APEC Training Program ______

Competition Policy

“ - a focus on investigations”

5 August – 7 August 2003

Hanoi, Vietnam

Mr Sam Di Scerni

Regional Director, Western Australia

Australian Competition & Consumer Commission

Index

1. Introduction...... 3 The legislation...... 4 Section 45 - Anti-competitive arrangements ...... 4 ...... 4 Market sharing ...... 4 Primary boycotts ...... 4 Secondary boycotts ...... 5 Section 46 - Misuse of ...... 5 Section 47 - ...... 5 Section 48 - Resale price maintenance ...... 6 Section 50 - Mergers and Acquistions ...... 6 Authorisations and Notifications ...... 6 2. The Competition Test...... 6 Factors that could affect competition...... 7 How to define a market...... 8 Penalties for offences under Part IV of the Act ...... 9 3. Sanctions against cartels...... 10 Cartels ...... 10 Investigation Toolkit...... 10 ACCC Leniency Policy for Conduct ...... 11 4. Recent history of cartel investigations and complaints ...... 12 5. Overview of ACCC investigation process...... 12 ACCC Enforcement outcomes...... 13 Investigation Process...... 13 Case Study One - Motor Vehicle Price Fix...... 13 6. Managing investigations ...... 18 The Evidence Matrix ...... 18 Case Study Two - Fire Protection Industry Cartel...... 23 16 Attachments

Annexure One Part IV of the Trade Practices Act 1974 Annexure Two ACCC Merger Guideline Annexure Three ACCC Leniency Policy for cartel conduct Annexure Three ACCC staff manual - Threshold enquiries Annexure Four ACCC staff manual – Conduct of investigations

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This paper describes the main features of Australia’s regulatory framework which deals with the problems of collusive business conduct and cartels. It outlines the role of the Australian Competition and Consumer Commission and the legislation it administers, in particular the Trade Practices Act 1974; looks at the main techniques and processes used to investigate allegations of anti-competitive conduct; and draws upon some cases studies to show how those techniques were used.

1. Introduction

In a free market economy such as Australia, competition policy is founded on the principle that free and fair competition brings about efficient production and the appropriate allocation of resources. In other words, competition ensures that producers make the things consumers want, in the most efficient way possible, and at a competitive price.

The cornerstone of competition policy in Australia is the Trade Practices Act. The specific object of the Act is outlined in section 2 where it is stated as:

The object of the Act is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection.

While the Trade Practices Act contains a number of provisions dealing with business conduct in the marketplace, including areas such as consumer protection and product safety, the main provisions relating to competition are contained within Part IV of the Act. This section contains laws which prohibit restrictive trade practices or anti-competitive conduct. The laws are designed to encourage, support and strengthen competition by making sure that the competitive process is not damaged by illegal conduct. I have attached a copy of these provisions at Annexure One for your future reference.

As with any set of laws, however, their effectiveness is largely determined by the way in which those laws are applied and enforced.

The Australian Competition and Consumer Commission (‘ACCC’) is the national statutory authority responsible for administering the Trade Practices Act and, as an enforcement agency, it is the ACCC’s job to make sure that everyone who participates in the economy follows the rules set out in the Trade Practices Act.

Competition law in Australia is largely based on the principle of allowing the competitive process to occur up until such time the conduct has the purpose or effect of substantially lessening competition in a market. This is commonly referred to as the “competition test”, that is, it must be shown that the conduct damages the market as a whole and not just one individual participant in the market.

However some conduct is prohibited outright under the Act as the conduct is deemed, by their very nature, to have an automatically damaging effect on competition. These “automatic” breaches, called per se prohibitions, include price fixing, primary boycotts, resale price maintenance and third line forcing.

3 The Legislation

The provisions in Part IV are framed on the basis that, while tough and vigorous competition leads to an effective and efficient marketplace, laws are still needed to encourage fair, honest and ethical business practices.

Section 45 - Anti-competitive arrangements

Section 45 is a general ‘catch-all’ provision which basically prohibits any anti-competitive agreements or arrangements between competitors in a marketplace. These provisions have a relatively wide scope for application and cover ‘arrangements’ and ‘understandings’ as well as contracts in the legal sense. Some of the conduct caught under section 45 of the Act includes:

Price fixing

Under section 45A of the Act, competitors are prohibited from having arrangements between themselves as to price, which are intended to, or are likely to have the effect of, fixing, controlling, or maintaining prices. Price includes a ‘charge of any description’ as well as discounts, allowances, rebates, and credit terms. It is worth noting that an agreement to fix prices does not have to be a formal one - a ‘nod and a wink’ or tacit agreement can potentially be enough to be interpreted as an understanding or agreement.

Price fixing is considered to be such a major offence that it is deemed to be a per se prohibition, that is, it is automatically deemed to damage competition.

Market sharing

Agreements between competitors which restrict the supply of goods in some way are prohibited if they have the purpose or effect of substantially lessening competition in a market in which the businesses operate. Sharing a market might be achieved in any of the following circumstances:

· on a product basis — eg. where businesses agree not to sell certain goods or services where those goods or services are also provided by other businesses;

· on a customer basis — eg. where businesses agree to divide up a market according to the status or characteristics of customers in the market (i.e., businesses in the more expensive or high class products as apposed to those in the cheaper or bulk discount end of market) with an understanding not to ‘poach’ customers;

· on a geographic basis — agreeing to not compete outside a specified area; and

· on a revenue basis — eg. where businesses agree to share a client base or product so that a sales revenue parity may be maintained between competitors.

Market sharing can often occur where competitors engage in bid-rigging or agree to share tenders.

Primary boycotts

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These are agreements that contain an exclusionary provision such that businesses in competition with each other collude to exclude or limit dealings with a particular supplier or customer. The businesses engaging in a primary boycott often try to squeeze a competitor or supplier out of the market by refusing to deal with them.

