Competition Law

03 Feb 2010

Cartel Criminalisation on the Cards

The Ministry of Economic Development (MED) has last month released a discussion paper which recommends that cartel conduct in New Zealand is made a criminal offence.

This is not a surprising recommendation, given that cartel conduct is already a criminal offence in Australia, the United Kingdom, Canada, the United States, Japan and Korea, and that the OECD recommend that it should be the subject of criminal sanction where appropriate.

The MED paper discusses the pros and cons for criminalisation, as well as the difficulties in drafting the criminal offence. Comments are invited and must be submitted by 31 March 2010.

Given world-wide trends in legislation and the significant deterrent effect of a possible jail sentence, our view is that it is almost inevitable that cartel behaviour will be criminalised in New Zealand. The most important aspect of the MED paper therefore concerns the drafting of the offence, and the impacts of criminalisation on the investigation and litigation process, as these issues will need careful consideration.

What is "cartel" behaviour?

The MED paper focuses on "hard-core cartel behaviour", by which they mean price-fixing, bid rigging, market allocation and output restrictions.

Why should it be a criminal offence?

Higher Prices and Economic Harm
The MED paper notes that cartels cause considerable economic harm, including over inflated prices for goods, reduced economic output and losses in efficiency.

Current penalties not sufficient deterrent
It is also said that the current penalties under the Commerce Act are not effective at deterring cartel behaviour and that imprisonment would be the single intervention most likely to have a significant impact on deterrence and detection. The MED paper uses the Australian experience to support this proposition as, following the recent introduction of criminal penalties for cartels in Australia, there has been an increase in firms whistle-blowing on other members of a cartel in order to obtain immunity from prosecution.

Harmonisation with Australian law
The introduction of criminal penalties in Australia is itself a further reason why the paper recommends criminal sanctions in New Zealand. Prior to the recent criminalisation of cartel behaviour in Australia, the New Zealand and Australian legislation in this area was reasonably consistent and the penalties broadly similar. One of the medium-term goals of the Single Economic Market Outcomes Framework is that firms operating in both the Australian and New Zealand markets are faced with the same consequences for the same anti-competitive conduct.

Possible downsides to criminalisation

The MED paper notes the need to balance the deterrence of harmful cartel activity with the protection of pro-competitive business practices which create efficiencies and encourage competition. The MED paper weighs up both the costs and the benefits of criminalisation, and ultimately recommends that cartel conduct should be criminalised .

The Criminal Offence

Jail Time - Five to Seven years
In general terms, the MED paper recommends that both companies and individuals be criminally liable for cartel conduct and that individuals be subject to a maximum jail term of between five and seven years (which is consistent with other offences such as tax evasion and insider trading).

The MED paper considers other issues, for example should conduct be criminal when the volume of commerce effected is low? And should an incompetent cartelist be criminalised? (Both of which the paper answers in the affirmative.)

Definition of “cartel conduct"
Consideration is given to the definition of "cartel conduct", which would have a significant impact on the scope of the offence. The OECD recommendation is that only "hard-core" cartel conduct be the subject of criminal penalty (that is price-fixing, bid rigging, market allocation and output restrictions).

The criminalisation options
In practical terms, the MED paper suggests three options for drafting the appropriate section, which are:

1. using the existing section 30 (which prohibits price-fixing in a civil context);
2. adopting the Australian section; or
3. drafting a new section (the "greenfields" approach").

There are advantages and disadvantages to all options. The biggest concern with using the existing price fixing section is that it is framed in very broad terms and could create uncertainty or have the effect of deterring legitimate or pro-competitive conduct. There is also an issue about whether or not the types of conduct (other than price-fixing) that are considered "hard-core" cartel behaviour (bid rigging, market allocation and output restrictions) would be caught by the wording of section 30.

The disadvantage of adopting the Australian legislation would be the inability to take into account the criticism that has been levelled against the Australian provisions.

The advantage of the greenfields approach is that New Zealand can decide on the essential elements of the offence and can pick the best of the approaches from other jurisdictions based on the experiences and case law to date.

All approaches include a mental element to the offence. That is, the person concerned needs to have the intention to enter into an agreement which is prohibited, or knowingly enter into such agreement.

Impact of criminalisation

There are a number of other issues that flow from criminalisation which also need to be considered:

• The relationship between the civil and criminal provisions. Should price-fixing and other hard-core behaviour be both a criminal and a civil offence? In Australia there are parallel criminal and civil provisions, but this does create some issues, such as the inability to know at the outset of an investigation which track the ACCC will pursue.
• What protections would be available to interviewees? Could the Commerce Commission still use its compulsory interview powers under section 98 of the Commerce Act or would this be inconsistent with the New Zealand Bill of Rights or a person's privilege against self-incrimination?
• Who would be responsible for prosecution of the criminal offences?  There is a suggestion that a similar system to that used by the Serious Fraud Office be implemented, which is where a prosecution panel of senior barristers in private practice is appointed.
• Whether the trial should be a jury trial or by judge alone.

These questions will require careful consideration and whatever legislative framework is ultimately proposed, the devil will be in the detail.

 
Discussion

The MED paper invites submissions by 31 March 2010 and includes a list of 35 "Questions for Submitters" seeking opinions both on whether it is necessary or desirable to criminalise cartel conduct and on how the offence should be defined.

If you would like more information on the MED discussion paper, please contact one of Simpson Grierson's competition law partners.

Authors

Anne Callinan

Partner - Dispute Resolution

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Shelley Cave

Partner - Corporate & Commercial

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James Craig

Partner - Dispute Resolution

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Peter Hinton

Partner - Corporate & Commercial

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Elisabeth Welson

Partner - Corporate & Commercial

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Alicia Murray

Senior Associate - Dispute Resolution

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