IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
COMMERCIAL LIST CL 38/96

UNDER

The Commerce Act 1986

BETWEEN

THE COMMERCE COMMISSION

Plaintiff

AND

TAYLOR PRESTON LIMITED AND OTHERS

Defendants

Hearing:

19 August 1998

Counsel:

J G Fogarty QC, P H Rainsford, Ms C Schache for Plaintiff

B R Latimour and P R Taylor for AFFCO (2nd defendant)

DAR Williams QC and J Hosking for Lowe Walker (6th)

A M Morrison and R S Lambert for Richmond (9th def)

R D Hindle for Pacific Beef (Huttons Kiwi)

(12th defendant) and Greenlea (22nd defendant)

F Miller for Waitotara (19th defendant)

Mrs W D Duggan for Taylor Preston (lst defendant)

and C R Grace 29th defendant)

B Davidson (Mr Hindle) for Wallford (26th defendant)

Judgment:

19 August 1998

ORAL JUDGMENT OF SMELLIE J

INTRODUCTION

The parties in this matter have placed before the Court eight agreed settlements for approval. This follows the procedure established by a full court of the High Court presided over by the Chief Justice in Commerce Commission v New Zealand Milk [1994] 2

NZLR 730, I preside today as the Judge in charge of the Commercial List and with the consent of all parties pursuant to R.442(1)(b) of the High Court Rules.

The procedure followed has been for counsel for the Commerce Commission to present an opening submission of relevance to a greater or lesser extent to all parties. Thereafter, individual party'scircumstances were considered with counsel for the Commerce Commission producing an agreed statement of facts and advising the penalty agreed between the parties subject to Court approval. As each party's case was reached counsel representing that party made submissions on its behalf.

ADMISSIONS OF BREACH

Without exception the corporate defendants have acknowledged contravention of s.27(1) of the Commerce Act 1986 ("the Act"). This has involved accepting in most cases, that between 14th October 1992 and 6th April 1995, they arrived at understandings that were likely to have the effect of lessening competition in the market. Typically the admission of a party has been couched thus:

"From October 1992 until April 1995 regular meetings or conference calls occurred between the defendants. During those meetings or calls the defendants discussed maximum premiums and maximum schedule prices for livestock procurements and arrived at understandings which were in breach of s.27(1)of the Act."

In all approximately 90 such meetings occurred usually on a weekly basis.

PECUNIARY PENALTIES; CRITERIA FOR IMPOSITION

The pecuniary penalties for such breaches are set out in s.80(1) of the Act and provide a maximum penalty in the case of a body corporate (that is, an incorporated company) of $5m, Additionally in s.80(2) certain criteria are set out which are not exhaustive but which the Court should take into account where appropriate. Those applying here are as follows:

  1. The nature and extent of the act or omission.
  2. The nature and extent of any loss or damage suffered by any person as a result of the act or omission.
  3. The circumstances in which the act or omission took place.

In addition to those specific criteria any other relevant circumstances are to be taken into account. I observe also, in passingthat pursuant to s.80(3) of the Act the civil standard of proof applies in respect of such breaches. That is, they must be proved on the balance of probabilities which means that it is not necessary to reach the criminal standard of beyond reasonable Doubt.

Before addressing those criteria and other relevant matters and assessing whether the penalties put forward for approval are appropriate some further background circumstances require discussion.

CHANGES IN THE MEAT INDUSTRY

The meat industry has undergone dramatic, indeed traumatic changes in the last two decades.

Prior to that for the best part of the century, New Zealand mutton and lamb had enjoyed unobstructed entry into the European market, and especially the United Kingdom.

The industry had relied upon high stock numbers, once in excess of 70 million sheep and a network of meat works which were used to capacity during the season.

Prices were fixed by largely overseas owned companies which served the northern hemisphere markets and inevitably exerted a dominant influence on the local market.

All this began to change when Britain entered the European Common Market. The overseas investors began to pull out, markets began to shrink, even disappear, and although the maintenance of stock numbers was encouraged by the Government funded system of supplementary minimum prices, the supply of stock for the works began to fall off.

At the same time new markets were demanding changes and old markets were lifting hygiene and presentation standards. The industry found itself with an over supply of capacity and an under-supply of stock,while at the same time having to face up to heavy capital expenditure to upgrade.

