Legal

By andrew Skinner of Auckland law firm Martelli McKegg

on 8 april 2021 new changes to the commerce act 1986 came into effect which provided that cartel conduct can now be punished with a term imprisonment for up to 7 years

thIS changE BrIngS New Zealand into line with other overseas jurisdictions and reinforces to business owners that they need to take compliance with this area of the law very seriously. This article will outline the types of prohibited cartel conduct with illustrative examples and refer to some recent prosecutions.

what IS cartEL condUct?

Cartel conduct basically refers to illegal co-operation between competitors. The conduct harms customers because it lessens competition resulting in customers having less choice or paying higher prices than if the competitors operated independently. The three types of prohibited cartel conduct are:

„ PrIcE fIxIng „ marKEt aLLocatIng „ rEStrIctIng oUtPUt

Taking each of these types of conduct in turn:

01. PrIcE fIxIng

is where two or more businesses agree on the prices that they will each charge to customers to avoid having to compete with each other on price. One of the important points to understand with price fixing, which is not widely known, is that price fixing may extend beyond setting the specific price for the good or service and also includes competitors agreeing to fix a significant part of the price or to set a price according to an agreed formula.

02.marKEtIng aLLocatIon

occurs when competitors collude to carve up markets so as not to compete for the same customers. This could be in relation to the sale of a specific product, a geographic area or a particular type of customer.

03.rEStrIctIng oUtPUt

is when two or more competitors agree to prevent, restrict or limit the goods or services they are buying or selling or the goods or services that would likely be bought and sold. The financial penalties for cartel conduct are already significant. Individuals can be fined up to $500,000 and companies up to $10,000,000, three times the commercial gain or 10% of the company’s turnover per year when the conduct was occurring (whichever is greater). Now, in addition, businesses and individuals can be liable for criminal conviction and individuals convicted of engaging in cartel conduct could face a term of imprisonment.

how mIght cartEL condUct occUr In thE hIrE IndUStrY?

The types of cartel conduct depicted in movies with smoke filled rooms and secret deals is not what happens in the real world. To provide more context as to how cartel conduct might occur in the hire industry, we describe the following hypothetical examples.

ExamPLE 1: PrIcE fIxIng

The sales representatives of two competing hire companies get to know each other attending various industry functions. The competitors have noticed that customers seem to be especially price sensitive and are often approaching both companies for pricing prior to hiring equipment. Over time this has lead to a gradual decline in margin and this has had an impact on the remuneration of the sales representatives. Over a couple of beers at an industry function, both agree that the margin erosion cannot continue and verbally commit to set daily hire rates. This is illegal cartel conduct known as price fixing.

ExamPLE 2: marKEt aLLocatIon

A new sales representative has recently joined your hire company from a competing business. Your sales representative still has strong contacts and relationships with their previous business. The new sales representative agrees with the sales representatives from their former business not to target the former business’ customers in return for the former business not targeting their customers. This is illegal cartel conduct known as market allocation.

ExamPLE 3: BId rIggIng

A number of large construction companies have been requesting tenders for the hire of various items of equipment for large construction jobs. A group of hire companies get together informally to discuss these tenders and to decide who will win the tender and the prices being submitted. This makes the tender process look legitimate but the bid rigging results in higher prices for the construction company and predetermined winners. This is illegal cartel conduct known as bid rigging.

Whilst the above scenarios are hypothetical, they illustrate potential scenarios where hire companies may breach the Commerce Act. Often these arrangements develop over time and staff can be somewhat oblivious to the potential problems they are creating.

rEcEnt ProSEcUtIonS

One of the most recent high profile cases involving price fixing was the prosecution against two Hamilton based real estate companies for engaging in price fixing in breach of the Commerce Act. The Commission’s case centred on the real estate agencies so called “vendor funding” model whereby the Hamilton agencies agreed to no longer to meet the costs of Trade Me property listings for their vendors. Instead, the default position would be that the seller of the property or their agent would pay. Thirteen companies and three individuals have been ordered to pay a total of nearly $23,000,000 in penalties related to this case.

PharmacY PrEScrIPtIon chargES

In 2020 the High Court ordered Prices Pharmacy 2011 Limited and its director to pay fines of $344,000 and $50,000 respectively after they admitted engaging in price fixing in breach of the Commerce Act. The arrangement arose from a Nelson Region pharmacy owners meeting in April 2016 which was attended by 10 pharmacy owners. In most cases, the arrangement resulted in consumers paying $6, instead of $5, for filling their prescription items.

PractIcaL tIPS for BUSInESSES

In light of the new law change, hire companies need to pay particular regard to this area of compliance. Hire company owners need to make sure that they and their staff are familiar with the requirements of the Commerce Act and receive proper training which is relevant to their business and easily understood. ■

Andrew Skinner has over 20 years of experience as a commercial lawyer and is a partner in the Auckland firm Martelli McKegg. Andrew’s phone number is (09) 300 7622 and his e-mail address is andrew.skinner@martellimckegg.co.nz. This article is not intended to be relied upon as legal advice.

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