Let's Talk Law: Covid 19 coronavirus and cartels

Issues can arise when business communities fix prices. Photo / supplied

Just as things were looking up for 2020, Covid-19 really has thrown a spanner in the works.

And as if you don't have enough on your plate to remember (cue washing your hands for 20 seconds, panic buying toilet paper, and, the buzzword of the moment: "social distancing"), there's more.

Cartel conduct.

Yep, add it to the list.

One of the quirks of natural disasters and their aftermath is the rise of anti-competitive conduct by businesses.

This makes sense too: in trying times, everyone scrambles about trying to make sense of the new normal.

Businesses do this too. We all seek guidance and support from our communities to figure out just what it is we should be doing.

But issues can arise when business communities do the same thing – particularly when they are in competition with one another.

Take, for instance, the current shortage of toilet paper.

Harriet Young

Imagine if your local supermarkets agreed between themselves that each roll would be sold for $5. (Just to be clear – this is a thought experiment and not what is actually happening.)

This price-fixing agreement would impact you as a consumer because you would either have to fork out your hard-earned cash (only then to literally flush it down the loo), or otherwise you would have to forgo an essential household item.

While some creative folk out there may be able to adapt to a paper-free toiletry situation, we can all agree this would be, at best, sub-optimal.

And it's not just price-fixing that businesses need to watch out for.

Businesses should also be wary of restricting output.

For instance, agreeing with your competitors that you will limit supply of the goods or services you supply.

There might be good reason for this – for instance, limiting panic purchasing of essential products – but businesses should exercise caution if they choose to go down this path.

The Commerce Commission polices cartel conduct in New Zealand and is experienced at paying close attention to markets in the aftermath of tumultuous events.

The rebuild following the Christchurch earthquakes is a good example of this.

The commission invested significantly in upskilling businesses – predominantly construction companies – on how to avoid falling foul of the Commerce Act.

In this instance, one of the main concerns was bid-rigging – where competitors covertly arrange how tenders will be divvied up among themselves.

Bid-rigging can fix prices and allocate markets – both of which are cartel activities prohibited by the Commerce Act.

Even if businesses don't realise they are engaging in cartel conduct, the penalties can be eye-watering.

For example, in 2014 real estate agencies across the country responded to a sudden increase in advertising costs by reaching an industry agreement.

This resulted in many real estate businesses – big and small – paying millions of dollars' worth of penalties. And, from April next year, penalties could involve up to seven years' imprisonment for complicit individuals.

So how can businesses get the support they need without breaching the rules?

Treadwell Gordon

A good first start is to consider whether any information you wish to share with a competitor is confidential.

As a rule of thumb, sharing confidential information with a competitor rings alarm bells.

Likewise, any agreement reached between competitors should be conditional on legal advice.

If an agreement is conditional on legal advice, don't take steps to follow through with it before the advice is sought.

And make sure your advice is good legal advice.

Unfortunately bad legal advice won't get you off the hook – it will only be one of the many factors considered when determining penalties.

However, the law isn't a complete ass.

It recognises that in some situations competitors have good reason to collaborate with one another, and that sometimes the collaboration will require cartel conduct.

These are called "collaborative activities". The first hurdle these activities must pass is that competitors must not be engaging in these activities for the dominant purpose of reducing competition.

The second hurdle is that any cartel provision contained within the collaborative activity must be reasonably necessary for the purpose of the collaboration. Sound complex? It is.

And has it been tested? Unfortunately not.

To boil it down to its essence, it seems to suggest that if competitors collaborate with a beneficial purpose, and the collaboration needs a cartel provision to achieve that beneficial purpose, then the cartel provision will be permitted.

A recent media release from the commission with respect to the rapidly unravelling Covid-19 outbreak reiterates this message.

Anna Rawlings, chairwoman of the commission, says, "If you need to work with your competitors to share staff or distribution networks or take other measures to ensure security of supply, you are able to do this."

This has two caveats: first, you must be a provider of essential goods and services. Second, businesses must not use Covid-19 as an excuse for non-essential collusion or anti-competitive behaviour.

While it's a thoughtful gesture from the commission, reasonable minds may differ as to what constitutes an essential product, or where the bounds of essential collusion lie.

So, agreeing to sell toilet paper at $5 per roll would likely be seen as rampant profiteering, whereas agreeing to limit purchases to two rolls per person may be seen as a permitted public health measure.

But then again who knows – we're in unchartered territory, both legally and globally.

Our advice: stay safe and be sensible. Your business might end up with more aches and pains than Covid-19.

•Harriet Young is one of the law column writers from Treadwell Gordon.