Bremworth Carpets and Rugs Limited v Godfrey Hirst NZ Limited
[2023] NZCA 652
•15 December 2023 at 11.00 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA348/2023 [2023] NZCA 652 |
| BETWEEN | BREMWORTH CARPETS AND RUGS LIMITED |
| AND | BREMWORTH LIMITED |
| AND | GODFREY HIRST NZ LIMITED |
| Hearing: | 1 November 2023 |
Court: | Miller, Brewer and Osborne JJ |
Counsel: | C L Elliott KC, J Edwards and Y Dong for Appellants |
Judgment: | 15 December 2023 at 11.00 am |
JUDGMENT OF THE COURT
A The appeal is allowed.
BThe order striking out Bremworth’s affirmative defences is set aside.
CGodfrey Hirst must pay one set of costs for a standard appeal on a band A basis, with provision for two counsel, and usual disbursements.
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REASONS OF THE COURT
(Given by Miller J)
Introduction
The parties are competitors in the business of manufacturing carpets and other floor coverings.
One of them, Bremworth Carpets and Rugs Ltd (of which Bremworth Ltd is the parent company), decided to stop making synthetic carpets and produce only carpets made from natural fibres, notably wool. It undertook several marketing initiatives, known collectively as the “Going Good” campaign. The gist of the campaign was said to be that synthetic carpets are bad for the environment and for human health. The campaign is said to be ongoing, although there may be some dispute about that.
The other party, Godfrey Hirst Ltd, still makes synthetic carpets. It is the biggest competitor in the New Zealand carpet and floor coverings market, with a larger market share than Bremworth. It has brought proceedings in the High Court under the Fair Trading Act 1986, complaining that the Going Good campaign was misleading and deceptive.[1] It wants to stop the campaign. It also seeks orders that Bremworth undertake detailed corrective advertising to the general effect that Bremworth’s claims were untrue.
[1]Fair Trading Act 1986, s 9.
Bremworth maintains that its campaign was not misleading or deceptive. It also pleaded what are described as affirmative defences: it would be inequitable to grant relief because Godfrey Hirst has made similar misleading statements of its own; the relief sought by Godfrey Hirst would amount to cartel conduct; the relief sought by Godfrey Hirst would amount to taking advantage of unilateral market power; and Godfrey Hirst’s conduct is unconscionable.
Peters J struck out the affirmative defences on the ground that they go not to liability but to relief.[2] Bremworth appeals. It is now common ground that the Judge was in error insofar as she held that affirmative defences must go to liability. Godfrey Hirst nonetheless supports the judgment.
The Fair Trading Act claim and defence
[2]Godfrey Hirst NZ Ltd v Bremworth Carpet and Rugs Ltd [2023] NZHC 1365 [judgment under appeal] at [32].
Godfrey Hirst’s amended statement of claim date 9 December 2022 pleads that Bremworth has engaged in an extensive campaign which makes use of its website, a brochure, and videos. The information has been disseminated by various means including social media.[3] It is said to include four misleading claims:
(a)the environmental impact of synthetic carpets installed in a home is said to be comparable in type, extent and effect to that of 22,000 single-use plastic bags;
(b)synthetic carpets shed sufficient microplastics to pose a substantial risk of harm to human health, the natural environment and wildlife;
(c)wool carpets are better for the environment; and
(d)these claims have a reasonable foundation in science.
[3]After the judgment under appeal was filed Godfrey Hirst filed a further amended statement of claim but it is not materially different.
Godfrey Hirst pleads that all of these claims are misleading and deceptive:
(a)synthetic carpets are not made from the same types of plastic as plastic bags, they are manufactured by different processes, they have different functions and life spans, and the risk that synthetic carpets will end up in the environment is much lower;
(b)synthetic carpets are not likely to shed sufficient amounts of microplastics to cause harm;
(c)synthetic carpet does not have a materially worse environmental impact than wool over its life cycle, and Bremworth did not materially reduce its environmental impact by switching to wool-only carpet manufacture; and
(d)Bremworth’s claims were not and are not supported by relevant and reliable scientific evidence.
