Australian, New Zealand JV cartel exemptions put under spotlight in lawsuits

24 October 2019 8:24am

22 October 2019, by James Panichi and Laurel Henning

When New Zealand scrapped the joint-venture exemptions under the country’s competition law in 2017, few mourned their passing. “They were a dog,” one lawyer told MLex recently. “They were form over substance and very difficult to apply.”

The update to the 1986 Commerce Act recast the exemptions as “collaborative activity” and focused more on the nature of cooperation from companies.

According to the guidelines published by the Commerce Commission in 2018, the new exemptions put forward a simple question: “does this look like a cartel?” This, the regulator said, was “the lens through which we view” collaborative activity.

Yet, some competition lawyers in the country concede there are still gray areas in the exemptions, raising the prospect of agreements that are seen as legitimate joint ventures, or JVs, by those who establish them, only to then cross the line into cartels.

That prospect is set to be raised in court over coming months, following the recent announcement by the Commerce Commission that it had filed a lawsuit against International Racehorse Transport New Zealand Partnership, an equine air-freight joint venture.

Both sides are playing their cards close to their chests, but the battlelines have been drawn and the JV exemptions are set to become central to the legal clash when it plays out in the High Court of New Zealand.

The Commerce Commission has alleged that companies including International Racehorse Transport, or IRT, engaged in price-fixing arrangements between May 1989 and October 2018 — that is, anticompetitive agreements under the old and new regimes.

IRT hit back, saying that the joint-venture agreements in place over that period had been the best way of dealing with the high cost of providing air transportation as a result of the “irregularity of horse shipments”.

The argument will need to be fleshed out in court, but the claim appears strong. The markets for moving horses within New Zealand and between New Zealand and Australia are small, cost-heavy and highly irregular. The JV responded to a legitimate business need, IRT argued.

The Commerce Commission will need to prove that the agreements, which had been recently updated but are no longer in effect, weren’t covered by the previous Commerce Act exemptions or the updated exemptions, which came into play on Aug. 15, 2017.

This will mean that the definition of a “collaborative activity” put forward by the Commerce Commission in its 2018 guidelines will need to withstand the scrutiny of a court. It will put the regulator’s JV approach to the test.

‘Lenient phase’

When the Commerce Commission announced its decision to pursue IRT Partnership, the detail that leaped out at some competition-law practitioners in Auckland was how far back in time the cartel allegations went.

In 1989, New Zealand industry was still coming to terms with the Commerce Act, which had only been introduced a few years earlier. As for the Commerce Commission, lawyers who were around at the time say it was still in its lenient, pastoral-care phase, preferring to avoid confrontation.

Since then, regulatory oversight has increased sharply and companies large enough to take legal advice before establishing a JV have done so. This year’s introduction of criminal-cartel offenses did even more to focus the minds of  companies setting up JVs.

Yet, many JVs put in place in the lax regulatory environment of the 1980s remained unchanged, giving little consideration to the implications of the new laws. Whether this was true for IRT Partnership has yet to be determined, but the company’s statement alludes to past mistakes.

“IRT … [n]ever wilfully intended to breach the law but acknowledges the outcome of the [Commerce] Commission’s investigation and continues to cooperate in full,” the statement says.

Australian exemptions

New Zealand’s now superseded definition of a joint-venture exemption was modeled on the wording contained in Australia’s Trade Practices Act, a competition law dating back to 1974 that remained in place until it was replaced by the 2010 Competition and Consumer Act.

Despite the 2010 changes, the provisions in the Trade Practices Act were part of a clash last month between the competition watchdog and the courts.

The Federal Court of Australia ruled against the Australian Competition & Consumer Commission, or ACCC, in a scathing judgment suggesting that the regulator had misunderstood the nature of a joint venture considered by mining companies.

In the Cascade Coal civil lawsuit, the ACCC had alleged that a proposed joint venture that would have seen some of the companies pull out of a tender process was merely a figleaf to conceal an anticompetitive arrangement.

But the appeal judges disagreed, saying the respondents were covered under Section 76C of the Trades Practices Act, which allowed for contraventions of competition provisions when an agreement is “for the purposes of a joint venture.”

The case highlights the challenges the ACCC faces in proving its arguments. While the ACCC considered the companies involved in the JV to be potential alternative buyers for the mining asset, again, judges disagreed.

The Federal Court found that each of the companies involved “lacked the financial capacity or intention, on its own,” to obtain assets covered by the joint venture deal. Not all potential buyers are genuine bidders.

The Cascade  judgment also points to a clear philosophical difference between the courts and the ACCC on how JVs should be viewed in light of exemptions to competition laws.

Observers believe that these differing views of what a JV is and how it may affect competition may be the result of judges with a background in commercial law seeing these agreements as business deals, rather than measures taken to avoid competition.

Wiggle room

Australian companies working under JV agreements have enjoyed greater freedom under competition-law changes introduced in 2017. But even exemptions in place under earlier legislation could be enough for companies to seek some wiggle room under JV agreements.

For example, the events that led prosecutors to lay criminal-cartel charges against the Australia & New Zealand Banking Group took place before the law changed and when a harsher regime was in place.

The banks facing charges — ANZ, Citigroup Global Markets, Deutsche Bank Australia — will argue that even without a formal contract in place, companies could be said to have engaged in “joint activity” that was a joint venture in all but name.

But the challenge for the banks will be to convince a judge that what they saw as a de facto JV under Australia’s pre-2017 rules should be seen as a legitimate JV, offering them protection from the charges they are now facing.