With the removal of supplementary minimum prices, stock numbers fell even further, although cattle as opposed to sheep, rallied in the 1980s. Deregulation of the market opened the door to new competitors which tended to establish smaller works employing more modern methods.

Inevitably there were at first closures and rationalisation, but eventually some companies went to the wall. Weddell and Fortex are prime examples. The industry was struggling to maintain profitability, in some cases even to remain viable. After such a long period of stability and control, the free market and competition took some getting used to.

DEREGULATION

I am left with the impression that initially many of the companies represented here today failed to grasp the significance of what had happened. In particular, that with deregulation came the Commerce Act with its emphasis upon maximising of efficiency in the use of resources and its prohibitions against interfering with the competitive market by which those resources are allocated.

THE COMMISSION'S ACTION

After warnings to the Meat Industry Association and through it, to the majority of those engaged in the industry, the Commerce Commission began to monitor the conduct of various companies. Eventually it executed search warrants and pursuant to its powers conducted interviews of senior executives after which these proceedings were launched in August 1996. Not surprisingly it has taken three years to bring this complex matter to near conclusion.

Initially all companies and their executives were cited as defendants. Today. however, two more companies have gone into liquidation and the Commerce Commission quite properly in my view, has decided to accept admissions of liability from the companies and discontinue against the executives concerned. As a result the following are no longer parties:

Defendants numbered 3, 4, 5, 7, 8, 10, 11, 13, 14, 15, 17, 18, 20, 21, 23, 25, 27, 28, 30, and 33.

For the sake of completeness I mention the Commission has accepted that its actions against defendants 16 and 24 cannot continue and they have been discontinued also.

The relevant market for these proceedings is the North Island livestock market (ie the market for sale of livestock for slaughter and processing). That market comprises approximately 9.000beef and sheep farmers, The farmers, too, are facing increasingly difficult conditions. The average income of those 9.000farms after tax, is between $40.000and $50,000 per annum. Given the capital involved, the long hours, and the skill, that kind of return is relatively modest.

In recent years the value of New Zealand's exports of meat and edible offal has been about $3 billion annually, over 16% of the total exports. In addition, by-products from livestock slaughter including hides and skins have accounted for nearly $600 million which is over 3% of total exports. The sale of meat for domestic consumption, about $440 million at wholesale prices, brings the value of the industry's output to over $4 billion. In the years ended 30th September 1993, 1994, and 1995, however, sales were at approximately $2 billion per annum, a decline overall after adjusting for inflation and exchange rates.

Even with that downturn the industry clearly is still a very large one in New Zealand terms.

BREACHES (Nature and Extent)

The breaches are at the lower end of the scale of culpability. Understandings were arrived at as opposed to the entry into contracts or arrangements which had the specific purpose of substantially lessening competition. And although the Commerce Commission initially alleged contracts and arrangements for the purpose of fixing or controlling prices, that has not been proved or admitted. Had the breaches been at the higher end of the scale, which would have involved agreements to stifle competition and fixed prices, I would not have been prepared to approve the penalties put forward. I would have considered that much higher levels would have to be fixed for those more serious breaches.

But that is not the case - understandings only, were arrived at. They were. however, likely to lessen competition and that warrants significant penalties which the parties have appropriately recognised in the agreed statements of fact which have been put before me in respect of each defendant.

LOSS SUFFERED (Nature and Extent)

It is acknowledged that this cannot be measured. There is room for the view that the effect of the understandings was limited and that competitive market forces worked anyway. This, if for no other reason that frequently there was an over-supply of capacity and an under-supply of stock, so that competition for what was available quickly took over. There was, however, and indeed, there may still be, a perception by the suppliers of the livestock that they were being disadvantaged. The admissions of liability and the levels of penalty agreed to, acknowledge that that may well have been the case.

CIRCUMSTANCES IN WHICH THE BREACHES TOOK PLACE

As I have explained earlier the meat industry emerged from a long period of stability protected by supplementary minimum prices and fixed schedule prices, into an hitherto unknown, fiercely competitive market in which some well established companies failed.

These proceedings are in effect, the first large scale challenge by the Commerce Commission to breaches of the Act. The penalties imposed must send a clear message to those who might be tempted to contravene the provisions of the Act. In short. The penalties must both deter and condemn. But some allowance should be made for the relative novelty of the situation and the lack of understanding that many in the industry, before these proceedings laboured under.

