Commerce Commission v Japan Airlines Co Ltd

[2012] NZHC 1683

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2008-404-8348 [2012] NZHC 1683

BETWEEN  THE COMMERCE COMMISSION Plaintiff

ANDJAPAN AIRLINES CO LIMITED Defendant

Hearing:         29 June 2012

Appearances: J C L Dixon and F J Cuncannon for plaintiff

D S Alderslade and J W J Graham for defendant

Judgment:      29 June 2012

Reasons:         6 July 2012

REASONS FOR JUDGMENT OF ALLAN J

Solicitors:

B W F Brown QC, Wellington  [email protected]

Meredith Connell, Auckland J C L Dixon,  [email protected] Chapman Tripp, Auckland  [email protected] [email protected]

THE COMMERCE COMMISSION V JAPAN AIRLINES CO LIMITED HC AK CIV 2008-404-8348 [29 June

2012]

Introduction

[1]      The  defendant,  formerly  Japan Airlines  International  Co  Ltd  (JAL),  has admitted breaches of Part 2 of the Commerce Act 1986 (the Act).   The plaintiff accordingly asks the Court to impose a pecuniary penalty. The Commission and JAL are agreed that an aggregate penalty of $2.275 million is appropriate, together with costs totalling $259,079.18.

[2]      At the hearing on 29 June 2012 I indicated to counsel that I was satisfied that the orders sought were appropriate, made the orders accordingly, and advised that these reasons would follow in due course.

Background

[3]      JAL is  a company incorporated in  Japan.    During the relevant  period  it carried on business in New Zealand and  elsewhere,  as  a carrier by air of both passengers and cargo.  It was approximately the 12th  largest airline in the world in terms of revenue passenger kilometres.   It had about 15,000 staff and operated in some 34 countries.

[4]      JAL is a participant in the international air freight industry which involves all facets of the movement of goods by air on passenger aircraft, using available belly air space capacity, and on dedicated air freighters.

[5]      During the period with which this case is concerned, JAL did not fly its own aircraft to or from New Zealand on scheduled flights, but it offered air cargo services to  and  from  New  Zealand  using Air  New  Zealand  aircraft,  pursuant  to  a  joint services agreement with Air NZ signed on 31 March 1993.

[6]      For the purposes of this proceeding, JAL and the Commissioner are agreed that during the relevant period markets existed, including in New Zealand, for air cargo services between New Zealand and individual regions throughout the world.

During all or part of the relevant period, JAL provided air cargo services in a number of those markets either directly or indirectly by interlining in the air cargo markets between New Zealand and:

(a)       United States of America;

(b)      Europe,   including   the   European   Union   and   Norway,   but   not

Switzerland (Europe);  and

(c)       Asia.

[7]      More than a dozen airlines competed with each other to supply air cargo services in these markets.

[8]      The impugned conduct in this case concerns what have been termed the Fuel Surcharge Understandings (FSU) and the Security Surcharge Understanding (SSU) respectively.

[9]      The FSU commenced in about January 2000, and involved competitors in a number of regions where cargo was flown to and from New Zealand, including the USA, Europe and Asia.  The understandings were related to the increasing price of aviation fuel.  Parties to the understandings undertook to follow common surcharge pricing guidelines suggested from time to time, in particular by Lufthansa, and in the early stages by the International Air Transport Association (IATA).  They also agreed to exchange information as to their fuel surcharge intentions on air cargo services from the affected regions, and to impose a fuel surcharge in accordance with the jointly expressed intentions of the participants.

[10]     It is common ground that JAL gave effect to the FSU during the relevant period by:

(a)       discussing the ongoing application of the Lufthansa and IATA indexes with its competitors;

(b)exchanging information and assurances with other airlines, parties to the FSU, as to the amount and timing of fuel surcharges to be imposed from time to time on their cargo services between New Zealand and the relevant regions;

(c)      imposing fuel surcharges on air cargo services to the extent possible, having regard to local conditions in each region.

[11]     Such fuel surcharges were imposed by JAL on their cargo services on routes from:

(a)       USA to New Zealand; (b)         Europe to New Zealand; (c)          Asia to New Zealand; and (d)      New Zealand to Asia.

