New Zealand: Competition & Trade Practices Bulletin – May 2006

As has been widely reported, Koppers Arch Wood Protection (NZ) Limited and its Australian parent company, Koppers Arch Investments Pty Limited, were recently fined a total of $3.6 million after they admitted participating in cartel behaviour in the wood preservative chemicals industry between 1998 and 2002.

The $3.6 million in penalties were made up of $2.85 million for price-fixing and $750,000 for attempting to exclude a new entrant into the market. The Koppers Arch companies were also ordered to pay $100,000 in costs to the Commerce Commission.

The case is the first major cartel case to be brought before the Courts since the maximum penalty for a body corporate engaged in anti-competitive conduct was raised in 2001 from $5 million to the greater of $10 million or a figure equal to three times the commercial gain from the conduct or (if this can not be ascertained) 10% of turnover of the body corporate (including interconnected bodies corporate).

The case also saw the Commission take advantage of the increased limitation period for Commission-initiated proceedings introduced by the 2001 reforms (three years from the date the contravention was discovered by the Commission or ought reasonably to have been discovered, with a limitation period of 10 years from the date of the matter giving rise to the contravention). It should be noted that this limitation differs from the position in Australia under the Trade Practices Act 1974, where the Australian Competition and Consumer Commission (ACCC) has a maximum of six years to institute proceedings from the date of the contravention.

The penalties imposed by the High Court against the Koppers Arch companies are more than double the previous highest penalties imposed on a party or related parties for cartel behaviour in New Zealand. The previous highest penalty was $1.5 million imposed against each of the three largest defendants in Commerce Commission v Taylor Preston et al in 1998. That case arose out of cartel behaviour by a number of meat companies in the North Island livestock market. Other fines imposed in recent times for price fixing or other coordinated behaviour in breach of the Commerce Act include:

• in August 2005, four surgeons admitted breaching the Commerce Act by fixing the prices to be paid for eye services, and were ordered to pay a total of $85,000 in fines and costs;

• in June 2004, the Ophthalmological Society of New Zealand Inc was ordered to pay $100,000 and two ophthalmologists a total of $30,000 for contravening the anti-competitive provisions of the Commerce Act. They were also ordered to pay $467,870 towards the Commission’s legal costs;

• in November 2003, the Court of Appeal ordered that Giltrap City Toyota pay $100,000 for entering into a price fixing agreement with other Auckland Toyota dealers. This followed a settlement in 1996 where the High Court imposed penalties totalling $350,000 after seven other Auckland Toyota dealers admitted that they had breached the Commerce Act by fixing prices by agreeing to limit the discount available to purchasers of new cars;

• in February 2000, the High Court ordered three petrol companies to pay penalties totalling $1.175 million for breaching the Commerce Act by price fixing. The Commission alleged that the three companies colluded to jointly withdraw a discount from the price of petrol at more than 50 Auckland petrol stations. The discount was in the form of a free car wash offered to customers who spent $20 or more on fuel.

While penalties in New Zealand remain relatively low in comparison with Australia (for example, in 2005 pecuniary penalties totalling $23.305 million were ordered by the Federal Court for price-fixing conduct in the Ballarat petrol market), it appears that further increases in penalties are likely. The penalties imposed against Koppers Arch were significantly discounted by the High Court given the companies’ early admissions and assistance with the Commerce Commission’s actions against other defendants. Williams J agreed with the Commission’s submission that a penalty of $7.2 million would have been appropriate if Koppers Arch had unsuccessfully defended the case at trial. The penalty took into account the early admissions and co-operation with other aspects of the investigation.

The case reinforces the need for business to have effective compliance programs in place. Businesses should also be aware that if current or historic cartel behaviour is discovered they may be entitled to apply for leniency under the Commerce Commission’s leniency policy.

Section 47 of the Commerce Act prohibits a person acquiring assets of a business or shares if the acquisition would have, or would be likely to have, the effect of substantially lessening competition in a market.

Section 66 of the Commerce Act allows a party considering an acquisition that might breach the Commerce Act 1986 to apply for a clearance. The Commission will grant a clearance if it is satisfied that the acquisition will not, or will not be likely to, substantially lessen competition in a market. Obtaining a clearance is voluntary, ie it is open to an acquirer to proceed with an acquisition without a clearance and take the risk that the acquisition will breach the Commerce Act.

For the second time in the last six months a company has applied for clearance under section 66, subsequently withdrawn the clearance and indicated to the Commission that it will nevertheless proceed with the relevant acquisition without a clearance.

New Zealand Bus Limited (NZBL) applied for clearance to acquire 74% of the shares in Mana Coach Services Limited on 16 January 2006. On 15 March 2006 NZBL withdrew its application for clearance and advised the Commission that it would be acquiring the shares on 3 April 2006.

The Commerce Commission issued proceedings on 30 March 2006 against NZBL, stating that the acquisition would breach section 47 of the Commerce Act 1986. The Commission also sought an interim injunction preventing the acquisition from taking place until the trial had been determined. The Commission, however, was satisfied that the undertaking given by NZBL not to proceed until the trial was determined, removed the need for an interim injunction.

As far as we are aware, the trial is set down for two weeks, beginning 22 May 2006. The main issue to be determined at trial will be whether the proposed acquisition of shares by NZBL in Mana will breach section 47 of the Commerce Act. The Court will be required to determine whether the acquisition of shares would have, or would be being likely to have, the effect of substantially lessening competition in a market.

Without considering the specifics of the NZBL case, the proposed transaction highlights some interesting strategic issues for acquirers. Following an investigation and negative decision by a regulator, it is relatively common in other jurisdictions for a party to inform the regulator that it intends to proceed with an acquisition despite the indication that the acquisition might be challenged (forcing the regulator to bring proceedings). In New Zealand, the general practice to date has been for an acquiror to put any proposed acquisition on hold while its clearance application is considered by the Commission. If the application for clearance is declined and the acquirer believes this to be incorrect, the usual practice has been to appeal to the High Court rather than going forward with the acquisition and leaving it to the Commission to bring injunctive proceedings.

We will keep you informed of developments as the NZ Bus case develops.

Although cartel enforcement has had centre stage in recent times, businesses should not forget about the prohibition on resale price maintenance contained in the Commerce Act. This is illustrated by the case of Morning Star Computer Limited, a computer parts and systems wholesaler, that has been found to be in breach of the Commerce Act 1986 provisions relating to re-sale price maintenance.

The Commerce Commission brought charges in the Auckland High Court against Morning Star in October 2005, after a two-week investigation into the conduct of the company in July 2004.

Morning Star admitted to contacting 16 or more computer parts resellers by telephone to induce them not to sell six Morning Star products below certain specified prices. Morning Star employees also threatened to impose penalties on retailers who would not comply with the suggested prices and proposed benefits for those retailers who complied.

The High Court found Morning Star breached section 37 of the Commerce Act, prohibiting resale price maintenance by suppliers, and ordered Morning Star to pay a penalty of $50,000 and $3,624 costs.

Resale price maintenance occurs when a supplier of certain goods specifies to a reseller the minimum price that can be charged for those goods. A supplier is entitled to issue a recommended retail price for goods, but cannot enforce a minimum price.

Paula Rebstock, Chair of the Commerce Commission, emphasised the seriousness of the conduct, stating that where suppliers impose prices on resellers, they are inhibiting the consumer’s ability to shop around and find the best price.

Justice Frater, in her judgement, stated that Morning Star’s conduct deprived the market of price competition.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.