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Brief Counsel

Supreme Court sets seal on competition law

01 September 2010

The Supreme Court’s judgment today in The Commerce Commission v Telecom on Telecom’s 1999 dial-up internet package definitively confirms the test for liability under section 36 of the Commerce Act 1986.

This Brief Counsel draws the salient points from the decision.

Key points

The decision (available here):

  • unanimously dismissed the Commerce Commission’s final appeal against its previous losses in the High Court and Court of Appeal

  • comprehensively affirmed the long-standing test for breach of s36 of the Commerce Act, and

  • reinforced the essential commerciality of Telecom’s introduction of the 0867 package in 1999 to close down a multi-million dollar arbitrage opportunity exploited by other carriers and ISPs, risking severe congestion on Telecom’s network.

The statute

Section 36 of the Commerce Act prohibits use of market power for anti-competitive purposes.  The original statutory threshold, which applied to the conduct at issue in this case, prohibited a firm using its dominant position.  In 2001, to align with the Australian formulation, s36 was amended to prohibit a firm from taking advantage of its substantial market power. 

The legal test 

The legal test was established by the Privy Council in Telecom v Clear (1994):

“it cannot be said that a person in a dominant market position ‘uses’ that position for the purposes of s36 [if] he acts in a way which a person not in a dominant position but otherwise in the same position would have acted”.

In the face of considerable academic opposition and some judicial ambivalence as to the test’s relevance and utility, the Privy Council affirmed the position in Commerce Commission v Carter Holt Harvey (2004), saying “if a dominant firm is acting as a non-dominant firm otherwise in the same position would have acted in a market which was competitive it cannot be said to be using its dominance…”.  That test – dubbed the ‘counterfactual test’ – the Privy Council said was both “legitimate and necessary”.

The appeal

On its appeal to the Supreme Court, the Commission contended for alternative approaches to determining s36 liability, not requiring any comparison between actual and hypothetical market conduct, any of which could be deployed in circumstances to establish s36 breach.   The Commission, supported by the Attorney General in this respect, argued that this multiplicity of approaches was consistent with case law on the comparable Australian provision, and that ‘harmonisation’ with the Australian position was a desirable outcome.The Supreme Court rejected both arguments:

"It is important when addressing the statutory concept of use of market power to take an approach which gives firms and their advisers a reasonable basis for predicting in advance whether their proposed conduct falls foul of s36 and risks a substantial financial penalty.  Having a range of tests, all potentially applying, depending on the circumstances and whether a comparative approach can ‘cogently’ be adopted would not assist predictability of outcome.  Nor is such an approach consistent with the Australian cases when they are appropriately analysed".

The Supreme Court confirmed that, under either the old or the new statutory formulation:

"[I]f the dominant firm would, as a matter of commercial judgment, have acted in the same way in a hypothetically competitive market, it cannot logically be said that its dominance has given it the advantage that is implied in the concepts of using or taking advantage of dominance or a substantial degree of market power".

Echoing its comment on the desirability of predictable outcomes, the Supreme Court also emphasised that commercial rationality is key to interpretation of s36.  The assessment, the Court said, is “essentially a commercial judgment”, to be “made objectively”, and “informed by all those factors that would influence rational business people”:

"… 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".

The result

Applying that test to the facts of the case, the Supreme Court found that the Commission failed to establish that Telecom would have acted otherwise in the hypothetically competitive market.  The Commission’s arguments to the contrary were “not grounded in any evidence given in the High Court” and constituted an “unsatisfactory… attempt to remake its case on what is really a speculative basis”

The Supreme Court concluded:

“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”.

Chapman Tripp partners, Jack Hodder SC and Pheroze Jagose, acted for Telecom throughout in this matter over the past decade, at trial and on first and final appeals.  Chapman Tripp also acted for Telecom throughout the original proceeding that gave rise to the Privy Council’s judgment in Telecom v Clear.

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