Cartel Behaviour

A change to the Commerce Act makes cartel behaviour a criminal offence, with the risk of up to seven years’ imprisonment.

What is a cartel and how can businesses avoid engaging in cartel behaviour, intentionally or accidentally (this includes small to medium businesses, not just those big corporates).  For those unfamiliar, what is the definition of cartel business/behaviour and the illegal acts associated with this?

The Commerce Act actually prohibits a wide range of there are a range of restrictive trade practices. These include cartel-like behaviour but also extend to taking advantage of market power, resale price maintenance and practices substantially lessening competition.

A cartel is where two or more businesses agree not to compete with each other. It applies both to the buying and selling behaviour of businesses.

This conduct can take many forms, including price fixing, dividing up markets (eg. by region or by suppliers used), rigging bids or restricting output of goods and services.

Factors that may increase the risk of cartel-like behaviours include:

• being in a market where you know most (or all) of your competitors;
• having competitors who are also customers or business partners;
• markets/sectors in which staff frequently move between businesses; and
• contact with your competitors through work or at social events, in particular where this might involve discussion of: pricing, fees, customers, territories, future plans/strategy or following set rules.

Resale price maintenance is where a supplier prevents resellers from independently setting their prices. This can lead to increased prices for consumers. While it is unlawful for suppliers to directly or indirectly enforce a price, the use of a recommended retail price (RRP) is permitted so long it is solely a recommendation.

Taking advantage of market power occurs where businesses who have substantial market power take advantage of that power for anti-competitive purposes. For example: lowering prices to drive competitors out of the market; refusal to supply competitors; increasing the prices for competitors to access infrastructure needed to compete; exclusivity deals with retailers or distributors; bundling of products; or otherwise acting in a way that they would not have been able to if there were competition).

This may be more likely for larger businesses but it will depend on the size and influence of your business relative to the size of the market(s) in which it operates.

Agreements or understandings for the purpose, or likely to have the effect, of substantially lessening competition in a market are illegal. In general terms, this is where businesses take joint steps to prevent new competitors entering the market or make it more difficult for existing competitors to gain market share (though there are limited exceptions for things like business partnerships and individual restraints of trade). This is illegal regardless of whether or not it is intentional.

These restricted practices generally only apply to products and services supplied in New Zealand markets. However, if a business supplies products or services to other markets, it is very likely those markets will have their own laws prohibiting anti-competitive practices.

What are the sanctions for engaging in restrictive trade practices?

Depending on the seriousness of the offence, sanctions will vary but they include cease and desist warnings, requirement for undertakings to comply, potentially large fines and imprisonment. Fines can be as high as $10 million (or, if higher, three times the commercial gain or 10% of turnover) and, from April 2021, prison sentences for breach of the cartel rules carry a maximum prison sentence of seven years. In terms of liability for sanctions, the net can be cast very wide and (in addition to engaging in cartel behaviours directly) includes aiding and abetting others and failure to report others.

How can businesses mitigate the risk of involvement in restrictive trade practices?

Businesses should ensure they are aware of what trade practices are restricted by the Commerce Act and educate staff that may be in situations where these practices may emerge. The Commerce Commission offers the following practical tips for businesses engaging with their competitors:

• Think carefully about who you are, or may be, in competition with, especially if sub-contracting is involved.
• Do not agree prices, discounts or any matters relating to price with your competitors (unless it is a specific sub-contract you are discussing).
• Do not agree to restrict output in any way, or to allocate customers or geographic markets between competitors.
• Do not exchange pricing, how much you plan to produce in the future, customer information or which markets you sell into with your competitors.
• If you are approached by another business to discuss pricing, allocating customers, bids for contracts or restricting outputs you should raise an objection straight away. Leave the discussion immediately.
• Make sure that you and your staff are familiar with the requirements of the Commerce Act. Keep records of who has attended training.
• Review internal documents, policies and procedures for compliance with the Commerce Act and seek independent legal advice.

If you become aware of anti-competitive conduct, contact the Commerce Commission straight away.

How has COVID-19 impacted on the risk to businesses in this area?

The Commerce Commission has acknowledged that the exceptional circumstances surrounding the COVID-19 pandemic may require businesses to collaborate in order to ensure the security of supply of essential goods and services that are important to New Zealanders. The Commerce Commission stated that there will be no enforcement action taken against businesses who are cooperating to ensure that essential goods and services are supplied to New Zealanders. This will not, however, extend to unscrupulous behaviour and the collaboration in question must meet the following requirements:

• must be undertaken in good faith;
• relates to essential goods and services;
• aims to benefit consumers or the public interest;
• only covers the scope and duration that is necessary for the COVID-19 pandemic;
• information shared must only extend to that necessary to address the COVID-19 pandemic; and
• includes all necessary measures to reduce the existence of competition-lessening through the inclusion of smaller or independent businesses.

Please note: This is a short summary and is general in nature. It is not legal advice and specific legal advice should be sought in relation to the matters discussed if they arise.

If you have any questions about this topic, please contact the writer or a member of Holland Beckett Law’s commercial team to discuss.