Research Handbook on Cartels 1839102861, 9781839102868

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RESEARCH HANDBOOK ON CARTELS

RESEARCH HANDBOOKS IN COMPETITION LAW This highly topical series addresses some of the most important questions and areas of research in competition law and antitrust. Each volume is designed by a leading expert to appraise the current state of thinking and probe the key questions for future research on a particular topic. The series encompasses some of the most pressing issues as well as the foundational pillars of the field, including merger control, competition damages, abuse of dominance and cartels, amongst others. Each Research Handbook comprises specially commissioned chapters from leading academics and practitioners, as well as those with an emerging reputation, and is written with a global readership in mind. Equally useful as reference tools or high-level introductions to specific topics, issues and debates, these Research Handbooks will be used by academic researchers, postgraduate students, practising lawyers, competition authority officials and policy makers. Titles in the series include: Research Handbook on Asian Competition Law Edited by Steven Van Uytsel, Shuya Hayashi and John O. Haley Research Handbook on Methods and Models of Competition Law Edited by Deborah Healey, Michael Jacobs and Rhonda L. Smith Research Handbook on the Law and Economics of Competition Enforcement Edited by Ioannis Kokkoris Research Handbook on Abuse of Dominance and Monopolization Edited by Pınar Akman, Or Brook and Konstantinos Stylianou Research Handbook on Private Enforcement of Competition Law in the EU Edited by Barry J. Rodger, Miguel Sousa Ferro and Francisco Marcos Research Handbook on Cartels Edited by Peter Whelan

Research Handbook on Cartels Edited by

Peter Whelan Professor of Law, School of Law, University of Leeds, UK

RESEARCH HANDBOOKS IN COMPETITION LAW

Cheltenham, UK • Northampton, MA, USA

© Editor and Contributors Severally 2023

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2023930160 This book is available electronically in the Law subject collection http://dx.doi.org/10.4337/9781839102875

ISBN 978 1 83910 286 8 (cased) ISBN 978 1 83910 287 5 (eBook)

EEP BoX

Contents

List of figuresviii List of tablesix List of contributorsx Introduction to the Research Handbook on Cartels1 Peter Whelan PART I

FUNDAMENTAL CONCEPTS

1

The practical requirements of a successful cartel Joseph E. Harrington, Jr

2

The prevalence and injuriousness of cartels worldwide John M. Connor and Robert H. Lande

22

3

An historical account of anti-cartel enforcement Susanna Fellman and Martin Shanahan

45

4

The morality of cartel activity Andreas Stephan

73

PART II

5

SUBSTANTIVE ISSUES

5

The legal concept of a cartel Okeoghene Odudu

90

6

Cartels and the concept of the firm Christopher Sagers

102

7

The concept of a Single and Complex Continuous Infringement Stefan Thomas

118

8

Lawful cartels Or Brook

135

9

Cartel facilitation Christopher Harding

156

10

The concept of a ‘hub-and-spoke conspiracy’ Mark Furse

169

11

Algorithmic tacit collusion Ariel Ezrachi and Maurice E. Stucke

187 v

vi  Research handbook on cartels 12

Smart contracts and cartel law Salil K. Mehra

213

13

Cartels and the exchange of information Daniel A. Crane

221

14

Buyer cartels Peter C. Carstensen

234

15

Crisis cartels Éric Barbier de La Serre

251

PART III PROCEDURAL ISSUES 16

The difficulties of proving an unlawful cartel Fernando Castillo de la Torre

271

17

Leniency programmes Cristina A. Volpin and Peerapat Chokesuwattanaskul

288

18

Cartels and fines Florian Smuda

308

19

Cartel activity and recidivism Catarina Marvão

332

20

The criminalization of cartel activity Bruce Wardhaugh

351

21

Calculating cartel damages Cento Veljanovski

369

22

Cross-border cartels and international cooperation Pierre Horna and Sophie Hunter

388

PART IV CARTEL LAW IN PRACTICE 23

The European Union Paolisa Nebbia

401

24

India and Pakistan Amber Darr

419

25

Hong Kong and Mainland China Thomas K. Cheng

438

26

Association of Southeast Asian Nations Rachel Burgess

454

27

Australia and New Zealand Julie Clarke

476

Contents  vii 28

South America Juan David Gutiérrez

500

29

North America Steven F. Cherry, Claire Bergeron, Lauren Ige, Mark Katz, Dajena Pechersky, Ernesto Duhne and Ivan Szymanski

521

Index550

Figures

2.1

Trend in cumulative cartel discoveries, worldwide, 1989–2018 (with 2026 projection)

25

2.2

Locations of price-fixing (with global cartels’ locations distributed)

31

2.3

Median affected sales, all guilty cartels, region of operation, 1990–2019

31

2.4

Mean recoveries, 332 international cartels, by type and region, 1990–2019

34

4.1

The relationship between cartel conduct and moral opprobrium 

84

11.1

‘Q-Learning to Cooperate’

209

17.1

The adoption of leniency programmes globally

291

18.1

Number of cases and undertakings over time

316

18.2

Gravity factor (left) and additional amount (right) over time

317

18.3

Average final fine per case (left) and per undertaking (right) over time

318

18.4

Percentage change between base fine and provisional fine (left) and between base fine and final fine (right)

320

18.5

Average leniency discount (%) per undertaking (left) and per case (right)

320

18.6

Histograms and kernel density estimates for provisional fine-sales ratios (left) and final fine-sales ratios (right)

323

18.7

Fraction of optimal deterrent fines depending on the ratio between overcharge rate and probability of detection

326

19.1

Average leniency reduction per year, for single (‘SO’) or multiple (‘MO’) offending firms (EU cartels, 1998–2020)

342

24.1

Comparing the enforcement strategies of CCI and CCP 2007–20

429

28.1

Number of cartels fined in South America, 2000–2020

512

viii

Tables

2.1

Mean average monetary penalties, international cartels, 1990–2019

32

2.2

Median average overcharges, by year and type

41

4.1

Proportion of respondents who felt cartels are harmful and should be prohibited 82

4.2

Do members of the public support the imprisonment of those responsible?

18.1

Process of fine calculation applied by the European Commission

315

18.2

Summary statistics

317

18.3

Share of deterrent fines (in %) for different values of overcharge level and probability of detection

325

19.1

Summary of empirical studies accounting for recidivism

346

19.2

List of multiple offending firms in EU cartels with LP applications (EU cartels, 1998–2020)

346

19.3

Set of all pairs of multiple offending firms with four or more interactions (EU cartels, 1998–2020)

349

24.1

Breakdown of orders passed by the CCI 2009–20

425

24.2

Breakdown of orders passed by the CCP 2007–20

426

26.1

ASEAN cartel provisions

464

26.2

Other ‘cartel’ provisions

469

28.1

Competition authorities in South America

503

28.2

The category of ‘agreements’ in South America’s antitrust laws

505

28.3

Cartel prohibitions clauses in South America’s antitrust laws

505

28.4

Types of horizontal agreements explicitly prohibited in South America’s antitrust laws 

506

28A.1 Competition agencies that enforce cartel laws in South America

ix

82

520

Contributors

Éric Barbier de La Serre, Member of the Paris Bar and Partner at Jones Day Claire Bergeron, Counsel, WilmerHale Or Brook, Associate Professor of Competition Law and Policy, School of Law, University of Leeds Rachel Burgess, Lecturer in Competition and Consumer Law, University of Southern Queensland Peter C. Carstensen, Fred W. & Vi Miller Chair in Law Emeritus, University of Wisconsin Law School Fernando Castillo de la Torre, Director of the Competition and Mergers Team, Legal Service, European Commission Thomas K. Cheng, Professor, Faculty of Law, University of Hong Kong Steven F. Cherry, Partner, WilmerHale Peerapat Chokesuwattanaskul, Lecturer in Law and Economics at the Faculty of Law, Chulalongkorn University Julie Clarke, Professor in Competition Law, Melbourne Law School, University of Melbourne John M. Connor, Professor Emeritus, Purdue University Daniel A. Crane, Frederick Paul Furth, Sr. Professor of Law, University of Michigan Amber Darr, Lecturer in Competition Law, University of Manchester and Senior Research Fellow, Centre for Law Economics and Society, University College London Ernesto Duhne, Partner, Santamarina + Steta Ariel Ezrachi, Slaughter and May Professor of Competition Law, University of Oxford and Director, Oxford University Centre for Competition Law and Policy Susanna Fellman, Professor of Business History at the School of Business Economics and Law at the University of Gothenburg Mark Furse, formerly Professor of Competition Law and Policy, School of Law, University of Glasgow Juan David Gutiérrez, Associate Professor at Universidad del Rosario and Co-Director of the Latin American chapter of Academic Society for Competition Law (‘ASCOLA’) Christopher Harding, Professor of Law, Aberystwyth University (RIP) Joseph E. Harrington, Jr., Patrick T. Harker Professor at The Wharton School of the University of Pennsylvania x

Contributors  xi Pierre Horna, Legal Affairs Officer, Competition and Consumer Policies Branch, Division on International Trade, United Nations Conference on Trade and Development (‘UNCTAD’) Sophie Hunter, Research & Project Assistant, Competition and Consumer Policies Branch, Division on International Trade, United Nations Conference on Trade and Development (‘UNCTAD’) Lauren Ige, Senior Associate, WilmerHale Mark Katz, Partner, Davies Ward Phillips & Vineberg LLP Robert H. Lande, Venable Professor of Law, University of Baltimore Catarina Marvão, Lecturer, Technological University Dublin and Affiliated Researcher, Stockholm School of Economics Salil K. Mehra, Charles Klein Professor of Law and Government, Temple University, James E. Beasley School of Law, Philadelphia Paolisa Nebbia, Référendaire, Court of Justice of the European Union Okeoghene Odudu, Professor of Competition Law, Faculty of Law, University of Cambridge Dajena Pechersky, Associate, Davies Ward Phillips & Vineberg LLP Christopher Sagers, James A. Thomas Distinguished Professor of Law at the Cleveland State University Martin Shanahan, Professor of Economic and Business History in the School of Business, University of South Australia and Elof Hansson Visiting Professor in International Business and Trade at Gothenburg University, Sweden Florian Smuda, Professor of Statistics and Empirical Economic and Social Research, University of Applied Sciences Koblenz Andreas Stephan, Professor of Competition Law, Centre for Competition Policy and School of Law, University of East Anglia, UK Maurice E. Stucke, Douglas A. Blaze Distinguished Professor of Law, University of Tennessee College of Law Ivan Szymanski, Competition & Compliance Associate, Santamarina + Steta Stefan Thomas, Professor of Law, Holder of the Chair in Private Law, Commercial Law, Competition and Insurance Law, Eberhard Karls University, Tübingen and Director of the Tübingen Research Institute on the Determinants of Economic Activity Cento Veljanovski, Managing Partner of Case Associates, IEA Law & Economics Fellow and Visiting Lecturer at the University of Buckingham Cristina A. Volpin, Competition Policy Expert at the Organisation for Economic Co-operation and Development (‘OECD’) Bruce Wardhaugh, Professor of Competition Law, Durham Law School

xii  Research handbook on cartels Peter Whelan, Professor of Law and Director of the Centre for Business Law and Practice, School of Law, University of Leeds

Introduction to the Research Handbook on Cartels Peter Whelan

When I was approached by Edward Elgar Publishing and asked to develop and edit a Handbook dedicated solely to the topic of cartels, I was more than happy to oblige. One of my first academic projects involved my acting as an editorial assistant on a Handbook published by Edward Elgar that focused on trans-Atlantic antitrust issues – and I enjoyed the process immensely. Almost 15 years later, I found myself at that point of my career when I was seriously contemplating devising my own Handbook with an ambition similar to that displayed by the collection that introduced me to the editing process. Edward Elgar thus came knocking at an opportune time. It was much appreciated that they were fully supportive of the concept that I had been forming in my mind: the creation of a collection that would aim to be an accessible yet comprehensive Handbook that appeals to competition law stakeholders across the globe, by providing in-depth analysis, from a variety of perspectives, of the most significant issues pertaining to the legal regulation of cartels. The current book represents the realisation of that concept. In order to achieve its aim, the Handbook (a) focuses on analysing the major economic, substantive and procedural issues that are encountered in cartel law; (b) contains chapters that, taken together, adopt theoretical, legal, economic, political and comparative outlooks on the issues under discussion; (c) provides insights into the experiences of various jurisdictions (with different degrees of maturity) in their dealing with cartels; and (d) captures the views of different stakeholders, including competition law academics, competition law economists, practising lawyers and competition law enforcers. The Handbook comprises 29 chapters and is divided into four parts. The first part is dedicated to fundamental concepts. The second part focuses on the analysis of various challenging substantive issues. The third part considers various procedural issues that are particularly relevant to cartel law. The final part of the book evaluates cartel law in practice; it presents a detailed evaluation of the experiences of various representative cartel law jurisdictions worldwide. The first part of the book (‘Fundamental Concepts’) comprises four chapters. Chapter 1 was written by Professor Joseph Harrington and focuses on the practical requirements for a successful cartel. Specifically, it analyses a variety of collusive practices in order to determine how they vary in their abilities to ensure success for cartelists and in their respective creation of legal risk. Chapter 2 was co-authored by Professor John Connor and Professor Robert Lande. Focusing on the economic injuries caused by price fixing, it outlines empirical evidence on the magnitude of such injuries globally and evaluates whether the deterrence objective of competition law enforcement is being pursued effectively. Chapter 3 provides an historical account of anti-cartel enforcement. Written by Professor Susanna Fellman and Professor Martin Shanahan, this chapter outlines and analyses the broad enforcement trends of cartel law over time, mostly across western countries. Chapter 4 was written by Professor Andreas Stephan and focuses on the moral wrongfulness of cartel activity. It identifies push and pull factors that influence whether cartel activity displays moral wrongfulness in any given jurisdiction. 1

2  Research handbook on cartels It is argued that these factors can be used to identify the types of cartel activity that would be viewed as morally offensive, as well as the policy tools that could potentially be employed to strengthen the moral opprobrium associated with such activity. The second part of the book (‘Substantive Issues’) comprises 11 chapters. Chapter 5, authored by Professor Okeoghene Odudu, explores the legal concept of a cartel. It analyses two problematic aspects of legal attempts to control cartelisation: determining what is objectionable with cartel conduct (consequentially or deontologically) and demonstrating that firms have conducted themselves other than independently. Chapter 6 was written by Professor Christopher Sagers. With reference to US and EU jurisprudence, it examines the issue of distinguishing cartels from the concept of the ‘firm’. Chapter 7 focuses on the concept of a ‘single and complex continuous infringement’ that has been developed by the EU courts. Written by Professor Stefan Thomas, this chapter explores the nature of the said concept, how such an infringement can be established and its implications for both public and private enforcement of EU cartel law. Chapter 8 examines ‘lawful’ cartels. That chapter, authored by Dr Or Brook, establishes that not every agreement among horizontal competitors would be unlawful under a given regime’s competition law and argues that a common framework is lacking in the assessment of the lawfulness of ‘cartels’. Chapter 9 focuses on the issue of cartel facilitation. Written by Professor Christopher Harding, this chapter evaluates the various ways in which cartel facilitation may occur and how cartel facilitation can be viewed as a species of delinquency that should be punished under cartel law. Chapter 10 was authored by Professor Mark Furse; it examines the issue of ‘hub-and-spoke’ cartels. With reference to key case law from the US and the EU, it critically evaluates the various ways in which a ‘hub-and-spoke’ arrangement may be dealt with for the purposes of competition law. Chapter 11 considers the issue of algorithmic tacit collusion. Written by Professor Ariel Ezrachi and Professor Maurice Stucke, the chapter argues that algorithmic tacit collusion is indeed possible and that antitrust enforcers should pay it increasing attention in practice. Chapter 12 is a short chapter that explores the evolving issue of smart contracts in cartel law. In that chapter, Professor Salil Mehra posits that smart contracts have some potential to unsettle cartel law and that such law must evolve if it is to serve consumers and the public interest. In Chapter 13, Professor Daniel Crane explores the issue of the exchange of information between competitors. Noting that the exchange of information between competitors can have both pro- and anti-competitive effects, it argues that such an exchange is not likely to cause antitrust issues when it is properly structured and that antitrust enforcers should pay careful attention to the relatively clear guidance that exists with respect to evaluating the lawfulness or otherwise of information exchange between competitors. Written by Professor Peter Carstensen, Chapter 14 considers the issue of ‘buyer cartels’. Its central thesis is that buyer cartels generate significant risks for the maintenance of a competitive market process and cannot be justified in a persuasive manner. In concluding the second part of the book, Chapter 15 moves the book’s focus to the issue of ‘crisis cartels’. In that chapter, Eric Barbier de La Serre argues that a lenient approach to crisis cartels on behalf of antitrust enforcers is very difficult to rationalise and that a structural crisis is best dealt with through mergers and specialisation agreements. The third part of the book (‘Procedural Issues’) comprises seven chapters. In Chapter 16, Fernando Castillo de la Torre explores the difficulties involved in proving an unlawful cartel. With a focus on the EU, the chapter examines issues such as the burden and standard of proof, the admissibility of evidence, evidence assessment, the reliance upon direct versus circumstantial or indirect evidence and the evidential value that one should give to leniency statements.

Introduction  3 Chapter 17 considers leniency applications. In that chapter, Dr Cristina Volpin and Dr Peerapat Chokesuwattanaskul emphasise the interdependence that exists between a well-functioning enforcement system and an effective leniency policy and identify the (six) common features that successful leniency programmes share. Chapter 18 focuses on cartel fines, and specifically their deterrent function. There Professor Florian Smuda compares the cartel fines imposed by the European Commission with those dictated by economic deterrence theory, finding that there is in fact a ‘deterrence gap’ in EU cartel law. In Chapter 19, Dr Catarina Marvão examines the issue of recidivism in anti-cartel enforcement. With reference to the empirical data, it argues that while in the US ‘true recidivism’ appears to have been eliminated by the antitrust authorities, it seems to be rising within the European Union. Chapter 20 was written by Professor Bruce Wardhaugh and focuses on the criminalisation of cartel activity. Its central argument is that the pragmatic rationales for criminal cartel sanctions are dependent upon their normative counterparts and thus, when there is no normative basis for cartel criminalisation, a practical one should also be lacking. With Chapter 21, Dr Cento Veljanovski moves the book’s focus to private enforcement, in particular the issue of calculating cartel damages. With a focus on the EU and the UK, it considers a multitude of relevant issues such as: the types of damages that may be sought by the victims of cartel activity; causation; passing on; and how to determine cartel overcharges, volume effects and the duration of cartels. Chapter 22 completes the third part of the book with an analysis of cross-border cartels and international cooperation. Co-authored by Dr Pierre Horna and Sophie Hunter, that chapter examines how game theory represents a useful analytical tool for antitrust authorities in developing countries to evaluate the obstacles they may face in ensuring international cooperation in the context of anti-cartel enforcement. The fourth and final part of the book considers how competition law has been implemented in practice in a cross-section of jurisdictions globally (‘Cartel Law in Practice’). Comprising seven chapters, it examines in turn the cartel law practice of the European Union (Chapter 23 by Dr Paolisa Nebbia), India and Pakistan (Chapter 24 by Dr Amber Darr), Hong Kong and Mainland China (Chapter 25 by Professor Thomas Cheng), the Association of Southeast Asian Nations (Chapter 26 by Rachel Burgess), Australia and New Zealand (Chapter 27 by Professor Julie Clarke), South America (Chapter 28 by Dr Juan David Gutiérrez) and North America (Chapter 29 by Steven Cherry, Claire Bergeron, Lauren Ige, Mark Katz, Dajena Pechersky, Ernesto Duhne and Ivan Szymanski). Read together, those particular chapters provide important practice-focused insights that, no doubt, will be appreciated by antitrust specialists across the globe. I would like to finish this introduction to the book on a personal note. Sadly, not long before the manuscript was finalised and sent to the publisher, one of its contributors, Professor Christopher Harding, passed away. I knew Chris personally and for many years have been a huge fan of his work on cartels. I am honoured that this collection contains what proved to be his last academic piece. This book is dedicated to his memory.

PART I FUNDAMENTAL CONCEPTS

1. The practical requirements of a successful cartel Joseph E. Harrington, Jr

I. INTRODUCTION In the context of a market, collusion is coordinated conduct among firms with the intent to constrain competition for their mutual benefit. A cartel is what we call that collection of firms. This chapter examines what it takes for firms to succeed in their collective endeavour to circumvent competition. As just defined, collusion is an economic phenomenon which existed before the adoption of antitrust or competition laws.1 Indeed, it was the egregious displays of collusion that inspired those laws. If one is to understand the practices that make for a successful cartel, it is necessary to appreciate how those practices vary in their efficacy in establishing and sustaining a supracompetitive market outcome but also in their legal exposure, with the commensurate risk of shutdown by the authorities and the imposition of financial penalties. In the US, EU and many other jurisdictions, firms engage in unlawful collusion when they have an agreement to unreasonably restrain trade. According to US jurisprudence, firms have an agreement when they have a ‘unity of purpose or a common design and understanding, or a meeting of minds’2 or ‘a conscious commitment to a common scheme designed to achieve an unlawful objective’.3 This perspective is echoed by the EU Courts, which have defined an agreement as ‘joint intention’4 or a ‘concurrence of wills’.5 In short, an agreement is a mutual understanding among firms to constrain competition. Through the lens of economic theory, an agreement corresponds well with an equilibrium which sustains a supracompetitive outcome.6 In order to prove there is an agreement, a common requirement is that ‘there must be evidence that tends to exclude the possibility that the [firms] were acting independently’.7 While many avenues have been pursued to argue that firms’ conduct could not have been reached independently, ‘few courts have found a conspiracy without some evidence of communication tending to show an agreement’.8 When firms communicate in a manner pertinent to future One of the earliest recorded cartels was formed in 1470 to control the price of alum (A. Günster and S. Martin, ‘A Holy Alliance: Collusion in the Renaissance Europe Alum Market’ (2015) 47 Review of Industrial Organization 1). 2 American Tobacco Co. v United States, 328 US 781 (1946). 3 Monsanto Co. v Spray-Rite Serv., 465 US 752 (1984). 4 Case 41-69 ACF Chemiefarma NV v Commission [1970] ECR 661, 663. 5 Case T-41/96 Bayer AG v Commission [2000] ECR II-3383, para 69. 6 D. Yao and S. DeSanti, ‘Game Theory and the Legal Analysis of Tacit Collusion’ (1993) 38 Antitrust Bulletin 113; G. Werden, ‘Economic Evidence on the Existence of Collusion: Reconciling Antitrust Law with Oligopoly Theory’ (2004) 3 Antitrust Law Journal 719. 7 Monsanto Co. v Spray-Rite Serv. Corp., 465 US 752 (1984), 768. 8 H. Hovenkamp, Federal Antitrust Policy: The Law of Competition and Its Practice (5th edn, West Academic Publishing, 2016) 243. 1

5

6  Research handbook on cartels conduct (either expressing intentions or conveying information relevant to intentions), they create the legitimate concern that they have influenced each other’s conduct and, therefore, their behaviour was not reached independently.9 With regard to liability and the attendant implications of possible shutdown and penalization, it is useful to recognize three broad categories of collusive practices. First, there is collusion so egregious that, once discovered, conviction is reasonably assured. Firms who pursue that brand of collusion know it is essential not to be discovered. Second, there is collusion that is legally problematic in that, once discovered, there may or may not be prosecution, and conviction is highly uncertain should a case be brought. Less legal exposure is the appeal of these practices, but they are generally less effective as a means of collusion. Finally, there is collusion that is grudgingly accepted by courts as lawful because there is no remedy.10 An example is price signalling, whereby a firm conveys an invitation to collude through its price. Another form of lawful collusion arises when government-mandated price caps act as a focal point.11 An episode during a German spectrum auction offers an example of lawful collusion.12 The German government was selling ten blocks of spectrum with the rule that any new bid had to be at least 10 per cent higher than the prevailing bid. The bidders were Mannesman and T-Mobile. Mannesman began with a bid of 20 million (Deutsche Marks per megahertz) on blocks 1–5 and a bid of 18.18 million on blocks 6–10. Why 18.18? With the minimum 10 per cent rule, the next highest bid that T-Mobile could submit on blocks 6–10 would be 20 million. A candidate explanation is that Mannesman was signalling to T-Mobile that each company should win five blocks at 20 million. Subsequent behaviour substantiates that intent and that T-Mobile correctly interpreted the signal. In the next round of bidding, T-Mobile bid 20 million on blocks 6–10 and did not submit a bid on blocks 1–5. There were no subsequent bids and each of them ended up with five blocks at a price of 20 million. These two bidders lawfully colluded. If, prior to the auction, the two companies had verbally shared the plan that was implicit in Mannesman’s bid, they would have unlawfully colluded. The point is that collusion is an economic phenomenon whose legal status lies on a continuum, ranging from clearly illegal to clearly legal, with grey areas between. How firms communicate is determinative of their legal exposure – the likelihood they are detected, prosecuted, and convicted – and whether they are able to coordinate on and sustain a supracompetitive

When they have the object or effect of distorting competition, so-called concerted practices are also prohibited by EU competition law. Such concerted practices involve a form of coordination between firms that falls short of an agreement properly understood. This chapter focuses solely on practices that align with the notion of an agreement. 10 ‘Courts have noted that […] individual pricing decisions (even when each firm rests its own decisions upon its belief that competitors do the same) do not constitute an unlawful agreement under section 1 of the Sherman Act […] [T]hat is not because such pricing is desirable (it is not), but because it is close to impossible to devise a judicially enforceable remedy for “interdependent” pricing. How does one order a firm to set its prices without regard to the likely reactions of its competitors?’: Clamp-All Corp., 851 F.2d 478, 484 (1st Cir. 1988). 11 See C. Knittel and V. Stango, ‘Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards’ (2003) 93 American Economic Review 1703 (credit card markets); and C. Genakos, P. Koutroumpis and M. Pagliero, ‘The Impact of Maximum Markup Regulation on Prices’ (2018) 66 Journal of Industrial Economics 239 (fruit and vegetable markets). 12 P. Klemperer, Auctions: Theory and Practice (Princeton University Press, 2004). 9

The practical requirements of a successful cartel  7 outcome. Both the legal and the economic dimensions are crucial in determining a cartel’s success.13

II.

COLLUSIVE OUTCOMES

Collusion ultimately manifests itself in terms of a market outcome that raises firms’ profits and, almost universally, lowers consumer welfare. In principle, it is possible that collusion can be beneficial to both firms and consumers. If firms coordinate on higher prices but continue to make independent decisions on other strategic variables (such as service and advertising) then, given the higher profit from selling another unit (due to charging the collusive price), competition will intensify with respect to those other variables.14 It is possible that the intensification of competition on these other variables could more than offset the harm from higher prices so that consumers are better off and, at the same time, not all collusive rents are competed away so that firms remain better off.15 Theoretical possibilities aside, firms agreeing to a common price or a market allocation scheme (whereby each firm serves a segment of the market without competition) are considered sufficiently unlikely to produce substantial mitigating benefits that they are a per se (or by object) offence, rather than subject to the rule of reason (or by effect). In this section, we review some of the supracompetitive outcomes that cartels have produced. Let’s start with the canonical one: firms directly coordinate on the prices that consumers pay (that is, transaction prices). For example, members of the citric acid cartel agreed to a higher price for all customers except a firm’s largest customers who received a discount of three percent.16 Rather than coordinate on a particular price, they may instead agree to a range of prices. For example, trade associations have conspired with its members to impose a minimum price that all firms should charge.17 Even though higher transaction prices are the goal, some cartels have chosen instead to coordinate on prices that influence transaction prices. In industrial markets where firms set list prices and buyers routinely negotiate discounts off of them, cartels in urethane and cement markets agreed to a higher list price but not to discounts and, therefore, not to transaction

13 For surveys of collusive theories and empirical evidence relevant to cartel success, see M. Levenstein and V. Suslow, ‘What Determines Cartel Success?’ (2006) 44 Journal of Economic Literature 43; and J. Asker and V. Nocke, ‘Collusion, Mergers, and Related Antitrust Issues’, in K. Ho, A. Hortascu and A. Lizzeri (eds), Handbook of Industrial Organization: Volume 5 (Elsevier, 2021). 14 When firms coordinate with respect to some, but not all, of the ways in which they compete, it is referred to as semi-collusion; see F. Steen and L. Sørgard, ‘Semicollusion’ (2009) 5 Foundations and Trends in Microeconomics 153. 15 This possibility is shown in C. Fershtman and A. Pakes, ‘A Dynamic Oligopoly with Collusion and Price Wars’ (2000) 31 RAND Journal of Economics 207, for when firms collude in prices and compete in product quality. 16 This and other cases can be found in J. Harrington, ‘How Do Cartels Operate?’ (2006) 2 Foundations and Trends in Microeconomics 1. Also see J. Connor, Global Price Fixing (2nd edn, Springer, 2008), and R. Marshall and L. Marx, The Economics of Collusion: Cartels and Bidding Rings (The MIT Press, 2012). 17 For cases, see J. Harrington, ‘Heterogeneous Firms Can Always Collude on a Minimum Price’ (2016) 138 Economics Letters 46.

8  Research handbook on cartels prices.18 The presumption was that these higher list prices would ultimately result in higher negotiated prices. Given that buyers observed list prices, collusion could then affect bargaining and thereby transaction prices. However, in the EU trucks cartel, manufacturers coordinated on an internal list price which was never observed by customers.19 A higher internal list price has been argued to raise transaction prices by affecting a firm’s internal pricing process determining dealer prices. Some cartels agreed to restrict discounts, such as eliminating a cash discount for industrial purchases of salt20 and double coupons in grocery retail21 or capping discounts on travel bookings to 3 per cent.22 Yet another outcome is adopting a surcharge, while leaving cartel members with full discretion as to the other components that make up the final price. Firms coordinated on a fuel surcharge in the air cargo, air passenger and rail industries and a lead surcharge in a battery market. In some of these cases, it is not clear how it was an effective form of collusion. If firms coordinate on only list prices, why wouldn’t firms undermine the agreement by offering larger discounts in order to gain more market share? If they only agreed on a surcharge, why not try to gain market share by lowering the price of other components of the invoice? Nevertheless, collusion was effective, as evidenced, for example, in the air cargo case with customer damages exceeding US$1.2 billion. Some progress has been made on understanding how and when coordination on list prices is effective.23 The point to be underscored is that collusion intended to raise transaction prices can be achieved by coordinating on other variables which influence those transaction prices. Rather than coordinate on specific prices – whether transaction prices, list prices, discounts or surcharges – firms may agree to pricing rules or conventions that again will result in higher transaction prices. In the market for turbine generators, the only two suppliers coordinated on replacing a policy of negotiation with one of non-negotiable posted prices.24 In a stock exchange, market makers coordinated on not quoting prices ending in odd-eighths which, by raising the minimum bid-ask spread, resulted in higher price-cost margins.25 In an online market, poster sellers on Amazon Marketplace coordinated on pricing algorithms rather than individual prices.26 By doing so, they eliminated competition with each other while still competing with other sellers. Another path to higher transaction prices is to coordinate on restricting supply. Firms have used public announcements in the markets for chicken and pork to promote a collective Unless otherwise noted, J. Harrington and L. Ye, ‘Collusion through Coordination of Announcements’ (2019) 67 Journal of Industrial Economics 209, provide references for cases pertaining to coordination on list prices and surcharges. 19 Case AT.39824, Trucks, Commission decision, 19 July 2016, C(2016) 4673 final. 20 Morton Salt Company v United States, 235 F. 2d 573 (10th Cir. 1956). 21 United States v The Stop and Shop Companies, Inc., US District Court of Connecticut, No. CRE B-84-51 (9 November 1984). 22 Case C-74/14 ‘Eturas’ UAB and others v Lietuvos Respublikos konkurencijos taryba, ECLI:​EU:​C:​ 2016:​42, 21 January 2016. 23 Harrington and Ye (n 18). 24 J. Harrington, ‘Posted Pricing as a Plus Factor’ (2011) 7 Journal of Competition Law and Economics 1. 25 W. Christie and P. Schultz, ‘Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?’ (1994) 49 Journal of Finance 1813. 26 Oxera, ‘When Algorithms Set Prices: Winners and Losers’, Discussion Paper, 19 June 2017. 18

The practical requirements of a successful cartel  9 curtaining of supply.27 Alternatively, collusion could have firms allocating the market so only a subset of firms supplies a particular collection of customers. This could take the form of exclusive territories whereby each firm is given monopoly power over a particular geographic market; or, when customers are large, allocating them among cartel members. With a customer allocation scheme, a firm is not supposed to solicit the business of a customer assigned to another firm and, should the customer approach the firm, it should offer a very high price or simply decline making an offer (‘Sorry but we do not have any available inventory’). The takeaway from Section II is that there are many ways in which firms can enact a collective increase in their prices and, more generally, constrain competition in a mutually beneficial manner.28 However, so as to make for a more coherent analysis, from hereon we will generally discuss collusion in terms of directly coordinating on transaction prices. A cartel is more successful when the profits earned while colluding are higher, which will be the case when price (or, equivalently, the overcharge which measures the percentage increase in price due to collusion) is higher. While a higher price reduces how much cartel members sell, the amount of reduction in sales depends on how much demand is diverted to non-cartel suppliers. The more the cartel can limit that diversion, the more profit it will earn. A cartel is also more successful when collusion has longer duration, which requires maintaining the cartel’s stability and avoiding detection that might cause the cartel’s shutdown. Finally, a cartel is more successful when it avoids or limits penalties in the event of conviction or settlement. The remainder of this chapter will discuss the challenges faced by a cartel in seeking to be successful and how firms have met those challenges.29

III.

OVERCOMING THE CHALLENGES TO SUCCESSFUL CARTEL ACTIVITY

Towards understanding cartel success, let us begin by contemplating why collusion might not succeed or achieve only modest success. First, firms may fail to coordinate. That is, firms do not agree to constrain competition or do not agree on a collusive arrangement. Second, firms may coordinate but the collusive arrangement is internally unstable. That is, there is a lack of compliance among cartel members which then reduces efficacy – overcharges are low, collusion periodically breaks down – and might result in the cartel’s collapse. Third, firms may coordinate on an internally stable collusive scheme but it is externally disrupted by non-cartel suppliers. As a result, the cartel sells fewer units and limits the overcharge in order to stem non-cartel supply, and its duration may be shortened because external instability spills

J. Harrington, ‘Collusion in Plain Sight: Firms’ Use of Public Announcements to Restrain Competition’ (2022) 84 Antitrust Law Journal 521. 28 A class of collusive outcomes not covered is when firms coordinate to perform exclusionary activities against some class of competitors. For some examples, see J. Kwoka, ‘Agreeing to Exclude: The North Carolina State Board of Dental Examiners’, in J. Kwoka and L. White (eds), The Antitrust Revolution: Economics, Competition, and Policy (7th edn, Oxford University Press, 2019); and L. Garrod, J. Harrington and M. Olczak, Hub-and-Spoke Cartels: Why They Form, How They Operate, and How to Prosecute Them (The MIT Press, 2021) Chapter 5. 29 Market conditions that contribute to a successful cartel are not reviewed here. The interested reader is referred to M. Motta, Competition Policy: Theory and Practice (Cambridge University Press, 2004). 27

10  Research handbook on cartels over to internal instability. Fourth, the cartel may fail because it is caught by public or private enforcers. We will examine each of these four challenges in turn: (a) coordination; (b) internal stability; (c) external stability; and (d) avoiding detection and penalization (enforcement). A. Coordination Though collusion is a joint activity, it begins with one firm (or, more exactly, one firm’s executives) deciding to shift rival firms’ beliefs that they are competing to a common belief not to compete, along with decisions as to how they are to constrain competition. To make this happen, a firm engages in a coordinating practice, which is communication intended to coordinate on a collusive arrangement.30 As we describe later, a cartel will communicate for other purposes but here it is done in order to agree not to compete and how not to compete. In seeking to coordinate, a firm communicates a message – either through an announcement or an action – which is conveyed privately (only among the prospective cartel members) or publicly (easily accessed by other market participants). An announcement is the expression of language, broadly defined. An action is an act that has consequences independent of the information that it delivers, while an announcement has consequences only because of the information that it delivers. For example, the announcement of a firm that it will raise price by 10 per cent in 30 days has consequences only if it conveys information that changes what other agents do, whether it induces customers to buy earlier (in order to avoid the anticipated price increase) or rival firms to match the price increase (so it is a coordinating practice). In contrast, the action of raising price by 10 per cent has consequences irrespective of the information that it delivers. Whether or not rival firms interpret a firm’s price increase as an invitation to collude, the firm’s revenue and profit will change, because fewer consumers will buy and those that do buy pay more. Let us begin by considering the use of announcements for firms to coordinate. The canonical coordinating practice is express communication, in which firms openly share their intentions and plans using natural language. For example, in the fine arts auction houses cartel, the Chairman of Christie’s conveyed to Sotheby’s Chairman: ‘We’re getting killed on our bottom line. I feel it’s time to increase pricing.’ Sotheby’s Chairman responded: ‘I agree. But it’s your turn to go first this time.’31 Here we have an unambiguous invitation to collude and acceptance of that invitation, which did indeed work, as both auction houses raised their commission rates. The history of cartels is replete with such cases. While such direct, unvarnished language is the most effective means to coordinate, it also delivers the most compelling evidence for proving a violation of competition law. Consequently, less transparent announcements may be used which, while less effective, leave less of an evidentiary trail. This category includes unilateral announcements whereby a firm expressly invites other firms to collude and, rather than soliciting an express acceptance, counts on them to act accordingly. This could take the form of a written letter describing

30 For a comprehensive discussion of communication in the context of cartels, see L. Kaplow, Competition Policy and Price Fixing (Princeton University Press, 2013) Chapter 3. 31 C. Mason, The Art of the Steal: Inside the Sotheby’s-Christie’s Auction House Scandal (Berkley, 2004) 121.

The practical requirements of a successful cartel  11 a collusive plan which is sent to all firms with the letter noting it has been sent to all firms32 or announcing a plan to increase price at a private meeting with other firms.33 The coordinating practices mentioned thus far all share the features of private communication with a reasonably explicit invitation to collude. Coordinating practices can also encompass public announcements such as advance price announcements. Consider a firm contemplating a joint increase in firms’ prices. It could raise its price hoping that other firms would interpret it as an invitation to collude. However, that is somewhat risky, for other firms may not follow and, in the meantime, the firm is losing sales. Alternatively, it could publicly announce a future price increase (specifying the amount and date) and wait for other firms to respond. If they make the same announcement, then firms have a ‘meeting of minds’ and implement the proposed price increase. If not, then the original firm retracts its announcement. This was the collusive theory used by the US Department of Justice against several airlines.34 Of course, firms will claim the announcements are intended to inform customers of future prices, which may well be true. That customers are a possible audience can make these cases difficult to prosecute but also make advance price announcements less effective as a means of collusion, since other firms may be uncertain as to whether there is an invitation to collude. Firms have also coordinated by using public announcements that refer to rival firms’ conduct rather than a firm’s own conduct. Three classes of messages have been identified.35 First, a firm describes how its future conduct is contingent on rival firms’ conduct. An example is AirTran stating during an earnings call that it would adopt a first-bag fee but only after its main competitor, Delta Airlines, did so. Shortly thereafter, internal documents show that Delta changed its decision and adopted a first-bag fee. Through further public announcements, the two airlines initiated the same fee on the same date. In this case, public announcements were used to form an agreement between firms to have a leader–follower arrangement which then resulted in a supracompetitive outcome. A second class of messages is when a firm announces how rival firms or the industry at large should behave. Examples are episodes of ‘capacity discipline’ in the airline and steel industries. Through earnings calls and statements at industry meetings, senior executives criticized past conduct as having been too aggressive and encouraged all firms to reduce capacity and supply in order to raise prices. Market data and their own subsequent announcements showed they succeeded. The third class has a firm announce how rival firms or the industry at large will behave. This forecast of future conduct could be an invitation to firms to act consistently with that forecast. As of yet, there are no documented episodes. A firm can also use actions to coordinate. In the turbine generator market, it has been argued that General Electric’s shift from negotiating with buyers to setting a non-negotiable price was an invitation to Westinghouse to collude because such a pricing policy could only be in GE’s self-interest if Westinghouse were to match that policy and coordinate its prices.36 Westinghouse did match it and supracompetitive prices followed as GE acted as a price leader.

Interstate Circuit, Inc., et al. v United States, 306 US 208 (1939). United States v Foley, 598 F.2d 1323 (4th Cir. 1979). 34 S. Borenstein, ‘Rapid Price Communication and Coordination: The Airline Tariff Publishing Case’, in J. Kwoka and L. White (eds), The Antitrust Revolution: Economics, Competition, and Policy (4th edn, Oxford University Press, 1994). 35 Harrington (n 27). 36 Harrington (n 24). 32 33

12  Research handbook on cartels Another avenue is price signalling, which, it has been argued, could be used to form an agreement, though not one that would be unlawful: ‘If a firm raises price in the expectation that its competitors will do likewise, and they do, the firm’s behavior can be conceptualized as the offer of a unilateral contract that the offerees accept by raising their prices.’37 In a meticulously documented analysis, price signalling was shown to be an effective form of collusion in an Australian gasoline market.38 In the same spirit is signalling through bids, as occurred in Federal Communications Commission (‘FCC’) spectrum auctions.39 As part of a market allocation scheme, a bidder used the last three digits of a multi-million dollar bid to signal to another bidder not to bid on a particular licence (which the FCC had numerated using three digits). As has been described, there is a wide array of coordinating practices. We next turn to exploring why they might fail in achieving a ‘meeting of minds’. One obvious source of failure is miscommunication; that is, the sending of a message fails to result in the receiver drawing the intended inference. Miscommunication may occur due to messages lacking clarity or veracity. Clarity refers to the ease with which the receiver can infer the meaning that the sender would like the receiver to infer. Veracity refers to the degree to which the meaning that the sender would like the receiver to infer reflects the sender’s true intentions. Clarity can be challenging when announcements do not involve the express use of natural language. For example, will rival firms interpret an advance price announcement as an invitation to collude? Will a higher price be so interpreted? Regardless of the mode of communication, veracity can be problematic because, even when the intended content of a message is clear, there may be a lack of trust. Ironically, the illegality of inviting a competitor to collude could actually enhance its veracity, as it may only be optimal for a firm to incur the risk of penalties if it intended to coordinate on higher prices.40 A second reason that coordinating practices may fail to deliver an agreement is due to bargaining breakdown. Even if messages are correctly interpreted and believed, there may be disagreement as to whether to collude or with regard to the collusive outcome or arrangement. In crystal clear language, the CEO of American Airlines invited Braniff Airlines to collude: ‘Raise your goddamn fares twenty percent. I’ll raise mine the next morning. You’ll make more money and I will too.’ However, Braniff’s CEO declined the invitation (and, having recorded the conversation, shared it with the US Department of Justice).41 Even if firms agree to collude, they may disagree on the collusive arrangement. There could be different views on the best collusive price. In a Quebec gasoline cartel, it took about 65 phone calls for several cartel members to agree to a price increase.42 Given that firms were heterogeneous – varying in their cost, number of stations, sale of complementary products – they probably had different views as to the most appropriate common price. Even if they In re High Fructose Corn Syrup Antitrust Litig., 295 F.3d 651, 654 (7th Cir. 2002) (Posner J). D. Bryne and N. de Roos, ‘Learning to Coordinate: A Study in Retail Gasoline’ (2019) 109 American Economic Review 591. 39 P. Cramton and J. Schwartz, ‘Collusive Bidding: Lessons from the FCC Spectrum Auctions’ (2000) 17 Journal of Regulatory Economics 229. 40 H. Aghadadashli and P. Legros, ‘Let’s Collude’, Working Paper, Universite Libré de Bruxelles, 4 September 2020. 41 United States v American Airlines, 743 F.2d 1114 (5th Cir. 1984). 42 R. Clark and J.F. Houde, ‘Collusion with Asymmetric Retailers: Evidence from a Gasoline Price-Fixing Case’ (2013) 5 American Economic Journal: Microeconomics 97. 37 38

The practical requirements of a successful cartel  13 do agree on price, they are likely to disagree on the allocation of demand. Market allocation is a zero-sum game, for the more sales one cartel member receives, the fewer sales there are to go to other members. A bromine cartel often experienced price wars due to bargaining breakdown as some cartel members sought to renegotiate the collusive outcome.43 The lysine cartel had no difficulty agreeing to a common price but struggled with finding sales quotas to satisfy all members.44 Though initially able to raise price without having settled upon a market allocation, the arrangement soon unravelled with a series of price cuts as firms sought to gain more market share. Only after coming back to the bargaining table and settling on an allocation was the cartel successful. Critical to the selection of coordinating practices is the efficacy–exposure trade-off. Coordinating practices vary in terms of their efficacy in achieving mutual understanding that firms will not compete and how they will collude. They also differ in terms of their legal exposure and, more specifically, the likelihood of detection and penalization. There is generally a trade-off because coordinating practices which are more effective for collusion also tend to come with more exposure. Private, express and unfettered communication is strong on efficacy but comes with considerable exposure. Though detection may be low by virtue of being private, conviction is high conditional on detection. In comparison, public announcements about rival firms’ conduct (for example, encouraging the industry to restrict supply) and advance price announcements are less effective and easier to detect but more difficult to prosecute. They are less effective and less prosecutable for the same reason: they could be intended for other market participants such as customers, input suppliers and investors. Using actions to coordinate – such as price signalling – is, compared to those public announcements, even less effective and, in most instances, comes with minimal or no legal exposure. Public announcements and actions are also less effective because they constrain the type of collusive arrangement. For example, advance price announcements may be able to coordinate on price but not on a market allocation scheme. Finally, it is worth emphasizing that leniency programmes, which have been quite useful in detecting and prosecuting cartels, are generally relevant only when firms engage in express, unfettered communication so that a leniency applicant has direct evidence of an agreement. Firms wary of a leniency programme may then opt for a subtler coordinating practice. B.

Internal Stability

Let us suppose firms agree to raise their prices to some common level (or by some common percentage) above the existing competitive price. This agreement comes with a source of potential instability in that there is a temptation to cheat. The competitive price has the property that it maximizes a firm’s current profit given other firms are charging the competitive price; in other words, each firm is doing the best it can given the prices set by competitors. Should rival firms raise their prices by, say, 10 per cent, the firm would also want to raise its price, for it now faces stronger demand given that customers find the alternative – rival firms’ products – to be priced higher. However, in maximizing current profit, the firm would raise its price by less than 10 per cent as it seeks to pick up more market share at this supracompetitive M. Levenstein, ‘Price Wars and the Stability of Collusion: A Study of the Pre-World War I Bromine Industry’ (1997) 45 Journal of Industrial Economics 117. 44 Case COMP/36.545/F3, Amino Acids, Commission decision, 7 June 2000, [2001] OJ L 152/24. 43

14  Research handbook on cartels price-cost margin. Thus, if the collusive agreement calls for it to raise price by 10 per cent along with all other firms, a firm is foregoing some current profits in doing so. There is then a temptation to cheat by undercutting the collusive price set by rival firms. In its simplest terms, this is the challenge for internal cartel stability. In practice, this temptation to cheat is neutralized by firms adopting strategies that embody a reward–punishment scheme. This strategy makes a firm’s current conduct (what price to charge) contingent on firms’ past conduct (what prices were charged). If a firm abides by the collusive outcome – which could involve high prices, sales quotas, customer allocation, etc. – then it is rewarded in the future by rival firms continuing to abide by the collusive outcome (for example, charging high prices, not selling more than their quotas, staying away from other firms’ customers), while if it departs from the collusive outcome (for example, setting a low price, selling above its quota, serving another firm’s customers), then it is punished in the future by rival firms acting aggressively to reduce the deviating firm’s profits (for example, lowering prices, selling more, soliciting the deviating firm’s customers). Collusion is a common understanding among firms that ties future rewards and punishments to current behaviour and, when effective, induces compliance with the supracompetitive outcome. This understanding can be viewed as contractual, though, where the penalties for acting contrary to the terms of the contract take the form of rival firms’ future punishing behaviour. Embodying this reward–punishment scheme, a collusive strategy is composed of three elements, some of which may be implicit but still understood by cartel members. First, there is the collusive outcome, such as what common price is to be charged. Second, there is the monitoring protocol, which refers to how firms will monitor each other for compliance with the collusive outcome. Third, there is the punishment that occurs when there is evidence of noncompliance. A cartel is internally stable when, given the reward–punishment scheme embodied in the collusive strategy, it is in each firm’s best interests to comply by acting in accordance with the collusive outcome. This means that the short-run gain in profits by deviating (for example, undercutting the collusive price and gaining more sales) is exceeded by the expected foregone future profits from the deviation being detected and the resulting lower profits from the punishment. The internal stability condition can be represented as: Collusive Profit + Expected Value of Future Collusive Profits > Deviation Profit + Expected Value of Future Punishment Profits.

The Expected Value of Future Collusive Profits encompasses the likelihood of continued collusion and possible future punishments in response to evidence of noncompliance, as well as possible cartel collapse. The Expected Value of Future Punishment Profits encompasses the likelihood that a deviation is detected and punished, as well as the likelihood that the firm gets away with it and collusion continues uninterrupted. The internal stability condition can be rearranged to: Future Loss from Deviation > Current Gain from Deviation

The practical requirements of a successful cartel  15 where Future Loss from Deviation = Expected Value of Future Collusive Profits - Expected Value of Future Punishment Profits Current Gain from Deviation = Deviation Profit - Collusive Profit.

The internal stability condition is more likely to be satisfied when deviations are detected sooner (which implies the current gain from deviation is lower) and the punishment is more severe (so the future loss from deviation is greater). As noted earlier, the charging of a higher common price will intensify competition along non-price dimensions. The more that the cartel can control those other dimensions and thereby keep collusive profit high, the more likely the internal stability condition is satisfied.45 Finally, when a firm cares more about future profit relative to current profit, the future loss from a deviation will loom larger and that will enhance stability. Satisfaction of the internal stability condition is one of the determinants of the collusive price. As the collusive price is set higher, the current gain from deviation increases as a given rise in sales from undercutting the collusive price yields more profits. On the other hand, a higher collusive price raises collusive profits and thus increases the future loss from a deviation. Generally, economic theory has shown that the first effect is larger in magnitude so that a higher collusive price makes it less likely the internal stability condition is satisfied. A cartel will then be constrained as to how high it sets the collusive price, for it will want to balance higher collusive profits against shorter duration due to a less stable cartel. Colluding firms will also limit how fast they raise prices. Constraining forces include cartel detection (inexplicably large price increases may cause customers to suspect collusion), learning (firms may be uncertain how high a price is stable and thus need to experiment) and buyer resistance (industrial buyers may threaten delaying purchases). Consequently, cartels tend to gradually raise price, as evidenced, for example, by cartels in citric acid and vitamins46 and in graphite electrodes.47 Monitoring for compliance is crucial for internal stability. If monitoring is less effective then the probability of a deviation being detected will be lower, which makes deviation more attractive. With retail markets, a firm’s price is posted (either in stores or online), which makes monitoring fairly straightforward. If retailers form a cartel and agree on certain prices, each can monitor the others for compliance. Price monitoring is well documented for cartels involving grocery stores, drugstores and many other retailers.48 In some of these cartels, an upstream manufacturer assisted in collecting price information as part of a hub-and-spoke cartel (which are covered below, in Chapter 10). Monitoring is a very different exercise with industrial products because transaction prices are often not public information. Those markets are typically characterized by the setting of list prices with buyer-specific discounts. That means the price that a buyer pays is private 45 In addition to commission rates, the fine arts auction houses cartel coordinated on many non-price dimensions: Mason (n 31), 119. 46 Connor (n 16). 47 M. Levenstein and V. Suslow, ‘Contemporary International Cartels and Developing Countries: Economic Effects and Implications for Competition Policy’ (2004) 71 Antitrust Law Journal 801. 48 Garrod, Harrington and Olczak (n 28).

16  Research handbook on cartels information to it and the seller, and thus is not observed by other sellers. Though a firm’s sales representative may periodically learn from customers what prices other firms are offering, such information is sporadic and not always reliable. If a cartel coordinates on setting some common transaction price but those prices are difficult to observe, there is the concern that a deviation might not be detected, which will then encourage deviations and undermine cartel stability. One response is to coordinate on list prices, for they are observable. While we have noted that some cartels pursued that strategy, it is a less effective form of collusion because it does not control discounts. More common is for a cartel to coordinate on transaction prices and put in place a market allocation scheme and to monitor sales rather than prices.49 For example, the lysine cartel agreed to a price and a global sales quota for each of the five cartel members: Ajinomoto – 73,500 tons; Archer Daniels Midland (ADM) – 48,000 tons; Kyowa – 37,000 tons; Sewon – 20,500 tons; Cheil – 6,000 tons. Each month, sales were reported to one of the cartel members, which were then shared at the quarterly meetings. Firms were complying as long as they did not sell more than their quota. As an ADM executive announced at a cartel meeting: ‘If I’m assured that I’m gonna get 67,000 tons by the year’s end, we’re gonna sell it at the prices we agreed to and I frankly don’t care what you sell it for.’50 Sales monitoring is made easier when the market allocation scheme assigns geographic markets or customers to cartel members. If a firm is not supposed to sell in a particular territory or to a particular customer, deviation is easily detectable. When it comes to monitoring, there are two other advantages of these schemes over sales quotas. First, a firm may not have full control over its sales due to unpredictability in its customers’ demands (and not wanting to upset customers by limiting supply) or some customers choosing to switch suppliers. Thus, a firm may exceed its sales quota even when it sets the collusive price. Second, a challenge with the use of sales quotas is that it requires cartel members to accurately report their sales, but a firm could easily have an incentive to underreport when it has oversold. We will return to that issue – and how cartels solved it – when discussing punishments. While allocation by territories or customers allows for more effective monitoring than sales quotas, some industrial markets do not lend themselves to divvying up the market in such a manner. Furthermore, there is the concern that the lack of willingness to serve some customers might create suspicions that firms are colluding. Monitoring serves both an ex ante and ex post role. Ex post, detection of a deviation offers an opportunity to induce the noncompliant firm to get back in line with the cartel plan. The well-documented sugar cartel showed that cartel meetings were often used for this purpose.51 However, more critical for the internal stability of the cartel is the ex ante role of monitoring. If a cartel member anticipates that it will be monitored and subsequently punished should it deviate, it will then be more inclined to comply. Thus, an essential complement to monitoring is the threatened punishment, to which we now turn. A punishment results in the cartel member suspected of deviation earning lower profits than if there had there been no evidence supporting its deviation. Let us begin by making two

Many such cartels are described in Harrington (n 16), which is the source of the ensuing facts. 10 March 1994 meeting of the lysine cartel; see ‘The International Lysine Cartel at Work, 3/28/00’, Antitrust Division, US Department of Justice. 51 D. Genesove and W. Mullin, ‘Rules, Communication, and Collusion: Narrative Evidence from the Sugar Institute Case’ (2001) 91 American Economic Review 379. 49 50

The practical requirements of a successful cartel  17 general points about punishments. From the perspective of cartel stability, a punishment should be designed to incentivize compliance, not wreak vengeance. Thus, a punishment should be severe enough to deter deviations but not more. The second point is that punishments are not always under the control of the cartel. When episodes of noncompliance reach a sufficiently high level of frequency or severity, some cartel members may choose to discontinue colluding, thereby causing the cartel’s collapse. There is still a punishment – the deviating firm (as well as all other firms) are back to earning lower competitive profits – but it may be more draconian than the cartel would have liked. A symmetric punishment refers to when all cartel members are harmed. We just mentioned one example – a return (temporary or permanent) to setting competitive prices – while another could be a short, intense price war which could have prices below competitive levels (and even below cost). The downside to a symmetric punishment is that it harms non-deviating firms, which is not only unfair but is counterproductive because it reduces the profitability of collusion. As a result, a firm may be more inclined to deviate when collusion is less profitable. An asymmetric punishment is one that is designed to punish only the deviating firm, and it does so by transferring profits from the deviating firm to the other firms. An asymmetric punishment can serve the purpose of incentivizing compliance and also provide compensation for those firms that were harmed by the deviation. As opposed to a symmetric punishment – which transfers surplus from the cartel to consumers (through lower prices) – an asymmetric punishment moves surplus around among the cartel’s members, and thereby is more attractive to a cartel. The transfer of profits from a deviating firm to other firms can take the form of cash, current sales or future sales. The transfer of cash is uncommon because an inexplicable monetary transfer between competitors is likely to generate suspicions. However, it has been used where legality was not a concern. Consider the 1926 international steel agreement which specified a quota for each country. Article 6 stated: ‘If the quarterly production of a country exceeds the quota which was fixed for it, that country shall pay in respect of each ton in excess a fine of 4 dollars.’ Article 7 provided compensation: ‘If the production of any country has been below the quota allotted to it, that country shall receive in compensation … the sum of 2 dollars per ton short.’52 More recent cartels have instead used inter-firm purchases to enact a transfer.53 Referred to as a ‘guaranteed buy-in’ in the lysine cartel and as ‘buy-back’ in the citric acid cartel, a cartel member that sold more than its quota was required to buy output from those members who sold below their quotas. For example, at the 14 November 1991 meeting of the citric acid cartel, Haarmann & Reimer was told to buy 7,000 tons of citric acid from ADM.54 As there are legitimate reasons for such inter-firm sales (for example, a firm is short on supply and has a contract to fulfil), they need not create suspicions like a monetary transfer. Another transfer scheme is to adjust the future market allocation by adjusting the market share or sales assigned to a firm that oversold or undersold its quota. In the zinc phosphate cartel, a particularly large

A. Plummer, International Combines in Modern Industry (Pitman Publishing Corp., 1938) 248. C. Leslie, ‘Balancing the Conspiracy Books: Inter-Competitor Sales and Price-fixing Cartels’ (2018) 96 Washington University Law Review 1. 54 Harrington (n 16). 52 53

18  Research handbook on cartels customer was rotated among the cartel members but would be disproportionately allocated to a member that had been underselling its quota.55 As previously noted, a sales monitoring scheme requires firms to accurately report their sales to other cartel members. Such a collusive arrangement creates a double challenge for cartel stability: a cartel member must be incentivized to price at the collusive level and to truthfully report its sales. The latter is problematic when overselling one’s quota means having to buy output from other firms. Nevertheless, this scheme was effective in a number of cartels, including those in the markets for citric acid, lysine and vitamins. It has been shown that a two-tier punishment can explain its success.56 If a firm anticipates accurately reporting its sales, it will be in its best interests to set the collusive price in order to avoid overselling and incurring the (tier one) punishment of buying output from other firms. A firm is incentivized not to underreport sales because of the (tier two) punishment of returning to competition which is triggered when the sum of all firms’ sales reports is too low. A firm that underreports, while presuming other firms are accurately reporting, would depress the aggregate sales report and thus increase the chances of causing a shift back to competition. Some cartels have used a third party to shore up internal stability by having them aid in coordinating, monitoring and punishing. To assist in arriving at a collusive outcome, a bidding ring of stamp dealers used a taxi driver,57 and the organic peroxides cartel used the consultancy AC Treuhand.58 A Swiss accounting firm validated firms’ reported sales in the lysine cartel,59 and in several retailer cartels an upstream supplier threatened retailers who undercut the collusive price with a higher wholesale price or denial of supply.60 C.

External Stability

A cartel can be made less effective or result in collapse because of the expansion of non-cartel supply. That cartel members are pricing at a supracompetitive level will cause existing suppliers who are not members of the cartel to increase their supply, and may even cause entry into the market. Non-cartel supply is a serious concern whenever significant capacity remains outside of the cartel.61 The global citric acid cartel encompassed only 60 per cent of global production and 67 per cent of EU production. In particular, Chinese suppliers were excluded, as they were with cartels in vitamins B1, B2, and C. The EU industrial tubes cartel left about 20 per cent of capacity out of its control. As a general rule, a cartel would like all firms to be members, for it would be better to have a firm inside the cartel keeping price high and restricting its supply than outside the cartel undercutting the collusive price. In practice, a cartel may choose to exclude some members due to a lack of trust. For a variety of reasons – such as past aggressive conduct or foreign ownership – a firm may be viewed with suspicion when it comes to abiding by a collusive ibid. J. Harrington and A. Skrzypacz, ‘Private Monitoring and Communication in Cartels: Explaining Recent Collusive Practices’ (2011) 101 American Economic Review 2425. 57 J. Asker, ‘A Study of the Internal Organization of a Bidding Cartel’ (2010) 100 American Economic Review 724. 58 Marshall and Marx (n 16). 59 Case COMP/36.545/F3, Amino Acids, Commission decision, 7 June 2000, [2001] OJ L 152/24. 60 Garrod, Harrington and Olczak (n 28). 61 The ensuing examples are from Harrington (n 16). 55 56

The practical requirements of a successful cartel  19 arrangement, in which case their inclusion could undermine internal stability. A firm may also be excluded related to enforcement concerns.62 More firms mean more ways in which a competition authority can learn of a cartel. If there is a leniency programme then one more cartel member is one more firm to compete with for receiving leniency, should it come to that. Especially when a firm is small – so its presence outside of the cartel will not be too disruptive – firms may prefer to exclude it from the cartel because of these enforcement concerns. A cartel may also not be all-inclusive because some firms choose not to join.63 Large firms will have to join if the cartel is to be effective. Small firms prefer not to join because their inclusion has a small effect on raising the collusive price but as a cartel member they may be expected to substantively restrict how much they produce. Medium-sized firms may or may not want to join, and their participation could make the difference between a moderately successful cartel and a highly successful cartel. It is worth noting that, even if a firm prefers to be outside of the cartel, cartel members could coerce participation by threatening exclusionary actions. As an example of the havoc non-cartel supply can create, consider the global vitamins cartel, which comprised 16 vitamins with an overlapping set of suppliers. Initiated during 1990–91, six cartels internally collapsed over 1994–95, while the other ten shut down due to government investigations over 1998–99. With the objective of understanding the source of internal collapse, a study focused on four vitamin markets: vitamin C, which did internally collapse, and vitamins A and E and beta carotene, which did not.64 They estimated the internal stability condition and found it was first violated for vitamin C in 1995 – the year in fact the vitamin C cartel collapsed – and was never violated for A, E and beta carotene. The determining factor in the collapse of the vitamin C cartel was the growth in Chinese supply, which increased four-fold in the cartel’s first four years and reduced the cartel’s market share from 85–90 per cent to 60–65 per cent. When a cartel is not all-inclusive, there are four strategies for dealing with non-cartel suppliers: starvation, coercion, bribery and takeover.65 Starvation limits non-cartel supply by taking control of an essential input or technology. When several Chinese firms expressed a desire to enter, the members of the global sorbates cartel agreed not to share their technology with them. Coercion curtails non-cartel supply through aggressive practices, such as selective price cuts, with the intent of continuing these practices until the non-cartel supplier limits its supply, joins the cartel or exits the market. In the district heating pipes cartel, the firm Powerpipe declined an invitation to join the cartel and later filed a complaint with the European Commission on the grounds that the colluding firms had acted anticompetitively against it. For example, after Powerpipe was awarded a sizeable contract, the cartel organized a boycott of Powerpipe’s customers and suppliers.

I. Bos and J. Harrington, ‘Competition Policy and Cartel Size’ (2015) 56 International Economic Review 133. 63 I. Bos and J. Harrington, ‘Endogenous Cartel Formation with Heterogeneous Firms’ (2010) 41 RAND Journal of Economics 92. 64 M. Igami and T. Sugaya, ‘Measuring the Incentive to Collude: The Vitamin Cartels, 1990–1999’ (2022) 89 Review of Economic Studies 1460. 65 These terms and the ensuing discussion are from J. Harrington, K. Hüschelrath and U. Laitenberger, ‘Rent Sharing to Control Non-Cartel Supply in the German Cement Market’ (2018) 27 Journal of Economics and Management Strategy 149. 62

20  Research handbook on cartels While coercion uses the stick, bribery uses the carrot by sharing collusive rents with non-cartel suppliers who agree to limit their expansion of supply. In order to control Coors, which was a producer of vitamin B2 but not a member of the cartel, cartel member Roche agreed to purchase 115 tons of B2 from Coors (which represented half of Coors’s capacity) and BASF in turn agreed to purchase 43 tons from Roche. In this manner, they shared the burden of controlling Coors’ supply. Takeover curtails non-cartel supply by acquiring non-cartel suppliers or the assets used to provide that supply. The carbon and graphite products cartel struggled with non-cartel suppliers known as ‘cutters’ who would purchase carbon blocks from the cartel members and then produce final products which competed with the cartel’s supply. In response to the aggressiveness of cutter EKL, cartel members considered not supplying graphite to it (starvation) and undercutting EKL’s price for customers considering doing business with EKL (coercion). Ultimately, the takeover approach was pursued, as cartel member SGL Carbon acquired EKL. D. Enforcement Suppose coordinating practices succeed in firms coming to a mutual understanding to constrain competition. Furthermore, they implement a collusive arrangement that is both internally stable – all cartel members comply – and externally stable – non-cartel suppliers do not substantively expand supply. If all that is done, the cartel may still fail because it is detected and penalized.66 That firms may be subject to public prosecution and private litigation can affect their decision as to the mode and extent of communications. Communications are relevant to achieving mutual understanding, the type of collusive arrangement (for example, is it just with regard to price or is there also a market allocation scheme) and monitoring for compliance as well as the imposition of punishments. The more extensive communications are, the more effective collusion will be, but also the greater the chance of detection and the imposition of penalties. In deciding on the communications protocol, a cartel balances higher collusive profits against possibly shorter duration and a higher likelihood of penalties. Enforcement will also impact cartel success in terms of the collusive overcharge. When prices are increased at a faster pace and to a higher level, detection by savvy customers (especially when they are industrial buyers) and the competition authority becomes more likely. In choosing the price path, the cartel may then moderate its price increases.67 Higher prices, as well as parallel price movements, will contribute not only to detection but also to the likelihood of prosecution and conviction. While economic evidence is not sufficient by itself to prove a violation of competition law, it can be an important part of a case. Finally, some penalties are tied to the overcharge. Private litigation seeks customer damages, which are measured by the overcharge multiplied by the number of units purchased by a customer. 66 For surveys of cartel detection, see G. Hay and D. Kelly, ‘An Empirical Survey of Price Fixing Conspiracies’ (1974) 17 Journal of Law and Economics 13; and J. Harrington, ‘Detecting Cartels’, in P. Buccirossi (ed.), Handbook of Antitrust Economics (The MIT Press, 2008) 213. 67 This trade-off is examined in Chapter 3.3 of J. Harrington, The Theory of Collusion and Competition Policy (The MIT Press, 2017). For indirect evidence that enforcement constrains the prices that a cartel sets and reduces the profitability of collusion, see I. Bos, S. Davies, J. Harrington and P. Ormosi, ‘Does Enforcement Deter Cartels? A Tale of Two Tails’ (2018) 59 International Journal of Industrial Organization 372.

The practical requirements of a successful cartel  21 The US Department of Justice can impose a fine as high as twice the harm to consumers. Thus, a cartel may limit its price in order to reduce this liability.68 Obviously, enforcement affects cartel success when it causes a cartel to be shut down. While conviction will surely result in a cartel’s collapse, detection and opening an investigation can often be sufficient. The ensuing increase in the probability of paying penalties can cause the cartel to become internally unstable. Less well recognized is that enforcement can reduce cartel duration even when a cartel goes undiscovered. Returning to the internal stability condition, expected penalties will lower the value of future collusive profits, which will reduce the foregone profits from deviating. By making collusion less profitable, enforcement makes a cartel less stable, and that will reduce cartel duration.69

IV.

CONCLUDING REMARKS

The takeaway should be that collusion is difficult but manageable. A successful cartel must coordinate on an internally stable collusive arrangement while controlling non-cartel supply and avoiding detection and penalization by public and private enforcers. Though the challenges are numerous and substantial, many firms in various industries have managed to master them. Successful cartels exist for three simple reasons. First, there is a lot of money at stake. Notably, cartels are most common in markets with highly similar goods where price competition is intense.70 In such a setting, even a modest increase in price can have a significant impact on a firm’s bottom line. Second, firms’ executives are smart, and they are used to solving difficult problems. Once a sufficient number of executives have come to believe that the primary obstacle to sufficient profits is too much competition, they are sharp enough to find a solution (as exemplified by the German spectrum auction at the start of this chapter). Third, there are many ways to constrain competition; collusion does not have to be sophisticated to succeed. In sum, cartels exist and thrive because firms have the incentive to collude, they have the skills to collude and they have at their disposal many ways in which to collude.

See Chapters 18 and 21 respectively for coverage of fines and damages. The ways in which enforcement can reduce cartel duration are examined in Chapter 3.1 of Harrington (n 67). 70 See P. Grout and S. Sonderegger, ‘Predicted Cartels’, Office of Fair Trading, Economic Discussion Paper, March 2005; and J. Harrington, ‘Thoughts on Why Certain Markets Are More Susceptible to Collusion and Some Policy Suggestions for Dealing with Them’, OECD Background Paper, Global Forum on Competition, 19 October 2015. 68 69

2. The prevalence and injuriousness of cartels worldwide John M. Connor and Robert H. Lande

I. INTRODUCTION The primary purposes of this chapter are to present empirical evidence on the size of the economic injuries resulting from contemporary price-fixing cartels and to assess the effectiveness of antitrust and competition-law enforcement that is designed to deter these harms. First, in Section II, we gather and analyse summary statistics on a large number of topics that might reveal whether discovered cartels are responding to the increased worldwide effort to suppress them; we examine numbers and sizes of price-fixing cartels, the damages they generate and key antitrust and competition law enforcement statistics. Broad geographic and jurisdictional differences are highlighted. Second, in Section III, we address whether current price-fixing penalties are sufficient to deter the formation of new cartels. In doing so, we first present a theoretical framework for determining optimal cartel penalties and then apply that framework to data on US-penalized cartels. That is, we examine whether the multiple sanctions imposed on such cartels are high enough to provide optimal deterrence. Our empirical results demonstrate that cartels are almost always under-deterred even in the United States, the jurisdiction that imposes the most severe sanctions. A fortiori, the overall levels of cartel sanctions should be increased dramatically worldwide.

II.

SUMMARY OF GLOBAL STATISTICS

Section II.A initially lays out a set of aggregate statistics on the numbers, affected sales, damages, and corporate and individual penalties connected with contemporary illegal price-fixing worldwide.1 Then, in Section II.B we look for geographic and jurisdictional differences in these features of cartels across major jurisdictions. Collecting and organizing such data is a daunting exercise, though one made feasible by the availability of reports of antitrust and competition law authority decisions on the World Wide Web since the early 2000s.2 The most comprehensive data set on cartels is ‘Private Because of subtle differences across jurisdictions, the conduct characterized as illegal will vary. However, explicit horizontal price or quantity restraints tend to be treated fairly similarly across most nations. This chapter focuses on cartels discovered since 1989. For analyses of mostly older cartels, see M. Levenstein and V. Suslow, ‘What Determines Cartel Success?’ (2006) 64 Journal of Economic Literature 43 and citations therein. 2 Around 2015, some large multinational law firms began assembling and publishing annual reports on cartel enforcement. See, e.g., Morgan Lewis, Global Cartel Enforcement Report (January 2021) www​ .morganlewis​.com/​pubs/​2021/​01/​global​-cartel​-enforcement​-report​-year​-end​-2020 [accessed 10 March 2022]. In the past, such efforts have been discontinued after five or ten years. 1

22

The prevalence and injuriousness of cartels worldwide  23 International Cartels’ (‘PIC’), which spans 30 years of consistent data collection.3 PIC comprises the most comprehensive compilation of legal–economic information on private international ‘hard-core’ cartels.4 Examining only ‘private’ collusion is appropriate for this Handbook, because non-sovereign cartels are potentially subject to antitrust or competition law enforcement; and ‘international’ is a criterion that is a precise way of capturing virtually all large cartels.5 Of course, no compilation can include the vast majority of such cartels that remained clandestine throughout their lives. In short, these data will considerably undercount the number and dimensions of cartel characteristics. A.

World-Wide Cartel Statistics

1. Cartel numbers PIC contains information on 1423 suspected or convicted cartels.6 This number is the tip of the cartel iceberg, because it excludes public, domestic and undiscovered cartels. ‘Public’ cartels are open agreements enforcing suppliers’ decisions by sovereign authority; they include multilateral commodity agreements, agricultural marketing schemes and compulsory cartels typically imposed during wars or deep recessions. They are normally immune from antitrust challenges. Historically, hundreds of public cartels have been recorded, but they appear to be in decline in the past few decades. Domestic cartels have no members from outside the jurisdiction that discovered the collusion. Domestic cartels are generally more numerous than international ones, but they tend to receive less attention in the press and in reports by antitrust authorities.7 A compilation of overcharge estimates classifies the number from domestic-membership schemes at double that from international schemes.8 DOJ data also 3 The PIC data set was built beginning around the year 2000 solely by the first author. No corporations, law firms or similar commercial entities have ever materially supported the development of PIC. The edition employed in this chapter includes cartels discovered during the 30 years from 1990 to 2019. It is fully accessible to interested readers at https://​purr​.purdue​.edu/​publications/​2732/​2 [accessed 10 March 2022]. An alternative version of PIC data is available at the OECD: http://​bit​.ly/​OECD​-ICStats [accessed 10 March 2022]. ICStats has the advantage of direct reporting of detected cartel activity from 55 jurisdictions, but the OECD’s summaries report on fewer variables than PIC. See OECD, OECD Competition Trends 2020 (Paris, 2020) www​.oecd​.org/​competition/​oecd​-competition​-trends​.htm [accessed 10 March 2022]; and OECD, OECD Competition Trends 2021: Volume I: Global Competition Update 2015-2019 (Paris, 2021) www​.oecd​.org/​daf/​competition/​oecd​-competition​-trends​-2021​-vol1​.pdf [accessed 10 March 2022]. The figures appearing in this chapter are constructed from the PIC data set. 4 PIC generally follows the definition of international price-fixing agreements employed by the Antitrust Division of the US Department of Justice (‘DOJ’). However, PIC defers to the somewhat variable concepts of hard-core cartel conduct employed by other jurisdictions. The term international primarily follows from a cartel’s membership composition. Therefore, an international cartel is a conspiracy in restraint of trade that has or is alleged to have one or more corporate or individual participants with headquarters, residency or nationality outside the jurisdiction of the investigating antitrust authority. Alternatively, cartels with at least two members with different nationalities are international. International conspiracies are typically more difficult to prosecute. 5 International cartels may have small sales in one nation, but the large majority are large and highly injurious. Many aspire to control multi-jurisdictional or indeed global prices. 6 PIC 2019, Table A0. 7 See OECD, Hard Core Cartels: Recent Progress and Challenges Ahead (Paris, 2003), which in its Annex A highlights a mere 17 cases of cartels with overcharge estimates out of more than 266 cartel cases prosecuted by OECD-affiliated authorities during the period 1996–2000. 8 See J. Connor, ‘Cartel Overcharges’ (2014) 26 Research in Law and Economics 249.

24  Research handbook on cartels suggest that during the period 1990–2017 about two-thirds of penalized corporate cartelists engaged in international cartels.9 The issue of how many undiscovered cartels there are relative to those discovered (the ‘survival rate’) is extremely knotty. Cartelists typically go to great lengths to operate covertly. Harrington and Wei warn that purported detection rates derived from widely cited empirical studies of listed US and EU companies (which average about 15 per cent) are in fact death rates – the end of collusion from either detection or natural collapse.10 Thus, the survival rates of cartels almost certainly exceed 15 per cent; that is, the number of undiscovered cartels is more than about seven times the discovered numbers, but by how much one cannot know. Considering the factors that result in most illegal cartels remaining hidden all their lives, we believe that 40,000 is a conservative projection of the number of illegal price-fixing cartels since about 1990.11 That is, the survival rate of contemporary cartels is at least 96 per cent. Of the 1423 private international cartels detected, 121 (or 8 per cent) of the cartel investigations have been abandoned or closed. Put another way, once a formal investigation of price fixing is launched, the chance that a cartel participant will be found liable for an antitrust infraction is 92 per cent. Reasons vary, but most investigations are shut down because of a lack of sufficient evidence of a violation. Lack of evidence may either derive from the internal discretion of antitrust-authority prosecutors or from the decision of a judge to dismiss a private civil damages suit.12 The United States, Canada, the EU and EU Member States tend to apply highly similar standards for the prosecution of hard-core cartels.13 Besides the 8 per cent ‘not proven’, as of late 2019, 129 cartels (9 per cent of the sample) were still being investigated by government authorities or sued by plaintiffs in private damages litigation. It is likely that 90 per cent of these probes will result in convictions or settlements. The percentage of cartels under investigation rises at an increasing rate with every new edition of PIC. An average of 81 cartels per year were detected in 2010–16 (a record number). By 2026, the number of discovered international cartels is projected to rise to 2200 (Figure 2.1).14 That leaves 1302 cartels (91.5 per cent of those discovered) that have been penalized by one or more antitrust or competition law authority (loosely, ‘guilty’ cartels). Convictions may be sorted into five categories. First, by far the largest category is filled with 790 cartels (61

9 See J. Connor, The Private International Cartels (PIC) Data Set: Guide and Summary Statistics, 1990–2019. (2020) https://​purr​.purdue​.edu/​publications/​2732/​2 [accessed 10 March 2022]. 10 Natural collapse can occur because of sovereign wars or internal dissention among members of the cartel; J. Harrington and Y. Wei, ‘What Can the Duration of Discovered Cartels Tell Us about the Duration of All Cartels?’ (2017) 127 Economic Journal 1977, 1983–84. 11 We start with 1423, triple it to account for domestic membership cartels and multiply by ten to account for undiscovered cartels. The few thousand ‘public’ cartels are not illegal because they are state-supported. 12 The PIC data do not record appeals won by defendants, partly because appeal courts can spend many years or more on rendering verdicts. Very few appeals result in all defendants being exonerated on the merits. 13 There are a few differences. The EU tends to consider combinations of vertical and horizontal price fixing to be a form of hard-core cartel conduct, while the US is more lax in such cases. The same is the case for frequent sharing of sensitive strategic business information with the objective of facilitating market coordination, which is often sufficient evidence for conviction in the EU. 14 The data sample for Figure 2.1 includes all 1292 cartels discovered during the period 1990–2018. The data for 2017–18 are incomplete because many investigations begin in secret and take more than two years to complete.

The prevalence and injuriousness of cartels worldwide  25

Figure 2.1

Trend in cumulative cartel discoveries, worldwide, 1989–2018 (with 2026 projection)

per cent of the guilty cartels) that had only government fines imposed and no known civil judgments; however, about 20 of these were being sued by private plaintiffs who have not yet reached a settlement with the guilty cartelists. Second, 167 cartels (13 per cent) paid both fines and civil penalties from follow-on damages litigation.15 Third, there were 98 cartels (7.5 per cent) that paid only civil damages and no fines. In these cases, the prosecutors were plaintiffs’ counsel who obtained typically large settlements without the benefit of a prior government conviction.16 Nearly all of these suits were court-supervised class actions in North America.17 In sum, the 1055 cartels (81 per cent) in the first three categories paid monetary penalties of some kind. Fourth, 100 cartels (7.6 per cent) accepted ‘consent decrees’ or similar non-monetary warnings or orders from antitrust authorities that require the members of a cartel to curtail specified anti-competitive practices.18 Although they are not technically an admission of guilt, we regard consent decrees as indicators that the authorities ‘more likely than not’ observed illegal cartel conduct.19 Resolution on indictments by means of decrees alone is most common

However, in the United States, all criminal convictions are followed by civil damages litigation. However, a minority may have benefitted from information available from a closed government probe. 17 See J. Connor, ‘Private Recoveries in International Cartel Cases Worldwide: What Do the Data Show?’ (2012) 1 Antitrust Chronicle 2. 18 Seven ‘consent decrees’ were in fact bans imposed on bidding rings of suppliers of goods or services to the World Bank. 19 For a discussion of the merits of settlements involving cartels, arguing that most involve such high penalties that they would have been unlikely to have been agreed to by defendants if the case was merit15 16

26  Research handbook on cartels in the EU, which accounted for half of the decrees. In other cases (in Switzerland, Japan and South Korea), warnings were issued because of a legal limitation on the issuance of fines or because the required fines were considered too high to be politically acceptable. Four consent decrees were issued by US agencies with only civil authority (the Federal Trade Commission (‘FTC’) and the Department of Transportation).20 Fifth, three prosecutions of cartels were interrupted by statutes of time limitations. Our reading of these cases is that these were probable cartel infringements that were abandoned because of an error by the authority or invincible non-cooperation by defendants. 2. Affected sales of cartels The sizes of cartels can be measured in several ways,21 but the most revealing economic measure of size is sales made by a cartel during its collusive period.22 Affected sales are occasionally revealed in a published decision or a posted guilty plea. Until such decisions can be utilized, we infer affected sales from information on the most precise definition of an affected industry’s market boundaries and the duration of collusion.23 We call these inferences ‘known’ affected sales estimates. Sales of cartels under investigation are generally unknown. Estimated known affected sales for 976 penalized cartels are $67 trillion worldwide.24 About 85 per cent of the guilty cartels have sales estimates; for these, the mean average cartel’s sales size is roughly $69 billion. (However, the median average sales size is much lower, $2.06 billion.) If the average sales size of the remaining cartels with no sales estimates is similar, then the affected sales of all detected cartels will add up to roughly $90 trillion – an enormous number but one that is a small share of relevant commercial activity.25

less, see J. Davis and R. Lande, ‘Towards an Empirical and Theoretical Assessment of Private Antitrust Enforcement’ (2013) 36 Seattle L Rev 1278. 20 The US DOJ began to replace nolo contendere pleas with guilty pleas in the early 1960s and stopped using consent decrees for cartel conduct in 1996. 21 For example, about 12,000 companies were identified as defendants in the 1423 detected cartels, a median of five members per cartel. Eleven cartels had 100 or more participants. Other measures of size could be geographic extensiveness or penalties, which are discussed below. 22 The duration of collusion is from the adoption of an effective agreement to when prices return to more competitive levels (including lags after formal collusion ceases). Sales figures from damages suits are preferred to those announced by other antitrust authorities. If sales by the cartelists are not available, then the most precise estimates from business-marketing sources are employed. Sales are nominal dollars, and thus are underestimated for older cartels. 23 We do not present analyses of cartel duration. We simply note that the PIC and the PFO data sets each show duration at a remarkably steady level over the past few decades as well as the last three centuries. Median duration for all cartels is about five years, but global cartels average 90 months. 24 The affected sales of two finance-industry cartels (each above $100 trillion, including derivatives) are omitted because the numbers appear to refer to assets affected rather than revenue flows. 25 Of course, $90 trillion in global revenues is a huge number, but it needs to be put into perspective. Focusing on sales of international cartels in North America, including the North American part of global cartels’ sales, estimates range from $37 to $44 billion. Revenues of all US firms in the construction, manufacturing and wholesaling industry groups – the most cartel-prone industry sectors – are reported to be $17.7 trillion in the 2007 Economic Census. Making an adjustment for Canada and multiplying by 29 years, such revenues total $550 trillion. Thus, we hazard that cartelized North American markets most likely comprise at most 6.7 per cent to 8.0 per cent of all relevant commercial sales.

The prevalence and injuriousness of cartels worldwide  27 3. Industry distribution of cartels During the period 1990–2019, international cartels arose primarily (56 per cent) in the manufacturing sector, with chemicals being the most prominent industry group; most are intermediate inputs sold to other manufacturers. Financial services, wholesale-retail trade, transportation and construction each account for 6–9 per cent of the number of cartels; most are business-to-business services. Thus, the great majority of cartelized markets supply inputs to other businesses. Since the 1990s, the dominance of manufacturing-sector cartels has been shrinking. Reflecting the changing mix of the structures of post-industrial economies, the shares of cartels in the services sector have expanded. 4. Corporate and individual cartel participants Tens of thousands of firms have participated in detected international cartels, but most are anonymous. The PIC data set identifies the names of 10,158 ultimate controlling parents26 that were involved in cartel activity during the period 1990–2019. In addition, there are about 4000 subsidiaries or intermediate operating companies of these parents cited by name. However, the largest number of participants are unnamed firms – more than 70,000 – not identified by name because some jurisdictions strictly follow national privacy laws. Many of the unnamed participants are banks that owned payment-card joint ventures such as Visa, Inc.27 Moreover, in several jurisdictions with strong privacy laws for government documents, cartel decisions often reveal the number of defendants only; for example, the Bundeskartellamt decision in the Waste-Packaging Collection prosecution simply states that there were 500 companies involved, and the German business press did not give the participants’ names. It turns out that the large number of anonymous cartelists implies only a small loss of information. One indicator is that anonymous parents accounted for a negligible share of total monetary penalties. The PIC data set lists unique monetary penalties for each cartel participation. By far the largest share of cartel penalties (63 per cent) was imposed on subsidiaries of large companies (the lion’s share are multinationals) that were identified by antitrust authorities as principally responsible for carrying out cartel activities. That is, the ultimate owners had passive roles in collusion, and their degree of responsibility for cartel conduct varies by jurisdiction.28 The ultimate parents themselves (or companies with simple corporate structures – single ownership layers) were legally responsible for 31 per cent of the penalties; in these cases the antitrust authorities held the top (or only) level of a company responsible for collusion. Thus, anonymous cartelists, while large in number, accounted for only 6 per cent of total cartel penalties.

Most are corporations, but a minor portion are holding companies, trusts, governments or families. Some of the parents were cited as jointly and severally liable by the antitrust or competition law authority, while in some other jurisdictions they were not mentioned in the decisions. PIC traces ownership of both. There is some double counting because of serial collusion. Thus, the numbers quoted are technically participations, not separate companies. 27 Thus, some of the unnamed defendants are not truly anonymous, because lists of the 22,000 US card-issuing banks could be constructed but doing so adds little information to the data set. And the portioning of penalties is unobtainable. In the PIC data set, there are about a dozen similar banking cases with large numbers of defendants. 28 Higher-level owners are generally not held responsible in the United States, but the reverse is true in the EU. 26

28  Research handbook on cartels In jurisdictions with criminal antitrust sanctions, individual cartel managers can be punished for price fixing with fines, incarceration and/or debarment. Prosecutors typically punish individuals along with their companies for the most severe egregious conduct. A total of 1382 executives were indicted for international price fixing during the period 1990–2019,29 of which 1164 (84 per cent) were penalized.30 Penalized individuals are concentrated among a small number of cartels and corporate cartelists. Only about 1 in 50 of all fined companies have had an employee or director penalized.31 Similarly, most cartels had no employee penalized. Of those cartels that have had at least one executive penalized, the mean number of individuals penalized is five per cartel. 5. Monetary penalties Antitrust and competition law authorities found 1157 international cartels guilty of crimes or competition-rule violations during the period 1990–2019. Total penalties imposed amount to $236 billion.32 Of these ‘guilty’ cartels, 89 per cent of the corporate participants paid monetary penalties of some kind, mostly fines. Total fines imposed33 worldwide amounted to $141 billion, a mean average of $230 million per cartel (median average $108 million). Civil damages paid by members of 265 cartels total $94 billion, or an average of $354 million per cartel.34 Both fines and damages are highly skewed numbers. Most executives indicted for price fixing are not penalized, but among the minority that were fined worldwide the average fine is roughly $59,000 per employee (the median fine is $50,000).35 About 73 per cent of cartel fines on individuals worldwide have been imposed by US courts, but since 2010 authorities in ten other criminal jurisdictions have accounted for the majority of fines on individual cartelists. For US international cartel enforcement, extradition of foreign nationals is a large and growing problem.36 During 1990–2019, prison sentences totalling more than 22,000 months were imposed on 410 cartelist executives worldwide, of which 77 per cent originated in the United States. The median US prison sentence is 14 months per person, and the median non-US sentence is 17

29 Many indicted executives agree to testify for prosecutors, thereby escaping with no or light sentences. 30 The PIC data set faithfully records fines and incarceration penalties by an antitrust authority. Debarment, disqualification, and dismissal actions are not quantified. 31 In Brazil, nearly all federal antitrust convictions of cartels are accompanied by two substantial fines on employees of each corporate cartelist. 32 All monetary penalties are converted into US dollars using the date a decision or settlement is first announced. 33 Recall that ‘imposed’ means announced fines, not necessarily paid fines. Some cartels are allowed to pay in installments over about five years, some have their fines reduced by appeals courts, and in some newer jurisdictions, officials have difficulties in securing any payments for fines. 34 Damages litigation through class action typically takes five or six years to be completed. The PIC data set measures from the year of filing to the year the first defendant offers a monetary settlement; the remaining defendants usually settle within a year or two. Mean average time is 5.3 years. Opt-out cases are shorter, but settlements are underreported. 35 US residents generally pay these fines personally, but in many other jurisdictions they are paid by employers. The average of 310 US fines and mandatory restitutions are $1.446 million, the median $70,000. 36 See J. Connor, ‘Problems with Prison in International Cartel Cases’ (2011) 56 Antitrust Bulletin 311. (Since 2010, the DOJ has extradited fewer than ten individuals for price-fixing violations.)

The prevalence and injuriousness of cartels worldwide  29 months.37 The great majority of these individuals have held positions in upper management or on boards of directors.38 Up until about 2010, incarceration penalties overwhelmingly originated in US courts, but since then the majority have been handed down by Brazil’s courts (for example, 19 cartel managers involved in the infamous Lava Jato cartels39), Israel’s 8, Japan’s 28, Korea’s 10 and the UK’s 12. In Germany and some other EU jurisdictions, names of individuals fined are confidential; anonymous defendants account for about 10 per cent of individual cartel penalties, and they are much less severely punished than are named individuals. B.

Geographic Differences in Cartels

In the wake of popular discontent with monopolies and cartels, several US states and Canada enacted antitrust laws in the 1880s, but evidentiary and remedies problems hampered effective prosecution. Passage of the Sherman Act in 1890 gave the US federal government effective criminal enforcement powers to convict hundreds of price-fixing cartels, but few international cartels were pursued and penalties were quite light until the early 1990s.40 The EU adopted a civil-administrative antitrust implementing statute (or ‘Regulation’) in 1962, thereby providing the European Commission (‘EC’) with specific powers to enforce the EU competition law provisions;41 but the EC was very cautious in enforcing these provisions until the late 1980s. By the early 1990s, only five jurisdictions had modern, effective anti-cartel laws, but soon after the Member States of the EU and many other nations began penalizing international cartels (Figure 2.1). The main point is that what had been largely a two-authority transatlantic activity before about 1990 expanded geographically to become a global enforcement enterprise. Cartelists now have many eyes trained on them, and while cartel fines originate from many directions, one can certainly question whether this increased vigilance has significantly discouraged cartel activity. In this sub-section, we examine broad geographic categories of cartel data. These regions also correspond to groups of jurisdictions with antitrust authorities that vary in their institutional capacities, maturities and acceptance of an antitrust culture among citizens and

37 Outside the United States, incarceration is often commuted (to home arrest, community service or probationary sentences) or followed by extremely lengthy appeals that delay prison sentences being served. 38 In Germany and some other EU jurisdictions, the names of individuals who are fined are withheld; anonymous defendants account for about 10 per cent of individual cartel penalties, and they are much less severely punished than are individuals cited by name in a decision. 39 C. McConnell, ‘Kovacic: Lava Jato is the World’s Most Important Antitrust Case’, Global Competition Review Online (27 October 2017) https://​glo​balcompeti​tionreview​.com/​kovacic​-lava​-jato​ -the​-worlds​-most​-important​-antitrust​-case [accessed 10 March 2022]. 40 See J. Gallo, K. Dau-Schmidt, J. Craycraft and C. Parker, ‘Criminal Penalties under the Sherman Act: A Study of Law and Economics’ (1994) 16 Research in Law and Economics 25. 41 Regulation 17/62 of 6 February 1962: First Regulation Implementing Articles 85 and 86 of the Treaty [1962] OJ 13/204 (superseded in May 2004 by Council Regulation (EC) No 1/2003 of 16 December 2002 on the Implementation of the Rules on Competition Laid Down in Articles 81 and 82 of the Treaty [2003] OJ L1/1). The EU competition law provisions themselves were introduced via the adoption of the Treaty of Rome (which came into effect in January 1958).

30  Research handbook on cartels businesspersons. We are looking for hints about how differences in degrees of enforcement assertiveness have influenced cartel effectiveness.42 1. Cartel numbers and size Almost half (46 per cent) of the sampled cartels operated exclusively in Europe, of which 81 per cent fixed prices in Western (or West-Central) Europe.43 Moreover, because global cartels44 also had sales territories in Europe, after allocating these territories, 40 per cent of all international cartels fixed prices in Western Europe (see Figure 2.2). By contrast, ignoring global schemes, only 13 per cent of all international cartels operated exclusively in North America; counting global cartels with North American operations would raise that share to 16 per cent. Given that markets in Western Europe and North America are similar in economic size, the propensity for cartelization in Europe is roughly triple the rate of that of North America. Perhaps this indicates that business cultures in the United States and Canada are more compatible with antitrust objectives and more averse to violations of antitrust laws than their European counterparts. Detected cartels confined to the other four continents (Rest of the World, or ‘ROW’) are much more numerous than are North American cartels and almost as numerous as Western European ones. With global cartels distributed, ROW cartels account for 36 per cent of all regional operations. Their share increased markedly in the past 30 years. However, because the antitrust authorities in ROW tend to be less experienced and have more lengthy prosecutions, a smaller proportion of discovered cartels has been prosecuted (33 per cent) in ROW than in the other two regions (76–77 per cent prosecuted). Global cartels have the highest prosecution rate (88 per cent). Affected sales data need to be treated with caution. Mean average cartel sales data are deceptively high because a few large figures skew the means.45 The median size cartel is a more accurate average, namely, $2.1 billion (Figure 2.3).46 (Had guilty global cartels been shown separately, their median average sales size would be the largest, $6.665 billion. Instead, We identify high overcharges and long duration as the principal dimensions of cartel effectiveness, which is inversely related to consumer (or customer) welfare; stability is sometimes an additional characteristic of effectiveness. Some scholars refer to cartel ‘success’, but we eschew this wording as it is a cartelist’s perspective. 43 Except for Switzerland and, since Brexit, the United Kingdom, every nation in Western Europe is in the European Economic Area. In this chapter, Western (or West-Central) Europe has Finland, Germany, the Czech Republic, Austria and Italy as its eastern border. Several EU members are classified by the United Nations’ standards in Eastern Europe. The high share of cartels found in Western Europe is largely due to the longer history of effective anti-cartel enforcement by the EC and a surge in international cases prosecuted by EU Member States since 2000. Data on penalties are heavily weighted by EC prosecutions. 44 Global cartels operated in two or more continents, usually Europe and North America and often East Asia. Thus, areas of operation are double counted for the 201 global cartels in this Figure. Generally, the corporate national headquarters of members of global cartels are so diverse that most cannot be classified to one continent. 45 In fact, the large mean is driven largely by four recently discovered global banking cartels (such as LIBOR, Foreign Currency Exchange) with tentative sales estimates of $1.4 trillion. Antitrust authorities have been notably reticent about reporting affected commerce of financial-sector cartels with enormous derivatives’ values. Without these four cartels, the mean average sales for all cartels becomes $66.94 billion and the median $2.02 billion. 46 Note that because PIC data end in 2019, the UK is classified as an EU Member State. 42

The prevalence and injuriousness of cartels worldwide  31

Figure 2.2

Locations of price-fixing (with global cartels’ locations distributed)

Figure 2.3

Median affected sales, all guilty cartels, region of operation, 1990–2019

Figure 2.3 distributes global sales across four regions.47) The US and EU-wide cartels are the largest, $2.5 and $2.7 billion, respectively. Single-nation EU cartels are about half the size, That is, each territory affected by a global cartel is treated as a separate unit. Sales are often revised downward after conviction as detailed decisions become available. Several of the recent banking scandals (most global) with convictions not yet completed have enormously affected sales estimates. 47

32  Research handbook on cartels Table 2.1 Type and jurisdiction

Mean average monetary penalties, international cartels, 1990–2019 Number of

Average fines Number of

fines

imposed ($

damages cases

mil.)

Average

Average

Average

damages paid

severity ratioa

recovery ratiob

($ mil.)

(%)

(%)

US fines

158

260.7

225

384.8

21.6

Canada fines

64

7.06

84

11.4

14.9

104.7c 54.3

EC fines

163

261.2

2

845.0

11.1

85.0 203.8

EU NCA fines

399

78.4

12

243.6

30.8

Other Eur. fines

36

36.1

0

0

NA

NA

ROW fines

288

83.6

9

197.5

14.0

55.0

All jurisdictions d

1102

127.7

332

282.5

19.4

139.9

All cartels d

930

151.3

265

354.0

19.4

173.9

Notes: Severity = all penalties/affected commerce. Recovery = penalties/estimated overcharges; 620 unique ratios for 332 cartels. c There are 253 non-US fines’ recovery ratios that average 111.4 per cent. If one adds private settlements, the US and non-US mean recovery ratios are 138 per cent and 111 per cent, respectively. d There are more penalties than cartels because of multi-jurisdictional violations. a

b

viz., $1.4 billion. Somewhat surprising is the large median average sales size of international cartels operating in ROW: $1.6 billion. Cartel penalties and severity 2. Penalties are precise money metrics of geographic patterns of enforcement effort (Table 2.1).48 A total of $141 billion in fines were imposed on 930 cartels, several of them by more than one jurisdiction.49 Total fines on international cartels in Europe (principally by the EC and National Competition Authorities (‘NCAs’) within the EU) are 59 per cent higher than the $47 billion in fines imposed by US and Canadian authorities, which is explained mainly by the larger number of EU cartels.50 Fines in ROW total $24 billion and are rising fast. In addition to fines, 264 cartels had members that paid $94 billion in damages, of which 97 (37 per cent) paid only damages.51 When civil monetary penalties are added to fines, North American penalties far outweigh those in Europe, $135 billion and $81 billion, respectively. North American civil settlements are 92 per cent of the world total. Damages compensation outside North America has remained low until recently.52 While the absolute values of monetary penalties are impressive, relative to sales they are not. The mean average severity of worldwide cartel penalties is 19 per cent of affected sales, and it averages 10–15 per cent in most years. Severity ranges generally from 8 per cent to 14

48 Moreover, for complicated reasons, amounts of US and EU penalties by PIC actually exceed what is officially reported by the DOJ and EC. (For the DOJ, see Connor (n 9).) We ignore changes in penalties from appeals. 49 The US, Canada, EC, EU NCAs, non-EU Europe and ROW jurisdictions imposed 158, 64, 163, 399, 30 and 288 fines, respectively – 1102 fines in total. 50 It is not explained by severity. Mean severity per cartel in North America is actually 68 per cent higher than EU fines. 51 The average award of damages in 167 follow-on cases is $315 million, and $424 million in the 97 non-follow-on-same-jurisdiction cases. The latter include US cases inspired by EC decisions. 52 J.-F. Laborde, ‘Cartel Damages Actions in Europe: How Courts Have Assessed Cartel Overcharges’ (2019) 4 Concurrences 1 (charting the exponential growth of European private cartel damages cases, which rose from zero in 1998, to 50 in 2012, and to 239 in 2019. Courts in 30 nations are involved).

The prevalence and injuriousness of cartels worldwide  33 per cent across jurisdictions, except for much higher percentages among the EU NCAs and ROW authorities. However, the median average severities of 882 fines are quite low: from 3 per cent to 6 per cent (except Canada’s 1.6 per cent and a mere 0.1 per cent in ROW); adding private damages raises the US median severity to about 5 per cent of sales. The weighted average worldwide cartel payment is a mere 2 per cent of affected sales; it is highest for North American cartel payments and lowest among the global cartels. As interesting as these benchmarks may be, severity calculations cannot inform enforcers about the deterrence power of penalties. For that one needs data-intensive recovery ratios. 3. Cartel injuries and recovery Estimated aggregated discovered-cartel overcharges since 1990 are substantial – at least $24 trillion worldwide. Interestingly, projected cartel overcharges in Europe and North America are almost equal, as both their GDPs and severity ratios are roughly equal.53 Cartels operating in ROW seem to be the least affected by cartel pricing relative to its GDP, even though only a few of ROW jurisdictions are well equipped to enforce their anti-cartel laws.54 In Figure 2.4, we have calculated 620 all-important recovery ratios for 332 international cartels.55 The weighted mean average recovery is 140 per cent.56 US fines on average tend to recover slightly over 100 per cent of overcharges in the jurisdiction on average; EC and Canadian recoveries are lower. Something of a surprise is the robust average recoveries of fines by the EU NCAs: 204 per cent, led by the Italian, French, Spanish, and Portuguese authorities. Private class actions add considerably to recoveries in North America, but are largely absent in other continents. 4. Geographic differences among corporate cartelists There are at least 7200 companies that have been caught or punished for international cartel infractions worldwide. This number does not include thousands of parents of large groups or intermediate operating companies that were identified as culpable but were not directly penalized. Because historically antitrust enforcement is largely located there, cartelists by and large hail from rich countries. Of these companies, 77 per cent are headquartered in Western Europe and North America, and another 10 per cent in Japan (6.0 per cent) and Korea (3.7 per cent).57 This phenomenon is largely explained by difference in the industry mix and duration of cartels. We primarily refer to Brazil, Korea, Japan, Australia and South Africa, which had demonstrated institutional capacity by the early 2000s. More recently, diverse authorities (India, Singapore, Chile, Mexico, and others) are in the running. 55 It is comforting to note that this subsample is 26 per cent of the roughly 1300 convicted cartels in the PIC data set. However, the subsample is not entirely representative of even discovered cartels, as overcharge estimates take time to develop and publish and North American cartels are over-represented. 56 An internal survey of 15 national members produced only nine estimates of recoveries by fines imposed during the period 1996–2000. The average was 74.6 per cent of harm, and three were above 100 per cent. See OECD (n 7) Annex A. 57 The location and size of penalized cartel activity and the location of parents do not perfectly overlay. Consequently, parent groups frequently transfer large funds to penalized subsidiaries in other continents. PIC data from 1990 to 2010 reveal that 82 per cent of companies fined for price-fixing by US authorities are non-US; for the EC, the comparable percentage is 32 per cent. EU fine regulations specifically require ultimate controlling parents to pay their cartel fines to the EU Treasury, and, while less explicit for guilty subsidiaries, the same requirements hold in North America. An analysis of the 53 54

34  Research handbook on cartels

Figure 2.4

Mean recoveries, 332 international cartels, by type and region, 1990–2019

In fact, only 3.3 per cent of the cartelists are from Africa, 0.7 per cent from Oceania, 1.9 per cent from Latin America, 2.6 per cent from Eastern Europe and 7.7 per cent from Asia (excluding Japan and Korea). The distribution of monetary penalties pretty much tracks company numbers. 5. Geographic differences among individual cartelists Like corporate cartelists, the 863 indicted cartel executives were overwhelmingly citizens of rich nations: Europe (33 per cent), North America (26 per cent), Japan (13.0 per cent) and Korea (3.4 per cent). Interestingly, 37 per cent of these individual cartelists are associated with global cartels. Fines imposed on these executives are typically slaps on the wrist: the mean average of $3.8 million is distorted by a handful of large penalties; the median fine is $75,000. European executives or their employers have paid the most. Most fines and nearly all prison sentences are meted out by US courts. Prison sentences totalling 7876 months have been imposed on international cartelists. The largest recipients of prison sentences have been imposed on US citizens (they account for about 30 per cent of the prison-months). Relatively few Europeans have been fined or imprisoned, mainly because few countries in Western Europe have criminal antitrust laws. The greatest numbers of penalized individuals from ROW are citizens of Japan, South Korea and Taiwan: a few were condemned by their national courts, but the great majority worldwide have been sentenced by US courts

US balance of payments flows shows that ‘[a] large share of […] outward and inward transfers result from the prosecution of international cartels’: C. Bach, ‘Fines and Penalties in the US International Transactions Accounts’ [July 2013] Survey of Current Business 55, 55.

The prevalence and injuriousness of cartels worldwide  35 because of their participation in global cartels.58 (The majority of European cartelists have also surrendered to US courts.) C.

Distributional Consequences of Cartel Injuries

Cartel overcharges act resemble a system of regressive taxes. That is, effective collusion in the great majority of markets transfers income from relatively low-income buyers to relatively high income-owners and managers of the companies that raise selling price above the price but-for the collusion.59 The monopoly profits created by effective collusion are rents paid to the perpetrators in the form of stock-price increases, stock dividends and managerial rewards and perquisites. This general outcome most clearly occurs when a consumer good is cartelized, because such goods must be price-inelastic ‘wage goods’ and tend to be standardized, homogeneous items. Foods and supermarkets fit this category well, as does bid rigging against governments.60 Things get more complex when the good is a minor intermediate input purchased by manufacturers – the most common type of cartelized good. In this instance, the immediate income transfer is between two sets of manufactures. There are many cartelized steel and plastic products ultimately used in construction of roads and buildings; similarly, collusive prices in DRAMs and LCD Screens are passed on mainly to households with wide-ranging income levels. In such cases, ultimate distributional consequences are difficult to trace. Perhaps most difficult to analyse are the numerous and very large financial instruments that have been discovered to be cartels in the past decade. Markets for foreign exchange, credit default swaps and a panoply of derivatives priced off of the LIBOR index affect the fees paid by households for mortgages, personal credit and student loans, which is clearly regressive; however, the principal buyers are likely to be pension funds and sovereign wealth funds that in principle benefit broader income strata. Cartelization in these markets may therefore be income-distribution neutral. D.

The Special Dimensions of Global Cartels

The PIC sample identifies 198 global international cartels. Global cartels have several distinct characteristics.61 Although representing only 17 per cent of the number of penalized cartels, due to the fact that they were on average about six times larger in sales than the others, global schemes generated more than half of all international cartels’ sales and attracted 50 per cent of worldwide monetary penalties. Global cartels also achieve considerably higher overcharge rates than The majority of cartel fugitives are from the same three nations. Ironically, even high-income stockholders are injured by the elevated prices on cartelized goods, but this offset is minimal. 60 That is, tenders issued by governments have such highly specified dimensions that they are virtually homogeneous goods; the same may be said for commercial tenders. 61 A significant portion of global cartels are also members of interrelated, overlapping conglomerations, entities that we have deemed ‘supercartels’; see J. Connor, ‘Is Auto Parts Evolving into a Supercartel?’ (AAI Working Paper No. 13-04, 28 August 2013) www​.antitrustinstitute​.org/​~antitrust/​ sites/​default/​files/​WorkingPaper13​-04​.pdf [accessed 10 March 2022]. The bulk vitamins, banking, and auto-parts industry groups were organized in this fashion. 58 59

36  Research handbook on cartels other international cartels – 30–40 per cent higher than the typical cartel. However, partly because the geographic scope of global cartels is inevitably wider than the jurisdictions62 that penalize them, the severity of penalties on global cartels is lower than the average severities of the other international cartels. Moreover, the known overcharges generated by global cartels are a large multiple of the world’s antitrust penalties. Global price fixing is pursued by an elite group of cartelists. Only about one penalized international cartelist in eight has joined a global cartel. Individuals who were managers of global cartels – especially European and East Asian nationals – are punished with greater frequency than managers of non-global cartels. In sum, global cartels are the worst of the worst: bigger in sales size, covering more territory and jurisdictions, and causing relatively greater injuries to their customers. Although enforcement is moving in the right direction, global schemes are penalized less severely on average by antitrust authorities than their greater injuriousness would warrant.

III. DETERRENCE A.

The Economic Framework for Optimal Penalties

To oversimplify, the optimal penalty for collusion is the expected losses caused by the illegal conduct, which is roughly equal to the overcharges paid by the cartel’s direct customers, divided by the cartelists’ expected probability of being detected and punished. Other measures – such as focusing on the cartel’s expected gains – are usually believed to be less likely to lead to optimal deterrence.63 This formula is correct if several conventional assumptions are made; for example, cartelists are risk neutral and rational in calculating the benefits and costs of risky illegal behaviour.64 Many sources place the probability that hidden cartels will be detected at 10–30 per cent,65 and the chance of conviction of discovered corporate cartels is very high, probably above 90 per cent.66 To be conservative about the size of optimal penalties, we will assume a high detection probability of 25–30 per cent. If cartelists on the whole are risk-seeking, then the

62 The maximum exposure of a global cartel is LIBOR, which has attracted investigations by at least ten antitrust authorities (of 140 worldwide). 63 For an extended discussion of these issues on a corporate and individual basis, see J. Connor and R. Lande, ‘Cartels as Rational Business Strategy: Crime Pays’ (2012) 34 Cardozo Law Review 427, 431–47. 64 Mostly to simplify calculations, this formula may require a number of additional assumptions. Those assumptions include that cartelists are well informed about their market conditions, such as the elasticities of demand and industry supply. If they are, then expected monopoly profits will be equal to actual incremental profits from collusion. However, the actual economic profits from cartelization are typically lower than the theoretical monopoly profits because of friction within the cartel; even in highly profitable cartels, there will be a tolerably small amount of cheating on the agreement. Experienced cartelists likely take some cheating into their expectations about collusive profits. If so, overcharges are a good proxy of economic profits. The same can be said for expected penalties. 65 See D. Ginsburg and J. Wright, ‘Who Should Be the Target of Cartel Sanctions?’ (2010) 6 Antitrust Sanctions Competition Pol’y Int’l 3. 66 See Connor and Lande (n 63) 466–68.

The prevalence and injuriousness of cartels worldwide  37 optimal penalties that will result from the calculations that rely upon these estimates will be understated.67 To apply optimal deterrence principles, both harm to victims and encompassing penalties must be relatively measurable. There are three penalties for which fairly precise money metrics are publicly available: (a)

Fines imposed by US courts on both companies and on individuals.68 These amounts are known precisely. (b) Settlements paid to direct and indirect customers from private damages suits in the US. These figures are very largely in the public record and verifiable. They often can be significant (for a sample of 71 US cartel cases the median average settlement was 37 per cent of single damages and the unweighted mean was 65 per cent).69 Most cases settle, and final verdicts are relatively unusual. (c) The disutility (or inferred wage and utility losses) arising from imprisonment and house arrest for culpable executives in criminal cartel prosecutions. After an extensive analysis of analogous situations, we assigned what we believe to be a generous (dis)value of $6 million per year of imprisonment or house arrest.70 On the one hand, there are other costs of collusion that, as a practical matter, usually cannot be measured by outsiders. These include: (i) legal costs of defendants (these are rarely revealed publicly); (ii) managerial costs of coordination of the legal defence, corporate distraction, public and investor relations, etc.; (iii) the size of smaller opt-out settlements that are subject to confidentiality agreements (by contrast, large settlements are often material to financial statements and are therefore published); and (iv) reputational losses.71 To the extent that the penalties we can measure are smaller than the actual total penalties and costs associated with collusion, our computations will lead to an optimal penalty higher than it needs to be. We believe, however, that these non-measured costs of collusion are usually relatively small and transitory compared to the three that we list above, but we know no way of proving their relative magnitudes.72

The simple model of deterrence assumes that cartel participants are ‘risk-neutral’ – neither risk-averse nor risk-loving. 68 On the definitions of fines, see J. Connor and R. Lande, ‘Fine’, in W. Kovacic, D. Healey, R. Whish and P. Trevisán (eds), Global Dictionary of Competition Law (Concurrences, Paris, 2022). 69 See J. Connor and R. Lande, ‘Not Treble Damages: Cartel Recoveries Are Mostly Less than Single Damages’ (2015) 100 Iowa L Rev 1997, 1997. 70 See Connor and Lande (n 63) 449–54, for the methodology used. 71 Studies using stock market prices show no long-lasting effects after two years. See C. Alexander, ‘On the Nature of the Reputational Penalty for Corporate Crime: Evidence’ (1999) 42(S1) The Journal of Law & Economics 489, Table 2 (showing that average stock-price movements of less than 1 per cent due to announcements of antitrust price-fixing fines). 72 A cartel is an illegal joint venture, a ‘virtual company’ with no assets other than the human capital and devotion of its managers and some historical records. The costs of the managers’ labour and expenses related to travel should be netted out from the cartel’s revenues, but are usually negligible relative to the profits generated. However, to keep the cartel secret, the number of managers that manage a cartel is kept small – typically, to only two or three executives, who meet and communicate sporadically. Thus, for all practical purposes, overcharges are equivalent to the aggregate monopoly profits from cartel conduct, and the quotas or profit-sharing rules of the cartel determine the monopoly profits of each corporate cartelist. Nearly all the overcharges imposed on cartel customers are economic and accounting profits, 67

38  Research handbook on cartels On the other hand, cartels cause losses of income to customers that require knowledge of participants’ internal transactions to be measured accurately.73 Full overcharges themselves rarely are recouped by victims. Moreover, several harms to society are not included in penalties paid by cartelists, neither fines nor overcharges paid to direct74 purchasers. These additional harms include deadweight losses, umbrella effects75 and the time value of money. Deadweight losses (the allocative inefficiency effects of cartel pricing) can reach up to 50 per cent of the overcharge, although our best estimate is that these losses usually are only about 10 per cent to 20 per cent of the overcharge.76 Because fines and payments to injured parties usually are made many years after the collusive period ended, all of these penalties ought to be restated in constant dollars to reflect general inflation and the time value of money. The victims lose the earnings that could have been made by them on the money illegally confiscated by cartelists (who get to keep such additional profits themselves). The adjustments necessary to compensate for the absence of prejudgment interest can be significant. Nevertheless, we are unaware

which mostly accrue to the owners, stockholders, workers and cartel executives whose compensation or promotions are tied to the profitability of their companies or divisions of the companies. (Dead-weight losses are damages to the whole economy. They are not captured by the cartelists.) High-cost participants may exhibit low or zero accounting profits from a cartel, while their economic profits are substantial. In other words, cartels can prevent or delay corporate bankruptcies. 73 Our results might be conservative for a methodological reason we have not yet discussed. Many of our affected sales figures are derived from decisions of antitrust authorities and might be overly small. Higher sales data would tend to lower recovery ratios, mainly because figures derived from plaintiffs or seemingly reliable third-party sources often are larger than the sum of corporate sales employed in DOJ sentencing memoranda. There may be legally defensible reasons for such understatement. For example, because of the high degree of reliability of evidence needed to convict corporations for crimes, the DOJ may narrow the true collusive periods, geographic region, or scope of products employed for calculating sales to that which can be proven ‘beyond a reasonable doubt’. On the other hand, prosecutors sometimes may uncritically accept arguments made by defendants that diminish the scope of the affected market because of time pressures in settling guilty plea agreements, or because the government lacks the resources necessary to disprove defendant assertions. An example is In re Ready-Mixed Concrete Antitrust Litig., 261 FRD 154 (SD Ind. 2009). Ready-mix concrete is a standardized product; the counties involved and the time period were not at issue. A sales figure of $680 million for all seven firms involved in the cartel was reported in the local press; all seven paid civil settlements. The sales information purportedly came from transcripts of a jury trial of two convicted executives and from the testimony of the plaintiffs’ class expert in fairness hearings (plaintiffs prevailed). Sales according to DOJ documents were much less. One participant was granted amnesty; two others were not charged, most likely because of cooperation agreements; and the DOJ used a smaller geographic market definition than civil plaintiffs. When one adds up the affected sales from the DOJ sentencing memoranda for the four companies that were criminally convicted of price fixing through plea agreements, its total is $391 million. Taking into account the fact that two of the smallest cartel members were not convicted because of bankruptcies, the DOJ’s total market affected sales is as much as 40 per cent lower than the affected sales proven by the private litigants. These numbers are updated and slightly revised from those shown in Table 5 of J. Connor, ‘Cartel Overcharges’, in J. Langenfeld (ed.), The Law and Economics of Class Actions, Research in Law and Economics (Emerald House Publishing Ltd, 2014). One should note that 93 (or 5.5 per cent) ‘ineffective’ (zero overcharge) episodes are included. 74 We are not considering harms to indirect purchasers. Since cartel overcharges can be marked up before being passed along in the distribution chain, this omission could be significant. 75 For a definition and analysis of umbrella effects, see Connor and Lande (n 63) 461–62. 76 See Connor and Lande (n 63) 457–61.

The prevalence and injuriousness of cartels worldwide  39 of deadweight losses, umbrella effects or prejudgment interest ever being awarded in a US antitrust case.77 B.

Optimality of Cartel Penalties

The true detection rate is a critical issue in assessing cartel penalties. As mentioned above, starting with Bryant and Eckard,78 multiple statistical analyses of the stock-price movements of penalized corporate cartelists have identified detection rates (more precisely, death rates) in the range of 10–20 per cent.79 Subsequent analyses of later periods and other geographic regions have reaffirmed this figure for similar public companies.80 Moreover, confidential surveys of experienced antitrust attorneys have also shown that these lawyers believe that the cartel detection rate is between 10 and 30 per cent.81 Consequently, several leading legal– economic scholars of cartels, including the present authors, have adopted a 25–30 per cent range as an assumed parameter for investigations into the deterrence power of cartel fines and other penalties.82 Under reasonable assumptions, these analyses have generally found significantly suboptimal cartel penalties.83 However, there are potentially at least two logical errors involved in asserting that cartel detection rates are at these levels. First, the statistical analyses of detection have been misinterpreted.84 They have in fact measured the likelihood of the termination of collusion from all sources, both from prosecution (‘antitrust’ death) and from the breakdown of collusion unrelated to antitrust enforcement (‘natural’ death). Consequently, detection is lower than the level or range adopted by many scholars, though how much lower is unknowable. Second, some scholars interpret the statistical studies as measuring the annual probability of the cessation of collusion, whereas the appropriate measure is the probability over the entire duration of a collusive episode (some call it ‘dynamic’ detection). If the likelihood of

We are aware of punitive interest rates being applied by a court in a Finnish damages case; see J. Connor and T. Kalliokoski, ‘The Finnish Asphalt Cartel Court Decision on Damages: An Important EU Precedent and Victory for Plaintiffs’ (2014) 2 Antitrust Chronicle 1. 78 P. Bryant and E. Eckard, ‘Price Fixing: The Probability of Getting Caught’ (1991) 73(3) The Review of Economics and Statistics 531. 79 See C. Veljanovski, ‘The Effectiveness of European Antitrust Fines’ (13 November 2020) https://​ssrn​.com/​abstract​=​3730361 [accessed 10 March 2022] 22–24. One problem with these studies is that most illegal collusion is carried out by either small companies unlisted on stock exchanges or the unlisted subsidiaries belonging to sprawling multinational conglomerates. Collusive conduct by unlisted companies could vary from that by listed ones. The other caveat is that the appropriate probability is that of detection and conviction. The chances of a guilty cartelist being convicted after a full investigation are certainly less than 90 per cent and in some jurisdictions possibly as low as 60 per cent. Thus, taking into account conviction likelihoods alone, the appropriate probability is lower than 15 per cent, somewhere in the range of 9 per cent to 14 per cent. Finally, there is a distinct possibility that the introduction of enhanced enforcement methods (leniency programmes, variance-screening algorithms, international data-sharing among authorities, and the like) could have raised the chances of detection; see R. Abrantes-Metz and P. Bajari, ‘Screen for Conspiracies and Their Multiple Applications’ (2009–10) 24 Antitrust 66. 80 Connor and Lande (n 63) Table 1. 81 Most worked in the EU or North America. 82 See Connor and Lande (n 63) 465–68. 83 ibid. 84 Harrington and Wei (n 10). 77

40  Research handbook on cartels detection is, say, 9–15 per cent in each year of collusion, then the likelihood of detection over a multiyear period of enforcement is much higher.85 The longer the duration, the higher the ‘dynamic’ rate. These higher episodic detection rates result in fines much closer to optimally deterrent levels.86 Two problems with relying solely on statistical models are that they often have arcane restrictive assumptions and that they are not the only sources of wisdom about detection rates. For example, Harrington and Wei do not differentiate between implicit and (illegal) explicit collusion. Legally this distinction is crucial because only explicit collusion is illegal in most jurisdictions. Moreover, confidential surveys of antitrust practitioners about detection rates are at odds with quantitative modelling. It is important to consider that practitioners can observe illegal conduct by their clients that cannot be observed by outsiders. These experts are in positions to have privileged, if limited, information about their clients’ participations in undiscovered, never-prosecuted cartels.87 Prosecutors and defence attorneys tend to place ‘dynamic’ detection rates at 10–30 per cent for an entire episode. Should detection rates be in this range, we are back to the lion’s share of cartel penalties being sub-optimal. In Section II.B, we noted that recovery ratios of cartel fines, private damages suits and other monetary penalties are highest in the world for the United States and Canada. Therefore, focusing on US cartels offers the most stringent test of optimality of penalties. The median percentage overcharges by cartels that ended their collusion between January 1990 and December 2018 are summarized, by type of cartel in top three rows of Table 2.2.88 The third row summarizes 1024 episodic overcharges available for cartels detected during the years 1990–2018. The ‘All Years’ row summarizes 1705 episodic overcharges for every estimate available for the entire time period (1700–2018). Utilizing a median average figure helps adjust for a high degree of statistical skewness in each cell of Table 2.2. Historical overcharges vary systematically by type of cartel and temporal enforcement characteristics.89 Seven types of cartel are distinguished. In most historical periods, international cartels have exhibited larger overcharge rates than cartels with only domestic companies participating.90 ‘Legal’ cartels – many of them operating openly, such as registered export cartels – generally have slightly higher returns than clandestine cartels detected and punished by antitrust authorities. Bid-rigging schemes and buyers’ cartels have distinctly lower overcharges than classic price-fixing cartels. However, none of the rows stray far from the median average

If p is the probability of detection in one year in ratio format and N is the number of years of collusion, then the episodic probability of detection is P = 1 – (1 – p)N. See Harrington and Wei (n 10) 1984. For a five-year episode and p = 0.09 to 0.15, P = 1 – (1 – p)5 or P = 0.38 to 0.56; similarly, a seven-year period of collusion implies P = 0.48 to 0.68. By this reasoning, an annual chance of detection of 9 per cent to 15 per cent is equivalent to a 38 per cent to 68 per cent likelihood of episodic detection, which is 2.5 to 4.5 times higher than the annual rate. 86 Velkanovski (n 79) 24–25. 87 For example, these antitrust specialists may know of leniency applications regarding cartels that the authorities declined to prosecute. 88 These numbers are updated and slightly revised from those shown in Table 5 of Connor (n 73). One should note that 93 (or 5.5 per cent) ‘ineffective’ (zero overcharge) episodes are included. 89 In Table 2.2, for example, effective corporate leniency programmes were implemented after 1999. 90 The 2000–18 period is an interesting exception that is attributable primarily to a large number of US pay-for-delay pharmaceutical cases. For details on these cases, see J. Connor, ‘Antitrust Developments in Food and Pharma’ (2015) 7(1) Annual Review of Resource Economics 375, Table 2. 85

The prevalence and injuriousness of cartels worldwide  41 Table 2.2 Cartel episode end date

Median average overcharges, by year and type Membership National

Legal status International

Found guilty

Conduct Legal

Bid rigging

Classic price fixing

Buyers’ cartels

ALL TYPES

Median percent a 1990–1999

16.65

25.00

24.60

20.75

19.00

24.90

22.05

24.00

2000–2018

24.00

20.00

20.00

27.50

17.05

24.00

17.00

20.10

1990–2018

20.70

22.50

22.20

25.60

17.95

24.25

16.90

22.30

ALL YEARS

18.30

25.00

22.00

27.50

18.30

25.00

18.10

23.00

Note: a Medians of the point estimates or, where appropriate, of the midpoint of range estimates. Excludes hundreds of ‘peak’ overcharge estimates that refer to maximal price effects over brief periods of time, rather than an entire, usually multi-year, episode of collusion. Includes 93 zero estimates. Source: J.M. Connor, Price-Fixing Overcharges Master Data Set, a spreadsheet dated 4 December 2018

for all types of cartels, of 23 per cent.91 As for time periods, unadjusted median overcharges tended to decline by about ten percentage points from before 1920 to the early twenty-first century, and this pattern has been confirmed by more formal econometric testing methods.92 Median average overcharges since 1999 appear to hover in the 20–23 per cent range. If one generously assumes a 25–30 per cent chance that a cartel will be detected, ceteris paribus, the optimal total penalties on cartels ought to be within the range of 55.5–110 per cent of affected commerce, depending on type of cartel and time period being examined.93 Variation in cartel overcharges is limited to a small number of cartel industries.94 Moreover, there are only small differences in overcharge rates due to the type of publication surveyed, method of analysis employed, or whether courts were the original sources of the overcharge information.95

91 The results of verdicts in private cartel overcharge cases are similar. We searched for every cartel overcharge we could find in a final verdict in a US antitrust case. We found 25. They yielded an average cartel overcharge of 31 per cent and a median overcharge of 22 per cent. See J. Connor and R. Lande, ‘How High Do Cartels Raise Prices? Implications for Optimal Cartel Fines’ (2005) 80 Tulane L Rev 515, 515 and 551–59. 92 Bolotova developed a meta-analysis of 406 cartels that colluded from 1700 to 2005: Y. Bolotova, ‘Cartel Overcharges: An Empirical Analysis’ (2009) 70 Journal of Economic Behavior & Organization 321. She showed that, controlling for many structural and conduct characteristics, overcharges declined by about 8.8 percentage points from the period before 1890 to 1990–2005. 93 The smallest median overcharge in the top two rows of Table 2.1 is 16.65 per cent, which if divided by 0.30 (a high estimate of the probability that the cartel will be detected and convicted) equals 55.5 per cent. Similarly, the largest median overcharge is for illegal cartels in 2000–18: 27.5 per cent, which if divided by 0.25 (the lower estimate) equals 110 per cent. 94 A meta-analysis of overcharges by Bolotova (see (n 92) Table 4) found that the food, timber and machinery industries had significantly lower overcharges (5 to 10 per cent lower than the reference group, chemicals); services were 11 percent higher. These are only 4 of about 30 broad industry groups tested. 95 Readers especially interested in these issues are urged to consult more formal statistical analyses, such as J. Connor and Y. Bolotova, ‘Cartel Overcharges: Survey and Meta-Analysis’ (2006) 24 International Journal of Industrial Organization 1109 or J. Connor and D. Werner, ‘Variation in Bid-Rigging Cartels’ Overcharges’ (27 October 2018) https://​ssrn​.com/​abstract​=​3273988 [accessed 10 March 2022].

42  Research handbook on cartels Table 2.2 reports median average overcharges, not the more familiar mean average overcharges. In every cell of Table 2.2, mean average overcharges are higher than medians, because in every category a few cartels overcharge by extremely large amounts.96 The mean overcharge by domestic cartels up to 2013 was 35 per cent, and the mean was 56 per cent for international cartels. The overall mean average was 49 per cent.97 Which averaging is the better metric for optimal deterrence purposes? We do not know of a clear answer as to whether means or medians are better. Another issue is whether deterrence should be based upon the expected harms generated by effective cartels only, or by all cartels. We included all cartel episodes in our sample, even though approximately 5.5 per cent did not effectively raise prices. If, for policy purposes, one should focus only on discouraging cartels that succeeded in raising prices, cartels with zero overcharges should be omitted from our sample. This would raise both the median and mean results.98 To address the issue of optimality more formally, we assembled and analysed a large sample of US-convicted cartels and the three most important sanctions: fines actually paid, payouts made in all the private cases filed against these cartels, and the deterrent value of prison sentences imposed.99 We undertook this analysis for every US-sanctioned cartel during 1990 to 2005 for which we were able to ascertain the necessary data, using the methodology summarized in the previous section. Our survey of experts’ opinions and economic analyses suggests that the probability of detecting hidden cartels is 10–30 per cent and the chance of conviction above 90 per cent. To be conservative about the size of optimal penalties, however, we assumed in our analysis a 25–30 per cent probability that hidden cartels will be discovered and convicted. (If, as seems likely, cartelists on the whole are risk seekers, however, then this formula will understate the optimal penalties.) The overall results for the 75 cartels show that on average the value of the imposed US sanctions has been much less than it should have been for society to obtain optimal deterrence against cartelization.100 If mean averages of overcharge figures are used, the total value of the imposed sanctions are only 16–21 per cent of their optimal level. If median figures are used, the imposed sanctions averaged only 9–12 per cent of optimality.101 We found only one unusual cartel for which the totality of sanctions was possibly larger than optimal. A second cartel was probably optimally sanctioned. The other 73 cartels, however, were sub-optimally sanctioned, and most of them substantially so (the median average was less than 10 per cent of optimality).102 Connor (n 8) addresses this issue. He concludes that the studies that produced the highest estimates were generally methodologically sound and fit theoretical expectations (that is, cartels with very few members in highly inelastic markets). 97 See top row of Table 7 in Connor (n 8) 294. 98 ibid third row. 99 We valued the disincentive effect of a year spent in prison or under house arrest by a corporate executive at $6 million. See Connor and Lande (n 63) passim. 100 See Connor and Lande (n 63) passim. 101 ibid. 102 ibid. One interesting factor that helped drive these conclusions is the relatively small effect of prison sentences (that is, they usually only constituted a modest portion of the imposed sanctions). Their mean value per case was a relatively modest $13.6 million, or 17 per cent of the average fine (the median is zero because for the majority of the cartels in the sample (48 out of 75) there was no imprisonment). See Connor and Lande (n 63) 475, footnote 239. Even though we valued the deterrence from a three-year sentence at $18 million (which is more than most estimates of the value of an entire life), this pales in 96

The prevalence and injuriousness of cartels worldwide  43 Because the recent historical level of monetary sanctions in the United States averages only 9–21 per cent of the optimal, it follows that United States’ sanction levels should be five to ten times their historical levels. A fortiori, the current overall level of sanctions imposed by the rest of the world also should at least be quintupled.

IV. CONCLUSIONS The sanctions imposed on cartels by the United States are, overall, the highest in the world. That point notwithstanding, perhaps the most important policy concern in this area is whether even these sanctions are high enough to provide optimal deterrence. If they are not, then a fortiori the cartel sanctions imposed by the rest of the world also should be increased. Thus, even if detection rates are well below 15 per cent, there is still significant underdeterrence of cartels worldwide. Whether this suboptimality of sanctions should be remedied by increased corporate fines, a heavier reliance on private lawsuits or increased use of prison for cartel violations is likely to depend upon factors unique to each country. We make no judgement as to which combination of increased sanctions is likely to be optimal for which country. To move in the correct direction, however, we propose five specific recommendations that can and should be implemented, at least in jurisdictions with tough anti-cartel enforcement.103 First, legislation should double the guidelines employed to calculate criminal antitrust fines. Alternatively, the US Sentencing Commission could double its current presumption that cartels raise prices by an average of 10 per cent (median cartel overcharges since 1990 have averaged 23 per cent), or most antitrust authorities can use their existing discretion to choose the higher starting points or maximal aggravating factors in existing fining guidelines.104 Ratcheting up penalties for international cartels is especially needed. Second, either legislation or judicial guidelines should add prejudgment interest to both private treble damage actions and criminal fines. Third, several studies conclude that the benefits of intensified detection and tough enforcement outweigh the costs; hence, upon requests to legislatures, the budgets of the antitrust authorities should be increased significantly. Fourth, antitrust authorities ought to impose more innovative non-monetary penalties, such as corporate debarment from government tenders, banning convicted cartel managers from employment in their company and their employer’s industry and industry restructuring through mandatory asset sales. Finally, comparison to the possible rewards from cartelization: ibid. Nevertheless, the absence of a criminal sanction correlates with an exceedingly small overall sanction. Almost all of the 15 cartels with actual sanctions that were less than 2 per cent of optimal penalties had no criminal sanctions imposed: ibid. The absence of a prior criminal conviction means that obtaining optimal sanctions in private damages actions is hampered by having to prove the fact of collusion. By contrast, the unusual E-Rate cartel case involved 626 months of prison, which constituted 85 per cent of the sanctions in that case; see ibid 451–55. 103 Although all five would be desirable if implemented in the United States, we emphasize that we make no judgement whether similar provisions should be implemented in other specific nations. See J. Connor and R. Lande, ‘Does Crime Pay? Cartel Penalties and Profits’ (2019) 33(2) Antitrust 29. 104 The DOJ currently starts fine calculations at the lower (10 per cent of affected commerce) end of the US Guidelines range instead of the allowable 20 per cent end of the range. The EC typically starts at 15 per cent or 16 per cent of EU affected turnover instead of an allowable 30 per cent. Neither uses their existing powers to raise fines for recidivism very often; perhaps mere serial collusion ought to be punished.

44  Research handbook on cartels the antitrust authorities in the United States, the EU and other jurisdictions should implement rewards or bounties for whistleblowers. Each of these recommendations has been analysed in much more depth insofar as they might be suitable for implementation in the United States.105 The evident international harmonization of anti-cartel policies and enforcement over the past several decades suggests that the said recommendations also would reduce injuries from cartelization in most other jurisdictions.

See Connor and Lande (n 103).

105

3. An historical account of anti-cartel enforcement Susanna Fellman and Martin Shanahan

I. INTRODUCTION This chapter deals with anti-cartel enforcement from a historical perspective. The discussion focuses on the appearance and distribution of legislative approaches aimed at the anti-competitive behaviour of cartels, trusts and other private sector forms designed to reduce competition between firms. We do not include all possible forms of legislation designed to promote market competition markets, nor the full range of possible enforcement mechanisms that authorities may use to counter anti-competitive behaviour. Our focus is on the legislation and policies directly addressing cartels, trusts and monopolies, but it is not possible to separate these completely from other policies aimed at prohibiting restrictive agreements or advancing competition. We also omit legislation limiting other types of restrictive practices, such as patent legislation and merger control.1 Policies against cartels can cover a wide spectrum of approaches. These can include legislation that prohibits certain types of cooperation; regulation that requires particular types of agreement to be registered; or legislation that proscribes some forms of company structures. Anti-cartel laws may also include statutes that require markets exhibit certain levels of competition, or that firms in those markets follow particular processes when operating or procuring tenders.2 Anti-cartel frameworks may not mention individual firm activities directly but create market conditions (such as a minimum number of operators or degree of openness to international trade) that have the effect of precluding successful cartel creation. Regardless Legislation designed to promote competition can include areas as diverse as merger and acquisition law, foreign investment controls, international trade and public sector regulation. In this chapter the terms anti-cartel and antitrust are used interchangeably, while our use of the phrase ‘competition legislation’ refers generally to statutes focused on groups of firms cooperating in a manner designed to reduce competition. For discussions and examples of the range of dimensions involved see: E. Alemani, C. Klein, I. Koske, C. Vitale and I. Wanner, New Indicators of Competition Law and Policy in 2013 for OECD and Non-OECD Countries, OECD Economics Department Working Paper No 1104, www​.oecd​ -ilibrary​.org/​economics/​new​-indicators​-of​-competition​-law​-and​-policy​-in​-2013​-for​-oecd​-and​-non​-oecd​ -countries​_5k3ttg4r657h​-en, 96 [accessed 23 February 2022]; A. Bradford, A.S. Chilton, C. Megaw and N. Sokol, ‘Competition Law Gone Global: Introducing the Comparative Competition Law and Enforcement Datasets’ (2019) 16(2) Journal of Empirical Legal Studies 411; and S. Fellman and M.P. Shanahan (eds), Regulating Competition: Cartel Registers in the Twentieth Century World (Routledge, 2016). 2 For example of the degree of overlap, see the United Nations Model Law on Competition, the purpose of which is ‘[t]o control or eliminate restrictive agreements of arrangements among enterprises, or mergers and acquisitions or abuse of dominant positions of market power, which limit access to markets or otherwise unduly restrain competition, adversely affecting domestic or international trade or economic development’: United Nations Conference on Trade and Development, Model Law on Competition (United Nations, 2007) 3. 1

45

46  Research handbook on cartels of the approach (or mix of approaches) adopted, the ultimate aim of all such legislation is to prevent or diminish those activities by firms that are perceived to disadvantage other suppliers ‘outside’ the cartel, or customers, or both, unfairly. In particular, our account examines the foundation and spread of anti-cartel legislation that was designed: to prohibit cartels and trusts completely (outright prohibition); to curb their worst effects (prevent abuse of market power); or to monitor and record their existence (establish a cartel register). Apart from the case of outright prohibition, every jurisdiction adopting legislation of this type also varied in whether their approach involved strict interpretations (an intolerant attitude to transgressions) or less strict interpretations (a tolerant approach).3 For example, a law to prevent abuse of market power may in one (tolerant) jurisdiction allow price fixing if in the national interest, while in another (intolerant) jurisdiction the same price fixing may be prohibited. This variation of anti-cartel enforcement legislation reflects variation in historical antecedents, legal influences and the economic and political circumstances when the legislation was introduced.4 In this chapter we describe the broad development trends in the enforcement of these anti-cartel practices, mostly across Western countries. Despite a diversity of attitudes towards cartels in the first decades of the twentieth century, in the latter half of the century there developed globally an increasing intolerance towards cartels and restrictive agreements. Today legislation to control and prohibit organized anti-competitive behaviour is more comparable, albeit still with clear differences in focus. Countries also differed in the route they travelled to reach contemporary anti-cartel policies, with their paths being influenced by their legal traditions and dependent on specific economic and political contexts.

II.

CONCEPTUAL FOUNDATIONS

At their heart, anti-cartel policies assume that market actors should be prevented from cooperating in a manner that disadvantages competitors or customers other than through open and transparent market mechanisms. This starting point has a long history, although there are only faint echoes that link modern concepts of competition and anti-cartel policy with pre-eighteenth-century writers’ efforts to explain what made a ‘just price’, or what made a monopoly’s behaviour unacceptable. While several early writers, such as Aristotle (384–322 bc), Thomas Aquinas (1225–74) and Leonard Lessius (1554–1623), explored these ideas, their work was based on social assumptions almost unrecognizable today. For example, Aristotle described ‘just’ prices in the context of isolated exchange between two people; Aquinas argued that for a price to be just, it should equal a good’s ‘worth’. Lessius saw the just price as one set by public authorities for the general good or by people’s general estimations. More obvious for this discussion, he condemned prices ‘set by a conspiracy of sellers’ and ‘where by force or fraud, import of goods from another source is prevented in order to maintain a higher

3 Another level of variation between jurisdictions is the degree to which the laws are actually enforced in practice. In several jurisdictions ‘strong’ antitrust legislation has little practical impact as the bureaucratic infrastructure is not adequate. For discussion, see e.g. M.P. Shanahan and S. Fellman, ‘Shifts in Government Business Relations: Assessing Change Using the Restrictive Business Registers in the OECD, 1945–1995’ (2019) 63(8) Business History 1253. 4 Fellman and Shanahan (n 1).

An historical account of anti-cartel enforcement  47 price in the state’.5 Although the religious and moral frame of reference of these earlier writers is dismissed in modern economic theory, they still resonate (albeit quietly) with motivations behind regulations prohibiting abuse of market power, or predatory pricing. Adam Smith’s A Theory of Moral Sentiments (1759) and The Wealth of Nations (1776) both built on these ethical foundations. Writing before the industrial revolution, Smith had nevertheless experienced markets with multiple buyers and sellers and arm’s-length exchange of goods, making his ideas on ‘natural’ and ‘market’ prices’, and on the damage caused by small numbers of sellers influencing the market, clearly recognizable to modern readers. Smith’s evocative warning against conspiracy is frequently cited in support of anti-cartel policy positions: ‘People of the same trade rarely meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.’6 Theoretical discussion on the market impact of monopoly (and noncompeting groups) was relatively late to develop in the second half of the nineteenth century.7 Precursor insights into the problems of non-competitive groups (J.S. Mill, 1848, UK) and of monopoly and duopoly (A.A. Cournot, 1838, France; Charles Ellet Jr, 1839, USA) emerged separately in different countries at this time. Alfred Marshall, whose life spanned the gilded age and the rise of trusts, and whose work influenced later generations, reflects views on both the benefits of cooperation between small firms and its limits when applied to big business.8 While proto-economists debated the pros and cons of antitrust theory through the late nineteenth and early twentieth centuries, differences in nations’ antitrust practices were at first eroded and then swept away by political events that saw antitrust attitudes dominate industrial and competition policy after the Second World War. The earlier debates often reflected different social and cultural perspectives on individual and collective action and turned on the consequences of cooperative behaviour versus stricter individualistic, antitrust policies.9 Stigler laid out the modern, firm-centric economic arguments against collusion by cartels, establishing a narrower focus of economic research on the costs and benefits of cooperation within cartels.10 The structure–conduct–performance paradigm of antitrust policy linked to the Harvard School of economics came to be at least partially eclipsed by the Chicago School’s view on theory in the 1980s. Their approach, based on theoretical confidence in market outcomes that maximized consumer welfare and a focus on the price mechanisms to eliminate inefficiency, produced conservative policies that minimized government intervention.11 This theoretical approach has been subjected to scrutiny since the rise of ‘big tech’, the Global Financial Crisis B. Gordon, Economic Analysis before Adam Smith: Hesiod to Lessius (Macmillan, 1975) 267. A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (first published 1776, W. Strahan and T. Cadell, London, 1990) Bk I, ch X. 7 R. Eklund and R. Herbert, ‘Retrospectives – The Origins of Neoclassical Microeconomics’ (2002) 16(3) Journal of Economic Perspectives 197. 8 J. Kerstenetzky, ‘Alfred Marshall on Big Business’ (2010) 34(3) Cambridge Journal of Economics 569. 9 S. Fellman and M.P. Shanahan, ‘Beyond the Market: Broader Perspectives on Cartel Research’ (2020) 68(3) Scandinavian Economic History Review 195. 10 G. Stigler, ‘A Theory of Oligopoly’ (1964) 72(1) Journal of Political Economy 44; and M. Levenstein and V. Suslow, ‘What Determines Cartel Success?’ (2006) 44(1) Journal of Economic Literature 43. 11 I.L.O. Schmidt and J. Rittaler, A Critical Evaluation of the Chicago School of Antitrust Analysis (Kluwer Academic Publishers, 1989). 5 6

48  Research handbook on cartels (2007–09) and more recently the COVID-19 crisis. Governments’ apparent inability to rein in the power of big companies in the new platform economy has brought forth a great deal of literature in recent years.12 Current theoretical views on the economic costs of cartels and the economic impetus for antitrust policy are not only comparatively recent, several remain contested.13 Areas of contestation include cartels’ impact on social welfare, their contribution to deadweight loss and productive inefficiency. It has also been argued that anticompetitive behaviour ultimately undermines trust in the market as an institution. Empirically what is clear, however, is that over the past century, cartels of all types have consistently manipulated markets to raise prices above competitive levels.14

III.

HISTORICAL FOUNDATIONS

Policies to curb cartels and monopolies and to prevent collusion and price fixing are often considered a phenomenon of the modern industrial capitalism and the result of the emergence of the large firm. Efforts to prevent private monopolies and entrepreneurs colluding to fix prices or restrict competition exist far back in history. For example, in Mesopotamia, cities banned price fixing, and in China during the Tang Dynasty in the seventh century condemned cartels.15 From the medieval and early modern periods, we have more information. In the Italian Commune, laws on ‘fair’ prices existed, especially on foodstuff. Scholars like Marco Corradi and Raymond de Roover emphasize that theological considerations tend to be overemphasized when looking at commercial laws in medieval times; local rulers needed to solve practical problems and scholastics were well able to reconcile theological, moral and commercial concerns with practical solutions to concrete problems.16 Most monopolies were owned by the state. Until the nineteenth century, anti-monopoly laws were primarily to safeguard rulers, not to protect consumers, small artisans or tradespeople. While rulers may have held negative views on monopolies, collusion and price-fixing, and occasionally enacted legislation to prevent such activities, this fact did not prevent those same rulers from granting privileges to key producers.17 12 See e.g. T. Philippon, The Great Reversal. How America Gave Up on the Free Markets (Belknap Press & Harvard University Press, 2019); T. Lenard, ‘Introduction to the RIO Special Issue on Antitrust and the Platform Economy’ (2019) 54 Review of Industrial Organization 617; and L. Phillips Sawyer and H. Hovenkamp, ‘New Perspectives in Regulatory History’ (2019) 93(4) Business History Review 659. 13 M. Motta, Competition Policy: Theory and Practice (Cambridge University Press, 2004); and D. Healey, M. Jacobs and R. Smith (eds), Research Handbook on Methods and Models of Competition Law (Edward Elgar Publishing, 2020). 14 J. Connor and Y. Bolotova, ‘Cartel Overcharges: Survey and Meta-Analysis’ (2006) 24 International Journal of Industrial Organization 1109. 15 B. Hawk, ‘Antitrust in History’ (2018) 63(3) Antitrust Bulletin 275. 16 M.C. Corradi, ‘Notes on Competition and Justum Pretium Theory and Practice in Medieval Italy: Lessons for Modern EU Competition Price Theory?’ (2018) 63(3) Antitrust Bulletin 330; and R. de Roover, ‘The Concept of the Just Price: Theory and Economic Policy’ (1958) 18(4) Journal of Economic History 418. 17 B. Kahn, ‘Antitrust and Innovation before the Sherman Act’ (2011) 77(3) Antitrust Law Journal 757.

An historical account of anti-cartel enforcement  49 After the Civil War (1642–51), English attitudes to concentrated power saw them adopt more negative views towards monopolies and a more positive outlook on free trade. Their common law tradition included three fundamental principles: freedom to trade, fair prices and prohibitions against monopolies.18 Nonetheless, prior to the twentieth century, English laws against market manipulation were few. A key tension that emerged, especially with the rise of larger enterprises, was the tension between the freedom to contract (and thus legally restrict competition) and principles of free trade (which were against manipulating markets). This tension still underpins many of the alternative views on the extent to which markets and agreements between firms should be regulated. The English common law tradition is often considered as influencing the first modern legislation emerging in the US, Canada and other Commonwealth nations; but the extent of such influence has been debated. More broadly, European nations’ attitudes and legal traditions were also transferred, to varying degree, to their colonies – a clear factor that would influence the path of subsequent antitrust legislation in those countries. Such influences and legal traditions are complex phenomena. Even within Europe, views on collaboration and restrictive practices varied and legal changes did not always have their intended effects. Overall, the existence of ‘modern’ anti-cartel or pro-competition legislation prior to modern twentieth-century capitalism is often over-emphasized and the existence of such laws should be understood in terms of responses to local conditions in a particular society and not as ‘linear stages in an historical march toward modernity’.19 The three major pillars of modern antitrust law – regulation or prohibition against restrictive agreements, unilateral firm conduct (monopolization) and merger control – cannot be found before the late nineteenth century.

IV.

EARLY MODERN ANTITRUST/ANTI-CARTEL/ COMPETITION LEGISLATION

The first modern antitrust and anti-cartel legislation was a response to the development of industrial and corporate capitalism after the industrial revolution. Rapid technological change, advances in communication technology, the opportunity to operate across borders and few legal restrictions enabled a rapid concentration in big business; the vertically and horizontally integrated firm emerged.20 As big industrial firms had high fixed costs, the temptation to fix prices with competitors was large. While developments in the US are usually given primacy, similar changes were occurring in other rapidly industrializing countries. For example, in Germany, cartelization in several economic sectors occurred swiftly in the late nineteenth century. The rapid industrialization process was followed by a severe recession in the 1870s which led to a downward spiral in prices, with devastating effects for a large number of entrepreneurs. Many firms rapidly organized themselves to prevent ‘cut-throat’ competition.

B. Hawk, ‘English Competition Law before 1900’ (2018) 63(3) Antitrust Bulletin 350. Hawk (n 15) 276. 20 A. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Harvard University Press, 1990); N. Lamoreaux, The Great Merger Movement in American Business, 1895–1904 (Cambridge University Press, 2010); and P. O’Brien, ‘The Great Merger Wave’, in R. Parker and R. Whaples (eds), Routledge Handbook of Major Events in Economic History (Routledge, 2013). 18 19

50  Research handbook on cartels This established a view in Germany that cartelization was a necessity and led to Germany later being identified as the country of cartels.21 The famous labelling of cartels as ‘children of distress’ (Kinder der Not),22 because they emerged in response to recessions and the fear of ‘ruinous competition’, meant that German authorities, until the interwar period, often viewed cartels as critical to economic stability. Research shows, however, that cartels are not formed only during recessions and to avoid price falls, but for many reasons and also during booms.23 While traditional price or market-sharing cartels were common in many modernizing countries in the late nineteenth century, the trust form is especially associated with the US. Private agreements between firms to manipulate the market could not be legally enforced, so the risk of cheating by cartel members was ever-present.24 In the trust model, subsidiary companies gave control of their firm to a larger trust, in exchange for a share in the profits of the overall business. The famous large US trusts, such as those in steel, oil and railways, emerged within a short time. These combines rapidly gained a dominant position in their markets; and with economic wealth came political power. These changes to industry structure, conduct and performance led to the creation of the most famous modern legislation to combat restrictive practices and monopolization, the Sherman Act, which was passed in 1890. The first country to pass a modern antitrust legislation, however, was not the US but Canada, which in 1889 passed legislation to prohibit ‘combinations’ that engaged in conspiracies to restrain trade. Canada too had experienced the rise of powerful combinations and the problems of price-fixing rings.25 Canada’s legislation was passed more quickly than in the US, partly because of the US corporate lobby’s success in delaying the passage of the Sherman Act. In 1889, 14 months earlier than in the US, the Canadian Combinations in Restraint of Trade Act (often called the Wallace Act) was passed.26 This legislation stated that every person who conspires, combines, agrees or arranges to restrain competition has committed an offence.27 The Canadian law deemed the restraint of trade a criminal offence. The Sherman Act banned ‘every contract, combination or conspiracy in restraint of trade in interstate and foreign trade’. As with the Canadian law, it treated these violations as criminal 21 I.E. Schwartz, ‘Antitrust Legislation and Policy in Germany – A Comparative Study’ (1956–57) 105(5) University of Pennsylvania Law Review 617; and D. Gerber, Law and Competition in Twentieth Century Europe: Protecting Prometheus (Oxford University Press, 2001) 75–76. 22 F. Kleinwächter, Die Kartelle. Eine Beitrag zur Frage der Organisation der Volkswirtschaft (Wagner, Innsbruck, 1883) 245. 23 See e.g. M. Levenstein and V. Suslow, ‘Cartels and Collusion: Empirical Evidence’, in R. Blair and D.D. Sokol (eds), The Oxford Handbook of International Antitrust Economics, Volume 2 (Oxford University Press, 2014). This was a question discussed early on in the literature; see e.g. R. Liefmann, Cartels, Concerns and Trusts (Methuen & Co., Ltd, 1932) 46­–54. 24 O’Brien (n 20). Although many countries tolerated cartel agreements at this time, few had legislation enabling cartel participants to enforce their agreements. 25 T.W. Ross, ‘Introduction: The Evolution of Competition Law in Canada’ (1998) 13(1/2) Review of Industrial Organization 1; M. Bliss, ‘Another Anti-Trust Tradition: Canadian Anti-Combines Policy, 1889–1910’ (1973) 47(2) Business History Review 177; and E. Iacobucci and M. Trebilcock, ‘Canada. The Competition Law System and the Country’s Norms’, in E. Fox and M. Trebilcock (eds), The Design of Competition Law Institutions (Oxford University Press, 2013). 26 Formally, Act for the Prevention and Suppression of Combinations formed in restraint of Trade, 52 Vict. c. 41 (1889). 27 C. Halladay, ‘The Origins of Canada’s Cartel Laws’ (2012) 25 Canadian Competition Law Review 157.

An historical account of anti-cartel enforcement  51 offences. Antitrust legislation was not entirely new in the US, as there was state-level antitrust legislation in existence prior to the Sherman Act.28 The US Sherman Act, however, set the stage for the next century of antitrust legislation and was to serve as a model for many other countries.29 For example, in 1906, the newly federated nation of Australia passed antitrust legislation based on the Sherman Act. The resulting ‘Australian Industries Preservation Act’ (and subsequent amendments) was, however, more focused on external monopolies and trusts than local businesses.30 It would not be until the passage of the Trade Practices Act in 1974 that Australian antitrust legislation began to approximate that in other modern economies.31 With the rise of large industry in parts of Europe, there had also been efforts to introduce pro-competition legislation in countries there. As early as 1870, an Austrian statute held that agreements among businessmen ‘designed to raise the price of a commodity to the detriment of the public’ were to be declared null and void.32 There were debates in the Austrian Parliament in the late nineteenth century about a system of registration to prevent price fixing.33 The proposal was influenced by a group of Austrian economists, who warned about the problems of cartels, and the legal scholar Adolf Menzel helped prepare the 1897 proposal. The scheme was never realized, but it later influenced other legislative initiatives in Europe. Ultimately Austria only introduced anti-cartel legislation in 1951. There were similar debates in Germany, especially after the swift growth of cartels in the 1870s. A general statutory provision relating to cartel regulation existed in the Trade Regulation Act of 1869, which stated: ‘All trade is open to everyone, unless this statute provides exceptions from or limitations upon this rule.’34 The question arose whether the provision applied to restraints of trade caused by cartels. The German courts held that a cartel may be harmful if the underlying agreements and arrangements intended to create, or resulted in, a monopoly and the exploitation of consumers. However, a fear of the alternative extreme – ‘ruinous competition’ – meant the courts generally ruled in favour of the cartel. In the precedent-setting Wood Pulp case35 the court held that, while economic freedom had been limited by the companies’ agreements, as these were not aimed at creating an exploitative monopoly, they were allowable. The court also found that agreements that were only temporary were acceptable. According to Schwartz, the balance between freedom to contract and freedom to trade was primarily interpreted to mean economic freedom from government interference, not freedom from contractually binding competitors.36 G. Stigler, ‘The Origin of the Sherman Act’ (1985) 14(1) Journal of Legal Studies 1, Table 1. W. Kovacic and C. Shapiro, ‘Antitrust Policy: A Century of Economic and Legal Thinking’ (2000) 14(1) Journal of Economic Perspectives 43. 30 K.A. Round, M.P. Shanahan and D.K. Round, ‘Anti-Cartel or Anti-Foreign: Australian Attitudes to Anti-Competitive Behaviour before World War I’ (2010) 56(4) Australian Journal of Politics and History 540. 31 H. Qaqaya and G. Lipimile (eds), The Effects of Anti-Competitive Business Practices on Developing Countries and their Development Prospects (United Nations Conference on Trade and Development, 2008). 32 P. Abel, ‘Legislation on Cartels in Austria’ (1952) 42(2) The Trade-Mark Reporter 101. 33 G. Hoffman, ‘The Austrian Cartel Law: Principles and Background’ (1969) 14(3) Antitrust Bulletin 249. 34 Schwartz (n 21) 625. 35 B. v den Sichsischen Holzstoff-Fabrikanten-Verband, Reichsgericht (VI. Zivilsenat), 4 Febuary 1897, 38 R.G.Z. 155. 36 Schwartz (n 21). 28 29

52  Research handbook on cartels The passage of the Sherman Act did not lead to an immediate transition to a strongly enforced antitrust regime. As the legislation was formulated broadly, the first years were marked by legal challenges and deliberations on how to interpret the law and the intent behind it.37 An important issue was to distinguish collaborations that suppressed competition from collaborations that promoted growth, that is, rationalization, and cooperation that improved efficiency.38 Initially, the Act gave the Supreme Court and federal judges significant powers to draw lines ‘between acceptable cooperation and illegal collusion, between vigorous competition and unlawful monopolization’.39 Critics feared that the Supreme Court was softening the law, by focusing only on ‘unreasonable’ restraints and narrowing the statute’s application. This led, in 1914, to the Clayton Act and to the establishment of the Federal Trade Commission (‘FTC’).40 The Clayton Act reduced courts’ discretion by specifically prohibiting certain tying arrangements, exclusive dealing agreements, interlocking directorates and mergers achieved by buying stocks. As an administrative body specifically designed to implement antitrust policies, the FTC was a new tool intended to improve the enforcement of antitrust legislation. It had the authority to identify and condemn ‘[u]nfair methods of competition’.41 Initially, the Canadian law was also loosely enforced.42 The legislation was amended several times but in reality it had little effect until the 1920s. Both the Sherman and Wallace Acts demonstrate a common pattern found in most antitrust and competition legislation around the world: that even when finally passed, the original legislation is soon challenged and amended as opponents fight to lessen the constraints of regulation. Also, the novelty of the legislation effected weak implementations. Early cases challenging the Sherman Act sharpened the courts’ and experts’ interpretations of what types of behaviour were to be curbed and what had been the lawmakers’ intent. These included cases against Trans-Missouri Freight Association43 and Standard Oil.44 The Standard Oil case led to the trust being broken into 34 different companies, hindering both vertical and horizontal control of the market. The case set important precedents. Critically, the case strengthened the ‘rule of reason’ test, which established that the court should consider the reasons behind otherwise market controlling agreements. The result was that45 such agreements were not necessarily illegal per se. The question to answer was whether an agreement unreasonably restrained trade, or whether another reason (such as enhanced efficiency) may justify the apparently noncompetitive arrangement.46 37 M. Sklar, ‘Sherman Antitrust Act Jurisprudence and Federal Policy-Making in the Formative Period, 1890–1914’ (1990) 35(4) New York Law School Law Review 791; and Kovacic and Shapiro (n 29). 38 Kovacic and Shapiro (n 29). 39 ibid 43. 40 ibid. 41 H. Hovenkamp, ‘The Federal Trade Commission and the Sherman Act’ (2010) 62(4) Florida Law Review 871. 42 Halladay (n 27). 43 United States v Trans-Missouri Freight Association, 166 US 290 (1897). 44 Standard Oil Co. of New Jersey v United States, 221 US 1 (1911). 45 R. Bork, ‘Legislative Intent and the Policy of the Sherman Act’ (1966) 9(3) Journal of Law & Economics 7. 46 Kovacic and Shapiro (n 29).

An historical account of anti-cartel enforcement  53 Scholars have subsequently discussed whether the ultimate goal of the original law was market efficiency, protection of competitors or advancing consumer welfare. Bork argued consumer welfare was a core goal, although later scholars have convincingly contested this. Bork’s argument underpinned the Chicago School’s focus on consumer welfare in antitrust policy decades later.47 Other commentators have noted that the Sherman Act aimed to satisfy multiple goals.48 There is considerable literature on whether the Sherman Act was a return to the English common law tradition that contracts restraining trade in a manner harmful to the public were unlawful. According to Sklar, the Sherman Act went further than the common law principle as it made restraints of trade that contravened the public interest illegal, and the collaborators liable to punishment. Such agreements were also liable to private, civil suits for damages by third parties.49 Spurred on by the rapid expansion of big business in the late nineteenth century, the Canadian and American antitrust laws were passed before those in other countries. Differences in each nation’s economy, stage of development, politics and culture meant that even when citing the Sherman Act as inspiration, lawmakers fashioned policies and legislation to deal with the specific problems and structures in their own country. In several countries, this occurred decades into the twentieth century. While the North American ‘antitrust’ policy has been frequently cited as influential in shaping pro-competitive attitudes, especially after the Second World War, each country followed its own path towards developing antitrust policy.50

V.

ANTI-CARTEL ENFORCEMENT IN THE INTERWAR PERIOD

The period which led to the Sherman Act was not only one of rapid industrialization but also an era of global economic integration, growing international investment and trade flows. The First World War ended this first period of globalization, while the interwar years brought with them heightened nationalism, economic isolation and a retreat from global trade.51 The interwar period is often considered the peak period for cartels, especially in Europe, where relatively tolerant attitudes towards restrictive practices were common. Increasing cartelization during this period was partly a result of policies during the First World War, when many governments encouraged or even forced industries to collaborate and cartelize as part of the war economy. For some governments, strong cartels and big business were also considered important national symbols during the war.52 For example, in

C. Grandy, ‘Original Intent and the Sherman Antitrust Act: A Re-Examination of the Consumer-Welfare Hypothesis’ (1993) 53(2) Journal of Economic History 359. 48 T. Hazlett, ‘The Legislative History of The Sherman Act Re-Examined’ (1992) 30(2) Economic Inquiry 276. 49 Sklar (n 37); and Kahn (n 17). 50 H. Schröter, ‘Cartelization and Decartelization in Europe 1870–1995: Rise and Decline of an Economic Institution’ (1996) 25(1) Journal of European Economic History 129; and Fellman and Shanahan (n 1). 51 M. Bordo, A. Taylor and J. Williamson (eds), Globalization in Historical Perspective (University of Chicago Press, 2001). 52 Gerber (n 21) 116. 47

54  Research handbook on cartels Germany, the government relied on cartels for economic mobilization.53 In Italy, which had fewer cartels in the early twentieth century than, for example, Germany, government support to key industries promoted concentration during the First World War.54 Similar patterns were observed in other countries. Despite the Sherman and Clayton Acts, business concentration also increased in the US, as large corporations in many industries benefited economically from war expenditure.55 After the war, benign attitudes towards restrictive practices, cartels and overall government­– business collaboration in key industries continued in many European countries. In several nations, cartels were not only tolerated but actively promoted by national governments. These favoured participation in both international and domestic export cartels, as they were considered to be in the national interest. This was especially the case in small open economies where participation was viewed as the only way to compete on the world market. Complementing this situation, businesses’ self-regulation and freedom of contract were considered to override harm from collusion. Even the UK – commonly regarded as supporting free trade and a free market – did not introduce modern competition regulation until after the Second World War. Significant collusion and concentration occurred in the interwar UK, while their courts were often reluctant to rule against restraint of trade, leaving the cartels a free hand to collude.56 Nonetheless, many economic experts, some political parties and various interest groups understood the cost of cartels and identified the harmful effects of restrictive practices of powerful cartels and trusts. Immediately after the end of the First World War, efforts were made to return to free trade, and restrictive practices and international cartels could hinder these efforts. In 1927 the League of Nations also held a series of debates on cartels and their effects, having commissioned several experts’ reports prior to the meeting.57 The meeting, however, did little other than recommend countries pay attention to the cartel phenomenon. Strong business interest groups had been influential in many of the debates and vigorously argued the case against restricting cartels. A dominant contemporary narrative was that cartels (national and international) were key players in maintaining economic governance and economic stability.58 Other organizations that were critical of the growing powers of the cartels were, for example, the cooperative movement in their international meetings and the Inter-Parliamentary Union in their meeting in 1930.59

53 J. Wolff, ‘Business Monopolies: Three European Systems in their Bearing on American Law’ (1934–35) 9(3) Tulane Law Review 325. 54 C. Giordano and F. Giugliano, ‘A Tale of Two Fascisms: Labour Productivity Growth and Competition Policy in Italy, 1911–1951’ (2015) 55(1) Explorations in Economic History 25. 55 M. Stoller, Goliath: The 100-Year War between Monopoly Power and Democracy (Simon & Schuster, 2019) 29–31. 56 J.D. Gribbin, ‘Recent Antitrust Developments in the United Kingdom’ (1975) 20(2) Antitrust Bulletin 377. 57 See e.g. P. De Rousiers, Les Cartels et les Trusts et leur Évolution (League of Nations, 1927); and J. Hirsch, Monopoles Nationaux et Internationaux du Point de Vue des Travailleurs, des Consommateurs et de la Rationalization (League of Nations, 1927). 58 M. Bertilorenzi, ‘Legitimising Cartels: The Joint Roles of the League of Nations and of the International Chamber of Commerce’, in Fellman and Shanahan (n 1). 59 L. McGowan, The Antitrust Revolution in Europe: Exploring the European Commission’s Cartel Policy (Edward Elgar Publishing, 2010) 64; and M. Shanahan and S. Fellman, ‘Introduction’, in Fellman and Shanahan (n 1).

An historical account of anti-cartel enforcement  55 Cartels were also the subject of considerable scholarly attention in the interwar period, which saw the publication of several works on international cartels and combines, as well as works on nations’ domestic economies, anti-cartel legislation and policies.60 Critical analyses faded with the Great Depression, however, and a benign attitude towards cartels became more prominent as fears of ‘ruinous competition’ and disastrous price falls increased. As democratic governments sought economic stability through cooperative organizations, nationalist, fascist and autarchic governments used cartelization as a tool to implement their economic policies and control business. Despite, and in some cases because of, the rise of cartels, the first stirrings of ‘modern’ anti-cartel or antitrust legislation in Europe are also evident in the interwar period. The development in the US and Canada did not go unnoticed, of course. There had also been serious attempts to introduce anti-cartel legislation in Austria in the late nineteenth century and echoes of this influenced subsequent European efforts. For example, the Norwegian Temporary Price Act of 1920 introduced the compulsory notification of restrictive business agreements, dominant enterprises and subsidiaries of foreign cartels and monopolies. The Norwegians extended this in their 1926 Trust Law, which was quite intolerant of anticompetitive behaviour and introduced a register to record cartels. This legislation is considered by several scholars as the first real competition legislation in Europe.61 The German authorities had also passed the German Decree against the Abuse of Economic Power Position (the ‘Cartel Ordinance’) in 1923, therefore formally the first European legislation, but the Norwegian legislation was more efficient and effective. The Ordinance was partly a response to Germany’s hyperinflation and a means to combat price rises. Small and medium-sized industries were important supporters of the legislation, as were consumer and labour interests. The influence of the Austrian debates is evident in the German approach, but the new Ordinance had more substance and political prominence.62 The aim was to use administrative procedures, to constrain cartels from abusing their market power to manipulate prices and output. The German Ordinance did not seek to forbid or eliminate cartels, only to curb their excess. The approach later became known as the abuse principle; cartels were to be punished only in cases they abused their market power – such as preventing cartels from boycotting former members who had withdrawn from an agreement.63 Overall, however, the legislation was not particularly strong.64 The fear of ‘ruinous competition’ was a ghost that haunted the German courts’ deliberations, causing them to favour cartels in their decisions.65 Some contemporary analysts even argued that the Ordinance was not really an

60 Core works included: W. Notz, Representative International Cartels, Combines and Trusts (Department of Commerce, 1929); Liefmann (n 23); and A. Plummer, International Combines in Modern Industry (Pitman & Sons, 1932). 61 Gerber (n 21) 6 and 15; H. Espeli, ‘Perspectives on the Distinctiveness of Norwegian Price and Competition Policy in the XXth Century’ (2002) 31(3) Journal of European Economic History 621; and H. Espeli, ‘Transparency of Cartels and Cartel Registers: A Regulatory Innovation from Norway?’ Fellman and Shanahan (n 1). 62 Gerber (n 21) 67. 63 C. Harding and J. Joshua, Regulating Cartels in Europe: A Study of Legal Control of Corporate Delinquency (Oxford University Press, 2003) 75. 64 Gerber (n 21) 134–35. 65 Schwartz (n 21).

56  Research handbook on cartels anti-cartel law.66 With the benefit of hindsight, later scholars consider the Ordinance a step forward for anti-cartel enactment legislation in Europe, especially as its approach influenced other countries.67 The ‘abuse principle’ became the dominant concept underpinning European counties’ cartel legislation up until the 1980s.68 The Ordinance did not have a long life. In 1929, the economic depression changed everything, and cartels were again fully accepted. The legislation was also modified in the early 1930s and then abolished after the Nazis’ rise to power. Cartels became part of the regime as private firms were forced into cooperative arrangements. A similar approach was taken in Italy after the rise of Benito Mussolini. Mussolini initially adopted a laissez-faire economic policy, but with the Great Depression, the country’s economic policies increasingly favoured both mergers and cartelization. In 1932, regulations creating both compulsory cartels and voluntary cartels was made law.69 In 1930 cartel legislation emerged in several countries, including in Eastern and Central Europe (that is, Hungary in 1932, Czechoslovakia and Poland in 1933, Yugoslavia in 1934, Bulgaria in 1936 and finally Romania in 1937).70 Comparatively little is known about these Acts as they were phased out during and after the Second World War, although some contemporary comments do exist. In all these countries, the legislation was heavily influenced by the Austrian and German models and focused on the avoidance of abuse. They also followed the Norwegian model by adopting a register. The practical implementation of the laws was often weak, and the meanings of ‘abuse of market power’, ‘public interest’ or ‘cartels’ were often ill-defined. Hungary in 1920 had prohibited the abuse of market power (Laws No. XV/1920 and No. V/1923), but with little effect as there was no state authority to determine what was the ‘right’ or ‘just’ price, or what was an ‘immoral business practice’.71 Anti-cartel legislation was introduced in 1931 (Law No. XX/1931). The Cartel Act did not prevent cartelization or protect consumers, however, as the legislation lacked clear definitions of cartel activities and the register’s contents were kept secret. Cartel agreements were valid contracts protected by law if they were registered. Actions against them could only be taken where they were endangering the public welfare or the economy.72 In Bulgaria, the Control of Cartels and Monopolistic Prices Act (1931) aimed to improve the legal and administrative framework promoting competition. A Cartel Commission was formed to register cartels and prices, but again enforcement was weak.73 Czechoslovakian legislation was passed in 1933 (Act on Cartels and Monopolies, No. 141 on 12 July 1933). Cartels were to register all valid agreements. The legislation did not prevent

Wolff (n 53). Harding and Joshua (n 63) 80–81. 68 Schröter (n 50). 69 Giordano and Giugliano (n 54). 70 See e.g. S. Timberg, ‘Restrictive Business Practices: Comparative Legislation and the Problems That Lie Ahead’ (1953) 2(4) American Journal of Comparative Law 445. 71 N. Varga, ‘The Research of Hungarian Cartel Supervision’ (2020) 11(2) Journal on European History of Law 211. 72 Varga (n 71); and M. Hidvégi, ‘Machine Building Cartels in Hungary, 1919–1949’ (2019) 20(1) Enterprise & Society 89. 73 Y. Todorova, ‘Historical Review of the Development and Competition Law System in Bulgaria until 1944’ (2018) 9(1) De Jure 30. 66 67

An historical account of anti-cartel enforcement  57 abuse or cartelization, and instead protected the participants, as the register was secret to the public.74 Teichova found that the majority of records were of domestic cartels, but a large number were also international – primarily German firms, as these had invested extensively in Czechoslovakia.75 In Poland, a Cartel Act was issued on 28 March 1933. Cartel agreements were valid and binding provided they were made in accordance with the cartel law. The cases were inspected by a Cartel Court, and the Supreme Court had the jurisdiction to punish violations.76 This legislation lay dormant after the Second World War until the late 1980s, when it was gradually revived as Poland transitioned to a market economy.77 The Yugoslavian Cartel Decree from 1934 was less tolerant than other Central European Cartel Acts.78 The first paragraph of the decree stated that cartels were forbidden, while the second paragraph allowed the Minister of Economic Affairs to grant special authorizations for their establishment. As actual implementation was also initially weak, the result was an ineffectual regulation.79 Anti-cartel legislation was also on the agenda of other western European countries. Danish and Swedish decision-makers followed the Norwegian example, and in Denmark a Price Act and registration system were introduced in 1936. The Danish cartel authorities only became active in monitoring restrictive practices after the Second World War, when new legislation was passed in 1955. Sweden had passed an anti-cartel law in 1925, which granted authorities permission to investigate cartels and their ‘influence on prices and sales’. It did not, however, produce any tangible results. The first legislation that produced real control of some restrictive practices was from 1946, when a cartel register was also established.80 In 1935 in Belgium and the Netherlands, Cartel Acts were introduced which enabled forced cartelization under specific circumstances. After Nazi occupation, the Dutch Act was replaced by a Cartel Decree, vesting the state with almost unlimited powers to regulate and control the economy.81 France had a different approach to monopolies, but even in that jurisdiction cartel legislation was under consideration in the early 1930s. A draft bill was prepared (Projet de loi relatif au regime des ententes commerciales et industrielles), but nothing eventuated. France introduced an Ordonnance in 1945, whereby the state could control prices. It was renewed on several occasions, but was only weakly enforced and had little effect on cartel agreements.82

A. Teichova, An Economic Background to Munich: International Business and Czechoslovakia 1918–1938 (Cambridge University Press, 2008), 57. 75 ibid 59. 76 W. Sokalski, ‘Supreme Court in Poland’ (1941) 4 Polamerican Law Journal 111. 77 M. Wise, ‘Review of Polish Competition Law and Policy’ (2003) 5 OECD Competition Law and Policy Journal 83. 78 Decree No. II 27945 from 3 August 1934. See F. de Kirnaly’s note in ‘Cartels’ (1934) 38 International Law Association Reports of Conferences 190. 79 K. Heinrich and G. Leighton, ‘Cartel Control: A Record of Failure’ (1946) 55(2) Yale Law Journal 297. 80 P. Sandberg, ‘Cartel Registration in Sweden in the Post-War Period’, in Fellman and Shanahan (n 1). 81 L. Petit, ‘The Dutch Cartel Collection in the Twentieth Century: Facts and Figures’, in Fellman and Shanahan (n 1); and Timberg (n 70). 82 C. Freedeman, ‘Cartels and the Law in France before 1914’ (1988) 15(3) French Historical Studies 478; and D. Gerber and R. Azarnia, ‘Dirigisme and the Challenge of Competition Law in France’ (1995) 3(1) Cardozo Journal of International and Comparative Law 9. 74

58  Research handbook on cartels The North American laws were mostly directed specifically at trusts, combines and monopolies. In contrast, the ‘cartel problem’ in Europe was aligned with efforts to combat the restraint of trade.83 While the US and the Canadian legislation ostensibly banned cartels, in interwar Europe, the cartel ‘problem’ was an issue of debate. This difference reflects economic differences between US and European markets, the preponderance of family-related firms in Europe, and attitudes to cooperation between businesses. The ‘cartel question’ was at first seen as a particularly ‘German problem’ by, for example, foreign experts, but it was to become an issue in many other countries. In the interwar period, the power of international cartels and trusts was of special concern to smaller countries. As global economic problems continued, courts began to reject the argument that price cooperation was benign because cartel members set ‘reasonable’ prices or desired only to stop downward price spirals.84 Horizontal and vertical price restrictions were increasingly considered unreasonable and against the public interest. A few non-Western countries introduced cartel legislation prior to the Second World War. These were mainly countries with strongly nationalistic governments and the statutes were often intended to promote, rather than prevent, cartelization and so enable state control of big business and industrialization. In 1931 Japan imposed an Important Industries Control Law, which mandated cartelization in many industries.85 In cases where the cartel included more than two thirds of the industry, the state authorities could force outsiders to comply with the cartel’s rules. After the invasion of Manchuria in 1937, the legislation was amended to allow the government to intervene directly into a cartel’s activities and set minimum prices and quotas. During the war, the mandatory cartels were replaced with mandatory trade or ‘control’ associations that could intervene directly in economic activities. These associations were no longer self-determining organizations, but served the state.86 A number of Latin American countries also introduced legislation that affected restrictive agreements during this period. In Brazil, an antitrust Act was passed in the 1930s, but its rationale was not to promote competition. It was designed as part of a nationalistic economic policy implemented by the autarkic leader Getfilio Vargas, who sought to industrialize and centralize the economy.87 In Argentina, a competition law was enacted in 1923 and renewed in 1946. The first two articles closely resembled sections 1 and 2 of the Sherman Act. The legislation was intolerant of cartels, prohibiting the creation, maintenance or exploitation of monopoly power and containing penal sanctions. The Argentinian Acts, although different

C.D. Edwards, Control of Cartels and Monopolies: An International Comparison (Oceana Publications, New York, 1967); and H. Thorelli, ‘Antitrust in Europe: National Policies after 1945’ (1959) 26(2) University of Chicago Law Review 222. 84 M. Perelman, ‘Fixed Capital, Railroad Economics, and the Critique of the Market’ (1994) 8(3) Journal of Economic Perspectives 189; and Kovacic and Shapiro (n 29). 85 H. Levy, ‘Industrial Law and International Cartelization’ (1949) 3(3) Industrial Law Review 184; T. Ohata and T. Kurosawa, ‘Policy Transfer and Its Limits: Authorised Cartels in Twentieth-Century Japan’, in Fellman and Shanahan (n 1); and B. Gao, ‘The State and the Associational Order of the Economy: The Institutionalization of Cartels and Trade Associations in 1931–45’ (2001) 16(3) Sociological Forum 409. 86 Gao (n 85); and Ohata and Kurosawa (n 85). 87 F. Todorov and M. Filho, ‘History of Competition Policy in Brazil: 1930–2010’ (2012) 57(2) Antitrust Bulletin 207. 83

An historical account of anti-cartel enforcement  59 in attitude to those in Brazil, were rarely enforced. Between 1933 and 1980, only four cases resulted in sanctions under these laws.88 Although the US has the reputation as the ‘birthplace’ of modern antitrust law, the first years of the interwar period in that country saw still quite weak enforcement of antitrust legislation, and the courts treated firms benignly.89 Powerful tycoons exercised strong influence in government while the FTC and the Supreme Court were relatively ineffectual. Business interests prevented antitrust cases proceeding far. Business and government were often closely aligned on economic issues.90 Despite US antitrust oratory, the Webb–Pomerene Act allowed US firms to participate in export cartels on international markets. The National Industrial Recovery Act of 1933 initiated a more vigorous antitrust policy. President Franklin D. Roosevelt appointed more energetic trustbusters into the Department of Justice, the most famous being Thurman Arnold, who was appointed as head of the Antitrust Division in 1938. Economists increasingly advocated a more forceful antitrust policy.91 At the same time there was an increasing focus on price fixing and market allocation cartels. In Canada the rules against firms’ involvement with restrictive practices had also been enforced sporadically and with lenience. Concerned by the limited ability to combat monopolies and cartels, the Combines Investigation Act of 1910 was reinvigorated in 1927. It was not until the 1960s, however, that new laws with real effect on anticompetitive behaviour were implemented.92

VI.

POST-SECOND WORLD WAR: THE GLOBAL SPREAD OF ANTI-CARTEL LEGISLATION

In the decades after the Second World War, intolerance of restrictive practices gradually expanded; legislation was adopted and more dynamic measures to combat restrictive practices were taken in many countries. The development is often attributed to the spread of the American antitrust ideas. This was especially the case in occupied Japan and Germany, and in a more general sense in Western Europe; but with the benefit of a longer perspective, these developments were more complex than a simple transfer of attitudes. American administrations in Germany, Italy and Japan immediately after the war promoted legislation designed to break up cartels, monopolies and strong business groups. The US considered that powerful business groups and cartels had been important backbones of German and Japanese military power. In Japan, breaking up cartels and strong business groups, such as the family-centred zaibatsus and bank-centred keiretsus, was considered important in the transition to peace and to minimize future threats. These policies never really became imbedded and after the withdrawal of the foreign administration the legislation was amended. The Organization for Economic Co-operation and Development, Competition Law and Policy in Latin America. Peer Reviews of Argentina, Brazil, Chile, Mexico and Peru (Paris, 2006). Laws to counteract monopolies and restrictive practices existed also in some other countries not dealt with here. For example, the Philippines instigated anti-cartel legislation in 1925, Mexico in 1926 and Costa Rica in 1932. Their implementation and effects remain unclear. See e.g. Timberg (n 70). 89 Kovacic and Shapiro (n 29). 90 Stoller (n 55) 33 and 43; and Phillips Sawyer and Hovenkemp (n 12). 91 Kovacic and Shapiro (n 29); Stoller (n 55) 134–39. 92 Iacobucci and Trebilcock (n 25). 88

60  Research handbook on cartels American model was also frequently resisted at the local level elsewhere, and businesses in, for example, Italy were especially successful in avoiding a top-down implemented competition policy. Italy remained one of the countries without antitrust and pro-competition laws until the 1990s. Despite several attempts in the 1950s and 1960s, the only successful antitrust legislation in Italy involved regulation against unfair competition in the Civil Code.93 In Germany, the occupation also involved French, British and Soviet forces. The four powers had somewhat different priorities, and it was in no one’s interest to destroy completely German industry. Segreto and Wubs emphasize that the US also was ambivalent towards German cartels and vacillated between pragmatic attitudes and aggressive statements.94 The Allies gave responsibility for anti-cartel legislation to the West German decision-makers in 1949. Differences between those seeking to prohibit cartels (the Josten Commission drafts), those promoting a framework to minimize cartelization (the ordoliberals) and those seeking fully free markets (business interests and heavy industry) led to drawn-out debates between politicians and experts, oscillating between anti-abuse-based legislation and prohibition. Not until 1957 was legislation based on the prohibition principle implemented, but with numerous potential exemptions.95 The US also pressured other Western European countries to change their policies towards cartels and restrictive practices. Such efforts were included in the Marshall Plan.96 Reform of anti-cartel regulation together with technical assistance, new managerial models and capital expenditure was promoted by the Americans as the way to lift Europe after the Second World War. In the early 1950s, the Schuman Plan and the foundation of the European Coal and Steel Community (‘ECSC’) paved the way for new policies in Western Europe. As the situation changed in Europe, the need for stability and growth saw American efforts to direct change in one direction fade. Attitudes had been influenced, however, and a wave of anti-cartel and competition legislation surged in Western Europe after the 1950s. However, the results were quite different from the US antitrust legislation. In most Western European countries, cartel or agreement registration became a common way to regulate restrictive agreements, especially where legislation was based on anti-abuse principles. The system, which had started in Norway, was used in different legal contexts throughout the 1950s, 1960s and 1970s.97 These registers were especially common in Europe, but existed also in some non-European countries, such as Australia, New Zealand (for a very brief period), Japan, Israel and India. In a system with anti-abuse-based legislation, the authorities documented information about restrictive practices so as to monitor and control these agreements and intervene in cases of abuse of market dominance. A registered agreement was, as a rule, permitted. This model existed in countries which prohibited restrictive practices and cartels but allowed exemptions, such as the UK, Germany, Israel, Japan and later India, Pakistan and South Korea. In these cases, cartel agreements exempted from the ban were L. Segreto and B. Wubs, ‘Resistance of the Defeated: German and Italian Big Business and the American Antitrust Policy, 1945–1957’ (2014) 15(2) Enterprise & Society 307; and P. Bianchi and G. Gualtieri, ‘Mergers and Acquisitions in Italy and the Debate on Competition Policy’ (1989) 34(3) Antitrust Bulletin 601. 94 Segreto and Wubs (n 93). 95 J.O. Hesse and E.M Roelevink, ‘Cartel Law and the Cartel Register in German Twentieth-Century History’, in Fellman and Shanahan (n 1). 96 Thorelli (n 83). 97 Fellman and Shanahan (n 1); and Edwards (n 83). 93

An historical account of anti-cartel enforcement  61 included in the register. Even the cartels permitted under the Webb–Pomerene exemptions in the US were registered.98 The European Economic Community (‘EEC’) introduced a system of registration for organizations that were exempted from the general ban on cartels affecting intra-EEC trade. Although it was initiated in 1962, the number of applications for exemption was so numerous that the administration could not keep up. The EEC system was abandoned in the late 1990s as the implementation of the intolerant European competition policies of the common market ensured its obsolescence.99 The practical enactment of anti-cartel legislation was similarly thwarted in India, where the backlog of cases became overwhelming. This was especially a problem in countries with intolerance-based legislation, where it was critical to receive a court’s exemption from a total ban. In more tolerant jurisdictions, administrators held a pragmatic attitude and let many cases go unregistered. In most cases, at least some of the information that was recorded was public. A public register was thought to allow consumers and competitors to be aware of any restrictive agreements, to restrain entrepreneurs and business from exploiting their market power and even to ‘shame’ the participants.100 In an era when many jurisdictions had little experience with anti-cartel enforcement, the registration system was often considered a pragmatic way to advance legislative reform. Even those who were reluctant to restrict cartels did not usually have serious objections against notification of their existence.101 The registration system came to an end in Europe in the 1980s and 1990s when stronger anti-cartel legislation and common European competition polices were adopted within the EU. Countries including Sweden, UK, Finland, the Netherlands and Austria had all introduced anti-abuse legislation including registration procedures in the late 1940s and 1950s. The UK, with a long tradition of promoting laissez-faire policies, only adopted the Monopolies and Restrictive Practices (Inquiry and Control) Act in 1948 as part of post-war rebuilding. Initially administrative and ‘gentle’ in nature until its strengthening in 1953, the legislation, together with a major public report in 1955, was credited with creating a sea-change in business attitudes.102 From 1956, companies had to record proscribed forms of cooperation on a Registrar of Restrictive Trading Agreements. To avoid registration, many agreements were simply dissolved. The legislation also allowed six ‘gateways’ whereby agreements against the public interest, or those otherwise proscribed, were specifically allowed and not registered. When these gateways proved to be too narrow for many forms of cooperation, some behaviour was driven ‘underground’.103 This approach remained in place, with only minor modifications, until new competition laws were introduced in the mid- to late 1970s. Not all major European countries introduced a registration procedure. France followed a quite different path which was aligned with its tradition of strongly dirigiste policies. After the war the French government introduced a new Ordonnance to restrict monopolies, and For details, see Fellman and Shanahan (n 1). L. Warlouzet, ‘Competition Policy in the European Economic Community, 1957–1992: The Curse of Compulsory Registration?’ in Fellman and Shanahan (n 1). 100 Shanahan and Fellman (n 3). 101 Espeli (2016) (n 61); and Gerber (n 21) 161. 102 Gerber (n 21). 103 A. Scott, ‘The Evolution of Competition Law and Policy in the United Kingdom’, LSE Law, Society and Economy Working Papers 9/2009, London School of Economics and Political Science Law Department, http://​ssrn​.com/​abstract​=​1344807 [accessed 23 February 2022], 10. 98 99

62  Research handbook on cartels in 1953 it set out a decree on cartels (Prohibition of Unlawful Settlement Agreements and Establishment of a Technical Commission on Cartels). In 1963, legislation prohibiting firms from abusing their dominant position was passed and in 1977 a competition commission was established. Overall, however, the French followed a state-led economic model and no active competition policy was implemented. Only in 1986 was an autonomous competition policy (Ordonnance no. 86-1243 or the ‘Competition Statute’) implemented. Attitudes had changed, but this shift also aimed to bring the French economy into accord with the European integration process.104 Another cartel-friendly country that reluctantly introduced anti-cartel legislation was Switzerland. It only enacted its first legislation, a Cartel Act, in 1962. The principle of freedom of trade and freedom of contract had dominated attitudes toward market regulation. The law prohibited boycotts and the cartel commission made decisions based on the balance of positive and negative effects from a cartel’s conduct. In 1985 the Act was revised, but substantial amendments only occurred in 1995, in conjunction with other reforms designed to make the economy more competitive. The Swiss had voted against entering the European Union, but the new legislation drew heavily on European legislation.105 A general problem with anti-abuse-based legislation was that it was often vague: it was unclear what abuse or harm meant in practice, while enforcement authorities were often understaffed and had little power to prevent damage. For example, was it the intent that was to be regulated or the effect? How much ‘harm’ was permitted? Commonly, some sectors were not covered by the legislation – often key industries, including agriculture, commodities and services.106 Despite these shortcomings, the introduction of anti-cartel legislation founded on inhibiting abuse of power was significant in changing attitudes towards anti-competitive restrictive behaviour and misuse of monopoly power.

VII.

DEVELOPMENTS IN NON-WESTERN COUNTRIES

Some Latin American countries were early adopters of anti-cartel initiatives. In these nations US antitrust principles were influential, even though there were frequently obstacles caused by political instability, autarchic or nationalistic regimes and military governments. For example, in Brazil it was only in the 1990s that efficient antitrust legislation was finally implemented. Through the post-war decades, Brazil’s governments prioritized building strong and competitive companies in specific industries. This often benefited big business. In 1994, a political breakthrough saw the introduction of laws to promote liberalization and other economic reforms.107 In contrast, Argentina had by 1946 already introduced legislation prohibiting activities designed to achieve monopoly power, restrict prices or allocate markets. Nonetheless, implementation was weak.

Gerber and Azarnia (n 82); and M. Dechamps, ‘Competition Policy: France’, in A. Marciano and G. Battista Ramello (eds), Encyclopedia of Law and Economics (Springer, 2019). 105 P. Gugler, ‘Competition Law and Policy in Switzerland’ (2007) 9(2) OECD Journal of Competition Law and Policy 7. 106 S. Fellman and M. Shanahan, ‘Sectoral Influence on Competition Legislation: Evidence from the Cartel Registers, 1920–2000’ (2018) 92(4) Business History Review 1. 107 Todorov and Filho (n 87). 104

An historical account of anti-cartel enforcement  63 In Colombia, legislation which prohibited a broad range of restrictive and cartel-type agreements was introduced in 1959. Companies could, however, receive exemptions from the ban if the agreements ensured industry stability.108 Chile also introduced anti-cartel legislation in 1959. US influence is especially notable here, as an American consultancy group had recommended the enactment of a competition law, while at the same time an Antitrust Commission was established. The latter was never actively implemented. It was not until the late 1990s that demands to reform the Decree and implement efficient competition policy were raised by both government agencies and academics. In 2003, a total ban on all restrictive practices was implemented.109 As Chile’s history reveals, it is not enough to have strong anti-cartel legislation; the anti-monopoly authorities must also have the power to act. In other Latin American countries, such as Mexico, appropriate anti-cartel legislation was often introduced only as free trade agreements, such as the North American Free Trade Agreement (‘NAFTA’) or the Uruguay Round, were initiated. In 1992, the Federal Law on Economic Competition (Ley Federal de Competencia Económica (‘FLEC’)) was introduced in Mexico in preparation for the signing of the NAFTA.110 In Japan, the very strict antitrust legislation introduced by the US occupying forces was considerably weakened in 1953 and replaced with a new domestically developed legislation, the Antimonopoly Act. The Act was in principle intolerant of monopolies, coercive restrictions and unfair practices, but allowed exceptions for cartels triggered by economic depression and rationalization and specific resale price maintenance agreements. A system of registering the exempted cartels was introduced and the number of such cartels recorded grew significantly over the years. The Japanese antitrust policy experienced considerable backlash, as it was weakly enforced. An important reason was the existence of two competing administrations; the Fair Trade Commission (‘FTC’) and Ministry of International Trade and Industry (‘MITI’). The MITI, which administrated industrial policies, prioritized industrial advancement over competition policy. In the 1960s this started to change, partly due to international efforts to liberate trade and curb restrictive practices. Tensions in trade relations with the US were also a concern. Domestically, there was increasing awareness of the cost of developmental policies and MITI’s strong position was questioned. Several exempted cartels were removed from the register. Change was slow, and it was only in the 1990s that the strategy of exempting cartels was phased out and anti-cartel policies became more active.111 Nations with colonial antecedents adopted anti-cartel legislation at different times, depending on a constellation of factors, including the shape of their economy (for example, manufacturing or agriculturally based), stage of development, political stability and timing of integration into the world economy. For example, South Africa adopted anti-cartel legislation relatively early, in 1955. This was a broad law where the Board of Trade and Industry could investigate agreements considered to be against the public interest. The law allowed the agreements to be removed altogether or declared unlawful. Australia had passed legislation as early as 1906 in the Australian Industries Preservation Act 1906. Despite its general antitrust

Edwards (n 83) 340. F. Agüero, ‘Chilean Antitrust Policy: Some Lessons behind Its Success’ (2016) 79(4) Chilean Law and Contemporary Problems 123. 110 U. Aydin, ‘Competition Law and Policy in Mexico: Successes and Challenges’ (2016) 79(4) Law and Contemporary Problems 155. 111 Ohata and Kurosawa (n 85); and Gao (n 85) 108 109

64  Research handbook on cartels appearance, the law was mostly aimed at external American trusts, and after a series of legal cases it was found ineffectual. It was not until 1965 that a modest Trade Practice Act was adopted that included a secret register of anticompetitive cartel agreements and some specific prohibitions on price fixing.112 New Zealand, like Australia heavily dependent on agriculture, briefly adopted a register for cartel activity in the late 1950s, but it abandoned this for more comprehensive laws. The timing of cartel legislation in other former colonies is frequently associated with their economic development, the rise of free trade agreements and, later in the century, the rise of globalization.113

VIII. 1980s/2000 ONWARDS: THE NEW CHALLENGES AND NEW AREAS Following the lead of the Reagan and Thatcher governments, combined with the increasing influence of the Chicago School of economics in the US, businesses were given more freedom from government regulation during the 1980s. This continued in the US under President Clinton, when regulations controlling banking and insurance were weakened.114 These changes were linked to political rather than economic or welfare considerations.115 Some of the changes, together with increased civil and criminal penalties, had the effect of lowering prosecutions, as only the worst offenders were charged with serious offences. A further consequence of increasing the focus on consumer welfare, the rule of reason and the economic impact of cartel behaviour was that prosecuting criminal behaviour became more problematic.116 The Sherman Act of 1890 gave authorities the power to prosecute using both civil and criminal sanctions. In the US, until 1974, criminal behaviour was categorized as a misdemeanour (with a maximum one-year penalty) and such prosecutions were the exception.117 The Antitrust Procedures and Penalties Act (Pub L No 93-528, § 3, 88 Stat 1706, 1708 (1974)) increased civil penalties and recategorized criminal cartel behaviour as a felony, with a maximum penalty of three years. The penalties (civil and criminal) were increased in 1987, 1990 and 2004 and criminal penalties in the US may now include a maximum of ten years in prison. In 1900, only the US, Canada (which always had slightly higher criminal penalties than the US) and Australia had criminal sanctions for certain forms of cartel behaviour. Other countries were slower to adopt criminal sanctions – and always for serious misconduct. For example, Brazil introduced sanctions in 1990; in the UK it took until 2003; in Denmark 2013.118 By

M.P. Shanahan and K.A. Round, ‘Transforming Australian Business Attitudes to Competition: Responses to the Trade Practices Act 1965’ (2013) 56(3) Business History 434. 113 ibid. 114 W. Mueller, ‘Antitrust in the Reagan Administration’ (1994) 21/22 Revue Française d’Études Américaines 427. 115 D. Wood and J. Anderson, ‘The Politics of U.S. Antitrust Regulation’ (1993) 37(1) American Journal of Political Science 1. 116 D.D. Sokol, ‘Reinvigorating Criminal Antitrust’ (2019) 60 William & Mary Law Review 1545. 117 W. Kolasky, ‘Criminalising Cartel Activity: Lessons from the US Experience’ (2004) 12 Competition & Consumer Law Journal 207. 118 M. Simpson, ‘The Criminal Cartel Offence around the World’ in Norton Rose Fulbright, Competition World: A Global Survey of Recent Competition and Antitrust Law Developments with Practical Relevance, 2016, www​.nortonrosefulbright​.com/​-/​media/​files/​nrf/​nrfweb/​imported/​ 112

An historical account of anti-cartel enforcement  65 2020, more than 30 jurisdictions criminalized certain forms of cartel behaviour, especially bid rigging.119 The formation of the European Economic Community in 1957 had as a major objective the creation of a common market between European nations. This process, by necessity, included the coordination of competition policy and the alignment of regulations dealing with anticompetitive behaviour and cartels; this took time to occur.120 The Treaty of Rome came into force in 1958, and while the first antitrust violation was successfully prosecuted in 1964, it was not until 1966 that the basis of future EU competition policies began to emerge. Colomo and Kalintiri argue that after 1992 the main motivation of antitrust policy shifted from ‘trade-enabling’ considerations to a more ‘economics-based’ approach, with market integration always an underlying factor.121 This policy development path was clearly different from the US.122 Similarly, variation is seen in other parts of the world.

IX.

INTERNATIONAL EFFORTS TO PROMOTE PRO-COMPETITION POLICIES AROUND THE WORLD AFTER THE SECOND WORLD WAR

Beginning slowly after the Second World War, and gaining pace in the last quarter of the twentieth century, the most dominant factor affecting international and national markets has been globalization. This second globalization period realized increasing global coordination, removal of trade barriers, increasing capital flows and, since the 1960s, rapid growth in new economic regions. Economic integration and trade openness was promoted by international organizations such as the Organisation for European Economic Co-operation (‘OEEC’) and its successor the Organisation for European Economic Co-operation and Development (‘OECD’), the General Agreement on Tariffs and Trade (‘GATT’) and the World Trade Organization (‘WTO’), and with the creation of free trade areas. These organizations’ activities included the publication of anti-cartel and competition legislative initiatives. For example, the Havana Charter in 1948, within the International Trade Organization, included one chapter devoted to restrictive business practices. In 1961 the Council of the OECD officially established a Committee of Experts on Restrictive Business Practices, while the OEEC had an Expert Group focusing especially on European competition policy issues.123 In 1964 competition​ - world—q2-2016.pdf?la=en-gb&revision=1cbcdf34-ae03-4a23-8f4d-f1ddd3c84f7f [accessed 19 April 2022]. 119 Organisation for Economic Co-operation and Development Council, 2020 Working Party No. 3 on Co-operation and Enforcement Criminalisation of Cartels and Bid Rigging Conspiracies – Note by Australia (Paris, 2020) https://​one​.oecd​.org/​document/​DAF/​COMP/​WP3/​WD(2020)8/​en/​pdf [accessed 23 February 2022]. 120 L. Warlouzet, ‘The Centralization of EU Competition Policy: Historical Institutionalist Dynamics from Cartel Monitoring to Merger Control (1956–91)’ (2016) 54(3) Journal of Common Market Studies 725; and N. Rollings and W. Laurent, ‘Business History and European Integration: How EEC Competition Policy Affected Companies’ Strategies’ (2020) 62(5) Business History 717. 121 P. Ibáñez Colomo and A. Kalintiri, ‘The Evolution of EU Antitrust Policy: 1966–2017’ (2020) 83(2) Modern Law Review 321. 122 Fellman and Shanahan (n 1). 123 M. Palim, ‘The Worldwide Growth of Competition Law: An Empirical Analysis’ (1998) 43(1) Antitrust Bulletin 105.

66  Research handbook on cartels the United Nations established the United Nations Conference on Trade and Development, in part because of developing nations’ concerns with the power of multinational companies. The OECD has been an important forum for competition policy issues, both monitoring legislation and their implementation and giving advice. Dialogue with non-OECD countries concerning competition policy began in the late 1980s. Countries in the early stages of industrialization often supported specific industries and/or used trade protection as part of their developmental policies, but since the 1970s international expert organizations had requested countries to create well-functioning markets and deregulate to improve economic efficiency. Individual countries were often advised to implement more active anti-cartel and competition policies, both as a condition of entry into international markets and to facilitate growth in their own countries. In 1998 the Council of the OECD adopted recommendations for action against ‘hard-core’ cartels.124 Hard-core cartels were defined as ‘an anticompetitive agreement, anticompetitive concerted practice, or anticompetitive arrangement by competitors to fix prices, make rigged bids (collusive tenders), establish output restrictions or quotas, or share or divide markets by allocating customers, suppliers, territories, or lines of commerce’.125 The recommendations included proposals that all member countries ensure their competition laws, institutions, enforcement mechanisms and sanctions were sufficient to halt and deter hard-core cartels, and further, that they should coordinate their efforts against such cartels. These proposals aimed to strengthen and extend the existing communities of competition law already in existence, such as those in the Caribbean Community and European Union.126 The EU has also advocated implementation of policies to curb restrictive practices in neighbouring countries, especially in Eastern and Central European countries in advance of their becoming Member States of the EU. It has also advocated anti-cartel policies in countries that aimed to increase economic exchange with the Union, such as Turkey and Tunis.127 The increase in globalization in the last decades of the twentieth century saw national governments take more interest in the activities of international cartels. This was a period when regulatory authorities began to adopt a wider range of techniques to obtain successful prosecutions again anti-competitive behaviour. These included whistleblower and leniency provisions that were introduced in the US (as Corporate Leniency Policies and Individual Leniency Policies) in 1993, and in the EU (as a Leniency Notice) in 1996. Although empirical estimates of these provisions’ impact demonstrate mixed results, almost 60 per cent of cartels

124 Organisation for Economic Co-operation and Development Council, Recommendation of the Council Concerning Effective Action against Hard Core Cartels (Paris, 1998) www​.oecd​.org/​daf/​competition/​2350130​.pdf [accessed 23 February 2022]. 125 ibid Rec A2.a. 126 P. Wirz, ‘Imprisonment for Hard Core Cartel Participation: A Sanction with Considerable Potential’ (2016) 28(2) Bond Law Review 89. 127 T. Doleys, ‘Promoting Competition Policy Abroad: European Union Efforts in the Developing World’ (2012) 57(2) Antitrust Bulletin 337.

An historical account of anti-cartel enforcement  67 detected in the EU are the result of leniency applications.128 Whistleblower policies appear to be more successful in some jurisdictions than in others.129 In 2008, the 12th meeting of member nations in UNCTAD produced the Accra Accord, which outlined UNCTAD’s role in formulating competition policies as a component of assisting national economic development.130 By 2020, this organization had established a working group on cross-border cartels. The OECD now publishes regular reviews of more than 40 nations’ antitrust, anti-cartel, merger and pro-competition regulations.131 It also has a database of hard-core cartels that have been prosecuted by competition authorities since 2012 from almost 50 jurisdictions.132

X.

A SWIFT INTRODUCTION TO LEGISLATION OUTSIDE THE WESTERN WORLD

This hardening of anti-cartel enforcement has been visible in different regions and in individual countries in most parts of the world since the 1990s. One important step for European economic development was the transition to market economies of the former socialist countries after the demise of the Soviet Union. Competition policies or anti-cartel laws were mostly redundant during the socialist regimes. After the collapse of the Soviet Union, Eastern European economies began actively transitioning to market economies; that change included the adoption of anti-cartel legislation. An easing of the state-led system occurred in some countries prior to 1989. For example, some rudimentary rules against price agreements existed in Yugoslavia, which had more free market elements than the other socialist economies. In Hungary some economic reforms occurred in the early 1980s and legislation which could be considered as pro-competition had emerged by 1984. This was taken further in 1990. In 1981 and again in 1990 Poland introduced legislation that edged the economy towards freer markets and, as mentioned earlier, the country revived its dormant pre-Second World War law.133 In 1991 Bulgaria, the Czech Republic, Slovakia and Latvia all introduced anti-cartel legislation, and by 1995 all post-socialist countries in Europe (including Russia) had competition laws. These were especially focused on restrictive practices and on confronting misuse of a dominant position and monopolization.134 At first implementation was not always very active, but 128 S. Brenner, ‘An Empirical Study of the European Corporate Leniency Program’ (2009) 27 International Journal of Industrial Organization 639; J.D. Jaspers, ‘Leniency in Exchange for “Cartel” Confessions’ (2020) 17(1) European Journal of Criminology 106; and N.H. Miller, ‘Strategic Leniency and Cartel Enforcement’ (2009) 9 American Economic Review 750. 129 T. Nyreröd and G. Spagnolo, ‘Myths and Numbers on Whistleblower Rewards’ (2021) 15(2) Regulation & Governance 82. 130 Qaqaya and Lipimile (n 31). 131 Organisation for Economic Co-operation and Development Council, Country Reviews of Competition Policy Frameworks (Paris, 2021) www​.oecd​.org/​daf/​competition/​cou​ntryreview​sofcompeti​ tionpolicy​frameworks​.htm [accessed 23 February 2022]. 132 Organisation for Economic Co-operation and Development, The OECD International Cartel Database https://​qdd​.oecd​.org/​subject​.aspx​?Subject​=​OECD​_HIC [accessed 23 February 2022]. 133 T. Varady, ‘The Emergence of Competition Law in (Former) Socialist Countries’ (1999) 47(2) American Journal of Comparative Law 229; and R. Pittman, ‘Competition Law in Central and Eastern Europe: Five Years Later’ (1998) 43(2) Antitrust Bulletin 179. 134 Doleys (n 127).

