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Stretching the bounds of price fixing?

19 April 2006

The New Zealand Commerce Commission, like its counterpart regulators overseas, has declared open warfare on cartels.  It has just secured a record $3.6 million penalty against Koppers Arch companies in the timber chemicals industry.

Few would disagree that covert, collusive arrangements between competitors to fix prices are unfair to consumers, destructive to the economy and deserve to be condemned. But the Commission’s battlefield goes beyond those type of cartels.  It has the potential to catch in its sweep many joint-venture activities, joint offers and responses to Requests For Proposals (RFPs) which are neither secretive nor typical "cartel" behaviour. 

The issue can arise whenever competitors or potential competitors join together in a joint venture, make a joint offer to supply goods or services, or make a joint response to a RFP.  The last scenario is becoming more common as purchasers increasingly elect to run competitive tender rounds before granting an exclusive supply contract to a single winning party.  Any agreement by suppliers to negotiate jointly needs to be carefully scrutinised.

The problem lies in very broad statutory provisions on price fixing, together with a complex and narrow exception for some types of joint venture behaviour.  The Commerce Commission has developed an interpretation in recent months that narrows that joint venture exception even further – especially where unincorporated joint ventures are concerned.

Funeral Directors’ joint tender

In 2005 the Commerce Commission issued a warning to six funeral directors in the Manawatu region that their behaviour risked breaching the Commerce Act.  The background was that New Zealand Police in the Manawatu region had chosen to reorganise the way in which they obtained services from funeral directors to assist with removing deceased persons from the place of death and transferring them to a hospital mortuary.  These services were usually required on an urgent, after-hours basis and often in quite distressing accident circumstances. 

Historically the funeral directors had operated a roster system to share the burden of providing this "body transfer" service in the region.  The Police decided to let out the contract for these body transfer services via a tender process.

The six funeral directors met and considered how best to respond to the tender.  They reached agreement to submit a joint tender for the contract and agreed upon the prices at which they would tender.  They each put in separate tender documents.  The nature of the joint tender was generally disclosed to the Police, who seem to have indicated that a joint RFP would be acceptable.

The key issue for the Commerce Commission was whether the parties would have individually made a bid if not for their agreement to jointly tender.  The funeral directors argued that they were individually either unwilling or unable to bid for the entire body transfer work throughout the region. 

They argued that this was within the scope of the joint venture exemption in the Commerce Act and that the supply of services was “in pursuance of, and made available as a result of” the joint venture.  The Commission took a very strict interpretation of the exemption.  It formed the view that were it not for the agreement to make a joint bid, the services would have been likely to have been provided individually by each of the funeral directors. 

The Commission concluded that the agreement was at risk of breaching the Act – although only a warning was given because the joint bid was in fact ultimately unsuccessful and the Police had awarded the contract to a different party.

Commission’s narrow interpretation

This strict line of interpretation has since been carried over by the Commerce Commission into analysing tendering situations in other joint RFPs.  In particular, a similar approach has been taken to healthcare markets, where District Health Boards are increasingly seeking to achieve efficiencies by letting out contracts for various services to a single supplier for a period of time. 

The interpretation that the Commission appears to be relying on suggests that if any of the parties to the joint tender or joint offer to supply might have been prepared to do the work or make an independent offer alone, then those parties cannot have the benefit of the joint venture exemption.  That would appear to suggest that companies who have historically at one time competed for supply to a large customer can virtually never choose to combine forces and offer a joint supply in future, even where the buyer may encourage or almost insist upon that.

Prosecution in ophthalmology markets

A similar issue arose in the High Court in 2005 for a group of ophthalmologists in Palmerston North who negotiated jointly with the local District Health Board to provide eye services.  The parties there reached a negotiated settlement with the Commerce Commission which resulted in penalties totalling $85,000 being agreed.  Since the matter did not go to a full contested hearing there was limited discussion of the Commission’s interpretation of the price fixing provision. 

It appears implicit in the Court’s decision that the very stance of negotiating jointly and presenting a collective position to the buyer may itself amount to price fixing, leaving to one side the later issue of whether a contract was in fact concluded with the buyer on terms that included a fixed set of prices.  If that turns out to be the ruling in any later case where the matter is fully argued, there are serious implications for many joint ventures.

The US approach to joint ventures

Help may be at hand from a recent decision of the United States Supreme Court on joint venture pricing.  It must be borne in mind that the statutory provisions are quite different and the case has no direct application as a precedent in New Zealand, but the policy issue it highlights is certainly relevant.

Two oil companies, Texaco and Shell, had formed a joint venture to refine and sell petrol in parts of the USA.  They were no longer competing in the market and the joint venture set a single agreed price for petrol sales (even though two separate brands were still used).

In Texaco v Dagher (28 February 2006), the US Supreme Court unanimously rejected a claim that the single pricing policy was per se illegal as price fixing.  Key points of the Court’s reasoning were that:

  • the companies had ceased competing against each other and were now participating in the market jointly, through their joint venture
  • the pricing policy under challenge amounted to little more than price setting by a single entity and not a pricing agreement between competing entities with competing products.

The pricing went to the core activity of the joint venture itself and should not be condemned as automatically illegal per se.

The situation in New Zealand remains difficult, but two things at least are apparent:

  1. formalising an incorporated joint venture company, rather than a looser unincorporated collaboration, is likely to be preferable
  2. until legal clarification is available, parties who have historically been in competition must tread very carefully in any joint bids or offers to supply.