Law change revives tap contract debate

The controversy over tap contracts was reignited following the ACCC’s approval of the acquisition of Carlton & United Breweries by Asahi last month.

At the time, chair of the Independent Brewers Association Peter Philip called it a “blow to the industry”.

In a damning verdict, Philip said the decision was “not very surprising given the ACCC’s weak historical performance on defending independent businesses,” and that the IBA would consider having another shot at getting tap contracts banned.

In 2017 a three-year investigation by the ACCC into tap contracts concluded with the competition watchdog ultimately declaring that they would not be considered anti-competitive, but that it would “continue to closely monitor conduct and developments in the market”.

However Associate Professor Rob Nicholls at the University of New South Wales’ School of Taxation and Business Law said that since 2017 the competition law landscape had changed considerably, meaning that whoever launches an investigation concerning the practice of tap contracts may well have a stronger case to take to the competition watchdog.

The tap contract landscape now

Back in 2017 when the original tap contract investigation concluded, misuse of market power under the section 46 provision was very difficult to prove.

However in November 2017, following the conclusion of the tap contracts investigation, the Competition and Consumer Act was amended to reflect the Harper Review.

“Two amendments which might change the approach of the ACCC to tap contracts were made,” Nicholls explained.

“The first one is in abuse of market power. In the past in order to get an action for abuse of market power, you had to show there was a purpose of substantially lessening competition in the market.

“Now, as a result of these amendments, all you have to do is show the effect or likely effect of substantially lessening competition.”

As such, it is no longer necessary to show that a company has taken advantage of its market power – that is, that it has consciously or knowingly undertaken practices which it knows will lessen competition, just that it has had this effect.

“There was no purpose in tap pricing in 2017 to substantially lessen competition in a market,” he said.

“They were just maximising revenue, that was the purpose, but the effect was likely to be a stifling of competition by an exclusion of craft beer supplies by virtue of the tap price. Now it’s changed.

“I’m not saying this is an argument that would work in court but it’s certainly a strong one, and one that big brewers would not want to see tested in the courts.”

The second major set of amendments relate to the ability and extent to which the brewers could be considered to have colluded.

“The other change that came in in 2017 is that in the past, proving cartel conduct, such as fixing prices or restricting supply has required a contract, arrangement or understanding.

“A nod and a wink wasn’t good enough. The ACCC could tap phones and do dawn raids, but you have to prove it with a contractual arrangement.”

In late 2017, Nicholls explained, the concerted practice offence came in.

“This means that where there is conduct that looks co-ordinated but you can’t find the contract arrangement or understanding, that is now also prohibited.”

This may imply that if CUB and Lion have substantially similar agreements but have no contractual agreement in place between them to ensure this, then they could still fall foul of anti-competition rules.

This would be similar to a concept in the US called conscious parallelism – where two competitors in an oligopoly engage in price-fixing even without an agreement.

“If both brewers have identical or very similar contract terms, then there would be an argument to say they are acting in concert in doing this,” Nicholls said.

“They would now have to show this was not something where they were acting in concert.”

The difficulty may be in proving the brewers had an awareness of each other’s pricing structures, although the new rules also mean that indirect exchange of information through a third party facilitator – such as a trade association or even a group of publicans discussing pricing – could count.

“It could be as simple as asking a venue: ‘Does Lion have the same prices as CUB?’ In which case the venue has acted as the mechanism for the two to act in concert,” Nicholls explained.

“It’s a bit more tenuous, but it’s something to explore.”

Price gouging and rebates

The original 2017 investigation stemmed from complaints from independent brewers about some of Lion and CUB’s contracts requiring venues to dedicate over 80 per cent of beer taps to their brands in exchange for rebates, infrastructure investment and refurbishment loans.

In a statement to Brews News when asked about the tap contracts and rebates, and what might be considered anti-competitive the ACCC said that businesses are generally free to determine their own sales promotions, including rebates.

“Rebates usually do not harm competition. In limited circumstances, a firm with a substantial degree of market power offering rebates can substantially lessen competition,” a representative responded via email.

“This is most likely to occur where the rebates significantly distort the competitive process, for example where retailers are unable to respond to changes in consumer demand for different goods or services.”

In guidelines on the misuse of market power, the ACCC used the example of companies who offer their retail customers volume rebates which are conditional on the retailer purchasing a large proportion of its requirements from them, which the ACCC said can have the effect of preventing retailers from purchasing from competing suppliers.

