Australia: The Cartel Conduct Provisions 1 Year On – What Has the Change been For Franchised and Dealer Networks?

Franchising Focus
Last Updated: 5 October 2010
Article by Greg Hipwell


The key "cartel conduct" amendments (Cartel Provisions) to the Trade Practices Act 1974 (Cth) (TPA) came into effect last year on 24 July. The amendments criminalised "cartels", which in ordinary terms are any competitors that form a syndicate to regulate price or the distribution or sale of products or services within a specific market.

In this article we look at the Cartel Provisions and their implications for participants in franchised and licensed dealer networks, and ask:

  • what are the Cartel Provisions
  • what have been the practical implications of the Cartel Provisions for the day to day operations of such networks, and
  • should such networks have changed their practices since the Cartel Provisions were enacted?

Executive Summary

In short, the Cartel Provisions have not significantly changed what businesses involved in the management of franchised or licensed dealer networks can and cannot do. That is, the pre-amendment regulation of prices, dealings with competitors, and the regulation of the sale and distribution of products and services, still stand and have been largely unchanged by the amendments. What has changed significantly however, are the penalties applicable for engaging in cartel and related conduct.

What are the Cartel Provisions?

The Cartel Provisions prohibit parties from creating or giving effect to a contract, arrangement or understanding that includes a "cartel provision", and renders parties that do so liable to criminal sanctions. These amendments to the TPA addressed perceived inadequacies in the act, by augmenting the existing civil penalty regime with more serious criminal sanctions.

In this article, in the context of franchised and licensed dealer networks, we have:

  • outlined what constituted prohibited conduct prior to the enactment of the Cartel Provisions and how manufacturers, distributors, franchisors and licensors legally operated within this structure
  • outlined the conduct that is prohibited by the Cartel Provisions, and whether or not the Cartel Provisions have or should have altered the day to day practices of manufacturers, distributors, franchisors and licensors
  • highlighted the increased penalties for engaging in cartel conduct, and
  • provided a checklist of key points that manufacturers, distributors, franchisors and licensors should be aware of regarding the Cartel Provisions.

Prohibited conduct prior to the Cartel Provisions

Cartel conduct was prohibited by the TPA prior to the enactment of the Cartel Provisions, by virtue section 45. This section prohibits a corporation from making or giving effect to a contract, agreement or understanding (CAU) that does either or both of the following:

  • The CAU contains an "Exclusionary Provision"

    "Exclusionary Provision" is an umbrella term. It encompasses any CAU between competitors that has the purpose of preventing, restricting or liming the supply of goods or services to, or the acquisition of goods or services from, particular persons, by a party to the CAU (or its related body corporate).

    Put simply, an Exclusionary Provision is an agreement between competitors that results in practices such as market sharing (e.g. sharing customers based on geographical territories), or restricting output (for example, supplying goods on the condition that the purchaser does not on-sell the goods to certain categories of customers, or sell the goods below or above a specific price).
  • The CAU has the purpose or effect of substantially lessening competition in the relevant market

    This is a form of "catch all" provision that is aimed at any capturing anti-competitive conduct that does not fall within the definition of an Exclusionary Provision.

    Section 45A of the TPA also provided that any CAU that had the purpose or effect of fixing, controlling or maintaining prices, discounts, allowances, rebates or credits, was deemed to have the effect of substantially lessening competition. This practice is commonly known as "Price Fixing". (As discussed below, section 45A has now been repealed, but the prohibition on Price Fixing is replicated in the new Cartel Provisions).

CAUs do not need to be written, and can comprise an oral agreement or understanding implied from conduct.

As "per se" offences, the provisions outlined above could be breached without the relevant person or company intending to do so, or having any knowledge that they were doing so. Whether or not an Exclusionary Provision actually resulted in a substantial lessening of competition in the relevant market was also, and continues to be, irrelevant.

How franchised and licensed dealer networks navigate section 45

Most forms of distribution and franchise structures will not breach section 45 because either the:

  • franchisor and franchisees do not compete with each other, or
  • CAU does not result in a substantial lessening of competition within a specific market.

However, most distribution and franchise agreements contain provisions which on their face would amount to Exclusionary Provisions if the franchisor and franchisee, or manufacturer and dealer, were competitors. For example a:

  • distribution agreement may stipulate that the manufacturer will only supply goods to the dealer if the dealer does not purchase similar goods from the manufacturer's competitor, and
  • franchise agreement may prohibit a franchisee from:
    • acquiring products from suppliers that have not been approved by the franchisor, and/or
    • servicing customers located outside of the territory allocated to the franchisee.

If, in the above examples, the franchisor operates company outlets, and the manufacturer (or its related bodies corporate) had a wholesale or retail arm, they may compete with some or all of their franchisees and dealers, respectively. Accordingly, for the purposes of section 45, the relevant distribution and franchise agreements would comprise CAUs between competitors that contain an Exclusionary Provision.

