COMMERCE COMMISSION v LODGE REAL ESTATE LTD [2020] NZHC 2329

COMMERCE COMMISSION v LODGE REAL ESTATE LTD [2020] NZHC 2329 [8 September 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2015-404-3045[2020] NZHC 2329BETWEEN COMMERCE COMMISSIONPlaintiffAND LODGE REAL ESTATE LIMITEDFirst defendantLUGTON'S LIMITEDSecond defendantMONARCH REAL ESTATE LIMITEDThird defendantContinued overleafHearing: 4 September 2020Appearances: JCL Dixon QC, LCA Farmer and VMA Fowler for the plaintiffL J Taylor QC and M A Cavanaugh for the first and seventhdefendantsD H McLellan QC and M S Anderson for the third and sixthdefendantsDate of judgment: 8 September 2020JUDGMENT OF JAGOSE JThis judgment was delivered by me on 8 September 2020 at 3.30pm.Pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarCounsel/Solicitors:JCL Dixon QC, AucklandL J Taylor QC, WellingtonD H McLellan QC, AucklandWotton + Kearney, AucklandMeredith Connell, AucklandONLINE REALTY LIMITEDFourth defendantSUCCESS REALTY LIMITEDFifth defendantBRIAN KINGSixth defendantJEREMY O'ROURKESeventh defendant[1] This judgment determines what pecuniary penalties should be paid to theCrown by each Lodge Real Estate Limited ("Lodge") and Monarch Real EstateLimited ("Monarch") – and their respective executives, Jeremy O'Rourke and BrianKing – for their contraventions of Part 2 of the Commerce Act 1986 (the "Act"), inentering and giving effect to a 30 September 2013 consensus between Hamilton realestate agencies to control the price of real estate agency services in Hamilton.1Background[2] My 2 November 2017 judgment explained:2Lodge, Lugton's, Monarch, Online and Success each provide real estateagency services in Hamilton. They compete by securing properties for salethrough their respective agency.Lodge is Hamilton's only member of the New Zealand Realtors Network("NZRN"), which is a network of geographically-separate real estate agencies.Lugton's is not affiliated with any other real estate agency. Monarch, Onlineand Success are respectively franchisees in the national Harcourts, Ray Whiteand Bayleys groups of real estate agencies. Assessments of market share(calculated by average monthly sales volumes) vary, but it is generallyaccepted Lodge (with approximately 35% market share), Monarch (28%), andLugton's (25%) are the larger agencies in Hamilton, with the other agencies'shares in single figures.[3] I concluded the five Hamilton real estate agencies' consensus – not to absorbthe cost of Trade Me's proposed per listing fees and to withdraw all listings from TradeMe, any subsequent Trade Me listings to be vendor funded3 – while entering andgiving effect to an arrangement or understanding between competitors,4 reservedsufficient discretion for the full range of price setting options on any individualtransaction not to have the purpose or effect of "fixing, controlling, or maintaining ofthe price" as prohibited by the Act's ss 27 and 30:5[I]t is at that individual level of analysis 'price' is to be understood – the"prices at which goods are in fact sold or offered for sale on terms whereacceptance will result in a contract": it is not an expansive concept. The1 Commerce Commission v Lodge Real Estate Ltd [2018] NZCA 523, [2019] 2 NZLR 168 ("CAjudgment") at [89].2 Commerce Commission v Lodge Real Estate Ltd [2017] NZHC 1497 ("HC judgment") at [28]–[29].3 At [193].4 At [200] and [208].5 At [227], citing Commerce Commission v Siemens AG (2010) 13 TCLR 40 (HC) at [246]–[248].arrangement or understanding does not interfere with the competitive settingof price.[4] The Supreme Court held the arrangement or understanding was as to "thedefault offer price for Trade Me advertising depriv[ing vendors] of the opportunityto be offered a price that had been set by an agency under workably competitive marketforces".6 It "interfere[d] with the competitive setting of price for the services offered":7The fact that the cost of Trade Me standard listing was going to besubstantially greater after Trade Me's new policy came into effect meant thatoffering a free Trade Me listing would have had greater significance. It was afield of potential competition between agencies in the quest for new listings.The arrangement between agencies effectively prevented that potentialcompetition from developing.Thus the Hamilton agencies' consensus contravened s 27, by reason of s 30'soperation. The other agencies earlier admitted their own liabilities; this Court thendetermined the penalties payable by them: $900,000 for Success; $1 million forLugton's; and $1,050,000 for Online.8[5] Had I to consider the individuals' status at trial, "[m]y inclination would havebeen to regard them as principals".9 That was upheld by the Court of Appeal,10 whichremitted the case back to me for assessment of penalties.11[6] The Commission now proposes I should impose a penalty on