First criminal cartel conviction: some initial thoughts

August 4, 2017 admin Comments 0 Comment

In brief

Yesterday (3 August 2017) the Federal Court convicted and fined Nippon Yusen Kabushiki Kaisha (NYK) for cartel conduct. The fine is significant in that it represents the first time that a corporation has been convicted and fined under the criminal cartel laws, introduced in Australia in 2009.

The cartel conduct the subject of the proceeding was said to have occurred since 1997 but, because Australia’s criminal cartel laws were only introduced in 2009, the charge related only to that portion of the cartel conduct occurring after that time and running until late 2012.

Following dawn raids on NYK and other shippers conducted by Japanese and US agencies in 2012, the ACCC contacted NYK. Shortly thereafter NYK (in October 2012) offered to fully cooperate with the ACCC investigation and subsequently continued to cooperate with the ACCC. The ACCC later referred the matter to the Commonwealth Department of Public Prosecutions, which is responsible for bring criminal cartel actions, and in 2016 the CDPP charged NYK with a cartel offence.

NYK pleaded guilty to the conduct in 2016 and, as a result of this guilty plea, combined with substantial levels of cooperation and evidence of contrition, received a fine discount of 50%, resulting in a fine of AU$25million. Justice Wigney confirmed that, but for these factors, the fine would have been $50 million, which represented half the maximum fine available to the Court for the offence. While the fine imposed is relatively modest by international standards, it is nevertheless high by Australian standards (it represents the second highest cartel penalty in Australian history).

In addition to its significance as the ‘first’ criminal cartel fine imposed under the current cartel laws, Justice Wigney’s reasons for judgment offer some insight into the seriousness with which courts will treat cartel offences and the factors which will – and will not – be considered relevant in determining an appropriate sanction. Notably, his Honour gave little weight to comparisons with similar civil cases, observing in part that:

[para 221] … the penalties imposed in the civil penalty cases, most of which were in cases that had settled on the basis of an agreed penalty and joint submissions, are of little if any assistance to the determination of the appropriate sentence in this matter.

In highlighting the seriousness of the conduct involved, Justice Wigney observed that NYK’s conduct in this case

‘was an extremely serious offence against Australia’s laws prohibiting cartel conduct’ (para 9)

and again that the

‘offence committed by NYK was on any view a very serious offence which requires condign punishment’ (para 204).

What was the charge?

NYK was charged with a single ‘rolled up’ offence; it was that NYK had given effect to a cartel provision contrary to s 44ZZRG(1) of the CCA (despite the single charge, Justice Wigney observed that there were in fact multiple offences involved over a long period of time.) The indictment was in the following terms (set out at para 4):

Between about 24 July 2009 and about 6 September 2012, in Japan and elsewhere, in connection with the transport of vehicles to Australia, Nippon Yusen Kabushiki Kaisha intentionally gave effect to cartel provisions in an arrangement or understanding with others in relation to the supply of ocean shipping services, knowing or believing that the arrangement or understanding contained cartel provisions contrary to s 44ZZRG(1) Competition and Consumer Act 2010 (Cth).

The cartel provision related to what Justice Wigney described as a ‘longstanding global cartel in a market of considerable importance to Australia: the market for the supply of ocean shipping services for “roll-on, roll-off” cargo’ – mainly cars and trucks (para 2). The conduct the subject of the charge related only to the cartel insofar is it involved shipping routes to Australia.

The international context

In September 2012 the Japanese Fair Trade Commission and the US Department of Justice conducted dawn raids on the offices of NYK and other shipping companies. This has resulted (so far) in the following cartel actions involving NYK: (from para 163)

Japan: JFTC issued administrative ‘Surcharge Payment Order’ of approximately AU$157 million as well as a ‘cease and desist order’. The conduct involved overlapped with some of the conduct the subject of this proceeding.

USA: After pleading guilty in December 2014 NYK paid a criminal fine of US$59.4 million. This does not appear to have involved any routes relevant to Australia. An individual was also fined US$20,000 and sentenced to 15 months imprisonment.

