Australia: Cartel conduct – not such a foreign concept for Australian franchisors

Cartel Conduct. While such words bring to mind Mexican drug syndicates, it is important for all franchise networks to be aware of what "cartel conduct" is in the context of Australian law, so as to ensure that they are not engaging in any conduct that may constitute cartel conduct.

Cartel Conduct - What is it?

Cartel conduct is a category of anti-competitive behaviour that is prohibited under the Competition and Consumer Act 2010 (Cth) (the Act). Broadly speaking, cartel conduct:

  1. involves a contract, arrangement or understanding. (Note that the arrangement does not have to be written. In fact, it often will not be - it could be as simple as a nod or a nudge);
  2. between two or more competitors;
  3. which:
    1. fixes, controls or maintains prices (price fixing);
    2. limits who you or your competitor deals with, or the areas or terms of dealing (market sharing); or
    3. prevents or restricts or limits output or rigs bids (market sharing).

The definition of cartel conduct is broad and captures a range of behaviours that you might not automatically think constitute cartel conduct – for instance, you cannot agree with a competitor to split up a marketing territory or customers, even if such an agreement might result in efficiencies (and therefore benefits) for both of you.

It is also important to note that cartel conduct is prohibited, regardless of the effect that it has on competition. Therefore if you engage in cartel conduct, even if there is no, or only a minimal, effect, you will be acting in breach of the Act.

What are the penalties for engaging in cartel conduct?

The potential penalties for engaging in cartel conduct are significant.

For corporations, there are potential financial penalties equal to the greater of:

  1. $10 million per contravention;
  2. 3 times the value of the benefit obtained from the anti-competitive behaviour; or
  3. if the value of the benefits cannot be determined, 10% of the annual turnover of the corporation.

Individuals can also be personally liable for financial penalties of up to $500,000 per contravention.

Criminal sanctions may also be imposed for engaging in cartel conduct – up to 10 years imprisonment and fines for individuals of up to $360,000 per offence.

In addition to the penalties prescribed under the Act, there are also less tangible consequences, such as the negative publicity that a brand will receive as a consequence of engaging in such conduct and the distraction for management in dealing with the issue.

How is this relevant to franchise networks?

Given the serious consequences that may arise from engaging in cartel conduct, it is important for all franchise networks, to have an understanding of what cartel conduct is and what needs to be done to minimise the likelihood of anyone in the network engaging in such conduct.

In the context of franchise networks, the concept of cartel conduct could be relevant:

  1. between franchise networks (or any other competitor of a franchise network);
  2. between a franchisor and its franchisees; and
  3. potentially, between franchisees themselves.

For instance if you, as a franchisor, were approached by the franchisor of a competitive network, and that franchisor sought to (for instance) strike an agreement with you about where you would open new sites and where they would open new sites, you could potentially be engaging in cartel conduct.

In relation to franchisees, issues could potentially arise if franchisees in any way sought to set prices or divide up the territories or customers whom they were going to service. It is not difficult to imagine franchisees innocently holding such discussions between themselves, thinking that setting up such arrangements might benefit their respective businesses, but not realising that in doing so they may actually be breaking the law.

If you operate retail outlets or an online store that competes to some extent with your franchisees, putting controls around prices to be charged (or discounts to be offered) by franchisees can also potentially constitute cartel conduct in certain circumstances, even if the intent is just to promote consistency across the network.

These examples are some of the more obvious examples of cartel conduct, aimed at showing you that cartel conduct is a very real issue for franchise networks. If you have any dealings with competitors, it is important to be aware of the cartel conduct provisions to ensure that you are acting within the law.

The AECL case – A recent look at cartel conduct

A recent case, Australian Competition and Consumer Commission (ACCC) v Australian Egg Corporation Limited (AECL) [2016] FCA 69, considered whether certain companies and individuals had sought to induce participants in the egg industry to partake in cartel conduct in order to address a perceived oversupply of eggs in the egg industry. In the context of franchising, this case is quite relevant as, while it did not involve a franchise network, it did involve an organisation which had a board comprised of competitors. This could be analogous to, for instance, a franchise advisory council.

Background

The case related to conduct by the AECL and a number of egg producers and related individuals.

During the AECL board meeting in January 2012 the board members discussed the perceived oversupply of eggs in the Australian market noting, among other points, that it was "disturbing" that egg production and chick placement orders were at an all-time high.

At the board meeting, the directors noted that there was an oversupply of eggs and expressed a need to "tackle" the issue. The directors identified 3 solutions to address the oversupply problem:

"firstly, to discourage backyard egg production, secondly to set up promotion to increase demand, and most urgently to invite the top 25 egg producers to a meeting to encourage destocking and egg disposal". [at 38]

Following the January board meeting, the AECL sent an email to 25 egg producers, inviting them to an "Egg oversupply (crisis) meeting" in February 2012 (the Summit) to discuss, among other things "how to resolve the current crisis for the betterment of the egg industry."

