From the Full Federal Court's judgment

[1] On 30 July 1998, amendments to the Copyright Act 1968 (Cth) (‘the Copyright Act’) came into effect. They removed the previous prohibition on the importation of sound recordings without the consent of Australian copyright owners or licensees. The effect of the amendments was that Australian wholesalers and retailers of compact disc recordings (‘CDs’), and other sound recordings, could thereafter acquire stock from other countries; but only provided the manufacture of that stock did not infringe copyright law in the source country and had been carried out with the consent of the copyright owner.

[2] … retailers were no longer limited to purchasing CDs from Australian sources.

[3] Two Australian distributors, PolyGram Pty Ltd (now Universal Music Australia Pty Ltd (‘Universal’)) and Warner Music Australia Pty Ltd (‘Warner’), ceased to supply certain retailers who imported CDs from overseas. They also made it known they might not supply other retailers who took that course. The Australian Competition and Consumer Commission (‘ACCC’) brought proceedings in this Court asserting the conduct of Universal and Warner contravened ss 45, 46 and 47 of the Trade Practices Act 1974 (Cth) (‘the Act’).

[4] After a lengthy trial, Hill J found on 14 December 2001 that both distributors had contravened ss 46 and 47 of the Act. …

The Court upheld an appeal based on s 46 on the basis that, following the High Court’s decision in Boral, it could not be said that the parties had the requisite ‘substantial market power’. The following extracts deal only with the Court’s consideration of exclusive dealing.

[102] At para 447 of his reasons, Hill J identified ‘three issues which need to be resolved before an offence under s 47 is made out’. They were:

‘• Whether Universal or Warner supplied or offered to supply goods (ie CDs) or services (ie aspects of its trading terms) on the condition that the acquirer would not acquire non-infringing copies of titles marketed by Universal or Warner as the case may be in Australia for resale from a competitor.

• Whether the words “a competitor” in s 47(2)(d) and 47(3)(d) require there to be a specific identified competitor at the time of imposition of a condition.

• Whether the conduct pleaded had the purpose, effect or likely effect of substantially lessening competition in a relevant market.’

[103] On the first issue, his Honour found PolyGram had indicated to a number of retailers that it would review the terms of its trading relationship with those who chose to parallel import and reserved its right to cease supplying them with PolyGram recordings. …

[109] In relation to the second issue, Hill J rejected a submission by Universal that there was a need, under s 47, to show that a specific competitor was the subject of the relevant non-acquisition condition. … Hill J observed that a condition that an acquirer of goods or services not deal with any competitor is, potentially, at least as anti-competitive as one preventing dealing with a particular competitor.

[110] Hill J then turned to the third issue he had identified: whether the conduct had the purpose or effect of substantially lessening competition. He referred to s 4G of the Act, which includes the idea of ‘preventing or hindering competition’ in the concept of ‘lessening of competition’. As to the requirement that the lessening be substantial, his Honour adopted, as the test, a requirement of substantial interference with competitive trading in the market, albeit as a matter of likelihood. This test was derived from observations of Smithers J in Dandy Power Equipment ...

[111] The trial judge found the purpose of both PolyGram and Warner was the discouragement of retailers from acquiring, whether by import or purchase, non-infringing copies of titles which were within their respective catalogues. … his Honour did not think the elimination of ‘free riding’ constituted the purpose of the relevant conduct.

[112] Having regard to the brief period of time during which PolyGram and Warner maintained their refusal to supply, his Honour held it could not be suggested the conduct of either of them, of itself, had any real effect on competition. The issue requiring consideration was whether, if the conduct had not been cut short by ACCC intervention, and having regard to the impact of ‘signalling’, there was likely to have been a substantial effect on competition. …

[114] Hill J considered whether the ‘purpose’ referred to in s 47 was subjective or objective. He did not express a concluded view on this issue, probably because it was not strongly suggested to him that the controversy made any difference to the outcome. He said at para 469:

‘While no doubt there is a difference between subjective and objective purpose, in most cases, the best evidence of subjective purpose will be objective effect.’ …

[116] Hill J considered the more difficult question to be whether the conduct engaged in by PolyGram or Warner, including what might have been undertaken had ACCC not intervened, was capable of being characterised as substantially lessening competition. His Honour found at para 478 that:

