High Court opens government procurement to competition law

The High Court today upheld the ACCC's appeal against findings by the Full Federal Court that Baxter Healthcare Pty Ltd was protected from the operation of the Trade Practices Act 1974 by Crown immunity. On the basis of this judgment, all transactions by companies are subject to prohibitions in the Act against anti-competitive conduct*.

At trial and on appeal, the Federal Court held that if the State health purchasing authorities with which Baxter was dealing were entitled to Crown immunity, Baxter was entitled to 'derivative' Crown immunity and was protected from the proceedings brought by the ACCC. In doing so it applied a line of judicial authority based on the High Court's decision in Bradken from 1979**.

The majority of the High Court*** noted that the Act had changed since the time of the decision in Bradken and held that the principle in that case regarding Crown immunity and the Act no longer accurately represented the state of the law. The premise acted upon by the Federal Court, that the Act would not apply to Baxter in relation to the formation or performance of a contract was unwarranted.

The State Governments of New South Wales, Queensland, South Australia and Western Australia took the position that companies contracting with them should be exempted from the Act.

The majority of the High Court was of the view that: "[the] construction urged by the respondents imposes a very extensive qualification upon the Act's object of promoting competition and fair trading in the public interest, in the name of the protecting of the capacities of the Crown, a qualification strikingly at odds with the way the Act deals with governments when they themselves carry on a business."

With the High Court making it clear that Crown immunity does not apply to Baxter the matter now returns to the Full Federal Court to consider the underlying issue; whether Baxter's conduct did constitute a misuse of market power or had the purpose, effect or likely effect of substantially lessening competition.

"Government procurement comprises a significant part of the economy," ACCC Chairman, Mr Graeme Samuel, said. "Today's decision of the High Court makes it clear that companies supplying government have the same rights and responsibilities that are applicable to companies supplying the private sector."

*Except those transactions which are expressly exempted by statute or regulation via section 51(1) of the Act.

**Bradken Consolidated Ltd v Broken Hill Proprietary Co Ltd (1979) 145 CLR 107.

*** Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ.

Background

The ACCC alleged that Baxter entered into long term, exclusive, bundled contracts of between three and five years which tied the supply of sterile fluids to the supply of peritoneal dialysis products, with each of the purchasing authorities in New South Wales, the Australian Capital Territory, Western Australia, South Australia and Queensland. Each State and Territory purchasing authority acquires these products for supply to publicly funded health facilities, including public hospitals.

On 16 May 2005 Justice Allsop handed down his judgment. He found that Baxter's conduct:

• in refusing to disaggregate its bundled tender to South Australia in 2000 for supply of peritoneal dialysis products, large volume parenteral fluids, parenteral nutrition fluids and irrigating solutions for use in South Australia by health facilities with the purpose of deterring competitive conduct, would have resulted in a breach of section 46 of the Act, and
• in submitting bundled tenders and negotiating bundled supply contracts in New South Wales, South Australia, Western Australia and Queensland for supply of PD products, LVP fluids, PN fluids and Irrigating Solutions with the purpose and likely effect of substantially lessening competition, would have resulted in a number of breaches of section 47 of the Act.

However, his Honour dismissed the ACCC's application on the basis that applying the principles of Crown immunity or derivative Crown immunity, the Act did not apply to Baxter in its dealings with the Crown in right of each of the relevant States.

Appeal

The ACCC appealed from that ruling, challenging Baxter's ability to derive the Crown's immunity. In addition, the ACCC appealed against the judge's findings that other instances of alleged misuse of market power and exclusive dealing did not possess the constituent elements to establish further contraventions. Baxter appealed against the entirety of the decision of Justice Allsop.

On 24 August 2006 the Full Federal Court considered Justice Allsop's conclusion on the Crown immunity issue to be correct and did not address the other grounds of appeal.