An example might be where major builders, who would normally compete with each other, get together and agree not to use certain types of products from a particular supplier (maybe because the supplier would not give them a discount or some other benefit in return for their patronage).

In general market sharing and other primary boycotts are also per se offences.

Secondary boycotts

Secondary boycotts, which are prohibited by section 45D of the Act, are most often associated with industrial disputes. The secondary boycotts involve action by two or more people - for example, members of a union or trade association - which hinder or prevent a third person from supplying goods or services to a business; or acquiring goods or services from a business.

Section 46 - Misuse of market power

Section 46 of the Act makes it illegal for a corporation that has a substantial degree of power in a market from taking advantage of that power for the purpose of:

· eliminating or substantially damaging a competitor; · preventing the entry of a person into the market; or · deterring or preventing a person from engaging in competitive conduct in the market.

Market power can be seen as the power or ability of a company to operate in a market without any constraints. When a company misuses its power it can either raise prices without any fear of losing customers (because they have nowhere else to go), or it cut prices to below costs in an effort to drive out competitors or stop the entry of new competitors, or it can monopolise all supply arrangements and refuse to supply others. It may even be able to engage in any combination of the above conduct.

In Australian law, or companies holding market power are not prohibited from having that market power but the law does stop those monopolies or companies from misusing their market power.

Section 47 - Exclusive dealing

Section 47 of the Act prohibits anti-competitive exclusive dealing which has the purpose or effect of substantially lessening competition in a . Broadly speaking, exclusive dealing involves one person which trades with another imposing restrictions on the other's freedom to choose with whom, or in what, it deals.

This mainly arises in relation to conduct known as ‘third line forcing’. Third line forcing is where a company supplies goods or services on the condition that the buyer takes other goods

5 or services from some other supplier. For example, it is illegal for a bank to offer to provide a housing loan on condition that the borrower take out insurance with a nominated insurance company, and not one of the borrower’s choice.

Most exclusive dealing arrangements are subject to the competition test. However, third line forcing is prohibited outright as it is deemed automatically to have the effect of substantially lessening competition. This provision is currently under review and it may well be that third line forcing will also be subject to a competition test in the future.

Section 48 - Resale price maintenance

Suppliers, manufacturers and wholesalers are prohibited from specifying a minimum price (although they can specify a maximum) below which goods or services may not be resold or advertised for resale.

A supplier may recommend a resale price for goods, provided that the document setting out the suggested price makes it clear that it is a recommended price only and that the supplier takes no action to influence the reseller not to sell or resupply below that price.

Section 50 – Mergers and acquisitions

Section 50 of the Act prohibits mergers and acquisitions that would result, or be likely to result, in a substantial lessening of competition in a market.

Authorisations and Notifications

Competition policy doesn’t try to achieve competition purely for its own sake. There is a recognition that, in some cases, completely free and open competition may not achieve the best outcomes for the economy or the community.

Where anti-competitive agreements, which would otherwise be likely to constitute a breach of the Act, are found to have public benefits that outweigh any anti-competitive detriment, the ACCC may grant an Authorisation or exemption from prosecution. Authorisation provides the corporation with immunity from prosecution under Part IV of the Act for the practice that has been authorised. Misuse of market power conduct cannot, however, be Authorised.

The exemption or immunity offered under the Act can be obtained through two particular processes.

For the more significant or substantial conduct, the Authorisation process calls for a formal and open consultation and assessment method.

Less substantial matters – generally confined to exclusive dealing conduct - can be granted exemption via a Notification process. This basically entails the parties informing or “notifying” the ACCC of the proposed conduct following which immediate immunity is granted - with the exception of third line forcing where the time frame is 14 days during which the ACCC either takes no action and the conduct goes ahead, or it intervenes. 2. The Competition Test

6 As described above, the competition provisions under the Act largely allow most forms of vigorous market behaviour to occur up until such time as that behaviour has the purpose or effect of substantially lessening competition in a market. This concept is colloquially known as ‘the competition test’.

As can be appreciated, it can be difficult to establish the exact point at which vigorous competition crosses the line and becomes damaging to the market. Often, situations are not clear cut and depend on what effect the conduct has, or would be likely to have, on competition in the market concerned. Say, for example, a firm will supply a reseller only on condition that it does not also buy from a competitor or does not sell outside a certain territory. Such distribution or sole agency arrangements are quite common in Australia and often have very little effect on the general level of competition at large, although they may adversely affect a particular business that is refused supply.

Under Australian it is not enough merely to show that an individual business has been damaged. The wider market must be considered. Put simply, you have to look at the overall market for the particular product (and its substitutes) and decide whether or not the conduct would severely restrict competition of that type of product or service to consumers, including business consumers. That is, to what extent does the conduct limit the choices buyers have? In an Australian case argued before the Federal Court in 1982, Dandy Power equipment Pty LT v Mercury Marine Pty Ltd (1982) 62 FLR238, Justice Smithers described the concept this way:

“To apply the concept of substantially lessening competition in a market, it is necessary to assess the nature and extent of the market, the probable nature and extent of competition which would exist therein but for the conduct in question, the way the market operates and the nature and extent of the contemplated lessening. To my mind one must look at the relevant significant portion of the market, ask oneself how and to what extent there would have been competition therein but for the conduct, assess what is left and determine whether what has been lost in relation to what would have been, is seen to be a substantial lessening of competition. I prefer not to substitute other adverbs for "substantially". "Substantially" is a word the meaning of which in the circumstances in which it is applied must, to some extent, be of uncertain incidence and a matter of judgment. There is no precise scale by which to measure what is substantial. I think in the context, particularly the penalty and other remedies for contraventions of the Act, and the nature of trade which is the subject of the Act, the word is used in a sense importing a greater rather than a less degree of lessening. Accordingly in my opinion competition in a market is substantially lessened if the extent of competition in the market which has been lost, is seen by those competent to judge to be a substantial lessening of competition. Has competitive trading in the market been substantially interfered with? It is then that the public as such will suffer … Although the words "substantially lessened in a market" refer generally to a market, it is the degree to which competition has been lessened which is critical, not the proportion of that lessening to the whole of the competition which exists in the total market. Thus a lessening in a significant section of the market, if a substantial lessening of otherwise active competition may, according to circumstances, be a substantial lessening of competition in a market.”

