University of Melbourne Law School Research Series
|
|
Home
| Databases
| WorldLII
| Search
| Feedback
University of Melbourne Law School Research Series |
|
Last Updated: 24 September 2009
Customer testimony and other evidence in
Australian antitrust
assessments – searching
for the oracle
Caron Beaton-Wells*
In United States of America v Oracle Corporation 331 F Supp 2d 1098 (ND
Cal 2004) the United States Government failed in its bid to enjoin the
acquisition by Oracle Corporation of one of its largest rivals, PeopleSoft Inc,
under the antitrust laws of that country. To a significant extent, the
government’s failure was attributable to weaknesses in its evidentiary case.
In particular, the court was not persuaded by the testimony of software
customers, called as witnesses to express a view on the scope of the
relevant market and the likely anticompetitive effects of the proposed
acquisition in that market. The approach taken by the court to the customer
testimony, as well as to expert evidence adduced in the proceeding,
provides useful insights for those dealing with Australian merger cases
under the Trade Practices Act 1974 (Cth). These insights will be relevant to
litigation in the Federal Court, as well as to decisions made by the
Australian Competition and Consumer Commission and the Australian
Competition Tribunal in relation to the clearance and authorisation of
merger proposals.
1. INTRODUCTION
On 6 June 2003 Oracle Corporation, the world’s third largest software
company, initiated a takeover
bid for the shares in one of its largest
competitors, PeopleSoft Inc. The United States Government
(the government),
acting through the Department of Justice and joined by seven States,
brought
proceedings to prevent the acquisition, alleging that it would
violate s 7 of the Clayton Act.1 Section 7
prohibits acquisitions
“where in any line of commerce in any section of the country, the effect
of such
acquisition may be substantially to lessen competition, or to tend to
create a monopoly”. The District
Court for the Northern District of
California (constituted by Walker J) delivered its judgment, against
the
government, on 9 September 2004.2 No appeal was lodged and on 1 June 2005,
Oracle’s
acquisition of PeopleSoft became final.3
In Australia, despite the fact that the Trade Practices Act 1974 (Cth)
(TPA) is entering its fourth
decade of operation, there have been only a
handful of merger cases that have been prosecuted to a
fully contested trial
and judgment. There have also been, relatively speaking, few
merger
authorisation cases determined by the Australian Competition Tribunal
(the Tribunal) on review from
a decision of the Australian Competition and
Consumer Commission (the Commission). It is
instructive therefore to be aware
of and learn from merger litigation in other jurisdictions in which
similar
legal principles and an adversarial system of justice apply. United States of
America v Oracle
Corporation 331 F Supp 2d 1098 (ND Cal 2004)
(Oracle) is a case in point.
* BA/LLB (Hons), LLM, PhD (Melb), Senior Lecturer, Melbourne Law School,
University of Melbourne; Victorian Bar. This
article is a slightly modified
version of a paper given by the author at the Trade Practices Conference hosted
by the Law
Council of Australia in Sydney on 26-28 August 2005.
1 15 USC
§ 18.
2 United States of America v Oracle Corporation 331 F Supp
2d 1098 (ND Cal 2004).
3 See the announcement made at
http://www.oracle.com/peoplesoft/integration.html (viewed 16 August 2005).
There are significant insights to be derived from Oracle for litigants
in Federal Court proceedings
under s 50 of the TPA regarding the evidence
presented on this issue.4 Those insights are likely to be
applicable equally
to proceedings before the Tribunal, the case load of which is set to increase
should
the 2005 amendments to the Act, as proposed by the government, be
passed.5 Tribunal proceedings
share many of the characteristics of Federal
Court proceedings,6 despite the fact that the Tribunal is
not bound by the
rules of evidence.7
Oracle should also be of substantial interest to the Commission and
parties with which it deals in
connection with merger clearances8 given that,
like legal proceedings, such matters involve the
collection and evaluation of
market “evidence” (including information from customers). Indeed,
the
vast majority of merger matters are resolved at this stage (most
unopposed)9 and hence it is important
to note that the practical insights
identified in this article are of equal relevance to participants in
these
non-litigious processes as they are to those involved at the stage
(should it ever be reached) of legal
proceedings. Notwithstanding this, the
language of “litigation” and related concepts is used
generally
in the article for the sake of brevity.
Adopting classifications that have been employed elsewhere,10 Oracle
is concerned particularly
with the categories of industry evidence and
expert evidence. The term “industry evidence” is used
here to
refer to evidence that is derived from the industry relevant to the case at hand
and concerns,
broadly speaking, competitive dynamics in that industry. Of
particular interest for present purposes is
the approach taken in Oracle
to evidence derived from customers, on the questions of market
definition
and anticompetitive effects. The term “customers” is intended in
this context to be confined
to industrial buyers, and is to be distinguished
in that regard from consumers (or end-users). The term
“expert
evidence” needs no explanation in this context.
Following a brief outline of the relevant legal principles and the
parties’ contentions, the
evidence that was led in each of these
categories and the court’s treatment of it are summarised
below. An
analysis of the key insights and possible implications for Australian
competition law and
practice follows. In particular, issues highlighted by
Oracle with respect to customer evidence are
examined. In short, such
issues relate to:
from which such witnesses might be called;
the future effects of the impugned transaction; and
that involve highly differentiated products.
4 Section 50 prohibits direct or indirect acquisitions of shares or assets if
the acquisition “would have the effect or be likely to
have the effect
of substantially lessening competition in a market”.
5 Pursuant to
those amendments, to be made by the Trade Practices Legislation Amendment
Bill 2005, applications for merger
authorisations will be determined by
the Tribunal rather than the Commission. As at the date of writing, the Bill had
been
amended by the Senate excising the schedule dealing with mergers and it
remained unclear as to whether the amended Bill
would be passed by the House
of Representatives.
6 As exemplified recently by the approach taken by the
Tribunal to expert evidence in Re Qantas Airways Ltd [2004] ACompT
9,
discussed below.
7 See s 103 of the Trade Practices Act 1974
(Cth).
8 While the Commission’s practice of entertaining
applications for informal clearances is longstanding and non-statutory
in
nature, a parallel procedure involving the assessment of applications for
formal clearances is proposed in the 2005 amendments
to the Act (see Trade
Practices Legislation Amendment Bill 2005), in accordance with
recommendations made by the Dawson
Committee of Inquiry in its Review of
the Competition Provisions of the Trade Practices Act 2003. As to the fate
of this Bill, see n 5, above.
9 In 2003-2004, for example, the Commission
examined 189 mergers and acquisitions for clearance purposes, 183 of
which
were not opposed and of the remaining 6, 2 were allowed to proceed upon
the acceptance of undertakings: Australian
Competition and Consumer
Commission, Annual Report, 2003-04, p 76, available at
http://www.accc.gov.au/publications
(viewed 16 August 2005).
10 See
Beaton-Wells C, Proof of Antitrust Markets in Australia (Federation
Press, 2003).
2. OUTLINE OF RELEVANT LEGAL PRINCIPLES
It is necessary to outline the relevant legal principles governing a case
such as this given that such
principles have a bearing on the nature of the
evidence that is led, as well as the court’s assessment of
the
evidence. In order to appreciate the insights for the Australian context it is
also useful to have an
appreciation of the key similarities and differences
between the principles governing merger cases in
the United States and those
governing such cases here. It is to be borne in mind, however, that
similar
principles apply to cases involving several of the other prohibitions
in Pt IV of the TPA11 and hence
much of the discussion in the article will
have application beyond the merger context.
Consistent with the approach
taken in applying s 50 of the TPA, an inquiry under s 7 of the
Clayton Act
is commenced by the definition of the relevant market(s), in terms of both
product and
geographic area. This is seen as a “necessary
predicate” to making a determination about
anticompetitive effects.12
Thus, in broad terms and applying the language of s 7, the approach taken
in
cases of this kind is for the court to determine: (1) the “line of
commerce” or product market in which
to assess the transaction; (2) the
“section of the country” or geographic market in which to assess
the
transaction; and (3) the transaction’s probable effect on
competition in those product and geographic
markets.13
In defining the market, the courts generally adopt the approach favoured in
the Merger
Guidelines published by the Department of Justice and Federal
Trade Commission (US Merger
Guidelines).14 It is an approach that relies on
demand-side responses. Starting with the smallest
possible group of competing
products, the Guidelines then ask whether a hypothetical monopolist
over that
group of products would profitably impose at least a small but significant and
nontransitory
price increase (SSNIP), generally deemed to be about 5% lasting
for the foreseeable future.15 If a
significant number of customers respond to
an SSNIP by purchasing substitute products having a
considerable degree of
functional interchangeability for the monopolist’s products, then the
SSNIP
would not be profitable.16 Accordingly, the product market must be
expanded to encompass those
substitute products that constrain the
monopolist’s pricing. The product market is expanded until
the
hypothetical monopolist could profitably impose an SSNIP.17 Similarly, in
defining the geographical
market, the Guidelines hypothesise a
monopolist’s ability profitably to impose an SSNIP, again
deemed to be
about 5%, in the smallest possible geographic area of competition.18 If
customers
respond by buying the product from suppliers outside the smallest
area, the geographic market
boundary must be expanded.19
The hypothetical monopolist test is endorsed in the Merger Guidelines
published by the
Commission (Australian Merger Guidelines),20 albeit in
conjunction with the so-called QCMA or
price elevation test.21 Three
key differences between the two tests have been identified.22 First,
the
hypothetical monopolist test quantifies the degree of constraint
necessary to include competing
products or geographic areas in the relevant
market whereas the QCMA test is non-prescriptive in this
11 See ss 45, 46, 47 of the Trade Practices Act 1974 (Cth).
12
Brown Shoe Co v United States 370 US 294 at 335 (1962).
13 United
States of America v Oracle Corporation 331 F Supp 2d 1098 at 1110-1111 (ND
Cal 2004).
14 Department of Justice and Federal Trade Commission, Horizontal
Merger Guidelines (2 April 1992, as revised 8 April 1997)
(US Merger
Guidelines).
15 US Merger Guidelines, n 14, § 1.11.
16 US Merger
Guidelines, n 14, § 1.11.
17 US Merger Guidelines, n 14, §
1.11.
18 US Merger Guidelines, n 14, § 1.21.
19 US Merger Guidelines,
n 14, § 1.21.
20 Australian Competition and Consumer Commission,
Merger Guidelines, June 1999 (Australian Merger Guidelines),
[5.44].
It is also the test used in Europe: see European Commission,
Notice on the Definition of the Relevant Market for the Purposes
of
Community Competition Law, Official Journal OJ C372, 9 December 1997.
21
See Australian Merger Guidelines, n 20, [5.41]-[5.42], referring to the landmark
statement on the test for market definition
articulated by the then Trade
Practices Tribunal in Re Queensland Co-Operative Milling Association Ltd and
Defiance
Holdings Ltd (1976) 25 FLR 169 at 189; 8 ALR 481.
22
Brewster D and O’Bryan M, “Market Definition – Drawing
Imaginary Lines?” (Paper presented at Law Council
of Australia
Trade
Practices Conference, 2004) pp19-21.
regard.23 Second, the QCMA test
takes account of supply-side substitution, as well as
demand-side
substitution, whereas in the United States the potential for new
entry is generally only considered
once the market has been defined. Thirdly,
the United States test is, as its name suggests, hypothetical
whereas the
QCMA test is concerned with the behaviour of the actual firm(s) that are
the subject of
the proceeding. It is this third difference that has been
cited as the reason why the hypothetical
monopolist test has not been and is
not likely in the future to be employed by the Federal Court,
notwithstanding
its endorsement in the Australian Merger Guidelines.24
In determining anticompetitive effects, the first step in the United States
traditionally has been to
calculate market shares of the firms involved in
the transaction, as well as the overall concentration
levels and trends in
the industry. Where the post-merger share is shown to be a certain
percentage
(identified as 30% in United States v Philadelphia Nat Bank
374 US 363 at 364 (1963); 35% in the
US Merger Guidelines),25 the
transaction is presumed to violate s 7. The burden then shifts to
the
defendant to rebut this presumption of illegality by proving that market
shares do not reflect
accurately the probable state of competition in the
post-merger market. Presumptions also operate in
relation to concentration
measurements. Under the US Merger Guidelines, these measurements are
made
quantitatively, using what is known as the Herfindahl-Hirschman Index (HHI).26 A
significant
trend toward concentration creates a presumption that the
transaction violates s 7.27 In other words, in
the United States, plaintiffs
establish a prima facie case of a s 7 violation by “show[ing] that
the
merger would produce ‘a firm controlling an undue percentage share
of the relevant market, and
[would] result in a significant increase in the
concentration of firms in that market’ ”.28
Since the 1960s the market share and concentration inquiry has been
recognised as merely the
starting point in a merger analysis,29 as it is in
the Australian Merger Guidelines (in which similar
thresholds are applied).30
In similar fashion to the approach required by s 50(3) of the TPA,
the
effects of the proposed acquisition thus are examined having regard to a
range of factors, both
structural and behavioural in nature.31 In both
jurisdictions the exercise is essentially predictive in
nature in that, in
the language adopted in Australian context, it involves a comparison of
future
23 See also the comments in Smith R and Walker J, “Australian Trade
Practices and the Emerging Role of ‘Commercial
Reality’ versus
Substitution in Market Definition” (1997) 5 CCLJ 1 at 6; Sweeney C and Hay
D, “Quantitative Economic
Evidence in Australian and New Zealand
Courtrooms” (2003) 10 CCLJ 284 at 291.
