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The Warehouse question heads to the Supreme Court

18 August 2008

In brief

On Friday, Woolworths announced it will seek leave to appeal the recent Court of Appeal judgment in The Warehouse litigation. The Court of Appeal affirmed the Commerce Commission's decision to decline a clearance to either the Woolworths or Foodstuffs supermarket chains to purchase The Warehouse.

If leave is granted, this will be the first time the Supreme Court considers the competition test for mergers. At issue in The Warehouse litigation is the approach the Commission should take in hard cases. When can the Commission decline clearance because it simply is not sure; and when are competition concerns so speculative they should not hold up a clearance? These questions go to the heart of the clearance process. After all, the clearance process is for hard cases.

Disappointingly, the Court of Appeal ducked the issue. As we explain below, the result is a greater freedom for the Commission to sit on the fence, and less incentive for commercial parties to approach the Commission with hard cases.

For these reasons, we believe the Woolworths appeal should be heard. There is an opportunity for the Supremes to clarify the important issues left vague by the Court of Appeal.

A new hope?

The central facts of The Warehouse litigation are well known. Both the Woolworths and Foodstuffs supermarket chains wish to buy The Warehouse. Both applied to the Commerce Commission for clearance.

The competition question related to a foray by The Warehouse into the grocery business. The Warehouse has three "Extra" stores selling groceries. This is a very small presence (the supermarket chains have over 150 supermarkets each), but the Commission was concerned The Warehouse Extra might develop into a viable competitive force.

At the time the supermarkets applied to the Commission, The Warehouse Extra concept was looking doubtful. Results were poor, and The Warehouse board had called a halt to the roll out of further stores and was reviewing the concept.

The competition analysis boiled down to a simple proposition: if The Warehouse Extra concept was viable then the acquisition by either supermarket would lessen competition and be declined. But was it viable?

Dealing with doubt

As the case unfolded in the High Court and Court of Appeal the central question was; what approach should the Commission and the courts take when the answer is not clear? The Commission had made a decision that it was satisfied competition would be lessened if either supermarket chain purchased The Warehouse. However, underpinning the arguments in the High Court and Court of Appeal is a sense that the supermarkets thought the Commission was responding to a speculative hope. Is a hope of future competition enough?

The High Court tackled the point head on, declaring the Commission must decide one way or another. The Commission, said the High Court, cannot sit on the fence.

For its part, the Court of Appeal disagreed, and emphasised the Commission has three options:

  1. decide the acquisition will not substantially lessen competition, and grant a clearance; 
  2. decide the acquisition will substantially lessen competition, and decline clearance; and 
  3. decide that it cannot be sure either way, and for this reason decline clearance. 

This is pretty standard stuff (and pretty dry). But what the supermarkets were asking for guidance on, and what the High Court had a crack at, is the nature of the third option. Are there any boundaries to the Commission saying it is not sure? A moment's reflection suggests this cannot be unfettered.

The supermarkets argued "The realm of 'doubt' is not a large one, in which the Commission can seek refuge from making findings… on the balance of probabilities".

These questions go straight to the utility of the process. The process exists to deal with hard questions, not easy ones. Is the Commission going to make decisions on the facts before it, and so grant more clearances and make the occasional mistake, or is it going to take refuge in doubt?

The dodge

The Court of Appeal said it was "reluctant to engage" with these issues, and simply referred parties back to the statutory test for mergers. In doing so, the Court of Appeal chose to ignore the fact that the Commission, the supermarkets, several QCs, three legal teams and a High Court judge had already read the statute, and the case was before the Court of Appeal because a question remained. So why stay silent? Some might ask whether, on this one, the Court of Appeal has discharged its obligation to make the law more certain, not less.

In the final analysis, the Court of Appeal decided there was no doubt that an acquisition by one or other of the supermarkets would lessen competition. The Court's conclusion flowed from its view that the recent information on the market performance of The Warehouse Extra concept showed it was viable. In a way, this result underscored the point being made by the supermarkets. If this latest information got the Court of Appeal across the line, what was the Commission's earlier decision based on?

The implications

The practical implications of the Court of Appeal's dodge are significant. There is now greater licence for the Commission to decline clearance on the basis it is not satisfied either way. There is also real daylight between the standard applied to a clearance application (when in doubt, decline) and the standard the Commission must meet when enforcing the Commerce Act. To enforce the Commerce Act the Commission must positively demonstrate the acquisition will substantially lessen competition. In a prosecution context doubt won't do.

For commercial parties, there is less incentive to approach the Commission with a hard case. Apply for clearance, and the Commission may decide it is not sure. Proceed with the acquisition and the Commission must demonstrate the deal will lessen competition.

This is clearly not ideal. Let's see if the Supremes take the opportunity to improve this rather unsatisfactory outcome.

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