Stick it to them

Our Commerce Commission has just hosted the International Competition Network's annual cartel workshop, on the nowadays typical hybrid online-plus-in-person basis, and it has been a fascinating meeting.

If you're not a competition policy tragic, sticking it to cartels may not ring your bell. You wouldn't be alone. People don't always appreciate the harm they do, and indeed it's not so long ago that cartels were seen as potentially a good idea. In FDR's depression-ravaged America, for example, cartels were actively encouraged: they were thought to be useful as a way of holding up prices when deflation was a macroeconomic problem. Some folks still think that cartels can help businesses through tough times by parceling out the available jobs so that everyone has some sort of income stream to help keep them going.

But these days, competition agencies, rightly, see cartels as an unmitigated evil. Cartels raise prices, ripping everyone off for illicit private commercial gain. They reduce output: think OPEC, which rorts the oil price by agreeing to curb production. And at least one of the four activities that fall under the general heading of 'cartel' - price fixing, market allocation, bid rigging, collective output control - is nothing short of outright commercial fraud. Crooked collusive bidding on tenders is a crime - and a particularly nasty one when it stitches up the likes of medical supplies or essential infrastructure - and the conspirators ought to face the prospect of being banged up with the other fraudsters, as they will when our cartel criminalisation regime goes live next April.

So there are good reasons why competition agencies everywhere want to discover and punish any existing cartels, and hence or otherwise deter new ones from forming.

Trouble is, one of their best weapons may be losing its oomph.

'Leniency', as it's known in the trade, was a Cunning Plan. It destabilised cartels by encouraging cartel members to rat on their mates. The first - and, importantly, only the first - cartelist to dob in the others got 'immunity': the Commerce Commissions of this world wouldn't take any proceedings against them, but would prosecute the rest of the gang. There is other stuff - the initial dobber-in had to continue cooperating with the investigation, for example - but that's the guts. 

The importance of 'only the first' is right out of game theory. If a bit of mistrust starts to bubble up in a cartel - and let's face it, it tends to, as cartelists are always worried that someone will renege and sneak a commercial advantage by undercutting the high price they are supposed to quote - then the 'first in' element sets up a payoff matrix where the first in gets a positive payoff at the others' expense. And there have indeed been real world instances of cartelists racing to be first in the regulators' door. Overall, it's been good at unearthing cartels that mightn't have been found otherwise.

But there is a growing suspicion that cartelists may be opting to stay away from looking for leniency. It doesn't seem to apply to New Zealand - apparently the Commerce Commission has at least 17 leniency applications in, and at the conference we heard that Portugal's authority has eight, which the local folks think is a lot for an economy Portugal's size - but at least in some jurisdictions, notably the EU, the number of leniency applications has dropped off. 

Why? Probably three things most of all. 

One is that the EU has made it easier for private parties to swing in behind the competition regulator and sue for damages: the prospect of megabuck claims across multiple jurisdictions to recover the cartels' overcharging has made cartelists reconsider the leniency matrix of payoffs. Personally I'm all for facilitating people getting back their ill-lost costs, and multiple expensive court cases are exactly what the conspirators deserve (and should have thought of before they started), but realistically you've also got to wonder about the cost to competition enforcement of leniency becoming ineffective. 

The second thing is that it's good to get immunity from a competition authority's civil proceedings and the risk of a big fine, but it's not always as clean a process as it might be for applicants to get immunity from criminal proceedings, where employees risk going to jail (as they have in Australia since 2009, and as they will here from next year). People really worry about that - you would, too - and if the deal doesn't come as a guaranteed combo, people won't buy it.

The third thing is that it's plausible that at least some competition authorities rested on their oars and let leniency do all the cartel detection work. Understandable: leniency was the gift that kept on giving. But, again, it upset the payoff matrix. Now, cartelists started to reckon that if they didn't dob a cartel in, there was sod-all chance that the competition authorities would find it by themselves. The calculus shifted to staying shtum. 

How to turn the tables back in the competition authorities' favour?

You don't have to be a professional game theorist to get to the answer, which is to re-stack the payoff calculus.

One leg is to make the payoff from leniency and immunity more attractive. There's some swallowing of dead rats involved, but there you go. The main moving parts are ironclad civil plus criminal immunity, and probably some form of protection against private claims.

The other leg is to increase competition authorities' independent capability to find cartels. The Commerce Commission's Grant Chamberlain (below) chaired the plenary session on 'Widening the enforcement toolkit - how do we detect cartels going forward without relying on leniency?', and the big takeaway for me was that outreach programmes have a lot of cartel-detecting potential. Go out and about in the community on competition advocacy tours, and you'll find (as one panelist said) that if you talk to people, they tell you things. Funny, that.

Another very promising line of attack is Big Data. Everyone says Big Data will mean this, that or the other for society as a whole: not everyone has connected the dots and realised that in the right hands it could be a powerful anti-cartel tool. I was impressed by Spain's efforts. There is a nationwide Spanish e-platform used for public procurement tenders: their authority cloned it, and devised software to interrogate it for patterns suggestive of bid-rigging. Way to go. 

And one last tool is encouraging whistleblowers, which has had some good results. Me, I'd stack the strategic deck a bit more, and as well as protecting whistleblowers from retaliation, I'd give them a share of the takings from any eventual fines. 

Not that some need much extra motivation. One of the speakers told us of a French example, which involved bid-rigging contracts for upgrading school buildings. The cartelists had an IT guy set up the software to keep track of who got what. Later, almost incredibly, they made him redundant.

His wife dobbed them in.

You probably got ripped off, too

I'm involved with a training programme for an overseas competition agency, and we've been going through the law and economics of cartels: I've been talking about the detriments they cause. As it happens, there's a recent spectacular example of how bad they can be.

One of the gurus of cartel documentation has been John Connor, emeritus professor at Purdue and a senior fellow of the American Antitrust Institute. In 'Twilight of Prosecutions of the Global Auto-Parts Cartels', he's written about one of the biggest cartels ever (amounts cited are US dollars):

At last count 18 jurisdictions vigorously prosecuted this supercartel, which demonstrated exceptional duration, global reach, size, and injuriousness. Estimates for affected commerce of the Auto-Parts supercartel range from $3.2 to $5.0 trillion. There are few reliable estimates of overcharges, but averaging the few preliminary estimates suggests that injuries are in the range of $0.6 to $1 trillion (p1)

That's a pretty impressive level of overcharges, exacted from 17 different car manufacturers from around the turn of the millennium though to late 2009, when the cartels started to get rumbled. Chances are, if you bought a car in the 2000s, you're one of the vast number of victims yourself. Depending on what criterion you use, this was either the largest or second largest grouping of related cartels ever found.

Connor reproduced this picture, originally from a European Union enforcement announcement, showing just how many different components of a car got targeted by the cartels. Basically everything but the engine, the transmission and the bodywork got rorted. If the 'wire harnesses' rings a bell, that's one where the ACCC got involved: the Japanese company pinged in that case unwisely decided to appeal their fine, with appropriately karmic results.

There's a great deal of stuff to take away from this example, one being that companies can be too hard-nosed at bargaining for their own good: "Did the assemblers [the carmakers] push too hard on price reductions in the early 2000s, and thereby trigger supplier collusion to cope with an existential threat?" (p1). It's not a defence, and it doesn't even take us very far into tout comprendre c'est tout pardonner territory, and you shouldn't blame the victims, but (like the Lodge case here at home) you do wonder whether the damn thing would ever have happened in a more reasonable world.

And if you're into corporate strategy, you might want to think twice about all that financial engineering cleverness. You can't be rorted if you've vertically integrated that component. Divest it, though  - free up capital and all that good stuff - and you've opened up some vulnerabilities:

Perhaps it is no coincidence that collusion against GM began soon after it sold its Delco-Remy division in 1994, against Toyota after DENSO no longer supplied a majority of output to Toyota, etc. Any financial cost savings resulting from divestment may have backfired. Second, by delegating manufacturing of minor inputs (say, 2% or 3% of total material inputs) to ostensibly unaffiliated suppliers, the OEMs ['original equipment manufacturers', i.e. the carmakers] suffer a substantial loss of information about manufacturing costs and a consequent loss of bargaining power over price (p16)

The main takeaway from the cartel, though, is the ineffectiveness of the fines. We know the theory: if there's a 100% chance of being detected, a fine equal to 100% (or more) of the overcharging will deter; if there's a 20% probability, then a fine of 500% (or more). What actually happened here?

