Cartels and Competition: An Antithetical Relationship

Vishesh Arora and Yashita Sharma

Cartels distort free competition in market and Competition law regulates and maintains free competition in the market. This article will deal with the most talked about anti competitive agreement i.e. Cartel. Author has included all the provisions and procedures related to it and even the position in various other countries along with the case laws.
I. Introduction Competition Law almost everywhere, prohibits three kind of activities, namely anti competitive agreements, abuse of dominance (or monopolization), and anti competitive mergers. Indian Competition Act, 2002 replaced The Monopolies and Restrictive Trade Practices Act, 1969.The Statement of Objects and Reasons1 annexed to the Competition Bill 2001, states the reasons for enacting the new law in the following words: In the pursuit of globalization, India has responded by opening up its economy, removing controls, and resorting to liberalization. The MRTP act has become obsolete in certain respects and there is a need to shift our focus from curbing monopolies to promoting competition. Competition Act, 2002 states that no enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an AAEC within India.2 A. Anti Competitive Agreements Section 3(1) prohibits any agreement with respect to production, supply, distribution, storage, acquisition, or control of goods or provision of services which causes or is likely to cause an appreciable adverse effect on competition within India.3 Further, Section 3(2) provides that any agreement in contravention of this provision shall be void.4 In Registrar of Restrictive Trade Agreement v. W.H. Smith and Sons5, the court observed, people who combine together to keep up prices do not shout it from the house tops. They keep it quiet. They make their own arrangements in the cellar, where no one can see. They will not put anything into writing nor even into words. A nod or wink will do. Parliament as well is aware of this. So it included not only an agreement properly so called but any arrangement, however informal. However, in the EU in some cases, for example, Bayer6 and Volkswagen,7 the court disagreed with ECs expansive interpretation of agreement and has effectively toughened the standards for proof of agreement in cases of restrictive distribution. Anti Competitive agreements between enterprises that restrict competition fall into two categories: horizontal agreements which are those between enterprises at the same stage of supply chain and vertical agreements which are between enterprises at different stages of the supply chain. Usually, it is the horizontal agreements that cause the greatest concern to competition authorities. The Supreme court in Telcos Case8 and Mahindra and Mahindra Ltd v. Union of India9, held that a trade practice does not become a RTP merely because it falls within one or the other clauses of Section 33(1), but that it must also satisfy the definition of restrictive trade practice contained in Section 2(o). Hence on an introspection of the Competition Act 2002, the modus operandi of proving that an agreement is anti competitive is as follows.

5th Year, B.A. (LLB.) Hons., Rajiv Gandhi National University of Law, Punjab, Patiala 4th Year, B.Sc (LLB.) Hons., National Law University, Jodhpur

Are you an enterprise or a person as defined under Section 2?

YES

Have you entered into an agreement with any person or enterprise engaged in identical or similar trade?

YES

Does your agreement fall under any one of the categories specifically enlisted under Section 3(4)?

YES

Does your trade practice fall under any of the presumptive provisions of Section 3(3)?

YES

Does this agreement cause or likely to cause an appreciable adverse effect on competition within India?

YES

YES

Does your trade practice fall under provision to Sub-section (3) of Section 3

NO

Anti-Competitive Agreement under Section 3

II. CARTEL Cartels are agreements between enterprises10 (including association of enterprises) not to compete on price, product (including goods and services) or customers. The objective of a cartel is to raise price above competitive levels, resulting in injury to consumers and to the economy. For the consumers, cartelization results in higher prices, poor quality and less or no choice for goods or/and services. In the European Union, Mario Monti, the former commissioner for Competition, once described cartels as cancers on the open market economy11, and the Supreme Court in US has referred to cartels as the supreme evil of antitrust,12 Cartels are included in the category of agreements, which are presumed to have appreciable adverse effect on competition. The term Cartel is explicitly defined in the Act as:Cartel includes 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 service.13

