Amendments will result in wide-ranging powers for perceived anti-competitive behaviour

On 13 October the Commerce (Cartels and Other Matters) Amendment Bill was introduced to Parliament. This follows the Ministry of Economic Development’s consultation draft of the Bill which set out a framework to prohibit cartels. If passed, this could put commercial players involved in genuine commercial arrangements through the criminal courts,discouraging them from setting up legitimate commercial arrangements.

Amongst other things, the Bill replaces s30 of the Commerce Act 1986. Its enactment could also make commercial decisions in this area more costly due to the increased need for legal advice and compliance. Additionally, parties going through the new process would need to prove their eligibility for an exemption.

What could this mean for business?

Cartel conduct involves contracts, arrangements or understandings that involve fixing prices, allocating markets, rigging bids or restricting output. Given the efforts being made to align Australian and New Zealand business laws, it had been likely that New Zealand would bring in cartel legislation ever since Australia criminalised cartel conduct in 2009. The proposed framework defines the civil prohibition on cartel provisions widely, which would capture a large number of arrangements. Because of this, the Bill proposes exemptions which would be used to legitimise some of these arrangements.

The proposed framework would also create a parallel criminal offence which means that these wide definitions would apply to arrangements in a criminal, as well as a civil, context.

‘Output restrictions’ and ‘market allocation’ are two terms used in the draft legislation; these are framed very broadly, and are likely to catch genuine commercial arrangements. For example, if a franchise such as Subway, specified defined geographic regions in which each of its franchisees was required to operate, and the arrangement included an agreement that the franchisee would not go into competition with the franchisor on termination of the contract – Subway would be defined as a ‘cartel’.

Why is the Amendment Bill a concern for business in New Zealand?

Despite the exemptions for legitimate arrangements which are, at first glance, cartels, the simple fact that an arrangement will at first be defined as a cartel will not encourage a businessperson to create such an arrangement.  Reliance on an exemption would be dependent on the Commerce Commission or the courts accepting that the arrangement satisfies one of the exemptions. Businesspeople will be exposed to the criminal process because of the establishment of a parallel framework between the civil and criminal jurisdictions; it seems harsh to put legitimate commercial arrangements through the criminal law and criminal procedure.

In both the criminal and civil frameworks, the burden of proof is on the defendant to prove that an exception applies to their situation. This requirement will discourage businesspeople setting up a genuine commercial arrangement which is initially caught by the scope of the proposed definition of cartel. It also infringes on the centuries-old common law presumption of innocence by placing the burden of proof on the defendant.

Commercial decisions will often depend on legal advice that a proposal is a cartel under the broad definition but will be covered by an exception. This will not only deter businesspeople from creating the commercial arrangements in question, but will also increase reliance on lawyers operating in this area of the law.

The Commerce (Cartels and Other Matters) Amendment Bill has a number of issues. In order to crack down on genuinely undesirable commercial practice, the statutory definition of ‘cartel’ is wide. It will discourage not only the establishment of perfectly legitimate businesses, but also ‘innocent’ business operators may find themselves inadvertently caught in the new framework.