$825k price fixing penalty for dairy industry arrangement

Price fixing proceedings brought by the Commerce Commission (NZCC) against a dairy technology company have resulted in an $825,000 penalty being imposed.  The company must also pay $100,000 towards the NZCC’s costs.

The decision is a reminder that vigilance is required where a wholesale supplier competes with its customers downstream.

What happened?

Milfos and DAF both supplied milk sensors and herd management software systems to farmers.  DAF manufactured its own milk sensors while Milfos acquired both milk sensors and software systems from DAF for on-supply to its farmer customers.

The parties explored an exclusive distribution arrangement whereby Milfos would be the exclusive retailer of DAF’s milk sensors in New Zealand but this was never agreed.  Instead, Milfos continued to supply DAF’s products under its own brand names and the parties continued to compete for customers using downstream prices agreed between them (the ‘quote calculator’).

What was Milfos charged with?

Milfos was prosecuted by the NZCC for fixing the price of milk sensors and/or herd management software systems by entering into the quote calculator agreement.  The agreement had the purpose or effect of substantially lessening competition in those markets, in breach of s27 of the Commerce Act (the Act), via s30 (the price fixing prohibition, now replaced by the cartel prohibition).

What did the High Court say?

The Court emphasised that the origins of the offending – legitimate business discussions relating to an exclusive supply arrangement – did not provide a defence to the ensuing conduct between the parties, which continued well after distribution discussions were no longer active.  The Court described Milfos’ conduct as ‘certainly reckless – even grossly careless’.

What shaped the penalty imposed?

The NZCC and Milfos presented a joint view about penalty to the Court.  Though the maximum penalty under the Act was $10 million, the starting point in this case was $1.1 million.  After deduction of a 25% discount for admitting its liability and cooperating with the NZCC, a penalty of $825,000 was imposed on Milfos.

The importance of deterrence was a key factor in determining penalty, with the objective being to make anti-competitive behaviour profit-less.  The agreement was carried out for two years by senior employees of the two key players in the relevant markets.  And although those markets were small, they were also important, being part of New Zealand’s wider dairy industry market.

What to keep in mind following the case

NZCC Chair Anna Rawlings said the case serves as a strong reminder to businesses that they must be mindful of agreeing prices with a distributor that competes with them in a retail market.

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