11 Jul 2012
Telecom “Data Tails” case – Court of Appeal uphold finding that Telecom had taken advantage of its market power
The Commerce Commission has obtained a significant victory against Telecom in the long-running “data tails” saga. The Court of Appeal announced its decision on Telecom’s liability appeal on 27 June 2012, upholding the High Court’s decision that Telecom had taken advantage of its market power, which is a breach of section 36 of the Commerce Act.
The Court of Appeal decision provides guidance on section 36 of the Commerce Act and will be an important benchmark for future cases. As we noted in our FYI in 2009, the decision is significant because it confirms the importance of the counterfactual test to assess a breach of section 36, and for providing a useful explanation of the framework and application of competitive pricing principles using an economic model to assess whether a firm would have charged the same price in a competitive market known as the efficient component pricing rule (ECPR).
What was the case about?
Between 1999 and 2004, Telecom charged other telecommunication services providers (TSPs) (its competitors) high prices for access to data tails. Data tails are the links between a customer's premises and another TSP's network. TSPs have to purchase data tails from Telecom if their networks do not extend to customer premises enabling them to supply data services to those customers.
What did the High Court decide?
On 9 October 2009, the High Court found that Telecom had breached section 36 of the Commerce Act 1986. It had used its market power (from 18 March 2001 until late 2004) to deter potential, or existing wholesale competitors, for backbone transmission services and for end-to-end high speed data transmission services in the retail market.
The Court found that Telecom's pricing in relation to the "two tail" scenario (where the TSP does not have any tails of its own) was higher than it would have been in a competitive market, because it was higher than the ECPR.
Telecom was ordered to pay a pecuniary penalty of $12 million in April 2011.
What did the Court of Appeal decide?
Telecom appealed both the finding that they had breached s36, and the amount of the pecuniary penalty. The Court of Appeal has not yet released its judgment in relation to penalty.
In relation to liability, the Court of Appeal unanimously upheld the High Court finding that Telecom had breached section 36 of the Commerce Act. The Court of Appeal went further than the High Court and found that Telecom's pricing in the "one tail" scenario (where a TSP provides at least one of its own tails) also breached the ECPR. The Court of Appeal also extended the declaration granted to the Commission to cover an earlier timeframe. The High Court's declaration was amended to read:
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.
There are three elements that must be proved in a section 36 case. One is market power, the second is the taking advantage of that market power, and the third is anti-competitive purpose.
The first element was not an issue in this case, as Telecom accepted it had a substantial degree of market power.
In relation to the second element, the Court of Appeal confirmed the use of the counter-factual test in order to assess the element of "taking advantage" (ie would a firm without market power have acted in the same way as Telecom?). The Court of Appeal affirmed the High Court decision that a firm without market power would not price above the ECPR.
In relation to the third element, the Court of Appeal held that the finding of pricing above the ECPR was sufficient to support the inference that Telecom had an anti-competitive purpose. The direct evidence of events occurring prior to the limitation period could be used to support a finding of continuing purpose.
What are the implications of this decision?
This case is a significant and resounding victory for the Commerce Commission. However, it does not change the way in which section 36 cases will be analysed. The case confirms the existing case law and the tests that should be applied to assess whether there has been a breach of section 36.
It will be interesting to see the decision on the penalty appeal. The $12 million penalty ordered by the High Court was the highest ordered against a single company under the Commerce Act to date.
If you would like a case summary or any more information, please contact one of our competition specialists.