are expressly stated. It follows that, in a complex case, where facts are not readily identifiable, it is not permissible to put the whole of the transcript and documentary evidence to the witness en bloc. This is complex litigation and the facts in respect of which Dr. Williams purported to express his opinion were not admitted by the respondents. Indeed, the facts, and the proper inferences or conclusions to be drawn from the facts contended for by the Commission, were vigorously disputed by the respondents over the many months of this litigation. In those circumstances, it is impossible for the court to know what facts Dr. Williams had in mind when expressing his views. This objection to his evidence is not a mere technicality nor is it only a rule to be applied in jury trials. ... the rule is of general application. In complicated litigation, there are sound reasons of policy which support a rule that the premises considered by the expert should be expressly stated rather than left to speculation. It is preferable that these matters be clarified when the witness is examined in chief rather than leave room for argument later as to exactly what matters the expert had in his mind when expressing his conclusions ...'

Their Honours noted:

The events of this case underline the importance of the principle that an expert witness must identify the facts assumed in his or her opinion. After Dr Williams left the witness box, a considerable amount of other material, both oral and documentary, was admitted into evidence. Without knowledge of the basis of Dr Williams' conclusions, the trial Judge had no way of knowing whether that additional material would have affected Dr Williams' views.

Their Honours discussed a number of principles relating to expert witnesses and noted that the 'fundamental problem about his evidence is that he attempted to act as advocate without making his assumptions clear. He did not assume a set of identified facts, consistent with those contended for by the appellants. Rather, he told the Judge what facts he should accept.' (para 139)

Their Honours noted that there were fragments of Dr Williams' evidence which 'might properly be regarded as admissible' (para 143), but concluded that if any of that evidence were admitted, it would not have affected any of their conclusions and therefore found no basis for granting a new trial.