Betfair Pty Limited v Racing New South Wales & Ors; Sportsbet Pty Ltd v State of New South Wales & Ors

[2011] HCATrans 230

[2011] HCATrans 230

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S116 of 2011

B e t w e e n -

BETFAIR PTY LIMITED (ACN 110 084 985)

Appellant

and

RACING NEW SOUTH WALES (ABN 86 281 604 417)

First Respondent

HARNESS RACING NEW SOUTH WALES (ABN 16 962 976 373)

Second Respondent

ATTORNEY-GENERAL (NEW SOUTH WALES)

Third Respondent

Office of the Registry
  Sydney  No S118 of 2011

B e t w e e n -

SPORTSBET PTY LTD (ACN 088 326 612)

Appellant

and

STATE OF NEW SOUTH WALES

First Respondent

RACING NEW SOUTH WALES (ABN 86 281 604 417)

Second Respondent

HARNESS RACING NEW SOUTH WALES (ABN 16 962 976 373)

Third Respondent

ATTORNEY-GENERAL FOR SOUTH AUSTRALIA

Fourth Respondent

FRENCH CJ
GUMMOW J
HAYNE J
HEYDON J
CRENNAN J
KIEFEL J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 30 AUGUST 2011, AT 10.16 AM

Copyright in the High Court of Australia

MR N.J. YOUNG, QC:   In the first matter, I appear with MR C.L. LENEHAN and MS K.C. MORGAN.  In the second matter, I appear with MR T.J.NORTH, SC, MR R.M. NIALL, SC and MR A.L. TOKLEY.  (instructed by Gilbert + Tobin Lawyers and Fitzpatrick Legal)

MR J.T. GLEESON, SC:   Your Honours, in the first matter I appear with MR N.J. OWENS, MR J.S. EMMETT and MR G.E.S. NG.  (instructed by Yeldham Price O’Brien Lusk Lawyers)

MR B.W. WALKER, SC:   In Sportsbet, the second matter, I appear with MR N.J. OWENS, MR J.S. EMMETT and MR G.E.S. NG for the second and the third respondents.  (instructed by Yeldham Price O’Brien Lusk Lawyers)

MR M.G. SEXTON, SC, Solicitor‑General for the State of New South Wales:   If the Court pleases, I appear with my learned friends, MR J.K. KIRK and MS A.M. MITCHELMORE for the third respondent in the Betfair matter and for the first respondent in the Sportsbet matter.  (instructed by Crown Solicitor (NSW))

MR S.J. GAGELER, SC, Solicitor‑General of the Commonwealth of Australia:   If the Court pleases, in both matters I appear with MR G.A. HILL for the Attorney‑General of the Commonwealth intervening.  (instructed by Australian Government Solicitor)

MR M.G. HINTON, QC, Solicitor-General for the State of South Australia:   If the Court pleases, I appear with my learned friend, MS L.K. BYERS in the first matter on the instructions of the Attorney‑General for the State of South Australia intervening and in the second matter on behalf of the fourth respondent.  (instructed by Crown Solicitor’s Office (SA))

MR S.G.E. McLEISH, SC, Solicitor-General for the State of Victoria:   If the Court pleases, I appear with my learned friends, MR S.P. DONAGHUE and MR P.D. HERZFELD for the Attorney‑General for Victoria intervening.  (instructed by Victorian Government Solicitor)

MR R.M. MITCHELL, SC, Acting  Solicitor‑General for the State of Western Australia:   May it please the Court, with my learned friend, MR. E.M. HEENAN, I appear for the Attorney‑General for Western Australia intervening in both matters.  (instructed by State Solicitor’s Office (WA))

MR G.J.D. DEL VILLAR:   May it please the Court, I appear for the Attorney‑General for Queensland intervening in both matters.  (instructed by Crown Law (Qld))

MR J.C. SHEAHAN, SC:   May it please the Court, I appear with my learned friend, MS R.C.A. HIGGINS, for TAB Limited and Tabcorp Holdings Limited seeking leave to intervene.  (instructed by Freehills)

FRENCH CJ:   Yes.  As to that, we have read the materials in support of your application for leave to intervene and also the submissions against and you will have leave to intervene.  Whether any oral submissions are necessary you will have to judge at the end of the day.

MR SHEAHAN:   Thank you, your Honour.

FRENCH CJ:   Thank you.  Yes, Mr Young.

MR YOUNG:   If the Court pleases, the statutory approvals in question in the Betfair matter span two years, from 15August 2008 and then the succeeding 2009 year there were two approvals granted by Racing New South Wales. Harness Racing New South Wales granted a single two‑year approval. Betfair sought a declaration that both approvals covering the two years were invalid by force of section 92 of the Constitution.

The span of the approvals means that the legislation that is relevant changed somewhat between July 2008 and the end of that period.  The changes are not material to the arguments that are going to be advanced but they do need to be noticed.  There is no challenge in Betfair to the validity of the legislation.  The challenge concerns the executive approvals issued purportedly pursuant to the statutory powers.  I want to turn firstly to the ‑ ‑ ‑

GUMMOW J:   I do not quite understand that, Mr Young.  You say there is no challenge to the legislation itself.

MR YOUNG:   There was no challenge in Betfair to the legislation.  There is in Sportsbet.  That is a distinction between the two cases.  The Racing New South Wales approval was granted following Betfair’s application of 5 August.  That application is in volume 4 of the appeal book at 1510.  I wanted to turn to that very briefly to make three points.  In the fourth paragraph of the application the Court will see that Racing New South Wales had already announced, prior to the application, that they:

“will” impose a fee of 1.5% of the –

applicant’s back‑bet turnover.  Betfair pointed out that that did not seem to be consistent with the broad discretion in the last paragraph on the first page of the letter, and over the page in the next paragraph Betfair pointed out that the effect of imposing a fee on it, given the intrinsic nature of its business, was the equivalent of a fee equal to “60 % of gross revenue”.  That is in the first paragraph at 1511. 

The actual approval, and I will only go to the first years, is in volume 4 of the appeal book at 1525.  It was an approval on standard conditions, the Court will see at 1525.  The standard conditions are in another volume, unfortunately, volume 3 at page 1210.  The relevant fee is imposed by clause 2.1 at page 1210.  The Court will immediately see in clause 2.2 that there was an exempt turnover threshold.  The subject of the fee was 1.5 per cent of the approved holder’s net assessable turnover.  For that concept and the concept of exempt turnover, it is necessary to turn to the definitions which appear at 1225.  In the case of exempt turnover threshold $5 million; at 1226 in the middle of the page:

Net Assessable Turnover, in respect of a period –

is arrived at by taking turnover, defined as wages made on the backer’s side, and subtracting bet‑back credits where applicable and the exempt turnover amount.

I need to briefly mention the concept of bet‑back credits.  It is defined at 1224 in the middle of the page.  It is concerned only with bookmakers.  When bookmakers are managing their book on a race they may find that the volume of bets on a particular horse is such that to protect themselves and ensure they make a profit no matter which horse wins they lay off the bet which means they themselves go and back that same horse with someone else – be it another bookmaker or the tote or Betfair.  Now, bookmakers, to take account of that inherent feature of their business are given a credit for bet‑back wages.  That appears in clause 2.3 at 1212 and it is also part of the equation to calculate in the net assessable turnover.

FRENCH CJ:   So far as the condition on approval is concerned the definition of the threshold and the reference to the back bets is all within the framework of, so far as the first is concerned, regulation 16.2 does not exceed.

MR YOUNG:   Yes.

FRENCH CJ:   So far as the second is concerned, the definition of wagering turnover on the back is signed off.

MR YOUNG:   Yes.

FRENCH CJ:   It is all within that framework?

MR YOUNG:   Yes, your Honour.  The position relating to the harness racing approval was similar.  I will not go through the details of it.  The harness racing approval – a two‑year approval – is at volume 4 of the appeal book, 1608.  There was a similar application by Betfair at 1261 of volume 3, again, pointing out that 1.5 per cent of its turnover would be the equivalent, in the case of harness racing, to 55 per cent approximately of its gross revenue and that would be a significantly greater effect on it than 1.5 per cent of back‑bet turnover would have for other wagering operators.  Betfair had made the same point earlier to the Minister in June 2008 at pages 1146 to 1147.

The third racing control body is Greyhound Racing New South Wales.  There was a different outcome there.  Greyhound Racing New South Wales granted approval on 31 August 2008, volume 4 at page 1603.  But they did not impose a fee condition reparable to back‑bet turnover.  Instead, Greyhound Racing New South Wales imposed a fee of 10 per cent of Betfair’s gross revenue margin.

GUMMOW J:   Where do we see that?

MR YOUNG:   It has been handed to the Court.  I should have said at the outset that we have distributed our outline of oral submissions in both matters, both to the parties and to the members of the Court, but accompanying those documents, we handed up the approval and the standard conditions in the greyhound matter.  The approval appears in part at 1603 of volume 4.  If the Court goes to 1603 and 1604, the Court will see that the approval letter is there.  The reference to 10 per cent of gross margin is at 1604 in the fourth paragraph, but unfortunately, the photocopying in the preparation of the appeal book left off the attached standard conditions applicable to that greyhound racing approval, which defined the concept of gross margin. 

That is why we handed up the extra document.  It defines “gross margin” at – there are numbers at the top of the page – at pages 488 to 489.  It is 10 per cent of commissions or other revenues in respect of a wagering transaction relating to New South Wales greyhound races.  Evidently, Greyhound Racing New South Wales took the view that the discretion conferred by the Act and regulation 16 permitted it to fix a fee, in the case of Betfair, having regard to the inherent nature of its business, by reference to a percentage of gross revenue.

FRENCH CJ:   The overall framework of your approach I understand is that the legislation is to be construed consistently with section 92 in such a way as not to authorise an approval on these conditions and that if it did authorise an approval on these conditions, it would infringe section 92. At the heart of the matter really is the question whether an approval which applies in the same terms to everybody because of its impact upon your particular business model, which you say is mandated by Tasmanian legislation, has a protectionist effect.

MR YOUNG:   Yes, your Honour, but we would add that the three approvals operate already in the case of bookmakers to take account of their betting model, the inherent nature of a bookmaker’s business by giving them a credit when they lay off.  So the special feature ‑ ‑ ‑

FRENCH CJ:   That is because it is directed to back wages?

MR YOUNG:   When a bookmaker lays off, that is, places a bet with somebody else to balance its book, that is inherent in the nature of a bookmaker’s business.  The point is that there are three different business conceptions and it is not a question of choice.  These matters are intrinsic to the nature of the business.

FRENCH CJ:   These are the people who fall within the definition of “wagering operators”.

MR YOUNG:   Yes.  They are either totalizators, bookmakers or the betting exchange.

CRENNAN J:   Your big point is that the turnover metric disadvantages a low‑margin operator?

MR YOUNG:   Yes.  It is discriminatory and imposes restrictions on competition in the national wagering market.  If I could finish my explanation to the Chief Justice, your Honour.  The nature of a totalizator is that it is a parimutuel form of betting, that is, it is a mutual bet.

FRENCH CJ:   We are familiar with that.

MR YOUNG:   A pool, a commission comes out of the pool.  The pool is composed entirely of back bets.  For a bookmaker it is ‑ ‑ ‑

FRENCH CJ:   Your commission is on the winnings?

MR YOUNG:   Net winnings.  Yes, and not at all dependant on ‑ ‑ ‑

FRENCH CJ:   Whereas the fee is imposed on the turnover, and that is your complaint.

MR YOUNG:   Yes.  Bookmakers, their way of betting is that they derive revenue by paying out less than they take in but everything they take in is a back bet.  That difference is such that they try and calculate their book by an over round.  In percentage terms the odds add up to more than 100 per cent.  But layoff bets are important to their business model because that is how they ensure that they adjust their position so that they can win no matter which horse wins the race.  They are accommodated and the intrinsic nature of their business is accounted for.  So it is not a uniform fee already.  It is inherent in the nature of the special conditions that they are accommodated.  The betting exchanges are intrinsically a totally different business.  It simply facilitates the matching of bets.  There is no volume of back‑bets turnover held by Betfair.  They simply facilitate a matching of opposing bets by punters.  The only way in which they derive revenue is by charging commission. 

Now, in our submission, those differences are fundamental to each of the three businesses and the device of imposing a fee by reference to back‑bet turnover on a betting exchange necessarily takes a six times greater takeout of its revenues than it takes out of totalizator which is the dominant player.  That is arrived at by taking the only metric that is consistent across the three businesses; revenue.  That is the essential point in the litigation. 

FRENCH CJ:   Perhaps I am misunderstanding here.  I am looking at regulation 16(2) which speaks of “a fee that does not exceed 1.5% of the holder’s wagering turnover” and now I am looking at the definition of “wagering turnover” which “means the total amount of wagers made on the backers side of wagering transactions”.  So it is directed already by the regulations of a backers side, is it not?

MR YOUNG:   Yes, by way of a maximum only though. 

FRENCH CJ:   Yes.

MR YOUNG:   The racing control bodies may have taken that as some kind of indication that it was appropriate to use back‑bet turnover, but in the form of regulation 16 it is only a maxima.  There is discretion to use some other way of calculating the fee if that is necessary to arrive at a non‑discriminatory fee, as Greyhound Racing did.  It is (2)(a), “a fee that does not exceed 1.5% of the holder’s wagering turnover”.  It is correct that there are lots of pushers in the regulations towards a use of turnover, and by that I mean there are certain provisions that do not compel it, do not require it, but seem to refer to wagering turnover and they include various subparagraphs of regulation 17. 

HAYNE J:   You identified what you said was, in effect, the core of your case.  Do I understand it as being there are three types of business?  A fee that does not distinguish between the businesses is discriminatory, is that the core of it?

MR YOUNG:   No. That is to put it in the inverse way that we put it, your Honour. Where there is a discretion to impose a fee on wagering operators, some of which are engaged in interstate commerce relating to New South Wales racing events, it is necessary to impose a fee which is non‑discriminatory to comply with section 92. If the fee mechanism that is chosen discriminates against one operator by imposing a burden that is six times greater, that is a discriminatory burden. It restricts competition in the national market, is inherently protectionist for that reason given the differential impact between it and the major domestic wagering operator, the TAB.

FRENCH CJ:   This is tailored fee structures are required within the framework of the regulations then?

MR YOUNG:   Yes, in the sense that you need to arrive at a non‑discriminatory fee. In some industries it might be a uniform fee because you take volume and volume is a metric applicable to every business, but if you have an industry where you have different types of businesses and you choose a fee which discriminates against the interstate operator and protects and favours the intrastate operator, our submission is that an executive decision and executive approval to that effect infringes section 92.

CRENNAN J:   But some interstate operators are high margin and some intrastate operators are low margin.  I just wonder how that all fits with this argument.

MR YOUNG:   Well, your Honour, there is a lot of confusion in the judgment of the Full Court about the concept of margin.  Margin was used by the trial judge to refer to the fact that a fee imposed on Betfair that takes 60 per cent of its gross revenue whereas a fee imposed on TAB that takes 10 per cent of its gross revenue can be compared to each other using a metric of turnover and when you compare them to each other so you have a consistent basis of comparison, Betfair works out at an average 2.5 per cent of turnover. 

So the concept of low margin really only describes the way in which the business operates and it converts revenue assessments that are common metric into a way of comparing Betfair’s position to a business which uses turnover as the source of its revenue and Betfair does not.  It is not low margin as used by the trial judge and as used in the industry in the sense of profit margin.  There is no question of simply a difference in impact on profit margins here, it is much more fundamental than that.  So when the Full Court speaks about low margin, it seems to be confused and to think that that is referring to profit margin; it is not.  I will need to explain that more fully.  It is explained in a productivity commission report and it is explained to some extent by the trial judge.

HAYNE J:   I still want to understand the basic structure of the argument.  There are three types of business.  A fee that has a differential impact on those businesses is, you say, discriminatory.  Is that the second step?  I understand you want to put it positively, but leave aside the positive or negative, that is the core of it, is it not?

MR YOUNG:   It is not simply a differential impact, your Honour. It is largely correct what your Honour puts to me, but it is a discriminatory impact when you take a measurement or a metric that is common across the businesses. I make that qualification because we are not suggesting that a fee that simply has a different outcome in terms of each entity’s net profit triggers the operation of section 92. We are not suggesting that.

HAYNE J: Section 92 is triggered, you say, because the types of business are variously located?

MR YOUNG:    No.  It is that the businesses have a fundamentally different character.  Some are engaged in interstate trade.  Those engaged in interstate trade have imposed upon them a burden which is six times greater than the dominant player engaged in intrastate.

FRENCH CJ:   When you say “those”, you are talking specifically about the betting exchange?

MR YOUNG:   Yes, I am, your Honour, but it would apply to any betting exchange, not just Betfair.

FRENCH CJ:   So it is betting exchanges who are engaged in a national market?

MR YOUNG:   Yes.  At the moment there is only Betfair licensed to operate a betting exchange, but in the course of 2009, Tabcorp, the Victorian tote, was authorised to conduct the betting exchange if it so wished, in which event it would have to pay a percentage of gross revenue from the betting exchange operations to Victoria.  So it is not theoretical that there might not be another betting exchange.  I wanted to draw attention next to several features of the legislation and for that purpose it is sufficient to look at the extracts of the legislation in the judgments in the Full Court.  That is volume 6, 2352.  We draw attention to these features of the regime, by which I mean the provisions of the Act, and I will come to the provisions of the regulations.  Section 33, the prohibition on use that criminalises unauthorised use is aimed at wagering operators.

