Commerce Commission v Lodge Real Estate Ltd

[2016] NZHC 3115

THE COURT FILE IN RELATION TO THIS PROCEEDING SHALL NOT BE SEARCHED COPIED OR INSPECTED WITHOUT LEAVE OF A JUDGE, ON AN APPLICATION MADE ON NOTICE TO ALL PARTIES.

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

COMMERCIAL LIST

CIV 2015-404-3045 [2016] NZHC 3115

UNDER

Sections 27, 30 and 80 of the Commerce

Act 1986

BETWEEN

COMMERCE COMMISSION Plaintiff

AND

LODGE REAL ESTATE LTD First Defendant

LUGTONʼS LTD

Second Defendant

Hearing:	16 December 2016
Counsel:	L C A Farmer and A McConachy for Plaintiff K M Burkhart for Second Defendant
Judgment:	16 December 2016

(ORAL) JUDGMENT OF HEATH J

Solicitors:

Meredith Connell, Auckland

Kennedys, Auckland

COMMERCE COMMISSION v LODGE REAL ESTATE LTD [2016] NZHC 3115 [16 December 2016]

Introduction

[1]      Lugton’s Ltd is a real estate agent based in Hamilton.   It offers a range of services, including assisting or promoting vendors to sell residential properties. Lugton’s acknowledges that, between 30 September 2013 and 1 August 2014, it entered into and gave effect to an anti-competitive price fixing arrangement with four other agencies in the Hamilton region:  Lodge Real Estate Ltd, Monarch Real Estate Ltd (trading under the Harcourts brand), On-line Realty Ltd (trading under the Ray  White  brand)  and  Success  Realty  Ltd  (trading  under  the  Bayley’s  brand). Success has already been dealt with by the Court in relation to its anti-competitive

conduct. The Court approved and imposed a pecuniary penalty of $900,000.1

[2]      The Commerce Commission (the Commission) seeks a pecuniary penalty to mark  Lugton’s breach  of the restricted trade practices provisions of s 27 of the Commerce Act 1986 (the Act).  It relies on the deeming provisions of s 30 of the Act. Those two provisions state:

27 Contracts, 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.

(3) Subsection (2) applies in respect of a contract or arrangement entered into, or an understanding arrived at, whether before or after the commencement of this Act.

(4) No provision of a contract, whether made before or after the commencement of this Act, that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market is enforceable.

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

(1) Without limiting the generality of section 27, 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

1      Commerce Commission v Lodge Real Estate Ltd [2016] NZHC 1494.

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) 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.

[3]      The Commission and Lugton’s have agreed that it would be appropriate for a penalty of $1 million to be imposed to mark Lugton’s conduct.   The Commission does  not  seek  costs  in  relation  to  the  proceeding.    I  am  asked  to  approve  the agreement reached and to make a pecuniary penalty order in the amount requested.2

The Court’s approach to fixing penalties

[4]      Section 80(1) of the Act empowers the High Court to order that a person pay a pecuniary penalty in such amount as it thinks fit if that party has (among other things) contravened a provision within Part 2 of the Act.

[5]      Although  it  is  open  to  parties  to  litigation  of  this  type  to  agree  on  an appropriate pecuniary penalty to be imposed, it remains necessary for the Court to give its sanction to it.   The authorities make it clear that the Court should acknowledge the public benefits of prompt resolution of penalty proceedings through agreement.   The approach that has been consistently applied is for this Court to consider whether the amounts agreed are within an appropriate range, rather than to

determine whether the penalty is the same as that which would have been imposed

2      Commerce Act 1986, s 80(1).

by  the  Judge  who  hears  a  defended  penalty  proceeding.3      If  so  satisfied,  the agreement reached between the parties will be sanctioned.

[6]      I adopt the approach taken by Venning J in Commerce Commission v Kuehne

+ Nagel International AG,4 in which His Honour emphasised the need for the Court to approach its evaluation of an appropriate penalty in a manner akin to the way in which a criminal sentencing would be undertaken.   That means it is necessary to determine a starting point by reference to the maximum penalties involved, and then to consider relevant aggravating and mitigating factors in relation to the particular defendant.  That exercise must be undertaken individually.  The respective level of culpability and mitigating circumstances can obviously differ between defendants. Although there is more than one defendant to this proceeding, the only party with which I am concerned in this case is Lugton’s.

[7]      In imposing pecuniary penalties, the Court is endeavouring to provide both general deterrence to others in a market who might consider acting in the same or a similar way, and specific deterrence to those who have infringed and are subject to a penalty.

