The Federal Court recently imposed a $12 million penalty on Australasian Food Group, trading as Peters Ice Cream (Peters), for engaging in anti-competitive exclusive dealing by preventing its distributor of ice creams to petrol stations and convenience stores from distributing for any of Peters’ competitors. The ACCC has also listed exclusive arrangements between firms with market power that impact competition as one of its compliance and enforcement priorities for 2022-2023.1
Many people assume exclusive dealing is illegal. However, exclusive dealing is common in many forms of commercial arrangements and often benefits both parties to the arrangement, as well as consumers. For example, exclusive dealing arrangements can enhance inter-brand competition and may result in supply chain efficiency gains (eg where a retailer specialises in a particular brand or geographic area). It is only in limited circumstances that exclusive dealing will contravene the Competition and Consumer Act 2010 (Cth) (CCA).
When dealings are between competitors, it may in fact be important to ensure that the arrangement falls within the definition of exclusive dealing. So, what is exclusive dealing, when is it prohibited, and why is it so important to get it right?
What is exclusive dealing?
Broadly speaking, exclusive dealing occurs when one person trading with another imposes restrictions on the other’s freedom to choose with whom, in what, or where they deal. Section 47 of the CCA defines a number of types of restrictions in vertical supply arrangements as constituting ‘exclusive dealing’, including:
- supplying goods or services to a reseller on condition that the reseller limit the extent to which it acquires goods or services from a competitor (eg BMW sells vehicles to a dealer on condition that the dealer won’t buy stock from Mercedes-Benz)2; or
- acquiring goods or services from a supplier on condition that the supplier will not supply to others, or will limit the extent to which it supplies to others (eg Woolworths buys Wheat Bix from Sanitarium on condition that the 1.2kg box size will be exclusive to Woolworths)3.
In the case mentioned above, Peters engaged in exclusive dealing whereby it acquired distribution services from its distributor, PFD Foods Services (PFD), on the condition that PFD would not supply similar services to Peters’ competitors or sell Peters’ competitors’ single serve ice cream products without the written consent of Peters.
When is exclusive dealing prohibited?
Exclusive dealing is only prohibited under the CCA where it has the purpose, effect or likely effect of substantially lessening competition in an affected economic market (commonly known as the ‘SLC test‘). Where the market in question is subject to effective competition with a range of competing buyers and sellers, exclusive dealing will typically not substantially lessen competition in the overall market and will therefore not be likely to contravene the CCA. This was reiterated in the ‘Harper Review’ of competition laws in 2015:4
Usually, vertical trading restrictions are unlikely to cause any significant competitive harm. Most markets have many manufacturers and importers of competing goods and many competing wholesalers and retailers. A vertical restriction agreed between one manufacturer and one retailer would be unlikely to cause any significant harm to competition.
Whether an arrangement is likely to substantially lessen competition in a market is often a complex economic question. However, in the context of exclusive dealing arrangements, the primary concern is typically that of ‘vertical foreclosure’. In other words, to what extent is the exclusive dealing arrangement likely to materially affect the ability of competitors in a market to:
- source an essential input from an upstream supplier (eg essential component parts for a particular good); or
- access an essential downstream facility or service (eg distribution services)?
For example, let’s consider an exclusive dealing arrangement whereby a manufacturer acquires a component part for its product from a supplier on the condition that the supplier will not supply the same or similar component parts to the manufacturer’s competitors. If there are multiple suppliers of the component part, then this is unlikely to substantially lessen competition, as the manufacturer’s competitors will be able to source their essential components from alternative suppliers. However, if for some reason there were only one or two suppliers of this key component and the exclusive dealing arrangement would therefore materially restrict the manufacturer’s competitors’ ability to source components for their products, the arrangement may have the effect of substantially lessening competition.
In the Peters case, the exclusive dealing arrangement prevented PFD from distributing ice cream products for Peters’ competitors. In assessing whether this arrangement would substantially lessen competition, a primary consideration would have been the extent to which Peters’ competitors or new market entrants could obtain effective distribution for their products through distributors other than PFD.
Ultimately, Peters admitted that the exclusive dealing arrangement had the likely effect of substantially lessening competition in the market for the supply by manufacturers of single service ice cream and frozen confectionary products. In commenting on this outcome, ACCC Chair Gina Cass-Gottlieb noted that “Peters Ice Cream admitted, that if PFD had not been restricted from distributing other manufacturers’ ice cream products, it was likely that one or more potential competitors would have entered or expanded in this market“.5
Exclusive dealing in vertical arrangements between competitors
The exclusive dealing provisions of the CCA have particular importance for arrangements between competitors. An arrangement between competitors that restricts one of them would normally risk falling within the definition of a cartel arrangement, exposing all parties to criminal sanctions – including large fines and, potentially, jail terms for individuals involved. However, if the arrangement also falls within the definition of an exclusive dealing arrangement, the CCA contains an ‘anti-overlap’ provision which provides that the exclusive dealing rules are to be applied, not the cartel conduct rules.6 In other words, to the extent that an arrangement falls within the definition of ‘exclusive dealing’, it is exempt from the prohibition against cartel conduct.
This is significant for two reasons:
- Cartel conduct is prohibited ‘per se’ (i.e. it is prohibited whether it has any real effect on competition or not), whereas exclusive dealing is subject to the SLC test. This means that an arrangement that would be prohibited if the cartel rules were to apply will commonly not contravene the CCA if it can be drafted in such a way as to constitute exclusive dealing.
