Hong Kong Telecommunications (Hkt) Ltd v. Secretary for Commerce and Economic Development and Another

HCAL 448/2018

[2018] HKCFI 1976

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 448 OF 2018

________________________

________________________

________________________

DECISION

________________________

INTRODUCTION

1.By a summons dated 24 April 2018 (“the Summons”), the Applicant applies for:-

(1)   an interim stay of the Respondents’ decision (“the Decision”) contained in a “Joint Statement” dated 19 December 2017, including but not limited to (i) the offer of right of first refusal in the second half of 2018, and (ii) the auction which is expected to take place around the end of 2018 pursuant to the Decision, pending the final determination of this application for judicial review (“the Interim Relief Application”); and

(2)   disclosure of (i) the full unredacted version of what has been referred to as the “Plum Report” prepared by Plum Consulting (“the Consultant”) in September 2016, and (ii) all communications to the Consultant comprising the instructions, terms of reference, facts and/or assumptions of facts upon which the Plum Report is based, subject to a “Confidentiality Ring” to be established in the terms of the draft Confidentiality Order annexed to the Summons (“the Disclosure Application”).

2.In view of the fact that the deadline for acceptance of the said offer of right of first refusal will fall on 10 September 2018, I shall first rule on the Interim Relief Application, and deal with the Disclosure Application separately.

BASIC FACTS

3.The underlying facts of this case are of some considerable complexity.  For the purpose of disposing of the Interim Relief Application, the following brief summary should suffice.

4.The mobile telecommunications market in Hong Kong is highly competitive, with 4 mobile network operators (“MNOs”), namely, HKT (“the Applicant”), China Mobile, Hutchinson Telephone (under the name “3”) and SmarTone Mobile, currently operating in Hong Kong.  As at September 2017, the number of mobile service subscribers in Hong Kong, with a population of some 7.3 million, was 18.25 million, representing one of the highest penetration rates in the world at about 247%.

5.Under Section 32H(1) of the Telecommunications Ordinance, Cap 106 (“the Ordinance”), the Communications Authority (the 2^nd Respondent, “the Authority”) may assign frequencies and bands of frequencies in all parts of the radio spectrum used in Hong Kong.  Under Section 32I(2) of the Ordinance, the Secretary for Commerce and Economic Development (the 1^st Respondent, “the Secretary”) may by regulation prescribe the level of spectrum utilization fee (“the SU Fee”) or the method for determining the SU Fee.

6.Currently, 552 MHz of the radio spectrum (“the Spectrum”) in four different frequency bands, including the “900 MHz band” and “1,800 MHz band”, are assigned to the 4 MNOs for the provision of public mobile telecommunications services in Hong Kong.

7.Of the 198.6 MHz of the Spectrum in the 900 MHz and 1.800 MHz bands, representing some 36% of the total available Spectrum, which have been assigned to the 4 MNOs:-

(1)   the assignments of 49.8 MHz of the Spectrum in the 900 MHz band are due to expire on dates between 19 November 2020 and 11 January 2021; and

(2)   the assignments of 148.8 MHz of the Spectrum in the 1,800 MHz band are due to expire on 29 September 2021.

8.The Decision concerns the arrangements to be made for the said 198.6 MHz together with 1.2 MHz of additional spectrum (currently vacant), making a total of 200 MHz, upon the expiry of the existing assignments.  The Respondents began the consultation process in February 2016 in relation to the said arrangements, and the Decision, in the form of the Joint Statement, was made on 19 December 2017.  It was decided, inter alia, that:-

(1)   an offer (“the Offer”) of a right of refusal (“RFR”) would be made to each of the 4 incumbent MNOs of up to 20 MHz (ie up to a total of 80 MHz) of the Spectrum in the 1,800 MHz band; and

(2)   the balance of the Spectrum, of at least 120 MHz, would be put up for auction (“the Auction”) to be held at the end of 2018, subject to caps on the amount of the Spectrum that could be acquired, to minimum prices that had to be paid, and to other rules.

9.On 19 March 2018, the Applicant made an application for leave to apply for judicial review of the Decision.  The Form 86 raises a total of 13 grounds of challenge to the Decision, which it is not necessary to recite here.  On 23 March 2018, the court granted leave to the Applicant to apply for judicial review of the Decision on consideration of papers alone.  On 24 April 2018, the Applicant issued the present Summons for, inter alia, interim relief.

