James Farmer

Legal Commentary

Commentary on Paper Delivered by Professor Andrew I Gavil at Commerce Commission Conference

Tuesday, November 19, 2013

The Supreme Court’s Telecom 0867 counterfactual Judgment, as seen by Professor Andrew Gavil, Director, Office of Policy Planning, US Federal Trade Commission

The Commerce Commission undertook its inaugural Conference on Competition Law and Policy in Wellington on 17 and 18 October 2013.  It was characterised by a number of excellent overseas experts as speakers, from the United States, the United Kingdom, Italy and Australia.  One of the keynote speakers was Professor Andrew Gavil, a lawyer and Professor at Howard University but currently serving as Director, Office of Policy Planning, US Federal Trade Commission.  His paper was entitled “Imagining a Counterfactual Section 36: Rebalancing New Zealand’s Competition Law Framework”.  As can be imagined, at the heart of his paper was an analysis of the much-criticised Judgment of the New Zealand Supreme Court in Commerce Commission v. Telecom, generally known as the 0867 case.   I was asked to give a commentary on Professor Gavil’s paper, which may have been a carefully weighted choice by the Commerce Commission given that I had appeared as unsuccessful counsel for it in the case.   What follows is the substance of my commentary, which candidly, also take the opportunity of revisiting the unsuccessful arguments put to the Supreme Court but which, happily, have attracted support (though more persuasively and in a much more learned fashion) from Professor Gavil’s paper.

Professor Gavil added his not inconsiderable authority to the views of those who think that the Supreme Court’s analysis was superficial and wrong.   He thought that the Court’s ruling that the counterfactual test – ignoring for the moment the difficulties of defining it in any given case – is the only legitimate way in which it can be determined whether a firm with market power has used that power for an anticompetitive purpose could not guarantee correct determinations.  As he put it:

… there should be no pretense that [the counterfactual test] will achieve [the] goal [of accurately differentiating] competitive from exclusionary conduct”. 

The failure of the counterfactual test, he correctly says, to consider actual market effects means that it will get the right answer, if at all, by default.  The counterfactual test, again as it has developed in New Zealand but not limited to the 0867 Case, has obscured the fact, he says further, that:

Conduct undertaken by a firm with significant market power may often have quite different effects on competition when compared to the same conduct practised by a firm without it – precisely because that firm has market power. 

That highlights the famous dictum of Scalia J in the Eastman Kodak case cited in Professor Gavil’s paper that the activities of a firm with substantial market power must be examined through a “special lens” – that behaviour “that might otherwise not be of concern to the antitrust laws – or that might even be viewed as procompetitive – can take on exclusionary connotations when practised by a monopolist”.   It is of interest that the High Court of Australia, in Melway, had proposed a further or alternative test that asked whether the firm’s market power had “materially facilitated” an advantageous outcome from the conduct under examination.  In so doing, it also cited the Scalia dictum.  Our Supreme Court thought however that all Australian case law was consistent with its view that the counterfactual test was the sole legitimate test for determining whether a firm had taken advantage of its market power.

The shortcomings of the counterfactual test were identified by Professor Gavil as being that “the counterfactual test substitutes a hypothetical inquiry into the conduct’s possible efficiencies for the more important question of its actual effects, both pro- and anti-competitive, when practised by a specific, dominant firm in a market with specific characteristics.”   As he says, “it never asks whether the anticompetitive effects are far more substantial than any realized efficiencies”.

The Development of the Counterfactual Test in New Zealand

The origins of the counterfactual test in New Zealand can be traced back to the joint Judgment of Mason CJ and Wilson J and the separate Judgment of Dawson J in the High Court of Australia in Queensland Wire.  In concluding that BHP was taking advantage of its substantial market power in refusing to supply Y-bar to Queensland Wire, the former said:

It is only by virtue of its control of the market and the absence of other suppliers that BHP can afford, in a commercial sense, to withhold Y-bar from the appellant.  If BHP lacked that market power – in other words, if it were operating in a competitive market – it is highly unlikely that it would stand by, without any effort to compete, and allow the appellant to secure its supply of Y-bar from a competitor.

Dawson J to similar effect:

....there can be no real doubt that BHP took advantage of its market power in this case.  It used that power in a manner made possible only by the absence of competitive conditions.

