Acquisition of Aurizons Acacia Ridge Terminal (ART) by Pacific National cleared by Full Federal Court - Antitrust, EU Competition

In a significant loss for the Australian Competition and Consumer Commission (ACCC), the Full Federal Court has rejected its appeal in relation to Pacific National's proposed acquisition of Aurizon's Acacia Ridge Terminal (ART) in Queensland.

The Full Court held that the proposed acquisition is not likely to substantially lessen competition in any market, and therefore does not contravene section 50 of the Competition and Consumer Act 2010 (Cth) (CCA). The Full Court separately ordered that Pacific National be released from an undertaking that it had controversially given to the Federal Court on the last day of the hearing of the matter at first instance.

In the context of the Federal Court's recent decision to allow the merger of Vodafone and TPG, over the ACCC's objections, the Full Court's decision in this matter will be particularly disappointing for the ACCC.

One immediate implication of the decision is that, by confirming the scope of the Court's power to accept undertakings from merger parties in lieu of an injunction where a transaction would otherwise contravene the CCA, it may give merger parties greater leverage in some circumstances to negotiate relatively favourable undertakings with the ACCC.

The decision has also seen ACCC Chairman Rod Sims renew his calls for reform to merger control in Australia – notwithstanding that in both the Pacific National and Vodafone/TPG matters, the decisions ultimately turned on key factual findings by the court that were against the ACCC, and not on particular interpretations of the law that suggest shortcomings in the current regulatory framework.

Background

The ART is located 16 kilometres south of Brisbane and is a significant multi-user terminal where rail freight can be transitioned from the standard-gauge interstate rail network to Queensland's narrow-gauge rail network. Pacific National is a major user of the ART and the largest provider of intermodal freight services in Australia and within Queensland.

In July 2018, after refusing to grant informal merger clearance for Pacific National's proposed acquisition of the ART (despite Pacific National offering an undertaking intended to prevent it from discriminating against other rail freight operators seeking to access the ART), the ACCC began proceedings in the Federal Court. The ACCC sought, amongst other things, a declaration that Pacific National's acquisition would contravene section 50 of the CCA (which prohibits acquisitions that are likely to substantially lessen competition in any market) and an injunction to prevent it from completing.

The ACCC alleged an anti-competitive effect in markets for interstate rail linehaul on the North-South corridor between Melbourne, Sydney and Brisbane, and on the East-West corridor between Perth, Adelaide and either Melbourne or Sydney. The ACCC's key concern was that, if Pacific National owned the ART, it would have the ability and incentive to discriminate against line-haul rivals and increase barriers to new entrants seeking to compete with Pacific National.

At first instance, Justice Beach determined that the acquisition was not likely to substantially lessen competition when considered with the behavioural undertaking offered by Pacific National to the court (which was in the same terms as the undertaking the ACCC rejected before it commenced the proceedings). In his reasons, Justice Beach stated that, but for the undertaking, he would have found that the proposed acquisition was likely to substantially lessen competition in the sense that there was a "real chance" of this outcome.

Grounds of appeal and cross-appeal

The ACCC appealed on two broad grounds. First, it argued Justice Beach should not have taken Pacific National's undertaking into account in determining whether the proposed acquisition was likely to substantially lessen competition. Instead, the ACCC contended, a court may only accept an undertaking once a contravention of section 50 of the CCA has been established on other facts.

Second, even if Justice Beach was correct in considering the undertaking in determining whether the proposed acquisition contravened section 50 of the CCA, he should not have concluded that the undertaking was effective in preventing Pacific National from engaging in anti-competitive conduct following the acquisition of the ART. According to the ACCC, the undertaking was too vague and not formulated with the necessary precision so as to be capable of being readily obeyed and enforced in a contempt proceeding.

Pacific National, together with Aurizon, cross-appealed on a number of bases, including that Justice Beach was incorrect in his construction of the word 'likely' in section 50 of the CCA and in concluding that, absent an undertaking, the acquisition would be likely to substantially lessen competition.

Decision of the Full Court

What is the meaning of 'likely' under section 50 of the CCA?

There has been a degree of uncertainty about the correct test to be applied under section 50 of the CCA to determine whether a transaction is 'likely' to have an anti-competitive effect – that is, whether 'likely' in this context means 'more probably than not' or 'a real – not remote – chance' or 'a probability that is not less than 50 per cent'.[1] Importantly , in their joint judgment, Justices Middleton and O'Bryan found that Justice Beach applied the correct test by equating 'likely' to a 'real commercial likelihood'.

Would the acquisition be likely to substantially lessen competition?