There are few reliable estimates of the size of overcharges for these cartels, and more are desperately needed, but averaging the few preliminary estimates suggests that injuries are in the range of $0.6 to $1 trillion. Even if monetary penalties rise to double the current $20 billion, cartel deterrence or cartel dissuasion is highly unlikely (p30)

Which does get you thinking about the alternative sanction of criminalisation - sending executives to jail - which we are about to introduce from April. In egregious cases like car parts, you can see why people would well reach for it. But as someone from the socially liberal end of town, I have two reservations.

Here's the first one (data from this Statista page, and originally compiled here). We're already well down the wrong end of this international comparison: we're just about the last country in the world that ought to be thinking about putting even more people in jail. 

And here's the other:

Unlike typical international cartel prosecutions in the past, few of the individuals held accountable by antitrust authorities in Auto Parts have been CEOs, COOs, or CFOs of their parent companies or even their subsidiaries ... Rather, they have held titles like sales manager, director, marketing manager, or department head of units below the corporate VP level (p27).

When we eventually press the criminalisation button, I hope we don't make the car parts mistake - jailing some midlevel functionaries, but letting the big fish swim free.

An excellent resource

Interested in staying up with Australia's criminalisation of cartels, and New Zealand's impending move to do the same? Then head over to the MLex site and download your free copy of  'Collusion Damage: Australia’s struggle to secure its first criminal cartel convictions — and make jail time a deterrent at last '.

It's an excellent resource. As the report says, "Since the first individual criminal cartel charges were laid early in 2018, MLex has been present at every material court hearing in Canberra, Melbourne and Sydney", and the expertise shows. The report is on top of all the cases currently live. My take, not theirs, but after reading this report, and also going by the coverage of the case in the Australian Financial Review, I do wonder from a variety of perspectives if the ACCC is going to succeed with its alleged cartel case against the underwriter banks left with unsold ANZ Bank shares. 

There's a chapter in the report about New Zealand's impending regime, where I agree with MLex that "It’s true that the Commerce Commission will still have the full suite of civil offenses at its disposal and will be under no obligation to unleash a criminal prosecution for trivial matters. Yet ensuring that well-meaning, small businesses -  those that aren’t large enough to have in-house counsel or even to employ a law firm to review their decisions - don’t get caught up with criminal offenses designed to ensnare larger, possibly global players, will remain a challenge for the agency".

In writing up the CLPINZ session on cartel criminalisation I'd also wondered about potential overkill, and had assumed we in New Zealand would end up with some arrangement similar to that between the ACCC and the Commonwealth Director of Public Prosecutions, which hopefully would set some seriousness threshold before unleashing the criminal process. But I learn from the MLex report that "Unlike the ACCC, the Commerce Commission will be able to take its investigations to court directly, without handing the file over to public prosecutors; however, it will be required to ascertain how its planned prosecution measures up with the Solicitor General’s Prosecution Guidelines, which demand “evidential sufficiency” and proof that the prosecution is in the public interest". As the Guidelines say, "The predominant consideration is the seriousness of the offence", and hopefully a conservative approach will be the way to go, rather than feeling the collar of commercial naïfs.

Speaking of resources, I came across the MLex report on its useful Twitter feed. If you're interested in competition tweets, head over to my own Twitter posts and help yourself to my Twitter 'Competition' list (currently 73 members). And if New Zealand economics is your thing, then the 'NZ economics' list (52 members) should be of interest. If there are local competition or economics folks I've missed, let me know and I'll add them.

CLPINZ 2020 goes online

Last week's Competition Law and Policy Institute (CLPINZ) workshop was - perforce - the first time CLPINZ has run the annual event online, and the good news is that the technology worked just fine (ably organised by Conference Innovators, special hat-tip Olivia Lynch). Covid is reshaping a lot of things (as I wrote in Acuity, the accountants' magazine) and sometimes for the better. Online workshops may not provide the same personal contacts and networking but they can deliver a lot of bang per buck once travel costs don't come into the equation for speakers or attendees.

Can't cover everything but here are some of my highlights.

The keynote was the topical 'Antitrust in times of crisis and emerging from the crisis', by Maureen K. Ohlhausen from Baker Botts in Washington DC, with commentary by Ayman Guirguis from K&L Gates in Sydney and session chair Anna Ryan of Lane Neave in Christchurch. One theme was the need for competition authorities everywhere to scramble hard to authorise (or at a minimum stand aside from preventing) collaborative activities between firms who would normally be competitors, when they are responding to covid logistical challenges (eg coordination of grocery deliveries, or availability of medical resources). The ACCC in particular has in my view been commendably quick to get provisional authorisations out the door. 

Another was how to treat 'failing firms': there are a lot of cases where firms are in trouble (or heading for foreseeable trouble) and while they can't qualify for the usually strict merger conditions around a 'failing firm', a properly forward-looking analysis of the competitive outlook might well lead you to allow a merger. 

A third theme was the renewed focus on market power in the tech space now that we're all even more dependent on the big tech names for our remote working and our online shopping. The conclusion as I saw it was that there is still no clear verdict on whether these markets are naturally tippy towards one predominant incumbent, or whether there are issues of market power that need to be corrected.

Consumer law isn't usually top of my interests, but I was very much taken with the session on 'Unconscionability and unfair contract terms', where the speaker was Sarah Court, Commissioner, ACCC, the commentator Anna Rawlings, Chair of the NZ Commerce Commission, and session chair James Craig of Simpson Grierson. As background, Australia's got unconscionability on the statute books, and we're minded to go the same way. I'd heard Sarah Court on this topic before (see here) and while the Kobelt case she cites as showing the Aussie law isn't working might be one of those odd cases that might not influence anything over the longer haul, there's a real chance that our courts might also struggle to nail genuinely ratbag behaviour. Why not read Kobelt and see what your call would have been? And if you think Kobelt got the wrong end of the stick, what would you suggest to fix it?

Another area where we look to be heading to align our legislation with the Aussies is changing our current s36 of the Commerce Act, the bit that deals with abuse of market power. The plan is we will move away from our current legal test (which focuses on the 'counterfactual test' of what would a firm without market power have done) to an 'effects test' which, as it says on the tin, tries to take an objective view of whether the conduct actually works anti-competitively (both jurisdictions would also retain anticompetitive purpose, which would catch those incriminating internal e-mails). 

I went into this session - 'Misuse of market power – what an 'effects test' would mean for New Zealand', speaker Dr Katharine Kemp from the University of New South Wales, commentator Brent Fisse of Brent Fisse Lawyers, session chair John Land from Bankside Chambers - with what I regret to reveal was a largely closed mind: I'm pro-change. But I came out with the odd niggle of doubt about potential over-reach. Faced with the choice of the status quo or the change, I'd still change, as the counterfactual test asks the wrong question plus we get the benefit of trans-Tasman alignment, but I suspect policy analysts on both sides of the Tasman will be watching the first few 'effects' cases very closely indeed.

And yet another area where we are harmonising with the Aussies (and with global practice generally) is criminalisation of cartels, where on the topic of  'Cartels – criminalisation – lessons from the Australian experience' we heard from Marcus Bezzi, Executive General Manager at the  ACCC, commentary from Marc Corlett QC from Britomart Chambers, chairing by Glenn Shewan from Bell Gully. I'm generally not in favour of yet more criminal offences when we already have far too many people in jail (by developed economy standards), but I'm prepared to make an exception for 'hard core' cartels which I see from a moral perspective as akin to fraud (quite apart from the often sizeable economic detriments).

One thing that's worried me, though, is that every 'ordinary' New Zealand cartel, if I can call it that, would attract criminal charges, which I would regard as overkill. I was partly relieved to hear Marcus talk about a memorandum of understanding between the ACCC and the Aussie Commonwealth Director of Public Prosecutions which aims to keep the criminal route for the worse cases, which is surely right. I presume something similar will go into place here at home before we go live in April next year. Marc Corlett's remarks said (to me at least) that individuals caught in the grinder between the criminal prosecutor and a perhaps not always supportive employer are going to be in a tough place: another reason in my view to make sure that we concentrate on the hard core conduct and the big fish.

