Of Arsenic, Antitrust and Agreed penalties for Price Fixing

Chris Noonan, New Zealand Business Law Quarterly, Volume 12, September 2006, at p.255

In the wake of the recent wood chemicals cartel cases where record penalties have been awarded for price fixing, Chris Noonan reviews the basis on which penalties for price fixing are calculated and finds that a more principled approach is required if deterrence is to be the primary outcome.

In the 2006 Autumn issue of Commercial Quarterly we noted the case of Commerce Commission v Koppers1 in which the High Court awarded the largest pecuniary penalty to date under the Commerce Act 1986 for price fixing. The case involved price fixing by a group of suppliers of wood preservative chemicals in the period from 1998 to 2002. Chris Noonan notes that the court case pointed out that even higher penalties will be appropriate in future cases given that most of the actions in Koppers took place before the new penalty regime came in force in May 2001.

The author makes the point that many factors are taken into consideration by courts in determining a penalty amount but there is a general failing on the courts' behalf to articulate why factors are significant. In his view this makes the outcome of price fixing cases unpredictable with the flow on consequences of lessening the deterrence effect of penalties and raising the costs of administration of justice. Furthermore it does not ensure penalties are just.

Chris Noonan notes that although deterrence was seen as a factor in Koppers , the court did not indicate how deterrence was linked with the underlying facts of the case nor did it give any indication on the principles it considered appropriate to calculate the level of the penalty.

In his opinion, deterrence is more than one factor, it also provides a framework in which a number of other factors can be analysed.

The author discusses the use of economic analysis to assist in calculating optimal deterrent penalties. He points out that there is a considerable body of scholarship discussing the economics of punishment and antitrust penalties which could assist New Zealand courts. He also notes that New Zealand courts have been traditionally receptive to using economic analysis to determine the content of the substantive rules of the Commerce Act and so should be open to using it to determine an appropriate penalty. Further, the adoption of an economic approach is consistent with the 2001 Amendments to the Commerce Act.

In situations involving a cartel, the author notes how lower penalties may be sufficient if the internal dynamics of the cartel can be exploited especially through the use of leniency programmes. Higher penalties could be imposed on ringleaders to:

• increase the expected costs of being a ringleader;
  
  
• make cartels less stable;
  
  
• provide members of a cartel with an incentive to cooperate with the Commission.

Comparison of penalties between countries are also noted as being relevant. The author points out that New Zealand will need to have particular regard to the proposal to introduce criminal penalties for executives involved in price-fixing in Australia.

The article also considers the application of deterrent principles in practice. In particular Noonan notes that:

• the actual harm (which is inherently difficult to prove) is not the appropriate variable upon which to base a deterrent penalty. Instead the focus should be on the subjective expectation of the defendant of harm or gain at the time of the contravention; and
  
  
• for effective deterrence the minimum penalty must exceed the gain from the anti-competitive conduct.

Chris Noonan suggests that based on the experience of the United States an appropriate approach for price fixing would include starting with a presumption that the penalty should be based on a certain percentage of the turnover of the defendant firms in the products that were subject to the price fixing arrangement and making the necessary adjustments to reflect the circumstances of the case. In New Zealand, the adjustments would include consideration of:

• whether the firm was a ringleader;
  
  
• whether the firm had cooperated with the Commission;
  
  
• the monetary limitations set out in section 80(2B) of the Act;
  
  
• actual proof of the harm or gain (if able to be established by either the Commission or the firm); and
  
  
• the ability of the firm to pay.

Other aspects considered in the article include discussions on:

• whether the defendant's ability to pay should be a should be taken into account in setting penalty levels;
  
  
• the use of leniency policies and the setting of reductions for cooperation with the Commerce Commission; and
  
  
• the role of the court in agreed penalty settlements.

His final points relate to the effect of agreed penalties on other parties involved in a cartel. Noonan argues that "the law should seek to maintain proportionality in penalties so that the equally culpable defendants get treated approximately the same" and goes on to say that "clear and consistent application of penalty principles would reduce the risk of inconsistent treatment of co-defendants". He points out that in the Giltrap2 case, the Court of Appeal considered that the agreed penalty settlement had tied the hands of the court to determine the penalty for the other participants in a cartel. In his opinion a rigid application of the rule in Giltrap may discourage the Commission from accepting agreed penalties until after it is closer to completing its preparation to litigate a case. It may also undermine the Commission's leniency policies which are seen as critical to uncovering and deterring cartels.

1 Commerce Commission v Koppers Arch Wood Protection (NZ) Limited and Ors (Unreported, High Court, Auckland, 6 April 2006, CIV2005-404-2080)

2 Giltrap City Ltd v Commerce Commission [2004] 1NZLR 608

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