SECTION 92 AND THE REGULATION OF E-COMMERCE: A CASENOTE ON BETFAIR PTY LTD V WESTERN AUSTRALIA

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1 SECTION 92 AND THE REGULATION OF E-COMMERCE: A CASENOTE ON BETFAIR PTY LTD V WESTERN AUSTRALIA Eli Ball* INTRODUCTION The internet is a new and ubiquitous tool for conducting business. In the age of e- commerce, distance and physical borders mean very little. The Constitution, however, was drafted at a time when trade and commerce was characterised by important geographical considerations, the most significant being the geo-political boundaries between the several colonies that became the States. The internet has all but destroyed whatever remnants of that age might have survived the previous 100 years. This tension between recent technological advancement and long established constitutional jurisprudence confronted the High Court in Betfair Pty Ltd v Western Australia. 1 Betfair is one of a long line of cases dealing with the freedom of interstate trade and commerce enshrined in s 92 of the Constitution, the most litigated section of Australia's highest document of government. But it is also truly unique: Betfair is the first time that the freedom of interstate trade and commerce has been considered in an e-commerce context. Presented with this opportunity, the High Court has elaborated upon the approach to s 92 set down nearly 20 years ago in Cole v Whitfield. 2 The outcome has significant consequences for both State and Commonwealth internet regulators. Betfair strongly suggests that e-commerce in Australia will be difficult to control at a State level in the future. States are precluded from regulating (or prohibiting) internet based activities if similar activities (whether they be physically or electronically based) are provided with a competitive advantage. Regulation will survive constitutional scrutiny if that competitive advantage is an unavoidable effect of an otherwise legitimate objective that is reasonably proportionate. 3 But even this threshold, Betfair suggests, will become increasingly difficult to satisfy during the internet age. * B Com (Accg), LLB (Hons 1) (Macq). The author would like to thank Robynne Croft and Sebastian Hartford-Davis for their input in preparing this piece for publication. All errors are, of course, the author's alone. 1 Betfair Pty Ltd v Western Australia (2008) 244 ALR 32 ('Betfair'). 2 (1998) 165 CLR See generally Castlemaine Tooheys Ltd v South Australia (1990) 169 CLR 436.

2 266 Federal Law Review Volume 36 THE FACTS Betfair Pty Ltd ('Betfair') is the Australian arm of a well-known online betting agency that was originally based in London. The service Betfair provides is unlike anything previously available to punters in Australia from the traditional TAB or racetrack bookmaker. The key difference is that Betfair operates an online 'betting exchange'. Punters do not place bets with Betfair. Instead, Betfair acts as an online intermediary through which punters can place bets with other punters. Another distinct feature of Betfair's operation is the ability of punters to bet against a team, horse or other competitor. This feature in particular has attracted heavy criticism from both racing and government bodies. It has been argued that the ability to 'bet on the loser' provides all too great a temptation for those with the ability to influence the outcome of a sporting event (such as trainers, jockeys or those associating with them). 4 This, it has been said, represents an unacceptable threat to the continued health and integrity of Australian sport. 5 There is a further threat posed by Betfair to the status quo of Australian sport. This threat comes in the form of competition to traditional wagering operators such as the TAB and local racetrack bookmakers. A report in 2003 to the Australasian Racing Ministers' Conference received special attention from the High Court on this very point. Among other things, the report concluded that 'betting exchanges on Australian racing would pose a serious threat to current betting turnover levels of the three categories of licensed wagering operator in Australia TABs, traditional bookmakers and corporate bookmakers.' 6 Despite these concerns Betfair was able to operate Australia-wide, taking bets from all States on sporting events in all States, until 29 January The company was (and continues to be) licensed in Tasmania to operate a betting exchange under the Gaming Control Act 1993 (Tas). Such a licence is subject to several conditions and restrictions. These include a prohibition on wagering on illegal activities, the requirement that betting exchanges maintain the capacity to freeze player funds where inappropriate activity is suspected, and the prohibition of wagering on any event which the Tasmanian Gaming Commission considers inappropriate. After 29 January 2007, however, Betfair was no longer able to operate in Western Australia, nor with respect to Western Australian sporting events. The Racing Legislation Amendment Act 2006 (WA) made it an offence to establish or operate a betting exchange. 7 It also created the offence of betting through a betting exchange. 8 This latter prohibition, when read in conjunction with ss 12 and 13 of the Criminal Code Act Compilation Act 1913 (WA), had the effect of making Betfair liable for aiding, counselling or procuring the offence. This was so even if Betfair itself never acted in Western Australia. 4 See, eg, Western Australia, Parliamentary Debates, Legislative Assembly, 13 September 2006, (Mark McGowan MLA); Katherine Jimenez, 'Tabcorp seeks betting exchange ban', The Australian (Sydney), 29 November 2007, See, eg, Andrew Darby and Orietta Guerrera, 'Betfair gets foot in door in Australia', The Age (Melbourne), 4 November 2005, 2. 6 Report of the Betting Exchange Taskforce Australasian Racing Ministers' Conference Volume 1 (July 2003) 2. 7 Betting Control Act 1954 (WA) s 27B(1). 8 Betting Control Act 1954 (WA) s 24(1aa).

