20 Nov The Impact of the new Cartel Laws on Commercial Arrangements
Recently enacted changes to the Commerce Act 1986 significantly extend the scope of what can be considered to be cartel conduct prohibited by the Commerce Act. Common, and often pro-competitive, commercial arrangements will be subject to greater scrutiny. This is particularly true of distribution arrangements and joint ventures.
There are limited exceptions for certain collaborative activity and for certain provisions in vertical supply contracts.
Previous proposals for criminalisation of cartel conduct were not ultimately adopted. However, the consequences of breach are still severe. They include potentially large pecuniary penalties, exposure to damages and the unenforceability of contracts.
The previous prohibition on price fixing in section 30 of the Commerce Act has been replaced with a new prohibition on cartel conduct. The new prohibition is against agreements, arrangements or understandings between competitors with the purpose, effect or likely effect of price fixing, restricting output or market allocating. The cartel prohibitions apply to persons who are or are likely to be “in competition with” each other.
The prohibition on price fixing is similar to the prohibition which previously applied, and covers not only the fixing of prices, but also of discounts, allowances, rebates or credit.
The prohibition on restricting output is particularly wide. It extends to agreements between competitors that limit the supply or acquisition of goods or services.
It may potentially catch the situation of a franchisor that operates a company owned store (and who thus is technically a competitor) who requires its franchisees not to supply competing products. It may also potentially catch a situation where a manufacturer who happens to sell directly to consumers through its website (and who may therefore technically be a competitor with its dealers) who then imposes a restriction on its dealers as to the products they supply in their stores.
The prohibition on market allocation arrangements is also wide.
It might for example catch a joint venture arrangement which involves an agreement or understanding between the joint venturers as to the geographic areas in which each venturer will operate, or an agreement or understanding between them as to the particular classes of customer that each venturer will service.
There are two key exceptions in the Act which are intended to protect pro-competitive collaborations that are commonly seen in joint venture agreements, franchise and distribution agreements. The first is the vertical supply contract exception and the second the collaborative activity exception.
There are three key elements to the vertical supply contract exception. A cartel provision will come within the exception where:
- it is contained in a contract between the supplier and customer;
- the cartel provision in the contract must “relate to” the supply or likely supply of goods or services by the supplier to the customer – this will generally require a close connection between the cartel provision and the act of the supplier supplying goods or services to the customer;
- the cartel provision must not have the dominant purpose of lessening competition between the supplier and the customer.
The most clear example of a cartel provision that “relates to” the supply by the supplier to the customer is a provision in the supply contract that actually sets the price at which the supplier will supply the customer. The vertical supply contract exception will likely apply where the cartel provision imposes on the customer a maximum price at which they may resupply the goods or services in question.
On the other hand a provision that is less likely to “relate to” the supply of goods is where a supplier restricts a customer’s ability to price or sell different goods or services to those being supplied by the supplier.
There are three key components to the collaborative activity exception. An agreement will come within the exception where:
- two or more parties to the agreement carry on an enterprise, venture or other activity in trade in co-operation;
- the enterprise, venture or other activity is not carried on for the dominant purpose of lessening competition between the parties;
- the cartel provision is reasonably necessary for the purpose of the enterprise, venture or other activity.
For the exception to apply the parties must normally be involved in a collaborative activity both at the time of entry into the contract, arrangement or understanding and at the time of giving effect to it.
The collaborative activity exception will not usually be available to continue to protect a cartel provision after the joint venture or other collaborative activity comes to an end. This is so even though the cartel provision may be expressed to apply for a period following termination of the contract in question.
Fortunately, the Act (through a late amendment) does protect the position in relation to restraint of trade provisions, by allowing a restraint of trade provision to be enforced after a collaborative activity has come to an end as long as the restraint of trade provision was reasonably necessary for the collaborative activity at the time that the collaborative activity was first entered into. This is important for franchise (and similar) agreements where there is often a restraint of trade provision preventing a franchisee from competing with the franchise network for a period of time following termination of the franchise agreement.
An important question under the collaborative activity exception is the requirement that the cartel provision be “reasonably necessary” for the purpose of the enterprise, venture or other activity. The Commerce Commission has previously commented that a cartel provision need not be essential for the collaborative activity, although it is not enough for a provision to be “merely desirable, expedient, or preferable”.
The Act provides for a new clearance regime for collaborative activity. This enables parties to an arrangement that includes a cartel provision to obtain clearance from the Commission under the Act if the collaborative activity exception applies and the Commission is also satisfied that there is no substantial lessening of competition.
The Act provides for a statutory 30 working day timeframe for clearance applications. The process followed for clearance applications is likely to be very similar to the current merger clearance process.
In the absence of a clearance, the parties to a proposed joint venture or other collaboration run the risk of the contract being unenforceable, as well as potential pecuniary penalties and damages.
The new regime for cartel conduct prohibited by the Commerce Act applies immediately to all new contracts. There is a 9 month transitional period before existing contracts will become subject to scrutiny under the new law. It will therefore be important to check existing contracts before the expiry of the transitional period on 14 May 2018 and update Commerce Act compliance programmes.