Refusals to License in Australia and New Zealand: Parsing the Hints and Silences
The Australian and New Zealand competition regimes make an interesting case study in that they have achieved a high degree of convergence as to the content and structure of their substantive law concerning unilateral abuses of market power,1 without having to set up anything very much in the way of joint enforcement mechanisms to keep that convergence on track.2 This is not simply a matter of harmonised legislative structures, although these are important, but also an awareness by judges on both sides of the Tasman Sea (an awareness perhaps felt more strongly on the New Zealand side) of the need to keep each other’s case law well in mind when giving meaning to what are by the standards of section 2 of the Sherman Act and Article 102 TFEU relatively detailed legislative provisions. There is a reverse side to the convergence coin, however, and that is this: where there are differences in the wording or gaps in the coverage between the two statutes, these can take on more significance than would perhaps be the case were the two regimes more divergent overall. Whether this holds true in relation to refusals to license remains to be seen, there being as yet no case speaking directly to the subject in either jurisdiction. Parsing the near judicial silence, a silence broken only occasionally and usually with wider objectives in mind, is what this chapter seeks to do.
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 –
(2) A person that has a substantial degree of power in a market must not take advantage of that power for the purpose of –
(a) restricting the entry of a person into that or any other market; or
(b) preventing or deterring a person from engaging in competitive conduct in that or any other market; or
(c) eliminating a person from that or any other market.
Its Australian counterpart, section 46 of the Competition and Consumer Act 2010 (Aust), is longer and more detailed (in keeping with Australian traditions of legislative drafting) but operates to similar effect.5
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?
A great deal of inconclusive debate then ensued (both in the cases and the commentary13) as to whether the inductive reasoning that the counterfactual test appeared to mandate also required the court to establish that the firm with market power could engage in the same allegedly anti-competitive conduct without that market power, or whether the firm would do so. This debate14 was prompted by the use of ‘would’ by two of the four majority judges15 in QWI, and the taking of a ‘could’ approach by the other two.16
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 four members of [the QWI Court] reasoned by inference from the premise that BHP could not have refused supply to QWI in a competitive market to the conclusion that its behaviour was made possible by the absence of competitive constraint (ie by market power). The source of the premise is not entirely clear. It seems to involve unstated assumptions about the nature and structure of the competitive market. There is nothing in s 46 that assists in that regard. An absence of a substantial degree of market power does not mean the presence of an economist’s theoretical model of perfect competition. It only requires a sufficient level of competition to deny a substantial degree of power to any competitor in the market. To ask how a firm would behave if it lacked a substantial degree of power in a market, for the purpose of making a judgment as to whether it is taking advantage of its market power, involves a process of economic analysis which, if it can be undertaken with sufficient cogency, is consistent with the purpose of s 46. But the cogency of the analysis may depend upon the assumptions that are thought to be required by s 46.
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?
The High Court has not directly addressed the question whether being able to offer a legitimate business reason for its conduct may absolve a firm with substantial market power from liability under section 46. Perhaps the closest it came to this was in Melway.31 Melway was the owner of copyright in street directories for Melbourne and Sydney, and had (in the days before electronic global positioning systems took hold) 80–90 per cent of the Melbourne street directory market and about 10 per cent of the Sydney street directory market. It had for many years operated a selective and rigid distribution system for its street directories in both cities. This entailed subdividing the retail market into segments and allocating exclusive wholesalers to each segment. Melway believed its system was efficient and maximised sales, particularly in Melbourne where it had published 26 editions at the time of trial. Melway terminated its arrangement in Melbourne with one wholesaler distributor (Robert Hicks), and refused to meet a large order from Hicks for 20–50,000 street directories because it believed Hicks intended to bypass Melway’s established distribution system and sell them to any retailer it wanted. What appeared to have impressed the High Court that the refusal carried no liability under section 46 was the fact that Melway had also established the same distribution system in Sydney where it had relatively very little market power. The High Court agreed with Merkel J at first instance, who pointed out that what had been characterised, by way of convenient shorthand, as a refusal to supply might equally well have been characterised as a termination of a distributorship. The Court also had no quarrel with Merkel J’s finding (here echoing Colgate) that Melway was entitled to maintain its distribution system without contravention of the competition statute, and that it was not the purpose of section 46 to dictate to Melway how to choose its distributors.32
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.
