Cryosite has been ordered by the Federal Court to pay $1.05 million in penalties for pre-completion cartel conduct, wrapping up the first ever Australian “gun jumping” case.
The Federal Court has ordered Cryosite Limited (Cryosite) to pay $1.05 million in penalties for pre-completion cartel conduct or “gun jumping” in respect of its proposed sale of certain of its assets to Cell Care Australia Pty Ltd (Cell Care), the first ever Australian “gun jumping” case. Read more about the case in our client alert here.
The judgment also makes some interesting observations about the treatment of multiple contraventions as a single course of conduct, and the availability of divestiture orders in such cases.
Gun jumping occurs where parties that are competitors unlawfully combine or coordinate their conduct before close of a sale and purchase transaction, risking falling afoul of the prohibitions against cartel conduct and concerted practices.
In this case, Cryosite engaged in cartel conduct when it signed an agreement in June 2017 to sell the assets of its private cord blood and tissue (CBT) banking business to Cell Care with a clause requiring Cryosite to refer all customer enquiries to Cell Care before the sale was completed (the cartel provision).
From that same date, Cryosite gave effect to the cartel provision by ceasing to supply private CBT banking services to new customers, setting up a system to refer enquiries from potential customers to Cell Care, and referring enquiries to Cell Care until August 2017.
In this way, Cryosite “jumped the gun” by prematurely ceasing to compete with Cell Care prior to the proposed sale completing.
The kind of harm resulting from gun jumping was summarised by Beach J who stated that such conduct “can have the commercial but illegitimate attractions of removing price or other competition between the parties, providing access to advantageous commercially sensitive information, or generating cost savings by enabling consolidation of customer bases.”
As to the economic effects of the contravening conduct, Cryosite and Cell Care were the only private suppliers of CBT banking services in Australia immediately prior to the making of the sale agreement. The Court found that their coordination deprived those interested in obtaining CBT banking services, of the benefit of having a choice of private providers between June 2017 to August 2017, constituting a detriment to the competitive process for the supply of CBT banking services in Australia.
Size of the penalty
Cryosite was ordered to pay $1.05 million in penalties, comprising:
- $600,000 for making the sale agreement containing a cartel provision; and
- $450,000 for giving effect to the restraint.
Additionally, Cryosite was ordered to pay the ACCC’s costs of $50,000.
Justice Beach observed that there were no previous cases concerning facts that were closely comparable to the present case and concluded that therefore there was little utility in drawing a comparison with penalties ordered in other cases involving cartel conduct.
Treatment of multiple contraventions
Justice Beach found that the conduct giving effect to the cartel provision involved multiple contraventions – each time a customer or potential customer was referred to Cell Care by Cryosite amounted to a separate contravention. As Cryosite received 12 enquiries from potential customers in relation to CBT banking services, there were 12 separate contraventions.
Despite the multiplicity of contraventions, Justice Beach considered it was appropriate to characterised the discrete acts giving effect to the cartel provision as comprising a single course of conduct in light of the overlap in time, nature, context and purpose among the acts giving effect to the cartel provision. In particular, each of the contraventions occurred in the context of the establishment and implementation of the referral process, comprised similar conduct by a number of Cryosite staff members (all of which was directed at the same ends), and occurred over the same discrete period. This led to the imposition of a single penalty for the contraventions, rather than separate penalties for each contravention.
His Honour made clear that the statutory maximum penalty applies to each contravention, not to each course of conduct, even though the maximum penalty for a single contravention may be used as a guide against which to consider the whole of the overlapping conduct in that course of conduct. It does not act as a limit on the maximum penalty to be imposed for the course of conduct, however.
Despite the penalty being modest in quantum, Beach J considered the size of the penalty to be sufficient to effect specific deterrence in Cryosite’s case:
“in light of Cryosite’s size and financial position, the proposed penalties could not reasonably be regarded as an acceptable cost of doing business, and could be expected to render any risk/benefit analysis materially less palatable to other potential wrongdoers”
In particular, the sum well exceeded the value of the $500,000 non-refundable upfront payment made by Cell Care to Cryosite under the sale agreement.
Further, Cryosite’s financial position (a negative net asset position and a loss before tax in the relevant financial years) was taken into account for the purposes of determining whether the penalty amounted to sufficient specific deterrence.
Penalties absent divestiture orders
Beach J emphasised the potential for gun jumping to cause permanent structural market change. However, although the Court has the power to make divestiture orders to correct structural changes arising from an “illegal acquisition”, Beach J considered that divestiture may not be available where permanent structural change results from cartel conduct, Further, his Honour observed that divestiture orders are available only where there has in fact been an acquisition of shares or assets in contravention of the merger provisions in section 50.
In the absence of divestiture orders in the present circumstances, Beach J reasoned that the penalty gun jumping needs to be “sufficiently high to deter businesses who may otherwise be able to circumvent the proper application of s 50 and its associated divestiture remedy or at the least render less effective or nugatory such a remedy.”
Cooperation and admission of culpability
Cryosite made admissions, agreed to the making of appropriate orders, and joined in the making of submissions reflecting the seriousness of its wrongdoing. The penalty includes a discount reflecting the prompt, ongoing and voluntary cooperation with the ACCC (from the time that the ACCC made inquiries).
As ACCC Commissioner Sarah Court has said, “This outcome should be a strong reminder to competing companies that they must conduct themselves at arm’s length until a deal has been completed.”
As noted in our client alert, gun jumping cases have also been the subject of enforcement actions in the United States and the European Unions.
The case serves as a timely warning that parties to a transaction must remain independent and continue to act as competitors until the deal is completed, even if they have signed a business or share sale agreement.