3 2008 Section 92 and the Regulation of E-Commerce 267 These were not the only limitations placed upon Betfair's activities. An essential part of its operations depended on the provision to punters of information about the events they wished to bet on. For horseracing this essential information was contained in the 'race field'. Section 27D(1) of the amended legislation however made it an offence for a person (be they a bookmaker, totalisator or betting exchange operator) to publish or otherwise make available a Western Australian race field in the course of business. This prohibition applied unless the person was granted ministerial approval. 9 Further, because the Minister had to have regard to the policy behind the legislation in granting an approval, and because that policy included the prohibition on betting exchanges, it was virtually impossible for Betfair to gain such approval. Indeed, Betfair was denied approval for this very reason. 10 Betfair was thus left in the awkward position of being unable not only to access the racing industry in Western Australia, but also to take bets on sporting events around Australia from anyone who happened to be in Western Australia at the time of making the bet. Because Betfair, like many businesses today, operated through the internet and telephonic means which transcend physical boundaries, the prospect of a cyber limitation in the peculiar shape of Western Australia was an unsettling and troublesome one. It is against this background that Betfair (with the intervening support of Tasmania) challenged the validity of the Western Australian legislation. Western Australia's defence was joined by the Commonwealth and the States of New South Wales, South Australia, Victoria and Queensland. Betfair's challenge was based on two alternative grounds. First, it argued that both ss 24(1aa) and 27D(1) were invalid in their application to Betfair by virtue of s 92 of the Constitution. 11 Secondly, and with respect to s 27D(1) only, Betfair argued that it was invalid by reason of s 118 of the Constitution and an implied constitutional restraint on the extraterritorial reach of State legislative power. 12 The High Court unanimously accepted Betfair's submissions with respect to s 92, and for this reason it was unnecessary to consider the alternative arguments. 13 The impugned Western Australian law was held to impose a discriminatory burden of a protectionist kind that was neither proportionate nor appropriate and adapted to a legitimate object and purpose. For this reason it violated s 92 of the Constitution and was invalid. 14 The decision came in two separate judgments. The main judgment was delivered by Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ. Justice Heydon gave a short, separate concurring judgment. In reaching the conclusion that it did, the High Court reiterated the approach to s 92 that has emerged since Cole v Whitfield. However, with what will no doubt attract a collective sigh from students and enthusiasts of constitutional law alike, the Court added the rider that Cole v Whitfield should not be viewed as 'a complete break with all that had been said in this Court respecting the 9 Betting Control Act 1954 (WA) s 27D(1)(a)-(b). 10 Western Australia Minister for Racing and Gaming Ljiljanna Ravlich, 'Betfair application to publish WA race fields not in the public interest' (Press Release, 11 October 2007). 11 Betfair (2008) 244 ALR 32, 55 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ). 12 Ibid. 13 Ibid 56 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ), 65, 68 (Heydon J). 14 Ibid (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ).

