resource jvs and tpa - michael filippich

Michael Filippich - 1 - 1/12/2010

A MISSED OPPORTUNITY – TPA CARTEL CONDUCT

AMENDMENT FAILS TO PROVIDE COMMERCIAL CERTAINTY

FOR RESOURCE JOINT VENTURES

BY MICHAEL FILIPPICH

I INTRODUCTION

For many years the Trade Practices Act 1974 (Cth) (‘the TPA’) has struggled to

provide the necessary legal framework to distinguish between legitimate, pro-competitive

joint ventures and anti-competitive cartels. The Trade Practices Amendment (Cartel

Conduct and Other Measures) Bill 2008 (Cth) (‘the Bill’) is the Government’s most

recent attempt to address this issue and was subject to widespread criticism in the

academic and business communities for failing to provide legal and commercial certainty

to companies involved in joint venture operations. This paper outlines the changes made

to the Trade Practices Act 1974 (Cth) by the Cartel Conduct and Other Measures Bill

2008 and the impact of these changes on resource joint ventures operating within

Australia. The paper also investigates the treatment of joint ventures in the United States

where, subject to the ‘rule of reason’, they are exempt from the strict per se liability

which exists for cartel conduct under antitrust legislation. It is argued that the US

approach of evaluating a joint venture by its conduct rather than its contract is the more

effective method of identifying cartel behavior.


II CHANGES MADE BY THE CARTEL CONDUCT AND OTHER MEASURES BILL 2008

The Cartel Conduct and Other Measures Bill 2008 was introduced to establish

civil and criminal penalties for cartel conduct. It also granted wider investigative powers

to the Australian Competition and Consumer Commission (ACCC) and the

Commonwealth Director of Public Prosecutions (CDPP) by enabling telecommunications

surveillance to be used to collect evidence against cartel offences. The Bill was based on

the Organisation for Economic Co-operation and Development (OECD)

Recommendation of the Council Concerning Effective Action Against Hard Core Cartels

which defined serious cartel conduct as anticompetitive arrangements by competitors to

fix prices, rig bids, establish output restrictions or share or divide markets.1 The OECD

called upon its member countries to ensure that legislation was in place to adequately

prohibit hard core cartels and provide for effective sanctions, enforcement procedures and

investigative tools to combat them.2

Section 45 of the previous version of the TPA prohibited arrangements that have

the purpose or likely effect of substantially lessening competition. Section 45A went on

to deem price fixing as having the purpose or likely effect of substantially lessening

competition. The Cartel Conduct and Other Measures Bill 2008 repealed the per se

prohibition on price fixing in s 45A and replaced it with new civil and criminal

prohibitions against cartel conduct which prohibit a corporation or individual from

making or giving effect to a Contract, Arrangement or Understanding (‘CAU’) that

contains a cartel provision. A cartel provision is defined in ss 44ZZRD of the TPA as a

provision relating to:

1 Explanatory Memorandum, The Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (Cth). 2 Ibid.


price-fixing; or

restricting outputs in the production and supply chain; or

allocating customers, suppliers or territories; or

bid-rigging

by parties that are, or would otherwise be, in competition with each other.

A CAU includes both formal and informal arrangements between competitors

which may or may not be in writing. The element that distinguishes the cartel offence

from the civil prohibition in the TPA is the need to establish certain fault elements under

the criminal code.3 In order to be charged with making or giving effect to a cartel

provision it would be necessary to establish that the individual or corporation knew or

believed that the contract, arrangement or understanding contained a cartel provision and

that they intended to give effect to this provision. A criminal cartel offence must be

proven beyond a reasonable doubt whereas a civil offence need only be proven on the

balance of probabilities.4 The maximum criminal penalty for an individual engaging in

cartel conduct is 10 years jail and or a fine of $220,000. For a corporation, the maximum

criminal penalty is 10 million dollars or three times the value of the benefit obtained from

the breach. If the value of the benefit cannot be determined a company can be fined up to

10% of its annual turn over. The amendments operate retrospectively to apply to cartel

provisions which were in place before the Bill was passed.

3 See above n 1. 4 Ibid.


III JOINT VENTURE EXCEPTIONS

Joint ventures between competitors play an important role in Australian and

international business, particularly in the resource and construction industries. The term

joint venture does not have a settled Common Law meaning but is defined in s 4J of the

TPA as:

a reference to an activity in trade or commerce:

(i) carried on jointly by two or more persons, whether or not in partnership; or

(ii) carried on by a body corporate formed by two or more persons for the purpose of enabling those persons to carry on that activity jointly by means of their joint control, or by means of their ownership of shares in the capital, of that body corporate;

Joint ventures typically involve a level of integration between participants which is less

than that of a merger or partnership and as such are treated differently for taxation and

legal purposes.

It is well established that joint ventures, including those between competitors, can

have pro-competitive benefits for consumers which could not be achieved if participants

acted independently.5 Joint ventures allow companies to share risk, combine capital,

technology and other assets as well as increase output and improve efficiency through

greater economies of scale. The commercial benefits of joint ventures were recognized

by the 2003 Review of the Competition Provisions of the Trade Practices Act chaired by

Sir Daryl Dawson (‘The Dawson Review’) which recommend that the scope of the joint

5 Bill Grant, Law Council of Australia Submission to the Inquiry into the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia <http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub10.pdf> at 20 August 2010.


venture exemptions in the TPA be broadened.6 In 2007 s 76C and s 76D were added to

the Act to provide a defence for exclusionary agreements and price fixing which were for

the purpose of a joint venture and did not have the purpose, effect or likely effect of

substantially lessening competition.

