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Davies, Chris --- "Seven Network Ltd v News Ltd: the Interlocutory Stage" [2006] JCULawRw 12; (2006) 13 James Cook University Law Review 260


CASE NOTE
SEVEN NETWORK LTD V NEWS LTD:
THE INTERLOCUTORY STAGE

DR CHRIS DAVIES*

I. INTRODUCTION

Recent litigation involving the Seven Network, News Ltd and just about every other major media outlet in Australia, arose from a claim by the Seven Network that there was breach of Part IV of the Trade Practices Act 1974 (Cth) (TPA) concerning television rights for the AFL and NRL, and that this had led to the demise of its pay television network, C7. This case has already proven to be long and expensive, with legal costs estimated at $200 million, a figure likely to increase, if an appeal is lodged against the trial judge’s decision. The case has also required numerous interlocutory judgments in relation to matters of practice and procedure, legal professional privilege and expert evidence.

This case note will examine the interlocutory judgments relating to expert evidence and analyses what guidance they give for the presentation of expert evidence in relation to the media industry, and to expert evidence in general under the relevant sections of the Evidence Act 1995 (Cth). It also relates the findings to the common law position regarding expert evidence which applies in jurisdictions like Queensland where the relevant statute, the Evidence Act 1977 (Qld), does not cover the presentation of expert evidence.[1] It will also consider the question of what amounts to taxpayer subsides for cases involving major corporations that can claim large legal fees as tax deductions.

II. THE GENERAL PRINCIPLES OF EXPERT EVIDENCE

Section 76 of the Evidence Act 1995 (Cth) states that witnesses cannot give evidence based on their opinion. Section 79 is an exception to this rule and allows evidence based on a person’s specialised knowledge obtained from training, study or experience, that is, the evidence of an expert, will be admissible. This requirement is the same as in the common law as experts are an exception to the common law rule against opinion evidence. Opinion evidence can only be given by an expert who is so defined based on his or her qualifications or experience. In Clark v Ryan,[2] for instance, Dixon CJ noted that the expert evidence proffered in that case was outside the range of opinion evidence by experts, and one particular expert witness was not qualified by practical experience to give the expert evidence relevant to that case. Academic qualifications can be an important indication of someone’s relevant expertise, as shown in R v Bebic[3] where a person with a PhD in history was able to give expert evidence in regard to an aspect of European history. Under the common law the relevant expertise can also come from experience, as it can under s 79 of the Evidence Act 1995 (Cth). The common law also requires that it be beyond the common knowledge of the fact finder, and that it be within an area that is accepted as an area of expertise, though s 80 of the Evidence Act 1995 (Cth) eliminates the common knowledge rule. In Seven Network v News Ltd (No14)[4] and (No15),[5] the question was whether the person giving the evidence had sufficient specialised knowledge to give such evidence.

III. SEVEN NETWORK V NEWS LTD

As part of its case, the Seven Network unsuccessfully sought to tender an expert report prepared by Roy Salter, a Principal of the Salter Group, who was based in Los Angeles. The Group was described as an independent financial firm that offered economic, investment banking support, corporate development and other advisory services to the entertainment and media industry.[6] Justice Sackville noted that during 2003 Salter had valued and advised on more than 50 media and entertainment projects with an aggregate value over US $3 billion. The purpose of the report was to value the Seven Network’s loss in relation to owning either the AFL or NRL rights; to own and operate a pay television station (C7) and ‘to leverage its assets to create a broader multi-platform business model.’[7]

The Salter Report was rejected. His Honour noted that despite relevant work experience in the United States, Canada, France, Germany, Italy and Brazil, Mr. Salter’s experience in Australia was limited, and ‘there was nothing to indicate that Mr Salter has particular knowledge of or substantial experience in the Australian media industry.’[8]

New Ltd’s objections to Salter’s report were that: (1) it did not disclose sufficient reasoning to enable the court to establish that the opinions expressed were based on Salter’s training, study or experience as required by s 76(1) and s 79 of the Evidence Act 1995 (Cth) and (2) that the report did not explain Salter’s claims.[9]

Salter developed an approach to help assess the value of the market premium attributable to synergies and growth opportunities available to integrated media companies (IMC). This approach was known as the Merger & Acquisition Analysis (‘M&A Analysis).[10] Salter’s methodology was to identify the existence and parameters of a premium paid by strategic acquirers of media companies, and then use this to quantify the effect the pursuit of the goal of being an IMC would have had on the value of the Seven Network.[11]

Justice Sackville believed that there ‘were obvious difficulties with the approach taken by Mr Salter.’[12] One was determining the average strategic acquirers’ premium from a number of overseas transactions and then applying it to Seven’s situation in Australia. In his Honour’s opinion there was ‘no systematic attempt to analyse the disparate circumstances of the various transactions, let alone the characteristics of the markets, regulatory regimes and other factors that might have influenced the premium deals that he identifies.’[13] Justice Sackville also stated that ‘it was difficult to understand the basis for selecting a range of between 10 and 20 per cent of the market capitalisation of Seven in 2001 as the appropriate determinant of its losses,’ it was unclear why, for example, a range between five and 25 per cent could not have been used.[14]