4 268 Federal Law Review Volume 36 place of s 92 in the scheme of the Constitution' prior to The Court noted that Chapter IV of the Constitution implemented a broad scheme of 'political economy' and that Cole v Whitfield directed the focus of deciding a case based on s 92 to achieving that scheme as it was understood at the time the Constitution was framed. 16 The challenge for the Court, however, was how to apply this late nineteenth century concept of political economy to a case involving early twenty-first century modes of e-commerce and the internet. THE PRESENT APPROACH TO SECTION 92 Section 92 has been described by the High Court as the greatest source of judicial concern and effort emanating from within the Constitution. 17 It appears under Chapter IV 'Finance and Trade' and states, in relevant part that '[o]n the imposition of uniform duties of customs, trade, commerce, and intercourse among the States, whether by means of internal carriage or ocean navigation, shall be absolutely free.' The section is grammatically awkward on its face. One may even go so far as to describe it as clumsy or ugly. The beginning phrase 'on the imposition of uniform duties of customs' is a reference to s 88 of the Constitution, which states that '[u]niform duties of customs shall be imposed within two years after the establishment of the Commonwealth.' Section 92 mandates that once the uniform duties of customs described in s 88 are imposed (a prerequisite long ago satisfied) then trade, commerce and intercourse among the States (whether by land or by sea) shall be absolutely free. Understanding the grammatical nuances of s 92 is, however, regrettably only the first and relatively easy step in appreciating its meaning and scope. For the better part of nearly 90 years controversy abounded as the High Court and Privy Council grappled with the task of interpreting exactly what was meant by the phrase 'trade, commerce, and intercourse among the States... shall be absolutely free.' A plethora of meanings have been cast upon s 92 since 1901, ranging from a free trade view of the section in the early days of the Federation to a laissez-faire endorsement by the mid to late twentieth century. 18 As Professors Tony Blackshield and George Williams describe, this ideological tension was matched by a division between some of Australia's greatest jurists. 19 Fortunately, much of what was said about s 92 prior to 1988 was reduced to little more than nostalgia, following the unanimous decision of the Mason Court in Cole v Whitfield. In an effort to resolve once and for all the issue of interstate trade and commercial freedom, the Court famously began by holding that it could consider the history of s 92's insertion into the Constitution, including that contained in the Convention Debates: 15 Betfair (2008) 244 ALR 32, 37 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ). 16 Ibid 39. (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and KeifelKiefel JJ). 17 Cole v Whitfield (1988) 165 CLR 360, (The Court). 18 See, eg, Fox v Robbins (1909) 8 CLR 115. Cf Commonwealth v Bank of New South Wales (1949) 79 CLR Tony Blackshield and George Williams, Australian Constitutional Law and Theory (3 rd ed, 2002) Professors Blackshield and Williams suggest that a convenient way to appreciate the caselaw prior to Cole v Whitfield is by reference to 'three dominant individuals': Sir Isaac Isaacs, Sir Owen Dixon and Sir Garfield Barwick.

5 2008 Section 92 and the Regulation of E-Commerce 269 Reference to the history of s.92 may be made, not for the purpose of substituting for the meaning of the words used the scope and effect if such could be established which the founding fathers subjectively intended the section to have, but for the purpose of identifying the contemporary meaning of language used, the subject to which that language was directed and the nature and objectives of the movement towards Federation from which the compact of the Constitution finally emerged. 20 After an extensive review of this history, the Court stated that '[s]ection 92 precluded the imposition of protectionist burdens: not only interstate border customs duties but also burdens, whether fiscal or non-fiscal, which discriminated against interstate trade and commerce.' 21 It explained that this test would invalidate a law whose formal or substantial effect was to subject interstate trade and commerce to disability or disadvantage. 22 As to this concept of 'protectionism', the Court explained that the object or purpose of the impugned law would be relevant: In the case of a State law, the resolution of the case must start with a consideration of the nature of the law impugned. If it applies to all trade and commerce, interstate and intrastate alike, it is less likely to be protectionist than if there is discrimination appearing on the face of the law. But where the law in effect, if not in form, discriminates in favour of intrastate trade, it will nevertheless offend against s.92 if the discrimination is of a protectionist character. A law which has as its real object the prescription of a standard for a product or a service or a norm of commercial conduct will not ordinarily be grounded in protectionism and will not be prohibited by s.92. But if a law, which may be otherwise justified by reference to an object which is not protectionist, discriminates against interstate trade or commerce in pursuit of that object in a way or to an extent which warrants characterization of the law as protectionist, a court will be justified in concluding that it nonetheless offends s This new approach swept away what had previously been one of the central theses of s 92 characterisation, namely that the freedom of interstate trade and commerce to which it referred amounted to a conferral of 'individual rights'. 24 Instead, the High Court shifted attention to the historical purposes and goals of federation, and economic unity among the States. Ultimately, what matters since Cole v Whitfield is whether the law in question has the effect of protecting intrastate trade and commerce by giving it a 'competitive or market advantage' over interstate trade and commerce. 25 If the answer to this question is 'yes' then the law is invalid by reason of s 92 unless, as the Court explained in the later case of Castlemaine Tooheys, that advantage can be justified as the unintended consequence of regulation which is 'necessary or appropriate and adapted' to a legitimate purpose unrelated to interstate trade and commerce Cole v Whitfield (1988) 165 CLR 360, 385 (The Court). 21 Ibid Ibid Ibid See, eg, Commonwealth v Bank of New South Wales (1949) 79 CLR 497, 635 (Lord Porter); McCarter v Brodie (1950) 80 CLR 432, 465 (Dixon J); North Eastern Dairy Co Ltd v Dairy Industry Authority of NSW (1975) 134 CLR 559, 582 (Barwick CJ). 25 Cole v Whitfield (1988) 165 CLR 360, 409 (The Court). 26 Castlemaine Tooheys (1990) 169 CLR 436, 472 (Mason CJ, Brennan, Deane, Dawson and Toohey JJ).