‘What the conduct of each company was designed to achieve and which was likely to have been achieved had it continued was to deter at least the small retailers or a substantial majority of them at least, and having regard to the inconvenience and costs of the large retailers, them also, from acquiring non-infringing copies of CDs for sale. Those CDs could either be imported directly by the retailer or by an Australian wholesaler or be exported to Australia for sale by an overseas wholesaler. It is thus not difficult to infer that the consequence of the continued conduct would be to prevent wholesalers operating in the market. That in turn would have the consequence of ensuring, in respect of Warner titles, that Warner had a monopoly of them in the wholesale market. It would in respect of Universal titles ensure that Universal had a monopoly of them in the wholesale market.’ …

[118] In determining the issue of substantial lessening of competition, his Honour accepted that none of the five major record companies dominated the market. However, the monopoly which each company had with respect to its own CDs could not be ignored. Generally, their Australian products were indistinguishable from the same titles imported from overseas, apart from the label statement about country of origin. His Honour then said at para 480:

‘In my view and in these circumstances a requirement that retailers buy all Universal labelled product from Universal and all Warner labelled product from Warner would be likely to have a substantial effect on competition in the wholesale market. Indeed, the result of free importation of CDs from overseas appears to have been some increase in the discounts available to retailers and in consequence an overall reduction in the wholesale net price to dealers. This supports the view that the freeing up of importation of non-infringing copies has improved competition in the market and enables an inference to be drawn that deterring such importation by the threat of refusal to supply and subsequent select refusal would, had it been continued, have had the consequence of reducing competition and to a substantial degree.’ (Emphasis added) …

(vii) Conclusions [relating to s 47]

[225] Section 47(1) of the Act refers to conduct by a corporation in trade or commerce. It is common ground that the relevant conduct of both PolyGram and Warner met that requirement.

[226] The next issue, between ACCC and each of the corporate appellants, is whether that conduct amounts to ‘the practice of exclusive dealing’, as that term is explained in subss (2) to (9) of s 47. As indicated, ACCC relies on subss (2) (conditional supply) and (3) (refusal to supply).

[227] Hill J found against the appellants in relation to s 47(3), although only in respect of a small number of retailers; in the case of Universal, Compact City, Wests and Ultimate; in the case of Warner, Raiders. These findings were not subjected to serious challenge before us. …

[229] Hill J found conduct by both corporate appellants that fell within s 47(2). …

[238] In our opinion, the factual findings made by Hill J amply support his conclusion that each of the corporate appellants engaged in the practice of exclusive dealing.

[239] The more difficult question is the application of subs (10) of s 47 to these cases. ACCC places no reliance on para (b) of that subsection. Therefore, the question is whether it has established any of the alternatives provided by para (a). It is necessary to determine whether the exclusive dealing was engaged in for the purpose, or had, or was likely to have, the effect, of substantially lessening competition.

[240] The purpose or effect or likely effect of the conduct must be a substantial lessening of competition in the market in question. The market in question is the Australian wholesale market for recorded music. Lessening of competition in this context includes a reference to preventing or hindering competition (s 4G). …

[242] Competition is a process and the effect upon competition is not to be equated with the effect upon competitors, although the latter may be relevant to the former. Competition is a means to the end of protecting the interests of consumers rather than competitors in the market (Queensland Wire per Mason CJ and Wilson J at 191). Competition is defined to include competition from imported goods (s 4). … The lessening of competition must be adjudged to be of such seriousness as to adversely affect competition in the market place, particularly with consumers in mind. It must be ‘meaningful or relevant to the competitive process’: …

[243] In his analysis of the effect, or likely effect, of the exclusive dealing conduct of PolyGram and Warner, Hill J accepted that, if considered in isolation, the completed conduct of neither of them had, or would have been likely to have had, any real effect on competition. However, his Honour thought it necessary to view the conduct in conjunction with two other circumstances: first, the impact of knowledge of the account closures upon other retailers; and, second, the fact that the conduct was discontinued only because of the intervention of ACCC.