Later in the same year that Queensland Wire was decided, the Magic Millions case was argued in the New Zealand High Court before Tipping J, then a High Court Judge and later one of the two Judges delivering the Judgment of the Supreme Court in 0867.  His Honour in that case found that a breach of section 36 had occurred.  After referring to a statement by Dawson J in Queensland Wire as to the difficulty in determining what conduct constitutes taking advantage of market power and conduct does not, said that, in his view: “It is not a breach of s 36 if a person, albeit with a dominant purpose, simply acts in a competitive manner”.  He said further that it would be “a matter of fact and degree and ultimately of judgment in the individual case whether the line between what one might call legitimate competition and illegitimate competition has been crossed”.  His Honour then reviewed in some detail the factual evidence of conduct that had occurred in the case and concluded that the defendant firm had used its dominant position to prevent or deter competitive market from the new entrant.  

That approach provides an extraordinary contrast with the position where His Honour ended up as a Supreme Court Judge in 0867, namely that establishing the use of market power can only ever be the product of a counterfactual analysis and not by the sort of exercise that he conducted in Magic Millions, namely assessing the facts and making a judicial judgment as to whether the firm had used its market power for an anti-competitive purpose.

The next major advance in the development of a counterfactual analysis based on a comparison between the actual market which is occupied by a firm with market power and a hypothetical competitive market was the Privy Council Judgment in 1994 in Telecom v. Clear, which reversed the Court of Appeal and reinstated the High Court’s Judgment.  In this case, economists of the highest standing (Baumol, Willig and Kahn) gave expert evidence consistently with the approach in Queensland Wire by arguing that Telecom’s interconnection charges to its new entrant rival Clear were the same charges that it would offer in a competitive market, defined by them in that case as a contestable market to take account of the need to recover fixed costs that all participants in a telecommunications market typically need to recover.  

Their Lordships agreed with an observation in the Court of Appeal that what constitutes “use of a dominant position” turns upon the true effect of the statutory words in section 36 but accepted the proposition that if the terms that Telecom was demanding were no higher than those which a hypothetical firm would seek in a contestable market it could not be said to be using its dominant position.  In order to discover that, the Privy Council said, it was “inevitable that the parties and the Court must have recourse to expert economic advice”.  In this respect, they accepted that the Baumol-Willig Rule was “a closely reasoned economic model which seeks to show how the hypothetical firm would conduct itself”.   That firm, they said, must – apart from the lack of a dominant position – be in the same position and circumstances in relation to its competitors as Telecom.   This particular requirement became the subject of enormous debate in the High Court in 0867 with Telcom’s experts in that case insisting that the hypothetical comparator be subject to the same regulatory features as Telecom (in particular that it be subject to the Kiwi Share Obligation requiring free calling to residential customers), a requirement that complicated and confused the exercise.  In addition, the question of how the terms of the Interconnection Agreement, which gave rise to the dispute in the case, should be treated in the counterfactual was never satisfactorily resolved.

It is to be noted that the Privy Council, as had the Courts below, were addressing the particular way in which in that case Telecom had elected to disprove the allegation that it had used its market power.  It was not saying that the competitive market comparator was the only way in which this issue could be decided.  Indeed, it left open the possibility that use of market power could be inferred from the presence of an anti-competitive purpose, although warning of the dangers of doing so because of the principle that a monopolist is entitled, like everyone else, to compete with its competitors and not be required, in the words of Posner J in Olympia Equipment, hold “an umbrella over inefficient competitors”.

Fast forward to 0867.   The facts are an important understanding to how any counterfactual analysis should proceed but they were largely glossed over by the Supreme Court.  The starting point was an interconnection agreement between Clear (later TelstraClear) and Telecom entered into 1996.  This was the sequel to Telecom’s win in the Privy Council.  Its terms were not in fact consistent with ECPR/the Baumol-Willig Rule at all but were simply the result of a commercial negotiation that took place between the CEOs of the two companies.   Its terms clearly reflected the stronger bargaining position of Telecom rather than a negotiation based on a hypothetical construct of a contestable competitive market.  In particular, the termination charge regime heavily favoured Telecom in that Clear was required to pay approximately twice the amount for calls that Telecom terminated from Clear’s network into its network than for calls from the Telecom network terminating in Clear’s network.  Clear complained that these terms represented a use of Telecom’s market power.