The Full Court held that, even in the absence of an undertaking, Pacific National's acquisition of the ART was unlikely to have the effect of substantially lessening competition. In the joint judgement of Justices Middleton and O'Bryan, this was because:

while Pacific National's acquisition of the ART would raise barriers to entry, the likelihood of a new supplier of intermodal rail freight entering the market with or without the transaction would not rise higher than a mere possibility;
even if new entry were to occur, it would be unlikely to occur within the next five years (given the planning and investment required); and
as a result of the separate Inland Rail Project being approved, it was likely that a new terminal in South-East Queensland would be constructed in five years' time or in the ensuing few years, meaning that by the time the possibility of a new entrant materialised, another terminal in South-East Queensland would likely be available to them.

In those circumstances, a lessening of competition – which could only occur in the small theoretical time window between the entry by a potential future competitor and the construction of a new terminal associated with the Inland Rail Project – was found to be unlikely.

Was Justice Beach correct to accept the undertaking of Pacific National?

While it was not necessary for the Full Court to determine the issue, it accepted the ACCC's argument that Justice Beach erred in taking into account Pacific National's undertaking when determining whether there was a contravention of section 50 of the CCA.

Justices Middleton and O'Bryan concluded that the Court's power to accept an undertaking is "remedial in nature", and derives from its power to grant injunctive relief under section 80 of the CCA. This power was held to be a comprehensive statement of the Court's power to accept an undertaking in relation to contraventions of the CCA. As a result, alternative sources of power for the Court to grant injunctive or declaratory relief, such as the Federal Court of Australia Act 1976 (Cth), are not available in respect of such contraventions. The power to accept an undertaking is therefore only enlivened once the Court is satisfied the relevant conduct contravenes the CCA.

Justices Middleton and O'Bryan also rejected the ACCC's argument that Justice Beach should not have accepted the undertaking because it was too vague. Their Honours held "[i]n our view, no error has been shown in the primary judge's conclusion that the Undertaking was capable of enforcement in contempt proceedings and would be effective." In reaching this decision, their Honours rejected an argument of the ACCC that its submissions should be accorded greater weight because of its experience regarding undertakings under section 87B of the CCA.

While in the minority on this point, Justice Perram expressed concerns about the feasibility of enforcing the Pacific National undertaking by means of civil contempt proceedings. For Justice Perram, many of the obligations under Pacific National's undertaking were such that it was unlikely a conviction could be achieved for contravention of the obligations it imposed on Pacific National when a court must be satisfied beyond reasonable doubt.

Implications of the decision

Law reform

The decision represents a significant loss for the ACCC, given that it reverses the first instance findings on the likely anti-competitive effects of the transaction and follows a string of losses in merger cases including, most recently, in relation to the merger of Vodafone and TPG.

The decision has already seen the ACCC renew its calls for reforms to Australian merger laws, with ACCC Chairman Rod Sims indicating that he would "work up some suggestions" for amendments as a result of decision.

In recent years, the ACCC has advocated for the onus of proof to be reversed so that, in mergers opposed by the ACCC, there is a rebuttable presumption that the merger is anti-competitive unless the merger parties can provide clear evidence to the contrary. It has also sought additional merger factors to be included under section 50(3) of the CCA, such as whether the acquisition would result in the removal from the market of a potential competitor. Finally, it has canvassed amendments to the 'substantial lessening of competition test', for example, to prohibit acquisitions that have the likely effect of 'materially' rather than 'substantially' lessening competition.

However, given that a number of the ACCC's recent losses can arguably be attributed to the courts simply taking a different view on factual matters, it is not clear these kinds of changes would be likely to materially improve the ACCC's prospects in future litigation. For example, in the Pacific National decision, the Full Court simply took a different view to the ACCC as to whether the evidence demonstrated a new entry by a supplier of interstate intermodal rail freight services was likely in the medium term. Similarly, in the Vodafone/TPG decision, the Federal Court did not accept the ACCC's argument that TPG would roll out its own mobile network if the merger did not proceed.

Use of behavioural undertakings

The ACCC has historically been reluctant to accept behavioural undertakings from merger parties. This has been in part because ongoing monitoring of compliance with non-discrimination obligations or ring fencing arrangements is inherently challenging. In the limited circumstances where it has accepted them, the ACCC often insists on relatively intrusive mechanisms to monitor and audit compliance.

The decision clarifies that there may be an avenue for potentially avoiding these objections by substituting ACCC oversight of behavioural undertakings for that of a court (if an undertaking proves necessary at all). In certain circumstances, this may give merger parties more leverage in negotiations with the ACCC on the form of any undertaking it requires. However, its strategic benefit is likely limited to circumstances where the merger parties are genuinely willing to litigate.

[1] This issue was not fully resolved in Australian Competition and Consumer Commission v Metcash Trading Ltd [2011] FCAFC 151.

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