Gateway Solutions Limited v Commerce Commission

[2018] NZHC 3049

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTEPOTI ROHE

CRI-2018-412-000032

CRI-2018-412-000033 [2018] NZHC 3049

BETWEEN

GATEWAY SOLUTIONS LIMITED

First Appellant

AND

IAN CARLINE

Second Appellant

AND

COMMERCE COMMISSION

Respondent

Hearing:	19 November 2018
Appearances:	C S Withnall QC and B J Nettleton for the Appellants J C L Dixon QC and I M Brookie for the Respondent
Judgment:	23 November 2018

JUDGMENT OF NATION J

[1]        This application for leave to appeal and intended appeal arises out of a disclosure application made during the course of a disputed facts hearing, after entry of guilty pleas but before sentence.

[2]        The first appellant, Gateway Solutions Ltd (Gateway), produces deer velvet supplements sold under the brand name “Silberhorn”. The company was taken over by the second appellant, Mr Carline, in 2002.

[3]        After drying, the velvet is ground into a powder and either packed in bulk or put in capsules ready for use by the consumer. Mr Carline and members of his family have been involved in producing the powdered product.

GATEWAY SOLUTIONS v COMMERCE COMMISSION [2018] NZHC 3049 [23 November 2018]

[4]        The Commerce Commission began investigating activities of Gateway in 2014 in response to allegations that it had been mislabelling its products by overstating the amount of deer velvet contained in capsules. Mr Carline failed or refused to comply with notices to produce documents. This led to the Commission filing charges in October 2015 against Gateway and Mr Carline under s 47J Fair Trading Act 1986 (FTA) for failing to comply with statutory notices. In May 2016, charges were filed against Gateway and Mr Carline under ss 10 and 13 of the FTA in relation to 22 batches of Silberhorn branded deer velvet dietary supplement capsules that bore labels overstating the amount of deer velvet contained within them (and understating the amount of carob, inserted as a filler to make up the weight of the capsules). There were also other charges relating to claims that capsules contained 100 per cent deer velvet when they did not and that Gateway’s website contained similar misleading statements.

[5]        An eight week defended hearing was scheduled to begin on 30 October 2017. On 1 November 2017, the appellants entered guilty pleas as follows:

(a)        Gateway – 27 charges in total, 26 charges under s 10 and 1 charge under s 47J FTA;

(b)        Mr Carline – 1 charge of being a party to the above breach by the company under s 47J FTA.

[6]        Pleas were entered on the basis of agreed summaries of facts, which had been discussed and revised between counsel and ultimately signed by Mr Carline on behalf of himself and Gateway.

[7]        At the scheduled sentencing hearing on 27 February 2018, it became apparent the appellants disputed several facts contained in the summaries of facts (or inferences that the Commission submitted should be drawn from them). In particular, the appellants claimed:

(a)        Mr Carline did not know about the mislabelling; and

(b)        customers were not disadvantaged by receiving less deer velvet because an alleged change to the manufacturing process (the cryogenic process) at the start of the charge period meant the product was more effective than it had been previously.

[8]        In support of their claim that the product was more effective the appellants relied on a draft research report by an expert on deer velvet, Dr Stephen Haines of AgResearch New Zealand (the Haines report). In that report, Dr Haines:

(a)        stated that he had received Silberhorn deer velvet powder in 2017 from Mr Carline, together with deer velvet powder from two other producers and deer velvet capsules from another vendor;

(b)        presented his test results that showed the Silberhorn product had more “actives” in it than the other powders; but

(c)        expressly advised that any questions as to the efficacy of the product were beyond the scope of his testing.

[9]        The Court asked counsel to meet and identify the issues in dispute. This was the subject of further memoranda. The Commission indicated in its memorandum that it needed to take advice on the Haines report.

[10]      The Court then scheduled the disputed facts hearing to begin on 13 August 2018 with an estimated duration of three days (but with five days set aside). Ultimately, nearly eight days were required to hear the evidence.

[11]      The Commission called evidence from a witness, Mr Winter. He gave evidence as to the process used by his company, Aroma (NZ) Ltd (Aroma), to produce a fine powder that could be used for encapsulation and of the way its services had been provided to Gateway in the relevant period from 2010 to 2015. A Commission investigator, Mr Lourie, produced documentary evidence relating to 15 of the 22 charged batches consistent with the deer velvet as to those batches having been processed by Aroma.