The Cartel Conduct and Other Measures Bill 2008 repealed the joint venture

defence in s 76D and inserted ss 44ZZRO and ss 44ZZRP which provide exceptions for

joint ventures from civil and criminal penalties relating to cartel conduct. Both of these

exceptions require the following elements to be met:

the cartel provision is contained in a contract;

the cartel provision is for the purposes of a joint venture;

the joint venture is for the production and/or supply of goods or services; and

the joint venture is carried on jointly by the parties to the contract, or by means of joint ownership or control of a body corporate formed by the parties to carry on the activity of the joint venture.

The drafting of these joint venture exceptions was the focus of much of the criticism

directed at the Bill.7 The most significant areas of concern were the requirement for

cartel provisions to be contained within a contract, the removal of the competition test for

joint venture arrangements and the limiting of the exceptions to joint ventures for the

production and/or supply of goods or services.

6 Ibid. 7 Brett Fisse, The Contract Requirement For The Joint Venture Exceptions Under Sections 44ZZRO AND 44ZZRP of the TRADE PRACTICES ACT (2009) Brent Fisse <http://www.brentfisse.com/images/Fisse_The_Contract_Requirement_for_the_Joint_Venture_Exceptions_under_ss_44ZZRO_and_44ZZRP.pdf> at 20 August 2010.


IV PROBLEMS WITH LIMITING JV EXCEPTIONS TO CARTEL PROVISIONS CONTAINED

WITHIN CONTRACTS

The requirement in ss 44ZZRO and ss 44ZZRP that a cartel provision be

contained within a contract seems at odds with the definition of a cartel provision in ss

44ZZRD which includes arrangements and understandings in addition to contracts.8

Most joint ventures are established through a series of written and verbal agreements that

may or may not be legally binding. Often non-compete or other cartel like provisions are

discussed and agreed in relation to the joint venture during negotiations. The execution

of a formal joint venture agreement between participants may not occur until well into the

project or not at all. It is unclear whether or not joint venture participants could be

exposed to civil or criminal penalties for cartel provisions that existed prior to the

formation of a formal contract.9 The joint venture exceptions make no reference to

Memorandums of Understanding or Heads of Agreements which are commonly used by

business people during the establishment phase of a joint venture to capture the essential

elements of a deal. In order to rely on the joint venture exceptions with respect to cartel

provisions contained within a Memorandum of Understanding or Heads of Agreement it

will be necessary for the joint venture participants to establish that this agreement was in

fact a contract and that they intended it to be legally binding until the execution of a more

formal agreement, which is often not the case.

8 Brett Fisse, Submission to the Inquiry into the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia <http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub05.pdf> at 20 August 2010. 9 Ibid.


The Government attempted to resolve this issue by modifying the Bill during the

consultation period to include the ‘contract proxy provisions’ in ss 44ZZRO(1A)(1B) and

ss 44ZZRP(1A)(1B). These amendments extended the joint venture exceptions to cartel

provisions contained within an arrangement or understanding provided that:

(b) when the arrangement was made, or the understanding was arrived at, each party to the arrangement or understanding:

(i) intended the arrangement or understanding to be a contract; and

(ii) reasonably believed that the arrangement or understanding was a contract;

These modifications are ineffective for a number of reasons. Business people rarely

intend for arrangements and understandings to be legally binding contracts particularly

during the negotiation phase of a deal. The exceptions also fail to address the

retrospective application of the TPA to cartel provisions which existed prior to the

establishment of a formal joint venture agreement or contract. This could be especially

problematic for existing joint ventures that were operating without a formal contract prior

to the cartel amendments coming into effect. It is also likely that a defence against cartel

conduct based on ss 44ZZRO(1A)(1B) and ss 44ZZRP(1A)(1B) would be extremely

complex, time consuming and costly as the respondent would not only need to establish

their own intention and belief but also the intention and belief of every other joint venture

participant who was a party to the arrangement or understanding.


Another major concern raised by joint venture participants was whether or not

joint venture contracts would need to be continually updated to reflect day to day

operational decisions which may be interpreted as containing a cartel provision.10 Often

the joint venture agreement will establish an operating committee which is responsible

for addressing a wide range of operational issues which may include setting production

levels and prices for the output of the joint venture. It is unclear from the drafting of the

Bill whether or not any cartel provisions which may arise from these operational

arrangements are covered by the joint venture exceptions. The issue is further

complicated in situations where the operator is a separate contractor and not a party to the

joint venture agreement, as it would appear that they are not covered by the joint venture

exceptions. It is also unclear whether or not the joint venture exceptions would apply to a

farmee who enters into or gives effect to a cartel provision in a farmout agreement which

is separate from the joint venture contract.

The Government attempted to address these concerns in the Supplementary

Explanatory Memorandum to the Bill by stating that:

If a board or committee is established under the joint venture contract to regulate or manage the joint venture and the activities of that board or committee are contemplated and regulated by the joint venture contract, then the exceptions would appear to apply in relation to those activities.

The Explanatory Memorandum went on to provide the example of two or more parties

entering into a joint venture to construct a shopping centre. If the joint venture contract

provided for the establishment of a management committee to decide the rent and charges

for the shopping centre, then the process of making or giving effect to those decisions 10 Supplemental Explanatory Memorandum, The Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (Cth).


would appear to be covered by the joint venture exceptions. The Explanatory

Memorandum is not a legal document and does not provide any legal guidance to support

this conclusion. The issue of how cartel provisions arising from day to day operational

decision will be treated by the TPA remains an area of commercial and legal uncertainty.

