Pilbara Infrastructure Pty Ltd & Anor v Australian Competition Tribunal & Ors; The National Competition Council v Hamersley Iron Pty Ltd & Ors; The National Competition Council v Robe River Mining Co Pty Ltd

[2011] HCATrans 53

[2011] HCATrans 053

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S294 of 2010

B e t w e e n -

BETFAIR PTY LIMITED (ACN 110 084 985)

Applicant

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

Application for special leave to appeal

FRENCH CJ
GUMMOW J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 11 MARCH 2011, AT 10.21 AM

Copyright in the High Court of Australia

__________________

MR N.J. YOUNG, QC:   If the Court pleases, I appear for the applicant with MS K.C. MORGAN and MR C.L. LENEHAN.  (instructed by Gilbert + Tobin Lawyers)

MR J.T. GLEESON, SC:   May it please the Court, I appear with MR N.J. OWENS and MR J.S. EMMETT for the first and second 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.  (instructed by Crown Solicitor (NSW))

FRENCH CJ:   Yes, Mr Young.

MR YOUNG:   The Betfair matter involves no rebate or offset in payments.  The question raised by the Full Court’s decision is quite a specific one.

FRENCH CJ:   This is the imposition on turnover?

MR YOUNG:   Yes.  Effectively, it is this, your Honours.  The primary judge found that the actual impact of the fee condition expressed in terms of impact per revenue dollar was that it reduced Betfair’s commission by some 54 to 61 per cent.  The same fee condition imposed on TAB reduced its commission by 9.375 per cent.  Essentially, there was a vast divergence in the practical effect of the fee on each of those players, the former being an interstate operator and a major source of competition in the interstate market and the second being an intrastate operator. 

KIEFEL J:   Did the effect principally, though, come about because of the particular business model of Betfair?

MR YOUNG:   No, not business model.  It came about because Betfair was the only betting exchange in Australia.  It was specifically targeted by the legislation.  As a betting exchange licensed by Tasmania, its commission was confined by the terms of its licence to net winnings capped at 5 per cent.  So, if you call that business model, yes, but it is not business model in the sense of an election about the way in which prices are structured or costs are incurred.  It was much more fundamental than that.  It went to one of the inherent characteristics of the only betting exchange operating in Australia.  The betting exchange was specifically brought within the scope of the New South Wales legislation.

Now, that impost, which was about six times greater than that imposed on the TAB, was found by Justice Perram to be a discriminatory impost.  His Honour, however, dismissed the application on the grounds that his Honour applied then a separate test and a different and deeper inquiry into whether that discriminatory impost was to be characterised as protectionist. 

Our submission is a very short one.  On this point, an impost five times, or six times greater necessarily affects Betfair’s cost of doing business and necessarily operates to the competitive advantage of its intrastate competitors who face, in practical terms, a much lower fee.  In the language of Cole & Whitfield, a substantial disability or advantage was imposed on Betfair but prejudiced its ability to compete and thereby, it may be inferred, protected the TAB.  That competitive advantage arises either way, to use a phrase from Bath & Alston, whether it is borne by Betfair, thereby affecting its profitability and ability to compete or, if passed on, it is going to affect the competitive nature and level of its prices. 

Now, the Full Court dismissed that argument on the grounds that it was a mere arithmetical point and I ask the members of the Court to go to the application book at pages 156 and 159.  The concept of a mere arithmetical point is raised at about the fifth line at page 156 or pointedly, it is raised at page 159, in the middle of paragraph 92:

To make this arithmetical point is not to show that the fee disadvantages -

It is not a mere arithmetical point.  It points to a vast difference in the cost of doing business that is imposed on the interstate trader compared to the intrastate trader.  The Full Court’s approach was that much more needed to be established than that divergence in the cost burden imposed on the interstate trader.  That appears in several places - first, at pages 155, 156 – at page 155, it is in paragraph 79, the second sentence:

there is no reason in the evidence to suppose -

At paragraph 80 as well, on the top of the next page, the last few lines refer to market share or profitability and then at page 161, paragraph 98.  This seems to postulate an inquiry that goes to the depths of asking whether Betfair is going to pass it on, and if it passes it on, what is going to be the consequential effect on its market share or on its net revenue.  It has never been thought previously in any of the jurisprudence of this Court that you need to go beyond the imposition of a large disproportionate cost burden on an interstate trader, but to go so far as to proving the consequential effect on market share for profitability.

