The new cartel regime, including criminal penalties, is now a step closer. 

The Commerce (Cartels and Other Matters) Amendment Bill went through its first reading last week and has been referred to the Commerce Committee with submissions due by 6 September 2012.

But the proposed changes have already been widely consulted on so we think it is unlikely that the Bill will be much changed as a result of the select committee process.  This Brief Counsel is designed to provide you with a user’s guide or safety manual for the legislation.

What is being criminalised?

Price fixing: fixing, controlling or maintaining the price of goods or services that companies supply or acquire in competition with one another (including discounts, rebates or other elements affecting price).

Output restrictions: competitors agreeing to prevent, restrict or limit their production of goods or services or their output capacity.

Market allocation: competitors allocating customers, suppliers, or geographic areas.

Bid rigging: exactly what it says (rigging bids), including agreements not to bid or specifying bid terms - but only if the essential features of the co-ordination are not disclosed to the person running the bid before the bid is lodged.

What will be allowed?

Fortunately the policy makers were aware of the potential for legitimate pro-competitive cooperation to be inadvertently caught and have proposed a series of specific exemptions for:

  • vertical supply arrangements
  • joint buying and promotion, and
  • collaborative activity.  

The “collaborative activity” exception is a new concept.  Essentially it applies where the cartel provision (price fixing, output restriction, market allocation or bid rigging): 

  • forms part of a business arrangement that does not have the dominant purpose of lessening competition, and
  • is “reasonably necessary” for the purpose of that arrangement.   

There is an element of judgement here – so to address any uncertainty about whether the exception will apply, the Bill offers a safety net in the form of an optional pre-clearance mechanism.  This will be similar to the mergers and acquisitions clearance process.

Penalties regime 

   For criminal sanctions to apply, the breach must be deliberate.  It is a defence if the person honestly believes that the cartel conduct is excepted by the Bill.

Further, the Government has signalled that the Commerce Commission should “only prosecute cases of serious offending” and has deferred the introduction of criminal penalties until two years after the Bill comes into effect to give the market time to get used to the new rules.

The consequences for non-compliance are severe.  Individuals can face up to seven years’ imprisonment.  For companies, the penalties are:

  • fines of up to $10 million, or
  • three times the value of any commercial gain resulting from the contravention, or
  • 10% of turnover of the body corporate and any interconnected companies during the accounting period over which the offending occurred.  

In addition to which there are the costs of:

  • litigation, as the company cannot indemnify or insure its directors or employees against cartel offending
  • the time and distraction of having valuable people tied up in assisting the Commerce Commission with its inquiries or lawyers with the defence, and
  • the damage to reputation.  

So what can I do?

This is a good opportunity to audit your business and ensure that you will not be caught by the new criminalisation regime.  We list below some of the steps you might consider. 

  • Identify all relationships with competitors throughout the company or group.
  • Assess those relationships for “cartel risks” (seeking professional advice if there is any doubt).
  • Review the company’s policies around interactions with competitors.
  • Check that the company’s representatives on any trade associations (by their nature, usually made up of competitors) understand that the cartel prohibitions apply to the association and its members.