In its 2 April 2020 judgment, the Supreme Court ruled that an arrangement between Hamilton real estate agencies to adopt a vendor-funded model for listing properties on Trade Me (a major property listing website) and to remove existing listings from Trade Me in January 2014 had the effect of controlling the price of real estate services they supplied in competition with each other, amounting to price fixing in breach of the Commerce Act 1986 (Act).
In the Commerce Commission’s (Commission) media release, Chair Anna Rawlings said the case will “inform [the Commission’s] future work” and is “[urging] businesses and their advisors to understand the Court’s findings, and the scope of the prohibition against pricing collusion between competitors.”
The case is a stark reminder for business and directors of the inherent risks of interacting with competitors, and that all business decisions should be made entirely independently. This is particularly important given that from April 2021 cartel conduct will also be a criminal offence punishable by up to 7 years’ imprisonment.
The context
Like most cases, the context is important but can sometimes be lost on the result. Here, the Commission’s allegations related to the way in which real estate agencies responded to (resisted) Trade Me “radically” changing the way it charged for listing properties on its website.
In late 2013, Trade Me moved from a per-office subscription (all you can eat) model – under which agency offices would typically “absorb” the relatively small monthly subscription cost, which they were arguably legally and morally required to do under governing legislation – to a per-listing model. The effect was to significantly increase listing fees, and therefore revenue for Trade Me. To put this in perspective, Lodge and Monarch’s total annual Trade Me listing fees would have increased from less than $10,000 for Lodge and approx. $36,000 for Monarch, to approx. $250,000 if they continued to absorb the Trade Me listing fees. Perversely, when implementing the change, Trade Me explicitly encouraged agencies to pass the increased costs on to vendors, with its brochure explaining the changes stating: “We’re changing our pricing model to reflect the value Trade Me Property delivers, and to make it easier for you to pass the cost on to vendors.”
As noted by the Court, Trade Me’s price increase “provoked an extremely adverse reaction”. While there were varying responses by national and regional agencies around the country, this case focused on the nature of two meetings between representatives of a number of Hamilton real estate agencies in September and October 2013.
The national and regional agencies’ responses (or more particularly, a complaint about those responses) kicked off a Commission investigation in early 2014. While it started as a “collective boycott” investigation, it quickly morphed into a price fixing case and the Commission ultimately brought three sets of proceedings against national and regional real estate agencies for their respective responses – one against five large national real estate agencies (ie the head office companies), and two against agencies in Hamilton and Manawatu.
11 real estate companies and one individual ultimately admitted liability and were ordered to pay a total of almost $19 million in penalties. Two Hamilton agencies (Lodge and Monarch) and their principals were the holdouts in relation to Hamilton proceedings, treating practitioners to the first defended price fixing case in New Zealand since the Commission’s unsuccessful proceeding against Siemens regarding high-voltage gas insulated switchgear in 2010.
The judgment
In essence, the Supreme Court (and the Courts before it) were required to answer two questions: (1) did the parties enter into an arrangement or arrive at an understanding and give effect to that arrangement or understanding; and (2) if so, did the arrangement or understanding have the purpose, effect or likely effect of fixing, controlling or maintaining the price of services provided by the parties in competition with each other (here, residential real estate agency services)? The Supreme Court answered “yes” to both of those questions.
Arrangement or understanding
The Supreme Court held that, even if the Hamilton agencies had each independently decided prior to the September 2013 meeting that they would not absorb the new Trade Me listing fee and would withdraw Trade Me listings, the consensus reached by those agencies at that meeting involved a commitment from each of them to adopt a vendor funded model for Trade Me listings and to remove existing listings in January 2014. This created an expectation as to the “common course of conduct” the Hamilton agencies would follow. Accordingly, there was a relevant “arrangement”. The fact that the reaction of the Hamilton agencies was a logical reaction to Trade Me’s announcement did not mean the Hamilton agencies had not entered into an arrangement. The Court summarised the test as:
- “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.”
Controlling of price
The Supreme Court agreed with the Commission that the Hamilton agencies’ arrangement to adopt a vendor-funding model affected the competitive process in the setting of the price for Trade Me listings by ruling out a default setting of free Trade Me standard listings for all customers, as had been the status quo before the September 2013 meeting. The fact that agencies retained a discretion to pay for or share the cost of Trade Me standard listings did not stop that effect on the price setting process from occurring.
While the Court accepted 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”, it considered this was not one of those cases:
- “[…] although the arrangement related to a mathematically small component [$159] of the overall charges by the Hamilton agencies to customers who successfully sold their properties [approx. $15,000], it was nevertheless a sufficiently significant component of the overall price to bring the arrangement within the ambit of [the price fixing prohibition].”
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- “The [agencies’] submission that the Trade Me listing fee was too insignificant to bring an arrangement that had the purpose or effect of controlling it within the ambit of [the price fixing prohibition] is hard to reconcile with their extreme reaction to the news of Trade Me’s proposed pricing policy change as illustrated by their conduct before and at the September meeting. 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 […].”
Our perspectives
This is a fascinating case, not least because it may not be intuitive to a lay person that the relevant conduct constitutes price fixing. It is also intriguing that the agencies’ responses, perhaps ironically, arguably led to a better (or “less bad”) outcome for consumers as Trade Me ultimately decided to abandon its new per-listing model shortly after it was implemented. The general public could therefore be forgiven for asking whether the agencies’ attempts to resist “price gouging” of consumers actually led to greater competition and improved consumer welfare. Yet that is the nature of the per se prohibition. Would a jury have reached a similar view?
The finding of a “controlling” of the price of real estate agency services will likely be a particularly hard pill for the agencies to swallow given:
- the Trade Me listing fee was a statistically insignificant component of overall price – the $159 listing fee equated to approx. 1% of the average Hamilton real estate agent commission of $15,000 (although that fee was relatively more significant if the property was not sold); and
- the arrangement to pass that listing fee on to vendors arguably equated to the likely counterfactual – Lodge and Monarch argued that each of the Hamilton agencies had concluded quite independently of the others that it would not absorb the new Trade Me listing fee and would withdraw Trade Me listings, announced this to the meeting in a way which reflected that each had reacted in the same way to the Trade Me announcement
Ultimately, the Court was (highly) attracted to the proposition that the arrangement removed normal competitive freedoms, and thus constituted the controlling of the price of residential real estate agency services.
Another important aspect of the case, which has greater relevance beyond competition law, is the Supreme Court’s strong rejection of the argument that an Appellate Court cannot reach different conclusions on any factual matters reached by a lower Court unless the lower Court Judge’s findings are unsupported by the evidence or a finding that no reasonable judge court reach. It rejected the argument that it should follow the 2019 UK Supreme Court decision of Perry v Raleys Solicitors:
- “Whatever the law may be in the United Kingdom, this Court has determined that on a general appeal, the parties are entitled to judgment in accordance with the opinion of the appellate court, even where that opinion involves an assessment of fact and degree: deference to the findings of the primary decision-maker is permitted, but not required”
We now await the penalty hearing. This will be particularly interesting given the majority of cartel cases in New Zealand have essentially involved “agreed” penalties (including agreed discounts). It will also be interesting to see whether the fact that the arrangement only related to a mathematically small component of the overall price will have a proportionate impact on penalty – the Supreme Court, perhaps subtly, suggested that it might. Time will tell whether Lodge and Monarch end up better or worse off than the rest of the agencies that admitted liability (rolled) early on in proceedings.