Competition Law: Cartel Provisions Essay

Question:

Discuss about the Competition Law for Cartel Provisions.

Answer:

The Competition and Consumer Act, 2010[1] is the legislative vehicle in Australia for the competition law. This law seeks to promote competition, along with fair trading, in addition to providing the necessary protection to the consumers[2]. Part IV of this act relates to the restrictive trade practices and provides provisions which are aimed at deterring such practices by the companies, which can be deemed as anti-competitive, or in other words, which restrict the free competition. Division 1 of this part contains the provisions regarding the cartel conduct[3].

The price fixing provision, as well as, the exclusionary provisions, before 2009, were subjected to civil penalty sanctions and were prohibited per se. but the Dawson review recommended that the criminal sanctions should be introduced for the cartel conduct[4]. This very recommendation was implemented in 2009 in the quoted division of the act. These provisions are in line with the recommendations of OECD (Organization for Economic Co-operation and Development) and the overseas practices[5].

In the matter of Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (No 2)[6], it was held that cartel provision is such an element or an aspect of the contract, understanding or an arrangement which had the ability to bring out the intended results. And so, this act prohibits any such arrangement amongst the competitors, which can result in or which are in the form of price fixation, restriction of outputs in the production or supply chains, rig bids, and the division of market through allocation or territories, customers or suppliers[7].

Since July 24th 2009, Division 1 of Part IV of the Competition and Consumer Act, 2010 has prohibited cartel conduct. Cartel conduct is treated as a criminal offence as it is prohibited civilly[8]. Earlier for this prohibited the definition of price fixing covered under Section 45A Trade Practices Act 1974 had to be relied upon, but it has been repealed. Section 44ZZRD of the Competition and Consumer Act covers the definition of cartel conduct and covers 4 kinds of activities. These are price fixing (as had been earlier covered in the now repealed section 45A), bid rigging, market division, and restricting outputs[9]. Such provisions are included so that the consumers are protected and at the same time, fair competition prevails.

The cartels have been made illegal as they cheat the other businesses and the consumers, and along with this they restrict healthy economic growth[10]. This is done by increasing the prices for both the businesses and consumers by inflating the capital and input costs artificially, across the chain of supply, and this includes the cost of buildings, interest, and rent of equipment[11]. The other ways in which this is done include:


  • Locking up the resources by interfering with the normal supply, so as to demand forces. By doing so, the other operators effectively lock out from access to the distribution channels and resources.
  • Reducing the investment as the cartels block new entrants, which could invest in jobs, opportunities or economic growth.
  • By dominating the markets, plus by confining the goods, as well as, the services, the cartels destroy the other business, and to such an extent that the well-run and honest organizations could not survive.
  • Reducing the innovations, as well as, choices through the protection of own members which are inefficient and who do not have to compete, and as a result of this, they do not invest in any kind of research and development.
  • By increasing the taxes and reducing series through the targeting of public sector or by taking the additional costs which are paid by the consumers in form of taxes and rates
  • By negating the confidence of the consumer over the entire industry, which includes the creation of bad consumer sentiment towards the compliant organizations, which do not undertake cartel activities.
  • Through rigging bids in public infrastructure projects to decrease the infrastructure, which results in the inflation of costs, and consequently reduces the capacity of the public sector to make investments in the beneficial projects[12].

Division 1 contains the primary prohibit on such cartel conduct in sections 44ZZRA - 44ZZRV in Australia. Section 44ZZRD provides the four forms of activities, as highlighted earlier. Such conduct has been prohibited where given effect or made in to a contract, understanding or an arrangement, in addition to the involvement of two or more parties, which are competitors. Regarding the price fixation, the provision has to be for the purpose or having the effect of fixation of price. And the rest of the conduct relates to the requisite purpose[13].

The Federal Court in the case of ACCC v Leahy Petroleum Pty Ltd[14] viewed that the following elements have to be present in a contract, understanding or an arrangement for it to exist, i.e., communication, consensus, and commitment. The most controversial is the last element, which is commitment, as it has resulted in a suggestion to expand the bar on the anti-competitive conduct to the concerted practices, but these do not include the direct cartel prohibitions.

To be covered under the definition provided in the act of the cartel conduct, the contract, understanding or arrangement has to be amongst the parties, which is more than 2 in number, and who are in or are likely to be in competition, relating to the attainment or supply of the related services or goods. The courts held that the threshold limit was quite low in the matter of Norcast S.?r.L v Bradken Limited[15]. Further at the first instance, the court held that the likeliness of being in competition could be taken to mean as likelihood that such is not distant, in the given circumstances. Recommendations were made by the Harper Panel regarding the threshold limit to be modified, so that the conditions of competition could be satisfied, only when the organizations are competing with each other or are likely to compete with each other. And in such a case, the likelihood has to be evaluated on the equilibrium of possibilities where “it is” is more probable in comparison to “not”[16].


