The Commerce (Cartels and Other Matters) Amendment Bill calls for the criminalisation of cartel conduct in New Zealand. It currently awaits second and third readings in Parliament. The Bill appears likely to be passed later this year or in early 2014. This Q&A discusses the implications of the Bill and outlines what businesses should be doing now, before it comes into force.
What is the main change brought about by the Cartel Bill?
The most talked about change that the Bill introduces is the criminalisation of "hard-core" cartel activity. This will bring New Zealand law up-to-speed with our major trading partners, like Australia, which have already criminalised cartel activity in recognition of the serious negative effects of cartels.
How do people know whether their business activities will be caught by the new cartel laws?
There are three types of "cartel" provisions, all of which involve anti-competitive arrangements between competitors.
Price Fixing - this is an arrangement between competitors to fix, control or maintain the price of goods or services that they supply or acquire in competition with each other. This was already prohibited by the Commerce Act.
Restricting Output - this is an arrangement between competitors to prevent, restrict or limit the production of goods, the capacity to produce goods, or the supply of services that they supply or acquire in competition with each other. This is a new provision. Previously this type of conduct would only have been illegal if it substantially lessened competition or amounted to price fixing.
Market Allocating - this is an arrangement between competitors to allocate between them the customers or classes of customers to whom they will supply goods or services, or the geographic areas in which they will supply goods or services. Again, this is a new provision.
If someone is involved in a "cartel" what could happen to them?
There are both "civil" (non-criminal) and criminal consequences for individuals and companies alike.
Companies can face civil penalties of the greater of $10 million per contravention, three times the commercial gain from the cartel activity or 10% of the company's turnover in the accounting period in which the contravention occurred.
Individuals can face civil penalties of up to $500,000 and, if found criminally liable, they can face jail time of up to seven years. Only intentional cartel conduct has criminal consequences - other breaches of the Commerce Act are not criminalised (eg misuse of market power).
Companies and individuals who are civilly liable can also be liable for additional penalties known as "exemplary damages" in very serious cases.
What's the difference between civil and criminal liability?
To be civilly liable, you need not intend to participate in cartel conduct.
But, to be criminally liable, you need to intend to participate in cartel conduct and it will be a defence if you honestly believed at the relevant time that the cartel provision was permitted under the legislation because it was a "collaborative activity".
What is the "collaborative activity" exemption for cartel conduct?
Cartel conduct will be exempted where the people involved in the cartel conduct are participating in a "collaborative activity." This is broadly defined as an activity in trade carried on in co-operation between two or more people that does not have the dominant purpose of lessening competition between the parties. The cartel arrangement must be reasonably necessary for the purpose of the collaborative activity. An example would be a joint venture between competitors to manufacture a new product, where the competitors then set the price of the new product. The collaborative activities exemption replaces the narrower exemption for joint ventures.
How can someone be sure that their activities will fit within the collaborative activities exemption?
There will be a new "clearance" regime that is similar to the business acquisition clearance regime. If you are entering into an arrangement that contains a cartel provision, you will have the opportunity to apply to the Commerce Commission for clearance to establish beforehand that the activity is legal.
If you receive clearance, you can safely proceed knowing that you fit within the collaborative activities exemption and the arrangement will not be in breach of the Commerce Act. The Commerce Commission will be able to revoke a clearance if it was granted based on information that was false or misleading, or there is a material change in circumstances.
Note, however, that a collaborative activities clearance is not available for an existing cartel arrangement. So, a clearance must be proactively sought before arrangements are put in place.
Are there any other exemptions to cartel conduct?
Yes. Many of the existing exemptions in the Commerce Act still apply and some have been amended. For example, there is an exemption for joint buying and it is now clear that joint negotiation of the price of goods or services by competitors is exempt. It is also made clear that there is no breach when competitors are supplying each other in a customer/supplier relationship, and when a supplier sets a maximum resale price for goods or services.
Is there any way to avoid these penalties?
The Commerce Commission's Leniency Policy gives immunity from prosecution to the first member of a cartel to report it to the Commission. In exchange for assistance with its investigation, and the provision of information, the Commission will agree not to bring proceedings for breaches of the Commerce Act. Leniency is granted on a strict first come, first served basis - so, if you are beaten to the Commission by another cartel participant, then you cannot get leniency. The Commission may, however, agree to seek lower penalties in exchange for the co-operation of other cartel participants.
If a cartel participant does not have sufficient information to lodge a full leniency application, it may seek a "marker" from the Commission, in order to preserve its position as first in line for leniency.
Has the Commission got any other new powers?
The Commission retains its wide powers to obtain information and documents from people under investigation and to require them to attend an interview. However the penalties for failing to comply with the Commission in its investigation have increased from $10,000 to $100,000 for individuals and from $30,000 to $300,000 for companies.
If a person is under investigation for cartel conduct do they have a right to silence?
No. If the Commission requires someone to attend an interview in the course of its investigation into cartel conduct (or any other breach of the Commerce Act) they must answer questions put to them, or they can be criminally prosecuted and fined. Statements gathered in such an interview can only be used in evidence in a subsequent criminal or civil case if the person concerned gives evidence which is inconsistent with what they told the Commission.
Are there any changes to how the Commission administers mergers and acquisitions?
The Commission vets mergers and acquisitions to ensure that they do not create a substantial lessening of competition in the markets concerned. Merger parties can apply for clearance, which the Commission will grant if it is satisfied that a merger will not substantially lessen competition. There are minor changes to the Commission's merger clearance processes. The Commission will now have 40 days instead of 10 days to respond to a clearance application for an acquisition, which reflects the fact that in practice the 10 day limit was almost never able to be met. There have been some changes to the rules relating to situations where an overseas person acquires an interest in a New Zealand company.
Are there any other significant changes?
There are a variety of small but significant changes to the Commerce Act. It is clarified that a company cannot indemnify directors or employees or agents for either civil or criminal claims. There are also changes to the Commerce Act's overseas jurisdiction, which define when conduct taking place overseas is deemed to occur in New Zealand. The Bill also clarifies the circumstances in which an employee or agent's conduct can be attributed to a manager or employer.
The current prohibition on "exclusionary" arrangements, when competitors agree not to deal with another competitor will also be repealed. Such cases will now fall to be analysed under the general prohibitions against substantially lessening competition or under the cartel prohibition.
Many parts of the Commerce Act have been unaffected. For example, the law relating to misuse of market power has not changed.
What stage is the Cartel Bill currently at and when will it become law?
The Bill was reported back from the Commerce Select Committee in May 2013 and indications are that it will be passed in late 2013 or early 2014.
The civil penalties for cartel conduct come into effect as soon as the Bill is passed into law. The criminal penalties will come into effect two years after this.
For cartel arrangements which were already in place when the new law comes into effect, there is a nine month transitional period under which no proceedings can be taken under the new laws. During this period, proceedings can still be taken under the current price fixing prohibition, so this transition does not provide a loop hole for conduct that is currently illegal. However, it will not be possible to get a clearance under the collaborative activities exemption for existing arrangements. It will be necessary to either re-jig or end such arrangements to comply with the law.
What do businesses need to start doing to prepare for the changes that the Bill will make to the law?
Businesses should begin reviewing arrangements that might fall under one of the three elements of the new cartel provision definition, particularly the newer prohibitions on restricting output or market allocating. If so, they need to consider whether any of the exemptions could apply. Businesses should consider if they need to apply for a clearance in relation to any "collaborative activities" in which they wish to participate.
Listen to our Insights video on the Cartel Bill here.