Proper evidence of comparative prices essential for Competition Act claim

Jim Blemings and Others (plantiffs) v David Patton Limited, Edward Kavanagh (Maynooth) Limited, Paul & Vincent Limited, John Thompson and Sons Limited and Monaghan Poultry Products Limited (defendants).

Competition Law - Contract - Plaintiffs all grew chickens for the defendant - Whether defendants had entered into agreements which had as their object and effect the restriction of competition - Whether the defendant had abused its position in the market by insisting that plaintiffs purchased their chicken meal from other defendants - Whether fifth defendant imposed unfair selling prices upon the plaintiffs - Whether fifth named defendant had acted in a price discriminating manner Whether the contractual relationship between each of the plaintiffs and the fifth defendant imposed an obligation, on the fifth defendant to act in a fair and equitable manner - Competition Act 1991 (No 24), sections 4, 5.

The High Court (before Mr Justice Shanley); judgment delivered 15 January 1997.

WHEN considering whether an undertaking has abused a dominant position in a market through, the imposition of unfair prices, it must be possible for the court to compare the prices charged by the undertaking and prices charged elsewhere.

The High Court so held in dismissing so much of the plaintiffs claim as was made pursuant to the Competition Act 1991.

Hugh O'Neill SC, Bill Shipsey SC and Brian Cregan BL for the plaintiffs; Paul Gallagher SC, Ian Finlay SC and Paul Gardiner, BL for the fifth defendant.

MR JUSTICE SHANLEY, outlining the facts of the case, said that the plaintiffs in this action all grew chickens for the fifth defendant (MPP). Thus the relevant product market with which the court was concerned was the market for the provision of broiler growing services. The plaintiffs claimed that each of the oral agreements between them and MPP infringed section 4 of the Competition Act 1991 in that the plaintiffs were not permitted to purchase meal directly from the millers who made it and that the agreements imposed unfair selling prices upon the growers selling chicken flesh to MPP.

It was further alleged that MPP, abusing their dominant position in the market contrary to section 5 of the Competition Act 1991 and were in breach of the contractual relationship between the parties which obliged MPP to act in a fair and equitable manner.

Mr Justice Shanley went on to describe the various stages involved in the production of broiler chickens for processing. Firstly the eggs were hatched in hatcheries which were mostly owned by the processors. From these, day old chicks were despatched to the growers, where they remained until they were taken live to the processor. With one exception, all the growers purchased their chicken meal and day old chicks from the processors for whom they grew, the price of which was deducted by the processor when they were paying for the live chickens delivered to them. The growers were paid for the weight of live birds delivered to the factory and were not paid for birds classified by the Department of Agriculture Veterinary Officer as "dead or useless".

Mr Justice Shanley said that plaintiffs' complaints with the MPP could be summarised thus the plaintiffs were not allowed to purchase their own meal directly from the millers; not, all meal was tested for its metabolising content; various deductions, such as fork lift charges, imposed by MPP, were unilateral and unjustified; the flesh price offered to the plaintiffs was unfair and was subject to a delayed cheque payment; the millers employed by MPP were not dealing satisfactorily with the plaintiffs complaints; and a variation in the plaintiffs' gross margins was due to poor quality feed.

The plaintiffs also pointed to disparities between the Department of Agriculture's record of the number of "dead and useless" birds and the number of birds declared dead and useless" on MPP's purchase invoices.

In support of their claim that the flesh price obtained from MPP was unfair, Mr Justice Shanley said that the plaintiffs had relied on the results of a questionnaire prepared by the plaintiffs and answered by the IDA on behalf of the growers of six other processors. However, Mr Justice Shanley felt that the conclusions which could be drawn from the answers to the questionnaire did not clearly suggest the proposition that MPP was paying a price which was less than the economic value of the chicken flesh or that other processors were paying a greater price.

The plaintiffs also sought to rely the price being offered for chicken flesh by the Cootehill Cooperative Society; but Mr Justice Shanley felt that the Cootehill price was not a proper basis for comparison because Cootehill was a cooperative society and therefore most of the people deciding the flesh price were ultimately beneficiaries.

Mr Justice Shanley said that both the plaintiffs and MMP saw, the quality of meal as critical to the success of their respective enterprises. The plaintiffs considered that high quality meal gave them a good food conversion ratio and gave evidence of the cost advantages and quality control advantages to them in purchasing meal directly from growers of their choice. However Mr Just ice Shanley felt that the evidence failed to establish any causal link between the designated MPP millers and a poor food conversion ratio. The plaintiffs went on to claim that if they had a direct contractual relationship, the millers would be more responsive to their difficulties and they could improve their gross margins. MPP also gave evidence in relation to the importance of meal and claimed that because supermarkets were now dictating what went into chicken feed it would be an administrative nightmare if the plaintiffs could purchase meal independently of MPP. MPP claimed that at that time it knew what meal was sent to each of its growers and accordingly could trace back from the consumer product to the meal each bird was fed on. All the processors in Ireland required their meal to be purchased through them and a similar practice existed in the UK.

Turning to the economic issues raised, Mr Justice Shanley said that both parties had introduced evidence as to the relevant product market and both were agreed that the market was that for the provision of a broiler growing service. Expert evidence was adduced by the plaintiffs that the relevant geographic market was located in County Monaghan within a 15 mile radius of MPP's plant. The plaintiffs then went on to argue that the position of MPP within that market was that of a monopsonist as the firm was the sole buyer of a particular service. The plaintiffs went on to say that MPP was in fact a price discriminating monopsonist in that it had applied flesh price incentives for new growers but not others. The observable barriers to entry and exit from the market and the lack of mobility of growers provided MPP, it was argued, with the potential to exploit its growers and the capacity to impose unfair trading conditions. The plaintiffs cited as an example of this the prevention of growers from negotiating the purchase of meal directly from the millers. This, it was claimed, amounted to an abuse of a dominant position by MPP.

