Riverstone Computer Services Pty Limited (ACN 002 311 462) v IBM Global Financing Australia Limited

BETWEEN: RIVERSTONE COMPUTER SERVICES PTY LTD (ACN 002 311 462)

AND: IBM GLOBAL FINANCING AUSTRALIA LIMITED (ACN 002 955 571)

REASONS FOR JUDGMENT HILL J: 1 The applicant, Riverstone Computer Services Pty Ltd ("Riverstone"), applies to the Court for discovery before action pursuant to Order 15A Rule 6 of the Federal Court Rules (Cth) ("the Rules"). 2 The parties ultimately agreed upon the terms of the order which should be made assuming that the applicant was entitled to an order. They differed, however, as to whether Riverstone had on the evidence adduced by it established that it was entitled to the relief it sought. 3 Order 15A Rule 6 provides as follows: "Where - (a) there is reasonable cause to believe that the applicant has or may have the right to obtain relief in the Court from a person whose description has been ascertained; (b) after making all reasonable inquiries, the applicant has not sufficient information to enable a decision to be made whether to commence a proceeding in the Court to obtain that relief; and (c) there is reasonable cause to believe that that person has or is likely to have or has had or is likely to have had possession of any document relating to the question whether the applicant has the right to obtain the relief and that inspection of the document by the applicant would assist in making the decision - the Court may order that that person shall make discovery to the applicant of any document of the kind described in paragraph (c)." 4 It is now well established that to succeed, an applicant does not have to show that it has a prima facie case entitling it to relief, but rather it must put before the Court evidence to show objectively that there is reasonable cause to believe that the applicant either has, or may have, a right to relief against the respondent, or at least a person whose description has been ascertained: Malouf v Malouf [1999] FCA 710; see also Quanta Software International Pty Ltd v Computer Management Services Pty Ltd (2000) 175 ALR 536. It has been said that the test under Rule 6(a) is "set at quite a low level": Gull Petroleum (WA) Ltd v Tah Land Pty Ltd [2001] FCA 1531. 5 The applicant relies upon an affidavit of Mr Vardill, a director. Mr Vardill first explains that the respondent is the leasing/financing and remarketing arm in Australia for International Business Machines Corporation ("IBM"), its American parent. IBM, or perhaps some company related to it, manufactures and supplies by retail mainframe computers which run on the IBM operating system. It is suggested that there is a world market for Mainframe Computers, by which I would understand that mainframe computers are sold throughout the world including Australia, by IBM . There had been other suppliers of mainframe computers, including Hitachi Data Systems and Amdahl, the trading arm of Fujitsi, but both these companies had withdrawn from the market for the sale of new mainframe computers, leaving IBM as the sole supplier in that market. 6 It is said that throughout the world approximately 70% of mainframe computers are not owned by those who operate them, but are leased under arrangements such as exist between consumers and the respondent in Australia. Because such a substantial number of mainframe computers are leased, generally on terms that title to the computer remains with the lessor, it follows that when the lease comes to an end the lessor is in a position to sell second-hand mainframe computers. The applicant sells second-hand mainframe computers to end users. Mr Vardill refers to the transactions of the applicant as being sales in the global second-hand users market for mainframe computers, where prices range from $7000 to $4,500,000. As I understand Mr Vardill's evidence the applicant endeavours as a wholesaler to sell second-hand computers to end users who might be in Australia or in other countries. It would seem that there are other companies who, in Australia, likewise endeavour to sell second-hand mainframe computers. 7 One of the consequences of IBM mainframe machines using the IBM operating system and continued compatibility of new or upgraded software for use in both new or second-hand machines is that, or so it is alleged, second-hand mainframe computers compete directly with new mainframe computers. In the absence of other suppliers of new computers it would follow that sellers of second-hand mainframe computers are the only competitors of IBM globally. 8 Since 1991 Riverstone has bought from the respondent or sold to the respondent second-hand mainframe computers. In recent times, however, their relationship has become strained. In part, at least, this came about as a result, it is alleged, of what the affidavit refers to as "Restriction Policies" designed to restrict trading in mainframe computers and also to restrict the geographical areas into which re-sellers of second-hand computers, known as "brokers" could sell. Hence sales could not be made to purchasers in the United States or the Common Market countries, these being substantially the largest markets for second-hand mainframe computers in the world. The geographical restrictions appear to have varied, in that at some time sales could only be made in the Asia Pacific area (and thus excluding Australia). The area of potential sale was further restricted by excluding Japan and China as well. 9 Another policy which is said to have been introduced and of which evidence is given is a policy of destroying or "sterilysing" certain models of mainframe computers which were likely, should they be available for sale, to impact upon the sales of new mainframe computers. The policy appears to be known as "Destruction under Supervision" (DUS). 10 In around the middle to end of 1999 the persons with whom Riverstone had dealt at the office of the respondent either had their service terminated or were moved to a position outside Sydney and relationships between Riverstone and the respondent thereafter became more difficult. All offers became subject to geographical restriction. On occasions there were to be written guarantees that the machines not leave the area into which they were permitted to be sold (ie the Asia Pacific). In some cases the respondent required to know the final purchaser and to see the contract with that purchaser. On some occasions prices were quoted which, it is suggested, were greatly in excess of prices which had been previously quoted. There were procedural changes which had adverse commercial consequences, so it is said, to Riverstone. 11 There is evidence also that a company, Independent Systems Integrators Pty Limited ("ISI"), said to be an agent of IBM agreed to sell a mainframe machine, but conditional upon the equipment not being resold to an Australian client or being installed within Australia. The relationship between ISI and IBM is not clear on the evidence, except so far as the allegation is made of agency. 12 The evidence leads to the conclusion, assuming it were to remain as it presently is, that the respondent was engaging in the conduct it did in order to protect a market for the sale of IBM products (a global market, although including Australia, by inference). It is also open to inference that the respondent engaged in conduct with a view to, or having at least the consequence of, harming Riverstone. 