Commerce Commission v Korean Air Lines Co Ltd

[2012] NZHC 1851

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

COMMERCIAL LIST

CIV 2008-404-8351 [2012] NZHC 1851

BETWEEN  THE COMMERCE COMMISSION Plaintiff

ANDKOREAN AIR LINES CO LIMITED Defendant

Hearing:         25 July 2012

Appearances: J C L Dixon and K C Francis for plaintiff

A M Callinan and A E Murray for defendant

Judgment:      27 July 2012

JUDGMENT OF ALLAN J

In accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 3.30 pm on Friday 27 July 2012

Solicitors:

Crown Solicitor Auckland  [email protected]

Simpson Grierson: Auckland,  [email protected]

COMMERCE COMMISSION V KOREAN AIR LINES CO LIMITED HC AK CIV 2008-404-8351 [27 July

2012]

Introduction

[1]      The defendant, Korean Air Lines Co., Limited (Korean Air) has admitted breaches of Part 2 of the Commerce Act 1986 (the Act).  The plaintiff asks the Court to impose a pecuniary penalty under the Act.  The Commission and Korean Air are agreed that an aggregate penalty of $3.5 million is appropriate, together with costs totalling $259,079.18.

Background

[2]      Korean Air is registered as an overseas company in New Zealand, pursuant to the Companies Act 1993.   Its parent headquarters are in Seoul, South Korea. Throughout the relevant period it carried on business in New Zealand and elsewhere as a carrier by air of both passengers and cargo.   In 2000 it was the 14th  largest airline in the world, ranked in terms of revenue passenger kilometres.   During the

2005-2006 period it was ranked 17th.  As at January 2010 it operated in 116 cities

and 39 countries.

[3]      Korean Air is a participant in the international freight industry which involves the  movement  of  goods  by  air  on  passenger  aircraft,  using  available  air  space capacity, and on dedicated air freighters.  Throughout the period with which this case is concerned, Korean Air maintained scheduled services between Seoul and Auckland, using its own aircraft.

[4]      For the purposes of this proceeding, Korean Air and the Commission are agreed that during the relevant period separate markets existed, including in New Zealand,   for   air   cargo   services   between   Hong   Kong,   Japan   and   Malaysia respectively, and New Zealand.  A number of airlines competed with each other to supply air cargo services in these markets.

[5]      The conduct with which this case is concerned relates to a series of Fuel Surcharge Understandings (FSU) and Security Surcharge Understandings (SSU) respectively.

[6]      The Hong Kong FSU commenced in or about January 2000.  In that month Korean Air and a number of other airlines entered into an arrangement or understanding  to  approach  the  Hong  Kong  Civil  Aviation  Department,  jointly seeking approval to apply an  IATA Fuel Price Index, in order to determine the imposition of fuel charges on air cargo services from Hong Kong to various destinations, including New Zealand.  If approved, the parties intended to apply and vary the proposed fuel surcharges on Air Cargo Services from Hong Kong to New Zealand from about mid-February 2000.

[7]      Upon approval, Korean Air gave effect to the Hong Kong FSUs from January

2000 to February 2006 by:

(a)      discussing the application of the IATA Fuel Price Index or, after 2002, a revised Lufthansa methodology, with its competitors operating in Hong Kong;

(b)acquiescing   in   applications   to   the   Hong   Kong   Civil  Aviation Department by the Board of Airline Representatives in Hong Kong, for approval for increases in the FSUs;

(c)      exchanging information and assurances with other airlines as to the amount and timing of fuel surcharges to be imposed on air cargo services from Hong Kong to New Zealand in response to movements in the IATA Fuel Price Index, or after 2002, the revised Lufthansa methodology;  and

(d)applying and varying fuel surcharges on Air Cargo Services  from Hong  Kong  to  New  Zealand  in  accordance  with  the  Hong  Kong FSUs.

[8]      At about the same time, Korean Air and other airlines that were members of the Inter-Airline Cargo Group – Malaysia, reached an arrangement or understanding to impose a fuel surcharge on Air Cargo Services from Malaysia to New Zealand and other destinations with effect from 1 February 2000, to exchange information as to the timing and rates for imposition and variation of fuel surcharges, and to adopt a practice whereby these airlines would follow fuel surcharges imposed by the national carrier, Malaysia Airlines.

