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19 March 2018
by Patrick Learmonth
COMMERCE ACT  UPDATE– CARTEL PROHIBITIONS

Amendments to the Commerce Act which prohibit cartel behaviour came into force in mid August 2017.These are in line with worldwide trends and also the focus on the Commerce Commission over the last few years into investigating and prosecuting anti-competitive behaviour in markets by cartels.

What is a cartel?: For Commerce Act purposes a cartel exists where business competitors agree to reduce or remove competition that exists or would otherwise exist between them

The prohibition on cartels places at risk arrangements between competitors that have the purpose, effect or likely effect of price fixing, output restriction or market allocation. Price fixing involves an agreement between 2 or more competitors to fix or control the price for goods or services. Output restrictions are arrangements between competitors to prevent, restrict or limit their supply, capacity, or production of goods and services. Market allocation occurs where competitors agree allocate between themselves customers to whom, or the geographic areas in which, each will supply goods or services.

Agreement types particularly at risk from these prohibitions include joint ventures, franchising and distribution..

The Commerce Act has been amended so that:

  • Cartel behaviour is a breach of the Commerce Act and the Commission has no need to show any purpose or effect of substantially lessening competition in the market.
  • There is an exemption for collaborative activities. This replaces the old joint venture exception to price-fixing. The collaborative activity exemption applies where the activity in question is carried on cooperation by two or more persons, that activity is not carried on for the dominant purpose of lessening competition between the parties, and the cartel provision is reasonably necessary for the purposes of that collaborative activity. This is fairly broad. 
  • Vertical supply contracts – e.g. between a supplier and a customer – can be exempted from the cartel conduct prohibitions. Where the parties to a vertical supply arrangement are in competition then that arrangement may be at risk under the cartel prohibitions under the Commerce Act but can be exempted if the parties can show that the cartel provisions do not have the dominant purpose of lessening completion between the parties.
  • There will be a clearance process for collaborative activities available through the Commerce Commission.
  • Businesses in breach of the cartel prohibitions carry the risk of fines of up to $10 million, three times the commercial gain from the breach or 10% of turnover.
  • Also there is a government proposal to make cartel conduct a criminal offence (the Commerce (Criminalisation of Cartels) Amendment Bill) where a person intends to act in price fixing, output restriction or market allocation. This will be a strict liability offence – intention to break the law is not necessary. Penalties will be up to seven years in jail, a fine up to $500,000 or both. There is proposed in the bill that a defence be available where the person honestly believed that the cartel provision was reasonably necessary for a collaborative activity.
  • New arrangements entered into will be caught by the new cartel conduct prohibition immediately.
  • The Commerce Commission will commence prosecuting pre-existing arrangements which breach the cartel conduct prohibitions following a nine month transitional period.

Businesses need to be familiar with the cartel prohibitions and:

  • Review distribution, franchise and joint venture et cetera contracts and identify any potential cartel clauses
  • Consider alternatives – some cartel clauses may not actually be necessary, never used, outdated.
  • Consider whether the exemptions available such as for collaborative activities will apply
  • Amend contracts as necessary and carry out policies updates et cetera.

The Commerce Commission has issued guidelines to assist businesses in understanding these new laws.