Commerce Commission v Prices Pharmacy 2011 Ltd

[2020] NZHC 1176

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE

CIV-2018-442-26

[2020] NZHC 1176

BETWEEN

COMMERCE COMMISSION

Plaintiff

AND

PRICES PHARMACY 2011 LIMITED

First Defendant

RICHARD STUART GRANT HEBBERD

Second Defendant

On papers
Judgment:	29 May 2020

JUDGMENT OF DOBSON J

[1]                 The plaintiff (the Commission) commenced these proceedings in 2018 alleging anti-competitive conduct by the defendants in breach of s 27, via s 30, of the Commerce Act 1986 (the Act).

[2]                 By December 2019, the defendants had admitted the relevant breaches. The parties negotiated an agreed statement of facts, and the defendants had agreed to a level of pecuniary penalties that were acceptable to the Commission.

[3]                 Settlement of such proceedings requires the approval of the Court and that was sought jointly by the parties. A scheduled hearing on the application for approval of the agreed settlement was frustrated by the restrictions imposed in dealing with the COVID-19 pandemic. The parties requested the Court to deal with the approval application on the papers.

COMMERCE COMMISSION v PRICES PHARMACY 2011 LTD [2020] NZHC 1176 [29 May 2020]

[4]                 After considering the written submissions, agreed statement of facts and other relevant materials provided, I came to the view that I was not able to approve the settlement on the quantum of penalties agreed between the parties. I came to that conclusion, acknowledging that it is not for the Court to determine for itself what the appropriate penalties should be, but rather to consider whether approval should be given to the agreed sum as falling within the appropriate range. I also acknowledged that the Court should approach the prospect of declining its approval cautiously.

[5]                 I issued an interim judgment setting out my conclusions on 8 April 2020. It was distributed only to counsel and the parties. The interim judgment acknowledged that I had tested all the circumstances relevant to what should be accepted as appropriate levels of penalty without the benefit of interchanges with counsel that would have occurred at a hearing. Because of that, I offered the parties a period of  10 working days each in which to invite me to reconsider my conclusions in light of any misapprehensions suggested in my interim judgment, or other matters that the parties considered to be relevant to determining appropriate penalties.

[6]                 My interim judgment observed that the timing of the parties’ agreement on the level of penalties had been concluded prior to the economic consequences of the COVID-19 pandemic becoming apparent. I took the view that, whatever the nature of Mr Hebberd’s retirement nest egg, it was likely to have been substantially reduced by the dramatic loss in value of all types of investments that has been caused by the pandemic.1 That new development since the agreement had been reached between the parties on penalties was among the reasons I cited for declining approval of the agreed settlement.

[7]                 The Commission’s initial response to my invitation for further submissions was to seek clarification of the extent of Mr Hebberd’s financial resources, and whether the reduction in value I projected had in fact occurred.

[8]                 Mr Hebberd obliged with an affidavit as to his financial position on 29 April 2020. That affidavit confirmed that the value of Mr Hebberd’s investment assets have

1 Interim judgment at [53].

indeed reduced materially, but he acknowledged that he has “a buffer” and he certainly did not wish to plead poverty to the Court.

[9]                 Subsequent to that, the Commission  filed  supplementary  submissions  on 12 May 2020 and the defendants filed supplementary submissions on 27 May 2020. I am grateful to the parties for their responses to my interim judgment. To conclude my consideration of the request for approval, I am attaching my interim judgment to this one, and it is to be read in light of the following reasoning which reflects the matters put to me since it was issued to the parties.

Respective roles of Messrs Hebberd and Wright

[10]              In [7], [13] and [37] of the interim judgment, I commented on the level of involvement respectively of Messrs Hebberd and Wright in initiating arrangements for a price-fixing arrangement, and carrying it into effect. Essentially because of his dominant position within Prices Pharmacy’s business, my interim judgment implicitly attributes a similarly senior role to Mr Hebberd relative to Mr Wright, in the conduct in breach of the Act.

[11]              The Commission’s supplementary submissions seek to correct that impression, attributing a larger role to Mr Wright in the mechanics of setting up and implementing the understanding between Nelson pharmacies.