Factors that could affect competition

7 The Australian courts consider a number of factors when determining the level of competition in a market. They include the:

· number, size and distribution of buyers and sellers, and especially the degree of ;

· height of the , i.e. the ease of importing products and the ease with which new firms can enter and secure a place in a viable market;

· extent to which products in the market can be characterised by extreme product differentiation and sales promotion (are they very different to each other?);

· character and extent of vertical relationships between customers and suppliers; and

· nature of any stable, formal and fundamental arrangements between firms which restrict their ability to function as independent entities.

How to define a market

In assessing the effect of anti-competitive conduct on a market, it is important to bear in mind that the Act is generally concerned with competition in a market rather than with the position of individual participants. Thus if the position in the market of an individual provider is adversely affected by the conduct of a competing provider, it is unlikely that there will be a contravention of the Act unless the conduct substantially lessens competition in the market as a whole.

Why is market definition so important? To determine whether conduct has any effect in a market, you need to determine what the market is. Let’s look at a hypothetical example. What if Toyota decided it would only sell its product through one retail network or distributorship and to no one else? If you were a car dealer who wanted to sell new Toyotas, do you think that this type of conduct would be anti-competitive? The answer depends on how the market is defined. Is it a Toyota market or a car market? If the market is narrowly defined to Toyota cars only, then there may be a problem. But if the market was more widely, and appropriately, defined to include all cars such as Fords, Mercedes Benz, Hyundai, and others as well as Toyotas, then the conduct is highly unlikely to be anti-competitive in that market.

One widely-accepted judicial definition of a market is the following:

A market is the area of close competition between firms or ... the field of rivalry between them. Within the bounds of a market there is substitution - substitution between one product and another, and between one source of supply and another, in response to changing prices. In determining the outer boundaries of the market we ask a quite simple but fundamental question: if the firm were to "give less and charge more" would there be, to put the matter colloquially, much of a reaction. Queensland Cooperative Milling Association Ltd/Defiance Holdings Ltd, re proposed merger with Barnes Milling Ltd (1976) ATPR 40-012.

A market has four important elements:

8 · Product - The range of products or services which will satisfy customer requirements. Customer response to price changes is an important clue to whether products are in the same market.

· Geography - The geographic area within which a product or service is traded, eg the Sydney metropolitan newspaper market; the South-East Queensland gas market.

· Level of function - The particular market level at which a company operates, eg manufacture, wholesale, retail.

· Time - The time required for suppliers or customers to switch products in response to a change in price.

Both demand and supply side substitution must be taken into account in determining the relevant market. Each of these elements has to be identified and examined in order to fully define the relevant market. An alternative method for defining a market is to look at the nature and extent of competitive constraints operating on the firm in question from the point of view of that firm.

The ACCC has issued a publication known as the Merger Guideline which is a useful tool to assist in defining the relevant market and determining the likely effect of mergers on competition. A copy of the ACCC’s Merger Guideline is attached at Annexure Two for your future reference.

Penalties for offences under Part IV of the Act

Australia’s Constitution requires that judicial power must only be exercised by the courts. Accordingly, the Act allows the ACCC to institute proceedings to recover penalties, subject to a statute of limitation period of six years, and empowers the Court to impose them. The factors the Courts refer to in determining the level of pecuniary penalty include the deliberateness of the conduct, the period over which it extended and the amount of loss or damage caused. However, like any litigant, the ACCC can make submissions to the Court as to what it considers an appropriate penalty (maximum penalties are summarised below).

Actions to recover penalties are civil proceedings and therefore attract the civil standard of proof. The ACCC is therefore required to establish the facts of the contravention on the ‘balance of probabilities’.

Pecuniary penalties available for cartels are summarised below.

· Corporations that contravene the competition provisions under Part IV of the Act may incur penalties of up to AUD$10 million per offence while individuals that contravene these provisions may incur penalties of up to AUD$500 000 per offence;

· Corporations that contravene the boycott provisions of the Act (sections 45D and 45DB) may incur penalties of up to AUD$750 000 per offence while individuals that contravene the boycott provisions are not subject to monetary penalties.

In addition, the ACCC may seek injunctions, either interlocutory or final injunctions, to restrain the businesses and people involved from engaging in this sort of conduct again.

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The ACCC can also seek the award of damages to third parties who were affected by the conduct or who suffered loss or damage as a result of the conduct. Such actions are subject to a three-year limitation period. It should be noted that such damages are designed not to punish, but to compensate for actual loss suffered. Other remedies may include declarations, corrective/informative notices and divestiture.

3. Sanctions against cartels

Cartels

Although not defined in Australian competition law, a cartel is broadly defined as a syndicate or group generally formed to regulate prices and output in some form of business. The oil cartel OPEC is an example of an international cartel of oil producers. In terms of any domestic economy, it involves two or more competitors getting together to either fix prices, share the market between them, or making some arrangement about production or sales levels. The cartel can be likened to a ‘closed shop’ which either limits competition or makes it very difficult for new entrants to come into the marketplace.

Cartel conduct breaches the per se provisions within section 45 of the Trade Practices Act. These per se provisions relate to price fixing (ss. 45 and 45A); and the exclusionary or primary boycott provisions (ss. 45 and 4D).

