Telecom Corporation of New Zealand Ltd v Commerce Commission [2001] NZCA 311; (2001) 10 TCLR 182 (17 September 2001)

Last Updated: 12 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA281/00

	BETWEEN	TELECOM CORPORATION OF NEW ZEALAND LIMITED
		First Appellant

	AND	TELECOM NEW ZEALAND LIMITED
		Second Appellant

	AND	THE COMMERCE COMMISSION
		Respondent

Hearing:	27 August 2001
Coram:	Gault J Blanchard J McGrath J
Appearances:	J E Hodder and P R Jagose for Appellants B W F Brown QC and P H Rainsford for Respondent
Judgment:	17 September 2001

JUDGMENT OF THE COURT DELIVERED BY GAULT J

[1] Having been unsuccessful in the High Court, the appellants (together referred to as Telecom) have appealed to this Court seeking further particulars of the Commerce Commission’s statement of claim alleging breaches of s36 Commerce Act 1986 which reads:

Use of dominant position in a market - (1) No person who has a dominant position in a market shall use that position for the purpose of –

(a) Restricting the entry of any person into that or any other market; or
(b) Preventing or deterring any person from engaging in competitive conduct in that or in any other market; or
(c) Eliminating any person from that or any other market.
[2] The Commission’s allegations are that Telecom is in a dominant position in certain markets for retail switched telecommunication services and in a national wholesale market for originating and terminating telecommunications network access services. It is alleged that Telecom has used that dominance for the proscribed purposes of preventing or deterring competitive conduct in those and other markets.
[3] The alleged dominance is said to arise from ten factors that are particularised including ownership of its public switched telecommunications network (PSTN) with which other providers of telecommunications services must and do interconnect.
[4] The conduct which the Commission alleges contravened s36 involved the introduction in 1999 of a package of measures (the 0867 package) affecting access by Telecom residential customers to the Internet through Internet Service Providers (ISPs) that acquire telecommunications services from suppliers (carriers) other than Telecom. The 0867 package is alleged to comprise the three elements:

Segregated numbering for data calls to ISPs utilising the 0867 number range.

A new charging regime for residential Internet users whereby as from 1 November 1999 an Internet Dial-up Charge would apply to telephone calls to access the Internet made by Telecom residential customers to an ISP at a local 7 digit number. The Internet Dial-up Charge, which was 2 cents per minute (GST inclusive) after the first 10 hours per month of Internet calling, did not apply to 0867 numbers or to 0873 numbers (the prefix for numbers used by Xtra and some other ISP’s connected to Telecom’s PSTN).

No payments for terminating access services would be made by Telecom in respect of telephone calls to 0867 numbers.

[5] Counsel provided some explanation of the significance of this “package” and the pleaded reason for its formulation and introduction (the Internet Problem). We have no doubt that the explanations we were given by counsel are common knowledge for the parties.
[6] Telecom has as its customers a high proportion of all telephone subscribers. By its interconnection agreements with other carriers offering telecommunications services, Telecom receives termination fees for calls terminating with its customers and pays termination fees to other carriers in respect of calls terminating with their customers. These fees are dependent on both the number and duration of calls. Because other carriers provide telephone services to some ISPs, and Telecom subscribers chose to use those ISPs for Internet access, as Internet use grew so did Telecom’s liability for termination fees. It is said some competing carriers were sharing the termination fees with ISPs.
[7] Telecom therefore offered to its subscribers an alternative route for their connections to ISPs served by competitive carriers. This involved customers (through their computers) dialling an 0867 access code. Such calls were connected to the ISPs through the relevant carriers via a network within the PSTN but claimed to be outside the scope of the interconnection agreements providing for termination fees. As an incentive to its customers to use this alternative access, Telecom introduced a charge to those of its customers using the previous route.
[8] This conduct is alleged to prevent or deter competitive conduct by those other competing telecommunications service providers and the ISPs.
[9] The revised request for particulars is detailed in an attachment to Mr Hodder’s written submissions in this Court as follows:

1. What characteristics or qualities of Telecom’s alleged dominance in each of the markets pleaded in paragraphs 24, 26 and 27 of the statement of claim, enabled it to introduce each of the elements of the 0867 package pleaded in paragraph 52?
2. What competitive conduct by ISPs, and by competing carriers, in the markets pleaded in paragraphs 56, 60 and 63 of the statement of claim, was or was likely or was intended to be prevented and/or deterred by Telecom’s introduction of the 0867 package?