A. Establishing A Cartel Three essential factors have been identified to establish the existence of a cartel, namely 1. Agreement by way of concerted action suggesting conspiracy; 2. The fixing of prices 3. The intent to gain a monopoly or restrict/eliminate competition14 Parity of prices coupled with a meeting of minds has to be established to prove a cartel. The test for concerted practice is that the parties have co-operated to avoid the risks of competition, and this has culminated in a situation which does not correspond with the normal conditions of the market. A cartel is a horizontal agreement to fix prices, allocate customers or territories, restrict output or rig bids. A cartel is regarded as the most pernicious form of violation of competition law since it unequivocally damages competition and causes loss to the economy and to consumers. Owing to the seriousness of cartels, they are subject to the per se rule15 in many jurisdictions e.g., in the US16 and in the European Union.17 B. Price Manipulation Not Price Parallelism The most crucial ingredient of cartelisation behaviour is collusive manipulation of prices by the competitors. A mere simultaneous movement of prices, especially for homogeneous products, is not by itself sufficient to prove a cartel18 C. Hard Core Cartel A hard-core cartel as defined in the OECD Recommendation is: 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.19 Adam Smith, often recognized as the father of modern economics, wrote in 1776 in The Wealth of Nations, 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.20 D. Appreciable Adverse Effect on Competition (AAEC) The term appreciable adverse effect has not been defined in the Act, but Section 19(3) of the Act provides for certain factors to be given due regard by the commission while determining whether an agreement have AAEC or not, namely: 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; Promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.21 The first three factors, relates to negative effect on competition while the remaining three factors relates to beneficial effects. Thus in assessing whether an agreements have appreciable adverse effect on competition, both the harmful and beneficial effects shall be taken into consideration while determining any case under Section 3 by the commission. 1. The Balancing Test In Yarn Spinners Agreement Case22, it was held by the MRTP Commission that while the removal of the restrictions would be likely to have a serious and persistent adverse effect on the general level of unemployment in an area, the detriment to the public resulting from the operation of the restrictions (in particular the waste of national resources in the form of excess capacity), was such that the restrictions were unreasonable. In Blanket Manufacturers Agreement Case,23 the court upheld the minimum substance restriction (but not the other restrictions). In Glazed and floor tile home traders Associations Agreement,24 the court held that there were no detriments flowing from the agreement other than a certain restriction of choice for the public and some small surcharges on deliveries, the court held that these detriments were considerably

outweighed by the benefit of lower overall prices resulting from standardization and the restrictions were not unreasonable within the balancing provision. The commission held in the case of FICCI- Multiplex Association of India v. United Producers/ Distributors Forum25 The factors given in Section 19(3) of the Act, for determination of appreciable adverse effect on competition, have been discussed in detail in the report of the D-G. As has been shown in the report, out of the six factors mentioned therein, the first three relating to creation of entry barriers in the market for multiplexes have been indisputably violated. As regards the last three factors, there are no benefits to the consumer nor are there improvements in distribution of films or promotion of scientific, technical or economic development in the industry. E. Tools for Detection of Cartels Cartels are not easy to detect since the colluding parties go to great lengths to cover their tracks. Therefore, competition agencies have been resorting to and seeking greater investigative powers for unearthing evidence. 1. Dawn Raids: Upon request by the Federal Competition Agency, the Austrian Cartel Court issues a search warrant (provided there is reasonable suspicion of a cartel infringement). With a search warrant, the Federal Competition Agency can, similar to the EU Commission, enter premises, search documents and computers, etc. Notably, the inspection can start without the search warrant being served on the undertaking(s) concerned; the law only provides that it must be served within 24 hours.26 2. Incentives and Rewards Under US law, the Civil False Claims Act enables a private citizen to bring an ction in the name of the US Government claiming fraud by government contractors and other entities that use government funds, and the litigant is then able to share in any money received. This legislation was used in the case of a bid-rigging cartel of wastewater treatment projects in Egypt funded by USAID, representing the first time that the legislation had been used to expose a large multinational cartel.27 In South Korea, the Korean Fair Trade Commission has established a reward system for those who report or give information about competition law violations.28 A reward of 66.87 million won (about $US63,700) was paid in June, 2005 to a person who provided decisive evidence in a welding rod cartel case.29 3. Whistleblowing and Leniency A crucial tool in the detection of cartels has proved to be the policy of encouraging whistleblowers to approach the competition authorities with information about a cartel. Subject to a series of conditions, such as that the whistleblower will cooperate with the investigation of the authority in question and that it was not a ringleader of the cartel, complete immunity will be available from any penalty that might otherwise have been imposed. Amnesty programs have been implemented in many jurisdictions, and have proved to be highly successful. For Example 200 the European Commission received 49 applications for immunity and leniency in 25 different cases in 2004.30 III. Rules Applied in the Interpretation of Anti-Competitive Agreements After taking all the relevant factors into account in a given statute, there should be still some principles on which one can arrive at a conclusion on the effect of the anti-competitive conduct or practice on competition. The courts all over the world including India have come to judge violations of anti-competitive agreements by the following three main approaches namely: A. The Rule of Reason Blacks law dictionary defines the law of reason in anti-trust law as a judicial doctrine holding that trade practice violates the Sherman Act only if the practice is unreasonable restraint of trade, based on economic factors31. Hon'ble Supreme Court of India observed it will thus be seen thus be seen that the rule of reason normally requires an ascertainment of the facts or features peculiar to the particular business; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable; the history of the restraint and the evil believed to exist, the reason for adopting the particular restraint and the purpose or end sought to be attained and its only on a consideration of these factors that it can be decided whether a particular

