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Flushed with approval over the banking cartel case, Australia's Competition Commission starts another case

Editorial Staff

There's bound to be some head-scratching going on after the announcement of a cartel case relating to blood and body tissue. Before the "yuk" factor makes you turn the page, we should explain: it's all about stem cell preservation.

The facts of the case are simple: in Australia, in 2017, there were two and only two companies involved in business relating to "core blood" and "tissue banking." One, Cryosite, agreed to sell that part of its business to the other, Cell Care. In June 2017, they entered into an agreement for sale and, on signing, Cell Care paid AUD500,000 to Cryosite as a non-refundable part payment.

Basically, when a baby is born, the umbilical cord is full of blood: that is extracted and retained and stem cells can be extracted from it. Other material is collected at birth and also provides the stem cells which are frozen and can be used for a variety of purposes in later life: the research into this area is one of the most exciting, and well funded, areas of research as claims are made for the ability to grow broken body parts, repair organs and nerves and, even, to - possibly - generate new strong healthy cells that can defeat cancerous growths. But the near-science fiction elements of the material is not what the case is about. It's far more mundane than that.

ACCC claims that once the agreement was entered into and the half-a-million dollars handed over, Cryosite and Cell Care acted as a cartel because Cryosite essentially closed down its own operations and transferred them to Cell Care in advance of the sale being legally completed. ACCC has issued proceedings against Cryosite alone. In a statement, ACCC said "Prior to their entry into the asset sale agreement, Cryosite and Cell Care were the only private suppliers of cord blood and tissue banking services in
Australia. The stem cells in cord blood and tissue, which are collected at the birth of a child and then stored, can be used in the treatment of certain blood disorders. The asset sale agreement required Cryosite to refer all customer enquiries to Cell Care after the agreement was signed but before the acquisition was completed. The ACCC alleges this amounts to cartel conduct because it restricted or limited Cryosite’s supply of cord blood and tissue banking services and allocated potential customers from Cryosite to Cell Care. In these proceedings, the ACCC is concerned the alleged cartel conduct amounts to “gun jumping”. Gun jumping occurs when merger or acquisition parties are competitors and they combine or coordinate their conduct before the actual completion of the transaction. Parties to a transaction must remain independent and continue to act as competitors, even though they may have signed a merger or acquisition agreement, until completion of the deal."

There is logic in the position: if the deal were to unravel, as deals sometimes do, then there would be immense complications. The deal was subject to regulatory approval. This, the ACCC perhaps inadvertently, is what has upset it. "When parties implement a transaction before the regulatory approval process is finalised, they undercut the competitive process. Gun jumping undermines the effective functioning of the ACCC and the merger process, " said ACCC Chairman Rod Sims. He went on to say that this is the ACCC's first case relating to "gun jumping" but he said that other regulators have taken action in similar cases.

So, why would one scratch heads?

The position here is a simple position. Cryosite obviously wanted to be out of the business and instead of doing what everyone fears and simply closing the business, leaving the stocks of material orphaned, with notices being sent to their owners (i.e. the parents of the child whose material is stored) telling them to arrange for it to be picked up before the freezers are turned off. Even more importantly, Cryosite decided not to take on new business. That, Sims says is anti-competitive "by ceasing to supply cord blood and tissue banking services to new customers." Surely the ACCC does not suggest that a company cannot close down a business area and decline new business.

The reason ACCC has a case is that the contract actually provides for Cryosite to cease taking in new business and to refer all new prospective clients to Cell Care starting from the date of execution of the contract. In fact, Cryosite was not exiting the business entirely: it was simply not taking on new customers - which is not quite the same as not taking on new clients. The contract contained a term that Cell Care would not, as the ACCC puts it "market to Cryosite’s existing customers."

"The ACCC alleges these restraints and the ancillary agreement amount to cartel conduct because they restricted or limited the supply of cord blood and tissue banking services and allocated potential customers between Cell Care and Cryosite."

And then there's the fascinating end to the tale: according to ACCC "in January 2018 Cryosite announced the proposed acquisition would not be completed, it has not re-entered the market and has retained the AUD500,000 it received from Cell Care. Cryosite continues to store and release cord blood and tissue for customers with existing storage contracts."

So, there has to be some serious question as to what, if any, harm has been done. The ACCC wants "declarations, pecuniary penalties, a compliance training program (sic) and costs." Time to scratch heads. The deal was abandoned very shortly after ACCC "announced it would not make a decision on whether to grant clearance for the proposed acquisition under section 50 of the Competition and Consumer Act 2010 and would discontinue its public review of the proposed acquisition. The ACCC also announced it was continuing to investigate the circumstances surrounding entry into the agreement and the closing of Cryosite’s cord blood and tissue collection operations."

It all sounds rather like a fit of pique with the ACCC feeling that its authority has been compromised whereas Cryosite simply wanted to discontinue a service and found a way to hand off. Maybe there is something in the background that ACCC is so far keeping close to its chest but somehow it doesn't seem like this is a good and proper use of resources: there's plenty of other things that the ACCC should be doing rather than looking for alleged breaches of technical regulations where no one has suffered and arguably those involved were making the best of a set of circumstances which could caused distress for the customers of both companies.

Cynically, one has to say that the ACCC has been emboldened by the press profile that its action against several banks has achieved and now that the word "cartel" is popular, they are capitalising on it even though the case, while actually a genuine case, is one that should, perhaps, not have been at the top of someone's in tray.

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