100. In what way would a party not in a dominant position, but otherwise in the same circumstances as Telecom, have acted in relation to the matters pleaded in paragraphs 35-50 of the statement of claim?

[10] Mr Brown QC for the Commission complained that these differ from the requests dealt with by Wild J in his judgment in the High Court delivered on 21 November 2000. They were modified still further in the course of oral argument in this Court. The differences have not proved material on the views we take.
[11] Telecom relies on the judgment of the Privy Council in Telecom Corporation of New Zealand Ltd v Clear Communications Ltd [1995] 1 NZLR 385 which recognised the entitlement of firms in a dominant position in a market to compete vigorously, and highlighted the distinction between lawful and unlawful conduct by such a firm by reference to the requirement that the dominant position must be used for the proscribed purpose. Whether dominance is used was said to be tested by whether a non-dominant firm, but otherwise in the same circumstances, would have engaged in the same conduct. Those propositions are said to justify the first and third particulars sought (paras A and C).
[12] The third request (para C) seeks directly to have this Court depart from the views expressed by Master Venning in Commerce Commission v Southpower Ltd (1997) 8 TCLR 6, 15.
[13] The particulars sought in para B relate to the alleged proscribed purpose or purposes. The Commission already has given further particulars of the forms of competitive conduct from which it is alleged the competing carriers and ISPs would be prevented or deterred. It has said:

Telecom’s use of each of its dominant positions was intended to prevent or deter each of the competing carriers and the ISPs referred to in paragraphs 56, 60 and 64 from engaging in competitive conduct in each of the relevant impact markets by constraining their ability to compete in those markets by reducing or extinguishing the funds which would otherwise have been available to them by virtue of the termination revenue payable to Telecom pursuant to the various interconnection agreements.

[14] Telecom contends that this is insufficient and maintains that the particular competitive conduct to be prevented or deterred must be specified for each identified market.
[15] Although addressing somewhat different requests, Wild J’s views on the general entitlement to further particulars in the areas sought are clear enough. With reference to the particulars of how a party otherwise in Telecom’s circumstances but not dominant would have acted he said:

I do not consider that the Commission is required to plead how an hypothetical person, not in a dominant position but otherwise in the same circumstances as Telecom, would have acted. That is the test for application at trial, not a matter of pleading. That was Master Venning’s view in Commerce Commission v Southpower Ltd (1997) 8 TCLR 6 at 14 and 17, and I agree with him. Mr Hodder submitted that Telecom wanted to know, beyond the mere introduction of 0867, why and how it had infringed s36. He said that Telecom was entitled to have a pleaded explanation of why it was on the wrong side of the law. I agree, and in my view Telecom has that. But what it is not entitled to is particulars of conduct which would not be anti-competitive – would not be in breach of s36. And I consider Telecom’s requests come back to it seeking that. I disallow this request.

With respect to the features, characteristics or qualities of Telecom’s alleged dominance which enabled it to introduce each of the elements of the 0867 package the Judge said:

Thus, particulars of 30 combinations are sought. For two reasons, I disallow this request. First, I do not consider that the particulars requested are necessary fully and fairly to inform Telecom of the claim it faces. In short, Telecom just does not need this level of complex particularity, and simply asking for it does not legitimise it. I view it as bordering, if not infringing, upon the prolix and vexatious. Secondly, I consider Mr Brown is correct in submitting that this request requires the Commission to focus on the “manner and extent” of those 30 (unlawful) permutations and to distinguish them from “other lawful business factors”. As Mr Brown contended, this is but an ingenious attempted circumvention of the inability to request an explanation of what the Commission alleges the non-dominant person would have done i.e. the counter-factual situation.

