The Commerce Commission is concerned that many businesses do not realise that collusion, or attempted collusion, over pricing is a major breach of the Commerce Act and is a serious economic crime.

The Commission's Commerce Act Manager, Jo Bransgrove, was speaking at the Purchasing Supply and Logistics Conference in Auckland.

"Most businesses realise that the Commerce Act prohibits collusion over prices, but many do not understand how serious such a breach is," Ms Bransgrove said.

Courts can impose penalties of up to $5 million on organisations and $500,000 on individuals. They can also impose a wide range of injunctions and orders.

"Collusion over prices is fundamentally anti-competitive. It strikes at the very heart of the competitive process by preventing competition over prices.

"If buyers collude, then suppliers are paid less. If sellers collude then customers pay more.

"Prices should be determined by healthy competition among suppliers, sellers and customers, and not by arrangements between industry players."

Ms Bransgrove said that the invitation to speak had been most timely. On Wednesday the Auckland High Court ordered nine North Island meat companies to pay more than $5.5 million in penalties for their part in anti-competitive arrangements relating to the prices they would pay farmers for livestock.

On Friday the Christchurch High Court imposed penalties and costs totalling $400,000 on Christchurch Transport Limited and its Chief Executive for attempting to rig bids for tenders for Canterbury Regional Council bus routes.

There is a further major pricing cases before the courts, involving Shell, Mobil and Caltex, alleging that the colluded to remove discounts from the sale of petrol in Auckland.

In her speech Ms Bransgrove explained the role of the Commission and what the Act states. One of the areas on which she focused was the exemptions under the Act for joint venture pricing, joint buying and advertising and for practices that have been authorised.

However, she warned that labelling an arrangement a "joint venture" or a "joint buying" scheme does not automatically exempt the practice from the Act.

The Act is complex, and Ms Bransgrove advised that before relying on any of the exemptions, businesses should get legal advice to make sure that they apply to their specific case.

Copies of Ms Bransgrove's speech are available from reception at the Commission's Wellington office, floor 7, Landcorp House, 101 Lambton Quay and from the Commission's web site, www.comcom.govt.nz, where they are attached to this media release.

Media contact: Commerce Act Manager Jo Bransgrove

Phone work (04) 498 0958

Communications Officer Vincent Cholewa

Phone work (04) 498 0920

Commission media releases can be viewed on its web site www.comcom.govt.nz

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INTRODUCTION

My objective today is to discuss in general terms:

? the role of the Commerce Commission;

? the provisions of the Commerce Act; and

? how the Commission enforces this piece of legislation.

Part of the Commission's role is to inform people about the Commerce Act so I welcome this opportunity of speaking to you today.

?Overhead 1

The Commission's General Role

The Commission is an enforcement agency whose primary role is to bring about awareness, acceptance and compliance with the Commerce and Fair Trading Acts.

The aim of the Commerce Act is to promote competition in New Zealand markets. The rationale behind this is that if the marketplace operates competitively, consumer welfare will be promoted. The underlying concept is one of efficiency.

The Commerce Act came into effect as a key piece of regulation in a large range of measures designed to reform the economy in the 1980s. An important purpose of the reforms was to allow competitive market forces to play a much greater role than in the past in determining economic developments and resource allocation, and to form a key element in the "light-handed" regulation policy for network and similar industries.

The Commission has a role in monitoring structural changes of, and behaviour in, markets in New Zealand. The Commission is not a policy body. It does not tell firms how to behave or how to organise themselves within a market.

?Overhead 2

Specifically the Commission:

? assesses business acquisitions;

? attacks anti-competitive behaviour; and

? monitors "monopoly" pricing.

THE COMMERCE ACT

The key sections of the Act dealing with anti-competitive behaviour are:

?Overhead 3

? Section 27, which prohibits any contract, arrangement or understanding which has the purpose or effect of substantially lessening competition in a market. This section covers such practices as market sharing, price fixing, and other collusive behaviour among competitors.