act, contract or agreement, imposing the restraint is unduly restrictive of competition so as to constitute restraint of trade32 B. The Per Se Rule The Per se rule and its rationale has been explained by US courts in a number of cases. Like in Northern Pacific Railway Company v. United States33, Arizona v. Maricopa County Medical Society,34 and Continental T.V. v. GTE Sylvania Inc.35 the Court observed that there are certain agreements and practices which because of their pernicious effects on competition and lack of any redeeming virtue are confusedly presumed to be unreasonable and therefore illegal without any elaborate inquiry as to the precise harm they have caused or the business excuse for their use. In Jefforson Parish Hospital Distt. No. 2 v. Hyde36 the court observed that the rationale for per se rule, in part, is to avoid a burdensome inquiry into the actual market conditions in situations where the likelihood of anti-competitive conduct is so great as to render unjustified the cost of determining whether the particular case at bar involves anti-competitive conduct. In India there is no concept of per se rule under completion law as such. However, Evidence Act, 1872 under Section 4 Clause 3 provides for conclusive proof which gives an artificial probative effect by law to certain facts. C. The Rule of Presumption The expression shall presume leaves no discretion with the Court to make the presumption and it is a legislative command to Courts to raise a presumption and regard such fact as proved unless and until it is disproved37. The principle of shall presume, used in Section 3(3), has been explained by Courts in India in numerous cases. Supreme Court in Sodhi Transport co v. State of Utter Pradesh38 observed that the words shall presume have been used in Indian judicial lore for over a century to convey that they lay down a rebuttable presumption in respect of matters with reference to which they are used and not laying down a rule of conclusive proof, the Court also observed that a presumption is not in itself evidence but only makes a prima facie case for the party in whose favour it exists. It indicates the person on whom the burden of proof lies. But when the presumption is conclusive, it obviates the production of any other evidence. But when it is rebuttable, it only points out the party on which lies the duty of going forward on the evidence on the fact presumed, and when that party has produced evidence fairly and reasonably tending to show that the real fact is not as presumed, the purpose of presumption is over.39 IV. Landmark Cases of CCI A. All India Tyre Dealers Federation v. Tyre manufacturers40 The AITDF alleged that since independence, the behaviour of domestic tyre majors has been anticompetitive, anti-consumer and they have been indulging in various pricing and trade mal-practices, which had direct bearing on the revenue of the state exchequer. In view of the contentions raised by the parties and the findings recorded by the DG, following issues arise for determination: (i) Whether the Commission has the jurisdiction to proceed with the matter under the provisions of the Competition Act, 2002? (ii) Whether the tyre manufacturers have contravened the provisions of section 3 of the Act? CCI undertook detailed investigation on various grounds after the report of DG was prepared and found that there is not sufficient evidence to hold a violation by the tyre companies Apollo, MRF, J.K. Tyre, Birla, Ceat and ATMA of the provisions of Section 3(3) (a) and 3(3)(b) read with Section 3(1) of the Act. B. Builders association of India v. Cement manufacturers association and others41 In a first-of-its-kind order, the CCI has imposed a penalty of over Rs 6,000 crore on 11 leading cement producers after finding them guilty of forming cartels to control prices, production and supply of cement in the market. According to the CCI order, it found cement manufacturers violating the provisions of the Competition Act. The CCI issued the order after investigation by the Director General (CCI) upon information filed by the Builders Association of India.

