On 3 December 2008, the Federal Government introduced the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill into the House of Representatives. The Bill passed through the House of Representatives and is currently before the Senate.
If it becomes law, the Bill will have far-reaching implications for the conduct of trade and commerce in Australia. It will make it a criminal offence to make or give effect to a contract arrangement or understanding that contains a "cartel provision".
By declaring that a company commits a criminal offence if it knowingly makes or gives affect to a cartel provision, the Bill signals a "get tough" approach on serious (sometimes known as "hard core") cartel conduct. Although the application of criminal sanctions to this behaviour is acceptable in principle, and is the law of most of Australia's major trading partners, serious questions have been raised about whether the Bill goes too far and will stifle legitimate commercial activity if it becomes law.
What is a cartel provision?
The Bill defines a criminal cartel provision as a condition contained in a contract, arrangement or understanding between competitors that relates to:
- price fixing;
- restricting outputs in the production or supply chain;
- sharing or allocating customers, suppliers or territories; or
- rigging a tender process.
Price-fixing and the Visy/Amcor case
The biggest price-fixing case in recent times was the Visy/Amcor case. Amcor and Visy conducted a price-fixing cartel relating to the sale of cardboard boxes between 2000 and 2004. The Federal Court found that Visy had committed 69 contraventions of the Trade Practices Act and fined the Visy Group of Companies $36 million. Amcor had earlier obtained immunity from liability for its role in the cartel under the Australian Competition and Consumer Commission's leniency policy. The case highlighted the absence of criminal sanctions for cartel conduct in Australia and resulted in the Australian Competition and Consumer Commission waging a public campaign promoting the imposition of jail terms for executives who engage in cartel activities.
Restricting outputs in the production and supply chain
This occurs when competitors make an agreement or arrangement, or arrive at an understanding, which prevents, restricts or limits:
- the production, or likely production, of goods by all or any of the parties;
- the capacity, or likely capacity, of all or any of the parties to supply services; or
- the supply, or likely supply, of goods or services to third parties by all or any of the parties.
Sharing or allocating customers, suppliers or territories These types of market divisions occur when competitors agree to allocate between them:
- the third parties with which they will or will not deal; or
- the geographical areas in which some or all of them are to or acquire goods or services.
Bid rigging
Bid rigging occurs when competitors agree that if they are requested to bid for the supply or acquisition of goods or services:
- only one or some of them will bid;
- two or more of them will lodge a bid on the basis that one of those bids is more likely to be successful than the others;
- some of them will deliberately lodge non-conforming bids or delay lodgement until after the closing date; or
- two or more of them will bid, having already worked out a material term (eg price) of one or more of those bids.
Criminal penalties
Individuals
The Bill establishes a maximum jail term of 10 years and/or a fine not exceeding $220,000 for criminal cartel offences by individuals.
Companies
For a company, the fine for a criminal cartel offence will be the greater of:
- $10 million;
- three times the total value of benefits gained from the offence; or
- where the total value of the benefits gained from the offence cannot be determined, 10 percent of the company's annual turnover during the 12 month period ending at the end of the month in which the company committed the offence.
The civil penalty provisions
Currently, cartel behaviour is dealt with as a matter of civil liability under the Trade Practices Act. In essence, the Act makes it unlawful for competitors to make or give effect to anti-competitive contracts, arrangements or understandings, including the so-called "hard core" conduct outlined above.
The Bill introduces a civil penalty provisions regime, to run parallel with the criminal penalty provisions. The civil penalty provisions also apply to "hard core" conduct only.
There are two significant differences between the criminal penalties and the civil penalty provisions.
First, to be found guilty of a criminal offence, the prosecution has to prove beyond reasonable doubt that the defendant engaged in the conduct (the so-called "physical" element) and that the defendant knew or believed that they were only require the prosecution to prove that the conduct had the purpose or likely effect of fixing prices, restricting output, sharing markets or bid rigging, and that the parties were competitors. The prosecution does not have to prove that the person knew or believed that they were engaging in cartel conduct.
The second important difference is in the area of penalties. The maximum penalty payable by an individual under the civil penalty provisions is $500,000, with no penalty of imprisonment.
Telephone interception powers
The Bill amends the Telecommunications (Interception and Access) Act 1979 to enable the Australian Competition and Consumer Commission to use intercepted telephone conversations in cartel investigations. It does this by deeming a criminal cartel offence to be a "serious offence" for the purposes of obtaining a telecommunications service warrant under the Act.
The Australian Competition and Consumer Commission's policy
The Australian Competition and Consumer Commission published its immunity policy for cartel conduct in August 2005. Under the policy, the Commission will grant immunity to a party satisfying the following conditions:
- The party is the first to apply for immunity in respect of the cartel.
- The party has not coerced others to participate in the cartel and was not the "leader" of it.
- The party has ceased involvement in the cartel or indicated to the Commission that it will stop involvement.
- Where the party is a company, its admissions are truly a corporate act and not simply the isolated confessions of certain officers or employees.
- The Commission had no knowledge or evidence of the cartel before receiving the application for immunity.
- The party gives full disclosure and cooperation to the Commission.
