The Select Committee has now reported back on the Commerce (Cartels and Other Matters) Amendment Bill (the Bill), which proposes major changes to New Zealand's competition law regime. We expect the Bill to be passed before the end of this year.
This Bill amends the Commerce Act 1986, with the most significant changes being to expand the current price fixing prohibition to a broad prohibition for cartel conduct and criminalising such conduct.
Bell Gully made submissions to the Commerce Select Committee (available here). Many of our suggestions have been reflected in the Select Committee's Report. We outline some of the Select Committee's main amendments to the Bill below and look ahead to the effect the changes will have once the Bill has passed.
Despite many submissions to the Select Committee, criminalisation for cartel conduct remains in the Bill. The Bill will introduce criminal sanctions, including up to 7 years jail time, for cartel conduct. Criminalisation will take effect two years after Royal assent and criminal sanctions will sit alongside monetary penalties, with the Select Committee making clear pecuniary penalty proceedings will be stayed if criminal proceedings are commenced in respect of the same conduct.
Cartel Provision Offence
The Select Committee's most significant change to the prohibition on cartel conduct is removing bid-rigging from the definition of "cartel" conduct, on the basis the relevant anti-competitive conduct should be caught under the other limbs.
The new law will therefore prohibit a person from entering into or giving effect to a contract, arrangement or understanding containing a cartel provision, with "cartel provision" broadly defined as a provision with the purpose, effect, or likely effect, of fixing prices, restricting output or allocating markets. A wide range of arrangements not covered under the current price fixing prohibition could be captured under the definition of a "cartel provision". For example, non-compete agreements, restrictions on who a distributor can sell to and territorial provisions in franchise or distribution agreements may well be captured by the prohibition – in which case they would need to fall under one of the exemptions.
The Select Committee has maintained the broad exemptions to the cartel prohibition with some minor amendments. The three key exemptions are those for:
- collaborative activities;
- vertical supply contracts; and
- joint buying and promotion agreements.
The collaborative activities exemption marks a significant improvement in the pre-existing joint venture exemption. The exemption requires:
the parties to be involved in a collaborative activity, being:
- an activity carried on in co-operation; and
- not for the dominant purpose of lessening competition between the parties; and
- the cartel provision must be reasonably necessary for the purpose of that activity.
Some ambiguity remains in how this exemption might be interpreted, particularly regarding what is "reasonably necessary", with the subjectivity of this term recognised by the Select Committee. The Commerce Commission is currently in the process of drafting guidelines on this exemption, which will be an important signal as to how it proposes to enforce the new legislation.
The exemption for vertical supply contracts exempts provisions of contracts between a supplier (or likely supplier) of goods or services and a customer (or likely customer), where the cartel provision relates to the supply of the goods or services and does not have the dominant purpose of lessening competition between parties to the contract. The Select Committee has accepted Bell Gully's submission and explicitly included within this exemption the setting of a maximum price at which a customer may resupply goods or services, recognising the pro-competitive effect of maximum prices.
The existing exemption for the collective acquisition of goods or services has largely been retained, with some minor tweaks to remove any ambiguity in the current wording.
The collaborative activities clearance regime has been maintained, which allows parties to seek clearance from the Commission that proposed (not existing) agreements potentially containing cartel provisions fall within the collaborative activities exemption and do not have the purpose, effect or likely effect of substantially lessening competition in a market. A major change is that clearances can now be revoked where there has been a material change of circumstances post-clearance.
Given the significant changes to the competition regime, and potentially serious consequences, Bell Gully advocated strongly during the submission phase and in front of the Select Committee for a transitional period covering existing arrangements. We're pleased to see that the Select Committee has included a 9 month period following Royal assent to allow businesses to ensure their existing arrangements are compliant under the new regime and, if necessary, amend their arrangements before they attract liability under the new provisions. The expanded cartel offence will apply to new arrangements, and existing arrangements will remain subject to the price fixing prohibition in section 30 during the transitional period.
What the changes mean for you
Given the significance of the changes, many companies are preparing to undertake detailed reviews of their existing contracts and other informal arrangements to identify any potential cartel conduct before the transitional period ends, so as to provide sufficient time to renegotiate or terminate arrangements to address any risks.
Now is also a good time to consider your compliance programmes, to ensure that staff are fully aware of the upcoming changes and the elements of the new cartel provision prohibition.