THE REASONS OF THE PRIMARY JUDGE
32 Betfair's case was that the fee was discriminatory in that it operated in practice to reduce its commission on its low margin turnover by approximately 60%, whereas it reduced TAB's commission by approximately 10%. His Honour summarised the elements of Betfair's case at [101]-[105]:
Betfair's pleaded case was straightforward. First, it alleged that the takeout rate of the TAB had "typically been approximately 16% on average over all events and contingencies". Secondly, it alleged that the commission earned by the TAB by the operation of its off-course totalizator had a fixed and direct relationship with the betting turnover which took place on it. The pleading referred to this as gross revenue, rather than, as I do, commission. However, as these reasons will show, references in Betfair's further amended statement of claim to "gross revenue" are plainly references to commission both for the TAB and for Betfair itself.
Thirdly, it alleged that there was no direct relationship between Betfair's commission and the turnover on its exchange. Fourthly, it alleged that the imposition of a fee calculated on 1.5% of back bet turnover represented between 55.86% and 60.79% of its commission earned from punters betting with each other on its exchange on thoroughbred races for the years 2005/06 - 2008/09 and between 54.83% and 61.41% over the same period in respect of harness racing. Only the years 2008/09 are directly relevant to these proceedings for it is only in those years that the fee was actually levied. The allegation suggests, however, a continuity of outcome rather than a statistical anomaly, which I accept.
At the heart of the case is Betfair's next allegation that, by contrast, the imposition of a 1.5% back bet turnover fee on the TAB's off-course totalizator turnover will result in a drop in its commission of 9.375%.
Another way of putting this allegation is that since the TAB's commission or takeout is approximately 16% of its turnover, the imposition of a 1.5% fee charged on back bet turnover will reduce its commission to 14.5% because of the alleged direct relationship between turnover and the totalizator's take out. That 1.5% drop in commission represents 1.5% of 16% or, as Betfair alleges, 9.375% of the TAB's commission.
Fifthly, Betfair alleges that the fee, in its practical operation, requires an interstate operator, Betfair, to pay a sum that exceeds, in terms of a proportion of their respective commissions, the amount imposed upon an in-State operator, the TAB. Sixthly, therefore, it is alleged that the fee imposes a burden on interstate trade that is not imposed on intrastate trade and, in its legal or practical effect, protects the TAB from competition by reason of which its imposition is protectionist in character. Seventhly, Betfair alleges that there is no other object consistent with s 92 to which the fee can be seen as being reasonably appropriate and adapted. Finally, in that regard Betfair points to a series of statements made by officials from RNSW and HRNSW which, Betfair submits, show that the fee was intended to discriminate in a protectionist way and that it breaches s 92 by reason of that intention. Taken altogether, the case is that the fee is discriminatory in a protectionist sense and was always intended so to be.
33 Ultimately, the primary judge concluded that, although the fee did discriminate against Betfair, it was not protectionist in character and so did not offend s 92 because it was not shown to affect adversely any competitive advantage enjoyed by Betfair. His Honour said at [110]-[112]:
The respondents submitted that s 92 was concerned with protectionism which, on the authorities, required Betfair to show that the fee was not competitively neutral. It was not enough to show that the fee discriminated against Betfair; rather, it needed to be shown that any discrimination which was proved either imposed some competitive disadvantage on Betfair or ameliorated some competitive disadvantage otherwise burdening the TAB.
This question raises important issues about how Betfair went about running its case. In summary, I have concluded that the respondents and the intervenor are correct; that Betfair has not alleged that the discriminatory effect of the fee is not competitively neutral beyond proving that the fee is discriminatory. Betfair has not alleged or proven any of the following (by way of example):
(i) that Betfair is more affected by the fee because it is a low margin operator and that its status as such derives from the competitive advantage it has as an interstate trader in not paying New South Wales betting taxes or payments to the racing industry under the Racing Distribution Agreement; or
(ii) that Betfair's status as a low margin operator is a result of a competitive advantage it has over the TAB in not having to maintain a retail network in New South Wales.
Further, Betfair has not alleged as part of its case on protectionism that the fee operates as an equalising tax falling only on interstate operators and is therefore protectionist. Without allegations of that kind, Betfair has only shown that the fee discriminates against it; it has not shown that that discrimination is protectionist.
