News
Seizing the opportunity to fix price fixing
First published in NZLawyer, 1 April 2010.
As most readers will be aware, the Ministry of Economic Development (MED) has issued a discussion document and has sought submissions on whether New Zealand should criminalise cartel conduct, and if so, how it should be done.
The MED's discussion document specifies broad categories of "hardcore" cartel behaviour: price fixing; bid rigging; output limitation agreements; and "market allocation" schemes.
The Competition Matters article (NZLawyer, 5 March 2010) discussed some of the issues that need to be considered about whether we criminalise cartel conduct. This article canvasses some of the (seemingly) benign conduct that already amounts to price fixing, and which could give rise to criminal liability unless the law is clarified. Helpfully, the MED acknowledges that any cartel offence will need to ensure that it does not overreach and capture non-hardcore conduct.
Irrespective of whether or not we criminalise cartel conduct, the price fixing provisions in the Commerce Act and the related exemptions are crying out for reform. This arises in part from the drafting itself, but also from some court decisions which have been interpreted as holding that price fixing requires no more than an agreement between competitors that is likely to interfere with the competitive determination of price (or discounts, etc.).
As the following examples show, this is not a trivial or merely theoretical issue.
Vertically integrated companies
The size of the New Zealand economy means many firms are active at different levels of the supply chain.
Consider a hypothetical clothing company which owns retail stores nationwide, but which also has a wholesale division which sells some clothing lines to independent retailers. The wholesale division is looking to increase volumes to drive efficiencies, so it lowers its wholesale price to retailers in the hope they will pass that reduction on and increase sales. However, the retailers bank the extra margin, so in order to achieve the reduction in the retail price the wholesale division imposes a maximum resale price on its retailers. Consumers are happy, because prices are lower, the clothing company is (initially) happy, because volumes are up – although it becomes somewhat less happy when it discovers that the imposition of the maximum resale price amounts to price fixing.
The price fixing occurs because the retail division of the clothing company competes with the retailers that are subject to the maximum resale price, and the breach occurs irrespective of whether the retail division had any knowledge of, or input into, the maximum resale price. In fact, it would make no difference if the retail business was a separately run company, so long as there was a majority ownership link between the wholesale and retail operations.
Franchises
Issues can also arise for franchises. Franchisees do not often regard members in the same franchising group as competitors, although they frequently are. The same is often the case for co-operatives. While franchise agreements are often vertical in nature (between franchisor and franchisee) in many cases the franchisor retains an ownership interest in a downstream franchise, giving rise to the horizontal element which triggers potential price fixing exposure – depending of course on the content of the arrangement - notwithstanding its effect may be pro-competitive.
While there is an exemption to enable parties to jointly advertise the price for the resupply of collectively acquired goods, each franchisee must nevertheless be free to ultimately price as it considers fit. As the preceding example shows, any attempt by franchisors that retain a downstream interest to set a maximum retail price will raise price fixing issues. The issue arises despite the fact both the aim and effect may genuinely be to keep prices low to remain competitive with the competition.
In addition, franchise arrangements typically include territorial restrictions, a point which the MED notes will need to be addressed in the event "market allocation" schemes are classed as cartel conduct in any new offence.
Joint ventures
It is widely accepted that the current joint venture exemption from price fixing is unclear, and helpfully the MED accepts that it will need to be addressed. It notes that there is a balance to be struck in designing a joint venture defence: it would need to capture cartels that are dressed up as joint ventures, while ensuring that legitimate business activity is not discouraged or penalised.
Under its "greenfields" approach, the MED has proposed defining a joint venture in economic terms, requiring significant economic integration of activities. This might call for proof of actual or potential efficiency gains. The proposal also contemplates that the cartel provision in question is reasonably necessary to achieve the commercial objectives of the joint venture. On its face this sounds sensible, although it will be important to ensure that firms can make informed decisions in advance as to the applicability of the exemption. In particular, this means that the inclusion of any economic integration threshold will need to be drafted carefully.
Practical certainty
When defining any new cartel offence (and when fixing the current price fixing provisions) it is important to remember that even if conduct escapes per se condemnation as price fixing, it remains subject to the general "SLC test", which prohibits arrangements that have a purpose, or have the effect or likely effect, of substantially lessening competition in a market.
This means that where a decision needs to be made on the breadth of what should constitute price fixing, the offence can be defined narrowly, in the knowledge that conduct which truly harms competition will be caught by the SLC test, even if technically it does not amount to price fixing (as defined). This will go some way to ensuring that we do not deter efficiency enhancing conduct.
Nevertheless, there will always be a degree of uncertainty around the fringes. To address this, we believe there is merit in a process whereby firms can seek clarity from the Commerce Commission as to whether proposed conduct amounts to a breach. As recently as last week, Alastair Mordaunt, director of services at the United Kingdom's Office of Fair Trading, advised that it will trial a short-form opinion process on prospective horizontal agreements in two or three months. New Zealand already has a clearance regime for mergers whereby parties unsure about the ramifications of a merger can seek certainty from the Commission. While the vast bulk of mergers do not involve clearance applications, that regime is available where certainty is needed.
In our view, the benefits of extending that clearance regime to contractual arrangements, in the form of increased certainty and hence greater levels of pro-competitive behaviour, far outweigh the costs of doing so – and we are yet to hear from a corporate that has an opposing view.
