Telecom Corporation of New Zealand Ltd v Commerce Commission
[2012] NZCA 278
•27 June 2012
| NOTE: ORDER PROHIBITING PUBLICATION OF THE JUDGMENT IN NEWS MEDIA OR ON THE INTERNET OR OTHER PUBLICLY AVAILABLE DATABASE UNTIL 12 PM 2 JULY 2012. |
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA700/2009 [2012] NZCA 278 |
| BETWEEN TELECOM CORPORATION OF NEW ZEALAND LIMITED |
| AND TELECOM NEW ZEALAND LIMITED |
| AND COMMERCE COMMISSION |
| Hearing: 26, 27, 28, 29 September and 3 October 2011 |
| Court: Glazebrook, Chambers and Ellen France JJ |
| Counsel: D Shavin QC, J E Hodder SC, P Jagose and T Smith for First and Second Appellants |
| Judgment: 27 June 2012 at 11.00 am |
JUDGMENT OF THE COURT
A The appeal is dismissed.
B The cross-appeal is allowed.
C The declaration made in the High Court is amended to read as follows:
The plaintiff is granted a declaration that Telecom used and/or took advantage of its dominant position/market power from 1 February 1999 until late 2004 (when Telecom introduced a UPC service) for the purposes of deterring potential or existing competitors in the wholesale market for backbone transmission services and the retail market for end-to-end high speed data transmission services.
DThe appellants must pay the respondent costs for a complex appeal on a band B basis and usual disbursements. We certify for three counsel.
REASONS
| Glazebrook and Ellen France JJ | [1] |
| Chambers J | [281] |
GLAZEBROOK AND ELLEN FRANCE JJ
(Given by Glazebrook J)
| Table of Contents | ||
| Para No | ||
| Introduction | [1] | |
| The legislation | [10] | |
| Technical background | [13] | |
| Telecom’s pricing structure | [21] | |
| Retail pricing | [21] | |
| Wholesale pricing | [29] | |
| Pricing of data tails | [33] | |
| The High Court judgment | [39] | |
| Market definition | [39] | |
| Dominance/market power | [41] | |
| Use of dominant position | [42] | |
| Use of dominance for proscribed purpose | [53] | |
| Telecom v Clear litigation | [56] | |
| Explanation of ECPR | [64] | |
| Issues on appeal | [74] | |
| Is ECPR merely a safe harbour rather than a price ceiling? | [79] | |
| Telecom’s argument | [79] | |
| Our assessment (a) ECPR is not, by itself, sufficient to ensure efficiency (b) The Privy Council’s application of ECPR (c) No alternative model proposed | [80] [81] [86] [89] | |
| Does requiring ECPR breach the need for commercial certainty? | [92] | |
| Telecom’s argument | [92] | |
| Our assessment | [93] | |
| Did the High Court err by not following the United States approach to price squeeze claims? | [104] | |
| Telecom’s argument | [104] | |
| Our assessment (a) United States cases | [105] [105] | |
| (b) European Union cases (c) Summary | [113] [120] | |
| Did the High Court err in concluding that Telecom had an obligation to supply data tails to competitors? | [125] | |
| Telecom’s argument | [125] | |
| Our assessment (a) Did the High Court reach its conclusion independently of the counterfactual? | [128] [128] | |
| (b) Can this case be distinguished from Telecom v Clear and Queensland Wire? Did the High Court err in concluding that a non-dominant Telecom would not have supplied data tails to competitors at a price that exceeded ECPR? | [133] [144] | |
| Telecom’s argument Our assessment | [144] [148] | |
| (a) Direct observation (b) The issue of marginal cost (c) The Bertrand model of competition | [148] [154] [160] | |
| Did the High Court err in concluding that the Commission had proved that the Telecom pricing in the two-tail scenario in fact relevantly breached ECPR? | [162] | |
| Telecom’s argument | [165] | |
| Our assessment | [171] | |
| (a) Breach in the aggregate (b) Level of proof and the de minimis approach (c) Were two-tail providers inherently inefficient? (d) Bundled services (e) CBR vs VBR | [171] [187] [198] [205] [211] | |
| Additional issues Settlement agreement | [218] [218] | |
| Avoided costs | [222] | |
| Did the High Court err in concluding that the Commission had not proved that the Telecom pricing in the one-tail scenario breached ECPR? The High Court judgment (a) Were the High Court’s examples of one-tail pricing inconsistent with ECPR principles? (b) Would the inclusion of profit foregone on Telecom’s entire network in the ECPR price lead to the exclusion of competitors? | [226] [230] [233] | |
| (c) Additional considerations | [238] | |
| (d) Was the way in which the High Court applied ECPR in the one-tail scenario inconsistent with the counterfactual? (e) What is the effect of the above analysis? | [243] | |
| Did the High Court err in finding that the Commission had proved that the Telecom pricing involved a purpose proscribed by s 36 of the Commerce Act 1986? | [253] | |
| Telecom’s argument (a) Inference of anti-competitive purpose (b) Direct evidence Conclusion | [256] [259] [259] [268] [278] | |
Introduction
Telecom inherited its telecommunications network from the Post Office when the telecommunications industry was privatised in 1989. The telecommunications network is used to transmit information that has been converted into digital format. During the 1990s, rival telecommunications service providers (TSPs)[1] sought access to Telecom’s network in order to provide their own data transmission services. This access was achieved by TSPs utilising data tails, which are the connection between an end customer’s premises and the point where a rival TSP can take delivery of data signals from Telecom.[2] This appeal concerns Telecom’s pricing of those data tails.
[1]As pointed out by the High Court, the telecommunications industry makes frequent use of acronyms. For the convenience of readers, we attach as an Appendix the glossary of acronyms and abbreviations prepared by the High Court.
[2] This is discussed further at [33] below.
In the High Court, the Commerce Commission alleged that, over the period from 1 December 1998 until late 2004,[3] the wholesale price charged by Telecom to other TSPs for access to data tails was so high relative to Telecom’s retail price that it caused a price squeeze. A price squeeze occurs when a dominant vertically integrated supplier sets prices in the upstream wholesale market in a manner that prevents equally or more efficient competitors from profitably operating in the downstream retail market.
[3]The Commission says Telecom’s anti-competitive pricing policies for data tails did not come to an end until June 2004, when Telecom gave undertakings that it would introduce an Unbundled Partial Circuit (UPC) service to telecommunications service providers (TSPs) at cost-based pricing by 30 September 2004. This led soon afterwards to UPC pricing agreements with TelstraClear and others.
In particular, it was alleged by the Commission that Telecom’s pricing breached the Efficient Component Pricing Rule (ECPR) endorsed by the Privy Council in Telecom v Clear[4] as the appropriate pricing model where there is a dominant vertically integrated provider of network infrastructure and services. Under ECPR the price of an input equals its average-incremental cost as well as a sum sufficient to compensate the incumbent for its opportunity costs. “Opportunity cost” refers to all potential earnings that the supplying firm foregoes, either by providing inputs of its own rather than purchasing them, or by offering services to competitors that force it to relinquish business to those rivals and thus to forego the profits on that lost business.[5]
[4]Telecom Corporation of New Zealand Ltd v Clear Communication Ltd [1995] 1 NZLR 385 (PC) [Telecom v Clear (PC)].
[5]William J Baumol and J Gregory Sidak “The Pricing of Inputs Sold to Competitors” (1994) 11 Yale Journal on Regulation 171 at 178.
In a judgment delivered on 9 October 2009 (we will refer to this as the Liability Judgment),[6] Rodney Hansen J and Professor Martin Richardson held that Telecom’s pricing was above ECPR in virtually all cases where Telecom provided all the tails in a TSP’s customer network, whether two or more, and the TSP did not self-provide any tails (the “two-tail” scenario). The Court did not consider that Telecom’s pricing breached ECPR in cases where a TSP self-provided one or more tails and Telecom supplied the remainder (the “one-tail” scenario).
[6]Commerce Commission v Telecom Corporation of New Zealand Ltd HC Auckland CIV-2004-404-1333, 9 October 2009 [“Liability Judgment”].
On the basis of those findings, it was held that Telecom had used and/or taken advantage of its dominant position/market power from 18 March 2001 until late 2004 for the purpose of deterring potential or existing competitors in the wholesale market for backbone transmission services and the retail market for end-to-end high speed data transmission (HSDT) services.[7]
[7]High speed data transmission (HSDT) services permit customers to transmit data from one site to another at speeds of above 64 kilobits per second (kbps). An HSDT service is a fixed connection between two sites only (unlike telephony services).
Telecom had therefore breached s 36 of the Commerce Act 1986. The High Court concluded that the Commission was entitled to relief (both declaratory and pecuniary) in respect of Telecom’s conduct in that period. The Court granted the Commission declaratory relief with respect to Telecom’s conduct between 18 March 2001 until late 2004, but not with respect to Telecom’s conduct prior to 18 March 2001.
Telecom appeals against the Liability Judgment. There is a cross-appeal by the Commission, asserting that declaratory relief should have been available for the period prior to 18 March 2001.[8] The Commission also seeks to challenge the Liability Judgment on the basis that the High Court should have found that Telecom’s pricing in the one-tail scenario breached ECPR.[9]
[8] This issue is dealt with in Chambers J’s judgment, starting at [281] below.
[9] We deal with this issue at [226] below.
The issue of the quantum of the remedy by way of pecuniary penalty was dealt with in a separate judgment.[10] Telecom also appeals against that decision.[11] We will deal with that appeal in a separate judgment.
[10]Commerce Commission v Telecom Corporation of New Zealand Ltd HC Auckland CIV-2004-404-1333, 19 April 2011 [“Penalty Judgment”]. In that judgment, Rodney Hansen J ordered that Telecom pay a pecuniary penalty of $12 million.
[11] CA313/2011.
Before we turn to the issues in the appeal against the Liability Judgment,[12] we set out the legislative background,[13] explain the technical background in more detail[14] and describe Telecom’s pricing structure.[15] We then summarise the High Court decision[16] and, as it was pivotal to the reasoning of the High Court, summarise the course of the Telecom v Clear litigation.[17] We also set out a description of ECPR.[18]
The legislation
[12] Set out at [74] below.
[13] At [10] below.
[14] At [13] below.
[15] At [21] below.
[16] At [39] below.
[17] At [56] below.
[18] At [64] below.
As noted above, the High Court held that Telecom’s conduct contravened s 36 of the Commerce Act. That section now provides that a person who has a substantial degree of power in a market must not take advantage of that power for a proscribed purpose. One of the proscribed purposes is preventing or deterring a person from engaging in competitive conduct in that or any other market. In relevant part that section provides:
36 Taking advantage of market power
…
(2)A person that has a substantial degree of power in a market must not take advantage of that power for the purpose of—
(a)restricting the entry of a person into that or any other market; or
(b)preventing or deterring a person from engaging in competitive conduct in that or any other market; or
(c) eliminating a person from that or any other market.