10.On 16 July 2018, the Authority made the Offer to the Applicant of a right of first refusal for re-assignment for a new term of 15 years starting from 30 September 2021 of 2x10 MHz of the Spectrum (“Relevant FRF Spectrum”), with a deadline for acceptance of the Offer falling on 10 September 2018.  Two other features relating to the Offer should be mentioned here:-

(1)   The Offer expressly provides that, should the Applicant decide to exercise the right of first refusal, the Applicant is required to return its existing licence for incorporation of a new SC 10.4 on phasing out of the second and other generations of mobile services (which is the subject of complaint under Ground 9 in the present application for judicial review).

(2)   The Offer also expressly provides as follows –

“the re-assignment of the Relevant RFR Spectrum upon acceptance of the offer contained in this letter remains conditional upon there being no judicial order or direction, legislation or other legal impediment which would otherwise prevent [the Authority] from re-assigning the Relevant FRF Spectrum to you. In such circumstances, [the Authority] shall return the standby letter of credit to you and it shall have no further liability to you whatsoever resulting from [the Authority’s] inability to effect the re-assignment of the Relevant RFR Spectrum and you agree not to pursue any claims for damages or losses in that regard.”

11.In so far as the Auction and the subsequent assignments of the “Auctioned Spectrum” are concerned, the Authority’s current timetable is as follows:

(1)   September 2018: the Authority will gazette terms and conditions of the Auction and issue an “Information Memorandum” to invite applications for participation in the Auction;

(2)   November 2018: the pre-qualification process of the applicants will be completed and the Authority will give notification to the qualified bidders;

(3)   December 2018/January 2019: the Authority will conduct the Auction and upon completion of the Auction, announce the result;

(4)   End of 2020: the Authority will grant the licences with assignment of the Auctioned Spectrum in the 900 MHz band (to take effect from 12 January 2021) after receiving payment of the relevant SU Fees from the successful bidders; and

(5)   3^rd Quarter of 2021: the Authority will grant the licences with assignment of the Spectrum in the 1,800 MHz band (to take effect from 30 September 2021) after receiving payment of the relevant SU Fees from the incumbent MNOs (for the RFR Spectrum) and the successful bidders (for the Auctioned Spectrum).

12.The substantive judicial review application has been fixed to be heard on 12 February 2019, with 4 additional days reserved.

DISCUSSION

13.The applicable principles relating to the grant of interim relief in public law cases are not in dispute.  I have recently had an opportunity to consider them in 梁頌恆v立法會主席 [2018] HKCFA 1869 (14 August 2018), at paragraphs 12 to 14, and do not propose to repeat what was said in that decision.  Specifically in relation to the present case, the following additional points should be mentioned:-

(1)   Since the present case does not involve any challenge to the validity of primary legislation, the Applicant does not have to satisfy the higher threshold of a “strong prima facie case” on the merits before the court will consider granting interim relief.

(2)   Nevertheless, it has been said that “[t]he public interest is strong in permitting a public authority to continue to apply its policy when ex hypothesi it is acting in the public interest.  That wider public interest cannot be measured simply in terms of the financial or individual consequences to the parties” (see R (Medical Justice) v Secretary of State for the Home Department [2010] EWHC 1425 (Admin), at paragraph 12 per Cranston J).

(3)   The above judgment of Cranston J was referred to with approval by Andrew Baker J in R (Association of British Insurers) v Lord Chancellor [2017] EWHC 106 (Admin), who said at paragraph 62 that “… the public interest referred to by Cranston J at [12] is a strong one in this case.  That is to say the public interest in permitting a public authority to apply its policy and be free to act as it proposes to do in the public interest in a particular sphere of activity as it judges that interest.”  I would add that the strength of such public interest must of course depend on the nature, or subject matter, of the policy.  The assignment of radio spectrum in the mobile telecommunications market is a “polycentric” issue involving broad evaluations and discretionary judgment calls which the court generally has neither the mandate nor the relevant expertise to make, and thus the public interest in permitting the Authority to apply its policy and be free to act as it proposes to do in the public interest is also a strong one in the present case.

14.On the merits of the Applicant’s case, when granting leave to apply for judicial review, I was satisfied that the application for judicial review was reasonably arguable and had a realistic prospect of success.  The parties have, understandably, not made any sustained submissions on the merits of their respective cases at the hearing on 22 August 2018, although Mr Benjamin Yu, SC (for the Applicant) did make some brief submissions on two of the grounds of judicial review, namely, Ground 1 (failure to follow the Spectrum Policy Framework) and Ground 3 (refusal or failure to carry out a full “refarming” cost-benefit analysis under paragraph 4.4 of the Spectrum Policy Framework).  The Respondents have yet to file their evidence in opposition to the substantive application for judicial review.  On the materials before me, I have no difficulty in coming to the view that the Applicant has demonstrated a “serious issue to be tried”, but I am unable to reach any firmer view on the merits of the application.

