Telecom Corporation of New Zealand Ltd v Telecom New Zealand Ltd v Commerce Commission Coa

JurisdictionNew Zealand
JudgeGlazebrook J
Judgment Date03 August 2012
Neutral Citation[2012] NZCA 344
Docket NumberCA313/2011
CourtCourt of Appeal
Date03 August 2012
BETWEEN
Telecom Corporation of New Zealand Limited
First Appellant
and
Telecom New Zealand Limited
Second Appellant

and

Commerce Commission
Respondent

[2012] NZCA 344

Court:

Glazebrook, Chambers and Ellen France JJ

CA313/2011

IN THE COURT OF APPEAL OF NEW ZEALAND

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

JUDGMENT OF THE COURT
  • A The appeal is dismissed.

  • B The appellants must pay the respondent costs for a complex appeal, but limited to a day's hearing and two days’ preparation plus usual disbursements. We certify for two counsel.

REASONS OF THE COURT

(Given by Glazebrook J)

Table of Contents

Introduction

[1]

The Liability Judgment

[5]

The Substantive Appeal Judgment

[8]

The legislation and case law

[10]

The Penalty Judgment

[14]

Issues on appeal

[20]

General comments

[26]

Did the High Court err in holding that Telecom's pricing had

significant exclusionary effects on competition and that Telecom

obtained significant commercial gain from its pricing?

[30]

Telecom's argument

[30]

Consequences of exclusionary effects

[32]

(a) Higher retail prices

[32]

(b) Cross-selling of other products

[38]

(c) Slower roll-out of other networks

[40]

Failure to assess extent of commercial gain

[42]

Did the High Court err in holding that Telecom's breach of s 36 was a

result of a deliberate strategy sanctioned at the highest levels of

[44]

Telecom?

Did the High Court err in failing to take due account of the novelty of

the points determined in the Liability Judgment and/or Telecom's

practical inability to ensure, in advance, compliance with ECPR?

[47]

Telecom's argument

[47]

Our assessment

[50]

Did the High Court err in failing to acknowledge the importance of

proportionality in relation to other penalties imposed under s 80, and

in giving weight to two Australian penalty judgments?

[57]

The High Court judgment

[57]

Telecom's argument

[61]

Our assessment

[62]

(a) Australian cases

[63]

(b) New Zealand cases

[68]

Conclusion

[72]

Result and costs

[73]

Introduction
1

In a judgment of 9 October 2009 (the Liability Judgment), 1 Rodney Hansen J and Professor Richardson held that Telecom had breached s 36 of the Commerce Act 1986 (the Act).

2

In a judgment delivered on 19 April 2011, Rodney Hansen J dealt with the issue of pecuniary relief (the Penalty Judgment). 2 In that judgment, the High Court ordered that Telecom pay a pecuniary penalty of $12 million.

3

Telecom appealed against both the Liability and the Penalty Judgment. On 27 June 2012, this Court dismissed Telecom's appeal against the Liability Judgment and allowed the Commerce Commission's cross-appeal. 3 We will refer to the June 2012 judgment as the Substantive Appeal Judgment.

4

This judgment deals with Telecom's appeal against the Penalty Judgment. Before turning to the issues in this appeal against the Penalty Judgment, 4 we summarise the Liability Judgment, 5 the Substantive Appeal Judgment, 6 the legislative and case law background relevant to penalties 7 and the Penalty Judgment. 8

The Liability Judgment
5

In the Liability Judgment, the High Court held that, from 18 March 2001 until late 2004, Telecom breached s 36 of the Act by using and/or taking advantage of its dominant position/market power in the wholesale market for data transmission 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. The High Court upheld the Commission's claim that some of the wholesale prices charged by Telecom for “data tails” (to achieve network access) 9 were so high, in relation to its retail prices, as to cause a price squeeze. 10

6

The High Court held that Telecom's pricing breached the Efficient Component Pricing Rule (ECPR), endorsed by the Privy Council in Telecom v3Telecom Corporation of New Zealand Ltd v Commerce Commission[2012] NZCA 278 [“Substantive Appeal Judgment”].4 Set out at [20] below.5 At [5] below.6 At [8] below.7 At [10] below.8 At [14] below.9 “Data tails” are the connection between an end customer's premises and the point where a rival telecommunications service provider (TSP) can take delivery of data signals from Telecom.10 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.Clear11 as the appropriate pricing model where there is a dominant vertically integrated provider of network infrastructure and services. It held that, in the wholesale market for data tails outside major CBD areas, Telecom's pricing breached ECPR in virtually all cases where Telecom provided all the tails in a rival telecommunications service provider (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).