[9]      Korean Air gave effect to the Malaysia FSUs between January 2000 and February 2006, by exchanging information and assurances with other airlines operating in Malaysia as to the amount and timing of fuel surcharges to be imposed on Air Cargo Services from Malaysia to New Zealand, and by applying and varying fuel surcharges on those Air Cargo Services.

[10]     Further, in January 2000, Korean Air and a number of other airlines that were members of the Board of Airline Representatives – Japan, and/or the International Cargo Association of Japan, entered into an arrangement or understanding to take steps to bring into effect a fuel surcharge on the price of Air Cargo Services from Japan, in accordance with IATA Resolution 116ss, and to apply to the Japanese Civil Aviation Bureau for approval of the Japan FSU.

[11]     Korean Air gave effect to the Japan FSU between October 2002 and February

2006, principally by:

(a)      exchanging information and assurances with other airlines operating in Japan as to the amount and timing of fuel surcharges to be imposed on Air Cargo Services from Japan to New Zealand;

(b)applying  in  October  2002  to  the Japan  Civil Aviation  Bureau  for approval of a specified surcharge on Air Cargo Services from Japan to foreign locations, including New Zealand (approval being granted subsequently by the Bureau);

(c)       applying for approval of variations in the fuel surcharge in accordance with the Japan FSUs on an on-going basis;

(d)applying and varying fuel surcharge on Air Cargo Services from Japan to New Zealand, in accordance with the Japan FSUs.

[12]     All of the foregoing FSUs were related to the increasing price of aviation fuel.  They all ceased in February 2006 when allegations concerning the FSUs were published, following raids undertaken by competition agencies in the United States and Europe.

[13]     The SSUs arose out of the terrorist attacks in the US on 11 September 2001. In September and October of that year, Korean Air reached understandings with other airlines to impose a security surcharge on cargo carried from Hong Kong, Japan and Malaysia to New Zealand.  The ostensible purpose of the SSUs was the recovery  of  increased  costs,  such  as  insurance  premiums  and  ground  handling charges for x-raying cargo.

[14]     In Hong Kong, Korean Air and other airlines entered into an understanding in September 2001 with other airlines to impose a security surcharge on Air Cargo Services from Hong Kong to New Zealand.   Between October 2001 and February

2006, Korean Air gave effect to the Hong Kong SSU by exchanging information with  other  airlines  on  plans  for  security  surcharges,  and  by  imposing  those surcharges on Air Cargo Services from Hong Kong to New Zealand.

[15]     A similar understanding was reached in September or October 2000 with airlines operating in Japan in respect of Air Cargo Services from Japan to New Zealand.  Between October 2001 and February 2006, Korean Air gave effect to the Japan SSUs by exchanging information with other airlines on plans for security surcharges and by imposing those surcharges on Air Cargo Services from Japan to New Zealand.

[16]     Similarly,  in  respect  of  Malaysia,  Korean Air,  along  with  other  airlines, entered into an understanding in about September or October 2001, that there would

be a security surcharge on Air Cargo Services from Malaysia to New Zealand.  From October 2001 to February 2006, Korean Air gave effect to the Malaysia SSU by exchanging information with other airlines on plans for security surcharges and by imposing those surcharges on Air Cargo Services from Malaysia to New Zealand.

[17]     All of the SSUs ceased in February 2006 when allegations concerning the existence of the FSUs were publicised following raids undertaken by competition agencies in the US and Europe.

The breaches

[18]     For  the  purposes  of  this  proceeding  only,  Korean  Air  accepts  that  it committed breaches of the Act by entering into the FSUs and the SSUs (in breach of s 27(1) of the Act via s 30), and by giving effect to each understanding (in breach of s 27(2) via s 30).

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:

[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.

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

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.

[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 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.

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].

[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 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]     The established 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’s specific factors.

[33]     Korean Air’s conduct in respect of the FSUs 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.

[34]     Conduct  in  respect  of  the  SSUs  falls  to  be  assessed  wholly  under  the amended s 80.

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.

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

[35]     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:

(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.

[36]     The Commission says that there was some commercial gain, although it is not readily ascertainable.   Korean Air, on the other hand, submits that there was no commercial gain from either of the surcharge understandings.  Korean Air’s position is that the fuel surcharges were imposed to meet the rising costs of aviation fuel, but they were not sufficient to recover all of the airline’s increased fuel costs.   The security surcharges  were  imposed to  recover  actual  cost  increases  in  respect  of security charges and insurance following the September 2001 terrorist attacks.

