Aug 2008

In December 2007 we published an FYI headed "The Warehouse Decision – Why the Commission Must Appeal the High Court Decision". The Commerce Commission did lodge an appeal and on 1 August the Court of Appeal set aside the clearances granted by the High Court permitting Woolworths and Foodstuffs to acquire The Warehouse.

Simpson Grierson was neither pleased nor displeased with the result. We never took sides. We were however pleased that the Court of Appeal has reaffirmed the principles of merger law that we at least had always thought were established.

There is in fact, nothing particularly earth-shattering in the Court of Appeal decision; it simply reaffirms old values.  But, given the way others had greeted the High Court decision, those old values did appear to need reaffirmation.  (We are not so naïve as to say that the Court of Appeal decision cannot be successfully appealed but we very much doubt that the Supreme Court would revert to the High Court's approach in any material respect.)

The Court of Appeal's decision indicates:

• Appeals against Commerce Commission decisions are by way of rehearing as distinct from de novo hearing, with further evidence to be adduced only with leave of the Court, which may be granted if there are "special reasons".
  
  
• The case in the High Court had effectively been run as a full de novo case.  (The Commission accepted this in the circumstances as a fait accompli.)
  
  
• There is a likely substantial lessening of competition if there is a real chance of such a lessening.
  
  
• Uncertainty as to competitive outcomes is not automatically "resolved" in favour of an applicant.
  
  
• Clearance should only be granted where the Court or the Commission is satisfied that there is no real chance of substantial anti-competitive effect.
  
  
• There was nothing in evidence as to the current state of competition which showed that any additional constraint by a new entrant would necessarily be irrelevant.
  
  
• Despite the evidence provided by the supermarkets and by The Warehouse, there is a real and substantial prospect that the Extra concept will succeed but most relevantly the supermarkets had not established the contrary.
  
  
• The Court was entitled to be sceptical about evidence as to conduct at a time when the two incumbent supermarkets were both trying to take over The Warehouse.
  
  
• The High Court was unduly focussed on the empirical evidence associated with the course of trading of the Extra stores and the responses of the supermarkets (ie, upon what happened following entry and what can be inferred from that) with particular reference to price impacts alone.
  
  
• It cannot reliably be predicted that existing competition between the supermarkets (to the extent it exists) will continue in the future absent Extra.
  
  
• The absence of impact by Extra on competition in the period until October 2007 did not establish that such impact was not likely.
  
  
• Updating evidence before the Court of Appeal indicates that enhanced performance by Extra has begun to emerge.  (We do not believe that this updating evidence was in any sense determinative in context, but we expect some may disagree.)
  
  
• The Commission acted correctly in giving weight to theoretical concerns raised by a 3:2 merger in markets characterised by high barriers to entry, especially where the structural features of the market do not drive the incumbents to compete vigorously.
  
  
• Co-ordinated effects were a plausible possibility.
  
  
• Extra's business case may not have been to be a price leader but this did not rule out the possibility of Extra having substantial competitive relevance.

We are pleased that the Court of Appeal has approached the issues as it did.  There are no major questions unaddressed and no obvious leaps of faith.   We are also pleased to have been part of the debate and it is comforting to know that  our  views were not quite as fanciful as some had indicated.

This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.