Lodge of $2.375million; on Monarch, of $2.1 million; on Mr O'Rourke, of $65,000; and on Mr King,of $40,000. The defendants propose substantially lesser penalties: no more than$400,000 on Lodge, and $350,000 on Monarch; and, if separate penalties should beimposed on the individuals, no more than $25,000 on Mr O'Rourke, and $20,000 onMr King.6 Lodge Real Estate Ltd v Commerce Commission [2020] NZSC 25 ("SC judgment") at [165] and[169]. Similarly, CA judgment, above n 1, at [89].7 SC judgment, above n 6, at [170]–[171]. Similarly, CA judgment, above n 1, at [91] and [93].8 Commerce Commission v Lodge Real Estate Ltd [2016] NZHC 1494 ("Success judgment") at[34]; Commerce Commission v Lodge Real Estate Ltd [2016] NZHC 3115 ("Lugtons judgment")at [25]; Commerce Commission v Lodge Real Estate Ltd [2017] NZHC 1875 ("Online judgment")at [25].9 HC judgment, above n 2, at [235].10 CA judgment, above n 1, at [110].11 At [118].Approach to pecuniary penalties[7] At the time of the defendants' contravention, the Act's s 80 relevantlyprovided:80 Pecuniary penalties(1) If the court is satisfied on the application of the Commission that aperson—(a) has contravened any of the provisions of Part 2 the court may order the person to pay to the Crown such pecuniary penaltyas the court determines to be appropriate .(2) The court must order an individual who has engaged in any conductreferred to in subsection (1) to pay a pecuniary penalty, unless the courtconsiders that there is good reason for not making that order.(2A) In determining an appropriate penalty under this section, the court musthave regard to all relevant matters, in particular,—(a) any exemplary damages awarded under section 82A; and(b) in the case of a body corporate, the nature and extent of anycommercial gain.(2B) The amount of any pecuniary penalty must not, in respect of each act oromission, exceed,—(a) in the case of an individual, $500,000; or(b) in the case of a body corporate, the greater of—(i) $10,000,000; or(ii) either—(A) if it can be readily ascertained and if the court is satisfiedthat the contravention occurred in the course of producinga commercial gain, 3 times the value of any commercialgain resulting from the contravention; or(B) if the commercial gain cannot be readily ascertained, 10%of the turnover of the body corporate and all of itsinterconnected bodies corporate (if any).[8] It is accepted the applicable corporate maximum penalty here is $10 million.[9] Having regard to "all relevant matters" under s 80(2A) "will bring to accountall those factors previously set out in s 80(2)",12 being (as continue to have applicationon contraventions of ss 47 or 47B, addressing business acquisitions substantiallylessening competition in a market)13:(a) the nature and extent of the act or omission:(b) the nature and extent of any loss or damage suffered by any person as aresult of the act or omission:(c) the circumstances in which the act or omission took place:(d) whether or not the person has previously been found by the court inproceedings under this Part to have engaged in any similar conduct.[10] Relevant considerations thus include:14(a) the duration of the contravening conduct;(b) the seniority of the employees or officers involved in the contravention;(c) the extent of any benefit derived from the contravening conduct;(d) the degree of market power held by the defendant;(e) the role of the defendant in the impugned conduct;(f) the size and resources of the defendant;(g) the degree of cooperation by the defendant with the Commission;(h) the fact that liability is admitted; and(i) the extent to which a defendant has developed and implemented acompliance programme.[11] Sentencing usually engages two steps, so that – with 'non-mechanical'reference to analogous cases,15 and aggravating and mitigating features of the12 Telecom Corporation of New Zealand Ltd v Commerce Commission [2012] NZCA 344 at [13],citing Commerce Commission v Qantas Airways Ltd HC Auckland CIV-2008-404-8366, 11 May2011 at [26], and Commerce Commission v Alstom Holdings SA [2009] NZCCLR 22 (HC) at [19].13 Commerce Act 1986, s 83.14 Telecom Corporation of New Zealand Ltd v Commerce Commission, above n 12, at [13], citingCommerce Commission v Qantas Airways Ltd, above n 12, at [26] (citing Commerce Commissionv Geologistics International (Bermuda) Ltd HC Auckland CIV-2010-404-5490, 22 December2010 at [20]), and Commerce Commission v New Zealand Diagnostic Group Ltd HC AucklandCIV-2008-404-4321, 19 July 2010 at [17].15 Telecom Corporation of New Zealand Ltd v Commerce Commission, above n 12, at [62], citingAustralian Competition and Consumer Commission v Telstra Corp Ltd [2010] FCA 790 at [210].offending – I should first decide a starting point for the contravention, to adjust thatup or down to take into account individual circumstances, for