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Cartel Conduct Notes

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This is an extract of our Cartel Conduct document, which we sell as part of our Competition Law Notes collection written by the top tier of University Of New South Wales students.

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Cartel Conduct Definition

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Cartels involve agreements between competitors - that is firms operating at the same level - to restrict competition.

Civil and criminal provisions for cartels The CCA outline of the cartel provisions 44ZZRA. Simplified outline

Cartel conduct is defined to include 4 forms of conduct engaged in by competing firms:

* Horizontal price fixing. o In the context of cartel behaviour, price fixing refers to the fixing or controlling of prices between firms operating at the same level in a particular market (competitors).

* Output restriction. o This involves agreements to restrict the volume of goods produced or services offered.

* Market division. o This involves agreements to divide up customers or territories to limit or avoid the need to compete for custom, and have a similar effect to price fixing by removing incentives for firms to engage in price competition.

* Bid rigging. o This involves agreements between competitors not to compete for tenders or to 'rig' who will win a tender. It is a form of price fixing but is now separately defined. Criminal offence provisions:

Subdivision B--Offences etc

44ZZRF. Making a contract etc. containing a cartel provision

* (1): Penalty is for a corporation that makes a Contract, Arrangement or arrives at an Understanding that contains a cartel provision.

* (2): the fault element is knowledge or belief.

* (3): An offence is punishable on conviction or fine not exceeding the greater of $10 million or 3 times the total value of the benefits obtained by the person and reasonably

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attributable to the offence. If these total benefits cannot be calculated by the court the penalty will be 10% of the corporation's annual turnover during the 12 month period ending at the end of the month when the corporation began committing the offence. (4): An offence against (1) is an indictable offence.

44ZZRG. Giving effect to a cartel provision

* (1): A corporation commits an offence if a contract, arrangement or understanding contains a cartel provision AND the corporation gives EFFECT to the cartel provision.

* (2): Fault element is knowledge or belief.

* (3): An offence is punishable on conviction or fine not exceeding the greater of $10 million or 3 times the total value of the benefits obtained by the person and reasonably attributable to the offence. If these total benefits cannot be calculated by the court the penalty will be 10% of the corporation's annual turnover during the 12 month period ending at the end of the month when the corporation began committing the offence.

* (5): An offence against (1) is an indictable offence. 44ZZRH. Determining guilt

* (1): A corporation may be found guilty of an offence under ss 44ZZRF or 44ZZRG even if (a) each other party to the CA or U is a person who is not criminally responsible OR (b) all other parties to the CA or U have been acquitted of the offence. (Note: 'Party' has an extended meaning under s 44ZZRC - each body corporate related to a body corporate is taken to be a party to that Contract, Arrangement or Understanding).

* (2): A corporation CANNOT be found guilty of a ss 44ZZRF or 44ZZRG offence if all other parties to the CA or U have been acquitted of such an offence AND a finding of guilt would be inconsistent with their acquittal. 44ZZRI. Court may make related civil orders

* If a prosecution against a person for an offence against ss 44ZZRF or 44ZZRG is being or has been heard by a court the court MAY: (a) grant a s 80 injunction against the person in relation to (i) the conduct constituting the offence or (ii) other conduct of that kind or make a s 86C, 86D, 86E or 87 order in relation to the offence.

79. Offences against section 44ZZRF or 44ZZRG

* (1): a person who (aa) attempts to contravene; or (a) aids, abets, counsels or procures a person to contravene or (b) induces or attempts to induce a person (whether by threats or promises or otherwise) to contravene or (c) is in any way, directly or indirectly, knowingly concerned in, or party to the contravention by a person; or (d) conspires with others to contravene a cartel provision is taken to have contravened that provision and is punishable (e) in a case where (i) the provision is a cartel offence provision and the person is not a body corporate by a term of imprisonment not exceeding 10 years or a fine not exceeding 2000 penalty units or both.

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Therefore, the provisions refer to corporations engaging in the prohibited conduct BUT s 79 provides that persons directly or indirectly knowingly concerned in the contravention are guilty of an indictable offence.