[12]      Mr Carline gave evidence that Gateway used Aroma to process deer velvet from June 2010, and it was very likely that Aroma was doing the drying and milling of deer velvet in relation to the charged batches. He also gave evidence that Aroma held a stockpile of processed deer velvet powder that could be used for a number of batches.

[13]      Mr Carline gave evidence that Mr Parsons’ company, Genesis, had also undertaken some processing of deer velvet for Gateway starting in 2013. Genesis produced powder by freeze drying, a process different to the heat drying process used by Aroma.

[14]Dr Haines gave evidence consistent with his draft report.

[15]      The disclosure decision related to four reports authored by Dr James Suttie, an authority on deer velvet (the Suttie reports). He was engaged by the Commission to assist in preparing for the disputed facts hearing by providing comments on the Haines report and other defence evidence relating to the cryogenic process used to produce the powder. The Commission withheld the Suttie reports under ss 16(1)(c)(i) and 16(1)(j) Criminal Disclosure Act 2008 (CDA) and s 56 Evidence Act 2006. During the disputed facts hearing, the appellants sought disclosure of the Suttie reports under s 30 CDA.

[16]      On 22 August 2018, Judge Phillips heard oral arguments from counsel. He then requested and inspected the documents. The Judge ruled in the Commission’s favour the next day, that the Suttie reports were not disclosable. His Honour released his reasons for that decision on 31 August 2018.

[17]      Judge Phillips ruled that the material was validly withheld in accordance with the decision of Williams J in Ministry of Business, Innovation and Employment v Centreport Ltd,1 and on the grounds of litigation privilege.2

1      Ministry of Business, Innovation and Employment v Centreport Ltd, [2014] NZHC 2751 at [38].

2      Commerce Commission v Gateway Solutions [2018] NZDC 17341 at [18].

[18]      As to whether privilege should be disallowed under either s 30(1)(b) CDA or s 67(2) Evidence Act, His Honour found that none of the material was necessary for the defence. Nor was there any public interest reason for overriding the valid withholding grounds in this case.3 In essence, His Honour concluded that disclosure of the material was not required to ensure the disputed facts hearing was fair.

Submissions for Appellants

[19]      In submissions for the appellants, Mr Withnall QC confirmed that the basis of the defence case in relation to sentence was that consumers were not disadvantaged by the incorrect labelling because the shortfall in quantity of the deer velvet powder in the capsules was compensated for by its superior quality, and Mr Carline’s belief in that negated any intent to mislead. That assertion was based on Mr Carline’s evidence that, since taking over the company, he had developed a processing method involving a cryogenic (ultra-low temperature) drying method which he believed resulted in retention of a higher proportion of the therapeutically active components in the finished powder than that obtained by the other processing methods.

[20]      Mr Withnall referred to the evidence as to the basis on which Dr Suttie had been engaged by the Commission and the refusal of the Commission to provide the Suttie reports. He referred to Dr Haines’ evidence at the disputed facts hearing and cross-examination, what the appellants said were the critical parts of his evidence and his ultimate conclusion “that the Silberhorn cryogenic process resulted in higher levels of the relevant proteins and lipids than those in the other New Zealand products analysed at the same time”.

[21]      Mr Withnall noted the Commission did not call any evidence at all to challenge Dr Haines’ findings. Rather, the thrust of cross-examination had been to point out that the majority of the capsules the Commission had obtained had been dried and milled on Gateway’s behalf by Aroma using a rotary vacuum dryer and the application of heat. Mr Withnall said Dr Haines’ evidence was that the application of heat results in more damage to the molecular structure of the active components, resulting in a lower

3      Commerce Commission v Gateway Solutions, above n 2, at [23]-[24].

concentration of them in the powder produced than that obtained in the low temperature processing.

[22]      Mr Withnall submitted that the inference to be drawn by the failure to challenge Dr Haines’ scientific analysis in any way is that the reports of Dr Suttie did not disagree with Dr Haines’ methodology and conclusions and, in fact, agreed with his findings.