6 270 Federal Law Review Volume 36 THE APPROACH TAKEN IN BETFAIR All of the parties in Betfair, including the interveners, accepted that the source of present doctrine respecting s 92 was Cole v Whitfield and the handful of High Court authorities subsequent to it. 27 Given that acceptance, the joint judgment developed that doctrine further by elaborating upon what was said previously in Cole v Whitfield and Castlemaine Tooheys. The significance of national unity Cole v Whitfield established that the history of s 92 prior to federation in 1901 could be relevant for 'the purpose of identifying the contemporary meaning of language used' in the section. 28 That language is 'trade, commerce, and intercourse among the States, whether by means of internal carriage or ocean navigation, shall be absolutely free.' The search for meaning undertaken by the joint judgment in Betfair was not strictly limited to these words. Following what was said in Ha v New South Wales, 29 the Court referred to the 'plan of the Constitution for the creation of a new federal nation' and the implementation of a political economy. 30 Neither of these concepts exists in the strict text, or for that matter in the structure of the Constitution. 31 Their significance derives from their place in the history of s 92 as instructed by Cole v Whitfield. The task undertaken by the joint judgment in Betfair was to explain the meaning of these concepts as they feature within that history. The joint judgment relied upon two key historical sources for this purpose. First, it considered the work of economic and political historians focusing on the mid to late nineteenth century and the fiscal policies of the British colonies. Secondly, it drew assistance from United States caselaw decided during this period on the basis that this jurisprudence had been a source of assistance in drafting, framing and inserting s 92 into the Constitution. The result of this analysis is a view of s 92 aligned with Cole v Whitfield and subsequent cases, promoting national unity in the regulation of trade and commerce among the States. That this is so is evident from the words of Cardozo J who, though speaking of the United States' Constitution, was cited with a degree of approval in the joint reasons: The Constitution was framed under the dominion of a political philosophy less parochial in range. It was framed upon the theory that the peoples of the several States must sink or swim together, and that in the long run prosperity and salvation are in union and not division. 32 Also cited with special emphasis in the joint reasons was another US decision, this time by Harlan J in Guy v Baltimore: [I]t must be regarded as settled that no State can, consistently with the Federal Constitution, impose upon the products of other States, brought therein for sale or use, or upon citizens because engaged in the sale therein, or the transportation thereto, of the 27 Betfair (2008) 244 ALR 32, 37 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ). 28 Cole v Whitfield (1988) 165 CLR 360, 385 (The Court). 29 (1997) 198 CLR Betfair (2008) 244 ALR 32, 38, 41 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ) (emphasis added). 31 See generally McGinty v Western Australia (1996) 186 CLR Baldwin v G A F Seelig, Inc, 294 US 511, 523 (1935) (emphasis added). Cited in Betfair (2008) 244 ALR 32, 44 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ).