FRENCH CJ:   And prescribed persons, but there are not any in that class?

MR YOUNG:   There are not any.  Wagering operators are defined ultimately in regulation 14 to include the three types; bookmaker, totalizator, betting exchange.  Secondly, the prohibition is broad because of the breadth of the concept of New South Wales race fields information.  That is now defined in section 27 of the Act which the Full Court does not set out.  The use of race field information is essential to the conduct of a wagering operation on New South Wales races, so therefore that prohibition catches any use of New South Wales information by a wagering operator based in another State.  When it accepts a bet on New South Wales races or matches a bet that may be placed by somebody in Western Australia with the Tasmanian Betfair operation or somebody in Queensland with the Tasmanian Betfair operation that operation necessarily uses New South Wales race field information. 

Originally the Act precluded publication rather than use.  It was amended in December 2008 to substitute “use” for “publication”, but the breadth of the prohibition is very broad whichever term you use.  In relation to New South Wales racing information and the prohibition we would add this.  That information is and was freely available in the public domain before this legislation was enacted and commenced on 1 July 2008.  It continued to be freely available in the same way after 1 July 2008.  All the legislation does is to attach a requirement for statutory approval on its use.  It does not alter the way in which it is accessed.  It is not a product fee governing supply, it is simply the fact that the approval becomes a hinge effectively for the imposition of a tax reminiscent of the franchise cases in the excise field. 

Next, the power to approve and impose conditions is conferred upon the relevant racing control bodies by section 33A(1).  Those bodies are statutory authorities but they do not represent the Crown and cannot be given directions by the New South Wales Government.  Moreover, they are representatives of the local New South Wales racing industry under their constitutions.  I have already made the point in answer to the Chief Justice that they have a discretion about what conditions and what fee conditions they impose.  Turning then to clause 16 of the regulations ‑ ‑ ‑

GUMMOW J:   Just before you leave the definition of “relevant racing control body”, do we have the relevant statutes which established these bodies?

MR YOUNG:   Yes, I will go to them.  I will certainly go to them in the course of both cases, in more detail in the Sportsbet Case.  Clause 16 gives a discretion to impose a condition relating to fees at 16(2) not exceeding “1.5% of the holder’s wagering turnover”, which term is defined as a reference to back‑bet turnover.  It does not compel the imposition of a fee based on wagering turnover.  The proceeds of the fees, if I can return to section 33A(3), constitute “a debt due to the relevant racing control body”.  That is an unusual feature of the legislation.  The industry representatives not only impose the fees whose quantum and nature they determine, but they take the proceeds and there were no constraints under section 33A in the way in which they apply them.  There may be under other legislation which I will need to explain in Sportsbet.  Finally, the imposition of the fee condition is not a reviewable decision.  One needs to look at the ‑ ‑ ‑

FRENCH CJ:   You cannot go to the Minister under 33D in the ‑ ‑ ‑

MR YOUNG:   Section 33D(1)(b), that is right.  A condition relating to the imposition of the fee is excluded from the appeal to the Minister, 33D(1)(b), so you cannot appeal to the Minister and the only right of administrative review relates to the Minister’s decision under 33E.

FRENCH CJ:   So it would be judicial review or nothing?

MR YOUNG:   Yes.

GUMMOW J:   What is the significance of section 33C?

MR YOUNG:   The racing control bodies are exempted from the operation of the Trade Practices Act.  That may be because of the way in which the fee affects transactions.

FRENCH CJ:   Racing Corp is set up by them under the RDA, is it not?

MR YOUNG:   Racing Corp is the agent of the racing control bodies in the context of the RDA. The commercial arrangements under the RDA are compelled by statute and there are TPA authorisations relating to those statutorily‑backed arrangements.

FRENCH CJ:   Well, they are a condition of the grant of the licence to the TAB, as I recall, under 21A, are they not?

MR YOUNG:   It goes further.  Compliance with the RDA is licence conditioned.

FRENCH CJ:   Administratively imposed?

MR YOUNG:   No, imposed by statute and enforceable by statute and, moreover, there are special powers conferred on the racing control bodies in relation to facilitating the operation of the totalizator and facilitating the operation of the division of funds from TAB’s wagering that are then divided amongst the racing clubs.  I will need to come to that.  It is more relevant in the Sportsbet Case than in the Betfair Case which turns on the essential point I have already described, but I will come to it, your Honour.

None of the three racing control bodies – we are only concerned with two, Racing New South Wales and Harness Racing New South Wales – represent the Crown.  None are subject to directions by the Crown and each is in, effectively, as the trial judge described it, an economic joint venture with the TAB.  They share TAB’s revenues from wagering on New South Wales races under the RDA which is a statutorily‑backed and enforced arrangement.  So when they are given the power to impose the fees and when they receive the fees, the racing control bodies are in a position, we would say, of profound conflict.  Their interests lie in protecting the revenues of TAB because they have a substantial share in those revenues.

FRENCH CJ:   What is that relevant to in terms of the constitutional question?

MR YOUNG:   It is relevant to the characterisation of the approvals as to whether they have a protectionist purpose or effect.

FRENCH CJ:   The fact that they are in a position of profound conflict?

MR YOUNG:   Yes.  It may only be a factor in the mix in characterising the effect of the fee conditions which have the primary and discriminatory vice I have already described but it is not irrelevant that the ones imposing the fee conditions are the racing control bodies who are in this joint venture with the local wagering operator, the TAB, who benefits from the differential in the fee impact.

The next point I want to make is our proposition 4 in the short outline.  It concerns the objective purpose and effect of the legislation.  Justice Perram did not deal directly with these matters in the Betfair decision but he did in the Sportsbet decision, having regard to the mischief at which the race fields legislation was addressed and the second reading speech.  His Honour concluded that the purpose and object of the legislation and regulations was discriminatory and protectionist. That appears at paragraphs 44, 46 and 48 of the Sportsbet judgment. 

The Full Court took a similar view in Sportsbet at paragraph 28.  That assessment of the objective purpose and effect of the legislative scheme or legislation and the regulations is supported by a consideration of the mischief to which the legislation was directed as revealed by background materials.  I want to refer to several documents, the effect of them is that publicly available reports, including taskforce reports commissioned by the Racing Ministers, indicated that there was underway a significant transfer of wagering revenue away from the totalizators which had been the dominant players to, amongst others, Betfair and that loss of revenue, obviously inured to the disadvantage of the racing industry because they shared in TAB’s revenues.

That appears, and I will not go to the documents because of time constraints, in a 2004 taskforce report which was referred to extensively by this Court in Betfair v WA.  That is volume 2 of the appeal book, page 415 and especially at 481.  It is also in an access economics report in volume 2, 672 at page 730, a briefing note to the New South Wales Minister in volume 2 at page 741 and a letter from Racing New South Wales to the Minister, page 748 of volume 2. We have made available in what we handed up this morning the second reading speech of the Minister in relation to the Bill that was introduced in October 2006.  Its commencement was delayed until July 2008 whilst regulations were drafted in consultation between the government and the racing control bodies.  The second reading speech describes:

The main purpose of the race fields proposal –

in the middle of the first paragraph, namely –

is to address the issue of wagering operators free riding on New South Wales racing events.

Justice Perram equated that with a desire to ensure that interstaters paid fees to the New South Wales racing control bodies, whilst the position of the others was held constant.  Prior to the legislation all licensed wagering operators paid fees to their home State ‑ ‑ ‑

FRENCH CJ:   That was the gentlemen’s agreement?

MR YOUNG:   The gentlemen’s agreement, yes, your Honour.  The reference to the status quo is the second page of the second reading speech, last sentence of the second paragraph.  The second reading speech also describes what is going to unfold about the formulation of the regulations on that same page, second‑last paragraph, last passage.  Both the regulations and the Bill are to be developed in consultations with the racing industry.

The next step in the development of the argument is that I want to describe, as briefly as time permits, the important market circumstances in which this legislation was enacted and in which the regulations were formulated and were to commence.  It is clear and it seems to be common ground amongst everyone that there is a national market in wagering transactions in which Betfair participates and its interstate transactions are going to be burdened by this New South Wales race fields’ fee. 

The competitive market position that demanded the enactment of this legislation and the formulation of the regulations is described in various documents.  In volume 3 of the appeal book can I turn very briefly to several of them - first to page 977?  These are New South Wales racing board papers and there is a CEO report.  I want to point to page 987.  The first bullet point on the page describes the loss of revenue to the interstate operators.  Now, there are many similar documents as one goes through the successive CEO reports and board papers of Racing New South Wales.  At the same volume, 1033, I point to – the market changes are referred to towards the bottom of page 1033 adopting a Tabcorp presentation.  The last bullet point is:

The NSW Racing Industry lost $51.4 million in revenue as a result of –

the transfer of market share to corporate bookmakers and betting exchanges in 2007.  The Tabcorp presentation itself, which is cross‑referenced by this document is, if I can give the reference, at page 957, especially at 961 of this volume, but I will not go through that in any detail.  Tabcorp followed up with a letter to the New South Wales Premier about the loss of market share at 995 of the same volume.

The loss of revenue to TAB reflected a growth in internet betting generally.  That is referred to in a Boston Consulting Group report to Racing New South Wales which is in volume 4 of the appeal book at 1357 to 1358.  It is the bottom half of page 1357 and the top of 1358.  At the top of 1358 the report says:

In 2006/07, betting via the internet accounted for 10 percent of wagering on thoroughbred racing through all Australian TABs, a three‑fold increase over five years.

FRENCH CJ:   This is factual context that is not really in dispute, as I understand it.

MR YOUNG:   No, it is not really in dispute.

FRENCH CJ:   I mean the significance of it may be another thing.

MR YOUNG:   Yes, we say it is significant in an assessment of the competitive restrictions brought about in the national market by force of these fee imposts.

FRENCH CJ:   Well, you say the purpose was to protect the locals.

MR YOUNG:   Yes, with an adverse effect on the national market, both on the supply side and the demand side is the point of this.  The productivity commission report brings this out.  That is in volume 5 of the appeal book at 2082.  I need to mention that this is the final report, 26 February 2010.  It is obviously after the trial.  Justice Perram had before him the published consultation draft of this report issued by the productivity commission.  He took it into account as constitutional facts and we say it is appropriate for this Court to do likewise.

MR GLEESON:   Could I preserve our position, your Honours?  The trial judge rejected the draft report, and we object to this material as well.

MR YOUNG:   My error was in saying the trial judge took it into account.  He said he did not need to take it into account, but it qualified as constitutional facts.

FRENCH CJ:   What is the basis on which you put it before us?

MR YOUNG:   It is authoritative economic material that analyses the effect of different kinds of fee imposts on the national wagering market.

HAYNE J:   That was the subject of a lot of evidence at trial?

MR YOUNG:   No, it was not the subject of any expert economic evidence if that is what your Honour is asking me.  There was a lot of financial information led by Betfair about the impact of the fee imposts on it.  For the moment, I wanted to give the Court references to pages 2141 and 2145.

FRENCH CJ:   Well, you should not assume that we would think it appropriate to refer to this.  This is after all simply a report of a body expressing opinions and no doubt setting out facts, which might or might not be contested.  To elevate that to the level of “constitutional fact” seems a bit bold.

MR YOUNG:   Your Honour, I am not assuming that the Court will necessarily take it into account.  That is why I prefaced my remarks in the way I did.

FRENCH CJ:   Just bear with us a moment.  I think you need to maybe just expose a little more clearly the basis upon which we can properly receive this at this stage of the proceedings given that it does really does, on the face of it, contain statements of opinion as well as statements of fact which might or might not be contestable, and it is objected to.

MR YOUNG:   Yes, your Honour.  I was about to do exactly that.  It does essentially two things of relevance, in our submission.  The first is that it describes and, to some extent, analyses the historical changes in the national wagering market brought about by new forms of betting including betting exchanges.

FRENCH CJ:   Well, that is already on the record and it is not really in contest, is it? 

MR YOUNG:   It is already on the record.  Perhaps that analysis goes a step further in the sense that it analyses the economic consequences of the changes that have taken place.

FRENCH CJ:   Well, the important economic consequence, from your point of view, as I understand it, is that there was an impact upon the revenues derived by the New South Wales racing industry by reason of the entrance of these national operators and, in particular, the betting exchange.

MR YOUNG:   Yes.  The way in which it elaborates it, your Honour, is by describing the benefits for consumers in the competition brought about from betting exchanges offering lower odds and lower commission rates.

KIEFEL J:   Does it alter the definition or content of the market?

MR YOUNG:   No.  Can I add to that explanation.  At least in argument in Norman v the Barley Marketing Board, the Court there requested, and there was some discussion about the availability of authoritative, economic literature analysing the impact of particular restrictions on the relevant national market.  This is material of that kind.  So that is the first thing it does, your Honours.  The second thing is that it analyses the economic consequences for the national market of imposing a turnover‑based fee on betting exchanges that have the differential impact we have described, that is, a sixfold greater impact on Betfair’s revenues.

FRENCH CJ:   If you were running a competition law case, you would not be able to get something like this in without agreement or otherwise proving it according to the ordinary rules, would you?

MR YOUNG:   That is so in private litigation, yes, your Honour. 

FRENCH CJ:   Yes.  What greater status does it have here?

MR YOUNG:   Well, this Court has on a number of occasions said that the normal rules that constrain admissibility in private litigation do not apply to constitutional litigation.  I refer to Justice Heydon in Mowbray and Justice Brennan in Gerhardy.

KIEFEL J:   Does this report go so far as to say what the impact of the fee on betting exchanges, what, if anything, that has upon the operation of competition within the market?

MR YOUNG:   Yes, it does.

KIEFEL J:   Where does it do that?

MR YOUNG:   It does that especially at 2157 to 2158.  The table contrasts the fact that other than two States, all other States have imposed fees based on gross revenues, two, New South Wales and Queensland have imposed fees based on gross turnover and then commences a discussion of the economic consequences in an introductory fashion at 2158 saying the economics of that kind of differential is relatively straightforward at about line 26.  The Productivity Commission returns to the disadvantageous competitive consequences of a turnover fee and that differential at 2174 to 2175. 

Can I add, this does not address the status of this document but I will come to Racing New South Wales’ own analysis when they made the decision of the consequences of the higher impost on Betfair compared to TAB.  So you have Racing New South Wales analysing the same sort of economic consequences, this is simply a more authoritative, or at least a more general, analysis of economic consequences.  What we say is, for what it is worth, it is an authoritative economic analysis of the consequences for the national market and if it qualifies as constitutional facts, then this Court should not feel restrained in having regard to it given the authorities in the area.

GUMMOW J:   In paragraph 65 of Mr Gleeson’s submissions – this may be relevant to assessing what you  have been saying to us.  In paragraph 65 of Mr Gleeson’s submissions, he says it is unclear whether or not you adhere to a requirement of protectionism and then he goes on in paragraph 67 to develop that point, the absence of protectionism.

MR YOUNG:   Your Honour, we adhere to what is said in both Cole and Betfair v Western Australia which is that there is a single characterisation test which inquires whether the discriminatory burden is of a protectionist kind, but that is a single inquiry.  There are two separate sequential steps of asking is there a discriminatory burden and next and separately is it protectionist based on some other inquiry.  It is part and parcel of the same inquiry. 

Protection is required but here, we say, it is inherent in the greater impost on the interstate competitor, Betfair, but greatly favours the dominant intrastate operator, that that discriminatory burden is protectionist and, moreover, in the sense explained in Betfair v Western Australia, it will operate to restrict competition in the national wagering market contrary to the interests of national unity and the interests of consumers across the country.

KIEFEL J:   In a national competition model, protectionism might be expressed as a conclusion about anti-competitive effects.  Your argument seems to be more concerned to address protectionism as a subjective purpose.

MR YOUNG:   No, no, your Honour.  What we say at the end of the day, because we are concerned with executive ‑ ‑ ‑

GUMMOW J:   It has to be the beginning of the day actually, otherwise we do not know whether we can admit this document.

MR YOUNG:   Your Honour, what we say about that matter of purpose is that where you are concerned with executive actions under legislation and regulations, the actuating purpose of the decision‑makers is relevant when characterising the effect of those executive actions.

KIEFEL J:   Why, if it is – they might not be effective to achieve it?  Is not the question whether the effect that they have, that the executive decisions or exercise of discretion have?

MR YOUNG:   Yes, but, your Honour, as a matter of logic and in other areas of the law, actuating purposes have been regarded as relevant in an assessment of the character of a particular action and where the burden is a discriminatory burden, the actuating reasons for imposing it may support the conclusion that it is protectionist.  You do not say it is a substituted test.

KIEFEL J:   In any event, and I would like to understand this quite clearly, it is no part of your argument that in more modern theories of competition in the national market that protectionism is a redundant requirement?