However, the law recognises that such arrangements, despite giving effect to Exclusionary Provisions, often have a legitimate commercial purpose and provide a public benefit that outweighs any anti competitive effect. For example, such restrictions in a franchising context often enhance competition by enabling a network of small businesses operating under a common brand to compete effectively with larger corporations. A franchisee that has an exclusive territory can compete against other brands in the knowledge that their efforts will not be undermined by other members of the network.

The TPA has specific sections that deal with such practices and permit them in specific circumstances. For example:

  • agreements between a supplier and a reseller regarding the price at which the reseller will on-sell goods are permitted, provided that a maximum and not a minimum price is stipulated (see the "Resale Price Maintenance" provisions in section 48), and
  • restrictions imposed by a supplier (e.g. a franchisor) regarding the:
    • types of customers that another party (e.g. a franchisee) can service, or the areas in which that party can operate its business, are permitted provided that the restriction does not have the purpose or effect of substantially lessening competition in the relevant market, or
    • conditions under which the supplier will supply goods and services to another party (e.g. a franchisor may only supply its services as franchisor to a franchisee on condition that the franchisee acquires goods from a nominated 3rd party supplier), are permitted provided that the franchisor has first notified the conduct to, or the conduct was authorised by, the Australian Competition and Consumer Commission (ACCC).

(see the "Exclusive Dealing" provisions in section 47 of the TPA). However, this creates a degree of "overlap" between those provisions of the TPA that are flexible in their application (e.g. Resale Price Maintenance and Exclusive Dealing), and those provisions of the TPA that contain absolute or per se prohibitions (e.g. Price Fixing and Exclusionary Provisions). How does the TPA resolve these inconsistencies? It does so via what is referred to as the anti-overlap provisions.

The Anti-Overlap Provisions

The anti- overlap provisions, prior to the introduction of the Cartel Provisions, were found in sections 45(5) (in relation to Resale Price Maintenance) and 45(6) (in relation to Exclusive Dealing arrangements). The effect of the provisions was to give precedence to the provisions that regulate the vertical aspect of the relationship over the provisions that regulate the horizontal or competitive aspect of the relationship.

Prior to the introduction of the Cartel Provisions, the setting of a maximum resale price by a supplier above which the reseller was prohibited from selling a particular product or service would breach section 45A (Price Fixing), if the supplier competed with the relevant reseller. However, the same conduct did not offend section 48 (Resale Price Maintenance), as the reseller was setting a maximum and not a minimum resale price. Ultimately, under section 45(5), the conduct was permitted on the basis that section 48 took precedence over section 45A.

The sections regarding Price Fixing have been altered by the Cartel Provisions, with the result that price fixing is now only dealt with by the Cartel Provisions (i.e. section 45A has been repealed). However, the principles underlying the operation of the anti overlap provisions in section 45 have been replicated and have the same effect on the operation of the Cartel Provisions.

It is important to note that the Price Fixing anti-overlap exemption only applied where there was a supply of goods or services by a party (e.g. a franchisor or manufacturer) to another party (e.g. a franchisee or dealer) who directly resold them. In many distribution networks there is no direct supply of goods or services by a franchisor/manufacturer to a franchisee/distributor for resale. Where there was no resale, the Resale Price Maintenance exemption to Price Fixing did not apply, and any CAU (whether as to maximum or minimum prices) between the competitive parties, was prohibited. However, genuine recommendations as to resale prices were, and are still, permissible.

The anti-overlap provisions regarding Exclusionary Provisions continue to operate the same way pre and post the enactment of the Cartel Provisions. These provisions state that if a CAU contains an Exclusionary Provision, but could also comprise one of the types of "Exclusive Dealing" described in section 47, that it will only be subject to the provisions of section 47. This means that conduct that would otherwise be caught by the definition of an Exclusionary Provision (and therefore per se illegal), will be permissible by virtue of the application of section 47 if it:

  • does not have the purpose or effect of substantially lessening competition in the relevant market; or
  • was authorised by, or notified to, the ACCC, and the ACCC deemed that the likely public benefit arising from the conduct outweighed the likely public detriment flowing from the anti-competitive arrangement.

A franchisor or manufacturer must have a significant market presence to be in a position to enter an arrangement that will substantially lessen competition within a market. There are, accordingly, numerous instances where the "exception" for Exclusive Dealing arrangements apply to what would otherwise have been an Exclusionary Provision, and therefore prohibited absolutely.

There is also an overarching exception for Exclusionary Provisions contained in CAUs between related bodies corporate (see section 45(8) of the TPA).

Prohibited conduct after the introduction of the Cartel Provisions

The key function of the Cartel Provisions was to criminalise "cartel conduct". "Cartel Conduct" is defined in section 44ZZRD of the TPA to be any provision of a CAU that has any of the following:

  • The purpose or effect of fixing, controlling or maintaining (or providing for the fixing, controlling or maintaining) of prices, discounts, allowances, rebates or credits

    This restriction applies to the price of goods or services to be supplied by or to the parties to the CAU, or to be supplied by re-sellers that were supplied by parties to the CAU.
  • The purpose of preventing, restricting or limiting production or supply by parties to the CAU
  • The purpose of allocating customers or otherwise sharing markets

    This restriction captures the imposition of restrictions on persons that may acquire goods or services from, or supply goods or services to, the parties to the CAU (including territorial restrictions).
  • The purpose of rigging bids and tenders

The relevant CAU must also be made between parties that are competitors, or would, but for the CAU, be competitors. (For example the CAU might give effect to a joint venture agreement between parties that would otherwise be competitors).

