Turners & Growers Ltd v Zespri Group Ltd HC Auckland CIV 2009-404-004392
[2011] NZHC 913
•12 August 2011
JUDGMENT FOR PUBLIC RELEASE: SEE ADDENDUM TO JUDGMENT DATED 22 AUGUST 2011.
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2009-404-004392
UNDER the Declaratory Judgments Act 1908
AND UNDER the Commerce Act 1986
BETWEEN TURNERS & GROWERS LIMITED First Plaintiff
ANDTURNERS & GROWERS HORTICULTURE LIMITED Second Plaintiff
ANDENZA LIMITED Third Plaintiff
ANDZESPRI GROUP LIMITED First Defendant
ANDZESPRI INTERNATIONAL LIMITED Second Defendant
Hearing: 9-13, 23-26 and 30-31 May, 1-3 and 7-10 June 2011
Court: White J
K M Vautier CMG (Lay member)
Counsel: C M Walker and M C Smith for Plaintiffs
D J Goddard QC and L A O'Gorman for Defendants
Judgment: 12 August 2011
JUDGMENT OF THE COURT
This judgment was delivered by me on 12 August 2011 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar
Date: ………………….
Counsel: D J Goddard QC, Thorndon Chambers, PO Box 1530, Wellington
Solicitors: Gilbert/Walker, PO Box 1595 Shortland Street, Auckland 1140
Buddle Findlay, PO Box 1433 Shortland Street, Auckland 1140
TURNERS & GROWERS LTD V ZESPRI GROUP LTD HC AK CIV 2009-404-004392 [12 August 2011]
Para
No.
Introduction
[1]
- Previous judgments
- Commerce Act causes of action
[6] [7] Factual background [13] - Zespri
- Turners & Growers
- Kiwifruit
- Season
- Grading and packing
- Quantity of kiwifruit produced in New Zealand
- Participants in the supply chain
- World production and export
- The Australia market[15] [18] [21] [27] [28] [32] [33] [53] [55] Regulatory background
[64]
- Current regulatory regime
- Application of Commerce Act
- Collaborative marketing[64] [66] [68]
Legal framework [73] The loyalty contracts and the supply agreements
[105]
- The provisions of the loyalty contracts
- The provisions of the supply agreements- The background to the loyalty contracts and the supply agreements
- Summary
- The issues
- Submissions for Turners & Growers
- Submissions for Zespri
- Contraventions in current regulated market?[105] [112]
[114] [132] [134] [137] [138] [139]
A “deregulated” market?
[141]
A relevant post-harvest services market?
[175]
The 2009 Australia service level agreements
[181]
- Factual background
- Summary
- Expert economic evidence
- Turners & Growers‘ claims
- The s 27(1) claim
- Amendments to pleadings- The s 27(1) issues
[181] [237] [240] [246] [247] [252] [259]
- Submissions for Turners & Growers
- Submissions for Zespri
- Competition analysis under s 27(1)
- The s 36(2) claim
- The s 36(2) issues
- Loss or damage?[262]
[264] [266] [285] [291] [298]
Zespri’s new kiwifruit cultivar policy
[299]
- The claim
- Factual background
- The letter
- The policy- Policy implementation
- Expert economic evidence
- The pleading and particulars
- The submissions
- The principal issue
- Market definition and relevant markets
- Section 36 – initial observations
- Has Zespri taken advantage of its market power?
- Proscribed purpose?
- Conclusion
- Relief-
[299] [301] [304] [308] [313] [319] [321] [325] [327] [328] [335] [336] [363] [370] [371]
Result [372]
Introduction
[1] Since 1 June 2000 the export of kiwifruit from New Zealand, other than for consumption in Australia, has been restricted to Zespri Group Limited (Zespri) in accordance with its authorisation granted by the New Zealand Kiwifruit Board (KNZ) as required by the Kiwifruit Export Regulations 1999 (the Regulations). It is unlawful for anyone else to export kiwifruit from New Zealand, other than for consumption in Australia or under a collaborative marketing arrangement with Zespri as approved by KNZ.
[2] As a result of the export ban, Zespri is the sole purchaser of kiwifruit for export destinations other than Australia, giving it the status of a monopsonist. In accordance with the regulatory definition of Zespri‘s ―core business‖ and the regulatory restrictions on its activities, Zespri purchases New Zealand-grown kiwifruit for export from other parties who grow or supply the kiwifruit. Since 2004
Zespri has entered into rolling three-year loyalty contracts with growers and annual supply agreements with its suppliers which also contain exclusivity provisions.
[3] In the 2009/10 season, as a result of an anticipated over-supply of Class 1
Green kiwifruit in the larger sizes for export by Zespri to markets other than Australia, Zespri took steps to arrange for this excess supply to be released for supply to Australia (or New Zealand) instead of the same sized Class 2 Green kiwifruit which, in accordance with a service level agreement, would be prohibited from export to Australia. Zespri would pay compensation to contractors for the Class 2 kiwifruit not packed, but this would be forfeited if any of the Class 2 fruit were exported to Australia.
[4] Zespri has also developed a policy for a mandatory evaluation process in relation to any new commercial kiwifruit cultivars for export from New Zealand. One of the stipulations in the policy is that, in most cases, a third party bringing a cultivar to Zespri must be able to grant (preferably) a world-wide exclusive licence to Zespri as well as an absolute assignment of the intellectual property rights associated with the cultivar.
[5] Turners & Growers Limited and the other plaintiffs (Turners & Growers)
have in this proceeding:
(a) challenged the validity of the Regulations imposing the export ban and requiring KNZ to authorise Zespri to export kiwifruit;
(b)sought declarations that Zespri has engaged in ―unjustifiable discrimination‖ and ―non-core activities‖ in breach of the Regulations; and
(c) sought declarations at common law and relief under the Commerce Act 1986 (the Commerce Act) in respect of Zespri‘s loyalty contracts and the exclusivity provisions in the supply agreements, Zespri‘s 2009
Australia service level agreements and Zespri‘s cultivar policy.
Previous judgments
[6] For the reasons given in a previous judgment dated 5 May 2010 it was decided to determine first as preliminary issues Turners & Growers‘ challenge to the validity of the Regulations and a challenge by Zespri to the Court‘s jurisdiction to grant the declarations sought by Turners & Growers relating to the alleged breaches of the Regulations by Zespri: Turners & Growers Ltd v Zespri Group Ltd.1 For the reasons given in judgment (No. 2) dated 13 August 2010 it was decided that the Regulations were valid and that the regulator KNZ had exclusive jurisdiction to determine in the first instance Turners & Growers‘ complaints about Zespri‘s
engagement in ―unjustifiable discrimination‖ and ―non-core activities‖: Turners & Growers Ltd v Zespri Group Ltd (No. 2).2 That decision is subject to appeal to the Court of Appeal, but the parties are in agreement that the remaining issues should be
determined now in this Court on the basis of the High Court‘s earlier decision.
1 Turners & Growers Ltd v Zespri Group Ltd HC Auckland CIV 2009-404-004392, 5 May 2010.
2 Turners & Growers Ltd v Zespri Group Ltd (No 2) HC Auckland CIV 2009-404-004392, 13 August
2010.
Commerce Act causes of action
[7] The remaining issues involve claims by Turners & Growers that Zespri has contravened the restrictive trade practices provisions of s 27 and s 36 in Part 2 of the Commerce Act. In essence Turners & Growers claim that:
(a) in contravention of s 27, the loyalty contracts and the exclusivity provisions in the supply agreements have the purpose and/or the effect and/or are likely to have the effect of substantially lessening competition in one or more of the following markets:
(i)the grower/exporter (non-Australia) market whether that is defined as two markets sequential in time (pre-deregulation and post-deregulation) or as a single, continuous market which is liable to a future change in dynamic by reason of deregulation (a ―deregulated‖ grower/exporter (non-Australia) market);
(ii)the grower/exporter (non-Australia) market for Hayward kiwifruit;
(iii) the grower/exporter (non-Australia) market for Hort 16A
kiwifruit post November 2018; (iv) the post-harvest services market;
(b)in contravention of s 36, by entering into the loyalty contracts and the exclusivity provisions in the supply agreements, Zespri has taken advantage of its substantial degree of power in the current grower/exporter (non-Australia) market for the purposes of preventing or deterring exporters or potential exporters of kiwifruit from engaging in competitive conduct in one or both of the following markets:
(i) a ―deregulated‖ grower/exporter (non-Australia) market;
(ii) The post-harvest services market;
(c) in contravention of s 27, provisions in the 2009 Australia service level agreements had the purpose, the effect and/or the likely effect of substantially lessening competition in the market for the acquisition and supply of kiwifruit for export to Australia;
(d)in contravention of s 36, by entering into the 2009 Australia service level agreements, Zespri has taken advantage of its substantial degree of power in the current grower/exporter (non-Australia) market for the purpose of preventing or deterring exporters or potential exporters of kiwifruit from engaging in competitive conduct in the supplier/exporter (Australia) market; and
(e) in contravention of s 36, by seeking to acquire and control the rights to new kiwifruit cultivars and restricting the ability of competitors or potential competitors to develop competing cultivars, Zespri has taken advantage of its substantial degree of power in the current grower/exporter (non-Australia) market for the purpose(s) of:
(i)preventing or deterring other exporters from engaging in competitive conduct in a ―deregulated‖ grower/exporter (non- Australia) market; and
(ii)preventing or deterring other rights holders from engaging in competitive conduct in the (kiwifruit) cultivar licensing market.
[8] While the export ban and Zespri‘s export authorisation are exempt from the operation of the restrictive trade practices provisions in Part 2 of the Commerce Act because they are ―specifically authorised‖ by the Regulations, the provisions in the contracts or agreements and the other conduct of Zespri that is the subject of the claims by Turners & Growers, are not exempt because they have not been specifically authorised under s 43(1) of the Commerce Act: cf New Zealand Apple
and Pear Marketing Board v Apple Fields Ltd.3 It was therefore common ground that the restrictive trade practices provisions in Part 2 of the Commerce Act apply to Zespri‘s contracts, agreements and other conduct which are the subject of Turners & Growers‘ claims.
[9] It was also common ground that in considering whether Zespri has contravened s 27 and s 36 as claimed by Turners & Growers it needs to be recognised that Zespri‘s contracts, agreements and other conduct have occurred within the existing regulatory regime for the export of kiwifruit and that it is not for the Court to express any view on the merits or otherwise of the existing regulatory regime or on the question whether the regulatory regime should be retained and, if it is not to be retained, any view on the timing and form of any deregulation. Those
are policy questions for the Government to consider and determine.4
[10] The separate question of the possibility or likelihood of deregulation has been raised by Turners & Growers in the context of the pleaded ―markets‖ for their claims relating to the loyalty contracts and the exclusivity provisions in the supply agreements under both s 27 and s 36. As Mr Walker, counsel for Turners & Growers, recognised in his submissions, the question of whether and when deregulation might occur is uncertain and, as Mr Goddard QC, counsel for Zespri, pointed out in his submissions, the form of any deregulation is also uncertain. The impact of these uncertainties on the ―market‖ analysis required under the Commerce Act raises a novel issue apparently not previously addressed in any New Zealand or Australian competition law case.
[11] A further unique feature of this case is that the ultimate ―markets‖ for the kiwifruit acquired by Zespri for export and the ―consumers‖ of that kiwifruit are overseas and therefore outside the reach of the New Zealand Commerce Act, the
purpose of which is to promote competition in markets in New Zealand for the long-
3 New Zealand Apple and Pear Marketing Board v Apple Fields Ltd [1991] 1 NZLR 257 (PC).
4 cf Crown Milling Co Ltd v The King [1927] AC 394 (PC) at 402; NZ Drivers’ Association v NZ Road Carriers [1982] 1 NZLR 374 (CA) at 388; Telecom Corporation of New Zealand Ltd v Clear Communications Ltd [1995] 1 NZLR 385 (PC) at 408; Unison Networks v Commerce Commission [2007] NZSC 74, [2008] 1 NZLR 42 at [54]; and Kacem v Bashir [2010] NZSC 112, [2011] 2 NZLR
1 at [36].
term benefit of consumers within those New Zealand markets.5 This case is therefore not concerned with the ability of Zespri, as a monopsonist, to obtain price premiums for its exported kiwifruit, or with the interests of overseas consumers. Those are issues that may arise in the context of international trade negotiations and any Government policy decision that may affect the current regulatory regime. In this case the focus is on the impact of Zespri‘s monopsony on the growers of kiwifruit and on other potential exporters such as Turners & Growers.