determination of theapplicable pecuniary penalty.16[12] As an exercise in sentencing for regulatory offending, "[t]he primaryconsideration is deterrence and penalties must be set at a level that achieves bothspecific and general deterrence[;] the size and resources of a firm, and its positionof influence in the industry, are relevant to deterrence".17[13] Reservations against drawing too close analogy with criminal sentencingprinciple – particularly given the Act's regulatory rather than penal nature, and theneed to have regard for the contravention in its market context – are notorious.18Nonetheless, some have resonance: the gravity of the contravention and the culpabilityof the contravenor; the serious of the contravention in the spectrum of proscribedconduct; and "the general desirability of consistency" of outcome with similarcontravenors committing similar contraventions in similar circumstances.19Discussion[14] I address first the reason for the substantial gap between the penalties proposedeach by the Commission and for the defendants. For the Commission, John Dixon QCdraws on starting points adopted predominantly in other real estate Trade Me price-fixing sentences. I return to that at [18] below.[15] For the defendants, Les Taylor QC and Daniel McLellan QC draw ons 80(2B)(b)(ii)(A)'s alternative maximum penalty "if the court is satisfied that thecontravention occurred in the course of producing a commercial gain, 3 times the valueof any commercial gain resulting from the contravention". Acknowledging thealternative maximum only is available if the multiplier results in a sum greater than16 Moses v R [2020] NZCA 296 at [46]; R v Taueki [2005] NZCA 174, [2005] 3 NZLR 372 at [8].17 Telecom Corporation of New Zealand Ltd v Commerce Commission, above n 12, at [28] and [55],the latter citing Carter Holt Harvey Building Products Group Ltd v Commerce Commission (2001)10 TCLR 247 (CA) at [94]; Commerce Commission v Qantas Airways Ltd, above n 12, at [24];and Commerce Commission v New Zealand Diagnostic Group Ltd, above n 14, at [17].18 Commerce Commission v Telecom Corporation of New Zealand Ltd (2011) 13 TCLR 270 (HC) at[6].19 Sentencing Act 2002, s 8.$10 million (thus, if readily ascertainable commercial gain is more than $3.33 million),nonetheless the multiplier is argued to provide "a compelling guide" to achievingeffective deterrence while avoiding over-deterrence.20 Lodge points to its commercialgain in avoidance of Trade Me fees in the range of $125,000–$146,000 during theperiod for which the contravention was operative, meaning "the maximum startingpoint" of $375,000–$438,000; Monarch to commercial gain of $114,000–$131,000,and a maximum starting point of $342,000–$393,000.[16] Such extrapolation is not legitimate. First, I do not accept the commercial gainexclusively is the avoided Trade Me fee. As avoiding development of "a field ofpotential competition between agencies in the quest for new listings",21 other thingsbeing equal, the commercial gain may be the corporate defendants' retention of theirhighly-profitable market shares, not only for the period of the contravention but withthe on-going structural change achieved in the market by Trade Me's subsequentabandonment of its new pricing. Second, that commercial gain is not 'readilyascertainable' on the evidence before me, but the evidence I do have suggests suchmay well be significantly higher even than the thrice-multiplied avoided Trade Mefees. And last, the multiplier is to establish an alternative maximum penalty, not amaximum starting point. The Act anticipates a $10 million or greater maximumpenalty for Part 2 contraventions, within which range any necessarily lower startingpoint must separately be determined.[17] That any Part 2 contravention falls to be penalised in the range requires somereflection on the full spectrum of contravening conduct: at the time of thesecontraventions, any collusive substantial lessening of competition, which price-fixingbetween competitors is deemed to do; or unilateral taking advantage of market poweror resale price maintenance. All are serious incursions into the Act's objective "topromote competition in markets for the long-term benefit of consumers withinNew Zealand".22 Just how serious falls to be comprehended from the circumstancesof the particular incursion.20 Citing Commerce Commission v Telecom Corp of New Zealand Ltd, above n 18, at [4], citingCommerce Commission v New Zealand Bus Ltd (No 2) (2006) 3 NZCCLR 854 at [25].21 SC judgment, above n 6, at [171].22 Commerce Act 1986, s 1A.