Skip to Content »

Trade associations boosted by cartel law changes

  • September 7th, 2013

Wellington is a city of trade associations. Current law changes may help them, though increasing the risks for their executives. They’ll certainly keep busy the Wellington lawyers who look after them.

Trade associations have always lived dangerously in competition law terms. They exist for collaboration among competitors. If members can act as a cartel there may be the prize of monopoly profits at customer expense.

Accordingly they’ve been suspect for hundreds of years. Members claim (and often believe) that their personal good is the public good, but Adam Smith famously summarised their incentives in 1776 in The Wealth of Nations:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices….

So trade associations will be paying close attention when Commerce (Cartels and Other Matters) Amendment Bill gets through Parliament within the next few months[1]. It criminalises ‘cartel behaviour’ but also makes safer what the government calls “pro-competitive collaboration” defined as “cooperation [that] is not carried on for the dominant purpose of lessening competition…”.

That sounds contradictory, and in practice it could be. The result could be a few sacrificial convicts, and more comfortably colluding competitors.

Prosecutors will have to establish beyond reasonable doubt that ‘lessening competition’ was the dominant purpose of ‘collaborative activity”. Plenty of other dominant purposes can disguise a collateral intention to nobble competitors, or to raise barriers to competitor entry. Standard setting to increase efficiency, or to ‘protect the public’ from cheap and shoddy service, and promoting health and safety, all sound like worthy purposes, and often are.

 On the other hand trade associations will lose some defences they may have relied on in the past. Wrongly intentioned arrangements will remain unenforceable and illegal without. the current Commerce Act exception (s.32) which protects non-binding price recommendations by trade associations with more than 50 members. Folklore has converted that exception into a belief by some that having 50 members is a get-out-of-jail-free card for trade associations. Understandings and arrangements for price fixing, market sharing, output restrictions, and bid rigging are illegal, and will remain so.[2]

The penalties for getting it wrong could be up to seven years in prison, and up to $10m in fines. Civil penalties (not needing the criminal standard of proof beyond reasonable doubt) of the greater of $10m and three times the gain, can be awarded for restrictive trade practices. The defendant will have the onus of proof of a defence in civil penalty proceedings. A company may not indemnify officers or employees for fine or penalty liability (s 80A).

New sections 65A to 65D provide for Commission clearances of cartel provisions.

So trade associations and their advisers should soon be considering whether to seek that Commerce Commission blessing.  The Commission must grant the clearance if the cartel provision is “reasonably” necessary for the collaborative activity and will not be likely to substantially lessen competition.

There will be nine months grace after the law change to review existing arrangements and decide if a clearance application is wise. Even if there is a good defence, remember the huge legal cost of being caught in a test case while new law beds down.

The Commerce Commission has kept a careful eye on trade associations. That is unlikely to change.[3]

In September 2010 the Commission issued Guidelines for Trade Associations, reminding them that their members can be liable if the association acts anti-competitively. It is unlikely to need much amendment in spite of the pending law change. That liability extends to members who do not take any part in the association’s conduct, or even do not know about it. The Guidelines are realistic, up to a point.  Practical Tips recommend, for example, that “if pricing discussion occurs…members should raise an objection straight away, leave the meeting if the discussion continues and write a letter dissociating themselves from the pricing discussion immediately afterwards”.

The risk is obvious in pricing discussions. It may be less obvious when the topic is, for example, a debateable new health and safety stipulation that also happens to be hard for new entrant competitors to satisfy.

If you are a member of an association and become seriously concerned, there is a substantial gain in being the whistle blower to the Commission. The first person to use the Commission’s Leniency Policy in a particular instance may be the only person safe. In effect the Commission says it will protect absolutely from its legal proceedings the first comprehensive nark. It will try to protect others whose narking is less useful, but still helpful.

Think about it.

(I wrote that for the DomPost  and it was published last month but it does not come up for linking in a Stuff search)




[1] Reported back from the Commerce Select Committee on 13 May 2013



[2] The new criminal charges (s 82B) allow for the defence of honest belief that a cartel provision was reasonably necessary for the purposes of a [lawful] collaborative activity.




[3] In the leading New Zealand case the Commission pursued eye doctors  who made it hard for Southland DHB to bring in an Australian contract surgeon to cut waiting lists. In Commerce Commission v Ophthalmological Society of New Zealand (2004) 10 TCLR 994 the High Court found an arrangement that substantially lessened competition. Penalties against the Society and two doctors totalled $125,000 and they were ordered to pay costs of $467,870 to the Commerce Commission.



Leave your comments:

* Required fields. Your e-mail address will not be published on this site

You can use the following HTML tags:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>