[12]     The   conduct   ceased   worldwide   in   February   2006,   when   allegations concerning  the  FSU  were  publicised  following  raids  undertaken  by competition agencies in the USA and Europe.

[13]     The SSU arose in September and October 2001 and involved the facilitation and co-ordination of a security surcharge on air cargo services, largely in order to cover increased administration costs arising out of the increased perceived security risk faced by airlines worldwide.

[14]     The SSU related to air cargo services from: (a)           USA to New Zealand;

(b)      Europe (except Switzerland) to New Zealand; (c)       Asia to New Zealand;

(d)      New Zealand to Asia.

[15]     The elements of the SSU were that:

(a)      JAL and  its  competitors  would  impose  security  surcharges  on  air cargo services;

(b)the security surcharge would be subject to variation on a regional basis where this was necessary, such variations to be:

(i)determined by the boards of airline representatives or other industry associations on a regional level; and/or

(ii)set by the home carrier for each country in which JAL and the other airlines operated.

[16]     JAL gave effect to the SSU between October 2001 and February 2006 by:

(a)      exchanging  details  with  other  airlines  of  intended  plans  for  the security surcharge at meetings of various airline and industry groups;

(b)exchanging information with other airlines of intended plans for the security surcharge by correspondence, including e-mails, in advance of that information becoming publicly available;

(c)      communicating regularly by telephone and e-mail with other airlines regarding the imposition of security surcharges;  and

(d)imposing security surcharges on air cargo services in accordance with the SSU.

[17]     The conduct involving the SSU also ceased in February 2006 following raids undertaken by competition regulators in the US and Europe.

The breaches

[18]     For the purposes of this proceeding only, JAL accepts that it committed breaches of the Act by entering into the FSU and the SSU (in breach of s 27(1) of the Act via s 30), and by breaching the Act by giving effect to the FSU and the SSU (in breach of s 27(2) via s 30 of the Act).

Legislation

[19]     Section 27 of the Act relevantly provides:

27Contracts,   arrangements,   or    understandings   substantially lessening competition prohibited

(1)       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.

(2)       No person shall give effect to a provision of a contract, arrangement, or understanding that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.

…

[20]     Section 30 of the Act provides:

30Certain  provisions  of  contracts,  etc,  with  respect  to  prices deemed to substantially lessen competition

(1)        Without limiting the generality of section 27 of this Act, a provision of  a  contract,  arrangement,  or  understanding  shall  be  deemed  for  the purposes of that section to have the purpose, or to have or to be likely to have the effect, of substantially lessening competition in a market if the provision has the purpose, or has or is likely to have the effect of fixing, controlling, or maintaining, or providing for the fixing, controlling, or maintaining, of the price for goods or services, or any discount, allowance, rebate, or credit in relation to goods or services, that are—

(a)       Supplied   or   acquired   by   the   parties   to   the   contract, arrangement, or understanding, or by any of them, or by any bodies corporate that are interconnected with any of them, in competition with each other; or

(b)       Resupplied by persons to whom the goods are supplied by the parties to the contract, arrangement, or understanding, or by  any  of  them,  or  by  any  bodies  corporate  that  are

interconnected with any of them in competition with each other.

(2)       The reference in subsection (1)(a) of this section to the supply or acquisition of goods or services by persons in competition with each other includes a reference to the supply or acquisition of goods or services by persons who, but for a provision of any contract, arrangement, or understanding would be, or would be likely to be, in competition with each other in relation to the supply or acquisition of the goods or services.

[21]     Under s 30 of the Act, the admitted conduct is per se illegal because price fixing agreements restrict competition and are detrimental to economic welfare without any beneficial effects.  By co-ordinating behaviour, competitors can achieve monopolistic outcomes in a market that would otherwise be subject to market forces.

[22]     It is often said that, where cartel behaviour is identified, punishments must be condign.  That is because it is necessary both to ensure that the participant is stripped of any profits derived from the illegal behaviour, and to serve as an appropriate deterrent in a class of case where, because illegal behaviour is often covert, detection will sometimes be avoided.