A more fundamental problem with the report, in Justice Sackville’s opinion, lay in the argument that, not only was the M&A Analysis the appropriate method to assess the IMC valuation premium in general, but it was also the appropriate method to assess Seven’s losses in 2001 arising from the anti-competitive conduct.[15] Another problem highlighted by Sackville J was that the report did not contain an analysis of the regulatory framework within Australia, or the market conditions in 2001. The report also made ‘no attempt to show that the market, regulatory, or business conditions that obtained in the seven countries, excluding Australia, referred to in Mr Salter’s report, mirrored conditions prevailing in Australia in 2001.’[16] It was his Honour’s opinion that Salter may have simply assumed that the conditions in the pay television industry in Australia were the same as those in countries like the United States. Justice Sackville however stated that there were differences, such as the Australian anti-siphoning regime and the regulations governing pay television in Australia. Sackville J also held that ‘it was also impossible to ascertain whether Mr Salter’s opinion is truly based on specialised knowledge.’[17] Salter’s report was therefore rejected.[18]

Another expert report the Seven Network wished to tender was that of Kevin Kinsella. Mr Kinsella was employed by British Sky Broadcasting from 1989-2000,[19] before holding the position of Senior Vice-President with News Corporation Europe until early 2002.[20] Since 2002, he provided independent strategic, financial and economic advice to various media groups.[21] News Ltd objected to the entire report arguing that Kinsella’s opinion was not founded on specialised knowledge based on his study, training or experience, as required by s 79 of the Evidence Act 1995 (Cth).[22] Much of this report was also excluded.

Sackville J noted that in section 5 of his report, Kinsella explained what he felt drove pay television subscriptions,[23] but despite that section being 45 pages long, only a few references were made to the Australian television industry.[24] Kinsella also examined the amounts paid in Australia for television sports rights, concluding that cricket, the AFL, the NRL and rugby union could potentially all be ‘marquee sports.’[25] However, as Sackville J pointed out, Kinsella concluded that only two sports, the AFL and the NRL, were classified as being marquee pay sport, that is, for the pay television market.[26] The author disagrees with Kinsella’s conclusion, as both cricket and rugby union have extensive pay television contracts that include Australia.

His Honour then stated that Kinsella’s reasoning was not clearly explained, despite the lengthy report,[27] and furthermore, the report did not indicate that he had extensive experience in the Australian television industry. His Honour also believed that Kinsella lacked specialised knowledge about Australia’s pay television industry and the significance of sports rights to Australian pay television retailers.[28] This lack of substantial experience or knowledge of pay television in Australia was considered by Justice Sackville to be ‘not a trivial matter.’[29] His Honour then held that Kinsella did not appear to have the expertise to make a fully informed judgment,[30] and that he did not possess ‘the specialised knowledge required for him to express an opinion of ‘marquee’ sports in Australia and their significance for Australian retail pay television operators.’[31] News Ltd’s objection was therefore upheld with the parts of the report that were the subject of News Ltd’s main objections being rejected (except for Appendix 3). Even in regard to this part of the report, Sackville J questioned whether the opinion expressed there would be relevant or helpful.[32]

Justice Sackville also stated that, like many of the expert reports prepared for the case, Kinsella’s reports were excessively long, the first being 143 pages, the report in reply being 89 pages, and the supplementary report being 73 pages.[33] His Honour further noted that the courts had ‘repeatedly warned about the potential waste of resources involved in the preparation of elaborate expert reports that may turn out to be of little assistance or no assistance in resolving the issues before the court.’[34] As the primary role of the expert witness is to assist the court, this is an important consideration.

In summary, Justice Sackville’s decisions in regard to these expert reports are that under the specialised knowledge requirement of the Evidence Act 1995 (Cth), such knowledge must be specific. In the Seven Network v News Ltd case this requirement meant that the knowledge needed to be specific to the relevant Australian markets, namely Australia’s pay television industry and the television rights paid for sports in Australia, which the experts used by the Seven Network did not possess.

IV. COURT COSTS AND THE TAXPAYER

Even before the original trial judge’s decision was handed down the case raised issues about taxpayers subsidising what many would describe as unnecessary litigation, estimated to cost between $150-200m.[35] First, it should be noted that court costs do not cover all of the costs of running the courts, with the rest being left to the taxpayer. The second consideration is that the legal costs can also be claimed against the tax that companies pay, unlike individuals who can rarely claim legal expenses against their tax.[36] It is estimated that for this case the tax deductions will reach over $70m.[37] Shareholders in the various media companies involved in the litigation will also be affected, with Justice Sackville stating that he was surprised ‘that the directors of media companies had allowed such a deep financial “hole” to be dug.’[38] With the case almost certainly to be appealed these costs to the taxpayer, and the impact on the shareholders, are only likely to increase.

