Refusals to License in Australia and New Zealand: Parsing the Hints and Silences

Section 36 of New Zealand’s Commerce Act 1986 and section 46 of Australia’s Competition and Consumer Act 2010³ are the key provisions in each country’s competition statutes prohibiting the unilateral exercise of market power. They may be invoked by firms seeking access to a product or process dependent on an intellectual property right, although their application is far broader. In 2001 New Zealand aligned its threshold for market power with that of Australia, and now both countries prohibit a firm taking advantage of a substantial degree of power in a market for a prohibited purpose. Before this harmonisation took place, New Zealand’s threshold was the higher one of dominance, as in Article 102 TFEU.⁴ Cases were still being adjudicated on the basis of this higher threshold as late as 2010.

Section 36(2) of the Commerce Act 1986 (NZ) gives the flavour of the two provisions, and its relevant post-2001 wording is set out below:

36. Taking advantage of market power –

The New Zealand section 36B, introduced into the statute in 2001, provides that the existence of any of the purposes specified in section 36 may be inferred from the conduct of any relevant person or from any other relevant circumstances. It too has a close Australian counterpart.⁶

The statutory wording makes two things clear. First, the possibility of leveraging has been given the statutory nod by the use of the phrase ‘that or any other market’. Secondly, to establish liability, regulators and private plaintiffs must be able to show that:

a) the defendant has the required degree of market power; and

b) the defendant has taken, or is taking, advantage of that market power; and

c) the defendant, in taking advantage of its market power, has carried out (or is carrying out) at least one of the three proscribed purposes.

The key to interpreting section 36 and its Australian counterpart is the presence or absence of a causal link between each of the three elements, usefully dubbed by one commentator⁷ the ‘threshold issue’, the ‘connection issue’ and the ‘purpose issue’ respectively. Missing from these provisions is any illustrative list of forms of abuse in the manner of Article 102 TFEU. Practices such as selective margin squeezing or excessive pricing cannot therefore be erected into separate heads of liability. Nor does the legislative scheme require that a distinction be made between constructive and actual refusals to deal.

In determining whether a firm has taken, or is taking, advantage of its market power for a proscribed purpose under section 46, the High Court of Australia has adopted a variety of approaches to linking the three limbs of the section. It is important to understand, however, that in Australian judicial eyes, these are merely alternative methodologies for bringing about the same result. All may be resorted to simultaneously, and sometimes are. These are not distinctive legal rules competing for supremacy.

The first refusal to deal case under section 46 to reach the High Court of Australia was Queensland Wire Industries v The Broken Hill Pty Co Limited.⁸ The Broken Hill Company (BHP) enjoyed substantial market power, not only itself producing around 97 per cent of steel in Australia, but also supplying about 85 per cent of the country’s steel and steel products.⁹ One of its products was Y-bar, used in the construction of the rurally ubiquitous star-picket fence. The company sold Y-bar in Australia only to its retailer/subsidiary AWI. The pivotal issue of whether BHP had misused its undisputed market power for a proscribed purpose arose only after Queensland Wire Industries (QWI), an aspiring rival retailer of rural fence posts, asked BHP to supply it with Y-bar so it could make and sell its own posts and was refused, at first outright and then constructively, when BHP offered Y-bar at an excessively high price.

In finding BHP’s refusal had breached section 46, the majority of the High Court did not require it to be shown that BHP had had any hostile intent before it could be said to have taken advantage of its market power.¹⁰ Instead, it took the approach that a defendant may not be held to have taken advantage of its position if it would have acted (or not acted) in the same way if the market had been competitive.¹¹ This hypothetical question, a form of economic modelling that posits another parallel reality, subsequently became known as the ‘counterfactual test’. It was more clearly articulated by Lockhart J in Dowling v Dalgety Australia Ltd¹²:

The central determinative question to ask is: has the corporation exercised a right that it would be highly unlikely to exercise or could not afford for commercial reasons to exercise if the corporation was operating in a competitive market?

Later, the majority of the High Court in Melway Publishing Pty Limited v Robert Hicks Limited¹⁷ also used both terms indiscriminately, but again without expressly preferring one over the other. Neither did any of the judges in Melway refer to the counterfactual test by name to describe what they were doing. It was not until the High Court decision in Rural Press Ltd v Australian Competition and Consumer Commission¹⁸ that the majority of the High Court articulated a preference for could, ostensibly in line with the approach supposedly taken in Melway. Thereafter, whenever the counterfactual test has been applied by the High Court (again not necessarily by that name), the ‘could’ approach appears to have gained the upper hand.¹⁹ Certainly could sits better with the way in which most economists would frame the issue, although it has to be said that any difference in outcomes does not appear to have been envisaged by judges using the alternative formulation. What is more important than this inconclusive (and possibly unintended) verbal duelling is that Australian courts have always made it plain that the counterfactual test is not the sole, nor even always the most appropriate, test to be applied in section 46 cases. As Toohey J put his concerns about the counterfactual test in Melway²⁰ (and tellingly, using both could and would):