Section 44ZZRF makes in an indictable offence to make a contract, understanding or arrangement which contains the provisions of cartel, and Section 44ZZRG lays down the same consequence for the contracts, understandings or arrangements which give such an effect. A fault element has to be established to constitute an offence, and this is defined as a belief or knowledge[17].

Under section 44ZZRH, an organization can be responsible for an unlawful act even when the other parties are such, which are not responsible unlawfully or who have been guilty or set free from the charges of offence, unless and until all the other parties to such an conformity have been found to be not guilty, and any guilt finding is or would be inconsistent with the acquittal[18].

The power to make a civil order against a person prosecuted against section 44ZZRGF or 44ZZRG is provided to the court under section 44ZZRI. In substance, the civil prohibition mirrors the criminal prohibition against the giving effect or making the cartel provision, as covered in sections 44ZZRK and 44ZZRJ, respectively. Though, for civil prohibitions, the fault element is not necessary to be proven[19].

By providing such provisions, which define and set out the criminal or civil liability upon the businesses, which are indulged in cartel conduct, the Division 1 of Part IV of the Competition and Consumer Act, 2010 promotes fair competition, and also protects the consumers.

Australian Competition and Consumer Commission v Visy Holdings Pty Ltd (No 3)[20] is one of the cases which have highlighted the far reaching consequence of violation of the competition law, both in terms of damage to the reputation and the pecuniary losses. This was a landmark case in the history of cartel conduct. Also, this was a crucial case due to the record fine that was imposed over the breaching parties and the company. This case came to be known as example for the cartel conduct for a long time, in the history of price fixation by the cartels. The businesses have to be aware about the requirements of the competition law, along with the conduct which could be inferred as, or which could lead to a breach of the Trade Practices Act 1974[21].

In the matter of ACCC v Visy Holdings, a penalty of $ 36 million[22] was levied on the Visy Industries Holdings Pty Ltd (Visy), and two of its employees, Harry Debney and Rod Carroll, were awarded personal fines of $ 1.5 million and $ 500,000, respectively[23]. Around 90% of the corrugated fiber packaging market, whose worth was $ 1.8 billion - $2 billion for each year, was controlled through an agreement between Amcor and Visy[24].

It was alleged by the ACCC that from 2000 to 2004, a market sharing, as well as, price-fixation agreement was entered between Visy and Amcor, regarding the supply of the corrugated fiberboard packaging. The nominated executives of both the companies used to consult and coordinate the price rises and also colluded while negotiations for quotes took place for the consumers. When the big organizations wanted to negotiate the contracts again, the information was swapped amongst the two companies to make certain that the quote of the competitor was higher than the existent pricing structure[25]. When the Amcor management reported this conduct to the ACCC, only then this scheme was discovered. Further, Amcor was given the protection from any sort of action, for the help in bringing Visy down and stopping the cartel conduct. But, in the class actions which involved over 4500 businesses, both Visy, as well as, Amcor were asked to pay up $ 95 million by the Federal Court to the consumers.

An agreement statement of fact was presented in the court, as per which Visy had breached Section 45 of the Trade Practices Act knowingly by a collusion with Amcor, which was a competitor, so that the prices could be fixed in the supply industry of the cardboard boxes. According to the judge of the case, Justice Heerey, this was the most serious case which had been brought to the Court, sine the time price fixation had been specifically prohibited through the statute, which was duration of over 30 years[26].


Trade Practices Act’s section 45 prohibited the corporations for arriving at or from giving the effect to any understanding which can be deemed as anti-competitive, as has been stated therein. The price fixation is specifically dealt in section 45A and provides that any provisions which is aimed at or which is expected to have such an effect of maintaining, fixing or controlling the prices, is to be considered as to having the purpose or having the effect of shrinking the competition in a substantial manner. In other words, once a fixation of price has been established, the test of lessening of competition in a substantial manner is satisfied, and there is no further need for any evidence[27].

After the penalty orders were handed down by the court against the employees of Visy and Visy itself, it was noted by the ACCC that for such cartel conduct, the maximum penalty can be 3 times the amount of benefit which was availed by the company which indulged in such conduct. And in case, such a value cannot be determined, then the amount shall be ten times the annual turnover of the corporate group indulged in cartel conduct[28].