MR YOUNG:   No, that is not our argument.  Our argument is that Betfair in Western Australia articulated a fuller understanding of the concept of protectionism by reference to the anti‑competitive restrictions that might flow from a discriminatory burden in the national market looking at both the demand and supply side of that market, including the adverse consequences for consumer in terms of availability of low‑price betting that would otherwise be adversely affected by discriminatory taxes of this kind.

HEYDON J:   Was this document before the Full Court?

MR YOUNG:   No.  There is nothing I wish to add ‑ ‑ ‑

GUMMOW J:   Was it in existence then?

MR YOUNG:   I beg your pardon, your Honour?

GUMMOW J:   Was it in existence at the time of the appeal to the Full Court?

MR YOUNG:   It was in existence, yes, your Honour.

HEYDON J:   It was 26 February 2010.

MR YOUNG:   Yes.

FRENCH CJ:   It could have been put before the Full Court.

MR YOUNG:   Yes.  I have nothing to add to what I have said.  It is for your Honours to determine.

KIEFEL J:   Given that we will have to at least read it, could I ask you, at page 2175 at about line 15 of that report, in preferring the fee being addressed to gross revenue as against turnover, a reason given is that there is a disproportionate burden effected, but you do not take up any proportionality argument in relation to the second stage really – proportionality argument in relation to why.  I suppose there is a problem in the administrative decision sense.

MR YOUNG:   We do, your Honour.  We take up the point which Justice Perram made, which is that there is no reason for not introducing a revenue‑based fee, in other words, no reason of convenience, practicality, anything like that, and secondly ‑ ‑ ‑

KIEFEL J:   That is a negative proposition.  You are not arguing, for instance, that there is a practicable alternative which is available from which you conclude that this approach, this decision, is disproportionate?

MR YOUNG:   Yes, we do, your Honour, we say the Full Court failed and erroneously failed to have regard to the finding that the use of turnover was not reasonably appropriate or adapted to the alleged purpose of the law which was the obtain a commensurate payment for the use of the New South Wales race field information.

KIEFEL J:   Apart from the productivity commission report, was there any expert opinion addressed to what we might describe as the reasonably practicable measures available?

MR YOUNG:   No, there was no other expert material.  The respondents led no material, but it is analysed at some length by Justice Perram at trial, and his Honour analyses and explains why the choice of the metric of back‑bet turnover not only has no relevance to Betfair, but it is an inappropriate proxy for use of New South Wales race field information.  The trial judge does that at 2283, volume 6, paragraph 244, the last few lines of paragraph 244, and also at 246, last few lines on the page:

it is impossible to form the view that back bet turnover is a reasonably appropriate method of measuring the commercial benefit derived from the use of race fields information –

As to the fact that there were no practical reasons for avoiding the revenue base fee, his Honour dealt with that at 249 and again towards the bottom of 251, and his Honour concluded that had Betfair demonstrated that it was protectionist:

I would readily have concluded . . . that it was not . . . reasonably and appropriately adapted –

to the alleged legitimate objective.  That is a false approach, in our submission, because proportionality in that sense, reasonable necessity, needs to be part of the single characterisation exercise.  It is not separate and sequential.

CRENNAN J:   How do we fit in the evidence from Betfair, which I understood was to the effect that the approval fees have not in fact discouraged price competition at all?  This is what is identified in the productivity report, as I understand it ‑ ‑ ‑

MR YOUNG:   That is not the full picture, if I can put it that way, your Honour.  Betfair led evidence about the impact of the fee on its profitability, and it showed that ‑ ‑ ‑

GUMMOW J:   I think the problem, Mr Young, if I can interrupt you, is that this evidentiary weakness, to put it that way, which you now seek to overcome by relying in this Court upon the productivity commission may come from a way this case was framed at the beginning under the influence of individual rights theories of section 92 doctrine, which is now discarded. I think the difficulty is thrown up by paragraph 67 of Mr Gleeson’s submissions in the fourth sentence, namely:

it will always be possible to choose a perspective from which an otherwise uniform fee has a different effect on different traders, by reason of their particular business models.

MR YOUNG:   No, your Honour.  We say that is not descriptive of the point we make in this case.  There is no other comparator for comparing these fees and whether they are discriminatory, otherwise than going to the effect on revenue.  That is the only common metric, having regard to the different operations. 

GUMMOW J:   Do we know if you have adjusted your competitive behaviour in the light of this imposition upon you?

MR YOUNG:   No.  The evidence was ‑ ‑ ‑

GUMMOW J:   Is there any evidence about that?

MR YOUNG:   Can I make two answers, your Honour.  There was evidence that Betfair had not passed it on, pending the decision in the litigation.  There was also evidence by Betfair that without passing it on it took a very substantial slice of its gross profit, decimated the gross profit and I will go to that evidentiary material, and that necessarily means that its ability to compete was adversely affected, in the same way as the High Court discussed in Bath v Alston.  So there was evidence.  There was evidence by way of analysis of the economic impacts of imposing an additional cost on Betfair, by Racing New South Wales itself and it expected that Betfair would pass it on.  It would push up prices, reduce Betfair’s competitiveness and produce its turnover.  So there was evidence.  There is no evidentiary gap in the case. 

GUMMOW J:   Why then do we need this material you are so eager to have?

MR YOUNG:   Because we felt it fell within what this Court had said about the kind of material that would assist in such a case.

FRENCH CJ:   I think, Mr Young, in order to avoid any further delay we should simply consider the question of whether we are going to receive this material in a formal way, but allow argument on the assumption that it is before us.  Speaking for myself, I am surprised, first of all, that it found its way into the appeal book rather than as a separate document because it certainly was not part of the record below.

GUMMOW J:   Yes, your solicitor should not have put it forward for inclusion in the appeal book.

FRENCH CJ:   I think it would be useful if you could briefly identify what is the constitutional fact which you advance.  Is it something said in the report?  Is it the report itself?  You have used that term and I am not quite sure what you are referring to.  Apart from that perhaps a brief reference to the conclusions, which you seek to derive from the report, without burying us in the detail of it.

MR YOUNG:   Yes, your Honour, yes.  Your Honour, I will address those matters.  Now, can I mention a number of other matters that ‑ ‑ ‑

HAYNE J:   So is this something you are going to come back to, is it?

MR YOUNG:   I am not going to come back to the document, your Honour.  I have indicated the passages that we rely upon.  In terms of a submission that the discriminatory impost is of a nature likely to restrict competition in the national market I can make that submission by reference to other materials.  The same submission would be supported by the productivity commission analysis.  But I do not need to refer again to the productivity commission report.

FRENCH CJ:   Very well.

MR YOUNG:   There is, in the background material and without going to the matter we have just discussed, evidence concerning the reason why Betfair had attracted a greater market share.  It boils down to offering better odds to punters and taking out a lower rate of commission – the 2 to 5 per cent on its net winnings.  The impact of its lower commission on the prices offered to punters was illustrated in evidence and was also the subject of the access economics report.  I will just give a reference to the latter – that is volume 2, pages 707 to 708. 

FRENCH CJ:   Mr Young, could I just ask a question so I can frame this discussion appropriately?  I understand there are some constraints on Betfair’s capacity to alter its business model by reference to Tasmanian legislation.  Is that correct?

MR YOUNG:   Yes.  Its commission is capped at 5 per cent and it is required to be a commission on net winnings.

FRENCH CJ:   Yes.

MR YOUNG:   The range of 2 to 5 per cent was explained in the evidence that for very large customers who bet in large volumes Betfair affords a volume discount.  So for large customers its takeout, its commission, may be as low as 2 per cent, but for most of its customers it is the statutory 5 per cent.

GUMMOW J:   What seemed to be this confidential material in this deficient record?

MR YOUNG:   I am sorry, your Honour.

GUMMOW J:   We have appeal books with a message about confidential material plastered all over them.  What is the significance of that?

MR YOUNG:   It is not going to affect my submissions, your Honour.

GUMMOW J:   Well, I am going to proceed on the basis that I can refer to any of it in my judgment unless you indicate the contrary.  We do not operate otherwise.

MR YOUNG:   No, I am not going to indicate the contrary, your Honour.

GUMMOW J:   All right.

MR YOUNG:   Betfair’s – if I can give the reference – it is the cap, the 5 per cent capped is referred to in the Tasmanian approval for Betfair’s operations at volume 3 of the appeal book, 1085.  Its method of operating, taking a commission on net winnings is described in the access economics report, volume 2 at pages 692 to 693 and 707.  It was also the subject of evidence by Mr Twaits.  He is the chief executive officer of Betfair.  That is in volume 1 of the appeal book, pages 303 to 304 at paragraphs 42 to 47. 

The thing about taking commission on net winnings is that there are many instances where, on a particular event, a customer may have a large number of bets on the same event, so there may be a very high turnover using that conception but, in fact, no revenue because there are no net winnings. 
           That is why there is no relationship between back‑bet turnover and revenue or commission.  That is Mr Twaits’ first affidavit, paragraph 151 at volume 1 of the appeal book page 336.  As to better prices, I did want to go to Mr Twaits’ second affidavit and, in particular, to an exhibit to it.  His affidavit is in volume 1 at 347 to 350, but the exhibit is in volume 5 of the appeal book.  It is at 2025.

FRENCH CJ:   This is what you see when you place a bet, is it?

MR YOUNG:   This is the screen shots.  The affidavit explains it in text.  It is simplest to do it simply by reference to an example at 2055 and 2056.  The point of the screen shot example is to show the impact of changing commission rates, so that if Betfair is forced to raise its commission to cover the extra cost, what impact will that have on consumers.  The screen shot at 2025 has a column in the middle “Adv. NSW”.  I misstated the number, I apologise, 2055.

HEYDON J:   Which is the heading?

MR YOUNG:   It is the Golden Slipper, Rosehill Race 7.  It is a screen shot at page 2055.  What that shows is the result of the race, the payouts for Betfair compared to rival wagering organisations and the effect of the commission.  It measures the effect of a $100 bet.  The rival prices of all the horses are listed in the main part of the table.  The column “Adv. NSW” shows the additional amount that a punter would have received in winnings if he or she had backed the runner with Betfair for $100 rather than TAB New South Wales.  So for all the runners but two, there would have been a substantially greater payout by betting with Betfair.  That is the combined effect of its betting exchange mechanism offering lower odds plus lower commission. 

On the winner, it is the bottom half of the page, Phelan Ready, there would be an extra profit by backing it with Betfair compared to using the TAB.  The entry at the bottom of the table shows that these calculations are done by assuming a commission of 5 per cent.  The same race is assessed at 2056 with only one change, that is reducing the commission to 2 per cent from 5 per cent and that means that Betfair is even more competitive because it offers a better return on more horses.  The green entries in the box “Adv. NSW” and it provides a better return on the winner.

FRENCH CJ:   Did I read somewhere that the better nominates the odds?

MR YOUNG:   Yes.

FRENCH CJ:   Then you have to find a lay better who will meet those?

MR YOUNG:   Yes, exactly.

FRENCH CJ:   So that Betfair is not at risk, although it stands formerly as the principal for the purposes of honouring the bets, but it is covered by the deposits that they have made.

MR YOUNG:   Yes, exactly.  When somebody lays a lay bet, there is no turnover.  They are simply exposing themselves ‑ ‑ ‑

FRENCH CJ:   So the turnover is the back bet?

MR YOUNG:   Yes, but that is effectively irrelevant or can be irrelevant to the revenue, the net winnings.  This kind of analysis is then carried through all of the races on that day at Rosehill and what it demonstrates is that Betfair offers better odds and takes out a lower commission and because of that, it offers a better return to punters on the majority of horses, not every horse, the majority of horses in the races.  So that is a concrete demonstration of the fact that on the consumer side Betfair’s low commission takeout and business structure means that it offers more competitive returns to punters.  The effect of a larger additional cost, if passed on, would be to restrict competition by forcing it to increase its prices and it would adversely affect consumers by reducing their return.  That follows inevitably from the comparison of the 2 per cent exercise with the 5 per cent exercise.

I next want to put some propositions about what the material shows about the development of the regulations and the fee conditions.  I will not be able to go to the various documents in the appeal books in the time available, but if I can put the propositions and give indicative references.  As I have said, the regulations were to be developed in consultation between the Government and the racing control bodies and that occurred between the legislation being enacted in 2006 and 1 July 2008.  There are a series of workshops to draft instructions that the racing control bodies had to agree before it went to the legislative draftsmen. 

There was also close consultation with Tabcorp, for instance, at pages 1018 and 1025.  In the course of the process it was agreed and the agreement was recorded between the Minister and the racing control bodies that the racing control bodies would set the price, set the fees and the fee conditions, both quantum and nature.  That appears, amongst other places, from letters passing between the chairman of the three control bodies and the Minister at 1007 and between Racing New South Wales and the Minister at 1006.

FRENCH CJ:   That appears from the regulation itself, does it not?

MR YOUNG:   Yes, but I am addressing the way in which the regulations were formulated.  The regulations were formulated at the same time as the fee condition was being formulated.

FRENCH CJ:   Yes.  To what end?

MR YOUNG:   The point is that the racing control bodies effectively chose back‑bet turnover as the basis for the fee.  They had the Government’s agreement that they would set that amount and that mechanism at their discretion and the material demonstrates that they did that knowing the discriminatory impact upon Betfair.  The Racing New South Wales board reports and CEO reports prior to the handing down of the Betfair v Western Australia decision on 27 March show this; all of the fee structures under consideration totally excluded the TAB.  No fee was to be asked from the TAB, rather, the structure was that there be a series of different fees applicable essentially to internet and telephone betting with totalizator betting in State, within New South Wales, excluded from any liability to pay any fee.  An example of that is the New South Wales board CEO report of July 2007 at page 929, particularly pages 933 to 939.

FRENCH CJ:   How does this fit into an argument that, properly construed, the regulations do not authorise these approvals or these conditions?

MR YOUNG: Your Honour, the regulations were intended to authorise these provisions. We say that if they do, the regulations themselves would be contrary to section 92. If the executive action ‑ ‑ ‑

FRENCH CJ:   But you did not challenge their validity in these proceedings?

MR YOUNG:   No, it was not challenged below, your Honour, and I cannot seek to alter that fact.

FRENCH CJ: Yes. You say, properly construed, they do not infringe section 92, so I am wondering what the dark purposes, as it were, what role they play.

MR YOUNG:   Well, your Honour, because they are relevant to the characterisation of the fee conditions that were imposed by executive action.

FRENCH CJ:   You say there are dark purposes, if you like, or infringing purposes behind the particular conditions imposed.

MR YOUNG: Yes, your Honour, protectionist purposes. The only reason why one would conclude the regulation does not infringe section 92 is that you read it subject to an implied term under the Interpretation Act, effectively, that it is to be construed so as not to infringe section 92.

GUMMOW J:   That is not quite right, is it?  The statute has to be construed so as to not authorising a regulation which has this characteristic?

MR YOUNG:   Yes.  I stand corrected, your Honour is correct.  The effect though is the same, but it is the implication arising from the proper mode of construing the legislation that leads to that limitation.  It does not gainsay the fact that the actuating purposes were as revealed by the evidence and they carried through and they are relevant to the characterisation of the executive action.  A change occurred with the delivery of the decision of this Court in Betfair on 27 March.  It is disclosed in two RNSW CEO reports of May and June 2008, respectively at these pages in particular, 1095 to 1098 and 1135 to 1136 of volume 3. 

Three changes were made; the previous concept of exempting face‑to‑face tote betting and targeting internet betting was abandoned.  It was a fee of 1.5 per cent of turnover.  The five million threshold was to be introduced, but the revenue forecasts were to the effect that no revenue was to be raised by means of the fee from any intrastate operator.  There was to be no revenue raised from TAB and no revenue raised from New South Wales bookmakers.  The reason for the latter was the combined effect of the fee and offsetting adjustments in club levies which were to be offset by payments out of the fees, and the reason for the New South Wales position concerned the RDA. 

If I can go briefly to the document at 1095 in volume 3.  Those changes are described at 1095, or some of them.  Can I then go to the revenue table at 1098.  The proposed revenue to be raised was zero from New South Wales TAB.  Not only was no revenue to be raised from New South Wales Bookmakers, but the scheme was to result in a negative $675,000.  The only revenues to be raised were from interstate operators, including betting exchanges.

So the whole burden of the fee was designed to fall on interstate operators.  The reason for TAB being zero is reference to the RDA at line 20.  There are similar minutes of harness racing at 1149 concerning a flat fee of 1.5 per cent.  The form of the regulations was adjusted in consultation to ensure that there was no constraint or no requirement to apply a non‑discriminatory fee to the same class or type of wagering operation. 

That change is reflected in an email of 12 June 2008 at page 1154.  It is a little bit difficult to read.  It is at the bottom of the page.  The draft of regulation 16(3) had a reference to the fee being applied to businesses of the same class or type.  The effect of the change is that that should be deleted.  The actual decision of the Racing New South Wales Board to impose the 1.5 per cent fee on all wagering operators, without regard to their class of business, was in fact passed by resolution before the regulations took effect.  That appears at page 1190 in the same volume. 

