Exclusive Dealing Arrangements
Exclusive dealing is common in many business and commercial arrangements such as in supply and distribution agreements. Exclusive dealing arrangements can often encourage inter-brand competition and benefit both the parties to the arrangements as well as consumers so it is important to note that it is not prohibited in all circumstances.
Exclusive dealing will be prohibited under section 47 of the Competition and Consumer Act 2010 (Cth) (CCA) in circumstances where it constitutes anti-competitive conduct and has the effect of substantially lessening competition within the market.
What is exclusive dealing?
Exclusive dealing occurs when one party agrees to trade with another party on the basis that the other party is restricted in its supply to, or acquisition from, others.
Section 47 of the CCA defines the types of conduct which constitute exclusive dealing, including:
1) Supplying goods or services or providing a discount in relation to the supply of goods or services on the condition that the buyer:
does not acquire goods or services from a competitor of the supplier;
does not re-supply goods or services acquired from a competitor of the supplier;
does not re-supply goods or services acquired from the supplier to particular persons or in particular areas; or
acquires goods or services of a particular kind from an unrelated third party business (referred to as third line forcing).
2) Refusing to supply goods or services or to provide a discount in relation to the supply of the goods or services because the buyer has:
acquired or refused to cease acquiring the goods or services from a competitor of the supplier;
re-supplied or refused to cease re-supplying goods or services acquired from a competitor of the supplier;
failed to accept some limitation / restriction on the right to re-supply goods or services acquired from the supplier; or
refused to acquire goods or services of a particular kind from an unrelated third party business.
3) Acquiring goods or services on the condition that the supplier accepts some limitation / restriction on its freedom to supply to third parties.
When is exclusive dealing prohibited?
Conduct which constitutes exclusive dealing is only prohibited when it has the purpose, effect or likely effect of substantially lessening competition within a relevant economic market.
Substantially lessening competition
Determining whether certain conduct has the effect of substantially lessening competition within a relevant market is a complex economic question. However, the key question to be answered is whether the conduct has the effect of meaningfully diminishing, preventing or hindering the rivalrous behaviour between competitors within the market. This involves an assessment of the nature and extent of the market as well as the probable nature and extent of competition which would exist but for the relevant conduct.
Market
Courts often rely on expert economic evidence to assist with determining the relevant market for a given circumstance. The approach taken by the Court in defining the relevant market is to have regard to a combination of functional, product or services and geographical dimensions within which buyers and sellers compete. Ordinarily, a market will include the maximum range of products and the widest geographic area within which, given sufficient economic incentive (e.g. price changes), buyers or sellers can switch from one product to another.
The dimensions referred to above can be defined as follows:
functional – the stage of the supply chain in which the goods or services are offered (e.g. manufacturing, wholesaling and retailing). Businesses within the same industry may not be competitors within the same market if the goods or services are offered at different stages of the supply chain;
product / service – the types of goods or services that are being supplied (and the substitutes available); and
geographical – the physical / geographic area or region within which the goods or services are being offered.
Factors to consider
Factors to consider in determining whether competition has been substantially lessened within a market include the following:
the impact of the conduct on the overall market (and not one specific competitor) in the long run;
dynamic characteristics of the market (e.g. the potential for the introduction of new technologies, methods and equipment etc. that competitors could adopt to further compete and offer alternatives in the market in the future);
whether there are readily substitutable products or services within the market (i.e. the existence of realistic alternatives to or which are competitive with the goods or services offered, in which case such goods or services are considered to be within the relevant market);
the ease of substitution between suppliers of the goods or services (e.g. the number of suppliers within the market offering the same goods or services or substitutable goods or services that are competing with one another);
whether the party engaging in exclusive dealing has a strong market position or substantial market power (if so, there is a higher risk of the conduct of that party having the effect of substantially lessening competition within the market or even constituting a misuse of market power for the purposes of section 46 of the CCA);
in relation to geographic area:
o the area within which consumers will travel to acquire the goods or services; and
o the area within which competitors will increase their supply of goods or services in response to other parties’ prices.
Examples
1) Where there is a geographically wide and generally competitive market with genuine substitutes available to consumers, a refusal to supply one of many consumers is unlikely to have the effect of substantially lessening competition within the market and therefore is unlikely to be prohibited.
2) In the case of ACCC v Australasian Food Group [2022] FCA 308, the Federal Court found that Australasian Food Group (trading as Peters Ice Cream) had engaged in anti-competitive conduct and ordered that it pay a $12 million penalty. Peters Ice Cream admitted to acquiring distribution services from PFD Food Services (PFD) on the condition that PFD would not sell or distribute competitors’ single serve ice cream products in various geographic areas throughout Australia without the prior written consent of Peters Ice Cream.
As PFD is Australia’s largest distributor of single serve ice creams and is able to reach more than 90% of Australian postcodes, the Federal Court determined that Peters Ice Cream’s conduct had the effect of substantially lessening competition within the market for the supply by manufacturers of single serve ice cream products in Australia and that had the exclusive dealing arrangement not been in place, it was likely that one or more potential competitors to Peters Ice Cream would have entered the single serve ice cream market.
It is important to note that section 47 of the CCA is not intended to deter conduct that results in a person obtaining a competitive advantage within a market altogether, but rather only conduct that adversely affects the competitive process. For example, an increase in a party’s competitive position by engaging in vigorous competitive conduct will not necessarily result in a contravention of section 47 of the CCA.
Enforcement
Enforcement measures under the CCA for engagement in exclusive dealing prohibited under section 47 of the CCA include:
1) Pecuniary penalties: A corporation that has contravened section 47 of the CCA may face pecuniary penalties of up to the greater of $50 million and three times the value of benefit obtained from the conduct.
2) Individual liability: Individuals involved in the contravention (e.g. directors, officeholders, employees) may also be held personally liable for the contravention. The maximum penalty is $2.5 million.
3) Court orders: The court can issue orders, including injunctions, to prevent further contraventions and require corrective actions.
4) Undertakings: The ACCC may accept court enforceable undertakings from the offending party. These undertakings commit the party to specific actions to rectify the breach or to publish corrective notices.
The ACCC has published guidelines setting out its enforcement approach to breaches. Generally, enforcement actions vary based on the circumstances, severity, and cooperation of the parties involved. The ACCC aims to deter anti-competitive behaviour and protect consumers and competitors in the marketplace.
Whilst exclusive dealing can be a legitimate business strategy, it is important for businesses operating within Australia to understand the rules and regulations surrounding exclusive dealing to ensure that any arrangements entered into do not result in a contravention of section 47 of the CCA.
We would recommend obtaining advice prior to finalising any exclusive dealing arrangements.
If you require any further information, please contact us.