GUMMOW J:   Paragraph 107 is probably the critical step.

MR YOUNG:   Yes, that is another.  This was the decisive step in the reasoning and, in our submission, it goes to a length that is unsupported by any authority in this Court.  The Full Court combined that reasoning with some other restrictive conditions on the application of the discrimination test.

KIEFEL J:   Is the point going to be advanced when you say what has been required by this Court?  Is it intended to advance a point that this Court has never required evidence of particular competitive effects?

MR YOUNG:   This Court has never gone so far as to say that the existence of discrimination of a protectionist character requires proof of the ultimate effect in the marketplace in terms of market share or profitability if one assumes that fee is passed on or not passed on.  It has always been regarded as sufficient that a much greater cost burden is imposed on interstate traders than intrastate traders.  Bath & Alston was an example of that.  So was Castlemaine Tooheys.  Castlemaine Tooheys was a greater bottle cost because of a higher refund, chargeable on the non‑refillable bottles.

KIEFEL J:   I just have in mind some extra‑curial statements, I think, by Chief Justice Mason that the Court has not always been happy with the level of expert of factual material necessary to findings about competitive effects.  So I am just a little concerned that there might be some assumptions about the Court’s approach in these matters.

MR YOUNG:   Well, you can only go on the basis on which the cases have been decided.

KIEFEL J:   Or the argument in the transcript.

MR YOUNG:   Yes.

KIEFEL J:   He refers to statements having been made by the Court.

MR YOUNG:   Yes. 

KIEFEL J:   I do not know whether such statements to which his Honour referred touch upon the particular questions in this case, but I think the point is made that there has sometimes been a dearth of expert evidence, at least, about competitive effects.

MR YOUNG:   Your Honour, if I take two of the important decided cases - Castlemaine Tooheys, there the Court said that the Bond companies were disadvantaged in two respects – the greater refund and the imposition of a requirement on retailers that they pay the refund.  They said both of those matters traced their way into much greater bottle costs for the Bond companies.  They were regarded as the two competitive disadvantages.  It was not stipulated that one needed to go further than that because as a matter of logic and economics, if you impose vastly greater costs on one competitive player it operates to its competitive disadvantage.

KIEFEL J:   You say it is as straightforward as there is no need for such evidence.

MR YOUNG:   Yes.  The primary judge considered whether it was obvious and concluded he could not assume that largely because of the view he took about the narrowness of the pleadings, but that point has disappeared.  The Full Court said the substance of the matter should be examined and that does not require one to look beyond the vastly divergent cost impact.  I was going to mention a couple of other points that the Full Court draws in aid.  The first was the proposition that the burden must affect all interstate traders.  That is at page 164, paragraph 104, particularly the reference to a burden in the common circumstances of the trade. 

That passage and an earlier passage at paragraph 95 suggest that what is required is proof that all interstate traders are affected in a like manner.  That proposition was explicitly rejected by this Court in Castlemaine Tooheys at page 475.  CUB was the major interstate trader in Castlemaine Tooheys.  It was not affected by the new regulations.  A small interstate trader was.  The Court said it was enough that CUB was a significant part of interstate trade. 

This was also a case in which the primary judge had found that there was no legitimate object served by the discrepancy in the imposts.  In Castlemaine Tooheys, a finding of that kind would have been regarded itself as a basis for characterising the impost as protectionist and that appears in Castlemaine Tooheys at pages 472 and 477.

There is one way of testing the proposition.  It goes back to Fox v Robbins.  The Full Court said Fox v Robbins was distinguishable because there the discrimination was on its face.  Fox v Robbins was a different fee payable according to whether the wine being sold in Western Australia was based on interstate grown grapes or locally grown grapes. 