[12]              The Commission’s submission on the point is that notwithstanding some measure of overstatement in the level of Mr Hebberd’s involvement relative to that of Mr Wright, in assessing Mr Hebberd’s level of culpability the Commission still contends that Mr Hebberd was substantially involved. He was at the key meetings, copied in on email correspondence and perhaps most importantly twice pressured a competing pharmacy to join the understanding.

[13]              Supplementary  submissions  on  behalf  of  the  defendants   suggest   that Mr Wright’s involvement should be put in a different context, in that he was involved in communications between the owners of community pharmacies in the Nelson region in part because he was standing for a vacant position as a South Island representative on the board of the Pharmacy Guild. Arguably, it mischaracterises his

involvement in dealings with those operating other pharmacies in the Nelson area to attribute it all to a role in co-ordinating an arrangement contrary to the Act, when he had a different relevant context in pursuing his election to the Pharmacy Guild board.

[14]              As to Mr Hebberd’s involvement, submissions on behalf of the defendants refer to his having no recollection of the second approach to the pharmacist who had declined to join the arrangement. Despite no clear recollection, Mr Hebberd disputed that he would have been “heated” or “forceful” in his dialogue with that non- participant, and the agreed statement of facts did not attribute that to him.

[15]              I accept that the size of Mr Hebberd’s business gave him a senior position among the Nelson community pharmacies and that the combined conduct of both of them reflected a leading role, and a relatively significant contribution to bringing the arrangement into existence.

The defendants’ motivation

[16]              The Commission invites me to reconsider my observation that the motive for the participating pharmacies was not primarily to force customers to pay a higher price for the products sold.2 This aspect of my analysis of the circumstances in which the breaches of the Act occurred was reflected in my earlier comment at [29] of the interim judgment that the conduct in issue was the antithesis of a cartel seeking to exploit an arrangement to extract super profits.

[17]              In its supplementary submissions, the Commission accepts that the pharmacies were motivated by a desire to alter their terms of trade with the Nelson and Marlborough District Health Board (DHB), but submit that they were pursuing that aim to increase their profitability by extracting further payments from the DHB, which was the primary funder of prescriptions. The Commission’s proposition is that the DHB was the main customer of the pharmacies in the monetary sense.

[18]              My analysis of the context in which the breaches of the Act occurred took into account (at [17] to [20] of the interim judgment) analyses of the viability of community

2 Interim judgment at [45].

pharmacies recorded in four reports prepared between January 2015 and November 2016. The Commission has now submitted that it is an overstatement to suggest that the then current model of funding by DHBs for provision of prescription medicines endangered the survival of community pharmacies.

[19]              The supplementary submissions for the defendants supported the analysis in my interim judgment suggesting that the motivation for the pharmacies in seeking to pressure the DHB is an important distinguishing factor when comparing the levels of penalty approved in other cases. It is submitted for the defendants that it is inappropriate for the Commission to downplay concerns at the viability of supplying prescription medicines by suggesting that other aspects of the businesses (that is, the margins on “over the counter” products) should subsidise the service of providing prescription medicines. I was urged to take into account that the impact of the margin charge was lessened by the pharmacies not applying the margin charge to many of the most vulnerable customers in the community.

[20]              The analyses reflected in my reasoning did not take into account the wider range of products sold by pharmacies, including some prescription medicines on which a higher mark-up was available, and the wide range of non-prescription medicines that community pharmacies sell, and on which they are able to maintain materially higher margins. The Commission does not suggest that pharmacies do treat the terms on which they sell prescription medicines at low margins as loss leaders, or that they should do so. The Commission does contend that it is the sale of prescription medicines which draws substantial volumes of customers into their retail premises, where they then take the opportunity of buying additional items attracting a higher mark-up for the pharmacy. Accordingly, the Commission suggested that there was no evidentiary basis for treating the defendants’ conduct as less culpable because in some way it was resorted to in a fight for their survival. Rather, the Commission characterised the conduct in breach of the Act as an illegitimate part of the pharmacies’ pursuit of greater returns.