There is the resolution of the 18 June.  Justice Perram refers to it at paragraph 93.  So, there was a degree of confidence about what the regulations would provide before they were promulgated and we underscore the word “all” wagering operators.  That was passed knowing of the differential impact of the turnover fee on Betfair.  Amongst other things, that is clear from Betfair’s letter to the Minister at 1146 to 1147 and Racing New South Wales’ discussion of Betfair’s position at 1182 to 1185.  It is also in briefing notes to the Minister at 1135 to 1136.

Racing New South Wales’ decision was based on a report from the CEO which contains an analysis of the competitive consequences of the differential impact of the fee.  That is at 1159 of volume 3.  I will need to refer to a few passages of this document because it is the basis of the decision by Racing New South Wales.  At 1161, three‑quarters of the way down the page, there is a reference to applying the same fee:

equally to all Australian wagering operators, irrespective of the type of betting they conduct –

Then at 1162 there is the table showing the expected revenues and it is much like the previous ones.

It has again the reference to the “offset by compensation” under the RDA opposite “NSW Tab”.  There is no revenue said to be raised from the totalizator operator in Victoria, a related company of NSW Tab, again because of the RDA, it is said.  In relation to bookmakers, 1166 opposite line 10, the:

fee structure is predicated on the assumption that NSW thoroughbred racing clubs will rebate or eliminate their turnover fee –

gaining a market share by Betfair, amongst others, referred to towards the bottom of 1166.  At 1167, a report in the last paragraph says:

The introduction of race fields fees will directly impose additional costs on corporate bookmakers and betting exchanges. 

At the top of the next page, will impose “financial pressure on” those operators “and promote consolidation”.  Then, jumping ahead to 1182, there is a more detailed analysis of the competitive market consequences of the disproportionate fee.  At 1182 under the heading “Corporate bookmakers and betting exchanges”, there is recognition of the discriminatory impact on Betfair.  At 1183, “25% reduction in their margins”.  Just at about line 23:

an increase in revenue margin – 

that is by Betfair, amongst others, increasing their prices to cover the extra cost – 

can be expected to reduce turnover – 

The footnote indicates that that might produce a “downward spiral” for Betfair and corporate bookmaker competitors because if they raise their fees and reduce their turnovers it may precipitate a series of such events.  At 1874 ‑ ‑ ‑

FRENCH CJ:   What was that number? 

MR YOUNG:   I have read the wrong number, I read the bottom one.  At 1184, again below the first set of bullet points, the bold bullet point: 

the additional cost burden may place financial pressure . . . This should provide an advantage to big operators with substantial capital bases which may benefit the TABs –

The next bullet point is relevant, as is the point that commences:

Given that corporate bookmakers and Betfair have been gaining market share . . . a situation likely to continue . . . the additional impact . . . extremely difficult to quantify.

Then under the heading “Betfair”, there is a recognition that Betfair under that fee structure will lose a major part of its revenue from New South Wales races.  That is why I say there is other evidence of economic repercussions throughout the national market of the discriminatory fee.  The position of harness racing is similar.

Now, if I can turn to the legal submissions we found on all of that.  There is no dispute, and the trial judge found, that the imposts have a differential and discriminatory impact on Betfair compared to TAB and others, a six times greater impact per revenue dollar.  The reason for that difference is that the selection of 1.5 per cent of back‑bet turnover treats two wagering operators, Betfair and TAB, who earn commission on different revenue streams and at different rates controlled by different pieces of legislation as if they were the same.

Justice Perram said that at paragraph 253 in his judgment in this case and in Sportsbet at paragraph 149.  That difference in inherent business operations was a known difference and the differential impact was intentional.  That was what the material reveals.  It was not necessary under the discretion that existed in the regulations as the decision by Greyhound Racing New South Wales shows.  The vastly greater impost on Betfair, in our submission, necessarily affected its cost of doing business and necessarily operated to its competitive disadvantage vis-à-vis TAB and New South Wales bookmakers, but especially TAB.

GUMMOW J:   What do you say about the cross‑examination of Mr Twaits at 4530 and following in volume 1?  There are too many numbers on these pages.  Top of the page HC203, line 40, going over to the next couple of pages.

MR YOUNG:   Yes.  That is particularly 205, we would say.  There has been no passing on of the extra costs but that does not mean, of course, that there has not been the imposition of a fundamental cost difference and Betfair has two choices.  In either way competition is restricted.  If it absorbs the fee and does not pass it on, its ability to compete is lessened because it has less revenue available with which to compete and to engage in an expansion of its business or other competitive activities.

GUMMOW J:   What do you say about this premium charge?

MR YOUNG:   The premium charge is an authorised charge that relates to high volume customers who, over a period of some 60 days, have paid only a small amount of commission because of the way in which their bets have happened and it is simply an extra charge that affects only a handful of customers by way of a premium charge referable to the fact that they have had a large volume of bets over a period of 60 days.  They have not paid a certain minimum commission, so it is an extra impost.  It does not alter the basic structure of the matters that we have been putting.  That is addressed ‑ ‑ ‑

GUMMOW J:   It was said that there was no connection between the introduction of that charge and the New South Wales events.

MR YOUNG:   No, there is no connection.  That was the evidence.  We deal with the premium charge in footnote 4 in our reply.  It is explained in Mr Twaits’ affidavit, his first affidavit, page 304.  This is Mr Twaits’ evidence about it.  It is much more precise than my oral explanation, but it is, I hope, to the same general effect.  Paragraphs 49 through 52, 96 customers have been charged it and it is effectively a small uplift in commission based on the profits of the punter over a previous 60‑week period.

FRENCH CJ:   How do you step around the contention that you are focusing on the trader rather than trade?

MR YOUNG:   In exactly the same way as addressed in Castlemaine Tooheys and Betfair v Western Australia.  Betfair is a substantial trader in the national market.  It is garnering an increasing market share.  It is one of the major sources of competitive pricing.  To adversely affect and restrict competition arising from its interstate transactions necessarily involves a restriction on competition in the national market.  It is exactly the same with Bond Brewing in Castlemaine Tooheys.  They were indeed a small interstate trader.  The major one was CUB.  Only Bond Brewing used the non‑refillable bottles and that was as much a business choice – indeed, that might have been a business choice.  Running a betting exchange, its inherent nature is to charge commission on net winnings.  You do not hold back‑bet turnover.  You do not have a pool and you do not hold the back‑bet turnover.  That is the only way in which you can derive revenue. 

In Betfair v Western Australia, interstate trade was regarded as burden by reason of the fact that Betfair, which was then an aspirant really, in the national market, a potential threat, not a realised threat as here, its exclusion from the WA market was regarded as attracting the operation of section 92. It involves no return to the individual rights theory to analyse the effect of a measure by looking both at the impact on the national market and the impact on a substantial player in the national market. In our submission, the discriminatory fee which was known and intended does subject interstate trade to a substantial disability or disadvantage that prejudices Betfair’s ability to compete.

I mentioned the first way.  It is either way, to use the words used in Bath, either because it imposes costs adversely affecting its profitability and reducing its competitive abilities on the one hand. The alternative is it passes it on. Now, if it passes it on, it means higher prices to customers in the national market. That restricts competition in the national market and, in our submission, it can hardly be an answer to section 92 that the trader in question should avoid the adverse effect on interstate trade by abandoning the very aspect of its operations which made it competitive, made its activities advantageous in the national market to the benefit of customers and thereby promoting national unity. So it can hardly be an answer to section 92 that you should pass it on, cease to be so competitive and if you do that, you do not need the protection of section 92. I mean that, in our submission, is entirely circular reasoning and hollows out section 92 of its real worth.

It is said that we should not make a comparison between Betfair and TAB.  In our submission, there is nothing inappropriate for the reasons I gave in answering the Chief Justice a moment ago.  Both are a substantial part of competition in the national market and there is direct head‑to‑head competition between them and that competition is affecting the national market.  It is promoting competition, even if TAB is losing market share.  TAB is also the obvious point of comparison because it is the dominant intrastate trader representing, in 2007, about 78 per cent of wages on New South Wales racing events.  A revenue‑based comparison is appropriate because it is the only neutral comparator and commission, that is revenue, performs exactly the same function in each business across the different types of betting; totalizator, bookmakers and betting exchanges. 

Justice Perram explained why there was no difficulty in using a revenue‑based fee that would operate in a non‑discriminatory manner across the three types of betting operation, but we would add to that TAB, under the RDA, shares a portion of its revenues with the racing control bodies.  So there is no difficulty in that.  It is a false proposition, in our submission, to say that the 1.5 per cent fee is either a flat fee or a uniform fee.  It is necessary to examine practical effect as well as facial operation and in terms of practical effect, it is not uniform or flat.  It is only uniform or flat vis-à-vis turnover, but if turnover is irrelevant to one business’ operations, then it is not uniform; it is discriminatory.

CRENNAN J:   In fact the TAB pays the fee, is that right?

MR YOUNG:   TAB has paid the race field fees.  The second case, Sportsbet, raises the question whether, as a matter of practical effect, it does pay the fee.  That is not ‑ ‑ ‑

CRENNAN J:   Yes, because of the RDA settlement, if I can put it that way.

MR YOUNG:   Yes, but that is not an issue in the Betfair case.  Betfair fastens on an earlier discriminatory burden as the basis for its case.  I want to turn to the evidence that was led about the impact of the fee on Betfair’s profitability.  It appears in volume 5 of the appeal book at page 2079.  This page and preceding pages were exhibits, in fact exhibit 4, to Mr Twaits’ affidavit.

GUMMOW J:   Is there a finding about this at any level?

MR YOUNG:   I think the answer is no, your Honour.  I will have it double checked.  It was only the Full Court that introduced the notion of an adverse affect on market share or profitability.  That was not introduced by Justice Perram although he did say that Betfair had eschewed attempts to demonstrate an actual adverse affect, relying instead on the differential impost on revenues.  But that was unfair; there was evidence.

GUMMOW J:   I was looking at paragraph 96 of the Full Court’s reasons, which you challenge, I take it.

MR YOUNG:   Yes.  We would say that the Full Court’s reasoning proceeds from an acceptance of the differential impact on revenue and their analysis is that it does not matter that there was a differential impact on revenue unless you go further and demonstrate that you in fact suffer a loss of market share or a loss of profitability, or a loss of a pre‑existing competitive advantage derived from your “interstatedness”, if there is such a word.

KIEFEL J:   Well, all of those matters would affect any distortions in the market, rather than a more narrow focus upon the profitability of someone within the market.

MR YOUNG:   Yes, but you can demonstrate for section 92 purposes that an extra impost is apt to burden interstate trade in a way that offends section 92, otherwise border duties would never be invalidated without demonstrating what impact they have on market share or profitability, et cetera. You could have a tariff on goods crossing the State border. That would not be struck down on the theory that you need to go further and demonstrate adverse market effects or adverse profitability effects. Now, that cannot be right, but that is the logical consequence of the reasoning adopted by the Full Court.

Can I return, if I may, to the financial evidence from Mr Twaits.  Looking at the first two columns of page 2079, what that analyses is the results of Betfair for the four months immediately preceding the imposition of the race fields’ fee and the four months afterwards.  The only change between the two columns represents a fee impost on equivalent to 60 per cent of its gross revenue.  So that becomes apparent.  The total betting taxes line is very substantially greater because of race fields.  There is no fee in the first column.  There is a fee of 1.635 in the second column.  The impact on gross profit is then demonstrated - 623,000 in the first period reduced to 46‑odd thousand post race fields’ fee.  The impact on the gross revenue margin is to reduce it from 56 per cent to 2 per cent.  So that was the evidence.

GUMMOW J:   Was this submission put to the Full Court?

MR YOUNG:   Yes, it was.  In our submission, Betfair v Western Australia articulated a broader understanding of protection of the role of section 92 than previous decisions, not inconsistent with Cole v Whitfield but a broader articulation of the concept of protection, describing it as being concerned with a preclusion of protection.

It is quite clear that the High Court was not using the expression “protection is concerned with a preclusion of competition” as if it was only concerned with a total elimination of competition, keeping somebody out of the market altogether.  Later passages make it clear that it was concerned with a restriction of competition in the national market, including paragraphs 116 and 118 of Betfair. 

The other more profound insight was that it is necessary, having regard to the purposes of section 92, to have regard not just to the position of traders supply side considerations, but also to have regard to the impact of the restrictive measure on consumers in a national market because that would recognise one of the purposes of section 92 is to ensure that benefits flow to the nation from a competitive national economy unimpeded by protectionist measures whether they be at the legislative or executive level. The actual decision was expressed by the Court in terms of the provisions infringing section 92 because they restricted the operation of competition in the national market to the advantage of intrastate operators. These measures, by the differential burden on Betfair’s revenues compared to TAB’s revenues, do exactly the same thing; they restrict the operation of competition in the national market.

I want to come back to the illustration I gave a moment ago using border duties and make a point concerning Fox v Robbins.  Fox v Robbins concerned a tax on grapes used in wine production. Grapes imported from other States were the subject of a much larger duty than WA grapes. The High Court said that the discriminatory impost was contrary to section 92.

FRENCH CJ:   This is what I think you refer to as an unequal law on equals.

MR YOUNG:   Possibly, your Honour, but I was going to try and illustrate a point in a slightly different way about the case.  There was no investigation in Fox v Robbins of the market effects or profitability effects of the differential impost.  It cannot be because the impost was plain for all to see on the face of the legislation, because we apply a single test to discriminatory imposts whether they are facial or revealed only by a consideration of practical operation.  So that cannot be the explanation as to why there was no further investigation.  The explanation must be that the differential impost was apt to be protectionist or to have a protectionist impact simply by virtue of the fact that to impose a substantially greater impost on an interstate trader and its grapes rather than on a local trader necessarily, of its very nature, either raises that trader’s costs or forces the trader to pass it on and adversely affects its competitive position. 

Now, the Full Court distinguished Fox v Robbins on the basis that it was a facial discrimination case.  That appears at paragraph 91 at 2379.  Indeed, both Fox v Robbins and Bath v Alston are said to fall into a particular category because they are facial discrimination cases, distinct from cases where practical operation is in issue.  The Fox v Robbins, Bath v Alston point could have been denigrated as a mere arithmetical point because they were only concerned with higher costs, but it was enough in those cases, but yet in a practical operation case the Full Court went on, in paragraph 92 and later paragraphs, to say it is not enough to point to the substantially greater costs imposed on the interstate trader. 

The reasoning is flawed, in our submission.  You can test it by a simple change to the facts we are concerned with.  If the different impact on revenue appeared on the face of the legislation, what approach would be adopted?  If the fee conditions prescribed that Betfair shall pay 60 per cent of its commission revenue for its approval and TAB shall pay 9.375 per cent of its commission for its approval, there would be facial discrimination.  It would plainly be bad.  You cannot arrive at any different result, in our submission, applying a practical operation approach simply because those figures are not there on the face of the legislation but are revealed when you consider the only neutral comparator between the position of the two parties, revenue.

GUMMOW J:   Could we just look at Victoria’s submissions, paragraph 51, in the light of what you have just been saying to us about Fox v Robbins and Bath.  Paragraph 51 on page 15, looking at point (a) there, you would fit Fox into (i), would you, or (ii)?

MR YOUNG:   Yes, your Honour, subject to this.  It is not clear whether this submission is trying to come back to criterion of operation principles, but putting that aside and subject to that qualification, yes.

GUMMOW J:   Well, no, it is not because of (iii).  You say your case falls in (iii) do you, and that that was ignored by the Full Court, relevantly?

MR YOUNG:   Largely, yes, your Honour, but there is a sense in which, if you understand the industry, the discrimination is almost apparent on the face of the legislation simply by the choice of back bet – I am sorry, I should not have said on the face of the legislation – on the face of the fee condition residing entirely in the choice of back‑bet turnover and an entirely inappropriate metric.  The other qualification to (iii), your Honour, is the insertion of the reference to objective intention.

GUMMOW J:   Yes.

MR YOUNG:   I was describing simply the effect.  If you substitute for 1.5 per cent the different figures of 60 per cent of gross revenue in our case and 9.375 in TAB’s case, I am not talking about objective intention, I am speaking about practical effect.

GUMMOW J:   What do you say about (b)?

MR YOUNG:   Again, I have a qualification because elsewhere this notion of competitive disadvantage is used to describe something extraneous to the cost burden imposed by the measure itself, in other words, a pre‑existing advantage tied to the state of origin.  That is, in our submission, an erroneous gloss, as Fox v Robbins and Castlemaine Tooheys demonstrate.  As for (c), the trial judge answered that adversely to the validity of the legislation by finding it was not reasonably necessary and not connected with any legitimate object.

GUMMOW J:   Thank you.

MR YOUNG:   I want to move to the next stage of the Full Court’s reasoning which was to add a requirement that you demonstrated a likely adverse effect on market share or profitability.  That appears at paragraphs 79 and following at 2375.  The proposition is that the much greater cost burden is not of itself demonstrative of anti‑competitive restrictions.  Their Honours say:

Whether or not Betfair chooses to recoup the fee . . . there is no reason in the evidence to suppose that the fee would be apt to have a greater adverse effect on Betfair’s market share or profitability than it would have upon TAB.

That is repeated at the end of paragraph 80, and it appears again at 98 and 99, towards the bottom of the page where 98 appears:

Betfair was not able to show that it . . . would lose any market share to TAB or that it would suffer any loss of net revenue whether it chose to pass on the fee or not.

