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The number of cartel investigations and High Court claims in New Zealand has dramatically increased in the last couple of years. Without a doubt this is the new wave of competition law litigation. It is a wave best avoided at all costs, as it can, and invariably does, wreak havoc on those companies and individuals caught up in it.
Why the rise in this type of case? Catching people involved in cartels is a priority for the Commerce Commission which is putting a very significant amount of resource into this area. The Commission announced last year that it was investigating around 20 cartels. Some of the cartels are domestic in origin although many are the New Zealand "end" of much bigger international cartels involving multi-national companies. Gone are the days when it was the done thing to have a cosy arrangement with a competitor. The business community is learning (some the hard way) that conversations with competitors about pricing matters are simply not legal and are not worth the risk.
This article comments on:
(a) the trend towards higher penalties being imposed for cartel conduct;
(b) the rise in the number of cartel investigations in New Zealand and overseas; and
(c) a recent Australian development in this area.
What is a cartel?
Cartels are formed when competing companies or individuals agree to work together to ensure prices are kept high instead of competing to offer a better deal to customers (or suppliers). Members of a cartel may agree, among other things, on price, output levels, areas and customers to supply, discounts, credit terms and who should win a particular contract (bid rigging). Cartels are considered a seriously damaging form of anti-competitive behaviour as they typically raise prices above competitive levels without a corresponding increase in benefits.
High penalties – Big Bucks & Jail Time?
Cartel behaviour has long been criminalised in the United States and Canada and criminalisation has been proposed in recent draft legislation in Australia. Closer economic relations suggest criminalisation in Australia increases the likelihood of criminalisation being considered in a New Zealand context. It is difficult to predict, at this time, whether such a move would be adopted. Currently significant monetary penalties may be imposed for cartel conduct in breach of the Commerce Act and individuals involved may be excluded from future management of a company.
In 2001, the maximum penalties for breaches of the Commerce Act were increased. A key driving force behind these increases was the desirability of deterring cartel conduct. For companies, the maximum penalty is now the greater of:
- NZ$10 million; and
- three times the commercial gain resulting from the conduct or (if such gain cannot be readily ascertained) 10% of the New Zealand turnover of the company and its interconnected New Zealand companies.
For individuals, the maximum penalty is NZ$500,000.
Last year the New Zealand High Court imposed record penalties on members of a cartel in the wood preservative chemicals industry. Fines totalling more than NZ$7.5 million were imposed for breaches of section 30 of the Commerce Act. These fines were more than double the highest penalties previously imposed for cartel conduct in New Zealand. The High Court stated that these fines would have been larger had they not been discounted due to early admissions and company co-operation. One company executive was fined NZ$100,000 – the highest ever penalty imposed on an individual cartel member in New Zealand. Individuals, whether or not they are owners, directors or employees must realise that participating in cartel behaviour exposes not only their company to liability but also themselves in a personal capacity.
In a recent media release (November 2007) the Commission advised it had initiated proceedings in the High Court alleging cartel conduct in New Zealand's corrugated fibre packaging industry, otherwise known as the "cardboard box" industry. The Commission asserts customer sharing, price fixing and bid-rigging in relation to the supply of cardboard boxes in New Zealand in 2000-2004.
The Commission's allegations follow similar allegations made by the Australian Competition and Consumer Commission (ACCC) (the Australian equivalent of the Commission) against the Australian company Visy Board Pty Limited for cartel conduct in the Australian cardboard box industry, which resulted in record penalties against Visy totalling AUS$36 million. The Australian fines included a AUS$1.5 million individual fine against Richard Pratt, Visy's owner and director, for his involvement in the cartel.
Whilst these penalties are very substantial the penalties in other jurisdictions are on an even bigger scale. In October 2005 Samsung Electronics Company Limited pleaded guilty to participating in a global conspiracy to fix dynamic random access memory prices and was fined US$300 million. In 2001 the Swiss based multinational Hoffman La Roche was fined €462 million for its role in operating a secret market sharing and price fixing cartel in the supply of vitamins throughout the 1990s.
In many jurisdictions the claims for penalties (and criminal sanctions) are followed up by class actions where customers seek damages based on alleged losses from the cartel conduct. The amount of these claims can dwarf even the massive penalties paid to the regulatory authorities. In New Zealand class actions are not commonly or easily brought but cartel conduct can be followed up by civil claims by customers seeking damages.
It is also worth bearing in mind the related costs of involvement in a cartel investigation. These costs can include damage to the reputation of a business, as well as significant management and legal costs which may include the Commission's costs if a prosecution is successful.
