Tiebreaker Interpretation

Currently, our playoff tiebreaker reads thusly:

  -----------
  -----------     

The teams qualifying for the playoffs are determined as follows:

The division champions and runners-up automatically earn playoff
berths.  The remaining teams are pooled together and the top four
teams will qualify for the playoffs.  The orders of these teams are
determined as follows:

1.  Season record.
2.  Head-to-head competition.
3.  Total points scored.

If their is a tie between two or more teams at any stage of the
hierarchy the order is determined by steps 1,2, & 3 above with all of
the tied teams involved.  When the above steps uniquely separate one
or more teams, be it either by qualifying for the playoffs of by being
eliminated from consideration, the remaining teams are pooled together
and the process is repeated until the playoff spots are filled.
(NOTE:  None of the above steps (1, 2, & 3) may be repeated until ALL
of the steps have been applied once, in order)

IT MUST BE UNDERSTOOD THAT DIVISION STANDINGS DETERMINE DIVISION
CHAMPIONS AND RUNNERS-UP ONLY.

It is possible for a team to finish 3rd in the division and not
qualify for the playoffs, while the 4th place team in the other
division qualifies.
  ------------ 
  ------------

What this does not say is how the teams with the same records should
be "uniquely" separated by the 'head-to-head' tiebreaker.  Currently,
in our league, we have (5) teams vying for 2 playoff spots.  All of
these teams has lost to at least one of the others, some more.  I see
two options here:

1) A team that has beaten the most teams (but not all of the other
teams it is tied with) could be considered 'Uniquely separated' from
the rest and could move on, and then the process would start over
again.  In the same regard, a team that has lost more to the other
tied teams could be eliminated as well.

Or

2) It is a 'one tie, all tie' scenario, regardless of how many wins
against the other teams might be separating the team(s) from the
others (unless, of course, a team has won all, or lost all against the
rest).  The tiebreaker then moves on to the 'points' phase to select
the winner of the tiebreaker.

My Question:  How does your league determine their "Head-to-Head"
Tiebreaker in this situation?