Just the facts, ma'am

The Commerce Commission suffered a blow to its ego with the release of High Court’s judgment in Commerce Commission v Lodge Real Estate Limited. The case dealt with high‑profile allegations of price‑fixing by real estate companies. Despite multiple parties settling with Commission out of court, a handful of defendants chose to defend their claim and force the Commission to prove its case – and the High Court obliged by dismissing the charges.

The Commission (and its external lawyers) would have been anticipating an easy win here. They didn’t get it. So I think it might be useful to reflect on where things went wrong for the Commission, and what the decision teaches us about competition law in New Zealand.

Before we begin, a bit of context. In New Zealand, the Commerce Act makes it unlawful for businesses to get together and set the prices of goods or services that they sell in competition with each other. We call this “cartel conduct”. While that term can bring to mind mysterious smoke‑filled rooms where competitors meet to directly agree the prices they charge to their customers, in reality the scenario is often much more mundane. Far more common is what we might call “inadvertent” cartel conduct – the type of situation where competitors just happen to be talking about a common industry issue and then someone takes it too far by discussing the pricing implications.

That’s essentially what happened in the Lodge case. Trade Me changed the way it charged for listings on the real estate segment of its website, and faced with these higher costs a group of real estate agents met to discuss what they should do in response. Under Trade Me’s previous low‑cost regime the real estate agents mostly absorbed the cost themselves. This was simply too expensive under the new, higher cost Trade Me charging model, and so everyone agreed that such costs should be “vendor funded” in the future (the vendor being the person selling the house through the real estate agent).

This is the point where the Commerce Commission’s investigator metaphorically jumped out from behind the bushes shouting “Aha!”. By agreeing that the Trade Me listing fees would be “vendor funded”, the Commission alleged that a key component of the price paid by the vendor to the real estate agents had been fixed. As input costs were always going to be passed through to consumers, the price to those consumers was (at least in part) being artificially controlled by the real estate agents outside of operation of normal market processors.

This allegation makes some intuitive sense, but it’s actually not self‑evident. Accepting the Commission’s argument relies on inferring a connection between the treatment of an input cost and the how prices are determined. There is nothing in the Commerce Act that specifically prevents competitors from reaching an agreement on how they will each treat input costs, but the Commission often (quite rightly) infers that this sort of agreement ultimately has the purpose or effect of controlling prices (at least in part). And it can be quite difficult to resist this inference. Why were the competitors meeting to discuss the issue if it wasn’t critical to their bottom line? And if it was critical in that respect, how could it not influence pricing decisions?

Usually those questions don’t get answered because they are never properly asked. The Commission often settles these claims out of court and we just sort of accept that the inference is probably true. But in this case, the High Court decided it would ask those questions. What had the real estate agents actually agreed to when they decided that Trade Me listing fees would be “vendor funded”?

As it turns out, not much. In the real estate sector, the term “vendor funded” can mean a bunch of different things. It may mean that the vendor pays the full amount, or that the agent pays the full amount, or that the vendor pays only part of the fees. As a result, by agreeing that listing fees would be “vendor funded” the real estate agents had not actually agreed on a particular treatment of those listing fees. Indeed, the Court found that the real estate agents were free to, and in fact did, recover the costs of those listing fees in a variety of ways. So the agreement that the real estate agents reached had no impact on prices charged to vendors.

The court reached this decision by carefully examining the facts as presented to it. And that’s a key lesson from this case for businesses affected by competition law. Ultimately, it’s the facts that really matter. That might seem like a basic point, but in my experience competition law advice is often abstracted from its factual context. That’s unhelpful, and needs to stop. Understanding the relevant facts in their particular context is hard work, but doing that hard work is necessary to understand whether there is any competition law risk in the first place.

I also think it’s revealing that the Commission was unable to marshal the factual evidence to support its case in this instance. As mentioned above, many cartel cases settle out of court, and I wonder if this means that the Commission (or more precisely its lawyers) aren’t as practised as they might be at demonstrating their theory of harm with clear evidence.

That’s not really a criticism of the Commission. No serious competition lawyer would have questioned the decision to try this case in advance, and in a small jurisdiction the opportunities to carry a case all the way through to final judgment can be few and far between. But it does serve as a timely reminder that the actual facts have a funny way of undercutting even the most compelling of legal arguments in competition law. The Court was right to question the factual evidence in Lodge and make the findings that it did, but I think the Commission will have learned a valuable lesson and we will see much stronger evidence to support claims of cartel behaviour in the future.

#CommerceAct #CommerceCommission #competitionlaw #cartels

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