…
Before 26 May 2001, s 36 provided that a person who has a dominant position in a market must not use that position for a proscribed purpose:
36 Use of dominant position in a market
(1)No person who has a dominant position in a market shall use that position for the purpose of—
(a)Restricting the entry of any person into that or any other market; or
(b)Preventing or deterring any person from engaging in competitive conduct in that or any other market; or
(c) Eliminating any person from that or any other market.
The High Court for convenience used the term “dominance” to encompass a firm possessing a substantial degree of market power unless it was necessary to distinguish between the concepts by the replacement of “use” with “take advantage of”. We shall do the same in this judgment.[19]
Technical background
[19]It was also accepted that no change to the meaning of s 36 resulted from the replacement of the word “use” with “take advantage of”. References to “use” of dominance accordingly are to be read if necessary as including taking advantage of a substantial degree of market power.
The transmission of data between geographically remote locations has been achieved by modifications to Telecom’s Public Switched Telephone Network (PSTN).[20] The PSTN has two main elements. The core or backbone of the system comprises the exchanges and the trunk lines that connect them. The connection of the core with customers’ premises is the access component, known as the local access network or local loop. Historically the local network comprised pairs of copper wires. Fibre optic cable has now replaced copper in many of the local access lines. They are linked to an exchange where, for the purpose of voice calls, switches enable a call from one telephone number to be connected to another number for the duration of the call.
[20]The description of the technical background in this section and the description of Telecom’s pricing structure and pricing of data tails in the following sections are largely taken from the Liability Judgment, above n 6. More detail is provided in that judgment at [13]–[32].
The PSTN was used for the transmission of basic data services such as telex and fax, but the speedy and efficient transmission of high volumes of data by converting the data into digital format required additional technology. The basic components are:
(a)A network terminating unit (NTU) located at the customer’s premises. The NTU converts and transfers data into digital format and receives and converts data transmitted in digital format.
(b)Multiplexers, which are sited at selected exchanges (or at a roadside cabinet). They aggregate individual data circuits. The aggregated stream is then transmitted to switches at telephone exchanges.
(c)Digital cross connect switches (DCS), which separate individual data streams from the aggregated flows coming in from a multiplexer and route them through the core or backbone part of the network to connect with another DCS near the destination for the data. The data is then delivered through another multiplexer to its destination, the NTU at the customer’s premises.
The entire connection between the two premises of a customer is known as an end-to-end connection. In the first platform or system used by Telecom to transmit data in digital format, the Digital Services Transport Network (DSTN), each end-to-end connection was a dedicated circuit. It was a permanent connection between the two points with a fixed transmission capacity and was never shared with any other user. Such circuits are said to provide a constant bit rate (CBR) service. The bit rate is the speed at which data is transmitted. Industry usage refers to speeds between 64 kilobits per second (kbps) and two megabits per second (Mbps) as high speed, speeds lower than that as low speed and speeds higher as very high speed.[21] A CBR service ensures that the speed and quality of transmission is constant and assured. There are, however, associated inefficiencies. When a user is not using its full allocated capacity, additional capacity in the circuits cannot be used to meet the needs of other users.
[21]The typical Digital Services Transport Network (DSTN) connection was low speed (64 kbps) and, in fact, there was evidence that a DSTN network terminating unit (NTU) could not operate over copper at more than 128 kbps.
A CBR service is to be distinguished from a variable bit rate (VBR) service, which is provided when circuits are shared by a number of users. The speed of transmission then will depend on the volume of traffic; at peak times service will be slower. A VBR service offers a Committed Information Rate (CIR) and a Peak Information Rate (PIR). A TSP guarantees the minimum speed of the CIR while offering the potential for the higher PIR at off-peak times.
A VBR service was introduced by Telecom with its Frame Relay (FR) network installed in 1994. It enabled data to be transmitted at higher speeds and a circuit to be connected to any customer on a switch: any-to-any rather than point-to-point transmission. This was achieved by the transmission of data in packets, known as frames.
From 1997 Telecom progressively rolled out a new network, the Asynchronous Transfer Mode (ATM), which enabled packets (now called cells) to be tagged with different service qualities and carried with different service guarantees. This permitted the ATM network to carry different types of traffic according to the service quality required. FR services were progressively migrated onto the ATM network, which was then able to provide VBR FR services and CBR services such as Digital Data Service (DDS).[22]
[22]These changes were gradual with different network elements being rolled out in different geographic areas at different times. The same applied to the application of the technology to different customers.
In the mid-1990s Telecom began introducing a connectionless technology known as the Internet Protocol (IP) technology. Since 2000 it has supported an increasing range of data communication services.
During the 1990s other TSPs rolled out limited networks and network components. Both Clear Communications Ltd (Clear) and Telstra Saturn Ltd (Telstra)[23] installed a fibre backbone network connecting some of the main centres. Both companies, and a number of other TSPs, constructed fibre networks in the CBDs of major cities. However, in non-major CBD areas Telecom had the only local access network or the only access network capable of transmitting business data. TSPs who wished to compete in the retail market for end-to-end HSDT services were dependent on access to Telecom’s access network in non-major CBD areas.
Telecom’s pricing structure
Retail pricing
[23]Clear and Telstra later merged and became TelstraClear.
Before 1999, Telecom’s retail prices for end-to-end data services were contained in Telecom’s List of Charges (TLoC). In addition to a one-off installation charge, there was a monthly charge that normally included:
(a)A charge for access to the customer’s premises at each end of the service.
(b)A charge for transmission between the two data exchanges to which the premises were connected. The charge varied according to the distance the data was carried.
(c) Incidental charges for service delivery and the like.
Access and transmission charges varied according to the speed of the circuit: the higher the speed the higher the charge.
It was common ground between the commercial witnesses at trial that, by late 1999, Telecom’s charges under TLoC had become uncompetitive, and, particularly in relation to the relativity of CBR and VBR HSDT services (the less valuable VBR services were more expensive than CBR services with the same PIR), irrational.
We note at this point that Telecom’s retail pricing prior to the introduction of Streamline pricing (described below), and in particular the irrational price relativity of CBR and VBR products, created an arbitrage opportunity for competing TSPs in respect of data tails. TSPs could purchase CBR circuits cheaply from Telecom, overlay their own FR switches and other core network equipment, and sell VBR services in competition with Telecom’s expensive VBR services.
In 1998 Telecom commenced an initiative to address the issues with TLoC pricing of HSDT services. The initiative was progressed by a project team under the name “Project Nike”. The pricing proposed by Project Nike was later rebranded, for introduction as “Streamline” pricing, which was signed off by the Chief Executive Officer of Telecom, Dr Roderick Deane, on 24 December 1998.
Streamline pricing involved major price reductions from TLoC and a rebalancing of VBR and CBR prices, so that the less valuable VBR services were less expensive than CBR services with the same PIR. The number of transmission steps was also reduced to two: local and national. The choice of access speed was also reduced to a choice of 128 kbps or more.
Streamline pricing was rolled out progressively to Telecom’s top 100 corporate customers from around February 1999. Subsequently, the business rules were changed to permit other customers to be offered Streamline pricing.
Streamline became and, remained, Telecom’s price book for data services. It is accepted by the Commission that Telecom was entitled to correct the anomalies in its retail pricing structure. The issue in the High Court was Telecom’s alleged failure to adjust its wholesale prices accordingly.
Wholesale pricing
Between 1996 and 1997, under the 1996 Interconnection Agreement,[24] TSPs could purchase data connections at TLoC prices less six per cent pursuant to the terms of their interconnection agreements with Telecom. Under pressure from TSPs, a wholesale pricing regime was introduced known as Wholesale Integrated Network (WIN) pricing. Telecom offered TSPs discounts of between 15 and 30 per cent off TLoC prices. Discounts were higher in major CBD areas.
[24]After substantial difficulties in negotiations between Telecom and Clear regarding the terms on which Clear might have access to Telecom’s network, which resulted in the Privy Council’s decision in Telecom v Clear, above n 4, the parties eventually signed an interconnection agreement in 1996.
Following the introduction of Streamline retail prices, new wholesale prices were not offered to TSPs immediately. TSPs continued purchasing data tails at TLoC less 15–30 per cent under WIN pricing. The Commission alleges that this was the beginning of the price squeeze. It was only after some months that Telecom introduced new wholesale prices. The new offer became known as Carrier Data Pricing (CDP). Typically it provided TSPs with a discount of between six and 15 per cent off Streamline pricing.
The Commission’s case was that under CDP, wholesale prices did not fall commensurately with the large reductions brought about by the introduction of Streamline retail prices. It asserted that the prices of two data tails in most instances were above the retail end-to-end price charged by Telecom to its customers. As noted above,[25] the Commission said that Telecom’s anti-competitive pricing of data tails did not come to an end until June 2004, when Telecom introduced an Unbundled Partial Circuit (UPC) service to TSPs at cost-based pricing, which was developed into an agreement with TelstraClear and others.
[25]At fn 3 above.
We note at this point that, in 2003, pursuant to an application by TelstraClear for wholesale determinations under the Telecommunications Act 2001, the Commission made a determination (Decision 497)[26] that required Telecom to supply wholesale end-to-end HSDT services in non-metropolitan areas at specified prices. The effect of Decision 497 is discussed in Chambers J’s judgment at [330]–[336] below.
Pricing of data tails
[26]Re TelstraClear Ltd and Clear Communications Ltd CC Decision No 497, 12 May 2003.
As noted above, a data tail is the connection between an end customer’s premises and the point where a TSP can take delivery of data signals from Telecom. The High Court used the following diagram to illustrate the concept:
In this diagram, an end-to-end circuit connects a customer’s premises at point A to another of their premises at point D. The links AB and CD represent connections from the physical premises to an exchange building and the links BX and CY represent connections from an exchange to a point at which a rival TSP can pick up the transmission. This is known as a point of presence (POP).[27] The links BC and XY represent the core or backbone network transmissions of Telecom and the rival TSP respectively. The heavy lines ABX and YCD are data tails: the links from the customer’s location to the point at which the TSP can take up the signal.
[27]The point of presence (POP) is the building where a TSP has installed its network equipment. The POP may also be the physical point where two network operators arrange to interconnect their respective networks (known as a point of interconnection (POI)).
If the customer were served by Telecom, the circuit would be represented by ABCD. If the customer were served by a TSP and both data tails were provided by Telecom the circuit would be ABXYCD. If the TSP provided one tail itself (because it had its own access network at one end of the circuit or obtained it from a provider other than Telecom) the circuit would be AXYCD or ABXYD, depending on which tail was leased. It was also open to a TSP simply to lease the entire circuit ABCD from Telecom and resell it to the customer.
