1 The Legislative Framework of the Cartel Prohibition

Cartels are prohibited through application of the Commerce Act 1986 (“Act”) and, in particular, the following sections of the Act:

·         Section 27 - contracts, arrangements or understandings that substantially lessen competition;

·         Section 29 - contracts, arrangements or understandings that contain exclusionary provisions; and

·         Section 30 - contracts, arrangements or understandings to fix, control or maintain price.

The prohibitions are civil, and not criminal, in nature.

Section 27(1) of the Act provides that no person shall enter into “a contract or arrangement, or arrive at an understanding, containing a provision that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market”.  Section 27(2) prohibits any person from giving effect to such a provision and section 27(3) renders the provision unenforceable.

Section 30 of the Act deems price fixing to be a breach of section 27 of the Act, without proof of a purpose, effect or likely effect of substantially lessening competition in a market.  Section 30 provides:

(1)           Without limiting the generality of section 27 of this Act, a provision of a contract, arrangement, or understanding shall be deemed for the purposes of that section to have the purpose, or to have or to be likely to have the effect, of substantially lessening competition in a market if the provision has the purpose, or has or is likely to have the effect of fixing, controlling, or maintaining, or providing for the fixing, controlling, or maintaining, of the price for goods or services, or any discount, allowance, rebate, or credit in relation to goods or services, that are:

(a)      supplied or acquired by the parties to the contract, arrangement, or understanding, or by any of them, or by any bodies corporate that are interconnected with any of them, in competition with each other; or

(b)      resupplied by persons to whom the goods are supplied by the parties to the contract, arrangement, or understanding, or by any of them, or by any bodies corporate that are interconnected with any of them in competition with each other.

(2)             The reference in subsection (1)(a) of this section to the supply or acquisition of goods or services by persons in competition with each other includes a reference to the supply or acquisition of goods or services by persons who, but for a provision of any contract, arrangement, or understanding would be, or would be likely to be, in competition with each other in relation to the supply or acquisition of the goods or services.

Section 29(3) and 29(4) of the Act prevent any person from entering into or giving effect to a contract arrangement or understanding that contains an “exclusionary provision”.  An exclusionary provision is defined in section 29(1).  A provision of a contract, arrangement, or understanding is an exclusionary provision if:

(a)        it is a provision of a contract or arrangement entered into, or understanding arrived at, between persons of whom any 2 or more are in competition with each other;

(b)        it has the purpose of preventing, restricting, or limiting the supply of goods or services to, or the acquisition of goods or services from, any particular person, or class of persons, either generally or in particular circumstances or on particular conditions, by all or any of the parties to the contract, arrangement, or understanding, or if a party is a body corporate, by a body corporate that is interconnected with that party; and

(c)        the particular person or the class of persons to which the provision relates is [or would, but for the exclusionary provision, be or be likely to be] in competition with one or more of the parties to the contract, arrangement or understanding in relation to the supply or acquisition of those goods or services.

Section 29(1A) provides a limited exception to this prohibition “if it is proved that the provision does not have the purpose, or does not have or is not likely to have the effect, of substantially lessening competition in a market”.

The Act is enforced by the Commerce Commission (“NZCC”), an independent body corporate established under the Act.  The NZCC investigates and may bring civil proceedings in the High Court to enforce the cartel provisions of the Act referred to above.

The NZCC can, of its own motion or following a complaint, investigate conduct that it suspects breaches the Act.  In doing so, it may seek information informally or may exercise its formal investigatory powers to obtain information (see below).

If, following investigation, the NZCC forms the view that there is sufficient reliable and admissible evidence of a breach of the Act, it may commence proceedings in the High Court.  The NZCC is not obliged to seek information from, or contact, an intended defendant before commencing proceedings.

The High Court (and not the NZCC) is the court of first instance with jurisdiction to determine whether the Act has been contravened and to impose sanctions where cartel conduct infringing the Act is proved at trial or is admitted.

There are no sector specific cartel offences.

There are no sector-specific exemptions under the Act.  However, there are a number of exceptions that should be noted.

·         The Act does not apply to Government activity except to the extent that it amounts to conduct in trade.

·         The Act may be subject to other legislative authorisation including as to intellectual property rights.  There are limited exceptions to the cartel provisions of the Act under a number of statutes, often relating to Industry Boards, public health or where NZCC or Ministerial approval has been given to the provision previously.

