Release of final Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008
After a period of extensive public consultation, the Federal Government recently released the finalised draft Bill to criminalise cartel conduct – the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (Final Bill). This is the end of a long road for the amendments first canvassed by the Dawson review of the Trade Practices Act 1974 (Cth) (TPA) way back in 2003 and which the Prime Minister Kevin Rudd pledged would become law during the ALP’s 2007 Federal election campaign.
There has been a lot in the press about the Final Bill over the last few weeks as it is a significant new law but there have also been some key changes to the exposure draft of the Bill which was released earlier in the year (Exposure Draft). This Special Update has been put together to tell you about these key changes, particularly as the Government last week indicated that the Final Bill will not be further amended. The Final Bill raises some serious ongoing compliance challenges for businesses and their daily operations, quite apart from the obvious criminalisation of “hard-core” cartel behaviour.
Proposed new cartel offences
Whilst repealing the existing price fixing provisions in the TPA, the Final Bill retains the rest of the competition law provisions in the TPA and creates 2 new criminal cartel offences which extend the TPA well beyond its current cartel prohibitions in the price fixing and exclusionary arrangements arena. These 2 new cartel offences are as follows:
- It will be an offence for a corporation to make a contract, arrangement or understanding that contains a “cartel provision” - which is a provision of a contract, arrangement or understanding by which parties that are or would otherwise be in competition with each other engage in price-fixing, restricting outputs in the production and supply chain, allocating customers, suppliers or territories or bid-rigging.
- It will be a separate offence for a corporation to give effect to a cartel provision.
Under the Final Bill, the question of whether or not particular conduct constitutes a criminal offence will turn on the person’s knowledge or belief that cartel conduct was occurring. A degree of intention, knowledge or belief is required for the offence to be established. Firstly, it must be shown that the accused intended to carry out the cartel conduct. Secondly, the accused must have had some “knowledge or belief” that the provision the subject of the cartel conduct was in fact a cartel provision. To have knowledge, the accused needs to be aware that the relevant circumstances exist or will exist in the ordinary course of events. “Belief” is not defined by the Criminal Code and is a less stringent requirement, being met even where an accused has some doubt as to the relevant circumstances.
All that is required to attract criminal prosecution is proof beyond reasonable doubt that the conduct occurred and that the parties had knowledge or a belief that the alleged specific cartel conduct was occurring, regardless of whether the parties understood the conduct was wrongful or illegal.
Importantly, the offence does not apply retrospectively to conduct engaged in before the Final Bill becomes law.
The Final Bill also creates 2 new civil prohibitions that mirror the criminal offences minus the intention, knowledge or belief requirement. These prohibitions need only be proven on the civil balance of probabilities standard.
The Final Bill envisages the possibility of both criminal and civil proceedings being brought against an accused for cartel conduct. The current thinking though is that the ACCC will make a decision early on in an investigation as to whether it will pursue one or the other rather than both simultaneously. The Final Bill actually amends the TPA to ensure that preference is given to criminal proceedings over civil proceedings in most cases. Also, for evidentiary reasons, the phone taps which the ACCC may carry out under the Final Bill to assist criminal cartel investigations will only be admissible in criminal proceedings and there may be some information obtained during the course of a civil investigation which is not able to be used in criminal proceedings. The bottom line is that it may not be practical or cost effective for 2 concurrent investigations or proceedings to run.
Penalties
The proposed penalties for the new criminal offences are:
- for individuals who attempt to contravene or aid and abet, induce, conspire with others or are knowingly concerned in a contravention of the criminal cartel provisions, a jail term of up to 10 years and/or a fine of up to $220,000;
- for corporations, the greater of $10 million, 3 x the gain from the contravention or if the gain cannot be assessed, 10% of the annual turnover of the body corporate and its related bodies corporate.
A defendant can also be subject to various civil orders like a compensation order, a community service order, an adverse publicity order or an order disqualifying a person from managing a corporation.
The proposed penalties for the new civil prohibitions are the same as apply to existing civil offences.
Key changes from Exposure Draft
Much of the Final Bill is the same as the Exposure Draft but there are some very significant changes outlined below.
Liability is strict with the dropping of the ‘dishonesty’requirement
The requirement to prove that a cartelist had the intention of dishonestly obtaining a benefit - a much debated and controversial part of the Exposure Draft - has been dropped. This brings Australia’s new criminal cartel laws into line with the US and most other countries with similar laws. What this means is that it will be easier to convict cartelists.
10 year jail terms - the highest in the world for cartel conduct
The Final Bill doubles the maximum penalty for individuals convicted of a criminal cartel offence set out in the Exposure Draft from 5 to 10 years. This is the harshest penalty in the world for this kind of offence but was necessary to justify the new powers of the ACCC to tap phones during the course of investigating criminal cartel conduct.
Joint venture defence for civil and criminal enforcement actions
The Final Bill has been expanded to create a defence to both civil and criminal actions for parties engaged in a legitimate commercial joint venture, in relation to cartel provisions that are for the purposes of the joint ventures. In the Exposure Draft, this defence was only provided for civil proceedings which meant joint ventures were exposed to liability under the new criminal cartel laws.
The new defence also covers incorporated and unincorporated joint ventures and no longer requires the joint venture provision not to have the purpose or effect of substantially lessening competition (as is currently the case). The joint venture must however produce or supply goods or services.
