What is cartel conduct anyway?

25 Jun

It is a natural part of running a business that you communicate with competitors in the industry.

However, in certain circumstances, the information that you gain from your competitors and their employees can have severe legal ramifications if used incorrectly.

In this article, we set out the risks to small businesses for misusing information received by or received about their competitors under competition law, in particular breaching prohibitions on cartel conduct, and best practice for avoiding these risks.

Risks under Competition Law

Although it is often thought that competition laws are relevant only to the largest firms in an industry, small businesses can face penalties under the Competition and Consumer Act 2010 (Cth) (CCA).

Whilst most prohibited activity under Australian competition law requires a substantial lessening of competition, which is generally irrelevant to small businesses (who do not have the power to affect the market), the prohibitions against cartel conduct under Part IV Div 1 of the CCA have no such requirement.

Instead, a small business can engage in illegal activity under the CCA simply by making, or giving effect to a contract, arrangement or understanding that contains a cartel provision.[1]

This means that a small business that engages in cartel conduct alongside a competitor, could face civil and criminal penalties.

What is cartel conduct?

Cartel conduct is a prohibited conduct under the Competition and Consumer Act 2010 (Cth) (CCA) and consists of four types of behaviours: price-fixing, restricting output, market sharing, and bid rigging.[2]

· Price-fixing occurs when competitors agree on a price for the goods and services that they provide such that it allows them to raise price above a competitive level.

· Restricting output occurs when competitors work together to negatively interfere with the production of goods, supply and acquisition of goods and services, or the capacity to supply.

· Market sharing occurs when competitors intentionally allocate customers between themselves to reduce competition.

· Bid rigging occurs when competitors arrange to influence the outcome of tenders such that they can split the benefits between themselves.

When is engaging in such conduct prohibited?

A breach of the cartel conduct provisions under the CCA consists of establishing two elements. First, there must be a contract, arrangement or understanding and second, the contract, arrangement or understanding must contain a cartel provision.

What is a contract, arrangement or understanding?

A contract, arrangement or understanding means that businesses can engage in cartel conduct even without a formal contract. The Courts have held that an arrangement or understanding can arise where three elements are present: communication, consensus and commitment.[3]

· Communication can be express, such as through phone calls, emails and conversations, or tacit, such as through covert signals.

· Consensus requires that there be a meeting of the minds where parties agree to engage in cartel conduct.

· Commitment requires the parties to assume an obligation or give an assurance that it will act in the manner agreed upon.[4]

Court cases, particularly relating to the petrol industry, have shown that the threshold for establishing these three elements, particularly, commitment, is quite high. This is because a mere hope or expectation that a business engaging in cartel conduct will act in the way that another business wants it to, is insufficient to establish a contract, arrangement or understanding.[5]

In the case of Apco Service Stations Pty Ltd v ACCC [2005][6], a petrol retailer was found not to be part of a cartel arrangement even though there were instances where they raised prices in line with other retailers. The Court focused on the fact that businesses acting in the same way is not indicative of commitment on its own. The retailer in this case made the price changes independently based on their own assessment and commercial judgment of the market compared to other cartel members who organised price increases through phone calls. Therefore, if a business acts independently and competitively, it is unlikely that they will be part of a contract, arrangement or understanding.

What is a cartel provision?

The CCA defines a cartel provision in s 45AD as the following things:

· A provision that has the purpose, effect or likely effect of price fixing; or

· A provision that has the purpose of restricting output, market sharing or bid rigging.

The Courts use two tests to determine purpose and effect. The test for purpose is a subjective test that looks at whether the parties to the contract, arrangement or understanding, when agreeing to act in a certain way, had the intention to engage in cartel conduct.[7] The test for effect, which only applies to price fixing conduct, is an objective test of whether, irrespective of the businesses’ intentions, their conduct resulted in price fixing.

Additionally, for there to be a cartel provision, at least two parties to the contract, arrangement or understanding, must be in competition with one another.[8]

Is it possible to unintentionally engage in cartel conduct?

Under the cartel conduct prohibitions, the CCA covers a broad range of agreements and conducts between parties. Thus, it is possible to be caught under these provisions without intending to engage in cartel conduct.