68  Research handbook on cartels according to Kovacic, transition economies quite vigorously adopted anti-cartel regulations in order to move from central planning to market economies.135 These laws were subsequently reformed; this was especially the case in those Eastern and Central countries that later aspired to enter the European Union and which committed to adopt EU competition policies. Other countries that transitioned to market economies during the last decades of the twentieth century also introduced legislative initiatives, most notably those in Latin America. The 1990s saw nations that did not have such legislation introduce it, while in those with existing legislation, the laws were more vigorously enforced. Competition laws in Latin America were often associated closely with political liberalization.136 In East and South East Asia, competition policies and cartel laws had been implemented quite early after the war. Outside Japan, India, Pakistan and South Korea introduced anti-cartel regulations in 1969, 1970 and 1980 respectively.137 India received its first legislation in 1969, the Monopolies and Restrictive Trade Practices Act (‘MRTP’) Act, in response to growing problems of concentrated business ownership, especially family-owned business groups. The MRTP Act was, in principle, prohibition-based legislation which required government permission for anticompetitive agreements and a registration of exempt cartels. The legislation was not vigorously enforced; it contained many ‘gateways’ and the administrators often focused on market problems other than cartelization and collusion. The system of registration suffered from overwhelming numbers of applications. Modern legislation intolerant of cartels and which prohibited restrictive practices was passed in 2002, but only implemented in 2009 when the MRTP Act was finally abolished.138 Taiwan initiated anti-cartel legislation in 1980, influenced by Japan and other Western countries and the expansion of free trade. Balancing pressures from strong domestic cartels, with policies enhancing trade only saw legislation enacted in 1991.139 Anti-cartel legislation was introduced in most East and South East Asian countries only in the 1990s and 2000. Many of these countries had pursued a developmental model which favoured active industrialization, protection and an active state. These strategies were pursued at the cost of vigorous competition policy. Moreover, the lack of a democratic political system in some countries also affected the active implementation of such a legislation. Nonetheless, the adoption of highly intolerant legislative frameworks has been rapid since the 1990s.140 China is in this respect a special case. Focused on internal political and economic problems after the Second World War, the most populous nation on the planet did not open its doors to outside economic markets until the late 1970s. The process proceeded relatively slowly,

W. Kovacic, ‘Lessons of Competition Policy Reform in Transition Economies for US Antitrust Policy’ (2000) 74(2) St John’s Law Review 361. 136 M. Palim, ‘The Worldwide Growth of Competition Law: An Empirical Analysis’ (1998) 43(1) Antitrust Bulletin 105. 137 F. Sayyeda, ‘Competition Law in Pakistan: Brief History, Aspirations and Characteristics’ (2012) 38(1) Commonwealth Law Bulletin 43; A. Bhattacharjea, ‘India’s New Antitrust Regime: The First Two Years of Enforcement’ (2012) 57(3) Antitrust Bulletin 449; and M. Yang, ‘Competition Law and Policy of the Republic of Korea’ (2009) 54(3) Antitrust Bulletin 621. 138 Battarcharjea (n 137). 139 See e.g. M. Williams, Competition Policy and Law in China, Hong Kong and Taiwan (Cambridge University Press, 2005); L. Liu, ‘All about Fair Trade. Competition Law in Taiwan and East Asian Economic Development’ (2012) 57(2) Antitrust Bulletin 259. 140 See e.g. Bradford et al (n 1). 135

An historical account of anti-cartel enforcement  69 with reforms to price controls, foreign investment, agriculture and entrepreneurial activity slowly being eased. More significant were changes in the early 1990s when many state-owned enterprises were at least partially privatized, although state monopolies remained in several sectors. While discussions about anti-monopoly legislation began in 1987, such laws were not formally adopted until 2007. The issue of how to regulate anticompetitive agreements became more urgent after China joined the WTO in 2001. The rapid growth of foreign firms in China and the country’s increasing integration in the global economy started to affect its own domestic market. The new legislation was broad in scope (including bans on restrictive practices, merger reviews and preventing abuse of market dominance), but involved balancing protection with a more open economy, creating regulations with considerable room for interpretation. Their enforcement has been flexible and adaptable.141 Under state capitalism, enforcement differs from systems with less government involvement. For example, the lack of an independent enforcement authority and the size and dominance of state-backed companies make separating economic and political behaviour difficult. Outside of the US and Europe, China is now the third major regulator of markets in the world. In several countries of the Middle East and North Africa (‘MENA’), competition legislation exists, but only since 2000. Most countries in the region are late comers in this field and some still lack legislation. The region should not be considered monolithic, however.142 For example, Israel has legislation dating from 1959, while among the nearby Islamic countries the process developed in different ways. Some early movers such as Tunisia, introduced legislation in 1991 to improve its trade relations with Europe. Its anti-cartel models came from the French Ordonnance of 1986 and later EU regulation.143 Complicating the introduction of such legislation is the belief that competition legislation is Western and to be resisted. Political instability has also affected several jurisdictions, and market intervention by the state is common. Since the 1990s, a number of African countries outside South Africa have prohibited price fixing, market allocation and other forms of anticompetitive behaviour. The effectiveness of these laws varies, and enforcement is often inadequate due to, among other things, political instability and occasionally corruption.144 Some African and MENA countries still lack any competition legislation.145 The technological and business changes in computing and communications in the 1980s, and their impact on markets, were resonant of the changes associated with steel, oil and railways in the nineteenth century. They saw new firms achieve dominant positions in a range of markets in many countries. The subsequent 40 years have seen many court cases with the new global players. The arguments, however still return to the question of freedom of contract versus freedom to trade, or whether market dominance was achieved through efficiency and techno-

Y. Svetiev and L. Wang, ‘Competition Law Enforcement in China between Technology and Industrial Policy’ (2016) 79(4) Law and Contemporary Problems 184. 142 M. Dabbah, Competition Law and Policy in the Middle East (Cambridge University Press, 2007). 143 P. Speelman, ‘Competition Law in the Middle East and North Africa: The Experiences of Tunisia, Jordan, and Egypt’ (2016) 48(4) New York University Journal of International Law and Politics 1227. 144 U. Aydin and T. Blüthe, ‘Competition Law & Policy in Developing Countries: Explaining Variations in Outcomes; Exploring Possibilities and Limits’ (2016) 79(1) Law and Contemporary Problems 1. 145 A. Bradford, A.S. Chilton, C. Megaw and N. Sokol, ‘Competition Law Gone Global: Introducing the Comparative Competition Law and Enforcement Datasets’ (2019) 16(2) Journal of Empirical Legal Studies 411. 141

70  Research handbook on cartels logical advance or abuse of power. With new technologies also came new versions of familiar forms of market manipulation: replacing ‘full-line forcing’ was ‘system lockout’; instead of ‘exclusive dealing’ came ‘network effects’. Unlike earlier cycles of market concentration and antitrust regulation, where the good or service was clear, there is today less transparency about what is actually being bought and sold (communication services to individuals or advertising space to business), or the price being paid (whether the price is paid via subscription or through unintentional transfer of personal attributes for on selling). The clearest example of regional difference in antitrust policies can be seen in differences in regulatory approach to the behaviour of the large computing and communications firms. Several of these companies, which either did not exist or were not particularly large in the 1980s, now have dominant positions in global, multibillion-dollar enterprises. Rollings and Waurlouzet suggest that the EU is now seen as acting more aggressively against such cartels than the US Department of Justice.146 Differences in attitude and approach are one explanation.147 While the US and EU are currently important jurisdictions influencing the global agenda on competition policy in this field, China’s attitude, especially to its own multinational firms, is also critical.148 The growth of China’s socialist economy has proved to be a test of how China adapts its own antitrust regulations to accommodate foreign companies and how the rest of the world adapts its antitrust regulations to accommodate China’s emerging state-owned enterprises.149 In an approach that echoes the public exposure of the cartel registers, China’s antitrust authority, the State Administration for Market Regulation, has required its ‘tech giants’ to publicly pledge their commitment not to engage in anticompetitive behaviour.150 Exactly how this framework will develop, and how the US and EU anti-cartel structures align with China, awaits to be seen.

XI.

CONCLUDING REMARKS

This chapter has provided a sweeping overview of the emergence and adoption of anti-cartel legislation over the past 130 years, combined with snapshots from specific countries. Modern anti-cartel legislation and policy measures to enforce competition first emerged in Canada and the US, were gradually adopted in parts of Europe and then spread to emerging Rollings and Laurent (n 120). M. Coppola and R. Nazzini, ‘The European and US Approaches to Antitrust and Tech: Setting the Record Straight – A Reply to Gregory J. Werden and Luke M. Froeb’s Antitrust and Tech: Europe and the United States Differ, and It Matters’ (Competition Policy International, 2020) www​.ftc​.gov/​system/​ files/​attachments/​key​-speeches​-presentations/​europe​-column​-may​-2020​-full​.pdf [accessed 23 February 2022]; and G. Werden and L. Froeb, ‘Antitrust and Tech: Europe and the United States Differ, and It Matters’ (CPI Antitrust Chronicle, 2019) www​.​competitio​npolicyint​ernational​.com/​antitrust​-and​-tech​ -europe​-and​-the​-united​-states​-differ​-and​-it​-matters​-2/​ [accessed 23 February 2022]. 148 A. Bradford, A. Chilton, K. Linos and A. Weaver, ‘The Global Dominance of European Competition Law over American Antitrust Law’ (2019) 17 Journal of Empirical Legal Studies 731. 149 E. Fox, ‘An Antimonopoly Law for China: Scaling the Walls of Government Restraints’ (2008) 75(1) Antitrust Law Journal 173; and A.H. Zhang, Chinese Antitrust Exceptionalism: How the Rise of China Challenges Global Regulation (Oxford University Press, 2021). 150 S. Yang, ‘China’s Tech Giants Vow, in Unison, to Play by Regulators’ Rules’ (The Wall Street Journal, 14 April 2021) www​.wsj​.com/​articles/​chinas​-tech​-giants​-vow​-in​-unison​-to​-play​-by​-regulators​ -rules​-11618402448 [accessed 23 February 2022]. 146 147

An historical account of anti-cartel enforcement  71 economies and developing countries. There are many reasons behind this global development: a breakthrough of anti-cartel and antitrust ideologies; economic theory-building; and increasing participation in international markets, economic integration and supranational efforts to promote free trade and removal of restrictive practices that hampered the free flow of goods and services. Factors including transnational learning and foreign advocacy to adopt new and more efficient legislation, as well as domestic economic modernization, have all contributed to the adoption of roughly aligned legislative approaches. The journey to adopt anti-cartel legislation has been complex, as countries and regions have followed their own historical path, and rarely has a country completely transformed from a jurisdiction tolerant of cartels to one that is completely non-tolerant. Since the 1990s global markets have seen a swift spread of legislative measures against cartels, including a rapid switch from a complete absence of legislation to legislation that is quite intolerant of cartels. Those countries that began earlier in the twentieth century, especially in Europe, often followed a more gradual, step-by-step transition towards less tolerant legislation. The development appears to imitate economic ‘catching up’ and is connected to this concept. Competition legislation is often linked to modernization of the economy, trade liberalization and, not infrequently, regime changes. Empirical evidence that such legislation is a prerequisite for economic growth or vice versa is not conclusive. Individual countries such as South Africa, Australia, New Zealand, Israel or Tunisia could, perhaps, have initiated competition acts earlier; however, in these cases, the colonial history and models derived from former colonial powers affected the implementation of their laws. In other countries with significant foreign influence, such as Germany and Japan, the introduction of anti-cartel legislation both triggered change and caused recoil. The effects of the various relevant pieces of legislations also varied. The existence of a particular piece of legislation is not enough. Its enforcement can be undermined by weak institutions or weak authorities. The need to foster a competition culture is frequently emphasized as a core for successful policies to curb anti-competitive behaviour. Countries that did not have formal competition legislation often had other laws that affected market behaviour and restrictive practices. Moreover, competition legislation includes a great variety of different types of restrictive practices and non-competitive behaviour; in some cases the law was narrow in scope, only controlling cartel agreements (horizontal or vertical), but it could also be broad and include a variety of restrictive practices and monopolistic behaviour, such as abuse of dominant market position and mergers and acquisitions. In some countries regulations focused on prices, unfair trade practices and monopolization, but not cartel agreements. The effect of specific legislation should always be viewed in its broader legislative context and as part of the economic and institutional situation. These anti-cartel laws always worked in conjunction with, and often complemented, other economic–political goals. Such important interactions, however, lie beyond the scope of this chapter. Attempts to balance the competing demands of free markets, freedom of trade, freedom of contracting and questions concerning economic efficiency and economic prosperity form a multifaceted problem that is not easy to resolve. As this chapter has shown, kings, dictators, autocrats and democratically elected officials have all grappled for decades with the problem of achieving equilibrium between these competing elements. Although circumstances change and technologies may advance, and the range of competing actors may vary from a local elite

72  Research handbook on cartels to global actors, the challenge of encouraging economic innovation and activity without facilitating exploitation and manipulation is a constant and ongoing one.

4. The morality of cartel activity Andreas Stephan

I. INTRODUCTION This chapter examines the extent to which cartel activity is morally wrongful and the resultant implications for cartel law more generally. It is important to begin by defining what is meant by morality and how it is different to ethics, as the two terms are closely related and are often used interchangeably. Morality concerns ‘a sense of right or wrong according to conscience’, while ethics concern ‘the rules and principles that ought to govern’ human behaviour.1 Thus, professional ethics generally prescribe how individuals are expected to behave in particular settings, regardless of whether those expectations align precisely with their sense of morality. Something unethical is not therefore necessarily something that is immoral. By contrast, morality is an instinctive emotion that is harder to pin down.2 While there are behaviours that would attract moral opprobrium from most or all in society, morality can also be highly subjective and capable of being wholly irrational depending on an individual’s particular set of beliefs.3 Any discussion of law and morality naturally gravitates towards the study of jurisprudence (or the philosophy of law), which consists of a wide spectrum of theories that explore this relationship. The most notable include: natural law theories that suggest laws are informed by a higher moral authority;4 positivism, which suggests there need be no connection at all between morality and law so long as the law is correctly formed;5 utilitarianism, which places an emphasis on the value of liberty over morality in promoting aggregate happiness for the greater good of all;6 and neoliberalism, which broadly argues that, to be moral, the law should not interfere with financial affairs (known as a ‘just holding’ in entitlement theory) through interventionist policies. A transfer is ‘just’ so long as the buyer pays a price they are willing to pay, although there is a contradiction in this argument in that it appears to assume the buyer has a choice and that markets are not therefore monopolized.7 The idea that there should be a strong link between morality and the law is weakened considerably by the fact we live in a liberal, pluralistic society in which there is a diversity of moral views and their relationship with the law is capable of changing significantly over time. In the UK, the publication of the 1957 Wolfenden Report reflected this relationship. It recommended

1 2

11.

Oxford English Dictionary (5th edn, HarperCollins, 2000). T.J. Horton, ‘Restoring American Antitrust’s Moral Arc’ (2017) 62(1) South Dakota Law Review

J. Coleman, ‘Competition and Cooperation’ (1987) 98(1) Ethics 76. T. Aquinas, Selected Political Writings (J.G. Dawson tr, Blackwell, 1959); J. Finnis, Natural Law and Natural Rights (Clarendon Press, 1980); and H.L.A. Hart, ‘Positivism and the Separation of Law and Morals’ (1958) 71 Harvard Law Review 593. 5 R. Dworkin, ‘Hard Cases’ (1975) 88 Harvard Law Review 1057. 6 J. Bentham, A Fragment on Government with an Introduction to the Principles of Morals and Legislation (first published 1776, Basil Blackwell 1948). 7 R. Nozick, Anarchy, State and Utopia (Basic Books, 1974). 3 4

73

74  Research handbook on cartels that homosexuality be decriminalized and pointed to glaring inconsistencies in the categories of behaviour that were unlawful at the time on the grounds of being ‘immoral’. They pointed, for example, to the fact that adultery between heterosexual couples was not a crime. There are also examples of where changes to the law have helped shape moral views – for example in relation to the perception of driving under the influence of alcohol. The law can therefore exist independently of morality and the relationship between the two can be highly subjective and capable of changing over time, as societal attitudes evolve. This is important because it opens up the possibility that certain types of cartel conduct might attract strong moral opprobrium while others might be viewed as morally ambiguous. What determines this is the characteristics of the cartel conduct, the circumstances that surround the conduct and the level of understanding an observer has about its nature and consequences. This is the central thesis of this chapter. We begin by setting out why morality is important to cartel law, despite competition law inhabiting a regulatory space that is largely void of moral considerations. This chapter argues that while the focus of morality lies mainly in the question of whether cartel behaviour should be treated as crime, it is actually important to the legitimacy of all cartel enforcement because such enforcement is often punitive and not merely regulatory in nature. It also speaks to the extent to which individuals are willing to comply with cartel law and report it to an employer or competition authority. The chapter then goes on to consider the extent to which cartels are considered morally wrongful. It is argued that as a fluid concept, what determine morally offensive cartel conduct are various pull factors that make it more likely that cartel conduct will attract moral opprobrium and push factors that have the opposite effect. Ultimately, these factors help us to identify both the types of cartel conduct that are most likely to be considered morally offensive and the potential policy tools for strengthening the moral opprobrium associated with cartel behaviour more generally.

II.

IS MORALITY IMPORTANT TO CARTEL LAW?

On the face of it, competition law inhabits a regulatory sphere that is principally concerned not with what is right or wrong, but with what is efficient. It is underpinned first and foremost by a set of economic theories that suggest interventions are necessary in markets to prevent monopoly outcomes that result in less being produced for a higher price, and a reduction in innovation and other benefits of rivalry. Yet in economics what is important is not the nature of the acts but rather their effect on the market. Academics belonging to the Chicago School of thought, for example, argue that behaviour should only be prohibited if it can be demonstrated to have a clear anticompetitive effect. They brand rules that are based on form (and especially those that ignore the effects of conduct altogether) as being blunt and inefficient in likely also prohibiting behaviour that is benign or beneficial.8 As Stones points out, their preference is

8 See for example: R.H. Bork, The Antitrust Paradox: A Policy at War with Itself (The Free Press, 1993); F.H. Easterbrook, ‘Workable Antitrust Policy’ (1986) 84(8) Michigan Law Review 1696; M.K. Block and J.G. Sidak, ‘The Cost of Antitrust Deterrence: Why Not Hang a Price Fixer Now and Then?’ (1980) 68(5) Georgetown Law Journal 1131.

The morality of cartel activity  75 to incorporate economics into an ex post effects-based analysis in a way that would combine rules, presumptions and structured tests, to ensure legal certainty and administrability.9 A case-by-case consideration of the effect on the market has undoubtedly become more important in competition law over the past 30 years. In the EU this has manifested itself in a more effects-based approach to merger control and aspects of abuse of dominance, and in the US there has been a gradual shift away from per se prohibitions of anti-competitive behaviour to the rule of reason approach that balances the likely pro- and anti-competitive effects.10 In justifying its decision to reclassify resale price maintenance as rule of reason, the US Supreme Court cited the fact that the ‘economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance’.11 Much of the rest of the world (and many US state-level antitrust regimes) continue to treat minimum resale price maintenance as per se illegal. Even when it comes to the question of who should be protected by competition law, there is no consensus that might be somehow linked to morality. For example, there is a longstanding debate over whether competition policy should be focused on the consumer welfare standard or on total welfare.12 If we accept the contention of neo-classical economists that total welfare is preferable and that transfers between consumer to producer are welfare-neutral, then this very much shapes the extent to which such transfers can be characterized as wrongful, so long as total welfare is not depleted.13 Also, the neoclassical economic principles that underpin modern EU competition law hold very different values to the ordoliberal tradition that dominated before it.14 In this diverse regulatory landscape, the design of cartel laws does little to make them stand out as any less morally ambiguous than other areas of competition law regulation. In particular, prohibitions of the most serious forms of cartel conduct are not focused on effects and are deliberately designed to capture a very wide spectrum of anti-competitive arrangements, including those entered into out of ignorance and those involving only very minimal communication and exchange of information between competitors. Someone with limited knowledge of competition law would be forgiven for wondering how this type of prohibition – which could potentially engage two competitors in a very small market – could possibly have a closer link with morality than the exclusionary behaviour of a dominant firm. The wide scope of cartel laws is deliberate, to ensure that competitors cannot circumvent regulation by simply watering down the nature of their collusion. Yet these prohibitions are meant to capture the categories of cartel behaviour that are most likely to cause anti-competitive harm. In not considering the effects of these arrangements, these prohibitions do not generally distinguish

R. Stones, ‘The Chicago School and the Formal Rule of Law’ (2019) 14(40) Journal of Competition Law & Economics 527. 10 See D.D. Sokol, ‘Reinvigorating Criminal Antitrust’ (2019) 60(4) William & Mary Law Review 1545, discussing R.H. Bork, ‘Legislative Intent and the Policy of the Sherman Act’ (1966) 9 Journal of Law & Economics 7. See also S. Kimmel, ‘How and Why the Per Se Rule Against Price-Fixing Went Wrong’ [2011] Supreme Court Economic Review 19. 11 Leegin Creative Leather Prods., Inc. v PSKS, Inc., 551 US 877 (2007) 889 and 894–5. 12 See for example: M. Harker, ‘Antitrust Law and Administrability: Consumer versus Total Welfare’ (2011) 34(3) World Competition 433. 13 See e.g. R. van den Bergh and P. Camesasca, European Competition Law and Economics (Sweet & Maxwell, 2006). 14 P. Akman, ‘Searching for the Long-Lost Soul of Article 82EC’ (2009) 29(2) Oxford Journal of Legal Studies 267. 9

76  Research handbook on cartels between attempted and actual cartel infringements, or even require them to have been fully implemented. Indeed, any exchange of commercially sensitive information has the potential to fall into this category, including behaviour that is likely to have benign effects.15 It is notable that even in the United States, where (public) cartel enforcement is a criminal process, the scope of the Sherman Act is far-reaching and there is no strong mens rea element to signal the moral offensiveness of what is prohibited.16 This means that cartel prohibitions are not restricted to arrangements with clear characteristics of a hard-core cartel but also include what Whish and Bailey describe as ‘atypical’ cartels, by which they mean those on the fringes of the prohibition.17 In addition, there are key aspects of how cartel laws are enforced that further suggest morality is of little relevance. Stucke is critical of an enforcement system that he describes as ‘largely encamped in utilitarianism and the economic theory of optimal deterrence’.18 This is evident in the emphasis on punishing corporations over individuals and holding them vicariously liable for the actions of their employees. Stucke and others suggest the very high levels of corporate fines reflect a belief in the economic paradigm of deterrence (or deterrence theory), in which businesses make rational choices based on the benefits and costs of entering into a cartel. Under the logic of deterrence theory, it is only where the expected cost (represented by the likelihood of getting caught and the size of punishment) is significant enough that deterrence is achieved. Also, increasing the size of the sanction is thought to have the same pro-deterrence effect as increasing detection.19 In this theoretical economic space, morality is only relevant to the extent that any perceived threat of social stigma or loss of reputation adds to the size of the sanction.20 It is interesting to note that early writings in economics were concerned with rationalising the effects of morality in economic terms. In Theory of Moral Sentiments (1759), Adam Smith suggested that individual behaviour towards society was constrained by external law enforcement, external incentives for control of opportunistic behaviour (which he characterized as a market) and the internal structure of the individual’s utility function that performs self-monitoring against that behaviour.21 So while deterrence theory has no discernible link to morality, it does recognize the effect of moral opprobrium as a cost, meaning that the more morally offensive cartels are considered to be, the greater the cost of participating in a cartel.22 The second feature of cartel enforcement that suggests little space for morality is the strong reliance on unmistakably utilitarian tools such as leniency and settlements or plea bargains. Murphy argues that the use of leniency programmes undermine compliance by making the See the discussion of cover bids and review of the relevant literature and case law in A. Stephan and M. Hviid, ‘Cover Pricing and the Overreach of “Object” Liability Under Article 101 TFEU’ (2015) 38(4) World Competition 507. 16 United States v United States Gypsum Co., 438 US 422 (1978). 17 See R. Whish and D. Bailey, Competition Law (9th edn, Oxford University Press, 2018) Chapter 13. 18 M. Stucke, ‘Morality and Antitrust’ [2006] Columbia Business Law Review 442, 449. 19 G. Becker, ‘Crime and Punishment: An Economic Approach’ (1968) 76 Journal of Political Economy 169. 20 S. Shavell, ‘Law versus Morality as Regulators of Conduct’ (2002) 4 American Law & Economics Review 227. 21 See G.M. Anderson and R.D. Tollison, ‘Morality and Monopoly: The Constitutional Political Economy or Religious Rules’ (1992) 12(2) Cato Journal 373. 22 D.D. Sokol, ‘Cartels, Corporate Compliance, and what Practitioners Really Think about Enforcement’ (2012) 78(1) Antitrust Law Journal 201, 203. 15

The morality of cartel activity  77 enforcement environment distinctly void of morality. What matters in the leniency ‘game’ is who is first through the door, and not the fact that one should ensure that perpetrators are punished.23 While reduced punishment for cooperation is common in sentencing guidelines around the world, allowing a guilty party to escape punishment altogether does not sit well in most legal traditions outside of competition law, and it undermines attempts to establish a strong moral underpinning for the prohibition of cartels. Indeed, leniency and settlement procedures reward virtues like cheating, distrust and informing on others, in a way that many might consider distinctly immoral.24 These tools are made all the more controversial by the way they combine the fate of the firm with that of the individuals who are responsible for bringing about the cartel in the first place. Even where there are no sanctions against individuals, leniency programmes generally require undertakings to ensure the full and continued support of current and former employees. This can often undermine a business’ own attempts to discipline those responsible, as those individuals typically hold the key to applying successfully for leniency.25 Where sanctions against individuals do exist, there is some evidence that plea bargaining is being used strategically by some businesses to reduce their corporate fine by facilitating a guilty plea from one of their employees.26 For those who believe cartel enforcement is void of morality, the growing international criminalization of hard-core cartel conduct has drawn particular criticism. If, at best, cartel conduct is morally ambiguous, then the use of criminal law might be seen as entirely inappropriate, because it represents an extreme act of regulatory control rather than any public upswelling of moral outrage at their nature and/or effects. For example, Parker described cartel criminalization in Australia as driven by ‘blind’ economics: ‘Cartel conduct is not a criminal offence because of its moral or political ‘offence’-iveness per se. Rather, it is a criminal offence because achieving economic welfare through competition is thought to be so important that anti-competitive conduct should be prohibited and, once prohibited, subject to the toughest possible sanctions.’27 Similarly, Haines and Beaton-Wells describe cartel criminalization as the ‘poster child’ of competition policy, in that it ‘elevates competition to a collective moral universe’ and pro-

23 J. Murphy, ‘Combining Leniency Policies and Compliance Programmes to Prevent Cartels’, in C. Beaton-Wells and C. Tran (eds), Anti-Cartel Enforcement in the Contemporary Age: Leniency Religion (Hart, 2015) 321–3. See also M.E. Stucke, ‘Leniency, Whistle-Blowing and the Individual: Should We Create Another Race to the Competition Authority?’, in Beaton-Wells and Tran (n 23); and the discussion in M.E. Siltoaja and M.J. Vehkaperä, ‘Constructing Illegitimacy? Cartels and Cartel Agreements in Finish Business Media from Critical Discursive Perspective’ (2010) 92 Journal of Business Ethics 493. 24 A. Stephan, ‘Survey of Public Attitudes to Price-Fixing and Cartel Enforcement in Britain’ (2008) 5(1) Competition Law Review 123, 140; For a discussion of the role of distrust in competition law, see C.R. Leslie, ‘Trust, Distrust, and Antitrust’ (2004) 82(3) Texas Law Review 515. 25 P. Whelan, The Criminalization of European Cartel Enforcement: Theoretical, Legal, and Practical Challenges (Oxford University Press, 2014), 133. See also the discussion of AkzoNobel’s internal amnesty tool in G. De Stefano and A. Stephan, ‘Impact of Cartel Enforcement on Compliance in the Chemical Industry’ (2023) Journal of Antitrust Enforcement, forthcoming. 26 See for example H. Greimel, ‘Confessions of a Price Fixer’ Automotive News (16 November 2014), as discussed in A Stephan, ‘The Price Fixer: Compliance Perspectives from the Other Side’ in A. Riley, A. Stephan and A. Tubbs (eds), Perspectives on Antitrust Compliance (Concurrences, 2022). 27 C. Parker, ‘Economic Rationalities of Governance and Ambiguity in the Criminalization of Cartels’ (2012) 52 British Journal of Criminology 974, 976.

78  Research handbook on cartels motes the individual over collective efforts for prosperity.28 This sentiment is also reflected in the writings of some political scientists who are taken by the dominance of a relatively small field of economics in this far-reaching regulatory sphere. Wilks comments that it marks a shift that ‘privileges a conception of the market which is neo-liberal, or perhaps Anglo-American, in its basic assumptions about how firms and individuals behave’.29 Horton argues that neoclassical economics has ‘led antitrust regulation’ astray by treating it as amoral and that notions like ‘fairness’ should be as central to the discipline as welfare.30 Finally, Williams points out a major problem in relation to labelling morally offensive behaviour as criminal, in that there is often no consistency or coherence to which behaviour is labelled criminal and which is civil (albeit often with the civil law serving a similarly punitive role).31 The problem is that ‘credibility may be undermined if one activity is criminalised while another, apparently equally delinquent activity, is not’.32 These criticisms further reflect the perceived amoral underpinnings of cartel enforcement described above – in particular the reliance on deterrence theory. Whelan’s work explores whether criminal antitrust sanctions are appropriate in the absence of negative moral content. He observes that deterrence theory (the key justification for cartel criminalization) is seen as lacking legitimacy because of the negative consequences if it is applied to a morally neutral offence, as it weakens all criminal law.33 For many scholars the identification of a sufficient moral delinquency goes to the heart of whether it is justifiable to intervene using criminal law. It is what Williams describes as the ‘bootstrap problem’.34 This refers to the way criminal law is used by policy makers to change public opinion in relation to behaviour they may not instinctively consider to be morally delinquent enough to be labelled criminal. Where this fails, we are left with ‘sticky norms’ – where a gap exists between what the law treats as morally offensive and how it is actually perceived by society at large.35 Whelan counters that such arguments ignore the educative effects of sanctions: ‘they do not allow for the criminal law actually to create, and not just reflect, a moral opprobrium’ for what is considered undesirable behaviour. There is at least some reciprocal effect in this context.36 He nevertheless

28 F. Haines and C. Beaton-Wells, ‘Ambiguities in Criminalizing Cartels’ (2012) 52 British Journal of Criminology 953, 972. 29 S. Wilks, ‘Cartel Criminalisation as Juridification: Political and Regulatory Dangers’, in C. Beaton-Wells and A. Ezrachi (eds), Criminalising Cartels: Critical Studies of an International Regulatory Movement (Hart, 2011) 350–51, as discussed in C. Harding and J. Edwards, Cartel Criminality: The Mythology and Pathology of Business Collusion (Ashgate, 2015) 57. 30 Horton (n 2). 31 R. Williams, ‘Cartels in the Criminal Landscape’ in Beaton-Wells and Ezrachi (n 29) 309. 32 ibid. 33 Whelan (n 25), in particular 56–58, with reference to: F. Sayre, ‘Public Welfare Offences’ (1933) 33 Columbia Law Review 55; and H. Packer, The Limits of the Criminal Sanction (Oxford University Press, 1968). 34 Williams (n 31) 299. 35 S. Green, Lying, Cheating and Stealing: A Moral Theory of White Collar Crime (Oxford University Press, 2006) 24, citing D.M. Khan, ‘Gentle Nudges vs Hard Shoves: Solving the Sticky Norms Problem’ (2000) 67 University of Chicago Law Review 607. 36 Whelan (n 25) 57, with reference to: J. Coffee, ‘Does “Unlawful” Mean “Criminal”? Reflections on the Disappearing Tort/Crime Distinction in American Law’ (1991) 71 Boston University Law Review 193, 201; and H. Ball and L. Friedman, ‘The Use of Criminal Sanctions in the Enforcement of Economic Legislation’ (1964) 17 Stanford Law Review 197.

The morality of cartel activity  79 accepts that the lack of legitimacy is a concern that needs to be addressed if criminalization is ultimately to succeed.37 Although cartel laws appear to inhabit a distinctly amoral space, there are three reasons why the relationship between morality and cartels is of great importance. The first is in relation to the use of criminal sanctions discussed above. As well as the issue of legitimacy, there are practical considerations such as the willingness to bring prosecutions and the danger of jury nullification – where a jury acquits, regardless of how the law is designed or their instructions from the judge, because they do not feel cartel conduct should be treated as crime.38 The second is a broader issue of legitimacy regarding all cartel enforcement, regardless of whether it occurs through a criminal or administrative procedure. Indeed, there is a real question of what practical difference the labels ‘criminal’ and ‘civil’ have in modern law enforcement.39 The problem is that while competition law is principally an area of business regulation, the investigative tools and sanctions imposed are distinctly criminal in nature, as confirmed by rulings of the European Court of Human Rights.40 The purpose of cartel enforcement is not simply to deprive the perpetrators of any unjust enrichment, but to punish and deter. The public statements of competition authorities speak not of regulatory breaches, but of theft by ‘well-dressed thieves’.41 As Harding and Edwards note, the moral and political basis for strong censure remains uncertain and a matter of uneasy consensus. What is so bad about cartel activity so as to justify criminalisation? Despite a strong official rhetoric, the basis for strong condemnation remains unclear and contestable, and an effective and credible system of legal control requires a firmer foundation, and indeed legitimacy.42

Parker describes this as a key vulnerability and one that could ultimately undermine cartel enforcement altogether, as the lack of clear moral support could result in businesses lobbying for softer laws and less enforcement.43 It also makes cartel enforcement susceptible to other policy objectives that some believe are better served by a more collaborative approach to business practices. For example, a number of competition authorities signalled a weakening of enforcement to allow for greater coordination in supply chains in response to supermarket shortages caused by the COVID-19 crisis.44 Other pressures include moves to relax cartel 37 P. Whelan, ‘Morality and Its Restraining Influence on European Antitrust Criminalisation’ (2009) 12(1) Trinity College Law Review 40. See also B. Fisse, ‘Reconstructing Corporate Criminal Law: Deterrence, Retribution, Fault and Sanctions’ (1983) 56(6) Southern California Law Review 1141. 38 R v Stringer and Dean, Southwark Crown Court, 24 June 2015 (unreported); see also: P. Whelan, ‘Antitrust Criminalization as a Legitimate Deterrent’, in T. Tóth (ed), The Cambridge Handbook of Competition Law Sanctions (Cambridge University Press, 2022), 111–12. 39 For a discussion of the civil versus criminal issue, see Coffee (n 36) 193. 40 See, e.g., A. Menarini Diagnostics srl v Italy, Application No. 43509/08, Judgment, 27 September 2011. 41 US Department of Justice Assistant Attorney General, JI Klein, Speech at Spring Meeting of the ABA Antitrust Division, 6 April 2006. 42 Harding and Edwards (n 29) 5. 43 C. Parker, ‘The “Compliance” Trap: The Moral Message in Responsive Regulatory Enforcement’ (2006) 40 Law & Society Review 591. 44 See P. Ormosi and A. Stephan, ‘The Dangers of Allowing Greater Coordination between Competitors during the COVID-19 Crisis’ (2020) 8(2) Journal of Antitrust Enforcement 299; and M.P. Schinkel and A. d’Ailly, ‘Corona Crisis Cartels: Sense and Sensibility’, Amsterdam Centre for Law & Economics Working Paper No. 2020-03, 12 June 2020.

80  Research handbook on cartels enforcement to promote environmental sustainability, through the greater use of carve-outs or comfort guidance.45 Such initiatives carry a significant danger that competitors will develop new, possibly tacit, ways of suppressing competition and exerting monopoly power. Without a strong moral basis for prohibiting cartels, the growth of such pressures could lead to a significantly more permissive regulatory landscape. The third reason why morality is important concerns compliance with the law. If the ultimate aim of cartel law is to prevent cartel harm, then enforcement can only go some way in preventing future infringements. The idea that fines alone will achieve deterrence, for example, is fundamentally flawed because it assumes cartelists engage in (and have the information they need to weigh the relative costs and benefits of) cartel behaviour. Parker points out that ‘[s]imple deterrence will often fail to produce compliance commitment because it does not directly address business perceptions of the morality of regulated behaviour – it merely puts a price on noncompliance’.46 Also, truly optimal fines (if deterrence theory is to be closely followed) would likely bankrupt most firms and so the general level of cartel fines is likely to be less than the overcharges achieved by successful cartels.47 So enforcement needs to be backed by norms (whether derived from ethics, morality, education or a combination of all three) to encourage desistance and compliance. 48 As Hodges and others point out, a shared set of values, ‘based on an innate ability to differentiate between what is morally right and wrong’, is more effective than simply threats of deterrence-based sanctions.49 A strong sense of right and wrong (which we might describe as a ‘moral compass’) is also important to the efforts of in-house compliance teams working to ensure employees either avoid cartel conduct or are able to recognize and report it.50 It is important to recognize that industry-wide cultures of cartelization are likely to have given way (at least in relation to larger firms and markets) to infringements involving smaller groups of individuals operating within particular divisions and subsidiaries.

See for example European Commission, ‘Statement on ACM Public Consultation on Sustainability Guidelines’, 9 July 2020, https://​ec​.europa​.eu/​competition​-policy/​european​-competition​-network/​ documents​_en [accessed 24 February 2022]; Autoriteit Consument & Markt, Guidelines: Sustainability Agreements: Opportunities within Competition Law, 9 July 2020, www​.acm​.nl/​sites/​default/​files/​ documents/​2020​-07/​sustainability​-agreements​%5B1​%5D​.pdf [accessed 24 February 2022]. 46 Parker (n 43) 592. 47 See, for example, W. Wils, The Optimal Enforcement of EC Antitrust Law: Essays in Law and Economics (Kluwer Law International, 2002) 6.5.2; and P. Buccirossi and G. Spagnolo, ‘Optimal Fines in the Era of Whistleblowers: Should Price Fixers Still Go to Prison?’, in V. Ghosal and J. Stennek (eds), The Political Economy of Antitrust (Elsevier, 2007). 48 M. Stucke, ‘Am I a Price Fixer? A Behavioural Economics Analysis of Cartels’, in Beaton-Wells and Ezrachi (n 29). 49 C. Hodges, ‘Science-Based Regulation in Financial Services: From Deterrence to Culture’, Oxford Legal Studies Research Paper No 19/2020, 2020. 50 See for example S.S. Simpson and M. Rorie, ‘Motivating Compliance: Economic and Material Motives for Compliance’ in C. Parker and V. Lehmann Nielsen (eds), Explaining Compliance: Business Responses to Regulation (Edward Elgar Publishing, 2011) 69. 45

The morality of cartel activity  81

III.

ARE CARTELS MORALLY WRONGFUL?

Having established that morality is a subjective and fluid concept that is of great importance to cartel enforcement despite its morally ambiguous underpinnings, we now turn to the question of whether cartels can in fact be viewed as morally wrongful. In this section we argue that there are various pull and push factors that determine whether particular cartel conduct is likely to be viewed as morally offensive or morally neutral. Some readers may be surprised to know that the issue of cartels and moral wrongfulness pre-dates the discipline of economics. There is evidence dating back to ancient Athens of severe punishment for merchants acting to drive up prices by restricting the supply of food,51 and there are also examples of this throughout the Middle Ages, some of which were driven by the fear of popular revolt and civil unrest at the monopoly prices for food and other key goods.52 For much of the pre-industrialization era, production of key goods and commodities in Europe was controlled by guilds, or associations of craftsmen and merchants. These guilds often had a legal monopoly over their trade in a particular geographical region and acted in their collective interests, although there were merchants who were not guild members who typically could not command the same price.53 In a remarkable empirical study on guilds that includes data from the fourteenth to the nineteenth centuries, Ogilvie estimates that they achieved price overcharges and output restrictions that are comparable and possibly greater than those estimated in modern cartel studies.54 She also notes evidence that ‘customers complained about high prices and supply restrictions that made their daily lives difficult’ and that many would travel to other geographical locations to buy shoes and other products from rural suppliers who were not members of the urban guilds.55 However, in the absence of established and reliable supply chains, guilds played an important role in organizing pre-industrialization production and in some cases spurring innovation.56 The more recent history of cartels has been a journey from ambivalence to strict prohibition and increasing criminalization.57 With this historical context in mind, we turn to the survey research available into what members of the public think about cartel practices today. This is a growing body of literature that has so far shown fairly similar results between jurisdictions, despite differences in language and culture. As summarized in Table 4.1, all of it suggests that members of the public – without being provided with any information as to the effects of cartels or their legality – show a strong understanding that cartel practices lead to higher prices and should therefore be prohibited. While these results show a broad consensus in favour of cartel prohibition, they do not necessarily reflect how wrong cartel conduct is perceived to be or the level of punishment (if any) that is appropriate. When asked about punishment, respondents tend to gravitate towards fines (whether corporate or against individuals) and there is particular support for naming and L. Kotsiris, ‘An Antitrust Case in Ancient Greek Law’ (1988) 22 International Law 451. W. Letwin, ‘The English Common Law Concerning Monopolies’ (1954) 21 University of Chicago Law Review 355. 53 S. Ogilvie, The European Guilds: An Economic Analysis (Princeton University Press, 2019). 54 ibid 218–31. 55 ibid 219. 56 S.R. Epstein and M. Prak, Guilds, Innovation and the European Economy, 1400–1800 (Cambridge University Press, 2010). 57 On this history, see Chapter 3 in this volume. 51

52

82  Research handbook on cartels Table 4.1

Proportion of respondents who felt cartels are harmful and should be prohibited

United Kingdom

Germany

Italy

United States

France

Swedena

Australia

79%

78%

73%

66%

59%

80%

73%

Note: a The question in the Swedish survey was focused on harm and there was a separate question that presented different options for punishment. Source: A. Stephan, ‘An Empirical Evaluation of the Normative Justifications for Cartel Criminalisation’ (2017) 37(4) Legal Studies 621; Stephan (n 24); E. Combe and C. Monnier-Schlumberger, ‘Public Opinion on Cartels and Competition Policy in France: Analysis and Implications’ (2019) 42(3) World Competition 335; C Beaton-Wells et al, ‘The Cartel Project: Report on a Survey of the Australian Public Regarding Anti-Cartel Law and Enforcement’, University of Melbourne Legal Studies Research Paper No.519, 2011; Swedish Competition Authority Report, Kartellbrottslighetens moraliska ekonomi: Av Tage Alalehto och Daniel Larsson på uppdrag av Konkurrensverket, Uppdragsforskiningsrapport 2020:3 (in Swedish).

Table 4.2

Do members of the public support the imprisonment of those responsible?

United Kingdom

Germany

Italy

United States

France

Sweden

Australia

27%

28%

26%

36%

25%

17%

20%

shaming those responsible. Perhaps the strongest indicator of the level of moral opprobrium is in relation to whether the individuals responsible should be imprisoned. All of the said surveys asked this question, but, as Table 4.2 shows, only a minority of respondents in each jurisdiction felt this was an appropriate punishment. Further research is needed to understand why this is the case. It could, for example, be that business misconduct is associated more with a corporate entity rather than individual decisions made by its employees and agents. The higher support in the US could reflect the greater level of white-collar crime enforcement more generally there. Whatever the reasons, the results suggest that cartels do not attract the same level of moral opprobrium as traditional forms of crime. Education about the nature and effects of cartel conduct goes a long way in shaping perceptions and judgements as to how right or wrong the conduct is. In 2006, the Centre for Competition Policy conducted an experiment with members of the public as part of the BA Festival of Science.58 Around 50 participants were given a simple explanation of what a cartel was and asked if they felt it was deserving of punishment. They were then given a brief talk describing how cartels operate and shown excerpts from the FBI’s secret covert filming of meetings of the Lysine cartel in the 1990s (more recently turned into the 2009 film The Informant, starring Matt Damon). The effect of seeing competitors meeting in secret to carve up the market and increase prices, while also mocking their customers, was quite stark. The participants were asked the same set of questions at the end of the experiment, and it was apparent that attitudes to the conduct were transformed, despite no information being revealed about whether cartels were illegal or about the sanctions imposed on them. What the participants were primarily moved by was the nature of the conduct they were observing. Indeed, so powerful is the Lysine video that this author has stopped showing it to students enrolled on the competition law class, because it pushes them to be overwhelmingly pro-enforcement and therefore stifles balanced debate. The lysine video captured the era immediately preceding an explosion of cartel enforcement and continued proliferation of competition law internation58 ‘Public Perceptions of Collusion’, 2006 BA Festival of Science, University of East Anglia, 8 September 2006.

The morality of cartel activity  83 ally. Other covert recordings like it do exist (for example in the Marine Hoses case), but none are publicly available because cartel cases tend to be settled by businesses. Indeed, the effect of a greater reliance on streamlined procedures such as settlement is that less information enters the public domain about how cartels operate. It may also be less likely that businesses would risk holding physical meetings because of the risk of detection. Whether of the nature of the cartel conduct or of the harm that it causes, moral opprobrium is facilitated by knowledge. Survey work undertaken by the Competition and Markets Authority (‘CMA’) in 2014 suggests there is a striking level of ignorance among members of the UK business community. Almost half of respondents said they had never heard of competition law and a fifth admitted having recently made direct contact with their competitors.59 Similarly, although a high proportion of respondents in surveys have recognized cartels are harmful and should be prohibited, significantly lower proportions (53 per cent in the UK and Italy) actually knew that such practices were illegal. There are various explanations for this stark gap in awareness. The main issue is dissemination of enforcement outcomes, as media reporting tends to be limited to the business press, except on occasion when the businesses involved are household brands recognized by the wider public.60 There is also a conspicuous absence of a clear ‘victim’ in cartel cases, as the main harm (the overcharge) tends to be borne by other businesses, or passed down to a very large number of consumers with little in the way of a newsworthy focus. In relation to businesspeople specifically, there is the question of what constitutes a ‘fair price’, as cartel laws (with their drive for lower prices and innovation) are often in conflict with marketing strategies taught in business schools that seek to increase profitability and in some cases find lawful ways to suppress competition.61 The effect of greater knowledge on the extent to which cartels are associated with moral opprobrium depends crucially on the characteristics of the conduct, the law and how it is enforced. To explore these factors, we separate them into two categories: pull factors, which make the cartel conduct more likely to be viewed as morally offensive, and push factors, which have precisely the opposite effect, causing observers to view the conduct as morally ambiguous or neutral. This relationship is illustrated in Figure 4.1. A.

Pull Factors

To assist us in identifying pull factors, we are able to draw on the extensive published research exploring normative justifications for the criminalization of cartel conduct. For the purposes of this chapter we make only a brief reference to these justifications, as they are discussed more fully in Chapter 20 below. Delinquency/Secrecy: Arguably one of the strongest pull factors is clear evidence that the cartel participants knew they were defying a clear legal prohibition. Harding describes this as a form of ‘moral delinquency’ that is heightened by the determination and effort that goes

59 IFF Research, Report: UK Business’ Understanding of Competition Law Prepared for CMA, 26 March 2015. 60 See A. Stephan, ‘Cartel Criminalisation: The Role of the Media in the “Battle for Hearts and Minds”’, in Beaton-Wells and Ezrachi (n 29). 61 For a discussion of this, see S. Ennis, ‘Business Strategy and Antitrust Compliance’, in Riley et al (n 26).

84  Research handbook on cartels

Figure 4.1

The relationship between cartel conduct and moral opprobrium

into concealing what they are doing and obstructing enforcement by competition authorities.62 Indeed, the participants descend into a ‘spiral of delinquency’, as the greater their efforts to hide their behaviour, the more morally offensive it becomes. This is consistent with Green’s Moral Theory of White Collar Crime,63 where he identifies both disobedience and cheating as strong elements of moral delinquency, and with traditional crime theory, where what matters is the nature of the defendant’s ‘choice’ to engage in the morally reprehensible conduct.64 Very little cartel conduct occurs openly and it is interesting to note that cartelists were reluctant to talk about their conduct even during periods when it was lawful. De Jong’s description of the research efforts of Friedrich Kleinwächter, published in one of the earliest books on cartels, Die Kartelle (1883), should be emphasised here: little was known about their existence, their names, locations, activities or the persons that guided them […] He therefore organized a survey among the leading industrialists in Austria and Germany but was seriously disappointed: the information given was scarce, respondents were reticent with respect to pertinent facts and processes and nearly all insisted on secrecy.65

Deception/Cheating: Another strong pull factor is whether cartel behaviour involves a clear deception. This is most evident in bid-rigging, where the dishonest submission of false bids for C. Harding, ‘The Anti-Cartel Enforcement Industry: Criminological Perspectives on Cartel Criminalisation’ (2006) 14 Critical Criminology 181. 63 See Green (n 35). 64 ibid 22. 65 H.W. de Jong, ‘Market Theory in the Low Countries’, in H.W. de Jong and W.G. Shepherd (eds), Pioneers of Industrial Organization: How the Economics of Competition and Monopoly Took Shape (Edward Elgar Publishing, 2007) 62. 62

The morality of cartel activity  85 financial gain in an explicitly competitive process amounts to a clear fraud. The same is also true where there is evidence of false statements made to customers (for example, that prices are going up due to rising costs), where there is blatant market sharing (refusing to sell to each other’s customers) or where steps are taken to ensure the behaviour goes unnoticed by senior management or a parent firm. As Whelan explains in his book, this factor becomes problematic where cartelists do not expressly state they have colluded, but nonetheless fail to disclose that they have.66 Would most people consider that failing to be a deception? To help us answer this question we can look again at the relevant public survey findings. In the UK, Germany and Italy, two thirds of respondents (in the absence of any knowledge of cartels and before they were asked cartel-specific questions) indicated that they ‘expect each business they buy from to have set their prices independently of each other’.67 If this is the regular expectation of how business is conducted by most in society, then arguably a failure to disclose the existence of a cartel also amounts to a deception. These findings support various arguments made by Whelan, Wardhaugh and Beaton-Wells that cartel conduct can be conceptualized as theft or deception.68 Social harmfulness: This pull factor rests on the value that society places on the free market and the competitive process. Cartels can be characterized as an attack on this valued institution,69 or as ‘subverting the competitive process’.70 This can amount to a dishonest exploitation, creating strong parallels with other forms of corporate crime, such as insider trading and fraud.71 By harming one of our most fundamental interests, the harm is such that it deserves moral opprobrium and protection from the criminal law.72 This pull factor can be served by efforts the enforcement process can make to communicate precisely how the cartel is likely to have had a negative impact on the market and in particular on consumers and other businesses.73 B.

Push Factors

The relevant push factors draw partly on the earlier discussion in this chapter on whether morality is in fact relevant to cartel conduct. They consist of anything that blunts or muddies the idea that cartels amount to deliberate and harmful wrongdoing.

Whelan (n 25) 101–05. A. Stephan, ‘An Empirical Evaluation of the Normative Justifications for Cartel Criminalisation’ (2017) 37(4) Legal Studies 621, 638. 68 C. Beaton-Wells, ‘Capturing the Criminality of Hard Core Cartels: The Australian Proposal’ (2007) 31 Melbourne University Law Review 675; B. Wardhaugh, Cartels, Markets and Crime: A Normative Justification for the Criminalisation of Economic Collusion (Cambridge University Press, 2014) Chapter 1; and Whelan (n 25), Chapter 4. 69 See generally Wardhaugh (n 68). 70 A MacCulloch, ‘The Cartel Offence: Defining an Appropriate “Moral Space”’ (2015) 8(1) European Competition Journal 73. 71 Williams (n 31) 300–01, with reference to R v Hinks [2000] UKHL 53, [2001] 2 AC 241 (HL) and Fraud Act 2006, s.4. See also C. Beaton-Wells and B. Fisse, Australian Cartel Regulation: Law, Policy and Practice in an International Context (Cambridge University Press, 2011), Chapter 2. 72 Wardhaugh (n 68). 73 See A. MacCulloch, ‘The “Public” Wrong of Cartels and the Article 101 TFEU “Object Box”’ (2020) 65(3) Antitrust Bulletin 361; and A. Stephan, ‘Why Morality Should Be Excluded from the Cartel Criminalisation Debate’ (2012) 3(2) New Journal of European Criminal Law 127. 66 67

86  Research handbook on cartels Crisis: While greed is undeniably a key feature of cartel arrangements, many such arrangements are driven more precisely by crisis in the industry or in the wider economy.74 In economic terms the effects of these cartels is the same – prices are higher and output lower than would otherwise be the case. However, crisis creates space for a very different interpretation of the nature and motivation of cartel conduct, as is illustrated by the apparent weakening in enforcement in response to the COVID-19 crisis. Kovacic and Shapiro note how even the prohibition of hard-core cartel infringements wavered in the United States during the depths of the Great Depression.75 In the only UK criminal cartel case to be heard before a jury, two defendants were acquitted following suggestions of crisis that transpired from the Crown’s evidence. In cross-examining a witness, one of the defendant’s barristers described a situation of ‘ruinous competition’ in the market immediately preceding the cartel arrangement and the prospect of one of the three competitors in the industry becoming insolvent. A witness called to give evidence against the defendants described them as ‘heroes’ because their actions in forming the cartel had helped to safeguard jobs and the future of the company.76 The defendants were tried under the original UK cartel offence (which required the behaviour to have been dishonest), but after two weeks of evidence the jury took just two hours to acquit both defendants, even though a third individual had pled guilty and given evidence against his alleged co-conspirators. Ignorance and ‘atypical’ cartels: Survey results and interview evidence suggest there is still a real possibility of some cartels being formed out of ignorance.77 The problem here seems to be one of public awareness and education, but many will question whether cartel conduct can really attract moral opprobrium if some of those responsible do not even realize they are doing something illegal. This is especially a problem in relation to ‘atypical’ cartels or those at the fringes of cartel prohibitions, which display few if any of the pull factors described above.78 In particular, enforcement cases involving ‘atypical’ cartels may display neither the outcome nor the conduct that attracts moral opprobrium.79 Exemptions and carve-outs: Whether in pursuit of environmental sustainability or to deal with a crisis, exemptions and carve-outs from cartel laws will always be a strong push factor. Talk to the average person on the street about cartel enforcement and they are likely to ask why OPEC (Organization of the Petroleum Exporting Countries) is allowed to be in existence, with governments often engaging in precisely the sorts of conduct cartel law seeks to prohibit in relation to private business. It is interesting to note that although under Article 101(3) of the Treaty on the Functioning of the European Union exceptions on efficiency grounds are in principle very narrow and focused on economics arguments, a recent study by Brook suggests that this may be far from the case in practice.80

74 A. Stephan, ‘Price Fixing during a Recession: Implications of an Economic Downturn for Cartels and Enforcement’ (2012) 35(3) World Competition 511. 75 W. Kovacic and C. Shapiro, ‘Antitrust Policy: A Century of Economic and Legal Thinking’ (2000) 14 Journal of Economic Perspectives 43, 46. 76 R v Stringer and Dean, Southwark Crown Court, 24 June 2015 (unreported). 77 Stephan (2017) (n 67). 78 See Stephan and Hviid (n 15). 79 Harding and Edwards (n 29) 79. 80 O. Brook, ‘Priority Setting as a Double-Edged Sword: How Modernization Strengthened the Role of Public Policy (2020) 16(4) Journal of Competition Law and Economics 435.

The morality of cartel activity  87 Lack of individual sanctions and overreliance on leniency: These factors, among other features of cartel enforcement, reinforce a sense that cartels are a regulatory problem and therefore void of moral opprobrium. The failure to adequately punish the individuals responsible for cartels and a high frequency of cartelists being allowed to escape punishment altogether both serve to strengthen the idea that enforcement is simply a cost of doing business in a utilitarian regulatory landscape in which cheating – far from being the basis for moral opprobrium for the illegal behaviour – is actively rewarded by the law. As Gilchrist points out in discussing the broader problem of ignoring the individual within the sphere of punishing corporate misbehaviour, ‘[i]t sends a dangerous message of tolerance or even affirmance for their conduct’.81

IV.

CONCLUDING REMARKS

Morality concerns a person’s sense of right or wrong according to their conscience. While there are some behaviours that all or most in society would find morally offensive, morality is otherwise a highly subjective notion that is capable of changing over time. The law regulates many aspects of our lives and the behaviour it seeks to control does not need to coincide with a common sense of morality – especially as we live in a secular and pluralistic society. In this context, cartel law appears to exist in a landscape entirely void of morality. It is underpinned by neoclassical economic theory that treats morality (or at least its manifestations in terms of stigma or loss of reputation) as a cost and is so wide in its scope and design that it matters not whether the arrangement was intentional, whether it was implemented or had any actual harmful effect on the market. For these reasons (among others), the trend to criminalize cartel conduct has been strongly criticized as an illegitimate and damaging misuse of criminal law and of the label ‘criminal’. Nevertheless, morality is of great relevance and importance to the effectiveness of cartel enforcement. The crisis in legitimacy that exists within the criminalization debate extends to all cartel enforcement, by virtue of the punitive (and therefore criminal) nature of its investigative powers and sanctions. Corporate fines are not aimed at reversing any unjust enrichment, but are designed to punish and deter. Without strong moral underpinning reflected in public support, there is a danger that political support for cartel enforcement could be eroded by lobbying. This is already happening to some extent in how competition authorities responded to the COVID-19 crisis and the growing pressures to allow exemptions and carve-outs for cooperation that further environmental objectives such as sustainability. This is not to suggest that sustainability should not be a priority, but there are serious questions about how we ensure competitors’ cooperation is focused on that goal without unwanted side-effects, such as reduced post-cooperation competition through tacit or explicit collusive outcomes. Other challenges to cartel enforcement may come from arguments that collective solutions are needed to problems of distributional fairness and from the automation of pricing through the use of algorithms. This chapter explored what determines whether cartel conduct is deemed morally offensive. The central proposition is that as a subjective and fluid concept, morality will be influenced by the characteristics of particular cartel conduct and the circumstances surrounding the 81 G.M. Gilchrist, ‘Individual Accountability for Corporate Crime’ (2018) 34(2) Georgia State University Law Review 335, 387.

88  Research handbook on cartels behaviour. As such, we can identify various factors that either pull the cartel conduct towards moral opprobrium or push it away and make it morally ambiguous or neutral. This provides a useful guide to policy makers in their design and enforcement of cartel laws. It highlights the particular importance of case selection, the need to publicize ‘pull factors’ that arise from enforcement action (including anything that speaks to the harm caused), the need for individual sanctions that recognize the role of individuals (whether through criminalization or civil individual sanctions such as director disqualification) and, above all, the need for continued public education and business advocacy. There is already some evidence that attitudes to cartels may be hardening, as support for the imprisonment of cartelists increased from 11 per cent to 27 per cent in surveys conducted in the UK in 2007 and 2014.82 The need to continue building a moral base for cartel enforcement is made all the more important by the apparent drop in cartel cases being detected by competition authorities internationally. This could reflect increases in the level of compliance; but it could also reflect the changing nature of cartel behaviour and the strengthening of efforts to avoid detection.83

See Stephan (2008) (n 24); and Stephan (2017) (n 67). Harding and Edwards (n 29) 215–18.

82 83

PART II SUBSTANTIVE ISSUES

5. The legal concept of a cartel Okeoghene Odudu

I. INTRODUCTION The word ‘cartel’ does not have a legal definition but is used to describe conduct seen as inherently objectionable.1 Cartels are sometimes described as ‘manifest infringements [of competition law] which it is almost always impossible to exempt’2 and have memorably been called ‘cancers on the open market economy’.3 A central feature of the legal analysis of cartels in Europe is that courts do not ask competition authorities and complainants to demonstrate that the participants have caused (or are likely to cause) harm or obtain and exploit market power.4 The economic consequences of the action are ignored and condemnation is based ‘solely on whether certain conduct took place’.5 Since the conduct is inherently objectionable, and very high fines (and sometimes imprisonment) are likely to follow, those engaged in cartel conduct take great steps to conceal its existence. This explains why many of the ‘controversies in cartel cases relate, first and foremost, to whether the practice has actually taken place (this is the “fact-intensive” inquiry)’.6 A consequence of the inherently objectionable nature of the conduct is that the ‘law’ and disputes around cartels, at least since the promulgation of the OECD’s 1998 Recommendations on Cartels, are primarily focused on establishing the existence of the maligned conduct (as distinct from the effects such conduct might have). The ‘law’ on cartels is somewhat elusive, given that cartels are merely a species of horizontal agreement treated with enhanced opprobrium. This chapter seeks to identify what marks out this species of horizontal agreement for special condemnation and the implications of being marked out as such. The chapter outlines two problems associated with the legal concept of a cartel. The first problem concerns the definition of inherently objectionable conduct. What conduct is identified as such, and on what basis? This first problem has two strands. In Section II it is explained that there is a demand that certain decisions are taken independently. In Section III we specify the type of decisions that must be taken independently. In Section IV we explore consequential and deontological reasons why it might be thought objectionable not to take the specified decisions independently. The second problem concerns proving firms 1 DTI, A World Class Competition Regime (CM 5233), para 7.26. See also N. Dunne, ‘Characterizing Hard Core Cartels under Article 101 TFEU’ (2020) 65 The Antitrust Bulletin 376. 2 Commission of the European Communities Tenth Report on Competition Policy, para 115. 3 N. Kroes, ‘Declaring on the Crackdown: Recent Developments in the European Commission’s Campaign Against Cartels’ (SPEECH/06/595). 4 E. Gellhorn, W. Kovacic and S. Calkins, Antitrust Law and Economics in a Nutshell (5th edn, West, 2004) 191. 5 ibid 200. See also A. Gavil, W. Kovacic and J. Baker, Antitrust Law in Perspective: Cases, Concepts, and Problems in Competition Policy (West, 2002) 215–16 and W. Kovacic, R. Marshall, L. Marx and H. White, ‘Plus Factors and Agreement in Antitrust Law’ (2011) 110 Michigan Law Review 393, 404. 6 P. Ibáñez Colomo, The Shaping of EU Competition Law (Cambridge University Press, 2018) 17.

90

The legal concept of a cartel  91 have acted other than independently. In Section V the task of demonstrating the absence of independent action is set out. The first part is to specify what it means to act independently. The second part is to evidence the absence of independence, which may be done by direct or indirect evidence. Indirect evidence may be communication-based or economics-based.

II. INDEPENDENCE The standard account of cartels begins with the idea of concertation or ‘collusion’.7 In Monsanto v Spray-Rite, the US Supreme Court observed: The correct standard is that there must be evidence that tends to exclude the possibility of independent action by the [parties]. That is, there must be direct or circumstantial evidence that reasonably tends to prove that [the parties] had a conscious commitment to a common scheme designed to achieve an unlawful objective.8

Cartel conduct arises only when, among firms competing in a market, there is a ‘joint intention to conduct themselves on the market in a specific way’.9 While it is common to consider how the requirement of ‘conscious commitment to a common scheme’ is developed and applied, here we focus on the alternative offered, which is the requirement of ‘independent action’.10 In Suiker Unie the Court of Justice explained that competition law imposes an obligation of independence, which requires ‘each economic operator [to] determine independently the policy which it intends to adopt on the […] market including the choice of persons and undertakings to which he makes offers or sells’.11 The obligation of independence exists in relation to competing entities rather than non-competing entities. It is only ‘contrary to the rules on competition contained in the Treaty for a producer to cooperate with his competitors, in any way whatsoever’.12 The first element 7 The seminal papers include: D. Turner, ‘The Definition of Agreement under the Sherman Act: Conscious Parallelism and Refusals to Deal’ (1962) 75 Harv L Rev 655–706; J. Joshua, ‘Proof in Contested EEC Competition Cases: A Comparison with the Rules of Evidence in Common Law’ (1987) 12 European Law Review 315; M. Guerrin and G. Kyriazis, ‘Cartels: Proof and Procedural Issues’ (1992) 16 Fordham International Law Journal 268; G. Hay, ‘Horizontal Agreements: Concept and Proof’ (2006) 51 Antitrust Bulletin 877; Kovacic et al (n 5); V. Korah, ‘Concerted Practices’ (1973) 36 Modern Law Review 220; and G. Hay, ‘Oligopoly’ (1982) 67 Cornell Law Rev 439. 8 Monsanto Co. v Spray-Rite Svc. Corp. (1984) 465 US 752, 768 (emphasis added). 9 Case T-41/96 Bayer AG v Commission [2000] ECR II-3383, para 67, citing Case 41/69 ACF Chemiefarma v Commission [1970] ECR 661, para 112, Joined Cases 209/78 to 215/78 and 218/78 Van Landewyck and others v Commission [1980] ECR 3125, para 86, and Case T-7/89 Hercules Chemicals v Commission [1991] ECR II-1711, para 256. See also Case T-1/89 Rhône-Poulenc v Commission [1991] ECR II-867, para 120; Case T-2/89 Petrofina v Commission [1991] ECR II-1087, para 211;Case T-7/89 SA Hercules Chemicals NV v Commission [1991] ECR II-1711, para 256; and Case IV/F-3/33.708 – British Sugar plc [1999] OJ L76/1, para 66. 10 Monsanto Co. v Spray-Rite Svc. Corp. (1984) 465 US 752, 768. See also Case 48/69 ICI v Commission (Dyestuffs) [1972] ECR 619, para 101 (emphasis added). Cp Joined Cases 40 etc./73 Coöperatieve Vereniging ‘Suiker Unie’ UA and others v Commission [1975] ECR 1663, para 180. 11 Joined Cases 40 etc./73 Coöperatieve Vereniging ‘Suiker Unie’ UA and others v Commission [1975] ECR 1663, para 173. 12 Case 48/69 Imperial Chemical Industries v Commission [1972] ECR 619, para 118 (emphasis added).

92  Research handbook on cartels of cartel conduct is therefore that a relevant decision is not taken independently of a competitor. In the next section we set out which decisions must be taken independently of competitors.

III.

PROSCRIBED CONDUCT

Central to the understanding of cartel conduct is an idea that, in a market context, it is inherently objectionable if certain decisions are taken other than independently.13 The OECD’s 1998 Recommendation concerning Effective Action against Hard Core Cartels identifies as inherently objectionable ‘arrangements by actual or potential competitors to agree on prices, make rigged bids (collusive tenders), establish output restrictions or quotas, or share or divide markets by, for example, allocating customers, suppliers, territories, or lines of commerce’.14 In its Directive concerning Actions for Damages under National Law, ‘cartel’ refers to an agreement or concerted practice between two or more competitors aimed at coordinating their competitive behaviour on the market or influencing the relevant parameters of competition, through practices such as, but not limited to, the fixing or coordination of purchase or selling prices or other trading conditions, including in relation to intellectual property rights, the allocation of production or sales quotas, the sharing of markets and customers, including bid-rigging, restrictions of imports or exports or anti-competitive actions against other competitors.15

Similarly, the Commission’s leniency notice understands the requirement of independent action to centre on ‘the fixing of purchase or selling prices or other trading conditions, the allocation of production or sales quotas, the sharing of markets including bid-rigging, restrictions of imports or exports and/or anti-competitive actions against other competitors’.16 If the price to be charged, the customers or territories to be served and the price, terms and conditions submitted in an invitation to tender are not determined independently there is general consensus that it is inherently objectionable.17

13 D. Encaoua, ‘Kaplow, Louis: Competition Policy and Price Fixing’ (2014) 113 Journal of Economics 205, 207; and Dunne (n 1), 388–91. 14 See the now revised Recommendation of the Council concerning Effective Action against Hard Core Cartels (OECD/LEGAL/0452) https://​legalinstruments​.oecd​.org/​en/​instruments/​OECD​-LEGAL​ -0452 [accessed 13 July 2022]. Cp Gellhorn et al (n 4) 191. 15 Article 2(14) of Directive 2014/104/EU of the European Parliament and of the Council of 26 November 2014 on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union (the ‘Damages Directive’). 16 Commission Notice on Immunity from Fines and Reduction of Fines in Cartel Cases [2006] OJ C298/11, para 1. 17 See International Competition Network, Defining Hard Core Cartel Conduct: Effective Institutions Effective Penalties, 10; and D. Baker, ‘The Use of Criminal Law Remedies to Deter and Punish Cartels and Bid-Rigging’ (2001) 69 George Washington Law Review 693. Though there is consensus, Kaplow raises the concern that ‘[c]onsensus has bred complacency’: L. Kaplow, Competition Policy and Price Fixing (Princeton University Press, 2013) xiii.

The legal concept of a cartel  93 A. Price Article 101(1)(a) of the Treaty on the Functioning of the European Union (‘TFEU’) identifies the fixing of purchase or selling prices as an action to be performed independently. In Dyestuffs the Court of Justice ruled that ‘it is contrary to the rules on competition contained in the Treaty for a producer to co-operate with his competitors, in any way whatsoever, in order to determine a co-ordinated course of action relating to a price increase and to ensure its success’.18 The expectation is that minimum prices, the range within prices are to be set, an amount or percentage price increase, discounts or allowances, transport charges, payments for additional services and any credit terms are established independently.19 And it is inherently objectionable if they are established other than independently. In Residential Estate Agency Services nine estate agents were condemned, having been found not to have determined independently their minimum commission rates for the sale of residential properties.20 In Passenger Fuel Surcharges two airlines were found not to have determined independently how to respond to increasing oil prices, instead agreeing to pass the cost on to the consumer.21 Arguments that price in the market is unaffected by the conduct have not succeeded because the objection is the failure to act independently, rather than the impact that such failure may have in the market.22 B.

Market Sharing

Article 101(1)(c) of the TFEU and many competition law jurisdictions require expressly that the territories and customers a firm will serve are determined independently. Not to do so is a – if not the – classic competition law infringement. Indeed, there are many infringement decisions that involve market-sharing cartels. For example, the European Commission imposed fines of €7 million on both Solvay and ICI in relation to their agreement that Solvay stay out of the United Kingdom and Ireland and ICI stay out of markets in continental Europe.23 The CMA condemned a market-sharing arrangement whereby Arriva agreed to withdraw from bus routes operating between Leeds and Holt Park in exchange for First Group withdrawing

Case 48/69 Imperial Chemical Industries v Commission [1972] ECR 619, para 118. Office of Fair Trading, Agreements and Concerted Practices, OFT401, paras 3.5–3.7. 20 Case 50235 Residential Estate Agency Services, Decision of the Competition and Markets Authority, 31 May 2017; and Case 50543 Residential Estate Agency Services in Berkshire, Decision of the Competition and Markets Authority, 17 December 2019. 21 CE/7691-06 Passenger Fuel Surcharges, Decision of the Office of Fair Trading, 19 April 2012. 22 In European Producers of Beams [1994] OJ L116/1, upheld in Case T-141/94 Thyssen Stahl AG v Commission [1999] ECR II-347, paras 254–56, the Commission and the General Court reject economic evidence demonstrating that market prices were no higher than could have been expected in normal conditions of competition. In Zinc Phosphate [2003] OJ L153/1, para 216, the Commission considered it irrelevant that the impact of the cartel is not what the cartel members expect. 23 Soda-Ash-Solvay/ICI [1991] OJ L152/1, annulled on procedural grounds in Cases T-30/91, T-31/91 and T-32/91 Solvay SA v Commission [2009] ECR II-4781 and Case T-36/91 ICI v Commission [1995] ECR II-1847. 18 19

94  Research handbook on cartels from bus routes operating between Leeds and Halifax.24 Firms should not agree to restrict their activities to their ‘home’ market or share geographic markets based on agreed quotas.25 C. Bid-Rigging It is expected that prospective suppliers independently determine and submit their best offer for the provision of goods or services specified in an invitation to tender. An objection would be raised where firms agree to take it in turns to submit the lowest bid (bid rotation); where one or more firms agree not to bid, or to withdraw their bids (bid suppression); and where bidders arrange for one or more of their competitors to submit an artificially high bid, distorting the procurer’s impression of the competitive price (cover bidding).26 The lack of independence has been identified and condemned by the European Commission since its early sugar investigation.27 The European Commission discovered that over a long period of time bids were not submitted independently in Gas Insulated Switchgear. With European firms having agreed not to win contracts in Japan, Japanese firms reciprocated by not trying to win contracts within the EU market.28 In Power Cables, producers of high voltage power cables were found to have allocated projects between themselves according to geographic region or customer, exchanging information to enable cover bidding to occur.29

IV.

THE BASIS OF THE INHERENT OBJECTION

A key difficulty with a legal conception of ‘cartels’ that captures inherently objectionable conduct is that the proscribed conduct is not always seen as inherently objectionable – context (if not effect) still seems to matter.30 For example, it is not objectionable for a number of competitors to fix the price they will jointly pay suppliers.31 Setting the maximum amount that

Case CP/1163-00 Market Sharing by Arriva plc and First Group plc, Decision of the Director General of Fair Trading No. CA98/9/2002, 30 January 2002. 25 Zinc Producer Group [1984] OJ L220/27; and Vitamins [2003] OJ L6/1. 26 See CMA advice for public sector procurers on bid rigging: www​.gov​.uk/​government/​publications/​ bid​-rigging​-advice​-for​-public​-sector​-procurers/​bid​-rigging​-advice​-for​-public​-sector​-procurers [accessed 13 July 2022] and Case AT.40098 Blocktrains [2015] OJ C351/5. 27 IV/26 918 European Sugar Industry [1973] OJ L140/17, upheld in Joined Cases 40 etc./73 Coöperatieve Vereniging ‘Suiker Unie’ UA and others v Commission [1975] ECR 1663. 28 Case COMP/F/38.899 Gas Insulated Switchgear C(2006) 6762 final, annulled in part on procedural grounds in T-122/07 to T-124/07 Siemens Österreich and VA Tech Transmission & Distribution v Commission [2011] ECR II-793. 29 Case AT.39610 Power Cables, C(2014) 2139 final. Cover-bidding was also a feature of Case 50366-1, Supply of Solid Fuel and Charcoal Products, Decision of the Competition and Markets Authority, 28 March 2018. 30 See Revised Version of 03/06/2015 Commission Staff Working Document Guidance on Restrictions of Competition ‘By Object’ for the Purpose of Defining which Agreements May Benefit from the De Minimis Notice SWD(2014) 198 final. See also C. Nagy, ‘EU Competition Law Devours Its Children: The Proliferation of Anti-Competitive Object and the Problem of False Positives’ (2021) 23 Cambridge Yearbook of European Legal Studies 290. 31 See, e.g., Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Cooperation Guidelines [2011] OJ C11/1), para 206. 24

The legal concept of a cartel  95 may be charged for a good or service is not seen as inherently objectionable.32 Nor is it objectionable to share markets when parties have engaged in joint development.33 The United States Export Trade Act 1918, commonly called the Webb–Pomerene Act, does not find conduct objectionable if it relates solely to the export trade.34 Further, during economic, environmental, social and political crises, otherwise objectionable conduct can be seen to be more palatable.35 Finally, some jurisdictions operate a de minimis doctrine and so consider that conduct is not objectionable if those involved have a low market share.36 For example, in Japan, ‘there are certain cases in which it is appropriate to allow SMEs to act in concert within a certain limit […] The Japanese Anti-Monopoly Act system has built into it an exemption system for certain activities undertaken by organisations made up of small scale enterprises.’37 Our initial account of cartel conduct is that there is an inherent objection to certain decisions being taken other than independently. It is however also seen that the context in which the decision is made seems to matter. Context matters if the need for independent decision is founded on consequential grounds, that is, that the conduct is harmful in economic terms. Condemnation does not automatically follow if either the economic harm does not (or is unlikely to) materialize in the specific context or the economic consequences are acceptable given the specific context. Context does not matter (or is relevant in different ways) if the need for independent decision is founded on deontological grounds, that is, that regardless of the economic harm, the conduct is normatively unappealing. It is possible simply to sketch out the two views below rather than give a comprehensive account of the merits of the consequential versus the deontological view, and it is not claimed that a single basis underpins the approach to cartel conduct in all jurisdictions.

Re Eurocheques [1985] OJ L35/43. In Re London Sugar Futures Market Ltd. [1985] OJ L369/25 it is said that agreeing that a good or service should not be provided free of charge can be viewed as permissible, so long as the price to be charged is set by each competing firm independently. 33 See ‘specialisation in the context of exploitation’ under Commission Regulation (EU) 1217/10, Article 5(b)(iii). See also COMP/C.2-37.398 Joint Selling of the Commercial Rights of the UEFA Champions League [2003] OJ L291/25; and Commission Press Release IP/03/1105 of 24 July 2003. 34 It should be noted that while ‘Associations under the Webb Pomerene Act exporting to the [EU] are not as such unlawful under [EU] law[, t]hey may, however, infringe Article [101] if they restrict competition within the common market, and are likely to affect trade between Member States to an appreciable extent’: IV/29.725 Wood Pulp [1985] OJ L85/1, para 123. See further E. Bond, ‘Trade Policy and Competition Policy: Conflict Vs. Mutual Support’, in M. Neumann and J. Weigand (eds), The International Handbook of Competition (Edward Elgar Publishing, 2004) 124–26. 35 T. Fisher, ‘Antitrust during National Emergencies: I & II’ (1942) 40 Michigan L. Rev. 969, 1161; D. Crane, ‘Did We Avoid Historical Failures of Antitrust Enforcement During the 2008-09 Financial Crisis?’ (2010) University of Michigan Law & Economics Working Papers 3; J. Fingleton, ‘Competition Policy in Troubled Times’ (Office of Fair Trading, 20 January 2009); and OECD Global Forum on Competition Policy Roundtable – Crisis Cartels (DAF/COMP/GF(2011)11, October 2011); and 36 ‘Background Note (by the German Delegation): Exemption for Horizontal Co-operation Agreements for Small and Medium-Sized Enterprises (SME) from General Cartel Ban’, in OECD, General Cartel Bans: Criteria for Exemption for Small and Medium-Sized Enterprises (1996) 6–17, 11 and 13; and ‘Canada: Criteria for Exemption for Small and Medium-Sized Enterprises from General Cartel Bans’, in OECD (n 36) 31–34. 37 ‘Japan’, in OECD (n 36) 35. 32

96  Research handbook on cartels A.

Consequential Objections

One reason why the proscribed conduct is objected to and therefore condemned may be that it causes (or is likely to cause) economic harm. For example, the independent setting of price is demanded because setting the price in this manner will ‘keep prices down to the lowest possible level’.38 The proscribed conduct is treated as such because the economic consequences are thought to be well known and reliably predictable – economic harm is ‘inevitable’.39 Objection to the proscribed conduct on consequentialist grounds can mean that the existence of the objectionable consequences is tested in each case. So, as an example, Advocate General Wahl writes that though ‘a horizontal agreement concerning the price of certain goods […] in general […] is highly harmful for competition, that conclusion is not inevitable where, for example, the undertakings concerned hold only a tiny share of the market concerned.’40 And Advocate General Bobek wishes to ensure that ‘there are no specific circumstances that may cast doubt on the presumed harmful nature of the agreement in question’.41 B.

Deontological Objections

A second approach is to consider that there are deontological objections to the proscribed conduct, and more recent scholarship pays attention to the inherent objection to cartel conduct.42 It is important to recognize that cartel conduct is exactly that – conduct: a way of behaving, rather than the consequences of any particular behaviour. An explanation given by Advocate General Kokott is that such conduct is comparable to the risk offences (Gefährdungsdelikte) known in criminal law: in most legal systems, a person who drives a vehicle when significantly under the influence of alcohol or drugs is liable to a criminal or administrative penalty, wholly irrespective of whether, in fact, he endangered another road user or was even responsible for an accident.43

What is said to be ‘wrong’ with cartel conduct is that it subverts a customers or consumers legitimate expectation of how a decision has been arrived at.44 Customers expect the relevant

Case 48/69 ICI v Commission (Dyestuffs) [1972] ECR 619, para 115. Case C-209/07 The Competition Authority v Beef Industry Development Society Ltd and Barry Brothers (Carrigmore) Meats Ltd [2008] ECR I-8637, AG Opinion, para 44; and Case C-228/18, Budapest Bank, ECLI:​EU:​C:​2019:​678, AG Opinion, para 40. 40 Case C‑67/13 Groupement des Cartes Bancaires v Commission, ECLI:​EU:​C:​2014:​1958, Opinion of AG Wahl, paras 42 and 81. 41 Case C-228/18, Budapest Bank, ECLI:​EU:​C:​2019:​678, Opinion of AG Bobek, paras 48–49 (emphasis added). 42 M. Stucke, ‘Morality and Antitrust’ [2006] Columbia Business Law Review 443. 43 Case C-8/08 T-Mobile Netherlands BV, KPN Mobile NV, Orange Nederland NV and Vodafone Libertel NV v Raad van bestuur van de Nederlandse Mededingingsautoriteit [2009] ECR I-04529, Opinion of AG Kokott, para 47. 44 A. Macculloch, ‘The Cartel Offence: Defining an Appropriate “Moral Space”’ (2012) 8 European Competition Journal 73, 85–89; A. Macculloch, ‘The “Public” Wrong of Cartels and the Article 101 TFEU “Object Box”’ (2020) 65 The Antitrust Bulletin 361, 366–69; P. Whelan, ‘Cartel Criminalization and the Challenge of “Moral Wrongfulness”’ (2013) 33 Oxford Journal of Legal Studies 535; Dunne (n 1) 396–99; Stucke (n 42) 495–503; and Chapter 4 in this volume. 38 39

The legal concept of a cartel  97 decisions to have been taken independently.45 It is the subversion of this expectation that causes ‘moral outrage’.46

V.

DEMONSTRATING INDEPENDENCE AND ITS ABSENCE

Certain decisions are required to be taken independently, either for consequential or deontological reasons. The central challenge faced by a competition authority or complainant is to show that a decision has been taken other than independently. Two issues emerge. The first is over what it means to take an independent decision. The second is how to demonstrate that the decision has been taken other than independently. A.

Independent Action and Its Absence

It is clear that firms do not act independently if they have agreed how they will act in the market. It has also been established that a firm does not act independently if it ‘disclose[s] […] the course of conduct which [it has] decided to adopt or contemplate adopting on the market’ to its competitors.47 Such a disclosure enables the firm to ‘influence the conduct on the market of an actual or potential competitor’.48 Finally, a firm is not seen as acting independently if it acts on information obtained from a competitor (directly or indirectly) that it could not otherwise have obtained.49 An important point to emphasize is that a firm’s decision remains independent even when it takes account of how it expects competing firms to react on the market – something often referred to as ‘intelligent adaptation’. The Court of Justice has been clear that such an approach remains independent, noting that ‘every producer is free to change his prices, taking into account in so doing the present or foreseeable conduct of competitors’.50 A firm is also taken to act independently (of its competitors) when it obtains information from others on which to base its decision; thus the Court of Appeals in the 8th Circuit, in Lomar Wholesale Grocery v Dieter’s Gourmet Foods, recognized that

45 A. Stephan, ‘An Empirical Evaluation of the Normative Justifications for Cartel Criminalisation’ (2017) 37 Legal Studies 621, 637–39. 46 Stucke (n 42) 507. Norris v Government of the United States [2008] UKHL 16; [2008] 1 A.C. 920 puts into serious doubt whether cartel conduct is inherently objectionable in the United Kingdom. Not only is it not clear that conduct is objectionable, but such conduct also has at certain times been actively encouraged by governments. See C. Harding and J. Joshua, Regulating Cartels in Europe (2nd ed., OUP, 2010) 53; and A. Falco, ‘The UK Cartel Offence: An Exploration into the Causes of the Underperformance Problem’ (2021) 42(12) ECLR 661, 674-675. 47 Joined Cases 40 etc./73 Coöperatieve Vereniging ‘Suiker Unie’ UA and others v Commission [1975] ECR 1663, para 174. 48 ibid. See also Case C-49/92 P Commission v Anic [1999] ECR I-4125, para 121. 49 Communication from the Commission – Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-operation Agreements [2011] OJ C 11/1, paras 92–94 and IV/26 918 European Sugar Industry [1973] OJ L140/17, 42. 50 Case 48/69 ICI v Commission (Dyestuffs) [1972] ECR 619, para 118. See also Communication from the Commission – Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-operation Agreements [2011] OJ C 11/1, paras 92–94 and IV/26 918 European Sugar Industry [1973] OJ L140/17, para 61.

98  Research handbook on cartels the ‘market strategy’ […] often will be the product of consultations between the supplier and his distributors. To apply a per se rule to the supplier’s solicitation of marketing advice from the distributor is to prohibit the supplier from drawing on the most important source of information in formulating and initially implementing a market strategy.51

Posner, an early proponent of treating intelligent adaptations as otherwise than independent action, revisits the idea in his review of Kaplow’s Competition Policy and Price Fixing.52 As the consequences of firms setting a price or staying out of markets in anticipation that their rivals will do the same are indistinguishable from the firms agreeing the same, it seemed illogical that the former was within the scope of independent action and therefore beyond the scope of the cartel prohibition. Following a deontological view, Kovacic et al, with whom Posner agrees, point out that intelligent adaptations leave courts ‘with a substantial conundrum because they cannot meaningfully instruct firms not to react to their rivals’ pricing’.53 The consequences are the same, from the deontological position the firms have done nothing wrong. B.

Demonstrating the Absence of Independence

The absence of independence may be shown directly, by examining the circumstances in which the decision was arrived at. In prosecuting cartel cases, competition officials prefer to have direct evidence of a decision being reached other than independently. Direct evidence is composed of documents (including email messages) expressing agreement and identifying parties to the agreement and oral or written statements from cartel participants describing the operation of the cartel and their participation in it.54 Gellhorn et al note that ‘[d]ocuments and testimony typically stand atop the hierarchy of proof because they tend to give the courts greater confidence that the defendants acted jointly’.55 Competition agencies are increasingly bestowed with enhanced investigatory powers, such as the ability to conduct unannounced inspections or conduct covert surveillance, which at times has enabled video or audio recordings that capture the details of the cartel’s operation contemporaneously.56 Leniency policies also encourage firms to provide agencies with direct evidence in exchange for grants of Lomar Wholesale Grocery, Inc. v Dieter’s Gourmet Foods, Inc., 824 F.2d 582, 593–94 (8th Cir. 1987). See also Case No: 2005/1071, 1074 and 1623 Argos Limited and Littlewoods Limited v Office of Fair Trading and JJB Sports PLC v Office of Fair Trading [2006] EWCA Civ 1318, para 99 and para 106; and Hasselblad [1982] OJ L161/18, para 49. 52 R. Posner, ‘Review of Kaplow, Competition Policy and Price Fixing’ (2014) 79 Antitrust Law Journal 761. See also Encaoua (n 13). On Posner’s earlier account, see R. Posner, Antitrust Law (2nd edn, University of Chicago Press, 2001) 55–60. 53 Kovacic et al (n 5) 410. See also R. Posner, ‘Review of Kaplow, Competition Policy and Price Fixing’ (2014) 79 Antitrust Law Journal 761, 765. 54 Case 65/86 Bayer AG and Maschinenfabrik Hennecke GmbH v Heinz Süllhöfer [1988] ECR 5249. 55 Gellhorn et al (n 4) 269. See also Judge Richard Posner in In re High Fructose Corn Syrup Antitrust Litig., 295 F.3d 651 (7th Cir. 2002). 56 The secret video tapes in Lysine and Galvanised Steel Tanks are the gold standard in cartel evidence, but are very rarely available. See S. Hammond, ‘Caught in the Act: Inside an International Cartel’, Speech, OECD Competition Committee Working Party No. 3 Public Prosecutors Program, www​ .justice​.gov/​atr/​speech/​caught​-act​-inside​-international​-cartel [accessed 13 July 2022]. In 2017, the CMA launched a free digital tool to that uses algorithms to spot unusual bidder behaviour and pricing patterns which may indicate that bid-rigging has taken place. See: www​.gov​.uk/​government/​news/​cma​-launches​ -digital​-tool​-to​-fight​-bid​-rigging [accessed 13 July 2022]. 51

The legal concept of a cartel  99 immunity or reduced penalties, though it remains possible to uncover cartel conduct without reliance on leniency tools.57 Direct evidence is not always available. Private litigants in particular, not having the enhanced enforcement tools afforded to public competition agencies, are often in the position of having to establish the absence of independence using indirect evidence. The greatest controversies in the law on cartels concern the extent to which it is possible to establish that decisions as to bid, market or price are taken other than independently, without there being direct evidence of how the decision was taken.58 In the absence of positive evidence as to how a decision was taken, it is possible to infer that a decision was taken other than independently when there is evidence that ‘tends to exclude the possibility that the alleged conspirators acted independently’.59 Evidence excluding the possibility of independent action may be communication-based or economics-based.60 1. Communication Communication evidence is that which shows the fact that communication or meetings have taken place but does not describe the substance of the communication or meetings.61 It is sometimes referred to as evidence of ‘contact’.62 The competition agency or complainant seeks to establish from the mere fact that contact has taken place, and although no records of what is discussed are available, that the attendees must have discussed bids, market allocation or prices. As an example, in Bananas the European Commission was able to establish that phone calls occurred once before prices were set and a second time shortly afterwards.63 As noted in the relevant decision, the parties had ‘informed the Commission that they had no notes or records concerning these communications’.64 The European Commission was able to establish that it was inconceivable that how the firms intended to conduct themselves on the market was not discussed in these calls. In doing so it relied on the conduct on the market following the calls, oral and written statements from

See as examples Case COMP/38.628 Nitrile Butadiene Rubber, C(2008)282 final; Case COMP/38.543 International Removal Services, C(2008) 926 final; and Case COMP/39.125 Car Glass, C(2008) 6815. 58 See W. Kopit, ‘Inferring Antitrust Conspiracies from Circumstantial Evidence: How Much Is Enough?’ (2007) 52 Antitrust Bulletin 417. 59 Matsushita Electric Indus. Co., Ltd. v Zenith Radio Corp., 475 US 574, 588 (1986). 60 In re High Fructose Corn Syrup Antitrust Litig., 295 F.3d 651, 655 (7th Cir. 2002). 61 Exchanges of correspondence, minutes of meetings, and other such documents, may be used to establish that ‘contact’ has occurred; see Case T-1/89 Rhône-Poulenc v Commission [1991] ECR II-867, AG Opinion, 955-957; and Case C-199/92 P Hüls v Commission [1999] ECR I-4287, paras 141–55. 62 Case T-15/99 Brugg Rohrsystem GmbH v Commission [2002] ECR II-1613, para 74; Case T-28/99, Sigma Tecnologie di rivestimento Srl v Commission [2002] ECR II-1845, paras 44–49; Joined Cases T-25/95 etc Cimenteries CBR v Commission [2000] ECR II-491, para 4098; Case COMP/36.571/D-1 Austrian Banks – ‘Lombard Club’ [2004] OJ L56/1; Joined Cases T-259/02 etc Raiffeisen Zentralbank Österreich AG and others v Commission [2006] ECR II-5169; and Joined Cases C-189/02 P etc Dansk Rÿrindustri. A/S, Isoplus Fernwarmetchnik Vertriebsgesellschaft mbH, Isoplus Ferwarmetchnik Gesellschaft mbtl, Isoplus Fernwarmetchnik GmbH, KE KEUT Kunststoftwerk GmbH, LR of 1998 A/S, Brugg Rohrsysteme gmbh, LR of 1998 and ABB Asea Brown Boveri LTD v Commission [2005] ECR I-05425. 63 Case COMP/39188 Bananas, C(2008) 5955 final, paras 51 and 62. 64 ibid para 147. 57

100  Research handbook on cartels the parties and contemporaneous documents that referred to the communications.65 Though it was argued ‘that the majority of the calls were under 10 minutes, which cannot demonstrate a pattern of any substantial discussions’, that argument was rejected.66 2. Economic Economic evidence is that which either shows an outcome to be implausible if there is independent action or demonstrates structural features of a market that tend to show that cartelization is feasible and so independent action unlikely. Certain outcomes are thought to be implausible if firms act independently. As an example, in Dyestuffs, ten producers of aniline dyes increased their prices by 15 per cent, then by 10 per cent and then by 8 per cent in January 1964, January 1965 and October 1967 respectively.67 The Commission concluded it was ‘not conceivable that without detailed prior agreement’ price increases could occur in this manner.68 The fact that the firms had not acted independently was inferred from: (i) the increases being applied to the same products, even though the ten firms each produced between 1500 and 3500 of some 6000 dyes; (ii) instructions to increase the price all being sent within a three-hour window; and (iii) the price increase notices being similarly worded, including identical drafting and spelling errors.69 By asking whether the conduct of the parties is contrary to their unilateral self-interest it is possible to infer that action is not unilateral. The question might be answered in the affirmative, and the absence of independence inferred, when firms: increase prices in time of oversupply; refuse to deal with a customer or supplier that appears to be an attractive business opportunity; or disclose information that rivals in a competitive market could use to their advantage. Showing that an outcome is implausible if there is independent action has fared more favourably than showing that cartelization is feasible and so independent action unlikely. This is because in Wood Pulp the Court of Justice made it clear that the feasibility of joint intention is insufficient when independent action remains as a plausible explanation for unlikely outcomes such as parallel conduct unprompted by, and unrelated to, a change in costs or demand, persistent and abnormally high profits and stable market shares.70 The Court of Justice had commissioned its own expert report and concluded the economic evidence did not rule out the prospect that the parties acted independently.71 Direct evidence is preferred and, in its absence, communication evidence is sought. To what extent will courts condemn conduct in the absence of communication evidence, that is, rely solely on economic evidence? In Wood Pulp the European Commission had attempted to

ibid paras 172–82. ibid para 80. 67 Case 48/69 ICI v Commission (Dyestuffs) [1972] ECR 619, paras 1–6 and 83–87. At para 58 there was some dispute as to the correct measure of price, the parties arguing that while the list price increased, customers were habitually given large discounts. 68 Re Cartel in Aniline Dyes [1969] OJ L195/11, para 7 (emphasis added). See also Case 48/69 ICI v Commission (Dyestuffs) [1972] ECR 619, para 54;Case 49/69 Badische Anilin-Und Soda-Fabrik AG v Commission [1972] ECR 713, para 35. 69 Re Cartel in Aniline Dyes [1969] OJ L195/11, paras 7–8; Korah (n 7) 220–21; Case 48/69 ICI v Commission (Dyestuffs) [1972] ECR 619, AG Opinion, 674. 70 Joined Cases C-89/85 etc.A. Ahlström Osakeyhtiö and others v Commission [1993] ECR I-1307, para 71. 71 ibid para 126. 65 66

The legal concept of a cartel  101 establish the absence of independence on the basis of economic evidence alone.72 As a result of its failure in Wood Pulp, in Cartonboard the European Commission placed greater emphasis on communication evidence to avoid the parties being able to ‘attribute […] the series of uniform, regular and industry-wide price increases in the carton board sector to the phenomenon of “oligopoly behaviour”’.73 It is generally considered that the reality of operating a cartel means that communication evidence will exist.74 This is not to discount the role of economic evidence in establishing that observed behaviour is determined other than independently. What it does suggest, however, is that economic evidence is more suited to the function of the case selection stage. In determining whether to investigate a market we need ‘to provide a plausible explanation’ of how a cartel can be said to exist and operate.75 The economic account may be used to cross that threshold and save considerable resources if the threshold is not crossed – a competition law investigation is resource intensive and a firm may suffer reputational damage merely by being the subject of a regulatory investigation.

VI. CONCLUSION Cartels are a species of horizontal agreement treated with enhanced opprobrium. This chapter has sought to identify what marks out this species of horizontal agreement for special condemnation. It does not attempt to map the features onto any specific legal regime, though such an exercise could be done. Instead it outlines two problems associated with legal attempts to control cartelization. The first is to specify what is wrong with cartel conduct, consequentially or deontologically. Independent action is expected in relation to price, market availability and bids submitted. To not act independently has negative economic consequences but is also objectionable in the absence of such consequences because it subverts a customer’s expectations of what a market offers. The deontological explanation is not often explored outside regimes that have sought to impose criminal sanctions, but criminal sanctions are not a necessary response to cartels. Identifying the objectionable conduct and explaining why it is objectionable paves the way for the second problem: proving that cartel conduct exists. How can we demonstrate that firms have acted other than independently? This involves an account of what it means to act independently, in situations when the reaction to that action can be readily observed or predicted and in which evidence can be concealed or destroyed. Although there are accounts of how it could be otherwise, the special opprobrium is triggered by the fact that firms have ‘communicated’ – it is communication that we are ultimately objecting to, and the task of cartel enforcement is to identify the ways in which the firms have communicated and why such communication is objectionable.

72 IV/29.725 Wood Pulp [1985] OJ L85/1. See also Joined Cases 29/83 and 30/83 Compagnie Royale Asturienne des Mines SA and Rheinzink GmbH v Commission [1984] ECR 1679, paras 16–17. 73 IV/C/33.833 Cartonboard [1994] OJ L243/1, para 73. See also Case T-304/94 Europa Carton AG v Commission [1998] ECR II-869, para 50. 74 Kovacic et al (n 5) 409–13. 75 ibid 408.

6. Cartels and the concept of the firm Christopher Sagers

I. INTRODUCTION A problem in cartel law is to distinguish between ‘cartels’ and other arrangements or entities that we think the law should treat differently. The law draws that distinction in various ways, but one important criterion is that, in many antitrust regimes, persons or components within a single ‘firm’ cannot conspire with one another. So, the basic law regulating agreements or multilateral action, which is the basis of cartel law, does not apply to such entities. This rule is an aspect of a more general tension, and like many problems in competition law, it is more difficult than it seems. Probably all competition laws need some rule to distinguish cooperation that is permitted from cooperation that is not. On the one hand, some cooperation is to be encouraged. Few goods or services can be produced by one natural individual alone, and even when cooperation is not strictly necessary to produce a given thing, it can generate extensive benefits. But on the other hand, the harms of concern to competition policies tend to be caused by cooperation in one way or another. Sometimes individual producers remain separate, but agree not to vie for the same customers or suppliers on terms of price or quality. That kind of cooperation is usually heavily disfavoured. But at other times, they combine more fully in some fashion – by merging, for example, or forming some joint venture – and combine so much production under common control that they can unilaterally restrain competition. That kind of cooperation is sometimes constrained too, but usually with much less vehemence. Implicit even in that basic example is that the distinction between good and bad cooperation can be difficult to draw and troubling to explain. Why does the law broadly prohibit separate ‘firms’ from agreeing on price or output, while remaining much more tolerant of mergers and other combinations that can have similar effects? When the same firms merge rather than conspire, the resulting entity will only make one price and output decision for the combined output, and the one-time competitors will be more fully, permanently combined. But so long as the merger itself was considered desirable, its decisions are likely legal. Why does law treat those outcomes so differently? Various explanations and distinctions might present themselves, but as we shall see, finding coherence within them has posed major challenges and led to sometimes regrettable policy. As leading scholars have explained, ‘[t]he courts have had to struggle’ in single-entity cases ‘with the unhappy dilemma of either drawing lines between different forms of conduct having virtually identical results, or treating different forms of conduct as being the same despite the

102

Cartels and the concept of the firm  103 differences’.1 Courts have been ‘bemused’ for decades by labels like ‘joint venture’,2 and so their decisions often read like ‘the use of a word rather than a rule’.3 This chapter examines this theoretical tension and the policy dilemmas it generates. It argues that the most basic source of the trouble is the apparent inevitability in single-entity cases of looking for objective answers by asking normative questions. Normative questions are more difficult, uncertain and perhaps ill-suited to law enforcement institutions, and they are particularly ill-suited to very preliminary decisions whether a law should even apply. On that most general level as well, we shall see that the challenge is made worse by a policy choice that is fundamental but not necessary: to focus mainly on conduct rather than structure. The chapter finally reviews the work of courts in the United States and the European Union, which both have developed substantial bodies of case law and critical commentary, and offers some comparative and reform-focused observations.

II. THEORY A.

Is the Distinction Necessary?

Whether and how to draw the distinction is a policy judgement. It balances administrative convenience and the practical needs of business against the risks of insulating harmful conduct without good policy reason. A first question might be whether the law really must distinguish joint and unilateral conduct at all. In principle, the law could empower officials to investigate any conduct or market situation, without preliminary distinctions such as the single-entity determination. Such an inquiry might ask whether a given situation involves net anticompetitive conduct or is organized in a net anticompetitive way. There is some precedent for such an approach. In the early US experience, some prominent observers doubted that unilateral and multilateral conduct should be treated differently.4 There also are some notable modern manifestations, such as the United Kingdom’s Market Investigation regime, which empowers authorities to investigate the competitiveness of given markets, with or without evidence of illegal conduct, and order structural changes.5 Whatever benefits it might have, such an approach probably poses several significant challenges, at least as the basis for day-to-day enforcement. A single entity distinction simplifies enforcement by quickly disposing of many unilateral action cases, since unilateral action is usually more difficult to challenge. That might be desirable if the threat posed by unilateral action is low. Without rules for summary disposal of cases where likelihood of harm is low, 1 D. Turner, ‘The Definition of Agreement under the Sherman Act: Conscious Parallelism and Refusals to Deal’ (1962) 75 Harv LR 655, 656. 2 R. Pitofsky, ‘Joint Ventures under the Antitrust Laws: Some Reflections on the Significance of Penn-Olin’ (1969) 82 Harv LR 1007, 1045–46. 3 A. Berle, ‘The Theory of Enterprise Entity’ (1947) 47 Columbia LR 343, 346. 4 Cp the discussion below in Section III. 5 See Competition and Markets Authority, Market Studies and Market Investigations: Supplemental Guidance on the CMA’s Approach (CMA3, July 2017) https://​assets​.publishing​.service​.gov​.uk/​ government/ ​ u ploads/​ s ystem/​ u ploads/​ a ttachment​ _ data/ ​ f ile/ ​ 6 24706/ ​ c ma3 ​ - markets ​ - supplemental​ -guidance​-updated​-june​-2017​.pdf [accessed 7 March 2022].

104  Research handbook on cartels enforcement could be much more costly. That does not in itself mean that a single-entity distinction is the right summary rule. Unilateral conduct as currently defined might not be so much less dangerous that affording it more deference is justified by the administrative savings. Any preliminary sorting rule will be arbitrary to some degree, and harmful if its factual premise is wrong. And in fact, this guiding premise of the single-entity distinction – that multilateral conduct is more dangerous – has been seriously questioned.6 But in any case, doing away with a single-entity distinction would also complicate business decision making. Managers must make internal decisions on price and output that could be much more difficult if their decisions were subject to legal review, even in principle. The problem is most severe in concentrated markets, in which firms might price supracompetitively and match one another’s elevated prices without any explicit agreement. While no one seriously doubts that that result is possible and undesirable, it could pose a special dilemma if it were made illegal. Firms would effectively have to determine the competitive price and charge it, even if other firms were charging more. But in practice, no firm can really say what the competitive price is. No firm knows even its own marginal costs on an ongoing basis, much less the marginal costs of other firms or in the market overall.7 Such a rule would pose a related problem of remedy. Imagine a court found a firm to violate the law by merely following other firms’ behaviour. The court could enjoin further violations or penalize the violation it found, but ensuring future compliance would require proceedings for contempt or subsequent damages as complex as the first. The effect could be ongoing entanglement of courts and enforcers in pricing and production. It would strain their resources and complicate the sensitivity of markets, dampening the function that is thought to be the most important benefit of market economies. B.

The Metaphysical Problem

Assuming some distinction is needed, however, there remain serious challenges in drawing it. To help with the explanation, the following describes two general approaches to the problem. Different approaches, however, tend to collapse into one another, as different faces of a general dilemma. They reflect the apparently irremediable need to find objective answers by asking normative questions, itself an artifact of the choice to follow a conduct-focused policy rather than one focused on structure. On the one hand, we could define some class of entities, based on common features we consider important, and call them ‘firms’. We could then treat cooperation that occurs within them more deferentially than conduct that occurs between them. To pick a term, we might call this the ‘legal approach’. On the other hand, we could ignore that essentially metaphysical question of legal doctrine, and remain agnostic about where firms’ boundaries lie. Instead, we could review any given example of cooperation and ask whether its participants maintain enough rivalry that the law should require them to compete, notwithstanding their relationship. We could call that the ‘economic approach’.

See, e.g., J. Baker, ‘Exclusion as a Core Competition Concern’ (2013) 78 Antitr LJ 527. See generally R. Pittman, ‘Who Are You Calling Irrational? Marginal Costs and the Pricing Practices of Firms’ (June 2009) https://​papers​.ssrn​.com/​sol3/​papers​.cfm​?abstract​_id​=​1420942 [accessed 7 March 2022]. 6 7

Cartels and the concept of the firm  105 Neither has been very satisfactory. The legal approach begs elusive and perhaps untheorizable questions. While organizations may be real in some senses – it would seem wrong to say, for example, that a government agency does not exist because we cannot say for sure which of its contractors or outside partners are ‘in’ or ‘outside’ of it8 – that does not mean that anyone can answer the questions needed to use the concept to apply legal rules. It remains the case that no one can say objectively what organizations are, how we find their boundaries or how their shared attributes serve competition policy goals. Failure to find those answers has not been for lack of asking, and not just within competition policy. From time to time, metaphysical problems of this nature have been burning jurisprudential preoccupations in Europe and America, notably during the late nineteenth century, as the Second Industrial Revolution generated society-shaping economic and political changes.9 And yet, interest in them has usually ended with a fizzle,10 and nowadays most legal applications leave them unasked. A related social science literature is vast but inconclusive, and seems generally uninterested in metaphysical questions of a kind that could be used in a legal approach. Some real-world examples will illustrate the challenges. It is clear at a minimum that we cannot just use pre-existing legal categories as proxies for antitrust ‘firms’. Imagine a simple rule that agreements between formal legal entities are subject to a conspiracy law, while their internal decisions are not. That rule would be easy to apply, but it would get many situations wrong, and create easy opportunities for evasion. Most obviously, it would be undesirable if a group of fully distinct horizontal competitors could immunize a conspiracy just by incorporating it as a single business entity. Conspirators have often done just that, for example by setting up joint selling agencies as cartel coordinators and incorporating them as separate entities. If such an entity does no more than set a common price for the members’ goods, it is just a price-fixing conspiracy, especially if it is their exclusive sales agent. But conspirators have often argued that such arrangements can’t be conspiracies because they constitute single entities. While courts usually reject that argument in obvious cases, matters are usually more complex, and the mere fact of separate incorporation can often cause real confusion. An example might be the current effort of the Visa and Mastercard networks to evade the conspir-

8 See, e.g., J. Freeman, ‘The Private Role in Public Governance’ (2000) 75 NYU L Rev 543, 572 (decrying arguments that ‘there is no such thing as “public” and “private”’ or that ‘there is no such thing as [a government] agency,’ because ‘[t]here is clearly such a thing as the Environmental Protection Agency, the Securities and Exchange Commission, or the Internal Revenue Service. You can visit their headquarters in Washington’). 9 This period generated a vast legal and philosophical literature to consider business entities, and especially issues such as whether they should be legally ‘personified’, what role they played in the social and political order and their relation to the state. For an excellent review, see G. Mark, ‘The Personification of the Business Corporation in American Law’ (1987) 54 U Chi LR 1441. For more general treatment of the period and the upheaval it generated in thinking about business law and larger economic and political problems, see H. Hovenkamp, Enterprise and American Law, 1836–1937 (Harvard University Press, 1991); W. Hurst, The Legitimacy of the Business Corporation in Law of the United States, 1780–1970 (UVA Press, 1970); G. Gerstle, ‘The Protean Character of American Liberalism’ (1994) 99 Am Hist Rev 1043; and M. Sklar, The Corporate Reconstruction of American Capitalism, 1890–1916 (Cambridge University Press, 1988). 10 See Mark (n 9) (explaining how turn-of-the-century preoccupation with business entities dissipated after publication of the pragmatic point of view laid out in John Dewey’s influential paper, ‘The Historic Background of Corporate Legal Personality’ (1926) 35 Yale LJ 655.

106  Research handbook on cartels acy challenges they have faced for many years by separately incorporating the same decision making that the network’s member banks had traditionally done themselves.11 Other distinguishing features can be found for use in a legal approach, but they tend to face similar problems. For example, some see promise in asking how an organization communicates with or disciplines its components. Cartels usually operate by contract, and they often must police their own members with fines or punitive price responses.12 No such thing characterizes the firm as usually understood; firms usually make internal decisions by fiat. So perhaps the use of contracting or discipline could make a simple and administrable single-entity distinction.13 It might seem nicely attuned to antitrust rules, at least in that it follows their statutory language. Conspiracy law tends to apply only to ‘agreements’, and semantically the term implies that the parties were free to reject the agreement. But the problems with such an approach are serious and immediate. Combinations are easy to imagine that would operate through strong internal fiat directives, but that are nevertheless composed of economically distinct entities free to separate at will, and that are otherwise just ordinary cartels. Imagine that two horizontal competitors establish a joint venture as a free-standing, jointly owned corporation, and contribute all their productive assets to it, but without integrating the assets. That arrangement itself might be subject to merger challenge and pre-consummation review, but it might escape challenge, as the vast majority of them do.14 If it were then considered a single entity, it would be free of conspiracy law, and if it lacks the large market share required for monopolization challenge, it will be effectively free of antitrust altogether.15 Unfortunately, economic approaches have not really worked better. Superficially they seem more promising, because they seem already connected to goals that drive competition policy. However, while certain theories of ‘firms’ have flourished in economics, they offer no very useful means to distinguish kinds of cooperation that could be useful to competition policy, at least not by way of preliminary rules for whether the law even applies. One obvious candidate for economic theory of single entity might be the well-known ‘neoinstitutional’ or ‘transaction cost’ economics (‘TCE’). That theory asks why firms exist at all, and offers some arguments for how they will be structured in particular circumstances.

V. Fleischer, ‘The Mastercard IPO: Protecting the Priceless Brand’ (2007) 12 Harv Negot LR 137. See H. Hovenkamp and C. Leslie, ‘The Firm as Cartel Manager’ (2011) 64 Vand LR 811; and R. Posner, ‘Oligopoly and the Antitrust Laws: A Suggested Approach’ (1969) 21 Stan LR 1562, 1570. 13 See, e.g., Hovenkamp and Leslie (n 12) 861–62 (observing that this distinction might usefully be drawn in antitrust cases, but urging that it not be used as a single-entity rule); cf W. Wils, ‘The Undertaking as Subject of E.C. Competition Law and the Imputation of Infringements to Natural or Legal Persons’ (2000) 25 Eur LR 99 (arguing that a distinguishing feature of single entities should be control, as opposed to contract). 14 At least in the United States, where typically about 99 per cent of the thousands of mergers subject to pre-consummation review each year receive no meaningful review at all, and the many thousands more mergers not even subject to the filing obligation are almost never challenged by either government or private plaintiffs. 15 Admittedly, if the entity then seriously constrains trade, it might face retrospective merger challenge to its initial formation, but only within limitation periods, which in the United States will typically only be four years. Private merger challenges are subject to a strict statutory limitation period of four years, and while there is no statute of limitations on government civil challenges, the equitable doctrine of laches ordinarily limits their claims, often to roughly four years. See generally L. Sullivan, W. Grimes and C. Sagers, The Law of Antitrust: An Integrated Handbook (3rd edn, West Academic 2015). 11 12

Cartels and the concept of the firm  107 Its most basic insight is that in perfect competition, there would be no firms at all – all goods and services could be gotten through market transactions. Its aim is therefore to explain the market imperfection that requires them. Its answer has been that sometimes the difficulty of negotiating open-market sales makes them costlier than making a good in-house.16 As proof of how poorly suited TCE might be to single-entity determinations, one important offshoot still effectively holds that firms do not exist or are irrelevant.17 While many economists still consider firms to matter in various ways, they consider them mainly mechanisms to address normative problems, such as efficiency18 or agency cost,19 and seem generally uninterested in determining what firms ‘are’ or how we tell one from another. More importantly, even if such a theory could offer concrete answers, it would be ill-suited to the preliminary question whether or not a law even applies. As a doctrinal antitrust inquiry, it might help to decide that in a given case two or more individuals seem like a ‘firm’, because the cost or uncertainty of long-term relations among them would be so greatly reduced through cooperation. But that normative inquiry would pose complex and uncertain empirical questions at the very beginning of proceedings, at a time when likely little evidence has been adduced, and would put courts or enforcers in the generally disfavoured position of judging how economic activities are best organized. One might think an economic approach could avoid that challenging normativity by asking not whether entities should combine, but whether, given their incentives, competition among them would be feasible. That is, we could ask whether it would do any good for the law to treat people as capable of conspiring, given the likelihood they would compete if they did not conspire. Sometimes called an ‘identity’ or ‘unity’ of interests approach, this view has been adopted in the United States.20 Competition is thought to be feasible among entities that do not share ownership of the same profits, because if they do, they will have such an identity of interest that they would have no incentive to compete. In principle, persons who are in zero-sum adversity over the same profits will compete over price or quality to steal sales from one another, but persons who share the same profits will not. A variation is that certain collaborators should be exempt, even though they would not otherwise be single entities, because their 16 That idea was introduced in TCE’s seminal article, R. Coase, ‘The Nature of the Firm’ (1937) 4 Economica 386. The literature that followed is vast, notably including O. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (Free Press, 1975). 17 Namely, the ‘nexus of contracts’ model views ‘firms’ as no more than sets of contracts among capital and input suppliers. Several surprising consequences follow, including that the ‘power’ of discretionary management is not actually power at all, and that a corporate law is counterproductive if it is more than an off-the-shelf, standard-form contract that can be fully varied by a firm’s constituents. See, famously, A. Alchian and H. Demsetz, ‘Production, Information Costs, and Economic Organization’ (1972) 62 Am Econ Rev 777, 777 (‘[Firm managers have] no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between any two people. I can “punish” you only by withholding future business or by seeking redress in the courts for any failure to honor our exchange agreement. That is exactly all that any employer can do. He can fire or sue, just as I can fire my grocer by stopping purchases from him or sue him for delivering faulty products. What then is the content of the presumed power to manage and assign workers to various tasks? Exactly the same as one little consumer’s power to manage and assign his grocer to various tasks’). 18 See, e.g., Alchian and Demsetz (n 17) (conceiving firms as coordinators of more efficient production). 19 See, e.g., M. Jensen and W. Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ (1976) 3 J Fin Econ 305. 20 See text from n 37 onward.

108  Research handbook on cartels particular good requires cooperation to be produced at all. That argument has been especially common in sports antitrust cases, following a famous suggestion by Robert Bork.21 However plausible they might seem, such approaches offer little help in most cases, because incentives are in fact complicated in most organizations. On the one hand, decision-making within any business entity can raise conflicts and generate conflicting incentives, even as to decisions such as the pricing or design of products. Especially in large organizations, there may be no real ‘unity’ of interest at all.22 More seriously, substantial harmony of interest commonly characterizes collections of firms that are distinct, independent and capable of socially beneficial competition. That is likely true, for example, in league sports with separately organized teams, trade and professional organizations, purchasing or sales cooperatives and many other organizations. Indeed, the members of any cartel or oligopoly have substantially overlapping interests. While they also have adversarial profit interests, all of them benefit most by sustained and anticompetitive cooperation. In the end, all approaches seem to suffer the same central dilemma. There appears to be no means that is both coherent and administrable on a preliminary basis to make this decision. There is no pre-existing, natural line of separation among objectively distinct ‘firms’. There are only normative judgments about how different arrangements should be thought of. C.

Policy Dilemmas

The continued application of the distinction without a better basis for drawing it generates several policy problems. First, all single-entity rules will tend to leave some conduct beyond the law’s reach that might cause harm. Because multilateral conduct is usually treated more harshly, bad actors might insulate harmful conduct if they can claim to be single entities. If the single-entity distinction is poorly drawn, the conduct might go unaddressed for no good reason. The most important example was already discussed above – follow-the-leader behaviour in oligopoly. Competing firms in concentrated markets might not need to reach any agreement or combination in order to raise their prices or restrict their output. In principle, merely parallel conduct among them can cause as much harm as conspiracy or unilateral exclusion. However, with some important dissenting views,23 it is now generally presumed that independent conduct should be punished only if done with monopoly power, and that rules for multilateral restraints should not be applied without at least some basic proof of agreement.24 R. Bork, The Antitrust Paradox: A Policy at War with Itself (Free Press, 1993) 278. For the influence of Bork’s observation on sports antitrust cases, see Natl Collegiate Athletic Assn v Alston 141 S. Ct. 2141 (2021) 2156; American Needle Inc v Natl Football League 538 F.3d 736 (7th Cir. 2008) 743, revd 560 US 183 (2010); and Natl Collegiate Athletic Assn v Bd of Regents of Univ of Oklahoma 468 US 85 (1984) 101. 22 Even courts very sympathetic to single-entity arguments so recognize; see Chi. Prof’1 Sports Ltd. P’ship v NBA 95 F.3d 593 (7th Cir. 1996) 598 (refusing to require proof of complete unity of interest before applying single-entity treatment, because ‘[c]onflicts are endemic in any multi-stage firm, such as General Motors or IBM, […] [but] these wrangles […] do not demonstrate that [such] firms are cartels, or subject to scrutiny under the [§ 1] [for] their decisions’). 23 Notably, Posner (n 12). 24 A seminal statement of this concern is Turner (n 1). There have been important differing views, and above all a more aggressive application of § 1 to tacit agreement was urged by Richard Posner. See R. Posner, Antitrust Law: An Economic Perspective (University of Chicago 1976) 71 (‘If the economic evidence […] warrants an inference of collusive pricing, there is neither legal nor practical justification 21

Cartels and the concept of the firm  109 So, in most antitrust regimes, actual horizontal agreement on price or output can be punished, while harmful parallelism with the same effects goes unaddressed. Next, the rule for drawing the distinction effectively apportions market power, and it might do so capriciously or inconsistently with policy goals. If ‘firms’ are effectively immunized by a rule that reserves harsh treatment only for agreements among separate entities, then actors that are able to establish large ‘firms’ might be able to build market power unavailable to actors that remain separate. A poignant and much-discussed example is the problem of labour. Workers who try to bargain collectively with their employers would, in most legal systems, need special legal clemency or they would constitute illegal price-fixing conspiracies. For reasons of policy, legal systems give them that clemency, but labour groups must comply with the terms of their special exemptions or face liability. The effect can be to give much more power to the owners of capital, for no better reason than that the people and resources combined within an employer are treated as a firm. Moreover, there often is no good substantive distinction between labour groups and other producers who sell to powerful buyers but that enjoy no exemption at all. For example, family farmers and fishers often sell to powerful agricultural intermediaries. Independent doctors or dentists might have to negotiate with powerful insurers, and news organs negotiate with powerful online media platforms over ad revenues. At least under US law, none of these entities can bargain collectively with their powerful counterparts, because they are considered ‘independent contractors’ rather than ‘employees’.25 And so, as a practical matter, the law preferences combinations that markets find conducive. That might be desirable, but only if markets in fact favour consolidations whose social benefits outweigh their anticompetitive costs. The gain might or might not be net positive, but the preference seems to have been adopted with no serious consideration of the problem or evidence one way or the other. Those considerations lead finally to the most significant policy problem, which has been mentioned several times already: that single-entity dilemmas are an artifact of the choice to prioritize conduct over structure. While it may be obvious that entities cannot be expected to compete when they have identical interests, the question remains how large or powerful entities come to have identical interests in the first place, and whether it is wise to let it happen. If single-entity determinations seem troublesome or leave large enforcement gaps, it may counsel a more aggressive no-fault, structure-focused merger policy, or adoption of rules for no-fault monopoly or affirmative deconcentration, or some other renewed concern for structure in its own right. At a minimum, the problems posed by single-entity doctrines are the price we pay when we deemphasize structure.26 Evidently, a society must choose between

for requiring evidence that will support the further inference that the collusion was explicit rather than tacit’). 25 See generally H. Hafiz, ‘Labor’s Antitrust Paradox’ (2019) 86 Chi LR 381; S. Paul, ‘Antitrust as Allocator of Coordination Rights’ (2020) 67 UCLA LR. 378. For cases distinguishing contractors from ‘employees’ entitled to labour exemption, see Los Angeles Meat and Provision Drivers Union Loc 626 v United States 371 US 94 (1962); and Columbia River Packers Assn v Hinton 315 US 143 (1942). 26 P. Neal, W. Baxter, R. Bork and C. Fulda, ‘Report of the White House Task Force on Antitrust Policy’ (1968–69) 2 Antitr L & Econ R 11, 22–23 (recommending a new structural approach, because ‘[u]nder […] conditions [of oligopoly], it does not suffice for antitrust law to attempt to reach anticompetitive behavior; it cannot order the several firms to ignore each other’s existence. The alternatives, other than accepting the undesirable economic consequences, are either regulation of price (and other decisions) or improving the competitive structure of the market’); Turner (n 1) 671 (‘[T]o fall back on

110  Research handbook on cartels having some structural remedies or living with the cost of a conduct law that cannot reach some substantial injuries.27

III.

LEGAL APPLICATIONS

Several jurisdictions have established single-entity doctrines, and their experience bears out the challenges discussed. The case law is especially well developed in the United States, where the law for some decades harshly punished a range of multilateral conduct but makes unilateral conduct hard to challenge. The EU courts have also developed a substantial case law, and commentators there have examined it at length. The primary American antitrust law, the Sherman Act,28 seems to draw the distinction by its very language. The Act makes two things illegal: § 1 prohibits some conspiracies and agreements, while § 2 prohibits ‘monopoliz[ation]’, as well as attempts and conspiracies to monopolize. Section 1’s language specifically prohibits any ‘contract, combination, […] or conspiracy’ that unreasonably restrains trade. American courts and commentators have almost always taken those words to convey that one legal person, acting alone, cannot violate § 1. The conduct of a single entity therefore can only violate § 2. Interestingly, while American lawyers now take this principle as undoubted, there is substantial reason to question whether the Congress of 1890 intended it. Semantically, ‘combination’ could easily include things we now consider single entities, and in the legal and popular usage of 1890 the word likely included such things – for example, the ‘trusts’ of that period, for which antitrust law is named.29 Even the modern Supreme Court has acknowledged as much.30 There also is policy reason to revisit the distinction in American law. When the Supreme Court adopted its modern approach, it did so against a backdrop of harsh substantive conduct rules. Throughout the mid-twentieth century, American courts held a large range of agreements automatically illegal, and if those rules could apply to the internal arrangements of corporate families or other ordinary combinations, they could seriously complicate mundane [a structural] remedy is virtually to concede that the finding of liability on the ground of conspiracy is dubious at best. If effective and workable relief requires a radical structural reformation of the industry, this indicates that it was the structural situation, not the behavior of the industry members, which was fundamentally responsible for the unsatisfactory results’). 27 See generally C. Sagers, ‘#LOLNothingMatters’ (2018) 63 Antitr Bull 7; and Wils (n 13) 105. 28 15 USC §§ 1–7. 29 As Justice Stevens pointed out in his dissent in Copperweld Corp v Independence Tube Corp 467 US 752 (1984), the law of criminal conspiracy as it existed in 1890 recognized that affiliated corporations could conspire and that corporate agents could conspire with one another or with their corporations: ibid 785–86 (Stevens J). (Justice Stevens’s citations are all to post-1890 cases, but there is plenty of authority to the same effect predating 1890.) None less than Oliver Wendell Holmes believed the two sections of the Sherman Act were essentially the same: Northern Secs Co v United States 193 US 197 (1904) 404 (Holmes J) (‘All that is added to the 1st section by § 2 is that like penalties are imposed upon every single person who, without combination, monopolizes […] It is more important as an aid to the construction of § 1 than it is on its own account. It shows that whatever is criminal when done by way of combination is equally criminal if done by a single man’). For a more elaborate history of the issue, see C. Sagers, ‘Why Copperweld Was Actually Kind of Dumb: Sound, Fury, and the Once and Still Missing Antitrust Theory of the Firm’ (2011) 18 Vill Sp & Ent LJ 377, 381–88. 30 Copperweld Corp v Independence Tube Corp (n 29) 769 (‘Nothing in the literal meaning of th[e] terms [of § 1] excludes coordinated conduct among officers or employees of the same company’).

Cartels and the concept of the firm  111 organizational choices. But per se rules have been significantly limited and it has grown much harder to prove § 1 claims in general, so perhaps there is room to consider how much of the uncertainty and policy cost of single-entity inquiry is worthwhile. In any event, the issue came to a fairly urgent head in America in the early 1980s, against that history of mid-century rigour.31 Over some decades there had grown a controversial case law in which the Supreme Court suggested that members of the same corporate family could conspire, at least if they were separately organized.32 That particular result came to be known as the ‘intra-enterprise conspiracy’ rule, and it was the target of decades of vehement criticism,33 even by the federal enforcement agencies.34 Because many kinds of agreements remained per se illegal, it was possible for a corporate parent to break the law, and in principle to risk criminal penalties and treble private damages, merely by directing the sales operations of a wholly owned subsidiary. Critics were especially bothered that two different companies might be treated very differently, though they are identical in substance, if one of them were organized through internal divisions and the other through separately organized subsidiaries. Critics observed that the reason to choose one organization or the other might just be to secure tax advantages, comply with different local regulation, limit liability or increase efficiency, and in any event that the choice had no relevance to the competitiveness of markets. The issue was to some degree put to rest in two key decisions, the seminal Copperweld Corp v Independence Tube Corp of 198435 and a follow-up decision of much later called American Needle Inc v NFL.36 Tellingly, however, despite the elaborate reasoning laid out in those opinions, the several subsidiary doctrinal rules subsequently established and the presumption of many lawyers that the law had been substantially clarified, the law remains more or less as uncertain as before. Not only is the law not obviously clearer or better after Copperweld, it seems not even materially different.

31 See, e.g., Hovenkamp and Leslie (n 12) 815 (noting that the issue seemed more urgent because of the strictness of substantive rules of the time). 32 The intraenterprise conspiracy rule was based almost entirely on three Supreme Court opinions, each of them written by Justice Hugo Black, over about 20 years: Perma Life Mufflers Inc v Intl Parts Corp 392 US 134 (1968); Timken Roller Bearing Co v United States 341 US 593 (1951); Kiefer-Stewart Co v Joseph E Seagram & Sons Inc 340 US 211 (1951). Justice Black also claimed that an intraenterprise rule was applied in United States v Yellow Cab Co 332 US 218 (1947). See Kiefer-Stewart (ibid) 215 (citing Yellow Cab). His interpretation of Yellow Cab has been disputed, and critics have noted that even the three decisions adopting the doctrine could have been decided on other grounds, since there was a basis under existing law either for § 2 liability or for § 1 conspiracies with parties other than the defendants’ own corporate relatives; see Sagers (n 29) 381–84. 33 See, e.g., M. Adelman, ‘Integration and Antitrust Policy’ (1949) 63 Harv LR 27, 50–53; P. Areeda, ‘Intraenterprise Conspiracy in Decline’ (1983) 97 Harv LR 451; M. Handler and T. Smart, ‘The Present Status of the Intracorporate Conspiracy Doctrine’ (1981) 3 Cardozo LR 23 (1981); D. Kempf, ‘Bathtub Conspiracies: Has Seagram Distilled a More Potent Brew?’ (1968) 24 Bus Lyr 173; L. McQuade, ‘Conspiracy, Multicorporate Enterprises, and Section 1 of the Sherman Act’ (1955) 41 Va LR 183; J. Rahl, ‘Conspiracy and the Anti-Trust Laws’ (1950) 44 Ill LR 743; G. Stengel, ‘Intra-Enterprise Conspiracy Under Section 1 of the Sherman Act’ (1963) 35 Miss LJ 5; A. Jones, ‘Intraenterprise Antitrust Conspiracy: A Decisionmaking Approach’ (1983) 71 Cal LR 1732; and Note, ‘Intra-Enterprise Conspiracy Under Section 1 of the Sherman Act: A Suggested Standard’ (1977) 75 Mich LR 717. 34 See, e.g., D. Turner, ‘Address before the American Bar Association’ (1965) 10 Antitr Bull 685, 687 (speech by Assistant Attorney General for Antitrust). 35 Copperweld (n 29). 36 560 US 183 (2010).

112  Research handbook on cartels Copperweld’s primary holding was to reverse the intra-enterprise conspiracy doctrine and to hold that a parent and a 100 per cent subsidiary cannot conspire, as a matter of law. Technically the decision was limited to those particular facts,37 but in the course of its opinion the Court laid out several economic arguments favouring exemption of corporate families from conspiracy law. They would effectively become the reasoning of all subsequent single-entity determinations. The core of this reasoning is the ‘unity of interest’ approach. The Court explained that entities sharing the same profits would not compete even if the law forbade them from conspiring, so they should be treated as single entities.38 Importantly, the Court also stressed another value, which was key to the dominant conservative economics of the day, and claimed that it was a value chosen by the 1890 Congress: that multilateral conduct is in fact much more dangerous that unilateral conduct, and thus that only clearly, plainly multilateral agreement could be exposed to the tougher liability standards of § 1.39 Single-entity issues were thereafter still litigated and could be uncertain, notwithstanding the apparent new clarity. Defendants attempted to use Copperweld’s economic reasoning to expand the category of exempt arrangements, with mixed results.40 The campaign was driven above all by professional sports leagues and their supporters, who stressed that some cooperation between separate teams seemed necessary for the product to exist.41 At length that effort too was nominally put to rest, in American Needle. The unanimous opinion – written, interestingly enough, by a Copperweld dissenter – rejected single-entity treatment for a professional sports league made up of separately incorporated teams, with respect to their participation in a joint licensing entity they created to license their trademarks. The Court reaffirmed Copperweld and its unity-of-interest approach, but found that the teams’ interests in their jointly produced sports product were not so unified that they couldn’t compete in a range of respects. In some particulars, Copperweld and American Needle may have clarified the policy. It is now clear as a matter of law that a corporation cannot conspire with a subsidiary, whether wholly- or majority-owned. Section 1 likewise cannot be violated by officers or employees of the same firm,42 by a corporation’s unincorporated internal divisions43 or by agreement among a firm and other entities that are its ‘agents’.44 There also is some reassurance since American Copperweld (n 29) 767. The Court stressed that ‘[a] parent and its wholly owned subsidiary have a complete unity of interest’. The parent’s and subsidiary’s ‘objectives are common, not disparate; their general corporate actions are guided or determined not by two separate corporate consciousnesses, but one. They are not unlike a multiple team of horses drawing a vehicle under the control of a single driver. With or without a formal “agreement,” the subsidiary acts for the benefit of the parent, its sole shareholder’: ibid 771–72. 39 ibid 775–76. 40 See, e.g., Freeman v San Diego Bd of Realtors 322 F3d 1133 (9th Cir 2003) (rejecting single-entity treatment for professional association of realtors); Oksanen v Page Mem Hosp 954 F2d 696 (4th Cir 1991) (holding hospital and doctors with privileges to practice there one single entity); and City of Mt Pleasant v Assoc Elec Coop Inc 838 F2d 268 (8th Cir 1988) (finding cooperative of separately incorporated electric utilities a single entity). 41 See, e.g., Fraser v Major League Soccer 284 F3d 47 (1st Cir 2002) (refusing to reach question of single-entity treatment for professional sports league); Chi Prof1 Sports Ltd. P’ship (n 22) 598 (finding that professional sports league could be single entity, but remanding for further consideration). 42 Copperweld (n 29) 769 and n 15 (affirming lower-court caselaw that had so held). 43 ibid 770 and n 16 (so stating, and affirming lower-court caselaw). 44 This in fact was an old rule, adopted in United States v General Electric Co 272 US 476 (1926). As later applied, courts required substantial proof of actual, substantive agency, as opposed to arm’s-length relation pretending to be agency; see Simpson v Union Oil Co of Cal 377 US 13 (1964). But the rule has 37 38

Cartels and the concept of the firm  113 Needle that the modern Court will hesitate to extend single-entity treatment very far beyond those categories. It remains the law that price-fixers cannot simply incorporate their cartels or label them ‘joint ventures’. Likewise, nothing depends on whether the arrangement in question is ‘legitimate’ or legal in other respects. And the same entity might be single for some purposes but not others, so that its conduct can be considered unilateral in some cases but multilateral in others.45 And yet, the law may not really have been clarified so much at all. Even the specific holding for which Copperweld is celebrated – that companies cannot conspire with wholly-owned subsidiaries – was arguably not very significant. Despite all the controversy, the intra-enterprise conspiracy rule was almost never actually applied – arguably only twice in the law’s entire history, one occasion being the lower court decision in Copperweld.46 While courts (including the Supreme Court) obligingly reaffirmed the rule in the abstract, they almost always found reasons to reject it in application, and the Supreme Court often wrote of it in ways at odds with the doctrine.47 So, Copperweld arguably just reaffirmed the existing law, more or less. And that specific issue had much, much less policy significance once the several per se rules of mid-century antitrust had softened. The intra-enterprise conspiracy rule could indeed pose serious problems in the days when a whole variety of agreements could be per se illegal and generate criminal penalties and treble damages, including vertical agreements. But as the law stood even by the mid-1980s, the likelihood of substantive liability for a parent’s directions to its subsidiary was small. As it stands now, that likelihood is essentially nothing, as any lawsuit on such a basis is likely to be summarily dismissed and no government or private enforcer would likely waste the time and money. The other black-letter rules now clear under Copperweld were likewise already established before Copperweld reaffirmed them.48 Copperweld’s holding also happens to be the easiest possible issue in single-entity law, and resolving it sheds little light on most disputes, which usually are harder. The law remains difficult to apply, and the cases that remain difficult are the ones that were difficult before Copperweld; post-Copperweld courts have observed that the law remains a quagmire.49 Most telling of all, the post-Copperweld decisions are not really any different than pre-Copperweld cases. As before, the courts apply largely unguided, untheorized, impressionistic hunches, though Copperweld itself explicitly criticized the varying lower court approaches existing

been reaffirmed and appears to be alive and well. See, e.g., Valuepest.com of Charlotte Inc v Bayer Corp 561 F3d 282 (4th Cir 2009). 45 See Hovenkamp and Leslie (n 12) 823–34. 46 The other was Photovest Corp v Fotomat Corp, 606 F2d 704 (7th Cir 1979) 725–27. As explained, and as Copperweld itself stressed, even the Supreme Court opinions on which the intraenterprise conspiracy doctrine was based could all have been resolved on other grounds. 47 See Areeda (n 33) 462–70 (so noting and citing cases). 48 United States v Gen Electric Co 272 US 476 (1926) (firm cannot conspire with its own agent, acting qua agent); Joseph E Seagram & Sons Inc v Hawaiian Oke & Liquors Ltd 416 F2d 71 (9th Cir1969) (unincorporated divisions of the same firm cannot conspire with one another); and Kempf (n 33) 173–74 (discussing caselaw holding that officers of the same firm cannot conspire with one another or the firm). 49 See, e.g., Freeman v San Diego Bd of Realtors 322 F3d 1133 (9th Cir 2003); and Fraser v Major League Soccer 284 F3d 47 (1st Cir 2002) (‘The criteria suggested in the [single entity] cases are so general and so various (unity of interest, lack of existing competition, extent of control), as to emphasize the lack of any developed body of law’).

114  Research handbook on cartels before that decision, and which the courts have essentially preserved.50 In other words, as a practical matter, the seemingly sensible and influential Copperweld resolved virtually no questions at all, except the simplest and most obvious. The US experience also shows how a single-entity rule can damage policy. As mentioned, mere parallel oligopoly pricing, without some agreement on price or output, cannot be illegal, unless the individual oligopolists committed violations of § 2. But since the mid-twentieth century, the courts have made § 2 much more difficult to enforce than § 1, mainly by requiring very substantial, entry-protected market share as proof of ‘monopoly’. The problem has grown significantly more severe since the Supreme Court also began making conspiracy very difficult to prove, in its controversial opinions in Bell Atl Corp v Twombly51 and Ashcroft v Iqbal.52 This so-called Copperweld gap,53 in which harmful conduct cannot be challenged because it is unilateral but not monopolistic, has thus grown wide. As the law currently stands, effectively no conduct is illegal unless there is either elaborate, detailed proof of conspiracy, or monopoly power shown by market share of roughly 70 per cent or more and substantial entry protection. That point was reached in some large part because courts and commentators feared risking antitrust exposure of single entities, and a major contribution to the rhetoric limiting that exposure was Copperweld’s extended argument that multilateral conduct is much more dangerous than unilateral conduct.54 European Union law deploys an apparently very similar distinction, and it too is set out in a substantial case law. Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’) prohibits ‘agreements’ between ‘undertakings’ whose ‘object or effect’ is the ‘prevention, restriction or distortion of competition’. As with Sherman Act § 1, the EU courts have interpreted Article 101 TFEU to require that there be more than one ‘undertaking’ for there to be ‘agreement’. The EU Merger Regulation likewise implies a single-entity notion, since it applies only to combinations of separate entities.55 Unilateral action can therefore violate only Article 102 TFEU, which more closely resembles Sherman Act § 2, in prohibiting ‘abuse […] of a dominant position’. One consequence is an effect like the American Copperweld gap, because Article 102 liability requires that an undertaking be ‘dominant’ and act ‘abusively’, and so that liability is more difficult to establish.56 There are some technical differences of doctrine, but overall the single-entity rules developed in Europe and the United States seem similar and serve similar policy commitments. In any number of decisions, the EU courts have held that there can be no conspiracy between

Sagers (n 29) 390–93 (summarizing cases). 550 US 544 (2007). 52 556 US 662 (2009). 53 See Baker (n 1). 54 Copperweld (n 29) 775–76. 55 Council Regulation (EC) No 139/2004 of 20 January 2004 on the Control of Concentrations between Undertakings (the EC Merger Regulation) [2004] OJ L24/1. 56 See Alison Jones, ‘The Boundaries of an Undertaking in EU Competition Law’ (2012) 8 Eur Comp J 301, 301–02; and Wils (n 13) 105. 50 51

Cartels and the concept of the firm  115 a parent and a subsidiary that it controls,57 among commonly owned corporate siblings,58 between an employer and its employees59 or between a firm and its non-employee agents.60 As in US law, the EU doctrine may contain some theoretical tension or confusion, in that its rationale is explained in varying terms. Some decisions explain it in terms of economic substance, similarly to Copperweld, saying that ‘[i]n competition law, the term “undertaking” must be understood as designating an economic unit […] even if in law [it] consists of several persons, natural or legal’, on the reasoning that ‘competition between [such] persons […] is impossible’.61 But in some other cases, the reasoning seems more legally formalistic, and rests on the view that commonly controlled entities are legally incapable of entering into ‘agreements’ for purposes of Article 101 TFEU, because a controlled entity has no discretion whether or not to ‘agree’ to anything.62 There also has been a fair bit of criticism of the EU doctrine, especially of one consequence it can impose at the remedy phase. Unlike US enforcers, the European Commission may impose fines on antitrust violators.63 Controversy arises because the maximum fine is set at 10 per cent of the firm’s global annual turnover, and that can include the entire turnover of a corporate group if the parent of the group exercised ‘decisive influence’ over a law-breaking subsidiary. Under certain conditions (viz., where it actually exercised decisive influence over the commercial policy of the violating company), a parent company and/or a sibling subsidiary thus can be vicariously liable for another company’s antitrust violation, despite an emphasis elsewhere in EU law on personal fault for imposition of liability,64 and despite some peculiar

57 Cases 56 and 58/64, Etablissements Consten SdRL and Grundigverkaufs-GmbH v Commission [1966] ECR 299, 340. 58 Case T-102/92, Viho v Commission [1995] ECR 11-17, para 47. 59 Joined Cases 40–48 etc, Cooperatieve Vereniging Suiker Unie v Commission [1975] ECR 1663, para 539. 60 Note that, under specific language in the Treaty itself, Article 101 TFEU does apply to an ‘association’ of undertakings; see Joined Cases 96/82 to 102/82etc, IAZ International Belgium and others v Commission [1983] ECR 3369, para 20 (finding that an association could not avoid Article 101 liability for conspiracy among its members, on grounds that it itself was a single entity). 61 Case 170/83, Hydrotherm v Compact [1985] ECR 3016, paras 10–11; and Case T-11/89 Shell v Commission [1992] ECR II-884, para 312. 62 Critics have noticed this tension, observing that the two separate rationales for finding a single entity – that the participants in the entity might be legally incapable of agreement and that the participants might be incapable of competing – are not the same, and won’t always both be true in the same case; see O. Odudu and D. Bailey, ‘The Single Economic Entity Doctrine in EU Competition Law’ (2014) 51 Common Market LR 1721, 1738–42. 63 In civil matters, the American enforcement agencies can ordinarily only seek injunctive remedies. The Justice Department can recover money when it prosecutes antitrust matters criminally (in which case it can secure criminal fines), but only a very narrow range of conduct is now prosecuted as criminal. Likewise, it can secure disgorgement of ill-gotten gains in some narrow circumstances (and the Federal Trade Commission’s (‘FTC’) disgorgement power was recently curtailed in AMG Capital Mgt LLC v FTC 141 S. Ct. 1341 (2021)). 64 See Jones (n 56) 304 and n 16 (stating this criticism and citing other critics). There is a very roughly equivalent doctrine in US law, under which principles are responsible for antitrust violations of their agents; see Am Soc of Mech Engineers Inc v Hydrolevel Corp 456 US 556 (1982). That doctrine is applied, however, only according to the common law of agency, under which corporate subsidiaries are not agents merely by the fact of the parent’s ownership. And even in cases of actual agency, the amount of any money damages or penalty would not be increased by considering the revenues of a larger corpo-

116  Research handbook on cartels policy effects. For example, we would not usually impute liability for a parent company’s wrongdoing on even wholly-owned subsidiaries.65

IV.

CONCLUSION: COMPARATIVE AND REFORM CONSIDERATIONS

Even though they already seem so similar, comparison of US and EU law suggests at least one important lesson. EU courts and critics have recently sought to import learning from the American approach, and above all the economic reasoning of the Copperweld doctrine.66 That is understandable, as was the hope of mid-century American lawyers for a more coherent doctrine. European lawyers are also keen to avoid specific policy problems, not unlike the peculiarities of intra-enterprise conspiracy that Americans found so frustrating. But the American experience really adds little support to a desire for a doctrine like Copperweld. For one thing, the policy problems of intra-enterprise conspiracy were problems much more in principle than in application, since intra-enterprise conspiracy was almost never found in practice. It also seems unlikely that the conjectural possibility of conspiracy liability actually dampened American companies’ organizational choices, even though it meant exposure to the per se rules and criminal liability risks that were much broader at that time. American corporations were actively acquisitive throughout the period, especially during the notorious conglomerate merger wave of the 1960s, and ownership of separately incorporated subsidiaries was common. So perhaps one lesson is that academic observers and others should be sure that problems are real before they solve them, not merely conceptual or intellectual. Second, Copperweld may have brought undesirable policy outcomes of its own. In the uncertainty that remained, defendants in all kinds of different arrangements sought single-entity treatment on vague claims that their interests were aligned in some way, and they not infrequently succeeded, even when they consisted of loosely affiliated, legally discrete entities.67 More importantly, the emphasis in Copperweld on the much greater danger of multilateral conduct seems to have contributed to America’s serious Copperweld gap. Admittedly, the problem may be less acute in Europe and other jurisdictions; in Europe, for example, Article 102 TFEU prohibits abuse of dominance by ‘one or more undertakings’ (emphasis added). So the gap may not be so large. But the point remains that in the American experience, academic concern over problems that turned out to be much more conjectural than real resulted in a serious worsening of what is now an acute policy problem. But in the end, maybe the most important lesson is just that, to whatever extent there were real problems to be solved, Copperweld’s celebrated ‘economic’ approach has not helped solve them. Its reasoning, seemingly so commonsensical, in fact resolves no difficult questions at all. By announcing its reasoning in a case whose facts happened to be the simplest possible

rate organization. Damages and fines are calculated according to actual injury caused or the nature of the conduct, without reference to any wrongdoer’s value. 65 Jones (n 56) 320 (making this point). 66 ibid 308; Odudu and Bailey (n 62) 1729–30; and Wils (n 13) 105. 67 See, e.g., City of Mt Pleasant (n 40) (cooperative of separately incorporated electric utilities was a ‘single entity’).

Cartels and the concept of the firm  117 iteration of a single-entity problem, the Court gave quite a misleading impression that the law would be improved by common-sense economics. But for all that, the direction of reform in both America and Europe might actually be towards increased application of single-entity protection. There is some indication in both US and European law that internal decisions of joint ventures might be exempt from conspiracy law where the creation of the joint venture itself could have been challenged under merger law. In the US, the much criticized Texaco Inc v Dagher68 seemed to hint as much without reaching the question, and some EU cases indicate that Art 101 TFEU should not apply to the ‘core’ decisions of combinations that were ‘legal at their inception’.69 All the evidence in this study suggests that any such change would just worsen the problems of a policy that may have been unnecessary to begin with. In summary, the basic lesson is that the seemingly commonsense need to let businesses make their own decisions might be fairly misleading. While legitimately individual businesses no doubt must make internal decisions hierarchically and without legal interference, the insularity they need absolutely should not be extended so far as many have assumed. Looser combinations of entities can easily withstand some legal exposure, and not so much is lost by considering them capable of conspiracy as to justify the cost of immunizing them from the law. If the comparatively mature experience of the American law teaches anything, it is that the gains of broader single-entity immunity are probably limited and come at significant cost.

547 US 1 (2006). Hovenkamp and Leslie (n 12) 866 (laying out criticisms of Dagher); and Jones (n 56) 324–25 (discussing European cases). 68 69

7. The concept of a Single and Complex Continuous Infringement Stefan Thomas

I. INTRODUCTION The concept of a Single and Complex Continuous Infringement (‘SCCI’)1 in EU competition law allows the European Commission (‘the Commission’) to treat different elements of conspiracy between firms at different times, and even relating to two or more distinct markets, as one unitary infringement. The doctrine can have huge implications in cartel cases. Depending on the context it can help the Commission build its case, plug evidence gaps, and prevent limitation periods from running. At the same time, it can benefit the perpetrator in that one unitary fine substitutes for several individual fines, so that the 10 per cent cap of Article 23 of Regulation 1/2003 is only applied once.2 Due to the ambiguity of the effects it may precipitate for the alleged perpetrator, the finding of an SCCI often becomes a matter of legal disputes in fine proceedings before the Commission and the EU courts. This chapter focuses on the concept of an SCCI. It examines in turn: the nature of the concept (Section II); how one establishes an SCCI (Section III); the implications of an SCCI for public enforcement (Section IV); and the implications of an SCCI for private enforcement (Section V).

1 On the concept of an SCCI, see generally P. Alexiadis, D. Swanson and A. Guerrero Perez, ‘Raising the EU Evidentiary Bar for the “Single and Continuous Infringement” Doctrine’ (2016) No. 4-2016 Concurrences 1; P. Biolan, ‘Limited Awareness of Cartel Participants: Any Consequence for the Single Infringement in EU Competition Law’ (2015) 6 J. Eur. Comp. L. & Prac. 383; J. Joshua, ‘Single Continuous Infringement of Article 81 EC: Has the Commission Stretched the Concept Beyond the Limit of Its Logic?’ (2009) 5 Eur. Competition J. 451; J. Kallaugher and A. Weitbrecht, ‘Microsoft and More – Developments under Articles 81 and 82 EC in 2007’ (2008) 29 ECLR 418; D. Riley, ‘Revisiting the Single and Continuous Infringement of Article 101: The Significance of Anic in a New Era of Cartel Detection and Analysis’ (2014) 37 World Competition 293; M. Romić, ‘Particularities of Proving a Single and Continuous Infringement of EU Competition Rules’ (2020) 22 YARS 169; K. Seifert, ‘The Single Complex and Continuous Infringement – “Effet” Utilitarism?’ (2008) 29 ECLR 546; P. Studt, ‘Case C-615/15 P Samsung SDI v Commission: The Concept of “Single and Continuous Infringement” and Cartels. Continuity or Change?’ (2017) 8 J. Eur. Comp. L. & Prac. 644; and M. van der Woude, ‘Judicial Control in Complex Economic Matters’ (2019) 10 J. Eur. Comp. L. & Prac. 415. 2 Case COMP/39092 Bathroom Fittings and Fixtures, Commission decision, 23 June 2010, para 1262 and footnote 1744.

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The concept of a Single and Complex Continuous Infringement  119

II.

NATURE OF THE CONCEPT

A.

Different Types of SCCI

The concept of SCCI is actually a ‘legal characterization’3 that covers a range of situations in which a multitude of actions and/or effects on one or more markets are compressed into one unitary finding of an infringement in terms of law enforcement. First of all, SCCI can describe the fact that a single cartel on a particular market is composed of several agreements, concerted practices or decisions of associations of undertakings.4 In those instances, the notion of SCCI merely describes the fact that the cartelists have relied on a range of different means and forms of interaction when coordinating their behaviour. Also, it can be used to combine two or more concomitant infringements among the same group of cartelists relating to two or more distinct product markets or geographical markets. Sometimes, the Commission speaks of a ‘market’ when making reference to the entirety of product categories that fall within the scope of an SCCI;5 yet this is not meant as a market definition in a technical sense. In Pre-Insulated Pipes, for example, the Commission applied the SCCI concept to a geographical area while leaving the question open as to whether the agreement actually related to segments of the same market or to different markets.6 The jurisprudence has ruled that a market definition is not necessary in SCCI cases since ‘the fact that the infringement extended over distinct product and geographic markets does not in any event preclude the finding of a single infringement’.7 The Commission initially showed reluctance to combine different product markets if not all addressees were involved in the cartelization of all these markets. In PO/Thread, the Commission stated that three distinct infringements had existed, inter alia based on the fact that only some of the firms had been active on all three markets, and others merely on one or two of them.8 In Methacrylates, however, the Commission found an SCCI9 even though not all conspirators had been active on all affected markets.10 An SCCI may therefore be found in

3 Joined Cases T-101/05 and T-111/05, BASF AG and UCB SA v Commission ECLI:​EU:​T:​2007:​ 380, para 159. 4 Joined Cases T‑305/94 etc. Limburgse Maatschappij and others v Commission ECLI:​EU:​T:​1999:​ 80, para 697; Case T‑1/89 Rhône-Poulenc v Commission ECLI:​EU:​T:​1991:​56, para 126; Cases T‑9/99 HFB and others v Commission ECLI:​EU:​T:​2002:​70, para 186; and BASF (n 3) para 159. 5 Bathroom Fittings and Fixtures (n 2) para 1211. 6 Case IV/35.691/E-4 Pre-Insulated Pipe Cartel, Commission decision, 21 October 1998, para 140. See also Case COMP/36.571/D-1 Austrian Banks – ‘Lombard Club’, Commission decision, 11 June 2002, para 425; Joined Cases T‑259/02 to T‑264/02 and T‑271/02 Raiffeisen Zentralbank Österreich AG and others v Commission ECLI:​EU:​T:​2006:​396, paras 111 et seq, especially para 121; and Case COMP/F-1/38.338 PO/Needles, Commission decision, 26 October 2004, where three distinct products markets in the field of haberdashery and needles were compressed into one SCCI (see paras 47 and 256). 7 Case C-625/13 P Villeroy & Boch ECLI:​EU:​C:​2017:​52, para 165. 8 Case COMP 38.337 PO/Threads, Commission decision,14 September 2005, paras 264 et seq. 9 Case COMP/F/38.645 Methacrylates, Commission decision, 31 May 2006, paras 6 and 222 et seq. 10 ibid para 226. See also Case T-28/99 Sigma Tecnologie di rivestimento Srl v Commission ECLI:​EU:​T:​2002:​76, para 40; Case COMP/E-2/37.857 Organic Peroxides, Commission decision, 10 December 2003, para 310; Joined Cases C-204/00 P etc. Aalborg Portland A/S and others v Commission ECLI:​EU:​C:​2004:​6, para 258; and Case T-279/02 Degussa AG v Commission ECLI:​EU:​T:​2006:​103, para 155.

120  Research handbook on cartels cases where some of the firms have supported, through their collusive action, the implementation of the cartel on markets on which they were not personally active.11 Some argue that it may suffice that only one cartelist is responsible for the entire scope of the SCCI, while all other firms engaged in mere fractions of it, yet with no overlaps between each other.12 It is possible that two or more SCCIs constitute one combined SCCI if there are sufficiently strong links between them.13 In BASF, however, the Court of First Instance (now known as the General Court (‘GC’)) denied sufficiently strong bounds between the anticompetitive actions on a global level, which had already expired, and the subsequent actions that were taken in the same business field in Europe.14 The SCCI doctrine is mostly relevant in horizontal cases, yet the Commission also applies it to vertical restraints relating to different product markets, as in Nintendo.15 SCCI usually becomes important for infringements of a long duration, while some scholars advance that it can, as a matter of principle, also gain relevance in complex cartel infringements of a shorter lifespan.16 B.

The Doctrinal Approach behind SCCI

The doctrinal background behind the SCCI concept has never been extensively discussed in the decisional practice. There is no specific provision in EU law concretizing it. The underlying idea buoys in the second sentence of Article 25(2) of Regulation 1/2003, which states that in ‘the case of continuing or repeated infringements, time shall begin to run on the day on which the infringement ceases’. The GC has argued that SCCI ‘has its origin in a widespread conception in the legal orders of the Member States concerning the attribution of responsibility for infringements committed by several perpetrators according to their participation in the infringement as a whole’.17 Accordingly, the jurisprudence finds that the concept reconciles with the principle of personal responsibility and the rights of defence.18 The Commission argues that it would be ‘artificial’ to ‘break down’ the behaviour in a number of separate infringements ‘while the relevant conduct in reality constituted a single infringement’.19 However, one should be careful not to succumb to the circular argument that something is ‘treated as a single infringement because it is a single infringement’. As is often the case with unwritten rules in EU antitrust law, the reasoning oscillates between arguments based on substantive law and mere enforcement postulates. In the given context this means that it is unclear whether, in the case of an SCCI, there is actually one

See BASF (n 3) paras 177–79; and HFB and others (n 4) para 231. A. Colombani, J. Kloub and E. Sakkers, ‘Cartels’, in J. Faull and A. Nikpay (eds), The EU Law of Competition (3rd edn, Oxford University Press, 2014) para 8.461. 13 BASF (n 3) para 159. 14 ibid para 179 et seq. See also Kallaugher and Weitbrecht (n 1) 423. 15 COMP/35.587 PO Video Games; COMP/35.706 PO Nintendo Distribution; and COMP/36.321 Omega – Nintendo, Commission decision, 30 October 2002, paras 246 et seq, especially para 295. 16 Colombani et al (n 12) 3.99 et seq and 3.154. 17 BASF (n 3) para 160. See also Case C-49/92 P Commission v Anic Partecipazioni SpA ECLI:​EU:​ C:​1999:​356, para 84. 18 BASF (n 3) para 160; Anic Partecipazioni SpA (n 17) para 89. 19 Bathroom Fittings and Fixtures (n 2) para 794. See also Rhône-Poulenc (n 4) para 126; and HFB and others (n 4) para 186. 11 12

The concept of a Single and Complex Continuous Infringement  121 infringement in terms of Article 101 TFEU or whether two or more infringements are merely treated as one for the purpose of law enforcement. On the one hand, the GC refers to several ‘infringements’ for which liability is attributed to the perpetrators, yet at the same time these ‘infringements’ are then coined as one identical ‘infringement’ if the SCCI doctrine applies.20 One might conceive of SCCI as an emanation of the concept of an ‘agreement’ or a ‘restriction’ in terms of Article 101 TFEU. This would fit with the judgment in Team Relocations, where it was held that the concept of SCCI reconciled with the law of Article 101 TFEU.21 Yet competition takes place on markets so that, technically spoken, every market constitutes its own realm in which Article 101 TFEU can grow in significance. Therefore it is hard to see why several cartels on distinct markets in terms of Article 101 TFEU can, at the same time, be one unitary cartel in the spirit of the very same provision. Therefore, the SCCI doctrine should rather be considered as a matter of law enforcement. It is inspired by the criminal law concept of accessory and common purpose. Accessories can become liable for an infringement committed by a principal due to the contributions they rendered to this infringement. Similarly, the concept of common purpose allows one to ascribe liability to all participants in an infringement by an act of imputation. All national EU jurisdictions appear to know these concepts in the realm of criminal law and tort law, albeit with slightly different definitions. This view is reflected in the jurisprudence of the Court of Justice, where an SCCI is considered a type of ‘indirect participation’ in an infringement if a market concerned is one on which the SCCI perpetrator was not active personally.22 At the same time, the concept of SCCI is relevant for the sentencing of an individual addressee if and to the extent that it has committed multiple offences through one unitary action. Here, SCCI leads to the agency’s imposing one unitary fine capped at 10 per cent instead of a multitude of fines.23 This dimension of the SCCI doctrine is best described as a type of aggregate sentencing that ensures that the overall fine remains proportionate.

III.

ESTABLISHING AN SCCI

A.

Common Objective, Contribution and Awareness

From Polypropylene, over BASF, to the jurisprudence in Bathroom Fittings, the decisional practice on SCCI has evolved. As a starting point, the finding of an SCCI is not governed by a single metric. Rather, a comprehensive analysis must account for the nature of the overall conduct.24 According to the judgment of the Court of Justice in Team Relocations, the SCCI concept can be compressed into three main criteria: that an overall plan existed by which the participants pursued a common objective; that the firms made an intentional contribution to

BASF (n 3) para 160–61. Case C‑444/11 P Team Relocations NV and others v Commission ECLI:​EU:​C:​2013:​464, para 49. 22 Villeroy & Boch (n 7) para 167. 23 On that aspect of an SCCI, see Case T‑446/05 Amann & Söhne GmbH & Co. KG and others v Commission ECLI:​EU:​T:​2010:​165, para 150. See also Joshua (n 1) 465 et seq. 24 See e.g. Bathroom Fittings and Fixtures (n 2) paras 793–96. 20 21

122  Research handbook on cartels this objective; and that firms were aware or ought to have been aware of the anticompetitive conduct of the other cartelists.25 Mere knowledge about other cartelists restricting competition cannot suffice for a firm to become responsible for those actions. Rather, the jurisprudence requires that, beyond actual or potential awareness of these restrictions on other markets, a firm must have contributed to these restrictions through its participation in an overarching scheme. In Enichem Anic the Court of Justice alluded to a situation in which ‘the agreements and concerted practices found to exist, formed part of systems of regular meetings, target-price fixing and quota-fixing, and that those schemes were part of a series of efforts made by the undertakings in question in pursuit of a single economic aim, namely to distort the normal movement of prices’.26 Under such circumstances, it is possible, according to the Court, to consider that an undertaking that had taken part in such an infringement through conduct of its own which formed an agreement or concerted practice having an anti-competitive object for the purposes of Article [101(1) TFEU] and which was intended to help bring about the infringement as a whole was also responsible, throughout the entire period of its participation in that infringement, for conduct put into effect by other undertakings in the context of the same infringement.27

That is the case, in the Court’s view, ‘where it is established that the undertaking in question was aware of the offending conduct of the other participants or that it could reasonably have foreseen it and that it was prepared to take the risk’.28 In this line of reasoning, the GC stated in HFB29 that: According to the case-law, an undertaking may be held responsible for an overall cartel even though it is shown that it participated directly only in one or some of the constituent elements of that cartel, if it is shown that it knew, or must have known, that the collusion in which it participated was part of an overall plan and that the overall plan included all the constituent elements of the cartel.

The GC added that this legal argument ‘is not at odds with the principle that responsibility for such infringements is personal in nature, nor does it neglect individual analysis of the evidence adduced, in disregard of the applicable rules of evidence, or infringe the rights of defence of the undertakings involved’.30 When applying these principles, a distinction should be made between two types of cases. If all participants were active on the same markets, potential benefits of the illicit conduct will, most likely, have accrued to each participant in equal measure, since all perpetrators derived profits on the same affected markets. That provides an economic rationale to the SCCI allegation, if the SCCI requirements are met. The situation is different, however, if not all of the addressees were active on all markets covered by the SCCI allegation. In those instances, it becomes questionable in what way a firm, which was active on market A and has engaged

25 Team Relocations NV and others (n 21) para 50 et seq; and Joined Cases T‑204/08 and T‑212/08 Team Relocations NV et al. v Commission ECLI:​EU:​T:​2011:​286, para 35. On the requirement of awareness, see also Biolan (n 1) 383 et seq. 26 Anic Partecipazioni SpA (n 17) para 82. 27 ibid para 83. 28 ibid. 29 HFB and others (n 4) para 231. 30 ibid para 231.

The concept of a Single and Complex Continuous Infringement  123 in conspiracy there, can, at the same time through its participation in the ‘A-market cartel’, have contributed to the implementation of a restriction of competition relating to market B, on which it was not active, while other ‘A cartelists’ might have done business there and have coordinated their ‘B activities’. Nevertheless, the SCCI doctrine is also applied in this latter category. In that respect, the finding of a common objective requires thorough assessment. In Methacrylates, where the Commission for the first time combined several markets despite not all cartelists being active on each of them, it pointed to a set of facts on which the allegation of a common objective was based:31 The anticompetitive arrangements for the three relevant product categories showed ‘a number of common features’. A ‘core group of the same undertakings’ were involved in the anticompetitive arrangements. The ‘three major European producers’ participated in the arrangements for all three products. Also, there was a ‘direct link’ between the three products in that they shared the same chemical basis. Additionally, the three major European producers were ‘fully integrated’ so that their product portfolio covered all three segments. The Commission concluded that, therefore, these companies ‘paid great attention to the spill-over effects of the anti-competitive arrangements concluded for each of the products’. Moreover, ‘the cartelisation on one product automatically influenced the cost structure and/or prices of the other products’. The Commission also highlighted that meetings and contacts ‘were occasionally dedicated to more than one of the three’ products ‘with the venue for the meetings often being the same’. Besides, it was mentioned that ‘a number of representatives of the undertakings involved in the anti-competitive arrangements had responsibility for more than one product under investigation and were therefore aware or should have been aware of the existence of anti-competitive arrangements covering several products’. In Lombard Club the GC applied similar criteria in that it alluded to the fact that the restrictions were thoroughly organized by a high-level group of company representatives,32 and that organizational committees relating to different product segments held some of their meetings jointly.33 Moreover, the GC found it relevant that a top-level body was involved in the taking of fundamental decisions.34 The assessment of a ‘single objective’, therefore, involves a comprehensive assessment of such criteria.35 Some authors argue that the finding of a single objective can be based on a combination of several such criteria without dependence on a specific single criterion.36 In any event, the Commission requires some degree of knowledge or potential awareness of a firm about the effects that an SCCI could have on another market for it to become liable under the SCCI doctrine for those effects.37 In the absence of such (actual or constructive) awareness, a firm must only answer for the part of the infringement in which it was personally engaged.38

Methacrylates (n 9) para 223. Raiffeisen Zentralbank Österreich AG (n 6) para 123. 33 ibid para 120. 34 ibid paras 114–18. 35 On such comprehensive appraisal, see Case T‑357/06 Koninklijke Wegenbouw Stevin BV v Commission ECLI:​EU:​T:​2012:​488, paras 33–71. See also Romić (n 1) 171 et seq. 36 Colombani et al (n 12) para 8.462. 37 See e.g. Bathroom Fittings and Fixtures (n 2) paras 789, 861. 38 Joined Cases C‑293/13 P and C‑294/13 P Fresh Del Monte Produce Inc. v Commission ECLI:​EU:​ C:​2015:​416, paras 156 et seq and para 159; and Sigma Tecnologie di rivestimento Srl (n 10) para 45. See 31 32

124  Research handbook on cartels B.

On the Requirement of Complementarity

Besides these criteria, it is questionable whether the different parts of a collusive conduct must complement each other in an objective, functional sense for an SCCI to arise. After all, it is one thing to be aware of a competitive distortion on market A, and a quite different matter whether a conspiracy relating to market B or an overarching agreement lent itself to promoting this competitive distortion on market A. In order to establish sufficient links between two or more restrictions of competition, the GC in BASF therefore applied a complementarity test.39 According to the GC, an SCCI ‘cannot be determined by a general reference to the distortion of competition’, since such distortion is a consubstantial element of any relevant conduct under Article 101 TFEU.40 Rather, for complementarity to be given, the GC required that each conduct ‘was intended to deal with one or more consequences of the normal pattern of competition and, by interacting, contributed to the realisation of the set of anti-competitive effects intended by those responsible, within the framework of a global plan having a single objective’.41 The same complementarity test was applied in Almamet.42 The complementarity test ensured that mere knowledge about a third-party infringement could not suffice to incur personal liability. Yet the more recent jurisprudence has jettisoned this requirement and instead focused on the mere finding of a ‘single objective’. While the Court of Justice, in Villeroy & Boch, maintained that a ‘general reference to a distortion of competition on the markets concerned’ cannot suffice for an SCCI,43 the Commission can nevertheless, in the Court’s view, establish a single objective if ‘the various instances of conduct complained of pursued the same goal’, namely ‘coordinating’ the cartelists conduct with respect to several product categories to wholesalers.44 The allegation of such a single objective may, according to the Court of Justice, be substantiated by reference to various objective factors, such as the central role played by the wholesalers in the distribution chain, the features of that chain, the existence of umbrella associations and cross-product associations, the similarities in the way the collusive arrangements were implemented and the material, geographic and temporal overlap between the practices concerned.45

The Court of Justice held that ‘in those circumstances’ there is ‘no need to establish a link of complementarity between the practices complained of, given that a single and continuous infringement may be imputed to undertakings that are not in competition and does not require the relevant markets to be systematically defined’.46 If such a single objective can be established, it suffices, in the Court’s view, for a firm to become liable for the entirety of market also CFI of 14 May 1998, Case T-295/94 Buchmann ECLI:​EU:​T:​1998:​88, para 119; and Joined Cases T-25/95 etc. Cimenteries CBR and others v Commission ECLI:​EU:​T:​2000:​77, paras 4041 et seq. 39 BASF (n 3) especially paras 179, 181 and 209. 40 ibid para 180. 41 ibid para 179. 42 Case T‑410/09 Almamet GmbH v Commission ECLI:​EU:​T:​2012:​676, para 154. 43 Villeroy & Boch (n 7) para 166. The same was emphasized by the Court in Team Relocations NV and others (n 21) para 57. 44 Villeroy & Boch (n 7) paras 163 et seq. 45 ibid para 166. 46 ibid para 167.

The concept of a Single and Complex Continuous Infringement  125 effects if ‘it was aware of all the offending conduct planned or implemented by the other cartel members in pursuit of the same objectives’, or if it ‘could reasonably have foreseen that conduct and was prepared to take the risk’.47 This jurisprudence, however, if pushed to its extreme, may lead to a firm becoming liable for distortions on markets where it was not active, of which it was not aware and which it could not have influenced or prevented under any circumstance. Eventually, such type of liability can raise issues under the principle of personal responsibility. Therefore, it must be applied cautiously. The mere fact that, albeit in different markets, similar product categories were affected should not be considered an argument in itself that a firm had the objective to help other cartelists implement restrictions on markets on which this firm was not active. C.

The Requirement of Individual Assessment of Each Participant

SCCI liability must be assessed individually for each participant.48 While the scope of individual involvement can therefore deviate between SCCI participants, it is not required for an SCCI to exist that each participant was active within the entire scope of the unitary infringement. Accordingly, the Court in Team Relocations concretized that it is not necessary to establish that an ‘undertaking was or should have been aware of the offending conduct of the initial participants in the infringement or that it adhered to that infringement from the outset’.49 Also, it is not the case that the ‘condition of awareness can be established only if that undertaking contributed to the single and continuous infringement in a way identical to that initially put in place’.50 Rather, according to the Court, ‘an undertaking may be held responsible for a single and continuous infringement even if it did not participate in all of the offending conduct of which it is made up’.51 About the intentional contribution requirement, the Court stated that ‘it does not mean that the intentional contribution to those common objectives can be established only where the undertaking concerned has contributed to those common objectives since the start of the infringement or on condition that it pursued those objectives in ways identical to those put into effect when the infringement commenced’.52 Also, finding an SCCI is not prevented if the structure of the cartel was altered during its lifetime,53 or if the types of contribution made by each cartelist differ from each other.54 On the other hand, the GC in Quinn Barlo stated that the mere fact that an infringement related to an economic field in which an SCCI was found does not suffice to hold a firm liable for the entire SCCI. Mere ‘objective links between that infringement and the agreement’ in which an undertaking participated, ‘such as belonging to the same economic sector’, will not suffice if it has not been established that the firm ‘was aware of the existence of such a single

ibid para 167. J. Faull, L. Kjølbye, H. Leupold and A. Nikpay, ‘Article 101’, in Faull and Nikpay (n 12) para 3.95. 49 Team Relocations NV and others (n 21) para 54. 50 ibid. 51 ibid, referencing Case C‑441/11 P Commission v Verhuizingen Coppens ECLI:​EU:​C:​2012:​778, paras 43 to 45. 52 Team Relocations NV and others (n 21) para 56. 53 Methacrylates (n 9) para 218. 54 Anic Partecipazioni SpA (n 17) para 79. 47 48

126  Research handbook on cartels infringement or that it could reasonably have foreseen it and was prepared to take that risk’,55 and that the further requirements for an SCCI are fulfilled.

IV.

IMPLICATIONS OF AN SCCI FOR PUBLIC ENFORCEMENT

A.

On Discretion in Applying the SCCI Doctrine

The Commission speaks of being ‘entitled’ to apply the SCCI doctrine.56 Some authors claim the Commission has the ‘discretion’ to invoke it.57 It is expedient to become more specific here. The assessment of complex economic facts leaves the Commission some room for its own appraisal,58 and this also holds true for the assessment of an SCCI. Yet the legal SCCI concept, and the legal requirements underpinning it, are not matters which the Commission or the courts could possibly choose to deny in a given case. The union organs, therefore, do not have a discretion whether to apply the SCCI doctrine or to leave it aside. This is echoed by the judgment of the GC in Tokai Carbon et al. The GC assessed whether the imposition of three fines rested on ‘objective grounds’59 in that the requirements for the finding of an SCCI were absent. This part of the judgment was based on the premise that the Commission would have been entitled to impose three different fines ‘provided that the applicant had committed three separate infringements of Article [101(1) TFEU]’.60 Eventually, the GC concluded that the facts of the case did not give rise to an SCCI so that the triple fining was upheld. This demonstrates that the Commission is bound by the concept if the requirements for an SCCI are fulfilled. The GC therefore concluded that ‘the Commission does not have unlimited discretion in finding that the rules on competition have been infringed, or in determining whether the various unlawful acts constitute a single continuous infringement or a number of separate infringements, or in setting fines for those infringements’.61 B.

Evidence and Limitation Periods

The SCCI doctrine can help the Commission to ‘bypass’ evidence gaps in long-term multi-market offences.62 Where infringements on several interrelated markets have taken place, a lack of evidence for a certain period in relation to one market can be bridged by suffi-

Case T‑208/06 Quinn Barlo v Commission ECLI:​EU:​T:​2011:​701, paras 149 et seq. Bathroom Fittings and Fixtures (n 2) para 784. 57 Colombani et al (n 12) para 8.462. 58 Case C-413/06 P Bertelsmann and Sony Corporation of America v Impala ECLI:​EU:​C:​2008:​392, para 144; Case C-12/03 P Commission v Tetra Laval ECLI:​EU:​C:​2005:​87, para 38; and Joined Cases C‑68/94 and C‑30/95 France and others v Commission (Kali & Salz) ECLI:​EU:​C:​1998:​148, paras 223, 224. See also Case T-342/07 Ryanair v Commission ECLI:​EU:​T:​2010:​280, para 136; and van der Woude (n 1). 59 Joined Cases T-71/03 etc. Tokai Carbon Co. Ltd and others v Commission ECLI:​EU:​T:​2005:​220, paras 124. 60 ibid para 118. 61 Amann & Söhne GmbH & Co. KG (n 23) para 130. 62 See also Alexiadis et al (n 1) 3. 55 56

The concept of a Single and Complex Continuous Infringement  127 cient evidence relating to that period of an infringement on another market, provided that both markets are part of the same SCCI. In a similar vein, the application of the SCCI doctrine can prevent infringements on particular markets from becoming time barred if the restriction of competition was continued on other markets. Conversely, to deny an SCCI can benefit the addressee to the extent that some of the potentially affected infringements will be time barred if treated separately.63 According to the jurisprudence, a cartelist – despite its joining and leaving the cartel ‘from time to time’ – will not necessarily be treated as entering into a new agreement ‘with each change in participation’.64 It is necessary, therefore, to determine whether the infringement was continuous, repeated or terminated. C.

Calculation of the Fine

1. Affected markets The finding of an SCCI leads to the calculation of one unitary sanction for the entirety of distortions on all markets that are covered. This means that the restrictions on all markets must be treated as one unitary infringement for the determination of the basic amount.65 The 10 per cent cap of Article 23 of Regulation 1/2003 is not multiplied.66 Effectively, this is an emanation of the principle of aggregate sanctioning. If an SCCI cannot be established, the Commission will therefore impose several fines, as in Tokai Carbon.67 The Court of Justice has stated that the amount of the fine must reflect the degree of direct involvement of a firm in an SCCI infringement: The fact that an undertaking has not taken part in all aspects of an anti-competitive scheme or that it played only a minor role in the aspects in which it did participate must be taken into consideration when the gravity of the infringement is assessed and if and when it comes to determining the fine.68

Where a firm is held responsible for infringements on markets on which it was not active, the limited role is accounted for when applying the Fining Guidelines. Under the 1998 Guidelines,69 the Commission based its calculation on the turnover with the cartelized good in order to apply differential treatment, so that the non-activity of a cartelist on a cartelized market, that was part of an SCCI, would have translated into a lower fine for this addressee.70 Also, the Commission, under the 1998 Fining Guidelines, granted a reduction of 25 per cent

BASF (n 3) para. 158; and Case C-235/92 P Montecatini SpA v Commission ECLI:​EU:​C:​1999:​362, para 196. 64 HFB and others (n 4) para 234. 65 Bathroom Fittings and Fixtures (n 2) paras 1194–1209. 66 ibid paras 1182–84 and 1192. 67 Tokai Carbon Co. Ltd (n 59) paras 117–24. 68 Anic Partecipazioni SpA (n 17) para 90; see also Case T-59/99 Ventouris Group Enterprises SA v Commission ECLI:​EU:​T:​2003:​334, para 219. On the assessment of facts relating to the role and extent to which a firm engaged in a cartel, see also Case C‑440/11 P Commission v Stichting Administratiekantoor Portielje ECLI:​EU:​C:​2013:​514, paras 115 et seq. 69 Guidelines on the Method of Setting Fines Imposed Pursuant to Article 15(2) of Regulation 17 and Art. 65(5) of the ECSC Treaty [1998] OJ C9/3. 70 To that effect, Methacrylates (n 9) para 333. 63

128  Research handbook on cartels on the basic amount to a firm due to its limited role in the cartel if it was involved only in one of three cartelized markets.71 Under the 2006 Fining Guidelines,72 the basic amount is directly based on ‘the value of the undertaking’s sales of goods or services to which the infringement directly or indirectly relates’, so that whether an SCCI cartelist was active on all or merely on some of the interrelated markets will directly bear on the basic amount.73 In a subsequent step, the Commission determines a percentage of the turnover affected in order to account for the gravity of the infringement.74 It has been suggested that, where an SCCI cartelist is not active on all markets, the Commission will ‘likely’ consider the fact that this cartelization was part of an SCCI scheme comprising other markets as a circumstance that justifies an increase in the percentage, since the overall infringement ‘looks worse than any individual violation committed therein’.75 In addition, it is argued that the Commission has ‘leeway’ to take an SCCI into consideration when determining the gravity of the infringement.76 2. Duration Another factor that bears on the severity of the fine is the duration of the infringement. In BASF, the GC stated that an ‘anti-competitive agreement cannot, in principle, be regarded as a means of implementing another agreement which has already come to an end’.77 The GC highlights that the cartel period is not exclusively determined by the period ‘during which an agreement was in force’, but by reference to the period in which the firms acted in an anticompetitive way.78 This must be assessed individually for each cartelist. Such was the Commission’s practice under the 1998 Fining Guidelines.79 In a similar spirit, the 2006 Fining Guidelines stipulate that the basic amount is multiplied by the number of years of the infringement for each addressee. The reliance on the SCCI concept can therefore extend the overall cartel period in which a participant was involved. It must be recalled that an SCCI can be used by the Commission to bridge periods in which a cartelist was inactive so as to compress all contributions, despite interruptions, into one unitary participation. Despite the impact on limitation periods, this can increase the factor by which the basic amount will be multiplied and therefore inflate the fine. In that regard, the more recent decisional practice makes a distinction between ‘continuous’ infringements and ‘repeated’ infringements.80 While both variants constitute one unitary SCCI, the distinction bears on the determination of the individual participation of a cartelist in the infringement. In a continuous infringement, the undertaking is assumed to have engaged

ibid para 335. Guidelines on the Method of Setting Fines Imposed Pursuant to Article 23(2)(a) of Regulation No 1/2003, OJ 2006 C 210/2 (hereinafter ‘2006 Fining Guidelines’) para 13. 73 Seifert (n 1) 552. 74 Fining Guidelines 2006 (n 72) para 19. 75 Seifert (n 1) 552. 76 ibid. 77 BASF (n 3) para 191. 78 ibid para 187. 79 Methacrylates (n 9) paras 306–13; and PO Video Games, PO Nintendo Distribution and Omega – Nintendo (n 15) para 109. 80 Joined Cases T‑147/09 and T‑148/09 Trelleborg Industrie SAS and others v Commission ECLI:​ EU:​T:​2013:​259, paras 72–94, especially 87 et seq. 71 72

The concept of a Single and Complex Continuous Infringement  129 uninterruptedly for the entire period, while in a repeated infringement the firm is assumed to have paused, with these periods of inactivity not being counted for the determination of the duration. The category of ‘repeated’ infringement, therefore, effectively means that interruptions do not lead to a termination of previous engagements so that limitation periods will not run, while the total amount of the fine must nonetheless reflect the inactive periods adequately. In Coppens, the Court confirmed that the fact that an undertaking did not commit to the full extent of the SCCI warrants a reduction of the fine.81 In conclusion, there are three distinct ways in which passive interim periods can impact on the fine: the involvement may nonetheless have been ‘continuous’, it may have been ‘interrupted’ or it may have been terminated completely.82 Limitation periods will only start in the latter case. The GC emphasizes the importance of considering the facts of the matter in order to distinguish between these three types.83 On a conceptual level, what the continuous and the repeated infringement have in common is that the undertakings involved have the same common objective during the entire period irrespective of whether they continuously or repeatedly contributed to the pursuit of this goal.84 That is the constitutional element in finding a ‘single’ infringement.85 To establish the existence of a single objective in terms of duration, a variety of factors must be taken into consideration, such as ‘the identical nature of the objectives of the practices at issue, of the goods concerned, of the undertakings which participated in the collusion, of the main rules for its implementation, of the natural persons involved on behalf of the undertakings and, lastly, of the geographical scope of those practices’.86 If such is established, the nature of the participation – provided the other requirements for an SCCI are fulfilled – is either continuous or repeated. In order to distinguish between the continuous or repeated nature of the SCCI, it must be assessed whether there were periods of ‘interruptions’ in the participation of a cartelist. This mandates ‘an overall evaluation of all the relevant evidence and [indicia]’.87 As a starting point, the jurisprudence requires ‘objective and consistent indicia’ underpinning the allegation that an infringement extended over a longer period despite intertemporal periods for which evidence is lacking.88 At the same time, however, the jurisprudence has stated that there is a presumption of continuous participation, so that it is upon the undertaking to demonstrate that it was inactive during a certain period.89 Accordingly, mere lack of evidence for a participation during a certain period will not exonerate the undertaking from the allegation of

81 See Case T‑587/08 Fresh Del Monte Produce, Inc. v Commission ECLI:​EU:​T:​2013:​129, para 649, and paras 814–17; Fresh Del Monte Produce Inc. v Commission (n 38) para 152; and Commission v Verhuizingen Coppens (n 51) para 45. See also Colombani et al (n 12) para 8.459. 82 On the requirements that must be fulfilled for a firm to terminate its participation in a cartel, see Case C‑68/12 Protimonopolný úrad Slovenskej republiky v Slovenská sporiteľňa a.s. ECLI:​EU:​C:​2013:​ 71, para 27; Case C‑290/11 P Comap SA v Commission ECLI:​EU:​C:​2012:​271, paras 47 et seqq; and Colombani et al (n 12) para 8.465. 83 Trelleborg Industrie SAS (n 80) para 94. 84 ibid para 88. 85 On the notion of ‘single’ in that regard, see Almamet GmbH (n 42) para 152. 86 Trelleborg Industrie SAS (n 80) para 88. 87 Case C‑113/04 P Technische Unie BV v Commission ECLI:​EU:​C:​2006:​593, para 167. 88 ibid para 169. 89 Trelleborg Industrie SAS (n 80) para 87.

130  Research handbook on cartels a continuous infringement according to the case law.90 This does not mean, however, that the addressee must give full evidence of its non-involvement during a certain period. Mere ‘indicia’ can suffice to deny a continuous infringement.91 Depending on the facts of the case, especially on the relation between periods for which evidence exists and those for which it does not, even gaps of nine months or longer can be acceptable when finding a continuous infringement.92 An undertaking may even be considered to have conspired after the Commission has made inspections, if there is sufficient evidence to assume the engagement in an SCCI to that effect.93 The nature of the agreement must also be taken into account. While a price-fixing cartel, according to the jurisprudence, usually depends on a more closely knit collusion fabric, for a market-sharing agreement it might suffice to convene less frequently so that inactive intermediate periods will not necessary prevent from finding a continuous infringement.94 The Commission, in its decisional practice, explicitly honours the principle of in dubio pro reo if, for certain periods, the evidence and indicia do not support a continuous infringement, so that the dates most favourable for the undertaking will be assumed.95 If sufficient evidence and indicia are absent that would allow one to find a continuous infringement despite a gap period; a repeated infringement can be given, provided that the re-engagement after the interruption is an expression of the same infringement that was committed before. It speaks for a repeated infringement and against a continuous one if the gap period was much longer than the intervals were that usually laid between cartel meetings. The GC in IMI stated that a 16-month period of cartel silence was more than one year longer than the usual terms between contacts, which sufficed to deny a continuous infringement during that period.96 A repeated infringement can relate to the entire SCCI, that is, all participants interrupted their engagement. In addition, it may relate to an individual participant that interrupted its participation, while the other cartelists engaged in a continuous infringement.97 D.

Leniency Applications

The SCCI doctrine can affect leniency applications. If an applicant falls short of providing the requested amount of information about one of the relevant markets affected by a cartel, this

ibid. ibid. 92 Case T‑83/08 Denki Kagaku Kogyo Kabushiki Kaisha v Commission ECLI:​EU:​T:​2012:​48, para 124. 93 Case T‑385/06 Aalberts Industries NV v Commission ECLI:​EU:​T:​2011:​114, paras 83–106, where such was denied in the given case; confirmed upon appeal in Case C‑287/11 P Commission v Aalberts Industries NV and others ECLI:​EU:​C:​2013:​445. 94 Case T‑439/07 Coats Holdings Ltd v Commission ECLI:​EU:​T:​2012:​320, paras 138–55, where, based on this line of argumentation, a gap period of more than 11 years did not hinder a continuous infringement. 95 Case COMP/38.899 Gas Insulated Switchgear, Commission decision, 24 January 2007, para 448. 96 See the IMI judgment, where the GC changed the Commission’s finding of a continuous infringement despite a 16-month gap into a repeated infringement so that the period of inactivity was excluded from the calculation of the fine: Case T‑18/05 IMI plc and others v Commission ECLI:​EU:​T:​2010:​202, para 96. 97 See Gas Insulated Switchgear (n 95) paras 425 et seq and 448. See also Colombani et al (n 12) para 8.462. 90 91

The concept of a Single and Complex Continuous Infringement  131 can lead to the loss of the immunity/leniency benefit for the entire SCCI. Leniency applicants, therefore, will usually relate their submissions to all potentially affected markets.98 It can however be hard to predict which markets the Commission will eventually compress into an SCCI. Therefore, firms should assess the potential scope of an SCCI thoroughly before making a leniency submission. If firms are not active on a market that falls within the scope of an SCCI, it must suffice, however, for them to submit all the information they have about these third-market restrictions, even if that is not very much due to their own absence. E.

Rights of Defence

The addressees of a Statement of Objections (‘SO’) based on an SCCI can find themselves in a predicament if they want to prove that they were not involved in an infringement during a certain time period or on a market on which they were not active.99 Effectively, they are precluded from any argument that their conduct did not have, as its object or effect, a restriction of competition there, for the finding of an SCCI substitutes for their direct involvement in the infringement in that area of the SCCI. The jurisprudence has nonetheless ruled that the concept of SCCI is compatible with Article 101 TFEU and Article 53 of the EEA Agreement and the principle of due process,100 the principle of personal responsibility and the rights of defence of the undertakings involved.101 Also, the GC found the SCCI doctrine to comply with Article 7 (nulla poena sine lege) of the European Convention on Human Rights (‘ECHR’), even though the EU antitrust legislation remains silent as to the legal foundation and criteria of an SCCI.102 The GC found a sufficient legal underpinning in the published case law on SCCI.103 According to the jurisprudence, for the rights of defence to be observed it suffices if the firms can exercise those rights in respect of the elements that give rise to an SCCI, namely the ‘common objective, their intention to contribute to the infringement as a whole by their own conduct and their knowledge of the conduct of other participants or its foreseeability and the acceptance of the related risk’.104 In order to observe the addressee’s rights of defence, the Commission must, in its SO, therefore address whether it intends to rely on the SCCI doctrine. That point was raised by the applicant in BASF.105 Even though the GC did not elaborate on this argument in its judgment, such a duty to disclose the intention of invoking the SCCI doctrine is mandatory, since the applicability can be detrimental to the addressee, namely with respect to limitation periods. In Villeroy & Boch, the Court of Justice held that pieces of evidence can support the finding of a cartelist to have committed an SCCI infringement on a relevant market even though the exact same piece of evidence, viz. a leniency statement, was considered insufficient proof for an infringement on that market by the same chamber of the GC upon application of another cartelist.106 That line of reasoning, however, is objectionable under the in dubio pro reo prin See e.g. Bathroom Fittings and Fixtures (n 2) paras 126–128; and Seifert (n 1) 553. Seifert (n 1) 553. 100 Villeroy & Boch (n 7) para 163. 101 Anic Partecipazioni SpA (n 17) para 89; and HFB and others (n 4) para 231. 102 Amann & Söhne GmbH & Co. KG (n 23) paras 125–33. 103 ibid para 133. 104 Anic Partecipazioni SpA (n 17) para 89. 105 BASF (n 3) paras 133, 157 and 211. 106 Villeroy & Boch (n 7) para 168. 98 99

132  Research handbook on cartels ciple. It is hard to see how a piece of evidence can be sufficiently robust to give evidence for an SCCI infringement on a market in relation to one alleged perpetrator, if the same piece of evidence was considered insufficient by the same court in the same case with respect to another cartelist. If the Court has doubts as to the probative value of this piece of evidence in an appeal lodged by one addressee of an SCCI infringement, the Court cannot, as a matter of logic, be sufficiently convinced of the probative value with respect to the same allegations in relation to another cartelist of the same SCCI infringement.

V.

IMPLICATIONS OF AN SCCI FOR PRIVATE ENFORCEMENT

A.

Scope of Liability for Damages on Non-Contested Markets

To the extent that an SCCI imputes liability for product markets, geographic markets or time periods in which a firm did not sell goods, the question arises about civil liability vis-à-vis customers on those markets or during these periods. Some authors argue that such liability for third-market effects/inactive time periods can arise if, and to the extent that, the SCCI covers those areas and the relevant firm was held responsible for this SCCI.107 Yet even though a firm is accountable under Article 23 of Regulation 1/2003 for an SCCI when receiving a fine, it is questionable if this translates into a corresponding civil liability without more. Since SCCI should be conceived of as a specific sanctioning concept rooted in the realm of law enforcement rather than a matter of the substantive notions of Article 101 TFEU, the answer to the question hinges on whether the laws on antitrust damages provide an identical scope of liability as those sanctioning concepts used under Regulation 1/2003. Several arguments deserve consideration. In Skanska, the Court of Justice ruled that a successor in a business can become liable for infringements committed by the previous owner of the business in analogy to the successor liability rules governing the imposition of fines.108 One might want to argue from here that any entity that incurs responsibility for an antitrust fine is equally liable for the entirety of damages precipitated by the infringement which was sanctioned. Yet such construal of the Skanska judgment would overstretch the ratio decidendi. Skanska was about the notion of an undertaking and the effects of legal changes on its identity. The SCCI doctrine, however, deals with concepts that relate to accessory and common purpose in terms of criminal law as well as aggregate sanctioning. These matters do not relate to the wording and interpretation of Article 101 TFEU. They concern the sanctioning of infringements of Article 101 TFEU. It is very clear, however, that the imposition of fines is governed by principles that are not, by definition, identical with those that govern damages liability. If it were different, compensation could be awarded on grounds of Regulation 1/2003, and the EU Damages Directive109 would not exist. The Court of Justice has emphasized that, as a general rule, damages liability is shaped by the

Seifert (n 1) 553. Case C‑724/17 Skanska ECLI:​EU:​C:​2019:​204. 109 Directive 2014/104/EU of the European Parliament and of the Council of 26 November 2014 on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union [2014] OJ L349/1. 107 108

The concept of a Single and Complex Continuous Infringement  133 national legislator110 within the boundaries of effet utile and the Damages Directive. Neither of them requires, however, to establish a rule that provides for a civil liability in analogy to the SCCI doctrine. Not even the national laws on antitrust sanctions for infringements of Article 101 TFEU are required to provide an SCCI rule. The ECN+ Directive,111 while making extensive stipulations about the national enforcement regime, does not mention this concept either. One might want to rely on the binding effect of a Commission decision for a damages case in order to establish civil liability in analogy to the scope of an SCCI fine decision. Yet the binding effect which a Commission decision precipitates is confined to the fact that the addressee of the decision participated in a cartel. It does not determine the amount of damages that a firm must compensate. This is not to say that an SCCI perpetrator must never be held liable for damages on such markets on which it was not active. Rather, this depends on the national principles governing damages claims, notably in the field of tort law and antitrust damages. It is conceivable that some EU member states will apply principles akin to those established by the Commission in its SCCI doctrine under Article 23 of Regulation 1/2003. Yet it is equally conceivable that the national provisions deviate from this doctrine. In Germany, for example, for someone to become jointly and severally liable for cartel damage to which this person has not contributed a physical cause, it is relevant whether this person acted in concert with a direct perpetrator.112 That, in turn, requires more than mere knowledge about the other person’s infringement. Rather, it is necessary to find some type of contribution that was directed at enabling or facilitating the infringement. Whether such a link can be established depends on the facts of a case. A mere reference to an SCCI decision cannot substitute for an assessment of these private law principles. B.

Recourse Claims for Joint and Several Liability

In any event, the fact that the cartelist was not active on a market can bear on the amount of recovery to be contributed by the other cartelists. Article 11(5) of the EU Damages Directive stipulates that the amount to be received by cartelists from their co-conspirators ‘shall be determined in the light of their relative responsibility for the harm caused by the infringement of compe­tition law’. This ought to allow for a consideration of the amount of harm precipitated on each relevant market. If customers on a market on which the cartelist was not active can, depending on the relevant private law principles and the circumstances, seek compensation from this cartelist, the latter carries a lesser ‘relative responsibility’ for their loss than his co-conspirators who were active on this market.

See Case C‑557/12 Kone ECLI:​EU:​C:​2014:​1317, para 24. Directive (EU) 2019/1 of the European Parliament and of the Council of 11 December 2018 to empower the competition authorities of the Member States to be more effective enforcers and to ensure the proper functioning of the internal market [2019] OJ L11/3. 112 See § 830 of the German Civil Code. 110 111

134  Research handbook on cartels

VI. CONCLUSION This chapter evaluated the EU-level doctrine of the ‘Single and Complex Continuous Infringement’. It explained the nature of the concept of SCCI, emphasizing in the process that the concept covers a range of situations in which a multitude of actions and/or effects on one market or more markets are compressed into one unitary finding of an infringement in terms of law enforcement. The chapter considered how one goes about establishing an SCCI, focusing on issues such as common objective, contribution and awareness and complementarity. The need to assess SCCI liability individually for each participant was also highlighted. Finally, the chapter outlined various implications of an SCCI for public enforcement and for private enforcement.

8. Lawful cartels Or Brook

I. INTRODUCTION The prohibition on hard-core cartels is one of the rare areas of consensus unifying competition law regimes across the globe. Cartels are dubbed as ‘the supreme evil of antitrust’1 and the ‘most egregious violations of competition law’.2 Nevertheless, not every agreement among competitors is deemed to be unlawful. In fact, for many years, various types of cartels have been perceived as a legitimate business strategy and as an engine for economic growth. Even today, a fine line exists between lawful and unlawful cartels. This chapter begins by tracing the historical shift in the international approach towards cartels (Section II). It demonstrates that the prohibition on cartels is not just a question of form, but also one of substance;3 namely, that even after the emergence of international scepticism towards cartels from the 1940s and especially following the 1990s, there is a wide array of acceptable forms of cartel or cartel-like agreements that are presumed to create efficiencies or promote industrial and social policies.4 Although some arrangements are accepted by multiple jurisdictions, to date there is no common framework that guides or can explain the assessment of lawfulness (Section III). Competition authorities, courts, governments and parliaments have often adopted rules incrementally, by responding to case-specific challenges. A notable divergence persists not only in the justifications invoked for lawfulness, but also in the legal, economic or political tests used to assess similar arrangements. To structure the discussion, this chapter distinguishes between two main types of justification.5 On the one end of the scale, there are arrangements that are presumed to create economic benefits, that is, cost and qualitative efficiencies enjoyed by the direct or indirect users of the relevant product or service. These benefits either directly affect prices or provide additional non-price value for consumers, such as new products, better quality or greater variety. On the other end of the scale, there are arrangements that are warranted by non-economic benefits. Those non-pecuniary benefits are more subjective and are not directly related to the characteristics of the relevant product or service. Accepting cartels on the basis of Verizon Communications v Law Offices of Curtis V. Trinko, 540 US 398 (2004) 408. See OECD Council, ‘Recommendation Concerning Effective Action against Hard Core Cartels’ (1998) OECD/LEGAL/0294; and OECD Council, ‘Recommendation Concerning Effective Action against Hard Core Cartels’ (2019) C(2019)87. 3 N. Dunne and I. Maher, ‘The “Acceptable” Cartel? Horizontal Agreements Within EU Competition Law: Introduction’ (2002) 5(3) Antitrust Bulletin 335, 335. 4 J. Fear, ‘Cartels’ in G. Jones and J. Zeitlin (eds), The Oxford Handbook of Business History (Oxford University Press, 2008) 273. 5 This distinction is based on the definitions presented by a group of experts in Office of Fair Trading, Article 101(3): A Discussion of Narrow versus Broad Definition of Benefits. Discussion Note for OFT Breakfast Roundtable (12 May 2010) paras 3.2–3.17. 1 2

135

136  Research handbook on cartels non-economic benefits entails balancing the harm caused to consumers against benefits created for society as a whole – such as promoting regional, national or international industrial policies; fostering employment; addressing situations of crisis; or protecting the environment. This balancing exercise is more contentious, often meriting socio-political value judgements and carrying distributional justice effects. This chapter uncovers a disconnect between the underlying economic and non-economic benefits invoked to justify cartels and the legal, economic or political strategies employed to assess their lawfulness (Section IV). It calls to rationalize the assessment of lawfulness by shifting the focus away from the types of cartels (for example, horizontal cooperation, export or crisis cartels) towards ensuring an alignment between the economic and non-economic justifications invoked and the assessment strategies. Such alignment, the chapter concludes, could enhance the effectiveness, transparency, legal certainty, democratic legitimacy and political accountability of the competition law regimes (Section V).

II.

BRIEF HISTORY OF LAWFUL CARTELS

Although attempts to collude on market prices and outputs are probably as old as markets themselves,6 the overwhelming opposition to cartels is a relatively recent phenomenon. This section illustrates that up until the mid-1940s, certain forms of cartels were viewed by members of industries and governments alike as a legitimate business strategy having a positive function on the organization of markets and generating societal benefits. The shift in the international approach towards cartels was mostly the result of strong American influence following the Second World War, which was later amplified and adjusted by the growing importance of EU competition law from the mid-1990s. A.

From the Late 1800s to the First World War: Cartels as a Social-Economic Institution

Cartels seeking to directly restrain outputs and sales of specific products first emerged as a common industrial organization model in the 1870s. During a time of falling world prices for agricultural and industrial products, most industrialized nations imposed high tariffs to protect their markets against foreign competition. Those tariffs, in turn, induced producers to enter into national cartels to maintain prices at profitable levels and avoid price swings.7 Banks too colluded to safeguard credit and local employment, many times receiving the support of state administration.8 Gradually, the cartel business model gained momentum, spreading from Europe and the US and becoming a defining feature of the global economy.9

6 In the words of R. Piotrowski, Cartels and Trusts: Their Origin and Historical Development from the Economic and Legal Aspects (G. Allen & Unwin, 1933). 7 C. Freedeman, ‘Cartels and the Law in France before 1914’ (1988) 15(3) French Historical Studies 462, 462; and S. Webb, ‘Tariffs, Cartels, Technology, and Growth in the German Steel Industry, 1879 to 1914’ (1980) 40(2) Journal of Economic History 309, 310. 8 H. Schröter, ‘Cartelization and Decartelization in Europe, 1870–1995: Rise and Decline of an Economic Institution’ (1996) 25(1) Journal of European Economic History 129, 133. 9 ibid.

Lawful cartels  137 The first blanket opposition to cartels appeared in the US, where the Sherman Act of 1890 stated that ‘every contract, combination, or conspiracy in restraint of trade […] is declared to be illegal’.10 Despite this broad wording, prohibiting all restraints to trade, the Supreme Court of Justice interpreted the prohibition as being limited to ‘unreasonable’ restraints. Accordingly, US antitrust law distinguishes between agreements that are per se restrictive and are irrebuttably presumed to be unlawful, and other agreements whose legality is determined under the rule of reason test.11 In its early years the US rule of reason was based on a legal proportionality test, examining whether a restraint was reasonably necessary to attain a legitimate agreement, or whether less restrictive alternatives were permissible. Yet in 1918 the Supreme Court embraced a cost–benefit approach, by which the legality of an agreement hinges on its net competitive effect.12 The per se category has been progressively narrowed, currently extending to naked price-fixing and market division agreements and to limited types of boycotts, concerted refusals to deal and tying arrangements.13 Nonetheless, the American approach still represents the principle of prohibition in the assessment of cartels, that is to say, a total ban that is subject to only a few exceptions.14 In parallel, up until the mid-1940s, most other countries continued to perceive cartels as generating a host of economic and non-economic benefits.15 Cartelization was not only accepted, but was regarded as a legitimate form of a capitalistic economy,16 carrying stabilizing effects on the public interest and economic life.17 In some European countries, cartels were also linked to a national cooperative ethos, positioning them as an adequate response to the threat of class conflict and social disintegration.18 This approach was fostered during the First World War, at the time when industrial production was first recognized as a key element of military success.19 Cartels were endorsed by governments, which preferred to control the production of a limited number of cartels rather than supervising numerous independent firms.20 They were also encouraged for industrial policy purposes, as a means to promote foreign trade.21 Even the US, which was guided by the

26 Stat. 209 (1890), sec 1. Standard Oil Co. v United States, 221 US 502 (1911). 12 G. Feldman, ‘The Demise of the Rule of Reason’ (2020) 24 Lewis & Clark L Rev 951, 954–61. 13 H. Hovenkamp, ‘The Rule of Reason’ (2018) 70 Fla L Rev 81, 83. 14 L. Federico Pace and K. Seidel, ‘The Drafting and the Role of Regulation 17: A Hard-Fought Compromise’, in K. Klaus Patel and H. Schweitzer (eds), The Historical Foundations of EU Competition Law (Oxford University Press, 2013) 60–61. 15 Fear (n 4) 268; H. Schröter, ‘Small European States and Cooperative Capitalism, 1920–1960’, in A. Chandler, F. Amatori and T. Hikino (eds), Big Business and the Wealth of Nations (Cambridge University Press, 1997) 189–96. 16 Schröter (n 8) 131. 17 A. Kuenzler and L. Warlouzet, ‘National Traditions of Competition Law: A Belated Europeanization through Convergence?’, in Klaus Patel and Schweitzer (n 14) 92–93. 18 D. Gerber, Law and Competition in Twentieth Century Europe: Protecting Prometheus (Oxford University Press, 1998) 75–76. 19 ibid; and W. Notz, ‘Cartels during the War’ (1919) 27(1) Journal of Political Economy 1. 20 Gerber (n 18) 116. 21 Notz (n 19) 2–6. 10 11

138  Research handbook on cartels principle of prohibition of cartels, allowed domestic firms to participate in international cartels as long as the affected goods were not sold in the domestic market.22 The economic and social merits attributed to cartels during the War are reflected in a report of the British Committee on Commercial and Industrial Policy, warning of manufacturers ‘acting independently and usually in acute competition one with another […] in many cases unable to pay adequate wages or to obtain sufficient capital for necessary improvements or developments’.23 Consequently, the report recommended that the principle of competition should be ‘supplemented or entirely replaced by co-operation and co-ordination of effort in respect of (1) the securing of supplies of materials, (2) production in which we include standardisation and scientific and industrial research, and (3) marketing’.24 B.