Now, if one takes that case and simply translates the primary judge’s uncontested findings about practical effect, 9.375 per cent versus 54 to 61 per cent and you put them into the face of the legislation, if this fee was to the effect that Betfair was to pay 55 per cent of its commission and TAB was to pay 9.375 per cent and that discrimination appeared on the face, Fox v Robbins would say it infringes section 92.  It should be no different where those facts - that discrepancy is established by evidence of practical effect.  You cannot have two different tests for discriminatory burden of a protectionist character according to whether it appears on the face of the legislation or only by reference to an assessment of practical effects.  The Full Court also made the ‑ ‑ ‑

FRENCH CJ:   Sorry, can I just ask whether it is correct to say, and I am looking to your reply in relation to this, that as the respondents say at paragraph 21, that your complaint is limited to the assertion that the adoption of turnover is protectionist. 

MR YOUNG:   No, it is not limited.  That is an important part of it, your Honour ‑ ‑ ‑

FRENCH CJ:   Yes.

MR YOUNG:   But it occurs within the context of a scheme in which the power to impose the fee is given to regulatory bodies who have a vital commercial interest in protecting the revenues of the TAB. 

FRENCH CJ:   Well, you say the adoption of turnover is protectionist in this context.

MR YOUNG:   In this context, yes, your Honour.  The same points arise in this case about the state of origin point and about the discretion given to administrative decision‑makers who have a conflict of interest.  The state of origin point was relied upon by the Full Court at paragraphs 68 and 103 and we make similar points about the positions of these decision‑makers.  They were industry representatives interested in protecting the revenues of the

intrastate traders and, as Justice Perram found, the legislation could be regarded as pursuing an objective of preventing a leakage of revenue from them. 

This Court has not examined, since Cole v Whitfield, the question of administratively imposed fees and what should be brought to account in terms of intentional purpose in the context of applying section 92 to administrative decisions and this is a very special context that throws that issue into stark relief.  If the Court pleases. 

FRENCH CJ:   Yes, thank you.  Yes, Mr Gleeson.

MR GLEESON:   Your Honours, can I indicate why the trial judge was correct to find a fatal lacuna in the Betfair Case?  If your Honours would go to page 58 between lines 30 to 40, his Honour considered that the fee was “facially neutral” but was discriminatory because it treated low margin operators differently from high margin operators.  The Full Court rejected that proposition as to whether there was discrimination and the reason for that, of course, was difference does not become discrimination until you are treating unequals the same or equals not the same and merely to say someone is low margin and one is high margin does not really take you from difference to discrimination. 

But leave that aside, what his Honour then said was “I am now going to examine the larger question” and although he headed it “protectionist” as section 10 of the judgment, obviously he was having regard to the learning of this Court in all cases, including Betfair.  The problem his Honour had – it commenced at page 62 in paragraph 165 – was that Betfair did not allege that the discriminatory effect of the fee:

(a)reduces some competitive advantage which Betfair enjoys over TAB; or

(b)ameliorates the effect of some competitive disadvantage by which the TAB is burdened; or

(c)is the result of an equalising fee or tax.

With respect, his Honour there has correctly captured the jurisprudence of the Court from Betfair and earlier that it is a competition focus in the national economy and you must in some way if you are an applicant engage with issues of competition.  So that is one critical paragraph.  The next page, page 63, is probably the most important page for us in the application book because his Honour did this not just as a pleading point, but he went further because what he said, starting at the foot of page 62 was:

although the proposition may look obvious -

that is the sort of propositions Mr Young is putting this morning, well, of course, if we are low margin, of course it is going to affect us.  That is because it is presently unchallenged by the respondents as they did not have to meet the case but then, thirdly, and his Honour here was dealing with the evidence and the lack of the evidence.  The evidence did not descend to the critical question, why?  Why was their commission rate different to the TAB’s and what his Honour correctly did was to say this is not just a fanciful possibility that there is an inquiry that needs to be done.  Here are a number of matters ‑ ‑ ‑

GUMMOW J:   What is meant by “why”?

MR GLEESON:   What were the circumstances in terms of competition, competitive behaviour and relativities between the two traders which brought about the fact that they charged at different margins.  So, for example, could I just focus on his Honours (b) and (d)?  Many traders might charge at a low price to generate losses or perhaps very low margin sales in order to build market share.  We led some evidence that that is exactly what Betfair did it.  It is on a massive growth curve.  Low margin equals building of customer base over time.  So that is one possible factor.  Then paragraph (c) is an important one.  Were there:

other streams of revenue, apart from the commission –

which allowed it to operate as an internal cross‑subsidy?  All, we might add, were related to the use of the information. 