It's Now OK to Whistleblow
The increasing number of cartel investigations may be attributed to a rise in international cartel behaviour being found to affect New Zealand and the introduction of the Commission's Leniency Policy.
Under the Leniency Policy, the Commission may grant immunity from proceedings to the first member of a cartel who reports the cartel and co-operates fully with the Commission. Immunity granted to a company may extend to any current or former director, officer or employee of that company. The aim is to aid the detection of cartels and help the Commission enforce actions against those involved. The introduction of the Leniency Policy in New Zealand has increased the likelihood that cartel conduct will be discovered as it encourages cartel participants to "whistleblow" on themselves. Since the Leniency Policy was introduced in October 2004, at least nine companies have applied for immunity.
Once an investigation into possible cartel conduct is underway, it is not possible to obtain leniency. Instead, a co-operation agreement may be sought under the Commission's co-operation policy which may result in lower penalties in exchange for information and continued co-operation.
The Commission has also become increasingly active in investigating international cartels as New Zealand's small, open economy is especially susceptible to the effects of international cartels. In 2007 Commission Chair, Paula Rebstock, confirmed that the majority of cartels brought to the Commission's attention are international cartels. The Commission is conscious of the need to prevent New Zealand being viewed as an easy target for international cartels.
The increased focus on the detection of cartel conduct has increased the need for companies to promote compliance with the Commerce Act. One approach is to establish internal compliance training for employees. We recommend you seek legal input when instigating a compliance programme.
Australian Geelong Petrol Case – No Commitment, No Understanding
Few cartel cases in Australia or New Zealand have been defended all the way to trial. Many settle before the evidence is fully tested. However in one recent Australian case which did go to trial, the ACCC did not manage to prove its claims. In that case, which is known as the Geelong petrol case, the Court dismissed allegations by the ACCC that several petrol retailers were involved in price-fixing arrangements or understandings in the Geelong retail petrol market. The ACCC alleged that Geelong petrol retailers informed each other of proposed price increases and the timing of such increases in contravention of the Australian price fixing laws. The ACCC sought to establish that there was a contract, arrangement or understanding between the petrol retailers that had the purpose or the likely effect of fixing, controlling or maintaining the price of petrol.
The Court reiterated that to prove an understanding to set prices existed, there needed to be evidence of a 'moral obligation' or 'commitment' to set prices pursuant to the understanding. Despite evidence that price information was shared and the admissions of several parties that there had been an understanding, the Court found there was no price-fixing understanding because the retailers were free to choose how and when to set their prices. The recipients were not under a moral obligation to increase prices after receiving price information.
It is important that regulators like the ACCC (and indeed our Commerce Commission) are required to meet the same standard of proof as other litigants, but the Geelong decision should not give any would-be cartelists any false comfort that they can easily argue their way out of a claim. In any prosecution of this kind, the final decision always turns on the particular evidence. In an earlier (very similar) case brought by the ACCC against petrol retailers in Ballarat, the regulator was successful in establishing an illegal understanding to set prices.
Final Thoughts
Cartel detection has become a priority nationally and internationally. The Commission is increasingly co-operating with overseas competition agencies to detect and punish cartel conduct. In recent times the number of prosecutions has risen along with the severity of the penalties imposed. The serious effects of cartel conduct mean a move to criminalise cartel conduct in New Zealand cannot be discounted.
The message is clear: individuals and companies should take considerable care to avoid sharing price information and any other discussion around pricing or customers with their competitors. This will minimise the risk of being involved in cartel investigations and the serious consequences that may arise. It is important for companies to have appropriate compliance policies and training in place to minimise the risk of breaching the Commerce Act.
"New Competition Law for Monopolies Pre Election?"
Commerce Minister Lianne Dalziel hopes to have a new competition law for monopolies passed before the election.
The new law will be in the form of the Commerce (Regulated Goods and Services) Bill, which will replace Part 4 (which deals with the regulation of controlled goods and services) and Part 4a (which only applies to allow price control to be imposed on the electricity industry) of the Commerce Act 1986. The Bill could be introduced to Parliament in April or May. Under the Bill, all regulatory control provisions will come under a single framework and will provide alternative forms of regulation as well as the more conventional price control. Minister Lianne Dalziel has signalled that the Government will retain its light handed approach to regulation by stating "the intent is that the minimum intervention required to achieve the objective will be applied".
We will report back on these alternative forms of regulation in a FYI when the Bill is introduced.
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
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