[12] As Turners & Growers‘ five claims relate to three separate factual matters, namely the loyalty contracts and the exclusivity provisions in the supply agreements, the 2009 Australia service level agreements and the new kiwifruit cultivar policy, it is convenient to consider Zespri‘s alleged contraventions of s 27(1) and s 36(2) in relation to these three matters separately. It is also convenient to set out first the general factual and regulatory background to the case and the legal framework under the Commerce Act before turning to consider the three matters and the specific issues, evidence and submissions relating to them.
Factual Background
[13] The evidence establishing the relevant factual background to this case was provided by way of an agreed bundle of documents (some 16 volumes), witnesses during the four week trial (five for Turners & Growers, with two briefs taken as read, and four for Zespri) and an agreed statement of facts. Each party also called an independent economic expert whose evidence was given and tested through the ―hot tub‖ process at the conclusion of the evidence from the factual witnesses for the parties.
[14] The existence of the extensive documentary evidence and the agreed statement of facts meant that in the end the factual evidence was largely undisputed and we were not called on to make any findings of credibility. It is, therefore, only necessary for us to summarise the evidence that is relevant to our determination of
the specific issues under the Commerce Act raised by Turners & Growers‘ claims.
5 Sections 1A, 3(1A) and 4. No contravention of s 36A was alleged in this case.
Zespri
[15] Zespri is the sole authorised exporter of kiwifruit from New Zealand, otherwise than for consumption in Australia. It is not a co-operative company. As at March 2011 Zespri had 2,188 shareholders of whom 1,816 were growers or entities economically aligned with current growers.
[16] As at March 2011 2,701 New Zealand growers supplied kiwifruit to Zespri.
[17] Zespri International Ltd is a wholly owned subsidiary of Zespri and acts as its international marketing arm.
Turners & Growers
[18] The first plaintiff is a New Zealand company that carries on business as a holder of companies growing and dealing in horticultural products. Both Turners & Growers Horticulture Ltd and ENZA Ltd are wholly owned subsidiaries of Turners
& Growers Ltd.
[19] Turners & Growers Horticulture Ltd trades as ―Kerifresh‖. It is a kiwifruit grower and also operates packhouse and coolstore facilities in New Zealand. It is a shareholder in Zespri. It is also party to a three-year rolling grower loyalty contract with Zespri, which is the subject of the first claim.
[20] ENZA Ltd holds the rights in the plaintiffs‘ new varieties of kiwifruit, ENZAGold™, ENZARed™ and Summerkiwi™. It also operates the plaintiffs‘ business trading in the Hayward variety in Australia.
Kiwifruit
[21] The most common kiwifruit variety or ―cultivar‖ is the green-fleshed
―Hayward‖. This variety currently comprises approximately 80% of the New Zealand kiwifruit crop. Hayward is not subject to any intellectual property protection. It is marketed by Zespri as ―ZESPRI® GREEN‖ and by Turners & Growers as ―ENZAGreen™‖.
[22] The other major kiwifruit cultivar grown in New Zealand is Hort 16A, a gold-fleshed variety developed by HortResearch in the early 1990s. It comprises approximately 20% of the kiwifruit grown in New Zealand. The rights to Hort 16A are now owned by Zespri. Fruit from this variety is marketed by Zespri as
―ZESPRI® GOLD‖. In addition to Zespri‘s grower licences, Zespri‘s contracts with growers and suppliers require them to supply all fruit grown from this cultivar to Zespri.
[23] Zespri is in the process of commercialising three new varieties: an early season, gold-fleshed kiwifruit currently known as ―Gold3‖; a long-storing, gold- fleshed kiwifruit currently known as ―Gold9‖; and an early season, green-fleshed kiwifruit currently known as ―Green14‖. Zespri applied for plant variety rights for these cultivars in June 2009 in New Zealand and the USA and in 2010 in various other overseas jurisdictions. In each jurisdiction, applications in respect of each of the three cultivars were filed on the same date. The applications have not yet been determined. While the applications are determined, Zespri enjoys provisional protection for these varieties under s 9 of the Plant Variety Rights Act 1987 and similar provisions overseas.
[24] Turners & Growers is commercialising three new varieties: a gold-fleshed kiwifruit marketed as ―ENZAGold™‖; a red-fleshed kiwifruit marketed as
―ENZARed™‖; and an early season, green-fleshed kiwifruit marketed as
―SUMMERKIWI™‖. Turners & Growers (or the cultivar owner) has applied for plant variety rights for these varieties in New Zealand and overseas. Rights have been granted for ENZAGold™ in the USA and for ENZARed™ in Argentina, China, Hong Kong and Uruguay. Applications are pending in other countries, including Australia and New Zealand. Responsibility for obtaining rights for SUMMERKIWI™ remains with the cultivar owner.
[25] Turners & Growers‘ licences with New Zealand and overseas growers require growers to supply all fruit grown from the ENZAGold™, ENZARed™ and SUMMERKIWI™ cultivars to Turners & Growers.
[26] The owners of rights to cultivars generally charge growers to plant their cultivars. Zespri sells the rights to grow its varieties by auction or tender, from time to time. Zespri has charged up to $25,000/ha for Hort 16A licences; $12,000/ha for Gold3 and Gold9 licences; and up to $3,000/ha for Green14 licences. Turners & Growers charges up to $5,000/ha for ENZAGold™; up to $4,000/ha for ENZARed™; and up to $4,500/ha for SUMMERKIWI™.
Season
[27] Kiwifruit is generally harvested in New Zealand between April and June. Fruit is available for release to market until November, and usually into December. The ―2009 season‖ refers to the season where fruit is picked in 2009.
Grading and packing
[28] Kiwifruit is packed into either single-layer trays (3.3 kg for Gold and 3.6 kg for Green) or 10 kg boxes for export. Quantities of kiwifruit are commonly described in ―tray equivalents‖ and pricing may be indicated in terms of either trays or boxes. Due to differences in fruit size the number of kiwifruit packed per tray or per box varies.
[29] Picked kiwifruit is graded into three standards based on shape, appearance and damage: Class 1; Class 2; and Class 3. 80% to 90% of the overall New Zealand crop is Class 1. The balance comprises roughly equal quantities of Class 2 and Class
3 fruit.
[30] Class 1 is the premium export fruit, almost all of which is exported to countries other than Australia. Class 2 is also an export grade, exported primarily to Australia. Zespri has also had a Class 2 export programme in place to other export markets for many years, but only a small proportion of Zespri's total exports are Class 2. ―Class 3‖ is not a grade standard as such, but simply the by-product of grading Classes 1 and 2; it is also referred to as ―reject fruit‖. Class 3 is sold domestically or dumped. The New Zealand market absorbs about 2 million trays of
Hayward kiwifruit annually and a small volume of Gold kiwifruit. Most of the fruit is Class 3; some is Class 2; there is very little Class 1.
[31] Kiwifruit is sorted into sizes when packed, from 14 to 46, indicating the number of pieces of fruit which will fit into a standard tray. Fruit of sizes 42 and above is regarded as ―small‖; fruit of sizes 18 to 33 is ―large‖.
Quantity of kiwifruit produced in New Zealand
[32] Over the last decade New Zealand‘s kiwifruit production has increased from about 65 million trays to well over 100 million trays per annum. In the 2009 season New Zealand produced about 102 million trays of Class 1 kiwifruit, comprising about 75 million trays of Class 1 Hayward; about 3.4 million trays of Class 1
Hayward Organic; and about 22.2 million trays of Class 1 Hort 16A. New Zealand typically produces about 5 million trays of Class 2 Hayward and roughly the same amount of Class 3 Hayward annually.
Participants in the supply chain
[33] There are a number of different parties in the supply chain for kiwifruit. These include registered suppliers; growers; supply entities; packhouses and coolstores; and exporters. We summarise the role of each of these in turn.
Registered suppliers
[34] A registered supplier is a person registered by Zespri to provide services to Zespri under a supply agreement. Under Schedule 5 of Zespri‘s supply agreement growers supplying fruit to Zespri must do so via a registered supplier (―option A‖) or agree to enter into the supply agreement themselves (―option B‖). Therefore, supply entities either have to become registered as suppliers to Zespri or enter into a contract with a registered supplier. For example, Turners & Growers Horticulture Limited contracts with the registered supplier G6 Kiwi Supply Limited (―G6‖). There are 15 registered suppliers.
[35] Registered suppliers operate as supply and logistics management companies, co-ordinating the supply activities of their member supply entities and representing them in dealings with Zespri. The registered supplier enters into agreements with the supply entities, packhouses and coolstore operators to coordinate the supply of fruit from the growers to Zespri. The registered supplier also contracts with a logistics operator to transport the fruit to the wharf and load it.
Growers
[36] The orchards of most New Zealand kiwifruit growers are less than 5 hectares in size.
[37] Each season, Zespri offers a ―ZESPRI Loyalty Contract‖ or ―Enhanced Three Year Rolling Grower Contract‖ to each grower. Under the loyalty contract, Zespri agrees to pay the grower a loyalty premium in exchange for contractual commitments by the grower over the term of the contract in relation to the supply of all Class 1 Hayward and Class 1 Hort 16A kiwifruit to Zespri for export to countries other than Australia. We consider the provisions of the loyalty contract in more detail when we deal with Turners & Growers‘ first claim.
[38] As depicted in the tables below, most orchards in New Zealand are planted in Hayward. Table 1 sets out: the numbers of distinct Zespri-registered growers and orchards; the number of ―Zespri growers‖ as defined in the supply agreement, including a break down by variety; and the number of ―Zespri growers‖ who signed up for the loyalty premium in each season. In all cases, the information in Table 2 relates only to growers who supply fruit to Zespri. Because some growers have more than one variety planted, the total of the grower numbers by variety exceeds the total number of growers.
Table 1: Time series of grower numbers with orchards planted in whole or part in conventional Hayward, conventional Hort 16A and Zespri new varieties. Also showing grower numbers signed up for loyalty premium.
| Total Zespri- registered growers | Total Zespri- registered orchards | Grower numbers | Grower numbers signed up for loyalty rebate | Hayward grower numbers | Hort 16A grower numbers | Gold 3, Gold 9, Green 14 grower numbers | |
| 2006/07 | 2,748 | 3,077 | 3,187 | 3,180 | 2,647 | 777 | Nil |
| 2007/08 | 2,727 | 3,106 | 3,216 | 3,211 | 2,669 | 774 | Nil |
| 2008/09 | 2,710 | 3,110 | 3,236 | 3,234 | 2,699 | 778 | Nil |
| 2009/10 | 2,711 | 3,080 | 3,244 | 3,241 | 2,618 | 785 | Nil |
| 2010/11 | 2,721 | 3,025 | 3,261 | 3,260 | 2,659 | 798 | Nil |
| 2011/12 | 2,701 | 3,169 | Unknown | Unknown | 2,590 | 807 | 621 |
[39] Table 2 sets out the productive hectares of each of the varieties grown for supply to Zespri, by season.
Table 2: Producing hectares of Zespri varieties
Hayward Hayward
Organic
Hort 16A Other Total 2006/07 9,479 456 2,032 - 11,967 2007/08 9,675 451 2,060 - 12,186 2008/09 9,766 480 2,091 - 12,337 2009/10 9,871 505 2,149 - 12,525 2010/11 9,937 558 2,330 - 12,825 2011/12 9,378 558 2,562 615 13,113
[40] It is possible to graft kiwifruit vines from one cultivar to another, eg from Hayward to Hort 16A. For example, 85% of the plantings of Zespri‘s new varieties in 2010 were grafted onto existing Hayward rootstock. The new budstock can be grafted in the same season that the final crop from the old variety is harvested. There will be no fruit in the following season and up to half yield in the season thereafter. Generally the vine then returns to full yield, depending on the cultivar. The 615 hectares referred to above as ―other‖ are newly grafted varieties which are not expected to be productive before 2012.
