Talking with competitors
For founders of start-ups & SMEs it’s great to be able to form a network with other founders going through the same process, both as a source of knowledge and support. It’s also common in some industries for employees to cycle between several employers. Often employers might want to hire them specifically because the employee has knowledge of how a competitor operates.
However, it’s important to be aware that there are legal risks you need to avoid when doing this. Co-operating too closely with competitors can breach competition laws. Further, in certain circumstances, the use of confidential information that you gain from competitors and their employees can have severe legal ramifications if used incorrectly.
In this article, we explore these risks and the steps you can take to mitigate them.
Risks under Competition Law
Although it is often thought that competition laws are relevant only to the largest firms in an industry, there are multiple ways a small business can be caught under the competition restrictions contained in the Competition and Consumer Act 2010 (Cth) (‘CCA’).
Most illegal activity under Australian competition law requires the activity to cause a substantial lessening of competition in the marketplace. This is largely irrelevant to small businesses because even if they behave anti-competitively, there is no effect on the market – consumers simply go on to the next business.
However, the prohibitions against cartel conduct under s 45AA of the CCA have no such requirement. 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. This means that a small business that engages in cartel conduct alongside a competitor, could face civil penalties.
What is cartel conduct?
Cartel conduct is a prohibited conduct under the CCA and covers the following four behaviours:
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; and
Bid rigging occurs when competitors arrange to influence the outcome of tenders such that they can split the benefits between themselves.
Can you unintentionally engage in cartel conduct?
The CCA captures a broad range of agreements under the term ‘contract, arrangement or understanding’ and thus, there does not need to be formal contract in order to be caught under these provisions. Cases have shown that agreements made in informal settings such as over lunch, or through digital communications such as phone calls, texts and emails can also amount to a breach of the law.
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 of the involved parties will 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.
It is unlikely that cartel conduct engaged by small businesses will result in criminal penalties unless the conduct would have resulted in severe economic harm to the market.
How can I 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 owner, the following actions may help reduce the risk of engaging in cartel conduct:
when communicating with competitors, avoid discussion matters of internal decision-making and confidential information;
ensure your decisions concerning pricing and strategy are made on an independent basis; and
avoid benefit from confidential information you have received.
Risks arising from the misuse of confidential information
A small business can also create significant risk if it misuses information from an employee, where that employee was previously hired by a competitor and has knowledge of the competitor’s confidential information.
In the (relatively) recent High Court case of Ancient order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43, a business had to pay all the profit due to the misuse of confidential information back to its competitor. The technical legal claim was for knowing assistance in breach of fiduciary duty. Foresters hired two employees from Lifeplan. The employees took confidential information with them and used it to divert business opportunities to Foresters. This was incredibly successful and Foresters made millions from it. However, Lifeplan was able to show that Foresters knew it was using confidential information of Lifeplan, and therefore Lifeplan eventually received a court order in its favour of over $14 million.
The critical take away is to be very careful with any confidential information you receive about competitors. If you profit from it, you may be liable to pay across such profits. If you’re unsure about whether such information is confidential then seek legal advice early.
This article was written by Pippin Barry (BA; JD, Unimelb 2012), an Australian lawyer, and Kai Chue (BComm, Unimelb 2022) paralegal.