[244] As to the first matter, we agree with the finding of Hill J that it was always inherently likely that word of the account closures would quickly spread through the industry. … Both PolyGram and Warner had … each made clear their desire for retailers not to avail themselves of their new right of parallel importation. There was some direct evidence that news travelled fast about market activities. … In assessing the effect or likely effect of the conduct, Hill J was entitled to take into account the fact or probability of other retailers becoming aware of it.

[245] As to the second matter, the effect, or likely effect, of the appellants’ conduct on competition in the market is not to be assessed on the assumption that it would extend indefinitely. As counsel for the appellants point out, such an assumption might cause a court to determine an allegation about past conduct by reference to assumptions about the future. However, in evaluating past conduct, it is legitimate to consider how long that conduct continued and, if it ceased before institution of legal action, the circumstances surrounding cessation.

[246] Whatever the intentions of the relevant PolyGram and Warner executives, their actions did not, as we know from the trial judge’s findings, in fact have the effect of substantially lessening competition in the market. This might have been because the conduct was ‘nipped in the bud’ by ACCC; it might have been because retailers exhibited more fortitude than PolyGram and Warner expected. … The evidence establishes that, after a slow start, many retailers purchased non-infringing copies of PolyGram and Warner CDs, either by direct importation or by purchasing stock imported by others. Within a few months, there was a thriving trade in imported stock.

[247] The making of a finding about likelihood presents greater difficulty. The question is whether, as at the date of the impugned conduct, it was likely, having regard to existing circumstances, that the conduct would effect a substantial lessening of competition in the market … We are prepared to assume, for the purposes of argument, that likely does not mean more likely than not, but rather that there is a real chance or possibility that a substantial lessening will occur (Monroe Topple per Heerey J at para 111.

[248] It is possible that an objective observer, with knowledge of the industry, might have concluded, at the time of the relevant conduct, that it would be likely to effect a substantial lessening of competition in the market. But we are uneasy about deciding the s 47 issue on that basis. Hill J did not make a finding about that specific question. The finding of his Honour, at para 478 of his reasons, included the element ‘had it [the exclusive dealing conduct] continued’. The addition of that element was consistent with Hill J’s view that the exclusive dealing would have continued indefinitely, but for ACCC intervention. However, as we have explained, we do not think it is legitimate to decide the cases upon the basis of future conduct, even if that future conduct is no more than a continuation of an existing policy. Once one takes away the effect of any future conduct, it becomes difficult to say that the exclusive dealing conduct of either of the appellants was likely to have the effect of substantially lessening competition in the market.

[249] We turn to the subject of purpose. A person may have the purpose of securing a result which it is, in fact, impossible for that person to achieve. That no doubt explains the reference to purpose, in para (a) of s 47(10) of the Act, as an alternative to effect and likely effect. The paragraph is satisfied if the relevant corporation has the requisite purpose, regardless of whether or not that purpose has been, or was or is likely to be, achieved. It may conceivably be satisfied even in a case where the Court finds the purpose could never in fact have been achieved; although that finding would be relevant in determining whether to infer the proscribed purpose.

[250] There was debate about whether the test for the relevant purpose is objective or subjective. Universal submitted the test is objective.

[251] Section 47 is directed at the conduct of corporations, … The debate about subjective and objective purposes has an air of unreality in connection with corporate conduct. The purpose of a corporation is a legal fiction. A corporation has no mind and can have no purpose, in the usual sense of that word. Its activities will necessarily reflect the purposes of the individuals who make the decisions which control those activities. In the case of most corporations, this will be a group rather than a single individual. Their minds are the mind of the corporation: …. The members of the group will often have differing reasons for arriving at a decision, some spoken and some unspoken. Necessarily, therefore, a finding about the purpose of a corporation is a legal conclusion expressed as an attributed state of mind. The distinction between subjective and objective purpose will ordinarily be blurred; …

[252] Authority bearing on the nature of the purpose to be demonstrated pursuant to Pt IV of the Act is mixed. This can be partly explained by differences in wording between the sections. … In relation to ss 4D, 45 and 45D of the Act, the requisite purposes have been held to be subjective: … The purpose in s 46 is the actual subjective purpose of the corporation in question. What is to be ascertained is the ‘intent of the corporation engaging in the relevant conduct’ …

