Catalogues and Cartel Conduct Banner Groups, Joint Advertisers and Franchisors need to take action

Potential criminal liability for banner groups, joint advertisers and franchisors means they should be seeking ACCC authorisation of their group marketing arrangements. We are talking about potential Visy/Pratt style headlines for businesses whose crime will be evidenced by the sending out of catalogues or the running of television advertisements.

The Legislative Change – from catalogue to criminal

Proposed legislation (the Cartel Amendments) designed to introduce parallel criminal offences and civil penalties relating to cartel conduct is now before Parliament.

While the Cartel Amendments are not yet law, there is the little doubt that its passage early this year is a priority.

Under the proposed Cartel Amendments organisations must not make, or give effect to, an understanding that contains a ‘cartel provision’. Cartel provisions are provisions relating to price-fixing, bid rigging, restricting outputs in the production and supply chain or allocating customers, supplier or territories in circumstances where the parties to the understanding are in competition with each other (or would be in competition but for that understanding).

Arrangements for a group catalogue or a television marketing campaign can be a form of price fixing, and under the Cartel Amendments can now be cartel provisions, where they establish a group price for goods sold.

Price fixing under the current law and the ‘buying groups’ exemption

In terms of price fixing, until the Cartel Amendments are passed, the Trade Practices Act 1974 (Cth) (TPA) continues to operate by ‘deeming’ price fixing (by section 45A) to be a breach of section 45 of the TPA regardless of whether or not it has an effect on competition.

Under the current law, section 45A(4) of the TPA exempts from the ‘deeming’ provision the collective acquisition of goods and joint advertising of price in relation to the re-supply of goods collectively acquired (the Exemption). In plain English that means that if goods are collectively acquired then those involved in the collective acquisition can also jointly advertise resale process without being deemed to breach the prohibition in section 45 of the TPA. However, if the purpose, effect or likely effect of the group acquisition and group marketing is to substantially lessen competition in a market that will still breach section 45 of the TPA.

Current practise – running the risk

Many banner groups, joint advertisers and franchisors facilitate a web of understanding amongst the participating stores as to promotional sale prices for goods that everyone in the group will apply in their store during a particular promotion. That understanding is conveyed to the public using television, radio, website, in-store or catalogue group marketing.

In the context of a buying group or franchise chain this conduct may constitute price fixing. This occurs because the individual stores are not in common ownership - meaning that while the each store in the group competes with stores that are not part of their own network, there is potential intra-network competition, particularly between stores that are located geographically close to one another.

Further, if the operator of the banner group, the arranger of joint advertising or the franchisor hold stores themselves that compete with one or more of the stores in the group then that ‘head entity’ will form part of the cartel of ‘price fixers’. However, even if they don’t hold any stores themselves the ‘head entity’ would still be liable under the TPA for aiding and abetting or being knowingly concerned in the price fixing.

As mentioned above, the Exemption operates to exclude collective acquisition of goods and joint advertising of price in relation to the re-supply of goods collectively acquired (where such activities do not have the purpose, effect or likely effect of substantially lessening competition in a market).

In considering that Exemption, it is clear that if the goods are not acquired collectively then the agreement between competing members about re-sale price (as evidenced by a group catalogue containing promotional prices) would be price fixing and would not fall within that Exemption.

The word “collectively” is not defined but commentary on this issue has suggested that there does not need to be any joint acquisition of goods by or on behalf of members. It is likely to be sufficient if the members use their collective bargaining power to negotiate a common purchase price. However, the Courts have not yet given their approval to that view.

What is likely to ‘slip through the gap’ and not be covered by that Exemption is the situation where the buying group or franchisor creates an obligation for members to support particular approved suppliers but does not negotiate a group price for the acquisition (even if they negotiate a group discount). In that situation the individual members need to negotiate price as best they can on an independent rather than a collective basis. It follows that group marketing of those products would not necessarily fall within the Exemption from price fixing because there was no collective acquisition of the products.

Changes in the law – the Cartel Amendments

Pursuant to the Cartel Amendments, section 45A will be deleted from the TPA and price fixing will form one of the categories of ‘cartel provision’. Price fixing, as a type of cartel provision, will remain illegal even if it has no adverse effect on competition and it will now be the subject of criminal as well as civil penalties.

The narrow Exemption for collective acquisition and joint advertising in relation to the resupply of those goods collectively acquired will be replicated in relation to the ‘cartel provision’. This means that the ‘gap’ in coverage of the exemption referred to above will remain.

Re-assessing the risk

Banner groups, joint advertisers and franchisors have, for the most part, taken a commercial view that the risk of contravention of section 45 of the TPA as a result of the joint advertising arrangements, such as catalogues, is outweighed by the cost of seeking authorisation from the ACCC for the conduct.

However, given the impending substantial increase in penalty for contravention, it is appropriate to revisit current practises. It is time to re-determine whether those practises remain commercially sensible in the light of the Cartel Amendments.

In particular, potential personal exposure for key management and officeholders changes the risk vs. cost profile dramatically.

Going forward, it is expected that organisations would revisit whether or not their activities clearly fit within the narrow exemption for joint marketing of collectively acquired goods and they will react by either:

1. developing internal compliance procedures to ensure that only collectively acquired goods are jointly advertised and no other understandings as to price are being facilitated in the network; or
2. apply for an authorisation.

Obtaining an authorisation

In most cases, group marketing activities by banner groups, franchisors and joint advertisers is a response to strong competition. Those collective acquisition strategies and marketing activities are normally designed to provide benefits to consumer in the form of consistency of range and quality, price and other factors. That being the case, an authorisation should be obtained in all but the most unusual circumstances.

Even under the current regime (without the potential for criminal sanctions) some businesses have chosen to seek authorisation in relation to their conduct. One example is Newfurn Floor Coverings. They sought and obtained authorisation from the ACCC for their preferred supplier arrangements pursuant to which Newfurn’s members needed to buy from preferred suppliers.

Another example is the authorisation sought and obtained by Franklins Limited in relation to joint promotional agreements with Action and Pick ‘n Pay while they operated under the “Franklins” brand.

Action required

Only those who can fit themselves clearly within the narrow collective acquisition and advertising for re-sale exemption should consider continuing current buying group, joint advertising or preferred supplier regimes without seeking an authorisation from the ACCC.

Most franchisors, buying groups and joint advertisers will not, in all cases, fall within the exemption because the group does not ‘collectively acquire’ every item referred to in the promotional catalogues or television advertisements which promote the common pricing. Many franchisors and heads of buying groups will negotiate a standard discount or establish a line of communication with the relevant supplier, but will not go so far as negotiation of a group wide acquisition price for all group members on all products. It is those organisations who are at risk.

Action should be taken now, prior to the passage of the Cartel Amendments, to ensure that the authorisation process is complete before those amendments become law. The draft legislation encourages early action by providing that authorisations in place, upon commencement of the new law, operate as if they also authorised giving effect to the relevant cartel provision.

The potential for personal exposure for senior management and directors should make the application for authorisation a priority.

Trade Practices compliance training should also be updated both now and when the Cartel Amendments are affected to ensure that best practise remains embedded within the organisation.

Warren Scott - Mills Oakley Lawyers