[37]     Ms Callinan points out that Korean Air’s total revenue from relevant fuel surcharges during the six year period was $266,681 and total revenue from security surcharges over a period of about four years was $30,328.  Given those figures, any commercial gain must have been minimal, she submits.

[38]     As Mr Dixon submits, and Korean Air admits, there are eight identifiable breaches. They involve:

(a)       entering into the FSU for each of the three identified geographical markets;

(c)       entering into the SSUs; (d)       giving effect to the SSUs.

[39]     Entry  into  each  of  the  FSUs  attracts  a  maximum  penalty  of  $5  million because the relevant  behaviour  occurred  prior to  the amendment  to  s  80.   The remaining breaches attract a maximum penalty of $10 million, or 10% of Korean Air’s  relevant  turnover,  whichever  is  the  greater.    The  parties  are  agreed  that breaches  involving  the  SSUs  should  be  treated  as  single  breaches,  although applicable in different geographical areas.

[40]     By reference to various turnover figures, Mr Dixon calculates the maximum available penalty in this case at a figure in excess of $72 million, but having regard to the agreed approach of the parties, it is unnecessary to do more than note the figure so calculated, in order to confirm that throughout the relevant period, Korean Air was conducting its New Zealand related business on a substantial scale.  It is to be noted that the turnover figures upon which Mr Dixon relies include all of Korean Air’s passenger revenue.  As Ms Callinan submits, the recommended penalty clearly strips Korean Air of any commercial gain in relation to its total surcharge revenue.

[41]     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;

(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;

(j)       the degree of co-operation by the defendant with the Commission; (k)          the fact that liability is admitted;

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

[42]     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 approach facilitates the determination of an appropriate penalty and enables the Court to maintain consistency between cases. That course has been adopted in most recent penalty cases including those involving airline cargo defendants.

[43]     Korean  Air’s  behaviour  constitutes  a  price  fixing  arrangement  which  is deemed to be anti-competitive per se.   It is common ground that the defendant’s conduct was towards the serious end of the spectrum.   It is however, to be remembered that the fuel surcharge comprised only a small portion of the total charges to customers for Air Cargo Services, and by reason of price based competition between various airlines, it cannot be assumed that the whole of the fuel surcharge was passed on to customers.  The same might, of course, be said for the security surcharge.

[44]     But in a more general sense, each of the understandings must inevitably have affected price competition, and so impacted upon competitive dynamics in the relevant markets.   Moreover, the understandings remained effective over a long period,  and  so  became  part  of  a  sustained  course  of  conduct.    Inevitably  they involved a good deal of planning, although I accept that those actually involved were senior managers at a regional level;  neither senior management at head office, nor any of the defendant’s New Zealand employees was aware of the infringing conduct. Nevertheless, some of those who were involved must have been aware that the United States Department of Transportation had rejected conduct of this type as being anti-competitive, and that IATA had advised that if carriers were to co-ordinate pricing by reference to the IATA or another similar index,  that could be regarded as an illegal conspiracy and violation of competition laws.

[45]     An aggravating factor is the calculated and deliberate character of the entry into the understandings and their subsequent implementation.  On the other hand, I accept that the arrangement was not sophisticated.  Neither was it covert.  Indeed, in certain instances successful applications for approval of the arrangements were made to the authorities in the countries from which the carriage commenced.

[46]     I accept also in mitigation, that there is no suggestion that any competitors were coerced into compliance;  nor is there any evidence that Korean Air was in any respect a ringleader among the airlines.

[47]     It  is  common  ground  that  the  markets  concerned  are  of  fundamental importance to New Zealand, given the degree of reliance placed on international Air Cargo Services by businesses and consumers across the whole of the national economy.

[48]     The FSU operated for a period of about six years,  the SSU for a shorter time: a little over four years.   The defendant’s impugned behaviour was confined to in- bound traffic, but that suggests that the burden of the increased charges would have fallen principally on New Zealand customers.

[49]     Although the precise degree of commercial gain from the surcharges cannot readily be ascertained, little turns on that.  The focus is rather on the overall potential and actual harm caused by the cartel arrangement, and not just the direct quantified harm or loss caused by the conduct of a particular participant.  It is likely that, by reason of the FSUs, end prices would have increased to some degree.  As I said in

Commerce Commission v Japan Airlines Co Ltd,11 it is proper to infer that there will

have been a degree of softening of competition overall, particularly in respect of prices, in that cartel participants were able to impose a surcharge without the need to consider the likely commercial response of competitors.12    Moreover, the Court is bound to accord significant weight to the need for deterrence.  It is obliged to impose a sanction that will be effective to that end, without the need for a close analysis of the incidence of detriment,13  although I accept that specific deterrence requires that the sanction imposed takes into account the size and resources of the contravening company.14

[50]     Against that factual background, the Commission considers an appropriate starting point to lie between $4.8 and $5.5 million in respect of the totality of the defendant’s conduct.  Probably the most helpful cases for comparison purposes are four recent air cargo cases.  It is to be noted however that they each relate to different price fixing agreements.

