Telecom Corporation of New Zealand Ltd v Commerce Commission COA

JurisdictionNew Zealand
CourtCourt of Appeal
JudgeGlazebrook J
Judgment Date27 Jun 2012
Neutral Citation[2012] NZCA 278
Docket NumberCA700/2009

[2012] NZCA 278

In The Court Of Appeal Of New Zealand

Court:

Glazebrook, Chambers and Ellen France JJ

CA700/2009

BETWEEN
Telecom Corporation Of New Zealand Limited
First Appellant
Telecom New Zealand Limited
Second Appellant
and
Commerce Commission
Respondent
Counsel:

D Shavin QC, J E Hodder SC, P Jagose and T Smith for First and Second Appellants

J A Farmer QC, G M Coumbe and J S McHerron for Respondent

Appeal from High Court decision which held appellant had breached s36 Commerce Act 1986 (“CA”) (taking advantage of market power) from 2001 to 2004 — wholesale charges to rival telecommunications service providers for access to data tails were high relative to the retail price creating a price squeeze and breached the Efficient Component Pricing Rule (“ECPR”) — whether the ECPR was a guide rather than a price ceiling — whether the High Court erred by not following the United States approach to price squeeze claims — whether appellant had an obligation to supply data tails — whether appellant's pricing involved a purpose proscribed by s36 CA (restricting the entry of a person into that market or preventing or deterring a person from engaging in competitive conduct in that or any other market) — whether appellant's anti–competitive behaviour had commenced prior to 2001.

The issues on appeal were:

  • • whether an ECPR was a guide rather than a price ceiling;

  • • whether requiring ECPR breached the need for commercial certainty;

  • • whether the United States approach to price squeeze claims should have been followed rather than the divergent European approach;

  • • whether Telecom had an obligation to supply data tails;

  • • whether the case could be distinguishable from Telecom v Clear;

  • • whether the HC erred in concluding that a non-dominant Telecom would not have supplied data tails to competitors at a price that exceeded ECPR;

  • • whether Telecom's pricing involved a purpose proscribed by s36 CA (restricting the entry of a person into that market or preventing or deterring a person from engaging in competitive conduct in that or any other market); and

  • • whether Telecom had engaged in price squeezing behaviour from 1999 onwards.

Held: ECPR was not, by itself, sufficient to ensure efficiency. ECPR had sometimes been described as setting both a floor and a ceiling. ECPR set 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 was to avoid cross-subsidy). ECPR set 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 did arrive at a price floor, but the full validity of the ECPR model was conditional upon downstream pricing being constrained by regulation or market forces so that no supernormal returns accrued to the incumbent.

Telecom had put the ECPR before the Court in Telecom v Clear as the proper pricing model. It was difficult to put a gloss on the pricing methodology approved in that case without some alternative methodology to assess whether pricing amounts to use of a dominant position.

There was no evidence that Telecom had regarded ECPR when setting its wholesale prices. Telecom 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. ECPR would not have been too difficult to calculate even if all information was available. The calculations were not as complicated as Telecom tried to make out. Telecom was a sophisticated company with full capability to set up computer models to calculate ECPR prices for the wholesale data tails it sold. However, it was accepted that to calculate individual ECPR prices for each tail, Telecom required information about the characteristics of the tail that a TSP required for use in the TSP's network. Telecom only appeared to identify two specific difficulties in calculating ECPR that arose from not knowing enough information about the use to which each data tail was put in the TSP's network. Telecom could have made a number of assumptions based on its own market knowledge.

The position in the United States appeared to be that, once a sector-specific regulatory scheme designed to deter and remedy anticompetitive harm was in existence, there was no scope for the courts to further intervene through the application of competition law. In contrast, regulation and competition law applied concurrently in the European Union, so that competition law could still apply where sector-specific legislation did not prevent a dominant firm from engaging in autonomous conduct that prevented, restricted or distorted competition.

However, the issues about the appropriate interaction between competition law and regulatory regimes did not arise as Telecom was not subject to regulation at the wholesale or retail level at the time of the alleged price squeeze. The United States jurisprudence therefore did not provide compelling authority for the proposition that a constructive refusal to supply essential inputs arising from a price squeeze was outside the scope of s36 CA. The United States approach of establishing a price squeeze claim through the lens of a predatory pricing claim should not be followed. Whilst predatory prices could create price squeezes, not every price squeeze involved predatory pricing.

In assessing whether Telecom was obligated to provide data tails the first step was to enquire whether there was an obligation to supply data tails at all. The second step was to consider whether supply in the counterfactual by a non-dominant incumbent would be at prices in excess of ECPR. The HC had noted that no essential facilities doctrine or statutory obligation existed that required Telecom to supply data tails to TSPs. The HC had accepted the Commission's submission that there was a duty on a vertically integrated incumbent to supply an essential wholesale input to a competitor in a downstream market based on Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd and also the obligation apparently assumed to exist in Telecom v Clear.

The first step of the HC's analysis could be taken as assuming a general duty to supply. There was no express reference to why a counterfactual would result in supply. However, in context, it was clear that the HC was relying on a counterfactual analysis. It had also started its analysis by stating that it was examining whether there was an obligation to supply data tails as the first of a two-stage approach to assessing the counterfactual. The HC had not held that Telecom had an obligation to supply independent of s36 CA and the counterfactual. The HC had properly concluded that Telecom had an obligation to supply data tails to competitors, in the sense that in the agreed counterfactual a non-dominant Telecom would not rationally have refused supply, and therefore would be in breach of s36 CA if it had refused supply.

Telecom v Clear was not distinguishable. Access in that case was essential to enable rivals to provide a competing service, whereas a data transmission service could be provided by a TSP acquiring an end-to-end circuit from Telecom or building its own circuit. 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 had a core network but no ubiquitous access network and no ability to construct access on economic terms, and who therefore needed to lease data tails.

In telecommunications, if a firm were to charge marginal cost it would go out of business. In a practical common sense business model in the counterfactual, T1 and T2 would not force prices down to marginal costs. However, this did not mean that T1 and T2 would necessarily continue to charge ECPR prices either. Certainly neither would be able to charge ECPR prices that included any element of monopoly profit because any such profits would have been competed out.

The evidence did not demonstrate that Telecom's pricing in the one-tail scenario created a profit margin for TSPs that could be used to recover the two-tail losses. There was unchallenged evidence that TelstraClear, the only TSP that had some access network of its own, was significantly affected by the two-tail breaches, as it was unable to bid for business where all the tails in a customer network had to be acquired from Telecom. There was also unchallenged evidence of one-tail violations of ECPR for a substantial number of higher speed tails.

Telecom was wrong to suggest that the Commission had to prove the price squeeze by reference to the number, configuration and distribution of data tails purchased by TSPs from Telecom. That would have been a difficult, error-prone and unreliable exercise. Further the number and distribution of two-tail data tails purchased by TSPs over the relevant period was necessarily reduced and distorted by the exclusionary effect of the price squeeze.

The HC had not erred in holding that, as long as non-compliance with ECPR pricing was more than de minimis, there could be a breach of s36 CA. The approach followed in the European cases and United States predatory pricing cases required an aggregated approach to retail products or services, rather than an aggregated approach to wholesale products. The de minimis approach was not inconsistent with such an approach. The rationale behind the aggregated approach and the de minimis approach was the same: a conclusion that there had been a use of dominance could not be justified if the breach was too slight or insignificant. The de minimis exception did not require a breach to be...

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