[23]Mr Withnall submitted that:

It is fundamentally wrong in a criminal proceeding brought by a statutory body such as the Commerce Commission, to withhold under the cloak of privilege a review reviewed by an expert of the scientific conclusions of another expert engaged by the defence, when that review either supports at the very least or does not derogate from the defence expert’s findings.

[24]      Mr Withnall acknowledged the Commission was relying on ss 16(1)(c)(i) and 16(1)(j) CDA and s 56 Evidence Act 2006. For the appellants, Mr Withnall referred to ss 3(1), 13(1), 13(2) and 13(6) CDA and the Court’s ability to override privilege under s 67(2) Evidence Act and s 30(1)(b) CDA.

[25]      Mr Withnall also referred to the judgment of Williams J in Centreport.4 He accepted the case provided prima facie support for the Commission’s arguments but said the courts had recognised that privilege can be overridden where necessary to enable a defendant to present an effective defence.5

[26]      The thrust of Mr Withnall’s submissions was that Dr Suttie must have agreed with Dr Haines’ scientific analysis and findings and that Dr Suttie’s report must have contained material which supported the defence case and should therefore have been made available to enable the defendants to present an effective defence. He argued the Judge had not provided reasons for his conclusion that the non-disclosure did not impact upon the fair trial rights of the appellants. He submitted the trial process, in this case the disputed facts hearing, could not have been fair when the prosecution had the benefit of undisclosed scientific information without the defence having access to it to ensure its witnesses were properly briefed.

4      Ministry of Business, Innovation and Employment v Centreport Ltd, above n 1.

5      Liev v R [2017] NZHC 1352.

[27]      The submissions of Mr Dixon QC and Mr Brookie for the Commission are reflected in the decision I have reached as set out below.

[28]The appellants rely upon s 13(1) CDA which provides:

The prosecutor must disclose to the defendant the information described in subsection (2) as soon as is reasonably practicable after a defendant has pleaded not guilty.

[29]And s 30(1)(b) CDA:

Even though the information may be withheld under this Act, the interests protected by the withholding of that information are outweighed by other considerations that make it desirable, in the public interest, to disclose the information.

[30]And s 67(2) Evidence Act:

A Judge may disallow a claim of privilege conferred by any of sections 54 to 59 and 64 in respect of a communication or information if the Judge is of the opinion that evidence of the communication or information is necessary to enable the defendant in a criminal proceeding to present an effective defence.

[31]      The Commission relies upon its right to withhold disclosure under s 16(1)(j) CDA which permits information to be withheld under any privilege applicable under the rules of evidence, and under s 16(1)(c)(i) CDA as to:

Material that is prepared by or for the prosecutor to assist the conduct of the hearing or trial.

[32]And s 56 Evidence Act:

56 Privilege for preparatory materials for proceedings

(1)Subsection (2) applies to a communication or information only if the communication or information is made, received, compiled, or prepared for the dominant purpose of preparing for a proceeding or an apprehended proceeding (the proceeding).

(2)A person (the party) who is, or on reasonable grounds contemplates becoming, a party to the proceeding has a privilege in respect of—

(a)a communication between the party and any other person:

(b)a communication between the party’s legal adviser and any other person:

(c)information compiled or prepared by the party or the party’s legal adviser:

(d)information compiled or prepared at the request of the party, or the party’s legal adviser, by any other person.

[33]Both counsel referred to the judgment of Williams J in Centreport.6

[34]      Mr Withnall did not take issue with Williams J’s statement that criminal trials are adversarial contests and the disclosure regime does not go so far as to require the prosecutor to admit the defence into the prosecution’s trial preparation room. He also accepted Williams J’s conclusions that litigation privilege applies equally to civil and criminal proceedings.

[35]      For the Commission, Mr Dixon accepted that the right to withhold information on the grounds of privilege could be overridden if that was necessary to enable a defendant to present an effective defence. In the context of the disputed facts hearing, that required the Judge to consider whether disclosure of the Suttie reports was necessary to enable the appellants to provide evidence to support the submission that Gateway had not intended to sell to consumers a less effective product because of the way the cryogenic process was used to produce the powder.