[51]     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.15    The conduct in British Airways was to some extent more serious than the present conduct, in that British Airways had reached a covert agreement with Lufthansa with respect to worldwide fuel surcharges.  Here, the Court is concerned only with cargo flown out of certain hubs.  British Airways was a smaller participant in New Zealand than Korean Air,

and its conduct continued over a shorter period.

11 Commerce Commission v Japan Airlines Co Ltd [2012] NZHC 1683, 6 July 2012.

12 At [44].

13 Commerce Commission v Qantas Airways Ltd HC Auckland CIV-2008-404-8366, 11 May 2011 at

[49].

14 Commerce Commission v Telecom Corporation of New Zealand ltd (2011) 13 TCLR 270 (HC) at

[57].

15 Commerce Commission v British Airways Plc HC Auckland CIV-2008-404-8347, 5 April 2011.

[52]     British Airways did not fly to New Zealand, as it interlined with Qantas for most of the relevant period.  All of British Airways’ conduct was subject to the new penalty regime.   Although it was not involved in an SSU, its surcharge revenue appears to have been in the same order as that derived by Korean Air.

[53]     In Cargolux,16  Potter J approved a pecuniary penalty of $6 million after discounting from a starting point of $8.5 to $14.5 million.  Mr Dixon accepts that the conduct of Cargolux was more serious than that of Korean Air, in that it involved a worldwide agreements to impose both fuel and security surcharges.   Cargolux’s cargo revenue out of New Zealand was substantially higher than that of Korean Air, and its surcharge revenue greatly exceeded that of the present defendant.   On the other hand, the fuel surcharge period was somewhat shorter in Cargolux’s case.

[54]     In Japan Airlines,17  I approved a pecuniary penalty of $2.275 million after discounting from a starting point of $3.1 to $3.9 million.  Japan Airlines had also entered into agreements to impose fuel and security surcharges out of various hubs. It did not fly its own planes to New Zealand.   Although its conduct was broadly similar to that of Korean Air, its relevant cargo revenues were less than half of those of the present defendant.  Its fuel surcharge revenue was slightly lower than that of Korean Air, but its security surcharge revenue was almost 30 times greater.

[55]     In Qantas, I approved a pecuniary penalty of $6.5 million, after discounting from a starting point of $13 million.  Qantas was involved in a worldwide agreement to impose fuel surcharges, but it did not enter into any understandings in respect of security surcharges.   Its surcharge revenue was very high:   of the order of  $31 million.    Like  Korean Air,  it  operated  its  own  aircraft  into  New  Zealand.    Its contravening conduct also occurred over a similar period.   In that case it was a proper inference that Qantas had derived significant commercial gain.

[56]     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

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

April 2011.

17 Japan Airlines.

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.

[57]     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.

[58]     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.

[59]     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.18    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

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

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

[60]     A comparison  of starting points  in  other cases  can  provide only general assistance.   The extent of the established commercial gain will be of significant importance.  Here, the direct gain could not exceed the total surcharge revenue of a little under $300,000.   The defendant’s fuel surcharge revenue of $266,681 was similar to that of Japan Airlines’ $241,896.

[61]     Mr Dixon submits that Korean Air’s position may however be distinguished

from that of Japan Airlines because:

(a)      Korean Air had a significantly larger presence and market share in New Zealand (its overall cargo revenue during the relevant period was more than twice that of Japan Airlines);

(b)Korean Air flew its own planes into New Zealand during the relevant period while Japan Airlines did not.

[62]     Mr Dixon submits that, by reason of the defendant’s market share and the scale of its New Zealand operations (and its correspondingly greater ability to affect competition in the relevant markets), it would be appropriate to fix a starting point for  the  defendant’s  conduct  that  is  higher  than  that  chosen  in  Japan  Airlines. Mr Dixon also distinguishes the freight forwarding cases by reason of the longer period  covered  by  the  cartel  conduct  in  this  case,  and  the  greater  number  of identified breaches.

