This article first appeared in Forum, The Edge Malaysia Weekly on June 29, 2020 - July 5, 2020

Companies are facing unprecedented uncertainties and challenges, including liquidity problems and disruptions to supply and distribution chains, owing to Covid-19. Even as Malaysia recovers and reopens for business, the true economic impact remains to be seen as the length and severity of the global pandemic remains unknown. With many companies struggling for survival, some may wonder if there will be any accommodation when it comes to compliance with competition laws in Malaysia.

Several antitrust regulators around the world have granted temporary exemptions from compliance during the Covid-19 outbreak. In the UK, to avoid panic buying and to ensure that consumer demand can be met, the Competition and Market Authority has allowed retailers to share data on stock levels, cooperate to ensure stores remain open and share distribution depots and delivery vans. Similarly, the US Department of Justice and Federal Trade Commission have introduced a fast-track process to accelerate the review of Covid-19 proposals involving competitor collaboration, such as research and development partnerships, sharing of technical know-how and joint purchasing arrangements among healthcare providers.

To date, however, the Malaysian Competition Commission (MyCC) has not issued any statements to relax competition law compliance in light of the pandemic. As such, it is important to note that the Malaysian Competition Act 2010 (MCA) continues to apply to businesses. There is no “corona pass” that will automatically excuse, exempt or defend any violations of the MCA and the conduct of business during this period remains subject to MyCC’s scrutiny.

Lawful collaborations versus crisis cartels

Many companies may be considering (if not already) reaching out to their competitors that are facing similar challenges to collaborate and weather the storm together. Collaborations that are pro-competitive, or do not have the object or effect of significantly preventing, restricting or distorting competition, will not violate the MCA. Covid-19 does not change this gold compliance standard.

Anti-competitive collaborations can only be justified under Section 5 of the MCA if they directly result in significant and proportionate efficiencies or social benefits that could not reasonably have been provided without the anti-competitive effect, and there is no complete elimination of competition in a substantial part of the market. Given the current pandemic, there may now be stronger arguments to justify certain forms of collaborations under the MCA, such as:

•     the collaboration is required to increase output or avoid a shortage of supply of essential products or services (for example, joint manufacturing of and sharing of distribution channels for an essential product);

•     the collaboration is limited in time and geography, which is defined by the pandemic; and

•     the scope of the collaboration is regularly checked to ensure that it remains necessary, given that economic conditions are rapidly changing in response to the crisis.

A distinction, however, must be drawn between potentially justifiable collaborations and “crisis cartels”. A crisis cartel commonly refers to a scenario when market players jointly decide in times of a crisis to reduce overcapacity in the market or agree on price levels of their products to prevent bankruptcy or departure from the market.

In 2008, the European Court of Justice (ECJ) considered the treatment of crisis cartels and held that an agreement between 10 Irish principal beef and veal processors to reduce their processing capacity by 25% within one year was unlawful, notwithstanding the ongoing economic downturn. The agreement involved the withdrawal of certain competitors from the market, which would then receive compensation payment from the remaining competitors. The ECJ considered that the agreement to reduce capacity constituted restriction of competition by object and could not be justified, even though it pursued other legitimate objectives.

In Malaysia, MyCC considers cartels as an “object” infringement of the MCA and has placed high priority in pursuing them. Since the MCA came into force in January 2012, six of the seven final decisions issued by MyCC were against anti-competitive agreements between competitors. It is unlikely that MyCC will treat crisis cartels any more leniently than other types of cartels, even in the face of a serious economic downturn.

Coordinated action between competitors to reduce capacity is not likely to be necessary even during a crisis as, typically, market forces would work to remove inefficient players or excess capacity from the market. Even in cases of prolonged structural overcapacity, which cannot be remedied by market forces alone, MyCC is likely to consider whether there are less restrictive measures — for example, whether there is a credible possibility that the excess capacity can be addressed by way of mergers and acquisitions. As such, we believe that only exceptional crisis cartels will fulfil the conditions of Section 5 of the MCA.

Even so, the MCA provides an avenue for companies to apply for relief from liability under it by way of individual or block exemption. To benefit from such exemptions, parties to the crisis cartel would still need to demonstrate significant efficiencies and social benefits that can outweigh anti-competitive effects to fulfil the requirements of Section 5 of the MCA.

Economic crisis as mitigation factor in fines

Crisis situations are not expressly stated as a mitigation factor in determining a potential fine under the MCA or MyCC’s guidelines on financial penalties. MyCC has previously stated in its decisions that it is important for financial penalties to act as a deterrent and send a strong signal to the business community of the seriousness of the infringement.

However, in MyCC’s 2015 decision against the 15 members of the Sibu Confectionery and Bakery Association, it decided not to impose any financial penalty on one of the defendants as he became bankrupt and only generated a very insignificant amount of turnover during the infringement period. This seems to suggest that when determining financial penalties, MyCC may consider the ability of the enterprises with financial difficulties to pay the fine.

In times of economic trouble, companies may be tempted to enter into arrangements with their competitors to maintain their stability in the market or to ensure their collective survival. Under the MCA, however, even a short-term cartel will attract liability.

While the Covid-19 pandemic may potentially justify certain types of collaborations, it should be limited to only essential products and services and operate within the parameters of the MCA. Companies must not exploit the crisis as a disguise for non-essential collusion during this period.

The general position that businesses must continue to act independently and compete with one another remains even during a crisis. Consequences resulting from non-compliance with the MCA (which may include hefty fines and reputational damage) will deal an even harder blow to companies that are already suffering from the economic downturn.

Andre Gan and Lydia Kong are partners at Wong & Partners, a member firm of Baker McKenzie International

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