[23]     Those considerations are reflected to some extent in s 80 of the Act, which confers on  the Court  jurisdiction  to  impose pecuniary penalties  for breaches  of Part 2.  Section 80, as now constituted, provides:

80       Pecuniary penalties

(1)       If the Court is satisfied on the application of the Commission that a person—

(a)      Has contravened any of the provisions of Part 2 of this Act;

or

(b)      Has attempted to contravene such a provision; or

(c)       Has aided, abetted, counselled, or procured any other person to contravene such a provision; or

(d)       Has  induced,  or  attempted  to  induce,  any  other  person, whether by threats or promises or otherwise, to contravene such a provision; or

(e)       Has  been  in  any  way,  directly  or  indirectly,  knowingly concerned in, or party to, the contravention by any other person of such a provision; or

(f)       Has conspired with any other person to contravene such a provision,—

the Court may order the person to pay to the Crown such pecuniary penalty

as the Court determines to be appropriate ….

(2)       The Court must order an individual who has engaged in any conduct referred to in subsection (1) to pay a pecuniary penalty, unless the Court considers that there is good reason for not making that order.

(2A)     In determining an appropriate penalty under this section, the Court must have regard to all relevant matters, in particular,—

(a)      any exemplary damages awarded under section 82A; and

(b)      in the case of a body corporate, the nature and extent of any commercial gain.

(2B)     The amount of any pecuniary penalty must not, in respect of each act or omission, exceed,—

(a)      in the case of an individual, $500,000; or

(b)      in the case of a body corporate, the greater of—

(i)       $10,000,000; or

(ii)      either—

(A)      if it can  be readily ascertained and if the Court is satisfied that the contravention occurred in the course of producing a commercial gain, 3 times the value of any commercial gain resulting from the contravention; or

(B)      if the commercial gain cannot be readily ascertained, 10% of the turnover of the body corporate and all of its interconnected bodies corporate (if any).

(3)       Repealed.

(4)       Repealed.

(5)       Proceedings under this section may be commenced within 3 years after the matter giving rise to the contravention was discovered or ought reasonably to have been discovered. However, no proceedings under this section may be commenced 10 years or more after the matter giving rise to the contravention.

(6)       Where conduct by any person constitutes a contravention of 2 or more provisions of Part 2 of this Act, proceedings may be instituted under this Act against that person in relation to the contravention of any one or

more of the provisions; but no person shall be liable to more than one pecuniary penalty under this section in respect of the same conduct.

[24]     Prior  to  its  amendment  in  May  2001,  the  section  required  the  Court  to determine  an  appropriate  penalty,  subject  to  the  statutory  maximum,  by  having regard to all relevant matters, including:

(a)       the nature and extent of the act or omission;

(b)the nature and extent of any loss or damage suffered by any person as a result of the act or omission;

(c)       the circumstances in which the act or omission took place;  and

(d)whether or not the person had previously been found by the court in proceedings under Part 6 of the Act, to have engaged in any similar conduct.

[25]     Since May 2001, s 80 has required the Court to determine an appropriate penalty subject to the statutory maximum by:

(a)       having regard to all relevant factors;

(b)having particular regard to the nature and extent of any commercial gain.

[26]     It is well established that the reference to “all relevant factors” will bring to

account all those factors previously set out in s 80.1

Sentencing principles

[27]     In  Alstom,  Rodney  Hansen J  discussed  the  significant  public  interest  in bringing about the prompt resolution of penalty proceedings, and the role of the

Court in ensuring the efficacy of negotiated resolutions.2   His Honour stated that:

1 Commerce Commission v Alstom Holdings SA [2009] NZCCLR 22 (HC) at [19].

[18]    Finally, in discussing the general approach to fixing penalty, I acknowledge  the  submission  that  the  task  of  the  Court  in  cases  where penalty has been agreed between the parties is not to embark on its own enquiry of what would be an appropriate figure but to consider whether the proposed penalty is within the proper range – see the judgment of the Full Federal Court in NW Frozen Foods v ACCC (1996) 71 FCR 285. As noted by the Court in that case and by Williams J in Commerce Commission v Koppers,   there   is   a   significant   public   benefit   when   corporations acknowledge wrongdoing, thereby avoiding time-consuming and costly investigation and litigation.   The Court should play its part in promoting such resolutions by accepting a penalty within the proposed range.   A defendant should not be deterred from a negotiated resolution by fears that a settlement will be rejected on insubstantial grounds or because the proposed penalty does not precisely coincide with the penalty the Court might have imposed.