It is unlikely that amending a joint venture contract to include provisions that deem any

subsequent cartel provisions made by the operating committee as automatically being a

cartel provisions contained within the contract would be effective as this would most

likely be interpreted as an attempt to contract out of the TPA.11

The legislative intent for requiring that cartel provisions be contained within a

joint venture contract remains unclear. If the Government’s intention was to prevent

hardcore cartelists from using the joint venture exceptions, then they have put legitimate

joint ventures at risk unnecessarily because there is nothing in that TPA to prevent

cartelists from drafting a contract which covers their cartel arrangements. On this basis it

is proposed that there is no reason that the scope of the joint venture exceptions cannot be

extended to include understandings and arrangements which are not necessarily intended

to be legally binding contracts. This will ensure consistency with the rest of the TPA

and provide greater certainty to legitimate joint ventures without providing camouflage to

cartelists. The ‘contract proxy provisions’ in ss 44ZZRO(1A)(1B) and ss

44ZZRP(1A)(1B) should be repealed on the basis that they are ineffective and

impractical. The joint venture exceptions should also be extended to cover third parties

with contractual arrangements with the joint venture, provided that their activities are

specifically related to and contemplated by the joint venture agreement.

11 Fisse, above n 8.


V REMOVAL OF THE COMPETITION TEST FROM THE JV EXCEPTIONS

The most effective method of distinguishing between a legitimate joint venture

and a cartel is not to require that cartel provisions be contained within a contract, but

rather to examine whether or not the cartel provisions are reasonably necessary to achieve

a pro-competitive benefit for the consumer. The removal of the joint venture exception

and associated competition defence for price fixing under s 76D in the previous version

of the TPA resulted in widespread criticism from both joint ventures and consumer

groups. According to DomGas, a business alliance formed to reduce prices and improve

supply of natural gas in Western Australia, the removal of s 76D from the TPA means

that it will no longer be relevant whether a cartel provision substantially lessens

competition so long as it is contained within a contract.12 Similarly, joint venture

participants have raised concerns that their inability to put forward a defence based on the

pro-competitive benefits of a cartel like provision means that they will be forced to seek

ACCC authorisation for any arrangements that could potentially be challenged as anti-

competitive. The ACCC authorisation process is both costly and time consuming.

In their submission to the Government regarding the Bill, the ACCC supported

the removal of the competition test on the basis that it would have complicated jury

trials.13 The ACCC argued that if s 76D remained in force the accused would only need

to establish that their conduct did not substantially lessen competition to the standard of

12 Stuart Hohnen, DomGas Alliance Submission to the Inquiry into the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia <http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub03.pdf > at 20 August 2010. 13 Brian Cassidy, Australian Competition and Consumer Commission Submission to the Inquiry into the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia <http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub12.pdf> at 20 August 2010.


the ‘balance of probabilities’ whereas the prosecution would be required to establish

‘beyond a reasonable doubt’ that competition was adversely affected. This would require

extensive market evidence and expert economic analysis to be presented to a jury which

would complicate the trial process and potentially diminish the deterrent effect of the

criminal prohibitions.14

The concern expressed by the Government and the ACCC about applying a

competition test to civil and criminal cases highlights the fact that the criminal sanctions

for cartel conduct are not confined to conduct that should be treated as illegal per se. The

Bill failed to distinguish between conduct that is serious enough to justify a criminal

offence and conduct that is less objectionable and should only be subject to a civil

penalty. This is contrary to the recommendations of the Dawson Review and the OECD

who only advocated criminal sanctions for serious or hardcore cartel activity. Instead the

cartel offences are broadly defined and only limited by the discretion of the ACCC and

CDPP.15 This discretion is covered by a Memorandum of Understanding between the

ACCC and CDPP which identifies the following factors for consideration when deciding

whether or not a cartel violation should be prosecuted:

The conduct was longstanding or had or could have had a significant impact on the market in which the conduct occurred.

The conduct caused or could cause significant detriment to the public. The conduct caused or could cause significant loss or damage to one or more of

the participant’s customers. One or more of the alleged participants had previously been found by a court to

have participated in cartel conduct. The value of affected commerce exceeded or would exceed $1,000,000 within a

12 month period. In the case of bid rigging the value of the bid or series of bids exceeded

$1,000,000 within a 12 month period.16

14 Ibid. 15 Grant, above n 5. 16 See above n 1.


According to the Law Council of Australia, the Memorandum of Understanding provides

insufficient guidance to the business community and its advisers as to when a matter is

likely to be pursued as a cartel offence.17 For example, it is unclear whether the above

factors act as a definitive threshold for when cartel conduct would becomes criminal or

whether they are merely indications for when the conduct should be assessed for

significance.

Greater legal certainty could be achieved by following the lead of overseas

jurisdictions and restricting criminal prosecution to serious, intentional cartel

arrangements where clear per se liability exists. These are typically agreements with no

other purpose than to raise prices or reduce outputs. Once identified such agreements are

considered to be illegal per se without inquiring into their claimed business purpose,

anticompetitive harms, pro-competitive benefits or overall competitive effects. In these

situations there is no need to complicate a jury trial with a detailed market analysis or a

competition test. Civil sanctions should be applied for more complicated or less serious

cartel arrangements and defendants should be entitled to rely on a competition defence

similar to that in s 76D of the previous version of the TPA. There is no reason that a

competition test could not be retained for civil cases as these are tried by a judge and not

a jury.

17 Grant, above n 5.


VI PROBLEMS WITH LIMITING JV EXCEPTIONS TO THE PRODUCTION AND/OR SUPPLY

OF GOODS AND SERVICES

Another major concern with the drafting of the joint venture exceptions is that

they are restricted to joint ventures for the production and or supply of goods of services.

