Introduction

In recent years the New Zealand Commerce Commission (NZCC) has increasingly sought to bring court proceedings under the Commerce Act 1986 regarding cartel conduct by parties that do not ordinarily reside or conduct business in New Zealand, or that do so only through a local branch or subsidiary.

While the courts are mindful of the statutory limits of extra-territorial claims, recent cases show a determination to hold foreign parent companies liable for alleged competition law breaches carried out through their New Zealand offspring.

Freight forwarding cartel case

Providers of international freight forwarding services have been prosecuted in several jurisdictions since 2007 for agreements to fix the prices and surcharges applied to international consignments. A number of firms have reached settlements or been fined, including in the United States and European Union.

In New Zealand, all but one party have settled cases brought by the NZCC, leading to almost NZ$9 million in total agreed penalties. The New Zealand Court of Appeal recently rejected a claim from the last defendant, Kuehne+Nagel International AG (K+N), that it is a "mere holding company" in Switzerland, inactive operationally, and so cannot be caught by the agency/principal or extra-territoriality provisions of the Commerce Act.(1)

The NZCC alleged that K+N 's subsidiary, Kuehne + Nagel Ltd (Kuehne NZ), had implemented or given effect in New Zealand freight forwarding markets to price-fixing agreements reached overseas by K+N. According to the NZCC, Kuehne NZ had done so on behalf of K+N, triggering agency/principal attribution provisions in the Commerce Act. K+N argued that it did not carry on any operational side of freight forwarding, and so the New Zealand entity could not have been acting on its behalf. In this way, it said that the attribution provisions of the act could not be satisfied and sought to have the NZCC case struck out for lack of jurisdiction.

Parent and group company arrangement

K+N is incorporated in Switzerland and is the parent company of the KN Group, which provides freight forwarding services worldwide. Group subsidiaries or local companies operate in any particular country. In order to move freight between countries effectively, a degree of coordination between the subsidiaries or local companies is needed, which is managed by the KN Group. The NZCC argued that at least two KN Group subsidiaries would have been involved in order for a price-fixing agreement to be implemented, because the fee for freight arranged by one country is usually collected by another entity at the destination. The NZCC alleged that Kuehne NZ imposed charges on outbound freight and charged rates to New Zealand customers that had been applied by another KN Group company on inbound freight. The NZCC asserted that this occurred at the direction of the KN Group (and thus of K+N).

Jurisdiction under the Commerce Act

Two provisions in the Commerce Act primarily affect international jurisdiction. Section 4 expressly deals with conduct occurring outside New Zealand, extending extra-territorial jurisdiction to "any person resident or carrying on business in New Zealand to the extent that such conduct affects a market in New Zealand".

In this case, K+N in Switzerland was clearly not carrying on business or resident locally, even if its conduct might affect a market in New Zealand, so Section 4 could not apply.

The other provision, Section 90, allows for conduct by a party's servants or agents to be attributed to a principal, including an overseas principal. In particular, under Section 90(2), any conduct in New Zealand engaged in on behalf of a body corporate is deemed to have been engaged in by that body corporate as well. This can apply to individuals who act on behalf of a company, but also to local companies acting on behalf of an overseas parent. The question in the Kuehne case was whether Kuehne NZ had given effect to price-fixing agreements on behalf of K+N, in which case K+N would be directly liable for that conduct (ie, no issue of extra-territoriality would technically arise). At this interlocutory stage of K+N's strike-out application, the Court of Appeal was satisfied that there was a good arguable case that Section 90(2) had been met.

Mere holding company?

K+N argued that its New Zealand subsidiary did not implement price-fixing agreements on its behalf, because K+N was merely a holding company and did not enter into any arrangements in relation to operational matters involving freight forwarding, including pricing. In support of this argument, K+N pointed to the fact that it had only a board of directors (and no employees), and that it received tax advantages under Swiss law on the basis that it is a holding company with no business outside that of owning and investing in other companies.

Neither the High Court nor the Court of Appeal agreed that K+N was a mere holding company. They were particularly influenced by the fact that K+N had entered into a plea agreement with the US Department of Justice (DOJ) in 2010 regarding criminal charges for similar price-fixing agreements in freight forwarding markets made by its US subsidiaries. The significance of the DOJ agreement was that K+N had previously accepted both that it was in business and that it had provided freight forwarding services.

K+N argued that the DOJ agreement was confined to the particular jurisdiction of the United States, which may have different rules of attribution to New Zealand. It also pointed out that defendants may plead guilty for a number of purely practical reasons, such as avoiding ongoing publicity and cost.