[21]              I accept that the analysis of context in my interim judgment may have placed more emphasis on the defendants perceiving the terms of trade stipulated by the DHB as a threat to their viability than is warranted. However, concerns of that type were

material to the defendants. I am not dissuaded from my view that the primary motive for the conduct in breach of the Act was distinguishable from the arrangements and understandings between competitors in a market that usually attracts attention for breach of s 30 of the Act. Certainly, the effect of the arrangement was to fix the prices that the participating pharmacies would charge for filling prescriptions. The immediate consequence was to substantially lessen competition in the Nelson community pharmacy market, to the detriment of the customers purchasing the prescription medicines.

[22]              However, it is common ground that the aim sought to be achieved by the pharmacists was to pressure the DHB, as an important contributor to the cost of those supplies, to deal on more generous terms with the pharmacies.

[23]              I remain of the view that applying pressure on the DHB was the main reason for the arrangement because the pharmacists blamed the DHB for the need to make the extra charge. When explaining it to their customers they did not demand the extra charge from those they perceived would have difficulty paying it, and they ceased the arrangement once the DHB had indicated its preparedness to alter the terms on which it would contribute to payment for the prescription medicines.

Mr Hebberd’s financial capacity

[24]              To the extent that  I  had  regard  to  a  presumed  substantial  reduction  in  Mr Hebberd’s financial capacity to contribute substantially to the company’s penalty and to pay his own, the Commission invites reconsideration.3 The Commission submits that Mr Hebberd’s affidavit as to his financial position indicates that he will not face hardship in paying the penalty that was agreed and that the standard accepted by the Court previously is that the purpose of such penalties is for them to “sting”, so that, for example, penalties have been imposed where they could only be met “with difficulty”.4

3      See interim judgment at [58]–[60].

4      Compare Commerce Commission v Koppers Arch Wood Protection (NZ) Ltd (2006) 11 TCLR 581 at [34].

[25]              For Mr Hebberd, it is submitted that his affidavit describing the adverse impact of the pandemic does justify the concerns I expressed at the impact being unduly harsh on him, where he is having to arrange for the bulk of the resources for the company to pay its penalty as well.

[26]              I accept that the extent of the adverse economic consequences of the COVID-19 pandemic described in Mr Hebberd’s recent affidavit are not as great as I contemplated would be most likely, and I further acknowledge that the level of penalty he agreed to appears not to put a life-changing extent of financial pressure on his retirement.

Revisiting the conclusions in my interim judgment

[27]              I am not persuaded to change the analysis in my interim judgment in light of the further submissions received about the respective roles of Messrs Hebberd and Wright, nor am I persuaded that the Commission’s analysis of the commercial motivation for the conduct in breach of the Act ought properly to require the conduct to be ranked more seriously than I have done. I remain of the view that the unusual motivation for the arrangement is an important distinguishing feature from other cases where the Court has approved such settlements. The other considerations I took into account in my interim judgment when assessing an appropriate range for the company’s penalty remain valid.

[28]              However, I am required to revisit the reasoning on the extent to which the penalties agreed to by Mr Hebberd will impose an exceptional level of financial pressure on him. Although the increased difficulty I perceived in his paying the pecuniary penalty ordered personally against him was not the only consideration in declining to approve it, the financial position as now disclosed is sufficient for me to accept that the penalty agreed personally ought to be approved. Rather than being at the bottom of the range I proposed, I am satisfied that a penalty can appropriately be placed at the top of the range of $20,000 to $50,000. I accordingly now approve the penalty at the top of that level, namely $50,000 as had been agreed between the parties.

[29]              My further analysis in light of the parties’ supplementary submissions does not alter my analysis on the grounds for declining approval for the penalty imposed on

Prices Pharmacy. I adhere to the level of $344,000 as explained in my interim judgment, as the amount for which I am prepared to grant approval of the pecuniary penalty imposed against Prices Pharmacy.

Dobson J

Solicitors:

Meredith Connell, Auckland for plaintiff Darroch Forrest, Wellington for defendants