A recent court case in South Australia put the spotlight on tap contract conditions. The case saw pub owners ordered by the SA Supreme Court to pay $380,000 for concealing “lucrative” deals with the big brewers from its business partners.

While not an adjudication on tap contacts themselves, the judgement revealed the terms of the deal between the big brewers and the Windmill Hotel in Adelaide, which included a $160,000 rebate from CUB in a deal which obliged the pub to purchase a minimum volume of 186,000 litres of beer and cider during the term of the contract, which was signed in 2016.

The deal also imposed rules on the pub that meant that CUB draught beer and cider would be the ‘first pour beer’, CUB would receive a minimum of 83 per cent tap representation at the venue, that taps would be in “positions of prominence”, that the venue would not sell draught beer or cider from CUB competitor Lion, and that CUB would have exclusivity for its products at all functions and special events.

Similar agreements were signed with Asahi and Coopers, each for two taps in exchange for cash payments.

Nicholls explained that in particular volume-based rebates can be a major issue.

“Wholesale discounts, they can be anti-competitive conduct and indeed an abuse of market power if they substantially lessen competition,” he said.

“Typically when there are two major sources, each offers something very similar to the other and that means there is no substantial lessening because between the two of them they are the market.

“But if they are doing that and there are only two of them then the risk of that being a concerted practice is higher.

“Either they’re abusing their market power, or if they’re not abusing their market power, if they are working together and it’s not even a nod or a wink and they just happen to come up with the same answer, and the same wholesale discount, that looks like a concerted practice.”

There are a number of issues when it comes to tap contracts which may raise the hackles of the ACCC, he explained.

“If they say we supply to you or buy from you conditionally, based on you buying something from us, or buying only from us. That type of conditionality has the potential for being exclusive dealing.”

The second is the issue of volumetric-based rebates.

“If a venue that sells let’s say 500 litres of beer a night, and the average sales over the week are somewhere between 3,000 and 3,500 litres and the volumetric obligation [to get rebate from a supplier] is 3,000 litres, that’s effectively an exclusive dealing arrangement.”

This would prohibit even the other major brewer from supplying the venue if they wanted the rebate.

“The landlord will have to choose one or the other. That’s an exclusive deal,” Nicholls explained.

Another issue that we have seen across the Brews News newsdesk is allegations that publicans who receive rebates are not passing this on to customers, and are instead charging based on an inflated wholesale price given by the brewer on initial pre-rebate invoices.

But this would be difficult to argue to the ACCC, according to Nicholls.

“On the consumer side of things, in Australia we have no fancy price gouging laws, if they are going to set prices like that, that’s tough. That’s the market.

“Price gouging in and of itself is not prohibited, because there is an expectation that competitive prices would come through and competitive solutions would come out of it, such as deals and happy hours. That’s what you’d expect.”

Geographic dimension

Another issue to consider this time around is the geographic dimension of the alleged anti-competitive practices.

“In the past the ACCC has taken a very strict view on some forms of geographical markets associated with liquor,” Nicholls explained.

“You might argue that the concept of the local is still important, and thus it should be considered on a local basis, with geographical constraints on individual pubs within walking distance for instance, as unless people have a designated driver they are not going to be driving.

“Instead of saying the geographical dimension of the investigation and the market is Australia or state-based, you would actually say no this is much more local.”

The question then becomes what effect do these practices have on a hyperlocal area?

“If you’re starting with the approach that Lion offers a significantly higher discount in some areas based on volume,if the 3,000-litre a week discount is 15 per cent in regional New South Wales but 30 per cent in the Inner West or eastern suburbs, why is that happening?

“There are a number of craft breweries that only supply the Inner West because of the location of their breweries.

“If Lion is expecting the market for beer to be based on states, they will do their analysis based on that.

“Geographic dimension is only important if you say it’s important.”

Nicholls said that the process of getting an ACCC investigation rolling is an involved one, requiring an in-depth report.

“The strategy of making a complaint to the ACCC for more info you can provide to the commission to determine on the market the better.

“It will need to be a detailed, well-thought-through complaint and responsive to ACCC concerns,” he said.

The IBA said in a statement to its members following the ACCC’s approval of the Asahi-CUB deal that while the effects if COVID-19 on the industry and how to mitigate this are the major issues on the agenda right now, it would be looking at exploring tap contracts in further detail.

It said it would be asking consumers to back a campaign to “break open” tap contracts and the anti-competitive practices used by multinational mega-brewers Asahi and Lion which it said restrict consumer choice by locking out small independent breweries.

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