The session on 'Acquisitions of nascent competitors', speaker Renata B. Hesse from Sullivan & Cromwell in Washington DC (who if I heard it right may indeed have coined the phrase 'killer acquisition'), commentator Iain Thain from DLA Piper in Auckland, session chair Will Taylor from NERA Economic Consulting in Auckland, got me thinking. This is a really tough area. It's important to stop killer acquisitions: as Iain emphasised, it's the competitive struggle that unearths all sorts of lucky discoveries (sometimes unexpected ones) even if in the end the market tips to one big winner. But it is very hard for competition authorities to deal with, when even those most up with the game in any given sector can't be sure what might have developed into a credible challenger to an incumbent, but for its pre-emptive acquisition. As Renata said, you're often trying to do an objective analysis of something that is inherently subjective. 

Some days I favour channelling my inner Schumpeter, not worrying too much about temporary tech monopolies and letting it all play out in the creative destruction gale. Sometimes there must be good outcomes when an incumbent offers a genuinely better product, once it has bolted on the smaller-firm functionality it's just bought, whereas you might be waiting years for the small firm to develop a full-feature offering. But then will incumbents' internal R&D slack off if they can rely on buying the next bright idea? And what if ... you get the drift. This is hard.

Life's too short to summarise everything but for the record we also had an economists' panel - 'Hipster economists? Values, welfare and evidence', and a corporate counsel oriented panel - 'Handy hints for practice – Joint ventures and commercial agreements', and if they ring your bell you can get in touch with the panellists (here's the full workshop programme with the details).

Go your own way, or else

Last week the Supreme Court published its Lodge judgement (media release here). By way of background the Commerce Commission had taken a range of Hamilton real estate agents to court for an alleged price-fix breach of s30 of the Commerce Act, alleging that they had collusively agreed to charge their customers TradeMe listing fees rather than absorbing them. The agencies were responding to a proposed thumping great rise in TradeMe's charges for online real estate listings. Before the increase, agencies would often absorb the charge, post increase they reckoned they wouldn't be able to afford to.

Many of the agencies settled and paid (even by my cartel-hostile standards) swingeing penalties. Lodge (the company and its principals) fought on. They won in the High Court ('...and then the wheels came off'). The Commerce Commission took it to the Court of Appeal and prevailed ('The wheels are back on'). Lodge took it to the Supreme Court, and as we now know, have lost.

In the process we've ended up in a better place. We've now got greater clarity on exactly what's involved in that 'meeting of minds' that turns what might have been simultaneous and identical but unilateral reactions into illegal collusion. We've also got a better steer on whether collective agreement on part of a product or service offering - even if only a smallish part of the overall price - constitutes 'controlling' the price (it generally does).

On the first point, the key bit at [54] (footnote omitted and Giltrap reference added) is

Tipping J [in the classic Giltrap cartel case] was making it clear that there will be no arrangement unless the expectation that arises from the consensus is such that it can be inferred that the parties to the consensus have assumed a moral obligation to each other. We would substitute “made a commitment” in place of “assumed a moral obligation”. Calling such an obligation a “moral obligation” introduces morality into a context where it adds nothing. It seems to us that the essential thing is that a commitment is made: one that is not legally binding but is sufficient to be the basis of an expectation on the part of the other parties that those who made the commitment will act or refrain from acting in the manner the consensus envisages.

Or as the Court wrapped it up at [58]

We summarise the test in this way. If there is a consensus or meeting of minds among competitors involving a commitment from one or more of them to act (or refrain from acting) in a certain way, that will constitute an arrangement (or understanding). The commitment does not need to be legally binding but must be such that it gives rise to an expectation on the part of the other parties that those who made the commitment will act or refrain from acting in the manner the consensus envisages.

On the second issue of 'controlling' price, you might argue that collectively agreeing on an approach to the TradeMe fee made no real difference, given that the TradeMe fee was only a small part of the overall cost of the service, which was of course dominated by the percentage-of-your-house-value estate agent's fee. But the Supreme Court harked back to the Caltex case where the petrol companies had collectively agreed to to remove a previously free carwash: at [143]

In that case, three petrol retailers entered into an arrangement to abandon a practice of offering a free carwash to any person making a purchase of $20 or more of petrol. A carwash was worth about $2 at the time. The arrangement did not involve any agreement as to the prices that would be charged for petrol or carwashes. Salmon J found that the arrangement had the effect of controlling the price of petrol sold by the parties to the arrangement because it restrained the free action of the parties in setting the price

and the Court said at [145]:

These [Caltex] authorities as to what amounts to “controlling” prices are longstanding and we see no reason to depart from them.

It is possible that some components of an overall deal might indeed be so small as to be competitively insignificant: at [155]

We accept that there will be cases where the component of the overall price that is affected by the arrangement is so insignificant that it cannot have the effect of controlling the overall price, assuming that the overall price is otherwise determined by market forces.

The way to think about it, the Court said at [156] is:

the correct position is that price includes a component of the price unless that component is insignificant in competition terms. We do not see this as a mathematical calculation, however

and that must surely be right. You may well be up for a $20K overall house-selling cost either way, but you might well go with the agency that swallows the relatively insignificant TradeMe fee rather than the one that doesn't.

That was exactly the case in the Hamilton house market. At [157]

The evidence established that Trade Me listings were a significant factor in competition between the Hamilton agencies, as both the High Court and Court of Appeal found 

 and at [160]

The effect of the arrangement in relation to the Trade Me listing fee controlled the overall price of the services provided by the agencies by interfering with the competitive process that would otherwise have applied.

So we've got to a clear statement of how the law applies to quite a common situation businesses may encounter. The Court said that there were similarities, for example, with the air cargo cases, where airlines were faced with various new security surcharges (post 9/11) and collectively (but in the end illegally) agreed to pass them on in full to their air cargo customers rather than making independent competitive decisions on whether to absorb them in full or in part.

It is easy to think of other circumstances: where an industry is whacked with some new industry-wide levy, for example, the temptation may be there to have a natter in the industry forum and agree to pass it on. Resist the temptation: you'll be breaching s30. As I put it after the original High Court case, "How much of a cost to absorb, and how much to pass on, needs to be your own independent decision".

There's only one bit of the judgement I'd quibble with, and in the greater scheme of things it doesn't matter, but I wonder about the reasoning in [159] where the Court felt that the Lodge parties seemed to want to have it every which way:

They say on the one hand that the new Trade Me listing fee was so high that it was a natural reaction for agencies to refuse to absorb it, given the considerable cost to them if they did so, but on the other that the fee was such a small component of the overall price of their services that it should be treated as insufficiently significant in competition terms to bring the agreement to fix or control it within the prohibition in s 30.

I don't see an intrinsic contradiction at all. In a very low-margin industry, for example, it is entirely possible to conceive of a cost that is very significant to the suppliers' profitability but is still only an insignificantly small part of the end-customer price. But that's neither here nor there: the big picture is the law is now clearer, and the necessity to do your own thing now even more obvious.

End-year bits and bobs

We're all winding down and people's appetites for competition and regulation stuff are likely waning, but as we all head for the beaches (Golden Bay in our case) here are some assorted bits and bobs that will tick over into 2020.

1 What's happened to Lodge? That's the case about real estate agents in Hamilton charged with anti-competitive collusive behaviour. The High Court said they didn't. The Court of Appeal said they did. The Supreme Court allowed an appeal last March and heard it in (from memory) August. Is four months the normal gestation period for a Supreme Court decision? Or is there some extended thinking going on about exactly what constitutes a meeting of minds as opposed to simultaneous but independent agreement on a course of action?

2 And if the Supreme Court does ping the Lodge real estate agents, what about the penalty? Other real estate companies hadn't fought the case, pleaded guilty, and got what I thought were fines on the high side of appropriate. I'm no fan of cartels: I was really pleased for example when the Aussie courts threw the book at the Japanese shipping lines (most recently here) and totally delighted when they nearly quintupled the fine on a brazen bang-to-rights Japanese cartellist who'd unwisely appealed the original A$9.5 million. But I'm not at all convinced that the book needs to get thrown in Lodge. Yes, of course, you don't want cartel fines becoming just another cost of doing business, and all that economics stuff about optimal deterrence needs to get an airing. But there also needs (in my view) to be a clearer distinction drawn between the less culpable and the most egregious.