[8]      It  is  necessary  for  such  penalties  to  be  pitched  at  a  level  which  is commercially realistic; namely, one which outweighs the likely profit margin to be obtained from any breach of provisions relating to anti-competitive conduct.  After maximum  penalties  were increased  in  2001,  the Court  of Appeal  observed  that Parliament had intended “to send a much stronger signal than the current provisions

that the deterrence objective will only be served if anti-competitive behaviour is

3      Generally, see Commerce Commission v Alstom Holdings SA HC Auckland CIV-2007-404-2165,

22 December 2008 (Rodney Hansen J) at para [18], applying a judgment of the Full Court of the Federal Court of Australia in NW Frozen Foods v ACCC (1996) 71 FCR 285; Commerce Commission v New Zealand Diagnostic Group Ltd HC Auckland CIV-2008-404-4321, 19 July

2010 (Allan J) at para [45]; Commerce Commission v Geologistics International (Bermuda) Ltd

HC Auckland  CIV-2010-404-4590, 22  December  2010  (Allan  J)  at  para  [38];  Commerce Commission v Whirlpool SA HC Auckland CIV-2011-404-6362, 19 December 2011 (Allan J) at para [15], Commerce Commission v Kuehne + Nagel International AG [2014] NZHC 705 at para [21] (Venning J), Commerce Commission v Envirowaste Services Ltd [2015] NZHC 2936 at para [27] (Heath J) and Commerce Commission v PGG Wrightson Ltd [2015] NZHC 3360 at paras [30]–[32] (Asher J).

4      Commerce Commission v Kuehne + Nagel International AG [2014] NZHC 705, at para [21].

profitless”.5   Deterrence is the primary public policy objective in fixing the level of appropriate penalties.

[9]      In determining individual penalties, the aggravating factors relating to the conduct (as opposed to the person against whom an order is sought) will generally fall into three main categories:

(a)       The first involves an assessment of the particular person’s culpability.

Those  who  initiate  anti-competitive  behaviour  will  ordinarily  be treated more harshly than those who carry out instructions to implement an arrangement.

(b)The second is duration.   The period over which the contravening conduct occurs is a relevant factor to be taken into account.

(c)      The third involves  causation.   The question  here is  whether  anti- competitive behaviour has caused loss to any person or produced a significant gain for the enterprise which undertook the contravening conduct.

The “Hamilton Agreement”

[10]     The anti-competitive conduct in this case arose out of what has been called the “Hamilton Agreement”.   That followed an announcement in mid 2013 by TradeMe that  it  was  adopting a  standard fee  price model,  in  substitution  for  a subscription based cost previously charged. The primary impact on real estate agents was the need to absorb significant additional costs.  The extent to which they would need to do so depended upon an ability to pass on costs to vendor clients.

[11]     Between 30 September and 16 October 2013, representatives of the five real

estate firms (including Lugton’s) exchanged communications regarding TradeMe’s

new pricing model.  The initial meeting was called by the largest real estate agent in

5      Telecom Corporation of New Zealand Ltd v Commerce Commission [2012] NZCA 344 at para

[53], quoting Commerce Amendment Bill 2001 (296-2) (select committee report) at 23.

the Hamilton market.   Lugton’s was not an initiator in the process but was an

important player.

[12]     Those involved in the Hamilton Agreement agreed to remove all of their listings of residential property from TradeMe, and in future, any vendor who requested their residential property be listed would be required to fund the cost of the listing itself, or alternatively the cost would be met by an individual real estate agent. The companies agreed that they would not compete with each other by offering any discount on the costs of a TradeMe listing.  This conduct constituted unlawful price- fixing.   In short, it compromised the ability of individual vendors to negotiate a better price.

[13]     In or about July 2014, TradeMe reverted to its previous pricing model, with some changes. At that point, agencies could have reverted to their previous practices in relation to TradeMe listings.  However, many have continued to pass on costs to vendors.  That, to me, does not necessarily represent an aggravating feature.  It was almost inevitable that costs would be passed on to vendors as time progressed.

[14]     The entry into and implementation of the Hamilton Agreement had the effect of controlling prices vendors paid for the services from real estate agents in relation to such listings.  Because it is deemed to have substantially lessened competition in the Hamilton real estate market, it in breach of s 27 of the Act.

Lugton’s Limited

[15]     Lugton’s is an independent Hamilton-based real estate agency dealing mostly in  residential  real  estate.   The  present  managing  director  is  Mr  Simon  Lugton. Mr Lugton was involved in the discussions leading to the Hamilton agreement in his previous role as a sales director.

[16]     I  shall  say  a  little  more  later  about  Mr  Lugton’s  assistance  to  the Commission.  It is a significant mitigating factor when the final penalty amount is fixed.

Analysis

[17]     In the circumstances of this case, the maximum penalty that can be imposed is $10 million.6    As indicated, the primary public policy goal is deterrence.   That must be taken into account in assessing an appropriate starting point.