Example: In 1994, 6 milk companies paid penalties totalling $350,000. They admitted that during the deregulation of the milk industry they had worked together to try to reduce the competition that deregulation aimed to introduce.

?Overhead 4

? Section 29, which prohibits a range of actions by competitors which restrict a rival from acquiring or supplying goods or services, such as:

? A group of competitors banding together and threatening a supplier so that they stop supplying a rival business with goods or services; or

? A group of suppliers threatening a business so that it stops buying from a competing supplier.

Example: In 1994 a group of real estate companies and agents paid penalties totalling $62,800 after admitting in the High Court in Wellington that they had threatened to boycott a property guide published by the Marlborough Express if a rival agent was allowed to advertise in the guide. The rival had reduced the commission it charged when it sold properties.

?Overhead 5

? Section 30, which deems that arrangements that lead to prices being fixed among competitors are in breach of section 27.

Example: Representatives of two large bakeries met at the Bakers' Association annual general meeting. They discussed the high levels of discounting in the South Island and the policies they had previously and independently developed to control discounting. They then sent instructions to their South Island management. These instructions stated their respective policies listing maximum discounts and stated that the policy was to be strictly adhered to. In court the companies admitted that the arrangement between them breached section 30 of the Act. Penalties of $150,000 were imposed against each company.

The Commission is also involved in court action against 12 North Island meat companies and 21 individuals which it alleges were involved in a long-standing arrangement to fix the prices paid to farmers for livestock.

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? Section 36, which prohibits unilateral anti-competitive conduct by a dominant firm. Trade practices that might constitute an abuse of a dominant position and therefore breach s 36 of the Act include:

? charging below cost for a good or service for the purpose of eliminating competition;

? refusing to deal with suppliers which sell to competitors; and

? requiring customers to deal exclusively with it.

?Overhead 7

? Section 37 & 38, which prohibits vertical price fixing, otherwise known as resale price maintenance. This can take the form of suppliers trying to enforce prices at which goods may be sold by other businesses.

Example: A computer retailer began vigorously advertising computer equipment at discounted prices. The computer supplier objected to the discount advertising and also advised the retailer of complaints from other retailers. The supplier terminated the retailer's agency when the discount advertising continued. The Commission took court action and a penalty of $35,000 was imposed on the supplier.

?Overhead 8

Arrangements do not have to be formal contracts. Informal understandings, which could be as simple as a discussion over coffee, are covered too. It is possible that this puts informal networks at greater risk of breaching the Act because, usually, more planning and legal consideration goes into a formal arrangement. It is more likely that any Commerce Act issues would become apparent as the formal arrangement is developed. To help stop informal arrangements breaching the Act, the legal issues must be considered before the arrangement is put into effect.

Where a formal group or association of some kind is formed, each member is liable for any breach of the Act by the group. A member must have actively disassociated itself from the activity to remove its liability.

It is also worth noting that anyone - be they a customer, a competitor or the Commission - can take action under the Act.

EXEMPTIONS

There are a small number of actions, which are exempted from the trade practices prohibitions. None are industry specific. Some are, however, more relevant to the subject of this conference than others. Two specific exemptions that I want to talk about today are:

?Overhead 9

? Section 31 - Joint Venture Pricing

Section 31 provides an exemption from section 30 for some aspects of a joint venture's activities. This means that, in some situations, where two or more people or businesses jointly manufacture a good or supply a service, they may fix prices for the goods and services that the joint venture deals in.

Example: Two competing manufacturers form a joint venture to make a new product and, while the joint venture remains in place, agree to sell the product at the same price.

?Overhead 10

? Section 33 - Joint Buying and Advertising

In some situations, where two or more people or businesses jointly buy goods and services and advertise them for resale, they may agree to advertise and resell those goods and services at fixed prices.

Example: Several competing grocers agree to buy a large volume of canned fruit in a special deal with a wholesaler and promote it at a fixed price.