The second half of that is simply wrong, there was evidence.  But neither requirement finds any foothold at all in earlier authorities of this Court.  It is denied by all of the earlier cases, including Fox v Robbins and Castlemaine, which were endorsed as recently as Betfair.  The analysis of the Full Court is based on a misreading of Castlemaine Tooheys.  Can I go back to the first of those passages?  It is just before paragraph 79 at 2375.  Their Honours say at paragraph 77:

It was the effect of the law upon the Bond companies’ market share which their Honours identified as the practical effect of the law which gave it its protectionist character.

That is inaccurate.  That is not what the Court said in Castlemaine, and can I ask the Court to go to Castlemaine 169 CLR 436, and I will try and make that proposition good.

The reference to the Bond company’s market share is at 464, point 3 on the page.  That is when one reads the whole of the reasons a recitation of an agreed fact from pages 488 to 489.  It is not enunciating a legal requirement that discrimination in a protection sense requires proof of a significant adverse effect on market share.  That is made abundantly plain by the balance of the Court’s reasons.

The competitive disadvantage, the burden, was in fact identified differently and entirely aside from market share.  At 462 to 463 two competitive disadvantages were identified.  The last paragraph at 462, the first disadvantage was the use of - non‑refillable bottles were subject to a refund of 15 cents, compared to refillable bottles at 4 cents, so there was a different refund quantum.  That impacted bottle cost, 463, point 5, making Bond bottle costs “26 cents” compared to the intrastate trader’s “16.65 cents”.  The second disadvantage was the Bond companies were not exempted from obligations to maintain delivery centres for bottles.  That again had an adverse cost impact, 464, point 2, further raising the bottle cost to “31 cents per bottle”. 

Now, it was those two imposts, those two additional costs affecting bottle costs that were the discriminatory imposts that triggered section 92, not market share. That is clear at 467, last paragraph, the two respects already mentioned which gave the South Australian brewers a competitive or market advantage. The Court comes back to those bottle cost matters at 474 to 475 and it is quite clear that the two measures; the differential refund and the exemption, both of which imposed greater bottle costs, were the burdens that infringed section 92. No requirements you go further of the kind that the Full Court identified in this case.

The issue in fact was that those two competitive disadvantages would be sufficient of themselves to infringe section 92 unless the respondents could demonstrate that the asserted objectives of litter control and energy conservation were being pursued in a way that was not disproportionate. That was the real turning point in the case, as 472 and following makes clear. So, in our submission, there is a misreading of Castlemaine Tooheys. It is no authority for the proposition that you cannot demonstrate a breach of section 92 by pointing to the imposition of a vastly different and discriminatory cost on interstate traders compared to intrastate traders.

GUMMOW J:   So what is the particular message in the Full Court that you say shows this up most clearly, their error?

MR YOUNG:   It appears that one of the fundamental reasons for holding that section 92 was not infringed despite the cost differences that were imposed ‑ ‑ ‑

GUMMOW J:   Where are you reading from?

MR YOUNG:   I was prefacing what I was going to read from paragraph 80, your Honour.

GUMMOW J:   Thank you.

MR YOUNG:   About five lines in there is a rhetorical question.  Just before that Betfair says the inquiry must stop at the:

obvious arithmetical truth that . . . take a greater percentage of its turnover –

Well, that was not the argument, it was a greater percentage of revenue. 

Why the inquiry . . . should stop at this point and leave hanging the obvious questions as to the likely effect of the fee upon its market share or profitability was not satisfactorily explained.

The failure to prove a loss of market share was decisive in the eyes of the Full Court. They called it a fatal deficit at paragraph 99 at 2382 from line 9 to about line 15. Our short point is, where a vastly different cost impost is demonstrated per revenue dollar, that is sufficient to demonstrate an infringement of section 92. You do not need to go further. If we did, we proved it anyway by the evidence concerning the adverse effect on profitability and revenue margin from Mr Twaits, plus the adverse effect on prices available to punters as shown by those screen shots. If we pass on the fee, the same competitive prices will not be available.

On that question of pass on, the Full Court in these passages refer on numerous occasions to business model.  The context seems to be a misunderstanding about margin as if what is at stake is profit margin; it is not.  It is a difference in revenue impost.  The suggestion, never entirely spelt out by the Full Court, is that Betfair could easily change its way of doing business so as to overcome the anti‑competitive effect of these fees.  Hence, the references to business model at, amongst other places, 92, line 32, and 99, the paragraph I was in.  The proposition seems to be that you could change aspects of your business, you could pass on the fee, you could readily adjust your business and you would not suffer any competitive detriment.  No thought seems to have been given to the position of consumers in the national market. 

The first submission we make as to why that is erroneous is that the differential impact is not a question of some discretionary aspect of the business.  It is not associated with profit decisions.  The fundamental difference between the two businesses goes to their intrinsic character.  The betting exchange does not have back‑bet revenue in the same way.  It does not hold back‑bet revenue and it takes nothing out of back‑bet revenue – I am sorry, back‑bet turnover.  It does not hold back‑bet turnover.  It takes nothing out of back‑bet turnover unlike bookmakers and the tote.  It simply matches punters who want to lay opposite sides of a contingency.

It can only take a commission out of net winnings. These are not matters of discretion or choice; these go to the fundamental character of the operation and the very reason why it is competitive, and the very heart of the matter as to why it is entitled to section 92 protection.

FRENCH CJ:   There seems to be a subtext of reasoning that says that because you can, as it were – the fact that you have not changed your position is an indicator of your capacity to soldier on under the additional burden which is a reflection on its lack of impact on your competitive position.

MR YOUNG:   Possibly, your Honour, although the Full Court does go on to reject the proposition that effect, as distinct from aptitude, if I can put it that way, or likelihood, needed to be demonstrated.  The Full Court said, and I am struggling to find the passage, that it is unnecessary to show anything more than the likely impact on competitive position.  You do not have to demonstrate an actual effect as you would in a substantial lessening of competition case.

FRENCH CJ:   Something at 106 perhaps.

MR YOUNG:   Yes, it is towards the end.  Yes, it is about line 30 in 106.  I am grateful to your Honour.  But if there is that kind of element, that because we have chosen to bear it then there is no harm done, it cannot be right because to bear that vastly greater impost with its effect on our revenues and profit necessarily weakens our competitive position.

CRENNAN J:   What it really comes down to is the less revenue you have because of the impost’s effect on each betting dollar reduces the ability to compete.

MR YOUNG:   Yes, and we say that is sufficient on the analysis in Betfair v Western Australia and it must follow consistently with Fox v Robbins because a border duty is one of the five traditional categories of impost that infringes section 92, mentioned in Cole v Whitfield, so is a tariff.  The only way in which they affect your competitive position in the national economy is by reason of the fact that it is an additional cost that you either have to bear or you have to pass on.  In your Honour Justice Crennan’s answer your Honour said “betting dollar”, because we do not hold turnover back bets, I took your Honour’s question to be referring to betting revenue.

CRENNAN J:   Yes, because you are talking about the difference between approximately 60 per cent and 10 per cent?

MR YOUNG:   Yes, it is a revenue comparison.  There are just a couple of very brief points to add.  The Full Court mentioned at one point that you needed to demonstrate an impact on all interstate traders by reason of the common circumstances of the trade, 104 of their judgment.  In our submission, that is not correct.  If you demonstrate an adverse impact on interstate trade on commerce by demonstrating an adverse impact upon a substantial interstate trader, that is sufficient.  Were it otherwise, Castlemaine Tooheys would have to be overturned, as would Betfair v Western Australia.

I mentioned that the Full Court judgment seems to be confused about the idea of margin.  I will not go through the passages, but that appears by reading these paragraphs; 420, 94, 99 and 103.  In some places it is explicitly profit margin.  In other places it is just entirely confused.  The margin comparison is simply a translation of our commission of 2.5 per cent to enable the comparison if you are looking at turnover.  That is explained by the trial judge in two places; at paragraph 136, 2252 and at paragraph 246 at 2283 to 2284. 

The Full Court also, in our submission, erred by treating Bath v Alston, and possibly Castlemaine Tooheys, as if they said that what you must demonstrate is an adverse effect on a pre‑existing competitive advantage.  That is an unorthodox and incorrect proposition.  Bath v Alston does not stand for that.  The Full Court references I would give are to paragraphs 68 and 103 at pages 2371 and 2383. 

Finally, on the executive decisions and the relevance of purpose, it is not a substitute for the established test.  Our submission is simply that when you move down to an administrative decision‑making level and you need to characterise the effect of that administrative order or executive order, the purpose actuating the decision‑makers is relevant to characterisation.  That is particularly so against ‑ ‑ ‑

FRENCH CJ:   Things are presumed to have their intended effect.

MR YOUNG:   Yes, or in the trade practices field, if you intend to mislead, it can be more readily concluded that the character of your conduct was that it was likely to mislead as Campomar. It is logical and there is no reason to exclude it, it would have to – well, firstly, in the earlier section 92 cases and I will give two references only, it was identified as a relevant consideration - James v Cowan 47 CLR 386 at 396 to 397 and Yates v Vegetable Seeds Committee 72 CLR 37 and a string of references between 68 and 84.

So, in our submission, it is a relevant consideration and it may be we arrive at the result without it but if it is necessary to assist, it assists in the conclusion that these executive orders infringe section 92 by imposing the discriminatory burden, that being the very purpose and intention to (a) discriminate and (b) protect TAB’s revenues which necessarily meant a protection that the racing control bodies share the TAB’s revenues. Now, if the Court pleases, those are our submissions. I apologise if I have been seen to race somewhat at times.

FRENCH CJ:   Thank you, Mr Young.  We will adjourn now until 2.15.

AT 12.45 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.17 PM:

FRENCH CJ:   Mr Young, just before you resume, apropos the question that, I think, Justice Gummow put to you in relation to confidentiality, I think there were some consent orders which were made and extended by Justice Heydon in the course of the lead up to this appeal.  Is there any reason why those orders should be maintained?

MR YOUNG:   Not that I am aware of, your Honour, but may I check with my instructors about that matter?

FRENCH CJ:   And the other parties, of course, as well.  All right, yes, please proceed.

MR YOUNG:   Your Honours, aside from the essential issue, there are some differences that arise in the Sportsbet appeal which it is appropriate to note at the outset. The first is that it arises under section 49 of the Northern Territory (Self‑Government) Act operating in combination with section 109. Because the terms of section 49 replicate section 92 of the Constitution, the essential question that arises is the same. Does the race fields legislation, alternatively the fee conditions, impose a discriminatory burden on State and commerce on this occasion between the Northern Territory and other States, the same characterisation ‑ ‑ ‑

GUMMOW J:   The inconsistency may just be operational inconsistency, would it be, as and when something is done under the New South Wales Act?

MR YOUNG:   It depends on what view is taken about the validity of the legislation.  That is the second difference.  The legislation is challenged in the Sportsbet Case as well as the fee conditions. 

GUMMOW J:   All I am inviting you to consider is that it is not just enough to speak of section 109 and then pass on as if you are in the same territory as we were in the first case.

MR YOUNG:   No. Obviously, your Honour, the question is whether the New South Wales race fields legislation or the executive orders under it alter or impair the operation of law of the Commonwealth being section 49 of the Northern Territory (Self‑Government) Act which erects this shield for trade and commerce between the Territory and the States. But, so analysed, the question is whether the protection, arising under a law of the Commonwealth – section 49 – is impinged upon by the New South Wales legislation or executive orders.

FRENCH CJ:   Your attack on the New South Wales legislation in this case is linked to the lifting of the burden from the New South Wales entities.

MR YOUNG:   Yes, it is.

FRENCH CJ:   It is not just a matter of looking at the law and looking for an inconsistency.  It is being seen in some sort of wider context, is it not?

MR YOUNG:   It is.  The argument, though, does stress the way in which the law operates upon the existing regulatory regime relating to the distribution of TAB’s revenues and that is the third difference.  This appeal requires a much closer analysis of the statutory‑backed regime for the control of totalizators in the distribution of their revenues to a substantial extent to the racing control bodies who are the regulators under these race fields regulations.  It is the combined operation of that underlying legal regime overlaid by the race fields legislation that we say has an important consequence for the validity of both the legislation and the executive orders.

I want to, without repeating, stress two of the features of the legislation, the race fields legislation I mentioned this morning.  Extra stress in the context of this appeal falls on the conferral of the power on the racing control bodies to impose the fee conditions as a condition of approval, relaxing what is otherwise a prohibition on interstate trade.  We also rely upon the conflicted position of the racing control bodies in exercising that function.  That is the first feature of the race fields legislation we stress. 

The second is that the fee proceeds are a debt due to the racing control bodies under this legislation.  It is unusual to confer a taxing power exercisable by representatives of a domestic industry in circumstances where they are free to distribute the proceeds of the tax for the benefit of the local industry.  That is not only what happened here, it is what was both expected and, we say, required by the intersection of the race fields legislation with the underlying regime constituted by other pieces of New South Wales legislation.  I will need to take some time to explain that submission.

There are operating, both before the race fields legislation and thereafter in conjunction with the race fields legislation, a series of State‑sponsored, in the sense of legislatively backed and enforced, arrangements for the funding of the New South Wales racing industry.  Those arrangements are not only required by legislation, they are made enforceable by State legislation and in connection with the operation of those arrangements, State legislation confers particular powers on the racing control bodies to act in the interests of the totalizator. 

One aspect is the sharing of TAB’s revenues under those commercial arrangements, but it does not finish there.  The control bodies can direct and control what fees are to be levied by clubs on bookmakers and they can distribute additional revenues to the clubs having regard to actions taken by the clubs in relation to the fees they charge bookmakers.  The control bodies are also given powers to take steps ancillary to the implementation of the commercial arrangements which we say includes that application of the fee proceeds to the benefit of TAB.

It is that interaction which is my starting point.  Can I ask if the Court would go to the Totalizator Act on our authorities.  The Court should have a version of the Totalizator Act 1997 (NSW) which is an “in effects” version from 1 July 2008 to 30 June 2009. Before I delve into the actual provisions, can I give a little background. Until 1997, the New South Wales totalizator, both off course and on course, was conducted by a statutory agency, the Totalizator Agency Board. It was corporatised into TAB Limited in anticipation of a float of the shares in 1997 and 1998. It was only in 2003 that the now public company TAB Limited was acquired by Tabcorp Holdings Limited which was and is the operator of the Victorian totalizator.

The Totalizator Act was enacted with that privatisation as its object.  The Totalizator Act 1997 was assented to on 1 July 1997 but did not commence until 3 March 1998. In the period between assent and commencement, the RDA, the commercial arrangement, was entered into by TAB Limited and the racing control bodies. The Totalizator Act provides firstly for the grant of a monopoly licence to the licence applicant to conduct an off‑course totalizator in New South Wales and that initial operator was to be TAB Limited, the corporatised statutory agency.  That appears in section 14.  The first 15 years of any such licence was to be exclusive under section 11.

GUMMOW J:   Did you say section 14? 

MR YOUNG:   Section 14, yes, is the entitlement of TAB to the off‑course licence, section 14(1).

HAYNE J:   One page we do not have.

MR YOUNG:   I am sorry, your Honour?

HAYNE J:   It is the one page we do not have, I think, or one of the pages we do not have.

MR YOUNG:   Under section 11 it is exclusive for the first 15 years.  The amount payable for the licence is governed by section 15A.  It is not fixed by the legislation.  Under section 17, any on‑course totalizator is to be conducted by TAB or by the racing clubs as agent for TAB.  That is the effect of section 17(3).  There is a Trade Practices Act exemption in relation to the grant of these licences in section 17A.  Section 21A requires that a commercial arrangement be entered into between TAB as the holder of the licence and the racing industry, that is section 21A, which is the requirement for the bringing into existence of the RDA.  The racing control bodies represent the racing industry for the purposes of this legislation.  In subsection (2), the racing industry comprises the controlling bodies and they are defined in section 6A as Racing New South Wales, Harness Racing New South Wales and Greyhound Racing New South Wales. 

FRENCH CJ:   The major racing bodies are also defined, are they not, in 6B?

MR YOUNG:   Yes.  The Court should have available to it the second reading speech for the Totalizator Legislation Amendment Bill in November 1997.  The second reading speech assists in understanding the structure of the payments for the monopoly totalizator licence.  At the bottom of the first page in the first paragraph over the page, what is explained is the grant of a 99‑year licence, the first 15 years exclusive.  The next paragraph explains the fee structure.  There is to be:

a single up‑front fee for the grant of its totalisator licences.  The Government does not intend to charge the TAB an ongoing licence fee for its totalisator licences. 

What follows is that instead of ongoing fees –

Arrangements are contemplated, covering an agreement between the TAB and the racing industry, which will provide a secure base for the long‑term future of the racing industry –

So instead of the former statutory agency model in which the Government distributed out of the revenues of the totalizator year by year a portion of the revenues to the racing industry, the corner was cut.  Instead of recurring yearly licence fees payable to the Government which the Government would then distribute to the racing industry, the structure of this legislation was that arrangements were required to be made by force of legislation directly between the totalizator under the licence and the racing control bodies.  That is the function of section 21A, commercial agreement.

