The cartel criminalisation legislation introduced to the House last week proposes a phased approach in which criminal sanctions will be delayed two years to allow the market to get used to the new regime.
This Brief Counsel looks at The Commerce (Cartels and Other Matters) Amendment Bill.
The Bill reflects the response to an exposure draft the Government released for comment in June 2011. There were 16 written submissions on the proposed reform and the Ministry of Economic Development (MED) also held workshops with competition law specialists, corporate counsel and other experts.
Key changes include:
- deferral of criminal sanctions for two years after the Bill’s new liability provisions have come into effect to allow the new framework and clearance system to bed in
- “intention” rather than “knowledge” to separate criminal from civil liability, and
- abandonment of the proposal to introduce jail time for individuals and fines of up to $1 million for companies obstructing the Commerce Commission’s information gathering powers. Instead fines are proposed of up to $100,000 for individuals and $300,000 for businesses (considerably higher than current limits).
The regime is designed to distinguish between cartel conduct and legitimate pro-competitive collaboration so that attempts to crack down on the former do not inhibit participation in the latter.
The Bill looks to achieve this balance by targeting “hard core” cartel behaviour, exempting collaborative activity, and providing a clearance mechanism.
What is being criminalised?
The Bill criminalises cartel behaviour, namely intentionally entering or giving effect to a contract, arrangement or understanding that has the purpose, effect or likely effect of:
- price fixing
- restricting output
- market allocating, or
- bid rigging.
This concept is defined as an enterprise, venture or other initiative in trade involving co-operation by two or more persons and not engaged in for the dominant purpose of lessening competition.
The exemption focuses on substance rather than form. The question is whether the collaborative activity has a legitimate purpose, and whether the cartel provision is “reasonably necessary” to achieve that purpose.
The Bill also proposes exemptions for a narrow range of activities which are commonly entered into and which have the predominant effect of making markets more efficient rather than less competitive: vertical supply arrangements, notified bid coordination and joint buying and promotion agreements.
Firms can protect themselves from prosecution by seeking Commerce Commission clearance (i.e. approval) for proposed collaborative activity. The Commission will apply the same test as it applies to applications for M&A approvals in deciding whether the proposal raises competition concerns and will charge the same fee: this to be raised from $2000 to $7000 (excluding GST).
To reduce the risk that criminalisation will inhibit pro-competitive activities, the Government has signalled to the Commerce Commission in the Cabinet paper that the Commission should “only prosecute cases of serious offending”.
Government has also asked the Commission to:
- develop guidelines outlining when it will take a criminal prosecution, and
- prepare information for market participants on what constitutes an offence under the regime.
Individuals will face up to seven years’ imprisonment. For companies, the penalties are:
- $10 million
- three times the value of any commercial gain resulting from the contravention (where that can be readily ascertained), or
- 10% of turnover of the body corporate and any interconnected companies during the accounting periods over which the offending occurred.
Chapman Tripp comments
The Government is banking on the Commission’s guidelines and clearance regime to guide firms on the scope of the “reasonably necessary” limb of the collaborative activity exemption. Only time will tell how effective these measures are at clarifying the law.
A clearance application can provide certainty for the firms involved, as well as other commercial and strategic benefits. However, clearance applications necessarily require disclosure of current practices to an inherently conservative regulator and could be varied or revoked if market conditions change. Firms and their advisers will need to assess carefully the value of any particular application.
It is also fair to remember that this is controversial law reform. Treasury, for instance, remains unconvinced about the wisdom of criminalisation. Treasury apparently thinks that any benefits in terms of international cooperation and harmonisation with Australia are unlikely to exceed the costs imposed on businesses, the Commerce Commission and the Courts, and that clarification of the law on cartel behaviour could have been achieved without the introduction of criminal penalties.
We have some sympathy with the Treasury’s concerns. But by the same token, cartels corrode workable competition in our markets to the detriment of the economy and consumers alike. There has to be a hard stop at some point.
Now that the political decision has been made to criminalise cartel conduct, every effort must be made to achieve the best legislation possible. It is important, therefore, to engage in the select committee process when the new Parliament convenes and submissions are called.