Tanya Thomson is the principal of Tanya Thomson Law, a boutique law firm specialising in competition, energy and commercial law. This is the third in a four-part series of articles on trade practices law for SMEs, covering the main competition and consumer protection legislation and also looking at the value of compliance programmes.
Most small businesses don't think about the Commerce Act much. They might know it is the legislation that governs how competitors can (or can't) interact with each other, but there is a perception that it is only relevant for big businesses.
In fact, Commerce Act rules preventing collaboration between competitors
and other anti-competitive behaviour are applicable to all businesses regardless of size. And while allegations of anti-competitive conduct by "big business" grab headlines, the Commerce Commission investigates and prosecutes a number of smaller firms every year for Commerce Act breaches.
So what can't you do? The following activities are generally prohibited (there are some exceptions):
• price-fixing - agreeing on price (or discounts, credits or rebates) with competitors.
• resale price maintenance - forcing resellers to sell at a specified price or not to discount below a certain price.
• market-sharing - dividing a market among competitors by customers or product type, or geography.
• acting with others to boycott a competitor (for example by agreeing not to supply a competitor with a product in order to prevent them competing)
• predatory pricing - pricing below cost in order to drive a competitor out of the market (whether this is a breach depends on a number of other criteria)
• misusing market power to restrict competition
The key to avoiding a breach is to recognise risky situations and adopt strategies for dealing with them. Three keys areas where businesses should take extra care are: associating with competitors, reacting to competitors (or potential competitors) and dealing with resellers.
Associating with competitors:
Many of the prohibited activities involve collusion between competitors. The most obvious form of collusion is price-fixing, but other collusive behaviour such as market sharing is also usually anti-competitive. This can take various forms such as tenderers agreeing to alternate tenders or businesses splitting a market based on customer size or location.
To minimise the risk of anti-competitive collusion, businesses should limit any association with competitors - including informal association by staff members. It's important to realise that collusion does not require a formal agreement but can arise from an informal understanding between competitors. This increases the scope for collusion to be inferred from informal meetings, even social occasions.
Industry associations are another area that needs to be treated with care. While such associations can promote competition by providing small businesses with information and resources that help them to compete effectively, they can also provide a forum for anti-competitive behaviour. Information exchanges facilitated by industry associations are particularly risky as they can lead to price-fixing.
In general, dealings with competitors - whether via an industry association or otherwise - should be minimised and should only occur for legitimate reasons (such as industry safety). Discussions should be limited to that legitimate purpose and should be recorded. Most importantly, make sure that pricing and other areas of competition are not discussed. If you are at a meeting with competitors and they start talking about pricing - leave.
Reacting to competitors:
How businesses react to competition - including potential new competition - is a yardstick of competitive behaviour. While vigorous competition for customers on the basis of price, service or terms is encouraged, action that is intended to prevent a competitor from competing may be anti-competitive. Unfortunately, it is not always easy to find the line between the two - if in doubt, get some advice.
Trying to prevent competitors from competing is risky. Examples of illegal behaviour include what is known as "collective boycotts" - where firms act together to stop a competitor from supplying or acquiring a product (for example by pressuring your own supplier not to supply them).
Unilateral actions designed to prevent competitors from competing (like predatory pricing or refusal to supply) are usually only illegal if carried out by a firm with market power. Small businesses are less likely to misuse market power simply because they usually don't have it - but that's not always the case as size and market power do not always equate. A business that has a significant presence in a niche market or market segment could fall foul of the misuse of market power rules if it tries to prevent a competitor from competing.
Dealing with resellers:
Businesses that supply a product for resale must take care not to pressure the reseller about the resale price. If you are a supplier, you can't force your retailers to sell at a particular price or force them not to discount. Refusing to supply a reseller because they have discounted previously is illegal.
Suppliers often want to know whether they are allowed to provide price recommendations. You can have a "recommended price" if it is clear that it is a recommendation only and there are no negative consequences for not adopting that price.
Penalties under the Commerce Act can be significant and can (for some offences) include personal liability of up to $500,000 for the officers of the company involved. If the thought of a huge fine is not enough to put you off anti-competitive behaviour, the Government appears to be at least considering the possibility of following Australia's recent law change and introducing jail time for cartel conduct. While small businesses are not the obvious target of such a policy, it does signal the need to take the Commerce Act seriously.
Tanya Thomson