The Interwar Period: Early Competition Rules

Early ideas advocating the value of competition began to spread in Europe during the interwar period. Several European countries prohibited specific forms of competitive restraints as a response to the hyperinflation of the early 1920s, when cartel members shifted to consumers the risks associated with currency devaluation.25 The 1923 German Ordinance against the Misuse of Economic Power, for instance, was introduced as an emergency decree to combat hyperinflation. It did not prohibit cartels as such, but empowered the Minister of Economic Affairs to control abusive practices where a cartel ‘endanger[s] the national economy or the public interest’.26 A 1926 amendment to the French Penal Code had distinguished between ‘good’ and ‘bad’ cartels, by which the negative effects emerging from a cartel were balanced against its positive impact on economic development on a case-by-case basis.27 Notably, those early rules did not impose a blanket prohibition on cartels. Rather, they reflected a principle of abuse, prohibiting only cartels presumed to have harmful effects.28 In parallel, governments continued to encourage domestic cartelization as an instrument of industrial policy to protect their national economies against the economic crisis of 1929–33.29 Some governments have further concluded international cartels to shield their markets from expropriation, secure access to raw materials or markets and influence the host country’s domestic policy.30 See Section III(C) below. Committee on Commercial and Industrial Policy after the War, ‘Final Report’ (London, 1918) para 160. 24 ibid para 161. 25 United Nations Department of Economic Affairs, ‘International Cartels: A League of Nations Memorandum’ (1947, Lake Success) 10–11; Gerber (n 18) Chapter V; and Kuenzler and Warlouzet (n 17) 95. 26 RGBl. 1923 I, 1090 (English translation from R. Liefmann, Cartels, Concerns and Trusts (Arno Press, 1977) Appendix I). Also see Kuenzler and Warlouzet (n 17) 94. 27 Articles 419 of the Code Pénal, as added by the 1926 law. Also see Freedeman (n 7) 476–77; and Kuenzler and Warlouzet (n 17) 94. 28 Kuenzler and Warlouzet (n 17) 92–94. 29 United Nations Department of Economic Affairs (n 25) v and 5–10; Fear (n 4) 276; E. Hadley, Antitrust in Japan (Princeton University Press, 1970); and Schröter (n 8) 134–41. 30 H. Schröter, ‘Risk and Control in Multinational Enterprise: German Businesses in Scandinavia, 1918–1939’ (1988) 62(3) Business History Review 420. 22 23

Lawful cartels  139 Schröter has recorded the national approaches to cartels during the interwar period by distinguishing between four groups of countries:31 the first group – including many developed nations, such as Austria, Belgium, Czechoslovakia, Finland, France, Germany, the Netherlands, Norway, Sweden and Switzerland – expressed a strong positive approach towards cartels; the second group, consisting of industrializing countries such as Hungary, Italy, Japan, Poland, and Spain, largely demonstrated a positive view towards cartels, yet introduced supervisory agencies; the third group, including Bulgaria, Canada, Denmark, South Africa and the UK, took an ambivalent position; and the fourth group – which included Argentina, Australia, New Zealand and Yugoslavia – followed the US approach, taking an active stance against cartels. It was estimated that by the advent of the Second World War, about 40 per cent of the worldwide trade was subject to cartelization.32 C.

The Post-War Period: A Shift in the Manière de Voir

The modern opposition to cartels emerged following the Second World War. Driven by strong American influence, cartels were positioned as the enemies of competition and liberalism, and of democracy itself.33 This has gradually shifted the international manière de voir, namely the collective approach to what constitutes a legitimate way of conducting business, the social consensus over the organization of economic life and the paradigm of how the question of the lawfulness of cartels should be approached.34 For example, cartels were first prohibited in both Japan and Germany in 1947, as part of an American attempt to implement democratic practices and reform their economic structures. Inspired by the Sherman Act’s principle of prohibition, those laws included a strict prohibition on cartels.35 The American manière de voir was further extended to the rest of Europe as the US military government in Germany strongly promoted the inclusion of an anti-cartel provision in the Treaty of Paris of 1951 establishing the European Coal and Steel Community (‘ECSC’). In fact, this provision was a condition for terminating the American control over the German coal and steel industry under the allied de-concentration legislation.36 Despite the above, the prohibition on anti-competitive agreements that was included in the European Economic Community Treaty of Rome of 1957 (‘EEC’) leaves greater room for lawful cartels in comparison to the Sherman Act. The drafting of Article 101 TFEU (ex. Article 85 EEC) was strongly influenced by the French competition law at force during that time. As mentioned, the French law did not unequivocally prohibit all anti-competitive agreements, but reflected the principle of abuse warranting a case-by-case analysis to determine if

31 Schröter (n 8). For the EU member states’ approaches, see United Nations Department of Economic Affairs (n 25) 32–36; and Kuenzler and Warlouzet (n 17) 103–08. 32 United Nations Department of Economic Affairs (n 25) 2. Also see Fear (n 4) 276 and 278. 33 Fear (n 4) 279; Schröter (n 30) 197; and Schröter (n 8) 142. 34 Schröter (n 8) 130–31. 35 M. Ariga and L. Rieke, ‘The Antimonopoly Law of Japan and Its Enforcement’ (1964) 39 Wash L Rev 437, 437–40; T. Nakazawa and L. Weiss, ‘The Legal Cartels of Japan’ (1989) 34 Antitrust Bull 641, 641–42; and Kuenzler and Warlouzet (n 17) 96–98. Such strict prohibitions, nevertheless, were short-lived. Quickly after the American occupation ended, the Japanese and German competition laws were amended to permit various types of lawful cartels. 36 Article 65 ECSC. See E.-J. Mestmäcker, ‘Towards a Concept of a Workable European Competition Law’, in Klaus Patel and Schweitzer (n 14) 192.

140  Research handbook on cartels positive effects on economic development or on society could counterbalance the agreement’s negative effects on competition. Therefore, while anti-competitive agreements are prohibited by Article 101(1) TFEU, Article 101(3) TFEU accepts agreements that contribute ‘to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit’, provided they do not impose indispensable restrictions and do not afford firms the possibility of eliminating competition in respect of a substantial part of the relevant market. Furthermore, Article 101(3) TFEU does not directly distinguish between hard-core cartels and other types of restrictive agreements. Unlike the US regime, in which naked cartels are considered as per se violations that cannot be justified, all types of anti-competitive agreements can be accepted in the EU.37 The nature of cartels accepted under Article 101(3) TFEU has changed over the years. During the first decades of EU competition law enforcement, the European Commission (‘Commission’) was openly inspired by Keynesian economic theories suggesting that free markets were not the only source for economic development. It called to limit market forces in favour of promoting other industrial and social policies.38 The Commission’s annual report of 1970, for example, stated that the trend towards industrial cooperation and concentration became more marked. Accordingly, the Commission’s policy necessarily consisted in preserving effective competition in the common market while at the same time encouraging schemes for cooperation, reorganisation and combination calculated to render Community enterprises as competitive as possible both inside and outside the Common Market.39

As I explore empirically elsewhere, until the late 1970s the Commission was willing to accept cartels and other serious restrictions of competition in favour of supporting a host of industrial and social policies, and particularly the EU’s market integration imperative.40 The Commission, moreover, had not focused its enforcement efforts on fighting cartels but rather on vertical restraints that threatened the single market. The few horizontal agreements examined during that period were prohibited only when they impeded market integration in addition to harming competition (for example, in situations of geographic market-sharing). The Commission exempted cartels pertaining to fostering growth, regional cohesion and employment if they did not impede market integration, by means of accepting voluntary commitments or attaching conditions to the exemptions.41

37 However, as elaborated below, naked cartels are less likely to be justified. For an empirical overview of the application of Article 101(3) TFEU to by-object restrictions, see Or Brook, Non-Competition Interests in EU Antitrust Law: An Empirical Study of Article 101 TFEU (CUP, 2022) Figure 3.7. 38 H. Buch-Hansen and A. Wigger, ‘Revisiting 50 Years of Market-Making: The Neoliberal Transformation of European Competition Policy’ (2010) 17(1) Review of International Political Economy 20, 26–32; S. Ramírez Pérez and S. van de Scheur, ‘The Evolution of the Law on Articles 85 and 86 EEC: Ordoliberalism and Its Keynesian Challenge’, in Klaus Patel and Schweitzer (n 14) 21. 39 European Coal and Steel Community, European Economic Community, European Atomic Energy Community, Forth General Report on the Activities of the Communities 1970 (Brussels and Luxembourg, February 1971) para 21 (emphasis added). 40 Brook (n 37), 102–5, 121–3. 41 ibid, 123–30.

Lawful cartels  141 The possibility of exempting restrictive practices under Article 101(3) TFEU was further broadened in 1977, when the European Court of Justice held that EU competition law is guided by the notion of workable competition – that is, the degree of competition ‘necessary to ensure the observance of the basic requirements and the attainment of the objectives of the Treaty’.42 The Court opened the door for accepting cartels and other anticompetitive agreements on the basis of environmental benefits, development of sports and allocation and supply of scarce national resources among states. No strict test guided this assessment. The Commission enjoyed a wide margin of discretion to take into account almost all types of benefits.43 The tolerance towards cartels had also characterized the national approaches of many of the European Member States.44 In France, the above-mentioned distinction between ‘good’ and ‘bad’ cartels had remained in force even after the Ordinance on Competition and Freedom of Prices of 1986 had established modern French competition policy and was later codified in Book IV of the Commercial Code.45 Similarly, in the UK, prior to the adoption of the Fair Trading Act of 1973, the prohibition on anticompetitive agreements was subject to a public interest test. There was no presumption that competition was the most effective model, and cartels were accepted if they fostered efficient production and distribution of goods, encouraged new enterprises or secured efficient regional distribution of employment and resources.46 Even the German competition law, which was relatively strict in prohibiting cartels, included various exceptions up until the turn of the millennium. Warranted by a mix of economic, industrial policy and social considerations, the prohibition did not apply to cartels involving setting standard terms for business, delivery or payments; rebates cartels; crisis cartels; rationalization cartels; specialization cartels; cooperation cartels; and export and import cartels (until 1988).47 The law also shielded a number of industries from the competition rules,48 and entrusted the Federal Minister of Economics to approve cartels in exceptional cases for reasons concerning the general economy and the common welfare. Corresponding to the above, Haucap et al found that, between 1958 and 2004, the German competition authority registered 864 cartels based on those provisions, of which around two-thirds were rationalization cartels.49 D.

The 1990s Onwards: Modernization and ‘Europeanization’

The European approach towards cartels had started to shift by the mid-1990s, when the Commission identified the fight against cartels as an enforcement priority,50 adopted a leni Case 26/76 Metro v Commission [1977] ECR 1875, paras 20–21. O. Brook, ‘Struggling with Article 101(3) TFEU: Diverging Approaches of the Commission, EU Courts, and five Competition Authorities’ (2019) 56(1) Common Market Law Review 121, 133. 44 Schröter (n 8) 142–52; and Kuenzler and Warlouzet (n 17) 95–103. 45 French Ordinance 86-1243 of 1986 on Competition and Freedom of Prices, Articles 7 and 10. 46 D. Elliott and J. Gribbin, ‘The Abolition of Cartels and Structural Change in the United Kingdom’, in A. Jacquemin and H. De Jong (eds), Welfare Aspects of Industrial Markets (Springer, 1977) 346–47. 47 German Act against Restraints of Competition, Sections 2–8. 48 E.g. transportation and postal, agriculture and forestry, banking and insurance, copyright associations, supply of public utilities including electricity, and gas and water (ibid Sections 99–103). 49 J. Haucap, U. Heimeshoff and L.M. Schultz, ‘Legal and Illegal Cartels in Germany between 1958 and 2004’ (University of Düsseldorf DICE Discussion Paper, 2010) www​.econstor​.eu/​bitstream/​10419/​ 41423/​1/​638076714​.pdf [accessed 3 March 2022] 7–8. 50 European Commission, XXXIInd Report on Competition Policy 2002 (Brussels and Luxembourg, 2003) 32. Also see European Commission, XXXIIIrd Report on Competition Policy 2003 (Brussels and 42 43

142  Research handbook on cartels ency programme incentivizing firms to reveal secret cartels51 and declared that cartels are the most harmful agreements to consumers and the European economy in general.52 This transition was complemented by the substantive modernization of EU competition law of the early 2000s, when the Commission called to replace the workable competition notion with a short-term narrow consumer welfare standard.53 According to the Commission’s new interpretation, restrictions of competition will only be accepted under Article 101(3) TFEU if they create quantifiable economic benefits enjoyed by direct or indirect consumers.54 Moreover, the Commission announced that although Article 101(3) TFEU does not a priori exclude certain types of agreements, hard-core restrictions are ‘unlikely’ to fulfil the conditions of the Article.55 The Commission’s new approach has thus considerably limited the type of cartels and other anti-competitive agreements that can be deemed lawful. The Commission’s new approach carried spill-over effects to the European national regimes. As the modernization decentralized the application of Article 101(3) TFEU – and the decision of what amounts to a lawful cartel – to national competition authorities,56 it facilitated a process of soft convergence and voluntary harmonization to the Commission’s approach.57 Although some national divergence still persists,58 many Member States have adopted a consumer welfare-centric approach and a relatively strict opposition to cartels. The Member States’ commitment to fighting hard-core cartels was also pronounced in the ECN+ Directive of 2019, harmonizing certain provisions related to the conditions for granting leniency for secret cartels59 and declaring that commitments decisions are ‘in principle’ inappropriate to deal with such infringements.60 Despite the shift in the Commission’s approach, EU competition law still leaves greater room for accepting some cartel arrangements in comparison to the US. This is often explained by the multitude of goals pursued by EU competition law. EU competition law is aimed not only at economic efficiency, but also at the promotion of economic freedom and the integra-

Luxembourg, 2004) 5; European Commission, Annual Report on Competition Policy 2004: Volume I (Luxembourg, 2005) 4. 51 European Commission, ‘Notice on the Non-Imposition or Reduction of Fines in Cartel Cases’ [1996] OJ C207/4. 52 European Commission, XXVIth Report on Competition Policy 1996 (Brussels and Luxembourg, 1997) 27; European Commission, XXIXth Report on Competition Policy 1999 (Brussels and Luxembourg, 2000) 31; Commission, XXXth Report on Competition Policy 2000 (Brussels and Luxembourg, 2001) 35; and European Commission, XXXIth Report on Competition Policy 2001 (Brussels and Luxembourg, 2002) 24 and 30. 53 European Commission, ‘Guidelines on the Application of Article 81(3) of the Treaty’ [2004] OJ C101/97 (‘Article 101(3) Guidelines’) para 33. 54 Brook (n 37) 67–73. 55 Article 101(3) Guidelines (n 53) para 46. Also see Commission Staff Working Document, ‘Guidance on Restrictions of Competition “By Object” for the Purpose of Defining which Agreements May Benefit from the De Minimis Notice’ SWD(2014) 198 final, 4. 56 Council Regulation (EC) No 1/2003 of 16 December 2002 on the Implementation of the Rules on Competition Laid Down in Articles 81 and 82 of the Treaty [2003] OJ L1/1, Articles 3 and 5. 57 Brook (n 37) 75–92, 149–85. 58 ibid. 59 Directive (EU) 2019/1 of the European Parliament and of the Council of 11 December 2018 to Empower the Competition Authorities of the Member States to Be More Effective Enforcers and to Ensure the Proper Functioning of the Internal Market [2019] OJ L11/3, Articles 17–23 and Recital 50. 60 ibid Recital 39.

Lawful cartels  143 tion of the common market. Moreover, the competition law provisions form part of the EU Treaties, which pursue various economic and social objectives. Accordingly, the EU courts have long insisted that the competition rules must be read in the context of those objectives, which ought to be balanced against each other.61 The EU approach to lawful and unlawful cartels bears a significant global influence. Bradford et al point to the process of ‘Europeanization’ of worldwide competition law regimes, by which the majority of jurisdictions with competition law provisions adopt laws that more closely resemble the approach of EU competition law than that of US antitrust. In particular, they attribute some of the popularity of the EU model to its plurality of goals and its tendency to defer less to markets and more to governments’ ability to correct market failures.62

III.

TYPES OF LAWFUL CARTEL: BETWEEN ECONOMIC AND NON-ECONOMIC BENEFITS

Even after the global shift in attitudes towards cartels, it is clear that not all horizontal agreements between competitors are deemed unlawful. Various competition law regimes accept a host of arrangements that are presumed to create economic benefits to consumers or non-economic benefits for the general public. This section demonstrates that although there are some practices that are accepted by a number of jurisdictions, there is no common framework that guides or can explain the dividing line between lawful and unlawful cartels. In many instances, the assessment of lawfulness differs according to the type of cartel rather than the degree of harm to competition or the balance of interests. Competition authorities, courts, governments and parliaments have mostly refrained from adopting a systematic approach, and have responded to case-specific challenges emerging from certain types of cartels. This section, therefore, presents the most common types of lawful cartel, drawing attention to the typical benefits invoked to justify them. While it does not attempt to provide a comprehensive list of all types of lawful cartels, identifying the types of benefits offers a useful analytical tool that can inform the strategies for assessing such practices, which will be discussed in the next section. A.

Horizontal Cooperation Agreements

Cooperative strategies, by which firms combine complementary activities, skills or assets, are a prevailing and growing business practice.63 They include agreements on joint research and development; production, purchasing or commercialization; and technical or quality standardization. Prompted by global competition and rapid technological developments, such

G. Monti, ‘Article 81 EC and Public Policy’ (2002) 39 Common Market Law Review 1057; and N. Dunne, ‘Public Interest and EU Competition Law’ (2020) 65(2) Antitrust Bulletin 256, 260–62. 62 A. Bradford, A. Chilton, K. Linos and A. Weaver, ‘The Global Dominance of European Competition Law over American Antitrust Law’ (2019) 16(4) Journal of Empirical Legal Studies 731, 735. 63 T. Hemphill, ‘Cooperative Strategy, Technology Innovation and Competition Policy in the United States and the European Union’ (2003) 15(1) Technology Analysis & Strategic Management 93, 93–94. 61

144  Research handbook on cartels arrangements are viewed as lawful when they are likely to lead to substantial economic benefits, such as risk-sharing, cost-saving, increased investments or pooled know-how, or when they enhance product quality, variety and innovation. They are subject to special rules and are protected by safe harbours in many jurisdictions, including in the US and EU.64 Although the lawfulness of such horizontal cooperation agreements is mostly explained in economic efficiency terms, at times they were also justified by broader industrial policy considerations. For example, cooperative strategies were seen as a means to protect the survival of SMEs and offset structural disadvantages, and a number of jurisdictions exempt or limit SMEs from the prohibitions on anti-competitive agreements even in cases of serious restrictions of competition.65 Moreover, in the EU, some horizontal cooperation agreements were accepted by noting their function in enhancing the competitiveness of the European industries as an additional justification to the main economic benefits.66 B.

Crisis Cartels and Restructuring Arrangements

The term ‘crisis cartel’ has been coined to describe both lawful and unlawful cartels adopted during times of industry-specific downturns or general economic distress.67 While those agreements are typically highly restrictive and would not be accepted as a rule, they are vindicated by a host of economic and non-economic benefits. In a line of cases during the 1980s, for example, the Commission accepted industrial-restructuring agreements directed at an orderly reduction of excess capacity following the 1970s economic crisis, as long as they did not set prices or quotas. The Commission mostly based its decisions on market-wide pro-competitive benefits and industrial policy justifications, noting that free-market forces have failed to achieve the necessary capacity reductions to re-establish and maintain a long-term, effective and competitive structure.68 These conclusions were reinforced by non-economic benefits, observing that the coordinated closure ‘helps to mitigate, spread and stagger their impact on employment’.69

ibid; European Commission, ‘Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-operation Agreements’ [2011] OJ C11/1 para 2; Federal Trade Commission and the US Department of Justice, ‘Antitrust Guidelines for Collaborations Among Competitors’ (2000) Preamble. 65 OECD, ‘General Cartel Bans: Criteria for Exemption for Small and Medium-sized Enterprises’ (OCDE/GD(97)53, 1996) www​.oecd​.org/​competition/​cartels/​1920345​.pdf [accessed 3 March 2022] 8 and 11–15. Also see Brook (n 37) 296–301. 66 See e.g. Case IV/30.320, Optical Fibres, Commission Decision 86/405/EEC [1986] OJ L236/30 para 59; and Case IV/32306, Olivetti/Canon, Commission Decision 88/88/EEC [1987] OJ L52/60 para 54. Also see Brook (n 37) 113–15, 130–32, 193–4. 67 OECD, ‘Policy Roundtable – Crisis Cartels’ ((2011) DAF/COMP/GF(2011)11, 18 October 2011) www​.oecd​.org/​daf/​competition/​cartels/​48948847​.pdf [accessed 3 March 2022]. On crisis cartels, see Chapter 15 in this volume. 68 Case IV/30.810, Synthetic Fibres, Commission Decision 84/380/EEC [1984] OJ L207/17, paras 28–52; Case IV/30.863, BPCL/ICI, Commission Decision 84/387/EEC [1984] OJ L212/1, paras 33–40; and Case V/31.055, ENI/Montedison, Commission Decision 87/3/EEC [1986] OJ L5/13, paras 26–41. 69 European Commission, Twelfth Report on Competition Policy (Brussels and Luxembourg, 1983) para 39. Also see European Commission, XXIVth Report on Competition 1994 (Brussels and Luxembourg, 1995) para 85. 64

Lawful cartels  145 The economic value of crisis cartels has been more contested in recent years. However, non-economic benefits – such as securing employment, stabilizing prices and protecting domestic firms – still sometimes tilt the balance in favour of accepting such practices.70 In particular, such public policies have been invoked as a justification for a relaxation of the competition rules as a response to the COVID-19 crisis. The ICN, for example, declared that the unprecedented health, social and economic challenges emerging from the pandemic ‘may trigger the need for competitors to cooperate temporarily in order to ensure the supply and distribution of scarce products and services that protect the health and safety of all consumers’.71 C.

Export Cartels

Export cartels involve the coordination of commercial behaviour of domestic producers in foreign markets.72 As mentioned, they were prevalent from the late 1800s, and are still a common practice today. The US Webb–Pomerene Act of 1918 and the Export Trading Company Act of 1982, for example, permit exporters to exercise their collective bargaining power in foreign markets as long as such conduct does not lead to a restriction on imports into the US and does not restrict competition on the domestic market.73 Similar explicit and implicit rules tolerating export cartels are also found in many other jurisdictions, in particular in developing countries.74 The lawfulness of export cartels is often explained with reference to economic benefits and industrial policies. They are said to facilitate new market entry, bringing innovation or lower prices and allowing SMEs to counter the economic power of foreign buying cartels. Nevertheless, empirical research challenges such justifications, demonstrating that in practice, large international companies, rather than local SMEs, are taking advantage of such rules.75 D.

Sustainability Agreements

The lawfulness of agreements banning the use of environmentally unfriendly products or production means and setting environmental standards and fair trade labels has been subject to much debate in recent years. Whereas many of those agreements could be analysed under the rules applicable to horizontal cooperation agreements or rules of trade and professional associations, they are frequently treated as a stand-alone category benefiting from a more relaxed

OECD (n 67) 24. International Competition Network Steering Group, ‘Statement: Competition During and After the Covid-19 Pandemic’ (2020) www​.i​nternation​alcompetit​ionnetwork​.org/​featured/​statement​-competition​ -and​-covid19/​[accessed 3 March 2022]. See also O. Odudu, ‘Feeding the Nation in Times of Crisis: The Relaxation of Competition Law in the United Kingdom’ (2020) 19(2) Competition Law Journal 68. 72 F. Jenny, ‘Export Cartels in Primary Products: The Potash Case in Perspective’ [2012] Trade, Competition, and the Pricing of Commodities 99. 73 Webb–Pomerene Act, 15 USC; Export Trading Company Act, 15 USC. Also see Jenny (n 72) 105. 74 M. Levenstein and V. Suslow, ‘The Changing International Status of Export Cartel Exemptions’ (2004) 20 Am U Int’l L Rev 785, 800–06 and 819. 75 World Trade Organization, Report of the Working Group on the Interaction Between Trade and Competition Policy to the General Council (WT/WGTCP/7, 17 July 2003) 14. 70 71

146  Research handbook on cartels application of the competition rules.76 A number of competition authorities have adopted dedicated policy papers setting out their approaches to the assessment of such initiatives.77 The lawfulness of such arrangements is justified not only by the economic benefits created to direct and indirect consumers, but also by non-economic benefits for the public and future generations. Given the unprecedented climate emergency, and as environmental protection receives constitutional status in various legal systems, there is a growing acceptance that environmental legislation may not be sufficient to address those concerns alone and that sustainability concerns should be supplemented by private initiatives.78 E.

State Sovereignty

A multitude of cartel and cartel-like agreements are either backed or run by a state. Such agreements may be the direct result of a state measure (for example, required by law or as part of the administrative use of public power), be influenced by a state, or delegate to private firms a task that was previously performed by the state. The legal status of such agreements is highly controversial. On the one hand, they may bear significant anti-competitive effects, akin to private cartels. In fact, cartel members are likely to prefer government-backed restraints that do not need to be kept secret and are more stable because the state power protects against cheating.79 On the other hand, such arrangements may create benefits to society, for example when they aim to correct market failures or ensure distributional objectives traditionally safeguarded by state measures.80 Consequently, state-run or backed arrangements are protected in many jurisdictions as a representation of state sovereignty or for political reasons.81 The US state action defence, for example, provides that states are shielded from federal antitrust laws when they engage in a bona fide exercise of their sovereign regulatory powers and that firms are immune from antitrust liability when they act in furtherance of an articulated state policy and under active supervision.82 In the EU, there is no clear state action defence as the principle of primacy of EU law requires Member States not to introduce or maintain in force legislative or regulatory

Monti (n 61) 1073–75. See e.g. Dutch Authority for Consumers and Markets, ‘Draft Guidelines on Sustainability Agreements’ (2020), www​.acm​.nl/​sites/​default/​files/​documents/​2020​-07/​sustainability​-agreements​ %5B1​%5D​.pdf [accessed 3 March 2022]; Hellenic Competition Commission, ‘Staff Discussion Paper on Sustainability Issues and Competition Law’ (2020) www​.epant​.gr/​en/​enimerosi/​competition​-law​ -sustainability​ .html [accessed 3 March 2022]; OECD Competition Committee Discussion Paper, ‘Sustainability and Competition’ (2020) www​.oecd​.org/​daf/​competition/​sustainability​-and​-competition​ -2020​.pdf [accessed 3 March 2022]. 78 S. Kingston, ‘Competition Law in an Environmental Crisis’ (2019) 10(9) Journal of European Competition Law & Practice 517; G. Monti, ‘Four Options for a Greener Competition Law’ (2020) 11(3) Journal of European Competition Law & Practice 124; and S. Holmes, ‘Climate Change, Sustainability, and Competition Law’ (2020) 8(2) Journal of Antitrust Enforcement 354. 79 T. Muris, ‘State Intervention/State Action – A US Perspective’ (George Mason Law & Economics Research Paper, No. 04-18, October 2003) 2. 80 OECD, ‘Regulated Conduct Defence’ (DAF/COMP(2011)3, 1 September 2011) www​.oecd​.org/​ regreform/​sectors/​48606639​.pdf [accessed 3 March 2022] 9. 81 ibid. 82 Parker v Brown, 317 US 341 (1943). Also see OECD (n 80) 188–89. 76 77

Lawful cartels  147 measures that could render the competition rules ineffective.83 Yet in certain cases, the Court of Justice accepted national measures that limited the full application of the prohibition on anti-competitive agreements, recognizing that a state must be allowed to exercise its sovereign power to adopt measures that it deems justified for economic or social reasons. The EU case law on this matter is complex and unclear, giving rise to much controversy on the lawfulness of cartels operating under the protection of state sovereignty.84 Similar questions surround the legal status of arrangements made by a number of states, most famously the operation of the Organization of Petroleum Exporting Countries (‘OPEC’). OPEC was created in 1960 as an intergovernmental organization to coordinate and unify oil policies among its Member States to uphold income from taxes and royalties payment against the backdrop of declining oil prices.85 While there is little doubt that such arrangement would have been deemed unlawful if adopted by private entities, OPEC was not given any sovereign powers and adopts resolutions that are subject to the approval of the national governments. This raises many questions as to the power of national courts and competition authorities to assert jurisdiction and effectively bring a case against such practices.86 F.

Regulated Professions and Trade Associations

Similarly to the questions surrounding the lawfulness of cartels that are backed or run by a state, the conduct of regulated professions and trade associations may reflect a clash between harm to competition and the protection of the public interest. In many countries, the admission to and practice of such professions are subject to state or self-regulation codifying ethical and safety rules. While such rules inherently restrict the freedom of action – and when adopted in the context of a trade or professional association can be seen as a cartel – they may be deemed necessary to bridge asymmetry of information gaps between customers and service providers in areas of a high level of technical knowledge; reduce externalities such services may bear on third parties (for example, inaccurate audit reports misleading creditors or poorly constructed building jeopardizing public safety); and regulate services that produce public goods for the benefit of society in general (such as the administration of justice or urban development).87 In the US, regulated professions and trade associations are only immune from antitrust law subject to the conditions of the state action defence.88 In the EU, however, the Court of Justice introduced a case-specific exemption. In Wouters, it held that professional regulations that are inherent and necessary for the proper practice of a profession as organized by the Member OECD (n 80) 195. For an empirical overview and analysis of the EU jurisprudence, see Brook (n 37) 230–53. 85 OPEC, ‘Statute’ (2021) www​.opec​.org/​opec​_web/​static​_files​_project/​media/​downloads/​ publications/​OPEC​_Statute​.pdf [accessed 3 March 2022] Articles 1–3. 86 M. Joelson and J. Griffin, ‘The Legal Status of Nation-State Cartels Under United States Antitrust and Public International Law’ (1975) 9(4) The International Lawyer 617; I.. Grossack, ‘OPEC and the Antitrust Laws’ (1986) 20(3) Journal of Economic Issues 725, 725; and S.W. Waller, ‘Suing OPEC’ (2002) 64(1) University of Pittsburgh Law Review 105. 87 European Commission, ‘Communication from the Commission – Report on Competition in Professional Services’ COM(2004) 83 final (2004) paras 22–30. See also I. Wendt, EU Competition Law and Liberal Professions: An Uneasy Relationship? (Martinus Nijhoff Publishers, 2012) 1–10. 88 A. Edlin and R. Haw, ‘Cartels by Another Name: Should Licensed Occupations Face Antitrust Scrutiny?’ (2013) 162 U Pa L Rev 1093; R. Newman Knake, ‘The Legal Monopoly’ (2018) 93(3) Wash L Rev 1293. 83 84

148  Research handbook on cartels States will not be deemed as unlawful despite their restrictive effects on competition.89 In Meca-Medina, the Court extended this reasoning to anti-doping rules adopted by sporting associations, referring to their function in ensuring that competitive sport is conducted fairly and safeguards the equal chances for athletes, athletes’ health, the integrity and objectivity of competitive sport and ethical values.90 G.

Labour and Trade Unions

Collective agreements concluded by labour and trade unions may be seen as a form of collusion between employees and employers, coordinating provisions related to wages, working hours and conditions, employment security and health and safety standards.91 Nevertheless, EU competition law affords special protection to collective bargaining agreements between employers and employees, which are mostly justified with reference to non-economic benefits. The Court of Justice explained that social security systems, negotiated through collective bargaining, serve an important social objective of improving working and employment conditions for the public interest and are protected by the EU Treaty and Charter of Fundamental Rights.92 Because those social objectives would be undermined if such agreements were made subject to the competition rules, such agreements ought to be regarded ‘by virtue of their nature and purpose’ as falling outside the EU cartel prohibition.93 The rise of the gig economy has given birth to new questions regarding the lawfulness of collective bargaining. The EU’s special protection does not currently extend to the self-employed and to platform workers that do not enjoy traditional worker status.94 Yet, between 2020 and 2021 the Commission launched two public consultations aimed to ensure that ‘EU competition law does not stand in the way of collective agreements that aim to improve the working conditions of solo self-employed people (that is, self-employed without employees)’.95 In parallel, some Member States have taken local initiatives to facilitate such practices. An amendment to the Irish Competition Act, for example, allows to exclude certain categories of self-employed

89 Case C-309/99 J.C.J. Wouters v Algemene Raad van de Nederlandse Orde van Advocaten [2002] ECR I-1577, para 97. 90 Case C-519/04P Meca-Medina and Majcen v Commission [2006] ECR I-6991, paras 42–43. 91 T. Boeri and J. Van Ours, The Economics of Imperfect Labor Markets (Princeton University Press, 2013) 51–80; and OECD, ‘Competition in Labour Markets’ (2020) www​.oecd​.org/​daf/​competition/​ competition​-in​-labour​-markets​-2020​.pdf [accessed 3 March 2022]. 92 Article 151 and 152 TFEU and EU Charter on Fundamental Rights, Article 28. 93 Case C-67/96 Albany International BV v Stichting Bedrijfspensioenfonds Textielindustrie [1999] ECR I-5751, paras 59–60; Case C-219/97 Maatschappij Drijvende Bokken BV v Stichting Pensioenfonds voor de Vervoer- en Havenbedrijven [1999] ECR I-6121, paras 56–57; and Joined Cases C-115/97 to C-117/97 Brentjens’ Handelsonderneming BV v Stichting Bedrijfspensioenfonds voor de Handel in Bouwmaterialen [1999] ECR I-6025, paras 56–57. 94 Case C‑413/13 FNV Kunsten Informatie en Media v The Netherlands EU:​C:​2014:​2411. Also see D. Schiek and A. Gideon, ‘Outsmarting the Gig-Economy Through Collective Bargaining – EU Competition Law as a Barrier to Smart Cities?’ (2018) 32(3) International Review of Law, Computers & Technology 275, 281–82. 95 European Commission, ‘Collective Bargaining Agreements for Self-Employed – Scope of Application EU Competition Rules’ (2021) https://​ec​.europa​.eu/​info/​law/​better​-regulation/​have​-your​ -say/​initiatives/​12483​-Collective​-bargaining​-agreements​-for​-self​-employed​-scope​-of​-application​-EU​ -competition​-rules [accessed 3 March 2022].

Lawful cartels  149 workers from the act,96 and guidelines issued by the Dutch competition authority interpret EU and national competition laws as allowing self-employed and platform workers to coordinate their rates and other conditions among each other and to collectively negotiate with their clients.97

IV.

ASSESSMENT STRATEGIES

This section points to a disconnect between the underlying economic and non-economic justifications accepted for cartels – as presented in the previous section – and the legal, economic and political tests used to assess their lawfulness. It advocates rationalizing the assessment of lawfulness by shifting the focus away from the types of the arrangement towards ensuring an alignment between the justifications for cartels and the assessment strategies used to evaluate their lawfulness. As elaborated below, there are four main strategies that guide the assessment of cartels: economic analysis, legal analysis, exclusion rules and the exercise of enforcement discretion.98 The following sub-sections discuss those strategies in turn, highlighting the types of benefit they are suitable to address. A.

Economic Analysis

One common strategy for the assessment of cartels is the use of economic principles to compare the impact of an agreement on competition against its quantifiable effects on other public policies. This process is based on economic cost–benefit analysis, aiming to ensure the maximization of consumer welfare, or of an alternative economic concept. A prominent example of economic analysis can be found in the application of Article 101(3) TFEU following the modernization of EU competition law. As mentioned, the Commission shifted the application of the Article towards a greater focus on consumer welfare. Accordingly, its Guidelines explain that ‘[w]hen the pro-competitive effects of an agreement outweigh its anti-competitive effects the agreement is on balance pro-competitive and compatible with the objectives of the Community competition rules’.99 Similar ‘efficiency defences’ can be found all around the globe. Bradford et al show that approximately 75 per cent of the competition regimes include such a defence.100 A cost–benefit analysis also guides the application of the US rule of reason, at least in its classic version.101 Unlike the efficiency defence of Article 101(3) TFEU, the US rule deter Irish Competition (Amendment) Act 2017 (Act 12 of 2017). Dutch Authority for Consumer and Markets, ‘Guidelines on Price Arrangements between Self-employed Workers’ (2019) www​.acm​.nl/​sites/​default/​files/​documents/​2020​-07/​guidelines​-on​-price​ -arrangements​-between​-self​-employed​-workers​.pdf [accessed 3 March 2022]. 98 Brook (n 37) 21–3. This classification of the first three strategies is inspired by C. Townley, Article 81 EC and Public Policy (Hart Publishing, 2009) 6–7 and 28–29, which uses slightly different terminology, referring to market balancing, mere balancing and exclusion. 99 Emphasis added. Article 101(3) TFEU Guidelines (n 53) para 33. 100 Bradford et al (n 62) 741. 101 Feldman (n 12) 989, however, illustrates that the rule of reason was interpreted as a mix of economic and legal analysis, incorporating both cost–benefit analysis and the assessment of whether less restrictive means exist. 96 97

150  Research handbook on cartels mines whether an anticompetitive agreement existed in the first place. It offers a binary test: net pro-competitive restraints are permitted, and net anti-competitive effects are prohibited. Using economic analysis as a strategy for assessing the lawfulness of cartels is hailed as an objective, clear and consistent approach, which is divorced from protectionist or political influences. It is particularly suitable to assess efficiencies generated to the benefit of the users of the relevant product or service, such as those typically invoked with respect to horizontal cooperation agreements that were described in Section III(A) above. The assessment of such agreements requires one to reconcile two relatively comparable economic interests (harm to competition versus efficiencies to consumers), which can ultimately be measured by the impact on consumer welfare. However, an economic analysis also carries a number of limitations. First, as many have already observed, the objectivity of the economic assessment should not be exaggerated. The calculation of consumer welfare is not an exact science. It requires some policy choices, and may provide merely an ‘illusion of certainty’.102 Second, economic analysis is particularly problematic when it attempts to take into account non-economic benefits, by quantifying or using subjective proxies to integrate broader political and social factors within a cost–benefit analysis. In the Chicken of Tomorrow case, for example, the Dutch competition authority pronounced in monetary terms the animal welfare and environmental benefits resulting from a minimum sustainability standard agreed upon between supermarkets and chicken-meat producers.103 It based the application of Article 101(3) TFEU and the national equivalent provision on a consumer survey measuring willingness to pay for such benefits. This methodology was criticized as failing to capture the social value attached to animal welfare initiatives that is not directly enjoyed by consumers of chicken meat as well as long-term environmental effects.104 Applying economic analysis to balance irreconcilable economic and non-economic benefits is therefore highly contentious. This exercise is dependent on socio-political values and preferences that cannot be solved by a cost–benefit analysis. For this reason, a sole reliance on economic analysis may not be suitable for competition law regimes that have as their goals multiple objectives beyond economic efficiency and consumer welfare, and that do not offer a clear hierarchy among the different objectives. B.

Legal Analysis

Assessing the lawfulness of cartels may also hinge on a legal proportionality test, considering whether an anti-competitive agreement is ‘justified’ or ‘reasonable’ for attaining a legitimate economic or public policy aim. This test is not based on economic cost–benefit analysis, but on a more abstract legal weighing of interests. A competition authority or court must determine whether the restriction did not go beyond what is necessary and whether the claimed benefits did not exceed the harm to competition. 102 R. Pitofsky, ‘Political Content of Antitrust’ (1979) 127 U Pa L Rev 1051, 1065. See also T. Wu, ‘After Consumer Welfare, Now What? The “Protection of Competition”’ (Competition Policy International, 2018) https://​papers​.ssrn​.com/​sol3/​papers​.cfm​?abstract​_id​=​3249173 [accessed 3 March 2022]; and Townley (n 98) 38. 103 Dutch Authority for Consumers and Markets, ‘Analysis of the Sustainability Arrangements Concerning the Chicken of Tomorrow’ (2015) acm​.nl/​en/​publications/​publication/​13789/​ACMs​-analysis​ -of​-the​-sustainability​-arrangements​-concerning​-the​-Chicken​-of​-Tomorrow [accessed 3 March 2022]. 104 Holmes (n 78).

Lawful cartels  151 Legal analysis has guided the assessment of many cartels that were justified with reference to non-economic benefits. In the EU, legal assessment informed the legality of cartels operating under the protection of state sovereignty, regulated professions and associations, and the special protection awarded to unions and collective bargaining. Moreover, it had characterized the application of Article 101(3) TFEU prior to the modernization of EU competition law, allowing the Commission to exempt a broad array of crisis restructuring arrangements and sustainability agreements.105 Legal analysis was also used to assess economic benefits. In the EU, it directed the application of the ancillary restraints doctrine, examining if a clause restricting rivalry between undertakings was necessary for the realization of an overall legitimate commercial purpose of an agreement.106 The EU courts held that the doctrine does not entail an economic assessment weighing the pro- and anti-competitive effects, but rather a legal assessment in which the necessity of the restriction for the main operation is being assessed in the ‘abstract’.107 In the US too, the rule of reason was sometimes interpreted as entailing a form of the less-restrictive-alternative analysis to examine arrangements creating economic benefits, in place or in addition to the traditional cost–benefit analysis.108 Legal analysis provides competition authorities and courts with a degree of flexibility to disapply the prohibition of cartels to arrangements creating non-economic benefits that cannot be accurately captured by an economic analysis or to exempt agreements without undertaking a full cost–benefit analysis. This flexibility, however, is also the main source of criticism against it. Legal analysis introduces a degree of subjectivity to competition law enforcement as it follows a more abstract analysis, especially when it calls for striking a balance between irreconcilable economic and non-economic interests. Such balancing raises the concern that competition is used as a regulatory market-building tool, going well beyond the competition authorities’ mandate and goals of protecting competition. This, in turn, also raises questions as to the democratic legitimacy and political accountability of administrative competition authorities to perform such balancing exercise and creates legal predictability challenges. Such risks can be moderated if legal analysis is confined to assessing non-economic benefits that are acknowledged as legitimate in a specific legal system. In the context of the EU, for example, it can be used to strike a balance between harm to competition and the objectives of EU competition policy (efficiency, market integration and economic freedom) or non-economic interest explicitly protected by the cross-sectional clauses of the Treaties. Consequently, while the assessment of the existence of an interest, as well as of its weight, would remain at the discretion of the competition authority, the identification of the interest as legitimate would be left to the national legislator or judiciary.

See Section III above. See e.g. Article 101(3) Guidelines (n 53) paras 28–31 and the references there. 107 Case T-112/99 M6 and Others v Commission [2001] ECR II-2459, paras 107–109. Also see Case C-179/16 Hoffmann-La Roche v Autorità Garante della Concorrenza e del Mercato ECLI:​EU:​C:​2018:​ 25, paras 70–71. 108 Feldman (n 12). 105 106

152  Research handbook on cartels C. Exclusion Economic and legal analyses rest on the measuring and weighing of interests on a case-by-case basis. However, cartels can also be deemed lawful pursuant to rules of exclusion, limiting the application of the competition rules in specific practices or sectors. In all, 49 per cent of the worldwide competition law regimes include at least one partial or complete industry exemption; agriculture, transportation, insurance, banking, and fishing are the most commonly exempted industries.109 Such exclusions are common in the EU. In addition to the special sector-wide rules applicable to the supply and price variations in nuclear materials, military equipment and the agriculture sector,110 several Block Exemption Regulations (‘BERs’) automatically discharge certain categories of agreements without the need to undertake a detailed analysis. Most BERs offer a presumption of legality for relatively unproblematic agreements where there are few or no competition concerns or due to overriding economic benefits. A smaller number of BERs also protect highly restrictive agreements in specific sectors in favour of promoting EU industrial policy and the functioning of such sectors, even if there are limited economic efficiencies.111 The motor vehicles BER, for example, were criticized as awarding disproportionate concern for market integration and social interest over the competitive process.112 Similarly, in the UK, the Secretary of State may adopt an order excluding the application of the prohibition on anti-competitive agreements for exceptional and compelling reasons of public policy.113 Such exclusion orders were issued with respect to the defence industry, to supply of oil and petroleum products and as a response to the COVID-19 pandemic.114 Exclusion rules may also be case-specific. A Hungarian act, for example, authorizes the Minister for Rural Development to exclude from the cartel prohibition agreements in the agricultural sector that provide a fair income for producers, as far as they do not preclude all

109 A. Bradford, A. Chilton, C. Megaw and N. Sokol, ‘Competition Law Gone Global: Introducing the Comparative Competition Law and Enforcement Datasets’ (2019) 16(2) Journal of Empirical Legal Studies 411, Figure 5; O. Brook, ‘Block Exemption Regulations and Public Policy: In the Defence of BERS’ (2022) 23 Cambridge Yearbook of European Legal Studies 1. 110 See the Treaty Establishing the European Atomic Energy Community, Art 106a(3); Article 346(1) (b) TFEU; and Articles 38–44 TFEU, respectively. 111 Brook (n 37) 193–5. 112 S. Marco Colino, ‘Recent Changes in the Regulation of Motor Vehicle Distribution in Europe – Questioning the Logic of Sector-Specific Rules for the Car Industry’ (2010) 6(2) Competition Law Review 203, 210. 113 Competition Act 1998, Schedule 3(7). 114 Competition Act 1998 (Public Policy Exclusion) Order 2006 (maintenance and repair of warships); Competition Act 1998 (Public Policy Exclusion) Order 2007 (strategic and tactical weapons and their supporting technology) (repealed by the Competition Act 1998 (Public Policy Exclusion) (Revocation) Order 2011 (Team Complex Weapons); Competition Act 1998 (Public Policy Exclusion) Order 2008 (design, construction, maintenance and disposal of nuclear submarines); The Competition Act 1998 (Public Policy Exclusion) Order 2012 (supply of oil fuels in an emergency); Competition Act 1998 (Groceries) (Coronavirus) (Public Policy Exclusion) Order 2020; Competition Act 1998 (Health Services for Patients in England) (Coronavirus) (Public Policy Exclusion) Order 2020; Competition Act 1998 (Solent Maritime Crossings) (Coronavirus) (Public Policy Exclusion) Order 2020; Competition Act 1998 (Health Services for Patients in Wales) (Coronavirus) (Public Policy Exclusion) Order 2020; and Competition Act 1998 (Dairy Produce) (Coronavirus) (Public Policy Exclusion) Order 2020.

Lawful cartels  153 market actors from joining the agreement.115 Such an exception is ultimately based on the Minister’s judgement, leaving a political actor considerable discretion to accept otherwise unlawful cartels. Exclusion rules may be susceptible to the creep of protectionist and political influences. They are also less case-sensitive, as they resolve clashes between the protection of competition and other public policies by promoting one set of interests and ignoring the other.116 At the same time, exclusion rules deliver a number of unique advantages when they are carefully used to assess cartels that are justified on the basis of public policies that are external to the competition law regime and merit a political choice. First, such rules set clear, transparent and predictable safe havens that may increase political accountability, because unlike the economic and legal analyses, the decision to set aside the competition rules is entrusted into the hands of the parliament or government. This may be of particular value in jurisdictions with an independent administrative competition authority, lacking the political legitimacy to balance between competition and other public policies. Exclusion rules invite an open and transparent legal, economic and public debate on the lawfulness of certain arrangements, instead of disguising them under the pretence of economic or legal analysis. Second, since exclusion rules are not bound to the regular competition law analysis, they allow one to exempt directly selected practices without the risk of spill-over effects and creation of precedent. This may be of particular value when such exceptions are foreseen as applying for a limited period of time (for example, the UK COVID-19 exclusion orders) or are created as a tool of experimental governance when the emergence of new technologies or markets gives rise to uncertainties as to whether competition law should prohibit certain types of arrangements (such as in digital markets or the gig economy). D.

Enforcement Discretion

Finally, a cartel may be tolerated by means of exercising enforcement discretion. Differing from the three previous strategies, a decision not to enforce the competition rules against a specific cartel does not render it to be lawful. Nonetheless, such a decision may bear a similar de facto effect, especially in countries where private enforcement is underdeveloped or unlikely. At times, competition authorities have declared in advance that they will refrain from enforcement of certain practices. The Dutch competition authority, for example, announced that it would seize to exercise its enforcement powers ‘against sustainability arrangements that enjoy broad social support if all parties involved such as the government, citizen representatives, and businesses are positive about the arrangements’.117 This statement means that sustainability agreements resembling those which have previously been prohibited by the authority – such as the above-mentioned Chicken of Tomorrow case – will no longer be

115 Hungarian Act No. CLXXVI of 2012 on inter-branch organisations and on certain issues of the regulation of agricultural markets, Art 18/A(1). 116 Townley (n 98) 32. 117 Dutch Authority for Consumers and Markets, ‘Basic Principles for Oversight of Sustainability Agreements’ (2016) www​.acm​.nl/​en/​publications/​publication/​16726/​ACM​-sets​-basic​-principles​-for​ -oversight​-of​-sustainability​-arrangements [accessed 3 March 2022].

154  Research handbook on cartels actively pursued.118 Similarly, shortly after the outbreak of the COVID-19 pandemic, various competition authorities and international stakeholders declared that they would temporarily tolerate a host of anticompetitive agreements. The European Competition Network (‘ECN’) stated that it ‘will not actively intervene against necessary and temporary measures put in place in order to avoid a shortage of supply’, and the Commission announced that exchange of commercially sensitive information to adapt production, stock management, and distribution of medicine ‘would not give rise to an enforcement priority’.119 In other situations, enforcement discretion can be used to tolerate cartels on a case-by-case basis. A competition authority can choose not to pursue infringements due to underlying economic or non-economic benefits, even if the cartel is unlikely to be deemed lawful under a legal or economic analysis or exclusion rules. Alternatively, a competition authority may decide to accept commitments to close the investigation into an arrangement that promotes interests that are not directly related to the economic consequences of the anticompetitive behaviour of the relevant firms. Competition authorities should avoid relying systematically on their enforcement discretion to refrain from taking a stance on the lawfulness of cartels. The exercise of enforcement discretion is subject neither to the analytical framework applicable to the economic and legal analyses, nor to the legitimacy and accountability embedded in exclusion rules. In many competition law systems, it is limited by almost no procedural or substantive constraints and the reasons behind the authority’s prioritization decision are often not published or detailed.120 Consequently, implicitly accepting cartels by means of enforcement discretion hampers the effectiveness of the competition rules and raises issues to do with legal certainty, accountability and legitimacy. It encompasses many of the shortcomings of the previous strategies, without offering their advantages and safeguards.

V. CONCLUSION This chapter traced the changing international manière de voir towards lawfulness of cartels. It demonstrated that even after the advent of an international consensus on the harm caused by hard-core cartels, there is no common framework that can explain the dividing line between lawful and unlawful cartels. Similar types of arrangement are subject to different rules and are assessed pursuant to various legal and economic tests or subject to political exceptions. In many cases, the assessment of lawfulness differs according to the type of cartel rather than the degree of harm to competition or the balance of interests, leading to a disconnect between the underlying economic and non-economic benefits justifying some practices and the legal, economic or political strategies used to assess their lawfulness.

Brook (n 37) 156–65. European Competition Network, ‘Statement on Application of Competition Law during the Corona Crisis’ (2020) https://​ec​.europa​.eu/​competition/​ecn/​202003​_joint​-statement​_ecn​_corona​-crisis​ .pdf [accessed 3 March 2022]; and European Commission, ‘Communication from the Commission – Temporary Framework for State Aid Measures to Support the Economy in the Current COVID-19 Outbreak’ C(2020) 1863 final. Also see Brook (n 37) 341–5. 120 Brook (n 37), 310–13. 118 119

Lawful cartels  155 The assessment of cartels could be rationalized by shifting the focus away from the type of agreement towards ensuring an alignment between the economic and non-economic justifications for cartels and the assessment strategies used to evaluate their lawfulness. In particular, the chapter suggested distinguishing between three types of underlining justifications: economic benefits enjoyed by the users of the relevant product or service should be assessed on the basis of a cost–benefit test; non-economic benefits that are recognized as legitimate by the relevant competition law regime should be examined by a legal proportionality test; and non-economic benefits that are external to the relevant competition law regime should be handled by a limited number of transparent and explicit exclusion rules. In parallel, competition authorities should avoid relying on their enforcement discretion to avoid systematically taking decisions on the lawfulness of certain types of practices. Aligning the justifications with the assessment strategies can increase the effectiveness, transparency and accountability of the competition law regimes. Such alignment limits and streamlines the discretion of independent competition authorities, enhances the democratic legitimacy and political accountability of administrative competition law authorities to perform such balancing exercise and provides greater legal predictability for firms.

9. Cartel facilitation Christopher Harding

I.

THE CONCEPT OF CARTEL FACILITATION

A convenient starting point would be the observation that the legal world seems to lack a precise definition of an anti-competitive business cartel, as distinct from descriptive listings of activities and strategies that may be counted as such cartels. The term ‘cartel’ itself, with its complex etymology, is fraught with some ambiguity in popular use, where it might more readily suggest to many an instrument of organized crime in a mainly Latin American context (as for instance, in ‘Columbian drug cartel’1). Put another way, the word lacks specificity and contextual clarity and distinction, which raises problems for the legal significance it has now acquired. Put in yet another way: where can we find a clear legal definition of the concept of the anti-competitive business cartel which we have in mind in this discussion? In the United States, lawyers and legislation refer to ‘trusts’, ‘combinations’ and ‘conspiracies’;2 in Europe (and elsewhere in the world) there are references to ‘concerted practices’ and ‘infringements’ of certain Treaty or legislative provisions. Such formal terms are frequently more conveniently talked about as ‘cartels’, but not formally defined as such. Tellingly, UK criminal legislation has used the term ‘cartel offence’, but only as a section heading, the text of that provision then going on to provide an exemplary listing of the offending conduct.3 Underlying this practice and theory of legal uncertainty there is indeed an ontological puzzle – in what sense more precisely does a business cartel exist?4 To describe the matter as an ontological issue does not mean that it is only a philosophical conundrum or theoretical debating point. It is also an important practical and empirical challenge in attempts at legal control and regulation, and leads to issues of evidence and prosecutorial strategy. Unless we are clear about what we are objecting to in this kind of business behaviour, how can we proceed efficiently in efforts of legal control and regulation? How do we ‘frame the charge’, or decide who should be the subject of legal process and sanctions? This uncertainty has led to a great deal of legal argument and, as a consequence, legal business. To aid the discussion, it might be argued that there are three main senses in which something may reasonably be referred to as a business cartel.5 First, the term may be applied to the instrument which implements the arrangement, as in the expression ‘entering into a cartel’, whatever the form taken, such as an agreement, secret contract or verbal understanding. The cartel in this sense will be a crucial element in legal proceedings as essential evidence of something which is prohibited and unlawful – it will In a very simple internet search, drug cartels will figure prominently in the list. The Sherman Antitrust Act of 1890, 26 Stat 209, 15 USC. 3 The Enterprise Act 2002, Section 188. 4 See the discussion of cartel ontology in C. Harding and J. Edwards, Cartel Criminality: The Mythology and Pathology of Business Collusion (Ashgate Publishing, 2015) 25 et seq. 5 For further discussion of this analysis, see ibid 26. 1 2

156

Cartel facilitation  157 provide the substance and details of an illegal arrangement. This may be referred to as a cartel in the instrumental sense. Second, we might refer to the collection of legal persons involved in the arrangement, whether they be human individuals or corporate, as the cartel in the sense of a collectivity with a certain membership, as in the phrase ‘this company is part of the “X” cartel’. This is another crucial application of the term for the purposes of legal liability, at least when the intention is to investigate the actions of such persons and render them subject to legal sanctions. The cartel in other senses may be commonly referred to as the subject of investigation and legal control (for instance in reporting of case law), but fines or prison terms will be imposed on individual members of the cartel, not the cartel as a whole. This may be referred to as a cartel in the personal sense. Third, it is possible to talk about the cartel as an organization embodying an ongoing arrangement, in that way having a selected moment of beginning and ending, but comprising three essential elements – temporal (for how long), personal (who was involved and when) and spatial (in relation to what goods, services and markets): all important matters of scope. This may be referred to a cartel in the organizational sense. As such this conveys the idea of an infrastructure of anticompetitive activity, as a continuing series of meetings, communications, discussions and implementing actions (what in EU enforcement language has been described as a ‘single continuing infringement’6). This rather more sophisticated sense of the term may, for the purposes of legal analysis, be represented by the device of the ‘cartel as a box’, used by Harding and Joshua,7 which enables any one instance of an actual cartel to be precisely described in the form of a three-dimensional box image, with its three axes exactly determined in terms of time (beginning and end dates), membership (the parties involved) and space (the market within which the cartel operated). As such, the box works as a prosecutorial tool, showing what must be proven for the purposes of legal liability. The above three senses of the word ‘cartel’, all of which validly derive from linguistic practice, policy and legal process, can then help to explain the difficulty in drafting an agreed and succinct legal definition. But it may be observed that the third or organizational sense tends to include the previous two senses, and that is the sense in which the term will be used in the discussion here. But also, in view of the linguistic complexity of the term and the concept, it is then unsurprising that neat legal definition has been evaded in practice throughout many legal systems. The basic question of business cartel existence and definition has been summarized by Harding and Edwards in the following terms: In short, cartel ontology is difficult and problematic: in what sense, more exactly, does a cartel exist? It is important to appreciate that cartels arise from a complex situation, comprising elements of geography, market behaviour and market analysis, organisation, business culture, and collective and individual determination and decision-making.8

On this concept, see Chapter 7 in this volume. C. Harding and J. Joshua, Regulating Cartels in Europe (2nd edn, Oxford University Press, 2010) 173. 8 Harding and Edwards (n 4) 12. 6 7

158  Research handbook on cartels

II.

THE SIGNIFICANCE OF COLLUSION

Key to the understanding of the nature and operation of business cartels is the idea of collusion. As in many other contexts, human action is a choice between working together or working against each other, between co-operation and contest (or, put more dramatically, between war and peace). Again, much may follow from the descriptive language that may be employed. Whereas many might assume that ‘peace’ is more benign and positive than ‘war’, there may be somewhat different connotations in using words such as ‘co-operation’ (shading into a sense of suspicious collusion) and ‘competition’ (shading into a sense of healthy and progressive advance). Much depends of course on circumstance and context and is historically contingent, and in the economic domain the world in the past hundred years or so has moved towards a general preference for the competitive over the co-operative, so much so that there is now a significant global edifice of competition law that is broadly protective of that economic phenomenon.9 Business cartels are now part of that policy and legal discourse and indeed have assumed a totemic role, undergoing transformation from an early twentieth-century acceptance and justification to a late twentieth-century degree of censure expressed in language of an intemperate nature.10 This is not the place to debate either the economics or the policies of cartel prohibition. Rather, the topic is the more specific aspects and scope of the normative approach to cartels. In general terms, competition law as a system of legal protection proceeds from a fear and distrust of the use of economic power, certainly and justifiably from a reaction against economic dominance and monopoly power. Yet, wherein lies the objection to cartel activity as a species of economic strategy? It has not always been thus, and not all cartel arrangements are necessarily prohibited and unlawful. The prohibition has settled upon the category of cartels often now described as ‘hard-core’ as blatantly and unjustifiably anticompetitive, although it has to be admitted that the precise borderline between what is ‘nakedly’ illegal and beyond the pale and what might be tolerable may be open to argument. This observation returns the discussion to the heart of the matter – it is not only a question of what the cartel may comprise, but also one of what makes it objectionable. Partly this has come about as a problem of economic analysis and assessment of anticompetitive impact, and that is something which is notoriously open to argument and contestable. Partly it has come about through the gradual, incremental and empirical development of competition law, as it has been worked out as much by competition authorities and courts working on the hoof as through detailed legislative statement. But while there may be a tricky penumbra, there is also now, in a large number of legal orders, a clear sense and awareness of the illegality of the ‘hard-core cartel’ – an agreement to fix prices or other conditions of supply, to share markets and bid rigging.11 To that extent the unlawfulness of a certain kind of business activity has become manifest. And indeed, that very process in itself, whereby the condemnation of the ‘hard-core’ as unacceptable and unlawful as a matter of official policy, emerging in Europe from the end of the 1960s, has contributed another important element of delinquency,

See generally the historical overview presented by Harding and Joshua (n 7). Cp. J. Fear, ‘Cartels and Competition: Neither Markets Nor Hierarchies’ (Harvard University Working Papers, October 2006); and M. Monti, ‘Fighting Cartels – Why and How?’ (Speech, Stockholm, 11 September 2000) (noting that cartels are ‘cancers on the open market economy’). 11 For more detail, see Harding and Joshua (n 7). 9

10

Cartel facilitation  159 by pushing persistent ‘hard-core’ infringement underground and encouraging measures of subterfuge on the part of traders, what may be characterized as a ‘spiral of delinquency’,12 adding a kind of obstruction of justice to the pure economic offending. An important part of the cartel ‘offence’ or ‘infringement’ has become the determination to persist in conduct on the market known to be objectionable as a matter of policy and to take measures to disguise that determination. And this may be seen as the equivalent to the mindset of ‘conspiracy’ which had long been embedded in the American condemnation of anticompetitive conduct contained in the Sherman Act.13 Without this second layer of ‘bad attitude’, anticompetitive activities in themselves need not attract such a strong degree of condemnation, strong punitive and deterrent sanctions and even criminalization. Just as with anti-competitive activity, the matter could be dealt with by administrative control, more consensually, via negotiated resolution rather than confrontational measures of legal control. And, of course, this was the traditional European approach prior to the later twentieth century.14 But it is also in the nature of the beast. Fixing a price or sharing a market is rarely a single, momentary action, over and completed in a single transaction. It is something that needs to be planned, calculated and maintained in operation; in short, something that requires organization. Following this analysis, it may be helpful to present the cartel infringement almost in universal terms and across legal orders globally15 – and, whatever the precise legal category of the offence (criminal, administrative or civil), as comprising three crucial elements: ● market conduct which in substance is anti-competitive in its effect and strongly and consistently prohibited as a matter of official policy; ● requiring ongoing organization; and ● undertaken knowingly, usually subversively, in defiance of the legal prohibition. Those three elements may be encapuslated by talking about each cartel infringement as a matter of anticompetitive collusion. This unifying idea of collusion is strongly evident for instance in sanctioning practice, on the part of the European Commission and EU courts for instance in the calculation and confirmation of fines,16 and in the practice of national courts and bodies in the determination of administrative and criminal law penalties.

III.

THE ABSENCE OF VERY CLOSE FRIENDS

Returning for a moment to the more restricted idea of a cartel as a group of businesses coming together to decide on something anticompetitive, we can play around with the image of

Or ‘delinquency inflation’; see Harding and Joshua (n 7) 149. See further the discussion of the Norris case infra. 14 D. Gerber, Law and Competition in Twentieth Century Europe: Protecting Prometheus (Clarendon Press, 1998, reprint 2001). 15 And let us remind ourselves that it has not been possible to agree on an international definition or legal concept of a business cartel, still falling back on the varying national vocabulary of, for instance, ‘conspiracy’, ‘concerted practice’ or ‘infringement’. 16 C. Harding, ‘Forging the European Cartel Offence: The Supranational Regulation of Business Conspiracy’ (2004) 12 European Journal of Crime, Criminal Law and Criminal Justice 275. 12 13

160  Research handbook on cartels a party. Who attends the party? For many economists (and also lawyers) the answer seems almost self-evident – market players; competing suppliers of whatever goods or services. That description might be extended in a vicarious way to connected parties, typically within the same corporate group and operating broadly in the same market, not actually present at the party but similar to those who allow the family home to be used by delinquent young party-goers. That might be done in order to convey a compliance-inspired signal (‘keep your house in order’) or, more cynically, to justify the imposition of a larger fine via an alleged wider involvement. But there may also have been others present at the event, partying in an intense and significant way – a special kind of friend, there to help the party go well, although not directly involved in the party games. Less attention has been paid to this kind of guest at the party. Yet a number of ‘cartel parties’ have included such ‘guests’, and this has been happening for some time. Such attendance has been a matter of function and role, and forms may vary – sometimes the role has been undertaken by an individual company or an individual working for a company trading as a member of the cartel, sometimes by an outside third party actor with specialist skills, such as the ‘consulting companies’ who have occasionally been dealt with by the EU courts, as occurred in Treuhand or Icap (see further below). These ‘guests’ are the cartel facilitators and they may carry out a number of roles, which are sometimes significant for the operation and health of the cartel. They may be present at meetings or via communications; be involved in organizing meetings or maintaining contact; be responsible for the management and safe-keeping of any sensitive or confidential material; advise on strategy as the cartel moves forward; negotiate disputes and tensions between the cartel members; and oversee compliance with the internal cartel aims and measures. Generally, such actors perform an important management role, are very well informed and certainly have a clear awareness of the illegality or otherwise of the cartel’s operation. Yet they are less frequently disaggregated from that overall operation, even though the ‘trading’ members will be disaggregated in the most significant way for purposes of legal liability and the imposition of sanctions.17 What may be seen here historically as a failure of disaggregation has largely reflected the legal nature of anti-cartel proceedings in different systems. United States federal law, applying the Sherman Act, has happily bundled most things together as a conspiracy, involving corporate and individual human actors working with each other at the same time, eschewing any theoretical distinctions of legal personality (a company may conspire with its own alter ego representative at a cartel meeting, the former then sanctioned through a financial penalty and the latter through a prison term).18 Much of this follows from the construction of legal liability under the Sherman Act, combined also with the fact that many of these US criminal cases are resolved through the use of guilty pleas so that some legal niceties are not publicly debated in open trials before a jury. This approach differs in many respects from that adopted in EU cases and in fact in a large number of other national systems of competition law. Under such

Compare for instance the persecution of the individual cartelist Romano Pisciotti (Marine Hoses Cartel) with the gentle and tentative treatment of the consulting firm Treuhand. See L. Crofts and L. Nylen, ‘MLex Interview with Romano Pisciotti – Il Capitano’ (MLex, December 2015). 18 Thus, in the case of the Marine Hose Cartel, the Italian company Manuli was subject to a $2 million fine, while three of its representatives (including Pisciotti) received prison terms and fines under US law, although in economic terms they were part of the same organization and constituted one member of the cartel as a grouping. For the details of this cartel, see Harding and Edwards (n 4) 87. 17

Cartel facilitation  161 a conspiracy-based system of prosecution, cartelist friends, whether corporate or individual,19 may or may not be disaggregated for liability and sanctioning, depending very much on the outcome of investigations, the strength of evidence, defence strategies regarding the use of guilty pleas20 and the good or bad luck of fugitive evasion. There is both an indifference towards sanction accumulation and a determination to achieve maximum legal deterrence which effectively obscures the facilitators’ role. Under the EU rules, and then in many other legal systems which have adopted a similar model, the legal liability of cartelists has been constructed differently. The European-level rules, contained in successive Treaty provisions from Article 85(1) of the Treaty of Rome onwards, have consistently prohibited ‘undertakings’ from infringing the European Community/Union competition policy, whatever the precise form (usually larger companies) or personality of such undertakings. In practice, the EU sanctioning process imposes administrative fines on corporate actors. Only occasionally has the European Commission tuned its attention to a particular kind of corporate actor as a discrete participant in a cartel, as a consulting company, as in the handful of Treuhand cases discussed below. A third route of legal disaggregation in relation to cartel friends or facilitators became possible through the criminalization of cartel conduct in some legal systems, inspired by although not always precisely matching the early criminalization under the US Sherman Act. Fostered by the aggressive enforcement policy of the US Department of Justice, a number of European and other national systems jumped on a cartel criminalization bandwagon in the later part of the twentieth century, replacing or supplementing ‘administrative’ legal regulation of cartels with the introduction of criminal offences and the high-profile prosecution of individuals working typically for international companies, intended to scare businessmen with the prospect of the ‘inferno’ of prison terms. Interestingly, this brought some national criminal courts into the picture, and, insofar as many of the cases involved a cross-border element, also rules relating to extradition and international criminal law transfer, and then in turn sometimes basic legal protection arguments involving jurisdictions, such as that of the European Court on Human Rights. Very occasionally, cartel facilitators found themselves netted into this environment of legal enforcement.

IV.

CARTEL FACILITATORS AS MANAGERS AND MASTERMINDS

It may be helpful at this stage to provide a more detailed account, from some of the legal proceedings involving facilitators, of the kind of role carried out by such participants. On closer examination, this may belie their earlier characterization as merely friends or guests. It should be appreciated that cartel facilitation in this sense encompasses in practice a range of persons and statuses. Business cartels vary in their internal organization and operation, or in what may be described broadly as their internal governance. At one end of the spectrum,

And indeed, in the case of the Marine Hose Cartel, the Manuli ‘friend’ – Peter Whittle, aka the company PW Consulting – was one and the same, and apparently the directing force of Manuli’s involvement. 20 In the Marine Hoses case, two individuals were convicted, then acquitted under Sherman Act proceedings; see Harding and Edwards (n 4) 138. 19

162  Research handbook on cartels facilitation may shade into the internal direction and governance of the cartel organization by a powerful producer member, virtually as a kind of gang boss. Such a model of autocratic direct rule is exemplified by the Pre-Insulated Pipes Cartel, a significant European-wide cartel of the 1990s, notable for its highly aggressive strategies.21 The cartel’s strategies were determined and strictly enforced by a dominating ‘ringleader’ company, the large Swedish-Swiss conglomerate Asea Brown Boveri (‘ABB’), acting in this particular market through its Danish subsidiary. In the analysis of the Commission: There can be no doubt that ABB was the ringleader and main instigator of the cartel. Domination of the market via a cartel in which it played a leading role was a clearly stated strategic objective of the company. The whole enterprise was conceived, authorised approved and guided at the most senior corporate level. Throughout the whole five-year period the initiatives to consolidate, reinforce and extend the cartel came from ABB […] Both the cartel and the measures to deny its existence were conceived, directed and actively supported at a high level in ABB group management.22

ABB’s governing and facilitating role was recognized in the size of the fine imposed on the company by the Commission (70 million euros). But this was a corporate penalty, of the kind that ABB was no stranger to, and there was no further disaggregation of sanctions in relation to individual company executives (which might have occurred if the American market had been affected and the cartel had been subject to investigation by the US authorities). Three points may be made in relation to this particular example. First, in relation to international cartels, legal outcomes may depend very much on the happenstance of the scope of the cartel and the market involved. Thus, factors such as the product and the geographical scope of the arrangement will determine the matter of legal jurisdiction, and the outcomes may then vary regarding policies of prosecution and the application of sanctions. A quick comparison of the legal outcomes for members of the Marine Hose and Pre-Insulated Pipes Cartels, both serious international breaches, serves to demonstrate that point: a range of different sanctions were scattered around the world in the first case, but the second was dealt with just by European financial (and non-criminal law) measures.23 Second, major cartels cannot be set up and left to run their own course; they require a considerable effort of continuing attention, organization and management, as business systems which demand internal governance. That will be a matter for some member or members of the cartel, or some specialist directors or administrators – the ‘facilitators’, as we may call such persons. Their role is likely to prove crucial to the survival and success of the cartel and their wits will be pitted against those of external regulators and legal advisers, and such wit will depend upon experience, expert knowledge and strategic sense. As individuals, such persons may be company executives or employees of ‘consulting firms’ – no matter, the role is the same. Third, large cartels vary considerably not only in terms of product market, geographical scope and duration, as will be seen from both empirical survey and case law, but also in their membership. The latter is not only a question of number (literally two firms or legal persons upwards) but also of their kind and degree of involvement, as consistent or ‘in-and-out’ partic See Case T-21/99, Dansk Rorindustrie and others v Commission (2002) ECR II-168. Case No IV/35.691/E-4, Pre-Insulated Pipe Cartel, Commission decision, 21 October 1998 [1999] OJ L24/1, paras 121 and 155. 23 For a detailed account, see Harding and Edwards (n 4) Chapter 5. 21 22

Cartel facilitation  163 ipants, as committed and loyal or nervous and untrustworthy, as passive or active and enthusiastic, and this will depend on factors such as their own economic interests and business culture and provenance. That is something which requires management, whether through the blatant bullying of a dominant member such as ABB in Pre-Insulated Pipes or the diplomatic skills of a consulting firm such as Treuhand. Insofar as any facilitator liability is to be disaggregated, much will then depend on the evidence of each facilitator’s role. Another model of facilitation can be seen in action in the case of the Marine Hose Cartel – a one-man consulting company, responsible for orchestrating these tricky matters of internal governance and operation. So much was revealed by the prosecution and conviction of the individual Peter Whittle, following the successful raid on one of the Cartel’s meetings by the US Department of Justice in Houston in Texas in May 2007. Three British executives subsequently negotiated guilty pleas and transfers to serve prison sentences in the UK, and information regarding the cartel’s internal operation emerges from this legal process.24 The Cartel had operated since the mid-1980s, but was faltering somewhat by 1999 when Whittle, a former marine hose executive, was recruited as a new ‘member’ to act, through his company PW Consulting, as the Cartel’s co-ordinator. Whittle’s role as co-ordinator was described later by British judge Geoffrey Rivlin when passing sentence in Southwark Crown Court in 2008:25 This was a full-time job. The cartel was run as it had to be, with meticulous attention to detail. Code names were used, clandestine meetings were organised and held, agreements were reached, both in relation to the market share and bogus contract bids […] You were very deeply involved in all this dishonesty; indeed it formed the basis of your whole working life […] You were the co-ordinator, and you did that job very efficiently […] this was a serious crime and you played a leading role in it.26

Moreover, an internal cartel view of the co-ordinator’s role was provided by a fellow cartel member, Bryan Allison: All communications were filtered to me. I never had any direct access to any of these people really. I never spoke to them on the phone or met them. Everything I got was filtered through Peter Whittle who was the coordinator of the cartel. He would receive the tenders from companies and would then administer the cartel by ensuring that particular companies won the tender through a rigged bidding process. In addition he coordinated the creation of global price lists […] would tell people largely what they wanted to hear […] He was basically running the cartel for his own ends rather than the benefit of the members.27

There is a stark contrast in this last example between active participation and coordination and passive membership, which serves to complicate judgement of responsibility and liability arising from cartel participation, both at the corporate and individual levels. Another example of such facilitator modelling brings together a senior executive and facilitator role in the person of one individual, and then raises somewhat different legal argument

Harding and Edwards (n 4) 125 et seq. ibid. 26 R v Whittle, Brammar and Allison, Unreported Judgment, Southwark Crown Court, 10 June 2008. Whittle was sentenced to a three-year prison term, and was disqualified under the Companies Directors Disqualification Act 1986 for a period of seven years. 27 M. O’Kane, ‘Does Prison Work for Cartelists – The View from Behind the Bars’ (2011) 56 Antitrust Bulletin 483, 490. 24 25

164  Research handbook on cartels regarding liability and sanctions. British businessman Ian Norris had been the chief executive of the company Morgan Crucible, a participant in the Carbon Products Cartel, and there was evidence of his clear role in a ‘cover-up’ operation: setting up a task force to destroy or conceal incriminating evidence and preparing a script to be used in the event of verbal questions.28 Attempts to secure his extradition to stand trial for the Sherman Act offence in the US were frustrated by an absence of double criminality as between that offence and the only applicable British offence at the time of the cartel, conspiracy to defraud.29 The US Department of Justice neatly changed tack and charged Norris with obstruction of justice, and this was held to be sufficiently serious to justify the extradition (leading eventually to conviction and a prison term for Norris in the US).30 The Norris example demonstrates the possibility of some clear awareness and involvement in a cartel activity at senior management level (‘boss facilitation and direction’), but also how a distinction may be drawn between measures such as evidence destruction on the one hand and briefing which might be cast as legal or even compliance training on the other hand. Moreover, it takes the discussion back to collusive conduct, comprising antitrust awareness and defiance of the rules as a central element in the offending conduct. The same may be said of the role of consulting companies such as Treuhand, whose role is to actively promote and sustain the cartel and should not be cast in any way as the provision of legal or financial advice of the kind supplied by defence lawyers or financial institutions. Evidence from the EU case law relating to successive proceedings involving the Swiss consultancy firm Treuhand (and its antecedent, Fides Trust AG) from 1980 through to 201531 has shown that this facilitating role was consistent over time in relation to a number of cartels: the organization of meetings, often safely outside the EC/EU jurisdiction in Zurich, and the supply of logistical assistance. The firm carried out calculations for market shares (sometimes referred to as ‘pink’ and ‘red’ papers) identifying the shares of the producer companies and which were kept securely at Treuhand’s office. It was involved in the supply of data to cartel members, and would sometimes carry out a diplomatic role, offering to moderate in the event of tensions and disputes regarding shares and prices and to work out compromise solutions. Treuhand would arrange for the reimbursement of travel expenses for individual participants at meetings, in order to disguise the purpose of such travel and meetings. In summary, the role of Treuhand was ‘to ensure the effective operation of the cartel, while also working to ensure its secret character and as such was consciously law-defying’.32 This amounts to an active and decisive role in the organization of cartels, far removed from ‘passive’ or ‘bystander’ involvement. For a summary of the Norris legal saga, see Harding and Joshua (n 7) 295–96. See generally P. Whelan, ‘Resisting the Long Arm of Criminal Antitrust Laws: Norris v. US’ (2009) 72(2) Modern Law Review 272. 30 The cartel was in operation prior to the enactment (via the Enterprise Act 2002) of the statutory UK Cartel Offence. See Norris v United States (2008) UKHL 15; and Harding and Joshua (n 7). 31 Thus surely raising the question whether the firm may be characterized as a ‘recidivist’ player in this respect. The Commission has found evidence of Treuhand’s facilitation in this way in relation to three separate cartels: Italian Cast Glass [1980] OJ L383/19; Organic Peroxides [2005] OJ L110/44; Case COMP/38589, Heat Stabilisers, Commission decision, 11 November 2009, C(2009)8682 final. Official legal sources are the two reported judicial proceedings: Case T-99/04, AC-Treuhand AG v Commission [2008] ECR II-1501; and Case C-194/14P, AC-Treuhand v Commission ECLI:​EU:​C:​2015:​ 717. 32 C. Harding, ‘Capturing the Cartel’s Friends: Cartel Facilitation and the Idea of the Joint Criminal Enterprise’, (2009) 34 European Law Review 298, 301. 28 29

Cartel facilitation  165 Nor is Treuhand the only such consultancy firm engaged in such activity. More recently, in 2015, the Commission fined the consultancy firm Icap Management Services almost £15 million in relation to its ‘coordination’ via six instances of a daily spreadsheet of Yen LIBOR rates in the Yen LIBOR Cartel distributed to participants in the cash deposit Japanese Yen active market, which had a decisive influence on the conduct of the banks. Although Icap’s fine was later annulled by the General Court and then also the Court of Justice,33 for insufficient reasoning regarding the calculation of the fine, that did not serve to deprive Icap, as an interdealer broker and provider of post-trade services, of its facilitator role.34 Certainly, in a more practical sense, cartel facilitation, whatever the form and status of the persons involved, is at the heart of cartel activity. Insofar as ‘facilitation’ might suggest an ancillary role, it may give a misleading impression – indeed, ‘management’ or even ‘direction’ in some instances may be more accurate descriptors.

V.

CARTEL FACILITATION AS A SPECIES OF DELINQUENCY AND THE CASE FOR DISAGGREGATION

Why has the subject so often been consigned to the periphery of discussion? Insofar as this has not been true, it has usually been in the case of individual cartel defendants, such as Norris and Whittle, who have been castigated by criminal courts as serious offenders deserving to be imprisoned and pursued by determined attempts at extradition or other rendition. This has also in practice been part of the American tradition of personalizing and individualizing anticompetitive behaviour through the Sherman Act concept of conspiracy. On the other hand, in the context of the EU system of regulation, and that of some other national systems still wedded to the idea of administrative offending on the part of corporate actors (for instance, Germany), the approach to disaggregation of the facilitator’s role has been more tentative, as is evident from the line of Treuhand cases. On this view, it is to some extent an issue of agency, whereby it has proven easier to conceptualize and censure as a scheming mastermind an individual (and human) businessperson than a consulting firm. This has led to some odd legal outcomes. On the one hand, a cartel defendant such as Norris was motivated to invoke legal argument arising from the European Human Rights Convention to try to defeat the determined legal pursuit on the part of the US authorities. And among the Marine Hose cartelists, Allison and Pisciotti may have felt sore regarding their treatment and legal sanctioning compared to that of their fellow cartelist Whittle. On the other hand, consulting firms have been able to exploit a European enforcement and appellate system which has encouraged an expectation of relatively lenient treatment (nominal or quite small financial penalties) and the repetitive deployment of unconvincing legal defence arguments based

33 See Case T-180/15, Commission v Icap Management Services ECLI:​EU:​T:​2017:​795; and Case C-39/18P, Commission v Icap ECLI:​EU:​C:​2019:​584. 34 Icap’s role as an information supplier within the arrangement was clear enough, whatever the outcome of long argument before the EU Courts regarding fine calculation and its explanation in the context of the cartel being dealt with largely through the settlement procedure rather than the imposition of sanctions.

166  Research handbook on cartels upon principles of legal certainty, nullum crimen sine lege and the protection of legitimate expectations.35 To some extent the EU judiciary has contributed to the tentative and uncertain outcome by itself justifying facilitator liability as a passive activity. In its judgment in the second Treuhand case in 2008, the General Court confirmed facilitator liability in these terms: although not active in the market of the relevant product, the consulting firm’s role was that of a passive ‘co-perpetrator’ within the cartel and so was caught by the prohibition. By its conduct it had tacitly approved an unlawful initiative, without publicly distancing itself from the content of that initiative or reporting it to the administrative authorities. The effect of its behaviour was then to encourage the continuation of the infringement and to compromise its discovery. This was to engage in a passive form of participation.36 But this analysis understates the delinquent nature of much that passes under the heading of facilitation and verges on a kind of bystander liability. Admittedly, drawing a more exact dividing line between ‘active’ and ‘passive’ contributions to the operation and success of the cartel may not always be easy.37 It is a familiar problem of organizational liability and substantial and relevant cause and effect within the operation of joint criminal enterprise.38 It would be useful, as a matter of both policy and law, to address the issue of cartel facilitation in those terms. If policy-makers, enforcement agencies, lawyers and economists are serious about the problem of resolving the perceived ill of business cartels, there is an underlying dilemma of agency to be addressed, as indicated in the discussion above. Such cartels need to be understood as complex and continuing organizations, often possessing both personal and corporate structures and roles which may be difficult to penetrate and evidence from the outside. Their operation, globally, may vary very much according to markets, business culture, the political and legal context of enforcement and personal elements. As a matter of legal control, one size does not fit all, yet this has been the global assumption, driven by a faith in strong deterrence and a perception of business cartels as a standard and consistent form of rational actor.39 On the contrary, it may be argued that an effective legal response to the malaise of cartel activity depends upon a more nuanced approach40 which seeks to unpick the organizational complexity of the phenomenon. Having made that point, it is not wholly beyond the wit of legal expertise to attempt some disaggregation of business cartels, even though in some cases issues of evidence may remain challenging and productive of prolonged argument if legal systems tolerate that possibility, as

See generally the arguments of the parties in the Treuhand cases (n 31), and in particular Case C-194/14P, AC-Treuhand v Commision ECLI:​EU:​C:​2015:​350, Opinion of AG Wahl. 36 Case T-99/04, AC-Treuhand AG v Commission [2008] ECR II-1501, para 130. 37 McCulloch for instance, in trying to link offensive cartel conduct with unlawful anticompetitive gain, reduces the matter to an investigation of what the facilitator gains from the cartel in a manner similar to the anticompetitive producer; see A. McCulloch, ‘The “Public Wrong” of Cartels and the Article 101TFEU “Object Box”’ (2020) 65(3) Antitrust Bulletin 361. But to focus on facilitator gain is to state the obvious while at the same time skirting over the surface of substantial contribution to illegal objectives. 38 See generally C. Harding, Criminal Enterprise: Individuals, Organisations and Criminal Responsibility (Willan Publishing, 2007); Harding and Edwards (n 4) 29 et seq; and Harding (n 32). 39 See generally the discussion in Harding and Joshua (n 7). 40 See the argument and conclusions in Harding and Edwards (n 4). 35

Cartel facilitation  167 in the case of the EU system of regulation. Moreover, the advent of leniency programmes, as tools to cartel exposure, has to some extent exacerbated the complications of internal agency, by encouraging cartel participants to ‘game’ with leniency and immunity opportunities.41 And to some extent this remains an obscure aspect of the subject – for instance, to understand how Treuhand-type advising or intervention may relate to a spoken or otherwise awareness that cartel producer members may be constantly weighing up the advantage or disadvantage of cheating on each other in this way. But at the very least, a framework for disaggregation is possible. Different roles and degrees of commitment within cartels may be envisioned and categorized and used as a basis for ordering legal liability. To some extent that is already an established practice in relation to the determination of sanctions applied to cartel members in relation to the proven length of their involvement or any tendency to enter, leave, or re-enter cartels, although, as just noted, successful leniency applications can then disturb (sometimes it might be said, violently disturb) such calculations. But as a general point, as is true of criminal and other forms of legal liability, sanctions may be used to reflect proven perpetrator participation. It is also important, as a matter of both policy and justice, that efforts of legal control take into account participator awareness of wrongdoing as an element of that party’s significant and relevant contribution to harmful outcomes.42 In that respect, the established contrast between ‘light’ treatment of ‘knowing’ advisers and ‘heavy’ treatment of ‘unknowing’ senior levels within large corporate structures (typical of the EU approach)43 should be seen as a matter of concern. Often this has been driven by a deterrence-induced desire to increase the level of market share and fines based on the latter, rather than being clearly justified by any principle of vicarious or supervisory responsibility or removal of opportunistic gain. Due diligence defences should at least be considered in such cases, since there is sometimes clear evidence of ‘senior’ surprise and dismay regarding the existence of cartel activity in other parts and levels of corporate structures and organizations.44 Anti-cartel enforcement has become riddled with inconsistency in this respect – for instance, by rewarding established corporate recidivists who have become expert at leniency gambling,45 or in the determined international hounding of certain individuals, such as Romano Pisciotti,46 as ‘poster-boys’ for a proclaimed policy and faith in deterrence. Criteria of proximity and relevance may also be more fully considered as aids to the disaggregation of core involvement in cartel activity. For instance, it is almost a matter of common-sense reasoning to separate consulting firm awareness and management of cartel strategies from a vague and uncertain ‘bystander’ suspicion in the case of the example some-

41 See in particular: C. Harding, C. Beaton-Wells and J. Edwards, ‘Leniency and Criminal Sanctions in Anti-Cartel Enforcement: Happily Married or Uneasy Bedfellows?’, in C. Beaton-Wells and C. Tran (eds), Enforcement in a Contemporary Age: The Leniency Anti-Cartel Religion (Hart Publishing, 2015). 42 Applying such basic principles as legal certainty, protection of legitimate expectations and nullum crimen sine lege. 43 See the discussion in Harding (n 32). 44 For instance, in the case of the Art House Auctions Cartel (Sotheby’s/Christie’s), the infringement was very much in the nature of a ‘frolic’ on the part of a small group of top executives and once it had come to light other members of the two organizations were very quick to disown the cartel. See Harding and Edwards (n 4) 167 et seq. And see the examples given by Harding (n 32) 308–09. 45 See Harding, Beaton-Wells and Edwards (n 41). 46 Crofts and Nylen (n 17).

168  Research handbook on cartels times given of hotel owners or airport authorities who may idly muse about business guests or travellers talking about cartel plans while on their premises. There is now enough usable precedent in relation to atrocity offending (such as the commission of war crimes and crimes against humanity) and joint criminal enterprise to guide the development of concepts of proximate and relevant activity to count as core offending in the context of business delinquency.47

VI.

CARTEL FACILITATION AS A MATTER FOR FURTHER INVESTIGATION AND DEBATE

In summary, this may be presented as a subject which merits some reconfiguration and new insights, to be brought from the fringe and into the mainstream of reflection of what it means to talk about business cartels and their internal dynamic and organization. Some of those described as facilitators have been key players and it would be appropriate to describe their role as one of management, even sometimes direction. As such, it behoves an effective system of legal control to recognize that aspect of internal cartel dynamic and consider the possibilities of disaggregation within the complex agency of cartel operation. A closer study of ‘facilitation’ reveals the extent to which the Sherman Act device of conspiracy enables different outcomes of legal liability compared to a European pursuit of corporate offending and the pursuit of large corporate fines. Put another way, while the former system, by criminalizing in that way, emphasizes a behavioural offence and elements of ‘antitrust awareness’, the latter is more concerned with anticompetitive market effect, however that may have come about. This suggests a need to reconsider policy and enforcement objectives – to examine more closely the role of the person who hides away the spreadsheet rather than that of an unknowing senior executive in a head office in another country. But at the same time, that will require a determined research effort to penetrate activities and interrelations within sometimes large and complex organizational structures.

See Harding (n 32) 306–07.

47

10. The concept of a ‘hub-and-spoke conspiracy’ Mark Furse

I. INTRODUCTION The term ‘hub-and-spoke conspiracy’ can be contested. Although seductive in its simplicity, ‘homespun metaphors for complex economic activities only go so far’.1 Hub-and-spoke cartels (or, in the United States, ‘hub-spoke-and-rim conspiracies’2) embrace a melange of legal issues, complex factual analyses and evidentiary complexities which merit discussion. These complexities flow from the fact that hub-and-spoke cartels achieve unlawful horizontal coordination by a series of vertical agreements or understandings: they ‘sit at the crossroads of various theories of harm’.3 In a pure form, horizontal coordination is achieved without direct communication at the horizontal level, such that the arrangement may also be characterized as a species of information exchange,4 or a series of vertical agreements. In much of the enforcement discussed below, the form is not pure, with at least indirect contact (which is to be distinguished from no contact) at the horizontal level. Where contact between the parties is purely vertical, with no direct contact between the horizontal competitors, it should not be assumed that harm has been created, although if the hub is in possession of market power this assumption may not hold.5 As Botteman puts it: ‘[a]dvising and investigating potentially illicit hub-and-spoke exchanges is not for the faint hearted.’6

In In re Musical Instruments and Equipment Antitrust Litigation (Guitar Center) 798 F.3d 1186 (9th Cir. 2015) 1192. 2 See ABA Section of Antitrust Law, Antitrust Law Developments (8th edn, 2017) 19. 3 G.L. Zampa and P. Buccirossi, ‘Hub and Spoke Practices: Law and Economics of the New Antitrust Frontier?’ (2013) 9 Competition L Int’l 91, 92. 4 See P. Whelan, ‘Trading Negotiations Between Retailers and Suppliers: A Fertile Ground for Anti-Competitive Horizontal Information Exchange?’ (2019) 5 European Competition Journal 823, 833 (arguing that ‘the exchange of information between retailer and supplier may indeed be conducted without creating a “hub-and-spoke” arrangement, in certain limited circumstances such an exchange can be conceptualised as an exchange of information that is horizontal in nature (ie between the retailer and her competitor). The challenge here is to identify the detail of those circumstances’). 5 See A. Overd, ‘Effects Analysis in Hub and Spoke Cartels’ (2010) www​.crai​.com/​insights​-events/​ publications/​effects​-analysis​-hub​-and​-spoke​-cartels [accessed 28 February 2022]. Amore argues that a hub-and-spoke theory of harm is conditional upon the exercise of market power, which is ‘necessary, very important, yet probably not sufficient’: R. Amore, ‘Three (or More) Is a Magic Number: Hub & Spoke Collusion as a Way to Reduce Downstream Competition’ (2016) 12 European Competition Journal 28, 43. Space does not permit the economic effects of hub-and-spoke arrangements to be dealt with in detail in this chapter. An outline of the issues is provided in: OECD, Roundtable on Hub-and-Spoke Arrangements – Background Note (DAF/COMP(2019)14) www​.oecd​.org/​daf/​competition/​hub​-and​ -spoke​-arrangements​.htm [accessed 28 February 2022] Section 2.2 (paras 11–42). 6 Y. Botteman, ‘National Competition Authorities’ Investigations in Hub-and-Spoke Arrangements: A Critical Review’, in D. Gerard, M. Merola and B. Meyring (eds), The Notion of Restriction of Competition: Revisiting the Foundations of Antitrust Enforcement in Europe (Bruylant, 2017) 164. 1

169

170  Research handbook on cartels There is a substantial literature about hub-and-spoke cartels, much of which is referenced in this chapter.7 Notwithstanding that enforcement action and cases involving hub-and-spoke arrangements have been limited in both the United States and in the European Union,8 the Organisation for Economic Cooperation and Development (‘OECD’) held a roundtable on the subject in December 2019.9 A hub-and-spoke cartel is one in which there exist vertical relationships between a firm at level A and firms which are competitors at level B, in which, through a series of bilateral vertical contacts, the competitors at level B are brought into the position of operating as a cartel (typically, but not necessarily, by price-fixing). In the language of the US Court of Appeals, Seventh Circuit, the initiating firm at level A acts as a ‘ringmaster’, corralling the firms at level B, which need not have contact with each other.10 The benefits to the participants of such an arrangement are clear: the ‘hub creates collusive efficiency by reducing the need for horizontal coordination’, and ‘vertical agreements entered to effectuate the horizontal agreement may be harder for authorities to detect’.11 Where relationships between horizontal competitors attract antitrust scrutiny, vertical relationships are less likely to do so. The direction of flow in a hub-and-spoke arrangement will determine whether the restraints ensuing are inter- or intra-brand in nature. While legal risks of operating a hub-and-spoke conspiracy may be lower than is the case in a purely horizontal conspiracy, negotiating the terms of the conspiracy may be made more complex. Not only do the interests of the horizontal competitors have to align, but so too does the interest of the hub participant.12 This may account for the relatively small number of cases, although an explanation may equally lie in the difficulty in detecting such cases.

See, e.g., B. Klein, ‘Inferring Agreement in Hub-and-Spoke Conspiracies’ (2020) 83 Antitrust LJ 127; P. Ray, ‘Vertical Restraints and Collusion: Issues and Challenges’ (2020) 83 Antitrust LJ 1; P. Perinetto, ‘Hub-and-Spoke Arrangements: Future Challenges within Article 101 TFEU Assessment’ (2019) 15 European Competition Journal 281; B. Orbach, ‘Hub-and-Spoke Conspiracies’ (2016) The Antitrust Source 1; N. Sahuguet and A. Walckiers, ‘Hub-and-Spoke Conspiracies: The Vertical Expression of a Horizontal Desire?’ (2014) 5(10) Journal of European Competition Law & Practice 711; O. Odudu, ‘Indirect Information Exchange: The Constituent Elements of Hub and Spoke Collusion’ (2011) 7 European Competition Journal 205; E. Garrity, ‘A New Chapter in Antitrust Law: The Second Circuit’s Decision in United States v Apple Determines Hub-and-Spoke Conspiracy per se Illegal’ (2016) 57 BC L Rev 84; B. Klein, ‘The Hub-and-Spoke Conspiracy that Created the Standard Oil Monopoly’ (2012) 85 S Cal L Rev 459; and E. Prewitt and G. Fails, ‘Indirect Information Exchanges to Hub-and-Spoke Cartels: Enforcement and Litigation Trends in the United States and Europe’ (2015) 1 CLPD 63. For a very full discussion see L. Garrod, J. Harrington and M. Olczak, Hub-and-Spoke Cartels: Why They Form, How They Operate, and How to Prosecute Them (MIT Press, 2021). 8 See Perinetto (n 7) 280, noting investigation ‘only cursorily and occasionally at EU level’. 9 OECD (n 5). A substantial set of materials, including the valuable OECD, Background Note (DAF/COMP(2019)12), is accessible. 10 Toys “R” Us Inc v Federal Trade Commission 221 F.3d 928 (7th Cir. 2000) 934. Here the horizontal conspiracy found expression in a collective boycott, and the arrangement flowed upstream, from a leading distributor to toy manufacturers. 11 ‘Hub-and-Spoke Arrangements – Note by the United States’ (OECD, DAF/COMP/WD(2019)88) para 4. 12 See, e.g., P. Van Cayseele, ‘Hub-and-Spoke Collusion: Some Nagging Questions Raised by Economists’ (2014) 5 Journal of European Competition Law & Practice 164, 165: ‘one should never forget that in most cases the incentives of the supplier and his buyers are not aligned’. 7

The concept of a ‘hub-and-spoke conspiracy’  171 A good example of such an arrangement is found in the United Kingdom case of Argos/ Littlewoods.13 Here, applying the UK’s equivalent of Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’) – the Chapter I Prohibition found in s 2 of the Competition Act 1998 – the Office of Fair Trading (‘OFT’) found that the toys and games manufacturer Hasbro had entered into an agreement and/or concerted practice with two major high-street retailers, Argos and Littlewoods, to fix prices of certain Hasbro products. Argos and Littlewoods had not been in contact with each other; business accounts managers at Hasbro had been in contact separately with Argos and Littlewoods, confirming to the latter the prices which Argos had agreed with Hasbro to adhere to.14 While the terminology may be relatively recent, being widely adopted only in the late 1990s, hub-and-spoke cartels are not new. The case of Interstate Circuit,15 heard by the Supreme Court in 1939, would now be described as a hub-and-spoke cartel, as might the 1983 EU case of AEG.16 Such an arrangement may be dealt with in a number of different ways for the purposes of competition law: (1) as a series of (potentially unlawful) vertical agreements;17 (2) as a horizontal agreement, or conspiracy, between the firms at level B; or (3) as an agreement or conspiracy in which all the firms, at both levels A and B, are involved. Each of these approaches has its difficulties, and the clear distinction offered here between vertical and horizontal restraints may not always be encountered in practice. Thus, in United States v Apple, Inc. the Court noted that ‘although this distinction is sharp in theory, determining the operation of

Decision of the Office of Fair Trading CA98/8/2003, Hasbro UK Ltd, Argos Limited and Littlewoods Ltd Fixing the Price of Hasbro Toys and Games (21 November 2003); upheld as to liability on appeal in Argos Limited and Littlewoods Limited v Office of Fair Trading (formerly the Director General of Fair Trading) [2004] CAT 24. 14 Although securing the appropriate evidence to confirm a horizontal arrangement may be challenging, here the OFT’s job was made easier by an extensive email chain which the investigation uncovered. Among these was an email from one of Hasbro’s sales directors which, in part, was in the following terms: ‘Ian … This is a great initiative that you and Neil have instigated!!!!!!!!! However, a word to the wise, never ever put anything in writing, its (sic) highly illegal and it could bite you right in the arse!!!!’ (Decision of the Office of Fair Trading (n 13) para 73). 15 Interstate Circuit, Inc v United States 306 US 208 (1939). Here, faced with reduced revenues, Interstate Circuit facilitated the agreement of movie distributors to impose minimum pricing on second-run theatres. The Supreme Court found a conspiracy extending to the distributors, holding in part that ‘[a]cceptance by competitors […] without previous agreement, of an invitation to participate in a plan the necessary consequence of which, if carried out, is restraint of interstate commerce is sufficient to establish an unlawful conspiracy’ (ibid 227). See Klein (n 7) 151–62. A later case, United States v General Motors Corp., 384 US 127 (1966), is also significant. 16 Case 107/82 Allgemeine Elektricitats-Gesellschaft AEG-Telefunken AG v Commission [1983] ECR 3151. 17 There is an increasing recognition that a legally and economically formalistic approach of treating vertical and horizontal restraints separately, with different presumptions as to efficiencies generated, anti-competitive injury and hence legality, may be flawed. See, e.g., M. Levenstein and V. Suslow, ‘How Do Cartels Use Vertical Restraints? Horizontal and Vertical Working in Tandem’ (2020) 83 Antitrust LJ 15, 16: ‘[o]bservers often miss the role of vertical relationships because both the economic and legal frameworks encourage us to characterise interfirm relationships as either horizontal or vertical.’ See also M. Levenstein and V. Suslow, ‘How Do Cartels Use Vertical Restraints? Reflections on Bork’s The Antitrust Paradox (2014) 57 J L & Econ S33. 13

172  Research handbook on cartels an agreement can be difficult as a matter of fact and turns on more than simply identifying whether the participants are at the same level of the market structure’.18 Discussing ‘the problem of ambiguity’, Orbach addresses the difficulties which flow when ‘[f]irms often use similar vertical restraints in their relationships with each multiple upstream or downstream trading partners, and those trading partners often respond to the restraints in a similar manner’.19 Distinguishing between legal and illegal arrangements in such situations raises significant evidentiary hurdles, the height of which may differ between regimes: in the US the hurdle is higher than is the case in the EU. In respect of option (1), the law relating to vertical agreements is more permissive in the US than it is in the EU. There are no vertical restraints which fall under the per se illegality of s 1 of the Sherman Act,20 and the Colgate doctrine21 gives manufacturers considerable latitude to set terms and conditions, and to refuse to supply to those who do not comply with them. This may incentivize hub-and-spoke claims, encouraging plaintiffs to seek to demonstrate horizontal conspiracy.22 That the rule of reason is permissive of vertical agreements may not be of significance: Posner suggested in 1981 that the presence of vertical restraints was of no consequence to horizontal illegality.23 In the EU, vertical agreements may be restrictions either by object or effect under Article 101 of the TFEU. The block exemption regulation (‘BER’)24 provides a limited safe harbour where market share thresholds are not exceeded, although certain restrictions, including resale price maintenance (‘RPM’), are not tolerated. Option (2) requires the relevant enforcer or court to establish to the degree required that there is in fact a horizontal agreement or conspiracy between the firms at level B, rather than a series of individual bilateral agreements. This may not be straightforward and is discussed further below. Option (3) provides perhaps the ‘easiest’ route to attack the arrangement on the basis that all the relevant firms are participants, operating a cartel which gives rise to a per se infringement in the US, or which is ‘restrictive by object’ in the EU. This approach avoids the need to flirt with legally diffuse boundaries, but, as is the position with option (2), relies upon evidence as to contact and understanding/agreement being available.

791 F.3d 290 (2d Cir. 2015) 313. Orbach (n 7) 2. 20 Section 5 of the Federal Trade Commission Act (‘the FTCA’) is also relevant to this chapter but will not be treated separately. In Toys “R” Us, Inc v Federal Trade Commission (n 10), discussed below, the court held that the FTCA ‘for present purposes tracks the prohibitions of the Sherman Act’ (ibid 933). 21 United States v Colgate & Co 250 US 300 (1919). 22 See Klein (n 7) 130: ‘as the antitrust analysis of vertical restraints has moved to a rule of reason standard, there is an increased incentive for plaintiffs to convert vertical restraint claims into per se hub-and-spoke claims.’ 23 R. Posner, ‘The Next Step in the Antitrust Treatment of Restricted Distribution: Per Se Legality’ (1981) 48 The University of Chicago Law Review 6. Posner argues that in ‘cases in which dealers or distributors collude to eliminate competition among themselves and bring in the manufacturer to enforce their cartel, or in which vertical restrictions are used to enforce a cartel among manufacturers, can be dealt with under the conventional rules applicable to horizontal price-fixing conspiracies. They are not purely vertical cases, and they would be decided the same way even if purely vertical restrictions were legal per se’ (ibid 22). 24 Commission Regulation 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices [2010] OJ L102/1. 18 19

The concept of a ‘hub-and-spoke conspiracy’  173

II.

THE LAW AND PRACTICE IN THE UNITED STATES

The Supreme Court found a hub-and-spoke conspiracy to be in breach of s 1 of the Sherman Act as early as 1939, in Interstate Circuit.25 A number of factors compel the courts in the US to focus on proving a horizontal conspiracy where a hub-and-spoke conspiracy is alleged to exist. A corollary of the applicability of the rule of reason to vertical restraints, and the Colgate doctrine, is that information exchanges which are purely vertical in nature cannot be condemned, whatever the nature of the information being exchanged. Illegality in hub-and-spoke conspiracies exists in the US only where ‘there is some set of facts showing a connecting agreement among the horizontal competitors’.26 This position differs to that relating to ‘rimless wheel’ conspiracies in other areas of federal law, where it may not matter that different conspirators operate at different levels of a market27 – in antitrust cases market positioning may be crucial to determining illegality. While there is no Supreme Court judgment to this effect, this is the position that has been upheld in all recent circuit cases,28 and earlier cases tentatively suggesting the contrary are unlikely to be reliable. In Leegin the Fifth Circuit held that ‘[i]n the absence of an assertion that the retailers agreed to [resale price maintenance] among themselves, there is no wheel and

Interstate Circuit, Inc v United States 306 US 208 (1939). ABA Section of Antitrust Law (n 2) 20. 27 See Kotteakos et al v United States, 328 US 750 (1946), where the Supreme Court characterised a fraudulent conspiracy as one of ‘of separate spokes meeting in a common center […] without the rim of the wheel to enclose the spokes’ (ibid 755). 28 See, e.g., Impro Products v Herrick 715 F.2d 1267 (8th Cir. 1983), in which the court appeared to suggest that a case could proceed where the plaintiff alleged ‘a single hub-and-spoke conspiracy in which each corporate defendant conspired separately with Dr Herrick, but did not conspire amongst themselves’ (ibid 1272; emphasis added). At 1280 the court cited Elder-Beerman Stores Corp. v Federated Department Stores 459 F.2d 138 (6th Cir. 1972) as to the simple requirement of ‘an overall plan to suppress the plaintiff as a competitor or that each defendant had knowledge that others were involved in the conspiracy’, but upheld the District Court in granting summary judgment for the defendant on the grounds that any evidence submitted was insufficient to find a breach of s 1 of the Sherman Act. In Howard Hess Dental Labs. Inc, v Dentsply Int’l, Inc. 602 F.3d 237 (3d Cir. 2010), the court found that the plaintiffs alleged ‘a hybrid of both vertical and horizontal conspiracies […] sometimes dubbed a “hub-and-spoke” conspiracy’ and upheld the district court’s dismissal of the claim, on the basis in part ‘that the amended complaint lacks any allegation of an agreement among the Dealers themselves’. In In re Insurance Brokerage Antitrust Litigation 618 F.3d 300 (3d Cir. 2010) the court stated that: ‘In all hub-and-spoke conspiracies, the horizontal agreement among the spokes supports the agreements between the hub and each spoke, and vice versa’ (ibid 346). In Pepsico, Inc. v Coca-Cola Co. 315 F3d 101 (2d Cir. 2002) the Court of Appeal upheld summary judgment for the defendant in the district court, holding, at 110, that the plaintiff’s ‘“offer of proof” of an agreement was simply that Coca-Cola assured the IFDs that the loyalty policy would be uniformly enforced and encouraged them to report violations. We agree with the district court that this was insufficient evidence of a horizontal agreement to withstand summary judgment.’ In Total Benefits Planning Agency, Inc. v Anthem Blue Cross & Blue Shield 552 F.3d 430 (6th Cir. 2008) the court held that ‘[t]here is no special exception for applying per se status just because there is a hub and spoke conspiracy; the complaint still must show some horizontal relationship’ (emphasis in original). In In re Musical Instruments and Equipment Antitrust Litigation (Guitar Center) 798 F.3d 1186 (9th Cir. 2015), the Ninth Circuit upheld a finding that, in the absence of any evidence of communication among the guitar manufacturers constituting the spokes, the plaintiff had failed to state a cause of claim. 25 26

174  Research handbook on cartels therefore no hub-and-spoke conspiracy’.29 However, the distinction is not as sharp as the case law cited here suggests. Section 1 of the Sherman Act requires that there be a ‘conspiracy’ in restraint of trade or commerce for the contested arrangement to be unlawful.30 The standard for proving conspiracy was set out by the Supreme Court in Monsanto.31 There must be a ‘conscious commitment to a common scheme [as shown by] evidence that tends to exclude the possibility of independent action’ by the parties.32 The permissive approach to vertical arrangements in the US ensures that demonstrating the required ‘conscious commitment’ to the ‘common scheme’ when there may be no contact between the horizontal participants in an alleged hub-and-spoke conspiracy is not straightforward. For their participation in a hub-and-spoke cartel to be unlawful, defendants must be shown to have entered into the arrangement knowingly, or intentionally, and must intend to participate in an action prohibited under s 1. This latter test goes not to the unlawfulness of the act under antitrust law, but to ‘the perpetrator’s knowledge of the anticipated consequences’.33 The only way to ensure that a hub-and-spoke cartel is caught within the s 1 rubric is by securing the evidence demonstrating conspiracy at the horizontal level. Vertical arrangements which are otherwise unobjectionable may form part of this evidence34 but are unlikely, in and of themselves, to be sufficient to establish a violation. There is but a small number of cases in the US where a hub-and-spoke conspiracy has been found to constitute a conspiracy to restrain trade. The two leading cases discussed below relied on the DOJ’s civil enforcement of s 1 of the Sherman Act, and on the FTC’s enforcement of the FTCA. In US v All Star Industries35 the Department of Justice (DOJ) successfully prosecuted a bid-rigging conspiracy to fix the prices of speciality pipe supplied in relation to cost-plus contracts. The district court handed down substantial fines, imposed a restitution order and sentenced three defendants to jail terms. As stated by the Fifth Circuit, the case was unique in ‘that the pipe distributors did not, as in a conventional case, come together voluntarily to fix prices […] directions flowed the other way. It was the suppliers’ customer […] which directed its suppliers in the scheme.’36 The Court rejected the appellants’ argument that ‘they dealt only with [their customer] and not with each other’,37 finding that they were ‘fully aware of their role in the overall scheme’.38 Succinctly, the Court stated that the ‘defendants cannot escape the per se rule simply because their conspiracy depended upon the participation

PSKS, Inc v Leegin Creative Leather Products 615 F.3d 412 (5th Cir. 2010) 420. See also, inter alia, Dickson v Microsoft Corporation 309 F.3d 193 (4th Cir. 2002) 203: ‘a wheel without a rim is not a conspiracy.’ 30 See generally ABA Section of Antitrust Law, Proof of Conspiracy under Federal Antitrust Laws (2010). 31 Monsanto Co v Spray-Rite Service Corporation 465 US 752 (1984). 32 ibid 768. 33 See United States v United States Gypsum Co 438 US 422 (1978) 446: ‘Where carefully planned and calculated conduct is being scrutinized in the context of a criminal prosecution, the perpetrator’s knowledge of the anticipated consequences is a sufficient predicate for a finding of criminal intent.’ 34 See Orbach (n 7) 4: ‘attempts to draw a sharp distinction between the rim requirement and rimless wheel theories are misleading. Circumstantial evidence (plus factors) may be used to establish the existence of the rim, and vertical coordination is a critical aspect of that circumstantial evidence.’ 35 962 F.2d 465 (5th Cir. 1992). 36 ibid 469. 37 ibid 470. 38 ibid note 11. 29

The concept of a ‘hub-and-spoke conspiracy’  175 of a “middle-man”, even if that middleman conceptualised the conspiracy, orchestrated it by bringing the distributors together around contracts it had with its buyers, and collected most of the booty’.39 The leading case in recent years is one arising under s 5 of the FTCA (in which the term ‘hub-and-spoke conspiracy’ is never used), Toys “R” Us Inc v Federal Trade Commission,40 on appeal from the FTC’s ruling Toys “R” Us, Inc.41 The FTC’s complaint stated that Toys “R” Us (‘TRU’), the nation’s largest, but not cheapest, toy retailer, had responded to price competition from ‘warehouse clubs’ to secure ‘agreements or understandings’42 with suppliers which had the result of restricting their sales to warehouse clubs. In the face of reluctance by some manufacturers to surrender sales unless their competitors did likewise, ‘TRU facilitated understandings among competing manufacturers to achieve substantial unity of action among them’;43 in short, there was in place a hub-and-spoke conspiracy with a downstream powerful retailer as the hub, and upstream toy manufacturers and suppliers as the spokes, with a rim constructed of ‘understandings’.44 The administrative law judge found that TRU first began to discuss the operation of the clubs with its suppliers in 1989–91 and had in 1992 disseminated its ‘warehouse club policy’, under which it would not deal with suppliers to the clubs unless the clubs were carrying the manufacturer’s entire line. Manufacturers were required to offer ‘specials and exclusives’ to TRU first; special packing was required for old and basic products; and clearances and closeouts would be permitted only if TRU was given the first opportunity to buy the product. The announced position made it clear that there was to be no discussion about prices. In and of itself, this policy would be lawful, falling within the Colgate safe harbour.45 Judge Timony found that the ‘manufacturers did not want to give up sales and they were also concerned that their competitors would gain share at their expense’.46 TRU then ‘tried to obtain a coordinated response from manufacturers by assuring them that TRU was applying its policy to each of its competitors and by telling each of the major manufacturers that its competitors were only selling to the clubs because the other was’.47 TRU then went further than this, acting as a conduit between manufacturers, passing on ‘the quid pro quo (ie, I’ll stop if they stop) from manufacturer to manufacturer’.48 Further, TRU ‘used the acquiescence of certain manufacturers to obtain the acquiescence of others’.49 Complaints made by one manufacturer about another were passed on, ‘allowing TRU to monitor compliance with the agreements and [assuring] the manufacturers that their competitors were complying’.50 In 1992 or early 1993 TRU changed its policy again, telling manufacturers that it would simply discontinue purchases of any products sold to the clubs. Enforcement mechanisms consistent with those out-

ibid 473. 221 F.3d 928 (7th Cir. 2000). 41 126 FTC 415 (1998). 42 ibid 416. 43 ibid 417. 44 See Amore (n 5) 37–39. 45 That this would be the position is acknowledged by the judge at 498. 46 126 FTC 415 (1998) 430. 47 ibid 431. 48 ibid 432. 49 ibid. 50 ibid 434. 39 40

176  Research handbook on cartels lined above continued to be applied. After analysing the agreements with the 14 involved toy manufacturers,51 Judge Timony found that the ‘purpose of the agreements […] was to restrain competition among toy retailers and among toy manufacturers’, and that the ‘campaign had its intended effect’.52 TRU’s argument that its approach ‘was justified as an effort to protect against free-riding’53 were rejected by the judge. While, as noted above, the Colgate doctrine would protect any firm announcing and applying a policy which would terminate distributors or suppliers, the doctrine does not extend to permitting a firm taking ‘the affirmative action of asking for or inducing acquiescence to its policy’.54 The evidence was that there were vertical agreements in place, not simply the imposition of policies. Toys “R” Us was heard before the Supreme Court’s Leegin judgment (discussed further below). Judge Timony was clear, based on the law at the time, that non-price vertical restraints were governed by the rule of reason, and that this would apply were TRU’s conduct ‘solely vertical and not motivated by price competition’.55 Here however, in the words of the Court of Appeals, the agreements ‘flunked scrutiny’.56 The relevant case law was driven by concerns as to the power of inter-brand competition to discipline intra-brand restraints. In the present case, however, the restraints related to inter-brand competition, and the applicable case law ‘did not take conspiracy out of the antitrust laws’.57 A horizontal conspiracy was in place among TRU’s suppliers, and this was orchestrated by TRU.58 While this was not a price-fixing agreement, it restricted sales, amounted to a boycott and was to be treated as per se illegal. TRU appealed. In a refreshingly short judgment, the Seventh Circuit unanimously affirmed the FTC’s decision. The central question for the Court was that of whether the Commission was right to find that there was ‘a horizontal agreement among the toy manufacturers, with TRU in the centre as the ringmaster, to boycott the warehouse clubs’.59 The Court found that while the Commission had relied on Interstate Circuit, the present case ‘if anything presents a more compelling case for inferring horizontal agreement than did Interstate Circuit’.60 The Court was clear: ‘the only condition on which each toy manufacturer would agree to TRU’s demands was if it could be sure its competitors were doing the same thing. That is a horizontal agreement.’61 Economic efficiency justifications for the vertical restraints were set to one side, and, as Klein has stated, ‘[t]he question whether there is a procompetitive efficiency rationale for the TRU contract demands is distinct from the question whether a horizontal agreement was reached’.62 Toys “R” Us was cited by Judge Cote, of the Second Circuit, in United States v Apple, Inc,63 in which Apple was found to be in breach of s 1 of the Sherman Act in a case which, like

53 54 55 56 57 58 59 60 61 62 63 51 52

ibid 437–76. ibid 477. ibid 488. ibid 498. ibid 513. 221 F.3d 928 (7th Cir. 2000) 930. 126 FTC 415 (1998) 514. ibid 507. 221 F.3d 928 (7th Cir. 2000) 934. ibid 935. ibid 936. Klein (n 7) 144. United States v Apple Inc. 952 F.Supp. 2d 638 (SDNY 2013).

The concept of a ‘hub-and-spoke conspiracy’  177 Toys “R” Us, dealt with inter-brand competition.64 The characterization of the conduct in this case as a ‘hub-and-spoke’ conspiracy may be contested: Judge Cote argued that the conduct complained of ‘is not properly viewed as either a vertical price restraint or solely through the lens of traditional “hub-and-spoke” conspiracies’.65 The DOJ and others alleged that Apple had committed a per se violation of s 1 by conspiring with five publishers of e-books to raise prices, particularly of New York Times bestsellers. The publishers settled the case, signing consent decrees. Under the terms of the agreements reached between Apple and the publishers, the prices of e-books offered by Apple to consumers were higher than was the case with sales through Amazon (which had set a ‘wretched’ price of $9.9966), but the publishers received less per title sold. The agreements incorporated most favoured nation (‘MFN’) clauses, requiring the publishers to offer Apple a price no lower than that of any of its competitors in the e-books market. The publishers then took control of pricing on Amazon, raising the prices of books sold for Amazon’s Kindle.67 Judge Cote recognized that the challenge facing the plaintiffs in the case was that set out by the Supreme Court in Interstate Circuit:68 ‘[w]here a vertical actor is alleged to have participated in an unlawful horizontal agreement, plaintiffs must demonstrate both that a horizontal conspiracy existed, and that the vertical player was a knowing participant in that agreement and facilitated the scheme.’69 After an extensive discussion of the background to the case, including the evidence relating to the conduct of Apple and the publishers, Judge Cote turned to the applicable legal standard. Monsanto Co v Spray-Rite70 required that ‘proof of joint or concerted action’ was required to establish a conspiracy in violation of s 1.71 A short discussion of the place of the rule of reason and the per se rule places the emphasis quickly on the application of the per se rule to restraints ‘that would always or almost always tend to restrict competition and decrease output’.72 Judge Cote notes here that ‘price-fixing agreements or agreements to divide markets that are horizontal in nature – meaning that the parties to the agreement are “competitors at the same level of the market structure,” – are per se unlawful’.73 Judge Cote then turns to the ‘direct or circumstantial evidence’74 that may be required to establish a conspiracy. The judge held that to prove an antitrust conspiracy ‘the antitrust plaintiff should present direct or circumstantial evidence that reasonably tends to prove that the [defendant] and others had a conscious commitment to a common scheme designed to achieve an unlawful objective.’ The evidence must also ‘prove

ibid 690: ‘Per se price-fixing agreements may also include those where a vertical player participates in and facilitates a horizontal conspiracy.’ See Toys “R” Us, Inc v Federal Trade Commission (n 10). 65 ibid 707. See also OECD, ‘Summary of Discussion of the Roundtable on Hub-and-Spoke Arrangements’ (DAF/COMP/M(2019)2/ANN3/FINAL): ‘the definition of hub-and-spoke may not apply to the case’ (ibid 9). 66 United States v Apple Inc. (n 63) 691. 67 791 F.3d 290 (2d Cir. 2015) 296. 68 Interstate Circuit, Inc v United States (n 15). 69 952 F.Supp. 2d 638 (SDNY 2013) 690. 70 Monsanto Co v Spray-Rite Service Corporation (n 31). 71 952 F.Supp. 2d 638 (SDNY 2013) 687. 72 ibid 688, citing Leegin Creative Leather Products, Inc. v PSKS, Inc. 551 US 877 (2007) 886. 73 ibid (footnotes omitted). 74 ibid 689. 64

178  Research handbook on cartels defendants had the intent to adhere to an agreement that was designed to achieve an unlawful objective; specific intent to restrain trade is not required.’ […] the evidence must demonstrate a ‘meeting of the minds.’ […] Just as a conspiracy’s ‘failure to achieve its ends’ after an intended period may be ‘strong evidence’ that the conspiracy did not in fact exist, the success of the conspiracy in achieving its goals may confirm the very existence of the conspiracy.75

Relying on testimony and records of meetings, telephone calls, numerous emails and transcripts of interviews, Judge Cote determined that there was ‘compelling evidence that Apple violated s 1 of the Sherman Act’ and ‘overwhelming evidence that the publisher defendants joined with each other in a horizontal price-fixing conspiracy’;76 that the conspiracy ‘would not have succeeded without the active facilitation and encouragement of Apple’;77 and that the evidence overwhelmingly demonstrated that Apple did not act independently.78 The terms that Apple offered to each publisher in new ‘agency Agreements’ were, ‘simply put, “terrible”’,79 but provided the framework within which the publishers would, in concert, change the terms on which they did business with Amazon. This was something that the publishers had been trying to achieve for months, and with the push from Apple were able to achieve ‘in a matter of weeks’.80 The efficacy of the approach was summed up by the judge in these terms: ‘Working together, and equipped with Apple’s agency agreements, Apple and the publisher defendants moved the largest publishers of trade e-books and their distributors from a wholesale to agency model, eliminated retail price competition, and raised e-book prices.’81 Apple’s formalistic defence to the action – that the focus should be on the terms of each (vertical) agreement, and that there was ‘nothing inherently illegal in those terms or the contract as a whole’82 – was brushed aside by Judge Cote, who pointed to the extensive negotiations leading to the conclusion of the agreements ‘when the conspiracy and Apple’s participation in it took shape’, and ‘the weeks that followed, during which the import of the agreements became apparent’.83 Apple appealed, unsuccessfully.84 Accepting that vertical agreements could constitute evidence from which a conspiracy could be inferred, the court held that ‘the district court did not err in determining that Apple organised a price-fixing conspiracy among the publisher defendants’;85 Apple’s argument that the agreements should be analysed under the rule of reason was therefore bound to fail. As the Court noted, there are a number of cases which appear to have characteristics typical of hub-and-spoke conspiracies in which the characterization

ibid (footnotes omitted) (emphasis added). ibid 691. 77 ibid. 78 ibid 698. 79 ibid 692. 80 ibid 693. 81 ibid. Similar issues were addressed by the EU Commission, although only as part of a wider investigation into e-books, resulting in two decisions (COMP/AT.39847 E-Books, Commission decisions of 12 December 2012 [2013] OJ C73/20 and 25 July 2013 [2013] OJ C378/25). The first decision was addressed to four publishers and Apple, the second to a single publisher. 82 952 F.Supp. 2d 638 (SDNY 2013) 698. 83 ibid 699. 84 791 F.3d 290 (2d Cir. 2015). The appeals court was split 2–1, with Judge Jacobs dissenting. The Supreme Court subsequently denied certiorari (Apple v United States 136 S. Ct 1376 (2016)). 85 791 F.3d 290 (2d Cir. 2015) 321. 75 76

The concept of a ‘hub-and-spoke conspiracy’  179 of the arrangements was that of per se unreasonable restraints on trade with the focus at the horizontal level.86 The relevant agreement in this case was not, the court held, any one vertical agreement incorporating terms on price, but ‘the horizontal agreement that Apple organised among the publisher defendants to raise e-book prices’.87 In essence, the court brushed aside arguments about the categorization of the various vertical agreements where it was clear as a matter of fact, as determined by the circuit court, that a horizontal conspiracy existed: ‘the court need not consider whether the vertical agreements restrained trade because all participants agreed to the horizontal restraint, which is “and ought to be, per se unlawful”.’88 The key passage in this context is the following: In short, the relevant ‘agreement in restraint of trade’ in this case is the price-fixing conspiracy identified by the district court, not Apple’s vertical contracts with the publisher defendants. […] the question is whether the vertical organiser of a horizontal conspiracy designed to raise prices has agreed to a restraint that is any less anticompetitive than its co-conspirators, and can therefore escape per se liability.89

The approach of the appellate court has not escaped criticism.90 In his dissenting opinion in United States v Apple, Inc.91 Judge Jacobs suggested, contra the majority, that Leegin had changed the law in relation to hub-and-spoke conspiracies. His conclusion is based on the Supreme Court’s statement at 893: ‘To the extent a vertical agreement setting minimum resale prices is entered upon to facilitate either type of cartel, it, too, would need to be held unlawful under the rule of reason.’ This argument was dismissed in the majority judgment. The majority doubted that the Supreme Court had intended to overturn in this respect earlier case law,92 but more fundamentally to Apple took the view that the Court ‘need not worry about the possibility that Leegin covertly changed the law governing hub-and-spoke conspiracies, however, because the passage relied upon by the dissent is entirely consistent with holding the ‘hub’ in such a conspiracy liable for the horizontal agreement that it joins’.93

86 The Court of Appeals cites Klor’s, Inc v Broadway-Hale Stores, Inc 359 US 207 (1959), and United States v General Motors Corp. 384 US 127 (1966). 87 791 F.3d 290 (2d Cir. 2015) 323. 88 ibid 325. 89 ibid. 90 See Garrity (n 7) and S. Marietta, ‘An Apple a Day Doesn’t Keep Doctor Miles Away: The Second Circuit’s Misuse of the Per Se Rule in United States v Apple’ (2016) 69 Rutgers UL Rev 325. For a different perspective on this case see Z. Flood, ‘Antitrust Enforcement in the Developing E-Book Market: Apple, Amazon and the Future of the Publishing Industry’ (2016) 31 Berkeley Technology Law Journal 879. The case is also discussed in Office of Fair Trading, The Competitive Effects of Buyer Groups – Economic Discussion Paper (OFT 863, 2007) paras 6.76–6.84. 91 791 F.3d 290 (2d Cir. 2015). 92 ibid 324: ‘If the Supreme Court meant to overturn General Motors and Klor’s – precedents that it has consistently reaffirmed – this cryptic sentence was certainly an odd way to accomplish that result. The Supreme Court does not normally overturn, or so dramatically limit, earlier authority sub silentio’ (internal quotes and footnotes omitted). See also Orbach (n 7) 12: ‘[t]his passage […] does not bear the weight given it by proponents of using the rule of reason’. 93 ibid.

180  Research handbook on cartels An approach similar to that advanced by Judge Jacobs was taken in Toledo Mack94 by the Third Circuit, but has not since been followed in that circuit, or elsewhere.95 Garrity sides with Judge Jacobs, arguing that ‘vertical price agreements, even if embedded in hub-and-spoke arrangements, are treated under the rule of reason to give parties, especially in new industries, the opportunity to present any procompetitive justifications’,96 and argues that the Court’s decision ‘contradicted’97 the Supreme Court’s approach in Leegin.98 The better view is that this is not the case, and that the majority was correct in its interpretation of Leegin.99 Orbach is persuasive: the antitrust jurisprudence of vertical restraints is too rigid and inadequate for cartels facilitated through vertical relationships. In this sense, the analytic framework courts use to analyse the hub-and-spoke conspiracies, underscores some of the limits of the antitrust jurisprudence of vertical restraints.100

It is, in this light, unfortunate that the Supreme Court denied certiorari. The treatment of hub-and-spoke conspiracies in US jurisprudence is superficially straightforward – there must be sufficient evidence of the existence of a conspiracy at the level of the rim – but the analysis in practice remains awkwardly complex. A bifurcation of an overall arrangement into its vertical and horizontal components, with each treated separately for the purposes of legal analysis, prioritizes the convenience of legal formality over economic reality.101 It is this approach that the both the district and appeal courts eschewed in Apple. As has been noted, in an analysis critical of the Appeal Court’s approach, the court ‘steadfastly refused to focus on the formalistic positioning of firms in the marketplace for antitrust analysis’.102 That the totality of actions in Apple gave rise to horizontal coordinated action seems beyond doubt. If, as Posner has argued should be the case, the vertical elements of the overall arrangement were treated as per se legal, and stripped out of the analysis, what is left? Arguably there would be sufficient evidence of ‘plus factors’ to sustain a finding of conspiracy between the book publishers to act in concert in their efforts to alter the terms on which they did business with Amazon: the district court made clear its view that no one individually could successfully do so. This approach is not without its difficulties given the conditions set out in Monsanto. In the absence of robust evidence of conspiracy, such cases are fragile, and the question whether a series of legal vertical agreements could support a finding of illegal horizontal agreement

Toledo Mack Sales & Service, Inc. v Mack Trucks, Inc. 530 F.3d 204 (3d Cir. 2008). See, e.g., Total Benefits Planning Agency, Inc. v Anthem Blue Cross & Blue Shield 552 F.3d 430 (6th Cir. 2008). 96 Garrity (n 7) 87. 97 ibid 102. 98 Similar arguments are made by Marietta (n 90), who states, inter alia, that the ‘legal error stems not from the Second Circuit’s analysis but rather from its ignorance of the Leegin decision, which fundamentally altered the relationship between the per se rule and the rule of reason’ (ibid 372). 99 The judgment in Leegin has itself been the subject of much analysis. See, in particular, A. Jones, ‘Completion of the Revolution in Antitrust Doctrine on Restricted Distribution: Leegin and Its Implications for EC Competition Law’ (2008) 53 Antitrust Bulletin 903. 100 Orbach (n 7) 14. 101 See Toys “R” Us Inc v Federal Trade Commission (n 10) 930: ‘it can be hard as a matter of fact to be sure what kind of agreement is at issue.’ 102 Marietta (n 90) 362. 94 95

The concept of a ‘hub-and-spoke conspiracy’  181 remains open. The court’s view was that it was important that the vertical Apple pricing agreements made sense only on the basis that they formed the basis for a renegotiation of price terms with Amazon – as the court made clear, the publishers received less money per sale under the Apple contracts but would overall be better off in the rearranged market.

III.

THE LAW AND PRACTICE IN THE EUROPEAN UNION

Neither the EU Commission nor the Court of Justice of the EU have directly addressed hub-and-spoke cartels in such terms in enforcement or judgments, although, as noted above, AEG could be so categorized.103 There have been decisions at the national level, determined on the basis of the application of EU law or national equivalents,104 and it is possible to draw out some guiding principles from the relevant principles of EU competition law. In applying EU competition law to hub-and-spoke cartels the competition authorities and the courts do not have to perform a delicate soft-shoe shuffle on the hubcap of the rule of reason. Vertical agreements may be, depending on their terms, restrictions by object or by effect. Information exchange may also be in breach of Article 101 TFEU by object, as will be the case where it relates to future pricing or output. Both the Commission’s vertical and horizontal guidelines make reference, albeit limited, to hub-and-spoke arrangements. Beyond these two references, the key Commission guidelines are silent on the treatment of hub-and-spoke arrangements. In its vertical guidelines brief mention is made of the relationship between hub-and-spoke arrangements and RPM: ‘[s]trong or well organised distributors may be able to force or convince one or more suppliers to fix their resale price above the competitive level and thereby help them to reach or stabilise a collusive equilibrium.’105 As the Commission states in its horizontal guidelines, ‘[i]nformation exchange can take various forms […] data can be shared indirectly through a common agency […] or through the companies’ suppliers or retailer’.106 At para 59 of the guidelines, the Commission states that ‘communication of information among competitors may constitute an agreement, [or] a concerted practice […] with the object of fixing, in particular, prices or quantities’. As is made clear, communication of information among competitors may take place where the transmission mechanism is not competitor-to-competitor, but competitor-to-hub-to competitor. Such indirect transmission does not preclude illegality – it simply makes it almost inevitable that this is more likely to be found in a concerted practice than in an agreement.107

See Allgemeine Elektricitats-Gesellschaft AEG-Telefunken AG (n 16). See also: COMP/AT.40182 Pioneer [2018] OJ C338/19; COMP/AT.40181 Philips [2018] OJ C340/10; and COMP/AT.40469 Denon & Marantz [2018] OJ C335/5. In these latter cases ‘there were indications (but no clear-cut evidence) that, in some instances RPM may have been driven by retailers who informed their supplier about low prices applied by other retailers and requested it to intervene to ensure a certain price level’: Note by the European Union (OECD, DAF/COMP/WD(2019)89) para 7. 104 At the OECD roundtable held in December 2019 (n 5), national contributions were made by Austria, Belgium, Germany, Greece, Hungary, Latvia, Portugal, Sweden and the UK. 105 European Commission, Guidelines on Vertical Restraints [2010] OJ C130/1, para 224. 106 European Commission, Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-operation Agreements [2011] OJ C 11/1. 107 The approach under EU competition law to the exchange of information is rightly more robust than is the case in the US. See e.g. Whelan (n 4) 824: ‘the act of exchanging information is capable of having 103

182  Research handbook on cartels Under Article 101 TFEU an agreement or ‘concerted practice’ is unlawful when, by object or effect, it prevents, restricts or distorts competition, and affects trade between member states.108 A concerted practice is ‘a form of co-ordination between undertakings which, without having reached the stage where an agreement properly so-called has been concluded, knowingly substitutes practical co-operation between them for the risks of competition’.109 This definition does not require the relevant undertakings to operate as horizontal competitors. In Suiker Unie the Court of Justice expanded on this, stating that ‘each economic operator must determine independently the policy which he intends to adopt on the common market including the choice of the persons and undertakings to which he makes offers or sells’.110 In Anic the Court stated that Article 101 TFEU applies ‘to all collusion between undertakings, whatever the form it takes’ and that the ‘only essential thing is the distinction between independent conduct, which is allowed, and collusion, which is not, regardless of any distinction between types of collusion’.111 As with Colgate in the US, purely unilateral acts are not prohibited; it is an essential requirement of Article 101 TFEU that an agreement or concerted practice involve ‘two or more undertakings’. The key judgment in this respect is that of Bayer, in which the Court of First Instance held that a distinction should be drawn between cases in which an undertaking has adopted a genuinely unilateral measure […] and those in which the unilateral character of the measure is merely apparent […] the latter must be regarded as revealing an agreement between undertakings and may therefore fall within [Article 101]. That is the case, in particular, with practices and measures in restraint of competition which, though apparently adopted unilaterally by the manufacturer in the context of its contractual relationship with its dealers, nevertheless receive at least the tacit acquiescence of those dealers.112

In VM Remonts,113 relying in part on Anic, the Court stated that an undertaking may, in principle, be held liable for a concerted practice on account of the acts of an independent service provider supplying it with services only if one of the following conditions is met:

a welfare-reducing effect and […] it should not be exempt a priori from the operation of antitrust law, particularly if consumer welfare is to the primary objective of this law.’ 108 It is not necessary for an infringement to be characterized definitively as either an agreement or a concerted practice and it is common to find phrases such as ‘whether by an agreement or by a concerted practice’ in enforcement decisions. See Cases T-305/94 etc NV Limburgse Vinyl Maatschappij v Commission [1999] ECR II-931, paras 696–98. Botteman (n 6) notes that the UK Court of Appeal, ‘one of the most cited authorities on hub-and-spoke exchanges, does not appear to get too bogged down by having to distinguish between an agreement and concerted practice’ (ibid 150). 109 Case 48/69 ICI v Commission [1972] ECR 619, para 64. 110 Cases 40/73 etc Suiker Unie v Commission [1975] ECR 1663, para 173. 111 Case C-49/92P Commission v Anic Partecipazioni [1999] ECR I-4125, para 108 (emphasis added). 112 Case T-41/96 Bayer v Commission [2000] ECR II-3383, para 71 (references omitted) (emphasis added). 113 Case C-542/14, SIA ‘VM Remonts’ (formerly SIA ‘DIV un KO’) and others v Konkurences padome ECLI:​EU:​C:​2016:​578, para 33 (emphasis added). See I. Apostolakis, ‘Antitrust Liability in Cases of Indirect Contacts between Competitors: VM Remonts’ (2017) 54 Common Market Law Review 605. If adopted, the opinion of Advocate General Wathelet would have created a rebuttable presumption of liability on the part of the spokes of a hub-and-spoke arrangement, where they use services provided by a hub engaged in anti-competitive acts.

The concept of a ‘hub-and-spoke conspiracy’  183 […] that undertaking could reasonably have foreseen the anti-competitive acts of its competitors and the service provider and was prepared to accept the risk which they entailed.

In other words, an undertaking may be party to a concerted practice under Article 101 without being in possession of direct knowledge of illegal activity. The case is not without its ‘analytical challenges’; the judgment is ‘brief and puzzling at times’ but has the potential to be ‘established as the authority for the attribution of antitrust liability to the principal for the acts of an external contractor in cases of hub-and-spoke cartels’.114 In Eturas,115 which has the appearance in part of a hub-and-spoke arrangement, the Court of Justice dealt with a request for a preliminary ruling from the Supreme Administrative Court of Lithuania. The Lithuanian Competition Council had imposed fines on a number of travel agencies and the E-TURAS booking platform, for entering into a concerted practice relating to a cap on discounting. The concerted practice was facilitated by E-TURAS by way of an amendment to the terms and conditions for engagement with the platform which was communicated to participants in the platform by way of an administrator message which, like an email, required opening, and by the subsequent imposition of a technical restriction on discounting.116 Appellants against the infringement decision argued inter alia that they were not aware of the content of the administrator message. The Court held that the presumption of innocence does not preclude the referring court from considering that the dispatch of the message at issue in the main proceedings may, in the light of other objective and consistent indicia, justify the presumption that the travel agencies concerned were aware of the content of that message as from the date of its dispatch.117

If the challenge in acting against a hub-and-spoke arrangement is to prove that there is a concerted practice operating at the horizontal level, the approaches of the Court of Justice outlined above appear to set a bar lower than that which applies in the US. A concerted practice cannot exist in the abstract. In Anic it is made clear that there must be ‘conduct on the market pursuant to those collusive practices’.118 This condition is fulfilled merely by the undertakings’ continued participation in the market. A final condition, however, requires that there is a link between the concerted practice and subsequent conduct, although ‘subject to proof to the contrary […] there must be a presumption that the undertakings participating in concerting arrangements and remaining active on the market take account of the information exchanged with their competitors when determining their conduct on that market’.119 While the bar does not appear to be set very high to establish the existence of a concerted practice, there remain evidentiary difficulties in establishing the intent to form a concerted practice between the spokes, but competition agencies and courts can surmount these. Prior to

Apostolakis (n 113) 606–07. Case C-74/14 ‘Eturas’ UAB and others v Lietuvos Respublikos konkirencijos taryva ECLI:​EU:​C:​ 2016:​42. 116 The message stated that the purpose of the capping policy was ‘to normalise the conditions of competition’ (ibid para 10). 117 ibid para 40. 118 Commission v Anic Partecipazioni (n 111) para 118. 119 ‘Eturas’ UAB (n 115) para 121 (emphasis added). 114 115

184  Research handbook on cartels Brexit, in Argos and Littlewoods (clearly a hub-and-spoke case, even though the term is never used) the UK Competition Appeal Tribunal (‘the CAT’) sums up perfectly the approach to be taken under Article 101 to such arrangements: broad assertions such as ‘it is lawful for a supplier to seek to persuade a retailer to follow RRPs’ or that Hasbro’s pricing initiative was ‘lawful in itself’ do not seem to us to be helpful ways of analysing the facts in the present case. The question at issue is whether there has, as a matter of fact, come into being ‘an agreement or concerted practice having as its object or effect the prevention, restriction or distortion of competition’ […] The issue then is whether what occurred can properly be characterised as purely unilateral action on the part of the supplier, or whether the facts disclose a sufficient degree of consensus to give rise to a relevant agreement or concerted practice […] That issue is a question of fact in each case.120

The case was appealed to the Court of Appeal.121 The subsequent judgment has received significant attention.122 At para 91 the Court held that: The Tribunal may have gone too far if it intended [illegality] to extend to cases in which A did not, in fact, foresee that B would make use of the pricing information to influence market conditions in which C did not, in fact, appreciate that the information was being passed to him with A’s concurrence.123

The Court upheld the CAT’s judgment but moderated the approach to be applied, to that where ‘A may be taken to intend that B will make use of that information’.124 An emphasis on intent is, arguably, at variance with EU jurisprudence, and certainly does not sit well with the later judgment of Remonts. The UK is not alone in having applied competition law to hub-and-spoke arrangements in Europe; in April 2019 the Spanish Competition Authority fined four undertakings engaged in the production and sale of tobacco €57.7 million for their engagement in a hub-and-spoke concerted practice,125 and in December 2020 the Portuguese Competition Authority gifted an early Christmas present in the form of fines totalling €304m to ten parties in two linked decisions finding that there was a hub-and-spoke conspiracy relating to the prices charged for certain beverages. As noted in the press release, ‘through a common supplier, companies ensured the alignment of sales prices to the public.’126 Eturas, discussed briefly above, may transpire to be one of the first in a new chain of cases. It has been recognized that Argos Limited and Littlewoods Limited v Office of Fair Trading (formerly the Director General of Fair Trading) [2004] CAT 24, para 713. The CAT also considered hub-and-spoke arrangements in JJB Sports plc v Office of Fair Trading, and Allsports Limited v Office of Fair Trading [2004] CAT 17 and in Tesco Stores Limited v Office of Fair Trading [2012] CAT 31. 121 Argos Limited and Littlewoods Limited v Office of Fair Trading and JJB Sports Plc v Office of Fair Trading [2006] EWCA Civ 1318. 122 See, inter alia, A. McCabe, ‘The English Court of Appeal’s Legal Test for “Hub and Spoke” Cartels – Is It Compatible with EU Jurisprudence’ (2012) 33 European Competition Law Review 452. 123 Emphasis added. The use of ‘may’ here is not entirely helpful. 124 [2006] EWCA Civ 1318, para 141. 125 www​.cnmc​.es/​node/​374435 [accessed 28 February 2022]. 126 Autoridade da Concorrência, Press Release 22/2020 ‘The AdC Imposed Fines on Six Large Retail Food Chains and Two Suppliers for Price Fixing, Harmful to Consumers’ (21 December 2020) http://​ concorrencia​.pt/​vEN/​News​_Events/​Comunicados/​Pages/​PressRelease​_202022​.aspx​?lst​=​1​&​Cat​=​2020 [accessed 28 February 2022]. 120

The concept of a ‘hub-and-spoke conspiracy’  185 E-commerce and online price comparison tools can facilitate hub-and-spoke arrangements and RPM, in particular as regards the monitoring of an agreement, and speedy reaction to deviations. When sales platforms play a role, cross platform parity agreements can lead to a lessening of competition between horizontal competitors, and platforms could facilitate anti-competitive supplier/seller actions.127

IV. CONCLUSION Taking into account increasingly complex commercial environments, and the new technologies, Perinetto argues that hub-and-spoke infringements, ‘because of their features, may represent the future of [Article 101 TFEU]’.128 His challenging proposal is that enforcement in hub-and-spoke arrangements should always require ‘an in concreto specific assessment of the mental involvement of the parties, of intent’, although he suggests too that ‘enforcers must always beware of relying too much upon intent to reach their conclusions’.129 A chapter examining hub-and-spoke arrangements that is differently written than the present one could foreground intent, which is nearly always challenging in competition law. Were it possible to do so within the legal frameworks, the better approach to hub-and-spoke arrangements would be to set aside the classic approach of analysing each element of the arrangement on the basis of strict legal classifications.130 Following Amore, ‘we should look more broadly at the cumulative effect of such conducts’.131 Not only does the vertical/horizontal distinction fall away in hub-and-spoke arrangements; so too may the distinction between inter- and intra-brand competition. As the cases show, the hub may coordinate competitors at either the downstream or the upstream level.132 The new economy, and two-sided markets in particular, challenge traditional approaches to market analysis and hence to legal analysis – ‘the identification of the position that each player has in the vertical chain relies heavily on which side (ie market) we want to focus on’.133 This is not to suggest that the requirement to establish clearly an infringement of any relevant specific legal provision should be entirely set aside. As Odudu forcefully argues, difficulties arise when there is ‘a failure to anchor the scrutinised behaviour to the legal provision said to be infringed’.134 One cannot wish away the differences between antitrust law in the US and competition law in the EU; attempts to synthesize these beyond the hard-core infringements are likely to fail. Recognizing therefore that legal differences abound, the questions that should be asked of an alleged hub-and-spoke arrangement are the following: (1) Is there an upstream or downstream hub, with horizontal competitors forming the spokes? (2) Is information exchanged between the hub and spokes? (3) Is this information of the sort that, if exchanged between horizontal competitors, could give rise to coordination on future pricing, output, or anti-competitive OECD (n 5) 2. Perinetto (n 7) 315. 129 ibid 316. 130 This is consistent with an economic approach to competition law enforcement. See Sahuguet and Walckiers (n 7) 711 (‘From an economics perspective, there is not always an indisputable motive to classify hub-and-spoke agreements as mainly vertical with a horizontal effect, or mainly horizontal with the involvement of a supplier’). 131 Amore (n 5) 29. 132 ibid 48. 133 ibid. 134 Odudu (n 7) 215. 127 128

186  Research handbook on cartels strategies? (4) Did the hub merely direct the spokes without their agreement to be so directed? (5) Is there evidence to suggest that the spokes acted in the belief or knowledge that the other spokes would do likewise?

11. Algorithmic tacit collusion1 Ariel Ezrachi and Maurice E. Stucke

I. INTRODUCTION The development of advanced algorithms and artificial intelligence raises many challenging legal and ethical questions about the relationship between humans and computers, humans’ control – or lack of it – over computers, and accountability for the computers’ activities. One area which has attracted attention has been the possible effect algorithms may have on market dynamics, and more specifically the way they could be used, or abused, to foster collusion and alignment of price without triggering intervention under current laws. In our earlier writing, we outlined four key scenarios where algorithms may be used to facilitate collusion.2 In 2016 we provided further context and analysis in our book Virtual Competition: The Promise and Perils of the Algorithm-Driven Economy.3 We developed our themes further in submissions to the UK House of Lords4 and OECD.5 Broadly, we have gleaned general consensus over our first two scenarios: Messenger (where algorithms help humans expressly collude) and Hub-and-Spoke (where a common intermediary, which provides the algorithm and the pricing decision mechanism, could facilitate price-fixing).6 Indeed, the European Commission (‘the Commission’) and United States antitrust authorities, among others, raised concerns that algorithms could facilitate collusion,7 and 1 This chapter is based largely upon A. Ezrachi and M. Stucke, ‘Sustainable and Unchallenged Algorithmic Tacit Collusion’ (2020) 17 Nw. J. Tech. & Intell. Prop. 217. 2 A. Ezrachi and M. Stucke, ‘Artificial Intelligence & Collusion: When Computers Inhibit Competition’, Oxford Legal Studies Research Paper No. 18/2015, University of Tennessee Legal Studies Research Paper No. 267 https://​ssrn​.com/​abstract​=​2591874 [accessed 2 March 2022]. 3 A. Ezrachi and M. Stucke, Virtual Competition: The Promise and Perils of the Algorithm-Driven Economy (Harvard University Press, 2016). 4 A. Ezrachi and M. Stucke, ‘Online Platforms and the EU Digital Single Market’, prepared for the UK House of Lords, Internal Market Sub-Committee (16 October 2015). 5 See https://​one​.oecd​.org/​document/​DAF/​COMP/​WD(2017)25/​en/​pdf [accessed 2 March 2022]. 6 See, e.g., Case C-434/15 Asociación Profesional Elite Taxi v Uber Systems Spain SL, ECLI:​EU:​ C:​2017:​364, Opinion of AG Szpunar, n 23; and Meyer v Kalanick, 174 F. Supp. 3d 817 (SDNY 2016) 822–27, reconsideration denied in part, 185 F. Supp. 3d 448 (SDNY 2016). 7 See, e.g., ‘Deputy Assistant Attorney General Richard A. Powers Delivers Remarks At Cartel Working Group Plenary: Big Data and Cartelization, 2020 International Competition Network Annual Conference’ (Washington DC, 17 September 2020) www​.justice​.gov/​opa/​speech/​deputy​-assistant​ -attorney​-general​-richard​-powers​-delivers​-remarks​-cartel​-working​-group [accessed 2 March 2022]; ‘Opening Remarks of FTC Commissioner Rohit Chopra Future of Work Roundtable US House of Representatives Committee on Education & Labor’ (Washington DC, 16 October 2019) www​.ftc​.gov/​ system/​files/​documents/​public​_statements/​1552143/​chopra​_​-​_opening​_remarks​_before​_committee​_on​ _education​_labor​_future​_of​_work​_roundtable​_10​-16​-19​.pdf [accessed 3 March 2022] 2; ‘Algorithms and Collusion – Note from the European Union’ (DAF/COMP/WD(2017)12, OECD, 14 June 2017) 7; ‘Algorithms and Collusion – Note by the United States’ (DAF/COMP/WD(2017)41, OECD, 26 May 2017) 6. That said, it has been acknowledged that, if the competitors independently and unknowingly

187

188  Research handbook on cartels have opened investigations on these scenarios.8 Most policymakers recognize how ‘pricing algorithms may make price fixing attempts more frequent and potentially more difficult to detect’.9 Most say ‘with confidence […] that the rise of pricing algorithms and AI software will require changes in our enforcement practices’; and most would agree that enforcers ‘need to understand how algorithms and AI software work in particular markets’.10 What have sparked debate, however, are our third and fourth scenarios, namely Tacit Collusion on Steroids – The Predictable Agent and Artificial Intelligence, God View, and the Digital Eye. In our third scenario, we noted how, already today, companies could unilaterally use algorithms with the intent to facilitate conscious parallelism. In our fourth scenario we predicted that, in the future, algorithms may arrive at this anticompetitive outcome on their own. Our Predictable Agent and Digital Eye categories raise significant policy issues, including: ● Does our current antitrust policy towards conscious parallelism apply when price optimization algorithms enhance firms’ ability to tacitly collude? ● Is the legal concept of agreement outdated for computer algorithms? ● Are our current antitrust laws sufficient to deter and prevent tacit algorithmic collusion? ● How can the agencies identify when algorithmic collusion occurs, especially when pricing is dynamic? ● What additional measures should be considered to reduce the additional risks associated with the industry-wide use of price optimization algorithms? ● In what ways should firms be obligated to integrate ethics and legality into a computer program? ● Should companies have an affirmative duty to program the computers so as to not tacitly collude? While there is little controversy that tacit collusion is generally beyond the reach of the competition laws of many jurisdictions, including the United States and European Union, some have questioned the likelihood of tacit collusion in either the brick-and-mortar economy or the digital economy. They argue that tacit algorithmic collusion should not pose any concern because collusion is unsustainable without communications.11 The issue is whether companies adopted the same or similar pricing algorithms, this would be ‘unlikely to lead to antitrust liability even if it makes interdependent pricing more likely’: ‘Algorithms and Collusion – Note by the United States’ ibid 6. An interesting issue is whether the competitors would be liable if they intentionally but unilaterally adopted the same algorithm knowing that this would make interdependent pricing more likely. 8 See, e.g., D. Mandrescu, ‘When Algorithmic Pricing Meets Concerted Practices – The Case of Partneo’ (CoRe Blog, 7 June 2018) www​.lexxion​.eu/​en/​coreblogpost/​when​-algorithmic​-pricing​ -meets​-concerted​-practices​-the​-case​-of​-partneo/​[accessed 3 March 2022]; and T. Bergin and L. Frost, ‘Software and Stealth: How Carmakers Hike Spare Parts Prices’ (Reuters, 4 June 2018) www​.reuters​ .com/​article/​autos​-software​-pricing/​rpt​-insight​-software​-and​-stealth​-how​-carmakers​-hike​-spare​-parts​ -prices​-idUSL5N1T60H9 [accessed 3 March 2022]. No formal findings, however, have been found in these cases against the respective carmakers or Accenture. 9 T. McSweeny, Commissioner, US Federal Trade Commission, ‘Algorithms and Coordinated Effects’, University of Oxford Centre for Competition Law and Policy (22 May 2017) www​.ftc​.gov/​ system/​files/​documents/​public​_statements/​1220673/​mcsweeny​_​- _oxford_cclp_remarks_-_algorithms_ and_coordinated_effects_5-22-17.pdf [accessed 3 March 2022]. 10 ibid. 11 U. Schwalbe, ‘Algorithms, Machine Learning, and Collusion’ (1 June 2018) https://​ papers​ .ssrn​.com/​sol3/​papers​.cfm​?abstract​_id​=​3232631 [accessed 3 March 2022]; T. Schrepel, ‘Here’s

Algorithmic tacit collusion  189 in concentrated industries ripe for tacit collusion would have the incentive and ability to develop pricing algorithms for that purpose. Some economists have argued that tacit collusion with three or more rivals – whether by algorithms or humans – is unlikely, as the ‘coordination problems are hard to solve without communication, even in simple static games’.12 According to this view, since algorithms cannot communicate to resolve this coordination problem, they cannot tacitly collude. And because pricing algorithms cannot tacitly collude, the antitrust laws – developed in the old economy – suffice for the digital economy. In this chapter, we explore their criticism and examine why it has not slowed the enforcers’ interest and momentum to tackle the policy issues underlying tacit algorithmic collusion. Indeed, the criticism reveals the widening divide between the law and market realties confronted by enforcers and courts on the one hand, and this economic viewpoint on the other hand. In Section II we outline the theory and the way in which pricing algorithms, in specific market conditions, may foster conscious parallelism. Sections III and IV next consider two areas that have attracted attention. In Section III, we tackle the instability of tacit collusion. Some argue that, absent some communication, tacit collusion is inherently unsustainable. This belief is based on experimental economics and the difficulty of sustaining tacit collusion under certain laboratory conditions. According to this view, the model of tacit collusion will rarely manifest itself in the real world without some supporting communication. The argument goes that this reality should subject ‘facilitated tacit collusion’ to the key EU antitrust law – Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’) – and the key US antitrust provision – Section 1 of the Sherman Act – and resolve concerns as to parallel behaviour that may seemingly escape antitrust scrutiny. Here we see how some economic observations diverge from antitrust law and enforcement policies. When observing the market reality, courts and enforcers on both sides of the Atlantic have seen in the brick-and-mortar economy durable tacit collusion that seemingly occurs without any human communication. Absent evidence of any agreement, the enforcers and courts say that the tacit collusion is legal. Because the conduct is otherwise legal, the primary mechanism to prevent tacit collusion is merger review. Enforcers, when appraising proposed acquisitions, may block mergers that significantly increase the risk of tacit collusion. They expect ‘industry awareness’ to allow conscious parallelism to materialize post-merger without any illicit communications. Put simply, enforcers and antitrust plaintiffs search hard for evidence of express collusion and communication. But they and courts ultimately recognize that anticompetitive parallel behaviour can arise without communications, and thus comfortably occur within the zone of legality. Indeed, the ‘pure’ model of tacit collusion happens with enough frequency that neither the EU nor the US law presume any illicit communication. If this debate was simmering before online commerce and the rise of pricing algorithms, the debate became quite heated over the feasibility of algorithmic tacit collusion. If the algorithms cannot communicate with each other, some argue that algorithmic tacit collusion is nothing to lose sleep over. But many enforcers are worried that tacit algorithmic collusion is likelier and

Why Algorithms Are NOT (Really) a Thing’ (May 2017) https://​ leconcurrentialiste​ .com/​ 2017/​ 05/​ 15/​algorithms​-based​-practices​-antitrust/​[accessed 3 March 2022]; and K.-U. Kühn and S. Tadelis, ‘Algorithm Collusion’ www​.cresse​.info/​wp​-content/​uploads/​2020/​02/​2017​_sps5​_pr2​_Algorithmic​ -Collusion​.pdf [accessed 3 March 2022]. 12 Kühn and Tadelis (n 11); see also Schwalbe (n 11).

190  Research handbook on cartels harder to detect. Section IV thus addresses the debate as to the added risk offered by algorithms (without express communication). We note how humans may program algorithms to reflect the logic behind conscious parallelism – punish deviations and follow price increases. We note how the use of similar algorithms by different firms, and the ability to identify the strategies employed by others, may further stabilize conscious parallelism. Importantly, we explain that when executed carefully and absent illicit communication, these unilateral strategies would not trigger antitrust intervention under current laws. As part of this discussion, we also consider possible future technologies and the capacity of self-learning algorithms to adopt a strategy, which may lead to price increases (absent illegal collusion). The question here is whether, in some future markets, tacit collusion could be sustained without human intervention. This issue is both timely and important. If an antitrust agency accepts the view that tacit collusion is impossible without human communications, then it need not assess the risk of algorithmic tacit collusion. This can play out in two ways. First, rather than keep a close eye on these technological developments and consider potential policy responses, the enforcer would, as some urge, do nothing. It won’t develop algorithmic tacit collusion incubators or conduct market inquiries. It won’t even distinguish between legitimate human tacit collusion and enhanced algorithmic tacit collusion. Nor would it consider what forms of enhancement may be caught as facilitating practices or signalling, or which action may qualify as collusion.13 In short, the agency would continue with its leniency programme for price fixers14 and sniff out cases where humans still conspire. Second, the agency’s merger review will remain incomplete. A primary way to deter tacit collusion is merger review. The agencies lack good predictive models of when a merger significantly increases the likelihood of tacit or express collusion. As one economist explained it to the entering Honors Program lawyers at the US Department of Justice Antitrust Division, ‘the merger occurs and s*** happens’. Not surprisingly, merger review in recent decades has primarily focused on unilateral effects,15 which are relatively easier to model and estimate. But as more markets become more concentrated and more susceptible to tacit collusion, the harm from ignoring (or downplaying) this risk in merger review increases.

II.

ALGORITHMIC TACIT COLLUSION – THE BASE CONDITIONS

Let us first consider the general consensus on tacit collusion. Everyone agrees that it is a challenging area for antitrust enforcement, as it leads to an anticompetitive outcome (namely higher prices, reduced output or allocated markets) without any illegal agreement among competitors.16 As the OECD noted, ‘Although there is great variance in how jurisdictions 13 J. Harrington, ‘Developing Competition Law for Collusion by Autonomous Price-Setting Agents’ (22 August 2017) https://​ssrn​.com/​abstract​=​3037818 [accessed 2 March 2022]. 14 US Department of Justice, Antitrust Division, Corporate Leniency Policy (10 August 1993) www​ .justice​.gov/​atr/​leniency​-program [accessed 2 March 2022]. 15 See, e.g., M. Coate, ‘The Merger Process in the Federal Trade Commission from 1989 to 2016’ (18 April 2017) https://​papers​.ssrn​.com/​sol3/​papers​.cfm​?abstract​_id​=​2955987 [accessed 3 March 2022]. 16 See, e.g., ‘Algorithms and Collusion – Background Note by the Secretariat’ (DAF/COMP/ WD(2017)4, OECD, 16 May 2017) 17; Brooke Group Ltd. v Brown & Williamson Tobacco Corp., 509

Algorithmic tacit collusion  191 interpret the notion of agreement, they traditionally require some sort of proof of direct or indirect contact showing that firms have not acted independently from each other (the so-called “meeting of the minds”)’.17 Tacit collusion has taken another dimension with the proliferation of pricing algorithms. Many competition authorities recognize the risk that algorithms can facilitate and enhance tacit collusion. The OECD in 2016, for example, commented that these strategies ‘may pose serious challenges to competition authorities in the future, as it may be very difficult, if not impossible, to prove an intention to coordinate prices, at least using current antitrust tools’.18 With the industry-wide use of computer algorithms and artificial intelligence, the concern is that algorithmic tacit collusion can arise in markets where such collusion previously would have been unstable. The OECD in 2017 reached the following two conclusions: Firstly, algorithms are fundamentally affecting market conditions, resulting in high price transparency and high-frequency trading that allows companies to react fast and aggressively. These changes in digital markets, if taken to a certain extent, could make collusive strategies stable in virtually any market structure. Secondly, by providing companies with powerful automated mechanisms to monitor prices, implement common policies, send market signals or optimise joint profits with deep learning techniques, algorithms might enable firms to achieve the same outcomes of traditional hard core cartels through tacit collusion.19

Similar concerns as to the possible use of algorithms to sustain tacit collusion have been raised by policymakers and competition agencies (among them, Germany, Italy, France, the United Kingdom, Russia, Israel and Australia).20 Algorithmic tacit collusion – that is, the use of algorithms to execute unilateral and rational reaction to market characteristics that reflect interdependence – will not affect every market, or even most. As Virtual Competition explores, one would expect it in markets with several important characteristics. First, algorithmic tacit collusion likely would arise in concentrated markets involving homogenous products where the algorithms can monitor to a sufficient degree the competitors’ pricing, other key terms of sale and any deviations from the current US 209 (1993); and R.S. Khemani and D.M. Shapiro, Glossary of Industrial Organisation Economics and Competition Law (OECD, 1993) www​.oecd​.org/​dataoecd/​8/​61/​2376087​.pdf [accessed 3 March 2022]. 17 ‘Algorithms and Collusion – Background Note by the Secretariat’ (n 16) 17. 18 ‘Big Data: Bringing Competition Policy to the Digital Era’ (DAF/COMP(2016)14, OECD, 27 October 2016) https://​one​.oecd​.org/​document/​DAF/​COMP(2016)14/​en/​pdf [accessed 3 March 2022] para 81. 19 ‘Algorithms and Collusion – Background Note by the Secretariat’ (n 16) 49–50. 20 See, e.g., German Monopolies Commission (Monopolkommission), Biennial Report XXII: Competition 2018 (3 July 2018); ‘The French Autorité de la Concurrence and the German Bundeskartellamt Launch a Joint Project on Algorithms and Their Implications on Competition’ (19 June 2018) www​.bundeskartellamt​.de/​SharedDocs/​Meldung/​EN/​Pressemitteilungen/​2018/​19​_06​ _2018​_Algorithmen​.html [accessed 3 March 2022]; ‘Algorithms and Collusion – Note from Italy’ (DAF/COMP/WD(2017)18, OECD, 2 June 2017) 2; and Competition and Markets Authority, ‘Pricing Algorithms – Economic Working Paper on the Use of Algorithms to Facilitate Collusion and Personalised Pricing’ (CMA94, 8 October 2018) https://​assets​.publishing​.service​.gov​.uk/​government/​uploads/​ system/​uploads/​attachment​_data/​file/​746353/​Algorithms​_econ​_report​.pdf [accessed 3 March 2022]; www​.oecd​.org/​competition/​algorithms​-and​-collusion​.htm [accessed 3 March 2022]; www​.accc​.gov​ .au/​speech/​the​-accc’s​-approach​-to​-colluding​-robots [accessed 3 March 2022]; and www​.publications​ .parliament​.uk/​pa/​ld201516/​ldselect/​ldeucom/​129/​12908​.htm [accessed 3 March 2022] paras 178–79.

192  Research handbook on cartels equilibrium.21 Software may be used to report and take independent action when faced with a rival’s deviation, be it from the supra-competitive or recommended retail price. Conscious parallelism would be facilitated and stabilized to the extent that: (i) these the rivals’ reactions are predictable; or (ii) through repeated interactions, the firms’ pricing algorithms ‘could come to “decode” each other, thus allowing each one to better anticipate the other’s reaction’.22 As the OECD observed: The increase of market transparency is not only a result of more data being available, but also of the ability of algorithms to make predictions and to reduce strategic uncertainty. Indeed, complex algorithms with powerful data mining capacity are in a better place to distinguish between intentional deviations from collusion and natural reactions to changes in market conditions or even mistakes, which may prevent unnecessary retaliations.23

A second important market condition is that once deviation (for example, discounting) is detected, a credible deterrent mechanism exists.24 Unique to an algorithmic environment is the speed of retaliation.25 Computers can rapidly police deviations and calculate the profit implications of myriad moves and counter-moves to punish deviations.26 The speed of calculated responses effectively deprives discounting rivals of any significant sales. The speed also means that the tacit collusion can be signalled in seconds. The greater the improbability that the first-mover will benefit from its discounting, the greater the likelihood of tacit collusion.27 Thus, if each algorithm can swiftly match a rival’s discount and eliminate its incentive to discount in the first place, the ‘threat of future retaliation keeps the coordination sustainable’.28 Noteworthy are observations made by the European Commission in its 2015–16 e-commerce sector inquiry: About half of the retailers track online prices of competitors. In addition to easily accessible online searches and price comparison tools, both retailers and manufacturers report about the use of specific price monitoring software, often referred to as ‘spiders’, created either by third party software specialists or by the companies themselves. This software crawls the internet and gathers large amounts of price related information. 67% of those retailers that track online prices use (also) automatic software programmes for that purpose. Larger companies have a tendency to track online prices of competing retailers more than smaller ones […] some software allows companies to monitor several hundred

Guidelines on the Assessment of Horizontal Mergers under the Council Regulation on the Control of Concentrations between Undertakings [2004] OJ C31/3 (‘the EU Merger Guidelines’) para 41; and ‘Algorithms and Collusion – Note from Singapore’ (DAF/COMP/WD(2017)24, OECD, 31 May 2017) 2. 22 ‘Algorithms and Collusion – Note from the European Union’ (n 6) para 33. 23 ‘Algorithms and Collusion – Background Note by the Secretariat’ (n 15) 20. 24 The EU Merger Guidelines (n 21) para 41; and ‘Algorithms and Collusion – Note from the European Union’ (n 7) 8. 25 Contrast this with EU Merger Guidelines (n 21) para 53. 26 J. Priluck, ‘When Bots Collude’, The New Yorker (25 April 2015) www​.newyorker​.com/​business/​ currency/​when​-bots​-collude [accessed 2 March 2022]. 27 S. Hwang and S. Kim, ‘Dynamic Pricing Algorithm for E-Commerce’, in T. Sobh and K. Elleithy (eds), Advances in Systems, Computing Sciences and Software Engineering (Springer, 2006) 149–55; N. Abe and T. Kamba, ‘A Web Marketing System with Automatic Pricing’ (2000) 33 Computer Networks 775; and L.M. Minga, Y.Q. Fend and Y.J. Li, ‘Dynamic Pricing: E-Commerce-Oriented Price Setting Algorithm’ (2003) 2 International Conference on Machine Learning and Cybernetic 893. 28 EU Merger Guidelines (n 21) para 52. 21

Algorithmic tacit collusion  193 online shops extremely rapidly, if not in real time […] Alert functionalities in price monitoring software allow companies to get alerted as soon as a retailer’s price is not in line with a predefined price.29

A third condition is that ‘the reactions of outsiders, such as current and future competitors not participating in the coordination, as well as customers, should not be able to jeopardise the results expected from the coordination’.30 Thus, algorithmic tacit collusion will likely arise in concentrated markets where buyers cannot exert buyer power (or entice sellers to defect), sales transactions tend to be ‘frequent, regular, and relatively small’,31 and the market in general is characterized by high entry barriers. A fourth condition is that tacit collusion is more profitable than competition. The algorithm, in maximizing profits, ‘would need to decide that it is a better course of action than competitive pricing, especially if competitive pricing leads to drastically larger sales volumes’.32 When these conditions are present, tacit collusion is likelier. The stability needed for algorithmic tacit collusion is enhanced by the fact that computer algorithms are unlikely to exhibit human biases.33 Human biases, of course, may be reflected in the programming code. But biases will not necessarily affect decisions on a case-by-case basis: a computer does not fear detection and possible financial penalties or incarceration; nor does it respond in anger.34 ‘We’re talking about a velocity of decision-making that isn’t really human’, said Terrell McSweeny, a former Commissioner with the US Federal Trade Commission. ‘All of the economic models are based on human incentives and what we think humans rationally will do. It’s entirely possible that not all of that learning is necessarily applicable in some of these markets.’35 To be clear, no bright line exists as to when an industry becomes sufficiently concentrated for either express or tacit collusion.36 Indeed, competition agencies often struggle in predicting when a merger may facilitate tacit collusion. In addition, it is important to stress that the above phenomenon will affect a select number of markets. Still, when the above conditions

29 European Commission, Commission Staff Working Document – Preliminary Report on the E-Commerce Sector Inquiry (SWD(2016) 312, 15 September 2016) http://​ec​.europa​.eu/​competition/​ antitrust/​sector​_inquiry​_preliminary​_report​_en​.pdf [accessed 3 March 2022] paras 550–51. 30 EU Merger Guidelines (n 21) para 41. 31 Federal Trade Commission and US Department of Justice, Commentary on the Horizontal Merger Guidelines (2006) www​.justice​.gov/​atr/​file/​801216/​download [accessed 3 March 2022]. 32 ‘Algorithms and Collusion – Note from the European Union’ (n 6) 8. As the OECD noted, ‘market stagnation characterised by declining demand and the existence of business cycles may hinder collusion. This is because firms have strong incentives to profitably deviate when demand is high and reducing the costs of retaliation in future periods when demand is low’: ‘Algorithms and Collusion – Background Note by the Secretariat’ (n 16) 20. 33 EU Merger Guidelines (n 21) para 44; and ‘Algorithms and Collusion – Note from Singapore’ (n 21) 2. 34 M. Stucke and A. Ezrachi, ‘How Pricing Bots Could Form Cartels and Make Things More Expensive’ (Harvard Business Review, 27 October 2016) https://​hbr​.org/​2016/​10/​how​-pricing​-bots​ -could​-form​-cartels​-and​-make​-things​-more​-expensive [accessed 3 March 2022]. 35 D. Lynch, ‘Policing the Digital Cartels’ (Financial Times, 9 January 2017) www​.pros​.com/​about​ -pros/​news/​financial​-times​-policing​-digital​-cartels/​ [accessed 3 March 2022]. 36 Note, for example, research by Levenstein and Suslow, who offer several explanations for the lack of a clear empirical relationship between industry concentration and cartels involving express collusion: M. Levenstein and V. Suslow, ‘What Determines Cartel Success?’ (2006) 44(1) Journal of Economic Literature 43.

194  Research handbook on cartels are present, the risk of tacit collusion is high. Importantly, the nature of electronic markets, the availability of data, the adoption of similar algorithms by key providers and the stability and transparency they foster will likely push some markets that were just outside the realm of tacit collusion into interdependence.37 Indeed, software vendors are promoting their price optimization algorithms as a way to avoid price wars and increase prices and margins. Boomerang, for example, promotes how its price optimization software can ‘put an end to price wars before they even begin’.38 As the Italian Competition Authority observed, ‘a number of specialized software developers offer solutions than allow even small companies to implement “strategic” dynamic pricing strategies, offering tools to “auto-detect pricing wars” as well as to “help drive prices back up across all competition”’.39 Ultimately, we may see more instances in which similar pricing is not the result of fierce competition, nor the result of cartel activity, but rather the result of algorithmic tacit collusion. In those affected markets, one may witness the same result as express collusion, namely higher prices (than in a competitive setting), without this triggering antitrust intervention.

III.

THE (IN)STABILITY OF TACIT COLLUSION ABSENT COMMUNICATION

Algorithmic tacit collusion should not be seen as pervading the entire digital economy. It will likely arise in markets with the characteristics discussed in Section II. Some critics, however, have questioned the likelihood of sustainable algorithmic tacit collusion even in these markets. As we explain below, their arguments, however, have failed to persuade enforcers and courts with respect to tacit collusion in the brick-and-mortar economy. Nor are they likely to gain traction in the digital economy. In discounting the possibility of tacit collusion – whether by humans or algorithms – several economists point to earlier scholarship, which highlights the important role of communications in stabilizing and optimizing collusion. They argue that, while collusion without communication may be possible, it is highly unlikely. To their mind, the increase in transparency, speed in retaliation and frequency in contacts are insufficient, even under these market conditions. In markets with more than two companies, some kind of explicit coordination (such as communications) is needed to enter and sustain collusion. In extending the consensus that communication facilitates alignment (the exact level of communication needed remains unclear),40 and that complex market realities would make collusion, and tacit collusion, diffi37 One would expect tacit collusion to be feasible with a larger number of participants than commonly assumed. On the common market assumptions, see generally R. Selten, ‘A Simple Model of Imperfect Competition, Where Four Are Few and Six Are Many’ (1973) 2 International Journal of Game Theory 141; S. Huck, H.-T. Normann and J. Oechssler, ‘Two Are Few and Four Are Many: Number Effects in Experimental Oligopolies’ (2004) 53(4) Journal of Economic Behavior and Organization 435. 38 A. Sathe, ‘How Retailers and Brands Can Avoid the Race to the Bottom in Online Pricing’ (Internet Retailer, 9 July 2018) www​.digitalcommerce360​.com/​2018/​07/​09/​how​-retailers​-and​-brands​ -can​-avoid​-the​-race​-to​-the​-bottom​-in​-online​-pricing/​ [accessed 2 March 2022]. 39 ‘Algorithms and Collusion – Note from Italy’ (n 20) 3. 40 K.-U. Kühn, ‘Fighting Collusion by Regulating Communication Between Firms’ (2001) 16 Economic Policy 167; and Y. Awaya and V. Krishnay, ‘On Tacit versus Explicit Collusion’ (Working Paper, Penn State University, 2014).

Algorithmic tacit collusion  195 cult,41 they argue that absent communication, tacit collusion is unlikely. Their argument is that ‘firms are unlikely to develop a mutual understanding over a collusive strategy absent direct communication in the initiation phase’.42 According to this view, even in simple markets that exhibit the characteristics outlined in Section II, a coordination problem exists in markets with more than two rivals. This is so since the number of collusive equilibria present in a repeated game defies the simple alignment of prices.43 Accordingly, to increase the likelihood of sustained tacit collusion, one would require some form of communication either to kickstart stable tacit collusion, or to sustain it.44 The issue is principal and goes beyond the discussion of algorithmic collusion. This body of scholarship suggests that many times, tacit coordination is unlikely absent some form of illicit communication or centralized orchestration, even in markets with three rivals.45 These findings are often based on empirical observations under laboratory conditions, with perfect control and transparency over communications. Permitting the human subjects to communicate, even briefly, increased their ability to enter into and sustain both coordination and higher prices with higher numbers of participants. Absent communications, in these experiments, collusion was difficult, if not impossible, to reach and sustain. With the above in mind, these critics have argued that the debate over algorithmic tacit collusion is unwarranted. According to them, the unavoidable need for communication among firms would bring the parallel behaviour into the realm of antitrust enforcement and enable agencies to condemn it as an anticompetitive agreement or concerted practice under well-established case law. Thus, if algorithms do not (or cannot) ‘communicate’ with one another, then tacit algorithmic collusion is unlikely. Indeed, the degree of coordination required to align the algorithms would increase the risk of exposure and civil (and potentially criminal) liability. So, when we observe what appears to be tacit collusion in these markets, it is likely the result of illegal human communications. So why have these criticisms failed to persuade enforcers and courts with respect to tacit collusion in the brick-and-mortar economy, and why are they unlikely to gain traction in the digital economy?

41 For instance, where the environment is dynamic, demand is uncertain and competition is not limited to price. See E. Green, R. Marshall and L. Marx, ‘Tacit Collusion in Oligopoly’, in R. Blair and D.D. Sokol (eds), The Oxford Handbook of International Antitrust Economics: Volume 2 (Oxford University Press, 2014). 42 D. Byrne and N. de Roos, ‘Learning to Coordinate: A Study in Retail Gasoline’ (23 July 2018) https://​ssrn​.com/​abstract​=​2570637 [accessed 3 March 2022]. 43 On the role of communications, see J. Harrington, R. Hernan Gonzalez and P. Kujalc, ‘The Relative Efficacy of Price Announcements and Express Communication for Collusion: Experimental Findings’ (2016) 128 Journal of Economic Behavior & Organization 251; M. Fonseca and H.-T. Normann, ‘Explicit vs. Tacit Collusion – The Impact of Communication in Oligopoly Experiments’ (2012) 56(8) European Economic Review 1759; D. Cooper and K.-U. Kuhn, ‘Communication, Renegotiation, and the Scope for Collusion’ [2009] American Economic Journal: Microeconomics 6; J. Farrell and M. Rabin, ‘Cheap Talk’ (1996) 10(3) Journal of Economic Perspectives 103; and V. Crawford and J. Sobel, ‘Strategic Information Transmission’ (1982) 50(6) Econometrica 1431. 44 Independent of the discussion here, it has been shown that ‘after a period of collusion supported by regular communication, firms are able to maintain collusive prices even when communication is no longer possible’: Fonseca and Normann (n 43). 45 See, for example, Schwalbe (n 11).

196  Research handbook on cartels When competition agencies or courts observe conscious parallelism that yields supra-competitive pricing, they do not assume that the competitors must be communicating with each other to jump start or sustain the tacit collusion. The law in both the US and EU recognizes that, under certain market conditions, companies can behave as rational agents and adjust to market characteristics without any communications. The classic example is one gas station in a remote town silently reacting to the pricing of its competitors across the street. Such a phenomenon, while dampening price competition, is legal, and will not trigger intervention. As the US Supreme Court held: Tacit collusion, sometimes called oligopolistic price coordination or conscious parallelism, describes the process, not in itself unlawful, by which firms in a concentrated market might in effect share monopoly power, setting their prices at a profit-maximizing, supracompetitive level by recognizing their shared economic interests and their interdependence with respect to price and output decisions.46

Both EU and US antitrust law recognize that anticompetitive ‘behavior can sometimes be coordinated without any communication or other observable and reprehensible behavior’.47 That is why ‘[t]acit coordination is feared by antitrust policy even more than express collusion, for tacit coordination, even when observed, cannot easily be controlled directly by the antitrust laws’.48 In recognizing this possibility, antitrust plaintiffs in the EU and US can only attack this tacit collusion indirectly. One way is for the Federal Trade Commission (‘FTC’) to attack practices that facilitate tacit collusion under its broader powers under Section 5 of the FTC Act. Another way is to target mergers that foster tacit collusion, precisely because it can be accomplished without any communications or agreement among rivals.49 We thus observe a gap between the law and the criticism according to which communication is needed to enter into, or stabilize, conscious parallelism, and industry awareness will not suffice to support a common strategy. The law posits that anticompetitive parallel behaviour among few firms can naturally occur in markets with the conditions outlined in Section II. Indeed, it can occur with sufficient frequency in these markets that the law will not presume any underlying communications. (For if the courts believed that communications often accompanied conscious parallelism, a legal presumption would likely arise.50) This notion affects both merger review and other antitrust enforcement. In the case of ex ante merger review, the realization that tacit collusion may emerge when the market conditions in Section II are present will justify careful scrutiny of proposed transactions that would foster conscious parallelism. In the case of ex post antitrust enforcement, the realization that tacit collusion may emerge when market conditions are present may provide an explanation to the parallel conduct and bring it outside the scope of Section 1 of the Sherman Act and Article 101 TFEU. Accordingly, even when private plaintiffs, the DOJ or European agencies have ample evidence of anticompetitive parallel behaviour, that in itself will not serve as proof of an agreement or illicit concerted practice, when the market conditions for tacit collusion are

46 Brooke Group v Brown & Williamson Tobacco Corp., 509 US 209 (1993) 224, 227. See also FTC v H.J. Heinz Co., 246 F.3d 708 (DC Circuit, 2001) 725. 47 City of Columbia v Omni Outdoor Advert., Inc., 499 US 365 (1991) 396 n 10. 48 Heinz, 246 F.3d 708 (2001) 725. 49 ibid. 50 Eastman Kodak Co. v Image Tech. Servs., Inc., 504 US 451 (1992), 466–67.

Algorithmic tacit collusion  197 present.51 Courts instead will assume that tacit collusion is likely and will require additional proof which include evidence of illicit communication. It is only when parallel behaviour cannot be explained as the outcome of tacit collusion (or due to other factors) that it may serve as proof of illegal collusion. As the European Court of Justice held: Although parallel behaviour may not by itself be identified with a concerted practice, it may however amount to strong evidence of such a practice if it leads to conditions of competition which do not correspond to the normal conditions of the market, having regard to the nature of the products, the size and number of the undertakings, and the volume of the said market.52

It is for the competition agency and private plaintiff to establish that no other explanation for the parallel behaviour is present. In doing so, it should also consider whether the market may display the conditions for tacit collusion which could explain the parallel behaviour. And so, the case law puts the onus on the antitrust plaintiff to prove the implausibility of rational unilateral reaction to market characteristics. One example is CISAC v Commission, where the EU General Court quashed a finding by the European Commission that parallel behaviour between collecting societies was the result of illegal collusion with the aim of dividing the market.53 The Court held that the Commission did not establish, to the requisite legal standard, the existence of collusion between the collecting societies to fix the national territorial limitations. The evidence relied upon by the Commission was not sufficient to render implausible the explanation that the national territorial limitations were the result of individual, carefully considered and rational decisions on a practical and economic level, given the specific conditions of the market, and not the result of a concerted practice. The Court held that ‘the Commission must show precise and consistent evidence in order to establish the existence of the infringement’.54 Indeed, it is settled case law that where the Commission’s reasoning is based on the supposition that the facts established in its decision cannot be explained other than by concentration between the undertakings, it is sufficient for the applicants to prove circumstances which cast the facts established by the Commission in a different light and thus allow another explanation of the facts to be substituted for the one adopted by the Commission.55

Thus, the case law accepts that, absent proof of express collusion or communication, parallel action and tacit collusion may be the only explanation of the market outcome. Consumers may be harmed due to higher prices, yet the law cannot condemn the parallelism as illegal. In other words, the courts and agencies accept that tacit collusion is not only legal, but likely and sustainable in concentrated industries. Absent proof of an agreement, the plaintiff cannot challenge the anticompetitive conduct.

51 See, e.g., Bell Atl. Corp. v Twombly, 550 US 544 (2007) 554; and Harlem River Consumers Co-op., Inc. v Associated Grocers of Harlem, Inc., 408 F. Supp. 1251 (SDNY, 1976) 1278. 52 Case 48/69 Imperial Chemical Industries (ICI) v Commission (Dyestuffs) [1972] ECR 619, para 66. 53 Case T‑442/08 CISAC v Commission ECLI:​EU:​T:​2013:​188. 54 ibid para 96. 55 ibid para 99, citing Joined Cases T‑305/94 etc Limburgse Vinyl Maatschappij and others v Commission [1999] ECR II‑931.

198  Research handbook on cartels One interesting example is the United States Court of Appeals for the Seventh Circuit, which in 2015 explored price alignment without any actual communications among the parties. The opinion is noteworthy as its author Judge Richard Posner, in his earlier writings, thought that it was ‘improbable that prices could long be maintained above cost in a market, even a highly oligopolistic one, without some explicit acts of communication and implementation’.56 Nonetheless, writing for the Seventh Circuit, Judge Posner accepted the notion that anticompetitive tacit collusion can occur without any such communication: As for the apparent anomaly of competitors’ raising prices in the face of falling costs, that is indeed evidence that they are not competing in the sense of trying to take sales from each other. However, this may be not because they’ve agreed not to compete but because all of them have determined independently that they may be better off with a higher price. That higher price, moreover – the consequence of parallel but independent decisions to raise prices – may generate even greater profits (compared to competitive pricing) if costs are falling, provided that consumers do not have attractive alternatives.57

In this case, the action taken by the companies was deemed unilateral and reflected an economic rationale, in light of each firm’s demand function. The Seventh Circuit recognized that anti-competitive pricing could arise from purely tacit collusion: ‘There isn’t even evidence that [an employee of the defendant] had ever communicated on any subject with any employee of any of the other defendants’.58 As the court noted: [T]he Sherman Act imposes no duty on firms to compete vigorously, or for that matter at all, in price. This troubles some antitrust experts, such as Harvard Law School Professor Louis Kaplow, whose book Competition Policy and Price Fixing (2013) argues that tacit collusion should be deemed a violation of the Sherman Act. That of course is not the law, and probably shouldn't be. A seller must decide on a price; and if tacit collusion is forbidden, how does a seller in a market in which conditions (such as few sellers, many buyers, and a homogeneous product, which may preclude nonprice competition) favor convergence by the sellers on a joint profit-maximizing price without their actually agreeing to charge that price, decide what price to charge?59

The courts thus assume that ‘competitors in concentrated markets watch each other like hawks’.60 Each competitor will copy or respond to competitive responses without necessarily communicating with one another. And ‘it is not a violation of antitrust law for a firm to raise its price, counting on its competitors to do likewise (but without any communication with them on the subject) and fearing the consequences if they do not’.61 So how does one reconcile the views of the courts and enforcers on the one hand and the discrete subset of economists on the other hand? One explanation is that the case law is simply wrong. Tacit collusion is unlikely and communications are occurring, but the colluders are effectively covering their tracks. We are presented with a case of a Type II error (false negative) where courts are reaching a negative result (dismissing cases) when they should be reach R. Posner, ‘Oligopoly and the Antitrust Laws: A Suggested Approach’ (1969) 21 Stan. L. Rev. 1562, 1574. 57 In re Text Messaging Antitrust Litig., 782 F.3d 867 (7th Circuit, 2015) 871–72. 58 ibid 872. 59 ibid 873–74. 60 ibid 875. 61 ibid 876. 56

Algorithmic tacit collusion  199 ing a positive one (finding liability). While economists doubt the ability to enter and sustain conscious parallelism, the law assumes that it is possible without illicit communications and does not intervene. The problem is that if one were to reject the prevailing legal viewpoint, we may quickly shift to a Type I error (false positive), where courts reach a positive result (finding the defendants liable for price-fixing) when they should reach a negative one (finding the defendants not liable because they never agreed with one another). All the plaintiff would have to show in markets with more than two competitors is an anticompetitive outcome – whether by tacit or express collusion. If anticompetitive conscious parallelism/tacit collusion is considered implausible without communication, the court would infer communications among the competitors. Once the court makes this inference, it is a small step to infer from the unobserved communications – along with the observed anticompetitive behaviour – an agreement among the rivals, and thus liability under EU and US law. Under such economic theory, the distinction between express and tacit collusion would fade as the agencies, antitrust plaintiffs and courts would assume an illegal agreement whenever observing conscious parallelism with anticompetitive outcomes.62 This, of course, would send shivers through the defence bar and their clients. Courts would presume that firms communicated, even when they haven’t. And how would they prove that they did not communicate? To avoid prosecution, firms will be required to operate irrationally in the market. A second explanation focuses on the misalignment between market realities and the experimental evidence upon which some economists rely. According to this explanation, economic experiments, carried out in laboratories with test subjects that interact over a period of a few hours (and with absolute control over communications), do not necessarily provide a good proxy for actual market behaviour, where awareness of interdependence exists absent illicit communications. The lab experiments do not reflect the interdependence of tacit collusion (and often discount the stability of actual collusion). In practice, firms can sustain tacit collusion without illicit communication as they operate with awareness that develops over time as to the market dynamics, and the benefit they may attain from parallelism and the avoidance of price wars. Firms that operate over long periods of time in these highly concentrated markets benefit from ‘industry awareness’ and understand the interdependence among their actions.63 That awareness emerges from a large number of abstract signals and observations, none of which triggers antitrust intervention, and can reduce uncertainty about future actions with long-lasting effects on coordination. This awareness may substitute for communication in laboratory settings and, at the very least, provide a plausible explanation to the durable conscious parallelism. 62 One potential rebuttal is that the antitrust plaintiffs should still have to hunt evidence of the communications. But why? When there is fire, why would the court require plaintiffs to prove independently the existence of smoke. If what you are observing – namely the anticompetitive coordination – is only possible with communications, then why would the courts require the plaintiff to expend time and resources to prove the communication? In the end, tacit collusion would always violate Section 1 of the Sherman Act and Article 101 TFEU. 63 See, for example, R. Dhalla and C. Oliver, ‘Industry Identity in an Oligopolistic Market and Firms’ Responses to Institutional Pressures’ (2013) 34(12) Organization Studies 1803; and M. Peteraf and M. Shanley, ‘Getting to Know You: A Theory of Strategic Group Identity’ (1997) 18(S1) Strategic Management Journal 165.

200  Research handbook on cartels Whichever explanation one favours, either way – when determining illegality – the law rejects the argument that communication is essential to establish tacit collusion. Quite the contrary, the law accepts that when market conditions for tacit collusion are present, conscious parallelism yielding anticompetitive outcomes may be sustained. Put simply, tacit coordination can exist ‘without any actual communication among competitors’.64 Returning to our discussion of algorithms, the same legal approach applies. So, when we raised our third and fourth scenarios of algorithmic tacit collusion, most enforcers, judges and lawyers recognized this possibility. It derived naturally from the law (and the market reality that they encountered over the decades). Moreover, other economists and game theorists accept tacit collusion without communications. But, if one assumes that the sceptics are right, then the gap between their beliefs and the law has widened. If the sceptics are right, humans have somehow successfully skirted antitrust liability for decades by disguising their communications. (One wonders why more cartels don’t adopt this stealth communication to avoid prosecution.) But because pricing algorithms cannot engage in this ‘stealth communication’, tacit algorithmic collusion should be impossible. If true, then whenever enforcers observe what appears to be conscious parallelism in markets dominated by pricing algorithms, they have a stronger case to argue that the humans must have communicated. For any other explanation is impossible. But the enforcers and courts, to date, have not adopted this presumption. They recognize the possibility of humans communicating (our first scenario), but also recognize humans and algorithms tacitly colluding (our third scenario) without explicit communications. Another anomaly emerges. If the critics are correct, in industries conducive to tacit collusion, firms would have little, if any, incentive to use pricing algorithms. These firms apparently have a golden ticket – they can charge supra-competitive prices through stealth human communications without the threat of antitrust liability. So, one would not expect industries characterized by such tacit collusion – like gas stations – to switch to pricing algorithms. For if they did, their prices and profits, without the stealth human communications, would likely drop. If the prices don’t drop, then one must assume, under this economic theory, that the firms, as in the Topkins case in the US65 and the Trod and GBE case in the UK,66 not only agreed to collude but also communicated with each other on the algorithms needed to implement and sustain their collusion. The level of communications should thus significantly increase as the firms switch to pricing algorithms. This assumption, however, requires enforcers and plaintiffs to hunt for communications that might not exist (if their theory is wrong).

64 Comment of the Federal Trade Commission, Proposed Confidentiality Determinations for Data Required Under the Mandatory Greenhouse Gas Reporting Rule and Proposed Amendment to Special Rules Governing Certain Information Obtained Under the Clean Air Act (30 September 2010, 2010 WL 9440202) 6; and In re High Fructose Corn Syrup Antitrust Litigation, 295 F.3d. 651 (7th Circuit, 2002) 654. 65 Plea agreement filed in United States v David Topkins (30 April 2015) www​.justice​.gov/​atr/​case​ -document/​file/​628891/​download [accessed 3 March 2022]. 66 The UK antitrust authority found in 2016 that Trod Limited and GB eye Limited infringed the competition law by agreeing that they would not, in certain specified circumstances, undercut each other’s prices for posters and frames sold on Amazon’s UK website and used pricing algorithms to facilitate their illegal agreement: www​.gov​.uk/​government/​news/​cma​-issues​-final​-decision​-in​-online​-cartel​ -case [accessed 3 March 2022].

Algorithmic tacit collusion  201 Thus, courts and competition authorities have largely marginalized the ‘tacit collusion is impossible without communications’ arguments. Indeed, as we discuss below, the emerging evidence justifies the courts’ and agencies’ scepticism of the sceptics.

IV.

THE (IM)PLAUSIBILITY OF ALGORITHMIC COLLUSION

Let us now move to a second, related issue which merits our attention – whether pricing algorithms can support anticompetitive conscious parallelism. If we accept the legal premise that conscious parallelism can occur without the communications that expose firms to antitrust liability, then the issue is whether algorithms can facilitate tacit collusion, and do so in a superior manner to that of humans. Using the criteria that the courts and agencies have applied for decades to explain why mergers may facilitate tacit collusion (and thus should be enjoined),67 the factors outlined in Section II, including the transparency of online markets and speed in responding to prevent the discounting firm from benefitting from the price cut, explain how the rational use of algorithms can increase instances in which tacit collusion is sustained. That use may provide a valid explanation for price alignment, even if that goes beyond the conditions of tacit collusion (for instance, additional sellers on the market). After all, under the current legal regime, a rational and permissible use of algorithms to unilaterally align prices may indeed establish parallelism in instances where humans may fail to do so. Importantly, this is not a revolution, but rather an evolution. It will not happen effortlessly, nor on all markets. Some contend that even if tacit collusion without communication is possible in the brick-and-mortar economy, that does not mean it is possible in industries where prices are set by algorithms (and perhaps for some firms by humans). The potentially large number of collusive equilibria presented by algorithms will likely decrease the likelihood of alignment in a repeated game – that is, algorithms are unlikely to obtain and sustain tacit collusion. In what follows, we consider this argument. Let us start by stating the obvious. The discussion does not concern ‘the rise of the machines’ or the creation of ‘evil’ algorithms that seek to profit at the expense of consumers. It is a somewhat less exciting debate about the possibility of algorithms, designed by humans, to offer a superior instrument for the optimization of pricing decisions, in markets that may support conscious parallelism. In that respect, one should note the limitations of the pricing algorithm. It will not necessarily change the basic characteristics of every market, nor will it overcome instability that results from lower barriers to entry, maverick companies or fierce competition. The tool at hand, at times, will amplify the power to monitor and punish in instances when humans see a benefit in sustaining parallel behaviour. When discussing the extension of the human will, it is helpful to distinguish between ‘simple’ adaptive algorithms that are programmed to monitor and ‘react’, and more sophisticated self-learning algorithms that rely on artificial intelligence to autonomously determine the optimal strategy. That simplified distinction is of value for our discussion, as it helps identify instances in which the human played a role in appreciating the benefit in parallelism (thus we have evidence of anticompetitive intent, but not necessarily communications), and instances in 67 See, e.g., US Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines (19 August 2010) §7; and EU Merger Guidelines (n 21) 5–18.

202  Research handbook on cartels which human involvement does not include an attempt to stabilize parallelism on the market. Let us explore both categories. A.

Simple Algorithms

Humans can program adaptive algorithms to reflect a pricing strategy which assumes interdependence on the market or is geared to push toward such interdependence. Humans identify the desirability of parallelism, and the particular market being ripe for conscious parallelism. Humans program the algorithm to reflect the unilateral actions of a rational agent in this tight oligopoly. Detection and punishment of deviation are imbedded into the pricing decision-making and so is the upward price adjustment that follows the price leader. In essence, tacit collusion happens at the human level and leads humans to utilize technology in order to stabilize it. As we saw in Section III, the law in the US and EU accepts that when market conditions are apt, such conscious parallelism can be established unilaterally, as humans develop an awareness to market dynamics and appreciate the interdependence among the rivals. As a result, the enforcers and private plaintiffs cannot legally challenge the new equilibrium (absent evidence of express collusion). As the algorithms are used unilaterally and as an extension of the human will, they will not be viewed, under the current antitrust policy, as facilitating practices that taint the behaviour as illicit collusion. That much is granted; but how likely is tacit algorithmic collusion without communications? To test the dynamic described above, let us start in the lab. Professors Nan Zhou, Li Zhang, Shijian Li and Zhijian Wang devised a Linear Extortion to Collusion Algorithm (LECA) which can ‘enforce its human rival to collude’.68 They then designed an algorithm– human game, where a human competed against the LECA algorithm for 600 rounds. In each round, the human and algorithm could decide the quantity of a product to produce. Importantly for our purposes, they could not otherwise communicate with each other. Nor did the human know of the algorithm’s pricing strategy. After they each selected a quantity of products they wanted to produce, they were told the human subject’s and algorithm’s profits. Over the first 300 iterations of the Cournot competition game,69 the humans learned that reducing quantity to reach the almost fully collusive level would secure the greatest profits. After learning this, the humans kept their quantity at the collusive level thereafter. In their algorithm–human duopoly market, the degree of tacit collusion rose to nearly 100 per cent in rounds 300 to 400. What is interesting is that the time to establish tacit collusion (about 400 rounds) in the algorithm–human experiment was quicker than the human–human collusion (about 800 rounds) experiments. From their experiments, the study’s authors concluded that, first, algorithms can facilitate tacit collusion more quickly and, second, there exist incentives for firms to use such algorithms in the market. That experiment, as the authors recognized, involved a duopoly. Now let us consider tacit collusion in markets with multiple competitors.

N. Zhou, L. Zhang, S. Li and Z. Wang, ‘Algorithmic Collusion in Cournot Duopoly Market: Evidence from Experimental Economics’ (21 February 2018) https://​ arxiv​ .org/​ pdf/​ 1802​ .08061​ .pdf [accessed 3 March 2022]. 69 On this concept, see W. Kenton, ‘Cournot Competition’ (Investopedia, 12 January 2018) www​ .investopedia​.com/​terms/​c/​cournot​-competition​.asp. 68

Algorithmic tacit collusion  203 Suppose an oligopolistic gas station market with limited transparency, that is, prices are only visible when reaching each gas station. In this market, customers can mitigate the search costs by asking friends about any available deals, visit a few gas stations and then support the one with the lowest price. Here, a gas station, by discounting, may increase its profits and develop a reputation for having a low (if not the lowest) price. At times, competitors, aware of the price reductions and promotions, would respond with their own initiative. While the gas prices are transparent, there is a lag for rivals to discover the lower price. (The rivals, after all, have to drive around town to monitor gas prices.) Their delayed response is likely to benefit the station with the reputation as a discounter. Under these market conditions, conscious parallelism is harder to sustain. The firms will likely compete as expected. We see here how markets ‘need to be sufficiently transparent to allow the coordinating firms to monitor to a sufficient degree whether other firms are deviating, and thus know when to retaliate’.70 This would be especially the case where customers are aware of the price, while competitors are not (for example, when there are significant and frequent discounts). When transparency and the rivals’ speed in responding to competitive behaviour increase in concentrated markets with homogeneous goods, so too does the risk of tacit collusion. With computerized pricing, the process may be faster and more stable. To foster parallelism, companies may adopt a pricing strategy which would be easy to decipher by competitors. Let us briefly illustrate with two examples. In 2012, petrol stations in Chile were required to post their fuel prices on a government website and to keep prices updated as they changed at the pump. An economic study found that this Chilean regulation softened rather than increased competition.71 The petrol stations’ margins increased by 10 per cent on average following the prices being posted on the government website.72 In Germany, the government suspected that an oligopoly of five firms – BP (Aral), ConocoPhillips (Jet), ExxonMobil (Esso), Shell and Total – dominated the off-motorway petrol station business.73 To promote competition, the government required the petrol stations to report to its government’s transparency unit any price changes for gasoline or diesel fuel in ‘real time’.74 The government’s transparency unit then transmitted the price data to consumers, with the aim that they could easily find the cheapest petrol nearby. Rather than lowering prices, the enhanced market transparency, one economic study found, actually increased prices

EU Merger Guidelines (n 21) para 49. F. Luco, ‘Who Benefits from Information Disclosure? The Case of Retail Gasoline’ (2019) 11(2) American Economic Journal: Microeconomics 277. 72 The softening of competition was common across brands and was not limited to a single Chilean city. Interestingly, although the stations’ margins increased across Chile, the effect was not uniform, varying from high-income to low-income areas; see ibid 278. 73 Bundeskartellamt, Fuel Sector Inquiry: Final Report (May 2011) www​.bundeskartellamt​.de/​ SharedDocs/​Publikation/​EN/​Sector​%20Inquiries/​Fuel​%20Sector​%20Inquiry​%20​-​%20Final​%20Report​ .pdf​?​_​_blob​=​publicationFile​&​v​=​14 [accessed 3 March 2022]. 74 R. Dewenter, U. Heimeshoff and H. Lüth, ‘The Impact of the Market Transparency Unit for Fuels on Gasoline Prices in Germany’ (May 2016) www​.dice​.hhu​.de/​fileadmin/​redaktion/​Fakultaeten/​ Wirtscha​ftswissens​chaftliche​_Fakultaet/​DICE/​Discussion​_Paper/​220​_Dewenter​_Heimeshoff​_Lueth​ .pdf [accessed 3 March 2022]. 70 71

204  Research handbook on cartels further. Compared to the control group, retail petrol prices increased by about 1.2 to 3.3 euro cents, and diesel increased by about 2 euro cents.75 Other studies also suggest that an increase in transparency can facilitate tacit collusion.76 First, these outcomes, which make sense under the legal standard, are harder to explain under the ‘no collusion absent communications’ theory. Under that economic theory, the government’s increase in transparency should not have prompted the rivals to increase prices further. Because, under the economic theory, sustaining tacit collusion among five competitors is implausible, the oligopolists, under the economic theory, must have been actively communicating to sustain their supra-competitive pricing. They conceivably would have communicated their dissatisfaction to each other after their daily drive. Rather, the result is consistent with the legal acknowledgement of sustained tacit collusion where each competitor watches the others like a hawk. To monitor pricing, the petrol station owners in Germany would drive past specified competitor petrol stations several times a day and note their prices. The monitored prices were then fed into the respective company’s electronic system. Generally, when one competitor increased petrol price, rivals would respond between three to six hours later.77 Now, with increased transparency from online pricing, the rivals can monitor and punish instantaneously. So, the increase in fuel prices was not the likely result of ‘communications’. Instead it likely reflects tacit collusion, where firms, aware of their interdependence, recognize that they will profit by acceding to the higher price rather than discounting. With pricing algorithms, the retaliation time is further reduced. As each firm taps into its rivals’ real-time pricing, no gas station likely profits by discounting. Given the velocity with which the pricing algorithms can adjust, each gas station is less likely to develop a reputation as a price discounter among its customers. Accordingly, the competitors will have less incentive to discount. On the flip side, the algorithms’ velocity of pricing decisions can shorten the time period for signalling price increases in other industries. Firms would no longer have to rely on lengthy (for example, 30-day) advanced price announcements, where they must wait and see what the competitive response is, to decide whether to raise prices (and to what extent). Computers can have multiple rounds whereby one firm increases prices and the rival computers respond immediately and without the risk that the firm that initiates the price increase will lose many customers to rivals. Essentially, companies may now need only seconds, rather than days, to signal price increases to foster tacit collusion. As we shift from a world where rivals drive around town to see the price that their rivals charge to one where pricing algorithms can achieve this within milliseconds, the human logic to maximize profits remains. Importantly, the algorithms help effectuate this logic. Needless to say, algorithms will not immunize market participants from disruptive technologies, entrants ibid. More generally, we also note another interesting study on the impact of price matching guarantee as stabilizing tacit collusive mechanism in petrol markets: L. Cabral, N. Dürr, D. Schober and O. Woll, ‘Learning Collusion: Theory and Evidence from a Gasoline Market Price Matching Guarantee’ (March 2018). 76 See, e.g., Byrne and de Roos (n 42); Project Update DNRME 18018-Variation 1: The Impact of MyFueINT on Retail ULP Prices in the Northern Territory (Griffith University, May 2018) www​ .parliament​.qld​.gov​.au/​Documents/​TableOffice/​TabledPapers/​2018/​5618T565​.pdf [accessed 3 March 2022]. 77 Dewenter et al (n 74). 75

Algorithmic tacit collusion  205 or mavericks. But absent such threats, the market participants can use pricing algorithms to sustain tacit collusion with higher profits (and do so without entering into any illicit communication or concerted practice). Humans may use additional means to further stabilize the conscious parallelism. They could, for example, limit variations in the design of the algorithms, making it easier to follow. Such unilateral moves are unlikely to trigger antitrust liability. Companies may invest in better tools to observe and imitate pricing decisions executed by other algorithms. Companies may, for example, introduce price matching guarantees to further support monitoring as deterrent mechanisms.78 The unilateral nature of the actions may well leave them outside the realm of Article 101 of TFEU, Section 1 of the Sherman Act and even Section 5 of the FTC Act.79 Going a step further, humans may use algorithms in a more aggressive way to decode the strategy used by competing algorithms and adjust accordingly.80 Depending on the technology used, this might trigger intervention – although, if used unilaterally, it remains open to argument that the decoding of information is not to be viewed as a communication or facilitating practice (and thus potentially illegal) but rather as unilateral (and legal) behaviour under the current law.81 To avoid the need to invest in decoding the competing algorithms, companies may adopt a different approach and use the same provider for their pricing algorithm, or the same provider for their dynamic pricing strategies. Returning to our example, several gas stations operating on a given market could use the same company for pricing decision-making. When multiple players use the same algorithm, data points and values, the likelihood for alignment increases. One example is the market for petrol in Rotterdam, the Netherlands, where a number of petrol stations, according to the Wall Street Journal, used the same provider – the Danish company a2i Systems – for advanced analytics to determine petrol prices.82 Importantly, one should note that the provision by the same company of dynamic pricing services, and the creation of a possible hub-and-spoke relationship, does not clearly infringe the competition laws. On its website, the company a2i Systems provides a case study to illustrate how it helped OK Benzin, Denmark’s leading petrol station owner, avoid a price war: ‘Between 2007 and 2012 the market was characterized by fierce competition and high volatility. At the peak there were 10 to 20 price changes a day, and the spread between the highest and the lowest price of the day could be up to 15 eurocent.’83 In enlisting a2i Systems, the leading retail network of approximately 700 petrol stations (which accounted for 25 per cent of the Danish retail fuel market) sought ‘to improve the pricing anal-

78 Price match may create an incentive to follow price increases by the price leader. See Cabral et al (n 75). 79 See, e.g., Ethyl Corp. v Fed. Trade Comm’n, 729 F.2d 128 (2nd Circuit, 1984) 139–40. 80 See M. Gal, ‘Algorithms as Illegal Agreements’ (2019) 34 Berkeley Technology Law Journal 67. See also B. Salced, ‘Pricing Algorithms and Tacit Collusion’ (Pennsylvania State University, 2015) http://​brunosalcedo​.com/​docs/​collusion​.pdf [accessed 3 March 2022]. 81 ‘Algorithms and Collusion – Note from the European Union’ (n 7) 8. 82 S. Schechner, ‘Why Do Gas Station Prices Constantly Change? Blame the Algorithm’ (Wall Street Journal, 8 May 2017) www​.wsj​.com/​articles/​why​-do​-gas​-station​-prices​-constantly​-change​-blame​-the​ -algorithm​-1494262674 [accessed 3 March 2020]. 83 ‘PriceCast Fuel Case Story’ http://​a2isystems​.com/​files/​pdf/​PriceCast​%20Fuel %20Case%20 Story%20('15).pdf [accessed 3 March 2022].