South Africa: In 2015 a settlement was reached pursuant to which NYK agreed to pay a penalty of approx AU$10.2 million)

Chile: In January 2015 the Fiscalia Nacional Economica (FNE) filed a claim; NYK was granted leniency and FNE have sought a fine of approx US$25 million against NYK (para 169)

China: In December 2015 China’s National Development and Reform Commission fined a number of shippers a total of US$65 million; however, NYK was not fined – it was the immunity applicant (para 170)

The Australian Law and its application in this case

The CCA provides for both civil prohibitions and criminal offences in respect of cartel conduct. The only relevant difference between the civil prohibitions and criminal offences is that the latter requires proof of a ‘fault’ element – that the party involved had ‘knowledge or belief’ that the contract, arrangement or understanding involved contained a cartel provision.

NYK was charged with making or to giving effect to a cartel provision contrary to s 44ZZRG. That provision is in the following terms:

(1) A corporation commits an offence if:

(a) a contract, arrangement or understanding contains a cartel provision; and

(b) the corporation gives effect to the cartel provision.

(2) The fault element for paragraph (1)(a) is knowledge or belief.

The elements required to be established were, therefore, that there was:

a contract, arrangement or understanding (an agreement)
that it contained a cartel provision
that NYK knew or believed that the agreement contained a cartel provision
that NYK gave effect to the cartel provision

Contract arrangement or understanding

There was no dispute that NYK and other shippers had ‘arrived at an arrangement or reached an understanding’ in this case (para 46)

Cartel provision

A cartel provision is defined in s 44ZZRD of the CCA. The definition runs to 36 paragraphs, but in essence provides that a provision is a cartel provision if

either the purpose or purpose/effect condition is satisfied; and
the competition condition is satisfied

Purpose or purpose/effect condition

This condition is satisfied if the provision has the purpose or effect of price fixing or the purpose of (a) preventing, restricting or limiting production, capacity or supply, (b) market sharing or (c) bid rigging.

The agreement in this case, referred to as the ‘Respect Agreement’ operated from ‘at least February 1997 between NYK and other shipping companies’ and effectively involved them agreeing not to ‘seek to alter their existing market shares or otherwise win existing business from each other’ (para 46) – this was ‘referred to as ‘maintaining the status quo’ or giving and receiving ‘respect” (para 46)

The Respect Agreement contained at least three relevant provisions which captured covered price fixing, market division and bid rigging. They were referred to as the “Freight Rate Provision”, the “Bid Rigging Provision” and the “Customer Allocation Provision” (para 48) and Justice Wigney describe each in some detail as they related to the specific definitions of cartel conduct in s 44ZZRD. His Honour observed that there was no dispute that the relevant provisions here satisfied the purpose/effect and purpose conditions (para 181). Specifically:

The Freight Rate Provision satisfied the purpose/effect condition (fixing, controlling or maintaining price);
The Bid Rigging Provision satisfied the purpose provision (bid rigging)
The Customer Allocation Provision satisfied the purpose provision (market sharing)

Competition condition

The competition condition is satisfied if at least two of the parties to the agreement are, are likely to be, or wold be (but for the agreement) competitors. It was common ground that the shippers were (or would have been but for the agreement) competitors in relation to the provisions the subject of the charge. In particular, Justice Wigney observed:

[182] As for the competition condition, it was not controversial, and in any event was fairly self- evident …

[47] … There could be no doubt that the parties to the Respect Agreement, including NYK, competed with each other in respect of the supply of the Services, or at the very least would have competed with each other but for the operation of the Respect Agreement.

Fault element: knowledge or belief

Justice Wigney observed that the fault element of ‘knowledge or belief’ in subsection 44ZZRG(2)

‘simply means that, in accordance with the general principles of criminal responsibility set out in Chapter 2 of the Criminal Code Act 1995 (Cth), it is necessary to prove that the corporation knew or believed that the relevant contract, arrangement or understanding contained a cartel provision. No fault element is specified in relation to paragraph (1)(b). It follows that the fault element for the conduct in that paragraph is intention: s 5.6 of the Criminal Code. It must accordingly be proved that the corporation intended to give effect to the cartel provision.’ [para 173] (emphasis added)

As NYK pleaded guilty, this was not contested.

Giving effect to the provisions of the Respect Agreement

His Honour noted that NSK did various things in order to give effect to the agreements (from para 55) including, for example, submitting or declining to submit bids on the basis of the agreements.

Sanction

Justice Wigney clearly condemned cartel conduct. In particular, his Honour concluded his reasons for judgment as follows (para 300):

Cartel conduct of the sort engaged in by NYK warrants denunciation and condign punishment. It is inimical to and destructive of the competition that underpins Australia’s free market economy. It is ultimately detrimental to, or at least likely to be detrimental to, Australian businesses and consumers. The penalty imposed on NYK should send a powerful message to multinational corporations that conduct business in Australia that anti-competitive conduct will not be tolerated and will be dealt with harshly. That is so even where, as here, the decisions and conduct are engaged in overseas and as part of a global cartel. As has already been explained, but for NYK’s cooperation and willingness to facilitate the administration of justice, the penalty would have been substantially higher. That should serve as a clear and present warning to others who may have, or may be considering or planning to, engage in similar conduct.

Maximum penalty

The maximum penalty is set out in s 44ZZRG as being the greater of:

(a) $10,000,000;

(b) if the court can determine the total value of the benefits that:

(i) have been obtained by one or more persons; and

(ii) are reasonably attributable to the commission of the offence;

3 times that total value;

(c) if the court cannot determine the total value of those benefits—10% of the corporation’s annual turnover during the 12-month period ending at the end of the month in which the corporation committed, or began committing, the offence.

Justice Wigney noted that it was not possible to determine the total value of benefits and that in most cases this would be ‘extraordinarily difficult’:

[para 185] It was common ground that the total value of the benefits obtained by NYK reasonably attributable to the commission of the offence could not be determined. That is perhaps not surprising. The task of determining the benefits “reasonably attributable” to the commission of all but the simplest of offences against s 44ZZRG(1) would most likely be extraordinarily difficult. That is particularly because the definition of “benefit” may be wide enough to include all manner of intangible benefits, and because the relevant benefits may include benefits obtained by “one or more persons”, who may be persons other than the offender.

In relation to annual turnover, Justice Wigney observed that:

[para 186] The calculation of an offending corporation’s annual turnover for the 12 month period before the offence may also be very difficult given the complex definition of “annual turnover” in this context. …

However, in this case, it was an agreed fact that ‘for the purpose of this proceeding that NYK’s annual turnover, as defined, from 1 August 2008 to 31 July 2009 was approximately AUD $1 billion’ with the result that the maximum fine was $100 million (10% of that turnover) (para 186).

Justice Wigney observed that the maximum penalty is generally considered a ‘guidepost’ bearing on the ultimate sentencing decision, because it ‘represents the legislature’s assessment of the seriousness of the offence’ (para 209). However, his Honour also observed that the level of assistance the maximum penalty will give will vary from case to case, and it is one of a number of factors to take into account. In the context of cartels, his Honour observed:

[para 210] The maximum penalty for an offence against s 44ZZRG(1) is somewhat unusual. Most offence provisions specify a single maximum penalty. As has been seen, s 44ZZRG(3) provides alternative maximum penalties. …

[para 211] One can readily comprehend why the legislature chose to include a maximum penalty for cartel offences which may be based on the offending corporation’s annual turnover. … specific and general deterrence must be considered to be a major consideration in determining the appropriate size of the fine to impose in relation to a cartel offence: the fine should be such as to ensure that the penalty is not to be regarded by the offender or others as an acceptable cost of doing business. The sum required to achieve that objective will generally be larger where the offending corporation is a very large corporation, as reflected in its annual turnover. That said, in some cases a maximum penalty based on the offending corporation’s annual turnover may not provide a realistic guide to the objective seriousness of the offending conduct or criminality involved in the offence. It is, for example, possible to imagine a case where a large corporation with a very high annual turnover committed a single relatively minor offence against s 44ZZRG. As the following discussion reveals, however, this case is not such a case.

His Honour also observed that it was curious that the maximum pecuniary penalty for a corporation under the civil prohibition was

[para 215] effectively the same as the maximum fine payable by a corporation which has been convicted of an offence against s 44ZZRG … It would seem that the only difference is that a criminal conviction attracts opprobrium and societal condemnation in a way that the imposition of a civil penalty cannot …

The appropriate sentence

Justice Wigney observed that NYK was to be ‘sentenced in accordance with Part IB of the Crimes Act‘ and noted the overarching principle is that any sentence imposed by the Court must be of a “severity appropriate in all the circumstances of the offence”: s 16A(1) of the Crimes Act. Subsection 16A(2) sets out a number of non-exclusive matters the Court must take into account and Justice Wigney worked through each of these in relation to this case.

Submission on appropriate fine

His Honour noted that as this was a criminal, not civil, case, the CDPP cannot propose an appropriate penalty; however, NYK can make submissions on an appropriate penalty range and the Director ‘can and should’ respond to any range proposed, indicating whether it considers ‘it would be would be open to impose a sentence within that range, or whether imposing a sentence within that range might lead to appellable error’ (para 294).

