Headnote: Commerce Commission v Canterbury Industrial Scrubbing Ltd

Written by Qinhao Zhu (Freelance Contributor) for the Company and Securities Law Bulletin

Headnotes

Commerce Commission v Canterbury Industrial Scrubbing Ltd

[2024] NZHC 1596

Competition — practice and procedure — cartel — price- fixing — market allocation — cleaning business — suppres- sion of commercially sensitive information — penalty in principle appropriate but for defendants’ financial circum- stances — long-lasting cartel — agreement with competi- tor induced by threats — no quantifiable commercial gain but price increase can be inferred — discount for coopera- tion — relevance of defendants’ financial circumstances

Dunningham J

Introduction

The plaintiff, the Commerce Commission, sued the defen- dants, Canterbury Industrial Scrubbing Ltd (Scrubbing) and its director, Daniel Jamieson, alleging that they had engaged in cartel conduct. The case settled, with the parties agree- ing on a penalty.

The Court now considers whether the proposed penalty meets the objectives of the Commerce Act 1986.

Background

Scrubbing was one of the biggest suppliers of industrial scrubbing services in the Canterbury region. Initially, it was owned and run by Daniel’s father, Paul Jamieson; Daniel had started as an employee in 2006, become a director in 2012, and the sole director in 2018.

Canterbury Industrial Sweeping Ltd (Sweeping) (later CanSweep Ltd) is the company that Scrubbing colluded with. Sweeping was one of the region’s biggest suppliers of sweeping services. Its sole director is Owen Kinnane. From 2012, his daughter, Sarah Kinnane, helped him with the running of the business.

Sometime before 2003, Paul and Mr Kinnane agreed not to compete in the market for industrial floor cleaning ser- vices. In this written, though unsigned, agreement the two divided the market for industrial floor cleaning services: Scrubbing took the scrubbing business, Sweeping took the sweeping business, and they agreed to refer customers seeking the service that the other company provided to the other company.

But in 2007, Sweeping entered the scrubbing business, having bought an industrial scrubbing machine. When Paul and Daniel found out about this, they arranged a meeting with Mr Kinnane. At that meeting, they agreed that they would adhere to their earlier agreement not to compete, and that Scrubbing would buy the machine from Sweeping. This is the 2007 Agreement, which was in place from August 2007 until late 2019.

In March 2019, Ms Kinnane incorporated CanSweep, which then took over Sweeping’s business in August.

Following complaints from customers that had been referred to Sweeping/CanSweep, Scrubbing acquired five industrial sweepers in December 2019. Soon afterwards, James told Ms Kinnane that Scrubbing would offer sweep- ing services and thus would no longer refer customers to CanSweep. He also expressed his concern that CanSweep was disparaging Scrubbing. In a January 2020 email, he warned that if CanSweep continued its disparagement, Scrubbing would “aggressively target” CanSweep’s cus- tomer base, which would “not [be] good for either of our companies” (at [13]).

Days later, Daniel met with Ms Kinnane and her partner. Daniel summed up the outcome of the meeting in an email sent later that day, noting that the parties had agreed not to give negative feedback about each other to customers, 10 to 15 key clients of each would be “off limits” to the other, and that each would talk to the other about services that they might offer to (potential) customers of the other. This is the 2020 Agreement.

Ms Kinnane and her partner did not reply to this email. Instead, a week later, Ms Kinnane’s partner emailed to say that there was no agreement and pointed to the Commis- sion’s guidance on cartel conduct. Daniel’s reply to this was: “[r]egardless of what you are saying now, you did actually agree at the meeting to my proposal” (at [17], alteration in original).

After these exchanges, Scrubbing started to compete with CanSweep, offering discounts to CanSweep’s custom- ers.

In 2023, the Commission sued Scrubbing and Daniel, alleging that Scrubbing’s entering into and giving effect to the 2007 and 2020 Agreements, and Daniel’s giving effect to the 2007 Agreement and entering into the 2020 Agree- ment violated ss 27 and 30 of the Commerce Act, as the Agreements fixed prices and allocated markets. Both defen- dants admitted the claims, except as regards the 2007 Agreement, the defendants only admitted that the Agree- ment’s likely effect was to control the price for cleaning services, when the Commission had also alleged that the Agreement’s purpose or effect was such.

Although several breaches have been admitted, the par- ties agree that the appropriate approach in fixing a penalty is to view the breaches as a whole.

The parties agree that the amount of the pecuniary penalty should be $51,000, payable in instalments by Scrub- bing. They agree that no penalty should be imposed on Daniel.