24 Brewster and O’Bryan, n
22, p 21.
25 US Merger Guidelines, n 14, §2.211.
26 The HHI is
calculated by squaring the market share of each participant, and summing the
resulting figures. The concentration
standards in the Guidelines concern (1)
the pre-merger HHI (HHI1), (2) the post-merger HHI (HHI2) and (3) the increase
in the
HHI resulting from the merger, termed delta HHI (DELTA SYMBOL HHI).
See Gavil AI, Kovacic WE and Baker JB,
Antitrust Law in Perspective:
Cases, Concepts and Problems in Competition Policy (Thomson West, 2002) pp
480-484. The
Guidelines specify safe harbours for mergers in already
concentrated markets that do not increase concentration very much.
For
example if the post-merger HHI is between 1000 and 1800 (a moderately
concentrated market) and the DELTA SYMBOL HHI
is no more than 100 points, the
merger is unlikely to be presumed illegal. See US Merger Guidelines, §
1.51. Likewise, if the
post-merger HHI is above 1800 (a highly concentrated
market) and the DELTA SYMBOL HHI is no more than 50 points, the
merger will
not be presumed illegal.
27 United States of America v Oracle Corporation
331 F Supp 2d 1098 at 1110 (ND Cal 2004), citing United States v
Baker
Hughes Inc 908 F 2d 981 at 982-983 (DC Cir 1990) (Thomas
J).
28 United States of America v Oracle Corporation 331 F Supp 2d
1098 at 1110 (ND Cal 2004), citing Federal Trade
Commission v H J
Heinz [2001] USCADC 59; 246 F 3d 708 at 715 (DC Cir 2001).
29 See, eg, Hospital Corp of
Am v Federal Trade Commission 807 F 2d 1381 at 1386, 1388-1389 (7th Cir
1986); United States
v Waste Management [1984] USCA2 813; 743 F 2d 976 (2d Cir
1984).
30 See Australian Merger Guidelines, n 20, [5.95].
31 The US Merger
Guidelines identify five relevant factors: (1) whether the merger would
significantly increase concentration
and would result in a concentrated
market, properly defined; (2) whether the merger raises concerns about potential
adverse
competitive effects; (3) whether timely and likely entry would deter
or counteract anticompetitive effects; (4) whether the
merger would realise
efficiency gains that cannot otherwise be achieved; and (5) whether either party
would be likely to fail in
the absence of the merger. See US Merger
Guidelines, n 14, § 0.2
competition in the relevant market(s) with (the
factual) and without (the counterfactual) the
transaction in question.32
In particular, consideration is given to predicting a substantial lessening
of competition as a result
of: (1) coordinated interaction between the merged
firm and remaining rivals (coordinated effects);33
and/or (2) unilateral
action on the part of the merged firm (unilateral effects).34 Coordinated
effects
were not alleged by the government in Oracle 331 F Supp 2d
1098 (ND Cal 2004) and hence are not
referred to further here.35
Unilateral effects are said to result from “the tendency of a
horizontal merger to lead to higher
prices simply by virtue of the fact that
the merger will eliminate direct competition between the two
merging firms,
even if all other firms in the market continue to compete
independently”.36 Such
effects are thought to arise in primarily two
situations,37 only the second of which was alleged in
Oracle. The
first situation involves a “dominant firm and a ‘fringe’ of
competitors producing a
homogeneous product”.38 In this situation, the
dominant firm has a substantial cost advantage over the
fringe competitors
and, therefore, can restrict output to obtain an above-marginal cost price.
The
second situation, and the one that was applicable in Oracle,
concerns differentiated products.39
Four factors were identified by the court as necessary to establish a
differentiated products
unilateral effects claim:40
differentiated if no “perfect” substitutes exist for the products controlled by the merging firms.41
close substitutes if a substantial number of the customers of
one firm would turn to the other in
response to a price increase.
32 This test has its origin in the reasons of the Full Court of the Federal
Court in Outboard Marine Australia Pty Ltd v Hecar
Investments (No
6) Pty Ltd [1982] FCA 265; (1982) 66 FLR 120. See, more recently, Stirling Harbour
Services Pty Ltd v Bunbury Port Authority
[2000] FCA 1381; [2000] ATPR 41-783 at 41,267
[12].
33 See US Merger Guidelines, n 14, § 2.1; Australian Merger
Guidelines, n 20, [5.167]-[5.170].
34 It was explained in United States of
America v Oracle Corporation 331 F Supp 2d 1098 at 1113 (ND Cal 2004)
that
“unilateral effects” is primarily a new term employed in
United States jurisprudence and literature to address antitrust
issues
that
courts have considered in other contexts for quite some time. In Australia, it
is generally understood that the merger test
was amended in 1993, lowering
the standard from dominance to substantial lessening of competition, so as to
catch not only
acquisitions that would enable the merged entity to exercise
unilateral market power, but also those that might facilitate
coordinated
market conduct. This amendment was effected from 21 January 1993 by the Trade
Practices Legislation
Amendment Act 1992 (Cth), consequent upon
the recommendations of the Senate Committee on Legal and
Constitutional
Affairs, Mergers, Monopolies and Acquisitions – The
Adequacy of Existing Legislation Controls (Canberra, 1991) (the
Cooney
Committee).
35 There was a belated attempt to raise them in the
government’s post-trial submissions suggesting the possibility of
tacit
collusion between the post-merger Oracle and SAP. However, as no
evidence had been presented in support of such a
possibility, it was
dismissed out-of-hand by the judge: see United States of America v Oracle
Corporation 331 F Supp 2d 1098
at 1165-1166 (ND Cal 2004).
36
United States of America v Oracle Corporation 331 F Supp 2d 1098 at 1113
(ND Cal 2004), citing Shapiro C, “Mergers with
Differentiated
Products” (1996) (Spring) 10 Antitrust 23 at 23.
37 United
States of America v Oracle Corporation 331 F Supp 2d 1098 at 1113 (ND Cal
2004), citing Starek III RB and
Stockum S, “What Makes Mergers
Anticompetitive?: ‘Unilateral Effects’ Analysis Under the 1992
Merger Guidelines”
(1995)
63 Antitrust Law Journal 801 at 803;
US Merger Guidelines, n 14, §§ 2.21, 2.22; Areeda PE, Hovenkamp H and
Solow JL,
Antitrust Law (rev ed, Aspen, 1998) at [910] (subdividing
unilateral effects theories into four categories).
38 United States of
America v Oracle Corporation 331 F Supp 2d 1098 at 1113 (ND Cal 2004),
citing Starek and Stockum, n 37
at 803.
39 United States of
America v Oracle Corporation 331 F Supp 2d 1098 at 1113 (ND Cal 2004),
citing Starek and Stockum, n 37
at 803.
40 United States of
America v Oracle Corporation 331 F Supp 2d 1098 at 1117-1118 (ND Cal 2004).
This is the court’s
summary based on a brief review of the relevant
literature and case law, albeit acknowledged as substantially tracking
the
analysis in Areeda, Hovenkamp and Solow, n 37 at [914f] at pp 68-69.
Notably, the court’s analysis is somewhat different from
the analysis
outlined in the US Merger Guidelines.
41 United States of America v Oracle
Corporation 331 F Supp 2d 1098 at 1117-1118 (ND Cal 2004).
firms so that a merger would make an SSNIP profitable for
the merging firms. In short, in a
unilateral effects case, a plaintiff is
attempting to prove that the merging parties could increase
prices
unilaterally. Accordingly, a plaintiff must demonstrate, in effect, that the
merging parties
would enjoy a post-merger monopoly or dominant position, at
least in what is referred to as a
“localized competition”
space.42
demonstrate that the non-merging firms are unlikely
to introduce products sufficiently similar to
the products controlled by the
merging firms to eliminate any significant market power created
by the
merger.43
In this case there was no issue that the relevant products were highly
differentiated and that the
products of Oracle and PeopleSoft were close
substitutes. The issues were centred on the third and
fourth factors of a
unilateral effects claim posited above. The government sought to prove that
Oracle
and PeopleSoft were in a localised competition sphere within the
proposed market, a sphere that
excluded any other vendors, and that the
proposed merger would affect adversely competition in this
sphere. It also
set out to prove that their nearest competitor, SAP, could not reposition itself
to replace
the localised competition that would be lost if the merger went
ahead (at 1166).
Finally, it should be noted that, unlike in Australia, defendants to a merger
suit in the United
States are entitled to raise an efficiencies defence.
Given that this issue does not arise (at least not
directly) in litigation
brought under s 50 of the TPA and given that, in any event, it played a
relatively
minor role in the outcome of Oracle and involved evidence
that was separate and distinct from the
evidence adduced on market definition
and anticompetitive effects (such evidence being the principal
focus of this
article), no more will be said here about it.
3. OUTLINE OF PARTIES’ CONTENTIONS
The government’s case against Oracle was based on the establishment of
a market that was extremely
limited in terms of the products, customers,
vendors and geographic area involved.
In terms of products, the relevant market was said to be for
enterprise resource planning (ERP)
system software. ERP is packaged software
that integrates most of an entity’s data across all or most
of its
activities. These copyrighted software programs are licensed to end-users along
with a
continued right to use the licence which usually includes maintenance
or upgrades of the software. To
the customer, the fees to license and
maintain ERP software are generally a small part, 10-15%, of the
total cost
of the installation and maintenance of an ERP system. An ERP installation,
because of its
complexity, usually requires substantial and expensive
personnel training, consulting and other
services to integrate the program
into the customer’s pre-existing or “legacy” software (at
1101).
Many ERP programs are developed to address the needs of particular
industries, referred to in
industry lingo as “verticals”.
Vertical-specific ERP programs often are not well suited to the needs
of
firms in other verticals. Thus, an enterprise the operations of which
embrace more than one vertical
faces the task of integrating the programs.
The largest and most complex organisations face particular
difficulty (at
1101-1102).
ERP programs have been developed to handle the full range of an
enterprise’s activities.
Although ERP encompasses many so-called
“pillars”, the government sought to confine the market in
this
case to two – Human Resources Management (HRM) and Financial Management
Systems
42 United States of America v Oracle Corporation 331 F Supp 2d 1098 at
1118 (ND Cal 2004). Whether Walker J was correct
in his approach to this
particular requirement has been debated in the United States: see, eg, the
commentary on the case in
“Unilateral Effects Analysis After
Oracle” (2005) (Spring) 19(2) Antitrust 8.
43 As was observed by
the judge in the Oracle case, these four factors reflect traditional
antitrust analysis in that they involve
consideration of demand-side
substitutability (factors 1-3) and supply-side substitutability (factor 4):
United States of America
v Oracle Corporation 331 F Supp 2d
1098 at 1118 (ND Cal 2004).
(FMS). Each ERP pillar consists of
“modules” that automate particular processes or functions.44
Some
of these modules might be regarded as “core” and others as more
peripheral.
In terms of customers, the government focused on “large complex
enterprises” (LCEs) that have
“high function software”
needs. The satisfaction of these needs was said to require software
with
particular performance characteristics. Software with the relevant
characteristics was described as
scalable; highly configurable; seamlessly
integratable; able to accommodate rapid growth,
acquisitions and
reorganisations; able to reflect actual units of business; and able to adapt to
industry
specific requirements (at 1125). LCEs rarely, if ever, buy core HRM
or FMS modules in isolation.
Customarily, FMS and HRM software are purchased
in bundles with other products.45
In terms of vendors, the government argued that only Oracle,
PeopleSoft and the German
company, SAP AG, should be considered. Although by
no means alone in the ERP business (many
firms develop, produce, market and
maintain ERP software), these three firms have the most
comprehensive of ERP
offerings (at 1104). The proposed market excluded:
including Lawson, AMS and Microsoft) (at 1105);
as Siebel that sells individual CRM pillars);
another firm, such as Accenture, Fidelity, Hewitt or Aon;
some of these service providers may
purchase software from an ERP vendor such
as Oracle, while others use internally created
software) (at 1106);
sometimes referred to as “legacy” software,
that it used prior to the development of ERP HRM
and FMS software) (at
1125).46
In terms of geographic area, the relevant area of competition between
these three firms was
alleged by the government to be confined to the United
States.
It was on these contentions about the scope of the market that the
government’s substantive case
effectively rose and fell, as the essence
of its complaint about anticompetitive effects was that the
proposed
acquisition would constrict what was an already highly concentrated oligopoly to
a duopoly
involving SAP and the merged Oracle/PeopleSoft (at 1107).