The Commission asserted that Telecom wrongly treated data tails as just another end-to-end data transmission service for resale, and TSPs as just another corporate customer. This meant that it priced each data tail in the same manner as its resale end-to-end circuits (ABCD) rather than as an essential wholesale input. The Commission’s position is that, while in a technical sense data tails resembled end-to-end circuits,[28] their function and purpose was that of an input. We accept that this is the case.[29]
[28]Telecom provisioned the data tails technically in the same manner as an end-to-end circuit, with an NTU at each end, instead of providing the interconnect model that was technically feasible and which both parties’ technical experts agreed would be more efficient.
[29]We discuss this further at [141]–[143] below.
If a TSP leased the entire retail circuit ABCD from Telecom to resell it to the customer, Telecom would charge two access charges and one transport charge. As a result of Telecom’s treatment of data tails as an end-to-end circuit, in relation to each data tail (ABX or YCD) there were two access charges and one transport charge. This meant that when a TSP purchased two Telecom tails to provide its own retail service ABXYCD, it had to pay to Telecom a total of four access charges and two transport charges. On top of that the TSP still had its own backbone transmission (XY) costs and its retail costs.
The Commission’s case was that, in continuing to price data tails in exactly the same way as an end-to-end service, Telecom was furthering a deliberate pricing policy driven by two main goals:
(a)to turn rivals into mere resellers of Telecom’s product and, by that means, to grow the market; and
(b)to encourage competitors to view Telecom as the network of choice. That would not only keep them as resellers but discourage them from developing their own networks.
The High Court judgment
Market definition
The Commission alleged that the relevant markets were:
(a)The national retail market for end-to-end HSDT services.
(b)The wholesale market outside major CBD areas for data tails where major CBD areas are defined as those:
(i)served by multiple telecommunications networks (owned by both Telecom and other network operators) capable of being used to provide retail HSDT services; and
(ii)with relatively low barriers of entry by reason of sufficient aggregation of demand relative to minimum viable scale.
(c) The national wholesale market for backbone services.
Telecom admitted there was a national retail market for end-to-end HSDT services. Although the wholesale market definitions were not admitted by Telecom in its pleadings, they were not challenged in argument in the High Court. However, Telecom did submit that the definition relied on by the Commission meant that it was not possible to say with respect to any tail, whether it was within a CBD area or not. The High Court acknowledged that the precise geographical locations of the market boundaries were unclear, but considered the definition adequate to permit a determination of the appropriate market for the vast majority of data tails in issue.
Dominance/market power
It was accepted in the High Court that Telecom had both dominance and a substantial degree of market power in the wholesale market outside major CBD areas for data tails as well as the national wholesale market for backbone services.[30] It was thus not necessary for the High Court to consider whether there was any difference between the two concepts.
Use of dominant position
[30]Liability Judgment, above n 6, at [9] and [41]–[42]. This had been challenged in Telecom’s statement of claim but not in evidence before the High Court.
The High Court noted that, in order to show “use” of a dominant position, a causal relationship is required between an incumbent’s alleged conduct and its dominance or market power.[31] The causal link is shown by the application of a counterfactual test: Telecom’s actions are compared to the way in which a hypothetical firm, not in a dominant position, but otherwise similarly placed, would have acted. If Telecom acted in a way in which it would not have acted if it had not been dominant, it will have used its dominant position.[32]
[31]Liability Judgment at [11], citing Carter Holt Harvey Building Products Group Ltd v Commerce Commission [2004] UKPC 37, [2006] 1 NZLR 145 at [51].
[32]Liability Judgment at [11], citing Telecom v Clear (PC), above n 4, at 403 and Carter Holt at [29] and [52].
It was agreed that the characteristics of the counterfactual scenario in this case were:
(a)two vertically integrated firms (T1 and T2), each with a “ubiquitous” access network (that is, a network with the capacity to provide connectivity to all areas and customers) and a 50 per cent share of the retail HSDT market; and
(b)an entrant or access seeker (T3) who has a core network but no ubiquitous access network and no ability to construct access on economic terms, and who therefore needs to lease data tails.
The High Court went on to say that in cases where the conduct in issue concerns the pricing of a dominant vertically integrated provider of network infrastructure and services, the ECPR economic model is employed.[33] There are two methods by which ECPR can be applied but both have the same end effect. In this case the “Kahn-Taylor” approach was used.[34]
[33]ECPR is discussed in further detail at [64] below.
[34]Liability Judgment at [48] and [51], referring to the method set out by Professor Alfred E Kahn and Dr William E Taylor in “The Pricing of Inputs Sold to Competitors: A Comment” (1994) 11 Yale Journal on Regulation 225.
The Court considered the evidence presented as to the calculation of ECPR prices.[35] It noted that the parties were at odds on two pivotal issues: the implications of a TSP self-provisioning tails in a circuit and the correct approach when data transmission is part of a bundle of services.
[35]The Court made a number of findings regarding the proper calculation of ECPR prices, which are summarised in the Liability Judgment at [123].
In terms of self-provisioning, Telecom argued that it was entitled to recover the profit foregone on the entire network (that is, the profit foregone on the self-provided tails as well as the Telecom-provided tails). Professor Gabel, an expert economist who gave evidence for the Commission, was of the view that Telecom should only be able to recover for each tail it leases the proportion of profit share that the leased tail bears to the total number of tails in the network. This would mean that, if Telecom provided one of five tails, it should be able to apportion 20 per cent of the profit foregone on the entire network to that tail. The Commission argued that the position contended for by Telecom ignored the effect of the sunk or fixed costs[36] in self-provisioning a tail and effectively required a TSP to pay twice for the tails.
[36]These are the initial startup costs that are independent of the volume of output. They are in two categories: fixed costs which can be recouped if the firm subsequently exits the industry, and sunk costs which cannot be recouped.
Regarding partial self-provisioning, the High Court concluded that the correct application of ECPR was largely as contended by Telecom.[37] It held that, in the one-tail scenario where a TSP self-provisions a tail or tails in a circuit and Telecom provisions the remainder, under ECPR pricing, Telecom is entitled to recover the profit foregone on the entire network. It considered that the pricing of data tails on this basis would not preclude entry by a more efficient rival.[38] The Court said that ECPR pricing does not prevent a more efficient entrant from building its own access network, as the incentive to do so is driven by any efficiency advantages an entrant may have.[39]
[37]We note that, in evidence for Telecom, Professor Hausman had also argued that ECPR pricing should include an option fee, which compensates Telecom for the opportunity it confers on an entrant to defer a decision to build out its own access network, but this argument was not accepted by the High Court: at [74]–[75].
[38] At [60].
[39] At [59].
The High Court sought to demonstrate that pricing of data tails on this basis would not preclude entry by a more efficient rival by the use of examples that assumed a five-tail customer network (of which two tails were in the CBD and three were in a rural area).[40] The High Court’s examples assumed a retail price of the network of $14, with a direct incremental network cost to Telecom of each tail of $1, a direct incremental network backbone cost of $2 and a direct incremental retail cost of serving the customer of $3. This would lead to a $4 profit for Telecom for the customer’s business. As one of its examples, the High Court noted that, if a TSP wished to self-provision one tail and lease four from Telecom, Telecom could, under ECPR, charge the TSP $8: that is, $2 per tail (being the cost of $1 per tail and the $4 opportunity cost spread over four tails). Assuming the same $14 retail cost and $5 for the TSP’s backbone and retail costs, this would leave a surplus of $1. The High Court said that it would be profitable for a TSP to self-provision only if it could provide the tail more cheaply than Telecom could (that is, for less than $1).[41]
[40] At [55]–[59].
[41]At [57]. Other examples were provided at [56] and [58] of the Liability Judgment.
The High Court did not accept that new entrants’ incentive to build access would be removed if, in addition to compensating the incumbent for profits foregone on the entire network, an entrant also incurred sunk or fixed costs in self-provisioning a tail. It accepted that the task of efficient competition is to ensure that the aspiring competitor prevails only to the extent that the total incremental costs (including fixed and sunk costs) to society involved in its supplying the service are equal to or lower than those of the incumbent. It did not consider that this outcome would be “irremediably inconsistent” with Telecom v Clear.[42] This meant that the High Court found no breach of ECPR in the one-tail scenario. It held that there was, however, breach in the two-tail scenario.
[42] At [61]–[63].
Regarding bundled services, Telecom argued that when data services are supplied to a customer as part of a “bundle” (including voice and/or internet services) the profits lost on all services, not just the data service component, should be taken into account in calculating the ECPR price. The Court said that the Commission was not given proper notice that this issue would be raised and so the issue could be disregarded for the purpose of calculating the ECPR price. The Court also said that, in any event, if the incumbent is to be compensated in an ECPR price for losing a data service customer, it is only to the extent of the additional profit derived from supplying the services as a bundle.[43] It concluded that there was no risk that ECPR prices calculated by the Commission were materially understated on this account.[44]
[43]The Court said that this was because what is foregone by the incumbent when it loses a data service customer is the ability to offer a bundle of services, not the ability to offer other components of the service such as voice or internet: at [71].
[44]At [72].
Having accepted evidence that Telecom had offered data tails to rivals at above ECPR prices when Telecom supplied both tails in a two-tail circuit,[45] the High Court said that it was satisfied that, in the agreed counterfactual comprising two vertically integrated firms, each with a 50 per cent share of the HSDT market, a non-dominant Telecom would not set prices for data tails at above ECPR. This was for the simple reason that, if it did so, the backbone provider would purchase input from another company and Telecom would lose the sale entirely.[46]
[45]The expert for the Commission, Professor Gabel, had concluded that, except in one scenario, there were ECPR violations throughout the period when Telecom supplied both tails in a two-tail circuit. This conclusion was largely accepted by the expert for Telecom. See the Liability Judgment at [124].
[46]At [129].
The High Court rejected a submission made by counsel for Telecom that the absence of information about the magnitude and distribution of ECPR violations was fatal to the Commission’s case.[47] The Court accepted that, as long as non-compliance was more than de minimis, it may found a breach of s 36.[48]
Use of dominance for proscribed purpose
[47]At [130]–[131].
[48]At [131]. The Court said that the number and extent of breaches goes to the gravity of the breach, not to its existence.
In relation to whether Telecom had used its dominance for a proscribed purpose, the Court said that this may be inferred from evidence that the conduct had an anti-competitive effect[49] or may be shown by direct evidence of what the conduct was intended to achieve.[50] The Court concluded that an anti-competitive purpose was established by both means.
[49]At [137], citing Telecom v Clear (PC), above n 4, at 402.
[50]At [138]. This includes evidence that an anti-competitive outcome was a substantial purpose of Telecom’s conduct: s 2(5)(b) of the Commerce Act 1986.
