New Zealand businesses, lawyers renew attacks on 'chilling effect' of criminal-cartel offenses

22 January 2019 10:08am

21 January 2019. By James Panichi.

Critics of New Zealand’s planned criminal-cartel offenses have little to look forward to in 2019. Wellington appears unlikely to offer any significant compromises, meaning that the country is likely to enter the Easter holidays in April with tough, new laws on the statute book.

Even allowing for a two-year implementation period — and probably a longer lapse for criminal-prosecutions to percolate through to the courts — this amounts to a significant increase in the regulatory risk faced by companies, and individuals, doing business in New Zealand.

Critics say the impact of the laws will be immediate. Not because there’s likely to be a sudden increase in antitrust prosecutions; but because of what they call the “chilling effect” on business.

Put simply: the horrifying scenario of company executives facing the perp walk in handcuffs won’t just keep them on the right side of the red line; it will keep them miles away from it. This could hurt legitimate cooperative business arrangements, critics say.

"My biggest concern is that cartel conduct isn't like other types of crime, where the general population know it when they see it,” says Troy Pilkington, a partner with law firm Russel McVeagh. “It's not always obvious."

"The chilling effect is that managers get too scared to look at a joint venture because they could be under the gun for criminal activity," Pilkington says.

This argument hasn’t convinced lawmakers or the country’s regulator, the New Zealand Commerce Commission. Both government parliamentarians and the watchdog are adamant that the new laws will deter cartels and will harmonize local laws with those in other jurisdictions — particularly Australia — and help with cross-border prosecutions.

And with a parliamentary committee winding up the proposed law's second reading, the Commerce (Criminalization of Cartels) Amendment Bill is just one debate away from being presented to the country’s governor general for the final seal of approval.

Tough penalties

Under current wording, the laws would criminalize cartels and cartel behavior, listed as price fixing, restricting output and market allocation. For individuals, the offenses would attract a penalty of up to seven years’ imprisonment or a fine of up to NZ$500,000 ($336,000) or both. For companies, fines would be up to NZ$10 million or higher, based on turnover.  

Those opposing the laws say civil-cartel laws are already tough enough, with high fines and provisions to stop companies covering penalties imposed on individual managers. More importantly, though, law firms and industry bodies say the local market isn’t big enough to warrant such severe penalties.

“If you look at recent domestic price-fixing cases in New Zealand, it’s questionable whether any of them would warrant criminal prosecution,” DLA partner Mark Williamson says.  

“This law should be used against people who know they are doing something wrong, the so-called smoke-filled room,” Williamson says. “But the price fixing we see is often due to well-meaning but misguided individuals.”

“Also, New Zealand is a small country with a handful of commercial centers. It’s difficult to hide cartel conduct for any meaningful period of time,” he says.

Tony Dellow, a partner with Buddle Findlay, describes the regulatory environment in New Zealand as “one of compliance” that suggests the proposed law may amount to legislative overkill.

“The cartels I hear of are most often people blundering into breaches in places where prosecutors aren’t going to be able to look for criminal charges.”

One example often cited by those arguing against criminal offenses is the case of a group of pharmacists in the city of Nelson that's facing civil-cartel charges at the High Court of New Zealand. Whatever the merits of the Commerce Commission’s case, observers doubt authorities would ever want to bring criminal charges against small-business owners.

For its part, the Commerce Commission has argued that the criminal offenses are both a deterrent and an opportunity for detection, with cartelists more likely to report fellow cartelists in a bid to seek immunity and avoid jail time.

Futhermore, the government appears likely to stay the course. The governing coalition is made up of the Zealand Labour Party, the Green Party of Aotearoa New Zealand and the populist New Zealand First. All three support the proposed criminal offenses.

Yet, Andrew Matthews, a partner with Matthews Law, believes that the prospect of local cartels requiring criminal sanctions is slim, even if the bill is passed.

“From memory, you’d have to go back to the 1990s in New Zealand to identify proper, domestic hard-core cartels,” he says. “Many recent domestic cases are the result of stupid discussions.”

Even so, Matthew says, the existence of criminal offenses in the prosecutors’ toolbox is likely to change regulatory dynamics, even without a criminal prosecution.

“When criminal charges are in the background, all things being equal, parties will naturally be more inclined to settle,” he says. “We could see a larger number of civil settlements as a result of the new offenses than might otherwise be the case.”

Other observers agree the proposed laws will have a “chilling” effect on business — but not simply as a result of companies steering clear of legitimate business dealings that are legal under provisions allowing for “efficiency-enhancing collaborative activity.”

According to Anne Callinan, a partner with Simpson Grierson, the fear of criminal prosecutions could lead companies to increasingly seek clearance from the Commerce Commission before embarking on a joint venture or a legally safeguarded “collaborative activity.”

The problem with that, Callinan says, is that the clearance process is public. This would force competing companies planning a business arrangement to reveal their plans to potential rivals.

“If these competitors are trying to do something innovative together, they might not want people to know that,” Callinan told MLex. “They’re going to have to expose their idea through a clearance process when it’s a commercially sensitive issue.”

“Everyone will know whether it goes through or not,” she says. “I think of that as the chilling effect.”

ABA 2019