Bremworth generally admits making the specific statements pleaded but denies that they were misleading or deceptive.
The affirmative defences
The first affirmative defence, headed “inequitable conduct”, concerns Godfrey Hirst’s own behaviour in the market. It alleges that Godfrey Hirst has made similar statements about the relative merits of synthetic and wool carpets. It is said that by making these statements Godfrey Hirst “has, whether through approbation and reprobation or otherwise, engaged in inequitable behaviour that is related to the subject matter of its claim” and so is not entitled to the relief sought.
The fourth affirmative defence, headed “unconscionable conduct”, concerns Godfrey Hirst’s legal reaction to the campaign. It alleges that by issuing cease and desist letters and claiming the relief sought Godfrey Hirst has engaged in unconscionable conduct. The conduct takes the form of misusing its market position for financial advantage, acting in bad faith, and subjecting Bremworth to unfair pressure or tactics.
The second and third affirmative defences concern Godfrey Hirst’s reaction to the campaign. Both invoke provisions of the Commerce Act 1986 which proscribe anticompetitive conduct. It is said that a cease and desist letter which demanded that Bremworth cease its campaign and publish corrective advertising amounts to an attempt to engage in cartel conduct in markets for the supply of carpets and for advertising services.[4] Alternatively, it is said that Godfrey Hirst enjoys a substantial degree of market power through its market share and financial strength vis‑à‑vis Bremworth and it used that power for an anticompetitive purpose by making the same demands.[5]
[4]Commerce Act 1986, s 30.
[5]Section 36.
No relief is sought in connection with the affirmative defences. They are relied upon to defeat Godfrey Hirst’s claim to relief. Relief will enter into it only if Godfrey Hirst proves that Bremworths’ conduct was misleading and deceptive.
Discussion
We see the Fair Trading Act dispute as serious and commercially significant for the parties, and quite likely to matter to consumers.
The affirmative defences face some conceptual difficulties.
Allegations made in the first affirmative defence are relevant to the Fair Trading Act claim to the extent they tend to show that Bremworth’s claims about the relative merits of synthetic and wool carpets were not misleading or deceptive. Godfrey Hirst can be forced to explain why Bremworth’s campaign was misleading when its own similar advertising was not. These allegations could be pleaded as particulars of the defence.
However, the Fair Trading Act is consumer protection legislation which trade competitors are permitted to enforce because it is in the public interest that consumers not be misled. It is difficult see how Godfrey Hirst’s attempt to enforce the legislation could be inequitable vis-á-vis a competitor. If it turns out that Godfrey Hirst has made similar claims which are misleading, the Court’s response will not be to dismiss Godfrey Hirst’s claim outright. The Court is more likely to find that Godfrey Hirst also engaged in misleading conduct.
But subject to that point of legislative policy, we agree with Peters J that relief is discretionary and Godfrey Hirst’s conduct may inform the particular relief it is granted.[6] For this reason we would not strike out the first affirmative defence or suggest that it be tried separately from the Fair Trading Act claim.
[6]Judgment under appeal, above n 2, at [33].
It is possible that litigation, or the threat of it, can be used to anticompetitive effect against a weaker rival. The theory is one of raising rivals’ costs. But speaking generally, behaviour is not anticompetitive if it is conduct that a firm in a competitive market might engage in. For that reason, and still speaking generally, it is not anticompetitive to enforce the Fair Trading Act against a rival which is misleading consumers. However, it might be otherwise if the Fair Trading Act claim fails outright or is in some way excessive. In this case the argument is that the relief sought is oppressive and an attempt to inhibit competition.