—starting points[18] Other Hamilton agency contraventions were held to have deprived vendors ofaccess to Trade Me listings, "or, at the least, of the ability to negotiate for thatservice".23 Such attracted a starting point in a range of $1.7–$2.1 million forLugton's;24 $1.5–$1.8 million for Online;25 and $1.4–$1.7 million for Success.26Reference also was made to similar contraventions among Manawatu agencies, thestarting point range being $1.5–$1.8 million for participants,27 and $1.8–$2.25mmillion for the ringleader.28 The lower ranges reflected materially smaller marketshares, including by reference to unrelated but comparable price-fixing arrangementsbetween livestock companies and saleyards in response to external price shocks,29 andthe highest to the initiator of those Manawatu contraventions.[19] Mr Taylor emphasised the incursion found in the present case was far less thanvendors' comprehensive 'deprivation' of access to Trade Me listings admitted in theother Hamilton cases, here only depriving them of a price set in workably competitiveconditions. While there may be some superficial attractiveness about sucha distinction, it disregards the Act's object, which is not of itself to ensure consumerbenefit, but only through promotion of competition in markets, to which price controlsuch as was exerted here is anathematic. Regardless of the degree of impact onvendors, the arrangement "interfere[d] with the competitive setting of price for theservices offered by the Hamilton agencies".30 That is why breaches of s 30 are deemedto contravene s 27 in principle, to be a substantial lessening of competition in a market.23 Success judgment, above n 8, at [14]; cited in the Lugton's judgment, above n 8, at [18]. Similarlyin the Online judgment at [17].24 Lugton's judgment, above n 8, at [22] and [25].25 Online judgment, above n 8, at [23].26 Success judgment, above n 8, at [29].27 Commerce Commission v Unique Realty Ltd [2016] NZHC 1064 ("Unique judgment") at [41];Commerce Commission v Property Brokers Ltd [2016] NZHC 2851 ("Manawatu (1994)judgment") at [14].28 Commerce Commission v Property Brokers Ltd [2017] NZHC 681 ("Property Brokers judgment")at [12].29 Commerce Commission v PGG Wrightson Ltd [2015] NZHC 3360 at [56]; Commerce Commissionv Rural Livestock Ltd [2015] NZHC 3361 at [52]. External price shocks also were the genesis ofprice-fixing in air cargo and freight forwarding markets, but the scale of those operations makestheir starting points of little utility here.30 SC judgment, above n 6, at [170].[20] The Hamilton arrangement was entered into and given effect for the whole ofits duration by the Hamilton agencies, through their directors and majorshareholders,31 each agency avoiding development of "a field of potentialcompetition" between them.32 Thus the first meaningful consideration is Lodge's andMonarch's respective market shares by reference to revenues or surpluses. There isnot too much in that to distinguish either between themselves or from Lugton's at thetime. Those three agencies clearly carried the bulk of the Hamilton market, and anydifferentiation between them would not have regard for such periodic variations asmay adjust their relativities. Any temporal pre-eminence is marginal; none of the threeis shown to have individual influence above the other two. That is a more significantconsideration than the cruder ruler of market shares alone, although the latter also goesto a contravenor's size and resources.[21] The Commission seeks to characterise Monarch and, more particularly, Lodgeas ringleaders, by attribution to them respectively of Mr King's and Mr O'Rourke'sactivities. That is not supported by the evidence.[22] Trade Me's initial approach was exclusively with the major national real estateagency groups and networks, through which individual agencies progressively becameaware.33 The groups and networks' starting points fell in a $3–$4 million range, insignificant part because of their initiator status across the country.34[23] Mr O'Rourke first initiated contact with Lugton's and then the Hamiltonagencies' meeting, which Mr King offered to host in Monarch's boardroom.35 WhileLugton's was independent, the other agencies learned of the issues initially from theirrespective groups and networks. But the unlawful consensus was found objectively toarise from the attendees' communication to each other at the meeting of their intended31 HC judgment, above n 2, at [97].32 SC judgment, above n 6, at [171].33 HC judgment, above n 2, at [46].34 Commerce Commission v Bayley Corporation Ltd [2016] NZHC 1493 at [30], citing CommerceCommission v PGG Wrightson Ltd, above n 29; adopted in Commerce Commission v Barfoot &Thompson Ltd [2016] NZHC 3111 at [26], in relation also to Harcourts, L J Hooker, and RayWhite.35 HC judgment, above n 2, at [65] and [83]–[91].and common course.36 It did not arise prior from, and was not at the time led by, anyof the meeting's attendees or their respective groups or networks.