A draft Bill providing for jail time for cartel conduct (price fixing, bid rigging, and / or agreements to share markets or limit output) was released by the Government last week. Under the draft Bill, individuals found guilty of the proposed criminal offence for cartel conduct will be liable for up to 7 years' imprisonment. The penalty for companies found guilty of the proposed criminal offence for cartel conduct remains, at one level, the same as the current maximum civil pecuniary penalty under the Commerce Act 1986 (the Act) - $10 million or 3 times the commercial gain or 10% of turnover - although companies would also have the additional stigma of a criminal conviction.
In setting the maximum period of imprisonment at 7 years, the drafters of the Bill have put cartel conduct on a par with the offences of:
- Wounding with intent to cause grievous bodily harm (s 188 of the Crimes Act 1961)
- Money laundering (s 243 Crimes Act 1961)
- Being party to treason (s 76 Crimes Act 1961)
- Bribery of judicial officers (s 101 Crimes Act 1961)
- Possessing forged bank notes (s 263 Crimes Act 1961)
- Arson (s 267 Crimes Act 1961)
- Using or producing anti-personnel mines (s 7 Anti-Personnel Mines Prohibition Act 1998)
By way of comparison the maximum period of imprisonment for the following offences is 5 years or less:
- Insider trading (s 43 Securities Markets Act 1988)
- Making false statements in financial statements (s 41 Financial Reporting Act 1993)
- Wilful ill-treatment of animals (s 28 Animal Welfare Act 1999)
- Carrying a firearm with criminal intent (s 55 Arms Act 1983)
- Various offences under the Companies Act relating false or fraudulent acts, claims or statements (s 373 Companies Act 1993)
- Wilfully ill-treating or neglecting children in one's custody (s 195 Crimes Act 1961)
- Aggravated burglary (s 232 Crimes Act 1961)
In Australia and the US, the maximum period of imprisonment for cartel conduct is 10 years and in Canada it is 14 years. In the UK the maximum period of imprisonment is 5 years.
How is cartel conduct defined?
The draft Bill repeals sections 30 to 33 of the Act and replaces them with 7 new sections:
- Section 30 which prohibits both the entering into of contracts, arrangements or understandings which contain 'cartel provisions' and giving effect to such provisions (the cartel prohibition).
- Section 30A which defines 'cartel provision' as a
provision with the purpose of:
- Price fixing i.e. fixing the price of goods or services supplied or acquired by the parties in competition with each other; or
- Restricting output i.e. preventing, restricting or limiting the production of goods, capacity to supply services, or supply or acquisition of goods or services that are supplied or acquired by the parties in competition with each other; or
- Market allocating i.e. allocating between the parties persons, or classes of persons, to or from whom, or geographic areas in which, the parties supply or acquire goods or services in competition with each other; or
- Bid rigging i.e. restraining one or more of the parties from making a bid, or requiring the bid of 1 party to be in accordance with a contract, arrangement or understanding between the parties, where the parties are in competition with each other for the supply or acquisition of the goods or services to which the bid relates.
- Section 30B extends the application of the cartel prohibition to the parties' interconnected bodies corporate.
- Section 30C limits the application of the cartel prohibition to conduct occurring after the cartel prohibition comes into force.
- Section 31 provides a broad exemption from the cartel prohibition for 'collaborative activity' where the cartel provision is 'reasonably necessary' for the collaborative activity. 'Collaborative activity' is an activity in trade carried on in cooperation by at least 2 persons that is not carried on for the dominant purpose of lessening competition.
- Section 32 provides an exemption for cartel provisions with the purpose of bid rigging where the person running the bid is notified in advance, by one or more of the parties, of the essential features of the cartel provision and the person running the bid agrees that the parties may make a bid.
- Section 33 provides for an exemption for joint buying and promotion arrangements similar to the existing exemption in section 33 of the Act.
What separates criminal cartel conduct from non-criminal cartel conduct?
Under the draft Bill a person is only guilty of criminal cartel conduct if they breach section 30 in the knowledge that the relevant cartel provision is a cartel provision. This means they have knowledge of the essential facts that make the cartel provision a cartel provision. An offender need not know that those essential facts constitute a 'cartel provision' as defined in the Act. For example, in relation to price fixing, the offender would need to know that the provision fixed the price of goods or services and those goods or services were supplied or acquired by the parties in competition with each other.
Someone who lacks the requisite knowledge may still be guilty of civil cartel conduct. To that extent the new sections 30 to 33 introduce parallel criminal and civil cartel prohibitions. The decision as to whether to deal with breaches of the cartel prohibition by criminal prosecution or by civil proceedings is a matter for the discretion, in the first instance, of the Commerce Commission.
The Explanatory Material released with the draft Bill indicates that the Commerce Commission will develop guidelines on when the Commerce Commission will pursue criminal proceedings and when proceedings will be commenced civilly.
Commerce Commission can 'clear' pro-competitive collaborative activity
For those seeking a greater level of certainty in relation to proposed collaborative activities, the draft Bill introduces a regime whereby the Commission can, on the application of someone proposing to enter a contract, arrangement or understanding containing a cartel provision, grant a clearance to that person. A person granted clearance does not breach the Act by entering into the relevant contract, arrangement or understanding or by giving effect to relevant the cartel provision.
A clearance is available if the Commission is satisfied that:
- The cartel provision is reasonably necessary for the collaborative activity; and
- The collaborative activity will not, or will not be likely to, substantially lessen competition in a market.
Clearance can however be rescinded in the event of a material change of circumstances.
Transitional provisions in the draft Bill provide a 12 month window of opportunity for clearances to be sought before the provisions introducing the rest of the draft Bill comes into force.
The draft Bill also proposes a range of other amendments including:
- Repeal of section 4(3) of the Act which currently provides for extra-territorial jurisdiction over overseas mergers to the extent they affect markets in New Zealand. It is replaced with a new regime giving the High Court power, on the application of the Commerce Commission, to make a declaration that the acquisition of a controlling interest in a New Zealand company by an overseas person will substantially lessen competition in a market in New Zealand. In those circumstances the New Zealand company must cease carrying on business in the relevant New Zealand market no later than 6 months after the declaration is made.
- The current 10 working day period provided in section 66(3) of the Act for the Commerce Commission to process applications for business clearance is extended to 40 working days. As the current period is invariably extended by agreement between the Commission and the person making the application this is recognition of existing practice.
- Providing that conduct engaged in on behalf of a person other than a body corporate, at the direction or with the consent or agreement of that person, is deemed to have been engaged in also by that person.
The Ministry of Economic Development is seeking public submissions on the draft Bill with the submission period closing at 5pm on 22 July 2011. The draft Bill and related material is available at www.med.govt.nz/cartels.
The Explanatory Material accompanying the draft Bill states that Cabinet has yet to make a final decision on whether to criminalize cartel conduct. However given that Australia has already done so, and that under the Single Economic Market agenda, the Government has committed to ensuring that those who engage in anti-competitive behavior in Australia or New Zealand face similar penalties, it is probably only a question now of the exact form that criminalization will take. If you would like to discuss making a submission on the draft Bill please contact either Jason Woolley or Mark Williamson.
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