Commerce Commission succeeds in securing $3.25 million penalty for anti-competitive covenants on land

The Commerce Commission has succeeded in securing a $3.25 million penalty against Foodstuffs North Island Limited (FSNI) for lodging anti-competitive covenants on land, which were intended to block competitors from opening or expanding their operations.

A covenant on land is an agreement which is registered against the title, imposing certain obligations and restrictions on the relevant land. This materially affects how the land can be used by the landowner, occupants, tenants, agents and contractors. Since covenants are registered against a property’s title their effect continues even after the property is sold.

Covenants on land in a commercial setting, such as that used by FSNI, are similar in nature. FSNI lodged covenants which reduced the competitive nature of suitable land for the grocery sector, which, in effect, breached section 28 of the Commerce Act that prohibits covenants which ‘substantially lessen competition in a market’.

FSNI purchased sites for its own expansion, or to prevent competitors from gaining access to them. It would either hold the land on a long-term basis or register a restrictive covenant which restricted the use of that land by the grocery sector. 

In some cases, where land was adjacent to competitors in the grocery sector, the restrictive element would extend to rights of way, carparking, or explicitly as a supermarket. These covenants were typically lodged for long durations (up to 99 years in some locations).

FSNI claimed they had not intended to contravene the Commerce Act and, upon learning that they were in contravention actively made progress on discharging them. 

The High Court began by assessing the maximum penalty available in such circumstances where the commercial gain is not easily ascertainable. An enlisted formula had the Court establish the availability of a maximum penalty of $7.3 billion, in light of FSNI’s annual turnover figures, multiplied by relevant contraventions. The maximum penalty was considered to be out of proportion with the offending.

The Court considered a further range of factors to determine the starting point of penalties, namely:

• the nature and seriousness of the contravening conduct;
• whether the conduct was deliberate or not;
• the role of the defendant in the impugned conduct;
• the seniority of the employees or officers involved in the contravention;
• the duration of the contravening conduct;
• the extent of any benefit derived from the contravening conduct as well as the extent of any loss or damage suffered by any person as a result of the conduct;
• the importance and type of market;
• the market share/degree of market power held by the defendant; and
• the size and resources of the defendant.

The primary difficulty found by the High Court was that while FSNI’s board anticipated that gains could be derived from the conduct, whether any gains were actually made (and to what extent), was not ascertainable. In light of this, and comparable cases, a starting point for the penalties ranged between $4.5million and $5.5 million.

There were several mitigating factors which reduced the penalty: FSNI had not previously breached the Act, had cooperated with the Commerce Commission in its investigation, took steps to discharge all restrictive covenants as far as practicable, and that it acknowledged at an early stage of the proceedings that it had breached the Act. With consideration of these factors, the High Court ordered a $3.25 million penalty.

This is a clear example of the strength of covenants on land, and the broad-brush impacts they can have when utilised in an anti-competitive manner.

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