New Zealand: Record Penalty For Cartel

Last Updated: 11 November 2006
Article by Andrew Peterson

On 6 April 2006 the High Court in Auckland imposed one of the largest ever penalties for price fixing and exclusionary conduct in breach of the Commerce Act. The Court endorsed a settlement between the Commerce Commission and the Koppers Arch Group which required Koppers to pay a total of $3.6 million in penalties. The Court’s decision provides useful guidance on how penalties under the Commerce Act are assessed, particularly in light of increased maximum penalties under the 2001 amendments, and in the context of early co-operation with the Commerce Commission.

Background

The Commerce Commission ("Commission") has brought High Court action against a number of defendants involved in the New Zealand market for the supply of wood preservative chemicals. It alleges breaches of the price fixing and exclusionary conduct provisions of the Commerce Act during the period mid-1998 to mid-2002. The Koppers group of companies comprised the first, second and third defendants in the proceeding. An additional 12 parties are also defendants to the proceeding.

Early in the Commission’s investigation, certain Koppers executives initially withheld documents and raised jurisdictional issues about the Commission's ability to interview Australian-based executives (see our January 2005 Alert). Subsequently, Koppers formally co-operated with the Commission and this co-operation materially facilitated the ability to bring proceedings. Soon after proceedings were commenced, the Commission reached a settlement with Koppers on the basis of agreed facts, set out below.

The breaches and penalties imposed

In the Agreed Statement of Facts accompanying the proposed settlement, Koppers admitted the following breaches of the Act:

  • Entering into an "overarching understanding" to maintain market share, avoid competition and keep prices above that level that would prevail in a fully competitive market;
  • Sharing price information to ensure price movements were implemented at around the same time;
  • Not competing on price, by making bids to certain prospective customers at existing market price or by utilising the pricing information which had been shared between the parties;
  • Not competing for the customers of its competitors by intentionally inflating competing bids;
  • Agreeing to prevent a new competitor's entry into the wood treatment market.

Importantly, however, the Court emphasised that the Agreed Statement of Facts did not constitute findings as against any of the other defendants.

The penalties approved by the Court comprised $2.85 million for "price fixing conduct" and $750,000 for "exclusionary conduct". The penalties also incorporated a discount to reflect the early co-operation of Koppers with the Commission during its investigation. Without that discount, this would have been the highest aggregate penalty ever imposed for price fixing and exclusionary conduct under the Commerce Act. In addition to penalties, Koppers agreed to make a contribution to the Commission's costs in the sum of $100,000.

This settlement highlights the tough stance which the Commission is taking toward cartel behaviour. The penalty also highlights the effect of amendments to the penalty regime which came into force in May 2001. These amendments doubled the maximum penalty for companies from $5 million to the greater of $10 million, or three times the value of any commercial gain resulting from the contravention, or (if the commercial gain cannot be readily ascertained) 10 per cent of the turnover of the company and any interconnected bodies corporate. Substantially higher penalties for covert cartel behaviour should be expected in future.

Approach to penalties for Commerce Act breaches

In endorsing the proposed penalty, the Court made a number of important comments relating to assessing quantum of penalties under the Commerce Act:

  1. Deterrence will be a significant factor: The Court reiterated that imposition of a penalty is not simply concerned with deterring the party being penalised, but also with deterring all other parties in the commercial community who might contemplate engaging in behaviour which breaches the Commerce Act. As such, the Court also noted that while generally a defendant’s ability to pay must also be taken into account when setting penalty, in some instances the behaviour may warrant a penalty which may put the defendant out of business.
  2. Early admission and co-operation deserves a high discount: The Court confirmed that early admission of anti-competitive conduct and co-operation with the Commission warranted a discount of 50% off the penalty which would otherwise be imposed:The Court said that Commission investigations and proceedings were roughly comparable to criminal proceedings, where sentence reductions of 50% are not uncommon in instances where an accused pleads guilty and co-operates with the Police, perhaps including providing evidence to assist other investigations or proceedings. The Court accepted that this reduction should apply to Koppers because co-operation with the Commission had commenced prior to proceedings being commenced and also because Koppers had assisted the Commission’s investigation by making evidence and witnesses available and continued to do so. This was despite a period early in the Commission's investigation where several of Koppers’ employees had actively attempted to disrupt the investigation. The Court noted that encouraging co-operation with the Commission was especially important in cases involving cartel behaviour, which is covert in nature and can also be time consuming and costly to prosecute.
  3. The increased penalty regime is a significant factor to consider: Because Koppers accepted breaches occurred both before and after the increase in penalties available under the Commerce Act, with a large proportion occurring prior to or very soon after this change, the Court noted that the increase in penalty had less impact on the level of penalty imposed in this case than in one where all the breaches took place after the law change. However, the Court noted that Koppers’ admitted behaviour would still have warranted a substantial penalty under the prior penalty regime and that the behaviour continued for nearly a year under the new regime. These comments indicate that, while the level of penalties imposed against Koppers is very high in relation to previous cases, the full effect of the new penalty regime is still to be felt in sentencing for breaches of the Commerce Act and that even higher penalties are possible in future cases.

Approach to penalties in settlement applications

As the Commission brought its proceedings against multiple parties, the Court was required to consider how it could assess the suggested penalty in a way which was fair to both Koppers (in light of its desire to be disengaged from the proceeding), and also to other defendants (some of whom had not even filed defences and may yet bring evidence to materially contradict the Agreed Statement of Facts). The Court made two important comments in relation to these matters which provide guidance for the Commission and defendants in other similar proceedings under the Commerce Act:

[W]hile generally a defendant’s ability to pay must also be taken into account when setting penalty, in some instances the behaviour may warrant a penalty which may put the defendant out of business.

[E]arly admission of anti-competitive conduct and co-operation with the Commission warranted a discount of 50% off the penalty which would otherwise be imposed.[T]he full effect of the new penalty regime is still to be felt in sentencing for breaches of the Commerce Act and that even higher penalties are possible in future cases.

  1. The quantum of penalty sought must be clearly established by fact: The Court noted that the Commission had quantified penalty on the basis of the overall categories of offending in which Koppers had agreed it engaged in (price fixing and exclusionary conduct) rather than by reference to specific instances of breach within those categories. said that a more rigorous approach was required in future. This was necessary to avoid "party and counsel capture" at the penalty stage in instances where there had been no substantive hearing of evidence before the Court:
  2. [W]hen parties approach the Court to seek approval of recommended penalties, they should hereafter advise of the process followed by which they have reached their recommended figures by reference to precedent and the facts rather than approach it, as was the case here, on a global factual basis with no great reference to such precedent as there is, both before and after the penalty increase and they should, in most cases, recommend a range of penalties and discuss the reasons for their recommendation within the range.

  3. The agreed facts which form the basis of an early settlement do not determine the complicity of other defendants: The Court stated that it is preferable to deal with the penalties to be imposed on all defendants who are found to be liable at the same time. However, in instances where an early settlement is reached only with particular defendants who admit liability in an Agreed Statement of Facts, the Court stressed that:

[A]ssertions in the agreed statement of facts involving [other defendants] have been considered [by the Court] only as part of the narrative against [Koppers] and, of course, involve no finding of liability against those other parties.

The Court recognised that the early settlement must be balanced against the right of other defendants to a fair hearing. As a result, it also restricted publication of the names of individual defendants in reporting of the decision.

Summary

The Commission has signalled publicly its increased focus on prosecuting cartel conduct, and in that context has repeatedly emphasised the importance to parties of being "first in the door" to obtain leniency. The Commission’s media release of 7 April 2006 confirms that Koppers were not "first in the door". This meant that, despite Koppers’ subsequent co-operation, the Commission brought proceedings against them to ensure that a penalty would be imposed (the Commission is unable to negotiate a penalty as part of an administrative settlement, as only the High Court may impose penalties under the Commerce Act).

$3.6 million now represents the benchmark penalty for a party who co-operates even before the Commission brings proceedings. Expect to see much higher penalties in the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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