Collusion is extremely harmful, both to business customers and consumers in that it denies the customer the right to choose what they can buy and at what price. It is contrary to an efficient competitive market. Cartels also harm the economy by distorting the ordinary processes of innovation and product development. This conduct damages business by increasing input prices, adversely affecting domestic and international competitiveness and ultimately resulting in reduced employment opportunities.

Hard-core is morally reprehensible, and abhorrent to the vast majority of business people as well as the public. The ACCC views it as a form of theft, comparable to fraud and little different from classes of corporate crime that already attract criminal sentences. The gains for those involved can be large and as a result cartels are often difficult to detect. The incentives for collusion are high in important areas of the modern economy.

It is the experience of the ACCC that relatively small penalties and remedies fail to deter the most flagrant and harmful collusive agreements, where competitors, usually in secret, agree to fix prices, rig bids, limit output or share markets. That is, where the potential returns from super profits from engaging in the anticompetitive behaviour out weigh the potential sanctions ‘if’ they are caught.

Investigation toolkit

There is no doubt that the best weapon against cartels is inside information and the task, which is by no means all that easy, is for the investigator is to locate, or induce, someone to provide that inside information. The “toolkit” used by investigators to crack open cartels combines (i) heavy sanctions, be they criminal sanctions such as imprisonment or civil

10 pecuniary penalties with (ii) a leniency policy which offers significant protection or immunity for a cartel participant to break ranks and confess.

It should also be stressed that the investigators should be:

· Professional, well trained, and committed; · possess very good interviewing and negotiating skills; · have a sound understanding of the industry in which the alleged conduct occurs; · able to use project management and investigation management tools (such as the evidence matrix) to plan, carry out, and monitor the progress of the investigation; and · able to have the necessary resources and full support of management.

An effective leniency policy is, however, a key element.

ACCC Leniency Policy for Cartel Conduct

Cartels spring up and continue in many instances because the members of the cartel use their market power and the elements of collusion, secrecy and deception to control the market. The secretive and self-contained nature of the cartels means that the arrangements or understandings which are put in place are invariably done so without any documentary evidence or third party awareness. Thus, while investigators may hold suspicions about the conduct of certain companies in a particular area of the market or may even receive complaints or “tip-offs” about alleged illegal conduct, actually uncovering and exposing cartels is among the most difficult tasks confronting investigators.

Perhaps the most effective tool used by regulators to expose cartels is a leniency policy which promises protection or some form of leniency for one of the cartel members, or someone closely associated with the cartel, in return for inside information on the operations of the cartel. If a cartel member can be identified who wants to “confess” or can be assisted by an offer of leniency, then the information gained from interviewing that person will go a long way to helping investigators collect the type of evidence necessary to prove the breach.

International experience has shown that law enforcement agencies that have a leniency policy are successful in encouraging insiders to come forward to break open the cloak of secrecy surrounding cartels. The US leniency program now uncovers more than 20 cartels per year and has led to numerous individual convictions and massive corporate fines. In the last five years alone the US Department of Justice has obtained over $US2 billion in criminal fines and the vast majority of its international cartel cases arise from the use of its leniency program.

Just as importantly, a leniency policy that provides incentives to businesses to disclose illegal behaviour is also a powerful disincentive to the formation of cartels, as there exists a greater risk of ACCC detection and court proceedings.

A leniency policy does not offer a reward to ‘good corporate citizens’. It is a compliance tool designed to deliver benefits to the economy and consumers by identifying, stopping and deterring harmful and illegal behaviour.

In July 2003, the ACCC released its Leniency Policy for Cartel Conduct. A copy of the ACCC’s Leniency Policy for Cartel Conduct is attached at Annexure Three for your future

11 reference. The ACCC’s Leniency Policy for Cartel Conduct can also be found on the ACCC’s website at www.accc.gov.au.

The leniency policy only applies to cartel conduct in particular circumstances and is intended to provide greater certainty and incentive for disclosure and cooperation by cartel participants. The essence of the leniency policy is that the ACCC will not institute proceedings or will not seek a pecuniary penalty (depending on the circumstances) against the first cartel participant to come forward with information disclosing the existence of a cartel operating within Australia. Any immunity granted by the ACCC to a leniency applicant will be conditional upon their full and ongoing cooperation and of course only provides immunity in relation to ACCC instituted proceedings. Importantly, the ACCC will not grant leniency to any person that has coerced others to break the law or who was the clear ringleader in the cartel.

The broad principle behind the leniency policy is the belief that the public interest in ensuring that secret illegal conduct is detected in the first place and then stopped and deterred in the future outweighs the public interest in allowing one of the participants involved in the cartel to escape prosecution or to receive only a minimum sanction.

4. Recent history of cartel investigations and complaints

Financial year 95–96 96–97 97–98 98–99 99–00 00–01 01–02 02-ytd Total Number of 167 311 328 285 471 422 442 576 3002 Complaints Cartels 13 53 75 53 75 70 61 59 459 Investigations

These numbers alone tend to suggest that the ACCC is not achieving its compliance goals in deterring cartel activity. However, it is more likely that the cartels have always been in existence but that the ACCC is now getting better at detecting cartels, particularly since the ACCC developed its leniency program and other such tools. In any event, this increasing trend also reinforces the need to have access to effective sanctions such as criminal sanctions.

5. Overview of ACCC investigation process

Priorities

As previously mentioned, the ACCC does not make the law - that is for the Parliament. The ACCC’s role is simply to enforce the Act. Similarly, the ACCC does not judge the parties to a breach, nor can it impose fines or penalties on people - that is the role of the Courts. To establish a breach of the Act, the ACCC, like any other litigant, has to produce evidence and prove to the Court that there has been a breach of the Act.