·         Joint ventures, joint buying groups and some recommended prices may be exempt from the price fixing provisions of the Act.

·         Section 44 of the Act provides a number of specific exemptions, for instance, relating to partnership agreements, employment, provisions that relate to the export of goods from New Zealand if certain procedures have been followed, and provisions relating to the carriage of goods by sea from or to New Zealand.

·         Contracts, arrangements or understandings that have been authorised under the Act by the NZCC are exempt.

Section 4(1) extends the application of the Act to cartel conduct outside New Zealand by any person resident or carrying on business in New Zealand to the extent that such conduct affects a market in New Zealand.  In addition, conduct by a person outside of New Zealand has been held to be within New Zealand for jurisdictional purposes of the Act where there are communications to or from New Zealand, the person has acted through an agent in New Zealand or there have been overt acts in New Zealand that amount to a breach of the Act.

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2 Investigative Powers

Table of General Investigatory Powers

 

Investigatory power	Civil / administrative	Criminal
Order the production of specific documents or information	Yes	N/A
Carry out compulsory interviews with individuals	Yes	N/A
Carry out an unannounced search of business premises	Yes*	N/A
Carry out an unannounced search of residential premises	Yes*	N/A
·    Right to ‘image’ computer hard drives using forensic IT tools	Yes*	N/A
·    Right to retain original documents	Yes*	N/A
·    Right to require an explanation of documents or information supplied	Yes	N/A
·    Right to secure premises overnight (e.g. by seal)	No	N/A

Please Note: * indicates that the investigatory measure requires the authorisation by a Court or another body independent of the competition authority.

Where the NZCC considers it necessary or desirable for the purpose of carrying out its functions and exercising its powers under the Act, it may serve on a person in New Zealand a notice under section 98 of the Act.  The notice can require that person to furnish information in writing, produce documents or appear in person before the NZCC to give evidence on oath either orally or in writing.  Documents are defined in the Act broadly and would include, among other things, electronic information recorded by or stored on computer.  A notice under section 98 can be served on any person and is not limited to suspected members of the cartel.

A person is not excused from furnishing information, producing documents or giving evidence, including answering any question when appearing before the NZCC, on the grounds that to do so might tend to incriminate him or her or their spouse.  However, a statement made by a person in answer to a question put by or before the NZCC shall not be admissible against that person in proceedings for pecuniary penalties or in criminal proceedings (except proceedings on a charge of perjury or misleading the NZCC).

The NZCC may seek a search warrant from the District Court.  The NZCC can execute the search warrant to enter and search premises and copy or remove documents and other items, including information on a computer (see above).  The removal of a computer for data retrieval or the cloning of the computer in its entirety may give rise to issues regarding the protection of information that is legally privileged or outside the scope of the search warrant and so may need to be undertaken by agreement and with suitable protections for that information.  The NZCC can seek explanations of the documents seized pursuant to a search warrant in subsequent section 98 interviews.

The NZCC’s powers to obtain and execute a search warrant of premises or to serve notice under section 98 of the Act may be exercised notwithstanding that proceedings have been commenced including in the High Court in respect of alleged cartel conduct.

The NZCC has power under section 100 of the Act to make orders preventing a person from disclosing specified information given to the NZCC during an investigation.  The power applies to any information, document or other evidence including statements made to the NZCC.  An order under section 100 remains in force until the completion of the investigation or any earlier date specified in the order.  It is an offence to publish or communicate the information covered by such an order.

No.  However, the NZCC can obtain telephone records pursuant to a section 98 notice or search warrant.

In situations of urgency, specially appointed Commissioners of the NZCC can make “cease and desist” orders preventing conduct from continuing.  These orders are similar in nature to injunctive orders made by the Court.  For orders to be granted, the Cease and Desist Commissioner must be satisfied that a prima facie case of breach of the Act has been demonstrated and it is necessary to act urgently to prevent a person or consumers from suffering serious loss and it is in the public interest.

The employee of the NZCC who is specified in the search warrant carries out the search, with the assistance of others if required.  The warrant must be produced on entry and the occupier of the premises must assist in its execution.  It is a criminal offence to resist, obstruct or delay the execution of the warrant.  There is no requirement in the Act for the person executing the warrant to wait for legal advisers to the occupier of the premises to be present but the Commission can allow a reasonable time for that to occur.