Since this decision has been given by the court, a concern has been expressed by Graeme Samuel, the ACCC Chairman, regarding the class action which was subsequently launched by the consumers against Amcor and Visy. As per Samuel, the immunity policy was threatened due to the class action, which was specifically made for the party leaving a cartel, and which was Amcor in his case. He viewed that if the ones seeking protection have the surety of being hit by massive class action damages claim, due to their confession, then the amount of such disclosures would significantly decline[29].

The Trade Practices Act was replaced by the Competition and Consumer Act. And even under the new act, especially under the provisions stated under Part IV of Division 1 of this act, i.e., section 44ZZRF and 44ZZRG were breached in the case of Visy[30]. As highlighted earlier, Section 44ZZRF presents that a company commits an offence when such a company makes a contract or an arrangement or arrives at such understanding, and a cartel provision is contained in these, in addition to the presence of fault element of knowledge and belief, then it is a criminal offence[31].

In Visy’s case, the company had entered into a contract, which limited the competition substantially[32]. Visy had entered into a contract for market sharing and fixation of price with Amcor, for the supply of corrugated fiberboard packaging. Moreover, the cartel went for nearly 5 years, so the fault element was clearly present, as there was a clear knowledge of cartel conduct happening. Hence, even in the new act, Visy is guilty. And according to the quoted section, is liable to higher penalties, than the one which was awarded to it under the Trade Practices Act.

So, Visy would have been liable to a fine not exceeding the higher of $10,000,000; or 3 times the value of total benefits determined by the court which have been attained by one or more individuals and are reasonably attributed to the commission; or in case the court is not able to decide upon the value of such benefits, than the 10% of the yearly turnover during the 12 months ending at the conclusion of month in which such an offence was undertaken by the corporation, or when such offence was begun[33].

Section 44ZZRG provides the provisions regarding an offence being committed by a corporation when such a corporation enters into a contract or an arrangement or arrives at such understanding which gives the effect to any cartel provision, in addition to the presence of fault element of knowledge and belief then it is a criminal offence. The penalty provisions remain the same as in section 44ZZRG[34]. The contract entered into between Visy and Amcor, also had the effect of considerably shrinking the competition, as they restricted the supply of goods and services.

So, under both the acts, i.e., Competition and Consumer Act and its predecessor, the Trade Practices Act, the conduct of Visy in the case of ACCC v Visy Holdings, would be treated as a cartel conduct. And under both the acts, the provision of knowledge and belief, to establish the fault element is present. The only difference is that the new act is much more stringent and hence, the penalty levied on Visy for such a cartel conduct, would have been a lot higher than it was due to the applicability of the Trade and Practices Act.

Bibliography

Articles/ Books/ Reports

Bruce, A, Australian Competition Law (LexisNexis, 2nd ed, 2013)

Corones, S, Australian Consumer Law (Thomson Reuters, 2nd ed, 2013)

Corones, S, Competition Law in Australia (Thomson Reuters, 6th ed, 2014)

Miller, R, Australian Competition and Consumer Law (Thomson Reuters, 38th ed, 2016)

Cases

ACCC v Leahy Petroleum Pty Ltd [2007] FCA 794

Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (No 2) [2001] FCA 1861

Australian Competition and Consumer Commission v Visy Holdings Pty Ltd (No 3) [2007] FCA 1617

Norcast S.?r.L v Bradken Limited (No 2) [2013] FCA 235 (19 March 2013)

Legislations

Competition and Consumer Act, 2010 (Cth)

Trade Practices Act 1974 (Cth)

Other

ACCC, Cartels (2017) <

ACCC, Cartels case studies & legal cases (2017) <

Australasian Legal Information Institute, Competition and Consumer Act 2010 (2017) <

Australian Competition Law, ACCC v Visy Industries Holdings Pty Ltd (No 3) (2014) <

Australian Competition Law, Australian Competition Law overview (21 June 2016) <

Australian Competition Law, Cartels | Overview (27 June 2016) < >

Australian Competition Law, Cartels | Prohibited conduct (27 June 2016) <

Australian Competition Law, Section 44ZZG: M Giving effect to a cartel provision (2014) <

Australian Competition Law, Section 44ZZR: Making a contract etc. containing a cartel provision (2014) <

Competition Policy Review, Part 4 — Competition Laws (2015) <

Jacobson, D, ACCC V Visy: Record Price-Fixing Cartel Penalties (3 November 2007) <

Mansfield, J, Litigation under the Trade Practices Act 1974 (22 May 2008) <

Stephens Lawyers & Consultants, Recent developments in Trade Practices (January 2008) <

Wells, CB, and Brydges, N, The cardboard box cartel case: Was all the fuss warranted? (17 June 2009) <

How to cite this essay: