Exclusive dealing
18/08/2008
Jane’s company owns and operates a chain of podiatry clinics in and around the Greater Sydney area. Lester’s company manufactures and supplies orthotics. Jane and Lester propose that their companies enter into an agreement in which Lester’s company will supply orthotics to podiatry clinics owned and operated by Jane’s company.
It is likely that Jane’s suggestion will have the effect of substantially lessening competition in the market and therefore amount to exclusive dealing and anti-competitive conduct.
Jane has suggested that in order to provide that best level of service to her clinics, Lester’s company must agree that it will not supply its orthotics to any other podiatry clinic in and around the Greater Sydney area. Essentially Jane is suggesting that Lester’s company be bound by a complete restraint.
Is there any wrong with Jane’s suggestion?
Well, there could be. What Jane is suggesting could amount to anti-competitive conduct, which is specifically prohibited under the Trade Practices Act. Anti-competitive conduct is conduct that limits or substantially lessens competition in the market place. The rationale behind the prohibition on anti-competitive conduct is that commercial agreements should be formed in a competitive environment to allow consumers to make a choice in price, quality and service. If there are restraints in competition in the market, there is a risk that some suppliers will take advance of the lack of competition by increasing their prices and offering sub standard services.
So is what Jane is suggesting, conduct that could limit or substantially lessen competition in the market place and therefore be seen as anti-competitive?
Well, it is conduct that may amount to exclusive dealing. Exclusive dealing essentially occurs when one party trading with another party imposes restraints on the other’s freedom to choose with whom or where they supply their services.
The Trade Practices Act provides that a corporation engages in the practice of exclusive dealing if that corporation acquires services from a supplier on the condition that the supplier will not supply services to particular parties or in particular places.
A corporation also engages in the practice of exclusive dealing if the corporation refuses to acquire services from a supplier for the reason that the supplier has supplied, or has not agreed not to supply, services to particular parties or in particular places.
This conduct is not prohibited outright, but rather the test is whether this conduct will have the effect of substantially lessening competition in a market?
To determine whether there is a substantial lessening of competition, Jane and Lester must consider the overall market for orthotics, including whether or not Lester’s exclusive contract with Jane will substantiality restrict the availability of those type of orthotics to other podiatry clinics, particularly as Jane is suggesting a territorial restraint of the Greater Sydney area.
As a general guide, the more exclusive or specialised the service, the more powerful the supplier, and the more likely it is that competition will be affected.
If you are about to enter a commercial agreement and are concerned that it may contain provisions in breach the Trade Practices Act contact Townsends Business & Corporate Lawyers on (02) 8296 6222.