The Act, however, is strongly self-enforcing. What that means is that the Act also provides for a private right of action to any party that believes it may have suffered loss or damage as a result of a breach of the Act. In fact, about 80% of all trade practice cases in Australia taken to Court are private actions. This is particularly important as the ACCC has only finite resources and it must therefore select and prioritise the cases that it pursues.

12 The effect of that is clear. It is not only the ACCC firms need to watch out for if they breach the Act, they leave themselves wide open to action from any party affected by the breach – competitors and customers.

The ACCC has a total of around 420 staff Australia-wide with approximately 124 of those in an enforcement role. This means that it must necessarily be selective in those matters it pursues. If the ACCC wants to maximise the use of its resources, it has to give priority to actions which are likely to have the greatest positive effect on compliance generally. Last year, the ACCC received around 90,000 complaints and of those only 80 resulted in litigation.

The ACCC will tend to give priority to matters where there is:

· apparent blatant disregard of the law; · significant public detriment; · national or ‘across States’ effect; · the potential for Court action to have worthwhile educative or deterrent effect; · a significant new market issue, eg, such as small business, franchising, or one arising from economic or technological change; and/or · an opportunity to test or clarify the case law of the Act.

However the ACCC always considers the per se offences under Part IV a high priority because of their effect on the economy and level of consumer detriment.

ACCC enforcement outcomes

In taking enforcement action, the ACCC seeks to:

· stop the conduct; · punish the wrong doing; · obtain redress for those affected; · prevent the conduct from re-occurring; and · publish the outcome as a deterrent/educative effect. Investigation Processes

It is worth noting from the outset that any investigation needs to be sufficiently flexible to suit the situation at hand to ensure a clear and accurate understanding of all the circumstances as they arise. No two situations will be the same.

Once a complaint has been examined in terms of its relevance to the Act and if it meets the ACCC’s enforcement criteria, staff usually go back to the complainant to obtain as much detail about their complaint as possible, ensuring any relevant documentation is obtained. This may also involve following up on any similar complaints, or obtaining corroborative information from other witnesses and seeking evidence from a variety of sources.

If, following an investigation, it appears that the matter may require litigation to resolve the problems, staff will obtain statements and affidavits from witnesses, seek legal advice in relation to the conduct and will in most cases engage in some discussions, either informal but more likely formal, with the trader before putting the matter to the ACCC management for its direction as to what further action is warranted.

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The ACCC also has a very powerful tool in the ‘section 155’ process. This section of the Act provides the ACCC with the power to issue notices of compulsion (similar to those of a subpoena) to provide information, documentation, verbal evidence, and search warrants. The ACCC does not use these powers lightly and it can only issue such notices if there is a sufficient reason to believe that an offence has occurred.

The following represents a very brief overview of a typical ACCC high level investigation process. The sequence of the steps is flexible and will depend upon the circumstances in each case and all of the steps outlined below would obviously not be required in cases where the matter is resolved in an informal manner or where no action by the ACCC is considered necessary. A more detailed overview can be found at Attachment A of Annexure Four headed “Overview of Investigations”.

· Complaint received - usually by telephone, letter, facsimile, in person or, anonymously.

· Seek more information (interview complainant) – collect all the necessary information as soon as possible after the initial contact with a view to obtaining a detailed outline of issues; who is involved; what the consequences of the conduct are; the structure and efficiency of the market; trading terms; market and product dimensions. In other words this is the ‘who, what, how, why and when’ of what allegedly occurred. If possible, formulate a witness statement for the complainant sign immediately. Even at this early stage it is critical to consider the elements of the offence.

· Selection Criteria test - Determine if the complaint meets the ACCC enforcement selection criteria.

· Evidence matrix – Prepare and consider what outcomes may be sought.

· Verification -There are always two sides to a story, hence it is prudent to conduct some market research and enquiries to ‘test’ what the complainant has alleged. Such enquires may include obtaining specific details from industry participants, those affected (other competitors, consumers, upstream and down stream supply and demand side considerations). Obtain witness statements from those interviewed.

· Analyse the initial evidence obtained in context of Act - Is there an arguable breach? What is the probity of the evidence obtained? What further information is required? What should be the source of that information and in what timeframe?

· Seek a response - You may put the substance of the issues to the trader/parties in writing stating the allegations, possible breaches and outcomes sought, seeking the trader’s response including seeking its comments as to what action/s it intends to take to remedy your concerns. However, in some circumstances it may be a tactical advantage to consider using s155 Notices of compulsion at an early stage, particularly if there is some doubt as to the willingness of the potential respondent to co-operate, or if the information (of itself) obtained to date appears to be sufficient to proceed to litigation.

· Legal Advice - It may be prudent to seek legal advice at this stage to look at the main issues, the sufficiency of evidence, what else is required, and what are the likely options available should litigation go ahead.

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· Other evidence - Consider the need for input or advice from expert witnesses (eg, economists) on the market information and evidence obtained to date.

· Interview the possible Defendant/Respondents – Conduct either informal or formal interviews of potential defendants and any further interviews of witnesses. Prepare statements from these interviews and have them signed, or conduct formal interviews of parties and prepare transcripts and statements.

· Section 155 – Consider issuing s155 Notices of compulsion to corroborate evidence or obtain required evidence. Prepare transcripts and statements from evidence given under oath. Collate and catalogue information and documentation provided.

· Analyse and Review – This is a time to stop and review exactly where the investigation has gone and what progress is being made. Assessments should be done of the material obtained to date against the evidence matrix to determine what additional material, if any, is required. Reassess the entire matter in terms of priorities and selection criteria.

· Reporting - Advise management of issues and recommend a course of action.

· Draft Pleadings – Finalise and confirm the legal advice and begin the process of drafting the pleadings in preparation for instituting court proceedings.

· Final Notice - Send final notice to parties (letter of demand).

· Institute court proceedings or pursue alternative enforcement action, to obtain outcome.