Under the Bill, the decision whether to grant immunity from criminal proceedings will lie with the Commonwealth Director of Public Prosecutions, not the Commission. Under the proposed policy, the Director will still retain an overall discretion in deciding whether to grant immunity, even if the threshold criteria specified in its policy are otherwise met. This is different from the Commission's immunity policy, where immunity is automatic upon satisfying the conditions set out above.
The essential attributes of any effective immunity policy are transparency, certainty and predictability. The Commonwealth Director of Public Prosecutions' overall discretion to grant immunity removes these attributes from the Director's immunity policy. The significant differences and inconsistencies between the two approaches, both in terms of the stage at and conditions under which immunity will be granted, are likely to deter would-be whistle blowers from seeking immunity from the Director. Detecting serious criminal cartel behaviour could become more difficult and unlikely as a result.
If recent public statements by the Commission are taken at face value, the passage of the Bill into law is also likely to lead to a significant change in the Commission's current policies and practices. The Commission has publicly stated that, if the new laws come into effect, it will pursue criminal charges instead of civil penalties for serious cartel conduct. It will not allow the prospect of a criminal prosecution to be "traded away" by an offer to resolve the matter through civil penalty proceedings and the payment of a large fine. The Commission's view appears to be that Australian companies engaging in cartel conduct have regarded fines, no matter how large, as merely a cost of doing business. However, it believes that the risk of jail terms for individuals changes the equation completely and that it is in the public interest to pursue a criminal remedy for serious cartel behaviour.
Exemptions and defences
The Bill lists a number of situations in which the criminal offences and the civil offences will not apply. Those situations are:
- Where a company has given the Commission a collective bargaining notice in relation to a contract, arrangement or understanding containing a cartel provision.
- Where a company applies for authorisation for a contract arrangement or understanding containing a cartel provision that will not come into operation unless and until authorisation is given.
- Contracts, arrangements or understandings between related companies.
- Where a contract containing a cartel provision is for the purposes of a joint venture:
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- for the production and/or supply of goods and services; and
- which is carried on by a company formed by the joint venture parties.
Although these exceptions aim to make sure that the Bill does not prevent legitimate business activities that will benefit the economy or the general public, some commentators have argued that the Bill does just that.
Criticisms of the Bill
Much of the debate about the Bill has centred on the proposed joint venture exceptions. One school of thought says that the Bill's joint venture defences are too narrow and could result in the criminalisation of legitimate joint venture activity. The alternative view is that the defences are too broad and that the parties to cartels will be able to shelter from the Bill under the umbrella of 'artificial' joint ventures.
Those who believe that the joint venture exceptions are too narrow have focused on two aspects. First, earlier versions of the Bill had a "dishonesty" requirement. In other words, the prosecution would have to prove that the defendant knew the conduct to be dishonest "according to the standards of ordinary people". The removal of the dishonesty requirement arguably makes it easier for the prosecution to prove guilt on a criminal charge.
Secondly, the Bill has been criticised for subjecting joint ventures that operate outside a formal contract, and are not related to the production and/or supply of goods and services, to criminal and civil cartel offences. It is important to note in this context that the joint venture exception is limited to "contracts" and does not extend to "arrangements" or "understandings".
For example, consider the following scenarios.
Scenario 1
Company A and company B are the joint owners of a shopping centre in Brisbane. They also independently own other shopping centres in Brisbane, and therefore compete with one another for the supply of retail space for lease. On a narrow reading of the joint venture exception, company A and company B could be caught by the cartel provisions because they compete with one another outside of their joint venture arrangement.
Scenario 2
Company A and company B come together to establish a consortium which has greater prospects of winning a tender than either would have individually. If those companies agree that they will not bid individually, then this appears to be a "bid-rigging" cartel provision.
Scenario 3
Company A and company B have world-recognised expertise in the research and development of different aspects of a water desalination plant. They compete with each other in other parts of the world. Any research and development joint venture between them for the development of a water desalination plant in Queensland that did not involve joint production is arguably caught by the criminal cartel provisions in the Bill.
Other people have argued that the joint venture exceptions are too broad and will enable cartels to shelter under artificial joint venture structures. Although this may be so, in our view this criticism ignores the fact that a joint venture which comes within the joint venture exception must still comply with the other competition provisions in the Trade Practices Act. Although a "sham" joint venture might avoid the penalties imposed by the Bill, it will still be potentially unlawful under other provisions in the Act which prohibit anti-competitive arrangements between competitors.
Conclusion
There seems to be a general consensus that Australia should have criminal offences and penalties for cartel behaviour. The Bill certainly brings Australia into line with the stance our major trading partners take towards cartel conduct, which is important to effectively deter cartel behaviour from crossing national boundaries.
The main area of debate is whether the Bill casts the net too widely and exposes participants in ordinary commercial activities to a criminal penalty.
Our main criticism is that the drafting of the Bill is extremely complicated. Previous experience shows that the more an Act of Parliament tries to cover every eventuality, the more likely it is that unanticipated situations will arise, creating uncertainty and disputes. Almost invariably, the solution to the unexpected problem is an even more complicated amendment. Legislation on this important topic should first be easily understood by business people and their advisers, and second be able to be used effectively and quickly by the Australian Competition and Consumer Commission in response to serious cartel behaviour. In our view, the proposed Bill satisfies neither of these objectives.
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