Commerce (Cartels and Other Matters) Amendment Bill

Monday 21 November 2011

Author: Simon Ladd

First published in NZ Lawyer, Issue 173, 18 November 2011.

After consultation last year and again this June, the Minister of Commerce introduced the Commerce (Cartels and Other Matters) Amendment Bill (the Bill) into Parliament on 13 October.

Two days later, Dr Andreas Stephan of the University of East Anglia presented a paper entitled "How dishonesty killed the cartel offence" to the Competition and Consumer Workshop at the University of South Australia. Dr Stephan's work has been cited by both the United Kingdom Government's review of its competition policy regime and the Australian Senate Standing Committee's Report on the criminalisation of cartel behaviour.

His paper contains salutary lessons for cartel criminalisation in New Zealand. Two aspects particularly resonate - the conditions necessary for successful implementation of a cartel offence and the inter-related importance of the design of the offence.

Implementation of a cartel offence

The arguments for criminalisation – improved detection and deterrence of cartels and a view of "hard core" cartel conduct as a white collar crime – are well understood by the Ministry and submitters. As a result (and as a result of the Minister's own views), discussion of criminalisation in New Zealand has not been framed in terms of whether criminalisation is necessary. As the explanatory note to the Bill indicates, the drive for criminalisation has arisen out of the Single Economic Market Outcomes Framework, which includes a goal that firms operating in both Australian and New Zealand markets face the same consequences for the same anti-competitive conduct. The discussion has also focused on a shared concern that an ill-defined criminal regime would deter pro-competitive activity.1

The first lesson from Dr Stephan's paper is that successful implementation of a criminal regime requires something more concrete than theoretical arguments in favour of criminalisation. Specifically, it requires that:

  • public attitudes towards cartel conduct are in step with criminalisation; and

  • the offence is "actively applied so that its deterrent effect is genuinely felt"; and

  • good prosecutorial decisions.

There has been no survey of public attitudes towards cartel criminalisation in New Zealand, but it is interesting to note that the results of a 2008 survey of public attitudes in the United Kingdom are precisely mirrored by the results of the Melbourne Law School's Cartel Project Survey Report in Australia last year. That is, there is substantial majority support for the view that cartel conduct is unacceptable, but a minority that cartel conduct should be a criminal offence and less than a quarter think that individuals should be jailed for it. It is difficult to see why public attitudes would differ greatly in New Zealand.

It is also difficult to see there being sufficient application of a cartel offence to create genuine deterrence. Currently, only a small number of proceedings for cartel conduct are brought by the Commission. It is clear that there would be an even smaller number of criminal prosecutions. In the United Kingdom, there have been two prosecutions since 2002. In Australia, although early days, there have been no prosecutions since July 2009. Even in the United States, where criminal sanctions have existed since 1890, the number of prosecutions is quite small (60 filed in 2010) given population and size of economy.

The ability to bring criminal prosecutions will also be constrained by the necessarily higher standards, for example of proof, required in criminal cases. In addition, if existing timeframes for investigations (usually around three years) and proceedings (upwards of three years to reach trial) are a guide, it will be difficult for the Commission to comply with section 25(b) of the New Zealand Bill of Rights Act 1990, the right to trial without undue delay. The effect of a failure to comply can range from reductions in length of sentence to a permanent stay of prosecution. The Commission can be expected to work assiduously to streamline its processes but those timeframes will be difficult to reduce given the complexity of competition matters and the nature of cartel conduct. Finally, the practical reality of increased investigation and prosecution costs will also constrain the number of prosecutions brought.

Taken together, this is likely to mean less than one prosecution a year on average in New Zealand. We query whether that is sufficient to create a real, rather than theoretical, increase in deterrence. (In that regard, the United Kingdom Law Commission has an interesting project under way, reviewing the application of criminal offences to business. The Law Commission's Consultation Paper No 195 asks 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.")

Design of the offence

It is clear that the Ministry of Economic Development has taken on board the United Kingdom's experience of criminalisation. The Ministry's draft explanatory materials observed that providing an additional fault element to differentiate the criminal offence from the civil prohibition "is the approach taken in the UK where the offence includes a dishonesty element" but continued:

    To date the UK Office of Fair Trading has not brought a successful criminal prosecution and currently the UK is considering whether to reformulate the offence.