GUMMOW J:   But ordinarily one is dealing with the law. 

MR GLEESON:   Yes. 

GUMMOW J:   You do not ordinarily assess its validity in this way, do you?

MR GLEESON:   With respect, one has a law which on its face is neutral.  The law on its face - and that is why we say it is not even discriminatory - the law says whoever wins the competition for $100 let us say from a punter, they pay $1.50.  It does not matter who you are, where you are based, what your business model is, what your pricing decisions are, whoever wins the battle for the $100 pays $1.50 to the revenue.  That is why we say it is just not discriminatory on the face of the law.  An applicant then says, “No, but I have to go beyond the law and I go one step beyond.  I go one step beyond to say because I have a lower margin, it hurts me more ‑ ‑ ‑

GUMMOW J:   You say they would have to go into some further steps?

MR GLEESON:   Some further ‑ ‑ ‑

GUMMOW J:   Well, that is a special leave question which we cannot answer this morning.

MR GLEESON:   Well, I would seek to persuade your Honour why it is not, in that in each of the cases mentioned by Mr Young the court did, in fact, have evidence on the further questions.  Can I show your Honours that in two cases - firstly, in Castlemaine Tooheys in the bundle of authorities.  Your Honours, of course, are familiar with it, but the critical part in Castlemaine at page 462 ‑ ‑ ‑

GUMMOW J:   Castlemaine was a case stated, do not forget.

MR GLEESON:   Of course, your Honour, and so I was seeking to draw attention to that that the parties had gone to quite some care in the case stated to identify the facts on the questions of cost and the like, and so the findings at the foot of 462 that there was disadvantage in two ways, firstly, their non‑refillable bottles were subject to a refund of 15 as against a smaller refund for the locals and then the second disadvantage is over at page 463 point 5.  The finding on practical effect which is important is at 464 in the first full paragraph:

The practical effect . . . was to prevent the Bond brewing companies obtaining a market share in packaged beer in South Australia in excess of 1 per cent –

So there was a true competitive effect.  Their market share was unlikely to grow and it was uneconomic for them to convert their existing plants to use refillable bottles.  Those findings were tied back to the agreed facts, and if I could just indicate, for instance, on page 440, fact 12 was a finding that there were economic advantages in using non-refillable containers including – and there they are set out.  At page 443 at about point 7, there was the finding that the market share had grown rapidly and they had a plan to grow to 10 per cent on their current business model and at 447 at the bottom there were findings on elasticities and there was an important finding:

it is not possible to sustain a market share in excess of 1 per cent with an uncompetitively priced product.

FRENCH CJ:   The market here was identified in terms of South Australia geographically, was it?

MR GLEESON:   Yes.  So, that is the evidence there.  There is a further way to put this.  What I was seeking to emphasise with the trial judge was that this was not just a pleading point.  His Honour actually looked at the evidence and then the Court might be assisted by looking at page 65 where - his Honour at the foot of 64 put, what we submit, is a correct legal proposition:

to go further and to put that the low margin operator’s status as such sprang from some competitive advantage over the high margin operator which the fee could be seen as reducing or eliminating.  Low margins, per se, did not demonstrate the existence of a competitive advantage but might well arise from other extraneous circumstances which might not necessarily bespeak the presence of a competitive advantage; for instance, as already mentioned, a deliberate competitive tactic in order to attract market share.

Now, what happened in the trial, which is significant, and paragraph 173 indicates it, is that when Betfair got to its reply submissions it, in fact, agreed with this statement of the law and in the passage cited from their submissions, which we substantially agreed with, Betfair said:

A burden has that characteristic if in its differential effect it is likely to remove or diminish significantly any competitive advantage which the interstate trader enjoyed over the intrastate trader –

and his Honour sets out some further reply submissions and then at 176 says:

These submissions are, with respect, on the mark.

