In 2010 the Commerce Commission commissioned research that found "disappointing levels of awareness of the Commerce Act in the business community". Only 58% of those businesses who were aware of the Commission believed the Commerce Act applied to them. Further research in the same year as to the levels of awareness of competition law in the non-residential construction sector found "little understanding of what cartel behaviour is" and revealed that the practice of "cover pricing" – where competitors talk to each other to come up with a believable but not genuine bid for a job – was common.

If awareness levels of what constitutes cartel activity are as bad as the research suggests, one hopes the risk of seven years imprisonment for this type of behaviour will make the business community sit up and take notice because prison terms for cartel conduct are now a virtual inevitability.

The Commerce (Cartels and Other Matters) Amendment Bill has passed its first reading and is currently before the Commerce Select Committee, with submissions due by 6 September. The aspects of the Bill that will introduce criminal sanctions for "hard core" cartel conduct are supported, not only by the Government, but also other parties including Labour and the Greens. Given this, whatever one thinks of the new law, or its need, the policy decision to criminalise seems well and truly set. The Select Committee process is likely only to tinker with the detail.

Ignorance of the law has never been an excuse, and therefore businesses (and the lawyers that advise them) should already be putting dates in the diary for competition law training of all staff that have any dealings with competitors. This includes staff who sit as company representatives on trade associations and other industry bodies. Thorough reviews of any commercial agreements involving competitors – both existing and intended – should also be conducted.

What is to be criminalised?

If there is to be a criminal offence for cartel conduct, it is essential that exactly what may see someone sent to jail is as certain as possible. The Commission's research suggests it may come as a shock for some to learn that what may have become standard industry practice will soon be a criminal offence. Thus, the training that staff will attend needs to be able to explain in plain terms what is, and is not, legal.

In this regard, the drafting of the core prohibitions makes matters pretty clear. An illegal cartel provision is an agreement reached between competitors that involves:

  • price fixing – agreeing the price (or level of discount, allowance, rebate or credit) at which goods or services are supplied or acquired;
  • restricting output – agreeing to prevent, restrict or limit levels of production or capacity;
  • market allocating – agreeing to allocate customers or geographic areas between them; or
  • bid rigging – agreeing not to fully compete in a bid or tender process (except where this has been made known to the person running the bid/tender in advance). The practice of "cover pricing" would certainly be covered here.

These definitions of what is / is not legal compare favourably with the existing price fixing prohibition in section 30 of the Commerce Act, which is imprecise in its scope. Spelling out the prohibited conduct in this way also brings New Zealand's prohibition closer to the approach taken in other jurisdictions including, for example, the United Kingdom.

What's not criminal?

A risk of criminalising aspects of a statute that is focused on economic outcomes, is that business may become overly conservative in decision making to avoid any risk of "getting it wrong". It is essential that only truly anti-competitive and undesirable conduct is caught and that pro-competitive, efficiency enhancing collaborations are not.

To ensure legitimate business activities are not inadvertently caught up in criminal acts, the Bill includes broad and (comparatively) easier to apply exemptions and introduces a new clearance regime.

Exemptions

The most significant exemption from the cartel prohibition is for "collaborative activities". This exemption replaces the existing joint venture exemption which has always been poorly drafted and difficult to apply. The new exemption is broader in scope and is intended to apply to all pro-competitive arrangements with competitors and not just joint ventures.

The Bill provides that collaborations with competitors will not amount to a breach of the cartel prohibition where:

  • competitors enter into a collaborative business arrangement that does not have the dominant purpose of lessening competition between them; and
  • the cartel provision is reasonably necessary for the purpose of that collaboration.

In our export driven economy, where collaborations between market participants are common (and where, but for the existing but impractical joint venture exemption, collaborations may have been even more common), one expects this will be a frequently used provision. The key terms of what constitutes "dominant purpose" and "reasonably necessary" will undoubtedly provide fertile ground for arguments from lawyers. However, the Commerce Commission is already taking a proactive approach. It has started discussions with the legal and business community about how it may interpret these terms. It would be a welcome move if the Commission published guidelines on how it will approach this exemption.

Another significant exemption is for vertical supply agreements. Bell Gully advocated that there should be an exemption for the imposition of a maximum resale price by suppliers who are also "in competition" with a customer to which that maximum relates. Such provisions are not uncommon as they drive volume, ensure cost savings are passed on to consumers and promote inter-brand competition. However, where the supplier also competes down-stream, such provisions are likely to amount to price fixing. The inclusion in the Bill of an exemption for these types of provisions (albeit with some provisos) is a desirable development.

Clearance

For parties who think a proposed arrangement may fall within the collaborative activities exemption, the Bill provides for legal certainty to be obtained by approaching the Commission for clearance of the arrangement.

Provided the Commission devises administrative procedures around this new clearance regime that ensure timely and cost effective decisions are produced, applications for clearance could become common. Certainly, the option of seeking clearance is something that any businesses engaged in collaborations with competitors will seriously consider.

Interrelationship with civil regime

The new criminal regime will run in parallel to potential civil liability. Once both regimes are operational – it is proposed that the introduction of criminal liability be delayed for two years – the interrelationship between the two may create issues including how Commission investigations are conducted, the application of a different burden of proof and a different onus for proving an exemption applies under each regime. The Commerce Minister, Craig Foss, singled out the interrelationship of the two regimes as an area where he hoped submissions would be made to the Select Committee.

Conclusion

While there is some fine tuning of the Bill to go at the Select Committee, it is only a matter of time until prison terms for cartel conduct is a reality in New Zealand. It's time to book the training room and start planning staff training sessions. They will thank you for it.

First published in NZ Lawyer, 24 August 2012.