The last participant in an international freight forwarders’ price fixing cartel has finally been dealt with by the New Zealand High Court, in a case that confirms the New Zealand approach towards negotiated settlements and agreed penalties in these quasi-criminal prosecutions brought by a regulator.
New Zealand courts remain quite content to endorse this sort of ‘plea bargaining’ approach, despite recent trends in Australia questioning the established approach.
On 8 April 2014, the High Court ordered Swiss company Kuehne + Nagel International AG (“KN”) to pay a $3.1 million pecuniary penalty, plus costs, for breaches of the Commerce Act affecting New Zealand markets.1 The latest penalty imposed regarding the long-running international air freight cartel takes the total penalties across 6 defendants in New Zealand to almost $12 million.
Background to “The Gardening Club”
KN was the last defendant in a long-running case brought by the New Zealand Commerce Commission against major international freight forwarding companies in relation to cartel conduct. The cartel agreed to charge surcharges on air freight forwarding services from the UK to other countries, including New Zealand, which were ostensibly to cover the increased costs of new security measures introduced by the UK government.
In manipulating a surcharge, as a component of overall price, rather than headline rates, the cartel shared similarities with previous cases against airlines in similar freight markets.
The cartel was known as “The Gardening Club” as it used code words referring to gardeners, greenhouses and types of vegetables in order to describe the surcharges imposed and agreements reached. The other members of the cartel admitted liability and paid penalties back in 2010-2011. KN tried to challenge the jurisdiction of the New Zealand Court, unsuccessfully in the High Court2 and its arguments were given even shorter shrift on appeal, before finally admitting liability.
Process of negotiating settlement
In New Zealand, the Commerce Commission has no power to impose a fine/penalty – it must ask the Court for that. But, following a well established process, the Commission and KN negotiated and then jointly proposed an agreed penalty to the Court. In determining the penalty to be imposed, however, the Court has discretion as to final approval. The Court must be satisfied that the figure suggested is within a range which satisfies the objectives of the Commerce Act (especially deterrence of other cartels) and the particular circumstances of the case before it. That can be a challenging process, especially where several defendants admit to cartel conduct at different times in the litigation.
The approach adopted by the High Court in determining the appropriate penalty was to:
- determine the maximum penalty;
- establish the appropriate starting point for the offending that would achieve the objective of deterrence in light of the relevant factors applying to the case; and
- adjust the starting point for the defendant’s specific factors, whether aggravating or mitigating.
Section 80(2B) of the Commerce Act provides the statutory maximum for each relevant breach of the Act to be the greater of:
- $10 million; or
- three times the commercial gain resulting from the breach; or
- 10% of the turnover of the company from trading within New Zealand.
The Commission originally sued alleging several causes of action (i.e. different breaches from the various aspects of cartel arrangements), but ultimately KN admitted two causes of action. Despite the two admitted breaches, KN could only be liable for one pecuniary penalty in respect of the same conduct. The Court agreed with the parties that the commercial gain was not readily ascertainable and that KN’s turnover in New Zealand was less than, or around, $100 million. The applicable maximum was therefore $10 million.
In finding an appropriate starting point, the Court noted that the conduct was at the serious end of the scale, covert and concealed, had lasted for 5 years, and that air freight was an important market which affected the price of many goods and services in New Zealand. Further, KN had the largest market share in New Zealand (although its local subsidiary was not aware of the conduct as that had all been engineered from abroad). The Court agreed that the parties’ proposed starting point of $3.5 - $4 million was within the available range of penalty in such cases.
Adjustments for specific factors
The parties submitted that a 20% discount was appropriate on the basis of several mitigating factors:
- Although KN did not initially cooperate and protested the Court’s jurisdiction, it did assist in some ways, such as accepting service of documents through local solicitors.
- KN acknowledged liability before witnesses were briefed, which avoided a substantial litigation cost to the Commission.
- It allowed employees to be interviewed and provided voluntary discovery.
- This was its first breach of the Commerce Act, and it has introduced a comprehensive global compliance programme.
The Court agreed that a 20% discount was available, but that it was as much as could be possibly expected in those circumstances. The 20% discount was accepted, particularly if applied to a starting point at the higher end of the range. A penalty of $3.2 million (including costs awarded to the Commission) was ordered.
This case, as well as another recent High Court decision in a domestic cartel case,3 confirms that the New Zealand High Court will not object to a joint view on penalty being presented by the parties even if the joint view is reached as a result of negotiations (such that it could be described as a “settlement”). The Court is careful not to merely rubber-stamp what is being proposed. The Judge noted that settlements are in the interests of not only the parties, but the community and the judicial system as they enable early disposal of proceedings. They also encourage both sides to take a reasonable view of culpability, and avoid the need for full contested hearing. However, it is always for the Court to approve the final figure and it must be satisfied that the figure proposed is within a suitable range which satisfies the objectives of the Act and the particular circumstances of the case.
This contrasts with recent decisions in Australia in which courts have held, in a civil case, that the idea that the agreed penalty should be endorsed if it is within the permissible range4 is an improper fetter on the Court’s discretion and, in a criminal case, that the prosecution should not be permitted even to make a submission on appropriate sentencing range when it had previously indicated that range to defendants in the process of negotiating plea agreements.5 That line of argument may yet have future implications, given that proposals to criminalise cartel conduct remain pending, in a Bill presently before New Zealand’s Parliament.