Associations, particularly the industry and professional varieties, play an important, valuable and fundamental role for the exchange of ideas of common interest within their representative industry or professional sector. However, they also bring together a number of competitors within a sector which, even where the legitimate objectives of an association may be being pursued, lends itself to scrutiny, and often criticism, by the public, competition regulators and enforcers as to the legality of the association’s members’ co-ordination.
Where an association’s objectives include the efficient functioning of its particular market, extreme caution must be applied to ensure that casual and legitimately-intended discussions about market factors such as prices, supply quantities, geographic or regional partitioning and future business or market strategies do not lead to agreements or understandings by (competing) members which would, or could, contravene the competition provisions of the Competition and Consumer Act 2010 (Cth) (CCA).
As part of our series on the application of the CCA to the third sector, this article will focus specifically on the provisions of the CCA relating to cartels.
Like its counterparts in North America and Europe, and generally throughout the world, the CCA strictly prohibits (subject to some highly regulated exceptions) anti-competitive conduct by parties within a market. Cartel conduct is one of the forms of restrictive trade practices specifically dealt with by the CCA and is stringently regulated by the Australian Competition and Consumer Commission (ACCC). In fact, contravention of the cartel provisions contained in the CCA may attract civil and/or criminal penalties.
Cartel conduct is a restrictive trade practice that is contained within Division 1 of Part IV of the CCA. Section 44ZZRD sets out the form of conduct that constitutes cartel conduct and which attracts penalties under the Act. In simple terms, the CCA prohibits contracts, arrangements and understandings that contain cartel provisions. A cartel provision is (see section 44ZZRA):
“…a provision relating to:
(a) price-fixing; or
(b) restricting outputs in the production and supply chain; or
(c) allocating customers, suppliers or territories; or
(d) bid rigging;
by parties that are, or would otherwise be, in competition with each other.”
The definition of a “party” is extended by section 44ZZRC to the effect that each body corporate that is related to the body corporate that is a party to a contract, arrangement or understanding that contains a cartel provision, is also taken to be a party to that contract, arrangement or understanding. The extension of the definition of party means that associations whose structure is built upon related associations (often found in a “peak body / regional association” relationship), is at risk of exposing its entire network to civil and/or criminal penalties under the Act.
Cartel conduct by an association
Industry and professional associations are, for the most part, constituted to provide a public benefit by ensuring efficiencies across the sector they represent. However, they can also be perceived as being a vehicle to surreptitiously engage in cartel conduct and other, more subtle, forms of anti-competitive behaviour.
Codes of conduct and price fixing
It is becoming increasingly common for associations to impose codes of conduct upon their members with a genuine intention that these codes regulate and standardise the manner in which the association’s members carry on their activities. In most cases, the codes perform a public benefit by, for example, regulating the conduct of the players within the sector and, thus, in turn, benefiting members by generating public confidence in respect of the sector as a whole. Care must be taken, however, in the drafting of industry and professional codes of conduct to avoid engaging in conduct that is proscribed under the CCA.
Price fixing is a specific area that associations should be aware of when drafting codes of conduct. What may be intended as recommended pricing structures/methods by an association, may be construed as restricting free market trading through price fixing. The line is blurred between what comprises a recommendation to members as to how prices could be derived or calculated, and that which is nothing more than a prescribed method applied to the industry or profession as a whole to fix, control or maintain prices.
Any contract, arrangement or understanding between members of an association to fix prices is a contravention under the CCA. At least two of the parties to such contract, arrangement or understanding must be parties who are, or who are likely to be, in competition with other. An association that facilitates such an arrangement or which is involved in the restrictive trade practices of members, facilitates an unlawful agreement between members and will be in contravention of the Act.
The constituent documents
An association’s constituent document (i.e. its rules or constitution) may also contain provisions that contravene the CCA. In particular, the membership eligibility clauses of the constituent document must not contain overly harsh or onerous entry criteria that may be construed as imposing barriers to entry into the industry or profession. Such barriers may be interpreted as restricting competition within the sector or market, as well as promoting cartel conduct by limiting outputs in production or the supply of a service or by limiting membership within particular geographic territories.
The constituent document is a contract between the association, its directors and its members. If the membership clauses of the constituent document demonstrate a purpose to restrict output and/or the allocation of customers, suppliers or territories, the parties to that contract will have contravened the civil prohibition under the CCA by entering into a contract, arrangement or understanding with competitors to engage in cartel conduct.
The concept of industry and professional associations suggests a collective, coordinated engagement in the relevant industry or profession for the benefit of both the public and the industry or profession, by members of such associations. There is nothing unlawful about coordinating certain aspects of an industry or profession to provide the public with consistent transactional conduct and interactions throughout the industry or profession. However, associations should ensure that members are aware that if the collective, co-ordinated behaviour transitions into what would reasonably be considered as collusive action, the parties involved may be in breach of the CCA.
One clear example of collusive and conspiratorial activity by competitive members of an association is bid-rigging. Bid-rigging is fraud and is illegal. It is a form of price fixing and market allocation, both of which are activities that are individually prohibited under the CCA.
Professional and industry associations are necessarily set up and organised to provide their members with a forum for collaborative and communicative interaction. Unfortunately, members are sometimes unaware as to when contracts, arrangements and understandings made between them have actually gone beyond what is lawfully permitted and have transformed into collusions and conspiracies that fall foul of the CCA. It is incumbent upon these associations (although they are not legally obliged) to ensure that their members are educated as to when and what actions exceed what is lawful.
Public interest exemptions
Both internationally and in Australia, the laws relating to cartel activities are strictly enforced. Notwithstanding, there are exceptions under the CCA providing for certain cartel conduct to be permitted. Typically, these exemptions are available when it can be demonstrated by the parties that the effect of the cartel conduct is outweighed by the public benefits it will deliver. One such exemption is collective bargaining. Collective bargaining is where two or more competitors make an arrangement between them as to the terms, conditions and/or price of a good or service with a supplier or a customer.
To receive an exemption, the parties, or the industry or professional association on behalf of its members, apply to the ACCC for authorisation to engage in the cartel conduct. The authorisation is proscriptive and, therefore, the ACCC cannot authorise any cartel conduct that has already occurred. The public benefit of the cartel conduct must be clearly demonstrated. Being granted an authorisation provides the parties engaged in the, otherwise illegal, activity immunity from legal action.
The process involves a comprehensive consultation process before the decision to grant or deny the authorisation is made, which can take up to six months to complete. No authorisation will be granted for any activity that the ACCC considers a misuse of market power.
The scrutiny to which industry and professional associations are subject, both in Australia and around the world, in respect of anti-competitive conduct generally and, more specifically, engagement in cartel activities, impose burdens and obligations upon these associations that go beyond merely supporting, encouraging and promoting the efficient functioning of their relevant sectors. Education programs, codes of conduct, constituent documents and policy documents should be developed and implemented to provide association members and its own board, employees and agents with as much information as possible to enable them to accurately assess whether engaging in a particular activity will contravene the relevant provisions of the CCA and attract severe civil penalties (in some instances $10,000,000) or even criminal penalties. The severity of these penalties should serve as a warning to industry and professional associations around the country to maintain vigilance and to exercise caution when engaging with and facilitating communications among their members.