Early last year, we signalled proposals to criminalise cartel conduct in New Zealand (see 3 February 2010 FYI). With the recent introduction of the Commerce (Cartels and Other Matters) Amendment Bill (the Bill) into Parliament on 13 October, those proposals are one step closer to reality.
While the introduction of criminal sanctions for hard-core cartel activity is likely to be the most talked about change, the Bill makes other significant changes to the law surrounding cartels, as well as competition law in general.
Many of New Zealand's major trading partners, such as Australia, the United States and Europe recognise the serious negative effects of cartels by providing for criminal sanctions for breaches of cartel laws. Although New Zealand has been slower to move on this, the importance of harmonising our business laws with those of Australia has seen the government seek to progress this over the last two years.
The Ministry of Economic Development released a discussion paper recommending criminalisation in early 2010. An exposure draft of the Bill was released in June of this year with the Bill being tabled in Parliament, largely based on the exposure draft, on 13 October.
The cartel prohibition
The first major thing the Bill does is clear up uncertainty over what the cartel provisions of the Commerce Act (the Act) cover. The provisions of the Bill replace the current wording of section 30 with a ban on entering into or giving effect to contracts, arrangements or understandings that contain a "cartel provision". A cartel provision is a contract, arrangement or understanding between competitors that has the purpose, effect or likely effect of price fixing, restricting output, market allocating or bid rigging.
Exemptions to the cartel provision
The Bill exempts a number of situations from being caught by the cartel provisions. These are collaborative activities, vertical supply contracts and joint buying and promotion agreements.
The collaborative activities exemption replaces the previous joint ventures exemption. Collaborative activities are defined as being enterprises, ventures or other activities in trade that are carried on in co-operation by two or more persons, and are not carried on for the dominant purpose of lessening competition between the parties. The cartel prohibition does not apply to a contract, arrangement or understanding that contains a cartel provision as long as it is reasonably necessary for the purpose of the collaborative activity.
If a defendant is seeking to rely on these exemptions in a proceeding against it for civil penalties, the burden of proof is on the defendant to show that the exemptions apply.
Clearance regime for collaborative activities
The Bill adds a clearance regime, much like the business acquisition clearance regime, for people entering into collaborative activities. A person entering into a contract, arrangement or understanding containing a cartel provision will have the opportunity to apply to the Commerce Commission for clearance. If clearance is granted, this procedure will allow people entering into collaborative activities to proceed, safe in the knowledge that the Commerce Commission will not investigate them for breaches of the cartel provisions.
The Commerce Commission may give clearance for a cartel provision if it is satisfied that:
- the parties are involved in a collaborative activity;
- the cartel provision is reasonably necessary for the purpose of the collaborative activity; and
- the collaborative activity will not, and would not be likely to have, the effect of substantially lessening competition in a market.
The most talked about change in the Bill is the introduction of criminal penalties for individuals for cartel behaviour. The Bill only criminalises what is often referred to as "hard core" cartel conduct. That is, a person will only be criminally liable if they enter into, or give effect to, a cartel provision with an intention to engage in price fixing, restricting output, market allocating or bid rigging. It is a defence if the defendant honestly believed at the relevant time that an exemption in sections 31-33 (ie collaborative activities etc) applied.
Penalties for those convicted under these provisions include prison terms of up to seven years for individuals. The criminal liability provisions do not come into effect until two years after the Bill is passed.
The Bill makes a number of changes important amendments to the Act including:
- the time after which a clearance for a business acquisition is deemed to be declined if the Commerce Commission has not responded in writing is increased from 10 to 40 working days;
- while the penalties for companies breaching the restrictive trade practices provisions of the Act remain similar at the greater of $10 million, three times the commercial gain or 10% of turnover, the Bill makes it clear that this latter element is 10% of the turnover in each accounting period in which the contravention occurred;
- exemplary damages can be payable by a defendant even if they are already liable to pay a pecuniary penalty for a restrictive trade practices contravention;
- penalties for failing to co-operate with Commerce Commission investigations are increased from $10,000 to $100,000 for individuals and from $30,000 to $300,000 for companies.
When does the Bill come into force?
Parliament has risen for the election, so the Bill is yet to receive its first reading in Parliament. The Bill could be subject to changes as it works its way through the Parliamentary system. It is unclear when the Bill will pass into law, but it may well be that this does not happen until 2012. We will keep you updated on progress.
In the meantime, companies should be aware of these important changes and take note of the fact that criminal liability for cartel behaviour in New Zealand is imminent. You should begin reviewing arrangements that might fall under one of the four elements of the new cartel provision definition to check whether they could apply to you, and whether any of the exemptions could apply.
Given that jail-time for cartel offences will start two years after the Bill is passed into law, now is the time to revisit compliance programmes to ensure that individuals are fully aware of the cartel prohibition and its requirements.