The court of appeal decision in Lodge

On 23 November 2018 the Court of Appeal issued its decision in Commerce Commission v Lodge Real Estate Ltd [2018] NZCA 523. The court held that a number of Hamilton’s biggest real estate agencies breached the prohibition on price fixing in the Commerce Act by reaching an arrangement to move to “vendor funding” of the cost of advertising properties on Trade Me. This decision overturned the decision of Justice Jagose in the High Court ([2017] NZHC 1497) who had held that the arrangement was not sufficient to fix or control the price of real estate agency services.

The Court of Appeal decision is significant as it shows that is possible to breach the Commerce Act by agreeing with your competitors on just a relatively small proportion of the overall price of a good or service. The reasoning of the court also shows that you can breach the Commerce Act even where you and your competitors reserve a discretion as to the overall price you might charge. Agreeing on a starting price, or even on a component of a starting price, will likely amount to price fixing.

The clarification of the scope of what amounts to price fixing under the Commerce Act is particularly important given the bill currently before Parliament which will criminalise price fixing. That proposed criminalisation will add jail terms of up to seven years as potential consequences of breaching s 30 in addition to the suite of civil remedies already available.

An application for leave to appeal the Court of Appeal’s decision has been made to the Supreme Court.

The trigger

In 2013 Trade Me changed its fee structure for property listings. Previously, real estate agent offices could pay a capped monthly fee for unlimited property listings on the site. This fee structure was replaced with a fee per individual property listing. This change substantially increased the overall cost of listings. For example, Lodge Real Estate faced an expected increase in annual Trade Me listing fees from about $9,000 to $220,000.

The substantial increase in cost was the cause of much concern by real estate agents. At a meeting of Hamilton real estate agents in September 2013, the agencies agreed in principle to stop absorbing the cost of Trade Me advertising and move in January 2014 to a model of “vendor funding” of the cost of Trade Me listings.

The Commerce Commission alleged that this agreement amounted to unlawful price fixing between the competing real estate agents under s 30 of the Commerce Act. The case was considered under the old form of s 30 prior to the recent amendments to that section passed in August 2017. However, the recent changes to s 30 would not have made any difference to this case. Both the old and new form of s 30 effectively prohibit competitors entering into a contract, arrangement or understanding containing a provision that has the purpose, effect or likely effect of fixing, controlling or maintaining price.

The issues

The Court of Appeal had to consider two issues. First, was there in fact an “arrangement” between the real estate agents? Secondly, if there was such an arrangement, did a provision of that arrangement have the purpose or likely effect of controlling price?

On the question of whether there was an arrangement the Court of Appeal agreed with Justice Jagose. There was an arrangement between the real estate agents that they would not absorb the cost of Trade Me’s proposed new listing fees and that subsequent Trade Me listings would be vendor funded.

The consideration

There was some debate before the Court of Appeal about the correct test for deciding whether there is an “arrangement” for the purpose of the Commerce Act. The court indicated that it preferred the approach of the majority of the court in its previous decision in Giltrap City Ltd v Commerce Commission [2004] 1 NZLR 608. That is, there is an “arrangement” between competitors where there is a consensus among them giving rise to mutual expectations as to how those competitors would act. By contrast, the minority approach of McGrath J in Giltrap would have required a finding of a “moral obligation” before there could be said to be an arrangement. The Court of Appeal in Lodge had concerns about a moral obligation test, as moral assessments were inherently unpredictable and imprecise.

The court accordingly applied the language of “consensus” and “mutual expectations” used by the majority in Giltrap. The court held that there was evidence that real estate agents appreciated the competitive risk that would occur if not all agents moved to vendor funding. The court considered the purpose of the real estate agents’ meeting in September 2013 was to avoid that competitive risk by reaching a “consensus” as to how the agencies would respond to the change in Trade Me fee structure, and that this resulted in “mutual expectations” that all agents present would commence vendor funding of Trade Me listings. That was enough to amount to an arrangement.

However, importantly the court in Lodge does also seem to recognise a requirement that there must be some “commitment” entered into by the parties before they can be said to have entered into an arrangement. The court accepted that to establish an “arrangement”, there needed to be more than just consciously parallel conduct. The court said (at [68]): “There has to be an element of conditionality in an understanding, that is the parties recognise that they will commit to a course of future conduct on the basis that others are making the same or a similar commitment and act in accordance with that commitment.”

Such a commitment-based test for an arrangement brings the test somewhat closer to that applied in Australia. There, the courts have been strict in requiring evidence of a clear commitment (moral or otherwise) before finding that there is an arrangement or understanding (Apco Service Stations v ACCC (2005) ATPR 42-078). However, the relevant evidence to establish such a test is different. In New Zealand, the question of whether there is a commitment between the parties will be determined objectively from outward appearances (see Lodge at [66]-[67]). By contrast, in Australia the courts are more concerned with whether the parties subjectively felt they were under a commitment to act in a certain way.