15.In relation to the issue of the balance of convenience, Mr Abraham Chan, SC (for the Respondents) submits, and Mr Yu agrees, that the court should only take into account the potential harm to the parties between the date of the application and the date of the first instance judgment.  Having regard to the dates of the substantive hearing which have already been fixed (12-18 February 2019) and the complexity of the evidence (including expert evidence of economists) and the grounds of judicial review raised in the Form 86, for the present purpose, I shall proceed on the assumption that the court will give its judgment in around April/May 2019.

16.The first part of the balance of convenience consideration relates to the potential harm or damage which the Applicant would or may suffer should the court make a “wrong” decision to refuse to grant the interim relief now sought by the Applicant.  Potential harm to the public is not irrelevant and should not be ignored even though, as pointed out by Mr Chan, it seems obvious that the Applicant is making the present application not to promote any public interest but to advance its own private commercial interests, which it is of course entitled to do.  By way of general observation, it should also be noted that the Decision does not affect the Applicant’s existing licences, which will continue to run their full courses. I pause to add that it has not been suggested that the Applicant has any legal right to renew or extend its existing licenses.

17.Four main points are relied upon by Mr Yu in relation to the harm or loss which may result from a refusal of the interim relief sought by the Applicant:-

(1)   There is a risk of the application for judicial review becoming academic if no interim relief is granted because, if the Auction proceeds in December 2018 and third parties acquire rights under the Auction in January 2019, there will be 2 consequences –

(a)   it can be said that it would be meaningless to grant an order to quash the Decision since it has already been implemented; and

(b)   third parties would have acquired rights under the RFR and the Auction.

There is also a risk or possibility that the court may, in the exercise of its discretion, refuse to grant remedies in this judicial review application on the ground that third party rights or interests are involved.

(2)   Even if the transactions can strictly be unwound, in order to do so, the Applicant may have to take legal actions against third parties, thereby resulting in a proliferation of litigation.

(3)   To proceed with the Auction in the midst of the uncertainty created by the present challenge to the validity of the Decision would give rise to a risk of inefficient assignment of spectrum occurring because (i) some bidders may decide not to incur the costs of preparing for and participating in the Auction if they believe that there is a real risk of the outcome being invalidated, and (ii) bidders may also be reluctant to submit bids that reveal their true valuations if they believe there is a risk that the authorities could exploit this information in any subsequent second auction, such as by setting higher reserve prices for the spectrum (see the 2^nd Affirmation of Mr Paul Nicholas Reynolds, paragraph 12).

(4)   Allowing the Auction to go ahead may result in implementation costs incurred by the Authority and other market participants subsequent to the Auction being wasted should the court ultimately find in favour of the Applicant that the Decision is invalid.  Also, a delay in the implementation of the Joint Statement may lead to an overall reduction in the potential costs of implementation due to the impending release of the 5G spectrum.

18.In my view, the first 2 points raised by Mr Yu can be adequately addressed by the Authority’s proposal to include a provision similar to the one contained in the Offer (referred to in paragraph 10(2) above) in the terms and conditions of the Auction to be gazetted such that any rights which may be acquired by any parties under the Auction would be subject to the court’s determination of the present judicial review application.  This proposal was, I understand, first made in Mr Chan’s Skeleton Submissions dated 20 August 2018, at paragraph 60(4)(a).  Mr Yu argues that the proposal is not found in the evidence filed on behalf of the Respondents and the court should only act on evidence properly filed.  Since the Respondents are public officers or authorities who can be trusted to act responsibly and in good faith, I am prepared to accept the statement or undertaking given by Mr Chan on their behalf that the terms and conditions of the Auction will include the aforesaid provision so that any third party which takes part in the Auction will know that any rights which he may acquire from the Auction are contingent upon, or subject to, the outcome of this judicial review application.

19.In respect of the 3^rd point, I accept that the uncertainty caused by the present litigation may have an impact on the Auction as suggested by Mr Reynolds.  However, that is a risk which the Authority is prepared to bear.  The Authority is the statutory body tasked by the legislature to promote the efficient allocation and use of the radio spectrum as a public resource of Hong Kong under Section 32G of the Ordinance.  It has specialised knowledge and insight into the mobile telecommunications market in Hong Kong which the court lacks, and is much better placed than the court to judge the behaviour of the market participants, in particular how their interests and bidding strategies in or at the Auction may be affected by the cloud of uncertainty created by the present litigation.  I consider that the court ought to accord considerable weight to the judgment of the Authority that the Auction should proceed notwithstanding the perceived risk of an inefficient assignment of spectrum in such circumstances.

