The Federal Court’s recent $12million penalty against a major Australian food manufacturer is a stark reminder of when the perfectly reasonable desire to protect brand and market share can tip into anti-competitive conduct.
This penalty is possibly the first in a number to come, given that the ACCC has announced it will focus on exclusivity arrangements that impact competition as an enforcement priority for 2022/23.
Is exclusivity always bad?
No. There are many legal and legitimate reasons to negotiate exclusivity. An easy example would be: when using a contract manufacturer, it is common practice to include a clause that prevents the contract manufacturer from using your recipe or proprietary processes for any other customer.
However, seeking exclusivity in your supply chain and distribution arrangements can land you in hot water if it significantly limits or prevents competition.
By way of background, exclusive dealing is when one party to a supply arrangement (e.g. the supplier) restricts the other party’s (e.g. the buyer’s) ability to choose what, where, or with whom it deals as a condition of the supply or purchase.
Importantly, exclusive dealing is only prohibited if the restriction has the purpose or likely effect of substantially lessening competition in a market.
How do you know if conduct substantially lessens competition in a market?
Conduct is generally considered to “substantially lessen competition” if it meaningfully interferes with the competitive process; for example, by restricting the availability of certain products to consumers.
However this can be a tricky economic question, as to answer it necessitates defining the relevant “market”. Essentially this involves working out the size of the “field of rivalry” in which the parties compete, taking into account the products/services in question and the geographical area. Market definition is critical to competition analysis. For example, it is much harder to substantially lessen competition in a market that features readily substitutable products that can be easily purchased from anywhere in the world.
It may be the case that, in some arrangements, exclusivity should only be legitimately sought by one party. For example, an importer seeking an exclusive licence to distribute a brand in a country (subject to parallel import exemptions) may actually increase competition, particularly if that brand wasn’t previously available in that country. On the other hand, a brand owner requiring a distributor to only distribute their product range could substantially lessen competition, particularly if there are a limited number of distributors in that market.
Peters Ice Cream: what happened?
In a recent Federal Court case, Australasian Food Group, trading as Peters Ice Cream (Peters) was found to have engaged in anti-competitive exclusive dealing in contravention of s 47 of the Competition and Consumer Act 2010 (Cth) (the Act).
For those unfamiliar, Peters is a household name in Australia and owns several ice cream brands, including Connoisseur, Drumstick, Maxibon and Frosty Fruits.
According to a recently published ACCC press release, Peters arranged for PFD Food Services (PFD) to provide them with distribution services from November 2014 to December 2019. PFD is Australia’s largest distributor of single serve ice creams, and its reach extends to at least 90 per cent of Australia’s postcodes.
Under the arrangement, PFD provided Peters single serve ice cream products to petrol stations and convenience stores all over Australia. During the proceedings, the Court heard that Peters had only acquired PFD’s services on the condition that PFD would not sell or distribute any competitor’s single-serve ice cream products without Peters’ consent.
Had this condition with PFD not been in place, it was likely that one or more potential competitors to Peters would have entered the single serve ice cream market. In fact, other ice cream manufacturers approached PFD to arrange for distribution of their products and were turned away.
On that basis, the Federal Court was satisfied that Peters’ conduct substantially lessened competition in the market for the supply by manufacturers of single serve ice cream products in Australia. The sizeable penalty likely reflects the Court’s view that Peters improperly obtained substantial commercial gain by insulating itself from competition over a long period of time, and over a large geographical area – given the restriction operated throughout most of Australia.
ACCC Chair Ms Gina Cass-Gottlieb said, “This case is a reminder to all businesses of the serious and costly consequences of engaging in anti-competitive conduct.”
What can businesses learn from this?
The case highlights the substantial penalties that can flow where a company is found to have engaged in anti-competitive conduct.
In relation to exclusive dealing specifically, generally, the more exclusive the product, and the more powerful the parties involved, the greater the risk that exclusive dealing will substantially lessen competition and therefore breach the Act. Businesses should exercise extreme caution if the restriction will prevent other players from entering the market at all, such as in the Peters example.
We recommend that food companies and other businesses review their supply chain and distribution agreements to see whether they have any exposure under competition laws.
If you or your business needs assistance with drafting a compliant distribution agreement, or otherwise has any competition concerns, please reach out to Charles Fisher, Principal Solicitor and head of our Food & Beverage team, or David Robbins, Principal Solicitor and head of our Competition Law & Regulatory Compliance team.
This article was written by Thomas Salzano (Lawyer), Madeline Wyre (Lawyer), David Robbins (Principal Solicitor) and Charles Fisher (Principal Solicitor).