However, as time went by and internet usage grew dramatically, Clear devised an effective commercial counter that not only neutralised Telecom’s contractual advantage but that  transformed the contract into one that favoured Clear.  What it did was to attract Internet Service Providers to its network by offering to share with them the termination revenues for calls to them.   A feature of such internet dial-ups was that they there was no balance between calls to and from ISPs and their clients.  The calls were virtually all one way so that there was no netting off that would have neutralised the situation.

What were the obvious responses that Telecom could have taken to stop the bleeding?  There were two.  First, it could compete for ISP customers itself.  It would only have had to attract half the number of ISPs that Clear had on its network to balance the position.   Secondly, it could have re-negotiated the 1996 Interconnection Agreement with Clear – something Clear wanted to do – to make its commercial terms more balanced (as one would expect in a competitive market in fact).  Telecom did neither of those.  It instead introduced a 2 cent dial up charge to all of its residential customers for calls made to the internet (except via Telecom’s ISP Xtra or to other ISP’s hosted on Telecom’s network), unless they used an 0867 prefix.  An ISP wanting its number to be reached through that prefix had to agree to Telecom’s terms that in effect cut Clear out of the picture. As the Supreme Court described it in a wonderfully understated way: “The 0867 package was designed to encourage residential customers and ISPs based on Clear’s network to ‘migrate’ to Telecom and to encourage Clear to adopt the 0867 prefix for ISPs on its network, thereby reducing the termination costs payable by Telecom.”   

One would have thought that it was fairly obvious that this was a situation where Telecom was using its market power to prevent Clear from competing for ISP customers by providing a penalty to residential Internet users who stayed with their preferred ISP.  However, that was not the view of the High Court, the Court of Appeal (though there were clear signs that those Judges were not happy with the outcome of the counterfactual analysis) or the Supreme Court.

How could this be?  The answer is to be found in the way that the economic debate around the definition of the appropriate counterfactual developed in the hot tub in the High Court.  The enthusiastic debate between the economists on each side, fuelled by the willing participation of the economist lay member of the Court, led to a focusing on the “correct” counterfactual rather than an analysis of the facts and the application of economic principle to them.  Attempts that were made from time to time by counsel for the Commission to bring the debate back to “real world reality” failed dismally in the over-heated intellectual climate that had been generated.  While I have been an advocate of the hot tub procedure – and remain so – it does have the disadvantage that economic debate between distinguished economists can take the process over and the lawyers and Judges caught up in it.

The Judgment of the Supreme Court was delivered by Blanchard and Tipping JJ.  Although the Court was presented with considerable argument and case law and other material over a 4 day hearing, the Judgment was (by Supreme Court standards) a short 50 paragraphs and delivered promptly in just over 2 months.  The Judgment began by discussing the two New Zealand Privy Council Judgments, Telecom v. Clear and Carter Holt Harvey v. Commerce Commission (in which there is a strong dissenting Judgment from 2 of the Law Lords questioning the legislative mandate for a compulsory counterfactual and also its utility in that case).  It then moved to the series of Australian High Court cases in which section 46 of the Trade Practices Act was considered – Queensland Wire, Boral Besser, Melway, Rural Press and NT Power – as well as a Judgment of French J (as he then was) in Natwest v. Boral.  The conclusion drawn by the Supreme Court from these cases was that the Australian case law did not allow permissible alternative approaches  to the determination of taking advantage of market power other than by making a comparison between the actual market and a hypothetically workably competitive market.  Only in this way, the Supreme Court said, would firms and their advisers have “a reasonable basis for predicting in advance whether their proposed conduct falls foul of s 36 and risks substantial financial penalty”.  The Court added that it was important that there was a broadly similar approach taken on both sides of the Tasman.

What we do not have is such a similarity.   In Melway, as referred to above, the majority joint Judgment referred to the dictum of Dawson J from Queensland Wire quoted earlier and expressly said that it:

does not exclude the possibility that, in a given case, it may be proper to conclude that a firm is taking advantage of market power where it 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 it 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 “materially facilitated” test had also attracted legislative approval in Australia – a fact that was before the Supreme Court - and is part of an amended section 46.  It cannot therefore be claimed by the Supreme Court that there was harmony between New Zealand law (as interpreted by it) and Australian law.

The Supreme Court’s Judgment next turned to the question of how the counterfactual analysis should be applied in the 0867 Case.  In doing so, it first avoided the inconvenient “materially facilitated “ test in Melway and the special lens requirement in the case of monopolists by referring to a passage in the later High Court case of NT Power, which explained Melway -  but on a completely different point.  There reference was made to a statement in Melway that determining how a firm without market power would act “involves a process of economic analysis”, the cogency of which “may depend upon the assumptions that are thought to be required by s 46”.  The point made in NT Power was no more than that unrealistic assumptions may be made but that there was a need for the analysis on those assumptions to be cogent.   Nothing was said there about the materially facilitated test also propounded in Melway.

