The Commerce (Cartels and Other Matters) Amendment Bill (the “Bill”) passed its first reading in Parliament yesterday, and has been referred to the Commerce Committee for consideration. The Bill proposes reforms that would fundamentally alter the scope and enforcement of New Zealand competition law.
While the introduction of prison sentences for cartel conduct has previously been the “headline” driver of the Bill, that aspect of the Bill has not really had strong public support. The Minister accordingly led his announcement with an emphasis on the proposed new exemption for collaborative arrangements between competitors.
Provided that the scope of this new exemption can be clearly articulated, Russell McVeagh continues to support this aspect of the reform on the grounds that it should limit the technical difficulties that can be encountered in applying the current joint venture exemption to certain types of pro-competitive collaborative arrangements.
This alert sets out:
- a refresher on the key reforms;
- how businesses can have their views on the Bill heard by the Commerce Committee; and
- what businesses should be doing to get themselves ready for the Bill's enactment, which we expect to happen during 2013.
The Government formally began the process towards cartel criminalisation in January 2010 when the Ministry of Economic Development (as it was at the time) released a Cartel Criminalisation Discussion Document. An exposure draft bill was released for consultation in June 2011 and the Bill was introduced into Parliament on 13 October 2011 (where it has been parked until receiving its first reading yesterday). The Bill encompasses the most substantive reform to the Commerce Act 1986 (“Commerce Act”) since its enactment.
We have considered the reforms in detail in previous Alerts1, but in summary, the proposed reforms include:
- Expansion of the existing price fixing prohibition to include all four OECD categories of hard-core cartel conduct, namely price fixing, market allocation, bid rigging and output restriction arrangements between competitors;
- Criminal penalties, including up to 7 years in prison, for individuals found to have intentionally engaged in cartel conduct;
- The replacement of the existing “joint venture” exemption from the price fixing prohibition with a new exemption for “collaborative activities”, which is intended to be broader and less technical than the existing exemption;
- A new clearance regime whereby businesses can seek immunity for collaborative activities that the Commerce Commission considers do not substantially lessen competition;
- An exemption for restrictive provisions in vertical supply arrangements that do not have the dominant purpose of substantially lessening competition;
- Significant expansion of the extraterritorial jurisdiction of the Commerce Act to capture acts that occur overseas where any part of a prohibited act occurs in New Zealand; and
- A new regime for mergers between foreign companies that affect markets in New Zealand, reflecting that merger control penalties under the existing regime may not be enforceable against companies that have no assets in New Zealand. Under the proposed new regime the Commerce Commission could apply to the High Court for a declaration that a merger by a foreign company substantially lessens competition in a New Zealand market and to seek an order that the foreign business must cease trading in New Zealand.
Different emphasis, same Bill
In 2011, when the then Commerce Minister, Hon Simon Power, introduced the Bill into Parliament, the announcement stated that “A bill that introduces criminal sanctions to deter hard-core cartel behaviour was introduced to Parliament today.”2 By contrast, yesterday's announcements by the current Minister, Hon Craig Foss stated that “A Bill designed to encourage pro-competitive collaboration passed its first reading in Parliament today.”3
In moving that the Bill be read for the first time, and referred to the Commerce Committee for consideration, the Minister emphasised that pro-competitive efficiency enhancing collaborative activities are to be encouraged, not prohibited, under the Commerce Act. He said that despite not being reflected in the title, a key purpose of the Bill is to encourage “pro-competitive collaboration and innovation” and that the collaborative activities exemption, the new clearance regime, and the vertical arrangements exemption act as three safeguards to ensure that the Bill appropriately targets anticompetitive behaviour that is harmful to New Zealand's productivity and competition.
The Minister also emphasised that the new collaborative activities exemption is designed so that businesses can assess for themselves whether their activities fall within the proposed exemption. To achieve that self-assessment, businesses will need to establish that their proposed activity has a legitimate collaborative purpose, does not have a dominant anticompetitive purpose, and that the cartel provision is reasonably necessary to achieve the desired purpose.
As outlined in Russell McVeagh's original submission on the Bill, in order to enable self assessment to work effectively, it will be important that there is sufficient clarity as to how the collaborative activities exemption will be applied given it is a novel exemption internationally and, at this stage at least, no further clarity is provided in the Bill itself.
Labour MP, Raymond Huo, speaking to the Bill, outlined the steps the Ministry has taken to address Russell McVeagh's concern that the lack of certainty around this exemption could have a chilling effect on competition and business innovations - including the allocation of budget for the Commerce Commission to develop prosecution guidelines and guidelines on their approach to the collaborative activities exemption.
For its part, the Commerce Commission is pro-actively starting to do a significant amount of work to develop its view on the new exemption in advance of the Bill being passed. Russell McVeagh will participate in that consultation with interest.
Submissions to the Commerce Committee
The Minister acknowledged the usefulness of submissions during the earlier stages of the Bill's development and encouraged further submissions to the Commerce Committee on the Bill. Although the Commerce Committee is yet to call for submissions on the Bill and the timeline is therefore yet to be determined, it can be expected that submissions will be due by mid-September, with hearings to follow. That will be the last opportunity for interested parties to have their views heard on the Bill. The Commerce Committee is due to report on the Bill by 13 January 2013.
Are you ready?
The Bill, once enacted, will apply to any arrangements entered into before it is enacted that continue in effect. Although there is a two year delay before the criminal offence provisions apply, the new definition of cartel conduct and the new defences will be enforced through the civil regime once the Bill is passed so we therefore recommend that businesses start to consider how they would screen their existing arrangements with actual or potential competitors, to consider which of them, if any, may need to be reviewed for the extent to which they might be at risk under the new prohibitions and/or would benefit from the new exemptions. If such arrangements do not fall within the new exemptions, continuing to give effect to them may constitute a serious breach of the law unless Commerce Commission clearance is specifically obtained.
If you are uncertain as to whether or how this Bill may affect your business, or would like assistance in making a submission to the Commerce Committee, please contact one of the contributors below.