13 Lawyers first became involved in the latter part of the year 2000. There appears initially to have been some agreement that informal discovery would be given but later the position hardened and that resulted in the present application to the Court. 14 I should say at this stage that in setting out the matters deposed to by Mr Vardill, in summary form I am not making any findings of fact in these proceedings. The matter at this stage is interlocutory and for that reason the evidence is admitted without cross-examination which might be expected if the matter were to proceed as an application for relief by Riverstone. Nor at this stage has there been any evidence led on behalf of the respondent which might contradict this evidence or otherwise provide matters in defence of any claim which Riverstone may ultimately make. 15 It is submitted that the facts deposed to demonstrate that there is reasonable cause to believe that Riverstone has or may have the right to obtain relief against the respondent or some other member of the group of companies of which IBM is parent arising from a breach of any or all of ss 46, 47 or 52 of the Trade Practices Act 1974 (Cth) ("the Act"). 16 For Riverstone it is submitted that regard should particularly be had to the evidence of the restriction policies and particularly the requirement that purchasers of second-hand computers could not resell without geographical restriction; the policy relating to the destruction of second-hand mainframe machines and the requirement that there be only a resale to a known purchaser (presumably one who would not sell into the restricted geographical areas). So too, it was said, it was relevant that the executives of the respondent with whom Riverstone had dealt over a long time had been dismissed or moved away from Sydney because they had been involved, so it might be inferred, with assisting Riverstone. It was submitted that IBM had no competitor in the world wide new computer market and that the only competition there was, was to be found in the second-hand market for mainframe computers. Further, the respondent because of its dominance in the leasing market (and it is suggested its intention of taking control of that market) had market power in the market for second-hand mainframe computers. 17 So, it was said the evidence showed at the least that it was arguable that the respondent, IBM or perhaps some other IBM related company in Australia had a substantial degree of power in a market and took advantage of that power to substantially damage Riverstone or competitors generally and to prevent Riverstone or others continuing in the market such as to contravene s 46. 18 So far as s 47 of the Act was concerned it was submitted that the Respondent, IBM or some other IBM related company in Australia engaged in exclusive dealing in supplying or offering to supply second-hand computers on conditions of a kind referred to in the section. 19 The case under s 52 was said to concern representations made in conversations deposed too, which representations were misleading or deceptive or likely to mislead or deceive Riverstone and which were relied upon by Riverstone which suffered loss as a result. I do not propose to say more of the s 52 case, because it is clear that it would be exceedingly difficult for Riverstone to succeed in recovering damages under s 52 on the evidence before me. 20 For the respondent it was submitted that the affidavit material referred only to a global market - either for new machines, or for second-hand machines and made no reference at all to an Australian market, even by way of alleging that such a market existed. It is said that in the absence of an assertion at the very least of a market in Australia no inference was available other than that what was alleged was that there was a global market in which IBM had considerable influence. Hence there was really nothing which showed a case of there being market power in Australia, whether for new or second-hand machines or that the respondent or any other company had market power in a market in Australia. 21 With respect to the submissions of the respondent they demonstrate a somewhat simplistic view of the material which is before the Court. First, it may be said that the fact that there exists a global market, whether for new or second-hand computers, does not mean that there is no market for such products in Australia. It may well be the case that the market both for new and second-hand mainframe computers in Australia is small. However, the inference is quite strong from the material before me that IBM made sales of new mainframe computers in Australia and that it was the only company so to do. Further it can be inferred that 75% of those sales were to the respondent who then leased the computers to third parties. Also it can be inferred that at the end of the leases, and except where the lessees may have had an option to purchase, the respondent would sell second-hand computers in Australia and that it might thus have a substantial degree of power in a second-hand market for mainframe computers in Australia. In any case it is not clear to me as a matter of law, merely because the Act is concerned with market power in a market in Australia (or New Zealand), that there could not be a breach of s 46. A global market which includes Australia (and the inference is that any global market did) is arguably a market in Australia if sales are made here (and the evidence shows they are) even if that market might also exist in the United States, Japan, China or any country which was a member of the European Union. 22 The fact that the affidavit material suggests there could be a breach of ss 46 and 47 of the Act is reinforced by virtue of the fact that there is some evidence that the respondent would sell on a number of occasions only on terms which had the result (and it may be inferred the purpose) of securing that second-hand mainframe computers could not be sold in Australia. That both suggests a market in Australia and conduct which might well contravene either s 46 or 47 of the Act. 23 I reject the submission, therefore, that because of the way the affidavit is framed it must be inferred that there was no market in Australia either for new or second-hand mainframe computers. I think an inference to the contrary is open from the evidence adduced. In my view the affidavit further leads me to the conclusion that there is reasonable cause to believe that the respondent, IBM or a subsidiary of IBM breached s 46 of the Act by exercising a substantial degree of market power in a market in Australia (whether for new or second-hand mainframe computers) in a way which would offend s 46. Likewise I think there is on the material reasonable cause to believe that the respondent, IBM or an IBM subsidiary engaged in the practice of exclusive dealing which had the effect and probably also was entered into for a purpose of substantially lessening competition in a market in Australia. 24 It is conceded by the respondent that if I am of the view that there is evidence of a market in Australia or if it can be inferred that there is cause to believe there is a market in Australia then the application should be allowed. 25 As I was of that view I announced that I would make orders in the terms agreed and that I would give reasons for so doing today. These are those reasons. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill.

Associate: Dated: 20 December 2002 Counsel for the Applicant: N Cotman

Solicitor for the Respondent: Blake Dawson Waldron