Oracle contended that the government’s market definition was both
legally and practicably too
narrow. Paraphrasing from the judgment (at
1107-1108), its defence was, in summary, that:
“high function”
HRM and FMS software does not exist; “high function” is simply a
label created
by the government for the purposes of the litigation;
developing, producing, marketing and maintaining HRM and FMS ERP software;
44 HRM and FMS software each consists of numerous modules. HRM
modules include such functions as payroll, benefits, sales
incentives, time
management and many others. FMS modules include such functions as general
ledger, accounts receivable,
accounts payable, asset management and many
others: United States of America v Oracle Corporation 331 F Supp 2d 1098
at
1102 (ND Cal 2004).
45 For example, customers may purchase a cluster of
products such as Oracle’s E-Business Suite that provide the customer
with
a “stack” of software and technology, which may include core
HRM or FMS applications, add-on modules,
“customer-facing”
business applications such as customer
relationship management software, and the infrastructure components
(application
servers and database) on which the applications run: United
States of America v Oracle Corporation 331 F Supp 2d 1098 at
1103, 1107
(ND Cal 2004).
46 Explained in the government’s post-trial brief,
available at http://www.usdoj.gov/atr/cases/oracle.htm (viewed 16
August
2005).
price competition comes from sources in addition to ERP
software vendors and includes
competition from firms that provide outsourcing
of data processing and from the durability and
adaptability of
enterprises’ incumbent or legacy systems;
Europe;
any market power by a merged Oracle/PeopleSoft; and
merger will not have an anticompetitive effect.
4. INDUSTRY EVIDENCE
Most of the evidence presented in Oracle was evidence that may be
characterised as industry
evidence in that it involved testimony and
documents from people and firms participating in the ERP
software industry.
The government presented evidence from 10 customer witnesses, five
vendor
witnesses and two systems integration/consultant witnesses. Oracle
presented witnesses in each of
these categories also.
4.1 Customer witnesses
Described by counsel as their “strongest witnesses” (at 1125),
the government led evidence from 10
senior managers of large enterprises
(both public and private), including DaimlerChrysler, the State of
North
Dakota, Pepsi Americas, and Greyhound Lines. Their evidence was remarkably
consistent,
with several recurring themes (at 1125-1130):
software;
PeopleSoft or SAP (some did not even include the latter in their consideration set);
vendors had been or was in the future to be 10% higher
(and in some cases even if greater than
10%), they still would not have
considered and would not in the future consider a possible
alternative.
The court found the testimony of the customer witnesses “largely
unhelpful to the government’s
effort to define a narrow market of high
function FMS and HRM” (at 1130). The credentials of the
witnesses was
not doubted and nor was the sincerity of their beliefs in the testimony that
they gave.
However, Walker J questioned the grounds upon which the witnesses
offered their opinions on the
definition of the product market and
competition within that market (at 1130-1131). Their opinions
amounted, in
the judge’s view, to a statement of preferences rather than a statement
about
substitutability, actual or potential. As the court saw it (at
1131):
The preferences of these customer witnesses for the functional features of PeopleSoft or Oracle
products was evident. But the issue is not what solutions the customers would like or prefer for their
data processing needs; the issue is what they could do in the event of an anticompetitive price increase
by a post-merger Oracle.
Furthermore, on the issue of anticompetitive effects, Walker J regarded the
evidence of these
witnesses as failing to rise above speculation,
“speculation [that] was not backed up by serious
analysis that they had
themselves performed or evidence they presented” (at 1131). There was, as
the
judge pointed out, scant testimony by these witnesses about what they
would or could do or not do to
avoid a price increase from a post-merger
Oracle. While each testified, “with a kind of rote” (at
1131),
that they would have no choice but to accept a 10% increase by a merged
Oracle/PeopleSoft,
none gave testimony about the cost of alternatives to the
hypothetical price increase: for example,
how much outsourcing would actually
cost, or how much it would cost to adapt other vendors’
products to the
same functionality that the Oracle and PeopleSoft products offer (at 1131).
Walker J
went on to say (at 1131):
If backed by credible and convincing
testimony of this kind or testimony presented by economic
experts, customer
testimony of the kind the government had offered was recognised by the court
as
capable of putting a human perspective or face on the injury to
competition that was alleged. But
unsubstantiated customer apprehensions do
not substitute for hard evidence.
Oracle, too, presented customer witnesses, albeit a far lesser number (from
the judgment it
appears to have been only two). One such witness spoke of his
experience at Fleet Boston and Bank
of America in which both firms had turned
to outsourcing to meet their HRM needs (at 1132-1133).
The other, a
representative of the Emerson Electric Company, testified as to the range of
options
available to his company for handling its HRM and FMS needs and gave
specific instances in which
in-house software and outsourcing were used
instead of purchasing from an ERP vendor (at 1132-
1133).
The testimony of the Oracle witnesses, like that of the government’s
customer witnesses, was
recognised by the court as entailing some speculation
about their future options. But the
distinguishing factor as far as Walker J
was concerned was that the Oracle witnesses testified about
concrete and
specific actions that they had taken in order to meet their firms’
information processing
needs. The judge found on this basis, as well as an
assessment of the witnesses’ credibility, that the
testimony of the
Oracle customer witnesses was “more believable” than that of the
government’s
witnesses (at 1133).
4.2 Vendor and consultant witnesses
In addition to its customer witnesses, the government in Oracle led
evidence from two executives
from PeopleSoft, one from Microsoft and one
formerly of JD Edwards, an ERP software company
that had been acquired by
PeopleSoft. It also adduced testimony from senior representatives of
two
consulting companies, BearingPoint and IBM, that specialise in advising
customers on the purchase
and implementation of ERP software. These
consulting firms generally have an alliance with a
particular ERP vendor
– in these instances, BearingPoint with Microsoft and IBM with
PeopleSoft.
On behalf of Oracle, evidence was given by executives from ERP
vendors, Lawson and SAP, a
consultant witness from Accenture and two
witnesses from outsourcing firms, Fidelity and ADP.
The government’s PeopleSoft witnesses gave evidence regarding the bases
upon which they
distinguished so-called high function customers from
mid-market customers; evidence as to why, in
their view, firms such as Lawson
were able to service only mid-market customers; and evidence as to
why
alternative solutions such as outsourcing, “do-nothing” and
best-of-breed solutions were not
realistic options for high function
customers. They also gave evidence explaining their view that there
was
localised competition between Oracle and PeopleSoft that excluded SAP, for the
purposes of
establishing the government case regarding unilateral
anticompetitive effects (at 1136-1142).
The Microsoft witness gave evidence
intended to support the government’s characterisation of
his company as
restricted to mid-market business. He also gave evidence aimed at explaining
why
neither Microsoft’s previous unsuccessful attempt at acquiring SAP
nor the successful alliance that it
has established with BearingPoint
indicated its intentions to enter the high function market (at
1143-
1144).
The JD Edwards witness was called to establish that there were high barriers
to entry to the high
function market through evidence of his company’s
failed attempt to reposition itself as a player in
that market, prior to its
acquisition by PeopleSoft (at 1144).
The two consultant witnesses, from
BearingPoint and IBM, were called to provide confirmatory
testimony as to the
ERP software needs of LCEs and the capacity of only Oracle, PeopleSoft and
SAP
to service those needs (at 1134-1136).
Notwithstanding this evidence, the government’s vendor and consultant
witnesses failed to
satisfy the court that there was a clear distinction to
be drawn between high function and mid-market
customers for the purposes of
defining the relevant market in the case. If anything, the evidence of
these
witnesses only undermined the government’s proposed market definition in
that they each
employed different criteria relevant to distinguishing between
these two categories of customer.
Moreover, one of the PeopleSoft executives
conceded (at 1138-1139) that there was no “clear-cut”
dividing
line between them and the other conceded (at 1141) that the day prior to
Oracle’s tender
offer, PeopleSoft’s demarcation line had been
moved from $500 million and/or 2,000 employees to
$1 billion in revenue only
– under the former standard the high function market clearly would
have
included competitors other than Oracle, PeopleSoft and SAP. The
deficiencies in this aspect of the
government’s evidence were
exacerbated by the evidence given by Oracle’s vendor witnesses, the
SAP
witness testifying that the term “high function” has no recognised
meaning in the industry and
that characterising a customer is by no means an
“exact science” (at 1152).
As to the balance of the vendor/consultant evidence adduced by the
government, it is fair to say
that the court rejected almost all of it on
credibility grounds. The attempt by the PeopleSoft witnesses
to persuade the
court that so-called mid-market firms posed no competitive threat to the big
three was
described as “self-serving” (at 1139). This adverse
impression was reinforced when, on crossexamination, their evidence
was
contradicted by PeopleSoft’s own internal records. Contrary to the
testimony that Lawson was not a serious competitor for
PeopleSoft, for example,
a PeopleSoft record documented Lawson as having been an enterprise competitor 27
times, SAP 33 times and
Oracle 38 times over the same period (at 1138).
Such was Walker J’s cynicism about the evidence of these witnesses that
he coined the term
“Lawson amnesia” to describe the weaknesses
exposed in their testimony (at 1139). The judge
included in this description
(at 1136), the witness from IBM whose evidence was discounted on
the
additional ground of possible bias, having regard to IBM’s
potential loss of PeopleSoft
implementation business should the merger
proceed. The final nail in the proverbial coffin on this
issue was hammered
in by the Lawson witness, called by Oracle, who gave uncontradicted
evidence
(at 1150) regarding Lawson relationships with some of the largest
enterprises in the United States,
customers that exceed $1 billion in
revenues, employ more than 10,000 people and are listed among
the Fortune
1000.
Walker J was also not persuaded by the PeopleSoft evidence that solutions
such as outsourcing
were not a feasible alternative for LCEs. In the case of
one of these witnesses, his testimony to this
effect was found to have been
“impeached” by a PeopleSoft document showing the company to
have
competed against ADP, an outsourcing firm, 15 times over a relevant
period (at 1142). By
comparison, the judge found the testimony of an Oracle
consultant witness from Accenture to be
“reliable and
informative”, such evidence having included a number of specific examples
of high
function clients that had chosen the outsourcing route (at 1149).
This account was supported by the
outsourcing witnesses themselves, whose
evidence was also characterised as “reliable” and
“amply
supported by specific examples of high function customers that
had chosen to outsource with Fidelity
or ADP as an ERP alternative” (at
1153).
The evidence of the PeopleSoft witnesses as to localised competition between
PeopleSoft and
Oracle was undermined by concessions given in
cross-examination of the one witness and the
deposition statement of the
other that there was no vertical segment of the market in which SAP was
not a
competitor for high function customers (at 1168). This was followed by evidence
of the
Accenture witness of a SAP/Accenture alliance that was aimed at
developing a product to see SAP
become competitive with Oracle and PeopleSoft
in the banking industry (the only vertical from which
it was then missing)
(at 1149). There was also the evidence from the SAP witness, found to have
been
“reliable and uncontradicted”, regarding its various high
function clients and specific instances in
which SAP had competed head to
head with Oracle and other ERP vendors (at 1151-1153).
The evidence of the Microsoft witness was discounted entirely by Walker J
without any
assistance, so it seems, from cross-examination. The judge
described (at 1144) the witness’s “Uriah
Heep like humility about
Microsoft’s intentions regarding the failed SAP alliance and the
successful
BearingPoint alliance unconvincing”, observing that
“it strains credulity to believe Microsoft would
offer billions of
dollars to acquire SAP merely to make data processing easier for customers who
use
both Microsoft Office and SAP ERP” (as had been suggested by the
witness). The witness’s
testimony regarding the supposed limited
functionality of some of its products was also found to be
contradicted by
statements made on the BearingPoint website, extolling the
multi-dimensional
capabilities of the same products (at 1144). Furthermore,
the BearingPoint witness himself gave
evidence that Microsoft had the
capacity and the intentions to enter the market space occupied by
Oracle,
PeopleSoft and SAP (at 1134). Not surprisingly in these circumstances, Walker J
found the
evidence of the MicrosSoft witness to be “incredible”
(at 1160) and the evidence of the BearingPoint
entry to the alleged market
(at 1134).
5. EXPERT EVIDENCE
The government called three witnesses to give expert evidence:
1. a
professor of business administration at Harvard Business School with particular
expertise in
operations management and information technology and experience
also as a consultant to
software companies (Iansiti);
2. a professor of
the University of Virginia and, as described by the court (at 1143), “a
well-known
and highly regarded economist” (Elzinga); and
3. a
professor the provenance and area of expertise of whom was not identified in the
judgment but
from whose testimony (as described by the judge) it was apparent
that he was an economist
(McAfee).
Oracle called two expert witnesses:
1. an industrial organisation
economist at MIT (Hausman); and
2. dean of the Haas Graduate School of
Business at the University of California and former director
of the Federal
Trade Commission (Campbell).47
5.1 Iansiti
Iansiti was essentially an industry expert, as distinct from an economic
expert. He was described by
the court as bringing “an academic
perspective that basically echoed the testimony of the
customer
witnesses” (at 1133). Based on his review of the product
documents and analyst’s reports of 148 ERP
vendors, the witness opined
that only the products of Oracle, PeopleSoft and SAP possess
the
functionality adequate to meet the needs of LCEs. He elaborated on
reasons as to why neither Lawson
nor Microsoft specifically are and would not
readily in the future be in a position to compete with the
products of the
big three for this business.
