This article was first published in ALB Legal News on 14 November 2011.
If New Zealand manages to criminalise cartel conduct without inhibiting legitimate collaboration, Australia and those other jurisdictions which marched into this legislatively tricky terrain ahead of us will be able to take a lot of the credit.
Yes, our policy-makers are learning from your mistakes.
In particular, they are alive to the need to structure the framework so that it punishes cartels and cartelists without having a chilling effect on collaborative arrangements which improve economic efficiency. This is especially important in an economy as small as New Zealand's.
And, so far at least, they seem to have got the balance about right – although opinion is still very much divided on whether criminalisation itself is a good idea.
Australian competition law experts, Caron Beaton-Wells and Brent Fisse, submitted on New Zealand's exposure draft Bill, endorsing it as a "substantial improvement" on the Australian regime, avoiding the "overreach and the undue complexity of the Australian provisions."
So what does the Commerce (Cartels and Other Matters) Amendment Bill (the Bill) which was introduced into Parliament last month look like, and how will it work?
'Cartel provision' is defined as a contract or understanding that has the purpose, effect, or likely effect of: price fixing; restricting output; market allocating; or bid rigging. Each of these categories of conduct is then separately defined.
The exemption for vertical supply arrangements is important, as this provides certainty for a material proportion of the likely collaborative arrangements between competitors or potential competitors. But it is the exemption for collaborative activity which is key to the Bill's clean design and practicality.
Other innovative features are:
- a clearance mechanism to reduce the risk of prosecution, and
- parallel civil and criminal sanctions with "intention" as the trigger to criminal liability.
The collaborative activity exemption
Collaborative activity includes, but is not limited to, joint ventures. The exercise of defining a joint venture has been avoided. Collaborative activity is defined in the Bill as an enterprise, venture or other initiative in trade involving co-operation by two or more persons and not engaged in for the dominant purpose of lessening competition.
The exemption focuses on substance rather than form. Does the activity have a legitimate purpose, and is the cartel provision "reasonably necessary" for the achievement of that purpose?
The "reasonably necessary" test necessarily involves some subjective judgement but, as Beaton-Wells and Fisse observed in their submission, this is similar to the requirement applied under the Sherman Act in the US so the test is articulated in the US Antitrust Guidelines and there is a body of US case law to provide guidance.
Nevertheless, the potential for judgment in applying the "reasonably necessary" test does create some risk for bona fide collaborators. If there is room for an argument as to whether a significantly less restrictive, practical alternative to the cartel provision is available, then parties might find their reliance on the collaborative activity exemption being second-guessed.
To manage this risk, businesses planning to enter a collaborative arrangement will be able to seek clearance in advance from the Commerce Commission. The Commission will apply both the collaborative activity exemption and the competition threshold normally applied to M&A applications.
The publicity of an application will not be attractive in all cases, but a clearance could provide certainty for significant business collaborations.
A parallel regime
The Bill creates a parallel regime in which there is a single set of offences which can attract either criminal or civil liability depending upon:
- the level of seriousness of the offending (whether it constitutes 'hard core' cartel conduct), and
- the intention of the offender.
Honest belief at the time of engaging in the conduct that it was exempt from the cartel provision is a defence to a criminal prosecution but not to a civil penalty. Conversely, to establish a conviction, the regulator will need to prove beyond reasonable doubt that the breach was intentional.
The maximum criminal sanction for individuals will be seven years in prison but the Government has announced that there will be a two year delay before the criminal sanctions come into effect to allow businesses and the Commission time to get acquainted with the mechanics and requirements of the new system (such as the new collaborative activity exemption).
Andy Nicholls is a partner at Chapman Tripp specialising in regulatory and competition law.
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.