Subsequently, the situation arose where TAB Limited was likely to be taken over by Tabcorp Holdings or Unitab, the Queensland totalizator operator. That led to the introduction of section 43A. Before I refer to section 43A, I should mention section 43. Section 43(2) makes it a condition of the licence that:

the licensee must have in place and must give effect to commercial arrangements with the racing industry . . . being arrangements that the racing industry has acknowledged in writing to the Minister are to the satisfaction of the racing industry.

Section 43A applies the same requirements of 21A and 43 to any nominated company which may acquire TAB Limited. So it is a licence condition under 43A that the commercial arrangements satisfactory to the industry are given effect to. Likewise under (2). Under subsection (1) any revised RDA involving Tabcorp as the new owner of Tab Limited was to contain provisions no less favourable than the pre-existing arrangements.

We have distributed, but I will not go to it, the second reading speech for the introduction of section 43A. It describes an advantage of the introduction of Tabcorp Holdings is that expenses would be spread across various jurisdictions in which the Victorian totalizator operated, meaning there should be a greater revenue distribution to the New South Wales racing industry who were described as 25 per cent beneficiaries of the profits of totalizator.

Now, the commercial arrangements not only had to be made as a precondition to the grant of a licence, the actual terms of the document had to be submitted to the Minister under section 21A(1)(c) and the industry had to certify that the arrangements were satisfactory, and again the same regime operated under section 43A. The other relevant provisions concern the powers of racing bodies ancillary to the operation of the commercial arrangements. They are dealt with in a schedule to the Totalizator Act. It is Schedule 2, clauses 14 and 15. Clause 14 confers on:

Each controlling body has such additional powers, authorities, duties and functions as may be necessary or convenient for enabling it to enter into and perform its obligations under the following arrangements:

(a)      commercial arrangements for facilitating the conduct of totalizator betting and . . . arrangements ancillary to those arrangements –

(c) is assistance to clubs and ancillary arrangements and (d) is arrangements for the distribution of moneys.  Clause 15 gives additional powers to controlling bodies to give directions to the clubs that are “necessary or desirable for the purpose of enabling it to exercise its rights and perform its obligations” not just under the commercial arrangements but under ancillary actions that might be taken pursuant to clause 14.

The RDA, as I said, was entered into in that period between assent and commencement.  It is dated a date in December – 11 December 1997.  It is in volume 2 at 316.  By 2008 there was an amended RDA in place arising out of Tabcorp Holdings’ acquisition of TAB Ltd.  So the original agreement predated the commencement of the Totalizator Act provisions 11 December 1997. 

The scheme of the agreement is most easily picked up from the original agreement.  The consolidated agreement is a schedule to the accession deed between the racing control bodies and Tabcorp.  The accession deed is at page 608.  It is dated 22 December 2004.  There are various amendments arising out of TAB’s accession.  Consolidated RDA commences at 628.  Amongst other things, the RDA provides for a sharing of TAB’s totalizator revenues and then those revenues are based on the net wagering earnings from TAB’s New South Wales operations.

CRENNAN J:   Where do we see that?

MR YOUNG:   You see that in the agreement.  I was going to take the Court to a summary of it because the agreement is a very cumbersome document to take the Court through.  The actual provision, the operative provision is clause 9.1 that provides for the payment of fees.  It appears at 718.  Clause 9.1 provides for the payment of various fees.  It is a fixed product fee which was a specified number of millions of dollars - I think, 12.  I will check that.  But the variable fees that are ongoing are the product fee and the wagering incentive fee.  The product fee is essentially 21‑odd per cent of the net wagering earnings of TAB year by year from its totalizator business in New South Wales and the wagering incentive fee is a 21 per cent share of EBIT – earnings before interest and tax from New South Wales operations – totalizator operations of TAB.

One only gets there by tracking through the detailed definitions.  The trial judge made findings concerning those matters.  I wanted to make these submissions arising out of that description of the underlying regime.  It has been put against us that the commercial arrangement is a private commercial arrangement between TAB and control bodies and stands altogether to one side when one is assessing the validity of the legislation and the fee conditions.  In our submissions that is not the case; it is not a private commercial agreement.  Historically it replaced direct government funding of the racing industry, as Justice Perram said at paragraph 31 of his judgment in Sportsbet. It is required by section 21A in section 43A.

It has to be the satisfaction of the control bodies and the Minister is aware, through provision of a copy of its provisions. TAB is obliged to comply with the terms of the RDA as one of its licence conditions. That is the effect of section 43 and 43A of the Totalizator Act.  Those licence conditions are enforceable by statute and non‑compliance can result in cancellation, suspension or monetary penalties.

FRENCH CJ:   You do not say it has statutory force?

MR YOUNG:   We say it has statutory backing in the ways I have just described, your Honour, is probably the best way of putting it if I am to sum it up in a few words.  We do say though it is part of the regulatory framework within which the government granted a 99‑year licence and the payments it provides for are effectively part of the consideration seen in the wider perspective for the grant of that exclusive licence.  It is not the way it is expressed within the RDA but, in our submission, that is the proper characterisation of what has occurred by force of this legislation.  In lieu of annual licence fee payments the government has required annual payments direct from the totalizator in respect of revenues arising under its licences to the racing industry.

The next proposition is one that founds itself on the findings of the trial judge and in the evidence which seems to be plain and irrefutable, which is that the underlying regime, including the RDA, creates an economic joint venture between TAB and the racing control bodies.

In Justice Perram’s words, those parties are commercially intertwined so that revenue migrating from TAB migrates from the racing control bodies.  If I can go to Justice Perram for a moment in volume 8, he summarises the fees and expresses certain conclusions about the conflict that the fee arrangements lead to.  In volume 8 at paragraph 35 Justice Perram deals with the fees.  There is a fixed product fee, “$12 million” – it is about line 34 – a percentage of net wagering revenue, essentially the “revenue streams of TAB”, and “a wagering incentive fee”.

His Honour says that leads to this commercial intertwining in paragraph 37, putting the control bodies, the chosen regulators, under the race fields legislation in what his Honour thought was an untenable position.  Paragraph 38, revenue migrating away from TAB effectively migrates away from the control bodies.  His Honour returns to the question of conflict of interest in paragraph 48 at page 2719.  The summary of fees – there is a document from New South Wales Racing ‑ ‑ ‑

GUMMOW J:   Where does his Honour first use this expression “revenue leakage”?

MR YOUNG:   I think it is first introduced, your Honour, in about those paragraphs I have just mentioned, but his Honour comes back to it in dealing more extensively with the purpose of the legislation, and he deals with that at paragraphs 45 and 46 at 2718.  His Honour essentially found that the express concern in the extrinsic materials about free riding was in reality a concern that interstate traders were diverting revenue away from the TAB, and hence away from the local racing industry.  His Honour dealt as well with the question of the sharing of revenues and the resulting conflict at 2728.

This was in the context of dealing with the actual basis explained in RNSW’s decision‑making paper of 18 June 2008 that I went to this morning.  There is a summary of fees, how these fees operate, that is useful in the RNSW document in volume 4 at page 1553.  This explains more fully the operative definitions that define the fees.  They are listed at 1553.  The definitions are cross‑referenced in the footnote 2 and then what follows is a more extensive explanation of the content or nature of each fee.  At 1555, in particular, the variable product fee is explained.  These explanations are accurate.  They conform to the definitions that it is tedious to work through:

The Variable Product Fee is 21.9965% of Net Wagering Revenue from totalizators conducted by the TAB Group under NSW wagering licences. 

At 1556:

The Wagering Incentive Fee (“WIF”) is 25% of the Wagering Earnings -

and below the first two bullet points at about line 32:

is broadly equivalent to the EBIT (Earnings before interest and tax) -

So essentially there is a revenue and profit sharing joint venture between the racing control bodies and TAB in relation to revenues from New South Wales Racing.  There are, in addition, a number of provisions of the RDA that, if the Court forgives me for time reasons, I will not attempt to work through the papers, but the provisions I am about to mention have the flavour of a joint venture in which the parties are consulting with each other about their respective businesses and working together to both resolve concerns and maximise totalizator revenues.

I would refer the Court to these clauses of the consolidated RDA - 3.1, 3.2, 4, 5.1, 6.1, 8.2, 9.1 and 16.  In the RDA I should specifically refer the Court to the provisions dealing with the supply of racing information.  There are two, without going in detail to them, 6.1 and 8.2.  Clause 6.1 is a provision to the effect that New South Wales Racing will procure the supply of New South Wales racing information.  In the consolidated RDA, I go to that, the first provision is 6.1, which I have just described at page 709.  The other provision is 8.2, which is at 716.  It is the second provision that TAB contended was affected by the imposition of a fee on it, namely the provision that TAB shall be entitled to, and:

NSWR will procure the grant to TAB of a non‑exclusive, royalty‑free (“Licence”) to):

(a)      disclose, use . . . the NSW Racing Information –

The other document I should refer the Court to in volume 2 is the intra‑code deed.  That is the agreement that was made again before the commencement of the Totalizator Act and the new licence arrangements under which the racing code split the revenue streams from TAB.  It is at page 388.

FRENCH CJ:   Those revenue streams did not just come out of racing, did they?  They were things like tennis.

MR YOUNG:   They largely did, is the answer, I think.

FRENCH CJ:   I thought there were other activities also that were covered by TAB.  Anyway, it does not matter.

MR YOUNG:   There is a limit to that, if I can put it that way, your Honour; it is complicated.  The ultimate source of the racing information is the clubs, and that is made clear by clause 10 of the intra‑code agreement at 392.  So the clubs provide the information or grant a licence to NSWR relating to the information permitting NSWR to supply the information to TAB.

An aspect of the joint venture nature of the relations between the party is indicated by clause 19 of this intra‑code agreement at 398. It is a non‑compete with TAB clause. Can I turn then to the powers of the control bodies. Their own Acts supplement the powers given by Schedule 2 of the Totalizator Act.  Clauses 14 and 15 of the Totalizator Act are probably the most important source of powers and obligations relating to totalizator revenue, but they are supplemented to some extent by the racing control bodies own Acts.  In the case of Racing New South Wales, it is the Thoroughbred Racing Act 1996.  The Court should have a historical version from 19 December 2008.  I will explain what changes occurred between July and December 2008, but this is the most convenient one to work from.  Under section 5:

Racing NSW does not represent the Crown and is not subject to direction or control by or on behalf of the Government.

It has broad functions in relation to racing in New South Wales under section 13 and has got powers to do everything necessary or convenient in connection with those functions under section 14.  It has got special powers under 29A to C to effectively give directions to the clubs.  They would need to be expressed as minimum standards but they could be minimum standards relating to, for instance, (e), “the fees and charges imposed by a race club in connection with races conducted by the race club”.  There is also powers relating to the intra‑code agreement under section 29H to 29J, especially 29J.

KIEFEL J:   I am afraid this is another Act where we do not have the relevant sections.

MR YOUNG:   I am sorry, your Honour.  I did try and ensure that the list of authorities referred to the relevant legislation.  Can I then, at least for the transcript, your Honour, finish that sentence.  Sections 29H to J give Racing New South Wales the ultimate power to determine what changes should be made to the intra‑code agreement so it can determine that certain adjustments be made as to the way in which the TAB revenue share is to be split between harness racing, thoroughbred racing, et cetera.

FRENCH CJ:   When did those provisions come in?

MR YOUNG:   They came into effect on 19 December 1998.

FRENCH CJ:   Right.

MR YOUNG:   That is the case, your Honour, in relation to ‑ ‑ ‑

FRENCH CJ:   19 December 2008.

MR YOUNG:   December 2008.

FRENCH CJ:   That is why they are not in these versions.

MR YOUNG:   One knows one is getting old when you refer to the wrong decade. But that commencement date, your Honour, 19 December 2008, applies both to 29A to 29C and 29H to J. So that means that until December 2008, the controlling bodies could control the clubs using their powers under Schedule 2 of the Totalizator Act and give directions to them not to charge bookmakers fees and so forth. They had extra powers in that regard from December 2008 under their own Act. Harness racing is likewise a statutory authority not representing the Crown and not subject to direction under Section 7 of the Harness Racing Act 2002. In its case, the special provisions about minimum standard directions to the clubs only came into operation under the Harness Racing Act 2009. I am sorry for the tedium of that explanation.

The power of the controlling bodies to give directions to clubs means, relevantly for this case, the clubs were not independent actors in relation to the fees they charge bookmakers.  Not only were they financially dependent on distributions from TAB which the control bodies and, in particular, RNSW controlled, they were subject to direction from the control bodies.  Control bodies could direct them to cease levying fees to bookmakers and the control bodies had the power to replace those fees with an additional distribution out of TAB revenue share, and that is, in effect, what happened.  Likewise, under that legislative regime that I have endeavoured to describe, to facilitate the implementation of the RDA, the control bodies had the power to use the fee proceeds and to pay them to TAB whether that was required legally by the RDA or whether it was regarded as necessary to give effect to the spirit of the RDA.

They had the power to apply the fee proceeds in that fashion and, indeed, under clauses 14 and 15 we would say they had the obligation to do so.  That is regardless of the argument that is raised by New South Wales Racing about a contractual breach of the RDA.  It is simply a proposition that the intent of the commercial arrangements is that TAB should not pay extra for race field information.  There is no breach when legislation supervenes to impose an approval requirement conditioned by the payment of a fee, but the racing control bodies under the underlying legislative regime have both the power and the obligation to apply the proceeds to make TAB whole.  That is the regime into which the race fields legislation was introduced.

Can I take a step back from that and deal with the race fields legislation itself that overlays these ongoing arrangements.  Both the trial judge and the Full Court considered that the primary purpose of the legislation objectively assessed was to prevent revenue leakage away from New South Wales wagering operators and hence away from the racing industry.  I mentioned this this morning.  It is Justice Perram at paragraphs 44 to 46 and 48 at 2717 and following, and the Full Court at paragraph 28.

We would add to that primary purpose a rider.  Not only was it to prevent revenue leakage away from the New South Wales domestic industry, it was to do that whilst allowing the nature and practical effect of the fees to be determined by the racing control bodies themselves.  That practical effect was determined not just by defining the nature and quantum of the fee, but by determining to apply the proceeds to insulate TAB and New South Wales bookmakers from the economic burden of the fee. 

As for legislative purpose, the lower court’s view that there was a leakage stemming purpose is supported by an analysis of the mischief by reference to publicly available materials.  There is another taskforce report in these appeal books.  It is a different taskforce from the one concerned with betting exchanges and the one that was referred to in Betfair v Western Australia.  This is about cross‑border betting and is concerned with corporate bookmakers attracting customers away from the domestic totalizators.  It is in volume 2 of the appeal book at 422.  We would refer the Court to these pages without going to them, 429 to 432, and 451 to 453, 459 and 468.

It is material of a similar flavour about the revenue leakage this time to the corporate bookmakers and away from the State‑based totalizators.  There is a similar expression in RNSW annual report for 2004 at 536.  We would also refer to the second reading speech and I have mentioned that this morning.  That is the second reading speech for the race fields legislation.  It is in the Sportsbet appeal books at page 919. 

Now, even before I turn to the actual approvals and how they developed, we submit that on an objective assessment protection is indicated by the fact that the legislation coupled with the regulations confer a taxing power on bodies that represent the local New South Wales industry that have existing commercial arrangements with TAB that give them a share of TAB’s revenues. 

They have both the ability and the obligation to determine financial arrangements between clubs and bookmakers consistently with the overriding TAB arrangements under those provisions of Schedule 2 of the Totalizator Act.  They have the power and the obligation to apply the proceeds raised by these fees in ways that make TAB hold and take account of the fact that the payments under the RDA assumed the availability of the racing information. 

The Full Court said that the purpose of the legislative scheme was – and I quote:  “To protect against the hazard of fraud and financially irresponsible operators”.  That appears from paragraphs 135 and 138 to 139.  In our submission, that is not the conclusion that one would arrive at on an objective assessment.  The clear purpose of the legislation – the legislative package - is revenue raising and, moreover, revenue raising from persons other than TAB and bookmakers because it is those others who were classed as free riders.

In any event, in terms of these integrity regulation purposes to which the Full Court refers, all of the wagering operators, Sportsbet and other corporate bookmakers and, indeed, Betfair, are already subject to licensing arrangements, integrity controls and probity requirements either in New South Wales or elsewhere.  TAB is caught by this legislation.  It is regulated in a probity sense by the Totalizator Act.  Bookmakers are likewise caught, but the other legislation, the licensing legislations, regulates probity controls.  That is not the purpose, in our submission, of this legislation.  It is revenue raising in a way that achieves protection. 

I have been through this morning the development of the regulations and the fee conditions.  The materials dealing with those matters are more extensive in the Sportsbet appeal books but to no different effect that I submitted this morning and many of the most important documents I have already traversed this morning and I do not intend to do that again.  The Sportsbet approval itself was 15 August 2008.  That is volume 5 of the appeal book 1998.  There was a further approval on 19 June 2009.  Again, the approvals followed resolutions of the control bodies that pre‑dated the promulgation of the regulations.  We make the same submissions about the development of the regulations and the fee conditions in this appeal as I made this morning.  The spur to the development was the loss of market share to Northern Territory Bookmakers, relevantly for present purposes. 