That is, however, very much a "one-off" mitigating factor. From now on all players in this market, and any other markets who breach the provisions of the Act, are on notice.

OTHER FACTORS

Pecuniary penalties are always influenced by the financial health and prospects of the party upon whom they are to be imposed. It is obvious from the information before the Court that several defendants are vulnerable to market fluctuations andof course, the current economic uncertainty in Asia will affect them all. The penalties are lower than those the Court might have thought appropriate in a more buoyant trading environment.

Finally, it is a well recognised feature associated with the imposition of penalties that acknowledgement of breach and co-operation with the prosecuting body is deserving of a discount. All defendants before me today have faced up to their responsibilities and thereby saved the very considerable cost and expenditure of judicial and court resources which would have been involved in the six to eight-week trial previously scheduled to start on 19th October 1998 and run substantially to the end of the year.

It appears also, that all defendants have instituted procedures so that staff affected are properly instructed and monitored in relation to compliance with the Act. Those facts also enable me to approve the suggested penalties which inevitably would have been higher had breach been found after trial and a lack of acknowledgement of fault persisted in.

THE INDIVIDUAL CASES

It will be appreciated that in each case the dominant factors relevant to the amount of the fine, are the size of the undertaking and the degree of involvement. Those two point to the extent to which the understandings arrived at may have diminished competition in the marketplace. In each case also, the circumstances leading up to the breaches, the acknowledgements of breach, and the steps taken to ensure compliance in the future, are relevant matters in mitigation.

THE SECOND DEFENDANT: AFFCO NEW ZEALAND LIMITED

AFFCO is one of theif not the largest operator in the market.

It was involved in 77 of the 90 or so conferences. Over the relevant period it marginally lost ground and otherwise it is entitled to have the mitigating factors that I have referred to taken into account in its favour. The negotiated pecuniary penalty of $1.5 million is appropriate in my judgment and accordingly the second defendant is ordered to pay that penalty consequent upon its breach of the Act.

THE SIXTH DEFENDANT: LOWE WALKER

LOWE WALKER is not as large as AFFCO and although it increased its market share during the relevant period, roughly speaking it was about a third the size of the largest player. It was involved in 83 of the 90 or so meetings and conference calls. It appears to have beenof all the defendants before the Court, perhaps the most aggressive and competitive in the market which probably explains why its share increased. Additionally, it also is entitled to the benefit of the mitigating factors that I have referred to. I am prepared to approve the negotiated pecuniary penalty of $1.5 million and the sixth defendant is ordered to pay that penalty as a consequence of its breaches of the Act.

THE NINTH DEFENDANT: RICHMOND LIMITED

RICHMOND appears to be the second largest operator in the market, about twice the size of LOWE WALKER. It was involved throughout the whole period and appears to have been represented in all of the meetings or conferences, The information before the Court indicates however, that over the period it was operating either at a modest profit or on occasion on a break-even basis. Like the other defendants it is entitled to have the mitigating factors taken into account and in all the circumstances I am prepared to approve the negotiated pecuniary penalty of $1.5 million which must be paid by Richmond Limited because of its breaches of the provisions of the Act.

THE TWELFTH DEFENDANT : PACIFIC BEEF

By comparison with the defendants so far dealt with, Pacific Beef is of a rather smaller size. It was involved in 58 of the 90 conferences or telephone calls and in fact, its management and shareholding today, and indeed its size is very different to the circumstances that pertained during the relevant period. As with the other defendants, it co-operated fully with the Commission and in all the circumstances I am prepared to approve the negotiated pecuniary penalty of $375.000 which penalty must be paid by Pacific Beef on account of its breaches of the Act.

THE NINETEENTH DEFENDANT : WAITOTARA MEAT COMPANY LIMITED

WAITOTARA is a mid-size operator, very much smaller than the largest operator. having about 10 percent of the turnover of AFFCO. Also WAITOTARA was a relatively newcomer to the industry having been formed in 1987 and it first became involved in the meetings and telephone conferences in 1993. In all, it attended or participated in 35 of the 90 meetings, Also WAITOTARA is involved in the sheep meat end of the industry whereas most of the others are either beef orientated or operate in both markets. In addition to the mitigating circumstances already mentioned, it appears that WAITOTARA was the only company of those cited in this litigation which published its price-list in local newspapers in fulleach week. In all the circumstances the negotiated pecuniary penalty of $225,000in my judgment, is appropriate and the 19th defendant must pay that penalty because of its breaches of the Act.

