Mr Wilson, who specialises in competition and regulatory matters and wrote a research paper entitled Go directly to jail? Criminal Penalties for Cartel Conduct in New Zealand, told Law News that there were a number of strong, principle-based arguments as to why criminalisation was desirable.
"But I think the thing that makes it inevitable now, is that most of our major trading partners have introduced it and it is becoming the international norm. I do think it's inevitable and the question really is "how"?
Mr Wilson was commenting following the release on January 27, 2010 by Commerce Minister Simon Power of a discussion document entitled Cartel Criminalisation and said there were quite significant differences in the approaches to criminalisation in different jurisdictions.
He was heartened by the fact that, despite an emphasis on harmonisation, it was clearly not a foregone conclusion that New Zealand would follow the Australian approach, as it had been criticised for significant flaws.
Mr Wilson said New Zealand was a small economy with often a limited numbers of players in markets and this made its dynamic different. A cautious approach should accordingly be adopted to following international models.
Mr Wilson said that the same physical elements should be included in both civil and criminal penalty regimes but there would be major practical issues to deal with in drawing up a criminal regime.
Chapman Tripp partner Grant David sounded a warning note about any hasty moves to introduce criminalisation.
Mr David told Law News there first needed to be a debate about whether or not cartels were prevalent and harmful in New Zealand and, if so, whether criminalisation was the appropriate remedy. He said that monetary penalties for firms in relation to cartel conduct had been significantly increased in 2001, and as yet, the courts had not used those penalties to their fuller extent as cases were still working their way through the system. Commerce Commission's leniency policy was proving to be effective in identifying cartels.
Mr David cautioned that the introduction of criminalisation could have a chilling effect on commercial activity, as it was sometimes difficult to draw a clear line between commercial co-operation and unlawful collusion.
New Zealand was embarking on major infrastructure projects that would require close co-operation between firms and it was important such work was not hindered by fears about breaching the law.
He said that the primary sector was another industry which depended on co-operation between firms, both in producing and in marketing products.
Bell Gully litigation partner specialising in competition law, Simon Ladd, said there must be a real question as to whether or not gains from the detection and prevention of cartels as a result of criminalisation would outweigh the costs changing the law. His assessment would be that the gains would be "at the margin".
Mr Ladd said vigorous debate on these issues was vital. "The cost to society of cartels is real, but the costs of investigating and prosecuting cartel conduct are equally real. The question we should be asking is not whether cartel conduct is bad, but rather whether criminalising cartel conduct is likely to create gains that outweigh the inevitable costs that would accompany criminalisation."
Justice Minister Simon Power, in releasing the discussion document, said that cartel activities such as price fixing and bid rigging were among the most harmful forms of anti-competitive business conduct.
"Such activities cause significant harm by reducing economic output, undermining trust in markets, slowing productivity growth and distorting investment signals by making cartels appear more profitable than they would be in an undistorted market."
Mr Power said that introducing criminal penalties, including imprisonment, could be a strong deterrent to organisations contemplating hard-core cartel behaviour. Many cartels were so large that current fines were seen as a cost of doing business, rather than a deterrent, so further measures to deter such conduct needed to be considered.
The minister noted that countries like the United States, the United Kingdom, Canada and Australia had already criminalised cartel behaviour and said it was important for New Zealand to keep in step with those jurisdictions.
The paper released by Mr Power said that there were concerns about whether or not New Zealand's current civil penalty regime was effective in deterring cartel behaviour.
"The single intervention most likely to have a significant impact on deterrence and detection is the possibility of imprisonment. This requires criminalisation which brings with it a number of costs and benefits. A greater deterrence of the most serious forms of cartel behaviour will have significant benefits for the effective operation of markets. Criminalisation and particularly the possibility of imprisonment, provides strong disincentives for executives of corporations to engage in cartel behaviour."
The document, which was prepared by the Ministry of Economic Development, discussed three possible approaches to criminalising cartel conduct:
- Creating an offence based on the existing civil prohibitions in the Commerce Act. The paper said the advantage of this option would be that businesses would be given certainty as they would be dealing with familiar language and concepts, but there could be "under-reach" caused by incertainty about whether or not the prohibition on controlling prices included market allocation schemes.
- Adopting the Australian offence provisions. This would be beneficial for harmonisation reasons - reducing compliance costs for trans-Tasman businesses complying with competition laws in both jurisdictions.
- Developing new offences based on first principles. The document said this would address most of the concerns relating to the first two approaches, but would have the disadvantage of being new and untested, meaning that there would be little ability to draw on case law from other jurisdictions.
A "Starter for 10" was set out in the paper, laying out the basic elements for the physical and mental elements for the physical and mental elements of cartel offences. The document said the majority of cartel trials would be by judge alone and asked whether provision should be made for all such trials to be judge only?
It suggested that maximum jail terms of between five and seven years would probably be appropriate for cartel offences.
The MED also noted that the current level of fines for obstruction offences in the Commerce Act was inadequate and said that consideration should be given to bringing it into line with the Securities Act penalties.
The paper posed 35 questions for submitters, including whether or not New Zealand should introduce criminal penalties for hard-core cartel conduct, what the physical elements of a cartel offence should be, whether or not there should be a competition element and whether or not conspiracy should be brought into an offence.
A second document about cartels, entitled Criminalisation of Cartel Behaviour, written by David King for the Ministry of Economic Development, was also released on January 27.
It said that empirical work over the past two decades established that cartels did significant harm. Mr King discussed two frameworks for dealing with such conduct:
- Retribution - because cartel conduct was widely seen as having the serious moral component associated with such a framework.
- Deterrence - both to minimise social loss and because it was a widely-used economic framework applied to cartel behaviour.
He concluded cartel conduct had a serious moral dimension and that criminalisation of the offence, including jail terms, was justifiable when a retributive approach was taken.
Mr King said that, while there would be significant evidential problems, he also believed that criminalisation would be optimal from a social loss deterrence perspective. Other penalties such as high fines and leniency programmes had drawbacks, many of which would be overcome by criminalisation.
"I find a number of the arguments against criminalisation unpersuasive, in particular those relating to judicial processes, for example the difficulty of defining the offence and the higher standard of proof, and the impact on incentives for innovative business behaviour."
Mr King said that it should be possible to define a hard-core offence with sufficient clarity to avoid impacts on innovation. Achieving broad community support, including from the judiciary and regulators, for the use of criminal sanctions would be critical to achieving credible deterrence. Submissions on the issue close on March 31, 2010.