7 2008 Section 92 and the Regulation of E-Commerce 271 products of other States, more onerous public burdens or taxes than it imposes upon the like products of its own territory. 33 Earlier in its reasons, the joint judgment had indicated that the emergence of a 'National Competition Policy' was a significant development to consider as part of the legal and economic background to s 92's application. This, together with Harlan J's reference to 'like products', called for a consideration of whether Betfair's outlawed betting exchange activities were in fact in competition with the traditional forms of gambling that were uninhibited by the Western Australian legislation. The Court held that they were and that the impugned law had the effect of restricting competition within that national market. 34 Because Betfair and the traditional gambling operators existed within the same market, outlawing of Betfair's activities within that State and denying it access to the vital race fields was characterised as an attempt to shield those traditional service providers from interstate competition. 35 The situation appears to have been aptly described by Kirby J during the hearing of the case in 2007 as an attempt 'to sort of hive off the little fortress, Western Australia'. 36 Employing the language of supply and demand, the joint judgment accepted Betfair's arguments that: [The] legislation of Western Australia impermissibly precludes, with respect to internet transactions having a geographical connection with that State, that increase in competition, on the supply side, within the national market for betting services which would be provided, on the demand side, by the presence within Western Australia at any one time of such persons as Mr Erceg... [The] legislation also applies to deny to the outof-state operator in the position of Betfair access for the purposes of its Australia-wide operations to information respecting race fields which is generated by racing operators in Western Australia, whilst in-state wagering operators do not suffer that disadvantage. 37 A further point should be made concerning the significance of national unity following the decision in Betfair. This relates to whether s 92 can render invalid a State law which nevertheless applies equally to interstate and intrastate trade and commerce. The answer to this question has been 'yes' since the Privy Council's decision in James v Commonwealth, 38 and continues to be so following Betfair. 39 However, with Betfair the High Court appears to have avoided an analysis based upon a simple dichotomy. What matters in each case is whether the effect upon the identified national market for goods and services is the diminution of interstate competition. 40 The fact that a law applies equally to interstate and intrastate trade and commerce will be 33 Guy v Baltimore, 100 US 434, 439 (1879). Cited in Betfair (2008) 244 ALR 32, 46 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ). 34 Betfair (2008) 244 ALR 32, 62 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ), 64 (Heydon J). 35 Ibid 62, 63 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ), 64, 67 (Heydon J). 36 Transcript of Proceedings, Betfair Pty Ltd & Anor v State of Western Australia (High Court of Australia, Kirby J, 9 November 2007). 37 Betfair (2008) 244 ALR 32, 37 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ). 38 (1936) 55 CLR 1, 56 (Lord Wright MR). 39 Betfair (2008) 244 ALR 32, 41 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ). The joint judgment also cited at 48 the opinion of Harlan J to the same effect in Minnesota v Barber 136 US 313 (1890). 40 Betfair (2008) 244 ALR 32, 37 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ).

8 272 Federal Law Review Volume 36 irrelevant if the range of activities prohibited by the State law is narrower than the Court-identified national market for s 92 purposes. 41 State governments must therefore 'cast the net' of prohibition as wide as the national market for goods and services in order to ensure that s 92 is not infringed. In this case, although Western Australia prohibited betting exchanges irrespective of their State of origin, the High Court's characterisation of the national market as including both betting exchanges and traditional modes of gambling meant that the prohibition on betting exchanges alone could not survive s 92. For the State legislation to have survived it would have had to prohibit all forms of gambling because that was the relevant national market. The test of proportionality In Castlemaine Tooheys the High Court set out the circumstances in which a law that had the practical effect of imposing a 'discriminatory burden of the protectionist kind' might nevertheless avoid the invalidating effect of s 92. The test set out three limbs to be satisfied: firstly, the law must have a legitimate non-protectionist purpose; secondly, the legislation must be necessary or 'appropriate and adapted' to achieving that purpose; and thirdly, the protectionist effect of the law must be merely incidental and proportional to that purpose. The joint judgment in Betfair noted that despite the presentation of arguments by the plaintiff and Tasmania doubting the satisfaction of the first limb of the test, the case could be resolved through application of the second. 42 To this end, it stated that the correct doctrine to apply was one based on proportionality and the concept of 'reasonable necessity'. 43 The joint judgment accepted the view of Mason J in North Eastern Dairy Co Ltd v Dairy Industry of NSW to the effect that a discriminatory law must be necessary for the advancement of a legitimate purpose if it is to be considered a reasonable, and therefore permissible, regulation of interstate trade and commerce. 44 The joint judgment framed the issue in Betfair as whether the alleged purposes of the impugned sections of the Betting Control Act provided an 'acceptable explanation or justification' for the differential treatment of Western Australian and interstate gambling services. The Court focused on the two justifications advanced by Western Australia for the prohibition of betting exchanges and the denial of access to the race fields. First, it was argued that betting exchanges made no contribution to the racing industry in Australia an industry vital, it alleged, for employment and enjoyment across the State. The joint judges quickly dismissed this as an unacceptable justification for the discriminatory effect of the legislation. In doing so they drew support from the fact 41 To use the words of Heydon J, the trading activity prohibited and the trading activity protected need not be identical if they can be described as part of the same overall trading activity, that is, part of the same national market: ibid Ibid 61 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ). 43 Ibid 59 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ). Citing Thomas v Mowbray (2007) 81 ALJR 1414, (Gleeson CJ). 44 (1975) 134 CLR 559, 608. Cited in Betfair (2008) 244 ALR 32, 59 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ). This is further evidence of the proposition advanced by the Court that Cole v Whitfield did not completely sever the continuity of s 92 jurisprudence.