This drafting is highly prescriptive and contrary to the broader definition of a joint

venture in s 4J of the TPA which does not attempt to prescribe the activity in trade and

commerce that a legitimate joint venture can pursue.18 Joint ventures are often involved

in the collective acquisition of goods or services by pooling resources for major capital

expenditure or obtaining more favourable terms of trade with a supplier or contractor.

These activities are not covered by the joint venture exceptions in ss 44ZZRO and ss

44ZZRP. According to the Supplementary Explanatory Memorandum, the joint venture

exceptions can be extended to apply to the acquisition of goods or services by including

these activities in the joint venture contract.19 The Government offered no explanation as

to why the provisions could not be modified to include the production, supply and or

acquisition of goods and services. Instead it will be left to drafters of joint venture

contracts to resolve this statutory deficiency.

Two other types of joint ventures that may not be covered by the joint venture

exceptions are those formed for research and development and minerals and petroleum

exploration. In response to criticism raised during the consultation period, explanatory

notes were added to the Bill to clarify that a research and development joint venture that

proceeds to produce and supply the ‘fruits of the research and development’, may be

18 Grant, above n 5. 19 See above n 10.


providing a service as defined under s 4 of the TPA and therefore qualify for a joint

venture exception. No formal definition is provided for the term ‘fruits of the research

and development’ and it remains unclear whether the exceptions would still apply to an

unsuccessful research and development joint venture which fails to produce any

meaningful results. Although the explanatory notes did not include exploration joint

ventures, it is likely that they would be treated in a similar manner.

VII IMPACT OF THE NEW CARTEL PROHIBITIONS ON THE JOINT MARKETING

AND SALE OF JV PRODUCTION

For joint ventures that are involved in the production and or supply of goods or

services it is unclear whether the joint venture exceptions extend to the joint marketing

and sale of production. Joint marketing is a common feature of many Australian resource

projects, particularly in the petroleum industry. This typically involves the joint venture

participants engaging in a coordinated marketing effort and agreeing identical terms,

conditions and prices with a common buyer or group of buyers.20 Each joint venture

partner then agrees to sell severally its participating share in the joint venture output

under the same terms and price. Separate sales contracts are usually established between

each seller and buyer to maintain the distinction between the unincorporated joint venture

and a partnership for tax and other purposes.21 Although this reasoning has not been

tested by the courts it is generally considered that the performance by each joint venture

producer severally and individually of its sales agreement with the common buyer or

group of buyers involves giving effect to the sales agreement but not the agreement to

20 Rose P, ‘Joint Marketing of Natural Gas: Competition Law Issues’ (2006) 06 AMPLA Year Book 392. 21 Ibid.


jointly market the product. The agreement to jointly market production ceases at the end

of the negotiation process but may be revived if the sales agreement provides for periodic

price reviews. At the end of negotiations a horizontal relationship remains for production

and other matters whereas it is a question of fact whether a horizontal relationship still

exists in relation to the joint marketing and sales agreement.22

It should be no surprise that this approach could expose joint ventures to liability

under then new cartel provisions in the TPA. As discussed earlier in Section IV of this

paper, the Supplementary Explanatory Memorandum for the Bill indicates that joint

marketing would appear to be acceptable so long as it is contemplated by the terms of the

joint venture contract. Prior to the passing of the Cartel Conduct and Other Measures

Bill, terms related to joint marketing and sales were typically kept out of the joint venture

contract to support the position that the unincorporated joint venture is not a partnership.

Inserting marketing and sales terms into the joint venture contract may avoid liability

under the cartel provisions of the TPA but could potentially result in the joint venture

being challenged as a partnership.

To avoid uncertainty many joint ventures seek authorization from the ACCC prior

to commencing joint marketing activities. Section 93AB of the TPA enables a

corporation to lodge a collective bargaining notice setting out the particulars of a

contract, arrangement or understanding that contains a provision relating to price fixing,

restricting outputs or allocating customers, suppliers or territories but not in relation to

bid rigging. The ACCC is then able to authorise this contract, arrangement or

22 Ibid.


understanding in accordance with s 88 of the TPA. Section 90 of the TPA requires that

the ACCC only authorise a corporation to make or give effect to a cartel provision if it is

satisfied that this provision will result in or be likely to result in a net public benefit.

Once ACCC authorisation has been obtained, s 45 (8A) provides an exception to criminal

prosecution and civil liability for any cartel provisions contained within the collective

bargaining notice.

Since the introduction of the Trade Practices Act 1974 (Cth) numerous

authorisations for joint marketing and sales have been granted by the ACCC to resource

joint ventures. The domestic sale of natural gas is one area in particular where the pro-

competitive benefits of joint marketing have long been recognised.23 Petroleum

ownership typically passes from the Crown to the title holder at the wellhead at which

point the interest of each joint venture partner is that of a tenant in common in undivided

shares.24 Some difficulty exists for joint venture participants who wish to sell their share

of the natural gas separately because each joint venture partner effectively has an

undivided interest in every molecule of petroleum which is extracted from the reservoir.

