A new case imposing penalties under the Commerce Act 1986 highlights the potential risks of discussions with competitors, if those discussions are not kept within legitimate boundaries.1
A penalty of between $400,000 and $520,000 was held to be appropriate for a single, unsuccessful attempt to enter into a price-fixing agreement, with an additional penalty of $24,000 to be paid by the person involved.
The case involved a single phone call between competitors in the container depot services market in Christchurch: SCS Christchurch and Lyttelton Port Company (LPC). Those companies operated depots where empty containers could be stored and maintained when not required for transporting cargo.
LPC was by far the largest player in the market, with 70 per cent market share. SCS Christchurch had only a 10 per cent market share. They were both planning to introduce new software that would allow their customers to book slots for dropping off or picking up containers, and to charge a fee for each booking. LPC publicly announced it would charge a $5.50 booking fee, whereas SCS Christchurch announced that it would charge a $6.50 booking fee.
SCS Christchurch presumably noticed the difference. In January 2018, a director of SCS Christchurch called the General Manager of LPC and said that $6.50 was the “going rate" for booking fees in Auckland and Tauranga, and asked LPC to charge the same or a similar fee. The Court described this as “a brief one-off" that was “unsophisticated". LPC rightly declined to discuss price with SCS because they were competitors.
There was no further discussion between the two. SCS Christchurch and LPC subsequently implemented the different fees that they had previously announced.
Prohibition on attempted cartel conduct
Section 30 of the Commerce Act prohibits cartel conduct. Entering into a price-fixing agreement is a classic form of cartel conduct, together with allocating markets and restricting output. Importantly for the purposes of this case, penalties can also be imposed for unsuccessful attempts at forming a cartel. However, such cases are rare – the Court recorded that there was only one other prosecuted “attempt" case within the last 20 years.
In this case, SCS Christchurch and the director admitted that they had attempted to enter into a price fixing agreement with LPC (that is, a contract, arrangement, or understanding to charge the same or similar booking fee), and were therefore liable to pay a penalty. Conversely, the Court acknowledged the business integrity of LPC in not entering into the agreement.
The maximum penalties for contraventions of the Commerce Act are the greater of $10 million, three times the commercial gain resulting from the contravention, or (if that cannot be ascertained) 10 per cent of the annual turnover of the relevant corporate group. (Criminal penalties now also apply, but did not at the time of the conduct in this case.) In practice, penalties under the Act are usually significantly lower than the maximum.
In this case, the parties agreed that a penalty within the range of $400,000 to $520,000 was appropriate for SCS Christchurch, and a penalty between $20,000 and $24,000 was appropriate for the director, by reference to previous cases. Those penalties incorporated 20 per cent discounts for limited co-operation with the Commission, admissions of liability, and the lack of any previous contraventions.
In assessing and ultimately approving the agreed penalties, the Court noted that the offence committed was no less serious for being an unsuccessful attempt. SCS Christchurch and its director could not be credited for the business ethics of LPC. The Court therefore applied the standard factors for assessing the gravity of the conduct as though the attempt had been successful. For example, while the attempt had no impact on the market, the Court considered the potential impact it would have had to the market, which was recognised to be a market of general importance to New Zealand as an island nation heavily reliant on imports and exports. Similarly, while there was no commercial gain, the Court considered the potential for gain had the attempt been successful. That was said to be significant.
Overall, the Court held that the agreed penalties were appropriate, fixing the penalty for the director at the top end of the range, at $24,000. However, given that the company had ceased to operate and was insolvent, the Court ultimately imposed an agreed penalty of $62,500 (to be paid by an associated company) on the basis that it was not in the interests of justice to impose a penalty that could not be met.
While the facts of this case were relatively straightforward, they highlight the risk of discussions with competitors. Even one-off discussions can contravene the Commerce Act if they relate to commercially sensitive matters such as pricing, even if the parties do not ultimately reach an arrangement or understanding on the matters discussed. As the Act imposes personal liability to pay penalties, there is added risk for anyone who engages in such discussions. In more serious cases involving intentional cartel conduct, people can be imprisoned for up to seven years, or pay a fine of up to $500,000.
Helpfully, the case also illustrates what people should do if approached by a competitor to discuss pricing: they should make what is sometimes referred to as a “noisy exit". That is, firmly decline to participate in the discussion, and end participation in it (for example, finish the phone call or leave the meeting room). If there are other people around, making the exit “noisy" can mean those other people will be more likely to remember that the person left, rather than participate, and if necessary can give evidence accordingly.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.