(d) Determining the penalty
66 For the reasons that follow, in my view it is appropriate to impose a penalty of $600,000 for making the sale agreement containing the Cryosite restraint as a cartel provision, and $450,000 for giving effect to the Cryosite restraint.
67 First, let me deal with the nature and extent of the contravening conduct.
68 The contravening conduct occurred from the signing of the sale agreement on 23 June 2017 until August 2017 when Cryosite ceased giving effect to the Cryosite restraint after concerns were raised by ACCC representatives that making the sale agreement and giving effect to the Cryosite restraint might contravene the CCA cartel provisions. But by that point Cryosite had proceeded to implement the Cryosite restraint by establishing a process to refer customer enquiries to Cell Care, and had ceased supplying CBT banking services to new customers.
69 Cryosite engaged in the contravening conduct openly in the course of its business rather than covertly. Nevertheless, the contravening conduct was not able to be readily observed or detected by parties other than Cryosite and Cell Care. Further, the terms of the Cryosite restraint could in the ordinary course have been expected to have remained confidential to the parties, and it would not have been obvious to third parties that Cryosite's conduct giving effect to that restraint was prompted by a contract with Cell Care. It is unlikely that the contravening conduct would have become apparent to any third party, absent the ACCC's inquiry regarding whether the proposed transaction might contravene s 50 of the CCA. The internal and confidential nature of this conduct is relevant in considering the level of penalty that is appropriate to achieve the objectives of specific and general deterrence.
70 Second, let me deal with the deliberateness of the contravening conduct.
71 Cryosite agreed to the inclusion of the Cryosite restraint in the sale agreement, and established and implemented a specific process by which it gave effect to the Cryosite restraint. But that is not to say that Cryosite engaged in that conduct with the intention to contravene the CCA or with an awareness that the sale agreement contained a clause which would contravene the cartel provisions of the CCA. Cryosite retained lawyers to advise it in relation to the drafting and terms of the sale agreement. Cryosite's lawyers were involved in the negotiation of the sale agreement but did not raise any concerns about cartel aspects of the Cryosite restraint.
72 Third, let me say something concerning the involvement of senior management.
73 The persons whose conduct resulted in Cryosite engaging in the contravening conduct included senior representatives of Cryosite. Further, as I have said, Cryosite retained lawyers to advise it in relation to the drafting and terms of the sale agreement. Further, any suggested changes to the draft sale agreement made by Cell Care were considered and agreed upon by the Board of Cryosite following legal advice.
74 Fourth, it is appropriate to address the question of relevant benefit. Cryosite obtained the commercial benefits from the contravening conduct. As a result of making the sale agreement, Cryosite:
(a) received a non-refundable upfront payment of $500,000; and
(b) obtained, until the sale agreement was brought to an end, the right to receive further annual payments with a minimum total value of $2.5 million.
75 Further, Cell Care may also have benefited from the contravening conduct. Cell Care may have obtained a benefit in the form of new business opportunities generated from the four potential customers Cryosite referred to Cell Care pursuant to the Cryosite restraint, and from the balance of the 12 customers who made enquiries with Cryosite but preferred to contact Cell Care directly. Further, Cell Care also attained an enhanced market position. Cell Care became from 23 June 2017 the only available private supplier of CBT banking services to customers other than pre-existing Cryosite customers. Further, to the extent that the contravening conduct hastened the closure of Cryosite's CBT banking services business, it also hastened Cryosite's exit from the CBT banking services industry, other than for the supply of cord blood and tissue storage and release services to pre-existing customers. The effect of the contravening conduct rendered more remote the possibility that Cryosite might recommence supplying CBT banking services to new customers.
76 Fifth, let me say something concerning Cryosite's size and financial position.
77 Cryosite is a publicly listed Australian company. Cryosite reported profit of $225,100 in the financial year ending 30 June 2017, which figure took into account its retention of the $500,000 non-refundable upfront payment paid by Cell Care. Cryosite reported a loss before tax of $1,240,439 for the financial year ending 30 June 2018. The profit before interest, taxes, depreciation and amortisation of the CBT banking services part of Cryosite's business was $219,044 (including the $500,000 non-refundable upfront payment from Cell Care) in the financial year ending 30 June 2017, and $5,630 in the financial year ending 30 June 2018. As at 1 July 2018, with International Financial Reporting Standard 15 effective, Cryosite's net asset position was -$21,260.
78 Now Cryosite's financial position does not excuse its contravening conduct or decrease the primary importance of deterrence. Further, the possibility that a pecuniary penalty may have a likely adverse consequence on the contravener does not prevent me from determining an appropriate penalty. If it were otherwise, the consideration of such matters may undermine the objective of general deterrence.
79 Nevertheless, the parties have submitted, with which I agree, that it is relevant for me to consider Cryosite's financial position in considering whether the proposed penalties are likely to be sufficient to achieve specific deterrence.
80 Sixth, as to the economic effects of the contravening conduct, as Cryosite and Cell Care were the only private suppliers of CBT banking services in Australia immediately prior to the making of the sale agreement, their coordination deprived a group of persons, being those interested in obtaining CBT banking services, of the benefit of having a choice of private providers between 23 June 2017 to August 2017. This constituted a detriment to the competitive process for the supply of CBT banking services in Australia.