Due to the physical properties of natural gas these molecules are intermingled in a single

stream and cannot be separated or stock piled in the same way as minerals or liquid

petroleum products. The continuous flow of natural gas from the wellhead and lack of

storage capacity in pipelines and underground storage reservoirs also creates practical

23 ACCC, Determination of application in respect of the joint marketing and sale of natural gas from the Gorgon Gas Project for supply in Western Australia (2009) ACCC Website <http://www.accc.gov.au/content/trimFile.phtml?trimFileName=D09+180600.pdf&trimFileTitle=D09+180600.pdf&trimFileFromVersionId=901112> at 20 August 2010. 24 Rose, see above n 20.


constraints for joint selling and marketing. For these reasons it is often much simpler for

gas to flow directly to end use customers in a commingled and co-owned stream.25

In addition to the practical and proprietary issues that arise with the separate

marketing and sale of joint venture products there are also a number of commercial

disadvantages. Resource projects often involve large capital investments and high risks.

In order to secure financial backing for these projects it is often necessary to establish

long term supply contracts to underpin the investment. These contracts are easier to

obtain when joint venture participants take a coordinated approach to the marketing and

sale of production. Forcing joint venture partners to market their share of production

separately can result in project delays, increased risk, production inefficiencies and

higher financing and transactional costs which ultimately lead to higher prices for the

consumer. It can also be argued that forcing joint ventures to separately market their

product does not dilute their market power or lead to greater competition because they are

still able to determine the quantity of their output. In essence a joint venture’s market

power is derived from the exploration and production leases that they control.26 The joint

marketing of production is just one of the many ways that this power can be exercised. It

is unlikely that a single joint venture partner could unilaterally decide to increase output

as the production levels are typically set by a joint operating committee and each

participant would be allocated their share of the additional production. Some companies

have attempted to facilitate separate marketing by inserting ‘borrow and loan’ or

25 Ibid. 26 Ibid.


production balancing provisions into their joint venture contracts however these

arrangements also require a high degree of coordination between joint venture partners.

The pro-competitive benefits of joint marketing and sales for large resource

projects have been confirmed in recent ACCC authorisations for the North West Shelf

Producers, Gorgon Gas Project and the now cancelled Papua New Guinea Gas Project.

In each of these authorisations the ACCC considered that allowing joint marketing in the

short term would create the necessary infrastructure and gas volumes required to establish

a fully competitive domestic gas market in the near future. In recognition of the pro-

competitive benefits of joint marketing and sales by legitimate joint ventures, the price

fixing provisions in s 45(2) of the TPA were amended in 2007 to provide joint ventures

with a competition defence for the prohibition on price fixing. The competition defence

in s 76D was subsequently removed by the Cartel Conduct and Other Measures Bill 2008

and replaced with the joint venture exceptions in ss 44ZZRO and ss 44ZZRP.

It is interesting to note that following the introduction of the competition test in

2007, the North West Shelf Partners in Western Australia requested that their 1977

ACCC authorisation to discuss and agree common terms and conditions including price

for the supply of domestic natural gas be revoked on the basis that this conduct no longer

breached the TPA.27 In their submission to the ACCC, the North West Shelf Partners

stated that the original request was made a time when it was unclear how the TPA would

be applied to joint venture activity and to avoid uncertainty regarding the application of

the then new law. The joint venture partners went on to state that it had always been their

view that joint marketing did not contravene the TPA.

27 Bob Baxt, North West Shelf Gas Pty Ltd - Applicant Initiated Revocation - A18492 (2007) ACCC <http://www.accc.gov.au/content/index.phtml/itemId/807158/fromItemId/401858/display/application> at 20 August 2010.


In what is perhaps a poor reflection on the Cartel Conduct and Other Measures

Bill 2008, the North West Shelf joint venture partners submitted an application to the

ACCC to reinstate their authorisation to engage in joint marketing activities after the Bill

was passed.28 The application was approved on similar grounds to the authorisations for

the PNG Gas Project and Gorgon Joint Venture. Critics of the Cartel Conduct and Other

Measures Bill 2008 claim that the ACCC authorisation process should not be seen as a

remedy for poorly drafted and misconceived statutory provisions.29 The inability of the

new joint venture exceptions to adequately address the issue of joint marketing is yet

another reason for introducing a competition test for civil prohibitions against cartel

conduct.

VIII JV EXCEPTIONS UNDER US ANTITRUST LEGISLATION

The United States is an example of a jurisdiction where joint ventures are exempt

from the strict per se liability that exists for cartel conduct subject to a competition test

known as the ‘rule of reason’. Section 1 of the Sherman Act, 15 U.S.C. § 1 – 7 (1890)

(‘the Sherman Act’) prohibits any agreement among competitors that unreasonably limits

competition. Price fixing, bid rigging and market allocation are all considered to be

violations of S1 and are generally prosecuted criminally by the US Department of Justice.

These activities are considered to be per se illegal because they have been shown to

defraud customers, raise prices and restrict output without creating any plausible benefits

28 ACCC, Determination of application in respect of the joint marketing activities for the sale of domgas in Western Australia from the North West Shelf Project and to administer existing gas supply contracts (2010) ACCC Website <http://www.accc.gov.au/content/index.phtml/itemId/922104/fromItemId/401858> at 20 August 2010. 29 Grant, above n 5.


to the consumer.30 Once identified the US courts conclusively presume such agreements

to be illegal without inquiring into their claimed business purposes, anticompetitive

harms, pro-competitive benefits or overall competitive effect. These agreements have

been proven through considerable judicial experience to be so likely to harm competition

that they do not warrant the time and expense of further investigation.

The pro-competitive benefits of joint ventures have long been recognized in the

United States. According to the U.S. Department of Justice, Antitrust Primer For

Federal Law Enforcement Personnel (2005), efficiencies generated through joint

ventures can enhance the ability of participants to compete resulting in lower prices,

improved quality, enhanced service or new production. 31 Joint ventures often allow

resources to be developed faster and cheaper than if participants acted alone. Over the

last twenty years relatively few US joint ventures have been found to be per se illegal.32

Most suspect joint ventures are instead analysed under the ‘rule of reason’ approach to

determine their overall competitive effect. This involves an assessment of whether

arrangements which would otherwise be considered per se illegal are reasonably related

to and necessary to achieve pro-competitive benefits.