[18]     In the proceeding involving Success Realty, the seriousness of the conduct involved was emphasised by Courtney J.  She observed:7

I do not accept that this conduct falls at the lower end of the spectrum.  The listing of properties on TradeMe was a widespread and popular means of advertising  for  vendors  and  the  agreement  had  the  effect  of  depriving vendors of access to that service or, at the least, of the ability to negotiate for that service.

[19]     In  assessing  the  seriousness  of  Lugton’s  conduct,  I  take  account  of  the

following factors:

(a)      A significant number of residential property listings in Hamilton were affected by the anti-competitive conduct.

(b)The Hamilton Agreement involved five separate real estate agencies which, together, controlled more than 90 percent of residential sales in that area.

(c)     The  Hamilton Agreement  was  implemented  through  active endorsement by executives, including the current managing director.

(d)The impact of the conduct was to save costs for Lugton and throw a greater cost on vendors.

(e)      Lugton’s was an active participant, though not a ringleader.

(f)      While   Lugton’s   deliberately  and   intentionally   entered   into   the

Hamilton Agreement, it did not do so with an intent to breach the restrictive trade practices provisions of the Act.

6      Commerce Act 1986, s 80(2B)(b)(i).

7      Commerce Commission v Lodge Real Estate Ltd [2016] NZHC 1494, at para [14].

(g)      The duration of the conduct between mid December 2013 and August

2014 was not significant overall.

[20]     Any commercial gain to Lugton’s cannot be quantified.   It is accepted that there was a potential for commercial advantage, though it cannot be assessed safely.

[21]     In selecting an appropriate starting point the Commission has referred to a number of existing penalty judgments relating to other real estate agencies and their responses to TradeMe’s altered pricing model.  In particular, I have been referred by Mr Farmer,  for the Commission,  to  the Success  Realty case8   and  to  two  other decisions which relate to agencies operating in Manawatu.9

[22]     Similar issues arose in that case.   Court approved penalties with starting points ranging between $1.4 million and $4.1 million have resulted.  Starting points towards the upper end of that range have been reserved for offending which occurred on a much larger scale.  In light of those cases, Mr Farmer submits that a starting point of between $1.8 million and $2.1 million would be appropriate.  Lugton adopts a slightly lower range of $1.7 million to $2.1 million.

[23]     There are no aggravating factors concerning Lugton’s itself but there are significant mitigating factors relating to its conduct.  In particular:

(a)       Lugton’s has not previously been found to have contravened the Act;

(b)Lugton’s is a well-resourced company.   It has promptly accepted responsibility and agreed that the scale of the penalty is appropriate;

(c)      Lugton’s   has   agreed   to   provide   ongoing   cooperation   to   the Commission in its investigation.  Significantly, Mr Lugton has agreed to give evidence for the Commission in other claims in relation to the Hamilton  Agreement.    The  ability  to  rely  on  someone  who  was

involved in the discussions leading to the Hamilton Agreement cannot

8      Ibid.

9      Commerce Commission v Unique Realty [2016] NZHC 1064 and Commerce Commission v

Property Brokers Ltd [2016] NZHC 2851.

be overstated.  This is a factor which must be taken into account and given significant weight in assessing the range for mitigating factors.

(d)      Lugton’s    did   not    initiate   discussions    involving    the   Hamilton

Agreement.

[24]     On that basis, the Commission accepts that a reduction of between 45 and 50 percent of the starting point is justified.   I accept that that is appropriate in the circumstances of this case.

[25]     That  results  in  a  final  penalty  range  of  $850,000  to  $1,155,000.    The suggested  penalty of  $1,000,000  falls  within  that  range.    I am  satisfied  that  in relation to the question of parity of penalties imposed, this penalty fits with those that  have  been  ordered  in  the  two  Manawatu  cases  and  in  respect  of  Success

Realty.10

[26]     Having regard to the aggravating and mitigating factors, and the need for a deterrent penalty, I am satisfied that the recommended penalty of $1 million falls within an appropriate range.  I am prepared to approve the proposed penalty and to make the declaration sought.

Result

[27]     For those reasons:

(a)      I make a declaration that Lugton’s engaged in conduct, arising out of the  Hamilton  Agreement,  that  breached  s 27  of  the  Act,  through application of s 30.

(b)      I impose a pecuniary penalty in the sum of $1 million.

[28]     By consent, there is no order as to costs.

10     Ibid.

[29]     To protect commercially sensitive information to which I have had regard but not referred, I make an order that the Court file in relation to this proceeding not be searched, copied or inspected without leave of a Judge, on an application made on notice to both the Commission and Lugton’s.

[30]     I thank counsel for their considerable assistance, without which I would not have been able to give judgment orally today.

P R Heath J