206  Research handbook on cartels ysis and decision process and optimize pricing according to their overall strategy in order to lower the cost of price wars or better yet, to avoid them’.84 As the Wall Street Journal reported, the complex algorithm operated by a2i Systems was tested against a control group which did not use the system to determine price. The result? ‘The group using the software averaged 5% higher margins.’85 For the petrol company, a2i Systems notes, this ‘means millions of Euros’ more annually.86 In essence, the a2i pricing algorithm lowered the cost and likelihood of price wars. Of course, this is not a case of a2i marketing its ability to coordinate a price-fixing cartel. That would subject it and the petrol stations in Europe to civil liability. Rather, it is about the unilateral use of a decision-making algorithm to soften competition. It is about using the a2i pricing algorithm to service multiple clients. The sharing of the same focal point, in our opinion, should raise concerns in such instances and call for some form of intervention. The hub-and-spoke algorithmic structure brings us further away from typical tacit collusion, but is yet to be challenged by competition agencies. It is important to stress that it differs from a cartel being facilitated by a hub-and-spoke structure.87 (The head of the DOJ in 2018 intimated a potential criminal case that may inform the legality of this practice.88) Indeed, it is an ‘incidental’ hub-and-spoke, which, while not driven by a cartel agreement, may nonetheless facilitate alignment. The UK Competition and Markets Authority (‘CMA’) expressed the greatest concern over this algorithmic hub-and-spoke structure ‘because it simply requires firms to adopt the same algorithmic pricing model’.89 As we indicated in Virtual Competition, such incidental hub-and-spoke, while not indicative of a cartel agreement, could indeed undermine competition. Let us move beyond hub-and-spoke, and note how algorithms may be used to amplify the effects of anticompetitive agreements. One example involves resale price maintenance (‘RPM’), which is where the manufacturer/distributor agrees with the retailer on what the minimum price should be for the manufacturer’s product. Historically the manufacturer would monitor and individually punish retailers that sold the manufacturer’s product below its suggested retail price. For example, after punishing retailer A, the manufacturer would voice its displeasure to retailers B, C and D. Punishing each offending retailer increases the manufacturer’s potential risks of antitrust liability, especially in jurisdictions where RPM is per se (or presumptively) illegal.90 But pricing algorithms can change that dynamic, to the detriment of consumers. The European Commission found in its e-commerce sector inquiry ‘increased use of automatic

ibid. ibid. 86 ibid. 87 See Interstate Circuit, Inc. v United States, 306 US 208 (1939). On hub-and-spoke cartels, see Chapter 10 in this volume. 88 See www​.broadcastingcable​.com/​news/​delrahim​-criminal​-case​-against​-anti​-competitive​-search​ -algorithms​-coming [accessed 3 March 2022]. 89 Competition and Markets Authority (n 20) para 5.35. 90 RPM is presumptively illegal in Europe and in some states in the US. RPM was per se illegal for nearly a century under the Sherman Act, until the Supreme Court in a controversial 5–4 decision, subjected it to a more deferential rule of reason standard: Leegin Creative Leather Products, Inc. v PSKS, Inc., 551 US 877 (2007). 84 85

Algorithmic tacit collusion  207 software applied by retailers for price monitoring and price setting’.91 Many, including the biggest online retailers, are using ‘pricing algorithms which automatically adapt retail prices to those of competitors’.92 In this environment, the manufacturer need not punish every offending retailer. Instead, the manufacturer would only have to punish one or two significant retailers that are discounting, and whose prices the other retailers’ pricing algorithms are tracking and matching. Once these discounters raise their prices, the other retailers’ pricing algorithms will automatically follow. The exposure to antitrust enforcement is reduced, due to the more limited communications. The Commission observed this anticompetitive dynamic in a 2018 vertical price-fixing case. As the Commission found, because many, including the biggest online retailers, were using pricing algorithms which automatically adapted the retail prices to those of competitors, the resale ‘pricing restrictions imposed on low pricing online retailers typically had a broader impact on overall online prices for the respective consumer electronics products’.93 In effect, the consumer electronics manufacturer only had to punish a few online discounters, and could be assured that many other retailers would automatically increase their prices. Thus, even in industries not susceptible to tacit collusion, one can obtain the same effect when manufacturers vertically fix prices with one significant retailer, and the other retailers’ pricing algorithms automatically follow suit. Consequently, the emerging evidence suggests that enforcers will likely uncover evidence of anti-competitive human intent in using relatively ‘simple’ algorithms to sustain tacit collusion, without any evidence of actual communications. After all, tech firms promote how their price optimization software can put an end to price wars before they even begin. B.

Artificial Intelligence

Now, let us turn to our fourth scenario, Digital Eye, where we raise the question of whether conscious parallelism could be established by self-learning algorithms without them reflecting the humans’ intention. Could algorithms that are based on reinforced learning provide a superior tool to sustain tacit collusion? And if so, when left to their own devices, might the pricing algorithms identify conscious parallelism as a superior strategy? We should start by stressing that the issue is not about algorithms conspiring against humans, but rather whether a self-learning price algorithm, programmed to optimize profit by interacting in a dynamic environment, may identify conscious parallelism as an optimal strategy. The question is whether in future markets, where the majority of dynamic pricing decisions will involve minimal human intervention, market equilibrium may be established above competitive levels – not as a result of express collusion, nor as a result of humans appreciating the benefits of tacit collusion (and programming their pricing algorithms accordingly), but rather as the result of rational action by independent learning algorithms which take account of various data points.

European Commission, ‘Antitrust: Commission Fines Four Consumer Electronics Manufacturers for Fixing Online Resale Prices’ (Press Release, IP/18/4601, 24 July 2018) http://​europa​.eu/​rapid/​press​ -release​_IP​-18​-4601​_en​.htm [accessed 3 March 2022]. 92 ibid. 93 ibid. 91

208  Research handbook on cartels No doubt much is still uncertain as to the capacity of future reinforced-learning or deep-learning algorithms to reach conscious parallelism with no human intervention. Doubts as to learning algorithms’ ability to sustain collusion refer to their increased sophistication, which would make alignment difficult. Doubts are also linked to the need and ability of algorithms to establish a hidden channel of communication which could address problems of entering and sustaining collusion.94 While acknowledging current uncertainty, competition agencies around the world are now looking into these developments. There is no need to be alarmed, but it is important to acknowledge that the tech industry is taking its first steps in this direction for its algorithms. From an enforcement perspective, and at a high level of simplification, one may envisage two outcomes. Outcome 1: If learning algorithms are incapable of autonomously reaching tacit collusion, humans in markets that tilt towards conscious parallelism would either train them to achieve that outcome or refrain from using them (as such use, absent any significant offsetting gains and efficiencies, would reduce profits). Accordingly, in a market where humans appreciate the benefits of interdependence, and can do so without infringing the competition laws, they would not introduce uncontrolled disruptors that could unleash a price war. They will continue using simple adaptive algorithms. Indeed, we have not found online any third party developer of pricing algorithms that promotes its algorithms’ ability to unleash and prevail in an all-out price war. If self-learning pricing algorithms reduced overall profits by destabilizing pre-existing tacit collusion, competitors would be unlikely to employ them. Thus, in industries already susceptible to tacit collusion, companies would ensure alignment of the learning algorithm with the overall strategy. They would be sure to exploit the freedom offered to them under the law and unilaterally use adaptive or simple algorithms. Under this scenario we return to our previous category of human-driven tacit collusion enhanced by algorithms. The question is whether such use should be condemned by competition law or remain unchallenged. Outcome 2: If, on the other hand, self-learning algorithms could solve the coordination problem, through trial and error, with no human intervention, then we face an additional complexity in the form of undetected and unchallenged conscious parallelism. In such a scenario algorithms will be able to learn through experimentation and shift, without the knowledge of the human executives, from competitive pricing rules to collusive pricing rules and sustain that new equilibrium. Several groups of economists and computer scientists are exploring this avenue. Research has already shown how, under certain conditions, reinforcement learning can sustain cooperation.95 Furthermore, learning algorithms were shown to gravitate towards conscious parallelism in simple oligopolistic settings.96 These observations support the possibility that self-learning algorithms may autonomously establish conscious parallelism, with no human For papers dismissing the possibility for algorithm-driven tacit collusion, see Schwalbe (n 11). See, for example, J. Crandall, M. Oudah, Tennom, F. Ishowo-Oloko, S. Abdallah, J.-F. Bonnefon, M. Cebrian, A. Shariff, M. Goodrich and I. Rahwan, ‘Cooperating with Machines’ (2018) 9 Nature Communications 233; and J. Leibo, V. Zambaldi, M. Lanctot, J. Marecki and T. Graepel, ‘Multi-Agent Reinforcement Learning in Sequential Social Dilemmas’ (2017) https://​arxiv​.org/​pdf/​1702​.03037​.pdf [accessed 3 March 2022]. 96 T. Klein, ‘Assessing Autonomous Algorithmic Collusion: Q-Learning under Sequential Pricing’ (Amsterdam Center for Law & Economics Working Paper No. 2018-05); and G. Tesauro and J. Kephart, 94 95

Algorithmic tacit collusion  209 input, in environments in which they operate in parallel (rather than only in a simplified environment in which they face a stable fixed-strategy opponent). With all the uncertainty and caveats in mind, let us briefly note observations by one group (Professors Calvano, Calzolari, Denicolò and Pastorello from the University of Bologna, European University Institute and Toulouse School of Economics) that have shown that self-learning algorithms can have the capacity to achieve coordination on the tacit collusive outcome.97 In experiments with two Q-learning pricing algorithms, tacit collusion emerged in more than 60 per cent of the cases, and at even higher levels following sufficient simulation. Importantly, these results were observed in a significantly rich environment with up to 100 price levels. As illustrated below (Figure 11.1), forcing a price deviation by one algorithm to the ‘Nash Price’ (the static equilibrium price which would emerge if there was no tacit coordination) led the other Q-learning algorithm to react. Subsequently both returned to the pre-existing price level which represents the tacit collusive equilibrium (which is above the competitive price, but below the monopolistic (cooperation) price).

Source: E. Calvano, G. Calzolari, V. Denicolò and S. Pastorello, ‘Q-Learning to Cooperate’ (presented at the NBER event on ‘Economics of Artificial Intelligence’, 13–14 September 2018).

Figure 11.1

‘Q-Learning to Cooperate’

In an extension of that experiment, the same group of scholars used three Q-learning algorithms (that is, more than what some argue is possible for tacit collusion without communica‘Pricing in Agent Economies Using Multi-Agent Q-Learning’ (2002) 5(3) Autonomous Agents and Multi-Agent Systems 289. 97 E. Calvano, G. Calzolari, V. Denicolò and S. Pastorello, ‘Algorithmic Pricing: What Implications for Competition Policy?’ (University of Bologna – CEPR, Toulouse School of Economics, 27 June 2018); and E. Calvano, G. Calzolari, V. Denicolò and S. Pastorello, ‘Artificial Intelligence, Algorithmic Pricing, and Collusion’ (2020) 110(10) American Economic Review 3267.

210  Research handbook on cartels tions) in a rich price environment. The group reported that it continued to observe conscious parallelism and increased profitability, with short learning times. In their experiments, the scholars observe how difficult it may be to detect such tacit algorithmic collusion: ‘What is most worrying is that the algorithms leave no trace of concerted action – they learn to collude purely by trial and error, with no prior knowledge of the environment in which they operate, without communicating with one another, and without being specifically designed or instructed to collude.’98 Researchers are continuing to experiment with the likelihood of tacit algorithmic collusion in even more complex environments – with increased and changing numbers of algorithms, increased sophistication of algorithms and increased price levels. Needless to say, these are still early days in the development of AI and its application to pricing decisions. Uncertainty still remains as to the operation of future markets, costs associated with the learning phase, the ability to simulate and operate in a multi-agent environment and the effects of increased algorithm complexity.99 Furthermore, developments in the ability of algorithms to signal,100 monitor, decode and communicate in stealth mode101 will affect any future equilibria. But we encourage researchers to continue to develop algorithmic tacit collusion incubators that model rich and realistic environments. What would be also interesting is if antitrust enforcers (or scholars) could use algorithms deployed in the field to see pricing levels (and margins) for particular products. It might be of interest if the agency could inquire into how algorithms responded when one competitor exited (or entered) the marketplace (perhaps informing future merger review).

V. CONCLUSIONS So why does this debate matter? Pricing algorithm suppliers tout as a benefit their clients avoiding price wars. If this is real, and not marketing hype, then there are significant potential profits from algorithms that can foster tacit collusion. This would represent an area ripe for further exploration by companies and developers of pricing algorithms, who at present benefit from an emerging gap in antitrust enforcement that may enable the attainment of higher profits (without the fear of antitrust liability, which includes, in the US, criminal fines, incarceration and trebled damages for the injured antitrust plaintiffs). That emerging gap merits closer consideration by competition agencies. But algorithmic tacit collusion can be even harder to detect – especially when the algorithms leave no trace of concerted action. As EU Commissioner Vestager noted, ‘[t]he trouble is, it’s not easy to know

98 E. Calvano, G. Calzolari, V. Denicolò and S. Pastorello, ‘Artificial Intelligence, Algorithmic Pricing, and Collusion’ (VOX, CEPR Policy Portal, 3 February 2019) https://​voxeu​.org/​article/​artificial​ -intelligence​-algorithmic​-pricing​-and​-collusion [accessed 3 March 2022]. 99 M. McGlohon and S. Sen, ‘Learning to Cooperate in Multi-Agent Systems by Combining Q-Learning and Evolutionary Strategy’ (2005) 1(2) International Journal on Lateral Computing 58. 100 Crandall et al (n 95). See also Gal (n 80). 101 M. Abadi and D. Andersen, ‘Learning to Protect Communications with Adversarial Neural Cryptography’ https://​arxiv​.org/​abs/​1610​.06918 [accessed 3 March 2022].

Algorithmic tacit collusion  211 exactly how those algorithms work. How they’ve decided what to show us, and what to hide. And yet the decisions they make affect us all.’102 If one accepts tacit coordination as a material risk in some susceptible industries, then the competition agencies must develop tools to assess (and deter) this risk.103 No doubt enforcement action at times will be challenging. After all, condemning rational reaction for market characteristics would, in itself, distort competition. Condemning it when it is assisted by bots may lead to a similar anomaly. Identifying, auditing or monitoring algorithms may be expensive and illusive. Using means to affect market transparency, undermine detection or delay reaction can undermine the essence of competition. These challenges should give us a pause. When considering any likely enforcement action, we must acknowledge the costs of over-intervention. Yet, the cost of under-intervention must also be acknowledged, especially when premised on the theory that tacit collusion is implausible without human communication. Efforts can focus on detection capacity. Market and sector investigations may be used to better understand industries and markets where algorithms may be used to align price.104 Another instrument, which we discuss elsewhere, may involve developing Algorithmic Collusion Incubators, which enable competition officials to test under what conditions tacit collusion occurs and the effects and likelihood of different counter-measures to destabilize this conscious parallelism.105 In addition, pre-emptive tools and regulations, such as the proposed Digital Market Act, may offer competition authorities more effective monitoring tools. In parallel to detection, there is room to consider updating current antitrust enforcement to capture tacit collusion which is facilitated by algorithms. A refinement of the approach to signalling may be a good place to start. Restrictions on certain market manipulations (through bots that underscore parallelism) may be another. The issue should be approached in a measured manner, as part of the everlasting adjustment of competition enforcement to market and technological reality. Failing to do so may well lead us to future markets where a competitive price is a mere illusion, and price optimization is used as code for tacit collusion’s supra-competitive profits. Increased awareness of the risks of algorithmic tacit collusion should also be addressed when assessing possible proposed merger transactions. As brick-and-mortar shops are closing at a faster rate, as sellers and buyers migrate to the online world and as technology, communications, big data and big analytics reach new highs, the effects of pricing algorithms will become more prominent. In the digitalized environment, tacit collusion might turn from being a mere outcome of market characteristics into a strategy. While the phenomenon of tacit collusion is limited to markets with given characteristics, it nonetheless is likely to exhibit greater durability in an algorithm-driven environment. So, with that risk in mind, we are encouraged that many policymakers and competition agencies are not only taking this risk seriously but are devoting resources to better understand ‘Algorithms and Competition’, Speech, Bundeskartellamt 18th Conference on Competition, Berlin, 16 March 2017. 103 ‘Algorithms and Collusion – Note from the European Union’ (n 7) 9; ‘Algorithms and Collusion – Note by the United States’ (n 7) 6; ‘Algorithms and Collusion – Note from the United Kingdom’ (DAF/ COMP/WD(2017)19, OECD, 30 May 2017) 11. 104 German Monopolies Commission (n 20). 105 A. Ezrachi and M. Stucke, ‘Algorithmic Collusion: Problems and Counter-Measures’ (DAF/ COMP/WD(2017)25, OECD, 31 May 2017) https://​one​.oecd​.org/​document/​DAF/​COMP/​WD(2017)25/​ en/​pdf [accessed 3 March 2022]. 102

212  Research handbook on cartels the implications of algorithmic collusion. While it might not be as glamorous as the dawn raid, their efforts might deter competitors from devising pricing algorithms that can better exploit us.

12. Smart contracts and cartel law Salil K. Mehra

I. INTRODUCTION Competition law still struggles with the definition of ‘agreement’. This is despite its long history grappling with the issue: some of the earliest prohibitions against price fixing had, by the nineteenth century, recognized the importance to the antitrust mission of agreement as a concept.1 In the 1990s, well before autonomous intelligent agents were possible, the question arose as to whether and how the law of commerce would be able to handle them.2 A core question is what to make of such agents’ negotiations – are they ‘agreements’ in the conventional contract law sense? This question has particular salience for competition law, since several jurisdictions have ‘agreement’ predicates before prohibitions attach. As this brief chapter discusses, the interplay of fast-moving technology and longstanding competition law doctrine makes this a thorny dilemma; direct interventions to promote competition law by design must be made to prevent the erosion of markets’ social benefits, and, by extension, consumers’ trust in them.

II.

BACKGROUND: THE RISE OF SMART CONTRACTS

The twenty-first century has seen a rapid rise in the development of intelligent agents. Siri, Alexa and Cortana – names inspired by Nordic legend,3 the TV show Star Trek4 and video games5 – are not just anthropomorphic female voices, but also household fixtures. But user-friendly technology does not exhaust the limits of software-powered agents. A series of developments at a deeper level of automated contracting has been occurring, including

1 See, e.g.,15 US Code Section 1 (Section 1 of the US Sherman Act of 1890) stating that ‘[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade of otherwise, or conspiracy [i.e., agreement] […] is declared to be illegal’); and An Act for the Prevention and Suppression of Combinations formed in Restraint of Trade (emphasis added), 52 Vict., Chapter 41, Act of the Parliament of the Domination of Canada (Brown Chamberlin, 1892) 489 (criminalizing offences in connection with such combinations). 2 I. Kerr, ‘Spirits in the Material World: Intelligent Agents as Intermediaries in Electronic Commerce’ (1999) 22 Dalhousie L.J. 190, 203 (observing that preexisting closed systems ‘have the commercial advantage of clarifying all legal rules in advance’, but that a ‘shift towards more open systems’ seems to be occurring). 3 ‘How Apple’s Siri Got Her Name’ (The Week, 8 January 2015) http://​theweek​.com/​articles/​ 476851/​how​-apples​-siri​-got​-name [accessed 3 March 2022]. 4 A. Alba, ‘Where Are All the Male AI Voice Assistants?’ (The Week, 18 March 2017) http://​ theweek​.com/​articles/​684606/​where​-are​-all​-male​-ai​- voice-assistants [accessed 3 March 2022]. 5 T. Warren, ‘The Story of Cortana, Microsoft’s Siri Killer’ (The Verge, 2 April 2014) www​.theverge​ .com/​2014/​4/​2/​5570866/​cortana​-windows​-phone​-8​-1​-digital​- assistant [accessed 3 March 2022].

213

214  Research handbook on cartels the development of ‘agreement technologies’, blockchain-driven ‘smart contracts’ and their potential successors. A.

Agreement Technologies

Since early in this century, computer scientists have worked on the problem of how to design autonomous software agents that can negotiate with each other to come to mutually acceptable agreements.6 Key factors include the degree of autonomy, interactivity and interoperability of such agents. Early in the past decade, combining insights from game theory, contract theory and computer science, Agreement Technologies (‘AT’) emerged as a field in its own right.7 Specialists in this area recognized that future applications would involve human users delegating increasingly complex tasks to software agents, which in turn would interact with each other in sophisticated ways to make and execute agreements automatically and, perhaps, autonomously.8 That future has come to pass. Google search involves an automated auction among advertisers for the user’s attention with respect to sponsored ads.9 Spotify contracts online with subscribers and artists, splitting up a royalty pool based on an automated process measuring an artist’s ‘streamshare’ – a figure analogous to market share based on the percentage of a rightsholder’s works out of the total music streamed.10 Observers predict that supply chains will be increasingly run by autonomous computerized applications.11 As a form of smart contracting, agreement technologies must necessarily interact with law and social science. The inputs and outputs of autonomous agents will not be limited to computer hard drives and screens. Instead, they will involve the pitfalls and externalities that have long been part and parcel of contract law. Where agreement technologies run into a glitch, or impose unreasonable costs on third parties, they will need to be dealt with by law and regulation. Among such concerns, competition law must come into play. Indeed, the subject of algorithmic collusion can be seen as an embryonic attempt to address potential competitive harm from smart contracting.12 The field of agreement technologies has already addressed issues of legal frameworks and regulation.13 Because the field focuses on the design of interoperable agents and plat6 See N. Jennings, ‘Agreement Technologies’ [2005] EEE/WIC/ACM International Conference on Intelligent Agent Technology 17. 7 See S. Ossowski (ed.), Agreement Technologies (Springer, 2012) (summarizing the European Cooperation in Science and Technology Action project on Agreement Technologies). 8 ibid. 9 J. Nicas, ‘How Google’s Ad Auctions Work’ (The Wall Street Journal, 19 January 2017) www​.wsj​ .com/​articles/​how​-googles​-ad​-auctions​-work​-1484827203 [accessed 3 March 2022]. 10 Spotify, ‘Loud and Clear’ https://​loudandclear​.byspotify​.com/​?question​=​how​-is​-stream​-share​ -calculated [accessed 3 March 2022]. 11 N. Duckworth, ‘Vibrant Network Ecosystems Are Turning Supply Chains into Competitive Weapons’ (KMWorld, 13 January 2020) www​.kmworld​.com/​Articles/​Editorial/​ViewPoints/​Vibrant​ -network​-ecosystems​-are​-turning​-supply​-chains​-into​-competitive​-weapons​-136019​.aspx [accessed 3 March 2022] (predicting increasing use of ‘intelligent agents’ to automate transactions along the supply chain). 12 On algorithmic collusion, see Chapter 11 in this volume. 13 T. Rubio, Z. Kokkinogenis, H. Lopes Cardoso, R. Rossetti and E. Oliveira, ‘Regulating Blockchain Smart Contracts with Agent-Based Markets’ in P. Moura Oliveira, P. Novais and L. Reis (eds), Progress in Artificial Intelligence (Springer, 2019).

Smart contracts and cartel law  215 forms, proposals include requiring regulation-enabled systems and hybrid approaches where markets themselves are active agents that ensure regulation even where contract execution is automated, as via blockchain.14 Essentially, competition law would have to be built into such systems by design. B. Blockchain Undoubtedly, the most famous example of a smart contracting technology is blockchain – even though the term itself is ambiguous. As Kevin Werbach notes, the term ‘the blockchain’ may be used for the universe of blockchains, the subset of public blockchains or just the public ledger for Bitcoin.15 In that last role, as the backbone of Bitcoin, among other cryptocurrencies, blockchain is probably the most well-known form of distributed ledger.16 Specifically, distributed ledgers represent a consensus of copied, shared and synchronized digital data spread out across geography and the internet, without a central administrator governing it. They need not be completely open to all; a class of systems called permissioned ledgers are designed for private groups to share information, including potentially information about transactions.17 Generally, blockchain in its myriad forms combines two powerful features. First, because of the way in which information is transformed via a cryptographic hash, the data encoded is very secure; an attempt at even a small change in the underlying data would make it possible via algorithmic comparison to see that a change has been made – the root hash is stored in the block header, and the comparison of changed information would generate a different hash. Additionally, the distributed nature of blockchain makes the data transparent to some set of users – varying from public to private access. For several years, blockchain has attracted significant attention for its cartel-fostering implications.18 As one prescient observer, Izabella Kaminska of the Financial Times, noted in 2015: Why are the great and the good of the banking and financial services world suddenly extolling the virtues of blockchain, the technology that underpins the artificial scarcity of bitcoin? Possibly because they’ve finally figured out what the technology really facilitates is cartel management for groups that don’t trust each other but which still need to work together if they’re to protect the value and stability of the markets they serve […] [S]uppose the rate of production could be algorithmically controlled to make it more difficult to mine commodities, money or financial assets as and when too many entities enter the system? And suppose, on top of that, such a mechanism was dubbed ‘technology’ instead of a cartel system outright? Would anti-trust authorities be inclined to look the other way then?19

ibid. K. Werbach, ‘Why the Blockchain Needs the Law’ (2018) 33 Berkeley Tech. L.J., 487, 489 n 1. 16 For example, Dogecoin is also based on blockchain, though apparently via a ‘find-and-paste’ job on Bitcoin’s blockchain; see M. Serrels, ‘Dogecoin: The Origin Story of the Elon Musk Supported Cryptocurrency’ (CNET, 8 May 2021) www​.cnet​.com/​news/​dogecoin​-the​-origin​-story​-of​-the​-elon​ -musk​-supported​-cryptocurrency/​[accessed 3 March 2022]. 17 Werbach (n 15) 498. 18 I. Kaminska, ‘Exposing the “If We Call It a Blockchain, Perhaps It Won’t Be Deemed a Cartel” Tactic’ (Financial Times, 11 May 2015) www​.ft​.com/​content/​bb7f42ec​-a049​-3739​-b74d​-131e9357694c [accessed 3 March 2022]. 19 ibid (emphasis in original). 14 15

216  Research handbook on cartels Thibault Schrepel, a leading commentator on competition law and blockchain, has raised the alarm concerning the disruptive potential that blockchain poses to existing competition law enforcement.20 In particular, he has focused on the usefulness of smart contracts for cartel members, whose price-fixing agreements are both punishable by competition law and unenforceable under contract law.21 The chief concern is that blockchain-based smart contracts will make it possible for cartel members to overcome their inherent trust dilemma, and simultaneously make it harder for enforcers to destabilize that trust with leniency programmes.22 Schrepel envisions smart contracts that cartel members can use to execute, for example, a market allocation agreement, and to automatically monitor compliance and make side payments among them.23 While concern may be warranted, there are reasons to doubt whether self-executing, self-monitoring and self-payment-making blockchain-based cartels are really on the horizon. Certainly, if detectable, a blockchain-based smart contract that automates collusion and the distribution of cartel profits to conspirators is forbidden by antitrust law; Professors Lin William Cong and Zhiguo He believe that such a mechanism would be ‘easy to detect’.24 It is worth observing that the distributed ledger potentially leaves an immutable transaction trail – one that may be easier to track than cash payments deposited in a bank secrecy jurisdiction. Moreover, as Cong and He observe, government regulators could be proactive in addressing blockchain-based smart contracts. We already see governments pushing back on some of the predicates for a blockchain-based cartel. First, to the extent that a system of automated side payments is required, governments around the world, including those of the US and China, are seeking to undercut private cryptocurrencies and to encourage government-backed cryptocurrencies in their stead.25 Presumably, if governments succeed in this effort, that would make secret, automated transactions via blockchain significantly harder. Additionally, government enforcers could proactively require identification methods that would reduce the ability to create a blockchain-based ‘secret meeting’. For example, cryptographic methods such as zero-knowledge proofs could make an account-based ledger susceptible to corporate identification; the government might be required to seek a warrant or a court order that would require the corporation to produce such proof of transaction, while otherwise preserving privacy. However, blockchain-based smart contracts may create a more difficult problem for antitrust enforcement due not to secrecy, but opacity. Cong and He model the potential due to blockchain for increased collusion, and thus lower output and higher prices.26 They point out that a distributed ledger improves a colluder’s accuracy at responding to defection from

20 See T. Schrepel, ‘Collusion by Blockchain and Smart Contracts’ (2019) 33 Harv. J.L. & Tech. 117, 119; T. Schrepel, ‘Is Blockchain the Death of Antitrust Law? The Blockchain Antitrust Paradox’ (2019) 3 Geo. L. Tech. Rev. 281, 285. 21 Schrepel, ‘Collusion by Blockchain’ (n 20) 141–43. 22 See H. Eenmaa-Dimitrieva and M.J. Schmidt-Kessen, ‘Creating Markets in No-Trust Environments: The Law and Economics of Smart Contracts’ (2019) 35 Computer L. & Secy. Rev. 69. 23 Schrepel, ‘Collusion by Blockchain’ (n 20) 141–43. 24 L. William Cong and Z. He, ‘Blockchain Disruption and Smart Contracts’ (2019) 32 Rev. of Fin. Studs. 1754, Section 2.3.2.1. 25 See G. Tett, ‘A Contest to Control Crypto Is Under Way’ (Financial Times, 25 June 2021) (predicting that private crypto will be ‘crushed’ in China). 26 Cong and He (n 24) (Section 2.3.2.2).

Smart contracts and cartel law  217 a cartel. In the absence of a distributed ledger, a cartel member considering whether to retaliate faces a dilemma that makes cartels relatively unstable: if the firm suddenly fails to receive buyers, is that because a defector is taking away buyers, or is it because buyers have left the market more generally? A distributed ledger reflecting transactions in the market may make it clear to the firm that buyers are indeed present in the market, a state that they can infer from being contacted for verification by the blockchain when new transactions occur. As a result, it becomes easier for cartel members to avoid unwarranted punishment of defectors due to imperfect information, and, all things being equal, collusion should become more stable.27 Note that this latter scenario is potentially a significant problem for antitrust law. Fortunately for the EU, existing law may be interpretable in such a manner as to prohibit a collusion-facilitating transparent blockchain of the type Cong and He describe as the adoption of a practice that facilitates joint dominance. Unfortunately, however, in the United States, antitrust law has long left a crack into which this scenario may fall.28 In the absence of a judicial finding of ‘agreement’ – either explicit or inferred from revelatory conduct – interdependent supracompetitive pricing is not punishable under Section 1 of the Sherman Act. It is unclear whether independent adoption by competing firms of blockchain or another system of distributed ledger would suffice for an inference of agreement. C.

Alternatives to Blockchain

The evolution of smart contracts is unlikely to stop with blockchain. First, there are questions about its continuing dependability in a future with quantum computing; faster computers could theoretically overcome its encryption.29 Moreover, doubts exist regarding the scalability of blockchain as it handles larger amounts of data.30 And even now, the US Department of Justice and FBI have apparently found methods to recover ransoms paid in Bitcoin, which suggests that blockchain will not always put violators beyond the reach of law enforcement.31 That said, the issue of smart contracts for competition law will doubtless not end with blockchain. The technology will continue to advance – witness the development of alternatives to blockchain. For example, Chia replaces the expensive computation that blockchain’s ‘proof

ibid. S. Mehra, ‘Antitrust and the Robo-Seller: Competition in the Time of Algorithms’ (2016) 100 Minn. L. Rev. 1323, 1340–41 (describing how algorithmic collusion may fall into the gap by which the Sherman Act allows interdependent supracompetitive parallel pricing). See also A. Ezrachi and M. Stucke, ‘Artificial Intelligence and Collusion: When Computers Inhibit Competition’ [2017] 5 Ill. L. Rev. 1785; and A. Ezrachi and M. Stucke, Virtual Competition: The Promise and Perils of the Algorithm-Driven Economy (Harvard University Press, 2016) 29 (arguing that ‘as pricing shifts from humans to computers, so too will the types of collusion and behavioral exploitation in which companies may engage’). 29 A. Fedorov, E. Kiktenko and A. Lvovsky, ‘Quantum Computers Put Blockchain Security at Risk’ (Nature, 19 November 2018) www​.nature​.com/​articles/​d41586​-018​-07449​-z [accessed 3 March 2022] (predicting that ‘within a decade, quantum computers will be able to break a blockchain’s cryptographic codes’). 30 A. Narayanan, J. Bonneau, E. Felten, A. Miller and S. Goldfeder, Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction (Princeton University Press, 2016) 48. 31 V. Romo, ‘How a New Team of Feds Hacked the Hackers and Got Colonial Pipeline’s Ransom Back’ (National Public Radio, 8 June 2021) (reporting that US enforcers obtained the encryption key linked to the Bitcoin account to which the ransom was delivered). 27 28

218  Research handbook on cartels of work’ requires with proof of alternative hard drive space; IOTA sets aside the blockchain model for a ‘tangle’, better suited for large-scale deployment on a system of nodes with limited computing power.32 The possibility that technology will advance further – for example, building on quantum computing to create even stronger encryption – cannot be discarded.33 As a result, a competition law approach to smart contracts cannot focus simply on blockchain. Instead, it must be proactive regarding challenges that are below the horizon, yet nonetheless foreseeable.

III.

THE CHALLENGE FOR COMPETITION LAW

A.

The ‘Agreement’ Dilemma, Algorithmic Collusion and Smart Contracts

As noted in connection with blockchain above, competition law, particularly in the United States, has had a longstanding dilemma concerning its requirement that an ‘agreement’ be found before punishing collusion. In the 1960s, Richard Posner and Donald Turner engaged in a famous debate on this point. Posner pushed for a broad definition of Section 1 of the Sherman Act that would cover interdependent pricing by oligopolists, even where they did not make an agreement.34 Turner argued that while the term ‘agreement’ should reach beyond only explicit agreements, punishing interdependent pricing was a mistake since business people were simply rationally optimizing their prices given market realities – and at any rate, such a rule would be difficult to administer, given that nearly all businesses price with a view to their competitors’ responses. In the past decade, this academic debate has reignited. Louis Kaplow has pointed out the paradox that the agreement requirement creates: interdependent supracompetitive pricing that does not require an agreement will tend to be more harmful and more stable than such pricing that does require agreement.35 The emergence of algorithmic collusion has spawned a modest literature focusing on the agreement requirement as a potential hazard to preventing consumer harm.36 This work has been triggered in part by the recognition from both theoretical modeling and empirical experience that algorithmic collusion is real and may expand.37

K. Werbach, The Blockchain and the New Architecture of Trust (MIT Press, 2019) 58. Federov et al (n 29). 34 R. Posner, ‘Oligopoly and the Antitrust Laws: A Suggested Approach’ (1969) 21 Stan. L. Rev. 1562, 1576–92. Later, wearing judicial robes, Posner walked back from the argument he had made as a law professor; see In re Text Messaging Antitrust Litigation, 782 F.3d 887 (7th Circuit, 2015) 874 (stating that ‘Harvard Law School Professor Louis Kaplow […] argues that tacit collusion should be deemed a violation of the Sherman Act. That of course is not the law, and probably shouldn’t be’). 35 L. Kaplow, ‘On the Meaning of Horizontal Agreements in Competition Law’ (2011) 99 Cal. L. Rev. 683, 815. 36 M. Gal, ‘Algorithms as Illegal Agreements’ (2019) 34 Berkeley Tech. L.J. 67; S. Thomas, ‘Harmful Signals: Cartel Prohibition and Oligopoly Theory in the Age of Machine Learning’ (2019) 15 J. of Comp. L. & Econ. 159; F. Beneke, ‘Remedies for Algorithmic Tacit Collusion’ (2021) 9 J. Antitrust Enf. 152; and S. Mehra, ‘Price Discrimination-Driven Algorithmic Collusion: Platforms for Durable Cartels’ (2021) 26 Stan. J.L. Bus. & Fin. 171. 37 A. Ezrachi and M. Stucke, ‘Sustainable and Unchallenged Algorithmic Tacit Collusion’ (2020) 17 Nw. J. Tech. & Intell. Prop. 217. See, however, U. Schwalbe, ‘Algorithms, Machine Learning and Collusion’ (2018) 14 J. of Comp. L & Econ. 568. 32 33

Smart contracts and cartel law  219 What remains undecided is whether and how competition law must change to address its agreement requirement. Competition law scholars are still at an embryonic stage in grappling with these questions.38 Algorithmic collusion tends to fall into gaps in the agreement requirement because competitors can use mass data collection, computerized processing and automated responses to achieve supracompetitive pricing without explicit agreement. Under the traditional competition law framework, the question is when the steps taken to employ such technology can be equated with an ‘agreement’. Smart contracts make this question still more urgent. Technologies such as the blockchain make possible interoperability, information sharing and automated response among very large numbers of players – those players being potentially economic competitors. B.

Consumer Welfare, the Traditional Competition Law Framework and Beyond

The traditional competition law framework focuses on whether firms have made an agreement that injures consumer welfare, the goal being to bring private agreements into alignment with social welfare. As a result, it is primarily a reactive tool whose ex post penalties create ex ante deterrence. Smart contracts and the technologies that may follow them raise questions about the future sufficiency of the ‘antitrust cop’ as a model for promoting and safeguarding the social benefits of competitive markets.39 In the twentieth century, traditional markets were the only way to gather widespread information, digest it and allocate resources in an acceptable manner.40 Digital platforms increasingly can digest massive amounts of information and match resources with those who need them. Whether resources are allocated based on markets or an alternative, such as closed firms, has long been a question of interest to law and economics;41 however, traditional antitrust law stops at the boundaries of the firm.42 The emerging forms of organization and allocation may require a different approach than competition law’s existing framework. Beyond antitrust law, Rory van Loo has pointed out that the delegation of consumer sovereignty to digital assistants may have significant new impacts that require different, proactive regulation.43 Similarly, competition law may have to take proactive steps to prevent markets being balkanized by technological developments into a series of walled gardens that do not serve consumer welfare or social interest. Competition has come to view interoperability as a potential remedy for consumer harm in the context of platforms and digital networks.44 Going forward, as technology may shift economic activity

See Gal (n 36) 101–13 (adapting the stepwise rule of reason approach to the context of algorithmic collusion). 39 E. Iacobucci and R. Winter, ‘Abuse of Joint Dominance in Canadian Competition Policy’ (2010) 60 U. Tor. L.J. 219 (stating that ‘[t]he central purpose of antitrust law in a market economy is to align firms’ incentives with the social interest by encouraging vigorous competition within markets’). 40 Friedrich Hayek reconceptualized markets as a system of information transfer between agents that assembled data in a manner ‘beyond human capacity’ otherwise: F. Hayek, Individualism and Economic Order (University of Chicago Press, 1948) 187. 41 R. Coase, ‘The Nature of the Firm’ (1937) 4 Economica 386. 42 S. Paul, ‘Antitrust as Allocator of Coordination Rights’ (2020) 67 UCLA L. Rev. 378. 43 R. van Loo, ‘Digital Market Perfection’ (2019) 117 Mich. L. Rev. 8. 44 M. Kades and F. Scott Morton, ‘Interoperability as a Competition Remedy for Digital Networks’ (Equitable Growth, September 2020) https://​equitablegrowth​.org/​wp​-content/​uploads/​2020/​09/​092320​ 38

220  Research handbook on cartels from traditional markets to closed or semi-closed digital networks, mandated interoperability and competition by design may be required to safeguard consumer welfare.45

IV. CONCLUSION Smart contracts have the potential to unsettle competition law. But they are a step in an ongoing process of technological evolution, from enterprise software-powered big-box store chains, to Web 1.0 e-commerce, to algorithmic competition, and ultimately to further stages we cannot yet imagine. As markets and their substitutes and complements evolve, so too must competition law, if it is to continue to serve consumer welfare and the public interest.

-WP​-Interoperability​-as​-a​-competition​-remedy​-for​-digital​-networks​-Kades​-and​-Scott​-Morton​.pdf [accessed 3 March 2022]. 45 S. Mehra, ‘What is an Antitrust Problem Anyway?’ (2003) 68 Antitrust Bulletin (forthcoming).

13. Cartels and the exchange of information Daniel A. Crane

I. INTRODUCTION This chapter focuses on the relationship between cartels and the exchange of information between competitors. Clearly, members of a cartel have to exchange information on price, output and other key ingredients of their collusive arrangement. But not all exchanges of information among competitors are part of cartel agreements. Competitors have legitimate reasons to exchange certain kinds of information, and information exchanges can have procompetitive effects and strengthen competition under certain circumstances.1 What, then, is the relationship between information exchanges and cartels, and how does the law treat this phenomenon? Historically, this has been a challenging question for courts – one largely dependent on prevailing attitudes towards associations of competitors and horizontal collaboration. US law, in particular, has evolved significantly over time towards greater solicitude towards competitor information exchanges. EU law employs similar categories, but remains somewhat more restrictive on information exchanges. Overall, as will become apparent below, competitor information exchange is tolerated if it serves to facilitate more effective competition and inform all market participants, but it otherwise poses significant antitrust risks.

II.

EVOLUTION OF US LEGAL DOCTRINE

A.

Associationalism and Its Discontents

The roots of US legal policy towards competitors’ exchanges of information can be found in the ‘Associationalist’ movement in the pre-First World War era.2 Associationalism provided an ostensible solution to the problem of ‘ruinous competition’ associated with classical economic thought.3 Jerome Eddy’s prominent 1912 book The New Competition suggested that competitor information exchange could solve this ruinous competition problem. Eddy argued that businesses in the same industry often announced prices at levels that would yield K.-U. Kühn and X. Vives, ‘Information Exchanges Among Firms and their Impact on Competition’ (December 1994) https://​blog​.iese​.edu/​xvives/​files/​2011/​09/​Information​-Exchanges​-and​-their​-Impact​ -on​-Competition​.pdf [accessed 3 March 2022] (reaching the ‘general conclusion that information sharing in itself cannot generally be regarded as detrimental to welfare and therefore a restriction of competition’); and A. Kirby, ‘Trade Associations as Information Exchange Mechanisms’ (1988) 19 Rand. J. of Econ. 138 (finding that where total cost functions are sufficiently convex, expected consumer surplus also always increases when information is shared). 2 The following paragraphs draw in substantial part from E. Fox and D. Crane, Cases and Materials on US Antitrust in Global Context (3rd edn, West Academic Publishing, 2020). 3 M. Winerman and W. Kovacic, ‘Outpost Years for a Start-Up Agency: The FTC from 1921–1925’ (2010) 77 Antitrust L.J. 145, 155. 1

221

222  Research handbook on cartels ‘fair’ profits but that then engaged in secret price shading that drove real prices down towards cost. This tendency could be halted by competitors’ exchanges of pricing information. If every sale were immediately publicized, firms would stop shading prices, since such shading would only lead to competitor retaliation. Edy proposed ‘open price associations’ that would supply members with data on industry-wide production, inventories and sales. Eddy’s ideas gained wide acceptance, and information-exchanging trade associations became common in American business. Although Edy’s ideas sound suspiciously like a form of soft cartelization, they found support in high places during the 1920s, particularly in the person of Secretary of Commerce and future President Herbert Hoover.4 Hoover was an engineer by training and a wartime production bureaucrat, who disliked cartels but supported industry associations as producing technocratic efficiency. Hoover saw associations as key components in a system of managerial capitalism that eliminated waste and maximized efficiency. He believed that spontaneous markets produced too little cooperation and information, and that economic decision makers therefore lacked the information necessary to make rational decisions. What was needed was a ‘plan of individualism and associational activities’ that would ‘preserve the initiative, the inventiveness […] the character of man’ and yet ‘enable us to socially and economically synchronize this gigantic machine that we have built out of applied science’.5 Trade associations were to be the ‘key component of the envisioned intelligence and coordinating apparatus’.6 In Hoover’s vision, trade associations would be sanctioned simultaneously by the Department of Commerce and the Chamber of Commerce – by both the public and private sectors. In 1921 Hoover’s associationalist vision took a hit in the first significant Supreme Court decision on information exchange – American Column & Lumber Co. v US.7 American Column involved an ‘open price plan’ of the Hardwood Manufacturers Association under which members of the association reported detailed daily sales and shipping reports, monthly production and stock reports, price lists and inspection reports to the association. The American Hardware Manufacturers’ Association consisted of 400 members operating 465 hardwood mills, one third of the total production in the United States.8 In 1918, the Association adopted an ‘Open Competition Plan’, with the purpose of disseminat[ing] among members accurate knowledge of production and market conditions so that each member may gauge the market intelligently instead of guessing at it; to make competition open and above board instead of secret and concealed; to substitute, in estimating market conditions, frank and full statements of our competitors for the frequently misleading and colored statements of the buyer.9

See E. Hawley, ‘Herbert Hoover and the Sherman Act, 1921–1933: An Early Phase of a Continuing Issue’ (1989) 74 Iowa L. Rev. 1067. On classical economic thought and the ruinous competition hypothesis, see generally D. Crane and H. Hovenkamp, The Making of Competition Policy: Legal and Economic Sources (Oxford University Press, 2013). 5 H. Hoover, ‘Address before the American Engineering Council, Washington, DC, on the Engineer’s Place in the World’ (10 January 1924) (available at Hoover Presidential Library, Public Statement File, Volume 14, Number 345A). 6 Hawley (n 4) 1072. 7 257 US 377 (1921). 8 ibid 391. 9 ibid 393. 4

Cartels and the exchange of information  223 The association served as a ‘central clearing house for information on prices, trade statistics and practices’ among its members.10 The association then compiled these data and transmitted them to its members, and the members then met to discuss the reports at monthly meetings. Prior to the monthly meetings, members shared information about their future price and output plans. The Supreme Court found this plan to be ‘simply an expansion of the gentlemen’s agreement of former days, skillfully devised to evade the law’.11 In the Court’s opinion, the fundamental purpose of the Plan was to procure ‘harmonious’ individual action among a large number of naturally competing dealers with respect to the volume of production and prices, without having any specific agreement with respect to them, and to rely for maintenance of concerted action in both respects, not upon fines and forfeitures as in earlier days, but upon what experience has shown to be the more potent and dependable restraints, of business honor and social penalties.12

In other words, the association’s information exchange agreement was nothing other than a disguised cartel agreement. Importantly, Justices Holmes and Brandeis filed dissenting opinions, finding the voluntary and non-coercive exchange of information critically important to the functioning of a free and egalitarian society.13 They emphasized that the plan was voluntary and open, that the information collected was available to buyers, sellers, and the general public and that meetings were open to the public – a point recalling Brandeis’s famous aphorism that ‘[s]unlight is said to be the best of disinfectants’.14 The information exchange might somewhat lessen competition, but Brandeis had already shown in his Chicago Board of Trade opinion that ‘the Sherman Act does not prohibit every lessening of competition’ and ‘it is lawful to regulate competition in some degree’.15 But, continued Brandeis, the purpose of the Open Competition Plan was not even to regulate competition, but rather ‘to make rational competition possible, by supplying data not otherwise available, and without which most of those engaged in the trade would be unable to trade intelligently’.16 The Supreme Court returned to information exchange four years later in Maple Flooring Manufacturers v US,17 this time with a more sympathetic attitude. Maple Flooring involved an unincorporated trade association of members selling maple, beech and birch flooring that distributed among its members statistics on the average cost to association members of all dimensions and grades of flooring and their average prices and amount of stock at hand. The association also held meetings of members to discuss the information exchanged. The Justice Department saw this as a cartel agreement akin to that condemned in American Column, but the Supreme Court disagreed. Although it recognized that ‘[e]xchange of price quotations of market commodities tends to produce product uniformity of prices’, it also believed that ibid. ibid 410–11. 12 ibid 411. 13 See generally Daniel A. Crane, ‘Collaboration and Competition in Information and News During Antitrust’s Formative Era’ (29 June 2020) https://​knightcolumbia​.org/​content/​collaboration​-and​ -competition​-in​-information​-and​-news​-during​-antitrusts​-formative​-era [accessed 3 March 2022]. 14 L. Brandeis, Other People’s Money and How the Bankers Use It (Frederick A. Stokes, 1914) 92 (‘Sunlight is said to be the best of disinfectants; electric light the most efficient policeman’). 15 257 US 377 (1921) 415, citing Chicago Board of Trade v United States, 246 US 231 (1918). 16 257 US 377 (1921) 415. 17 268 US 563 (1925). 10 11

224  Research handbook on cartels ‘[k]nowledge of the supplies of available merchandise tends to prevent over-production and to avoid the economic disturbances produced by business crises resulting from over-production’. The Court then expressed a broadly supportive view of information exchange: It is the consensus of opinion of economists and of many of the most important agencies of Government that the public interest is served by the gathering and dissemination, in the widest possible manner, of information with respect to the production and distribution, cost and prices in actual sales, of market commodities, because the making available of such information tends to stabilize trade and industry, to produce fairer price levels and to avoid the waste which inevitably attends the unintelligent conduct of economic enterprise. Free competition means a free and open market among both buyers and sellers for the sale and distribution of commodities. Competition does not become less free merely because the conduct of commercial operations becomes more intelligent through the free distribution of knowledge of all the essential factors entering into the commercial transaction. General knowledge that there is an accumulation of surplus of any market commodity would undoubtedly tend to diminish production, but the dissemination of that information cannot in itself be said to be restraint upon commerce in any legal sense. The manufacturer is free to produce, but prudence and business foresight based on that knowledge influence free choice in favor of more limited production. Restraint upon free competition begins when improper use is made of that information through any concerted action which operates to restrain the freedom of action of those who buy and sell.18

B.

The High Point of Judicial Hostility to Information Exchange

American Column and Maple Flooring left some doubt about the future direction of judicial attitudes toward competitors’ exchanges of information. During the Depression era, the courts initially retreated from antitrust scrutiny of collaborative efforts by competitors to stabilize industry prices. In Sugar Institute v United States,19 the Court ruled that an industry ‘plagued’ by secret price concessions granted by ‘unethical’ refiners in a market of declining demand for a standardized product could lawfully agree to make advance announcement of price changes, along with exchanges of statistical information. Defendants were enjoined only from agreeing with each other to adhere to their announced prices. As long as they each maintained pricing freedom, they were allowed to act cooperatively ‘to end abuses and to foster fair competitive opportunities’.20 The Court held that ‘the fact that the correction of abuses may tend to stabilize a business, or to produce fairer price levels [does not] require that abuses should go uncorrected or that an effort to correct them should for that reason alone be stamped as an unreasonable restraint of trade’.21 Depression-era permissiveness towards competitor collaborations came to a crashing halt after 1937 when the Antitrust Division became increasingly aggressive in challenging cartel-like behaviour and the New Deal Supreme Court shifted dramatically in favour of antitrust enforcement.22 While trade associations continued to flourish, they became considerably more cautious about exchanging sensitive pricing and output information. When the Supreme Court next decided an information exchange case, it underlined that such caution was warranted. ibid 582–83. 297 US 553 (1936). 20 ibid 598. 21 ibid. 22 D. Crane, ‘The Story of United States v Socony-Vacuum: Hot Oil and Antitrust in the Two New Deals’, in E. Fox and D. Crane (eds), Antitrust Stories (Foundation Press, 2007) 107. 18 19

Cartels and the exchange of information  225 United States v Container Corporation of America23 did not involve a trade association, but rather competitor-to-competitor inter-seller price verification. The defendants, accounting for about 90 per cent of corrugated container sales in the Southeastern United States, were in the habit of informally exchanging price quotations to specific customers, with the expectation of reciprocity. Interestingly, the Court noted that the general tendency of the information exchange was to stabilize prices at a ‘downward level’. Although this might have been thought to be beneficial for buyers in the market, the Court observed that any ‘interference with the setting of price by free market forces is unlawful per se’.24 The Court then noted a series of factors that made this inter-seller price verification particularly suspect: the industry was dominated by a few sellers; the product was fungible and the only competition was over price; and demand was inelastic. In condemning the arrangement as unlawful, the Court held: ‘Price is too critical, too sensitive a control to allow it to be used even in an informal manner to restrain competition.’25 Following Container Corp., it seemed that certain kinds of competitor information exchanges might not only raise antitrust scrutiny, but be adjudged as illegal per se. However, with the advent of the Chicago School’s growing influence, the US Supreme Court shut the door on this possibility in 1978 in United States v Gypsum Co.26 The Justice Department indicted gypsum board manufacturers for criminal price fixing. A key part of the evidence was that the defendants frequently called one another to verify prices to particular customers – the sort of inter-seller price verification condemned in Container Corp. There were between 9 and 14 producers in the industry, with the eight largest companies accounting for 94 per cent of the market. The Justice Department secured a criminal conviction, but the Supreme Court reversed, holding that the jury charge was inappropriate for allowing the jury to find liability based on the information exchange’s effect on pricing, regardless of whether defendants intended or were even aware of the price effect. The Court also noted, in passing, that mere information exchange is never per se illegal: The exchange of price data and other information among competitors does not invariably have anticompetitive effects; indeed such practices can in certain circumstances increase economic efficiency and render markets more, rather than less, competitive. For this reason, we have held that such exchanges of information do not constitute a per se violation of the Sherman Act.27

Gypsum left the law on information exchange in some degree of confusion. Container Corp. had stated unequivocally that information exchange among competitors could support a finding of per se illegality and Gypsum, without purporting to overrule Container Corp., had held the contrary. The United States Supreme Court has not returned to the question of information exchange since Gypsum, leaving it to the lower courts to harmonize the doctrine.

393 US 333 (1969). ibid 512. 25 ibid. 26 438 US 422 (1978). 27 ibid 441 n 16. 23 24

226  Research handbook on cartels C.

Contemporary Doctrinal Structure of US Law on Information Exchange

The most comprehensive and authoritative analysis of contemporary antitrust doctrine toward competitor information exchange can be found in then-Judge Sonia Sotomayor’s decision for the US Court of Appeals for the Second Circuit in Todd v Exxon Corp.28 The decision is significant both because of its scholarly harmonization of Supreme Court precedent into an operationalizable doctrinal package and because of Judge Sotomayor’s subsequent elevation to the US Supreme Court. Todd involved a class action lawsuit by managerial and technical employees of 14 major integrated and petrochemical companies that collectively accounted for 80–90 per cent of the industry’s revenues and employed an equal share of the industry’s workforce. The defendant oil companies instituted a system whereby they periodically conducted surveys comparing past and current employee salary information and benchmarking them to job categories at Chevron, one of the defendants. A third-party consultant, Towers Perrin, compiled the information, analysed and refined it and distributed it to the defendants. Human resources personnel from the defendants then met at least three times a year to discuss the salary information and their budgets for future salaries. The trial judge dismissed the plaintiffs’ complaint, but the Court of Appeals reversed and allowed the case to proceed. Judge Sotomayor began by helpfully distinguishing between two types of antitrust cases in which information exchange may play a role. The first type is hard-core price fixing or cartel cases in which the plaintiff must prove that the defendants actually agreed to fix prices. In such cases, direct or ‘smoking gun’ evidence of collusion may be missing, and the question then is whether the circumstantial evidence is sufficient to prove collusion. When firms exchange in parallel conduct accompanied by ‘plus factors’ – factors that tend to disprove the possibility that the parallel conduct was the result of independent decision making – the circumstantial evidence may be sufficient to prove per se illegal price fixing.29 Defendants’ use of facilitating factors – factors that make it easier for cartel agreements to form or to punish cheating – may serve as a plus factor. Information exchange may be a facilitating factor, and hence may serve (with other circumstantial evidence) to meet a plaintiff’s burden of proving that the defendants engaged in per se illegal price fixing. A ‘closely related but analytically distinct type of claim’ is that the ‘violation lies in the information exchange itself – as opposed to merely using the information exchange as evidence upon which to infer a price-fixing agreement’.30 Unlike the first category, ‘[t]his exchange of information is not illegal per se, but can be found unlawful under a rule of reason analysis’.31 This doctrinal synthesis made sense of the Supreme Court’s muddled case law on information exchange. Cases such as Container Corp. should be understood as ones where the information exchange helped to prove that the defendants were engaging in price fixing. However, where the plaintiff was not alleging actual price fixing, but rather that the information exchange had the effect of causing a price increase through conscious parallelism, the claim required analysis under the rule of reason, including proof of a relevant market, market 275 F.3d 191 (2d Cir. 2001). Bell Atlantic Corp v Twombly, 550 US 544 (2007). 30 275 F.3d 191 (2d Cir. 2001) 199. 31 ibid. 28 29

Cartels and the exchange of information  227 power and anticompetitive effects and consideration of defendants’ offsetting efficiencies justifications. In Todd, the plaintiff was not alleging a per se claim, and therefore did not have the burden of proving that the defendants went further than agreeing to exchange information and actually agreed to fix prices. Cases of that variety are still brought, and sometimes founder on the lack of clear evidence that the defendants agreed to more than information exchange.32 On the other hand, the Todd plaintiff faced burdens that the plaintiff in a per se case would not – namely, of showing market power in a properly defined relevant market and anticompetitive effects. Despite these differences in the two types of information exchange theories, there are significant commonalities regardless of which theory a plaintiff pursues. The Todd Court analysed two broad categories of factors relevant to a rule of reason claim, but they could also be relevant to determining the plausibility of a claim that information exchange facilitated price fixing. The first bucket of factors falls under the rubric of market structure. The more that a market is structurally conducive to anticompetitive effects from information exchange, the stronger the plaintiff’s claims. Three structural factors are significant: fungibility; elasticity; and concentration. Fungibility: As is generally true in cartel cases, it is easier for competitors to soften competition through coordinated action if they are selling a homogenous or fungible product, as opposed to one that is differentiated or heterogeneous. Accordingly, the more that a product is fungible, the more likely it is that an information exchange among competitors evidences a price-fixing agreement (in a per se case) or supports an inference that the information exchange causes an anticompetitive effect. Elasticity: Market-wide elasticity of demand is an important factor in determining whether the competitors sharing information have the collective market power to increase prices and reduce output. In a market with elastic demand, customers may substitute outside the market in response to a price increase, thereby making coordinated price increases less profitable and therefore less tempting.33 Concentration: The more highly concentrated a market, the more likely that oligopolists can coordinate on pricing or output, whether explicitly in a per se case or implicitly in a rule of reason case. Notably, in Todd the defendants argued that the petroleum market would be considered unconcentrated under the Horizontal Merger Guidelines’ Herfindahl Hirschman Index concentration categories, but Judge Sotomayor found that the market was nonetheless sufficiently concentrated to sustain the plaintiff’s claims. The second bucket of factors goes to the nature of the data exchanged, who has access to it and how it is exchanged. Four factors are significant in this facet of the analysis: timing; specificity; public dissemination; and other meetings. Timing: In Todd, the court noted that ‘exchanges of future price information are considered especially anticompetitive’.34 The same goes for exchanges of information about prices being

See, e.g., Blomkest Fertilizer, Inc. v Potash Corp. of Saskatchewan, 203 F.3d 1028 (8th Cir. 2000) (en banc). 33 Observe that this elasticity factor is closely related to market definition, which also considers consumer cross-elasticity of demand in determining which products are substitutes. 34 275 F.3d 191 (2d Cir. 2001) 212. 32

228  Research handbook on cartels currently quoted, since such information may serve to diminish the seller’s incentives to lower their prices. By contrast, exchanges of past information are less threatening to competition. Specificity: As a general matter, the more aggregated and general the information exchanged, the safer is its exchange from an antitrust perspective. On the other hand, granular or customer-specific information exchange is problematic: ‘Price exchanges that identify particular parties, transactions, and prices are seen as potentially anticompetitive because they may be used to police a secret or tacit conspiracy to stabilize prices.’35 Public dissemination: Picking up on a theme from Justice Holmes’s and Brandeis’s dissents in American Column, the courts today recognize that information exchanged by competitors can serve a salutary public purpose if it is made widely available, including to buyers or other transactional counterparties. Judge Sotomayor noted in Todd that ‘in the traditional oligopoly (seller-side) context, access to information may better equip buyers to compare products, rendering the market more efficient while diminishing the anticompetitive effects of the exchange’.36 Conversely, when the information exchanged is kept confined to the competitors exchanging it, there is a stronger inference that it is being used to subvert competition. Other meetings: Although it is not inherently unlawful for competitors to meet, when competitors exchange sensitive pricing or other commercial information and then get together to talk about it, the suspicion arises that the further discussions are efforts to use the exchanged information to fix prices. Until instructed not to do so by a federal court,37 the US Justice Department was in the habit of reading the following quotation from Adam Smith during its summation in criminal cartel cases: ‘People of the same trade seldom meet together even for merriment or diversion, but the conversation ends in a conspiracy against the public and in some contrivance to raise prices.’38 Although the law is clear that oligopolists cannot be held liable merely for the act of meeting together, their meetings following the exchange of competitive information can help to create an inference that they were price fixing (again, in a per se case) or that their information exchange had an anticompetitive effect (again, in a rule of reason case). Although these factors are cumulative and it is impossible to say how much weight each holds, the combination of these factors provides fairly clear guidance on the risks of information exchange under current US law. Exchanges of information by competitors operating in markets with differentiated goods, high demand elasticity and low seller concentration, and where the information is for past transactions, aggregated and widely disseminated and there are no further meetings, lie at the low-risk end of the spectrum. At the opposite end are cases of homogenous goods, low demand elasticity, high concentration and the dissemination of present or future data on a customer-specific basis, with the information only disseminated to the firms sharing the information and further meetings to discuss the information exchanged.

ibid. ibid 213. 37 US v Taubman, 297 F.3d 161 (2d Cir. 2002). 38 A. Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (First published in 1776, Great Books edition, 1952) 55. 35 36

Cartels and the exchange of information  229

III.

EU LEGAL DOCTRINES

Trade associations have a long and influential history throughout much of Europe. Despite this – or perhaps because of it – the EU takes a much more severe perspective on competitor information exchange than does US law. Unlike Gypsum, which as we have seen rejected per se illegality for information exchange itself, certain types of information exchange may be condemned as restrictions of competition by object under Article 101 of the TFEU. In the Thyssen-Stahl case, the Advocate General argued that [a]n agreement on the exchange of information is incompatible with the rules on competition, even where the relevant market is not a highly concentrated oligopolistic market, if it reduces or removes the degree of uncertainty as to the operation of that market with the result that competition between undertakings is restricted.39

The Court of Justice took a similar point of view in the 2009 T-Mobile Netherlands judgment,40 which involved exchanges of information among representatives of five large mobile telephone operators. The operators ‘held a meeting [on 13 June 2001 at which] they discussed […] the reduction of standard dealer renumerations for postpaid subscriptions, which was to take effect on or about 1 September 2001’.41 The defendant firms argued that they had not made any agreement within the purview of Article 101, and that, even if they had, it lacked any anticompetitive effect. The Dutch court made a preliminary reference to the Court of Justice, which in turn held that for concerted practice to have an anticompetitive object, ‘it is sufficient that it has the potential to have a negative impact on competition’.42 In the case of an anticompetitive object, it is not necessary that there be an anticompetitive effect, which ‘can only be of relevance for determining the amount of any fine and assessing any claim for damages’.43 The Court observed that ‘Article [101] of the Treaty on the Functioning of the European Union is designed to protect not only the immediate interests of individual competitors or consumers but also to protect the structure of the market and thus competition as such’.44 A detailed examination of the legality of information exchanges under Article 101 appears in the 2011 Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-operation Agreements.45 The Guidelines frame their discussion around three general propositions: Information exchange is a common feature of many competitive markets and may generate various types of efficiency gains. It may solve problems of information asymmetries, thereby making markets more efficient. Moreover, companies may improve their internal efficiency through benchmarking against each other's best practices. Sharing of information may also help companies to save costs by reducing their inventories, enabling quicker delivery of perishable products to consumers, or dealing

Case T-141/94 Thyssen Stahl v Commission [1999] ECR II-347. Case C-8/08 T-Mobile Netherlands BVand others v Raad van bestuur van de Nederlandse Mededingingsautoriteit [2009] ECR I-4529. 41 ibid para 12. 42 ibid para 31. 43 ibid paras 30 and 31. 44 ibid para 38. 45 Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-operation Agreements [2011] OJ C11/1. 39 40

230  Research handbook on cartels with unstable demand etc. Furthermore, information exchanges may directly benefit consumers by reducing their search costs and improving choice.46 However, the exchange of market information may also lead to restrictions of competition in particular in situations where it is liable to enable undertakings to be aware of market strategies of their competitors. The competitive outcome of information exchange depends on the characteristics of the market in which it takes place (such as concentration, transparency, stability, symmetry, complexity etc.) as well as on the type of information that is exchanged, which may modify the relevant market environment towards one liable to coordination.47 [C]ommunication of information among competitors may constitute an agreement, a concerted practice, or a decision by an association of undertakings with the object of fixing, in particular, prices or quantities. Those types of information exchanges will normally be considered and fined as cartels. Information exchange may also facilitate the implementation of a cartel by enabling companies to monitor whether the participants comply with the agreed terms. Those types of exchanges of information will be assessed as part of the cartel.48

Although articulated in the different vocabulary of Article 101, the guidelines present a similar set of criteria to those identified in US law. Both the structure of the market and the nature of the information exchanged are relevant criteria. On market structure, the guidelines find information exchange more likely to have anticompetitive effects ‘in markets which are sufficiently transparent, concentrated, non-complex, stable and symmetric’.49 Similarly, exchanges of individualized data are more concerning than those of aggregated data,50 exchanges of historic data are more benign than those of present or future data,51 highly frequent exchanges are more suspect,52 and ‘exchanges of genuinely public information are unlikely to constitute an infringement of Article 101’, but a greater suspicion arises when data are kept to the exchanging parties.53 One concern raised in the guidelines that is characteristic of the EU’s concern for fringe players in the market and is not shared by US antitrust concerns foreclosure effects from information exchange: An exclusive exchange of information can lead to anti-competitive foreclosure on the same market where the exchange takes place. This can occur when the exchange of commercially sensitive information places unaffiliated competitors at a significant competitive disadvantage as compared to the companies affiliated within the exchange system. This type of foreclosure is only possible if the information concerned is very strategic for competition and covers a significant part of the relevant market.54

48 49 50 51 52 53 54 46 47

ibid para 57. ibid para 58. ibid para 59. ibid para 77. ibid para 89. ibid para 90. ibid para 91. ibid para 92. ibid para 70.

Cartels and the exchange of information  231

IV.

OPEN QUESTIONS OF LAW AND POLICY

Today, the legal criteria governing information exchanges among competitors seem relatively settled and predictable in both the US and the EU. Nonetheless, there remain open questions about antitrust risk created by information exchanges that are not easily answered simply by surveying the applicable legal doctrines and agency guidance. These fall into two big buckets: (1) to what extent is information exchange, standing alone, sufficient to create an inference of price fixing?; (2) when there is no evidence of actual price fixing, to what extent does information exchange still pose a serious antitrust risk? As previously observed, under US law challenges to information exchanges can be brought either on the theory that the information exchange evidences the formation of a price-fixing conspiracy (in which event it is illegal per se) or on the theory that the information exchange itself harms competition by reducing competitors’ incentives to compete aggressively on price. Although both of these theories are available in principle, the former theory is the one more commonly invoked. Plaintiffs relatively rarely challenge information exchange as an antitrust violation itself, and more frequently challenge it as circumstantial proof of price-fixing collusion. Although it is common to see competitor information exchange as part of the evidence supporting price-fixing charges in criminal antitrust cases, stand-alone civil challenges to alleged collusion based principally on the existence of competitor information exchange have not been overwhelmingly successful.55 Courts frequently note, per Gypsum, that competitor information exchange is not per se illegal standing alone and that its existence does not necessarily raise an inference of collusion. Typically, circumstantial evidence of agreement on prices or output in addition to the information exchange is necessary to make out a collusion case. Turning to rule of reason challenges, there have been relatively few cases in which plaintiffs bring such claims. Although the Todd Court allowed a private challenge to information exchange proceed past the motion to dismiss stage, most plaintiffs have chosen to allege per se theories, which comes with the advantage of not having to prove a relevant market, market power or anticompetitive effects, but the disadvantage of having to prove actual collusion. In one recent enforcement action, the Justice Department did bring a civil suit against six broadcast television companies that had allegedly participated in information exchange regarding revenue pacing – which compares a broadcast station’s revenues booked for a certain time period to the revenues booked in the same point in the previous year – in advertising

55 Significant recent US Court of Appeals judgments include: In re Flat Glass Antitrust Litig., 385 F.3d 350 (3rd Cir. 2004) (relying on information exchange among competitors to find that factual issues precluded summary judgment for defendants on conspiracy claims); Stanilaus Food Prods. Co. v USS-POSCO Indus., 803 F.3d 1084 (9th Cir. 2015) (rejecting claim that inter-firm communications sufficed as plus factors to prove conspiracy); In re Chocolate Confectionary Antitrust Litig., 801 F.3d 383 (3rd Cir. 2015) (finding that information exchange not sufficient to create an inference of price fixing conspiracy); In re Text Messaging Antitrust Litig., 782 F.3d 867 (7th Cir. 2015) (same); Omnicare, Inc. v UnitedHealth Group, Inc., 629 F.3d 697 (7th Cir. 2011) (finding that exchange of even pricing data insufficient to support inference of conspiracy); Blomkest Fertilizer, Inc. v Potash Corp. of Saskatchewan, 203 F.3d 1028 (8th Cir. 2000) (en banc) (divided en banc court finding that information exchange among competitors insufficient to create a genuine issue of material fact showing the presence of a price-fixing conspiracy among potash manufacturers).

232  Research handbook on cartels sales.56 While not alleging that the defendants had engaged in actual price fixing, the Justice Department alleged that the ‘exchange of competitively sensitive information allowed these television broadcast companies to disrupt the normal competitive process of spot advertising in markets across the United States’.57 To the extent that anti-competitive effects and procompetitive justifications are important in rule of reason cases, there remain open questions about the application of those principles. One question concerns what evidence a plaintiff would need to show to establish that an information exchange had an anti-competitive effect on prices. Information exchange among competitors can have the effect of smoothing prices – meaning that it eliminates both peaks and valleys in prices. A plaintiff would seem to have the strongest case if the mean price increased because of the information exchange – although even a slight increase in the mean price might not be adverse to the interests of buyers if it made prices more transparent and predictable for buyers. A closer case would arise if mean prices remained at or below previous prices because of the effects of the information exchanged, but a buyer argued that the level prices were higher than the ones he himself would have paid in the but-for world, perhaps because of the timing or unique nature of his purchases. In such a case, a court would have to decide whether an information exchange producing a market-wide mean price at or below previous levels may still be unlawful if it leads to net price increases for some subset of buyers in the market. Questions might also arise concerning the scope of procompetitive justifications allowed to justify an information exchange. Early on in the COVID-19 pandemic, the US Justice Department blessed a proposed arrangement by a group of pharmaceutical companies to exchange information regarding ‘manufacturing facilities, raw materials, and supplies that could be used to produce COVID-19 mAb treatments, specifically global capacity that has been reserved internally or through third parties for the potential production of COVID-19 mAb treatments’.58 The Division noted that [g]iven the immediate need for effective therapeutics, and the likely demand, the Proposed Conduct, which is seeking to use production capacity efficiently and enable the rapid, large-scale production of mAbs, could offer Americans considerable benefits and provide [them] with products or services that might not be available otherwise.59

The Division thus recognized that competitive information exchange may be a catalyst for rapid innovation, particularly if it is subject to competitive safeguards of the types that the parties proposed.

56 Department of Justice, ‘Justice Department Requires Six Broadcast Television Companies to Terminate and Refrain from Unlawful Sharing of Competitively Sensitive Information’ (13 November 2018) www​.justice​.gov/​opa/​pr/​justice​-department​-requires​-six​-broadcast​-television​-companies​ -terminate​-and​-refrain​-unlawful [accessed 3 March 2022]. 57 ibid. 58 Justice Department Business Review Letter, Re: Eli Lilly and Company, AbCellera Biologics, Amgen, AstraZeneca, Genentech, and GSK Expedited Business Review Request Pursuant to COVID-19 Expedited Procedure (23 July 2020) www​.justice​.gov/​atr/​page/​file/​1297161/​download [accessed 3 March 2022]. 59 ibid.

Cartels and the exchange of information  233

V. CONCLUSION Information exchange among competitors can be procompetitive, but it can also soften competition or facilitate price fixing. For the purposes of this volume, which is concerned with cartel behaviour, perhaps the most important summative point is that information exchange can give rise to cartel liability, but it can also give rise to liability even outside of cartel behaviour. At the same time, properly structured information exchange is unlikely to cause antitrust problems; therefore careful attention to agency guidelines and case law – which provide fairly clear guidance on this issue – is advisable. Further, this chapter has shown that judicial and agency attitudes toward information exchange are contingent on underlying attitudes about whether market economies should be characterized more by robust atomistic competition or rather by collaboration among rival firms. As those underlying attitudes shift, so does the law on information exchange.

14. Buyer cartels Peter C. Carstensen

I. INTRODUCTION This chapter examines the law and policy governing horizontal agreements among buyers.1 While buyer cartels should be absolutely illegal unless expressly authorized and regulated, some scholars and a few courts have argued that even pure buyer cartels should be lawful in some instances.2 On the other hand, reasonable buying groups that pool the needs of buyers can make real contributions to economic efficiency. Buyer cartels and buying groups have received increasing notice in the past 15 years, with growing awareness of buyer power’s potential for harmful competitive effects.3 The most recent area of interest is labour markets, where buyer power appears to be much more pervasive than conventional labour market theory had postulated.4 The central thesis of this chapter is that buyer cartels pose serious risks to the market process and have no persuasive justification. Hence, unregulated buyer cartels should be unlawful under all circumstances, despite the potential negative effects of seller power on buyers. At the same time, buying groups have significant utility even when they engage in minimal joint activities. But those same groups can result in significant cartelistic competitive harm if they have sufficient power in the buying market. Overall, there remains significant under-appreciation of the prevalence and the impact of buyer cartels and buying groups on the competitive process. 1 This chapter draws substantially on my earlier work on this topic: P. Carstensen, Competition Policy and Buyer Power: A Global Issue (Edward Elgar Publishing, 2017) Chapter 7 (hereafter Competition Policy); and P. Carstensen, ‘Buyer Cartels versus Buying Groups: Legal Distinctions, Competitive Realities, and Antitrust Policy’ (2010) 1 William & Mary Bus. L. Rev. 1. 2 See, e.g., Balmoral Cinema, Inc. v Allied Artists Pictures Corp. 885 F.2d 313 (6th Cir. 1989) 316–17; A. Devlin, ‘Questioning the Per Se Standard in Cases of Concerted Monopsony’ (2007) 3 Hastings Bus. L.J. 223, 241–43 (arguing that reduced costs resulting from monopsony should be considered in assessing the reasonableness of such collusion); similarly, some scholars have argued for the legality of both buyer and seller cartels: see Christopher Leslie, ‘Achieving Efficiency through Collusion: A Market Failure Defense to Horizontal Price-Fixing’ (1993) 81 Cal. L. Rev. 243; and R. Blair and D.D. Sokol, ‘The Rule of Reason and the Goals of Antitrust: An Economic Approach’ (2012) 78 Antitrust L.J. 471, 487–90. 3 In addition to my own work (see n 1), other notable examples include: R. Blair and J. Harrison, Monopsony in Law and Economics (Cambridge University Press, 2012); R. Blair and J. Harrison, Monopsony: Antitrust Law and Economics (Princeton University Press, 1993); R. Noll, ‘“Buyer Power” and Economic Policy’ (2005) 72 Antitrust L.J. 589; J. Kirkwood, ‘Powerful Buyers and Merger Enforcement’ (2012) 92 Boston U. L. Rev. 1485 and; C. Scott Hemphill and N. Ross, ‘Mergers that Harm Sellers’ (2018) 127 Yale L. Rev. 2078. 4 See, e.g., A. Manning, ‘Monopsony in Labor Markets’ (2021) 74 ILR Rev. 3; T. Angerhofer and R. Blair, ‘Collusion in the Labor Market: Intended and Unintended Consequences’, CPI, 12 June 2020; S. Naidu, E. Posner and E. Weyl, ‘Antitrust Remedies for Labor Market Power’ (2018) 132 Harv. L. Rev. 537.

234

Buyer cartels  235 As an initial matter, it may seem difficult to distinguish between the bidders at an auction who allocate purchases as well as deciding what they will pay for items from a group of hospitals that pool their purchases and seek lower prices in return for the volume they offer.5 In the United States, the auction-buying ring (which is a cartel) is illegal per se and its members are committing a felony,6 while the hospital buying group is subject to a rule of reason analysis, with a strong presumption of legality.7 What differentiates these situations is the functional characterization of the buyer-entity. But a nominally lawful buying group can become a cartel akin to the auction conspiracy.8 Conversely, a group of bidders at an auction might lawfully collaborate to make a better (that is, higher) bid for an item, often a bundle of components, than any one individual bidder could offer.9 Because there is a continuum of functions from a buying group or a cartel, effective public policy must identify the factors that justify alternative characterization of the entity. Because buyer power can arise from much smaller market shares than are usually associated with seller power, there are important policy implications for both the identification of buyer cartels and the assessment of the competitive risks that legitimate buying groups can present. Moreover, buyer cartels can include more participants and face lower risks of defection because of the strong incentives to remain. Such agreements can be more informal, even tacit, for the same reason. Thus, buyer cartel issues require a fuller recognition of the incentives that motivate and facilitate such conduct, as well as the need to modify conventional criteria for inferring the existence of a cartel in light of these economic incentives. Finally, although legitimate buying groups can efficiently respond to the needs of their participants, they can pose real threats to the long-term competitiveness of both the supply and demand sides of the market. The prevailing assumption that even very large buying groups are competitively benign ignores the differences between buyer and seller power that result in competitive risks from buyer power at levels that arguably do not create serious antitrust concerns on the selling side.10 Competition policy needs to recognize and articulate, much more clearly than it does at present, the competitive risks that powerful buying groups can pose and, in light of those risks, adopt better standards for judging the reasonableness of such buying groups. Section II focuses on the differences between buyer cartels and buying groups. It also explains key differences between seller cartels and buyer cartels. Section III sets forth conflicting contemporary legal standards governing both types of activity and evaluates the policy arguments for and against legalizing some buyer cartels. Finally, it evaluates the competitive 5 See B. Meier and W. Walsh, ‘Senate Panel Criticizes Hospital Buying Groups’, New York Times, 1 May 2002, C1. 6 See, e.g., United States v Taubman, 297 F.3d 161 (2d Cir. 2002). 7 See, e.g., Nw. Wholesale Stationers v Pac. Stationery & Printing, 472 US 284 (1985) 297–98; see also J. Jacobson and G. Dorman, ‘Joint Purchasing, Monopsony and Antitrust’ (1991) 36 Antitrust Bull. 1, 4 (arguing that joint purchasing should be treated more leniently than joint ventures among sellers). 8 See In re Brand Name Prescription Drugs Antitrust Litig., 123 F.3d 599 (7th Cir. 1997) 606. 9 When items are sold in a bundle, there is a plausible basis for a joint buying agreement in order to facilitate the most efficient use of the goods by combining the highest value a set of buyers would give for each component of the bundle. See G. Stigler, ‘A Note on Block Booking’ [1963] Sup. Ct. Rev. 152 (movie bundling explained in terms of maximizing value to distributor). Such buying agreements can, however, create antitrust issues. See, e.g., United States v Seminole Fertilizer Corp., No. 97-1507-CIV-T-17E, 1997 WL 692953 (MD Florida, 19 September 1997). 10 See, e.g., Jacobson and Dorman (n 7).

236  Research handbook on cartels benefits and risks associated with legitimate buyer groups to argue that stricter scrutiny of such entities is necessary. The central policy conclusions that emerge from this analysis are set forth in Part IV. With respect to buyer cartels, first, there is good reason to believe that they are more prevalent than current enforcement actions would imply. Second, while it is difficult sometimes to distinguish cartels from legitimate buying groups, cartels not expressly authorized by public authority should remain per se illegal. Third, buyer cartels can involve larger and less well-organized groups than standard cartel theory postulates. Fourth, because buyer power raises from small market shares, cartels can also be less inclusive and more narrowly focused than conventional cartel theory would suggest. Finally, with respect to legitimate buying groups, such entities can create significant competitive risks. Hence, those likely to cause such harms merit stricter scrutiny.

II.

BUYER CARTELS AND BUYING GROUPS

Distinguishing between a buyer cartel and a buying group is easy at a conceptual level.11 But in application, the two activities exist on a continuum ranging from a pure cartel to a buying group that totally integrates the purchase of all inputs. The central problems in characterization are that form and function are not congruent and that buyers do not necessarily differentiate the bases on which they obtain lower input prices. Hence, a group that is functionally a buying group can appear to be little more than a cartel, but it is equally possible to ‘dress up’ a cartel to look like a buying group. Buyer cartels have different characteristics than conventional seller cartels that need to be recognized. A.

Buyer Cartels

A cartel is a group of competitors who have agreed to limit or eliminate their competition in some economically relevant dimension.12 The objective of such a combination is to create, allocate and exploit power in the market. While conventional monopsony theory posits primarily exploitative explanations, that is, collusive or unilateral conduct to reduce input prices, buyer cartels can also: (1) allocate customers or suppliers; (2) agree on the composition of the output or input ratios; or (3) share competitively significant information.13 Moreover, buyer cartels can use their collective power to exclude or restrain their competitors in the markets in which they buy goods or otherwise regulate the nonprice dimensions of the supply market as a means of entrenching their own dominance in both upstream and downstream markets.14 A buyer cartel focuses on eliminating competition for input purchases to reduce prices or otherwise control supplier conduct. Buyers may collude to drive down input prices even 11 See T. Piraino, ‘A Proposed Antitrust Approach to Buyers’ Competitive Conduct’ (2005) 56 Hastings L.J. 1121, 1131–32. 12 See N. Rosenfelt, ‘The Verdict on Monopsony’ (2008) 20 Loy. Consumer L. Rev. 402, 405–06. 13 See R. Lande and H. Marvel, ‘The Three Types of Collusion: Fixing Prices, Rivals, and Rules’ [2000] Wis. L. Rev. 941, 951–53. 14 See, e.g., Klor’s, Inc. v Broadway-Hale Stores, Inc., 359 US 207 (1959) 212–13; Montague v Lowry, 193 US 38 (1904) 45; Toys ‘R’ Us, Inc. v Fed. Trade Comm’n, 221 F.3d 928 (7th Cir. 2000) 936–38.

Buyer cartels  237 though they sell in highly competitive markets where cartelization is unlikely.15 Such buyer collusion may eventually reduce the total output in the market.16 A significant reduction in output can affect the downstream market by reducing the volume of the output produced, resulting in higher prices for the remaining production.17 Examples of buyer cartels abound. One of the earliest was Montague v Lowry, involving a challenge to a buyer cartel of retailers of mantels and fireplace tiles.18 The cartel insisted that manufacturers deal only with its members – thereby boycotting the cartel’s competitors – and adopt and enforce resale price maintenance. Having a supplier enforce the cartel’s commands is often a more effective way for retailers to police their cartel than trying to do so directly.19 Another early case involved use of buying power to compel lumber companies to refuse to deal with integrated wholesaler-retailers.20 As in Montague, the cartel used its buyer power to eliminate potentially more efficient competition. Other buyer cartels have focused on labour or agricultural inputs. Several cases have challenged the practices of hospitals and other employers of nurses, alleging that employers engaged in collective wage-setting outside a union contract.21 In another case, a court of appeals decision upheld a complaint challenging as a buyer cartel a scheme to coordinate job classifications and consequent wage rates for various types of professional workers in the energy industry.22 Similar cartels have been documented in agriculture with respect to blueberries in Maine23 and tobacco in the Southeast.24 Another classic case involved an agreement to set the percentage of durum wheat in macaroni and spaghetti at a time when durum wheat was in short supply.25 Finally there are auction cartels, such as those involving postage stamps.26 Use of cartel power varies depending on the goals and interests of the participants, but also, importantly, on the nature of the supply market. If supply is relatively price inelastic, then 15 A good example is the timber buyer’s cartel in Alaska that drove down the price of trees in the regions where those companies operated, but which had no effect on the overall price of the lumber produced from those trees because that lumber competed in a much broader geographic market; see Reid Bros. Logging Co. v Ketchikan Pulp Co., 699 F.2d 1292 (9th Cir. 1983) 1303. 16 The likelihood of this effect and its substantiality are functions of the elasticity of supply; see Carstensen (2017) (n 1) Chapter 3. 17 This effect is discussed in R. Blair and J. Harrison (1993) (n 3) 36–42. See also R. Sexton and M. Zhang, ‘An Assessment of the Impact of Food Industry Market Power on US Consumers’ (2001) 17 Agribusiness 59; C. Doyle and M. Han, ‘Expropriating Monopoly Rents through Stable Buyer Groups’ (Amsterdam Center for Law and Economics, Working Paper No. 2009-03); see also M. Han, ‘How Buyer Groups Can Effectively Operate as Stable Cartels’ (2009) 62 Aenorm 14. 18 Montague v Lowry, 193 US 38 (1904). 19 See J. Palamountain, The Politics of Distribution (Harvard University Press, 1955) 99–100; W. Bowman, ‘The Prerequisites and Effects of Resale Price Maintenance’ (1955) 22 U. Chi. L. Rev. 825, 834–35; L. Telser, ‘Why Should Manufacturers Want Fair Trade?’ (1960) 3. J.L. & Econ. 86; see also Doyle and Han (n 17). 20 E. States Retail Lumber Dealers’ Ass’n v United States, 234 US 600 (1914). 21 See, e.g., Fleischman v Albany Med. Ctr., 728 F. Supp. 2d 130 (NDNY 2010). 22 Todd v Exxon Corp., 275 F.3d 191 (2d Cir. 2001) 191. 23 See ‘Judge OK’s Award in Blueberry Lawsuit’, Boston Globe, 4 January 2004, www​.boston​.com/​ news/​local/​articles/​2004/​01/​04/​judge​_oks​_award​_in​_blueberry​_lawsuit/​ [accessed 25 February 2022]. 24 DeLoach v Lorillard Tobacco Co., 391 F.3d 551 (4th Cir. 2004) 554. 25 Nat’l Macaroni Mfrs. Ass’n v Fed. Trade Comm’n, 45 F.2d 421 (7th Cir. 1965) 426–27. 26 See J. Asker, ‘A Study of the Internal Organization of a Bidding Cartel’ (2010) 100 Am. Econ. Rev. 724; and R. Marshall and M. Meurer, ‘Bidder Collusion and Antitrust Law: Refining the Analysis of Price Fixing to Account for the Special Features of Auction Markets’ (2004) 72 Antitrust L.J. 83.

238  Research handbook on cartels colluding buyers have a strong incentive to drive down price because it will not significantly reduce the supply of the input. In other cases, supply may be more price elastic, and reducing price would result in an inadequate supply,27 but buyers can still use their collective power to compel their suppliers to discriminate in price or refuse to deal with new entrants or marginal buyers.28 Thus, supply elasticity will affect the methods used by a cartel but may not alter its goals.29 B.

Legitimate Buying Groups

A buying group is a set of potentially competing buyers that pool their purchase orders and, jointly or through an agent, negotiate for the inputs they seek even if the products obtained will be shipped directly to each buyer and billed separately.30 The fundamental distinction between a legitimate buying group and a cartel is that a buying group acts to gain the efficiencies of a joint enterprise. The buyer-participants have integrated some or all of their input acquisition function by creating or participating in the buying group. Efficiencies (passed through as lower prices) can result from longer production runs, reductions in transaction costs or lower costs per unit of quality control, and can include protection against defective or dangerous products, preferred status with shipping services based on high volume and improved ability to develop new products.31 A buying group can reduce transaction costs by acting as a single buyer for a given input. A centralized buying system must have a coordinated way to distribute the inputs among participants as well as assure payment for them. The scale of purchases and the range or variety of inputs buyers need will determine whether the participants find a buying group to be useful. A buying cooperative can also bargain for price. In the abstract model of competitive prices, all prices arise from a market process that results in a single price known to all buyers and sellers. But in a real-world, workably competitive market, sellers almost always have some latitude in pricing. In particular, a seller may find it attractive to lower prices slightly to gain a large order that will ensure more efficient volume in the production facility. A buyer seeking a large volume may make a more extensive search of the market for suppliers and generate a more active bidding process as a result. Therefore, in a market where competition is imperfect but workable, buyers can gain a price advantage by employing more sophisticated and effective searches for the inputs they need. At the same time, sellers can profit from making

27 If, however, buyers can obtain additional inputs from another, more competitive market, they may be able to exploit one set of suppliers while still filling their residual supply needs. They will then be somewhat less concerned about supplier reaction. 28 The collective volume of purchases gives a cartel significant leverage over any individual seller because that seller must engage in a costly and time-consuming search for other buyers. See P. Carstensen, ‘Buyer Power, Competition Policy, and Antitrust: The Competitive Effects of Discrimination among Suppliers’ (2008) 53 Antitrust Bull. 271, 281 and 284. 29 Doyle and Han (n 17) posit a buyer cartel that requires suppliers to raise their prices, thus causing some reduction in sales but generating significant profits for the sellers, which the sellers then rebate to the buyers in the form of slotting fees or other kickbacks. See Discon v NYNEX, 525 US 128 (1998); NicSand v 3M, 507 F.3d 442 (6th Cir. 2007). 30 See T. Piraino, ‘A Proposed Antitrust Approach to High Technology Competition’ (2002) 44 Wm. & Mary L. Rev. 65, 92–93; and Piraino (n 11) 1151 n 139. 31 See Piraino (n 30) 835–36.

Buyer cartels  239 larger sales at lower prices when the transaction reduces selling costs or when the resulting volume takes advantage of scale economies. The economic logic is that some functions are subject to significant economies of scale and scope that will generate gains for the participants. But other aspects of the same business may be subject to diseconomies of scale. If those functions are separated, the resulting partially integrated enterprises are more efficient at both levels than a fully integrated enterprise of the same size. The evidence from the American grocery market is that in the 1950s and 1960s, at least, national chains were less efficient than regional chains, in part because the regional chains used buying groups to mimic the buying efficiency of the national chains but avoided the inefficiencies of the national chains’ centralized retail management systems.32 Buying groups occur in a number of retail activities. Two prominent American examples are Topco, which provides a joint buying programme and house brands for its members, which are midsized grocery store chains,33 and Northwest Wholesale Stationers, which provides buying, warehousing and delivery services to retail stationery stores in the Pacific Northwest.34 In the European Union (EU), Euronics is a buying group for independent electrical appliance retailers, representing 11,000 stores.35 The ten largest European grocery buying groups had between 30 and 100 billion euros in annual turnover as of 2011.36 Some buying groups originate with an entrepreneurial actor that organizes the group and acts as its agent, sometimes using a franchise model.37 The participants in the downstream market benefit from the efforts of an upstream coordinator, a third party with more efficient skills in the provision of inputs. There are no fixed parameters for a buying group. A legitimate buying group involves some integration of activities, but the integration is limited to facilitating the functioning of the particular enterprise.38 One way to distinguish a buying group from a buyer cartel is to focus on its functional goals. If the participants make an investment in, and consolidate, coordinate and administer some aspects of, their buying activity, then they are a prima facie buying group. Conversely, if the group exists only to agree on how the parties will conduct their own purchases, it is prima facie a cartel.39

P. Carstensen and H. First, ‘Rambling through Economic Theory: Topco’s Closer Look’, in E. Fox and D. Crane (eds), Antitrust Stories (Foundation Press, 2007) 178­–79. 33 See United States v Topco Assocs. Inc., 405 US 596 (1972) 598; see also Carstensen and First (n 32). 34 See Nw. Wholesale Stationers, Inc. v Pac. Stationery & Printing Co., 472 US 284 (1985) 286–87. See also E. Brunet and D. Sweeney, ‘Integrating Antitrust Procedure and Substance after Northwest Wholesale Stationers: Evolving Approaches to Pleadings, Burden of Proof, and Boycotts’ (1986) 72 Va. L. Rev. 1015. 35 See www​.euronics​.com/​[accessed 25 February 2022]. 36 Institute of Grocery Distribution, ‘Grocery Buying Groups’ (4 February 2016) www​.igd​.com/​ articles/​article​-viewer/​t/​grocery​-buying​-groups/​i/​15517 [accessed 25 February 2022]. 37 In the United States, examples include the IGA and Piggly Wiggly grocery chains. See www​.iga​ .com/​about [accessed 25 February 2022]; and www​.pigglywiggly​.com/​about​-us [accessed 25 February 2022]. 38 See P. Dobson, ‘Exploiting Buyer Power: Lessons from the British Grocery Trade’ (2005) 72 Antitrust L.J. 529, 543–44. 39 See, e.g., Mandeville Island Farms, Inc. v Am. Crystal Sugar Co., 334 US 219 (1948) 223–24. 32

240  Research handbook on cartels C.

Distinguishing Buying Groups from Cartels

Because of the flexibility inherent in the organization of legitimate buying groups, there can be significant difficulty in distinguishing such groups from cartels. The hallmark of a buyer cartel is that the buyers have coordinated their individual buying only to exercise power over sellers. The key characteristic is that the buyers have not integrated their buying activity to any degree. In contrast, a buying group will have integrated some elements of its input buying process. This is the crucial distinction. Once a buying group has been organized, it may be able to impose other, cartelistic, restraints on its suppliers, such as requiring them to refuse to deal with nonmembers or requiring more favourable terms than nongroup buyers would enjoy.40 In addition, the group may coordinate downstream competition through various restraints, including resale price controls or territorial allocation.41 There are plausible theoretical arguments in support of the claim that many of these restraints are necessary to facilitate the legitimate interests of the group. Therefore, it is essential to evaluate whether the restraint serves to address a risk of opportunistic behaviour by participants or otherwise coordinates their internal relations. Buying groups are also more likely to be legitimate when input production is price elastic, both because economies of scale are likely and because attempts to depress input prices artificially will be met with reduced output levels. In these situations, a buying group’s volume purchase creates higher net profits (and increased output) for producers while at the same time holding the total cost (price plus transactional expenses) down for buyers. Again, a focus on the specific activities and functions of the buying group is important because, even when supply markets are elastic, a group with a sufficient share of the buying side might well impose its will on producers with respect to nonprice aspects of competition. D.

Differences between Buyer Cartels and Seller Cartels

There are four ways in which buyer cartels present different characteristics from conventional seller cartel models. The differences make buyer cartels more likely and harder to detect. First, buyer power arises with much lower market shares than is generally assumed to be the case on the selling side of the market.42 Thus, the EU has found that a buyer taking as little as 20 per cent of a grocery input has the capacity to distort competition.43 In the UK, power was found in groceries where the buyer took as little as 10 per cent of the branded goods.44 Toys “R” Us had only about a 20 per cent share of the toy retail market but was able to coerce its

‘Most favoured nation’ or even ‘most favoured nation plus’ contracts provide a frequent means to achieve this goal. Cf. United States v Blue Cross Blue Shield of Michigan, 2:10-cv-14155-DPH-MKM (ED Michigan) www​.justice​.gov/​atr/​case/​us​-and​-state​-michigan​-v​-blue​-cross​-blue​-shield​-michigan [accessed 25 February 2022]. 41 See, e.g., United States v Topco Assocs. Inc., 405 US 596 (1972) 601–04. 42 This analysis is elaborated in Carstensen (2017) (n 1) 65–75. 43 See European Commission, Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-operation Agreements [2011] OJ C11/1 para 204; see also Case No IV/M.1221, Rewe/Meinl, Commission decision, 3 February 1999, C(1999) 228 final, para 99. 44 See Dobson (n 38). 40

Buyer cartels  241 major suppliers into refusing to deal with third parties.45 Because the buyer decides whether to buy and from whom to buy, this creates significant leverage, especially when suppliers face significant costs in seeking alternative outlets. Second, because buyers share an interest in keeping input costs down, the risks of defection from a cartel agreement are low. The defector must bid up the price and process the input into a larger volume of goods that will expand output and so is likely to lower sales prices even as its costs increase. In contrast, in a seller cartel, defection can yield an immediate gain to the defector by increasing volume even if the price per unit is lower. Thus, buyer cartels are generally more durable and also require less explicit organization and monitoring. Third, taken together, the lower market share necessary for power and the greater durability of buyer cartels leads to such organizations being made more varied. One result is that they can be more inclusive. Hence even in markets with a substantial number of competing buyers, cartelistic agreements are possible because the mutual interest of the participants gives them a strong incentive to cooperate.46 But for the same reasons, it is also possible to have cartels that have limited participation from competitors, and which can focus on limited objectives. The no-poach agreements in employment are good examples of this. The participants agree not to compete for each other’s employees but remain free to compete for new entrants and for employees of non-participants.47 Fourth, again because of the nature of buyer power, tacit collusion is very significant risk in buyer markets. If buyers respect each other’s suppliers and so do not compete head-to-head for their services, each has somewhat more freedom to impose burdens on its suppliers because those suppliers will have few, if any, alternative outlets for their products or services. Taken together, these four factors make buyer cartels more likely but also harder to identify and more challenging to remedy. Indeed, where the restraints are established, tacit understandings can maintain them more easily on the buying side than on the selling side.

III.

THE LEGAL TREATMENT AND COMPETITION POLICY ANALYSIS OF BUYER CARTELS AND BUYING GROUPS

A.

Legal Treatment of Buyer Cartels and Buying Groups

Many competition laws expressly prohibit cartel agreements among buyers, and the oldest known cartel case involved a grain-buying conspiracy in ancient Athens.48 It appears that the conspirators were put to death – a stricter penalty than is currently available even among countries that use criminal sanctions.49 In the United States it is unlawful, as well as a basis for treble damage liability, for buyers to agree (1) on what they individually will pay for goods or services, (2) that they will not bid against each other for particular items at an auction or

See Toys ‘R’ Us v FTC, 221 F.3d 928 (7th Cir. 2000). Todd v Exxon, 275 F.3d 191 (2nd Cir. 2001). 47 See United States v Adobe Sys. Inc., No. 1:10-cv-01629 (DDC, Final Judgment, 18 March 2011) www​.justice​.gov/​atr/​case/​us​-v​-adobe​-systems​-inc​-et​-al [accessed 25 February 2022]. 48 See L. Kotsiris, ‘An Antitrust Case in Ancient Greek Law’ (1988) 22 Int’l Law 451. 49 ibid 457. 45 46

242  Research handbook on cartels (3) that they will restrict wage or employment competition.50 Thailand’s competition law expressly prohibits horizontal restraints on buying,51 although the law appears generally to be unenforced.52 South Africa similarly forbids buyer-side restraints.53 Other examples include cases from Canada.54 The EU has held such conduct to be absolutely illegal.55 EU state competition authorities have also been aggressive in challenging it.56 This is consistent with the express terms of Article 101(1) of the Treaty on the Functioning of the European Union (‘TFEU’).57 Indeed, globally, there is general recognition that buyer cartels are anticompetitive and should be prohibited.58 There is a tension between the policy goal of consumer welfare and challenges to buyer cartels that present no evidence of direct harm to consumers.59 European and American case law reflects a consistent policy that such cartels are unlawful. This is more consistent with the goal of facilitating the competitive process than with the narrow focus on consumer welfare only.60 At the same time, American enforcement agencies, the EU and other competition authorities rarely object to the creation of ‘buying groups’.61 The United States apparently presumes that such groups are lawful if they buy no more than 35 per cent of the total volume of purchases 50 See, e.g., United States v Crescent Amusement Co., 323 US 173 (1944); Swift & Co. v United States, 196 US 375 (1905); Knevelbaard Dairies v Kraft Foods, Inc., 232 F.3d 979 (9th Cir. 2000); United States v Romer, 148 F.3d 359 (4th Cir. 1998); Reid Bros. Logging Co. v Ketchikan Pulp Co., 699 F.2d 1292 (9th Cir. 1983); and Asker (n 26). For cases dealing with employment issues, see, e.g., Todd v Exxon Corp., 275 F.3d 191 (2d Cir. 2001). See also United States v Adobe Sys. Inc., No. 1:10-cv-01629 (DDC, Final Judgment, 18 March 2011) www​.justice​.gov/​atr/​case/​us​-v​-adobe​-systems​ -inc​-et​-al [accessed 25 February 2022]. 51 Trade Competition Act B.E. 2542 §§ 25(1) and 27(2) (1999) (Thailand). 52 See C. Poomipark, M. Intaranont and S. Thanapase, ‘Thailand to Overhaul Trade Competition Law’, Mondaq, 25 February 2010, www​.martindale​.com/​matter/​asr​-929360​.Thailand​.pdf [accessed 25 February 2022]. 53 Competition Act 98 of 1999, as amended, § 4(1)(b)(i) (S. Afr.) (an agreement among firms is prohibited ‘if it involves any of the following restrictive horizontal practices: (i) directly or indirectly fixing a purchase or selling price or any other trading condition’) (emphasis added). 54 See, e.g., R. v Abitibi Power & Paper Co., 36 CPR 1888 (Que. QB); and 321665 Alberta Ltd. v Mobil Oil Can. Ltd., [2011] ABQB 292 (Canada). 55 See, e.g., Case C-209/07, Competition Authority v. Beef Industry Dev. Soc’y Ltd. [2008] ECR 1-8637; Case COMP/C.38.238/B.2, Raw Tobacco Spain, Commission decision, 20 October 2004, C(2004) 4030. 56 See European Competition Network, ECN Activities in the Food Sector (2012) http://​ec​.europa​.eu/​ competition/​ecn/​food​_report​_en​.pdf [accessed 25 February 2022]. 57 ‘The following shall be prohibited […] all agreements [that] directly or indirectly fix purchase […] prices or any other trading conditions’: Article 101 TFEU. 58 In 2020, India proposed to add an explicit condemnation of buyer cartels. See P. Barik, ‘India: Buyer’s Cartels Have Now Taken The Driver’s Seat In India’, Mondaq, 20 April 2020, www​ .mondaq​.com/​india/​cartels​-monopolies/​919282/​buyer39s​-cartels​-have​-now​-taken​-the​-driver39s​-seat​-in​ -india [accessed 25 February 2022]. 59 See text at notes 66–69 infra for a further analysis of this issue. 60 V. Daskalova, ‘Consumer Welfare in EU Competition Law: What Is It (Not) About?’ (TILEC Discussion Paper 2015-011, 1 May 2015) https://​papers​.ssrn​.com/​sol3/​papers​.cfm​?abstract​_id​=​2605777 [accessed 25 February 2022] 20–22. 61 See, e.g., US Department of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in Health Care (August 1996) www​.justice​.gov/​atr/​page/​file/​1197731/​download [accessed 25 February 2022] 54–55.

Buyer cartels  243 in a particular market and that product is no more than 20 per cent of the resulting revenue.62 Some EU decisions suggest that adverse competitive effects will arise only if a buyer takes more than 22 per cent of the volume in a market, but its guidelines require review if a buying group takes more than 15 per cent of any commodity.63 Thus, there is recognition that buying groups can have adverse competitive impact, but the market share necessary to justify serious inquiry remains uncertain. B.

Buyer Cartels and the Per Se Illegal Standard

Conventional analysis says that buyer cartels cause economic harm similar to that caused by seller cartels.64 But as with seller cartels, some scholars defend buyer cartels as enhancing efficiency in some circumstances.65 The credibility of these arguments depends in large part on the goals of competition policy against which those arguments are measured. Although the conventional explanation of why buyer cartels are undesirable has serious limitations, as discussed below, there remain serious and substantial reasons to object to such cartels and the justifications appear to overestimate substantially the potential gains to the competitive process. 1. Theories of competitive harm The conventional economic welfare argument against buyer cartels rests on the assumptions that buyers purchase in discrete units and resell in a market in which they are the only sellers and that producers face increasing unit costs as volume increases. Under these assumptions, when the price paid for inputs is reduced, output of that commodity declines. As a result, the static comparison of a world with and without a buyer cartel shows that the cartel causes a reduction in production and a consequent increase in prices to consumers. The conclusion, therefore, is that buyer cartels harm consumers as well as aggregate welfare.66 The force of this economic theory is contingent on the validity of its assumptions. The argument loses force if the cartel uses all-or-nothing contracts. Such contracts compel producers to deliver approximately the competitive output but at a lower price.67 Further, if the cartel members compete with many other producers who have different sources of input, they would have no incentive or capacity to raise the prices of their output.68 In such a situation, the cartel’s output will be lower than it would have been, but overall prices will not be noticeably affected because volume in the downstream market will not change appreciably. In either case, there

See ibid 54–55; see also M. Botti, ‘Observations on and from the Antitrust Division’s Buyer-Side Cases: How Can “Lower” Prices Violate the Antitrust Laws?’, paper presented at the 2007 meeting of the ABA Antitrust Section meeting, 19 April 2007, www​.abanet​.org /antitrust/at-committees/at-hcic/ pdt7program-papers/Botti-Paper.pdf [accessed 25 February 2022]. 63 See European Commission (n 43) para 204; see also Case No IV/M.1221, Rewe/Meinl, Commission decision, 3 February 1999, C(1999) 228 final, para 99. 64 On the economic harms from seller cartels, see Chapter 2 in this volume. 65 See Devlin (n 2); Leslie (n 2); and Blair and Sokol (n 2). 66 See, e.g., H. Hovenkamp, ‘Is Antitrust’s Consumer Welfare Principle Imperiled?’ (2020) 45 J. Corp. L. 101, 115–17. 67 Carstensen (2017) (n 1) 42–46 and 80–81. 68 See, e.g., Reid Bros. Logging Co. v Ketchikou Pulp Co., 699 F.2d 1292 (9th Cir. 1983); see also Mandeville Island Farms v American Crystal Sugar, 334 US 219 (1948). 62

244  Research handbook on cartels would be no adverse effect on the static price-output parameters on which the conventional economic models are based. Thus, a focus on static measures of consumer welfare as the goal of competition law weakens the argument that buyer cartels are necessarily undesirable. But if the primary goal of competition law is the protection and advancement of economic competition as a process, two related policy arguments support a broader condemnation of buyer cartels. First, buyer cartels, like seller cartels, directly distort the market process through private agreement.69 By preempting the market, any cartel undermines the fundamental goal of ensuring the goods and services clear markets at competitively determined prices. Second, a buyer cartel distorts incentives and causes a misallocation of economic rewards over time, undermining the core goals of a competitive market system. Competition policy should focus on the dynamic interest of providing incentives to invest and develop new, innovative solutions to problems. Buyer cartels, however, diminish the rewards to a producer below the level that a competitive market would have provided,70 which sends the wrong signal to investors and innovators. Indeed, the strategic responses to cartels, such as vertical integration, although rational, can, in dynamic terms, result in further distortions of the market process away from better structural options.71 2. The argument for legalizing some buyer cartels The primary argument for buyer cartels rests on a notion of countervailing power.72 Small buyers facing a monopoly or oligopoly-seller market are individually powerless to bargain for lower prices;73 they are compelled to accept the monopoly or oligopoly price. However, if these buyers together can make a credible threat that they will withhold their purchases unless they receive lower prices, they might succeed.74 Independent pharmacies sought an antitrust exemption that would enable them to bargain collectively over prices with oligopolistic wholesalers that both engaged in price discrimination and imposed unreasonably low reimbursement prices on independent retailers.75 The pharmacies’ belief was that if they were allowed to band together, they could obtain lower prices and higher reimbursement rates for the prescription drugs they resell.76 This analysis is based on a competition policy goal of static consumer welfare. The theory is that the successful buyer cartel will induce the seller to reduce prices and increase output,

See, e.g., Fed. Trade Comm’n v Super. Ct. Trial Lawyers Ass’n, 493 US 411 (1990); and Fashion Originators Guild of Am. Inc. v Fed. Trade Comm’n, 312 US 457 (1941). 70 See Blair and Harrison (1993) (n 3) 156–63. 71 See Omega Envtl. Inc. v Gibarco, Inc., 127 F.3d 1157 (9th Cir. 1997). 72 J.K. Galbraith, American Capitalism: The Concept of Countervailing Power (Houghton Mifflin, 1952) 109–12; see also Blair and Sokol (n 2) 487–90. 73 See generally T. Campbell, ‘Bilateral Monopoly in Mergers’ (2007) 74 Antitrust L.J. 521 (2007). This article produced some strong disagreement; see J. Baker, J. Farrell and C. Shapiro, ‘Merger to Monopoly to Serve a Single Buyer: Comment’ (2008) 75 Antitrust L.J. 637, 637–46. 74 Baker, Farrell and Shapiro (n 72) 638–46. 75 See Impact of Our Antitrust Laws on Community Pharmacies and Their Patients: Hearing before the Task Force on Antitrust and Competition Policy of the H. Comm. on the Judiciary, House Hearing, 110th Congress, 18 April 2007; and ibid 82–83 (statement of David A. Balto, representing the pharmacies). 76 ibid 11 (statement of Rep. Weiner). 69

Buyer cartels  245 moving the market towards competitive price and output levels.77 The model assumes that the buyer cartel has sufficient power to do so and also passes on its gains to consumers. But this outcome is contingent on the relative options of each side, as well as on the bargaining skill and sophistication of the parties. Powerful sellers can disrupt the group by offering some participants secret discounts to defect. In the short run, the defector would gain a head start in competing with the other members of the group in processing the input and producing saleable output. Under these circumstances, cartels might prove ineffective. The case for buyer cartels is plausible in the short run only if no other reasonable alternative exists.78 Monopoly profits at the producer level ought, over time, to induce other responses, such as creating an entity to produce the input, sponsoring entry, finding substitute inputs or creating a legitimate buying group. Entry or innovation would reduce or avoid the need for the monopolized product. Therefore, unless there is a strong argument that the seller’s power is not likely to dissipate even in the long run, the justification for a buyer cartel is weak.79 However, if a buyer cartel is the least worst option for establishing equitable prices and services, then an appropriate public regulatory body should oversee the cartel process – the interests of private parties will not necessarily be congruent with the public interest. C.

Buying Groups: Efficiency Gains and Competitive Risks

A number of efficiency arguments justify the organization of buying groups, but their competitive risks frequently go unrecognized or are unduly minimized. By marshalling a significant share of the market demand for an input, a buying group can also create a variety of competitive risks in both upstream supply markets and the downstream markets in which the participants compete. With increased power, the buying group can impose onerous conditions on sellers that exploit them, require restrictions that foreclose competitors in the buying market or use control of significant inputs to achieve coordination of competition in the downstream market.80 The most obvious risk is that the buying group will exploit its power to drive prices below a competitive level. The buying group gains economically whether the reason for the lower prices is transactional efficiency, productive efficiency or market power exploitation. A second, related risk, illustrated in a number of cases, is the use of buyer power to exclude competing producers from access to inputs. But some restraints on the freedom of suppliers might be reasonable and even essential to the efficient operation of legitimate buying groups. For example, if a buying group contracts for a differentiated good – especially if it has invested in its development – it should be entitled to retain the rights to that product to avoid the risks

See Devlin (n 2) 241–43; and Blair and Sokol (n 2) 487–90. Donald Baker has argued for limiting the rules that require access to networks, which he believes reduce the incentives for the creation of competing networks; see D. Baker, ‘Compulsory Access to Network Joint Ventures Under the Sherman Act: Rules or Roulette?’ [1993] Utah L. Rev. 999, 1127–28. The same argument applies to other issues in buyer-power contexts. 79 In addition, a buyer cartel can result in coordination on the downstream side of the market if the buyers constitute a substantial part of the resale market. If that occurs, the buyer cartel would morph into a seller cartel whose function would be to raise price and reduce output to the customers of its participants. 80 Carstensen (2017) (n 1) Chapter 4 (examining these competitive risks in some detail). 77 78

246  Research handbook on cartels of free-riding or other strategic conduct by either the producer or competing buyers.81 The factual–functional question is whether the restraint is reasonably necessary for the legitimate needs of the venture.82 The third risk, illustrated by Topco, is the use of the buying group to allocate downstream markets or set resale prices.83 Topco’s members used their annual meeting to allocate and reallocate territory to minimize intragroup competition.84 There was no justification for allocating territory to promote the legitimate activities of Topco, which provided its members with house brand groceries.85 Buying groups might use their power to discourage innovation in the input markets. New inputs might require buyer investment in a new plant or equipment and might alter the barriers to entry. Moreover, innovations might induce more competition among buyers in their downstream markets. Using their buyer power to insist on limits to the kinds of innovation that suppliers engage in would reduce the risk of disruptive innovation. Even if attempted, this use of buyer power might have no effect in many markets. If a small number of buyer groups dominate an input market, they can foreclose competition in the input market by selecting the same supplier. This will foreclose entry and indeed eliminate existing competition. The resulting monopoly price from the supplier will raise downstream prices, but the buyers may be able to use their buyer power to bargain for a substantial share of the profit. An illustrative example occurred in the automotive sandpaper market.86 A supplier with deep pockets made attractive long-term offers to buyers, forcing out the more poorly financed incumbent, which ultimately resulted in the entrant’s capture of nearly 100 per cent of the sales.87 The excluded competitor claimed that the entrant then shared a substantial part of its projected monopoly profits with the buyers, who collectively dominated the downstream retail market.88 This community of interest eliminated the buyers’ incentive to seek competitive supplies.89 The size of a buying group becomes competitively problematic when its purchase volume exceeds the quantity necessary for minimum efficient scale. For example, the EU expressly requires that buying groups be no more restrictive than is necessary to achieve their legitimate objectives.90 But it may be inappropriate to condemn a group that provides significant effi-

81 A group that invested in research and development to create an improved input could rationally insist that the contract producer provide that input only to the group that had made the investment and taken the risks. 82 See Carstensen (2017) (n 1) 126–29; see, e.g., United States v Visa, 344 F.3d 229 (2nd Cir. 2003). 83 See United States v Topco Assocs. Inc., 405 US 596 (1972). 84 ibid 601–03. 85 Carstensen and First (n 32) 182–85. 86 NicSand Inc. v 3M Co., 507 F.3d 442 (6th Cir. 2007). 87 ibid 447–49. 88 ibid. Nevertheless, the court held that there was no antitrust violation on these facts. 89 This conclusion assumes that the downstream market is not subject to easy entry. See J. Klish, ‘Serving Economic Efficiencies or Anticompetitive Purposes? The Future of Group Purchasing Organizations and the Antitrust Safety Zone’ (2005) 2 Ind. Health L. Rev. 173. In the sandpaper case, as in the case of hospital supplies discussed by Klish, it was not feasible to enter the downstream market only to market the specific product. A more general model of this conduct is found in Doyle and Han (n 17). 90 See Article 101(3) TFEU. See also European Commission (n 43), paras 189–224 (policy on buying groups).

Buyer cartels  247 ciency savings to its participants, unless it is possible to fashion two or more efficient entities from the participants and unaffiliated members. The EU has a safe harbour for buying groups that take no more than 15 per cent of the input and sell no more than 15 per cent of the relevant output.91 Larger groups must seek advance approval although, as illustrated in the examples in the guidelines, larger groups are allowed in some contexts.92 These policies seek to address the potential exclusionary and exploitive risks that buying groups present. In sum, buying groups can contribute to efficiency, but can also be used to exploit producers, retard innovation, facilitate tacit or express downstream collusion as well as exclude the group’s competitors from access to essential inputs. Risks to competition exist whenever a buying group acquires a substantial share of the inputs on which it is focused. Substantial should mean a share of 15 per cent or more of general inputs or even 10 per cent or more of a class of goods resold by retail members of the buying group. The EU policies, the UK studies and the American cases show that at such levels significant risks of buyer power exist.

IV.

RETHINKING COMPETITION POLICY FOR BUYER COMBINATIONS

Competition law relating to buyer combinations needs thoughtful reappraisal today. A.

Buyer Cartels: More Pervasive and Requiring Specific Standards

1. Likelihood The general paucity of buyer cartel cases stands in stark contrast to data which show that input prices are vulnerable to exploitation.93 This suggests that there is substantial potential for conspiracies among competing buyers to affect prices. The recent empirical work on labour markets showing the scope of monopsony and oligopsony power has highlighted the capacity of employers in these markets unilaterally or collusively to exploit the labor input in their products and service.94 The resulting emergence of litigation focused on such exploitation through ‘no-poach’ agreements underlines the scope of risk. The experience with labour markets and the underlying data on price effects in input markets generally strongly suggest that more enforcement resources should be invested in examination of buyer-side collusion. There are metrics that can provide clues, such as unexplained increased margins between input and output prices either in an entire market or in regional input markets.

European Commission (n 43), para 208. By way of comparison, American antitrust authorities use a 35 per cent share of inputs. See US Department of Justice and Federal Trade Commission (n 61) 53–54. 92 European Commission (n 43) paras 221–24. 93 C.E. Fee and S. Thomas, ‘Sources of Gains in Horizontal Mergers: Evidence from Customer, Supplier, and Rival Firms’ (2004) 74 J. Fin. Econ. 423, 424–27; and S. Bhattacharyya and A. Nain, ‘Horizontal Acquisitions and Buying Power: A Product Market Analysis’ (2011) 99 J. Fin. Econ. 97. Other studies have found substantial losses to sellers resulting from buyer cartels. See J. Kwoka, ‘The Price Effects of Bidding Conspiracies: Evidence from Real Estate Auction “Knockouts”’ (1997) 42 Antitrust Bull. 503, 503; and J.P. Nelson, ‘Comparative Antitrust Damages in Bid-Rigging Cases: Some Findings from a Used Vehicle Auction’ (1993) 38 Antitrust Bull. 369, 386 Table 4 and 392–94. 94 See references at n 4 above. 91

248  Research handbook on cartels 2. Buyer cartels should remain per se illegal Earlier sections of this chapter have evaluated the arguments for a general acceptance of buyer cartels when they provide countervailing power. The weakness of those arguments provides strong support for retaining a per se rule except when there is express authorization for a cartel. Any short-term gains are likely to be offset by longer-term harms. Moreover, the development and implementation of appropriate criteria for any general basis to allow such cartels would be extremely difficult, if not impossible. As William Howard Taft observed more than 100 years ago: ‘where the sole object […] is merely to restrain competition […] there […] is no measure of what is necessary […] except the vague and varying opinion of judges as to how much, on principles of political economy, men ought to be allowed to restrain competition.’95 Taft warned that courts would ‘set sail on sea of doubt’ if they undertook to decide with respect to agreements with ‘no other purpose and no other consideration on either side than the mutual restraint of the parties, how much restraint of competition is in the public interest, and how much is not’.96 Hence, a per se rule prohibiting unauthorized buyer cartels remains the best public policy. 3. Buyer cartels require buyer-side criteria The preceding analysis shows that there is need for criteria appropriate to the buyer side of the market. In particular, two factors deserve recognition. Buyer power arises at relatively low market shares in comparison to standard analysis of seller-side risks. Hence, a buyer cartel can incorporate a lower share of the overall market and still have the capacity to exploit suppliers or exclude some competitors from market access. This is most evident in the cases involving ‘no-poaching’ agreements. The conspiracy among some, but not all, of the leading Silicon Valley technology firms provides a very good example.97 The implication of this insight is that enforcers need to be more attentive to evidence of collusion among any set of buyers regardless of their overall position in the market. Another distinction between buyer and seller cartels is that buyer cartels can include more participants and are less likely to require detailed policing or overt understanding. The incentives to collude in many circumstances where supply is price inelastic, combined with the disincentives to defect, mean that there is less need for the kind of verification that is frequently looked for in seller cartels where the incentives to defect are greater. Hence, a low number of potential participants as well as overt policing mechanisms are less likely to be evident on the buyer side. This makes detection harder. But the absence of such indicia if other elements suggest a cartel should not dissuade enforcers from further investigation. Indeed, the criteria used to exclude ‘tacit’ collusion from condemnation themselves merit reconsideration on the buying side of the market. Rather, the central issue should be remedy and not the absence of more formal collusion. If a remedy can restore workable competition to the supply side of the market, that ought to justify intervention, given the inherent incentives to exploit buyer power.98

United States v Addyston Pipe Steel, 85 F. 271 (6th Cir. 1898) 282­–83. ibid 283–84. 97 See United States v Adobe Sys. Inc., No. 1:10-cv-01629 (DDC, Final Judgment, 18 March 2011) www​.justice​.gov/​atr/​case/​us​-v​-adobe​-systems​-inc​-et​-al [accessed 25 February 2022]. 98 In some situations tacit buyer collusion is unavoidable, but market conduct regulation can modify the adverse impact to make it more difficult for buyers to collude. 95 96

Buyer cartels  249 B.

Stricter Review of the Competitive Impact of Buying Groups

There should be closer scrutiny of buying groups. They have the potential to cause anticompetitive effects in both upstream and downstream markets. A strong presumption of legality for all groups with formal characteristics of a legitimate joint venture and a market share below a generous threshold creates a serious risk of false negatives. Buyer power arises at market shares below those currently considered problematic, but such organizations can and do serve legitimate functions. Thus, the challenge is to design screens and filters that more accurately identify the buying groups that are likely to raise competitive concerns. Three screens can help authorities identify those groups that merit further and more focused inquiry. The first screen should be based upon the proportion of the input market taken by the buying group and the structural concentration of the buying side of the market. In general, more than five buyers are usually necessary to ensure a workably competitive buying market.99 Hence, a buying group could be presumed lawful only if it takes less than 10 or even 15 per cent of a commodity, regardless of the overall concentration of the market.100 This should not, however, preclude investigation of cartelizing restraints.101 The second screen should be a rough estimate of the elasticities of supply and demand in the buying group market. The barriers to exit on the supply side are relevant, as is the capacity and willingness of other buyers to take the commodity if its price declines slightly.102 When these factors are present, the competitive risks both upstream and downstream are reduced. On the other hand, if supply is price inelastic and overall demand is relatively unresponsive to price changes, the potential for anti-competitive conduct that exploits suppliers increases. The third screen should be the scope and range of scale economies in the supply market. When such economies exist, there are both incentives for legitimate efficiency-enhancing transactions and for anti-competitive use of control over the volume of business necessary to achieve scale economy. Efficiency gains provide the primary justification for groups that fall into the presumptively illegal category after focused review using the first two screens. The burden of proving that the scale of the organization is necessary to achieve economies should rest on the buyer group and its members. Dissolution is the preferable remedy (assuming that two or more buying groups would be feasible) because it ensures a more robustly competitive buying market without the need for ongoing regulatory oversight. If dissolution is impractical due to economies of scale, careful examination of the policies and procedures of the buying group can ensure that it has no greater adverse effect on the competitive process than is absolutely necessary to achieve its legitimate function. Ultimately, the goal of the screening process is to focus inquiry on the kinds of buyer groups that create the greatest risk of anticompetitive conduct. The goal should not be to eliminate an See Carstensen (2017) (n 1) 76. The threshold could be lower where the product is a branded and differentiated good rather than a more generic input; see ibid 214–17. 101 See, e.g., United States v Topco, 405 US 596 (1972), where the downstream territorial restraints had no functional relationship to the purposes of the buying group. See Carstensen and First (n 32) 203. 102 See Blair and Harrison (2010) (n 3) 53–64. The authors propose a buyer-power index in which these factors are central to assessing whether the buyer or buyer group has effective power. This measure can show power at low market share or little power despite high market share. 99

100

250  Research handbook on cartels efficiency-enhancing buyer group merely because it creates risks of anticompetitive conduct, but rather to focus on ways of avoiding or reducing the risks of such conduct. Topco is an illustration.103 The venture was prohibited from engaging in downstream territorial allocations among its members but continued to survive and prosper because its members found the group’s other services valuable.104

V. CONCLUSION Both buyer cartels and legitimate buying groups present serious challenges to maintaining a strong and viable competitive process. Despite some plausible arguments that buyer cartels provide countervailing market power to a concentrated sellers’ market, the demands of a workable competitive process preclude accepting this justification as a defence. Naked restraints of competition by buyers should be absolutely illegal unless subject to direct public regulation. Enforcement authorities also ought to look more broadly at the impact of parallel buying practices – especially in markets with relatively few buyers and many sellers. In contrast to naked restraints of competition by buyers, legitimate buying groups provide transactional efficiency as well as negotiating capacity that individual buyers often lack. As such they can make positive contributions to the overall competitive process. However, the different ways in which such groups are constituted make it hard sometimes to differentiate between legitimate joint buying ventures and naked restraints of buyer competition. For this reason, it is not irrational to implement a screening process, beginning with market-share benchmarks, to help identify the kinds of arrangement – facially legitimate – that merit further review. Thus, the general thrust of the current enforcement policies in the United States and the EU is appropriate, but the market-share screen in the United States is too generous. Overall, competition authorities ought to be more focused on the competitive risks that buying groups pose to the market.

United States v Topco Assocs., Inc., 405 US 596 (1972). Carstensen and First (n 32) 201–02.

103 104

15. Crisis cartels Éric Barbier de La Serre1

I. INTRODUCTION Economists are often mocked for their inability to reach common conclusions.2 However, if one had to identify the most established consensus among competition economists, it would probably be that, as a whole, cartels are very harmful.3 Yet, in the presence of a harsh economic crisis, even this strong consensus may need to be revisited. This may be justified for instance if market forces do not appear sufficient to solve structural overcapacity issues caused by a downturn. In this case, in the absence of public intervention or private coordination aimed at reducing or reallocating production capacities, inefficient facilities may remain on the market, to the detriment of clients. In addition, in crisis times, it cannot be excluded that collaboration will avoid the disappearance of undertakings which contribute to the competitive dynamics of the market. As a result, under extreme circumstances, there may be a tradeoff to consider between an immediate loss of competition and the maintenance of a healthy competitive structure in the long-run, at least if entry on the market is not easy. Of course, this does not mean that cartels – or restructuring agreements more generally – should normally be deemed valid in crisis times. There are, on the contrary, multiple reasons to be wary of cartels even during such exceptional periods. First, various alternatives to horizontal coordination – whether public or private – may exist to settle overcapacity issues. Mergers in particular may constitute a less harmful alternative. While mergers may affect the competitive structure of a market on a permanent basis, since an independent competitor will generally disappear, they normally generate more efficiencies (in particular through cost reductions) than cartel-like behaviour. In addition, merger control is well-equipped to take into account overcapacity issues and the difficulties encountered by the sector, not only through the failing-firm defence but also, if the stringent conditions attached to this theory are not met, as part of the competitive analysis (for example, as part of the counterfactual).

The views and opinions set forth herein are the personal views or opinions of the author; they do not necessarily reflect views or opinions of the law firm with which he is associated. 2 See, e.g., George Bernard Shaw, who is reported to have said: ‘If all economists were laid end to end, they would not reach a conclusion’: B. Robertson, J. Johnson and R. Hummerstone, Little Giant Encyclopedia: Toasts and Quotes (Sterling Publishing Company, 2009) 195. 3 While views on the methodology may differ, economists generally conclude the existence of price overcharge inflicted by cartels. See, e.g., E. Combe and C. Monnier, ‘Fines against Hard Core Cartels in Europe: The Myth of Overenforcement’ (2011) 56 Antitrust Bulletin 235, for a panorama of various methodologies used to assess the harm caused by cartels. For a balanced view on such harm, see, e.g., I. Bos and E. Pot, ‘On the Possibility of Welfare-Enhancing Hard Core Cartels’ (2012) 107 Journal of Economics 199. 1

251

252  Research handbook on cartels Second, from a more empirical standpoint, there seems to be a broad consensus that these countries that allowed cartels in crisis times did not solve their problems, but rather made them worse.4 Academic research has shown for instance that, in the United States, the NIRA (which organized the industry through ‘codes of fair competition’) delayed rather than fostered economic recovery.5 As a result, the overwhelming view is that, as such, crisis periods should not justify the implementation of cartels. The fact remains however that competition authorities have not always been so opposed to crisis cartels. And even nowadays, some prominent competition authorities still appear ready to accept that, under genuinely exceptional circumstances, coordination among competitors on the most sensitive competitive topics (and in particular on an orderly decrease of capacity) may be contemplated to settle the problems raised by a prolonged crisis. In the EU, for instance, crisis cartels taking the form of restructuring agreements are one of the rare instances where an agreement with an anticompetitive object may be found to trigger efficiencies justifying an exemption under Article 101(3) of the Treaty on the Functioning of the European Union (‘TFEU’), although this is subject to a very strict analysis. While the gate is undeniably narrow, it remains open, at least in theory. This chapter will examine this question mostly from an EU law perspective. Many of the conclusions nonetheless remain valid for other jurisdictions, as EU law is quite representative of the view taken in a number of countries. Section II deals with the difficulties associated with the definition of a crisis cartel. Section III describes the evolution of the policy and thinking on crisis cartels, with a special focus on EU law. Finally, Section IV presents the current EU rules on liability and exemptions for crisis cartels.

II.

WHAT IS A CRISIS CARTEL?

The notion of a crisis cartel is not easy to grasp. There are two main reasons for this. First, in many jurisdictions, crisis cartels are a phenomenon rather than a legal concept. In EU law, for instance, there is no regulation, nor even case law, that refers to ‘crisis cartels’ as a commonly accepted (or precisely defined) legal notion. Second, the notion of a crisis cartel is polymorph, as it covers multiple forms of collusion that occur during economic downturns. Admittedly, a commonly accepted feature of crisis cartels is that they imply coordination among competitors in the context of a crisis. However, beyond this general characteristic, many terminological questions arise.

4 J. Rivas, ‘The Views of the GCLC’, in M. Merola, J. Derenne and J. Rivas (eds), Competition Law in Times of Economic Crisis: In Need of Adjustment? (Bruylant, 2013) 45. 5 OECD, Crisis Cartels (DAF/COMP/GF(2011)11, 18 October 2011) 151 (Ireland) and 174 (Norway). See also the references cited at ibid 238.

Crisis cartels  253 A.

Is State Sponsorship Necessary?

The first question is whether the notion of a crisis cartel supposes the existence of State-sponsored measures authorizing or fostering coordination among competitors to settle a crisis situation, possibly through legislation.6 In this chapter, we will cover crisis cartels that are either organized by private parties without State support or simply encouraged by the State.7 By contrast, we will not cover crisis cartels that are either imposed or authorized by public regulations on the basis of non-competition grounds. This is because State-sponsored cartels may be justified by a broad range of socio-political, economic concerns, such as maintaining employment, which are often extraneous to the competitive analysis. In addition, while – as a matter of economics – State-sponsored cartels are not necessarily more justified than purely private coordination, they enshrine a public choice which – as a matter of law or political theory – makes them inherently more acceptable than a private cartel (provided that they comply with the State’s constitutional rules and international obligations). As reflected by the law on Article 106 TFEU and Article 4(3) of the Treaty on European Union (‘TEU’), which does not prohibit all types of State interference with competition, one cannot always assess State measures as severely as private actions. This does not mean, however, that the existence of State measures is totally irrelevant in this context. First, if the formation of a crisis cartel is not imposed or authorized – but is nonetheless encouraged – by the State, this may constitute at least an attenuating circumstance when setting the amount of the fine.8 Second, the possibility of State action through public bailouts may be relevant to determine whether a private cartel is truly indispensable (subject to State aid rules where they exist), although such measures are also imperfect from a competition standpoint.9 B.

Does a Crisis Cartel Imply Secrecy?

The second question relates to the necessity of an element of secrecy. Nowadays, the word ‘cartel’ is commonly associated to covert collusion. However, the notion of a cartel does not necessarily involve secrecy. For instance, the EU Damages Directive does not refer to covert action when it defines cartels.10 And indeed, not requiring an element of secrecy appears particularly justified for crisis cartels, which encompass hard-core cartels caused by a crisis but also less covert forms of competitor collaboration designed to address the consequences

6 OECD (n 5) 20, according to which the notion may refer to ‘a cartel that was formed during a severe sectoral, national, or global downturn without State permission or encouragement’ or ‘situations where a government has permitted, in other cases fostered, the formation of a cartel among firms during several sectoral, national or global economic downturns’. 7 For instance in 2008, when the Greek Minister of Agriculture supported an agreement to set prices and restrict sales/output in the fish-farming sector in Greece; see Hellenic Competition Commission, Decision No. 492/Vi/2010. 8 See Section IV.C below. 9 L. Vitzilaiou, ‘Crisis Cartels: For Better or For Worse?’ [2011] 2 CPI Antitrust Chronicle 2. 10 See Article 2(14) of Directive 2014/104/EU of the European Parliament and of the Council of 26 November 2014 on Certain Rules Governing Actions for Damages under National Law for Infringements of the Competition Law Provisions of the Member States and of the European Union [2014] OJ L349/1.

254  Research handbook on cartels of a downturn and, in particular, some restructuring agreements designed to deal with overcapacity. C.

Which Type of Collusive Conduct?

During severe crisis times, competitors may be inclined to coordinate on various forms of capacity or output reduction, but also on prices, for instance, so as to maintain sufficient profitability on the market or to make output reduction more effective.11 However, the notion of a crisis cartel is also sometimes used to designate narrower forms of collusive action. It may refer to any type of horizontal collusion among competitors on the most sensitive aspects of competition (on capacity, output or prices, for instance) that occurs in the context of a crisis. But it may also refer, more restrictively, to agreements between a large number of (if not all) competitors in a given sector that are designed to settle excess capacity issues caused by a crisis.12 The latter definition covers the type of restructuring agreements that the European Commission (‘the Commission’) has sometimes authorized, although under strict conditions. By contrast, at least in the EU, the broader definition is less meaningful from a legal standpoint, as the sole fact that coordination on the most sensitive aspects of competition occurred in a crisis context normally triggers very limited consequences on the legality of the related action. There is a broad consensus to the effect that, for instance, price fixing designed to address the consequences of a crisis remains unjustifiable. As a result, in this chapter we will focus on crisis cartels meeting the narrow definition. However, on this aspect, legal categories appear to be quite blurred. For instance, it is not always easy to distinguish a potentially valid restructuring agreement from a cartel designed to limit output. D.

Which Type of Crisis?

Over the past 70 years the world economy has suffered a number of economic shocks that were prone to the formation of crisis cartels, including two oil shocks (in 1973 and 1979), the dotcom bubble (in 2000), the financial crisis (in 2008) and the sanitary crisis related to COVID-19 (from 2020). There have also been multiple downturns affecting specific sectors of the EU economy. However, assuming that there is room for an exemption applicable to crisis cartels, it cannot cover any crisis. Otherwise, any exemption that would be triggered by a crisis would risk becoming quasi-permanent. The problem is compounded by the fact that many cartels arise in the context of a crisis. On this point, EU case law has even taken the view that ‘as a general rule cartels come into being when a sector encounters problems’.13

See, e.g., the Greek crisis cartel concerning fish-farming reported by Vitzilaiou (n 9); and OECD (n 5) 131 (Greece). 12 Concerning the latter, see A. Fiebig, ‘Crisis Cartels and the Triumph of Industrial Policy Over Competition Law in Europe’ (1999) 25 Brooklyn Journal of International Law 607. If a restructuring agreement is bilateral rather than multilateral, it will often qualify as a specialisation agreement (see below). 13 See e.g., Joined Cases T-236/01 etc. Tokai Carbon v Commission [2004] ECR II-1181, para 345. 11

Crisis cartels  255 If not all types of crisis may justify cartels, where should one draw the line? As will be further detailed below, an important distinction must be made between structural and cyclical downturns. In the EU, the dominant view is that only the former type of crisis may justify cartel behaviour, as the overcapacity issues created by a cyclical crisis should normally be overcome through price adjustments which may lead the least efficient undertakings to disappear.14 This was also the view in Germany until 2005 (when the specific crisis cartel exemption enshrined in German legislation was suppressed and the conditions for a possible exemption were aligned on those of Article 101(3) TFEU).15 But then, what is a ‘structural crisis’? According to the Commission, structural over capacity exists where over a prolonged period all the undertakings concerned have been experiencing a significant reduction in their rates of capacity utilisation and a drop in output accompanied by substantial operating losses and where the information available does not indicate that any improvement can be expected in this situation in the medium-term.16

The decisional practice shows that, normally, an exemption may be considered only when there is a strong consensus on the existence of a durable overcapacity crisis. In Synthetic Fibres, for instance, the structural crisis had lasted more than ten years, and there was a strong institutional consensus to the effect that a reduction of overcapacity was necessary.17

III.

POLICY EVOLUTIONS ON CRISIS CARTELS UNDER EU LAW

While the Commission currently promotes a hard stance against cartels, including when they are implemented in crisis times, its position has not always been so strict. On the contrary, the Commission has sometimes been rather pragmatic in the presence of dire economic circumstances, although this has resulted in a very limited number of exemption decisions. To our knowledge, the Commission has never disowned these precedents. However, at the beginning of the millennium, it strived to limit the situations in which an exemption may apply. A.

From the 1970s to the Mid-1990s: The Commission’s Flexible Approach

In EU law the first signs of a legal debate on crisis cartels seem to date from the early 1970s, due to the harsh overcapacity crisis caused by the two oil shocks of this period, in particular in the EU textile and petrochemical sectors.

OECD (n 5) 122–23 (Germany). According to the same source, the exemption has very rarely been applied. 15 ibid (European Union) 110. 16 European Commission, Twelfth Report on Competition Policy (Brussels and Luxembourg, 1983) para 38. See also OECD (n 5) 110 (European Union). For a discussion of this definition, see Fiebig (n 12). 17 European Commission, Eighth Report on Competition Policy (Brussels and Luxembourg, 1979) para 42. See also Case IV/30.810, Synthetic Fibres, Commission decision, 4 July 1984 [1984] OJ L207/17, paras 8–10. 14

256  Research handbook on cartels In 1972, in the Cimbel case, a group of Belgian cement producers notified a cartel that included elements of market allocation and price fixing. In support of the notified agreement, the cartelists argued that it had been concluded during the Great Depression of the 1930s. The Commission refused to exempt the cartel. However, it did so not because, as such, a crisis could not justify a cartel, but because the crisis at stake in this case was no longer ongoing.18 This suggested that a case-by-case approach was needed.19 The Commission reaffirmed its cautious approach when it was asked to rule on a coordinated attempt by the European textile industry to decrease capacity in an orderly fashion. In the Second Report on Competition Policy of 1972, the Commission acknowledged that ‘the cut polyester fibre industry labour[ed] under heavy surplus capacity’ and that, ‘because the manufacturers endeavor[ed] to scale down their surpluses, pressure [was] brought to bear on prices’.20 The Commission nonetheless objected to the agreement because it covered ‘the participants’ production and selling policies’. However, the Commission took care to note that the question of whether the structural difficulties experienced by the industry could ‘be solved in a manner compatible with the rules of competition of the EEC Treaty was not settled in this case’.21 Six years later in 1978, in light of the hard crisis still faced by European industry, there were discussions within the Commission concerning the adoption of a regulation (pursuant to what is now Article 103 TFEU) declaring Article 85 EEC (now Article 101(1) TFEU) inapplicable to agreements between firms aimed at balancing excess capacity with a lasting decline in demand.22 Commissioner for Industrial Affairs Etienne Davignon and Commissioner for Competition Raymond Vouel produced a draft regulation according to which the Council of Ministers would decide, upon proposal by the Commission, whether a coordinated reduction in the capacity of a given sector was necessary. While this proposal was abandoned, this did not put an end to the debate on crisis cartels. On the contrary, in its Eighth Report on Competition Policy of 1979, the Commission reported a second attempt of the textile industry to agree on a decrease of capacity. The Commission noted that, since 1972, the continuing economic crisis and the commissioning of new production capacity in Europe had increased the precariousness of the situation in the European man-made fibres industry, where capacity utilization rates had dropped to an average of 70 per cent. There was therefore a broad consensus to the effect that capacity needed to be restricted. This context prompted eleven producers to notify an agreement organizing an orderly restriction of capacity. The Commission once again dismissed the application, as the notified agreement included a quota system.23 This is because, according to the Commission,

18 Case IV/243, 244, 245, Cimbel, Commission decision, 22 December 1972 [1972] OJ L303/72, para 21. 19 European Commission, Second Report on Competition Policy (Brussels and Luxembourg, 1973) para 30 (‘the agreement had not solved the overcapacity problem […] Moreover, the purely potential danger of cut-throat competition could not justify at the present time the elimination of competition in the field of prices’). See also ibid para 29 concerning another agreement (in the Netherlands) designed to settle overcapacity issues in the cement industry. 20 ibid para 31. 21 ibid. 22 See Fiebig (n 12); and I. Kokkoris, ‘Should Crisis Cartels Exist amid Crises?’ (2010) 55 Antitrust Bulletin 727. 23 European Commission (n 17) para 42.

Crisis cartels  257 an agreement to restrict capacity could be authorized only if it did not include provisions fixing prices, production or sales.24 However, once again the Commission refrained from finding that crisis cartels should necessarily be found anti-competitive. On the contrary, one year later, in view of the relentless economic recession and acute unemployment, the Commission decided to offer guidance on crisis cartels in its Twelfth Report on Competition Policy.25 These guidelines are still influential today. In particular, the report set a definition of ‘structural overcapacity’ that was used in recent Commission policy guidance.26 The report also stated an economic principle on which the Commission still relies, and according to which, although one should normally count on market forces to settle overcapacity issue, ‘economic circumstances do not necessarily guarantee a reduction of the least profitable surplus capacity’.27 As a result, the Commission recognized that certain agreements addressing a whole sector may be condoned if they are ‘aimed solely at achieving a coordinated reduction of overcapacity and do not otherwise restrict free decision-making by the firms involved’, which supposes in particular that companies do not resort to price fixing or quotas.28 The Commission also offered guidance on how the four conditions of Article 85 EEC (now Article 101(3) TFEU) could be satisfied. The Commission emphasized the need for a detailed programme of closures and positive effects on employment.29 It also noted that, as an alternative to sectoral agreements, it could envisage reciprocal specialization agreements between a small number of firms (which would enable them to close excess capacity).30 One year later, in its Thirteenth Report on Competition Policy of 1983, the Commission confirmed what it called its ‘flexible approach towards joint structural capacity reductions aimed at achieving a healthier structural situation in the sector concerned’.31 That same year, it examined a notification made by the six major Community zinc producers, who sought exemption of a ‘shutdown agreement’ under Article 85(3) EEC. In view of the heavy financial losses suffered by the European zinc industry and the fact that the agreement was to last for a fixed period, set in advance, the Commission considered exempting the agreement, although eventually the parties gave up their plans in view of the improvement of the situation on the zinc market.32 One year later, in 1984, the Commission finally adopted its first decision exempting an agreement to restrict capacity, which concerned the synthetic fibres industry. This agreement had been concluded between the ten biggest European companies active in this sector and 24 European Commission, Eleventh Report on Competition Policy (Brussels and Luxembourg, 1981) para 46. In 1980, the Commission refused to exempt a cartel agreement among Italian cast glass producers that included quantitative sharing under the form of sales quotas. The Commission’s decision is not based on the absolute impossibility of raising a crisis defense, but on the fact that it was ‘not possible to allow, in the guise of a crisis cartel, restrictions which are not indispensable’: Case IV/29.869, Italian Cast Glass, Commission decision, 17 December 1980 [1980] OJ L383/19, para 3. 25 European Commission, Twelfth Report on Competition Policy (Brussels and Luxembourg, 1983) para 38. 26 ibid para 38. 27 ibid para 38. 28 ibid para 39. 29 ibid paras 39–41. 30 ibid para 41. 31 European Commission, Thirteenth Report on Competition Policy (Brussels and Luxembourg, 1984) para 61. 32 ibid paras 58–59.

258  Research handbook on cartels aimed at closing down parts of their production capacity (on average 18 per cent) by specified dates. The actual implementation of the cuts was to be controlled through an internal reporting system, and failure to carry out the capacity reductions agreed upon would give rise to compensation payments. In spite of its clear anticompetitive object and effect, the agreement was exempted. Crucially, the Commission found that: (i) ‘market forces by themselves had failed to achieve the capacity reductions necessary’; (ii) the agreement ‘ensur[ed] that the shake-out of capacity w[ould] eliminate the non-viable and obsolete plant that could only have survived at the expense of the profitable plant through external subsidies or loss financing within a group, and w[ould] leave the competitive plants and business in operation’; (iii) fears about future price levels were alleviated by buyer power; and (iv) the agreement did not interfere with the parties’ freedom to determine their output or deliveries.33 And the same year, the Commission once again confirmed its flexible approach when it exempted a scheme among competitors in the petrochemical industry designed to settle overcapacity issues, which it assimilated to a specialization agreement.34 A few years later, in view of the acute recession of the early 1990s, the Commission deemed it necessary to reiterate its policy statements in the XXIIIrd Report on Competition Policy,35 and in 1994 it exempted for the second time a broad restructuring agreement, in the Dutch Bricks case.36 The notified agreement was designed to address a structural reduction in the demand for common bricks, which had been replaced by alternative building and finishing materials. According to the Commission, while the cyclical situation in the construction industry had exacerbated the reduction in demand, several indicators pointed to long-term underlying structural overcapacity. As a result, the Dutch producers notified an agreement pursuant to which the obsolete capacity production units would be concentrated in a more modern plant operating at higher capacity and productivity level. However, the agreement also contained provisions to fix production quotas and leading to the sharing of virtually the entire output of bricks in the Netherlands. The parties dropped these restrictions, which led the Commission to exempt the agreement. In sum, the Commission has not always been averse to horizontal cooperation aimed at reducing capacity, provided that such cooperation is indispensable to achieve productive efficiency and the measures are narrowly tailored to this objective. However, recent policy statements show that these precedents should now be taken with great caution.

33 Synthetic Fibres (n 16) paras 31–32, 39, 41 and 43. See also European Commission, Fourteenth Report on Competition Policy (Brussels and Luxembourg, 1985) paras 81–82. 34 Case IV/30.863, BPCL/ICI, Commission decision, 19 July 1984 [1984] OJ L212/1. See also: European Commission (n 33) paras 83–84 and para 85 (noting, with respect to Case No IV/30.778, Rovin, a ‘favourable attitude to another restructuring operation’). See two other specialization agreements in the petrochemical industry that were designed to settle overcapacity issues and were approved in spite of their anti-competitive object and effect: Case IV/31.055, ENI/Montedison, Commission decision, 4 December 1986 [1987] OJ L5/13; and Case IV/31.846, Enichem/ICI, Commission decision, 22 December 1987 [1988] OJ L50/18. In the latter decision, the Commission noted that ‘the imperative need to reduce overcapacity in this sector [was] in the general interest of the Community’ (ibid para 41). 35 European Commission, XXIIIrd Report on Competition Policy (Brussels and Luxembourg, 1993) para 82. 36 Case IV/34.456, Stichting Backsteen, Commission decision, 29 April 1994 [1994] OJ L131/15. See also European Commission (n 34) para 89.

Crisis cartels  259 B.

The New Millennium: A Hardened View

In 1999, a legal scholar complained that the Commission’s practice on crisis cartels constituted a ‘triumph of industrial policy over competition law’.37 This was an overstatement, since to our knowledge (and leaving aside specialization agreements) the Commission has exempted only two sectoral restructuring agreements due to a crisis. But in any event this fear is now outdated, as the Commission’s official policy on crisis cartels has become much more severe. This shift may be explained by two main reasons. First, the Commission’s general policy against cartels considerably hardened at the beginning of the millennium. In September 2000, Mario Monti, who at that time was the Commissioner in charge of Competition, stated that cartels were ‘cancers on the open market economy, which forms the very basis of our Community’.38 It therefore became increasingly difficult for the Commission to accept the possibility of exempting measures which, objectively, are very detrimental to competition in the short term. Second, the early 2000s also correspond to the period when the application of EU competition law was decentralized. National courts and authorities were granted the right – through Regulation No 1/2003 – to apply Article 101(3) TFEU in full. At that time, the Commission may have been concerned that this new right would result in an excessively loose application of the exemption. As a result, the Commission’s guidelines on Article 101(3) TFEU reflect a rather conservative view of the conditions for the application of this provision, and this strict view has even more reasons to apply in the presence of what normally constitutes a hard-core restriction of competition. Maybe for this reason, the guidelines do not address the issue of capacity reduction agreements directly, but only refer in general terms to agreements allowing for better planning of the production or better capacity utilization.39 Neither do the Commission’s guidelines on horizontal cooperation contain any explicit reference to restructuring agreements.40 Admittedly, the Commission seems to have never officially disowned its two precedents of the 1980s–1990s. However, at the very least, it has strived to limit their precedential value. First, although the financial crisis of 2008 constituted a major shock for the EU economy and the rest of the world, it has not triggered any relaxation of the fight against cartels.41 On the contrary, the Commission intervened in 2010 to prevent the implementation of the ‘Baltic Max Feeder’ scheme whereby European ‘feeder’ vessel owners coordinated to address the collapse of world trade following the financial crisis of 2008 and, as result, agreed to jointly cover the

Fiebig (n 12). M. Monti, ‘Fighting Cartels Why and How? Why Should We Be Concerned with Cartels and Collusive Behaviour?’ (SPEECH/00/295, 3rd Nordic Competition Policy Conference, Stockholm, 11–12 September 2000). 39 Guidelines on the Application of Article 81(3) of the Treaty [2004] OJ C101/97, para 68. 40 Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-operation Agreements [2011] OJ C11/1. 41 According to Neelie Kroes, then Commissioner in charge of Competition, ‘encouraging cartelists and others would be guaranteeing disaster. It would drag down recovery, increase consumer harm and create more cartel and cartel cases into the future. No-one wins – today’s softness is tomorrow’s nightmare’: N. Kroes, ‘Tackling Cartels – A Never-Ending Task’ (SPEECH/09/454, Conference on Anti-Cartel Enforcement: Criminal and Administrative Policy – Panel Session, October 2009, Brazil). 37 38

260  Research handbook on cartels costs of removing vessels from service.42 The Commission’s press release does not contain any sign that it was somehow ready to maintain its flexible approach of the previous millennium. Second, in the Irish Beef case43 – which will be presented further in Section IV below – but also in its contribution to the OECD Report on crisis cartels of 2011,44 the Commission promoted a restrictive view on the validity of restructuring agreements. In substance, the Commission submitted that crisis cartels may still be exempted, but only in very special market failure situations, which will be further detailed below (that is, when there is structural overcapacity that does not result from a cyclical downturn, in combination with an inefficient war of attrition between competitors). This harder stance is in line with the progressive suppression or restriction of crisis cartel exemptions in many countries where they still existed at that time (for example, in Germany and Japan).45 In the United States, while legislation of the Great Depression era allowed the implementation of a number of crisis cartels through ‘codes of fair competition’, the US government’s official position is now crystal-clear: ‘[c]artels are illegal at any time and are subject to criminal prosecution, regardless of the economic climate.’46 The harsh economic crisis resulting from the COVID-19 sanitary crisis also confirms this hardened stance. In its temporary framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak, the Commission pointed out that competition rules, far from constituting rigid barriers to the behaviour of operators, allow for adjustments to be made in situations of economic crisis.47 The Commission acknowledged that ‘[t]he exceptional circumstances of this time and its related challenges may trigger the need for undertakings to cooperate with each other in order to overcome or at least to mitigate the effects of the crisis to the ultimate benefit of citizens’.48 The Commission has therefore been rather open to competitor collaboration designed to address the shortage of essential products and services during the COVID-19 outbreak (notably medicines and medical equipment). It has also accepted that it may be necessary to provide undertakings with ad hoc feedback or comfort on the legality of specific cooperation initiatives.49 The Commission has accepted in particular that cooperation in the health sector might occur through a trade association (or an independent advisor, or independent service provider, or public body) so as to: (i) coordinate joint transport for input materials; (ii) contribute to identifying those essential medicines for which, in view of forecast production, there are risks of shortages; (iii) aggregate production and capacity information, without exchanging individual company information; (iv) work on a model to predict demand on a Member State

European Commission, ‘Antitrust: Commission Closes Investigation into “Baltic Max Feeder” Scheme’ (IP/10/374, 26 March 2010). 43 Case C-209/07 BIDS and Barry Brothers [2008] ECR I-8637. 44 OECD (n 5). 45 ibid 122–23 (Germany) and 155–56 (Japan). 46 OECD (n 5) 215 (United States). 47 European Commission, ‘Communication from the Commission – Temporary Framework for Assessing Antitrust Issues Related to Business Cooperation in Response to Situations of Urgency Stemming from the Current COVID-19 Outbreak’ [2020] OJ C116/7. 48 ibid para 3. 49 ibid paras 4–5. 42

Crisis cartels  261 level and identify supply gaps; and/or (v) share aggregate supply gap information and request participating undertakings, on an individual basis and without sharing that information with competitors, to indicate whether they can fill the supply gap to meet demand (either through existing stocks or increase of production).50 The Commission has also been open to measures designed to adapt production, stock management and, potentially, distribution in the industry, which may require exchanges of commercially sensitive information and a certain level of coordination of which site produces which medicines (so that not all undertakings focus on one or a few medicines, while others remain in under-production). According to the Commission, while such exchanges and coordination between undertakings are in normal circumstances problematic under EU competition rules, they would not raise issues or – in view of the emergency situation and temporary nature – give rise to an enforcement priority, to the extent that they would be: (i) designed and objectively necessary to actually increase output in the most efficient way to address or avoid a shortage of supply of essential products or services, such as those that are used to treat COVID-19 patients; (ii) temporary in nature; and (iii) not exceeding what is strictly necessary to achieve the objective of addressing or avoiding the shortage of supply.51 However, this pragmatic position does not reveal any kind of renewed openness to crisis cartels, since what is at stake here is not overcapacity or a shortage of demand (as is normally the case in crisis cartels), but on the contrary under-capacity (or poorly allocated capacity) and therefore shortages of supply. These are completely different situations: in the case of COVID-19, coordination is designed to meet an overriding requirement (that is, the efficient organization of productive capacities to address a health crisis); it is not designed, like in classical crisis cartels, to address overcapacity concerns caused by a structural downturn. In some Member States, competition authorities have authorized measures which are more oriented towards the economic consequences of the sanitary crisis and, in particular, the maintenance of a competitive structure. In Germany, the Bundeskartellamt stated that it would not (at this stage) take action against coordinated measures among car manufacturers that were designed to ensure the restart of automotive production.52 As noted by the Bundeskartellamt, as the automotive industry relies on complex supply chains, downtime at individual sub-suppliers can cause even more economic harm by considerably delaying the restart of production processes at many suppliers and manufacturers. As a result, the companies concerned were to set up stakeholder groups and exchange information within and between the stakeholder groups over a limited period of time. Owners, employees, customers, creditors and public authorities were to exchange information on the solvency, credits, aid measures or operational problems of a company and quickly develop effective restructuring measures together. However, the scheme included many safeguards. In particular, the relevant suppliers in the automotive industry remained free to choose when and in what way they would like to restart their activities. The scheme also included strict limitations on the exchange of sensitive

ibid paras 10–13. ibid paras 14–15. 52 Bundeskartellamt, ‘Crisis Management Measures in the Automotive Industry – Bundeskartellamt Supports the German Association of the Automotive Industry (VDA) in Developing Framework Conditions under Competition Law Aspects’ (9 June 2020) www​.bundeskartellamt​.de/​SharedDocs/​ Meldung/​EN/​Pressemitteilungen/​2020/​09​_06​_2020​_VDA​.html [accessed 6 March 2022]. 50 51

262  Research handbook on cartels data, and the relevant suppliers remained free to choose when and in what way they would like to restart their activities. This type of cooperation is closer to the restructuring measures that are generally covered by classical crisis cartels aimed at rationalizing output. However, this cooperation remains restricted in scope. In addition, it is under the control of public authorities and is limited to a short period (the restart of the automotive industry). As a result, the acceptance of such measures does not constitute a sign of renewed openness to crisis cartels.

IV.

LIABILITY AND EXEMPTIONS UNDER EU LAW

Under EU law, collusion to restrict capacity, and even more so to fix prices, will nearly always be found to be anticompetitive by object, even if it originates from a crisis. A more delicate question is whether the harsh economic conditions that may have triggered this behaviour justify an exemption under Article 101(3) TFEU. As is apparent from the Commission’s most recent policy statements, the existence of a crisis may justify an exemption only in genuinely exceptional circumstances. In addition, when an infringement is found and a fine is imposed, the existence of a crisis is increasingly less relevant as a mitigating circumstance. A.

Crisis Cartels as a Restriction by Object

According to the Court of Justice, in order to determine whether an agreement between undertakings or a decision by an association of undertakings reveals a sufficient degree of harm to competition that it may be considered a restriction of competition ‘by object’ within the meaning of Article [101(1) TFEU], regard must be had to the content of its provisions, its objectives and the economic and legal context of which it forms a part.53

The three decisive elements to qualify an anticompetitive object are therefore: (i) the content of the agreement; (ii) its objectives; and (iii) its economic and legal context. For crisis cartels, the economic context of the agreement (that is, the crisis) matters less than its content (for example, provisions decreasing and/or allocating capacity), as the sole existence of the agreement is very likely to result in a restriction of competition. As to the parties’ intention, they are in general less decisive than the content of the agreement and its context.54 As a result, even if the parties to a crisis cartel were well intentioned and aimed at preserving a healthy competitive structure in the medium or long term, this would normally not be sufficient to escape the finding of a restriction by object. The leading case on this issue is BIDS (also called ‘Irish Beef’).55 In this case, the major beef and veal producers in Ireland had put in place a capacity reduction agreement taking the form of an association of undertakings, the Beef Industry Development Society (‘BIDS’). According to the agreement, certain producers withdrew from the market in return for the Case C-67/13 P CB v Commission ECLI:​EU:​C:​2014:​2204, para 53; see also ibid (‘When determining that context, it is also necessary to take into consideration the nature of the goods or services affected, as well as the real conditions of the functioning and structure of the market or markets in question’). 54 ibid para 54. 55 Case C-209/07 BIDS and Barry Brothers [2008] ECR I-8637. 53

Crisis cartels  263 payment of compensation from the BIDS, which was funded by the producers remaining on the market. The Irish Competition Authority objected to this scheme and brought the case before the Irish courts. Upon request for a preliminary ruling, the Court of Justice held that the BIDS arrangements were intended to implement a common policy whose object was to encourage the withdrawal of certain players from the market.56 According to the Court, such arrangements ‘conflict patently with the concept inherent to the treaty provisions relating to competition, according to which each undertaking must act independently’.57 In addition, as stressed by Advocate General Trstenjak in her observations,58 the means put in place to attain the objectives of the BIDS agreements included restrictions by object. First, each remaining producer was subject to a contribution which was calculated on the basis of the additional cattle slaughtered beyond their usual volume of production. As a consequence, the companies staying on the market were tempted to freeze their production in order to limit their contributions to the exiting producers.59 Second, the exiting producers were subject to non-compete obligations preventing them from using or leasing their plants, then hindering the possible use of those capacities by new operators entering the market to compete with the remaining producers.60 The scheme was therefore found to be anticompetitive by object, and in our view this outcome is not affected by the view – later expressed by the Court of Justice – according to which the notion of anticompetitive object should be interpreted restrictively.61 The Commission’s observations in the BIDS case also provide interesting insight into its current policy on crisis cartels.62 In these observations, the Commission relied on the Weyl Beef Production63 and FNCBV64 cases to argue that a crisis context is not in itself sufficient to exclude the application of Article 101 TFEU.65 In Weyl Beef Production, the Commission had authorized a State aid restructuring scheme in the Dutch beef sector that was designed to settle overcapacity issues. The scheme provided for departure from the market in exchange of public compensation. One company challenged the decision authorizing the scheme based on the anti-competitive nature of the private reorganization agreements underlying the aid. On this point, the Court of First Instance (now the General Court) concluded that even if the agreements fell within the scope of Article 101 TFEU, they could not be assessed independently of the aid, as they were inextricably linked to it.66 The Commission inferred from this holding that a crisis context is not in itself sufficient to exclude the application of Article 101 TFEU

ibid para 33. ibid para 34. 58 Case C-209/07 BIDS and Barry Brothers [2008] ECR I-8637, Opinion of AG Trstenjak. 59 Case C-209/07 BIDS and Barry Brothers [2008] ECR I-8637, Judgment of the Court, para 37. 60 ibid para 38. 61 Case C-67/13 P CB v Commission, EU:​C:​2014:​2204, para 58. 62 European Commission, ‘In the Court of Justice of the European Communities – Written Observations of the Commission of the European Communities – Case C-209/07’ (14 August 2007) https://​ec​.europa​.eu/​dgs/​legal​_service/​submissions/​c2007​_209​_obs​_en​.pdf [accessed 5 March 2022]. 63 Joined Cases T-197/97 and T-198/97 Weyl Beef Products and others v Commission [2001] ECR II-303. 64 Joined Cases T-217/03 and T-245/03 FNCBV and others v Commission [2006] ECR II-4987. 65 European Commission (n 62) paras 53–55. 66 Joined Cases T-197/97 and T-198/97 Weyl Beef Products and others v Commission [2001] ECR II-303. 56 57

264  Research handbook on cartels to reorganization agreements.67 Similarly, in FNCBV, the Court of First Instance (now the General Court) stated that the existence of a crisis in a particular industry is not sufficient to exclude the application of Article 81 EC (now Article 101(1) TFEU).68 Building on these two precedents, the Commission argued in BIDS that, even if overcapacity was part of the context to be taken into account to assess the qualification of object, by signing the agreements, both outgoing and remaining BIDS members entered into a series of legal obligations to reduce capacity. The Commission agreed with the Irish Competition Authority that agreements constituting a reduction in capacity necessarily lead to a reduction in output.69 And since the agreement at stake restricted the freedom of the parties to decide on investments and competitive strategies or to leave the market,70 it did not matter whether the remaining producers retained their freedom to produce or not.71 B.

The Very Strict Conditions for the Exemption of Crisis Cartels

In EU law, even an agreement with a clear anticompetitive object may in theory be exempted under Article 101(3) TFEU.72 Crisis cartels offer a good illustration of this exceptional possibility, since in Synthetic Fibres and Dutch Bricks the agreements analysed by the Commission were exempted in spite of their anticompetitive object.73 However, the path to an exemption now appears to be very narrow. An exemption seems available only in presence of: (i) overcapacity that does not result from a cyclical downturn; and (ii) risks of an inefficient war of attrition between competitors having a similar cost structure. As a result, in the Commission’s own words, ‘it will be very difficult for parties to succeed with a defence under Article 101(3) TFEU’.74 This is further illustrated by the BIDS case. In this matter, the Irish Supreme Court had not requested the Court of Justice to determine the conditions under which an output reduction agreement may be exempted under Article 101(3) TFEU in spite of its anticompetitive object. This question was nonetheless raised at a later stage of the national proceedings, which prompted the Commission to state its views in an amicus curiae brief of 30 March 2010 (pursuant to Article 15(3) of Regulation No 1/2003).75 This brief provides useful insights on the Commission’s current understanding of how Article 101(3) TFEU may apply to crisis cartels, although it does not address the condition relating to the elimination of competition (and, on this point, simply refers to the Commission’s guidelines).76

European Commission (n 62) para 53. Joined Cases T-217/03 and T-245/03 FNCBV and others v Commission [2006] ECR II-4987, para

67 68

90.

European Commission (n 62) para 77. ibid para 80. 71 ibid para 88. 72 Case T-17/93 Matra Hachette v Commission [1994] ECR II-595, para 85. 73 Synthetic Fibres (n 17). 74 OECD (n 5) 120 (European Union). 75 European Commission, ‘Amicus Curiae Brief of 30 March 2010 before the Dublin High Court in Case No. 7764 P, The Competition Authority vs. BIDS’ (hereafter ‘Amicus Curiae’). 76 ibid para 16. See also K. Dekeyser, ‘The Views of the EU Enforcement Officers’, in Merola et al (n 4) 149. 69 70

Crisis cartels  265 Concerning the first condition of Article 101(3) TFEU, that is, the need for a contribution to economic progress, the Commission notes that capacity reduction agreements may trigger two types of efficiencies. First, the agreement may lead to the removal of inefficient capacity from the industry. However, according to the Commission, the parties must be able to (i) establish the prior existence of the inefficient capacity on the market, and (ii) give sufficient indication of what capacity will be removed, that is, which firms are to exit the market or which plants are to reduce their capacity, or at least the criteria according to which capacity will be reduced.77 Second, a capacity reduction agreement may lead to a better utilization rate of the remaining capacities. A restructuring agreement that would provide for limitations on production seems unlikely to benefit from the exemption, although the Commission does not rule out a case-by-case approach.78 The Commission then specifies the type of cost benefits which may arise from greater capacity utilization, in the hypothetical situation where there is no output limitation. According to the Commission, most of the time, a capacity reduction agreement will allow savings of fixed costs, as the remaining players will be able to increase their output while spreading their fixed costs over a larger quantity of products.79 The Commission stresses that a capacity reduction agreement would more rarely lead to a reduction in variable costs (that is, the costs which vary with output). This is an important distinction since, as will be seen below, reductions in variable costs are much more likely to meet the third condition of Article 101(3) TFEU than reductions in fixed costs. According to the Commission, a saving of variable costs may happen where higher production levels enable the use of more efficient technology, where larger purchases of raw materials decrease input costs, or in industries that lend themselves to learning economies.80 In its brief, the Commission does not identify employment protection as a possible efficiency. This is hardly surprising in view of the Commission’s recent focus on ‘objective economic efficiencies’ under Article 101(3) TFEU, that is, mostly cost and qualitative efficiencies.81 Yet, historically, the Commission and the EU Courts have already taken into account employment as an objective worthy of protection under Article 101(3) TFEU, not only in the context of restructuring agreements,82 but also more generally.83 Realistically, one should not expect a relaxation of the Commission’s position on this point in the coming years. However, this narrow interpretation remains to be tested before the EU courts. The second condition of Article 101(3) TFEU relates to the indispensability of the restriction. This condition consists of a twofold test. First, the agreement in general must be reasonably necessary to bring about efficiencies. Second, each of the individual restrictions arising from the agreement must be reasonably necessary to achieve the claimed efficiencies. In its observations, the Commission focuses on the first test, as the second one depends on a casuistic assessment of each agreement.84 Amicus Curiae (n 75) paras 20–23. ibid paras 24–25. 79 ibid para 26. 80 ibid para 27. 81 Guidelines on the Application of Article 81(3) of the Treaty [2004] OJ C101/97, paras 59–72. 82 European Commission (n 16) para 39; Synthetic Fibres (n 17) para 38, and Stichting Baksteen (n 36) para 27. 83 Case 26-76, Metro I [1977] ECR 1875, para 43. See also Rivas (n 4). 84 Amicus Curiae (n 75) para 29. See also OECD (n 5) 115 (European Union). 77 78

266  Research handbook on cartels The Commission notes in particular that it will verify whether ‘no other economically practicable and less restrictive means of achieving the efficiencies’ were possible. And the indispensability considered is not the indispensability to the existence of the agreement itself, but indispensability for the achievement of the benefits identified. In the case of restructuring agreements, this supposes answering the question of whether market forces alone could have solved the problem of overcapacity without the collective intervention of individual undertakings.85 The Commission underlines that, traditionally, when demand falls, it is for each undertaking to adapt its pricing policy and to decide whether and to what extent its overcapacity becomes economically unsustainable.86 Nevertheless, the Commission acknowledges that overcapacity problems cannot always be solved within a reasonable time period by the free interplay of market forces, in which case overcapacity is likely of a structural nature.87 The Commission gives the example of a ‘war of attrition’ scenario that leads to a prisoner’s dilemma: in certain circumstances, firms may refrain from releasing unused capacity in order to induce their rivals to leave the market first. In this case, no operator will take the risk of reducing its own capacity and suffer economic losses. Instead, each player will wait for another player to reduce capacity in order to benefit from the overall fall in capacity in the industry.88 The Commission stresses that firms are likely to participate in such a war of attrition in two situations: either when companies refuse to reduce capacity because of high fixed or sunk costs that normally decrease with output, or when firms cannot reduce capacity because they operate in a stable, transparent and symmetrical market structure in which firms of similar size and cost structure are sufficiently aligned to maintain capacity at excess level.89 While the Commission accepts that these two situations do not constitute an exhaustive list, it nonetheless assumes that in most cases merger and acquisitions and specialization agreements constitute less restrictive remedies to solve a problem of structural overcapacity in an industry.90 The Commission considers that, generally, these two alternatives tend to eliminate inefficient plants and therefore reduce overcapacity on the market.91 The Commission’s strict view is compounded by its decisional practice, which shows that reciprocal specialization agreements may indeed constitute valid alternatives to industry-wide restructuring schemes, provided that they do not incorporate any price-fixing, quota-fixing or market-allocation provisions. For instance, in 1984, the Commission exempted an agreement between two British manufacturers (British Petroleum Chemicals and Imperial Chemical Industries) that aimed at reducing capacity.92 The Commission stated that ‘given that the over-capacity in the industry is of a structural nature, market forces would have been too slow at bringing about the necessary radical changes. These agreements by their immediate closure of plants, accelerate the tendency to re-establish the equilibrium in supply and demand.’93

87 88 89 90 91 92 93 85 86

Amicus Curiae (n 75) para 32. ibid para 33. ibid para 35. OECD (n 5) 117 (European Union); and Amicus Curiae (n 75) para 36. OECD (n 5) 117 (European Union); and Amicus Curiae (n 75) para 37. Amicus Curiae (n 75) paras 37–39. OECD (n 5) 117 (European Union). BPCL/ICI (n 34). ibid para 35.

Crisis cartels  267 The Commission noted that the petrochemical sector was characterized by excess of capacity, and that the agreement would allow the two firms to reduce production costs. It also found that, even after the agreement and the elimination of one producer, consumers would still have the choice of supplier.94 Finally, concerning the third condition of Article 101(3) TFEU (according to which consumers must receive a fair share of the resulting benefits), the Commission recalls that pass-on benefits must at least compensate for any potential negative impact caused by the reduction of capacity.95 The Commission then specifies the nature of the cost benefits and the degree of competitive constraints on the market, which are the two other elements it will take into account in the assessment of the pass-on defence. First, as regards the nature of cost benefits, the Commission explains that reductions of variable costs are more likely to lead to a fair share of cost efficiencies benefiting to consumers than reductions of fixed costs. This is because, as a general rule, pricing decisions of profit-maximizing firms are not determined by fixed costs but by variable costs.96 In this context, the Commission will adopt a case-by-case approach in order to identify cost benefits for consumers, as capacity reduction agreements generally tend to reduce the fixed cost component of unit costs.97 Second, the Commission recalls that the degree of competitive constraints on market players will be assessed in view of (i) actual competition, (ii) potential competition and (iii) buyer power. In this regard, a restructuring agreement must not go beyond a simple reduction in capacity and directly lead to the withdrawal of certain players. In addition, in order not to hinder potential competition, a restructuring agreement must not increase barriers to entry in a sector which involves high fixed or sunk costs.98 Finally, on buyer power, the Commission notes that undertakings with excess capacity will generally be subject to greater competitive pressure from purchasers than undertakings with low overcapacity. As a result, a capacity-reducing agreement would generally constrain buyers because of the decrease in the supply on the market. However, the Commission concludes that this will depend on the nature of the market in question.99 C. Sanctions The existence of a crisis is an element that competition authorities may consider when setting the amount of fines. For instance, the Commission has often taken into consideration the economic situation of the industry where the infringement occurred.100 In the Seamless Steel Tubes decision, the Commission held that the crisis affecting the steel pipe and tube industry in the 1970s could be seen as an attenuating circumstance justifying a 10 per cent reduction in the See ENI/Montedison (n 34); and Enichem/ICI (n 34). Amicus Curiae (n 75) para 40. 96 ibid para 41. 97 OECD (n 5) 119 (European Union). 98 Amicus Curiae (n 75) paras 45–46. 99 ibid para 47. 100 See, e.g., Case IV/30.064, Cast Iron and Steel Rolls, Commission decision, 17 October 1983 [1983] OJ L317/1, paras 72–75; and Case IV/30.988, Agreements and Concerted Practices in the Flat-Glass Sector in the Benelux Countries, Commission decision, 23 July 1984 [1984] OJ L212/13, para 55. 94 95

268  Research handbook on cartels amount of the fine.101 More recently, in the French Beef case, the Commission applied a 30 per cent reduction due to the encouragement of the cartel by the French government and a further 60 per cent reduction linked to long-term effects of the mad cow crisis on the relevant market, which went beyond a straightforward collapse in price.102 However, according to the Court of Justice, the Commission is not required, when determining the amount of the fine, to take into account the poor financial situation of an undertaking, since recognition of such an obligation would be tantamount to giving unjustified competitive advantages to undertakings least well adapted to the market conditions.103

In our view, this stance is over-simplistic. By definition, in a crisis context, the parties’ competitors are subject to the same structural crisis, and the fact that they did not participate in the cartel does not mean that they thrive or that they are necessarily more adapted to the market conditions. The fact remains that, as such, the existence of a crisis does not constitute a mitigating circumstance. This is also true in other jurisdictions. For instance, in the US, while the US Sentencing Guidelines take into account the defendant’s ability to pay, this is linked to its particular situation and not to general economic conditions.104

V.

CONCLUSION – THE GRIM FUTURE OF CRISIS CARTELS

In 1985, the Commission held that a system whereby inefficient firms are kept afloat is against the public interest.105 Although competition authorities, including the Commission, have not always been adverse to crisis cartels, this behaviour has become extremely difficult to justify. In the EU, for instance, the Commission has adopted only two decisions exempting crisis cartels implemented in the form of restructuring agreements, and it is far from obvious that it would adopt the same decisions if it had to rule on these cases today. Mergers seem to constitute a more robust way to deal with a structural crisis and, in particular, overcapacity (provided that sufficient individual economic incentives exist to implement a concentration). In any event, crisis cartels appear to be increasingly difficult to implement even under the form of a restructuring agreement. First, globalization makes the successful implementation of a crisis cartel very difficult. Even if such a cartel is authorized in one jurisdiction, which as noted above has become an ambitious assumption, it may be prohibited in another jurisdiction 101 Case IV/E-1/35.860-B Seamless Steel Tubes, Commission decision, 8 December 1999 [2003] OJ L140/1, paras 168–69. 102 Case COMP/C.38.279/F3, French Beef, Commission decision, 2 April 2003 [2003] OJ L209/12, paras 176–85. 103 Joined Cases 96/82 etc IAZ International Belgium and others v Commission [1983] ECR 3369, paras 54–55; and Joined Cases C-189/02 P etc Dansk Rørindustri and others v Commission [2005] ECR I-5425, para 327. 104 OECD (n 5) 216 (United States), referring to US Sentencing Guidelines, Guidelines Manual (2010), § 8C3.3. See now Sentencing Guidelines, Guidelines Manual (2010), § 8C3.3, which enshrine the same principle. 105 Case IV/30.307, Fire Insurance (D), Commission decision, 5 December 1984 [1985] OJ L35/20, para 44.

Crisis cartels  269 where the cartel also has effects. Second, it is now undoubtedly riskier to implement a crisis cartel than in the 1980s, since: (i) the repression of cartels has become a clear enforcement priority, with less stability for cartelists due to the rise of leniency programmes and higher fines associated to a finding of infringement; and (ii) agreements between competitors (like any other agreements) can no longer be notified to the Commission for approval. One must never say never, but the exemption of crisis cartels has likely become a thing of the past.

PART III PROCEDURAL ISSUES

16. The difficulties of proving an unlawful cartel Fernando Castillo de la Torre1

I. INTRODUCTION Proving the existence of a cartel poses special problems for the competition law enforcer. Cartels are typically unlawful in all systems and national laws do not normally provide for any exceptions. Participants understand that their conduct is unlawful, and so they take pains to conceal it. If an investigation into their conduct is undertaken, the participants usually do not co-operate with it, except through a leniency programme. Cartels can take significant measures to conceal their crimes:2 discussions are conducted over payphones and untraceable burner phones; face-to-face meetings use offsite locations; participants may register in hotels under false names or assign code names to firms or individuals within the cartel. Probably the most common way in which illegal contacts are concealed is by organizing them in conjunction with trade association meetings. They require the destruction of incriminating evidence, and it is not uncommon to see communications that terminate with ‘destroy this email after reading’. Therefore, the task of finding the evidence can be daunting. Fact-finding nowadays may require the most advanced technological means to review the voluminous electronically stored information in the undertakings’ files. The two main challenges for the decision-maker in this area are obtaining evidence and proving the infringement to the requisite legal standard.3 The ways to obtain the evidence are regulated differently in the different legal systems, and may vary depending on whether the enquiry is carried out in a civil, administrative or criminal setting. In turn, how high the standard of proof is will determine how far the investigative efforts of the claimant must go. One crucial aspect will be whether case law in each jurisdiction requires direct evidence of

All views expressed are personal to the author and should not be attributed to the European Commission (‘the Commission’) or its Legal Service. 2 C. Leslie, ‘How to Hide a Price-Fixing Conspiracy’ [2021] 4 University of Illinois Law Review 1199. 3 See, for a comparative view, OECD, Prosecuting Cartels without Direct Evidence (DAF/ COMP/GF(2006)7, 11 September 2006); and OECD, ‘Prosecuting Cartels without Direct Evidence of Agreement’ (2007) 9(3) OECD Journal of Competition Law and Policy 49. On specific legal systems, ABA Antitrust Law Section, Proof of Conspiracy under Federal Antitrust Laws (2nd edn, 2019); F. Castillo de la Torre and E. Gippini Fournier, Evidence, Proof and Judicial Review in EU Competition Law (Edward Elgar Publishing, 2017); M. Brealey and K. George (eds), Competition Litigation: UK Practice and Procedure (2nd edn, Oxford University Press, 2019) Chapters 10, 12 and 13; K. Schmidt, ‘GWB § 57’, in U. Immenga and E.J. Mestmäcker (eds), Wettbewerbsrecht (6th edn, 2020) paras 1–38; L. Idot, ‘Réflexions sur l’Évolution de la Preuve des Pratiques Anticoncurrentielles Devant les Autorités de Concurrence’ [2017] 4 Concurrences 45; K. Arai, ‘Indirect Evidence in Japanese Cartel Control’ (2015) 46 IIC – International Review of Intellectual Property and Competition Law 340; and A. Lamadrid de Pablo and A. Balcells, ‘La Prueba de los Cárteles en Derecho Español’, in J. Porras, J.M. Beneyto and J. Maillo (eds), La Lucha Contra los Cárteles en España (Aranzadi, 2015).  1

271

272  Research handbook on cartels the infringement, and to what extent indirect or circumstantial evidence may be enough to convince, ultimately, the judge who will have to deal with the case. At the same time, proving a cartel in most jurisdictions is facilitated by the fact that provisions of competition laws prohibiting anticompetitive agreements apply not only to explicit agreements but also to other types of joint arrangements, variously identified as ‘arrangements’, ‘combinations’ or ‘concerted practices’. However, regardless of the precise terminology, liability for a competition law violation can be imposed only if it can be shown that the parties reached some ‘conscious commitment to a common scheme’.4 The focus of cartel litigation is generally whether or not the claimant can prove an agreement or unlawful coordination.5

II.

BURDENS OF PROOF: SHIFTS AND INFERENCES

Issues of burden and standard of proof typically arise in competition cases generally and in cartel cases in particular. The rules differ depending on whether the case concerns a civil claim or is of criminal or administrative nature. As regards the latter, insofar as, for cartels, administrative enforcement generally implies the imposition of penalties, the burden and standard tend to be quite similar to that applicable in a criminal context. The legal burden of proof is the obligation of a party to meet the requirement of a rule of law that a fact in issue be proved to the satisfaction of the court. The burden of proof is said to frequently act as a burden of persuasion: even if the law frequently states who should prove what (such as ‘the plaintiff will prove the facts representing the basis of his claim’), in fact either by way of case law or by way of legislation the rules on burden of proof are standards for the allocation, between the parties, of the negative effects of the final lack of proof of material facts. In other words, they are aimed at providing the court, which must always decide the case and may not end up with a non liquet decision, with criteria that the court is to apply in its final decision-making, at the point at which it finds out that some material facts have not been proved.

OECD (2007) (n 3) 60–61. In the EU, case law has softened such difficulties by embracing a wide concept of ‘agreement’ and ‘concerted practice’. An agreement within the meaning of Article 101(1) of the Treaty on the Functioning of the European Union (‘TFEU’) can be regarded as having been concluded where there is a concurrence of wills on the very principle of a restriction of competition, even if the specific features of the restriction envisaged are still under negotiation; see Case T-9/99, HFB and others v Commission, EU:​T:​2002:​70, paras 151–57 and 206; Case T-240/07, Heineken Nederland v Commission, EU:​T:​2011:​ 284, para 45; and Case T-444/14, Furukawa Electric v Commission, EU:​T:​2018:​454, para 54. There is no need to demonstrate the precise mechanism by which the restrictive object was sought: Joined Cases T-67/00 etc, JFE Engineering and others v Commission, EU:​T:​2004:​221, para 203; and there is no need to show effects as regards agreements or concerted practices which have as their object the restriction of competition. The concept of concerted practice does in fact imply the existence of reciprocal contacts, and the condition of reciprocity is met where one competitor discloses its future intentions or conduct on the market to another when the latter requests it or, at the very least, accepts it. See Joined Cases T-25/95 etc, Cimenteries CBR and others v Commission, EU:​T:​2000:​77, paras 1849 and 1887. The exchange does not need to be reciprocal, in the sense of both sides exchanging the information; see Case T-54/03, Lafarge v Commission, EU:​T:​2008:​255, para 458; and Case T-377/06, Comap v Commission, EU:​T:​ 2011:​108, para 70. 4 5

The difficulties of proving an unlawful cartel  273 Typically, in civil and criminal cases the burden is for the plaintiff or prosecutor. In the EU, the burden of proving an infringement was typically borne by the Commission: it is incumbent on the Commission to prove the infringements which it has found and to adduce evidence capable of demonstrating to the requisite legal standard the existence of circumstances constituting the infringement. […] In doing this, the Commission must establish in particular all the facts enabling the conclusion to be drawn that an undertaking participated in such an infringement and that it was responsible for the various aspects of it.6

This is now ‘codified’ in Article 2 of EC Regulation 1/2003,7 which places the burden of proof on the claimant who is asserting that a decision, agreement or concerted practice infringes Article 101(1) TFEU. This general regime applies both to public authorities and to private claimants. Even if it is quite uncommon to claim that a cartel is to be exempted under Article 101(3) TFEU, it must be recalled that the same Article 2 provides that the burden of proving the four conditions for exemption lies with the party claiming exemption.8 Whereas the legal burden of proof is normally determined by law, the different shifts in the ‘evidential’ one are normally refined in the case law. The evolution of EU law could not escape this phenomenon. However, this reality covers different types of situation, which are not to be treated in the same way. In the area of competition law, the leading case where this was made explicit is Aalborg, pre-dating the adoption of Regulation 1/2003: it should be for the party or the authority alleging an infringement of the competition rules to prove the existence thereof and it should be for the undertaking or association of undertakings invoking the benefit of a defence against a finding of an infringement to demonstrate that the conditions for applying such defence are satisfied, so that the authority will then have to resort to other evidence. Although according to those principles the legal burden of proof is borne either by the Commission or by the undertaking or association concerned, the factual evidence on which a party relies may be of such a kind as to require the other party to provide an explanation or justification, failing which it is permissible to conclude that the burden of proof has been discharged.9

These two paragraphs make a clear difference between ‘defences’, where the burden appears to be more squarely on the party invoking it (as later codified in Regulation 1/2003), and shifts of what is sometimes called the ‘evidential burden of proof’. This ‘evidential’ burden of proof, or the ‘burden of production’, is the basis for the use of a number of evidentiary tools, such as factual presumptions. Jurists approaching this issue from a continental tradition take a somewhat similar view, even if the language used is not always identical. They tend to distinguish between the objective and the subjective burden of proof.10 The allocation of the evidential (or

Case C-49/92 P, Commission v Anic, EU:​C:​1999:​356, para 86; see also Case T-132/07, Fuji Electric v Commission, EU:​T:​2011:​344, para 84. 7 Council Regulation (EC) No 1/2003 of 16 December 2002 on the Implementation of the Rules on Competition Laid down in Articles 81 and 82 of the Treaty [2003] OJ L1/1. 8 On the burden and the standard of proof for the application of Article 101(3) TFEU, see Castillo de la Torre and Gippini Fournier (n 3) paras 3.093–3.110. 9 Joined Cases C-204/00 P etc, Aalborg Portland and others v Commission, EU:​C:​2004:​6, para 79; see also Case C-609/13 P, Duravit v Commission, EU:​C:​2017:​46, para 57. 10 On the burden of proof as an objective rule to decide in case of uncertainty, see A-L. Sibony, Le Juge et le Raisonnement Économique en Droit de la Concurrence (LGDJ, 2008) para 826. Advocate General Kokott has differentiated the categories at stake: ‘The burden of proof determines, first, which 6

274  Research handbook on cartels subjective) burden of proof leads to situations where certain facts may be said to be proven in the absence of alternative explanations by the undertaking. It is generally accepted that these shifts of the evidential burden on to the other party have to do more with the standard of proof than with the legal burden of proof.11 Accordingly, courts and competition authorities make inferences all the time. This role is particularly salient for cartels, as the authorities do not always possess a clear evidential record or documentary evidence of the infringements. Hence, they should be capable of supplementing the evidential record with inferences that allow the relevant circumstances to be reconstituted. Yet, inferences cannot go too far. The EU judicature has stressed in several judgments that ‘the participation of an undertaking in a cartel cannot be inferred from speculation based on imprecise evidence’.12 Certain inferences, amounting to a shift in the evidential burden of proof, have developed in the area of cartels. Some inferences are qualified as ‘presumptions’, even if that category is full of nuances.13 One important presumption in cartel cases concerns the link between participation in anticompetitive meetings and adherence to the anticompetitive practice. It is sufficient for the administrative authority to show that the undertaking concerned participated in meetings at which anticompetitive agreements were concluded, without manifestly opposing them, to prove its participation in the cartel. In a shift in the evidential burden of proof, it is then for that undertaking to put forward evidence to establish that its participation in those meetings was without any anticompetitive intention by demonstrating that it had indicated to its competitors that it was participating in those meetings in a spirit that was different from theirs.14 The reason underlying that principle is that, having participated in the meeting without publicly distancing itself from what was discussed, the undertaking has given the other participants to believe that it subscribed to what was decided there and would comply with it. A party which tacitly approves of an unlawful initiative effectively encourages the continuation of the

party must put forward the facts and, where necessary, adduce the related evidence (subjektive or formelle Beweislast, also known as the evidential burden); second, the allocation of that burden determines which party bears the risk of facts remaining unresolved or allegations unproven (objektive or materielle Beweislast)’ (Case C-8/08, T-Mobile Netherlands, EU:​C:​2009:​110, Opinion of AG Kokott, footnote 60). As she also explained in her Opinion in FEG: ‘before there is any need to allocate the burden of proof at all, each party bears the burden of adducing evidence in support of its respective assertions. A substantiated submission by the Commission can be overturned only by an at least equally substantiated submission by the parties. […] [I]f in its decision the Commission draws conclusions as to the conditions prevailing in a particular market on the basis of objectively verifiable evidence from stated sources, the undertakings concerned cannot refute the Commission’s findings simply by unsubstantiatedly disputing them. Rather, it falls to them to show in detail why the information used by the Commission is inaccurate, why it has no probative value, if that is the case, or why the conclusions drawn by the Commission are unsound. This requirement does not represent the reversal of the burden of proof … but the normal operation of the respective burdens of adducing evidence’ (Case C-105/04 P, FEG v Commission, EU:​C:​ 2005:​751, Opinion of AG Kokott, paras 73–74). 11 Case C-97/08, Akzo Nobel v Commission, EU:​C:​2009:​262, Opinion of AG Kokott, para 74. 12 See Case T-68/09, Soliver v Commission, EU:​T:​2014:​867, para 58; Case T-104/03, Toshiba v Commission, EU:​T:​2015:​610, para 50; and Case T-772/15, Quanta Storage v Commission, EU:​T:​2019:​ 519, para 93. 13 A. Kalintiri, ‘Analytical Shortcuts in EU Competition Enforcement: Proxies, Premises and Presumptions’ (2020) 16(3) Journal of Competition Law & Economics 392. 14 Aalborg Portland and others v Commission (n 9) para 81. For different cases of application, see Castillo de la Torre and Gippini Fournier (n 3) paras 2.072–2.074.

The difficulties of proving an unlawful cartel  275 infringement and jeopardizes its discovery.15 Other presumptions and inferences are typically present in cartel cases.16

III.

ADMISSIBILITY, EVIDENCE ASSESSMENT AND STANDARD OF PROOF

Before the judge must decide the case by applying the burden of proof, other concepts come into play. Proving a cartel implies first gathering admissible evidence. Evidence must be presented to the fact-finder or be gathered by the relevant authority; that is, it must find its way into the file. Evidence must also be admissible according to the rules of the relevant legal system. Exclusionary rules have been widely considered a hallmark of Anglo-American evidence, but they are less prominent in continental law systems and also in EU practice. ‘Extrinsic’ exclusionary rules, that is, rules rejecting probative information for the sake of values unrelated to the pursuit of truth (such as certain privileges, or the exclusion of illegally obtained evidence), exist in some form in EU law. However, the ‘intrinsic’ exclusionary rules, that is, rules which try to ensure accuracy of fact-finding (such as the hearsay rule), do not find a real analogue in continental trials and in EU law. This is not to say that the dangers related to some type of evidence will be ignored, but the objection will not be structured as an exclusionary rule: caution will be applied at the time of assessing the weight of the evidence.17 In principle, in the EU, the fact that the Commission is bound to respect the general principles of law, including fundamental rights, which are recognized as part of the Union legal order means, inter alia, that evidence that has been collected or processed in contravention of fundamental rights is in principle inadmissible.18 Yet, in practice it is not so clear whether

Aalborg Portland and others v Commission (n 9) paras 82, 84. See Castillo de la Torre and Gippini Fournier (n 3) paras 2.069–2.078 and 2.088–2.093. 17 For details, see M. Damaška, ‘Of Hearsay and Its Analogues’ (1992) 76 Minn L Rev 425, 444–56. The same applies to character evidence or similar information about a person’s past life. Continental evidentiary theory focuses only on whether information from a person’s past has probative value: if it is probative, it can and should be used in adjudication: M. Damaška, Evidence Law Adrift (Yale University Press, 2013) 17. 18 See Joined Cases 46/87 and 227/88, Hoechst v Commission, EU:​C:​1989:​337, para 34; Case C-94/00, Roquette Frères, EU:​C:​2002:​603, para 49; Case T-410/09, Almamet v Commission, EU:​T:​ 2012:​676, para 39; and Case T-54/14, Goldfish BV and others v Commission, EU:​T:​2016:​455, para 47. For further discussion see Castillo de la Torre and Gippini Fournier (n 3) paras 4.011–4.020. 15 16

276  Research handbook on cartels unlawfully obtained evidence must always be excluded,19 and the case law of the EU judicature has become more nuanced over time.20 If evidence is admitted, one must then examine the ‘strength’ of that evidence, where the focus is on how the decision-maker weighs the evidence in reaching the verdict. In this connection, two main properties of evidence must be distinguished.21 The first property is the probative value of the evidence. Evidence must first be assessed in order to determine its probative value. However, this assessment is not done in the abstract and it is relational to what the party intends to prove: evidentiary inferences and arguments must be developed (when it is a party) and assessed (by the decision-maker) to determine the evidentiary support to the conclusions. Evidence does not normally ‘speak by itself’, and therefore parties and the decision-maker must construct evidentiary arguments based on the items presented. Here courts have typically developed common principles which actually apply in different contexts, and they are not necessarily unique to competition law. In a comparative scheme, assessment criteria can be ordered according to the degree of freedom they confer upon the fact-finders, stipulating that a criterion is ‘objective’ if it decreases such freedom and is ‘subjective’ if it increases it. This is, however, not a categorical distinction, it is a matter of degree. In other words, objective criteria are evidence-centred since they focus on the evidence at the fact-finder’s disposal, while subjective criteria are evaluator-centred since they focus on the states of mind and attitudes of the fact-finder (on prudence, conscience, conviction, etc.).22 Whether such conceptualizations have a real impact on the practice of the courts remains to be seen. 19 This is not an outright consequence of the European Convention on Human Rights (‘ECHR’), which appears to focus more on how the evidence is used as opposed as how the evidence was obtained. This is the distinction between Beweiserhebung and Beweisverwertung, which is well developed in German legal doctrine. On the ECHR issue, see I. Vilsmeier, Tatsachenkontrolle und Beweisführung im EU-Kartellrecht auf dem Prüfstand der EMRK (Mohr Siebeck, 2014) 139–40. The relevant question is whether the proceedings as a whole, including the way in which the evidence was obtained, were fair. This involves an examination of the alleged unlawfulness in question and, where the violation of another Convention right is concerned, the nature of the violation found (Khan v United Kingdom, Application No. 35394/97, ECHR 2000-V, § 34; and Allan v United Kingdom, Application No. 48539/99, ECHR 2002-IX, § 42). As to the examination of the nature of the ECHR violation found, the question whether the use as evidence of information obtained in violation of Article 8 ECHR rendered a trial as a whole unfair contrary to Article 6 ECHR has to be determined with regard to all the circumstances of the case, and in particular to the question of respect for the applicant’s defence rights and the quality and importance of the evidence in question: Gäfgen v Germany, Application No. 22978/05, ECHR 2010 § 165. 20 It is apparent from the Court’s case law that in deciding whether to exclude information and evidence obtained in contravention of the requirements of EU law, regard must be had, in particular, to the risk of breach of the adversarial principle and, therefore, the right to a fair trial entailed by the admissibility of such information and evidence (see Goldfish BV and others v Commission, n 18, paras 50–87; Joined Cases C‑511/18 etc, La Quadrature du Net and others, EU:​C:​2020:​791, para 226; and Case C-276/01, Steffensen, EU:​C:​2003:​228, paras 76 and 77). 21 A third property is the ‘degree of completeness’. Not only must the evidence be assessed in a holistic way (see below), but, more fundamentally, the decision-maker has a duty to examine all relevant circumstances when adopting its decision. The weight of the allegedly incriminating evidence will be assessed not only against the potential exculpatory evidence in the file, but bearing in mind the evidence that the decision-maker could have obtained. 22 The criterion of the ‘intime conviction’ is not purely subjective. The relevant texts tend to underscore the need to fix that state of mind on the basis of the evidence. It does not boil down to a purely subjective and psychological feeling about the defendant’s guilt.

The difficulties of proving an unlawful cartel  277 While most civil law countries usually have in their respective codes some basic rules about evidence and proof, they do not tend to be very detailed. Most of the time these rules set evidence assessment criteria instead of standards of proof. Nowadays these criteria are rather relaxed, leaving room to judicial discretion. This trend is historically explained by the nowadays widely accepted principle of ‘free evaluation’ of the evidence. The EU judicature has held on a number of occasions that the prevailing principle in Community law is the ‘unfettered evaluation of evidence [‘libre administration de la preuve’ in French],23 the only relevant criterion for such evaluation being the reliability of the evidence’.24 The establishment of general rules is inimical to such a principle. The principle of unfettered evaluation implies precisely the scarcity of such rules.25 The credibility, and thus the probative value, of a document depends on its origin, the circumstances in which it was drawn up, the person to whom it is addressed and the soundness and reliable nature of its content.26 Accordingly, even a single piece of evidence can be sufficient to establish an infringement provided that the probative value is such that it attests definitively to the existence of the infraction.27 The freedom in the evaluation of the evidence frees the fact-finder from legal rules, but it does not imply licence to disregard extralegal canons of valid inference and is usually combined in domestic law with the obligation to duly reason the factual findings.28 As an essential guarantee of a fair trial, courts are under an obligation to explain in detail why and how their factual findings stem from the evidence presented during the proceedings.29

23 See, inter alia, Case C-407/14 P, Dalmine v Commission, EU:​C:​2007:​53, para 63; and Joined Cases T-426/10 etc, Moreda-Riviere Trefilerías and others v Commission, EU:​T:​2016:​335, para 110. 24 Case C-411/04 P, Salzgitter Mannesmann v Commission, EU:​C:​2007:​54, para 45; Joined Cases C-239/11 P etc, Siemens and others v Commission, EU:​C:​2013:​866, para 128; Case T-58/14, Stührk Delikatessen Import v Commission, EU:​T:​2018:​474, paras 71–72; and Case T-433/16, Pometon v Commission, EU:​T:​2019:​201, para 115. 25 Siemens and others v Commission (n 24) paras 190–91. The principle of free evaluation of the evidence appeared as a rebellion against the principle of legal assessment, which prescribed the ways and means in which each element was to be proven. In Continental Europe, the rebellion rested in important part on the belief that the probative weight of evidence is a matter too unruly to obey, and too contextual to be captured in a web of categorical legal norms. In its most pristine historical form, the principle of free evaluation of the evidence (‘free proof’) was conceived to be so radical that it demanded not only freedom from legal chains in analysing evidence but also freedom from all inter-subjectively ascertainable standards governing the fact-finding decision: the adjudicator’s inner persuasion (his ‘conviction intime’) was thought sufficient to justify the verdict. 26 Stührk Delikatessen Import (n 24) paras 72 and 73 and the case law cited. 27 Cimenteries CBR and others v Commission (n 5) para 1848. 28 The appellate review forces the adjudicator to justify its findings in a written opinion. The hierarchical supervision will typically give rise to authoritative statements on the adequacy of the evidentiary support for the factual findings of the court below, and although the prevailing legal doctrine refuses generally to acknowledge that these statements (expect at most those imposed by compliance with fundamental rights) can be the font of binding legal norms, the standards contained in these statements are actually observed. The fear of reversal exerts a degree of constraining influence on the first instance judge’s freedom. However, most of the time these standards are highly contextual and they seldom harden into sharp-edged rules. See Damaška (2013) (n 17) 21. 29 How the EU courts comply with this obligation depends on each case. Certain judgments are more open about qualifying certain pieces of evidence as having particularly high, high, moderate or low probative value, but this intrinsic value is always based, as any evidentiary issue, on generalizations. Other judgments stress the overall strength of the evidence as a whole, rather than that of the different pieces of evidence. When examined in isolation, each piece of evidence is included in a given ‘category’, to

278  Research handbook on cartels The second property relates to the ‘sufficiency’ of the evidence, generally articulated as the ‘standard of proof’. Fact-finders need to consider whether the evidence meets the relevant standard of proof. The standard of proof rules set the qualitative or quantitative thresholds that must be reached to have a decision in favour of the party which bears the burden of proof. This party bears the risk that the amount of evidence is insufficient with respect to the standard. So, standard of proof rules are, in the end, also decision rules. They justify decisions in favour of one party or the other, based on the factual claims and the arguments given the evidence.30 The standards of proof can be ordered according to the degree of belief on the claim at stake (qualitative reading) or according to the probability value that the claim is attributed (quantitative reading). Different degrees of belief would correspond to three theoretical basic standards: ‘beyond reasonable doubt’, ‘clear and convincing evidence’ and ‘preponderance of the evidence’. In civil cases, whereas the common law tradition applies the balance of probabilities,31 the continental tradition tends to be more demanding.32 In criminal law, the ‘beyond reasonable doubt’ is commonly used throughout the world. When sanctions are imposed outside criminal proceedings, the applicable standard tends to be close or identical to the one applied in criminal proceedings. Accordingly, in EU law, the ‘benefit of the doubt’ is now systematically recalled as regards the existence of the relevant conduct.33 The case law has also referred, and still refers, to the need to convince the judge, which is the ultimate aim which certain attributes are normally associated. As for any generalization based on experience, parties may provide indicia that the assumption on which the generalization is made does not apply in the instant case. Using case-specific evidence, one party can challenge the existence of the background conditions under which a generalization becomes operative. That is why, even when relying on generalizations, the EU judicature often leaves the door open for the existence of specific circumstances (Castillo de la Torre and Gippini Fournier (n 3) paras 2.102 and 4.023–4.024). 30 Standards of proof are not criteria of evidence assessment. Instead, they presuppose and require some criteria that determine the probative force, or probative value, of the evidence in play, in order to decide whether it meets the relevant threshold. Evidence must be assessed in order to check whether it satisfies a relevant standard of proof. G. Tuzet, ‘Evidence Assessment and Standards of Proof: A Messy Issue’ [2020] 2 Quaestio Facti 87, 90, explains that this difference is not always recognized and it is not uncommon that some legal scholars, practitioners and decision-makers miss the difference between assessment criteria and standards. The common law world shows a prominent concern for standards of proof, and this finds an explanation in the features of jury trial (ibid 104). 31 For the different burdens in different types of litigation within the same legal system, see, for example, for the United Kingdom, Brealey and George (n 3) Chapter 10. 32 Authors often assume that the standard applied in civil proceedings is that of balance of probabilities. However, this is not necessarily the standard applied in many legal systems of the member states of the EU. For a lively debate on this, see K. Clermont and E. Sherwin, ‘A Comparative View of Standards of Proof’ (2002) 50 American Journal of Comparative Law 243; M. Taruffo, ‘Rethinking the Standard of Proof’ (2003) 51 American Journal of Comparative Law 659; and K. Clermont, ‘Standards of Proof Revisited’ (2009) 33 Vermont Law Review 469. See also C. Engel, ‘Preponderance of Evidence versus Intime Conviction – A Behavioural Perspective on a Conflict between American and Continental European Law’ (2009) 33 Vermont Law Review 435, making a similar point: ‘in principle, continental law does not make a difference between civil law and criminal law.’ 33 Joined Cases C-403/04 P and C-404/04 P, Sumitomo Metal Industries and Nippon Steel v Commission, EU:​C:​2007:​52, para 52; Case T-110/07, Siemens AG v Commission, EU:​T:​2011:​68, para 44; Case T-348/08, Aragonesas v Commission, EU:​T:​2011:​621, paras 93–94; Case T-377/06, Comap v Commission, EU:​T:​2011:​108, para 56; Pometon v Commission (n 24) para 108; Case T-240/17, Campine v Commission, EU:​T:​2019:​778, para 108; and Case T‑105/17, HSBC Holdings v Commission, EU:​T:​ 2019:​675, 204, 265. On the evolution of the case law on this point, see Castillo de la Torre and Gippini Fournier (n 3) paras 2.021–2.031.

