Date posted: 1/12/2016 6 min read

Cartels and the misuse of market power

New Zealand and Australia take different approaches to the criminality of cartels and the abuse of market power

In brief

  • Australia criminalised cartel behaviour in 2010, making laws similar to many other jurisdictions
  • It was considered that criminalisation could affect collaboration and innovation in New Zealand
  • In Australia, laws around the misuse of market power are also being reviewed

Often when we think of cartels, the mind races straight to South America where a collective of Mexican villains continues to lord over the region’s illicit drug trade.

However, the Antipodes is not immune from cartel activity either, and while not on quite the same criminal scale, the Australian Federal Court recently hit Colgate-Palmolive Pty Ltd (Colgate) with a fine for A$18m. The laundry heavyweight contravened the Competition and Consumer Act 2010 and the fine followed its admissions in proceedings brought on by the Australian Competition and Consumer Commission (ACCC).

Colgate admitted to entering understandings which limited the supply, and controlled the price, of laundry detergents, and agreed with the ACCC to joint submissions on the penalty being put to the court.

“By ordering these substantial penalties, the Court has recognised the seriousness of this conduct, which affected the supply and pricing of laundry detergents, a consumer staple,” said ACCC Chair Rod Sims.

“The information sharing understanding involved phone calls between senior managers of competing companies, many of which started as social calls, but turned to unlawful exchanges of pricing information. Any contact between competitors carries risk and while discussion of price is particularly serious, there are many topics which may lead to an anticompetitive understanding.”

Specifically, Colgate admitted that it made, and gave effect to, an understanding with Unilever Australia Limited (Unilever) and PZ Cussons Australia Pty Ltd whereby they agreed to cease supplying standard concentrate laundry detergents in early 2009 and to supply only ultra concentrates from that time. Colgate also admitted that it and Unilever shared sensitive market information, including information about when they would increase the price of their laundry detergents, through telephone contact between executives representing both companies.

Cartels criminalised

Interestingly, while cartel conduct was criminalised in Australia in 2010, the alleged laundry cartel matter occurred in 2009, before the criminal provisions came into effect. In February, in an address to the Committee for Economic Development of Australia, Sydney, Sims said that detecting and deterring cartel conduct continues to be a major focus for the ACCC, “not to mention our international counterparts”.

“We have around 20 cartel investigations under way at any one time and we expect one or two criminal prosecutions this year and some other important civil proceedings.”

Later in 2016, the Court will also hear an application for a penalty against Yazaki Corporation, a global automotive parts supplier, after finding a contravention in the automotive wire-harness cartel case. The ACCC has an appeal in train against Garuda and Air New Zealand in relation to air cargo matters.

“Australia criminalised cartels about five years ago, bringing our cartels laws into line with other jurisdictions including the US, Canada, UK, Japan and the EU,” says Stefanee Lovett, director of government relations firm, Barton Deakin.

“This means that executives need to weigh up the prospect of getting caught and serving jail time in Australia with any potential gains they think they can get from illegal cartel behaviour.”

New Zealand cartel operators safe from jail

In New Zealand, the Minister of Commerce and Consumer Affairs removed cartel conduct as a criminal offence from the Commerce (Cartels and Other Matters) Amendment Bill (the Cartels Bill) on 9 December 2015.

“The decision to introduce criminal sanctions has always been an ‘on balance’ decision due to the difficulties in defining what is cartel conduct,” says Jennie Kerr, manager competition and consumer policy, Ministry of Business, Innovation and Employment (MBIE).

“A cartel is an agreement between actual or would be competitors to fix prices, restrict output or allocate markets,” she says.

“This can cover a broad range of agreements from pro-competitive joint ventures to egregious collusion that causes serious harm.”

The Cartels Bill included a range of exemptions to cover most forms of pro-competitive collaborations, but there was still a risk that some conduct would be caught by the criminal offence that would not meet many people’s view of serious conduct.

“For example, two competing alcohol retailers agreeing on business closing times to reduce alcohol-related harm could be considered to be an output restriction and, as it was agreed ‘intentionally’, would have been covered by the criminal offence as originally proposed in the Bill,” says Kerr.

Given this difficulty, there was a risk that the criminal sanctions could create significant cost and uncertainty for businesses and company directors.