The key point to note is that these exemptions apply only to section 30 of the Act, leaving joint ventures exposed to all the other provisions of the Act. They would not, for example, apply to price fixing between competitors which resulted in a substantial lessening of competition under section 27 of the Act. So if a group of competitors who used a single entity to negotiate goods were able to force the price of those goods down below the pre-existing level, it is likely that the buying group would have such market power to expose themselves under s 27 of the Act.

The Commission is unlikely to take action against the normal type of joint buying and promotion group. Such groups usually consist of small traders who, by combining their purchases and engaging in joint promotional activity, can compete more effectively against larger competitors. This may increase, not decrease, competition. Two types of buying groups, however, are likely to come in for special scrutiny:

(a) large-scale buying groups involving a substantial number of competitors in the industry as a whole or in a particular geographic area; and

(b) buying groups whose members are the major purchasers of a particular product or service.

?Overhead 11

The solution for those considering a joint venture which might result in a substantial lessening of competition in the relevant market, is to seek authorisation from the Commission prior to entering into the joint venture. The Commission has received only a handful of applications for authorisations of strategic alliances, including:

? The Weddel application, where a consortium of meat processors wished to collectively acquire and close the meat processing plants previously operated by Weddel; and

? The application by the four RHAs to jointly purchase all services for liver transplants in New Zealand.

The Commission does not come across many joint ventures in its day-to-day operations. This is due largely to the fact that there are business structures that firms wishing to co-operate appear to prefer. More typically, companies who wish to work together merge completely but we expect more joint venture applications as companies attempt to take advantage of the synergies available through working together.

If any of you are considering entering into any type of strategic alliance, I would say two things. Firstly, anti-competitive behaviour is not a good strategy. It will restrict your own opportunities, as well as your competitors'; it will invariably fail or you will be caught; and enforcing your alliance will probably be more costly than any benefits received from it.

Secondly, remember the penalties under the Act. The Court is increasingly willing to use those penalties, as was shown by the Port of Nelson case, where penalties and costs imposed on the port company were $825,000. In addition, I would confidently expect that the cost to the port company of running the litigation was well in excess of that figure. Add to that the cost to your firm's reputation, and it should be clear that the smart strategy is to avoid alliances that might lead to allegations of anti-competitive collusion.

COMMISSION PROCEDURES AND COURT PENALTIES

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An assessment of the competitiveness of markets and the need for the Commission to act is undertaken on a case by case basis in light of the prohibitions spelled out in the Act.

As an enforcement body, there is not normally a role for the Commission as an arbiter or mediator of disputes between parties involving practices, which may breach the Act. The Commerce Act does not include the concept of fairness or protection of individuals. It is the competitive process, not individual competitors, that are protected by the Act and, accordingly, there may be those who suffer in markets without a breach of the Act having occurred.

The Commission has, at times, been criticised by firms, which consider that the Commission is not doing enough, or has not enough resources, or is not investigating some particular matter, which has been the subject of a complaint. Significantly, these criticisms are not made by firms, which have been investigated by the Commission.

A discussion of the Commission's procedures may assist in clearing up any misconceptions about the Commission's approach to its enforcement role.

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The Commission may act on information received from complainants, but it can also act on information it receives from any other source. When the Commission receives a complaint, it passes through a screening process to determine what action, if any, is appropriate. In terms of the Commerce Act, the first stage of that screening process (which takes about two days) is whether there is a prima facie breach of the Act. If the complaint doesn't pass that test, then obviously the Commission takes no further action. The majority of complaints received by the Commission in the last three years have been screened out on the basis that they did not disclose evidence of a likely breach.

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However, even if the complaint reveals a prima facie breach of the Act, the Commission may take no further action if, on balance, the investigation criteria employed by the Commission in the second stage of the screening process are not met. These investigation criteria include the following:

? Whether the complainant is taking, or is likely to take, private action. The statute and Parliament always envisaged that, in some instances, private action under the Act would be more appropriate than publicly funded enforcement. If the complainant is well funded, and its complaint refers to a dispute between itself and another well-funded party, it may be that the Commission (and hence the taxpayer) need not get involved in order for the Act to be effectively enforced. An example of this was the long running litigation between Clear and Telecom regarding local access interconnection, where the Commission could see no public gain arising through its involvement.