30 U.S. Department of Justice, An Antitrust Primer For Federal Law Enforcement Personnel (2005) U.S. Department of Justice <http://www.justice.gov/atr/public/guidelines/209114.htm > at 20 August 2010. 31 Ibid. 32 Federal Trade Commission & U.S. Department of Justice, Antitrust Guidelines for Collaborations Among Competitors (2000) U.S. Federal Trade Commission <http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf> at 20 August 2010.


When evaluating a suspect joint venture, the US courts will often take a ‘quick

look’ at an arrangement that does not appear to be per se illegal to assess whether the

arrangement harms or is likely to harm competition.33 The purpose of a ‘quick look’

assessment is to determine whether the suspect practice of a joint venture resembles

another practice that is already considered to be per se illegal. This approach works well

when the anticompetitive effects are easily recognisable. If the anticompetitive effects

are not immediately obvious then the courts and agencies evaluate the overall competitive

effect of the agreement by applying a ‘rule of reason’ analysis. This takes into

consideration a number of factors including the:

Nature of the agreement and its specific business purpose.

Market in which the agreement operates.

Market power of each of the participants.

Level of integration of the joint venture participants and the extent to which they are likely to continue to compete against each other outside of the joint venture.

Extent to which participants retain independent control of assets necessary to compete.

Control each participant has over decision making.

Likelihood of anticompetitive information sharing.

Duration of the collaboration.34

If the examination of these factors indicates limited potential for anticompetitive harm

then the joint venture will be considered legal.

33 Ibid. 34 See above n 30.


US courts will typically assess the nature and business purpose of a suspect joint

venture by applying the ‘doctrine of ancillary restraint’ outlined by Taft J in US v

Addyston Pipe & Steel Co, 85 Fed 271 (1898). Under this doctrine the court examines

the purpose behind an agreement which contains an alleged anticompetitive restraint. If

the agreement has a lawful business purpose then the restraint is considered to be

ancillary. The court then examines whether the ancillary restraint is reasonably necessary

(but not necessarily essential) to achieve the legitimate business outcome. If it is, the

court will conclude that the agreement is legal.

Another factor evaluated by the US courts as part of a ‘rule of reason’ analysis is

the level of integration between joint venture participants. This inquiry is often referred

to as the ‘single entity determination’ and is based on the following line of reasoning:

Is the joint venture acting as a single entity or as a collaboration of independent competitors engaged in a potential conspiracy in restraint of trade?

If the joint venture is acting as a collaboration of independent competitors is its conduct of a type that always or almost always tends to raise prices or reduce output?

If not, then is the JV causing or likely to cause anti-competitive harm?

If so, then is the overall competitive effect of the JV such that its overriding pro-competitive benefits outweigh its anticompetitive harms?35

The answers to the previous questions determine whether the joint venture is subject to

S1 of the Sherman Act which prohibits cartel conduct or S2 of the Sherman Act which

prohibits monopolisation of the market place. If the joint venture is operating as a single

entity then it will more than likely be subject to S2 of the Sherman Act and will therefore

only be illegal if the joint venture possesses or threatens to possess monopoly power 35 See above n 32.


which is defined as more than two thirds of the market share. If a court treats a joint

venture as a single entity rather than as a collaboration of multiple entities then it is more

likely to escape liability under antitrust laws.

A number of other factors are examined by the US courts when assessing a joint

venture arrangement using a ‘rule of reason’ analysis. Courts will inquire as to whether

or not the arrangement allows competitors to share information on pricing, output, costs

or strategic planning that could potentially affect competition beyond the joint venture’s

area of operation. For example a joint venture partner may be able use commercially

sensitive information learnt through the joint venture to their advantage when

participating in other joint ventures or competing in a separate market. Access to current

joint venture information is more likely to raise competition concerns than access to

historic information. Another consideration for the Courts is the effect the agreement

will have on market share and concentration. In the US a ‘Safe Harbour’ exists for joint

venture’s where the market share of participants accounts for no more than 20% of the

relevant market in which competition may be affected. Under this ‘Safe Harbour’ joint

ventures with less the 20% market share are presumably lawful as long as their main

purpose is not per se illegal. For joint ventures with greater than 20% market share the

Courts will investigate the extent to which the participants have the ability to manipulate

the market by raising prices and reducing output. The Courts will also consider to what

extent the participants are able to compete against each other outside of the JV and how

much autonomy participants have in relation to decision making and the control of joint

venture assets. The more freedom joint venture partners have to compete outside of the

joint venture and to make independent decisions within the joint venture the less likely


competition will be affected. The final factor considered by the US Courts is the

duration of the collaboration. It is generally considered that the shorter the duration of

the collaboration the less likely it is to harm competition.

IX TEXACO INC. V DAGHER

The leading case in the US on the antitrust treatment of joint ventures is the

Supreme Court decision in Texaco Inc. v. Dagher, 547 U.S. 1 (2006). In this case the

Supreme Court unanimously held that a legitimate joint venture’s decision to set the price

of joint venture production is not subject to per se liability under S1 of the Sherman Act.