It should also be noted that this issue of corporate tax deductions for legal costs is presently part of an inquiry involving a broader review of civil justice being conducted by the Victorian Law Reform Commission. The concern is that such deductions are causing delays and cost blowouts in Victoria’s courts.[39] It is therefore an issue that extends beyond the Federal Court and Seven Network v News Ltd, and is likely to be one that attracts further scrutiny in the months and years to come.

V. CONCLUSION

Ultimately, the outcome of the litigation between the Seven Network and News Ltd will depend on the application of s 45 of the TPA to the specific facts of the case.[40] The outcome will depend on whether the C7 was driven out ‘by the ruthless, predatory and conspiratorial behaviour of its opponents, or whether it was the victim of normal, everyday competitive nature.’[41] Which ever way the decision goes, it will provide further case material in relation to the application of that section of the TPA in a sports related context, the same section having previously been the subject of litigation in News Ltd v Australian Rugby Football League Ltd,[42] and News Ltd v South Sydney District Rugby League Football Club Ltd.[43]

Regarding the two interlocutory judgments examined in some detail, they illustrate that in regard to the media industry, and specifically the pay television industry, the specialised knowledge of an expert must relate to the relevant market, that is, the Australian market. Knowledge of other markets, no matter how extensive, will not be sufficient, unless it can be shown that the same conditions apply to Australia. More generally, these cases also indicate that the specialised knowledge required under s 79 of the Evidence Act 1995 (Cth) must be specific to what is at issue in a particular case. This will apply equally to jurisdictions like Queensland, where the principles governing the use of expert evidence are still based on the common law. It is a case that is also likely to raise discussion about the fact that major companies can effectively obtain a tax subsidy to carry out this type of litigation, particularly as it is an issue being discussed in relation to jurisdictions other than the Federal Court.


* Senior Lecturer, School of Law, James Cook University.

1 Sections 423-429S of the Uniform Civil Procedure Rules 1999 (Qld) cover expert evidence. However, this is limited to civil cases and procedural matters. What determines whether a person is eligible to give expert evidence is still governed by the common law.

[2] [1960] HCA 42; (1960) 103 CLR 486, 492.

[3] (Unreported, Supreme Court of New South Wales, Maxwell J, 23 September 1980). See Ian Freckelton and Hugh Selby, Expert Evidence: Law, Practice, Procedure and Advocacy (3rd ed, 2005) 35.

[4] [2006] FCA 500.

[5] [2006] FCA 515.

[6] Seven Network Ltd v News Ltd [2006] FCA 500 1.

[7] Ibid 5.

[8] Ibid 2.

[9] Ibid 8.

[10] Ibid 12.

[11] Ibid 13.

[12] Ibid 19.

[13] Ibid.

[14] Ibid 20.

[15] Ibid 21.

[16] Ibid 23.

[17] Ibid 25.

[18] Ibid 34.

[19] Seven Network Ltd v News Ltd (No15) [2006] FCA 515, 7.

[20] Ibid 8.

[21] Ibid 9.

[22] Ibid 6.

[23] Ibid 11.

[24] Ibid 12.

[25] Ibid 16.

[26] Ibid 20.

[27] Ibid 22.

[28] Ibid 23.

[29] Ibid 25.

[30] Ibid 28.

[31] Ibid 31.

[32] Ibid 32.

[33] Ibid 2.

[34] Ibid 3.

[35] Vanda Carson, ‘Taxpayers to have stake in huge costs of C7 case.’ The Australian (Sydney), 8 September 2006, 25.

[36] Vanda Carson, ‘Taxpayers fitted with up in $72, C7 suit,’ The Australian (Sydney), 12 October 2006, 22.

[37] Ibid.

[38] Ibid.

[39] Chris Merritt, ‘Probe into tax deductions for legal fees’, The Australian (Sydney), 8 September 2006.

[40] Section 45 of the TPA prohibits a corporation or any other corporate entity from making an exclusionary provision. An exclusionary provision is then defined in s4D of the TPA as being a provision of a contract, arrangement or understanding which is arrived at between persons, any two or more of whom are competitive with each other, and where the provision has the purpose of preventing, restricting, or limiting the supply of goods or services to, or the acquisition of goods or services from, particular persons or classes of persons.

[41] Mark Day, ‘Hands-off Stokes blurry on details’, The Australian (Sydney), 29 September 2005, 17.

[42] (No1) [1996] FCA 1256; (1996) 135 ALR 33; (No2) (1996) 139 ALR 193.

[43] [2003] HCA 45; (2003) 77 ALJR 1515.


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