The additional materials in this appeal book include Tabcorp documents at 1371 to 1374 and 1360 to 1362 and relating to harness racing, a BIS Shrapnel report the Court would not have heard mentioned previously at 1801 to 1806.  As to the better odds being offered by the Northern Territory bookmakers, it is different from Betfair obviously enough.  Justice Perram makes findings at paragraphs 7 and 19 to 21 about it.  Essentially, the corporate bookmakers offered odds on their websites that matched or bettered what was called the best tote odds available anywhere around the country.  So they had a column for what the tote was offering and they had a rival column of their odds that bettered the tote price.

The development of the regulations went through the same stages pre‑Betfair v Western Australia and post.  On the question of purpose we would refer – and it is only in this appeal book – to the Premier’s news release, volume 5 of the appeal book 1649, which spoke of obtaining payment from those who do not currently support the industry, which would seem to single out persons other than TAB and New South Wales bookmakers.  The whole regulations and the whole fee condition was predicated on the clubs eliminating their turnover fees and being compensated out of the fee proceeds by the racing control bodies.  Justice Perram made findings to that effect at paragraphs 70, 75, 81 and 84.

The existence of an agreement in principle was discussed by one of the clubs, Sydney Turf Club, at 1966 and a ministerial briefing note at 1970 and 1972 and in a Sydney CEO’s report where it was stated that Racing New South Wales CEO had advised that it be made whole.  That is at page 1982.  In our submission, given the existing regulatory and commercial arrangements underlying the race fields legislation, in practical terms it was inevitable that these proceeds, the proceeds of these fees, would be applied in the way they were.  They were, in fact, applied to make an exactly equal payment to TAB, exactly corresponding to its race field fees and in the case of the New South Wales bookmakers, it was inevitable that they would also carry no burden from the fee.  They would be immunised by eliminating the existing fees they pay clubs with the clubs being reimbursed by the control bodies and all of that was orchestrated by the racing control bodies exercising the powers they enjoyed under the Totalizator Act, clauses 14 and 15. 

Now, that inevitability, in our submission, must have been taken to have been understood and intended by Parliament when it conferred these powers in the fashion it did on the racing control bodies.  They could not act otherwise and that is, indeed, why the powers were vested in them and why the fees were made a debt due to the racing control bodies.  The prospect that the control bodies would exercise their powers other than by making fully offsetting payments was, to quote a word from Betfair v Western Australia, “illusory” in this scheme; viewing the scheme as not just the race fields legislation but the race fields legislation as it intersected with the statutorily‑backed arrangements that already existed and which were to continue. 

The primary judge held that the package was inseverable and that the practical and substantive effect of the statutory fee – 1.5 per cent of turnover for Sportsbet – could not be assessed for the purposes of section 92 without taking all of the interconnected measures into account. Justice Perram reaches those views at pages 2740, 2749 and 2751. That is paragraphs 101 to 104, 137 and 141. His Honour stresses that the so‑called uniform fee, a fee of 1.5 per cent of back‑bet turnover, would not have been imposed on TAB and New South Wales bookmakers and Sportsbet and other interstaters without the offsetting payments and both the ability and intention to make the offsetting payments. That is paragraphs 102 and also 137 and 141 of the trial judge’s reasons.

The essential issue in the case is whether you view what happened, given the whole legislative environment, in that fashion, as an inseverable package, when one comes to assess practical effects for the purposes of section 49 and section 109. The Full Court said it was immaterial that adjustments were made to these other burdens. That appears at paragraph 96 – if I can turn to the Full Court. In the middle of paragraph 96, the Court seems to fasten on a criterion of operation approach:

If all wagering operators are now subject to the same burdens, whatever their state of origin, the fact that the burdens had previously been borne only by intrastate trade is immaterial.  Equally immaterial is the circumstance that adjustments to the previous burdens, such as reductions in standing fees . . . did occur, to ensure that they did not bear the old burdens –

The other passage is at 109 which is at page 2843, second sentence and then the last two sentences.  In our submission, in this passage and elsewhere, the Full Court is falling back into a legal operation approach to the assessment of practical effect.  That is apparent in a number of passages as well where the Full Court speaks of what obligations were in fact truly imposed.  Paragraph 58 at 2826, not in truth obliged to pay the fee, last line of paragraph 86 at 2833, “not truly required to bear the burden” and in paragraph 112 at 2844, lines 38 and 40:

TAB was, in truth, liable to pay the fee and did pay it . . . It was because TAB was truly liable to pay the fee . . . was entitled to insist on compensation –

No one doubts but that it had a legal obligation to pay the newly assessed race fields fee under the legislation and that it did pay it.  That is not the issue and to leave the analysis there and to ignore practical operation of the conjoined steps that work together is to retreat to a criterion of operation approach.

GUMMOW J:   Going back to volume 5, 1649, it is a statement by the New South Wales Premier of 17 October 2006 where he says:

“It’s only fair that those who benefit financially from racing pay their way and support.”

Is there any affinity between that reasoning and the sort of reasoning in the second round transport cases simplified by Armstrong v Victoria 99 CLR 28 at 43?

MR YOUNG:   There is.  There is also as well, your Honour ‑ ‑ ‑

GUMMOW J:   In other words, there would not be any racing industry in which your client would operate unless there was this regulatory structure.  There would just be a free for all, would there not?

MR YOUNG:   No, your Honour. What is at issue is not paying a fee for the use of New South Wales race fields. Wagering operators have always paid a fee. It is just previously they paid the fee in their home State under the gentlemen agreement. That is to be varied and States to pass their own legislation. The objection that this case raises is not an objection to the levying of a fee, it is to the unequal burdens imposed on interstate operators compared to local operators if the fee proceeds are to be taken by regulators with a vested interest in the operations of the local industry and applied to insulate the locals from the effect of the fee. It is not concerned with not making a contribution to the industry. Sportsbet, like Betfair, is happy to make a contribution to the industry but one that everybody shares equally and legislation is introduced where the whole burden of the fee falls on one party, because it is an interstater taking business away from the locals, in our submission, that offends section 92 concepts. Can I refer to Bath, your Honour?  I was going to add Bath.  The reasoning in Bath is to much the same effect ‑ ‑ ‑

GUMMOW J:   It is all bound up with excise, is it not, to a large degree?

MR YOUNG:   No, Bath was a licensing regime, but the case addressed section 92 issues.

GUMMOW J:   I realise that.

MR YOUNG:   I will go to some passages in a moment in Bath, your Honour, but what Bath shows is that a burden cannot be imposed on interstate traders that their transactions alone bear because it is felt that intrastate traders are already bearing an equivalent burden.  Intrastate tobacco was the subject of an exemption, it was said in Bath, because at an earlier stage of distribution wholesale, it had already borne a tax, a license fee. 

What the High Court said is that is no justification for imposing a fee that only falls on interstate traders at the retail level.  This reasoning, in our submission, becomes very clear in Bath at 425 and following.  There, there was a statutory exemption for products purchased from a Victorian wholesaler.  The Court looked at the overall context of the act from the foot of 425 through to 426, line 2 at 426.  It reveals the explanation for the exclusion of tobacco purchased from a Victorian wholesaler.  That explanation is:

the licence fee . . . requires Victorian wholesalers to pay –

the fee already.  A little bit further on –

The explanation tends, however, to underline, rather than remove, the protectionist character of the discrimination at the retail level effected by the provisions imposing the tax –

and then the Court postulates two alternatives.  If there is already a tax in another State, and alone the interstate traders are to bear the Victorian tax, their costs would rise.  That is the first alternative “if”.  Then they say on the other hand, if they have a lower base tax base, nonetheless, the effect of the tax will be to discriminate against them in the other option.  Either way, the fee operates in a discriminatory fashion.  Then at 427 at about point 7 on the page:

to hold that a law which protects local goods by imposing a discriminatory tax on interstate goods at the retail level is consistent with s. 92 because the law equalizes in favour of the local goods an advantage which the interstate goods enjoy . . . would be to disregard the critical constitutional purpose -

So here to impose a fee only on the interstaters because there is a pre‑existing burden on TAB and New South Wales bookmakers is to fall into the very protectionist hole that the High Court identified in Bath.

HAYNE J:   An alternative point of view is that you have masked an important temporal shift in that proposition because I think the analysis in Bath presupposed all taxes existing at the one time, did they not?

MR YOUNG:   No, your Honour, that is why I went through the two alternatives.  They assumed there was no tax interstate, did not matter, that is the second alternative.  The proposition at 426 is that if a tax falls solely on the interstaters in respect of ‑ ‑ ‑

HAYNE J:   The proposition that it falls solely on the interstaters is a proposition that itself masks the temporal shift, does it not?

MR YOUNG:   No, your Honour.  My shorthand, inadequate though it was, was intended to deal with the fact that tobacco purchased from a Victorian wholesaler was exempted from a fee at the retail level and the justification was said to be that the tobacco in question will have already borne a fee effectively at the wholesale level.  That was no justification for imposing a tax, a fee, on retailers that operated only in respect of tobacco sourced from interstate.  So the existence of an alternative burden, a previous burden at an earlier stage of the distribution chain, was no justification for a fee that operated unequally on retailers in the sense that it fell only on tobacco which had been sourced from interstate.

GUMMOW J:   Perhaps you should have taken us to 424, the starting point, line 6:

If the tax had been imposed directly on all retail sales of tobacco products in Victoria, it would not have infringed the injunction of s. 92 of the Constitution. It would have been a tax which applied without differentiation or discrimination to interstate and intrastate products and transactions. Such a tax would, however, have been invalid –

et cetera, by reason of section 90.  That is the setting of it all.

MR YOUNG:   Yes, but likewise, this fee would have been entirely valid - no one suggests otherwise - without the offsetting payments.  The issue is whether the offsetting payments are to be taken into account in characterising the effect of the fee.  That proposition your Honour referred me to was simply dealing with a neutral fee imposed alike on interstate and intrastate traders.

In our submission, the reasoning in Bath does apply.  Bath was the statutory exemption.  It would not make any difference if that exemption for tobacco sourced from Victoria had been the subject of a ministerial exemption under regulations, and if instead of an exemption the power to exempt was given to the Victorian tobacco industry and the fee proceeds were made a debt due to them and they applied the fee proceeds in a way to insulate the Victorian operatives, in our submission it would not make any difference to the analysis of practical effect. 

The existence of a previous burden or a burden earlier in the distribution stage is not to the point, in our submission, when one follows the analysis in Bath.  Now, I jumped ahead to make that point.  I referred the Court to the timing point made by the Full Court, that is if you can pay certain amounts for the benefit of bookmakers or the TAB independently and you can impose a tax of 1.5 per cent of turnover independently and you could do those two things separately, then it necessarily follows you can do them at once. 

In our submission, that is forward reasoning when one is applying a doctrine of practical operation.  It ignores the primary judge’s findings that there was a causal nexus between the two that the 1.5 per cent would not have been applied but for the relief that was to be given.  But more importantly, it ignores the link in the fact that it is the very proceeds of the fees that are used by the regulator to provide the offsets.  The Full Court said there was no authority to the contrary. 

In our submission, all of the authorities require a close examination of practical effect, and they recognise that the ways of achieving protection are “a legion” in the words of Cole v Whitfield.  As I have said, the reasoning in Bath supports an assessment in the whole context of practical effect and so does the approach of the US Supreme Court. 

Our submissions mention the case of West Lynn Creamery v Healy 512 US 186. The case raises the same point as this case. It is a case in which there was a tax imposed on the wholesale sale of milk in Massachusetts but most of the milk was produced out of the state. On its face it appeared to be uniform tax, non-discriminatory. But the state took the entire proceeds of the tax that had been raised and distributed those proceeds to in-state, that is, within Massachusetts, dairy farmers. So there is a combination of a tax and then an offset as the first paragraph, paragraph (a) of the headnote, indicates.

The majority in the Supreme Court rejected the argument that you assess practical effect by divorcing the tax payments from the use to which the tax payments were put.  There are several passages we would refer the Court to in the plurality judgment.  They commence at 198.  The same argument that if you can do both separately you can do them together was advanced in the bottom half of 198.  The court rejected that argument at 199 and 200.  Important in the reasoning was the fact that the offset was funded out of the first tax.  At 201 there is a reference to the substantive and practical approach which is adopted.  At the bottom half of page 201:

Our Commerce Clause jurisprudence is not so rigid as to be controlled by the form by which a State erects barriers to commerce . . . “The commerce clause forbids discrimination, whether forthright or ingenious.

The cases relied upon, the Court will see at page 202 Guy v Baltimore and Baldwin v Seelig, the very cases that this Court thought of assistance in Betfair v WA.  There was a joint judgment as well by Justices Scalia and Thomas to the same effect.  At 210 Justice Scalia set out four possible devices in the last paragraph.  A combination of a discriminatory tax and an offsetting payment or rebate was the third of them.  His Honour considered that in practical effect it was no different from a directly discriminatory tax.  That appears at 211, especially at about point 6 on the page.

West Lynn has recently been affirmed by the US Supreme Court in a case notable for nothing other than that affirmation or nothing relevantly other than that affirmation.  It is referred to in our written outline, it is a case of CSX Transport.  It is footnote 68 of our submissions in‑chief.  There are similar US cases.  They include Maryland v Louisiana 451 US 725, especially at 756 to 757; Armco Inc v Hardesty 467 US 638 at 642 to 645; New Energy Company of Indiana v Limbach 486 US 269 at 274 to 275. So there is respectable authority, at least, persuasive for the view that in assessing practical operation you do take account of combined actions where they are connected together by this legislative regime that exists here. I turn back to the Full Court ‑ ‑ ‑

GUMMOW J:   What do you say about the treatment of West Lynn by Mr Walker in paragraph 66? 

MR YOUNG:   I think there is ‑ ‑ ‑

GUMMOW J:   That seemed to be a crucial distinction.

MR YOUNG:   Well, with respect, your Honour, it is not a distinction in anything other than form.  The subsidy in that case was a distribution of the proceeds raised by the imposition of tax.  That is exactly our case.  It is a distribution of the proceeds by the racing control bodies.  So, in our submission, as a matter of practical operation, one looks at substance, not form and not labels.  It does not matter that the reason for the distribution of the proceeds was the perception that the payments should be made because of the RDA and because of the payments that TAB was already making under the RDA.  That is the motivation.  That is the perception.  No doubt, there were motivations in the distribution of the proceeds to the Massachusetts dairy farmers.  In other words, it may be that it was felt that there were good economic reasons for supporting the in‑house farmers. 

We, in fact, rely upon the fact that the payment was because of the RDA.  The RDA was part of the existing regulatory scheme.  It was statutorily backed.  So the existence of that need, to use a neutral expression, to be made whole must have been taken into account by Parliament in conferring these powers on the regulators.  They could do nothing else but apply the proceeds in that fashion. 

The Full Court described the position as one in which there was a universal expectation that TAB and the New South Wales bookmakers would not bear both burdens.  They use expressions to that effect at paragraphs 85 to 87, 96 and 111.  If I start with paragraph 85 – we do not disagree with any of these propositions.  Indeed, we embrace them and we take them a step further – 85, a perception that it is unjust to bear both burdens.  Paragraph 86 – not surprising – “universal expectation” in paragraph 86, last few lines.  In 87 – the top of page 2834:

That TAB could be expected to insist on being compensated –

Leaving aside whether there is any breach, we certainly agree that they could be expected to insist on being compensated.  In fact, that was the case.  In 111 there the Court speaks of a recognition – third line:

as a matter of common sense and fairness, if not of legal entitlement, the need not to doubly burden intrastate trade –

There is no doubt that the payments were made because of the RDA and because of that perception, but if there were an obligation to make the payments and this regime intersects that obligation, then the control bodies had no option but to apply the payments in this fashion and the net result would be only Sportsbet and other interstate traders bear the fees.  It is clear from what I have said that we do submit that the concept of universal expectation understates the true position. 

The Full Court also relied upon Boardman v Duddington.  They did that at paragraphs 104 to 107.  It suffices for me to make some submissions by reference to the passage extracted from Sir Owen Dixon’s judgment at paragraph 105.  Boardman was a case in which there were two taxing statutes and the later of them provided for a reduction of a licence fee because of fees payed under the former statute.  The case was decided by applying the criterion of operation doctrine.  Everything turned on the legal operation of the latter statute.  That appears in the first sentence of the passage from Sir Owen Dixon in paragraph 105 “affected in no way the legal operation”.  His Honour though went on to contemplate, to use a neutral expression, the proposition that an offsetting arrangement might be different.  At line 30:

Now if licence fees were something more than a tax, if they were the price of a valuable right . . . one could see that by the reduction of price something was being actually given to the licensee.

What was the case here in relation to the RDA was that the payments that were being made, the existing burdens, were for certain existing rights including, for the reasons I have explained, the exclusive licence for 15 years and the licence for 99 years to conduct the totalizator.  That entitlement was for something else.  True it included the supply of the race fields information, but it was not limited to that, nor were the fees divisible in a way that you could identify any segmentation.  That is the fees under the RDA.  So, really, the entitlement under the RDA is quite different from the subject matter of the approval fee.  That is paying a fee to get statutory approval to use the fees.  The RDA fees were paid for some other and different entitlements.

