In brief 7 min read
The Full Court of the Federal Court of Australia recently dismissed the ACCC’s allegations that the Australian Egg Corporation Limited and others had attempted to enter into a cartel arrangement or understanding to reduce the supply, and increase the price, of eggs. The Full Court upheld the primary judge's decision that, in certain circumstances, an industry body can encourage its members to make production and pricing decisions that maintain profitability, without contravening the cartel provision. Associate Julia Kovarsky and Vacation Clerk Max Jones look at the case.
How does it affect you?
- Industry bodies can legitimately educate and inform members and can encourage members to examine their profitability or make production and pricing decisions to maintain market profitability.
- Businesses and industry bodies should not engage in any conduct which appears to be a call for unified and reciprocal action between competitors, as this conduct risks amounting to cartel conduct.
- Additionally, recent competition law reforms, arising from the Harper Review, introduce a prohibition on anti-competitive 'concerted practices' which has a broader scope than the prohibition on cartel conduct. Businesses and industry bodies will need to be more vigilant when disclosing information to or dealing with competitors or their members in the future.
The background
The Australian Egg Corporation Limited (AECL) operates as an industry services body for the purposes of the Egg Industry Services Provision Act 2002 (Cth). From late 2010 to 2012, the AECL was considering ways to
manage an oversupply of eggs, including by educating and advising producers on strategies to preserve a viable market. In 2012, the AECL convened a summit of the top 25 egg producers. At the summit, and in related correspondence, information about the oversupply was provided to producers, and strategies for managing the situation were recommended.
In May 2014 the ACCC instituted proceedings in the Federal Court alleging that the AECL, together with two of its directors and two companies that produce and distribute eggs, had attempted to encourage egg producers to act in a ‘co-ordinated and consolidated
fashion’ to limit the supply of eggs in Australia, in contravention of the cartel provisions in the Competition and Consumer Act 2010 (Cth) (the CCA).
This case is one of a number of cases recently brought by the ACCC arising out of, among other things, conduct occurring at industry association meetings.
The cartel laws
Under the CCA, a corporation contravenes the cartel provision if:
- the corporation makes a contract or arrangement, or arrives at an understanding; and
- the contract, arrangement or understanding contains a cartel provision.
A 'cartel provision' is defined as including a provision with the purpose, indirectly or directly, of 'preventing, restricting or limiting' the production or supply, or likely production or supply, of goods or services by parties to a contract, arrangement or understanding who are, or are likely to be, in competition with each other.
The CCA also prohibits corporations and individuals from, among other things, attempting to contravene or inducing or attempting to induce a person to contravene the cartel laws.
At first instance: ACCC v Australian Egg Corporation Limited [2016] FCA 69
In the Federal Court, Justice White dismissed the ACCC's claim. Although his Honour found that the evidence established that some respondents intended that the attendees at the summit should take action to address and correct the oversupply of eggs, he was not sufficiently persuaded that the intended action was to be under an agreement or understanding involving mutual or reciprocal obligations.
A range of factors led to that decision, including that:
- the egg industry is generally competitive, so egg producers were likely to take action only where it was practical and in their individual interests;
- several short term solutions to egg oversupply had been proposed at the meeting, making it unlikely that mutuality and reciprocity between the parties could have been achieved;
- different egg producers occupy different markets which do not fully coincide, contrary to the idea that a single agreement or understanding could be arrived at;
- there was no direct evidence of a proposal being put to a vote or a call for support as to a course of action at the summit;
- the AECL has a legitimate role in encouraging profitability and the re-examination of production and pricing decisions among its members, so long as that does not involve cooperative action; and
- the ACCC did not identify the precise form of the alleged tempted arrangement or understanding, leading to a degree of uncertainty in the conduct or words alleged to contravene the cartel provisions.
The appeal
The ACCC appealed the primary decision on five grounds. The first was that the trial judge had erred in finding that a contravention of the cartel provisions required the proposed arrangement or understanding to involve 'mutual or reciprocal obligations'. Alternatively, it argued that this requirement was met.
The second to fifth grounds involved various claims that the primary judge erred in his consideration of factors relevant to establishing the respondents' alleged breach.
Are mutual or reciprocal obligations necessary to establish an arrangement or understanding?
The Full Court noted that contravention of the cartel provisions requires a meeting of the minds involving 'commitment to act in a particular way', and that a mere expectation of particular action is insufficient. At the same time, it noted that 'an understanding can be tacit'. Ultimately, the Full Court found it unnecessary to decide whether an arrangement or understanding can be established by unilateral, rather than mutual or reciprocal, obligations, since
the ACCC's case and pleadings were framed in a way that implied mutuality or reciprocity.
Educating and informing are permissible functions of an industry body
The Full Court stated that an industry body can, in the interests of its members and the industry, perform an educational role and provide information to its members. Suggesting to members that they examine their present practices and consider changing them also will not necessarily contravene the cartel provisions.
The Full Court also rejected the ACCC's submission that once a trade association or industry body goes beyond the provision of information, it is attempting to induce a contravening arrangement or understanding. The Full Court agreed with the primary judge that 'trade associations and their officers may legitimately encourage their members to examine their profitability and to make production and pricing decisions in order to maintain profitability'.
The presence of an accountability mechanism?
The ACCC also claimed that an attempt to enter into a contravening arrangement or understanding could be inferred on the basis that the AECL proposed to engage an independent auditor so that producers would know whether each producer was heeding its warnings.
The Full Court rejected that argument. This was on the basis that where producers voluntarily and independently take action, the fact that they do so with the knowledge that a mechanism will exist to inform producers that an industry problem is being addressed, does not amount to an agreement between producers.
Dismissing the appeal
The Full Court noted that the some of the primary judge's conclusions involved a 'finely balanced' case and on that basis refused to interfere with them, dismissing the appeal.
What can industry bodies eggspect from current laws?
Industry bodies can take comfort in the fact that advising members on market risks and strategies to avoid those risks may be legitimate and will not contravene cartel laws under the CCA. However, there is a fine line between cartel conduct and conduct that is lawful and caution should still be exercised to avoid anything that might resemble a call for unified and reciprocal action, as this is likely to contravene the CCA.
Businesses and industry bodies should also take note of recent reforms to the CCA, including the new prohibition on engaging in 'concerted practices' with the purpose, effect or likely effect of substantially lessening competition. While no definition of 'concerted practices' is provided in the CCA, the Explanatory Memorandum defines the concept as 'any form of cooperation between two or more firms (or people) or conduct that would be likely to establish such cooperation, where this conduct substitutes, or would be likely to substitute, cooperation in place of the uncertainty of competition'.
'Concerted practices' are therefore likely to encompass conduct that does not amount to a contract, arrangement or understanding which is required to engage the cartel laws. It is difficult to say whether the conduct in this case would contravene the new provision. Educational and advisory functions of industry bodies remain legitimate under the new laws. However, additional caution should be exercised in the future when disclosing information to and dealing with competitors and members of an industry association, because a contravention of the 'concerted practices' provision requires a lesser degree of cooperation between businesses.
For egg producers, the reforms add to a growing body of laws and regulations to be aware of, notably the recently passed Free Range Egg Labelling information standard which commences on 26 April 2018.