The difficulties of proving an unlawful cartel  279 of the evidence, and which is formulated with the expression frequently used of achieving a ‘firm conviction’ (‘intime conviction’ in the French version).34 The EU judicature has developed specific case law as regards proof of certain aspects. Beyond the proof of the cartel as such, many other aspects may have to be proven depending on the case. The burden of proof of duration lies with the claimant, even if case law has softened the burden in certain cases.35 The claimant may have to prove that a line of conduct by multiple participants may be considered to be a single and continuous infringement.36 The claimant may have to prove that the defendant is liable for the infringement as well.37

IV.

A HOLISTIC ASSESSMENT OF THE EVIDENCE

One important issue that affects how courts evaluate the different types of evidence, and in particular indirect or circumstantial evidence, is whether the court is willing to consider all evidence that is proffered as a whole, giving it cumulative effect, or whether it requires that each item unequivocally supports the hypothesis of agreement. In High Fructose Corn Syrup Judge Posner strongly adopted the holistic approach. The trial judge in the case had refused to consider the communication evidence that was offered because he thought its character was such as to ‘require that a substantial inference be drawn in order to have evidentiary significance’. This is correct in the sense that no single piece of the [communication] evidence […] is sufficient in itself to prove a price-fixing conspiracy. But that is not the question. The question is simply whether this evidence, considered as a whole and in combination with the economic evidence, is sufficient to defeat summary judgment.38

It should be noted, however, that there are different views even within the US. Other federal appeals courts have examined each item of circumstantial evidence independently as to whether it tended to exclude independent, unilateral action of competitors.39 In the EU, it is not necessary for every item of evidence produced by the Commission to satisfy those criteria in relation to every aspect of the infringement. It is sufficient if the body of evidence relied on by the Commission, viewed as a whole, meets that requirement.40 The items of evidence must not be assessed separately, but as a whole.41 The outcome of any evaluative process will be a complex one, as the specific factual matrix of each case will be JFE Engineering and others v Commission (n 5) para 179. Castillo de la Torre and Gippini Fournier (n 3) paras 3.022–3.085. 36 ibid paras 3.001–3.021. 37 ibid para 2.078, with analysis of all different scenarios dealt with by EU courts so far. See also, more recently, Case C-882/19, Sumal, EU:​C:​2021:​800. 38 In re High Fructose Corn Syrup Antitrust Litig., 295 F.3d 651 (7th Cir. 2002) 661. 39 See Williamson Oil Co. v Philip Morris USA, 346 F.3rd 1287 (11th Cir. 2003). 40 Case T-448/14, Hitachi Metals v Commission, EU:​T:​2018:​442, para 118 and the case law cited therein. 41 Goldfish and others v Commission (n 18) para 93 and the case law cited therein. In the cartel context, the holistic approach implies that the authority may rely on pieces of evidence dated before or after the period for which the Commission finally finds the infringement, insofar as the document is useful to interpret facts relating to that period; see Case T-655/11, FSL and others v Commission, EU:​T:​2015:​383, paras 178, 217; Lafarge v Commission (n 5) para 428; Pometon v Commission (n 24) para 113 and 263; Case T-8/16, Toshiba Samsung v Commission, EU:​T:​2019:​522, paras 270­–76, 364; 34 35

280  Research handbook on cartels necessarily different. Precedents need to be relied upon with the outmost caution. Documents with low intrinsic probative value may become important if they match other documents and the impact that each piece of evidence will have on the overall assessment crucially depends as well on factors external to it. The soundness and reliability of a piece of evidence is proportional to the extent to which that evidence is consistent with other known facts.

V.

DIRECT VS CIRCUMSTANTIAL OR INDIRECT EVIDENCE

A. General One of the traditional evidentiary debates regarding cartel conduct is whether direct evidence is necessary or if circumstantial evidence may instead be enough. While the debate has developed a bit differently in each jurisdiction, depending on the features of its own evidentiary rules as well as the specific type of enforcement at issue (criminal, administrative or civil), the issues tend to be the same conceptually. There is a trend in OECD countries towards building cases based on direct evidence. However, countries continue to bring cases employing mostly circumstantial evidence where it is appropriate.42 It is likely that countries just beginning an anti-cartel programme will have some difficulty generating direct evidence, and hence will have to rely more on circumstantial evidence in early cases. Further to the distinction between direct and circumstantial evidence, there is a second dichotomy between contemporaneous evidence (emails or documents drafted in close connection with the events) and ex post evidence (prepared for the purpose of the proceedings, typically statements by individuals or companies). Direct evidence tends to demonstrate directly the relevant fact, whereas indirect evidence tends to prove a fact with which the relevant fact bears a logical relationship. Common types of direct evidence include a document or documents (including email messages) essentially embodying the agreement, or parts of it, and identifying the parties to it, oral or written statements by co-operative cartel participants describing the operation of the cartel and their participation in it.43 Circumstantial evidence, in turn, consists of ‘communication’ evidence and ‘economic evidence’, which include firm conduct, market structure and evidence of facilitating practices. Indirect evidence can rarely be used in isolation and usually requires corroboration or is itself used to corroborate other (possibly also indirect) evidence. Yet, under certain circumstances, cartel participants can be prosecuted, even against the highest standards of proof, without direct evidence of the agreement or of their involvement in it.44 Indirect (circumstantial) evidence is used in most jurisdictions, including those Case T-475/14, Prysmian v Commission, EU:​T:​2018:​448, 207–16, upheld by Court of Justice in Case C-601/18 P, Prysmian v Commission, EU:​C:​2020:​751, paras 141–43. 42 OECD (2007) (n 3) 58–60. 43 ‘Direct evidence is evidence which requires no mental process on the part of the tribunal of fact in order to draw the conclusion sought by the proponent of the evidence, other than acceptance of the evidence itself. Circumstantial evidence is evidence from which the desired conclusion may be drawn, but which requires the tribunal of fact not only to accept the evidence presented, but also to draw an inference from it’: P. Murphy, Murphy on Evidence (8th ed., Oxford University Press, 2003) 23. 44 ‘Classic criminal proceedings allow for the use of circumstantial evidence and recourse to principles derived from experience’: Case C-8/08 P, T-Mobile Netherlands, EU:​C:​2009:​110, Opinion of AG Kokott, para 93.

The difficulties of proving an unlawful cartel  281 with the longest and most successful records of cartel prosecutions, where competition law enforcers now enjoy the virtuous circle of strong sanctions in past cases energizing leniency programmes, which generate direct evidence in new cases and stronger sanctions. Indirect evidence is particularly important for competition law enforcers in jurisdictions without such enforcement records, given that cartel conspiracies are cloaked in secrecy and direct evidence is not forthcoming.45 There are different types of circumstantial or indirect evidence typically used in cartel cases. One is evidence that cartel operators met or otherwise communicated, but which does not describe the substance of their communications. This is often referred to as ‘communication’ evidence, and includes records of telephone conversations between competitors (but not their substance), or of travel to a common destination or of participation in a meeting, for example during a trade conference. It also includes other evidence that the parties communicated about the subject, such as minutes or notes of a meeting showing that prices, demand or capacity utilization were discussed, or internal documents evidencing knowledge or understanding of a competitor’s pricing strategy, such as an awareness of a future price increase by a rival.46 A broader category of circumstantial evidence is often called ‘economic’ evidence. Economic evidence identifies primarily firm conduct that suggests that an agreement was reached, but also conduct of the industry as a whole, elements of market structure which suggest that secret price fixing was feasible and certain practices that can be used to sustain a cartel agreement. Insofar as it covers actual conduct in the market, the economic nature of this type of evidence comes from the fact that it requires inferences premised on economic reasoning, but conduct evidence does not have, as such, an economic nature. Reliance on that type of evidence may require advice from economic experts.47 Conduct evidence includes, first and foremost, parallel pricing, such as changes in prices by rivals that are identical, or nearly so, and simultaneous, or nearly so.48 Industry performance could also be described as conduct evidence. It includes abnormally high profits or stable market shares. Evidence related to market structure can be used primarily to make the finding of a cartel agreement more plausible, even though market structure factors do not prove the existence of such an agreement. Over the years, courts, competition authorities and competition experts have come to accept that ‘conscious parallelism’, which involves nothing more than identical pricing or other parallel behaviour deriving from independent observation and reaction by rivals in the marketplace, is not unlawful.49 This view is well grounded in economic theory. Economic theory and case law have made it clear that something more than conscious parallelism is required. Defining that ‘something more’ has proved difficult; courts in a few jurisdictions have wrestled with the problem for decades. Some type of conduct will be more difficult to explain by anything but concerted action; that is the case of parallel boycotts or individual bid-rigging actions that are repeated.50 OECD (2007) (n 3) 58. ibid 61–63. In the EU, some of this conduct is more than just circumstantial evidence and can be considered by itself a concerted practice; see n 78 below. 47 On economic expertise, see, for example, Brealey and George (n 3) Chapter 13; and Castillo de la Torre and Gippini Fournier (n 3) paras 4.105–4.124 and 5.059–5.074. 48 It includes other forms of parallel conduct, such as capacity reductions, adoption of standardized terms of sale, and suspicious bidding patterns, e.g., a predictable rotation of winning bidders. 49 OECD (2007) (n 3) 70. 50 Arai (n 3) 346–47. 45 46

282  Research handbook on cartels B.

The United States

The US Supreme Court has famously said that ‘“circumstantial evidence is the lifeblood of antitrust law” because direct evidence will rarely be available to prove the existence of a price-fixing conspiracy’.51 Although the Federal Rules of Evidence do not mention direct or circumstantial evidence, courts rely on the distinction in a variety of contexts, including in Section 1 conspiracy cases.52 The reason why the dichotomy of direct versus circumstantial evidence is important, as opposed to the sufficiency of the evidence, lies in the role of the court in evaluating the legal sufficiency of evidence, especially on motions for summary judgment.53 In the US, the use of circumstantial evidence may depend on whether the case is criminally prosecuted or not. Only in unusual circumstances will the Department of Justice (‘DOJ’) proceed with a criminal prosecution when direct evidence is lacking.54 US courts have defined direct evidence in the context of antitrust conspiracies as ‘evidence that is explicit and requires no inferences to establish the proposition or conclusion being asserted’.55 Beyond such descriptions of direct evidence, in the US many courts define the concept of direct evidence by listing examples of it.56 In reality, direct evidence is not a monolithic category in US law. Direct evidence exists along a continuum of strong to weak: from admissions of guilt to a recorded phone call between competitors in which the defendants agreed to fix prices, to hand-written notes detailing inter-competitor conversations. Moreover, the difference between direct and indirect evidence is not always clear.57 Many have pointed out that all evidence depends upon some inferences.58 A fact-finder’s only access to the event is by inference from traces provided by witnesses, documents and physical objects that have some connection to the event. However, 51 City of Rockford v Mallinckrodt ARD, Inc., 360 F. Supp. 3d 730 (ND Ill. 2019) 749 (quoting United States v Falstaff Brewing Corp., 410 US 526 (1973) 534 n 13). 52 For further references, see W. Page, ‘Direct Evidence of a Sherman Act Agreement’ (2020) 83 Antitrust Law Journal 347; and C. Leslie, ‘The Decline and Fall of Circumstantial Evidence in Antitrust Law’ (2020) 69 American University Law Review 1713. 53 If the plaintiff presents direct evidence of an agreement, then the plaintiff does not need circumstantial evidence to survive summary judgment. The presence of direct evidence of price fixing should fast track an antitrust case to be heard by a jury because a proffer of direct evidence generally prevents the dismissal of a Section 1 case and precludes summary judgment for defendants. Because direct evidence requires no inferences, once an antitrust plaintiff proffers direct evidence of an agreement, the case should proceed to a jury, which can evaluate the credibility of this evidence. 54 OECD (2006) (n 3) 174. 55 Burtch v Milberg Factors, Inc., 662 F.3d 212 (3d Cir. 2011) 225 (citations omitted). See also In re Baby Food Antitrust Litig., 166 F.3d 112 (3d Cir. 1999) 118 (‘Direct evidence in a Section 1 conspiracy must be evidence that is explicit and requires no inferences to establish the proposition or conclusion being asserted’). Cf. In re Publ’n Paper Antitrust Litig., 690 F.3d 51 (2d Cir. 2012) 64 (‘All evidence, including direct evidence, can sometimes require a factfinder to draw inferences to reach a particular conclusion, though “[p]erhaps on average circumstantial evidence requires a longer chain of inferences”’ (quoting Sylvester v SOS Children’s Vills. Ill., Inc., 453 F.3d 900 (7th Cir. 2006) 903)). 56 Leslie (n 52) 1721. 57 See In re High Fructose Corn Syrup Antitrust Litig. (n 38) 661–62 (describing the ‘distinction between direct and circumstantial evidence’ as ‘confusing’ and ‘largely if not entirely superfluous’). 58 Greenstein writes that ‘all testimony requires interpretation – i.e., inferences – to give it meaning; consequently, the connection between direct evidence and the ‘material fact’ it ‘proves’ is every bit as inferential as is the case with circumstantial evidence’: R. Greenstein, ‘Determining Facts: The Myth of Direct Evidence’ (2009) 45 Houston Law Review 1801, 1807.

The difficulties of proving an unlawful cartel  283 none of this evidence can represent the event’s full complexity.59 As evidence forms part of a continuum, depending upon the number of inferences it requires to find a fact, the less ambiguous one, in the sense that it proves a fact on the basis of few and obvious inferences, will be classified as direct evidence. The distinction is based on the existence of shorter or longer chains of inference. In civil cases, the approach appears to be more relaxed. Yet, consistent with economic theory, a long line of case law in the US has recognized that evidence of parallel conduct, such as simultaneous price increases by rivals, alone is not sufficient proof of a cartel agreement. There must be additional evidence, which tends to prove the existence of an unlawful agreement as required under the applicable standards of proof. Courts refer to this additional evidence as ‘plus factors’.60 Therefore, traditional process for proving an anticompetitive agreement through circumstantial evidence involves two steps: parallel conduct and ‘plus factors’. These ‘plus factors’ may prove that agreement is more likely the cause of the parallel conduct than independent action.61 Under Matsushita, courts resolving these motions usually rely on a framework of ‘plus factors’ to evaluate whether the plaintiff’s circumstantial evidence raises a plausible inference of agreement, one that ‘tends to exclude the possibility’62 the defendants were simply pricing interdependently, as oligopolists typically (and lawfully) do.63 Under Twombly, courts faced with motions to dismiss for failure to state a claim, evaluate the plausibility of inferring agreement from circumstantial evidence the complaint alleges.64 In the US, the ‘plus factors’ that are taken into consideration include the defendants’ opportunity to conspire; their intercompetitor communications, including invitations to collude; their exchanges of price and sales data; their possession of rivals’ confidential documents; their

Page (n 52) 356. OECD (2007) (n 3) 58–60. 61 One US court described the standard in a decision as follows: ‘[W]e have required that plaintiffs basing a claim of collusion on inferences from consciously parallel behaviour show that certain “plus factors” also exist. Existence of these plus factors tends to ensure that courts punish “concerted action” – an actual agreement – instead of the “unilateral, independent conduct of competitors”. In other words, the factors serve as proxies for direct evidence of an agreement’: In re Flat Glass Antitrust Litigation, 385 F 3d 350 (3rd Cir. 2004) 359–60. 62 Matsushita Elec. Indus. Co. v Zenith Radio Corp. 475 US 574 (1986) 587 (quoting Monsanto Co. v Spray-Rite Service Corp., 465 US 752 (1984) 764). 63 See, e.g., In re Chocolate Confectionary Antitrust Litig., 801 F.3d 383 (3d Cir. 2015) 396–98 (‘Although we have not identified an exhaustive list of plus factors, they may include (1) evidence that the defendant had a motive to enter into a price fixing conspiracy; (2) evidence that the defendant acted contrary to its interests; and (3) evidence implying a traditional conspiracy’) (citations and internal quotations omitted); ABA Antitrust Law Section, Proof of Conspiracy under Federal Antitrust Laws, 82–106 (2nd edn, 2019) (surveying 9 commonly cited plus factors); and W. Kovacic, R. Marshall, L. Marx and H. White, ‘Plus Factors and Agreement in Antitrust Law’ (2011) 110 Michigan Law Review 393, 414–35 (arguing for recognition of a set of ‘super plus factors’ that strongly indicate agreement). 64 See Bell Atl. Corp. v Twombly, 550 US 544 (2007) 570 (requiring the complaint to allege facts sufficient to ‘state a claim to relief that is plausible on its face’). See, e.g., In re Ins. Brokerage Antitrust Litig., 618 F.3d 300 (3d Cir. 2010) 323 n 22 (holding Twombly ‘necessarily rejected the proposition that plaintiffs may plead conspiracy on the basis of mere parallelism – and thus necessarily required the pleading of plus factors […] although a plaintiff still need not plead specific evidence’). For further references see W. Page, ‘Pleading, Discovery, and Proof of Sherman Act Agreements: Harmonizing Twombly and Matsushita’ (2018) 82 Antitrust Law Journal 123. 59 60

284  Research handbook on cartels price-fixing activities in foreign countries; their artificial standardization of their products; and their maintenance of stable market shares. However, there appears to be an increasing judicial hostility to circumstantial evidence. For these plus factors, some courts have essentially required plaintiffs to present direct evidence of an agreement in order for a particular plus factor to count as circumstantial evidence from which an agreement can be inferred. 65 C.

The European Union

The distinction between direct and indirect or circumstantial evidence is known as such in Europe, but its legal tradition tends to give less weight to such distinction. As is the case in the US, in the EU it is also the difficulties to prove a cartel that explain the wide use of indicia, indirect evidence, and inferences. The principle of effectiveness ‘requires that an infringement of EU competition law may be proven not only by direct evidence, but also through indicia, provided that they are objective and consistent’.66 EU courts have taken into account ‘that anticompetitive activities take place clandestinely, meetings are held in secret, the associated documentation is reduced to a minimum and the evidence discovered by the Commission is normally only fragmentary and sparse’.67 Accordingly, ‘in most cases, the existence of an anticompetitive practice or agreement must be inferred from a number of coincidences and indicia which, taken together, may, in the absence of another plausible explanation, constitute evidence of an infringement of the competition rules’.68 The Commission cannot be required to produce documents expressly attesting to contacts between the economic operators concerned. The fragmentary and sporadic items of evidence which may be available to the Commission should, in any event, be capable of being supplemented by inferences which allow the relevant circumstances to be reconstituted.69 Moreover, evidence does not always lend itself to a straightforward classification as ‘direct’ or ‘indirect’. Generally speaking, evidence produced ex post will have a lower evidentiary value,70 to the point that it is not always considered ‘direct’ evidence. For instance, should an oral statement reproduced in writing and giving an account of a cartel meeting be described as direct documentary evidence or indirect oral evidence? Although such a statement tends to prove directly the fact in question, the language of the judgments in the EU fluctuates, and the EU judicature tends to only use the expression ‘direct evidence’ when it refers to contemporaneous notes which clearly demonstrate the fact in question.71 Contemporaneous documents drafted in close connection to the events which just report them ‘second hand’, or

Leslie (n 52) 1719; and Page (n 52). Case C-74/14, Eturas and others, EU:​C:​2016:​42, para 37. 67 Case T-363/18, Nippon Chemi-Con Corporation v Commission, EU:​T:​2021:​638, para 150. 68 Aalborg Portland and others v Commission (n 9) para 57. 69 Hitachi Metals v Commission (n 40) paras 119–20 and the case law cited therein. 70 Castillo de la Torre and Gippini Fournier (n 3) para 4.044. 71 For the use of the expression ‘direct evidence’ or ‘direct documentary evidence’, see Case T-149/89, Sotralentz v Commission, EU:​T:​1995:​69, para 44; Joined Cases T-44/02 OP etc, Dresdner Bank and others v Commission, EU:​T:​2006:​271, paras 82, 117 et seq; and Case T-213/00, CMA CGM and others v Commission, EU:​T:​2003:​76, para 141. For a discussion on what constitutes direct documentary evidence, see also Cimenteries CBR and others v Commission (n 5) para 903; and, on appeal, Aalborg Portland and others v Commission (n 9) paras 236 et seq. 65 66

The difficulties of proving an unlawful cartel  285 do not directly relate to the disputed facts but rather to circumstances relating to it, are rarely described as ‘direct’ evidence.72 Communication evidence as such cannot be sufficient, but it is helpful in the overall examination of the evidence, and may fill certain evidential gaps. For example, the EU courts consider that the Commission must be able to apply conclusions drawn from periods where the evidence is fairly solid to other periods where the gap between the various pieces of evidence is perhaps larger. There will therefore need to be a particularly good explanation in order to convince a court of law that in a particular phase of a series of meetings things occurred which were completely different from what had transpired at earlier and subsequent meetings when those meetings were attended by the same people, took place under similar external conditions and indisputably had the same purpose.73 So, in essence, the simple fact of having contact with a competitor is not enough to show continuity of anti-competitive conduct (there may be plenty of reasons why two undertakings talk), but if the circumstances under which such contact takes place resemble those of contact where the anticompetitive content of the meetings has been proven, it can be inferred that that other contact for which there is no evidence of the content is part of the same scheme. As regards parallel conduct, the EU follows the general trend in other jurisdictions. The Court of Justice held in Dyestuffs that although parallel behaviour may not by itself be identified with a concerted practice, ‘it may however amount to strong evidence of such practice if it leads to conditions of competition which do not correspond to the normal conditions of the market, having regard to the nature of the products, the size and the number of undertakings, and the volume of the said market’.74 In Woodpulp it concluded that parallel conduct cannot be regarded as furnishing proof of concertation unless concertation constitutes the only plausible explanation for such conduct. Article 101 TFEU does not deprive economic operators of the right to adapt themselves intelligently to the existing and anticipated conduct of their competitors.75 In a few cases, the EU judicature appears to give some weight to parallel conduct, but there were typically additional elements indicating collusive activity, either preceding the observed parallelism or in parallel.76 The picture which emerges from this case law is that the presumption of collusion is ‘strong’ if there is ‘no alternative explanation for the conduct’ or, in the words of Dyestuffs, it does not ‘correspond to the normal conditions of the market’. The

For example, in Aragonesas, the General Court held that a (contemporaneous) note of a telephone conversation was only ‘indirect’ evidence, as the conversation was reporting on another conversation: Case T-348/08, Aragonesas v Commission, EU:​T:​2011:​621, paras 186­–89. In Sachsa the General Court, after excluding the existence of what it called ‘direct evidence’, considered that anticompetitive contacts were proven from inferences made on the basis of several contemporaneous documents: Case T-79/06, Sachsa Verpackung v Commission, EU:​T:​2011:​674, paras 60–70. 73 Case T-191/06, FMC Foret v Commission, EU:​T:​2011:​277, paras 127 and 243. See also, applying a similar method, Case T-441/14, Brugg Kabel and Kabelwerke Brugg v Commission, EU:​T:​2018:​ 453, paras 142–95 (where the content of the first meeting to which the applicant participated was partly inferred from a number of contextual elements); Pometon v Commission (n 24) paras 216–17; and Case T-8/16, Toshiba Samsung v Commission, EU:​T:​2019:​522, para 436. 74 Case 48/69, ICI v Commission, EU:​C:​1972:​70, para 66. 75 Joined Cases C-89/85 etc, Ahlström Osakeyhtiö and others v Commission, EU:​C:​1993:​120, para 71. 76 Case T-45/98, Krupp Thyssen Stainless v Commission, EU:​T:​2001:​288, para 173; Case T-53/03, BPB v Commission, EU:​T:​2008:​254, paras 143–44; and Case T-482/07, Nynäs Petroleum and Nynäs Petróleo v Commission, EU:​T:​2013:​437, paras 299–316. 72

286  Research handbook on cartels Commission must examine these alternative explanations or the normal market conditions of its own motion, as part of its role, and cannot simply rely on a shift on the evidential burden of proof. Interestingly, exchanges of information, which tend to be considered as ‘plus factors’ in the US,77 may in certain jurisdictions be treated to something akin to a cartel, under the wider concept of ‘concerted practice’, and the evidentiary requirements may be accordingly high. In the EU both the origin of the information (if it was shared by participants or rather received from other market actors, such as clients) and the usefulness of the information exchanged must be proven to the requisite standard.78 On the first point, the fact that the information may also have been known on the market is often irrelevant, if there is a direct contact between competitors.79 When one undertaking had information about competitors, the fact-finder may infer that it was transmitted by the competitor where other plausible explanations do not exist.80 The more detailed the information, the more likely it will be that the information has been given by the undertaking concerned itself, since information so detailed cannot be easily obtained in the market.81 In a second step, the usefulness will also be examined in detail. The exchange of past figures may often be considered useful.82 The HSBC judgment gives good examples of how different types of information and circumstances may lead to different outcomes. Certain aspects of the conduct concerned ‘precise information which could have been exploited by the other party’.83 However, the decision was annulled as regards other aspects: either because the information in a chat was not useful, or because, for a meeting, the information was not even confidential, as it was ‘merely a simple observation which any market observer could make’.84

VI.

LENIENCY STATEMENTS

One of the topical issues in proving cartels over recent decades is the value to be given to leniency statements. Those applying for leniency will typically provide evidence by way of Leslie (n 52) 1741–48. For a good recent summary of the principles on exchanges of information, see HSBC Holdings and others v Commission (n 33) paras 57–67. For a very detailed examination of the evidence on exchanges of information, see Case T-582/15, Silver Plastics and others v Commission, EU:​T:​2019:​497, paras 40–153; Case T-762/15, Sony Corporation v Commission, EU:​T:​2019:​515; and Case T-240/17, Campine v Commission, EU:​T:​2019:​778, paras 138–211. 79 Stührk Delikatessen Import (n 24) para 83. 80 Case T-8/16, Toshiba Samsung v Commission, EU:​T:​2019:​522, para 295. In certain cases, the General Court has rejected as implausible that the information would come from the client, since it is not logical that the client would want to distort competition: Case T-762/15, Sony Corporation v Commission, EU:​T:​2019:​515, paras 85, 94–96, 120 and 163; and Quanta Storage v Commission (n 12) para 158. 81 Case T-462/07, Galp v Commission, EU:​T:​2013:​459, para 392. See also Joined Cases T-305/94 etc, Limburgse Vinyl Maatschappij and others v Commission (‘PVC II’), EU:​T:​1999:​80, paras 613 and 633–34; Case T-79/06, Sachsa Verpackung v Commission, EU:​T:​2011:​674, paras 60–70 and 196; Case T-398/10, Fapricela v Commission, EU:​T:​2015:​498, paras 187-188; and Case T-84/13, Samsung SDI and others v Commission, EU:​T:​2015:​611, paras 65 and 67. 82 Case T-762/15, Sony Corporation v Commission, EU:​T:​2019:​515, paras 127, 130, 165 and 180; and Case T-763/15, Sony Optiarc v Commission, EU:​T:​2019:​517, paras 128, 133 and 150. 83 HSBC Holdings and others v Commission (n 33) para 146. 84 ibid paras, 146, 189 and 193. 77 78

The difficulties of proving an unlawful cartel  287 documents, but they will also provide in parallel a ‘narrative’ about the facts, typically on the basis of information provided by employees. According to settled case law, some caution as to the evidence provided voluntarily by the main participants in an unlawful agreement is understandable, since they might tend to play down the importance of their contribution to the infringement and maximize that of others. However, given the inherent logic of the leniency procedure, the fact of seeking to benefit from the application of that notice in order to obtain a reduction in the amount of the fine does not necessarily create an incentive for the other participants in the cartel in question to submit distorted evidence. Indeed, any attempt to mislead the Commission could call into question the sincerity and the completeness of cooperation of the undertaking seeking to benefit, and thereby jeopardize its chances of benefiting fully under the leniency policy.85 In particular, when a person admits that he or she committed an infringement and thus admits the existence of facts going beyond those whose existence could be directly inferred from the documents in question, that implies, a priori, in the absence of special circumstances indicating otherwise, that that person has resolved to tell the truth. Thus, statements which run counter to the interests of the declarant must in principle be regarded as particularly reliable evidence. Statements made by undertakings in the context of their applications for leniency must, nonetheless, be assessed with caution and, in general, cannot be accepted without corroboration. According to settled case law, an admission by one undertaking accused of having participated in a cartel, the accuracy of which is contested by several other undertakings similarly accused, cannot be regarded as constituting adequate proof of an infringement committed by the latter unless it is supported by other evidence. If a body of consistent evidence makes it possible to corroborate the existence and certain specific aspects of the collusion referred to in the statement made in the context of cooperation, that statement may in itself be sufficient to evidence other aspects of the contested decision. In those circumstances, the Commission may rely exclusively on that statement, provided that the veracity of what has been claimed is not susceptible of doubts and the information in it is not vague.86

VII. CONCLUSION This chapter highlighted the difficulty of proving a cartel infringement in practice. In doing so, it considered a variety of issues, including the burden and standard of proof, the admissibility of evidence, evidence assessment, the reliance upon direct versus circumstantial or indirect evidence and the evidential value to be given to leniency statements. Although the chapter focused on EU law and US law, its analyses should be of interest to many other countries across the globe.

Case T-214/06, Imperial Chemical Industries v Commission, EU:​T:​2012:​275, para 59 and the case law cited therein. 86 ibid paras 60–61 and case law cited; and FMC Foret v Commission (n 73) paras 119 and 125 and the case law cited therein. On leniency statements, see generally Castillo de la Torre and Gippini Fournier (n 3) paras 4.044–4.100. 85

17. Leniency programmes Cristina A. Volpin and Peerapat Chokesuwattanaskul1

I. INTRODUCTION Although the concept of leniency programmes has been universally accepted, there is no consensus on the required details of the individual policies. Some have proven a great success, while others have produced fewer results. Although there are clearly difficulties in determining the effectiveness of a leniency programme in practice,2 this chapter nonetheless aims to draw out some lessons on the common features of successful leniency programmes from the theoretical and practical viewpoints. To achieve this aim, the chapter comprises five substantive sections in addition to its conclusion. Section II outlines the global trend towards the adoption of antitrust leniency programmes. Section III explains very briefly the economics that underlie the employment of such leniency programmes. Section IV focuses on the experience of the early adopters of leniency programmes and identifies from that experience the internal and external factors that can impact upon success in this context. Section V outlines the challenges that leniency programmes present for ‘younger’ competition authorities. Drawing upon the analyses from earlier sections, Section VI proceeds to outline six criteria for the successful implementation of leniency programmes. Finally, Section VII concludes the chapter.

II.

THE INTRODUCTION OF LENIENCY PROGRAMMES WORLDWIDE

Cartels are the most serious of the competition law infringements. They are considered the ‘supreme evil of antitrust’,3 given the likelihood that the cartel conduct will negatively affect competition and the magnitude of those effects will be large. Some studies estimate, for instance, the median price overcharge of cartels in the EU and in some developing countries

The opinions expressed and arguments employed in the present chapter do not necessarily reflect the official views of the Organisation for Economic Co-operation and Development (‘OECD’) or of its member countries. The authors are grateful to Wouter Meester, Aura García Pabón and Menna Mahmoud for providing the data reported in this chapter and to Grichawit Tatinij for the research assistance provided. 2 The difficulties characterizing the decision to apply for leniency are listed by Ian S. Forrester and Pascal Berghe, ‘Leniency: The Poisoned Chalice or the Pot at the End of the Rainbow?’, in C. Beaton-Wells and C. Trans (eds), Anti-Cartel Enforcement in a Contemporary Age (Hart Publishing, 2015) 167. It is possible that, in many jurisdictions, the level of cartel sanction and the probability of detection may be too low to exercise effective pressure on cartel participants; see A. Stephan and A. Nikpay, ‘Leniency Decision-Making from a Corporate Perspective: Complex Realities’, in Beaton-Wells and Trans (ibid) 147. 3 Verizon Communications, Inc. v Law Offices of Curtis v Trinko, LLP., 540 US 398 (2004). 1

288

Leniency programmes  289 at or over 20 per cent and between 16.7 per cent and 25 per cent in the US and Canada.4 In addition to higher prices for consumers, empirical research links a lack of effective cartel enforcement with lower productivity growth,5 showing that a well-functioning approach to cartel enforcement is a fundamental staple of competitive markets.6 In addition to their impact, cartels are among the hardest competition law infringements to detect. This is because they are often deliberately hidden by participants, which results in a lack of supporting documentary evidence.7 Given cartels’ detrimental impact and secretive nature, their discovery and investigation are generally recognized as a priority for enforcers worldwide. Overall cartel detection and deterrence levels are not, however, considered optimal. Over the past few decades, the introduction of leniency programmes8 in numerous jurisdictions has allowed competition authorities to complement their ex officio efforts with a powerful detection tool. The OECD defines leniency programmes as ‘mechanisms offering the opportunity to cartel members to self-report their conduct, provide information and evidence and cooperate with an investigation, in exchange for immunity from, or a reduction in, sanctions, and, in some jurisdictions, immunity from proceedings/prosecution’.9 The US Department of Justice (‘DoJ’) was the first adopter of such leniency policies. Its Corporate Leniency Policy was adopted in 1978, but its success was limited. In 1993, the DoJ

M. Ivaldi, F. Jenny and A. Khimich, ‘Cartel Damages to the Economy: An Assessment for Developing Countries’, in F. Jenny and Y. Katsoulacos (eds), Competition Law Enforcement in the BRICS and in Developing Countries (Springer, 2016); F. Smuda, ‘Cartel Overcharges and the Deterrent Effect of EU Competition Law’ (2014) 10(1) Journal of Competition Law & Economics 63; J. Connor, ‘Price-Fixing Overcharges’ (American Antitrust Institute, 24 February 2014) https://​ssrn​.com/​abstract​ =​2400780 [accessed 3 March 2022]; and J. Connor and Y. Bolotova, ‘Cartel Overcharges: Survey and Meta-Analysis’ (2006) 24(6) International Journal of Industrial Organization 1109. 5 On the link between competition and productivity, see S. Nickell, ‘Competition and Corporate Performance’ (1996) 104 Journal of Political Economy 724; R. Blundell, R. Griffith and J. van Reenen, ‘Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms’ (1999) 66 Review of Economic Studies 529; P. Aghion and M. Schankerman, ‘On the Welfare Effects and Political Economy of Competition-Enhancing Policies’ (2004) 114 Economic Journal 800; Paolo Buccirossi et al, ‘Competition Policy and Productivity Growth: An Empirical Assessment’ (2013) 95(4) Review of Economics and Statistics 1324; and C. Marvão and G. Spagnolo, ‘What Do We Know about the Effectiveness of Leniency Policies? A Survey of the Empirical and Experimental Evidence’, in Beaton-Wells and Trans (n 2) 57. 6 Marvão and Spagnolo (n 5) 57. See also Competition and Markets Authority, Productivity and Competition (CMA45, 9 July 2015) https://​assets​.publishing​.service​.gov​.uk/​government/​uploads/​ system/​uploads/​attachment​_data/​file/​909846/​Productivity​_and​_competition​_report​_​_​.pdf [accessed 3 March 2022] para 4.17 et seq and literature quoted therein. 7 See European Commission Notice on Immunity from Fines and Reduction of Fines in Cartel Cases [2006] OJ C298/17 (‘the EU Leniency Notice’) para 3. For a more detailed analysis of why evidence of cartel infringements is hard to find see C. Volpin, ‘The Ball Is in Your Court: Evidential Burden of Proof and the Proof-Proximity Principle in EU Competition Law’ (2014) 52(4) CML Rev 1159, 1162. 8 The terms ‘immunity’ and ‘amnesty’ are also used to identify analogous systems, or to identify differences in the level of exoneration from sanctions of the cartel participants in different jurisdictions. Throughout the chapter the term ‘leniency’ will be used as a synonym for ‘amnesty’ and ‘immunity’, unless otherwise specified. 9 OECD, ‘Recommendation of the Council concerning Effective Action against Hard Core Cartels’ (OECD/LEGAL/0452, 2019) https://​legalinstruments​.oecd​.org/​en/​instruments/​OECD​-LEGAL​-0452 [accessed 3 March 2022] 5. 4

290  Research handbook on cartels revised the policy by providing stronger incentives for reporting cartels, through expanding the coverage of the leniency protection and making the regime more predictable. The revisions included the automatic granting of amnesty for qualifying companies in the absence of pre-existing investigation, the possibility to apply for leniency also for investigations that had already started and the protection of cooperating individuals from criminal prosecution.10 With this change, the number of applications for leniency increased from one per year before 1993 to one per month in 2003.11 The European Commission (‘EC’) introduced its first leniency programme in 1996. It revised its programme in 200212 by reducing the evidential standard (‘decisive evidence of the cartel’s existence’) required to benefit from leniency and increasing rewards for applicants. Later reforms in 200613 and in 201514 addressed the marker system and access to documents. Three factors played a major role in the development and dissemination of leniency programmes: the experiences of the early adopters (such as the US, Canada and the EC),15 the theoretical input of the academic community16 and the push of international organizations. With these factors, the global adoption of leniency programmes rose and paved the way for many other countries in implementing and developing effective leniency policies. In addition, convergence on main competition rules, and on many substantive rules of leniency, was key to the rise in leniency applications across various jurisdictions, which led to the discovery and fining of large international cartels.17 Since the end of the 1990s, the adoption of leniency policies became gradually more widespread; more than 85 leniency programmes have now reportedly been adopted around the world (see Figure 17.1).18

See US Department of Justice, Corporate Leniency Policy (1993) www​.justice​.gov/​atr/​file/​ 810281/​download [accessed 3 March 2022]. 11 J. Griffin, ‘The Modern Leniency Program After Ten Years’ (American Bar Association Annual Meeting, 12 August 2003) www​.justice​.gov/​atr/​speech/​modern​-leniency​-program​-after​-ten​-years​ -summary​-overview​-antitrust​-divisions​-criminal [accessed 3 March 2022]; E. Motchenkova, ‘Effects of Leniency Programs on Cartel Stability’ (CentER Discussion Paper No. 2004-98, September 2004) https://​ssrn​.com/​abstract​=​617224 [accessed 3 March 2022] 2. 12 European Commission Notice on the Non-Imposition or Reduction of Fines in Cartel Cases [2002] OJ C/45. 13 EU Leniency Notice (n 7). 14 Amendments to the European Commission Notice on Immunity from Fines and Reduction of Fines in Cartel Cases [2015] OJ C 256/1. 15 See, for instance, S. Hammond, ‘Recent Developments, Trends, And Milestones In The Antitrust Division’s Criminal Enforcement Program’ (56th Annual Spring Meeting ABA Section of Antitrust Law, 26 March 2008) www​.justice​.gov/​atr/​speech/​recent​-developments​-trends​-and​-milestones​-antitrust​ -divisions​-criminal​-enforcement [accessed 3 March 2022]; Ann O’Brien, ‘Leadership of Leniency’, in Beaton-Wells and Trans (n 2) 19. 16 In those years, many aspects of leniency programmes were explored by academia, such as criminal punishment, effects on cartel stability, information exchange and individual leniency. Academic work emerged not only in support of the effectiveness of leniency programmes against cartel formation, but also to analyse their potential adverse effect. 17 O’Brien (n 15) 19. 18 OECD, Review of the 1998 OECD Recommendation concerning Effective Action against Hard Core Cartels (2019) www​.oecd​.org/​daf/​competition/​oecd​-review​-1998​-hard​-core​-cartels​-recommendation​ .pdf [accessed 3 March 2022] 24. 10

Leniency programmes  291

Source: OECD, Review of the 1998 OECD Recommendation concerning Effective Action against Hard Core Cartels (2019) www​.oecd​.org/​daf/​competition/​oecd​-review​-1998​-hard​-core​-cartels​-recommendation​.pdf [accessed 3 March 2022] 25.

Figure 17.1

The adoption of leniency programmes globally

OECD data from 70 jurisdictions (drawn from the CompStats Database) suggest a positive link between the number of immunity/leniency applications and that of cartel decisions, indicating that there may be a positive impact of well-functioning leniency programmes on cartel enforcement.19 Studies also show that leniency programmes effectively destabilize cartels and that they tend to last for shorter durations in jurisdictions with an effective leniency policy.20 Some commentators have observed, however, that, while more jurisdictions have gradually adopted leniency programmes across the world in the past quarter of a century, their effectiveness may decrease over time. After an initial short-term positive spike in the effectiveness of OECD CompStats Database (2021) with data from 70 jurisdictions from 2015 to 2019. J. Chen and J. Harrington, ‘The Impact of the Corporate Leniency Program on Cartel Formation and the Cartel Price Path’, in V. Ghosal and J. Stennek (eds) Political Economy of Antitrust (Elsevier, 2007); J. Harrington, ‘Optimal Corporate Leniency Programs’ (2008) 56(2) Journal of Industrial Economics 215; G. Spagnolo, ‘Divide et Impera: Optimal Leniency Programmes’ (Center for Economic Policy Research Discussion Paper 4840, 2004); and Y. Jeong Choi and K. Soo Hahn, ‘How Does a Corporate Leniency Program Affect Cartel Stability? Empirical Evidence from Korea’ (2014) 10(4) Journal of Competition Law & Economics 883. 19 20

292  Research handbook on cartels anti-cartel policies, they observe, the effects of leniency tend to diminish.21 OECD data from the same database seem to support this observation, showing, for most of the years between 2015 and 2019, a higher ratio of total cartel decisions over immunity/leniency applications for leniency programmes introduced fewer than 10 years ago or between 10 and 15 years old in 70 jurisdictions.22 Various reasons, however, have been identified for a possible drop in immunity or leniency applications. According to some, the reason may be found in the growing success of private enforcement and civil damages actions in some jurisdictions. Others consider that this phenomenon is due to the lack of coordination between different leniency programmes for cross-border cases or a lower detection rate.23 Still others attribute this decline to the fact that leniency policy may come to have a strong destabilizing and dissuasive effect that reduces actual detection levels in the long run.24

III.

THE ECONOMICS OF LENIENCY PROGRAMMES

The mechanism of leniency, and relevant variations, is based on the theory of optimal deterrence, originally inspired by Jeremy Bentham’s The Theory of Legislation and the work of the economist Gary Becker.25 In the context of leniency, this theory assumes that rational economic actors will consider the benefits and risks of entering into a cartel versus those of reporting the cartel and its participation. If the size of the penalty and the probability of being discovered are high enough, the likelihood that economic players will enter into a cartel will be lower. In a collusive equilibrium, cartelists know that they can always benefit more from the cartel if they cheat on its rules and, for instance, decide to deviate from the agreed prices by applying a discount or if they increase the quantities of the products sold. This ‘prisoner’s dilemma’ faced by cartelists is usually obviated by adopting monitoring and punishing systems, aimed at discouraging fellow participants from engaging in such deviations. The functioning of leniency programmes is based on making a specific deviation – that of reporting the cartel – more appealing to the cartel participants, so that it is seen as a more alluring option when weighing the costs and benefits of the cartel. This destabilizing effect of leniency consists in breaking the trust among participants, and is attained mainly by offering immunity only to the first business to report the cartel. The uncertainty concerning who will submit the earliest application and what information they will disclose encourages cartelists’ race to report or, desirably, refrain from cartel formation altogether.26 In practice, some relaxation of the assumptions may affect the effectiveness of leniency programmes. For example, the repeated nature of business relationships significantly sustains cartels. 21 N. Miller, ‘Strategic Leniency and Cartel Enforcement’ (2009) 99(3) American Economic Review 750, 765; and J.-R. Borrel et al, ‘25 Years of Leniency Programs: A Turning Point in Cartel Prosecution’ (2019) CPI Antitrust Chronicle. 22 OECD, CompStats Database (2021) with data from 70 jurisdictions from 2015 to 2019. 23 Covington and Brussels School of Competition, Immunity and Leniency Survey 2019/2020 www​ .covcompetition​.com/​?s​=​competition+​immunity+​and+​leniency+​survey [accessed 3 March 2022]. 24 Miller (n 21) 765; Borrell et al (n 21). 25 See, for more details, A. Stephan, ‘Cartel Laws Undermined: Corruption, Social Norms, and Collectivist Business Culture’ (2010) 37(2) Journal of Law and Society 345, 349 n 16. 26 Stephan and Nikpay (n 2) 141.

Leniency programmes  293 However, the aim of leniency policies is typically twofold: to disrupt ongoing cartels by heightening the probability that they will be reported; and to discourage the formation of new ones.

IV.

LENIENCY PROGRAMMES IN PRACTICE: THE EXPERIENCE OF THE EARLY ADOPTERS

Relying upon the experiences of the early adopters, especially the EU and the US, this section discusses the features of effective leniency programmes, including the adequate incentives for firms to make recourse to leniency programmes (internal factors) and the overall ‘health’ of the enforcement system (external factors). A.

The Internal Factors: Predictability and Legal Certainty as Regards the Profitability Incentives

The first characteristic of a system that strengthens the incentives of applicants to come forward is its predictability, which is strongly connected to the legal certainty of the system and the procedural fairness with which the system is applied. This feature allows applicants to assess ex ante whether cooperating with the competition authority may be more rewarding than starting or continuing their cartel participation. The three main elements that aim at reducing the uncertainty of leniency programmes, without eliminating incentives to report, are: (1) publicity; (2) leniency for successive applicants; and (3) a marker system. 1. Publicity Publicity is an essential aspect of leniency programmes. It has to do not only with duly advertising the existence of a leniency policy and its scope but also with creating awareness of its different features and what cartel participants may expect in return for their leniency application. First, competition authorities can engage in wide advertisement campaigns for the broader public of the newly adopted instrument or recent reforms, which can take different forms, such as establishing hotlines for reporting, creating webpages, fact sheets, online quizzes and even video advertising.27 Second, competition authorities can ensure a suitable degree of transparency regarding what companies receive from their submission. However, a certain amount of uncertainty is inherent and should be expressly preserved to ensure that incentives are maintained. Under the said uncertainty, companies are unable to calculate precisely the amount of the fine they face, calculate ex ante the sanction discount that they will be able to obtain or know in advance whether the information they will provide will meet the ‘significant value’ evidentiary threshold in case of a subsequent application. A healthy level of uncertainty is what encourages cartel participants to come forward quickly and provide as much information as possible.28 ‘Challenges and Co-Ordination of Leniency Programmes – Note by the United Kingdom’ (DAF/ COMP/WP3/WD(2018)38, OECD, 28 May 2018) 3. 28 Forrester and Berghe (n 2) 163. 27

294  Research handbook on cartels The balance between ensuring enough predictability to incentivize leniency applications and not giving enough information to allow a precise calculation of the pros and cons of cartel reporting is attained with other two features of leniency programmes: leniency for successive applicants and the marker system. Leniency for successive applicants 2. In the EU system, the first cartelist to submit a leniency application can benefit from full immunity from an administrative fine if it consists of a ‘decisive contribution to the opening of an investigation or the finding of an infringement’.29 The ‘decisive contribution’ typically includes information and evidence that allows the EC to conduct a targeted inspection or find an infringement in connection with the cartel.30 If the EC has not started an investigation, it usually suffices to indicate the product affected by the cartel and its geographic scope, duration and participants. Otherwise, the first applicant must provide corroborating statements or evidence of the existence of the cartel and its scope and duration. The leniency applicant must also cooperate fully, end its involvement in the cartel and protect the evidence of the cartel to enjoy immunity. The evidentiary standard to benefit from leniency is much more demanding for the subsequent applicants,31 requiring ‘evidence that adds significant value’ to that already possessed by the EC to establish the infringement.32 To meet the ‘significant value’ evidentiary threshold, companies are typically required to provide corporate statements or contemporaneous evidence informing the EC on how the cartel operated, who took part in the cartel meetings, where and when they took place, as well as what information was exchanged.33 If the evidence and information submitted by subsequent applicants effectively helps the EC to establish the infringement more in detail or broaden its scope,34 the EC may grant fine reductions to the subsequent applicants (30–50 per cent, 20–30 per cent and up to 20 per cent to the second, the third and the subsequent applicants, respectively).35 A similar system has been adopted in many countries, such as Austria, China, France, Germany, Japan, and South Korea.36 The way in which subsequent applicants are treated is a feature of the EU system that is not shared by all jurisdictions implementing a leniency policy. For instance, in the US, the Corporate Leniency Policy provides immunity from jail and any criminal conviction and from criminal fines only to the first applicant; it does not provide for discounts to the second or subsequent applicants.

EU Leniency Notice (n 7) para 4. ibid para 8. 31 Forrester and Berghe (n 2) 160. 32 EU Leniency Notice (n 7) para 5. 33 Forrester and Berghe (n 2) 162. 34 For instance, by documenting the participation of a company whose involvement had not been discovered yet, or by extending the geographic scope of the infringement or its duration. 35 EU Leniency Notice (n 7) paras 5 and 26. 36 P. Chokesuwattanaskul, Transition from Domestic Competition to Strategic Choice and Its Cultural Effects as an Ex-Ante Process Toward International Competitiveness of Thai Firms: A Laboratory Experiments Study (PhD Thesis, Chulalongkorn University, 2011). 29 30

Leniency programmes  295 Conceding leniency treatment to subsequent applicants helps the authority in obtaining additional evidence and relieving the investigative burden of pursuing a case.37 Given the inherent difficulties in detecting cartels and obtaining first-hand evidence of the conspiracy, this is an inexpensive mechanism that competition authorities can benefit from to enrich their investigation arsenal. To fully maximize this effect, for example, the recent reform of the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (AMA) in Japan introduced the possibility of a reduction in fines for the sixth and following applicants, which did not have an incentive to apply for leniency in the previous system.38 Importantly, providing incentives to report a cartel beyond the first applicant does not always have to be an in-built feature of the leniency policy since similar results can be obtained in different ways, depending on the procedural system in each jurisdiction. Similar outcomes may be obtained, for instance, via plea agreements with the competition authority in the United States. The DoJ may reward subsequent applicants for the information offered and their cooperation in the investigation by using its discretion in recommending the level of sanctions under the US Federal Sentencing Guidelines. In addition, the DoJ may offer substantial fine reductions and instalments, or more favourable treatment of individuals involved in the cartel. This is why commentators have highlighted the substantial convergence of these two types of systems on this point.39 It should be noted that this solution, however flexible, is not always preferable. Excessive discretion on the part of the authority may create too much uncertainty and eliminate the incentive to report, rather than increase it. 3. Marker system Another fundamental feature incentivizing leniency applications and ensuring the predictability of the system is the use of markers. Competition authorities know that applicants need to be encouraged to race through the authority’s door. However, they may need extra time and effort to collect the evidence meeting the requirements of the leniency system. The marker temporarily saves the place in the queue of the company to which it is granted, to allow it to collect evidence to substantiate and perfect its application. A marker system is adopted in many jurisdictions, such as Australia, Austria, Belgium, Brazil, the EU, the US, France, the United Kingdom, Malaysia and Singapore. It serves to protect the quality of the evidence brought forward with the leniency submission from the urgency and speed of the self-reporting decision. The evidentiary threshold to obtain a marker is typically relatively low, usually requiring that the company provides a basis for a suspicion of cartel activity and proves its intention to report.40 To obtain the marker, it will typically be enough to disclose (i) preliminary information about the existence of a cartel and (ii) the nature of the cartel conduct and its material scope (that is, industry or relevant products or services). It may be possible, under certain circumstances, for the legal counsel to submit a request for a marker for an anonymous client and add that information later.

37 OECD, Leniency for Subsequent Applicants (2012) www​.oecd​.org/​competition/​Lenie​ncyforsubs​ equentappl​icants2012​.pdf [accessed 3 March 2022] 5. 38 J. Ae, M. Suzuki, R. Yamaguchi and L. Nagao, ‘Japan’, in A. Synnott (ed.), The Public Competition Enforcement Review (13th edn, The Law Reviews, 2020). 39 O’Brien (n 15) 28. 40 Forrester and Berghe (n 2) 161.

296  Research handbook on cartels The time granted to the company to complete its application may vary, and it is typically longer in those cases where the authority has not yet begun an investigation. For example, a 30-day period may be granted to complete the application in the US if the DoJ was unaware of the cartel. It is also common to allow extensions of the period granted to complete the applications, provided that a good faith effort is made to finalize it in a timely manner.41 Since the applicant usually must inform the competition authorities if it has submitted leniency applications to competition authorities in other countries or of its possible intention to do so,42 the marker system also allows competition authorities in different jurisdictions to cooperate to a fuller extent when applications in multiple jurisdictions are submitted for cross-border cartels.43 B.

The External Factors: Deterrence of the Enforcement System

While evidence on the effectiveness of leniency policies is not unequivocal, empirical studies suggest that ‘cartel deterrence effects of well-designed and well-administered leniency policies tend to be positive […] but rather modest unless sanctions for non-applicants are really severe or monetary rewards are introduced’.44 The interdependence between an effective leniency policy and a well-functioning enforcement system, characterized by strong deterrence and high detection levels, is well recognized. It has been noted that: [Three] essential cornerstones […] must be in place before a jurisdiction can successfully implement a leniency program. First, the jurisdiction’s antitrust laws must provide the threat of severe sanctions for those who participate in hardcore cartel activity and fail to self-report. Second, organisations must perceive a high risk of detection by antitrust authorities if they do not self-report. Third, there must be transparency and predictability to the greatest extent possible throughout a jurisdiction’s cartel enforcement program, so that companies can predict with a high degree of certainty how they will be treated if they seek leniency and what the consequences will be if they do not. These three major cornerstones (severe sanctions, heightened fear of detection, and transparency in enforcement policies) are the indispensable components of every effective leniency program.45

Leniency policies are therefore part of a delicate ecosystem of incentives that needs to be well calibrated based on the individual characteristics of each competition law enforcement regime (such as the level of sanctions, the resources and the detection rate of the agency, the existence of criminal sanctions or the strength of private enforcement). Some essential aspects of the external system are as follows: (1) fear of detection and severity of sanctions; (2) coordination within the same enforcement system (namely in the form of coordination with (a) settlements,

41 ICN, Anti-Cartel Enforcement Manual, Drafting and Implementing an Effective Leniency Policy (2014) www​.i​nternation​alcompetit​ionnetwork​.org/​wp​-content/​uploads/​2018/​05/​CWG​_ACEMLeniency​ .pdf [accessed 3 March 2022] 11. 42 EU Leniency Notice (n 7) para 15. 43 O’Brien (n 15) 28. 44 C. Marvão and G. Spagnolo, ‘What Do We Know about the Effectiveness of Leniency Policies? A Survey of the Empirical and Experimental Evidence’, in Beaton-Wells and Trans (n 2) 80. 45 Scott D. Hammond, ‘Cornerstones of an Effective Leniency Program’ (ICN Workshop on Leniency Programs Sydney, 22 November 2004) www​.justice​.gov/​atr/​speech/​cornerstones​-effective​ -leniency​-program [accessed 3 March 2022]. This consideration is reflected in OECD (n 9).

Leniency programmes  297 (b) private enforcement, and (c) criminal enforcement); (3) reporting by individuals; and (4) coordination with different leniency programmes for cross-border cartels. Fear of detection and severity of sanctions 1. The first fundamental element preserving companies’ incentives to submit for leniency lies in the probability of being caught and the severity of sanctions. Fear of detection a. The fear of detection is positively determined by the probability of detection, that is, the credible threat. While methodological limitations and estimations are complex,46 past research has identified the probability of cartel detection to be between 10 per cent and 17 per cent in the US and between 13 per cent and 33 per cent in Europe.47 The actual figures might arguably be even lower in jurisdictions where cartels may never be detected, including younger jurisdictions. Moreover, the more competition authorities concentrate their resources on reactive detection tools, the fewer resources are allocated to proactive detection, such as screen methodologies, intelligence or agency cooperation. Cartel detection with these methods could also be significantly challenged in the coming years due to the more widespread use of algorithms and artificial intelligence and the connected difficulties in detecting and punishing algorithmic collusion.48 If the probability of detection is low, general deterrence and the incentives to file for leniency may be negatively affected. The overall functioning of a detection and enforcement system and the effectiveness of its leniency programme are, therefore, interdependent and a good mix of reactive and proactive tools is desirable. b. Severity of sanctions Before the 2000s, the EC imposed an average fine of 40 million per cartel infringement. This amount more than doubled in the period between 2000 and 2006, and in the past few years it has grown to roughly 235 million per cartel infringement.49 The highest cartel fine imposed by the EC was issued in the Trucks cartel case, for 3.8 billion euros.50 Despite this growth and the

See P. Whelan, The Criminalization of European Cartel Enforcement: Theoretical, Legal and Practical Challenges (Oxford University 2014) 62, noting the impossibility of knowing the number of undiscovered cartels. 47 P. Ormosi, ‘A Tip of the Iceberg? The Probability of Catching Cartels’ (2014) 29(4) Journal of Applied Econometrics 549, 549–50; A. Golub, J. Detre and J. Connor, ‘The Profitability of Price Fixing: Have Stronger Antitrust Sanctions Deterred?’ (8 April 2005) https://​ssrn​.com/​abstract​=1​ 188515 [accessed 3 March 2022]; E. Combe, C. Monnier and R. Legal, ‘Cartels: The Probability of Getting Caught in the European Union’ (Bruges European Economic Research Papers No. 12, 2008) www​ .coleurop​.be/​eco/​publications​.htm [accessed 3 March 2022]; P.G. Bryant and E. Woodrown, ‘Price Fixing: The Probability of Getting Caught’ (1991) 73(3) Review of Economics and Statistics 531; and W. Wils, ‘Is Criminalization of EU Competition Law the Answer?’ (2005) 28(2) World Competition 117, 138. 48 See Chapter 11 in this volume. See also Emilio Calvano and others, ‘Algorithmic Collusion: A Real Problem for Competition Policy?’ (Competition Policy International, 2020) www​.c​ ompetitio​ npolicyint​ernational​.com/​algorithmic​-collusion​-a​-real​-problem​-for​-competition​-policy/​ [accessed 3 March 2022]. 49 From 2017 to July 2021. See European Commission, ‘Cartel Statistics’ https://​ec​.europa​.eu/​ competition​-policy/​cartels/​statistics​_en [accessed 3 March 2022]. 50 ibid. 46

298  Research handbook on cartels high absolute value of the sanction, it is suggested that overcharges from cartel participation tend to be higher than these amounts. Many commentators point out that the 10 per cent annual worldwide group turnover cap applied in the EU may be too low to ensure effective deterrence. They argue that, to preserve deterrence and consider the current probability of detection, if the probability of detection were to be estimated around 20 per cent, optimal fines would need to be five times the unlawful gains expected from the cartel.51 While limiting the total amount of sanctions responds to legitimate public policy interests, this is one of the elements to consider when tailoring leniency programmes to any jurisdictions and assessing their effectiveness.52 In addition to cartel detection, the severity of sanctions on other anti-competitive conduct could create a ‘credible threat’ for potential cartelists. The positive externalities in terms of detection and sanction may not be limited to cartel-related enforcement only. 2. Coordination with other components of the same enforcement system Equally fundamental to ensure that the threat of detection will destabilize cartels and induce cartel participants to report their infringement is interaction and careful coordination with other parts of the same enforcement system. Depending on the jurisdiction,53 these may vary, for instance, between: (a) coordination with other forms of sanction reduction; (b) coordination with criminal enforcement; and (c) coordination with private enforcement. a. Coordination with other forms of sanction reduction In order to protect the effectiveness of leniency programmes, a careful balancing must be attained with other forms of procedural tools entailing a sanction reduction, such as accelerated procedures in negotiated settlement agreements and plea bargaining. To the extent that leniency and negotiated discounts can be cumulated and the settlement discount will be added to the leniency reward,54 it may be important to ensure that the discount is capped to preserve the severity of the sanction and its deterrent effect. For example, in the EU system, the maximum discount in the fine available is 10 per cent after applying the leniency reduction to the base amount. This limitation is all the more important in those systems, such as the EU one, where negotiated discounts are very commonly applied (roughly one in two cartel cases is closed by a settlement procedure).55

Stephan and Nikpay (n 2) 148. Note that estimations vary. See, for instance, M. Mariniello, ‘Do European Union Fines Deter Price Fixing?’ (2013) 4 Bruegel Policy Brief 1, 2–3 and 6 (reporting 6.7 times the illegal gains yielded by the cartel as an appropriate level, based on a 15 per cent rate of detection). 52 ICN (n 41) 5. 53 Depending on the jurisdiction, careful coordination between systems may also concern: (i) involving multiple national authorities (for instance in the case that the power to grant immunity is exclusively in the hands of the public prosecutor or jointly with the competition authority); (ii) determining the right scope of protection (as regards the individuals within the company who can benefit from it); (iii) preserving the evidence collected (i.e. by establishing ex ante the possibility to use the evidence collected in different proceedings as well as ensuring confidentiality requirements). See OECD, ‘Criminalisation of Cartels and Bid Rigging Conspiracies: A Focus on Custodial Sentences’ (DAF/COMP/WP3(2020)1, 22 April 2020) 29–34. 54 European Commission Notice on the Conduct of Settlement Procedures in View of the Adoption of Decisions Pursuant to Article 7 and Article 23 of Council Regulation (EC) No 1/2003 in Cartel Cases [2008] OJ C 167/1, para 33. 55 European Commission (n 50). 51

Leniency programmes  299 b. Coordination with criminal enforcement Criminal enforcement against competition infringement exists in some jurisdictions. It typically focuses on hard-core infringements of competition law, such as cartels, as in the United States and Israel, or specific types of cartel conduct such as bid rigging, as in Austria, Belgium, Colombia, Germany, Hungary, Italy, Poland and Turkey.56 Leniency policies have to be coordinated with criminal procedures to ensure their effectiveness.57 Evidence of whether criminalization constitutes an incentive or discourages leniency applications is, however, mixed. On the one hand, the risk of criminal sanctions may incentivize the concealment of the cartel conduct to avoid the more severe consequences of participation in it. This could arguably result in a chilling effect on leniency applications after the introduction of criminal sanctions.58 For instance, the Australian Competition and Consumer Commission experienced fewer requests for leniency and markers after the introduction of criminal sanctions in 2009, although making the leniency programme more effective was one of the intended objectives for the criminalization of cartel conduct in Australia.59 On the other hand, there has been an increase in leniency applications after the criminalization of anticompetitive conduct in some jurisdictions.60 Criminal sanctions can support leniency programmes by providing stronger incentives to self-report than systems where only pecuniary sanctions are imposed. For example, in the well-known Lysine cartel, cartel participants were recorded by the US Federal Bureau of Investigations (‘FBI’) jokingly discussing the empty seats at the meeting table and remarking that one chair was left for the FBI and the remaining ones for the Federal Trade Commission. This episode shows how the lysine conspirators were not worried about enforcement, and their criminal prosecution helped increase awareness about the risks and severity of cartel enforcement.61 Despite a paradoxical relationship between the criminalization of cartels and the granting of leniency, criminalization seems to contribute to making leniency more appealing.62 The pragmatic conclusion could be summarized as follows: ‘there is a need for leniency to work, and the best way to ensure that outcome is to make criminal law sanctions available.’63

OECD (n 53) 6. OECD (n 18) 27. 58 P. Whelan, ‘A Principled Argument for Personal Criminal Sanctions as Punishment under EC Cartel Law’ (2017) 4(1) Competition Law Review 7. 59 See G. Samuel, ‘The Relationship Between Private and Public Enforcement in Deterring Cartels’ .accc​ .gov​ .au/​ system/​ files/​ (International Class Action Conference, Sydney, 25 October 2007) www​ The​%20relationship​%20between​%20private​%20and​%20public​%20enforcement​%20in​%20deterring​ %20cartels​.pdf [accessed 3 March 2022]. See also C. Beaton-Wells, ‘Immunity for Cartel Conduct: Revolution or Religion? An Australian Case Study’ (2014) 2(1) Journal of Antitrust Enforcement 126, 136.  60 See, for example, in the US, S. Hammond, ‘The Evolution of Criminal Antitrust Enforcement over the Last Two Decades’ (24th Annual National Institute on White Collar Crime, 25 February 2010) www​ .justice​.gov/​atr/​file/​518241/​download [accessed 3 March 2022] For Brazil, see Whelan (n 47) 137. 61 Scott D. Hammond, ‘Caught in the Act: Inside an International Cartel’ (OECD Competition Committee, Working Party No. 3 Public Prosecutors Programme, 18 October 2005) www​.justice​.gov/​ atr/​speech/​caught​-act​-inside​-international​-cartel [accessed 3 March 2022]; and O’Brien (n 15) 23–24. 62 C. Harding, C. Beaton-Wells and J. Edwards, ‘Leniency and Criminal Sanctions in Anti-Cartel Enforcement: Happily Married or Uneasy Bedfellows?’, in Beaton-Wells and Trans (n 2) 248. 63 ibid 260. 56 57

300  Research handbook on cartels In the lack of more conclusive evidence on the interplay between criminal sanctions and leniency applications, a balance between the two systems seems to be needed to preserve the functioning of leniency policies. To ensure that the effectiveness of their leniency policies is protected, many jurisdictions, such as Australia, Canada, Chile, Ireland, Israel, Mexico, the UK and the United States, opted for granting immunity from criminal charges to the first individual applicant. This way of coordinating the two systems aims to preserve the incentives to be the fastest through the competition authority’s door while maintaining severe sanctions and high fear of detection.64 This solution’s workability is recognized by the ECN+ Directive.65 There is, however, an attempt to ease the tension between rewarding the wrongdoers and the need to maintain the incentives to report cartels by excluding cartel coercers from the benefit of immunity. The OECD also endorses this exclusion in its 2019 Recommendation.66 c. Coordination with private enforcement The system may require a careful alignment of the leniency system and private enforcement, particularly in two aspects. The first aspect is the necessity to maintain high incentives to report, knowing that consequences will stem from public enforcement but also from the civil liability of cartel participants to direct and indirect purchasers (and sometimes third parties). In order to protect incentives to file for leniency and coordinate the leniency policy with their private enforcement system, some jurisdictions opted for adopting mechanisms aimed at equalizing the position of leniency and non-leniency applicants. For instance, before the adoption and implementation of the EU Damages Directive,67 non-leniency applicants were able to controvert the finding of an infringement by the EC, not only in terms of extent and duration but also in its existence. This was not possible for leniency applicants, limited in practice by their self-confession to the EC both in the administrative and the civil proceedings.68 To obviate this disparity, the EU Damages Directive now provides that competition authorities’ decisions are binding in follow-up damages claims, and introduces a rebuttable presumption of harm from the cartel so that the only contestable fact for non-leniency applicants remains the quantification of damages.69 Further, the Directive provides that immunity applicants are not in principle held jointly and severally liable with their co-participants.70 All of this is the fruit of the EC’s experience with its leniency policy, which shows that ‘any aspect of the system that dilutes immunity from fines for the first applicant significantly reduces the incentives to come forward’.71 Hence the fundamental importance of striking the right

Whelan (n 46) 136–37. See Council Directive (EU) 2019/1 to Empower the Competition Authorities of the Member States to Be More Effective Enforcers and to Ensure the Proper Functioning of the Internal Market [2019] OJ L11/3 (‘the ECN+ Directive’) Article 23(2). 66 OECD (n 9). 67 Council Directive (EU) 2014/104 on Certain Rules Governing Actions for Damages under National Law for Infringements of the Competition Law Provisions of the Member States and of the European Union [2014] OJ L349/1 (‘the Damages Directive’). 68 Forrester and Berghe (n 2) 168. 69 Damages Directive (n 67) Articles 9(1) and 17(2). 70 ibid Article 11(4). 71 Forrester and Berghe (n 2) 169. 64 65

Leniency programmes  301 balance between encouraging leniency applications and supporting the functioning of private enforcement. The second aspect of fundamental importance in the coordination between leniency applications and private enforcement is the access to evidence for private enforcement. While different equilibria may be appropriate in different jurisdictions, depending on the strength and development of private enforcement, the features of the administrative and civil proceedings and the features of the leniency policy, the legislator should be aware that the two are intrinsically linked. Recognizing this interconnection, the 2019 OECD Recommendation provides that adherents should aim to ‘[p]rotect leniency statements, as well as settlement submissions, from disclosure to ensure the right balance between public enforcement by competition authorities and private enforcement by victims of cartels’.72 In the EU, for instance – where private enforcement, although growing, is less pervasive than in the US, particularly as regards stand-alone claims – the Damages Directive tends to carve out leniency statements from disclosure to third parties.73 This appears to reveal a public policy choice favouring preserving the functioning of the leniency instrument, knowing that follow-on private claims can still count on binding competition authorities’ decisions. In the US the situation is different because stand-alone private damages actions are an important part of competition enforcement, and discovery requests are commonly used in the proceedings. Therefore, protection mechanisms have been devised with the specificities of this system in mind, including limiting successful leniency applicants’ liability to single damages. In addition, the Antitrust Criminal Penalty Enhancement and Reform Act (‘ACPERA’) provides that leniency applicants are only liable for damages deriving from their own sales, thus eliminating the joint and several liabilities for all the overcharges deriving from the cartel that would otherwise apply to all the co-participants.74 Commenting on the possible trade-off between leniency regime and full compensation as a principle of corrective justice in the US, Crane noted: Compensation makes sense as an objective in many aspects of the justice system, but antitrust – with its sprawling and complex economic effects – is not a good candidate. Given the enormous apparent success of the leniency system in achieving deterrence, it would be foolish to weaken the instruments of leniency in order to pursue a compensation objective that is unlikely to be meaningfully met in any event.75

Ultimately, whether to favour compensation of private claimants or the functioning of the leniency system is an individual choice for each jurisdiction, but what was mentioned above shows that, in many cases, specific safeguards can ensure that their conflict is reduced to a minimum.

OECD (n 7). Damages Directive (n 67) Article 6(6). 74 Daniel A. Crane, ‘Why Leniency Does Not Undermine Compensation’, in Beaton-Wells and Trans (n 2) 267. 75 ibid 271. 72 73

302  Research handbook on cartels 3. Reporting by individuals a. Individual leniency policies Particularly in systems that provide for criminal sanctions against individuals, such as those of the UK or the US, more than one ‘individual’ may race to the competition authorities’ door.76 This has to do with the fact that individuals are responsible for the cartel in addition to the company they represent. In the US, for instance, where individuals can face fines of up to one million US dollars and jail time of up to ten years, all officers, directors and employees of the first company to report a cartel forego jail time and criminal sanctions. Individuals whose liberty is at stake can also put pressure on the company’s management to report the cartel and seek immunity. However, on balance, companies may conclude that a leniency application is not the most appealing of outcomes. For this reason, some systems provide individuals involved in cartel activities with incentives to protect themselves regardless of the company's decision not to self-report. An example is, in the US, the Individual Leniency Policy, introduced in 1994, that ‘seeks to split the interest of the culpable individual and those of the firm recalcitrant in seeking amnesty’.77 This policy seeks to attract leniency applications, independently of any corporate leniency request, so that the company is in a race both externally (with competitors) and internally (with the representatives or employees involved).78 There is some ambiguity regarding the effectiveness of this individual leniency policy, with data showing that most leniency applications in the US, for example, are corporate leniency applications.79 However, it seems probable that individual incentives place significant pressure on the company to report, and that ‘[t]he real value and measure of the Individual Leniency Program is not in the number of individual applications we receive, but in the number of corporate applications it generates’.80 b. Whistleblowing Several jurisdictions (such as Canada, Romania, South Korea, Denmark, Germany, Hungary, Pakistan, Singapore, Spain, the UK and the EU) have adopted tools to encourage cartel reporting by third parties who are not complicit in the misconduct. Some of them also provide monetary compensation for the reporting and cooperation that allows the uncovering of an infringement by producing relevant information and evidence. For example, in the US, a reward may be given for reporting anti-competitive behaviour against the federal government, such as bid-rigging cartels in public procurement.81 No reward is currently provided to those who report other cartel infringements to the DoJ, but there have been recent proposals to establish a ‘bounty system’.82 While some systems do not provide any financial compensation, M. Stucke, ‘Leniency, Whistle-Blowing and the Individual: Should We Create Another Race to the Competition Agency?’, in Beaton-Wells and Trans (n 2) 209. 77 ibid 214. 78 Hammond (n 45). 79 United States Government Accountability Office, ‘Criminal Cartel Enforcement: Stakeholder Views on Impact of 2004 Antitrust Reform Are Mixed, but Support Whistleblower Protection’ (Report to Congressional Committees, GAO-11-619, 2011) www​.gao​.gov/​products/​gao​-11​-619 [accessed 3 March 2022] 60. 80 Hammond (n 45). 81 Stucke (n 76) 218. 82 See Senator Amy Klobuchar’s proposal for a Competition and Antitrust Law Enforcement Reform Act: https://​secureservercdn​.net/​166​.62​.112​.219/​f51​.56e​.myftpupload​.com/​wp​-content/​uploads/​2021/​ 02/​CALERA​-Bill​-Summary​.pdf [accessed 3 March 2022]. 76

Leniency programmes  303 they may allow whistleblowers to maintain anonymity and guarantee a high level of legal protection against retaliation, as in the EU.83 In systems where a whistleblowing system for third parties is in place, reporting by third parties further creates a sense of urgency for cartelists. The perspective of a financial reward may further encourage the reporting by third parties, but its lack in any given system should not be understood as necessarily undermining the functioning of that system. It is reported that the financial incentive is not the main trigger for whistleblowers: ‘the most important motivational factor in whistleblowing is an individual’s sense of ethical obligation.’84 4. Coordination with leniency programmes in other jurisdictions A further source of complexity, which requires international cooperation between different jurisdictions, is the coordination between different leniency programmes. The evolution of the EU system in this respect is another example of the necessity to preserve the effectiveness of leniency programmes. Before the adoption of the ECN+ Directive and in the lack of an EU-harmonized system of leniency programmes, much criticism had been addressed to the system due to the risks posed to the effectiveness of leniency programmes by the multiplication of competition law regimes envisaging a leniency policy. For example, it is unlikely that the same company will be the first applicant in all relevant jurisdictions in cross-border cartels. This may significantly smother the applicants’ enthusiasm to come forward with information, particularly where one of the relevant jurisdictions provides criminal sanctions for cartel conduct. Further, companies simultaneously applying for leniency or analogous discounts in different jurisdictions will be subject to dramatically different timings of the various procedures. For instance, a final decision will be obtained within very different timeframes in the cases of a leniency application in the EU and a plea-bargaining agreement in the US.85 Building on the ECN Model Programme, the ECN+ Directive provides for a summary application system to eliminate this obstacle to applications and reduce the administrative burden faced by leniency applicants. When a leniency application concerns a cartel affecting more than three member states, applicants can submit a full application to the EC and submit summary applications to national competition authorities (‘NCAs’) in relation to the same infringement that may be completed later.86 With the growth and increased interconnectedness of economies, the problems concerning coordination and administrative burden on leniency applicants concern an ever-increasing number of cartels, with the proportion of the solely domestic ones tending to shrink. Proposals to facilitate cartel reporting include coordinating deadlines for leniency submissions, witness interviews and other milestones in the cartel reporting procedure. It has also been submitted that allowing oral testimony in addition to written statements would enable cartelists to apply for leniency more easily in those jurisdictions for which written evidence is not available. Finally, suggestions have been made for a one-stop-shop integrated global marker system, 83 Council Directive (EU) 2019/1937 on the Protection of Persons Who Report Breaches of Union Law [2019] OJ L305/17. 84 A. Brink, J. Lowe and L. Victoravich, ‘The Effect of Evidence Strength and Internal Rewards on Intentions to Report Fraud in the Dodd-Frank Regulatory Environment’ (2013) 32(3) Auditing: A Journal of Practice & Theory 87, 89. 85 OECD, Experience with Direct Settlements in Cartel Cases (DAF/COMP(2008)32, 1 October 2009) 73. 86 ECN+ Directive (n 65) Recitals 60–62 and Article 22.

304  Research handbook on cartels allowing one or more competition authorities to receive markers for international cartels centrally.87

V.

THE CHALLENGES OF LENIENCY PROGRAMMES FOR YOUNGER COMPETITION JURISDICTIONS

Jurisdictions that have not yet implemented leniency programmes have the significant advantage of being in a position to learn from the forerunners’ experiences, avoid foreseeable problems, and adopt better-suited programmes for their jurisdictions. However, the implementation of leniency programmes in jurisdictions with younger competition policies or developing countries also faces specific issues that do not characterize the experience of early adopters such as the US and the EU, such as having to confront the scarcity of resources, difficulties in attracting talent, a weaker competition culture or a lack of experience with competition law enforcement. A first challenge may be the lack of effective competition enforcement.88 As mentioned above, high detection rates, sanctions and transparent and predictable procedures are considered as the key pre-conditions for a well-functioning leniency programme.89 Benefiting from the experience of past cartels or other competition cases, applicants are better able to assess the risks of coming forward and estimate the penalty they would receive based on the use of authority’s discretion. Where there is a lack of a credible enforcement threat,90 the incentive of cartel members to come forward to join the leniency programme may be weak. Second, unawareness about competition law may also weaken the effectiveness of leniency programmes. In addition to clear and predictable laws and strong institutions, the presence of a competition culture can play an important role in promoting the effectiveness of the leniency programme. For the public to comply with the law, more than mere legislation is needed. A key factor determining the degree of transferability of competition policies across different jurisdictions is competition culture. Drawing from the cultural dimensions of Geert Hofstede, studies91 have confirmed that leniency programmes are less effective towards relatively more collectivist societies vis-à-vis individualist ones.92 Thus, cultural factors could significantly affect the incentive to report. J. Taladay, ‘Time for a Global One-Stop Shop for Leniency Markers’ (2012–13) 27 Antitrust 43,

87

47.

88 D. Waked, ‘Antitrust Enforcement in Developing Countries: Reasons for Enforcement & Non-Enforcement Using Resource-Based Evidence’ (5th Annual Conference on Empirical Legal Studies, July 2010) https://​ssrn​.com/​abstract​=1​ 638874 [accessed 3 March 2022]; and J.-R. Borrell, J.L. Jiménez and C. García, ‘Evaluating Antitrust Leniency Programs’ (2014) 10 Journal of Competition Law & Economics 107. 89 OECD, Challenges and Co-Ordination of Leniency Programmes (DAF/COMP/WP3(2018)1, 1 June 2018) 7–8. 90 OECD, Ex Officio Cartel Investigations and the Use of Screens to Detect Cartels (DAF/ COMP(2013)27, 7 June 2014) 22; and OECD (n 85) 7. 91 Chokesuwattanaskul (n 36). 92 Theoretically, degree of collectivist environment decreases value of future relationship or discount of future values in the repeated-game setting. Therefore, it is more likely that the dynamic prisoner dilemma introduced by the leniency programme may have a collusive solution such as the grim-trigger or the tit-for-tat strategy.

Leniency programmes  305 Third, since many late adopters are developing countries with developing institutions, resources may be severely limited. Issues such as trust in institutions may affect public service delivery to a greater extent than in other jurisdictions.93 The implementation of leniency programmes in these jurisdictions has to be managed particularly carefully to ensure success. Many younger jurisdictions have suggested to us that, in such circumstances, it is better to have an imperfect mechanism in place rather than having nothing at all. To strengthen the efficacy of enforcement in these jurisdictions, leniency policies may benefit from being accompanied by early case resolution mechanisms, such as plea bargaining or settlement agreements,94 Amnesty Plus mechanisms95 and compliance programmes.96 Fourth, a significant challenge may arise from the abuse of authority or its perception. To prevent this, it would be important to ensure the limitation of discretion. The clarity and transparency of the leniency programme are key to fill the gap left behind by weak authority enforcement. Clarity and transparency must be attained, for instance, as regards coverage of the leniency programme, conditions to grant immunity and leniency and confidentiality safeguards. The level of information that the agency requires to grant immunity or leniency also needs to be clear. The problem exists in all jurisdictions, but it is particularly acute in developing jurisdictions where precedents may be sparse. Even if evidential standards are provided, in the form of a substantive test (such as the ‘decisive contribution’ or the significant added value test), it may take a few processes of trial and error before the common knowledge is spread and trust is developed among the authority and businesses. This is one of the reasons why several authorities find leniency essential: the all-or-nothing amnesty offer makes it more difficult for business to benefit from the programme.97 One way to address this information asymmetry is to offer a confidential and anonymous pre-consultation process for the potential applicant to decide whether to come forward. Alternatively, authorities may consider adopting, in a first phase, a more lenient approach when scrutinizing applications, choosing to inflate the rate of short-run false positives (those who provide insufficient information yet still get the leniency) in order to boost the long-run rate of true positives (those who provide sufficient information get the leniency).

93 Waked (n 88) 13; and G. Gurkaynak, Ö. İnanılır and S. Diniz, ‘The Good and Evil of Leniency and Settlement Procedures in Formative Competition Law Regimes’ (2015) 2 International Antitrust Bulletin 20. 94 OECD (n 85) 12–13. 95 Amnesty Plus types of programmes typically provide a discount from sanctions for the investigated cartel to subsequent applicants disclosing the existence of other cartels, different from the first one investigated, in addition to immunity for participation in these other infringements. 96 UNCTAD, The Use of Leniency Programmes as a Tool for the Enforcement of Competition Law Against Hardcore Cartels in Developing Countries (TD/RBP/CONF.7/4, 26 August 2010) 10. 97 OECD (n 37).

306  Research handbook on cartels

VI.

THE ‘6Cs CRITERIA’ FOR SUCCESSFUL IMPLEMENTATION OF LENIENCY PROGRAMMES

Considering all the above analysis, some common success factors seem to play a major role in the implementation of leniency programmes worldwide. We therefore propose the following ‘6Cs approach’ to the effective leniency programme in both older and younger jurisdictions. Clarity (clear criteria and details of the whole process so that the applicants can ex ante evaluate their positions): In some jurisdictions, stepping into the leniency programme may feel like a leap in the dark.98 However, clarity can emerge from the (hard or soft) law or from the decisional practice of the authority and can be fostered by practical tools like the anonymous pre-consultation process. Commitment from both sides (limited discretion on one side and duty of full collaboration on the other side): The required trust between authority and business operators takes time to build, but it is fundamental to attract applications. Mutual commitments between applicants and the authority play a big part in determining the success of leniency programmes. While a limited margin of discretion of the competition authority cannot be eliminated, the exercise of its power must be bound by predetermined or predictable standards. Analogously, the applicant must be bound by a duty of full collaboration. Credibility (without applying for leniency under the leniency programme, cartels must be exposed to a credible threat of investigation and enforcement): Adequate powers and resources to detect and sanction cartels outside of leniency programmes establish enforcement credibility. Proactive detection tools, such as screening methodologies, intelligence or agency cooperation, strengthen the leniency programme by increasing detection threats.99 The authority must be capable, and be seen as being capable, of conducting an extensive investigation and gathering compelling evidence to sanction the wrongdoer. In addition, the sanction imposed must be substantial enough to push the potential leniency applicant to self-report. Confidentiality (pre-consultation and during the process guarantee): The protection of the confidentiality of leniency information is necessary to maintain the attractiveness of the leniency programme. Ensuring complete confidentiality for the applicants preserves the incentives for applicants to come forward with self-reporting. The programme should include strictly observed mechanisms and controls to protect the confidentiality of potential and actual applicants at all stages of the enforcement process, not only during the investigation by the authority but also in the adjudicative stage (for example, in court proceedings). Safeguarding mechanisms (such as the acceptability of oral leniency applications) must be put in place to protect leniency applicants from information leakage and disclosure. Whistleblowing tools and marker systems should require analogous levels of confidentiality. Cooperation and coordination between authorities (all areas/jurisdictions covered without major gaps): International cooperation in cartel enforcement is increasingly needed, given that

98 ICN, Good Practices for Incentivising Leniency Applications (30 April 2019) www​.i​nternation​ alcompetit ​ i onnetwork ​ . org/ ​ w p ​ - content/ ​ u ploads/ ​ 2 019/ ​ 0 5/ ​ C WG ​ - Good ​ - practices ​ - for ​ - incentivising​ -leniency​.pdf [accessed 3 March 2022] 33. For more details on the uncertainty of leniency programmes, see C. Volpin, ‘Protecting the Effectiveness of Leniency Programmes: Applying for Leniency is a Leap in the Dark: DHL Express’ (2017) 54(4) CML Rev 1179. 99 OECD (n 18) 34–40.

Leniency programmes  307 the number of international cartels continues to rise.100 Cooperation is needed for the initiation of investigations in other jurisdictions and for gathering evidence in a timely manner. It also enables the formal exchange of information, and informal discussion varies between competition authorities and jurisdictions. The jurisdictions involved can prevent inconsistencies between their leniency programmes and pave the way for the unification of the marker system and the creation of regional one-stop systems in the future. Without proper coordination, authorities run the risk of jeopardizing enforcement outcomes against the same cartel. Most importantly, trust needs to be built between agencies. Context and culture (adaptation to the leniency ecosystem and to the local context): First, leniency programmes need to be adapted to the specific ecosystem of that jurisdiction, and are affected, as seen above, by a number of internal and external factors. No standardized leniency policy would be effective in all jurisdictions. Each country is different in terms of economic size, market structure, legal system, competition system and business culture, all of which ensures that responses to incentives will vary. The adopted programme needs to be tailored to the local economic and legal conditions, while maintaining its attractiveness and rigour. Second, public competition awareness outreach should be promoted to create a fundamental understanding of competition law and the leniency programme. Culture, institutions, procedures and many other factors can affect how leniency programmes can be best tailored to each jurisdiction. One can hardly propose a ‘secret recipe’ or a ‘one-size-fit-all’ approach to leniency to guarantee its success. The ‘6Cs criteria’ proposed above, however, identify a convenient checklist for the successful design, implementation and effectiveness of leniency programmes across jurisdictions.

VII. CONCLUSION This chapter articulated the lessons one can learn on the common features of successful leniency programmes, both from the theoretical and practical viewpoints. Jurisdictions where leniency programmes are at the beginning or early stages of implementation face different challenges from those that have now had a leniency policy in place for years. However, some common features are shared by all leniency policies and contribute to creating the right ecosystem in which leniency policies can thrive. By looking at the experience in selected jurisdictions with older and younger leniency programmes, this chapter has highlighted the strict interdependence between an effective leniency policy and a well-functioning enforcement system, characterized by strong deterrence and high detection levels. Importantly, it has identified six main features as the basis for the successful design, implementation and effectiveness of leniency programmes.

100 J. Connor, ‘The Private International Cartels (PIC) Data Set: Guide and Summary Statistics, 1990– July 2016’ (9 August 2016) https://​ssrn​.com/​abstract​=​2821254 [accessed 3 March 2022].

18. Cartels and fines Florian Smuda

I. INTRODUCTION In the fight against cartels, competition authorities follow two main goals: (i) to detect and punish existing cartels and (ii) to deter the formation of new cartels in the future. Particularly for the latter goal, cartel fines play an important role. Cartel deterrence is based on the idea that a potential cartel firm ex ante decides not to join/form a cartel agreement because the expected fine will exceed or at least offset any cartel gains. The magnitude of fine level – defined by law, as well as by the extent to which antitrust authorities make use of its margin of judgement – therefore impacts the deterrent effect towards existing offenders and potential new offenders. Whereas a low penalty framework thwarts cartel deterrence, a more stringent fining regime, combined with its strict exploitation, is likely to deter at least some undertakings from forming/joining cartel agreements. This chapter focuses on cartels and fines. Section II briefly describes the theory of optimal cartel fines and provides a practical formal framework with respect to the design of cartel fines as a tool to punish and deter cartels effectively. Section III analyses cartel fines in practice, with a particular focus on Europe. After a brief summary of the fining principles applied by the European Commission (‘the Commission’ or ‘EC’) based on its current guidelines (Section III.A), the section then presents a detailed overview of European cartel fines based on a data set that covers undertaking-specific data on all cartel cases decided by the Commission since the introduction of the guidelines in 2006 (Section III.B). Based on these statistics, it then deals with the question of deterrence and provides new evidence on the deterrent effect of the European fining policy (Section III.C). In Section IV, sanctions beyond cartel fines are discussed. The chapter concludes with a summary in Section V.

II.

CARTEL FINES IN THEORY

A cartel is formed with the intention to increase the overall profit of its participating members. The cartel profit represents the additional gain received by the cartelists compared to the counterfactual situation in which they compete with each other in the relevant market. It is therefore obvious that cartel fines as a deterrent should somehow or other take into account the cartel profit as one key factor. More precisely, if cartel fines signal from an ex ante perspective that the expected costs of collusion will exceed or at least offset any cartel gains, they will diminish the incentives to collude and act as a deterrent.1

1 See, e.g., OECD, Fighting Hard Core Cartels: Harm, Effective Sanctions and Leniency Programmes (Paris, 2002).

308

Cartels and fines  309 Existing theoretical research on the optimal design of cartel fines abstracts from cartel profits in favour of a total welfare approach based on the net harm caused by cartels. This is due to the fact that cartel profits merely represent a welfare transformation from injured parties to cartelists and do not represent a harm towards society. The cartel induced harm towards society, by contrast, is given by an allocative inefficiency in terms of foregone transactions that are not realized due to the cartel but that would have been realized without collusion (‘deadweight loss’), along with further dynamic and productive inefficiencies (such as reduced product quality and variety, less efficient production technologies, less innovation efforts).2 On the other hand, it cannot be ruled out that (at least some) cartels also generate specific efficiencies (for example, in terms of more efficient customer supplies) that have to be counterbalanced from a total welfare point of view. Accordingly, Landes3 provides a framework for the design of optimal antitrust fines based on an approach developed in a seminal article by Becker4 to show that the optimal fine should be equal to the net harm (including enforcement costs) divided by the probability of apprehension and conviction. The theoretically optimal fine level therefore does not correspond with the fine level that is built on cartel gains as the primary incentive to collude. As has been noted by Connor and Lande, fines based on profits (in terms of monopoly overcharges) are likely to be significantly less than optimal fines (as suggested earlier by Landes), which is why the latter are likely to serve as a deterrent even more than the former.5 Turning to the practical side, implementing a fining policy based on net harm seems both costly and difficult, if not impossible, to realize on a case-by-case basis. The estimation of inefficiencies and (possible) efficiencies is not straightforward and is more time-consuming than the calculation of cartel gains. In addition, given the complexity of the task, there seem to exist higher risks regarding unequal treatment of offenders/offences compared to a fining approach based on cartel profits. These might be two reasons why competition authorities abstract from fines based on the overall harm. Indeed, the EC, for instance, even builds its fining practice on cartel affected sales instead of cartel profits, for reasons of practicability.6 In the light of the previous considerations, a fining scheme based on cartel profits seems more workable and is closely linked to the incentives to collude. A simple theoretical framework for the design of cartel fines that is both practical and deterrent can therefore be formulated as follows: Let pcartel be the price charged by one cartel member during the collusive period and pcompetition the price charged in the counterfactual situation of competition. For simplicity, it is assumed that: (i) the cartel survives one period (for example, one year); (ii) the price elasticity of demand is zero, that is, the cartel induced price increase neither leads to shifts in demand between cartel members nor shifts in favour of cartel outsiders

See, e.g., F. Maier-Rigaud and U. Schwalbe, ‘Quantification of Antitrust Damages’, in D. Ashton and D. Henry (eds), Competition Damages Actions in the EU: Law and Practice (Edward Elgar Publishing, 2013). 3 See W. Landes, ‘Optimal Sanctions for Antitrust Violations’ (1983) 50 University of Chicago Law Review 652. 4 See G. Becker, ‘Crime and Punishment: An Economic Approach’ (1968) 76(2) Journal of Political Economy 1. 5 See J. Connor and R. Lande, ‘Cartel Overcharges and Optimal Cartel Fines’, in S. Waller (ed), Issues in Competition Law and Policy: Volume 3 (ABA Section of Antitrust Law, 2008) 2203. 6 See European Commission, Guidelines on the Method of Setting Fines Imposed Pursuant to Article 23(2)(a) of Regulation No 1/2003 [2006] OJ C210/02. 2

310  Research handbook on cartels (xcartel=xcompetition=x); and (iii) the cost function is linear in the form of C(x) = CF + cx. The gain from price-fixing for one cartel member is then given as the difference between cartel profit and counterfactual competitive profit as ( pcartel − c) x − ( pcompetition − c) x which simplifies to ( pcartel − pcompetition) x (1) Now let     be the share of cartel affected sales ( pcartel x) of one offender to be imposed by a competition authority as cartel fine and  (0,1) be the probability of detection. Then, for the cartel fine to be deterrent in the sense that it shatters ex ante incentives to collude, the following condition must be fulfilled:

  pcartel x  ( pcartel  pcompetition) x (2) Inequation (2) fulfils ex ante deterrence as it implies that the expected fine to be paid by an offender (left-hand side) achieves at least the level of cartel profit of this offender (right-hand side). Note that the cartel fine ϕ is explicitly defined as a share of cartel affected sales as it is the case in Europe.7 pcartel  pcompetition Now let OvRate  be the cartel overcharge rate that captures the cartel pcartel induced price increase relative to the cartel price. Then inequation (2) can be rewritten as



OvRate (3) 

Inequation (3) suggests that the share of cartel affected sales to be imposed as cartel fine should be equal or greater than the overcharge rate divided by the probability of detection. If, for instance, the cartel overcharge is 15 per cent and the probability of detection is assumed to 0.15 .6 60 per cent of be 25 per cent, the fine for one offender should amount at least to = 0= 0.25 the offenders’ cartel sales. It is worth noting that the connection between cartel fines, probability of detection and overcharge is far from new but coincides with previous research on antitrust fines.8 Furthermore, one should keep in mind that inequation 3 is simplified and built on the assumption that, among others, the cartel induced price increase causes no output effect (which is critical in most cases). If this assumption were relaxed, ϕ would generally be lower as the cartel gains would decrease. Fines based on inequation 3 therefore merely approximate the

ibid. See, for instance, Connor and Lande (n 5).

7 8

Cartels and fines  311 optimal deterrent fine levels and the goodness of fit in one specific case crucially depends on the intensity of demand elasticity.9 For the practical implementation of cartel fines in line with inequation 3 (as an approximation of an optimal deterrent fine level), competition authorities would have to (1) estimate the cartel overcharges, as is already the case in private antitrust litigation; (2) calculate cartel affected sales, as is already done by the EC in conjunction with its current fining policy; and (3) make use of a reasonable value for the probability of detection.10 Whereas the first two points are generally straightforward, or at least feasible in most cases, the latter point needs more attention as it is arguable whether or not to use individual detection rates. Indeed, there is much to suggest that the probability of detection depends, among others, on cartel-specific factors such as the number of participating firms or the type of anti-competitive conduct. In addition, it is likely that the detection rate is no static parameter but varies over time depending on current market conditions or existing antitrust rules, such as the existence and design of leniency programmes or legal conditions for private antitrust litigation. All this generally speaks in favour of case-specific detection rates. This would, however, be a demanding task that competition authorities might shy away from for the same reasons as regards the case-specific assessment of the overall harm. Therefore, if competition authorities were to prefer the use of an identical but suitable detection rate in all cases, this raises the question of what ‘suitable’ is meant to be. Existing research assumes that the average probability of detection lies somewhere between 10 per cent and 33 per cent.11 Relating this spread to the fining scheme from inequation 3, this would suggest the imposition of an overcharge multiplier between 3 and 10. The question of suitability then shifts to the question of whether the size of the resultant fines is affordable for the offenders. As has been argued by Wils, who anticipated corresponding fine levels of around 150 per cent of the annual turnover in the cartel affected products, those fine levels ‘are likely often to exceed the undertakings’ ability to pay, with as a result not only incomplete deterrence but also costly side effects’.12 The financial distress may occur because – as expressed in the words of Whelan – either the undertaking ‘will not have earned sufficient revenue from the cartel activity to cover the fine’ or some cartel profit ‘may have already been 9 Economic literature has developed approaches to identify optimal deterrent fines with less stringent assumptions than those made to receive inequation 3. These approaches are – obviously – also more data intensive and therefore not implementable with the collected data that will be used to analyse the deterrent effect of cartel fines imposed by the European Commission in Section IV. In the remainder of this chapter, the simplified approach formulated in inequation 3 will therefore be followed. For a more advanced theoretical approach on optimal deterrent cartel fines, see, e.g., P. Buccirossi and G. Spagnolo, ‘Optimal Fines in the Era of Whistleblowers. Should Price Fixers Still Go to Prison?’, in V. Ghosal and J. Stennek (eds) The Political Economy of Antitrust: Contributions to Economic Analysis, Volume 282 (Emerald Group Publishing, 2007). 10 In addition, if the case-specific conditions suggest that a significant output effect is likely to exist, either the demand elasticity has to be estimated or the competition authority has to specify a suitable discount on ϕ . 11 Connor and Lande cite several studies that find detection probabilities between 10 per cent and 33 per cent; see J. Connor and R. Lande, ‘The Size of Cartel Overcharges: Implications for US and EU Fining Policies’ (2006) 51 Antitrust Bull 983. A study conducted by Combe et al finds probabilities between 12.9 per cent and 13.3 per cent for the European market; see E. Combe, C. Monnier and R. Legal, ‘Cartels: The Probability of Getting Caught in the European Union’ (Bruges European Economic Research Papers 12, 2008). 12 See W. Wils, ‘Is Criminalization of EU Competition Law the Answer?’ (2005) 28(2) World Competition 17.

312  Research handbook on cartels paid out to others in the form of taxes, dividends, salaries and/or wages’.13 Costly side effects may, however, already occur below the level of optimal deterrent fines. If the fine level is generally set too high (but still below the optimal deterrent level), more damage than benefit might be caused from a total welfare point of view since some cartelists might already have to reduce employment levels, downsize business divisions and product fields or even withdraw from the market, with increased market concentration as a consequence. The associated harm for society could then outweigh the harm averted via increased cartel deterrence, to the detriment of total welfare. To put it in a nutshell, although the fining scheme presented in inequation 3 would approximate optimal deterrence in theory, there are valid reasons to believe that the corresponding fine levels might overshoot in practice, with adverse effects as a consequence. Cartel fines as the only solution to achieve optimal deterrence therefore seem to be more a theoretical construct than a viable option or common practice. The following section takes a closer look at this aspect by analysing the level of cartel fines actually imposed in practice, with the objective to evaluate the existing deterrence gap between actual fines and optimal deterrent fines.

III.

CARTEL FINES IN PRACTICE

In many jurisdictions around the world, laws, rules and regulations with respect to cartel sanctions have developed and progressed in the past decades and now build a solid framework for public antitrust enforcement. The subsequent sections deal with the implementation of cartel fines in practice with a particular focus on Europe. Section III.A briefly summarizes the fining principles applied by the EC based on its current fining guidelines, established in 2006. Section III.B translates the information into numbers by presenting a detailed overview of European cartel fines based on a data set that covers undertaking-specific data on all cartel cases decided by the EC under these guidelines. Section III.C then focuses on the question of deterrence, thereby bridging the gap to the theoretical considerations from the previous section. A.

The EU Guidelines on the Method of Setting Fines

For the calculation of cartel fines, the EC deviates from the theoretically optimal fine level as described in Section II in favour of a more practical concept. The approach applied by the EC is even more practical than the overcharge approach suggested in inequation 3 as it does not consider the entire cartel profit in the first place but rather focuses on the value of cartel affected sales during the last full business year of cartel participation. The method for calculating cartel fines is laid down in the Guidelines on the Method of Setting Fines Imposed Pursuant to Article 23(2)(a) of Regulation No 1/2003.14 The guidelines were introduced in September 2006 and replaced the prior version from 1998. Table 18.1 summarizes the key factors considered when calculating the cartel fine for undertakings that violated European antitrust law. The order of steps in Table 18.1 largely follows the order of

See P. Whelan, ‘Antitrust Criminalization as a Legitimate Deterrent’, in T. Tóth (ed.), The Cambridge Handbook of Competition Law Sanctions (Cambridge University Press, 2022). 14 European Commission (n 6). 13

Cartels and fines  313 steps written down in the guidelines as well as in the decision documents published by the EC for each decided cartel case. The penalty calculation is based on the value of affected sales, which is why, in a first step, the EC calculates the value of sales of goods or services during the last full business year of cartel participation to which the infringement directly or indirectly relates in the relevant geographic area within the European Economic Area (‘EEA’). Given these affected sales, the basic amount of the fine (‘Base fine’) is then calculated in two subsequent steps. The EC may impose a ‘gravity factor’ of up to 30 per cent of the value of affected sales, multiplied by the number of years of cartel participation (step (2)). Furthermore, an additional amount between 15 and 25 per cent of the value of affected sales, but irrespective of cartel duration, is added (step (3)). The decision of whether both of these percentages are set at the upper or lower end of the scale depends on the gravity of the infringement. The factors considered in that context comprise the nature of the infringement (for example, horizontal price-fixing, market-sharing agreement, etc.), the combined market share of all the undertakings concerned, the geographic scope of the infringement and whether or not the infringement has been implemented. Given the level of base fine, steps (4), (5) and (6) are conducted to receive the final amount of the fine. First of all, the base fine may either be increased or decreased based on an overall assessment of aggravating and mitigating circumstances (step (4)). The EC classifies repeat offences, refusals to cooperate, obstructions of the investigation, roles as ringleader or instigator, coercion of other undertakings to participate and retaliatory measures taken against other undertakings as aggravating circumstances. By contrast, mitigating factors comprise the provision of evidence, substantially limited involvement in the infringement, effective cooperation (outside the leniency notice and beyond legal obligation) and authorization or encouragement of the anti-competitive conduct by public authorities or by legislation. Due to the variety of factors considered, the overall assessment allows for a broad scope of action for the EC. In particular, it seems challenging to balance undertaking-specific mitigating factors towards undertaking-specific aggravating factors both within one particular cartel case and between independent cases. In step (5) the EC then considers the question of deterrence. Depending on whether the fine level reached up to this point seems sufficient for deterrence, the EC decides whether or not to add a specific deterrence increase. It is worth mentioning that this step explicitly relates to the question of whether the fine level exceeds the amount of cartel gains, provided that it is possible for the EC to estimate that amount. If, however, the quantification of cartel damages is not possible/practicable (and this appears to be the normal practice), the EC alternatively makes use of the turnover. In case of a particularly large turnover beyond the sales of goods or services to which the infringement relates, a deterrence multiplier can be imposed. Finally, the calculated fine level is compared to the legal maximum (step (6)). The final amount of the fine may not exceed 10 per cent of the total turnover in the preceding business year of the undertaking or association of undertakings participating in the infringement. Where the calculation process based on steps (1) to (5) yields an amount above the 10 per cent cap, the fine level is adjusted accordingly. However, contrary to what the name might suggest, in many cases this ‘final amount of the fine’ does not represent the true final fine to be paid by the offender. In the remainder of this chapter the corresponding fine level will therefore be referred to as ‘Provisional fine’ instead of ‘Final fine’. For the calculation of the true final fine, five further steps are relevant. Step (7) is particularly important since it never results in an increase in fines; rather the outcome is often substan-

314  Research handbook on cartels tial fine reductions. Here, the EC applies the rules set out in its leniency notice. Depending on whether an undertaking applies for leniency and fulfils the corresponding conditions, it might receive a much lighter sentence, up to full amnesty.15 After having adjusted the fine to a possible leniency discount, the EC may grant an additional 10 per cent ‘settlement reduction’ to reward cooperation in the conduct of proceedings (step (8)).16 In addition, step (9) considers inability to pay arguments brought forward by an offender. Here, the hurdles seem to be high since the offender has to provide objective evidence that the fine would irretrievably jeopardize the economic viability of the undertaking concerned and cause its assets to lose all their value. The mere finding of an adverse or loss-making financial situation, by contrast, is insufficient. Step (10) also appears to be more a theoretical point rather than common practice, as only in particular cases might the EC impose a symbolic fine, for which its reasons must explicitly be justified in the decision. The final step (11) relates to paragraph 37 of the guidelines. The particularities of a given case or the need to achieve deterrence in a particular case may justify departing from the methodology or from the limits described in the steps before. Thus, in addition to step (5), this is the second position where the guidelines explicitly refer to deterrence considerations. B.

The Anatomy of EC Cartel Fines

For each decision adopted by the EC in relation to cartel proceedings under Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’), a non-confidential version is published on the EC website.17 Although the non-confidential versions conceal various information that would be particularly interesting to study, at least some case, undertaking and penalty-specific information is left in most decision documents. Some of this information was gathered by the author to create a data set that contains details from all cases decided by the EC since the introduction of the recent guidelines in 2006. More precisely, the data set covers information on 435 undertakings from 93 cartel cases18 for which decision documents were published on the EC website between 2007 and 2020.19 It allows one to get a full picture of the final fines imposed by the EC and, at least for some undertakings, more in-depth insights regarding fine characteristics as well as the relation between base fine, provisional fine and final fine.

On the Commission’s antitrust leniency policy, see European Commission, Commission Notice on Immunity from Fines and Reduction of Fines in Cartel Cases [2006] OJ C298/17. 16 On the Commission’s antitrust settlement policy, see European Commission, Commission Notice on the Conduct of Settlement Procedures in View of the Adoption of Decisions Pursuant to Article 7 and Article 23 of Council Regulation (EC) No 1/2003 in Cartel Cases [2008] OJ C167/1. 17 See https://​ec​.europa​.eu/​competition/​cartels/​cases/​cases​.html [accessed 10 March 2022]. 18 Some EC decision documents comprise several (independent) infringements with or without differing cartel participants, but for which separate fines were imposed. Although these cases have the same case number, they are treated as independent cases in the dataset. The number of cases in the data set therefore exceeds the number of decisions published by the EC under its 2006 guidelines. 19 The first decisions made by the EC under the 2006 guidelines were published in 2007. The most recent case from the data set is Case AT.40299, Closure Systems, Commission decision, 29 September 2020, C(2020) 6486 final. 15

Cartels and fines  315 Table 18.1

Process of fine calculation applied by the European Commission

Step

Penalty component

Details

(1)

Affected sales

Calculation of the value of sales of goods or services during the last full business year of cartel participation to which the infringement directly or indirectly relates in the relevant geographic area within the EEA

(2)

(3)

Gravity of the infringement:

Relevant factors:

Up to 30% of the value of affected sales,

Nature of the infringement, combined market share of all the

multiplied by the number of years of cartel

undertakings concerned, geographic scope of the infringement, whether

participation

or not the infringement has been implemented

Additional amount:

Relevant factors:

15–25% of the value of affected sales,

Same as in step 2

irrespective of the duration of cartel participation Basic amount of the fine (‘Base fine’) = (2) + (3) (4)

Adjustment in the basic amount:

Aggravating circumstances:

Increase or decrease of the basic amount

Repeat offences, refusal to cooperate, obstruction of the investigation,

based on an overall assessment of aggravating roles as ringleader or instigator, coercion of other undertakings to and mitigating circumstances

participate, retaliatory measures taken against other undertakings   Mitigating circumstances: Provision of evidence, substantially limited involvement in the infringement, effective cooperation (outside the leniency notice and beyond legal obligation), authorization or encouragement of anti-competitive conduct by public authorities or by legislation

(5)

(6)

(7)

Specific deterrence increase:

Relevant factors:

If necessary, fine increase to ensure that fine

Particularly large turnover beyond the sales of goods or services to

has a sufficiently deterrent effect

which the infringement relates, exceedance of the amount of cartel gains

Legal maximum:

Final amount of fine may not exceed 10% of the total turnover in

10% of total turnover in the preceding

the preceding business year of the undertaking or association of

business year

undertakings participating in the infringement

Final amount of the fine (‘Provisional fine’) = Base fine + (4) + (5) + (6) Leniency notice Application of the leniency rules set out in the leniency notice

(8)

Settlement notice

10% fine reduction for rewarding cooperation in the conduct of

(9)

Inability to pay

Objective evidence that the fine would irretrievably jeopardize the

proceedings economic viability of the undertaking concerned and cause its assets to lose all their value (10) (11)

Symbolic fine

Imposition of a symbolic fine in certain cases

Paragraph 37

Deviation from the aforementioned methodology/limits

Final fine imposed = Provisional fine + (7) + (8) + (9) + (10) + (11)

Figure 18.1 illustrates the number of undertakings and the number of cases from the dataset on a yearly basis over the observation period. The yearly number of decided cases shows quite some variation, with three years (2013, 2014, 2017) having particularly large numbers. The number of undertakings per year is also noticeably dispersed, although the highest numbers do not entirely correspond with the years with the highest case numbers, that is, the number of cartel participants per case seems to vary considerably. This aspect is confirmed by descriptive statistics provided in Table 18.2 for some key variables from the data set. The number of

316  Research handbook on cartels

Figure 18.1

Number of cases and undertakings over time

cartelists per case ranges from 2 to 18, with an average value of 4.7 undertakings and a standard deviation of 3.2 undertakings. Turning to fine-specific information, the average gravity factor applied by the EC is 16.66 per cent and the average additional amount is 16.63 per cent of the value of cartel affected sales during the last business year of cartel participation. Thus, whereas the gravity factor is set around the middle of its defined limits (0–30 per cent) on average, the average additional amount clearly scratches its lower bound (15–25 per cent). The scatterplots in Figure 18.2 show how both gravity factor (left-hand side) and additional amount (right-hand side) developed over time.20 Both scatterplots are almost identical, which is due to the fact that – despite its different limits – the EC imposes identical percentages for the gravity factor and the additional amount in most cases. Furthermore, the fitted lines are downward sloped which suggests that either the fining policy of the EC has become less strict or the severity of infringements with respect to the relevant factors from the guidelines (see steps (2) and (3) in Table 18.1) has decreased over time (or a combination of both). The average undertaking-specific final fine imposed by the EC amounts to €48.5 million, ranging from zero values in which full leniency immunity has been granted to more than €1 billion imposed on Daimler AG in the trucks cartel case. A more detailed overview of the 20 The size of the circles varies depending on the number of cases per year in which the EC imposed identical percentages.

Cartels and fines  317

Figure 18.2

Gravity factor (left) and additional amount (right) over time

imposed final fines is provided in Figure 18.3. With the exception of the years 2010 and 2016, the average final fine per case (left-hand side) is below €400 million in all other years and below €200 million in several of these years. The average final fine per undertaking (right-hand side) is even less volatile than the average case fine. With the exception of the year 2016, the fine is below €100 million in all other years and below €50 million in some of these

Table 18.2

Summary statistics

 

Mean

St.Dev

Min

Max

N

Number undertakings

4.677

3.207

2

18

93

Gravity factor (%)

16.661

1.423

15

25

90

Additional amount (%)

16.627

1.378

15

25

90

Final fine (million €)

48.5

121.676

0

1008.766

435

Provisional fine (million €)

80.794

169.823

.002

1441.094

326

Basic fine (million €)

84.105

168.459

.055

1441.094

348

Duration (months)

65.458

61.127

1

419

435

Affected sales (million €)

83.034

137.194

.058

695

247

Aggravating circ.

.074

.261

0

1

435

Mitigating circ.

.138

.345

0

1

435

Specific deterrence increase

.122

.327

0

1

435

Increase due to aggr. circ. (%)

45.003

17.141

17.143

100

27

Decrease due to mitig. circ. (%)

12.493

13.607

1

70

53

Deterrence multiplier

1.236

.227

1.1

2

50

Legal maximum

.099

.299

0

1

435

Leniency application

.671

.471

0

1

434

Leniency reduction

.611

.488

0

1

434

Leniency first

.207

.406

0

1

434

Leniency follower

.461

.499

0

1

434

Leniency reduction (%)

53.512

33.895

5

100

265

Settlement

.379

.486

0

1

435

Case-specific variables

Undertaking-specific variables

318  Research handbook on cartels years. The significant outlier observable in both charts in the year 2016 is driven by the trucks cartel case, in which the EC imposed a total fine of €2.93 billion on five truck makers.21 Apart from the values of the final fine, it seems worth analysing the intermediate stages of the fine calculation applied by the EC under its 2006 guidelines. As has been discussed in Section III.A, the calculation process can be subdivided into 11 steps, with the base fine and the provisional fine as intermediate values before the final fine is determined. The basic fine is the first intermediate fine level and rests on the application of the (typically case-specific) percentages of gravity factor (step (2)) and additional amount (step (3)) to undertaking-specific cartel sales (step (1)) and durations of cartel participation. The average basic fine is €84 million, with a huge standard deviation of around €168 million. Given the previously mentioned average final fine of €48.5 million, the average final fine amounts to around 58 per cent of the average basic fine.

Figure 18.3

Average final fine per case (left) and per undertaking (right) over time

The provisional fine is the result of the application of steps (4)–(6) (see Table 18.1) to the base fine, that is, having regard to aggravating/mitigating circumstances, deterrence considerations and the legal maximum of 10 per cent of the total turnover. In all, 7.4 per cent of the undertakings received an increase in the base fine due to aggravating circumstances and 13.8 per cent of the undertakings were granted a base fine reduction due to mitigating circumstances (step (4)).22 Whereas the average decrease as a result of mitigating circumstances is 12.5 per cent of the base fine level, the average increase because of aggravating factors amounts to 45 per cent of the base fine. In addition, for 12.2 per cent of the undertakings from the dataset the EC increased the fine due to deterrence (step (5)). The average deterrence multiplier applied to the

It is worth mentioning that in 2017 the EC imposed an additional €880 million fine on Scania due to the company’s decision not to settle the case (unlike the other companies). Although the Scania decision was published in 2017, the fine is related to the same infringement and is therefore assigned to the 2016 values. There are a few similar cases in the data set (e.g., AT.39965, Mushrooms or Case AT.39792, Steel Abrasives) in which undertakings decided not to settle and the corresponding decisions therefore postdate the first case decisions. 22 These numbers also contain undertakings for which the EC considered both aggravating and mitigating circumstances. In those cases, the overall effect can be either an increase or a decrease in the base fine level. 21

Cartels and fines  319 base fine level is around 1.2, ranging from 1.1 (that is, a 10 per cent deterrence increase) up to 2 (that is, a 100 per cent deterrence increase). Turning to the legal maximum, almost 10 per cent of the fines calculated until step (5) exceeded the 10 per cent cap and have therefore been downward adjusted by the EC (step (6)). The average provisional fine that takes into account all of the aforementioned steps amounts to around €81 million. Compared to the average base fine level of around €84 million, it seems that there is only little movement on average level. The most important steps from provisional fine to final fine comprise the application of the leniency notice (step (7)) as well as the settlement notice (step (8)). In total, 67 per cent of the undertakings applied for leniency and 61 per cent were granted a leniency reduction; that is, around 91 per cent of the leniency applications were successful. Of these, 21 per cent of the undertakings were the first party to apply for leniency and 46 per cent were ‘leniency followers’. The average leniency discount in case of successful applications is around 54 per cent of the provisional fine with a lower limit of 5 per cent and an upper limit of 100 per cent for those undertakings that received full immunity. Almost 38 per cent of the undertakings could additionally benefit from a 10 per cent fine reduction within the settlement notice (step (8)). Given the average values of base fine (~ €84 million), provisional fine (~ €81 million) and final fine (~ €48.5 million) in combination with the substantial leniency reductions, it becomes apparent that the leniency notice constitutes the key instrument for cartelists to impact the penalty level in their favour. The average provisional fine still accounts for 96 per cent of the average base fine level but the average final fine merely amounts to 58 per cent of the average base fine and 60 per cent of the average provisional fine. In order to reveal the relation between the three fine levels on disaggregated level and to study the development over time, Figure 18.4 illustrates corresponding scatter plots and linear fits. The left figure shows the percentage change of provisional fine to basic fine for all undertakings for which both fine levels are either available or could be recalculated with the information provided in the decision documents (n=290). The percentage change is defined as FineProvisional  FineBasic 100, FineBasic that is, a negative (positive) value implies a fine decrease (increase) between basic fine and provisional fine. A zero value indicates no change between both fine levels and this applies for 151 of the 290 undertakings; that is, for these undertakings the EC did not make use of steps (4) to (6). The right figure illustrates the percentage change of final fine to basic fine for all undertakings for which these two fine levels are available (n=348). The percentage change is analogously defined as before and given as FineFinal  FineBasic 100. FineBasic There are at least two interesting aspects that are observable in Figure 18.4. First, in both scatterplots, positive as well as negative percentage changes between provisional/final fine and base fine are observable and the changes show much variation. For some undertakings the intermediate fine (final fine) has been increased considerably in the course of the application of steps (4)–(6) (steps (4)–(11)) from the fine calculation process, in some of these cases by

320  Research handbook on cartels

Figure 18.4

Percentage change between base fine and provisional fine (left) and between base fine and final fine (right)

even more than 100 per cent. Conversely, for the vast majority of undertakings, percentage decreases are observable. Some undertakings benefit from reductions of up to nearly (provisional fine) or completely (final fine) 100 per cent. This confirms that once the EC has specified the basic amount of the fine, most undertakings can benefit from the subsequent steps. Second, the linear lines have negative slopes, which implies a decrease in the percentage changes over time. The negative slope is more pronounced in the right figure than in the left, suggesting that the more steps are applied by the EC, the higher the penalty reductions tend to be (and vice versa). The negative tendency is even observable without linear fit as a higher fraction of observations is located below the 0 per cent limit in the course of time. In contrast to the decreasing trends already observed in Figure 18.2, the decreasing trends in Figure 18.4 are less sensitive to potential changes in the severity of infringements over time. There is therefore much to suggest that either the cartelists have taken better advantage of the guidelines in their favour or the EC has made more generous use of its discretionary scope regarding the application of the guidelines (or a combination of both). In order to shed a little more light on this question, Figure 18.5 illustrates the average leniency discount per undertaking (left) and per case (right) over time. The descriptive statistics of leniency variables from Table 18.2 already emphasized the importance of the leniency notice

Figure 18.5

Average leniency discount (%) per undertaking (left) and per case (right)

Cartels and fines  321 with respect to the final fines and Figure 18.5 confirms that there is an associated time effect. Average leniency discounts on both undertaking level and case level noticeably increased over time. Leniency discounts therefore seem to be an important driver for the decreasing trend observed in the right scatterplot of Figure 18.4. Despite this fact, it still remains unclear whether or not the increase in average leniency discounts is entirely driven by more frequent and more fruitful leniency applications. Likewise, the trend observed in the left scatterplot from Figure 18.4 still remains unexplained. C.

The Deterrent Effect of EC Cartel Fines

Given the content of the European fining guidelines described in Section III.A and their practical implementation analysed in Section III.B, the question raised is to what extent EC cartel fines serve the purpose of deterrence. This section is dedicated to this question and examines deterrence considerations in two respects. In Section III.C.1, fine-sales ratios are calculated for a subset of the undertakings from the dataset and compared to optimal deterrent fine levels as formalized in inequation 3 from Section II. More precisely, the cartel fines actually imposed by the EC are compared to optimal deterrent fines under different settings regarding overcharge rate and probability of detection with the objective to evaluate the existing deterrence gap. Section III.C.2 then critically comments on the legal maximum rule formalized in the EU guidelines. It is argued, and formally shown, that the predefinition of a legal maximum facilitates potential cartelists to adjust their agreements a priori in such a way that cartelization is likely to pay off, thereby decreasing uncertainties and, accordingly, dampening cartel deterrence. 1. Fine-sales ratios According to the theoretical considerations presented in Section II, the optimal deterrent fine level in the sense that any ex ante incentives to collude are eliminated can be approximated by inequation 3 as



OvRate . 

As has been discussed before, the fine level is based on cartel sales and the share of cartel sales imposed as fine for one offender should be at least as high as the overcharge rate achieved by the cartel(ist) divided by the probability of detection. One approach to study the deterrent effect of EC cartel fines would therefore be to apply inequation 3 to data; that is, to analyse which share of EC cartel fines fulfils the inequation and to what extent the penalty levels that fall below underperform. Although it is obvious that the undertakings from the dataset belong to detected cartels and, therefore, de facto were not deterred from an ex ante perspective, applying the approach to detected cartels can nevertheless provide useful information regarding cartel fines as a deterrent. More precisely, by comparing the imposed fines with optimal deterrent fines, it is possible to identify the magnitude of deterrence gap that is causal for the undertakings from the data set not having been deterred ex ante. The size of this deterrence gap is likely to impact not only ex ante deterrence towards these detected cartelists regarding recidivism in the future, but also that towards potential new offenders. This is due to the fact that the larger and more evident the existing deterrence gap, the more undertakings are likely to be

322  Research handbook on cartels generally encouraged to join antitrust agreements in the future as the gains from price-fixing seem to exceed, to a sufficiently strong degree, the expected values of fines imposed by the EC pursuant to its 2006 guidelines. Implementing the approach in that way is data intensive as it is based on case and undertaking-specific information regarding overcharge rate and cartel affected sales. Indeed, neither detailed sales figures of the cartelists over the entire cartel period nor overcharge estimates on case level are systematically documented in the EC decision files or any other publicly accessible source, and therefore they are not part of the data set. In addition, case-specific risks of cartel detection are unknown. Despite these data issues, it is still possible to approximate the approach by calculating fine-sales ratios and simulating the results of inequation 3 under different settings regarding average overcharge rate and probability of detection. This can be done for a subsample of undertakings from the dataset for which cartel affected sales data are provided in the decision documents (n=247).23 Since the sales numbers used by the EC for the fine calculation are those during the last cartel year and therefore do not entail the entire cartel period, the approximation is additionally based on the assumption that the cartel affected sales of one offender during the last business year of cartel participation are representative of its cartel affected sales during the remaining years of the cartel period.24 The undertaking-specific fine-sales ratios are then estimated as

 

FineFinal Affected sales  cartel duration

and represent the shares of final fines relative to estimated cartel sales during the entire period of cartel participation. A fine-sales ratio of 0.4, for instance, indicates that the final fine paid by the offender accounts for 40 per cent of the estimated sales generated by this offender with the cartel affected product(s) during the entire period of cartel participation. Since the estimated fine-sales ratios have zero values for those undertakings that received full immunity under the leniency notice and this is the case for a significant fraction of the undertakings from the data set, the fine-sales ratios are additionally calculated on the basis of the provisional fines (instead of final fines), that is, the fine levels before leniency discounts are rewarded.25 This allows to study the deterrent effect of the fining guidelines independently from leniency discounts and, by comparing both fine-sales ratios, to get further insights with respect to the importance of the leniency programme on cartel fines and deterrence. Figure 18.6 illustrates the histograms and kernel density estimates for both types of fine-sales ratios, the ‘provisional fine-sales ratios’ (left) and the ‘final fine-sales ratios’ (right). Both distributions are left-skewed with the final fine-sales ratios showing a more pronounced

It is worth mentioning that in some cases the decision documents do not provide detailed numbers on cartel affected sales during the last business year of cartel participation, but provide intervals instead. In these cases, the interval centres are used. 24 If, for instance, one offender participated in a cartel from 2010 to 2015 and the cartel affected sales in 2015 are €20 million, then the assumption implies that the cartel affected sales of this offender over the entire six years of cartel participation amount to 6*20 = €120 million (irrespective of how this amount is distributed on a yearly basis between 2010 and 2015) or at least provide a good approximation. 25 Information on provisional fines and sales figures are available only for 216 undertakings (and not for 247 undertakings, as in the case of the final fine-sales ratios). 23

Cartels and fines  323

Figure 18.6

Histograms and kernel density estimates for provisional fine-sales ratios (left) and final fine-sales ratios (right)

skewness than the provisional fine-sales ratios, as expected. The impact of the leniency discounts becomes apparent. Whereas around 75 per cent of the provisional fine-sales ratios are below 0.3, almost the same percentage of final fine-sales ratios is located below the 0.2 value. Consequently, for about three out of four undertakings the levels of fine amount to less than 30 per cent (provisional fine) or 20 per cent (final fine) of the estimated cartel sales. Against the background that the average cartel overcharge is found to be around 20 per cent in Europe26 and keeping in mind that research on the probability of detection reveals values of well below 50 per cent,27 one might already raise serious doubts concerning the deterrent effect of EC cartel fines at this point. In order to study the question of deterrence in greater detail, the estimated fine-sales ratios can be used to simulate the share of fines that fulfil inequation 3 under different settings regarding the overcharge level and probability of detection. For this purpose, the condition of optimal deterrence formulated in inequation 3 is applied to the data by comparing the estiOvRate mated fine-sales ratios ϕ with the proportion for a number of different values for the π overcharge rate and detection probability. The results of the simulation are presented in Table 18.3. Each cell of the matrix represents the share (in per cent) of undertaking-specific fines from the data set that fulfils the deterrence condition under a specific combination of overcharge rate and probability of detection. Whereas the upper number in each cell represents the share based on final fine-sales ratios, the lower number shows the respective percentage based on the provisional fine-sales ratios. If, for instance, the overcharge rate is assumed to be 5 per cent and the probability of detection is assumed to be 10 per cent, the simulation yields shares of fines that fulfil the deterrence condition of 2 per cent and 3 per cent, respectively. Conversely, under this setting, for 98 per cent (97 per cent) of the undertakings the deterrence condition from inequation 3 is not fulfilled, that is, the estimated final fine-sales ratios (provisional fine-sales ratios) are less than

See F. Smuda, ‘Cartel Overcharges and the Deterrent Effect of EU Competition Law’ (2014) 10(1) Journal of Competition Law & Economics 63. 27 See the literature cited above (n 11). 26

324  Research handbook on cartels OvRate 5%   0.5. Thus, for almost all offenders from the restricted data set the share of 10%  cartel sales imposed by the EC as final fine (provisional fine) is lower than the share that is required to achieve optimal deterrence under the given setting of overcharge rate and probability of detection. The simulation results provide several valuable insights with respect to the deterrent effect of EC cartel fines. First, it becomes apparent that for overcharge levels of 60 per cent and above no deterrence is achieved. In other words, if any of the cartels/cartelists would have raised prices by 60 per cent or more, the fine levels imposed by the EC would have had no deterrent effect irrespective of the probability of detection. Second, insufficient deterrence is already the case for substantial shares of fines below the 60 per cent overcharge level. Even if the overcharges are assumed to be around 20 per cent (as the empirical literature suggests on average), more than two out of three fines do not fulfil deterrence. And even under a low overcharge setting of 5 per cent the share of fines that meets deterrence is 72 per cent at most, that is, independently from the values for the probability of detection, at least one out of four fines are not deterrent in any case. Likewise, assuming a probability of detection of 35 per cent (which is close to the largest number found in economic literature so far), the share of deterrent fines lies between 43 per cent and 1 per cent, depending on whether the overcharge level lies at the lower or upper end of the interval (5 per cent; 20 per cent). Thus, independently from the exact overcharge level, more than half of the fines are below optimal deterrence if the probability of detection is set at a plausible level. Third, independently from the exact overcharge level, the share of deterrent penalties is below 100 per cent under each value for the probability of detection. Even if a probability of 100 per cent is assumed, a number of fines do not fulfil the deterrence condition. Therefore, given the fact that the data set contains detected cartels, there are at least (100% – 72%) = 28 per cent of undertakings for which cartel participation paid off from an ex post perspective and, accordingly, ex ante incentives for repeat offences in the future persist. Last but not least, the differences between the simulated shares based on final fine-sales ratios and provisional fine-sales ratios again stress the impact of the leniency programme on cartel fines and deterrence. Given a probability of detection of 35 per cent and an overcharge rate of 5 per cent, for instance, the share of optimal deterrent fines increases from 43 per cent to 73 per cent if the provisional fines would have been imposed instead of final fines. Hence, under this setting the ‘deterrence rate’ would have increased by 30 percentage points if the EC would have imposed the fine levels without leniency discounts instead of the fines actually paid by the offenders. In this context, it is yet important to keep in mind that there exists a contrary effect of the leniency programme on cartel deterrence. Whereas the fine levels would increase significantly without leniency discounts, the probability of detection would also suffer without the leniency programme. Many cartels/cases seem to be detected/decided in conjunction with the leniency programme nowadays and the simulation results confirm the importance of a high detection rate. Independently from the level of overcharges, the shares of deterrent fines under high detection rates are much higher than those under very low probabilities of detection.

Cartels and fines  325 Table 18.3

Share of deterrent fines (in %) for different values of overcharge level and probability of detection 5

10

15

20

25

30

35

Probability of Detection (%) 40 45 50 55 60 65 70

75

80

85

90

95

100

5

0

2

10

18

27

37

43

49

68

68

69

70

71

72

0

3

16

28

47

60

73

75

77

78

78

79

80

82

83

83

84

84

86

88

10

0

0

0

2

6

10

13

18

23

27

32

37

40

43

46

49

51

54

55

57

0

0

0

3

10

16

21

28

38

47

56

60

71

73

74

75

77

77

78

79

15

0

0

0

0

0

2

5

6

10

13

14

18

22

25

27

29

34

37

40

41

0

0

0

0

0

3

9

12

16

20

22

28

36

41

47

52

58

60

69

73

20

0

0

0

0

0

0

1

2

5

6

7

10

11

13

15

18

21

23

25

27

0

0

0

0

0

0

1

3

9

10

12

16

19

21

23

28

33

38

41

48

25

0

0

0

0

0

0

0

0

1

2

4

5

6

7

10

11

13

14

17

18

0

0

0

0

0

0

0

0

1

3

6

10

11

12

16

19

20

22

26

27

30

0

0

0

0

0

0

0

0

0

0

1

2

3

5

6

6

7

10

11

13

0

0

0

0

0

0

0

0

0

0

1

3

6

9

10

12

12

16

19

20

35

0

0

0

0

0

0

0

0

0

0

0

1

1

2

3

5

5

6

6

8

0

0

0

0

0

0

0

0

0

0

0

0

1

3

6

9

10

11

11

13

40

0

0

0

0

0

0

0

0

0

0

0

0

0

1

1

2

3

5

5

6

0

0

0

0

0

0

0

0

0

0

0

0

0

1

1

3

5

9

10

10

45

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

1

1

2

3

5

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

1

1

3

5

9

50

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

1

1

1

2

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

1

1

3

55

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

1

1

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

1

1

60+

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

 

OvRate (%)

54

57

59

62

65

66

Figure 18.7 puts the simulation results in a nutshell by plotting the fraction of deterrent fines OvRate 28 . It becomes apparent that with an depending on different values for the ratio π OvRate exceeds the value increasing ratio the fraction of deterrent fines decreases. If the ratio π 0.3, less than 25 per cent of the undertaking-specific fines are deterrent, irrespective of whether the final fine or the provisional fine is taken as a basis. If the ratio exceeds the value 0.5, less than 5 per cent of the fines fulfil the deterrence condition. Finally, if the ratio is based on the average overcharge and detection rate as they were found in economic literature (that is, OvRate 20%   0.61), the fraction of deterrent fines is close to zero. 33%  To sum up, the simulation results reveal a substantial share of fines imposed by the EC that fall below its optimal deterrent level under various different settings of overcharge and detection rate. Furthermore, even under the assumption of a probability of detection of 100 per cent and a low overcharge level of 5 per cent at least (100% – 72%) = 28 per cent of the fines

28 Compared to the results presented in Table 18.3, Figure 18.7 only plots fractions of undeterred penalties different to zero.

326  Research handbook on cartels

Figure 18.7

Fraction of optimal deterrent fines depending on the ratio between overcharge rate and probability of detection

do not fulfil deterrence. Due to the fact that these fines relate to detected cartels, there seems to exist quite a number of cartelists for which cartelization paid off from an ex post perspective and, accordingly, ex ante deterrence with respect to repeat offences in the future is not assured. Legal maximum 2. Apart from the fines actually imposed by the EC, the deterrent effect of the European fining guidelines may be limited due to specific rules set out in the guidelines. In particular, albeit that the guidelines address the question of deterrence at several points, there exists one particular regulation within the guidelines that might counteract cartel deterrence. This regulation relates to the legal maximum formulated in step 6 of the fine calculation process (see Section III.A). According to this regulation, the final amount of the fine may not exceed 10 per cent of the total turnover in the preceding business year of the undertaking or association of undertakings participating in the infringement. The guidelines thus specify a maximum fine level that cannot be exceeded regardless of how lucrative the antitrust infringement has been for the cartelists with respect to the overcharge level and cartel duration. Albeit there might be legal grounds for setting a legal maximum, from an economic point of view such a pre-formulated maximum fine level might hamper cartel deterrence. This is due to the fact that the 10 per cent cap provides a kind of natural break-even point for cartelists. More precisely, given the ex ante knowledge of potential cartelists that their undertaking-specific fines to be paid in case of detection will not exceed 10 per cent of the total turnover generated during the last business

Cartels and fines  327 year of cartelization, they might adjust their agreements a priori in a way that cartelization always pays off, irrespective of whether or not the cartel will be detected in the future. In order to illustrate this aspect more formally, let pi,cartel be the price charged by one potential cartelist for the cartelized product i during the collusive period and pi,competition the price charged for the same product in the counterfactual situation of competition. It is assumed that: (i) the cartel agreement the potential cartelist intends to join survives one period (for example, one year); (ii) the cost function is linear in the form of C (xi) = CF + cxi; and (iii) the price elasticity of demand is zero, that is, the quantity sold by the potential cartelist during collusion is identical to the quantity sold under competition (xi,cartel = xi,competition = xi). Aside from product i for which the potential cartelist intends to join the cartel agreement, several non-cartelized products are additionally produced and sold. For simplicity, it is assumed that all these non-cartelized products have the same price. This price can then be defined as p-i and the corresponding quantity is given as x-i. Given this formal framework, the potential cartelist can now approximate the break-even point of overcharge level prior to joining the cartel agreement. The underlying condition is that the cartel induced price increase for product i is sufficiently large so that the gain from price-fixing will reach at least the expected maximum fine level: ( pi , cartel  pi , competition) xi   0.1 pi , cartelxi    p  i x  i  (1) The left-hand side of inequation 1 represents the gain from price-fixing, that is, the per unit price increase of the cartelized product i, multiplied by the units sold. The right-hand side reflects the expected maximum fine level and is given by the probability of detection π , multiplied by the legal maximum pursuant to the European guidelines. As described above, the maximum fine level amounts to 10 per cent of the overall turnover generated by the undertaking during the last business year of cartel participation which, under the given framework, comprises the turnover generated with the cartelized product (pi,cartel xi) as well as the turnover achieved with all non-cartelized products ( p − i x − i ). pcartel  pcompetition Now introducing OvRate  as cartel overcharge rate and defining pcartel pi xi  as the ratio on non-cartelized sales to cartelized sales, inequation 1 can be simpi , cartel xi plified to OvRate  0.1 (1   ), (2) ( pi , cartel xi)  ( p  i x  i ) reflecting the ratio of overall sales to cartel sales. pi , cartel xi Inequation 2 implies that a potential cartelist can anticipate ex-ante the break-even point of overcharge rate for different values of π and α . If, for instance, an undertaking specialized in the production of one single product evaluates whether or not to form/join a collusive agreement related to that product (that is,   0), cartelization will always pay off if the overcharge rate exceeds the value of 10 per cent, even if the probability of detection is assumed to be 100 with (1  ) 

328  Research handbook on cartels per cent.29 If the probability of detection is assumed to be 50 per cent, the undertaking already has incentives to form/join a cartel agreement as long as the overcharge is agreed to be 5 per cent or above.30 Accordingly, a multiproduct enterprise that calculates with a probability of detection of 70 per cent and for which the cartel affected product accounts for 60 per cent of 40% 2 its overall sales (that is,    ) will benefit from cartel participation and therefore has 60% 3 incentives to collude if the overcharge rate is set at a level of 11.67 per cent or above.31 The aforementioned examples illustrate the impact of the legal maximum rule on cartel deterrence. Potential cartelists receive additional knowledge that allow them to establish profitable cartel agreements with positive return even before the anti-competitive behaviour is implemented in the market. It merely needs a good understanding of the distribution of sales between cartelized and non-cartelized products and the break-even overcharge rate can be anticipated for any probability of detection in due course. This is only possible because of the predetermination of a maximum fine level formulated in the guidelines. In a scenario without legal maximum, it would be impossible for potential cartelists to make such a cost-benefit analysis from an ex ante perspective as the EC could always react unrestrained with its fine level in case of detection depending on how harmful the cartel agreement has been. Accordingly, for potential cartelists the legal maximum formulated in the guidelines decreases uncertainty regarding the expected costs of collusion, thereby counteracting cartel deterrence.

IV.

PRIVATE ANTITRUST ENFORCEMENT AND SANCTIONS BEYOND PUBLIC CARTEL FINES

The results from the previous sections indicate that the fining policy of the EC based on its recent guidelines leaves a deterrence gap. The existence and substantial size of this gap is supported by the facts (i) that the existing fines imposed by the EC seem to lie below its optimal deterrent levels in many cases and under various settings for the overcharge rate and probability of detection, and (ii) that the legal maximum formulated in the guidelines facilitates cartelists to agree on overcharges that make collusion a priori a profitable business strategy. This result is indirectly confirmed by the fact that cartels are detected and fined in a very regular manner and some of the detected cartelists are repeat offenders. It is therefore obvious to raise the questions of (1) how the deterrence gap could be reduced in general and (2) whether it is even desirable and possible to bridge the gap entirely in practice. As regards the latter question, Block and Sidak argue that an efficient enforcement policy will not deter all antitrust violations as the enforcement costs to deter some infringements will exceed the harm averted.32 Accordingly, optimal antitrust enforcement for society is desirable at the point where the harm averted by increased antitrust enforcement exactly corresponds with the cost of increased enforcement efforts and this point lies below optimal deterrence. The 10 per cent overcharge level is given via inequation 2 as 0.1 (1  0)  0,1. The 5 per cent overcharge level is given via inequation 2 as 0.1 50%  (1  0)  0, 05.

29 30

2 The 16.67 per cent overcharge level is given via inequation 2 as 0.1 70% 1    0.1167.

31



3

32 See M. Block and J.G. Sidak, ‘The Cost of Antitrust Deterrence: Why Not Hang a Price Fixer Now and Then?’ (1980) 68(5) Georgetown Law Journal 1131.

Cartels and fines  329 In order to shift the level of optimal antitrust enforcement at least closer to the level of optimal deterrence, enforcement measures that are at low cost but with a significant degree of deterrence impact therefore seem to be indispensable. But even with an enforcement policy that has a strong overall deterrent impact and is built on low enforcement costs, there would remain a deterrence gap in the end. The question of optimal deterrence is no exclusive antitrust issue and in other legal fields and countries optimal deterrence is unattained despite the fact that some offences might be punished by death in the worst case. Thus, Block and Sidak’s fanciful solution to ‘hang a price fixer now and then’33 would – despite the obvious irony – be equally insufficient. Optimal deterrence therefore seems to be neither desirable (as the optimal enforcement level lies below the optimal deterrent level) nor attainable in practice (as even strong sanctions such as death penalties are insufficient to achieve this goal), but rather remains a theoretical reference point. Turning to the question of how the deterrence gap that is left by public fines could be reduced, private antitrust enforcement is one instrument that could complement public enforcement in a useful way in that regard. Private enforcement aims to compensate the victims from antitrust infringements, that is, to reverse the welfare transformation between cartelists and damaged parties. Thus, under the assumption that private enforcement resets any cartel profits to zero in case of detection, the ex ante incentives for cartelization diminish. Even if no full compensation is achieved, the combination of public fine and private compensation payment increases the expected overall costs of cartelization, thereby negatively influencing the ex ante cost-benefit analysis of potential cartelist compared to the scenario without private enforcement. Furthermore, (increased) private antitrust enforcement does not only increase the expected costs of cartelization but additionally creates an uncertainty regarding its size. This uncertainty evoked by private enforcement counteracts the impact of the legal maximum rule on cartel deterrence as described in Section III.C.2. The unknown size of a potential compensation payment to be paid in case of detection foils any break-even calculations fostered by the legal maximum of the public fine. On the other hand, private enforcement is not free of charge. Claiming antitrust damages is often a long-lasting and costly process with uncertain outcome, even though the legal conditions have improved continually during recent years. Furthermore, public and private enforcement are not entirely complementary since there are countervailing effects between both enforcement systems, for instance as regards the leniency programme. Due to the fact that with increased private enforcement leniency applications become less attractive for cartelists, increased private enforcement might decrease the detection rate and thus counteract the effectiveness of public enforcement as a whole.34 Last but not least, the additional compensation payment on top of the cartel fine imposed by a competition authority may lead to an overshooting overall level, with negative consequences for society comparable to those that might occur from public fines being set too high (see Section II). The benefits from private enforcement as a tool to reduce the deterrence gap therefore seem to be limited, which is why it is worth thinking about additional measures. For instance, one

ibid 1132. It is worth noting that, most recently, Buccirossi et al argue against the described conflict and show that damage actions can even improve the effectiveness of leniency programmes; see P. Buccirossi, C. Marvão and G. Spagnolo, ‘Leniency and Damages: Where Is the Conflict?’ (2020) 49(2) Journal of Legal Studies 335. 33 34

330  Research handbook on cartels trend that has been observable in jurisdictions around the world relates to the introduction of criminal sanctions in cartel cases. The OECD debated and suggested criminal sanctions as early as 200335 and at present, at least 35 countries have already criminalized cartel participation or (at least) bid rigging.36 Although anecdotal evidence confirms that criminal sanctions against individuals are likely to boost deterrence,37 Whelan points on the difficulty of securing efficient competition law enforcement as well as the need for connecting (the criminalized) cartelization to morally wrongful behaviour when criminal sanctions are used as a deterrent.38 In addition, the implementation of criminal sanctions may generally come along with theoretical, legal and practical challenges that can restrict their effectiveness, efficacy and legitimacy.39 Whereas the implementation of criminal sanctions entails significant changes in the legal system, other measures proposed in the law and economics literature seem less far-reaching. Increased use of cartel screenings (for example, based on artificial intelligence) could be one way of boosting the probability of detection and, accordingly, deterrence.40 Granting financial rewards to whistleblowers is seen as another promising approach.41 Here, one might even consider financial rewards not only for individuals, but additionally for undertakings in the sense of a reworked leniency programme. Extending the existing leniency programme from immunity to reward could mitigate the countervailing effects between leniency and private enforcement described above. If the reward would be limited to the purpose of handling possible compensation payments in the future, the incentives for cartelists not to reveal the cartel via leniency because of the fear of private litigations would decrease. Finally, Harrington recently proposed the use of structural remedies as a complementing penalty in suitable cases.42 Structural remedies are commonly used in merger enforcement and imply the divestiture of some assets with the objective to stimulate competition in the concerned market. As has been thoroughly discussed by Harrington, imposing structural remedies on one or more cartel members could be particularly useful as this moves into additional areas unreached by the aforementioned measures. Unlike public fines or private enforcement, structural remedies are not only deterrent but also corrective as they are targeted on modifying the market (structure) to make collusion less likely in the future (such as by establishing a new competitor in the cartel affected market(s)). In addition, compared to private enforcement that focuses on compensating injured parties for the harm suffered during the collusive period, structural remedies can benefit future customers in the post-cartel period since the more competitive market structure results in lower competitive prices. Harrington argues that structural remedies may even be superior to customer damages from private litigation under some cir See OECD, Cartel Sanctions against Individuals (DAF/COMP(2004)39, 10 January 2005). See J. Harrington, ‘A Proposal for a Structural Remedy for Illegal Collusion’ (2018) 82 Antitrust Law Journal 335. 37 See OECD, Hard Core Cartels: Third Report on the Implementation of the 1998 Council Recommendation (Paris, 2005). 38 Whelan (n 13). 39 See P. Whelan, The Criminalization of European Cartel Enforcement: Theoretical, Legal and Practical Challenges (Oxford University Press, 2014). 40 On the implementation of screens based on machine learning for the detection of bid rigging cartels, see, e.g., M. Huber and D. Imhof, ‘Machine Learning with Screens for Detecting Bid-Rigging Cartels’ (2019) 65 International Journal of Industrial Organization 277. 41 See M. Bigoni, S.-O. Fridolfsson, C. Le Coq and G. Spagnolo, ‘Fines, Leniency, and Rewards in Antitrust’ (2012) 43(2) RAND Journal of Economics 368. 42 Harrington (n 36). 35 36

Cartels and fines  331 cumstances and provides specific guidelines for its implementation in practice. Consequently, given (i) the convincing arguments brought forward, (ii) the guidelines at hand, and (iii) the fact that competition authorities can build on their existing pool of knowledge and practice from merger control, structural remedies are particularly promising and worthy of consideration as an additional penalty (in suitable cases) to reduce the deterrence gap.

V. CONCLUSION This chapter has dealt with cartel fines as a sanction to deter cartelization. Cartel fines as a deterrent imply that a potential cartelist will refrain from collusion if the expected fine will exceed or at least offset cartel gains. It has been stated that a deterrence-oriented fine level built on cartel gains does not correspond with the theoretically optimal fine level based on net harm, but that the former approach is more practical than the latter and closely linked to the incentives to collude. Based on a simple formal framework, it was shown that the optimal deterrent fine level – expressed as a fraction of the value of affected sales, that is, just as fines are defined in the EU antitrust fining guidelines – can be approximated by the cartel overcharge rate divided by the probability of detection. The extent to which the fining policy of the Commission fulfils optimal deterrence was then analysed. For that purpose, a data set that contains undertaking-specific data for all cartel cases decided by the Commission between 2007 and 2020 was used to compare the imposed fines with optimal deterrent fines under different settings for the overcharge and detection rate. The simulation results revealed a noticeable deterrence gap that, as was further discussed and formally shown, is additionally intensified by the legal maximum rule formulated in the guidelines. Finally, several alternative and complementary measures from the law and economics literature were compiled, with structural remedies assessed as a particularly promising approach to reduce the deterrence gap.

19. Cartel activity and recidivism Catarina Marvão

I. INTRODUCTION Cartels are explicitly prohibited by Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’) and by the US Sherman and Federal Trade Commission Acts. Nevertheless, they are a perennial problem and are one of the main concerns of the European Commission (‘EC’) and the US Department of Justice (‘DOJ’). In fact, there is evidence to suggest that, among a range of competition policy features, effective anti-cartel enforcement is by far the most important determinant of positive productivity growth.1 Recidivism in any criminal setting is often considered a failure of the system in fighting such behaviour, as well as a clear sign of the limited effectiveness of its enforcement tools. Recidivism in collusive behaviour is no exception. The fact that many cartel members have been discovered to have colluded multiple times can be perceived as the outcome of the limited efficiency of competition policy.2 For competition authorities across the world, leniency policies (‘LPs’) have become the main instrument of competition law enforcement against ‘hard-core’ cartels. The EU leniency programme grants immunity from or a reduction of fines to individual firms that are members of a cartel, in exchange for the initial reporting of the cartel and/or relevant cooperation with the European Commission during a cartel investigation.3 The US leniency programme grants immunity from fines to the first reporting firm only.4 However, the fact that this is usually followed by plea-bargaining agreements brings the two programmes closer to each other. Optimizing the design and administration of LPs is a key objective for competition authorities and society at large. Theoretical research has highlighted the strong potential for well-designed and well-managed LPs to contribute to social welfare.5 However, it has also highlighted the serious risk that poorly implemented LPs may have the opposite effect. An overly generous LP offering fine reductions to several reporting firms may make a competition authority appear very successful in terms of the number of convicted firms, while reducing social welfare by decreasing cartel deterrence and increasing the amount of prosecution costs (because there are more prosecuted cartels).

1 P. Buccirossi, L. Ciari, T. Duso, G. Spagnolo and C. Vitale, ‘Competition Policy and Productivity Growth: An Empirical Assessment’ (2013) 95(4) Review of Economics and Statistics 1324. 2 M. Levenstein, C. Marvão and V. Suslow, ‘Preventing Cartel Recidivism’ (2016) 30(3) Antitrust Magazine 157. 3 European Commission, Commission Notice on Immunity from Fines and Reduction of Fines in Cartel Cases [2006] OJ C298/17. 4 See Department of Justice, Antitrust Division, Corporate Leniency Program (10 August 1993). 5 A survey of the literature on leniency programmes is provided in C. Marvão and G. Spagnolo, ‘Cartels and Leniency: Taking Stock of What We Learnt’, in L. Corchón and M. Marini (eds), Handbook of Game Theory and Industrial Organization: Volume II (Edward Elgar Publishing, 2018).

332

Cartel activity and recidivism  333 This chapter reviews the legislation connected to recidivism and reviews the current theoretical, experimental and empirical literature on recidivism and related issues. In addition, it presents novel evidence on: (i) the amount of recidivism in the EU between 1998 and December 2020; (ii) the trend of ‘leniency inflation’, noticed by Marvão and Spagnolo,6 which is even steeper for multiple offending firms; and (iii) the ability of recidivists to use LPs strategically by rotating reports and using multi-market contact. It also provides new empirical evidence on the number of multiple offenders (a firm fined at least twice) and of true recidivists (a firm who initiates a new cartel after a conviction). Connor defines a recidivist as a multiple offender and claims 18 per cent of worldwide cartel members are recidivists.7 Werden et al use the definition of true recidivist and claim that recidivism has been eliminated in the US.8 In the EU, between 1998 and the end of 2020, 19 per cent of the convicted cartel members were multiple offenders and 1.8 per cent were true recidivists. The latter group consists of ten firms, which is a significant increase from the four true recidivist firms identified in Marvão.9 While one cannot observe whether leniency is increasing deterrence, one can clearly see the increasing trend in the share of cartel members which receive some degree of leniency reduction and in the average leniency reduction granted. Marvão and Spagnolo document this recent phenomenon of ‘leniency inflation’.10 This chapter presents new evidence that the trend of ‘leniency inflation’ is in fact much steeper for multiple offending firms. This is a concern: if leniency is awarded when the competition authority is already aware of the cartel’s existence it will have ambiguous effects,11 particularly if it provides additional incentives to recidivists. This ‘leniency inflation’ phenomenon seems to be an attempt to solve a problem of low cartel deterrence which is worsened, rather than solved, by overusing leniency. Its cost adds to the already large distortive effect of non-deterrent fines.12 In this chapter, the analysis of recent data on EC cartel convictions (herein termed ‘EU cartels’) suggests that firms may be able to use LPs to coordinate leniency applications and to sustain collusion between the same members across different markets. The strategic use of leniency by cartel members may undermine the deterrent effects of cartel prosecutions by reducing expected fines (and thus increasing expected collusive profits) and by making cartels more stable. The latter effect can be due to cartel members coordinating leniency applications (and leniency reductions) among themselves, therefore increasing the level of trust between members, or due to multi-market contact and the spread of collusive practices between

C. Marvão and G. Spagnolo, ‘Leniency Inflation, Cartel Damages and Criminalization’ (18 May 2018) https://​papers​.ssrn​.com/​sol3/​papers​.cfm​?abstract​_id​=​3180685 [accessed 16 March 2022]. 7 J. Connor, ‘Recidivism Revealed: Private International Cartels 1991–2009’ (2010) 6(2) Competition Policy International 101. 8 G. Werden, S. Hammond and B. Barnett, ‘Recidivism Eliminated: Cartel Enforcement in the United States Since 1999’ (Georgetown Global Antitrust Enforcement Symposium, Washington DC, 22 September 2011). 9 C. Marvão, ‘The EU Leniency Programme and Recidivism’ (2016) 49(1) Review of Industrial Organization 1. 10 Marvão and Spagnolo (n 6). 11 M. Motta and M. Polo, ‘Leniency Programs and Cartel Prosecution’ (2003) 21(3) International Journal of Industrial Organization 347. 12 See V. Bageri, Y. Katsoulacos and G. Spagnolo, ‘The Distortive Effects of Antitrust Fines Based on Revenue’ (2013) 123 The Economic Journal 545 (shedding some light on the distortive effect of fines which fail to deter cartels). 6

334  Research handbook on cartels markets. In fact, competition authorities may be aided by the coordination of leniency applications, as they are rewarded for prosecuting cartels but not for deterring them. However, if the recidivists who strategically use the LP are multiple offenders rather than ‘true recidivists’, then the LP may be beneficial, as it gives incentives for firms to repeatedly report cartels (or cooperate with ongoing investigations), thus increasing the success rate of cartel investigations. The chapter is organized as follows. In the next section (Section II), the fining and leniency legislation is described in the context of recidivism. Section III offers a review of the current literature. Section IV provides novel evidence on recidivism in EC cartel cases. Section V concludes with a discussion of potential solutions for the issue of recidivism.

II.

LEGISLATION ON RECIDIVISM: EU VERSUS US

There is no accepted definition of recidivism in the relevant (soft) laws. In EU competition law, repeat offending occurs ‘where an undertaking continues or repeats the same or a similar infringement after the Commission or a national competition authority has made a finding that the undertaking infringed’ Article 101 or 102 TFEU.13 The US DOJ defines a recidivist as any firm that ‘after release from custody for having committed a crime, is not rehabilitated’.14 The 2006 European Commission Guidelines on the setting of fines acknowledge the serious issue of recidivism.15 As noted in a EC press release,16 ‘[m]ultiple offenders will […] be fined more heavily’. The new guidelines strengthened the fines for repeat offenders by including not only previous EC cartel cases but also cartel convictions in the EU member states and imposing a fine increase of up to 100 per cent, instead of the 50 per cent set in the previous guidelines.17 However, this policy received extreme criticism from both legal bodies and the industry.18 In practice, it did not materialize. Connor noted that there is a ‘large number of defendants convicted under the new guidelines that received no recidivism penalty when they clearly qualified for such […] One wonders whether such a severe undercounting is wilful or simply the result of poor record-keeping by the Commission.’19

European Commission, Guidelines on the Method of Setting Fines Imposed Pursuant to Article 23(2)(a) of Regulation No 1/2003 [2006] OJ C210/02, para 28. 14 M. Maltz, Recidivism (Academic Press, Inc., 1984). 15 European Commission (n 13). 16 European Commission, ‘Competition: Commission Revises Guidelines for Setting Fines in Antitrust Cases’ (IP/06/857, 28 June 2006). 17 European Commission (n 13) para 28. 18 See, e.g., K. Nordlander, ‘The Commission’s Policy on Recidivism: Legal Certainty for Repeat Offenders?’ (2005) 2 Competition Law Review 55; J. Lever, ‘Whether, and If So How, the EC Commission’s 2006 Guidelines on Setting Fines for Infringements of Articles 81 and 82 of the EC Treaty Are Fairly Subject to Serious Criticism’ (BDI – Federation of German Industries, 12 November 2007); and A. Winckler, ‘La Récidive en Droit Européen de la Concurrence: Un Droit d’Exception?’ [2010] 4 Concurrences 21. 19 J. Connor, ‘Has the Commission Become More Severe in Punishing Cartels? Effects of the 2006 Guidelines’ (2011) 32 European Competition Law Review 27. 13

Cartel activity and recidivism  335 Veljanovski provides additional support to this statement and shows that the increase in the absolute value of EC fines between 1999 and 2010 was due to a generous leniency programme rather than to harsher fines.20 Many national competition authorities did not follow the steps of the Commission in terms of their (soft) laws. For example, the Spanish National Competition Commission21 stated in 2009 that recidivists would receive a fine increase of 5–15 per cent, whereas the 2011 guidelines of the French Competition Authority22 included a 15–50 per cent fine increase for recidivism. The EC and US Leniency Program Notices do not explicitly exclude recidivists from receiving a leniency reduction; nor do the fining policies of the EU National Competition Authorities (‘NCAs’). In fact, the Greek competition authority’s 2011 guidelines23 allow recidivists to receive leniency (which was previously not possible). A related issue is that of private damage claims. In the United States, victims of an antitrust infringement are entitled to treble damages, and cartel members are jointly and severally liable for these damages. Further, the applicable discovery rules allow claimants in a damages action to obtain full disclosure of all relevant documents, including those provided by the leniency applicants. In Europe, the legal debate on private versus public antitrust enforcement has incorrectly assumed that an inherent conflict exists between the correct functioning of a LP and private damage claims, such that there needs to be a compromise between the interest of the public enforcement system and the interest of private cartel victims to be fully compensated. The recent 2014 EU Directive on damage actions,24 which was expected to be transposed into the national law by the EU member states by June 2018, is unfortunately in line with the legal debate. While it does partially limit the liability of the immunity recipient (the first leniency applicant), it also limits the information that is available to the claimants by restricting access to LP applications. Bucirossi et al show that this compromise is not actually required. In fact, the authors show that damage actions can improve the effectiveness of the LP.25 The authors propose that to enforce the legal principle that any victim has the right to be fully compensated, the optimal solution is to grant complete access to all documents submitted by the immunity applicant and restrict (possibly eliminate) the civil liability of the immunity recipient.

20 C. Veljanovski, ‘Deterrence, Recidivism and European Cartel Fines’ (2011) 7 Journal of Competition Law & Economics 871. 21 National Competition Commission (‘NCC’), ‘Communication of 6 February 2009 on the Quantification of Sanctions Arising from Violations of Articles 1, 2 and 3 of the Spanish Competition Act 15/2007 of 3 July 2007 and Articles 81 and 82 of the European Community Treaty’ (6 February 2009). 22 French Competition Authority, ‘Notice of 16 May 2011 on the Method Relating to the Setting of Financial Penalties’. 23 Decision 526/VI/2011 of 30 August 2011 www​.epant​.gr/​faqs​.php [accessed 16 March 2022]. 24 Directive 2014/104/EU of the European Parliament and of the Council of 26 November 2014 on Certain Rules Governing Actions for Damages under National Law for Infringements of the Competition Law Provisions of the Member States and of the European Union [2014] OJ L349/1. 25 P. Bucirossi, C. Marvão and G. Spagnolo, ‘Leniency and Damages: Where Is the Conflict? (2015) 49(2) Journal of Legal Studies 335.

336  Research handbook on cartels Marvão and Spagnolo argue that the Directive explains, at least partially, the recent decrease in the number of both EU cartel cases and convicted cartel members.26 This is because the LP immunity recipient will still be liable to pay private damages, thus making leniency less attractive and therefore hindering the success of private damage claims.

III.

LITERATURE ON RECIDIVISM

A.

Experimental Evidence on Recidivism

Contrary to what the first models of leniency assumed,27 Hinloopen and Soetevent show that substantial cartel deterrence can be achieved with the introduction of a LP that is only available to spontaneous reports before an investigation is opened.28 A second notable result of the study is that there exists a constant high rate of recidivism – the same percentage of detected and convicted cartels start colluding again after some time, with or without LPs. Desistance (that is, specific deterrence) is not effective. The lack of desistance effects implied by recidivism may be a consequence of the absence of higher fines or the higher probability of detection for recidivists. Therefore, after a conviction, collusion remains practically as attractive as before for the convicted cartel. Unfortunately, the study did not consider rewards. Bigoni et al used the same setup as above to study how standard antitrust enforcement (without a LP), LPs and monetary rewards for the first reporting party affect cartel formation and prices.29 They found that antitrust enforcement without leniency reduces cartel formation but increases cartel prices: subjects use costly fines as punishment against deviators. Leniency improves antitrust enforcement by strengthening deterrence, as fewer cartels are formed and existing cartels that are detected through leniency do not form again; that is, leniency eliminates recidivism – against the views expressed by Hinloopen and Soetevent.30 However, LPs also stabilize surviving cartels: subjects appear to anticipate the lower post-conviction prices and lack of recidivism after self-reports or leniency. Therefore, overall average prices do not fall significantly. Conversely, with rewards, prices rapidly fall to the competitive level. Overall, the results suggest a strong cartel deterrence potential for well-run LPs, where firms self-report before an investigation is opened. The results also imply that rewards should be introduced to obtain substantial welfare gains in terms of lower prices.

Marvão and Spagnolo (n 6). Motta and Polo (n 11). 28 J. Hinloopen and A. Soetevent, ‘Laboratory Evidence on the Effectiveness of Corporate Leniency Programs’ (2008) 39 RAND Journal of Economics 607. 29 M. Bigoni, S.-O. Fridolfsson, C. Le Coq and G. Spagnolo, ‘Trust, Leniency and Deterrence’ (2015) 31(4) Journal of Law, Economics and Organizaton 663. 30 Hinloopen and Soetevent (n 28). 26 27

Cartel activity and recidivism  337 B.

Theoretical Evidence on Recidivism

The EU and US Leniency Programs do not exclude recidivists from receiving immunity or a fine reduction. Theoretically, it is not clear whether LPs should exclude recidivist firms and whether firms can exploit them. Chen and Rey develop a standard model of tacit collusion, where in an infinitely repeated game, N homogeneous firms compete à la Bertrand.31 The model reconciles the positive effect of LPs: cartel destabilization, with its negative effect: the risk that it can be exploited by firms, and which was first explored by Motta and Polo.32 The model shows that, to maximize deterrence, it is optimal to: (i) offer some leniency pre-investigation; (ii) offer some leniency during an investigation when investigations are unlikely to detect cartels; (iii) offer leniency to the first reporting firm only; and (iv) not exclude recidivists from obtaining leniency. Houba et al measure the effectiveness of the LP in terms of deterrence but also in terms of the effect of undeterred cartels on prices and on the firms’ ability to exploit the LP.33 The authors examine a symmetric and infinitely repeated Bertrand game with N firms that produce homogeneous or heterogeneous products. The model includes a ‘cartel-culture’ parameter which describes how likely it is that cartels persist after each conviction and the game is set up as a sequential game in two stages, to proxy both the set of sustainable cartel prices and consumers’ worst-case scenario of maximal damage. The results suggest the opposite to Chen and Rey,34 that is, that excluding recidivists from obtaining leniency can (i) minimize the amount of time firms can exploit adverse effects through ‘collude and report’ strategies, and (ii) minimize the maximal cartel price sustainable under adverse effects. Shen addresses theoretically the issue of recidivism.35 The author uses a reputation model with two firms who produce and collude on a homogeneous product. One firm is a long-lived multi-product firm which may be tough (commitment type) or normal (profit-maximizing). The other firm is a short-lived (one-period) single product firm which maximizes profits. In a finite-period repeated game, the model explores the incentives to apply for the LP (which is always chosen in the ‘tough’ strategy). The model suggests that the long-lived firm, which may form several cartels, may report the cartel(s) to protect its ‘tough firm’ reputation and deter future cartel deviations. C.

Empirical Studies on Recidivism

Recidivism is not a new issue but is one that has received much attention lately. Bryant and Eckard develop a theoretical model to estimate the probability that a cartel is detected.36 When applied to data on 1300 cartel members fined by the US DOJ between 1961 and 1988, the 31 Z. Chen and P. Rey, ‘On the Design of Leniency Programs’ (2013) 56(4) Journal of Law and Economics 917. 32 Motta and Polo (n 11). 33 H. Houba, E. Motchenkova and Q. Wen, ‘The Effects of Leniency on Maximal Cartel Pricing’ (Tinbergen Institute Discussion Paper 2009-081/1, 2009). 34 Chen and Rey (n 31). 35 C. Shen, Multiple Cartels and Strategic Use of the Leniency Policy (PhD Thesis, Pennsylvania State University, 2017) Chapter 2. 36 P. Bryant and E. Eckard, ‘The Probability of Getting Caught’ (1991) 73 Review of Economics and Statistics 531.

338  Research handbook on cartels authors find that the probability of detection is around 13–17 per cent. The authors also note that around 14 per cent of the cartel members are recidivists. Unfortunately, the paper does not separate the likelihood of detection for single and multiple offending firms. In Europe, Harding and Gibbs noted early on that there was an ‘awesome level of recidivism on the part of major companies who appear as usual suspects in the world of business cartels. In short, this suggests a confirmed culture of business delinquency’.37 The existence and extent of recidivism are highly debated issues. Connor indicated that there is evidence of a large amount of recidivism worldwide.38 Connor’s definition of recidivism includes all infringements by a firm, including simultaneous ones and those involving firms which merged and became a new firm. One should note that, according to the legal practice (of both the EC and DOJ), a firm resulting from a merger is considered a new and single-offending firm. Connor identifies 389 recidivists worldwide in the period between 1990 and 2009. This number constitutes 18.4 per cent of the total number of firms involved in 648 international cartel convictions. Werden et al have contested Connor’s definition of recidivism and his calculation of the numbers of multiple and repeat offenders.39 The authors argue that the enhancement of the US leniency program in 1993, the sharp increase in fines in the 1990s and the first criminal prosecution of non-US citizens in 1999 justify looking at the post-1999 period only. By excluding all cases of multiple offences where firms did not start a new cartel after a conviction in the post-1999 period,40 the authors argue that recidivism in the US, since 1999, has been eliminated. Wils examines the issue of recidivism in Europe.41 The author describes how the European Commission and the EU courts dealt with the issue of recidivism up until 2011 and surrounding the introduction of the 2006 Fining Guidelines. He reports that between 2006 and 2010, 12 per cent of the convicted cartel members participated in more than one cartel. He also puts forward four main reasons for the strengthening of sanctions for repeat offenders: (i) a higher propensity to collude; (ii) moral condemnation; (iii) lower probability of detection; and (iv) discovery of the profitability of cartels. However, Wils concludes that it is difficult to assess the effectiveness of EU antitrust enforcement by considering the incidence of recidivism. This is because the absolute amount of the cartel fines increased over time and the Fining Guidelines were strengthened in 2006, which may have affected the incentives to collude and/ or to report a cartel.

37 C. Harding and A. Gibbs, ‘Why Go to Court in Europe? An Analysis of Cartel Appeals 1995–2004’ (2005) 30 European Law Review 349, 369. 38 Connor (n 7). 39 Werden et al (n 8). 40 For example, Bayer was convicted three times in 2004 and 2005 for cartels in acrylonitrile-butadiene rubber, aliphatic polyester polyols, and rubber chemicals. Similar examples can be found for Akzo (convictions in 2001 and 2006), Ajinomoto (convictions in 2000 and 2002) and Degussa (convictions in 2002 and 2004). 41 W. Wils, ‘Recidivism in EU Antitrust Enforcement: A Legal and Economic Analysis’ (2012) 35(1) World Competition 5.

Cartel activity and recidivism  339 Marvão examines EC cartel fines between 1998, when the first leniency reduction was granted,42 and 2014.43 The paper tries to clarify the definition of recidivism and identifies three categories of recidivism: (i) multiple offenders – any firm fined for two (non-)contemporaneous cartels (17 per cent of the firms in the data); (ii) repeat offender – a firm who starts a new cartel after an investigation started for another cartel (2 per cent); and (iii) true recidivist – a firm who starts a new cartel after a fine (1 per cent). The author states that in the EU, the number of ‘true recidivists’ is not zero – as Werden et al argue that it is for the US44 – as it should be interpreted as a lower bound estimate due to firms participating in uncovered cartels or cartels under investigation at the time of data collection. The focus of the paper is on the empirical examination of the percentage leniency reduction granted to each cartel member. The main result is that recidivism is one of the factors which positively influence the granting and scale of EU leniency reductions. The paper provides some evidence that firms can ‘learn how to play the leniency game’ in the EU, learning either how to cheat or how to report, as the reductions that are given to repeat (and multiple) offenders are substantially higher. Using the same data, Marvão highlights that the mechanism through which recidivists receive larger fine reductions is by being the first reporting firm.45 Levenstein and Suslow expand the data from Bryant and Eckard46 for the same period, by including bid-rigging cases and cases which had been appealed and by adding data up until 2013.47 They gather a total of 1366 Commerce Clearing House reports on 524 distinct cartels during the period of 1961 to 2013. Within these reports, 6 per cent of the cartel members are identified as recidivists. The authors note that collusion is pervasive across industries but fail to establish a systematic relationship between concentration and collusion. Cartel agreements are highly sophisticated, and the determinants of cartel activity are varied and endogenous. Levenstein et al were the first to suggest that variation in collusion at the industry level may reveal novel insights into the structures of those industries and into possible policy implications.48 The authors examine whether recidivism should be discussed at the industry or firm level, finding that industry recidivism has less to do with industry concentration (or other predictable determinants of industry prevalence) but depends in part on the success of prior cartels, such that the focus should be on firm-level recidivism. The paper then examines recidivism at the firm level, searching for patterns and commonalities that may explain it. For example, in the EU, between 1998 and 2014, the sectors with the highest share of convicted recidivists were electrical and transport equipment, whereas the transport sector had the lowest share. Finally, the paper opens the debate on the relationship between firms and industry recidivism regarding multi-market cartel members that may spread collusive practices.

The first decision applying the leniency policy to a cartel case was in 1998, involving British Sugar. The complaint was made in 1994 and, after the introduction of the leniency policy, all four cartel members applied for leniency. Three reductions of 10 per cent and one of 50 per cent were granted. 43 Marvão (n 9). 44 Werden et al (n 8). 45 C. Marvão, ‘Heterogeneous Penalties and Private Information’ (Konkurrensverket Series in Law and Economics Working Paper 2014:1, 2014). 46 Bryant and Eckard (n 36). 47 M. Levenstein and V. Suslow, ‘Price Fixing Hits Home: An Empirical Study of US Price-Fixing Conspiracies’ (2016) 48 Review of Industrial Organization 361. 48 Levenstein et al (n 2). 42

340  Research handbook on cartels The literature on the issue of multi-market contact in the context of collusion is not new. The general theoretical consensus seems to be that multimarket contact facilitates collusion,49 particularly in the presence of an Amnesty Plus programme,50 and the empirical work provides support for it.51 Zhou examines European Commission cartel cases between 1996 and 2014 and finds that the start of an investigation does not affect the rate at which cartel members apply for leniency in the market investigated but increases it in separate markets in which a cartel member also colludes.52 Kovacic et al add to the discussion on the strategic use of leniency and multi-market contact by providing evidence that many large multi-product firms participated in several (and mostly large) EU cartels between 1980 and 2017.53 However, the paper does not empirically analyse the strategic interaction between the cartel members. The relationship between recidivism and the effectiveness of cartels is examined by Connor.54 He proposed assessing recidivism by using the share of ‘global serial cartels’ (‘SC counts’), which refers to the number of offences by a parent firm, anywhere in the world. This is the same measure used by the current author, labelling it ‘share of multiple offenders per cartel’.55 Connor identifies multiple offenders in 86 per cent of worldwide cartels between 1990 and 2015 and concludes that cartels are likely formed with the assistance of firms with a history of collusion. The author recommends that cartel legislation should directly target recidivists and that a broad concept of recidivism should be used. Marvão and Spagnolo examine empirically the likelihood and duration of prison sentences in the US, for individuals involved in collusive behaviour, between 1990 and 2014.56 The analysis shows that individuals involved in cartels with more (or a higher share of) multiple offenders are more likely to avoid a jail sentence. This suggests a learning effect also in the US, which may be connected to the LP if multiple offending firms learn how to use the LP to obtain immunity, thus avoiding pecuniary fines but also jail sentences. Two recent studies provide additional evidence on the existence and extent of recidivism. Abraham and Marvão examine the LP in India and identify 46 out of 197 cartel members fined between 2009 and 2017 as multiple offenders.57 The empirical estimations indicate that multiple offenders obtain larger fine savings, through lower fines and/or higher leniency

See, e.g., D. Bernheim and W. Whinston, ‘Multimarket Contact and Collusive Behavior’ (1990) 21(1) RAND Journal of Economics 1; and L. Marx, C. Mezzetti and R. Marshall, ‘Antitrust Leniency with Multiproduct Colluders’ (2015) 7(3) American Economic Journal: Microeconomics 205. 50 Y. Lefouili and C. Roux, ‘Leniency Programs for Multimarket Firms: The Effect of Amnesty Plus on Cartel Formation’ (2012) 30(6) International Journal of Industrial Organization 624. 51 F. Ciliberto and J. Williams, ‘Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conduct Parameters in the Airline Industry’ (2014) 45(4) RAND Journal of Economics 764. 52 J. Zhou, ‘The Dynamics of Leniency Application and Cartel Enforcement Spillovers’ (TILEC Discussion Paper 2016-006, 2016). 53 W. Kovacic, R. Marshall and M. Meurer, ‘Serial Collusion by Multi-Product Firms’ (2018) 6 Journal of Antitrust Enforcement 296. 54 J. Connor, ‘Serial Collusion and Cartel Effectiveness: Hypotheses, Empirical Regularities, and Implications for Anti-Cartel Penalties’ (17 August 2018) https://​ssrn​.com/​abstract​=3​ 234365 [accessed 16 March 2022]. 55 Marvão (n 9). 56 Marvão and Spagnolo (n 6). 57 V. Abraham and C. Marvão, Leniency of the Competition Commission of India (Mimeo, 2021). 49

Cartel activity and recidivism  341 reductions. In addition, while the Competition Commission of India is able to impose harsher pecuniary sanctions than in jurisdictions such as the EU or the US, the authors show that its fining decisions are inconsistent, lenient and exceedingly appealed.58 The above studies can be interpreted as a lower bound estimate for recidivism; that is, they examine the amount of recidivism in detected and convicted cartel offences. Ormosi suggests that only 20 per cent of all cartels are detected.59 Therefore, to the extent that undetected cartels differ from detected ones in relevant dimensions, the results on recidivism are biased. Le Coq and Marvão address this issue of sample selection bias by using a novel data set of a population of cartels which were legal in Sweden up until 1993.60 The analysis shows that, absent legal cartel enforcement, firms collude in many cartels: 48 per cent of the firms collude in up to 63 cartels over a period of 46 years; and most cartels include recidivists. The authors also shed some light on the characteristics of cartels with recidivists and which: (i) include more homogeneous firms; (ii) are more stable in terms of the number of cartel members; and (iii) have less strict rules, fewer meetings, fewer voting mechanisms and a less delineated hierarchy.

IV.

NEW EVIDENCE ON RECIDIVISM AT THE EU LEVEL

This section explores data on the 161 cartels fined by the European Commission in the period between 1998 and the end of 2020. These cartels include 814 fines imposed on 555 unique firms. The data was collected by the author through publicly available summary reports and associated press releases of the antitrust cases handled by the European Commission and accessible via the Commission’s website. Some of the EU reports were triggered by a previous investigation and/or fine in another jurisdiction. At least 25 per cent of the cartels reported to the Commission by a cartel member were first convicted in the US, and at least another 20 per cent were convicted by US and EU authorities in the same year. An additional 6 per cent were fined by the EU Commission before a US conviction. The remaining cases were discovered due to other reasons, such as reporting by a third party (for example, a customer or rival firm) or under the Commission’s own initiative, perhaps by observing the evolution of prices. A.

Multiple Offending Firms and ‘Leniency Inflation’

Following on from the discussion in Section III.C, Table 19.1 compares the share of recidivists identified in different studies.61 The EU data analysed here includes ten true recidivists (1.8 per cent), that is, firms who entered a new cartel agreement after a fine for another cartel; 18 firms are repeat offenders and 103 are multiple offenders, that is, firms which have been convicted (non-)contemporaneously for at least two cartels.

On the Indian anti-cartel regime, see Chapter 24 in this volume. P. Ormosi, ‘A Tip of the Iceberg? The Probability of Catching Cartels’ (2013) 29(4) Journal of Applied Econometrics 549. 60 C. Le Coq and C. Marvão, ‘Managerial Incentives to Repeatedly Collude: Frequency, Partners and Governance Rules [2020] 4 Concurrences 19. 61 All of the tables for this chapter can be found below; see Annex. 58 59

342  Research handbook on cartels Table 19.2 presents new statistics on the multiple offending firms in the EU since the first leniency application in 1998. The list includes the names of the firms, the number of cartels they have been convicted for by the European Commission, the average LP reduction received and the number of times they received full immunity from fines. These firms have been (found to be) involved in up to nine cartels and it is not uncommon for some degree of LP-related fine reduction to be granted in all these cartels. In fact, the first 15 firms in the table were convicted 5–9 times and received, on average, full fine immunity in 36 per cent of the cartels. Their overall average leniency reduction was also extremely high at around 56 per cent. As discussed in Section III.C, Marvão and Spagnolo document the recent phenomenon of ‘leniency inflation’ at the EU level, that is, the increase in the number and generosity of LP reductions in EC fines.62 Figure 19.1 shows that this phenomenon is mostly driven by leniency reductions granted to multiple offenders.

Figure 19.1

Average leniency reduction per year, for single (‘SO’) or multiple (‘MO’) offending firms (EU cartels, 1998–2020)

The linear trend lines in Figure 19.1 show that, between 1998 and 2020, the average leniency reduction granted went from around 35 per cent to 42 per cent for single-offending firms and to 71 per cent for multiple offending firms. This suggests a learning effect; that is, firms learn how to use the LP for their own benefit. Marvão and Spagnolo (n 6).

62

Cartel activity and recidivism  343 B.

Strategic Use of Leniency

Table 19.3 presents a more in-depth look at multiple offenders to explore whether recidivism may be encouraged by multi-market contact firms and coordination of leniency applications. These two hypotheses are not mutually exclusive, since multi-market collusion may facilitate rotating applications for leniency. If firms collude in multiple markets they may rotate who gets the benefit of reporting the cartel at the end of its life, once the cartel becomes unprofitable. This would allow the cartel members to maintain trust that facilitates collusion in other product markets, since leniency applications would undermine this trust and make collusion in other markets unstable. For this analysis, a matrix of all the interactions between all cartel members convicted at least twice in the period 1998–2020 was constructed by the author. It highlights the enormous number of firms which repeatedly collude with the same firm: 157 pairs of firms interact at least twice. From these pairs, those which have had four or more interactions are described in detail in Table 19.3. As previously mentioned, these numbers should be interpreted as lower bound estimates. 1. Coordinating reports in the EU The optimal scenario is one where firms do not collude because they are afraid of the rush to report in case collusion occurs. However, if cartel members can coordinate LP applications between themselves, they can reduce their expected collective liability while maintaining trust among cartel members. This means that they are still cooperating (that is, colluding) and not competing fiercely in the ‘reporting queue’ but using leniency strategically. Columns 8 and 9 in Table 19.3 report the leniency reduction granted to each firm in all pairs of firms that interact at least four times. In several of these cases it is possible that firms rotated leniency applications by taking turns being the first to report the cartel. For example, in the six cartels in which Akzo and Arkema both participated, the average leniency reductions are 66 per cent and 40 per cent, respectively, with Akzo having been the first reporter in the first (fined in 2003) and fourth (fined in 2008) cartels detected. One other example which includes collusion in the same product but across regions is the cartels in elevators and escalators. Kone reported the cartels in Belgium and Luxembourg, while Otis reported the cartel in the Netherlands in the same year. A third example is the interaction between RBS and UBS. The firms colluded together in four (convicted) cartels. In 2013, RBS reported the cartel in yen interest rate derivatives and obtained immunity from fines. In the same year, UBS reported the cartel in the Swiss Franc interest rate derivatives and obtained immunity from fines. Multi-market firms 2. Multi-market firms may encourage the spread of collusion between markets if they have ‘learned how to collude’ in one market. Theory suggests that if one of the cartel members deviates from the cartel agreement by reporting, the optimal equilibrium is to deviate in all the markets in which it colludes. In the US this seems to be the case, particularly due to the presence of the Amnesty Plus Programme. However, Choi and Gerlach show that reporting in a single market is also an equilibrium if confidentiality agreements are available, the pros-

344  Research handbook on cartels ecution probability is medium to high and the fine–profit ratio is sufficiently large.63 As such, a different way in which firms can use LPs for their own benefit is to maintain collusion in several product markets. If firms collude in different markets, they may be able to sustain collusion with the threat of reporting, since if they report in one market (and not all markets) their cartel partners may report them in a different market. The last column in Table 19.3 describes the product (four-digit NACE code) on which firms colluded. In many cases it appears that firms may be able to use leniency to sustain multi-market contact. For example, RBS and UBS colluded on product NACE codes 64 and 66 and Hitachi and Toshiba on four products across product NACE codes 26 and 27. While the available data does not allow us to conclude whether these firms exploited multi-market contacts to stabilize collusion, it does raise the possibility.

V. CONCLUSION Werden et al argue that, in the US, true recidivism has been eliminated.64 This is not the case in the EU. In fact, the new evidence in this chapter suggests that the number of true recidivists is increasing. The literature has provided some evidence on the existence and extent of recidivism, how recidivists should be dealt with regarding leniency reductions and how they may be able to use leniency strategically. Together with the new evidence provided in Section IV, it suggests that recidivists receive large(r) leniency reductions and may be able to use LPs strategically by frequently being the first LP applicant and/or rotating reports and using multi-market contact. The impact of these findings is twofold. If the recidivists that strategically use the LP are multiple offenders, rather than ‘true recidivists’, this means that leniency is beneficial and gives incentives for firms to repeatedly report cartels (or cooperate with ongoing investigations), thus increasing the success rate of cartel investigations. Conversely, if these recidivists are ‘true recidivists’, then this suggests that deterrence is weak. A theoretical investigation of this issue would be welcome. Ormosi suggests that cartel detection is weak. Consequently, empirically, the impact of firms learning how to play the ‘leniency game’ on deterrence is obscured by a sample selection bias in the sense that one can only study detected and convicted cartels.65 While some authors have tried to find patterns of recidivism at the industry and firm level, the evidence is scarce and inconclusive regarding the relationship between recidivism and firm or cartel characteristics. One avenue which has not been explored in the literature is to examine the geographical location of the multiple offending firms in international cartels, and whether culture can help explain cartel participation. In Japan, large business groups (known as keiretsu) would traditionally organize themselves as cartels of companies with interlocking interests, and this

63 J.P. Choi and H. Gerlach, ‘Global Cartels, Leniency Programs and International Antitrust Cooperation’ (2012) 30(6) International Journal of Industrial Organization 528. 64 ibid. 65 Ormosi (n 59).

Cartel activity and recidivism  345 was supported by the government.66 Although most cartels were made illegal in 1947, the government continues to allow for some exemptions. In fact, a significant share of the multiple offenders in the EU, as shown in Table 19.2, are Japanese firms. While ‘culture’ is not easy to change, it may shed some light on which firms are more likely to repeatedly collude. The EU LP has the potential to become a more powerful deterrence mechanism, but this requires addressing some of its current challenges: leniency inflation, strategic use of leniency and access to leniency statements for private damage claims. In addition to optimal LPs, and to prevent recidivism and collusive behaviour in general, the punishment must fit the ‘crime’. If cartels are not deterred even in the US, where criminal sentences (as well as private damage claims) are present, then one may argue that for EC fines to have a comparable deterrent effect to that in the US their current level is insufficient, such that pecuniary fines should be much larger or criminal penalties should be introduced, as suggested by Marvão and Spagnolo.67 The introduction (and implementation) of criminalization in the EU can be complemented with other tools. Levenstein et al propose using structural remedies as these will have a longer impact than behavioural remedies (previously recommended by Motta et al68) and require little or no monitoring.69 Structural remedies such as disclosure, divestiture of assets, selling minority shares in competitors or licensure of intellectual property to competitors, when efficiently applied, may therefore make collusion less stable. However, what structural remedies might deter collusion is uncertain, particularly since the current literature has been unable to identify structures systematically related to collusion. One suggestion of a structural remedy has been advanced by Harrington.70 The author proposes that deterrence can be increased by using divestitures, such that cartel members would sell productive assets to other firms, to make the market more competitive. Other proactive enforcement tools, such as screens and whistleblower rewards, may also be beneficial when used in moderation and as a complement to optimal leniency programmes and criminal penalties.

S. Martin, ‘Depression Cartels, Market Structure, and Performance’, in D. Mueller, A. Haid and J. Weigand (eds), Competition, Efficiency, and Welfare (Springer, 1991). 67 Marvão and Spagnolo (n 6). See also P. Whelan, The Criminalization of European Cartel Enforcement: Theoretical, Legal, and Practical Challenges (Oxford University Press, 2014) Chapter 3. 68 M. Motta, M. Polo and H. Vasconcelos, ‘Merger Remedies in the European Union: An Overview’ (2007) 52(3-4) Antitrust Bulletin 603. 69 Levenstein et al (n 2). 70 J. Harrington, ‘A Proposal for a Structural Remedy for Illegal Collusion’ (2018) 82(1) Antitrust Law Journal 335. 66

346  Research handbook on cartels

ANNEX Table 19.1

Summary of empirical studies accounting for recidivism

 

Sample

Bryant and Eckard

Recidivism

US

1961–88

World

1990–2009

1300 firms

(n 36)

Multiple

Repeat offender:

True recidivist:

offender:

starts new cartel

Starts new cartel

at least 2

after investigation

after being fined for

fines

for another cartel

another cartel

14%

184 cartels

Connor (n 7)

2114 firms

18%

648 cartels Werden et al (n 8)

US

1999–2011

n/a

Wils (n 41)

EC

2006–10

255 firms

Marvão (n 9)

EU

1998–2014

0 12%

38 cartels

Levenstein and

Table 19.2

4 firms

2.0%

0.8%

113 firms

14 firms 0.7%

2054 firms 524 cartels

5.5%

Sweden

1947–93

23,426 firms

48%

(legal cartels)

2318 cartels

2009–17

197 firms

India

(n 57) This chapter

10 firms

17%

1961–2013

(n 60) Abraham and Marvão

89 firms

113 cartels US

Suslow (n 47) Le Coq and Marvão

510 firms

23%

41 cartels EU

1998–2020

555 firms

103 firms

18 firms

10 firms

161 cartels

19%

3.2%

1.8%

List of multiple offending firms in EU cartels with LP applications (EU cartels, 1998–2020)

Firm name

Nb. Cartels

Average LP red.

Akzo Nobel

9

46%

Nb. Immunity 3

BASF AG

9

47%

0

F. Hoffmann-La Roche

9

47%

0

Samsung

7

61%

3

Denso

6

90%

5

Sumitomo Electric

6

91%

5

Takata

6

92%

5

Autoliv

5

38%

0 3

Aventis Pharma

5

70%

Coats group

5

27%

0

Kühne & Nagel

5

20%

1

Linpac

5

100%

5

Prym group

5

48%

1

RBS

5

46%

1

ThyssenKrupp

5

12%

0

ABB

4

58%

2

Arkema France

4

30%

0

Cartel activity and recidivism  347 Firm name

Nb. Cartels

Average LP red.

Bayer

4

63%

Nb. Immunity 2

Hitachi

4

19%

0

JPMorgan

4

13%

0

KONE

4

63%

2

Mitsubishi Electric

4

1%

0

Otis

4

51%

1

Panasonic

4

40%

1

Schindler

4

4%

0 0

Toshiba

4

0%

UBS

4

83%

3

Valeo

4

59%

1

Vitembal

4

48%

0

AC Treuhand

3

0%

0

Asahi Glass

3

33%

0

Archer Daniels Midland

3

33%

0 1

Barclays

3

67%

Bosch

3

31%

0

Chunghwa Pic.Tubes

3

68%

2

Coopbox

3

27%

0

DHL Global

3

100%

3

Furukawa

3

27%

0

Huhtamaki

3

0%

0

Philips

3

20%

0

SGL Carbon

3

28%

0 1

Shell

3

33%

Sirap-Gema

3

37%

0

Sony

3

17%

0

Total France SA

3

13%

0

TRW (now ZF TRW, Germany)

3

67%

1

UPS Supply Chain Solutions

3

0%

0

Yazaki

3

37%

0 0

YKK group

3

20%

Agility Logistics

2

28%

0

Ajinomoto Co.

2

40%

0

ALSTOM

2

0%

0

AREVA T&D

2

0%

0

Barbour

2

0%

0

Boliden Odda

2

55%

1

BP

2

100%

2

Britannia Alloys & Chemicals

2

25%

0 0

Brugg

2

15%

Carbone Lorraine

2

38%

0

CEVA Freight Limited

2

43%

0

Cheil Jedang

2

35%

0

Chemtura

2

100%

2

Chiquita

2

100%

2

Ciba

2

13%

0 0

Citigroup

2

39%

Clariant

2

65%

1

Continental

2

60%

1

Daesang Corp.

2

50%

0

348  Research handbook on cartels Firm name

Nb. Cartels

Average LP red.

Danone

2

5%

Nb. Immunity 0

Deltafina

2

30%

0

Deutsche Bank

2

31%

0

EKA Chemicals

2

70%

1

Elementis

2

0%

0

ENI Spa

2

0%

0

FMC Corporation/ Foret

2

0%

0

Fuji Electrics

2

20%

0 0

Heineken

2

0%

Hoechst

2

25%

0

Infineon

2

23%

0

Jungbunzlauer

2

20%

0

Kawasaki Kisen Kaisha

2

25%

0

Kemira Oyj

2

50%

1

LG Electronics

2

30%

0 2

Magna

2

100%

Mitsui OSK Lines

2

50%

1

Mueller Industries

2

100%

2

Nippon Steel Chemical

2

18%

0

Nippon Yusen Kaisha

2

10%

0

Nynäs

2

0%

0

Outokumpu

2

50%

0

Panalpina World/ China

2

0%

0

Pilkington Group

2

0%

0 0

Repsol

2

33%

Sanden

2

20%

0

SAS

2

13%

0

Schenker China

2

20%

0

Silver Plastics

2

5%

0

Solvay Pharm

2

23%

0

SYS

2

43%

0 0

Takeda Chemical Industries

2

35%

Tokai Rika

2

73%

1

UCAR International

2

70%

1

Wieland Werke

2

28%

0

Cartel activity and recidivism  349 Table 19.3

Firm i

Firm j

Set of all pairs of multiple offending firms with four or more interactions (EU cartels, 1998–2020) Cartel

US Fine

EU: Investigation and Fine

Cartel

Cartel

LP

LP

duration

size

red.(i)

red.(j)

NACE

  Organic peroxide

2001

2001–03

1971–99

7

100%

50%

2010

MCAA acid

2001

2003–09

1987–2000

8

25%

40%

2013

Akzo

Arkema

Hydrogen peroxide

2001

2003–09

1991–2000

8

40%

30%

2000

Nobel

France

Sodium chlorate

2006

2002–06

1994–2000

9

100%

 

2013

Heat stabilizers (1)

 

2003–08

1994–2000

6

 

30%

2030

Heat stabilizers (2)

2001

1999–2005

1984–2010

4

 

50%

2000

EIRD

 

2011–13

2007–08

7

0

50%

6430

YIRD

 

2013–13

2007–10

7

0

25%

6430

Swiss Franc

 

2013–14

2008–09

4

40%

100%

6619

FOREX I

2015

2013–19

2007–13

5

10%

30%

6430

YIRD

 

2013–13

2007–10

7

25%

100%

6430

Swiss Franc

 

2013–14

2008–09

4

100%

30%

6619

FOREX I

2015

2013–19

2007–11

5

30%

100%

6430

FOREX II

2015

2013–19

2009–12

4

25%

100%

6430

Elevators-Belgium

5

100%

40%

Elevators-Germany

4

50%

25%

4

100%

40%

  J.P. Morgan

RBS

RBS

UBS

  KONE

KONE

KONE

Otis

Otis

Schindler

Otis

Elevators-Luxemb.

 

2004–07

1995–2004

Elevators-Netherlands

4

 

100%

Elevators-Belgium

5

100%

20%

Thyssen

Elevators-Germany

4

50%

 

Krupp

Elevators-Luxemb.

4

100%

 

Elevators-Netherlands

4

 

40%

Elevators-Belgium

5

100%

 

Elevators-Germany

4

50%

15%

4

100%

 

Elevators-Netherlands

4

 

 

Elevators-Belgium

5

40%

 

Elevators-Germany

4

25%

15%

4

40%

 

Elevators-Netherlands

4

100%

 

Elevators-Belgium

5

40%

20%

Thyssen

Elevators-Germany

4

25%

 

Krupp

Elevators-Luxemb.

4

40%

 

Elevators-Netherlands

4

100%

40%

Elevators-Belgium

5

 

20%

Thyssen

Elevators-Germany

4

15%

 

Krupp

Elevators-Luxemb.

4

 

 

4

 

40%

Schindler

Schindler

Elevators-Luxemb.

Elevators-Luxemb.

 

 

 

 

 

2004–07

2004–07

2004–07

2004–07

2004–07

1995–2004

1995–2004

1995–2004

1995–2004

1995–2004

Elevators-Netherlands

2822

2822

2822

2822

2822

2822

  Hitachi

Toshiba

DRAM

2003

2002–10

1998–2002

11

18%

0%

2620

Gas Insulated Sw.

 

2004–07

1988–2004

10

0%

0%

2712

Power Transformers

 

2007–09

1999–2003

7

0%

0%

2711

Optical Disk Drives

2011

2009–15

2004–08

8

50%

0%

2680

350  Research handbook on cartels

Firm i

Firm j

EU:

Cartel

Cartel

LP

LP

duration

size

red.(i)

red.(j)

Freight Forwarding(1)

9

100%

 

Freight Forwarding(2)

9

100%

25%

13

100%

20%

Cartel

US Fine

Investigation and Fine

NACE

  DHL Global

Schenker

Freight Forwarding(3)

11

100%

50%

9

100%

 

9

100%

 

13

100%

 

Freight Forwarding(4)

11

100%

 

Freight Forwarding(1)

9

 

 

Freight Forwarding(2)

9

 

25%

13

 

20%

11

 

50%

Freight Forwarding(2)

Global

Nagel

Freight Forwarding(3)

Schenker

2002–07

Freight Forwarding(4) Kuehne +

Nagel

2007–12

Freight Forwarding(1) DHL

Kuehne +

2007

Freight Forwarding(3)

2007

2007

2007–12

2007–12

2002–07

2002–07

Freight Forwarding(4)

5320

5320

5320

 

Autoliv

Takata

Occupant Safety Systems (I)

2012

2014–17

4

30%

50%

Occupant Safety Systems (II)

2012

2014–17

3

50%

100%

Occupant Safety Systems (IV)

2012

2014–17

2

50%

100%

Safety Systems 2019 (I)

 

2011–19

3

30%

100%

Safety Systems 2019 (II)

 

2011–19

3

30%

100%

2008–2011

2932

 

BASF

Vitamin A

1989–99

3

50%

50%

Vitamin E

1989–99

4

50%

50%

Vitamin B2

1992–95

3

50%

50%

F.Hoffmann-

Vitamin B5

1991–99

3

50%

50%

L.R.

Vitamin C

1991–95

4

50%

50%

Vitamin D3

1994–98

4

50%

50%

Beta-carotene

1992–93

2

50%

50%

Carotinoids

1992–93

2

50%

50%

1999

1999–2001

2120

  Linpac

Vitembal

Retail Food Packaging NEW

 

2008–15

2002–07

4

100%

50%

Retail Food Packaging SWE

 

2008–15

2000–07

5

100%

45%

Retail Food Packaging Fr

 

2008–15

2004–05

5

100%

50%

Retail Food Packaging It

 

2008–15

2002–07

7

100%

45%

2222

20. The criminalization of cartel activity Bruce Wardhaugh

I.

INTRODUCTION: THE TREND TOWARDS CRIMINALIZATION

This chapter considers the normative reasons for the criminalization of cartel activity, focusing, in particular, on the imposition of criminal sanctions on individuals involved in such activity. Criminal sanctions are the harshest punishment a state can mete out to its citizens. Such sanctions are designed to deprive those convicted of their liberty or property, and a conviction may have resulting reputational effects. It is therefore reasonable to demand a justification for the imposition of such sanctions. In other words, we can inquire why cartel activity is sufficiently wrong (or repugnant to society’s values) that it must be addressed with the force of the criminal law. There is, of course, a practical answer to this question: that the criminal law, by the deterrent effect of its sanctions, is a powerful tool to prevent this activity. Although the practical answer may inform the shaping of criminal penalties (should antecedent analysis provide a justification), a practical answer alone begs the normative question. Given the number of jurisdictions which have criminalized cartel activity, and the global movement towards the greater use of such sanctions in the past couple of decades, there is a pressing need to address this normative concern. In 1776, Adam Smith observed: People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty or justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.1

Smith’s observation is almost certainly correct. From a historical perspective, it appears cartels have always been a feature of commerce. Although early records are scarce, the earliest known trial for cartel (or cartel-like) activity appears to have occurred in Classical Athens about 326 bce.2 In that trial, Athenian grain dealers were accused of conspiring to monopolize or otherwise raise grain prices. While the

A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (W. Strahan and T. Cadell, London, 1776) Book I, Chapter 10, Part ii. 2 The prosecution’s speech to the Athenian jury is preserved as Lysias’s ‘Against the Corn Dealers’ (see Lysias (W.R.M Lamb tr, Harvard University Press, 1930) 492–503). See also J. Connor, ‘Forensic Economics: An Introduction with Special Emphasis on Price Fixing’ (2008) 4 Journal of Competition Law and Economics 31, 32–33; and C. Argenton, D. Geradin and A. Stephan, EU Cartel Law and Economics (Oxford University Press, 2020) 1–2. 1

351

352  Research handbook on cartels exact nature of their crimes is uncertain,3 as is the outcome of the trial, we know that the prosecution asked for the death penalty on the grounds of general deterrence.4 There are instances of Roman, Byzantine and medieval laws which restricted profiteering, particularly with respect to essential foodstuffs and other necessities (such as clothing).5 Such laws, while implicitly recognizing the economic effects of monopoly pricing, also likely reflected concern about the social effects of high prices of necessary commodities (for example, food riots). Yet concerns about monopolization did not extend to condemnation of those monopolies held by guilds. By the middle of the nineteenth century, medieval protectionist policies surrounding guilds had disappeared, and laissez-faire capitalism was well into its ascendency. Although the common law had developed a doctrine of restraint of trade, this tradition did not criminalize cartels and cartel behaviour.6 Similarly, the continental legal traditions imposed no criminal penalties on this activity. The first jurisdiction to introduce a criminal cartel offence was Canada, in 1889.7 The details and history (both legislative and subsequent) of the Canadian Act are irrelevant to our task.8 The next year, following the lead of its northern neighbour, the US adopted the Sherman Act.9 However, there was little willingness in other jurisdictions to criminalize cartel behaviour until the 1980s, after which time there was a marked increase in the number of jurisdictions that adopted criminal anti-cartel laws and a symbiotic understanding of the economic consequences of cartel activity.10

R. Seager, ‘Lysias against the Corndealers’ (1966) 15(2) Historia: Zeitschrift für Alte Geschichte 172 4 Lysias (n 2) 500–503. 5 See Argenton et al (n 2) 1. 6 See B. Wardhaugh, Cartels Markets and Crime: A Normative Justification for Criminalisation of Economic Collusion (Cambridge University Press, 2014) 213–15. 7 An Act for the Prevention and Suppression of Combinations Formed in Restraint of Trade, 1889, 52 Vict, Ch 41 (Can). These provisions (albeit amended) were incorporated into the Criminal Code in 1892, and are now included in the Competition Act (RSC 1985, c. C-34) s 45. 8 See J. Ball, Canadian Anti-Trust Legislation (The Williams & Wilkins Company, Baltimore, 1934) and C. Halladay, ‘The Origins of Canada’s Cartel Laws’ (2012) 25 Canadian Competition Law Review/Revue Canadienne de Droit de la Concourrence 157. For an interesting perspective see also W.L. Mackenzie King, ‘The Canadian Combines Investigation Act’ (1912) 42 Annals of the American Academy of Political and Social Science 149. 9 26 Stat 209, codified as 15 USC §§ 1–7. On the legislative history of that Act, see, e.g., W. Letwin, ‘Congress and The Sherman Antitrust Law: 1887–1890’ (1956) 23 University of Chicago Law Review 221; R. Peritz, Competition Policy in America: History, Rhetoric, Law (Oxford University Press, 2000); and Wardhaugh (n 6) 114–25. 10 See G. Shaffer, N. Nesbitt and S. Weber Waller, ‘Criminalizing Cartels: A Global Trend?’, in J. Duns, A. Duke and B. Sweeney (eds), Comparative Competition Law (Edward Elgar Publishing, 2017); they also note that several jurisdictions criminalized bid rigging. This was as result of those offences being viewed as akin to fraud (or, in public procurement cases, theft from the treasury). The only criminal competition crime in Germany concerns bid-rigging: Criminal Code (Strafgesetzbuch, StGB) § 298. On this, see C. Vollmer, ‘Experience with Criminal Law Sanctions for Competition Law Infringements in Germany’, in K. Ceres, M.P. Schinkel and F. Vogelaar (eds), Criminalization of Competition Law Enforcement: Economic and Legal Implications for the EU Member States (Edward Elgar Publishing, 2006) 257; and F. Wagner-von Papp, ‘What if All Bid Riggers Went to Prison and Nobody Noticed? Criminal Antitrust law Enforcement in Germany’, in C. Beaton-Wells and A. Ezrachi (eds), Criminalising Cartels: Critical Studies of an International Regulatory Movement (Hart, 2011) 3

The criminalization of cartel activity  353 This trend towards expanded criminalization therefore merits careful consideration. In the next two sections, we will consider the normative and pragmatic justifications for cartel criminalization. We note the dependency of the latter on the former. If there is no normative reason why criminal sanctions should be applied to cartel activity, there would also be no practical reason to apply such punishment. A final substantive section that considers the relationship between public opinion towards cartel activity and public views of moral wrongfulness will follow these sections. This final section is significant given the relationship between the moral force of criminal law and the norms of the society governed by that law. If there is a gap between what the law criminalizes and what members of society view as wrong, that element of the criminal law loses the normative force it may once have had. Hence, when one considers the possibility (or the need for) criminalization of cartel activity, one must also consider public opinion and the possible evolution that opinion to determine the strength of social support for the imposition of criminal penalties on those who engage in that sort of activity.

II.

NORMATIVE JUSTIFICATIONS FOR CRIMINALIZATION

The central question of concern to us is the normative (or moral) basis for the criminalization of cartels in a given society. This requires two lines of analysis. The first is the general issue of what kinds of behaviour ought a society to make the subject of criminal sanctions; and the second is the more specific question of addressing how cartel behaviour fits into the answer given by the more general question. A.

