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Exclusivity Clauses in Distribution Agreements – The New Frontier in terms of Record Fines
Date : 01 November 2018
Author/s : Laura Hartley, Sarah Best
Type : Focus Paper
 

 

Over August and September 2018, the Federal Court imposed penalties of $11.95 million against a variety of companies, with a director of one of the companies personally ordered to pay $350,000, as a result of illegal exclusivity clauses in the distribution agreements between the companies. The case of ACCC v Oakmoore1 has resulted in the highest penalty ever imposed on an individual for breaching the competition provisions of the Competition and Consumer Act 2010 (CCA). It also marks the first time the Court has imposed a penalty on a company for being “knowingly concerned” in a contravention of the exclusive dealing provisions.


Background


In around 2008, Oakmoore Pty Ltd trading as EGR (EGR) began manufacturing polycarbonate roofing (polycarb), a material commonly used in commercial and home building projects such as pergolas and verandas. EGR supplied polycarb to distributors such as Palram Australia Pty Ltd (Palram) and Ampelite Australia Pty Ltd (Ampelite), which then on-sold to retail stores such as Bunnings and Mitre 10, large commercial users and on-sellers. Palram and Ampelite were at that time the major Australian distributors of this type of roofing material and EGR only competed in the distribution market to a limited extent.


From around late 2008 to mid-2013, EGR made numerous threats to Palram and Ampelite, separately, to the effect that unless they met minimum order volumes, EGR would begin supplying polycarb directly to retailers. Further, EGR informed Palram directly that unless Palram met certain order volumes, EGR would “destroy [Palram] in the Australian market” (i.e. by entering the market and interfering with Palram’s existing customers). Neither Palram nor Ampelite was willing for EGR to enter the distribution market directly. A director of Ampelite gave evidence that he considered EGR’s entry into the market would negatively impact profit margins for existing distributors and would likely eventually force an existing distributor to exit the market.


As a result of the communications between the parties, Palram and Ampelite each committed to order certain quantities of polycarb from EGR on condition that EGR would not supply polycarb directly to retailers in competition with Palram and Ampelite.


Court proceedings


The ACCC commenced proceedings against Palram, Ampelite, EGR and various directors in 2016, alleging that their arrangements contravened the exclusive dealing provisions of the CCA.


Palram and Ampelite both fully cooperated with the ACCC and agreed to settle the legal proceedings at the earliest opportunity. They both admitted that their conduct amounted to exclusive dealing that had the purpose of substantially lessening competition. Palram and Ampelite were ordered by consent to pay $3.5 million and $2 million respectively whilst a director of Ampelite involved in the arrangements was ordered to pay $100,000.


EGR and its director, Mr Horwill, however initially chose to defend the proceedings. There was a huge amount of evidence placed before the Court of the types of communications between the parties, which demonstrated clearly that their purpose was to prevent, hinder or substantially deter EGR from competing with its distributors. This evidence included the following:

 

  • “Our promise was a gentleman’s promise. We gave our word, so we should try and meet this target… Rod said that we will probably meet [EGR] in the market place but [EGR] will not interfere with our markets. That is his promise to Palram.” (Internal email sent by a director of Palram on 5 February 2012).2 
  • That Ampelite did not want EGR as a “fourth player” (i.e. in addition to the existing three major players) in the distribution market. (Telephone conversation between a director of Ampelite and a director of EGR on 22 December 2008).3
  • “I need … your agreement on the volume and price. If so I will continue to support Palram – If not you have just created a very aggressive competitor …” (External email sent by Mr Howill to Palram on 14 December 2010).4


EGR and Mr Horwill conceded “at the door of the court”5 that by refraining from supplying polycarb directly to retailers, they were knowingly concerned in the exclusive dealing conduct of Palram and Ampelite. In addition to contributing to the ACCC’s costs and establishing a compliance program, the Court ordered EGR to pay a $6 million penalty and Mr Horwill a $350,000 penalty. The size of the penalties was due not only to the lateness of the concessions but also to there being multiple courses of conduct which involved “systematic and deliberate” negotiating ploys that were “conceived and implemented at the very highest managerial level in EGR”.6


Action points

 

  • Train all your teams responsible for negotiating distribution or supply terms that may involve exclusivity agreements on the effect of this set of proceedings.
  • There may be multiple legitimate commercial drivers behind the inclusion of exclusivity provisions in a distribution or supply agreement but it is important for these drivers to be tested and then clearly and accurately documented. Your team also needs to understand these legitimate commercial drivers and make sure they don’t inadvertently misrepresent the commercial position when negotiating.
  • Review all your distribution and supply terms to ensure that any existing exclusivity arrangements do not have the purpose or effect of substantially lessening competition.
  • Take particular care when developing strategies around a new business entering your market as the ACCC has exclusivity arrangements in its sights. Following this decision, Rod Sims announced that “the ACCC is determined to push for substantial penalties to deter business from breaking competition laws. Conduct which circumvents competition when a new player enters a market may prevent lower prices and innovation … [which] is likely to cause loss or damage to customers and consumers”.7

1. Australian Competition and Consumer Commission v Oakmoore Pty Ltd [2018] FCA 1472.
2. Ibid para 25 (para 61).
3. Ibid para 25 (para 43).
4. Ibid para 25 (para 57).
5. Ibid para 31.
6. Ibid para 26.
7. ACCC Media Release “EGR to pay $6m penalty for exclusive dealing” dated 28 September 2018.

 

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