The joint venture in question was called Equilon and was formed by Shell and Texaco in

1998 to enhance efficiency and compete more effectively in the downstream refining and

marketing of gasoline on the west coast of the United States. Shell and Texaco

consolidated their downstream assets and signed a non-competition agreement preventing

them from competing with Equilon in the gasoline market. The joint venture was

approved by the US Federal Trade Commission and a number of state antitrust regulators

through consent decrees that did not place any restrictions on Equilon’s marketing

activities. Shell and Texaco established fixed ratios for profit sharing and for bearing the

risk of losses based on the assets that each party contributed to the joint venture.

Equilons formation effectively ended competition between Shell and Texaco in the west

coast gasoline market. The two companies continued to compete in domestic upstream

exploration and production as well as in foreign operations and operations unrelated to

refining and gasoline marketing. Gasoline produced by Equilon was sold separately

under the Shell and Texaco brands at a single price set by the joint venture.


In 1999 23,000 service station owners filed a class action lawsuit against Shell

and Texaco alleging that the decision to sell gasoline under separate brands at the same

price was a per se violation of the Sherman Act that resulted in them being overcharged

between 25 to 50 cents a gallon. In order to simplify proceedings the plaintiff’s did not

challenge the arrangement under a ‘rule of reason’ analysis. At first instance the District

Court found in favour of Shell and Texaco and concluded that a ‘rule of reason’ and not

per se standard should be applied when evaluating the joint venture’s price fixing

arrangement. The Court concluded that by not including a ‘rule of reason’ analysis in

their petition, the plaintiffs had failed to raise a triable issue.36 This decision was

reversed by the 9th Circuit Court of Appeal which applied the ‘doctrine of ancillary

restraint’ to conclude that the price fixing policy was per se illegal. According to the 9th

Circuit Court the price fixing arrangement was ancillary to the joint venture’s business

purpose and was not reasonably necessary to achieve the efficiencies that led to Equilon’s

creation.37

This decision was appealed to the Supreme Court which unanimously held that

the ‘doctrine of ancillary restraint’ did not apply because the practice of pricing the goods

produced and sold by Equilon was not ancillary to the joint venture but rather a core

activity. The court went on to state that the pricing decisions of legitimate joint ventures

did not fall within the narrow category of activity that is per se illegal under S1 of the

Sherman Act. In reaching this conclusion the court evaluated the level of integration

36 Kelly McRobie, Texaco Inc. v. Dagher (04-805); Shell Oil Co. v. Dagher (04-814) (2009) Cornell Legal Information Institute <http://topics.law.cornell.edu/supct/cert/04-805> at 20 August 2010. 37 Ibid.


between Shell and Texaco in the Equilon joint venture and concluded that the joint

venture effectively operated as a single entity. According to Justice Clarence Thomas:

The pricing policy challenged here amounts to little more than a price setting by a

single entity –– albeit within the context of a joint venture –– and not a pricing

agreement between competing entities with respect to their competing products.38

The fact that the joint venture product was sold under two separate brands did not have

any antitrust implications as Shell and Texaco effectively ended competition between

these brands with the formation of Equilon. The Supreme Court’s judgment was based

on the fact that Equilon represented a ‘true economic integration of the parties

competitive operations’.39 The decision in Texaco Inc. v Dagher40 did not go so far as to

conclude that S1 of the Sherman Act did not apply to all joint ventures but rather

emphasised that the presumptive rule of analysis in antitrust cases involving joint

ventures is the ‘rule of reason’. This echoed the decision of the District Court Judge who

was reluctant to expand the reach of per se illegality for fear that it would have a ‘chilling

effect on pro-competitive conduct’.41

The decision in Texaco Inc. v Dagher illustrates the emphasis that US courts place

on evaluating a joint venture by its business purpose and conduct rather than the label it

assigns to its activities. As the US Court of Appeals for the 1st Circuit observed in

Engine Specialties Inc. v. Bombardier Ltd., 605 F 2d (1st Cir. 1979), merely labeling an

arrangement as a joint venture will not save it from per se illegality. Through the

application of the ‘rule of reason’ and the ‘doctrine of ancillary restraint', the US courts

38 Texaco Inc. v. Dagher, 547 U.S. 1 (2006). 39 Ibid. 40 547 U.S. 1 (2006). 41 McRobie, above n 36.


are able to effectively weigh the business purpose of a cartel provision against its

potential harm to competition. It is argued that by focusing solely on a joint venture’s

contract rather than its conduct, the Trade Practices Amendment (Cartel Conduct and

Other Measures Bill) 2008 (Cth) fails to achieve an equivalent outcome. Australian

legislators should consider applying a similar approach to the US whereby per se

condemnation and criminal prosecution is reserved only for conduct that is manifestly

anti-competitive. All other conduct should be assessed by evaluating the particular facts

of the arrangement and its overall competitive effect. It is interesting to note that the

factors assessed by the US Courts under a ‘rule of reason’ analysis are similar to those

considered by the ACCC as part of the authorisation process. The key difference

between these two approaches being that the ‘rule of reason’ is a judicial process whereas

the ACCC authorisation process is an administrative one. If a competition test similar to

the ‘rule of reason’ was introduced into the TPA joint venture exceptions, legitimate joint

ventures would be able to mount a defence against claims of cartel conduct if their

arrangements were challenged rather than having to go through the time and expense of

seeking ACCC authorisation from the very beginning.

X CONCLUSION

In order to compete in modern markets competitors often need to collaborate.42

Joint ventures enable companies to expand into new territories, make costly investments

and engage in innovation. A mature competition law must be able to distinguish between

joint ventures formed for a legitimate, pro-competitive business purposes and a cartel

42 See above n 30.


which simply raises prices and harms competition. This paper has highlighted a number

of deficiencies in the treatment of joint ventures by the Trade Practices Amendment

(Cartel Conduct and Other Measures Bill) 2008 (Cth), most significantly the requirement

for cartel provisions to be captured in a contract and the removal of the competition

defence for joint ventures under s 76d of the previous version of the TPA. Although

criminal sanctions against cartel conduct are a necessary part of Australian law, their

introduction has come at the expense of commercial certainty for joint ventures.