[16] The request for particulars of the competitive conduct intended or likely to be prevented or deterred (para B), in a different formulation, was also rejected by Wild J. He considered the request to be outside the scope of s36.
[17] Use of a dominant position in a market for one or more of the specified purposes might seem a straight-forward factual enquiry once the dominant position is established – and that is to be assumed for present purposes. However, in Queensland Wire Industries Pty Ltd v The Broken Hill Pty Co Ltd (1989) [1989] HCA 6; 167 CLR 177 the High Court of Australia considered that the way to test whether BHP was taking advantage of (i.e. using) its market power was to ask how it would have been likely to behave in a competitive market – was the conduct possible because there was not a competitive market?
[18] It was that decision that influenced the approach taken in the Telecom v Clear litigation culminating in the judgment of the Privy Council. The material passage in that judgment (p403) reads:

However, it does not follow from the existence of Telecom’s anti-competitive purpose that Telecom has used its dominant market position. In Their Lordships’ view that is the critical question.

As to what constitutes “use of a dominant position”, although Their Lordships agree with Gault J that ultimately the question depends upon the true effect of the statutory words used in s36 and not on any economic model, the statutory words provide no explanation as to the distinction between conduct which does, and conduct which does not, constitute such use. Both the High Court and Court of Appeal proceeded on the basis, with which Their Lordships agree, that if the terms Telecom were seeking to extract were no higher than those which a hypothetical firm would seek in a perfectly contestable market, Telecom was not using its dominant position. In order to discover what such hypothetical terms might be it is inevitable that the parties and the Court must have recourse to expert economic advice. The Baumol-Willig Rule is a closely reasoned economic model which seeks to show how the hypothetical firm would conduct itself.

If, as Their Lordships consider, it is legitimate and necessary to consider how the hypothetical seller would act in a competitive market, attention must be directed to ensuring that (apart from the lack of a dominant position) the hypothetical seller is in the same position vis-à-vis its competitors as is the defendant.

[19] The Privy Council thus employed a similar approach to that referred to in the Queensland Wire case. It is not clear whether in using terms such as “inevitable” and “necessary” their Lordships were looking beyond the circumstances of the particular case. In that respect the High Court of Australia more recently has qualified its approach. In Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 75 ALJR 600, the majority judgment indicates (paras 50 – 53) that the hypothetical question of how a party would have behaved without market power can be relevant but is not a necessary test for use of that power. Where it is employed, the High Court of Australia recognised (para 52), as had the Privy Council in Telecom v Clear, that:

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 s46. But the cogency of the analysis may depend upon the assumptions that are thought to be required by s46.

In some cases, a process of inference, based upon economic analysis, may be unnecessary. Direct observation may lead to the correct conclusion.

The last sentence expresses a similar view to that offered in the judgment of this Court in Port Nelson Ltd v Commerce Commission [1996] 3 NZLR 554, 577 ln 47.

[20] In the circumstances it must be said there is substance in the comment of Smellie J in Clear Communications Ltd v Telecom New Zealand Ltd (unreported) High Court, Auckland, CL54/96, judgment 4 April 1997 (cited in Commerce Commission v Southpower (pp 13,14)):

It seems to me that the vexed question of ‘use’ in respect of which s36 gives no guidance, is still in a state of evolution.

