Beware when commercial discussions lead to trouble

Wade Pearson, David Smillie

Businesses often work with other businesses – through distribution arrangements, joint ventures, or collaborations. However, sometimes these initially legitimate discussions can have unintended and significant consequences – such as a fine of almost one million dollars. One recent case is a good reminder to be careful when discussing commercial details with potential competitors.

The case concerned two businesses – Milfos and Dairy Automation. Milfos designed, made and sold milking sheds for dairy farms. The milking sheds incorporated milk sensors, to help farmers see the health of their cows, and the milk sensors often came with herd management software. The other business, Dairy Automation, sold both the sensors and the herd management software to Milfos on a wholesale basis.

Discussions begin

In mid-2010, Milfos and Dairy Automation began exploring the possibility of Milfos becoming the exclusive retailer of Dairy Automation’s milk sensors in New Zealand. In these discussions, the two businesses shared pricing details for their products. Milfos even created an Excel spreadsheet that sales staff from both businesses used to calculate quotes for customers.

Later on – in 2012 – Milfos and Dairy Automation agreed to present a joint site at field days. Crucially, they also agreed not to quote against one another for the same customers (note: this is almost always anti-competitive). They revised the prices in the quote calculator, which resulted in prices that were higher than Dairy Automation’s prices, but lower than the prices used by Milfos.

Two years passed, and by September 2014, they hadn’t been able to agree on an exclusive supplier or distributor arrangement. In the meantime, both businesses had been using the quote calculator and sticking to the agreed prices when quoting customers.

Investigation and fine

Eventually, the Commerce Commission investigated and took Milfos to court for price fixing. Price fixing is illegal, as it involves businesses agreeing to not compete with each other, so that they can make more money. Milfos accepted that by using the quote calculator, it had fixed the prices that Milfos and Dairy Automation used to offer milk sensors and herd management systems to customers. This anti-competitive conduct lessened competition in the market, which meant Milfos had breached the Commerce Act 1986.

Given that Milfos admitted its conduct, the case focused on sentencing: determining how much money Milfos had to pay. Fines for anti-competitive conduct can be up to $10M (or higher), but in this case the Commission and Milfos agreed to a fine of $825,000. The Court approved this amount, which already included a 25% discount to recognise that Milfos had admitted its role and cooperated with the investigation. Milfos also contributed $100,000 to the Commission’s legal costs.

Lessons

So what can be learnt from the case? The big lesson here is to be very, very careful when discussing prices with anyone who could be a competitor. The classic danger area is at industry events or within trade associations. But this can also apply in other contexts – like here, where the businesses were discussing collaboration in an initially legitimate way.

If you are considering collaborating with a competitor, you should (as much as possible):

Above all, take care when entering discussions with potential competitors – especially with price-sensitive information. The anti-competitive conduct prohibitions in the Commerce Act 1986 have a wide scope. So even an initially legitimate discussion could end up landing you with a hefty fine, if you forget to protect yourself.

If you want to know more, the Commerce Commission’s website (comcom.govt.nz) has some useful guidance on what to watch out for.

This article originally appeared in the Otago Daily Times on 30 September 2019.