Why Criminalize Behaviour in a Liberal Society?11

Cartel behaviour takes place in the context of a market economy. As noted above, cartels and concerns about monopolies coexist with commerce, that is, market exchanges. It makes no sense to talk about harms to competition in economies where goods and services are distributed via a planned economy (that is, where markets are not a means of distribution). Market-based economies are one element of a liberal society. These sorts of societies are social orderings characterized by respect for personal autonomy where individuals are able to arrange their own lives in accordance with their preferences. Indeed, markets and a market-based system of distribution are frequently praised for their advantages in being responsive to participants’ needs and preferences. They produce what consumers want, in the right quantities, with competition among producers ensuring that qualitative improvements are made to the products and services that are produced. Hence, the first question can be reformulated to ask: on what normative basis can a liberal society – which seeks to enhance individual autonomy – criminalize behaviour? The harm principle is usually invoked to answer this question. This principle holds that a justification for prohibiting some forms of behaviour is the propensity of this behaviour to cause harm,

157. See also C. Harding and J. Joshua Regulating Cartels in Europe (2nd edn, Oxford University Press, 2010). 11 This discussion is based on my previous work, in particular B. Wardhaugh, ‘A Normative Approach to the Criminalisation of Cartel Activity’ (2012) 32 Legal Studies 369; and Wardhaugh (n 6) 18–51.

354  Research handbook on cartels and in particular harm to others. Although his argument in support is complex (and present constraints prevent comprehensive discussion),12 J.S. Mill states the principle thus: that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection. That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant.13

Yet, Mill recognizes, not all harms should merit protection. He further argues: In many cases, an individual, in pursuing a legitimate object, necessarily and therefore legitimately causes pain or loss to others, or intercepts a good which they had a reasonable hope of obtaining […] Whoever succeeds in an overcrowded profession, or in a competitive examination […] reaps benefit from the loss of others, from their wasted exertion and their disappointment. But it is, by common admission, better for the general interest of mankind, that persons should pursue their objects undeterred by this sort of consequences. In other words, society admits no right, either legal or moral, in the disappointed competitors, to immunity from this kind of suffering; and feels called on to interfere, only when means of success have been employed which it is contrary to the general interest to permit – namely, fraud or treachery, and force.14

Under this view, harm per se is insufficient to justify the criminalization of a given activity. To justify criminalization, the harm must strike at a sufficiently relevant interest. I have argued elsewhere that certain forms of harms to social institutions – in particular to the market and market activity – merit condemnation via the criminal law. This argument is based on the fundamental role which the market has as an institution of distributive justice in a liberal society.15 Developing this argument in greater detail is beyond the scope of the present chapter. Hence our present task is to consider the harms occasioned by cartel activity, in order to determine the extent to which these can be used to justify criminal sanctions. The literature on cartels has identified the following as sources of social and economic harm: 1. 2. 3. 4. 5. 6.

Raising prices (appropriation of consumer welfare); Creating deadweight loss; Creation of social waste; Hindering development of improved products and processes; Exacerbation of X-inefficiency; and Secret self-exception to the understood rules of the market.

Although there may be other harm created by cartel activity, and thus potentially other normative justifications for criminalizing this activity, these five sources of harm are the most commonly discussed.16

The details of Mill’s argument are discussed ibid. J.S. Mill, On Liberty (1859), reprinted in J.M. Robson (ed.), The Collected Works of John Stuart Mill Vol. XVIII: Essays on Politics and Society (University of Toronto Press, 1977) 223–24. 14 ibid 292–93. 15 See Wardhaugh (2012) (n 11) 383–85 and 390–94; and Wardhaugh (n 6) 33–37 and 43–48. 16 On the economic harms from cartel activity, see Chapter 2 in this volume. 12 13

The criminalization of cartel activity  355 1. Raising prices (appropriation of consumer welfare) It is an indisputable fact derived from simple microeconomic theory (and confirmed by people’s experience in the market) that (successful) cartels raise the price of goods. This is the main reason why cartelists enter into such arrangements. As a result of this increase in prices, consumers pay more for the good than they would have paid in a competitive (that is, non-cartelized) market. As a result, the consumer has less money left over to spend on other goods. Otherwise put, the cartelist has appropriated some or all of that customer’s consumer surplus. It is because of this effect of cartel activity that it has been regarded as tantamount to theft. In this regard, Neelie Kroes, when EU Competition Commissioner, stated that cartels ‘rip-off consumers’.17 This narrative of cartelists as ‘well-dressed thieves’18 can also be found in comments by Richard Whish: ‘However, if competition policy is about one thing, it is surely about the condemnation of horizontal price-fixing, market-sharing and analogous practices: on both a moral and practical level, there is not a great deal of difference between price-fixing and theft.’19 And it is also very forcefully reflected in the statements of the Antitrust Division of the (US) Department of Justice: ‘Price-fixing, bid-rigging, and market allocation agreements are economic crimes with potentially devastating effects on the U.S. economy. They rob purchasers, hurt workers, contribute to inflation, destroy public confidence in the economy, and undermine our system of free market competition.’20 However, it is not possible to immediately draw the conclusion that cartelists are thieves from the premise that cartelists appropriate consumer surplus. Rather, there is a need to add an intermediate premise, which somehow assigns a right (or some other legally protected interest) to the consumer surplus.21 In the normal course of events, property rights (as protected interests) are defined prior to participants engaging in market transactions. To meaningfully suggest that a cartelist commits theft by appropriating consumer surplus requires a prior legal assignment of property rights in consumer surplus to the consumer. Antitrust laws have the effect of making this assignment. Indeed, a reasonable reading of the legislative history of both the Sherman Act and the 1889 Canadian Act is that both had this as one of their primary goals.22 Thus, as American antitrust law has now been interpreted, the US Supreme Court can reasonably claim ‘that Congress designed the Sherman Act as a N. Kroes, ‘Tackling Cartels – A Never-Ending Task’, Anti-Cartel Enforcement: Criminal and Administrative Policy – Panel Session, Brasilia, SPEECH/09/454, 8 October 2009. 18 ‘Well-Dressed Thieves: Why the Threat of Prison Is Necessary to Deter Cartels’ The Economist (21 February 2008) www​.economist​.com/​finance​-and​-economics/​2008/​02/​21/​well​-dressed​-thieves [accessed 24 February 2022]. 19 R. Whish, ‘Recent Developments in Community Competition Law 1998/99’ [2000] European Law Review 219, 220. 20 US Department of Justice, Antitrust Division, An Antitrust Primer for Federal Law Enforcement Personnel (August 2003, Revised September 2018) www​.justice​.gov/​atr/​file/​761666/​download [accessed 24 February 2022] 1. 21 See, e.g., P. Whelan, ‘Cartel Criminalization and the Challenge of Moral Wrongfulness’ (2013) 33(3) Oxford Journal of Legal Studies 535, 544–45. 22 On the Sherman Act, see Wardhaugh (2012) (n 11) 114–47; and R. Lande, ‘Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged’ (1982) 34 Hastings Law Journal 67. On the Canadian Act, see Ball (n 8) 3–12. 17

356  Research handbook on cartels “consumer welfare prescription”’.23 The EU’s Competition Commission has expressed similar sentiments.24 But this legal assignment also begs the normative question of why the legal rights should be assigned to consumers, as opposed to assigned to producers, left unassigned to be bargained over in the marketplace or replaced with a total welfare standard. Indeed, given the voluntary nature of most market transactions, one can suggest that being aggrieved by ‘having less money than I otherwise could have had’ after such a transaction is more of a feeling of being hard done by than of being a victim of a crime. This is more of a sense of ‘I didn’t get as good of a bargain as I might have otherwise got’, rather than the violation of being mugged at gunpoint. There is an involuntary element to theft. That element is generally not present when one overpays as a result of elevated prices due to cartel activity. The selection of consumer surplus as the quality which is legally protected is almost certainly based on distributive concerns.25 These concerns dictate that an apparently wider distribution of benefits over a population is preferable; hence the protection of consumer welfare is to take normative priority over the (perceived additional) wealth of comparatively fewer producers. Given the above, a legal assignment of property rights in consumer surplus to consumers would act as an appropriate legal principle to justify the claim that price fixing should be regarded as akin to theft. Normative support for this legal principle can be found by appeal to appropriate distributive considerations, of the sort that would suggest the preferability of a wider social distribution of this benefit. Hence, such an argument could serve as one such normative justification for the imposition of criminal penalties on cartelists.26 2. Creating deadweight loss Cartels are viewed as harmful because they create a deadweight loss to society. This deadweight loss is occasioned by the cartel’s effect on prices, raising it above the reservation price of a set of consumers. As a result, consumers who would have been willing to purchase the good at the (lower) competitive price are now prevented from purchasing the product. In other words, deadweight losses are the social cost of frustrated non-consumption of a good. It is difficult to see how a strong argument could be constructed which would criminalize those who caused this particular state of affairs. Any such argument would likely be an extension of an argument which criminalized the appropriation of consumer surplus. However, this extended argument would have to overcome the objection that when consumer surplus is ‘taken’ by the cartelist, this was a result of an overpayment during market transaction. But with deadweight losses, by definition, no transaction occurred.

Reiter v Sonotone Corporation et al 244 US 330 (1978) 343, citing R. Bork, The Antitrust Paradox: A Policy at War with Itself (Basic Books, 1978) 66. 24 Guidelines on the Application of Article 81(3) of the Treaty (Text with EEA Relevance) [2004] OJ C-101/97, para 13: ‘The objective of Article 81 [now 101 TFEU] is to protect competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources.’ See also ibid para 33. 25 See, e.g., L. Kaplow, ‘On the Choice of Welfare Standards in Competition Law’, in D. Zimmer (ed.), The Goals of Competition Law (Edward Elgar Publishing, 2012); and H. Hovenkamp, ‘Distributive Justice and the Antitrust Laws’ (1982) 51 George Washington Law Review 1. 26 In spite of this suggestion, there are some obstacles which this justification must overcome, as I have previously suggested; see Wardhaugh (n 6) 37–40; and Wardhaugh (2012) (n 11) 386–88. 23

The criminalization of cartel activity  357 3. Creation of social waste Posner has noted that cartels (and monopolies) impose further costs, beyond the costs they directly impose on consumers and the deadweight losses imposed on society. These costs are those associated with obtaining and maintaining their position.27 They include (for legal monopolies) the lobbying and regulatory costs to obtain a licence or trade barriers and (with cartels) the costs of avoiding detection, and of administering and policing the agreement.28 These are transfers of wealth: lobbying costs are transfers to the political classes; administrative costs are to the legal industry. To the extent that some of these transfers may be bribes, they are illegal on that basis. Seen in this light, it is difficult to see how this could provide an independent ground for the criminalization of cartel activity.29 4. Hindering development of improved products and processes In addition to collusion on price, cartelists can (and do) collude to avoid competition on producing new (‘better’) products or more efficient means of producing existing products, and passing these savings on to consumers in the form of ‘cheaper’ products. These productive inefficiencies30 purportedly ‘harm’ consumers by depriving them of better or cheaper goods. The former harm either reduces (or is similar to) the harm occasioned by deadweight losses discussed above. The latter harm reduces to, at best, a form of the harm caused by the cartelists’ elevation of price. These appear to be weak justifications for criminalizing cartel activity. The former claim would entail recognition (and criminalization) of harms caused by the non-fulfilment of a desire for a non-existent product.31 Further, the latter claim of harm is that failure to invest in more efficient processes thereby makes existing products more expensive than they would be in a competitive market. This claim is parasitical on, if not identical to, claims regarding the harms caused by increased prices caused by cartel activity. It is not an independent normative ground.32 5. Exacerbation of X-inefficiency X-inefficiency is managerial ‘slack’.33 It arises when those running cartels opt for the ‘quiet life’ – one free from the competitive pressures of having to increase sales, develop new products and the like – while, due to cartel activity, their enterprises nevertheless receive a sufficient revenue stream. As Motta notes, ‘managers care about their individual utility, determined by wage, career prospects, as well as the level of effort and time they have to put into the 27 R. Posner, ‘The Social Cost of Monopolies and Regulation’ (1975) 83 Journal of Political Economy 807, 809–15. 28 Case C-194/14 P, AC-Treuhand AG v Commission, ECLI:​EU:​C:​2015:​717, 22 October 2015 is an interesting illustration of this. Treuhand organized cartel meetings, exchanged data and mediated disputes among members (see ibid para 47). 29 See Wardhaugh (n 6) 41–42; and Wardhaugh (2012) (n 11) 388–89. 30 See M. Motta, Competition Policy: Theory and Practice (Cambridge University Press, 2004) 45–51. 31 We can, of course, suffer similar frustration when a wanted product’s release is delayed (think here of a movie or videogame, for instance). But it is a significant normative jump to argue that causing these sorts of frustration should be criminalized. 32 See further Wardhaugh (n 6) 42–43; Wardhaugh (2012) (n 11) 389–90. 33 H. Leibenstein, ‘Allocative Efficiency vs. X-Inefficiency’ (1966) 56 American Economic Review 392.

358  Research handbook on cartels job’.34 As a consequence of the X-inefficiency which cartel activity can offer, the managers in question do not have to work hard, and will still keep their jobs. However, the harms which X-inefficiency causes are unlikely to be the sorts of harms which the criminal law ought to prevent. One perspective of X-inefficiency is that it is a form of diminished return to owners: this behaviour increases the firm’s costs. Viewed in this light, the use of the criminal law to prevent this is inappropriate: there are other, more proportionate means to align the incentives of managers and owners than the criminal law. Another perspective (which does not exclude the first) is that X-inefficiencies are another form of productive inefficiencies. The latter perspective reduces to the general case of productive inefficiencies, which we discussed – and dismissed as an appropriate justification for criminal sanctions – earlier. 6. Secret self-exception to the understood rules of the market A further normative argument in support of criminalizing cartel activity is that such activity undermines our confidence in the market as society’s instrument of distributive justice.35 A market-based system of distributive justice assumes that those engaged in market activity adhere to a certain set of rules, which include that prices reflect the competitive conditions of the marketplace. By agreeing, secretly, to fix prices or collude on other parameters of competition, cartelists violate these rules – in Kantian terms, by creating a (secret) self-exception to the universal rule. By fixing prices, the cartelist engages in a form of cheating which undermines social confidence in the market. This is the harm which is of significance. That harm is somewhat analogous to (but more profound than) the harm which occurs to a sport when cheating is uncovered. The spectator discovers that rather than the event being decided by fair competition, the outcome was the result of a prearranged agreement. This, of course, brings all outcomes (past and future) into question, and undermines the credibility of the sport. Given the significance which the market has in a liberal society as a result of its fundamental role as a means of distributive justice, the argument concludes that such a society is entitled to use the coercive force of the criminal law to prevent market confidence from being undermined. 7. The existence of other normative concerns The above list of possible normative justifications for the criminalization of cartel conduct is by no means complete. It is merely a list of the most commonly identified economic harms which cartels produce and how they can (or cannot) serve to justify the employment of criminal sanctions. However, the ingenuity of legal theorists will mean that others are likely to be developed.

Motta (n 30) 47. See P. Whelan, ‘A Principled Argument for Personal Criminal Sanctions as Punishment under EC Cartel Law’ (2007) 4 Competition Law Review 7; P. Whelan, The Criminalization of European Cartel Enforcement: Theoretical, Legal and Practical Challenges (Oxford University Press, 2014); Wardhaugh (n 6) 18–51; and Wardhaugh (2012) (n 11). 34 35

The criminalization of cartel activity  359 B.

The Normative Foundation of Existing Criminal Cartel Laws

From what has been seen above, raising prices and secret self-exceptions appear to provide the most secure normative justifications for the criminalization of such behaviour. In this regard, the US’s Sherman Act and the UK’s criminal cartel provisions can be seen as instances of this. 1. The Sherman Act and a property right in consumer welfare Section 1 of the Sherman Act criminalizes cartel activities. To the extent that the US Supreme Court is correct in its assertion that this Act is a consumer welfare prescription, the Sherman Act could be viewed as a legal assignment of this welfare to consumers. The legislative history of that Act shows concern for its distributive consequences, preferring the benefit of consumers to those of producers.36 As Senator Sherman remarked in introducing his bill, its purpose ‘is to arm the Federal courts within the limits of their constitutional power that they may co-operate with the State courts in checking, curbing, and controlling the most dangerous combinations that now threaten the business, property, and trade of the people of the United States’.37 It does so because: The sole object of such a combination is to make competition impossible. It can control the market, raise or lower prices, as will best promote its selfish interest, reduce prices in a particular locality and break down competition and advance prices at will where competition does not exist […] The law of selfishness, uncontrolled by competition, compels it to disregard the interest of the consumer.38

Although divining legislative intent from the statements of individual legislators during debate is difficult, these remarks provide some support for this normative backbone of the American law. 2. The UK’s cartel offence and secret self-exceptions The Enterprise Act 2002 (‘EA’) established the UK’s original cartel offence. That Act made it a criminal offence for an individual to dishonestly cause or implement cartel activities (including bid rigging). ‘Dishonesty’ was evaluated using the now rejected Ghosh39 test, which required proof of both objective and subjective elements of the defendant’s conduct and state of mind.40 That original offence proved to be a weak deterrent, as the (now defunct) Department for Business, Innovation and Skills was to admit in a consultation on reform to the offence. It remarked: ‘only two cases have so far reached trial stage and only one of them

See, e.g., Reiter v Sonotone Corporation et al 244 US 330 (1978) (per Berger CJ). 21 Cong Rec 2457 (1890). 38 ibid (emphasis added). 39 R v Ghosh [1982] QB 1053. The test was rejected by the Supreme Court in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67, para 74 (holding that ‘[the] second leg of the test propounded in Ghosh does not correctly represent the law’). Ivey was decided too late to ‘save’ the original cartel offence. 40 The objective test was ‘whether according to the ordinary standards of reasonable and honest people what was done was dishonest’ (R v Ghosh [1982] QB 1053, 1064); and the subjective test, ‘whether the defendant himself must have realised that what he was doing was by those standards dishonest’ (ibid). 36 37

360  Research handbook on cartels resulted in convictions.’41 This is disingenuous: the trial collapsed in a spectacular fashion,42 and the ‘conviction’ in fact resulted from a plea-bargaining process motivated by a desire to serve a prison sentence in a UK rather than an American prison.43 It is almost certain that the dishonesty requirement (and its legal and evidentiary burdens) killed the original defence.44 The UK’s ‘new’ cartel offence, now found in s 188 (as amended45) of the EA, was a result of a 2011 consultative process.46 The result of this process was that the government decided to ‘remove the “dishonesty” element from the offence and define the offence so that it does not include cartel arrangements that the parties have agreed to publish in a suitable format before they are implemented, so that customers and others are aware of them’.47 Publication in the London Gazette (or similar) would be deemed to be sufficient notice.48 In its Response the government focused only on what were perceived as the practical advantages of the redefined offence,49 only obliquely noting why ‘secrecy’ should be part of the defining characteristics of the offence. The government noted that Commission discussions of hard-core cartels often focus on the secretive nature of the activity.50 Presumably, this secrecy by the participants is their recognition that they are doing wrong.51 This new cartel offence is defined in ss 188–188B of the EA. Section 188 defines the offence in terms of six instances of standard hard-core cartel activity (price fixing, output/ supply reduction, customer or market allocation and bid rigging). Section 188A of the Act

Department for Business, Innovation and Skills, A Competition Regime for Growth: A Consultation on Options for Reform (2011) 61–62. 42 R v Burns and others (Southwark Crown Court). The prosecution offered no evidence and an acquittal was directed on 10 May 2010; see https://​webarchive​.nationalarchives​.gov​.uk/​20140402171229/​http://​ www​.oft​.gov​.uk/​OFTwork/​competition​-act​-and​-cartels/​criminal​-cartels​-completed/​fuel​-surcharges​ -proceedings [accessed 24 February 2022]. As a result, the matter was subject to internal review which found the Office of Fair Trading (which was responsible for the prosecution) had ‘made mistakes’. See Office of Fair Trading, Project Condor Board Review https://​assets​.publishing​.service​.gov​.uk/​media/​ 55687​6fce5274a1​895000008/​Project​_Condor​_Board​_Review​.pdf [accessed 24 February 2022] 1. 43 R v Whittle, Allison and Brammar, Crown Court Sentencing (11 June 2008) https://​webarchive​ .nationalarchives​.gov​.uk/​20140402155736/​http://​www​.oft​.gov​.uk/​OFTwork/​competition​-act​-and​ -cartels/​criminal​-cartels​-completed/​marine​-hose [accessed on 24 February 2022]; [2008] EWCA Crim 2560. The defendants appealed the sentence imposed by the Crown Court, but in their appeal requested the Court of Appeal not to reduce their sentence to below that which was agreed by the US authorities as part of their plea bargain. This was an unusual request (‘give us less jail, but not too much less’), about which the Court had reservations (at paras 27–32). 44 See A. Stephan, ‘How Dishonesty Killed the Cartel Offence’ [2011] Criminal Law Review 446; see also Department for Business, Innovation and Skills, Growth, Competition and the Competition Regime: Government Response to Consultation (March 2012) para 7.8. 45 By s 47 of the Enterprise and Regulatory Reform Act 2013. 46 See Department for Business, Innovation and Skills (n 41); and B. Wardhaugh, ‘The Cartel Offence within a “World Class” Competition Regime: An Assessment of the BIS Consultation Exercise and Its Results’ (2012) 8 European Competition Journal 573; and P. Whelan, ‘Section 47 of the Enterprise and Regulatory Reform Act 2013: A Flawed Reform of the UK Cartel Offence’ (2015) 78 Modern Law Review 493. 47 Department for Business, Innovation and Skills (n 44) 66 and para 7.26. 48 ibid para 7.26. 49 See ibid paras 7.26–7.36. 50 ibid para 7.30. 51 But this, in itself, is insufficient as a normative premise: thinking you are doing wrong and doing wrong are two different concepts. The latter is the normative concern. 41

The criminalization of cartel activity  361 enumerates a set of circumstances under which the offence is not committed. In essence, these are circumstances relating to situations where ‘relevant information’ is disclosed to customers, is disclosed to those requesting bids or is published in a manner directed by the Secretary of State. Section 188B provides a defence for an individual charged to show that they did not intend the offence to be concealed.52 By exempting hard-core cartels which are openly conducted, the new offence reflects moral norms which condemn deception and secret self-exception to universally applicable principles of conduct. In the absence of a declaration to the contrary, the cartelist engages in deception by creating the circumstances that allow its customer to believe that the price was established by market forces, when it was a result of an anticompetitive agreement.53 Indeed, this is well captured in the sentencing remarks of HH Judge Rivlin in Whittle, Allison and Brammar: ‘the great mischief of the offence is not just the amount of money involved, but the damaging effect that it is bound to have upon the confidence with which the business community is entitled to have in the integrity of the whole process of contract bidding.’54 Removing the dishonesty requirement from the cartel offence was an improvement, but the new offence is far from ideal.55 However, it does illustrate an attempt at the use of self-exception and consequent deception as the normative basis for criminalizing cartel activity. In the first of these subsections, we identified the two strongest normative arguments for criminalization of cartel activity. These were viewing that activity as a form of theft, and viewing that activity as creating a self-exception to general and expected moral and social norms. In the second subsection, our brief consideration of the US and UK regimes served to illustrate how the two regimes have adopted these differing normative approaches to their criminal cartel offence. The difference is illustrated in the activities captured, and explained as a result of differing conceptions of the moral norm which the cartelist’s conduct violates. The former regime focuses on the consumer welfare losses caused by cartel activities, and has the effect of establishing a legal assignment of this to consumers. This regards price fixing as a form of theft, and uses the established moral norms against theft to provide a normative justification for criminalizing cartel activity. The latter regime focuses on the clandestine nature of the conduct. This implicitly recognizes that the cartelist is creating a situation whereby it secretly carves out a self-exception to the established market norms, or – viewed alternatively – creating a situation where it can deceive prospective customers into believing that the price was established via this market mechanism. From either perspective, the moral maxim incorporated into this regime reflects the norm that condemns non-adherence (or creating a self-exception) to universal rules.

Section 188B(3) provides a defence for an individual to show that ‘he or she took reasonable steps to ensure that the nature of the arrangements would be disclosed to professional legal advisers for the purposes of obtaining advice’ before implementing the agreement. There is no requirement than any advice needed to be acted upon. On s 188B(3), see Whelan (n 46) 517–20. 53 See Whelan (n 46) 511–14; Wardhaugh (n 6) 45–46; and Wardhaugh (2012) (n 11) 391–92. 54 Crown Court transcript (n 43) 14. 55 See Whelan (n 46) passim. 52

362  Research handbook on cartels

III.

PRAGMATIC JUSTIFICATIONS FOR CRIMINALIZATION

A pragmatic justification for criminalizing cartel activity starts from the position that this behaviour is unwanted, and establishes that criminal sanctions are an effective means of reducing the prevalence of this behaviour in the economy of the jurisdiction. Those working in competition law and policy are well aware of these harms (indeed, they were identified in the previous part of this chapter). Accordingly, the starting point of this justification is not in dispute. Pragmatic arguments need to establish that criminalization reduces the behaviour, and does so in a manner which is consistent with other legal norms. These norms include considerations of administrative costs, proportionality of sanctions and the relationship that individual criminal sanctions may have with other elements of a general anti-cartel regime (in particular administrative sanctions on firms and civil actions for damages). There may be an overlap between pragmatic and normative considerations. A.

Criminalization and Lack of Recidivism

Cartel activity is, by nature, a clandestine activity. Accordingly, it is difficult to accurately measure its incidence within in an economy. Further, even if the incidence of cartel activity can be accurately measured, there are additional legal and cultural considerations which would preclude precise causal explanations between criminalizing the activity and its incidence.56 However, recidivism may be one possible measure of the efficacy of cartel criminalization. The American anti-cartel regime is globally perceived as imposing severe sanctions. Since roughly 1981, the sanctions and the number of prosecutions for this activity have increased.57 There is strong anecdotal evidence that in some cartels, cartelists have divided up the rest of the world while not making agreements about the American market, in an effort to escape American sanctions. A prison sentence is almost an inevitability for a conviction or guilty plea under the Sherman Act.58 As a result, the US Department of Justice proudly states: ‘No company and no individual convicted in the US of a cartel offense after July 23, 1999 subsequently joined a cartel prosecuted in the United States. Moreover, no company and no individual granted conditional leniency after July 23, 1999 subsequently joined a cartel prosecuted in the United States.’59 The 1999 date refers to the date on which the first non-US citizens were sentenced to a period of imprisonment as a result of their participation in the vitamins cartels.60

56 See A. Hyytinen, F. Steen and O. Toivanen, ‘Cartels Uncovered’ (2018) 10 American Economic Journal: Microeconomics 190 and P. Bryant and E. Eckard, ‘Price Fixing: The Probability of Getting Caught’ (1991) 73 Review of Economics and Statistics 531. 57 V. Ghosal and D.D. Sokol, “The Evolution of US Cartel Enforcement” (2014) 57 Journal of Law and Economics S51, S58–S61. 58 Judges will incarcerate elderly cartelists. For example, Alfred Taubman, then 78 years old, was given a sentence of one year and one day for his role in the Art Auction cartel: US v Taubman (2002 WL 34387010, SD NY, 23 April 2002). 59 G. Werden, S. Hammond and B. Barnett, ‘Recidivism Eliminated: Cartel Enforcement in the United States Since 1999’, Georgetown Global Antitrust Enforcement Symposium Washington, DC, 22 September 2011, 6. 60 ibid 4.

The criminalization of cartel activity  363 In contrast to the American success, the EU’s regime is less effective. That regime does not impose sanctions on individuals for cartel activity; rather, it imposes fines (often substantial) on undertakings involved in this activity. In his 2010 study of cartels and recidivism, Connor notes: 52 firms were members of seven or more cartels; 26 were in ten or more cartels; and six companies engaged in 20 or more cartels […] These top recidivists are primarily headquartered in the EU. The largest single number (eight of the 52) is French firms; indeed, three of the top six firms – each with at least 20 examples of recidivism – are French. The remaining European recidivists are mainly headquartered in Germany and other northern nations.61

Connor might be rightly criticized for using an atypically broad definition of ‘recidivism’.62 However, even if Connor overestimates European recidivism, this does not speak against the general principle that there is less recidivism under the American system. An explanation for this lack of recidivism might be found in the targeting of sanctions. The American criminal regime targets both the individual and the firm participating in cartel activity; the European administrative regime targets only the firm. Targeting individuals who commit these crimes is likely more effective than targeting their employer. B.

Individual Sanctions vs Corporate Sanctions

To paraphrase the (American) National Rifle Association, ‘companies don’t cause cartels, people employed by companies do’. This is reflected in the comments of a former US Deputy Attorney General, who remarks: Corporations only commit cartel offenses through individuals, so executives as well as their employers need to be deterred from engaging in such conduct. Hard-core cartel offenses are premeditated offenses committed by highly educated executives. Before deciding whether to commit the offense, those executives weigh the risk and consequences of detection against the potential financial rewards of colluding.63

It is individuals who meet to arrange cartels and implement the practices they agreed upon. These individuals also benefit from the implementation of these strategies: they need not compete as hard (X-inefficiencies), and may achieve a supra-competitive return for their efforts, thereby making them candidates for bonuses or promotion. Their firm also benefits. However, in the absence of individual sanctions, the costs of this activity will be borne by the firm. The firm is responsible for paying the fine, and in the time between the start of the investigation and the announcement of the Decision,64 the individual responsible may have 61 J. Connor, ‘Recidivism Revealed: Private International Cartels 1990–2009’ (2010) 6 Competition Policy International 101, 111. 62 The usual understanding of a recidivist is one who reoffends after ‘conviction’. Connor includes within his definition those participating in more than one cartel prior to ‘conviction’. However, this broad sense does not undermine the chosen definition’s use as a measuring device for cartel prevalence. 63 S. Hammond, Deputy Assistant Attorney General for Criminal Enforcement, Antitrust Division, US Department of Justice, ‘Charting New Waters in International Cartel Prosecutions’, Remarks at the National Institute on White Collar Crime, 2 March 2006. 64 K. Hüschelrath, U. Laitenberger and F. Smuda, ‘Cartel Enforcement in the European Union: Determinants of the Duration of Investigations’, ZEW Discussion Paper No 12-071 http://​ftp​.zew​.de/​

364  Research handbook on cartels moved to another firm, may have retired, or in some cases may still be employed with the original firm. If no costs are imposed on the prospective cartelist/employee, then there is little to dissuade individuals from engaging in this activity. This is an instance of the principal/agent problem endemic to much corporate activity. When the costs of an activity exceed the benefits of that activity, rational actors will not participate in the activity. And, as Becker has noted, crime is one such activity.65 General deterrence can be achieved by increasing the expected costs (the penalty multiplied by the probability of its imposition) of criminal activity so that it exceeds the expected benefits. Criminal sanctions can be targeted at individuals. Incarceration and personal disqualification (for example, director disqualification and/or loss of civil liberties66) are examples of this type of sanction. It is submitted that a credible threat of incarceration provides an important means of increasing the expected costs of cartel activity, increasing the deterrent effect. Fines and pecuniary sanctions can be indemnified,67 and director disqualification may merely result in early retirement; however, it is not possible to pay another person to take one’s place in prison. Here the threat of incarceration, by increasing the employee’s/prospective cartelist’s personal expected costs, will have a deterrent effect. This likely explains the efficacy of the American system, and the reason why it has seen no recidivism since 23 July 1999. Yet the existence of criminal sanctions alone is insufficient. Becker’s insight relied on the expected costs of the activity, which includes the probability of the imposition of the punishment. Hence, for deterrence to be effective, candidates for deterrence must recognize that there is a likelihood that these penalties will be applied to them should they break the law. To achieve this, the offence must be legally workable, that is, not too difficult to prosecute; the prosecutors must be sufficiently able to prosecute offenders; and there must be a willingness among the judiciary (which is not hindered by other – for example, social or legal – considerations) to impose a sanction which is sufficient to complement this deterrence effect. As an illustration, the UK experience with its criminal cartel offence recognized the difficulties that the ‘old’ version of the offence presented for prosecution. This was the version which contained the ‘dishonesty’ element, and it was this element that was identified in the BIS Consultation68 and the Government Response69 as posing difficulties for effective prosecution. Indeed, revising the offence to make it more effective, in the sense of being able to prosecute the offence successfully ‘at reasonable cost and in reasonable time’,70 was among the primary objectives in the reform of the offence. This lesson thus shows the need for the criminal cartel offence to be written in a manner which makes it easy to prosecute – or, at least, not unduly difficult to prosecute. Of course, this ‘easy to prosecute’ offence must be crafted within the usual constraints imposed on criminal offences within a liberal society, such as the presumption of

pub/​zew​-docs/​dp/​dp12071​.pdf [accessed 24 February 2022] 9: ‘On average, a [EU] cartel investigation lasted about 50.8 months (about 4.2 years) for the entire period from 2000 to 2011 and 46.6 months if the (exceptional) year 2000 is excluded from the analysis.’ 65 G. Becker, ‘Crime and Punishment: An Economic Approach’ (1968) 76 Journal of Political Economy 169. 66 In the US, this includes the right to possess firearms and, in some states, the right to vote. 67 It is not unfathomable to believe that these may be treated as a licence fee or the cost of doing business where the gains from collusion will exceed any fines. 68 Department for Business, Innovation and Skills (n 41) paras 6.6–6.17. 69 Department for Business, Innovation and Skills (n 44) paras 7.7–7.11. 70 Department for Business, Innovation and Skills (n 41) paras 1.7 and 1.14.

The criminalization of cartel activity  365 innocence, appropriate burden and standards of proof and respect for defendants’ procedural and substantive rights during investigation and trial. In addition to an appropriately crafted offence, effective deterrence requires that those responsible for investigating and prosecuting the offences are adequately trained and resourced.71 The investigation of cartel offences requires a mixed skill set, which may include forensic accounting and IT analysis, economic methodology and – given the clandestine activity of cartel activity – perhaps covert surveillance and wiretapping.72 Finally, for a punishment to serve as a deterrent, there must be fear by the would-be deterred that the punishment will in fact be imposed. In the US, the inevitable result of a conviction (or a plea bargain-induced guilty plea) under the Sherman Act is a jail sentence. As a result of federal sentencing guidelines,73 even 78-year-old first offenders will be sent to prison.74 However, this is not necessarily the case in other jurisdictions, even if imprisonment is a possible sanction for the offence in question. Non-violent first-time offenders are typically regarded in the sentencing process as ideal candidates for non-custodial sentences.75 In the UK, where criminal sanctions are imposed, these have been suspended for a period of time.76 Similarly, in Ireland, jail sentences are typically suspended.77 And although the Canadian cartel offence provides for a prison sentence of up to 14 years in prison upon conviction (increased in 2009 from five years),78 the Canadian sentencing regime also allows for so-called 71 Note the OFT’s discussion of these points in the Project Condor Board Review (n 42), i.e. its post-mortem review of its failure to secure convictions in R v Burns et al. 72 The so-called Lysine Tapes illustrate this well; see S. Hammond, ‘Caught in the Act: Inside an International Cartel’, OECD, Paris, 18 October 2005 www​.justice​.gov/​atr/​speech/​caught​-act​-inside​ -international​-cartel [accessed 24 February 2022]. 73 The US Sentencing Commission’s 2018 Guidelines Manual (effective 1 November 2018) sets the base level for a Sherman Act violation at ten months’ incarceration (§2R1.1), which is adjusted upwards for volume of commerce considerations. See also Office of General Counsel, US Sentencing Commission, Primer on Antitrust (March 2020) www​.ussc​.gov/​sites/​default/​files/​pdf/​training/​primers/​ 2020​_Primer​_Antitrust​.pdf [accessed 24 February 2022]. 74 See US v Taubman (n 58). 75 This view of an appropriate disposition for antitrust offenders is eschewed under the US Sentencing Guidelines; Guidelines (n 73) §2R1.1, comment. 76 For instance, R v Snee (Southwark Crown Court, 13 September 2015, HHJ Goymer) the starting point was two years, but that was discounted by 75 per cent due to a guilty plea, cooperation with the prosecution and testimony against co-accused. The resulting six months was ordered suspended for two years; see www​.gov​.uk/​government/​news/​director​-sentenced​-to​-6​-months​-for​-criminal​-cartel [accessed 24 February 2022]. And on 15 September 2017: ‘Having pleaded guilty to one count under section 188 of the Enterprise Act 2002, the criminal cartel offence, Barry Kenneth Cooper was today sentenced to 2 years’ imprisonment suspended for 2 years and made the subject of a 6 month curfew order from 6 pm to 6 am. He was also disqualified from acting as a company director for 7 years.’ See www​.gov​.uk/​ cma​-cases/​criminal​-investigation​-into​-the​-supply​-of​-products​-to​-the​-construction​-industry [accessed 24 February 2022]. 77 DPP v Duffy and Anor [2009] IEHC 208 para 71; see also DPP v Hegarty (3 May 2012, Circuit Criminal Court, Galway, Groarke J) and DPP v Aston Carpets and Flooring Limited, and Brendan Smith [2018] IECA 194, para 23 (holding that ‘[i]n respect of the suspended prison sentence imposed on the second respondent [for attempting to impede] the court is satisfied that this was reasonable and proportionate, and indeed appropriate, and therefore will not interfere with it’). On changes to the Irish regime which treat cartel behavior more severely, see P. Whelan, ‘Strengthening Competition Law Enforcement in Ireland: The Competition (Amendment) Act 2012’ (2013) 4 Journal of European Competition Law and Practice 175. 78 Competition Act RSC 1983, c C-35, s 45(2).

366  Research handbook on cartels conditional sentences – for prison sentences of less than two years to be served in the community, with appropriate conditions judicially imposed on the offender.79 Until these provisions were amended, price-fixers would be allowed (and universally granted) a community-based sentence.80 The Criminal Code was amended in 2012 as part of an omnibus law and order bill, eliminating the possibility of such a disposition where the maximum sentence is 14 years or life imprisonment.81 But since these cases typically take years to investigate and prosecute, it will be some time before a sufficiently robust data set is available in order to determine if the increased penalties have increased the Canadian regime’s deterrent effect. Thus, it is overly simplistic to suggest that the mere existence of a criminal cartel sanction in a jurisdiction’s statute book will be sufficient to add the desired deterrent. The words of the statute must be complemented by a sufficiently resourced and competent set of investigators and there must be a willingness in the judiciary to impose actual custodial sentences for the criminal offence to achieve its desired effect. The private redress for competition violations is (on its own) an inadequate deterrent. One reason behind the amendment of the Sherman Act (by the Clayton Act) to permit the recovery of treble damages was to incentivize private parties to act as ‘private Attorneys General’ was to enhance antitrust enforcement.82 As a result, the US system has evolved so that the majority of competition issues are privately litigated. Nevertheless, private actions are always, ex post, seeking compensation for (or enjoining further83) harm. Given the retrospective nature, private actions are unlikely to deter future activities. The principal/agent issue that operates to reduce the effectiveness of administrative sanctions imposed only on the firm acts similarly towards private actions for damages. As these costs are borne by the firm involved and not by the employee who participates in the cartel activity, they are almost certainly not taken into account in that individual’s assessment of the benefits of participating.84

Criminal Code RSC 1985, c C-46, s 742.1. See, e.g., Competition Bureau of Canada, ‘Ontario Individual Sentenced After Pleading Guilty to Bid‑Rigging’ (21 May 2015) www​.competitionbureau​.gc​.ca/​eic/​site/​cb​-bc​.nsf/​eng/​03936​.html [accessed 24 February 2022]. This is in spite of the calls by some members of the judiciary for actual imprisonment; see, e.g., R v Maxzone Autoparts (Canada) Corp [2012] FC 1117 (FC) paras 39–120, and in particular para 80 (holding that ‘[i]n the absence of a serious and very realistic threat of at least some imprisonment in a penal institution, directors, officers and employees who may otherwise contemplate participating in an agreement proscribed by section 45 of the Act […] are unlikely to be sufficiently deterred from entering into or implementing such agreements by mere fines. In brief, achieving effective general and specific deterrence requires that individuals face a very real prospect of serving time in prison if they are convicted for having engaged in such conduct’). See also R v Fedele [2018] QCCA 1901 (Que CA), where a conditional sentence for bid-rigging (prosecuted under Criminal Code s 380(1) as fraud) was altered to a sentence of actual imprisonment; see ibid para 49. 81 Safe Streets and Communities Act SC 2012, C-1, s 34 amending Criminal Code s 742.1. 82 Wardhaugh (n 6) 158–60. 83 See, e.g., Case C‑59/19, Wikingerhof GmbH & Co KG v Booking.com BV, ECLI:​EU:​C:​2020:​950, 24 November 2020. 84 Additionally, there are numerous other problems which can reduce the efficacy of private actions as the sole deterrent. These include legal (and economic) standards of proof (including limitation periods), the collective action problem arising from a multitude of small harms (and the need for collective actions), the direct/indirect purchaser distinction and standing for a suit, etc. On these sorts of issues, see, e.g., C. Veljanovski, Cartel Damages: Principles, Measurement, and Economics (Oxford University Press, 2020). 79 80

The criminalization of cartel activity  367

IV.

MORAL WRONGFULNESS AND POPULAR OPINION

Implicit in the discussion of the previous two sections is a need for there to be a coincidence between social norms of and understandings about wrongfulness and cartel behaviour. If the proscribed activities are not socially viewed as harmful, then the statutory provisions criminalizing these activities will fall into disrepute or disuse. One need only have regard to the narrowing scope of criminal laws in some of the spheres of life in the past three-quarters of a century to find evidence of this. Another facet of not being seen as harmful relates to the judiciary’s views. If judges themselves do not believe that cartel matters are harmful, then they may be unwilling to impose severe sanctions on cartelists, thereby blunting any deterrent effect that criminalization might have. While American perceptions of cartel activity tend to regard it as a serious matter, the same cannot be said about views in other jurisdictions. In Europe, where cartel activity was often the way business was done (particularly in the pre-Second World War economy), popular attitudes different from those in the US. In 2007 Stephan conducted a survey of British attitudes towards price fixing; while 73 per cent thought the practice was harmful, only 11 per cent supported imprisoning offenders.85 This view is reflected in other parts of Europe.86 American attitudes were shaped over time through the Department of Justice’s case selection. This involved particular attention to selecting those sorts of cases which could be seen as causing the public harm, such as price-fixing involving public procurement and school milk.87 These were widely reported, and allowed for acceptance that an increase in penalties was needed – which occurred in several stages over several decades. In Europe, through the efforts of the Commission and the National Competition Authorities, there appears to be a gradual, albeit slow, change in public attitudes. A 2014 study, also conducted by Stephan,88 demonstrated what might the start of a slow shift in attitudes: Respondents were fairly split on whether theft was more serious or about the same as price fixing, and the results were similar in relation to corporate tax evasion. But when asked to compare with fraud, a clear majority of respondents in all jurisdictions except Italy felt that price fixing was about as serious (around 40% felt that it was less serious).89

This study also showed that in the UK, 27 per cent of those surveyed supported incarceration – an increase from 2007’s 11 per cent.90 If anything, this study shows that such advocacy work has not been in vain; however, there is room for more such work. This is particularly so with regard to the business community, where – in the UK – 77 per cent of surveyed business

85 A. Stephan, ‘Survey of Public Attitudes to Price-Fixing and Cartel Enforcement in Britain’ (2008) 5 Competition Law Review 123. 86 See, e.g., V. Brisimi and M. Ioannidou, ‘Criminalizing Cartels in Greece: A Tale of Hasty Developments and Shaky Grounds’ (2011) 34 World Competition 157. 87 See Ghosal and Sokol (n 57) S55–S58; Wardhaugh (n 6) 157–58; and R. Lanzillotti, ‘The Great School Milk Conspiracies of the 1980’s’ (1996) 11 Journal of Industrial Organization 413. 88 A. Stephan, ‘An Empirical Evaluation of the Normative Justifications for Cartel Criminalisation’ (2017) 37 Legal Studies 305. 89 ibid 327. 90 ibid 326.

368  Research handbook on cartels admitted that they ‘do not know Competition Law very well ([responding] Not very well / not at all well / never heard of it)’.91

V. CONCLUSION This chapter has briefly considered the reasons, from normative and practical perspectives, why cartel activities should be criminalized. Although a number of reasons have been proposed to justify such criminalization, we have determined that the two most appropriate are those associated with recognizing a legal equivalence between price fixing and theft. Hence the statute acts as a legal assignment of a property right to (at least some) of consumer surplus to consumers, and the argument which grounds the moral wrongness of price fixing in a self-exception to the generally understood rules of the marketplace. As such, the latter considers price-fixing behaviour to violate the rules of a liberal society’s institution for distributive justice. We have additionally considered pragmatic justifications for criminalizing this behaviour. Criminalization can be a very effective means of deterring this activity. Our examination of the US experience has shown this. However, to be effective, the criminal price-fixing regime must contain a credible threat that the personal criminal sanction (that is, imprisonment) must be applied. This requires more than the law being ‘on the books’. Not only must the law that is ‘on the books’ be clear and easily prosecutable (within the usual safeguards applicable to the criminal process), but those responsible for investigation and prosecution of offences under it must be adequately trained and resourced. But, more significantly, judges (and where relevant, juries) must be willing to convict and impose sentences. And unless these crimes are seen as serious, such resolutions will not occur. Fortunately, the advocacy programmes of National Competition Authorities seem to be having an effect, which is likely to be helping them to win the battle of hearts and minds in the long war against cartels.

Competition and Markets Authority, UK Businesses’ Understanding of Competition Law (Report Prepared by IFF Research, 26 March 2015) www​ .gov​ .uk/​ government/​ publications/​ uk​ -businesses​ -understanding​-of​-competition​-law [accessed 24 February 2022] para 1.11. 91

21. Calculating cartel damages Cento Veljanovski

I. INTRODUCTION In this chapter, the general and specific issues regarding the award of civil damages for cartel conduct are considered generally and in relation to the United Kingdom and European Union, together with the techniques and approaches that have been used in litigation to estimate the losses.1 More specifically, the chapter examines the types of damages available; the issues surrounding causation, pass-on, volume effects, and mitigation; and the methods that have been be used to estimate overcharges, volume effects and duration of a cartel.

II.

LEGAL PRINCIPLES

Competition damages follow the common law principles governing damages in tort and contract.2 The EU Damages Directive 2014/104/EU,3 which has been mostly transposed into UK law,4 seeks to harmonize the law across the European Union. Competition damages are compensatory. They are to award a sum of money that places the victim in the position he or she would have been in the absence of the illegal act. This means that a claimant cannot recover for any loss or damage that they passed on to their purchasers at higher prices or otherwise offset. The claimant is also entitled to interest for the period from the date on which the cause of action arose to the date of judgment. The compensatory principle imposes an almost unbounded liability on defendants, as any person and, it appears, any loss that can be causally linked to the illegal act is compensable. This is expressly stated in the Damages Directive Article 3(1), which gives the ‘right to full compensation’ to ‘any natural or legal person who has suffered harm caused by an infringement of competition law’. Causation and the necessity to prove the loss can act to place limits on the extent of the defendants’ liability. However, as discussed below, the courts generally apply weak causation tests that seek to establish a mere ‘causal link’ or ‘foreseeability’, rather than a stricter ‘but for’ analysis constrained by rigorous principles of remoteness and other For an extensive discussion of cartel damages, see C. Veljanovski, Cartel Damages: Principles, Measurement, and Economics (Oxford University Press, 2020). 2 The right to compensation was first acknowledged in UK law in 1984 in Garden Cottage Foods v Milk Marketing Board [1984] AC 130. Yet it took a further two decades before an English court awarded damages for a breach of competition law (subsequently overturned) in Crehan v Inntrepreneur Pub Co CPC [2004] EWCA Civ 637. 3 Directive 2014/104/EU of the European Parliament and of the Council on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union [2014] OJ L349/1 (‘EU Damages Directive’). 4 Transposed as Competition Act 1998 Schedule 8A. With effect for damages actions commenced in the UK after 9 March 2018. 1

369

370  Research handbook on cartels limiting factors. Moreover, proving the loss – while generally difficult – is subject to a weak standard of proof, partially in recognition of the difficulties of estimating past losses extending over long periods.

III.

TYPES OF DAMAGES

The following types of damages are potentially available in a cartel damages action. A.

Overcharge Damages

The core of a cartel damages claim is the overcharges paid by purchasers; or, in the case of a buyer’s cartel, the undercharges paid to suppliers. The UK Supreme Court has stated that pecuniary loss is measured by the overcharge5 and there is no need to assess its impact on the claimant’s profits.6 The ‘overcharge’ is the difference between the prices paid by purchasers and the prices which would have been charged in the absence of the prohibited conduct. The latter prices are variously referred to as the ‘but for’, ‘counterfactual’ or ‘non-infringement’ prices. These prices are not observable and therefore cannot be stated with any certainty. Determining hypothetical prices is inherently difficult and contentious, both conceptually and because of data limitations. The central task of the claimant is to present evidence as to what these prices would have been using factual, statistical and accounting techniques. B.

‘Run-On’ Damages

Most cartel damages actions follow on from a prohibition or settlement decision of the European Commission or a national competition authority. The competition authority will base its finding on the duration of the cartel on documentary evidence that can withstand a challenge in the courts. However, there will often be good reasons why the effects of the cartel may endure beyond the end date as determined in the prohibition decision. This can include sluggish price adjustments, continued oligopolistic pricing or tacit collusion (which for the most part is not illegal), and/or that because of the firm’s participation in the cartel, it continues to understand its competitors’ pricing policies. Follow-on actions that also claim run-on damages for a period longer than stated in the prohibition decision are known as ‘hybrid actions’, combining elements of a follow-on action (which establishes liability) and a stand-alone action for the run-on period. The claimant has the burden of proof to establish that the cartel persisted after the end date found in the prohibition decision.

Sainsbury’s Supermarkets Ltd (Respondent) v Visa Europe Services LLC and others (Appellants) Sainsbury’s Supermarkets Ltd and others (Respondents) v Mastercard Incorporated and others (Appellants) [2020] UKSC 24 (herein ‘Sainsbury’s UKSC Appeal’) para 199. 6 ‘[T]he effect of breach on the overall profitability of the claimant […] is not the relevant measure of damages’: Sainsbury’s UKSC Appeal para 203. 5

Calculating cartel damages  371 C.

‘Lost Profit’ or ‘Lost Volume’ Damages

Claimants may also seek damages for lost profits. These will typically arise when a direct purchaser has passed on the overcharge in higher prices which reduce its sales. The lost sales are often referred to as the volume effect. The extent of this volume effect will depend on the demand and supply conditions in the downstream market. Similarly, an indirect purchaser who passes on all or part of an overcharge in higher prices will suffer reduced sales and have a lost profit claim on these. This involves a hypothetical calculation of losses arising from something that has not happened and therefore lacks data. Moreover, the English courts tend to treat such losses as secondary and speculative. As Longmore LJ said in Devenish, the ‘loss of a possible sale is less serious than actual out-of-pocket loss’.7 Nonetheless, where it is passed on then there are potential claims for lost profits. There have been no UK cartel actions awarding ‘lost volume’ damages. In BritNed v ABB,8 an action for damages arising from the defendant’s participation in a bid-rigging cartel, the applicant sought lost profits arguing that, but for the overcharge, it would have commissioned a higher capacity cable which would have generated greater future profits. The claim was dismissed as too speculative. D.

‘Umbrella’ Damages

Following the rendering of the Court of Justice’s (‘CoJ’) judgment in Kone, ‘umbrella’ damages can be claimed.9 These arise where firms who are not members of the cartel raise their prices under the ‘umbrella’ of the higher prices charged by firms that are members of the cartel. The CoJ held that the members of a cartel are vicariously liable for umbrella overcharges whether or not they knew that firms outside the cartel had raised their prices. The Advocate General’s Opinion in Kone is more explicit, stating that umbrella pricing is a reasonably foreseeable consequence of price-fixing and not the result of ‘an entirely extraordinary train of events’.10 AG Kokott further expressed the opinion that the actions of the cartel which lead to higher prices being charged by non-cartel firms do not need to be the only cause of the claimant’s loss if ‘there is sufficient support for the assumption of a direct causal link if the cartel was at least a contributory cause of the umbrella pricing’.11 The CoJ12 and AG Kokott13 further justified liability for umbrella pricing as necessary to ensure the effectiveness of EU competition rules by adding a further financial sanction to the European Commission’s civil fines. To date, there has been no award of umbrella damages in the UK.

7 Devenish Nutrition Ltd v Sanofi-Aventis SA (France) [2008] EWCA Civ 1086 (‘Devenish’) para 148. 8 BritNed Development Ltd v ABB AB [2018] EWHC 2616 (Ch) (‘BritNed’) para 464 ff. 9 Case C-557/12, Kone AG v ÖBB-Infrastruktur AG, EU:​C:​2014:​1317, 5 June 2014 (‘Kone’) para 34. 10 Case C-557/12, Kone AG v ÖBB-Infrastruktur AG, EU:​C:​2014:​45, 30 January 2014, Opinion of AG Kokott (‘Kone Opinion’) para 42. 11 ibid para 36. 12 Kone para 33. 13 Kone Opinion para 54.

372  Research handbook on cartels Damages for umbrella pricing are problematic. The defendants are liable to compensate purchasers who are not their customers, whom they did not overcharge and who did not profit from the overcharge, while leaving the excess profits of these overcharges in the coffers of the non-cartel firms because umbrella pricing is not illegal. In many jurisdictions, the fact that umbrella pricing arises from the independent action of a third party would be sufficient to break the chain of causation to deny damages.14 Paradoxically, the decision in Kone places the ‘umbrella’ firms in the preferred position of being able to legally ‘overcharge’ their customers, keeping the profits, while being indemnified by members of the members of the cartel. Arguably this indemnification will increase the prospects of umbrella pricing or ensure that future cartels include all substantial firms in the industry. E.

‘Cost-Based’ Damages

In several English cases, cost-based damages have been awarded.15 In BritNed,16 the High Court found that although the defendant was a member of the power cables cartel it had not overcharged the claimant. The Court nonetheless awarded two heads of cost-based damages, neither of which were pleaded by the claimant. The Court fixed on some fragmentary documentary evidence which suggested that the defendant had used thicker, more expensive copper cables than its competitors and awarded damages for what it termed the ‘baked-in inefficiencies’.17 The Court also hypothesized that, because the members of the cartel had not needed to compete for business, they had reaped cost savings in the form of lower tendering costs and greater certainty, which should also be awarded as damages. Both these heads of damages were questionable. First, the Court’s finding that the defendant had competitively priced its tender and that had passed on the alleged cost savings at a lower price in negotiations should have, arguably, been the end of the action. Second, as regards the ‘baked-in’ inefficiencies, the defendant continued to quote using thicker cables after the end of the cartel, indicating that this was a commercial decision unrelated to the existence of the cartel. Third, the Court had no direct or indirect evidence of the existence of any cost savings. Fourth, the cost-saving damages awarded were restitutionary in character, not compensatory.

Recent decisions by the US federal district courts have reasoned that ‘the damages for an umbrella plaintiff would be unacceptably speculative and complex’ because of the ‘wide range of factors [that] influence a company’s pricing policies’ and that the non-cartel members’ independent pricing decisions constitute intervening causes that break the chain of causation from price fixing to higher prices: Garabet v Autonomous Techs Corp., 116 F Supp 2d 1159 (CD Cal, 2000) 1167–68; Associated General Contractors of California, Inc v California State Council of Carpenters, 459 US 519 (1983). 15 In the retailers’ interchange fee cases, the English courts have used cost-based approaches to calculate the ‘competitive’ but-for interchange fee: Sainsbury’s Supermarkets Ltd v MasterCard Inc [2016] CAT 11 (‘Sainsbury’s’); Sainsbury’s Supermarkets Ltd v Visa Europe Services LLC [2017] EWHC 3047 (Comm); Sainsbury’s Supermarkets Ltd v MasterCard Inc [2018] EWCA 1536 (Civ) (‘Sainsbury’s Appeal’). 16 See C. Veljanovski, ‘Damages for Bid-Rigging – The English High Court’s Idiosyncratic Cost-Based Approach in BritNed’ (2019) 10 Journal of European Competition Law & Practice 109; and Veljanovski (n 1) paras 14.07–14.17. 17 BritNed para 445. 14

Calculating cartel damages  373 On appeal, the Court found that the trial judge had made ‘an error of law’18 in respect of his award of ‘cost-saving’ damages, in that these violated compensatory principles by looking at the defendant’s alleged gains rather than the claimant’s losses. Further, the trial judge’s attempt to translate the purported cost savings of other members of the cartel into an ‘overcharge’ by the defendant was found to be a mere assertion ‘not open to the judge’ and, in any case, the trial judge had expressly found that any cartel savings had been competed away in a lower price.19 The Court of Appeal made clear that the exclusive focus of a damages award was the loss to the claimant and not the gains to the defendant. Accordingly, at least in English law, the award of cost savings damages is unlikely in the future, and the award of baked-in inefficiencies, which was not appealed, remains available. F.

‘Lost Chance’ Damages and Future Losses

Future losses arising from lost chance and lost opportunity damages, are, in principle, compensable. Lost chance damages are most applicable to market power violations where the dominant entity seeks to foreclose the market to its downstream competitors. These damages can also arise in cartel cases where, for example, the price overcharge is so great that it has damaged the purchaser’s business, generating continuing future losses; in bid-rigging cartels which prevent firms not a party to the cartel from securing a tender they would or most likely would otherwise have won; or where the price-fixing is coupled with other anti-competitive abuses such as those alleged in Devenish (that several of the vitamins’ cartelists who had downstream pre-mix businesses also operated a margin squeeze to foreclose the market to one of the claimants who was an independent pre-mixer). Lost opportunity damages have been claimed in several actions. In BritNed, the claimant unsuccessfully sought lost chance damages arguing that, had the tender not been overpriced, it would have purchased a higher capacity submarine cable enabling it to generate more business and revenues.20 They were also addressed in Enron (a discriminatory pricing case).21 Before the UK Competition Appeal Tribunal (‘CAT’ or ‘Tribunal’),22 and on appeal, the claimant could not establish on the balance of probabilities that it would have been awarded the contract but for the impugned conduct of the defendant. The CAT23 applied the principles set out in Allied Maples24 that the claimant must ‘show on the balance of probabilities what it would have done, but for the infringement’;25 that where the ‘loss depends on what a third party would have done, but for the abuse, then the applicant must satisfy the Tribunal on the balance of probabilities that there is a real or substantial (i.e., not negligible) chance that the third party

BritNed Development Ltd v ABB AB and ABB Ltd [2019] EWCA Civ 1840 (‘BritNed Appeal’) para 235. 19 ibid para 165. 20 [2018] EWHC 2616 (Ch) para 464 ff. 21 Enron Coal Services Ltd (in liq) v English Welsh and Scottish Railway Ltd [2009] CAT 36; and Enron Coal Services Ltd (In Liquidation) v English Welsh & Scottish Railway Ltd [2011] EWCA Civ 2. 22 The CAT is a specialist tribunal dealing with competition cases with High Court status. 23 Enron Coal Services Ltd (in liq) v English Welsh and Scottish Railway Ltd [2009] CAT 36, para 85. 24 Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 (‘Allied Maples’). 25 ibid 1610G. 18

374  Research handbook on cartels would have acted in the way which the claimant asserts’;26 and that if these conditions are satisfied the court ‘must then put a figure on what it has lost that depends on a realistic assessment of the prospects of a successful outcome’.27 In Albion Water,28 a discriminatory pricing case, these principles were applied with damages reduced by 33 per cent to reflect the ‘prospects of a successful outcome’, even though the CAT held that it was ‘highly likely’ that the contract would have been awarded to the claimant. G.

Aggregate Damages

The UK’s new collective proceeding regime allows for the award of aggregate damages in opt-in and opt-out actions. The award of aggregate damages does not need to be based on the aggregation of the individual losses of each member of the class. Rather, s 47C(2) of the Competition Act 1998 states: ‘The Tribunal may make an award of damages in collective proceedings without undertaking an assessment of the amount of damages recoverable in respect of the claim of each represented person.’29 This provision notwithstanding, the CAT in the Merricks v Mastercard collective certification proceeding held that aggregate damages had to be based on calculations of damages that were individually compensatory to members of the class.30 This was rejected by the Court of Appeal31 and by the majority judgment of the UK Supreme Court.32 The CAT accepted that a top-down method could be used to calculate aggregate damages. It follows that this form of ‘statutory’ damages need not be based on compensatory principles. To date, there has been no award of aggregate damages. H.

Damages Which Cannot Be Sought

In line with the compensatory principles of damages, gains-based and punitive damages cannot be sought. Gains-based damages – also called an ‘account for profits’ – are based on the ill-gotten gains or profits made by the defendants.33 These were rejected by the High Court34 and Court of Appeal in Devenish,35 and by the Court of Appeal in BritNed.36 The EU Damages Directive provides that damages ‘which lead to overcompensation, whether by means of punitive, multiple or other types of damages’ are barred by the Damages Directive.37 Exemplary damages which were available in the UK are also barred following the transposition of the Damages Directive into UK law.38 Exemplary damages were awarded in ibid 1614C. See Mount v Barker Austin (A Firm) [1998] EWCA Civ 277. 28 Albion Water Limited v Dwr Cymru Cyfyngedig [2013] CAT 6, para 220. 29 R. Mulheron and D. Edlin, ‘The Mere Mirage of a Class Action? A Challenge to Merricks v Mastercard Inc’ (2018) 37 Civil Justice Quarterly 216; and C. Veljanovski, ‘Collective Certification in UK Competition Law: Commonality, Costs and Funding’ (2019) 42 World Competition 121. 30 Walter Hugh Merricks v Mastercard Incorporated [2017] CAT 16. 31 Walter Hugh Merricks v Mastercard Incorporated [2019] EWCA 674. 32 Mastercard Incorporated v Walter Hugh Merricks [2020] UKSC 51 (‘Mastercard v Merricks’). 33 Devenish Nutrition Ltd v Sanofi-Aventis SA (France) [2008] EWCA Civ 1086. 34 Devenish Nutrition Ltd v Sanofi-Aventis (France) [2007] EWHC 2394 (Ch). 35 Devenish Nutrition Ltd v Sanofi-Aventis SA (France) [2008] EWCA Civ 1086. 36 BritNed Appeal [2019] EWCA Civ 1840. 37 EU Damages Directive, Article 3(3). 38 Competition Act 1998, Schedule 8A s 36. 26 27

Calculating cartel damages  375 2 Travel (a predation case) mainly because the actions of the defendant were blatant, its chief executive had misled the court and it had not been fined by the UK competition authority.39

IV. CAUSATION To succeed in a damages action, the claimant(s) must prove that the losses were causally related to the illegal actions of the defendant(s). In Manfredi,40 the CoJ gave any individual the right to claim compensation ‘where there is a causal relationship between the harm and agreement, or practice prohibited provided that the principles of equivalence and effectiveness are observed’. The English courts have traditionally limited liability through concepts such as foreseeability, remoteness and causation to those most directly affected. To establish causation the English courts, in line with most other jurisdictions, have used the ‘but for’ test.41 ‘But for’ causation applied literally would require the impugned conduct to be the sole and exclusive cause of the claimant’s losses. This is a demanding test and is difficult to make good, particularly in the context of cartels. Accordingly, the English courts have not required that the harm be shown to be the sole, exclusive or even substantial cause of the defendant’s actions, but merely that it be shown to be a contributory cause,42 even if minor. US federal antitrust law adopts a similarly weak standard of causation.43 While the chain of causation must not be ‘broken’ to establish proof of a loss, this has been given an elastic interpretation. As already discussed, the CoJ’s judgment in Kone44 overrode Austrian law by recognizing liability for umbrella pricing, which would have been rejected under Austrian law because ‘there is no adequate causal link between the cartel and the loss potentially suffered by a buyer, since it consists of an indirect loss: a side effect of an independent decision that a person not a party to a cartel has taken on the basis on his own business considerations’.45 Specifically, the CoJ held that umbrella pricing was foreseeable46 and liability would make a ‘significant contribution to the maintenance of effective competition in the European Union’.47 The principle of effectiveness is an additional requirement that is used to override both the requirement of causation and the operation of national laws on causation.

2 Travel Group plc (in liq) v Cardiff City Transport Services Ltd [2012] CAT 19. Case C–295/04, Manfredi v Lloyd Adriatico Assicurazioni SpA [2006] ECR I–6619, paras 43–44. 41 Enron Coal Services Ltd (in liq) v English Welsh and Scottish Railway Ltd [2009] CAT 36, para 85(a); Arkin v Borchard Lines Ltd [2003] EWHC 687 (Comm) para 489 ff; and 2 Travel Group plc (in liq) v Cardiff City Transport Services Ltd [2012] CAT 19, para 285 ff. 42 Kone Opinion para 36. 43 Under the ‘material cause’ standard, it is ‘enough that the antitrust violation contributes significantly to the plaintiff’s injury even if other factors amounted in aggregate to a more substantial cause’: P. Areeda, R. Blair and H. Hovencamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application (2nd edn, Aspen Law and Business, 2000) para 338a. 44 Kone para 4. 45 ibid para 14. 46 ibid para 30. 47 ibid para 23. 39 40

376  Research handbook on cartels

V.

PROOF OF DAMAGES

The English courts take a ‘pragmatic’, ‘generous’ and ‘evidence-driven’48 approach to the quantification of damages. They have stated that ‘[t]he Court will not allow an unreasonable insistence on precision to defeat the justice of compensating a claimant for infringement of his rights’.49 This is the general common law position50 that the courts will require ‘as much certainty and particularity […] as is reasonable, having regard to the circumstances and to the nature of the acts themselves by which the damage is done’.51 Shaw L’s statement in Watson52 is now routinely cited in competition damage cases – that the amount of the loss should be quantified ‘by the exercise of a sound imagination and the practice of the broad axe’. The ‘broad axe’ approach has been affirmed by the UK Supreme Court in Mastercard v Merricks as a general principle of quantification and pass-on – the court will ‘do the best it can on the available evidence’53 and ‘resort to informed guesswork’.54 The EU Damages Directive reiterates a similar principle but from a different angle. It draws on the European law principle of effectiveness to direct that national rules should ‘not be formulated or applied in a way that makes it excessively difficult or practically impossible to exercise the right to compensation guaranteed by the [Treaty of the Functioning of the European Union]’.55 It then sets out statutory provisions that go further by requiring the national courts of the EU to establish a rebuttable presumption of harm (Article 17(2)) and a rebuttable presumption of pass-on where indirect purchasers use pass-on to mount a claim for damages (Article 14(2)). The practical effect of these presumptions is dubious since no default overcharge or pass-on percentages are specified. As Marcus Smith J in BritNed tersely observed: ‘I fail to see how a bare presumption of harm – particularly one, which does not involve a presumed quantification of harm – takes matters any further at all’.56 The Court of Appeal agreed adding that such a presumption was unnecessary given the generous approach of English law to the problems of proof.57 The UK transposition of the EU Damages Directive does not contain an equivalent to Article 17(2).58 The Hungarian Competition Act addresses this issue by setting out a rebuttable ten percent default overcharge rate.59 Most cartel damages claims are follow-on actions. They rely on an infringement decision of the European Commission or a national competition authority to establish liability and the

Asda Stores Ltd v Mastercard Inc [2017] EWHC 93 (Comm) (Popplewell J). ibid para 306(8)(b). 50 Chaplin v Hicks [1911] 2 KB 786, 792 (‘[t]he fact that damages cannot be assessed with certainty does not relieve the wrongdoer of the necessity of paying damages’). 51 Ratcliffe v Evans [1892] 2 QB 524, 532–33. 52 Watson, Laidlaw, and Co Ltd v Pott, Cassels, and Williamson (1914) 31 RPC 104, 118 (HL). Lord Shaw’s obiter in Watson related to the difficulties of quantifying future non-pecuniary losses and not past financial losses. 53 Mastercard v Merricks para 47. 54 ibid para 48. 55 See Veljanovski (n 1) Chapter 8. 56 BritNed [23(5)] (emphasis in original). 57 BritNed Appeal para 42. 58 Competition Act 1998, Schedule 8A. 59 Competition Act 1996, Section 88/C (applicable to damages arising after September 2008). 48 49

Calculating cartel damages  377 nature of the impugned conduct.60 They do not establish or quantify the losses or provide much useful information that would enable the calculation of damages. This is because the members of a cartel are prosecuted under the infringement by object provision of Article 101(1) TFEU, which does not require proof of the adverse effects on competition or the quantification of harm, overcharges or losses. Moreover, the increased use of settlements by the European Commission and national competition authorities results in a published short-form decision that tersely describes the infringement with little discussion of the basis for and evidence supporting the infringement. Claimants can gain access to the competition authority’s files, which will contain useful information. However, typically the infringement decisions are of limited use in establishing quantum, and the claimants will have to seek disclosure from the defendants.

VI.

QUANTIFYING OVERCHARGE DAMAGES

The core of any damages claim is the ‘overcharge damages’. These give rise to at least two empirical tasks: first, to estimate the prices that would have existed in the absence of anti-competitive conduct; and second, to determine the duration of the cartel.61 A.

Counterfactual Prices

Determining the prices in the absence of the cartel is a difficult empirical inquiry, not least because these prices are hypothetical. In most markets, prices are affected by myriad factors and market forces. Even if there is direct evidence that the members of the cartel agreed to raise prices by a stated amount, this may not have taken place because of failure to implement these, because of clandestine undercutting by some or all members of the cartel, and/ or because the agreed price increases could not be sustained in the face of opposing market forces. The problem is compounded where the cartel is formed to arrest a decline in prices, in which case the ‘overcharge’ is a smaller reduction in prices than would have occurred in the absence of the cartel. There are other economic, factual and legal difficulties surrounding the estimation of overcharges. In law, the ‘but for’ prices are those that would have prevailed in the absence of the illegal cartel. Yet to others, this is something more theoretical. Some economists argue that the appropriate ‘but for’ prices are the competitive prices or the prices equal to the firms’ marginal costs plus a competitive profit margin. This approach assumes that the market would have been effectively competitive in the absence of the cartel, which invariably will not be the case. Markets that have been cartelized tend to have a small number of large firms (oligopolies) in which prices will be above textbook competitive levels without explicit coordination between the firms, and other factors may cause markets to depart from competitive prices.

60 ‘The final decision of a competition authority should constitute full proof of an antitrust offence to establish an action for damages’: Damages Directive, Article 9(1). 61 Published estimates of percentage overcharges vary considerably ranging from 0 to 40 per cent and larger. The methods used and resulting analysis have been controversial and subject to conflicting analysis and interpretation. For a review of the publicly available research, see Veljanovski (n 1) paras 3.01–3.30.

378  Research handbook on cartels Further, the method used to identify counterfactual prices, and hence overcharges, must adjust for the non-cartel factors. A cartel will not be the only factor affecting prices and sales during the cartel period. Nor will the counterfactual prices be some constant price lower than the cartel’s prices. Both factual and counterfactual prices will be affected and fluctuate over the cartel period due to the influence of both cartel and non-cartel factors. These fluctuations may be due to changes in the economy and/or the industry, the latter due to the entry of a new firm, import competition, technical developments, increases in input costs, industrial actions, weather, price wars, and so on. The parties, and particularly the claimants’ experts, will need to disentangle the price effects of cartel and non-cartel factors to give plausible estimates of the non-infringement prices and overcharges. There are other complications. For some cartels, the primary goal is to arrest the decline in prices. This does not pose a problem in principle but makes identification of the effects of the cartel more difficult – for example, how would prices have fallen in the absence of the cartel and by how much? Further, a ‘price increase’ can be implemented without increasing prices but rather by lowering the quality and quantity of the product supplied at the pre-cartel prices: so-called shrinkflation. Another complication is where the discussion between the parties sets gross or list prices. These are not the transaction prices charged to customers, which are affected by discounts, rebates and negotiations. The claimant must establish a positive relationship between gross and transaction prices either directly or by showing that the latter was affected by the actions of the cartel. A similar but more severe problem arises when the impugned conduct is information exchange and/or collusion on non-price factors such as customer and market sharing arrangements. Again, this requires claimants to establish that the shared information and/or market sharing arrangement affected prices, and then to estimate the amount of the overcharge. B.

Quantification Techniques

The empirical techniques which can be used to estimate overcharges and pass-on have been set out in numerous publications.62 These include the non-legally binding European Commission’s practical guidelines on the quantification of competition damages (‘EU Practical Guidelines’)63 and its guidelines on pass-on to indirect purchasers (‘EU Pass-on Guidelines’).64 These EU guidelines are addressed to the national courts to describe the methods that can be used, together with their pros and cons. The methods that can be used to quantify overcharges and volume effects can be classified in different ways. EU Practical Guidelines classifies these as ‘comparator’ (before-and-after and yardstick) and other methods (cost-based, simulations and others). It identifies two com62 European Commission, Quantifying Antitrust Damages: Towards Non-Binding Guidance for Courts (Report prepared by Oxera, December 2009). See also Veljanovski (n 1); Proving Antitrust Damages: Legal and Economic Issues (3rd edn, American Bar Association, 2017). 63 European Commission, Practical Guide Quantifying Harm in Actions for Damages Based on Breaches of Article 101 or 102 of The Treaty on the Functioning of the European Union (Staff Working Document, C(2013) 3440) (‘EU Practical Guidelines’); and European Commission, Communication from the Commission on Quantifying Harm in Actions for Damages Based on Breaches of Article 101 or 102 of the Treaty on the Functioning of the European Union [2013] OJ C 167/19. 64 [2019] OJ C 267/4. See also European Commission, Study on the Passing-on of Overcharges (Final Report prepared by RBB Economics, 2016).

Calculating cartel damages  379 parator methods: the ‘before-and-after’ approach, which uses prices or profit margins before and after the cartel period to determine whether prices or margins during the cartel period were relatively higher; and the ‘yardstick’ method, which measures the overcharge by comparing the prices of the cartel with the prices for the same product in a similar geographical or product market not affected by a cartel. The ‘other’ methods include ‘cost-based approaches which use the defendant’s costs plus a competitive profit margin to derive the but for prices, simulations, and “economic theory” which model market outcomes. Different techniques can be used in the quantification including econometrics (statistical) and accounting analysis.’ The most common method used to estimate the overcharge is the straight-line before-and-after approach.65 This can use one or more of the observed prices as a proxy for the non-infringement prices, such as: prices before the start of the cartel; prices after the end of the cartel; the average of the prices before and after the cartel; prices derived from a straight-line projection between before and after cartel prices; the prices from one or several price wars during the cartel. A more sophisticated approach is to adjust actual prices during the cartel period by changes in costs, foreign exchange movements, and so on. The problem with the straight-line method is that it fails to take into account the myriad factors influencing cartel and non-infringement prices. Further, the choice of non-cartel prices can have a dramatic effect on the overcharge estimate and may not be representative of the non-infringement prices. To illustrate the point, one can consider the damages action brought in the High Court of Western Denmark66 against members of the pre-insulated pipe bid-rigging cartel.67 The applicants used the price of the first awarded tender after the end of the cartel adjusted for annual changes in the costs of iron, steel, plastic and wages used in the production of preinsulated pipes to conclude that the non-infringement prices were on average 35 per cent to 40 per cent lower than those during the cartel period. The defendants argued that the higher prices before the cartel period were more representative because demand had fallen off significantly during the cartel period. This reduced the overcharge claim by 80 per cent. The court, in a wholly arbitrary but practical compromise, awarded damages based on the average of the two estimates.68 Another approach is to benchmark the cartel’s prices against the prices for the same or very similar products that have not been cartelized. This in principle would adjust for non-cartel

A review of all decided cartel damage cases in the 27 EU Member States plus Norway and Switzerland to end August 2019 found that, in the 59 decisions which awarded damages, most used simple before-and-after comparisons (31 cases). Cost-based and financial methods (9 cases) and yardstick comparisons (four cases) were also employed. Of the remaining 19 cases, in 10 Spanish judgments the courts estimated the overcharge by reference to the EU Practical Guidelines, and 4 German judgments relied on damages for contravention of competition rules set out in liquidated damages clauses. See J.-F. Laborde, ‘Cartel Damages Claims in Europe: How Courts Have Assessed Overcharges (2019 ed.)’ [2020] 4 Concurrences 1; J.-F. Laborde, ‘Cartel Damages Claims in Europe: How Courts Have Assessed Overcharges’ (2018 ed.)’ [2019] 1 Concurrences 1; and J. Connor, Price Fixing Overcharges (4th edn, Purdue University, 2019) Table 13. 66 Based on the discussion in P. Møllgaard, ‘Assessment of Damages in the District Heating Pipe Cartel’, in B. Lyons (ed), Cases in European Competition Policy: The Economic Analysis (Cambridge University Press, 2012) 159. 67 Case No IV/35.691/E-4, Pre-Insulated Pipes [1999] OJ L 24/1. 68 EU Practical Guidelines [125] states that ‘it is normally not appropriate to simply take the average of the two results, nor would it be appropriate to consider that the contradictory results cancel each other out in the sense that both methods should be disregarded’. 65

380  Research handbook on cartels factors provided the two products or geographical markets were similar in other respects.69 However, it is rare to find two markets that are similar in all respects other than the cartel, although it is possible to adjust for some differences between the two markets. C.

Econometric and Statistical Approaches

Econometrics has been used to estimate overcharge damages.70 It can rigorously adjust for the non-cartel factors which affect prices to arrive at the counterfactual price. The downside of econometrics is that it is often compromised by insufficient data, a small sample size and a host of statistical issues, and it may be difficult for the court to interpret the results and relate these to the other facts in the case. The English courts however have not shied away from accepting and critically evaluating econometric evidence of cartel overcharges. In BritNed71 the judge comprehensively evaluated the claimant’s econometric evidence.72 The trial judge also requested a half-day teach-in on econometrics by the parties’ experts during the trial, for them to explain the statistical techniques which they had used. In BritNed the claimant’s econometric evidence consisted of a single during-and-after price regression. This estimated ABB’s overcharge during the cartel period by reference to its prices after the cartel period. To adjust for other factors that would have affected prices, the price regression was estimated using the ordinary least squares (‘OLS’) statistical technique. The cartel effect on prices (as measured by the contract values) was captured by a (shift) dummy variable which took the value of 1 for contracts awarded during the cartel period and zeroes for contracts awarded after the cartel had ended. Such a variable seeks to determine whether the cartel ‘shifts’ the relationship between prices and the other variables and whether this shift is statistically and economically significant. These regressions include several ‘control variables’ to take account of the effect on the contract prices of the non-cartel factors such as costs, the difference between underground and submarine cable projects, demand and a time trend. In BritNed the claimant’s econometric analysis was rejected as ‘too complex’ and ‘unspecific’.73 It is instructive to see how the judge dealt with the econometric evidence. He identified several concerns. The first was the small sample size. The claimant’s economist used both ABB’s underground and submarine projects. The court concluded that the former should be excluded, thus halving the sample size, which was already small. This resulted in the cartel dummy having a large standard error so that it lacked what statisticians call ‘precision’. As the judge observed, ‘the confidence interval of the model is scarcely impressive’. The estimated average overcharge was around 22 per cent, but there was a 95 per cent chance that the true value lay between 0.32 per cent and 39 per cent, implying losses of anywhere between €885,000 and €108.7 million. This ‘shocked’ the judge, who concluded that it was ‘an indicator that the model is not producing useful outcomes such that I can rely upon’. The court then considered the ‘robustness’ of the claimant’s regression results. Robustness consists of an 69 For a statistical example of the difference in difference approach, see U. Laitenberger and F. Smuda, ‘Estimating Consumer Damages in Cartel Cases’ (2015) 11 Journal of Competition Law & Economics 955. 70 See Veljanovski (n 1) Chapters 15 and 16; see also American Bar Association, Econometrics: Legal, Practical and Technical Issues (2nd edn, American Bar Association, 2014). 71 BritNed para 416. 72 See Veljanovski (n 1) ‘Box 14.4’ and paras 16.08–16.17. 73 BritNed para 417.

Calculating cartel damages  381 assessment of how sensitive the estimated overcharges are to changes in the variables and/or time periods used in the regression equation. Both experts carried out sensitivity tests, although the judgment focused on those of the defendant’s economist. These involved excluding in turn and separately cartel projects other than the BritNed project, underground cable projects, the time trend and the ‘order backlog’ variable (used as a measure for demand conditions facing ABB). With one exception, these reduced the estimated overcharge and rendered it statistically insignificant. This by itself was not a matter of concern. As the judge commented: ‘If the parameters are material […] their removal from the model will make a difference’.74 The killer blow for the econometrics came from elsewhere. The judge said, ‘the fragility of the model is in large measure hidden by […] [the] use of averages’.75 A regression using a cartel dummy variable estimates an average overcharge over all cartel period projects which the claimant’s expert used ‘to compute the overcharge for the specific case, the BritNed project’. As the judge commented, ‘given the bespoke and unique nature of these projects, I find that an overcharge calculated by a model that is explicitly averaging across multiple projects to be an inappropriate one’.76 This was a valid criticism, given the highly differentiated nature of ABB’s projects. Lumping them together and suggesting that the average overcharge applied to any one project is hard to defend. BritNed is not a setback for the econometric approach, but simply the rejection of the claimant’s econometric evidence. As stressed by the judge, it was applied to contracts that were ‘bespoke’ and not as typically used for large data sets of relatively homogeneous products sold in volume. BritNed points to the need to treat statistical evidence as complementary to, and ensure that it is consistent with, the documentary and other evidence. It is apparent from the trial judge’s subsequent extra-judicial comments that he regarded the econometric evidence to be ‘idiosyncratic’ and not compliant with the law of evidence.77 Notwithstanding this, the courts are increasingly prepared to accept econometric evidence. However, it is likely to be treated with more scepticism, if only because of the inherent tendency of lawyers and judges to look in detail at the facts and evidence rather than models and systematic trends in large data sets. It is therefore necessary that the method used to estimate overcharges be consistent with the facts and lay witness evidence. To treat a piece of statistical analysis as the sole and a determinative piece of evidence invites disaster (as happened to the claimant in BritNed). More rigorous methods are just part of the mosaic of evidence needed to support a competition claim. D.

Cartel Duration

Most UK and EU cartel damages actions are ‘follow-on’ actions. These follow from and are based on the findings of fact and law in an infringement decision of a competition authority. The claimant(s) in a ‘follow-on’ action will rely on the competition authority’s findings as to the start and end dates of the cartel. These dates may not reflect the true dates at which

ibid 379 (emphasis in original). ibid para 418. 76 ibid para 421. 77 M. Smith, ‘Lawyers Come from Mars, and Economists Come from Venus: Or Is It the Other Way Around? Some Thoughts on Expert Economic Evidence in Competition Cases’ (2019) 18 Competition Law Journal 1, 6. 74 75

382  Research handbook on cartels the cartel started and ended; they are those that the competition authority can prove based on documentary or witness evidence such as emails, meeting notes and so on, which have been discovered during an investigation, and which the European Commission can defend if challenged in court. The cartel may have started earlier, operated for a shorter period or continued to maintain prices at a high level after the end of the infringement period.78 Indeed, the European Commission often notes in its decisions that a cartel may have operated before the dates it has determined, as with, for example, the ‘amino acid cartel’.79 It is now usual for claimants to bring a ‘hybrid action’ which uses the dates for the cartel as determined in a competition authority decision plus ‘run damages’ for the overcharges and other losses that occurred after the legally determined end date of the infringement. The start and end dates are crucial to the various methods available to estimating overcharges. If the wrong dates are used, the amount of the overcharges will be either overestimated or underestimated depending on the real duration of the cartel and the way prices varied during these different periods. For some methods of calculating the overcharges, the use of incorrect dates can have a major effect; this is particularly true of the ‘before-and-after’ approach, which assumes that the pre-cartel prices and/or post-cartel prices are an indication of the counterfactual prices during the cartel period. If this is incorrect, it results in a compound error – the wrong percentage overcharge applied over the wrong period. It is therefore prudent for the claimants (and defendants) to explore different start and end dates for the cartel based on the available data. There are statistical techniques that can and have been used. For example, an econometric analysis of US vitamins prices found statistically significant evidence that prices before 1989, which the European Commission places as the start of the ‘vitamins cartel’, and as early as 1985 were collusive prices, and that price increases after 1985 could not be explained by cost and demand factors alone.80 A statistical analysis of the sodium chlorate cartel found that the cartel operated for a longer period than set out in the European Commission’s prohibition decision (specifically, January 1995 to February 2002, compared to the infringement period of September 1994 to February 2000). As a result, the authors of the study estimate that using the European Commission’s dates resulted in a reduction in estimated damage estimates of more than 28 per cent because the overcharge estimates and duration were both smaller than using the true dates found by the statistical analysis.81 There is a second, practical consideration. While the legal concept of a cartel is a single and continuous event, in practice many cartels operate episodically in reaction to internal and external disruptions. Cartels are susceptible to defections and cheating, which can cause a complete breakdown of their price-fixing policy and the flareup of a price war. External factors can also buffet a cartel and its prices, such as the entry of a new firm or plant, technical innovation, import competition, cost shocks and so on. As a result, there may not be one continuous period, but several cartel ‘episodes’ reflecting major changes in market and

See J. Harrington, ‘Post-Cartel Pricing during Litigation’ (2004) 52 Journal of Industrial Economics 517. 79 Case COMP/36.545/F3, Amino Acids [2001] OJ L152/24. 80 R. Marshall, L. Marx and M. Raiff, ‘Cartel Price Announcements: The Vitamins Industry’ (2008) 26 International Journal of Industrial Organization 762. 81 H. Boswijk, M. Bun and M.P. Schinkel, ‘Cartel Dating’ (2018) 34 Journal of Applied Econometrics 1. 78

Calculating cartel damages  383 cartel-specific factors. For example, a cartel may form with five firms, then react with a price war to deter the entry of the credible competitor which fails, and then resolve this by admitting the entrant into the cartel. This suggests not fewer than three distinct cartel episodes where the factors determining prices, and amount of the overcharges, will likely differ.

VII.

PASS-ON, MITIGATION AND OFFSETS

Where a claimant has been able to pass on the overcharge at higher prices to its customers or otherwise reduce its losses, these should be offset against or netted from the amount of damages.82 This appears now to extend beyond pass-on to the efforts by purchasers to reduce their costs in response to an overcharge. A. Pass-On The EU Damages Directive has as its principal concern the avoidance of overcompensation. It thereby gives the erroneous impression that a purchaser will be overcompensated if it has been able to pass-on the overcharge and this is ignored by the courts. This is incorrect because a concomitant of pass-on is an additional lost profits claim. The EU Pass-On Guidelines state that ‘there is an inherent link between the underlying price effect and volume effect. Therefore, if passing-on becomes relevant, both effects and their interaction should be taken into account.’83 ‘The volume effect can be described […] as the harm that is caused by the fact that fewer of the products or services are purchased as a result of the overcharge.’84 Put more technically: because most products exhibit a downward sloping demand curve, the higher the price, the smaller the quantity of the product that is purchased. This means that where a defendant pleads pass-on it necessarily accepts that the purchasers’ sales have been reduced and invites a lost profits claim. The pass-on defence was firmly established in the UK in Sainsbury’s and is routinely pleaded in cartel damage cases.85 The Tribunal in Sainsbury’s set out a two-part test: 1. ‘the pass-on defence is only concerned with identifiable increases in prices by a firm to its customers’ which ‘must be causally connected with the overcharge, and demonstrably so’; and

82 Pass-on is extensively discussed in Veljanovski (n 1) Chapters 18–21; and C. Veljanovski, ‘The Law and Economics of Pass-On in Price Fixing Cases’ (2017) 38 European Competition Law Review 209. See also M. Strand, The Passing-On Problem in Damages and Restitution under EU Law (Edward Elgar Publishing, 2017). 83 EU Pass-on Guidelines para 16. 84 ibid para 15. 85 The CAT in Sainsbury’s (at para 484(3)) questioned whether pass-on was a ‘defence’: ‘[t]he pass-on “defence” is in reality not a defence: it simply reflects the need to ensure that an applicant is sufficiently compensated, and not over-compensated, by a defendant’; but it then referred to it as defence. Sainsbury’s UKSC Appeal (at para 211) has affirmed it as a defence.

384  Research handbook on cartels 2. ‘where, on the balance of probabilities, the defendant has shown that there exists another class of claimant, downstream of the claimant(s) in the action, to whom the overcharge has been passed on’.86 This test has been heavily circumscribed. On causation, the Court of Appeal commented that the defendant could establish ‘a sufficiently close causal connection between an overcharge and an increase in the direct purchaser’s price […] by a combination of empirical fact and economic opinion evidence’.87 Also while the Court of Appeal was not required to decide the issue, it rejected the second part of the test as ‘not an essential condition’ and ‘inconsistent with the principle that damages are compensatory’.88 The UK Supreme Court in Sainsbury’s v Visa & Mastercard further clarified the legal position on pass-on: ● Pass-on is required by the compensatory principle and to avoid double recovery.89 ● Defendants have the legal burden to plead and prove pass-on.90 ● Once the defendants have raised the issue of mitigation, in the form of pass-on, there is a heavy evidential burden on the claimants to provide the evidence as to how they recovered their costs as the relevant information ‘is exclusively in their hands’.91 ● The broad axe principle applies to the quantification of pass-on.92 The law does not require unreasonable precision in the proof of the amount of the loss passed on to suppliers and customers.93 ● The degree of precision requires a balance between achieving justice by precisely compensating the claimant and dealing with disputes at a ‘proportionate cost’. ‘The court and the parties may have to forgo precision, even where it is possible if the cost of achieving that precision is disproportionate, and rely on estimates.’94 ● A greater degree of precision in the quantification of pass-on is not required from the defendants than the claimants. B.

Mitigation and Other Offsets

In Sainsbury’s, the Tribunal identified other offsets which could reduce the claimant’s award of damages: When faced with an unavoidable increase in cost, a firm can do one or more of four things: (1) It can make less profit (or incur a loss or, if loss making, a greater loss).

Sainsbury’s para 484 (emphasis in original). Sainsbury’s Appeal para 332. 88 ibid para 338. 89 Sainsbury’s UKSC Appeal para 197. 90 ibid para 324; and EU Damages Directive, Article 13 (‘The burden of proving the overcharge was passed on shall be on the defendant’). 91 Sainsbury’s UKSC Appeal para 216. See also Royal Mail Group Ltd, BT Group & Others v Daf Trucks Ltd & Others [2021] CAT 10. 92 Sainsbury’s UKSC Appeal para 175 ff. 93 ibid para 225. 94 ibid para 217. 86 87

Calculating cartel damages  385 (2) It can cut back on what it spends money on – reducing, for example, its marketing budget; or cutting back on advertising; or deciding not to make a capital investment (like a new factory or machine) or shedding staff. (3) It can reduce its costs by negotiating with its own suppliers and/or employees to persuade them to accept less in payment for the same services. (4) It can increase its own prices, and so pass the increased cost on to its purchasers.95

Sainsbury’s has been read as setting out a general principle of mitigation in cartel damage cases – whether by pass-on of the overcharge and/or where the purchasers reduce their costs. This has given the green light to defendants to take account of the wider and inter-market effects. For example, some defendants in the UK ‘trucks’ damages litigation before the CAT have (at least initially) pleaded, in addition to pass-on, pass-back and cost savings, and the savings from lower trailer prices should also be offset against the overcharge claim. The last offset is based on the proposition that because trucks and trailers are complements, the reduced sale of trucks (volume effect) would also reduce the purchases of complementary inputs, such as trailers, and thereby result in a fall in the price of trailers. The savings from cheaper trailers should, it is claimed, be deducted from the overcharge damages. The CAT’s discussion in Sainsbury’s can be recast in terms of the three ways a profit-maximizing firm can react to an overcharge – the cost effect, pass-on and the volume effect.96 The last two have already been discussed. The cost effect (or what can be called ‘pass-back’) consists of several elements. An overcharge increases the purchaser’s costs of production and the relative price of the cartelized input. Where possible, a profit-maximizing firm will substitute to cheaper inputs (the substitution effect). The overcharge will also decrease the purchaser’s ability to purchase all types of inputs (the output effect). These two effects will raise the firm’s marginal costs which will further decrease the demand for both the cartelized and other inputs (the profit-maximizing effect). The ‘cost effect’ is the outcome of these three adjustments. The cost effect interacts with the pass-on and volume effects. The cost effect leads to an increase in the firm’s marginal cost by less than the overcharge, and as a result decreases the pass-on and the volume effects. The purchaser will pass on all or part of the cost savings, the proportion depending on supply and demand conditions for its product(s). If the counterfactual is a perfectly competitive market, the entire cost saving would be pass-on so that the amount passed would be net of the mitigated costs, and the volume effect will be smaller.97 Second, and harder to incorporate in any damages measure, is the situation where, because of the overcharge, the purchaser has adopted inefficient production methods using too little of the cartelized input and too much of substitute inputs. This is a real loss and jars with the justification for a duty to mitigate, which is to reduce ‘economic waste’.

95 Sainsbury’s para 434, repeated at para 455. See also L. Kotlikoff and L. Summers, ‘The Theory of Tax Incidence’, in A. Auerbach and M. Feldstein (eds), Handbook of Public Economics – Volume II (Elsevier, 1987); and J. Stiglitz, Economics of the Public Sector (2nd edn, Norton, 1988) Part 4. 96 F. Verboven and T. van Dijk, ‘Cartel Damage Claims and the Passing-On Defence’ (2009) 57 Journal of Industrial Economics 457. 97 There will be estimation problems. If an econometric approach is used the cartel will affect both the price and cost variables, and this will need to be considered in the specification of the estimating equation.

386  Research handbook on cartels C.

Proof of Pass-On and Mitigation

While the broad axe approach applies to the quantification of pass-on and other mitigating factors, it must be recognized that these raise the complexity, difficulty and costs of mounting a damages action. This approach requires the defendant and claimant to trace the proportion of the overcharge that has been passed through the different downstream (and upstream) tiers of the supply chain. The factual issues are compounded when the second tier and subsequent tier(s) of indirect purchasers bring an action. For the courts and defendants, it leads to practical problems and necessity to ensure that the defendants in aggregate only pay the losses they have imposed and no more, and to the delays inherent in having to determine multi-layered litigation. This is combined with the experience in the UK of interminable interlocutory actions and appeals. This requires active case management by the courts to avoid litigation chaos and, from that, fears that the integrity of the justice system may be brought into question. The EU Damages Directive attempts to deal with the evidentiary problems surrounding pass-on. The measures it implements include pre-trial disclosure, a rebuttable presumption of pass-on for indirect purchasers’ claim, the publication of the EU Pass-On Guidelines98 to assist the courts with the quantification of pass-on and providing the national courts with the power to estimate losses and, where feasible, to seek assistance from the respective national competition authority. Whether these amount to an effective package to overcome quantification problems is doubtful, not least because claimants are still left with the burden of proof and need to quantify the losses. The emerging practice has been to rely on more informal approaches such as economic theory, and accounting methods99 that trace the way purchasers recovered their costs during the cartel period. While the consistency of pass-on with the compensatory principle is unassailable, this must be tempered by the practicalities of litigation. Allowing pass-on and indirect purchaser actions risks less compensation because it fragments claims and pushes the losses downstream to second or third-tier indirect purchasers that suffer minor individual losses, which most likely will not warrant bringing a claim unless in aggregate sufficient to attract third party litigation funding to mount a collective action. This works against the compensatory function of damages actions and its complementary role of enhancing the deterrent effects of anti-cartel laws and civil penalties.100 Quantifying pass-on will invariably be crude. The Tribunal in Sainsbury’s accepted this: ‘The problem is that it can be very difficult to ascertain whether and, if so, how, a given cost has been passed-on.’101 It quotes White J’s US Supreme Court judgment in Hanover Shoe,102

See n 64 above. A good example of the use of basic economics to establish pass-on can be found in tax cases; see, e.g., The Berkshire Golf Club, The Glen Golf Club, The Wilmslow Golf Club v The Commissioners for Her Majesty’s Revenue & Customs [2015] UKFTT 0627 (TC) para 56 ff. 100 M. Hausfeld, L. Sorkin and I. Scher, ‘Litigating Indirect Purchaser Claims: Lessons for the EU from U.S. Experience’ (2017) 37 Antitrust 58. 101 Sainsbury’s para 434. 102 Hanover Shoe Inc v United States Machinery Corp., 392 US 481 (1968) 491–94. White J’s focus was on the deterrence role of private actions in US antitrust, stating that they would be ‘more effectively enforced by concentrating the full recovery for the overcharge in the direct purchasers rather than by allowing every plaintiff potentially affected by the overcharge to sue for only the amount it could show was absorbed by it’. 98 99

Calculating cartel damages  387 which stressed the ‘insuperable difficulty’ of establishing the ‘unascertainable figures’ required for pass-on so that the task would ‘normally prove insurmountable’. Hanover Shoe resolved these evidentiary problems by rejecting the pass-on defence in US federal antitrust law. Illinois Brick103 cemented this position by refusing standing to indirect purchasers under US federal law. While these judgments and their reasoning are widely cited, they mislead as to the legal position in the US. Even under federal antitrust law, the defendants can argue pass-on where the direct purchaser has a pre-existing fixed quantity ‘cost plus’ contract with an indirect purchaser. Also, more than half the US states have amended their respective state antitrust laws by enacting so-called Illinois Brick repealers that allow indirect purchasers’ claims.104

VIII. CONCLUDING REMARKS The law and practice governing cartel damages are in their infancy and evolving. The discussion above outlines the state of play at the beginning of 2022. The development and experience with competition damages will be rapid especially in light of the huge amount of litigation over the trucks’ cartel across Europe. Moreover, it will be interesting to see whether and how UK law will differ from that within the European Union following Brexit. One of the ironies of Brexit is that the EU Damages Directive is an attempt by the European Commission to anglicize cartel damages law and procedures within the EU.

Illinois Brick Co. v Illinois, 431 US 720 (1977) 735. The federal prohibition does not apply to states, as held by the US Supreme Court in California v ARC America Corporation, 490 US 93 (1989). For a survey of state law, see P. Areeda and H. Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application (4th edn, Wolters Kluwer, 2019). 103 104

22. Cross-border cartels and international cooperation Pierre Horna and Sophie Hunter

I. INTRODUCTION Enforcement of cross-border cartels (‘CBC’) can be influenced by the size and maturity of competition authorities. Recent developments in technology have led to the emergence of oligopolistic cross-border collusion, for instance in the case of digital platforms, with detrimental negative spillover effects.1 CBCs fall within the definition of price-fixing arrangements and within the scope of Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’), as well as many other competition provisions globally. Their impact is most harmful in the competition law context and has been described as ‘the dark side of globalisation’.2 Growing importance is placed on cooperation between competition authorities in combating cross-border cartels. Competition authorities with less experience in cross-border cartel enforcement show significant interest in sharing and learning best practices from more developed competition authorities.3 Developing countries face several obstacles in investigating CBC cases. For instance, according to the Competition Commission of Zambia, having different priorities as well as different levels of development leads to obstacles.4 This suggests the need to agree on specific priority sectors to investigate because sharing informal information is duly overrated and can be difficult in some jurisdictions. Leniency is also an obstacle for many younger and developing agencies because it requires buy-in from the private sector, compliance with international standards, clear procedures and policies similar to those of neighbouring countries. The Indonesia Competition Authority noted that the difference in structure across the various legal systems can hinder cooperation. Instruments such as waivers and having a waiver-friendly environment may be paramount for younger agencies, combined with trust-building exercises to resolve some of the relevant obstacles.5 Another important way to address obstacles in investigating CBC is for competition authorities to actively involve foreign companies in the

1 UNCTAD, Competition Issues in the Digital Economy (TD/B/C.I/CLP/54, 1 May 2019) https://​ unctad​.org/​system/​files/​official​-document/​ciclpd54​_en​.pdf [accessed 9 March 2022]. 2 Intervention from the USA Representative (UNCTAD Working Group on Cross Border Cartels, Third Meeting, 3 June 2021). 3 UNCTAD, International Cooperation in Competition Law Enforcement – Challenges for Developing Countries and Best Practices (UNCTAD/SER​.RP/​2021/​2, UNCTAD Research Paper No. 59, 2 February 2021) https://​unctad​.org/​webflyer/​international​-cooperation​-competition​-law​-enforcement​ -challenges​-developing​-countries​-and [accessed 9 March 2022]. 4 Intervention from the Zambian Competition Commission (UNCTAD Working Group on Cross Border Cartels, Third Meeting, 3 June 2021). 5 Intervention from the Indonesian Competition Commission (UNCTAD Working Group on Cross Border Cartels, Third Meeting, 3 June 2021).

388

Cross-border cartels and international cooperation  389 investigative process, which may be very useful in bringing to light a more serious competition law violation. Several developing countries (such as South Africa, for instance) have highlighted that what is crucially needed is more organization and more effective interaction between competition authorities when relevant information is available.6 Cooperation and trust are two essential assets and are key to the development of coordination between competition agencies. It is time to move from cooperation to the implementation of a more formal cooperation arrangement. In this regard, it is essential for competition authorities to work hand in hand on compliance as a step towards more cooperation and trust building, for instance by developing an international document to spell out cooperation best practices in combating CBCs. Such global standards may aid developing countries in tackling CBCs more efficiently. These standards could be a great addition to other instruments discussed in the international arena.

II.

FROM COOPERATION TO COORDINATION: STRENGTHENING COOPERATION AMONG COMPETITION AGENCIES THROUGH COORDINATION GAME THEORIES

A.

International Cooperation Concerning Developing Countries’ Competition Authorities and Its Attendant Challenges

International antitrust cooperation does not occur frequently. This is especially salient for competition authorities in developing countries, which frequently have difficulties in participating in international cooperation. Among the various challenges faced by competition authorities – such as (i) a general lack of awareness of cooperation practices, (ii) a lack of a national legal basis to facilitate and support cooperation with foreign authorities and (iii) an overall lack of trust regarding the sharing of information with other authorities – the main obstacles for younger competition authorities relate to awareness, legal factors and practical factors. The lack of mutual trust and understanding reinforces the observed lack of interactions and of a focal point, and vice versa. Overall, the main problem relates to the lack of enforcement interests between experienced and less experienced authorities, as well as a lack of incentives for cooperation between them, particularly in terms of the incentives for experienced competition authorities to cooperate with less experienced competition authorities.7 International cooperation remains important for UNCTAD member states in the midst of the COVID-19 crisis. Cross-border anticompetitive cases are still taking place, and competition authorities around the world are facing similar issues ranging from price fixing concerning health care products to abusive behaviour of online platforms. The unprecedented challenges faced by competition authorities call for enhanced cooperation to prevent and deal with the crisis in an efficient and collaborative manner. The current crisis has had a positive impact in fostering stronger cooperation at regional and international levels among competition authorities, which have shared best practices to respond to challenges coming out of this crisis. It has

Intervention from the South Africa Competition Commission (UNCTAD Working Group on Cross Border Cartels, Third Meeting, 3 June 2021). 7 UNCTAD (n 3). 6

390  Research handbook on cartels demonstrated how useful regional cooperation is, and how international cooperation is much needed to deal with issues of common concern.8 B.

International Cooperation during Times of Crisis

International cooperation is much more about relationships and trust than rules and Memoranda of Understanding (‘MOU’), especially in times of crisis, during which it is essential to have closer relationships, exchange more experience and share public information among agencies and authorities. The crisis has underlined the importance of international cooperation. International cooperation is much needed in order to respond to this crisis. During the COVID-19 crisis, and also during the post-crisis phase, one can identify an increasing need for competition authorities to reinforce advocacy efforts and law enforcement, which call for closer relationships with other authorities, more exchange of experience and the sharing of relevant information. Historically, in times of economic recession, cartelists step forward. In addition, hospitals and other public organizations are major purchasers of pharmaceutical equipment, which can lead to cartel enforcement overlapping with procurement law. International cooperation could help in improving the institutional framework. For instance, the US Department of Justice (‘DOJ’) has formed a ‘strike force’ to focus on collusion in public contracting and has been sharing best practices internationally; it expects to continue to do so going forward.9 The key role of soft law, advocacy and international cooperation through the exchange of experiences, as well as harmonizing best practices among authorities, to assess responses to crisis and analyse consequence at both national and global level has been highlighted. The following three areas should be prioritized for competition authorities: international cooperation in case handling; advocacy; and state aid. 10 The crisis has brought common interests in health and food sectors among authorities, and there is an interest in further exploring cooperation in case handling for more productive results. Interest has also been expressed regarding competition and public procurement, where enhanced awareness is needed, especially in the health sector.11 There is a strong need for, and an interest in, promoting a competitive business environment following the crisis. Competition authorities may expand and develop further actions to advocate for competition-driven new legislation and policymaking, with an emphasis on creating more sustainable, resilient and healthier economic ecosystems across the world.12 With the large amounts of public money geared towards businesses bail-outs and supporting economic recovery, it is key to monitor carefully the use and impact of state aid so that markets remain dynamic and opportunities are available for SMEs and entrepreneurs. This requires a strong role of competition authorities as advisors to governments and with respect to close coordination with other public bodies and sectoral regulators.13

ibid. ibid. 10 ibid. 11 ibid. 12 ibid. 13 ibid. 8 9

Cross-border cartels and international cooperation  391 C.

The Problem of Cooperation and Trust for Competition Authorities

Building trust between agencies is a prerequisite to any cooperation and any coordination exercise. The main obstacle that hinders agency cooperation between the experienced and the less experienced competition agencies is a lack of trust. The dynamics of trust development between mature and young competition authorities differ from those between young competition authorities, particularly when dealing with transnational CBCs.14 For instance, agencies can aim to align their strategies from further cooperation to coordination through the signing of MOUs or information cooperation agreements. Cooperation among competition authorities, regardless of their level of experience, is crucial because it is possible that an agency may not be aware of a cartel affecting its jurisdiction, while another agency has cognisance of it. In the case of international cartels, coordination of investigatory measures may be necessary in order to avoid the risk of destruction of evidence if one agency moves before other agencies, on whose territory evidence may be located. Subsequently, agencies may well wish to gain access to evidence located outside their own jurisdiction. More general discussions and comparing of notes between investigators of the same cartel in different agencies may facilitate the smooth progression of the case, and better rebutting of the arguments of the parties. Information on turnover relevant for the calculation of sanctions may be exchanged.15

A transnational CBC investigation requires a special type of trust to foster cooperation between an experienced and a less experienced competition authorities due to obstacles such as the costs of cooperation and the issue of distributional conflicts. This specific trust should be based on incentives to share information at the investigatory phase (despite the fact that the information might be protected under confidentiality rules). Without trust, it is difficult for agencies to align strategies and find common enforcement to develop cooperation on case investigations, as well as to develop incentives for more long-term coordination mechanisms. D.

Game Theory and Its Application to Competition Law

Looking at game theory and coordination games can be useful to solve the problem of cooperation and coordination between agencies. Based on the assumption that there is already a pre-existing relationship between two agencies, coordination games may help to strengthen informal cooperation for cross-border investigations among young competition authorities. The classic view is the one represented by the Prisoner’s Dilemma (‘PD’), in which incentives rely on sanctions. This calculus-based trust (‘CBT’) governs the relations between mature and young competition authorities based on the rationale that a scarce level of knowledge of each other is a constant factor between these institutions.16 This game highlights the ‘ineffectiveness and counter productivity of these sanctions in correcting the problem of defection or free riding in the [PD]’.17 Therefore, this chapter advocates a move away from 14 P. Horna, Fighting Cross Border Cartels: The Perspective of the Young and Small Competition Authorities (Hart, 2020). 15 International Competition Network, Co-operation Between Competition Authorities in Cartel Investigations (Report to the ICN Annual Conference, Moscow, May 2007) 7. 16 Horna (n 14) 220. 17 J. Lee, ‘Gaining Assurances’ [2012] Wisconsin Law Review 1137, 1138.

392  Research handbook on cartels this classic view, especially for younger agencies, to a more dynamic game theory approach which spurs coordination. The Stag Hunt (‘SH’) or assurance game addresses ‘the problem of coordinating one’s actions with others in situations where everyone does best by cooperating, but otherwise should all defect’.18 In this case, there are two players who face two potential strategies (hunt a stag or a hare), with different potential pay-offs. Finally, the Battle of the Sexes game (‘BOS’) presents a situation which requires negotiation to choose the most convenient outcome for both players, and to avoid outcomes where each of them would be worse off than had an agreement been made. E.

Catching the Uncatchable: CBCs and Coordination Game Theory

Competition authorities in developing countries face numerous challenges in tackling CBCs, challenges which relate to different level of development and priorities among agencies, leniency framework requirements, difference in legal structures, sharing of informal information and lack of cooperation, incentives and trust.19 In addition, at a recent Southern African Development Community (‘SADC’) Cartel Workshop, participants pointed to the following challenges: knowledge, capacity, procedural blocks and information sharing.20 In 2014, Peña identified seven challenges in order to foster international cooperation in Latin America: (1) to have more Latin American countries going from receivers to givers of technical cooperation; (2) to avoid having overlap in the existing initiatives; (3) to avoid limiting the cooperation to the informal level; (4) to overcome the budget and geographic limitations; (5) to define what confidential information means; (6) to recognize the existence of legal limits to the recognition of evidence gathered abroad; and (7) to avoid copying models on a one-size-fits-all basis without contemplating the local reality.21 What is important in deciding whether to cooperate is to look at the degree of usefulness of the cooperation, as well as at the pre-existing relationships and knowledge between the two agencies on their respective procedures. For private practitioners and mature competition authorities, having an international benchmark for the definition of confidential information would be a desirable solution to smooth information exchange flows with young competition authorities.22 In order for trust to be built regarding competition authorities with less experience in prosecution and investigation, it is essential for those competition authorities to develop a robust and effective leniency programme to gain credibility, which is crucial during the pre-investigative phase of a CBC case. Mechanisms should be developed to support the exchange of information between relevant agencies at the regional level through the creation of a notification system or databases. This will in turn become a useful platform to signal similar anticompetitive practices and enable agencies to coordinate strategies on how to approach the

ibid 1143. UNCTAD Working Group on Cross Border Cartels, Third Meeting, 3 June 2021. 20 SADC Cartel Training Workshop, 10 September 2021. 21 J. Peña, ‘The Role of International Cooperation in the Development of Competition Law in Latin America’, in N. Charbit, E. Ramundo, A. Pavlik and J. Rebarber (eds), William E. Kovacic. An Antitrust Tribute-Liber Amicorum, Volume II (Institute of Competition Law, 2014) 196. 22 Interview with David Anderson at the ICN Annual Conference, Porto, 10–12 May 2017. 18 19

Cross-border cartels and international cooperation  393 case and conduct coordinated responses (such as dawn raids). However, this process might be hindered by efforts to ensure the full protection of confidential information. Finally, the rationale for catching CBCs is the fact that CBCs often have a regional impact on cross-border matters. Therefore, cartelized activities affect neighbouring countries, as the case studies will demonstrate. Considering the trend towards regionalization because of COVID-19, which might lead to potential cartel discovery post-crisis, tackling CBCs at the regional level remains paramount. Since CBC investigation requires collaboration pre, during and post-investigation, and that investigations face challenges in obtaining information and uncovering in different jurisdictions, coordination game theory such as BOS and SHT is a useful tool for younger agencies in assessing how best to align common enforcement strategies with neighbouring countries.

III.

LATEST DEVELOPMENTS IN THE INTERNATIONAL ARENA TO TACKLE CBCs

A.

OECD Recommendation on International Hard-Core Cartels

The OECD predicted in 2014 that the cooperation complexity index would increase by 92 per cent, to 162 per cent, by 2030 because of cross-border enforcement cartel increasing in line with world trade predictions.23 In 2016, an inventory of international cooperation MOU between competition agencies was also published. Based on more than 140 MOU, the inventory lists examples of typical and atypical provisions that can be useful for the negotiation of MOU.24 In July 2019, the OECD Council adopted a Recommendation regarding the fight against hard-core cartels.25 The Recommendation updates and replaces the 1998 Recommendation Concerning Effective Action against Hard Core Cartels. While the 1998 recommendation is still valid, the OECD Competition Committee concluded that it did not reflect some of the significant developments in anti-cartel policies and enforcement practices from the past 20 years in leniency programmes. The OECD Council adopted the Recommendation of the OECD Council concerning the ‘International Co-operation on Competition Investigations and Proceedings’,26 which calls for the OECD member states to foster their competition laws and practices to promote further international cooperation among competition authorities. Since the adoption of the Recommendation, the monitoring activity of the developments and trends in international cooperation in competition cases has been taking place.27

23 OECD, ‘Recommendation of the OECD Council Concerning International Co-operation on Competition Investigations and Proceedings’ (OECD/LEGAL/0408, 16 September 2014) 52. 24 www​.oecd​.org/​competition/​internationalco​-ope​rationandc​ompetition​.htm [accessed 9 March 2022]. 25 OECD Council, ‘Recommendation of the Council Concerning Effective Action against Hard Core Cartels’ (OECD/LEGAL/0452, 2 July 2019). 26 OECD, Improving International Co-operation in Cartel Investigations (DAF/COMP/GF(2012)16, 30 November 2012) www​.oecd​.org/​daf/​competition/​Improving​Internatio​nalCoopera​tionInCart​elInvestig​ ations2012​.pdf [accessed 9 March 2022]. 27 UNCTAD (n 3).

394  Research handbook on cartels B.

UNCTAD’s Latest Efforts on CBCs

In its efforts to support its member states in combating CBCs, the United Nations Conference on Development and Trade (UNCTAD) has set up a specific working group on CBCs to explore ways of supporting developing countries in effectively tackling CBC cases through the sharing of best practices among developing countries. It is clear from the ongoing discussions at the UNCTAD Working Group on Cross Border Cartels that more cooperation and new tools are required to enhance cooperation efforts.28 It is essential for competition authorities to work hand in hand on compliance as a step towards more cooperation and trust building, for instance by developing an international document to spell out cooperation best practices in combating CBCs, as was suggested at the latest session of UNCTAD’s Working Group based on a survey of the members of the group. Such global standards may help developing countries in tackling CBCs more efficiently. These standards could be a great addition to the recently approved Guiding Principles and Procedures (‘GPP’) under Section F of the United Nations Set. Since the Working Group’s inception in 2019, UNCTAD has already received two requests for assistance from authorities in developing countries seeking support to address administrative, technical and legal obstacles in obtaining crucial information for CBC cases currently under investigation in their jurisdiction. More research and analysis is required to understand how the GPP can feed into strengthening developing countries’ enforcement strategies in tackling CBCs.

IV.

COORDINATION GAMES FOR TACKLING REGIONAL CARTELS: CASE STUDIES AND PRACTICAL APPLICATION

A.

Coordination Game Theory and the Alignment of Strategies and the Fostering of a Common Enforcement Interest

For competition authorities in developing countries, coordination games can be a useful tool to analyse specific strategies in the approach to be taken when faced with a CBC case. In the pre-investigative phase, young competition authorities would have to balance whether to approach the cartel from a regional or domestic perspective. The relevant risks that are usually present at the pre-investigatory phase may not be as relevant if the one or two neighbouring competition authorities have already opened a formal investigation, as the information used to open an investigation is no longer confidential. Hence, relatively advanced but still young competition authorities would be in a better position to share information in the investigatory phase with their younger counterparts, while respecting confidential information rules.29 Through coordination game analysis, competition authorities may benefit from receiving tip-offs from other authorities that have already started investigating a company and from exchanging intelligence information from other competition agencies that could help in analysing if the cartel has an impact in a particular jurisdiction.

UNCTAD Working Group on Cross Border Cartels, Third Meeting, 3 June 2021. Horna (n 14) 184.

28 29

Cross-border cartels and international cooperation  395 Coordination games can also help align strategies and information gathered from cartel enforcement cases and merger notifications. Indeed, when possible, agency and sharable information could be exchanged among young competition authorities when they receive merger notifications from regional companies operating in a regional relevant market.30 This proposal assumes that an international merger transaction can be a way to legalize a regional CBC. As a result, incorporating the information gathered from merger notifications, whether regarding hostile takeovers or any other kind, would deter cartels from taking that road and legalizing a regional CBC.31 Younger agencies should lean towards shifting from cooperation to coordination because of the shortcomings resulting from cooperation mechanisms, since cooperation and PD coordination cannot address the issue of having common enforcement strategies because there needs to be a specific coordination mechanism in place between agencies to develop, strengthen and maintain trust. Under the PD theory, even where a collusive outcome is profitable for both players, there is a higher likelihood that both players will cheat. Therefore, coordination game theory presents a more agile, flexible and sustainable approach. While the PD rests upon sanctions and therefore makes defecting a more likely outcome, the Stag Hunt theory demonstrates the better outcome when cooperating and the Battle of the Sexes relies on negotiation and compromise to achieve an outcome. In essence, calculus-based trust activities (‘CBT’) fail to cement a sustainable trust mechanism that knowledge-based trust (‘KBT’) and identification-based trust (‘IBT’) activities can achieve, since they rely on long-established cultural social links and are based on information rather than deterrence – in contrast to KBT.32 B.

How to Analyse CBCs Through the Lenses of Coordination Games: A Practical Application33

The case studies described below aim to demonstrate how, despite pre-existing or non-pre-existing cooperation and coordination mechanisms being in place, the investigations carried out still faced numerous obstacles in coordinating efforts which could have been solved by relying on game theory. Case study 1: How to strengthen coordination in a parallel investigation into taxi services34 The Peruvian Competition Authority (‘INDECOPI’) undertook an investigation into an alleged collective taxi service agreement between two cross-border cities, Arica and Tacna. The Chilean Competition Agency (‘FNE’) collaborated with INDECOPI, which was conducting a parallel investigation regarding the same events, on the notification process and on the exchanges of non-confidential information, including public information (such as data to 1.

A. Cosnita-Langlais and J.-P. Tropeano, ‘Fight Cartels or Control Mergers? On the Optimal Allocation of Enforcement Efforts within Competition Policy’ (2013) 34 International Review of Law and Economics 34. 31 Horna (n 14) 184. 32 For a typology of these different trust mechanisms, please refer to Annex 1 below. 33 These case studies are real cases which were discussed during the UNCTAD Working Group on Cross Border Cartel during 2021. 34 Intervention from the Peruvian and Chilean Competition Commissions (UNCTAD Working Group on Cross Border Cartels, Third Meeting, 3 June 2021). 30

396  Research handbook on cartels identify and notify the investigated persons) and internal information of the agency (referring mainly to the status and nature of their respective investigations, as well as their preliminary conclusions). The investigation from INDECOPI and FNE did not result in any sanction, but highlighted the potential to cooperate on cross-border matters and emphasized which obstacles were faced. For instance, the ten-month gap between the investigations might have jeopardized the overall investigation. Carrying out the same interview in different jurisdictions is inefficient and burdensome on the investigative parties. The lack of experience of FNE and INDECOPI in multijurisdictional interview processes meant these two agencies needed to explore such mechanisms while considering their respective legal restrictions. Both FNE and INDECOPI stressed that trust and willingness are very useful for cooperation through informal communication (such as WhatsApp) but respect for internal and international rules is also needed. FNE pointed out that treaties for sharing information are complex; it prefers to rely on informal cooperation, which is much more useful. In this case, if the information would not have been publicly available, the relevant documents would not have been able to be transferred under Peruvian law. By looking at the Stag Hunt game theory, we can analyse that cooperation between the two authorities despite the lack of eventual sanction. In this case, the two authorities have two strategies with different pay-offs. Strategy 1 – Exchange of information at the pre-investigatory phase: full cooperation and coordination in the exchange of intelligence information about the regional duopoly’s business behaviour, the possible theory of harm of the regional CBC and how the regional market has been divided. The coordination could also be helpful to organize simultaneous raids in the three jurisdictions at stake. Strategy 2 – Coordination at the investigatory phase: exchange of evidence gathered at the investigatory phase among the three jurisdictions, provided no confidential information is exchanged unless there are information gateways between the three competition authorities. The highest pay-off would mean full prosecution and deterrence of the regional CBC, the seizing of key documents and the avoidance of evidence destruction in other jurisdictions, including other jurisdictions beyond Peru and Chile. The lowest pay-off would mean no coordination, unilateral enforcement of competition rules and an attempt to apply anti-cartel laws extraterritorially, but with limited results. While there is clear cooperation after the start of the Peruvian investigation, the lack of coordination from the onset of the investigation (Strategy 2) led to severe delays in the procedure of notifying the relevant agents, due to their foreign domiciliation; coordinating the investigation; and carrying out interviews. Therefore, an analysis of the Stag Hunt game theory demonstrates that full coordination at the onset of the investigation (Strategy 1) would have brought the highest pay-off for the two parties. In essence, while the PD theory would have led to parallel investigation, the application of the Stag Hunt theory can lead to a better outcome by showing that more coordination at the pre-investigatory phase would be a better outcome, since defection would be worse off for both agencies.

Cross-border cartels and international cooperation  397 2.

Case study 2: How to alleviate jurisdictional obstacles in the coordination of an investigation in motor parts in Asia35 This case study involves a cartel of motor parts manufactured by a company in Japan. The investigation which started in Indonesia also involved the Japanese Fair Trade Commission (‘JFTC’), which gathered evidence. However, numerous difficulties were faced by the Indonesian Competition Commission (‘ICC’) in coordinating investigation efforts due to different jurisdictional and judicial structures. Although an MOU was already in place with the JFTC, the case required the involvement of further ministries (Ministry of Foreign Affairs, Embassy of Japan to Indonesia) because the ICC is independent. Therefore, in the case of Indonesia, cooperation with other ministries is essential to deal with CBC cases. In future, cooperation could be taken to the next level among the agencies in order to facilitate case cooperation. Cooperation with the JFTC was paramount in providing a database and relevant permissions because of the sensitivity of the case. Economic analysis included evidence from the JFTC and was challenging due to the level of data. Evidence for this case was gathered based on email communication and witness statements. This case shows that that despite the existence of a relevant MOU, the investigation was still cumbersome. This case highlights the problem of coordination when ‘one’s actions with others in situations where everyone does best by cooperating, but otherwise should all defect’36 under the Stag Hunt (‘SH’) or assurance game. If the ICC manages to reach the Japanese headquarters of the companies, this can potentially lead to the revelation of bigger schemes, of a truly global nature, and of bigger regional cartel schemes. The coordination did not reach the best outcome in this case, among others due to the different legal structures of the ICC and the JFTC, as well as the lack of a workable definition of sharing of information. 3.

Case study 3: How to prevent carrying out a parallel investigation into the same company by strengthening coordination among neighbouring agencies37

This case study focuses on the cement sector. It relates how a cartel agreement between four cement producers in the Southern African Customs Union (‘SACU’), which covers South Africa, Botswana, Namibia and Eswatini, only led to one prosecution in South Africa due to lack of cooperation among the other agencies. It also concerns a successful prosecution from Zambia which did not share information with the Central African Economic and Monetary Community (‘CEMAC’) partners. It reflects how two competition authorities (those from South Africa and Zambia) arrived at different outcomes (one successful and one unsuccessful prosecution) due to a lack of regional cooperation. The South African Competition Commission (‘CompCom’) case demonstrates how a cartel agreement between four cement producers in SACU only led to one prosecution in South Africa despite the information being readily available to all agencies. Since this case, there has been a significant increase in cooperation among agencies on cartel cases (forex, fishing and

Intervention from the Indonesian Competition Commission (UNCTAD Working Group on Cross Border Cartels, Third Meeting, 3 June 2021). 36 Lee (n 17) 1143. 37 Intervention from the South Africa and Zambian Competition Commissions (UNCTAD Working Group on Cross Border Cartels, Third Meeting, 3 June 2021). 35

398  Research handbook on cartels the automotive industry). Nevertheless, CompCom is yet to investigate a cross-border cartel which requires coordination among these agencies. With respect to the Zambia case, which deals with the same sector, the investigation resulted in a prosecution after evidence was uncovered during a dawn raid in January 2020. It involved similar companies and would also result in price wars whenever there was a new entrant. There was a concern from the Common Market for Eastern and Southern Africa (‘COMESA’) Competition Commission that the cement cartel in Zambia affected Malawi. This was seen as a Zambian cartel with cross-border effects in DRC, Malawi and the Great Lakes region. No information was shared with COMESA or any other agency. Even though the Zambian Competition Commission did not cooperate with CompCom, it still learnt from the experience of the SACU cement cartel. This experience paved the way for further cooperation. While two settlements were agreed with CompCom and one case was dismissed, the same company was prosecuted successfully in Zambia (2020). Coordination games could play a role in this exercise because these would assist in laying out the specific strategies for young competition authorities to implement. For instance, in the liquid oxygen cases in Latin America, none of the young Latin American competition authorities verified with their counterparts whether the same liquid oxygen companies were undertaking the same actions in their respective territories.38 Moreover, they did not discuss ways of approaching the same unlawful business practices, nor did they coordinate dawn raids at the regional level.39 In this case, Zambia managed to effectively prosecute the cement cartel. In South Africa, the case was dismissed due to a lack of evidence. Greater cooperation among the parties at a regional level would have led to a higher level of prosecution and a different outcome at the regional level. By applying the BOS theory, agencies might have benefited from the sharing information on this case across the region. This could have led to the pooling of investigatory resources and resulted in a better outcome based on negotiation and compromise among neighbouring countries regarding the sharing of evidence and information. In this example, the introduction of game theory would have meant efficiency of the resources allocated to investigate these cartels, and ultimately better deterrence at the regional level.

V. CONCLUSION This chapter has attempted to demonstrate how game theory can provide a new coordination tool of analysis for younger competition authorities in developing countries which face numerous obstacles in the cooperation of their anti-competitive enforcement efforts. It has exemplified how coordination games provide an alternative to the problem of cooperation based on real case studies. These case studies highlight the potential for better cooperation through enhanced coordination efforts among agencies based on coordination game theories. Notably, the unsuccessful liquid oxygen cartel case acts as a reminder that regional cooperation is key to carrying out an effective investigation. In the Southern Africa case, the uncoordinated investigation of the same company in SACU and Zambia opened the door for Horna (n 14) 216. See P. Horna, ‘Regional Coordination in Cartel Investigations: The Liquid Oxygen Case’, in P. Burnier da Silveira (ed.), Competition Law and Policy in Latin America: Recent Developments (Wolters Kluwer, 2017). 38 39

Cross-border cartels and international cooperation  399 strengthened future collaboration on CBC case investigation. Nevertheless, one size does not fit all and adaptations must be made in line with specific circumstances of the case. Therefore, a case-by-case analysis is required to effectively tackle the best approach to case investigation and enforcement.

ANNEX 1: TYPOLOGY OF TRUST-BASED ACTIVITIES40 A typology of three different types of trust can be helpful to understand what stages and what dynamics operate between two agencies in seeking the best strategies for further cooperation and coordination, for instance through the signing of memorandum of understandings or information cooperation agreements. Deterrence-based or calculus-based trust (‘CBT’) is sustained by the threat of punishment if consistency is not maintained, rather than the promise of reward. In economic terms, this type of trust is ‘ongoing, market-oriented, a mere economic calculation whose value is determined by the outcomes resulting from creating and sustaining the relationship relative to the costs of maintaining or severing it’.41 CBT governs the relations between mature and young competition authorities based on the rationale that scarce knowledge of each other is a constant factor between these institutions.42 Knowledge-based trust (‘KBT’) is based on information rather than deterrence, in contrast to CBT. KBT is grounded in behavioural predictability, where one has enough information about others to understand them and to accurately predict their behaviour.43 KBT can govern the relations within young competition authorities where they have more incentives to come forward with information and to trust each other.44 KBT is key in developing competition enforcement at regional level, as exemplified by the signing of the Lima Declaration, an informal cooperation agreement between Andean countries, which was concluded after repeated interactions and negotiation between the three heads of the authorities enhanced their ability to understand the ways in which their counterparts enforce competition rules domestically. Identification-based trust (‘IBT’) relies on the full internationalization of others’ desires and mutual understanding between both parties. Under the Nordic Competition Network (‘NCN’), which was established well before the regional model for cooperation between the cartel units of the Nordic competition authorities formed in 2000, the Nordic countries (Denmark, the Faroe Islands, Finland, Greenland, Iceland, Norway and Sweden) would meet to discuss common enforcement interests prior to conducting an investigation into a business with possible links to other Nordic countries. This high level of trust was developed based on common characteristics such as ethnic homogeneity, Protestant religious traditions, good government, wealth and income equality.

See Horna (n 14) 181. R. Lewicki and B. Bunker, ‘Trust in Relationships: A Model of Development and Decline’, in B. Bunker and J.Z. Rubin (eds), Conflict, Cooperation, and Justice: Essays Inspired by the Work of Morton Deutsch (Jossey-Bass Inc, 1995) 145. 42 Horna (n 14) 182. 43 Lewicki and Bunker (n 41) 142. 44 Horna (n 14) 180. 40 41

PART IV CARTEL LAW IN PRACTICE

23. The European Union Paolisa Nebbia

I. INTRODUCTION According to the latest statistics available from the European Commission (‘the Commission’),1 between 2017 and December 2021, 29 cartel cases were decided by the Commission, entailing a total amount of fines imposed of more than 6.2 billion euros.2 The highest cartel fine (for a total of 3.8 billion euros) was imposed by the Commission in 2016/2017 on the so-called Trucks cartel,3 which also records the highest fine per undertaking (1 billion euros, imposed on Daimler). The Commission, as well as national competition authorities, has wide-ranging powers to investigate suspected cartels (as well as other competition infringements), which include sending requests for information, either by a formal decision or, more frequently, by an informal request; conducting inspections of business premises and, subject to certain conditions, of non-business premises; and asking questions and conducting interviews. It also has at its disposal a variety of tools for encouraging cartel reporting (such as leniency and whistleblowing procedures) and taking more efficient action (such as settlement procedures), with a view to increasing deterrence. This chapter will mostly focus on EU-level competition procedure and the Commission’s more frequently used investigatory powers. The main pieces of legislation governing the conduct of competition proceedings, including cartel investigations, are Regulation 1/20034 and Regulation 773/2004.5 Useful information and practical details on the conduct of competition proceedings can also be found in the Commission Notice on Best Practices for the Conduct of Proceedings Concerning Articles 101 and 102 TFEU,6 as well as in the Commission’s Antitrust Manual of Procedures.7

1 See European Commission, ‘Cartel Cases Statistics’ https://​ ec​ .europa​ .eu/​ competition​ -policy/​ cartels/​statistics​_en [accessed 4 March 2022]. For an overview of the Commission’s activity on cartels and, more generally, in competition enforcement, see also European Commission, Commission Staff Working Accompanying the Document Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – Report on Competition Policy 2019 (SWD(2020) 126 final, 7 July 2021). 2 Before adjustment by the European Court of Justice. 3 Case AT.39824, Trucks, Commission decision, 27 September 2017, C(2017) 6467 final. 4 Council Regulation (EC) No 1/2003 on the Implementation of the Rules on Competition Laid Down in Articles 81 and 82 of the EC Treaty [2003] OJ 2003 L 1/1 (‘Regulation 1/2003’). 5 Commission Regulation 773/2004 Relating to the Conduct of Proceedings by the Commission Pursuant to Articles 81 and 82 of the EC Treaty [2004] OJ L123/18. 6 [2011] OJ C308/6. 7 European Commission, ‘Antitrust Manual of Procedures – Internal DG Competition Working Documents on Procedures for the Application of Articles 101 and 102 TFEU’ (November 2019) https://​ ec​.europa​.eu/​competition/​antitrust/​antitrust​_manproc​_11​_2019​_en​.pdf [accessed 4 March 2022].

401

402  Research handbook on cartels

II.

THE RELATIONSHIP BETWEEN CARTEL LAW ENFORCEMENT AND HUMAN RIGHTS

A.

The Growing Importance of Human Rights-based Arguments

The enforcement of cartel law by the Commission has been increasingly subject to a delicate balancing exercise between the need to ensure, on the one hand, the effective detection and punishment of illegal conduct and, on the other hand, the respect for the fundamental rights of the individuals. In the past few years, a general trend has been identified towards an exponential increase in the – more or less successful – use of fundamental rights-based arguments.8 This development can be attributed to at least two factors: first, the 2011 Menarini judgment of the European Court of Human Rights (‘ECtHR’),9 in confirming the applicability of Article 6(1) (right to a fair trial in criminal cases) of the European Convention of Human Rights (‘ECHR’) to competition law procedures, substantially paved the road to a material and significant enhancement of human rights-based defences; second, in 2009 the Treaty of Lisbon introduced a clear binding force for the European Charter of Human Rights (‘Charter’), which ‘placed the protection of fundamental rights at the core of the European Legal Order’.10 The human rights narrative has surfaced in cartel defences with regard, inter alia, to the right to good administration and to the right to privacy, both of which will be considered herein. B.

Good Administration

The right to good administration, embedded in Article 41 of the Charter, provides that every person has the right, inter alia, to have his or her affairs handled impartially, fairly and within a reasonable time by the institutions, bodies, offices and agencies of the Union. In the context of cartels, this principle has been interpreted, most notably, as encompassing the right of any person to have his or her affairs handled impartially by the EU institutions, entailing both subjective impartiality, insofar as no member of the institution concerned who is responsible for the matter may show bias or personal prejudice, and objective impartiality, For a deeper analysis, as well as precise figures, see J. MacLennan, B. Vereecken and A. Senoner, ‘EU Competition Law and the Charter of Fundamental Rights: An Overview of EU and National Case-Law’ (e-Competitions, 3 December 2020) www​.concurrences​.com/​en/​bulletin/​special​-issues/​ echr/​eu​-competition​-law​-and​-the​-charter​-of​-fundamental​-rights​-an​-overview​-of​-eu​-and​-en [accessed 4 March 2022]. 9 A. Menarini Diagnostics srl v Italy, Application No. 43509/08, Judgment of the ECtHR, 27 September 2011. In that case, the ECtHR confirmed that an antitrust procedure against Menarini in the Italian jurisdiction had a ‘criminal nature’ for the purpose of Article 6 ECHR. The elements taken into account by the court to determine whether the procedure had a criminal nature, based on settled case law, were: (i) the classification of the infringement by the national legislation; (ii) the nature of the offence; and (iii) the nature and severity of the applied penalty. The infringement was formally qualified by the domestic legislation as having an administrative nature rather than a criminal one; but this criterion was not determinative for the issue at hand. Indeed, the amount of fine applied to Menarini and the respective deterrent effect led the Court to hold that the sanction had a criminal nature. 10 K. Lenaerts, ‘Making the EU Charter of Fundamental Rights a Reality for All: 10th Anniversary of the Charter Becoming Legally Binding’ (Speech, 12 November 2019)   https://​ec​.europa​.eu/​info/​sites/​default/​files/​charter​_lenaerts12​.11​.19​.pdf [accessed 4 March 2022]. 8

The European Union  403 insofar as there must be sufficient guarantees to exclude any legitimate doubt as to bias on the part of the institution concerned. Such a right, together with the principle of presumption of innocence, has been invoked particularly in the context of hybrid settlement cases, based on the argument that, as from the time of adoption of the settlement decision, the Commission would no longer be able to make an impartial assessment of the case and would tend to attribute to the non-settling undertakings unlawful conduct. As is apparent from the different solutions given by the EU courts in Pometon v Commission11 and in ICAP plc and others v Commission,12 the manner in which the settlement decision is structured and drafted is fundamental for the purposes of the Court’s assessment of impartiality. While in both cases the Commission’s settlement decisions had not formally included a legal qualification of the facts set out with regard to the non-settling undertaking, in Pometon the Court of Justice noted that the settlement decision was so drafted that, upon reading it, no potentially interested persons could objectively infer from the references to some of Pometon’s conduct that it was conclusively guilty, since that decision made clear, leaving no room for doubt, that it was addressed exclusively to the other four undertakings which had agreed to settle and that the case concerning Pometon would be dealt with at a later stage in a separate adversarial procedure; in ICAP, on the other hand, the General Court found that the Commission’s position as to the participation of the non-settling undertaking in the conduct was nonetheless ‘reveal[ed] very clearly’ and ‘could easily be inferred from a reading of that decision’.13 On other occasions, the right to good administration has been interpreted as a right to have the case handled within a reasonable lapse of time. In such cases, failure of the Commission to act within a reasonable time can constitute a ground for annulment in the case of a decision finding an infringement, provided it has been established that the breach of that principle adversely affected the rights of defence of the undertakings concerned. Other than in that specific case, failure to observe the duty to deal with the matter within a reasonable time has no effect on the validity of the administrative procedure, though it may result in a reduction of the fine.14 Whether the time taken for each step of a procedure is reasonable must be assessed in relation to the individual circumstances of each case, in particular its context, the conduct of

Case C-440/19 P Pometon v Commission EU:​C:​2021:​214, confirming Case T-433/16 Pometon v Commission EU:​T:​2019:​201. See, more recently and along the same lines as Pometon, Case T‑799/17 Scania AB EU:​T:​2022:​48. In this judgment, the General Court also pointed out (para 104) that the fact that, in hybrid procedures, the adoption of the settlement decision and the decision following the standard procedure are staggered over time does not in itself, in all circumstances, entail an infringement of the presumption of innocence, the rights of the defence or the duty of impartiality. See also P. Nebbia, ‘Hybrid Settlements’ (3rd Cartels Workshop: An Advanced Seminar on Substantive and .concurrences​ .com/​ IMG/​ pdf/​ Procedural EU Developments, Concurrences, 20 January 2022) www​ 220120​_cartels​_2022​_2​-transcript​.docx​.pdf​?75711/​ec4b0b18f8​ad455987f0​ff4a9056505026074a23 [accessed 4 March 2022]. 12 Case T-180/15 ICAP plc and others v Commission EU:​T:​2017:​795 (as confirmed by the Court of Justice in Case C-39/18 ICAP plc and others v Commission EU:​C:​2019:​584). 13 M. Giangaspero, ‘Pometon v Commission: Reviving Staggered Hybrid Settlements?’ (2020) 9 Journal of European Competition Law & Practice 509. 14 Case C-185/95 P Baustahlgewebe v Commission [1998] ECR I-8417, para 48. 11

404  Research handbook on cartels the parties during the procedure, what is at stake for the various undertakings concerned and its complexity.15 Settled case law16 considers that the competition administrative procedure is characterized by two successive stages: the first stage, covering the period up to notification of the Statement of Objections, begins on the date on which the Commission, exercising the powers conferred on it by the EU legislature, takes measures which imply an accusation of an infringement and must enable the Commission to adopt a position on the course which the procedure is to follow; the second stage covers the period from notification of the Statement of Objections to the adoption of the final decision. It must enable the Commission to reach a final decision on the infringement concerned. The length of each of these phases may be subject to separate scrutiny as to its duration: so, for example, in Prysmian, the General Court reviewed an investigation related to a cartel of long duration and global scope, with a high total number of participants, during which the Commission was required to uncover vast amounts of evidence included in the file and sent to participants in the sector concerned several requests for information. In addition, the decision adopted contained the complete references to all the evidence collected during the investigation phase, was addressed to a large number of parties that underwent complex restructuring and had to be fully translated into several languages: in the light of this, it concluded that the duration of neither of the two phases of the administrative procedure (respectively 29 and 33 months) was excessive in order to enable the Commission to assess thoroughly the evidence and arguments raised by the parties concerned by the investigation.17 C.

The Right to Privacy

The right to privacy under Article 7 of the Charter has been invoked, alone or in combination with Article 8 ECHR, mostly in the context of claims for confidential treatment of information in possession of the Commission and with regard to inspections. In the first case, while implicitly recognizing that information provided in the context of leniency applications is protected and must be disclosed with extreme care, the Court of Justice held that information which is at least five years old has, as a rule, lost its confidential nature, unless the applicant shows that that information still constitutes essential elements of its commercial position. The Court also held that a possible loss of reputation ensuing from disclosure of information regarding participation in a cartel was a foreseeable consequence of an undertaking’s own conduct and that, accordingly, Article 8 ECHR and Article 7 Charter could not be used to complain about publication of such information; in addition, the applicant had not shown what consequences disclosure would have on the undertaking’s right for respect of private life.18 In the context of inspections, Article 7 has been invoked, without success, to argue that the ‘copying “en masse” of material which had not been examined by the Commission before-

Joined Cases T‑305/94 etc. Limburgse Vinyl Maatschappij and others v Commission [1999] ECR II-931, para 126. 16 Case C‑113/04 P Technische Unie v Commission [2006] ECR I‑8831, paras 40 et seq. 17 Case T-475/14 Prysmian v Commission EU:​T:​2018:​448, paras 82–85. 18 Case C-162/15 Evonik Degussa GmbH v Commission EU:​C:​2017:​205, paras 64–70 and 117–18. 15

The European Union  405 hand’ constituted an ‘arbitrary and disproportionate’ intervention in the applicant’s rights protected under Article 7 of the Charter.19 On the other hand, claims based on the infringement of the right to privacy may be more successful when specifically focused on the rights of natural persons. In this respect, the timing and modalities adopted to contest the collection of data may be crucial: it is indeed up to the inspected undertaking to promptly ask the Commission not to enter certain data which may adversely affect the private life of its employees or managers or to ask for the return of those data – as noted by the General Court in Les Mousquetaires,20 an undertaking should invoke protection under the right to respect for the private life of its employees or managers in order to oppose the seizure of computer hardware or communication tools and the copying of the data contained therein, so that the decision by which the Commission rejects that application produces legal effects vis-à-vis that undertaking. However, in the absence of a prior request for protection made by the applicants, the seizure of the material at issue and the copying of the data contained in that material could not have given rise to the adoption of a decision open to challenge by which the Commission rejected, even implicitly, such an application for protection. Furthermore, the request for the return of the private data in question was not formulated in a sufficiently precise manner to enable the Commission to adopt a proper position with regard to it, with the result that the applicants had not received, at the date on which the action was brought, a response from the Commission capable of constituting a challengeable act. An interesting comparison may be drawn with the orders adopted on 29 October 2020 by the President of the General Court in the Facebook case.21 While falling outside the domain of cartels, the orders may be relevant to the extent that they establish the principle that the processing of certain categories of personal data, such as information on racial or ethnic origin, political opinions, religious or philosophical beliefs or health data (so-called sensitive data), requires additional safeguards in compliance with the General Data Protection Regulation22 and Regulation 2018/1725.23 In that case, Facebook was obliged (on pain of substantial fines) to process and hand over sensitive data of its employees in response to a Commission request for information. The President of the General Court, also in consideration of the sensitivity of the data at issue, maintained that the collection and processing of such data by the Commission must be necessary and proportionate to the exercise of its powers and, for that purpose, required the Commission to adopt a four-step mechanism to strengthen the protection of sensitive personal data, including the identification and separate storage of such data, which would then be accessible only to a limited number of members of the investigation case team in the presence of Facebook lawyers, with a possibility to negotiate the status of the contested data

Case T-449/14 Nexans v Commission EU:​T:​2018:​456, para 39 and paras 52–64. Case T-255/17 Les Mousquetaires and ITM Entreprises v Commission EU:​T:​2020:​460, paras 39–48 (judgment under appeal). 21 Case T‑451/20 R Facebook Ireland Ltd v Commission EU:​T:​2020:​515; and Case T‑452/20 R Facebook Ireland Ltd v Commission EU:​T:​2020:​516. 22 Regulation 2016/679 of the European Parliament and of the Council on the Protection of Natural Persons with Regard to the Processing of Personal Data and on the Free Movement of Such Data, and Repealing Directive 95/46/EC (General Data Protection Regulation) [2016] OJ L 119/1. 23 Regulation (EU) 2018/1725 of the European Parliament and of the Council on the Protection of Natural Persons with Regard to the Processing of Personal Data by the Union Institutions, Bodies, Offices and Agencies and on the Free Movement of Such Data, and Repealing Regulation (EC) No 45/2001 and Decision No 1247/2002/EC [2018] OJ L295/39. 19 20

406  Research handbook on cartels and have any outstanding issue resolved by the Director for Information, Communication and Media at the Commission’s Directorate-General for Competition (‘DG COMP’). Finally, the General Court’s judgment in Goldfish24 suggests that, provided that evidence is lawfully collected by the Commission, the question whether it was originally obtained in breach of the right to respect for private life is irrelevant, to the extent that, before the Commission, all relevant procedural safeguards are observed and the evidence has an immediate and direct link with the investigation.

III.

CARTEL INVESTIGATIONS

A. Detection A suspected cartel may come to the attention of the Commission in one of the following ways: ● ● ● ●

a customer or competitor may complain to the Commission; the Commission may open the investigation of its own initiative; the Commission may be tipped off by an individual whistle blower; or a participant to the cartel may submit a leniency application.

If the initial assessment of the suspected cartel leads to the conclusion that the case merits further investigation, and where the scope of the investigation has been sufficiently defined, the Commission will open formal proceedings. This step has a twofold importance: first, it creates clarity as regards the allocation of the case within the European Network of Competition Authorities; second, it signals a commitment on the part of the Commission to further investigate the case. Pursuant to Article 2 of Regulation 773/2004, the Commission may decide to open proceedings at any point in time, but no later than the date on which it issues one of the following: a Statement of Objections; a Preliminary Assessment as referred to in Article 9(1) of Regulation 1/2003; or a Notice pursuant to Article 27(4) of Regulation 1/2003 (for instance in an Article 10 procedure) – whichever is the earlier. The Notice on Antitrust Best Practices further provides that the Commission will open proceedings under Article 11(6) of Regulation 1/2003 when the initial assessment leads to the conclusion that the case merits further investigation and where the scope of the investigation has been sufficiently defined. In cartel cases, the opening of proceedings normally takes place simultaneously with the adoption of the Statement of Objections, after inspections have already been carried out. In order to enhance the effectiveness of its leniency procedure, in May 2019 the Commission launched its ‘e-leniency’ online tool. This enables companies and their lawyers to file statements and submissions in the context of leniency and settlement proceedings, with the same guarantees in terms of confidentiality and legal protection as under the traditional procedure and the advantage that it avoids the need for companies or their lawyers to travel to DG COMP’s premises to dictate oral corporate statements.

Case T-54/14 Goldfish BV and others v Commission EU:​T:​2016:​455. The applicant had (unsuccessfully) questioned the possibility for the Commission to use as evidence some recordings made by a trader of its conversations with a competitor, allegedly in breach of Article 8 ECHR and of Dutch law. 24

The European Union  407 DG COMP also has a dedicated ‘whistleblower’ webpage25 providing the appropriate contact details to be used by those wishing to report a cartel, as well as the possibility to submit an anonymous message via an intermediary encryption tool. The lodging of a complaint does not, according to settled case law, give a complainant the right to insist that the Commission take a final decision as to the existence or non-existence of the alleged infringement and does not oblige the Commission to continue the proceedings, whatever the circumstances, right up to the stage of a final decision:26 in order to be able to perform the task of orienting and implementing the competition policy of the EU effectively, the Commission enjoys a broad discretion in giving differing degrees of priority to the complaints brought before it. B.

Limitation Periods

Pursuant to Article 25 of Regulation 1/2003, the Commission’s power to impose a fine for a competition law infringement is limited to five years. Time begins to run on the day on which the infringement is committed. However, in the case of continuing or repeated infringements, time shall begin to run on the day on which the infringement ceases. When the cartel activities form part of schemes of regular meetings, target-price fixing and quota fixing, so that those schemes can be considered as part of a series of efforts in pursuit of a single economic aim – namely, to distort the market – and therefore constitute a single and a continuous infringement of Article 101 TFEU, the five-year limitation period does not begin to run until the day on which the infringement ceases.27 According to Article 25(3) of Regulation 1/2003, any action taken by the Commission for the purpose of the investigation or proceedings in respect of an infringement is to interrupt the limitation period for the imposition of fines or periodic penalty payments. The limitation period is to be interrupted with effect from the date on which the action is notified ‘to at least one undertaking or association of undertakings which has participated in the infringement’. The expression ‘undertaking which has participated in the infringement’ must be understood to mean any undertaking identified as such in a Commission decision imposing sanctions in respect of an infringement. Article 25(4) of Regulation 1/2003 further clarifies that the interruption of the limitation period shall apply for all the undertakings or associations of undertakings which have participated in the infringement. The word ‘all’ is designed to emphasize that what matters is the objective participation of the undertaking concerned in the infringement – independently, therefore, of: the capacity in which that undertaking participated in the infringement; whether that undertaking was known to the Commission before the Statement of Objections; whether or not it was the addressee of an act interrupting the limitation period before that Statement of Objections; or whether in the past it had obtained the annulment of a first decision of the Commission imposing sanctions on it. The letter of Article 25(3) also suggests that, in order to interrupt the limitation period, the requests for information by the Commission, which are expressly mentioned in that provision

https://​ec​.europa​.eu/​competition​-policy/​cartels/​whistleblower​_en [accessed 4 March 2022]. Case T‑712/14 Confédération européenne des associations d’horlogers-réparateurs (CEAHR) v Commission EU:​T:​2017:​748, para 33; and Case C-56/12 P EFIM v Commission EU:​C:​2013:​575, para 57. 27 Case C-235/92 P Montecatini v Commission [1999] ECR I-4539, para 52. 25 26

408  Research handbook on cartels as examples of actions interrupting the limitation period, must be made for the purpose of the preliminary investigation or proceedings in respect of an infringement: if this were not the case, the Commission would be encouraged to make requests for information for the sole purpose of artificially prolonging the limitation period so as to preserve the power to impose a fine.28 The issue of calculation of limitation periods has arisen on several occasions in connection to parental liability. The fact that the Commission’s power to impose penalties is time-barred pursuant to Article 25(1)(b) of Regulation 1/2003 means that a penalty can no longer be imposed on the companies in respect of which the limitation period has expired. This does not preclude another company, which is considered personally responsible and jointly and severally liable with those companies for the same anticompetitive behaviour and in respect of which the limitation period has not expired, from having proceedings instituted against it: in other words, the fact that the Commission’s power to impose penalties on a subsidiary is time-barred does not result in the parent company’s liability being called into question and in preventing proceedings being brought against that parent company.29 Liability cannot cease to exist because the penalty against the subsidiary is time-barred, since the effect of the limitation period provided for in Article 25 of Regulation 1/2003 is not to cause an infringement to cease to exist, but only to enable those that benefit from it to avoid penalties. It is irrelevant, in this respect, that the parent’s liability arises exclusively from its subsidiaries’ participation in the cartels: by virtue of the doctrine of the so-called single economic unity, a group parent company is considered automatically responsible for a cartel infringement committed down the line by the subsidiaries on which it is in the position to exercise, and actually exercises, decisive influence.30 Accordingly, the anti-competitive activities in relation to the infringement are regarded as having been carried out by the parent company itself, since it forms a ‘single economic unit’ with its subsidiaries. C.

The Commission’s Powers of Investigation: Requests for Information

The Commission’s power to require, by a simple request or by a decision, that undertakings and associations of undertakings provide all the information necessary to carry out its tasks is governed by Article 18 of Regulation 1/2003. Failure to comply in a timely fashion with a formal Commission request for information, as well as the supply of incorrect, incomplete or misleading information, may attract a fine of up to 1 per cent of the addressee’s worldwide aggregate group turnover. In addition, interference, resistance or non-cooperation may be treated as aggravating factors by the Commission when calculating the fine. Article 18(3) defines the essential elements of a request for information by decision, in particular by requiring (in compliance with the general duty to state reason under Article

See, by analogy, Case T-213/00 CMA CGM v Commission [2003] ECR II-913, paras 484–88. Case T-47/10 Akzo Nobel v Commission EU:​T:​2015:​506, paras 124–28; Case T-372/10 Bolloré v Commission, EU:​T:​2012:​325, paras 193–96, not affected on that point by Case C‑414/12 P in Bolloré v Commission, EU:​C:​2014:​301, para 109. 30 Where a parent company has a 100 per cent shareholding in its subsidiary there is a rebuttable presumption that that parent company exercises a decisive influence over the conduct of its subsidiary: Case C-97/08 Akzo Nobel AG v Commission [2009] ECR I-8237, paras 62–63. 28 29

The European Union  409 296(2) TFEU) that the Commission states the legal basis and the purpose of the request, specifies what information is required and fixes the time-limit within which it is to be provided. Moreover, it states that the Commission shall also indicate the penalties provided for in Article 23, that it ‘shall indicate or impose the penalties provided for in Article 24’ and that it ‘shall further indicate the right to have the decision reviewed by the Court of Justice’. That obligation to state specific reasons is a fundamental requirement, designed not merely to show that the request for information is justified, but also to enable the undertakings concerned to assess the scope of their duty to cooperate while at the same time safeguarding their rights of defence. The obligation to state the purpose of the request means that the Commission must identify the suspected infringement of the competition rules, and the necessity of the information must be interpreted by reference to the objectives for the achievement of which the powers of investigation in question have been conferred upon the Commission. Thus, the requirement that a correlation must exist between the request for information and the presumed infringement will be satisfied as long as, at that stage in the procedure, the request may legitimately be regarded as having a connection with the presumed infringement, in the sense that the Commission may reasonably suppose that the information will help it to determine whether the alleged infringement has taken place.31 The requirements to be satisfied by the statement of reasons depend on all the circumstances of each case, in particular the content of the measure in question, the nature of the reasons given and the interest which the addressees of the measure, or other parties to whom it is of direct and individual concern, may have in obtaining explanations. It is not necessary for the reasoning to go into all the relevant facts and points of law, since the question whether the statement of reasons meets the requirements of Article 296 TFEU must be assessed with regard not only to its wording but also to its context and to all the legal rules governing the matter in question.32 However, the Commission is not required to communicate to the addressee of such a decision all the information at its disposal concerning presumed infringements or to make a precise legal analysis of those infringements, although it must clearly indicate the presumed facts which it intends to investigate. In particular, at the preliminary investigation stage the Commission cannot be required to indicate – besides the putative infringements it intends to investigate – the evidence, that is to say, the information leading it to consider that Article 101 TFEU may have been infringed, since such an obligation would upset the balance struck between preserving the effectiveness of the investigation and upholding the defence rights of the undertaking concerned.33 On the other hand, an excessively succinct, vague and generic or ambiguous statement of reasons does not fulfil the requirements of the obligation to state reasons: in HeidelbergCement34 the Court of Justice held that, while the questions asked by the Commission were ‘extremely numerous’ and broad-ranging, the statement of reasons lacked detail regarding the nature of the suspected infringements, as well as the products and geographic markets concerned, and did not make it possible to determine whether the requested information was necessary for

Case T‑293/11 Holcim (Deutschland) and Holcim v Commission EU:​T:​2014:​127, para 110. Case C‑367/95 P Commission v Sytraval and Brink’s France [1998] ECR I-1719, para 63; and Case C‑37/13 P Nexans and Nexans France v Commission EU:​C:​2014:​2030, paras 31–32. 33 Case T-297/11 Buzzi Unicem v Commission EU:​T:​2014:​122, paras 31–39. 34 Case C‑247/14 P HeidelbergCement AG v Commission EU:​C:​2016:​149, in particular paras 27–39. 31 32

410  Research handbook on cartels the purposes of the investigation. The timing of the Commission’s information requests (two years after the first inspections), as well as the fact that the Commission had already sent a number of requests for information, was also relevant as to whether the statement of reasons was adequate. The Court therefore considered that the Commission ‘already had information that would have allowed it to present more precisely the suspicions of infringement by the companies involved’.35 In contrast, the Court added, an inspection may take place at a time when there is less precise information available to the competition authority, and consequently it is ‘not essential’ to provide an exact market definition, duration period or legal nature of the presumed infringements in a decision authorizing an inspection.36 D.

The Commission’s Powers of Investigation: Inspections

According to Article 20 of Council Regulation 1/2003, Commission officials are, on the occasion of an inspection, empowered to enter any business premises, land or means of transport on the basis of an inspection decision and examine – within its scope – books and business records in any format, taking or obtaining copies or extracts thereof in any form and asking for explanations on facts or documents of any business representative or employee during the inspection. In the process, the Commission may seal business premises, books or records to secure the continuation of the inspection, either at the company’s premises or at the Commission’s premises. Article 21 of Regulation 1/2003 also allows the Commission to conduct inspections at other premises, including homes, when there is a reasonable suspicion that relevant business records may be found there. In such a case, prior authorization by a judge is required and the inspectors cannot seal a home or ask oral questions there. Those provisions have not been used very often, but one cannot rule out home searches gaining greater prominence, especially if remote working becomes the rule in many companies as a result of the COVID-19 pandemic. While inspections in the past involved significant amounts of photocopies, nowadays inspection teams temporarily disconnect computers from the network, obtain administrator access rights to deploy sophisticated tools to transfer data to carriers, index the digital material for selection and make forensic copies of the selected items.37 In that regard, the most recent case law has confirmed that there is no right for an undertaking to force the Commission to continue an inspection on site and the Commission may decide to take forensic images of entire hard drives during an inspection for later examination and selection at their premises. In Nexans, the General Court found that the Commission had acted correctly in adopting the following procedure: placing in sealed envelopes copy-images of the relevant storage tools and devices (such as hard drives); opening and examining them on the date agreed with the applicants and in the presence of their representatives; ensuring that the premises at which that examination was to take place were to be duly protected from any interference; printing and listing the documents extracted from the data that they decided to append to the investigation

ibid para 39. ibid para 38. 37 For a complete and up-to-date overview of the Commission’s inspection powers and procedure, see N. Jalabert-Doury, Competition Inspections under EU Law (Concurrences, 2020). 35 36

The European Union  411 file; providing copies thereof to the applicants; and, at the end of the examination, wiping the copy-images away definitively.38 The principle described in relation to requests for information, that is, the obligation to state reasons, described with regard to requests for information, also applies to inspections. Article 20(4) of Regulation 1/2003 provides that inspection decisions taken by the Commission are to indicate the date on which the inspection is to begin, the penalties provided for in Articles 23 and 24 of that Regulation and the right to have the inspection decision reviewed by the Court of Justice, as well as the subject matter and the purpose of the inspection. In order to meet those requirements, the Commission must state as precisely as possible the presumed facts which it intends to investigate, namely what it is looking for and the matters to which the inspection relates. More specifically, the inspection decision must contain a description of the features of the suspected infringement, indicating the market thought to be affected, the nature of the suspected restrictions of competition and the sectors covered by the alleged infringement to which the investigation relates, and explanations of the way in which the undertaking is supposed to be involved in the infringement.39 In the specific context of inspections, it is important to enable the undertakings covered by inspection decisions imposing obligations on them, and entailing an interference with their private life, to grasp the reasons for those decisions without excessive interpretative effort, so that they can exercise their rights efficiently and in good time40 to grasp the scope of their duty to cooperate. Nonetheless, inspections take place by definition at a preliminary stage, at which the Commission does not have precise information allowing it to characterize the conduct in question as an infringement and implying the power to search for various items of information that are not yet known or fully identified. Thus, in order to safeguard the effectiveness of inspections and for reasons to do with their very nature, it has been accepted that the Commission is not required to communicate to the addressee of such a decision all the information at its disposal concerning the presumed infringements, or to delimit precisely the relevant market, or to indicate the period during which those infringements are alleged to have been committed or the indicia that justified the inspection.41 Against this background, where the inspections have called into question a possible infringement of the right to inviolability of the home, the General Court has carried out a thorough review of whether the Commission had sufficiently serious evidence at its disposal to allow it to suspect an infringement of the competition rules by the undertaking concerned test.42 A question has recently arisen as regards the form of evidence which may justify the inspection decisions, in the specific case where such evidence consists of notes of informal interview with third parties, which had not been officially recorded. The General Court established that

Case T-449/14, Nexans and Nexans France v Commission EU:​T:​2018:​456, paras 45–47 and 52–64. 39 Case T‑339/04 France Télécom v Commission [2007] ECR II-521, paras 58 and 59. 40 Case T‑249/17 Casino, Guichard-Perrachon and Achats Marchandises Casino SAS, v Commission EU:​T:​2020:​458 paras 107–11; and Case T-255/17 Les Mousquetaires and ITM Entreprises v Commission EU:​T:​2020:​460, paras 177–78. 41 Case T‑402/13 Orange v Commission EU:​T:​2014:​991, paras 80–91; and Case C‑37/13 P Nexans and Nexans France v Commission EU:​C:​2014:​223, Opinion of AG Kokott, para 48 (as confirmed in para 37 of the Court’s judgment (EU:​C:​2014:​2030)). 42 Case T-255/17 Les Mousquetaires and ITM Entreprises v Commission EU:​T:​2020:​460, para 174. See the discussion under Section II.C above. 38

412  Research handbook on cartels the rules relating to the obligation to record interviews were not applicable prior to the opening of an investigation by the Commission. Thus, interviews with suppliers, conducted prior to the initiation of an investigation, are likely to constitute indicia even if they have not been registered. If that were not the case, the detection of anti-competitive practices would be seriously undermined because of the deterrent effect that the possibility of being formally recorded may have on the propensity of witnesses to provide information and to report infringements. As regards the content of the indicia which justified the inspection decisions, the Court observed that, in view of the necessary distinction between evidence of a concerted practice and evidence justifying inspections for the purpose of obtaining such evidence, the threshold for recognizing the Commission’s possession of sufficiently serious evidence must necessarily fall below that for establishing the existence of a concerted practice.43 E.

The Limits to the Commission’s Powers of Investigation: Legal Professional Privilege, Privilege against Self-Incrimination

The principle of legal privilege was first established in the 1982 judgment AM & S v Commission,44 where it was held that protecting the confidentiality of written communications between lawyer and client is an essential corollary to the full exercise of the rights of defence. Information provided by an undertaking to its lawyer, or the content of the advice given by that lawyer, can therefore not be used against an undertaking in a decision which penalizes it for a breach of the competition rules. Furthermore, the Commission cannot compel a company or its lawyer to disclose the content of a document covered by legal professional privilege. For such a principle to apply, two conditions must be fulfilled. First, the communication must be made for the purposes and in the interests of the client´s rights of defence in competition proceedings. In the EU antitrust regime, the protection therefore covers all written communications exchanged after the initiation of the administrative procedure which may lead to a decision on the application of Articles 101 and 102 TFEU. The protection is extended to earlier written communications which have a relationship to the subject matter of that procedure. Likewise, internal documents summarizing the content of privileged communications will enjoy privilege, but the privilege only refers to certain information and not a document in itself. In other words, if a document contains privileged and non-privileged information, the Commission can access and use the non-privileged information. Second, as established in Akzo,45 the legal privilege only extends to communications originating from independent lawyers: communications to and from in-house lawyers do not attract privilege, based on the idea that employed in-house lawyers do not enjoy the same degree of independence as an external lawyer, and therefore their advice should not benefit from any shelter.46 43 Case T-255/17 Les Mousquetaires and ITM Entreprises v Commission EU:​T:​2020:​460, paras 189–92 (judgment under appeal). 44 AM & S v Commission [1982] ECR-1575. 45 Case C-550/07 P Akzo Nobel Chemicals and Akcros Chemicals v Commission [2010] ECR I-8301. 46 The Court of Justice has adopted a more articulated reasoning on lawyers’ independence in Joined Cases C-515/17 P and C-561/17 P Uniwersytet Wrocławski and Poland v Research Executive Agency (REA) EU:​C:​2020:​73, which considered the question whether the existence of a contract for the provision of lecturing services between a party and its lawyer infringes the requirement for a legal

The European Union  413 Privilege benefits any lawyer entitled to practise his or her profession in one of the Member States, regardless of the Member State where the client lives, but does not apply to non-EU lawyers, although in practice the Commission does not insist on disclosure of advice provided by external lawyers established outside of the EU. Neither does legal privilege apply to communications with other professional advisers, such as patent attorneys or accountants, as such communications are not presumed – which may be debatable in view of the significant use of economic expertise in competition cases – to be related to an undertaking exercising its rights of defence in competition cases. As regards patent attorneys, the Commission appears to admit that this conclusion may be different if the undertaking can demonstrate that there is a link between the advice provided or sought and the assessment of future litigation under competition law.47 In certain circumstances, the Commission and the undertaking may not agree on whether a document should benefit from the protection under legal professional privilege. This may arise, in particular, where the undertaking concerned refuses to let officials take a cursory look at an allegedly privileged document and it cannot be excluded that the document can be protected. In such cases, the Commission officials may place a copy of the document or documents in question (including documents in a digital form) in a sealed envelope and then remove it with a view to a subsequent resolution of the dispute with the intervention of the Commission Hearing Officer, provided that the undertaking consents to him or her reviewing the information.48

representative before the Courts of the EU to be independent. The Court specified that the objective of the task of representation by a lawyer referred to in Article 19 of the Statute of the Court is, above all, to protect and defend the principal’s interests to the greatest possible extent, acting in full independence and in line with the law and professional rules and codes of conduct. It recalled that the concept of the ‘independence of lawyers’, in the specific context of that provision of the Statute, is determined not only negatively, that is to say, by the absence of an employment relationship, but also positively, by reference to professional ethical obligations. In that context, the lawyer’s duty of independence is to be understood not as the lack of any connection whatsoever between the lawyer and his or her client, but as the lack of connections which have a manifestly detrimental effect on his or her capacity to carry out the task of defending his or her client while acting in that client’s interests to the greatest possible extent. Accordingly, a lawyer who has been granted extensive administrative and financial powers which place his or her function at a high executive level within the legal person he or she is representing, such that his or her status as an independent third party is compromised, is not sufficiently independent from that legal person; nor is a lawyer who holds a high-level management position within the legal person he or she is representing, or a lawyer who holds shares in, and is the president of the board of administration of, the company he or she is representing. However, the situation in which the legal adviser was simply connected to the university by a contract for the provision of lecturing services at that university cannot be regarded as equivalent to those situations and is not sufficient for a finding that that legal adviser was in a situation that had a manifestly detrimental effect on his capacity to defend his client’s interests to the greatest possible extent, in full independence. It is as yet unclear whether the reasoning could – and, if so, how – apply in the context of legal privilege in competition proceedings. 47 The Commission’s approach to legal privilege is fully set out in the contribution submitted to the OECD Working Party No 3 on Co-operation and Enforcement: ‘Treatment of Legally Privileged Information in Competition Proceedings – Note by the European Union, 26 November 2018’ (DAF/ COMP/WP3/WD(2018)46, OECD, 21 November 2018) https://​one​.oecd​.org/​document/​DAF/​COMP/​ WP3/​WD(2018)46/​en/​pdf [accessed 4 March 2022]. 48 Decision of the President of the European Commission of 13 October 2011 on the Function and Terms of Reference of the Hearing Officer in Certain Competition Proceedings [2011] OJ L275/29, Article 4(2)(a).

414  Research handbook on cartels A separate principle is that of privilege against self-incrimination, entailing that the Commission cannot require from the undertakings under investigation an answer which would constitute acknowledgement of participation in an illegal activity. However, privilege against self-incrimination in favour of an undertaking does not extend to ‘all necessary information concerning facts as may be known to it and to disclose to [the Commission], if necessary such documents relating thereto as are in its possession, even if the latter may be used to establish, against it or another undertaking, the existence of anti-competitive conduct’.49 No ruling has been rendered on the scope of privilege against self-incrimination since the Charter became legally binding: it remains to be seen whether the new constitutional framework will trigger any changes in the interpretation that the EU courts are prepared to give to it.

IV.

ACCESS TO THE FILE

The general principle of equality of arms presupposes that, in a competition case, the undertaking concerned has knowledge of the file used in the proceedings, a file which must be the same as that of the Commission.50 The Commission’s file in a competition investigation consists of all documents which have been obtained, produced and/or assembled for the purposes of the investigation. This specific right is distinct from the general right to access to documents under Regulation 1049/2001,51 and is commonly used to indicate the access granted to the persons, undertakings or association of undertakings to whom the Commission has addressed a Statement of Objections: complainants cannot claim a right of access to the file as established for parties.52 The underlying idea is that parties involved in a Commission investigation must be able to acquaint themselves with the information in the Commission’s file, so that, on the basis of this information, they can effectively express their views on the preliminary conclusions reached by the Commission in its objections. Access to the file is granted following notification of the Commission’s Statement of Objections, upon request of the parties and, normally, on a single occasion. A party will, however, be granted access to documents received after notification of the objections at later stages of the administrative procedure, where such documents may constitute new evidence – whether of an incriminating or of an exculpatory nature – pertaining to the allegations concerning that party in the Commission’s Statement of Objections. This is particularly the case where the Commission intends to rely on new evidence. If the Commission has decided in

49 Case 374/87 Orkem v Commission [1989] ECR-3283. For a critical perspective see M. Veenbrink ‘The Privilege against Self-Incrimination in EU Competition Law: A Deafening Silence?’ (2015) 42(2) Legal Issues of Economic Integration 119. 50 Case T-36/91 ICI v Commission [1995] ECR II-1847, paras 93 and 111. For a complete overview of the law and practice governing access to file, see H. Abbott and W. Wils, ‘Access to the File in Competition Proceedings Before the European Commission’ (2019) 42(3) World Competition 255. 51 Regulation 1049/2001 of the European Parliament and of the Council Regarding Public Access to European Parliament, Council and Commission Documents [2001] OJ L 145/43. 52 Case T-17/93 Matra-Hachette SA v Commission [1994] ECR II-595, para 34, where the Court ruled that the rights of third parties were limited to the right to participate in the administrative procedure.

The European Union  415 a cartel case to pursue a settlement procedure, the Commission will disclose information in its file to the parties that are engaged with it in settlement discussions.53 No automatic access will be granted to other parties’ replies to the Commission’s objections. Nonetheless, if the Commission wishes to rely on a passage in a reply to a Statement of Objections or on a document annexed to such a reply in order to prove the existence of an infringement, the other undertakings involved in that proceeding must be placed in a position in which they can express their views on such evidence. In such circumstances, the passage in question from a reply to the Statement of Objections or the document annexed thereto constitutes incriminating evidence against the various undertakings alleged to have participated in the infringement. Similarly, if a passage in a reply to a Statement of Objections or in a document annexed to such a reply may be relevant for the defence of an undertaking in that it enables that company to invoke evidence which is not consistent with the inferences made at that stage by the Commission, it constitutes exculpatory evidence. In that case, the undertaking concerned must be authorized to examine the passage or the document concerned and to give its view thereon.54 Other documents and pieces of information which are exempted from access are internal Commission documents, business secrets of other undertakings or other confidential information, as defined in paragraphs 12 to 20 of the Commission Notice on the Rules for Access to the Commission File.55 The exclusion from access of business secrets or other confidential information arises out of the need to reconcile the right of defence with the opposing interest in not disclosing to the other parties to the procedure information which an undertaking may have provided, more or less voluntarily, in the context of an investigation. To facilitate the submission of confidentiality requests, in 2018 the Commission published a note containing ‘Guidance on confidentiality claims during Commission antitrust procedures’.56 For the purposes of this chapter, it is sufficient to signal that this document provides definitions of business secrets and other confidential information, as well as what is not considered to be a business secret or other confidential information. It is made clear that the assessment of whether any given information contains business secrets or other confidential information has to be done on a case-by-case basis. This being said, in order for information to be considered confidential, it is necessary that the person or undertaking in question has made a claim to this effect and that such a claim has been accepted by the Commission. Information can be classified as confidential when it is known only to a limited number of persons, its disclosure must be liable to cause serious harm to the person who has provided it or to third parties and the

53 Article 10(a)(2) of Regulation 773/2004 (n 5); and Commission Notice on the Conduct of Settlement Procedures in Cartel Cases [2008] OJ C167/1, paras 15–16. 54 Case C-591/18 P Brugg Kabel AG v Commission EU:​C:​2019:​1026, paras 40–44; and Case T-441/14 P Brugg Kabel AG v Commission EU:​T:​2018:​453, paras 64–74. See also Case C-607/18P NKT v Commission EU:​C:​2020:​385, para 267, where the Court emphasized that ‘“Undertakings” replies to the statement of objections are not comparable to the replies given to such requests for information, the content of which has been taken into account by the Commission in its statement of objections and which therefore constitute essential documents relating to the procedure conducted by that institution’. 55 Commission Notice on the Rules for Access to the Commission File in Cases Pursuant to Articles 81 and 82 of the EC Treaty, Articles 53, 54 and 57 of the EEA Agreement and Council Regulation (EC) No 139/2004 [2005] OJ C325/07. 56 https://​ec​.europa​.eu/​competition/​antitrust/​business​_secrets​_en​.pdf [accessed 4 March 2022].

416  Research handbook on cartels interests liable to be harmed by the disclosure are objectively worthy of protection.57 Also, it is expressly provided that in the event of non-compliance with the guidance, the Commission may assume that the submissions/documents do not contain any business secrets or other confidential information and, therefore, that there are no objections to the disclosure of that information. The qualification of a piece of information as confidential is not a bar to its disclosure if such information is necessary to prove an alleged infringement or could be necessary to exonerate a party. In this case, the need to safeguard the rights of the defence of the parties through the provision of the widest possible access to the Commission file may outweigh the concern to protect confidential information of other parties. While internal notes, as pointed out above, are not part of the Commission’s file, information gathered in the course of an interview with a third party for the purpose of collecting information relating to the subject of an investigation under Article 19 of Regulation 1/2003 is. In this respect, past Commission practice to take succinct ‘internal’ notes of informal meetings with third parties has recently come under the scrutiny of the EU courts. Article 3(3) of Regulation 773/2003 makes it clear that the Commission has an obligation to record, in the form of its choice and in full, any interview conducted for the purpose of collecting information relating to the subject of an investigation. The General Court has held that for this purpose no distinction can be drawn between formal interviews and informal interviews which would escape this obligation.58 To this end, it is not sufficient that the Commission drafts and discloses, during the administrative procedure, the non-confidential version of an internal note of such an interview containing a brief summary of the subjects addressed during the interview in question: this must contain an indication of the content of the discussions that took place during that interview, in particular as regards the nature of the information that was provided during that interview on the subjects raised.59 Correct recording and disclosure of such information may be particularly important for the applicant where this may have exculpatory value: in this case, it is sufficient for the undertaking concerned to show that it would have been able to use the exculpatory documents for its defence, in the sense that it must adequately demonstrate not that the Commission’s decision would have been different in content, but rather that it would have been better able to ensure its defence had there been no procedural error.60 It is equally clear from the very terms of Article 19 of Regulation 1/2003 that the interviews concerned are those aimed at ‘collecting information relating to the subject of an investigation’, which by definition must have been open, and the subject of which must have been determined before the said interviews are carried out. It cannot therefore be inferred from this that the obligation to register also applies to interviews prior to the opening of an investigation,61 or in any case prior to the date on which the Commission, under the powers conferred In this respect, the Guidance draws inspiration from the definition of confidential information provided by judgments such as: Case T-198/03, Bank Austria Creditanstalt v Commission [2006] ECR II-1429, para 71; and Case T-345/12, Akzo Nobel and others v Commission EU:​T:​2015:​50, para 59. 58 Case C-413/14 P Intel v Commission EU:​C:​2017:​632, paras 90–91. 59 ibid para 92. 60 Case C‑194/99 P Thyssen Stahl AG v Commission [2003] ECR I-10821, para 31. 61 Case T‑254/17 Intermarché/Commission EU:​T:​2020:​459, para 198. Note, however, the different opinion of AG Pitruzzella in Case C-682/20 P Les Mousquetaires and ITM Entreprises v Commission EU:​C:​2022:​578, paras 145–163. 57

The European Union  417 by the legislature, takes measures which imply an accusation of an infringement and enable the Commission to adopt a position on the course which the procedure is to follow.62 Finally, since the use of confidentiality rings and data rooms for access to file has become a common practice, in the past few years the Commission has published guidance as to the conduct of such procedures. In particular, the 2018 guidance document on ‘The Use of Confidentiality Rings in Antitrust Access to File Proceedings’63 codifies DG COMP’s practice on this negotiated disclosure procedure, through which a restricted circle of individuals is given access to confidential information contained in the Commission’s file. According to the Commission, confidentiality rings have the dual purpose of safeguarding the rights of defence, while both respecting the legitimate interest in confidentiality of the information providers and reducing the burden of preparing non-confidential versions of documents. While further details are laid down in the guidance document, the underlying idea is that the party seeking access to information filed with the Commission negotiates with the party that provided the documents an agreement by virtue of which specific individuals are allowed to have access to the files; these individuals constitute the confidentiality ring. In this context, the Commission plays the role of a facilitator and has discretion to decide whether a confidentiality ring is appropriate in a particular case. The Commission has however made it clear that it is not prepared to take on liability in the event that documents are leaked as a result of a breach of the negotiated disclosure agreement by a member of the confidentiality ring. In addition, if counsel for one of the parties breaches the confidentiality ring, the Commission can report such counsel to his or her bar association and recommend that disciplinary action be taken. Data rooms are similar, in that they also aim to ensure that documents in the Commission’s file are made accessible to an addressee of a Statement of Objections in a restricted manner, that is, by limiting the number and/or category of persons – the ‘external advisors’ – having access and the use of the information being accessed to the extent strictly necessary for the exercise of the rights of defence. They are used mostly for the disclosure of quantitative data (individual sales data, price data, cost data, bidding data, margins, etc.) on which the Commission has relied directly or indirectly in its Statement of Objections. Further details on the practical organization of data rooms are provided in the ‘Best Practices on the Disclosure of Information in Data Rooms in Proceedings under Articles 101 and 102 TFEU and under the EU Merger Regulation’, published in 2015.64 For the purposes of this chapter it is worth noting that, as compared to confidentiality rings, data rooms are organized by DG COMP following a request to organize a data room by the addressees of a Statement of Objections. Before organizing the data room, DG COMP will inform the data providers with a view to obtaining their consent and will identify the information to be disclosed, as well as provide the reasons for the proposed disclosure. Data rooms are subject to DG COMP’s Data Room Rules, which must be accepted by the addressees of a Statement of Objections and signed by the external advisers before access to the data room is granted.

See, in this sense, Case T-470/13 Merck v Commission EU:​T:​2016:​452, paras 473 and 479; and, by analogy, Case T-240/07 Heineken Nederland BV v Commission [2011] ECR II-3355, para 288. 63 https://​ec​.europa​.eu/​competition/​antitrust/​conf​_rings​.pdf [accessed 4 March 2022]. 64 https://​ec​.europa​.eu/​competition/​mergers/​legislation/​disclosure​_information​_data​_rooms​_en​.pdf [accessed 4 March 2022]. 62

418  Research handbook on cartels

V. CONCLUSION It is to be expected that, given the growing importance of the Charter within the EU legal order, the next few years will see a further rise in appeals against Commission decisions for alleged failures to respect human rights, especially regarding the protection of personal data; presumably, claims concerning procedural infirmities in the use of digital instruments during inspections and in the application of the new tools for access to file are also likely to be on the rise, since these are areas where the Commission’s developing practice has not, in many respects, been reviewed and greenlighted by the EU courts. Another new set of issues may arise in the aftermath of the COVID-19 pandemic: while recognizing in its ‘Temporary Framework for Assessing Antitrust Issues Related to Business Cooperation in Response to Situations of Urgency Stemming from the Current COVID-19 Outbreak’65 that greater cooperation may be needed in certain areas to mitigate the effects of the crisis, the Commission has also highlighted that it is more important than ever that undertakings and consumers receive protection under competition law. It has therefore stated that it will continue to closely and actively monitor relevant market developments to detect instances of undertakings taking advantage of the crisis to breach EU antitrust law, either by engaging in anticompetitive agreements or abusing their dominant position. Notably, the Commission has made it clear that it will not tolerate conduct by undertakings that opportunistically seek to exploit the crisis as a cover for anticompetitive collusion by, for example, exploiting customers and consumers (such as by charging prices above normal competitive levels) or limiting production to the ultimate prejudice of consumers (such as by obstructing attempts to scale up production to face shortages of supply). Against this background, the practical application of cartel law in the EU is likely to offer many interesting developments in the next few years.

[2020] OJ C116 I/7.

65

24. India and Pakistan Amber Darr

I. INTRODUCTION India and Pakistan are the only two countries in the South Asian region1 that have both adopted and implemented modern competition laws,2 with India adopting its competition law in early 2003 (officially referred to as the Competition Act 2002)3 and Pakistan following suit nearly five years later by promulgating the Competition Ordinance 2007.4 At the time they adopted these laws, India and Pakistan already had anti-monopoly legislation in place and, therefore, were no strangers to the need to guard against monopolistic and restrictive trade practices.5 However, it was only with the adoption of modern competition laws that the two countries joined a growing international community of competition regimes, became acquainted with the language and priorities of competition enforcement of this community and acquired the necessary tools for addressing a range of anti-competitive practices. Cartels, and the need to tackle them, were an important consideration for both India and Pakistan in adopting their respective competition legislations. In the case of India, cartels figured explicitly and prominently in the Report of the High-Level Committee established by the government to recommend an appropriate competition policy for the country.6 The Committee recognized the need to prevent ‘international cartels from indulging in 1 A reference to South Asia is a reference collectively to Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka; see Charter of the South Asian Association of Regional Cooperation (‘SAARC’) (8 December 1995) www​.saarc​-sec​.org/​index​.php/​about​-saarc/​about​-saarc [accessed 15 March 2022]. 2 With the exception of Bhutan, which has preferred a competition policy rather than a law, and Afghanistan, whose competition law is in the drafting stage, all South Asian countries have enacted competition laws. However, for various reasons these laws have not yet been fully implemented. 3 Hereafter ‘the Indian Competition Act’, which includes all amendments made to the Act. 4 Competition legislation in Pakistan has a complicated history. In the ordinary course, the Competition Ordinance 2007 would have lapsed upon the expiry of a 120-day period unless presented to the parliament before that (Article 89, Constitution of Pakistan 1973). However, before the expiry of this period, the Ordinance was ‘saved’ by the Constitution (Amendment) Order 2007 (www​.pakistani​ .org/​pakistan/​constitution/​post​_03nov07/​po5​_2007​.html [accessed 15 March 2022]) and lapsed only in November 2009, in pursuance of the July 2009 order of the Supreme Court of Pakistan in Sindh High Court Bar Association v Federation of Pakistan PLD 2009 SC 879, para 22(vii). After promulgating two further Ordinances in 2009 and 2010 respectively, Pakistan finally enacted the Competition Act 2010 in October 2010 (hereafter ‘the Pakistani Competition Act’). References to the Pakistani Competition Act throughout this chapter refer to the version of the legislation in force at the relevant time. 5 The Indian Monopolies and Restrictive Trade Practices Act 1969 and the Pakistani Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance 1970 were repealed by the new Competition Acts. 6 Report of the High-Level Committee https://​the​indiancomp​etitionlaw​.files​.wordpress​.com/​ 2013/​02/​report​_of​_high​_level​_committee​_on​_competition​_policy​_law​_svs​_raghavan​_committee​.pdf [accessed 15 March 2022].

419

420  Research handbook on cartels anti-competitive practices in [India]’7 and emphasized the function of competition law as a tool for dealing with cartelization.8 It also classified cartels as a category of horizontal agreements and recommended that these should be presumed to be illegal.9 The Committee’s views were duly reflected in the relevant provisions of the Indian Competition Act.10 In the case of Pakistan, the term ‘cartel’ only appeared in an appendix to the Report of the World Bank-led team that had been established to provide guidance on competition legislation to the Pakistani government.11 It is no surprise, therefore, that the Pakistani Competition Act does not explicitly refer to cartels, dealing with them under the ambit of prohibited agreements.12 The difference in approach and semantics notwithstanding, investigating and sanctioning cartels has formed a significant part of the operations of the Competition Commission of India (‘CCI’) and the Competition Commissions of Pakistan (‘CCP’) in the approximately ten years that these authorities have been in operation. This chapter examines and compares the various aspects of cartel enforcement in India and Pakistan. To this end, this chapter is organized as follows: Section II sets out the legal regime for proceeding against cartels in the two countries and compares these with their EU and US antecedents and with each other; Section III provides an overview of cartel enforcement in India and Pakistan; Section IV examines and compares the decisions of the CCI and the CCP in respect of various types of cartels; and Section V observes how decisions of the CCI and CCP have fared in appeals. The final section concludes.

II.

THE LEGAL REGIME GOVERNING CARTELS IN INDIA AND PAKISTAN

The legal regime governing cartels in India and Pakistan is laid out primarily in Section 3 of the Indian Competition Act and Section 4 of the Pakistani Competition Act. Here, I examine these and connected legislative sections to understand how they relate to comparable provisions in the EU and US competition and antitrust regimes. A.

Cartel Regime in India

A cartel is defined under the Indian Competition Act as including ‘an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or trade in goods or provision of services’.13 As for all antitrust matters, the CCI may commence proceedings in respect of cartels by taking a suo motu notice of the suspected violation, upon receipt of

9

ibid paras 1.2.3 and 2.1.2. ibid para 2.9.7. ibid paras 4.3.1 and 4.4.2. 10 Indian Competition Act, Sections 2(c) and 3(3). 11 World Bank, A Framework for a New Competition Policy and Law: Pakistan (Washington, September 2007) https://​documents1​.worldbank​.org/​curated/​en/​875361468283497835/​pdf/​68468​ 0ESW0WHIT0​etition0Po​licy000Law​.pdf [accessed 15 March 2022] Appendix 3. 12 ibid para 3.2; and Pakistani Competition Act, Section 4. 13 Indian Competition Act, Section 2(c). 7 8

India and Pakistan  421 information from a person, consumer or association or a reference from the government or a statutory authority.14 Cartels, as defined in the Indian Competition Act, fall within the category of agreements presumed to have an appreciable adverse effect on competition (an ‘AAEC’), and include cartels for directly or indirectly determining purchase or sale prices; limiting or controlling production, supply, markets, technical development, investment or provision of services; sharing the market or source of production of provision of services by way of allocation of geographical markets or types of goods or services, or number of customers, or in any other similar way; and directly or indirectly engaging in bid rigging or collusive bidding.15 Like all agreements in this category, cartels are prohibited and voided if discovered.16 The section is silent as to whether the presumption of an AAEC is rebuttable, or the factors that the defending party may press to do so. ‘Agreements entered into by way of joint ventures’ are exempt from the application of the section if these increase ‘efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services’.17 The CCI has the power to issue interim as well as final orders in respect of cartels.18 It may direct the parties involved to cease and desist their operations19 and penalize each ‘producer, seller, distributor, trader or service provider’ that may be found to be a party to the cartel in a sum ‘of up to three times of its profit for each year of the continuance of such agreement or ten per cent of its turnover for each year of the continuance of such agreement, whichever is higher’,20 subject to the CCI’s discretion to grant leniency.21 In the event that a party to a cartel is a company, every person in charge of the company at the material time may also be fined.22 Appeals from orders of the CCI lie to the National Company Law Appellate Tribunal (‘the NCLAT’)23 and from the order of the NCLAT to the Supreme Court of India.24 B.

Provisions Dealing with Cartels in Pakistan

In the Pakistani Competition Act, cartels are included in prohibited agreements, which are described as agreements or decisions in respect of the production, supply, distribution, acquisition or control of goods or the provision of services which have the object or effect of preventing, restricting or reducing competition within the relevant market.25 In terms of the non-exhaustive list of prohibited agreements provided in Section 4(2), agreements for fixing the purchase or selling price or imposing other restrictive trading conditions with regard to the sale or distribution of any goods or the provision of any service; dividing or sharing of markets Indian Competition Act, Section 19. ibid Section 3(3). 16 ibid Sections 3(1) and 3(2). 17 ibid Section 3(3), proviso. 18 ibid Section 33. 19 ibid Section 27(a). 20 ibid Section 27(b) proviso. 21 Indian Competition Act, Section 46; and the Competition Commission of India (Lesser Penalty) Regulations 2009. 22 Indian Competition Act, Section 48. 23 ibid Section 53A as amended by the Finance Act 2017. The NCLAT replaced the specialist Competition Appellate Tribunal established in pursuance of the Competition (Amendment) Act 2007. 24 ibid Section 53T. 25 Pakistani Competition Act, Section 4. 14 15

422  Research handbook on cartels for the goods or services, whether by territories, by volume of sales or purchases, by type of goods or services sold or by any other means; fixing or setting the quantity of production, distribution or sale with regard to any goods or the manner or means of providing any services; and collusive tendering or bidding for sale, purchase or procurement of any goods or service, are all prohibited. In terms of Section 4(3), agreements falling within the ambit of sub-sections 4(1) and 4(2) are automatically void. The CCP has the power to grant individual or block exemptions to agreements or practices falling within the ambit of Section 4. It may grant individual exemptions under Section 5,26 if the request for an exemption is made by a party to the agreement or practice and the agreement substantially contributes to improving production or distribution; or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit; or if its benefits clearly outweigh the adverse effect of absence or lessening of competition.27 The CCP may consider block exemptions under Section 7 for agreements that meet the above criteria. The CCP may commence proceedings in respect of cartels by taking suo motu notice of a suspected violation; upon receipt of information from a person, consumer or association; or if the federal government refers a matter to it.28 If, after an investigation and hearing, the CCP forms the view that an undertaking has entered into a prohibited agreement, it may issue interim orders to restrain its operation29 or a final order imposing a penalty in an amount not exceeding Pak Rupees 75 million or not exceeding 10 per cent of its annual turnover, as appropriate.30 The CCP also has the power to grant leniency to the parties charged with cartelization.31 Appeals from orders of the CCP passed by a single member lie to the CCP’s Appellate Bench,32 while appeals from orders of the CCP passed by more than one member or from orders of the Appellate Bench lie to the Competition Appellate Tribunal (‘CAT’).33 Appeals from orders of the CAT lie to the Supreme Court of Pakistan.34 C.

Indian and Pakistani Provisions in Relation to the EU and US Models and to Each Other

It is evident from its form and substance that Section 3 of the Indian Competition Act is a combination of Section 1 of the Sherman Act and Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’): it echoes Section 1 of the Sherman Act and Article 101(1) TFEU in assuming jurisdiction over all agreements that have, or are likely to have, an AAEC in India and in declaring them automatically void. However, in stipulating a requirement of appreciable adverse effect on competition, the section reflects the EU’s approach as provided

ibid Section 6: CCP may also cancel the exemption. ibid Section 9. 28 Pakistani Competition Act, Section 30, read with Regulation 16(1) of Competition Commission (General Enforcement) Regulations, 2007. 29 Pakistani Competition Act, Section 32. 30 ibid Section 38. 31 Pakistani Competition Act, Section 39; and Competition Regulations 2007, replaced by Competition (Leniency) Regulations 2019. 32 Pakistani Competition Act, Section 41. 33 ibid Section 42. The CAT was introduced for the first time in the Pakistani Competition Act 2010 but only became fully operational in 2015. 34 ibid Section 44. 26 27

India and Pakistan  423 in the De Minimis notice, albeit without providing guidance as to the factors on the basis of which the value ‘appreciable’ may be ascertained.35 However, Section 3 may equally be said to be a version of the US formula of ‘substantial lessening of competition’, employed in rule-of-reason analysis, which leaves it to the enforcement authorities to specify the necessary thresholds.36 To the extent that Section 3(3) of the Act raises a presumption of anti-competitiveness in respect of horizontal agreements, it appears to be more in consonance with the scheme of Article 101 TFEU than with the US-style per se rule, for even though it neither specifies whether the presumption is rebuttable nor lists the pro-competitive factors that may be taken into account in rebutting it,37 it provides an option for arguments in rebuttal to be presented rather than outright declaring certain practices or agreements to be anticompetitive. The scheme for evaluating anti-competitive agreements as provided in Sections 4, 5, 7 and 9 of the Pakistani Competition Act bears a strong similarity with EU competition provisions: Section 4(1) employs the language of Article 101 TFEU in prohibiting agreements that have the ‘object or effect of preventing, restricting or reducing competition within the relevant market’; the list of agreements listed in Section 4(2) is nearly identical to the list provided in Article 101(1) TFEU; and the criteria for exemptions as provided in Section 9 is comparable to that provided in Article 101(3) TFEU. However, the scheme of exemptions in the Pakistani Competition Act departs from that provided in Article 101(3) TFEU to the extent that it includes a balancing dimension38 which is more reminiscent of the US rule-of-reason approach than of EU competition law,39 while the CCP’s discretion with regard to granting block exemptions under Section 7 reflects the EU’s approach towards block exemptions.40 Despite not being explicitly modelled on each other, the provisions of the Indian and Pakistani Competition Acts are comparable, due in part to their common antecedents and in part to the similar economic circumstances of the countries and their common ambition to promote private enterprise. The competition regimes of both countries sanction cartels for similar purposes, including cartels that directly or indirectly determine purchase or sale prices or impose other restrictive trading conditions with regard to the sale or distribution of any In its De Minimis Notice (Communication from the Commission – Notice on Agreements of Minor Importance Which Do Not Appreciably Restrict Competition under Article 101(1) of the Treaty on the Functioning of the European Union (De Minimis Notice) [2014] OJ C291/01), the European Commission treats agreements as being outside the scope of the application of Article 101 TFEU if the market shares of the parties to the agreements meet the thresholds provided in the Notice. The Indian Competition Act or regulations made under it do not provide any such thresholds even for agreements which are not presumed to be anti-competitive. 36 Clayton Act, ch. 323, 38 Stat. 730 (1914) (codified as amended at 15 USC §§ 12, 13, 14–19, 21, 22–27 (2012)); ibid § 13 (price discrimination); ibid § 14 (tying and exclusive dealing); ibid § 18 (mergers). 37 Although Section 3(3) does not explicitly state this, the use of the term ‘presumption’ suggests that if an agreement falls within the ambit of Section 3(3), the burden of proof is likely to shift to the defendant to prove that the agreement does not have an AAEC in India. 38 Pakistani Competition Act, Section 9(1)(c). 39 M. Carrier ‘The Four-Step Rule of Reason’ (2019) 33(2) Antitrust 51; and P. Areeda and H. Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application (2nd edn, 2003) 1507(C) 385–86. 40 The EU has issued a number of block exemptions in respect of horizontal and vertical agreements; see https://​ec​.europa​.eu/​competition​-policy/​antitrust/​legislation/​horizontal​-block​-exemptions​_en and https://​ec​.europa​.eu/​competition​-policy/​antitrust/​legislation/​vertical​-block​-exemptions​_en [accessed 15 March 2022]. 35

424  Research handbook on cartels goods or services; divide or share markets for goods or services, whether by territories, by volume of sales or purchases, by type of goods or services sold or number of customers or in any other similar way; and directly or indirectly engage in bid rigging or collusive bidding for sale, purchase or procurement of any goods or service. Their common antecedents notwithstanding, the tests for establishing a cartel as provided in the Indian and Pakistani regimes are considerably different. Under the Indian Competition Act, cartels are presumed to be anticompetitive, which means that it is incumbent upon the parties to the cartel to rebut the presumption and to establish that the agreement does not have an AAEC; under the Pakistani Competition Act, meanwhile, they may be deemed to be anticompetitive by object or effect. Although the Indian regime does not specify factors that the offending party must establish in rebutting the presumption, the fact that a presumption of anti-competitiveness may be rebutted suggests that the Indian Competition Act is open to the idea of accepting pro-competitive justifications for cartels. Similarly, although the Pakistani Competition Act does not list any pro-competitive factors that the CCP may take into consider in evaluating a cartel, it allows the possibility of an exemption for such an agreement if the offending party succeeds in establishing the pro-competitive effects of the agreement through a separate application. Both the Indian and Pakistani competition regimes also adopt a similar approach in sanctioning cartels. Both Acts prescribe a formula for imposing penalties; however, while the Indian regime also allows penalties to be imposed on relevant directors and officers of the relevant entity, the Pakistani regime restricts the penalties to the offending entity itself. Both Acts also authorize the competition authorities to give directions to the offending entities. In both the Indian and the Pakistani regimes, appeals lie from the decisions of the CCI and the CCP, as the case may be, to an independently established appellate tribunal and from the order of the tribunal to the relevant Supreme Court. In 2017, India replaced its dedicated Competition Appellate Tribunal, the COMPAT, with a generalist corporate tribunal, the NCLAT.

III.

AN OVERVIEW OF CARTEL ENFORCEMENT IN INDIA AND PAKISTAN

Despite being enacted in 2002, the Indian Competition Act was not brought into force, and the CCI not fully established and operationalized until 2009.41 The CCP, however, was made

Soon after its enactment the Indian Competition Act was challenged before the Indian Supreme Court on the ground that it did not conform with the constitutional principle of separation of powers (Brahm Dutt v Union of India (2005) 2 Supreme Court Cases 431). The Supreme Court disposed of the petition in January 2005 on the government’s assurance that it would amend the Act to allow for an independent tribunal to hear appeals from CCI’s decisions. Consequently, the Indian government introduced the Competition (Amendment) Bill in Parliament in March 2006, which was enacted as the Competition (Amendment) Act 2007. The Amendment Act was brought into force in stages: provisions relating to anticompetitive agreements and abuse of dominant position came into force on 20 May 2009 by Notifications Nos SO 1241(E) and SO 1242(E), both dated 15 May 2009, whilst provisions relating to mergers or ‘combinations’ came into effect only in 2011. In addition, on 15 May 2009, the government established the appellate tribunal by Notification No SO 1240(E). The CCI was fully constituted in March 2009 (see Competition Commission of India, Annual Report 2009–2010 www​.cci​.gov​.in/​sites/​ default/​files/​annual​%20reports/​PubAnnRep0910​-060911​.pdf [accessed 15 March 2022] i). 41

India and Pakistan  425 Table 24.1 Year

Breakdown of orders passed by the CCI 2009–20

Total Orders 26(6)

Anticompetitive Agreements 27

26(6)

Cartels

27

26(6)

27

2009

0

0

0

0

0

0

2010

5

0

5

0

3

0

2011

25

8

19

4

13

4

2012

15

16

12

13

8

13

2013

9

12

7

8

6

8

2014

4

18

4

10

2

10

2015

9

19

6

15

5

14

2016

5

3

2

3

2

3

2017

4

15

2

10

1

9

2018

4

16

1

11

1

12

2019

2

8

1

7

0

7

2020

4 86

4 119

2 61

3 84

1 52

3 83

205

145

135

operational and started taking up cases almost immediately after the promulgation of the Competition Ordinance 2007. However, despite the ease with which it commenced operations, the CCP soon faltered, initially due to challenges to the validity of the Pakistani Competition Act,42 and later due to the failure of the government to appoint a CCP chairperson for more than a year.43 These challenges notwithstanding, both the CCI and the CCP have issued a number of orders in the years they have been operational. For the purposes of this chapter, I focus only on the final antitrust orders issued by the two authorities (that is, orders in respect of anti-competitive agreements and abuse of dominance),44 and, more particularly, their orders in respect of cartels (that is, all orders in which cartels were considered, whether or not these were eventually established). In the case of the CCI this means orders issued in the years between (and including) 2009 and 2020, and in the case of the CCP it means orders issued in the years between (and including) 2007 and 2020. In this period, the CCI has issued 205 antitrust orders. Of these, 145 or 70.7 per cent of the orders relate to anti-competitive agreements, which includes both horizontal and vertical agreements, and 135 or 65.8 per cent of all orders, and 93.1 per cent of orders in respect of anti-competitive agreements, include a discussion about cartels (see Table 24.1). The CCP, on the other hand, has issued a total of 48 orders, of which 31 or 64.5 per cent include a discussion of anticompetitive agreements. Further, 20 or 41.6 per cent of all orders issued by the CCP and 64.5 per cent of all orders in relation to anti-competitive agreements include a discussion of cartels (see Table 24.2). It is also interesting to note that while the majority of the CCI’s proceedings in respect of cartels (79.5 per cent) are initiated on the basis of complaints or See n 4 above and text thereto. When Ms Rahat Kaunain Hasan, Chairperson of the CCP, completed her term in 2013, the Pakistani government appointed Dr Joseph Wilson as an acting rather than a full-time chairperson. During his period, the CCP issued no orders in respect of abuse of dominance or anticompetitive agreements and focused on competition advocacy. The government appointed Ms Vadiya Khalil as a full-time chairperson only in December 2014, 13 months after Ms Kaunain-Hassan had left office. 44 Both the CCI and the CCP have issued several interim orders which are not included in this evaluation. 42 43

426  Research handbook on cartels Table 24.2

Breakdown of orders passed by the CCP 2007–20

Year

Total Orders

Anticompetitive Agreements

Cartels

2007

0

0

0

2008

3

2

2

2009

9

7

3

2010

8

4

3

2011

8

6

4

2012

2

2

2

2013

4

2

1

2014

0

0

0

2015

2

2

1

2016

1

1

1

2017

2

0

0

2018

5

3

1

2019

4

2

2

2020

0 48

0 31

0 20

references received by the CCI, and only a very small proportion (20.5 per cent) were initiated by the CCI itself in its suo motu jurisdiction, only 38 per cent of proceedings before the CCP were initiated on the basis of complaints, while 62 per cent were initiated by the CCP on its own motion. The CCI and the CCP have taken up cartels in a range of sectors. In India, the CCI found at least 24 instances of cartelization in the ‘pharmaceutical’ sector and at least 18 in the ‘entertainment’ sector. The majority of the CCI orders regarding pharmaceutical cartels focus on associations of chemists and druggists,45 while those regarding the entertainment sector focus on associations of producers or distributors in the Indian film industry. In Pakistan, the CCP has not considered the entertainment industry at all and has taken up one instance of cartelization in a more broadly defined health sector46 and one in respect of the Pharma Bureau.47 The CCP appears to have focused more on the food and agriculture sector, where it has taken up at least five instances of cartelization,48 and a broadly defined banking and finance sector, in which it has taken up four instances of cartelization.49 45 C-87/2009/DGIR Vedant Bio Sciences v Chemists and Druggists Association of Baroda decided 5 September 2012; 60/2012 Arora Medical Hall Ferozpur v Chemists and Druggists Association Ferozpur decided 8 February 2014; and C-175/09/DGIR/27/28-MRTP The Belgaum District Chemists and Druggists Association v Abbott India Limited and others decided 2 March 2017. 46 File No. 2(2)/JD(L)/POEPA/CCP/2011 Employment Promoters Association v GCC Approved Medical Centres (GAMCA) decided 29 June 2012. 47 File No. 68/PB/C&TA/CCP/2016 Show Cause Notice issued to Pharma Bureau decided 29 June 2019. 48 File No. CCP/Cartels/04/2010 Pakistan Poultry Association decided 16 August 2010; File No. 1(15)/PVMA-ISB/C&TA/CCP/2011 Pakistan Vanaspati Manufacturers Association decided 30 June 2011; File No. 42/PPA/C&TA/CCP/2015 Pakistan Poultry Association decided 29 February 2016; File No. 89/PFMA/C&TA/CCP/2016 Show Cause Notice issued to Pakistan Flour Mills Association decided 13 December 2019; and File No. 248/Catkin/C&TA/CCP/2019 Khyber Pakhtunkhwa Directorate of Agriculture Engineering decided 16 December 2019. 49 File No. 2/sec-4/CCP/07 Pakistan Banking Association & other decided 10 April 2008; File No. 3/ sec-4/CCP/08 The Institute of Chartered Accountants of Pakistan decided 28 November 2008; File No.