[28]     In  Commerce  Commission  v  Geologistics  International  (Bermuda)  Ltd,  I noted also His Honour’s analysis of the place of ordinary criminal sentencing principles in the context of cases under the Act.3  There I said:

[18]      In Commerce Commission v Alstom Holdings SA,4 Rodney Hansen J confirmed that criminal sentencing principles provide an appropriate framework for the assessment of a proposed penalty under the Commerce Act.  His Honour said:

[14]     The parties invite me to consider the proposed penalty, broadly by reference to orthodox sentencing principles.   That requires assessing the seriousness   of   the   offending,   identifying   relevant   aggravating   and mitigating factors to determine an appropriate starting point and, finally, having regard to any factors specific to the defendant that may warrant an uplift in, or reduction from, the starting point.   I accept that approach is appropriate.  It is consistent with the statute and is endorsed by practice in New Zealand and other jurisdictions.

[19]      I agree with that approach.5    But while the analogy with sentencing in the ordinary criminal jurisdiction provides broad assistance, a degree of caution is advisable, as Rodney Hansen J pointed out in Commerce Commission v EGL Inc.6     The two jurisdictions serve markedly different ends.   The primary purpose of pecuniary penalties for anti-competitive conduct is deterrence, but a range of other factors will be relevant as well. The identification of those factors and the weighting to be accorded them when fixing pecuniary penalties must, as Rodney Hansen J observed,7  be

2 Ibid at [18].

3 Commerce Commission v Geologistics International (Bermuda) Ltd HC Auckland CIV-2010-404-

5490, 22 December 2010.

4 Alstom Holdings SA above fn 1.

5 New Zealand Bus Ltd v Commerce Commission [2008] 3 NZLR 433 (CA) at [197]; Commerce Commission v Koppers Arch Wood ( NZ) Ltd (2006) 11 TCLR 581 (HC) at [18]; and Commerce Commission v New Zealand Diagnostic Group Ltd HC Auckland CIV-2008-404-4321, 19 July 2010 at [15].

6 Commerce Commission v EGL Inc HC Auckland CIV-2010-404-5474, 16 December 2010 at [13].

7 Alstom Holdings at [14].

informed by the distinctive character and consequences of anti-competitive conduct.

[20]      Among the factors which will be relevant are:

a.         The duration of the contravening conduct;

b.The seniority of the employees or officers involved in the contravention;

c.The  extent  of  any benefit derived  from the  contravening conduct;

d.        The degree of market power held by the defendant; e.         The role of the defendant in the impugned conduct; f.         The size and resources of the defendant;

g.        The  degree  of  co-operation  by  the  defendant  with  the

Commission;

h.        The fact that liability is admitted;

i.        The  extent  to   which  a   defendant  has  developed   and implemented a compliance programme.

[29]     I continued:

[37]      Ultimately, it is the final figure which the Court is asked to approve. The identification of appropriate starting points and discounts for mitigating factors are simply tools aimed at producing a result which is in accordance with the ends of justice and which properly reflects the aims and objectives of the Act.

[30]     It follows that, provided I am satisfied that the ultimate penalty falls within the appropriate available range, the Court ought to accept the penalty proposed by the parties.

[31]     In Commerce Commission v New Zealand Diagnostic Group Ltd, I noted that:8

The general approach of the Court is to accept and impose a penalty which has been agreed between the parties, so long as it is within the Court determined permissible range:    Australian Competition & Consumer Commission v ABB Power Transmission Pty Ltd;9   NW Frozen Foods v

8 Commerce Commission v New Zealand Diagnostic Group Ltd at [45]

9 Australian Competition & Consumer Commission v ABB Power Transmission Pty Ltd; (2004) ATPR

48,848 at 48,855.

