FEDERAL COURT OF AUSTRALIA Telstra Corp Ltd v AAPT Ltd [1999] FCA 1351 PRACTICE & PROCEDURE - PLEADINGS - motion seeking to strike out certain paragraphs of AAPT's cross claim as not disclosing a reasonable cause of action - cross claim alleges misuse of market power by Telstra under Part IV of the Trade Practices Act - whether the pleaded facts demonstrate a casual nexus between the alleged conduct and the market power so that the conduct is seen to be a use of the power Telecommunications Act 1997 Trade Practices Act 1974 (Cth) Queensland Wire Industries v Broken Hill Proprietary Co Ltd [1989] 167 CLR 177, applied Dowling v Dalgety Australia Ltd [1992] 34 FCR 109, applied General Newspapers Pty Ltd v AOTC [1993] 40 FCR 98, referred to Natwest Australia Bank Ltd v Boral Gerrard Strapping Systems Pty Ltd [1992] ATPR 41-196, applied Multigroup Distribution Services Pty Ltd v TNT Australia Pty Ltd [1996] ATPR 41-522, referred to BT Australasia Pty Ltd v State of New South Wales & Anor [1999] ATPR (Digest) 46-187, applied TELSTRA CORPORATION LIMITED (ACN 051 775 556) v AAPT LIMITED (ACN 052 082 416) NG 484 OF 1997 NG 449 OF 1997 NG 1125 OF 1997 THE HON JUSTICE MARCUS EINFELD AO 29 SEPTEMBER 1999 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 484 OF 1997 NG 449 OF 1997 NG 1125 OF 1997 BETWEEN: TELSTRA CORPORATION LIMITED (ACN 051 775 556) Applicant AND: AAPT LIMITED (ACN 052 082 416) Respondent JUDGE: THE HON JUSTICE MARCUS EINFELD AO DATE OF ORDER: 29 SEPTEMBER 1999 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The applicant's motion to strike out part of the respondent's cross claim based on Part IV of the Trade Practices Act (1974) (Cth) be adjourned to Thursday 21 October at 9.45am THE COURT DIRECTS THAT: 1. AAPT file and serve, by not later than 4pm on Wednesday 13 October, a further amended cross claim on the Part IV case in compliance with the views and rulings I have made in these reasons 2. By not later than 12 noon on Tuesday 19 October, Telstra file and serve any further submissions in support of leave being refused to file the pleading and to strike out the existing Part IV claim 3. By not later than 4pm on Wednesday 20 October, AAPT file and serve any submissions in reply 4. The parties have liberty to apply on 2 days' notice, if necessary by telephone or video to the Federal Court in Hobart Note: Settlement and entry of orders are dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 484 OF 1997 NG 449 OF 1997 NG 1125 OF 1997 BETWEEN: TELSTRA CORPORATION LIMITED (ACN 051 775 556) Applicant AND: AAPT LIMITED (ACN 052 082 416) Respondent JUDGE: THE HON JUSTICE MARCUS EINFELD AO DATE: 29 SEPTEMBER 1999 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 The hearing of this long running case is fixed to commence on 6 December 1999. The case involves a claim by Telstra for unpaid calls and services to AAPT and its customers in excess of $100 million and a cross claim by AAPT for damages of the order of $300 million. There have been a large number of directions hearings and several interlocutory motions. The latest fully contested motion was filed by Telstra on 5 March 1999 seeking, relevantly for present purposes, that certain paragraphs of AAPT's cross claim as it then stood be struck out as not disclosing a reasonable cause of action. Although submissions were made on the basis of that edition of the cross claim, AAPT has since sought leave to file a further version of its proposed cross claim which amends a number of clauses relevant to the motion. As a consequence, the submissions needed revisiting by the parties as late as 6 August 1999. 2 As only two weeks are available for the hearing this year and it is expected that the case will occupy most of my Court time in 2000, it is unlikely that the cross claim will be actually embarked upon for some time. Nevertheless, the imminence of the hearing commencement provides the matter with some urgency. This urgency, and the exigencies of my docket this year, mean that this judgment on the motion is briefer than would otherwise be the case. The Cross Claim 3 Like its predecessor, the present form of the cross claim pleads a number of different and quite discrete causes of action : breaches of contract, negligence, misrepresentations and false and misleading conduct under Part V of the Trade Practices Act, defamation, breach of confidence, discrimination under section 184 of the Telecommunications Act 1997, unconscionable conduct, and misuse of market power under Part IV of the Trade Practices Act. The challenge to the cross claim relates to the Part IV claim. 4 The cross claim refers to a number of markets. What is called the "Overall Market" covers all the others which include the local calls market, the Australian long distance or STD calls market, the international or ISD calls market, and the mobile phone market. The pleading alleges that there are high barriers to entry and to expansion in these markets for various reasons and that at the relevant time for this case, Telstra had a substantial degree of power in all of them. The pleading then proceeds to allege that if Telstra did not have this power in these markets, it would not have done all of the things alleged in the other causes of action which have caused AAPT all the losses it is claiming. In other words, Telstra is said to have used its market power to put barriers in the way of AAPT and frustrate its business, whereas in a truly competitive market it would have facilitated AAPT's sales of services to customers and thereby increased Telstra's sales of services to AAPT. Telstra's suggested motivation was to increase its own customer base and profits thereby enabling it to provide more services to its customers, and to restrict AAPT's services to its customers thereby damaging or eliminating AAPT as a competitor in each of the markets. 