Seven years’ bad luck – cartel criminalisation comes into force

Collusion. Bid rigging. Price fixing. Market allocation. Output restriction. Cartel conduct.

Whatever name you give it, as of today, entering into or giving effect to any agreement with your competitors where you agree not to compete with each other could land you in prison. For seven years. It sounds serious because it is serious. Unlawful agreements between businesses holding themselves out to be in competition with each other – when really they are in cahoots – can have a considerably harmful impact on consumers.

Take, for instance, a scenario where there is an agreement between the four largest construction companies in a region. The managers responsible for pricing bids for building projects agree that they will share their pricing information before placing bids on building projects, so that each company can take turns offering the most “competitive” tender price. This way, each company gets its “fair share” of building projects.

This is a classic example of cartel conduct, and from today could lead to the imprisonment of each of the four managers involved.

You may ask (and certainly the hypothetical managers would despairingly cry): “Surely this sort of carry-on isn’t too bad?” “It’s a highly competitive industry, and the agreement was only to make life a little easier!” The harm from cartel conduct comes from its impact on the quality and price of goods and services. Using the example of the building companies, these businesses have no incentive to innovate, perform more efficiently or sharpen their prices, because the competitive tension has been removed from the bidding process. In short, there is no reason for these companies to put in any more than the bare minimum effort.

What also makes cartel conduct so pernicious is the relative ease with which businesses can engage in it, and the difficulties in its detection. It only takes one conversation between the right people – which, knowing New Zealand, could equally be at an industry meeting or during a backyard cricket match – for collusion to blossom. Likewise, from a consumer perspective, it is near-on impossible to spot the difference between competitive and anti-competitive conduct when interacting with businesses.

While the seven-year criminal sanctions are new, the tried-and-true Cartel Leniency Policy administered by the Commerce Commission continues to apply to cartel conduct. This policy has been instrumental over the years for detecting cartel conduct. In a nutshell, if a business reports cartel conduct in which it is involved, the business can be granted immunity from prosecution.

The effectiveness of this policy comes from its destabilising effect on cartels. It puts parties to a cartel in a prisoners’ dilemma – either rat out the other cartelists and get off scot-free yourself, or continue to look over your shoulder at your fellow cartelists and wonder who is going to do the same to you. Even if you are adamant your business is not involved in cartel conduct, do remember that not all illegal agreements are formed in shadowy alleys with the express intention of filling a Scrooge McDuck-style swimming pool with gold coins. There are plenty of illegal agreements entered into without thought of what the potential anticompetitive consequences might be.

Now is an opportune time to revisit any arrangements you may have with competitors, and to familiarise yourselves with the prohibition against cartel conduct set out in the Commerce Act 1986. Your freedom may depend on it.