Australian Competition & Consumer Commission.10    That approach is also adopted in this country.   In the Gas Insulated Switchgear case [Alstom] Rodney Hansen J said at [18]:

… there is a  significant public benefit when corporations acknowledge wrongdoing, thereby avoiding time-consuming and costly investigation and litigation.  The Court should play its part in promoting such resolutions by accepting a penalty within the proposed range.  A defendant should not be deterred from a negotiated resolution by fears that a settlement will be rejected on insubstantial grounds, or because the proposed penalty does not precisely coincide with the penalty the Court might have imposed.

Penalty assessment

[32]     I  accept  Mr  Dixon’s  submission  that  the  proper  approach  to  penalty

assessment under s 80 is to:

(a)      determine the maximum penalty;

(b)establish an appropriate starting point aimed at achieving the principal object of deterrence in the light of relevant factors, including available information about commercial gain;  and

(c)      adjust the starting point for defendant specific factors.

[33]     JAL’s conduct in respect of the FSU commenced under the pre-2001 regime and continued for some years.   It is therefore necessary to consider the statutory maximum both before and after 2001.   Conduct in respect of the SSU falls to be assessed wholly under the amended s 80.

[34]     Prior to May 2001, the statutory maximum prescribed by s 80 for companies was  $5 million  for  each  breach.    After  May  2001,  the  maximum  penalty  for companies increased significantly.   Section 80 now provides that the statutory maximum for each breach is the greater of:

(a)      $10 million;  or

(b)      Either:

10 NW Frozen Foods v Australian Competition & Consumer Commission . (1996) 71 FCR 285.

(i)3 x the commercial gain from the breach if it can be readily ascertained, or

(ii)10% of turnover from trading within New Zealand if the commercial   gain   from   the   breach   cannot   be   readily ascertained.

[35]     As is not uncommon, the parties are not in complete agreement as to the existence or extent of any likely commercial gain.  The Commission maintains that there was some gain, although quantum is not readily ascertainable.  JAL says there was none, but if there was, it is likely to have been modest at best.

[36]     Mr Alderslade accepts that, in the circumstances, it is appropriate for the Court to proceed on the basis of the Commission’s argument as to pecuniary gain. That is because, on the accepted turnover figures, the element of likely pecuniary gain is of limited moment.  It is common ground that the turnover derived by JAL from the fuel surcharges imposed in New Zealand between 2001 and 2005 was NZ$241,896, whilst similar income for the security surcharges was NZ$581,822.  So JAL’s relevant turnover measured over any of the potentially relevant periods, is obviously less than $10 million.  It is accordingly agreed that the maximum penalty for breach is $10 million.

[37]     Although no person is liable to more than one pecuniary penalty in respect of the  same  conduct,  the  different  FSUs  and  the  SSU  all  arose  from  separate agreements, so they are plainly different conduct.11    Entry into and giving effect to the understandings also constitute distinct conduct and are separate offences under ss 27(1) and (2) of the Act respectively.12   The Commission calculates the maximum available penalty in this case at $65 million, calculated as follows:

(a)       Entry into the US FSU (maximum penalty $5 million);

(b)      Giving effect to the US fuel surcharge agreement (maximum penalty

$10 million);

11 The Commerce Act 1986, s 80(6).

12 Commerce Commission v EGL Inc HC Auckland CIV-2010-404-5474, 16 December 2010 at [11].

(d)Giving effect to the Europe (regional) FSU (maximum penalty $10 million);;

(e)      Entry into the Asia FSU (maximum penalty $5 million);

(f)       Giving effect to the Asia FSU (maximum penalty $10 million); (g)    Entry into the SSU (maximum penalty $10 million);

(h)      Giving effect to the SSU (maximum penalty $10 million).

[38]     While general and specific deterrence is of primary importance, other matters will be relevant in determining the starting point.  They have been summarised in several recent judgments of this Court, and will normally include:

(a)       the nature and seriousness of the contravening conduct; (b)     whether it was deliberate or not;

(c)      the duration of the conduct;

(d)the    seniority    of    the   employees    or    officers   involved    in    the contravention;

(e)      the extent of any benefit derived from the conduct;

(f)       the extent of any loss of damage suffered by any person as a result of the conduct;

(g)      the degree of market power held by the defendant; (h)      the role of the defendant in the impugned conduct; (i)       the size and resources of the defendant;

(k)      the fact that liability is admitted;

(l)the extent to which the defendant has developed and implemented a compliance programme.

