This article first appeared in the December 2011 issue of Boardroom magazine.
A lot of ink has been spilled about the “criminalisation of cartel conduct” – a proposal found in the Commerce (Cartels and Other Matters) Amendment Bill. But what does “criminalisation” mean – and what is a “cartel”?
“Criminalisation” means that for certain types of anti-competitive conduct the people involved can go to jail (up to seven years) and taint themselves with a criminal record - with all the consequences which flow from that.
“Cartel”, although evoking South American drug operations or oil tycoons, is used in this context to describe activity as simple as two competitors coordinating over something they shouldn’t. Essentially, the proposed new law tells us that “cartel” conduct involves arrangements or understandings between competitors involving price fixing, output restrictions, market allocation, or bid rigging.
Types of cartel conduct
Price fixing: fixing, controlling or maintaining the price of goods or services that companies supply or acquire in competition with one another (including discounts, rebates or other elements affecting price).
Output restrictions: competitors agreeing to prevent, restrict or limit their production of goods or services or their output capacity.
Market allocation: competitors allocating customers, suppliers, or geographic areas.
Bid rigging: exactly what it says (rigging bids), including agreements not to bid or specifying bid terms - but only if the essential features of the co-ordination are not disclosed to the person running the bid before the bid is lodged.
Will all cartel conduct turn up the “go to jail” card?
Fortunately not. First, our policy makers were aware of the potential for legitimate pro-competitive collaboration to be inadvertently caught and have proposed a series of specific exceptions for:
- vertical supply arrangements
- joint buying and promotion, and
- collaborative activity.
The “collaborative activity” exception is a new concept. Essentially it applies where the cartel provision (price fixing, output restriction, market allocation or bid rigging):
- forms part of a business arrangement that does not have the dominant purpose of lessening competition, and
- where the cartel provision is “reasonably necessary” for the purpose of that arrangement.
There is an element of judgement here – so to address any uncertainty about whether the collaborative activity exception will apply, the proposed new law offers a safety net in the form of an optional pre-clearance mechanism. This will be similar to the mergers and acquisitions clearance process.
Second, there are criminal consequences only where a person “intends” to enter into or give effect to cartel conduct. And it is a defence if the person honestly believed one of the exceptions applied.
Will the new law change anything?
Yes it will. Although cartels are already illegal, the new law (assuming it is passed) will make the substantive offences much clearer than they currently are.
And there is no doubt that the personal risk to directors (and to employees) will substantially increase.
But even if you don’t draw the “go to jail” card, there can still be serious consequences if the company is party to commercial arrangements that involve “cartel” conduct:
- penalties for the company could be up to $10 million, three times the value of any commercial gain resulting from the offence, or 10% of turnover during the accounting periods over which the activity occurred – and penalties for individuals of up to $500,000
- defence costs are not cheap – and the company cannot indemnify or insure its directors or employees against cartel offending, and
- the time and distraction of having valuable people assisting the Commerce Commission with inquiries or lawyers with the defence is unproductive.
Clearly the price for engaging in cartel behaviours can be high. There is to be a two year window, after the Bill is passed into law, before the criminalisation aspect kicks in.
In the meantime, directors may want to consider activating a Commerce Act audit of the business. Check too that the company’s representatives on any trade associations (by their nature, usually made up of competitors) understand that the cartel prohibitions apply to the association and its members.
What can you do?
- Identify all relationships with competitors throughout the company or group.
- Assess those relationships for “cartel risks” (seeking professional advice if there is any doubt).
- Review the company’s policies around interactions with competitors.
- Risk assess any trade association memberships or arrangements.
Lindsey Jones is a partner at Chapman Tripp specialising in competition law.