3 Talking about appropriate penalties, when cartel criminalisation goes live in New Zealand in April 2021, is every cartel case going to be treated as a criminal matter? Or only the worse ones?

4 Still on cartels, I wonder how the ACCC's underwriting case is going to fare? Apart from the current skirmishing over whether the evidence trail has been contaminated - the case is definitely in criminal law process territory, as we will be too from 2021 - we're going to have another of those Lodge-style bunfights about whether everyone took the same view, given the force of the ambient circumstances, or went that step too far and collusively agreed to act together (in this case, allegedly, controlling how many unsold ANZ Bank shares would be dribbled out onto the market).

5 Does history repeat itself? You betcha. Seen the ACCC's first go under the new Australian 'effects' based formulation of abuse of market power (media release here, concise statement of claim here)? Let's see now, what does a port with its own pilot and towage business allegedly over-reacting to a competitor remind you of?

6 In the great scheme of things I'm more interested in competition and regulation than consumer protection. But I get it that consumer law has its place in making markets work well, and was persuaded a bit more in that direction at this year's RBB Economics conference. So I think we're on the right track with the new Fair Trading Amendment Bill, which aims to bring in a new 'unconscionable conduct' provision, and which you'd think would help address gross imbalances in market power between sellers and buyers. "Unconscionable" isn't defined in the Bill but the government's explanatory note (which presumably will come into play when there's the eventual statutory interpretation headbutting) says that "Unconscionable conduct is serious misconduct that goes far beyond being commercially necessary or appropriate". The good bit is that s7(3) and s8 try to give some guidance to the court, in order to avoid the Kobelt outcome we recently saw in Oz (good summary here, case itself here) where it went to penalty goals and a 4 -3 decision against finding the alleged unconscionability. But - and maybe it's a fool's search to go looking in the first place - I can't say that "serious misconduct that goes far beyond being commercially necessary or appropriate" rings my bells as a decisive guide.

7 Out of the blue, earlier this month I got an e-mail from the American Bar Association Antitrust Law Section about a seminar that will "be focused on platforms regulation and merger litigation. Rod Sims will deliver a keynote that follows-up on the ACCC’s Digital Platforms Inquiry and provides an update on the ACCC’s next steps, followed by an interactive panel discussing that report and other issues related to digital platform regulation. This will be followed by an all-star panel of judges and litigators from the United States and Australia discussing the unique features and challenges involved in the increasingly common practice of litigating merger cases". I looked it up: it sounds promising, and I'm going. It's free, and only half a day, in Sydney on February 6. While it's free, you need to register here.

The unsung heroes

Earlier this month, in a criminal case, the Federal Court of Australia pinged Kawasaki Kisen Kaisha Ltd (K-Line) A$34.5 million, the highest ever criminal cartel fine in Australia, though just adrift of the highest civil penalty, Visy's A$36 million in 2007.

K-Line was the second Japanese shipping company to have its collar felt for the longstanding rort of rigging the cost of shipping Japanese cars to Australia, following the earlier criminal conviction and A$25 million fine for NYK Line (see 'The Shipping News'). The K-Line judgment is here (handy hint - you can safely skip paras 86 through 169).

The only reasonable response to the fine is, jolly good. This fell squarely within the 'hard core' kind of cartel conduct that criminalisation was intended to punish and deter, complete with the usual cloak and dagger contrivances. NYK had had a version of Maxwell Smart's 'cone of silence', and K-Line had "reports ... often marked with words to the effect of “Confidential. Dispose of after Reading”. You can imagine some hapless manager in Tokyo trying to eat the files as the lads from Japan's Fair Trade Commission arrived.

The only smidgen of mitigation that, as an economist, you might feel for them is that, as the judge noted

41 ... the market for ocean transport service for roll-on, roll-off cargo was characterised by high capital costs with ‘lumpy’ investment, meaning that capacity could not be smoothly adjusted in response to demand.

42    The market was also characterised by long investment lead times. That was because the length of time required to commission and build a specialised car, or car and truck vessel was approximately two to three years per vessel. Such vessels were also not generally available for short term lease or charter, though in some instances space on vessels was made available between particular carriers pursuant to space chartering arrangements

But workably competitive markets are inventive enough to come up with licit solutions to these kind of problems. One is long-term 'take or pay' contracts, as you see every other day in (for example) the commercial property market, where developers line up leasing precommitments before they turn the first sod.

Lawyers should probably have a look at the bits of the judgment that discuss the extent of K-Line's cooperation with the ACCC, as described in the agreed statement of facts. The judge at [193] pointed to the "rather general and anodyne nature of some of the facts recited in it" and at [341] said it was "a statement of facts which appears to have been the product of detailed discussion and agreement between the respective legal teams. The result is a lengthy and detailed document which has no doubt been carefully crafted as a result of the negotiations, but which is nonetheless rather unhelpful in a number of important respects. The Court is left in the rather unenviable position of having to decipher and draw inferences and conclusions from that rather bland and sanitised document". You can be too clever by 'arf, in other words.

Other than that, there isn't too much to take away from the sheeting home of a particularly large, global and brazen cartel.

Except for two unsung heroes at K-Line.

One pops up at [79], where we read that "The Car Carrier Business Group General Manager was particularly distrusted by some NYK and Mitsui employees because he would sometimes compete aggressively for market share and on occasion attempt to depart from agreements reached with the other carriers" (he subsequently got sat on).

The other appears in [81], where "a Manager in one of the regional teams in the Car Carrier Business Group proposed to the Managing Executive Officer of the Car Carrier Business Group that K-Line should consider ceasing its communications with other carriers because such communications were risky for K-Line and its employees and K-Line should focus on having a strong sales force" (he - almost certainly a he - was ignored).

Well done, guys. And hopefully for their companies' sakes there aren't honest New Zealand executives in the same ignored and sidelined boat. Cartel criminalisation goes live in New Zealand from April 2021.

The wheels are back on

"The goss", I said a while back, "is that the Commission stands a good chance of having Lodge overturned in the Court of Appeal, but stranger things have happened", Lodge being the High Court case involving price-fixing amongst Hamilton real estate agents.

The Commission had rather unexpectedly lost it - "...and then the wheels came off" - but now the Court of Appeal has put the wheels back on, tightened the nuts, and banged the hubcaps into place.

In the High Court, Justice Jagose had said that the estate agents had come to a collective agreement (their agencies would stop absorbing the cost of Trade Me real estate listings and instead start charging the house sellers for it), and had given effect to it (part of it, for example, was a collective withdrawal of listings on Trade Me, which duly occurred).  But - and this was the surprise bit - the arrangement didn't breach s30 of the Commerce Act. If the seller wanted a Trade Me listing, it was still open to individual real estate agents to offer a discount or indeed carry the cost themselves if they badly wanted the listing. If the ad cost was still negotiable, then it couldn't be said that the collective agreement had controlled the price.

Not so, said the Court of Appeal. The estate agents had collectively agreed to remove State of the World A (the agencies wore the cost) and replace it with State of the World B (the vendor probably paid, but maybe twisted the arm of the agent and got it for free). That's not on: at [89]

We agree with Mr Dixon’s [John Dixon QC, for the Commission] submission that all of those vendors after January 2014 who chose not to list on Trade Me when faced with having to pay for it, and indeed those who did pay the fee, lost the opportunity to be offered a price which had been set for an agency operating in response to working competitive market forces ... Plainly the agreement in principle to withdraw from agency-paid Trade Me advertising would affect price; if the vendor did not have a Trade Me advertisement it had lost an allowance or credit that had been previously provided. The price for the real estate agencies’ services was correspondingly more.

And the Court gave a homely but useful example: at [88]

By way of example, if the retailers of motor vehicles in a street all agreed on an asking price for a certain model, aware that this was the asking price only and the end price after negotiation could be quite different, that would have an anti-competitive effect in the way discussed in Plymouth Dealers’ Association [an American case from 1960]. The starting point for one side of a negotiation about price would undoubtedly affect the end price, even if it may be possible or even likely the end price would be different from the starting point.

I could see Justice Jagose's point, but the Court of Appeal has put us both right. It's clearly the better take, and I'd be mightily surprised if the Hamilton agents press on to the Supreme Court.

Getting back onto the safer ground of economics, there was a side issue of whether economic evidence about what the real estate agents were likely to have done in any event was admissible. The High Court had said no; the Court of Appeal agreed.

