Cartel criminalisation - a well designed sledgehammer to crack a nut?

Monday 1 August 2011

Author: Simon Ladd

First published in NZ Lawyer 29 July 2011.

Following initial consultation last year, the Ministry of Economic Development (MED) has released an exposure draft of the Commerce (Cartels and Other Matters) Amendment Bill (the Bill), which provides for the criminalisation of cartel conduct. Although the MED's draft regulatory impact statement records that final policy decisions have not been made, criminalisation of cartel conduct is clearly government policy and, subject to the impact of the election on the government, can be expected to form part of the legislative programme of the next Parliament.

The stated objectives of the Bill are:

  • "a. To promote deterrence of hard core cartels, while not deterring efficiency-enhancing collaborative activity.

  • b. To improve international cooperation and facilitate New Zealand's active contribution to enforcement efforts against global cartels."

Those are worthwhile aims and it is clear from the explanatory materials that the MED has recognised concerns expressed during initial consultation about the potential for criminalisation to "chill" pro-competitive business activity. That is welcome. As the MED notes, the effectiveness of criminalisation will depend on reducing the costs of criminalisation through effective design. It remains possible, however, for effectively designed legislation to represent bad policy if the need for legislative change or the incremental gains from that change are minimal. The justifications advanced by the MED, increased deterrence of cartels and the benefits of enhanced international cooperation, are theoretical. That is not to say they are not real, but there is good reason to question whether criminalisation will make any real difference to fighting cartels. Good policy design requires that the benefits and costs be properly identified before the Bill proceeds further.

Key features of the Bill

New cartel prohibition and criminal offence

Wherever possible, the Bill draws on existing concepts in the Commerce Act 1986 (the Act) in defining the criminal prohibitions. The Bill provides for parallel criminal and civil liability. It specifically prohibits provisions with the purpose of price fixing, restricting output, market allocating or bid rigging. The effect or likely effect of the conduct (previously relevant under the Act) would no longer be relevant. The MED considers that this "form-based approach" gives greater certainty as to the prohibited conduct.

The Bill makes it a criminal offence to enter into a cartel provision with a competitor or to give effect to a cartel provision, with the knowledge that it is a cartel provision. The MED notes that "The only distinguishing feature of the criminal regime is that the criminal offence requires knowledge, at the time person enters into or gives effect to a contract, arrangement or understanding, that the provision is a cartel provision."

The maximum penalties are imprisonment for up to 7 years for an individual and, for a body corporate, a fine of up to the greater of $10 million, 3 times the commercial gain from the conduct (where "readily ascertainable"), or 10% of turnover (i.e., the existing maximum civil penalties).

"Collaborative activities" exemption

While taking a broad "per se" approach to the scope of the offence, the Bill seeks to meet concerns about chilling pro-competitive activity by providing a broad exemption for "collaborative activities". A collaborative activity is an enterprise, venture, or other activity, in trade, that is carried on by two or more persons in cooperation. The exemption focuses on whether there is a legitimate collaborative purpose (i.e., the activity does not have a dominant purpose that is anticompetitive) and whether the cartel provision is reasonably necessary to achieve that purpose.

The Bill also contains other exemptions, including for notified arrangements between bidders (i.e., for notified bidding consortia) and for joint-buying arrangements. (The Bill also repeals the existing exemption for price recommendations made by trade associations.) The Bill places the burden on defendants to prove that an exemption applies on the balance of probabilities.

To help manage "any residual risk", the Bill also provides for a clearance regime under which parties can prospectively apply to the Commerce Commission (the Commission) for clearance. The Commission would be able to grant clearance for collaborative activities containing cartel provisions where the provision is reasonably necessary for the purpose of the activity and it is not likely to have the effect of substantially lessening competition.

Trial processes

The Commission would act as the prosecuting body, with a discretion whether to commence criminal or civil proceedings. The MED expects that, as in Australia, public guidelines would be promulgated to provide clarity about when the Commission would pursue a criminal prosecution.

Judges will have the ability to direct that the trial be Judge-alone, i.e., without jury. It is also intended that Judges sit without lay member (i.e., specialist economists).

Good policy?

In order to know whether the additional costs of legislative change and of criminal processes are worthwhile, it is necessary to form some view of the likely effectiveness of the new regime. If criminalisation is unlikely to result in any material change then it is hard to conclude that the change, and associated use of scarce resources, can be justified. In this regard, there is an interesting project currently under way between the United Kingdom's Ministry of Justice, Department for Business Innovation and Skills, and Law Commission to "introduce rationality and principle into the structure of the criminal law, especially when it is employed against business enterprises." The Law Commission's Consultation Paper No 195 regards this as an important issue "not least because of the costs and uncertainty associated with the use of criminal law and procedure in regulatory contexts." It asks (among other questions) how often offences are used, whether the resources being put into creation of the offences are being wasted, and whether "ordinary people and businesses are being subjected to ever increasing numbers of what, in all probability, will turn out to be illusory or empty threats of criminal prosecution."

In the United Kingdom, there have been only a handful of prosecutions since criminalisation under the Enterprise Act 2002. In the United States, where criminal sanctions have existed for more than a century, the number of convictions is very small given history, population and size of economy. In Australia, there have been no prosecutions yet. If those experiences are a guide, the likely reality for New Zealand is that there would be an extremely small number of prosecutions. If that is correct, it is hard to see real benefit from the proposed change from civil to parallel civil and criminal regime. As Andreas Stephan of the ESRC Centre for Competition Policy and Norwich Law School has noted in "The UK Cartel Offence: Lame Duck or Black Mamba?", lack of prosecutions means that the United Kingdom cartel offence has had only a very limited deterrent effect. (Interestingly, Dr Stephan also notes that a YouGov survey found only 11 percent of people who felt price fixing was harmful believed imprisonment was an appropriate punishment.)

Although the MED has made good progress in framing a possible criminal regime, the hollow core of the underlying policy remains the assessment of likely costs and benefits. It cannot be sufficient, when recommending the introduction of a criminal offence with maximum sentences of 7 years in jail or a fine of $10 million, to simply say that the extent of the problem, the likely benefits and costs, are unknown.


This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

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  • Simon Ladd

    Partner Auckland
Related areas of expertise
  • Competition