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Ignorance of competition law is major business risk

15 November 2017

A number of recent developments concerning the Commerce Act 1986 mean that the time is right for businesses to update their Commerce Act compliance procedures.  It's more important than ever for businesses to ensure that board members, management, and all staff are aware of the types of conduct that could breach the Commerce Act.  In summary:

  • The recent changes to the cartel prohibitions in the Commerce Act (as outlined in our last competition law update) provide an ideal opportunity for businesses to ensure that they are adequately covering their risk of non-compliance with the Commerce Act
  • Recent cases have shown that a lack of awareness of the Commerce Act and its prohibitions might be exposing businesses to the possibility of substantial fines, and the associated costs of enforcement action under the Commerce Act.

Broadened cartel prohibitions increase risk of inadvertent breaches

The risk of inadvertent breaches of the Commerce Act has increased with recent legislative changes that broadened the scope of the Commerce Act's cartel prohibitions.  Amendments to the law always provide an ideal point at which businesses can refresh their compliance programmes, and remind their personnel about the prohibitions in the Commerce Act.

Previously, the Commerce Act prohibited price fixing (in addition to other arrangements that substantially lessen competition).  The Commerce Act now also explicitly prohibits output restrictions and market allocation arrangements - no matter whether they are implemented, or how insubstantial their effect might be on competition.  For more information about the new cartel prohibitions, see our legal update available here

It is also worth remembering that the new cartel prohibitions are part of a global trend towards greater enforcement activity by competition regulators.

High Court exposes worrying lack of awareness of the Commerce Act

Recent cases have shown that the lack of awareness in the business community of the Commerce Act does not reflect the seriousness of the consequences of breaching the Commerce Act. 

For example:

  • In Commerce Commission v PGG Wrightson Ltd and Elders Rural Holdings Ltd [2017] NZHC 2584, recognising that the defendants were not aware that their conduct breached the Commerce Act, Courtney J observed that:
    • "If the senior members of the industry could fall into this error then it must be a risk for other members in the industry and other industry bodies."
  • Real estate agencies have paid almost $19m in fines in the real estate cartel case.  A careful reading of the court decisions imposing those fines indicates that many, if not all, of the defendants who had penalties imposed on them were unaware that their conduct might breach the Commerce Act.

The penalties for breaching the Commerce Act are serious

The penalties for breaching the Commerce Act are substantial.  Businesses can be exposed to maximum penalties up to the greater of:

  • $10m
  • If the commercial gain from the conduct can be readily ascertained, three times the value of the commercial gain
  • If the commercial gain from the conduct cannot be readily ascertained, 10% of the annual turnover of the business and any interconnected bodies corporate.

Those penalties understate the true cost of dealing with a Commerce Commission investigation and enforcement proceedings, even if an agreement is reached with the Commerce Commission as to the resolution of the case.  Individuals involved in cartel conduct may also face penalties of up to $500,000.

The previous National-led Government had considered criminalising cartel conduct, including introducing imprisonment to the range of available penalties.  National dropped that proposal in late 2015, but Labour revived that proposal in its manifesto on Commerce (released before the election).  If the new Labour-led Coalition Government proceeds with Labour's stated policy, individuals found to have engaged in cartel conduct could face jail time.

What businesses can do to reduce the risk and how we can help

The most effective way to avoid enforcement action under the Commerce Act is to avoid breaching the Commerce Act in the first place.  We are happy to help businesses reduce their risk:

  • We provide seminars on Commerce Act compliance, which are popular with participants, and provide a cost-effective way to ensure that our clients' personnel understand their obligations, and their employers' obligations, under the Commerce Act
  • We can help design robust, up-to-date internal policies and procedures designed to help avoid breaches of the Commerce Act (for example, a policy on how employees should conduct themselves at meetings of industry associations, or in any interactions with competitors, is imperative).

If you have any questions about the issues raised in this update, please contact a member of our competition law team.