Australia’s cartel laws are now amongst the toughest in the world.43 As the resources

boom regains pace it will no doubt be necessary for legislators to review the drafting of

the cartel provisions in the TPA in order to restore the balance between the needs of

industry and the rights of the consumer.

43 Michael Corrigan and Lina Fischer, Infrastructure joint ventures as cartels? (2009) Clayton Utz <http://www.claytonutz.com/publications/newsletters/projects_insights/20090916/infrastructure_joint_ventures_as_cartels.page> at 20 August 2010.


BIBLIOGRAPHY

1. Articles / Books / Reports

Rose P, ‘Joint Marketing of Natural Gas: Competition Law Issues’ (2006) 06 AMPLA Year Book, 392. 2. Case Law Engine Specialties Inc. v. Bombardier Ltd., 605 F 2d (1st Cir. 1979). Texaco Inc. v. Dagher, 547 U.S. 1 (2006). US v Addyston Pipe & Steel Co, 85 Fed 271 (1898). 3. Legislation Explanatory Memorandum, The Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (Cth). Trade Practices Act 1974 (Cth) The Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (Cth). Supplemental Explanatory Memorandum, The Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (Cth). Sherman Act, 15 U.S.C. § 1 – 7 (1890). 4. Other Sources

ACCC, Cartel conduct (ss. 44ZZRF, 44ZZRG, 44ZZRJ and 44ZZRK) (2010) ACCC Website <http://www.accc.gov.au/content/index.phtml/itemId/883986> at 20 August 2010. ACCC, Determination of application in respect of the joint marketing and sale of natural gas from the Gorgon Gas Project for supply in Western Australia (2009) ACCC Website <http://www.accc.gov.au/content/trimFile.phtml?trimFileName=D09+180600.pdf&trimFileTitle=D09+180600.pdf&trimFileFromVersionId=901112> at 20 August 2010. ACCC, Determination of application in respect of the joint marketing activities for the sale of domgas in Western Australia from the North West Shelf Project and to administer existing gas supply contracts (2010) ACCC Website <http://www.accc.gov.au/content/index.phtml/itemId/922104/fromItemId/401858> at 20 August 2010.


Bill Grant, Law Council of Australia Submission to the Inquiry into the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia <http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub10.pdf> at 20 August 2010. Bob Baxt, North West Shelf Gas Pty Ltd - Applicant Initiated Revocation - A18492 (2007) ACCC <http://www.accc.gov.au/content/index.phtml/itemId/807158/fromItemId/401858/display/application> at 20 August 2010. Bob Baxt, Submission to the Inquiry into the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia <http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub09.pdf> at 20 August 2010. Brett Fisse, Submission to the Inquiry into the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia <http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub05.pdf> at 20 August 2010. Brett Fisse, The Contract Requirement For The Joint Venture Exceptions Under Sections 44ZZRO AND 44ZZRP of the TRADE PRACTICES ACT (2009) Brent Fisse <http://www.brentfisse.com/images/Fisse_The_Contract_Requirement_for_the_Joint_Venture_Exceptions_under_ss_44ZZRO_and_44ZZRP.pdf> at 20 August 2010. Brian Cassidy, Australian Competition and Consumer Commission Submission to the Inquiry into the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia <http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub12.pdf> at 20 August 2010. Chris Jose, New cartel laws – getting the joint venture right (2009) Freehills <http://www.freehills.com.au/5349.aspx> at 20 August 2010. Federal Trade Commission & U.S. Department of Justice, Antitrust Guidelines for Collaborations Among Competitors (2000) U.S. Federal Trade Commission <http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf> at 20 August 2010.


Frank Zumbo, Submission to the Inquiry into the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia <http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub11.pdf> at 20 August 2010. Graham Finlayson, Ergon Energy Submission to the Inquiry into the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia <http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub04.pdf> at 20 August 2010. Kelly McRobie, Texaco Inc. v. Dagher (04-805); Shell Oil Co. v. Dagher (04-814) (2009) Cornell Legal Information Institute <http://topics.law.cornell.edu/supct/cert/04-805> at 20 August 2010. Lauren E. Schrero & Ryan Marth, Antitrust Treatment of Joint Ventures: Analyzing Competitor Collaborations (2009) Robins, Kaplan, Miller & Ciresi LLP < http://www.rkmc.com/Antitrust-Treatment-of-Joint-Ventures-Analyzing-Competitor-Collaborations.htm> at 20 August 2010. Michael Corrigan and Lina Fischer, Infrastructure joint ventures as cartels? (2009) Clayton Utz <http://www.claytonutz.com/publications/newsletters/projects_insights/20090916/infrastructure_joint_ventures_as_cartels.page> at 20 August 2010. Stuart Hohnen, DomGas Alliance Submission to the Inquiry into the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (2009) Parliament of Australia <http://www.aph.gov.au/senate/committee/economics_ctte/tpa_cartels_09/submissions/sub03.pdf > at 20 August 2010. U.S. Department of Justice, An Antitrust Primer For Federal Law Enforcement Personnel (2005) U.S. Department of Justice <http://www.justice.gov/atr/public/guidelines/209114.htm > at 20 August 2010.

resource jvs and tpa - michael filippich

Documents