Bundling ruled illegal !

Do we have your attention ?  The Federal Court of Australia has ruled that a product bundling arrangement is illegal under the Trade Practices Act 1974.

Before you panic, you need to understand that the decision was based on a pretty special set of facts that would rarely occur in the telecoms industry.  The reason we’re talking about the case is to show you that it can happen, and how.

Key parts of the Trade Practices Act

The TPA deals with several main areas.  One of them is consumer protection (e.g. the section 52 law against misleading and deceptive conduct).

Another big area deals with business practices that are bad for competition.  In legal industry jargon, that part is called ‘Part IV’, and the suspect business practices are called ‘restrictive trade practices’.

What Part IV does

Part IV outlaws a variety of conduct and arrangements.  For instance, it says that an upstream supplier cannot order a reseller to resell goods or services at a minimum price.

(That could be legal in a special case where the reseller was a legal agent of the supplier, but that’s not the normal position.  And genuine recommended retail prices are OK, too – as long as they are a true recommendation and not an order.)

Now, Part IV broadly puts conduct into two categories.  The first category is always illegal.  Full stop.  No exceptions.  Lawyers sometimes call this a ‘per se’ breach, because the conduct by itself (i.e. ‘per se’ in Latin) is illegal.

The second category is illegal only if it has a significant bad effect on competition.  If not, it’s OK.  If so, it’s illegal.

An example of a per se breach

A supplier that orders a retailer not to sell its goods below recommended retail price commits a per se breach of the Trade Practices Act.

So does a retailer that engages in a practice called ‘third line forcing’.  An example:  AutoCarSales Pty Ltd tells customers they will only sell them cars if they also sign up an insurance contract with SuperInsure Pty Ltd, run by their owner’s cousin.

If Business A won’t do business (or charges higher prices) unless you agree to buy something from Business B, that’s third line forcing.  It’s illegal.  Full stop.

An example of the other kind of breach

Imagine MegaTel says, ‘We only offer our VoIP service to customers who also buy our adapter.’  That sounds a bit like third line forcing.  ‘To get product A you must also buy Product B.’

But there’s a difference:  MegaTel is tying together two of its own products, not one of its products plus a requirement to buy a product from a third party.

This second kind of arrangement is commonly called ‘full line forcing’.  The telco industry calls it by another name – ‘bundling’.  It may or may not be illegal.  It depends.

It depends on whether or not the arrangement has a significant detrimental effect on competition.  If it does, it’s illegal.

That condition is called the ‘competition test’.

To summarise so far

Part IV of the TPA outlaws:

• some arrangements, if they fail the competition test (e.g. ‘full line forcing’ aka ‘bundling’)
• other arrangements, whether or not they fail the competition test (e.g. ‘third line forcing’)

Most bundling arrangements don’t fail the competition test

Where a product or service has lots of competition and alternative suppliers, it’s very hard for a bundling arrangement to harm competition.  There are heaps of VoIP services available, and plenty of adapters.  MegaTel’s bundling arrangement is hardly likely to harm the marketplace.

But in a recent pharmaceuticals case, there was an illegal bundling arrangement

In the case of ACCC v Baxter Healthcare, Baxter was the only Australian supplier of a certain kind of medical fluid.  Hospitals bought from Baxter or they didn’t buy at all.

Baxter also sells other medical products that are in a competitive market.

So Baxter said to its customers, ‘We’ll give you discounts on our exclusive product, but only if you also buy these other products from us.’

Of course, competitors in those other products couldn’t possibly match that offer since they could not supply they key product at all.  Baxter had used its control in relation to one product to force up the process of other products but still be assured of sales.

Quotes from the ACCC news release

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 [full line forcing] 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.

‘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 … 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.

So bundling can be illegal in Australia

In the telco sector, which is so competitive in many respects, it would be hard to re-create circumstances that match the Baxter case.  Probably only a very major player, or someone who controlled a unique and significant product, service, technology or infrastructure could fall foul of the law.

But it’s possible.  For the purposes of the TPA, there are many potential ‘markets’ in Australia, and the wrong kind of bundling arrangement could damage competition in some markets.

The lesson

As a lawyer, every time a telco or ISP client offers a bundle, I have a quick think about whether it could conceivably offend the competition test.  In almost every case, the answer is ‘no’ after five to ten seconds of thought.  It isn’t an issue.

But if the answer is ever, ‘Well, maybe’ you need to ask a couple more questions and think a little longer.  I have never actually concluded there was a likely problem with one of my client’s bundling arrangements, but it’s always good to be clear about it.

And more than once, so-called bundling arrangements have turned out to be ‘third line forcing’ rather than ‘full line forcing’.  Those proposals do present serious legal issues.