On 27 August 2010, the Federal Court ordered Baxter Healthcare Pty Ltd (Baxter) to pay penalties of $4.9 million in respect of contraventions of sections 46(1)(c) and 47(1) of the Trade Practices Act (1974) (the TPA). The contraventions occurred when Baxter tendered to various State Purchasing Authorities for the supply of sterile fluids (SFs) and peritoneal dialysis fluids (PDFs). The judgment makes it clear that even if a corporation has reason to think that its conduct does not contravene the TPA, it may still be subject to significant penalties if it is subsequently found to have breached the TPA.

Background

Baxter was a manufacturer of both SF and PDF products. PDF products are used to treat renal failure. Prior to and at the time of the contraventions of the TPA, Baxter had a market share in the Australian PDF products market in excess of 90 per cent. Between June 1998 and May 2001, Baxter responded to requests for tender for the supply of SF and PDF products by the New South Wales, South Australian, Western Australian and Queensland Governments. They were successful in all four tenders and subsequently negotiated and entered into long-term contracts with each of the States. In its response to the tenders, Baxter offered two alternatives:

  1. To supply the SF products on an item-by-item basis at a very high price, or
  2. To supply the SF products at a much lower price on condition that the State acquired all, or substantially all, of its requirements for SF and PDF products from Baxter.

The contracts which Baxter subsequently negotiated and entered into with the State governments were on the basis of alternative 2.

Court hearings

The matter was heard by a number of different Courts over a period of years. Initially, in proceedings in the Federal Court, Baxter and the States argued that Baxter could claim derivative Crown immunity from the operation of the TPA. In a previous case, the High Court of Australia had determined that unless a statute expressly or impliedly applies to the Crown, the Crown is immune from the operation of the statute, and the statute does not apply to companies which contract with the Crown, if the statute would interfere with the ability of the Crown to enter into that contract (see Bradken Consolidated Limited v Broken Hill Co Ltd). In the Baxter case, Baxter and the States argued that the States were immune from the operation of the TPA, and therefore that the provisions of the TPA did not apply to Baxter. The High Court disagreed, and in 2007, ruled that the TPA did apply to Baxter in respect of the negotiations and contracts with the States (see ACCC v Baxter Healthcare Pty Ltd [2007] HCA 38).

The Full Court of the Federal Court subsequently ruled (on appeal from the Federal Court) that Baxter had contravened sections 46 and 47 of the TPA.

Section 46 of the TPA prohibits a corporation which has a substantial degree of power in the market from taking advantage of that power for the purpose of (among other things) deterring or preventing a person from engaging in competitive conduct in that or any other market. Section 47 of the TPA prohibits exclusive dealing (i.e. offering to supply on the basis that the person to whom the goods are supplied will not acquire the goods from a competitor).

The Court found that:

  • in offering to supply SF products at a high price, or at a lower price on condition that the relevant State acquired all its SF products and PD products from Baxter, Baxter was taking advantage of its substantial degree of market power, for the purpose of preventing two other corporations from competing with them in the market for PD products  
  • Baxter’s negotiation strategy had the substantial purpose, and likely effect, or substantially lessening competition in the PD products market, and  
  • Baxter had engaged in exclusive dealing in breach of section 47 of the TPA.  

Awareness of likelihood of contravening the TPA  

The ACCC asked the Court to impose significant penalties on Baxter for these contraventions of the TPA. Baxter submitted that no penalties should be imposed. In his judgment of 26 August 2010, Justice Mansfield accepted that Baxter did not engage in its negotiation strategy with “the conscious awareness that its conduct contravened the TPA”, and that Baxter did not deliberately intend to contravene the TPA. He also accepted that Baxter may have believed its conduct would not contravene the TPA because it believed it had derivative Crown immunity.

However, he said that he was not prepared to accept that Baxter was, or was entitled to be, confident that its conduct did not contravene the TPA. He took into account evidence of the circumstances surrounding the contraventions, including the Trade Practices compliance programs in place at the company at the time of the breaches, and found that Baxter “was aware that it was taking advantage of its significant degree of power in the SF products market to procure and maintain its hold in the PD products market”.

For that reason, in determining penalties, he proceeded on the basis that Baxter had deliberately engaged in conduct which breached the TPA. He said that an appropriate level of penalties must be fixed to deter Baxter from engaging in similar conduct and to operate as a general deterrent to the community.

Implications

This judgment underlines the importance for companies of ensuring that those responsible for making strategic decisions and entering into commercial negotiations on behalf of the company have a good understanding of the TPA and that they ensure that the company complies with the TPA in its negotiations and commercial arrangements into which it enters. One way of ensuring this is to have in place effective TPA compliance systems and training programs. The judgment is also a reminder that TPA considerations need to be taken into account when responding to Government tenders, as companies can no longer be confident of exemption from the provisions of the TPA on the basis of derivative Crown immunity.