The counterfactual test is the most widely applied of all the methodologies described in this section. This is scarcely surprising, as it is both simple to state and, on the face of it, offers the strongest causal connection between power, use and purpose. As with any hypothetical, however, the need to conjure up imagined scenarios which may never happen (and which perhaps can never happen) can make outcomes anything but predictable. It can also lead to the sterile battle of the models feared by Toohey J in Melway. This may explain why, when applying the test, judges faced with the same set of facts have managed to come to very different conclusions.²¹

(b) Material facilitation

An alternative test for ‘taking advantage’ of market power is that of material facilitation. The reasoning behind it is perhaps best described by Toohey J in Melway.²² Thus:

[I]n a given case, it may be proper to conclude that a firm is taking advantage of market power where it does something that is materially facilitated by the existence of the power, even though it may not have been absolutely impossible without the power.

In other words, section 46 would be contravened if a corporation’s market power had made it easier for the corporation to act for a proscribed purpose than otherwise would be the case. The ‘material facilitation’ test was subsequently applied by the High Court in Rural Press,²³ and by the Full Federal Court in Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd.²⁴ What the latter case demonstrates quite clearly, however, is that material facilitation is just another way of thinking about the problem, not a test vying for first place over the counterfactual test. Thus while the Full Federal Court was able to say that what the defendant Safeway had done was ‘not absolutely impossible’ without substantial market power, it found that Safeway would not have engaged in the impugned conduct had it not had that power, because it would not have anticipated being able to achieve its anti-competitive purpose in those imagined circumstances.²⁵

The so-called ‘purpose test’, first propounded by Deane J in QWI, is another option available to regulators and judges. It derives its name from the suggestion by Deane J that taking advantage for section 46 purposes could be inferred from a defendant corporation’s substantial market power and purpose.²⁶ In essence the test asks whether the purpose of the allegedly anti-competitive conduct could have been achieved only by virtue of the defendant’s substantial market power. It provides the required causal nexus between the conduct and substantial market power but approaches the issue in reverse. It is arguably a more appropriate test than the counterfactual test in cases where conduct that might be of no concern—or even pro-competitive—if engaged in in a competitive market may be anti-competitive in the market as it is.²⁷ The purpose test is not merely speculative. It was used as a stand-alone test by Finkelstein J in the Full Federal Court decision in Northern Territory Power Generation Pty Ltd v Power and Water Authority,²⁸ its application, separate from the counterfactual test, was subsequently approved of as ‘sound’ by the High Court in that case.²⁹

The purpose test also comports with the High Court’s observation in Melway that sometimes there is no need to propose a hypothetical market and carry out a counterfactual analysis because courts can sometimes find a taking of advantage from direct observation of conduct.³⁰

(d) Legitimate business purpose: stand alone test or exculpatory factor?

That having a legitimate business purpose may have an exculpatory effect had already been recognised by Heerey J in his dissent in the Full Federal Court decision in Melway.³³ He found Melway’s reasons for strict adherence to its selective distribution system to be pro-competitive and legitimate,³⁴ and observed that if the firm had acted to conduct its business more efficiently, there would be no taking advantage of market power. In another lower court decision, Australian Competition and Consumer Commission v Boral Ltd,³⁵ Heerey J also took pains to point out that having a legitimate business reason for a practice may play a part in the determination of misuse disputes. As he put it³⁶:

If the impugned conduct has a business rationale, that is a factor pointing against any finding that conduct constitutes a taking advantage of market power. If a firm with no substantial degree of market power would engage in certain conduct as a matter of commercial judgment, it would ordinarily follow that a firm with market power which engages in the same conduct is not taking advantage of its power.

That said, what still remains unclear is whether having a legitimate business reason for conduct can suffice as a defence on its own or is simply one, albeit important, factor in applying the counterfactual test.³⁷

In the face of the evolving smorgasbord of judicial tests, the Australian legislature sought to take matters in hand in 2008 by adding to the misuse provision a non-exhaustive range of tests that courts might legitimately use in determining whether a corporation has taken advantage of its substantial degree of power in a market. Section 46(6A) states that courts may, but need not, have regard to any or all of the following factors:

a) whether the conduct was materially facilitated by its substantial degree of power in the market;

b) whether it engaged in the conduct in reliance on its substantial degree of power in the market;

c) whether it is likely it would have engaged in the conduct if it did not have a substantial degree of power in the market;

d) whether the conduct is otherwise related to its substantial degree of power in the market.

Conspicuous by its absence is any reference to how courts may treat conduct which might be considered to have a legitimate business rationale. However, since the legislators have backed would over could as the suggested mode of inductive reasoning in any counterfactual analysis the court may choose to carry out, this preference for the narrower and less inclusive approach would arguably see courts able to take into consideration what might be a rational business practice.

