Regulatory blowback

One unintended legacy of the late businessman and philanthropist, Richard Pratt, who passed away more than a month ago, was that the successful prosecution of price fixing agreements between his company, Visy Industries and its competitor Amcor Ltd revived public debate and awareness of the possible effects of secret cartels on the economy. This in turn helped facilitate a more favourable legislative movement towards the introduction of jail terms for cartel convictions, resulting most recently in the passing of the Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 in the House of Representatives. This bill introduces a jail term of a maximum of 10 years for individuals found guilty of defined ‘serious cartel conduct’ such as price fixing and market sharing between competitors.

This ‘regulatory blowback’ to criminalise cartels which had been brewing for years, appears to be motivated by three related perspectives.

Firstly is the populist view that sees cartelisation as akin to fraud or theft. However there are underlying tensions between this view and the various statutory exceptions taken for granted in the case of anti-cartelisation laws. For instance the current bill identifies various exceptions including for joint ventures, collective bargaining and conduct which can demonstrate net public benefits. Such exceptions which have no ready equivalent in defined criminal offences suggests that the decision to punish cooperative agreements between firms which is essentially what a cartel agreement amounts to, is a matter of public policy rather than cut and dried moral distinctions.

Equally pertinently, while certainty and predictability are generally desirable qualities of all laws, this consideration should be even more important in the case of provisions defining criminal offences given the significant social stigma attached to such offences. Yet it is unclear how much certainty and predictability anti-cartelisation laws are capable of, no matter how carefully drafted. For instance, a corporation commits an offence under the bill where it is found to make or give effect to ‘a contract, arrangement or understanding that contains a cartel provision’ and does so with the ‘intention of dishonestly obtaining a benefit.’ The concept of an ‘understanding’ in itself is a problematic one but one which would be most relevant as cartels tend to be informally enforced. Adding to the reduced element of certainty and predictability in the proposed cartelisation offences in the bill are the significant economic issues involved in the determination of whether a particular provision is a defined ‘cartel provision.’ How much certainty can there be in laws with interpretations that may be argued over by economists in courts many years after the conduct?

A second perspective argues that cartels are so destructive to the Australian economy that a stronger emphasis on rooting them out should be adopted. However, many recent post-mortem analyses of successful cartel prosecutions have failed to find that the relevant markets after such prosecution actually reaped any benefits in terms of lower prices. Furthermore, cartels by their nature tend to be unstable as they depend on the parties agreeing to price above market rates, and there will be a constant temptation on the part of these parties to undercut the agreed cartel price. This means that even without intervention, they may be unlikely to persist for long; even if they do persist, they may not be as effective as they intended to be because of the constant temptation for cartel partners to ‘cheat,’ which may erupt into price wars.

A third contention relies on the argument that there is an inherent limit to the extent to which civil penalties can be used to deter cartels because a high enough penalty would bankrupt the offending company and not be credibly enforceable. But whatever the theoretical merits of this argument, penalties awarded against successfully prosecuted cartels to date have not yet taken maximum advantage of the discretion available to the courts. Thus, even if an alleged ‘deterrence gap’ exists, it is not because the full extent of past civil penalties was exhausted.

Arguments about the inadequacy of current laws absent criminalisation provisions also sit strangely with past pronouncements of the Australian Competition and Consumer Commission (ACCC), notably about the effectiveness of its whistleblower program (called the Immunity Policy) in significantly increasing the odds of secret cartels being detected. For example, describing the ACCC’s Immunity Policy and its interaction with significantly increased fines in 2006, ACCC Chairman Graeme Samuel said that ‘The Immunity Policy … makes it more likely that cartel participants will break ranks and report illegal conduct … and more likely that perpetrators will be caught and punished … So there’s a much greater chance of being exposed, and when the cartel is exposed, the new fines will mean the cost for any company will outweigh the gain.’

The weaknesses of these rationales for criminalisation of cartel conduct should be weighed along with various criticisms of the Bill to date that have been made by industry groups and legal experts. For instance there have been concerns expressed about the narrowing of joint venture exceptions which may well increase the risk of erroneous prosecution of businesses engaging in efficient and competitive conduct for conduct which could now potentially face criminal sanctions. Policymakers should avoid a regulatory blowback that may result in a cure that is worse than the disease.

Jason Soon is a Visiting Fellow at The Centre for Independent Studies. His report The Folly of Criminalising Cartels is released by CIS on Wednesday.