And there's a lesson there for businesses in the real world. It's a recurring theme: some sort of shock happens - in this case, Trade Me tried on an enormous rise in its listing fees, in the air cargo cases airlines got whacked with new security charges - and the question arises, what to do? Chances are, in a competitive market, you're going to have to pass them on to the ultimate customer. All of you in the real estate or air freight game may have independently come to the same conclusion.

But you mustn't get together and collectively agree to do it, even if the two outcomes don't look very different. "It would have happened anyway" will be no defence. At [112] the Court of Appeal agreed with the High Court which had said at [238] that

in principle, s 30 type conduct does not avail of a competition analysis. Constraints on price-setting are deemed in breach of s 27. That the same price may have arisen in the counterfactual (ie, absent constraint) does not respond to the presence of constraint in the factual. The proposed [economics] evidence was irrelevant

So there have been twists and turns in the story, but the end point for businesses is still as I put it after the High Court: "it remains highly dangerous to go near any discussion of price or pricing models with your competitors ... How much of a cost to absorb, and how much to pass on, needs to be your own independent decision".

Double or quits?

Last month Australia's High Court told Japanese company Yazaki that no, it couldn't appeal against the record A$46 million cartel fine it had copped in Australia's Full Federal Court in May.

Now that the legal race is run, we can sit back and learn some lessons from the whole affair. Mostly, unfortunately, they're lessons about what not to do, though on the positive side they are guides to avoiding future heffalump traps.

First up in the catalogue of mistakes was Yazaki's disastrous decision to keep on fighting both conviction and penalty through the courts. Yazaki was bang to rights from the off: Yazaki and a bunch of other companies had already been convicted and fined in the US and Europe for price-fixing, bid rigging and market allocation in the market for "wire harnesses", which are things that link up the electrical components in a car. Yazaki had, for example, worn most (€125 million) of the €142 million penalty the European Commission had imposed in July 2013 for a cartel that had been ripping off Honda, Nissan, Toyota and Renault.

Sure, Yazaki had every right to claim it hadn't been ripping off Toyota in Australia (though it had). And to make the ACCC prove its case (it did). And to dispute the penalty imposed (originally A$9.5 million). But the proverbial snowball in hell had a better chance of beating the rap. Apart from the evidence in other jurisdictions of Yazaki being up to its eyeballs in wire harness rorts, Sumitomo Electric, Yazaki's comrade in cartel crime, had ratted Yazaki out both overseas and in Australia under the cartel leniency regime. Yazaki was always going to get its collar felt.

The sensible thing to have done was fold your hand as gracefully as you could. And you'd like to think Yazaki, or any New Zealand company in the same pickle, would send out for some independent economic and legal advice on the realistic chances of beating the rap and on the likely penalty (very low, and rather high, would have been the answers). But no: Yazaki appealed the original conviction in the Federal Court and the A$9.5 million penalty; the ACCC cross-appealed; and Yazaki scored one of the bigger corporate own goals of recent times, and got its fine quintupled to A$46 million.

Good. It's about time something disrupted the cynical calculus of appeals. Recall that in both Australia and New Zealand one way of setting cartel penalties is three times the profit gained from the cartel, the idea being that it acts as a disincentive to absorb cartel fines as a cost of doing business (provided the perceived chance of being detected and convicted is higher than one in three). But there's nothing equivalent deterring companies from clogging up the courts with doomed nuisance appeals. A $10 million fine? A 30% chance of getting it reduced to $5 million? A legal bill of $1 million? See you in the Court of Appeal, is the line of reasoning. This time it's fallen flat on its face, and I'm not sorry.

And it's not as if the courts are in any good place to absorb the dead weight of these nuisances. The ACCC first laid charges in December 2012. The Federal Court's liability judgement came out in November 2015 The original penalty judgement appeared in May 2017. The Full Federal Court  ramped up the fine in May 2018. The High Court finally drew two lines under the affair in October. That's nearly six years from go to whoa. I'd guess a similar timetable would have played out here in New Zealand. It's too slow. If 'hard core' cartelists like Yazaki think twice in the future before clogging up already slow courts, it'll be a good outcome.

Another lesson is that if you are in a cartel, or discover you've been in one, do not walk, do not amble, do not pause to think you're well hidden in the undergrowth and they'll never find you, RUN for the protection of the cartel leniency programme. So far Yazaki has copped well in excess of $1 billion globally, while Sumitomo Electric is home free, at least with the criminal enforcers (private class actions can't be fended off in the same way).

That was always good advice, but even more so now given the reasoning behind the Full Federal Court's whacking up the fine, and which I'd expect the New Zealand courts will be looking at. For one thing, it took the view that there were more contraventions than the Federal Court had identified (five, rather than the primary court's two, namely an overarching scheme plus a giving effect). For another, it said Yazaki's whole corporate income in Australia would go into the calculation of the maximum penalty (it ended up being a penalty based on turnover rather than on three times profits).

Yazaki wriggled: its argument was that the rest of its Australian business (which didn't even know about the cartel fix being in) shouldn't be swept into the maximum penalty calculation for what happened in one little corner. The Full Federal Court wasn't having a bar of it: at [198]

We also do not accept the respondents’ [Yazaki's] submission that the construction for which they contend is to be preferred by considering the position of a tiny subsidiary of a major Australian corporation, carrying on some very incidental and discrete part of the corporate group’s business, and engaging in cartel conduct, in circumstances where no other company in the corporate group had any knowledge of what was going on. If the consequence is that all of the values of the supplies made by every company in the corporate group were brought in, irrespective of their connection with the conduct of the contravening subsidiary corporation, we would not regard that as an absurd consequence, that is, a consequence obviously unintended by the Parliament.

One final learning is that, yet again, the primary victims of this cartel were other businesses: industrial inputs like wire harnesses are a common target for cartel operators. When it comes to debating cartel enforcement policy, it's fine for the business community to have reservations about criminalising cartels and sending ringleaders to prison, and to worry about pro-competitive collaborative activity being mistakenly characterised as anti-competitive cartels. But that's as far as concern or business solidarity should go: more businesses should realise they're the prime prey for these conspiracies, and should be supporting throwing the book at the Yazakis of this world.

Workshop takeaways

Last weekend was the latest annual workshop of the Competition Law and Policy Institute of New Zealand (CLPINZ). Wellington turned on its loveliest weather, all the speakers and discussants performed well, there were sausage rolls at the meal breaks, and during my absence in Wellington the Warriors broke their home game hoodoo and took the two points. An excellent week-end all round, and special thanks to Chapman Tripp for providing the excellent facilities.

Many of the usual suspects were at the workshop, but if you're in the game and had to miss it, head over to the CLPINZ website, sign up as a member, and you'll get access to the papers (they're not up yet, but will be). You'll also get access to previous years' presentations.

The papers speak for themselves: here are some personal thoughts I took away.

Cartels - the cause célèbre du jour is the Lodge case. This is the one where a whole bunch of real estate agencies pleaded guilty to price-fixing, but for the eponymous hold-out in Hamilton, who went to trial and to widespread surprise beat the rap in the High Court. At the time I wrote about the fines for those who had pleaded guilty and said that "in the context of small to medium provincial businesses, even to my unsympathetic eye they were looking down the severe end". Having listened to the cartels session, and to the session on coming to a negotiated settlement with the Commission, I'm more of that view now. I never thought I'd feel that way, but as David Blacktop's presentation said, there can often be some "precipitating event" that causes otherwise well-meaning, normally competitive businesses to lapse into a concerted (rather than independent) response to the event - in this case to Trade Me's attempted jack-up of real estate listing fees. No, they shouldn't collude on a response, and in principle it doesn't matter that they would have come to the same decisions independently, but all the same they got backed into a corner and were anything but the cartoon cartelists in the proverbial smoke-filled room. Time for more understanding, in my view, of the reality they found themselves in. The goss, by the way, is that the Commission stands a good chance of having Lodge overturned in the Court of Appeal, but stranger things have happened. And while we're on the topic...

The law - okay, I'm an economist, and anyone who gets their legal advice from an economist deserves what happens to them, but I've got some questions. Is there anyone on the look-out for where Australian and New Zealand competition law might be diverging? We don't want, for example, the situation John Land described, where the legal approaches to price fixing may be going down different roads. Is there any kind of trans-Tasman body that keeps a weather eye out and acts to harmonise on best practice? And speaking of harmonising on best practice, it seems from what Minister Faafoi said at the workshop dinner that reform of s36 - anti-competitive abuse of market power - will be back on the agenda next year. Good: the Aussies have fixed their equivalent, and we should get in behind. I've also got some disquiet (partly stemming from Lodge but also more generally) whether behaviour at the lower end of culpability will be prosecuted under the forthcoming criminalisation regime, rather than the 'hard core' cartels that should be its target.

Regulation - I found myself in strong agreement with Ross Patterson's response to Sasha Daniel's paper on 'The future shape of telecommunications regulation'. Ross argued that there is no lack of competition in access to fast broadband and hence no case for regulation, especially when you're regulating one technology (fibre) but not another (fixed wireless) and with a - I think he said 'clunky', but if he didn't I am - a clunky form of 'building block' price cap regulation.

The internet - our new digital economy is going to be a minefield from both competition and consumer law perspectives, and I suspect we'll be making both Type 1 and Type 2 errors for some time before we get it right, if we ever do. That was my overall impression from the keynote 'Collusion without the smoke-filled room: from public statements by wetware to algorithmic pricing by software' from Professor Joseph Harrington and 'Consumer Analytica: NZ consumer law application to international developments in privacy and use of data' from Sarah Keene. I suspect there's likely to be behaviour that is anticompetitive or unfair/misleading that will not be pinged, and behaviour that's legit that risks being rapped. Joe Harrington is surely right that we likely need jurisprudence and new guidelines to distinguish between the two, but we're still a long way from being able (for example) to "develop rules for how a platform can intervene in the setting of prices" or to "define the class of prohibited pricing algorithms".

Market studies - the papers presented at the session I chaired were absolutely on the money. If you're thinking about how the Commission should use the powers it's (more than likely) going to get, you've got to read the excellent presentations from Mike Tilley and Richard Meade. They've both had first-hand experience of doing these studies, and it showed. Market studies are a great idea, but there are more process issues to think through than you (or I) might have imagined. I'll just chuck in one final thought for MBIE's consideration: I suggest that any company that attempts to invoke our 'anti-dumping' provisions should automatically trigger a market study into its industry.

Quantification - James Mellsop and his NERA colleague Kevin Counsell gave a very good presentation on 'Mergers: exploring the economic tool box', and walked the attendees through unilateral effects in auction markets (using a pathology merger example), vertical arithmetic (a version of critical loss analysis) using the AT&T/Time Warner example, and then some Cournot modelling of a wool scouring merger (using made-up data, by the way, if anyone involved in any of those cases is wondering). Good stuff, and they got it across in a user-friendly way that - my keyboard nearly inserted 'even' - lawyers could understand. My feeling is that we are, finally, on the brink of a new more data-driven and more quantitative approach to competition analysis, after a long period when the tide had gone out a very long way indeed on playing with the numbers. As I've said a few times before (eg here or here) there's far more empirical data becoming available, and better (and often more robust) ways of interrogating it. The Commission's Reuben Irvine said that some of these quantitative techniques, like the auction and vertical arithmetic tools James and Kevin mentioned, are already in use, if somewhat behind the scenes, at the Commission, and about time, too. In my stint there, applicants and opponents very rarely reached for even the more basic econometric methods (regression, differences-in-differences), and you could go years without tripping over a correlation coefficient. We've become an immensely data-rich world: time to start using it, rather than making anecdotal guesses about (for instance) the degree to which products are or are not in the same market.

Focus on the worst

I've been reading Auckland University lecturer Ed Willis's excellent submission on the Commerce (Criminalisation of Cartels) Amendment Bill, which he's put up on his 'Great Government' blog. I don't know what other submitters have put in - at time of writing the submissions, which were due on April 9, haven't yet been put up on the Economic Development, Science and Innovation Select Committee web page about the Bill - but I'm completely on board with what Ed has to say.

His big argument is that we should keep criminalisation for the worst 'hard core' cartel cases, and he's right, for the various reasons he lists. I agree, but when you read the Bill you find that there's nothing in it about confining criminalisation to the worst cases. Here's the relevant clause:

82B Offence relating to cartel prohibition

(1) A person commits an offence if—

(a) the person,—

(i) in contravention of section 30(1)(a), enters into a contract or arrangement, or arrives at an understanding, that contains a cartel provision; and

(ii) intends, at that time, to engage in price fixing, restricting output, or market allocating

Other than the reference to intention, there's nothing there about "deception" or "dishonesty" or any other word for the "seriously bad stuff" that criminalisation would normally be appropriate for. And even intention may have been well-meant rather than predatory, for example as an ancillary provision that collaborators thought was necessary to make a go of some joint venture. There is an out in the legislation for people in that position (it's section 31(1) of the Commerce Act), but what if a court decides, after the fact, that the cartel provision wasn't, in its view, "reasonably necessary" for the joint venture? S31(1) is a pretty slim protection against accidental criminal overreach.

There needs to be a better corralling of cartel criminalisation than currently proposed. We already have a lamentably high rate of incarceration by international standards; we have been too ready to create new ‘strict liability’ offences which penalise people who had no ill intent; we maintain as criminal offences activities which many in society would no longer regard as sanctionable (‘assisted suicide’, recreational use of cannabis); some politicians, partly following overseas examples, have seen electoral advantage in being ‘tough on crime’; and in general, across many issues from commercial failure through to drug use we reach for punitive approaches which fill the prisons, instead of for rehabilitation or prevention approaches which are cheaper, more effective, and more humane.

But all that said, there's still a decent case for criminalising the worst cartels. These are cartels where the intent to cartelise is clear and deliberate; where the behaviour is covert because the cartelists recognise that it needs to be concealed both from customers and local competition authorities; where it is systematic and prolonged rather than an isolated or brief episode; where there are agreed mechanisms for reporting on the cartel’s effects, the distribution of the illicit gains, and disciplining any deviation from the cartel agreement; and where it involves senior members of the cartel companies rather than rogue junior employees possibly not acting at the behest of the company. These are seriously harmful conspiracies, and deserve their own sanction. The first criminalisation case in Australia (see 'The Shipping News') ticked all the boxes.

And quite apart from their conspiracy and deceit aspects, let's not forget the significant economic impacts, including on other (and more honest) businesses who are often the prime victims of these rorts. By far the largest survey available of the international evidence – which covered 700 instances of economic studies or court decisions which looked at cartel price increases – found that

The primary finding is that the median episodic cartel overcharge for all types of cartels over all time periods is 23.0%. It is lower for cartels with solely domestic membership (18.2%), higher for international cartels (25.1%), and highest of all for global cartels (30.4%).

But the proposed law as it stands makes no distinctions, and it should. Ed's solution is as good as any, to split out the especially bad stuff (bid-rigging and "deliberately deceptive" cartels) and leave everything else as is, as a civil rather than criminal offence.

Back to square one

First we were going to criminalise cartels - the main effect being that business executives could go to jail. That was back in October 2011 when a bill was introduced which allowed for a criminal cartel offence in addition to the existing civil offence (where companies and employees can be fined, but not jailed). And if you think October 2011 is ancient history, you're right, but then you haven't been following the recent pace of competition policy reform in New Zealand.

Criminalisation wasn't the only thing on the bill's menu. It also made various other changes, including splitting out 'cartel' into three distinct infringements (price-fixing, collective output restrictions, and divvying up markets). And it provided both exemptions from cartel accusations for various desirable business activities such as joint ventures, and a new mechanism where businesses could get a new kind of okay ('clearance') from the Commerce Commission for cartel provisions that were "reasonably necessary" for a collaboration, in addition to the existing 'authorisation' route.

The proposals made it through the Select Committee process, but in December 2015 the National government yanked the criminalisation bit (the rest of the bill made it through, a mere five years and ten months after it had been introduced). I wasn't happy about the yanking. As I said at the time

Let's get serious here. Piddling offences not worth the courts' time are prosecuted every day. But "hard core" cartels,  about as obnoxious and harmful as it gets when it comes to white collar crime, escape the dock. It's not right.

or a little later

For cases that fit the classic hard core model - anti-competitive intent that is manifestly not bona fide, secrecy, collusion, persistence, materiality - it's beyond absurd that the shop assistant who pockets $25 from the till will end up in the District Court, whereas the shadowy guys who meet on the fringes of industry fairs to steal $25 million from the public won't hear the knock of the cop at their door.

And now reason has prevailed, with the news that criminalisation is back on again. MBIE's write-up of the new Commerce (Criminalisation of Cartels) Amendment Bill can be read here, and the Cabinet paper proposing the return to square one is here.

I had some interesting exchanges on Twitter when I welcomed the tack back to the original course. As one guy sarcastically put it, "Great. I look forward to the bright line definition of cartel behaviour which unmistakably distinguishes it ex ante from pro-competitive cooperation and coordination in all circumstances, and absolutely no chilling effects through uncertainty. Brilliant".

That's fair comment, and indeed the potential chilling effect was the stated rationale for the yanking in the first place.

But personally I think there are enough safeguards to prevent chilling desirable collaboration or - more importantly - miscarriages of justice where people end up jailed for well-meant behaviour. There has to be a clear intention, or as the Cabinet paper put it in paragraph 23, "this mental element of the offence will target the offence to those persons who meant to engage in cartel conduct or who would be aware that this result would occur in the ordinary course of events". And people will be able to argue that they genuinely thought one of the collaboration/cooperation exemptions applied.

I did wonder about paragraph 33 of the Cabinet paper which said

The [Commerce] Commission has raised concerns about the breadth and complexity of the defences proposed. It will raise these concerns at Select Committee.

Concerns about the complexity - maybe. Concerns about the breadth: if the Commission thinks the defences aren't robust enough and need bolstering, excellent, but if it thinks they've gone too far, I can't agree. This is an area where criminalisation really needs to catch only the "hard core" cartels, and nothing else, and the protections need to be industrial strength to prevent a mistaken view of clause 206 in a joint venture agreement turning into a two year sojourn in Mount Eden.

I'm no lawyer (as my lawyer friends occasionally point out) but if anything I'd err even further on focussed targeting of the provisions. As extra protection, I'd be inclined to have a closer look at that "intention" element and tighten it up a bit more, especially that second leg of being "aware that this [cartel] result would occur", and at some stage the Select Committee is likely to get my best impression of the mens rea bits of Legally Blonde.

This year's RBB Economics conference

Last week's RBB Economics conference in Sydney lived up to its six excellent predecessors (write-ups of last year's: keynote addresses, using economists, mergers, competition law).

Rod Sims, the chair of the ACCC, led off on the theme of  'Towards the new era in competition law'. Mostly the 'new' bits centred around changes to legislation. The Aussies'  Competition and Consumer Act (the CCA) has a new s45 on anti-competitive 'concerted practices', and an improved version of s46 dealing with abuse of market power, which incorporates the 'effects' test for use of market power as recommended by the Aussies' Harper review of competition policy.

We, on the other hand, are still lumbered with the 'taking advantage of market power' test that the Aussies have moved on from. As our Commerce Commission said in its just-released Briefing to its Incoming Minister

The Commission supports changes to Section 36 [our abuse of market power provision] as our enforcement programme continues to be constrained by practical difficulties in applying the legal tests set down by the courts. We note that the equivalent misuse of market power provision in the Australian Competition and Consumer Act 2010 (Section 46) has been amended (and came into effect in October this year), ostensibly to overcome similar issues and limitations encountered by the ACCC with ‘market power’ cases.

Don't know what cavilling nitpicker put 'ostensibly' in there: there's no ostensibly about it. Rod Sims said that "the old Section 46 saw us powerless to deal with a range of behaviour by powerful firms in many parts of the value chain who were stopping their competitors competing on their merits". The Aussies did have issues. They did have limitations. They've had a go at fixing them. We haven't (yet).

If the Aussies are ahead of us in some areas, it was nice to see that at least sometimes we have made the running. Currently our Commission does both merger clearances (no lessening of competition involved) and merger authorisations (there's a lessening, but it's worth it on a net public benefit basis), and has done for yonks. In Australia however there was an 'informal' clearance regime run by the ACCC (though in practice it became rather formalised and not unlike our clearance process), but authorisations went to the Australian Competition Tribunal. Now both clearances and authorisations go to the ACCC in the first instance, which makes total sense. So it was nice to see our own Mary-Anne Borrowdale, general counsel in the competition branch of the Commerce Commission, explaining to the Aussies how the processes work in practice and how to make them work smoothly for everyone.

Sims also made the good point that enforcing a competition regime is even more important these days when people are more than usually concerned about inequality and inequity. As he said, "Often populism opposes the essence of our market economy because it seems to many that the common person loses out and a small elite get wealthy at their expense. As I have repeatedly said, however, the role of the CCA is to ensure that our market economy does, and is seen to, work as it should, to the benefit of people generally".

I was struck by a couple of other things he said. One was that the ACCC has five criminal cartel cases with the Commonwealth Director of Public Prosecutions on top of others they've already pinged ("shipping, polycarbonate roofing, electrical cable, air freight, electrical componentry in cars, foreign exchange in the banking sector, airline tickets, and laundry detergent"), plus "there are others in our now‑healthy pipeline from our investment in establishing our serious cartels unit". Like all cartel policemen, he's got an interest in talking up his book, if only to make cartel leniency programmes look more attractive to potential dobbers-in: those five with the CDPP for all I know could all be the other Japanese shipping lines after NYK rolled over on its erstwhile co-conspirators. But even after allowing for some puffery it does leave me wondering: if the ACCC is finding stuff, are we? And if not, why not?

Sims also said that the ACCC had won a prize for competition advocacy. I'd never heard of the International Competition Network (ICN) / World Bank competition advocacy contest: now that I have, and acknowledging that we in New Zealand can't go through life forever making invidious comparisons with our Aussie mates, I wouldn't mind at all if the Commerce Commission was on the ICN / World Bank podium some day.

Luke Woodward, partner and head of the competition and regulation practice at Gilbert + Tobin, followed Sims on the same 'new era' topic (summary here, full remarks here). It put the evolution of Australia's competition regime in historical perspective. He said that "in Australia we developed an excessive level of legal formalism, where statutory construction has at times predominated over competition analysis. This approach has been rigid and not well able to flexibly adapt to developments in thinking over time...Section 46 suffered this fate: it started poorly with judicial glosses; was put on a good workable footing... and then...an artificial and disconnected legalistic approach to causal connections was introduced. The ACCC got shy and backed off. The hunting dog retreated to the porch".

But now Australia is in a potentially better position - potentially, because it might get to a place where the substance and the economics prevail over the legalism, or it might not. As Luke said, "The ACCC’s s 45 and s 46 guidelines don’t as of yet provide any guidance around the competitive theories of harm that the ACCC considers applying. In form, they are documents that look more like they were written by lawyers or administrators with an eye to warning businesses and keeping options open; rather than written by economists articulating a coherent economic theory of harm".

Other presenters - notably Peter Armitage from Ashurst (on s45) and Kirsten Webb from Clayton Utz (on s46) - made similar points about early days, detail still needing to be filled in, and how things might yet develop through the cases. Where the Aussies take s46 in particular will be hugely important to us if (as I think likely) we'll eventually join them in changing our law to match theirs. Whether we'll opt for a 'concerted practices' provision is more debatable. I can see a logic to one, but as Armitage argued, it's not fully clear what its reach is. If it's meant to catch anti-competitive things that aren't quite caught by the traditional 'contract, arrangement or understanding', fair enough. But (as he instanced) what about the example of smaller coal or iron producers swinging in behind the prices negotiated by the big guys with the big Chinese and Japanese buyers? There's a risk of overreach.

Luke Woodward also had some questions about the ACCC's extensive series of market studies: one came out on the morning of the conference (on the dairy industry), and another one has got underway since (a highly interesting one, on digital platforms). Luke worried that they might be going too far: for example, "If regulators themselves are prone to regulatory failure,then having found market failures, we run the risk of not correcting market failures, but simply adding regulatory failure to market failure" (read his full comments on pp 9-11 of his speech). All I can say is, it's a nice problem to have: up to now our Commerce Commission has been left twiddling its thumbs. The new government, goaded by the petrol  market, looks like it'll finally - finally - let the Commission proactively look at competition issues, but at the usual glacial pace of legislative and policy change in this area it'll be late next year before they have the powers, and 2019 and beyond before we see anything from them.