NYK suggested that, given the maximum penalty available in this case, an appropriate fine level would be between $20 – $25 million. The CDPP responded that it made no submission that the court would ‘fall into appellable error in relation to the range of penalty suggested by NYK …’ (para 296)

Factors weighing in favour of more severe punishment

Justice Wigney listed the factors tending to weigh in favour of more severe punishment as (at 298):

‘the maximum penalty (fine of $100 million)’
‘the very serious nature of the offence (involving as it did deliberate, systematic and covert conduct by relatively senior management over a lengthy period involving a large number of shipments)’ (notable, senior staff made efforts to conceal their conduct from those that might have reported it)
‘the damage, or potential damage, to the integrity of Australia’s markets and economic system caused by the conduct’ and
‘the need for general deterrence, particularly in respect of offences of this kind.’

Mitigating factors

His Honour described the ‘mitigating factors’ as (at 298)

‘NYK’s genuine contrition and rehabilitation, including the extensive steps taken by it to present any reoffending’
‘NYK’s early plea of guilty’
NYK’s significant and valuable cooperation and assistance to the ACCC and the Director in relation to the investigation of this offence and possible offences by others’
‘NYK’s undertaking to provide assistance in relation to proceedings in the future’
‘the extra-curial punishment, in the form of penalties imposed by courts and tribunals in other jurisdictions, already imposed on NYK in respect of conduct related to the relevant cartel’ and
‘the fact that NYK has not previously been convicted of any offence in Australia or overseas.’

On comparisons made with civil cases

In the course of considering an appropriate penalty his Honour dismissed references made by the CDPP and NYK to pecuniary penalties in civil cartel cases, noting they ‘provide little, if any assistance, in relation to the imposition of an adequate sentence in this matter’ (para 287). In particular, his Honour observed:

[289] … the purpose of imposing a civil penalty is different to the purpose of imposing a criminal penalty. Whereas criminal penalties import notions of retribution and rehabilitation, the purpose of a civil penalty is said to be primarily, if not wholly, protective in promoting the public interest in compliance: … Indeed, it has been suggested that punishment is not a purpose of imposing a civil penalty: … Given the differences between criminal proceedings and civil penalty proceedings … some caution must be exercised in applying to criminal sentencing the principles that have been developed in the civil penalty context.

His Honour also observed that in many of the civil penalty cases the penalties have been ‘agreed’ and that, in any event, the civil penalty cases don’t disclose any ‘discernible pattern or range range of penalties that could be transposed to the criminal sentencing context.’ (para 293).

Nevertheless, the factors identified as relevant for imposing civil penalties would be equally applicable in criminal sentencing (para 220), observing that ‘most of the factors are simply matters of common-sense’ and most are replicated in the list of considerations in s 16A(2) of the Crimes Act (para 220). The overriding principle, his Honour observed, was that the Court should weigh all relevant circumstances (para 220).

Conclusions on sentence

Considering the maximum penalty, the factors weighing in favour of severe punishment and the mitigating factors, his Honour concluded the appropriate sentence was $25m:

[para 299] Having regard to all of the relevant features and factors, and giving them appropriate weight, the appropriate sentence in all the circumstances is a fine of $25 million. That fine incorporates a global discount of 50% for NYK’s early plea of guilty and past and future assistance and cooperation, together with the contrition inherent in the early plea and cooperation: meaning that but for the early plea and past and future cooperation, the fine would have been $50 million. Of that 50% discount, 10% relates to future cooperation.For the purposes of s 16AC of the Crimes Act, it is stated that the severity of the sentence imposed on NYK has been reduced because NYK has undertaken to cooperate with law enforcement agencies in proceedings relating to alleged offences committed by others and that the sentence that would have been imposed but for that reduction was $30 million.