The parties also agree that this is appropriate, given the financial circumstances of both defendants, but the Com- mission says the Court should still determine what the penalty would have been but for those circumstances.

Judgment

• The Court imposed the pecuniary penalty recom- mended by the parties on Scrubbing. The penalty is to be paid in instalments.
• It imposes no pecuniary penalty on Daniel.
• It declares that both defendants’ conduct contra- vened the Commerce Act.
• No interest is payable.
• There is no order as to costs.

Reasons

Section 80 of the Commerce Act

The Court’s jurisdiction to impose pecuniary penalties comes from s 80 of the Commerce Act. Under s 80(5), in this case, only conduct occurring after 30 June 2013 can be consid- ered in fixing the penalty.

Under s 80(2B), for a corporate defendant, the maxi- mum penalty is $10 million, three times the commercial gain from breach, or 10 per cent of turnover, whichever is greater.

Like criminal sentencing, determining a civil pecuniary penalty involves setting a starting point based on the grav- ity of the contravention, and then adjusting it to reflect the circumstances of the defendant. Differing from criminal sentencing, the primary objective of pecuniary penalties is deterrence. “[P]enalties must not be a licence fee and the deterrence objective will only be served if anti-competitive behaviour is profitless” (at [29], quoting Telecom Corp of New Zealand Ltd v Commerce Commission, internal quo- tation marks omitted).

In determining the starting point, the Court considers (at [30]):

• (a) the importance and type of market;
• (b) the nature and seriousness of the contravening conduct;
• (c) whether the conduct was deliberate or not;
• (d) the role of the defendant in the impugned con- duct;
• (e) theseniorityoftheemployeesorofficersinvolved in the contravention;
• (f) the duration of the contravening conduct;
• (g) the extent of any benefit derived from the contra- vening conduct;
• (h) the extent of any loss or damage suffered by any person as a result of the contravening conduct; and
• (i) the market share/degree of market power held by the defendant.

In adjusting the starting point, the Court then considers (at [31]):

• (a) the nature, size and resources of the defendant;
• (b) the degree of co-operation by the defendant with the Commission;
• (c) the fact that liability is admitted; and
• (d) the extent to which a defendant has developed and implemented a compliance programme.

The role of the Court in dealing with agreed penalties

The Court’s role when presented with an agreed penalty is to consider whether it “is in the appropriate range, rather than to embark on its own enquiry independently” (at [33], quoting Commerce Commission v Ronovation Ltd at [25]). This promotes the interests of the parties and the commu- nity, “enabling early disposal of potentially complex and lengthy proceedings and encouraging a realistic view of culpability and penalty” (at [33], citing Commerce Commis- sion v New Zealand Milk Corp Ltd).

The starting point in this case

Nature and extent of any commercial gain

The parties agree that they have been unable to determine the extent of the gain, and the Court “acknowledge[s] that neither [Scrubbing]’s current financial circumstances, nor those of [Daniel], suggest any significant or sustained com- mercial benefit was received” (at [35]). The Court does note, however, the Commission’s submission that the gain could have been significant, given the steep discount Scrub- bing offered once the 2020 Agreement fell apart.

Duration of the contravening conduct

While only conduct from June 2013 can be considered, the duration of the contravention is still “significant” and “a clear aggravating factor” (at [37]).

Nature and circumstances of the contravening conduct

The conduct was serious. It was an integral part of Scrub- bing’s business practice over a long period.

The likely effect of the 2007 Agreement was anti- competitive. Notably, the Agreement stopped an actual competitor from competing.

While the 2020 Agreement was only for a very short period, it was explicitly focused on avoiding price competi- tion. And Daniel induced CanSweep, which was trying to leave an unlawful arrangement, to enter into it by threats.

Defendants’ role in the conduct

Both defendants “were the instigators and primary drivers of the conduct” (at [40]).

While Daniel was only an employee when the 2007 Agreement was reached, he became a director in 2013 and continued it.

Deliberateness of the conduct

The conduct was deliberate, being done with the intention of benefiting Scrubbing’s financial position, though the defendants did not know it was illegal. But importantly, when Daniel was confronted by its illegality in 2020, he did not end it immediately.

Seniority of those involved

The conduct was undertaken by the most senior person in Scrubbing, Daniel, as its director.

Nature of the market and market share

The parties have not agreed on market definition or market shares but Scrubbing and Sweeping/CanSweep were two of the biggest industrial cleaning companies in Canterbury.