A bundle of trouble: Baxter breaches Trade Practices Act

The Full Federal Court issued orders yesterday declaring that Baxter Healthcare Pty Ltd had breached the misuse of market power and the exclusive dealing provisions of the Trade Practices Act 1974 when it entered long term contracts with state purchasing authorities.

The contracts related to bundling the supply of sterile fluids with peritoneal dialysis products used by people with kidney failure.

The court found that Baxter, which is the sole supplier of sterile fluids, had taken advantage of its market power in sterile fluids to structure the terms on which it offered to enter into contracts for the supply of these products to the purchasing authorities in NSW, Queensland, South Australia, and Western Australia.

Baxter required the authorities to also purchase peritoneal dialysis products (a market in which Baxter faced competition) if they wished to have the benefit of significantly lower prices.

The court found that Baxter's purpose in leveraging its market power in sterile fluids was to deter or prevent competitors from being competitive in the supply of peritoneal dialysis products in contravention of section 46 of the Act.

The court also found that the bundling of all of sterile fluids and peritoneal dialysis products into long term exclusive contracts with purchasing authorities in NSW, Queensland, South Australia, and Western Australia contravened the exclusive dealing provisions of the Act.

It found that Baxter engaged in this conduct for the purpose and with the effect or likely effect of substantially lessening competition in the peritoneal dialysis products market in contravention of section 47 of the Act.

Australian Competition and Consumer Commission, Chairman, Mr Graeme Samuel, said the ACCC welcomes the decision.

"The ACCC took these proceedings following a complaint from a medical practitioner that exclusivity agreements between the government and Baxter limited the choice of treatment which would best meet the needs of their patients.

"While bundling of itself is not necessarily a problem, companies need to be careful when bundling the supply of their products, to seek an advantage over their competitors, that they do not fall foul of misuse of market power and exclusive dealing provisions of the Act.

"Baxter has said that it was only responding to tenders as sought by various governments but let me be clear, it was Baxter's purpose and its alone to deter or prevent competitors from being competitive by its bundling strategy and to lessen competition. And it's not to be forgotten that this did lessen competition," Mr Samuel said.

As noted in the judgment of Justice Gyles:

"In each negotiation, Baxter used its market power in the sterile fluids market to achieve exclusive dealing by means of bundling to endeavour to snuff out competition as it threatened in the PD fluids market." (391)

Having made declarations that Baxter's conduct contravened the Act the Full Federal Court has remitted the matter to a single judge of the Federal Court to consider the imposition of penalties and other relief.

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.

On 29 August 2007 the High Court upheld the ACCC's appeal, finding that Baxter was subject to the Act and remitted the matter to the Full Federal Court for further consideration.