7

The Court concluded that the Commission was entitled to both declaratory and pecuniary relief.

The Substantive Appeal Judgment
8

As noted above, Telecom's appeal against the Liability Judgment was dismissed.

9

The Commission also challenged the Liability Judgment on the basis that the High Court should have found that Telecom's pricing in the one-tail scenario breached s 36 of the Act and that the Court should have held that declaratory relief was available for the period prior to 18 March 2001. This Court found for the Commission on both those points.

The legislation and case law
10

Section 80(1) of the Act provides for the imposition of a pecuniary penalty “as the Court determines to be appropriate” for a breach of Part 2 of the Act. Section 36, which prohibits firms with a substantial degree of market power from taking advantage of that power for anti-competitive purposes, falls under Part 2.

11

The Court's discretion to impose a penalty is subject to the provisions of s 80(2A) and (2B) which provide:

(2A) In determining an appropriate penalty under this section, the Court must have regard to all relevant matters, in particular,—

  • (a) any exemplary damages awarded under section 82A; and

  • (b) in the case of a body corporate, the nature and extent of any commercial gain.

(2B) The amount of any pecuniary penalty must not, in respect of each act or omission, exceed,—

  • (a) in the case of an individual, $500,000; or

  • (b) in the case of a body corporate, the greater of-(i) $10,000,000; or

    • (ii) either-

    • (A) if it can be readily ascertained and if the Court is satisfied that the contravention occurred in the course of producing a commercial gain, 3 times the value of any commercial gain resulting from the contravention; or

    • (B) if the commercial gain cannot be readily ascertained, 10% of the turnover of the body corporate and all of its interconnected bodies corporate (if any).

12

Section 80 of the Act was amended in 2001 to increase substantially the penalties for anti-competitive conduct. 12 Before 2001, the maximum penalty that could be imposed on a body corporate was $5 million. 13 Parliament had also stipulated a list of balancing factors that the court must take into account in determining an appropriate penalty for anti-competitive conduct. 14 Section 80(2) previously read: 15

In determining an appropriate penalty under this section, the Court shall have regard to all relevant matters, including-

  • (a) The nature and extent of the act or omission:

  • (b) The nature and extent of any loss or damage suffered by any person as a result of the act or omission:

  • (c) The circumstances in which the act or omission took place:

  • (d) Whether or not the person has previously been found by the Court in proceedings under this Part of this Act to have engaged in any similar conduct.

13

It is accepted that the reference to “all relevant matters” in the current s 80(2A) will bring to account all those factors previously set out in s 80(2). 16 In Commerce Commission v Qantas Airways Ltd, the High Court affirmed the relevance of the following factors in assessing an appropriate penalty: 17

  • (a) the duration of the contravening conduct;

  • (b) the seniority of the employees or officers involved in the contravention;

  • (c) the extent of any benefit derived from the contravening conduct;

  • (d) the degree of market power held by the defendant;

  • (e) the role of the defendant in the impugned conduct;

  • (f) the size and resources of the defendant;

  • (g) the degree of cooperation by the defendant with the Commission;

  • (h) the fact that liability is admitted; and

  • (i) the extent to which a defendant has developed and implemented a compliance programme.

The Penalty Judgment
14

The Commission sought an order, pursuant to s 80(1) of the Act, that Telecom pay a pecuniary penalty in the range of $20 to 25 million. Telecom submitted that no penalty should be fixed, leaving the breach to be marked by declaratory orders and an order for costs. Telecom submitted that the very limited nature of the proven contravening conduct and the absence of evidence of material commercial gain or exclusionary effects told against the imposition of a pecuniary penalty.

15

The High Court noted that it is well-established that the primary objective of determining penalties under the Act is deterrence. 18 Penalties imposed must be such as to amount to a real deterrent “and not merely some kind of...

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