Problems seen in framework design for cartel prohibition legislation
The proposed design of legislation to prohibit cartels could have a negative impact on bona fide commercial arrangements, the New Zealand Law Society has told the Ministry of Economic Development.
The Law Society says the proposed framework defines widely the civil prohibition on cartel provisions in a way that will impugn a range of bona fide arrangements. The bill would then use exemptions to delineate legitimate and illegitimate arrangements.
In a submission on the Exposure Draft of the Commerce (Cartels and Other Matters) Amendment Bill, the Law Society says the ministry wanted feedback on whether the proposed approach would have a material chilling effect on bona fide commercial arrangements. It says it is concerned that this could be the result.
“Commercial actors are likely to react to the suggestion that bona fide proposals are cartels, even where an exemption may be available,” the submission says. “The principal exemption for collaborative activity carries with it a significant risk of the Commerce Commission or the court second-guessing the judgment of the parties as to the necessity of the particular aspects of the commercial arrangement or issue. For this reason, potential parties will be conservative in their reliance on the exemption.”
The Law Society says these effects will be accentuated by the framework design choice of setting a parallel criminal offence, thus importing the same issues of scope into the criminal context.
“Those bona fide arrangements caught by the expansive scope of the offence are unlikely to be pursued, particularly in light of the onus on the defendant to prove the defence based on the exemptions.”
The new definitions of output restrictions and market allocation, in particular, are sufficiently broad to pick up all arrangements between competitors (or potential competitors) that include any agreed restriction or condition on the commercial freedom of the parties.
One example of this would be an ordinary franchise arrangement that allocates to each franchisee a specific region, and includes a non-compete on termination. Under the proposed legislation this would be a cartel arrangement by virtue of its market allocation and output restriction provisions.
The Law Society acknowledges that the over-inclusive prohibition is a deliberate design choice, with generally worded exemptions used to remove bona fide arrangements.
However, this depends upon a commercial and legal framework that does not deter commercial decision-makers from going through the process of being advised a proposal is prima facie a cartel but that there are solid grounds for proceeding.
“The idea of entering into a cartel arrangement on the basis of legal advice regarding an exemption is likely to be off-putting,” the Law Society says. “It seems inevitable that bona fide wealth-enhancing arrangements will be avoided as a result. Certainly, the level of legal costs and involvement of lawyers in commercial decision-making will increase.”
The submission questions whether a criminal offence should be cast in terms that will capture bona fide behaviour. It says it is “no small matter” to subject blameless commercial actors to the criminal law and criminal procedures, even where defences are made available.
The proposal to put the burden of proof on the defendant to prove the defence is inappropriate. The analysis will rest on whether a defence is available, and that onus has been placed on the defendant. In practice this is a reverse onus provision, which is contrary to the right to be presumed innocent, and should not be used.
The Law Society says that in response to the concerns it has identified, there are several broad alternatives available – including staying with the status quo.
The ministry could also consider introducing only the civil prohibition and exemption framework, with an intention that a criminal offence be considered in several years time when sufficient experience and certainty have been gained in relation to the civil prohibition.
Another alternative would be to introduce the civil prohibition and exemptions as proposed, but to define the criminal offence in more narrow terms to minimise the risk of capturing bona fide arrangements.
The Law Society submission commends the Ministry of Economic Development for releasing an exposure draft of the Bill for comment. It says this allows for constructive engagement on the intention and drafting of the Bill in a way that is not practicable during the formal legislative process.