The High Court at Auckland has imposed a penalty of $3million against a major manufacturer of refrigerator compressors following a cartel investigation under the Commerce Act.

The penalty was jointly recommended to the Court by the Commerce Commission and refrigerator compressor manufacturer Empresa Brasileira de Compressores S.A (Embraco), following a settlement announced in October when the Commission filed proceedings against Embraco.   The $3million penalty has now been imposed on Embraco, and it was also ordered to pay the Commission $50,000 in costs.

The case involved Embraco and a competitor exchanging information between January 2005 and November 2006. The exchanges related to prices, production capacities and other market intelligence concerning the supply in New Zealand of certain refrigerator compressors. A refrigerator compressor is the key device in a fridge that produces the cooling effect.  

As a result of the information exchanges, Embraco and its competitor came to an understanding and expectation that each company would seek to increase prices for some compressor units supplied into New Zealand.

The Commission was tipped off to the cartel in 2009 following an application for immunity under the Commission's cartel leniency policy.

In his decision imposing the penalty, Justice Allan noted that the purpose of the cartel was to pass on significantly increasing input costs without the risk of losing sales to competitors.   According to Justice Allan, "this type of conduct is serious and warrants substantial penalties under the Act, in order to deter both the defendant and others minded to act in like fashion".  

"This is the latest in a growing body of cartel cases in which significant penalties are being imposed by the courts against companies that engage in cartel conduct directed at New Zealand markets and consumers," said Kate Morrison, the Commission's General Manager of Competition.   "While the Judge found that Embraco cannot be assumed to have profited from the conduct, the amount of the penalty sends a signal about the Court's low tolerance for this kind of illegal conduct."

The judgment is available on the Commission's website at http://www.comcom.govt.nz/competition-enforcement-outcomes/

Background

During the cartel, Embraco was a company incorporated in Brazil, but carrying on business in New Zealand as a supplier of domestic and light commercial hermetic compressors (DLCs) under one horsepower in New Zealand.   Embraco sent communications into, and met with customers in New Zealand in respect of DLCs it supplied into New Zealand. During the relevant period, Embraco and its competitor were the largest suppliers in the New Zealand market. They had annual sales within the markets valued at approximately $15million, of which Embraco's share was approximately 20%.

 

The conduct was carried out by employees of Empresa Brasileira de Compressores SA (Embraco SA). Following a merger which led to the formation of the defendant (Whirlpool SA), those employees became the defendant's employees in May 2006.

 

Section 30 of the Commerce Act makes price-fixing agreements between competitors unlawful. This includes agreements with the purpose, effect or likely effect of fixing, controlling or maintaining prices, or that provide a mechanism for doing so. An agreement can be a formal document, such as a contract. An agreement can also be very informal.

 

These agreements are sometimes referred to as cartel agreements. Cartel agreements are deemed to substantially lessen competition, because in practice they are almost always harmful. These agreements aim to maximise the profits of cartel members while maintaining the illusion of competition. Cartel conduct can damage the economic welfare of New Zealanders by raising prices and reducing choice, innovation, quality and investment.

 

A company that contravenes section 30 may be ordered to pay penalties under section 80 of the Commerce Act.   The penalty must not exceed the greater of:

  • $10million or

Either

  • If it can be readily ascertained and if the Court is satisfied that the contravention occurred in the course of producing commercial gain, three times the value of any commercial gain resulting from the contravention
  • Or, if the commercial gain cannot be readily ascertained, 10 % of the turnover of the body corporate and all of its interconnected bodies corporate (if any).