How franchised and licensed dealer networks navigate the Cartel Provisions

Cartel Conduct encompasses much of the same conduct as the prohibition on Exclusionary Provisions in section 45. Whilst the Cartel Provisions repealed section 45A (meaning that Price Fixing is now only dealt with by the Cartel Conduct provisions), the remainder of section 45 was left otherwise unchanged. This means that the Cartel Provisions have created a parallel enforcement regime, whereby anticompetitive conduct can be pursued under section 45 (where civil penalties apply), and/or as Cartel Conduct (where both criminal and civil penalties apply).

Sections 44ZRR and 44ZZRS replicate the previous anti-overlap provisions of section 45, and state that conduct that can be assessed under the Resale Price Maintenance or Exclusive Dealing provisions, as well as the Cartel Provisions, must be assessed under the Resale Price Maintenance or Exclusive Dealing provisions.

The Cartel Provisions, similarly to the provisions dealing with Exclusionary Provisions, contain an exception for Cartel Provisions contained in CAUs between related bodies corporate (see section 44ZZRN).

Penalties and the differences between the civil and the criminal regimes

The TPA does not stipulate when a perpetrator will be pursued under section 45, and when it will be prosecuted for engaging in Cartel Conduct. It is assumed that more serious anticompetitive conduct will be prosecuted under the criminal regime.

In this context, it is useful to highlight the fundamental difference between civil and criminal offences, being that a "fault or intent element" must be present for a criminal conviction. This means that a court must find, beyond reasonable doubt, that the perpetrator was aware of the existence of the relevant Cartel Conduct provision in the CAU and its effect, and that each element of the relevant offence was proven. In a civil proceeding no fault or knowledge element is required, and the contravention of the TPA need only be established on the balance of probabilities. In either circumstance, it is no defence for the perpetrator to say that he or she was not aware of the law or his or her responsibilities under the TPA.

The penalties also vary, as set out in the below table:

Civil penalties Criminal penalties
For a company:
Same as the criminal penalties Fines of the greater of:
  • $10 million, and
  • 3 times the value of the benefit attributable to the offence, or if this cannot be determined, 10 per cent of the corporate group's annual turnover for the 12 months prior to the offence.

For an individual:
A fine of up to $550,000
  • up to 10 years imprisonment, and/or
  • a fine of up to $220,000.

(Both of which may involve a criminal record)

Key points - what manufacturers, distributors and franchisors need to know

In short, section 45 and the new Cartel Provisions create parallel civil and criminal enforcement regimes for conduct that amounts to: price fixing; the restriction of output; the allocation of customers, suppliers or territories; and bid rigging; between parties that are competitors.

From the perspective of manufacturers, distributors, franchisors and licensors, the Cartel Provisions should not have any significant impact on the way that they operate their businesses. This is because the Cartel Provisions supplement, strengthen and extend the scope of longstanding prohibitions in the TPA on certain forms of anti-competitive conduct. However, the ACCC, and the Commonwealth Department of Public Prosecutions, can now pursue perpetrators of such conduct on the criminal front, as well as the civil front.

Manufacturers, distributors, franchisors and licensors should be aware of the following issues:

  • Companies can be held liable for the actions of their employees and representatives for breaches of the TPA (including engaging in Cartel Conduct). Accordingly, consideration should be given to delivering TPA training to employees and agents, and to establishing a compliance program in relation to TPA issues, in order to manage this ongoing risk.
  • A CAU does not need to be written down; "handshake" agreements and mutual understandings are sufficient.
  • "Competitor" is construed widely. Indirect or possible competition, via any distribution method (including the internet) is sufficient. Franchisors that operate company run outlets or businesses are highly likely to compete with their franchisees. Competition between related bodies corporate of the parties to the CAU, even if they are not themselves parties to the CAU, will also be sufficient to establish the "competition" nexus.
  • The purpose or the effect of the relevant provision of the CAU will be considered in the context of the remaining provisions of that CAU, and all other CAUs between the parties.
  • It is an offence to give effect to a CAU that contains a Cartel Provision or an Exclusionary Provision, irrespective of when or by whom the relevant CAU was prepared. Accordingly, all CAUs between competitors should be reviewed periodically to ensure that they do not breach the TPA.

For many manufacturers, distributors, franchisors and licensors, the Cartel Provisions necessitate a regular "sanity check" of their supply chain and the relevant supply, franchising, distribution and licensing agreements. Although the TPA is a dense and technical act, structuring supply relations in the correct fashion, and taking pre-emptive action by introducing a TPA compliance program, will minimise the risk of inadvertently engaging in Cartel Conduct or other forms of anticompetitive conduct.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Greg Hipwell
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