[39]     Where a defendant has admitted a number of separate breaches of the Act, it will generally be convenient to view the contravening behaviour as a single related course of conduct.  Adopting that course facilitates the determination of penalty and enables the Court to maintain consistency between cases.   That course has been adopted in most recent cases including those involving airline defendants in cargo

cases.13

[40]     I consider first the FSU.  It is common ground that the defendant’s conduct was at the serious end of the spectrum. As a price fixing arrangement it is deemed to be anti-competitive per se.  It is however to be borne in mind that the fuel surcharge was only a small portion of the total charges to customers for air cargo services, and on some occasions was not imposed at all by reason of market conditions for international air cargo services.  But the understanding must inevitably have affected price  competition,  and  so  impacted  upon  competitive  dynamics  in  the  relevant market and the efficiency of the parties to the understandings.

[41]     It is to be borne in mind also that the understandings remained effective over a long period and so became part of a sustained course of conduct.  There was much planning by those involved, including senior employees of JAL.  The conduct ceased only when regulatory bodies took action in the USA and Europe.  The conduct was deliberate and not inadvertent.  But it was not sophisticated and neither was it covert

or rigorously enforced. There was no element of coercion.

13 Commerce Commission v Cargolux Airlines International SA HC Auckland CIV-2008-404-8355, 5

April 2011; Commerce Commission v British Airways Plc HC Auckland CIV-2008-404-8347, 5 April
2011; Commerce Commission v Qantas Airways Ltd HC Auckland CIV-2008-404-8366, 11 May
2011.

[42]     On  the  other  hand,  JAL was  aware  that  early  surcharge  proposals  were rejected by the US Department of Transportation as being anti-competitive. Subsequently IATA advised its members that co-ordinated pricing could be regarded as an illegal conspiracy in violation of competition laws;   yet the participants proceeded, and the understandings operated for some six years.

[43]     It is agreed that the markets concerned are of fundamental importance to New Zealand, given the reliance on international air cargo services by businesses and consumers across the whole of the national economy.

[44]     It is likely that JAL derived some commercial benefit, and equally likely that customers   and   consumers   who   imported   and   exported   goods   suffered   a corresponding detriment.  Moreover, in cases like this, it is proper to infer that there will have been a degree of softening of competition overall, particularly in respect of prices, in that JAL and other participants were able to impose a surcharge without the need to consider the likely commercial response of competitors.

[45]     Many of the foregoing factors are relevant also to a consideration of the SSU. But there are some differences.  The SSU operated for a shorter time, a little over four years.  They were always imposed on outbound air cargo services from New Zealand, but that was not always the case in respect of fuel surcharges.  All of the contravening conduct is covered by the post-2001 penalty regime.

[46]     The security surcharge generated revenue of $581,822 over the whole of the relevant period, significantly more than was derived from the FSU.  The likelihood of actual commercial gain was therefore so much the greater.

[47]     Against that background I turn to a consideration of recent comparable cases. As Mr Dixon submits, the most helpful are the three recent air cargo cases.

[48]     In British Airways Potter J approved a pecuniary penalty of $1.6 million after discounting from a starting point of $2.5 to $3 million.   In a sense, the impugned conducted was more serious there than in the present case.   British Airways had reached a covert agreement with Lufthansa in respect of worldwide fuel surcharges.

But British Airways was a smaller participant in New Zealand and its conduct was for a shorter time.   Relevant surcharge revenue was $300,000.   Like JAL, British Airways did not fly to New Zealand, as it interlined with Qantas (for at least most of the period concerned).   All of British Airways’ conduct was subject to the new penalty regime.   It was not involved in the SSU.   But British Airways is perhaps closest to the facts of the present case.