FRENCH CJ:   Statutory approval to use the information.

MR YOUNG:   Yes, your Honour, and likewise with the bookmakers.  They paid a fee to the clubs for the right to stand, that is, carry on their business on the racecourse.  Those fees were eliminated or reduced and then offsetting payments were made, but they still have the right, the privilege of carrying on their business on the racecourse granted by the clubs.  It is not as if the entitlements under the State legislation, the race fields legislation, are the same entitlements as those which were adjusted; they are not.

The matter I then turn to concerns the actual intentions of the control bodies.  In our submission, those actual intentions have been the subject of findings by the trial judge.  They were not disturbed by the Full Court.  There is ample material to support those findings as to intention that both New South Wales bookmakers and TAB should not carry any ultimate burden from the race field fees.  The existence of those intentions actuating the decision‑makers are, in our submission, relevant to an assessment of the practical effect of the fee conditions and the offsetting payments.  We are not suggesting some kind of substituted test.  We suggest they are a relevant factor in the overall assessment as to whether there is an inseverable package here and whether practical operation of the fees need to be assessed taking into account the offsetting payments.

FRENCH CJ:   Does practical operation collapse into purpose in your submissions?

MR YOUNG:   No, your Honour, we submit not.  We are not substituting a purpose test, but we are maintaining that subjective intentions or subjective purposes are relevant when you are dealing with ‑ ‑ ‑

FRENCH CJ:   You can characterise purposive legislation.  I am just looking at paragraph 7 of your outline.  I am not talking about subjective ‑ ‑ ‑

MR YOUNG:   Yes, that is objectively assessed.  That is the ordinary way ‑ ‑ ‑

FRENCH CJ:   It may appear from text and context.

MR YOUNG:   Yes.  We assess the purpose of the legislation in the same way that APLA subjectively assessed but taking into account the mischief at which the package of legislation was directed.  They have actual purposes.  Previous cases dealing with executive actions I mentioned this morning have regarded it as relevant, James v Cowan and Yates v Vegetable Seeds Committee. 

The subjective purpose matters arise in a way that is different from the way in which absolute discretion arose in the cases that apply the criterion of operation doctrine, cases like Miller and other cases, Boyd and so forth. That analysis was that the prohibition on the conduct of an activity was prima facie in contravention of section 92 and the argument was the presence of a discretion that could be exercised conformably with section 92 meant that ultimately there was no infringement. That is not the way in which it arises now. One simply looks at the legislative package or hear the executive actions in particular and ask the question, do they impose a discriminatory burden as a matter of practical operation on trade and commerce between the Northern Territory and the States?

GUMMOW J:   How does section 109 get engaged?  What is the extent of the inconsistency and what is invalid?

MR YOUNG:   Section 109 is engaged if the legislation combined with the regulations ‑ ‑ ‑

GUMMOW J:   You keep saying “combined with the regulations”. 

FRENCH CJ:   You have to find two inconsistent laws.

MR YOUNG:   Yes, your Honour. But if the legislation operates to impose a discriminatory burden on trade and commerce between the Northern Territory and New South Wales, the imposition of that burden by force of the New South Wales legislation will alter or impair the protective provisions found in a law of the Commonwealth, section 49.

GUMMOW J:   Prohibition by the State law is section 33, is it not?

MR YOUNG:   Yes, but that is a prohibition subject to relaxation when an authority is in place.

GUMMOW J:   That is right, section 33A.

MR YOUNG:   Yes.  And the authority has been granted on conditions.

GUMMOW J:   So what is the relevant law and to what extent is it inconsistent and invalid?

MR YOUNG:   I am doing it in two steps, your Honour. 

GUMMOW J:   Take as many steps as you like.

MR YOUNG:   The relevant law is the Commonwealth law.  Section 109 strikes at both executive action authorised by a State law and at State legislation.

GUMMOW J:   A State law to the extent that it authorises such executive action.

MR YOUNG:   Yes, your Honour. 

GUMMOW J:   Yes, go on.  And to the extent that the State law has not yet been used by the executive, you have a Kakariki problem.

MR YOUNG:   Yes.  But to the extent that the State law authorises the imposition of these fee conditions, there is inconsistency between the State law and a law of the Commonwealth.  The argument against us is that the fee conditions were authorised by the statute.  If they are authorised by the statute, they impose an impermissible burden on trade and commerce with the Northern Territory.  That burden is inconsistent.

FRENCH CJ:   That imposition being part of an “inseverable package”.  You have to bring the “inseverable package” in to characterise the conditions in that way, do you not?

MR YOUNG:   When I go to the offsetting payments, the answer is yes, your Honour.  But we put our case in two ways.  One is that there is an inevitability about the legislative prescription, that is, there is a prohibition that can be relaxed by an authorisation granted by the control bodies who are in this pre-existing joint venture with TAB and who have the obligations under the pre-existing legislative regime.  Now, if that means, as we say, it is inevitable or it is illusory to think that those control bodies will ever do anything with the proceeds other than apply them in a way to make TAB and the New South Wales bookmakers whole, then you have invalidity in the legislation.

FRENCH CJ:   That is pretty close to characterisation of the purpose of the legislation, is it not?

MR YOUNG:   No, it is effect.

FRENCH CJ:   Which might be more relevant for 109 purposes.

MR YOUNG:   Yes.  It is both purpose and effect, your Honour, purpose assessed objectively.

FRENCH CJ:   Yes.

MR YOUNG:   But we put the alternative argument which is that if you look at the actual fee conditions and the intentions that actuated then, if those fee conditions are authorised by the legislation they impose a burden on, for simplicity I will say interstate trade, I mean trade with the Territory - they impose a discriminatory burden in practical operation on interstate trade.  How do you arrive at the discriminatory burden?  You look at the application of the proceeds.  But the application of the proceeds was, as your Honour puts to me, part of the package.  It was both the power and the obligation to apply the proceeds in that fashion.

In the way we have put those submissions it is unnecessary to our argument that there be any pre‑existing understanding or arrangement as between the control bodies and TAB, or as between the control bodies and the race clubs.  That arrangement was found to exist by the trial judge on the materials, on the evidence.  That finding was within the scope of the pleadings and the way in which the case was conducted.  We have made it clear that we do not regard that as a necessary finding, but that is not to say that it was not open to the judge to make those findings.  At the end of the day they add little to the findings he made concerning intention. 

The reason why we say there is no need for reciprocal arrangements to exist is really this.  Given the ability of the control bodies to apply the proceeds in the way they did, and their obligation to do so under the arrangements already in place, they did not need any reciprocal arrangements with TAB.

FRENCH CJ:   Well, this is your rubric of invevitabilty.

MR YOUNG:   Sorry, your Honour – yes.  But I am explaining why his Honour’s findings about ‑ ‑ ‑

FRENCH CJ:   Yes, I understand.

MR YOUNG:   ‑ ‑ ‑ arrangement or understanding are not central ‑ ‑ ‑

FRENCH CJ:   You do not need it for your argument.

MR YOUNG:   No.  But we say it was open to his Honour and it was within the cases conducted.  TAB was hardly going to say, “We reject a payment of a sum exactly equal to the fees we have paid”, nor were the race clubs going to say, “We reject the payment that makes us whole and fully compensates us for the elimination of the levies we previously charged to the New South Wales bookmakers”.  The racing control bodies controlled those payments. 

Before I close I need to make a mention about relief.  There were two matters raised below that are outstanding:  one, if we were to succeed, there is a question of what should be invalidated.  There was some discussion in one of Justice Perram’s judgments relating to an amendment motion about whether the invalidity should relate to the whole of approval or simply the fee conditions.  That is at appeal book 2768.  Section 109 would invalidate the law or executive action to the extent of any inconsistency.  The declaration of invalidity should be confined, in our submission, to the fee conditions.

GUMMOW J:   Looking at your submissions in Sportsbet at page 19, you are varying that, are you?  We need to know precisely.  Page 19.

MR YOUNG:   Page 19, your Honour, sorry.  I am looking at paragraph 19.

GUMMOW J:   Second‑last page and last page.

MR YOUNG:   Yes.

GUMMOW J:   

Declare that ss 33 and 33A. . . are invalid.

MR YOUNG:   No, I am consistent, your Honour.  Under paragraph (c), it is the requiring the payment of fees that I am drawing attention to.

GUMMOW J:   But you want declaration that 33 and 33A are ‑ ‑ ‑

MR YOUNG:   Yes, your Honour.

GUMMOW J:   I see.

MR YOUNG:   But in relation to the executive action it is that aspect of the condition of approval that requires the payment of fees. 

GUMMOW J:   Well, it would be invalid as the Solicitor for the Commonwealth reminds us in his submissions because it was beyond power of the sections correctly construed.  

MR YOUNG:   Yes, that would follow, your Honour.  The other matter relates to the 2009 approval.  Sportsbet sought to amend late to put in issue the 2009 approval as well as the 2008 approval.  The Full Court said that the trial judge should have allowed that amendment at paragraph 148, appeal book 2856.  Should it become relevant, we seek to have the relief extend to both approvals.  I have surprised myself, if the Court pleases ‑ ‑ ‑

FRENCH CJ:   It is a very pleasant surprise, Mr Young.

MR YOUNG:   Yes.  Unless there is something further I can assist the Court with, those are our submissions.

FRENCH CJ:   Thank you.  Yes, Mr Gleeson.

MR GLEESON:   Your Honours, an outline is just being circulated.  In the time available this afternoon, I would like to deal with perhaps four introductory but important points.  The first is a straightforward one, that the vices that this Court found in the scheme in Betfair v Western Australia are not present in this case.  There is no prohibition upon conduct of business as a betting exchange and Betfair has obtained its approval to use the information, so we put that to one side.

More substantively, your Honours, we offer a characterisation of the approvals in our proposition 2 which reflects the regulation and the approvals granted under it and we invite your Honours to consider whether there are these five critical features of the approvals.  Firstly, that Betfair is required to pay compensation to the racing bodies for the use of the race field information which has been generated by the activities of quite some variety of persons within the New South Wales industry.

I do not need to belabour the steps involved in the creation of the information but they are many and various and involve the activities of everyone involved in putting on the events.  So that is what the fees are about, a fee for use of information.  Secondly, and again it is not controversial but important to note, use of that race field information is essential for Betfair to generate, I will use a neutral term, generate back‑bet turnover.  The trial judge has explained that clearly in the judgment.  I will give a reference to paragraph 70.  So the information is essential to the generation of back‑bet ‑ ‑ ‑

GUMMOW J:   Is this Justice Perram?

MR GLEESON:   Justice Perram at paragraph 70 – essential to the generation of back‑bet turnover.  What that paragraph shows, and this comes to a straightforward but important point, is that viewed in economic terms, what occurs with the back‑bet turnover is not that it is irrelevant in some way to Betfair’s business, as Mr Young suggests, but the essence of the contract or bargain between the punter and Betfair or any wagering operator involves, as his Honour said at page 2231 line 25, the parties with that information agreeing a price and a stake and thereby concluding the wagering contract.

Now, the stake, of course, is the back‑bet turnover and the essence of the deal is, I as a punter place in your hands, let us say, $100 of back‑bet turnover on terms that if the contingency plays out in one manner, you keep my money, if it plays out in another manner, you pay it back with a premium.  What we therefore submit is that there is this direct and immediate relationship between the use of the information and the receipt by Betfair, or any wagering operator, of back‑bet turnover. 

That leads us to our next point that the approvals themselves have chosen as the measure of use of information and as the charging point the very criterion identified in the regulation, back‑bet turnover.  Now, Mr Young said this morning, well, there is perhaps a few indications or nudges in the regulation that turnover might be something the racing authorities would consider.  We would put that a little stronger.  If your Honours have the regulation, not only is there the definition of “wagering turnover” in clause 14 which squarely identifies it with the total amount of wages on the backer’s side, but there is the fee power in clause 16 where under subclause (2) the condition may be imposed including “a fee that does not exceed 1.5% of the holder’s wagering turnover” relating to the rates.

Now, on a straightforward reading of that, unless some limitations arise through section 92, one could impose a fee of up to 1.5 per cent on Betfair’s wagering turnover. The Betfair argument seems to be that without striking down the regulation, one must read into it some equalisation calculation whereby the authorities put that cap to one side, as it were, and do some calculations on revenue, the effect of which on Betfair’s case is the cap becomes for them .25 per cent of wagering turnover or thereabouts.

Your Honours will also see in the balance of the regulation the importance given to wagering turnover.  Could I just mention clause 17 refers to conditions which could be attached to the licence, including 17(c)(ii), where an event such as a significant improvement in wagering turnover must be notified, (d) there must be access to wagering records, (e) information about wagering turnover, (h)(vii) and perhaps, importantly, under clause 18(2):

a change in financial circumstances of the approval holder (such as a significant improvement in the wagering turnover . . . as a ground for the variation of an approval. 

Your Honours will know from clause 20 that the regulation says you cannot take into account the location of the trader. So the regulation has been designed not to infringe section 92, that is clear from clause 20, and it has been designed, we would submit, to identify wagering turnover as a criterion of equality for charging between different wagering operators. That leads to our final points under proposition 2 that what the racing bodies have done is to apply that criterion of equality, back‑bet turnover, identified in the regulation as the measure of use and charging point for everyone. That leads us to a position where, far from this being in any sense discriminatory or protectionist, it is the exact reverse. It is a measure which creates approvals which are indifferent, indifferent and neutral to decisions which different operators might make as to business model, price or revenue.

Your Honours, the third matter is from this Court’s decision in Betfair v Western Australia.  We would put two propositions.  While, of course, that case was not about turnover against gross revenue the Court did, at the paragraphs we have mentioned, refer to cases such as Guy v Baltimore which indicated that in general there is no difficulty with a State seeking compensation for use of a product generated within the State.  It is simply a case of not imposing unfair burdens and ‑ ‑ ‑

GUMMOW J:   Just coming back to regulation 20 for a minute.  Is the effect of what you are putting to us that if there is an exercise of power under 33B those matters would have to be taken into account?

MR GLEESON:   Yes.

GUMMOW J:   But there is no 33B complaint here, is there?

MR GLEESON:   No.

GUMMOW J:   So 33A, how do you get any mileage out of regulation 20 when we are dealing with 33A?

MR GLEESON:   Not directly under 33A - I was pointing to it only that the package of regulations 16 to 20 were designed expressly to avoid section 92 issues by saying you cannot take into account whether they are interstate or not but what you can do, we would submit, is treat wagering turnover as a measurable quality.

FRENCH CJ:   That is in determining an approval application and you would say that extends to the conditions you would impose under regulation 16?

MR GLEESON:   Yes.  Your Honours, the other matter we were referring to from Betfair v Western Australia was that in three paragraphs of the judgment - 80, 81 and 107 - the Court, without of course having to address the present point, did refer to the history of charging of fees by reference to turnover in the racing industry.  It has been a well‑established metric for treating wagering operators equally over many years, and your Honours might recall at paragraph 107 of Betfair indeed, Betfair on that occasion put to the Court that they were perfectly willing to pay a fee by reference to turnover, and they said that is what they were doing in Victoria and the Court could rest assured that they had no difficulty doing that in Western Australia.  The Court noted that assurance in paragraph 107 of that case.

Your Honours, could I just conclude today with one aspect of proposition 4. What this case, in our submission, comes down to is a proposition that section 92 prevents a fee struck by reference to measures of volume or, perhaps, value and that the only fees which can survive section 92 in the modern economy are ones which look beyond volume or value and take into account pricing decisions and revenue earned by various traders.

We have provided your Honours – and I would wish to rely upon it if possible – with a short folder of authorities on fee charging mechanisms together with a summary of the materials which we trust is accurate which is designed to show that there is a long tradition, both before and since Federation, of charging based on volume or value where the pricing decisions made by the user are treated as irrelevant to the charging calculation and while examples we have given are only some of many, it is a practice well established in the area of court fees, mineral royalties, copyright licensing and, of course, many excise duties.  We would suggest that what Betfair is really asking the Court to do is to hold that that entire

tradition of fee charging offends section 92 and we would submit it does not.

FRENCH CJ:   I suppose it goes beyond the particular business model, in a sense, and this may fall outside the framework of the way in which this case is being conducted, I suppose, but one might look at the Betfair model as representing a way of doing things in the market and therefore, to some extent, a lot of market structure which makes a burden which falls unequally on that class of activity.  It is perhaps of more significance than something which just happens to fall on a particular business model that somebody has adopted.

MR GLEESON:   Yes, and that will lead us to what I will take up tomorrow, that the central deficit in Betfair’s Case at trial and on appeal, which both courts recognised, was a failure to identify any such matters which took this out of the league of simply being an arithmetic proposition. I just wanted to conclude today on the proposition that really they are seeking to strike down volume and value‑based fees and it is not difficult to think of many examples in the modern economy where that form of charging continues, even apart from examples I have given. One might think of the electricity grids in the national market which could well seek to charge by reference to the amount of electricity taken out of the grid during a particular period without bringing to account the pricing decisions of the purchaser, and we would suggest that that form of pricing is not struck down by section 92.

FRENCH CJ:   Yes, all right.  The Court will adjourn until 10.15 tomorrow morning.

AT 4.17 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 31 AUGUST 2011