Case highlights complications of Commerce Act penalty model

In late 2015, the Commerce Commission (Commission) filed proceedings against five real estate agencies: Bayley Corporation Ltd, Barfoot & Thompson Ltd, Harcourts Group Ltd, LJ Hooker New Zealand Ltd, and Ray White (Real Estate) Ltd (the Agencies), together with a company owned by those agencies, Property Page (NZ) Ltd (PPL).

Joanna Trezise

The Commission alleged that the Agencies and PPL had engaged in price fixing in breach of the Commerce Act 1986 (the Act). The case highlights a number of issues concerning the application of penalties under the Act.

Background

In 2013, the website Trade Me announced a change to its pricing model. Where previously it had charged real estate agencies a capped subscription fee for standard property listings, it proposed to begin charging a fee per listing.

This amounted to a substantial price increase. However, while subscription fees had generally been absorbed by the Agencies’ franchisees or offices, Trade Me proposed that the per-listing fees could be “vendor funded”, meaning that the cost would be passed on to the property vendors or paid by the individual real estate agent.

In August 2013, senior executives from the Agencies (who were, for the most part, directors of PPL) attended a PPL board meeting. At that meeting, the attendees discussed the development and promotion of realestate.co.nz, which was half-owned by PPL, as an alternative to Trade Me for property listings. In that context, they proposed (amongst other things) to follow Trade Me’s suggestion that the new per-listing fees be vendor-funded. The proposal for promoting realestate.co.nz was made subject to legal advice.

The Commerce Act 1986

Section 27(1) of the Act provides that: “No person shall enter into a contract or arrangement, or arrive at an understanding, containing a provision that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.” Section 27(2) of the Act provides that no person shall give effect to such a provision.

Section 30 of the Act provides that a provision shall be deemed to have that prohibited purpose or effect if it has the purpose, or has or is likely to have the effect, of fixing, controlling, or maintaining the price for goods or services supplied by parties who are in competition with each other.

The Agencies had no wish to contravene the Act or any other law. Therefore, they obtained legal advice before pursuing the arrangement as discussed. That advice declared that the Agencies’ proposed action would not breach sections 27, 29 or 36 of the Act. Unfortunately, the advice did not consider section 30 of the Act at all.

The conduct

Most of the Agencies or their franchisees (with the exception of Ray White (Real Estate) Ltd) moved to vendor funding at some point between February and June 2014 as their prior arrangements with Trade Me expired.

Then, in July 2014, Trade Me announced that it was readjusting its model and would again offer a subscription-based fee for listings. Any relevant conduct by the Agencies therefore ended when this revised model was implemented on 1 August 2014.

The claims

The Commission alleged that the Agencies’ agreement to vendor-fund had the effect of fixing or controlling Trade Me listing prices in breach of section 27, via section 30, of the Act.

It is now well accepted that the Commission and defendants may negotiate a penalty for approval by the Court. The penalty figure is assessed by application of the principles used in criminal sentencing. That is, a starting point is set (on the basis of such factors as nature of the market, degree of market power held by the defendant, seniority of the employees involved, potential for commercial gain, seriousness of the conduct, whether it was deliberate and its duration), then any relevant aggravating or mitigating factors are used to adjust that figure to suit the particular circumstances of the defendant.

Defendants have strong incentives to attempt to reach such an agreement. First, the complexities of competition law can result in court proceedings that are particularly arduous and expensive. Second, there is potential for the imposition of significant penalties under the Act. Conversely, there is potential for significant discounts to be applied to penalties when a defendant makes an early admission of contravention and offers assistance to the Commission in its investigation of other parties involved in the same conduct.

In this case, Bayley Corporation Ltd negotiated a penalty (of $2,200,000) with the Commission early in the proceedings, which was approved by the Court (Commerce Commission v Bayley Corporation Ltd [2016] NZHC 1493). By the end of 2016, the remainder of the Agencies had also negotiated penalties: $2,575,000 for Barfoot & Thompson Ltd, $2,575,000 for Harcourts Group Ltd, $2,475,000 for LJ Hooker New Zealand Ltd, and $2,200,000 for Ray White (Real Estate) Ltd. These were also approved by the Court. (See Commerce Commission v Barfoot & Thompson Ltd & Ors [2016] NZHC 3111. The Commission did not seek a penalty payment from PPL.)

Discussion

The case is of interest for a number of reasons.

First, the primary public policy objective in fixing a penalty under the Act is deterrence (Commerce Commission v Barfoot & Thompson Ltd & Ors [2016] NZHC 3111 at [13]). Accordingly, the Act provides for penalties that are greater than the commercial gain the particular company made in the course of contravening it (in order to completely remove its ability to benefit from the prohibited conduct), and sizeable enough to discourage others who may be tempted to engage in comparable behaviour.

Section 80(2B)(b) of the Act requires that the maximum penalty for each breach not exceed the greater of $10 million, three times the commercial gain obtained by the defendant (if it can be readily ascertained), or 10 per cent of the defendant’s turnover (if commercial gain cannot be readily ascertained).

Here, the Agencies’ commercial gain could not be readily ascertained, so the maximum applicable penalty was not set by reference to it. However, the Commission (and the Court) did accept that any actual commercial gain received by the Agencies was limited. In fact, because it never moved to vendor funding, Ray White (Real Estate) Ltd made no commercial gain at all.

Despite this, each of the Agencies was obliged to pay a penalty in the millions. It may be doubted whether penalties that are so disconnected from actual commercial gain can truly be justified, and whether penalties of this magnitude are necessary to meet either the specific or the general deterrence objective.

Second, taking a wider view, allowing for a penalty discount where companies have acted in good faith on the basis of legal advice could also appear to support the objective of deterrence. Those with no intention of contravening the Act do not need to be deterred and companies should be encouraged to take reasonable precautions (such as legal advice) to ensure that a breach does not occur.

However, the penalty hearings for the Agencies confirmed that acting in reliance on legal advice simply results in the absence of an aggravating factor (lack of intent to contravene the Act) in the assessment of a penalty, not the presence of a mitigating factor (see Commerce Commission v Bayley Corporation Ltd [2016] NZHC 1493 at [18] and Commerce Commission v Barfoot & Thompson Ltd & Ors [2016] NZHC 3111 at [27]).

In other words, if a defendant finds that, through no fault of its own, the advice relied upon was flawed, the fact it took advice does not justify a discount to any penalty imposed (though there has been some suggestion that the presence of legal advice may exempt employees from being pursued by the Commission in their personal capacities).

The final issue is wider still. Under the current model, where defendants are incentivised to agree to a penalty rather than proceed to trial, development of competition law is likely to be impeded. Differing interpretations of the relevant provisions will be discussed in Court less frequently, and judicial analysis of their proper application becomes scarcer. This risks the creation of authority not via adversarial testing between parties during a hearing, but by negotiated consent (necessarily a process of compromise). It is worth noting that the New Zealand courts have never declined a recommended penalty.

Conclusion

Penalties applied under the Act continue to be sizeable and, in some instances, appear disproportionate to the conduct being penalised. Of greater importance, however, is the possibility that the question of whether a defendant ought truly to be liable to pay a penalty at all may too frequently be going untested.

(Note: The author appeared as junior counsel for Ray White (Real Estate) Ltd, a defendant in these proceedings.)

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