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Cartel criminalisation: Do honest businesses have nothing to fear?

Home Insights Cartel criminalisation: Do honest businesses have nothing to fear?

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Contributed by: Troy Pilkington, and Sarah-Michelle Washer

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Published on: October 03, 2018


Competition Alert – 3 October 2018

There were two interrelated developments in New Zealand competition law over the last week; the Commerce Commission's appeal to the Court of Appeal in relation to a price fixing prosecution that failed at the High Court, and the second reading of the Commerce (Criminalisation of Cartels) Amendment Bill (Cartel Criminalisation Bill). As this note highlights, both hinge on the difficulty and importance of being able to distinguish intentional cartel conduct from legal or benign behaviour.

The Commission's appeal concerns allegations that two Hamilton-based real estate agencies agreed to fix their prices by agreeing to pass through to customers the costs of Trade Me Property advertising.

The High Court found the real estate agencies' conduct was intentional; it found that the real estate agencies had entered into and given effect to an arrangement under the Act. The Court of Appeal is grappling with whether this intentional agreement had the effect, likely effect or purpose of fixing or controlling the real estate agencies' prices.

The High Court found that it did not. A number of other Hamilton and other real estate agencies around the country have already formed the view it did, having settled the Commission's prosecutions by admitting breach. To date the Commission has obtained penalties of around $3 million for the Hamilton agreements,1 over $12 million in penalties from national real estate agencies and $4 million in penalties from Manawatu real estate agencies for similar agreements. However, the Commission's appeal demonstrates it would be wrong to say that there is any bright line that allows easy categorisation for businesses, or Courts, to draw the line between legal intentional conduct, and illegal – and soon to be criminal - cartel conduct.

The timing of the appeal has a certain cosmic coincidence: in the same week the Cartel Criminalisation Bill was receiving its second reading in Parliament.2 The Select Committee, which released its report on the Cartel Criminalisation Bill in mid-August, could not agree that introducing criminal sanctions for cartel conduct was warranted, and so a number of different views were expressed in Parliament during the second reading – including from Hon Kris Faafoi (Minister of Commerce and Consumer Affairs) and other members of Labour, NZ First and National.

Views expressed in favour of cartel criminalisation included that "honest business should have no concerns in relation to this bill" as the requirement for intention means that businesses will never inadvertently engage in criminal cartel conduct. The current appeal before the Court of Appeal suggests otherwise, and calls into question whether it truly is appropriate to have businesses and individuals face potential criminal sanctions on the basis of a complex (and often not well understood) prohibition.

Helpfully, Minister Faafoi has already indicated that before progressing to the Committee of the Whole House, consideration will be given to whether:

  • the "belief defence" to the criminal offence (ie where the defendant believes that their conduct was reasonably necessary for a collaborative activity) should be based on reasonable grounds; and
  • the defence should also be expanded to other exemptions in the Commerce Act (such as the joint buying and vertical supply exemption).

Russell McVeagh also submitted that the Commission should be provided with a list of criteria to include in its enforcement decision-making, to further assist the Commission in distinguishing between truly criminal conduct and behaviour that was more in the nature of a technical "foot fault" of an otherwise "honest business". These criteria were drawn from OECD committee publications on the subject, which recognise the difficulty in distinguishing "hard core" cartel behaviour from technical breaches of the Act more appropriate for civil enforcement.

In any event, further consideration is to be commended to avoid the potential for honest businesses to inadvertently cross the line. Striking the right balance between deterrence of deliberately covert conduct, akin to fraud on customers, and chilling legitimate collaboration, is particularly critical in a small economy such as New Zealand.

Hon Kris Faafoi also intends to look at setting up a specialised panel to prosecute criminal cartel offences, and the categorisation of the offence, as well as seeking guidance from the Commerce Commission for businesses to understand the prohibitions. These developments are also welcome.

The debate on the Cartel Criminalisation Bill will resume on 16 October 2018.

If you have any questions as to how this proposed law change may impact your business, please contact one of the authors below.

Further reading can be found as follows:

  • A copy of the Cartel Criminalisation Bill is available here.
  • A copy of the Report of the Economic Development, Science and Innovation Committee released in August 2018 can be found here.
  • A copy of the Commerce Commission v Lodge Real Estate Limited & Ors decision from the High Court is available here.
  1. Prior to the hearing, three of the five defendants, Lugton's Limited, Online Realty Limited and Success Realty Limited admitted their liability and together paid penalties to the Commission of around $3 million.
  2. More information about the Bill can be found in our February 2018 Competition Alert.

This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.

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