The NZCC may not obtain legally privileged material under either a notice under section 98 or in executing a search warrant.  Legal advice provided by in-house counsel will be protected where the rules of privilege apply.

The Act contains few express material limitations on the Commission’s investigatory powers.  The NZCC may use its powers under section 98 where it considers it necessary or desirable for the purposes of carrying out its functions and exercising its powers under the Act.  This is a low threshold.  The exercise of its powers within those limits and the interaction with the New Zealand Bill of Rights Act 1990 has been the subject of little judicial scrutiny although the courts have commented on when it will be appropriate for the NZCC to seek a search warrant and what information it must provide to the District Court when doing so.

It is an offence under section 103 of the Act:

·         without reasonable excuse, to refuse or fail to comply with a notice under section 98 including refusing or failing to appear before the NZCC to give evidence;

·         in purported compliance with a section 98 notice, to furnish information, produce a document or give evidence knowing it to be false or misleading;

·         to refuse to answer any question or produce any book or document, having been required to appear before the NZCC;

·         to resist, obstruct or delay an employee of the NZCC acting pursuant to a search warrant; or

·         to deceive or knowingly mislead the NZCC in relation to any matter before it.

A body corporate who contravenes section 103 is liable to a fine of up to $30,000 and an individual may be fined up to $10,000.

The NZCC has successfully prosecuted companies and individuals under section 103.  It has also indicated that it, in appropriate circumstances, it could consider the failure to comply with a section 98 notice to justify prosecution for obstructing the course of justice under the Crimes Act 1966 and deceiving or knowingly misleading it to amount to perjury.

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3 Sanctions on Companies and Individuals

The Court may also make declarations and grant injunctive relief.

The maximum pecuniary penalty that the High Court can order in respect of the contraventions referred to above by an individual is $500,000 in respect of each act or omission.  On the application of the NZCC, the High Court can also order that a person be excluded from management of a body corporate for up to five years.

Proceedings may be commenced by the NZCC within 3 years after the matter giving rise to the contravention was discovered or ought reasonably to have been discovered.  However, no proceedings may be commenced 10 years or more after the matter giving rise to the contravention occurred.

A company must not indemnify a current or former director, servant, or agent of the company or an interconnected company in respect of liability for:

·         payment of a pecuniary penalty that arises out of a provision of a price fixing contract, arrangement, or understanding that is deemed under section 30 to breach section 27 of the Act; or

·         costs incurred by that person in defending or settling any proceeding relating to that liability. 

Any company that purports to indemnify may be subject to a pecuniary penalty of up to two times the amount of the indemnity granted and the indemnity is void.

Indemnification is not prohibited in respect of other breaches of the Act.

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4 Leniency for Companies

The NZCC operates a leniency policy for cartel conduct (“Leniency Policy”).  The NZCC will grant immunity from NZCC initiated proceedings to the first person (company or individual) to approach it formally with information about a cartel provided the person fully co-operates with the NZCC in its investigation and any subsequent legal proceedings.

The Leniency Policy is available to the first person to apply formally to the NZCC for leniency, even if that person instigated the cartel or was the clear leader of it.  The Policy is not available where the NZCC is already investigating conduct relating to the leniency application or there has been an earlier leniency applicant (although the Co-operation Policy may be available in either of those circumstances).  The NZCC will grant conditional immunity initially and requires full and timely cooperation before it will issue a letter confirming final immunity.

The NZCC also operates a co-operation policy (“Co-operation Policy”).  Pursuant to it, the NZCC may, at its discretion, agree to pursue a lower level of enforcement against a person who fully cooperates with it.  The NZCC has stated that where the assistance of a person is unusually critical to the success of the investigation or proceeding, the NZCC may agree not to pursue that person at all in return for co-operation.  The Co-operation Policy is available even where the NZCC is already aware of a cartel or there has already been a successful leniency applicant.

When co-operating pursuant to either the Leniency Policy or the Co-operation Policy, all information available to the person regarding the existence, activities, operation and membership of the cartel, including information that is held overseas, must be provided to the NZCC.  If the applicant is an individual, he or she must be available for interviews and to appear as a witness in proceedings if required to do so by the NZCC.  If the applicant is a company, it must use best efforts to secure the complete and truthful co-operation of current and former directors, officers and employees.  It is usual for the NZCC to require the person to agree to permit the NZCC to share information provided to it with overseas regulators.