The Court concluded that the readily foreseeable effects of pricing two-tail circuits to TSPs above ECPR and, in many cases, above retail prices, was sufficient to support an inference that Telecom used its dominance for the pleaded purposes.[51]
[51]At [151].
In regard to the direct evidence of what Telecom’s conduct was intended to achieve, the Court concluded that two factors demonstrated a strategy on the part of Telecom to deny rival TSPs access to data tails at prices that would permit them to utilise and develop their own networks for the purpose of data transmission.[52] The first was the way in which Streamline and CDP were introduced (that is, by rolling out Streamline retail pricing quickly and “covertly”[53] on 1 February 1999 but not completing the revision of wholesale prices under CDP until August 1999). The second was the statements of those responsible for their introduction (that is, acknowledgements by Telecom that its philosophy was that there should be no price competition between Telecom and rival TSPs).[54]
Telecom v Clear litigation
[52]Ibid.
[53]At [140].
[54]At [145]–[146].
At issue in the Telecom v Clear proceedings was the appropriate charge that Telecom could make to Clear, a new entrant in the market for the provision of local telecommunications services in New Zealand, for connection to the PSTN. Clear required access to the PSTN, owned by Telecom, because the size and nature of this infrastructure made replication uneconomic for competitors. Telecom admitted that it was dominant over the PSTN and had a duty to provide interconnection to a new entrant.
Telecom relied on ECPR (or the “Baumol-Willig rule”, as it was referred to in those proceedings) to assert that the appropriate price of interconnection included both the direct incremental costs of providing the interconnection and Telecom’s opportunity cost foregone due to Clear’s use of the facility. Clear alleged that the price offered by Telecom was so high as to amount to a use of its dominant position, in contravention of s 36 of the Commerce Act.
Under ECPR, a firm seeking access must pay the incumbent a sum sufficient to compensate the incumbent for the opportunity cost of customers lost by the incumbent to the entrant, including the incumbent’s foregone profits, if any. Hence, the ECPR access price may include the monopoly profits (that is, profits received from setting prices above the level that would be charged in a competitive market)[55] that the incumbent loses by selling access. This implication of the rule was the central issue before the Privy Council.
[55]Monopoly profits are a kind of “monopoly rent”. The other type of monopoly rent is inefficiency in a monopolist firm’s provision of a service, giving rise to higher costs.
In the High Court,[56] it was determined that Telecom was entitled to make a charge to Clear for interconnection, equal to its opportunity cost. The Court also held that the existence of monopoly rents had not been proved.[57] The Court considered whether the risk of monopoly rents at a level sufficient to exclude Clear should lead it to reject ECPR as a model, but concluded that this risk was outweighed by the fact that failure to use a pricing rule that charges for access to Telecom’s network (to cover the incremental cost imposed on Telecom) would foster the development of uneconomic bypass and the proliferation of uneconomic operators.[58]
[56]Clear Communications Ltd v Telecom Corporation of New Zealand Ltd (1992) 5 TCLR 166 (HC) [Telecom v Clear (HC)].
[57]At 217.
[58]Ibid.
This Court overturned the High Court’s decision on the ground that it allowed Telecom to charge a monopoly price.[59] Gault J[60] considered that, in a perfectly contestable market, monopoly profits would not be obtainable, and that this cast doubt on the validity of ECPR as an appropriate pricing rule.[61] He said that the inclusion of monopoly profits in the access price must affect the price at which Clear can enter the market and so affect the vigour of its competitive conduct.[62]
[59]Clear Communications Ltd v Telecom Corporation of New Zealand Ltd (1993) 5 TCLR 413 (CA) [Telecom v Clear (CA)].
[60]With whom Cooke P and Richardson J agreed.
[61]At 433.
[62]At 434.
In Gault J’s view, an appropriate access price would allow Telecom to recover a contribution for its “true costs”: that is, the incremental cost of providing interconnection plus a reasonable return on capital employed.[63] Such an approach would eliminate any element of monopoly profits, as it would only allow Telecom to recover the level of charge that could be recovered in a competitive market.[64]
[63]At 442.
[64]Ibid.
The Privy Council overturned this Court’s decision. The Privy Council held that Telecom’s reliance on ECPR to set its access price did not breach s 36 since it did not involve the use by Telecom of its dominant position.[65] Their Lordships said that Telecom would be acting uncompetitively if it refused to permit Clear to interconnect with Telecom’s network. But it was not acting uncompetitively in charging its opportunity cost since that is what it would have charged in a fully competitive market.[66]
[65]Telecom v Clear (PC), above n 4, at 408.
[66]At 406.
The Privy Council was not concerned by the fact that Telecom’s opportunity cost could include monopoly profits. Their Lordships said that monopoly rents would initially be preserved but that these would eventually be competed out by Clear’s competition in the contested area.[67] Further, Clear had not produced any figures to establish that Telecom’s charges would be so high that Clear would be unable to enter the CBD market at all and thus it followed that the risk of monopoly rents had no bearing upon the question whether the application of ECPR prevented competition in the contested area.[68] Their Lordships also said that monopoly profits could be removed by regulatory action and said that s 36 did not have any wider purpose, beyond producing fair competition, of eliminating monopoly profits currently obtained by the person in the dominant market position.[69]
Explanation of ECPR
[67] At 407.
[68] Ibid.
[69] Ibid.
ECPR was devised as a regulatory tool to be used in addressing the problem of how to price network access in markets dominated by a single vertically integrated provider of network infrastructure and services.[70] In the telecommunications sector, the application of ECPR was intended to ensure that the wholesale pricing of network access to competitors did not restrict or distort competition in the relevant downstream markets for telecommunications services. More succinctly, the proper application of ECPR was seen as the means by which regulatory agencies could establish an appropriate relationship between the profits an owner of a bottleneck facility (such as Telecom) earns from providing access to itself, and those profits it earns from selling access to its competitors in the wholesale market.[71]
[70] The seminal article on ECPR is by Professors Baumol and Sidak, above n 5.
[71] Ibid, at 173.
As argued by Professors Baumol and Sidak, the price of access must be selected in a manner that provides compensation to the incumbent for all of its properly incurred costs, including its foregone profits, while at the same time the price of access must be sufficiently low that it does not act as a barrier to entry:[72]
If X charges its rival more for the input than it implicitly charges itself, it will have handicapped that rival’s ability to compete with X, perhaps seriously. The reverse will be true if regulation forces X to charge the rival less for the input than X charges itself …
[72] Ibid.
The rationale for allowing an incumbent to recover its opportunity costs in cases of natural monopoly is that there is a typical pattern of high fixed costs and economies of scale. Pricing at incremental costs would result in revenues failing to recoup capital costs. This would be inimical to dynamic efficiency, as there would be little incentive to maintain existing or create new facilities.[73]
[73]Brenda Marshall “Pricing Third Party Access to Essential Infrastructure: Principles and Practice” (2005) 24 ARELJ 172 at 177 and fns 54 and 55 (and the references cited therein).
As mentioned above, there are two methods by which ECPR can be applied but both arrive at the same results. The first methodology[74] was illustrated in the following manner by Professor Gabel.
[74]The approach put forward by Professors Baumol and Sidak, above n 5.
Assume that the prevailing retail price for data circuit AD is $11, the direct incremental network cost of using data tails ABX and YCD is $2, the direct incremental network cost of using backbone BC is $2, and finally, that the direct incremental retail cost of serving the customer is $3. Given this set of assumptions, when providing data circuit AD as a retail service the integrated firm will earn a profit of $4 ($11 – $2 tail cost – $2 backbone cost – $3 incremental retail cost = $4).
ECPR states that the wholesale price for using data tails ABX and YCD is equal to the direct incremental cost of the tails ($2) plus the foregone profit ($4), so the ECPR price for the data tails is $6 ($2 + $4 = $6).
In this diagram, the shaded grey areas represent the costs (including opportunity costs, being profit) of those parts of the retail service in which the incumbent firm is dominant – that is, the service that the entrant is required to purchase from the incumbent. The white areas represent the costs of those parts of the retail service where the firms are in competition with each other. It can be seen from the diagram that:
(a)$6 is the proper ECPR price for the data tails in this example because the profit earned by the integrated firm as a wholesale supplier to the entrant ($4) is equal to the profit it would have earned providing circuit AD as a retail service;
(b)if the entrant is more efficient in the area of competition – that is, in the provision of backbone and retail support – than the incumbent, it will be able to compete effectively in the retail market by lowering its retail price; and
(c)if the incumbent was to charge more than $6 then the entrant would not be able to compete by lowering its retail price (either at all or to the same extent) even if it was more efficient in the area of competition, so that competition will have been impeded or restricted in the retail market.
An alternative approach was put forward by Professor Kahn and Dr Taylor.[75]This approach can be demonstrated by using the same assumptions as in the example above.
[75] Kahn and Taylor, above n 34.
The Kahn-Taylor price for data tails is the retail price, less the costs avoided by the vertically integrated firm because another TSP is providing the retail service and backbone facilities. Those costs are $2 for the backbone and $3 for retail costs which, when deducted from the retail price ($11), produce $6, as in the earlier example.
The Kahn-Taylor approach was used in this case, as it requires an analyst to identify only three items as against the four items required under the traditional ECPR formula.
Issues on appeal
On appeal, Telecom mounts a full-scale attack on the Liability Judgment. It first argues that the High Court erred in its assumption that any pricing above ECPR entailed use of a dominant position. In its submission, the Privy Council in Telecom v Clear merely held that ECPR provides a safe harbour (or a floor) where a dominant firm can be assured of not falling foul of s 36.
Telecom argues in addition that, as it was impossible for Telecom to calculate, in advance, ECPR prices as a matter of practical reality, this breaches the requirement for commercial certainty and is contrary to the rule of law. Telecom also argues that the High Court should have followed the United States approach to price squeeze claims and concluded that such claims do not fall within the scope of s 36.
The more particular issues for determination identified by the parties were:
(a)Did the High Court err in concluding that Telecom had used and/or taken advantage of its dominant position/market power? Specifically:
(i)in concluding that Telecom had an obligation to supply data tails to competitors?
(ii)in concluding that a non-dominant Telecom would not have supplied data tails to competitors at a price that exceeded ECPR?
(iii)alternatively, in concluding that the Commission had proved that the Telecom pricing in the two-tail scenario in fact relevantly breached ECPR?
(iv)in addition, or alternatively, in concluding that the Commission had not proved that the Telecom pricing in the one-tail scenario breached ECPR?
(b)Did the High Court err in finding that the Commission had proved that the Telecom pricing involved a purpose proscribed by s 36 of the Commerce Act?
In addition, the implications of a settlement reached in 2000 between Telecom and Clear will be dealt with in this judgment.[76] We will also deal with a submission made by the Commission regarding the appropriate measure of Telecom’s avoided marketing costs.[77]
[76] At [218] below.
