​​Cryosite's small gun-jumping fine prompts judge's concerns over weak deterrent effect

14 February 2019 00:00 by James Panichi

The penalty imposed on Australian biomedical company Cryosite in the country’s first-ever case involving gun-jumping cartel offenses could have been 30 times higher, according to a court document that also points to the judge’s ongoing concerns that the small fine would affect its value as a deterrent. 

In his detailed list of reasons for accepting an agreed penalty of A$1.05 million ($750,000), Judge Jonathan Beach said the law entitled him to impose a fine totaling A$30 million — or A$10 million for each of the three cartel offenses — but that he had come to accept mitigating circumstances.

Among the reasons for leniency, Beach identified Cryosite’s precarious financial situation, which included a before-tax loss of A$1.2 million for the financial year ending in June 2018, with the company going on to declare a negative net asset position.

“[I]t is relevant for me to consider Cryosite’s financial position in considering whether the proposed penalties are likely to be sufficient to achieve specific deterrence,” the Federal Court of Australia judge said in his list of reasons, which was published today.

However, Beach used the judgement to reiterate concerns expressed when handing down his decision earlier this week that the size of the penalty did little to address “general deterrence” — that is, the message the fine would send to others considering engaging in cartel conduct.  

“[I]t is fair to say that I did have a residual concern concerning general deterrence,” Beach said in his list of reasons explaining the judgment. “But I have ultimately been persuaded that the quantum to be imposed also satisfactorily meets the objective of general deterrence,” given the limited scope of the cartel.

The judgment amounts to an unusual role-reversal, with Australia’s competition regulator campaigning over the past year for federal judges to impose higher penalties for cartel offenses, citing the need to create deterrence for those planning to engage in similar conduct.

On this occasion, however, the Australian Competition & Consumer Commission recommended that the court impose only a small fine after revealing it had reached an agreement with Cryosite last year.

In a statement released yesterday, the ACCC said it had recommended that sum in recognition of Cryosite’s weak financial position. Sarah Court, a senior ACCC official, said the fine was still likely to make such behavior “less palatable to other potential wrongdoers.”

Gun jumped

The matter received close scrutiny because it was regarded as the first clear-cut gun-jumping cartel case in Australia. It involved Cryosite and rival Cell Care Australia agreeing to non-compete arrangements before a proposed $A3 million merger between them had been finalized.

Under Australia’s voluntary notification process, gun-jumping refers to any anticompetitive arrangement put in place by two parties planning a merger or an acquisition. Under Australian law, merging parties must continue to compete until any such deal has been finalized and cleared by regulators.

The agreement between the two companies came into effect on June 23, 2017. It included a provision for Cryosite to refer any new business to Cell Care, as Cryosite pursued an earlier plan to wind down its operations, while maintaining its commitments to existing clients.

In September of the same year, the ACCC commenced a review of the proposed merger, but by December, it had abandoned its probe following a decision by the companies to walk away from the deal.

In July 2018, the ACCC launched legal proceedings against Cryosite at the Federal Court, claiming the deal reached by the two companies, which would have ended Cryosite’s storage of cord-blood tissue, amounted to cartel conduct.

Deterrence conundrum

Beach’s written reasons for his decision to accept the ACCC’s recommended penalty detailed the court’s belief that the cartel involved three discernible offenses and made clear that he would have been able to impose fines of A$10 million for each offense.

The judge also reserved the right to ignore the impact on a company’s business prospects of any fine the court were to impose.

“[T]he possibility that a pecuniary penalty may have a likely adverse consequence on the contravener does not prevent me from determining an appropriate penalty,” Beach said. “If it were otherwise, the consideration of such matters may undermine the objective of general deterrence.”

The judge also appeared to bristle at the request for a small penalty by arguing that “the penalty to be imposed for cartel conduct of the kind I am considering ahead of a proposed sale or its completion needs to be sufficiently high to deter businesses who may otherwise be able to circumvent [the law]."

Beach detailed how that the cartel arrangements would have had a direct impact on a total of 16 potential Cryosite customers, which had either been referred directly to Cell Care or had subsequently contacted the rival company.

Returning to comments made this week in court, the judge also appeared to express surprise that the cartel arrangement had been drafted by external legal advisers, with apparently little consideration of the document's potential to fall foul of Australian competition law.

The judge also raised his eyebrows at the fact that the written agreement underpinning the arrangement between Cryosite and Cell Care made specific reference to the hope that the ACCC wouldn’t take an interest in the proposed acquisition — suggesting that lawyers knew notifying the regulator would have been the most prudent course of action.

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