In Trade Practices Commission v Nicholas Enterprises Pty Ltd (No 2)[9], a contract, arrangement or understanding was inferred from a series of conversations that business owners had over lunch in which one business owner indicated their intention to reduce their allowance on beer cases. By mentioning these plans, the Court found that the business owner raised expectations that put themselves under a duty to act upon his statements. This case demonstrates the dangers of sharing business plans even in informal settings.

Additionally, as stated earlier, all types of cartel conduct will be caught if the parties had the intention of engaging in such conduct. However, it is only necessary for one party to the contract, arrangement or understanding to have the requisite purpose for there to be a cartel provision.[10] Thus, even if a business did not have the subjective intention to engage in cartel conduct, if another business did, then the first business will still be liable for making, arriving at or giving effect to a cartel provision.

Therefore, it is possible that when small businesses owners and employees communicate with each other, they may casually share information that is acted upon by their competitors. If this amounts to one of the four cartel conducts, then all the involved parties could be in breach of the law.

What are the consequences of engaging in cartel conduct?

Engaging in cartel conduct will attract civil penalties, and in cases of serious cartel conduct, criminal penalties as well. For businesses, this civil penalty will be the highest amount of the following three calculations: $50 million, 3 times the benefit received from the offence, or 30% of the business’ adjusted turnover during the breach turnover period. Individuals that engage in cartel conduct can receive fines of up to $2.5 million. The criminal penalty is the same as the civil penalty for businesses, but for individuals, the criminal penalty is up to 10 years imprisonment or a fine of 2000 penalty units per offence.[11]

The ACCC primarily handles cartels under civil proceedings but can refer the proceeding to the Commonwealth Department of Public Prosecutions (CDPP) if there is serious cartel conduct.[12] However, it is unlikely that cartel conduct engaged by small businesses will result in criminal penalties as the conduct must have caused serious economic harm, significant public detriment or had a significant impact on the market.[13]

How can you avoid engaging in cartel conduct?

The determination of cartel conduct is largely centred around whether a business colluded with their competitors to engage in one of the four conducts. Thus, if a business can show that it has acted independently, it is unlikely to be captured under the provisions.

For small business owners, the following actions may help reduce the risk of engaging in cartel conduct.[14]

· When communicating with competitors, avoid discussing matters of internal decision-making and confidential information.

· Avoid trying to agree with competitors on anything relating to the price of your goods or services, including discounts, allowances, rebates or credit.

· Do not agree with competitors to limit the types of goods or services you or they supply, or the customers or geographic areas you or they supply to.

· If you receive information from a competitor, do not act in accordance with that information unless an independent decision has been made to follow that course of action. The courts have found that acting on publicly published prices is unlikely to constitute cartel conduct as long as you are acting competitively in response to those prices.

· Avoid trying to benefit from confidential information you may have received.

What can you do if you have engaged in cartel conduct?

If you suspect or know that you are involved in cartel conduct, you should report it to the ACCC. To encourage cartel detection, the ACCC provides immunity from civil and criminal proceedings to the first party that reports cartel activity.

This immunity is conditioned on the continued cooperation of the reporting party in the ACCC’s investigations and proceedings for the relevant duration.[15]

Additionally, parties that are not the first to report cartel conduct but cooperate with the ACCC’s investigations and proceedings may receive more lenient penalties.[16]

If you have further questions regarding compliance with competition laws in Australia, please contact us here.

This article was written by Pippin Barry, Australian lawyer (BA, JD UniMelb, 2012) and Kai Chue, paralegal (BComm Unimelb 2022).

Sources:

[1] Competition and Consumer Act 2010 (Cth) s 45AA.

[2] https://www.accc.gov.au/business/competition-and-exemptions/cartels.

[3] https://www.australiancompetitionlaw.info/law/anticompetitive-agreements; ACCC v Leahy Petroleum Pty Ltd [2007] FCA 794.

[4] https://www.australiancompetitionlaw.org/cases/leahy.html; ACCC v Leahy Petroleum Pty Ltd [2007] FCA 794 [35].

[5] https://www.australiancompetitionlaw.info/law/anticompetitive-agreements.

[6] Apco Service Stations Pty Ltd v ACCC [2005] FCAFC 161

[7] ACCC v Cement Australia Pty Ltd [2003] FCA 909 [3004]–[3006].

[8] Competition and Consumer Act 2010 (Cth) s 45AD(4).

[9] Trade Practices Commission v Nicholas Enterprises Pty Ltd (No 2) [1979] FCA 51.