[77] At [222] below.
There are also issues as to whether the High Court erred in holding that there was no jurisdiction to grant a declaration in relation to Telecom’s conduct prior to 18 March 2001 and whether the High Court erred in concluding that the commencement of the Telecommunications Act 2001 and the Commission’s Decision 497 did not reduce or pre-empt the application of s 36 of the Commerce Act to the Telecom pricing in issue. Those issues are dealt with in Chambers J’s judgment.[78] We agree with his judgment on those issues.
Is ECPR merely a safe harbour rather than a price ceiling?
Telecom’s argument
[78]From [281] below.
Telecom argues that the Privy Council in Telecom v Clear did not hold that charging prices above ECPR constitutes a use of a dominant position. It merely held that, if ECPR prices are charged, then this provides a safe harbour whereby a dominant incumbent player can be assured of not breaching the Commerce Act. The ECPR price is therefore submitted to be a floor rather than a ceiling. This argument is partly predicated on the assumption that ECPR provides an efficient price (and thus any lower price is inefficient).
Our assessment
We do not accept this submission.
(a) ECPR is not, by itself, sufficient to ensure efficiency
To the extent that Telecom’s argument relies on ECPR producing efficiency, ECPR is not, by itself, sufficient to ensure efficiency. If a firm obtains monopoly profits, its opportunity cost will include monopoly profits. Similarly, monopoly rents in the form of inefficiencies in a monopolist firm’s provision of a service, giving rise to higher costs, will be preserved. ECPR can therefore preserve the allocative or consumption inefficiency that results from the monopolist’s excessively high final product prices.[79]
[79]Nicholas Economides and Lawrence White “Access and interconnection pricing: how efficient is the ‘efficient component pricing rule’?” (1995) 40(3) Antitrust Bulletin 557 at 564.
The proponents of the model have stressed that ECPR plays its full beneficial role only when a number of underlying assumptions are valid.[80] An important underlying assumption, which Professors Baumol and Sidak have described as a “second economic efficiency requirement”, is that, in addition to ECPR, final product prices must be constrained by market forces or regulation so as to preclude monopoly profits.[81]
[80]Baumol and Sidak, above n 5, at 195–196.
[81]William J Baumol and J Gregory Sidak “The Pricing of Inputs Sold to Competitors: Rejoinder and Epilogue” (1995) 12 Yale Journal on Regulation 177 at 178. See also J Vickers “Regulation, competition, and the structure of prices” (1997) 13 Oxford Review of Economic Policy 15.
ECPR has sometimes been described as setting both a floor and a ceiling:[82]
(a)ECPR sets a floor because a rival seeking access should never be charged less than the average incremental cost of its usage of the incumbent’s facility (this is to avoid cross-subsidy). Thus ECPR precludes inefficient entry by ensuring that a rival enters and produces in the market only if its costs are no greater than those of the incumbent.[83]
(b)ECPR sets a ceiling because the rival should never be charged in excess of the “stand-alone cost” of producing the final product (that is, the price that would rule in a competitive market, which would not include monopoly profits). ECPR then encourages efficient entry.
[82]For example, in Telecommunications Pricing: Theory and Practice (Cambridge University Press, Cambridge, 1991) at 146, Bridger Mitchell and Ingo Vogelsang describe ECPR as allowing a firm “freedom to set its price structure within the range provided by incremental cost of a service as a lower bound and stand-alone cost (SAC) of a service as an upper bound … SAC is characteri[s]ed by Willig… as the price that would rule for the service if the market were contestable, and by Baumol … as the price that would induce entry by an efficient entrant in the absence of entry barriers.” See also Vickers, ibid, and William J Baumol and Robert D Willig “Competitive Rail Regulation Rules: Should Price Ceilings Constrain Final Products or Inputs?” (1999) 33 Journal of Transport Economics and Policy 43 at 43–44.
[83]See the explanation given by Economides and White, above n 79, at 563.
In principle, therefore, ECPR does arrive at a price floor, but the full validity of the ECPR model is conditional upon downstream pricing being constrained by regulation or market forces so that no supernormal returns accrue to the incumbent. In the present case, the High Court said that:[84]
[T]he objective of ECPR [is] to price access in a manner that compensates the incumbent for properly incurred costs, including profits foregone, while at the same time ensuring that the price of access is sufficiently low so as not to deter entry. A price set in accordance with ECPR will permit efficient entry by ensuring that an entrant’s costs will not exceed those of the incumbent. A price which exceeds it will be harmful because it impedes efficient entry.
The italicised part of this passage is an accurate summary of ECPR only when the underlying assumption that final product prices do not include monopoly profits is valid. The fact that ECPR without regulation or competition does not produce efficient pricing reinforces the conclusion that ECPR as applied by the Privy Council cannot be seen as a safe harbour with firms free to charge more.
[84]Liability Judgment, above n 6, at [45] (emphasis added).
Indeed, the difficulty inherent in the Privy Council’s decision in Telecom v Clear is that Telecom was not constrained in its downstream pricing decisions by competition law or by a regulator, which meant that, in those circumstances, ECPR could not calculate a price that a non-dominant firm in a hypothetical competitive market would charge.[85] Yet their Lordships endorsed the counterfactual test (that is, comparing the dominant firm’s actions to the way in which a hypothetical firm, not in a dominant position but similarly placed, would have acted) but at the same time endorsed ECPR, thus allowing monopoly profits in a hypothetical competitive market. If one did assume a commercially functioning market with workable competition then clearly monopoly profits (which could be included in ECPR) would not occur.[86]
(b) The Privy Council’s application of ECPR
[85]As Economides and White argue, above n 79, at 568, if ECPR is placed in this context, the “luster of its rationale tarnishes rapidly”. Brenda Marshall notes that ECPR was developed for regulated markets in the United States, where price or other controls restrict monopoly profits. In markets that are subject to light-handed regulation where there are no such controls, such as in New Zealand, “the rule’s effect is blunted”: Marshall, above n 73, at 193 and fn 210.
[86]Brenda Marshall and Rachael Mulheron “Access to Essential Facilities under Section 36 of the Commerce Act 1986: Lessons From Australian Competition Law” (2003) 9 Cant L Rev 248 at 254. See also George Hay “Reflections on Clear” (1996) 3 CCLJ 231 at 243–244, Warren Pengilley “The Privy Council Speaks on Essential Facilities Access in New Zealand: What are the Australasian Lessons?” (1995) 3 CCLJ 26 at 45, 59 and fn 43 and Michael O’Bryan “Access Pricing: Law Before Economics?” (1996) 4 CCLJ 85 at 96.
The Privy Council concluded that a non-dominant Telecom in a competitive market would not have charged below ECPR, so Telecom had not used its dominant position in charging its opportunity cost since that is what it would have charged in a fully competitive market. Telecom submits that their Lordships’ treatment of ECPR illustrates that ECPR was seen as a safe harbour, relying in particular on their Lordships’ statement that a dominant firm “[would] not be acting uncompetitively if [it] refuses to deal at a figure less than that which [it] is currently receiving”.[87]
[87] Telecom v Clear (PC), above n 4, at 405.
We do not accept that their Lordships’ statement that a hypothetical firm would not have charged prices below ECPR can be interpreted as suggesting that, had Telecom’s prices been higher than ECPR, it would not have been using its dominant position. The essential question was whether the terms Telecom was seeking to extract were “no higher than those which a hypothetical firm would seek in a perfectly contestable market”.[88] If a hypothetical firm would charge ECPR prices (and not less than ECPR), it follows that charging prices above ECPR would amount to a use of a dominant position.
[88] At 403.
Further, the Privy Council recognised that ECPR pricing could allow the continuation of monopoly profits (although Clear had not proved their existence). Their Lordships considered that monopoly profits would be competed out (that is, prices would be lowered over time). It is inconceivable that the Privy Council considered that an incumbent could with impunity charge more than ECPR, effectively increasing rather than decreasing any monopoly profits.
(c) No alternative model proposed
Finally, as we note below,[89] there was no evidence that Telecom ever had regard to ECPR when setting its wholesale prices. Mr Shavin QC describes Telecom as instead adopting a “generous” approach to its wholesale pricing.
[89] At [93] below.
It must be remembered that it was Telecom that put ECPR before the Court in Telecom v Clear as the proper pricing model. In the present proceedings, Telecom did not propose that its allegedly “generous” methodology (or indeed any other methodology) was a suitable alternative for assessing whether pricing structures could potentially lead to a breach of s 36.
While it is strictly the case, as Mr Shavin points out, that there is no obligation on Telecom to place an alternative before the Court, given that ECPR is the pricing method endorsed by the Privy Council in Telecom v Clear, it is difficult for this Court to put a gloss on the pricing methodology approved in that case[90] without some alternative methodology to assess whether pricing amounts to use of a dominant position.
Does requiring ECPR breach the need for commercial certainty?
Telecom’s argument
[90]Remembering of course that decisions of the Privy Council which are given on appeals from New Zealand remain binding unless and until they are reversed by the Supreme Court: Couch v Attorney-General (No 2) [2010] NZSC 27, [2010] 3 NZLR 149 at [32] and [51]; Shannon v Shannon [2005] 3 NZLR 757 (CA) at [40]; and R v Chilton [2006] 2 NZLR 341 (CA) at [111].
Telecom submits that reliance on the ECPR model in the present case breached the requirement for commercial certainty.[91] Telecom says that ECPR was inapplicable because Telecom was unable to calculate, in advance, ECPR prices as a matter of practical or commercial reality. Telecom says that, in order to calculate ECPR prices, Telecom would have needed a level of knowledge of a TSP’s activities that was unachievable.
Our assessment
[91]In Telecom v Clear (PC), above n 4, their Lordships said that s 36 needed to be construed in such a way as to enable a monopolist, before entering upon a line of conduct, to know with some certainty whether or not it was lawful: at 403. See also Commerce Commission v Telecom Corporation of New Zealand Ltd [2010] NZSC 111, [2011] 1 NZLR 577 at [30] [0867 Case].
There is no evidence that Telecom ever had regard to ECPR when setting its wholesale prices. It is hard to assess how difficult it was for Telecom to calculate ECPR prices in advance, when there is no evidence that Telecom ever attempted to do so. As the Commission points out, Telecom in fact had no interest in how TSPs used their tails, because it charged for them as if they were end-to-end circuits rather than inputs.
We do not accept Telecom’s submission that ECPR would have been too difficult to calculate even if all information was available. As the Commission points out, the Telecom v Clear decision envisaged that the calculation of ECPR prices would necessitate a high degree of input by Telecom, including “regular reviews of Telecom’s opportunity costs being charged to Clear”,[92] a process that Telecom was happy to embrace at that time. Further, the calculations are not as complicated as Telecom tries to make out. Telecom is a sophisticated company with full capability to set up computer models to calculate ECPR prices for the wholesale data tails it sold.