Walker J was unmoved by this testimony on the basis primarily, so it seems,
that Iansiti had not
(and did not claim to have) performed an “economic
study of the ERP industry” (at 1134). It is not
entirely clear what the
judge had in mind in relation to such a study, but from his
subsequent
treatment of the other expert evidence, it would appear that he
meant an econometric or some other
quantitative exercise. Notably,
Iansiti’s evidence was not seen as bolstering the industry
evidence
simply by providing an independent and consistent view of customer
requirements and the capacity of
competing products to satisfy them. Such,
perhaps the judge perceived, were matters that fall within
the domain of the
industry witnesses and hence, an expert would have to bring a somewhat
different
approach to the analysis in order to add substantive value to the
testimony of the lay witnesses.
5.2 Elzinga
Elzinga was referred to by Walker J as “[b]y far the most important of
[the government’s] witnesses”
(at 1145). His opinion was that the
relevant product market should be limited to high function FMS
and HRM
software on the basis that a hypothetical monopolist could profitably impose an
SSNIP in
that market and that it should exclude mid-market vendors,
best-of-breed solutions, incumbent or
legacy solutions and the services of
outsourcing firms (at 1145). He reached this opinion having
analysed four
“strains” of evidence:
47 Oracle also adduced evidence from two experts on the integration
layer of software technology in an attempt to argue that
developments in this
layer suggest that it should be included in the product market. That argument
was only a minor aspect of
Oracle’s rebuttal of the government’s
case and was rejected. It does not warrant discussion in any detail in this
article
and
hence the evidence of these two experts is not referred to
further.
Having reached the conclusion that the market should thus be
limited to Oracle, PeopleSoft and
SAP, Elzinga used sales data (applying a
minimum threshold purchase of $500,000 per customer) to
calculate market
shares and perform the HHI concentration calculations. In summary, his
calculations
produced results that, if accepted, would have attracted the
presumptions of illegality (at 1148).
Oracle’s experts criticised Elzinga’s testimony on product market
definition, as well as the
evidence given by the government’s industry
witnesses, describing it as “vague, unrealistic
and
underinclusive” (at 1153). As to the first of these criticisms,
Hausman and Campbell argued that the
term “high function”
software is too imprecise and much was made of the fact that there were
no
“quantitative metrics” that could be used to distinguish high
function vendors from other vendors
(something Elzinga had conceded) (at
1154). Oracle claimed that “there must be a clear break in the
chain of
substitutes in order for separate markets to be found” (at 1154) and
Walker J agreed.
The proposed definition was said to be unrealistic or disconnected in that it
failed to acknowledge
that ERP software was bought as a bundle; rarely are
FMS or HRM pillars bought on their own.
Hence, any discounts offered are
blended discounts and, if not acceptable to the customer, then (as
Hausman
argued), the customer can always threaten to turn to a best-of-breed solution as
an
alternative for a particular pillar (at 1154-1155).
Finally, Oracle’s experts argued and Walker J agreed that there were
viable substitutes to high
function ERP that had to be included in the
market, pointing to evidence that demonstrated numbers
of LCEs opting for
mid-market, outsourcing and other solutions in preference to the offerings
by
Oracle et al (amongst them, ironically, the Department of Justice that,
two weeks after bringing the
case, had chosen a mid-market firm, AMS, from
which to buy its FMS software for $24m) (at 1155-
1156).
Given that the industry evidence had failed to establish the
government’s case on market
definition, “the full weight of the
plaintiffs’ product market burden fell at trial on Elzinga” (at
1158).
Elzinga, the court found, was unable to discharge that burden.
Instead, “in resolving the battle of the
expert witnesses”, the
court was of the view that “Oracle’s witnesses presented the better
and more
convincing case”. Elzinga, the judge considered, “for
all of his indubitable credentials as an
economist seemed mostly to apply the
techniques of his avocational interest in mystery writing” (at
1158).
The evidence that he had marshalled was criticised by the judge as
“circumstantial and highly
qualitative”, his concentration
statistics as flawed having been based on sales that did not separate
FMS and
HRM pillars from other pillars included in the sale, and his other statistical
tabulations as
“sketchy” (for example, the customer surveys were
based on a sample of only 28 sales opportunities)
(at 1158-1159).
Elzinga also carried the evidentiary burden with respect to the
government’s proposed
geographic market (confined to the United
States). In relation to this aspect of the case, he attempted
to argue that
it would be inappropriate to employ the Elzinga-Hogarty (E-H) test, a test
frequently
applied in defining geographic markets in United States antitrust
cases and, as the name suggests, a
test of which he himself is the
co-author.48 If that test was employed, he conceded, it would support
48 See Elzinga K and Hogarty T, “The Problem of Geographic Market
Delineation in Antimerger Suits” (1973) 18 (Spring)
Antitrust
Bulletin 45. In general terms, the E-H test “measures the accuracy of
a market delineation by determining the amount
of either imports into or
exports from a tentative market. The test is based on the assumption that if an
area has significant
exports or imports, then that area is not a relevant
geographic market. Under the [test], exports or imports greater than
10%
Oracle’s argument that the market should be seen as a global one
(at 1163). Elzinga also argued that
the geographic market should be defined
without regard to the site of manufacture of the software (a
reference to the
manufacture of SAP software in Germany) but rather, focusing on the
vendorcustomer
relationship which entails installation, implementation,
maintenance and upgrade and hence
is necessarily local in character (at
1161-1162). Elzinga also pointed to the absence of arbitrage in this
market
and to the fact that prices in the United States are not affected by prices in
Europe and vice
versa (at 1162).
Again, on the question of geographic market, Walker J preferred the analysis
of Oracle’s experts
over Elzinga’s analysis. The explanation
proffered by the latter for failing to apply the E-H test in this
case was
considered “unpersuasive” (at 1164); it has been used in other cases
to define the relevant
geographic market for the purposes of merger analysis
and is seen as especially important when
vendor-customer relationships are
involved. There were many other markets involving such
relationships that
could not on any tenable basis be limited to the United States (eg computer
sales).
Furthermore, the “relationship” factor could not be seen
as all-important given the evidence
indicating that
“non-relationship” solutions were also favoured by customers (eg
outsourcing) (at
1164-1165). Finally, there was, as noted by Hausman,
empirical evidence showing that prices in
Europe constrain prices in the
United States and vice versa (at 1163-1164).
Having rejected the government’s proposed market in the case, the court
had to conclude (at
1165) that the market share and concentration statistics
presented by Elzinga were of no assistance.49
Thus, without the benefit of
the presumptions, the court turned next to the evidence of
anticompetitive
effects. The government rested its theory of anticompetitive
effects on an attempt to prove that Oracle
and PeopleSoft are in a
“localized” competition sphere (a “node”) within the
high function FMS and
HRM market, a sphere excluding SAP and one into which
SAP could not be repositioned to replace
the competition that would be lost
by an Oracle/PeopleSoft merger (at 1166). In attempting to prove
localised
competition between Oracle and PeopleSoft, the government relied on virtually
the same
evidence that was used to prove the product market (at 1166). There
was, however, additional expert
testimony on this aspect of the case, derived
from McAfee.
5.3 McAfee
This expert supported the government’s unilateral anticompetitive
effects claim based on three
analyses. First, like Elzinga, he analysed
Oracle discount approval forms with a view to showing the
vigorous nature of
the competition between Oracle and PeopleSoft (at 1168). Second, he
ran
regression analyses (using the variables of competitor, next revenue and
discount percentage based on
sales representative surveys), aimed at
demonstrating that, when competing against PeopleSoft,
Oracle offers greater
discounts than in any other competitive situation (at 1168-1169). Third,
he
conducted a merger simulation analysis designed to show how competitive
the market was premerger
and compared it with the likely scenario
post-merger.50 Based on this analysis, he concluded
that the merger would
lead to a unilateral price increase – from 5% to 11% in the FMS market
and
from 17% to 30% in the HRM market (at 1169-1170).
Oracle’s experts attacked the government’s case on unilateral
effects on several fronts. Campbell
argued that the unilateral effects theory
was not applicable in this type of case because it is predicated
on a market
in which buyers have little or no power whereas ERP software buyers are
plainly
suggest that the market examined is not a relevant market”: United
States of America v Oracle Corporation 331 F Supp 2d
1098 at 1161 (ND Cal
2004), citing United States v Country Lake Foods, Inc 754 F Supp 669 at
672 n 2 (D Minn 1990).
49 The words used were in fact “wholly
inapplicable”.
50 The simulation works by putting in necessary
variables and assumptions, such as market shares and percentage of wins
in
head-to-head competition. Once these variables were accounted for, McAfee
still had to set a variable for “how competitive the
market [was]
pre-merger”. One way of creating such a measurement is by estimating the
“total value of the product that
accrues to the buyer” (ie, how
“much of the value of the software to the buyer actually accrues to the
buyer and how much
accrues to the vendors in the form of price”).
McAfee ran the simulation based upon five different “buyer accrual”
estimates:
0.5 (only 50% accrual) to 0.9 (90% accrual). McAfee used the
market shares calculated by Elzinga as his market shares
variable. Once all
the data are compiled and the variables accounted for, the merger is simulated
by merging the shares of the
two merging firms. Once this is done, data can
be calculated showing how much the price of the relevant product is expected
to
increase. See United States of America v Oracle Corporation 331 F
Supp 2d 1098 at 1170 (ND Cal 2004)
knowledgeable and sophisticated (at 1171).
McAfee’s analysis of the discount approval forms showed
no more than
that Oracle and PeopleSoft are frequent and close rivals; it says nothing
about
competition between these two firms and SAP (at 1171). McAfee’s
regression analysis was flawed
from the outset as it was based only on data
involving broader suites of enterprise application
software, rather than on
data confined to FMS and HRM software (at 1171). His merger
simulation
analysis was “simplistic” and “spurious”
in that it employed an inappropriate simulation model and it
was based on
Elzinga’s market share statistics which had already been showed to be
artificial – being
based on the government’s
“gerrymandered” market definition (at 1172).
Finally, and said to be most importantly, Oracle complained that the
government had failed to
provide “econometric calculations in trying to
prove localisation”. Proving localisation, it was argued,
requires
“extensive econometric analysis”, such as diversion ratios,
price-cost margins and the like
and the government had offered none (at
1172). Walker J accepted most of the criticisms made of
the
government’s evidence by Oracle’s experts. He appears to have
been influenced, in particular, by the
argument concerning the absence of
econometric evidence, pointing to several other cases in which
courts have
based their rulings on unilateral effects, at least in part, of such evidence
(at 1172).
6. INSIGHTS AND IMPLICATIONS
In analysing the insights to be derived from and possible implications of
Oracle for Australian
antitrust assessments, it is useful to consider
the various categories of evidence dealt with in the case
separately.
6.1 Industry evidence generally
Industry evidence, of which customer evidence is a part, has been the most
crucial category of
evidence on issues such as market definition and
competitive dynamics in Pt IV proceedings to date.51
It has been valued
highly and consistently by courts in ensuring that the findings made on such
issues
reflect “commercial realities”52 and, for this reason, has
often been preferred over expert evidence.53
As in Oracle, industry
evidence in Australian litigation has taken the form of testimony
from
members of the industry (including customers) as well as business
records that emerge from the
discovery process or are subpoenaed by the
parties. Business records, in particular, have been valued
for their
contemporaneity and have been seen as a rich and reliable source of evidence
about what
firms actually think and what they actually do in the normal
course of their business.54
Similarly, industry submissions play a significant role in the deliberations
of the Commission in
dealing with clearance or authorisation proposals. As is
stated in the Australian Merger Guidelines,
the Commission has a practice of
seeking the views of participants in the relevant industry,
including
competitors, suppliers and customers, amongst others, with respect
to such proposals.55 In the case of
customer views specifically, the
Guidelines indicate that they will be taken into account in defining
51 In News Ltd v Australian Rugby Football League Ltd [1996] FCA 1256; [1996] ATPR
41-466 at 41,679, for example, Burchett J pointed out
that: “[i]t is
accepted that an industry’s own perception of the breadth of the market in
which a product is involved,
as
evidenced by the conduct of those engaged in
the industry, may be persuasive to show the true extent of the market.”
More
recently, in Boral Besser Masonry Pty Ltd v Australian Competition
and Consumer Commission [2003] HCA 10; (2003) 215 CLR 374; 195
ALR 609 at [257], McHugh
J commented that “the views and practices of those within the industry are
often most instructive
on the question of achieving a realistic definition of
the market”.
52 This expression has been coined in several cases. See,
for example, the comments made in Australia Meat Holdings Pty Ltd
v
Trade Practices Commission [1989] FCA 25; [1989] ATPR 40-932 at 50,105 (Pincus
J); Singapore Airlines Ltd v Taprobane Tours WA Pty Ltd
[1992] ATPR
41-159 at 40,170 (French J); News Ltd v Australian Rugby Football League Ltd
[1996] FCA 1256; [1996] ATPR 41-466 at 41,668;
Australian Competition and Consumer
Commission v Universal Music Australia Ltd [2002] ATPR 41-855 at 44,676
[351]. For
a discussion of whether an approach based on “commercial
reality” is any different from an approach based on the
principles
enunciated in QCMA (1976) 25 FLR 169, see Smith and Walker,
n 23.