20.In respect of the 4^th point, in so far as the costs which may be incurred by the Authority are concerned, they are not insignificant but cannot, in the scheme of the matter, be said to be very substantial.  Mr Reynolds has estimated costs of between £250,000 and £500,000 for an authority to obtain advice on auction design and implementation of the auction.  There are other costs which are more difficult to quantify, such as the costs of the necessary legislative amendments.  In so far as the MNOs, bidders and new assignees are concerned, they are, or are likely, to be substantial commercial enterprises and will no doubt appropriately balance the risk of a wasted outlay of capital against the reward of a potentially lucrative business venture in the mobile telecommunications market in Hong Kong.

21.The other side of the balance of convenience consideration relates to the potential harm to the public should the court make a “wrong” decision to grant the interim relief sought by the Applicant.  Two points are made by Mr Chan on behalf of the Respondents, with emphasis being placed on the first one:-

(1)   If an interim stay is granted, the MNOs and new entrants will have insufficient “lead time” to optimally configure and/or roll out their telecommunications networks before the scheduled new term of the Spectrum reassignment in 2021.

(2)   The grant of an interim stay will delay the wider public benefits of the reassignment of the Spectrum by auction.

22.In respect of the 1^st point, Mr Chan refers to and relies on, inter alia, the following statement in paragraph 84 of the Joint Statement:

“Taking into account the preparatory work required to implement the decisions of the [Authority and Secretary] in relation to the FRF Spectrum and Auctioned Spectrum, including amendments of the subsidiary legislation; gazettal of the auction reserve prices and the terms and conditions of the auction; issue of the information memorandum for auction; invitation for bidding; etc., the auction is expected to be conducted around the end of 2018. This will provide incumbent MNOs and new spectrum assignees a transitional period of about two years following completion of the auction to reconfigure their existing networks and/or to roll out a new network infrastructure, as the case may be, so that the Auctioned Spectrum could be put to immediate use at the beginning of the new term of the spectrum assignments.”

23.Two matters arising out of this statement are of note.  First, the Authority and the Secretary consider that the Auctioned Spectrum should be put to immediate use at the beginning of the new term of the spectrum assignments.  The importance of the MNOs and new assignees being able to do so is obvious, having regard to the fact that (i) the radio spectrum is a valuable, but limited, public resource of Hong Kong, and (ii) the Auctioned Spectrum would make up at least 120 MHz (21.74%) of the total of 552 MHz of radio spectrum which has been assigned for the provision of public mobile telecommunications services in Hong Kong.

24.Second, the Authority and the Secretary consider that a transitional period of about 2 years following the completion of the Auction is required.  As earlier mentioned, the new term of the spectrum assignments will take effect from 12 January 2021 (for the 900 MHz band) and 30 September 2021 (for the 1,800 MHz band).  If a transitional period of about 2 years is required, the Auction will need to be conducted in late 2018 or early 2019.

25.Mr Yu, on behalf of the Applicant, disputes the length of the transitional period mentioned in the Joint Statement, and refers to paragraph 86 of the Affidavit of Mr Sanda Cheuk, Assistant Director in the Office of the Communications Authority, who states that “the [Authority] would expect the MNOs to take at least 1.5 years to deal with the coordination work which the adjustments to their spectrum would involve”.  That paragraph must, however, be read in the light of the immediately preceding paragraph 85, where Mr Cheuk reiterates that the current timetable incorporates a transitional period of about 2 years following the completion of the Auction.  As explained by Mr Cheuk in paragraph 86 of his affidavit, the estimate of 1.5 years is based on the Authority’s experience from carrying out an earlier 1.9-2.2 GHz Spectrum Re-assignment exercise in 2016, but the current re-assignment exercise is technically more complicated than the previous one.  Mr Cheuk also says that any unsatisfactory transitional arrangement for the current re-assignment exercise in 2021 (involving 2G, 3G and 4G services) will have a greater impact on the mobile telecommunications services provided to the general public as compared with the one in 2016 (involving mainly 3G services).

