New cartel laws

An amendment to the Commerce Act 1986, the Commerce (Cartels and Other Matters) Amendment Act 2017 (the “Act”) came into force on 15 August 2017, after six years before Parliament.  The Act enhances New Zealand’s protections against anti-competitive behaviour and expands the scope of what can be considered as illegal cartel conduct under the Commerce Act.

Cartel provisions

Section 30 of the Act provides that no person may enter into a contract or arrangement that contains a cartel provision, or give effect to a cartel provision.  A cartel provision includes the following in relation to the supply or acquisition of goods or services in New Zealand:

• Price fixing;
• Restricting output; or
• Market allocating.  

“Price fixing” remains unchanged in this amendment, and includes agreements between competitors that fix or provide for the fixing of the price for goods and services supplied or acquired, or for the discount, allowance, rebate or credit in relation to any goods or services supplied or acquired.    

The term “restricting output” has been expanded to not only include agreements between competitors that limit or restrict the production of goods or capacity to supply services, but also to agreements between competitors that limit or restrict the supply or acquisition of goods or services. 

“Market allocating” includes agreements that allocate, between competitors, the consumers or suppliers of the goods or services in which they compete, or the geographic areas in which they compete.     

Generally, a competitor relationship may exist between two parties where they carry on business:

• At the same functional level (i.e. wholesale or retail); and
• Within the same geographic area; or
• Be readily capable of both.

The Act provides a number of exceptions for entering into cartel provisions.  These include:

• Where at least two of the parties to an agreement are involved in collaborative activity, and the cartel provisions are reasonably necessary for the purpose of collaborative activity.  Collaborative activity means an enterprise or other activity in trade that is carried on in co-operation by two or more persons, of which its dominant purpose is not to lessen competition between the parties. 
• Where a vertical supply contract exists.  A vertical supply contract exists between a supplier and customer when the cartel provision relates to the supply of goods or services to that customer and do not have the dominant purpose of lessening competition between the parties to the contract.
• Where there are joint buying or promotion agreements.  A provision in an agreement will not have the effect of price fixing where that provision relates to:
  • The price for goods or services that will be collectively acquired or collectively negotiated;
  • The joint advertising of the price; or
  • An intermediary taking title to goods to resell or resupply.   

The Act also introduces a clearance regime in which parties can seek clearance from the Commerce Commission for proposed agreements that potentially contain a cartel provision falling under the collaborative activities exemption.  Having received a clearance, a party can proceed with the confidence of knowing they will not later be found in breach of the Act. 

Penalties

The financial penalties for a party found in breach of the new cartel provisions are substantial.  Fines may be issued for the higher of:

• $10 million;
• Three (3)  times the commercial gain made from the breach; or
• 10% of the offending party’s annual turnover.   

Implications for business

The Act is likely to affect suppliers and resellers as well as franchisors or franchisees as these traders typically rely on arrangements that include territorial allocation clauses and restraints of trade. 

Common cartel provisions in supply agreements include clauses which:

• Set resale prices;
• Allocate geographical territories or a specific type of customer or reseller; or
• Prevent a reseller from also selling a competitor’s product. 

Common cartel provisions in franchise business arrangements include clauses which:

• Allocate geographical territory to franchisees;
• Require franchisees to purchase stock from an approved supplier;
• Set the price at which a franchisees can sell at; or
• Restrict franchisees from carrying on other business activities.

There is a nine month transition period for existing contracts and arrangements to be updated to meet the new requirements.  Businesses should take care to ensure that any arrangements they have in place are compliant before this period expires on 14 May 2018.  Any new contracts or arrangements are immediately subject to the provisions brought about by the Amendment. 

The collaborative activity exemption will likely be important for many businesses.  This exemption will cover arrangements like joint ventures, strategic alliances, syndicated loans and consortium bidding so long as the arrangement’s dominant purpose is not anti-competitive and the cartel provision is reasonably necessary to achieve that purpose.  The onus falls on the applicant to prove that an exemption applies.  The Courts and the Commerce Commission will likely look to business documentation as well as oral evidence in assessing whether a particular conduct is prohibited under the Act.  It is unclear at this stage the approach the Courts will take in applying the new provisions. 

If you would like further information please contact Laura Monahan on 07 958 7479.