53 See, for example, the approach taken at first instance in Trade
Practices Commission v Australia Meat Holdings Pty Ltd
[1988] FCA 244; [1988] ATPR 40-876
and endorsed on appeal: Australia Meat Holdings Pty Ltd v Trade Practices
Commission [1989] ATPR
40-932.
54 The value of this evidence was noted
early on by Wilcox J in Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd
[1987] ATPR
40-809 at 48,798.
55 Australian Merger Guidelines, n 20,
[4.11], [6.18].
relevant markets.56 The Commission also generally requires
the firms involved in the proposed
transaction to produce internal documents
and is prepared to invoke its powers under s 155 of the
TPA if they are not
provided voluntarily.57
Given the priority assigned to it by both the courts and the Commission, the
selection and use of
industry evidence (to the extent that such matters lie
within a party’s control) require substantial care.
As was seen in
Oracle, this evidence is as capable of losing a case for a party as it is
capable of
winning it. In my view, the key insight to be derived from the
Oracle experience in this regard is that
the greatest prospects for
success lie in proposing a market that is widely recognised by the
industry
itself and is reflected in industry attitudes and practices that may
be established through the evidence.
Any other market almost certainly will
be found to be divorced from “commercial realities”, a
finding
that in the Australian context at least, may well be fatal. In the
process, the testimony of industry
witnesses is likely to be characterised,
at best, as unsubstantiated or inconsistent with other evidence
(such as that
found in business records); at worst, as self-serving or simply lacking in
credibility.
The exposure of such weaknesses in the industry evidence may have
implications that resonate
beyond the issue of market definition given that
the same evidence is often treated as relevant also to
the substantive
competition issues. In unilateral effects cases, the relevance of the industry
evidence
in this respect flows from the fact that, applying the United
States’ approach, the assessment of such
effects has become an exercise
involving the identification of what is essentially a narrow version of
a
market (a submarket, perhaps).
Notably, commentators in the United States have questioned whether Oracle
has elevated
“industry recognition” from the status of a
relevant factor58 to that of a necessary condition for
judicial acceptance of
a proposed market definition.59 This may be over-reaching but it
does
underscore the importance of this category of evidence in both
jurisdictions. Whether or not
Australian courts are correct in the emphasis
that they give to industry evidence is a matter that has
attracted
substantial debate. It is not intended to rehearse the arguments and
counter-arguments on
that score here, suffice it to say that, in general
terms, commentators have sought to emphasise the
distinction between the
concept of a market as employed in the business context, and the concept as
it
applies in the statutory antitrust context.60
The “commercial realities” approach is defensible, in my view, to
the extent that it reflects the
fact that effective constraints are a
function of dynamics in the business world and it is such
constraints, after
all, that lie at the heart of competition law analysis. However, as I have
argued in
detail elsewhere, it should not be used as a substitute for
rigorous testing of the industry evidence.61
For the reasons discussed below,
this is of particular relevance for present purposes to evidence
derived from
customers.
6.2 Customer evidence
Oracle highlights the particular difficulties that may be involved in
establishing a market and
assessing future market dynamics based primarily on
customer evidence. There are four such
difficulties that are exposed by the
case.
(a) Selection of customer evidence – how many customers
The judge in Oracle was concerned that the views expressed by the
government’s customer witnesses
were not sufficiently representative of
customer views generally in the ERP software industry. This
56 Australian Merger Guidelines, n 20, [5.59], [5.62].
57 Australian
Merger Guidelines, n 20, [4.10].
58 “Industry recognition”
traditionally has been seen as just one of seven factors relevant to
establishment of a submarket
(which, in the United States, is equivalent to a
market for liability purposes), identified in Brown Shoe Co v United States
370
US 296 (1962).
59 “The Oracle/PeopleSoft Decision: The
Implications for Merger Analysis in High-Tech Industries” (Paper presented
as
part of
Antitrust TeleSeminar Series organised by the Antitrust Law
Section of the American Bar Association, 4 November 2004
(slides on file with
author)).
60 For a summary of these references, see Beaton-Wells, n 10, pp
118-119.
61 Beaton-Wells, n 10, pp 330-331, and the discussion in Ch 4
generally.
concern was reflected in his repeated observation that, while the
government’s customer witnesses
clearly had particular views about the
feasibility of vendors or solutions other than Oracle and
PeopleSoft, there
were plainly other customers (including so-called LCEs) that, as evidenced by
the
Oracle witnesses, held very different views (at 1131).
As this experience demonstrates, parties selecting customer witnesses face
the perennial
challenge of persuading the court that their evidence is
representative of the broader class of
customers to which they belong. Lack
of representativeness is a criticism that is readily made and can
be
substantiated fairly easily given that, in most instances, for every witness
with one view there is a
second with another.
Undertaking a survey may avoid this issue but inevitably will raise issues of
a different kind.
While hurdles to the reception of survey evidence based on
the hearsay rule were dismantled in
Arnotts Ltd v Trade Practices
Commission [1990] FCA 473; (1990) 24 FCR 313 it remains the case that evidence in
this
form is vulnerable to attack on methodological grounds and, as a general rule,
is given little
weight.62
One way of overcoming the representativeness criticism may be to adduce
evidence from a
consulting firm that has had experience in advising numerous
customers on their purchases. Of
course, it is preferable that such a firm
not be allied with any particular vendor given that the
neutrality of their
evidence is likely to be undermined by any such alliance (as it was in the case
of
the consultant witnesses called by the government in Oracle).
Another option may be to adduce evidence from an industry expert, perhaps an
academic who
has studied the industry and may even have some consulting
experience. Such a strategy may mean
that credibility concerns are avoided.
However, as illustrated by the judicial response to Iansiti’s
evidence
in Oracle, there is always the risk with such a witness that his or her
perspective is seen as
simply too theoretical and as adding little value to
the evidence derived from the lay witnesses.
The representativeness dilemma illustrated by the government’s
experience in Oracle, and the
most effective way of overcoming it,
were addressed recently by a former Deputy Director of the
Federal Trade
Commission’s Bureau of Competition, George Cary, where he said:
back in the old days we used to wonder whether you could bring a case without customer testimony,
and now we wonder whether you could bring a case without econometric testimony, no matter how
many customer witnesses you have. The key is that you need systematic proof that a particular
customer’s testimony can be generalized to the market as a whole. Obviously, you cannot bring in
every customer, and you cannot, at least not often very credibly, do a poll of customers. You need
some linkage of evidence, whether documentary evidence plus econometrics or documentary evidence
plus customers plus econometrics; you need some combination that allows you to say that what these
customers are testifying to does not apply uniquely to them; it applies across the board, and the proof
of that is: (fill in the blank). The correct standard has never been “how many customers can you get to
say that a merger is good or bad”; it has always been, “does the customer testimony exemplify the
reality of the marketplace.” But, as a result of the Oracle opinion, there will be more attention paid to
affirmatively showing how it is that the conclusions from a group of customers can be systematized
and made consistent with other evidence.63
In Australia the issue of representativeness has arisen predominantly in the
context of evidence
from consumers and then more so in proceedings under s 52
of the TPA (alleging misleading and
deceptive conduct and related
intellectual property infringements) than under Pt IV. It does not appear
to
have been an issue in relation to the evidence adduced from industry (including
customer)
witnesses in competition cases. There have been several such cases
in which a selected handful of
customers have been presented as witnesses
(just as in Oracle) and yet it is not apparent that
the
representativeness of their testimony was a matter for concern (at least
insofar as it failed to rate a
62 See the discussion of the weaknesses of survey evidence in Beaton-Wells, n
10, pp189-210.
63 “Unilateral Effects Analysis After Oracle”
(2005) 19(2) (Spring) Antitrust 8 at 16.
mention in the judgment).64
The reasons for this are unclear but it should not be taken to mean
that
parties can afford simply to ignore the issue in future proceedings.
(b) Selection of customer evidence – which customers
In Oracle the testimony of the government’s customer witnesses
about their insensitivity to a future
price increase may have been seen as
pre-determined, in effect, by the past decisions of their
particular firms.
By those decisions the firms in question had locked themselves into
long-term
relationships with either Oracle or PeopleSoft. As shown by the
evidence in the case, such
relationships involve a significant investment of
time and money in their establishment and
maintenance and, by their nature,
are very difficult to undo. Albeit not framed explicitly in these
terms,
concern about the implications of this for the probative value of the testimony
may have
underpinned the comment by Walker J (at 1167) that:
the court cannot take the self-interested testimony of five companies which chose to eliminate SAP
from consideration, and from that sample draw the general conclusion that SAP does not present a
competitive alternative to Oracle and PeopleSoft. Drawing generalized conclusions about an extremely
heterogeneous customer market based upon testimony from a small sample is not only unreliable, it is
nearly impossible.
In economic terms the criticism that could be made about the
government’s witnesses is that they
represented so-called
“inframarginal” customers, that is, customers who, for whatever
reason, would
not be responsive to an SSNIP. Identifying a group of customers
who would be unwilling to switch in
response to a price increase does not
mean necessarily that they or the products to which they are
loyal constitute
a relevant antitrust product market. Rather, economists argue, it is marginal
customers
(those who would be responsive to an SSNIP) whose views should be
considered in defining a market
for this purpose.
Firms consider the likely reaction of marginal customers in determining
whether or not to
increase prices; hence, it is these customers that act as a
constraint on pricing. If marginal customers
represent a sufficiently large
percentage of a firm’s sales, the firm will lose more through
the
imposition of an SSNIP than it will gain from sales under the new price
from its inframarginal
customers. In differentiated product markets, it is
usually the case that only a relatively small
percentage of a firm’s
sales need to be made to marginal customers in order for a price increase to
be
unprofitable (and thus for the firm to be constrained in imposing such an
increase).65
Applying this approach, it is arguably evidence of the attitudes and
behaviour of marginal rather
than inframarginal customers that will assist a
court most in making determinations about market
definition and
anticompetitive effects. This may have been what Walker J was referring to,
amongst
other things, when he described the testimony of the
government’s customer witnesses as “largely
unhelpful” (at
1130).
(c) Scope of customer evidence
Generally speaking, there can be little doubt that the most effective
evidence from customer witnesses
is evidence concerning the past and present
behaviour of their firms and others in the marketplace (for
example, evidence
as to their purchasing decisions and the criteria and processes applied in
making
them). As was remarked by the judge in Oracle, reflecting
specifically on the customer evidence (at
1167): “the most persuasive
testimony from customers is not what they say in court but what they do
64 See, eg, Eastern Express Pty Ltd v General Newspapers Pty Ltd
[1991] ATPR 41-128 at 52,891 in which Wilcox J accepted
the
“unchallenged evidence of numerous [real estate] agents as to the
importance of locally advertising properties” in
preferring
a market
definition that excluded national newspapers and, more recently, Australian
Competition and Consumer Commission
v Rural Press Ltd [2001] ATPR
41-804 at 42,737 [107] in which Mansfield J relied on the evidence of
advertisers to support
confining the relevant market to regional newspapers,
and excluding other forms of media such as radio.
65 See Hausman JA and
Leonard GK, “Economic Analysis in Differentiated Products Mergers Using
Real World Data” (1997)
5 George Mason Law Review 321 at
323-324.
relation to industry evidence generally.66
However, there may be occasions on which customer witnesses may be invited to
opine on a
likely state of affairs in the future. Oracle raises
questions about the extent to which such opinions
might properly or usefully
be given by such witnesses.
Undoubtedly it is legitimate for a customer witness to express a view as to
the likely conduct or
decisions of his or her firm in the future, based on
its experiences, needs, resources, information about
options and the like.
Such a view would have to be expressed on the assumption that such things
will
remain unchanged and, for this reason, its utility necessarily may be
limited.67 Furthermore, there may
be some debate as to whether the proper
question in this context is what the firm “could” do (say,
in
response to an SSNIP) or whether the question that ought be asked is what
the firm likely “would” do.
In Oracle the judge appeared
to favour the former (at 1131).
In my view, the probative value of evidence given in response to the
“could” question will be
limited as it is a question arguably
aimed at determining the range of decisions that are theoretically
open to a
customer rather than the range of decisions that a customer realistically might
make. It is
artificial and quite unhelpful, in my opinion, to inquire of such
witnesses whether they “could”
possibly act in a certain way if
it is their evidence that, for particular reasons, they “would” not
so act.