The Summit

The Summit took place on 8 February 2012 and was attended by 22 people representing 19 egg producers. During the meeting, several options for addressing the perceived over-supply of eggs were discussed.

Of particular note, Mr James Kellaway, Managing Director of the AECL gave a presentation during which he presented a slide titled "Solutions". In that slide he set out a number of solutions to address the "crisis". The proposed solutions included: "Dispose of eggs by either donating eggs to one or more charity groups or dumping/burying eggs" and "Reduce the number of laying hens by culling birds".

During the Summit Mr Kellaway made a number of contemporaneous notes, which included "Cull of birds", "Egg donations", "Growth above 4% then you need to cull!", "Hens to be culled 6-8 weeks earlier!" and "Donation of eggs today to FoodBank!".

Attempts to induce cartel conduct

The ACCC alleged, among other things, that the respondents had engaged in an attempt to induce cartel conduct, by taking steps to induce the participants at the Summit to enter into a contract, arrangement or understanding to limit the production or supply of eggs.

In this particular case, the ACCC relied on section 76(1)(d) of the Act which allows a court to impose a penalty on a person if the court is satisfied that the person has "induced or attempted to induce, a person...to contravene such a [cartel] provision."

As such, the Court did not have to consider if the respondents had actually engaged in cartel conduct themselves, but only whether their conduct sought to induce the participants at the Summit to engage in cartel conduct.

The Outcome

While the Court found that the ACCC's case had "some force", it ultimately found that the ACCC failed to establish that the respondents sought to induce the participants at the Summit to engage in cartel conduct. In this regard, the Court noted that:

"The evidence does not warrant a finding that the respondents who participated in the trial had the intention of inducing a prescribed arrangement or that any conveyed to the Attendees the potential for such an arrangement or understanding" [at 380]

Essentially, while it was accepted that the various means by which egg production would be reduced were in fact discussed at the Summit, there was insufficient evidence to conclude that the options discussed amounted to a form of collective action - ie contravention of the cartel provision.

The ACCC subsequently appealed this decision. A decision on the appeal is yet to be made.

What does the result of the AECL case tell us?

The ACCC has taken a strong stance against cartel conduct, with Chairman Rod Sims stating that:

"Detecting and deterring cartel conduct continues to be a major focus for the ACCC. It is important that we seek clarity from the Full Court on issues of what will and will not constitute attempted cartel conduct, particularly in the context of conduct by a trade association interaction with its members"5

While the ACCC have not (to date) been successful in prosecuting the AECL for inducing others to engage in cartel conduct, it is important to be aware that the ACCC is proactively taking action against companies that they consider are involved in cartel conduct.

It is also important to consider the AECL case in the context of franchising. As noted above, this case involved an industry association comprised of competitors (amongst others). It is, arguably, analogous to a franchise advisory council which are often comprised of franchisees from the same network, who may, depending on the composition of the council, be competitors. While the ACCC may not have been successful in this instance, this case highlights the dangers of groups of competitors meeting and discussing matters such as supply issues. If your franchise network has a franchise advisory council in place, we strongly recommend that both you as franchisor and each of the members on the council have specific training about what cartel conduct is and how you can avoid engaging in such conduct.

Practical tips

All franchisors should put in place appropriate steps to minimise the likelihood of a breach of the Act by its franchisees and/or employees. For example, we recommend that franchisors:

  1. provide specific training to staff about the Act. Such training may take the form of an online module or internal presentations by the company's lawyer;
  2. provide an information statement on competition laws;
  3. implement a policy to provide guidance regarding franchisee compliance with competition law, including the Act;
  4. implement a compliance program to stipulate a franchisee's obligations under the Act, including setting out the notification and authorisation processes under the Act. Note that when there is a breach of the Act, the ACCC and the Court will have regard to any compliance program in place when assessing the appropriate enforcement action or penalty;
  5. facilitate discussions with the franchisees in relation to their responsibilities under the Act, including taking a strong position against cartel conduct. Franchisors should actively discourage franchisees from having any discussions with competitors about pricing/market sharing. We suggest that franchisors facilitate this discussion in the context of issuing the information statement, or implementing/updating a compliance program; and
  6. provide training to your operational employees to ensure that they understand the issues and are able to address any issues that might arise in discussions with franchisees; and
  7. seek legal advice immediately, if you suspect that your business is or may be engaged in cartel conduct.

Footnotes

1 S 550 of the Fair Work Act.
2 Australian Financial Review, 1 September 2016.
3 Address to the Franchise Council of Australia's NSW Luncheon, 1 September 2016.
4 The Coalition's Policy to Protect Vulnerable Workers, May 19, 2016.
5 ACCC appeals AECL decision', 2 March 2016, Australian Competition and Consumer Commission, online at https://www.accc.gov.au/media-release/accc-appeals-aecl-decision, accessed 3 November 2016

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions