02 August 2006
Key Points:
Private enforcement actions by cartel victims could be on the rise.
The Australian Competition and Consumer Commission ("ACCC") speaks often and volubly about its primary enforcement focus, which is the art of "cartel cracking". Cartels have been described by Australia's chief competition regulator as a "cancer on the economy" and one of the most "egregious violations of competition law ". Perhaps more than any other form of anti-competitive behaviour, cartels are regarded as threatening the heart of the competitive market championed by the ACCC.
The ACCC's focus on cartel cracking has coincided with a significant rise in media interest in and publicity about anti-cartel investigation and enforcement activities. Where companies may previously have considered side-agreements with competitors as a convenient, necessary and entrenched part of their industries, the publicity surrounding the ACCC's focus on cartel cracking means that there can no longer be any doubt about the vigour with which the ACCC will pursue suspected cartel participants.
The risk of pursuit by an enthusiastic Australian regulator is plainly visible on the radar screens of companies who have reason to suspect that they may be involved in some form of anti-competitive conduct. However, there is another, potentially more financially costly, consequence that could flow from alleged cartel involvement. The regulatory zeal for anti-cartel operations is being closely scrutinised by the inquiring minds and willing hands of Australia's plaintiff bar. Increasingly, the natural consequence of the ACCC's very public pursuit of alleged cartel participants is the commencement of private enforcement actions on behalf of the "victims" of cartels.
The purpose of this article is to identify the factors that could lead to the emergence of private enforcement actions, and the questions which ought to be asked by companies offered an opportunity to recover ill-gotten gains as victims of a proven cartel.
What is a cartel?
While the Trade Practices Act 1974 (Cth) ("TPA") does not specifically use the word "cartel", Part IV of the TPA regulates the types of conduct and arrangements (both horizontal and vertical) that constitute cartel activity. Generally, a cartel refers to an association of manufacturers or suppliers formed to maintain high prices and restrict competition (according to the Oxford Dictionary). Under the TPA, conduct such as price fixing, resale price maintenance, third line forcing, and entering into any arrangement having the effect of lessening competition is per se illegal, regardless of its purpose or effect on competition.
The TPA enables both public (ACCC) and private actions against cartel participants. Indeed, the TPA, which is now more than 30 years old, owes much of its competition jurisprudence to private, as opposed to public, enforcement actions. Public enforcement refers to investigations and court action initiated by the ACCC, the government regulator. A private enforcement action refers to a civil right of action by persons who have suffered loss as a result of a contravention of the Part IV provisions, and will usually involve a claim for damages, as well as declarations and injunctions, in an attempt to recover the losses that result from the alleged contravention (sections 82 and 87 of the TPA).
The emerging risk of private enforcement
The anticipated rise in private enforcement claims will be driven by the likely increase in the number of public enforcement actions but also by several recent developments in the Australian legal environment.
ACCC actions
It is trite to note that the more cartels the ACCC uncovers, the greater the prospect of private enforcement actions. However, it is the manner in which the ACCC is cracking cartels and then pursuing the participants that is likely to drive private enforcement.
This ACCC's approach to cartel investigations and enforcement has been complemented by the introduction of a new Immunity Policy[1]. The Immunity Policy replaces the old Leniency Policy. It has been specifically redrafted to create more incentive for cartel participants to be the first to seek immunity.
A principal link between regulatory investigations and private enforcement actions is found in one of the main requirements necessary to obtain, and maintain, public enforcement immunity. Under the Immunity Policy, the ACCC will demand complete and ongoing cooperation involving a disclosure of all the information held by that corporation evidencing its involvement in the cartel.[2] In any resulting public enforcement action against other participants the ACCC's pleaded allegations, which will usually be based on that disclosed information, become available for all to see. Such information is of great interest to those with the legal ability and commercial drive to frame a potential private recovery claim. The potential for the information disclosed as part of a cartel participant's application for public immunity to be turned against it in a private enforcement action creates a risk management issue which immunity cannot avoid.
The changing nature of private litigation in Australia
The new focus on public enforcement has coincided with a tripartite development in private litigation. These changes will give impetus to legal interest in private cartel enforcement. They promote an environment in which entrepreneurs may exploit the opportunities presented by this type of litigation, especially via class actions.
Recognition of the power and utility of class actions
Australia has become increasingly aware of the capabilities and potential of the class action. Representative proceedings, as they are known in the Federal Court, offer claimants a potentially attractive option for recovering losses resulting from a cartel. Class actions are routinely touted as a vehicle which provides affordability, efficiency and access to justice.
A cartel "victim" seeking to commence a class action need only have seven or more persons, who have claims arising out of the same, similar or related circumstances, which give rise to at least one substantial common issue of law or fact. A class action is an attractive and potentially powerful vehicle to seek recovery for harm caused by a cartel. This is especially so given certain open door features, including the opt-out procedure and the lack of a certification requirement. These features, coupled with the court's liberal interpretation of the class action requirements, create the appearance of an attractive, plaintiff-friendly enforcement vehicle.
Tort law reform
The increased recognition of the potential power of the class action procedure has coincided with a desire for new areas of practice where other traditional areas of litigation, such as personal injury and medical negligence, have declined as a direct result of tort law reform. How timely then that the ACCC announces a strong focus on public enforcement, yet remained apparently unwilling to pursue claims on behalf of individuals and corporations who have suffered losses by reason of cartel conduct. Of course, like the public regulator, not all law firms can afford to fund the pursuit of what are invariably complex claims involving detailed and expensive economic and econometric expert evidence.
Litigation funding
Enter the funder.
The difficulties arising in funding large scale, complex litigation have provided opportunities for a new form of legal entrepreneur: the litigation funder. Litigation funders provide the funds necessary to commence and maintain large scale litigation, and take a commercial percentage (return) of any damages or compensation awarded. The legality of litigation funding agreements has recently been argued before the High Court (The High Court has reserved judgment in Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd [2005] NSWCA 83). If given the green light, litigation funders have the potential to play a key role in the Australian private enforcement environment.
An apparent increase in private enforcement
Private enforcement claims, particularly class actions, are already apparent. In 2000, a massive private enforcement action was initiated against various international manufacturers and national distributors alleging cartel conduct in the Australian vitamins industry. More recently, a class action has followed in the immediate wake of public enforcement proceedings commenced against VISY and others in relation to alleged cartel conduct in the cardboard box industry.[3]
What does this mean for business?
If a company suspects that one of its officers, employees, agents or contractors may be involved in cartel behaviour, it must now consider not only the risk of ACCC investigation and enforcement, but also the increased prospect of a private enforcement claim. The prospect of a class action being commenced against a company changes the dynamic of the decision making process, and may also affect the manner in which a company approaches its application for immunity or defence of a public enforcement action.
This will not be the time for commercial "lineball calls", however carefully framed. It is a time when rapid legal investigation, firm advice and the assessment of cogent corporate governance alternatives become a necessity.
When the boot is on the other foot
As this article suggests, the recent developments in private enforcement should also be seen as a potential opportunity for corporations to recover ill-gotten gains if they have been the victims of cartel activity. As private enforcement is more commonly being pursued by class actions, and potentially litigation funders, corporations may find that they are more frequently given the opportunity to be a part of a class action, at a relatively low management cost to the corporation.
At first blush this seems a wholly attractive option for a company. However, the decision to participate in any class action, particularly those which involve litigation finding, is not without its complexities and concerns. As in any endeavour, there is really no such thing as a free lunch, even if the lawyers managing the class action present the claim as the only effective means of recovery.
There are some important questions to ask: What is the price tag? Is it the likely time period and the evidentiary requirements to prove for loss? Who will conduct the claim and what are the alternatives (if any)? What losses will be sought and what are the company's prospects in a legal system where recovery occurs at the point where the loss falls? If the claim is being promoted by a litigation funder, how does it manage the interplay between the funder's motive to make a return on an investment when matched against the corporation's interest in recovering lost money? How do those motives affect the manner in which the claim will be pursued? This is simply a cross-section of the questions which those with carriage of the private enforcement action ought to consider.
Conclusion
With the advent of the criminal cartel offence in Australia expected in 2006, and its attendant risk of jail time for executives involved in cartels, the trend towards private enforcement class actions will likely increase as the incentives to self-report move sharply higher, more cartels are reported by executives wishing to avoid jail, and the evidence they provide become available under discovery or subpoena to private claimants in their damages claims."
[1] The ACCC's new Immunity Policy came into effect on 5 September 2005. It superseded the ACCC's Leniency Policy for Cartel Conduct, which was first released in 2003. The Immunity Policy is supported by Interpretation Guidelines and the Co-operation Policy for Enforcement Matters.
[2] ACCC, Immunity Policy for Cartel Conduct, 26 August 2005.
[3] ACCC v Visy Industries Holdings Pty Ltd & Ors, VID1650/2005; Jarra Creek Central Packing Shed Pty Ltd v Amcor Ltd & Ors, NSD702/2006; Zonneveldt, Mandi, "Amcor, Visy in cartel claims", Herald Sun , 22 December 2005.For further information, please contact Andrew Morrison.
