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HG Alert: Australia’s new cartel laws - 14 Sep 2009

Australia has now introduced some of the toughest cartel laws in the world. Not only have the new laws shifted the boundary between legitimate arrangements and unlawful collusion, the penalties for a breach are severe, and extend to imprisonment for individual offenders.

Although no court has had to consider the application of the new laws as yet, these provisions have the potential to significantly change the way business is conducted in Australia. Certain business arrangements which were lawful under the previous laws are now illegal.

What is cartel conduct?

The new laws make it a criminal offence to:

  • make a “contract arrangement or understanding“ that contains a “cartel provision”; and
  • give effect to a “cartel provision”.
The same conduct is also unlawful under equivalent civil penalty provisions. However, liability under those provisions does not depend on proving intent, which has to be proved under the criminal provisions.

A provision is a “cartel provision” (under both the criminal and civil penalty provisions) if the following two elements are present:

  1. The provision must have either the purpose or effect of price-fixing, or the purpose of limiting output, market sharing or bid ridding.
  2. At least two of the parties to the cartel provision must be in competition with each other (or they would otherwise compete but for the cartel provision).

Important changes

Under the previous laws, only price fixing and “exclusionary provisions” - essentially an agreement between competitors to “boycott” a third party by agreeing not to acquire or supply goods or services from or to that third party - were illegal per se (unlawful irrespective of their effect on competition). Under those laws, the following arrangements between competitors were only unlawful if they substantially lessened competition in the relevant market:

  • collusive restricting of production, capacity or supply;
  • market sharing; or
  • bid rigging.
Under the new laws these types of arrangements are also now illegal per se.

Further, the new laws have significantly broadened the concept of who is a “competitor” in two key respects. First, it is enough if the parties compete in some way with each other. They do not have to be in competition with each other for the supply or acquisition of goods or services which are the subject of the cartel provision. Second, it is arguable that the territorial reach of the new laws extends beyond Australia and that an Australian company operating in overseas markets will have to investigate:

  • who its competitors are in those foreign markets;
  • whether those competitors have any related companies operating in Australia; and
  • whether those related companies have any arrangements in Australia with companies that are related to it.

The joint ventures exception

The old laws excluded joint ventures from the prohibitions on price fixing and collective boycotts. A defence could be made to any allegation of price fixing or collective boycott conduct if the conduct was for the purposes of a joint venture and unlikely to have the effect of substantially lessening competition.

Although the new laws also contain a joint venture exception, its operation is much narrower in scope. Therefore, a joint venture which was lawful under the old laws may now be illegal.

The activities of joint ventures are only immune from the operation of the new laws if they satisfy the following requirements:

  1. There must be a “contract” which is legally binding on the parties. Informal arrangements and understandings are not within the exception. Even a Memorandum of Understanding or non-binding Heads of Agreement will not be protected.
  2. The contract itself has to contain sufficient details of the cartel provision. Joint venture agreements often delegate operational decision-making powers to a committee. Arguably, the new laws will not protect any decision by such a committee to, for example, fix prices or restrict output.
  3. The exception only applies to joint ventures for the production and/or supply of goods or services. It does not apply to the joint acquisition of goods or services. As a result, the exception arguably does not apply to any joint ventures for research and exploration only, because such joint ventures do not necessarily involve the production or supply of goods or services. This should be of significant concern to businesses operating in the mining and resources sector.

Criminal penalties

A company convicted of a criminal cartel offence is liable to a maximum fine of the greater of:

  • ten million dollars;
  • three times the total value of the benefits obtained from the criminal conduct;
  • 10 percent of the company’s annual turnover during the 12 months preceding the commission of the offence if the court cannot determine the total value of the benefits. “Annual turnover” means the total value of all supplies made by the entire corporate group of which the offending company was part.

An individual who either directly engages in criminal conduct or is involved in the criminal behaviour of another party is liable to a maximum term of imprisonment of ten years, or a fine of up to $220,000, or both.

Civil contravention penalties

The penalty regime for a company which contravenes a civil cartel provision is the same as for a contravention of the criminal prohibition.

Although not faced with the prospect of a term of imprisonment, an individual who contravenes a civil cartel provision is liable to a fine greater than the amount he or she would have to pay if found criminally responsible.

Where to from here?

Trade practices compliance experts describe areas of risk as “red zones”. Below is a list of “red zones” that businesses should look out for.

Do any of these “red zones” apply to your business?

  • Does your business regularly participate in collective bidding on projects, especially in the mining, resources and construction industries?
  • Do you have active and vigorous trade or industry associations in your industry? Are you or your employees members of that association and do you participate regularly in its activities?
  • Are you in a small or confined industry where “employee - hopping” is common or market participants have a relatively clear idea of what their competitors are doing?
  • Do you have bonus systems or structures which create incentives for your employees to collude with their competitors?
  • Do you regularly succeed (or fail) with the same tenders?

Even if none of the above “red zones” apply to you, the new cartel laws make it essential that you review any joint venture arrangements you have, especially those not properly documented, along with any other arrangements, whether formal or informal, with competitors.

For more information

For more information and advice about these important changes, please contact HopgoodGanim’s Competition and Trade Practices team.