 While imposing the penalty, the commission considered the parallel and coordinated behaviour of cement companies on price, dispatch and supplies in the market. The commission observed that the act of these cement companies in limiting and controlling supplies in the market and determining prices through an anticompetitive agreement was detrimental to the entire economy. V. Worldwide Actions Against Cartels A. Argentina: In July 2005, five cement companies were prosecuted in Argentina for a cartel that lasted for 18years from 1981 to 1999. The companies agreed on a market division that was closely monitored by their trade association. The respondents were fined US $ 107 million.42 B. Australia: On 7th April, 2004, the Federal Court ordered fines of Australian $ 14 million against ABB power Transmission Pty. Ltd. and ABB Transmission and Distribution Ltd. For their involvement in power transformer and distribution transformer cartels. The total penalties in this case amounted to Australian $ 35,045,000, a record for Australian competition law. Company Executives involved in the cartel were fined just over Australian $ 1,000,000.43 C. Brazil: In 2005, CADE, the Brazillian competition authority, found cartels in relation to pharmaceuticals, steel, and crushed stone.44 D. European Commission: On 30th November, 2005, the European Commission imposed fines totaling EURO 290 million on 16 firms for price-fixing and sale quotas by geographical area in the industrial bags market.45 It is perhaps worth noting that, in the calendar year 2001, the European Commission adopted no fewer than 10 decision on hard-core cartels, in which the fines totaled EURO 1.836 billion. In 2002, the commission adopted nine decisions, the fines amounting to around EURO 1 billion.46 E. France: On 1st December, 2005, Frances Competition Council imposed fines on three mobile telephone companies, Orange France, SFR, and Bouygues Telecom, amounting to Euro 534 million for operating a cartel.47 F. Germany: On 23rd March, 2005, in cartel proceedings against industrial insurers, the Bundeskartellamt in Germany imposed fines totaling approximately EURO 130 million against ten industrial insurers and against the directors involved. The cartel law violation had a nation-wide and cross-industry effect on, in particular, the industrial property insurances sector as well as transport insurance and the buildings/monopoly insurance sector.48 G. Japan: On 11th March, 2005, the Fair Trade Commission of Japan ordered six manufacturers to pay fines amounting to Japanese Yen 6,776.72 million (about the US $60 million) for fixing the prices of cold-rolled stainless steel sheets and steel strips.49 H. South Korea: On 25th May, 2005, the Fair Trade Commission of South Korea fined KT corporation a record fine of Korean Won 115.9 billion (about $US 115 million) for price collusion in broadband internet and landline telephone services with two smaller rivals, Hanarotelecom and Dacom corp.50 I. United Kingdom: In the UK, the office of Fair Trading has imposed fines totaling 1.026.897 due to leniency applications granted in three of the four cases, in the period 2004-5 on firms involved in collusive tendering for roofing contracts. All these cases came to light as a result of whistleblowing.51 J. United States of America:

In 2005, Samsung agreed to plead guilty and pay a criminal fine of US $300 million for its role in a price-fixing conspiracy in the dynamic random access memory industry. Three companies including Samsung, and five individuals were charged and fines totaling more than US $646 million have resulted from the Department of Justices ongoing antitrust investigation into price fixing, in the DRAM industry.52

