By John Land
On 2 April 2020 the Supreme Court issued its first decision on the application of the prohibition on price fixing in the Commerce Act 1986. In Lodge Real Estate Ltd v Commerce Commission [2020] NZSC 25 the Court confirmed that a number of Hamilton’s biggest real estate agencies breached the prohibition on price fixing by reaching an arrangement to move to “vendor funding” of the cost of advertising properties on Trade Me.
Although the Commerce Commission was successful in Lodge, the Supreme Court’s important clarifications of the law will make establishing a price fixing allegation in the future harder rather than easier. The Supreme Court judgment provides helpful guidance on two imatters of significance.
The first is to confirm that there will not be an “arrangement” between competitors for the purposes of the Commerce Act 1986 unless there is a consensus between them involving a commitment from one or both parties to act in a certain way. This resolves the uncertainty as to what amounts to an arrangement or understanding for the purpose of the Commerce Act, following the previous leading decision (Giltrap City Ltd v Commerce Commission [2004] 1 NZLR 608 (CA)). The clarification by the Supreme Court that a mere consensus between the parties giving rise to mutual expectations is not enough unless the consensus involves a commitment from one or both parties is important. It will make it harder to establish that competitors have entered into an “arrangement”, but in my view appropriately so.
The second is to confirm the approach to assessment of whether an arrangement can be said to “control” price in terms of s 30 Commerce Act. The test is whether the arrangement has the purpose or effect of restraining a freedom that would otherwise have existed as to the price to be charged for a good or service. The Supreme Court has clarified, however, that the relevant price that must be controlled is the overall price for the good or service. Contrary to the approach of the Court of Appeal (and of the Commerce Commission in its published guidelines) agreement on a small portion or component of a price will not necessarily amount to controlling the overall price. This will only be so if the particular portion or component could be seen as competitively significant. (Here the cost of Trade Me advertising was small compared to the average commission paid for real estate agency services but was nevertheless accepted on the facts as being competitively significant.)
The Supreme Court’s clarification of the scope of what amounts to price fixing under the Commerce Act is particularly timely given the recent amendment to the Commerce Act which will criminalise price fixing with effect from April 2021. That criminalisation will add jail terms of up to seven years as a potential consequence of engaging in cartel conduct in addition to the suite of civil remedies already available.
Background to the Lodge Case
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 Trade Me. Trade Me replaced this fee structure with a fee per individual property listing. This change substantially increased the overall cost of listings. For example, Lodge 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 are not material to the 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 Supreme Court 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?
Was there an arrangement between competitors?
On the question of whether there was an arrangement, the Supreme Court agreed with both the High Court and Court of Appeal. 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.
Prior to Lodge, there had been debate about the correct test for deciding whether there is an “arrangement” for the purpose of the Commerce Act. That test is relevant to both the application of s 30 (which now prohibits arrangements between competitors that include a cartel provision, including price fixing) and s 27 (which prohibits arrangements that substantially lessen competition in a market).
The previous leading decision on what amounts to an arrangement or understanding for the purpose of the Commerce Act was the Court of Appeal’s decision in the Giltrap City case. In that case, the majority of the Court of Appeal had held that 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 City would have required a finding of a “moral obligation” before there could be said to be an arrangement.
The majority’s test from Giltrap City was potentially capable of being read as requiring quite a low threshold for establishing an arrangement. At first instance Jagose J even said that the “bar is determinedly not set high” (Commerce Commission v Lodge Real Estate Ltd [2017] NZHC 1497 at [21]). On one view, the test in Giltrap City might be satisfied in a situation where participants in the market understand full well how other participants will react to certain pricing or supply decisions that are made and can be said to have reached a “consensus” as to how they will each act and to have “mutual expectations” of such actions accordingly.
The term “conscious parallelism” has been used to describe this situation. Firms in a market make decisions (say as to prices or the supply of particular customers) based on a well-founded expectation as to how other participants will react, but do so without actually commiting to each other how they will act.
It could potentially have been argued that the majority’s approach in Giltrap City might have applied to at least some such situations on the basis that there was a clear consensus between market participants as to what would happen in a particular situation and a clear expectation as to how the participants would behave.
The Supreme Court has made it clear, however, that the test for an arrangement will not extend to a situation of conscious parallelism. There needs to be not only a consensus but a commitment to act in a certain way.
The Supreme Court summarised its approach at [58]: “If there is a consensus or meeting of minds among competitors involving a commitment from one or more of them to act (or refrain from acting) in a certain way, that will constitute an arrangement (or understanding). The commitment does not need to be legally binding but must be such that it gives rise to an expectation on the part of the other parties that those who made the commitment will act or refrain from acting in the manner the consensus envisages.”
The Supreme Court preferred the term “commitment” to the term “moral obligation” which had been used in Giltrap City. The Supreme Court suggested that calling such an obligation a moral obligation was undesirable as it introduced morality into a context where it didn’t add anything. (The Court of Appeal had similarly had concerns about a moral obligation test, as moral assessments are inherently unpredictable and imprecise.) The Supreme Court also confirmed that provided that there was a commitment of the kind described then there was no additional requirement to prove a moral obligation.
