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Why tap contracts are likely here to stay

June 23, 2017
By

Professor Caron Beaton-Wells

It would be extremely difficult for the ACCC or small brewers to prove that CUB and Lion’s tap contracts are anti-competitive, according to a competition law expert.

There have been very few cases brought under Section 46 of the Competition and Consumer Act – the misuse of market power provision – and all have been very difficult to prove, Professor Caron Beaton-Wells told Brews News.

“Section 46 in its current form is very difficult to enforce. There’s three hurdles that the private claimants, or if it’s the ACCC that is plaintiff, would have to cross to establish a breach,” she said.

Beaton-Wells, a competition law specialist at Melbourne Law School, was commenting on the ACCC’s long-running investigation into tap contracts, as well as the prospect of a separate class action brought by small brewers.

First hurdle: Substantial power

She said the first hurdle for either plaintiff would be to show that each of the brewers in question – individually, not together – has substantial power in the market for beer on tap.

“When you do a test to work out whether or not a company has substantial power, obviously the first thing you would look at is market share,” she said.

“But that is a very crude indicator and really just the rough starting point for the analysis, because it depends on how many, and who else the competitors are in the market.

“Even if you’ve got a duopoly, as we virtually have here… if the two of them are competing vigorously with each other, neither can be said to have substantial power.

“Together they would, but the allegation’s got to be made out against each of them individually. If the two of them are competing aggressively on price and therefore terms of supply, you’re going to have a problem at the first hurdle,” Beaton-Wells said.

She said the ACCC has previously failed in attempts to show that Woolworths has substantial power, because the supermarket competes vigorously with Coles to keep prices down.

“That’s going to be the first problem. Market share and concentration is only the starting point, ultimately the real test for market power is the condition of entry to market,” she said.

She said this test rests on the ability of other players to compete with CUB and Lion if the companies put up their prices.

“If there was limited opportunity for others to enter and take advantage of that by pricing below the incumbents, then you might be able to say that they have market power,” she said.

“[But if] in response to that, there could be a new entrant or a significant expansion of a current small player to compete on price and take advantage of undercutting the higher prices, then you say they don’t have power, because their advantage of size is going to be eroded over time.”

Second hurdle: Willing publicans 
Beaton-Wells said the next hurdle for the plaintiff would be showing that through these tap contracts, CUB and Lion have each been taking advantage of their power in a way that’s anti-competitive.

This effectively means proving the brewers are ‘getting away’ with tap contracts only because they have power in the market, she said.

This would be problematic for the plaintiffs in that – as raised by Matt Kirkegaard in this article – the publicans appear to be entering into these contracts willingly, Beaton-Wells said.

“They actually value those arrangements because they get rebates and other incentives and support from the big brewers,” she said.

“Commercially, they are deciding that it’s in their interests to have a principle source of supply from CUB and/or Lion, because they get commercial benefits from that arrangement.

“If that is the reality, then it’s going to be very difficult to say CUB and Lion are getting away with this, just because they are exercising their muscle by virtue of their market share,” Beaton-Wells said.

Third hurdle: Proving purpose
If these first two hurdles are crossed, the plaintiff would then have to show that, by in effect foisting these contact on publicans, “the purpose of CUB and Lion individually is to damage or eliminate a competitor from the market or stop a new competitor from entering the market”, she said.

Beaton-Wells said the evidence is highly subjective in arguing this point. The big brewers would argue they were competing vigorously in a way that actually advantages their customers and consumers.

Small brewers, on the other hand, would argue that the objective of the big brewers’ tap contracts was to put them out of business.

“It’s very, very hard for the ACCC and the court to choose between those two [arguments], because ultimately they both look the same in effect, but they are very different slants on what’s actually going on,” said Beaton-Wells.

Very difficult for ACCC
The Professor said the ACCC has brought very few of these cases to date and it has a “very patchy” record of success, which is why the watchdog has actively sought to have Section 46 amended through the recent Harper Competition Review.

Beaton-Wells said a bill to implement changes to Section 46 is currently before Federal Parliament, and looks likely to eventually pass through.

“The new test will be whether or not a firm is acting in a way that just has the effect or likely effect of substantially lessening competition, so the hurdles about ‘substantial power’, ‘taking advantage’ and ‘purpose’ have all been removed,” she said.

Brewers await news of two possible proceedings relating to tap contracts

She said any tap contracts proceeding would relate to conduct that has already taken place, and the new law cannot be applied retrospectively.

“It will be the former version of Section 46, with all the hurdles I’ve described, that will have to be made out,” she said.

“All in all, based on what I’ve seen, this will be a very difficult case.”

Private claim even harder
Beaton-Wells suggested it may be even more difficult for Melbourne law firm Adley Burstyner to succeed in a private claim.

“There is only one other plantiff law firm that has taken class actions for breaches of competition law and that’s the very well known one, Maurice Blackburn,” she said.

“There have only been five class actions to date. They’ve all been for price fixing or cartel-related types of conduct. They’ve all been extremely hard to run and extremely expensive.”

Beaton-Wells said price fixing and cartel conduct do not require the plaintiff to prove there was a negative impact on competition.

“The effect on competition is just assumed. As long as you can prove that the companies in question have fixed prices, that’s it. That is what we call a ‘strict liability test’,” she said.

And in the case of these five class actions, the ACCC had already brought its own proceedings against the companies in question.

“There had been admissions made and penalties imposed, whereas what’s being talked about here is a stand alone action, not a follow on action from an ACCC proceeding, which you might think in some ways would also make the task for the private claimants a difficult one,” she said.

Perennial problem
Beaton-Wells said the size of the Australian market is such that it lends itself to a high level of concentration, which is the “perennial problem” for small business in many industries.

“That can be good for consumers in terms of price, because the big players will compete very heavily on price, but it’s not good in terms of diversity and choice,” she said.

“You can see that as well in grocery. Coles and Woolworths are very difficult to differentiate, and Aldi competes largely on price as well.

“Consumers, I think, suffer in terms of the range that they have to choose from.

“That may well be, in the case of beer on tap,” said Beaton-Wells.

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