Grower returns
[41] A common measure of grower returns is the ―Orchard Gate Return‖ (―OGR‖), which is the notional gross fruit return to growers at the ―orchard gate‖. The OGR is the fruit payment from Zespri, less off-orchard costs such as packing, coolstorage and transport costs. The OGR can be measured by tray or by hectare. The OGR per hectare reflects the yield of kiwifruit per hectare as well as the per tray return.
[42] The grower‘s on-orchard costs must be deducted from the OGR to obtain a net return. On-orchard costs vary depending on the size of the orchard and the efficiency of the particular grower.
[43] Table 3 below shows historic OGRs and estimated net orchard returns per hectare for an average New Zealand orchard for each season from 2004 to 2010.
Table 3: Historic OGRs and estimated net orchard returns (NOR) per hectare for an average New Zealand orchard.
Hayward
OGR
Hayward
estimated average NOR
Hayward
Organic
OGRHayward
Organic estimated average NOR
Hort 16A
OGR
Hort 16A
estimated average NOR
2004/05 31,900 16,900 33,500 18,500 49,400 29,400 2005/06 25,600 10,600 30,000 15,000 42,500 22,500 2006/07 29,000 14,000 35,200 20,200 48,500 28,500 2007/08 24,100 4,223 34,700 12,700 46,100 25,663 2008/09 30,100 7,750 39,400 17,515 60,900 35,568 2009/10 29,600 8,061 39,400 19,019 83,100 54,894 2010/11 32,234 9,153 37,541 14,040 83,785 51,233
[44] Zespri pools grower returns based on the characteristics of the kiwifruit supplied. The characteristics are: variety Green (Hayward) or Gold (Hort 16A); growing method (conventional or organic); and class of fruit (Class 1 or 2). Within each pool, the returns are paid out to growers either via their supply entities (option A) or directly (option B).
[45] Most growers also receive the loyalty premium from Zespri, which is paid out of Zespri‘s corporate margin, rather than from the grower pools. Table 4 below contains a time series of the total fruit and service payments for each pool, showing the proportion of which is loyalty premium.
Table 4: Summary of fruit and service payments
| Zespri Green Fruit and Service Payment ($/TE) | Loyalty % | Zespri Green Organic Fruit and Service Payment ($/TE) | Loyalty % | Zespri Gold Fruit and Service Payment ($/TE) | Loyalty % | Loyalty premium | |
| 2006/07 | $7.67 | 3.39% | $9.35 | 2.78% | $9.68 | 2.87% | $0.26 |
| 2007/08 | $6.40 | 1.56% | $8.25 | 1.21% | $8.91 | 1.12% | $0.10 |
| 2008/09 | $7.14 | 2.38% | $9.43 | 1.80% | $9.86 | 1.72% | $0.17 |
| 2009/10 | $7.15 | 2.10% | $9.11 | 1.65% | $12.28 | 1.22% | $0.15 |
| 2010/11 | $7.56 | 3.31% | $9.33 | 2.68% | $12.90 | 1.94% | $0.25 |
Supply entities
[46] Growers generally contract to supply their fruit to one or more of 42 ―supply entities‖. Turners & Growers Horticulture Limited is a supply entity. Supply entities are a mechanism for aggregation, creating efficiencies and economies of scale. When growers contract with supply entities in relation to their Class 1 fruit, they usually also agree to the supply entity taking their Class 2 and Class 3 reject fruit. The supply entities arrange harvesting, packing and coolstorage contracts, on behalf of their growers. The packing and coolstorage contracts tend to be with operators economically associated with the supply entity.
[47] Title to the kiwifruit passes to Zespri at FOBS,6 either directly from the grower (ie the supplier acts as an agent authorised to pass title directly from the grower to Zespri), or through the registered supplier acting as principal (ie the supplier acquires title from the grower prior to FOBS, then passes title to Zespri at
FOBS).
6 FOBS is defined in reg 2 of the Kiwifruit Export Regulations 1999 to mean ―stowed on board the
ship or aircraft on which the kiwifruit is exported‖.
[48] Most of Zespri‘s fruit payments are made on an individual grower basis but are paid by Zespri to the grower‘s supply entity (option A) rather than directly to the grower (option B). To spread the risk, in particular of fruit loss, growers commonly pool their returns at a supply entity level.
[49] Although contracting through a supply entity is the norm, some growers contract directly with Zespri for fruit supply. They have no contractual relationship with either a supply entity or a registered supplier. They have to make their own arrangements for picking, coolstorage and transport and do not pool risk with other growers.
[50] In most cases option B growers assign their payments from Zespri to their post-harvest operators so there is no difference in cash-flow from option A. For example, in the 2011 season, there are 77 option B growers, 72 of whom have assigned their payments to their post-harvest operators.
Packhouses
[51] There are currently 71 packhouses which pack kiwifruit. Usually supply entities are associated with a post-harvest facility, and often a supply entity will be a trust and/or company owned or controlled by a group of growers. Most kiwifruit packhouses can pack fruit other than kiwifruit. Many packhouses pack other fruit, typically avocados, during the offseason. However, most packhouses pack only kiwifruit during the kiwifruit season. Generally a packhouse in the main Bay of Plenty growing region could not survive if it were unable to pack kiwifruit. There is not enough alternative crop to satisfy the capacity. Growers tend to use packhouses in the same locality or at least the same region, to avoid additional transport costs and risk of fruit damage. There is competition between packhouses, particularly in the Bay of Plenty. Growers may switch between packhouses from season to season. Larger growers commonly split their crop between separate packhouses.
Coolstores
[52] From the packhouse, kiwifruit moves to the coolstore to be held before dispatch to market. There are currently 77 coolstores which store kiwifruit. Traditionally, most coolstores have been operated by entities which also run packhouses. There are some independent operators. Fruit is progressively released from the coolstore until the end of October, with the best lasting fruit being released until November and usually into December. It is impractical to store kiwifruit with certain other types of fruit, in particular apples, so coolstores tend to be dedicated to kiwifruit at least during the kiwifruit season.
World Production and Export
[53] Notwithstanding its name, ―kiwifruit‖ is a fruit grown and consumed in many countries around the world. Indeed there are significant international markets for the export of kiwifruit produced in many countries, including New Zealand. Information published in the latest World Kiwifruit Review7 shows that:
(a) The top five kiwifruit producing countries in the world, accounting for
87.3% of the world‘s production in the period 2007 to 2010, were in descending order: China, Italy, New Zealand, Chile and Greece.
(b)The major exporters of the world‘s kiwifruit, as measured by their respective shares of world export trade in 2008, were: New Zealand (35.1%), Italy (28.6%) and Chile (14.9%), followed by Greece (3.5%) and France (2.4%). China, which consumes most of its own production, accounted for only 0.2% of the world‘s exports.
(c) In the period 2007 to 2010 New Zealand exported 90.3% of its kiwifruit production. Zespri‘s export markets by volume and by value
for the 2010/11 season are set out Tables 5, 6 and 7 below:
7 Belrose Inc’s World Kiwifruit Review (2010 ed, Belrose, Pullman (Washington, USA).
Table 5: Volume and value by market of New Zealand-grown kiwifruit exported by
Zespri in the 2010/11 season (all varieties)
Volume
Sold (million TE)
% of Zespri volume
Market Return (NZ$m)
% of Zespri returns
Europe 46.42 47% 406.14 40% Japan 17.62 18% 315.44 31% China & Hong Kong 9.25 9% 93.33 9% Korea 6.68 7% 60.75 6% Taiwan 6.06 6% 60.65 6% Southeast Asia 2.10 2% 18.69 2% North Africa & Middle
East
6.03
6%
35.62
4%
Australia 0.63 1% 5.91 1% Collaborative
Marketing
2.52
3%
17.11
2%
Other 0.80 1% 3.72 0% TOTAL 98.12 100% 1,017.36 100%
Table 6: Volume and value by market of New Zealand-grown kiwifruit exported by
Zespri in the 2010/11 season (Hayward Class 1 conventional only)
Volume
Sold (million TE)
% of Zespri volume
Market Return (NZ$m)
% of Zespri returns
Europe 38.52 55% 322.59 51% Japan 9.50 14% 147.64 23% China & Hong
Kong
5.66
8%
45.81
7%
Korea 3.04 4% 23.55 4% Taiwan 3.99 6% 35.12 6% Southeast Asia 1.30 2% 10.18 2% North Africa & Middle East 4.89
7%
26.01
4%
Australia 0.25 0% 1.51 0% Collaborative
Marketing
1.96
3%
12.24
2%
Other 0.76 1% 3.70 1% TOTAL 69.86 100% 628.34 100%
Table 7: Volume and value by market of New Zealand-grown kiwifruit exported by
Zespri in the 2010/11 season (Hort 16A Class 1 conventional only)
Volume
Sold (million TE)
% of Zespri volume
Market Return (NZ$m)
% of Zespri returns
Europe 4.95 24% 58.09 18% Japan 7.25 35% 152.62 48% China & Hong
Kong
3.14
15%
43.04
14%
Korea 2.05 10% 24.57 8% Taiwan 2.02 10% 24.95 8% Southeast Asia 0.63 3% 7.08 2% North Africa & Middle East 0.20
1%
2.01
1%
Australia 0.32 2% 3.81 1% Collaborative
Marketing
-
0%
-
0%
Other 0.05 0% 0.27 0% TOTAL 20.62 100% 316.44 100%
(d)Worldwide production of kiwifruit has increased by nearly 75% in the last decade. For the last two decades Chile has been a major competitor of New Zealand in respect of Hayward and the volume of production of Hayward in Chile and other countries has been increasing. The parties agree that, reflecting such world supply and market conditions, orchard gate returns for Hayward growers worldwide have been decreasing in real terms; and that New Zealand‘s distance from market and higher wage costs make it difficult for New Zealand growers to compete on a pure commodity basis. World production of kiwifruit is likely to continue to expand for the next few years with more areas of production, particularly in China, and new varieties of kiwifruit, particularly from New Zealand, Italy and China.
(e) There is a general acceptance in the New Zealand kiwifruit industry, including on the part of Turners & Growers and Zespri, that the future of the industry lies in new cultivars. Zespri said in its proposal to FRST (Foundation for Research Science and Technology) in February
2009:
―The ‗Hayward‘ cultivar (ZESPRITM GREEN) is not controlled by plant variety protection or licensing and returns are dropping as this product becomes commoditised by competitors with cheaper production economics. In the
2008 season, 34% of the New Zealand ZESPRI™ GREEN
growers were cash negative for the season (even greater when mortgage costs are taken into account), yet they [ie
New Zealand‘s ZESPRI GREEN growers] contribute 79% of
New Zealand‘s kiwifruit production by volume. Chile is New Zealand‘s key Southern Hemisphere kiwifruit competitor with cheaper production economics than New Zealand and will double its ‗Hayward‘ production in the next
5 years. This will place huge pressure on the viability of
man y ‗ Haywar d‘ gr ower s i n New Zea l and. While more efficient production will sustain New Zealand average profitability in the short term, this strategy is unlikely to be viable in the long-term.‖
―If more proprietary new cultivars are not supplied to the industry, such as ‗Hort16A‘, many New Zealand growers will struggle to compete globally against countries with cheaper production economics and that are closer to key markets. If new cultivars are not commercially released in the medium term it is likely many New Zealand ‗Hayward‘ growers will have to exit kiwifruit production with the flow- on effects adversely impacting the 25,000 people currently employed by the New Zealand kiwifruit industry.
New cultivars therefore have huge market potential and are key to the sustainable future of the New Zealand kiwifruit industry. The New Zealand kiwifruit industry therefore needs to identify and protect premier new cultivars to replace ‗Hayward‘ and use these to provide a new foundation for the New Zealand kiwifruit industry.‖ (emphasis in original)
[54] In summary the position is that:
(a) New Zealand and Chile are the main Southern Hemisphere exporters of kiwifruit. The principal competitor for New Zealand-grown Hayward fruit is Chilean-grown Hayward. This is in the market for
approximately the same time period, although New Zealand fruit is available further into October and November.
(b)In recent years about 90% of kiwifruit produced in New Zealand has been exported. A grower would generally prefer to have fruit sold into international markets other than Australia, because this earns higher returns than sales to Australia or the domestic market.
