The dangers of exclusive dealing

Key Point
  • Companies must assess the effect that their dealings have on the market and retreat from activities that could be construed as ‘substantially lessening competition’.


Exclusive dealing occurs when one person (or entity) trading with another, imposes restrictions on the other’s freedom to choose how they operate in the marketplace. This may include restrictions on with whom or in which manner the trader can deal. Exclusive dealing is against the law only if it substantially lessens competition.

When entities engage in exclusive dealing, the Australian Competition and Consumer Commission (ACCC) is keen to swoop in and penalize offenders.  This was experienced by Ampelite Australia Pty Ltd (Ampelite), Palram Australia Pty Ltd including its Israeli parent company Palram Industries (1990) Ltd (Palram) and Oakmoore Pty Ltd trading as EGR (EGR). These industry giants were recently found guilty of engaging in exclusive dealing along with some of their directors Rod Horwill (of EGR), Talia Horesh (of Palram) and Hendrikus Verhagen (of Ampelite).

Background

Ampelite and Palram are two of Australia’s largest suppliers of polycarbonate roofing (‘Polycarb’). They primarily supply the product to retail stores. In late 2008, EGR (a competing manufacturer of Polycarb) sought to enter the market with the intention of undercutting Ampelite and Palram on price and obtaining a larger market share for itself.

Prior to entering the market, EGR contacted Ampelite and Palram with hopes of securing a supply arrangement with them. Both suppliers were incredibly concerned about EGR and the effect that attempting to compete with it would have on their profit margins. At the time, EGR indicated that it would supply Polycarb direct to retailers in competition with Ampelite and Palram unless it obtained sufficient supply commitments from them.

Exclusive dealing arrangements

Over a five year period from 2008 to 2013, these companies made and gave effect to a number of cartel arrangements which had the purpose of preventing or restricting the supply of Polycarb to retailers. Palram and Ampelite each admitted that its conduct was intended to substantially lessen competition in the market. 

Under the terms of the supply agreements entered into with EGR:

  • Ampelite and Palram (severally) agreed to purchase between 300 and 600 tonnes of Polycarb from EGR per annum; and
  • EGR agreed not to supply Polycarb to retailers supplied by Ampelite and Palram.

The key representatives of each company, Rod Horwill, Talia Horesh and Hendrikus Verhagen were aware of the arrangements.

Penalties

Both Ampelite and Palram provided assistance to the ACCC quite early within its investigation.  Both parties admitted that their activities contravened exclusive dealings provisions and also reached an agreement with the ACCC on suggested penalties.  This was an important consideration in the penalties that were awarded.

The maximum penalties that may be ordered against an organisation for engaging in exclusive dealing are the greater of:

a)   $10 million;
b)   3 times the value of the “reasonably attributable” benefit obtained by the contravening parties, if this can be determined by the Court; or
c)   10% of the annual turnover of each offender in the preceding 12 month period, if the Court cannot determine the benefit obtained by the contravening parties.

Individuals who are knowingly concerned in exclusive dealing may be fined up to $500,000.

Having found the parties guilty of engaging in exclusive dealing:

  • Ampelite was fined $2 million and ordered to pay $100,000 in legal costs to the ACCC;
  • Ampelite’s director, Hendrikus Verhagen was fined $100,000;
  • Palram was fined $3.5 million and ordered to pay $250,000 in legal costs to the ACCC;
  • Palram’s director, Talia Horesh, was disqualified from managing corporations for 3 years. Ms Horesh was not fined because she did not ‘own any assets or property’; and
  • Both Palram and Ampelite were ordered to establish a compliance program to ensure their awareness of their responsibilities and obligations under the Competition and Consumer Act.

ACCC proceedings against EGR and its director Rod Horwill are continuing and are scheduled to take place in September 2018.

What are the implications of this decision on a business’ conduct?

This decision highlights the dangers of entering into arrangements with competitors where those arrangements have the effect of substantially lessening competition. It is imperative that businesses which engage with one another are advised about whether their activities remain in the scope of what constitutes valid competitive conduct in the eyes of the ACCC.

Post by Joshua Yan and John Kell. 

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