Then follow some words that provide a stark contrast with what actually happened in the 0867 case.  In considering the hypothetically competitive market, the Court said that it was “involved in making what is essentially a commercial judgment” which should be “informed by all those factors that would influence rational business people in the hypothetical circumstances which the inquiry envisages”.  Economic analysis, the Court said, “may be helpful” but it “must always be remembered that the ‘use’ question is a practical one, concerned with what the firm in question would or would not have done in the hypothetically competitive market”.

The Supreme Court’s analysis of the hypothetical in the case before it however led it to express views that were anything but “practical”.   Its conclusion was that a non-dominant Telecom in a competitive market would not be concerned about losing residential customers as a result of its 0867 requirement for internet calls because no other competing network would want those customers if (notionally having Telecom’s free-calling KSO obligation imposed on it) it had to provide free residential service also but lose the benefit of the terminating charges paid by Telecom.  The response of Dr Bamberger, the Commission’s expert economist, to that was to point to the additional revenues that Telecom typically earns from residential customers for services outside the KSO – toll charges, telephone rentals, fault fixing, directory assistance, call minder, facsimile and broadband, etc.  Telecom would not be indifferent to losing those revenues and they would be attractive also to a competing telco.  Dr Bamberger also pointed to the fact that reduction of Telecom’s customer base and the economies of scale that it enjoyed (and that assisted its coverage of fixed costs) would be of concern to Telecom.

To an economist or a competition lawyer, none of that is surprising and is entirely consistent with rational economic analysis.  But no, said the Supreme Court.  Those propositions could not be accepted because, although they “may be theoretically sound”, there was no empirical evidence that had been called by the Commission to establish what Telecom’s additional revenues in fact were.  “The Commission’s argument, that on any rational consideration the potential loss of customers would necessarily and inevitably have outweighed the other matters at issue, relies on speculation rather than evidence”, the Court said.  And such Telecom financial material that had been before the High Court, it continued, was either before or after the time with which the case was concerned and was not put to witnesses.  In short, the learned Judges delivering the Judgment of the Supreme Court, neither of whom as practising lawyers had ever run a trial in a competition law or even major commercial case, chastised the Commission and its lawyers for not leading factual empirical evidence about Telecom as a monopolist in order to establish what would happen in a fictional counterfactual.  No mention is made of the massive discovery exercise (and the likely resistance to it and the attendant costs) which this would have entailed.

More seriously, the Court did not address the real problem that the counterfactual analysis as it developed in the hot tub gave rise to – namely the importance of the 1996 Interconnection Agreement, the terms of which were the outcome of Telecom’s dominance but which in respect of termination charges (though not in relation to other features that Clear wanted to re-negotiate) had over time proved beneficial to Clear through the internet explosion.  The Commission had argued from the very beginning of the litigation that, but for Telecom’s continued dominance, the re-negotiation of that agreement was the obvious solution for both parties.  Telecom’s dominance meant however that it did not have to consider this option but could solve its problem without cost by introducing 0867.   The use of a counterfactual in which the Interconnection Agreement was neutralised diverted attention away from what was in reality happening.  

It is acknowledged that the Court of Appeal was also unconvinced that it had been demonstrated (the onus being on the Commission) that the lost revenues from losing customers would outweigh the lost revenues from the termination charges on internet calls being paid to Clear.  However, this led the Court to say:

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.

That contrasts with the Supreme Court’s direction that “the hypothetically competitive market must genuinely deny [the dominant] firm all aspects of its dominance” and that the “constraints acting upon the firm in the hypothetical market must neutralise the dominance in the actual market”.  The hint from the Court of Appeal that there will be cases, of which 0867 was probably one, where the counterfactual was not plausible was ignored.

The utility of the counterfactual that was being urged was raised on more than one occasion by Dr Bamberger during his cross examination in the High Court by reference to the Interconnection Agreement, which contained termination charges that were above the levels that would exist in a competitive market but which the hypothetical analysis required to be removed.  As he said:

you have this kind of peculiar situation where you’re asked to assume a competitive market, but you’re also – you have to assume that there’s this asymmetric traffic problem because if you say in an appropriate counterfactual competition drives all fees to a competitive level and, therefore, there’s not asymmetric traffic problem, that’s just not a useful counterfactual.