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See Competition Bill, 2001, Statement of Objects and Reasons Indian Competition Act, 2002, 3 Indian Competition Act, 2002, 3(1) Indian Competition Act, 2002, 3(2) [1969] 3 All ER 1065; [1969] 1 WLR 1460. Bundesverband der Arzneimittel- Importeure and Commission of the European Communities v. Bayer AG C-2/01 P and C3/01P European Commission v. Volkswagen Case No. C-74/04P. Telco Case [1977] 47 Com Cases 520 (SC) [1979] 2 SCC 529 (SC) Indian Competition Act, 2002, 2(h) (discussing the definition of Enterprise). Press Release, available at www.europa.eu/rapid/pressReleaseAction.do?reference=SPEECH/00/295&format=HTML&aged=0&language=EN&Tguila nguage=en. See Verizon Communication Inc. v. Law offices of Curtis v. Trinko,www.supremecourtus.gov/opinions/03pdf/02-682.pdf. Indian Competition Act, 2002, 2(c) See ITC Ltd v MRTP Commission (1996) 46 Comp Cas 619. BLACKS LAW DICTIONARY 1162 (1999), (The per se rule is the judicial principle that a trade practice violates the Sherman Act simply if the practice is a restraint of trade, regardless of whether it actually harms anyone). See White Motor Co. v. United States 372 US 253 (1963); C.A.A. V. Board of Regents of the University of Oklahoma 468 US 85 (1985); Federal Trade Commission V. Superior Court Trial Lawyers Association 493 US 411 (1990); Ernited States v. Topco Associates Inc 405 US (1972); Copperzueld Corporation V. Intieptlhicirce TubeCorp. 467 US 752 (1984), etc, (Price-fixing, market allocation, output limitation etc are subject to the per se rule in the United States.) EC Treaty, Article 81 (In EU law, the prohibition in Article 81 applies in particular to, inter- alia Agreements to directly or indirectly fix purchase or selling prices or any other trading conditions; agreements to limit or control production, markets, technical development; or investment and agreements to share markets or sources of supply). See Re Alkali and Chemical Corporation of India Ltd, Calcutta and Bayer(I) Ltd, Bombay RTPE 21 of 1981, Order dated 3/7/1984; Association of State Road Transport Undertakings v. Kar Mobiles Ltd, 2002 CTJ 433 (MRTP). Hard Core Cartels: Third report on the implementation of the 1998 Council Recommendation, OECD Journal of Competition Law and Policy, Vol. 8, No-1, June 2006, OECD Publishing Smith Adam, An Inquiry into the Nature and Causes of the Wealth of Nations in THE WEALTH OF NATIONS 125 (2007) Indian Competition Act, 2002, 19(3) Yarn Spinners Agreement Case [1959] LR 1 RP 118 Blanket Manufacturers Agreement Case [1959] LR 1 RP 208 Glazed and floor tile home traders Associations Agreement Case [1963] LR 4 RP 239 FICCI- Multiplex Association of India vs. United Producers/ Distributors Forum Case No. 01 of 2009, 25th May 2011 Florian Neumayr, bpv Hgel Rechtsanwlte OG, Dawn Raids: The (New) Austrian Way, available at http://kluwercompetitionlawblog.com/2012/07/17/dawn-raids-the-new-austrian-way/ Speech by Bill Koviav, available at www.ftc.gov/speeches/other/030514biicl.htm Reward System, available at www.ftc.go.kr/data/hwp/rewardsystem.doc. Informant Reward, available at www.ftc.go.kr/data/hwp/informant_reward.doc. Paul Crompton and Graham Reynolds, Leniency Programs in Competition Law in COMPETITION LAW TODAY 108 (2008) BLACKS LAW DICTIONARY 1033 (1999). Mahindra and Mahindra Ltd v. UOI [1979] 2 SCC 529 (SC) Northern Pacific Railway Company v. United States [1958] 356 US 1 457 U.S. 332 (1982) 433 U.S. 36 (1977) Jefforson Parish Hospital Distt. No. 2 v. Hyde [1984] 466 US 2 State of West Bengal v. E.I.T.A India Ltd. AIR 2003 SC 4126; (2003) 5 SCC 239. Sodhi Transport co v. State of Utter Pradesh [1980] AIR 1099 (SC) D. LAL AND R. LAL, COMMENTRY ON LAW OF EVIDENCE, 173 (2011) MRTP CASE: RTPE NO. 20 OF 2008

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CASE NO. 29/2010, DATED 20.06.2012 Available at www.unctad.org/en/docs/tdrbpconf6d4_en.pdf Available at www.accc.gov.au/content/index.phtml/itemId/516066 Available at www.cade.gov.br/publicacoes/cartilhaeng.asp Available at www.europa.eu/rapid/pressReleaseAction.do?reference=IP/05/1508&format=HTML&aged=0&language=EN&guiLangua ge=en Press Release, available at http://europa.eu/rapid/pressReleaseAction.do?reference=MEMO/05/454&format=HTML&aged=0&language=en&guiLan guage=en (For a list of ten largest fines imposed by the commission in cartel cases) Press Release, available at www.conseil-concurrence.fr/user/standard.php? id_rub=160&id_article=502 Press Release, available at www.bundeskartellamt.de/wEnglisch/News/press/2005_03_23.shtml Press Release ,available at www.jftc.go.jp/e-page/pressreleases/2005/march/050311.html Kftcnews(2005july), available at www.ftc.go.kr/data/hwp/kftcnews(2005july).doc Roofing Contracts in Western Central Scotland, available at www.oft.gov.uk/News/Press+releases/2005/126-05.htm Press Release, available at www.usdoj.gov/atr/public.press_release/2005/212002.htm