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Working with competitors on law reform: how to manage the risk

Home Insights Working with competitors on law reform: how to manage the risk

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Contributed by: Troy Pilkington and Bradley Aburn

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Published on: January 24, 2019

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Industry reviews, and proposals for (or threats of) new industry-specific regulations, have never been more common.  Last year saw the banking industry under review by the Financial Markets Authority (FMA) and Reserve Bank of New Zealand (RBNZ),1 and those same regulators are this month due to report on the life insurance industry's conduct and culture (see today's Financial Regulation Update). Meanwhile, the Government has given the Commerce Commission powers to conduct industry-wide studies, along with powers to recommend changes to business practices and industry regulations as an outcome (with the first such study, into the retail fuel industry, launched in December 2018).2

This creates an environment of significant additional cost for businesses. Responding to questions that arise in industry reviews can be time-consuming and costly.  Equally, evaluating any resulting proposals for, or responding to threats of, industry law reform, and submitting effectively, is also often time-consuming and costly (and daunting for individual businesses that do not want to put their "head above the parapet" on sensitive issues or appear to be self-serving). 

In this environment, it is not surprising that businesses are increasingly looking to work together with competitors (potentially through an industry association) to respond jointly to industry reviews and law reform proposals. Joint engagement can be an effective, and cost efficient, tool to advocate on industry-wide issues. However, because joint engagement involves competitors working together, it is also necessary to consider the Commerce Act (competition law) issues carefully.

In particular, it is generally illegal for competitors to share competitively sensitive information or to cooperate instead of compete – especially on pricing, future plans, competitive strategies, or (importantly) individual competitive responses to new legislation. Conversations that occur in the context of an industry association, or joint engagement on regulatory matters, are no exception.

Nor is it an excuse to say that industry coordination was encouraged by a government minister or department. While the government minister or department may escape liability (as they are not acting "in trade"), the industry players will be left to face the consequences. There have been a number of instances where industry players have been encouraged to come up with an "industry solution" by a government minister or department, only for that industry solution to be subject to scrutiny from the Commerce Commission.

Equally, agreeing an industry "code of ethics" or "voluntary standard" could also potentially give rise to risks given such codes/standards will impact on how businesses otherwise compete with one another.

Getting it wrong is a costly exercise. Individuals can be fined up to $500,000, and companies millions of dollars. Given it is estimated that more than half of all cartel cases worldwide have involved discussions started at industry associations, and a significant number of those are understood to be connected with changes in government regulations, it is worth considering the issues carefully. For example, in New Zealand:

  • the Commission's livestock price fixing prosecutions had their genesis in the livestock industry's response to the introduction of a tracking system for cattle (via the National Animal Identification and Tracing Act 2012); and
  • the Commission's air cargo price fixing prosecutions had their genesis in the aviation industry's response to additional security regulations following the 9/11 terror attacks.

The good news is that, with a little bit of preparation and discipline, appropriate safeguards can usually be put in place to mitigate the competition law risk associated with joint engagement on regulatory issues in order to enable an efficient and effective coordinated approach. At the outset, you should put in place competition law guidelines so that both you and your competitors are fully aware of the rules of engagement.

Each industry association and regulatory engagement exercise is different and carries varying degrees of competition law risk. It is therefore worth obtaining specific competition law advice in advance so that the guidelines are fit for purpose. Irrespective of the industry or context, some general rules include:

  • limiting discussions to just the regulatory reform issue in question, and how the parties will engage with/submit to the relevant regulator;
  • ensuring discussions do not spill over into other commercial topics or the exchange of competitively sensitive information;
  • ensuring discussions do not spill over into whether/how each party will modify its competitive strategy in response to any regulation that is ultimately implemented; and
  • having named and confined "teams" for engaging in those discussions (with those team members educated on their competition law obligations).

With industry reviews and law reform proposals set to become a regular part of the New Zealand regulatory landscape, it is worth giving some thought to how your company may wish to participate. Coordinated action on proposed law reforms remains an effective and efficient strategy if you put in place specific safeguards to mitigate the competition law risks.

If you have any questions, or would like assistance in implementing the necessary protections for any coordinated industry action, please get in touch with Troy Pilkington or Sarah Keene. We have extensive experience advising on these issues, and we will help you proceed with confidence.

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(NB: The information contained in this article is of a general nature and should not be substituted for specific legal advice on any initiative.)

FOOTNOTES
  1. Available at https://www.rbnz.govt.nz/regulation-and-supervision/banks/thematic-review-of-bank-conduct-and-culture.
  2. See https://comcom.govt.nz/about-us/our-role/competition-studies/market-study-into-retail-fuel.
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