What I would say is, in the counterfactual, there’s an ICA that has the characteristics of the real world, and that involves a small, a relatively small firm – one of the firms, company Y, receiving a price substantially in excess of cost, company X is getting and even higher price, but that is a fundamental part of the counterfactual.  If we don’t have that, I don’t think we have a useful counterfactual, so the existence of that ICA is something that company Y can exploit to attract ISPs to its network.

Post the Supreme Court

There have been two further section 36 Court decisions since the Supreme Court’s Judgment in 0867.  The first is another battle between the Commission and Telecom over Telecom’s pricing in the wholesale data transmission market for backbone transmission services and in the retail market for end-to-end high speed data transmission services.  It was held in the High Court and upheld in the Court of Appeal that Telecom’s had inflicted a price squeeze on its rivals and had breached the Efficient Component Pricing Rule (otherwise known as the Baumol-Willig rule) that it had itself established in the High Court and Privy Council previously.

The High Court accepted that, on the Privy Council authorities referred to above, a counterfactual provided the proper basis for analysis and that in particular the adoption of ECPR (Baumol/Willig) was the appropriate standard for interconnection pricing in a contestable market.   The Commission itself as plaintiff had indeed pleaded that. The characteristics of the counterfactual had also been agreed by the parties as being one where there were 2 vertically integrated telcos, each with a ubiquitous access network and a 50% share of the retail high speed data transmission (HSDT) services market.  Also seeking entry into that market was an entrant or access seeker with a core network but not ubiquity and no ability to construct a ubiquitous network on economic terms and who therefore needed to lease data tails.   There was no further debate around the issue.

Telecom tried (unsuccessfully) however in the Court of Appeal to argue that ECPR was inappropriate on the facts of that case.   Its further argument that the High Court had decided the case independently of section 36 and the Privy Council’s ECPR counterfactual by finding a general duty to supply derived from Telecom’s monopolist status was also rejected.  It was clear, the Court said, that the High Court had relied on a counterfactual analysis.  The Judgment then went to consider, and reject, further Telecom arguments that ECPR was a mere safe harbour and that ECPR was inapplicable because ECPR prices could not be calculated in advance as a matter of practical or commercial reality. Telecom then – paradoxically, given its stance in 0867 - argued that recourse to ECPR was unnecessary because factual evidence of how Telecom and TelstraClear were competing in the major CBD areas provided the answer as to how a non-dominant firm would behave.  It relied on the dictum in Melway that in some cases a process of inference based upon economic analysis may be unnecessary and that direct observation may lead to the correct conclusion.  The Court of Appeal, in response, referred to the way in which the Supreme Court in 0867 had disposed of Melway, namely that in that case the Court used the competitive market comparator but said that there may be no need for economic analysis given the factual evidence of how Melway had acted before it achieved market power.  It also said however that the factual evidence referred to by Telecom was not sufficient to provide the necessary comparator because TelstraClear did not have a presence throughout the whole of the major CBD areas at the relevant time.

The second case was a Judgment of the High Court delivered in August 2011 by White J and Kerrin Vautier (lay member) in Turners & Growers Ltd. v. Zespri Group Ltd.  That case covered a wide range of causes of action, including an attack on the validity of statutory regulations.  In terms of section 36 of the Commerce Act, it was held that it had been established by the plaintiff that Zespri, in setting policy terms for evaluating new commercial cultivars from New Zealand, had taken advantage of its market power in the grower/exporter (non-Australia) market but the claim failed because it had not been established that it had an anti-competitive purpose in doing so.   Being the High Court, it was of course bound by the Supreme Court’s Judgment and reasoning in 0867.   It faithfully set out the principles relating to the counterfactual test stated by that Court but ventured that the direction by it that firms and their advisers must have a reasonable basis for predicting in advance whether proposed conduct is likely to breach section 36 meant that “the hypothetical market construct itself should be as straightforward and realistic as possible, notwithstanding that in some cases a key assumption may be neither realistic nor practical.”  Though not referred to, the cautionary note in NT Power quoted earlier is to similar effect.