At present the competition law allegations must be taken at face value. Because we cannot say they are untenable we accept that it is inappropriate to strike out the second and third affirmative defences. The same is true of the fourth affirmative defence, which similarly relies on the abuse of power for an improper purpose.
There is force in the submission of Mr Dixon KC, for Godfrey Hirst, that the second to fourth affirmative defences are insufficiently connected to the claim to survive as defences and must be pleaded as counterclaims, but we are not persuaded that it is appropriate to strike them out on that ground.
We do wonder why Bremworth thinks it is a good idea to pursue the second to fourth affirmative defences. They do not respond directly to the question whether the Going Good campaign misled consumers. They all concern the purpose or effect of Godfrey Hirst’s legal response to the campaign. The prospects of any of the affirmative defences succeeding will be much reduced, perhaps to the vanishing point, if Godfrey Hirst proves that the campaign was misleading and deceptive in the respects pleaded. In that event, the most that can be said for the defences is that they might condition the relief granted in some way. And if Godfrey Hirst cannot prove that the campaign was misleading and deceptive, it is not obvious why Bremworth would pursue the affirmative defences at all, as defences.
As Mr Dixon recognised, it would be a different matter if the competition law allegations were pleaded as counterclaims seeking declaratory or pecuniary relief to discipline Godfrey Hirst’s alleged misuse of market power.
However they are pleaded, the competition law allegations will require evidence of market power, which is a function of market structure and especially barriers to entry. Godfrey Hirst will deny market power on the ground that it experiences import competition. None of this evidence is needed for the Fair Trading Act claim. The allegations will require extensive expert and factual evidence about relevant markets and behaviour in those markets. The allegations will have to be repleaded to give sufficient particulars of these matters. Proceedings of this kind invariably involve a good deal of expert evidence and require a lot of hearing time.
The affirmative defences also focus on the extensive and distinctly censorious corrective advertising sought by Godfrey Hirst, but Bremworth need not be forced to publish corrective advertising should it be found liable.[7] If relief of that kind is granted, it will not be designed to punish Bremworth. It will be confined to what the Court finds necessary to remedy any misleading effects of Bremworth’s claims.
[7]Carter Holt Harvey Ltd v Cottonsoft Ltd CA83/04, 7 October 2004 at [59]; and Norbrook Laboratories Ltd v Bomac Laboratories Ltd (No 3) HC Auckland CP241/SW02, 2 December 2002 at [236]–[237].
We were told that pleadings are closed in the Fair Trading Act claim (any further amendments will require leave) and the evidence in chief has been exchanged. We understand that a fixture of two weeks duration is required.
A question of sequencing arises from the features of the proceeding that we have just discussed. It is a reasonable working assumption that the allegations in the second to fourth affirmative defences will be tried separately.[8] That may force Bremworth to plead them as counterclaims, since they will have no substratum if Godfrey Hirst fails to make out its Fair Trading Act allegations in the first hearing.
[8]We adopt it as a working assumption because it is a matter for the High Court to decide.
Bremworth’s capacity to sustain litigation of this kind formed a subtext to the argument. It appears to be common ground that Godfrey Hirst is in a much stronger financial position. This raises the question whether separating the affirmative defences might harm Bremworth by increasing the final costs of the litigation and reducing the likelihood that the affirmative defences will ever come to trial. But Mr Elliott KC did not make that argument for Bremworth, and it is equally arguable that it is the affirmative defences that will substantially raise the overall costs of the litigation.
We record that after the hearing, and without leave, Bremworth filed further submissions seeking intervention in subsequent case management of the affirmative defences by the High Court. We decline to say any more than we have said in this judgment.
Disposition
The appeal is allowed.
The order striking out Bremworth’s affirmative defences is set aside.
Bremworth having succeeded, Godfrey Hirst must pay one set of costs for a standard appeal on a band A basis, with provision for two counsel, and usual disbursements.
Solicitors:
Russell McVeagh, Auckland for Appellants
Meredith Connell, Auckland for Respondents
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