9 2008 Section 92 and the Regulation of E-Commerce 273 that Betfair had undertaken, with other States' regulators, to return a certain amount of money to the industry as part of its ongoing operations. This method of referring to other States' legislative responses to Betfair also featured prominently in the rejection of the second justification advanced by Western Australia, namely that the amendments to the Betting Control Act were necessary to safeguard the integrity of the racing industry. The joint judgment expressed doubt as to the existence of such a threat, but reasoned that even if it did exist, the regulatory regime in Tasmania had demonstrated what was one possible 'appropriate and adapted' response to it: What is involved here is an attempt at an evidentiary level to measure something of an imponderable. But, allowing for the presence to some degree of a threat of this nature, a method of countering it, which is an alternative to that offered by prohibition of betting exchanges, must be effective but non-discriminatory regulation. That was the legislative choice taken by Tasmania and it cannot be said that that taken by Western Australia is necessary for the protection of the integrity of the racing industry of that State. In other words, the prohibitory State law is not proportionate; it is not appropriate and adapted to the propounded legislative object. 45 Justice Heydon, on the other hand, in his separate concurring judgment resolved the case by reference to the first limb of the test set out in Castlemaine Tooheys. That is, he rejected Western Australia's contention that the prohibition of betting exchanges and denial of access to the race field had a legitimate non-protectionist purpose. Referring to the prohibition on betting exchanges, he agreed with the joint judgment that the prohibition was not proportionate. However, this he reasoned was evidence of the fact that preserving the integrity of the racing industry was not the purpose sought to be advanced by the legislation. 46 SECTION 92, THE INTERNET AND LEGISLATIVE RESPONSES TO E- COMMERCE Betfair is the first time that internet technology has featured as an issue within constitutional litigation. It would be a mistake, however, to assume that constitutional jurisprudence was unprepared for this inevitability. The necessity of a flexible and timeless approach to the interpretation of the Constitution has long been appreciated by those charged with carrying out that task. This made them readily capable of absorbing the internet and new technologies within the established framework of constitutional assessment. In the early days of the High Court, it was O'Connor J who famously said: '[I]t must always be remembered that we are interpreting a Constitution broad and general in its terms, intended to apply to the varying conditions which the development of our community must involve.' 47 Betfair was not the first time that new forms of trade and commerce had been the subject of s 92 considerations and it almost certainly will not be the last, 48 a fact which 45 Betfair (2008) 244 ALR 32, 61 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ). 46 Ibid 64 (Heydon J). 47 Jumbunna Coal Mine, No Liability v Victorian Coal Miners' Association (1908) 6 CLR 309, (O'Connor J). See also, in the context of s 92, Samuels v Readers' Digest Association Pty Ltd (1969) 120 CLR 1, 14 (Barwick CJ); North Eastern Dairy Co Ltd v Dairy Industry Authority of NSW (1975) 134 CLR 559, 615 (Mason J). 48 See, eg, Australian National Airways Pty Ltd v Commonwealth (1945) 71 CLR 29, (Dixon J); Commonwealth v Bank of New South Wales (1949) 79 CLR 497, 632 (Lord Porter).