THE FIRST AND TWENTY NINTH DEFENDANTS : TAYLOR PRESTON LIMITED AND

C R GRACE

The involvement of these two defendants both of whom were represented by Mrs Duggan. covered most of the relevant period. Their operations can be described as in the mid-range of size although it should be mentioned that the first defendant only has one plant. and is said to have processed about 3 percent of the total stock killed in any one season. And the 29th defendant is a stock procurer. And although the first defendant's chief executive only attended two meetings, nonetheless between them, they attended in all 46 out of the 90 meetings.

In respect of defendants operating in the mid-range and smaller range, Mr Fogarty has properly pointed out on behalf of the Commission that breaches by smaller players in the market result in reinforcement of any arrangements arrived at by larger players, whereas if the medium to smaller players stand out the effect of such arrangements on the market is lessened and conceivably even eliminated.

Both these defendants however, are entitled to have taken fully into account on their behalf the mitigating factors and indeed the first defendant claims that it sought to negotiate a resolution of this matter in good faith, at an earlier stage with the Commission but unfortunately the pivotal witness died before they could be bought to fruition. I am satisfied here also that the negotiated penalty of $250,000 is appropriate and that is a penalty in respect of which the lst and 29th defendants are to be jointly and severally liable and it must be paid on account of their breaches 5 of the Act.

THE TWENTY-SECOND DEFENDANT : GREENLEA PREMIER MEATS LIMITED

GREENLEA is acknowledged to be at the lower end of the size spectrum and it became involved quite late in the piece. Indeed it did not start to attend or be involved in the meetings until October1994 and the relevant period ceases in April 1995. In that six months, however, it attended 25 of the 90 meetings and once again, as a small player which did not maintain its independence, it helped by its co-operation to maintain the effect of the understandings that had been arrived at and their potential for diminution of competition in the market.

GREENLEA, however, is entitled to the advantage of the mitigating factors that I have referred to and taking those into accounts, its size, and the short period that it was involved, the agreed pecuniary penalty of $90,000 is appropriate and I approve it. The twenty-second defendant must pay the penalty of $90,000 on account of its breaches of the Act.

THE TWENTY-SIXTH DEFENDANT : WALLFORD MEATS NZ LIMITED

WALLFORD also is at the bottom end of the size scale and it only attended eight out of the ninety meetings on a fairly 30 intermittent basis. It is involved in the beef side of the industry and operates only one plant. It was submitted on behalf of Wallford that it was a passive participant and in fact, did not rely upon or apply any of the understandings arrived at at the meetings. And inevitably its attitude in this matter would be affected by what would otherwise be for a company of its size and limited involvement, an expensive piece of litigation.

In those circumstances I feel able to approve the agreed pecuniary penalty of $70,000 but that penalty must be paid by the 26th defendant for its involvement and breaches of the Act.

Attached to this judgment is a draft judgment prepared by the Commerce Commission. Since the preparation of that draft, however,there have been further developments and whilst I approve the form of the draft, in its final form it will require amendment. In particular, all those parties against whom the Commission has discontinued should be removed. Also the 12th defendant has changed its name and should be referred to as Pacific Beef Limited.

In the first paragraph of the order, Mrs Duggan should be shown as appearing for the lst and 29th defendants and Mr Hindle for the 12th. 22nd and 26th defendants.

So far as the orders themselves are concerned, order 2 is to be amended to read as follows:

"That the lst and 29th defendants pay to the Crown a pecuniary penalty in the sum of $250.000 for which penalty they are to be jointly and severally liable."

There also needs to be added paragraphs 9 and 10 reading as follows:

"9, That the 26th defendant pay to the Crown a pecuniary

penalty in the sum of $70.000.

10, There will be no orders as to costs."

The total of the pecuniary penalties that are to be paid by the defendants appearing before the Court today is $5.510 million.

I wish to express my appreciation to all counsel involved for the responsible and accommodating attitude that they have taken over the last ten days during which the negotiated pecuniary penalties have been worked through and the agreed statements of facts prepared for presentation to the Court today.

Finally. because certain material on the file is subject to confidentiality orders and other material was provided for a settlement conference and thus is not available for search, I propose to prohibit search of the file without leave of the Court. If any interested party wishes to search part or all of the file leave is granted for an application to be made which, however, would have to be served upon the Commission and any defendant affected.