26.Mr Yu also refers to the estimated timeframe given by China Mobile (“the Right of First Refusal and Auction periods need to be completed by early to mid-2019 at the latest in order to allow for a sufficient transitional period before the expiry of the existing assignments between November 2020 and September 2021”) in support of the contention that a transitional period of about 1.5 years would be sufficient.  As for the estimated timeframe given by SmarTone (“[t]he reason for putting the re-assignment of spectrum in place by the end of 2018 is to give the current operators and any new licensee(s) time to reconfigure and prepare for re-assignment with a 2-year buffer before the earlier 900 MHz assignment expires” in HFW’s letter dated 24 April 2018), Mr Yu submits that this timeframe takes into account the possibility of an appeal from this court’s judgment which, as is common ground, should not form part of the consideration when determining the issue of balance of convenience.  It seems to me, however, that although HFW did refer to the likelihood that the outcome of the present challenge to the Decision might not be determined “until 2019 and beyond” because of the possibility of appeals potentially to two levels of appellate court, when HFW referred to the “2-year buffer” period, they were focusing on the time required by the current operators and any new licensee(s) to reconfigure and prepare for re-assignment.

27.The transitional period following the completion of the Auction which is required to enable the MNOs and new licensees to put to immediate use the Auctioned Spectrum is not a matter that can be determined with scientific precision.  It seems clear that a period of at least 1.5 years is required for them to reconfigure their existing networks and/or to roll out a new network infrastructure.  On the assumption that the court is able to deliver a judgment in this judicial review application in April/May 2019, it would, I consider, be unrealistic to believe that the Auction can be conducted immediately after the date of handing down of the judgment (in the event that the application is refused).  Inevitably, time will be required to prepare for the actual conduct of the Auction, proper notice of the Auction has to be given to the potential bidders, and pre-qualification vetting has to be carried out to determine the qualified bidders.  Again, the Authority, with its experience in conducting a similar re-assignment exercise recently in Hong Kong and its specialised knowledge of the technical and practical issues which may be encountered by the MNOs and new assignees to reconfigure their existing networks and/or to roll out a new network infrastructure, is much better placed than the court to judge what would be the necessary transitional period in relation the present re-assignment exercise.  The court should, I believe, accord considerable weight to the considered opinion of the Authority on this matter.  Moreover, in a matter as important as the provision of mobile telecommunications services to the public, it would be reasonable for the Authority and Secretary to err on the side of caution to ensure a smooth transition to the regime under the new spectrum assignments.

28.Mr Yu also complains that the tight timeframe is a matter of the Authority’s own making.  While I accept that the current timetable is laid down by the Authority, the commencement dates of the new assignments have to take into account, or be synchronised with, the expiry dates of the existing assignments, namely, between 19 November 2020 and 11 January 2021 for the 900 MHz band and on 29 September 2021 for the 1,800 MHz band.  Taking into account the proposed commencement date of the new assignments in the 900 MHz band, namely, 12 January 2021, the proposed Auction date at the end of 2018 would, I consider, be appropriate or necessary on an objective view of the matter.

29.In all the circumstances, I consider that granting the interim stay sought by the Applicant would create a significant risk that the MNOs and new licensees may not be able to put the Auctioned Spectrum to immediate use at the beginning of the new term of the spectrum assignments.  There is some discussion about the possibility of an administrative extension of the existing spectrum assignments.  However, such extension would require mutual agreement of the parties and inevitably would involve a degree of uncertainty.  I do not consider that the possibility of an administrative extension should be entered into the equation when considering the issue of balance of convenience.

30.The 2^nd point relied upon by Mr Chan is, I believe, more controversial on the evidence.  I do not propose to place any weight on it in the balancing exercise.

31.In my view, the risk of public harm as a result of the MNOs and new assignees not being able to put the Auctioned Spectrum to immediate use at the beginning of the new term of the spectrum assignments outweigh the risks of inefficient assignment of spectrum and of wastage of implementation costs which may be incurred by the Authority and other market participants referred to in paragraph 17(3) and (4) above.  In other words, the balance of the risk of injustice favours a refusal of the interim relief sought by the Applicant.

DISPOSITION

32.For the foregoing reasons, I dismiss the Interim Relief Application.  I further make an order that the Respondents’ costs in relation to the Interim Relief Application shall be in the cause of this application for judicial review, to be taxed if not agreed with certificate for 2 counsel.

33.Lastly, it remains for me to thank counsel for their assistance rendered to the court.

Mr Benjamin Yu, SC and Mr Roger Beresford, instructed by Ms Baker & McKenzie, for the Applicant

Mr Abraham Chan, SC and Mr Joshua Chan, instructed by Department of Justice, for the 1^st Respondent

Mr Abraham Chan, SC and Mr Joshua Chan, instructed by Ms Eversheds Sutherland, for the 2^nd Respondent