[253] The purpose to which s 47(10) refers has been said to involve ‘subjective’ considerations: see O’Brien Glass … But in that case there was no express evidence of subjective purpose; purpose had to be inferred by resort to objective evidence including the natural consequences and ‘effect’ of the conduct. …

[254] In our opinion, the language of s 47(10), taken together with s 4F and the weight of authority, establish that what needs to be proved is the actual purpose of the relevant respondent. …

[256] Ascertaining the purpose for which conduct is engaged in by a party stands on quite a different footing. It would make no sense to consider that issue without paying regard to the direct and indirect evidence as to the actual intentions and purposes of the party. Of course, proof of the required purpose is not limited to direct evidence as to those purposes. Further, the Court is not bound to accept such evidence. Indeed, it will normally be critically scrutinised; it is often ex post facto and self-serving. In these cases, no such evidence has been led, either against the respondents (by way of direct admission) or for them from the relevant decision-makers. Thus, a finding of purpose is an inference to be drawn from all of the circumstances on the balance of probabilities. That inference, however, is as to the purpose of the particular respondent, not of some hypothetical bystander. That said, the objective circumstances will be of considerable (often critical) probative value in assessing whether to draw the inference.

[257] Hill J found the purpose of each of Universal and Warner was to discourage retailers from acquiring, whether by importation or purchase, non-infringing copies of titles within their respective catalogues. …

[259] His Honour’s finding is unsurprising. It is clearly pointed to by a body of evidence, … there is evidence from which purpose may be inferred.

[260] It is clear that both PolyGram and Warner opposed the legalisation of parallel importation and were seriously concerned about its effect on their businesses. Hitherto, each corporate appellant had enjoyed a monopoly in the supply of their group’s labels to the Australian market. They now faced the prospect of imports from other countries, possibly at prices below their own. Before either of them had any evidence of retailers engaging in parallel importation, each of them devised a pre-emptive strategy to deter retailers from doing so. The strategy was devised at the highest level, in each company. It involved communication with retailers in terms designed to dissuade them from having anything to do with imported stock. Each company threatened to withdraw supporting services from retailers who purchased stock elsewhere. When it discovered a retailer had done so, each corporate appellant came down hard on that retailer. Not only did it withdraw supporting services; it denied supply of all product. The evidence suggests, and the trial judge found, that the corporate appellants’ course of conduct ceased only because of the intervention, or anticipated intervention, of ACCC. …

[262] In argument, much was made of the fact that all the retailers whose accounts were closed were small traders. It was said their sales volume was miniscule; therefore, the cessation of supply to them could have no significant effect on competition in the market. We agree. Insofar as it is relevant to comment on factual arguments, those very facts make us wonder why the appellants thought it necessary to close the retailers’ accounts, unless for the purpose of making an example of them. How better to fortify a general warning to all retailers than to deny supply to one or more small retailers, whose purchase value was, in any event, insignificant, ‘pour encourager les antres’.

[263] It was submitted that it was extremely unlikely that unilateral action by one supplier of CDs in relation to particular retailers could have prevented, or even seriously hindered, competition from parallel imports in relation to its own titles. Counsel likened such action to holding back the tide or putting a finger in the hole in a dyke; … Given the strong economic interest of each respondent to deter the new competition, there was every incentive to try and achieve that objective, even if against the odds. … Nipping incipient small-scale competition in the bud was held to substantially lessen competition in Rural Press at paras 129 to 133. This is applicable by analogy to the potential intra-brand competition here. …

[265] If it be accepted that the purpose of each corporate appellant was to dissuade retailers from purchasing imported stock, the question arises as to whether that involved the purpose of ‘substantially lessening competition’ within the meaning of s 47(1)(a) of the Act. It certainly involved a purpose of substantially lessening (if not altogether eliminating) competition with PolyGram and Warner, as the case may be, in respect of their own labels. But the competition contemplated by s 47(10)(a) is competition in the relevant market, considered as a whole; not competition with a particular market participant. …

[268] It was submitted by reference to some texts that, absent collusion or parallelism, exclusive dealing can only be effective if the ‘excluder’ has substantial market power. That is not the premise upon which s 47 is framed. It does not refer to market power and provides other criteria. Even if correct, it would relate directly to effect rather than purpose.