10 274 Federal Law Review Volume 36 does not appear to have been lost on the High Court. Presented with this opportunity, the High Court set about the task of adapting s 92 to what US Court of Appeals Judge and noted economist Richard Posner has described as the 'new economy' where trade and commerce are characterised by internet-based businesses and borderless communication services. 49 Even the recent analyses of s 92 expounded in Cole v Whitfield and Castlemaine Tooheys, the joint judgment explained, could not avoid certain practical and conceptual difficulties in this new context. On the vice of protecting intrastate trade from interstate competition in the age of the internet, the joint judgment noted that: Cole v Whitfield established that, at least in its application to trade and commerce among the States, the object of s 92 is the elimination of protection. The term 'protection' is concerned with the preclusion of competition, an activity which occurs in a market for goods or services. To focus upon the geographic dimension given by State boundaries, when considering competition in a market in internet commerce, presents practical and conceptual difficulties. 50 Later, as it considered Western Australia's claim of proportionality, the joint judgment hinted that the internet might yield an inevitable contraction in the range of discriminatory regulation otherwise permissible under s 92. Referring to what was described in Castlemaine Tooheys as the 'fundamental consideration' of a State to enact laws for the wellbeing of its people; 51 it noted that 'a condition of localised well-being will not encompass much modern State regulatory legislation in the new economy.' 52 With regard to proportionality, the joint judgment seems to suggest that as the reach of trade and commerce transcends geographical boundaries with the aid of the internet, so too does the reach and practical effect of State regulation, thus making it harder for State laws to keep under the threshold of proportionality. Taking the facts of Betfair as an example, the internet enabled operators like Betfair located outside Western Australia to access customers located inside Western Australia in the national market for gambling services. The corollary of this access was that that State's prohibition on betting exchanges was felt across State borders and therefore on interstate traders like Betfair. The geographical reach of State regulation is doubtless one important factor to consider in assessing whether it is reasonably proportionate: the more wide-ranging the impact of an impugned law, the less likely it is to be found necessary for the protection of a legitimate State-related interest. The effect of the internet therefore is twofold: first, State-centred regulation is broad in effect, and therefore; secondly, the proportionality of that regulation seems less likely. One also needs to consider the effect of the internet on market definition for s 92 purposes. Market definition was arguably always an inherent part of any approach to s 92 based upon protectionism and competition. This is because the very concept of competition has, at its heart, the existence of a market in which competition may occur. In Betfair, market analysis assumed a new prominence in the Court's reasoning process. As stated above, what matters in a s 92 case is whether the effect of State 49 See generally Richard A Posner, Antitrust in the New Economy (2001) 68 Antitrust Law Journal Betfair (2008) 244 ALR 32, 38 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ). 51 Castlemaine Tooheys (1990) 169 CLR 436, 472 (Mason CJ, Brennan, Deane, Dawson and Toohey JJ). 52 Betfair (2008) 244 ALR 32, 57 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ).

11 2008 Section 92 and the Regulation of E-Commerce 275 legislation on an identifiable national market for goods and services is the diminution of interstate competition. As Betfair makes clear, how one defines and measures the ambit of the particular market is critical. The market must be defined before the existence of interstate competition within it can be determined. Only then can one go about the further task of assessing whether the impugned law has the effect of lessening such interstate competition. Justice Dawson explained, albeit in the context of the Trade Practices Act 1974 (Cth), that the test for defining the market and its scope involves a consideration of what is known as 'the cross elasticities of both supply and demand, that is to say, the extent to which the supply of or demand for a product responds to a change in the price of another product.' 53 In a later case, McHugh J noted that factors relevant to the assessment of cross elasticity and, therefore, the definition and scope of a market included inter alia 'the physical and technical characteristics of the product', 'the views and past behaviours of consumers regarding the potential for substitution between products' and '[t]he cost to consumers... of switching from one product to another.' 54 The suitability of this analysis to s 92 cases was acknowledged by the joint judgment in Betfair. 55 The potential influence of the internet on the factors featured within that analysis, and therefore the overall market definition, should be obvious. In many cases the availability of goods and services online, where costs are cheaper and the agony of distance less, will mean a greater substitutability of products and increased cross elasticity of demand. The inevitable result is a larger market both in terms of products available and the spread of geographical area. This larger market means State legislators face a greater threat from s 92 that their regulation of trade and commerce will be struck down as disadvantaging interstate competition. The type of product at issue in Betfair provides a good example. Prior to the advent of mass means of instantaneous communication services, such as the internet, it is more than likely that there existed separate discrete markets for gambling on horseraces in and across the several Australian States. It would have been difficult (though not necessarily impossible) for a punter in Tasmania to place a bet on a horserace in Western Australia. There would have been low cross elasticity of demand and supply. If Western Australia had sought to outlaw betting exchanges during such a time then it seems more than likely that the legislation would not have been held invalid under s 92. This is because a Tasmanian and Western Australian betting exchange would not have existed in the same market. There would have been no effect on interstate competition because there would have been no interstate competition in the first place. However, Betfair was decided in the age of the mass digital communication, where a punter in Tasmania could easily place a bet on a Western Australian horserace. The ease of navigating the internet means there is little difference to that punter between placing a bet through a betting exchange like Betfair or through a traditional gambling service provider like the TAB. The market is larger in size and in scope, so when 53 Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177, 199 (Dawson J). See also Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374, (McHugh J). 54 Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374, 456 (McHugh J). 55 Betfair (2008) 244 ALR 32, 36 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ).