34 The primary judge acknowledged that Betfair had asserted in its pleadings that the fee is "protectionist in character", but explained that Betfair's case failed to identify any competitive advantage which was nullified or diminished by the fee. His Honour considered that Betfair's conclusionary assertions of protectionism were supported only by the allegations that the fees discriminated against Betfair because it is a low margin operator. His Honour said at [162]-[163]:
Cole v Whitfield 165 CLR 360 establishes that what is needed to enliven s 92 is not just discrimination but discriminatory protectionism. As one might expect, therefore, Betfair alleged that the fee was, in fact, protectionist and this it did at paragraphs 100 and 100A:
100. By reason of the matter [sic] referred to in paragraphs [98] and [99] above:
(a) the Racing NSW Approvals and the RNSW Turnover Fee Condition impose on interstate trade, commerce and intercourse a burden or disadvantage which they do not impose on intrastate trade, commerce and intercourse of the same kind; and
(b) the legal and practical effect of the Racing NSW Approvals and the RNSW Turnover Fee Condition is to protect a wagering operator in New South Wales (being TAB Limited) from competition from a wagering operator in another State (being Betfair).
100A. By reason of the matters referred to in paragraphs [99] and [100] above, the Racing NSW Approvals and the RNSW Turnover Fee Condition are protectionist in character and are thereby contrary to s 92 of the Constitution and invalid, or are invalid to the extent that they impose a discriminatory fee contrary to s 92 of the Constitution.
(emphasis added)
But it is quite obvious that those paragraphs did no more than rely on what was alleged in paragraphs 98 and 99 which, as I have already noted, contained only allegations of discrimination.
35 His Honour continued with his analysis of Betfair's pleaded case at [164]-[166]:
The first allegation of protection is in paragraph 100(b). The matter in paragraph 100(b) flows, however, "by reason of the matter[s] referred to in paragraphs [98] and [99]". The second allegation of protection in paragraph 100A likewise arises "by reason of the matters referred to in paragraphs [99] and [100]". Whichever way one looks at it, the factual matters underlying the two allegations of protection are those in paragraphs 100 and 100A and they lead one inevitably back to paragraphs 98 and 99. But the only allegations in those paragraphs are that Betfair is engaged in interstate trade and commerce and that it has to pay a larger proportion of its commission than the TAB does. That, on the face of things, is not an allegation of protectionism.
To understand that, it is important to emphasise some matters which are not alleged by Betfair in its pleading. It does not allege that the discriminatory effect of the fee on it and the TAB:
(a) reduces some competitive advantage which Betfair enjoys over TAB; or
(b) ameliorates the effect of some competitive disadvantage by which the TAB is burdened; or
(c) is the result of an equalising fee or tax.
Another way of putting this is to observe that Betfair does not allege in paragraph 99 of its pleading (or in any other part of its pleading) that the imposition of the fee is not competitively neutral. Be that as it may, it is not difficult to imagine ways in which it might have been alleged that the discriminatory effect of the fee was not competitively neutral. It might, as I have already noted, have been argued, for example, that the TAB's position in New South Wales was such that it was required to maintain an extensive retail network, pay significant betting taxes to the New South Wales Government as well as making substantial contributions to the racing industry under the RDA all of which could be characterised (perhaps controversially) as competitive disadvantages. The discriminatory effect of the fee could be seen to ameliorate the competitive disadvantages of the TAB vis À vis Betfair by subjecting the latter to an equalising or compensatory burden which severely impacted its operating margin in NSW and thereby levelled the playing field.
36 The primary judge explained that the deficiency in the case advanced by Betfair was not confined to the manner in which the case was pleaded. The insufficiency of the pleading was the harbinger of a failure to prove facts necessary to Betfair's case that the fee is protectionist. His Honour said at [167]-[172]:
One might have some sympathy with the proposition that the fee's lack of competitive neutrality was so obvious that it went without saying. However, whilst it is always tempting to accede to the obvious I do not think that is a correct way to proceed in this case for four reasons.
First, the short and perhaps unpalatable fact is that such a case has not been pleaded. Secondly, although the proposition may look obvious that may well be because it is presently unchallenged as the respondents have declined (as they are fully entitled so to do) to meet anything but the case pleaded against them. Thirdly, the evidence does not disclose why Betfair's commission rate is between 2% and 5% and why the TAB's is 16%. It may be that the lower commission rate is caused, in part or in whole, by any of the following:
(a) the absence of the need to maintain a retail network;
(b) the deliberate generation of losses by Betfair in order to increase its market share;
(c) the presence of other streams of revenue, apart from the commission earned on the exchange, which are operating as a form of internal cross-subsidy;
(d) undemanding shareholders; or
(e) very large numbers of customers.