In the result, the Court unanimously not only found (in upholding the decision of the Court of Appeal39) that the counterfactual test is the sole test for ‘taking advantage’, but renamed it the ‘comparative exercise’40 because it involves making a comparison between the actual market and a hypothetical, workably competitive market. Ironically, as a result of its purported drawing together of all the threads in its harmonisation exercise, the Supreme Court has now put New Zealand out of alignment with Australia which, as seen above, remains flexible, permitting a range of approaches in determining misuse.
(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 0867 case concerned the introduction by Telecom during 1999 of a dial-up Internet service known as ‘0867’. Prior to this, in 1996, Clear Communications and Telecom had entered into an agreement about interconnection and termination charges whereby when a customer of one provider called the other provider’s network, the originating network paid a per minute charge to the terminating network. Clear ended up paying Telecom more, largely because most voice calls terminated on Telecom’s much larger network. The balance of payments changed when the use of dial-up Internet became common, with Telecom customers making long calls to Internet Service Providers (ISPs). (It should be noted here that Telecom was bound to provide all residential customers with local calls that were free no matter how long they lasted, as part of the arrangement it had struck with the New Zealand Government upon privatisation.) Telecom then had to pay higher termination charges to Clear when its own residential customers dialled an ISP on Clear’s network. In order to take advantage of this new turn of events, Clear attracted ISPs to its network by charging minimal or low fees. It also agreed with the ISPs it hosted to share termination charges received from Telecom. Telecom then introduced the 0867 service to encourage residential customers and ISPs on Clear’s network to migrate to Telecom’s. Those residential customers who used the 0867 prefix were not charged at all for their calls (no matter how many or how long), but if their ISP was Clear’s ISP and not Telecom’s, they were charged two cents per minute beyond 10 hours of Internet use per month.
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.
In disallowing the appeal, the Supreme Court did several significant things: First, it affirmed both Privy Council cases, saying it was necessary to apply the counterfactual test as the sole test, which it preferred to refer to as the ‘comparative exercise’ because, in its words, ‘the simpler idea of comparing actual with hypothetical is a more straightforward and illuminating description of the process’.44 The Court then applied the counterfactual test itself, finding that the Commission had failed to show that in a hypothetical workably competitive market, a hypothetical company X would (for fear of losing retail customers) not have introduced an 0867 service. It pointed out that the advent of dial-up Internet had made the termination charges regime under the Clear/Telecom 1996 interconnection agreement unsustainable for a firm on the wrong side of the asymmetry, and that any firm acting competitively, whether dominant or not, would have taken steps to mitigate the loss by introducing a scheme analogous to the 0867 package rather than continue to incur substantial losses.45 Secondly, the Supreme Court analysed all the principal Australian High Court authorities and their alternate tests, and pointed out that the differences in approach were more apparent than real.46 All boiled down essentially to the need to conduct a comparative exercise. Lastly, it adopted a very cautious approach to the input of economic analysis in section 36 cases, saying47:
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
Telecom Corporation of New Zealand Limited v Clear Communications Limited48 (described by Professor Baumol, an economic expert in the case, as the ‘first modern litigation on the pricing of interconnection among rival local telephone companies’) was the principal authority on section 36(2) before the 0867 case and met with considerable criticism in the commentary.49 Clear had wanted to enter and compete with the dominant incumbent Telecom in the market for the provision of telecommunications services for businesses in the three main central business districts in New Zealand. To do this it needed access to the nationwide fixed, copper wire infrastructure owned by Telecom. The fact that it was wholly impractical and uneconomic to duplicate this network, and that it therefore constituted a bottleneck facility (in the days before satellite and broadband communication technologies became commonplace), was not seriously contested.
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.)