(c) Access for New Zealand-grown fruit to foreign markets other than Australia is dependent upon either: Zespri agreeing to export the fruit; or KNZ approving a collaborative marketing arrangement under Part
4 of the Regulations.
The Australia market
[55] The Australia market takes around 5% of the kiwifruit exported from New Zealand. Approximately 4.2 million trays are exported to Australia each year. Generally, around 90% is Hayward and the balance is Hort 16A.
[56] Australia is predominantly a Class 2 market. It is the primary market for New Zealand-grown Class 2 fruit. In a typical season (ie excluding 2009/2010), approximately 3.5 million trays of Class 2 Hayward go to Australia and between
1.6 million and 1.8 million trays to Zespri‘s other Class 2 export markets. Only a small proportion of the kiwifruit exported from New Zealand to Australia has been Class 1.
[57] Zespri has a small share of the Hayward market to Australia: in 2008 it was just under 8%. The volumes exported to Australia by Zespri and by the other exporters to Australia in the 2008/2009, 2009/2010 and 2010/2011 seasons are referred to in more detail when we deal with Turners & Growers‘ claim in relation to the Australia service level agreements.
[58] Export of kiwifruit to Australia is regulated under the New Zealand Horticulture Export Authority Act 1987 (the ―HEA Act‖). The HEA Act regime requires exporters of prescribed products to have licences and the relevant industry
―product group‖ to formulate an annual ―export marketing strategy‖.8 The export marketing strategy may not limit either the number of export licences available or the volume of product to be exported.
[59] Kiwifruit exported to Australia for consumption in Australia is a prescribed product. The ―New Zealand Kiwifruit Product Group to Australia Incorporated‖ (NZKPGA) is a recognised product group for the purposes of the HEA Act. The kiwifruit export marketing strategy requires all licensed exporters to be members of
―Kiwifruit Exporters to Australia‖ (KETA). It also imposes a minimum Class 2 grade standard.
[60] In the 2009/2010 season there were 18 licensees, including Turners & Growers and Zespri, entitled to export fruit to Australia. That is the relevant season for the claims regarding the Australia service level agreements.
[61] Most of the New Zealand exporters into the Australia market are supply entities. As already explained, when growers contract with a supply entity in relation to their Class 1 fruit, they usually also agree to the supply entity taking their Class 2 fruit. Most of the exporters to Australia only export Class 2 fruit acquired in this manner from their supplying growers. The market shares of New Zealand exporters in the Australia market accordingly tend to reflect the packhouses‘ relative shares of supply from growers.
[62] Relatively few exporters seek to acquire fruit from other supply entities for export. Turners & Growers is an example of a company that does. If fruit is acquired by an exporter from another supply entity, an issue for negotiation between the parties is whether the fruit is to be packed and sold in the exporter's packaging or in the supplier's own boxes. Many exporters will want it packed in their own branded boxes, but some will take fruit in another party's branded packing and
effectively spot trade during the selling season.
8 Parts 2 and 3, New Zealand Horticulture Export Authority Act 1987.
[63] Fruit sold into Australia is sold on a commission basis. The wholesale prices achieved have been between A$12 and A$25 per 10 kg box (about A$4 to A$8 per
3.6 kg tray).
Regulatory background
Current regulatory regime
[64] The regulatory background to the kiwifruit industry under the Kiwifruit Export Regulations 1999 (the Regulations) and Zespri‘s export authorisation is described in the earlier High Court judgment in Turners & Growers Ltd v Zespri Group (No. 2), 13 August 2010, at [41]-[55].
[65] For present purposes the following features of the current regulatory regime are relevant:
(a) The combined effect of the ban on the export of kiwifruit otherwise than for consumption in Australia and the obligation on KNZ to authorise Zespri as the sole exporter makes Zespri a monopsonist for the purchase of kiwifruit for export destinations other than Australia: regs 3 and 4. This means that only Zespri may acquire kiwifruit in New Zealand for export to countries other than Australia. No-one else is permitted to compete with Zespri for the acquisition of kiwifruit for that purpose.
(b)As Zespri‘s export authorisation cannot, by law, have an expiry date and must not provide for any events on which the authorisation is to terminate, Zespri‘s status as a monopsonist will continue unless and until the regulatory regime is changed: regs 5(a) and 6(1)(h). In terms of the Regulations, Zespri‘s monopsonist status is indefinite.
(c) As part of its authorisation, Zespri is generally free to decide what proportion of the kiwifruit crop it purchases and the basis on which it does so: reg 6(1)(b) and (c). At the same time, as was common
ground in this case, Zespri was not precluded by these regulations from entering into the loyalty contracts and supply agreements.
(d)The potential costs and risks arising from Zespri‘s monopsony are mitigated by the non-discrimination and non-diversification rules and the information disclosure obligations in Part 3 of the Regulations which, by virtue of reg 8, have the purpose of:
(a) Encouraging innovation in the kiwifruit industry while requiring that providers of capital agree to the ways in which their capital is used outside the core business; and
(b) Promoting efficient pricing signals to shareholders and suppliers; and
(c) Providing appropriate protections for [Zespri's]
shareholders and suppliers; and
(d) Promoting sustained downward pressure on
[Zespri's] costs.
Constraints of this nature are described as ―light-handed‖ regulation.
(e) Zespri‘s monopsonist powers are also constrained by the requirements that the point of acquisition of title to kiwifruit purchased for export by Zespri be at FOBS or later in the supply chain and that Zespri must generally not carry out activities, nor own or operate assets that are not necessary for its ―core business‖, which is defined as the purchase of New Zealand grown kiwifruit for export other than for consumption in Australia: regs 5(c), 11(1) and 2 (definition of ―core business‖). The combined effect of these regulations is to prevent Zespri from becoming vertically integrated as a grower or supplier of kiwifruit itself.
(f) The obligations on Zespri to disclose the terms and conditions for the purchase of kiwifruit grown in New Zealand, the period for which the terms and conditions are applicable, the methodology used to determine the payments for kiwifruit, the relationship between purchase prices and selling prices and the key costs, ensure
transparency in respect of Zespri‘s terms and conditions and pricing
and are part of the ―light-handed‖ regulatory regime: reg 14.
(g)The collaborative marketing provisions in Part 4 of the Regulations, which enable KNZ to require Zespri to enter into such arrangements for the purpose of increasing the overall wealth of New Zealand kiwifruit suppliers and, no later than one month after the commencement of the season, to direct Zespri to make a certain volume of kiwifruit available for collaborative marketing arrangements, permit the only other exception to the export ban: regs
24, 26 and 29.
(h)The enforcement regime, which must enable KNZ to ensure reasonable compliance by Zespri with the non-discrimination and the non-diversification rules, the information disclosure and the collaborative marketing requirements, and the point of acquisition requirement, reinforce the ―light-handed‖ regulatory regime: regs
7(1)(a) and 33(1)(b). It was the existence of this enforcement regime that led to the decision in the judgment of 13 August 2010 that KNZ had exclusive jurisdiction to determine in the first instance Turners & Growers‘ complaints about Zespri‘s engagement in ―unjustifiable discrimination‖ and ―non-core activities‖.
(i)The express recognition in reg 30 that, subject to any collaborative marketing allocation, nothing in Part 4 of the Regulations affects or limits the ability of Zespri to enter into ―any contract or arrangement‖ for the purchase and marketing of kiwifruit. This confirms that it was anticipated that Zespri might well enter into such contracts or arrangements provided that they complied with the terms of its authorisation and did not contravene any relevant prohibitions under the Commerce Act.
(j)In performing its functions and exercising its powers under its export authorisation Zespri must comply with any international obligation of
New Zealand specified by notice given to Zespri by the Minister of international trade: reg 45.
Application of Commerce Act
[66] As already noted, the export ban and Zespri‘s export authorisation are exempt from the operation of the restrictive trade practices provisions in Part 2 of the Commerce Act because they are ―specifically authorised‖ by the Regulations: s 43(1) of the Commerce Act. It is common ground, however, that the provisions in the contracts or agreements and the other conduct of Zespri that is the subject of the claims by Turners & Growers have not been ―specifically authorised‖ by the Regulations. The provisions and conduct are therefore not exempt under s 43(1) of the Commerce Act from the trade practices provisions in Part 2 of the Commerce Act.
[67] The issue in the present case, therefore, is whether, in respect of the rolling three-year loyalty contracts with growers and the exclusivity provisions in the annual supply agreements, the 2009 Australia service level agreements and the new kiwifruit cultivar policy, Zespri has acted inappropriately and contravened s 27(1) and/or s 36(2).
Collaborative marketing
[68] As noted, the collaborative marketing provisions in Part 4 of the Regulations are an important aspect of the regulatory background. It is therefore convenient to describe briefly how the provisions have been applied in practice.
[69] The criteria applied by KNZ for the grant of a collaborative marketing approval are described in KNZ‘s ―Information Document‖ for the 2011 season. The primary criteria are: proof that the proposed programme will increase the overall wealth of New Zealand kiwifruit suppliers; and proof that collaboration has taken place with Zespri in preparing the application and will take place in the execution of
the arrangement if the application is approved by KNZ. KNZ has explained:9
9 Collaborative Marketing Committee Decisions, Kiwifruit New Zealand, 24 March 2009.
KNZ is of the view that the spirit and intent of collaboration envisaged by the Regulations is generally of a continuous nature from the formulation of the arrangement through to its implementation and completion. Collaboration requires the parties involved, the applicant and Zespri, to work together on a project.
[70] The volume of kiwifruit exported under collaborative marketing approvals has historically been relatively low, generally with less than 2% of the New Zealand crop exported by this method. All of the fruit sold pursuant to collaborative marketing approvals prior to 2010/11 has been Hayward. The volumes over the last five seasons are set out in Table 8 below. The other fruit types exported under collaborative marketing approvals in 2010/11 were Hort 16A (10,767 tray equivalents) and Hayward OECD Class 1 (a different grading standard, falling between Zespri‘s Class 1 and 2) (134,835 tray equivalents).
Table 8: Time series of volumes of New Zealand-grown kiwifruit exported under collaborative marketing approvals
| Green Organic Class 1 | Green Class 1 | Green Class 2 | Other | Total CM (TE) | Total New Zealand- grown exports sold (TE) | CM/Total | |
| 2006/07 | 91,867 | 1,258,492 | 77,716 | - | 1,428,075 | 80,060,000 | 1.8% |
| 2007/08 | 290,180 | 1,292,195 | 74,492 | - | 1,656,867 | 92,436,000 | 1.8% |
| 2008/09 | 372,405 | 1,449,271 | 85,931 | - | 1,907,607 | 99,969,000 | 1.9% |
| 2009/10 | 345,999 | 1,306,419 | 62,328 | - | 1,714,748 | 98,550,000 | 1.7% |
| 2010/11 | 457,814 | 1,882,171 | 45,452 | 145,602 | 2,531,039 | 98,117,000 | 2.6% |
[71] A number of the collaborative marketing applications record Zespri International Limited as the applicant or exporter of record. The volumes by season since the 2006 season are set out in Table 9 below.
Table 9: Time series of volumes of New Zealand-grown kiwifruit exported by
Zespri International Limited under collaborative marketing approvals
Total CM (TE) ZIL volume ZIL % 2006/07 1,428,075 584,327 40.9% 2007/08 1,656,867 625,000 37.7% 2008/09 1,907,607 570,504 29.9% 2009/10 1,714,748 406,269 23.7%
[72] We now turn to consider the legal framework.
The legal framework
[73] Interpretation of the relevant provisions of the Commerce Act is governed by well-established principles of statutory interpretation and previous decisions of appellate courts. The meaning of a statutory provision must be ascertained from its text and in light of its purpose and in determining purpose the court must have regard to both the immediate and the general legislative context and its social, commercial or other objective: Interpretation Act 1999, s 5, and Commerce Commission v
Fonterra Co-operative Group Ltd.10
[74] The purpose of the Commerce Act 1986, prescribed by s 1A, is:
to promote competition in markets for the long term benefit of consumers within New Zealand.
[75] The following elements of this purpose provision are to be noted:
(a) The term ―competition‖ is defined in s 3(1) as meaning ―workable or effective competition‖.
(b) The term ―market‖ is defined in s 3(1) as:
a reference to a market in New Zealand for goods or services as well as other goods or services that, as a matter of fact and commercial common sense, are substitutable for them.
