Saleyard beef settled

Late last year, the Commerce Commission (Commission) settled proceedings against two livestock companies said to have breached sections 27 and 30 of the Commerce Act 1986 (Act) in relation to saleyards.

Andy Glennie

The decisions of the High Court approving the penalties agreed between the parties illustrate the severity with which such transgressions are now punished under the Act.

Background

The National Animal Identification and Tracing Act 2012 established a scheme for tagging cattle and tracking their movement throughout New Zealand.

A large proportion of the cattle traded in New Zealand are sold at saleyards. Saleyard operators are therefore obliged to assist with the implementation of the National Animal Identification and Tracing (NAIT) scheme.

The Commission alleged that various saleyard operators and livestock companies agreed in 2012 that:

• vendors would be charged a tagging fee of $25 per head of cattle delivered to the saleyard incorrectly tagged;

• yard fees would be increased by $1.50 per head to cover the costs of dealing with tagged livestock (to be shared equally by vendors and purchasers);

• a radio frequency identification administration fee of $1.50 would be imposed to cover NAIT reporting costs (to be shared equally by vendors and purchasers).

The Commission alleged that conduct continued until August 2015, when it commenced proceedings against PGG Wrightson Limited (PGW), Rural Livestock Limited (Rural), Elders New Zealand Limited and five individuals.

It also issued warning letters to seven livestock companies, as well as the New Zealand Stock and Station Agents’ Association.

PGW and Rural each admitted liability in respect of the three agreements and agreed penalties with the Commission.

The parties asked the High Court to make declarations of contravention and impose the agreed penalties under section 80 of the Act. (The proceeding against Elders is continuing.)

Approach to penalties

The High Court granted the orders sought, in Commerce Commission v PGG Wrightson Ltd [2015] NZHC 3360 and Commerce Commission v Rural Livestock Ltd [2015] NZHC 3361.

In each case, Justice Asher began by observing that even where the parties had reached agreement, the Court must perform its own assessment of the range of appropriate penalties – if the agreed penalty is within that range, the Court will not substitute its own exact view of the right penalty.

His Honour then adopted the usual criminal sentencing methodology of identifying a starting point before considering aggravating and mitigating factors relevant to the particular defendant (including the deliberateness of the conduct, the defendant’s role in the conduct, the duration of the contravention, the commercial gain to the defendant and the harm done to the market).

For PGW, Justice Asher accepted the parties’ suggested starting point range of $3.4 million to $4.3 million, and suggested that the penalty itself should lie in the range of $2.4 million to $3 million, before ultimately agreeing to impose the suggested penalty of $2.7 million (with PGC to contribute a further $50,000 to the Commission’s investigation costs).

For Rural, his Honour again accepted the suggested starting point range of $1.6 million to $2 million, with a final penalty range of $1.2 million to $1.5 million. In light of evidence that Rural was simply unable to pay such a large penalty, it was ordered to pay $475,000.

Comment

Three observations could be made.

First, caution should be exercised in referring to earlier decisions when deciding on an appropriate penalty. In recent years, the New Zealand courts have imposed substantial penalties on defendants involved in protracted, global, covert, damaging cartels – the classic “smoke-filled room” case.

The livestock agreements do not easily fit that paradigm. Rather, it appears that the parties were seeking to deal openly with a complicated and potentially costly new regime. There was even evidence that legal advice had been obtained in relation to aspects of the new regime (albeit the reaction to that legal advice may not have been entirely consistent).

As the Court itself noted, past cases often involve “very different facts”, so may not provide a helpful yardstick going forward (Commerce Commission v PGG Wrightson Ltd [2015] NZHC 3360 at [52]; Commerce Commission v Rural Livestock Ltd [2015] NZHC 3361 at [48]).

Second, the final penalties imposed by the Court appeared to be significantly greater than any commercial gain received by PGW and Rural.

The Court noted that the gains to PGW from the conduct were unlikely to exceed $1 million (and could have been considerably less); the figure for Rural was $100,000 (Commerce Commission v PGG Wrightson Ltd [2015] NZHC 3360 at [42]; Commerce Commission v Rural Livestock Ltd [2015] NZHC 3361 at [41]).

No-one would suggest that a penalty must mirror the illicit gain, but some degree of proportionality must be desirable.

Indeed, section 80B(2B)(b)(ii)(A) of the Act might be thought to indicate that a penalty should not exceed three times the value of any commercial gain. It is worth noting that, but for its impecuniosity, Rural could have been ordered to pay a penalty that would have been between twelve and fifteen times that gain.

Third, it may be wondered if the scale of potential penalties is discouraging defendants from contesting price-fixing cases such as this.

By way of example, PGW reported operating revenue of $1.2 billion for the year ended 30 June 2015, so the maximum penalty which could have been imposed on it under section 80(2B)(b)(ii) (B) for each of the three agreements could have run into hundreds of millions of dollars.

Conspicuously, nearly every price-fixing case brought by the Commission in recent years has been settled rather than tried.

That does not enhance the community’s perception of the overall fairness of the Act, or the development of the law on section 30.

Perhaps it is time to give some thought to whether penalties have been set too high.

Contact Us
Phone 09 303 5270
Fax 09 309 3726
Email reception@adls.org.nz