You are now in the territory of a case which is engaging with the necessary competition matters.  But where did it go wrong?  His Honour said it was not in reply.  It was not in the pleading.  What his Honour then did as a matter of discretion, and this case ultimately turned on discretion, was to consider whether he would permit, in effect, a re-opening of the case to explore the factual questions.  Your Honours see at the tope of 66 he allowed for some further submissions to come on on both sides and at 178 he addressed the proposition that Betfair should be allowed to explore what we agree was the relevant legal issue. 

That goes through for a couple of pages and at page 70 at paragraph 195 his Honour rules on the discretionary question and says “I will not let you re-open to expand the case”.  Accordingly, in terms of the law, at page 71, his Honour actually accepted Betfair’s submission as to the law at paragraph 197.  So there was no dispute in the end relevantly as to the legal principle and his Honour then analysed Bath and Castlemaine and the ultimate conclusion at 72 at the bottom was measured against that test.  The record did not establish it.  So, as we conceive it, unless the Court could hold this proposition that a fee which is not tailored to margin is necessarily offensive to section 92, the appeal would fail.

GUMMOW J:   What do you say about page 213, paragraph 6?

MR GLEESON:   In terms of paragraph 6 – that is the linear relationship point - the trial judge, in fact, found that was not even a discrimination.  Your Honour, that is at page 57 and Betfair simply ignores the fact that his Honour has given careful reasons why there is not even discrimination in relation to linear.  That is the first part of paragraph 6.  The last part is really just the issue I have tried to capture.  The Betfair Case is the only way you can measure a fee under section 92, the only way that it can pass muster is by comparing it to the gross revenue of different traders whatever be the reasons that gross revenue takes size and the form it does and no further inquiry is necessary or is permitted and there is no further competitive question involved.

If I can just ask your Honour to go to our supplementary materials to tab 4 to give some illustrations of how the evidence we led was sufficient to show there were bigger factual issues.  At page 27 of the transcript at trial, between lines 10 to 37, there was evidence that Betfair was, in fact, engaging in a cross‑selling model and that it was on a path to expand capital growth.  At page 41 Mr Twaits agreed with six propositions that the fee to date, at least, had had no effect on any competitive behaviour of Betfair.  Now, they are not exhaustive of the sort of inquiry that would be needed in a case.  They were indicative that, to the extent material was led, this could not be treated as a “so obvious it goes without saying” proposition. 

Your Honours, just to give a final analogy, I was thinking about court fees or perhaps even professionals charging by the day.  A litigant who uses the court’s time, conventionally, not always, will pay a fee for the use of the time whatever be their status.  It may vary for particular indulgences and the like but in general the fee might be $2,000 a day.  We are that sort of situation.  The Court does not say “I will have to tailor that fee and my fee will depend upon the value of the litigation to the particular person”.  It might be difficult to set a budget in that area.

FRENCH CJ:   You would have fee waivers occasionally.

MR GLEESON:   Occasional fee waivers, but if a proposition was laid down that the law required a charging body to always set your fees by reference to the revenue of the user we submit it would be a rather remarkable result.  That is the reason why I say there really was not

discrimination at all here and certainly not matters that attracted section 92.  May it please the Court.

FRENCH CJ:   Thank you, Mr Gleeson.  Yes, Mr Solicitor.

MR SEXTON:   Your Honours, can I just add one point to my learned friend Mr Gleeson’s argument?  It is that it is important, we would say, to note that there are high and low margin operators both inside New South Wales and outside New South Wales.  For example, interstate TABs are part of this system and they are relatively high margin operators, whereas, New South Wales on-course bookmakers have, by comparison, relatively low margins. 

The problem is, therefore, that any governmental measure that affects more than a handful of participants in a particular market will almost certainly have different practical effects on the different traders.  That is what has happened in this situation and that is why we say that again the result in the Full Federal Court would be, we would say, inevitable in this Court as well. 