[36]      Dr Suttie was asked to assist the Commission through a letter of 26 March 2018. He was advised that Mr Carline and Gateway had pleaded guilty to certain charges, was provided with the admitted summary of facts and the Haines report. He was asked to “review the [Haines] report and to be available to discuss [his] review with representatives of the Commission”. He was told the Commission might require additional assistance from him to enable the Commission to prepare its case.

[37]      It was accepted by Mr Withnall that the Suttie reports did attract privilege in terms of s 56 Evidence Act. I also accept that it was information which the Commission had the discretion to withhold under s 16(1)(c)(i) CDA.

[38]      It was submitted for the appellants that the Court should have ordered disclosure of the reports, or at least those parts of them in which Dr Suttie must have

6      Ministry of Business, Innovation and Employment v Centreport Ltd, above n 1.

indicated that he took no issue with the scientific analysis and conclusions of Dr Haines, on the grounds this was necessary to enable the appellants to advance the arguments they wished to make in mitigation. As stated, their argument was that the powder produced by Mr Carline’s cryogenic process was twice as effective as powder produced by other processes. In his report, Dr Haines outlined his analysis of the level of “active” ingredients in powder produced by that process as against that produced by two other processes, including the process used by Genesis.

[39]      Gateway submits that, with Dr Suttie being asked to review Dr Haines’ report and with the Commission choosing not to challenge Dr Haines’ conclusions, there must have been comments or findings in Dr Suttie’s report consistent with the conclusions reached by Dr Haines. Gateway submits that it requires disclosure of such information to enable it to more effectively advance its mitigation defence.

[40]      The Commission’s first response to this is that, even if there was such information or such opinions were included in the Suttie reports, they would not be of any assistance to Gateway because Dr Haines’ analysis and conclusions related to a comparison he made between the active ingredients present in the cryogenically produced powder and that produced by the freeze drying process used by Genesis. That comparison was irrelevant in all the circumstances of this case where, with regard to the proposed mitigation defence, the Court had to be concerned with the effectiveness of the powder as it was made available to consumers in the circumstances relevant to the charges to which the appellants had pleaded guilty.

[41]      Mr Withnall took no issue with the way Mr Dixon had summarised what occurred at the disputed facts hearing. I also accept the correctness of that summary.

[42]      At the disputed facts hearing, the Commission did not challenge Dr Haines’ expertise, qualifications, methodology or results. There was no real challenge to the substance of his evidence. The cross-examination was directed at the relevance of his evidence.

[43]      The point of the defence calling Dr Haines was to support an argument that consumers had not been harmed because the Silberhorn capsules were a more effective

product, but Dr Haines had expressly disavowed such a suggestion in his evidence. There were other ways Dr Haines’ evidence was irrelevant to the argument that Gateway wished to advance:

(a)        Dr Haines had been supplied with freeze dried deer velvet powder to test. The evidence from Mr Winters, accepted by Mr Carline, was that for the majority of the period of the charges, Gateway’s product had not been freeze dried. It had been dried in a rotary vacuum tumbler. Thus, Dr Haines was not testing the powder that Gateway had used for the majority of the period or powder that had been produced by the same process.

(b)        The powder tested by Dr Haines would likely have had characteristics different to the product produced by Aroma. Dr Haines’ evidence in chief had been that heating deer velvet, as occurred with it being dried in a rotary tumbler in the Aroma process, could damage the product and reduce the “actives” within it. He accepted that, as most of the Silberhorn product during the relevant period had been heat dried, it might have less actives in it than the powder he was given to test.

(c)        In his evidence, Mr Carline had advanced the argument that he considered consumers were better off, because he had tested Gateway’s cryogenically produced powder on himself and found it twice as effective as the powder Gateway had previously used. Dr Haines had not, however, been given any of Gateway’s earlier powder to test so his analysis of what he tested could not support the proposition advanced by Mr Carline.

(d)        Dr Haines had been given three different deer velvet powders to test, as well as some capsules of deer velvet powder which contained a “filler”. He found the results from capsules difficult to interpret and out of step with the powders. He was not provided with capsules of Gateway’s deer velvet, as supplied to consumers, which had contained a filler. He was thus not able to comment on the actives that would have been in the Silberhorn capsules that Gateway supplied to its customers.

(e)        Dr Haines reiterated in cross-examination that he was not able to comment on the efficacy of the powder he tested.

