On 16 June, the Minister of Commerce released an exposure draft of the Commerce (Cartels and Other Matters) Amendment Bill. The Bill follows a MED discussion document released in January 2010 seeking feedback on whether New Zealand should criminalise "hard-core" cartel conduct so as to optimise cartel deterrence, and to ensure international/trans-Tasman harmonisation.
The major changes to the Commerce Act proposed in the Bill are set out below.
Introduction of criminal liability for "cartel" behaviour
The Bill introduces a new provision prohibiting any person from entering into, and/or giving effect to a 'cartel provision' and consequently repeals the existing prohibition in section 30 of the Act.
The Bill defines a 'cartel provision' as a provision of a contract, arrangement or understanding which has the purpose of fixing prices, restricting output, allocating markets and rigging bids.
The terms "fixing prices", "restricting output", "allocating markets" and "rigging bids" are each defined in the Bill. In broad terms, in relation to agreements between competitors the Bill defines:
- price fixing to mean fixing, controlling, or maintaining of prices discounts etc., offered by the parties;
- restricting output to mean preventing, restricting, or limiting production, capacity, supply or acquisition by the parties;
- market allocating to mean allocating customers or geographic areas as between the parties;
- bid rigging to mean restraining a party from making a bid, or requiring a party to bid in a certain way (this includes both tenders and conduct at the expression of interest stage).
The new prohibition focuses on the purpose of the provision and excludes reference to the effect or likely effect of a provision. The Explanatory Note to the Bill explains that the focus on purpose is designed to remove the uncertainty associated with an effects based test where criminal liability can attach for a breach.
Criminal liability only attaches where a person knowingly enters into, or gives effect to, an arrangement containing a cartel provision. This knowledge element attaches on top of the requirement that the provision has a purpose of "fixing prices", "restricting output", "allocating markets" and "rigging bids".
The criminal offence provides for a maximum 7 year imprisonment term for individuals.
The existing civil liabilities will run alongside the new criminal offence and does require knowledge. For bodies corporate and individuals, the maximum penalty remains the same as the current maximum civil penalties.
Proposed exemption for collaborative activity
The Bill proposes a new exemption for 'collaborative activity' which replaces the existing joint venture exemption in section 31 of the Act.
The proposed exemption, as drafted, applies to all 'collaborative activity' which is reasonably necessary to achieve the purpose of the collaborative activity, and is not carried on for the dominant purpose of lessening competition. The exemption is intended to capture all pro-competitive arrangements, regardless of their form, and use of the term 'dominant' is intended to reflect that objective.
The exemption is only from the cartel prohibition; the general prohibition on arrangements which 'substantially lessening competition' will continue to apply.
Other proposed exemptions
The Bill also proposes an exemption in relation to bid rigging arrangements, where the parties to the arrangement have advised the person running the bid of the arrangement, and that person has agreed to the arrangement. The rationale behind this proposal is recognition that there can be pro-competitive collaboration between bidders in the bidding process (e.g. in the form of consortium bids or mutual discounts).
Additionally, the Bill clarifies the collective acquisition exemption by explicitly providing that an individual purchasing following a collective negotiation is exempt. The exemption also will apply to situations where an intermediary takes title to the goods and resells or resupplies them to another party to the arrangement.
Notably, the Bill proposes to repeal the existing exemption for price recommendations made by trade associations with 50 or more members. The rationale being that there is little economic justification for the exemption and the OECD has specifically recommended it be repealed.
The Bill proposes to introduce a clearance regime for arrangements which may breach the cartel prohibition. The clearance regime is intended to manage any residual uncertainty around the scope of the prohibition and the accompanying exemptions.
To obtain a clearance the Commerce Commission must be satisfied that:
- the cartel provision is reasonably necessary for the purposes of a collaborative activity; and
- the collaborative activity would not have, or would not be likely to have, the effect of substantially lessening competition in a market.
The effect of a clearance is to exempt the agreement from sections 27, 29 and 30(1) of the Act.
The Bill also proposes a transitional clearance regime which would enable parties to obtain clearance for arrangements entered into in the six months before the criminal regime comes into force. Additionally, the Bill proposes to extend the scope of the existing authorisation regime to arrangements containing cartel provisions.
Following the approach in Australia, guidelines will be developed to give greater clarity on the circumstances where the Commission would pursue criminal as opposed to civil prosecution. Factors to be considered include whether the cartel is longstanding, the harm or potential harm caused to the market and whether the participants have previously been involved in cartels.