Thursday, 9 April 2020

Go your own way, or else

Last week the Supreme Court published its Lodge judgement (media release here). By way of background the Commerce Commission had taken a range of Hamilton real estate agents to court for an alleged price-fix breach of s30 of the Commerce Act, alleging that they had collusively agreed to charge their customers TradeMe listing fees rather than absorbing them. The agencies were responding to a proposed thumping great rise in TradeMe's charges for online real estate listings. Before the increase, agencies would often absorb the charge, post increase they reckoned they wouldn't be able to afford to.

Many of the agencies settled and paid (even by my cartel-hostile standards) swingeing penalties. Lodge (the company and its principals) fought on. They won in the High Court ('...and then the wheels came off'). The Commerce Commission took it to the Court of Appeal and prevailed ('The wheels are back on'). Lodge took it to the Supreme Court, and as we now know, have lost.

In the process we've ended up in a better place. We've now got greater clarity on exactly what's involved in that 'meeting of minds' that turns what might have been simultaneous and identical but unilateral reactions into illegal collusion. We've also got a better steer on whether collective agreement on part of a product or service offering - even if only a smallish part of the overall price - constitutes 'controlling' the price (it generally does).

On the first point, the key bit at [54] (footnote omitted and Giltrap reference added) is
Tipping J [in the classic Giltrap cartel case] was making it clear that there will be no arrangement unless the expectation that arises from the consensus is such that it can be inferred that the parties to the consensus have assumed a moral obligation to each other. We would substitute “made a commitment” in place of “assumed a moral obligation”. Calling such an obligation a “moral obligation” introduces morality into a context where it adds nothing. It seems to us that the essential thing is that a commitment is made: one that is not legally binding but is sufficient to be the basis of 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.
Or as the Court wrapped it up at [58]
We summarise the test in this way. 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.
On the second issue of 'controlling' price, you might argue that collectively agreeing on an approach to the TradeMe fee made no real difference, given that the TradeMe fee was only a small part of the overall cost of the service, which was of course dominated by the percentage-of-your-house-value estate agent's fee. But the Supreme Court harked back to the Caltex case where the petrol companies had collectively agreed to to remove a previously free carwash: at [143]
In that case, three petrol retailers entered into an arrangement to abandon a practice of offering a free carwash to any person making a purchase of $20 or more of petrol. A carwash was worth about $2 at the time. The arrangement did not involve any agreement as to the prices that would be charged for petrol or carwashes. Salmon J found that the arrangement had the effect of controlling the price of petrol sold by the parties to the arrangement because it restrained the free action of the parties in setting the price
and the Court said at [145]:
These [Caltex] authorities as to what amounts to “controlling” prices are longstanding and we see no reason to depart from them.
It is possible that some components of an overall deal might indeed be so small as to be competitively insignificant: at [155]
We accept that there will be cases where the component of the overall price that is affected by the arrangement is so insignificant that it cannot have the effect of controlling the overall price, assuming that the overall price is otherwise determined by market forces.
The way to think about it, the Court said at [156] is:
the correct position is that price includes a component of the price unless that component is insignificant in competition terms. We do not see this as a mathematical calculation, however
and that must surely be right. You may well be up for a $20K overall house-selling cost either way, but you might well go with the agency that swallows the relatively insignificant TradeMe fee rather than the one that doesn't.

That was exactly the case in the Hamilton house market. At [157]
The evidence established that Trade Me listings were a significant factor in competition between the Hamilton agencies, as both the High Court and Court of Appeal found 
 and at [160]
The effect of the arrangement in relation to the Trade Me listing fee controlled the overall price of the services provided by the agencies by interfering with the competitive process that would otherwise have applied.
So we've got to a clear statement of how the law applies to quite a common situation businesses may encounter. The Court said that there were similarities, for example, with the air cargo cases, where airlines were faced with various new security surcharges (post 9/11) and collectively (but in the end illegally) agreed to pass them on in full to their air cargo customers rather than making independent competitive decisions on whether to absorb them in full or in part.

It is easy to think of other circumstances: where an industry is whacked with some new industry-wide levy, for example, the temptation may be there to have a natter in the industry forum and agree to pass it on. Resist the temptation: you'll be breaching s30. As I put it after the original High Court case, "How much of a cost to absorb, and how much to pass on, needs to be your own independent decision".

There's only one bit of the judgement I'd quibble with, and in the greater scheme of things it doesn't matter, but I wonder about the reasoning in [159] where the Court felt that the Lodge parties seemed to want to have it every which way:
They say on the one hand that the new Trade Me listing fee was so high that it was a natural reaction for agencies to refuse to absorb it, given the considerable cost to them if they did so, but on the other that the fee was such a small component of the overall price of their services that it should be treated as insufficiently significant in competition terms to bring the agreement to fix or control it within the prohibition in s 30.
I don't see an intrinsic contradiction at all. In a very low-margin industry, for example, it is entirely possible to conceive of a cost that is very significant to the suppliers' profitability but is still only an insignificantly small part of the end-customer price. But that's neither here nor there: the big picture is the law is now clearer, and the necessity to do your own thing now even more obvious.

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