Some other observations of note

On the meaning of ‘likely’

Justice Wigney discussed some of the definitions contained in s 44ZZRB for purposes of the definition of cartel conduct in s 44ZZRD. One of those definitions is ‘likely’, which is defined in s 44ZZRB (in relation to the supply or acquisition of goods or services or the production of goods or the capacity to supply services’) as including ‘a possibility that is not remote’. His Honour observed:

[180] Curiously, the word “likely” is defined as including a “possibility that is not remote”, but only when used in relation to a supply of goods or services, an acquisition of goods or services, the production of goods or the capacity to supply goods. That definition would appear to extend the ordinary meaning of the word “likely”. That expanded definition would clearly apply to the word “likely” where it is used in some of the paragraphs of s 44ZZRD(2) and (3) in relation to the purpose/effect condition and purpose condition: for example, it would apply to the use of the word in s 44ZZRD(2)(c), which refers to “goods or services supplied, or likely to be supplied”. Issues may arise in relation to whether the definition of “likely” applies to other uses of the word in s 44ZZRD, including where it is used in the description of the competition condition in s 44ZZRD(4). The competition condition may be satisfied if 2 or more parties to the relevant contract, arrangement or understanding “are or are likely to be … in competition with each other in relation to … the supply of those goods or services”: s 44ZZRD(4)(a) and (c). On one view, at least, the use of the word “likely” in that particular phrase is not “in relation to” a supply of goods or services or any of the other elements of the definition in s 44ZZRB. Equally, however, it would be just a little bit bizarre if the word “likely” could have a different meaning in s 44ZZRD depending on the exact context in which it is used. …

Justice Wigney expressed some relief that it was not necessary to resolve that issue in this case!

[180] … Fortunately, it is unnecessary for present purposes to resolve any such arcane issues that may arise from the definition of “likely”.

On extraterritorial operation

As the conduct occurred outside Australia, his Honour made the following observations:

[188] … As is readily apparent from the agreed facts, all of the offending conduct occurred outside Australia. All of the collusive arrangements and discussions, and all of the contracts that resulted from them, were engaged in overseas. It would appear that none of the NYK managers who were involved in conduct were Australian citizens or residents. Section 5 of the C&C Act provides that the provisions of, inter alia, Part IV of the C&C Act extend to, relevantly, the engaging in conduct outside Australia by bodies corporate incorporated or carrying on business in Australia. NYK was not incorporated in Australia, however it is an agreed fact that NYK carried on business in Australia. It is on that basis that s 44ZZRG extends to NYK’s offending conduct, occurring as it did outside Australia. [emphasis added]

Final thoughts

The case is significant as involving the first criminal fine under the current criminal cartel laws. It was, however, a relatively straight-forward decision, given the level of cooperation and admissions made by NYK. The initial detection that prompted the cooperation and guilty plea resulted from the work of the Japanese and US agencies in conducting dawn raids in 2012.

There are, however, several takeaways from Justice Wigney’s reasons for judgment worth noting:

the application of the Crimes Act criteria (for the first time applied to a cartel case) and his Honour’s observations that the issues considered in civil cases remain relevant (and essentially common sense) and in any event overlap with the Crimes Act criteria
the confirmation that the ‘fault element’ of ‘knowledge or belief’ in s 44ZZRG requires proof that the ‘corporation intended to give effect to the cartel provision’ (para 173)
the observation that there are different rationales for civil pecuniary penalties and criminal offences so that penalties applied in civil cases do not provide a helpful guide to the appropriate fine to be imposed in criminal cases
the potential for considerable penalty reductions in the event of early guilty pleas and cooperation (in this case worth AU$50m to NYK)
clarification the right of the accused to submit an appropriate penalty (and for the CDPP to respond, though not in the form of their own proposed penalty) (quite a different process from the civil approach in which ACCC and defendant often submit agreed penalties)
the strong language adopted by Justice Wigney in relation to cartel conduct; in particular, his Honour’s observation that cartel conduct like NYK’s is ‘inimical to and destructive of the competition that underpins Australia’s free market economy.’

His Honour also highlights some of the challenges that may be associated with a more contested case.

The meaning of the word ‘likely’ in s 44ZZRB, destined to be remain contentious in the future when it might lead to ‘bizarre’ application of different meanings of the word within the same provision (s 44ZZRD)
The challenges of setting a maximum penalty; Justice Wigney was clearly relieved that the parties had agreed on a turnover figure, noting that this would normally be ‘extraordinarily difficult’. His Honour’s also provides some observations on the challenges of assessing the total value of benefits attributable to a cartel.

In addition, contested proceedings which face a jury face fairly obvious additional challenges.

Despite the (relatively) straight-forward nature of this case, it is, nevertheless, a start … finally … eight years after criminal sanctions were introduced for cartel conduct. The penalty, though small by international standards, is significant Australian standards (even if not sufficient) and may assist in changing attitudes toward cartel conduct.

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