[44]      I accept the above as a fair analysis of the relevant evidence. I accept that, on that analysis, even if Dr Suttie had indicated in his report that he accepted the analysis and conclusions Dr Haines reached, that would have been of no assistance to Gateway with regard to the mitigation plea it wished to make.

[45]      In oral submissions before me, Mr Withnall made the point that, even if Dr Haines’ analysis was not of powder in the capsules that were the subject of 15 of the 22 charges, that was not necessarily so as to seven other charges. In relation to those seven charges, it had not been conclusively established that the powder in the capsules had been produced by Aroma.

[46]      If there was any uncertainty as to who produced the powder used in the product that was the subject of seven charges, that uncertainty did not require disclosure of the Suttie reports. The Haines report provides information as to the level of active ingredients found in the powder produced by the cryogenic process. If Gateway produced evidence that the capsules that were the subject of the seven remaining charges included powder produced by the cryogenic process then Gateway can still refer to Dr Haines’ findings if it considers that would usefully advance its case. The utility of that is however doubtful given that Dr Haines made it clear he was not able to comment on the efficacy of the powder produced by the cryogenic process as against powder produced by the other processes he considered. I note also Mr Carline’s evidence that it was very likely the case that Aroma was doing the drying and milling of deer velvet in relation to all the charged batches.

[47]      There is a further reason why the non-disclosure of material in the Suttie reports, consistent with Dr Haines’ findings, would not prejudice Gateway in the mitigation plea it wishes to advance.

[48]      To the extent Dr Haines’ analysis and the conclusions he reached are before the Court, they remain unchallenged. The sentencing Judge has to proceed with sentencing on the basis that, if and to the extent those findings are relevant, they must be accepted as correct. If on reviewing Dr Haines’ report Dr Suttie agreed with Dr Haines’ analysis and conclusions, disclosure of those opinions would add nothing to the state of the evidence already before the Court.

[49]      For the Commission, Mr Dixon accepted that, if Dr Suttie had reached conclusions which were different from those reached by Dr Haines and wished to rely on them, then it would have been necessary for the Commission to produce at least those parts of the reports. Had this happened, they would of course then become the subject of contested evidence at the disputed facts hearing. This was not what happened.

[50]      Before the disputed facts hearing, counsel for the Commission advised the then counsel for Gateway:

In addition, in response to the Haines’ report, the Commission is prepared to accept that Dr Haines’ report establishes that the capsules provided to AgResearch (Dr Haines) as being from Silberhorn had less damage to the proteins that are the major components of deer velvet compared to the other capsules tested by AgResearch. We would also accept that Dr Haines’ research did not involve testing of the relative efficacies of the capsules.

The Commission does not, however, accept that this provides a basis for a submission along the lines advanced at 1.6(b) of the joint memorandum. If you wish to establish anything other than what we have accepted in [5 above], then you will need to call Dr Haines.

The reference to 1.6(b) of the joint memorandum was to the submission “that the product that customers received was at least as good if not better than the labelled weight of the deer velvet as previously processed”.

[51]      Mr Withnall submitted that the Commission’s acceptance of Dr Haines’ conclusions could not have justified the Judge’s ruling during the disputed facts hearing that the Suttie reports need not be disclosed because at that time he would not have known that Dr Haines’ conclusions were not being challenged. Mr Withnall was not counsel during that hearing. Given the Commission’s position, as stated in their letter of 2 May 2018 to Gateway’s then counsel, the application for an order for disclosure must have been made with knowledge of the Commission’s position over the Haines report.

[52]      Mr Withnall however further argued that, in terms of s 30(1)(b) CDA, the Court should have ordered disclosure of at least those parts of the Suttie reports pertaining to scientific conclusions consistent with the Haines report because the public interest requires such disclosure by a prosecuting authority such as the Commerce

Commission. He said this was consistent with the purpose of the CDA as stated in s 3(1):

The purpose of this Act is to promote fair, effective, and efficient disclosure of relevant information between the prosecution and the defence … for the purposes of criminal proceedings.

[53]      He was essentially submitting that, whenever an authority such as the Commerce Commission obtains a report or advice which includes information that might be of assistance to the other party, that information needs to be disclosed. He argued that, whenever the Commerce Commission has information from an expert witness it has engaged that either supports or at the least does not detract from expert evidence called by a defendant in a prosecution, the proper discharge of the duty of fairness requires that the information be disclosed to the defendant, not withheld by invoking a claim to privilege.

