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Commerce Commission guidelines on collaborative activity exemption

02 October 2013

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​The Commerce Commission yesterday issued draft Competitor Collaboration Guidelines with a view to having them finalised and ready to go before the Commerce (Cartels and Other Matters) Amendment Bill, now awaiting its second reading, is passed.

How the new Act is applied, particularly the exemption for collaborative activities, will be key to the new regime’s workability and responsiveness so it is important that the Commission gets this right.

Submissions close on 12 November 2013.  We are happy to help. 

The Competitor Collaboration Guidelines explain and seek feedback on the Commission’s proposed approaches to:

  • the new prohibition on cartel provisions, which will replace the current price fixing prohibition
  • the exemptions for cartel provisions for vertical supply, joint buying and (most importantly) collaborative activities, and
  • administering the clearances and authorisations regime.

New cartel provision

The cartel prohibition applies to any arrangement between competitors that has the purpose, effect or likely effect of fixing prices, restricting output or allocating markets.  This is similar to the current position under the price fixing prohibition, and the civil penalties regime will remain the same.

The key difference is that criminal sanctions of up to seven years in prison will apply, alongside the current civil penalties, from two years after the Amendment Act comes into force.  The revised Enforcement Response Guidelines, outlining how the Commission will enforce its consumer and competition legislation, were released yesterday.

The Cartel Leniency Policy, which describes when immunity may be granted to people who report cartels in which they are involved, will continue.

Exemptions

If you enter into an arrangement which contains one or more “cartel provisions”, the provision(s) may be within an exemption.  The vertical supply and joint buying exemptions are substantially the same as under the current law.  The big area of change and, in our view, the pivot on which the new Act will succeed or fail is…

…the collaborative activity exemption

This provides important flexibility which is not available under the current New Zealand law, nor under the Australian regime.  A collaborative activity is an enterprise, venture or other activity in trade that:

  • is carried on in cooperation by two or more persons, and
  • is not carried on for the dominant purpose of lessening competition.

Legitimate reasons identified by the Commission for entering into collaboration are to:

  • allow the participants to combine their different capabilities and resources so as to improve their ability to compete – e.g. providing technical expertise to improve another party’s manufacturing process in ways which either lower the cost or improve the quality of the product
  • attain economies of scale or scope beyond what either could achieve individually
  • achieve an environmental, health and safety or other social welfare purpose unrelated to their individual or collective competitiveness.

The draft guidelines state that, where the parties cannot demonstrate why they are collaborating, “there is a high risk that we or a court will infer that their dominant purpose is to lessen competition”.

Clearances

New clearances will be available from the Commission which can give applicants certainty that the Commission does not consider the cartel provision to be unlawful.  A clearance will be granted only if three criteria are met:

  • the application relates to a collaborative activity that has not yet been entered into or given effect to
  • every cartel provision in the arrangement is reasonably necessary for the purpose of the collaborative activity, and
  • entering into the arrangement will not substantially lessen competition in a market.

Clearance will not be available for past conduct, regardless of whether it would fit within the collaborative activity exemption.  You may want to consider undertaking a health check of existing practices before the Amendment Act comes into force.

To gain the exemption each cartel provision must be “reasonably necessary” for the purpose of the collaborative activity.  The Commission’s working definition for “reasonably necessary” is if the parties would be “materially hindered” in achieving the collaborative activity’s purpose if they used a significantly less restrictive but still practically workable alternative.  The Commission will not apply a “but for” test but will make a “pragmatic and commercial assessment” as to the level of material hindrance which would be incurred without the arrangement. 

The Commission’s interpretation of “reasonably necessary” makes reference to relevant guidelines from the United States, which means that the exemption in New Zealand will likely evolve to reflect experience in the United States.

Applicants will be expected to provide evidence to support their explanation for why the collaboration is necessary, including the pro-competitive or benign outcomes it will achieve.  They will need to be able to explain why other alternatives are unavailable or inadequate and will need to be able to justify the necessity of the time frame and geographical scope over which the cartel provision will apply. 

As well as evidence about the collaboration, applicants for clearance will need to show that the arrangement will not substantially lessen competition in a market - equivalent to the current test for clearances under section 27.  Whether parties will be comfortable engaging in a formal public process around commercial arrangements which otherwise would be expected to be confidential remains to be seen. 

Authorisations

The authorisations regime is unchanged from the current Act, and is outlined in more detail in the Authorisation Guidelines.

Our thanks to Sebastian Templeton for writing this Brief Counsel. 

For further information or assistance in writing a submission, please contact the lawyers featured.

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