India and Pakistan  427 The difference in their focus notwithstanding, there are considerable parallels in the sectors that the CCI and the CCP have investigated for cartelization and the types of practices the two authorities have sanctioned. For instance, both the CCI and the CCP have taken up cartels in the cement sector;50 the food, beverage and agriculture sector;51 pharmaceuticals;52 automobiles;53 and a broadly defined banking and finance sector.54 Both the CCI and the CCP have also investigated cartels for price fixing,55 limiting or controlling supply,56 market

1/Dir (Inv) KSE/CCP/08 Karachi Stock Exchange, Lahore Stock Exchange, Islamabad Stock Exchange decided 18 March 2009; and File No.1/24/ATM Charges/C&TA/CCP/2011 1-Link Guarantee Limited and Member Banks decided 28 June 2012. 50 For the CCI, see 29/2010 Builders Association of India v Cement Manufacturers Association and others decided 20 June 2012; RTPE 52/2006 In re Alleged Cartelization by Cement Manufacturers decided 3 July 2012; 29/2010 Builders Association of India v Cement Manufacturers Association and others decided 31 August 2016; RTPE 52/2006 In re Alleged Cartelization by Cement Manufacturers v Cement Limited and others decided 31 August 2106; and Ref Case 5/2013 Director, Supplies and Disposals Haryana v Shree Cement Limited and others decided 19 January 2017. For the CCP, see File No. 4(2)/sec-4/CCP/2008 All Pakistan Cement Manufacturers Association and members decided 27 August 2009. 51 For the CCI, see Suo Motu 02/2011 Suo Motu Case: RE Aluminium Phosphide Tablets Manufacturers decided 23 April 2012; and Cases Nos 21/2013; 29, 36, 47, 48 & 49/2013 India Glycols Limited v India Sugar Mills Association and others decided 18 September 2018. For the CCP, see n 48 above. 52 For the CCI, see n 45 above; for the CCP, see nn 46 and 47 above. 53 For the CCI, see 3/2011 Shri Shamsher Kataria v Honda Siel Cars India Limited and others decided 25 August 2014; and Suo Motu 5/2017 Re Cartelisation in Industrial and Automotive Bearings decided 5 June 2020. For the CCP, see File No. 1/101/PAMADA/C&TA/CCP/2013 Pakistan Automobile Manufacturers Authorised Dealers Association and Member Undertakings decided 10 April 2015. 54 The CCI has not found any cartelization in this sector: 5/2009 Neeraj Malhotra v Deutsche Post Bank Home Finance Ltd decided 2 December 2010; 15/2010 Shri Surinder Bhakoo v The HDFC Bank Limited & others decided 22 March 2011; 12/2009 Yashoda Hospital and Research Centre Limited v Indiabulls Financial Services Limited decided 22 March 2011; 28/2010 Metalrod Limited v Religare Finvest Limited decided 23 May 2011; and 2/28, 6/28, 11/28, 12/28 13/28 15/28 Shri Govind Aggarwal & others v ICICI Bank Limited and others decided 7 June 2011. For the CCP see n 49 above. 55 For the CCI, see 30/2013 Express Industry Council of India v Jet Airways (India) Limited and others decided 17 November 2015; Suo Motu 2/2017 Re Anti-Competitive Conduct in the Dry Cell Batteries Market in India v Panasonic Corporation Japan and others decided 30 August 2018; and Industrial and Automotive Bearings (n 53). For the CCP, see Institute of Chartered Accountants of Pakistan (n 49); File No. 8/APPMA/CMTA/CCP/10/1709 Pakistan Ship’s Agents Association decided 22 June 2011; and File No. 61/ETPB/C&TA/CCP/2016 All Pakistan Newspaper Society & others decided 6 December 2018. 56 For the CCI, see 03/2009 Uniglobe Mod Travels Pvt. Limited v Travel Agents Association of India and others decided 4 October 2011; 16/2011 Mr. Sajjan Khaitan v Eastern India Motion Picture Association and others decided 9 August 2012; Chemists and Druggists Association Ferozpur (n 45); and 42/2017 Mr. G. Krishnamurty v Karnatha Film Chamber of Commerce decided 18 September 2018. For the CCP, see Cement (n 50).

428  Research handbook on cartels allocation57 and collusive bidding,58 as well as cartels that engage in more than one of these anti-competitive practices.59 Both the CCI and the CCP have prescribed a range of remedies for cartels. In at least 66 of the 83 cases in which the CCI found a cartel (that is, in 79.5 per cent of cartel cases) it has imposed a monetary penalty, which is almost always calculated as a percentage of the average turnover (in case of companies), receipts (in case of associations) and income (in case of individuals related to the companies or associations involved in the cartel) of the preceding three years.60 After the decision of the Indian Supreme Court in the Excel Crop Care case,61 the CCI has used the ‘relevant’ turnover as the base for these calculations. In addition to the monetary penalties, the CCI has also issued cease and desist orders and behavioural remedies in at least 69 orders (that is, in 83.1 per cent of all cartel cases).62 The CCP also imposed monetary penalties in 16 of the 21 cartel cases (76.1 per cent) that came before it. However, in all but four cases, these penalties are expressed as lump sum amounts rather than as a percentage of the

57 For the CCI, see 43/2012 A Foundation for Common Cause and People Awareness v PES Installations (Pvt.) Limited and others decided 16 April 2012; 68/2013 Shri Ghanshyam Das Vij v Bajaj Corp Limited and others decided 12 January 2015; and 61/2013 Surendra Prasad v Maharashtra State Power Gen Co Limited and decided 10 January 2018. For the CCP, see GCC Approved Medical Centres (GAMCA) (n 46). 58 For the CCI, see 40/2010 Shri Gulshan Verma v Union of India through Secretary Ministry of Health and others decided 25 April 2012; Suo Motu 03/2012 Alleged Cartelisation in the Matter of Supply of Spares to Diesel Loco Mordernization Works, Indian Railways Patiala Punjab v Stone India Ltd. & others decided 5 February 2014; 34/2015 Western Coalfields Limited v SSV Coal Carriers (Pvt) Limited decided 14 September 2017; and Suo Motu 4/2016 In re Cartelisation in Tender no. 59 of 2014 of Pune Municipal Corporation for Solid Waste Processing v Lahs Green India Private Limited and others decided 31 May 2018. For the CCP, see File No. 3(17)/LO/CCP/2009 Dredging Companies case decided 23 July 2010; File No. 13/PESCO/CMTA/CCP/2010 Amin Brothers Engineering et al (PESCO) decided 13 May 2011; and Khyber Pakhtunkhwa Directorate of Agriculture Engineering (n 48). 59 In PES Installations (n 57) and Ref Case 1/2012 Ministry of Commerce Government of India v Puja Enterprises and others decided 6 August 2013, the CCI investigates limiting supply, market allocation and collusive bidding whilst in Suo Motu 04/2013 Sheth & Co. and others decided 10 June 2015, the CCI takes up price fixing, limiting supply, and collusive bidding; in Suo Motu 2/2016 Cartelisation in respect of Zinc Carbon Dry Cell Batteries market in India v Ever Ready Industries India Limited and others decided 19 April 2018 and in Suo Motu 7/2014 In re Cartelisation in the Supply of Effective Power Steering Systems against NSK Limited Japan & others decided 9 August 2019, the CCI considered price fixing, limiting supply and market allocation, and in India Sugar Mills Association (n 51) it takes up price fixing, limiting supply and collusive bidding. For the CCP, Pakistan Banking Association (n 49) in which it considered price fixing and attaching dissimilar conditions to similar contracts; its order in the Cement case (n 50) regarding price fixing and limiting supply; and its order in File No. 5(114)/REG/ADG-SCP/ LHC/CCP/13 LDI Operators case decided 30 April 2013 regarding price fixing and market sharing. 60 See n 19, n 20 and n 22 above, and the text thereto. 61 Excel Crop Care Limited v CCI (2017) 8 SCC 47. 62 In at least four cases before it, the CCI did not impose a penalty because it had already imposed one on the same parties in a preceding case (see 71/2011 Shri Ashtavinayak Cine Vision Limited v PVR Picture Limited New Delhi and others decided 8 May 2013, in which the CCI did not impose a penalty because it had already done so in 25/2010 Reliance Big Entertainment Limited v Karnataka Film Chamber of Commerce decided 16 February 2012). Similarly, in at least four cases, the CCI did not issue further directions because it simply reiterated directions that had been issued in earlier cases (40/2010 Shri Gulshan Verma v Union of India through Secretary Ministry of Health and others decided 25 April 2012, in which the CCI simply reproduced its earlier order in PES Installations (n 57)).

India and Pakistan  429 turnover of the concerned entity.63 In ten (47.6 per cent) of these cases, the CCP also issued simple cease and desist as well as other behavioural remedies. A comparison of the orders of the two authorities suggests that while the CCI prefers a strategy of combining penalties and directions, issuing both in at least 71 per cent of all its orders in respect of cartels, the CCP is as inclined to issue both directions and penalties (33.3 per cent) as it is to penalize without directions (42.8 per cent). Both the CCI and the CCP have also exercised their power to grant leniency in specific circumstances.64

Figure 24.1

IV.

Comparing the enforcement strategies of CCI and CCP 2007–20

ESTABLISHING A CARTEL: CCI AND CCP’S INTERPRETATIONS OF THE RELEVANT PROVISIONS

The Indian Competition Act specifically recognizes a cartel as a particular type of horizontal agreement and raises a presumption of an AAEC as soon as an ‘agreement’65 which has as its object the formation of a cartel is established.66 The Pakistani Competition Act, on the other hand, neither makes any mention of cartels nor prescribes a specific test for establishing their existence and examines these under the umbrella of prohibited agreements.67 This section analyses select orders of the CCI and the CCP to explore how they have interpreted the provisions relating to cartels stipulated in their respective competition Acts.

In terms of Pakistani Competition Act Section 38(2), the CCP may impose a lump sum penalty. However, the CCP does not explain the basis on which it fixes the quantum of the lump sum. 64 For the CCI, see Suo Moto Case 03/2014 In Re: Cartelization in respect of tenders floated by Indian Railways for supply of Brushless DC Fans & other electrical items decided 18 January 2017; and Carbon Dry Cell Batteries (n 59). For the CCP, see File No. 1(2)/Reg/S.39/CCP/2011 In the matter of Leniency Application filed by Siemens (Pakistan) Engineering Company decided 3 April 2012. 65 Indian Competition Act, Section 2(b). 66 Section II.A above. 67 Section II.B above. 63

430  Research handbook on cartels A.

Interpreting Section 3(3) of the Indian Competition Act

The first cartel that the CCI examined in the case of Neeraj Malhotra v Deustche Post Bank Home Finance Ltd. & others related to price fixing.68 In terms of Section 3(3) of the Indian Competition Act, such an agreement gives rise to a presumption of an AAEC. Although Section 3(3) does not specify this, in the case of a presumption, the burden of rebuttal shifts onto the defendant.69 Contrary to this provision, the CCI evaluated the AAEC of the alleged anticompetitive agreement with reference to factors listed in Section 19(3),70 before concluding that there was no agreement between the relevant parties. The CCI adopted this strategy in a number of other cases. For instance, in the supply cartel case of Vijay Gupta v Paper Merchants Association Delhi & others, the CCI examined factors listed in Section 19(3) and explained that the mere absence of pro-competitive factors does not establish an offence unless anti-competitive factors are also present. The CCI also noted that it was incumbent upon the defendant to refer to these factors to rebut the presumption.71 In another supply cartel case, Reliance Big Entertainment Limited v Karnataka Film Chamber of Commerce & others,72 the CCI stated that ‘in order to find out whether the agreement […] has caused appreciable adverse effect on competition factors listed in Section 19(3) are to be considered’,73 while maintaining that the defendant had the onus of rebutting the presumption. However, in another price-fixing cartel case, Builders Association of India v Cement Manufacturers Association & others,74 the CCI went so far as to resort to the Section 19(3) factors to establish the effect of the defendant’s actions on the cement prices, thereby abandoning the presumption altogether.75 In a number of other cases, the CCI expressly declared the Section 19(3) factors to be irrelevant for establishing cartels, while going on to consider these regardless. For instance, in the price-fixing cartel case of FICCI v United Producers/Distributors Forum & others,76 the CCI limited its analysis to finding an agreement,77 after which it was required to ask the defendants to provide evidence to rebut the presumption of an AAEC.78 The CCI also clarified that in case of agreements falling within Section 3(3), factors listed in Section 19(3) ‘need not be gone into’.79 It nevertheless examined these factors, for the reason that the Director General (‘DG’)

Deutsche Post Bank (n 54). See A. Kalintiri, ‘Analytical Shortcuts in EU Competition Enforcement: Proxies, Premises and Presumptions’ (2020) 16(3) Journal of Competition Law & Economics 392, 394. 70 Indian Competition Act, Section 19(3) lists the factors that CCI may take into account in determining whether an agreement has an AAEC. These include creation of barriers to new entrants in the market; driving existing competitors out of the market; foreclosure of competition by hindering entry into the market; accrual of benefits to consumers; improvements in production or distribution of goods or provision of services; or promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services. 71 Case 7/2010 Vijay Gupta v Paper Merchants Association Delhi & others decided 24 March 2011. 72 Karnataka Film Chamber of Commerce (n 62). 73 ibid paras 6.90 and 6.91. 74 Cement Manufacturers Association (n 50). 75 ibid. Particularly paras 6.8 and 6.9. 76 Case 1/2009 FICCI v United Producers/Distributors Forum & others decided 25 May 2011. 77 ibid para 23. 78 ibid para 23.51. 79 ibid para 23.53. 68 69

India and Pakistan  431 had already considered these at great length in his report.80 Similarly, in Varca Druggist & Chemist and others v Chemists & Druggists Association Goa and others,81 the CCI stated that, ‘once existence of prohibited agreement […] is established there is no further need to show an effect on competition because then a rebuttable presumption is raised that such conduct has an appreciable adverse effect on competition’.82 The CCI further stated that, in such circumstances, the burden of proof shifts on to the defendants ‘to rebut the presumption referring to factors enumerated in Section 19(3) of the Act’,83 and that it is not incumbent upon the CCI ‘to launch into an enquiry […] to find out existence of appreciable adverse effect on competition’. Interestingly, the CCI still considered these factors84 before arriving at a decision.85 In Indian Sugar Mills Association & others v Indian Jute Mills Association & others,86 the CCI emphasized the express wording of Section 3(3), stating that ‘[a] bare reading of the statutory scheme […] indicates that under Section 3(3) of the Act, the presumption of appreciable adverse effect on competition has to follow once an agreement falling under clauses (a) to (d) of Section 3(3) of the Act is found to exist’ and that it was ‘wholly untenable’ that the defendants should try and shift the statutory scheme.87 Here too, however, the CCI made this statement only after it had considered and affirmed the DG’s discussion in respect of factors listed in Section 19(3). In yet other cases, the CCI accepted the presumption without reference to Section 19(3). For instance, in considering the supply cartel in Uniglobe Mod Travels (Pvt.) Limited v Travel Agents Federation of India & others,88 the CCI clarified that ‘once existence of a prohibited agreement, practice or decision enumerated in Section 3(3) is established it may not be necessary to show an effect on competition’ and that ‘the burden of proof [shifted] upon the opposite parties to show that impugned conduct does not cause appreciable adverse effect on competition’.89 Although the CCI evaluated factors listed in Section 19(3), it did so in response to arguments made by the defendants rather than of its own accord. The CCI went further in the collusive bidding case of A Foundation for Common Cause & People Awareness v PES Installations (Pvt.) Limited,90 in which, once it had decided that the acts of the defendants constituted a violation of Section 3(3)(d),91 it simply declared its decision on the basis of the DG’s report92 rather than raising a presumption of an AAEC or examining the response of the defendants to identify possible rebuttals. However, in Re Aluminum Phosphide Tablets

ibid para 24. MRTP Case No. C-127/2009/DGIR (4/28) Varca Druggist & Chemist and others v Chemists & Druggists Association Goa and others decided 11 June 2012. 82 ibid para 27.6. 83 ibid para 27.29. 84 ibid para 27.30. 85 ibid para 27.31. 86 Case 38/2011 Indian Sugar Mills Association & others v. Indian Jute Mills Association & others decided 3 April 2014. 87 ibid para 173. 88 Travel Agents Federation of India (n 56). 89 ibid para 68.2.1. 90 PES Installations (n 57). 91 ibid para 6.56. 92 ibid para 6.60. 80 81

432  Research handbook on cartels Manufacturers93 and in Shri B.P Khare v Orissa Concrete and Allied Industries & others,94 the CCI reverted to the practice of examining the rebuttal evidence led by the defendants on the touchstone of Section 19(3).95 B.

Establishing Cartels under Section 4 of the Pakistani Competition Act

In terms of Section 4 of the Pakistani Competition Act, the core question before the CCP in relation to cartels is whether these are anti-competitive ‘by object’ or ‘by effect’. The answer to this question then determines whether or not the CCP requires evidence to establish the impact of the cartels on competition in the relevant market. The CCP first took up this question in the case of Pakistan Banking Association & others,96 in which it traced the links of Section 4 with ‘Article 81 of the EU Treaty’ (now Article 101 TFEU) and confirmed that in the case that an agreement had an anti-competitive object, there was no need to inquire into its effect.97 The CCP further stated that both EU and US competition authorities had ‘taken the view that certain types of agreements – direct or indirect price fixing […] limiting or controlling production, markets or agreeing levels of output or dividing markets – by their very nature always restrict competition and so are prohibited per se regardless of effect, impact or the fact that very small undertakings are involved’.98 In the Institute of Chartered Accountants of Pakistan case,99 the CCP reaffirmed that not only is Section 4 ‘similar to Article 81 of the Treaty of Rome’100 (now Article 101 TFEU), but it is also ‘in congruity with Section 1 of the Sherman Antitrust Act of the United States.’101 In the Karachi Stock Exchange case,102 which involved a price-fixing cartel, the CCP developed an understanding of the concept of the ‘object’ (of an agreement), combining the EU competition law definition of ‘object’103 with the US antitrust concept of ‘naked restraints’,104 and once again categorized a price-fixing cartel as a ‘per se violation’105 of the Pakistani Competition Act.106 Similarly, in considering collusive bidding in the PESCO Tender Order/ Amin Brothers Engineering et al case,107 the CCP stated that the difference between EU and Aluminium Phosphide (n 51). Ref Case 5/2011 Shri B.P Khare v Orissa Concrete and Allied Industries & others decided 21 February 2013. 95 Aluminium Phosphide (n 51) paras 7.43–7.45; and Shri B.P Khare v Orissa Concrete (n 94) para 36. 96 Pakistan Banking Association (n 49). 97 ibid para 48. 98 Ibid. 99 Institute of Chartered Accountants (n 49). 100 ibid para 11. 101 ibid. 102 Karachi Stock Exchange (n 49). 103 ibid para 42. 104 ibid. 105 ibid paras 44, 45, 48, 49, 52, 53. 106 The CCP replicated this approach in several other cases: File 06/Sec 3/CCP/08 All Pakistan Newspaper Society and others decided 23 April 2009; Cement case (n 51); File 3/LPG/DIR(INV)/M&TA/ CCP/2009 Jamshoro Joint Venture Limited and LPG Association of Pakistan decided 14 December 2009; Poultry Association (n 48); and File CCP/Cartels/03/2010 Pakistan Jute Mills Association and its Member Mills decided 3 February 2011. 107 PESCO (n 58). 93 94

India and Pakistan  433 US competition (antitrust) laws was only one of ‘semantics’ and that the EU encompassed ‘the principles developed in the US jurisdiction within its statute’.108 The CCP further stated that the ‘EU classification of “object” and “effect” clearly echoes the broad principles developed by the US courts in the “per se” and “rule of reason” doctrines’109 and the ‘various terms developed in the US and the EU, therefore, have the same underlying principles’.110 Following this reasoning, the CCP indiscriminately drew upon precedents from both jurisdictions. In the 1-Link Guarantee Limited & Member Banks case,111 the CCP drew a distinction between prices fixed by a joint venture for the purposes of ‘creating significant and beneficial efficiencies that could not otherwise be accomplished’, which it stated ‘may be considered under a rule of reason’ and also for an exemption under Section 5 (read with Section 9),112 and other ‘horizontal price fixing agreements’ that have ‘the object of preventing, restricting and reducing competition’ and, therefore, are not eligible to be considered for an exemption.113 The CCP did not attempt to reconcile this decision with any of its earlier decisions on price fixing, and even though it had declared that the case required a rule-of-reason inquiry, it moved directly to the issue of exemption without engaging in such an analysis.114 Similarly, in discussing collusive bidding in the Dredging Companies case115 and after examining the treatment of bidding agreements in various jurisdictions,116 the CCP concluded that ‘bidding consortia are to be treated on case-to-case basis applying the rule of reason and should not be treated as per se illegal i.e. agreements that always have anticompetitive objects and effects’.117 In the particular case, however, the CCP did not engage in economic analysis and decided the case on the basis of the relevant market, specifications of the project for which the bid had been made and the legal status of the parties to the agreement. Less than a year later, however, in the PESCO case,118 the CCP held that ‘collusive bidding remains in the restraint by object category before the Commission’ as the ‘anti-competitive effects of these actions have consistently been established over a hundred years of competition jurisprudence and no economic evidence has been established that shows pro-competitive benefits of these actions’.119 The CCP did not distinguish the Dredging Companies case,120 and it did not cite any precedent in support of its arguments. C.

Evolution in the CCI’s and the CCP’s Approaches towards Cartels

Over time the CCI has demonstrated increasing clarity and uniformity in interpreting and applying the analytical test for establishing cartels as provided in Section 3(3) of the Indian

ibid para 25. ibid. 110 ibid para 27. 111 1-Link (n 49). 112 ibid para 62. 113 ibid para 91. 114 ibid para 64. 115 Dredging Companies (n 58). 116 ibid paras 48–52, 54 and 56–57. 117 ibid para 59. 118 PESCO (n 58). 119 ibid para 30. 120 See n 116. 108 109

434  Research handbook on cartels Competition Act. In a number of recent orders, the CCI has expressly explained the analytical test as stated in Section 3,121 while in others it has simply applied the test to the facts before it, without any reference to the statute.122 Regardless of the approach adopted, in all these cases the CCI has presumed an AAEC unless the defendants have rebutted the presumption with reference to factors listed in Section 19(3). Unlike the CCI, however, the CCP continues to be hesitant to set out a test that is fully anchored in the language of Section 4 rather than in its international antecedents, and prefers to link its findings either to a foreign decision that fits the particular facts of the case before it123 or to its own earlier decisions.124 Despite the difference in their approach towards cartels, both the CCI and the CCP have in common the fact that they are increasingly passing orders without reference to US or EU antecedents and without citing international case law in support either of their analysis (in the case of the CCI) or of their interpretation of the analytical test for establishing cartels (in the case of the CCP).

V.

APPEALS FROM CARTEL DECISIONS IN INDIA AND PAKISTAN

In both India and Pakistan, appeals from the orders of the CCI and of the CCP, respectively, lie to independently constituted appellate tribunals and from the orders of the appellate tribunals to the Supreme Courts of the countries. A.

Evolution of the Appellate Regimes in the Countries

India established its first appellate tribunal, known as the Competition Appellate Tribunal (‘COMPAT’), on 15 May 2009, concurrently with operationalizing the CCI.125 Over the next eight years COMPAT heard appeals from the CCI’s interim and final orders in a range of matters. In May 2017, however, the dedicated COMPAT was replaced by a consolidated National Company Law Appellate Tribunal (‘NCLAT’), which was mandated to hear all competition matters previously within the jurisdiction of the COMPAT, as well as appeals in respect of company law matters.126 In Pakistan the provision for an appellate tribunal was inserted in the Pakistani Competition Act in 2010, three years after competition legislation was first introduced in the country. However, the Pakistani Competition Appellate Tribunal (‘CAT’) has been operational only intermittently and has issued very few orders relating to anti-competitive agreements.127

Case 61/2012 Indian Foundation of Transport Research & Training v Sh. Bal Malkait Singh & others decided 16 February 2015. 122 Case 58/2012 Kannada Gratiakara Koota Shri Ganesh Chetan v Karnataka Film Chamber of Commerce & others decided 27 July 2015. 123 Poultry Association (n 48). 124 Pakistan Automobile (n 53). 125 SO 1240(E) (n 41). 126 Section II.A above (particularly n 23 and n 24 and the text thereto). 127 The Pakistani government appointed the CAT’s first member and chairman in July 2011; however, it did not appoint technical members until 2012. In April 2013, the CAT became inquorate once again; it was not reconstituted until 2015. In July 2015, the CAT made rules to regulate its conduct and proceed121

India and Pakistan  435 B.

Appellate Decisions in India

In the years that the COMPAT was operational (2009 and 2017), it heard approximately 41 appeals in relation to cartels. By December 2016, the COMPAT had allowed and dismissed an almost equal number of appeals (13 and 10 respectively); in at least two cases, it had dismissed the appeal but also set aside the penalty imposed by CCI; in at least five cases it had reduced the penalty imposed by CCI; it had remanded at least six cases to CCI for re-hearing. At the end of this period five appeals were still pending before the COMPAT.128 The primary grounds on which the COMPAT reduced or quashed penalties or remanded the cases to the CCI for reconsideration included arbitrariness in imposing penalties, violation of principles of natural justice and inadequate evidence to prove collusion.129 Several of the COMPAT’s decisions were appealed before the Indian Supreme Court and played a critical role in clarifying competition principles and CCI procedure in India. Perhaps the most significant decision in this regard was in respect of an appeal filed by the Steel Authority of India (‘SAIL’) against the CCI’s interim order in Jindal Steel and Power Limited v Steel Authority of India.130 By its order dated 11 January 2010, the COMPAT allowed SAIL time to file its reply before the CCI, and by a further order dated 15 February 2010 it held that while there was no requirement for the CCI to invite comments from parties to proceedings pending before it, once it had invited such comments it could not withdraw the opportunity. The COMPAT also held that it was incumbent upon the CCI to provide reasons for its orders.131 The CCI appealed the COMPAT’s order before the Indian Supreme Court, and by its order dated 9 September 2010 the Supreme Court confirmed COMPAT’s decision on various counts and provided guidance to the CCI, which it has followed in all its subsequent decisions.132 The CCI’s decision in the Aluminium Phosphide Tablets Manufacturers case133 was also challenged before the COMPAT,134 and while the COMPAT confirmed that the parties had contravened the provisions of the Indian Competition Act, it also reduced the penalties imposed on them on the ground that penalties must be calculated as a proportion of the ‘relevant turnover’.135 The appellants and the CCI challenged this decision before the Supreme Court and the Supreme Court decided both these appeals by a single order dated 8 May 2017, in which it confirmed the CCI’s right to hold an inquiry136 as well as its right to direct its Director General of Investigations to investigate into the boycott of the tender.137 However, the ings. The Competition Appellate Tribunal Rules 2015 made by SRO 749(1)/2015 dated 31 July 2015 www​.cc​.gov​.pk/​images/​Downloads/​rules/​appellate​_tribunal​_2015​.pdf [accessed 15 March 2022]. 128 A. Bhattacharjea and O. De, ‘Anti-Cartel Enforcement in India’ (2017) 5 Journal of Antitrust Enforcement 166, 180. 129 ibid. 130 Case 11/2009 Jindal Steel and Power Limited v Steel Authority of India decided 20 December 2011, para 13. 131 COMPAT Appeal 1/2009 Steel Authority of India Limited v Jindal Steel & Power Limited decided 15 January 2010, para 2. 132 CA 7779/2010 Competition Commission of India v Steel Authority of India Limited decided 9 September 2010, paras 8–9. 133 Aluminium Phosphide (n 51). 134 Joint order of COMPAT in Appeals No. 79/2012, 80/2012 and 81/2012, dated 29 October 2013. 135 ibid para 67. 136 Excel Crop Care (n 61) para 34. 137 ibid para 36.

436  Research handbook on cartels Supreme Court also endorsed the COMPAT’s analysis with regard to penalties and emphasized that ‘the penalty cannot be disproportionate to the violation and it should not lead to shocking results’.138 Another important judgment of the COMPAT and of the Supreme Court was in respect of the CCI’s order in the Liquefied Petroleum Gas Cylinders case,139 in which it had imposed a penalty on LPG cylinder manufactures for collusive bidding. By its order dated 20 December 2013, the COMPAT upheld the CCI’s findings but reduced the amount of penalty. The cylinder manufacturers and the CCI both appealed to the Supreme Court, and the Supreme Court confirmed that the CCI has no obligation to establish the AAEC of agreements that fall within the presumption of Section 3(3) of the Indian Competition Act.140 However, the Court also held that in ‘a situation of oligopsony’, ‘credible and corroborative evidence’ other than simply parallel pricing must also be provided to establish collusive bidding,141 and on the basis of this reasoning quashed the penalty. C.

Appellate Decisions in Pakistan

According to a 2015 Report of the Law and Justice Commission of Pakistan, there were 49 appeals pending before the CAT when it commenced operations earlier that year. By the end of the year, one appeal had been decided and five new appeals instituted.142 By 2017 CAT had disposed of 44 appeals against orders of the CCP while 51 remained pending.143 The limited available data about the operations of the CAT suggests that the majority of appeals filed before it have been against the CCP’s final rather than interim orders, and in respect of the CCP’s decisions with regard to deceptive marketing practices.144 In the one reported CAT order against a final order of the CCP in respect of cartels, the CAT appears to have accepted and endorsed the CCP’s findings without evaluating or analysing these in any depth.145 Some of the CAT’s orders have also been appealed before the Pakistani Supreme Court, both by the aggrieved parties and by the CCP.146 An important example in this regard is the CCP’s appeal before the Supreme Court against the CAT’s decision in respect of an appeal against the CCP’s order in the 1-Link case.147 The CCP has raised some very important issues

ibid para 50. Rajasthan Cylinders Containers Limited and others v Union of India and another decided 1 October 2018 https://​ indiankanoon​.org/​doc/​ 66135551/​[accessed 15 March 2021]; and D. Sharma, ‘COMPAT’s Underwhelming Power: LPG Cylinder Manufacturers’ Cartel’ (Mondaq, 14 December 2016) www​.mondaq​.com/​india/​cartels​-monopolies/​553186/​compat39s​-underwhelming​-power​-lpg​ -cylinder​-manufacturers39​-cartel [accessed 15 March 2022]. 140 Rajasthan Cylinders (n 139) para 73. 141 ibid para 96. 142 National Judicial (Policy Making) Committee, Administrative Tribunals and Special Courts Annual Report 2015 (The Secretariat of Law and Justice Commission of Pakistan) http://​ljcp​.gov​ .pk/​nljcp/​viewpdf/​pdfView/​UH​VibGljYXRp​b24vYTY4Y2​ItYXRzYy0y​MDE1LnBkZg​=​=​#book/​ [accessed 15 March 2022] Chapter 16. 143 ‘Tribunal Takes up 95 Appeals for Reviewing CCP Orders’ (Business Recorder, 30 August 2017) https://​fp​.brecorder​.com/​2017/​08/​20170830213730/​ [accessed 15 March 2022]. 144 Engro Foods (Pvt.) Ltd. and 2 others v Competition Commission of Pakistan [2019] CLD 981. 145 Pakistan Poultry Association v Competition Commission of Pakistan [2018] CLD 759, para 9. 146 Appeal No. 3/2016 Al- Rahim Foods (Pvt.) Limited v CCP. 147 1-Link case (n 49) para 62. 138 139

India and Pakistan  437 in this appeal, which, if decided, would clarify important substantive as well as procedural requirements of the Pakistani Competition Act.148 However, at the time of writing, the Pakistani Supreme Court has still to decide the matter.

VI.

CONCLUSION

Despite the contemporaneous adoption of modern competition laws in India and Pakistan and the very mixed enforcement record of the countries, it is evident from the data that proceeding against cartels has been a priority for both the CCI and the CCP. The authorities have investigated different types of cartels, including cartels for price fixing, limiting supply, market sharing and collusive bidding, in economic sectors as diverse as entertainment and food, and have utilized the range of penalties and directions available to them under their respective Acts to sanction these practices. However, both the CCI and the CCP have been unsuccessful in realizing the extent of penalties they have imposed due to their orders or actions being challenged on appeal before the appellate tribunals or in constitutional petitions before the courts. Even so, in India, the appeals before the appellate tribunal, and from the orders of the tribunal to the Indian Supreme Court, have until recently generated a dialogue between each of the competition enforcement tiers in the country, which in turn has clarified competition principles and procedures and has supported and strengthened the operation of the CCI. Unfortunately, this supportive relationship has run aground since the appointment of the non-specialist NCLAT, which, either due to overwork or to lack of expertise, has generally avoided passing orders on competition matters. The situation is even gloomier in Pakistan, where competition enforcement in all areas except deceptive marketing practices appears to have declined over the years; even though independent committees established by the Pakistani government discovered cartels in the wheat and sugar industry, there is as yet no order from the CCP in this regard.149 In both countries, competition enforcement generally and cartel enforcement specifically are inextricably linked with the political will of the government. While India, seemingly more than Pakistan, recognizes that time and technology present new challenges for the detection and investigation of cartels,150 its ability to deliver will continue to depend on the robustness of its enforcement institutions.

Civil Appeal No. 551/2013 Competition Commission of Pakistan v NIB Bank. A. Darr, ‘Cartels & the Politics of Competition Law Enforcement in Pakistan’ (Competition Policy International, 2 September 2020) www​.​competitio​npolicyint​ernational​.com/​cartels​-the​-politics​ -of​-competition​-law​-enforcement​-in​-pakistan/​ [accessed 15 March 2022]. 150 ‘Report of the Competition Law Review Committee submitted to Union Finance and Corporate Affairs Minister’ (Press Information Bureau, Government of India, Ministry of Corporate Affairs, 14 August 2019)  www​.pib​.gov​.in/​newsite/​PrintRelease​.aspx​?relid​=​192629 [accessed 15 March 2022]. 148 149

25. Hong Kong and Mainland China Thomas K. Cheng1

I. INTRODUCTION Cartel enforcement has long been a top enforcement priority for competition authorities across the globe. This is particularly the case for newer authorities, which often may not have the expertise, manpower or inclination to take on more complicated cases such as abuse of dominance cases. This applies to many Asian authorities, which are relatively new to competition law enforcement. Competition law was adopted in most jurisdictions in Asia in the past 20 years. Two such jurisdictions are Hong Kong and Mainland China. Hong Kong adopted its Competition Ordinance in 2012 and Mainland China promulgated the Anti-Monopoly Law in 2007. Hong Kong has focused its enforcement effort almost exclusively on cartel cases thus far. Only very recently did the Hong Kong Competition Commission initiate its first abuse of dominance case. Enforcement in the Mainland has perhaps been less lopsided. Abuse of dominance claims were brought against Qualcomm and Tetra Pak by the previous enforcement authorities of the National Development and Reform Commission and the State Administration for Industry and Commerce. The current enforcement authority, the State Administration for Market Regulation, has taken aggressive action against the Big Tech giants since 2020. Nonetheless, cartel cases still account for a majority of the public enforcement cases in Mainland China. Cartel enforcement remains a critical component of public enforcement in both jurisdictions. Many of these cases were traditional cartel cases involving direct collusion among competitors. In recent years, hub-and-spoke cartels have attracted more attention in both jurisdictions. In fact, the very first case brought by the Hong Kong Competition Commission involved such a cartel. The increasing prominence of competition issues raised by online platforms also shines the spotlight on such cartels in the Mainland. There are concerns that platforms coordinate collusion among their suppliers through hub-and-spoke arrangements. It is thus high time to examine the record of these two jurisdictions with hub-and-spoke cartels so far and see whether they can benefit from the experience of more established jurisdictions, such as the United States and the European Union.

1 The author would like to acknowledge the generous support of the Hong Kong Research Grants Council under project code 17606518.

438

Hong Kong and Mainland China  439

II.

HUB-AND-SPOKE CARTELS: A GENERAL OVERVIEW

A.

What Is a Hub-and-Spoke Cartel?

Ever since the 2016 publication of Virtual Competition by Ariel Ezrachi and Maurice Stucke, hub-and-spoke cartels have attracted considerable attention in the competition law community. Hub-and-spoke is one of the four scenarios of collusion described in the book. The possibility of algorithms serving as a hub to facilitate collusion among competitors as spokes has once again put hub-and-spoke arrangements at the forefront of competition law thinking and enforcement. It is the seemingly greater likelihood of hub-and-spoke cartels in the digital economy that has spurred the Chinese competition enforcement authority, the State Administration for Market Regulation (‘SAMR’), to focus on these arrangements. Hub-and-spoke cartels, however, did not originate in the digital world. These arrangements have been around for a long time. Although the Court did not invoke the term in the case, the agreement that was condemned by the US Supreme Court in the famous Interstate Circuit case concerned exactly such an arrangement.2 The case dates back to the 1930s. Hub-and-spoke cartels are arrangements that feature both a horizontal and a vertical element. In essence, it is a cartel consummated through a series of vertical agreements between the hub and the spokes.3 They consist of ‘horizontal collusive behaviour between the competitors as well as vertical “agreements” between a firm operating at a different level of the supply chain and each competitor’.4 As observed by Roberto Amore, the lynchpin of a hub-and-spoke arrangement is the repeated interaction between economic players operating at different levels of the supply chain, which would normally be expected to have divergent commercial needs, but which, in certain circumstances and for different business reasons, through the triangle-shaped dynamic end up having at least one convergent interest: the creation of horizontal collusion (at some level, downstream or upstream) through a network of similar vertical restraints with the ultimate objective of reducing competition at the downstream level.5

In most hub-and-spoke cases, there is no evidence of direct communication among the spokes. The lack of evidence of direct communication, however, does not obviate the need for an agreement among the spokes. A horizontal agreement among the spokes needs to be inferred from circumstantial evidence, including the vertical agreements themselves. At least under US antitrust law, courts have consistently rejected ‘rimless wheel theories’ offered by plaintiffs and insisted on proof of a horizontal agreement among competitors.6 The law in the EU is slightly different due to the existence of the concept of concerted practices, which are mostly applied to information exchange and require less concertation than that found in a typical

Interstate Circuit v United States 306 US 208 (1939). G.L. Zampa and P. Buccirossi, ‘Hub and Spoke Practices: Law and Economics of the New Antitrust Frontier’ (2013) 9 Competition Law International 91, 91. 4 R.L. van Rutten and C. Buts, ‘Hub and Spoke Cartels: Incentives, Mechanisms and Stability’ (2019) 3 European Competition & Regulation Law Review 4, 4. 5 R. Amore, ‘Three (or More) Is a Magic Number: Hub & Spoke Collusion as a Way to Reduce Downstream Competition’ (2016) 12 European Competition Journal 28, 29 (italics in the original). 6 B. Orbach, ‘Hub-and-Spoke Conspiracies’ (2014) 15 Antitrust Source 1, 3–4. 2 3

440  Research handbook on cartels agreement.7 This partly explains why most of the hub-and-spoke cases in the EU have featured information exchange, which is largely absent in their US counterpart. The inference of a horizontal agreement would be relatively straightforward if there was other circumstantial evidence suggestive of a meeting of minds among the spokes, such as the uniform and highly particularized response from the spoke film distributors in reaction to the demand from the hub film exhibitor in Interstate Circuit.8 Absent such probative evidence, inference will need to be drawn from the existence of a series of parallel vertical agreements. Given the ubiquity of vertical agreements in the modern-day economy and the prevalence of highly similar agreements between a manufacturer and its distributors, an excessive readiness to infer a horizontal agreement from parallel vertical agreements risks subjecting otherwise legitimate commercial practices to per se or by object condemnation. For instance, a manufacturer desiring to implement resale price maintenance (‘RPM’) in the US, where such a practice is analysed under the Rule of Reason, would most likely enter into a string of highly similar RPM agreements with its distributors. The manufacturer may be motivated by genuinely pro-competitive reasons such as prevention of free-riding and the market-wide RPM scheme may be consummated by a series of agreements independently negotiated with each distributor. There is no agreement among the distributors to fix prices. If, however, a horizontal price-fixing agreement is inferred among the distributors based on their agreements with the manufacturer, the RPM scheme would risk being inappropriately condemned. Therefore, the scope of permissible inference from parallel vertical agreements needs to be delineated with care. A number of commentators have attempted to classify hub-and-spoke arrangements.9 Most of them concur on two of the three types of hub-and-spoke arrangements. The remaining type is where more divergence is observed. Benjamin Klein provides probably the most persuasive classification of these arrangements. According to him, there are three types of hub-and-spoke arrangements. These include purely intrabrand manufacturer-hub arrangements10 and interbrand hub arrangements,11 which can be further sub-divided into interbrand manufacturer-hub arrangements12 and interbrand retailer-hub arrangements.13 The distinction between intrabrand and interbrand hub-and-spoke arrangements is highly significant because it sheds important light on the origin of and the motivation behind the arrangement. If a hub-and-spoke arrangement is purely intrabrand, the only circumstance under which it can generate extra profits to the manufacturer is if it produces efficiencies.14 Absent efficiencies, a purely intrabrand hub-and-spoke arrangement would only affect the splitting of rent between the manufacturer and the distributors. A retailer cartel would only increase retailer margin and the distributors’ share of the rent at the manufacturer’s expense,

A. Jones, B. Sufrin and N. Dunne, EU Competition Law: Text, Cases, and Materials (7th edn, Oxford University Press, 2019) 177–84. 8 B. Klein, ‘Inferring Agreement in Hub-and-Spoke Conspiracies’ (2020) 83 Antitrust Law Journal 127, 159. 9 ibid 131–42. Amore (n 5) 33–39. Zampa and Buccirossi (n 3) 94–95; and van Rutten and Buts (n 4) 4–5. 10 Klein (n 8) 131–32. 11 ibid 138. 12 ibid 139. 13 ibid 142. 14 ibid 132. 7

Hong Kong and Mainland China  441 which the latter will never have the incentive to facilitate.15 This insight applies not only to RPM but also to other kinds of intrabrand vertical restraints.16 This leads Klein to conclude that manufacturer participation in an intrabrand hub-and-spoke arrangement that produces no efficiencies must be the result of retailer coercion.17 A manufacturer would otherwise never take part in such an arrangement. The lack of efficiencies is important because otherwise the efficiencies would produce rent which the distributors could share with the manufacturer to entice the latter to take part in the arrangement. The lack of efficiencies means that the arrangement would be a zero-sum game between the manufacturer and the distributors. Two qualifications to Klein’s observation, however, are in order. First, the lack of efficiencies in an intrabrand hub-and-spoke arrangement indicates retailer coercion but does not definitively demonstrate retailer collusion or the existence of a horizontal agreement among the retailers. The coercion on the manufacturer may have stemmed from a single powerful retailer. Therefore, to infer retailer collusion from the lack of efficiencies, it is necessary to first verify that none of the retailers on their own are powerful enough to coerce the manufacturer to comply. The lack of a single powerful retailer means that the coercion on the manufacturer must have come from the retailers collectively. Second, it turns out that even the inference of retailer coercion from the lack of efficiencies is not foolproof. As one of the cases discussed subsequently will illustrate, it is possible for an intrabrand arrangement devoid of efficiencies to be initiated by the manufacturer under some specific circumstances. It is impractical to try to enumerate all the circumstances under which this could be the case. What is clear is that exceptions exist. Therefore, the lack of efficiencies in an intrabrand hub-and-spoke arrangement should only create a rebuttable presumption of a horizontal agreement among the retailers, subject to possible rebuttals such as the existence of a single powerful retailer and other circumstances. The distinction between intrabrand and interbrand hub-and-spoke arrangements also has important implications for the legal treatment of these arrangements. There has been some confusion as to whether Leegin,18 which promulgated the Rule of Reason for RPM, intended to extend the rule to hub-and-spoke arrangements as well. This confusion stems from the fact that there is no ostensible difference between a series of parallel RPM agreements between the manufacturer and the distributors and a hub-and-spoke cartel. To an objective bystander, the business arrangements between the manufacturer and the distributors look the same. Upon closer reflection, however, it should be clear that the reasoning in Leegin was never meant to extend to interbrand hub-and-spoke arrangements, which have implications well beyond the trade-off between distributional efficiencies and possible consumer harm inherent in RPM.19 Leegin only concerned the legal treatment of RPM used as an intrabrand distributional restraint.20 Thus, as Klein pointed out, the Rule of Reason under Leegin has no application to interbrand hub-and-spoke arrangements.21

ibid. ibid. 17 ibid. 18 Leegin Creative Leather Products, Inc. v PSKS, Inc. 551 US 877 (2007). 19 B. Klein, ‘The Apple E-Books Case: When Is a Vertical Contract a Hub in a Hub-and-Spoke Conspiracy?’ (2017) 13 Journal of Competition Law & Economics 423, 455. 20 ibid. 21 ibid 456. 15 16

442  Research handbook on cartels The interbrand arrangements differ from the intrabrand ones in that in the former, the vertical agreements between the hub and the spokes govern how the spokes deal with the hub’s interbrand competitors.22 The impact of the arrangement is no longer confined within the brand and the anti-competitive potential is correspondingly higher. It can also no longer be assumed that manufacturer acquiescence is secured by retailer coercion if the arrangement creates no efficiencies. The fact that the hub-and-spoke arrangement harms an interbrand rival means that extra profits can be earned, which can be shared with the manufacturer to secure compliance. Therefore, the existence of a hub-and-spoke arrangement in the interbrand context can no longer be deduced simply from the lack of efficiencies. More will be needed. An interbrand manufacturer-hub arrangement entails a manufacturer serving as a hub to organize a cartel at the distributor level.23 The manufacturer may organize its distributors to exclude a rival by requiring the distributors to refuse to carry the rival’s products or only carry them on less advantageous terms.24 While exclusive dealing agreements are usually analysed under the Rule of Reason, it is also possible to argue that the manufacturer orchestrates the concerted acceptance by the distributors of the manufacturer’s demand for exclusivity.25 In an interbrand retailer–hub arrangement, a powerful retailer organizes a cartel at the manufacturer level to boycott a retailer rival or to sell to that rival only on less advantageous terms.26 The powerful retailer may be motivated by a desire to exclude a price-cutting rival or potential new entrant. The archetypal example of an interbrand retailer–hub arrangement is the Toys “R” Us case in the US.27 There is a particular type of hub-and-spoke arrangement that is unique to the European Union. These are indirect information exchanges under which one of the spokes, A, shares commercially sensitive information with the hub, B, which then passes on the information to another spoke, C.28 C acts on the information and adjusts its pricing accordingly.29 This type of arrangement is only caught under EU law because EU competition law contains the concept of concerted practices that is not found in US antitrust law. Condemnation under Section 1 of the Sherman Act is premised on the finding of an agreement, which is usually absent in indirect information exchanges. Concerted practices require less of a meeting of minds between undertakings than would be needed by an agreement, and therefore can be applied to indirect information exchanges.30 The Court of Justice (‘CoJ’) has defined concerted practices as ‘co-ordination between undertakings which, without having reached the stage where an agreement, properly so called, has been concluded, knowingly substitutes practical co-operation between them for the risks of competition’.31 The Court proceeds to explain that the prohibition of concerted practices

Klein (n 8) 138. ibid 139. 24 ibid. 25 ibid. 26 ibid 142. 27 Toys “R” Us, Inc. v Federal Trade Commission 221 F.3d 928 (7th Cir., 2000), aff’g 126 FTC 415 (1998). 28 JJB Sports plc v Office of Fair Trading; Allsports Limited v Office of Fair Trading [2004] CAT 17, para 141. 29 ibid. 30 Jones, Sufrin and Dunne (n 7) 182–84. 31 Joined Cases 48, 49, and 51-57/69, ICI v Commission [1972] ECR 619, paras 64 and 65. 22 23

Hong Kong and Mainland China  443 proscribes ‘any direct or indirect contact between such operators, the object or effect whereof is either to influence the conduct on the market of an actual or potential competitor or to disclose to such a competitor the course of conduct which they themselves have decided to adopt or contemplate adopting on the market’.32 This language clearly indicates that an indirect information exchange in a hub-and-spoke situation would be covered by the concept of concerted practices. The Court clarifies that the main difference between an agreement and a concerted practice is that the latter must be put into effect in the market, while an unimplemented agreement may also infringe Article 101(1) of the Treaty on the Functioning of the European Union (‘TFEU’).33 The Court further explains that to establish a concerted practice, there needs to be concertation and conduct, and a causal connection between them.34 Such a causal connection can be presumed where ‘the undertakings participating in concerting arrangements and remaining active on the market take account of the information exchanged with their competitors when determining their conduct on that market, particularly when they concert together on a regular basis over a long period’.35 This is generally known as the Anic presumption. To find an infringement in an information exchange, it is important to show both that there is a concerted practice and that the practice has the object or effect of restricting competition. Okeoghene Odudu argues that these two distinct elements are often conflated in concerted practice cases.36 There is, however, no need to show a direct link between the practice and consumer prices in order to establish that the practice has an anticompetitive object.37 One of the key issues in the legality of indirect information exchanges is the degree of awareness that spoke A has about the likelihood that the hub, B, will pass on its information to its competitor spoke C. Both the English and the EU courts have ruled on the issue. The Competition Appeal Tribunal in the United Kingdom had held that foreseeability would be sufficient.38 It suffices that A foresees that its information will be passed on to C when A conveys the information to B. The Court of Appeal disagreed and ruled that subjective knowledge or intention on the part of A is required.39 An object of restricting competition will be established if commercially sensitive information exchanged is intended to be received by A’s competitors.40 In AC-Treuhand, the Court of Justice adopted a lower standard and held that either an awareness or reasonable foreseeability of ‘the actual conduct planned or put into effect by other undertakings in pursuit of the same objectives’41 would suffice to establish liability for cartel facilitation. This species of hub-and-spoke arrangement is only found in the European Union because of the unique concept of concerted practices under EU competition law. Indirect information

Joined Cases 40–48, 50, 54–56, 111, and 113–114/73, Suiker Unie [1975] ECR 1663, para 173. Jones, Sufrin and Dunne (n 7) 175. 34 ibid 178. 35 Case C-49/92 P Commission v Anic Partecipazioni Spa [1999] ECR I-4125, para 121. 36 O. Odudu, ‘Indirect Information Exchange: The Constituent Elements of Hub and Spoke Collusion’ (2011) 7 European Competition Journal 205, 215. 37 Case C-8/08, T-Mobile Netherlands and others [2009] ECR I-4529, paras 38 and 39. 38 JJB Sports plc and Allsports Limited [2004] CAT 17, para 659. 39 Argos Limited and Littlewoods Limited v Office of Fair Trading and JJB Sports plc v Office of Fair Trading [2004] EWCA Civ 1318, para 141. 40 Odudu (n 36) 232. 41 Case C-194/14 P AC-Treuhand AG v Commission EU:​C:​2015:​717, para 30. 32 33

444  Research handbook on cartels exchanges as hub-and-spoke arrangements are generally not encountered in other jurisdictions because it would be exceedingly difficult to establish an agreement among undertakings simply from the indirect exchange of information between competitors through an upstream or downstream hub. Establishment of liability for indirect information exchanges under EU law is facilitated by a number of devices, such as the Anic presumption, which are absent from the competition law of most other jurisdictions. Therefore, the ensuing discussion will largely ignore this rather unique kind of hub-and-spoke arrangement and focus on the more conventional ones. B.

An Economic Perspective of a Hub-and-Spoke Arrangement

The principal difficulty with hub-and-spoke cases is in distinguishing between a purely vertical case consisting of a series of parallel vertical agreements and a genuine hub-and-spoke case in which competitors have tacitly agreed with each other to acquiesce to the hub’s demand. Because evidence of direct communication between the spokes is usually absent, it is necessary to draw inferences from circumstantial evidence. To assist in this endeavour, economists have made some important observations about hub-and-spoke arrangements. Amore has categorically noted that ‘[t]he first necessary, very important, yet probably not sufficient, condition is that the downstream firms have a sufficient degree of market power that translates into strong buyer power or in any case are able to exercise very significant bargaining power vis-à-vis their suppliers’.42 He asserts that if the manufacturer holds most of the bargaining power and the retailers are in a weak bargaining position, the arrangement is essentially of a vertical nature.43 According to Amore, there are two types of hub-and-spoke arrangements, the first type consisting of a manufacturer hub being coerced by powerful distributors to organize a retailer cartel and the second featuring a powerful retailer organizing a cartel among upstream manufacturers.44 A manufacturer-hub arrangement can only be the result of retailer coercion. Unlike Klein, Amore does not consider a manufacturer cajoling its distributors to accept its demands as a hub-and-spoke arrangement. Klein draws a slightly different, and probably more nuanced, line between purely vertical agreements and hub-and-spoke cartels, even though the basis of his rationale is similar to Amore’s. Klein provides a more precise formulation of the determining factor. To him, the demarcation between a purely vertical situation and a horizontal agreement is not whether most of the bargaining power resides with the retailer but whether the hub’s enforcement sanction mechanism is sufficient to ensure spoke compliance.45 The most common, and probably most effective, sanction the hub can impose on a non-compliant spoke is to terminate dealing with the spoke. The trade-off for the spoke is thus between the gains from refusing to comply with the hub’s demand against the loss from losing the hub’s business relationship. Klein’s criterion would seem to be more readily applicable in a concrete case than the nebulous notion of bargaining power, which is incapable of direct measurement and can only be ascertained from its manifestations. The ostensible precision of Klein’s criterion, however, can be deceptive. It is very difficult to quantify the potential gains and losses from non-compliance 44 45 42 43

Amore (n 5) 43. ibid 44. ibid 33. Klein (n 8) 138.

Hong Kong and Mainland China  445 in practice, especially when such gains and losses can depend on the reaction of other spokes. For instance, in the Toys “R” Us case, the gains could be huge if every other supplier acceded to Toys “R” Us’s demand. The one non-compliant supplier will become the only supplier for the discounters. If a few other suppliers also reject Toys “R” Us’s demand, the upside for each of the non-compliant suppliers would be significantly smaller. Klein acknowledges the difficulty with a precise quantification of the gains and losses and resorts to other proxy indicators such as the manner and the length of the negotiation between the hub and the spokes. He argues that the case for inferring the existence of a horizontal agreement among the suppliers in Toys “R” Us is strong because of the arduous negotiations between Toys “R” Us and the suppliers.46 It took a year and a half for some of the suppliers to accept Toys “R” Us’s demand.47 In contrast, Klein argues that the case for inference is much weaker in Interstate Circuit because the film distributors accepted Interstate Circuit’s demand within a month.48 Difficulty in application notwithstanding, it is worth examining the theoretical soundness of Klein’s criterion. The logic behind his criterion that the hub must lack an effective enforcement sanction mechanism for an inference of a horizontal agreement to be permissibly drawn from the spokes’ parallel conduct is that a horizontal agreement can only be found if the possibility of vertical agreements is refuted. In other words, a horizontal agreement must be the only plausible inference from the facts. While this logic may be sound from an economic perspective, it is highly problematic from the legal perspective of the standard of proof. At least under US antitrust law, the standard of proof in a civil case is preponderance of evidence.49 If a factual inference needs to be drawn, this standard of proof does not require the inference purported to be drawn to be the only plausible one. It only requires that the inference be the most plausible one.50 From a legal perspective, what makes an agreement is ‘a meeting of minds’,51 ‘a unity of purpose or a common design and understanding’52 or ‘a conscious commitment to a common scheme designed to achieve an unlawful objective’.53 In the context of a hub-and-spoke arrangement, what a meeting of minds means is that the spokes accept the hub’s demand knowing that everyone else will accept it. Or, to put it slightly differently, the spokes will not accede to the agreement unless everyone else also accepts it. This indicates a concerted acceptance of the agreement by the spokes. Klein assumes that the spokes will only accept the hub’s demand together if the hub cannot force the spokes to each accept the demand independently. He ignores the possibility that the spokes could accept the hub’s demand simply because concerted acceptance is more beneficial to them as compared to the situation ex ante, even though the hub may possess sufficient leverage under its enforcement sanction mechanism to cajole them to accede to its demand. Klein surmises that the spokes’ calculus consists of comparing the gains of acceding to the hub’s demand and joining the hub-and-spoke arrangement with the losses of rejecting the demand and being cut off by the hub. More realistically, the spokes will compare the gains of joining ibid 147. ibid. 48 ibid 156. 49 A. Gavil, ‘Burden of Proof in US Antitrust Law’ (2008) 1 Issues in Competition Law and Policy 128. 50 ibid 134. 51 American Tobacco Co. v United States 328 US 781 (1946) 809. 52 ibid. 53 Monsanto Co. v Spray-Rite Service Corp. 465 US 752 (1984) 764. 46 47

446  Research handbook on cartels the hub-and-spoke arrangement against their ex ante profits before the cartel offer is made. If joining the cartel improves their profit level, the spokes would join regardless of the severity of the loss the hub can inflict on them. What motivates the spokes to join the cartel is not the loss they would sustain if they said no, but the gains they will make if they say yes. Not all hub-and-spoke arrangements are profitable to the spokes. It is possible that the spokes are forced by the hub to accept a loss-making proposition against their will. The hub is able to do that simply due to its bargaining power, which ultimately emanates from the hub’s enforcement sanction mechanism. The spokes are willing to accede to the hub’s demand because that would still be preferable to losing the hub’s business altogether. The spokes may have difficulty replacing the hub’s business. In that case, the potency of the hub’s enforcement sanction mechanism matters. But that still does not definitively disprove the possibility of a hub-and-spoke arrangement. If the loss from joining the arrangement can only be minimized if every spoke joins, and the spokes are aware of that and all join in the arrangement, then it is clear that their acceptance of the hub’s demand is not independent and there is a meeting of minds among them. This is aptly illustrated by Interstate Circuit and Toys “R” Us. In Interstate Circuit, if any one film distributor implemented Interstate Circuit’s demand on its own, it would have incurred the wrath or perhaps lost the business of many film exhibitors. But if all eight film distributors acted together, the cinemas would have had no choice but to accept the change. In Toys “R” Us, the toy suppliers did not want to cut off the discounters. If at least one of them did not go along with Toys “R” Us’s demand, that supplier would have monopolized the discounters’ business and the loss to the remaining suppliers would have been hefty. But if all of them took part in Toys “R” Us’s plan, there is a good chance that together they would be able to exclude the discounters from the market and maintain the high margins that Toys “R” Us could provide them. Therefore, in both cases, the pain from the act against self-interest is greatly alleviated if all the spokes accede to the hub’s demand. Thus, contrary to Klein’s contention, what matters is not whether the hub can inflict sufficient pain on the spokes to force them to succumb to its will, but whether the hub’s offer or demand is rendered more attractive or palatable by concerted acceptance by the spokes. This could be because the cartel is more profitable, or perhaps only profitable if every spoke joins, or because the hub’s demand would be less costly for the spokes if all accede to it. Once this is the case and the spokes are aware of it and proceed to accept the hub’s offer, the inference of a horizontal agreement would be fully justified, as there is clearly a meeting of minds among the spokes. It is thus necessary to evaluate the facts holistically to determine whether consummation of the hub-and-spoke cartel requires the spokes’ concerted participation and whether the spokes are aware of this fact. The foregoing suggests that inference of a horizontal agreement in a hub-and-spoke situation can be approached as follows. For an intrabrand manufacturer-hub arrangement, we can be fairly confident that the hub is coerced to orchestrate the cartel by the spokes if the vertical agreements produce no apparent efficiencies. Retailer collusion is evident. Therefore, the main question in an intrabrand situation is whether the vertical agreements produce efficiencies. For an interbrand manufacturer-hub or retailer-hub arrangement, the existence of efficiencies is no longer determinative. What matters is whether the spokes accede to the hub’s demand with the awareness that consummation of the arrangement is contingent on their concerted acquiescence. If the spokes’ participation in the arrangement is accompanied by such an awareness, there is a sufficient meeting of minds to constitute a horizontal agreement.

Hong Kong and Mainland China  447

III.

HUB-AND-SPOKE CARTELS IN MAINLAND CHINA

It is fair to say that hub-and-spoke cartels were not within the conception of the original drafters of the Anti-Monopoly Law (‘AML’). The AML draws a sharp distinction between horizontal and vertical agreements and the legality of these two types of agreements is assessed under two separate articles. Article 13 focuses on horizontal agreements while Article 14 is concerned with vertical ones. Article 13 prohibits agreements that prevent or restrict competition between business operators that share a competitive relationship.54 It enumerates agreements that fix prices, restrict output, divide markets, restrict access to new technology and enact a group boycott as instances of prohibited monopolistic agreements.55 Article 14 proscribes agreements between business operators and their transactional counterparts that prevent or restrict competition.56 It specifies agreements that fix resale price or set minimum resale price as instances of forbidden monopolistic agreements.57 Such a clear demarcation between horizontal and vertical agreements in a competition law statute is probably an exception rather than the rule. Neither Section 1 of the Sherman Act in the United States nor Article 101 TFEU draws such a distinction. A general prohibition of restrictive agreements under Section 1 and Article 101 renders it easy for them to be applied to hub-and-spoke arrangements, which contain both horizontal and vertical elements. It is unlikely that the design of Articles 13 and 14 represented a conscious decision on the part of the AML drafters to exclude hub-and-spoke arrangements from its purview. The unintended consequence of such a statutory design, however, is that it creates significant awkwardness in the regulation of hub-and-spoke arrangements under the AML. Similar to the rest of the world, hub-and-spoke arrangements began to attract enforcement attention in recent years with the advancement of the digital economy and the increasing possibility of coordination of collusive behaviour by platforms and with the use of algorithms. Such arrangements, however, are not new to Mainland China. From the early days of AML enforcement, many cartels organized or facilitated by trade associations – which are ubiquitous in the country – featured prominently in the enforcement records of the authorities. In fact, the AML drafters seem to have anticipated this problem and singled out trade associations for attention. Article 16 prohibits trade associations from organizing monopolistic conduct among business operators.58 Article 46 imposes a maximum penalty of RMB 500,000 for a trade association found to have organized a monopolistic agreement.59 While it is possible to hold trade associations accountable for their role in a hub-and-spoke cartel, the penalty amounts to no more than a slap on the wrist. And if the hub is a firm and not a trade association, there is little recourse against it currently under the AML.

54 Fan longduan fa [Anti-Monopoly Law] (promulgated by the Standing Comm National People’s Congress, 30 August 2007, effective 1 August 2008) 2007 Standing Comm National People’s Congress Gazette 517 (PRC) Art. 13 www​.gov​.cn/​flfg/​2007​-08/​30/​content​_732591​.htm [accessed 9 March 2022]. 55 ibid. 56 ibid Article 14. 57 ibid. 58 ibid Article 16. 59 ibid Article 46.

448  Research handbook on cartels Some early cartel cases involving trade associations include the Beijing Scallop case and the Shenzhen Pest Control case, both of which were private enforcement cases.60 A public enforcement case that is regarded as a classic illustration of the loophole under the AML for hub-and-spoke cartels is the Loudi Insurance case.61 In that case, the Loudi Insurance Industry Association set up Loudi New Vehicle Insurance Service Centre. This centre, together with Hunan Ruite, entered into a series of cooperation agreements with 11 insurers under which the insurers agreed that all their insurances would only be sold through the Centre.62 Hunan Ruite also secretly coordinated a market division agreement among the 11 insurers.63 Due to the limitations of the AML, only the trade association and six of the insurers were fined by the Hunan Price Bureau, the enforcement authority in the case. Even though Ruite was the hub of the cartel agreement and the Price Bureau was satisfied that its conduct restricted competition, Ruite got off scot-free. This case has caused some commentators to call for reforms of the AML to tackle hub-and-spoke cartels. The spread of the digital economy in Mainland China has led to increased attention to hub-and-spoke cartels. There are concerns that platforms may facilitate cartels among merchants selling on these platforms. The equivalent of Uber in Mainland China, Didi Chuxing, is accused of coordinating a cartel among its drivers.64 These concerns ultimately spurred the Anti-Monopoly Commission of the State Council to issue the Anti-Monopoly Guidelines on the Platform Economy (‘Platform Economy Guidelines’) on 7 February 2020. Article 8 of the Guidelines specifically addresses hub-and-spoke arrangements. It states: Platform-based operators with competitive relationships may, by virtue of the vertical relationships with platform operators, or through organization and coordination by platform operators, reach hub-and-spoke agreements with the effect of horizontal monopoly agreements. To analyze whether such agreements are monopoly agreements as prescribed in Articles 13 and 14 of the Anti-Monopoly Law, whether platform-based operators with competitive relationships have reached and implemented monopoly agreements by technical means, platform rules, data, algorithms and other methods, to eliminate and restrict competition in relevant markets may be considered.65

Article 8 helpfully acknowledges the possibility that a horizontal agreement can be consummated through a series of parallel vertical agreements. Beyond that, however, it provides limited guidance on how a hub-and-spoke cartel can be established. It merely instructs the enforcement authority to examine whether a platform operator has set up a cartel through technical means, platform rules, data and algorithms. It does not lay out how these channels should be analysed. Nor does it provide a set of factors or elements that must be shown to establish a hub-and-spoke arrangement.

T. Cheng, ‘The Meaning of Restriction of Competition Under the Monopolistic Agreements Provisions of the PRC Anti-Monopoly Law’ (2017) 40 World Competition 323, 332–34. 61 刘继峰, ‘“中心辐射型”卡特尔认定中的问题’ (2016) 384 法制园地 33, 33. 62 ibid. 63 张晨颖, ‘垄断协议二分法检讨与禁止规则再造—从轴辐协议谈起’ (2018) 184 法商研究 102, 102. 64 S. Shu, ‘轴辐协议中的算法共谋——以迈耶诉卡兰尼克案为例’ (16 December 2020) https://​ blog​.csdn​.net/​weixin​_39578674/​article/​details/​112108681 [accessed 9 March 2022]. 65 Anti-Monopoly Commission of the State Council, Guidelines of the Anti-Monopoly Commission of the State Council for Anti-Monopoly in the Field of Platform Economy (7 February 2021) Article 8 www​.pkulaw​.com/​en​_law/​dec522cd66c7b43ebdfb​.html [accessed 9 March 2022]. 60

Hong Kong and Mainland China  449 The potential competitive harm inflicted by hub-and-spoke arrangements is referred to in another guidance document. In Article 3 of the consultation version of the Anti-Monopoly Guidelines in the Field of Active Pharmaceutical Ingredients (‘API’) (‘API Guidelines’) issued by SAMR on 13 October 2020, SAMR warns API manufacturers to avoid exchanging commercially sensitive information such as prices, output quantity and sales and production plans through third parties such as API distributors and downstream manufacturers.66 The concern here is clearly the indirect information exchanges that have attracted much attention under EU competition law. However, no explanation is given in the document as to why indirect information exchanges are a particularly important concern in the pharmaceutical industry. The competitive risks of hub-and-spoke arrangements have also been discussed in a few other guidance documents, such as Shanghai Business Operators’ Anti-Monopoly Compliance Guide.67 These guidance documents have evinced a piecemeal approach to hub-and-spoke arrangements under the AML. This is in many ways consistent with the approach adopted by the PRC enforcement authorities, which are prone to issuing industry-specific guidelines and guidance documents. The drawbacks of such a piecemeal approach, however, are plain to see. First, hub-and-spoke arrangements are by no means confined to digital platforms. The Loudi Insurance case and other cases involving trade associations aptly illustrate that. Article 46 allows a limited penalty to be imposed on a trade association. But a non-trade association cartel facilitator would be beyond the purview of the AML. The Platform Economy Guidelines demonstrate the inadequacy of relying on an industry-specific approach to tackle a general competition problem. A more fundamental change than an industry-specific guideline, perhaps in the form of an amendment to the AML, would seem to be needed. There are two possibilities for such an amendment. The first is the addition of an article that is specifically targeted at hub-and-spoke arrangements, just as Article 13 applies to horizontal agreements and Article 14 vertical agreements.68 The second is the wholesale abandonment of the specific enumeration approach adopted in the AML and adoption of a general prohibition approach akin to that in the Sherman Act and the TFEU.69 There are pros and cons to either approach but the first approach is arguably more suitable for China. The general prohibition approach adopted in the United States and the European Union is heavily reliant on case law to elaborate and elucidate important concepts. The first 15 years of AML enforcement have shown that case law plays a less important role in the interpretation of the AML than it does in the United States and the European Union. It may be unrealistic to expect the PRC courts to adopt a case law approach and flesh out and develop the meaning of a general monopolistic agreement in case after case. Such an approach is largely alien to the PRC courts.70 The addition of a new article that specifically prohibits hub-and-spoke arrangements may be preferable. ibid Article 3. State Administration for Market Regulation, Anti-Monopoly Guidelines in the Field of Active Pharmaceutical Ingredients (API) (Consultation Draft) (13 October 2020) Article 3 www​.samr​.gov​.cn/​ hd/​zjdc/​202010/​t20201013​_322278​.html [accessed 9 March 2022]. 68 O. Kun, ‘How Should Hub-and-Spoke Conspiracy Be Incorporated in the PRC Guidelines for Anti-Monopoly in the Field of Platform Economy: Solutions to the Flaws in the Guidelines and Loopholes in the PRC Anti-Monopoly Law’ 7 (student dissertation, on file with author). 69 ibid 8. 70 M. Zhang, ‘Pushing the Envelope: Application of Guiding Cases in Chinese Courts and Development of Case Law in China’ (2017) 26 Washington International Law Journal 269, 304–5. 66 67

450  Research handbook on cartels Second, the legal basis for the regulation of indirect information exchanges attempted in the API Guidelines is not exactly clear. Recall that such information exchanges are regulated as concerted practices under EU competition law. No such analogous concept exists under the AML, which only catches monopolistic agreements. Although the AML has not explicitly adopted notions, such as a meeting of minds or a concurrence of wills, which must be found to establish an agreement under US antitrust law or EU competition law, it is highly unlikely that the Chinese term for agreement can be stretched to accommodate indirect information exchanges. It is thus debatable whether SAMR has any legal basis upon which to go after such exchanges. If it is decided that such exchanges are undesirable and require intervention, a legislative amendment may again be necessary. Perhaps the new article that prohibits hub-and-spoke arrangements can be extended to cover concerted practices. Third, beyond a legislative amendment to allow for the direct regulation of hub-and-spoke arrangements and indirect information exchanges, further guidance on how to establish a hub-and-spoke arrangement will be needed. A mere series of parallel vertical agreements should not suffice. There is, however, currently little guidance on the requisite elements of a hub-and-spoke arrangement under the AML. Zhang Chenying has attempted to provide some guidance on this issue. She suggests the following multi-part framework for analysing the existence of a hub-and-spoke arrangement: (1) the existence of parallel vertical agreements; (2) parallel behaviour by the spokes; (3) subjective elements such as the spokes’ awareness of each other’s existence; (4) other factors in support of the finding of a hub-and-spoke arrangement such as the bargaining power of the spokes vis-à-vis the hub; and (5) rebuttals against the inference of a horizontal agreement.71 Zhang’s proposal provides a reasonable basis for constructing a suitable analytical framework. To establish a hub-and-spoke arrangement, first and foremost, there must be parallel vertical agreements and parallel behaviour by the spokes. These are the basis for every hub-and-spoke arrangement. The relevance of factors such as bargaining power of the respective parties would depend on the type of hub-and-spoke arrangement alleged. If what is alleged is an interbrand manufacturer-hub arrangement where the manufacturer coerces the spokes to exclude a rival manufacturer, evidence of the manufacturer’s superior bargaining power would bolster the case. If an interbrand retailer-hub arrangement is alleged, then evidence of retailer bargaining power would strengthen the theory of harm. The most important factor of the framework is what is sufficient to imbue a horizontal element to a series of vertical agreements. Zhang argues that subjective elements such as the spokes’ awareness of each other’s existence suffices. The foregoing discussion of the economics of hub-and-spoke arrangements suggests that mere awareness of each other’s existence should not be enough. Instead, the spokes must have accepted the hub’s demand with the awareness that consummation of the arrangement is contingent on their concerted acquiescence. They only acquiesced to the hub’s demand on the basis that every other spoke will do the same and they are aware that their acquiescence would only make sense if they all adopt the same course of action. Lastly, if there are facts that may rebut the inference of a horizontal agreement among the spokes, they will need to be considered and rejected before a hub-and-spoke arrangement can be established.

张晨颖 (n 63) 113.

71

Hong Kong and Mainland China  451

IV.

HUB-AND-SPOKE CARTELS IN HONG KONG

Hong Kong has an even shorter history of competition law enforcement than Mainland China. The Anti-Monopoly Law was passed in August 2007. The Hong Kong Competition Ordinance (‘CO’) was adopted in June 2012. After that the government promised the local business community a very long grace period. The CO did not come into effect until December 2015.72 Enforcement by the Hong Kong Competition Commission (‘HKCC’) has been relatively slack and, so far, we have seen the HKCC bring no more than ten cases. Most of these cases, unsurprisingly, have concerned cartels. As it so happens, the very first competition case in Hong Kong, Nutanix, featured a hub-and-spoke arrangement. Nutanix was a bid-rigging case.73 Nutanix was a supplier of servers to businesses. It does not sell servers directly to users and instead relies on distributors to provide installation and after-sale services. YWCA was the customer at issue. It had initially issued a tender for servers, which was called off because there was an insufficient number of bidders. BT, one of Nutanix’s distributors, was the only bidder in that tender exercise. When YWCA issued another tender, Nutanix and BT worked together to ensure that there would be a sufficient number of bidders. Nutanix proceeded to help BT procure cover bids from other distributors, namely Innovix, Tech-21 and SiS.74 BT was not directly involved in Nutanix’s agreement with Tech-21 and SiS. In fact, Tech-21 and SiS were not even aware of BT’s identity.75 All they knew was that Nutanix needed cover bids and would submit bid documents under their names.76 The bid documents, which turned out to contain common mistakes and typos, were prepared by Nutanix. The bid-rigging scheme was only discovered because YWCA’s employees spotted these mistakes in the bid documents and reported the case to the HKCC. In contrast, Innovix was fully aware that Nutanix was setting up the entire scheme to let BT win.77 The Competition Tribunal (‘CT’) found that there were a series of parallel vertical agreements that had as their object the restriction of competition between (1) Nutanix and BT; (2) Nutanix, Innovix and BT; and (3) Nutanix and Tech-21.78 Under these agreements, Nutanix would organize cover bids from Innovix and Tech-21 to ensure that BT would prevail in the tender. The CT did not find an agreement between Nutanix and SiS on a separate ground that is unrelated to the present discussion.79 The CT refused to invoke hub-and-spoke theories to find that Nutanix had colluded with Tech-21 to obtain cover bids for BT. The reason given was that Tech-21 was not aware of BT’s identity and therefore could not be said to be parties to the same agreement with BT.80 This case presents another twist in the classification of hub-and-spoke arrangements discussed above. One should recall here the three types of hub-and-spoke arrangements: intrabrand manufacturer-hub, interbrand manufacturer-hub, and interbrand retailer-hub arrangements. 72 K. Kwok, ‘“Hub-and-Spoke” Bid-Rigging and Corporate Attribution under Hong Kong Competition Law’ (2020) 8 Journal of Antitrust Enforcement 223, 223. 73 Competition Commission v Nutanix Hong Kong Ltd and others [2019] HKCT 2. 74 ibid paras 139, 168, 205 and 554. 75 ibid paras 237 and 286. 76 ibid paras 237 and 287. 77 ibid para 265. 78 ibid paras 548–52. 79 ibid para 556. 80 ibid para 286.

452  Research handbook on cartels The bid-rigging scheme in Nutanix belongs to the first type. Klein argues that for this type of arrangement, a lack of efficiencies means that the scheme was the result of retailer coercion. There were no efficiencies in the bid-rigging scheme. The facts, however, do not suggest that Nutanix was coerced to help BT. If anything, Nutanix seemed very willing to extend its help, even though its motivation was not entirely clear.81 The facts of the case did not suggest how Nutanix would benefit from the success of the bid-rigging scheme as opposed to a genuinely competitive tender. What is clear is that Nutanix was not subject to any retailer coercion. The question is whether the finding of a hub-and-spoke arrangement among Nutanix and the various distributors should require the spokes’ awareness of each other’s identity. The answer would seem to be an unequivocal yes if it concerned an interbrand arrangement. It was argued earlier that to establish such an arrangement, there must be an awareness on the part of the spokes that their individual acceptance of the arrangement is contingent on the collective acceptance of the hub’s demand by all the spokes. That would presume that the spokes were aware of each other’s identity. The situation, however, is different in an intrabrand big rigging case. The success of a hub-and-spoke bid-rigging scheme is not premised on the spokes’ awareness of each other’s identity. In many interbrand hub-and-spoke cases, the spokes’ acquiescence to the hub’s demand would have acted against self-interest in the absence of collective acceptance by the spokes. The spokes would only accept the hub’s demand if they knew that the other spokes would do the same. This is not the case in Nutanix. All the distributors benefited from the bid-rigging scheme and unilateral acquiescence to the submission of a dummy bid does not constitute an act against self-interest, apart from possible sanctions under competition law. Although the facts of the case did not indicate how the cover bidders would be compensated for their effort, they would presumably take turns to win tenders. Nutanix presumably would perform the function of identifying the winner of a particular tender, or standard industry practices such as first-come-first-served may be used to allocate the winning bid. The exact identity of the dummy bidders is not essential to the success of a bid-rigging scheme. The dummy bids are only there to meet the minimum bid quota of the tender and are not meant to have any competitive significance. A rough idea of the identity of the dummy bidders would suffice for the spokes. The facts of the case are silent on how many distributors regularly work with Nutanix. If the number is small, the distributors presumably had a rough idea of who they could be colluding with in a particular tender. This distinguishes hub-and-spoke bid-rigging schemes from other hub-and-spoke arrangements under which spokes’ awareness of each other’s identity is probably essential to the finding of a horizontal agreement. In sum, the CT created needless complication for itself by insisting on four parallel vertical agreements and refusing to find an overarching bid-rigging scheme among all the distributors.

V. CONCLUSION Both Hong Kong and Mainland China are still in the early days of attempts to tackle hub-and-spoke cartels. Neither jurisdiction has settled on a satisfactory approach. Mainland

Kwok (n 72) 226.

81

Hong Kong and Mainland China  453 China has demonstrated strong determination in attacking these cartels. Yet its piecemeal handling of these cartels through the adoption of sector-specific guidelines such as the Platform Economy Guidelines and the API Guidelines leaves much to be desired. Legislative amendment to the AML in the form of a specific article dedicated to these cartels is required. The Hong Kong CT has attempted to wrestle with the substantive issues raised by these cartels. The approach taken in the Nutanix case, however, can be said to be unnecessarily formalistic by insisting on the spokes’ knowledge of each other’s identities. In the specific context of bid rigging, it is argued that such knowledge is not necessary to allow the hub-and-spoke arrangement to serve its intended function. There is still much room for improvement for both jurisdictions in their regulation of hub-and-spoke cartels.

26. Association of Southeast Asian Nations Rachel Burgess

I. INTRODUCTION In many parts of the developing world, reliance upon competition law is a new policy development, with associated low levels of awareness. This is certainly the case in parts of the Association of Southeast Asian Nations (‘ASEAN’) region. Although competition laws and policies now exist in all ten ASEAN member states (‘AMS’), the picture as recently as ten years ago was very different. In 2010, only four AMS had operative competition laws (Indonesia, Singapore, Thailand and Vietnam1), with not all jurisdictions undertaking enforcement activities. It is not surprising that terms such as ‘cartels’ and ‘abuse of dominance’, as used in competition law parlance, remain unfamiliar. The AEC Blueprint 2025 identified measures to be taken to create a ‘competitive, innovative and dynamic ASEAN region’, including achieving ‘greater harmonization of competition law and policy’.2 This is the goal that has been set for the ASEAN region. The competition authorities in the AMS are embracing the challenge. Early on, the region established an ASEAN Experts Group on Competition (‘AEGC’) which has driven regional development in this area. Most recently, the AEGC has established an ASEAN Competition Enforcers Network (‘ACEN’) to facilitate cooperation on competition cases in the region and to serve as a platform to handle cross-border cases.3 All ASEAN competition laws include prohibitions against cartels, but no two laws are the same. This chapter considers all of the ASEAN cartel regimes, with a focus on the prohibitions, sanctions and leniency regimes, highlighting key similarities and differences. Where guidelines and case law exist, the chapter considers the impact these may have on the interpretation of the laws. To the extent possible the chapter considers procedural issues, although, as many agencies in the region are new, procedures are still evolving. It ultimately concludes with recommendations for convergence, recognizing that many jurisdictions are still in the initial phases of their anti-cartel enforcement and the focus should still be on capacity building and advocacy efforts.

Note that Thailand’s and Vietnam’s laws were subsequently completely overhauled to bring them more into line with international best practice in a number of areas. 2 ASEAN Secretariat, ASEAN Economic Community Blueprint 2025 (Jakarta, November 2015) 13. 3 ASEAN Secretariat, ASEAN Establishes Competition Enforcers Network, Regional Cooperation Framework and Virtual Research Centre (Jakarta, 11 October 2018) https://​asean​.org/​asean​-establishes​ -competition​-enforcers​-network​-regional​-cooperation​-framework​-virtual​-research​-centre/​ [accessed 17 March 2022]. 1

454

Association of Southeast Asian Nations  455

II.

GROWTH OF COMPETITION POLICY AND LAW IN ASEAN

There are more than 130 jurisdictions around the world with a competition law in place. More than two-thirds of these laws have been enacted within the past 25 years.4 All ASEAN national competition laws have been enacted in this period, with more than half adopted in the past decade. Competition law and policy in the region falls within the scope of the ASEAN Economic Community (‘AEC’) Blueprint. As part of the goal to establish a competitive economic region, the first AEC Blueprint (2008–15) set out the objective for competition policy: B1. Competition Policy 41. The main objective of the competition policy is to foster a culture of fair competition […] Actions: i. Endeavour to introduce competition policy in all ASEAN Member Countries by 2015; ii. Establish a network of authorities or agencies responsible for competition policy to serve as a forum for discussing and coordinating competition policies; iii. Encourage capacity building programmes/activities for ASEAN Member Countries in developing national competition policy; and iv. Develop a regional guideline on competition policy by 2010, based on country experiences and international best practices with the view to creating a fair competition environment.5

The AMS have performed well in relation to the Actions themselves. All AMS (except Cambodia) had enacted a competition law by the end of 2015. In 2007, the ASEAN Economic Ministers endorsed the establishment of the AEGC ‘as a regional forum to discuss and cooperate on competition policy and law’.6 In 2010 the ASEAN Secretariat published the ASEAN Regional Guidelines on Competition Policy,7 which were intended to ‘serve as a general framework for the AMS as they endeavour to introduce, implement and develop competition policy in accordance with the specific legal and economic context of each AMS’.8 Throughout this period, capacity-building programmes have been undertaken to support the development of competition law and policy in the region. With the formal establishment of the AEC in Kuala Lumpur, Malaysia in November 2015, the AEC Blueprint (2016–25) was adopted. The ongoing key importance of competition policy and development of competition laws continues to be recognized: For ASEAN to be a competitive region with well-functioning markets, rules on competition will need to be operational and effective. The fundamental goal of competition policy and law is to provide a level playing field for all firms, regardless of ownership. Enforceable competition rules that pro-

4 U. Aydin and T. Buthe, ‘Competition Law & Policy in Developing Countries: Explaining Variations in Outcomes; Exploring Possibilities and Limits’ (2016) 79 Law and Contemporary Problems 1, 2. 5 ASEAN Secretariat, ASEAN Economic Community Blueprint (Jakarta, January 2008) www​.asean​ .org/​wp​-content/​uploads/​images/​archive/​21083​.pdf [accessed 17 March 2022] para 41. 6 See https://​asean​-competition​.org/​aegc [accessed 17 March 2022]. 7 ASEAN Secretariat, ASEAN Regional Guidelines on Competition Policy (Jakarta, August 2010) www​.icao​.int/​sustainability/​Compendium/​Documents/​ASEAN/​ASEAN​-Region​alGudeline​sonCompeti​ tionPolicy​.pdf [accessed 17 March 2021]. 8 ibid para 1.2.1.

456  Research handbook on cartels scribe anti-competitive activities are an important way to facilitate liberalisation and a unified market and production base, as well as to support the formation of a more competitive and innovative region.9

The AEC Blueprint 2025 outlines the strategic measures to be taken to create a competitive, innovative and dynamic ASEAN region: (a) (b) (c) (d) (e)

Introduction, and effective implementation, of national competition laws; Strengthening the capacity of the competition agencies; Promoting a ‘competition-aware’ region including encouraging competition compliance; Establishing Regional Cooperation Arrangements; and Achieving greater harmonization of competition policy and law.10

For the first time, an ASEAN Competition Action Plan (‘ACAP’) was agreed by the AMS, based on the strategic measures in the AEC Blueprint 2025 and building upon the initiatives in the AEC Blueprint 2015.11 The strategic goals for competition law and policy from 2016 to 2025 are as follows: (1) Effective competition regimes are established in all AMS; (2) The capacities of competition-related agencies in AMS are strengthened to effectively implement CPL [competition policy and law]; (3) Regional cooperation arrangements on CPL are in place; (4) Fostering a competition-aware ASEAN region; and (5) Moving towards greater harmonization of competition policy and law in ASEAN.12

The ACAP then sets out initiatives and desired outcomes for each of the five strategic goals. Cartels are mentioned in relation to Strategic Goal 3 (Regional Cooperation Arrangements), where it is recognized that the establishment of the AEC in 2015 is likely to give rise to more cross-border cartels.13

III.

OVERVIEW OF ASEAN COMPETITION LAWS

The AMS are at various stages of economic development. For the 2022 fiscal year, the World Bank has classified Brunei Darussalam and Singapore as high-income economies, Malaysia and Thailand as upper middle-income economies and the remaining AMS (Philippines, Lao PDR, Cambodia, Indonesia, Vietnam and Myanmar) as lower middle-income economies.14 These varying stages of economic development have an impact on the design of competition policy and law and, ultimately, its enforcement.



ASEAN Secretariat, ASEAN Economic Community Blueprint 2025 (Jakarta, November 2015) 12. ibid 13. 11 ASEAN Secretariat, ASEAN Competition Action Plan (2016–2025) (Jakarta, 30 December 2016) https://​asean​-competition​.org/​file/​post​_image/​ACAP​%20(Website)​%2023​%20December​%202016​.pdf [accessed 17 March 2022]. 12 ibid 2. 13 ibid 5. 14 See World Bank Data https://​datahelpdesk​.worldbank​.org/​knowledgebase/​articles/​906519​-world​ -bank​-country​-and​-lending​-groups [accessed 17 March 2022]. 9

10

Association of Southeast Asian Nations  457 Before considering the cartel provisions in detail, it is helpful to understand the broad competition law and policy picture across ASEAN. At the outset, it is useful to note that all ASEAN competition laws apply an administrative enforcement system (with an exception for Myanmar15), meaning that it is the competition authority that investigates, determines whether the law has been infringed and imposes the appropriate sanction. Those decisions are subject to appeal either to the courts or to a specialized competition appeal tribunal. In some jurisdictions, responsibility for imposing criminal sanctions will fall to a different body (Myanmar, Philippines, Thailand and Vietnam). Generally, the ASEAN competition laws apply either to businesses established in ASEAN or foreign businesses operating in a Member State.16 A. Brunei Darussalam: Staged Implementation of the Law The Brunei Darussalam Competition Order 2015 was passed into law in 2015 and covers all three pillars of competition law. The law contains a broad exemption for any activity, agreement or conduct of the government of Brunei or any statutory body unless otherwise ordered by the Minister.17 All vertical agreements are exempt.18 The law is being enforced in phases, starting with the prohibition against anti-competitive agreements and practices, which was put in place on 1 January 2020. The Competition Commission of Brunei Darussalam was established in August 2017, supported by the Competition and Consumer Affairs Department, which operates as the Executive Secretariat to the Commission. A Chairman and six Commissioners have been appointed, from government and academia. B.

Cambodia: Just Enacted

The competition law for Cambodia was enacted in October 2021. The Law on Competition covers all three pillars of competition law. That law applies to state-owned enterprises19 and individual and collective exemptions may be available where the stated conditions are satisfied. The Law on Competition provides for the establishment of a competition enforcer: the Cambodian Competition Commission (‘CCC’), led by the Minister of Commerce, ‘with the involvement of relevant ministries and institutions, and with the Directorate General in charge of competition’. Under the Law on Competition, the CCC’s functions and duties include, inter alia, establishing competition policies and plans; issuing decisions, orders and interim measures; and imposing fines and receiving complaints.20

In Myanmar, the competition authority has administrative powers in relation to less serious infringements of the law only. 16 For a discussion on extra-territorial application of the laws, see R. Burgess, Study on Commonalities and Differences in ASEAN Competition Laws and Areas Feasible for Convergence for the ASEAN Experts Group on Competition, https://​phcc​.gov​.ph/​wp​-content/​uploads/​2020/​08/​Study​-on​-Commonalities​-and​ -Differences​-across​-Competition​-Legislation​-in​-ASEAN​.pdf [accessed 13 March 2022]. 17 Brunei Darussalam Competition Order 2015, Sections 10(4) and 10(5). 18 Brunei Darussalam Competition Order 2015, Third Schedule. 19 Based on the definition of ‘Persons’ in Cambodian Law on Competition (adopted 5 October 2021) Article 3(11). 20 ibid, Article 6. 15

458  Research handbook on cartels C.

Indonesia: Active Enforcement

Indonesia’s competition law (No.5/1999 Regarding Prohibition of Monopolistic Practices and Unfair Business Competition) has been in operation since 2000. The law covers all three pillars of competition law and policy, applies to state-owned enterprises and contains a number of specific exemptions, including an exemption for small-scale businesses.21 Indonesia’s competition authority, Komisi Pengawas Persaingan Usaha (‘KPPU’), is recognized as a leading competition authority in the region. It is now commonly referred to as the Indonesia Competition Commission (‘ICC’). Currently, the ICC has a Chairman and seven Commissioners, drawn from private practice and academia. Decisions of the ICC are not available in English, although summaries are commonly posted on their website. Guidelines and other materials are also available on the website.22 D.

Lao PDR: Enforcement Beginning

Lao PDR’s Law on Business Competition was passed in 2015 and covers all three pillars of competition law. It is not clear whether the law is intended to cover state-owned enterprises. Individual exemption is available if an anti-competitive agreement promotes the technological and technical progress, improves the quality of goods and services and strengthens the competitiveness of SMEs.23 The Lao Business Competition Commission was established in 2018. All Commissioners are civil service appointees. E.

Malaysia: Active Enforcement

The Competition Act 2010 came into effect in Malaysia on 1 January 2012, following an 18-month transitional period. While the Malaysian law covers anti-competitive agreements and abuse of dominance, it does not prohibit anti-competitive mergers. It is alone in ASEAN in this respect. The law applies to state-owned enterprises (known in Malaysia as government-linked companies) and individual and block exemptions may be available where stated conditions are satisfied. The Malaysia Competition Commission (‘MyCC’) has been in operation since 2011. The MyCC has made significant progress in the past ten years, with a number of important enforcement decisions and an active advocacy programme. The MyCC’s decisions, guidelines and other materials are available in English on their website.24 It has also had success in appeal cases heard by the Malaysia High Court.25 The MyCC comprises a Chairman and nine Commissioners, drawn from government, the private sector and academia.

Indonesian Competition Law 1999, Article 50 sets out the full list of exemptions. See https://​eng​.kppu​.go​.id/​ [accessed 17 March 2022]. 23 Lao PDR Law on Competition 2015, Article 45. 24 See www​.mycc​.gov​.my [accessed 17 March 2022]. 25 See Judicial Review decisions listed at www​.mycc​.gov​.my/​case [accessed 17 March 2022]. 21 22

Association of Southeast Asian Nations  459 F.

Myanmar: Enforcement Beginning

The Pyidaungsu Hluttaw Law No. 9/2015 (Myanmar Competition Law 2015) was passed on 24 February 2015. The law covers the three pillars as well as unfair practices. As most of the provisions apply only to ‘businesspersons’, it appears that the law is not intended to apply to state-owned enterprises. Specific exemptions may apply to agreements when consumer benefit and other conditions are satisfied.26 No exemptions seem to be provided for in the law itself. The Myanmar Competition Commission (‘MmCC’) was established on 31 October 2018. The Chairman of the MmCC and many of its members are government representatives. G.

Philippines: Active Enforcement

The Philippine Competition Act 2015 was passed into law in July 2015, after 25 years in Congress. The law covers all three pillars of competition law and policy, applies to state-owned enterprises and contains a provision allowing the Philippine Competition Commission (PCC) to ‘forbear from applying the provisions’ of the Act.27 The PCC was established in 2016. The Commissioners brought high profiles and exemplary technical competence in law and economics. The PCC is quickly building capability and a good reputation in the competition community. The Office for Competition within the Department of Justice is responsible for investigating and imposing sanctions for criminal breaches of the Philippine Competition Act. The PCC has been actively enforcing the merger provisions. To date, there are no decisions on anti-competitive agreements and only one decision on abuse of dominance. PCC decisions, guidelines and other materials are available publicly on their website.28 H.

Singapore: Active Enforcement

The Competition Act 2004 was passed into law in 2004 and came into operation in a phased approach commencing on 1 January 2006.29 The law covers all three pillars of competition law and policy and applies to state-owned enterprises. Like Brunei Darussalam, Singapore exempts all vertical agreements and allows for block exemptions if the stated conditions are satisfied.30 The Competition and Consumer Commission of Singapore (‘CCCS’) was established in 2005.31 It is a highly respected competition authority that is a leader in the region with well-reasoned judgments and a robust appeals process. It has an impressive advocacy record,

Myanmar Competition Law 2015, Section 14. Philippine Competition Act 2015, Section 28. 28 See www​.phcc​.gov​.ph/​[accessed 17 March 2022]. 29 Sections 34 (anti-competitive agreements) and 47 (abuse of dominance) of the Singapore Competition Act came into force on 1 January 2006; Section 54 (mergers) of the Singapore Competition Act came into force on 1 January 2007. 30 Singapore Competition Act, Sections 36–41. One should also note here the ability to seek the examination of an agreement by the Commission under Section 42. 31 It was established as the Competition Commission of Singapore (‘CCS’) but changed its name in 2018 when it assumed responsibility for consumer laws. 26 27

460  Research handbook on cartels and all of its decisions (including reasons) are available on its website.32 Since 2018, the CCCS has also assumed jurisdiction over consumer protection laws. I.

Thailand: Limited Enforcement under Old Law; Enforcement Beginning under New Law

Thailand was one of the first ASEAN member states to adopt a national competition law (Trade Competition Act, BE 2542) in 1999. However, there was no substantive enforcement of the 1999 law.33 In 2018, Thailand passed the Trade Competition Act, BE 2560, which replaced the Trade Competition Act, BE 2542 from 5 October 2017. New administrative measures were adopted to facilitate enforcement of the law. Implementing rules were promulgated within 365 days of the passing of the law and guidance on the law was issued in 2018. The law continues to cover all three pillars of competition law and policy but now also applies to state-owned enterprises, although there is a wide exemption for activities ‘necessary for the benefit of maintaining national security, public interest, the interests of society, or the provision of public utilities’.34 Limited exemptions are available.35 The law has created important new institutional arrangements, as the Office for Trade Competition Commission (‘OTCC’) is now independent of the Department of Internal Trade. There was an open selection process for Commissioners, with a Chairman and six Commissioners now appointed from the private sector. J.

Vietnam: Limited Enforcement under Old Law; Enforcement Beginning under New Law

Vietnam’s new competition law – the Law on Competition 23/2018/QH14 (Vietnam’s Competition Law 2018) – was passed in 2018. Although Vietnam has had a competition law since 2004, the new legislation brings Vietnam more in line with international and regional best practice. The law covers all three pillars and includes a general exemption provision if all conditions are satisfied.36 The new law will apply to state-owned enterprises. The Vietnam Competition and Consumer Authority (‘VCCA’) also has jurisdiction over consumer protection laws. To date, its decisions have not been publicly available, although summaries of key cases are provided in the Annual Reports.37

See www​.cccs​.gov​.sg/​[accessed 21 July 2021]. It took considerable time to issue detailed implementing rules articulating how parts of the law (such as the provisions on abuse of dominance) should operate. In addition, the criminal threshold for enforcement made it difficult for the competition authority. 34 Trade Competition Act, BE 2560, Section 4(2). 35 ibid Section 56. 36 Vietnam’s Competition Law 2018, Article 14. 37 See http://​en​.vcca​.gov​.vn/​default​.aspx​?page​=​document​&​category​_id​=​4e53a6f8​-2c47​-4fe0​-8625​ -97169914b781​&​current​_id​=​7a6db5ba​-88dd​-4f41​-8f46​-9ba54b5b05dc [accessed 13 March 2022]. 32 33

Association of Southeast Asian Nations  461

IV.

ASEAN CARTEL PROHIBITIONS

A.

The 2010 Regional Guidelines

The 2010 ASEAN Regional Guidelines on Competition Policy recommended that the AMS consider ‘identifying specific ‘hardcore restrictions’, which will always be considered as having an appreciable adverse effect on competition (e.g. price fixing, bid-rigging, market sharing, limiting or controlling production or investment) which need to be treated as per se illegal’.38 To a greater or lesser extent, all AMS have followed this recommendation. From a convergence perspective, this is a positive first step. It also accords with international best practice. The OECD Recommendation of the Council concerning Effective Action against Hard Core Cartels,39 for instance, provides that the concept of hard-core cartels refers to anticompetitive agreements, concerted practices or arrangements by actual or potential competitors to agree on prices, make rigged bids (collusive tenders), establish output restrictions or quotas, or share or divide markets by, for example, allocating customers, suppliers, territories, or lines of commerce.

Paragraph 3.2.2 Regional Guidelines defines what is meant by ‘price fixing’, ‘bid-rigging’, ‘market sharing’ and ‘limiting or controlling production or investment’: ‘Price fixing’ involves fixing either the price itself or the components of a price such as a discount, establishing the amount or the percentage by which prices are to be increased, or establishing a range outside which prices are not to move. ‘Bid-rigging’ includes cover bidding to assist an undertaking in winning the tender. An essential feature of the tender system is that tenderers prepare and submit bids independently. ‘Market sharing’ involves agreements to share markets, whether by territory, type or size of customer, or in some other ways. ‘Limiting or controlling production or investment’ involves agreements which limit output or control production, by fixing production levels or setting quotas, or agreements which deal with structural overcapacity or coordinate future investment plans.40

Although the AMS have not expressly adopted these definitions, the wording of the AMS laws is consistent with these policy objectives. B.

Scope and Treatment of Hard-Core Cartel Prohibitions in ASEAN

As is to be expected, the AMS laws include the prohibitions against hard-core cartels within their prohibition against anti-competitive agreements. However, there are two key areas for potential differences that need to be considered: the application of the provisions to concepts wider than agreements, and the treatment of hard-core cartels as per se offences (or otherwise).

ASEAN Secretariat (n 7) para 3.2.2. OECD, Recommendation of the Council Concerning Effective Action against Hard Core Cartels (OECD/LEGAL/0452, 2 July 2019) https://​legalinstruments​.oecd​.org/​en/​instruments/​OECD​-LEGAL​ -0452 [accessed 17 March 2022]. 40 ASEAN Secretariat (n 7) paras 3.2.2.1–3.2.2.4. 38 39

462  Research handbook on cartels 1. Agreements, decisions by associations of undertakings and concerted practices The AMS use various terms to describe the type of agreements or arrangements covered by the hard-core cartel prohibitions. This inconsistency has the potential to result in some divergence across the region in the application of the hard-core cartel prohibitions. The European terminology of agreements, decisions by associations of undertakings and concerted practices is specifically used in Brunei Darussalam,41 Malaysia42 and Singapore.43 The Philippines prohibition applies to agreements,44 defined to include collective recommendations and concerted actions – terms similar to those used in Europe. Similarly, the law in Cambodia applies to ‘agreements’ but this term is defined to refer to the European case law on concerted practices.45

41 ‘Agreement’ is defined in Section 2(1) of the Brunei Darussalam Competition Order 2015 as including ‘any agreement, arrangement, understanding, undertaking or promise, whether express or implied, written or oral’; ‘decisions by associations of undertakings’ is not defined; and ‘concerted practices’ is defined in Section 2(1) as meaning ‘any form of coordination between undertakings which knowingly substitutes practical cooperation between them for the risks of competition, and includes any practice which involves direct or indirect contact or communication between undertakings, the object or effect of which is either (a) to influence the conduct of one or more undertakings in a market; or (b) to disclose the course of conduct which an undertaking has decided to adopt or is contemplating to adopt in a market, in circumstances where such disclosure would not have been made under normal conditions of competition’. The latter definition reflects the Dyestuffs definition of concerted practice: Case 48/69 Imperial Chemical Industries Ltd. v Commission [1972] ECR 619, para 64. 42 ‘Agreement’ is defined in Section 2 of the Malaysian Competition Act to mean ‘any form of contract, arrangement or understanding, whether or not legally enforceable, between enterprises, and includes a decision by an association and concerted practices; ‘decisions by associations of undertakings’ is thus included in definition of agreement; and ‘concerted practices’ is defined in Section 2(1) as ‘any form of coordination between enterprises which knowingly substitutes practical co-operation between them for the risks of competition, and includes any practice which involves direct or indirect contact or communication between enterprises, the object or effect of which is either (a) to influence the conduct of one or more enterprises in a market; or (b) to disclose the course of conduct which an enterprise has decided to adopt or is contemplating to adopt in a market, in circumstances where such disclosure would not have been made under normal conditions of competition’. This definition also reflects the Dyestuffs definition of concerted practice; see Case 48/69 (n 41). 43 Neither ‘agreements’ nor ‘decisions by associations of undertakings’ nor ‘concerted practices’ are defined, but they are used expressly, in Section 34 of the Singapore Competition Act. 44 ‘Agreement’ is defined in Section 4(b) of the Philippine Competition Act to mean ‘any type or form of contract, arrangement, understanding, collective recommendation, or concerted action, whether formal or informal, explicit or tacit, written or oral’. 45 ‘Agreement’ is defined in Article 3(2) of the Law on Competition as meaning ‘any form of contract, agreement, arrangement or understanding between Persons, regardless of whether it is written, verbal or implied, and can include direct or indirect coordination where that coordination has the object or effect of (a) influencing the conduct of one or more Persons in a Market; or (b) disclosing a course of conduct which a Person has decided to adopt or is contemplating adopting in a Market’. ‘Horizontal agreement’ is defined in Article 3 as meaning ‘an Agreement between Persons who operate, or are likely to operate, at the same level in the production or distribution chain’.

Association of Southeast Asian Nations  463 Two jurisdictions refer only to ‘agreements’ (Lao PDR46 and Vietnam47), while Indonesia applies its prohibition to ‘contracts’.48 The law in Thailand applies to conduct undertaken jointly between business operators competing with each other in the same market,49 while Myanmar’s prohibition applies to acts of restraint of competition but there is no reference to the types of arrangements that will be covered. Both Cambodia and Malaysia apply their hard-core cartel provisions to ‘horizontal agreements’,50 defined in a manner consistent with European jurisprudence. 2. Per se infringements The AMS laws are not entirely consistent in relation to whether the hard-core cartel prohibitions are treated as per se infringements or whether they are subject to an ‘object’ test. In practice, this may not result in any significant difference in application. The Philippines is the only jurisdiction to specify any hard-core cartels as per se offences (price fixing and bid-rigging only).51 Brunei Darussalam, Malaysia and Singapore all use the ‘object or effect’ terminology. In the case of Brunei Darussalam and Singapore, an approach similar to that taken in Article 101 of the Treaty on the Functioning of the European Union (‘TFEU’) is adopted. Both jurisdictions list the types of agreement that ‘may, in particular, have the object or effect of preventing, restricting or distorting competition’. This list includes price fixing, market sharing, limiting production or supply and, in the case of Brunei Darussalam only, bid-rigging. The CCCS Guidelines state that directly or indirectly fixing prices, bid-rigging (collusive tendering), sharing markets and limiting or controlling production or investment ‘are, by their very nature, regarded as restrictive of competition to an appreciable extent’.52 Guidelines published by the Competition Commission Brunei Darussalam (‘CCBD’) state that ‘agreements between competitors to fix prices, to share markets, to restrict output or to rig bids are agreements which the Commission has established to have the object of harming competition and are per-se illegal under the Order’.53 Malaysia deems hard-core cartel conduct to have the object of significantly preventing, restricting, or distorting competi ‘Agreement’ is used in Article 21 of the Lao PDR Law on Competition 2015, but it is not defined. ‘Agreement in restraint of competition’ is defined in Article 3 of Vietnamese Competition Law 2018 as ‘an act of agreement between the parties in any form which causes or may cause a restraint of competition’. 48 In relation to price fixing, market sharing and limiting production. ‘Contract’ is defined in Article 1(7) Indonesia’s Competition Law as ‘an action by one or more entrepreneurs to bind themselves with one or more other entrepreneurs under any name, either made in writing or not. The bid-rigging provision prohibits ‘conspiring with other parties’ (Article 22). 49 Section 54 of the Thai Trade Competition Act, BE 2560 refers to ‘conduct which monopolizes, reduces or restricts competition in that market’ in one of the ways listed. ‘Conduct’ is not defined. 50 Defined in Article 3(8) of Cambodian Law on Competition to mean ‘an Agreement between Persons who operate, or are likely to operate, at the same level in the production or distribution chain’; it is defined in Section 2(1) of the Malaysian Competition Act 2010 as ‘an agreement between enterprises each of which operates at the same level in the production or distribution chain’. 51 Section 14(a) of the Philippine Competition Act. Market sharing and limiting production or supply are subject to an object or effect test under Section 14(b) of the Philippine Competition Act. 52 CCCS, Guidelines on the Section 34 Prohibition 2016 (February 2022, Singapore) www​.cccs​.gov​ .sg/​legislation/​competition​-act [accessed 17 March 2022] para 3.2. 53 CCBD, Guidelines on Anti-Competitive Agreements (Section 11) (January 2020, Brunei Darussalam) http://​ccbd​.gov​.bn/​Shared​%20Documents/​guidelines/​Guidelines​%20on​%20Anti​ -Competitive​%20Agreements​.pdf [accessed 17 March 2022] para 3.5.2. 46 47

464  Research handbook on cartels Table 26.1

ASEAN cartel provisions Price Fixing

Bid-Rigging

Market Sharing

Limiting or Controlling Production

Brunei Darussalam

Section 11(2)(a)

Section 11(2)(f)

Section 11(2)(c)

Section 11(2)(b)

Cambodia

Art 7(1)

Art 7(5)*

Art 7(3) and (4)

Art 7(2)

Indonesia

Art 5

Art 22

Art 9

Art 11

Lao PDR

Art 21(1)

Art 21(8)

Art 21(2)

Art 21(3)

Malaysia

Section 4(2)(a)

Section 4(2)(d)

Section 4(2)(b)

Section 4(2)(c)

Myanmar

Section 13(a)

Section 13(g)

Section 13(e)

Section 13(f)

Philippines

Section 14(a)(1)

Section 14(a)(2)

Section 14(b)(2)

Section 14(b)(1)

Singapore

Section 34(2)(a)

No express provision

Section 34(2)(c)

Section 34(2)(b)

Thailand

Section 54(1)

Section 54(3)

Section 54(4)

Section 54(2)

Vietnam

Art 11(1)

Art 11(4)

Art 11(2)

Art 11(3)

Note: *The Cambodian Law on Competition only covers bid-rigging in the context of private procurement contracts. Source: Burgess (n 16).

tion,54 which seems akin to a per se breach prohibition. Similarly, the drafting of the Vietnam law would also suggest that all hard-core cartels are treated as per se offences.55 In the remaining jurisdictions (Cambodia, Indonesia, Lao PDR, Myanmar and Thailand), the law does not use either per se or object in the context of the hard-core cartel provisions. In some cases, the intention may be implied. In Cambodia, Article 7 prohibits a person from ‘making and implementing a Horizontal Agreement that directly or indirectly affects competition’ in relation to the specified conduct. Article 8 (Vertical Agreements), Article 9 (Abuse of Dominance) and Article 11 (Business Combinations) impose an object or effects test in the form of ‘significantly preventing, restricting or distorting competition’. The absence of this requirement in Article 7 suggests that hard-core cartels are intended to operate as per se breaches. In Lao PDR, the listed practices are ‘considered as the agreement aimed at restraint of competition’, which suggests these practices are per se prohibited.56 Admittedly, this interpretation – based as it is on an English translation – may not be completely accurate. C.

Cartel Provisions in ASEAN Competition Laws

The AMS laws contain prohibitions against hard-core cartels, as illustrated in Table 26.1. 1. Price fixing Although the precise wording of the AMS laws to prohibit price fixing differs across the AMS, it seems likely that common types of agreements will indeed be captured across the region.

Malaysian Competition Act 2010, Section 4(2). Article 12(1) of the Vietnamese Competition Law prohibits agreements in restraint of competition between enterprises in the same relevant market as stipulated in Articles 11(1) (price fixing), 11(2) (market sharing) and 11(3) (limiting production or supply). Similarly, Article 12(2) prohibits agreements in restraint of competition between enterprises as stipulated in Articles 11(4) (bid-rigging), 11(5) (preventing entry to markets) and 11(6) (boycott arrangements). All other agreements in restraint of competition listed in Article 11 are subject to the ‘significant impact on restraint of competition’ test, suggesting that agreements stipulated in Articles 11(1) to 11(6) are per se offences. 56 Lao PDR Law on Competition, Article 21. 54 55

Association of Southeast Asian Nations  465 Six of the jurisdictions (Brunei Darussalam, Malaysia, Myanmar, Singapore, Thailand and Vietnam) expressly cover both direct and indirect price fixing. Those same jurisdictions (excluding Vietnam) also expressly refer to purchase or selling price, making it clear that buyer cartels are also prohibited. Cambodia refers to ‘fixing, controlling or maintaining’ prices, which is likely to have the same effect as imposing a direct or indirect requirement. Six jurisdictions also specifically mention agreements relating to other trading conditions (Brunei Darussalam, Malaysia, Myanmar, Philippines, Singapore and Thailand), recognizing that these other trading conditions are sometimes the only manner in which competitors can differentiate themselves. Some of the AMS have already successfully prosecuted price-fixing cases in the region.

BOX 26.1 EXAMPLES OF PRICE-FIXING CASES IN ASEAN Singapore: Bus Fares57 The Express Bus Agency Association and 16 of its members were found to have infringed competition law in Singapore as a result of an agreement to fix the price of coach tickets on various routes between Singapore and Malaysia. Malaysia: Cut Flowers The first cartel case prosecuted by the MyCC was a price-fixing case. The case involved the Cameron Highlands Floriculturist Association, which had reached an agreement with its 150 members to increase the price of cut flowers by 10 per cent. Notification of the proposed price increase was published in the local newspaper. The basis of the increase was a rise in production inputs (such as workers’ salaries, fertilizers, electricity costs) and the time that had passed since the last price increase. As the members were MSMEs and this was the first infringement, the MyCC elected to accept undertakings rather than impose financial penalties. 2. Bid-rigging With the exception of Cambodia and Singapore, all laws appear quite clear in their intention to classify bid-rigging or collusive tendering as hard-core cartel activity. Although Singapore’s competition law does not expressly refer to bid-rigging, its guidelines confirm that bid-rigging (collusive tendering) is conduct that is by its ‘very nature regarded as restrictive of competition to an appreciable extent’.58 In the case of Cambodia, bid-rigging is limited to ‘contracts in private procurement’. This would seem to suggest that it is not applicable to government contracts. A potential for divergence exists in relation to bid-rigging where there is overlap with corruption laws. The current investigation in Malaysia into meat cartels is not being run by Case No. CCS 500/003/08, Price Fixing in Bus Services from Singapore to Malaysia and Southern Thailand, 3 November 2009 www​.cccs​.gov​.sg/​public​-register​-and​-consultation/​public​-consultation​ -items/ ​ p rice ​ - fixing ​ - of​ - coach​ - bus​ - services​ - for​ - travelling​ - between​ - singapore​ - and​ - destinations​ - in​ -malaysia​-from​-2006​-to​-2008​?type​=​public​_register [accessed 17 March 2022]. 58 CCCS (n 52) paras 2.24, 3.2 and 3.8. 57

466  Research handbook on cartels the MyCC – it is being conducted by the police, the Malaysian Anti-Corruption Commission and the Domestic Trade and Consumer Affairs Ministry.59 Some of the AMS have already successfully prosecuted bid-rigging cases in the region.

BOX 26.2 EXAMPLES OF BID-RIGGING CASES IN ASEAN60 Singapore’s Swimming Pools Case61 In 2020, the CCCS found three businesses to have infringed Section 34 of the Competition Act by engaging in bid-rigging conduct relating to maintenance services for swimming pools, spas and other water features from 2008 to 2017. The bid-rigging conduct involved the provision of a ‘support quotation’ by one party which would be higher than the bid to be submitted by the receiving party. The receiving party would sometimes specify the price to be included in the ‘support quotation’. The parties also agreed not to quote lower than the incumbent contractor. The CCCS conducted an unannounced inspection of the business premises of the parties, following which two of the parties sought leniency. The case was investigated under the CCCS’s fast track procedure.62 Vietnam The VCCA reports a bid-rigging case in medical supplies in its 2019 Annual Report. The report seems to indicate that the investigation was closed following a change in behaviour from the parties.63 In its 2018 Annual Report, the VCCA reports potential bid-rigging violations in provinces such as Hanoi, Da Nang, Tien Giang and Ca Mau.64

59 A. Adam, ‘How Malaysia’s “Meat Cartel” Scandal Unfolded: A Timeline’ (Malay Mail, 4 January 2021) www​.malaymail​.com/​news/​malaysia/​2021/​01/​04/​how​-malaysias​-meat​-cartel​-scandal​-unfolded​-a​ -timeline/​1937007 [accessed 17 March 2022]. 60 Malaysia has issued its first bid-rigging decision against IT contractors with a proposed fine of RM1.94million: www​.mycc​.gov​.my/​sites/​default/​files/​pdf/​decision/​PD​%20ASWARA​%20​%28Eng​ %29​.pdf [accessed 17 March 2022]. There have also been reports that the MyCC is investigating three other procurement cases: www​.thestar​.com​.my/​business/​business​-news/​2019/​03/​06/​mycc​-cracks​-down​ -on​-bidrigging​-practices/​[accessed 17 March 2022]. 61 Case No. CCCS 500/7003/17, Infringement of the Section 34 Prohibition in Relation the Provision of Maintenance Services for Swimming Pools, Spas, Fountains and Water Features, 14 December 2020 www​.cccs​.gov​.sg/​public​-register​-and​-consultation/​public​-consultation​-items/​cccs​-penalises-​ contractors​ -for​-bid​-rigging​-maintenance​-svs [accessed 17 March 2022]. 62 For further information on the CCCS Fast Track Procedure, see CCCS, Practice Statement on the Fast Track Procedure for Section 34 and Section 47 Cases (1 December 2016) www​.cccs​.gov​.sg/​ legislation/​competition​-act [accessed 17 March 2022]. 63 VCCA, Ministry of Industry and Trade, Vietnam Competition and Consumer Authority Annual Report 2019 (Hanoi) http://​en​.vcca​.gov​.vn/​default​.aspx​?page​=​document​&​category​_id​=​4e53a6f8​-2c47​ -4fe0​-8625​-97169914b781​&​current​_id​=​7a6db5ba​-88dd​-4f41​-8f46​-9ba54b5b05dc​# [accessed 17 March 2022] 19. 64 VCCA, Vietnam Competition and Consumer Authority Annual Report 2018 (Hanoi) http://​en​.vcca​ .gov​.vn/​default​.aspx​?page​=​document​&​category​_id​=​4e53a6f8​-2c47​-4fe0​-8625​-97169914b781​&​current​ _id​=​7a6db5ba​-88dd​-4f41​-8f46​-9ba54b5b05dc​# [accessed 17 March 2022] 19.

Association of Southeast Asian Nations  467 3. Market sharing The provisions dealing with market sharing across the AMS are consistent in their intention, albeit that the precise language differs. The concept of sharing markets or allocating markets is expressly referred to in Brunei Darussalam, Indonesia, Lao PDR, Malaysia, Myanmar, Singapore and Vietnam. Cambodia, the Philippines and Thailand are more specific as regards the type of market sharing, referring to customer, geographic/territorial, product or volume allocations. It is unlikely that this will have any significant bearing on its application in practice. Some AMS have already successfully prosecuted market-sharing cases in the region.

BOX 26.3 EXAMPLE OF A MARKET-SHARING CASE IN ASEAN Malaysia’s Case against MAS/Air Asia Perhaps the most high-profile case of the MyCC to date was its 2014 decision to impose a fine of RM10million each on Malaysia Airline System Bhd (‘MAS’) and AirAsia Bhd for market sharing. The airlines had entered into a collaboration agreement shortly before the Malaysian Competition Act entered into force. Pursuant to the agreement, MAS agreed to ‘focus on being a full-service premium carrier’, AirAsia agreed to ‘focus on being a regional low-cost carrier’ and AirAsiaX agreed to ‘focus on being a medium-to-long haul low-cost carrier’ (Clause 5.1 Collaboration Agreement). There was also evidence that following entry into the arrangement, the airlines ceased operating on routes previously operated.65 This arrangement continued after the Competition Act came into effect. The MyCC found a breach of its cartel prohibition on the basis that the ‘object’ of the agreement was to share the market in relation to sectors and categories of services.66 The MyCC decision was overturned by the Competition Appeal Tribunal; it was subsequently reinstated by the High Court. The Court of Appeal subsequently held that the MyCC had no standing to appeal the Competition Appeal Tribunal decision to the High Court. This decision was affirmed by the Federal Court, leaving the MyCC in the unenviable position of not being able to appeal a decision of the Competition Appeal Tribunal. Limiting production or supply 4. The wording employed in the AMS laws to cover limiting production or control varies quite considerably, although the intention is consistent. Brunei Darussalam, Malaysia and Singapore use the European terminology of ‘limiting or controlling’ while the Philippines proscribes ‘setting, limiting or controlling’. The other AMS use ‘restraining or controlling’ (Myanmar, Vietnam), ‘preventing, restricting or limiting’ (Cambodia) and ‘influencing the price’ (Indonesia). The various restrictions relate to production, markets, technical development or investment in Brunei Darussalam, Malaysia, Myanmar, Philippines and Singapore, which is again consistent with the European terminology. Other jurisdictions focus on limits on quan-

65 Case No. MyCC.0001.2012, Infringement of Section 4(2)(b) of the Competition Act 2010 by Malaysian Airline System Berhad, AirAsia Berhad and AirAsia X Sdn. Bhd, 31 March 2014 www​.mycc​ .gov​.my/​sites/​default/​files/​pdf/​decision/​MAS​%20AIRASIA​.pdf [accessed 17 March] paras 7 and 9. 66 ibid para 8.

468  Research handbook on cartels tity or volume (Lao PDR, Thailand, and Vietnam), quantity, types or development (Cambodia) and production and/or marketing (Indonesia). It may be that we will not understand the extent of these differences until cases are decided in the various jurisdictions. Some of the AMS have already successfully prosecuted production limitation cartels in the region.

BOX 26.4 EXAMPLE OF A LIMITING PRODUCTION OR SUPPLY CASE IN ASEAN Indonesia’s Garlic and Tyre Cartels The KPPU found a breach of Article 11 of the Indonesian Competition Law 1999 arising from conduct occurring at the docks when garlic imports arrived in Indonesia. There were delays to the release of the garlic onto the Indonesian market due to delays in completion of the required paperwork. Upon investigation, the KPPU found that these delays were deliberate and intended to force the price of garlic up due to a shortage of supply. Regulatory requirements, such as the need for companies to have storage facilities at the port, also supported the continuation of the cartel as it meant that only the larger companies (those that could provide storage facilities) could import the garlic. The decision of the KPPU was upheld by the Supreme Court.67 The decision of the KPPU in relation to cartel activity by six tyre manufacturers was also upheld by the Supreme Court.68 The parties had agreed not to compete on price and to limit production and control distribution to put upward pressure on prices. Media coverage at the time indicated that the KPPU relied heavily on evidence from minutes of a meeting of the Association of Indonesian Tire Producers (‘APBI’) conducted from 2009 to 2012. The minutes recorded statements such as ‘to all members of APBI, once again, to uphold their self and continue to control their distribution and maintain a conducive market condition according to their demand’; and ‘market monitoring by APBI will be reactivated from May 2010, and all members must control their tire distribution to sustain this condition’. The maximum fine of RP150billion (the highest fine that could be imposed under Indonesia’s competition law at the time) was imposed on each participant. Other prohibitions treated as per se or object offences 5. The AMS laws include other prohibitions that appear to be treated as per se or object offences. These are set out in Table 26.2. These additional prohibitions do not meet the internationally recognized definition of hard-core cartel provisions, but nonetheless are set out alongside the cartel provisions in some of the AMS laws. The application of the per se or object threshold to these additional prohibitions will be a matter for each of the AMS. In some jurisdictions, the criminal sanctions

67 KPPU, ‘KPPU Won the Garlic Importation Cartel Cessation in the Supreme Court’ (4 July 2018) https://​eng​.kppu​.go​.id/​supreme​-court​-grants​-cassation​-on​-garlic​-cartel/​ [accessed 17 March 2022]. 68 KPPU, ‘KPPU Won the Tire Cartel Cessation in Supreme Court’ (6 June 2018) https://​eng​.kppu​ .go​.id/​kppu​-won​-the​-tire​-cartel​-cassation​-in​-supreme​-court/​ [accessed 17 March 2022].

Association of Southeast Asian Nations  469 Table 26.2

Other ‘cartel’ provisions

Brunei Darussalam

Legislative provision

Wording

Section 11(2)(d), (e)

Apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts

Cambodia

N/A

Indonesia

N/A

Lao PDR

Art 21(4), (5), (6), (7), (9)

Restraining the development of technology and quality of goods and services; Imposing conditions on purchasing and selling of goods and services; preventing other business operators from entering market/impeding access of other business operators; driving other business operators out of the market; other practices as stipulated in the relevant laws and regulations.

Malaysia

N/A

Myanmar

Section 13(b), (d)

Philippines

N/A

Singapore

Section 34(2)(d), (e)

Making agreement on restraint on competition in the market; conducting restraint on market by individual or organization Apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts

Thailand

N/A

Vietnam

Art 11(5), (6)

Prevent, impede or prohibit other enterprises to participate in the market or develop business; exclude from the market enterprises which are not parties to the agreement

appear also to be intended to apply to this wider range of agreements, giving rise to a potential divergence in approach across the region. D. Sanctions The AMS laws allow for a mix of civil and criminal sanctions for infringements of the cartel provisions. 1. Civil sanctions All AMS impose civil sanctions for infringement of the cartel provisions. Common features include imposition of a financial penalty, a requirement to pay compensation or return profits (Cambodia, Indonesia, Lao PDR, and Vietnam), closure of the business and warnings (Lao PDR, Myanmar and Vietnam). The manner in which the financial penalties will be calculated differs across the region. Some features reflect the position in Europe. Brunei Darussalam and Singapore impose

470  Research handbook on cartels a requirement for the breach to have been committed intentionally or negligently before a penalty will be imposed. Five jurisdictions impose a cap of up to 10 per cent of turnover (Brunei Darussalam, Malaysia, Singapore, Thailand and Vietnam), although the nature of the turnover differs between worldwide (Malaysia), the local jurisdiction (Brunei Darussalam and Singapore) and the relevant market (Vietnam). Thailand refers simply to ‘turnover’. The calculation is limited to up to three years in Brunei Darussalam and Singapore. In Vietnam, the penalty must be lower than the lowest fine specified in the Penal Code. To date, only Singapore69 and Malaysia70 have published guidelines on the calculation of financial penalties. The Philippines and Indonesia impose a range of financial penalties, with the Philippines and Thailand prescribing that, when setting the fines, regard will be had to the ‘gravity and duration’ of the violation (Philippines)71 or to the ‘seriousness of the offence’ (Thailand).72 Neither the amount of the fines nor the manner of the calculation is specified in Lao PDR and Myanmar. In Cambodia, the intention appears to be that only criminal sanctions (fines and imprisonment) will be imposed. The civil sanctions seem limited to additional measures including compensation and a return of profits. An order for compensation and/or a return of profits is also provided for in Indonesia, Lao PDR, and Vietnam. Administrative measures of potential closure of businesses are provided for in Lao PDR and Myanmar, while warnings can be given in Lao PDR, Myanmar and Vietnam. 2. Criminal sanctions Criminal sanctions for hard-core cartels are provided for in seven of the ten AMS (Cambodia, Indonesia, Lao PDR, Myanmar, Philippines, Thailand and Vietnam). The details of the punishment in Lao PDR and Vietnam are set out in their respective criminal laws.73 Imprisonment is provided for in Cambodia, Indonesia, Myanmar, Philippines, Thailand and Vietnam.74 In the case of the Philippines, individual office holders in the business can be imprisoned where they are knowingly or wilfully responsible for the conduct. Criminal fines can be imposed in Cambodia, Indonesia, Myanmar, Philippines, Thailand and Vietnam.75 In the case of the Philippines, where the cartel involves basic necessities or prime commodities (as defined in Republic Act No. 758776), the fine to be imposed must be tripled. 69 CCCS, Guidelines on the Appropriate Amount of Penalty in Competition Cases 2016 (1 February 2022) www​.cccs​.gov​.sg/​legislation/​competition​-act [accessed 17 March 2022]. 70 MyCC, Guidelines on Financial Penalties (December 2014) www​.mycc​.gov​.my/​sites/​default/​ files/​pdf/​newsroom/​Guildline​-on​-Financial​-Penalties​.pdf [accessed 17 March 2022]. 71 Philippine Competition Act, Section 29. 72 Thailand Trade Competition Act, BE 2560, Section 85. 73 Article 303 of the Lao Penal Code and Article 217 of the Vietnamese Criminal Code (Law No.100/215/QH13), as amended. 74 The position in Lao PDR cannot be confirmed as the author was not able to access Article 303 of the Lao Penal Code in English. 75 The position in Lao PDR cannot be confirmed as the author was not able to access Article 303 of the Lao Penal Code in English. 76 Republic Act No. 7581, An Act Providing Basic Protection to Consumers by Stabilizing the Prices of Basic Necessities and Prime Commodities and by Prescribing Measures Against Undue Price Increases during Emergency Situations and Like Occasions www​.dti​.gov​.ph/​sdm​_downloads/​republic​-act​-no​ -7581​-the​-price​-act/​#:​~:​text​=​Republic​%20Act​%20No​.​%207581​%20​%E2​%80​%93​%20The​%20Price​

Association of Southeast Asian Nations  471

V.

ASEAN LENIENCY PROVISIONS

The 2010 Regional Guidelines provide that: AMSs may introduce a leniency programme targeted at undertakings who have participated in cartel activities and therefore are liable for infringing the prohibition against anti-competitive agreements, but who would nevertheless like to come clean and provide the competition regulatory body or other law enforcement body with evidence of the cartel.77

Leniency programmes have grown around the world in recent years and are still considered to be a key tool in fighting cartels. Cartelists whose guilt is troubling them may be willing to come forward and confess the existence of the cartel in return for lenient treatment. In the integrated AEC, convergent leniency regimes are likely to be particularly important. As noted by Maximiano et al: A consistent approach to leniency across ASEAN will be important if cross-border cartels are to be prosecuted and if competition authorities are to be able to cooperate effectively and efficiently. For this they need to avoid conflicting requirements. An inconsistent approach will risk convergence as cartelists may forum shop for the most favourable leniency regimes.78

Seven out of the ten AMS have leniency provisions specified in their competition laws.79 Although Singapore does not have a legislative provision for a leniency regime, one is included as part of its enforcement strategy.80 Indonesia was seeking amendments to its competition law to allow for a leniency regime to be introduced but this is understood to be on hold due to the COVID-19 pandemic.81 Currently, Thailand does not have a leniency regime, nor any plans to introduce one. Four of the eight jurisdictions have leniency regimes already in operation: Brunei Darussalam, Malaysia, Philippines and Singapore. All of those jurisdictions have also published guidelines on how the leniency regimes will operate in practice.82 Key features of all four leniency regimes include a marker system and the ability to reduce the fine by 100 per %20Act​,Price​%20Increases​%20during​%20Emergency​%20Situations​%20and​%20Like​%20Occasions [accessed 17 March 2022]. 77 ASEAN Secretariat (n 7) para 6.9.1. 78 R.L.P. Maximiano, R. Burgess and W. Meester, ‘Promoting Regional Convergence in ASEAN Competition Laws’, in P. Burnier da Silveira and W. Kovacic (eds), Global Competition Enforcement: New Players, New Challenges (Kluwer Publishing, 2019) 240–41. 79 Brunei Darussalam Competition Order 2015, Section 44; Cambodian Law on Competition, Article 15; Lao PDR Law on Competition, Article 62; Malaysian Competition Act 2010, Section 41; Myanmar Competition Law, Sections 8(p) and 52; Philippine Competition Act 2015, Section 35; and Vietnamese Competition Law, Article 112. 80 CCCS, CCCS Guidelines on Lenient Treatment for Undertakings Coming Forward with Information on Cartel Activity 2016 (1 December 2016) www​.cccs​.gov​.sg/​legislation/​competition​-act [accessed 17 March 2022] para 1.6. 81 International Comparative Legal Guides, Indonesia: Cartels and Leniency Laws and Regulations 2021 (2 November 2020) https://​iclg​.com/​practice​-areas/​cartels​-and​-leniency​-laws​-and​-regulations/​ indonesia [accessed 17 March 2022]. 82 CCBD, Guidelines on Leniency (July 2020) http://​ccbd​.gov​.bn/​Shared​%20Documents/​guidelines/​ Guidelines​%20on​%20Leniency​.pdf [accessed 17 March 2022]; MyCC, Guidelines on Leniency Regime (October 2014) www​.mycc​.gov​.my/​guidelines/​guidelines​-on​-leniency​-regime [accessed 17 March

472  Research handbook on cartels cent (usually for the first to come forward) or a lesser amount (for those not the first to come forward or those who come forward after an investigation has commenced). In all cases, conditions must be satisfied to obtain leniency. For example, in the Philippines, immunity eligibility depends upon the party not being the leader or a coercer in the cartel. As many of the remaining jurisdictions have young competition authorities, it may take time for leniency regimes to be introduced. In some cases, clarity will be required as to how the regime is to apply. For example, in Myanmar and Vietnam, the regimes are stated to apply to provisions in the law that go beyond hard-core cartels,83 so clarity around how this will work in practice will be needed.

VI.

ENFORCEMENT OF CARTEL PROVISIONS

The establishment of well-respected competition authorities that make robust decisions based on solid evidence will play a significant role in ensuring that an internationally recognized (and feared) cartel regime is in operation in the region. Enforcement and advocacy will work hand in hand in this respect, both on a national and regional level. Cross-border cooperation will also be critical to successful enforcement in the region and, in turn, this will depend on the extent of the authority’s enforcement powers. A.

Enforcement Powers

The 2010 Regional Guidelines identify three types of investigation power: the power to require production of documents and information; the power to enter and search business premises without warrant; and the power to enter and search business and private premises, land and means of transport under warrant. The power to require production of documents and information includes the right to take originals or copies of documents, to require an explanation of a document, to require a person to state to the best of that person’s knowledge or belief where the document can be found and to require a person to provide information that is not already in recorded form.84 The scope of this chapter prevents a thorough discussion of this important topic. However, it is worth noting that most of the powers alluded to in the Regional Guidelines 2010 have been adopted, to a greater or lesser extent, by most of the AMS. All AMS laws, except that of Indonesia, include express search and seizure powers. (Indonesia is currently proposing amendments to its competition law, which include the introduction of search and seizure powers.) There is a diverse approach to the need to obtain a warrant to undertake search and seizure, based on national legal requirements.

2022]; PCC, Rules of the Leniency Program (December 2018) www​.phcc​.gov​.ph/​wp​-content/​uploads/​ 2018/​12/​Leniency​-Rules​-Clean​-Version​.pdf [accessed 17 March 2022]; and CCCS (n 80). 83 In Myanmar, leniency applies to Section 13 of the Myanmar Competition Law, and in Vietnam, leniency applies to Article 12 of the Vietnamese Competition Law, both of which are wider than hardcore cartels. 84 ASEAN Secretariat (n 7) para 6.2.

Association of Southeast Asian Nations  473 All search and seizure regimes include production and inspection powers, with many including an express right to take either original documents (Brunei Darussalam,85 Lao PDR,86 Malaysia,87 Myanmar88 and Singapore89) or copies of them (Brunei Darussalam,90 Philippines91 and Singapore92).93 Many AMS also expressly allow the competition authority to require someone to explain a document (Brunei Darussalam,94 Malaysia,95 Philippines96 Singapore,97 and Thailand98). Fewer jurisdictions include an express provision allowing the competition authority to require a person to state where a document can be found99 or to require the production of information in recorded form.100 Most AMS jurisdictions have express powers to require the production of documents or information as part of their investigation process (outside of the search and seizure regime)

85 Only where searching under warrant and it appears necessary to do so to preserve the document (see Brunei Darussalam Competition Order 2015, Section 38(2)(d). 86 Lao PDR Law on Competition, Articles 53, 64 and 68. 87 Sections 19 and 25 of the Malaysian Competition Act. A list of records, books and accounts seized must be provided in accordance with Section 29 of the Malaysian Competition Act. 88 The Myanmar Competition Rules (Rule 34) provide for materials to be seized. See also Section 8(n) of the Myanmar Competition Law. 89 Singapore Competition Act, Sections 64(5)(d) and 65(2)(iv). 90 Including extracts; see Brunei Darussalam Competition Order 2015, Sections 36(4)(a)(i), 37(5)(d) and 38(2)(c). 91 Supreme Court Rules on Administrative Search and Inspection under the Philippine Competition Act, Rule 10. 92 Singapore Competition Act, Sections 61A(4)(a)(i), 63(4)(a)(i) and 64(5)(d). 93 The power to take original documents may only arise where a search warrant has been issued (Brunei Darussalam, Singapore). Malaysia expressly allows original documents to be taken, irrespective of whether a warrant exists: Section 79 of the Malaysian Competition Act. The Philippines expressly provides that only copies may be taken: Rule 10 of the Supreme Court Rules on Administrative Search and Inspection under the Philippine Competition Act. Article 82 of the Vietnamese Competition Law allows the VCCA to temporarily seize exhibits which would suggest originals can be taken. 94 Brunei Darussalam Competition Order 2015, Sections 36(4)(a)(ii), 37(5)(b)(ii) and 38(2)(f). 95 Malaysian Competition Act, Section 18(1)(b). 96 Supreme Court Rules on Administrative Search and Inspection under the Philippine Competition Act, Rule 10. 97 Singapore Competition Act, Sections 61A(4)(a)(ii) and 63(4)(a)(ii). See, however, ibid Sections 63(4A) and Section 63(4B), added in 2018. 98 Thai Trade Competition Act, BE 2560, Section 63(2). 99 This power exists in: Brunei Darussalam (Brunei Darussalam Competition Order 2015, Sections 36(4)(b), 37(5)(c) and 38(2)(f)); Malaysia (Malaysian Competition Act, Section 18(2)); Philippines (Supreme Court Rules on Administrative Search and Inspection under the Philippine Competition Act, Rule 10); Singapore (Singapore Competition Act, Sections 61A(4)(b), 63(4)(b), 64(5)(c) and 65(2)(vi)); and Vietnam (Vietnamese Competition Law, Article 83). 100 This power exists in: Brunei Darussalam (Brunei Darussalam Competition Order 2015, Sections 37(5)(e) and 38(2)(g)); Malaysia (Malaysian Competition Act Section 27); Philippines (Supreme Court Rules on Administrative Search and Inspection under the Philippine Competition Act, Rule 10); Singapore (Singapore Competition Act, Sections 64(5)(e) and 65(2)(vii)); and Vietnam (Vietnamese Competition Law, Article 83).

474  Research handbook on cartels (Brunei Darussalam,101 Cambodia,102 Indonesia,103 Malaysia,104 Myanmar,105 Philippines,106 Singapore,107 Thailand108 and Vietnam109). In some jurisdictions, this includes the power to require a person to give evidence in person or to explain a document (Brunei Darussalam,110 Malaysia,111 Myanmar,112 Philippines,113 Singapore,114 Thailand115 and Vietnam116). The scope of this chapter prevents a detailed consideration of two other important issues in this context. First is the extent to which the authority can enforce compliance with their enforcement powers. Particularly for young competition authorities that may not be well known or understood, having these powers to gather evidence is only useful if that power can be enforced. Second, from a due process perspective, the protections of self-incrimination and legal professional privilege do not appear to be widely recognized in the region and this may impact on cross-border investigations and prosecutions. B.

Challenges in Enforcement

The challenges in enforcement for younger competition authorities are well known. Where a new authority has not yet established itself in a jurisdiction, businesses may not be aware of the authority’s existence, let alone its powers, and may consequently have little regard for compliance. New competition authorities are often under-resourced and staff usually face an enormous learning curve. The focus is, rightly, on capacity building, which may mean that enforcement in the first few years is limited. In this sense, advocacy plays a critical role in the early years of a new competition authority. The ASEAN competition authorities have all been incredibly active in advocating their new competition laws. For example, by April 2020, the CCBD had already organized 46 capacity-building activities since its commencement in August 2017;117 the PCC conducted

Brunei Darussalam Competition Order 2015, Section 36. Cambodian Law on Competition, Article 17. 103 Indonesian Competition Law, Article 41. 104 Malaysian Competition Act, Section 18(1). 105 Myanmar Competition Law, Sections 8(k) and (l). The Investigative Committee has similar powers under ibid Section 12(a). 106 Philippine Competition Act, Section 12(f). 107 Singapore Competition Act, Section 63. 108 Thai Trade Competition Act, BE 2560, Section 63(1). 109 Vietnamese Competition Law, Article 76(2). 110 Brunei Darussalam Competition Order 2015, Section 36(4). 111 Malaysian Competition Act, Section 18(1). 112 Myanmar Competition Law, Sections 8(k) and (l). The Investigative Committee has similar powers under ibid Section 12(a). 113 Philippine Competition Act, Section 12(f). 114 Singapore Competition Act, Section 63(4). 115 Thai Trade Competition Act, BE 2560, Section 63(1). 116 Article 56 of the Vietnamese Competition Law appears to allow the power to demand explanations of documents. 117 CCBD, Annual Report 1 January 2019 to 30 April 2020 http://​ccbd​.gov​.bn/​Shared​%20Documents/​ educational​%20materials/​2019​-​%202020​%20Annual​%20Report​%2028September​%202020​%20FULL​ .pdf [accessed 17 March 2022]. 101 102

Association of Southeast Asian Nations  475 32 advocacy and capacity-building activities in 2020;118 and the CCCS, an experienced competition authority in the region, conducted 30 outreach activities in the 2019 financial year.119

VII. CONCLUSION In accordance with international best practice, all AMS intend to prosecute hard-core cartels as serious breaches of competition law. This is a significant step in the direction of convergence in this important area of competition law and policy. Although many of the ASEAN cartel laws are in nascent stages, the established regimes have already undertaken significant cartel-related enforcement activities. Singapore, Malaysia, Indonesia and Vietnam have successfully prosecuted cartels, while others have already commenced investigations. Ongoing efforts will be needed to upskill staff in the new competition authorities, and the need for advocacy to government, legal and business communities and consumers will continue for many years to come. As cases are investigated and the law enforced, jurisprudence will grow, and with it the understanding of how the individual AMS laws will be interpreted and applied to cartels. Experience in other regions around the world shows us that there is a substantial likelihood of cross-border cartels or, at the very least, commonality of issues in the region, due to the similar economic environments. This is already evident in the ASEAN region, where a garlic cartel has been successfully prosecuted in Indonesia and is the subject of investigation in the Philippines.120 Work will need to be undertaken to ensure the cooperation that has already begun between the AMS competition authorities continues. With ongoing enforcement and development of jurisprudence, the extent to which the ASEAN cartel provisions are likely to converge will become clearer – with the hope that ten different regimes can operate as one, when the need arises.

PCC, 2020 Annual Report www​.phcc​.gov​.ph/​wp​-content/​uploads/​2017/​08/​2020​-PCC​-Annual​ -Report​.pdf [accessed 17 March 2022]. 119 CCCS, Annual Report 2019–2020 www​.cccs​.gov​.sg/​resources/​publications/​annual​-reports [accessed 17 March 2022]. 120 PCC, ‘Press Release – Beyond 8/8: Competition Law’s Transitory Period Ends Today’ (8 August 2017) www​.phcc​.gov​.ph/​press​-releases/​beyond​-88​-competition​-laws​-transitory​-period​-ends​-today [accessed 17 March 2022]. 118

27. Australia and New Zealand Julie Clarke

I. INTRODUCTION New Zealand’s competition laws have historically followed legislative and judicial developments in Australia very closely, with the result that there are many similarities in the law and the approach taken to cartel enforcement in both jurisdictions. This can be seen in the language employed, in the penalties imposed and in much of the judicial interpretation. In recent years both jurisdictions have also enacted new comprehensive cartel laws, replacing an existing price-fixing provision, and introduced criminal offences for cartel conduct. Despite these similarities, differences have emerged, particularly in recent years. New Zealand has developed a broader suite of defences for cartel conduct than Australia and has not yet introduced a prohibition on concerted practices, which became part of Australian law in 2017. The processes for criminal cartel trials in New Zealand are also likely to fundamentally differ from those in Australia. Nevertheless, there remains considerably more that is similar than is different in the approach to cartel conduct in both jurisdictions. This chapter explores the key elements of the cartel prohibitions and enforcement in both jurisdictions.

II.

LEGISLATIVE SCHEME

Australia and New Zealand have both enacted national competition law schemes administered through a single court hierarchy. Australia is a federation with federal powers limited by the Australian Constitution. State and territory governments enjoy concurrent power in relation to commerce. Despite the clear potential for parallel and inconsistent state and territory laws on cartels and other competition matters, an agreement between the federal, state and territory governments has ensured that for all practical purposes a nationally consistent piece of legislation exists for competition law matters,1 administered through a single federal court hierarchy. New Zealand, as a unitary state, has avoided the risk of inconsistent legislative development. Cartel conduct is per se prohibited in both Australia and New Zealand, where it may attract criminal sanctions in addition to civil penalties, other civil orders and private remedies. Both countries relatively recently amended their laws to specifically define and prohibit cartel conduct2 and both also prohibit anticompetitive agreements, capturing a broader range of In April 1995 the Australian governments reached agreement on a National Competition Policy, following recommendations made in Australian Government, National Competition Policy (Report by the Independent Committee of Inquiry, August 1993) (‘Hilmer Report’). 2 Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2009 (Australia); and Commerce (Cartels and Other Matters) Amendment Act 2017 (NZ). 1

476

Australia and New Zealand  477 competitor activity than the more specific cartel provisions. Australia has also introduced a prohibition on anticompetitive concerted practices.3 Prior to the introduction of targeted cartel prohibitions, both countries effectively prohibited a broad range of price-fixing conduct per se through the application of a provision that deemed various forms of price fixing to be anticompetitive for the purposes of the general prohibition on anticompetitive agreements. While the deeming provisions have now been repealed, the case law relating to them remains instructive. In both Australia and New Zealand a single national independent government agency is responsible for public civil enforcement and for the authorization of certain cartel matters. They are the Australian Competition and Consumer Commission (‘ACCC’) and the New Zealand Commerce Commission (‘NZCC’), respectively. In both countries a separate authority – the Commonwealth Department of Public Prosecutions in Australia and the Solicitor-General in New Zealand – is responsible for criminal cartel enforcement. A. Australia The modern Australian competition legislation was introduced in 19744 and included a prohibition on contracts, arrangements or understandings (‘CAUs’) in restraint of trade or commerce.5 The legislation was soon modified to prohibit making agreements or giving effect to provisions in agreements having the purpose or effect of substantially lessening competition.6 A specific provision dealing with price fixing was also introduced, effectively making agreements between competitors that fixed, controlled or maintained prices per se illegal.7 Together with a prohibition on exclusionary provisions,8 this was the primary means by which cartels were prohibited until 2009, when a set of dedicated cartel provisions were introduced. 1. Prohibition on making or giving effect to a cartel provision Australia’s current cartel conduct provisions are contained in Division 1 of Part IV of the Competition and Consumer Act 2010 (Cth) (‘CCA’).9 The provisions are voluminous and

3 Introduced into s 45 CCA by the Competition and Consumer Amendment (Competition Policy Review) Act 2017 (Cth) following recommendations by the Harper Committee, Competition Policy Review (Final Report, March 2015) (‘Harper Report’). 4 Trade Practices Act 1974 (Cth). The Act was later renamed the Competition and Consumer Act 2010 (Cth). 5 There was no restraint of commerce unless it likely to have a ‘significant’ effect on competition: s 45(4) as originally enacted. 6 This followed concern about a restrictive and ‘unduly legalistic’ approach to the original formulation: Trade Practices Review Committee, Report to the Minister for Business and Consumer Affairs (August 1976) (‘Swanson Report’) 15, referencing the High Court judgment in Quadramain Pty Ltd v Sevastapol Investments Pty Ltd and another (1976) 8 ALR 555. New provisions were introduced by the Trade Practices Amendment Act 1977 (Cth). 7 Section 45A CCA. Introduced by the Trade Practices Amendment Act 1977 (Cth). Although Section 45A did not prohibit price fixing directly, it had the effect of prohibiting, per se, contracts, arrangements or understandings which involve fixing, controlling or maintaining of prices. 8 Now repealed because of the considerable overlap with the new cartel laws. 9 This is a federal statute but effectively applies to conduct within the exclusive remit of the states and territories, as a result of a series of enabling state and territory acts.

478  Research handbook on cartels complex, perhaps evidenced by the inclusion of a ‘simplified outline’ at the beginning of the Division,10 which has been aptly labelled a ‘harbinger of doom’ for simplicity!11 This Division prohibits the making of a ‘contract, arrangement or understanding’12 containing a cartel provision or the giving effect to a cartel provision contained in a contract, arrangement or understanding.13 A person or corporation must be a party to the CAU in order to ‘give effect’ to it,14 but it is not necessary that they know that the CAU contained a cartel provision.15 This may occur, for example, if a subsidiary company acts at the direction of a parent company, without being aware that the provision it is implementing is a cartel provision.16 2. Contract, arrangement or understanding The phrase ‘contract, arrangement or understanding’ is used throughout the Act, including in the specific cartel provisions and the more general prohibition against anticompetitive conduct. It therefore has the advantage of a long history of interpretation. Arrangement or understanding simply refers to something less binding than a contract,17 though there has been no resolution about whether there is a practical difference between those two terms.18 It is not essential that there be a reciprocity of obligations,19 but in all cases evidence of consensus or meeting of the minds20 ‘under which one party or both of them must assume an obligation or give an assurance or undertaking that it will act in a certain way’ is required.21 Mere hope or expectation that a party will act in a certain way is not sufficient to constitute a ‘consensus’,22 but it is sufficient if there is consensus that one party will act in a particular way.

Section 45AA CCA. M. Wigney, ‘Practice and Procedure in the Criminal Jurisdiction of the Federal Court of Australia’ (Paper, ‘Competition Law Conference’, Sydney, May 2021) 6. See also M. Weinberg, ‘Federal Indictable Offences: Has the “Autochthonous Expedient” Run Its Course?’ (Paper, ‘40th Anniversary of the Federal Court of Australia Conference’, 9 September 2017) 14, referring to the language in the Division as ‘prolix, dense and opaque’ and describing the ‘legislative jargon’ as ‘unhelpful and off-putting’. 12 Section 45AF CCA (criminally) and 45AJ CCA (civilly). 13 Section 45AG CCA (criminally) and 45AK CCA (civilly). The CCA defines ‘give effect to’ as including doing ‘an act or thing in pursuance of or in accordance with’ or to ‘enforce or purport to enforce’: s 2. 14 ACCC v Olex Australia Pty Ltd [2017] FCA 222, para 662. 15 ACCC v Yazaki Corporation [2018] FCAFC 73, para 77. 16 ibid para 79. 17 Norcast S.ár.L v Bradken Limited (No 2) [2013] FCA 235, para 263, citing ACCC v Amcor Printing Papers Group Ltd (2000) 169 ALR 344, para 75; and Top Performance Motors Pty Ltd v Ira Berk (Queensland) Pty Ltd (1975) 5 ALR 465, 469. 18 Norcast S.ár.L v Bradken Limited (No 2) [2013] FCA 235, para 263. 19 ibid. 20 ibid, citing ACCC v Construction, Forestry, Mining and Energy Union [2008] FCA 678, para 10. See also TPC v Email Ltd (1980) 43 FLR 383, 385; and ACCC v CC (NSW) Pty Ltd (No 8) (1999) 92 FCR 375, para 141. 21 Norcast S.ár.L v Bradken Limited (No 2) [2013] FCA 235, 263, citing ACCC v Construction, Forestry, Mining and Energy Union [2008] FCA 678, para 10. 22 Apco Service Stations Pty Ltd v ACCC (2005) 159 FCR 452, para 45; Rural Press Ltd v ACCC (2002) 118 FCR 236, para 79; Norcast S.ár.L v Bradken Limited (No 2) [2013] FCA 235, para 263; and ACCC v CC (NSW) Pty Ltd (No 8) (1999) 92 FCR 375, para 141. 10 11

Australia and New Zealand  479 This requirement for ‘consensus’ may be proved by independent facts or may be inferred from conduct.23 Mutual consent has, for example, been inferred in hub-and-spoke arrangements.24 3. Cartel provision Cartel provision is defined in Section 45AD of the CCA.25 This definition applies to both criminal and civil cartel conduct and is complex, running to several pages of statutory text. In effect, it provides that a provision is a cartel provision if it has the purpose, effect or likely effect of price fixing26 or it has the purpose of restricting outputs, dividing markets or bid rigging and the ‘competition condition’ is satisfied. 4. Purpose or effect of price fixing Price fixing is defined in the same terms as in the former Section 45A of the CCA, which deemed price fixing to substantially lessen competition for purposes of the general prohibition on anticompetitive agreements. It has, therefore, the benefit of considerable judicial interpretation.27 Price fixing is prohibited if it has the purpose, effect or likely effect of fixing, controlling or maintaining prices, discounts, allowances, rebates and credit in relation to goods or services supplied or acquired (directly or indirectly) by any or all parties to the CAU.28 ‘Likely’ in this context is defined to include a possibility that is not remote.29 In determining whether a provision has an effect or is likely to have the requisite effect it may be considered together with other provisions.30 The terms ‘fixing, controlling or maintaining’ are not defined, but have their normal meaning. In particular, fix has been held to mean to ‘make fast, firm or stable’,31 for a period of time that is ‘not instantaneous or merely ephemeral’.32 Control has been taken to mean to restrain a freedom that would otherwise exist in relation to charging prices;33 importantly, there is no requirement that a particular price be set. Maintaining does not seem to add anything to either fix or control.34 Norcast S.ár.L v Bradken Limited (No 2) [2013] FCA 235, para 263. News Ltd v Australian Rugby Football League Ltd (1996) 48 FCR 447; TPC v David Jones (Australia) Pty Ltd (1986) 13 FCR 446. Cf ACCC v PZ Cussons Australia Pty Ltd [2017] FCA 1590, where the ACCC’s claims of a hub-and-spoke cartel failed. 25 Originally numbered s 44ZZRD CCA. 26 The term price fixing is not actually used, but this is the substance of the prohibition, which captures fixing, controlling or maintaining prices, or discounts, allowance, rebates or credits: see, for example, ACCC v Australian and New Zealand Banking Group Limited (2015) 236 FCR 78. 27 See, e.g., ACCC v Australian Egg Corporation Ltd [2017] FCAFC 152; ACCC v Olex Australia Pty Ltd [2017] FCA 222; and ACCC v ANZ Banking Group Ltd [2016] FCA 1516. 28 See ACCC v Pauls Ltd [2002] FCA 1586, para 104. 29 Section 44ZZRB CCA. 30 Sections 45AD(8) and (9) CCA. 31 Apco Service Stations Pty Ltd v ACCC [2005] FCAFC 161, para 44, citing the Macquarie Dictionary meaning of the verb ‘fix’. 32 Radio 2UE Sydney Pty Ltd v Stereo FM Pty Ltd (1982) 62 FLR 437, 449. 33 ACCC v CC (NSW) Pty Ltd (No 8) (1999) 92 FCR 375, para 168. See also ACCC v PT Garuda Indonesia Ltd [2016] FCAFC 42, paras 550–55; ACCC v Yazaki Corporation [2018] FCAFC 73, para 145; and ACCC v TF Woollam [2011] FCA 973, paras 82–90. 34 Radio 2UE Sydney Pty Ltd v Stereo FM Pty Ltd (1982) 62 FLR 437, 449; and ACCC v CC (NSW) Pty Ltd (No 8) (1999) 92 FCR 375, para 133. 23 24

480  Research handbook on cartels Merely exchanging price information will not constitute a fixing of price, and recommendations alone are not sufficient to constitute price fixing;35 there needs to be some sort of arrangement or stipulation as to price charged. Purpose, in relation to cartel provisions, refers to the ‘purpose of the provision’ and, oddly, is interpreted subjectively by reference to the purpose of the parties responsible for including the provision, rather than objectively by reference to the apparent purpose of the provision itself.36 It is sufficient if one of the relevant parties had the requisite purpose.37 The focus of inquiry is the end sought to be achieved38 rather than the immediate purpose of the conduct and, while a cartel purpose need not be the sole purpose for the conduct, it must be a ‘substantial purpose’.39 In relation to cartel proceedings or prosecutions, where the state of mind of a corporation must be demonstrated, it is sufficient to show that a director, employee or agent had that state of mind while acting within the scope of their actual or apparent authority.40 5. Purpose of restricting outputs, dividing markets or bid rigging Other forms of cartel conduct are only prohibited where the requisite purpose can be established; it is not necessary or sufficient that conduct have a particular effect or likely effect. Output restrictions capture conduct having the purpose of preventing, restricting or limiting the production of goods, capacity to supply services, the supply of goods or services or the acquisition of goods or services.41 Market division captures agreements to allocate, between any or all parties to the agreement, customers, suppliers or geographic areas.42 Finally, bid rigging, which overlaps considerably with price fixing, includes various agreements to manipulate bids, including agreeing that only one party to the agreement will bid, or that more than one will bid, but on the basis that one will be more likely to succeed than the others.43 6. Competition condition The ‘competition condition’ requires that at least two or more of the parties to the CAU be competitors or potential competitors in the relevant market.44

Section 45AD(6) CCA. Norcast S.ár.L v Bradken Limited (No 2) [2013] FCA 235, para 273. See also News Ltd v South Sydney District Rugby League Football Club (2003) 215 CLR 563. 37 ACCC v TF Woollam & Son Pty Ltd (No 2) (2011) 196 FCR 212, para 58. 38 Norcast S.ár.L v Bradken Limited (No 2) [2013] FCA 235, para 275; ACCC v Flight Centre Travel Group Limited [2016] HCA 49, para 181 (per Justice Gordon); and News Ltd v South Sydney District Rugby League Football Club Ltd (2003) 215 CLR 563, para 18. 39 Section 4F CCA. 40 Section 84 CCA. 41 See, e.g., ACCC v Olex Australia Pty Ltd [2017] FCA 222; and ACCC v Australian Egg Corporation Ltd [2016] FCA 69. Previously much of this conduct was caught by a more specific per se prohibition on exclusionary provisions, which has now been repealed. 42 Section 45AD(3)(b) CCA. See, e.g., ACCC v Renegade Gas Pty Ltd [2014] FCA 1135. 43 Section 45AD(3)(c) CCA. For cases, see ACCC v Olex Australia Pty Ltd [2017] FCA 222; and Norcast S.ár.L v Bradken Limited (No 2) [2013] FCA 235. 44 Section 45AD(4) CCA. This is necessarily a simplification; its complexity has been the subject of much criticism. See, e.g., CDPP v Nippon Yusen Kabushiki Kaisha [2017] FCA 876, para 174 (per Justice Wigney). A corporation is also a party to a cartel if a related corporation is a party to that cartel: s 45AC CCA. 35 36

Australia and New Zealand  481 This includes parties who would, but for the contract, arrangement or understanding, be in competition with each other in relation to a relevant supply or acquisition to which the cartel conduct relates. A party is ‘likely’ to be in competition with another if there is a possibility of competition that is not remote.45 7. Criminal ‘fault’ elements Making a CAU containing a cartel provision and giving effect to a CAU containing a cartel provision is prohibited as both a civil wrong and a criminal offence. In both cases the cartel provision is defined in the same way, but in relation to the criminal offences an additional ‘fault element’ must be proven. In particular, it is necessary that the accused had knowledge or belief that the CAU contained a cartel provision.46 The Criminal Code Act 1995 (Cth) provides that a person has ‘knowledge’ if ‘he or she is aware that it exists or will exist in the ordinary course of events’.47 ‘Belief’ is not specifically defined, but has been interpreted as meaning something less than actual knowledge.48 It is possible to be found guilty of a cartel offence even if other parties have been acquitted, unless a finding of guilt would be inconsistent with their acquittal.49 8. Other anticompetitive practices In addition to specific cartel provisions, Australian law prohibits CAUs which have the purpose, effect or likely effect of substantially lessening competition. The prohibition attracts civil penalties only. It is not restricted to conduct between competitors and so may capture both horizontal and vertical arrangements. As a result, there is considerable overlap with the specific cartel laws, but the general prohibition has the potential to capture a greater range of cartel conduct, including conduct for which exemptions to the per se prohibition apply, including joint venture conduct, and conduct for which it is not possible to establish the ‘competition condition’. Despite its apparent breadth, concern that CAU has been interpreted restrictively, in particular by requiring a ‘commitment’ to act by at least one party, has led to calls to expand the scope of the prohibition. Following unsuccessful attempts to capture a broader range of conduct,50 a prohibition on anticompetitive concerted practices was introduced in 2017,51 drawing heavily from the European experience.

Norcast S.ár.L v Bradken Limited (No 2) [2013] FCA 235 [259]. Sections 45AF(2) and 45AG(2) CCA and Criminal Code Act 1995 Schedule 1 (Australia) (‘Criminal Code’) s 5.3. 47 Criminal Code, s 5.3. 48 George v Rockett (1990) 170 CLR 104, para 14; see also S. Meacock and T. Kearney, ‘Criminal Cartel Conduct: A Brief Survey of Domestic and International Criminal Cartel Enforcement Activity’ (2017) 25 AJCCL 53, 54. 49 Section 45AH CCA. 50 See, e.g., Australian Treasury, ‘Meaning of “Understanding” in the Trade Practices Act 1974’ (Discussion Paper, 2009); and the price signalling legislation (2012–2017) introduced by the Competition and Consumer Amendment Act (No 1) 2011 and repealed by Competition and Consumer Amendment (Competition Policy Review) Act 2017 (Cth), Schedule 3 following a recommendation by the Harper Committee, which had concluded that it was not fit for purpose; Harper Report (n 3) 59–60 (rec 29). 51 Competition and Consumer Amendment (Competition Policy Review) Act 2017 (Cth), Schedule 3. 45 46

482  Research handbook on cartels Although ‘concerted practice’ is not defined in the legislation, the Explanatory Memorandum states that a ‘concerted practice is any form of cooperation between two or more firms (or people), or conduct that would be likely to establish such cooperation, where this conduct substitutes, or would be likely to substitute, cooperation in place of the uncertainty of competition’.52 It is not essential that parties act in the same manner, in the same market or at the same time and the intention is to prohibit conduct falling short of a CAU.53 The ACCC has also released guidelines on concerted practices,54 which refer to the concept of concerted practices as involving ‘communication or cooperative behaviour that does not require all of the elements of an understanding but involves more than a person independently responding to market conditions’.55 The ‘degree of uniformity of purpose or action’ will be relevant though not determinative,56 it being clear that something more than mere parallel behaviour will be required.57 There have not yet been any concerted practices cases testing this new law, but the ACCC hopes that it will overcome some of the challenges it has confronted proving agreement in cartel cases.58 Nevertheless, the requirement to prove a purpose or effect or substantially lessening competition will significantly limit its scope. B.

New Zealand

1. Cartel prohibition Just as the Trade Practices Act represented a fundamental overhaul of competition legislation in Australia, so too did the Commerce Act when introduced in New Zealand in 1986. The Commerce Act was modelled largely on Australia’s legislation59 but benefits from being ‘largely straightforward and concise’60 when compared with its Australian counterpart, including in relation to its cartel provisions. Dedicated cartel provisions were introduced into the Commerce Act in 2017 and criminal cartel offences were introduced in 2021 to supplement the civil regime.61 Prior to the dedicated cartel laws, price fixing was effectively prohibited through a deeming provision, in much the same way as in the Australian law. Despite the change in the law which now describes cartel 52 Competition and Consumer Amendment (Competition Policy Review) Bill 2017 (Cth) (Explanatory Memorandum) para 3.19. 53 ibid paras 3.20-3.21. See generally R. Nicholls and D. Kayis, ‘Concerted Practices Contested: Evidentiary Thresholds’ (2017) 25 CCLJ 128; C. Davies and L. Wainscoat, ‘Not Quite a Cartel: Applying the New Concerted Practices Prohibition’ (2017) 25 CCLJ 173; M. Gvozdenovic, ‘Concerted Practices and Statutory Interpretation: An Affirmation of the Jurisprudence on “Contracts, Arrangements and Understandings”’ (2019) 26 CCLJ 213; and L. Foster and H. Kaci, ‘Concerted Practices: A Contravention Without a Definition’ (2018) 26 CCLJ 1. 54 ACCC, Guidelines on Concerted Practices (August 2018) (‘ACCC Concerted Practices Guidelines’). 55 ibid para 1.2. 56 ibid [3.4]. 57 ibid [3.6]. 58 See, e.g., ACCC, ‘Full Federal Court Dismisses ACCC’s Appeal in Australian Egg Corporation Case’ (Media release, 25 September 2017); and ACCC v Australian Egg Corporation Ltd [2017] FCAFC 152. 59 R. Ahdar, The Evolution of Competition Law in New Zealand (Oxford University Press, 2020) 90. 60 B. Fisse, ‘The Proposed NZ Anti-Cartel Law a Key-Point Comparison’ (2013) 28(10) CCCLN 156, 166. 61 Commerce (Criminalisation of Cartels) Amendment Act 2019 (NZ).

Australia and New Zealand  483 conduct in more detail, the NZCC has stated that it does not consider it to represent a fundamental change to the type of cartel conduct previously captured under the legislation.62 The cartel laws prohibit a person entering into a contract or arrangement, or arriving at an understanding, containing a cartel provision or giving effect to a cartel provision.63 A cartel provision is defined as a CAU having the purpose, effect or likely effect of price fixing, restricting output or market allocation. Each of these forms of conduct are defined with greater granularity, in similar (though simpler) terms to their Australian counterpart, including incorporating a requirement that two or more parties to the CAU be engaged in competition in relation to the relevant conduct. Notably, all forms of cartel conduct are prohibited if purpose, effect or likely effect can be established, there being no distinction between price fixing and other forms of conduct in this regard. It is also notable that there is no specific reference to bid rigging as a specified form of cartel conduct, although the NZCC has observed that it believes bid rigging is captured by the other prohibitions.64 As in Australia, the terms ‘contract, arrangement or understanding’ involve degrees of formality. Arrangements or understandings are intended to catch informal agreements, including ‘a wink and a nod’,65 provided there is a ‘meeting of the minds’66 and a ‘commitment’ to act in a particular way67 and not mere conscious parallelism.68 As in Australia, mutuality of obligation is not required,69 nor is any moral obligation required.70 In this respect, a party should be ‘held to be a party to an arrangement if they give the appearance of agreeing to be a party (even by silence) and thereby deliberately encourage others to enter into an arrangement, even if they themselves have no intention of abiding by it’.71 What is required is consensus and an expectation that at least one person will act or refrain from acting in the manner envisaged by that consensus.72 Importantly, and in contrast to the approach adopted in Australia, whether there is an agreement is determined objectively, by reference to what a reasonable person would have thought was happening.73

62 New Zealand Commerce Commission, Competitor Collaboration Guidelines (January 2018) 2 (‘Competitor Collaboration Guidelines’). 63 Section 30 Commerce Act. 64 Commerce Commission New Zealand, ‘The Commerce Act: Cartel Conduct’ (Fact Sheet, April 2021) 4. 65 See Ahdar (n 59) 91. 66 New Zealand Apple and Pear Marketing Board v Apple Fields Ltd [1991] 1 NZLR 257, 216. 67 See J. Land, ‘Clarifying New Zealand Competition Law: Establishing “Arrangements” between Competitors, the “Controlling” of Price, and Anti‑Competitive “Purpose” after Lodge’ (2019) 25 New Zealand Business Quarterly 255. 68 Commerce Commission v Lodge Real Estate [2018] NZCA 523, para 68. 69 Giltrap City Ltd v Commerce Commission [2004] 1 NZLR 608, para 15. 70 Commerce Commission v Lodge Real Estate [2018] NZCA 523, para 67, cited in Ahdar (n 59) 96. 71 Commerce Commission v Giltrap City Ltd (2001) 10 TCLR 190 (HC) [66], cited in Commerce Commission v Lodge Real Estate Ltd [2018] NZCA 523, para 65. See also Ahdar (n 59) 94. 72 Giltrap City Ltd v Commerce Commission [2004] 1 NZLR 608, para 17, cited in Ahdar (n 59) 94. 73 Ahdar (n 59) 92. See e.g. Commerce Commission v Caltex NZ Ltd (1999) 9 TCLR 305, 310 (HC); and Giltrap City Ltd v Commerce Commission [2004] 1 NZLR 608, paras 23 and 37 (CA).

484  Research handbook on cartels 2. Criminal elements A person commits an offence if they enter into or give effect to a CAU containing a cartel provision in contravention of Section 30 and they intend at the time to engage in price fixing, restricting output or market allocating.74 3. Other anticompetitive agreements As in Australia, the Commerce Act contains a more general prohibition on entering into or giving effect to anticompetitive agreements.75 This was previously coupled with a deeming provision in relation to price fixing, which effectively made price fixing per se prohibited, which was repealed when the dedicated cartel law was introduced.

III.

EXEMPTIONS, EXCEPTIONS AND AUTHORIZATION

In addition to general exemptions, such as those relating to export cartels,76 both Australia and New Zealand have introduced specific exceptions from cartel conduct and both provide the opportunity for otherwise contravening conduct to be authorized on public benefit grounds. A. Australia 1. Specific exemptions and anti-overlap provisions The most significant exception from Australian cartel laws relates to joint ventures. Cartel provisions in CAUs that are for the purpose of a joint venture to produce goods or supply or acquire goods or services and which are reasonably necessary for the joint venture will not be captured by the cartel laws, provided the joint venture is not carried on for the purpose of substantially lessening competition.77 Joint ventures remain subject to the general prohibition on anticompetitive agreements. A further exemption from the cartel prohibitions applies for collaborative acquisitions. The exemption will operate insofar as a CAU containing a cartel provision has the purpose, effect or likely effect of price fixing and either it relates to the price for goods or services to be collectively acquired or is for the joint advertising of a price for the resupply of goods or services collectively acquired.78 Anti-overlap provisions mean that the cartel prohibitions and offences will not apply where certain other prohibitions capture the same conduct. Consequently, for example, where conduct constitutes resale price maintenance it will not also contravene the cartel provisions.

Section 82B(1) Commerce Act. Section 27 Commerce Act. 76 Section 51(2)(g) CCA and Section 44 Commerce Act. Other general exemptions can be found in s 51 of the CCA and Sections 44 and 44A of the Commerce Act; there is some variation between jurisdictions, but they generally include partnership arrangements, employment arrangements relating to restrictions on the work a person may engage in during or after termination their contract, agreements relating to other employment conditions, sale of business restrictions relating to protection of the goodwill of a business, certain IP compliance agreements (in NZ) or agreements only between related entities and export arrangements. 77 Section 45AO CCA (criminal cartel offences) and Section 45AP CCA (civil prohibitions). 78 Section 45AU CCA. 74 75

Australia and New Zealand  485 Importantly, the anti-overlap exceptions apply only insofar as the conduct is captured by the more specific prohibitions; to the extent that it is not, it may still be caught by the cartel provisions.79 Finally, contracts, arrangements or understandings between related bodies corporate do not attract cartel prohibition.80 2. Authorization, notification and class exemption Where a corporation is part of a small business81 collective bargaining group it may notify the ACCC of proposed collective bargaining arrangements. Provided the ACCC does not object within 14 days, the notice will stand and will provide protection against contravention of the cartel laws for three years, unless extended or unless withdrawn or revoked within that time.82 The ACCC may only object if it determines that there is no net public benefit arising from the conduct.83 The ACCC has indicated that benefits it generally accepts as likely to rise from collective bargaining include increased input into contracts, transaction cost savings and improvements in information.84 Cartel conduct may also be authorized by the ACCC85 where the ACCC is satisfied the conduct will result in a net public benefit.86 Unlike the simpler notification process, there are no financial thresholds or limits on the type of conduct that can be authorized. Despite various procedural safeguards, the authorization process allows substantial flexibility. During the COVID-19 pandemic the ACCC experienced a significant increase in the volume of authorization applications for proposed competitor collaborations and granted a similarly unprecedented number of ‘interim’ authorizations, within days of application.87 The ACCC also has the power to determine class exemptions where satisfied that the conduct is of a kind that would not be likely to have the effect of substantially lessening competition or would result in a public benefit that would outweigh the detriment that would result from the conduct.88 The first collective bargaining class exemption came into operation on 3 June 2021 and allows eligible small businesses to collectively bargain without contravening

79 Norcast S.ár.L v Bradken Limited (No 2) [2013] FCA 235. The anti-overlap provisions include s 45AQ CCA (resale price maintenance), s 45AR CCA (exclusive dealing), s 45AS (dual listed companies), s 45AT CCA (mergers). 80 Section 45AN CCA. 81 Small business is defined by reference to financial thresholds: s 93AB CCA. 82 See Part VII, Division 2, CCA, in particular 93AB. See further s 45AL CCA. 83 Sections 93AC(1) and (2) CCA. 84 ACCC, Small Business Collective Bargaining: Notification and Authorisation Guidelines (December 2018) 7. For examples of notifications that have been allowed to stand see National Association of Charitable Recycling Organisations (Charitable Recycling Australia) (Notification Number CB10000478, 15 April 2021); and Tasmanian Farmers and Graziers Association (Notification Number CB10000476, 10 February 2021). 85 ACCC, Guidelines for Authorisation of Conduct (Non-Merger) (March 2019). 86 Sections 88, s 90(7)(b) and s 90(8) CCA. See also Section 45AM CCA. 87 ACCC, ‘Competition Exemptions in the Time of COVID-19’ (Media Release, 15 April 2021); and ACCC, COVID-19-Related Authorisations (April 2021). See also D. Gray, ‘ACCC Authorisations Keep Industries Afloat during COVID-19’ (In Competition, King&Wood Mallesons, 17 July 2020). 88 Section 95AA CCA.

486  Research handbook on cartels the law.89 In order to benefit from the exemption a business must first provide notice to the ACCC. B.

New Zealand

When introducing the specific prohibition of cartel conduct in 2017, New Zealand also introduced three key exceptions designed to avoid overreach: collaborative activities, vertical supply contracts and joint buying agreements. Where these exceptions are relied upon, it is for the defendant to prove on balance of probabilities.90 1. Collaborative activity exemption and clearance The collaborative activities exception provides that the prohibition of price fixing and output restriction does not apply to a person in relation to a cartel provision if, at the time of entering into the agreement, the person and one or more other parties to the CAU were involved in collaborative activities and the cartel provision was reasonably necessary for the purposes of that activity.91 Collaborative activities mean activities carried on in cooperation between two or more persons where the dominant purpose is not to lessen competition between them.92 Competitors wishing to engage in collaborative actions who desire certainty about whether their conduct would benefit from the exemption can apply for a clearance, which, if granted, will mean conduct does not breach the cartel prohibition.93 The NZCC has issued guidance in relation to the operation of this exemption and the associated clearance regime.94 The collaborative activities exemption is broader than the Australian joint venture exemption and avoids some of the complexity and limitations of that exemption.95 2. Vertical supply contracts The cartel prohibition does not apply to certain vertical supply agreements. In particular, it does not apply if ‘the contract is entered into between a supplier or likely supplier of goods or services and a customer or likely customer of that supplier’ and the cartel provision ‘relates to the supply or likely supply of the goods or services to the customer or likely customer’. This includes provisions relating to ‘the maximum price at which the customer or likely customer may resupply the goods or services’. The exemption only applies where the cartel provision ‘does not have the dominant purpose of lessening competition’ between two or more of the parties to the contract.96 A similar exemption was proposed in Australia, but has not yet been introduced.97 As a result, a range of vertical supply restrictions between suppliers who might be in compe 91 92 93 94 95 167. 96 97 89 90

See ACCC, Collective Bargaining Class Exemption: Guidelines (June 2021). Section 80(2C) Commerce Act. Section 31 Commerce Act. Section 31(4) Commerce Act. See NZCC Competitor Collaboration Guidelines (n 62). Section 65A Commerce Act. See also NZCC Competitor Collaboration Guidelines (n 62). NZCC Competitor Collaboration Guidelines (n 62). See B. Fisse, ‘The Proposed NZ Anti-Cartel Law: A Key Point Comparison’ (2013) 28(10) CCLN Section 32(1) Commerce Act. Harper Report (n 3) 364–65.

Australia and New Zealand  487 tition or potential competition with their customers risk being captured by the per se cartel prohibitions.98 3. Joint buying and promotion agreements The third broad exemption provides that a provision in a CAU will not have the purpose, effect or likely effect of price fixing if it relates to certain joint buying and joint advertising arrangements.99 4. Authorization As in Australia, the NZCC can authorize agreements that might otherwise contravene the general prohibitions on anticompetitive conduct.100 Although it is not possible to directly seek authorization for cartel conduct, where the relevant conduct would be captured by both the general prohibition on anticompetitive agreements and the more specific cartel law, authorization granted in relation to the general prohibition will have the effect of protecting parties against action under the specific cartel prohibition.101 Authorization is granted on public benefit grounds, where the NZCC is satisfied the agreement will be likely to result in a public benefit that would outweigh the lessening of competition.102 Unlike the position in Australia, authorization may be granted even after the conduct has commenced.103 In 2020, temporary amendments were made to the Commerce Act to allow provisional authorization, faster processes and fee waivers in order to facilitate faster responses to companies seeking COVID-19 related authorizations.104

IV.

INVESTIGATION AND ENFORCEMENT

A.

Investigatory and Enforcement Bodies

In Australia the investigatory body is the ACCC, which is also responsible for public civil enforcement through the judicial system. Criminal matters are prosecuted by the Commonwealth Director of Public Prosecutions (‘CDPP’) and must be proved beyond reasonable doubt. The CDPP and ACCC have entered into a Memorandum of Understanding

See, e.g., Australian Competition and Consumer Commission v Flight Centre Travel [2016] HCA 49, involving dual distribution: see J. Clarke, ‘Flight Centre: Australian High Court Finds Agent Competed with Principal and Breached Cartel Laws’ (Competition Policy Blog, 9 January 2017); and E. Avery, C. Coorey and G. Rahman, ‘ACCC Win against Flight Centre in High Court Raises Competition Compliance Risk for Dual Distribution Models’ (Knowledge, 14 December 2016). 99 Section 33 Commerce Act. 100 See Sections 58(1) and (2) Commerce Act in relation to the general prohibition on anticompetitive conduct. See also NZCC, Authorisation Guidelines (December 2020). 101 See NZCC, Authorisation Guidelines (December 2020) 6–7 and ss 58A and 59 Commerce Act. 102 Section 61(6) Commerce Act. 103 Section 59A Commerce Act. Conduct engaged in prior to the authorization may still be found to have contravened the Act: s 59B Commerce Act. 104 See COVID-19 Response (Further Management Measures) Legislation Act 2020 (NZ) and NZCC, Guidelines on Approach to Authorisations under the COVID-19 Response (Further Management Measures) Legislation Act (May 2020). 98

488  Research handbook on cartels regarding serious cartel conduct,105 setting out the respective roles of each and factors relevant to a decision to investigate and prosecute. The Federal Court of Australia has exclusive jurisdiction to hear civil cartel matters and has concurrent jurisdiction with the states and territories in relation to criminal cartel offences, although in practice these matters are heard in the Federal Court, either directly or following committal proceedings.106 Matters may be appealed to the Full Court of the Federal Court and then, by leave, to the High Court. In New Zealand, the Commerce Commission is responsible for the investigation and public civil enforcement of cartel contraventions. In relation to criminal cartel conduct it is the Solicitor-General who is responsible for oversight of all public prosecutions107 and must act independently of the investigation agency.108 In practice, competition matters commence in the High Court and may be appealed to the Court of Appeal and then the Supreme Court.109 B.

Investigatory Powers

The ACCC’s investigatory powers are contained in Part XII of the CCA. The key provision, Section 155, contains compulsory information-gathering powers. This allows the ACCC to obtain information, documents and other evidence, including requiring evidence to be provided under oath or affirmation, in relation to its investigation of matters that might contravene the CCA. Although Section 155 cannot be used to require a person to produce a document disclosing information that is the subject of legal professional privilege,110 self-incrimination is not an excuse for failing to provide the information sought.111 However, any information or evidentiary material gathered pursuant to a Section 155 notice is not admissible in criminal cartel proceedings against individuals.112 Where a Section 155 notice requires the production of documents, it will not apply to the extent that a person proves that they are not capable of complying113 or have conducted a ‘rea-

Memorandum of Understanding between the Commonwealth Director of Prosecutions and the Australian Competition and Consumer Commission regarding Serious Cartel Conduct (15 August 2014) (‘MOU’). 106 In states and territories with committal proceedings in civil matters, these committals have typically been heard in the relevant state or territory courts before the matter is transferred to the Federal Court. 107 Criminal Procedure Act 2011 (NZ), s 185. 108 Criminal Procedure Act 2011 (NZ), s 193. See Crown Law, Guidelines on Immunity from Prosecution for Cartel Offences (April 2021) (NZ) [80] 109 The District Court sits below the High Court, but has limited jurisdiction. 110 Section 155(7B) CCA. 111 Section 155(7) CCA. 112 Section 155(7) CCA. Note that the privilege does not apply to corporations, so that information furnished under a s 155 notice may be used in criminal proceedings against a corporation. 113 Section 155(5A). 105

Australia and New Zealand  489 sonable search’ and are not aware of the documents.114 Guidelines on the use of these powers have been published by the ACCC to assist those confronted with the notices.115 Serious penalties attach to non-compliance with Section 155 or knowingly providing false or misleading information, including up to two years’ imprisonment.116 The ACCC has proactively sought penalties for non-compliance.117 In addition to administrative notices under Section155, the ACCC may obtain a search warrant where a magistrate is satisfied that there are reasonable grounds for suspecting that there is evidential material on the premises, or that there may be within 72 hours.118 For the purposes of seeking and carrying out a search warrant, the ACCC Chair may appoint an inspector,119 who must carry an identity card whenever exercising powers as an inspector.120 Where granted, a search warrant will authorize entry, search and seizure of evidential material, the making of copies of evidential material, operating electronic equipment to see whether evidential material is accessible and taking equipment and material onto the premises to use for any of the above purposes.121 A person executing a search warrant may also authorize a member of the Australian Federal Police, a member of staff or a consultant to assist in executing the warrant.122 During the execution of a search warrant, an executing officer or assistant may require a person at the premises to answer questions or produce relevant evidential material.123 Failure to do so is an offence.124 As withSection155 notices, the potential for self-incrimination is not an excuse for not answering a question or producing evidential material, but any answer given will not be admissible in criminal cartel proceedings against an individual.125 An occupier of a premises who is present during the search is entitled to observe the search being conducted, but will lose that right if they impede the search.126 In the absence of a search warrant, an inspector may enter a premise and exercise the same search and seizure powers described above127 if the ACCC Chair or Deputy Chair ‘has reasonable grounds for suspecting that there may be evidential material on the premises’ and the 114 Section 155(5B) CCA. See also s 155(6) providing guidance as to what may constitute a reasonable search. The ‘reasonable search’ defence was introduced in November 2017 by the Competition and Consumer (Competition Policy Review) Act 2017 (Cth). 115 ACCC, ACCC Guidelines – Use of Section 155 Powers (June 2019). 116 Section 155(6A) CCA. This provides for imprisonment of up to two years or a fine not exceeding 100 penalty units for individuals (the equivalent of AU$22,200) (Crimes Act 1914, Section 4AA and Attorney-General, Notice of Indexation of the Penalty Unit Amount (14 May 2020)); the amount of a ‘penalty unit’ is indexed in accordance with a formula set out in the Crimes Act 1914 (Cth), Section 4AA(4)) or, in the case of companies, for a fine of five times the amount for individuals: Crimes Act 1914 (Cth), s 4B(3). 117 See I. Wylie, ‘When Too Much Power Is Barely Enough – S155 of the Trade Practices Act and Noblesse Oblige’ (2009) 16 CCLJ 314, 330; and ACCC v Rana [2008] FCA 374. 118 Section 154X CCA. 119 Section 154B CCA. 120 Section 154C CCA. 121 Section 154G CCA. 122 Section 154K CCA. 123 Section 154P CCA. 124 Section 154R CCA. 125 Sections 154R(3) and (4) CCA. 126 Section 154P CCA. 127 Section 154E CCA.

490  Research handbook on cartels inspector ‘obtains the consent of the occupier of the premises’,128 provided the inspector first notifies the occupier of their right to refuse consent.129 In New Zealand, the NZCC has power to require a person to supply information or documents or to give evidence (Section 98 notice).130 It is an offence to refuse or fail to comply with a Section 98 notice without reasonable excuse or to provide knowingly false or misleading information or evidence,131 with individual offenders subject to a fine not exceeding NZ$100,000 and in other cases a fine not exceeding NZ$300,000.132 The NZCC may also authorize an employee to search under a warrant for the purpose of ascertaining whether there has been a contravention of the Act.133 Search warrants may be issued by an issuing officer134 if there are ‘reasonable grounds to believe that it is necessary for the purpose of ascertaining whether or not a person has engaged in or is engaging in conduct that constitutes or may constitute a contravention of this Act’.135 The search warrant will include details of what may be seized and an explanation of any available privileges.136 It is an offence to ‘resist, obstruct, or delay’ the NZCC from acting pursuant to a Section 98A search warrant. 137 C. Adjudication In Australia, the adjudication of civil competition law matters, including cartel matters, is the exclusive domain of the federal court system. Civil competition actions are initiated before a single judge of the Federal Court, with the possibility of appeal to the full bench of the Federal Court and then (with leave138) to the High Court of Australia, which sits at the peak of Australia’s judicial system. In the case of criminal matters, the Federal Court and state and territory courts have concurrent jurisdiction to hear a prosecution for indictable cartel offences,139 with the CDPP determining which court will hear the trials. To date the CDPP has prosecuted all cartel matters before the Federal Court and it is anticipated that trend will continue.140 However, as there is no federal system for committal hearings, it is likely that a variety of state-based charge Section 154D CCA. Section 154D(3) CCA. 130 Section 98(1) Commerce Act. 131 Section 103(1) and (4) Commerce Act. 132 Section 103(4) Commerce Act. 133 Section 98A Commerce Act. 134 A judge or other person authorized to be an issuing officer: Search and Surveillance Act 2012 (NZ) s 3. 135 Section 98A(2) Commerce Act. 136 Search and Surveillance Act 2012 (NZ) s 103. 137 Section 103(1)(c) Commerce Act. 138 Section 35(2) Judiciary Act 1903 (Cth). 139 Section 163(1) CCA. Criminal jurisdiction was conferred on the Federal Court by the Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2009 (Cth). 140 To date, following committal in state courts, criminal cartel proceedings have been transferred to the federal court for trial. In CDPP v Nippon Yusen Kabushiki Kaisha [2017] FCA 876 and CDPP v Wallenius Wilhelmsen Ocean AS [2021] FCA 52 (WWO) an indictment was presented by the CDPP directly to the Federal Court, with no charge or committal hearing. In the other shipping case, CDPP v Kawasaki Kisen Kaisha Ltd [2019] FCA 1170, the charges were initially contested at a committal in the Local Court of New South Wales, but later committal was waived and a guilty plea entered. 128 129

Australia and New Zealand  491 and committal procedures will continue to operate at the initial stages of contested criminal proceedings.141 Competition law litigation in New Zealand typically commences in the High Court, with the possibility of progression on appeal to the Court of Appeal and subsequently to the Supreme Court of New Zealand, which sits at the peak of the judicial system. Importantly, the Commerce Act includes provision for lay members to sit on the High Court in civil competition matters.142 These members must be qualified by virtue of their ‘knowledge or experience in industry, commerce, economics, law, or accountancy’.143 At least one lay member, together with a judge, is usually ‘necessary to constitute a sitting of the court’,144 and a judge may appoint additional lay members.145 A decision of the court requires a majority, including the judge, and where there is more than one judge, a majority of judges.146 In the event that the number of members on the bench is even, the decision of the judge or majority of judges is the decision of the court.147 D.

Private Enforcement

In both Australia and New Zealand, individuals and corporations suffering loss as a result of cartel conduct may bring civil action for damages.148 This includes actions against those contravening and those aiding, inducing or knowingly concerned in contravention of cartel provisions.149 In Australia actions for damages must be brought within six years from the date of contravention and are limited to actual damage suffered.150 Findings of fact by a court or admissions made in other proceedings are prima facie evidence that can be used in proceedings for damages.151 Class actions are possible and, where the relevant criteria are satisfied, they operate on an ‘opt out’ basis.152 The ACCC also has the power to bring representative proceedings on behalf of those likely to suffer loss.153 In New Zealand, action may be commenced within three years of discovery or when it ought reasonably to have been discovered, and in any event no more than ten years later.154 Both actual and exemplary damages are available.155 There is no codified class action system See Judiciary Act 1903 (Cth) s 68(2) See generally Wigney (n 11) 6. Sections 77 and 78 Commerce Act. 143 Section 77(2) Commerce Act. 144 Section 77(9) Commerce Act. One should note that judge sitting alone can make certain orders, including orders that are not opposed or where substantially a question of law only: Section 77(14). 145 Section 78 Commerce Act. 146 Section 77(10) Commerce Act. 147 Section 77(11) Commerce Act. 148 Section 82 CCA; and Section 83 Commerce Act. 149 Sections 75B and 82 CCA; and Section 82 Commerce Act. 150 Section 82 CCA. 151 Section 83 CCA. 152 Section 33C Federal Court of Australia Act 1976 (Cth). See also L. Edgar, ‘Cartel Class Actions in Australia: Risks vs Rewards’ (2019) 27 AJCCL 183. 153 Section 87(1B) CCA; this has not been a feature of ACCC public competition enforcement to date. 154 Section 82(2) Commerce Act. 155 Section 82A Commerce Act. See also J. Hambleton, A. Payne and A. Percy, ‘The Cartels and Leniency Review: New Zealand’, in J. Buretta and J. Terzaken (eds), The Law Reviews (Tom Barnes, March 2021) Chapter 18. 141 142

492  Research handbook on cartels in New Zealand,156 but representative actions on an ‘opt in’ basis are possible where initiated by interested parties.

V.

PUBLIC CIVIL ENFORCEMENT

In both Australia and New Zealand pecuniary penalties and other orders are available where contraventions of the civil cartel provisions are established. The level of penalty for cartel conduct in both countries is tiered, with a maximum pecuniary penalty for a corporation for each act or omission contravening the cartel laws, set at the greatest of: ● $10 million; ● three times the benefit obtained from the conduct; or ● if benefit cannot be ascertained, 10 per cent of the annual turnover of the body corporate and related bodies corporate for the 12-month period prior to the conduct occurring (in Australia) or in each accounting period in which the contravention occurred (in New Zealand).157 For individuals the maximum penalty is set at $500,000.158 In both countries liability extends not only to corporations and individuals who directly contravene a cartel provision, but also those who attempt to contravene the provision; aid, abet, counsel or procure others to contravene the provision; induce or attempt to induce others to contravene the provision; conspire with any others to contravene the provision; or were ‘in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by any other person’ of a cartel provision.159 The primary objective of corporate financial penalties in Australia and New Zealand is deterrence,160 and while pecuniary penalties can and have been imposed on individuals, corporate penalties remain the principal sanction in both countries. In the majority of cases, respondents admit liability and agree with the ACCC or NZCC about the penalty to be submitted to the court.161 It is ultimately for the court to determine the penalty, but the courts will generally not depart from the penalty proposed unless it is considered to be outside an acceptable range. In both countries there are restrictions on corporations indemnifying individuals against pecuniary penalties and costs.162

See Law Commission, ‘Class Actions and Litigation Funding’ (Issues Paper 45, December 2020). Section 76(1A) CCA; Section 80(2B) Commerce Act. The terminology used is slightly different in each Act. 158 Section 76(1B) CCA; 80(2B) Commerce Act. 159 Section 76(1) CCA; s 80(1) Commerce Act. 160 TPC v CSR Ltd [1990] FCA 521, para 40; and Commerce Commission v Herberts Bakery Ltd [1991] 2 NSLR 726, 728. 161 C. Beaton-Wells and J. Clarke, ‘OECD-Inspired Reform: The Case of Corporate Fines for Cartel Conduct’, in N. Charbit and E. Ramundo (eds), Frédéric Jenny: Standing Up for Convergence and Relevance in Antitrust (Institute of Competition Law, 2018) 228; and Ahdar (n 59) 272. See also Commerce Commission v Visy Board (NZ) Ltd [2013] NZHC 2097, para 34. 162 Section 77A CCA; s 80A Commerce Act. 156 157

Australia and New Zealand  493 In addition to pecuniary penalties, injunctions may be awarded restraining a party from engaging in contravening conduct163 and orders may be made disqualifying individuals from managing corporations.164 A. Australia The level of pecuniary penalty for cartel contraventions in Australia has been the subject of considerable debate in recent years.165 Although civil penalties for corporate conduct have increased significantly over the past decade, they remain low by international standards, with the highest penalty awarded being AU$46m against Japanese car parts manufacturer Yazaki in 2018.166 In 2018 an OECD report into pecuniary penalties for competition law infringements in Australia found that both the maximum and average penalties imposed by Australian courts are significantly lower than other OECD jurisdictions.167 This is, at least in part, a result of the methodology applied in reaching penalties. Unlike many comparable jurisdictions which adopt a structured methodology for calculating fines, commencing with a base fine and then considering aggravating and mitigating factors, Australian courts adopt an ‘instinctive synthesis’ approach to applying penalties.168 This takes account of a variety of factors and allows a broad discretion in setting an appropriate penalty. The factors to be considered when determining penalties include: the size and financial position of the contravening company; whether the contravention was intentional; the period over which the contravention extended; whether the contravening conduct was systematic, deliberate or covert; whether senior management were aware of or involved in the contravention; whether the contravening company had a corporate culture conducive to compliance with the Act; whether the company co-operated with the ACCC; whether the contravener has engaged in similar conduct in the past; and the effect on the functioning of the market and other economic effects of the conduct.169

The list is not exhaustive, and the judiciary has cautioned against approaching them in a ‘regimented or formulaic way’, which would ‘impermissibly constrain […] a broad evaluative judgment’.170

Section 80 CCA; s 81 Commerce Act. Section 86E CCA, s 80C Commerce Act. 165 See further C. Beaton-Wells and J. Clarke, ‘Corporate Financial Penalties for Cartel Conduct in Australia: A Critique’, in P. Hanrahan and A. Black (eds), Contemporary Issues in Corporate and Competition Law: Essays in Honour of Professor Robert Baxt AO (LexisNexis Butterworths, 2019) Chapter 6; and C. Beaton-Wells and J. Clarke, ‘Deterrent Penalties for Corporate Colluders: Lifting the Bar’ (2018) 37(1) University of Queensland Law Journal 107. 166 ACCC v Yazaki Corporation [2018] FCAFC 73. 167 OECD, Pecuniary Penalties for Competition Law Infringements in Australia (2018); see also ACCC, ‘OECD Finds Australian Competition Law Penalties Are Significantly Lower’ (Media Release, 26 March 2018). 168 For a detailed assessment see Beaton-Wells and Clarke (2019) (n 165) and OECD (n 167); see also ACCC (n 167). 169 ACCC v Visa Inc [2015] FCA 1020, para 82, drawing on the factors set out in TPC v CSR [1990] FCA 762, para 42. 170 ACCC v Visa Inc [2015] FCA 1020, para 83. 163 164

494  Research handbook on cartels B.

New Zealand

In New Zealand, unlike Australia, a pecuniary penalty must be ordered unless there is good reason for not making such an order.171 Nevertheless, as in Australia, New Zealand’s pecuniary penalties for cartel conduct have been criticized as being too low.172 The process for determining pecuniary penalty is to: ● determine the maximum penalty; ● establish an appropriate starting point that would achieve objectives of deterrence, taking into account relevant factors; and ● adjust that starting point for mitigating factors.173 When assessing penalties, consideration must be paid to all relevant matters, including the ‘nature and extent of any commercial gain’.174 Relevant factors are substantially the same as those considered in Australian penalty cases and include the importance and type of market, the nature and seriousness of the contravention, the role of the defendants in the contravention, whether the contravention was intentional, the degree to which it was initiated or condoned by senior management, the duration of the conduct, the potential commercial gain to the defendants and harm caused by the conduct, the market share of the parties, the size and resources of the defendant and consistency with other decisions.175 Mitigating factors include admissions, cooperation and the existence of corporate compliance programmes.176 Once criminal proceedings are brought the court must not order a pecuniary penalty in relation to the same conduct.177 Conversely, once civil proceedings for pecuniary penalties are determined, a person cannot be convicted of an offence for the same conduct.178 It is, however, possible to stay uncompleted proceedings for pecuniary penalties if criminal proceedings are started.179

VI.

PENALTIES: CRIMINAL PENALTIES

In both Australia and New Zealand cartel conduct constitutes an offence and may attract criminal penalties, both for individuals and for corporations. In both cases individuals may face fines or significant periods of incarceration; to date no individuals have been imprisoned for cartel conduct under Australian or New Zealand cartel laws. In Australia the criminal offences were introduced in 2009; in New Zealand cartel activity became a criminal offence in April 2021.180

Section 80(2) Commerce Act. Ahdar (n 59) 274 and 175. 173 Commerce Commission v Visy Board (NZ) Ltd [2013] NZHC 2097, para 35. 174 Section 80(2) Commerce Act. 175 Commerce Commission v Visy Board (NZ) Ltd [2013] NZHC 2097, para 39. 176 ibid para 60. 177 Section 80(2A) Commerce Act. 178 Section 79B(2) Commerce Act. 179 Section 79B(3) Commerce Act. 180 Commerce (Criminalisation of Cartels) Amendment Act 2019 (Royal Assent 8 April 2019). 171 172

Australia and New Zealand  495 A. Australia Australia introduced criminal penalties for cartel conduct in 2009, following lobbying by the ACCC and subsequent recommendations by an independent committee of inquiry.181 It is an offence for a corporation to make or give effect to a cartel provision182 and it is an offence to aid, abet, induce or otherwise be knowingly concerned in the offence.183 It is the CDPP (not the ACCC) that makes a determination about whether to prosecute in accordance with the Prosecution Policy of the Commonwealth;184 the ACCC retains the key investigatory role and refers serious cartel conduct to the CDPP for consideration.185 For individuals, cartel offences are punishable by up to ten years’ imprisonment and/or a fine not exceeding 2,000 penalty units (currently AU$444,000); for corporations the criminal fine is set at the same level as that applicable for civil contraventions. 186 When assessing the appropriate level of criminal penalty, the court will take account of the same factors considered for civil cartel penalties,187 as well as additional matters, including the need to ensure adequate punishment, set out in the Crimes Act.188 The differences between criminal and civil penalty proceedings require that caution is applied when seeking to utilize previous civil pecuniary penalty awards as a benchmark for appropriate penalties in criminal cases. In the first criminal cartel decision, Justice Wigney observed:189 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: […] 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.

In contrast to the common approach of proposing ‘agreed penalties’ in civil cartel cases, the prosecutor is not permitted to submit a particular penalty for consideration in criminal cartel matters.190

D. Dawson, J. Segal and C. Rendall, Review of the Competition Provisions of the Trade Practices Act (Commonwealth of Australia, Canberra, 2003) (‘Dawson Report’). 182 Sections 45AF and 45AG CCA. 183 Section 79(1) CCA. See, e.g., charges laid against individuals discussed in The Country Care Group Pty Ltd v Commonwealth Director of Public Prosecutions [2020] FCAFC 30. 184 CDPP, Prosecution Policy of the Commonwealth: Guidelines for the Making of Decisions in the Prosecution Process. 185 MOU (n 105) para 4.2. 186 Sections 45AF(3) and 45AG(3) CCA. 187 CDPP v Nippon Yusen Kabushiki Kaisha (2017) 254 FCR 235, para 220. 188 Crimes Act 1914 (Cth) s 16A. See also CDPP v Nippon Yusen Kabushiki Kaisha (2017) 254 FCR 235. 189 CDPP v Nippon Yusen Kabushiki Kaisha (2017) 254 FCR 235, para 289. 190 Barbaro v The Queen (2014) 253 CLR 58, paras 6–7; and CMB v A-G (NSW) (2015) 256 CLR 346, para 39. 181

496  Research handbook on cartels Australia’s first criminal cartel prosecution commenced in 2016191 and the first jury verdict was delivered in June 2021. In the absence of a guilty plea, for an individual to be convicted of a cartel offence it is necessary for a unanimous guilty verdict to be given by a jury.192 The first three criminal cartel matters to be decided in Australian courts all involved foreign corporate offenders who pleaded guilty. All three arose out of the global shipping cartel.193 The first contested criminal cartel case to reach trial, and the first involving an Australian company and related individuals, involved a regional family business. The CDPP alleged that Country Care, which supplied a range of ‘assistive technology products’ such as wheelchairs and walkers, had, together with its managing director and a former employee, attempted to induce competitors to make arrangements or arrive at an understanding involving price fixing.194 Charges were originally laid in February 2018, and it was more than a year before the matter was committed for trial, in March 2019. Further delays, including those related to the COVID-19 pandemic, resulted in the trial commencing two years later, in March 2021. Following a 12-week trial, the jury deliberated for less than four hours before acquitting the accused on all counts.195 Although the reasons for the verdict are unknown, the nature of the business charged and the complexity of the law was always going to prove a challenge for the first criminal cartel trial. In relation to complexity of the law it has been observed that those ‘responsible for the drafting of the cartel provisions clearly had a somewhat optimistic view of how juries might react to legislation of this nature. These provisions, drafted as they are, create a labyrinth which many lawyers would struggle to find their way through’.196 Additional challenges confronting the prosecution in this case were highlighted in media reports: Defense lawyers had a strong narrative: Rob Hogan, the former boilermaker from the small town of Mildura, was the big-picture thinker with a list of small-businesses across regional Australia willing to act as subcontractors on government tenders. What the prosecutors had was often mind-numbingly boring antitrust theory, which lawyer Oren Bigos parsed over three-and-a-half seemingly interminable days of what the court referred to as his ‘summing up’ – a misnomer if ever there was one.197

See Meacock and Kearney (n 48). Australian Constitution s 80 (interpreted to require a jury trial and to require a unanimous judgement: Cheatle v The Queen (1993) 177 CLR 541, para 23). 193 CDPP v Nippon Yusen Kabushiki Kaisha [2017] FCA 876; CDPP v Kawasaki Kisen Kaisha Ltd [2019] FCA 1170; and CDPP v Wallenius Wilhelmsen Ocean AS [2021] FCA 52. 194 Commonwealth Director of Public Prosecutions v The Country Care Group Pty Ltd (No 2) [2019] FCA 2200 (particularly paras 28–30). See further C. Caulfield, ‘Jury Finds Country Care Not Guilty in First Criminal Cartel Case against Australian Biz’ (Lawyerly, 2 June 2021). 195 See ACCC, ‘Country Care, CEO and Former Employee Acquitted of Criminal Cartel Offences’ (2 June 2021). See further L. Henning and J. Panichi, ‘Failure of Australia’s Country Care Prosecution May Prompt a Tactical Rethink’ (MLex, 2 June 2021); and M. Pelly, ‘ACCC Suffers Humiliating Loss in Country’s First Cartel Case’ (Australian Financial Review, 2 June 2021). 196 Weinberg (n 11) 17. See also M. Gordon, ‘Criminalisation of Cartel Conduct’ (2011) 34 Australian Bar Review 177. 197 Henning and Panichi (n 195). 191 192

Australia and New Zealand  497 It was also reported that Justice Bromwich, who presided over the case, ‘raised concerns with lawyers that some jury members were struggling to stay awake’ through the closing remarks.198 Criminal charges were laid in June 2018199 with respect to several banks and their executives, who were accused of cartel conduct involved in raising billions of dollars in capital. Those charges, however, were later dropped by the authorities. B.

New Zealand

In April 2021 a new cartel offence was included in the Commerce Act, following a long period of debate.200 An individual who commits a cartel offence is liable to imprisonment of up to seven years or a fine of up to $500,000, or both.201 Businesses are liable to a fine up to the same level as the civil fines available against business for cartel conduct.202 It is a defence to prosecution if at the time of the alleged conduct the defendant believed on reasonable grounds that one or more of the exceptions applied, provided the belief was not based on ‘ignorance, or mistake, of any matter of law’.203 The New Zealand Bill of Rights allows an accused to elect for a trial by jury,204 but in complex trials (those likely to run for more than four months) the prosecution may apply for a judge-alone trial.205 This significantly reduces the prospects of a jury trial in cartel matters. The cartel offences have not yet been tested.

VII.

