First published NZLawyer, 18 September 2009.
Questions over the use of the counterfactual test in misuse of market power cases under section 36 of the Commerce Act have been raised in the recent Court of Appeal decision in the "0867 proceedings", Commerce Commission v Telecom Corporation of New Zealand Ltd  NZCA 338.
In declining the Commission's appeal, the Court of Appeal expressed discomfort with the counterfactual test applied by the Privy Council in earlier cases. The Commission has announced that it will seek leave to appeal, asking the Supreme Court to reconsider the use of the counterfactual test as the sole test for determining misuse of market power cases and to adopt a more flexible approach in sync with Australian law and reflecting the views of Parliament that a less restrictive approach should be taken when section 36 was amended in 2001.
In 1999, Telecom introduced changes to its calling system to encourage residential customers to move to the Telecom network. Residential customers using an 0867 dial-code would not be charged for their calls to internet service providers (ISPs). An ISP then lost its right to claim termination fees from Telecom relating to that call. Where residential customers sought to call an ISP without using the 0867 dial-code, they would be required to pay a two cent per minute fee to Telecom after 10 hours of internet use. The Commission alleged that Telecom had breached s 36 of the Act (as it stood at the time) by using its dominant position in the market for an anti-competitive purpose, preventing or deterring its competitors from engaging in competitive conduct by reducing or eliminating the termination fees that would have otherwise been payable to its competitors.
High Court decision
To show that s 36 had been contravened, three elements needed to be proved:
The High Court found that, while Telecom did enjoy a dominant position in the market at the relevant time, Telecom did not "use" that position in the required competition law sense. It reached this conclusion by applying a counterfactual analysis comparing the actual situation with a hypothetical scenario in which Telecom was not dominant but the market was otherwise the same. On the basis of this analysis, the Court found that Telecom could rationally have acted in the same way and introduced the 0867 system even if it had not had a dominant position in the market.
The High Court followed the decisions of the Privy Council in Telecom Corporation of New Zealand Ltd v Clear Communications Ltd  1 NZLR 385 and Carter Holt Harvey Building Products Group Ltd v Commerce Commission,  1 NZLR 145, which held that a counterfactual test must be applied in assessing s 36 cases. In the latter case, the Privy Council stated (at ):
"It is, as the Board said in Telecom Corporation of New Zealand Ltd v Clear Communications Ltd at p 403, both legitimate and necessary when giving effect to s 36 to apply the counterfactual test to determine whether the defendant has used its position of dominance."
The High Court also found that, even if Telecom had used its dominant position, it did not do so for an anti-competitive purpose, as the introduction of the calling charges had been somewhat motivated by a need to reduce congestion on Telecom's network.
The arguments on appeal
On appeal, the Commission contended that the counterfactual test should not be the sole test for determining whether use had been made of a dominant position. The Commission referred to a number of decisions of the High Court of Australia, where the counterfactual test had not been regarded as the sole test for determining use of a dominant position, including the:
The "materially facilitated" approach proposes that it may be appropriate to conclude that a firm has taken advantage of its market power, where (at ):
"[I]t does something that is materially facilitated by the existence of the power, even though it may not have been absolutely impossible without the power. To that extent, one may accept the submission made on behalf of the ACCC, intervening in the present case, that s 46 would be contravened if the market power which a corporation had made it easier for the corporation to act for the proscribed purpose than otherwise would be the case."
The direct observation approach is based on the proposition that directly observing what had occurred would be sufficient to decide whether a firm had taken advantage of its market power.
The Commission submitted that, rather than always applying the counterfactual test, the Court should be able to also refer to these other approaches.
The Court of Appeal's decision
The Court of Appeal was sympathetic to the Commission's arguments for a more flexible approach, but concluded that, in light of the Privy Council decisions, any change of approach should be made by the Supreme Court. Applying the counterfactual test, the Court held that Telecom had not misused its dominant position in the defined market.
The Court was clearly uncomfortable with the counterfactual test. It noted that the assumptions that needed to be made for the test to work correctly could be difficult to get right, and that applying those assumptions in a particular case could be unrealistic. In the Court's concluding comments, Hammond J said:
"This case exposes the realities of the difficulty of counterfactual analysis and that it is not always of utility in the context of a case such as the present. The reality of the case is that it is about terminating charges which are markedly above cost and the willingness of Telecom, under threat of regulation, to share its monopoly rents with Clear. Any realistic counterfactual must take monopoly rents as a given. It is difficult to see how there can be any plausible counterfactual about the distribution of monopoly rents where non-dominance has to be assumed: in the absence of dominance there can be no monopoly rents."
Although section 36 has been amended since 1999, the counterfactual approach has been applied to the amended section 36, despite Parliament's intention to take a more flexible approach than the Privy Council (see Commerce Commission v Bay of Plenty Electricity Ltd (unreported, High Court, Wellington, 13 December 2007, CIV 2001-485-917, Clifford J and Professor M Richardson). If leave to appeal to the Supreme Court is granted (and it should be), the comments of the Court of Appeal will provide a clear opportunity for the Supreme Court to determine whether the Privy Council's approach should continue.
Jenny Cooper is a litigation partner and Farzana Nizam is a litigation law clerk at Bell Gully.