The business community is facing widespread uncertainty, both in New Zealand and around the globe with many forecasting a significant slowdown in economic activity.
During tough and uncertain economic times, there is a natural tendency to band together. Industries and trade associations see a role for themselves in cushioning the impact of losses, providing certainty to customers and suppliers trying to plan for price impacts and a material change in short run demand and supply conditions.
It is a common misconception that competition law recognises economic crises, or a declared state of emergency, as a defence. In fact, cartels that have been prosecuted by regulators were more likely to arise during periods of economic shock, recession or economic distress. Collective action for the greater good can be protected under the Commerce Act, but those collaborations need to be done correctly and within the law.
What to watch out for
Watch out if it is suggested in your organisation that you agree with competitors:
- not to enforce contractual rights, eg, to cut off supply or charge fees for late payment;
- to apply a new discount or credit;
- which suppliers to buy from and how much;
- how to deal with independent contractors (employees have a special exemption); and/or
- to share granular cost information, or demand or supply forecasts (or any other competitively sensitive information).
These arrangements do not have to be formal, or in writing, to breach of competition laws.
Also watch out for industry associations. Any recommendation of an industry association is deemed to be an agreement between members unless the members expressly distance themselves from the recommendation. It is unlikely to be sufficient to vote against the recommendation, you need to also say you will not be following it.
Not a defence
- "It was a crisis": One of the largest international cartel prosecutions in recent times was the air cargo cartel. NZ Commerce Commission received millions in penalties as a result.1 That originated in the airline industry's agreements to enhance security in response to the 9/11 attacks, where the increased costs of enhanced security screening resulted in a charge being agreed.
- "It improves public health": In 2010, ten Hamilton bar owners were warned after they decided to implement a charge, with the support of the Police, to address issues with intoxicated customers.2
- "The government told us to": In 2002, Irish meat processors created a scheme to address the significant excess capacity in the industry following an economic downturn. They agreed that several participants would leave the market, and would be compensated by the remaining participants each paying a levy to the newly formed association, to be distributed to the "leavers". The European Court of Justice declared this agreement was anti-competitive, despite the fact that lessening competition was not the intention of the agreement and that the initiative was started as a Government-sponsored scheme to manage industry overcapacity.3
Competitors can collaborate
The message is not that competitors can't collaborate, you just need to do it within the law.
New Zealand's new collaborative activities exemption is potentially one of the wider ones internationally, in terms of its ability to recognise a variety of different legitimate justifications for collaboration.
However, you still need to show:
- A legitimate purpose;
- A "collaborative activity" which is an enterprise, venture or other activity, in trade, carried on by two or more persons;
- The collaboration is time limited and proportionate;
- The people receiving competitively sensitive information are clearly identified and are aware of the purpose and restrictions on its use; and
- there is a protocol or NDA in place that sets out the legitimate purpose, obliges people to keep commercially sensitive information confidential and not use it for any other purpose than the identified legitimate purpose, and not share the information more widely than necessary for the purpose, and describes when the collaboration will end and how it will be wound up.
The way this applies in practice is that it is:
- easier to agree a temporary sharing of information about sharing infrastructure or capacity to manage the crisis response; and
- harder to show that agreeing simply not to enforce a contractual right, or how to independently price to consumers, is part of any sort of ongoing venture in trade. Consider whether collaboration is necessary or whether it is equally feasible for each competitor to respond independently in market.
Consequences
If you breach the law in a period of crisis response, it is possible the Commission will recognise it as a technical breach only and either not enforce at all or only issue a warning. However, as the air cargo cartel demonstrates, it is hard to know how actions will be viewed ex-post.
We recommend following the above steps to keep your crisis collaborations compliant with the law, even if only informally documented by email, if you need to act quickly. Briefing the Commission is also an option, although the Commission cannot provide formal guidance outside its formal clearance or authorisation framework. Also, if other businesses in market are financially affected by your collaboration, then they can bring a private action, regardless of what the Commission has said about whether it would be inclined to enforce or not.
If you have any questions, or would like assistance in implementing competition law protocols for your business, please get in touch with Troy Pilkington.
This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.
1 See Commerce Commission media release here.
2 See Stuff news article here.
3 Case C-209/07 Competition authority v Beef Industry Development Society Ltd. And Barry Brothers (Carrigmore) Meats Ltd.