Commerce Commission seeks leave to appeal 0867 case to Supreme Court

The Commerce Commission will seek leave to appeal to the Supreme Court in its case against Telecom Corporation of New Zealand Limited (Telecom) over Telecom’s introduction of the 0867 dial-up prefix in 1999.

The case relates to section 36 of the Commerce Act 1986. Section 36 is aimed at preventing firms with market power from taking advantage of that power to deter competition.

At issue is the application of the so-called ‘counterfactual test’ that has been developed by the Privy Council as the sole test for determining whether conduct by a dominant player in the market is competition on the merits, or an unlawful use of market power. The law as currently formulated creates a significant degree of complexity and uncertainty for the Commission and the business community over a key aspect of applying section 36. The New Zealand law now deviates from the law developed under the parallel Australian provision, section 46 of the Trade Practices Act. In Australia the counterfactual test is not the sole test for determining the monopolisation law.

The Commission alleged Telecom contravened section 36 when it introduced its 0867 package in 1999. In April 2008, applying the counterfactual test, the High Court found that Telecom had not used its dominant position in the market for fixed line retail telephone services to residential customers, nor had it had an anti-competitive purpose, when it introduced the 0867 package, and so did not contravene section 36. The Court of Appeal last month rejected the Commission’s appeal in this case, again applying the counterfactual test.

“The Commerce Commission is charged with promoting competition. Yet applying the law, developed in 2004 by the Privy Council on a predatory pricing case, to every type of unilateral conduct in the market poses real difficulties. The law as it currently stands is affecting the Commission’s ability to fulfil its role in enforcing section 36,” said the Commission’s General Counsel Peter Taylor.

“This case represents the first opportunity for the Supreme Court to consider whether the counterfactual test as formulated by the Privy Council should continue to be the sole test for ‘use’, or whether the test needs to be brought into better alignment with Australian law. The case presents a very good opportunity to determine the future direction of this important area, and for the courts to decide whether the response to unilateral conduct on both sides of the Tasman can continue to move forward in parallel, as the law makers originally intended,” said Mr Taylor.

“In the Commission’s view this is an appropriate opportunity for the framework for the application of section 36 to be reconsidered, and for the facts of the case to be reassessed, in light of the counterfactual and any other test that the Supreme Court may consider applies to section 36,”
said Mr Taylor.

The Commission will file its application to the Supreme Court today.

Background
Counterfactual. The counterfactual test is a form of analysis developed by the courts in Australia and New Zealand. The purpose of the counterfactual is to try to determine whether a business with market power has used or taken advantage of that power to harm competitors. The principle behind it is to distinguish between ordinary competitive behaviour and use of market power. Businesses with market power must be able to compete robustly with competitors so that competitive behaviour is not chilled.

The counterfactual is an analysis that tries to create a hypothetical competitive scenario replicating to a reasonable degree the facts of the market circumstances under review. The intent is to determine whether the dominant market player would have done what it did if the market were competitive. If it would have behaved in the same way in the hypothetical competitive market, then it is inferred that what it did was not the use of a dominant position.

In Australia the courts have used the counterfactual scenario as one of a range of analytical tools, and have applied the test in a relatively straightforward way making robust assumptions. In New Zealand the counterfactual requires the hypothetical to replicate all the current circumstances save for the market power. This can prove to be very difficult to do, and is often a speculative and uncertain exercise, with significant dispute likely over the details of the hypothetical competitive scenario.

The Privy Council. The Court of Appeal applied the counterfactual test formulated by the Privy Council in Telecom Corporation of New Zealand Ltd v Clear Communications Ltd [1995] 1 NZLR 385, and as confirmed by the Privy Council in Carter Holt Harvey Building Products Group Ltd v Commerce Commission [2006] 1 NZLR 145. The Privy Council held that the counterfactual test – namely whether a hypothetical firm not in a dominant position but otherwise in the same circumstances would have acted as the dominant firm did – is the ‘appropriate and necessary’ test of whether a firm has ‘used’ its dominant position in breach of section 36 of the Commerce Act 1986. The Court of Appeal in 0867 considered that it was bound by the Privy Council decision that the counterfactual test was the sole determinant of the key issue of use of dominance (or of substantial market power), and that any change in the law was for the Supreme Court to make.

Relevant Australian law. The Australian equivalent of section 36 is section 46 of the Trade Practices Act 1974. Section 46 is written in very similar terms to section 36. Australia amended its provision recently to specify the types of approach that can be used to determine whether a company has used its market power. The amendment is considered to be largely a codification of the Australian case law. A counterfactual analysis is not the sole test used. Instead the Australian courts may look at whether the company’s market power materially facilitated the conduct, whether the company relied on its market power, whether the company would have engaged in the conduct if it did not have market power, and/or whether the conduct is otherwise related to the company’s market power.

In 2001 the government amended section 36 to align it more with the Australian provisions and changed the reference of use of dominance to taking advantage of substantial market power. Courts in New Zealand and Australia have taken the view that parallel tests apply in determining whether market power has been used or taken advantage of.

Key dates
18 June 1999 - Commission opens its investigation
31 July 2000 - Proceedings filed
20 August 2007 - High Court trial
18 April 2008 - High Court decision
23 May 2008 - Appeal to Court of Appeal lodged by Commission
23 March 2009 - Court of Appeal hearing
4 August 2009 - Court of Appeal decision