Cartel criminalisation – where Australia stands we stand?
By Simon Ladd, partner, Bell Gully

The Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2009 came into effect in Australia in July last year, introducing criminal liability for cartel conduct (arrangements between competitors involving price fixing, bid rigging, market allocation, and output restrictions) in Australia. Although the issue was not previously on the New Zealand Government’s agenda, six months later, the Ministry of Economic Development issued its Cartel Criminalisation discussion document, and is now seeking submissions in response to its preliminary conclusion that there is a case for criminalisation.

The discussion document begs an important question – is cartel criminalisation necessary when the Commerce Act 1986 (Act) already prohibits cartel conduct and provides substantial penalties for the companies and individuals involved? This article outlines the key features of the discussion document’s proposals and questions the strength of the case for criminalisation. It takes as its starting point the view that, in an area of law where distinguishing legal from illegal conduct is often very difficult (see the observations of the United States Supreme Court below), there should be clear evidence of a need for criminalisation, and that the benefits will outweigh the costs before proceeding.

A subsequent article, following Ministry workshops during March and the submission process, will discuss in more detail the specific issues that must be addressed before the Government proceeds with criminalisation.

Key features of the Ministry’s proposal
The preferred option appears to be using the Australian legislation as a model on which to build, although the Ministry is also consulting on alternative approaches. The Australian legislation criminalises “hard-core” cartels – contracts, arrangements, or understandings to engage in price fixing, bid rigging, market allocation, and output restrictions – which it refers to as “cartel provisions”. Subject to proof of a “mental element”, it would be an offence to either make or give effect to a contract, arrangement, or understanding that contains a cartel provision. The necessary mental element is likely to be an intention to form or implement the agreement, arrangement, or understanding knowing that it contains a cartel provision.

Criminal liability would apply to both individuals and companies, and the jurisdiction of the offence may extend to cartels formed by individuals and companies outside New Zealand (as for conspiracy offences under the Crimes Act 1961).

The discussion document proposes that the Commerce Commission would investigate suspected offences and make prosecution decisions, with prosecutions carried out by a panel of senior barristers, as is the case with the Serious Fraud Office. (That is not the Australian model, which separates investigation and prosecution decisions, in the same way that the roles of the Police and Crown Solicitors operate here). Trials would likely be by judge alone, rather than jury trials (applying section 361D of the Crimes Act). A maximum jail sentence of between five and seven years is proposed.

The case for criminalisation
Because cartel conduct is already illegal and subject to significant financial penalties, the case for criminalisation cannot simply be that cartels are harmful to society and must be deterred, detected, and defeated – and at the heart of the discussion document is the statement that “[t]here are some concerns regarding whether or not our current civil penalty regime is effective at deterring cartel behaviour”. This bald statement follows from the Ministry’s views that:

• there is a lack of detection of domestic cartels in New Zealand;
• most international cartels operating in New Zealand are detected as a result of enforcement activity or leniency applications in other jurisdictions – that is, those jurisdictions are more successful at detecting cartels; and
• following the introduction of criminal penalties in Australia, the Australian Competition and Consumer Commission has reported an increase in leniency applications.

These views reflect a belief that criminalisation will improve deterrence and detection by increasing penalties and incentives for cartel members to break ranks and seek leniency, or, as the Antitrust Division of the United States Department of Justice succinctly put it:

“It is obvious why prison sentences are important in anti-cartel enforcement. Companies only commit cartel offenses through individual employees, and prison is a penalty that cannot be reimbursed by the corporate employer. As a corporate executive once told a former Assistant Attorney General of ours: “[A]s long as you are only talking about money, the company can at the end of the day take care of me ... but once you begin talking about taking away my liberty, there is nothing the company can do for me.” Executives often offer to pay higher fines to get a break on their jail time, but they never offer to spend more time in prison in order to get a discount on their fine.”
(Barnett, “Criminalization of Cartel Conduct – the changing landscape”, Address to Joint Federal Court of Australia/Law Council of Australia (Business Law Section) Workshop, Adelaide, 3 April 2009.)

Of course, such statements ignore the other costs of engaging in cartel conduct, such as deserved reputational damage and loss of employment. In addition, in New Zealand, the company cannot “take care” of employees engaged in price-fixing, because section 80A of the Act prohibits indemnification.

The case for criminalisation is also bolstered by reference to international practice, and it is no surprise that the discussion document follows hard on the heels of criminalisation in Australia. An important goal of the Single Economic Market Outcomes Framework is that firms operating in New Zealand and Australia face the same consequences for the same anti-competitive conduct. More generally, the discussion document notes that a number of our key trade and investment partners, such as the United States, United Kingdom, Canada, Australia, Japan, and Korea have criminalised cartel activity, and that the OECD recommends criminalisation where this is consistent with social and legal norms.

Unanswered questions
The strength of the Ministry’s concerns can be debated. During the last decade, there has been a steady increase in the detection of domestic cartels (see for example, Commerce Commission v Ophthalmological Society of New Zealand Inc [2004] 3 NZLR 689 and the various Koppers Arch cases). As the Commission’s latest annual report notes, “The leniency programme has gained momentum with an increasing number of cases being brought to the Commission. The Commission now has a considerable programme of cartel cases in both the litigation and investigation phases.”