The Supreme Court’s clarification of what is required to show an “arrangement” is very significant. The Supreme Court’s approach will make it more difficult for the Commerce Commission to establish an arrangement for the purpose of s 30 (or s 27). However, in my view this is appropriately so. That is especially the case now that price fixing can amount to a criminal offence.
The Supreme Court found that the test for an arrangement had been met on the evidence. In the Court’s view the consensus reached by the Hamilton agencies involved a commitment from each of them to adopt a vendor-funded model for Trade Me listings and to remove existing listings in January 2014. This created an expectation as to the common course of conduct the Hamilton agencies would follow.
The commitment based test for an arrangement adopted by the Supreme Court brings our approach 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 Pty Ltd v ACCC [2005] FCAFC 161, (2005) ATPR 42-078 and ACCC v Australian Egg Corporation Ltd [2017] FCAFC 152).
However, the relevant evidence to establish such a test is different between the two jurisdictions. In New Zealand, the question of whether there is a commitment between the parties will be determined objectively from outward appearances (Lodge at [50]). 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.
Controlling Price
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, Jagose J 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 had disagreed and held that the arrangement did control price. Further, the Court of Appeal even suggested that a component of price (such as the Trade Me fee) itself amounted to “price” for this purpose.
Argument relating to “Component” of Price
In the Supreme Court, Lodge argued that the Trade Me listing cost 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 for such services.
A similar argument had succeeded in one Australian case (ACCC v Olex Australia Pty Ltd [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.
In Lodge, the cost of Trade Me advertising at $159 was also small compared to the average commission paid for real estate agency services in Hamilton of $15,000.
The Supreme Court rejected, (at [156]) that part of the Court of Appeal’s reasoning that suggested that under s 30 of the Commerce Act “price” automatically includes a component of the price. I have previously criticised that part of the Court of Appeal’s judgment in my note on the judgment (see “Price fixing without fixing the whole price”, LawTalk 925, February 2019, 52 at 54). As the Supreme Court pointed out, there can be cases where the component of price affected by an arrangement is so insignificant that it will not have the effect of controlling the overall price. Cases like Olex show that 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.
The Supreme Court said therefore that the Court of Appeal’s observation that price includes a component of price was incorrect as a general statement of the law. To this (limited) extent the Commission’s Competitor Collaboration Guidelines (January 2018) (chapter 2, para 23 and footnote 21) must now also be considered incorrect.
Accordingly, it is necessary to show that there is a controlling of the overall price of a good or service, not just of a component of price.
The Supreme Court confirmed, however, that agreement on a small portion of a price can amount to controlling the overall price if the particular portion of the price could be seen as competitively significant.
Here, although the cost of the Trade Me fee was relatively small, it was nevertheless accepted as being competitively significant given the evidence as to the importance placed by the parties on the cost of the Trade Me fee.
The arrangement in relation to the Trade Me fee therefore did have the effect of controlling the overall price for real estate agent services. The Supreme Court was satisifed that although the arrangement related to a mathematically small component of the overall charges by Hamilton real estate agencies to their customers “it was nevertheless a sufficiently significant component of the overall price to bring the arrangement within the ambit of s 30.” (at [161])
Argument relating to discretion to depart from price
The Supreme Court held that what the Commission had to prove to show a controlling of price was that the arrangement had the purpose or effect of restraining a freedom that would otherwise have existed as to the (overall) price to be charged by the Hamilton agencies to customers.
The Supreme Court held that the arrangement to adopt a vendor funding model for the Trade Me listing fee interfered with the competitive setting of price for the services offered by the Hamilton agencies. The Supreme Court accepted the argument that the arrangement ruled out the previous default setting of free Trade Me standard listings for all customers. The fact that agencies retained a discretion to depart from the new default position of vendor funding did not stop there from being an effect on the price setting process. Customers were deprived of the opportunity to be offered a price set under competitive market forces. In effect, they obtained a lesser service that may have been available to them for the same price if the agreed vendor funding model had not been adopted.
Relevance of Lodge to the current law
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 Supreme Court in Lodge remains relevant under the new prohibition.
Further, the guidance will also be relevant in considering the new criminal offence provisions introduced by the Commerce (Criminalisation of Cartels) Amendment Act 2019, which comes into force on 8 April 2021. In particular, s 82B of the Commerce Act will now provide for a criminal offence for cartel conduct based on a definition of such 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.
Criminal sanctions should not be applied unless the law is clear and the conduct truly culpable. Accordingly, with the introduction of a criminal offence provision, the clarity provided by the Supreme Court as to what amounts to price fixing is welcome.
So also is the Supreme Court’s restriction of what amounts to a price fixing “arrangement” between competitors to situations in which the parties have entered into a “commitment” giving rise to mutual expectations as to how the parties should act. A lesser test for what amounts to an arrangement risks setting the bar too low for criminal cartel conduct.
John Land is a senior competition law specialist and commercial litigator at Bankside Chambers in Auckland. He can be contacted on (09) 379 1513 or at john.land@bankside.co.nz.