Crisis cartels or COVID collusion: Supreme Court Judgement a timely reminder against cartel arrangements
By: Stephen Lowe, Penny Birch, Katrina Hammon
Published: 12/05/2020
A Supreme Court judgement handed down last month related to the Commerce Commission’s cases against real estate agencies in Hamilton in connection with TradeMe fees for properties listed for sale. The Commerce Commission has to date secured $19m in penalties and the High Court will now determine the penalties for the remaining two agencies and two individuals. 

This time next year it will be a criminal offence to enter into a cartel arrangement in New Zealand. This aligning New Zealand competition law with that of Australia and other trading partners.

The Supreme Court judgement can be found here. The judgement is the final decision to determine the liability of a number of real estate agents and real estate agencies for entering into a cartel arrangement that allowed for 'vendor funding' of the TradeMe property listing fees after they were increased by TradeMe in 2013.

The Commerce Commission proceedings alleged cartel conduct by 13 real estate agencies and related parties. The Commerce Commission also issued warnings to eight other real estate agencies. 

This Supreme Court judgement is timely given the increased temptation for competitors to co-operate or collude during a time of crisis. As with this case, often business owners and their employees are unaware that their conduct may be anti-competitive and a breach of the Commerce Act 1986.

Crisis cartels or COVID collusion
In the past crises have resulted in 'Crisis Cartels', the Commerce Commission and competition law regulators globally have made it clear that such conduct will not be tolerated.

Major market or industry disruptions can cause a desire for competing businesses to co-operate or collaborate on initiatives aimed at achieving better outcomes for an industry and its customers. There is a risk that COVID-19 will generate that desire that would otherwise be anticompetitive.  The Commerce Commission was quick to issue guidance as to the continued enforcement of the Commerce Act during this time.

The Commerce Commission has had to take into account the exceptional circumstances created by COVID-19 as it monitors business in the coming months. Early on essential sectors like grocery and telecommunications were recognised as businesses that might need to collaborate in a way that would normally attract the attention of the Commerce Commission.

The Commerce Commission ​has reassured businesses providing essential goods and services that there was "no intention of taking enforcement action under the Commerce Act against businesses who are cooperating to ensure New Zealanders continue to be supplied with essential goods and services during this unprecedented time”.  For that strict purpose, competitors can work together to share staff or distribution networks or take other measures to ensure consistency and security of supply.

However, the Commerce Commission tempered that reassuring media release with a timely reminder that it will not tolerate “unscrupulous businesses using COVID-19 as an excuse for non-essential collusion or anti-competitive behaviour. This includes sharing information on pricing or strategy where it isn't necessary in the current situation".

The Commerce Commission has taken further steps to assist businesses and issued a set of helpful guidelines as to how it will assess competitor collaboration required due to COVID-19.
The guidelines provide a framework and indication of urgency that the Commerce Commission will place for COVID-19 related authorisations. 

On 5 May 2020, a bill was introduced to with the objective being to enable the Commerce Commission to quickly consider authorisations for businesses entering into arrangements that have a net public benefit overall but for COVID-19 would have otherwise been an issue.  It is expected that if passed, the authorisations will be only for the “epidemic period", that is six months after the Epidemic Preparedness (COVID-19) Notice 2020 comes to an end.

Business must understand that the reassuring statements and guidelines issued by the Commerce Commission do not provide any new legal protection. Any collaboration or behavior that would otherwise be seen as anti-competitive must not go beyond what is strictly necessary to deal with COVID-19 specific issues.

We recommend that you seek advice if your business is likely to engage in such conduct, this may require an authorisation from the Commerce Commission and with the proposed changes in the bill this process should be streamlined.

Cartel arrangements - mitigating and managing risk
A cartel is an arrangement between two or more businesses in which they agree not to compete with each other.  These cartel arrangements are strictly illegal and include market sharing, price fixing, bid rigging/tender fixing or restricting output.

With the introduction of criminal penalties from 8 April 2021, we expect businesses to update policies and procedures and introduce mandatory compliance training to mitigate the risk of the business and individuals unknowing being party to cartel arrangements. The potential for imprisonment for a term of up to 7 years and criminal fines are a strong deterrent and a reminder to businesses that competition law compliance training is an important investment.

Many of the defendants penalised in the recent Supreme Court matter were unaware that their conduct was illegal and a breach of the Commerce Act. Further highlighting the need for businesses in New Zealand to ensure that their employees are aware of policies and procedures and that regular mandatory compliance training is completed
.
Key learnings
The Supreme Court judgement is an important decision given the introduction of criminal penalties next year and the level of detailed discussion about legal technicalities and tests. In particular the legal test for an arrangement or understanding is:

"whether there is a consensus or meeting of the minds among competitors involving a commitment from one or more of them to act (or not act) in a certain way. The commitment does not need to be legally binding but must be such that it gives rise to an expectation on the part of the other parties that those who made the commitment will act or refrain from acting in the manner the consensus envisages" (paragraph 58 of the judgement).

The cartel arrangement reached had the substantial purpose and the effect of controlling the overall price that the real estate agencies charged for their services. This is despite the TradeMe fee being a small component of the total charges for the services.  The increase in TradeMe’s listing fee should have meant that this cost increase created a leaver for competition between the agents and real estate agencies, they could have absorbed or passed on the increased fee.  However, the arrangement reached by the real estate agencies in question resulted in prices being controlled and therefore preventing competition.

Timely reminders
As a general rule, all business decisions should be made independently.  Business decisions should not be based on any agreement / understanding with competitors.

Remember price fixing occurs where competitors enter into a contract, arrangement or understanding (formal or informal) which has the purpose or effect of fixing, controlling or maintaining:
  • the price that the competitors will sell their goods or services to their customers; or
  • the price that the competitors will purchase goods or services from their suppliers
Businesses must be vigilant. Don’t discuss pricing, strategies, customers or business plans with your competitors. If your business is a member of an industry association or business group, be aware that in these forums you could be inadvertently communicating with your competitors.

Business must not enter into an arrangement with a competitor which has the purpose of:
  • limiting who they sell their goods to / provide services to;
  • only providing goods / services to certain types of customers or to customers located in certain areas; and
  • sharing tenders.
If you operate a network of licensed or franchised businesses and your business (franchisor/licensor owned businesses) also competes with the network, you will be competitors and must understand the risks.

If you require assistance with an authorisations, reviewing policies or processes and training for your employees, please contact Katrina Hammon, Stephen Lowe or Penny Birch
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