Most businesses now recognise that there are benefits in addressing the Environmental, Social and Governance (ESG) issues that might arise in their supply chains.

Media coverage, consumer awareness, legislation such as the Modern Slavery Act and pressure from investors have all focused corporate attention on the need for better environmental and human rights practices.

One of the most effective ways for businesses to solve these ethical risks in their supply chain is to collaborate. Other businesses are facing the same challenges, so it makes sense to share information, learn from one another and share the cost.

Collaboration may involve other businesses from within their sector, or from other sectors. It may take place in the context of an industry association or be coordinated by an NGO from the not-for-profit sector.

When setting up, or getting involved, in a cross-industry initiative, there are some legal risks that need to be considered. These risks can be easily managed, so they shouldn’t deter you from joining a project. However, taking some simple steps can help keep you away from problems – and make sure these risks don’t distract you from the important goals of the project.

So, what are the legal risks?

Any forum that brings competitors together can create some legal risk.

Australia is a free-market economy, where businesses are supposed to compete independently. Collusion is strictly prohibited. Businesses should set their own prices, provide better service and compete vigorously to get the best deal from suppliers and to win customers.

There are different ways that Australian competition law prohibits collusion between businesses.  And under Australian competition law – business “includes a business not carried on for profit”, so the rules apply equally to the not-for-profit sector.

The risk with cross-industry collaboration projects is that participants might accidentally cross the line into prohibited behaviour, such as:

• Cartel conduct. This is where businesses form arrangements such as fixing prices, restricting output or allocating customers, suppliers or territories.  Fixing prices goes both ways – the price at which products are sold to customers, but also the price at which products or services are purchased from suppliers. And it’s not just prices – the prohibition catches discounts or rebates too.
• Anti-competitive agreements. Any agreement (or even just an understanding or joint practice) that aims to, or that actually does, reduce competition is prohibited.
• Collective bargaining. This is where two or more competitors get together to negotiate with a supplier or customer. They may do this themselves, or via an industry association.
• Collective boycotts. This is where competitors agree not to buy from, or sell to, another business unless that business accepts the group’s terms.

There is also always an unofficial risk when bringing together competitors to discuss ethical issues in the supply chain. It opens new lines of communication between those competitors outside of the original forum. Business cards are exchanged, coffees are arranged, meetings are held. It is possible that these later discussions might move beyond the original subject and into illegal topics.

Some hypothetical examples

It is sometimes easier to understand these issues by thinking about some fictional examples:

• Competing supermarket chains get together and agree to add a 10-cent levy on all chocolate bars sold in store during December. The levy will be used to fund social initiatives that will support sustainable farming.
• A group of landlords share information about what price they are paying a service provider for sustainability audit reports. They agree that they should all be paying the same price for the service, and so they agree not to use that service unless the provider agrees to the new price.
• Three different charities charge businesses a fee, at commercial rates, to run training courses to help these businesses raise awareness of modern slavery in their supply chain. The charities meet to agree which sectors, regions and businesses each will focus on. To save duplication and wasted effort, they agree that they won’t promote their services outside this agreement.
• A charity undertakes a research project that collects information about what prices are being paid to different seafood suppliers in different markets. Companies who participate in the research get access to the report findings and the pricing data.
• An industry association representing the construction sector creates a new sustainability rating scheme. It scores suppliers of building materials according to how proactive those suppliers are about sustainability issues. The association tells members not to buy from suppliers that don’t have a gold star rating.

It might seem strange that some of these initiatives are restricted or prohibited. After all, if they were implemented, they would have important social benefits. However, the prohibitions apply because they risk damaging the competitiveness of the economy, which ultimately harms consumers.

Does the activity have social benefits that outweigh this consumer harm? If so, there are procedures to notify or get an authorisation from the Australian Competition and Consumer Commission (the regulator who polices these laws).

Case study

These legal risks can and do arise in the real world.

For example, during 2008, suppliers of laundry products started to discuss, via their industry body, a big switch from the old standard domestic laundry detergents to ultra-concentrates. This switch would have economic benefits (lower manufacturing cost, less packaging and higher profit margins). It would also have significant environmental benefits throughout the supply chain. It was going to be good for business, good for consumers and good for the environment.

The product suppliers were concerned that the switch needed to be carefully managed. For example, it might confuse customers if each supplier rolled out the new product at different times or used different labelling.

The discussions involved meetings and contact between the suppliers, an industry association and one of their major customers (a supermarket chain). The ACCC accused these businesses of cartel conduct, arguing that by coordinating the date of the switch, these businesses had agreed to withhold products from the market. One supplier and the customer decided to admit to the conduct and pay fines amounting to millions of dollars. Another supplier opted to defend their conduct. The court ultimately found there was not enough evidence, so no penalty was imposed. However, the distraction and time wasted on court proceedings would have also been substantial.

Managing the risks

It is a good idea to be aware of the risks if you are a business that is involved in cross-industry projects, or work for an association or NGO that supports these efforts. Luckily, there are some simple strategies that are easy to implement, and which will help you manage the risk:

• Have a Competition and Consumer Act compliance policy in place, supported by the right processes and regular training. In fact, providing effective training for managers and staff is likely to give you the best return on any investment you make in reducing legal risk. It will raise awareness of the legal risks and help build a compliance culture.
• Provide specific training or briefings for executives or managers who represent the company at cross-industry events.
• Start any discussions or meetings that involve competitors with a competition law warning and run the meeting to a written agenda.
• Recorded any discussion in minutes. Always check that these are accurate.
• Immediately stop any discussion that starts to get into prohibited issues. This includes prices, financial or other market information, strategic plans to increase or decrease production, customer or supplier information and the like.
• If there is any discussion about these issues, the best option is to leave the meeting immediately.
• If you are concerned that the organisation has become involved in a cartel, it is very important to get legal advice and act quickly. Immunity may be available, but only if the conduct is reported to the ACCC in time.

Conclusion

These risks can usually be easily managed. The first step is awareness. The next step is putting in place measures to prevent the risk from occurring. The legal risk shouldn’t deter you from working towards the important results that cross-industry collaboration can bring.

The important point is that these issues should always form part of the planning for your project.

Please note: The articles published on this blog are for general information purposes only. They are not legal advice! You should always obtain your own legal advice about your specific circumstances.