First published NZLawyer, 24 July 2009.
On 24 July 2009, the Trade Practices Amendment (Cartel Conduct and Other Measures Act) 2009, comes into effect in Australia, adding a significant stick – criminal liability for cartel conduct – to the existing carrot of immunity for cartel members who cooperate with Australian Competition and Consumer Commission.
ACCC Chairman Graeme Samuel has said that while the ACCC is not interested in prosecuting minor matters under the new criminal offence it is "however of the view that, wherever possible, serious cartel conduct should be prosecuted criminally. In those serious matters, it will not trade away the possibility of criminal prosecution in return for agreement to settle with civil remedies".
The new Act follows the 2003 Dawson Review, which recommended introducing criminal liability for "serious or hard-core cartel activity", and a draft bill released by the previous Australian Government for consultation in December 2007.
The Act introduces parallel criminal and civil prohibitions for making or giving effect to a contract, arrangement or understanding (concepts that are already familiar in the Trade Practices Act 1974 and Commerce Act 1986) that contains a "cartel provision". At least two of the parties to the cartel arrangement must be persons who are, or who are likely to be, in competition with each other.
A "cartel provision" is defined as a provision in a contract, arrangement or understanding between competitors that has the:
purpose or effect of fixing, controlling or maintaining prices for goods or services supplied or acquired or resupplied by a customer (i.e., price-fixing); or
purpose of preventing, restricting or limiting the production of goods or capacity to supply services, or the purpose of allocating customers, suppliers or territories, or bid rigging (i.e., output restrictions, market sharing, or bid rigging).
Under the Act's civil prohibitions, an individual or a company will be liable if he, she, or it enters into a contract, arrangement or understanding with a competitor that contains a cartel provision or by giving effect to a cartel provision.
The criminal prohibitions are distinguished by the additional requirement that fault (a mens rea element of intention, knowledge or belief) must be established. That is, the prosecution must prove beyond reasonable doubt:
for the offence of making a contract, arrangement or understanding containing a cartel provision, that the individual or company intended to enter into the contract, arrangement or understanding and the individual or company knew or believed that the contract, arrangement or understanding contained a cartel provision; and
for the offence of giving effect to a cartel provision, that the individual or company knew or believed that the contract, arrangement or understanding contained a cartel provision and the individual or company intended to give effect to that provision.
The potential penalties are severe. For individuals who are convicted of criminal cartel offences, the maximum sentence is 10 years' imprisonment and/or fines of up to A$220,000 for each contravention of the Act. For individuals who breach the civil prohibition, the maximum pecuniary penalty is A$500,000 for each contravention.
For companies, the maximum fine or pecuniary penalty for criminal offences and breaches of the civil prohibition is the greater of A$10 million, three times the total value of the benefit reasonably attributable to the offence/breach, or (where the benefits cannot be fully determined) 10% of the corporate group's annual turnover in the 12 month period when the offence/breach occurred.
The Act contains a number of exceptions or circumstances in which an individual or company who makes or gives effect to a cartel provision will not contravene it. The exceptions principally relate to conduct subject to a collective bargaining notice or to authorisation, joint ventures, agreements between related bodies corporate, and collective acquisition of goods or services.
The narrowness of the joint venture exception has been criticised in Australia, even after changes to the Bill made by the Australian Government earlier this year. The concerns were that the exception applied only to joint venture contracts, but not to less formal arrangements or understandings, and only to joint ventures for the production and/or supply of goods or services, but not to arrangements to acquire inputs for the joint venture activity. The Act as passed extends the exception to arrangements between joint venturers who have failed to enter into a contract but intended and reasonably believed they had done so at the time they entered into the arrangement (there are potential issues around less formal day to day decisions made by joint venturers). Somewhat strangely, the concern regarding acquisition of inputs has been addressed through a Supplementary Explanatory Memorandum, which explains that where the acquisition of inputs by a joint venture is provided for in a joint venture contract, and the joint venture is for the production or supply of goods or services, the acquisition of inputs is intended to be included in the joint venture exception. However, this explanation can only be considered by the courts where the meaning of the legislation is uncertain.
Under the Act, the Commonwealth Director of Public Prosecution (CDPP) is responsible for prosecuting alleged criminal cartel conduct. On 14 July, the CDPP and the ACCC entered into a Memorandum of Understanding regarding serious cartel conduct (MOU). The MOU records that "The Australian Government has introduced criminal sanctions for serious cartel conduct, which operate in parallel with civil sanctions for cartel conduct. This enables a proportionate response to cartel conduct. Criminal investigations and prosecutions will be targeted at serious cartel conduct, and relatively minor conduct will ordinarily be pursued civilly."
Under the MOU, the ACCC is responsible for investigating cartel conduct and gathering evidence, managing the immunity process in consultation with the CDPP, and referring serious cartel conduct to the CDPP for consideration for prosecution. Referrals will concentrate on conduct of the type that can cause large scale or serious economic harm. In making a decision whether to refer a matter to the CDPP, the ACCC will have particular regard to whether the conduct is longstanding or has a significant impact on the market affected, and the scale of loss, damage or detriment caused by the conduct (including whether the value of the affected commerce for all participants in the cartel exceeded $1 million within a 12 month period). The CDPP will consider the same matters when deciding whether to prosecute.
The introduction of criminal liability in Australia reflects a growing trend towards criminalisation of cartel conduct internationally. Prosecutions of anti-competitive conduct in the United States already have a high profile, but anti-competitive conduct also attracts criminal liability in the United Kingdom, Ireland, France, Germany, Japan, Canada and other countries.
In the US in 2008, the average jail sentence for breaches of the Sherman Act was 25 months, down from a high of 31 months in 2007. Despite this drop, jail sentences for cartel conduct in the US have increased 135% since the 1990s. In addition to jail sentences against individuals, total fines were approximately US$690 million in 2008. This year the Department of Justice has already obtained lengthy jail sentences, including four years for a defendant involved in collusion in the coastal shipping industry, the longest jail sentence ever imposed for one charge.
The introduction of criminal liability for cartel conduct in Australia brings the international trend closer to home. In appearing before the Commerce Select Committee on 18 June, the Minister of Commerce, Simon Power, was asked whether the Government was considering criminalising cartel conduct. While indicating that it was on the radar, it was clear that it is not an immediate government priority. However, given the international trend, harmonisation of trans-Tasman business laws, and existing criminal liability in New Zealand for breaches of the Securities Act, tax legislation and other commercial conduct, it is only a matter of time before New Zealand follows the lead of Australia and our other trading partners.
In the meantime, Australia's Act has immediate implications for New Zealand companies and individuals operating on both sides of the Tasman. Allegations of conduct occurring in both Australia and New Zealand are already a feature of ACCC and Commerce Commission investigations of alleged cartel conduct, which often run in parallel. If New Zealand companies or individuals are involved in cartel conduct in or affecting Australia, they now face the real risk of criminal prosecution in Australia.
Simon Ladd is a litigation partner at Bell Gully, specialising in competition law, and Kristel McMeekin is a solicitor in Bell Gully's competition team.