The Government has taken another step toward the criminalisation of cartels with the release last week of draft legislation.
Submissions close on 22 July, 2011.
The story so far
The Ministry of Economic Development (MED) set the ball rolling in February last year when it released a discussion document outlining the case for criminalisation and called for feedback.
A key theme of the submissions was that it would be difficult to distinguish in legislation between hard-core cartel conduct and legitimate pro-competitive collaboration, and that failure to make this distinction would inhibit genuine efficiency-enhancing commercial practices.
So how does the Bill define cartel conduct?
The Bill defines “cartel provision” as:
…a provision contained in a contract, arrangement, or understanding that has one or more of the following purposes:
- price fixing
- restricting output
- market allocating, or
- bid rigging.
The Bill also exempts:
- collaborative activity (defined as an enterprise, venture, or other initiative in trade involving co-operation by two or more persons and not engaged in for the dominant purpose of lessening competition)
- notified bid coordination, and
- joint buying and promotion agreements.
It is the “collaborative activity” exemption that will likely be of most interest to business as this covers common arrangements such as joint ventures.
Chapman Tripp commentary
The definition in the Bill does not provide any meaningful limits as to what can properly be called hard-core cartel conduct – it is simply too broad to do so. We must look to the exemptions for any comfort that pro-competitive behaviour will not be captured.
Problematically, MED has taken the high risk approach of starting from scratch in drafting the exemptions, having only indirect recourse to the tests applied in overseas jurisdictions. This means that they are untested and it is anyone’s guess as to how a court might view them. We think this creates an unacceptable level of uncertainty.
Further, the Bill places the onus on the defendant to establish the exemption. When businesses and executives are faced with the possibility of proving in a courtroom that the joint venture they are involved in did not have a dominant purpose of lessening competition, the potential for a chilling effect on efficiency-enhancing commercial practices is obvious.
That said, the collaborative activity exemption does appear to be quite broadly framed and might just be sufficient to exempt genuinely pro-competitive behaviour. Whether that is the case, and whether it will provide sufficient comfort for businesses to make commercial decisions (without the spectre of criminal liability), is a legitimate question that needs to be addressed.
Other features of the Bill
The new cartel offences are accompanied by new, and more painful, penalties for individuals. An individual can face up to seven years’ imprisonment. This recognises that individuals are the driving force for cartel behaviour. A company faces the same maximum penalties as before the Bill, namely the greater of:
- $10 million, or
- three times the value of any commercial gain resulting from the contravention, if it can be readily ascertained, or
- 10% of the turnover of the body corporate and all of its related companies.
However, the penalties for criminal cartel behaviour will be significantly higher than for civil breaches of the Act.
A clearance regime – some comfort?
The Bill introduces a clearance regime for pro-competitive activity likely to fit the “cartel provision” description. The idea is that firms concerned about whether their activity is exempted can apply to the Commerce Commission for a clearance. If granted, the clearance will protect firms from prosecutions by the Commission or third parties.
This new regime should provide comfort to risk-averse firms, reduce chilling effects and ensure that money is not wasted over litigating whether the conduct fits an exemption. However, the regime could also see the Commission swamped with applications: prison time for executives is a strong incentive to ensure you fit an exemption.
If it takes too long to get a clearance, conservative firms will abandon the proposed pro-competitive activity.
Finally, the kitchen sink
The MED has taken the opportunity of the Bill to fix what it sees as a range of other areas of uncertainty in the Act or to tweak provisions that have produced inconvenient results for the Commission in the recent past. Our initial comments on these are outlined in the table below.
Please click here to view table.