(c) The focus is on ―the long term benefit‖.
(d)The reference to ―consumers‖ makes it clear that consumers are the intended beneficiaries of the promotion of competition: cf Commerce Commission v Telecom Corporation of New Zealand Ltd.11 While the term ―consumer‖ is defined in s 52C of the Act for the purposes of Part 4, which relates to regulated goods or services, there is no
definition of the term in the Act applicable to Part 2.
10 Commerce Commission v Fonterra Co-operative Group Ltd [2007] NZSC 36, [2007] 3 NZLR 767 at [22].
11 Commerce Commission v Telecom Corporation of New Zealand Ltd [2009] NZCA 338, (2009) 12
TCLR 457 at [34]-[35].
(e) The reference to ―New Zealand‖, consistent with the legislature‘s
territorial jurisdiction12 and the definition of ―market‖, limits the
―benefit‖ from the promotion of competition to consumers within this country.
[76] As appellate courts have recognised, the definitions of the terms
―competition‖ and ―market‖, with their respective references to ―workable or effective‖ and to substitutability as ―a matter of fact and commercial common sense‖, show that the Act is concerned with the economic role of competition and with promoting the competitive process rather than protecting individual competitors: Port Nelson Ltd v Commerce Commission and ANZCO Foods Waitara Ltd v AFFCO New Zealand Ltd (ANZCO v AFFCO).13 Vigorous legitimate competition by a powerful firm may damage competitors, but will not necessarily damage competition: Commerce Commission v Telecom Corporation of New Zealand Ltd.14
[77] The definitions of the terms ―competition‖ and ―market‖ also mean that the Act is concerned with the real world of commerce. Furthermore, as the Supreme Court has recognised in Commerce Commission v Telecom Corporation of New Zealand Ltd,15 the analytical approach to s 36 requires a reasonable basis for predictability of risk of contravention by firms and the exercise of commercial judgment by the courts.
[78] As the parties were largely in agreement as to the interpretation of many of the specific provisions of the Act relevant to the present case, we are able to summarise both the provisions and the authorities relatively briefly. We address later the principal disputes between the parties relating to aspects of the relevant markets and the application in the present case of the Supreme Court‘s approach in
Commerce Commission v Telecom Corporation of New Zealand Ltd.
12 Section 4 and Poynter v Commerce Commission [2010] NZSC 38, [2010] 3 NZLR 300.
13 Port Nelson Ltd v Commerce Commission [1996] 3 NZLR 554 (CA) at 564-565; and ANZCO Foods Waitara Ltd v AFFCO New Zealand Ltd [2006] 3 NZLR 351 (CA) at [242]-[243] and [248].
14 Commerce Commission v Telecom Corporation of New Zealand Ltd [2010] NZSC 111, [2011] 1
NZLR 577 at [25].
15 Commerce Commission v Telecom Corporation of New Zealand Ltd [2011] 1 NZLR 577 at [30], [31], [35] and [42].
[79] The relevant parts of s 27 provide:
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.
(3) .....
(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.
[80] For the purpose of interpreting s 27(1), the following definitions are also relevant:
2 Interpretation
(1) ...
provision, in relation to an understanding or arrangement, means any matter forming part of or relating to the understanding or arrangement ...
(1A) ...
...
substantial means real or of substance.
(3) Where any provision of this Act is expressed to render a provision of a contract .... unenforceable if the provision of the contract .... has or is likely to have a particular effect, that provision of this Act applies in relation to the provision of the contract .... at any time when the provision of the contract .... has or is likely to have that effect, notwithstanding that—
(a) at an earlier time the provision of the contract .... did not have that effect or was not regarded as likely to have that effect; or
(b) the provision of the contract .... will not or may not have that effect at a later time...
...
(5) For the purposes of this Act—
(a) a provision of a contract, arrangement or understanding, .... shall be deemed to have had, or to have, a particular purpose if—
(i) the provision was or is included in the contract, arrangement or understanding .... for that purpose or purposes that included or include that purpose; and
(ii) that purpose was or is a substantial purpose
...
3 Certain terms defined in relation to competition
(1) ....
(2) In this Act, unless the context otherwise requires, references to the lessening of competition include references to the hindering or preventing of competition...
...
(5) For the purposes of section 27 of this Act, a provision of a contract, arrangement, or understanding shall be deemed to have or to be likely to have the effect of substantially lessening competition in a market if that provision and—
(a) the other provisions of that contract, arrangement, or understanding; or
(b) the provisions of any other contract, arrangement, or understanding to which that person or any interconnected body corporate is a party—
taken together, have or are likely to have the effect of substantially lessening competition in that market.
[81] While the term ―purpose‖ is not defined separately in the Act, its meaning
may be discerned in part from:
(a) s 27(1) itself which makes it clear that it is the ―purpose‖ of the
―provision‖ in the ―contract or arrangement‖ and not the ―purpose‖ or intentions or motives of the ―person‖ that is relevant: Port Nelson Ltd v Commerce Commission, Giltrap City Ltd v Commerce Commission and ANZCO v AFFCO;16
(b)s 2(5)(a) which deems a ―provision‖ in a contract or arrangement to have had, or to have, a particular purpose if it was included for that purpose or purposes that included or include that purpose and the purpose was or is a substantial purpose. This means that one substantial anti-competitive purpose will suffice even if the provision also has legitimate business purposes and/or reflects a unilateral rather than a joint purpose: Tui Foods Ltd v New Zealand Milk Corporation Ltd, Port Nelson Ltd v Commerce Commission and ANZCO v
AFFCO;17 and
(c) s 2(1A) which, consistently with the real world definitions of
―competition‖ and ―market‖, defines ―substantial‖ as meaning real or
of substance.
[82] The question whether ―purpose‖ is to be ascertained or assessed subjectively or objectively has been considered in several cases: Tui Foods Ltd v New Zealand Milk Corporation Ltd (CA) at 409, Port Nelson v Commerce Commission (CA) at
564, ANZCO v AFFCO (CA) at [143]-[147] and [250]-[263], and Commerce Commission v Bay of Plenty Electricity Ltd.18 It is unnecessary to address this question further in the present case as the parties were in agreement that whether a provision has a s 27 purpose is to be determined objectively from the contracts
themselves and the relevant surrounding circumstances.
16 Port Nelson Ltd v Commerce Commission [1996] 3 NZLR 554 (CA) at 563; Giltrap City Ltd v
Commerce Commission [2004] 1 NZLR 608 (CA) at [73]; and ANZCO v AFFCO (CA) at [258].
17 Tui Foods Ltd v New Zealand Milk Corporation Ltd (1993) 5 TCLR 406 (CA) at 410; Port Nelson
Ltd v Commerce Commission (CA) at 563-564; and ANZCO v AFFCO (CA) at [259].
18 Commerce Commission v Bay of Plenty Electricity Ltd HC Wellington CIV-2001-485-917,
13 December 2007, at [333]-[340].
[83] The term ―effect‖ is also not defined separately in the Act, but there is no dispute that whether a provision has an ―effect‖ is essentially a question of fact: ANZCO v AFFCO at [135]. Actual results are relevant when considering the ―effect‖ of a provision in a contract or arrangement: Commerce Commission v Bay of Plenty Electricity Ltd at [342]. As Turners & Growers accepted, if a provision has the
―effect‖ of substantially lessening competition, necessarily that is ―an immediate effect‖ in an existing market. In Commerce Commission v Bay of Plenty Electricity Ltd the Court explained at [343]:
That said, the reference to an ―immediate‖ effect denotes an effect that follows directly from the provision without an intervening cause, rather than an effect which occurs immediately in time upon the promulgation or implementation of the provision.
[84] The meaning of the expression ―likely effect‖ in the context of s 27(1) was explained by the Court of Appeal in Port Nelson Ltd at 562-3:
bearing in mind the purpose of the provision the appropriate level is that above mere possibility but not so high as more likely than not and is best expressed as a real and substantial risk that the stated consequence will happen.
[85] In considering whether a provision in a contract or arrangement is ―likely‖ to
have an anti-competitive effect, it is useful to compare the likely state of competition
―with‖ the provision (―the factual‖) against the likely state of competition ―without‖ (―the counterfactual‖). As the Court of Appeal put it in a business acquisition case, Commerce Commission v Woolworths Ltd:19
―This exercise requires a comparison of the likely state of competition if the acquisition proceeds (―the factual‖) against the likely state of competition if it does not (―the counterfactual‖). The expression ―factual‖ is, in the context of a clearance application, a misnomer as it is just as hypothetical as the counterfactual. A substantial lessening of competition is ―likely‖ if there is a
―real and substantial risk‖ that it will occur, see Port Nelson Ltd v Commerce Commission [1996] 3 NZLR 554 at 562-563 (CA). Another way of putting it is that there must be a ―real chance‖ that there will be a substantial lessening of competition, see Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 27 ALR 367 at 382 (FCA).‖
[86] The issue of time in relation to whether a provision in a contract has or is likely to have a particular effect is addressed in s 2(3) of the Act which provides that
19 Commerce Commission v Woolworths Ltd [2008] NZCA 276, (2008) 12 TCLR 194 at [63].
s 27 applies ―at any time‖ when the provision has or is likely to have that effect notwithstanding that it did not have or was not regarded as likely to have that effect at ―an earlier time‖ or will not or may not have that effect at ―a later time‖.
[87] In the present case there is a dispute between the parties as to whether a provision may presently be regarded as likely to have the effect of substantially lessening competition in a future state of affairs in a current market or in a future market. We consider this dispute when we address the definition of the relevant markets in this case and in particular whether a ―deregulated‖ market should be accepted.
[88] The meaning of the phrase ―substantially lessening competition‖ is to be
derived from the definitions of ―substantial‖ in s 2(1A) as ―real or of substance‖,
―the lessening of competition‖ in s 3(2) as including references to ―the hindering or preventing‖ of competition and ―competition‖ in s 3(1) as ―workable or effective competition‖. The phrase ―substantially lessening competition‖ was considered in some detail in ANZCO v AFFCO by Glazebrook J at [239]-[249]. Among the points the Judge made were the following:
(a) while a strict proportionality approach is likely not required,
―substantially‖ is nevertheless used in a relative rather than absolute sense;
(b)―workable and effective‖ competition encompasses a market framework which participants may enter and in which they may engage in rivalrous behaviour with the expectation of deriving advantage from greater efficiency;
(c) whether firms compete is very much a matter of the structure of the markets in which they operate and the Court will need to look to structural features such as market concentration, barriers to entry, product differentiation and vertical integration;
(d)a behavioural approach may also be useful in assessing effects on competition;
(e) when assessing whether there has been a substantial lessening of competition in a market, the phrase must obviously be construed as a whole which essentially means that the competitive functioning of a relevant market must be assessed with and without the disputed practice: cf Commerce Commission v Woolworths at [63];
(f) judicial intervention is justified only if there is a purpose, effect or likely effect on competition which is substantial in the sense of meaningful or relevant to the competitive process; and
(g) short-term effects are unlikely to be substantial.
[89] We turn next to s 36, the relevant parts of which provide:
36 Taking advantage of market power
(1) Nothing in this section applies to any practice or conduct to which this Part applies that has been authorised under Part 5.
(2) A person that has a substantial degree of power in a market must not take advantage of that power for the purpose of—
(a) restricting the entry of a person into that or any other market;
or
(b) preventing or deterring a person from engaging in competitive conduct in that or any other market; or
(c) .....
(3) For the purposes of this section, a person does not take advantage of a substantial degree of power in a market by reason only that the person seeks to enforce a statutory intellectual property right, within the meaning of section 45(2), in New Zealand.
(4) .....
[90] For the purpose of interpreting s 36(2), the following provisions are also relevant:
2 Interpretation
(2) In this Act,—
(a) a reference to engaging in conduct shall be read as a reference to doing or refusing to do any act, including—
(i) the entering into, or the giving effect to a provision of, a contract or arrangement; or
(ii) the arriving at, or the giving effect to a provision of, an understanding; or
(iii) the requiring of the giving of, or the giving of, a covenant:
(b) a reference to conduct, when that expression is used as a noun otherwise than as mentioned in paragraph (a) of this subsection, shall be read as a reference to the doing of, or the refusing to do, any act, including—
(i) the entering into, or the giving effect to a provision of, a contract or arrangement; or
(ii) the arriving at, or the giving effect to a provision of, an understanding; or
(iii) the requiring of the giving of, or the giving of, a covenant:
(c) a reference to refusing to do an act includes a reference to—
(i) refraining (otherwise than inadvertently)
from doing that act; or
(ii) making it known that that act will not be done:
...
