Australia Moves To Criminalise Cartels - And More - Government/ Statutory Law

Key Points

The new criminal provisions are likely to be law by 2009.
It is not yet known whether the new criminal offences will be strict liability offences not requiring proof of "dishonest intent".
Some previously legal arrangements could become unlawful under the proposed laws.
Because the new offences are per se, corporations doing business in Australia should audit their operations for compliance when the new laws come into force.

Acting on an election promise to introduce criminal penalties for cartel conduct within the first 12 months of gaining office, on 11 January 2008 the newly elected Australian Labor Government issued a long awaited exposure draft of legislation to criminalise "serious cartel conduct", the Trade Practices Amendment (Cartel Conduct and other Measures) Bill 2008. The new Rudd Government is seeking public comment on two principal issues:

how to distinguish the proposed criminal prohibitions from civil prohibitions; and
whether telephone interception powers should be available to the ACCC in relation to the new criminal cartel offences.

Of particular interest is whether the new criminal offence will require proof of a "dishonest intent" to gain a benefit from the cartel. While the draft Bill includes this element, it is not a requirement for civil liability under existing law. Some media reports before Christmas suggest certain members of the new Government believe the dishonesty element to be unnecessary and that a strict liability regime should apply.

In addition to criminal sanctions, the draft Bill introduces new civil liability provisions which will further extend the reach of the Trade Practices Act 1974.

Criminal And Civil Sanctions For Cartel Conduct

The draft Bill would create criminal offences for making, or giving effect to, a contract, arrangement or understanding ("CAU") that contains a cartel provision "with the intention of dishonestly obtaining a benefit".

A cartel provision is defined as a provision of a CAU that relates to:-

price fixing;
restricting outputs in the production and supply chain;
allocating customers, suppliers or territories; or
bid rigging by parties that are or otherwise would be in competition with each other.

In brief, the maximum penalties proposed by the draft Bill are:

for an individual - a terms of imprisonment of five years and a fine of $A220,000; and
for a corporation - a fine that is the greater of $A10 million or three times the value of the benefit from the cartel, or where the value cannot be determined, 10 percent of annual turnover.

The draft Bill also creates new civil cartel offences which parallel the criminal cartel offences. These offences do not require proof of "dishonest intent". The maximum pecuniary penalty for these civil offences will be $A500,000 for individuals and, for corporations, the same as the existing civil penalties introduced in 2006.

The new offences cover some new ground compared to the existing Act. As they are per se offences (ie. unlawful by themselves, irrespective of a corporation's intent), corporations doing business in Australia should therefore audit their operations for compliance when the new laws come into force.

Criminal Cartel Conduct - Dishonest Intent?

Whether or not criminal sanctions will require proof of "dishonest intent" is one issue likely to be hotly debated in submissions on the Bill. Under the proposed Bill, criminality will be judged against the concept of dishonesty based on the legal ordinary person test.

The inclusion of this element has already been criticised as unnecessary. There are two arguments against making it a requirement.

First, despite its recent big win in the Visy/Pratt case, the ACCC can have difficulty in proving liability under existing law in cartel cases. This is shown by the recent Geelong Petrol case in which there was no "understanding" to fix prices where competitors merely exchanged prices without an express or implied commitment or obligation to fix prices. A dishonesty element will add a further evidentiary hurdle for the ACCC to conquer. One can therefore expect that the ACCC would quietly prefer that no element of dishonesty be required in any new criminal cartel offence.

Secondly, critics of the draft Bill also argue that dishonesty is not an appropriate measure of culpability or harm. The argument is that cartels can often result in widespread economic harm on business without necessarily being dishonest.

Civil Cartel Conduct - A Complementary Regime

Parallel and new civil liability provisions accompany the criminal provisions proposed in the draft Bill.

To show a contravention of the civil offences, there is no requirement to prove that the person made or gave effect to the CAU with the intention of dishonestly obtaining a benefit.

A breach of any of the proposed civil cartel provisions will be a per se breach, unless one of the applicable defences applies.

Price fixing

This will catch CAUs between competitors which have the purpose, or likely effect, of directly or indirectly, fixing, controlling or maintaining the price (or discount, allowance, rebate or credit) in relation to:

goods or services supplied by any of the parties to the CAU;
goods or services acquired by any of the parties to the CAU
goods or services resupplied by customers of any of the parties to the CAU (i.e. a joint arrangement concerning resale price maintenance).

This new provision is broader than the current per se prohibition in section 45A (which will be repealed) as it extends the concept of "price fixing" to the downstream resale of those goods or services by customers of the parties who made the CAU.

