Cartels, Narcos, and the New Zealand Commerce Act

The word ‘cartel’ might suggest secret deals between drug lords (or perhaps oil company executives).  But, closer to home, cartels have also been the subject of recent changes to the Commerce Act.  Gaze Burt partner Michael Bright was closely involved as MBIE finalised the Bill that then became law.  He is therefore eminently qualified to assess whether the drug cartels portrayed in the Netflix hit ‘Narcos’ would comply with the new provisions.

The first test is whether the various parties are in competition with each other.  This is an economic, not a legal, test.  So even though the Medellin, Cali and Juarez cartels agreed at various times not to sell cocaine into each others’ territories, the fact that they would likely have sold similar product to similar customers (but for the agreement between them) meant they were in competition.

Secondly, there must be an agreement, arrangement or understanding between the parties.  This need not be a formal legal agreement.  Your classic “wink wink, nudge nudge” understanding will do.  Clearly the drug lords pass this test, although it might be difficult to find willing witnesses to the arrangement.

The arrangement must include a ‘cartel provision’.  This is any provision that has the purpose or effect of:

• influencing the price at which goods or services are bought or sold; or
• allocating or restricting the markets each party can sell to or buy from; or
• restricting output, productive capacity or the acquisition of goods or services.

Medellin and Cali agreed not to sell cocaine into each others’ territories (Miami and New York, respectively).  Cali and Juarez agreed that Juarez would distribute only Cali’s cocaine (in addition to its own).  These arrangements are both output restrictions, hence would be illegal cartel provisions under the Commerce Act.

Obviously any self-respecting drug lord needs a good ally in law enforcement.  This is where the exemptions come in.  A cartel provision will be allowed, and may be enforced by the parties against each other, if the parties fall within one of three exemptions under the Act:

• Vertical supply contracts may contain a cartel provision if it relates to the actual supply between the parties or the price at which one party may re-sell the others’ goods.
• Joint buying and promotion agreements may allow price fixing when the goods to which the provision relates were acquired collectively by the parties.
• Parties who carry on a collaborative business activity (for reasons other than reducing competition between themselves) may include cartel provisions in their arrangements, provided that the cartel provisions are no more than what is reasonably necessary for the purposes of the collaborative activity.

The Medellin and Cali cartels did not buy from or sell to each other and had no form of collaborative activity (they were too busy murdering each other).  Hence the allocation of territories between them would be illegal under the Commerce Act.  However Juarez and Cali arguably did have a collaborative activity, in that Juarez used its supply routes across the Mexican border to distribute Cali cocaine into the US and Cali contributed its extensive surveillance and security capabilities.  Without the output restrictions agreed between them, the collaborative activity would not have been possible.  Hence we reach the unfortunate conclusion that Cali and Juarez’s arrangements may have been permissible under the Commerce Act.  We suspect however that they would not fare so well under some other legislation…

The Commerce Act ‘cartels provisions’ are now in effect and there are serious consequences for breach.  Anyone contemplating an arrangement with any company that sells similar or substitute products or services to similar customers, should contact Michael before making any contact with the other company.  Furthermore, virtually all franchisors and franchisees are caught by the new laws – please contact Michael.