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CRIMINALISING CARTELS – HOW WILL IT AFFECT FRANCHISING?

by Simon Lord,
last updated 27/02/2018

23 February ­– New legislation amending anti-cartels legislation would mean franchises need to be more careful than ever to ensure proper compliance

The Government is proposing new legislation to criminalise cartel conduct in New Zealand.

If passed, it will make engaging in ‘cartel conduct’ a criminal offence punishable by up to seven years’ imprisonment or fines of $500,000 for individuals. Companies would face fines of up to $10 million, three times the commercial gain resulting from the offence, or 10 percent of the turnover of the company and any related companies. Criminalisation was considered and then abandoned by the previous Government.

The current cartels legislation under the Commerce Act has been of major concern to the franchise sector because of the possibility that franchisees – or a franchisor and their franchisees – could in some circumstances be deemed to be in competition with each other. This would make such common features of franchising as price agreements, trade restraints or the allocation of territories an offence, unless the parties can prove that one of the few legislated exemptions applies.

While the situation regarding franchises has been clarified following lobbying by the Franchise Association, franchisors still have to take care and may have to modify their requirements and documentation. The proposed legislation further harshens the possible penalties for cartel behaviour.

Why criminalise?

Criminal penalties for cartel conduct are common overseas, particularly in the countries in which many New Zealand companies operate. Criminalisation allows more effective collaboration with foreign enforcement agencies and promotes compliance when, for some international cartels, the level of financial penalty imposed here could be seen as just a cost of doing business. The criminalisation of cartel conduct also allows greater resources to be brought to enforcement and the ability to convict individuals is seen as a strong deterrent.

While the prospect of significant criminal penalties in this area will be of concern to many businesses and trade organisations, in fact the financial penalties would be no higher than under the current law. ‘Criminalising cartel conduct will certainly raise the stakes in this area, although the potential financial penalties are already in play,’ says Michael Bright, a franchise specialist lawyer with Gaze Burt. ‘Section 80 of the Commerce Act, as it stands now, already gives a Court the power to impose the same fines as are proposed under the new Bill. Section 82A also provides a power to award exemplary damages. The only new penalty is the prospect of imprisonment and the consequences that follow from an individual being criminally convicted.’

‘It’s perhaps worth remembering that the underlying law – the cartels law just enacted – isn’t changing, so complying with the law will be no more or less difficult than it was already,’ Michael points out. ‘There will also be a two-year ‘grace period’ before the criminal sanctions apply, so there is no immediate need for panic, although it is still important to review franchise systems and agreements in light of the cartels law passed last year.’

Belief defence helpful, likely to change

One area of uncertainty in the amendments is a proposed change to the ‘honest belief’ defence, which (in earlier versions of the proposed legislation) would have provided a defence to criminal conviction if the defendant ‘honestly believed’ that their conduct was covered by an exemption to the Act. This was the subject of some scrutiny by the MBIE and the Commerce Commission, which argued against the 'honest belief' defence, essentially because there was too much scope for a defendant to make sweeping claims that would allow them to escape liability. The current proposal still revolves around a defendant’s belief, but it is more focused on a particular aspect of the defence. 'However, I think we can probably expect some change to this aspect of the Bill as it works through the legislative process,’ says Michael.

If the Bill is enacted 'as is', it will be a defence to prosecution if the defendant and other parties were involved in a collaborative activity and the defendant ‘believed that the cartel provision was reasonably necessary for the purposes of the collaborative activity. Michael explains that the element of belief is what will make defending criminal charges different to defending a charge under the current (non-criminal) law.

‘The current defence is an objective test, so the exemption might not apply even if the party believed that the cartel clause was necessary. However, even if a party fails to come under the current collaborative activity exemption, and is thus in breach of the Commerce Act, this does not mean they must be criminally liable. Their clause would be ineffectual, and they could be fined under section 80, but they could still escape criminal conviction if they believed the clause was reasonably necessary for their collaborative activity. Of course that’s somewhat cold comfort, given that the same fines can still be levied even without criminal conviction!’

Check with your lawyer

The Bill is currently only at the ‘First Hearing’ stage – it has yet to go through Select Committee, submissions and further debate in Parliament – and may never be enacted, or may be changed before it is enacted. In any case, Michael suggests that there will no doubt be a number of issues yet to resolve before the Bill is ready to become law, ‘So we can’t draw any hard conclusions at this point.

‘But the prospect of criminal sanctions coming down the track certainly heightens the need for those in the franchise sector to examine their arrangements in the light of the Commerce Act and either take appropriate action to remove cartel clauses or ensure they have a solid case for falling under one of the exemptions (and can provide appropriate evidence to support their position).’

Read the Cabinet paper recommending criminalisation of cartels [PDF 112KB]

The Commerce (Criminalisation of Cartels) Amendment Bill is available on the government legislation website.

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