- Cartel conduct carries both civil and criminal penalties, including prison sentences of up to 10 years per offence for individuals involved in criminal cartel conduct. Accordingly, even if the prohibition against anti-competitive exclusive dealing is contravened, this will be a civil contravention, not criminal.
For an example of how the anti-overlap mechanism works, let’s consider a common restraint found in franchise agreements – territorial exclusivity. In franchise agreements, it is common for the franchisee to be allocated an exclusive territory within which the franchisor and other franchisees will not compete. If the franchisor might otherwise compete with the franchisee (eg through the franchisor’s online store or franchisor owned stores), this would prima facie constitute a cartel arrangement in the form of geographic market allocation. However, if the territorial exclusivity clause is drafted on the basis that the franchisee is acquiring franchise rights from the franchisor on condition that the franchisor not supply similar rights to other franchisees or supply goods or services within the franchisee’s territory, it will be an exclusive dealing arrangement within section 47(4)(d) of the CCA and therefore exempted from the cartel prohibitions.
Why is the drafting of exclusive dealing arrangements so important?
If parties are relying on the exclusive dealing anti-overlap provision to exempt arrangements between competitors from cartel rules, it is critical that the relevant provisions are drafted so that, on any reading, they fall entirely within one or more of the definitions of exclusive dealing set out in section 47 of the CCA. If this is not done, to the extent that the arrangements fall outside the definitions of exclusive dealing, they may still contravene the cartel prohibitions of the CCA.
For example, in Visy Paper Pty Ltd v ACCC [2003] HCA 59 (the ‘Visy case‘), Visy and Northern Pacific Paper Pty Ltd (NPP) competed in the supply of waste paper collection services. However, a vertical relationship also existed between the parties, as Visy acquired the collected waste paper from NPP for the purpose of recycling. Visy and NPP proposed to enter into an exclusive supply agreement whereby Visy would acquire waste paper from NPP on the condition that NPP would not collect, or offer to collect, waste paper from Visy’s customers or prospective customers. Visy argued that this constituted exclusive dealing and was therefore exempt from the per se prohibition on exclusionary provisions contained in what was then section 45 of the Trade Practices Act 1974 (Cth) (TPA).
However, the High Court ultimately found that a restriction on ‘collecting’ waste paper restricted NPP’s freedom to both supply services to others (waste paper collection services) and to acquire goods from them (the acquisition of waste paper). A restriction on NPP’s ability to ‘supply services’ fell within the definition of exclusive dealing, but the restriction on NPP’s ability to ‘acquire goods’ did not. On that basis, to the extent that the proposed clause prohibited NPP from acquiring goods in competition with Visy, it was still held to contravene the per se prohibition on exclusionary provisions in section 45 of the TPA. What was then called an ‘exclusionary provision’ would now be prohibited as a ‘cartel provision’ under the CCA.
The decision in the Visy case demonstrates why it is so important to exercise care when drafting exclusive dealing provisions in vertical arrangements between competitors. This importance is even greater now, as the Visy case was decided prior to the introduction of the criminal cartel regime in the CCA in 2009. If the case were heard today, Visy could have been subject to criminal proceedings, including prison sentences for those involved.
Is section 47 here to stay?
In 2015, the Harper Review recommended that section 47 of the CCA should be repealed, primarily due to the following reasons:7
- section 47 is needlessly complex and therefore difficult for businesses to read and understand;
- despite its complexity, section 47 does not cover all forms of vertical supply restrictions (which has implications for the cartel anti-overlap exemption, as is evidenced in the Visy case discussed above); and
- if section 47 were repealed, anti-competitive exclusive dealing would still be caught by section 45 (the broad prohibition on anti-competitive contracts, arrangements or understandings) and/or section 46 (misuse of market power) of the CCA.
The Harper Review also recommended the inclusion of a broader exemption to cartel conduct for trading restrictions imposed by one firm on another in connection with the supply or acquisition of goods or services.8 This recommendation was based on the fact that vertical supply restrictions not explicitly covered by one of the definitions of exclusive dealing in section 47 fall outside the anti-overlap exemption, and are therefore subject to the per se cartel conduct prohibitions in the CCA.9 The outcome in the Visy case is a key example of how this might arise in practice.
Unfortunately, to date the Harper Review’s recommendations to simplify the law applying to vertical supply arrangements have not been implemented. As such, the need to carefully draft exclusivity arrangements in accordance with section 47 in order to trigger the anti-overlap exemption to cartel conduct is here to stay for the foreseeable future.
How can we help?
We have a specialist competition law team that has considerable experience in drafting, reviewing and advising on exclusive dealing arrangements. If you would like more information about the services we provide, please contact us.
This article was written by Richard Westmoreland, Partner, and Alexander Shepherd, Solicitor.
1We recently summarised the ACCC’s Compliance and Enforcement Priorities 2022-23 in an article available via the following link: https://hwlebsworth.com.au/the-accc-enforcement-and-compliance-priorities-for-2022-23-greenwashing-social-media-influencers-and-exclusive-arrangements-among-those-issues-under-the-spotlight/
2See section 47(2)(d) of the CCA.
3Section 47(4)(c) of the CCA.
4Ian Harper et al, Final Report of the Competition Policy Review, March 2015 (Harper Review), 373.
5ACCC media release 38/22: https://www.accc.gov.au/media-release/peters-ice-cream-to-pay-12-million-penalty-for-anti-competitive-exclusive-dealing
6Section 45AR of the CCA.
7Harper Review, 374-375.
8Harper Review, 59.
9Harper Review, 364.