· Publish the outcome to inform the community and the affected parties of the action; and to deter the prospect of similar conduct. Some Australian agencies use the media to ‘name and shame’ offenders as an alternative to other forms of enforcement action to let the market (consumers) penalise the conduct – consumers are less likely to deal with businesses which are known to be dishonest or unethical.

· Debrief – assess how the matter was progressed, what was done well and not so well, lessons learnt and passed on, changes to future procedures and processes.

At the completion of the ACCC’s enquiries, there are several possible outcomes, including:

· taking no action (if the matter is not likely to be a breach of the Act); · recommend that the complainant pursue their own private right of action (where their may be a breach of the Act but the matter does not fall within the ACCC’s priorities); · referral to another state or federal agency; · low key administrative settlements; · Court enforceable Section 87B Undertakings1; or · litigation (either by consent or contested).

1 Section 87B of the Act allows the ACCC to accept formal administrative undertakings where there is evidence of a breach, or potential breach of the Act that might otherwise justify litigation. If an undertaking is breached the Federal court may make enforcement or compensation orders.

15 In addition to the above, attached to this paper are excerpts from the ACCC’s investigations manual. Annexure Four contains basic instruction with regard to Threshold Enquiries. Annexure Five contains basic instruction with regard to the Conduct of Investigations.

Case study 1 – Motor Vehicle Industry

Case overview

In September 1989 trading conditions for retailers of motor vehicles were in recession. Paragon Investments (a Toyota motor vehicle dealer) submitted a proposal to Prestige Motors that Toyota dealers in Perth Western Australia, reach an accord to fix the discount on the recommended retail price to be offered by dealers on Toyotas. The purpose of the proposal was to terminate the "heavy discounting of vehicles" said to be eroding the profit margins received by dealers and to return trading in vehicle sales to a profitable level.

Paragon arranged for a representative from each of the metropolitan Toyota dealers to attend a meeting of dealers on 20 October 1989. The corporate officers and a representative of Motorways attended the meeting. Paragon informed the meeting that it had been asked by dealers to "implement a survival policy" and would leave the meeting unless the dealers had resolved by 11 a.m. to take action in the terms proposed. Paragon informed the meeting that stock levels carried by dealers were very low and that sales of commercial vehicles had never been lower.

At that meeting the corporate officers, on behalf of the Toyota dealers, arranged that the price at which Toyotas, and accessories, would be sold by the dealers after 1 November 1989 be as follows:

(i) 'National Fleet - exactly in line with the Toyota published National Fleet Price List. Trade-ins and vehicle maintenance schemes by negotiation. Delivery fee $350.00.' (ii) 'General Fleet - exactly in line with the Distributor published General Fleet Price List. Trade-ins and vehicle maintenance schemes by negotiation. Delivery fee $600.00.' (iii) 'Local Government - exactly in line with the Distributor published Local Government Price List. Trade-ins and vehicle maintenance schemes by negotiation. Delivery fee $350.00 where applicable.' (iv) 'Retail Sales - because trades are usually involved and add-ons are available to improve total retained gross, there is no recommendation other than to give written quotes on the new vehicle exactly in line with the Recommended Retail Price list with negotiations commencing from that point. Delivery fee $600.00.' (v) Accessories and air conditioning not to be sold at a price less than the prices shown in price lists provided by suppliers. (vi) If permitted by Prestige Motors, a Toyota dealer could supply a Toyota at a lower price than the dealers had agreed upon provided that such permission would only be given if it is necessary for a Toyota dealer to offer a price on a Toyota vehicle that was competitive with the price offered by a supplier of a non Toyota vehicle. (vii) Each Toyota dealer was to deposit $5,000 with the advertising committee and sign a "fidelity pledge" in respect of that deposit, and to pay $5,000 to the advertising committee for any breach of the trading arrangements agreed upon by the dealers."

16 In November 1989 the Toyota dealers agreed to vary the arrangement by providing for retail sales prices to be discounted below the recommended retail price by an amount no greater than the recommended general fleet discount shown in the general fleet price list but each dealer was to commence negotiation with a prospective purchaser by quoting a price not less than the recommended retail price.

There was no restriction on the amount to be offered for a "trade-in" or upon the price at which vehicles that had been used for the purpose of demonstration may be sold. A Toyota dealer was not to provide a customer with gifts, or inducements of value.

The Toyota dealers agreed upon other minor variations to the trading arrangements from time to time and gave effect to those arrangements until November 1990 when the ACCC’s investigation commenced.

Framework of investigation

This matter was brought to the ACCC’s attention by a Toyota dealer who was not happy with the restrictions of the agreement and the penalty system. Because his dealership sold primarily ‘clean skin models’ (i.e. basic models with no options) he said the agreement severely restricted his ability to discount, that his volumes were down, and therefore ultimately that his profitability was down. The complainant telephoned the ACCC twice with information before being convinced to meet with ACCC staff.

A statement was prepared with the complainant which included the details of the arrangement, documentation recording the agreements, who was involved, how the system operated, and how long it had been operating.

Given scope of the conduct, its blatancy, and the strength of the statement provided by the complainant, the ACCC sought legal advice and input in preparing notices of compulsion to all of the participants, seeking documentation with respect to industry meetings, the agreement and motor vehicle sales records. However, once the parties were served with these notices, Prestige applied to the Court and challenged the validity of the notices of compulsion on administrative grounds that the ACCC used its powers for an improper purpose. This had the effect of delaying the entire investigation as the Court granted injunctions preventing the ACCC from enforcing the notices. After almost nine months the Court found in favour of the ACCC and the notices were allowed to stand.

Almost 20,000 pages of documentation were provided to the ACCC under the notices by more than thirty Toyota dealers. This information was collated and analysed. From these documents ACCC staff prepared a database which cross referenced sales activity that could pinpoint the effect of the agreement and quantify the consequences of the agreement.