5 As to the international calls market in particular, AAPT alleges that to the same ends Telstra used its market power to oppose or hinder AAPT's efforts to obtain overseas cable capacity and, in relation to a facility called National Connect, acted in various ways adverse to AAPT with the intent and result of placing AAPT at a competitive disadvantage. 6 Telstra makes no present challenge to the allegations concerning the markets or its power in them. Its attack on this style or formulation of the claim of misuse of market power is that there is no pleaded or necessary link between the market power and the conduct alleged to represent its misuse. It classifies AAPT's allegations as saying no more than that by acting as alleged in the other causes of action, it has taken or must have taken advantage of its power in the various markets. Telstra says that no material facts are pleaded to demonstrate the causal nexus between these two elements as is required for the Part IV claim to stand. Taking advantage of substantial market power 7 The applicable principle was stated by Lockhart J in Dowling v Dalgety Australia Ltd [1992] 34 FCR 109 at 144, following Queensland Wire Industries v Broken Hill Proprietary Co Ltd [1989] 167 CLR 177: If a corporation has market power which causes it to exercise rights which it would not exercise under competitive conditions then the exercise of those rights is the exercise of market power, and it is this consideration which runs through the judgments in Queensland Wire: see per Mason CJ and Wilson J (at 192), per Deane J (at 198), per Dawson J (at 202) and per Toohey J (at 214). The central determinative question to ask is: has the corporation exercised a right that it would be highly unlikely to exercise or could not afford for commercial reasons to exercise if the corporation was operating in a competitive market? … However, there is a distinction between the exercise of rights of the kind that are exercisable only in non-competitive conditions and the exercise of rights which come into existence and would be exercisable in competitive conditions but which may establish a framework or base that may lead to the establishment of a substantial degree of power in a market. The question here is whether the pleading alleges conduct which either by necessary implication from its very nature, or by reference to other pleaded facts or circumstances constitutes a factual basis for establishing that Telstra would be likely to have acted in the way it did had it been operating in a competitive market : Natwest Australia Bank Ltd v Boral Gerrard Strapping Systems Pty Ltd [1992] ATPR 41-196, 40, 643. Looked at from the opposite viewpoint, does the alleged conduct constitute legitimate competitive activity judged by the requirements of or limitations imposed by section 46 of the Trade Practices Act? Material facts and causal link 8 It is unarguable that AAPT must plead material facts which assert or support an assertion of conduct by Telstra that is a use/taking advantage of its substantial degree of power in the alleged markets : BT Australasia Pty Ltd v State of New South Wales & Anor [1999] ATPR (Digest) 46-187. In Natwest Justice French said (repeating Toohey J in Queensland Wire at 213) that the words "take advantage of" mean: use market power, that is they are a reference to the overt deliberate exercise of market power. His Honour continued: It is as I have said an essential element of a cause of action based upon section 46 that the alleged contravener is said to have used its market power. The conduct must either by necessary implication from its very nature or by reference to other pleaded facts and circumstances constitute a use of that power… There must be a causal connection between the conduct alleged and the market power pleaded such that it can be said that the conduct is a use of that power. See also General Newspapers Pty Ltd v AOTC [1993] 40 FCR 98 at 122 (Wilcox J); Multigroup Distribution Services Pty Ltd v TNT Australia Pty Ltd [1996] ATPR 41-522 (Burchett J). Thus, the pleaded facts must demonstrate a causal nexus between the alleged conduct and the market power so that the conduct is seen to be a use of the power. Pleading defects 9 Paragraphs 117A, 117B and 117C, paragraphs 126A, 126B and 126C, and paragraphs 129A, 129B and 129C in the proposed new cross claim plead not the misuse of market power but its conclusions and results. Dalgety and Queensland Wire decided that it must be a corporation's market power which causes it to impose uncompetitive conditions on its competitors, not that commercial dealings which are disadvantageous to competitors establish a misuse of market power. The fact that corporations operating competitively act negligently, breach contracts, engage in misleading and deceptive conduct, defame and the like is not determinative of this question. Nor is the pleading of the opposite, viz that in competitive markets these things do not occur, of any relevance at all. 10 All commercial dealings, regardless of questions of market power, involve the quest to increase profits. Allegations that conduct was engaged in for that purpose cannot without more establish a misuse of market power. Likewise, conduct by one corporation that does not facilitate a competitor gaining or retaining customers and increasing its own profitability is also not per se a misuse of market power. The issue raised by the proposed cross claim is whether Telstra would be likely to have engaged in the relevant conduct if it had been acting as a true competitor or, put another way, whether it did so because it had substantial market power. 