[92] Telecom v Clear (PC) at 397.
However, it is accepted by the parties that, to calculate individual ECPR prices for each tail, Telecom would require information about the characteristics of the tail that a TSP required for use in the TSP’s network, that is, the configuration of the retail customer network (in the sense of the circuit speed, whether local or national step, and whether the input required was VBR or CBR).
Telecom only appears to identify two specific difficulties in calculating ECPR that arise from not knowing enough information about the use to which each data tail was put in the TSP’s network:
(a)in both the two-tail and one-tail scenarios, if Telecom supplied a CBR tail to a TSP, Telecom did not know whether the TSP would use that tail to provide a CBR or VBR retail service, so Telecom did not know whether it was losing the opportunity to provide a CBR retail service or a cheaper VBR retail service; and
(b)in the one-tail scenario, Telecom did not know how many tails in a network were to be self-provided by the TSP (or their characteristics), so Telecom did not know what it was losing the opportunity to provide (for example, whether it was losing the opportunity to provide only one retail HSDT service, or an unknown number of HSDT services in a network).
The Commission responds to Telecom’s first concern by arguing that Telecom was well aware that TSPs were using CBR tails as inputs to provide VBR retail services.[93] Further, Telecom could readily have included in its supply contracts a provision regarding the use of CBR tails (to ensure the tails were used for a VBR service), in order to prevent arbitrage. Contrary to Telecom’s submission, Telecom would not also need a technical ability to monitor how a particular circuit was being used by a TSP. We largely accept the Commission’s submissions on this point.
[93] We discuss this is in further detail at [211] below.
In relation to Telecom’s second concern, there was acknowledgement by the Commission that slightly more information would be required in order to calculate ECPR prices in the one-tail scenario, as Professor Gabel considered that the profit share that Telecom could recover for each tail it leased to a TSP was the proportion that the leased tail bore to the total number of tails in the network.[94] However, the Commission says that Telecom could readily have included in its supply contracts a requirement for TSPs to supply the further information it claimed it needed to calculate ECPR.
[94] See at [46] above.
Telecom submits that a contractual approach would have required the transfer of enormous volumes of information of competitive value between competitors in order to monitor the contractual arrangements. We have some sympathy for the view that Telecom and other TSPs were competing in a climate of mutual suspicion and mistrust in litigation and that therefore this transfer of information in the contractual arrangements would have been an issue. We doubt that Telecom’s competitors would have been as ready to supply the information as the Commission maintains. However, we accept the Commission’s submission that much of the information, including as to customers, was necessarily acquired by Telecom on a regular basis through supplying tails.
In our view, in any event, Telecom could have made a number of assumptions based on its own market knowledge. We acknowledge that Telecom had organisational structures in place to protect confidential information and to prevent information flow between its wholesale and retail divisions. However, as we have mentioned, Telecom’s interconnection group would have acquired a great deal of market knowledge by virtue of supplying the data tails. As a sophisticated company Telecom also had the capability to set up a research division.
We acknowledge that the Privy Council expressed reservations concerning Gault J’s comments in this Court[95] that it may be helpful, in determining whether “use” has been made of a dominant position, to consider whether the incumbent firm has acted reasonably.[96] Their Lordships considered that such an inquiry would be contrary to the requirement of certainty, and were concerned about the serious consequences that a monopolist firm could face under the Commerce Act if a Court subsequently disagreed with the firm’s genuine assessment that it was acting reasonably.[97] Against the background of these comments, we suggest that, if Telecom had made a genuine attempt to apply ECPR prices, then the Court would not have second guessed its pricing on the basis that the Court would have made different assumptions to underpin the analysis or that the assumptions made by Telecom turned out to be factually wrong.[98]
[95] Telecom v Clear (CA), above n 59, at 430.
[96] Telecom v Clear (PC), above n 4, at 403.
[97] Ibid.
[98]Except perhaps on the grounds of lack of reasonableness akin to that in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 (CA).
In any event, Telecom could have applied other accepted pricing methods that did not result in the stifling of competition. Although this Court’s methodology was rejected by the Privy Council in Telecom v Clear, it would, if used, clearly not lead to use of a dominant position (being lower than ECPR). Indeed, the Privy Council observed without any apparent disapproval the pricing negotiations between Telecom and Clear which did not appear to be based on ECPR and which appeared to be similar to the Court of Appeal methodology.[99] The Privy Council said that Clear had accepted that it must pay something (in excess of traffic charges) for access to Telecom’s network, such payment being based on Telecom’s true costs, including a reasonable return on capital. Telecom, on the other hand, had accepted that it should not seek to recover any element of monopoly rents from Clear.[100]
[99]We acknowledge that those negotiations took place before the Privy Council decision. The Privy Council itself acknowledged that its decision did not deal with whether Clear’s past stance in negotiations was reasonable, let alone fix the terms for interconnection: Telecom v Clear (PC) at 390.
[100]On the basis that, if necessary, these could be stripped out by the activation of Part 4 of the Commerce Act 1986. See Telecom v Clear (PC) at 409.
Finally, we note that the difficulty with courts being involved in setting prices where there is no history of prior dealing is well recognised.[101] The result of the Telecom v Clear litigation has been called a “philosophical abstraction” that is almost impossible to convert to a practical market price with any degree of certainty.[102] In Professor Pengilley’s opinion, a regulatory authority is needed for setting prices where there has been no prior access.[103] However, in our view, whilst there are acknowledged difficulties for the courts in the area of pricing, they do not mean that the courts should abdicate responsibility to enforce s 36.
Did the High Court err by not following the United States approach to price squeeze claims?
Telecom’s argument
[101] Pengilley, above n 86, at 29.
[102] Ibid, at 50.
[103] Ibid, at 60.
Telecom argues that the High Court should have followed the United States approach to price squeeze claims and concluded that such claims do not fall within the scope of s 36. Telecom relies in particular on two decisions of the United States Supreme Court: Verizon Communications Inc v Law Offices of Curtis V Trinko (Trinko)[104] and Pacific Bell Telephone Company v Linkline Communications Inc (Linkline).[105] Telecom submits that the United States jurisprudence is to be preferred over the divergent approach taken towards price squeeze claims in European Union cases.Telecom also submits that, in line with the United States jurisprudence, price squeezes should be treated as a form of predatory pricing, and thus the requirements of a predatory pricing claim should be fulfilled in order for a breach of s 36 to be established.[106]
Our assessment
(a) United States cases
[104]Verizon Communications Inc v Law Offices of Curtis V Trinko 540 US 398 (2004) [Trinko].
[105]Pacific Bell Telephone Company v Linkline Communications Inc 129 SCt 1109 (2009) [Linkline].
[106]Predatory pricing occurs when a dominant firm sets its downstream prices below the firm’s variable costs and there is a likelihood of recoupment of the lost profit: Carter Holt, above n 31, at [67].
In Trinko, the United States Supreme Court considered whether a vertically integrated telecommunications company’s failure to share elements of its network with competitors (as required under the Telecommunications Act 1996) was exclusionary conduct contrary to s 2 of the Sherman Act,[107] which prohibits monopolisation and attempts to create a monopoly. The principal opinion was written by Scalia J,[108] who began his discussion of refusal to deal claims by stating that a dominant firm has the right to exercise its discretion freely as to the parties with whom it will deal.[109] He acknowledged that this right is not unqualified, but stressed that the Court had been very cautious in recognising exceptions.[110]
[107] Sherman Act 15 USC § 2.
[108]On behalf of himself, Rehnquist CJ, O’Connor, Kennedy, Ginsburg and Breyer JJ. A separate opinion was written by Stevens J, on behalf of himself, Souter and Thomas JJ.
[109]At 408.
[110]Ibid.
Scalia J concluded that the present case did not fall within the existing exceptions, and also cast doubt on the validity of an “essential facilities” doctrine,[111] which had developed in the Federal Circuit Courts but had never been expressly endorsed by the Supreme Court, by declining either to recognise or repudiate the doctrine.[112]
[111]Whereby a firm which controls a facility that is considered essential to a competitor’s ability to compete would be required to provide access to an upstream or downstream competitor.
[112]At 411.
Scalia J also considered that traditional antitrust principles did not justify adding the present case to the existing exceptions to the proposition that there is no duty to aid competitors.[113] He said that the 1996 Act created an extensive regulatory framework, which was “an effective steward of the antitrust function”.[114] He also noted that competition law obligations to help rivals and share resources risk chilling incentives to innovate, and that the Court needed to be wary of “false positives”, namely wrongfully condemning conduct that is efficient and beneficial as monopolistic.[115] Finally, he also approved Professor Areeda’s observation that no court should impose a duty to deal that it cannot explain or adequately and reasonably supervise.[116]
[113]Ibid.
[114]At 413.
[115] At 414.
[116]At 415, referring to Phillip Areeda “Essential Facilities: An Epithet in Need of Limiting Principles” (1990) 58 Antitrust Law Journal 841 at 853.
After Trinko, the effect of the decision on refusal to deal claims was unclear. The Circuit Courts issued conflicting decisions as to whether refusal to deal claims were still viable, outside of a very narrow set of exceptions.[117] The interaction between competition law and regulatory regimes and the continued viability of price squeeze claims was particularly unclear.[118]
[117]See for example American Central Eastern Texas Gas Company v Union Pacific Resources Group Inc 93 Fed Appx 1 (5th Cir 2004), Tucker v Apple Computer Inc 493 F Supp 2d (ND Cal 2006), AIB Express Inc v FEDEX Corp 358 F Supp 2d 239 (SD NY 2004) and Z-Tel Communications Inc v SBC Communications Inc 331 F Supp 2d 513 (ED Tex 2004).
[118]For example, in Covad Communications Company v Bellsouth Corporation 374 F 3d 1044 (11th Cir 2004) at 1050, the Court said that price squeeze claims were not specifically excluded by Trinko, but in Covad Communications Company v Bell Atlantic Corporation 398 F 3d 666 (DC Cir 2005) at 673–674, the Court said that, because there was no antitrust duty to deal, it made no sense to prohibit a predatory price squeeze in those circumstances.
In 2009, in Linkline, the Supreme Court[119] reversed a decision from the Ninth Circuit Court of Appeals[120] that recognised that a price squeeze claim may be brought under s 2. In that case, a vertically integrated telecommunications company was alleged to have charged its competitors wholesale prices that were unfairly high in relation to its retail prices. Under the 1996 Act, the incumbent was required to supply wholesale Digital Subscriber Line services to competitors at a reasonable and non-discriminatory price. The central issue before the courts was therefore whether a price squeeze claim could be brought under s 2 when the incumbent is under no antitrust duty to deal with its competitors.
