Total penalties of more than $1 million were imposed on Universal Music Australia Pty Ltd, Warner Music Australia Pty Ltd, and company senior executives in the Federal Court today.
The court had previously found that the companies and executives had breached the Trade Practices Act 1974 by threatening to refuse to supply to CDs to Australian retailers who stocked parallel-imported CDs, and later refusing to supply retailers who stocked such imports.
Universal and Warner are now permanently restrained from refusing or threatening to refuse supply of recorded music CDs to Australian retailers for the reason, or if one of the reasons is, that the retailer has stocked, or proposed to stock, non-pirated copies of CDs in the music catalogue of either Warner or Universal from an alternate source.
"This is an important precedent, as well as an important win for Australian consumers as it means that retailers will be able to freely access cheaper, legal, imported CDs without fear that they will lose supply of other stock", ACCC Chairman, Professor Allan Fels, said today. "This was the intention of the Australian Parliament when it amended the Copyright Act 1968.
In July 1998, amendments to the Copyright Act legalised the parallel importation of CDs that did not infringe the copyright laws of the country in which they were made. Shortly after, the ACCC began its investigation of the conduct of PolyGram Pty Ltd (since taken over by Universal), and Warner after allegations that PolyGram and Warner had closed the accounts of retailers, and had threatened to withdraw trading benefits of those who stocked parallel imports.
On 14 December 2001 Justice Graham Hill found that both Universal and Warner breached the Act by misusing their market power and by exclusive dealing. Senior executives of those companies were held to be knowingly concerned in the contravention of their employers.
He held that Universal and Warner had a substantial degree of market power in the wholesale recorded music market with market shares of approximately 15 to 17 per cent and 17 to 18 per cent respectively.
Each major record company (including Warner and Universal) has exclusive rights to a range of music, which forms its catalogue. In each catalogue a company is likely to have top selling titles which, at any one time, are on the chart. For most consumers a specific title cannot be substituted. It is commercially imperative that a music retailer can access major companies catalogues. A retailer denied supply may not be able to obtain music from the companies' catalogues either locally or overseas at an economic price, on time, or at all.
Both Universal and Warner were concerned that competition from cheaper,
imported CDs would affect their profits. Justice Hill found that Universal and Warner tried to stop alternative, imported supplies of non-infringing imported recordings of titles in the companies' catalogues. Justice Hill found that neither Warner nor Universal could establish that it had a separate aim of preventing 'free riding' and rejected "any attempt on the part of Universal to suggest that the action taken by it was taken to prevent piracy".
Today Justice Hill penalised Universal, Warner and their senior executives for this conduct and ordered:
- penalties – Universal - $450,000, Warner, $450,000
- Paul Dickson (formerly PolyGram Group Managing Director of Music Operations) - $50,000
- Craig Handley (formerly PolyGram General Manager of Sales) - $45,000
- Gary Smerdon (Director of Warner, formerly Finance and Business Affairs Director) – $45,000
- Greg Maksimovic (Warner NSW State Manager) – $45,000
- injunctions permanently preventing Warner and Universal from refusing, or threatening to refuse supply to retailers for the reason that they source or propose to source non-infringing copies of music within their catalogue from an alternate source
- costs – Universal, Warner to pay 75 per cent of the ACCC's costs, with Paul Dickson, Gary Smerdon, Greg Maksimovic each to pay 75 per cent, and Craig Handley 70 per cent.
Professor Fels highlighted a comment from Justice Hill, in his findings, that: 'The dire predictions of reduced promotion through to reduced production and ultimate market failure have simply not happened. If anything, the evidence shows a continued increase in titles, promotion and production and at the same time at lower prices'.
"This case has been a really important precedent in establishing that market share is not the sole determinant of a substantial degree of market power", Professor Fels said. "The ACCC is pleased that the court has permanently restrained Universal and Warner from repeating their conduct which had the deliberate purpose of preventing competition from legitimate, cheaper parallel imports".
Justice Hill said: "It must be accepted that the conduct engaged in here was serious. It was a deliberate attempt to subvert the consequences of legislation designed to permit parallel imports of non-infringing copies of compact discs".
In assessing the penalty, Justice Hill indicated that the finding of a contravention involved a difficult question of law. Justice Hill reduced the penalty to take into account the complexity of the case and uncertainty of the law prior to his decision while noting that subsequent deliberate conduct of the kind in question would lead to a higher penalty.
He also noted that the early intervention of the ACCC led to the conduct being discontinued although he noted that the conduct may well had continued had the ACCC not intervened.
The ACCC instituted proceedings in September 1999 alleging breaches of sections 45 (contracts, arrangements or understandings that restrict dealings or affect competition), 46 (misuse of market power) and 47 (exclusive dealing) of the Act. Justice Hill did not find that Warner or Universal had breached s.45 of the Act.