Associating for what purpose? Trade Associations under the competition law spotlight

Torrin Crowther, Partner and Kate Frankish, Solicitor | Friday 15 October 2010

First published in NZLawyer, 15 October 2010.

Trade associations have important roles to play in their respective industries, but members and the executive of associations must bear in mind that associations are, by definition, a forum where competitors meet to discuss industry matters. Many price fixing and bid rigging 'cartels' have had their origins in one or two trade association meetings.

The Commerce Commission has been active in the trade association space. It has recently concluded several investigations into statements made by industry associations and has issued Guidelines for Trade Associations – both of which evidence an increased scrutiny in this area. This means that now, more than ever, members and the association's executive need to be on guard.

Meetings among competitors always carry competition law risks. In addition to the obvious risk that members determined to discuss and agree price might take the opportunity to do so, two other risks arise.

• First, the risk that seemingly innocuous discussions stray over the line – e.g. the inevitable discussion over drinks about the industry generally (being the one thing all members have in common) strays into a discussion as to why margins are so tight, and from there into a (only half joking) comment to Firm A that "If they stopped discounting, then things might return to normal."

• Second, the risks arising from the special treatment of trade associations under the Commerce Act. In essence, the Commerce Act is drafted to ensure that trade associations can't do the "dirty work" of individual members. It does this by effectively attributing the actions of the association to individual members.

Many corporates will have employees who attend trade associations, and many of those same corporates will have in place comprehensive compliance programmes to ensure their employees are aware of the risks. However, those 'educated' employees can often be the minority among trade association members. For in-house counsel this means their compliance programmes should include practical guidance on how their employees should handle 'sticky' situations, as much as what the actual law is in the first place.

Recommendations made by associations are deemed to be "arrangements" among members

Section 2(8) of the Act provides that arrangements entered into by an association are deemed to have been entered into by all of the association's members. This has the effect of rendering all members of an association liable for the association's conduct, and thus liable for any penalty issued by the Commission (unless a member disassociates themselves in writing or establishes that he or she had no knowledge and could not reasonably have been expected to have had knowledge).

The Act also provides that recommendations made by an association to its members are deemed to be arrangements made between the members of the association, and between the association and its members. What this means is that a price recommendation, for example, made by an association is no different to one member recommending to another member that they sell at a certain price – which would clearly raise price fixing issues.

Price fixing is prohibited by the Act regardless of its actual impact on competition. Generally, price fixing occurs where there is an agreement between competitors that has a purpose, or has the effect or likely effect, of interfering with the free movement of price. As the Commission's Guidelines point out, this includes agreements to, for example, set a minimum price, hold prices constant or adopt a formula for computing price.

For associations with 50 or more members, the Act provides for a specific exemption to the price fixing provision (although there has been speculation that this exemption may be removed in any review of the Commerce Act). In essence, the exemption states that the price fixing prohibition does not apply to recommendations of price, discounts, etc made by associations of 50 or more members.

However, it must be a true recommendation, i.e. adoption must be genuinely discretionary. Any attempt by an association to recommend a mandatory course of pricing, or to seek to enforce the adoption of the recommendation (e.g. by offering inducements) runs the risk of losing the protection of the price fixing exemption. In order to avoid breaching the price fixing prohibition, the Commission advises associations to make it clear to their members that the prices are recommended only and that it is up to them how, and whether, they act on the recommendations.

Arrangements substantially lessening competition

Even where the price fixing exemption outlined above applies, recommendations made by associations remain subject to the overarching prohibition in the Commerce Act on provisions of arrangements which substantially lessen competition in a market.

The Commission's Guidelines provide a non-exhaustive list of factors it will consider when assessing whether a price recommendation substantially lessens competition, including the degree to which members accept and adopt the recommendations, and the degree to which the price list and the association's involvement in the recommendations inhibit members in engaging in competition with each other.

A close call - NZ Society of Physiotherapists

Earlier this year the Commission warned the New Zealand Society of Physiotherapists over a letter written to the physiotherapy practice, Physiomed. The background to this letter was that in late 2009, ACC reduced the subsidy given to physiotherapists to treat patients by 30% and allowed physiotherapists to charge their clients a co-payment (a nominal charge paid by patients) to cover any shortfall caused by the subsidy cut. Physiomed opted not to charge a co-payment as part of its business strategy, and advertised free consultations to ACC patients.

According to the Commission's investigation report, the Society stated in its letter that it had recommended to all members that they add a co-payment. It apparently also expressed the Society's disappointment in Physiomed's decision not to charge its patients a co-payment by stating that it "should not be trying to undercut other physiotherapy practices by aggressively advertising our fee structure or 'free physiotherapy'."

Due to the Society's members totalling approximately 3000, the Commission's investigation report commented that the pricing recommendation itself was not an issue under the Act, provided members were not pressured to charge the co-payment.

The Commission concluded that the letter "only just" fell short of an attempt to enforce the Society's recommendation. The conduct was not investigated further as the Commission did not find evidence to suggest that any follow up or monitoring was intended or carried out by the Society to check if Physiomed had enforced its recommendation. The Commission commented in its report that had there been any evidence suggesting that the Society intended to follow up, the price fixing exemption protection would be lost and the conduct would need to be considered under the price fixing provisions of the Act.