While section 46(6A) tells us nothing particularly new about the content of the tests (apart from the legislative preference for would over could), it does make it clear that all the tests it propounds are part of the armoury of the courts. This is a matter of some significance when we come to the way in which the Australian section 46 jurisprudence has been understood by New Zealand judges, there being no equivalent of section 46(6A) in the latter jurisdiction.

In its recent decision Commerce Commission v Telecom Corporation of New Zealand Limited (‘0867’),³⁸ the Supreme Court endeavoured to synthesise the principal Australian and New Zealand authorities on misuse of market power. The Court considered it important that the way in which issue is approached be broadly the same on both sides of the Tasman Sea, since under agreements between the two countries, competition law in Australia and New Zealand and associated enforcement provisions are increasingly being framed in a common way to address anti-competitive practices affecting trans-Tasman trade.

(a) The 0867 case

Since the events occurred before the amendment to section 36 in 2001, the case was dealt with according to the language of the section at that time, which then referred to use of a dominant position rather than, as now, taking advantage of a substantial degree of market power. However, nothing in the case turned on that difference as far as the threshold of market power was concerned, since the respondent, Telecom (as the owner, after privatisation in 1989, of the nationwide copper-based wire network to which all other would-be providers of fixed or mobile telephone services required access), could easily meet both thresholds. As regards the change from ‘use’ to ‘taking advantage’, the Court from the outset treated the two expressions as essentially involving the same inquiry.

The primary issue before the Supreme Court was whether Telecom had used an assumed dominant position (whether this was in the retail or wholesale market or both was not seen by the Court as requiring close analysis) for one of the proscribed purposes under section 36(2). The Court of Appeal had found that it had, by applying the counterfactual test that it considered to have been endorsed as ‘legitimate and necessary’ in section 36(2) cases by two decisions of the Judicial Committee of the Privy Council⁴¹: Telecom Corporation of New Zealand Limited v Clear Communications Limited⁴² and Carter Holt Harvey Building Products Group Limited v Commerce Commission.⁴³ On appeal, the Commerce Commission, New Zealand’s competition regulator, argued the counterfactual test did not have to be the sole test for misuse and that it was useful only when a court could cogently apply it. In support of its claim, it argued that Australian authorities had used other tests, such as Deane J’s purpose test in QWI and the material facilitation test in Melway, and that section 36(2) was flexible enough to accommodate these.

Economic analysis may be helpful in constructing the hypothetically competitive market and to point to those factors which would influence the firm in that market. But it must always be remembered that the ‘use’ question is a practical one, concerned with what the firm in question would or would not have done in the hypothetically competitive market. As the question is one of rational commercial judgment, the test should be what the otherwise dominant firm would, rather than could, do in the hypothetical market.

While a degree of caution when dealing with the deductive face of economics is, as we argue in chapter two, pure prudence, the Supreme Court’s dose of cold water sits oddly with its preference for the counterfactual test. Once the economics is removed from the counterfactual test, what remains is only a judicial stab in the dark as to the dominant firm’s likely response in a competitive world. If a less deferential attitude to economic input was what the Supreme Court was after, almost any of the other tests used by the Australian courts would have served them better.

(b) Before 0867

When the State-owned enterprise Telecom Corporation of New Zealand was privatised in 1989 there were three significant omissions:

a) No provision was made for any statutory rights to interconnection.

b) No legislative guidelines were given as to the terms and conditions on which the company owning the network was to give access to another company who was not only a consumer but a potential competitor.

c) No specialist, independent, regulatory body was set up (such as the Australian AUSTEL or British OFTEL) to set the standard interconnection price and the conditions of supply by the incumbent.

Indeed, the Privy Council in Telecom v Clear took the opportunity to deliver a very thinly-veiled criticism of the New Zealand Government’s ‘light handed’ regulatory regime, observing that it had left the dominant player Telecom and would-be new entrant competitors free to negotiate ‘in a fog’ all the terms and conditions of access to the network.

Clear alleged that the conditions imposed by Telecom for interconnection were so unfavourable as to amount to misuse of market power. The connection fees Telecom wanted to charge its would-be competitor were based on a pricing rule referred to as the ‘efficient components pricing’ rule⁵⁰ (or sometimes the ‘Baumol-Willig’ rule, after Professor Baumol, one of the US-based economists whom Telecom engaged in the case). According to the pricing mechanism arrived at by Telecom’s expert witnesses, if Telecom, in a fully contestable market, sold to a competitor the facilities necessary to produce a service that Telecom could otherwise provide, Telecom would not be abusing its dominant market position if it demanded a price equal to the revenue it would have received had it provided those facilities itself. That is to say, Telecom was entitled to its lost ‘opportunity costs’ assessed on the basis of regular reviews. (Telecom had conceded that necessary periodic adjustments would have to be made in the assessment of those costs.)