12 276 Federal Law Review Volume 36 Western Australia decides to outlaw betting exchanges the effect of that move is to disadvantage the interstate trader, Betfair. Section 92 will not allow this. Above all, despite the omnipresence of the internet and its influence upon important factors such as market definition, the High Court has maintained the approach to s 92 set out in Cole v Whitfield. This is evident from the penultimate paragraph of s 92 discussion in the joint reasons. Despite the significant role of technology on the facts of the case, Western Australia's actions could be described in technologically neutral language: The effect of the legislation of Western Australia is to restrict what otherwise is the operation of competition in the stated national market by means dependent upon the geographical reach of its legislative power within and beyond the State borders. This engages s 92 of the Constitution. 56 CONCLUSION The internet is an effective means of conducting business, trade and commerce over vast distances, across physical boundaries and with minimal cost. The barriers to entry for e-commerce markets are significantly lower than their traditional real-world counterparts. The result is that in this 'new economy' markets are larger in both physical size and product make-up. In the context of the several Australian States, as elsewhere, the growth of e-commerce presents a threat to traditional localised market participants including those who have had the benefit of near monopolistic local market conditions. As that threat heightens, State governments may be inclined to pass legislation in an attempt to safeguard the prevailing economic conditions of what they may have traditionally considered to be local State markets. So it was in the case of Betfair. But the underlying assumption behind such a move, namely that its effect is localised within the confines of a small local market, is wrong. The internet has brought growth to local markets and with it, interstate competition. That engages s 92 of the Constitution. State legislatures may therefore be powerless in many cases to prevent the inevitability of e-commerce. Beyond predicting what the High Court will consider a legitimate object and purpose met with an 'appropriate and adapted response', the most obvious means of avoiding s 92 when regulating e-commerce seems, at first thought, to be the adoption of uniform legislation. Under a uniform scheme, the potential for irregularities and advantages in competition between intrastate and interstate market participants would be significantly reduced: traders in one State would be subject to the same burden as traders from other States operating across the border. However, following Betfair, there would appear to be two problems with such an approach: one constitutional and one practical. First, as to the constitutionality of such a scheme, a uniform approach to internet regulation alone ignores the fact that in many cases the relevant market will consist, as it did in Betfair, of both traditional participants and their internet-based counterparts. Denying suppliers from one State access to demanders in another through the internet is just as impermissible as denying them access to physical roads into that other State. Regulation must be uniform not only across the internet but also 56 Ibid 62 (Gleeson CJ, Gummow, Kirby, Hayne, Crennan and Kiefel JJ).

13 2008 Section 92 and the Regulation of E-Commerce 277 as between internet and non-internet commerce. These concerns apply whether the source of regulation is State or Commonwealth legislators. 57 Second, the practicality of maintaining a uniform legislative regime seems unlikely. A scheme based on State cooperation seems highly volatile. All that might be necessary for the scheme to collapse would be the refusal by one State to adhere to what it perceived to be unduly harsh restrictions. E-commerce providers would then flock to base themselves within that State and subsequently challenge the validity of those other States' more oppressive regulatory regimes. As Betfair illustrates, the least restrictive form of regulation is most likely to survive. It is often said that the practical success of attempts to regulate the internet depends upon the willingness of legislators to work together in achieving uniformity across physical boundaries. 58 That this is true in the case of e-commerce cannot be doubted. Betfair demonstrates, however, that it is not merely a matter of developing convenience, ease and expediency. It is also, at least in the Australian context, a constitutional imperative. The regulation of trade and commerce, whether physical or electronic, must not give the market participants of one State a competitive advantage over the market participants of another. In the 'new economy', however, the potential for such imbalance may prove to be too great. 57 See generally Cole v Whitfield (1988) 165 CLR 360, , (The Court). 58 See, eg, Joel R Reidenberg, 'Resolving Conflicting International Data Privacy Rules in Cyberspace' (2000) 52 Stanford Law Review 1315; Organisation for Economic Co-operation and Development, Dismantling the Barriers to Global Electronic Commerce, OECD Doc DSTI/ICCP(98) (1998).