For example, an arrangement between three bread manufactures, intended to fix, control or maintain the price at which their bread was likely to be resupplied by retailers would now be deemed to be price fixing on a per se basis. This includes any arrangement intended to cover a maximum price as well as a minimum price on resale.

A provision of a CAU will not be deemed to have a prohibited purpose or effect if it merely recommends a price, discount, allowance, rebate or credit.

Production arrangements between competitors restricting outputs in the production and supply chain

This will catch CAUs between competitors which have the purpose or effect of "preventing, restricting or limiting":

the production of goods by any of the parties to the CAU; or
the capacity of any of the parties to the CAU to supply services; or
the supply of goods or services to any persons or classes of persons by any of the parties to the CAU.

This is partly based on the existing section 4D (concerning exclusionary provisions), but is significantly broader. First, it will catch any CAUs between competitors limiting or preventing their production of goods or capacity to supply services. Secondly, the current section 4D is confined to a CAU made for the purpose of restricting supply, whereas the draft Bill will also catch CAUs having that effect (even if the effect was not intended).

For example, an arrangement between two flour manufacturers which restricts one of them from producing certain types of flour or from operating at certain times would now be a per se breach of the Act.

Similarly an arrangement between two mobile phone operators which limited the capacity of one of them to offer certain services would also appear to be caught.

Customer allocation

Again, this is partly based on the existing section 4D, but goes further by addressing allocation by geographical areas. It will catch CAUs between competitors which allocate, between any of the parties to the CAU:

customers or classes of customer likely to acquire goods or services from any of the parties
suppliers or classes of suppliers likely to supply goods or services to any of the parties; or
geographical areas in which goods or services are to be supplied, or likely to be acquired, by any of the parties.

For example, an arrangement between two competing retailers to the effect that one does not acquire oranges grown in a certain part of the Riverina would now be a per se breach of the Act.

Similarly, an arrangement between two competitors not to acquire goods or services from certain suppliers would also appear to be illegal.

Bid rigging

This provision is new and effectively prohibits "collusive tendering" where the bidders do not retain independent discretion. Any arrangement between competing bidders where "a material component of at least one of the bids" is worked out in accordance with the CAU will be a per se breach.

This will catch CAUs between parties who may be competitors in response to a request for bids for the supply of goods or services. Any CAU between those parties:

that one or more of the parties do not bid
that at least two of them do so (or two of them do so and proceed with their bids) on the basis that one of those bids is more likely to be successful than the others
that not all of the parties proceed with their bids until the suspension or finalization of the requests for bids process; or
that a material component of a least one of those bids is worked out in accordance with a provision of the CAU,

will be per se illegal.

Consortium bidding

Consortium bidding is not necessarily illegal under these arrangements. It will be critical to determine in each case whether parties to a bid consortium would have been competing bidders in their own right against other members of the consortium in the absence of the CAU made between them. If they would otherwise be independent competing bidders and they join the consortium on terms that they will not bid individually in their own right, then this is likely to breach the new section. If however they are part of a bid consortium but retain their discretion, then this will probably not breach the new section.

Interplay Of Criminal And Civil Sanctions

Exactly how a criminal regime will co-exist with the existing civil regime, including the 2005 Immunity Policy, is unclear. The ACCC has indicated that its practice, in accordance with its draft Memorandum of Understanding with the Director of Public Prosecutions ("DPP"), will be to stay any ACCC civil proceedings until criminal proceedings are completed and to terminate the civil proceedings if the defendant corporation or individual is convicted.

The ACCC has indicated that the final decision on whether to launch a prosecution will be left up to the DPP, acting on advice from the ACCC. In criminal cartel proceedings, the higher "beyond a reasonable doubt" standard of proof will apply.

Defences And Exemptions

For both the criminal and civil cartel provisions, defences will be available for cartel provisions subject to: the collective bargaining notification regime, authorisation process, or in respect of a CAU between related bodies corporate. In addition, the existing exemptions under section 51 of the Act will continue to apply, including the various IP exemptions and the sale of business exemption.

An additional defence to the civil cartel provisions will be available for pro-competitive joint ventures.

So What Should You Do Now?

The long-awaited introduction of criminal sanctions will lift Australia into the top tier of anti-cartel enforcement. It is expected that the reforms will facilitate closer co-operation between the ACCC and those overseas jurisdictions that already have criminal sanctions.

For businesses operating in Australia, the key actions now are to make submissions where necessary to seek clarity on the operation of the proposed Bill. There is also a real need to check compliance with the new civil provisions and to revamp corporate compliance programs if and when the draft Bill becomes law, especially where formerly legal arrangements could be made unlawful.

Submissions on the draft Bill close on 29 February 2008.

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.

Australia: Australia Moves To Criminalise Cartels - And More