11 AAPT's explanation, as opposed to its pleading, of its cause of action is that Telstra has conducted a concerted or cumulative campaign against it of civil wrongs, breaches of contract, and the like, and that the campaign was made possible by its market power. However, I do not see that allegation in the proposed new pleading which actually alleges the opposite – ie that each one of the other causes of action represents a separate and distinct misuse of market power. As so pleaded, the allegations do not make out the cause of action. If amended in accordance with its argument on this motion, the claim would not in my opinion be so hopeless that it would be bound to fail. I will give AAPT a short further period for contemplation of this position. If no satisfactory amendment emerges, the Part IV claim will be struck out. Specific complaints 12 Some technical objections were taken to parts of the proposed new formulation of the cross claim. One related to the claim that Telstra used its market power to prevent AAPT from obtaining certain cable capacity for operation in the international calls market. Telstra said that parts of this pleading are embarrassing for want of additional material facts and the necessary causal link. The submission is detailed in writing so it is not necessary for me to repeat it. In my opinion it does not raise a strike out point but is a matter for additional clarification either in the pleading itself or by way of particulars. 13 A second set of technical objections was made to AAPT's claim in relation to the National Connect facility. One arose from AAPT's allegation that if acting as a true competitor Telstra would have ensured that AAPT was not placed at a competitive disadvantage in this regard. This pleading is faulty in terms but there may be no defective principle involved. What I take AAPT to be here alleging is that Telstra used its market power to impose on AAPT two elements in this transaction – first, an uncompetitive price regime greater than was charged to its own "vertically integrated operations" for the same product, and second, features which were, deliberately, significantly disadvantageous to AAPT. If this allegation is said to be part of the overall cumulative campaign of obstruction and harassment previously referred to, it cannot be summarily struck out. If not, it does not allege a contravention of section 46 and will be struck out. 14 The second part of this objection arises from the pleading of paragraph 128(f): The price paid by AAPT for and the quality of network access using National Connect placed AAPT at a competitive disadvantage to Telstra because: (f) the extraction of monopoly rents from the supply of the long distance transmission capacity to new carriers, and carriage service providers. The first obvious observation is that this paragraph is grammatically defective to the point where it is not clear what is being said. Even if the word "of" were inserted at the beginning of (f), its sense would not be greatly enhanced. Nor did the submissions take the matter much further. Telstra interpreted the allegation as being that the price charged by Telstra for National Connect provided it with unreasonably excessive profits. As Telstra submitted, there is no misuse of market power for one corporation to charge a competitor more than what the competitor regards as a reasonable rate of return on the products sold. If this allegation is to be supported by expert evidence on what price would be reasonable and what would be unreasonable, the Court would be called upon to be a price-fixing or price-assessing body for a technical product that belongs to what is presumably a very limited market indeed. This course cannot be permitted. In any event, unless the price charged was quite exorbitant or usurious, the result of this exercise could hardly involve a contravention of section 46. There can be no obligation on Telstra to supply products to AAPT at cost and there is no misuse of market power for a commercial entity to charge a competitor a premium for its product. The proposed pleading contains at present no allegation of anything more. 15 Once again, the accumulation of this allegation, once properly framed, together with the others being made, could make out a case of misuse of market power. By itself it could not. If AAPT does not avail itself of the further opportunity I am now giving to amend its pleading so as to embrace the concept embodied in section 46, this allegation will be struck out with the rest of the current pleading. Conclusions 16 The only orders that will now be made is that Telstra's strike out motion be adjourned for 3 weeks to Thursday 21 October 1999 at 9.45am. I direct that AAPT file and serve, by not later than 4pm on Wednesday 13 October, a further amended cross claim on the Part IV case in compliance with the views and rulings I have expressed in these reasons. By not later than 12 noon on Tuesday 19 October, Telstra will file and serve any further submissions in support of leave being refused to file the pleading and to strike out the existing Part IV claim. By not later than 4pm on Wednesday 20 October, AAPT will file and serve any submissions in reply. By file I mean supply to my Chambers on Level 20 of the Law Courts Building. Whatever the ultimate result of the current dispute, AAPT will pay Telstra's costs of the motion to strike out and the application for leave to amend the cross claim. I observe that as the current form of the pleading makes no allegation that further or different damage or loss was suffered by the alleged misuse of market power, and as in whatever form it may be permitted to proceed, it will presumably be based on the conduct alleged in the other causes of action, it is difficult to see what is gained by its inclusion in the cross claim at all. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Marcus Einfeld AO. Associate: Dated: 29 September 1999 Counsel for the Applicant: Mr J. Sackar QC and Mr A. W. Street SC Solicitor for the Applicant: Mallesons Stephen Jaques Counsel for the Respondent: Mr M. J. Slattery QC, Mr I. M. Jackman and Mr R. A. Dick Solicitor for the Respondent: Clayton Utz Dates of Hearing: 7 May 1999, 28 May 1999, 6 August 1999 Date of Judgment: 29 September 1999