As was pointed out in Australia Meat Holdings v Trade Practices
Commission [1989] FCA 25; [1989] ATPR 40-932
at 50,092 (Davies J), one of the few
Australian cases in which customer evidence has played a major
role in
securing a particular market definition, “[t]he existence of a market, a
concept of economics
and commerce, ought not to be determined by reference to
theoretical possibilities”.68
Of course, this distinction depends on what is meant by “could”
in this context. If it is taken to
refer only to decisions that make economic
sense to a rational customer, then it is probably
indistinguishable in
practice from “would”. Notably, the US Merger Guidelines make the
point that
the analysis carried out under those guidelines is focused on
whether “consumers or producers ‘likely
would’ take certain
actions, that is whether, the action is in the actor’s economic
interest”.69
This issue aside, it is difficult to quibble with the insistence by Walker J
that industry witnesses
give specific evidence to support their assertions.
In this instance, as suggested by the judge, such
evidence might have
included an explanation of the detailed cost/benefit analyses that would
be
undertaken by a customer in selecting an ERP vendor (at 1131). As one
commentator has remarked,
there is some difficulty in understanding exactly
the point that the judge was attempting to make in
Oracle, but it is
possible that he:
could have been thinking that the customers did not know what they would do in a world different
from the world they were living in. The customers knew exactly what to do in the current world, and
they were doing it, but they had not investigated all of the possible options, because it wasn’t sensible
to investigate all of the possible options. But if the world changes, the customers may have to get more
information and reevaluate their decisions, and they may come to different conclusions. I think what
Judge Walker may be saying is that the customers had not gone out and gotten that information yet, so
they could not tell us what they would do after this merger. You don’t have to read the testimony that
66 While it is true that there have been occasions on which Australian courts
have valued the opinions of industry witnesses,
including on the issues that
fall ultimately for judicial determination in the case at hand, such evidence
generally has not been
relied on in isolation but rather has been noted as
confirmatory of other categories of evidence. See the discussion in
Beaton-
Wells, n 10, pp 168-172.
67 Indeed, for this reason it seems,
evidence from customers as to their likely reaction to a future hypothetical
price increase has
been described by the leading United States antitrust
authors, Areeda, Hovenkamp and Solow, as the “least reliable” form
of
evidence; the “most reliable” evidence on such matters being
identified as historical shifts in prices and trading patterns:
Areeda et al,
n 37 at [538b], p 230.
68 In this case, the evidence of some 32 cattlemen
(the relevant customers) that transporting their cattle to distant abattoirs
was
neither feasible nor likely was highly influential in Wilcox J’s
decision to confine the market to a region of Queensland: see
Trade
Practices Commission v Australia Meat Holdings [1989] ATPR 40-876.
69 US
Merger Guidelines, n 14, § 0.1.
way, but if you do, ... then there isn’t much of a lesson for the future except that complicated facts
make it difficult to win a merger case.70
In fairness to Walker J, his criticisms might also have been prompted as much
by the style of the
customer testimony as by its substance (or lack thereof).
The government’s customer witnesses
apparently each recited in fairly
formulaic fashion (as if “by rote” (at 1131)), their view as to
the
likely effect of a post-merger price increase by Oracle/PeopleSoft. In
light of this, as well as the
supposed paucity of specific evidence given to
support such views, it was hardly surprising that the
court found these
witnesses less than “believable” (at 1133). The reaction of an
Australian judge no
doubt would be similar.71
Of more fundamental concern in relation to the scope of customer evidence is
the extent to which
customer witnesses may be asked to opine on the likely
effects on competition of the transaction in
question, that is evidence
purporting to predict market-wide effects as distinct from evidence
confined
to the effects on the decision-making of the particular customer.
There is a good argument that
customers should not be asked to speculate on
the probable state of competition in the market in the
future with or without
the relevant transaction. This is simply because customer opinions on
such
matters necessarily will be subjective and based on incomplete
information. Instead, predictions about
anticompetitive effects are matters
on which additional expert evidence should be led. Customer
testimony about
past purchases and decision-making will be one of the inputs to such evidence.
Other
inputs might include information about barriers to entry, levels of
capacity, any vertical integration
and so on.
This limitation on the proper use of customer evidence was argued forcibly by
another United
States judge in explaining his reasons for rejecting such
evidence in a merger decision handed down a
month prior to the Oracle
decision – Federal Trade Commission v Arch-Coal Inc 329 F Supp
2d 109
(DDC 2004). In Arch-Coal the government presented testimony
from numerous customers, which in
that case were the utilities that converted
coal into electricity, in which the view was expressed that
the challenged
merger would lead to higher prices. In a subsequent extra-curial speech, Bates
J
explained that, in his view, customer testimony is useful on issues about
which such witnesses have
actual knowledge, such as evidence that explains
certain market behaviour and casts light therefore on
market definition or
substitutability. It is far less useful, if not incompetent, on issues that
involve the
court in a forward-looking inquiry, in predicting the likely
effects on competition of a proposed
merger, for example.72 In comments that
reflected on the reasoning in Oracle, as well as in
Arch-
Coal, he went on:
customers do not have any particular expertise that allows them to speculate on the likely effect of a
merger ...
Absent such expertise or meaningful in-house empirical studies or experiences with similar mergers in
the past, any speculation by customers on the likely anti-competitive effects of a proposed merger is
likely to be no more than that – speculation. Witnesses can do no more than repeat broad economic
principles that they think will result in certain effects in the market. I described this in my opinion [in
Arch-Coal], and it appears that Judge Walker had the same reaction in Oracle....
... Ultimately customer testimony was unhelpful in either case because those witnesses, unlike experts
who have studied the market and have a basis for offering opinions, are not competent to provide what
amounts to largely ungrounded opinions as to likely future collusion among their suppliers. Their
testimony is simply not rationally based in their experience or expertise.
70 Werden G, Comments made in an American Bar Association Section of
Antitrust Law Brown Bag Program on “Coordinated
Effects Analysis: the
Arch-Coal Decision”, 27 October 2004, available at
www.antitrustsource.com, March 2005 (viewed
16 August 2005).
71 As was
observed recently by Gyles J (himself an experienced advocate, including in
trade practices litigation, prior to
judicial appointment) in Australian
Rugby Union Ltd v Hospitality Group Pty Ltd [2000] FCA 823; [2000] ATPR 41-768 (ARU),
the industry
witnesses in that case may not have been “guilty of any
known untruths”; however, he could not be expected “[s]imply
to
accept at face value each statement made by a witness in a carefully
prepared affidavit”: at 41,047 [44].
72 Justice Bates, “Customer
Testimony of Anti-Competitive Effects in Merger Litigation” [2005]
Columbia Business Law
Review 279.
Part of the problem lies in the essential nature of an action to block a proposed merger. Unlike in most
antitrust cases, the question of anti-competitive effects in the merger context involves predictions about
the future, and the game of predicting the future poses a unique set of dilemmas for counsel and the
fact-finder alike. The predictive power of economics far outreaches the similar power of any individual
in the industry, no matter how intelligent or experienced that individual may be. Working at Oracle
does not make one an Oracle, and unless the executive moonlights as a professor or can travel through
time, she will not be able to testify directly as to the future events that are at the center of the court’s
inquiry. Of course, the executive will be able to provide essential information on the nature of the
industry, the likelihood of entry, the history of pricing activity, and the predatory activities of firms
with market power in a pre-merger world. All of these variables are certainly critical inputs in the
economic analysis and will therefore shine light indirectly on the likely results of the merger. However,
emotional appeals or predictions of dire consequences by customers will rarely carry the day in the
antitrust context.73
As is evident from these comments (as well as those made by other
commentators),74 there is a
persuasive argument that the best evidence
regarding anticompetitive effects is economic evidence,
presented through an
expert witness, preferably based on some form of quantitative analysis.
This
category of evidence and its treatment in Oracle, as well as the
experience with its use in Australian
proceedings, are examined below.
(d) Conclusiveness of customer evidence
Difficulties in relying on customer evidence will be especially acute in an
industry in which the
relevant products are highly differentiated and
products are marketed across a broad range of prices
and quality.75
Differences between products in such industries will be very much a matter
of
subjective customer perception and will be assessable on multiple
dimensions. Such difficulties will
be accentuated further where the industry
is undergoing rapid development, as a consequence of
which customer needs and
perceptions can be expected to be fluid.
In such circumstances it will be near impossible to demonstrate a clear break
in the chain of
substitutes, distinguishing one set of products or customers
from another and enabling bright-line
market boundaries to be drawn.
Inevitably as a result, any attempt to define a market based on
customer
attitudes and behaviour will be susceptible to the criticism that it is so vague
as to be
manipulable for the purposes of the substantive competition
analysis. This argument was made by
Oracle’s experts and was accepted
by the judge in relation to the customer-based market proposed by
the
government in that case.76
Putting concerns about gerrymandering to one side, it is clear that a
proposed market should not
be rejected on the grounds simply that its
boundaries are blurred. As has been acknowledged
repeatedly in the Australian
context, a certain amount of boundary blurring is to be expected with
respect
to any market.77 It is, however, as with almost every aspect of competition
analysis, a matter
of degree. At some point a line has to be drawn. At least,
this would appear to be the case in Australia
in which market definition is
necessitated by the terms of the relevant prohibitions in Pt IV of the
Act.
In the United States it is argued by some (most actively in the recent
past, by representatives of the
73 Bates, n 72 at 286.
74 See, for example, Harkrider J, “Proving
Anti-Competitive Impact: Moving Past Merger Guidelines Presumptions”
[2005]
Columbia Business Law Review 317.
75 See the observations
made about this in United States of America v Oracle Corporation 331 F
Supp 2d 1098 at 1120-1121
(ND Cal 2004).
76 Hausman, for example, argued
that in formulating this market, the government had “clearly worked
backwards from their
desired result”: identifying a group of customers
all of which had bought Oracle, PeopleSoft or SAP products, and then
claiming
that those customers were “similarly situated” as a means of
defining the market. Hausman also noted that, at
trial, the
government
changed its position and attempted to argue that the high function market was
based on the performance attributes
of the software (such as its
functionality and scalability), and not the customers who buy it. See United
States of America v
Oracle Corporation 331 F Supp 2d 1098 at 1154
(ND Cal 2004).
77 In its first major decision in relation to Pt IV, the High
Court pointed out that markets cannot be defined with precision; that
market
definition necessarily involves questions of degree and the making of value
judgments See Queensland Wire Industries
Pty Ltd v Broken Hill
Proprietary Co Ltd [1989] HCA 6; (1989) 167 CLR 177 at 196 (Deane J).
regulatory
authorities) that market delineation, as traditionally applied in the antitrust
context, in fact
is not required in unilateral effects cases in
differentiated product industries.78
This argument aside, it is trite to observe that if the boundaries are drawn
so as to widen the
market unduly, it will frustrate the competition policy
objective of preventing or restraining excess
market power. Equally, if drawn
too narrowly, it will impede firms in the legitimate conduct of
their
business. From a practical perspective, given the purposive nature of
the market definition task, what
matters is that a view about the relevant
boundaries is settled upon with sufficient confidence by the
decision-maker
and those affected by the decision to be made. In many instances, for the
reasons
previously stated, it may be difficult to attain the requisite degree
of confidence with respect to
markets based solely on customer evidence.
Campbell, one of the Oracle experts, described the government’s
customer-based product market
as “unprecedented” and
“unusual” (at 1154). In Australia, attempts to establish a market in
Pt IV
proceedings based entirely or even substantially on customer evidence
are not unprecedented but they
could probably be said to be unusual.79 As
previously indicated, by comparison, material provided by
customers regularly
plays an important role in Commission decisions concerning clearances
and
authorisations. In the United States, the Federal Trade Commission too
has a history of heavy reliance
on customer opinion.80 While obviously the
same evidentiary standards applicable to legal
proceedings do not apply to
Commission intelligence gathering, there is no reason why regulators
should
not approach customer “evidence” with the same degree of caution as
it was approached by
the court in Oracle and for the same
reasons.81
6.2 Expert evidence
The evidence given by the economists in Oracle is illustrative of the
expansive role that, despite some
initial judicial resistance, Australian
economists also now routinely play as expert witnesses in Pt IV
proceedings.
That role involves the identification, selection and compilation of evidence,
from which
inferences and conclusions are then drawn by the expert, applying
economic theory and modes of
analysis, relevant to issues that include the
so-called “ultimate” issues in the proceeding. Recognition
of
such a role for economists has meant understanding that their value lies in
contributing a whole
process of reasoning rather than just a set of abstract
theoretical principles.82 However, it also raises
78 See discussion of this
argument in Werden G and Rozanski G, “The Application of Section 7 to
Differentiated Product
Industries: The Market Delineation Dilemma”
(1994) 8 Antitrust 40; Stoll N and Goldfein S, “Markets! We
Don’t Need
Markets!” (2003) 29 New York Law Journal 3;
Keyte J and Stoll N, “ ‘Markets, We Don’t Need No Stinking
Markets!’ The
FTC and market definition” (2004) 49 (Fall)
Antitrust Bulletin 593.