(d) a reference to a person offering to do an act, or to do an act on a particular condition, includes a reference to the person making it known that the person will accept applications, offers, or proposals for the person to do that act or to do that act on that condition, as the case may be.
(5) For the purposes of this Act—
...
(b) a person shall be deemed to have engaged, or to engage, in conduct for a particular purpose or a particular reason if—
(i) that person engaged or engages in that conduct for that purpose or reason or for purposes or reasons that included or include that purpose or reason; and
(ii) that purpose or reason was or is a substantial purpose or reason.
...
36B Purposes may be inferred
The existence of any of the purposes specified in section 36 .... as the case may be, may be inferred from the conduct of any relevant person or from any other relevant circumstances.
[91] There is no dispute between the parties that a contravention of s 36(2)
requires:
(a) the existence of the relevant market;
(b) a person who has ―a substantial degree of power‖ in that market; (c) who has ―taken advantage‖ of that power;
(d)for one of the proscribed purposes either in the market in which the person has a substantial degree of power or in ―any other market‖.
[92] Nor is there any dispute between the parties that:
(a) the current grower/exporter (non-Australia) market exists and that
Zespri has ―a substantial degree of power‖ in that market;
(b)whether Zespri has ―taken advantage‖ of its market power depends on the application of the analytical method adopted by the Supreme Court in Commerce Commission v Telecom Corporation of New Zealand Ltd;
(c) in s 36(2) it is the ―purpose‖ of the person with market power rather than the purpose of a provision as in s 27(1) which is in issue: cf Commerce Commission v Bay of Plenty Electricity Ltd at [330];
(d)as long as it was or is ―substantial‖, a proscribed purpose may exist alongside a legitimate (benign) purpose: s 2(5)(b) : Port Nelson Ltd v Commerce Commission (CA) at 578 and Commerce Commission v Bay of Plenty Electricity Ltd at [323]-[324].
[93] In determining whether Zespri has ―taken advantage‖ of its market power in contravention of s 36(2), the decision of the Supreme Court in Commerce Commission v Telecom Corporation of New Zealand Ltd at [42] requires the Court to decide whether Turners & Growers has shown, on the balance of probabilities, that in a ―hypothetical workably competitive market‖, constructed in accordance with the analytical method adopted by the Supreme Court, a company without Zespri‘s market power would not, as a matter of practical business or commercial judgment, have acted as Zespri did in respect of its impugned conduct. The rationale for, and the construction of, a ―hypothetical workably competitive market‖ is explained in full in the decision of the Supreme Court. We return to the application of the Supreme Court‘s analytical method when we come to consider Turners & Growers‘ claims under s 36(2) in relation to Zespri‘s new kiwifruit cultivar policy, noting that the parties disagreed on the construction of a hypothetical market in this context.
[94] The issue of the relationship between a finding of anti-competitive purpose and reaching a conclusion about ―taking advantage‖ of market power has been considered by both the Privy Council in Telecom Corporation of New Zealand Ltd v Clear Communications Ltd20 and the Supreme Court in its recent decision.21 In both cases it was said that it may be dangerous to proceed too quickly from a finding of anti-competitive purpose to a conclusion about ―taking advantage‖ of market power.
[95] The converse situation, namely proceeding from a finding of ―taking advantage‖ of market power (or ―use of a dominant position‖ in terms of s 36 as it previously stood) to a conclusion of anti-competitive purpose, was considered by the Privy Council, but not by the Supreme Court because the issue did not arise.22 The
Privy Council said at 402:
20 Telecom Corporation of New Zealand Ltd v Clear Communications Ltd [1995] 1 NZLR 385 at 402-
403.
21 Commerce Commission v Telecom Corporation of New Zealand Ltd at [19].
22 At [50].
If a person has used his dominant position it is hard to imagine a case in which he would have done so otherwise than for the purpose of producing an anti-competitive effect; there will be no need to use the dominant position in the process of ordinary competition. Therefore, it will frequently be legitimate for a Court to infer from the defendant’s use of his dominant position that his purpose was to produce the effect in fact produced. Therefore, as the Court of Appeal in the present case accepted, use and purpose, though separate requirements, will not be easily separated
...
Although it is legitimate to infer “purpose” from use of a dominant position producing an anti-competitive effect, it may be dangerous to argue the converse ie that because the anti-competitive purpose was present, therefore there was use of a dominant position.
(emphasis added)
[96] As the emphasised passages show, the Privy Council accepted that, when an anti-competitive ―effect‖ is produced as a result of the use of a dominant position, it will frequently be legitimate to infer an anti-competitive ―purpose‖ under s 36(2). This reflects the well-recognised relationship between ―purpose‖ and ―effect‖: a purpose is the effect which it is sought to achieve or the end in view: cf Glenharrow
Holdings Ltd v Commissioner of Inland Revenue.23 The concept of using dominance
to enable ―the conduct to be undertaken and the purpose to be achieved‖ or for the
―achievement‖ of an anti-competitive purpose was also recognised by the Supreme Court in Commerce Commission v Telecom24 This reinforces the view that, when an anti-competitive ―effect‖ is in fact produced or achieved by a person taking advantage of market power, an anti-competitive purpose may well be able to be inferred from the person‘s conduct.
[97] The ability of the court to infer anti-competitive purpose from a person‘s conduct in taking advantage of market power is now also reinforced by s 36B of the Act which expressly provides that the existence of an anti-competitive purpose may be inferred from the person‘s conduct or from any other relevant circumstances. An inference is to be drawn logically from proven facts and should not be mere speculation or guesswork: R v Puttick and Commerce Commission v Visy Board (NZ)
Ltd.25 This means, as the Privy Council recognised, it may be possible to draw the
23 Glenharrow Holdings Ltd v Commissioner of Inland Revenue [2008] NZSC 116, [2009] 2 NZLR
359 at [37]-[38].
24 At [14].
25 R v Puttick (1985) 1 CRNZ 644 (CA) at 647; and Commerce Commission v Visy Board (NZ) Ltd
HC Auckland CIV 2007-404-7237, 20 April 2011 at [63].
inference that a person‘s purpose is proscribed if on the proven facts it is established that the effect of the taking advantage of the person‘s market power was anti- competitive.
[98] Equally, however, if no anti-competitive effect is produced or achieved by the taking advantage of the person‘s market power, then it will not be possible to draw an inference of anti-competitive purpose from that particular conduct. Unless there is other evidence establishing an anti-competitive (proscribed) purpose, the absence of an anti-competitive effect may be determinative. The situation where no anti- competitive effect is in fact produced or achieved may need to be distinguished from the situations where the taking advantage of market power has not occurred, but remains prospective; and where there is an anti-competitive purpose, but no achievable anti-competitive effect. The former situation is recognised by the power of the court to grant an injunction under s 81 restraining a person from engaging in conduct that ―would constitute‖ a contravention of any of the provisions of Part 2 and by the power to grant interim injunctions under s 88. In the latter situation it would be necessary in the High Court to follow the approach of the majority in ANZCO v AFFCO where it was held in the context of s 27 and s 28 that anti- competitive purpose might be established in the absence of proof of an achievable anti-competitive effect or likely effect: William Young P at [152]-[154] and Anderson P at [302], cf Glazebrook J at [256]-[262].
[99] Again it is not necessary in the present case to address the question whether in the context of s 36(2) the ―purpose‖ of the person is to be ascertained subjectively or objectively because Turners & Growers accepted that it should be determined objectively. Support for the view that in the end there may not be much practical difference is provided by Union Shipping NZ Ltd v Port Nelson Ltd:26
(c) whether publication of Zespri‘s New Cultivar Evaluation Policy can constitute ―conduct‖ that is capable of being prohibited by s 36;
(d)whether, in adopting the Policy, Zespri has taken advantage of its market power in the current regulated grower/exporter (non-Australia) market; and
(e) whether Zespri did so for a proscribed purpose in a defined market.
Market definition and relevant markets
[328] In addition to their grower/exporter (non-Australia) market, Turners & Growers pleaded a cultivar licensing market in New Zealand, between growers and the holders of the rights to grow particular kiwifruit cultivars in New Zealand, for the licensing of such rights. It was submitted for Turners & Growers that the evidence supported a cultivar licensing market limited to kiwifruit.
[329] Zespri, supported by Dr Yeabsley, submitted that from a grower perspective a cultivar licensing market would be much broader than kiwifruit cultivars alone, having regard to land use alternatives. It would therefore encompass the acquisition of rights to grow kiwifruit cultivars as well as other horticultural crops for cultivation. On the basis of its economic evidence, Zespri submitted that there were two relevant markets in addition to the grower/exporter (non-Australia) market, namely:
(a) grower use of land, being the retail market for providing goods or services to owners of land in New Zealand relating to their potential commercial use of that land (including but not limited to the commercial licensing of kiwifruit cultivars and other horticultural crops to growers); and
(b)a new cultivar intellectual property market, being the wholesale market for the supply and acquisition of new cultivar intellectual property and materials for the purpose of testing, development and possible commercialisation. (The other party could be located in other countries, and any resulting testing and production of kiwifruit could occur in other countries.)
[330] For the following reasons we do not accept that either of these markets was established or shown to be relevant to the analysis required for this claim:
(a) Dr Yeabsley‘s view on the ―grower use of land market‖ was not
supported by any specific evidence on the degree of substitutability
between alternative land uses. Nor was his view developed in submissions for Zespri. The relevant participants in this market were not identified.
(b)In respect of a ―new cultivar intellectual property market‖, Zespri provided explanatory material on plant variety rights and related intellectual property obligations, but this ―market‖ was not supported by any specific evidence on the degree of substitutability between alternative new cultivar intellectual property rights within New Zealand. Again Zespri did not develop further this market definition which related to a different activity from licensing new cultivars to New Zealand growers for which plant variety rights have already been obtained.
[331] The kiwifruit cultivar licensing market therefore remains for consideration. While neither Turners & Growers nor their economic expert explained the process whereby the definition of this market was reached, there was evidence on the practice and process of licensing New Zealand kiwifruit growers and the relative level of licence fees depending on supply and demand for the hectares to be planted. The market participants are: the companies (notably Zespri and Turners
& Growers and any other cultivar rights holders, ie non-exporters (beyond Australia) who grant grower licences, ie sell the growing rights; and the growers in New Zealand who purchase the licences to plant or graft new varieties.
[332] Of 2701 Zespri-registered growers in New Zealand, only 621 are licensed
to grow 615 hectares of Zespri‘s three new varieties (see [40]). These will not produce until 2012. [
] Such indications suggest that the competition dynamic in the claimed cultivar licensing market is already changing.
[333] The functional boundary of the claimed cultivar licensing market is around this licensing and growing function, being the sale and acquisition of grower licences for planting proprietary kiwifruit. The relevant product is the kiwifruit grower licence and the relevant price is the licence fee.
[334] As the claim relates solely to licensing activity in respect of New Zealand grown kiwifruit, we are prepared to adopt for present purposes Turners & Growers‘ definition.
Section 36 – initial observations
[335] Turning to s 36, we make some initial observations:
(a) It was not disputed that Australia and New Zealand together are unlikely to have the capacity to absorb significant volumes of kiwifruit from new cultivars. Turners & Growers, having recently acquired licence rights from new cultivar developers overseas, wish to export (beyond Australia) the fruit from these proprietary cultivars that it has licensed, or seeks to license, to New Zealand growers. Further, the company wishes to export new cultivar fruit without assigning its commercial rights to Zespri. It cannot export beyond Australia under the existing law. As Mr Goddard submitted, Turners
& Growers‘ main complaint about new cultivars is in substance a
complaint about the single point of entry regime.
(b)Zespri‘s legal monopsony also impacts upon competition in the kiwifruit cultivar licensing market. As a result, the demand for and prices of third party cultivar licences are lower than for Zespri licences. This regulatory circumstance helps explain why third party rights holders are presently restricted in the returns they can offer growers planting their cultivars.
