In a year characterised by low merger activity, the Commerce Commission (the Commission) has continued to prioritise behavioural (cartel) related work. More recently we have seen the Commission focus on compliance with the Commerce Act through education and creating a greater awareness of competition law, an approach that was highlighted in the Commission's recent research work in the construction sector. In line with this educational approach, over the past year the Commission has continued to produce guidelines and has also updated its leniency policy.

Construction sector – "susceptible to cartel conduct"

Off the back of a number of overseas cases, the Commission chose to gather information about the current levels of awareness and understanding of competition law in the non-residential construction sector. Internationally, this sector is seen as being particularly prone to anti-competitive conduct due to certain market characteristics, including repeat bidding by the same companies for similar products/services.

Research undertaken on behalf of the Commission highlighted a low level of understanding in this sector as to what constitutes anti-competitive conduct and in particular highlighted the practice of 'cover pricing'.

The research was a very unusual, but welcome, move for the Commission and signifies a shift towards a pro-active approach designed to prevent anti-competitive conduct before breaches occur. Although the Commission has stated that it will not investigate any of the parties involved in this research (due to an agreement that the responses were to be used only for research purposes) the findings suggest that the Commission is likely to be watching this sector very carefully in future.

Cover pricing

The Commission's research indicated that cover pricing is (or at least, was) prevalent in the New Zealand construction industry.

Cover pricing occurs where a tenderer collaborates with a competitor in order to invent a believable, but not genuine, bid for a job. There are a variety of different ways in which cover pricing can occur but a common thread is that the "competitor's" bid is not intended to win the tender. For example, Builder A is preparing a genuine bid for a job, but is worried that there may not be enough tenderers and the job may have to be re-tendered. Builder A approaches Builder B to tender and to do so at a higher price than Builder A, to increase Builder A's chances of winning the tender without having to re-tender.

Bid rigging, or collusive tendering, occurs when there is an agreement, whether formal or informal, among some or all of the bidders as to which of them should win a bid. Other behaviour between bidders such as agreeing on the price or a component of the price to be bid, or agreeing to take turns to bid for contracts, will constitute bid rigging. Bid rigging is prohibited under the Act where firms in competition with each other reach a contract, arrangement or understanding that has the purpose, or has the effect or likely effect, of fixing, controlling or maintaining the price for goods or services or substantially lessening competition in a market.

Depending on the circumstances, cover pricing may breach the Act as it has the ability to undermine the competitiveness of the tender process because competitors make their bids known to one another. This may impact, either directly or indirectly, the price accepted at tender. Naturally, cover pricing will have a greater impact on price and the competitive process where there are only a few bidders and/or where there is a high proportion of cover prices in relation to genuine bids submitted in a tender round.

Detecting and deterring bid rigging

The Commission has recently been active in the bid rigging space and has released a series of guidelines and fact sheets outlining how to recognise and deter bid rigging. The guidelines focus on supporting procurers (i.e. parties seeking tenders) as their unique position enables them to detect unusual or suspicious bidding and pricing behaviour.

Behaviour to watch includes likely bidders not submitting a bid, a pattern of winning bidders revealed over time, identical pricing and bids with identical wording. Where bid rigging is suspected, the Commission's guidelines advocate questioning bidders about their pricing, acting normally so as not to alert the bidders, continuing with the tender process and approaching the Commission with any suspicions.

The guidelines also list a number of practical steps that procurers can take to minimise the risk of bid collusion, including the insertion of anti-collusion clauses into tender documents (with suggested wording set out), ensuring the largest number of potential bidders are obtained, making it difficult for bidders to communicate and come to an agreement regarding bids, and removing any obligation to bid as a condition of staying on a standing list of pre-qualified suppliers.

Commission's approach to litigation: picking its battles

A noticeable trend developing this year has been the Commission's preference for pursuing alternatives to court action for alleged contravening conduct where appropriate. For example, following investigations into price fixing conduct in relation to air ambulances, waste oil and tyre trading, compliance training was required to be undertaken. Similarly, a suitable settlement was reached outside of court in relation to a price fixing rule implemented by the Committee of Gisborne Farmers Market. These examples suggest that the Commission is looking to pick its court battles carefully and that proceedings will not be taken where the conduct can be dealt with sufficiently in another way or where limited detriment is caused by the conduct. The Commission no longer operates under something approaching a "zero tolerance" regime. The Commission's litigation approach has also benefited its budget, which came in at $4.6 million below budgeted expenditure.

New guidelines and an updated leniency policy

In addition to the development of bid rigging guidelines, the Commission has been busy releasing guidelines in relation to divestment undertakings and as we have discussed in an earlier edition, guidelines for trade associations.

Planned guidelines on section 36 relating to the misuse of market power were cancelled due to the limited value they would add post the Supreme Court's decision in the Telecom 0867 case. The Supreme Court reaffirmed that the counterfactual is the sole determinative approach when considering whether a firm has taken advantage of its market power. (See: Jenny Cooper & Farzana Nizam, "Counterfactual test confirmed by Supreme Court", NZ Lawyer, 17 September 2010, Issue 145).

The Commission has also made a few tweaks to its "Cartel Leniency Policy and Process Guidelines". Importantly, a company or individual can now apply for conditional immunity from prosecution even after the Commission has knowledge of the cartel but does not yet have sufficient evidence to launch court proceedings. Also, the Commission now has the ability to grant a 'marker' or placeholder allowing a person who wishes to apply for conditional immunity from prosecution to save their place as an immunity applicant for a specified time while they collect evidence to provide to the Commission.

First published in NZLawyer, 10 December 2010