The Court of Appeal rejected these arguments for strike-out purposes, holding that K+N was not a mere holding company and was caught by Section 90(2) because its New Zealand subsidiary was acting on its behalf when it gave effect to price-fixing agreements. Kuehne NZ was representative of K+N in this jurisdiction, because that is how the group business structure operates, and it conducted the New Zealand "business, affairs and activities…at the direction of [K+N] and for its benefit".

The DOJ agreement was found both relevant and instructive, since it required K+N to make a factual admission of guilt in the United States and to provide sufficient information concerning its role in the price-fixing crimes in order to make sentencing appropriate. K+N accepted that it had entered into the DOJ agreement voluntarily. It was not open to K+N to argue later in a New Zealand court that it was a mere holding company when it had clearly accepted involvement in the business of a subsidiary in another jurisdiction, including practices of that subsidiary which amounted to price-fixing offences.

Attribution to foreign companies or individuals

Although unnecessary on the facts to consider Section 90 more broadly, the court did make some general observations on the key test for attribution: namely, whether conduct is engaged in "on behalf of a body corporate". The court observed that the statutory purpose is to extend potential competition law liability to the actions of other persons in circumstances where they may not have been liable at common law. In particular, a company should not be able to benefit from prohibited trade practices merely because such practices were undertaken by employees or agents without knowledge of the board or management.

The court rejected K+N's submission that an earlier decision of the New Zealand Supreme Court, Poynter, limited the scope of Section 90 so that it could not be applied in this expansive way.(2)That case concerned jurisdictional reach against an overseas senior executive alleged to be a party to a cartel, but whose participation took place outside New Zealand (he was resident in Australia and had managerial responsibility for New Zealand and Australia). On the facts, staff who had acted within New Zealand did not do so on behalf of Poynter individually – although they did act on behalf of the company. Since neither Section 4 nor Section 90 applied, the Supreme Court decided that the Commerce Act could not be extended in an amorphous way based on common law or commercial concepts such as the increasing globalisation of business. The extra-territorial reach of the act is exhaustively set out in the specific statutory language used.

The Court of Appeal in Kuehne has now held that Poynter did not mean that Section 90 was to be applied in a restrictive way – rather, it was intended to expand upon the circumstances in which a company might be held liable for the actions of others.

Comment

The Kuehne decision is notable for three reasons. First, after the DOJ agreement had been entered into, it was likely to be difficult for K+N to argue elsewhere that it was a mere holding company. The lesson is that even when plea agreement concessions are carefully couched in limited factual and jurisdiction-specific terms, in an increasingly connected world of competition law enforcement, what is agreed to in one country inevitably influences later developments elsewhere.

Second, the court's discussion of Poynter and the thorny issue of the principal/agency provisions is interesting. The Court of Appeal appears to have struck a balance on this issue, explaining that Poynter was really about the extra-territorial scope of the act as a whole, rather than Section 90 particularly. It confirms that the statutory language must have been intended to apply to a wider range of principal/agent relationships than existed at common law, in order to catch companies that benefit from restrictive practices by the instrumentality of their employees. Kuehne demonstrates the court's willingness to prevent foreign businesses from hiding behind a corporate veil in such instances.

Finally, when placing the case in context, it can be seen as part of a trend against allowing parent or holding companies to evade their responsibilities in other jurisdictions. Other examples include the following:

• In a 2011 case against airlines for air cargo price fixing, the High Court held that inbound air cargo services for imported goods were supplied in a relevant market in New Zealand, and that it had jurisdiction to hear the case (jurisdiction in respect of outbound and export cargo from New Zealand was not disputed).(3) It was sufficient that part of the market was situated in New Zealand. The arrival and handling of cargo locally and demand for cargo shipments from local importers meant that a market existed in New Zealand for inbound cargo services.
• Parliament has, subsequent to the Poynter case, introduced a major set of amendments to the Commerce Act which, among other things,(4) alter Section 4 and Section 90 to allow a conspiracy that is formed overseas but given effect to at least partly in New Zealand to be more clearly actionable. If any act, omission or event necessary to the completion of the breach occurs in New Zealand, it will be sufficient under the proposed new law.

In government, as in the courts, it appears that the trend is towards closing any technical loopholes for overseas companies where their actions affect a New Zealand market.

Endnotes

(1) Kuehne+Nagel International AG v Commerce Commission [2012] NZCA 221.

(2) Poynter v Commerce Commission [2010] 3 NZLR 300.

(3) Commerce Commission v Air New Zealand, HC Auckland, CIV-2008-404-008352, August 24 2011.

(4) The Commerce (Cartels and Other Matters) Amendment Bill, which had first reading speeches in Parliament on July 24 2012. Among a raft of legislative reforms, this bill will make cartel conduct (along the lines of the Organisation for Economic Cooperation and Development's four categories of 'hardcore cartels') an imprisonable criminal offence.