(c) Zespri‘s export authorisation places no purchase obligations on Zespri; nor can Zespri be obliged to purchase a particular proportion of the kiwifruit crop.
(d)Equally, as submitted for Zespri, Zespri, even with its substantial degree of market power, does not have any duty to assist its
competitors to develop competing cultivars, but this is not necessarily conclusive.
(e) On its face, the New Cultivar Policy is non-discriminatory amongst holders of cultivar rights in that it applies to new commercial cultivars regardless of source.
(f) The Regulations enable any person to apply to KNZ for a collaborative marketing approval, pursuant to which a person may export New Zealand-grown kiwifruit in collaboration with Zespri. To date, as noted in the regulatory background section of our judgment, these have had a small (but permissible) impact on Zespri‘s monopsony. If Turners & Growers consider that Zespri is being unduly obstructive in its submissions on collaborative marketing applications, or that the collaborative marketing approval process is failing applicants in some way, the remedy lies in the first instance with KNZ not the Court in this proceeding. As Mr Goddard submitted, in the absence of evidence of other prohibited conduct, Zespri is entitled to make submissions to KNZ opposing collaborative marketing applications without contravening s 36: Electricity Corporation Ltd v Geotherm Energy Ltd. And further, he submitted, the ease or difficulty of entering collaborative marketing agreements is not a Commerce Act issue. We agree.
(g)At the same time we note that the process does seem somewhat fraught as shown in KNZ‘s 19 May 2011 decision on a Turners & Growers‘ application for exporting kiwifruit to multiple countries in collaboration with Zespri. For example, while Zespri cannot stop New Zealand companies from competing in overseas markets by licensing growers overseas, Turners & Growers‘ trade in Chilean grown (Hayward) kiwifruit – in competition with Zespri – was cited by Zespri as a barrier to successful collaboration in the context of the recent application.
(h)Zespri has formulated a market strategy whereby it has committed itself to developing a small number of product types, given limited shelf space for and consumption of kiwifruit internationally. A new cultivar which extends the attributes of an existing ―product type‖ is therefore seen by Zespri as more desirable and likely to succeed under the Policy, than a totally new ―product type‖ cultivar.
Has Zespri taken advantage of its market power?
[336] We turn now to the question whether Zespri, in promulgating its New Cultivar Policy following its letter to Turners & Growers, and through that Policy seeking to acquire and control the rights to new kiwifruit cultivars and allegedly restricting the ability of competitors or potential competitors to develop competing cultivars, has taken advantage of its market power.
[337] At the outset we address the issue whether the mere publication of Zespri‘s
New Cultivar Policy can constitute ―conduct‖ that might be prohibited by s 36(2). [338] For the following reasons, we proceed on the basis that it can:
(a) The definitions of the expressions ―engaging in conduct‖ and
―conduct‖ in s 2(2) of the Commerce Act are comprehensive and far-
reaching. Both expressions are to be read as references to ―doing‖ or
―refusing to do‖ any ―act‖; and ―refusing to do an act‖ includes a reference to ―making it known that that act will not be done‖.
(b) When these comprehensive definitions are read with the references to
―engaging in competitive conduct‖ in s 36(2)(b) and ―conduct‖ in s 36B, it is clear that they should be construed broadly to encompass all types of ―conduct‖ by the person with the substantial degree of market power which might constitute taking advantage of that power for a purpose proscribed by s 36(2).
(c) This approach to the interpretation of the expression ―conduct‖ is consistent with the purpose and scheme of the Commerce Act which does not exclude any particular form of ―conduct‖ from the application of s 36(2), other than that specified in s 36(1) and (3), s 43(1), and s 44(1) and (2).
(d)The publication of a policy by a person with a substantial degree of market power which states what ―act‖ the person will do or will refuse to do in certain circumstances may therefore constitute ―conduct‖ that amounts to taking advantage of that power. A policy that makes it known that that ―act‖ will not be done would be within the extended definition of ―conduct‖ under s 2(2)(c)(ii) of the Commerce Act.
(e) As the Court of Appeal said in Electricity Corporation Ltd v
Geotherm Energy Ltd55 at 650:
We are not satisfied that statements [of policy] made on behalf of a company in a dominant position as to intended exercise of market power to deter potential competitors, made in circumstances that make them in fact likely to deter competition, could not fall within s 36. Such statements may be said to ―use‖ a dominant position if it is the dominant position that gives the statements the force amounting to deterrence.
(f) It is the making it known in the policy statement of the acts that will or will not be done that constitutes the ―conduct‖, rather than the publication of the policy itself: cf Re ACCC by Pathology Practices.56
(g)Consequently, the statements by Zespri in its New Cultivar Policy, including those that indicate that it will decline to market the fruit of new cultivars unless they have been evaluated by, and rights granted to, Zespri are within the extended definitions of ―engaging in
conduct‖ and ―conduct‖ under the Commerce Act.
55 Electricity Corporation Ltd v Geotherm Energy Ltd [1992] 2 NZLR 641.
56 Re ACCC by Pathology Practices [2004] ACCMPT 4, (2004) 206 ALR 271 at [64]-[70] and [85]- [88].
(h)If Zespri, as is claimed, was indeed attempting through its Policy to dissuade third parties from licensing and commercialising fruit from new cultivars, when there is no legal barrier to doing so, such
―conduct‖ is properly addressed under s 36(2).
[339] In view of the substance, language, reach and the potential rigidity of Zespri‘s Policy and its terms, together with the circumstances in which it was introduced, we cannot rule out that Zespri‘s release of this Policy would significantly influence the expectation of a cultivar rights holder as to likely outcomes from applications of the Policy, ie in the event that, post-evaluation, Zespri supported a new third party‘s cultivar for commercialisation; supported it in principle; or did not support it. Given that expectation, licensors or potential licensors could well be disincentivised from opting in to Zespri‘s new cultivar evaluation process and from pursuing new cultivar investment.
[340] On this basis we now turn to apply the ―take advantage‖ test as formulated by the Supreme Court in Commerce Commission v Telecom Corporation of New Zealand Ltd.57 This requires Turners & Growers to show, on the balance of probabilities, that in a hypothetical workably competitive market, constructed in accordance with the Supreme Court‘s analytical framework, the firm without a substantial degree of market power (Zespri) would not as a matter of commercial
judgment have introduced the New Cultivar Policy (or at least the main elements of the Policy that have been challenged by Turners & Growers) as Zespri did. The commercial judgment is to be made by the Court objectively and informed by all those factors that would influence rational business people in the hypothetical
circumstances which the inquiry envisages.58
[341] Before applying the ―take advantage‖ test in this case, it is convenient to set out the requisite steps and cross-checks that constitute the Supreme Court‘s method for constructing a hypothetical market and for exercising the required
commercial judgment.
57 Commerce Commission v Telecom Corporation of New Zealand Ltd [2011] 1 NZLR 577 at [42].
58 At [35].
[342] First, in constructing a hypothetical market it is necessary to replicate the actual or existing market,59 save for eliminating the dominance or substantial degree of market power by:
(a) stripping out or neutralising the features or matters that give, or give rise to, the substantial degree of market power ;60
(b)denying all aspects of the firm‘s substantial market power by having constraints in the hypothetical market which neutralise that level of market power;61
(c) ensuring that the firm, now denied all aspects of its substantial market power, does not gain (or rather retain) any advantage from its monopoly or monopsony in its dealings with its hypothetical competitors;62
(d)retaining any special or essential features in the actual market, ie those that do not give rise to the substantial degree of market power;63 and
(e) checking that the hypothetical firm without its substantial degree of market power is in the same position and circumstances as the actual powerful firm in the real world, but for the removal of its substantial degree of market power.64
[343] Second, in constructing a hypothetical market it is necessary to include at least two participants, ie the firm without a substantial degree of market power (Zespri in this case) and at least one other firm in effective competition;65 and to
recognise that:
59 At [36].
60 At [38].
61 At [36].
62 At [39].
63 At [40].
64 At [12], [13] and [33].65 At [36].
(a) the hypothetical market structure must be workably competitive;66 and
(b)the hypothetical market construct, being an analytical tool for comparative purposes, need not depend either on realistic or practical assumptions (or predictions); unrealistic scenarios are permissible.67
[344] Third, in conducting the comparative exercise and in exercising the requisite rational commercial judgment, the following five questions are likely to guide the inquiry:
(a) What are the factors that would influence commercially rational business people68 in the hypothetical workably competitive market?
(b)How would the firm, denied its substantial market power, act in the hypothetical circumstances of a workably competitive market?69
(c) Would competition in the hypothetical market have restrained the firm without substantial market power from acting as it did in the actual market?70
(d)Would the powerful firm, once denied its substantial market power, have acted in the same way in the hypothetical market as it is alleged to have acted in the actual market?71
(e) As a cross-check: was the alleged conduct in the actual market caused by or materially enabled or facilitated by the firm‘s substantial degree of market power?72
[345] While the hypothetical market construct is not required to conform with the factual and commercially realistic approach required by the statutory ―market‖
66 At [42].
67 At [29] and [39], footnote 56.
68 At [35].
69 At [12] and [33].
70 At [32].
71 At [31] and [34].72 At [14] and [31].
definition, it is nevertheless required to replicate the actual market, defined in accordance with that definition, but for removing the source(s) of the substantial market power that exists. In resolving the nature of the hypothetical market test, the Supreme Court emphasised the need to give firms and their advisers a reasonable basis for predicting in advance whether their proposed conduct falls foul of s 36.73
We infer from this that the hypothetical market construct itself should be as
straightforward and realistic as possible, notwithstanding that in some cases a key assumption may be neither realistic nor practical.
[346] In the Supreme Court‘s case, Telecom‘s dominance was attributed to its ownership of the PSTN network, a prohibitive physical and economic entry barrier to the market.74 This had to be neutralised by the ―unrealistic scenario‖ of having two firms each with a PSTN network. The Supreme Court did not suggest, however, that such an unrealistic scenario would be necessary in all cases.
[347] Zespri‘s ―substantial degree‖ of power in the grower/exporter (non- Australia) market arises from the Regulations which create a legal barrier preventing any competitor from entering that market and acquiring kiwifruit for export to countries other than Australia. In addition, Zespri has been able to replicate the substantial degree of power conferred by its legal monopsony through creating a
―commercial monopsony‖ with its loyalty contracts and the exclusivity provisions in the supply agreements.
[348] The parties suggested the following ways of stripping out or neutralising
Zespri‘s substantial degree of power in the market:
(a) the revocation of the Regulations thereby enabling other firms to compete in a completely deregulated market for the acquisition of kiwifruit in New Zealand for export to countries other than Australia (a ―fragmented market‖ as proposed by Mr Mellsop and Turners &
Growers);
73 At [30].
74 At [39].
(b)the introduction of new regulations under s 26(1)(d) of the Kiwifruit Industry Restructuring Act 1999 providing for KNZ to permit other persons to export kiwifruit and the grant of a permit by KNZ to at least one other firm enabling that firm to compete in the modified regulated market for the acquisition of kiwifruit in New Zealand for export to countries other than Australia (a ―modified regulated market‖, recognised as a possibility by Turners & Growers); and
(c) the adoption of new regulations creating a ―duopsony‖ with two firms entitled to acquire between them all kiwifruit for export to countries other than Australia with each firm having a monopoly in respect of different export markets (a ―regulated duopsony market‖ as proposed by Dr Yeabsley and Zespri).
[349] Adopting the most straightforward approach to the construction of the hypothetical workably competitive market in the present case, we consider that both the ―fragmented market‖ and the ―modified regulated market‖ proposed by Turners
& Growers would serve to strip out or neutralise the substantial degree of power conferred on Zespri by its legal monopsony. For reasons given earlier in this judgment, we are not in a position to predict, assume or suggest the most realistic way for the Government to remove this source of Zespri‘s market power.
[350] We agree with Turners & Growers that, in the hypothetical grower/exporter (non-Australia) market, Zespri also needs to be denied the substantial power that would result from the operation of its loyalty contracts and supply agreements in such a ―deregulated‖ market. Being the sole acquirer of 100% of Class 1 Hayward Green fruit, for at least three years, in addition to acquiring
100% of the Class 1 Hort 16A crop at least up to the end of 2018 when the plant variety rights in New Zealand expire, would give Zespri an advantage in dealing with its hypothetical competitors. In our view, retaining these contracts would not meet from the outset the Supreme Court‘s requirement that the hypothetical market be workably competitive.