[24] Any meeting at the time between the Hamilton real estate agencies was likelyto engender a similar response, given the commonality of the challenge presented byTrade Me's new pricing. And there is considerable evidence the meeting was notexpressly intended to achieve any unlawful consensus, but rather to discuss responsesto that changed pricing. A diversionary exception is Lodge's network's prior note ofMr O'Rourke's advice he had obtained each Hamilton agency's agreement in principleto "[o]nly vendor funding for Trade Me listings", which specificity I found "hard togainsay",37 but is an insufficient foundation from which to doubt the contrary evidenceof all the meeting's attendees.[25] There is some basis cautiously to distinguish between Lodge, Monarch, andLugton's in terms of their relative sizes and resources.38 Distinction can be discernedfrom the contended sizes of the Hamilton and Manawatu markets in uplifting from thelatter participants' range to determine Lugton's starting point.39 The Hamiltonagreement's unique withdrawal of listings from Trade Me does not offer a further basisto discriminate from the Manawatu result in terms of any s 30 analysis, as is illustratedby the consistency of the Online judgment with those of the Manawatu participants.40[26] So far as starting points for Lodge and Monarch are concerned, I set themwithin the range adopted for Lugton's of $1.7–$2.1 million.[27] Given Mr King and Mr O'Rourke also are contravenors, I must order they "paya pecuniary penalty, unless [I consider] there is good reason for not making thatorder".41 Their closest comparator is the individual Manawatu initiator:42[He] was the instigator of the agreement. He organised, hosted and chaired themeeting at which the Manawatu price-fixing agreement was reached. He36 At [192], upheld on appeal (CA judgment, above n 1, at [68]–[70]; SC judgment, above n 6, at[107]–[109]).37 At [57].38 Telecom Corporation of New Zealand Ltd v Commerce Commission, above n 12, at [56].39 Lugton's judgment, above n 8, at [22] and [25].40 Online judgment, above n 8, at [23].41 Commerce Act 1986, s 80(2).42 Property Brokers judgment, above n 28, at [17].directed the follow-up correspondence confirming the terms of the agreementreached and ensured that other parties implemented it as soon as their contractswith Trade Me expired. He also attempted to expand the terms of the initialagreement. His conduct was a deliberate attempt to save costs for his companyand he indirectly stood to benefit from this because his family trust owned allof the shares in the company.His role meant the starting point for Property Brokers, otherwise relativelyindistinguishable from Unique and Manawatu (1994), was in the higher range.The Judge considered a comparable $100,000 starting point for the individual was toohigh, and established his starting point at $70,000, bearing in mind his interests "willbear the burden of meeting the substantial monetary penalty imposed on PropertyBrokers".43[28] Mr King's and Mr O'Rourke's activities are not at all comparable. There is noobvious basis to distinguish them from, or to justify them carrying a materially heavierpersonal burden than, their fellow directors and shareholders Davinder Singh andDavid Couch also in attendance at the meeting (but not alleged individually tocontravene).44 As said at [24] above, a meeting of Hamilton real estate agencies todiscuss responses to the Trade Me price change was near inevitable. All entered andgave effect to the consequent arrangement. Mr King and Mr O'Rourke did not"enforce" it.45 Most significantly, their activities also are not materially distinct fromother Hamilton agencies' directors and shareholders in attendance at the meeting (alsonot alleged individually to contravene).46 That last disparity, in particular, providesgood reason not to require Mr King or Mr O'Rourke pay a pecuniary penalty. I willnot require they do so.—adjusting for individual circumstances[29] No aggravating or mitigating individual factors exist. I am not preparedwithout substantially more evidence to conclude the companies disregarded or werereckless as to their responsibilities under the Act, including as to any compliancetraining. In particular, although Lodge and Monarch each initially engaged with theCommission on a voluntary basis, any benefit as may be thought to have accrued from43 At [20]–[21].44 HC judgment, above n 2, at [97].45 At [197]–[199].46 At [180]–[182].that initial engagement comprehensively is offset by the contest for and at trial and onfirst and second appeals. Without any adjustment to make, the penalties shoulddistinguish between Lodge's and Monarch's respective sizes and resources, whileallowing lower room for Lugton's, within the starting point range I have identified.Result[30] I order:(a) Lodge to pay to the Crown $2.1 million; and(b) Monarch to pay to the Crown $1.9 million;as pecuniary penalties under s 80 of the Commerce Act 1986.—Jagose J