Proposed changes beef up the Commerce Act 1986
The law relating to cartels is changing and the changes will impose criminal sanctions on people or corporates involved in cartels. This article explains the reasons for the new legislation and how those changes will affect commercial behaviour.
Currently cartels are prohibited by the Commerce Act 1986, which make agreements between competitors unlawful through the price fixing provisions. The Commerce (Cartels and Other Matters) Amendment Bill includes specific provisions which define and prohibit cartel provisions in contracts, arrangements or understandings between competitors. The proposed legislation imposes up to seven years’ imprisonment on individuals intentionally participating in cartels. These criminal sanctions raise the cost of such collusion.
The Bill has had its first reading in Parliament and is expected to become law later this year.
Why prohibit cartels?
The purpose of the legislation is to promote competition in markets in New Zealand. The economic theory is that competition promotes the efficient allocation of resources and provides benefits to consumers through low prices, increased quality of goods and services, and innovation. If the competitive process is interfered with by cartel behaviour then it imposes a cost on consumers from increased prices, consumers having less choice, and quality or service levels deteriorating.
The Bill prohibits entering into contracts, making arrangements or understandings that contain cartel provisions or the giving effect to a cartel provision. A cartel provision is one which has the purpose or effect of price fixing, restricting output or allocating markets.
Busting a cartel
Cartels are difficult to catch without the help of insiders. To aid detection the Commerce Commission has a leniency programme that provides incentives to companies to confess and help it in the investigation and prosecution of other companies involved in the cartel. Under the programme, the Commission offers immunity from prosecution to individuals or companies involved in a cartel if they cooperate and provide information and assist in any court proceedings. It’s a condition, however, that they are the first member of the cartel to apply.3
The proposed reforms will bring New Zealand’s cartel regime into greater alignment with our significant trading partners and will enhance our ability to take action against global cartels.
Individuals will face up to seven years’ imprisonment if found criminally liable. Corporates will be subject to fines of the greater of $10 million or three times the value of any commercial gain or – if this can’t be ascertained – 10% of the turnover. This criminalisation has at its genesis the view of ‘hard core’ cartel conduct as white collar crime.
Genuine collaborative activity
Only intentional cartel behaviour has criminal consequences. A person has a defence if they can show they honestly believed they were engaging in a collaborative activity. A collaborative activity is ‘an enterprise, venture, or other activity, in trade, that is carried on in cooperation by two or more persons; and is not carried on for the dominant purpose of lessening competition’. The exemption looks to the substance rather than form of an arrangement. It would cover arrangements such as joint ventures, strategic alliances, syndicated loans and consortium bidding provided the arrangement had a legitimate purpose and the cartel provision was reasonably necessary to achieve that purpose.
To be certain that an activity will fit within the collaborative activity exemption, the Bill also introduces a clearance regime similar to the Commerce Commission’s business acquisition regime. Competitors can prospectively apply to the Commission for clearance. This may be granted if the Commission is satisfied that ‘the cartel provision … is reasonably necessary for the purpose of the collaborative activity; and … will not have, or would not be likely to have, the effect of substantially lessening competition in the market.’ It’s worth remembering, however, that a clearance can be revoked where there have been material changes.
The Bill doesn’t change the Commission’s wide powers to obtain information. The penalties for failing to comply in an investigation, however, have been increased to $100,000 for individuals and to $300,000 for companies. There is no right to silence in Commerce Act investigations.
Other small, but significant, proposed changes to the Act include clarification that a company cannot indemnify directors or employees, the scope of the Commission’s powers in other jurisdictions and that an employee or agents’ behaviour can be attributed to a manager or employer. A court can also order an individual involved in a cartel to be excluded from managing a body corporate.
The proposed criminal sanctions significantly increase the costs for those involved in cartels. Be careful when communicating or otherwise dealing with firms competing against you or when proposing to enter into joint ventures or strategic alliances. If you have any concerns, you should always contact us first for advice.
3 Leniency Policy for Cartels, Commerce Commission Fact Sheet, September 2011