Civil offence provisions (NOT FAULT ELEMENT): Subdivision C--Civil penalty provisions 44ZZRJ. Making a contract etc. containing a cartel provision

* A corporation contravenes this section if (a) the corporation makes a contract or arrangement or arrives at an understanding AND (b) the CA or U contains a cartel provision. Enforcement is under Part VI.

44ZZRK. Giving effect to a cartel provision

* (1): A corporation contravenes this section if (a) a CA or U contains a cartel provision AND (b) the corporation gives EFFECT to the cartel provision.

What is a cartel provision?

44ZZRD. Cartel provisions

* (1): for the purposes of this Act, a provision of a CA or U is a CARTEL PROVISION IF: o (a): Either of the following conditions is satisfied in relation to the provision:
? (i) the purpose/effect condition set out in (2);
? (ii) the purpose condition set out in (3); or o (b) the competition condition set out in (4) is satisfied in relation to the provision.

* (2): PURPOSE/EFFECT CONDITION: satisfied if the provision has the purpose, or has or is likely to have the effect, of directly or indirectly: o (a) fixing, controlling or maintaining or (b) providing for the fixing, controlling or maintaining: of the price for, or a discount, allowance, rebate or credit in relation to: (c) goods or services supplied (or likely to be supplied) by any (or all) of the parties to the CA or U OR (d) goods or services acquired (or likely to be acquired) by any (or all) of the parties to the CA or U OR (e) goods or services re-supplied (or likely to be re-supplied) by persons (or classes of person) to whom those goods or services were supplied by any (or all) of the parties to the CA or U OR (f) goods or services likely to be resupplied by persons (or classes of persons) to whom those goods or services are likely to be supplied by any (or all) of the parties to the CA or U.
? Note: this purpose/effect condition can be satisfied when a provision is considered with related provisions (see (8)). Also party has the extended meaning in s 44ZZRC (Note: 'Party' has an extended meaning under s 44ZZRC - each body corporate related to a body corporate is taken to be a party to that Contract, Arrangement or Understanding).
? Subsection (5) It is IMMATERIAL whether the identities of persons can be ascertained (referred to in (2)(e) or (f) or subparagraph (3)(a)(iii), (b)(i) or (ii))
? Subsection (6): Recommending prices: A provision of a CA or U is NOT TAKEN (a) to have the purpose mentioned in subsection (2) or to have or be likely to have the effect in subsection (2) by reason only that it recommends or provides for the recommending of a price, discount, allowance, rebate or credit.
? (8): For the purposes of this Division, a provision of a contract, arrangement or understanding is taken to have the purpose, or to have or be likely to have the effect, mentioned in subsection (2) if the provision, when considered together with any or all of the following provisions: (a) the other provisions of the contract, arrangement or understanding; (b) the provisions of another contract, arrangement or understanding, if the parties to that other contract, arrangement or understanding consist of or include at least one of the parties to the first-mentioned contract, arrangement or understanding; has that purpose, or has or is likely to have that effect.
? Purpose/effect of a provision: (10) For the purposes of this Division, a provision of a contract, arrangement or understanding is not to be taken not to have the purpose, or not to have or to be likely to have the effect, mentioned in subsection (2) by reason only of: (a) the form of the provision; or (b) the form of the contract, arrangement or understanding; or (c) any description given to the provision, or to the contract, arrangement or understanding, by the parties.