“The New Zealand Productivity Commission raised doubts about the cartel offence in its 2014 Report on Boosting Productivity in the Services Sector,” says Kerr.

“It considered that criminalisation of cartels could affect business decisions to undertake collaboration and innovation, and that it may raise the cost of doing business in New Zealand.”

The New Zealand government considered that the current civil prohibition regime is better suited to dealing with cartel conduct. The civil sanctions include injunctions, pecuniary penalties of up to tens of millions of dollars for body corporates or up to NZ$500,000 for individuals and, in the most serious cases, banning orders preventing the defendant from holding a management position for up to five years.

“Significant pecuniary penalties and the potential loss of livelihood from a banning order are seen as strong deterrents,” says Kerr.

The New Zealand government has also directed that MBIE continues to monitor developments both in New Zealand and overseas, including Australia.

It considered that criminalisation of cartels could affect business decisions to undertake collaboration and innovation, and that it may raise the cost of doing business in New Zealand.
Jennie Kerr Manager competition and consumer policy, Ministry of Business, Innovation and Employment

Whistleblowing

Like other countries with criminal sanctions (jail time) for cartel offences, Australia has an immunity policy that can protect whistleblowers from prosecution.

“Provided companies (or individuals) are first in the door to notify the ACCC of a cartel, and that the company (or individual) is not the instigator (or ring leader) of the cartel, they can apply for immunity from prosecution from the ACCC or the Director of Public Prosecutions (in the case of a criminal investigation),” said Lovett, who was formerly the ACCC’s director of International Affairs.

“If you suspect a client of being involved in a cartel, you should ensure that they engage the skills of a very good competition lawyer early on — companies in the past have missed the opportunity to be granted immunity by minutes — and that can be the difference between a ‘get out of jail free’ card, or paying out millions of dollars in penalties.”

The ACCC’s counterpart in New Zealand, the Commerce Commission, has a leniency policy for whistleblowers. As is the case in Australia, it’s “first in, best dressed” and all approaches must be made in person or by phone to the commission during normal business hours. This ensures that applicants are treated strictly in order of application and approaches can be made on a no names basis to protect the identity of the company seeking to apply for immunity.

Market power — using it effectively

A business with a substantial degree of power in a market is not allowed to use this power for the purposes of eliminating or substantially damaging a competitor or to prevent other market entrants. This behaviour is referred to as “misuse of market power”, which is covered by the controversial Section 46 of Australia’s Competition and Consumer Act 2010.

According to the ACCC, the possession of market power is not unlawful and to determine whether there has been a misuse of market power, the courts consider three questions, which is commonly referred to as the effects test. These questions include:

Does the company have substantial market power?

Is it taking advantage of that power?

Is it using the power for an illegal purpose?

“There is a lot of debate about whether there needs to be a change to the misuse of market power provisions in the law, which has centred around the introduction of an effects test,” says Lovett.

“The Harper Review of competition laws recommended last year that the change be made, and again this would bring Australia into line with many other countries.

“However there has been a lot of debate about the effectiveness of this change — will it stifle innovation? Will it see an explosion of court cases against big business? Or will it protect the corner store from being closed down because of the practices of bigger businesses?

Sims says proving a section 46 violation is never cut and dried.

“The ACCC is often urged to take action under section 46 when harm has been done to an individual competitor, particularly if that competitor is a small business,” Sims said in a speech to the 2015 Competition Law Conference.

“Supermarkets provide an illustration of this point. I am often told, including by a number of Parliamentarians, that when a supermarket opens in a new geographic area, the existing shops will be substantially damaged. I am then asked: what is the ACCC going to do about it? The answer I give is that, on its face, such behaviour is not against the law, and nor should it be because more competition is being introduced.”

According to Lovett, the Australian Government has said that it will draft laws to introduce an effects test.

“There has been more consultation about this in recent weeks and legislation will be introduced later this year,” she says.

In New Zealand, MBIE published an issues paper late last year that considered whether the misuse of market power provision was functioning adequately, and 39 submissions were received.

“While the issues paper briefly mentioned the ‘effects test’ approach, it is a preliminary paper whose focus is on the adequacy of our current prohibition,” said Kerr, from the MBIE.

“Only if the Government decides (following completion of the issues paper process) that the prohibition is functioning inadequately will it consider adopting alternative approaches, such as the effects test.”

This article was first published in the August 2016 issue of Acuity magazine.