LENIENCY AND IMMUNITY TOOLS

As is the case in most jurisdictions, New Zealand and Australia make use of leniency and immunity tools to encourage whistleblowing, compliance and cooperation. A. Australia The ACCC released a new immunity policy for cartel conduct in 2019.206 This does not extend to concerted practices or other anticompetitive conduct falling outside the specifically defined ‘cartel conduct’ provision.207 Broadly, civil immunity is available only to the first eligible party ibid. See ACCC, ‘Criminal Cartel Charges Laid Against ANZ, Citigroup and Deutsche Bank’ (Media Release, 5 June 2018); and ACCC, ‘ANZ, Citigroup and Deutsche Bank Committed for Trial in Federal Court on Criminal Cartel Charges’ (Media Release, 8 December 2020). 200 Commerce (Criminalisation of Cartels) Amendment Act 2019 (NZ). See also Ahdar (n 59) 112–15; Ministry of Economic Development, Cartel Criminalisation: Discussion Document (January 2010); and S. Schwoerer, ‘New Zealand and Cartel Criminalisation’ [2018] NZLJ 2019. 201 Section 82B(2) Commerce Act. 202 Section 82B(3) Commerce Act. 203 Section 82C Commerce Act. 204 New Zealand Bill of Rights Act 1990 s 24. See also Criminal Procedure Act 2011, s 50. 205 Criminal Procedure Act 2011 (NZ), s 102. 206 ACCC, ACCC Immunity and Cooperation Policy for Cartel Conduct: A Policy Document (October 2019). 207 See D. Kayis and R. Nicholls, ‘When the Carrot Resembles a Stick: The Exclusion of Concerted Practices from the ACCC’s Revised Immunity Policy’ (2020) 27 CCLJ 187. 198 199

498  Research handbook on cartels to disclose the cartel conduct; other parties may seek to cooperate with the ACCC to achieve a reduction in subsequent penalty. To qualify for conditional immunity a corporation must admit it is engaging in, or has engaged in, cartel conduct, be the first party to apply for immunity, must not have coerced others to participate in the cartel, must have ceased involvement or undertake to cease involvement in the cartel, must make admissions as a ‘truly corporate act’, must provide ‘full, frank and truthful disclosure’, must cooperate fully, must have entered into a cooperation agreement and must maintain and agree to maintain confidentiality with respect to its status as an immunity applicant and details of the investigation or subsequent proceedings.208 To maintain immunity cooperation must continue and final immunity may be achieved after resolution of any subsequent proceedings.209 Related entities and individuals may qualify for derivative conditional immunity.210 Similar criteria apply to individuals applying directly for immunity.211 Only the CDPP may offer immunity for criminal cartel conduct, but the CDPP and ACCC have reached agreement on procedures to facilitate granting immunity to cartel offences at the same time as immunity is granted for civil proceedings.212 Amnesty Plus is available when parties discover a second (unrelated) cartel while cooperating with the first and will take the form of a recommendation for a reduction in penalty.213 Individuals and corporations who do not qualify for immunity may nevertheless benefit from cooperation with the ACCC. In civil matters the ACCC will make submissions to the court relating to the extent and value of cooperation for purposes of setting an appropriate pecuniary penalty. In criminal matters the CDPP is not able to make submissions to the court regarding cooperation for purposes of imposing a cartel fine, but cooperation is a matter to be considered in sentencing214 and has attracted considerable discounts in criminal cases to date, including a 50 per cent discount in the first criminal cartel decision.215 B.

New Zealand

The NZCC is the primary point of contact for both criminal immunity and civil leniency and cooperation. It is only the Solicitor-General who can provide immunity in relation to criminal cartel conduct, but they do so on recommendation from the NZCC.216 In the case of criminal cartels, if the Solicitor-General grants immunity, it will undertake to stay any prosecution commenced in respect of the applicant’s involvement in the cartel.217 To qualify for immunity (criminal) or leniency (civil), an applicant must be the first to qualify for immunity, in relation to cartel conduct either of which the NZCC is not aware or

ACCC (n 206) para 23. ibid para 26. 210 ibid paras 29 and 32. 211 ibid para 36. 212 ibid para 41; and Prosecution Policy of the Commonwealth (n 184) Annexure B. 213 ACCC (n 206) Section H. 214 Crimes Act 1914 (Cth) s 16A. 215 CDPP v Nippon Yusen Kabushiki Kaisha [2017] FCA 876, para 299 (representing a AU$25m fine reduction). 216 Crown Law, Guidelines on Immunity from Prosecution for Cartel Offences (April 2021) (NZ) (New Zealand). 217 ibid para 7. 208 209

Australia and New Zealand  499 of which they are aware but do not have sufficient evidence to prosecute, and the applicant must be able to provide ‘valuable evidence that could not be reasonably obtained elsewhere’. The applicant must also have been a participant in the cartel conduct, admit participation, have ceased or confirm they will cease involvement, have not coerced others to participate, provide full and continuing cooperation and, in the case of corporate applicants, ‘makes admissions that it is liable for the cartel conduct, including due to the actions of its directors, officers, contractors, agents or employees’.218 Amnesty Plus may also be available for those who do not qualify for immunity or leniency in a cartel under investigation, but notify of participation in a separate cartel of which the NZCC is not aware.219 As in Australia, where a party does not qualify for immunity or leniency, they may still obtain concessions for cooperation.220

VIII. CONCLUSION The next few years will prove significant for cartel enforcement in Australia and New Zealand. In both there will be considerable attention directed towards the effectiveness of criminal cartel laws; in Australia because the first jury trials commenced in 2021, more than a decade after the introduction of criminal offences, and in New Zealand because of the recent introduction of criminal offences following many years of debate. The level of civil penalties for cartel contraventions will also continue to be closely watched. The effectiveness of Australia’s new concerted practices laws will also be under scrutiny and will no doubt be watched by New Zealand competition lawyers and law makers to assess their effectiveness at capturing a broader range of anticompetitive conduct between competitors that falls short of an agreement. In addition to monitoring recent changes, new challenges will continue to emerge, such as dealing with crisis cartels, most notably those brought about as a result of the COVID-19 pandemic, and the emerging challenges to enforcement and implications for policy arising through the increased utilization of algorithms and other AI technologies and the implications this may have for detecting and successfully prosecuting cartel conduct.221

ibid para 15; and NZCC, Cartel Leniency and Immunity Policy (April 2021) paras 33–42. NZCC (n 218) paras 113–17. 220 ibid paras 118–34. 221 See R. Sims, ‘The ACCC’s Approach to Colluding Robots’ (Speech, ‘Can Robots Collude?’, Conference, Sydney, 16 November 2017). See also B. Liu, ‘Algorithmic Tacit Collusion’ (2019) 25 New Zealand Business Law Quarterly 199, 199 (‘The accelerating application of algorithms and other AI technologies in the marketplace has raised concerns of possible tacit collusion among pricing algorithms’). 218 219

28. South America Juan David Gutiérrez1

I. INTRODUCTION On 7 September 2012, the Supreme Court of Chile confirmed the ruling of the Competition Court (‘TDLC’) that declared that two pharmacies had agreed to increase the prices of at least 206 medicines between December 2007 and March 2008.2 In the 300-page ruling the TDLC imposed the maximum fine established by the law at that time, a penalty equivalent to USD $20 million for each of the colluding companies.3 This case did not finish with the penalization of two members of the cartel. In February 2013, Chile’s consumer protection agency (‘SERNAC’) filed a lawsuit, joined by three consumer associations, against the pharmacies to claim the damages caused by the cartel against consumers. In December 2019, the 10th Civil Justice of Santiago ruled in favour of the plaintiffs. Later, in November 2020, the plaintiffs and two of the defendants reached an agreement to settle the case; the latter agreed to compensate more than 53,000 consumers.4 Chile’s Pharmacies case illustrates how competition law is implemented in an experienced jurisdiction of South America, but it also offers an estimation of the negative impact generated by this type of conduct. One of the products that was part of the cartel’s scheme was the oral contraceptive pill. The collusive agreement generated price increases that ranged between 30 per cent and 100 per cent, leading to ‘about 146 additional individuals […] born in Chile per week, a 3.2% increase in the weekly birth rate’.5 Moreover, children conceived after the price increases were less likely to enrol in school and were more likely to be registered in educational programmes specialized in supporting children with intellectual disabilities.6 In this region of the world, in which poverty and inequality are still high and markets tend to be concentrated, the effective enforcement of competition law is a key policy challenge. The markets in Latin America and the Caribbean (‘LAC’) ‘are characterized by a small number of big businesses and high levels of market power’.7 Furthermore, the high levels of market

The author thanks Sarah María Muñoz-Cadena for her diligent research assistance. A third pharmacy had been formally accused by Chile’s competition agency, the Fiscalía Nacional Economía (‘FNE’), but during the process this company and the FNE settled. 3 Pharmacies Case, Rol 2578-2012 (Corte Suprema de Justicia de Chile, 7 September 2012). 4 B. Tomic, ‘Indemnización por Colusión del “Caso Farmacias”’ (CeCo, 17 November 2020) https://​centrocompetencia​.com/​indemnizacion​-caso​-farmacias/​ [accessed 21 March 2022]. 5 T. Rau, M. Sarzosa and S. Urzúa, ‘The Children of the Missed Pill’ (2021) 79 Journal of Health Economics www​.sciencedirect​.com/​science/​article/​pii/​S0167629621000813​?via​%3Dihub [accessed 21 March 2022] 2. 6 ibid. 7 United Nations Development Programme, Regional Human Development Report 2021: Trapped: High Inequality and Low Growth in Latin America and the Caribbean (New York, 2021) www​ .latinamerica​.undp​.org/​content/​dam/​rblac/​irdh2021/​undp​-rblac​-RHDR​-UNDP​-EN​.pdf [accessed 21 March 2022] 139. 1 2

500

South America  501 concentration contribute to the region’s high inequality and low productivity growth. A recent report published by the World Bank pointed out that ‘[a]t least 21 percent of the cartels detected in LAC involved basic consumption products such as sugar, toilet paper, wheat, poultry, milk, and medicines’.8 However, competition agencies of the region have low budgets in comparison with OECD countries and in some cases the agencies lack key investigative capacities and tools (for example, powers to perform dawn raids, digital forensics). As explained in this chapter, the capacity to prosecute, penalize and claim damages from cartels in South America is uneven. Most countries of the region have competition laws and active antitrust agencies, but the number of cartels that each agency can investigate per year varies significantly. Five jurisdictions of South America have more than two decades of uninterrupted experience in enforcing competition laws: Argentina, Brazil, Chile, Colombia, and Peru. Not surprisingly, most of the cartel case law of the region has been produced in these jurisdictions: the enforcement activities of the competition agencies in these five countries account for 93 per cent of all the cartels detected and sanctioned in South America during the period 2000–20. The main objective of this chapter is to introduce readers to cartel law in practice in South America, which comprises 11 national jurisdictions and one supranational jurisdiction. Section II presents an overview of the antitrust enforcement systems in South America. This section characterizes and classifies the type of authorities that enforce competition laws in South America. Section III surveys how competition laws prohibit cartels, including both hard-core cartels and other forms of anticompetitive agreements by competitors.9 Section IV explores the diverse trajectories of cartel prosecution by South American competition agencies. Finally, Section V summarizes the main findings of the chapter and suggests future avenues of research.

II.

ANTITRUST ENFORCEMENT SYSTEMS IN SOUTH AMERICA

There are 23 countries in Latin America and the Caribbean with national competition laws.10 Almost half of these countries are South American: Argentina, Bolivia, Brazil, Chile,

M. Martínez, T. Goodwin, D. Sanchez and N. Carreras, Fixing Markets, Not Prices: Policy Options to Tackle Economic Cartels in Latin America and the Caribbean (The World Bank, 2021) 15. 9 In this chapter ‘cartel’ is understood as ‘[a]rrangement(s) between competing firms designed to limit or eliminate competition between them, with the objective of increasing prices and profits of the participating companies and without producing any objective countervailing benefits’: Glossary of Terms Used in EU Competition Policy: Antitrust and Control of Concentrations (Brussels, July 2002) 8. Furthermore, I follow the OECD’s definition of ‘hard-core cartels’; see OECD, Review of the 1998 OECD Recommendation concerning Effective Action against Hard Core Cartels (Paris, 2019) 3. 10 For an introduction to Latin America’s competition law systems and their trajectory, see J.D. Gutiérrez, ‘Derecho de la Competencia en América Latina y el Caribe: Evolución y Principales Retos’, in M.Á. Recuerda Girela (ed.), Anuario de Derecho de la Competencia (La Ley, 2021). 8

502  Research handbook on cartels Colombia, Ecuador, Guyana, Paraguay, Peru, Uruguay and Venezuela.11 The only sovereign state located in South America that lacks a national competition law is Suriname.12 In addition to the 11 national competition regimes, there are two regional integration processes with competition rules in South America: the Andean Community of Nations (‘CAN’) and the Southern Common Market (‘Mercosur’). However, the latter did not establish a supranational system that enforces competition laws on its own, while the CAN established a regional charter of anticompetitive practices and an executive body, its General Secretariat, that implements CAN’s regional competition law.13 In 2020, the 11 South American countries with national competition laws comprised a population of almost 430 million and had an average GDP per capita of approximately USD $7,651.14 Except for Venezuela, these countries have market economies and, according to a cross-country survey from 2018, around 63 per cent of the population agrees with the statement ‘The market economy is the only system with which the country can be developed’.15 In South America, public enforcement of antitrust laws prevails over private enforcement. The typical authority in charge of implementing competition laws in South America is a national executive body that has the power: (i) to investigate and adjudicate cases through administrative proceedings; (ii) to oversee all or most of the country’s markets; and (iii) to conduct enforcement activities (for example, investigating anticompetitive practices) and non-enforcement activities (for example, competition advocacy).16 Of the 14 national competition authorities in South America, 11 fit within this characterization (see Table 28.1). In this sense, the architecture of most of South America’s antitrust systems is analogous to the administrative model that predominates among European states.17 The three national enforcers with exceptional features are the authorities from Peru, Brazil and Chile. Peru has two competition agencies rather than a single executive body with exclusive powers to investigate and prosecute, as happens in most South American countries. The two Peruvian antitrust agencies are the Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual (‘Indecopi’), which has a general mandate to supervise markets except for telecommunications, and the Organismo Supervisor de Inversión Privada en Telecomunicaciones (‘OSIPTEL’), which has authority over the telecommunications markets.

11 The rest of the jurisdictions with national antitrust laws in Latin America and the Caribbean are Barbados, Costa Rica, Curaçao, Dominican Republic, El Salvador, Honduras, Jamaica, Mexico, Nicaragua, Panama and Trinidad and Tobago. The antitrust law of the Bahamas is included in this list, but it only covers telecommunication markets. 12 French Guiana also lacks its own competition law, but French Guiana is an overseas region of France, not a sovereign state. 13 On the implementation of Latin American and Caribbean Regional Competition Agreements, see OECD, Latin American and Caribbean Regional Competition Agreements (DAF/COMP/LACF(2013), 28 August 2013). 14 Economic Commission for Latin America and the Caribbean, CEPALSTAT https://​estadisticas​ .cepal​.org/​cepalstat/​portada​.html [accessed 21 March 2022]. 15 Latinobarómetro, Latinobarómetro Database 2018 www​.latinobarometro​.org/​latContents​.jsp [accessed 21 March 2022]. 16 Gutiérrez (n 10). 17 F. Jenny, ‘The Institutional Design of Competition Authorities: Debates and Trends’ (1 January 2016) https://​papers​.ssrn​.com/​sol3/​papers​.cfm​?abstract​_id​=​2894893 [accessed 21 March 2022].

South America  503 Table 28.1

Competition authorities in South America

Antitrust agencies

Specialized antitrust agencies

1. Autoridad de Fiscalización y Control Social de Empresas (‘AEMP’)

● Organismo Supervisor de Inversión Privada en

(Bolivia) 2. Conselho Administrativo de Defesa Econômica (‘CADE’) (Brazil) 3. Competition and Consumer Affairs Commission (‘CCAC’) (Guyana)

Telecomunicaciones (‘OSIPTEL’) (Peru), specialized in telecommunications markets ● Secretaria de Promoção da Produtividade e

4. Comisión Nacional de Competencia (‘CNC’) (Paraguay)

Advocacia da Concorrência (‘Seprac’), formerly

5. Comisión Nacional de Defensa de la Competencia (‘CNDC’)

SEAE (Brazil), specialized exclusively in competi-

(Argentina) 6. Comisión de Promoción y Defensa de la Competencia (‘CPDC’) (Uruguay) 7. Fiscalía Nacional Económica (‘FNE’) (Chile) 8. Defensa de la Competencia y de la Protección de la Propiedad Intelectual (‘Indecopi’) (Peru) 9. Superintendencia Antimonopolios (‘SA’), formerly ProCompetencia (Venezuela)

tion advocacy activities Specialized competition tribunals ● Tribunal de Defensa de la Libre Competencia (‘TDLC’) (Chile) Regional competition authorities ● Secretaría General (‘SGCAN’) (Andean Community of Nations: Bolivia, Colombia, Ecuador, and Peru)

10. Superintendencia de Control del Poder de Mercado (‘SCPM’) (Ecuador) 11. Superintendencia de Industria y Comercio (‘SIC’) (Colombia)

Second, Brazil also has two distinct antitrust agencies: the Conselho Administrativo de Defesa Econômica (‘CADE’) and the Secretaria de Promoção da Produtividade e Advocacia da Concorrência (‘Seprac’).18 The CADE is an independent body that reports to the Ministry of Justice, which is in charge of investigating and prosecuting infringements, operating the merger review process and conducting competition advocacy activities. In contrast, the powers of the Seprac, which is part of the Ministry of Finance, are limited to two types of activity: producing competition assessments, mostly about regulatory projects, and submitting amicus curiae briefs for administrative and judicial proceedings. Furthermore, the CADE is subdivided into three main bodies: the General Superintendence (investigator); the Administrative Tribunal (adjudicator); and a Department of Economic Studies (producer of economic opinions). Third, Chile is the only country in the region with an antitrust enforcement system that follows a prosecutorial rather than administrative model.19 In Chile the function of investigating is separated from the adjudicating role through an executive body. The Fiscalía Nacional Económica (‘FNE’) has the power to investigate anticompetitive conduct and implement the merger control process, while a specialized competition court, called the Tribunal de Defensa de la Libre Competencia (‘TDLC’), adjudicates antitrust infringement cases, upon request of a party or the FNE.20 Venezuela’s antitrust system deserves mention here because it is almost completely inactive. The first antitrust agency of Venezuela, the Superintendencia de Promoción y Protección

In January 2018 the Seprac replaced the Secretaria de Advocacia da Concorrência e Competitividade (‘SEAE’). 19 I follow Jenny’s description of the ‘prosecutorial model’ (in which ‘the competition authority prosecutes the cases that it brings in an adversarial proceeding in a courtroom’, with the decision maker being the court rather than the competition authority’) and of the ‘administrative model’, in which ‘the competition authority investigates and adjudicates cases’: Jenny (n 17) 20. 20 The TDLC is subject to the oversight of the Supreme Court of Justice. 18

504  Research handbook on cartels de la Libre Competencia (‘ProCompetencia’), was created in 1992, when the country enacted its competition law. During the 1990s, the agency was acknowledged by its peers due to its rigorous work. But the Bolivarian governments that have ruled Venezuela since the early 2000s gradually muted the agency. In November 2014, the national government enacted a decree establishing a new competition law that replaced ProCompetencia with a new agency: the Superintendencia Antimonopolios (‘SA’). The SA’s website has been inactive in recent years and the only sources of fresh information about its activities are its Twitter and Facebook accounts. Based on the information published on these social networks, the agency has focused on enforcement activities that are not related to antitrust matters.21 Finally, it is pertinent to review the CAN’s regional competition system. The CAN currently has four member states: Bolivia, Colombia, Ecuador and Peru. CAN’s first competition rules were issued in 1971: Decision 45, ‘Rules to prevent or correct practices that may distort competition within the Subregion’. This Decision was later replaced by Decision 234 of 1987 (that preserved the original title of Decision 45) and by Decision 285 of 1991, ‘Rules to Prevent or Correct Distortions in Competition Generated by Restrictive Practices of Free Competition’. Decision 285 was the first Andean regulation that established a list of ‘anticompetitive agreements’ (vertical and horizontal) and distinguished between agreements and abuse of a dominant position.22 The Andean competition rules were scarcely implemented in the twentieth century.23 The current CAN’s competition rules were adopted in 2005, through Decision 608, ‘Rules for the protection and promotion of free competition in the Andean Community’. Article 10 of Decision 608 provides that CAN’s General Secretariat can initiate investigations on its own, upon request of a member state’s antitrust agency, and upon request of persons or organizations when there are indications that a member country has ‘carried out conduct that could unduly restrict competition in the market’. However, the CAN’s General Secretariat has fined only one cartel under Decision 608.24

The last press release issued by the SA that informed a specific antitrust enforcement activity was issued in August 2019, when the agency informed that it had dismissed a complaint against a company accused of an alleged abuse of its dominant position. For an analysis of the factors that may explain the descent of Venezuela’s competition system can be explained see W. Kovacic, ‘Competition Lifecycles in Latin America’, in J. Peña and M. Calliari (eds), Competition Law in Latin America: A Practical Guide (Kluwer Law International, 2016) 13. 22 Article 2(b) of Decision 45 and Decision 230 explicitly defined ‘undue price manipulation’ as a type of ‘practice that distorts competition’ but they did not list the types of anticompetitive agreements; nor did they differentiate between anticompetitive agreements and abuse of a dominant position. 23 F. Marcos, ‘Downloading Competition Law from a Regional Trade Agreement (RTA): A New Strategy to Introduce Competition Law in Bolivia and Ecuador’ (Instituto de Empresa Business School, Working Paper No. WPED07-02, 2007) 24. 24 For a description of the CAN’s antitrust system, see I.S. Ortiz and D.A. Solano, ‘La Aplicación Pública de las Normas de Libre Competencia en la Comunidad Andina y sus Países Integrantes’ (2016) 65 Vniversitas 311. 21

South America  505 Table 28.2

The category of ‘agreements’ in South America’s antitrust laws

Legal categories that amount to ‘agreement’

Jurisdiction

Agreement, covenant or contract

Argentina, Bolivia, Brazil, CAN, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Venezuela

Concerted practices

Brazil, CAN, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Uruguay, Venezuela

Consciously parallel practices

Colombia, Ecuador, Paraguay, Peru (only in telecommunications)

Collective decisions or recommendations

CAN, Guyana, Paraguay, Peru, Ecuador, Uruguay, Venezuela

Table 28.3

Cartel prohibitions clauses in South America’s antitrust laws

Clause with a general prohibition against anticompetitive

Clause with a list of horizontal agreements (e.g. price fixing,

agreements

bid rigging, market sharing, output restriction etc.)

Argentina, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Argentina, Bolivia, Brazil, CAN, Chile, Colombia, Ecuador, Uruguay, Venezuela

III.

Guyana, Paraguay, Peru, Uruguay, Venezuela

THE PROHIBITION OF CARTELS IN SOUTH AMERICAN COMPETITION LAWS

Current competition legislations in South America were inspired by foreign ones, such as the Treaty on the Functioning of the European Union (‘TFEU’), the United States’ Sherman Act, the competition laws of European states such as Spain, and statutes from other Latin American jurisdictions.25 These common sources may explain the resemblances between the prohibitions of cartels by the competition laws of different jurisdictions of South America. Most competition laws of South America use the term ‘agreement’ to refer to different types of conducts committed by a plurality of undertakings (Table 28.2). Furthermore, the language of most of the statutes in the region implies that the competition laws apply to both explicit and implicit agreements. Most of the relevant pieces of legislation in the region establish both a general clause that prohibits anticompetitive agreements (analogous to Section 1 of the Sherman Act) and a clause that lists types of conduct that are deemed anticompetitive agreements (analogous to Article 101 TFEU). However, as Table 28.3 shows, the prevailing form of prohibition in South American antitrust laws for cartels is a clause that explicitly lists which conducts are considered anticompetitive agreements (see Annex Table 28A.1 for the respective articles and statutes). In most of the competition laws of South America, the articles that list the types of horizontal agreements that are prohibited tend to include at least six different conducts (see Table 28.4). Furthermore, all the jurisdictions’ laws explicitly prohibit the categories of conduct that are identified with ‘hard-core cartels’: price fixing, market sharing, limiting or allocating output or suppliers and bid rigging. Only Venezuela’s competition law does not include a specific prohibition for bid rigging. See, e.g., J.D. Gutiérrez, ‘Tacit Collusion in Latin America: A Comparative Study of the Competition Laws and their Enforcement in Argentina, Brazil, Chile, Colombia and Panama’, in E.M. Fox and D.D. Sokol (eds), Competition Law and Policy in Latin America (Hart Publishing, 2009) and J.Peña, Las Políticas de Competencia en América Latina Post-Consenso de Washington (Centro de Competencia, Universidad Adolfo Ibañez, 2021). 25

506  Research handbook on cartels Table 28.4

Types of horizontal agreements explicitly prohibited in South America’s antitrust laws

Prohibition Hard-core cartels

Jurisdiction

1. Price fixing

Argentina, Bolivia, Brazil, CAN, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Uruguay, Venezuela

2. Market sharing

Argentina, Bolivia, Brazil, CAN, Chile, Colombia, Ecuador,

3. Limiting output or abstaining from producing or distributing

Argentina, Bolivia, Brazil, CAN, Chile, Colombia, Ecuador,

Guyana, Paraguay, Peru, Uruguay, Venezuela Guyana, Paraguay, Peru, Uruguay, Venezuela 4. Limiting or allocating sources of supply

Argentina, Bolivia, Brazil, Colombia, Ecuador, Guyana, Paraguay, Venezuela

5. Bid rigging

Argentina, Bolivia, Brazil, CAN, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Uruguay

Other anticompetitive horizontal agreements 6. Fixing other commercial conditions

Brazil, CAN, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Uruguay, Venezuela

7. Exchange information with the purpose of fixing prices (as an

Bolivia, Ecuador

autonomous illegal conduct) 8. Limiting technical development or innovation

Brazil, Colombia, Ecuador, Guyana, Paraguay, Uruguay, Venezuela

9. Discriminating against third parties

Brazil, Colombia, Ecuador, Guyana, Paraguay, Uruguay, Venezuela

10. Tying or bundling

Brazil, Colombia, Ecuador, Guyana, Paraguay, Uruguay, Venezuela

11. Limiting access to markets, excluding current competitors, or

Brazil, Chile, Colombia, Ecuador, Uruguay

boycotting potential rivals 12. Unjustified inadmissibility of an economic agent in a trade or

Ecuador, Paraguay

business association 13. Limiting access of competitors to essential infrastructure

Uruguay

While the wording of most of the laws in the region is similar to that contained within Article 101(1) TFEU, the lists of forms of unlawful agreements among competitors tend to be longer in South America. This is particularly the case for jurisdictions that issued their legislation more recently, such as Ecuador, Paraguay and Uruguay. Few jurisdictions within South America have adopted criminal cartel offenses. Colombia’s legislation (Law 1474, 2011) criminalized a specific type of cartel conduct: bid rigging in public procurement processes. The legislation of Brazil (Law 8137, 1990),26 Chile (Law 20,945, 2016)27 and Peru (Law 31,040, 2020)28 established criminal sanctions for broader types of hard-core cartels. In Argentina, Law 25,156, 1999 ‘eliminated criminal sanctions for antitrust violations’ and the current antitrust law does not include criminal penalties. However, Article 300(1) of the Argentinian Criminal Code punishes price fixing.29 See Article 4 of Law 8,137, amended by Article 116 of Law No. 12,529. See Article 62 of Law 20,945. 28 See Article 232 of the Peruvian Criminal Code, amended by Law 31,040. 29 OECD, Fighting Bid Rigging in the Procurement of Public Works in Argentina (2019) www​.oecd​ .org/​daf/​competition/​Fighting​-bid​-rigging​-procrument​-public​-works​-Argentina​-EN​-web​.pdf [accessed 21 March 2022] 27. 26 27

South America  507 So far, in Argentina, Chile and Peru there have been no judicial rulings imposing criminal penalties for cartel conducts.30 Krause argues that criminal enforcement of cartels in Chile faces three types of challenges: (i) the procedural and institutional implications of its sequential design (the criminal action must follow on a definitive ruling from the TDLC that declares the existence of the cartel); (ii) the monopolization of the criminal action by the FNE (only the competition agency can file cartel offence claims); and (iii) the accumulation of civil and criminal sanctions.31 In Colombia, since the criminalization of bid rigging in 2011 there has been only one conviction and ‘an ongoing criminal procedure against 16 individuals belonging to a criminal enterprise in charge of defrauding the State through bid rigging schemes’.32 In contrast, criminal enforcement of cartels in Brazil has been significant in recent years: ‘[i]n 2015, over 300 individuals were facing criminal prosecution for antitrust offences’.33 Moreover, according to the most recent OECD Peer Review of Brazil’s competition law and policy, ‘Criminal prosecutions for cartel cases appear to be on the increase […] Some of these cases have resulted in criminal convictions and jail sentences.’34 Several cartel laws in South America grant some sort of exception for restrictive agreements among competitors. The competition statutes of Argentina, Ecuador and Guyana include exceptions that resemble the conditions and wording of Article 101(3) TFEU. In the case of Paraguay and Uruguay, the competition laws establish broader ‘efficiency clauses’, not limited to horizontal agreements, that oblige the competition agencies to weigh the alleged ‘economic efficiency gains’ of the practices that are investigated, to assess if their supposed benefits offset the negative effects over competition and to determine if these benefits are passed on to consumers.35 Colombia’s competition laws include a specific procedure to authorize certain restrictive agreements (the so-called block exemption) and an efficiency clause that covers three types of conducts (not limited to agreements). Article 1 of Law 155 of 1959 and Article 1(8) of Decree 4886 of 2011 empower the competition agency to authorize agreements that limit competition but that aim at ‘defending the stability of a basic sector of the production of goods or services of interest to the general economy’. Agriculture is one of the ‘basic sectors’ specifically identified by the competition laws (Article 5 of Law 1340, 2009).36

ibid. For an overview of cartel criminalization in Chile, see OECD, Criminalisation of Cartels and Bid Rigging Conspiracies – Note by Chile (DAF/COMP/WP3/WD(2020)17, 3 June 2020). For a discussion of the desirability of establishing cartels as criminal offences in Peru and the challenges of criminal enforcement, see Indecopi, Criminalización de los Carteles: Experiencia Comparada y Desafíos (2019). 31 M.S. Krause, Desafíos para el Sistema Infraccional de Libre Competencia a raíz de la Penalización de la Colusión (Centro Competencia, 2021) https://​centrocompetencia​.com/​wp​-content/​ uploads/​2021/​10/​Krause​-Desafios​-Sistema​-Infraccional​-Penalizacion​-Colusion​_oct​_2021​.pdf [accessed 21 March 2022]. 32 OECD, Criminalisation of Cartels and Bid Rigging Conspiracies – Note by Colombia (DAF/ COMP/WP3/WD(2020)14, 14 May 2020) 7. 33 OECD, Criminalisation of Cartels and Bid Rigging Conspiracies: A Focus on Custodial Sentences – Background Note by the Secretariat (DAF/COMP/WP3(2020)1, 22 April 2020) 17. 34 OECD, OECD Peer Reviews of Competition Law and Policy: Brazil (2019) 13. 35 With respect to Paraguay see Articles 2(3) and 8 of the competition law and Article 5 of the decree that develops the competition law. 36 For a detailed explanation of Colombia’s so-called block exemption, see, e.g., J.D. Gutiérrez, ‘Agricultural Exceptions to Competition Law’ (2010) 10 Revista de Derecho de La Competencia 173. 30

508  Research handbook on cartels Additionally, Article 49 of Decree 2,153, 1992 explicitly states that the following types of conduct will not be deemed contrary to freedom of competition in Colombia: (i) research and development cooperation; (ii) agreements about compliance with law and non-mandatory standards, provided that the agreements do not limit market entry; and (iii) ‘procedures, methods, systems and forms of use of common facilities’. Venezuela’s competition law is the most sui generis case because it explicitly establishes that the President of the Republic, not the competition agency, can exempt the application of the law to price-fixing agreements ‘when he considers it convenient to the interest of the Nation’. However, Article 18 of Venezuela’s competition law conditions the exemption to practices that improve the production of goods or promote technical progress and that benefit consumers. The competition laws of Bolivia, Brazil, CAN, Chile and Peru do not establish substantive or procedural provisions for exempting certain restrictive agreements. However, in these countries and, in general, in Latin American jurisdictions with antitrust systems, the COVID-19 crisis prompted discussions on whether exceptions for certain forms of cooperation among competitors were needed to guarantee the provision of certain goods. Some competition authorities issued guidelines for cooperation agreements in the context of COVID-19 and/or created fast-track procedures for parties to consult about the legality of their cooperation projects.37 In Brazil, for example, the CADE issued ‘comfort letters’ to food and beverage companies that intended to implement a project called ‘Movimento Nós’ that aimed at supporting small retailers that struggled during the COVID-19 crisis.38

IV.

CARTEL ENFORCEMENT IN PRACTICE

The experience of South America’s agencies with regard to antitrust enforcement, including the fight against cartels, varies significantly among jurisdictions due to historical, political, economic and institutional factors.39 To start with, their first competition laws were issued in at least three different eras.40 The biggest economies of the region were early adopters of antitrust laws. Argentina was the first jurisdiction of the region to adopt a competition law (in 1923), after which Colombia (1959), Chile (1959) and Brazil (1962) followed suit. 37 In April 2020, Chile’s TDLC decided to grant provisional authorizations for collaboration agreements that aimed at ensuring the supply of goods during the COVID-19 crisis. For an overview of how Latin American competition agencies dealt with the COVID-19 crisis, see J. D. Gutiérrez, ‘Introducción – El Derecho de La Competencia Pandémico En América Latina y El Caribe’, in J. D. Gutiérrez (ed), Retos del COVID-19 para el derecho y la política de la competencia en América Latina y el Caribe (Capítulo América Latina de la Academic Society for Competition Law – ASCOLA 2020) https://​papers​ .ssrn​.com/​sol3/​papers​.cfm​?abstract​_id​=​3663905 [accessed 2 April 2022]. 38 CADE, ‘Cade authorizes collaboration among Ambev, BRF, Coca-Cola, Mondelez, Nestlé and Pepsico due to the new coronavirus crisis’ (2020) http://​en​.cade​.gov​.br/​cade​-authorizes​-collaboration​ -among ​ - ambev ​ - brf ​ - coca​ - cola​ - mondelez​ - nestle​ - and​ - pepsico ​ - due ​ - to ​ - the ​ - new ​ - coronavirus ​ - crisis [accessed 21 March 2022]. 39 Gutiérrez (n 10). 40 For an overview of the history of antitrust in the region, see A. Palacios Lleras, Competition Law in Latin America: Markets, Politics, Expertise (PhD Thesis, University College London, 2017); and A. Palacios and J. D. Gutiérrez, ‘Histories of Competition Law in Latin America’, in J. Peña and M. Calliari (eds), Competition Law in Latin America: A Practical Guide (2nd edn, Kluwer Law International, 2022).

South America  509 By the end of the twentieth century, two more countries approved competition laws for the first time: Peru (1991) and Venezuela (1992). The adoption of these competition laws took place as part of the wave of economic reforms that liberalized most of the economies of Latin America in the 1990s.41 The last South American countries that issued their first competition laws were the smallest economies of the region: Guyana (2006), Uruguay (2007), Bolivia (2008), Ecuador (2011) and Paraguay (2013). The timing of these first competition laws in South America helps to explain a key difference among jurisdictions: the variation in their enforcement capabilities, especially regarding the prosecution of cartels.42 Around half of the countries in the region have had fewer than 15 years’ experience enforcing competition laws. Moreover, the jurisdictions that approved their first competition laws in the twenty-first century are still working on setting up their agencies and building enforcement capacity. A.

Enforcement in Emerging Jurisdictions

The South American countries that issued their first competition laws in the last fifteen years have undertaken relatively few cartel enforcement activities: Ecuador and Uruguay fined a total of five cartels, Bolivia two and Guyana one. Paraguay is the only South American country to have not fined a single cartel. However, on 24 February 2021, the Director of Investigations of Paraguay’s CONACOM issued a formal accusation against two companies and two of their directors for rigging eight different public bids related to health and medicine supplies.43 To date, all five cartel cases detected and fined by the competition agency of Ecuador have been associated with bid rigging conducts. The SCPM’s cases related to public tendering processes for boots, printer cartridges (first leniency case), contact centre services and pharmaceutical products.44 In Uruguay, the competition agency’s cases were more varied: two price-fixing cartels, one that also included retail price maintenance conducts45 and one that was coordinated by a business association;46 one market-sharing agreement that was detected thanks to a leniency

See, e.g., A. Bullard, ‘Competition Law in Peru’, in Peña and Calliari (n 21). In all of the countries there were gaps between the issuance of the law and its effective enforcement, or periods in which the jurisdiction ceased to enforce the law. 43 Medical Supplies Case, Technical Report CONACOM/DI No. 01/2021 (Comisión Nacional de la Competencia de Paraguay, 24 February 2021). 44 Pharma Case, Resolución SCPM-CRPI-001-2020 (Superintendencia de Control del Poder de Mercado, 4 August 2020). 45 Frozen Food Case, Res. No. 80/014 (Comisión de Promoción y Defensa de la Competencia, 19 August 2014). 46 Maritime Agency’s Services Case, Res. No. 72/012 (Comisión de Promoción y Defensa de la Competencia, 21 September 2012). 41 42

510  Research handbook on cartels application;47 one agreement that aimed at excluding a rival and dividing the market;48 and one bid rigging case.49 However, the CDPC imposed its last cartel fine in 2014. In the case of Bolivia, since 2008 the competition agency has fined only two cartels: one in the market of cement and one in the sugar cane market. In the Cement Case, the AEMP fined four cement producers for price fixing, exchanging sensible information (in itself punishable), allocating market quotas and geographic market sharing.50 In a separate decision, the agency also fined a cement business association because the prices of the four cement producers had been fixed through its directorate and because it produced reports with detailed information of production and sales per company.51 The last time the competition agency of Bolivia fined a cartel was in December 2016, when the AEMP concluded that four sugar cane mills fixed prices and exchanged information. Although Guyana adopted its first competition law in 2006, to date the competition agency has only detected and sanctioned one cartel. The rest of the fines imposed by the CCAC dealt with consumer protection affairs. In 2019 the CCAC fined five maritime terminal operators and the Shipping Association of Guyana for fixing the rates for the haulage of containers, thereby distorting the ‘competitive environment among terminals for the services provided by them to consumers’.52 B.

Divergent Paths Followed by Experienced Jurisdictions

1. The Argentinian and Venezuelan pendulum The more experienced jurisdictions of South America followed diverse paths. Venezuela actively enforced cartels in the 1990s and the first half of the 2000s, but in the past decade its enforcement activities have declined drastically. The Venezuelan competition agency detected 28 cartels between 1993 and 2006, but since then all its enforcement and non-enforcement activities have been muted and currently it is almost completely inactive. While the average number of cartels detected in South America doubled between the periods 1980–2000 and 2000–02,53 Venezuela followed the opposite trend. The progress of Argentina’s antitrust system is not linear, but rather pendular. Kovacic describes the Argentinian case as one in which the competition agency improves its level of performance but then stalls or even lowers its enforcement capacity due to the predominance of political ideas that do not support market-oriented policies.54 This description coincides with the pathway of cartel enforcement. 47 Processed Tomato Case, Res. No. 24/014 (Comisión de Promoción y Defensa de la Competencia, 1 April 2014). 48 Clinical Laboratory Analysis Services Case, Res. No. 10/014 (Comisión de Promoción y Defensa de la Competencia, 20 February 2014). 49 Dialysis Supplies Case, Res. No. 81/011 (Comisión de Promoción y Defensa de la Competencia (CPDC) 19 July 2011). 50 Cement Case, Resolución Administrativa RA/AEMP/DTDCDN/No 115/2012 (Autoridad de Fiscalización y Control Social de Empresas, 23 November 2012). 51 Cement Case, Resolución Administrativa RA-AEMP-DTDCDN-072-2013 (Autoridad de Fiscalización y Control Social de Empresas, 15 August 2013). 52 Cargo Case, Decision of Complaint by JD Transport Services (Competition and Consumer Affairs Commission, 31 January 2019) 10. 53 Martínez et al (n 8). 54 Kovacic (n 21).

South America  511 Argentina was one of the most active jurisdictions in the 1980s and 1990s. Between 1981 and 1999, the competition agency detected and fined 27 collusion cases.55 The cartels operated in diverse sectors, such as: anaesthesiology services (price fixing); economists (price fixing); translators (price fixing); real estate agents (price fixing); bakeries (price fixing and exclusionary practices); sand manufacturing (three cases, production quotas); liquified petroleum gas – LPG (market division); stowing companies (price fixing); and producers of safety valves for LPG bottles (market division).56 Between 2000 and 2020, Argentina’s CNDC fined only 14 cartels.57 Therefore, the outcome of its enforcement activity halved with respect to the period 1981–99. In the past two decades, the competition agency detected cartel activity in new markets such as cement (market allocation), liquid oxygen (bid rigging), automotive dealerships (price fixing) and medicinal gelatines (bid rigging).58 Moreover, the CNDC also identified sectors that had been affected by collusion in the past, such as LPG distribution and sand production (price fixing).59 2. Consistent developments in Brazil, Chile, Colombia and Peru In contrast, with Venezuela and Argentina, the jurisdictions of Brazil, Chile, Colombia, and Peru have actively prosecuted cartels in the last two decades (see Figure 28.1). Between 2000 and 2020, 89 per cent of the cartels sanctioned in South America were detected in Brazil, Chile and Colombia. The antitrust agencies of these countries increased their enforcement capacity thanks to the investigatory powers vested by the laws, the creation of computer forensics units, and strengthening of the working groups that focus on fighting cartels and, more specifically, specialize in prosecuting bid rigging cases. Brazil is the jurisdiction that has fined the highest number of cartels in the past two decades: more than 160 cartels (see Figure 28.1). Its main competition agency, the CADE, was created in September 1962 by Law 4,137, which aimed at ‘regulating and supressing the abuse of economic power’. Although Brazil has had antitrust laws for more than six decades, the strengthening of the efficacy of enforcement system is relatively recent. Between the 1960s and 1980s, CADE’s efforts to implement the antitrust law occurred in the context of governments that privileged price controls rather than market-oriented policies. Brazil’s slow start with regard to developing its antitrust system started to change with the passage of the 1988 Constitution and the new competition law issued in 1994, Law 8,884.60 55 CNDC, Memorial Anual 1997 www​.argentina​.gob​.ar/​sites/​default/​files/​memorias​_cndc​_1997​.pdf [accessed 21 March 2022]; CNDC, Memorial Anual 1998 www​.argentina​.gob​.ar/​sites/​default/​files/​ memorias​_cndc​_1998​.pdf [accessed 21 March 2022]; CNDC, Memorial Trianual Años 1999/2000/2001 www​.argentina​.gob​.ar/​sites/​default/​files/​memorias​_cndc​_1999​_2000​_2001​.pdf [accessed 21 March 2022]. This list does not include cases of horizontal practices that aimed at excluding rivals, which were classified separately by the CNDC. Between 1981 and 1999, the CNDC sanctioned 21 market obstruction cases, some of which involved concerted practices among rivals. 56 G. Coloma, ‘The Argentine Competition Law and its Enforcement’, in Fox and Sokol (n 25). 57 G. Irizar and C. Boidi, ‘La Persecución de Cárteles en la República Argentina’, in D.A. Chamatropulos, P. Trevisán and M. del Pino (eds), Comentarios a la Ley de Defensa de la Competencia (La Ley, 2018). 58 UNCTAD, Voluntary Peer Review of Competition Law and Policy: Argentina (UNCTAD/DITC/ CLP/2017/1, 2017). 59 For a description of the main collusion cases decided in Argentina, see ibid. 60 J.W. Clark, ‘Competition Law and Policy Developments in Brazil’ (2000) 2(3) OECD Journal of Competition Law and Policy 181.

512  Research handbook on cartels

Note: The period for Bolivia, Ecuador, Guyana, Paraguay and Uruguay is shorter because their first competition laws were adopted after the year 2000. The figures were created by the author using relevant annual reports from the competition agencies and from the OECD.

Figure 28.1

Number of cartels fined in South America, 2000–2020

However, the first genuine cartel case was decided only in 1999, when the CADE imposed a fine on three manufacturers of flat rolled steel products for price fixing. The capacity to detect and prosecute cartels increased significantly after the passing of the Law 10,149 of 2000, which created the ‘Brazilian Competition Policy System’. The law vested the competition agencies with two key investigatory powers: a leniency programme and the ability ‘to carry out dawn raids and inspections’.61 However, the results of adopting these reforms were not immediate: ‘it took seven years from implementation of the law in 2000 for the first cartel case based on the leniency program to be concluded with a condemnation. The first cartel case using direct evidence collected by dawn raids was completed in 2006 and the first one based on wiretapping in 2005.’62 The exponential growth of fines imposed by CADE since the late 2000s until the present day is linked with the prioritization of hard-core cartel prosecution (2003); the creation of specialized working groups that focused in investigating bid rigging (2007); the setup of adequately equipped digital forensics units (2009); the effective operation of its leniency programme; the greater capacity to coordinate simultaneous dawn raids; the creation of an e-tool that permitted the submission of anonymous violation reports (2008); and improvement of its coordination with other law-enforcing agencies.63

E.M. Farina and P. Agra, ‘The Recent Development of the Brazilian Competition Policy System’, in Fox and Sokol (n 25) 33. 62 ibid 40. 63 OECD, Competition Law and Policy in Brazil: A Peer Review (2010) www​.oecd​.org/​daf/​ competition/​ 45154362​ .pdf [accessed 21 March 2022]; OECD, Investigative Powers in Practice— 61

South America  513 Since 2014, the CADE has developed technologies to process big data, supporting the work of the staff involved in investigations and case handlers, with the objective of detecting bid rigging.64 The so-called Brain Project aims at integrating ‘large public procurement databases by applying data mining tools and economic filters capable of identifying and measuring the probability of cartels occurring in public bids’.65 These tools have already helped CADE with the initiation of investigations of alleged bid rigging.66 The cartels sanctioned by the Brazilian competition agencies in the past two decades concerned a diverse array of markets: flat rolled steel products (price fixing); fuel retailing (price fixing, in several cities); anaesthesiology services (price fixing); urology services (price fixing); newspapers (price fixing); LPG distribution (price fixing); airlines (price fixing); compressors used in refrigeration (price fixing, allegedly an international cartel); sand for construction (price fixing); security guard services (bid rigging); crushed rock (price fixing and bid rigging); cement (price fixing, market allocation, among others); and building maintenance services (bid rigging), among others.67 Like Brazil, Chile was an early adopter of a competition law, but the economic and political backdrop did not initially favour the setup of effective enforcement agencies. Chile’s first competition law was enacted in 1959 but the Commission in charge of enforcing the law ‘never became a strong agency’.68 According to Cruz and Zárate, ‘this statute was barely used until 1973, the year in which a new Competition Act came into force’.69 During the first three decades after the passing of Legislative Decree 211 of 1973, the antitrust commissions in charge of adjudicating the cases issued 46 decisions in which collusion was found.70 The sectors in which fines were imposed between 1973 and 2003 included, among others, soft drinks bottlers (market sharing), airlines (price fixing, twice), the public transport industry (price fixing, five cases), pharmacies (price fixing) and several bid rigging cases.71 Hence, in contrast with the Brazilian cartel prosecution experience that only started at the end of the 1990s, Chile’s antitrust system imposed its first cartel fines almost half a century ago. Moreover, although the OECD’s first peer review of Chile’s competition law and policy argued, regarding the years 1974–2002, that the ‘number and amount of fines tend to confirm the apparent reluctance of Chile’s competition institutions and legal system to impose sanctions’,72 Chile was actually one of the most active Latin American jurisdictions during the said period.

Contribution from Brazil (2018) https://​one​.oecd​.org/​document/​DAF/​COMP/​GF/​WD(2018)21/​en/​pdf [accessed 21 March 2022]; OECD (n 34). 64 OECD (2018) (n 63); and OECD, Latin American and Caribbean Competition Forum – Session I: Digital Evidence Gathering in Cartel Investigations (DAF/COMP/LACF(2020)2, 5 August 2020). 65 OECD (n 34) 54. 66 OECD (2020) (n 64). 67 For a description of the main cartel cases of Brazil during 2000–2019, see, e.g., OECD (n 34). 68 OECD, Chile – Peer Review of Competition Law and Policy 2004 (2004) www​.oecd​.org/​daf/​ competition/​34823239​.pdf [accessed 21 March 2022] 15. 69 E. Cruz and S. Zárate, ‘Building Trust in Antitrust: The Chilean Case’, in Fox and Sokol (n 25) 159. 70 ibid. 71 ibid. 72 OECD (n 68) 70.

514  Research handbook on cartels The competition reform of 2003 was an institutional watershed for Chile’s enforcement system, which adopted a bifurcated agency model with separate bodies in charge of prosecution and adjudication. Through Law 19,911, the National Congress created a specialized competition tribunal, the TDLC, which replaced the antitrust commissions that adjudicated the cases. Furthermore, the statute allowed private parties to bring competition cases directly to the competition tribunal. Later, Law 20,361 of 2009 aimed at increasing the independence of the TDLC (for example, modifying the rules for appointing its justices), created Chile’s leniency programme and vested the FNE with additional investigatory powers that are key for cartel prosecution (for example, dawn raids and communication interception), among others. The most recent OECD assessment of Chile’s competition law and policy points out that the reforms that have entered into force since 2004 helped to step up antitrust enforcement in terms of the increase in the value of sanctions: while the average fine imposed by the TDLC between 2004 and 2010 was USD 840,000, the average fine between 1974 and 2002 was just USD 13,500.73 However, the number of fines in cartel cases has not increased significantly in the past two decades.74 This result is not the product of reduced enforcement activity by the FNE or private parties, but rather due to the higher burden of proof required by the TDLC and the Supreme Court of Justice for successful prosecution. These tribunals have ruled out several claims that were not sufficiently based on direct evidence of collusion.75 Between 2004 and 2020, the FNE brought 39 cartel cases to the TDLC, while private parties only filed five claims.76 The success rate of the FNE was relatively high: in 25 of the 35 finalized procedures (71 per cent), the TDLC issued a condemnatory ruling.77 In contrast, only one of the five procedures initiated by private parties finalized with a condemnatory ruling of the TDLC.78 Furthermore, three of the TDLC’s condemnatory rulings were revoked by the Supreme Court of Justice. Additionally, one of the TDLC’s rulings absolving the defendants was reversed and the Supreme Court of Justice concluded that a group of tourism agencies were involved in a collusive agreement with regard to the fees charged to hotels in exchange for the commercialization of products.79

73 OECD, Chile – Accession Report on Competition Law and Policy 2010 (2010) www​.oecd​.org/​daf/​ competition/​sectors/​47950954​.pdf [accessed 21 March 2022] 11. 74 Only 15 per cent of the cases brought to the TDLC by the FNE and private parties were associated with collusion; more than 50 per cent of the cases were related with unilateral conduct, while 12 per cent dealt with unfair competition and 15 per cent with regulatory issues: TDLC, ‘Estadísticas Causas 2020 – Tribunal de Defensa de la Libre Competencia’ www​.tdlc​.cl/​estadisticas​-causas​-2020/​[accessed 21 March 2022]. 75 J.D. Gutiérrez, ‘Tacit Collusion: Theory and Case Law in Argentina, Brazil, Chile, Colombia and Panama (198–2008)’ (2009) 9 Revista de Derecho de La Competencia 303. 76 FNE, Investigaciones de la FNE (2021) www​.fne​.gob​.cl/​biblioteca/​actuaciones​-de​-la​-fne/​ investigaciones​-de​-la​-fne​-2/​[accessed 21 March 2022]; and TDLC (n 74). Between 2007 and 2020, the FNE dismissed 207 claims of alleged collusive agreements: FNE ibid. 77 In the rest of the cases brought by the FNE, the TDLC absolved the defendants in six processes, two cases were settled, one claim was withdrawn, and one was archived. The data of all the procedures handled by the TDLC is available here: www​.tdlc​.cl/​estadisticas​-causas​-2020/​[accessed 21 March 2022]. 78 In the rest of the cases brought by private parties, the TDLC absolved the defendants in two processes; one was settled and one was filed. 79 J. Gumucio and G. Frene, ‘Competition Law in Chile’, in Peña and Calliari (n 21); and TDLC (n 74).

South America  515 In sum, between 2000 and 2003, before the creation of the TDLC, two cartels were fined by the antitrust commissions and between 2004 and 2020, the TDLC ruled against defendants in 26 cartel cases and the Supreme Court of Justice overruled a ruling that absolved the defendants. The cartels sanctioned by the Chilean authorities included a variety of markets such as: flat-panel TV (collusive boycott); drug stores (price fixing, two cases); physicians (price fixing); maritime agency’s services (price fixing, reversed by the Supreme Court); supply of bottled oxygen (market division and bid rigging, reversed by the Supreme Court); public transport (price fixing and collusive boycott, eight cases); poultry (allocation of market quotas); advertising agencies (bid rigging); low power hermetic compressors (price fixing, global cartel); paper tissue (price fixing, cross-national); and construction materials, among others.80 As in the case of Chile, Colombia was both an early adopter of antitrust laws and had enforcement experience stretching back several decades before the 1990s. In fact, Colombia appeared to have fined one of the first cartels in South America. In August 1961, the Superintendence of Economic Regulation, the predecessor of the SIC, found that five companies that purchased rawhide and a cooperative that comprised 90 per cent of rawhide producers had entered into agreements to allocate the sources of supply of rawhide. The Superintendence concluded that the undertakings had breached Article 1 of Law 155, 1959, and that a fine should be imposed on all of them.81 However, the early enforcement of antitrust laws in Colombia during the 1960s, which included abuse of dominance and merger cases, was followed by a period of two decades in which the competition agency ceased to operate in practice.82 Then, as occurred in Brazil and Chile, the Colombian competition enforcement system was revived in the 1990s. The restoration of antitrust in Colombia was prompted by two key legal reforms: the new Constitution of 1991, which established freedom of economic competition as a constitutional right, and Decree 2153, 1992, which reorganized the SIC and introduced substantive and procedural reforms to the antitrust system. In 1994, after the SIC activated its Unit for the Promotion of Competition, the first contemporary antitrust investigations appeared in Colombia.83 In the first five years of the Unit’s operation, 22 cartel cases were opened; 73 per cent of the process dealt with alleged price fixing. However, in this period no fines were imposed: more than half of the cartel cases were terminated due to ‘guarantees’ offered by the defendants and accepted by the competition agency, and the rest of the processes were closed because the conduct was not deemed ‘significant’ or because the authority did not find conclusive proof of infringement.84 On 20 December 1999, the SIC imposed its first two contemporary cartel fines, concerning the markets of milk commercialization and real estate services in Bogota, respectively. In the first case, the SIC concluded that two milk producers had agreed maximum selling prices

For a description of the main cartel cases in Chile, see, e.g., Cruz and Zárate (n 69); and Gumucio and Frene (n 79). 81 Rawhide Case, Resolución 005, 1961 (Superintendencia de Regulación Económica, 31 September 1961). 82 For an exploratory research on the early adoption and implementation of competition law in Colombia, see A. Palacios and J.D. Gutiérrez, ‘Una Nueva Visión Sobre los Orígenes del Derecho de la Competencia Colombiano’ (2015) 11 Revista de Derecho de La Competencia 137. 83 SIC, Actuaciones en Materia de Promoción de la Competencia 1994–1998 (1998). 84 ibid. 80

516  Research handbook on cartels during a period of at least three years. The second case involved several realtors from Bogota who fixed the prices of their services under the coordination of their real estate association.85 Since the late 1990s and until the present time, horizontal agreements have been the most common type of antitrust infringement sanctioned by Colombia’s competition agency. Between 2000 and 2020, the SIC fined 72 cartels in diverse markets, including: fuel retailers (several, price fixing); green paddy rice (purchase prices fixed by buyers); cement (twice, price fixing); sugar cane (purchase prices fixed by buyers); sugar (obstruct market access to third parties); cocoa beans (purchase prices fixed by buyers); road and building construction (over twelve cases, bid rigging); food supply for public schools (three cases, bid rigging); software for public schools (bid rigging); disposable baby diapers (price fixing); toilet paper (price fixing, cross-national cartel); notebooks (price fixing); casting agencies services (price fixing); security services (several, bid rigging); caustic soda (price fixing and market allocation); livestock auctions (price fixing); and concrete sewer pipes (price fixing and market allocation), among others.86 The 1999 milk commercialization cartel is important for Colombia’s antitrust system because it inaugurated a lineage of price-fixing cases that have been analysed by the agency through the concept of ‘consciously parallel practices’. This is worth highlighting because Colombia is the jurisdiction of South America with the highest number of price-fixing fines imposed under the ‘conscious parallelism’ approach. The antitrust laws of four South American countries explicitly incorporate parallelism as a form of agreement: Colombia, Ecuador, Paraguay and Peru (only for telecommunications).87 However, Colombia is the only country that has effectively used the legal category to fine cartels. Between 1999 and 2018 the Colombian antitrust agency issued at least 21 decisions that explicitly developed the category. The definition of ‘conscious parallelism’ used by the SIC in Colombia has varied since the late 1990s. Initially, the agency simply considered that conscious parallelism occurred when companies were aware of the policies adopted by their rivals and made the decision to imitate them repeatedly. In the following years, the agency started to include additional elements in the definition and was influenced by the case law of the United States. The following excerpt from the Cement III case illustrates the reasoning of the agency:

Gutiérrez (n 75). For an account of the main cartel cases in Colombia, see, e.g., A. Miranda Londoño, ‘Competition Law in Colombia’, in Peña and Calliari (n 21); and OECD, Colombia: Assessment of Competition Law and Policy 2016 (2016) www​.oecd​.org/​daf/​competition/​Colombia​-assessment​-competition​-report​-2016​ .pdf [accessed 21 March 2022]. 87 In Peru, the telecommunications law prohibits restrictive practices such as ‘agreements, parallel conducts and concerted practices’. However, this sectoral regulation does not apply to the rest of the markets. In 2008, the reform of Peru’s competition law eliminated the term ‘parallel actions’ from the definition of horizontal collusive practices. Furthermore, Article 4 of CAN’s Decision 285 established that an anticompetitive agreement can take the form of an ‘agreement, a parallel conduct or a concerted practice’. The term ‘parallel conduct’ was not included in the wording of CAN’s Decision 608. Competition laws of other countries of Latin America and the Caribbean, such as El Salvador, Panama and Mexico, explicitly state that ‘parallel behaviours’ may constitute indicia of a competitive agreement. Moreover, the legislations of Nicaragua and Dominican Republic refer to ‘tacit contracts’ as a kind of ‘agreement’. For a detailed account of conscious parallelism in Colombia’s case law, see J. D. Gutiérrez, ‘El Paralelismo Consciente En El Derecho de La Competencia’, in I. S. Ortiz (ed), Estudios en derecho de la competencia (Universidad Externado de Colombia, 2022). 85 86

South America  517 in order to configure a consciously parallel pricing practice, it is enough that a price symmetry is noticed and verified in a given period of time, with homologous variations and homogeneous trends, as long as such symmetry is accompanied by additional factors that denote that the behaviour of prices responds to an agreement between the agents involved or to an abstinence from competition and not to variables of another nature. Such factors have been called by the doctrine and by the most well-known competition authorities around the world as ‘plus factors’, as well as by the most authoritative doctrine.88

Finally, Peru was not an early adopter or enforcer of antitrust laws, but since the mid-1990s its competition agency, Indecopi, has actively and steadily prosecuted cartels.89 Since Indecopi started operating, in 1993, the agency has imposed fines in more than 30 cases of horizontal anticompetitive agreements. The most common types of ‘collusive horizontal practices’ detected by Indecopi during this period were price fixing.90 In contrast with other jurisdictions of the region, the competition agency has detected and sanctioned few bid rigging cases. According to the OECD’s latest peer review report, not only is the enforcement against bid rigging in Peru ‘very scarce’, but the agency has failed to coordinate its work with public procurement authorities.91 Indecopi has fined cartels in various markets, such as: flour (price fixing); live poultry (price fixing); automobile insurance services (price fixing); sodium silicate (price fixing and market allocation); medical liquid oxygen (bid rigging); road transport (several, price fixing); construction (bid rigging); taxi services (price fixing); notary services (price fixing); drugstores (price fixing); haemodialysis services (bid rigging); toilet paper (price fixing, cross-national cartel); liquefied petroleum gas (several, price fixing); and the maritime transport market (international cartel, market allocation), among others.92 Peru is one of four Latin American jurisdictions93 in which a competition agency that is competent in matters related to the telecommunications sector (Ospitel) coexists with another competition agency (Indecopi) that oversees all other sectors. Unlike Indecopi, the investigative activities undertaken by Osiptel in Peru have focused on abuses of dominant position rather than on collusion; furthermore, Osiptel has not issued a single fine due to collusive conduct.94

88 Cement III Case, Resolución 81391, 2017 (Superintendencia de Industria y Comercio, 11 December 2017) 81. 89 See OECD, OECD-IDB Peer Reviews of Competition Law and Policy: Peru (2018) www​ .oecd​.org/​daf/​competition/​PERU​-Peer​-Reviews​-of​-Competition​-Law​-and​-Policy​-2018​.pd [accessed 21 March 2022]. 90 Indecopi, Indecopi: Buscador de Resoluciones (2021) http://​servicio​.indecopi​.gob​.pe/​b​uscadorRes​ oluciones/​competencia​.seam [accessed 21 March 2022]. 91 OECD (n 89). 92 For descriptions of the main cartels cases in Peru, see E. Quintana, Análisis de las Funciones del Indecopi a la luz de las Decisiones de sus Órganos Resolutivos – Libre Competencia (Indecopi, 2013); and OECD (n 89). 93 The other jurisdictions in Latin America and the Caribbean with this institutional configuration are Mexico, Costa Rica and the Dominican Republic. 94 OECD (n 89).

518  Research handbook on cartels C.

Andean Episode: The Paper Tissue Case

The Andean Community’s antitrust authority, the SGCAN, has imposed only one cartel fine. While the supranational authority has scarcely enforced the Andean competition law, the Paper Tissue case is the most important cross-national cartel prosecuted in the history of Latin America. The story began in 2014, at the national level, when a multinational company that operated in Colombian markets filed an application for the SIC’s leniency programme. Two years later, based on the information contributed by the applicant and the evidence collected in the investigation, the SIC concluded that between the years 2000 and 2013 four companies fixed prices in different paper markets: toilet paper; napkins; kitchen towels; and hand and face tissues.95 The investigation did not stop at Colombia’s borders: similar cases related to the paper tissue market were also prosecuted by the national antitrust agencies of Peru, Chile and Ecuador. The Andean chapter of the story started in October 2016 with a request from the Ecuadorian competition agency, the SCPM, to the SGCAN. The SCPM formally asked the Andean authority to investigate four companies for allegedly fixing prices and dividing the paper tissue markets in Colombia and Ecuador, thereby infringing the Andean competition law. One of the greatest controversies spurred by this case originated in the fact that the SCPM supported its request with evidence that had been previously presented by the leniency applicant at the national level. The defendants argued that the evidence filed by the SCPM was illegal since such information was supposed to be confidential and exclusively for Ecuadorian authorities. In its first instance decision, issued in May 2018, the SCGAN concluded that it was not competent to decide whether the information that had been collected by the SCPM in its national administrative proceeding, and later filed before SCPM, should have been subject to confidentiality. Furthermore, the SGCAN concluded that, between 2006 and 2013, companies based in Colombia had fixed prices of Ecuadorian paper tissue markets.96 The SGAN fined four companies, two of them based in Colombia and two in Ecuador, including the companies that had been leniency applicants in both countries. In November 2021, the SGCAN decided the application for appeal of the defendants and partially confirmed its initial decision. The SGCAN concluded that the cartel existed, but reduced the value of the fines imposed on the companies that had participated in the Ecuadorian leniency programme. One of the biggest concerns raised by competition agencies and practitioners of the region was that the precedent could reduce the incentives of companies to participate in national leniency programmes due to the risk of ending up in an Andean-level investigation. This risk appeared to be credible due to the lack of coordination between the national agencies and the SGCAN and the fact that the Andean competition law does not have leniency rules. However, the SGCAN explicitly acknowledged in its second instance decision, following the case law of the Andean Tribunal of Justice, that the information collected through leniency applications at the national level should not be used in other processes against the applicants.97

Papers Case, Resolución 31739, 2016 (Superintendencia de Industria y Comercio, 26 May 2016). Tissue Paper Case, Gaceta 3292 (Secretaría General de la Comunidad Andina de Naciones, 28 May 2018). 97 Tissue Paper Case, Second Instance, Gaceta 4369 (Secretaría General de la Comunidad Andina de Naciones, 19 November 2021). 95 96

South America  519

V.

CONCLUSIONS

In South America, 11 countries and one supranational jurisdiction enacted competition laws and created antitrust agencies. The laws of these South American jurisdictions share similar traits, for example: (i) the wording of the legislations was inspired by the Sherman Act and the European Union’s legislation; (ii) the laws incorporate the term ‘agreement’ as an open-text category that includes different sorts of arrangements among economic agents; and (iii) most of the statutes combine two types of cartel prohibitions, a general prohibition clause and a list of anticompetitive horizontal agreements (mostly ‘hard-core cartels’). This chapter also reported that enforcement activities against cartels in South America are highly concentrated in a handful of jurisdictions. Between 2000 and 2020, five countries were responsible for 93 per cent of the fines imposed for cartels in the region: Argentina, Brazil, Chile, Colombia and Peru. Moreover, during the same period, Brazil and Colombia imposed 69 per cent of the cartel fines in South America, and Brazil accounted for almost half of all the fines. The chapter identified different enforcement trajectories followed by the South American jurisdictions. There is a group of five national jurisdictions that adopted competition law recently: Guyana, Uruguay, Bolivia, Ecuador and Paraguay. These countries are still building their enforcement capacity, and each has not detected more than a handful of cartels. Moreover, the chapter classified the ‘more experienced’ jurisdictions into two groups. Argentina and Venezuela were very active in the 1980s and 1990s, respectively, and then stalled in the 2000s and 2010s. The consolidation of governments that have reversed pro-market policies has significantly impacted the institutional trajectory of the competition agencies in Argentina and Venezuela. The route taken by Brazil, Colombia, Chile and Peru runs in the opposite direction: since the 1990s these jurisdictions have constantly progressed in their competition law enforcement capacity, and in the past two decades they account for 89 per cent of the fines imposed for cartels in South America. A common challenge that appeared in most of the jurisdictions of South America is the pervasiveness of cartelization in certain sectors that are key for basic consumption, such as agricultural and food products, health-related services and goods, energy, transportation, and construction products, for example sand and cement. A similar account was reported by the World Bank’s report on cartels in Latin America.98 This suggests that there could be a greater scope for collaboration among competition agencies in the region to share their lessons in the investigation of certain markets and to open new cross-national cases. There are diverse avenues of research on the fight against cartels in South America that could be developed in the future, such as: (i) understanding why some agencies specialize in prosecuting cartels that affect public procurement processes while other agencies have very few bid rigging cases; (ii) exploring why the great majority of South American jurisdictions do not offer an effective judicial path of damage recovery for cartel victims; and (iii) studying how certain competition agencies have built their prosecutorial capacities, particularly regarding digital evidence gathering in cartel investigations.

Martínez et al (n 8) 13–16.

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520  Research handbook on cartels

ANNEX Table 28A.1

Competition agencies that enforce cartel laws in South America

Antitrust authority

Current competition law(s) Articles that prohibit

Has the agency

anticompetitive agreements sanctioned cartels (general prohibition & list)

in the past five

Law 27,442, 2018

Art. 1 (general prohibition)

Yes

Supreme Decree 29,519,

Art. 10 (list)

No

Art. 36.1 (general

Yes

years? 1. Argentina – Comisión Nacional de Defensa de la Competencia (‘CNDC’) 2. Bolivia – Autoridad de Fiscalización y Control Social de Empresas (‘AEMP’) 3. Brazil – Conselho Administrativo de

Art. 2 (list) 2008 Law 12,529, 2011

Defesa Econômica (‘CADE’)

prohibition) Art. 36.3 (list)

4. Chile – Fiscalía Nacional Económica (‘FNE’) 5. Colombia – Superintendencia de Industria y Comercio (‘SIC’) 6. Ecuador – Superintendencia de Control del Poder de Mercado (‘SCPM’)

Decree Law 211, 1973

Art. 3 (general prohibition

(amended)

and list)

Law 155, 1959; Decree

Art. 1, Law 155 (general

2,153, 1992; Law 1,340,

prohibition)

2009

Art. 47, Decree 2152 (list)

Organic Law for the

Art. 11 (general prohibition

Regulation and Control of

and list)

Yes Yes

Yes

Market Power, 2011 7. Guyana – Competition and Consumer Affairs Commission of Guyana

Competition & Fair Trading

Art. 20.1 (general

Act, 2006

prohibition)

Law 4,956, 2013

Art. 8 (general prohibition

Art. 20.2 (list)

– (‘CCAC’) 8. Paraguay – Comisión Nacional de Competencia (‘CNC’) 9. Perú – Instituto Nacional de Defensa de la Competencia y de la Protección de

Yes

No

and list) Legislative Decree 1,034,

Art. 11 (list)

Yes

Supreme Decree 013, 1993

Art. 69 (general prohibition)

No

Law 18,159, 2007 (amended

Art. 2 (general prohibition)

No

by Law 19,833, 2019)

Art. 4 (list)

Decree 1,415, 2014

Art. 8 (general prohibition)

The agency is

Art. 9 (list)

inactive since the

Art. 7 (list)

Yes

2008

la Propiedad Intelectual (‘Indecopi’) 10. Perú – Organismo Supervisor de Inversión Privada en Telecomunicaciones (‘OSIPTEL’) 11. Uruguay – Comisión de Promoción y Defensa de la Competencia (‘CPDC’) 12. Venezuela – Superintendencia Antimonopolio (‘SA’) (formerly

mid-2010s.

ProCompetencia) 13. Andean Community of Nations – Secretaría General (‘SGCAN’)

Decision 608, 2005

29. North America Steven F. Cherry, Claire Bergeron, Lauren Ige, Mark Katz, Dajena Pechersky, Ernesto Duhne and Ivan Szymanski1

I. INTRODUCTION This chapter focuses on the cartel law of the United States, Canada and Mexico. All of these jurisdictions have robust antitrust enforcement regimes designed to target cartel activity. There are many similarities between these regimes. Each jurisdiction prohibits price fixing, bid rigging, market allocation and similar cartel conduct generally viewed as inherently anticompetitive. And the penalties for cartel conduct in each country are severe. Individual defendants may be sentenced to years of prison time, and corporations are subject to fines in the tens of millions or even hundreds of millions of dollars. Each jurisdiction also permits individuals and corporate entities that are the first to voluntarily disclose antitrust misconduct, and to cooperate in the investigation of that conduct, to obtain immunity from prosecution. Private plaintiffs in each of these jurisdictions also enjoy the right to sue for civil damages arising from unlawful cartel conduct. That said, there are differences in how the three North American countries deal with specific issues; for example, in how they may treat agreements between employers to fix wages, the statutes of limitations for bringing civil claims and claims brought on behalf of a class.

II.

CARTEL ENFORCEMENT IN THE UNITED STATES

A.

Overview of Cartel Prohibitions in the United States

The United States’ primary antitrust statutes – the Sherman Act and the Clayton Act – were enacted in 1890 and 1914, respectively, as part of the federal government’s efforts to regulate economic competition.2 These laws form the backbone of an antitrust enforcement scheme that provides for criminal and civil penalties for cartel conduct. Criminal cases are litigated by the Department of Justice’s (‘DOJ’) Antitrust Division, and are generally limited to cases involving ‘per se’ conduct – that is, conduct such as price fixing, bid rigging and market allocation that is so inherently anticompetitive that it is presumed to be unreasonable. Civil cases may be brought by the federal government or by state attorneys general or private parties. Under US law, it is generally not illegal for competitors to meet with each other, or even to share information through ‘information exchanges’ and the like. But agreeing to set prices,

1 Steven F. Cherry, Claire Bergeron and Lauren Ige wrote the section on the US. Mark Katz and Dajena Pechersky wrote the section on Canada. Ernesto Duhne and Ivan Szymanski wrote the section on Mexico. 2 See 15 USC § 1 et seq.

521

522  Research handbook on cartels reduce outputs, allocate markets or otherwise engage in ‘anticompetitive’ conduct is illegal, and because the requisite agreement may be inferred, courts may – and do – find that an agreement was formed based on circumstantial evidence, such as evidence that two competitors exchanged communications about pricing strategies and then engaged in parallel pricing.3 Criminal penalties and civil remedies for antitrust cases are high. In both types of case, significant benefits may be available to defendants who provide ‘cooperation’ as leniency applicants. B.

Criminal Conspiracy Offence

1. Elements Section 1 of the Sherman Act prohibits ‘every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce’.4 Although read literally, the Sherman Act would seem to prohibit every agreement that restrains trade or commerce, the Supreme Court has long clarified that the Act is properly construed as only prohibiting unreasonable restraints of trade.5 To establish a criminal violation of Section 1 of the Sherman Act, the government must show ‘(1) the charged conspiracy was knowingly formed and was in existence at or about the time alleged, (2) the defendant knowingly joined the charged conspiracy, and (3) the charged conspiracy either substantially affected interstate or foreign commerce or occurred within the flow of interstate or foreign commerce’.6 The first element requires the government to establish the existence of an agreement between two or more competitors with the purpose or effect of unreasonably restraining trade. An agreement exists where the parties have a ‘conscious commitment to a common scheme’.7 The agreement does not need to be formal or written. In addition, the agreement itself constitutes a criminal violation, so the government is not required to show that the parties took overt action in furtherance of the conspiracy.8 The second element requires the government to establish that the defendant knowingly joined the conspiracy. While intent is an element of a criminal antitrust offence,9 the government is not required to establish specific intent to violate the Sherman Act.10 Rather, in per se cases, the government only needs to prove that the defendant knowingly joined the conspiracy. The requisite intent may be inferred from the defendants’ participation in the agreement.11 The final element requires the government to show that the restraint of trade affected interstate or foreign commerce or occurred in the flow of such commerce. This element is satisfied if the activity ‘substantially and adversely affects interstate commerce’ regardless of whether the restraint is local or that the restraint was indirect.12

See, e.g., In re Plywood Antitrust Litig., 655 F.2d 627 (5th Cir. 1981) 633–34. 15 USC § 1. 5 See, e.g., Nw. Wholesale Stationers, Inc. v Pac. Stationery & Printing Co., 472 US 284 (1985) 289 (citing Chicago Board of Trade v US, 246 US 231 (1918)). 6 DOJ, An Antitrust Primer for Federal Law Enforcement Personnel (September 2018). 7 Monsanto Co. v Spray-Rite Serv. Corp., 465 US 752 (1984) 768. 8 Summit Health, Ltd. v Pinhas, 500 US 322 (1991) 330. 9 US v US Gypsum Co., 438 US 422 (1978) 435. 10 See US v Nippon Paper Indus. Co., 109 F.3d 1 (1st Cir. 1997) 7. 11 See, e.g., US v Koppers Co., 652 F.2d 290 (2nd Cir. 1981) 298. 12 Hosp. Bldg. Co. v Trs. of Rex Hosp., 425 US 738 (1976) 743. 3 4

North America  523 2. Agreements covered The government typically prosecutes only hard-core antitrust violations that are per se illegal.13 With a per se offence, the government does not need to establish anticompetitive effect from the conduct, as the existence of the agreement itself is all that is needed to establish a violation. The types of agreements that are considered per se illegal include price fixing, bid rigging and market allocation. Because output restrictions also have the effect of impacting price, agreements to restrict output are also per se illegal.14 Most recently, DOJ has brought criminal charges based on naked wage-fixing and no-poach agreements, contending they too are per se illegal.15 Price-fixing agreements include agreements to raise, fix, stabilize or maintain prices – they are not limited to agreements on actual price to be charged.16 For example, price-fixing agreements can include agreements regarding the list price or reference price used to start a negotiation or which the defendant uses to calculate its own price. Price-fixing agreements can also relate to other economic terms of sale such as discounts, rebates or warranties. Bid-rigging agreements typically involve conspirators taking turns to win bids, agreements not to bid on certain contracts or competitors submitting bids designed to be too high to give the appearance of competition.17 Market or customer allocation agreements are agreements to allocate business among participants, for example, by dividing territories or customers.18 Output restrictions are agreements to limit output, such as by setting quotas or by restricting production quantity, which may likewise affect price.19 Naked wage-fixing and no-poach agreements are agreements to set the wages of employees or not to hire or solicit employees from a competitor.20 Agreements that are not per se illegal are typically analysed under the rule of reason, which considers conduct to be unlawful only if the pro-competitive benefits are outweighed by its anticompetitive effect.21 These types of agreements are typically pursued civilly instead of criminally. 3. Penalties Violations of the Sherman Act are punishable by imprisonment of up to ten years for an individual and fines of up to $1 million for an individual and up to $100 million for a corporation

DOJ, Antitrust Division Manual (2018). The Antitrust Division Manual is currently undergoing revision. 14 See FTC v Superior Court Trial Lawyers Ass’n, 493 US 411 (1990); and US v Socony-Vacuum Oil Co., 310 US 150 (1940) 223. 15 DOJ (n 13). See also FTC and DOJ, Antitrust Guidance for Human Resource Professionals (20 October 2016) 4. 16 Socony-Vacuum (n 14) 174. See also DOJ, Price Fixing, Bid Rigging, and Market Allocation Schemes: What They Are and What to Look For (February 2021). 17 DOJ (n 16). 18 DOJ (n 16). 19 See FTC v Superior Court Trial Lawyers Ass’n (n 14); National Collegiate Athletic Ass’n (n 14) 100; and Socony-Vacuum (n 14) 223. 20 In recent years the Antitrust Division has expressed a focus on antitrust violations in labour markets and has announced its intention to prosecute these types of agreements criminally: FTC and DOJ (n 15). 21 Nat’l Soc’y of Prof’l Eng’rs v US, 435 US 679 (1978); and Continental TV, Inc. v GTE Sylvania, Inc., 433 US 36 (1977). 13

524  Research handbook on cartels for each count.22 However, under alternative minimum sentencing provisions, the government may seek fines of up to the greater of twice the pecuniary gain to the conspirators or loss to the victims caused by the antitrust violation.23 4. Defences a. Statute of limitations The statute of limitations period for a criminal violation of the Sherman Act is five years after the commission of the offence.24 An antitrust conspiracy is a continuing offence, so the statute of limitations will not begin to run until the conspiracy has ended or has been abandoned. As long as a portion of the alleged conspiracy occurred during the five-year statute of limitations timeframe, the Antitrust Division may bring criminal antitrust charges for the entire period of the conspiracy.25 b. Foreign Trade Antitrust Improvements Act (‘FTAIA’) The Foreign Trade Antitrust Improvements Act (‘FTAIA’) amended the Sherman Act to lay down a general rule placing all (non-import) activity involving non-US commerce outside the Sherman Act’s reach.26 A defence based on the FTAIA is available to a defendant where its conduct did not (1) have a ‘direct, substantial, and reasonably foreseeable’ anticompetitive effect on US commerce; or (2) that effect on US commerce did not ‘give rise to’ the claim. The Antitrust Division has taken a relatively pro-enforcement view on the FTAIA.27 For example, the Division considers an effect to be ‘direct’ if ‘there is a reasonably proximate causal nexus’. The Division also takes the position that the substantiality requirement ‘does not provide a minimum pecuniary threshold, nor does it require that the effects be quantified’.28 The Division views the ‘reasonable foreseeability’ requirement as an objective test, considering whether the effect would be ‘foreseeable to a reasonable person making practical business judgments’.29 c. State action immunity The state action, or Parker, doctrine immunizes anticompetitive conduct that is engaged in pursuant to state government policies or regulations.30 The Supreme Court has held that the state action defence is available to private parties if they can show that the challenged restraint is (1) pursuant to a ‘clearly articulated and affirmatively expressed […] state policy’ and (2) ‘actively supervised by the State itself’.31 A clearly articulated state policy may be found in an express statutory provision, or where it is a foreseeable outcome of the state’s authority – that

15 USC § 1. 18 USC § 3571(d). 24 18 USC § 3282(a). 25 See Flintkote Co. v US, 7 F.3d 870 (9th Cir. 1993) 873. 26 See 15 USC § 6a et seq. 27 DOJ and FTC, Antitrust Guidelines for International Enforcement and Cooperation (13 January 2017) 17. 28 ibid 21–22. 29 ibid. 30 Parker v Brown, 317 US 341 (1943) 351. 31 California Retail Liquor Dealers Ass’n v Midcal Aluminum, Inc., 445 US 97 (1980) 105. 22 23

North America  525 is, the challenged action is the logical result of the state actor’s authority to regulate.32 The active supervision requirement is met where state officials have and exercise the power to review and, if needed, disapprove of particular anticompetitive acts of private parties.33 d. Foreign sovereign compulsion The foreign sovereign compulsion defence protects private parties from antitrust liability where their conduct was compelled by a foreign government.34 The defence is generally available only where compliance with the state directive required the anticompetitive conduct, rather than where the conduct was merely consistent with the sovereign directive.35 e. Noerr–Pennington doctrine The Noerr–Pennington doctrine recognizes that the First Amendment gives companies the right to petition the government, and to collaborate with competitors in support of legitimate petitioning, even if the result of the government intervention is anticompetitive.36 Such petitioning may not be prosecuted, even if it would otherwise be found to violate the antitrust laws. The Supreme Court identified a ‘sham’ exception to antitrust immunity where (1) the petitioning is ‘objectively baseless’, that is, no reasonable petitioner would expect a favourable outcome, and (2) the petitioner’s motive was to use the adjudicatory process itself as an ‘anticompetitive weapon’.37 f. Regulated industries Certain federal statutes offer antitrust immunity to specific regulated industries, including agriculture, export trade, insurance, labour and professional sports, among others.38 The scope of the antitrust immunity offered is limited by the statute, and conduct falling outside the scope of the statutory exemptions remains subject to antitrust enforcement.39 C. Enforcement 1. Criminal enforcement authorities The Department of Justice’s Antitrust Division has exclusive authority over criminal enforcement of the federal antitrust laws in the United States. In addition, some states have state criminal antitrust statutes, which are enforced by the respective state attorneys general. The Antitrust Division’s investigations originate from many sources, including the Division’s Leniency Program, other government agencies, US Attorneys and state attorneys general, and press reports.40 The Antitrust Division may request the assistance of the FBI in a criminal investigation.41 City of Columbia v Omni Outdoor Advert., Inc., 499 US 365 (1991) 373. North Carolina State Board of Dental Examiners v FTC, 574 US 494 (2015) 507. 34 See Mannington Mills, Inc. v Congoleum Corp., 595 F.2d 1287 (3d Cir. 1979) 1293. 35 ibid 1293. 36 United Mine Workers of Am. v Pennington, 381 US 657 (1965). 37 Professional Real Estate Inv’rs, Inc. v Columbia Pictures Indus., Inc., 508 US 49 (1993) 60–61. 38 See, e.g., Credit Suisse Securities (USA) LLC v Billing, 551 US 264 (2007). 39 For a non-exhaustive list of statutes containing antitrust immunities, see DOJ (n 13) II-13–II-24. 40 ibid III-6. 41 ibid III-15. 32 33

526  Research handbook on cartels When deciding whether to pursue a criminal investigation, the Antitrust Division will consider (1) whether the allegations are sufficiently credible to warrant a criminal investigation, and (2) whether the matter is significant, based on factors such as the volume of commerce, nature of the conduct, breadth of the geographic area impacted, potential for expansion of the investigation, deterrent impact and degree of culpability of the conspirators.42 During the course of a criminal investigation, the Antitrust Division may issue subpoenas duces tecum and subpoenas ad testificandum, which require the production of documentary materials and sworn testimony before the grand jury, respectively.43 The grand jury, which is composed of between 16 and 23 citizens, hears the prosecutors’ evidence in the case and decides whether there is probable cause to believe that a criminal offence has been committed, in which case it issues an indictment, which formally charges the defendant. The Antitrust Division may use search warrants, generally carried out by FBI agents, to gather evidence when there is probable cause to believe that a crime has been committed and that evidence of that crime is located at the premises to be searched.44 For a search warrant to be valid, a magistrate judge must make a finding of probable cause, and the warrant must state the timeframe in which it must be executed (which can be no longer than 14 days from date of issuance) and identify the person or property to be searched, and any person or property to be seized.45 Once a warrant is granted, the search will be conducted by a team of agents, who may also conduct on-site interviews. Antitrust Division staff attorneys are not physically present during the search, but are generally available by phone.46 The Antitrust Division may also use wiretaps to gather evidence of an antitrust crime.47 A federal judge will evaluate the Antitrust Division’s application for wiretap authority to determine whether there is probable cause that a particular crime has been or is about to be committed and probable cause to believe that communication concerning the offence will be obtained, and that normal investigative procedures have failed or are unlikely to succeed.48 In addition, where there is a leniency applicant or other cooperating witness, the Antitrust Division may engage in consensual monitoring, with the cooperating witness agreeing to record a conversation with another conspirator.49 No warrant is required for such consensual monitoring. The Antitrust Division may issue civil investigative demands (‘CIDs’) to compel the production of information and documents in civil investigations.50 A CID may be issued if there is reason to believe that the person may have documents relevant to a civil antitrust investigation. Although CIDs are filed in the context of a civil antitrust investigation, the documents produced in response to a CID may also be used by the Antitrust Division to assess whether to proceed with a criminal prosecution against the recipient of the CID or against another defendant.

44 45 46 47 48 49 50 42 43

ibid III-6–III-7. ibid III-85. ibid III-90. Fed. R. Crim. Proc. 41. DOJ (n 13) III-91. 18 USC § 2516(r). 18 USC § 2518(3). DOJ (n 12) III-84. 15 USC §§ 1311-14; and DOJ (n 13) III-45.

North America  527 2. Prosecutions a. Charging and indictments The Antitrust Division makes charging recommendations consistent with the Department of Justice’s Principles of Federal Prosecution, the Principles of Federal Prosecution of Business Organizations and the Division’s leniency policies.51 Division staff will charge the ‘most serious, readily provable offenses’, unless there are exceptional cases where a variance is warranted.52 Typically, the Division staff will inform defence counsel when it is seriously considering recommending an indictment and the defence will be afforded an opportunity to meet with Staff and the Office Chief about the recommendation.53 Staff recommendations to seek an indictment are submitted to the Division’s Front Office accompanied by a memorandum with information on the defendants, the proposed offences to be charged, a summary of key evidence that the government would likely present at trial, a summary of any anticipated defences and potential weaknesses in the government’s evidence and sentencing and charging analysis, among other items. The decision to proceed with seeking an indictment from the grand jury ultimately is made by the Division’s Front Office.54 Once an indictment is returned, under the Speedy Trial Act, the government has 70 days to bring a case to trial, absent an agreement to extend.55 Failure to comply with the Speedy Trial Act deadline may result in dismissal of the indictment.56 Once a defendant has been indicted, the defendant generally has two options: to plead guilty or to plead not guilty and go to trial. The Division’s policy is to oppose pleas of nolo contendere.57 Relatively few cases ultimately go to trial, and most that do are against individuals. b. Guilty pleas Criminal prosecutions may be settled through a negotiated plea agreement with the Antitrust Division where the defendant pleads guilty to the charged conduct and makes a factual admission of guilt. The Antitrust Division has developed standard model corporate and individual plea agreements for violations of the Sherman Act, which are subject to further negotiation.58 The Antitrust Division typically enters into two types of plea agreements with defendants: Type B agreements and Type C agreements. Type B agreements c. Type B agreements are plea agreements entered into pursuant to Federal Rule of Criminal Procedure 11(c)(1)(B), under which the Antitrust Division recommends, or agrees not to oppose, a particular sentence. The defendant may join the Antitrust Division’s recommendation, but is not required to do so – the defendant may argue for a sentence that is shorter than the one recommended by the Antitrust Division. Type B agreements are not binding on the court, but are binding on the defendant as long as the Antitrust Division’s sentencing recom DOJ (n 13) III-119. ibid III-119. 53 ibid III-120. 54 ibid III-121. 55 ibid IV-64. 56 ibid IV-64. 57 ibid IV-64. 58 DOJ, Model Annotated Corporate Plea Agreement (14 March 2019); and DOJ, Model Annotated Individual Plea Agreement (31 December 2018). 51 52

528  Research handbook on cartels mendation is consistent with what is contained in the plea agreement.59 The defendant cannot withdraw a guilty plea even if the court imposes a sentence other than the one contained in the plea agreement. d. Type C agreements Type C agreements are plea agreements entered into pursuant to Federal Rule of Criminal Procedure 11(c)(1)(C), under which the Antitrust Division and the defendant agree to a specific sentence or sentencing range. Unlike a Type B agreement, if the court accepts the Type C plea agreement, the joint sentencing recommendation of the parties is binding on the court – the court may not deviate from the recommended sentence. And if the court does not accept the agreement, including the recommended sentence, the parties are free to withdraw from the agreement. e. Extradition Foreign nationals are subject to the US antitrust laws where their conduct affects US commerce. The Antitrust Division has brought charges against numerous foreign nationals, many of which have resulted in plea agreements and some of which have involved prison sentences served in the United States. Where foreign nationals are under investigation or have already been indicted but remain outside of custody, the Antitrust Division will typically place them on a ‘border watch’ list to monitor for their entry into the United States. If they have already been indicted (sometimes under seal), the Division will also place them on Interpol’s Red Notice list so that they are subject to provisional arrest and potential extradition to the United States if they are caught entering participating countries.60 The availability of extradition generally depends on whether the United States has an extradition treaty in place with the relevant country, and whether the antitrust violation is a criminal violation in both countries. The Antitrust Division achieved its first extradition based on an antitrust charge in 2014, resulting in an Italian national being extradited from Germany to stand trial in the United States. (He subsequently agreed to plead guilty.61) 3. Sentencing and calculation of fines The Antitrust Division seeks sentences based on the (advisory) US Sentencing Guidelines, which address antitrust violations in Section 2R1.1.62 The Guidelines’ range for an antitrust violation is based on a number of factors, including the volume of affected commerce, the size of the defendant company and the defendant’s role in the offence.63 Where the defendant provides substantial cooperation in the investigation or prosecution of others, the Antitrust Division may request a downward departure from the amount within the Guidelines range that it would otherwise request (including from the bottom of the Guidelines range).64

S. Hammond, ‘The US Model of Negotiated Plea Agreements: A Good Deal with Benefits For All’ (OECD, 17 October 2006). 60 S. Hammond, ‘Charting New Waters in International Cartel Prosecutions’ (2 March 2006). 61 DOJ, ‘First Ever Extradition on Antitrust Charge’ (4 April 2014). 62 US Sentencing Commission, 2018 Guidelines Manual (‘USSG’) (1 November 2018) § 2R1.1. 63 USSG § 2 R1.1. 64 USSG §§ 5K1.1 and 8C4.1. 59

North America  529 a. Immunity and leniency The DOJ’s Leniency Program affords immunity from prosecution to corporate or individual conspirators who are the ‘first in the door’ to report criminal antitrust violations, so long as certain conditions are met. The programme is designed to incentivize self-reporting of cartel activity to avoid criminal convictions and the associated penalties and incarceration. In addition, the Antitrust Criminal Penalty Enhancement and Reform Act (‘ACPERA’) provides further incentives by limiting a leniency applicant’s potential civil liability.65 The DOJ’s Corporate Leniency Policy offers two forms of corporate leniency: Type A and Type B.66 The DOJ also offers individual leniency to individuals where certain requirements are met. b. Type A leniency The DOJ will grant Type A Leniency to a corporation that reports criminal antitrust activity before the DOJ has begun an investigation where the following conditions are met: (1) the corporation is the first to report the illegal activity – the DOJ has not received information about the activity from any other source; (2) the corporation, upon discovery of the illegal activity, ‘promptly reports’ it to the DOJ; (3) the corporation reports the illegal activity with ‘candor and completeness’ and the confession of wrongdoing is a corporate act, as opposed to isolated confessions of individual executives; (4) the corporation provides ‘timely, truthful, continuing, and complete’ cooperation to the DOJ throughout the investigation; (5) the corporation uses ‘best efforts’ to make restitution to injured parties, remediate the harm caused by the illegal activity, and to improve its compliance program; and (6) the corporation did not coerce another party to participate in the illegal activity and ‘clearly was not the leader or originator of that activity’.67 With Type A Leniency, current employees of the corporation who admit involvement in the illegal activity will also receive leniency, as long as they cooperate with the investigation.68 c. Type B leniency The DOJ will grant Type B leniency where it has already initiated an investigation if the following conditions are met: (1) at the time the corporation reports the illegal activity, the DOJ does not yet have evidence against the corporation that is likely to result in a sustainable conviction; (2) the corporation, upon discovery of the illegal activity, ‘promptly reports’ it to the DOJ; (3) the corporation reports the illegal activity with ‘candor and completeness’ and the confession of wrongdoing is a corporate act, as opposed to isolated confessions of individual executives; (4) the corporation provides ‘timely, truthful, continuing, and complete’ cooperation that advances the DOJ’s investigation; (5) the corporation uses ‘best efforts’ to make restitution to injured parties, remediate the harm caused by the illegal activity, and to improve Pub. L. No. 108-237, § 215(a), 118 Stat. 668 (2004). DOJ, Antitrust Division Leniency Policy and Procedures (4 April 2022). 67 ibid. 68 If an employee does not fully cooperate with DOJ’s investigation, he or she will be ‘carved out’ of the leniency grant. In addition, DOJ reserves the right to revoke leniency protections for employees who continue to participate in the anticompetitive activity after the company has notified the individual to cease his or her participation, and for any employee who has obstructed or attempted to obstruct any investigation of the activity: DOJ, ‘Frequently Asked Questions About The Antitrust Division’s Leniency Program and Model Leniency Letters’ (26 January 2017) 20–21. 65 66

530  Research handbook on cartels its compliance program; (6) the corporation did not coerce another party to participate in the illegal activity and ‘clearly was not the leader or originator of that activity’; and (7) the corporation is the first to qualify for leniency for the illegal activity reported and the DOJ determines that granting leniency would not be unfair to others.69 With Type B leniency applicants, the DOJ has more discretion with respect to whether current officers, directors and employees will receive leniency. While the DOJ often extends leniency to current employees of Type B applicants, it has the discretion to carve out ‘highly culpable’ executives.70 d. Individual leniency DOJ’s Leniency Policy for Individuals offers leniency to individuals who report illegal antitrust activity on their own behalf, not as part of a corporate proffer, before an investigation has begun, where the following conditions are met: (1) the DOJ has not received information about the illegal activity from another source; (2) the individual reports the illegal activity with ‘candor and completeness’ and provides ‘timely, truthful, continuing, and complete’ cooperation to the DOJ throughout its investigation; and (3) the individual did not coerce any other party to participate and was not the leader of the activity.71 e. Leniency process Counsel may obtain a ‘marker’ from the Antitrust Division upon learning of a possible criminal violation by reporting that they uncovered evidence of a possible antitrust violation and disclosing the general nature of the conduct, the industry or product/service involved and the client’s identity.72 The marker holds the applicant’s place in line for leniency while they gather additional information to perfect the application.73 The length of time a defendant has to perfect a marker depends on several factors, including the location and number of employees that need to be interviewed, amount and location of documents and whether the Division has an ongoing investigation into the conduct.74 Counsel generally will be required to provide an attorney proffer about their investigation findings, to produce documents and to make witnesses available for Division interviews. If these requirements are met, and establish an antitrust violation, the Division will grant a conditional leniency letter, which is the initial letter provided to a leniency applicant providing leniency conditioned upon the applicant meeting certain obligations over the course of the criminal investigation (typically, cooperation in the investigation of co-conspirators and the payment of restitution to any victims).75 After all obligations have been met, the Division will provide a final leniency letter.76 4. Corporate compliance programmes DOJ policy provides that, in making charging and sentencing decisions, the DOJ must consider whether a company has an effective antitrust compliance programme designed to detect DOJ (n 66). ibid. 71 ibid. 72 ibid. 73 ibid. 74 DOJ, Revised Leniency Policy FAQs (3 January 2023). 75 ibid. 76 ibid. 69 70

North America  531 and prevent misconduct. In deciding whether to bring criminal charges, prosecutors consider the ‘adequacy and effectiveness of the corporation’s compliance program at the time of the offense, as well as at the time of the charging decision’.77 Among other factors, prosecutors will look at whether the compliance programme that was in place at the time of the violation led to the uncovering of the violation, and whether, since the uncovering of the violation, the company has made ‘remedial efforts and improvements’ to prevent the violation’s reoccurrence.78 An effective corporate compliance programme may also help a defendant achieve a reduction in sentencing. The Guidelines provide that a corporate defendant may receive a three-point reduction in its culpability score if a defendant has an effective compliance programme, and an effective compliance programme may otherwise be relevant in the Division’s determination of an appropriate level of fine.79 D.

Civil Actions for Damages

1. Procedures/persons who may sue Under Section 4 of the Clayton Act, ‘any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws’ may sue for injunctive relief, as well as treble damages, based on joint and several liability, plus attorneys’ fees and costs. Contribution is not available – meaning that any defendant may be sued for three times the amount of the damages caused by all of the defendants, and has no right to recover from any of the other defendants for their share of the damages. Two Supreme Court cases lay out the parameters for who may sue under the Clayton Act. In Hanover Shoe, the Supreme Court held that, subject to some narrow exceptions, when the plaintiff is a ‘direct purchaser’ of the product allegedly subject to an overcharge, a defendant may not defend on the ground that the overcharge was passed on to another purchaser further down the supply chain.80 In Illinois Brick, the Court held that the same reasoning precludes most indirect purchasers from suing for damages under federal law.81 The combined effect of Hanover Shoe and Illinois Brick is that federal antitrust claims generally may only be brought by direct purchaser plaintiffs. But a number of states have enacted their own antitrust laws specifically allowing indirect purchasers to sue under state law.82 In addition, some states allow cartel claims to be brought under state consumer protections statutes and/or common law claims for unjust enrichment.83 In recent years, an increasing number of civil antitrust cases have also been filed by state attorneys general (‘state AGs’). State AGs may assert claims based on their own direct or indirect purchases. In some states, state AGs may also bring antitrust claims on behalf of their

DOJ, Justice Manual (2018) § 9-28.800; and DOJ, Evaluation of Corporate Compliance Programs in Criminal Antitrust Investigations (July 2019). 78 DOJ (2019) (n 77) 13. 79 USSG § 8C2.5(f). 80 Hanover Shoe, Inc. v United Shoe Machinery Corp., 392 US 481 (1968). 81 Illinois Brick Co. v Illinois, 431 US 720 (1977). 82 See M. Lindsay, ‘Overview of State RPM’ [April 2017] The Antitrust Source 1. 83 See In re New Motor Vehicles Canadian Export Antitrust Litig., 350 F. Supp. 2d 160 (D. Maine 2004) 177–207. 77

532  Research handbook on cartels citizens when their citizens were direct or indirect purchasers. And finally, under some states’ laws, state AGs may seek civil penalties. When multiple suits are filed by different groups of plaintiffs bringing claims based on the same alleged conduct, they are often consolidated into a ‘multidistrict litigation’ (‘MDL’) – a process that allows related cases to be transferred by the Judicial Panel on Multidistrict Litigation to a single judge and consolidated for pretrial proceedings.84 Each case that has not been terminated is then generally remanded back to its originating district court for trial. In addition to private plaintiffs and state AGs, the Clayton Act authorizes DOJ to bring civil suits seeking damages, injunctions, and disgorgement of profits.85 And under Section 5 of the Federal Trade Commission Act, the Federal Trade Commission (‘FTC’) may also bring civil and administrative actions to enforce the Sherman and Clayton Acts through injunctions and civil and administrative penalties.86 2. Elements of a claim To succeed on a civil claim, a plaintiff must establish: (a) an agreement; (b) an unreasonable restraint of trade; and (c) a substantial effect on interstate commerce. a. An agreement As in a criminal case, a civil plaintiff must establish that there was concerted action among two or more individuals or entities. In Copperweld, the Supreme Court held that an agreement between entities that are part of the same corporate family (for example, a parent company and its subsidiaries) or employees of the same company or corporate family is unilateral action, not concerted action for purposes of a Sherman Act offence.87 As in the criminal context, an agreement may be established through direct evidence or through circumstantial evidence.88 Courts have found that several types of factors (known as ‘plus factors’), when combined with parallel conduct, may suggest a conspiracy, including evidence of motive to enter into a conspiracy, evidence that the defendant acted contrary to its own interests and evidence that the defendant had the opportunity to conspire, followed shortly thereafter by parallel conduct.89 b. An unreasonable restraint of trade A plaintiff must also establish that the defendant’s conduct amounted to an unreasonable restraint of trade. As noted above, certain types of practices, such as price fixing between competitors, are considered to be so inherently anticompetitive that they are deemed illegal under the ‘per se’ rule.90 All other types of restraints are analysed under the ‘rule of reason,’ under which a court will assess the pro-competitive and anti-competitive effects of the alleged restraint.91 28 USC § 1407. 15 USC §§ 4 and 15. 86 See FTC, A Brief Overview of the Federal Trade Commission’s Investigative, Law Enforcement, and Rulemaking Authority (May 2021). 87 Copperweld Corp. v Independence Tube Corp., 467 US 752 (1984). 88 Bell Atl. Corp. v Twombly, 550 US 544 (2007) 557. 89 See, e.g., US v Apple, Inc., 791 F.3d 290 (2d Cir. 2015) 315. 90 Socony-Vacuum (n 14). 91 Ohio v American Express Co., 138 S. Ct. 2274 (2018) 2284. 84 85

North America  533 c. A substantial effect on interstate commerce Finally, a plaintiff must establish that the defendant’s conduct had a ‘substantial effect on interstate commerce’.92 As the Supreme Court has held, this means that a plaintiff must show that the activities ‘infected’ by the alleged conspiracy have, ‘as a matter of practical economics’, a ‘not insubstantial effect on the interstate commerce involved’.93 3. ACPERA benefits Defendants who have applied for and received leniency under the DOJ’s Corporate Leniency Program may also limit their civil liability by complying with the cooperation obligations under the Antitrust Criminal Penalty Enhancement and Reform Act (‘ACPERA’). Under ACPERA, the leniency applicant’s civil liability is limited to single damages based on its own sales, rather than the treble damages and joint and several liability that other defendants face.94 However, in order to qualify for this benefit, leniency applicants must provide civil plaintiffs with a ‘full account’ of known facts concerning the cartel; ‘furnish all documents or other items […] potentially relevant to the civil action’; and use ‘best efforts to secure and facilitate’ cooperation from individuals.95 Frequently, leniency applicants will provide attorney proffers, documents, and witness interviews. In addition, in assessing whether a leniency applicant has met those criteria, courts consider the ‘timeliness’ of the applicant’s or cooperating individual’s cooperation.96 To date, there is scant case law governing what constitutes a ‘full account’ of the relevant facts or ‘best efforts’ to secure individuals’ cooperation, or when cooperation is considered ‘untimely’. One 2013 decision found that the defendants were not entitled to ACPERA benefits where they withheld certain facts from the plaintiffs that they had previously disclosed to DOJ.97 Other decisions have emphasized that in general, determinations about whether a leniency applicant is entitled to ACPERA benefits should not be made until post-trial, when the court has imposed judgment or otherwise determined liability and damages.98 4. Class actions Private civil actions are often filed as class actions, whereby certain named plaintiffs seek to represent the interests of a broader group of similarly situated individuals. Rule 23 of the Federal Rules of Civil Procedure states that a suit may proceed as a class action only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defences of the representative parties are typical of the claims or defences of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.99 Plaintiffs seeking monetary damages must also show that questions of law or fact common to the class predominate over questions affecting

McLain v Real Estate Bd. of New Orleans, Inc., 444 US 232 (1980) 242. ibid 246. 94 Pub. L. No. 108-237, § 213(a), 118 Stat. 668 (2004). 95 ibid § 213(b), 118 Stat. 666-67 (2004). 96 ibid § 213(c), 118 Stat. 666 (2004). 97 In re Aftermarket Automotive Lighting Products Antitrust Litig., 2013 WL 4536569 (CD Cal. 26 August 2013) *4. 98 See, e.g., In re Polyurethane Foam Antitrust Litig., 314 F.R.D. 226 (ND Ohio 2014) 290. 99 Fed. Rules Civ. P. 23(a). 92 93

534  Research handbook on cartels only individual members, and that proceeding as a class action is superior to proceeding with individual adjudications.100 Civil antitrust claims are often filed as class actions, and it is not uncommon for a single MDL to contain multiple putative class actions, brought by purchasers at different levels in the supply chain (for example, a ‘direct purchasers’ class, an ‘indirect resellers class’ and an ‘end payers’ class). In opposing class actions, defendants usually focus largely on the ‘predominance’ requirement, seeking to show that individualized issues among members of the class preclude class certification. 5. Arbitration Civil antitrust claims may also be subject to arbitration. Agreements to arbitrate are commonplace in purchasing contracts and invoices in certain industries, and under the Federal Arbitration Act (‘FAA’) the litigation of any claim that is ‘referable to arbitration under an agreement in writing for such arbitration’ shall be stayed.101 The Supreme Court has upheld a decision staying litigation and compelling arbitration of antitrust claims where the contracts at issue contained a broadly worded arbitration clause.102 Where the defendant has been sued for joint and several liability based on sales by an alleged co-conspirator, who had an arbitration provision in its contract with the plaintiff, the defendant may under some circumstances still be able to obtain a stay of the litigation and to compel arbitration under the co-conspirators’ agreement based on equitable estoppel.103 Whether an arbitration agreement applies may be especially important with respect to a putative class action. The Supreme Court has held that an arbitration may not be brought as a class action where the arbitration provision is silent or ambiguous on the issue (or outright prohibits class actions).104 6. Defences a. Statute of limitations The period of limitations for civil suits under the Sherman Act and Clayton Act is four years.105 However, a plaintiff may argue that the period of limitations was tolled due to the defendant’s ‘fraudulent concealment’, in which case the period will be extended to when the plaintiff knew or reasonably should have known of the wrongdoing.106 Some courts have also held that under the continuing violation doctrine, the period of limitations is tolled so long as there continue to be sales of the product that were affected by the anticompetitive conduct.107 In addition, a separate provision tolls the period of limitations during the pendency of an antitrust proceeding brought by the DOJ.108 The period of limitations for antitrust suits brought under state law varies from state to state, but typically ranges from four to six years.109

ibid 23(b). 9 USC § 3. 102 Mitsubishi Motors Corp. v Soler Chrysler-Plymouth, Inc., 473 US 614 (1985) 617 and 640. 103 See, e.g., JLM Indus., Inc. v Stolt-Nielsen SA, 387 F.3d 163 (2d Cir. 2004) 178 n 7. 104 Lamps Plus, Inc. v Varela, 139 S. Ct. 1407 (2019) 1416–19. 105 15 USC § 15b. 106 See, e.g., In re Animation Workers Antitrust Litig., 123 F. Supp. 3d 1175 (ND Cal. 2015) 1205. 107 See In re Pre-Filled Propane Tank Antitrust Litig., 860 F.3d 1059 (8th Cir. 2017). 108 15 USC § 16(i). 109 See, e.g., Ariz. Rev. Stat. §44-1410; and Wis. Stat. §133.18(2). 100 101

North America  535 b. Antitrust standing The Supreme Court has held that in order for a plaintiff to bring claims under the Sherman Act, the plaintiff must have ‘antitrust standing’, which is assessed based on an analysis of five factors: (i) the nature of the plaintiff’s injury and whether the injury is of the type that the antitrust laws were intended to prevent; (ii) the directness or indirectness of the injury; (iii) the existence of more direct victims; (iv) the potential for duplicative recovery; and (v) the danger of complex or speculative apportionment of damages.110 Several state courts have adopted a similar test governing antitrust standing under state law (including for indirect purchasers), or have followed federal precedent.111 Applying these factors, some courts have barred suits in which the plaintiffs did not participate in the same market as the defendants (for example, where the plaintiffs purchased a product for which the defendants manufactured and sold a single component).112 Others have dismissed lawsuits brought by plaintiffs who are merely suppliers to participants in the relevant market.113 A related issue concerns whether plaintiffs alleging ‘umbrella damages’ have antitrust standing. Umbrella damages are those arising from purchases from a supplier that was not part of the alleged conspiracy, based on the argument that the defendant’s conduct affected the non-conspiring supplier’s prices or the market as a whole. US courts have largely rejected ‘umbrella’ theories, reasoning that in such circumstances the plaintiff’s alleged injuries are too far removed from the defendant’s alleged conduct, and any measure of damages would be speculative.114 But there are decisions that have allowed such claims to proceed under certain states’ antitrust laws.115

III.

CARTEL ENFORCEMENT IN CANADA

A. Background Cartel conduct has been prohibited in Canada since competition laws were first introduced in 1889, and the detection and prosecution of cartels has remained an enforcement priority. Anti-cartel enforcement in Canada is a matter of federal jurisdiction. The Competition Act is the key federal legislation proscribing cartels in Canada.116 It is administered and enforced by the Commissioner of Competition, who heads the Competition Bureau. The Canadian federal prosecution office (the Public Prosecution Service of Canada) also has an important role in anti-cartel enforcement in Canada.

Associated Gen. Contractors of Cal., Inc. v California State Council of Carpenters, 459 US 519 (1983) 536–45. 111 See, e.g., In re Dynamic Random Access Memory (DRAM) Antitrust Litig., 516 F. Supp. 2d 1072 (ND Cal. 2007) 1088–89. 112 In re Dynamic Random Access Memory (DRAM) Antitrust Litig., 536 F. Supp. 2d 1129 (ND Cal. 2008) 1136. 113 See, e.g., Hanover 3201 Realty, LLC v Village Supermarkets, Inc., 806 F.3d 162 (3d Cir. 2015) 173. 114 See, e.g., Mid-West Paper Prods. Co. v Continental Grp., Inc., 596 F.2d 573 (3d Cir. 1979) 575. 115 See, e.g., County of San Mateo v CSL Ltd., 2014 WL 4100602 (ND Cal. 20 August 2014). 116 Competition Act, RSC 1985, cC-34, as amended. 110

536  Research handbook on cartels The Competition Act contains several general provisions that make it a criminal offence to engage in certain categories of ‘hard-core’ cartel conduct (such as price fixing), as well as several other criminal prohibitions with a more specific focus. It also contains a civil provision that applies to all other types of agreements between competitors that may have a negative impact on competition but that do not fall into the specific categories subject to criminal prohibition.117 This chapter focuses on criminal cartel enforcement in Canada and will not deal with the separate civil regime. Notwithstanding that cartel enforcement occupies a central position in Canadian competition law, recent case law is limited. This principally reflects the fact that, to the extent that proceedings are commenced, the vast majority of cartel cases in Canada are resolved by way of guilty plea rather than contested at trial. To address this gap in jurisprudence, Canada’s Competition Bureau has issued ‘Competitor Collaboration Guidelines’ (the ‘Collaboration Guidelines’) setting out its enforcement approach to different issues.118 Although the Collaboration Guidelines are an important window into the Competition Bureau’s thinking, and will be referred to on occasion herein, it must be emphasized that they are not binding on the courts or even the Bureau itself. B.

The Cartel Offences

The Competition Act’s two principal cartel offences are the criminal conspiracy offence (Section 45) and the bid-rigging offence (Section 47).119 1. Criminal conspiracy a. Overview The principal criminal cartel prohibition is contained in Section 45 of the Competition Act, which makes it an indictable criminal offence for competitors or potential competitors to conspire, agree or arrange with each other to: (i) fix, maintain, increase or control the price for the supply of a product in respect of which they compete; (ii) allocate sales, territories, customers or markets for the production or supply of such a product; or (iii) fix, maintain, control, prevent, lessen or eliminate the production or supply of such a product. The penalties for contravening Section 45 are severe: up to 14 years imprisonment and C$25 million in fines per charge, with there being no limit on charging the same entity or individual with multiple counts and seeking multiple fines per count. This C$25 million cap will be removed effective June 23, 2023; penalties for contravening Section 45 will be unlimited and up to the court’s discretion. Importantly, there is also no time limit on bringing charges under

See Section 90.1 of the Competition Act. Competition Bureau Canada, Competitor Collaboration Guidelines (6 May 2021). 119 The Competition Act contains several other cartel-related offences. For example, there are specific offences applying to conspiracies relating to professional sports and to federal financial institutions. The most important of these other offences is the ‘foreign-directed conspiracy’ offence in Section 46. This provision makes it an offence for a corporation carrying on business in Canada to implement a directive or instruction from a person outside of Canada to give effect to a foreign conspiracy that would be illegal in Canada. 117 118

North America  537 Section 45, and it is not unusual for parties to be charged for conduct that occurred a considerable period of time prior to the commencement of proceedings.120 The Section 45 offence was substantially amended in 2009 to assume its current form. There were two principal aspects to these amendments. First, the offence was limited to the specific categories of conduct identified above, and restricted to agreements between competitors or potential competitors affecting products in respect of which the parties compete. According to the Collaboration Guidelines, the intent was to focus the conspiracy offence on ‘hard-core’ cartel conduct, while leaving other types of potentially anticompetitive arrangements between competitors for civil review under Section 90.1 of the Competition Act. Second, a key element of the offence was dropped, namely the prosecution’s obligation to prove that the impugned conduct had resulted in an ‘undue lessening of competition’. The Section 45 offence is now ‘per se’; that is, the prosecution is no longer obliged to prove that the conduct had an anticompetitive effect in a relevant market. The intention of this last change was to make it easier to successfully prosecute cartel conduct in Canada; however, given the paucity of contested cartel cases in Canada, it is not apparent that this change has secured the desired results. b. Elements As a result of the 2009 amendments (which came into force only in 2010), there are now four principal elements to the Section 45 offence: (i) there must be an ‘agreement’; (ii) the accused must have the requisite mens rea or intent; (iii) the agreement must be between competitors or potential competitors; and (iv) the agreement must fall within one or more of the specific categories of ‘hard-core’ cartel conduct identified above. Because Section 45 is a criminal offence, the prosecution bears the burden of proving each of these elements ‘beyond a reasonable doubt’, which is the criminal standard of proof in Canada. The Agreement Element: For the Section 45 offence to occur, there must be an agreement between the conspirators to engage in prohibited conduct. The mere intention or design on the part of one or more of the accused to effect an anticompetitive agreement, or even discussions to that effect that do not culminate in an agreement, will not contravene Section 45. It is not necessary for the Crown to prove that there were any acts in furtherance of the agreement. Once a person enters into an agreement prohibited by Section 45, that person has committed an offence even if the plan is not later put into effect or no attempt is made to enforce the agreement. An offence also is committed even if the agreement could not have been successfully carried into execution. In short, ‘the crime is in the conspiracy’, not in the acts that it contemplates. Such acts, however, may be evidence of the agreement and Section 45(2.1) of the Competition Act expressly permits a court to infer the existence of a conspiracy from circumstantial evidence. Conscious parallelism, without more, is not likely to be found to contravene Section 45. As in the US, the presence of ‘plus factors’ is generally required before parallel behaviour will be considered to have crossed the line into criminal conduct under Section 45. These plus factors may include efforts to police compliance with the agreement, simultaneous adoption of facilitating practices, efforts to keep meetings or other communications secret and conduct which can be explained only by the existence of an illegal agreement. 120 In a recent case, for example, the Bureau commenced the criminal investigation of a matter in 2013 but only brought charges against the accused parties in 2021.

538  Research handbook on cartels The Intent Element: In a prosecution under Section 45, it must be proven that the accused had the intention to enter into the agreement, knowledge of the terms of that agreement and the intention to carry it out. In establishing this element of subjective intent, mere words purporting agreement but without ‘an assenting mind’ are not sufficient. However, a person who initially had an intention to carry out the conspiracy, but subsequently refused to put the plan into effect, would be guilty of the offence because all of the ingredients of intent were present in the accused’s conduct. The Competitor Element: The Section 45 offence applies only to competitors or potential competitors, and is further limited to agreements affecting products in respect of which these parties compete. Where it is unclear if parties are competitors, the Competition Bureau will consider factors such as their business and strategic plans, marketing and communications with potential customers, and evidence of actual competition for similar customers in neighbouring regions or in respect of similar products. The Competition Bureau’s Collaboration Guidelines helpfully clarify that the Bureau will not generally consider suppliers and customers to be competitors of each other even in situations where the supplier may also be involved in the relevant downstream market (for example, where the supplier engages in a ‘dual distribution’ strategy). The same applies to franchisors and franchisees, where the franchisor may also operate in the downstream market. That said, the Bureau will not refrain from taking action where a distribution or franchise arrangement does involve conduct that clearly contravenes Section 45, such as where distributors or franchisees agree to restrain competition among themselves.121 Agreements Covered: The Section 45 prohibition against price fixing extends not only to agreements to raise prices or to fix prices at a predetermined level, but to any agreement affecting what customers may pay for a product, including agreements to eliminate or reduce discounts or rebates, to fix the rate or amount by which prices may be increased or decreased, to eliminate or reduce promotional allowances or to eliminate or reduce price concessions or other price-related advantages provided to customers. Importantly, however, the prohibition only applies to the price for the supply of a product, and not to the price for the purchase of a product. Accordingly, joint purchasing agreements – even those between firms that compete in respect of the purchase of products – are not prohibited by Section 45, although they may be subject to the civil prohibition against anticompetitive agreements between competitors if they result in a substantial prevention or lessening of competition.122 Section 45 also prohibits market allocation agreements between competitors. This provision prohibits all forms of agreements between competitors that allocate markets by any means, including agreements restricting competition with respect to specific customers, groups or types of customers, in certain regions or market segments or in respect of certain types of transactions or products. It is also illegal under Section 45 for competitors (and potential competitors) to enter into any form of output restriction agreement, including agreements to reduce the quantity of products supplied, limit increases in the quantity of products supplied by a set amount, discontinue supplying products to specific customers or groups of customers or permanently or temporarily close manufacturing facilities.

Collaboration Guidelines (n 118) Section 2.3.3. Mohr v National Hockey League, 2021 FC 488 (CanLII) [2021].

121 122

North America  539 c. Defences Section 45 also sets out defences that can be relied upon to counter a potential prosecution. The principal defence applies where a party to an impugned agreement can establish, on a balance of probabilities, that the agreement (1) is ancillary to a broader or separate agreement or arrangement that includes the same parties, and (2) is directly related to, and reasonably necessary for giving effect to, the objective of that broader or separate agreement or arrangement. In addition, it must be established that the broader or separate agreement, considered alone, does not itself fall within the scope of any of the three per se illegal categories.123 There is no case law interpreting this so-called ancillary restraints defence, and especially what is meant by the requirement that the restraint must be ‘directly related to, and reasonably necessary for’ the broader agreement. According to the Collaboration Guidelines, however, ‘it is not adequate merely to establish that the participants would not enter into the broader agreement in the absence of the challenged restraint’, and ‘[i]f the parties could have achieved an equivalent or comparable arrangement through practical, less restrictive means that were reasonably available to the parties at the time when the agreement was entered into’, the Bureau will conclude that the restraint was not reasonably necessary.124 Section 45 also provides that parties cannot be convicted of an offence where all of the parties to the agreement are affiliates of each other (Section 45(6)); or where the agreement relates only to the export of products from Canada (Section 45(5)). Section 45(7) also formally codifies into effect the judicially developed ‘regulated conduct defence’, which provides that a party cannot be convicted for a cartel offence where the conduct in question is directed or authorized by valid provincial or federal legislation. 2. Bid rigging Bid rigging is the other principal cartel offence in the Competition Act.125 Section 47 makes it a criminal offence for persons to agree (1) not to submit a bid in response to a call for bids or tenders, (2) to withdraw a bid or tender already made, or (3) to submit bids or tenders on terms that have been coordinated by the parties, but only where the agreement in question is not made known to the person calling for or requesting the bids at or before the time bids are submitted. The key to the offence, therefore, is in concealing the arrangement from the party who requested the bids or tenders. Accordingly, joint bids that are properly disclosed are unlikely to raise issues under this offence.126 Like criminal conspiracies, bid rigging is a per se offence – injury to competition is presumed and need not be proved. Each of the specific elements above must be demonstrated beyond a reasonable doubt for a conviction to be secured. In addition, the prosecution must prove that the accused intended to enter into the agreement. Competition Act, Section 45(4). Collaboration Guidelines (n 118) Section 2.5.3. 125 Bid-rigging has been a particular enforcement focus in recent years, especially as regards public sector procurement. The Competition Bureau has conducted outreach and designed other educational tools and programs to raise the awareness of government officials and help them identify when they may be the potential victims of bid-rigging. 126 One of the other questions in bid-rigging cases is whether the process qualifies as a ‘bid’ or ‘tender’ for the purposes of Section 47. Although the issue has not been determined definitively, it seems that a key consideration will be the extent to which the process is intended to result ultimately in a contractual arrangement between the party calling for the bid/tender and the winning party. 123 124

540  Research handbook on cartels The penalty for bid rigging is imprisonment for a term not exceeding 14 years, a fine in the discretion of the court, or both. C. Enforcement 1. Authorities The Competition Bureau, which is headed by the Commissioner of Competition, is responsible for the investigation of criminal cartel conduct in Canada.127 The Bureau has a wide variety of investigatory powers and tools at its disposal in this regard. These include: Search and seizure powers: The Competition Bureau may apply ex parte to a judge for a warrant to enter premises in order to search for and seize relevant evidence, including searches of a company’s computer files. Searches and seizures are the Competition Bureau’s compulsory process of choice in cartel matters and are conducted without warning (that is, as dawn raids). Compulsory orders to provide evidence: The Competition Bureau is also authorized to apply ex parte for judicial orders requiring parties to (1) produce relevant documents and information, (2) be examined under oath and/or (3) provide written responses under oath to Competition Bureau interrogatories. Wiretaps: The Competition Bureau can also apply ex parte for a judicially authorized wiretap to intercept private communications. Wiretaps are issued by judges under the federal Criminal Code. Although the Competition Bureau is responsible for investigating alleged cartel offences, it does not have carriage over prosecutions. Rather, the prosecution function is the responsibility of the Public Prosecution Service of Canada (‘PPSC’), which is headed by the Director of Public Prosecutions (‘DPP’). If the Bureau believes that its investigation has disclosed a criminal offence, it will ‘refer’ the matter to the PPSC with a recommendation to prosecute. The PPSC will then decide whether or not to proceed and will be responsible for the entire prosecution process. That said, as a practical matter, the Competition Bureau officers on the file will remain closely involved in the conduct of the matter as the process unfolds. 2. Sentencing and sanctions The potential consequences for violating the Competition Act’s cartel offences are severe, both in terms of fines and imprisonment.128 Consistent with the division of labour described above, it is the Bureau’s role to make sentencing recommendations to the PPSC, which will then decide what position to adopt before the court. Generally speaking, the Competition Bureau/PPSC will start from the position that an accused party must pay a fine that equates to 20 per cent of the accused’s sales of the relevant product in Canada over the period of the offence (relevant volume of commerce). This

Cartel investigations are the responsibility of the Competition Bureau’s Cartels Directorate, which forms part of the Bureau’s Cartels and Deceptive Marketing Practices Branch. 128 In addition to fines and/or imprisonment, the authorities may seek an order prohibiting the accused from engaging in similar conduct in the future. The intent is to expose recidivists to the additional risk of committing the criminal offence of violating a court order. There are also federal and provincial ‘integrity programmes’ that will debar anyone convicted of a cartel offence (including by way of a plea agreement) from obtaining government procurement contracts for a given period of time. 127

North America  541 will then be adjusted upwards or downwards depending upon the presence of mitigating or aggravating factors (for example, the timing and degree of cooperation offered by the accused, whether senior officers were involved in the offence and whether the accused is a first-time offender or a recidivist). In addition, there may be cases in which taking a percentage of the accused’s relevant volume of commerce is considered to be insufficient; for example, where the conspiracy involved an agreement not to sell into Canada and thus there is no relevant volume of commerce to use as a benchmark. In those cases, the Competition Bureau likely will insist on a fine that is sufficiently large under the circumstances to send the appropriate deterrence message. In terms of the courts, there are no formal sentencing guidelines that must be adhered to when deciding what penalties to impose on parties convicted of cartel offences under the Competition Act.  Rather, the courts are guided by the general principles of sentencing as set out in the federal Criminal Code and by certain principles developed by the case law specifically in relation to cartel offences. Among the considerations that courts will take into account are the need to maintain and encourage competition, the objective of deterring both the specific accused and the general public from committing cartel offences and ensuring that the sentence is proportionate to the gravity of the offence and the degree of responsibility of the accused. Additional factors include the duration of the offence, the market share of the accused and the potential harm to consumers. It is important to note, however, that there are very few contested cartel prosecutions in Canada and that the vast majority of cartel cases are settled by way of plea agreement. In those instances, the PPSC and the accused will typically make a joint submission to the court in support of the penalties that they have negotiated, having regard to the various considerations outlined above. Although the courts are in no way bound by these settlements, it is exceedingly rare for a court to reject a penalty recommendation that the parties have agreed upon. Moreover, while the penalties that may be imposed for cartel offences in Canada, both in terms of fines and imprisonment, are quite serious, in practice most cartel fines are relatively modest and it is rare for a fine to reach (or even approach) the maximum.129 Similarly, although the Bureau is committed to pursuing sanctions against individuals, prison sentences are rare and typically for less than two years. To the extent that custodial sentences are imposed, the vast majority have involved conditional sentences to be ‘served in the community’; that is, they involve house arrest. There also have not been any custodial sentences imposed on foreign nationals. This is all consistent with Canada’s generally more lenient approach to white-collar crimes, certainly in comparison to the United States. Immunity and leniency programs 3. The Competition Bureau offers cartel participants the opportunity to receive full immunity from prosecution, or lenient treatment in sentencing, as an incentive to disclose illegal conduct. In the case of both immunity and leniency, the division of labour between the Competition Bureau and the PPSC is similar to that seen above. That is to say, the Competition Bureau will

Of course, there are exceptions to this rule. For example, one of the parties convicted in connection with the international bulk vitamins cartel was fined C$48 million, which is the largest ever fine to be imposed against a single defendant in a Section 45 conspiracy case. Similarly, one of the parties in the auto parts cartel agreed to plead guilty and pay a fine of C$30 million, the highest fine ever imposed for bid-rigging in Canada (which has no statutory cap). 129

542  Research handbook on cartels recommend to the PPSC whether or not to issue a grant of immunity or leniency, but the final decision will rest with the PPSC.130 Full immunity from prosecution may be available to a party (either a company or an individual) that is either first to disclose an offence of which the Bureau is unaware, or first to come forward with information where the Bureau is aware of an offence but does not have enough information to refer the matter to the PPSC.131 In either case, a grant of immunity will be conditioned upon the party cooperating with the Competition Bureau’s investigation of the matter and with any ensuing prosecution of other cartel participants. Leniency may be available to a party (either a company or an individual) that/who, while not eligible for immunity (because it is not ‘first in’), is willing to resolve matters and meets the following criteria: ● demonstrates that it was a party to the offence; ● terminates its participation in the illegal activity; ● cooperates in a timely manner, at its own expense, with the Competition Bureau's investigation and any subsequent prosecution of other cartel participants; and ● agrees to plead guilty. Where a party meets these requirements it may benefit from a fine reduction of up to 50 per cent, based on the timing of the application and the value of its cooperation. Credit may also be given where the party can demonstrate that it has a credible and effective compliance programme in place.132 The Competition Bureau’s immunity and leniency programmes have historically been among its most potent tools for detecting cartel offences. However, in what may be the beginning of a long-term trend, the number of immunity/leniency applications has declined significantly in recent years. For example, in the last full fiscal year for which data is available (1 April 2020 to 31 March 2021), the Competition Bureau received only two applications for immunity and zero applications for leniency (as compared to 31 immunity and 12 leniency applications in 2015, and 20 immunity and 17 leniency applications in 2014). Not surprisingly, the decline in immunity/leniency applications is having an impact on the Bureau’s investigations of criminal conduct. Since 2018, for example, the Bureau has only commenced two inquiries into cartel matters (those were in 2019 – there were none in 2018 or 2020). A number of explanations have been offered for this decline, including that it simply reflects a temporary downward trend in the enforcement cycle. However, there are several structural issues that point to the prospect of a more permanent decline. These include the onerous cooperation obligations imposed on both immunity and leniency recipients, exposure to class actions for damages and the poor track record of the PPSC in litigating contested cases (thereby decreasing the incentive to cooperate). Recent changes to the Competition Bureau’s

130 The details of the Competition Bureau’s approach to immunity and leniency are set out in Competition Bureau Canada, Immunity and Leniency Programs under the Competition Act (15 March 2019, modified 26 November 2020). 131 The fact that a party may have initiated or been the leading player in a cartel is not a disqualification for receiving immunity. However, immunity will not be available to a party that coerced others to participate in the cartel. 132 The Bureau/PPSC may revoke any grant of immunity or leniency where a party fails to abide by its cooperation (and other) obligations.

North America  543 immunity and leniency programmes may also be contributing factors, including significantly extending the time before a final decision on granting immunity is made and eliminating automatic immunity/leniency coverage for directors, officers and employees under the umbrella of corporate immunity/leniency.133 If we are truly witnessing a permanent decline in the Competition Bureau’s ability to attract immunity and leniency applicants, the Bureau will need to take measures to prevent any further erosion in its cartel enforcement capabilities. These may include devoting more resources to improve its investigative capabilities, adopting new technologies to help identify potential cartel conduct or offering financial incentives for ‘whistleblowers’ beyond the mere confidentiality assurances that currently exist. D.

Civil Actions for Damages

Section 36 of the Competition Act allows any person who has suffered loss or damage as a result of (1) conduct contrary to any of the criminal offences under the Competition Act or (2) the failure of any person to comply with an order made under the Competition Act to bring a civil action against the person who engaged in the conduct or failed to comply with the order. Plaintiffs may recover an amount equal to the loss or damage suffered, together with the costs of the proceeding (including attorney’s fees) and any investigation of the matter. In contrast to US law, however, treble damages are not available. Claims under Section 36 must be commenced within two years of the day the conduct was engaged in or within two years of the day on which criminal proceedings were finally concluded, whichever is later. The result is that parties can be exposed to the risk of civil litigation for an extended period of time, because it often takes several years before criminal proceedings are disposed of in Canada. The vast majority of Section 36 actions are now brought as class actions, which are often initiated in multiple jurisdictions. The threshold for certifying class actions in Canada is very low. At certification, the class plaintiffs need only provide a plausible and credible expert methodology that can establish that loss flowed to the relevant purchaser level (meaning that the methodology is capable of showing harm was suffered by at least one or more class members). The plaintiffs’ methodology does not need to be capable of either showing that all members of the proposed class were harmed or identifying who was harmed and who was not. This standard for certification stands in sharp contrast to antitrust class actions in the US, where at certification the plaintiffs must provide a methodology showing that all or nearly all class members were injured.134 As a result, it is now common to see follow-on litigation subsequent to a guilty plea or conviction, or even the announcement that an investigation is under way – in Canada or elsewhere.

In order to be covered by a grant of immunity or leniency, individual directors, officers and employees must now expressly admit their knowledge of or participation in the offence and agree to cooperate with the Bureau and the PPSC. Individuals that are not willing to cooperate may be excluded from (‘carved out of’) the immunity/leniency grant. 134 Pioneer Corp. v Godfrey, 2019 SCC 42 (CanLII) [2019]. 133

544  Research handbook on cartels E.

Looking Ahead

One of the changes made by the 2009 amendments to Section 45 of the Competition Act was to leave ‘buy-side’ agreements between competitors – for example, those affecting the purchase rather than the supply of products – outside the criminal cartel regime. The rationale was that these agreements could be pro-competitive and thus should not be per se prohibited under the law. A debate on this issue was triggered when several of Canada’s largest retailers were accused of colluding in their decisions to end special ‘hero’ wages paid to employees who were asked to work during the COVID-19 pandemic. This led Canada’s Parliament to consider whether buy-side agreements should be re-criminalized under Section 45 in order to capture ‘wage-fixing’ and other similar agreements between employers (for example, ‘non-poach’ agreements). It was noted that Canadian law is narrower in this regard than the law in the US, where antitrust authorities have begun to proceed criminally against employers who enter into agreements that affect the rights of employees.135 As a result, amendments to the Competition Act were passed in June 2022 to include a prohibition against wage-fixing agreements that fix, maintain, decrease or control salaries, wages or terms and conditions of employment, and against no-poaching agreements to not solicit or hire employees between unaffiliated employers. These amendments, which come in to effect on June 23, 2023, are consistent with a broader view that is gaining ground in Canada that competition law should be used to more directly protect the interests of labour and other social groups. The Canadian government is also currently consulting on whether the scope of criminal liability should be expanded to once again include other forms of anticompetitive buy-side agreements.

IV.

CARTEL ENFORCEMENT IN MEXICO

A. Overview In Mexico, the Federal Constitution establishes the existence of two constitutionally autonomous federal agencies – the Federal Economic Competition Commission (‘COFECE’) and the Federal Institute of Telecommunications – that enforce antitrust legislation (the Federal Economic Competition Law, or the ‘Law’). This is the only statute that governs antitrust matters in Mexico. The Telecommunications Institute has the authority to enforce the Law in connection with economic competition in the broadcasting and telecommunication industry sectors (including cartel enforcement). All other matters or industries fall under the competence of COFECE. There are two types of anticompetitive conduct under the Law: absolute monopolistic practices and relative monopolistic practices. Absolute monopolistic practices, or cartels, are horizontal contracts, agreements, arrangements or combinations among competing economic agents, which purposes or effects hinder, harm, impede or condition any form of free market

135 Section 45 of the Act does not apply to buy-side agreements, including wage-fixing and non-poach agreements between employers; see Mohr v National Hockey League, 2021 FC 488 (CanLII) [2021].

North America  545 access or economic competition concerning the production, processing, distribution or marketing of goods or services through any of the conduct described in the next paragraph. Price fixing is defined in the Law as an agreement to fix, raise, coordinate or manipulate the sale or purchase price of goods or services supplied or demanded in the markets. An output restriction is an obligation (agreed with a competitor) not to produce, process, distribute, market or acquire goods, or to only produce, process, distribute, market or acquire a restricted amount of goods. Market allocation means an agreement to divide, distribute, allocate or impose portions or segments of a current or potential market of goods and services, by a determined or determinable group of customers, suppliers, time spans or spaces. Bid rigging is defined as an agreement, arrangement or combination, to establish, arrange or coordinate bids or abstentions from tenders, contests, auctions or purchase calls. Finally, the Law includes in the list of cartel activities any information exchange whose purpose or effect is any of the cartel conduct specified above. In other words, an exchange of information between competitors with the intention of manipulating prices is in itself an absolute monopolistic practice. Like per se anticompetitive offences in foreign jurisdictions, absolute monopolistic practices are always illegal, regardless of the effects they may or may not have on the markets, and therefore efficiencies cannot be used as justification for incurring in such a practice. Case law in Mexico overwhelmingly supports this conclusion. Cartel conduct carries the stiffest penalties under the Law. Corporations involved in the cartel may be subject to a fine of up to 10 per cent of their annual income in Mexico. Also, individuals directly or indirectly participating in the cartel, on behalf or on account of an economic agent, may be prohibited from becoming members of a board of directors, managers, directors, executives, agents, representatives or legal representatives of any company or legal entity in general for up to five years. Finally, individuals who contributed to, facilitated or instigated the execution of the cartel may be fined up to 180,000 times the equivalent of the minimum wage. B.

The Criminal Offence

A cartel is also a criminal offence. The definitions of the conduct that constitute this criminal offence in the Federal Penal Code are identical to the definitions contained in the Law, which are noted above. 1. Requirements The criminal investigation may only be initiated as a result of a complaint filed by the antitrust authority (COFECE or the Federal Institute of Telecommunications), and only after such administrative authority has concluded its investigation and has determined both that cartel conduct did occur and the identity of those responsible for such conduct, through a resolution called the Probable Responsibility Ruling (‘Dictamen de Probable Responsabilidad’). It is important to note that, at the time that a Probable Responsibility Ruling is made, the administrative proceedings before the administrative antitrust authority (COFECE or the Federal Institute of Telecommunications) have just entered their second and final stage (the trial-like proceedings). The economic agent(s) (as well as the individuals mentioned in such Ruling) have not yet had the opportunity to defend themselves. Therefore, the criminal investigation would run parallel with the second stage of the administrative proceedings before the administrative antitrust authority. In other words, at this stage the responsibility of the

546  Research handbook on cartels individuals and the economic agents allegedly involved in the cartel activities has not yet been conclusively determined by the administrative antitrust authorities. Those individuals or entities that have obtained leniency protection shall not be subject to criminal liability. The administrative authority, by means of a plenary decision, may request the federal attorney’s office to dismiss the criminal proceedings when the defendants have complied with the administrative sanctions imposed and, additionally, comply with the requirements specified in the technical criteria issued by said administrative authority. The criminal action must conclude within seven and a half years. 2. Penalties A cartel offence is punishable by imprisonment of five to ten years, and with a fine of between one thousand to ten thousand ‘days of fine’. A ‘day of fine’ is equivalent to the daily net income of the sentenced person at the time the criminal offence took place, taking into account all his income. C. Leniency As in most jurisdictions, Mexican antitrust law includes a leniency benefit for those cartel members that admit their participation in the cartel activities. The request for leniency can be made by an undertaking that has engaged or is engaging in the cartel activities or has directly participated in such activities on behalf or by account of an undertaking, or where the undertaking (or the individual, as the case might be) has contributed, fostered, induced or participated in the cartel. The applicant must acknowledge its participation in the cartel before the competent administrative authority and request the benefits of the leniency programme (officially called the ‘penalties reduction benefit programme’). Full leniency protection is granted to the first leniency applicant to provide sufficient supporting evidence to allow the authorities to initiate an investigation, or which at least allows for the presumption of the existence of the anticompetitive practice. The applicant must cooperate fully and continuously throughout the investigation and, if applicable, in the trial-like administrative procedure that follows the investigation, and it must cease its participation in the cartel. If an applicant receives full leniency protection, it will receive a minimum fine, as well as immunity against criminal prosecution. It is possible to obtain leniency protection in second, third or further place for subsequent leniency applicants, provided each provides additional supporting evidence which was not already in possession of the economic competition authorities. Such subsequent leniency beneficiaries are also protected against criminal prosecution, but instead of a minimum fine they will receive a fine reduction of 50, 30 or 20 per cent of the maximum permitted fine, in strict chronological order. Individuals that participated in the cartel on behalf of an undertaking receiving leniency protection would receive a similar fine reduction as long as they cooperate fully and continuously with the authorities, submit all evidence in their possession and terminate their participation in the cartel. The identity of the leniency applicant or beneficiary shall not be disclosed by the economic competition authorities, but it is important to understand the limits of this protection, since said authorities will disclose the names of those undertakings that have been sanctioned for their

North America  547 participation in a cartel, and even the amount of the fines that each one received. The authority shall not disclose, however, which of the undertakings applied for leniency, or the amount of the reduced fine. The Law requires the leniency beneficiary to acknowledge its participation in the absolute monopolistic practice, and also to cooperate fully and continuously through both the investigation and the subsequent trial-like procedure. However, the courts have upheld the right of a leniency beneficiary to challenge the final resolution of the administrative authority in a cartel investigation, based on an alleged incorrect interpretation and application of the Law. The specialized collegiate court that handles antitrust matters determined that such legal challenge did not amount to a lack of full and continuous cooperation on the part of the leniency beneficiary. D. Enforcement 1. Authorities The enforcement of antitrust laws is entrusted to COFECE and to the Federal Institute of Telecommunications. As constitutionally autonomous agencies, neither one depends directly or indirectly from any of the three branches of government. Both agencies are fully autonomous and are financially independent. The importance of the autonomy of the antitrust agencies has been highlighted in the past few years, as COFECE has consistently issued opinions and started investigations and even legal proceedings (even at a constitutional level) against resolutions issued by the highest authorities of the current Federal Administration, or even against new federal laws issued by Congress, when it considered that the same breached constitutional principles of free competition, particularly in connection with the electric and oil industries. The mandate of the two Mexican antitrust agencies, as per Article 28 of the Mexican Constitution, is to ‘ensure free competition and market access, as well as prevent, investigate and combat monopolies, monopolistic practices and mergers and acquisitions, as well as other restrictions to the efficient working of the markets’.136 To comply with its constitutional mandate, the agencies were given the authority to interpret and enforce the Law by, among others, preventing market structures that generate risks to competition through merger analysis; investigating and sanctioning monopolistic practices; determining the existence of essential inputs or barriers to competition; and issuing resolutions regarding market conditions. In COFECE, the authority to carry out the investigation of allegedly monopolistic practices and unlawful concentrations was given to the Investigative Authority, an autonomous section within the Commission which also acts as the competition prosecutor in the administrative trial-like procedures before the Board of Commissioners, which is the highest decision-making body of the Commission (the Federal Institute of Telecommunications has its own Board of Commissionaires; both are composed of seven members). The administrative proceeding is divided into two stages: the administrative investigation on the alleged unlawful monopolistic practices (the ‘Investigation’); and the accusatory proceeding or ‘proceeding followed as a trial’ (the ‘Trial-like Proceeding’). 136 Constitución Política de los Estados Unidos Mexicanos www​.diputados​.gob​.mx/​LeyesBiblio/​pdf/​ 1​_29ene16​.pdf [accessed 23 March 2022].

548  Research handbook on cartels 2. Investigation and trial-like procedure As per the Law, an investigation may be started ex officio by either of the competition authorities or at the request of (i) a party to a cartel; (ii) the Federal Executive Branch (President of Mexico); (iii) the Ministry of Economy; or (iv) the Federal Consumer Protection Agency. The Law provides that any person may report monopolistic practices and unlawful concentrations, in which case the antitrust authorities will open a ‘Report File’ and in case the evidence provided by the person making the report and the evidence gathered by the authorities is enough to presume the existence of an infringement to the Law, they shall start an ex officio investigation; if not, the report shall be dismissed. The Investigative Authority has a term of 120 days (which may be extended up to four times) to conclude its investigation. While investigating an alleged monopolistic practice the Investigative Authority has broad authority to gather information for its investigations, including: (i) requesting reports and documentation as it deems necessary from any individual or entity; (ii) subpoenaing anyone that may be related to the investigated facts; and (iii) carrying out inspection visits (‘dawn raids’). Dawn raids do not require judicial authorization. After the conclusion of the investigation, the Investigative Authority shall issue a resolution recommending either ● the initiation of a Trial-like Proceeding, when it believes it has enough evidence to presume the existence of the cartel and the presumed liability of the economic agent (the ‘Probable Responsibility Ruling’),137 or ● the closing of the file, when it considers that there is not enough evidence to make such assumption.138 The Probable Responsibility Ruling will clearly identify the economic agents (‘potential offenders’), the facts under investigation and their probable purpose or effect in the relevant market; the evidentiary elements included in the investigation file and the analysis made by the Commission of the elements that support the initiation of the trial-like proceedings; and the legal provisions that may have been infringed.139 During the trial-like procedure, the Investigative Authority will act as the competition prosecutor. Therefore, the parties to this proceeding are, on the one hand, the Investigative Authority, and on the other, the potential offender(s). The complainant (that is, the one who reported the infringement) will only take part as co-adjutor to the Investigative Authority during the proceedings. During the trial-like procedure, the potential offenders will have the right to be heard and defend themselves against the accusations made by the Investigative Authority.

If, from the investigation, the FECC considers that evidence exists that allows assuming damages and lost profits for consumers, the Probable Responsibility Ruling shall be also notified to the Consumer Protection Agency. 138 As per Article 78 of the FLEC, even when the Investigative Authority recommends the Board of Commissioners to close the file on a determined investigation, the Board of Commissioners may order the initiation of the Trial-like Proceeding, if it deems there are sufficient elements in order to assume the alleged liability of the economic agent. 139 Federal Economic Competition Law www​.cofece​.mx/​cofece/​images/​Documentos​_Micrositios/​ Federal​_Economic​_Competition​_Law​.pdf [accessed 23 March 2022]. 137

North America  549 Once (i) all admitted evidence has been gathered or produced, (ii) the parties have responded to the Investigative Authority allegations and (iii) the final closing arguments have been submitted, the Board of Commissioners shall issue its resolution finding either the potential offenders guilty or not guilty. Parties may appeal the decision of COFECE via an amparo (habeas corpus) trial, before the federal courts specialized in antitrust matters. E.

Civil Actions for Damages

The concept of damages in Mexico is based on civil law tradition. According to the Federal Civil Code, individuals and legal entities are entitled to pursue direct damages actions based on contractual and non-contractual liability. The concept of punitive damages is underdeveloped in Mexico, and it has not yet been applied in antitrust cases. Article 134 of the Law confirms forth the possibility of private parties looking redress for the damages they suffered as a result of monopolistic practices committed by third parties: ‘Individuals that may have suffered damages or losses deriving from a monopolistic practice or an illicit concentration have the right to file judicial actions in defence of their rights before the specialized courts in matters of economic competition, broadcasting and telecommunications, once the Commission’s resolution is final and conclusive.’ Damages actions on antitrust issues can be sought only after the antitrust authority’s resolution is final and conclusive, and can be pursued either as a private action or a as class action. A private claimant may rely on the antitrust authorities’ finding of infringement to establish the defendant’s liability, but still needs to prove to the requisite standard that a link exists between the infringement and the loss, as well as the extent of the loss itself.

Index

1-Link Guarantee Limited & Member Banks case 433, 436 a2i pricing algorithm 206 abuse of dominance 454 of market power 56, 70 principle of 138–9 accessory, concept of 121 account for profits 374 Accra Accord (2008) 67 Actions for Damages under National Law 92 AC-Treuhand case 443 ad testificandum 526 advanced algorithms, development of 187 AEC Blueprint 454–6 aggregate sanctioning, principle of 127 Agreement Technologies (AT) 214–15 development of 214 AirTran 11 Akzo case 412 Albion Water case 374 Alexa 213 algorithm–human experiment 202 algorithmic tacit collusion base conditions 190–94 brick-and-mortar economy 194 concentrated markets 193 conditions for 197 creation of ‘evil’ algorithms 201 illegal agreement among competitors 190 implications of 212 interdependence of 199 Linear Extortion to Collusion Algorithm (LECA) 202 market conditions for 196–7 meeting of the minds 191 outcome of 197 (im)plausibility of 201–10 artificial intelligence 207–10 simple algorithms 202–7 proof of 197 risk of 194, 203 stability needed for 193 (in)stability of 194–201 supra-competitive pricing 204 sustainable 194 Type I error 199 Type II error 198

Allied Maples case 373 Almamet case 124 Aluminium Phosphide Tablets Manufacturers case 435 Amazon Marketplace 8 ambiguity, problem of 172 American Column & Lumber Co. v US. 222–4, 228 American Needle Inc v NFL 111, 112 amicus curiae 264, 503 Amnesty Plus programme 340, 343 Amore, Roberto 439 AM & S v Commission 412 ancillary restraints defence 539 Andean Community of Nations (CAN) 502 Andean Tribunal of Justice 518 Anic presumption 443–4 animal welfare 150 anthropomorphic female voices 213 anti-abuse-based legislation and prohibition 60 anti-cartel enforcement 3, 43 antitrust and anti-cartel legislation 49–53 conceptual foundations of 46–8 development trends in 46 historical foundations of 48–9 historical perspective of 45 interwar period 53–9 introduction to legislation outside the western world 67–70 new challenges and new areas 64–5 non-western countries 62–4 post-second World War 59–62 anti-cartel legislation 29, 33, 45 abuse principle 56 adoption of 67 Argentina 62 Austria 55 Brazil 58, 62 Bulgaria 56 Canada 59 Chile 63 China 68–9 Colombia 63 Czechoslovakia 56–7 Denmark 57 enforcement of 59 France 61–2 global spread of 59–62 Hungary 56

550

Index  551 India 68 introduction of 56 Japan 58 Mexico 63 Norway 57 Pakistan 68 Poland 57 South Africa 63 South Korea 68 spread of 46 Switzerland 62 United Kingdom 61 United States 59 anti-cartel policies, international harmonization of 44 anti-cartel regulation, reform of 60 anticompetitive agreements 68, 128, 141, 144, 459 prohibition against 461 anti-competitive behaviour of cartels 45 anti-competitive business cartel 156 anticompetitive conduct 197 anticompetitive costs 109 anti-competitive harm 75 anti-competitive mergers 458 anticompetitive parallel behaviour 196 Anti-Monopoly Law (AML) 48, 69, 447 regulation of hub-and-spoke arrangements under 447 antitrust attorneys 39 antitrust-authority prosecutors 24 antitrust commissions 515 Antitrust Criminal Penalty Enhancement and Reform Act (ACPERA), US 529, 533 antitrust enforcement systems, in South America 501–5 antitrust immunity 525 antitrust infringement, in Colombia 516 antitrust laws and legislation 5, 49, 51, 174 Argentina 510 CADE’s efforts to implement 511 Colombia 516 enforcement of 52 European Union 120, 131 North American 53 Peru 517 pillars of 49 price-fixing cases 516 pros and cons of 47 South America 505 structure–conduct–performance paradigm of 47 United States 60 antitrust liability 183, 205 risks of 206

threat of 200 antitrust mission of agreement 213 antitrust violation 65 appreciable adverse effect on competition (AAEC) 421 Aquinas, Thomas 46 Argos/Littlewoods case 171, 184 Aristotle 46 Arnold, Thurman 59 artificial intelligence 187, 191, 201, 207–10 Asea Brown Boveri (ABB) 162–3 ASEAN Competition Action Plan (ACAP) 456 ASEAN Competition Enforcers Network (ACEN) 454 ASEAN Economic Community (AEC) 455 ASEAN Experts Group on Competition (AEGC) 454 ASEAN member states (AMS) 454, 462 ASEAN Secretariat Regional Guidelines on Competition Policy (2010) 455 Ashcroft v Iqbal 114 Association of Southeast Asian Nations (ASEAN) administrative enforcement system 457 anti-cartel enforcement in 454 cartel prohibitions in competition laws 464–9 Regional Guidelines on Competition Policy (2010) 461, 472 sanctions 469–70 scope and treatment of hard-core 461–4 cartel provisions in bid-rigging 465–6 civil and criminal sanctions for infringements of 469–70 competition laws 464–9 enforcement of 472–5 limiting production or supply 467–8 market sharing 467 other prohibitions treated as per se or object offences 468–9 price fixing 464–5 cartel regimes in 454 competition laws and policies 454 active enforcement of 458 Brunei Darussalam 457 Cambodia 457 cartel provisions in 464–9 growth of 455–6 implementation of 457 Indonesia 458 Lao PDR 458 Malaysia 458 Myanmar 459 overview of 456–60

552  Research handbook on cartels Philippine 459 Singapore 459–60 Thailand 460 three pillars of 457, 460 Vietnam 460 COVID-19 pandemic 471 enforcement of cartel provisions in challenges in 474–5 powers for 472–4 establishment of a competition enforcer 457 hard-core cartel prohibitions in agreements and decisions by associations of undertakings and concerted practices 462–3 per se infringements 463–4 scope and treatment of 461–4 Law on Competition (Cambodia) 457 leniency provisions 471–2 market-sharing case in 467 quality of goods and services 458 sanctions for infringements of the cartel provisions in civil sanctions 469–70 criminal sanctions 470 state-owned enterprises 457 assurance game 392, 397 ‘atypical’ cartels 76, 86 Australia adjudication of civil competition law 490–91 anticompetitive conduct 497 authorization, notification and class exemption 485–6 cartel laws 484 collective bargaining arrangements 485 Commonwealth Director of Public Prosecutions (CDPP) 487 Competition and Consumer Act 2010 (Cth) (CCA) 477 Part XII of 488 section 45AD of 479 Criminal Code Act 1995 (Cth) 481 Explanatory Memorandum 482 Federal Court of 488 Full Court of the Federal Court 488 investigatory and enforcement bodies 487–8 joint ventures 484 leniency and immunity tools in 497–8 Memorandum of Understanding 487 national competition law schemes 476 cartel provision 479 competition condition 480–81 contract, arrangement or understanding 478–9 criminal ‘fault’ elements 481 other anticompetitive practices 481–2

prohibition on making or giving effect to a cartel provision 477–8 purpose or effect of price fixing 479–80 restricting outputs, dividing markets or bid rigging 480 penalties for cartel conduct in 495–7 price fixing in 479–80 private enforcement 491–2 public civil enforcement 493 specific exemptions and anti-overlap provisions 484–5 Australian Competition and Consumer Commission (ACCC) 477, 485–7, 489 immunity policy for cartel conduct 497 investigatory powers of 488 Australian Industries Preservation Act (1906) 51, 63 auto-detect pricing wars 194 automobile insurance services 517 autonomous intelligent agents 213 average leniency discounts 321 Bananas case 99 bargaining breakdown 12 bargaining power 446 BASF case 121, 124, 128 Bathroom Fittings case 121 Battle of the Sexes game (BOS) 392 Beef Industry Development Society (BIDS) 262–3 Beijing Scallop case 448 Bell Atl Corp v Twombly 114 Bentham, Jeremy Theory of Legislation, The 292 bid rigging 339, 360, 463 ASEAN countries 465–6 Australia 480 CADE investigations of 513 Canada 539–40 criminalization of 507 Hong Kong 451–2 penalty for 540 public procurement processes 506 schemes for 40, 94, 158, 507 United States 521 bid rotation 94 bid suppression 94 big tech, rise of 47 Bitcoins 215 artificial scarcity of 215 ‘blind’ economics 77 blockchain 215–17, 218 alternatives to 217–18 scalability of 217 block exemption 507

Index  553 Block Exemption Regulations (BERs) 152, 172 Book IV of the Commercial Code (France) 141 bootstrap problem 78 Brain Project 513 Brazilian Competition Policy System 512 Brexit referendum 184, 387 bribery 20 brick-and-mortar economy 188–9, 194, 201 British Committee on Commercial and Industrial Policy 138 BritNed v ABB 371–2, 380–81 bromine cartel 13 Builders Association of India v Cement Manufacturers Association & others 430 burden of persuasion 272 burden of proof 279, 365, 431 evidential 273 shifts and inferences in 272–5 business cartels 161 business delinquency, culture of 338 business secrets 415 ‘but for’ causation 375 ‘but for’ prices 377 buyer power 241 buyers’ cartels 40, 236–8 argument for legalizing 244–5 condemnation of 244 economic welfare argument against 243 elimination of competition for input purchases to reduce prices 236 legal treatment of 241–3 likelihood 247 monopoly profits 245 per se illegal standard 248 argument for legalization 244–5 theories of competitive harm 243–4 requirement of buyer-side criteria 248 versus seller cartels 240–41 buyer-side collusion 247 buyer-specific discounts 15 buying groups versus cartels 240 creation of 242 efficiency gains and competitive risks 245–7 key characteristic of 240 legal treatment of 241–3 legitimate 238–9 risk of opportunistic behaviour 240 stricter review of the competitive impact of 249–50 bystander liability 166 calculus-based trust (CBT) 391, 399 Cambodian Competition Commission (CCC) 457 Canada

anti-cartel enforcement in 535 ‘buy-side’ agreements between competitors 544 Canadian Act 352 cartel enforcement in background of 535–6 bid rigging 539–40 criminal conspiracy 536–9 civil actions for damages 543 civil prohibition against anticompetitive agreements 538 Combinations in Restraint of Trade Act see Wallace Act (1889) Commissioner of Competition 540 Competition Act 536, 539 consequences for violating 540 prohibition against wage-fixing agreements 544 section 36 of 543 section 45 of 544 Competition Bureau 538, 540 ability to attract immunity and leniency applicants 543 compulsory orders to provide evidence 540 financial incentives for ‘whistleblowers’ 543 immunity and leniency programs 541–3 investigations of criminal conduct 542 role of 540 search and seizure powers 540 wiretraps 540 Competitor Collaboration Guidelines 536 criminal conspiracy offence in 536–9 defences against 539 elements of 537–8 overview of 536–7 Director of Public Prosecutions (DPP) 540 enforcement of criminal cartel conduct authorities 540 immunity and leniency programs 541–3 sentencing and sanctions 540–41 joint purchasing agreements 538 market allocation agreements between competitors 538 output restriction agreement 538 prohibition against price fixing 538 Public Prosecution Service of Canada (PPSC) 540–42 capacity discipline 11 Caribbean Community 66 cartel as ‘children of distress’ 50 definition of 5, 90 history of 10

554  Research handbook on cartels proscribed conduct 92–4 stability of 17 tolerance towards 141 cartel activity, challenges to successful 9–21 Australian gasoline market 12 coordination 10–13 enforcement 20–21 external stability 18–20 internal stability 13–18 cartel activity, criminalization of economic consequences of 352 effect on raising prices 355–6 justifications for 353–4 moral wrongfulness and popular opinion on 353, 367–8 normative justifications for liberal society 353–61 pragmatic justifications for criminalization and lack of recidivism 362–3 individual sanctions vs. corporate sanctions 363–6 under Sherman Act 359 social and economic harm 354 trend towards 351–3 cartel activity, morality of 73–4 cartel law and 74–80 elements of moral delinquency 84 morally wrongful 81–7 pull factors 83–5 push factors 85–7 rule of reason approach 75 cartel agreements 221 cartel conduct absence of independence, demonstrating of 98–9 communication evidence 99–100 economic evidence 100–101 Australia 498 criminalization of 83 independent action and its absence 97–8 inherently objectionable 94–7 consequential objections 96 deontological objections 96–7 nature and motivation of 86 oligopoly behaviour 101 proscribed conduct 92–4 bid-rigging 94 market sharing 93–4 price 93 cartel criminalization 77 cartel damages calculation of EU Pass-On Guidelines on 383–4 legal principles governing 369–70

causation for 375 mitigation and other offsets of 384–5 proof for 376–7 pass-on and mitigation 386–7 quantification of 313 counterfactual prices 377–88 duration for 381–3 econometric and statistical approaches for 380–81 techniques for 378–80 types of aggregate damages 374 cost-based damages 372–3 lost chance and lost opportunity damages 373–4 ‘lost profit’ or ‘lost volume’ damages 371 overcharge damages 370 ‘run-on’ damages 370 ‘umbrella’ damages 371–2 which cannot be sought 374–5 cartel deterrence, idea of 308, 312, 326, 332 cartel enforcement Canada 535–44 China 438 effectiveness of 87 Hong Kong 438 political support for 87 relation with human rights 402–6 cartel facilitation case for disaggregation 165–8 concept of 156–7 further investigation and debate regarding 168 as managers and masterminds 161–5 as a species of delinquency 165–8 cartel industries 41 cartel injuries distributional consequences of 35 and recovery 33 cartel investigations access to the file 414–17 Commission’s powers of inspections 410–12 limits to 412–14 requests for information 408–10 detection 406–7 limitation periods 407–8 cartel law 102 comparative and reform considerations 116–17 distinction of 103–4 metaphysical problem 104–8 policy dilemmas 108–10 cartel management 215

Index  555 Cartel Ordinance (1923), Germany 55 cartel overcharges, in Europe and North America 33 cartel parties 160 cartel penalties 27, 32–3, 36 optimality of 39–43 cartel power, use of 237 cartel prohibition, policies of 158, 519 United States 521–2 cartel prosecutions 281 by South American competition 501 Cartonboard case 101 Cement Case 510 Cement III case 516 Central African Economic and Monetary Community (CEMAC) 397 centralized buying system 238 centralized retail management systems 239 channel of communication 208 Chicago Board of Trade 223 Chicken of Tomorrow case 150, 153 Chilean Competition Agency (FNE) 395–6 Chile’s competition law and policy enforcement system 515 leniency programme 514 OECD assessment of 514 China Anti-Monopoly Law (2007) 438, 447–8 API Guidelines 449–50 cartel enforcement in 438 hub-and-spoke cartels in 447–50 Platform Economy Guidelines (2020) 448–9 risks of hub-and-spoke arrangements in 449 Shanghai Business Operators’ Anti-Monopoly Compliance Guide 449 spread of the digital economy in 448 State Administration for Market Regulation (SAMR) 439, 449–50 Cimbel case 256 CISAC v Commission 197 citric acid cartel 17 civil antitrust claims 534 civil claim, elements of agreement 532 substantial effect on interstate commerce 533 unreasonable restraint of trade 532 civil investigative demands (CIDs) 526 civil liberties, loss of 364 Civil War (1642–51) 49 Clayton Act (1914), US 52, 54, 521 section 4 of 531 codes of fair competition 260 coercion 20 Colgate doctrine 172–3, 175–6

collusion, significance of 158–9 collusive horizontal practices, concept of 517 collusive price 15 determinants of 15 collusive tenders 92 collusive theories, of market outcomes 7–9 Colombian competition enforcement system 515 Colombia’s antitrust system 516 Columbian drug cartel 156 Combines Investigation Act of 1910 (Canada) 59 Committee of Experts on Restrictive Business Practices 65 Common Market for Eastern and Southern Africa (COMESA) Competition Commission 398 common purpose, concept of 121 communication of information 181 communication technology 49 community-based sentence 366 compensation, right to 376 competing entities 91 Competition and Consumer Commission of Singapore (CCCS) 459 Competition and Markets Authority (CMA) 83 competition authorities, in South America 503 Competition Commission Brunei Darussalam (CCBD) 463 Competition Commission of Zambia 388 competition, distortion of 124 competition infringements 401 competition law 5, 77 and blockchain 216 Brazil 507, 511 Brunei Darussalam 457 Cambodia 457 Chile 514 Colombia 507 for consumer welfare 244 European Union 141, 143 game theory and its application to 391–2 goals of 243 Indonesia 458 infringement of 93, 288 Commission’s power to impose a fine for 407 Lao PDR 458 Latin America 68, 505–8 Malaysia 458 New Zealand 476 Philippine 459 Singapore 459–60 Thailand 460 Venezuela 508 Vietnam 460 violation of 10, 20, 135 competitive harm, theories of 243–4

556  Research handbook on cartels competitors’ exchanges, of pricing information 222 competitor-to-competitor inter-seller price verification 225 CompStats Database 291 computer algorithms, use of 191 concertation, idea of 91 concerted practices, concept of 286, 482 concurrence of wills 5 confidential information 415 confidential information, definition of 392 consciously parallel practices, concept of 516 conscious parallelism, notion of 192, 281, 516 Conselho Administrativo de Defesa Econômica (CADE), Brazil 503 Brain Project 513 development of technologies to process big data 513 efforts to implement the antitrust law 511 growth of fines imposed by 512 investigations of bid rigging 513 consent decrees 25 conspiracy-based system of prosecution 161 conspiracy, concept of 165 consulting firms 162 consumer sovereignty 219 consumer welfare 7, 47, 75, 142, 149–50 losses caused by cartel activities 361 prescription 356 property right in 359 Container Corp. case 225 contract bidding, process of 361 Control of Cartels and Monopolistic Prices Act (1931), Bulgaria 56 cooperation cartels 141 cooperation within cartels, costs and benefits of 47 co-operative cartel 280 Copperweld case 532 Copperweld Corp v Independence Tube Corp 111–12, 115 corporate capitalism 49 corporate cartelists, geographic differences among 33–4 corporate cartels 36 corporate compliance programmes 530–31 corporate crime 85 corporate fines 87 corporate leniency, forms of Type A 529 Type B 529–30 see also individual leniency Cortana 213 counterfactual prices 377–8 Court of First Instance 120

Court of Justice (CoJ) 181, 371, 375, 442 COVID-19 crisis 48, 79, 87, 145, 152, 154, 232, 410, 471, 485, 496, 544 enforcement in response to 86 ‘Movimento Nós’ project 508 sanitary crisis 260 credit default swaps 35 criminal anti-cartel laws, adoption of 352 criminal antitrust cases 231 criminal antitrust laws 34 criminal antitrust sanctions 28, 78 criminal cartel prosecutions 37 criminal conspiracy offence, in United States agreements covered 523 defences against foreign sovereign compulsion 525 Foreign Trade Antitrust Improvements Act (FTAIA) 524 Noerr–Pennington doctrine 525 regulated industries 525 state action immunity 524–5 statute of limitations period 524 elements of 522 penalties 523–4 criminal fines 470 criminalization of cartel conduct 161 criminal penalties 351 imposition of 356 crisis cartels 141, 251–69 collusive conduct of 254 Commission’s flexible approach 255–8, 259 definition of 252 economic value of 145 element of secrecy 253–4 formation of 253 future of 268–9 legal debate on 255 liability and exemptions under EU law conditions for 264–7 restriction by object 262–4 sanctions 267–8 meaning of 252–5 OECD Report on 260 policy evolutions under EU law from the 1970s to the mid-1990s 255–8 New Millennium 259–62 restructuring agreements 254 and restructuring arrangements 144–5 state sponsorship and 253 types of 254–5 ‘war of attrition’ scenario 266 cross-border cartels (CBCs) 67 approach to prevent carrying out a parallel investigation 397 best practices to respond to challenges 389

Index  557 competition-driven new legislation and policymaking 390 cooperation between competition authorities in combating 388 coordination games for tackling regional cartels approach for the analysis of CBCs 395–8 coordination game theory and the alignment of strategies 394–5 and coordination game theory 392–3 coordination in a parallel investigation into taxi services 395–6 cross-border anticompetitive cases 389 enforcement of 388 game theory and its application to competition law 391–2 international antitrust cooperation 389–90 during times of crisis 390 jurisdictional obstacles in the coordination of an investigation in motor parts in Asia 397 latest developments to tackle OECD recommendation on international hard-core cartels 393 UNCTAD’s latest efforts on CBCs 394 Memoranda of Understanding (MOU) 390 price-fixing arrangements 388 problem of cooperation and trust for competition authorities 391 typology of trust-based activities 399 cryptocurrencies 215 government-backed 216 cumulative cartel discoveries, trend in 25 damages compensation, outside North America 32 data-intensive recovery ratios 33 data mining 192 data sets 322 deadweight losses 38 creation of 356 decision-making algorithm 206 deep-learning algorithms 208 defence, rights of 131–2 de minimis doctrine 95, 423 Department of Justice (DOJ), US 11–12, 21, 70, 174, 332 Antitrust Division of 190, 355, 521 corporate compliance programmes 530–31 Corporate Leniency Policy 529 Leniency Program 289, 529 strike force 390 deterrence ‘deterrence gap’ in EU cartel law 3

economic framework for optimal penalties 36–9 economic paradigm of 76 optimality of cartel penalties 39–43 theory of 78 deterrence-based trust (DBT) 399 Devenish case 373 Die Kartelle (1883) 84 digital economy 188–9, 194 China 448 hub-and-spoke cartels in 439 Digital Eye case 207 digital forensics 501 ‘direct purchasers’ class 534 diseconomies of scale 239 distributed ledger 217 domestic cartels 23 domestic economies 55 dominance claims, abuse of 438 dotcom bubble crisis (2000) 254 Dredging Companies case 433 duces tecum 526 due process, principle of 131 duopoly 47, 202 Dutch Bricks case 258, 264 Dyestuffs case 93, 100, 285 dynamic pricing decisions 207 ECN+ Directive 133, 300, 303 ECN Model Programme 303 e-commerce 185, 192, 206 economic crisis of 1929–33 138 economic depression 56 economic deterrence theory 3 economic downturns 252 economic efficiency 150 economic isolation 53 economic recession 390 economic rewards, misallocation of 244 economic waste 385 economic welfare 77 economies of scale 239 efficacy–exposure trade-off 13 efficiency defences 149 Eighth Report on Competition Policy (1979) 256 ‘e-leniency’ online tool 406 employment security 148 enforcement discretion, rules of 153–4 enforcement system, deterrence of 296–304 English common law 49 English laws, against market manipulation 49 Enichem Anic case 122 environmental sustainability 80 Eturas case 183–4 EU courts 110

558  Research handbook on cartels EU law 181–5, 252 evolution of 273 liability and exemptions under 262–8 principle of effectiveness to direct the national rules 376 Euronics 239 European Charter of Human Rights 402 right to privacy under Article 7 of 404 European Coal and Steel Community (ECSC) 60, 139 European Commission (EC) 19, 29, 94, 99–101, 140, 159, 161, 187, 192, 197, 206, 254, 332, 382, 401 Antitrust Manual of Procedures 401 Competition Commission 356 ‘e-leniency’ online tool 406 legal professional privilege 412–14 leniency notice 92 leniency programme 290 Notice on the Rules for Access to the Commission File 415 power of cartel investigation 408–12 to impose a fine for a competition law infringement 407 practice under the 1998 Fining Guidelines 128 privilege against self-incrimination 412–14 right to access to documents under Regulation 1049/2001 414 European Competition Network (ECN) 154 European Convention on Human Rights (ECHR) 131, 402 European Court of Human Rights (ECtHR) 79 Menarini judgment of 402 European Court of Justice 141, 197 European Court on Human Rights 161 European Economic Area (EEA) 313 European Economic Community (EEC) 61, 139, 256 formation of 65 European grocery buying groups 239 European industries, competitiveness of 144 European Legal Order 402 European Network of Competition Authorities 406 European textile industry 256 European Union (EU) 239 antitrust law 120, 131, 189, 418 cartel problem in 58 case law 164 civil-administrative antitrust implementing statute (1962) 29 classification of evidence in 284–6 Competition Commissioner 355

competition law in 141, 143 competition policies of the common market 61 competition policy issues 65 Damages Directive 132, 253, 300, 369, 376, 383, 386 General Court 197 law and practice in 181–5 Leniency Notice (1996) 66 market integration imperative 140 Member States of 29 National Competition Authorities (NCAs) 32, 335 Pass-on Guidelines 378, 383, 386 Practical Guidelines 378 price overcharge of cartels in 288 sanctioning process 161 Statement of Objections 404, 406–7 trucks cartel 8 whistleblower policies 67 evidence admissibility and assessment of 275–9 benefit of the doubt 278 beyond reasonable doubt 278 burden of proof 275 communication 99–100, 280 direct vs. circumstantial 280–86 economic 100–101, 280 European Union 284–6 free evaluation of 277 general 280–81 holistic assessment of 279–80 price-fixing conspiracy 282 probative value of 276 on recidivism 336–41 US law 282–4 ex ante deterrence 219 Excel Crop Care case 428 exclusion, rules of 152–3 experimental economics 189 export cartels 141, 145 lawfulness of 145 Export Trade Act 1918 (United States) see Webb–Pomerene Act of 1918 (United States) ex post penalties 219 extradition, of foreign nationals 528 Facebook case 405 facilitated tacit collusion 189 ‘fair’ prices, laws on 48, 83 fair trial, right to 402 family-owned business groups 68 federal antitrust laws 146 Federal Arbitration Act (FAA) 534

Index  559 Federal Communications Commission (FCC) spectrum auctions 12 Federal Law on Economic Competition (FLEC) 63 Federal Rules of Civil Procedure, Rule 23 of 533 Federal Trade Commission (FTC), US 26, 52, 193, 196 FICCI v United Producers/Distributors Forum & others 430 fighting against cartels, goals of 308 financial crisis of 2008 254, 259 financial distress 311 financial penalties, imposition of 5 fines against cartels anatomy of EC cartel fines 314–21 average leniency discounts 321 calculation of affected markets 127–8 base fine 313 duration 128–30 EU guidelines on 312–14, 331 final fine 313, 322 leniency applications 130–31 process of 315 provisional fine 313 rights of defence 131–2 United States 528–30 design of 309 deterrent effect of fine-sales ratios 321–6 legal maximum 326–8 Fining Guidelines of 1998 127 of 2006 128 formulation of 309–10 framework for the design of 309–10 immunity against 319 implementation of 311 imposed on both companies and on individuals 37 in practice 312–28 in theory 308–12 number of cases and undertakings over time 316 policy based on net harm 309 private antitrust enforcement and sanctions beyond 328–31 sanction to deter cartelization 331 settlement reduction and 314 fine-sales ratios 321–6 firm-level recidivism 339 firms, definition of 104 Fiscalía Nacional Económica (FNE), Chile 503 FNCBV case 263–4 foreign buying cartels, economic power of 145

foreign cartels and monopolies, subsidiaries of 55 foreign exchange, markets for 35 foreign sovereign compulsion defence 525 A Foundation for Common Cause & People Awareness v PES Installations (Pvt.) Limited 431 France Book IV of the Commercial Code 141 competition policy 141 decree on cartels 62 Ordonnance to restrict monopolies 61, 69 Paris, Treaty of (1951) 139 free competition, in the Andean Community 504 free competition, notion of 224 freedom of contract 54 versus freedom to trade 69 freedom of economic competition 515 free markets 60, 67, 140, 355 free-riding, prevention of 440 free trade agreements 63 free trade areas, creation of 65 French Beef case 268 French Penal Code 138 FTC Act 196 future collusive profits, expected value of 14–15 game theory assurance game 392, 397 Battle of the Sexes game (BOS) 392 calculus-based trust (CBT) 391 and its application to competition law 391–2 Prisoner’s Dilemma (PD) 391 for problem-solving 391 Stag Hunt (SH) 392, 396–7 Gas Insulated Switchgear case 94 GBE case 200 Gefährdungsdelikte 96 General Agreement on Tariffs and Trade (GATT) 65 General Court (GC) see Court of First Instance General Data Protection Regulation 405 geographic market-sharing 140 Germany American control over the coal and steel industry 139 competition authority 141 Decree against the Abuse of Economic Power Position see Cartel Ordinance (1923), Germany Ordinance against the Misuse of Economic Power (1923) 138 spectrum auction 6, 21 Ghosh test 359 global cartels geographic scope of 36

560  Research handbook on cartels severity of penalties on 36 special dimensions of 35–6 global economy 136 Global Financial Crisis (2007–09) 47 globalization, rise of 64 global price fixing 36 global serial cartels 340 global statistics, summary of 22–3 cartel injuries, distributional consequences of 35 geographic differences in cartels 29–30 among corporate cartelists 33–4 among individual cartelists 34–5 cartel injuries and recovery 33 cartel numbers and size 30–32 cartel penalties and severity 32–3 global cartels, special dimensions of 35–6 world-wide cartel statistics affected sales of cartels 26 cartel numbers 23–6 corporate and individual cartel participants 27–8 industry distribution of cartels 27 monetary penalties 28–9 Goldfish case 406 good administration, right to 402–3 Google search 214 grain-buying conspiracy, in ancient Athens 241 Great Depression of the 1930s 55–6, 86, 256, 260 guilty pleas 527 Hanover Shoe case 386–7, 531 hard-core cartels 66, 135, 158, 332, 461, 505 harm, theory of 450 Havana Charter (1948) 65 HeidelbergCement case 409 high-income economies 456 homosexuality, decriminalization of 74 Hong Kong Anti-Monopoly Law (2007) 451 bid-rigging scheme in 451–2 cartel enforcement in 438 classification of hub-and-spoke arrangements in 451 Competition Commission 438, 451 Competition Ordinance (2012) 438, 451 Competition Tribunal (CT) 451 hub-and-spoke cartels in 451–2 Nutanix case 451–3 horizontal price fixing agreements 433 hub-and-spoke cartel 15, 169–70, 438 algorithmic structure 206 antitrust cases market positioning 173 antitrust jurisprudence of vertical restraints 180

application of EU competition law to 181 cases in the EU 440 China 447–50 conspiracy 169–70, 173, 175, 177–80 relating to the prices 184 digital economy 439 economic perspective of 444–6 general overview of 439–46 Hong Kong 451–2 horizontal agreement in 446 horizontal price-fixing conspiracy 178 illegality in 173 interbrand competitors 442 law and practice in the United States 173–81 meaning of 439–44 ‘plus factors’ to sustain a finding of conspiracy 180 price-fixing agreements 177 regulation of 453 warehouse club policy 175 hub-spoke-and-rim conspiracies 169 human tacit collusion 190 Icap case 160 Icap Management Services 165 ICAP plc and others v Commission 403 identification-based trust (IBT) 399 Illinois Brick case 387, 531 immoral business practice 56 Important Industries Control Law (Japan) 58 import cartels 141 imprisonment and house arrest 37 income equality 399 income transfer 35 independence, obligation of 91–2 independent contractors 109 India anti-cartel regulations 68 anti-competitive practices in 420 appeals from cartel decisions in 434–7 appellate decisions in 435–6 Builders Association of India v Cement Manufacturers Association & others 430 cartel enforcement in 424–9 cartel regime in 420–21 Competition Act (2002) 420–21, 424 interpreting section 3(3) of 430–32 Competition Appellate Tribunal (COMPAT) 434–5 Competition Commission of India (CCI) 420–21 approaches towards cartels 433–4 breakdown of orders passed by 425 enforcement strategies of 429

Index  561 interpretations of the relevant provisions 429–34 order in the Liquefied Petroleum Gas Cylinders case 436 right to hold an inquiry 435 competition laws in 419 Director General of Investigations 435 Excel Crop Care case 428 FICCI v United Producers/Distributors Forum & others 430 film industry 426 Monopolies and Restrictive Trade Practices Act (MRTP) Act 68 monopolistic and restrictive trade practices 419 National Company Law Appellate Tribunal (NCLAT) 421, 434 Neeraj Malhotra v Deustche Post Bank Home Finance Ltd. & others 430 provisions in relation to the EU and US models 422–4 Reliance Big Entertainment Limited v Karnataka Film Chamber of Commerce & others 430 Supreme Court of 421, 435 Vijay Gupta v Paper Merchants Association Delhi & others 430 individual cartelists, geographic differences among 34–5 individual leniency 530 Indonesia competition laws and policies in 458 Competition Law (1999) 468 garlic and tyre cartels in 468 Indonesia Competition Commission (ICC) 397, 458 in dubio pro reo, principle of 130–31 industrial capitalism 48, 49 industrial-restructuring agreements 144 industrial revolution 47, 49 industry-wide cultures of cartelization 80 information exchanges 221 competitive outcome of 230 EU legal doctrines on 229–30 judicial hostility to 224–5 legality under Article 101 of TFEU 229 Open Competition Plan 223 open questions of law and policy on 231–2 at pre-investigatory phase 396 of price quotations of market commodities 223 trade associations 222 US legal policy towards competitors’ associationalism and its discontents 221–4

contemporary doctrinal structure of 226–8 information providers, confidentiality of 417 information sharing 392 inherently objectionable conduct, definition of 90 Institute of Chartered Accountants of Pakistan case 432 intelligent adaptation 97 intelligent agents, development of 213 interbrand competition, power of 176 internal cartel stability, challenge for 14 internal governance 161–2 International Trade Organization 65 Inter-Parliamentary Union 54 inter-seller price verification 225 Interstate Circuit case 171, 173, 176–7, 439, 445–6 interstate commerce 533 intrabrand manufacturer-hub arrangement 446 intra-EEC trade, effect of ban on cartels on 61 ‘intra-enterprise conspiracy’ rule 111, 113 Irish Beef case 260, 262–3 Irish Competition Act 148 Italy antitrust and pro-competition laws 60 legislation designed to break up cartels 59 regulation against unfair competition 60 Japan Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (AMA) 295 anti-cartel legislation in 58 Antimonopoly Act (1953) 63, 95 antitrust policy 63 bank-centred keiretsus 59 Fair Trade Commission (FTC) 63, 397 family-centred zaibatsus 59 legislation designed to break up cartels 59 military power 59 Ministry of International Trade and Industry (MITI) 63 Jindal Steel and Power Limited v Steel Authority of India 435 joint ventures 102–3, 113, 117, 433, 484 judicial hostility, to information exchange 224–5 Judicial Panel on Multidistrict Litigation 532 just price, notion of 46 Karachi Stock Exchange case 432 Keynesian economic theories 140 Kleinwächter, Friedrich 84 knowledge-based trust (KBT) 399 Komisi Pengawas Persaingan Usaha (KPPU) 458 Kone case 371–2, 375

562  Research handbook on cartels Kroes, Neelie 355 labour markets 234 laissez-faire capitalism 352 economic policy 56 ‘lawful’ cartels 2 assessment strategies economic analysis 149–50 enforcement discretion 153–4 exclusion 152–3 legal analysis 150–51 business model of 136 cost–benefit approach 137 early competition rules 138–9 economic benefits 135, 137, 143–9 European approach towards 141 history of 136–43 1990s onwards 141–3 from the late 1800s to the First World War 136–8 interwar period 138–9 post-war period 139–41 manière de voir 139 non-economic benefits of 135, 137, 143–9 rule of reason test 137 Sherman Act and 139 as social-economic institution 136–8 types of crisis cartels and restructuring arrangements 144–5 export cartels 145 horizontal cooperation agreements 143–4 labour and trade unions 148–9 regulated professions and trade associations 147–8 state sovereignty 146–7 sustainability agreements 145–6 lawful collusion 6 Law on Business Competition (Lao PDR) 458 leader–follower arrangement 11 League of Nations 54 learning algorithms 208 Leegin case 173, 176, 180, 441 ‘legal’ cartels 40 legal privilege, principle of 412–14 legal uncertainty, theory of 156 leniency discounts 321 leniency inflation multiple offending firms and 341–2 phenomenon of 333 leniency policies (LPs) antitrust enforcement without 336 contribution to social welfare 332

design and administration of 332 effectiveness of 335 leniency programmes adoption of antitrust 288 aim of 293 challenges of 304–5 concept of 288 coordination in other jurisdictions 303–4 coordination with criminal enforcement 299–300 other forms of sanction reduction 298 private enforcement 300–301 destabilizing effect of 292 deterrence of the enforcement system 296–304 EC and US Leniency Program Notices 335 economics of 292–3 effectiveness of 288, 292, 298 elements of leniency for successive applicants 294–5 marker system 295–6 publicity 293–4 EU-harmonized system of 303 European Commission 290 experience of the early adopters 293–304 external factors 296–304 fear of detection 297 functioning of 292 global adoption of 290–91 implementation of 288 ‘6Cs criteria’ for 306–7 internal factors 293–6 introduction of 288–92 mechanism of 292 OECD definition of 289 predictability and legal certainty 293–6 reporting by individuals individual leniency policies 302 whistleblowing 302–3 severity of sanctions 297–8 strategic use of 340 coordinating reports in the EU 343 multi-market firms 343–4 US Department of Justice (DoJ) policy 289 leniency statements 286–7 Les Mousquetaires case 405 Lessius, Leonard 46 LIBOR index 35 Lima Declaration 399 Linear Extortion to Collusion Algorithm (LECA) 202 Liquefied Petroleum Gas Cylinders case 436 liquid oxygen cartel case 398 Lisbon, Treaty of (2009) 402

Index  563 Lomar Wholesale Grocery v Dieter’s Gourmet Foods 97 Lombard Club case 123 London Gazette 360 Loudi Insurance case 448–9 lysine cartel 13, 17 Lysine cartel 82, 299 Malaysia Anti-Corruption Commission 466 case against MAS/Air Asia 467 Competition Act (2010) 458 competition laws and policies in 458 Domestic Trade and Consumer Affairs Ministry 466 Malaysia Competition Commission (MyCC) 458 price-fixing case in 465 price of cut flowers in 465 manière de voir 154 Mannesman 6 Maple Flooring Manufacturers v US 223–4 Marine Hoses case 83 market allocation 13, 360 market allocation scheme 7, 12, 20 market-based economies 353 market competition markets 45 market dominance, abuse of 69 market economies 68, 90, 104, 233 market power, abuse of 46–7 market sharing 93–4, 313, 467 market-sharing cartels 50 market strategy, implementation of 98 Marshall, Alfred 47 Marshall Plan 60 Mastercard network 105 Mastercard v Merricks 376 Matsushita case 283 Meca-Medina case 148 mens rea 537 Menzel, Adolf 51 Merricks v Mastercard 374 Methacrylates case 119, 123 Mexico, cartel enforcement in administrative antitrust authority 545 civil actions for damages 549 concept of damages 549 criminal offence leniency 546–7 penalties 546 requirements of 545–6 enforcement of antitrust laws authorities 547 investigation and trial-like procedure 547–9

Investigative Authority 548 overview of 544–5 Probable Responsibility Ruling 545, 548 Report File 548 Middle Ages 81 Middle East and North Africa (MENA) countries 69 middle-income economies 456 milk commercialization cartel 516 Mill, J.S. 354 miscommunication, issue of 12 monetary penalties 28–9 Monopolies and Restrictive Practices (Inquiry and Control) Act (1948), UK 61 monopolization, misuse of 67–8 monopoly 114 case for buyer cartels 245 market impact of 47 power of 108 pricing, economic effects of 352 prohibitions against 49 monopsony 247 Monsanto Co v Spray-Rite 91, 174, 177, 180 Montague v Lowry 237 Moral Theory of White Collar Crime 84 most favoured nation (MFN) 177 ‘Movimento Nós’ project 508 multidistrict litigation (MDL) 532 multi-market contact 333, 340 multi-market firms 343 multi-market offences 126 Mussolini, Benito 56 Myanmar Competition Commission (MmCC) 459 Nash Price 209 national competition authorities (NCAs) 303 National Industrial Recovery Act of 1933 (United States) 59 national privacy laws 27 natural language, use of 12 natural law, theory of 73 Neeraj Malhotra v Deustche Post Bank Home Finance Ltd. & others 430 neoliberalism, notion of 73 new cartels, formation of 22 New Zealand adjudication of civil competition law 490–91 anticompetitive agreements 487 authorization granted on public benefit grounds 487 balance of probabilities 486 Bill of Rights 497 cartel laws 483 cartel prohibition 482–3

564  Research handbook on cartels collaborative activity exemption and clearance 486 Commerce Act 482, 497 Commerce Commission 488 competition laws in 476 criminal elements in 484 investigatory and enforcement bodies 487–8 joint buying and joint advertising arrangements 487 joint buying and promotion agreements 487 leniency and immunity tools in 498–9 other anticompetitive agreements 484 penalties for cartel conduct in 494, 497 private enforcement 491–2 prohibition of cartel conduct 486 price fixing and output restriction 486 public civil enforcement in 494 Trade Practices Act 482 vertical supply contracts 486–7 vertical supply restrictions between suppliers 486 New Zealand Commerce Commission (NZCC) 477, 483, 487, 490 Noerr–Pennington doctrine 525 no-fault monopoly, rules for 109 nolo contendere, pleas of 527 non-competing entities 91 non liquet decision 272 ‘no-poach’ agreements 247–8 Nordic Competition Network (NCN) 399 North American Free Trade Agreement (NAFTA) 63 Norwegian Temporary Price Act (1920) 55 nulla poena sine lege, principle of 131 nullum crimen sine lege 166 Nutanix case 451–3 offenders’ cartel sales 310 Office for Trade Competition Commission (OTCC) 460 oil shocks (in 1973 and 1979) 254 oligopolistic price coordination 196 oligopoly 108, 114 oligopsony power 247 online markets, transparency of 201 open market economy 90 open-market sales 107 open price associations 222 optimal penalties, economic framework for 36–9 Organisation for European Economic Co-operation (OEEC) 65 Organisation for European Economic Co-operation and Development (OECD) 65, 170

anti-cartel policies and enforcement practices 393 Competition Committee 393 Council of 65–6, 393 Recommendations on Cartels 90, 92, 393 Organismo Supervisor de Inversión Privada en Telecomunicaciones (OSIPTEL) 502 organization of cartels 164 organization of economic life 139 Organization of Petroleum Exporting Countries (OPEC) 86, 147 organized crime 156 organized subsidiaries 111 output restriction, prohibition of 486 Pakistan anti-competitive agreements 434 appellate decisions in 436–7 cartel enforcement in 424–9 Competition Act (2010) 421, 424, 434 establishing cartels under section 4 of 432–3 Competition Appellate Tribunal (CAT) 422, 434 Competition Commissions of Pakistan (CCP) 420, 422 approaches towards cartels 433–4 breakdown of orders passed by 426 enforcement strategies of 429 interpretations of the relevant provisions 429–34 competition laws in 419 Competition Ordinance (2007) 419 instances of cartelization 426 monopolistic and restrictive trade practices 419 provisions dealing with cartels in 421–2 provisions in relation to the EU and US models 422–4 Report of the Law and Justice Commission of 436 Supreme Court of 422 Pakistan Banking Association & others case 432 Paper Tissue case 518 Paraguay’s CONACOM 509 parallelism, desirability of 202 Paris, Treaty of (1951) 139 Passenger Fuel Surcharges case 93 pass-on defence, assessment of 267 payment-card joint ventures 27 penalties antitrust 36 cartel 27, 32–3, 36 civil monetary 32 deterrence power of 33

Index  565 monetary 28–9 optimal 36–9 penalties reduction benefit programme 546 permissioned ledgers 215 per se offence 539 personal responsibility, principle of 131 Peruvian Competition Authority (INDECOPI) 395–6 PESCO Tender Order/Amin Brothers Engineering et al case 432–3 Pharmacies case 500 Philippine Competition Commission (PCC) 459 plea-bargaining agreements 303, 332, 360, 528, 541 pluralistic society 73 Polypropylene case 121 Pometon v Commission 403 positivism, notion of 73 Posner, Richard 218 Power Cables case 94 predatory pricing 47 Pre-Insulated Pipes case 119, 162–3 presumption of innocence, principle of 403 price alignment 201 price discrimination 244 price fixing activities in foreign countries 284 agreements 226, 523 ASEAN competition laws 464–5 Australia 479–80 Canada 538 Colombia 516 conspiracy 105, 109, 178, 179, 279, 282 horizontal 313 New Zealand 486 punishment under Argentinian Criminal Code 506 United States 523 price-fixing cartels 22, 29, 40, 48, 130 locations of 31 South America 509 price monitoring 15 price optimization algorithms 188, 194 price overcharge of cartels, in the EU 288 pricing algorithms 200 proliferation of 191 rise of 189 pricing decisions, optimization of 201 Principles of Federal Prosecution of Business Organizations 527 Prisoner’s Dilemma (PD) 266, 292, 391 prison sentences 34 privacy, right to 402, 404–6 infringement of 405 private communication 11

Private International Cartels (PIC) 22–3, 35 pro-competition policies, international efforts for promotion of 65–7 profit-maximizing firms 267 prohibition, principle of 137 ‘public’ cartels 23 public dissemination 228 public power, administrative use of 146 Public Prosecution Service of Canada (PPSC) 540 Pyidaungsu Hluttaw Law No. 9/2015 (Myanmar Competition Law 2015) 459 Q-learning pricing algorithms 209 Qualcomm 438 quantum computing 217 Quebec gasoline cartel 12 Quinn Barlo case 125 quota system 256 ratio decidendi 132 rationalization cartels 141 rebates cartels 141 recidivism categories of multiple offenders 339 repeat offenders 339 true recidivists 339 definition of 334, 338 Europe 338 evidence on empirical 336–41 experimental 336 theoretical 337 legislation on 334–6 literature on 336–41 new evidence at the EU level 341–4 relation with effectiveness of cartels 340 recourse claims, for joint and several liability 133 Registrar of Restrictive Trading Agreements 61 regulatory market-building tool 151 Reliance Big Entertainment Limited v Karnataka Film Chamber of Commerce & others 430 request for information, elements of 408–10 resale price maintenance (RPM) 172–3, 181, 206, 237, 440 Residential Estate Agency Services 93 Rest of the World (ROW) 30, 33 restraint of trade, doctrine of 352 restrictive business agreements, notification of 55 restrictive business practices 65 restrictive practices, intolerance of 59 reward–punishment scheme 14 rimless wheel theories 439 risk-sharing 144 rivalry, benefits of 74

566  Research handbook on cartels Rome, Treaty of (1958) 65, 139 Article 85(1) of 161 Roosevelt, Franklin D. 59 ruinous competition, problem of 50–51, 55, 86, 221 Rule of Reason 7, 52, 64, 75, 137, 149, 151, 172–3, 176–81, 226–8, 231–2, 235, 423, 433, 440–42, 523, 532 Sainsbury’s v Visa & Mastercard 384, 386 sales monitoring 16, 18 sales quotas 13–14, 16, 92 sanctions aggregate sanctioning, principle of 127 cartel cases 330 criminal antitrust 28 imposed on cartels 43, 267–8 liability and exemptions under EU law 267–8 use of 79 sanitary crisis economic consequences of 261 related to COVID-19 pandemic 254, 261 Schuman Plan 60 Seamless Steel Tubes decision 267 search warrant 489 Second Industrial Revolution 105 Second Report on Competition Policy (1972) 256 Secretaria de Promoção da Produtividade e Advocacia da Concorrência (Seprac), Brazil 503 secret cartels 142 self-incrimination, privilege against 414 self-learning algorithms 190, 201, 207–9 seller cartels 244, 248 sensitive data 405 settlements 37 SGCAN (Andean Community’s antitrust authority) 518 share markets 158 Shenzhen Pest Control case 448 Sherman Act (1890), US 29, 50–51, 53–4, 58, 64, 76, 110, 137, 161, 164, 168, 173, 198, 223, 332, 352, 442, 505, 519, 521 criminalization of cartel activities under 359 passage of 52 principle of prohibition 139 purposes of 532 section 1 of 174, 189, 359 scope of 196 violation of 178, 198, 522 Singapore bid-rigging in 465–6 bus fares 465 Competition Act (2004) 459

Competition and Consumer Commission of Singapore (CCCS) 459 competition laws and policies in 459–60 price-fixing cases in 465 swimming pools case 466 Single and Complex Continuous Infringement (SCCI) application of 127 under Article 23 of Regulation 1/2003 133 assessment of 126 calculation of the fine affected markets 127–8 duration 128–30 leniency applications 130–31 rights of defence 131–2 common objective, contribution and awareness 121–3 assessment of 123 compatibility with Article 53 of the EEA Agreement 131 Article 101 TFEU 131 concept of 118, 121, 131 doctrinal approach behind 120–21 under EU competition law 118 immunity/leniency benefit for 131 implications for private enforcement recourse claims for joint and several liability 133 scope of liability for damages on non-contested markets 132–3 implications for public enforcement on discretion in applying the SCCI doctrine 126 evidence and limitation periods 126–7 leniency statement 131 liability of 125 limitation periods 129 on requirement of complementarity 124–5 individual assessment of each participant 125–6 Statement of Objections (SO) based on 131 types of 119–20 single economic unity 408 single entity, economic theory of 106, 110 single-entity immunity 117 single-nation EU cartels 31 Siri 213 Skanska case 132 small and medium-sized industries 55 smart contracts cartel law 2 competition law 217 ‘agreement’ dilemma and algorithmic collusion 218–19

Index  567 challenge for 218–20 and consumer welfare 219–20 traditional competition law framework 219–20 evolution of 217 for price-fixing agreements 216 rise of 213–18 agreement technologies 214–15 alternatives to blockchain 217–18 blockchain 215–17 usefulness of 216 Smith, Adam 76, 351 Theory of Moral Sentiments, A (1759) 47 Wealth of Nations, The (1776) 47 social harmfulness 85 socialist economies 67 social stigma, threat of 76 social waste, creation of 357 social welfare 219 cartels’ impact on 48 sodium chlorate cartel 382 software-powered agents, limits of 213 solo self-employed people 148 South African Competition Commission (CompCom) 397–8 South America’s antitrust laws antitrust enforcement systems 501–5 Andean episode 518 Argentina and Venezuela 510–11 developments in Brazil, Chile, Colombia and Peru 511–17 emerging jurisdictions 509–10 and cartel enforcement in practice 508–18 cartel prohibitions clauses in 505–8 category of agreements in 505 Cement Case 510 competition agencies that enforce 520 competition laws 505 criminal enforcement of cartels and 507 criminalization of bid rigging under 507 current competition legislations 505 and market-oriented policies 510 number of cartels fined under 512 Paper Tissue case 518 types of horizontal agreements explicitly prohibited in 506 Southern African Customs Union (SACU) 397 Southern African Development Community (SADC) Cartel Workshop 392 Southern Common Market (Mercosur) 502 sovereign regulatory powers 146 Soviet Union, collapse of 67 Spanish Competition Authority 184 specialization cartels 141 spiral of delinquency 84

Stag Hunt (SH) game theory 392, 396–7 Standard Oil case 52 standards of proof 274, 278, 365 state action immunity 524–5 Statement of Objections (SO) 131, 404, 406–7, 415, 417 state sovereignty 146–7 state sovereignty, protection of 151 state-sponsored cartels 253 stealth communication 200 stealth human communications 200 stock-price movements 39 “strategic” dynamic pricing strategies 194 streamshare 214 structural crisis 255 structural overcapacity, definition of 257 Sugar Institute v United States 224 sui generis case 508 sunk costs 267 Superintendence of Economic Regulation 515 Superintendencia Antimonopolios (SA), Venezuela 504 Synthetic Fibres case 255, 264 takeover 20 Tang Dynasty (China) 48 Team Relocations case 121, 125 technical knowledge 147 technological developments 143 Texaco Inc v Dagher 117 Theory of Moral Sentiments (1759) 76 Thirteenth Report on Competition Policy (1983) 257 Thyssen-Stahl case 229 T-Mobile Netherlands case 229 Todd v Exxon Corp 226, 231 Tokai Carbon case 126–7 Toledo Mack case 180 Topco case 246 Topkins case 200 total welfare, concept of 75 Toys “R” Us Inc v Federal Trade Commission 175–6, 442, 445–6 Trade Practices Act (1974) 51 trade unions 148–9 ‘transaction cost’ economics (TCE) 106 transfer of profits 17 transition economies 68 Treaty on European Union (TEU) Article 4(3) of 253 Treaty on the Functioning of the European Union (TFEU) 86 Article 101 of 114–15, 121, 124, 132, 189, 332, 422, 447, 463 breach of 181

568  Research handbook on cartels cartel proceedings under 314 drafting of 139 guidelines on the applicability of 229 infringement of 230, 407 legality of information exchanges under 229 restrictions of competition by object under 229 scope of 388 UK’s equivalent of 171 Article 101(1) of 242, 443, 506 infringement by object provision 377 Article 101(1)(a) of 93 Article 101(1)(c) of 93 Article 101(3) of 142, 149–51, 252, 255, 259, 264, 423 Article 106 of 253 Article 296 of 409 reforms in 141 on right to compensation 376 Treuhand case 160, 165 trial for cartel 351 Tribunal de Defensa de la Libre Competencia (TDLC), Chile 503 Trod case 200 Trucks cartel case 297 true recidivists 339 Trust Law (1926) 55 Turner, Donald 218 Twelfth Report on Competition Policy 257 undertaking-specific fine-sales ratios 322 undiscovered cartels 24 unfair trade practices 71 Uniglobe Mod Travels (Pvt.) Limited v Travel Agents Federation of India & others 431 United Kingdom (UK) Brexit referendum 184, 387 cartel offence and secret self-exceptions 359–61 collective proceeding regime 374 Competition and Markets Authority (CMA) 206 Competition Appeal Tribunal (CAT) 184, 373 Enterprise Act 2002 (EA) 359 Fair Trading Act (1973) 141 House of Lords 187 Market Investigation regime 103 ‘new’ cartel offence 360 Office of Fair Trading (OFT) 171 ‘trucks’ damages litigation before the CAT 385 United Nations Conference on Trade and Development (UNCTAD) 66–7

latest efforts on CBCs 394 role in formulating competition policies 67 Working Group on Cross Border Cartels 394 United States (US) ‘anticompetitive’ conduct 522 Antitrust Criminal Penalty Enhancement and Reform Act (ACPERA) 301, 529 antitrust law 110, 196, 439, 445 bid-rigging agreements 523 cartel enforcement in corporate compliance programmes 530–31 criminal conspiracy offence 522–5 criminal enforcement authorities for 525–6 overview of cartel prohibitions 521–2 prosecutions 527–8 sentencing and calculation of fines 528–30 civil actions for damages ACPERA benefits 533 arbitration 534 class actions 533–4 defences against 534–5 elements of a claim 532–3 procedures/persons who may sue 531–2 civil investigative demands (CIDs) 526 Clayton Act (1914) see Clayton Act (1914), US Corporate Leniency Policies 66 Court of Appeals for the Seventh Circuit 198 criminal and civil penalties for cartel conduct 521 Department of Justice (DOJ) 282, 362 Antitrust Division of 190, 355, 521 Corporate Leniency Policy 529 Leniency Program 289, 529 strike force 390 Export Trading Company Act (1982) 145 Federal Bureau of Investigations (FBI) 299 Federal Sentencing Guidelines 295 Foreign Trade Antitrust Improvements Act (FTAIA) 524 Individual Leniency Policies 66 Individual Leniency Policy 302 price-fixing agreements 523 primary antitrust statutes in 521 prosecutions against criminal offences charging and indictments 527 extradition of foreign nationals 528 guilty pleas 527 Type B agreements 527–8 Type C agreements 528 Sherman Act (1890) see Sherman Act (1890), US

Index  569 Speedy Trial Act 527 state action defence 146 Webb–Pomerene Act (1918) 59, 61, 145 United States v Apple, Inc 171, 176, 179 United States v Container Corporation of America 225 United States v Gypsum Co 225 urban development 147 Uruguay Round 63 US-convicted cartels 42 Use of Confidentiality Rings in Antitrust Access to File Proceedings (2018) 417 user-friendly technology 213 US v All Star Industries 174 utilitarianism, notion of 73 Varca Druggist & Chemist and others v Chemists & Druggists Association Goa and others 431 Vargas, Getfilio 58 Vietnam bid-rigging case in medical supplies 466 competition laws and policies in 466 Vietnam Competition and Consumer Authority (VCCA) 460 Vijay Gupta v Paper Merchants Association Delhi & others 430 Villeroy & Boch case 124, 131 Virtual Competition (2016) 191, 206, 439 Visa network 105 vitamins cartel 19, 362, 382

VM Remonts case 182 wage goods 35 Wallace Act (1889) 50 ‘war of attrition’ scenario 266 Waste-Packaging Collection prosecution 27 Webb–Pomerene Act of 1918 (United States) 59, 61, 145 Weyl Beef Production case 263 whistleblowers 44 ethical obligation of 303 financial incentives for 302–3, 330, 543 legal protection against retaliation 303 white-collar crime enforcement 82 wholly-owned subsidiaries 113 wiretraps 540 Wolfenden Report (1957) 73 Wood Pulp case 51, 100, 285 workable competition, notion of 141 World Trade Organization (WTO) 65 World War I 53–4 World War II 54, 59 Wouters case 147 X-inefficiency, exacerbation of 357–8 Yen LIBOR Cartel 165 Yugoslavian Cartel Decree 57 zinc phosphate cartel 17