[49]    In Cargolux Potter J approved a pecuniary penalty of $6 million, after discounting from a starting point of $8.5 to $14.5 million.  Cargolux was involved in a worldwide agreement to impose fuel surcharges and security surcharges.   Its operation in New Zealand was much larger than that of JAL.  Its combined surcharge revenue relating to the two agreements was $12.5 million.   Commercial gain was taken to be of the order of several million dollars.

[50]     In Qantas I approved a penalty of $6.5 million, after discounting from an effective starting point of $13 million.   Qantas had entered into a worldwide agreement to impose fuel surcharges, but was not involved in the SSU.   Qantas operated  on  a  large  scale  in  New  Zealand.    Its  surcharge  revenue  totalled  $31 million.   Unlike British Airways and JAL, it operated its own aircraft into New Zealand.   Its contravening conduct extended over the same period as that of JAL. Given its very substantial revenues, it was a proper inference that Qantas derived significant commercial gain from the contravening conduct.

[51]     Four other cases may usefully be considered.  In Alstom a penalty of $1.05 million  was  imposed  after  discounting  from  a  starting  range  of  $1.25  to  $1.75 million, in relation to a worldwide price fixing understanding for a key component in electrical substations, even though there was no pecuniary gain associated with the conduct.    The  cartel  in  Alstom  sought  to  fix  “budget  inquiries”  for  possible purchases, but none eventuated.  That was a case under the former s 80 regime, with a maximum penalty of $5 million.

[52]     In EGL, a starting range of $2.3 to $2.8 million was adopted for entering into and giving effect to a price fixing agreement, on a fee charged by freight forwarders for all freight forwarding services for cargo shipped between New Zealand and the

United Kingdom, from about October 2002 until no later than October 2007.   As here, the price fixing arrangement related to only one component of the service price. Commercial gain was thought to be something over NZ$100,000. All of the conduct fell under the new penalty regime.

[53]     In Geologistics a starting range of $3.75 to $4.25 million was adopted for entering into and giving effect to a price fixing agreement on a fee charged by freight forwarders for all freight forwarding services for cargo shipped to and from New Zealand via the USA between about 2003 and 2007.  Accordingly, like EGL and this case, the price fixing arrangement related only to a component of the price of the service.  Commercial gain was acknowledged to be substantial.  All of the conduct occurred under the new penalty regime.  A higher starting point than in EGL was appropriate by reason of Geologistics’ larger New Zealand operation and turnover.

[54]     Finally, in Commerce Commission v Whirlpool SA, the Court was concerned with the markets in New Zealand for domestic and light commercial hermetic compressors under one horsepower.14    The two largest suppliers in the New Zealand market entered into an understanding that each would increase prices during the relevant period, and for that purpose met and exchanged information and market intelligence.  The parties to the understanding did substantially increase their prices to New Zealand customers during the currency of the understanding, although it was accepted that the defendant’s input costs increased at a greater rate than its prices to

New Zealand customers.  The defendant enjoyed about a one-fifth share of the New Zealand market.  The value of its sales here was of the order of about $3 million per annum.  No actual commercial gain was established.  I adopted the starting point of

$4 to $6 million suggested by the counsel for the Commission (counsel for the defendant advocated a slightly lower starting point).

[55]     Only general assistance can be obtained from a broad comparison of starting points.   Perhaps the most significant factor will be the extent of the established commercial gain.   Precise calculation of any such gain is ordinarily elusive.   But

given JAL’s total surcharge revenue of about $800,000, its commercial gain is likely

14 Commerce Commission v Whirlpool SA HC Auckland CIV-2011-404-6362, 19 December 2011.

to be lower than that obtained in Geologistics and in the vicinity of the low six figure sum in EGL.

[56]     I agree that, among the airline cases, this case is closest to British Airways. The worldwide scope of the FSU in which British Airways participated is counterbalanced to some degree by the fact that it did not participate in any SSU.

[57]     The Commission suggests that a starting point of $1.9 to $2.4 million is appropriate for entering into and giving effect to the FSU.   That assessment recognises that JAL entered into each of the FSU under the pre-2001 penalty regime. It submits further that a starting point of $2 to $2.5 million is appropriate in respect of both entering into and giving effect to the SSU.  That produces a total range of between $3.9 and $4.9 million.