If the ongoing conditions of leniency or co-operation are not met, the NZCC will not be bound by the conditional grant of immunity and may use all information provided to it in any proceedings against that person.  It is usual for the NZCC to have previously required the person to agree to waive any jurisdictional challenges to such proceedings.

Immunity under the Leniency or Co-operation policies will not affect private claims by third parties.

There is presently no formal marker system.  The NZCC has indicated that it may consider whether to implement one when it reviews the Leniency Policy this year.

The Leniency Policy applies where a confidential formal written application has been made.  The NZCC will receive oral hypothetical or off the record enquiries as to whether leniency may be available.  However, the Commission did not include a paperless process in its Leniency or Co-operation policies.  It addresses, on a case by case basis, issues arising around creation of documentation following the application.  This includes considering whether without prejudice or litigation privilege may apply to prevent third parties gaining access to information provided by a leniency or co-operation applicant.

Applications are treated as being confidential.

As a condition of the Leniency Policy, the NZCC requires that the person must not disclose to, or communicate with, any third parties the fact of the application, the grant of conditional immunity and any information provided to the NZCC.

The NZCC endeavours to keep confidential the identity of successful and unsuccessful applicants for leniency.  It has said that it will take steps to ensure that, as far as the law allows, communications between it and leniency applicants are not disclosed.

The continuous co-operation requirement applies throughout the investigation and any subsequent proceedings.

The NZCC does not formally operate a leniency plus arrangement.  The Co-operation Policy described above can operate, to some extent, as a leniency plus policy.

The NZCC does not operate a formal penalty plus policy.  However, failure to voluntarily advise the NZCC of involvement in another cartel that is subsequently discovered is likely to be considered an aggravating factor in any subsequent application for co-operation or any assessment of recommended penalty in respect of cartel behaviour.

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5 Whistle-blowing Procedures for Individuals

The Leniency Policy applies to the first person (corporate or individual) who applies for leniency.  If an individual successfully applies for leniency independently from a company, the ensuing immunity does not extend to the company.  If a company successfully applies for leniency, the immunity may extend to any current or former director, officer or employee of that company.

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6 Plea Bargaining Arrangements

Cartel activity is not a criminal offence in New Zealand and so ‘plea bargaining’ is not relevant.

The NZCC may enter into without prejudice settlement discussions with a party to cartel conduct in the context of its Co-operation Policy.  In such discussions, the NZCC has said that it will debate the legal basis and the sufficiency of evidence in respect of each cause of action in a proceeding but that it will not trade causes of action in order to reach a settlement.

A settlement may be as to liability only or may also include a recommended penalty.  Any penalty for cartel conduct is set by the High Court.  The NZCC and defendant can, at most, agree a recommended penalty (and put forward a range of appropriate penalties) for the court to consider.  The High Court has indicated that it will carefully consider the appropriateness of any penalty recommended to it by the parties but, to date, has set penalties in accordance with the parties’ recommendation.

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7 Appeal Process

Enforcement proceedings for breach of the cartel provisions of the Act are commenced by the NZCC in the High Court.  The judgment of the High Court may be appealed to the Court of Appeal.  Appeals from the Court of Appeal are to the Supreme Court but require leave.

Evidence, including cross examination of witnesses, is produced in the High Court.  It is unusual for evidence to be admitted on appeal.

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8 Damages Actions

Civil proceedings for breach of the Act may be brought by third parties in the usual way.  The plaintiff must establish each element of the contravention, on the balance of probabilities, and prove loss resulting from the contravening conduct.  Compensatory and exemplary damages may be awarded but there are no multiple damages awards.

The present High Court Rules enable one or more persons to sue on behalf of all persons with the same interest in the subject matter of the proceeding.  However, this is more limited than common provisions overseas for class actions and new legislation and amendments to the High Court Rules have been suggested to enable class actions in New Zealand.  It has been suggested that any such legislation could enable the NZCC to seek to become the lead plaintiff in a class action.

The limitation period for civil proceedings is the same as for penalty proceedings brought by the NZCC (see above).

The usual rules as to costs in civil cases apply.  Costs are at the discretion of the court and will usually be awarded to the successful party.  Costs awarded are only a contribution to actual costs incurred and indemnity costs are seldom awarded.

Private actions for cartel conduct have not reached trial.  Confidential settlements may account for this, especially where the private action follows on from a proceeding brought by the NZCC.

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