Companies involved in investigations, whether as targets or witnesses, would add that the financial and opportunity costs (time diverted from productive activity) are very significant – and that there has been a corresponding increase in the number of companies putting in place internal compliance programmes.

Nor is it surprising in an open economy like New Zealand’s that many of the cartels that are detected are international or that, for example, an American company engaged in a cartel would seek leniency in the United States before other jurisdictions such as New Zealand. Overseas jurisdictions that have criminalised cartel conduct have continued to suffer from cartels, and it is not clear whether the incidence of cartels has been reduced by criminalisation.

Benefits?
There is very little empirical evidence regarding the incidence of cartel conduct in New Zealand, and although the discussion document candidly acknowledges the need to weigh the costs and benefits of criminalisation, there is little discussion of the likely magnitude of either. The discussion document asserts that:

“The single intervention most likely to have a significant impact on deterrence and detection is the possibility of imprisonment. This requires criminalisation which brings with it a number of costs and benefits. A greater deterrence of the most serious forms of cartel behaviour will have significant benefits.”

The basis for the statement that the possibility of imprisonment will have a significant impact on deterrence and detection is unclear. Intuitively, a threat of imprisonment must be more significant than the threat of a fine. However, the number of prosecutions in jurisdictions that have criminalised cartel conduct has been very small and, of course, those jurisdictions continue to experience cartel conduct.

Uncertainty and the risk of deterring pro-competitive activity
Although the discussion document’s foreword says, “Cartels are relatively easily recognised – we know them when we see them”, experience shows that is often not true. In markets with few participants, producing the same or very similar goods or services, it can be hard to distinguish between competitive and cartel conduct (petrol prices are an often-cited example). In the presence of a cartel, you would expect to see near identical prices that move in parallel and, in the absence of a cartel, the same behaviour is economically rational. The United States Supreme Court has recognised this difficulty in its recent judgment, Bell Atlantic Corp v Twombly 550 US 554 (2007), stating:

“The inadequacy of showing parallel conduct or interdependence, without more, mirrors the ambiguity of the behavior: consistent with conspiracy, but just as much in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market.”

Consider two further examples. In the first, two publicly funded institutions are competing to buy the same property. Realising that they are simply driving up the price that one of them will ultimately pay, they agree that one will withdraw. Many members of the public might suggest that such a result was sensible because it avoided additional cost to taxpayers. It is nevertheless bid-rigging.

Secondly, suppose that competing manufacturers meet through their industry body and agree that they will jointly fund research into lower emission technologies and, to do so, will impose a levy on each unit of production, which is then incorporated into their selling-price. That may also amount to price-fixing.

These examples emphasise that, in a complex area of law, it is critical that the law is certain and clear. As the discussion document notes, defining the offence too broadly, or uncertainty about whether conduct is legal or illegal, risks deterring pro-competitive activity. That is, managers and executives concerned about whether competitive conduct (following a competitor’s prices, joint ventures involving competitors) may appear illegal, and therefore expose them to the risk of criminal prosecution, may simply decide not to engage in that activity.

Costs
The introduction of criminalisation will inevitably involve considerable cost. For the Commission to conduct criminal investigations as proposed, it would need additional staff, resources, and training to meet the standards required to prove offences beyond reasonable doubt, while recognising the rights of those subject to serious criminal investigation (the Commission’s existing criminal jurisdiction does not require proof to this standard). At a time when the Commission already carries heavy responsibilities for telecommunications, energy, airports, and dairy (among other areas), and Government entities face strict budget constraints, it is difficult to see that priority will or should be given to the funding necessary for cartel criminalisation (especially when greater economic benefit can be obtained by advancing reform in other areas such as electricity pricing and security of supply, and telecommunications).

Those subject to investigation will also face additional costs that cannot be recouped whether or not a prosecution results. Under the current civil regime, those costs are very significant (potentially hundreds of thousands of dollars for major investigations), and are a dead-weight loss to the company concerned, detracting from productive activity by consuming management time and reducing profitability. Criminalisation will increase these costs.

Conclusion
The Minister has said, “My view is that there are compelling reasons to criminalise cartel behaviour” (Speech to the Competition Law and Regulatory Review Conference, 22 February 2010), and the discussion document concludes that there is a prima facie case for criminalisation. However, in many places, the evidence and arguments put forward are thin or based on rhetoric. During the submission process and beyond, the strength of the case for criminalisation, the concerns briefly identified above, and the details of implementation (if that is the Government’s decision) need to be addressed and answered before changes are made. In Australia, the Dawson Committee’s comprehensive Review of the Competition Provisions of the Trade Practices Act (30 April 2003) acknowledged difficulties with criminalisation, and said, “It is, however, apparent to the Committee that they need to be addressed and answered before the introduction of criminal sanctions. In the United Kingdom, after the decision to introduce criminal penalties had been made by the Government, a lengthy study of the problems surrounding implementation was undertaken. The Committee considers a similar, focused implementation exercise should be undertaken here.”

Simon Ladd is a litigation partner with Bell Gully, specialising in competition law.