White J and Kerrin Vautier also ventured that, although the Supreme Court had postulated the “unrealistic scenario” of two Telecoms each with its own PSTN networks, it did not suggest that such an unrealistic scenario would be necessary in all cases.  What follows in the Judgment is a recording of the arguments of counsel and of at least one economist as to what the nature of the hypothetical market with Zespri, stripped of the many market and regulatory features that went to establish its market power, would look like.  The arguments ranged from deregulating the market, fragmenting it, introducing new regulations (a “modified regulated market”) that would either facilitate new entry or create a duopsony in place of the existing monopsony.  The Court concluded that either the modified regulated market or the fragmented market would serve to neutralise Zespri’s market power.  One can only wonder what approach the experienced competition law Judge and economist lay member would have taken had they not been shackled by the inexperienced (in competition law and economics terms) Supreme Court.  

Conclusion

The Court of Appeal in 0867 suggested a process for making the counterfactual more workable.  While commending the hot tub process, the Court thought that the downside of its use was that there may be no clear consensus as to what the counterfactual was so that counsels’ final submissions would be “addressing a somewhat shadowy target”.  That was no better illustrated than in the 0867 Case itself where the continuing debate in the hot tub obscured rather than illuminated analysis of the use of market power issue.  The Court of Appeal then made what it clearly hoped was a practical solution, namely that at the end of evidence the Court should be addressed as to the counterfactual that should be adopted, the Court should then take a decision on that and then further submissions should be made as to the application or consequences of that particular counterfactual.  As to this last point, it is not clear whether the Court had in mind the possibility of further evidence being called or the hot tub reconstituted or whether the further submissions would just be part of the closing.   The suggestion is of course useful and constructive, though my own reservations would be that it is not addressing the real problem, which is the exclusive employment of counterfactuals as a means of determining the use issue and the excessive sophistication and sophistry that has developed around it.

A larger dimension of that problem is the compartmentalisation that has built up around section 36 and in particular the isolation of use of market power as a discrete exercise in itself.   It is of course the case that there are a number of components in section 36 – market, market power, use of market power and anticompetitive purpose - all of which must be established.  But, as was said by Mason CJ and Wilson J in their joint Judgment in Queensland Wire in relation to markets and market power, in identifying initially the relevant market, it must be borne in mind that the object of is to discover the degree of the defendant’s market power.  “Defining the market and evaluating the degree of power in that market are part of the same process”, they said, “and it is for the sake of simplicity of analysis that the two are separated”. The same point was made by Franklin Fisher in his famous article “Diagnosing Monopoly” when he said that the purpose of market definition is to analyse market power.  And, as the Privy Council in Telecom v. Clear said, “use and purpose, though separate requirements, will not be easily separated”.

In a paper given in 1999 by a US legal practitioner and former Deputy Assistant Attorney General  in the Antitrust Division of the US Department of Justice, Ky Ewing Jnr. said that in antitrust as well as in gardening it is worth pausing occasionally to smell the roses and to see if the plant needs fertilising with new ideas.  He gave the example of the issue in 1968 of the first Merger Guidelines, which were a response to what was thought would be excessive rule of reason analyses following Brown Shoe, and the substantial revision of those Guidelines in 1982.  One can add to that the subsequent re-thinking of market concentration as the primary determinant of market power.

The great value of Professor Gavil’s paper is that it will not only induce us to examine critically where we are going with counterfactual analysis and whether the Supreme Court has sent us down a blind alley but it will also compel us to examine the two major questions that are in effect posed in his paper:

(1)    Is it a correct assumption that the conduct of a firm with market power, if the same as a firm without market power, cannot be regarded as breaching section 36?  To put that another way: are the competitive effects – pro and anti-competitive – necessarily the same in relation to conduct of a firm with market power and of one without market power?

(2)    Has the time come to reform section 36 and how is that best achieved – by piecemeal amendment (perhaps adopting the wording of Australia’s amended section 46) or as part of a major review of our competition laws, drawing on the lessons learned in other jurisdictions?   There is also the further possibility raised by Professor Gavil of another test case to be brought by the Commission to demonstrate the unworkability of the Supreme Court’s Judgment.  I suspect however that the Commission may lack the appetite for that!

Postscript

Although in a different area of the law, the recent Judgment of the Court of Appeal in Alesco New Zealand Ltd. v. Parbury Building Products (NZ) Ltd. – a tax avoidance case – is illustrative of a healthy scepticism (and rejection) by the Court of the construction of hypothetical alternatives as a means of assessing whether a commercial transaction was or was not tax avoidance.

Jim Farmer
19 November 2013

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