[21] What can be concluded, quite readily, is that if the hypothetical competitive market test is to be employed, the economic modelling or analysis involved is a matter for evidence not pleading.
[22] This brief review of the case law leads to answers to the requests for particulars A and C. Paragraph A apparently rests on the assumption that the hypothetical contestable market test is not employed and the enquiry is directly into whether the alleged dominance was used. In that situation it is claimed that Telecom is entitled to particulars of how the component elements of the alleged dominance were used in the introduction of each element of the 0867 package. The request appears to rest on another assumption; that the matters to which it is necessary to have regard in determining whether there is dominance under s3(8) of the Act bear some direct causal relationship to steps taken by way of use of the market power which the dominant party commands. We do not see any such necessary relationship. Dominance is a status determined by reference (inter alia) to a non-exhaustive set of factors identified in s3(8). Whether, once attained, it is used for a particular purpose is to be determined by reference to the exercise of the market power not by reference to individual factors taken into account in identifying the status. Nor is the conduct alleged to be an exercise of the market power necessarily capable of being broken into component elements to determine whether in fact it constitutes use of a dominant position. It is the conduct as a whole that is to be examined.
[23] The Commission has pleaded the conduct in terms that are not objected to. It is alleged that that conduct involved use of the alleged dominance. There is no pleading of any causative link between the dominant position and the conduct. But the allegation is not that the dominance caused the conduct. It is that the dominant position was used or employed in the conduct. That is a clear enough allegation. It is what the Commission will need to prove. The Judge was right to refuse the detailed particulars sought.
[24] The request in paragraph C proceeds on the assumption that the hypothetical contestable market is to be constructed and seeks particulars of it. In this respect we comment that without further assistance we have difficulty in postulating Telecom confronted by the Internet problem (which seems to rest on its high proportion of customers) yet not dominant in the market. But in any event, the hypothetical construct is at best a test for one of the elements of breach of s36; it is not a factual issue appropriate for pleading. We note that when the appeal against the judgment of Master Venning in Commerce Commission v Southpower came to this Court it was dismissed without any reasons for judgment being given. The reasons of the Master were regarded as correct. He said (p 15):

In conclusion, in my view s36 imposes a negative obligation on a dominant party not to use its dominance for an anti-competitive purpose. The section does not impose positive obligations. It is not necessary for the plaintiff to plead how it says Southpower has used its dominant position in its network distribution area in a way different to that which it would have done in a hypothetically competitive local network. Clearly, evidence of that will be given at trial. That is, however, a matter which, in my view, is more properly dealt with in evidence rather than in pleadings.

We agree. We again see no reason to review that decision.

[25] The particulars asked for in paragraph B require the Commission to specify the competitive conduct that “was or was likely or was intended to be prevented and/or deterred” by Telecom’s alleged conduct. This has the appearance of attempting to introduce a trip-wire rather than truly to inform Telecom of matters material to the cause of action. Section 36 is directed to specified purposes of alleged uses of a dominant position. Actual outcomes, intended or consequential, are not the focus. As the Privy Council said in Telecom v Clear (p 402):

If a person has used his dominant position it is hard to imagine a case in which he would have done so otherwise than for the purpose of producing an anti-competitive effect; there will be no need to use the dominant position in the process of ordinary competition.

The allegations are that Telecom has put in place a structure with the effect of cutting off a source of revenue to participants in particular markets. It hardly seems necessary to plead that denial of access to revenue will impact adversely on the ability of businesses to compete, particularly if their competitors are not similarly denied.

[26] We do not consider further particulars in this respect would be necessary even if the request were again reformulated to focus on purpose.
[27] We conclude by agreeing with Wild J that there are not and do not need to be special rules for pleading in competition law cases. The governing principle is that the pleadings must fully and fairly inform the other party of the case it must meet. We have not been persuaded that the Commission must do more than it has done in this case.
[28] The appeal is dismissed.
[29] The respondent is entitled to costs which we fix at $5,000 together with disbursements as approved (if necessary) by the Registrar.

Solicitors
Chapman Tripp Sheffield Young, Wellington, for Appellants
P H Rainsford, Wellington, for Respondent