Unfortunately, the party seeking to rely on the defence retains the evidentiary burden of demonstrating that the defence applies.
Practical implications for various commercial arrangements
There are significant unanswered questions about how the new cartel laws will operate in practice. The drafting of the Final Bill in fact raises some difficult compliance issues for businesses and their daily operations. Not only is the Final Bill drafted broadly, but the Final Bill repeals the current price fixing provision in the TPA whilst not otherwise dealing with the overlap between the new cartel offences and various other existing competition law prohibitions. This means that in certain circumstances, the Final Bill’s new provisions may strictly prohibit and criminalise conduct which is currently legal having not failed the competition test.
Let’s consider 2 common commercial arrangements, vertical distribution arrangements and maximum resale price directions.
Distribution arrangments
An issue which has received a lot of recent press is that there are holes in the Final Bill which could result in currently legal and pro-competitive vertical distribution arrangements between competitors being effectively not just illegal but criminal.
It is common for businesses to sell their products direct to consumers as well as engaging distributors to sell those products. Often restrictions are imposed on distributors so, for example, they are restricted from selling to a certain geographic area or to a certain segment of the market. Under the current TPA, this sort of distribution arrangement is not automatically illegal due to an “anti-overlap” provision which requires the conduct to be evaluated under the exclusive dealing regime rather than the current cartel provisions and it is only unlawful if the purpose or effect of the restriction substantially lessens competition.
One of the key provisions missing from the Final Bill is a comparable “anti-overlap” provision that specifies that supply contracts between competitors that involve some form of exclusive dealing (eg. where restrictive conditions are placed on the supply) do not amount to cartel conduct. The practical effect of the Final Bill is that even if conduct is not unlawful exclusive dealing, it may fall within the parameters of the new cartel prohibition and therefore be illegal due to the absence of the “anti-overlap” provision.
This is a real concern for food and consumer goods manufacturers who often enter into commercial arrangements where one company manufactures goods for a competitor on the proviso that the company for whom the goods have been manufactured accepts various restrictions on its on-selling or supply. These arrangements are not shielded from the new cartel laws.
The absence of the “anti-overlap” provision therefore creates a serious risk for these businesses which will need to be addressed.
Maximum resale price directions
A business can also currently dictate maximum prices to its distributors or franchisees within the limits of the TPA, above which the distributor or franchisee cannot sell. This conduct is currently exempted from the cartel provisions of the TPA by an “anti-overlap” provision with resale price maintenance and similar conduct.
The absence of the “anti-overlap” provision in the Final Bill means that a corporation that specifies a maximum resale price to a party with which it is in competition may risk contravening the new cartel laws even if it is essentially a vertical supply arrangement. The Final Bill contains a specific provision to allow prices to be recommended, but does not permit a supplier in these circumstances to specify a maximum resale price.
Special concerns for the franchise sector
The new provisions pose a real concern for businesses operating in the franchise sector especially where franchisors commonly operate company owned businesses in competition with their franchisees. The new cartel offences are much wider than the current provisions in the TPA which means that a number of exceptions that franchise systems currently rely upon have been removed. Under the Final Bill, if franchisees compete with company owned outlets, there is no maximum resale price exemption and giving effect to exclusive territory provisions in franchise agreements may be a criminal offence.
What does this mean for your business?
It was thought initially that the absence of “anti-overlap” provisions was purely inadvertent on the part of the legislative drafters and that the Federal Government would quickly fix this problem. When the Exposure Draft was being discussed, this drafting flaw was pointed out to the Government. However the issue has not been corrected in the Final Bill and the Government last week made it clear that it was unwilling to make any further amendments to the Final Bill.
Unless the “anti-overlap” provisions are inserted into the Final Bill, this could prove problematic for your business if you are in a distribution arrangement with a corporation that you are also competitive with. One way around this problem is for an authorisation application to be lodged with the ACCC, but this is often a time consuming and costly process. The ACCC could be inundated with these applications if this failure in the Final Bill is not fixed.
When will the Final Bill become law?
Whilst the Federal Government is seeking the support of the State and Territory Governments before introducing the Final Bill (this being a key aspect of the actual administration of the proposed cartel offences), it appears to have already attracted the support of the Greens and Independent Senators. It is expected that the Final Bill in its current form will be introduced into Parliament before the end of the year and that it could be law by April/May 2009.
The Final Bill will have far reaching effects on Australian business practice as it introduces some significant changes to the existing competition laws of Australia and also creates some real anomalies in the type of conduct that falls outside the limits of these new offences.
Although it appears that the Government is unwilling to amend the current form of the Final Bill and that no further amendments are being contemplated, we are hoping that the Government sees sense and actually fixes the various anomalies. We will keep you advised on how this progresses.
How should you prepare for the introduction of the new criminal cartel laws?
You need to make sure that your business has in place an effective and up-to-date trade practices compliance program which factors in the new cartel laws. Existing arrangements will need to be reviewed to ensure that you and your business do not infringe the new cartel laws. It may also be necessary to amend some of your commercial contacts and lodge authorisation applications with the ACCC.
If you would like more information, please contact a member of our Competition & Trade Practices listed on the right hand side of the screen.
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