The expert evidence adduced by MPP maintained that the relevant geographic market was the island of Ireland and claimed that growers for different processors throughout Ireland were indirectly in competition with one another in the provision of their broiler growing services. As to the suggestion that preventing growers form negotiating the purchase of meal directly from the millers was unfair and anti competitive, MPP claimed that such conduct was not abusive and could be objectively justified. Additional evidence, adduced by MPP, sought to establish that the market prices for feed and final output were independent from the relationship between growers and processors. It was claimed that the market was characterised by increased competition and declining output prices so that it was untenable to suggest that MPP could guarantee a fair price or return.

Mr Justice Shanley then addressed the legislative provisions on which the plaintiffs were seeking to rely. Section 4 of the Competition Act 1991 provides that all agreements and concerted practices between undertakings which have as their effect the restriction of competition are void. Section 5 of the 1991 Act goes on to prohibit an abuse by one or more undertakings of a dominant position in trade for any goods or services in the State.

The plaintiffs had urged that in considering whether MPP had infringed section 4 of the 1991 Act the court should adopt the approach of the Court of Justice in Societe Technique Miniere v Maschinenbay Ulm GmbH [1966] ECR 235, viz, the court should first look at the object of the agreement or concerted practice and if the object did not by its nature restrict competition then the effect of the agreement or concerted practice should be considered, taking into account the whole economic context in which the agreement operated. It was submitted by the plaintiffs that Masterfoods v HB Ice Cream Limited [1993] ILRM 145 had established that if the court found that the object of an agreement was to restrict competition, then the court did not have to consider its effect on competition. It was claimed by the plaintiffs that MPP's systematic deductions from the growers' margins together with the gradual but consistent decline of those margins pointed to an agreement or practice which necessarily had as its object or effect the restriction of competition, in that it directly or undirectly imposed on the growers unfair purchasing prices for chicken flesh.

Equally the plaintiffs submitted that the agreement, whereby they were required to purchase their meal through MPP, had the object or effect of restricting competition and was a contractual term which had "no connection" with the subject matter. Finally the plaintiffs argued that when MPP had introduced a flesh price incentive for new growers this had the effect of applying dissimilar conditions to equivalent transactions.

In relation to section 5 of the 1991 Act the plaintiffs claimed that the unfair purchase prices offered by MPP, the restriction on the purchase of meal other than through MPP and the price discrimination of MPP were all features of what they submitted was abusive conduct within the terms of that provision. The plaintiffs relied on the decision in Hilti V Commission [1992] 4 CMLR 16 to establish that the obligation to purchase their meal through MPP was the imposition of a "supplementary obligation which by its nature had "no connection" with the broiler growing service and was thus an abuse under section 5(d).

Mr Justice Shanley said that he accepted the plaintiffs' assertion that the relevant geographic market was one within a 15 mile radius of the MPP plant. In addition, Mr Justice Shanley was satisfied that while in an independent market a monopsonist was not necessarily in a dominant position, the market in this case was not contestable and there were significant barriers to entry and exit. Mr Justice Shanley, then said that the court had to consider whether MPP had abused its position within the market. To this end, Mr Justice Shanley considered whether the flesh price offered by MPP was fair. Having discounted the plaintiffs' evidence based on the Cootehill Cooperative price and the questionnaire drawn up on behalf of other processors, Mr Justice Shanley said that he accepted MPP's evidence that it was untenable to suggest that MPP should be able to assure the growers a fair return. Mr Justice Shanley was satisfied that no genuinely comparable flesh prices had been adduced in evidence to allow the court to make an assessment of the fairness of MPP's prices and that the plaintiffs had thus failed to establish a breach of section 5(2)(a) of the 1991 Act in accordance with the test propounded in Bodson v Pompes Funetrees des Regions Libres [1988] ECR 2479.

Mr Justice Shanley went on to say that the evidence before the court established that the practice of requiring growers to purchase their feed through their processor had commenced, in the 1960s and that this obligation was connected with the contract, for the provision of a broiler growing service. Thus, Mr, Justice Shanley felt that this obligation was not capable of being characterised as a "supplementary obligation" with "no connection" with the object of the contract. The processor was perfectly entitled to specify how and where and with what particular feed the chicks in question should be reared. In conclusion, Mr Justice Shanley felt that the imposition of an obligation as to feed stuffs could be objectively justified and was therefore not prohibited by section 5(2)(d) of the 1991 Act.

While there had been evidence that MPP offered different terms to new growers, Mr Justice Shanley said that there had been no evidence to suggest that such conduct had the result of placing the affected growers at any competitive disadvantage; accordingly he was satisfied that MPP had not abused its dominant position and that even if it had, any such abuse could be objectively justified.

Turning to the alleged breach of section 4 of the 1991 Act, Mr Justice Shanley found that the evidence did not sustain the allegation that the agreements with MPP had as their object or effect the restriction of competition either in the broiler growing market or the market for meal. No proper evidential basis had been laid for the allegation that MPP was guilty of, fixing unfair prices and the obligation to purchase meal could he objectively justified and thus did not fall foul of section 4.

Finally, Mr Justice Shanley, was satisfied that the plaintiffs had established that the Department of Agriculture's record of "dead and useless" birds was correct and that the figures recorded on MPP's purchase notes, were incorrect. Thus the plaintiffs were entitled to recover damages for breach of contract by reason of the inaccurate assessment of "useless" birds.

Solicitors: Malone and Potter (Dublin) for the plaintiffs; Mason Hayes and Curran (Dublin) for the fifth defendant.