79 Australia Meat Holdings [1989] FCA 25; [1989] ATPR 40-932 (referred to at n 68)
stands out as a success story in this regard, the customer
evidence in that
case having plainly been more robust than that presented by the government in
the Oracle proceeding. There
also have been attempts to establish
markets based primarily on consumer needs or perceptions but they have generally
been
unsuccessful. In Aut 6 Pty Ltd v Wellington Place Pty Ltd [1993]
ATPR 41-202, for example, an attempt to establish a luxury
car market failed
at first instance, as did the attempt to restrict the market in Taprobane
Tours WA Pty Ltd v Singapore Airlines
Ltd [1990] FCA 325; [1990] ATPR 41-054 to
holiday packages to the Maldives (while the argument succeeded at first
instance, on appeal the
airline was successful in having the trial
judge’s finding that the market should be so restricted overturned:
Singapore Airlines
Ltd v Taprobane Tours WA Pty Ltd [1992] ATPR
41-159). Both attempts were based on the argument that consumers
associated
particular, mostly intangible, benefits with the products in question such that,
in the minds of consumers at least,
they were not closely substitutable with
what, on any objective view, would be obvious alternatives.
80 Harkrider, n
74 at 338, noting that between 1996 and 2003, the FTC took enforcement action in
98% of cases where there
were strong customer complaints. See also Whitener
M, “Editor’s Note: The Regulators” (2005) 19(2) (Spring)
Antitrust 5 at 6,
noting that in the United States: “traditional
view is that customer testimony should be given significant weight in merger
cases
... much more weight than the views of competitors – because
customers’ interests are generally more likely to be aligned
with
the
goals of the merger laws.”
81 Indeed, it was indicated recently by the
Assistant Director for Antitrust in the Federal Trade Commission’s Bureau
of
Economics, Michael Vita, that, as a result of Oracle, the
Commission in future would “press customers hard to identify the
basis
for their opinions on, say, their likely reaction to an attempted post-merger
price increase. Given the way the customer
testimony was dismissed in the
Oracle case, if that decision does become a model for other judges, we
will have to make sure
that the testimony we elicit from complaining
customers can stand up to that heightened standard.” See “Unilateral
Effects
Analysis After Oracle”, n 63 at 16.
82 See the discussion in
Beaton-Wells, n 10, pp 303-314.
qualitative debate) as well as the nature of
such opinions (the advocacy versus evidence debate).
(a) Quantitative versus qualitative evidence
What is perhaps most striking for Australian observers in relation to the
treatment of the expert
evidence in Oracle was the proposition,
submitted by the Oracle experts and accepted by the judge,
that such evidence
should be supported by some quantitative analysis in order to be effective
in
establishing a position on the issues of market definition, market shares
and unilateral anticompetitive
effects. As indicated above, much emphasis was
placed by Campbell on the absence of any
“quantitative metrics”
that could be used to distinguish high function vendors from other vendors
(as
well as on the fact that Elzinga had conceded as much) (at 1157). Walker
J evidently was disturbed by
this omission, critical of Elzinga’s
testimony that there was “something different” about high
function
software (at 1157):
the court cannot delineate product boundaries in multi-million dollar merger suits based upon the mere
notion that there is “something different” about the merging products and all others.83
The employment of empirical analysis to support expert opinions has not been
a common feature
of Pt IV proceedings. There have been very few Australian
cases in which evidence of this nature has
been adduced and in those cases in
which it has been presented it has been ineffective.84 Reservations
by
Australian judges towards this category of evidence in Pt IV cases were
illustrated most recently in
Australian Gas Light Co v Australian
Competition and Consumer Commission (No 3) [2003] ATPR
41-966, the first
substantive merger to come before an Australian court in over a decade.85
The
quantitative evidence presented by the Commission was considered in some
depth by French J but
ultimately failed to persuade him that the proposed
acquisition met the test in s 50. For some, the
treatment of the evidence by
French J has only reinforced the impression that there may be limited
utility
in a party investing the time and expense in compiling quantitative evidence in
Pt IV
proceedings.86
83 The judge rejected Elzinga’s claim that it was not possible to
present reliable quantitative data because the proposed high
function market
was “shot through with price discrimination”. There was said to be
price discrimination given that, based
on
the discount approval forms, it
appeared that Oracle offered different discounts to different customers. Of this
argument,
Walker J retorted: “Elzinga’s assertion that this
market is ‘shot through’ with price discrimination because
‘somehow’ Oracle
was able to determine what level of discount it
could offer to different customers uncannily resembles his argument that there
is
‘something different’ about Oracle, PeopleSoft and SAP. Again,
the court refuses to sustain plaintiffs’
inarticulable
contentions” (at 1173). In defence of Elzinga it should
be noted that the evidence did suggest that LCEs and high function
ERP
vendors enter into relationships as distinct from transactions and that
the relationships are complex, long-term, to a large extent
services-oriented
and hence involve many intangible elements. It also suggested that each of these
relationships was unique,
involving a bundle of products and services
tailored to meet the particular needs of the customer and priced accordingly.
In
such circumstances, Elzinga’s failure to undertake an econometric
study (involving cross price elasticities, for example) might
have been
viewed more sympathetically. It should also be pointed out that neither of the
Oracle experts conducted such a study
(albeit, admittedly, they did not bear
the same burden of proof borne by Elzinga) and nor did they appear to suggest
that data of
the kind necessary to carry out an econometric study was in fact
available.
84 In Trade Practices Commission v Australia Meat Holdings Pty
Ltd [1988] FCA 244; [1988] ATPR 40-876 the court declined to place any
weight on evidence
of price correlations and gave specific reasons for doing so. In News Ltd v
Australian Rugby Football
League Ltd [1996] FCA 1256; [1996] ATPR 41-466 the court
either overlooked or chose to ignore the quantitative evidence (aimed at
showing
limited substitutability for rugby league). In Australian Rugby
Union Ltd v Hospitality Group Pty Ltd [2000] FCA 823; [2000] ATPR 41-768
evidence of
cross-elasticities was found not to be statistically significant and in
Australian Competition and Consumer
Commission v Universal Music
[2002] ATPR 41-768, qualitative evidence was preferred to the quantitative
evidence presented
on the issue of market power.
85 The Commission
presented detailed quantitative evidence to support a decision that it had made
to refuse informal clearance
of AGL’s proposed acquisition of a 35%
stake in the Loy Yang Power Station and Coal Mine. The analysis was made
possible
by the availability of data concerning electricity trading in the
national electricity market.
86 In a recent gloomy comment on the case, a
solicitor who acted for the Commission has said: “In stark contrast to
judgments
such as News Ltd, ... French J engaged with the quantitative
evidence in a manner never before seen in an Australian
competition case. For
example, he closely examined the residual demand curves presented to the court
by an ACCC expert, and
carefully considered the different methodologies put
forward for the derivation of residual demand curves and the calculation
of
negative inverse elasticities of demand. One would be hard-pressed to find
another Australian judgment concerning Part IV
of the TPA which demonstrates
a more concerted effort to engage with, understand and critique complex economic
evidence.
There are good reasons, related primarily to problems with data
availability and methodology,
that explain why quantitative evidence has not
been tendered to a greater extent in Pt IV proceedings
than has been the case
to date. What is of particular note in the present context, however, is
that
Australian courts generally have not been critical of the lack of such
evidence presented to them on
Pt IV issues and when it has been presented
have demonstrated a distinct preference for qualitative,
principally
industry-sourced, evidence – evidence of just the kind regarded as vague,
unreliable, and
highly circumstantial in Oracle.
In the United States an insistence on quantitative evidence may be explained,
to some extent, by
reference to the relevant legal tests employed in
antitrust cases. The hypothetical monopolist test, for
example, requires that
it be shown that an SSNIP of approximately 5% be profitable before
market
boundaries are closed. Market concentration involves the use of the
Herfindahl-Hirschmann index.
The unilateral effects theory also invites
quantitative analysis so as to establish the likelihood of a
unilateral price
increase by the merged entity. Indeed, in his discussion of the relevant
principles
governing the Oracle proceeding, Walker J cautioned against
the use of “qualitative factors” in the
task of identifying a
localised competition space for the purposes of a unilateral effects claim
(at
1118-1119). Such factors, he pointed out, have been associated
traditionally with the now largely
discredited submarkets doctrine and have
been recognised as misleading courts into “identify[ing]
artificially
narrow groupings of sales on the basis of non-economic criteria having little to
do with the
ability to raise price above cost” (at 1119).87 By
contrast, the judge observed, “modern econometric
methods hold promise
in analyzing differentiated products unilateral effects cases” (at 1122).
In
particular, Walker J referred to merger simulation models that “may
allow more precise estimations
of likely competitive effects and eliminate
the need to, or lessen the impact of, the arbitrariness
inherent in defining
the relevant market” (at 1122).88
In relation to market definition, in Australia, the degree of constraint
required before a competing
firm or product or geographic area is included in
the proposed market has not been quantified in the
same way as under the
hypothetical monopolist test. The QCMA test is far less
prescriptive,
employing broad concepts such as “close
competition”, “strong substitution”, a “sufficient
price
incentive” and “relatively high”
cross-elasticities.89 Similarly, broad descriptive terms appear in s 50
(for
example, “substantial” and “likely”) and in s 50(3)(e),
in particular, referring to “the likelihood
that the acquisition would
result in the acquirer being able to significantly and substantially
increase
prices or profit margins”. Furthermore, such increases are
only one factor that the court must take into
account in determining the
likely effects of an acquisition. The others, by comparison, are
largely
structural in nature (for example, level of import competition;
height of barriers to entry; degree of
countervailing power; and the nature
and extent of vertical integration).90
In light of this direction provided by the statute and by the Tribunal, and
taking account of the
other difficulties associated with the presentation of
quantitative evidence referred to above, it can be
expected, in my view, that
qualitative industry evidence will continue to predominate in Pt
IV
proceedings for the foreseeable future.
Given French J’s conclusions, however, one wonders whether this has in
fact been more detrimental to the cause of quantitative
analysis than if he
had completely ignored it. For example, after providing a 30 page exposition of
the economic evidence put
before the court, he turned to the evidence of an
industry expert, which he clearly preferred, stating: this evidence ‘had a
ring of
commercial reality about it.’” See Merrett A,
“Quantitative Analysis Again Up in Lights” (2005) 13 TPLJ 90 at 96.
See also the
observations made by Allsop J about the limitations of economic
modelling, specifically the simplicity of the assumptions on
which they are
invariably based and hence their inaccuracy in representing reality, in
Australian Competition and Consumer
Commission v Baxter Healthcare
Pty Ltd [2005] ATPR 42-066; [2005] FCA 581 at [512]- [513].
87 Referring
to Areeda, Hovenkamp and Solow, n 37, [914a] at p 60. These commentators have
been concerned about the
potential for localised competition analysis to
devolve into an unstructured submarket-type analysis.
88 See generally in
relation to these models, Werden G and Froeb L, “The Effects of Mergers in
Differentiated Products
Industries: Logit Demand and Merger Policy”
(1994) 10 J L Econ & Org 407; Werden G, “Simulating the Effects
of
Differentiated Products Mergers: A Practical Alternative to Structural
Mergers Policy” (1997) 5 George Mason Law Review
363; Baker J,
“Contemporary Merger Analysis” (1997) 5 George Mason Law Review
347.
89 Re Queensland Co-Operative Milling Association Ltd (1976]
ATPR 40-012 at 17,247.
90 See s 50(3)(a), (b), (d), (i) of the Trade
Practices Act 1974 (Cth).
This should not be taken to suggest that
quantitative evidence has been a major feature or that it
has been embraced
unconditionally by the judiciary in the United States (as compared, for
example,
with the attitudes of the regulators by whom quantitative studies
have been employed regularly, not
only in the United States but increasingly
also in other jurisdictions such as New Zealand, Canada and
Australia).91
Issues with the data availability (merger simulation analyses, for example,
generally
require detailed high frequency data in order to estimate demand)
and with methodology (including
the nature of the underlying assumptions made
in such analyses) plague litigants in the United States,
just as they do in
Australia.92 As a consequence, litigants in neither jurisdiction are in a
position to
adduce such evidence with confidence that the investment will
prove to be worthwhile.
In the United States, in Federal Trade Commission v Staples 970 F Supp
1066 (DDC 1997), for
example – the first major merger case in which the
regulatory authorities presented extensive
quantitative analysis in a
contested proceeding – the evidence had a most equivocal
reception.93
While the court granted the injunction sought by the FTC, it did
so without explicit reliance on the
quantitative analysis. This has not
stopped the Commission Director from claiming that the
court’s
conclusions were based “demonstrably” on the
econometric evidence.94 Others have been less
generous, arguing that the
studies presented by opposing experts in the case were so
vigorously
contested that they effectively cancelled each other out, forcing
the court to revert to the documentary
industry evidence (an arguably
inevitable outcome whenever well-prepared, reasoned, supported and
presented
expert evidence is given on each side).95 The result was said to provide
“further
confirmation that econometric analyses will be more persuasive
when key modelling choices are
consistent not only with economic theory but
also with the documentary and other evidence available
about the market and
tested against plausible alternatives”.96
Thus, so it seems, even in the United States the prospects for greater use of
econometric analysis
outside the regulatory framework are not as assured as
some might imagine.97 The judge in Oracle
may have been critical of
the supposed lack of econometric analysis presented by the government
in
support of its case. However, it should not be overlooked that the
government did present evidence,
through McAfee, by way of a merger
simulation analysis. The effectiveness of the criticisms levelled
by the
Oracle experts at this evidence and the short shrift that it was given by the
judge only
reinforces, in my view, the need for caution in judging the extent
to which such evidence might
profitably be employed in legal proceedings in
the future.