[58]     Counsel for the Commission accepts however, that for totality purposes, the ultimate combined starting point ought to be reduced to $3.1 to $3.9 million in order to recognise JAL’s conduct in its entirety, and to ensure that the starting point is consistent with previous decisions of the Court.  Mr Alderslade agrees that a starting point falling within that range is both consistent with prior cases and a satisfactory reflection of JAL’s overall culpability.

[59]     I turn to mitigating factors.  The proceeding was filed on 15 December 2008. The case was managed along with a great many other proceedings against airlines, against which similar allegations had been made.  Judgment was recently given on a preliminary jurisdictional argument in respect of all of these associated proceedings (the so-called stage one hearing).   In broad terms, the Court ruled that it has jurisdiction to entertain all aspect of the claims brought by the Commission against the defendants.

[60]     JAL has promptly sought to resolve this proceeding with the Commission following delivery of the Court’s jurisdiction judgment.   The Commission accepts that  a  proper  allowance  ought  to  be  made  for  JAL’s  willingness  to  meet  an appropriate pecuniary penalty.

[61]   The defendant has also entered into a co-operation agreement with the Commission,  pursuant  to  which  it  will  provide  assistance  in  those  related proceedings.  That will include the provision of documentary materials to assist the Commission,  and  the provision  of appropriate  personnel  (including  former staff members) as witnesses for the Commission.   The Court is advised that JAL has already facilitated access to a number of its current and former staff for interview by the Commission, and will continue to do so as required.

[62]     Some  of  those  who  are  assisting  the  Commission  are  New  Zealand employees of the defendant.    It is appropriate to record that there is no suggestion that any New Zealand employee was involved in the contravening conduct.   JAL entered into the understandings through senior staff based elsewhere.

[63]     JAL has accepted responsibility for the offending to the extent that corporate remorse is a separate factor to be taken into account.  I accept that it arises here.

[64]     The defendant has since 2006 devised and promulgated detailed compliance programmes and training modules.  Staff training has included numerous seminars conducted internationally.

[65]     The defendant has not previously contravened the Act, nor has it previously been warned by the Commission in respect of conduct likely to breach the Act.

[66]     Further,  JAL has  paid,  and  is  still  paying,  significant  penalties  in  other jurisdictions in respect of related conduct and harm.   I accept that to be broadly relevant  although,  as  I  said  in  Qantas,  the  imposition  of  penalties  in  other jurisdictions is a relatively minor factor.15   As the Commission submits, the penalty currently sought is referable to deterrence in New Zealand. But I accept that to some degree, penalties imposed in other jurisdictions will serve as a future deterrent to Qantas, and that the need for the imposition of deterrent based penalties here might

accordingly be diminished to a minor degree.

15 Qantas at [57].

[67]     The Commission suggests, and JAL accepts, a total discount of 35% for mitigating factors particular to the defendant.  That discount is less than in Qantas (50%), and British Airways (40%).  It is also lower than the 50% allowed in EGL. But in each of those cases co-operation with the Commission was more extensive and on-going, and crucially, proffered at an early stage of the Commission’s investigations.   But a discount of 35% is higher than is standard, and it properly reflects the extent to which JAL is going out of its way to assist the Commission in bringing the wider proceedings to an appropriate resolution.

[68]     The Commission submits that the proposed discount of 35% be applied to the suggested starting point range.   That produces a final penalty range of $2.01-2.54 million.  The recommended penalty of $2.275 million is at about the halfway point of that range.

Result

[69]     I was persuaded that a starting point of $3.1-3.9 million was within the properly  available  range  in  all  the  circumstances  of  this  case.    I  was  likewise satisfied that a discount of 35% for mitigating factors was appropriate, and accordingly reached the view that the agreed penalty of $2.275 million was justified.

[70]     For that reason, I approved the recommended penalty and made an order directing the defendant to pay a pecuniary penalty of $2.275 million.  The defendant was further ordered to pay costs to the Commission of:

(a)       $159,079.18 for the“stage one” hearing;  and

(b)      $100,000 for the Commission’s other Court costs.

C J Allan J