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(3): PURPOSE CONDITION: is satisfied if the provision has the purpose of DIRECTLY or INDIRECTLY: o (a) preventing, restricting or limiting: (i) the production (or likely production) of goods by any (or all) of the parties to the CA or U; or (ii) the capacity (or likely capacity) of any (or all) of the parties to the CA or U; or (iii) the supply (or likely supply) to persons (or classes or persons) by any (or all) of the parties to the CA or U; OR o (b) allocating between any (or all) of the parties to the CA or U (i) the persons (or classes of persons) who have acquired (or who are likely to acquire) goods or services from any (or all) of the parties to the CA or U or (ii) the persons (or classes of persons) who have supplied (or who are likely to supply) goods or services to any (or all) of the parties to the CA or U or (iii) the geographical areas in which goods or services are supplied (or likely to be supplied) by any (or all of the parties to the CA or U or (iv) the geographical areas in which goods and services are acquired (or are likely to be acquired) by any (or all) of the parties to the CA or U; OR o (c) ensuring that in the event of a request for bids in relation to the supply or acquisition of goods or services (i) one or more parties to the CA or U bid but one or more other parties do not or (ii) 2 or more parties to the CA or U bid but at least 2 of them do so on the basis that one of the bids is more likely to be successful than the others or (iii) 2 or more parties to the CA or U bid but not all of those parties proceed with their bids until the suspension or finalisation of the request for bids process or (iv) 2 or more parties to the CA or U bid and proceed with their bids but at least 2 of them proceed with their bids on the basis that one of those bids is more likely to be successful than others or (v) 2 or more parties to the CA or U bid but a material component of at least one of those bids is worked out in accordance with the CA or U.
? Note this purpose condition can be satisfied when a provision is considered with related provisions (see (9)). Party has the extended meaning in s 44ZZRC).
? (5) It is IMMATERIAL whether the identities of persons can be ascertained (referred to in (2)(e) or (f) or subparagraph (3)(a)(iii), (b)(i) or (ii))
? (7): It is IMMATERIAL whether (a) for the purposes of subsection (2), subparagraph (3)(a)(iii) and paragraphs (3)(b) and (c)--a supply or acquisition happens, or a likely supply or likely acquisition is to happen, in particular circumstances or on particular conditions; and (b) for the purposes of subparagraph (3)(a)(i)--the production happens, or the likely production is to happen, in particular circumstances or on particular conditions; and (c) for the purposes of subparagraph (3)(a)(ii)--the capacity exists, or the likely capacity is to exist, in particular circumstances or on particular conditions.
? (9): For the purposes of this Division, a provision of a contract, arrangement or understanding is taken to have the purpose mentioned in a paragraph of subsection (3) if the provision, when considered together with any or all of the following provisions: (a) the other provisions of the contract, arrangement or understanding; (b) the provisions of another contract, arrangement or understanding, if the parties to that other contract, arrangement or understanding consist of or include at least one of the parties to the first-mentioned contract, arrangement or understanding; has that purpose.
? Purpose of a provision : (11) For the purposes of this Division, a provision of a contract, arrangement or understanding is not to be taken not to have the purpose mentioned in a paragraph of subsection (3) by reason only of: (a) the form of the provision; or (b) the form of the contract, arrangement

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or understanding; or (c) any description given to the provision, or to the contract, arrangement or understanding, by the parties. (4) COMPETITION CONDITION: is satisfied if at least 2 of the parties to the CA or U; (a) are (or are likely to be); or (b) but for any CA or U would be (or would be likely to be) in competition with each other in relation to: o (c) if paragraph (2)(c) or (3)(b) applies in relation to a supply, or likely supply, of goods or services--the supply of those goods or services; or o (d) if paragraph (2)(d) or (3)(b) applies in relation to an acquisition, or likely acquisition, of goods or services--the acquisition of those goods or services; or o (e) if paragraph (2)(e) or (f) applies in relation to a re-supply, or likely re-supply, of goods or services--the supply of those goods or services to that re-supplier; or o (f) if subparagraph (3)(a)(i) applies in relation to preventing, restricting or limiting the production, or likely production, of goods--the production of those goods; or o (g) if subparagraph (3)(a)(ii) applies in relation to preventing, restricting or limiting the capacity, or likely capacity, to supply services--the supply of those services; or o (h) if subparagraph (3)(a)(iii) applies in relation to preventing, restricting or limiting the supply, or likely supply, of goods or services--the supply of those goods or services; or o if paragraph (3)(c) applies in relation to a supply of goods or services--the supply of those goods or services; or o (j) if paragraph (3)(c) applies in relation to an acquisition of goods or services-the acquisition of those goods or services.
? Note: Party has extended meaning under s 44ZZRC.

Why do firms collude?