[351] The presence of one or more new entrants to the hypothetical market would constrain Zespri and deny any one firm from having a substantial degree of power. This market would therefore replicate the actual market, but for the elimination of the two sources of Zespri‘s substantial power, and ensure that Zespri could not in its dealings with actual or potential competitors gain or retain any advantage from its regulatory or commercial power. We do not consider that it is necessary to adopt the less straightforward assumptions associated with a ―regulated duopsony market‖ as proposed by Zespri.
[352] For the purpose of its proposed ―regulated duopsony market‖, the only special features of the grower/exporter (non-Australia) market which Zespri submitted should be retained, because they did not give rise to its market power, were the provisions of the regulatory regime, such as reg 5(c) (which prevents Zespri from taking title to kiwifruit earlier than FOBS) and reg 11 (the non-diversification rule which limits Zespri‘s ability to integrate backwards into the industry in New Zealand). We agree that the same argument might apply in a ―modified regulated market‖, but it would not be the position in a ―fragmented market‖ where all exporters, including Zespri, would be entitled to be vertically integrated.
[353] This leaves for consideration the question whether the hypothetical workably competitive grower/exporter (non-Australia) market in New Zealand would enable Zespri and the new firm(s) to take steps to continue to receive premium prices or ―rents‖ from the overseas export markets. Mr Walker submitted for Turners & Growers that with the removal of the sources of Zespri‘s substantial power, Zespri‘s present ability to earn such rents from having an export monopoly in respect of New Zealand-grown kiwifruit, should also go. Mr Goddard for Zespri submitted however that, notwithstanding competition in the hypothetical New Zealand market, Zespri and the new firm(s) should be assumed to have the opportunity to take steps to continue to receive rents from the sale of Class 1 kiwifruit in overseas export markets. He pointed out that Zespri and the new firm(s) would be able to avoid the application of the Commerce Act by entering into a contract or arrangement or arriving at an understanding, insofar as it contains a provision relating exclusively to the export of kiwifruit from New Zealand, if full and accurate disclosure (including particulars of any method of fixing, controlling or
maintaining prices) were furnished to the Commission within 15 working days under s 44(1)(g) of the Commerce Act.
[354] In our view there is no good reason why, in constructing the hypothetical workably competitive market, it is necessary to assume away the ―opportunity‖, as described by Mr Goddard, for New Zealand exporters not to compete with one another in premium overseas markets. The existence of these overseas markets for New Zealand grown kiwifruit, beyond the reach of the Commerce Act, and the financial incentives for ―commercially rational‖ hypothetical exporters to take steps to endeavour to retain the rents from these markets, should therefore not be disregarded in considering economic activity within the hypothetical market in New Zealand.
[355] Having said that, it would equally be open to acquirers/exporters in a hypothetical workably competitive market not to agree with one another on export marketing strategies, as appears to be the case in respect of the actual grower/exporter (Australia) market. It cannot simply be assumed therefore that in ―a fragmented‖ or ―modified regulated market‖, the conduct of hypothetical acquirers/exporters would be as predictable as it might be in the ―regulated duopsony‖ market preferred by Zespri.
[356] We now turn to answer the five questions we identified above in [342].
[357] First, the main influencing factor on Zespri‘s conduct in the hypothetical market would be competition from third party cultivar rights holders who would no longer be dependent on Zespri for exporting the fruit from their cultivars. Neither would they be dependent on Zespri for a decision on whether or not to commercialise their new cultivars. And nor would they be faced with the prospect of having to grant Zespri their commercial rights should the decision be made to commercialise their new cultivars.
[358] Second, in these circumstances, Zespri would at least consider exporting the fruit offered from rival cultivars, subject to being compensated for its opportunity costs, on the assumption that such fruit would otherwise be exported independently
and, as Turners & Growers submitted, Zespri could lose market share in both the grower/exporter and cultivar licensing markets. We agree with Mr Mellsop that Zespri could no longer prevent loss of market share, as a result of cannibalisation of its own branded products, and hence the opportunity costs would not include this risk. A commercially rational Zespri would, as Mr Walker submitted, blend the promotion of select, proprietary (higher value) cultivars with the export of other fruit if a commercial opportunity arose.
[359] While Turners & Growers submitted that Zespri would ―no longer be able to prevent third party cultivars from being planted‖, we note that Zespri does not in the current cultivar licensing market have such power. Indeed, the minutes of the Zespri Board (21 October 2009) record that in the event of Zespri not electing to pursue a new variety ([ ] in that instance) owners were free to commercialise for themselves. Any economic disincentive to do so derives from the current export ban. Turners & Growers‘ complaint is more accurately described later in its submission as Zespri‘s attempts to prevent third parties from licensing and commercialising fruit from those cultivars.
[360] In the hypothetical market, Zespri need not modify its cultivar evaluation procedures for determining which of its cultivars will be released commercially. However, it could no longer require Turners & Growers (or other exporters of new cultivar fruit in competition with Zespri) to subject their new cultivars to that process as a prerequisite for commercial release. And a policy requiring an assignment of rights to Zespri as a condition of it agreeing to export would likely meet with such resistance that the policy would serve no practical purpose. As Turners & Growers submitted, a commercially rational Zespri could no longer afford to insist on acquisition of the rights to a cultivar as the price of export. Furthermore, in our view in the hypothetical market royalty rates, if any, would be negotiated on a commercial basis rather than being expressed as a unilateral fixed maximum.
[361] In light of these conclusions on the first two questions our answers to the remaining three questions are:
(a) Competition in the hypothetical market would have restrained the firm without substantial market power from acting as it did in the actual market.
(b)The firm denied its market power would not have acted in the same way in the hypothetical market as it is alleged to have acted in the actual market.
(c) The alleged conduct in the actual market was caused by or materially
enabled or facilitated by Zespri‘s substantial degree of market power.
[362] Accordingly, we find that Turners & Growers have shown, on the balance of probabilities, that in a hypothetical workably competitive market, so constructed, Zespri stripped of its substantial degree of market power, would not as a matter of commercial judgment have introduced the New Cultivar Policy (or at least the main elements of the Policy that have been challenged by Turners & Growers) as it did. We find therefore, that Zespri has taken advantage of its power in the grower/exporter (non-Australia) market in respect of this Policy.
Proscribed purpose?
[363] The next question is whether Zespri has taken advantage of its market power for a proscribed purpose in respect of the new kiwifruit cultivar licensing market; or, in the more specific terms of the pleading, has Zespri the purpose of preventing or deterring competitive conduct in that market?
[364] As already noted in the legal framework section of our judgment, a purpose proscribed by s 36(2) may be inferred when the effect produced by or achieved from the taking advantage of market power is anti-competitive. Equally, however, if no anti-competitive effect is produced or achieved by the taking advantage of the person‘s market power, then it will not be possible to draw an inference of anti-competitive or proscribed purpose from that particular conduct.
[365] Turners & Growers in their pleadings and submissions suggested a number of effects arising from the New Cultivar Policy, giving rise to the issue of whether a proscribed purpose could be inferred from the conduct (or from any relevant circumstances) under s 36B. While incentives for developing new cultivars in New Zealand, independent of Zespri, are undoubtedly dampened by the regulatory regime, it is important to distinguish between an effect arising from Zespri‘s legal control of the export channel (beyond Australia) and an effect from the conduct in question. Here, any restrictions or deterrents in the kiwifruit cultivar licensing market flow from the ban on exports and cannot be attributed to Zespri‘s conduct in adopting the Policy. In our view, therefore, Turners & Growers have not established that an anti-competitive effect has in fact been produced or achieved from the conduct. A proscribed purpose cannot be inferred from that conduct. This leaves the question whether any other evidence established a proscribed purpose.
[366] We accept that Zespri‘s New Cultivar Policy is something more than flexible guidance and that it reflects Zespri‘s desire to maintain tight control over the fruit exported from New Zealand. It also reinforces ―the Zespri way‖ which extends to product branding and promotion and marketing overseas. In Zespri‘s view, ―it would be irresponsible for [it] to agree to support for export a new product which was unproven through the Zespri system‖.
[367] But we also agree with Dr Yeabsley that the Policy reflects a rational business case approach by Zespri to any commercialisation investment. Growers‘ interests will be served by commercialising and exporting kiwifruit from the best cultivars, regardless of source, and maximizing the net returns of the product portfolio. All of this is in the face of global competition for new cultivar development.
[368] Objectively, then, Zespri has a real and substantial commercial purpose for the present policy. And the fact that competition for new cultivar development is international is likely to act as a discipline on Zespri‘s policy for evaluating and selecting and commercialising new cultivars in New Zealand. The sale or licensing of potentially successful new cultivars for commercialisation overseas and in competition with New Zealand growers would not be in Zespri‘s interest.
Furthermore, Zespri‘s references to ―the best interests of New Zealand kiwifruit growers‖ and ―adding value to the New Zealand kiwifruit industry and Zespri shareholders‖ are consistent with the mandate entrusted by the Government to Zespri. Zespri is mandated to represent the economic interests of all kiwifruit growers in New Zealand. In our view Turners & Growers did not establish that Zespri‘s purpose in issuing its New Cultivar Policy was other than a substantial purpose consistent with that mandate.
[369] Nor did Turners & Growers establish any other substantial proscribed purpose.
Conclusion
[370] In our view, therefore, the s 36 claim in relation to the New Cultivar Policy fails. While Turners & Growers established on the balance of probabilities that Zespri, in setting the policy terms that it did, has taken advantage of its market power in the relevant grower/exporter market, they have not established on the balance of probabilities that Zespri had a substantial purpose of preventing or deterring competitive conduct in the kiwifruit cultivar licensing market.
Relief
[371] As no s 36(2) contravention has been found, it is unnecessary for us to consider the relief sought by Turners & Growers.
Result
[372] For the reasons given in our judgment, we have decided that:
(a) Zespri has not contravened s 27(1) or s 36(2) of the Commerce Act in respect of the loyalty contracts and the exclusivity provisions in the supply agreements in the current regulated grower/exporter (non- Australia) market, and no ―deregulated‖ market was established;
(b)Zespri has not contravened s 27(1) in respect of the 2009 Australia service level agreements because the provisions of the agreements did not have the purpose or effect or likely effect of substantially lessening competition in the current regulated market;
(c) Zespri has not contravened s 36(2) in respect of the 2009 Australia service level agreements because, even assuming that Zespri had taken advantage of its market power, it did not do so for a proscribed purpose;
(d)Zespri has not contravened s 36(2) in respect of the new kiwifruit cultivar policy because, while it did take advantage of its market power, it did not do so for a proscribed purpose.
[373] As Turners & Growers‘ claims under Part 2 of the Commerce Act have therefore been unsuccessful, the relief sought by Turners & Growers in the fourth and fifth causes of action in their second amended statement of claim is formally declined.
[374] We see no reason why Zespri should not be entitled to its costs on a category 3 basis as determined in judgment (No. 3) dated 29 October 2010,75 with disbursements to be fixed by the Registrar, but if the parties are unable to agree Zespri may submit a memorandum within 14 days and Turners & Growers may
respond within a further 14 days.
D J White J
K M Vautier
75 Turners & Growers Ltd v Zespri Group Ltd (No. 3) HC Auckland CIV 2009-404-004392,
29 October 2010.
Addendum dated 22 August 2011
[375] The complete version of this judgment was released only to counsel for the parties on 12 August 2011 to enable them to advise whether there were any parts of the judgment which they sought to have redacted from the public version of the judgment on grounds of confidentiality: minute (No 6) of the Court dated 12 August
2011.
[376] By joint memorandum of counsel for the parties dated 18 August 2011, redactions for reasons of confidentiality and commercial sensitivity were sought to aspects of the following paragraphs of the judgment: [157], [198], [277](d), [317], [318], [332] and [359].
[377] The Court accepts that these redactions should be made to the judgment for reasons of confidentiality and commercial sensitivity.
[378] The judgment with these redactions may now be released and published.
D J White J
0
6
1