81 Seventh, let me say something concerning co-operation and admission of culpability.
82 Cryosite and Cell Care were aware during the negotiations of the sale agreement that the proposed sale might attract the attention of the ACCC with respect to whether the proposed sale would result in a substantial lessening of competition i.e. concerns relating to s 50 of the CCA. But Cryosite and Cell Care did not seek any form of merger clearance from the ACCC, which in the ordinary course would have been sought by the acquirer. Cell Care communicated to Cryosite the importance of Cryosite first announcing that it had decided to close part of its CBT banking services business before it announced that it had entered into an agreement for the proposed sale, as there was perceived to have been an otherwise greater risk that the ACCC might seek to stop the proposed sale from proceeding.
83 Cryosite first cooperated with the ACCC after representatives of the ACCC made inquiry in August 2017 regarding the proposed sale. And as I say, it executed the deed of variation described above. But by that time the parties had commenced giving effect to the Cryosite restraint.
84 Further, prior to the commencement of this proceeding, Cryosite voluntarily provided information and documents to the ACCC, and met with ACCC representatives when requested to do so.
85 Further, in October 2018, Cryosite reached an in principle but non-binding agreement with the ACCC to settle this proceeding. Since that time it has further cooperated with the ACCC in relation to the resolution of the present proceeding and the finalisation of the agreement. Further, to finalise the agreement Cryosite has made admissions, agreed to the making of appropriate orders, and joined in the making of submissions reflecting the seriousness of its wrongdoing. In the circumstances, a discount for cooperation is appropriate and is reflected in the penalties that I propose to impose.
86 Eighth, it is now convenient to address the question of maximum penalty.
87 Notwithstanding the commercial benefits to the contraveners of the contravening conduct as identified above, the maximum penalty for each of the contraventions is still nevertheless $10 million. This is because of the following matters. The parties are not able to quantify the value of the benefits from the contravening conduct, other than for the non-refundable upfront payment of $500,000. Further, Cryosite's relevant annual turnover for the purposes of s 76(1A) is expected to have been comparable to its revenue for the financial year ending 30 June 2017, which was $10,163,028. Accordingly, 10% of Cryosite's relevant annual turnover is expected to have been in the order of $1 million. Accordingly, as $10 million is greater than $1 million, the effect of s 76(1A) is that the maximum penalty per contravention is $10 million.
88 Ninth, the sum of the penalties proposed equates to just over 10% of the maximum penalty per contravention. But the sum of those penalties well exceeds, as is appropriate, the value of the $500,000 non-refundable upfront payment. Further, in light of Cryosite's size and financial position, the proposed penalties could not reasonably be regarded as an acceptable cost of doing business, and could be expected to render any risk/benefit analysis materially less palatable to other potential wrongdoers.
89 Tenth, in terms of comparable cases there are no previous cases concerning facts that are closely comparable to those before me. Therefore there is little utility in drawing a comparison with penalties ordered in other cases involving cartel conduct. But it is nevertheless appropriate to refer to the seriousness with which the Court has treated cartel conduct when imposing penalties in other cases. As was observed in Australian Competition and Consumer Commission v Yazaki Corporation (2018) 357 ALR 55, cartel conduct is "generally regarded as the most pernicious of all breaches of competition law", is "often attended by secrecy" and "notoriously difficult to identify", and may only be detected a long time after the conduct occurs (at [257] per Allsop CJ, Middleton and Robertson JJ). These matters need to be reflected in an appropriate penalty. More generally, the seriousness with which the Court views cartel conduct is reflected in the scale of recent penalties imposed for cartel conduct, which include penalties of $12.5 million (ACCC v Flight Centre), $15 million (ACCC v Air New Zealand), $9 million, $6 million (ACCC v ANZ and ACCC v Macquarie) and $46 million (ACCC v Yazaki).
90 In conclusion and taking into account all of the above considerations, it seems to me that the quantum of the penalties sought is appropriate.
91 Now I have little doubt that the penalties to be imposed well discharge the objective of specific deterrence, but it is fair to say that I did have a residual concern concerning general deterrence. But I have ultimately been persuaded that the quantum to be imposed also satisfactorily meets the objective of general deterrence, when one appreciates the limited context under which the Cryosite restraint came to be agreed and implemented.
92 Finally, it is appropriate that the relevant penalties be paid in instalments, with $200,000 to be paid within 30 days of the date of my order and the balance to be paid in 10 equal annual instalments from 2020 to 2029. It is open to me to order that pecuniary penalties be paid by instalments where I am satisfied that there is sufficient financial information before me to justify the instalment arrangements proposed (see Australian Competition and Consumer Commission v Humax Pty Ltd (2005) ATPR 42-072 at [12] per Merkel J and Director of Consumer Affairs Victoria v Gibson (No 3) [2017] FCA 1148 at [101] per Mortimer J). In my view it is appropriate that Cryosite be permitted to pay the proposed penalties in instalments in the manner described in the light of Cryosite's recent financial performance and the fact that Cryosite needs to fund its ongoing obligations to existing customers (such as providing cord blood and tissue storage) out of its present assets, which are partly made up of the funds collected in advance from these customers which Cryosite holds in order to pay for the ongoing obligations it has to these customers.
93 For all of the above reasons I will make orders in the terms sought by the parties.
I certify that the preceding ninety-three (93) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beach.