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

Last Updated: 24 April 2017
Article by Allison McLeod

Most Read Contributor in Australia, April 2017

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

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