So too, the reasons why the TAB's commission is over three times higher than Betfair's and why that state of affairs continues despite the presence of low margin operators are also matters of conjecture not having been explored in evidence. They may include, for example:
(a) the ability of the TAB to trade at high rates given its monopoly with respect to operating an off-course totalizator on New South Wales racing events;
(b) the costs and expense involved in maintaining a substantial retail network;
(c) the size of New South Wales betting taxes and the expenses incurred by the TAB under the RDA; or
(d) the brand strength of the TAB.
I mention these points not to give any of them any particular credence but to indicate that to determine whether the fee is protectionist these matters would need to be examined. None of the propositions set out above, nor any like them, were put as part of the s 92 case and none have been factually investigated in a context where the respondents have been obliged to meet them. In those circumstances, it is not open to proceed upon the basis that the pleading should be taken, on the grounds of obviousness, to include an allegation that the discriminatory impact of the fee upon the respective commissions of Betfair and the TAB is not competitively neutral.
Fourthly, by not saying what the competitive effect of the fee is Betfair denies the respondents any opportunity to make a defence to that case. This is the point which the respondents sought to make, I think, in paragraph 100.1(d) of their defence, which was in the following terms:
Betfair cannot establish that the burden is offensive to section 92 of the Constitution without alleging and proving the economic or financial impact of the alleged burden on the relevant interstate trader including:
(i) whether the interstate trader is able to pass the alleged burden onto its customers, either at all or in a manner that is competitively neutral vis-À-vis the relevant intrastate trader;
(ii) the profitability of the interstate trader in light of the imposition of the alleged burden;
(iii) whether it is uneconomic for the interstate trader to engage in the relevant interstate trade in light of the imposition of the alleged burden;
(iv) whether the interstate trader does conduct or is able to conduct its business in such a way that the alleged burden does not place the interstate trader at a discernible competitive disadvantage vis-À-vis a relevant intrastate trader;
(v) whether the interstate trader is able to achieve an amelioration of fees which it faces from other regulators relative to the same business, in whole or in part, such that the alleged burden does not place the interstate trader at a discernible competitive disadvantage vis-À-vis a relevant intrastate trader.
…
On the form that Betfair's case took all that was alleged was that Betfair was a low margin operator. Whilst it was true that fixed charges were apt to discriminate against low margin operators and in favour of high margin operators such discrimination could not, without more, constitute protectionism. For that, one needed to go further and to put that the low margin operator's status as such sprang from some competitive advantage over the high margin operator which the fee could be seen as reducing or eliminating. Low margins, per se, did not demonstrate the existence of a competitive advantage but might well arise from other extraneous circumstances which might not necessarily bespeak the presence of a competitive advantage; for instance, as already mentioned, a deliberate competitive tactic in order to attract market share.
37 The point made by his Honour in this passage is that the imposition of the fee does not necessarily adversely affect low margin operators in comparison with higher margin operators who are also subject to the fee. Unless issues of the kind referred to by the primary judge are addressed, one cannot conclude that any competitive advantage enjoyed by the low margin operator is likely to be diminished. His Honour considered that Betfair's own submissions in reply highlighted this difficulty in its case. His Honour explained at [173]-[176]:
Betfair's written submission in reply recognised, I think, the problem with which it was confronted. At paragraph 8 of those submissions it was said:
Section 92 is concerned with the "practical effect" of a law or executive action and whether it burdens interstate trade to a "significantly greater extent" than it burdens intrastate trade and the burden is "of a protectionist kind". A burden has that characteristic if in its differential effect it is likely to remove or diminish significantly any competitive advantage which the interstate trader enjoyed over the intrastate trader before the imposition of the fee or is likely to impose a competitive disadvantage on the interstate trade alone. A law or administrative decision which does not have that effect is one which can be described as "competitively neutral". Here the issue is whether the fee is "competitively neutral" as between TAB Limited (the trader within NSW) and Betfair (the trader outside NSW): Betfair v Western Australia at [146].
Having then said in paragraph 10 of the same document that the question was "whether in its operations the fee is not competitively neutral" the submission went on to say (at paragraph 11):
At the time of the imposition of the fee Betfair enjoyed competitive advantages over TAB Limited as a result of its cost structure and operating margin. The competitive advantages which the betting exchange model enjoyed were the result of a lower cost structure partly because Betfair does not take any risk on the outcome of the wagering transaction, partly because it does not support retail outlets and oncourse facilities and partly because of the level of NSW tax and industry contributions paid by TAB under the RDA.
The submission continued at paragraph 13:
To identify any competitive effects of the fee it is necessary to understand what it means in terms of revenue or expense to Betfair and TAB Limited. It is only by reference to its revenue and expense consequences that likely competitive effects can be considered. (Such an analysis was in fact undertaken by Racing NSW in June 2008.)
These submissions are, with respect, on the mark. They single out Betfair's competitive advantages and seek to show that the fee protects the TAB from them. The difficulty, as the respondents pointed out, was that this case was neither really in reply nor, more seriously, in Betfair's pleading. I am bound to accept the respondents' argument as correct. The pleading does not make the allegations about the competitive effects of the fee.
38 The primary judge reviewed at [179]-[194] the detail of Betfair's pleaded case and the arguments advanced by it at trial. His Honour concluded at [195]:
Betfair did not run a case that its status as a low margin operator was derived from competitive advantages it enjoyed as a result of its being an out-of-State trader. Nor, for completeness, did Betfair's pleaded case allege that the fee was to be seen as an equalising measure to which the principles in Bath v Alston Holdings Pty Ltd (1988) 165 CLR 411 might apply. For the reasons delivered simultaneously with these reasons in Sportsbet [2010] FCA 604, the fee in question was, in fact, refunded to the TAB and the New South Wales on-course bookmakers so that it was a measure that fell substantially only on interstate traders and was to be seen as an equalising measure designed to reduce the burden imposed by the RDA and to prevent revenue leaking away from the TAB. Such a case was not run by Betfair.
39 The primary judge referred at [196]-[204] to the authorities in relation to s 92 of the Constitution. He drew from them the proposition that where the impermissible burdening of interstate trade is not apparent on the face of the impugned law, the kind of discrimination which offends s 92 involves the disruption of a competitive advantage which an interstate trader would enjoy were it not for the impugned law. His Honour concluded at [205]:
Betfair needs to demonstrate that the fee is not only discriminatory (as I have found) but that the burden imposed is protectionist. Further, I accept that to demonstrate the protectionist effect it needs to prove that the fee is not competitively neutral. However, as I have endeavoured to show, the absence of the competitive neutrality was not put as part of Betfair's pleaded case. It follows that its case must fail.
40 It is important to appreciate that his Honour rejected a contention advanced by the respondents that Betfair was obliged to show that it had actually been adversely affected in its business by the imposition of the fee. In this Court, Betfair argued that his Honour did not appreciate that Betfair was not obliged to show that it was actually adversely affected by the fee, it being sufficient to show that the tendency of the fee was likely to affect it adversely. In this regard, his Honour said at [206]:
It is necessary to add a postscript to these conclusions. The respondents pursued an argument that Betfair was obliged by Castlemaine Tooheys 169 CLR 436 to prove some actual competitive effect upon its business (for instance the raising of the rate of commission on winning bets). Mr Twaits' evidence was that Betfair had not yet done anything in response to the fee. It followed, as I understood the submission, that Betfair could have no claim under s 92. I reject this argument. There is a distinction to be drawn between requiring a plaintiff in a s 92 case to allege and prove the existence of some competitive advantage possessed by it (or correspondingly some competitive disadvantage possessed by the in-State trader) and requiring it to prove the effect of the impugned measure on its actual business decisions. If Betfair had alleged that its lower margins derived from the competitive advantage accruing to it then this may well have shown the fee to be protectionist. What Betfair did, however, in response to the fee is irrelevant.
41 The primary judge considered whether the motives of RNSW and HRNSW were material. His Honour was prepared to draw the inference (at [227]) "that the members of the board of RNSW were, at the time of the decision to impose the fee, of the view that the fee would limit revenue leakage away from the TAB and thereby protect its revenues from competition with interstate traders".
42 Having so found, his Honour went on to hold that the intention of those individuals responsible for the imposition of the fee was not material to the resolution of the issue as to protectionist effect. His Honour said at [236]-[237]:
However, having concluded that the respondents were actuated by protectionism this does not, thereby, establish a breach of s 92. As matters presently stand, there appear to be two ways an infringement of the guarantee erected by s 92 may be established. First, a plaintiff may show that a law or measure directly discriminates against interstate trade or commerce. Secondly, it may be shown that the law or measure in its practical operation or effect is discriminatory in a protectionist sense: see Cole v Whitfield 165 CLR at 408.
I can discern no room on either of those limbs for a role for the intention of the decision maker.