Following this, further notices were issued requiring all the Toyota dealers to provide verbal evidence under oath. In reply to questioning under oath, a variety of responses were given by the dealers ranging from complete denial, pleas of misunderstanding, to admissions of guilt.

Notwithstanding this, given the compelling documentary evidence against the dealers, and the strength of statements prepared by the ACCC of several co-operating dealers, most conceded at hearing.

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In preparation for the trial, the ACCC sought expert advice from an economist with respect to how to argue the effect on competition, defining the market and the flow on effects the agreement had on the market overall.

6. Managing investigations

I would like to revisit a method raised by an ACCC colleague at the previous APEC Training Program at Bangkok last year which is a method of investigation management that is simple and helps investigators concentrate on the correct issues, plan what they need to do, and ignore irrelevant issues.

The Evidence Matrix

This method involves the use of what we call an evidence matrix. An evidence matrix allows us to examine an allegation, reduce that allegation to the elements of a contravention and then to assess the evidence available to satisfy each element of the contravention. It also enables us to record what avenues of inquiry might be pursued to satisfy other elements of the contravention not able to be proved. Evidence Matrix

Investigation: Prepared by: Date: Page of

Allegation Contravention Elements Avenues of inquiry

Let us now apply this form to a hypothetical situation. Let us imagine you are about to investigate a complaint that ABC Concrete Pty Ltd, Better Concrete Pty Ltd and Elite Concrete Pty Ltd have arrived at an agreement not to discount delivered concrete below AU$250 per delivered cubic metre, and have agreed not to compete outside geographical boundaries. You have a complaint from an efficient new entrant Cheapa Concrete Pty Ltd who has been approached by its competitors to abide by the terms of the agreement or face the consequences. Although this matter may raise a number of potential breaches under the Act, for simplicity this investigation will be conducted under sections 45 of the restrictive trade practices provisions of the Act.

The investigator should start by stating the general nature of the investigation and then state the law under which the matter is being considered. In the third column the investigator should list the elements of the offence. At that stage the form will look something like this:

18 Allegation Contravention Elements Avenues of enquiry

That ABC Concrete Pty Section 45 which states: “A A corporation shall not Ltd, Better Concrete Pty corporation shall not: Ltd and Elite Concrete Pty (a)make a contract or Make a contract, Ltd have arrived at an arrangement, or arrive at an arrangement, or agreement: understanding, if: understanding (i)the proposed contract, (i) not to discount arrangement or containing an exclusionary delivered concrete below understanding contains an provision; or a provision of $250 per metre, and exclusionary provision; or the contract (ii)a provision of the (ii) not to compete outside proposed contract, has the purpose, or is likely geographical boundaries arrangement or to have the effect of understanding has the substantially lessening purpose, or would have or competition, or be likely to have the effect, of substantially lessening give effect to competition; or (b)give effect to a provision a provision of a contract, of a contract, arrangement arrangement or or understanding, whether understanding the contract or arrangement was made, or the made before or after the understanding was arrived commencement of this at, before or after the section if that provision commencement of this section, if that provision: is an exclusionary provision, or (i)is an exclusionary provision; or has the purpose (ii)has the purpose, or has or is likely to have the likely to have the effect of effect, of substantially substantially lessening lessening competition. competition.

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By reaching this stage the investigator has identified the relevant law and identified the elements that need to be proved. The next stage is to identify the avenues of enquiry. This is where the matrix really helps the investigator concentrate on the relevant evidence.

The matrix will then look something like this:

Allegation Contravention Elements Avenues of enquiry

That ABC Concrete Pty Section 45 which states: “A A corporation shall not To establish that they are corporations and do actually trade, Ltd, Better Concrete Pty corporation shall not: can look at the official corporate registration documents, Ltd and Elite Concrete Pty interview the companies to record what they do, check Annual Ltd have arrived at an reports, sales documentation, telephone directories, internet agreement: enquiries, staff consumer enquires.

(i) not to discount (a)make a contract or Make a contract, delivered concrete below arrangement, or arrive at an arrangement, or Interview Cheapa Concrete Pty Ltd and prepare statement that $250 per metre, and understanding, if: understanding (Is it a includes an outline of their knowledge of any contract formal contract or an arrangement or understanding between ABC Concrete Pty Ltd, (ii) not to compete outside (i)the proposed contract, “understanding” based on Better Concrete Pty Ltd and Elite Concrete Pty Ltd, seeking geographical boundaries arrangement or oral agreements?) copies of any documentation, file notes, correspondence, diary understanding contains an entries or other material that relates to the matter. exclusionary provision; or containing an exclusionary (ii)a provision of the provision (how did they proposed contract, propose to share the market Research ACCC complaints data base for similar complaints arrangement or and to keep out new from consumers or industry participants and interview as understanding has the entrants?); or appropriate. purpose, or would have or be likely to have the effect, a provision of the contract of substantially lessening (any special clauses in Identify construction sites and seek assistance and information competition; or supply contracts?) from contractors in relation to history of supply.

20 (b)give effect to a provision has the purpose or effect of Might be able to obtain information from contractors who had of a contract, arrangement substantially lessening talked to sales representatives of ABC Concrete, Better or understanding, whether competition (what exactly Concrete and Elite Concrete about any illegal arrangements the contract or arrangement are the companies trying to which might have been put in place or imminent price rises was made, or the achieve – fix prices, share (and the reasons why). understanding was arrived markets and HOW did they at, before or after the propose to go about it)? commencement of this Seek contracts and documentation under notices of compulsion section, if that provision: (How did they give effect to (eg. s 155(1)(a)(b) notices) from ABC Concrete, Better the arrangement – did they Concrete and Elite Concrete. (i)is an exclusionary raise prices at the same provision; or time, stagger the increases, refuse to supply at lower Seek to interview ABC Concrete, Better Concrete and Elite (ii)has the purpose, or has prices etc - Concrete, under s155(1)(c) notice of compulsion to give verbal or is likely to have the evidence under oath. effect, of substantially lessening competition. Interview other employees of ABC Concrete, Better Concrete and Elite Concrete, to see whether they may have “heard” anything from the managers about any illegal arrangements being put in place (similar to Geelong Petrol case where manager “bragged” about price rises).

