The Courts have just issued their penalty judgements against Foodstuffs North Island for use of restrictive covenants, and Milkio Foods for misleading country-of-origin representations.

Restrictive covenants at three locations in the North Island bring $3.25 million fine for Foodstuffs NI

Background

Land covenants which have the purpose or effect of substantially lessening competition in a market are prohibited under section 28 of the Commerce Act 1986 (the Act). Under the new section 28A of the Act, covenants that impede development or use of land as a retail grocery store (or a likely competitor of a retail grocery store) are presumed to have the purpose or effect of substantially lessening competition and therefore are absolutely prohibited. For more information about how restrictive land covenants were identified by the Commerce Commission (NZCC) in its grocery market study as a key barrier to entry and expansion in the retail grocery sector see here.

As we noted in our earlier article, here, the NZCC recently filed proceedings in the Wellington High Court against Foodstuffs North Island (Foodstuffs NI), alleging that it lodged restrictive land covenants with the intention of preventing competitors (namely Woolworths New Zealand) from opening new supermarkets and/or expanding existing ones at several locations in the North Island.

The High Court has now released its penalty judgement setting out more detail on how the covenants had the effect and purpose of substantially lessening competition in the relevant locations. We summarise the Court’s conclusions below on purpose and effect in each local market, before considering the implications for businesses registering restrictive land covenants in the future.

Newtown

In 2009 Foodstuffs NI acquired a parcel of land adjacent to a site owned by Woolworths, which became the Newtown Countdown (now Woolworths) in 2012. Foodstuffs NI and Woolworths both submitted bids for the site, with Foodstuffs NI the successful bidder paying what was regarded as well above the market rate. When Woolworths opened its supermarket in 2012, Foodstuffs NI sold the site with a restrictive covenant in place that prevented it being used for a supermarket and other associated uses. 

The site was located in the only direction by which Woolworths would be able to expand its store in the future (its site otherwise fronted the surrounding streets). This meant that the effect of the covenant was that the supermarket was constrained to its existing site. The Court found that the covenant was lodged with this purpose.

Petone

In 2013, Woolworths opened the Petone Countdown (now Woolworths). While this supermarket was under development, Foodstuffs NI had acquired eight sites surrounding the development. Once the supermarket opened, Foodstuffs NI sold each of the eight sites with restrictive covenants in place preventing various uses - some prevented use as a supermarket, while others prevented use as a right of way or a car park.

The Petone Woolworths only had one point of access, was set back from the street and was surrounded by large commercial/industrial buildings. The Court held that the covenants were lodged with the purpose of preventing Woolworths from using these sites to expand the Petone Woolworths.

Tamatea

In 2012, Foodstuffs NI acquired a site across the road from PAK’nSAVE Tamatea (South Napier). The site was sold in 2015 with a restrictive covenant in place preventing use as a supermarket and other associated uses. 

Woolworths operated two supermarkets in Central Napier, but none in South Napier. The Court found that the covenant was lodged to prevent Woolworths (or another competitor) from using the site to develop a supermarket in South Napier. 

Penalty calculation

The Court imposed a $3.25 million penalty on Foodstuffs NI for these contraventions. While the pecuniary penalties under the Act are set at the greater of (1) $10 million; (2) three times the commercial gain from the breach if the gain can be readily ascertained; and (3) if the gain cannot readily be ascertained, 10% of the defendant’s turnover from trading in New Zealand, the Court acknowledged that these are maximum penalties.

The Court did not consider commercial gain from the breach to be readily ascertainable, and held the 10% of company turnover calculation (around $7.3 billion) to be disproportionate. Taking into account several mitigating factors, such as Foodstuffs NI receiving legal advice that the covenants did not breach the Act, that it had never sought to enforce the covenants, and discharged most of the covenants once raised by the NZCC in its grocery market study, the Court considered a penalty of $3.25 million was appropriate. 

Implications for your business

While restrictive covenants in the retail grocery sector are now presumed by statute to have the purpose or effect of substantially lessening competition, covenants in other sectors do not carry this presumption. This means they may be permissible provided they do not have the purpose or effect of substantially lessening competition in the relevant local market. 

However, the NZCC are increasingly focusing on the use of these covenants in other sectors. In 2023, the Court found NGB Properties (the operator of a Mitre 10) to have breached the Act through restrictive covenants which prevented a Bunnings Warehouse from setting up on a nearby site. 

Accordingly, before registering a restrictive land covenant, we recommend you first seek legal advice on whether any issues could arise under the Commerce Act. Similarly, to the extent that you have registered any covenants in the past which are still in force, it would be worth reviewing those to check they do not have an anti-competitive purpose/effect now.

Milkio Foods fined $420k for misleading country-of-origin representations

The District Court has fined Hamilton-based producer and supplier of ghee (a clarified butter commonly used in Indian cooking) for misleading representations under the Fair Trading Act. The NZCC filed proceedings against Milkio Foods (following referral by the Ministry of Primary Industries) alleging that slogans such as “100% Pure New Zealand” had misled consumers about its products, when the core ingredient was imported from India. 

Milkio Foods was also found to have obtained certain licenses and certifications, such as the FernMark sticker, through its misrepresentations. The Court noted such misrepresentations could cause damage to the reputation of other New Zealand producers of dairy products, which rely on the value of “brand New Zealand” in marketing their products, particularly on the export markets. The fine of $420,000, when weighed against the maximum penalty of $600,000, reflected what the Court considered “wilful blindness, perhaps to the point of ‘commercial sleepwalking’” on the part of Milkio Foods. 

This case follows a series of Court cases that resulted from NZCC’s prosecution against businesses making a “Made in New Zealand” claim a few years ago. It is a timely reminder to businesses that, if your products are marketed using statements about country-of-origin or other statements of environmental or ethical status, it is important to ensure that these statements are accurate, able to be substantiated and must not mislead consumers about the country of origin. It also demonstrates the NZCC’s continued focus on protecting the valuable New Zealand brand by taking enforcement actions against businesses which do not comply with the requirements for making a “Made in New Zealand” claim. Detailed information on what businesses should watch out for when making a country of origin claim can be found in the NZCC’s fact sheet here.

Special thanks to Henry King and Tawhiwhi Watson for their assistance in preparing this article