[269] … CD titles are not an homogeneous commodity. Each is unique. Each appeals to a different audience, although audiences overlap. If intra-brand competition is eliminated, there is no direct price competition or any direct competition in relation to the aggregation of unique titles. Of course, each title is in competition with the titles of other suppliers in the same market and that, over time, would impose some competitive pressure. However, if a major supplier could hold the line against intra-brand competition from imports, it could determine in its own time whether to respond to competition from other suppliers and, if so, how to do this. We are satisfied this comfortable situation would apply to a significant proportion of the available titles, and amount to a substantial lessening of competition in the market. Further, the introduction of intra-brand price competition would flow through to inter-brand price competition and so affect the whole market. …

[271] Universal argues its defence of its market position reflected a purpose of competing effectively in the new environment, notwithstanding the result would damage or even eliminate free riding competitors. PolyGram’s conduct, it is submitted, promoted inter-brand competition, albeit at the possible cost of reducing intra-brand competition, each title being regarded as a brand for the purpose of that analysis. Warner adopts the same argument.

[272] A difficulty about that argument, for our purposes, is that it is a factual argument unsupported by any finding of the trial judge and is inconsistent with the findings which are made. Universal failed to call any witness who could speak about its objectives, policies and activities. In the absence of such evidence, it is not open to an appellate court to make the findings sought. A similar observation applies to Warner.

[273] Furthermore, s 47 does not contain any ‘rule of reason’, or any scope to permit a substantial lessening of competition because it is balanced by claimed pro-competitive effects elsewhere. The policy is to let competition work. …

[274] In our opinion, Hill J was right to find that s 47(10) was satisfied in each case and that there was thus a contravention by each corporate appellant of s 47(1) of the Act; however, only by reference to the purpose of that appellant, not the effect or likely effect of its conduct. …

(i) Background

[297] A penalty of $450,000 was imposed on each of Universal and Warner. ACCC had sought imposition upon each of them of a penalty of $8,000,000, that being 80% of the maximum penalty. …

(ii) Arguments on appeal

[300] It is submitted on behalf of ACCC that Hill J failed to give proper weight to the element of general deterrence in fixing the penalty; in addition, and alternatively, the penalty imposed was so manifestly inadequate as to demonstrate that the discretion had miscarried. …

[301] Counsel for Universal and Warner submit that the primary judge adverted to the relevant principles, including the need for deterrence; therefore it is not possible to challenge the discretionary judgment which he exercised. …

(iii) Conclusions

[302] Notwithstanding that Hill J’s decision on penalty was discretionary in nature, it must be set aside. … the penalty imposed on each respondent was manifestly inadequate. The starting point for consideration is the following finding of Hill J …

‘It must be accepted that the conduct engaged in here was serious. It was a deliberate attempt to subvert the consequences of legislation designed to permit parallel imports of non-infringing copies of compact discs. One consequence of the legislation was to increase the competition in compact discs available in Australia. Subverting the legislation inevitably had the consequence of reducing the competition for discs in the catalogue of each respondent corporation to the extent that they were available for purchase overseas and subsequent sale in Australia. Universal and Warner engaged in the conduct they did with the deliberate purpose of preventing parallel importation of non-infringing copies and for the purpose of affecting competition in the market in Australia.’

[303] Each corporation is substantial. …

[304] … Each [party] is only to be penalised for the conduct which did take place. Although short-lived, the purpose of that conduct was to snuff out the emergence of a form of competition opened up in the interests of consumers by the amendments to the Copyright Act. On any view, these factors would indicate the need for a substantial penalty to be assessed, bearing in mind the maximum of $10,000,000.

[308] … the contravening conduct was plainly and deliberately anti-competitive in its intent. It was conduct which, at least, ran a serious risk of being in breach of the Act.

[310] In our opinion, to give a substantial discount for these factors sends the wrong signal to the commercial community. It will encourage risk-taking and pushing the boundaries of anti-competitive conduct. …

[311] … the penalties imposed on the two corporations must be set aside. …

[312] In imposing the penalty, we shall have regard only to the contravention of s 47. … In our opinion, any amount less than $1,000,000 in each case is insufficient to mark the seriousness of the conduct and deter these corporations and others from similar conduct in the future. The amount would have been significantly greater if the conduct had occurred over a longer period and/or had a greater actual effect.

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