91 See the developments in this regard canvassed in Evans L, “Economic
Measurement and the Authorisation Process: The
Expanding Place of
Quantitative Analysis” (1999) 7 CCLJ 99 and also Merrett, n 86.
92 For
a discussion of these issues in the United States context and an argument that
empirical analysis cannot and should not
replace structural analysis, see
Note, “Analyzing Differentiated-Product Mergers: The Relevance of
Structural Analysis”
(1998) 111 Harvard Law Review 2420.
93
The Federal Trade Commission had performed a systematic empirical study of
Staples’ pricing that was presented in court by
an econometric expert.
The Commission also relied on an econometric study of the rate that Staples
historically passed through
cost savings to consumers by way of lower prices.
The merging firms presented alternative statistical analyses of pricing,
as
well as econometric studies of the determinants of Staples’
price-cost margins and the effect on revenues at Staples’
stores
of
nearby store openings by possible rivals. For a more detailed explanation
of the evidence, see Baker JB, “Econometric Analysis
in FTC v
Staples” (Paper presented before the American Bar Association’s
Antitrust Section Economics Committee, 18 July
1997, revised 31 March 1998
(at http://www.ftc.gov/speeches/other/stspch.htm, viewed 16 August 2005).
94
See Baker, n 93.
95 As was observed by Shapiro in “Unilateral Effects
Analysis After Oracle”, n 63 at 12-13: “By downplaying the
role
of
customer testimony and arguably emphasizing the role of this type of
simulation method or expert testimony, Judge Walker has
encouraged some sort
of battle of the experts, and everybody who does simulation models knows there
is a lot to argue about:
you have to make a bunch of assumptions in those
models. I do not know what judges are going to do when, inevitably they
see
one expert get up with this complex model with all these assumptions and
another expert gets up and testifies that those are
crazy assumptions and
this whole thing is not reliable. How is a judge supposed to sort that
out?”
96 See Evans, n 91 at 111. Also, Shapiro, “Unilateral
Effects Analysis After Oracle”, n 63 at 12 for a similar point made
about
the use of merger simulation analyses by the Federal Trade
Commission.
97 For a review of recent United States cases indicating that the
use of econometrics in lieu of traditional structural analysis
lacks judicial
support, see Hill R, “Practicing What They Preach: One Lawyer’s View
of Econometric Models in Differentiated
Products Mergers” (1997) 5
George Mason Law Review 393.
(b) Evidence versus advocacy
In Oracle it appears fairly plain that the experts were engaged in an
exercise of advocacy on behalf of
the parties that they represented –
Elzinga’s attempt to distance himself from his own geographic
market
test on the grounds that it did not suit the government’s case was a prime
example of this.
Their evidence did not attract any criticism from the judge
on this basis, even if some of his more
cryptic remarks in relation to
Elzinga’s testimony suggested a degree of scepticism concerning
the
impartiality of this witness.
The question as to the extent to which an expert can act as an advocate for
the party that he or she
represents, and related issues of expert
impartiality, have been the subject of considerable debate in
Australia. This
debate has been accentuated in connection with economists giving evidence
in
competition cases by the recognition that their evidence may take the form
of submission or argument
(as distinct from evidence)98 and by the practice
of “hot-tubbing”99 that in itself could be said at least
to
empower if not encourage the economists involved to act as advocates. In light
of this, it is notable
that there have been hardly any Pt IV cases in which
the impartiality of the economic experts has
attracted adverse judicial
comment (let alone adverse findings).100
In 2003 the Federal Court revised its 1998 Practice Direction on expert
witnesses, incorporating
suggestions as to ways in which the criticism of
partiality might be avoided.101 The revised version
retained an emphasis on
the general duties of an expert witness, being, first and foremost, to assist
the
court and not to act as an advocate for a party.
Interestingly, this statement of duties was drawn on recently by the Tribunal
in support of
criticisms made of experts who gave evidence in Re Qantas
Airways Ltd [2004] ACompT 9 at
[217].102 The Tribunal drew a
distinction between an expert advocating an opinion, which is
permissible,
and an expert advocating for a party, which is impermissible. Additionally, the
Tribunal
commented (at [216]) that:
The role of expert witnesses appearing before the Tribunal is to instruct on areas of specialist
knowledge in a manner that is ultimately designed to inform rather than to advocate a particular view.
Obviously, parties will call upon experts whose opinions support their view of the case. However, it is
not appropriate for an expert witness to act as an advocate for the instructing party at all costs, and
professional witnesses should be willing to concede points which, whilst not advancing the case of the
party engaging them, they believe to be open as a fair and reasonable assessment on the material before
them. The Tribunal will be assisted by expert witnesses who can clearly explain the relevant issues and
concepts and can pinpoint the differences between opinions in the profession and the reasons for such
differences so that an informed decision can be made as to which opinion should be accepted on the
available evidence. The Tribunal will not be assisted by experts who uncritically push a party line,
avoid challenging questions, and seek to obscure the real issues in contention.
98 See Federal Court Rules, O 10, r 1(2)(j); Robertson D,
“Expert Economic Evidence: Challenging the Paradigm” (2003)
11
TPLJ 70
99 This practice is explained in CCH, Australian Trade
Practices Reporter, vol 1 at [16-015.91]. See also Federal Court
Rules,
O 34A, r 3(2)(e)-(i).
100 There is only one Pt IV case of which
I am aware in which the judge considered it necessary to make some comment on
the
subject of expert impartiality. In Australian Competition and Consumer
Commission v Universal Music Australia Ltd [2002]
ATPR 41-855 at 44,675
[345], Hill J observed of the two economists who gave evidence in the
case that “[e]ach can fairly be
said to have been an advocate for the
party for whom he was called”. Having made this observation, it did not
appear thereafter
to have any significant influence on the use that Hill J
made of the expert opinion evidence, except insofar as it might be seen
as
connected with his criticisms of the extent to which each expert expressed views
on the ultimate issues in the case. Hill J
declined to accede to the
submission that he should disregard the evidence of the Commission’s
expert (Ergas) on the grounds
that he was too biased in favour of the
Commission, noting in that regard that the same might well have been said of
the
respondent’s expert (Hausman), given that he had been engaged as a
consultant for the past three years to the major record
companies in the
United States.
101 Federal Court Practice Direction, Guidelines for Expert
Witnesses in Proceedings in the Federal Court of Australia
(4 September
2003).
102 The Guidelines, it was said, should apply to Tribunal proceedings
notwithstanding the Tribunal is not bound by the rules of
evidence (see s 103
of the Act).
These comments may reflect a degree of conservatism on the part
of Australian adjudicators
towards the conduct of expert witnesses that may
not be shared by their United States counterparts. It
might also suggest that
expert witnesses can expect harsher criticism from their
professional
colleagues (one of the members of the Tribunal panel in the
Qantas case having been Professor
Round, an economist who himself has
experience in acting as an expert witness in Pt IV cases) than
from members
of the judiciary sitting alone. Such suggestions are speculative, at
best.
However, what is clear is that for Australian expert witnesses at
least, there are limits on the type
of advocacy that will be persuasive and
perceived independence will be as important as actual
independence in
ensuring that such witnesses perform their function effectively.
6.3 Relationship between industry evidence and expert evidence
Oracle raises interesting questions regarding the relationship between
industry evidence and expert
evidence. On the one hand, the treatment of
Iansiti’s and Elzinga’s evidence suggests that where the
court
has taken a dim view of the industry evidence on an issue such as market
definition, it may be
difficult for an expert to persuade the court to adopt
a different, more favourable, view of that
evidence. This is particularly so
where the expert acts solely or primarily as an analyst or interpreter
of the
same evidence derived from the industry that the court itself has been in a
position to analyse
and interpret. In such instances, the expert may even be
superfluous.
On the other hand, the analytical/interpretive role of an expert may be
employed more effectively
in a negative fashion, as was the case with the
Oracle experts, to criticise and cast doubt on the
industry evidence. Greater
value may be gained from an expert used in this capacity as it is
not
uncommon for a court simply to adopt the expert’s criticisms of the
industry evidence in much the
same way as legal submissions are adopted. It
is notable that in Oracle those acting for the defendant
made an
obvious and deliberate decision not to attempt to present a positive case
establishing an
alternative market to that proposed by the government.
Rather, Oracle employed a defensive strategy,
described by the judge as
“pick[ing] apart [the] plaintiff’s market definition piece by
piece” (at 1165).
It was a strategy that worked. As Walker J pointed
out, the burden of proof lay on the government and
the government failed to
discharge it (at 1165).
While the Oracle strategy and the judge’s reaction to it are neither
surprising nor controversial,
they do not reflect fully the complexity
involved in the forensic choice that must be made by a
respondent between an
approach of positively disproving the applicant’s case and an approach
of
simply criticising it with a view to establishing that the applicant has
failed to discharge its burden of
proof. This choice is of particular
relevance in relation to the expert evidence. It is now accepted that
experts
may provide an opinion on the ultimate issues in a proceeding.103 Indeed, in Pt
IV
proceedings, in light of the special status of the expert evidence by
economists, it might even be said
that such witnesses will be expected to do
so. Such is the strength of expectation in this regard that an
expert witness
may be criticised for failing to offer a positive opinion on such matters.
In Australian Rugby Union Ltd v Hospitality Group Pty Ltd [2000] FCA 823; [2000] ATPR
41-768, for example,
the economist, Officer, was engaged by ARU to give
evidence critical of the expert evidence adduced
by the other side. As was
observed by Gyles J, Officer “did not give evidence as to his opinion on
the
relevant market or markets and made [it] clear that he would not be in a
position to express such an
opinion without further work”. Of this
omission and of his rebuttal of the evidence by the opposing
experts, Gyles J
was unreserved in his criticism (at 41,061 [79]):
As a tribunal of fact I did not find this evidence of any great value. Indeed much of it was of doubtful
admissibility, as it was argumentative as to mixed questions of fact and law. Furthermore, the general
economic principles which underlie Pt IV and its overseas progenitors are well understood, were no
doubt taken into account by the legislature and do not need to be restated. By and large, his evidence
added little to the cross-examination of the applicant’s experts by counsel for the respondent which
was, no doubt, based in part upon assistance from Professor Officer. Even that cross-examination
would have been more effective if deployed to support a positive view as to market based upon
103 See s 80 of the Evidence Act 1995 (Cth) which abrogated the common law rule that evidence on the ultimate issue in a
proceeding is inadmissible.
admissible expert evidence. It would be correctly seen as misconceived in a personal injury case for the
defendant to call a specialist physician, who had not seen the patient and had expressed no opinion as
to the plaintiff’s medical condition, who proceeded to take pot shots at a well-qualified specialist called
by the plaintiff who had examined the plaintiff and had expressed an opinion as to the plaintiff’s
condition.
As this reaction by Gyles J suggests, ultimately, the decision whether to
adopt an offensive or a
defensive strategy in formulating an approach to the
evidence (that of the experts, particularly) should
rest, at least in part,
on an assessment of the audience in the particular case.
6.4 Last words (if there can ever be) about market definition
It would seem remiss to conclude without noting what is perhaps the most
obvious insight extractable
from Oracle, concerning the significance
of the issue of market definition. In Australia, the question
of the relevant
market has been described as “the most vigorously (and expensively)
litigated and
discussed question in our courts and tribunals”.104 The
reasons for this are more than borne out by the
experience in the Oracle
litigation. As that experience demonstrates, while the principles might
be
settled, the task of establishing a relevant market as a matter of
evidence remains complex and often
controversial.
Market definition is also an exercise that, albeit intended (at least
theoretically) to be only a
precursor to the “real” analysis, can
prove to be determinative of the outcome of the proceeding.105 It
is
therefore an exercise that parties must get right. In effect, as shown by the
demise of the
government’s case in Oracle, this means getting
the industry evidence right. It may well be that
greater employment of
unilateral effects analysis and merger simulation studies,106 has the potential
to
diminish the significance of market definition.107 However, as things
presently stand (at least in
Australia, if not also the United States), the
prospects of such studies being employed regularly and
effectively in
contested court proceedings should not be overestimated.
104 Baxt R, “The Australian Concept of Market – How it Came to
Be” in Richardson M and Williams P (eds), The Law and
the
Market (1995) p 28.
105 See the comment by the United
States Supreme Court in Eastman Kodak Co v Image Technical Services [1992] USSC 73; 504
US 451 at 469
(1992): “market definition generally determines the
result of the case.”
106 Economic analysis regarding unilateral effects
is more amenable to quantification than is economic analysis of
coordinated
effects (collusion): see Shapiro, n 36 at 23.
107 The
likelihood of this occurring is discussed in Beaton-Wells C, “Mergers
without Markets? Unilateral Effects Analysis in
the United States and its
Prospects in Australia” (2006) (forthcoming).
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/journals/UMelbLRS/2005/2.html