09 Dec 2015
(by Andreas Stephan) Yesterday the New Zealand government to criminalize cartel conduct on the grounds that it would have a chilling effect on pro-competitive behaviour. While there may be good reasons to reject the criminalization of cartel conduct, this is probably the least convincing.
Why the New Zealand Government has dropped Criminalization
The Minister for Commerce and Consumer Affairs, Paul Goldsmith, yesterday announced that the criminal provisions contained in the Commerce (Cartels and Other Matters) Amendment Bill would be dropped. He stated “I have re-examined the case for criminalization, and on balance I have recommended that the criminalization provisions be removed”. He went on to say:
“In weighing up the benefits of criminalizing cartel activity, the Government had to consider the significant risk that cartel criminalization would have a chilling effect on pro-competitive behaviour between companies”
Elsewhere as having said:
“I want directors of companies to be very cautious about their decision making in this area, but if you move them to being ultra-cautious in their decision making, then there’s an economic cost to that” … “If we keep providing new ways for directors to go to prison if the judgements are wrong then overall there’s a potential chilling effect on innovation”.
This rationale appears to have been shared by opposition parties, with ACT leader David Seymour stating, “It’s easy to envisage how honest New Zealand businesspeople may be deterred from legitimate growth-enhancing activity for fear of imprisonment”. Only the Green Party attacked the move, the ruling party had “gone soft” on white collar crime and that the existing regime was inadequate.
As I shall explain, while there may be good reasons for rejecting criminal sanctions, the Minister’s explanation makes little sense.
Do these reasons stack up?
Influenced by the United States, there has been a global movement towards cartel criminalization over the last decade, with between 20-30 jurisdictions now with a cartel offence on their statute books. There is a on whether cartel conduct should be criminalized and how an offence should be designed.
It is not for this blog piece to argue for or against criminal sanctions, but the main concerns raised by sceptics can be summarised as follows:
- The difficulties in designing a cartel offence – deciding on an appropriate mental element (intention, dishonesty, negligence etc) and identifying exclusions and defences.
- Problems associated with successfully prosecuting a cartel offence – in particular whether a jury will convict and whether a judge will impose a custodial sentence. The criminal law process is tougher and less predictable than a civil enforcement regime in which the competition authority imposes a sanction directly on the firm, which can then be appealed.
- Issues surrounding legitimacy – whether ordinary members of the public consider price fixing to be offensive enough to attract criminal sanctions and the dangers of ‘over-criminalization’, especially if the cartel offence is seen as an extreme form of regulatory control.
- The danger of a chilling effect on leniency programmes – Some practitioners complain that there is no “prize” for coming second in a criminal process, as opposed to civil fines where discounts are granted in return for subsequent cooperation.
By contrast, the reasons cited by the New Zealand government barely feature in the academic debate. There is no evidence of a chilling effect on pro-competitive behaviour in the United States, despite the very wide scope of the Sherman Act (negligence will do), the lack of any notable exclusions or defences and the existence of a plea bargaining system that stacks the odds heavily against the defendant. Instead, there is anecdotal evidence that international cartel infringements avoid meeting in the US or directly manipulating US markets for fear of imprisonment. It is also no coincidence that cartels are sometimes reported in Europe and elsewhere by firms recently acquired by US owners hot on internal antitrust compliance.
The suggestion that criminal sanctions would stifle innovation by making businessmen “ultra-cautious” is also highly questionable. It blurs the distinction between hard-core cartel conduct and arrangements that are clearly recognised by competition law as being beneficial (such as joint ventures). Cartel laws are a driver of innovation and competition, not an obstacle. A weak enforcement regime risks cartels locking in inefficiency and complacency without being challenged.
Concerns about the competition authority prosecuting behaviour at the fringes of hard-core cartel conduct can be dealt with through the design of an offence or through defences. For example the UK’s cartel offence will fail where defendants can demonstrate they acted openly or intended to act openly. If individuals go to efforts to hide their activities (especially where they are hidden from their own firm as well as customers and the authority), this suggests they know their actions are not in pursuit of a legitimate goal.
Shades of the business community
The language used by the New Zealand politicians seems strangely familiar. It very closely mirrors the concerns raised by business lobbyists when the to its cartel offence in 2011. These resulted in a number of carve-outs and defences being introduced when the requirement of ‘dishonesty’ was removed from the offence.
In New Zealand they appear to have defeated cartel criminalization altogether. Indeed, although the Commerce Amendment Bill will strengthen civil penalties (which can be imposed on individuals as well as corporate bodies), it ‘collaborative arrangements that can help businesses innovate and tap into overseas markets’ and creates an exemption where cooperation between competitors ‘can be efficiency enhancing’. These may have been introduced as a concession to concerns about criminalization, but have been retained.
If the government U-turn on cartel criminalization is the result of business lobbying, then it is a very regrettable development. The business community’s voice should not be the loudest when it comes to tackling anti-competitive behaviour (or any other form of white collar crime for that matter). They will always fight against greater regulation or new forms of criminal liability for businesspersons.
This is not to suggest that cartel criminalization is always appropriate, but to reject it on the grounds it could hinder innovation is to blur very well established principles of competition law in relation to cartels. It also loses sight of the fact corporate fines in civil cartel enforcement are designed to serve precisely the same function as a criminal offence: to punish and deter. Unfortunately they do not usually punish the individuals responsible.
This assumes there is no US style system of plea bargaining or high level of flexibility built into sentencing guidelines.