The second issue that the court had to consider in Lodge was whether the arrangement had the purpose or likely effect of fixing or controlling the price of real estate agency services. In the High Court, Justice Jagose had said there was no controlling of price because the real estate agents still retained a discretion as to whether they would in particular cases bear some or all of the Trade Me listing cost.

The Court of Appeal, however, said the fact there was such a discretion did not mean there was no purpose or likely effect of controlling price. Section 30 could be breached even if the arrangement allowed the parties discretion as to the end price for real estate agent services.

The judgment

The Court of Appeal’s judgment makes it clear, if it wasn’t already, that competitors agreeing on a starting price or list price amounts to price fixing. The court noted by way of example “… [If] the retailers of motor vehicles in a street all agreed on an asking price for a certain model, aware that this was the asking price only and the end price after negotiation could be quite different, that would have an anti-competitive effect…” (at [88]).

Accordingly, agreeing with competitors on a starting position for price will breach s 30 as the starting position of any vendor as to price will have some effect on the ultimate agreement on price. In the view of the Court of Appeal, all that is needed to breach s 30 is an arrangement “that will be likely to interfere with the competitive setting of price” (see [90] and [91]).

The Court of Appeal therefore considered the arrangement between the Hamilton real estate agents controlled price as the agencies agreeing in principle to move to vendor funding was an agreement on a starting position which affected price (of real estate agent services) adversely for customers.

The court, however, had to deal with an important argument by Lodge Real Estate that the Trade Me fee was not a sufficiently significant proportion of the price of real estate agent services so as to have the effect of controlling the overall price. A similar argument had succeeded in one Australian case (ACCC v Olex Australia [2017] ATPR 42-540).

In Olex, an alleged agreement between suppliers of electrical cable as to a cable cutting fee was held not to have the likely effect of controlling the overall price for supply of electrical cable. The cable cutting fee was not a materially significant proportion of the overall price for supply of cable. Further, not only was the cable cutting fee in question only a modest component of the overall price of electrical cable, the price of cable supplied by each manufacturer was not visible to each other. Accordingly, there was no commercially realistic ability to control the price of cable by controlling the price for cutting services.

The Court of Appeal in Lodge, however, considered that the cost of advertising on Trade Me was a significant part of the price of the services provided by the Hamilton agencies. That was especially so if no property sale eventuated. Even if a property sale did occur, the strong reaction by the Hamilton agencies to the change of policy by Trade Me was an indication of the importance of the cost as a part of the price of the agents’ services.

Further, the Court of Appeal also considered the move to vendor funding could be seen as the removal of a “discount or allowance” (in the form of the provision of free advertising on Trade Me). (It can be noted that the definition of price fixing in the Commerce Act extends to agreements concerning any “discount, allowance, rebate or credit” in relation to goods or services – see now s 30A(2)(b)).

Conclusion

While I agree generally with the Court of Appeal’s analysis on the question of s 30, and the end result in Lodge, there is one statement in the judgment (not essential to the court’s view) that I disagree with. The Court of Appeal judgment in my view goes too far in asserting without qualification that under s 30 “price also extends to the component parts of a price” (at [99]). As the decision in Olex shows, there can be situations where agreement on a component part of price could have no conceivable impact on the overall price of a good or service, or on competitive dynamics in the market.

Although s 30 has now been replaced by a wider prohibition on cartel conduct, that prohibition includes a definition of price fixing that is in essentially the same terms as the prohibition on price fixing in the old s 30. Accordingly, the guidance provided by the Court of Appeal in Lodge remains relevant under the new prohibition.

Further, the guidance will also be relevant in considering the proposal for criminalisation of cartel conduct. The Commerce (Criminalisation of Cartels) Amendment Bill had its second reading on 25 October 2018. That bill will insert a new criminal offence provision, s 82B, into the Commerce Act. Section 82B is based on a definition of cartel conduct (including price fixing) that is the same as that applying for civil remedies already applicable under the Commerce Act. The only additional requirement for an offence to be committed is the addition of a mens rea requirement- in the case of price fixing, the defendant must have intended to engage in price fixing.

Given the potentially severe consequences of breaching s 30, the Lodge decision suggests the need for greater care in any discussions between competitors. To be safe, businesses should not discuss any aspect of price with their competitors and should avoid any arrangements with competitors that interfere with competitive price setting.

Lodge makes it clear that businesses cannot assume that discussions about price are OK just because the competitors involved retain a discretion as to the final price of the service or product in question. Further, Lodge suggests it is unwise for competitors to even discuss the price of a small component of an end service or product.

John Land is a senior competition law specialist and commercial litigator at Bankside Chambers in Auckland. Formerly a partner of Kensington Swan for 20 years, he can be contacted on 09) 379 1513 or at john.land@bankside.co.nz