? Another criterion relates to the economic significance of the alleged breach of the Act, and the market in which it is claimed to have occurred. Generally complaints about relatively minor and isolated incidents would be screened out under this criterion.

? The precedent value of any penalty action which may result from a successful investigation is also considered as are the level of publicity expected from an investigation and its educative impact on the industry being examined.

? The reliability and level of co-operation that the complainant and other witnesses exhibit is also very important. On some occasions, a complainant might indicate that a Commerce Act issue exists, but refuse, either through fear of repercussions or for other reasons, to provide evidence to back up its complaint. This may effectively handicap a Commission investigation, as the best evidence of a breach of the Act will usually come from a person affected by that breach. Specific examples of this are not easy to provide as the complainants are treated confidentially, but Commission staff have screened out a number of complaints over the past three years because further information was not forthcoming.

? Further, the alleged 'offender' may have ceased to behave in an allegedly anti-competitive manner when it became aware of the allegation against it. This will be taken into account in mitigation of a complaint.

Should a complaint pass the screening process, it goes to investigation. This can be a long and painstaking process, which often frustrates complainants and others. However, an investigation is necessarily time-consuming as the issues involved are often complex and require the gathering and analysis of large amounts of detailed information. The complainant (if any) and others form whom information is sought do not always supply requested information expeditiously. While the Commission attempts to conclude investigations as soon as practicable, they may take up to a year or more.

?Overhead 15

If, at the end of an investigation, the Commission finds that there is likely to have been a breach of the Act, it has a number of options, the most obvious of which is taking court action in the High Court. The penalties for a breach are significant (up to $5 million for an organisation and up to $500,000 for an individual) and the Courts are showing an increasing tendency to impose higher penalties on offenders.

Again, this can be a time-consuming and costly exercise. The Commission has experienced difficulties gaining hearing times that are reasonably proximate in time to alleged breaches of the Act. It has also faced numerous interlocutory applications that delay proceedings until the eventual outcome is less relevant than it might have been. Even though the Commission attempts to work efficiently to gain pro-competitive outcomes, opposing parties, and inefficiencies inherent in the court process may sometimes limit its effectiveness more than we would like.

?Overhead 16

Given the resources involved, and the cost to the complainant and the economy in terms of delay that can result from attempting to take court action, the Commission also considers giving warnings, or entering into settlements, with persons who appear to have breached the Act.

A warning is a written indication to a person that, if they continue to behave in a certain manner, they will be at risk of breaching the Act. A settlement usually involves a party formally agreeing with the Commission that it will alter particular elements of its behaviour to ensure that it is no longer at risk under the Act. The effects of all warnings and settlements are monitored, and a second chance is not usually offered.

CONCLUSION

?Overhead 17

To conclude, I would emphasise that an important feature of the Commerce Acts is that anyone can take their own legal action, irrespective of whatever the Commission does or does not do.

It is becoming increasingly common for companies to take action for damages against a competitor who they believe may have broken the law.

Customers and even people who were not directly affected by the behaviour can also take legal action.

That can be to the Disputes Tribunal, to courts, ombudsmen or through other trade or professional organisations.

I have talked a lot about what the Commission can do, the law and court actions. But one of the most important things the Commission can do is talk to you. We cannot give you legal advice, but we can give your our interpretation of the law. If you are unsure about a business practice, talk to the Commission or your legal adviser.

If, following a complaint or one of our surveillance programmes, you are investigated and warned about a business practice, consider it to be advice. Warnings are intended to be educative.

Our objective is compliance with the law. When necessary, we will take court action, but there are better ways for everyone concerned for compliance to be achieved.