On a slightly related point which indicates this question of different business models, the Tasmanian legislation proposes a cap on Betfair’s commission of 5 per cent although, in fact, they did not actually charge the full rate of 5 per cent.  But that raises the question of whether the Tasmanian legislation, because of its impact on Betfair’s activities can, in effect, restrict what the legislature in another State might be able to do by way of fees and charges because that is one particular restriction on Betfair’s business model that does not arise out of its own activities, but arises out of the legislation in its home State.  It illustrates, in our submission, the difficulties here that face Betfair in the arguments that have been put to the Court by my learned friend, Mr Young.  That is all we would want to add, your Honours.

FRENCH CJ:   Thank you, Mr Solicitor.  Yes, Mr Young.

MR YOUNG:   Can I take the Court to pages 62 and 63 of the application book?  Mr Gleeson went to paragraph 165.  This is in Justice Perram’s judgment.  Paragraphs (a), (b) and (c) do not identify the relevant universe of the ways in which effects may be discriminatory.  It omits the case of imposing greater business costs on one party compared to another which was exactly the Bath & Alston Case without further evidence and it is exactly the Fox v Robbins Case. 

As to the passage at the top of page 63, paragraph 168, we are not sure why Justice Perram said the evidence did not disclose why Betfair’s commission was between 2 per cent and 5 per cent and why TAB’s is 16 per cent.  TAB admitted a 16 per cent average commission take.  Betfair’s legislation capped its commission at 5 per cent and there was evidence that lower commissions were given by way of volume discounts to high turnover punters. 

The Full Court dealt with the restriction on commission at page 132 of the application book, paragraph 23.  The commission was limited in two ways.  It was based on net winnings not each bet and it was capped at 5 per cent.  Mr Gleeson’s proposition that it is $1.50 taken out of each bet is simply wrong.  It is effectively for the TAB because it only takes back bets.  Betfair matches back and lay bets and there may be multiple transactions on any race and the commission only applies to the net winnings.  That is why it is a different money flow that one is concerned with and a different rate of commission.  It is a low margin because it charges commissions at less than 5 per cent.

FRENCH CJ:   So does the question of the validity – to what extent – maybe this gets right back to what Justice Kiefel put to you at the beginning, but to what extent does the question of validity, on your submissions, turn upon accidents of the marketplace, whether they be legislative or business model or otherwise.

MR YOUNG:   Well, it does not turn on accidents as such.  It turns on the fact that Betfair is a major competitor operating as a betting exchange and as a betting exchange it matches bets. 

FRENCH CJ:   So you are saying one looks to the structure of the market?

MR YOUNG:   Yes.  One could put it that way, as formed by legislation.

GUMMOW J:   One is, after all, talking about a constitutional fact.

MR YOUNG:   Yes.

GUMMOW J:   It is easy to slide into the word “evidence” as if you are trying some other sort of case.

MR YOUNG:   No.

GUMMOW J:   Do you see what I mean?

MR YOUNG:   Yes, your Honour.  This is a case about constitutional fact but a constitutional fact is the inherent character of a betting exchange under its legislation.  That is the set of facts that are relevant to the question of validity. 

FRENCH CJ:   Inherent, for the time being.

MR YOUNG:   Yes, and the rest of it is really an attempt at distraction.  May I say this about Castlemaine Tooheys?  In Castlemaine Tooheys, the source of competitive disadvantage was identified at page 467 at the bottom of the page, about point 9.  The disadvantage was in the two respects already mentioned which gave the South Australian brewers a competitive or market advantage.  The two respects already mentioned are listed at 462 and 463.  The first was the refund.  That is at point 9 at 462 which imposed a greater bottle cost on the Bond companies.  At 463, the second disadvantage was the obligation that retailers were under that they had to provide the refund and that was a disincentive to stocking Bond beer because it required them to pay out a higher refund.  They were the two disadvantages.  They were cost disadvantages.  That was what was critical to the reasoning of the Court.  If the Court pleases.

FRENCH CJ:   Thank you, Mr Young.  Yes, there will be a grant of special leave.  These cases will be either heard consecutively or together, but I would think that we would be looking at at least two days for the two of them. 

MR YOUNG:   At least two days and, I think it may be safer to set them down for three days.

FRENCH CJ:   Because we can expect interveners in this, yes.

MR YOUNG:   Yes.

FRENCH CJ:   Yes.  All right.  Thank you very much.

AT 11.00 AM THE MATTER WAS CONCLUDED