Record $3.6 million in cartel penalties
Issued 7 April 2006/122
Koppers Arch to pay a record $3.6 million in cartel penalties
The High Court has imposed record penalties on Koppers Arch Wood Protection (NZ) Limited and its Australian parent company, Koppers Arch Investments Pty Limited, after the companies admitted participating in a cartel in the wood preservative chemicals industry between 1998 and 2002. The affected part of the industry was worth an estimated $35 million in 2002.
The total penalty imposed on the Koppers Arch companies is more than double the previous highest penalty for cartel behaviour in New Zealand. The $3.6 million comprises $2.85 million for price-fixing and $750,000 for attempts to exclude a new entrant competitor from the market. $100,000 in costs must also be paid to the Commission.
"This record penalty is a tremendous result and should make others think twice before engaging in this kind of illegal behaviour." says Commerce Commission Chair Paula Rebstock.
"Koppers' illegal gains came at the expense of ordinary New Zealanders - farmers paying more for their fence posts or home-owners paying more for their decking timber."
"This illegal behaviour has hurt New Zealand businesses and the economy. The companies who use the chemicals have paid more than a fair price for them. Overseas companies have not been subject to price fixing so New Zealand companies have been disadvantaged when competing in offshore markets."
"The illegal behaviour of Koppers
Arch was serious, it was intentional, and it was sustained,"
says Ms Rebstock.
"Cartels are internationally recognised as the very worst kind of anti competitive behaviour, and this penalty reflects the seriousness of the conduct, and the need for a strong deterrent."
"The Commission has encountered significant obstruction in the course of this investigation," Ms Rebstock says.
In June 2005 Koppers Arch NZ and its former General Manager Roy Parish pleaded guilty to breaching the Commerce Act by not producing company documents when required to by the Commission. KANZ was convicted and fined $25,000 and Roy Parish was convicted and fined $8,000. In one instance, Mr Parish hid company documents under his house, and then in another secret location, before eventually providing them to the Commission after charges were laid.
Ms Rebstock says the High Court's penalty would have been higher if Koppers Arch had not admitted guilt and cooperated with the Commission's case against other defendants. In his judgment, Justice Williams agreed with the Commission's submission that a penalty in the order of $7.2 million would have been appropriate had Koppers Arch unsuccessfully defended the case at a trial.
The Koppers Arch companies admitted breaching the Commerce Act by reaching agreements and putting them into effect. Koppers Arch admitted agreeing with their competitors to:
- share pricing
- simultaneously raise prices;
- not compete on price;
- not compete for each other's customers;
- attempt to exclude a new entrant, TimTech Chemicals Ltd, from the market; and
- attempt to eliminate TimTech from the market once it had entered.
The illegal behaviour occurred between 1998 and 2002 in markets for two wood preservatives, Chrome Copper Arsenate and Light Organic Solvent Preservative. The Commission's investigation opened in May 2002 after a complaint from competitor TimTech.
Ms Rebstock noted that High Court proceedings are continuing against other corporate defendants and company executives, and it is not appropriate for the Commission to comment on the ongoing proceedings.
Cartels harm consumers by raising prices above the competitive level. Cartels harm competitors by "ganging up" to share customers with other cartel members, and to squeeze non-cartel members out of the market. Cartels harm the New Zealand economy by making other businesses pay inflated prices for goods, resulting in more expensive end products that can't compete overseas.
In 1998 the OECD Council for Competition considered cartel behaviour "the most egregious violation of competition law and hence a principal focus of competition policy and enforcement." An OECD survey confirmed that the parties to cartel agreements, for the most part, are not honest business people who inadvertently become involved in a technical violation. Rather, they fully realised that their conduct was harmful and unlawful, causing them sometimes to go to great lengths to keep their agreement secret.
In his judgment Justice Williams notes the importance of significant penalties in deterring cartel behaviour, stating: "...[D]eterrence is a significant factor, perhaps the most significant factor, to be considered in the imposition of penalties for anti-competitive behaviour. That deterrence is not just deterrence for the particular defendant but for all others in the commercial community who might contemplate being engaged in such behaviour. And deterrence is of especial importance given that anti-competitive behaviour is almost always covert, discovery can be fortuitous and proof can be time-consuming, arduous and expensive."
The penalties fixed by the Court represented a significant discount from likely after-trial penalties, to reflect the companies' early admissions and assistance with the Commission's case against the other defendants. Koppers Arch Wood Protection (NZ) Limited and Koppers Arch Investments Pty Limited have assisted the Commission with the provision of documentary evidence, including some held overseas, and with access to overseas witnesses. In his judgment, Williams J imposed penalties that were around 50% lower than post-trial penalties, to reflect the value of these early admissions and co-operation.
The previous highest penalty was imposed in Commerce Commission v Taylor Preston in 1998. Penalties of $1.5 million were imposed on each of the three largest defendants.
The present case is the first significant case to be brought since Parliament doubled the maximum penalties that can be imposed on companies for breaching these provisions. In 2001 the maximum penalty per offence for companies was doubled from $5 million to $10million. For individuals it is $500,000.
Wood preservative market
Wood preservation of softwoods is a significant domestic and export industry. It produces a range of products, from poles and fenceposts to house framing and decking timber.
The chemicals involved in this proceeding are Chrome Copper Arsenate and Light Organic Solvent Preservative The market for these two chemicals is estimated to have reached around $35 million per annum in 2002. There are significant downstream export markets of NZ grown and treated timber to Australia and the USA in particular.
The Commission's case is that TimTech's entry into the NZ market and its ability to conduct business were affected by the breaches. The Commission also considers that the behaviour will have had an effect on the price paid by consumers for treated timber products.
Criminal prosecutions for hindering investigation
In the course of the investigation, relevant documents have been withheld. In November 2004 the Commission prosecuted KANZ and its former General Manager Roy Parish under s103 of the Commerce Act. In June 2005 KANZ and Roy Parish pleaded guilty to breaching the Commerce Act by not providing information when required. KANZ was convicted and fined $25,000 and Roy Parish was convicted and fined $8,000.
Criminal charges have also been laid under s103(2) of the Commerce Act against two other defendants for misleading and deceiving the Commission in a January 2004 voluntary interview. These prosecutions are ongoing and the defendants cannot be named.
The cartel proceedings continue against a number of New Zealand and Australian companies. Individual and corporate defendants are protesting the jurisdiction of the Court to hear these claims against them on various grounds. On 14 March 2006 the Commission filed an application to set aside the protests to jurisdiction, and filed affidavits supporting its case that the proceedings against the overseas defendants should be heard by the High Court.
The overseas defendants who are protesting jurisdiction will file their responses in May 2006. A hearing in relation to the jurisdiction issues is likely to occur in late 2006 or early 2007.
Leniency and cooperation policies
The Koppers Arch proceedings are not a case of a cartel member coming forward to an enforcement agency, providing admissions and information in exchange for "first through the door" leniency. The Commission's investigation was well advanced before any admissions were forthcoming.
The Commission encourages participants in anti-competitive conduct to approach the Commission at an early stage to admit liability. If they sign a Leniency agreement with the Commission they can be immune from Commission prosecution.