[63]     Having carefully reviewed the judgments in the earlier cases, I am satisfied that the initial starting range of $4.8 to $5.5 million proposed by the Commission is appropriate.

[64]     I  turn  therefore  to  factors  specific  to  the  defendant.    First  there  is  the admission of liability. Although Korean Air defended the proceedings for some time (they  were  filed  on  15  December  2008),  it  promptly sought  to  resolve  matters

following  the  delivery  of  the  recent  judgment  on  a  preliminary  jurisdictional argument in respect of all of these associated proceedings (the so-called stage one hearing).

[65]     In broad terms, the Court ruled that it has jurisdiction to entertain all aspects of claims brought by the Commission against a number of defendants.   Moreover and importantly, Korean Air has also entered into a co-operation agreement with the Commission, pursuant to which it would provide specific limited co-operation in related proceedings.   The Commission accepts that an additional discount is appropriate for that.

[66]     To the extent that corporate remorse is a separate factor to be taken into account, it arises here.   Corporate remorse is best demonstrated by the entry of a guilty plea, an offer of co-operation and entry into compliance arrangements.  The defendant has implemented a worldwide anti-trust compliance programme, including across its cargo business.   That occurred in 2005, and there have been follow up initiatives in 2006 and 2007.  The policy was again updated on 14 January 2008, and the defendant continues its practice of regularly reminding all staff of the key points of the compliance policy.

[67]     The defendant has not previously been found to have contravened the Act, and there have been no warnings by the Commission in respect of conduct likely to breach the Act.

[68]     Korean Air has paid, or is to pay, significant penalties in other jurisdictions in respect of related conduct.  Such penalties include NZ$27.35 million in South Korea, AU$5.5 million in Australia, US$300 million in the USA (of which about 78% relates to conduct concerning air cargo rates), and NZ$5.5 million in Canada.

[69]     Ms Callinan points out that the defendant is an overseas company registered in  New  Zealand,  and  that  penalties  imposed  overseas  have  had  a  direct  and substantial deterrent upon the defendant company as a whole, including its New Zealand operations.  She submits that some identifiable allowance ought to be made for the deterrent value of penalties imposed elsewhere.

[70]     Mr Dixon submits that while such penalties might assist from a deterrent point of view, no discount is necessary for overseas penalties, because the penalty currently sought is for deterrence and potential and actual harm in relation to New Zealand.  The trend of recent authorities is to take overseas penalties into account, but only to a relatively minor degree.19

[71]     It is relevant also to take into account the fact that the defendant did not coerce other airlines to join in the understandings and was not a ringleader.   Of particular importance, I consider, is the fact that those who instigated the defendant’s participation in the understandings and arrangements were neither head office management in Seoul nor New Zealand employees. As earlier observed, the relevant conduct was neither sophisticated nor rigorously enforced or implemented.  Neither was  it  covert  –  indeed,  in  someone  instances  it  was  based  upon  the  grant  of regulatory approval in countries from which the carriage commenced.

[72]     Finally, I note that the defendant is a substantial company and that it has agreed that the recommended penalty is appropriate.

[73]     The Commission suggests and Korean Air accepts a total discount of 33% for mitigating factors particular to the defendant.  That discount is less than in Qantas (50%), British Airways (40%), and EGL (50%).  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.  Likewise, Cargolux was entitled to a 33% discount, having accepted early responsibility.  The Commission suggests that a 25% discount is appropriate in this case to reflect an admission of liability coupled with other mitigating factors, but not including co-operation.

[74]     The degree of co-operation  in the cases  mentioned above,  and  in  Japan Airlines (35% discount overall), was somewhat greater than is suggested here, but the parties are nevertheless agreed that it is appropriate that a discrete allowance of a further  8%  be  allowed  for  co-operation.    I  consider  that  to  be  an  appropriate

discount.

19Alstom Holdings SA at [31]; British Airways Plc at [38]; Cargolux Airlines at [46], Qantas Airways

at [57] and Japan Airlines Co Ltd at [66].

[75]     The 33% reduction results in a final penalty range of between $3.2 and $3.7 million.  The recommended penalty of $3.5 million sits at about the middle of that range.

[76]     In all the circumstances, and in the light of a comparison with similar cases, I

consider the recommended penalty to be appropriate.

Result

[77]     There will accordingly be an order approving the recommended penalty, and directing the defendant to pay to the Commission the sum of $3.5 million.   The defendant is 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