We also had sessions on competition issues in key industries, the pick for me being RBB's George Siolis with his commentary on the ACCC's retail electricity inquiry. At the risk of making those invidious comparisons again, I was left with the clear view that we've managed a much better job of regulating electricity lines businesses than the Aussies have, partly because Aussie lines companies were able to see off the regulator's decisions through the courts (a bolt hole that's since been sealed off).

All up, an engrossing conference, and well done RBB Economics. We're fortunate - in Australia and New Zealand - to have a variety of high level fora where these kinds of issues can get serious treatment. On our side of the ditch, though - those damn comparisons again - we're not very good at translating them into worthwhile reforms within any sensible timeframe.

...and then the wheels came off

It was all going so well.

The Commerce Commission had pinged a whole series of real estate agencies for price fixing. The claim was that, after Trade Me tried a big jack-up of its house listing rates, the real estate companies had colluded to stop absorbing the previous, lower cost and to collectively pass on the new charges to house vendors.

Seemed straightforward. As the judge put it at [19] in the Online case, for example

Prior to the agreement, the status quo was that the cost of standard Trade Me listings was commonly absorbed by the real estate agents. In the normal course, any move to a vendor-funded listing arrangement against that background would most likely have resulted in some real estate agents electing to negotiate, thereby retaining competition in the market. Although Trade Me did not ultimately implement the per-price listing arrangement initially proposed, as a result of the Hamilton agreement the majority of Hamilton real estate agents implemented a vendor-funded model. This has been retained despite the implementation of the revised subscription model. The Hamilton agreement has brought a significant and lasting change to the market.

Sure enough one agency after another rolled over, conceded they'd contravened s30 of the Commerce Act, and agreed on penalties with the Commission, which were later ratified by the High Court.

They weren't small penalties, either: in the context of small to medium provincial businesses, even to my unsympathetic eye they were looking down the severe end. Alternatively, you could argue that the Commerce Commission was finally getting the courts to take price fixing more seriously. In any event, the Commission was enjoying a string of wins.

And then along came Justice Jagose in what I'll call Lodge & Monarch, the case where two Hamilton real estate agencies (and their principals) defended the charges. And they won.

The judge stepped through all the bits needed to prove a contravention of s27/s30.

Was there a "contract, arrangement or understanding"? Yes there was. It wasn't a cold, clear-eyed sit around a table process - the key meeting on September 30 2013 was actually a disorganised, talk-over-each-other general bitch and moan about Trade Me - but the judge found at [193] that

the defendants were part of a consensus giving rise to expectations each would not absorb the cost of Trade Me’s proposed per listing fees, and each (other than Success) would withdraw their standard listings from Trade Me by January 2014, subsequent Trade Me listings to be vendor funded. For the purposes of s27, the defendants entered into an arrangement, or arrived at an understanding, to those ends.

Did they "give effect" to it. Yes they did, as the judge found at [200]. The judge did not make a big thing of it, but the coordinated withdrawal of listings from Trade Me was highly suggestive.

Were the agencies "in competition with each other". Clearly yes. There was a little bit of argy bargy from the Commission about market definition, but nothing was going to affect  the obvious.

And then we got to the knobbly bit, "Fixing, controlling, or maintaining, of the price". Here are the key paras (my emphases):

[231] The defendants’ refusal to absorb the cost of Trade Me’s new fees says nothing about the price of their services to vendors. Nothing in the arrangement or understanding reached between the defendants constrains any freedom to charge any price to any individual vendor on any individual transaction, including by absorbing part or all of the cost of the residential property’s standard listing on Trade Me.

[232] Neither does anything in the arrangement or understanding ‘provide for’ such constraint: the only relevant constraint on an agency’s price-setting is the degree to which it is prepared to absorb, rather than to pass on, the expenses it incurs in the delivery of the service. Even if the comfort any agency drew from knowing of its competitors’ intentions made it less likely any proportion of those expenses would be absorbed, that does not ‘provide for’ price-fixing in s 30’s sense. “Providing for” means steps taken in advance of the direct fixing, controlling, or maintaining of the price as well as alternative means of achieving that result. But agencies retained their full pricing discretion, despite the arrangement or understanding.

End of story: it can't have been a price fix.

Lessons for the future, assuming the Commission doesn't appeal* and get it overturned?

The obvious one: despite the acquittal on the facts of this case, it remains highly dangerous to go near any discussion of price or pricing models with your competitors. The Commission may have been worsted on the battlefield on this occasion, but it was no accident that it ran a panel on 'The anti-competitive potential of industry groups' at its big conference this year.

And while it's tempting for people stuck in a Trade Me jack-up fix to argue, "Look, all of us going over to charging the customer for the new fee was always going to happen anyway, where's the beef?" - there were economists lined up in the background of Lodge & Monarch to argue along those lines - it won't do you any good. As Justice Jagose put it at [238]

Constraints on price-setting are deemed in breach of s 27. That the same price may have arisen in the counterfactual (ie, absent constraint) does not respond to the presence of constraint in the factual.

In the well-known air cargo cases, airlines were similarly hit with new, higher costs for the likes of airport security. Their shipper customers may also have ended up wearing the bill come what may. But it's not on (as the airlines did) to collude on a standard tariff. How much of a cost to absorb, and how much to pass on, needs to be your own independent decision.

*Update November 24 - the Commission announced it will indeed file a notice of appeal in the Court of Appeal because of "significant legal issues" arising from the case.

A blast from the past

A reader who'd liked my post the other day on The Shipping News pointed me towards something I'd forgotten (or possibly missed at the time). It's the European Union's submission on shipping cartels, made to our Productivity Commission's 2012 inquiry into freight forwarding.

Why, you may wonder, was the EU bothering with a freight inquiry at the far end of the world?

Two reasons. The EU - through its competition arm, 'DG Comp' as it's known - had an interest because it had relatively recently (2008) abolished the shipping lines' exemption from cartel laws in Europe. And because it wanted to tell us that it thought the case for allowing shipping cartels (as we were doing at the time) was a load of cobblers.

DG Comp said that more countries were bringing shipping under the competition law or had never exempted them in the first place: "exempting container shipping cartels can hardly be described as the global regulatory standard" (para 9). And it pointed out that "the EU repeal is very significant in that it expressed the unanimous agreement of the then 25 EU Member States. Any Member State could have vetoed the proposed legislation. Yet all Member States chose to support" (para 7). In other words, getting the whole 25 to agree on anything is normally a colossal exercise in cat herding, but the case for getting rid of shipping cartels was so obvious that even the fractious 25 were all on board.

DG Comp also said that if the shipping lines' argument for cartels - "stable rates and reliable services" (para 12) -  had any merit, then exporters and importers would support them, but they don't: "the shippers have repeatedly stated that they would rather have competitive prices than stable high prices" (para 12). And the shipping lines' claims about the downside of abolishing cartels - "exemption would lead to "destructive competition", increased concentration, lack of investment and reduced service" (para 13) - had not been borne out by what had actually happened in Europe when cartels got the flick.

And it made the excellent general point (para 14b) that

the liner industry is no different from other fixed-schedule, high-fixed costs transport industries (such as the airline sector or the rail sector) that function well under the standard competition law regime.

So the good news is that we did, after navel-gazing for nearly six years, see the sense of views like DG Comp's, and we finally brought shipping cartels within the general competition law. The bad news is that we continued to give the shipping lines special treatment, in particular allowing them to cooperate on "capacity adjustments in response to fluctuations in supply and demand for international liner shipping services" (s44A(8)(e) of our amended Commerce Act). If they end up having the ability to jointly determine capacity, then effectively they will have ended up with the ability to jointly determine prices, so we'd be back to square one as if price-fixing had never been outlawed. And there's a further bit of leeway in s44B relating to an exemption for "price fixing in relation to space on ship".

Another oddity of the special treatment for the shipping lines is that the amended Act (in sections 65A through 65D) introduced a new clearance regime for cartel provisions that are "reasonably necessary" for the purpose of a collaborative activity. If there is indeed, as the shipping lines argue, a necessary link between cartel provisions and running a shipping service, they, like any other group of businesses, have now got this new avenue to get the official seal of approval.

But no: it's one law for the rest of the country and one law for the shipping lines. And this for a sector that's been revealed to have been a global competition scofflaw.