[119]Roberts CJ delivered the principal opinion of the Court, on behalf of himself, Scalia, Kennedy, Thomas and Alito JJ. Breyer J wrote a separate concurring opinion, on behalf of himself, Stevens, Souter and Ginsburg JJ.
[120]Linkline Communications Inc v SBC California Inc 503 F 3d 876 (9th Cir 2007).
The Supreme Court held that, if there is no antitrust duty to deal with a competitor at the wholesale level, a price squeeze cannot violate s 2 unless the dominant firm’s retail prices are predatory.[121]
[121]This would mean that the requirements of a predatory pricing claim, as defined by the Supreme Court in Brooke Group Ltd v Brown & Williamson Tobacco Corporation 509 US 209 (1993), would need to be met.
The Supreme Court also expressed some reservations about the recognition of a price squeeze claim even where there is an antitrust duty to deal. The Court considered that institutional concerns counselled against recognition of price squeeze claims.[122] The Court was concerned that recognising price squeeze claims would require courts to police both the wholesale and retail prices and courts would be aiming at a moving target, since it is the interaction between these two prices that may result in a squeeze.[123]
[122]Linkline, above n 105, at 1114.
[123]Ibid.
The effect of Trinko and Linkline is still a debated topic amongst academic commentators, with some commentators arguing that these two Supreme Court decisions do not expressly overrule any of the prior refusal to deal or price squeeze decisions, but are instead limited to the regulatory context in which they were decided.[124]
(b) European Union cases
[124]Daniel Shulman “Refusals to Deal: Is Anything Left; Should There Be?” (2010) 11 Sedona Conf J 95 at 108–109. Compare Erik Hovenkamp and Herbert Hovenkamp “The Viability of Antitrust Price Squeeze Claims” (2009) 51 Arizona L Rev 273 at 274.
Unlike s 36 of the Commerce Act, the European courts have interpreted their equivalent provision[125] as not requiring the use of a dominant position.[126] This is because, under European law, a dominant firm has a “special responsibility not to allow its conduct to impair genuine undistorted competition”.[127] The special responsibility arises because of the inherent prejudice that a dominant firm’s conduct may cause to competition. Thus activities that might be acceptable in a normal competitive situation might amount to abuse if carried out by a dominant firm.[128]
[125]Article 102 of the Treaty on the Functioning of the European Union (formerly art 82 of the Treaty establishing the European Community).
[126]See the description of the European approach in Carter Holt, above n 31, at [63]–[64].
[127]Case 322/81 NV Nederlandsche Banden-Industrie Michelin v Commission of the European Communities [1983] ECR 3461 at [57]; Case C-62/86 AKZO Chemie BV v Commission of the European Communities [1993] 5 CMLR 215; Case C-333/94P Tetra Pak International SA v Commission of the European Communities [1997] 4 CMLR 662; Cases C-395/96P and C-396/96P Compagnie Maritime Belge Transports SA v EC Commission [2000] 4 CMLR 1076 at [114] and T-201/04 Microsoft Corp v Commission of the European Communities [2007] 5 CMLR 11 at [775].
[128]Case 85/76 Hoffmann-La Roche and Co AG v Commission of the European Communities [1979] ECR 461 at [6]. See also Case T-219/99 British Airways plc v Commission of the European Communities [2004] 4 CMLR 19; Case T-210/99 General Electric Company v Commission of the European Communities [2006] 4 CMLR 15.
Telecom’s counsel also sought to uphold the High Court’s point (c).[272] They argued that, because s 75 relief was not available for pre-2001 conduct, declaratory relief could not be available. They made the point that the time limitations in the Commerce Act sections differed in their functionality from limitations under the Limitation Act; under the Commerce Act, they submitted, the time limitations were “essential elements of the definition of the enforceable rights themselves”.
[272] At [291] above.
I do not accept the High Court’s point (c) or Telecom’s expansion on it. The starting point is that the High Court has jurisdiction to grant declaratory relief, as all counsel accept, even though that remedy is mentioned nowhere in the Commerce Act. The purpose of s 75 and s 76, which deals with the District Courts’ jurisdiction, is to specify which Court has jurisdiction with respect to specific orders sought under the Commerce Act. These sections say nothing about which Court can grant declaratory relief. Nor do the sections purport to permit declaratory relief only if tied to an application for or an order of specific Commerce Act relief. Indeed, such a construction of the Commerce Act would be contrary to s 2 of the Declaratory Judgments Act, as I have said.
Telecom’s submission is also flawed in the distinction it attempts to draw between limitation provisions in the Limitation Act and limitation provisions in the Commerce Act. They all operate in the same way. They are “procedural” and may be waived. The Full Court of the Federal Court of Australia put it this way when considering the equivalent Commonwealth provision:[273]
… [Section] 82(2) [the equivalent of our Commerce Act, s 82(2)] is a condition of the remedy rather than an element in the right and a prerequisite to jurisdiction which cannot be waived. It follows that it is for a defendant to assert non-compliance, rather than for a plaintiff to assert compliance with s 82(2) as an element of the cause of action.
The need for compliance with s 82(2) may be waived by the defendant and an estoppel may prevent the defendant denying such a waiver. If the defendant fails to plead the limitation, this may be taken as a waiver of the need for compliance with s 82(2).
[273]State of Western Australia v Wardley Australia Ltd (1991) 30 FCR 245 (FCAFC) at 259. See also Hook v Gulf Harbour Town Centre Ltd (in liq) HC Auckland CIV-2002-404-1931, 2 March 2007.
I agree with the Full Court. Indeed, it is noteworthy that in the present case Telecom did plead a limitation defence “to the maximum extent of its application to each of the plaintiffs’ causes of action” in just the same way as one would plead a limitation defence under the Limitation Act.
(d) Distinguishing Sisters of Mercy
Contrary to the High Court’s view, I consider Randerson J’s judgment in Sisters of Mercy to be applicable to the present case. I do not accept the final sentence of the High Court’s judgment at [186].[274]
[274] Set out above at [292].
There is nothing to construe in the Commerce Act, as it does not provide jurisdiction for declaratory relief. Since the Limitation Act does not apply to the jurisdiction to grant declaratory relief, whether under general law, the Declaratory Judgments Act or the Judicature Amendment Act 1972, there is no statutory constraint on the Commission’s application for a declaration with respect to pre-2001 conduct.
(e) Earlier cases
Finally, Telecom’s counsel referred to two earlier cases, which they said were consistent with its submission and “the analysis adopted by the High Court”.
The first of these cases is Commerce Commission v Fletcher Challenge Ltd.[275] That case does not help on the current issue, as no limitation problem arose.
[275] Commerce Commission v Fletcher Challenge Ltd [1989] 2 NZLR 554 (HC).
Similarly, I cannot see how the Federal Court’s decision in Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations[276] applies when, as Telecom’s counsel acknowledge, “no issue of a limitation period arose in the case”. In addition, the Federal Court has limited jurisdiction, unlike the High Court of New Zealand, which is a general court “in and for New Zealand” with unlimited jurisdiction in respect of “the administration of justice throughout New Zealand”, except in so far as such jurisdiction may by statute be excluded.[277] The High Court has jurisdiction to make declarations with respect to any legal rights, whether common law or statutory, except in so far as such jurisdiction may be restricted by statute.
[276]Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations (1993) 113 ALR 257 (FCAFC).
[277] Judicature Act 1908, s 3.
The position I have adopted will not mean that defendants will be regularly facing stale claims. First, most claims in this area of Commerce Act litigation are brought by the Commerce Commission. While the Commission is not always right, it would be almost unthinkable that the Commission, as a State agency, would bring a vexatious or frivolous claim. Further, Commerce Act litigation is notoriously expensive. The Commission has a limited litigation budget. It would be very unlikely to waste that budget on pursuing stale claims. For instance, I have little doubt that, had Telecom desisted from its anti-competitive behaviour prior to 18 March 2001, there is no realistic likelihood that the Commission would in 2004 have brought proceedings for stale declaratory relief. Cost is also likely to deter other plaintiffs from pursuing stale claims. And defendants can always fall back on r 15.1 of the High Court Rules and apply to strike out all or part of a pleading which can be shown to be frivolous or vexatious or otherwise an abuse of the process of the Court.
On this first issue, therefore, I accept the Commission’s challenge to the High Court’s conclusion. I would hold that the High Court did have jurisdiction to give declaratory relief with respect to Telecom’s pre-2001 conduct.
Should we grant declaratory relief with respect to pre-2001 conduct?
As the Woolfs say, “[a] most important feature of the declaratory judgment is that it is a flexible and discretionary remedy”.[278] The authors go on to say that “[t]he discretion as to whether or not to grant relief is that of the trial judge”, a discretion which an appellate court will interfere with only “if it can clearly be shown to have been exercised wrongly”.[279] The problem in this case is that the High Court did not consider whether it should grant declaratory relief with respect to pre‑2001 conduct because of its view that it had no jurisdiction to grant it. I have determined there was jurisdiction. Accordingly it now falls to this Court to decide whether declaratory relief with respect to pre-2001 conduct should have been granted. Neither party sought to have that issue referred back to the High Court in the event we found there was jurisdiction.
[278] Woolf and Woolf, above n 266, at [4-01].
[279] At [4-04].
While the discretion is broad, it is not completely unfettered. A starting point, the Woolfs explain, is that “if a party has succeeded in his action he should not usually be sent away empty handed”.[280] The learned authors conclude their general discussion of the development of principles as to the exercise of the discretion in these words:[281]
In general, however, the present attitude of the judges to the exercise of the declaratory discretion has not changed from the way in which it was expressed by Bankes LJ who said[282]:
The relief claimed must be something which it would not be unlawful or unconstitutional or inequitable for the Court to grant, or contrary to the accepted principles upon which the Court exercises its jurisdiction. Subject to this limitation I see nothing to fetter the discretion of the Court in exercising a jurisdiction under the rule [now CPR Pt 40.20] to grant relief, and having regard to general business convenience and the importance of adapting the machinery of the Courts to the needs of suitors I think the rule should receive as liberal construction as possible.
[280]At [4-05], citing as authority Chief Constable of the North Wales Police v Evans [1982] 1 WLR 1155 (HL) at 1172 per Lord Brightman.
[281]At [4-09].
[282]Guaranty Trust Co of New York v Hannay & Co [1915] 2 KB 536 (CA) at 572. (Remainder of footnote omitted.)
Telecom’s counsel put forward four reasons why we should decline to grant declaratory relief with respect to pre-2001 conduct.
They first point to the “policies [underlying] the statutory limitation periods in the [Commerce] Act”. In the declaratory judgment context, the limitation periods in the Commerce Act with regard to Commerce Act claims have as much relevance as the limitation periods in the Limitation Act have with respect to claims, say, for contract or tort. That is to say, they are not definitive. They may indicate that a proceeding is an abuse of process; they may be a guide to the need to strike out a proceeding on the ground of staleness. But that is all.
Telecom’s second argument is that declaratory relief should be denied on the grounds of delay. I accept that delay could be a ground for refusing declaratory relief, especially in circumstances where the delay is unreasonable and prejudice has been caused to the defendant. That is the test generally applied in equity when determining whether discretionary equitable remedies should be refused.[283] (By mentioning the test in equity, I am not to be taken as saying this test would be applicable in every situation where declaratory relief was sought. But in a case of this sort, I think the equitable test has relevance. Were I satisfied in this case that the delay was unreasonable and prejudice had been caused to Telecom, I would be strongly inclined to exercise the discretion against granting declaratory relief.)
[283]See for example Andrew Barker “Permanent Injunctions” in Peter Blanchard (ed) Civil Remedies in New Zealand (2nd ed, Thomson Reuters, Wellington, 2011) 227 at [5.2.2(3)] and Terence Prime and Gary Scanlan The Law of Limitation (2nd ed, Oxford University Press, Oxford, 2001) at ch 12.
Telecom’s counsel submit the delay was unreasonable. I would have accorded that submission considerable weight had the allegedly unlawful conduct been confined to 1999 and 2000 and had the Commission not commenced a proceeding with respect to it until March 2004. There would then have been a strong argument that the claim was stale. But the argument is less convincing in circumstances where the 1999 and 2000 conduct is of the same kind as the 2001–2004 conduct and merely its precursor in time. Telecom was not being dragged to court solely to deal with a stale claim; it was inevitable in this case that its explanation of and justification of its post-2000 conduct would necessarily require detailed evidence as to what had been happening in the industry for at least the previous two years. I have emphasised “in this case” because I am not stating a general proposition that delay is excusable wherever “stale” conduct is tied to “recent” conduct. My comment is confined to the facts of this case.
This leads on to the next point. I cannot see how Telecom has been prejudiced by the delay. Telecom has always known that it faced a claim that its pre‑2001 conduct was said to be anti-competitive. It did not seek to strike out that part of the claim. Accordingly it went to trial and presented a defence which covered its pre-2001 conduct as well as its post-2000 conduct. So far as I can see, the inclusion of a claim for declaratory relief covering pre-2001 conduct as well as post-2000 conduct did not lead to any different evidence being called from what would have been called had no declaration with respect to pre-2001 conduct been sought.
I therefore do not accept the submission that the Commission’s delay in commencing the proceeding should prevent declaratory relief in this case with respect to pre-2001 conduct.
Telecom’s third argument was that a declaration with respect to pre-2001 conduct should be declined on the basis that it would be “purely hypothetical”. It is true that the courts may decline declaratory relief in hypothetical cases, although the Woolfs note that “the courts have been expressing an increasing willingness to provide guidance in appropriate cases, even though the courts recognise that the case might be regarded as hypothetical”.[284] But the present case is not “hypothetical” in the sense the courts have used that term in this context.[285] What I suspect Telecom really means is that a declaration as to pre-2001 conduct would have no “practical significance”. That is a slightly different point. In any event, I do not accept the submission. After all, if it were right, why did Telecom not oppose a declaration with respect to post-2000 conduct on the basis that the declaration would have no practical significance? The declaration the High Court did make does not of itself hit Telecom in the pocket. It is possible that the declaration that was made will have no downstream consequences for Telecom: we simply do not know. But that is not a ground for denying the Commission, in the public interest, from obtaining a declaration that Telecom’s conduct was anti-competitive. Once it is conceded that a declaration as to post-2000 conduct is available and may have practical significance, it is hard to see why we should not extend the declaration to cover substantially similar conduct pre-2001.
[284] Woolf and Woolf, above n 266, at [4-57].
[285]The Woolfs give the four classes of hypothetical cases for these purposes at [4-59]. This case does not come within any of the four classes.
Telecom’s final submission under this head was that Telecom had been “plainly placed in difficulty in relation to pre-March 2001 matters”. I have already dealt with this when discussing prejudice under the heading of delay. I do not accept the submission. As I have said, Telecom did not attempt to strike out this part of the claim on the basis of prejudice in defending. Telecom amassed and led copious evidence with respect to its pre-2001 conduct.
Telecom has not persuaded me that the discretion should be exercised against making a declaration with respect to pre-2001 conduct. Whether a declaration should be made, however, needs to await consideration of the two remaining issues.
Did the passage of the Telecommunications Act 2001 bar relief in respect of Telecom’s conduct after the Act’s commencement?
The Telecommunications Act 2001 came into force on 19 December 2001. The High Court recorded Telecom’s submission as follows:
[153] Mr Shavin argued that on the Telecommunications Act coming into force, Telecom ceased to be able to take advantage of any market power over high speed data transmission services. He contended that the Act expressly and by necessary implication excluded review under the Commerce Act of Telecom’s conduct subsequent to its passing. He relied on provisions in the Telecommunications Act which permit an access-seeker to apply to the Commission for a determination of the price of HSDT and which exclude from review under the Commerce Act such determination or any matter necessary to give effect to such a determination.
The High Court rejected that submission.[286]
[286] Liability Judgment, above n 6, at [161]–[162].
On appeal before us, Telecom’s counsel noted this argument at [7.3] of their submissions but then immediately went on to discuss Decision 497 (the next issue I shall be dealing with).
In my respectful view, there is nothing in Telecom’s argument that the 2001 Act in itself excluded review under the Commerce Act with respect to services covered by the Act. The argument that the exclusion of Commerce Act review was a “necessary implication” is clearly wrong. Such an argument is inconsistent with s 63 of the 2001 Act, which provides as follows:
Part 2 of the Commerce Act 1986 does not apply in respect of the determination made under this Part or any matter necessary for giving effect to a determination made under this Part.
This makes clear that Part 2 of the Commerce Act is excluded where a determination has been made under the 2001 Act. It is not excluded, however, until a relevant determination is made.
I reject the submission that the passage of the 2001 Act in itself barred relief in respect of Telecom’s conduct after the Act’s commencement.
Did Decision 497 bar relief after 1 June 2002?
Decision 497 was a determination made under Part 2 of the Telecommunications Act. Telecom’s contention is that that decision fixed prices for the services at issue in this proceeding. The determination came into effect on 1 June 2002. From that date, therefore, by virtue of s 63, the determination applies and relief under the Commerce Act is barred.
The High Court held that Decision 497 was concerned only with Telecom’s pricing for specified data services in non-metropolitan areas.[287] Decision 497 was “not concerned with access to or the pricing of data tails”.[288] The Court went on to say:
[159] ... The Commission’s claim focuses on CDP pricing of data tails; it is not concerned with the pricing of circuits for resale as an end-to-end retail service. The pricing of data tails as a component of the retail service is expressly excluded from Decision 497. Section 63 can have no application.
[287] At [156].
[288] At [157].
Telecom’s counsel challenged the Court’s decision. They argued that the distinction the Court drew between “the resale of an end-to-end HSDT service [and] a tail” was fallacious, as “the actual products were technically identical – that is, HSDT circuits were what TSPs used as ‘data tails’ and for resale”.
I do not accept that submission, for the reasons given by the High Court and by the Commission before us. A data tail is not an end-to-end retail service: it is, as Glazebrook and Ellen France JJ have made clear, an intermediate component, namely a connection between an end user’s premises and a TSP’s POP or POI. In my view, the following passage in the High Court’s judgment is unanswerable:
[162] While the Telecommunications Act plainly imposes constraints on Telecom in relation to designated access services, there is nothing to indicate that it provides (or provided) any material constraint in relation to the pricing of data tails. There was no change to CDP pricing after the Act came into force. It was recognised that the decision not to specify data tails as a designated access service may give rise to competition concerns. A ministerial paper submitted to the Ministerial Inquiry into Telecommunications in November 2000, acknowledged that data tail access issued could “prove to be a competition problem”. It is clear there was no expectation that the legislation would remove the need for oversight in that sector. While the Commission’s review under s 64 of the Telecommunications Act led to the introduction of UPC pricing, that was because of the threat of further regulation. The existing legislation had no discernible effect on Telecom’s conduct.
I think it is clear that the 2001 Act imposed constraints on Telecom in relation to designated access services, but it did not regulate data tails. We were shown the Cabinet Paper which led to the Act and which recommended that data tails were not to be designated access services.[289] In fact, as the Commission pointed out, the decision to exclude access to data tails from the statutory regime was to a significant extent a consequence of Telecom’s submission to the Minister of Communications, dated 17 October 2000, requesting just that. That the Commission also thought the pricing of data tails was outside its remit was made very clear in Decision 497:
[64] ... Telecom advised that it only sells end-to-end data services at the retail level, and a customer cannot purchase separately the components of data services such as the access components or “data tails”. The Commission notes that the Relevant Wholesale Service is the end-to-end data service. This Determination does not require Telecom to wholesale the individual components of an end-to-end data service, as they are not retail services.
[289]Cabinet Paper “Telecommunications: Paper Three: Regulated Services” (29 November 2000) FIN (00)312 at [26].
This makes it clear, as the Commission’s counsel submitted, that the relevant wholesale service was the end-to-end data service and that its individual components – the data tails – were expressly excluded from the Decision’s ambit.
I reject Telecom’s argument under this head. I agree with the High Court that s 63 of the Telecommunications Act and Decision 497 do not bar the Commission’s proceeding.
Conclusion
I have rejected Telecom’s submissions on the four issues with which I have dealt. I have concluded that the Commission was entitled to a declaration covering the pre-2001 conduct as well as the post-2000 conduct. I would accordingly amend the declaration the High Court made to read as follows:
The plaintiff is granted a declaration that Telecom used and/or took advantage of its dominant position/market power from 1 February 1999 until late 2004 (when Telecom introduced a UPC service) for the purposes of deterring potential or existing competitors in the wholesale market for backbone transmission services and the retail market for end-to-end high speed data transmission services.
Solicitors:
Chapman Tripp, Wellington for Appellants
Commerce Commission, Wellington for Respondent
APPENDIX
GLOSSARY
ATM Asynchronous Transfer Mode
CBD central business district
CBRconstant bit rate
CDP Carrier Data Pricing
CIRCommitted Information Rate
DCS digital cross connect switches
DDS digital data services
DSL digital subscriber line
DSLAM digital subscriber line access multiplexer
DSTN Digital Services Transport Network
ECPR Efficient Component Pricing Rule
FR Frame Relay
HSDT high-speed data transmission
IP Internet Protocol
NTU Network Terminating Unit
PIR Peak Information Rate
POP point of presence
PSTN Public Switched Telephone Network
SWA stacked wideband access
TLoC Telecom List of Charges
TSP Telecommunications Service Provider
UPC Unbundled Partial Circuit
VBR variable bit rate
WIN Wholesale Integrated Network
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