The central concern of Dr Stephan's paper, the effects of the requirement of dishonesty on the viability of a cartel offence, are met by the Bill's different approach to design. It is clear that the Ministry has recognised concerns about the potential for criminalisation to "chill" pro-competitive business activity and there has been a real focus on trying to create a bright line for the imposition of serious criminal sanctions.

The Bill prohibits competitors entering into or giving effect to a "cartel provision". That is, a provision contained in a contract, arrangement, or understanding that has the purpose, effect, or likely effect of price fixing, restricting output, market allocating or bid rigging.2 The Ministry considers that this "form-based approach" gives greater certainty as to the prohibited conduct. By contrast, "defining hard-core cartel conduct by reference to effects would require economic evidence that market allocation, bid rigging and output restrictions affect price. This would make trials considerably more complex."

In contrast to the dishonesty requirement under the United Kingdom's Enterprise Act, the Bill provides that a person commits an offence if the person enters into or gives effect to a contract, arrangement, or understanding containing a cartel provision and "intends, at that time, to engage in price fixing, restricting output, market allocating, or bid rigging."3

The Bill provides for 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 (if "readily ascertainable"), or 10% of turnover (i.e., the existing maximum civil penalties).4

While taking a broad "per se" approach to the scope of the offence, the Bill seeks to meet concerns about the risk of chilling pro-competitive activity by providing a broad exemption for "collaborative activities".5 A collaborative activity is "an enterprise, venture, or other activity, in trade, that (a) is carried on in cooperation by two or more persons; and (b) is not carried on for the dominant purpose of lessening competition". A person would not breach the proposed cartel prohibition if "(a) [that] person and 1 or more other parties to the contract, arrangement, or understanding are involved in a collaborative activity; and (b) the cartel provision is reasonably necessary for the purpose of the collaborative activity." The Ministry notes, "Per se prohibitions sometimes capture pro-competitive or competitively neutral conduct. To remedy this, the exposure draft Bill relies on a broad principle-based exemption to ensure that all pro-competitive arrangements would be exempt, irrespective of their form. The breadth of the exemption should create greater certainty for businesses that are proposing to enter into collaborative, efficiency enhancing agreements."

To help manage "any residual risk", the Bill also provides a clearance regime under which parties can prospectively apply to the Commission for clearance.6 The Commission may grant a clearance if it is satisfied that "the cartel provision ... is reasonably necessary for the purpose of a collaborative activity; and ... the collaborative activity will not have, or would not be likely to have, the effect of substantially lessening competition in a market."

Conclusion

The Ministry has made good progress in framing a criminal regime that provides a relatively high level of certainty as to the definition of the cartel offence (especially relative to the current position under the United Kingdom's Enterprise Act). It remains a well designed draft in search of an actual (rather than theoretical) policy justification, but that observation has been overtaken by the introduction of the Bill into Parliament. That means that the real issues will be refining the design of the offence during the Select Committee process and whether New Zealand can successfully implement cartel criminalisation. Given differences in design, including the absence of a dishonesty requirement, New Zealand is likely to make better progress than the United Kingdom. Nevertheless, it appears unlikely that the level of enforcement (however successful prosecution outcomes) will be sufficiently high to outweigh the inevitable costs of criminalisation.7


1 The Regulatory Impact Statement which accompanies the Bill provides an analysis of options to "promote deterrence of hard-core cartels, while not deterring efficiency enhancing collaborative activity".

2 Section 7 of the Bill, proposed sections 30 and 30A of the Act.

3 Section 21 of the Bill, proposed section 82B of the Act.

4 Ibid.

5 Section 7 of the Bill, proposed section 31 of the Act.

6 Section 18 of the Bill, proposed section 65A of the Act.

7 Treasury has expressed the same view to the Government, noting that it is not clear New Zealand has levels of cartel behaviour that warrant criminalisation, criminalisation is unlikely to significantly increase the deterrence or detection of cartel behaviour, and the marginal benefits of criminalisation are likely to be significantly outweighed by the costs: Report of the Minister of Commerce to the Cabinet Business Committee, at [64].


Disclaimer

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
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  • Competition