[54]      It is however part of the statutory scheme for disclosure that a prosecutor may withhold information which could be subject to privilege as provided for in ss 16(1)(c)(i), (ii) and (iii) and s 16(1)(j) CDA.

[55]In Centreport, Williams J observed:7

… s 16(1)(c)(i) on its plain terms maintains the traditional separation between the prosecution and defence at trial. It reflects the fact the criminal trials are still adversarial contests, whatever one might say of the strengths and weaknesses of that system. The disclosure regime does not go so far as to require the prosecutor to admit the defence into the prosecution’s trial preparation room.

[56]      Section 16(1)(c) gives the prosecutor a discretion to withhold otherwise disclosable information in various situations, including where the information is generated at the investigation stage, prior to the filing of the charge or laying of the information, and is analytical or evaluative material prepared in connection with the investigation, by an employee of an agency either for a colleague or a prosecutor.

[57]      Williams J accepted that advice given on issues to explore in cross-examination of defence experts, advice on areas of focus for cross-examination or lay or fact

7      Ministry of Business, Innovation and Employment v Centreport Ltd, above n 1, at [38].

witnesses, and issues for trial strategy (generally within the expert’s area of expertise) will be covered by the broad exclusionary category in s 16(1)(c)(i).

[58]      Mr Withnall recognised the defence could not expect, through disclosure, to be admitted into the prosecution’s trial preparation room. He accepted this could mean that disclosure of the Suttie reports should be on a redacted basis. It would be only the science in those reports, consistent with the Haines report, that would have to be disclosed. It must however be commonplace for experts advising prosecuting authorities such as the Commission to provide reports or advice which include evaluative material and advice as to the potential conduct of a trial or cross- examination as well as information or opinion as to matters which are at issue in the proceedings where they agree with defence experts or witnesses. Sections 16 CDA and 56 Evidence Act allow the prosecuting authority to claim privilege in respect of such material.

[59]      Sections 16 CDA and 56 Evidence Act are consistent with there being a public interest in prosecuting and investigating authorities being able to obtain full and frank advice from experts as to matters they are investigating or prosecuting without either the expert or the prosecuting authority having to be concerned that expressions of agreement with another party’s expert will, as a matter of course, have to be disclosed to the defence. I am therefore not prepared to rule that it must be in the public interest for a prosecuting authority, such as the Commerce Commission, to have to disclose to the defence opinions or information in an expert’s report, which would otherwise be privileged, simply because the information in that report is consistent with information or advice that the defence might be relying on.

[60]      In the circumstances of this case, the test for whether disclosure is required in the public interest again comes down to whether disclosure is required to present an effective defence. Palmer J reached a similar conclusion in the context of criminal proceedings in Liev v R.8

8      Liev v R, above n 5.

[61]      In the circumstances of this case, if disclosure of the Suttie reports was necessary to enable Gateway to advance its case in mitigation then it would be in the public interest to order such disclosure. This is not the situation.

[62]      Judge Phillips inspected the documents which are at issue. He ruled that privilege should not be disallowed under either s 30(1)(b) CDA or s 67(2) Evidence Act because none of the material was necessary for the defence to present its defence. Nor was there any public interest reason for overriding the valid withholding grounds in this case. Disclosure was thus not required to ensure a fair disputed facts hearing.  I agree with the conclusions he reached.

[63]      The Commission did not seek a separate hearing on the leave application. The merits of the substantive appeal have been fully argued. There is nothing, on the face of his decision, to indicate Judge Phillips made any error in the conclusion he came to. His decision involved the exercise of a discretion where he applied settled case law principles to undisputed facts.

[64]      In all the circumstances, leave to appeal could have been declined. But, as the hearing proceeded as to the merits, I grant leave to appeal but dismiss the appeal.

[65]      The proceedings are remitted to the District Court for the Judge to proceed with sentencing.

Solicitors:

CS Withnall QC, Barrister, Dunedin French Burt Partners, Invercargill JCL Dixon QC, Barrister, Auckland IM Brookie, Barrister, Auckland