Cartel conduct gives conspiring firms market power and deprives consumers of the most visible benefit of competition - lower prices. It can lead to inefficiency and misallocation of resources. But cartels still occur because they insulate firms from price and other forms of competition and thus protect profit margins. Self Interest

* It is in firm's self interest to transfer wealth from consumers to the conspirators. A reason for authorisation Preventing cutthroat, unfair or ruinous competition

* A justification for cartel conduct is to prevent price competition becoming so intense that the continued viability of firms is threatened. In this situation where there is cutthroat, unfair or ruinous competition firms argue that they should be able to fix a fair price to allow a realistic profit margin. In itself the preservation of competing firms is not a significant social benefit. Rather it is argued that more firms mean more employment opportunities and productive capacity in the industry.

* These arguments are strong where there are significant start up costs in plant and equipment which are likely to fall bellow the needed value when there is a recession. Attorney General v The Adelaide Steamship Co Ltd (1913) - page 220

* Following a period of what the Board of the Judicial Committee of the Privy Council called 'ruinous competition,' the owners of collieries in Newcastle and Maitland entered into an agreement called the 'vend' to fix prices, allocated quotas and restricted the opening of new mines. Vend members entered into an agreement with shipping companies, shipping coal from Newcastle, which provided that the members and shipping companies would only deal with each other. They also fixed the maximum reselling price of coal. The Cth argued that this shipping agreement contravened the Australian Industries Preservation Act 1906 (Cth).

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Issue: According to the Board, the Act could only be contravened if cartel members had an intention to injure the public of restraining trade. Thus the Vend's purpose was crucial.

* Privy Council Ratio: Thus the Crown cannot rely on the mere intention to raise prices as proving an intention to injure the public. To prove an intention to injure the public by raising prices the intention to charge excessive or unreasonable prices must be apparent.

* Finding: there was no intention here to raise coal to an unreasonable extent. The agreement did not eliminate competition because it did not include all the coal fields. If the vend lifted its' prices too high it would lose trade. The Act was not contravened. Re The Yarn Spinners' Agreement [1959] - page 221

* Members of the Yarn Spinner's Association entered into an agreement that fixed their minimum selling prices. Issue: Court was asked to decide whether the agreement was contrary to the public interest. The Association argued that it was under the Restrictive Trade Practices Act 1956.

* Restrictive Trade Practices Court, Devlin J: Even if the industry were reduced to the five large combines which control 40% of it - it is not suggested the reduction will go any further - it would not necessarily diminish competition.

* The Court concluded that the agreement was contrary to the public interest. Safety

* In certain industries cartels are justified on the grounds of public safety: if price competition is allowed, firms will cut their costs to levels that jeopardise the safety of the goods they produce or the services that they deliver. ACCC v Woolworths (SA) Pty Ltd (2003)

* Here they were concerned to reduce the level of alcohol consumption by Aboriginals and so the parties agreed not to advertise or sell at a discount certain takeaway beverages. When the matter was investigated by the ACCC, the parties acknowledged there was no evidence to show alcohol consumption had been reduced by the agreement.

* For professional associations, they use the safety argument to establish codes of ethics that ban fee competition between members. This has been rejected in the Australia and the USA. Agsafe Ltd (ACCC authorisation case) - page 226

* Where the conduct does not involve price fixing, the ACCC, has been willing to accept some safety arguments as this case shows.

* The ACCC granted conditional authorisation to Agsafe in respect of a Code of Conduct which required persons and premises involved in the storage, handling, transport or distribution of agricultural and veterinary (agvet) chemicals to be accredited through Agsafe's Accreditation and Training Program and to impose trading sanctions upon businesses not accredited under the program. This conduct could constitute cartel conduct in the form of prevention, restriction or limitation of supply of goods or services to persons or classes of persons.

* Yet although the ACCC thought the Code would be likely to result in reduced competition in the provision of training and accreditation in the industry, it accepted that the Code would bring public benefits as a result of increased safety and training.

* Authorisation was made conditional upon Agsafe making it clear that training could be provided by other registered training organisations and the ACCC's decision was influenced by Agsafe's transition to a new incentive based program which would not involve sanctions. Countervailing power

* Price fixing cartels are sometimes justified on the ground that they are needed to create a countervailing power to that possessed by the suppliers or customers, with whom cartel members trade. E.g. producers supplying a single customer because there is no

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