Risks to industry associations in the current economic climate

With economic trading conditions in New Zealand continuing to deteriorate and inflation currently at a nearly 30-year high, it is vitally important in the current economic climate that industry associations take steps to proactively manage the risk of cartel conduct amongst its membership base and governance team.

What is cartel conduct?

Illegal collusion, or cartel conduct, occurs when two or more competitors agree to coordinate their activities in a manner prohibited under the Commerce Act 1986 (the Act). This illegal conduct can take various forms, including price-fixing, dividing up markets, bid rigging, or restricting the output of goods and services.

The Act contains specific provisions prohibiting cartel conduct, with breaches of such provisions being punishable by fines of up to $10 million or more, and periods of imprisonment of up to 7 years. With such serious ramifications, industry associations should be acutely aware of these provisions and the importance of actively avoiding such conduct.

It is particularly pertinent to note that if an industry association engages in cartel conduct, every member of the industry association is deemed to be a party to the illegal activity. The only exceptions are if a member can show that they had no knowledge of the cartel conduct (and could not reasonably have been expected to have any knowledge), or if the member expressly notifies the industry association that it wishes to be disassociated with the anticompetitive behaviour.

Why has the risk profile changed?

It is well recognised that industry associations inherently present a heightened risk from a Commerce Act compliance perspective, given their membership typically consists of direct competitors.

Conceptually, however, competitors have little reason to collude when business is going well. It is when trading conditions deteriorate that competitors are more likely to discuss the problems their businesses are facing and attempt to solve them collaboratively. These discussions, irrespective of the competitors’ intentions, run the risk of falling foul of the Act’s cartel provisions.

Examples of high-risk activities

  • Discussing commercially sensitive topics: At Board and subcommittee meetings, and get-togethers for members (including social events), care needs to be taken to ensure that discussions do not turn to commercially sensitive topics. Pricing, costs, discounts, margins, payment terms, production volumes, customers, business strategies, and bidding tactics are all high-risk subjects that should be avoided.
  • Coordination of business activities: While it is natural for industry associations to look to develop solutions to challenges members are facing, any solution that involves businesses coordinating their activities carries a high risk of non-compliance with the Act.
  • Advocacy: When undertaking advocacy work, industry associations need to take care not to champion measures or initiatives which, in practice, would have the purpose or effect of substantially lessening competition, or constitute price-fixing output restriction or market allocation.
  • Information exchange: Industry associations sometimes collect information from their members for collation and redistribution back to the membership. This is a high-risk activity, as information sharing between competitors can facilitate the formation and operation of cartels. For this reason, industry associations should be extremely careful when collecting and circulating information to members.
  • Membership criteria and Codes of Conduct: It is essential that industry associations’ membership criteria, rules, terms of reference and codes of conduct do not breach the Act by containing provisions that relate to price-fixing, output restriction or market allocation, or by restricting or reducing business competition in a substantial way. Access to industry associations should generally be granted on non-discriminatory terms, and rules or standards that might affect fees, advertising, permitted business structures or locations of practice should be avoided.

How can we help?

One of the most effective ways for an industry association to manage Commerce Act risk is to upskill its key personnel on New Zealand’s cartel laws. Organising an in-house training session for the Board and senior leadership team is often a good starting point. In addition to demonstrating commitment to compliance (which may be a mitigating factor in the event that a breach of the Act occurs), training sessions can also help industry associations to identify any high-risk activities and areas of potential concern. Lane Neave’s Competition and Consumer Protection Law team run regular training sessions on anticompetitive collusion and cartel criminalisation, and would be happy to speak to your team, either at a location of your choosing, or at our Auckland, Wellington, Christchurch or Queenstown offices. We also contribute articles to newsletters and other industry association publications to help raise awareness of Commerce Act risks.

Industry associations play a vital role in keeping its members safe from the risk of cartel conduct, both by educating members on their obligations under New Zealand’s cartel laws, and by adopting appropriate internal risk management strategies (which can include compliance policies, statements to be read out at the start of meetings, and regular training for members).

If your organisation is a member industry association, it is important to satisfy yourself that the association has appropriate measures in place to ensure Commerce Act compliance. You may wish to ask the association when its key personnel last received Commerce Act training, and what steps have been taken to ensure that the association’s practices comply with New Zealand’s cartel laws.

If you require more information about how the Commerce Act applies to industry associations, please contact the head of the Competition and Consumer team, Anna Ryan on anna.ryan@laneneave.co.nz or 021 117 4940.

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