Gearing up for the Cartels Bill: the Commission’s draft guidelines

by 28 Feb 2014

Article by: Bell Gully senior associate, Glenn Shewan and solicitor, Penny Pasley

The Commerce Commission has recently released draft Competitor Collaboration Guidelines which outline its intended approach to assessing collaborations between competitors under the new Commerce (Cartels and Other Matters) Amendment Bill (Bill) which is currently proceeding through Parliament. These have been anticipated with some interest due to the novelty of the cartel provisions and exemptions, and criminalisation of cartel conduct.

The Commission had originally intended to restrict its guidelines to the “collaborative activities” exemption. However, the Commission has helpfully provided a wider set of guidelines, which also address the new cartel provisions themselves and the vertical and joint buying exemptions from the new prohibition on cartel conduct. In addition, in response to specific encouragement by the select committee, the Commission has included guidance on the application of the Bill to franchise systems.

While not binding on the courts, the Commission’s guidance will form an important point of reference for the business and legal community when seeking to ensure compliance with the new law. We cover below some of the key aspects of the guidelines and address some areas where further explanation may be warranted.

Cartel prohibition and actual or potential competitors

As we have previously reported (refer, for example, to Cartels Bill reported back, Issue 209, 31 May 2013), the new Bill replaces the current prohibition on price fixing in the Commerce Act 1986 (Act) with a new cartel prohibition, prohibiting price fixing, output restrictions, and market (customer/territory) allocation. The Commission has indicated it sees the change in prohibition to be “renovation rather than revolution”, because existing provisions in the Act already prohibit serious cartel conduct, albeit that the new provisions make this more explicit, and may make proving a breach easier.

Nevertheless, any business that has arrangements with “competitors or potential competitors” needs to be confident that those arrangements comply with the new law. The draft guidance suggests a broad view of “potential competition”, noting that a non-compete between parties at different levels of a supply chain may suggest they are “potential competitors”. Accordingly, businesses need to consider carefully whether customers or suppliers may be considered potential competitors, even if they are not actually currently in competition.

Vertical supply exemption

The vertical supply exemption exempts certain cartel provisions in a contract between a (competing or potentially competing) customer and supplier relating to the supply or likely supply of goods or services, or the maximum price at which goods may be resupplied. The Commission has set out a reasonably clear test as to whether a provision “relates to” the supply of goods. For example, stipulating where or to whom the purchaser can resupply the goods or services is likely to “relate to” the supply if it forms part of the contractual obligations giving rise to the supply. However, the restrictions cannot be collateral to the contractual obligations for the supply (eg if the restriction relates to the supply of a different good than that supplied between the parties). Note that, unlike most other provisions in the Bill, the exemption only applies to contracts, ie it does not extend to protect arrangements and understandings.

The exemption also requires that the ‘cartel provision’ does not have the dominant purpose of lessening competition between any of the contracting parties. This differs from the equivalent provision in the collaborative activities exemption where it is the overall ‘collaborative activity’ that must not have the dominant purpose of lessening competition. On one interpretation, proving that a cartel ‘provision’ does not have the dominant purpose of lessening competition would be more difficult, yet the Commission notes that the general principles it applies will be the same. Given the importance of this exemption to businesses, an explicit reference to this difference in wording and how the Commission will approach it in practice would be welcomed.

Collaborative activity

The collaborative activities exemption applies where the parties to an arrangement are involved in a collaborative activity (which is an activity carried on in cooperation and not for the dominant purpose of lessening competition between the parties) and the cartel provision is reasonably necessary for the purposes of the collaborative activity.

The “reasonably necessary” aspect of the test has attracted significant debate. The Commission has sought to position its approach in line with the United States and Canada which also use the “reasonably necessary” test. The Commission does not equate “reasonably necessary” with “essential”, but instead will require parties to show that they “would be materially hindered in achieving the collaborative activity’s purpose if they used a significantly less restrictive alternative to the cartel provision”. The Commission also recognises “the significantly less restrictive alternative must be one which is practically workable”. If for example, the cartel provision materially reduces the risk, reduces the cost, or shortens the timeframe, parties might be “materially hindered” without it. While this is a difficult area, the Commission has said it does not propose to second-guess commercial decisions. However, it has made it clear that parties should be able to explain why alternatives are inadequate, unavailable, or wouldn’t allow the parties to pursue their collaborative activity.

No less important, the draft guidelines provide the Commission’s proposed approach to purpose: “[w]here parties cannot demonstrate why they are collaborating then there is a high risk that we or a court will infer that their dominant purpose is to lessen competition between the parties.” It is therefore important for parties to be able to provide solid evidence of a pro-competitive purpose.

No less important, the draft guidelines provide the Commission’s proposed approach to purpose: “[w]here parties cannot demonstrate why they are collaborating then there is a high risk that we or a court will infer that their dominant purpose is to lessen competition between the parties.” It is therefore important for parties to be able to provide solid evidence of a pro-competitive purpose.

The Commission’s proposed process appears very similar to that it applies when assessing clearance applications for mergers. However, unlike a merger which will inevitably become public, agreements between parties are often kept private. There has been much discussion about whether the Commission should therefore offer a confidential process in which it can provide parties with guidance as to whether a provision qualifies for the collaborative activities exemption (albeit not whether the activity will substantially lessen competition). The Commission has not made reference to this possibility in the guidelines, but this will no doubt remain a hot topic during the Commission’s consultation on the draft guidelines.

A draft of the Guidelines can be found here.