Try and find out details of “where” or “how” the arrangements were put in place – restaurant booking sheets, telephone records, witnesses who saw the companies having talks, email records.

Seek appropriate economic advice and input from an economic expert.

21 That matrix is somewhat general and incomplete, but I hope it explains the basic principles. By completing the matrix the investigator should be able to see where the gaps in evidence are and be able to organise the investigation to get the relevant evidence from the right people.

The evidence matrix or as it is sometime known ‘investigation plan’ or should be revisited and updated at regular intervals by the entire project team to ensure the investigation continues in line with the identified strategies and outcomes.

Once this process is mastered, it is easy to expand the matrix concept to include issues such as staff resources and time needed to complete the investigation. Such a form might look like this.

Time for completion of tasks

Avenues of Tasks and Resources Jan Feb Mar Apr May Jun enquiry staff Allocated responsible

To use such a form, you merely insert the avenues of enquiry from the evidence matrix and then map out the tasks that need to be done, who will do them, and when they will be required to be completed. This is an indispensable aid for the investigator.

Case study 2 – Fire Protection Industry

Case overview

The ACCC’s investigation commenced after a former company employee cam e forward and made certain allegations (without direct evidence) of collusion and cartel activity against a number of companies involved in the installation of fire sprinklers and alarm systems. Although there was no direct evidence, the information was sufficiently credible to prompt staff to commence an investigation. Staff began by interviewing as many former employees as they could locate, and eventually located people who could and would tell what happened. During the ensuing investigation, evidence also surfaced about misleading and deceptive conduct in the maintenance of fire protection systems, and then about secondary boycott activity by an industry-related union.

As the investigation progressed, a number of whistleblowers’ came forward to provide inside information.

The ACCC alleged that anti-competitive arrangements were made at regular meetings over many years, beginning in the mid-1980s. At these meetings, the companies agreed which tenders each would win by agreeing on prices to be tendered. They also agreed they would not discount their tender prices beyond a certain range.

The ACCC alleged that the parties agreed that all alarm projects would be tendered at a labour rate of AUD$40 per hour with a margin on labour and materials of 40%. This was known as "the 40/40 agreement".

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As a result of the above investigation, the ACCC discovered sufficient evidence to allege that numerous fire protection companies had committed various other contraventions of the Act. The evidence suggested they failed to meet Australian Standards in routine inspection, testing and maintenance of fire protection systems for approximately eleven years, and had inadequate systems to verify whether checks had been performed. (Australian Standards must be met in order to ensure the reliability and performance of these systems.)

In February 2001, after four years of investigation and an eighteen-month trial, the ACCC secured an award of AUD$15 million in penalties and costs. The case involved 38 individuals and 18 companies, ranging from large multinational corporations to small local operators. This constituted almost all Brisbane-based companies operating in the fire alarm and sprinkler installation service industry at that time.

In addition to the penalties and costs, the Court ordered injunctions, refunds, issuance of public notices, institution of compliance programs and undertakings to maintain management control programmes, after finding the companies had engaged in misleading and/or deceptive conduct, had made false representations regarding the standard or quality of services provided, and had accepted payment without intending or being able to supply goods or services.

Framework of investigation

The matter was initiated when the ACCC located former employees of some of the companies who were able to inform the ACCC of the conduct engaged in by the companies. Staff interviewed each of the witnesses informally to establish the details of the allegations and to obtain any relevant documentation or information which would assist the ACCC understand the circumstances as they arose.

The information provided by the witnesses was specific as to who was involved, what occurred, when meetings and arranged contracts occurred and how the arrangement worked.

The initial material was considered in terms of potential breaches of the Act (elements of the offence), whether it met the ACCC matter selection criteria, and what enforcement outcomes would be sought.

A project plan was created to manage the investigation. Given the ramifications to participants if the conduct was revealed, staff considered it would be very unlikely potential respondents would co-operate. Further, given the blatancy of the conduct, the serious safety impacts, and cost to the community, staff considered it appropriate that the investigation proceed by issuing notices of compulsion. Legal advice was sought with respect to preparation of the notices of compulsion.

Notices of compulsion were served on all relevant parties seeking details of all contracts tendered for.

The strategy was to identify all contracts subject to the cartel (within the enforceable time limit), and to then follow up with further notices requiring the production of documentation with respect to a finite number of those contracts. That was done.

23 In excess of 10,000 pages of documents and information were provided by the parties with respect to the notices. Surprisingly, the notices also resulted in two documents being produced which were found to be records kept at the cartel meetings setting out which firms were allocated the contracts. This material was catalogued and entered into a database for cross referencing, analysis and interrogation. After careful analysis of this material, staff were able to reveal and map the co-ordinated activity of the cartel and cross reference contracts and meetings between parties, (i.e. to prove that the cartel arrangement was put into effect).

The investigation strategy then called for a long series of compulsory interviews with key personnel. Before that strategy was put into place, a couple of companies, including one of the biggest companies, approached the ACCC wishing to confess in return for leniency. The ACCC agreed to leniency in the form of lower penalties, and interviewed the relevant corporate personnel. Word was soon out that that confessions were being received and the trickle of cooperation slowly turned into a torrent.

Transcripts were made of the interviews conducted, and statements and affidavits were prepared for all witnesses and respondents.

This material, combined with the evidence provided under oath, was sufficient to prove elements of the offence and the matter proceeded to litigation.

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