M: 106

Analysis on Anti-Competitive Agreements with Respect to Cartels: Special Reference to USA

Anila Geo K, Dr. Sonika Bhardwaj, and Kapil Joshi

Student of BBA LLB (Hons.); Student of LLM at School of Law, Christ (Deemed to be University), Bengaluru.

Abstract

Cartels are those agreements formed by companies or associations or enterprises to control and limit concerning prices, supply or production. It is considered illegal in most jurisdictions. This article mainly gives an understanding of cartel conducts. It is described that these activities are considered anti-competitive and can be seen in every sector of trade. It is also bringing up that free and fair market is the backbone of a sustainable competition which is only possible if cartels are prohibited. Cartels are considered to be one of the economic activities which are very hard to trace. This article also discusses the four categories of an agreement which is given under the competition Act prohibited and considered illegal including cartel. This article also gives an insight on the laws and statutes which layout awareness regarding cartels in India. There are certain loopholes and ambiguities present in the legislations in combating cartel which are to be taken much importance. Competition Commission of India is the statutory board established under the Competition Act 2002 for the enforcement of cartel laws in India which must be improved so that it will give much more clarity and becomes successful in effectively prohibiting cartels. In India, cartels laws are civil, but in jurisdictions like USA, UK etc. cartels are criminalized. By making a comparative study with the legislations of USA to examine and analyze whether criminalization of cartel is needed to make it more effectual. Cartel has been compared with theft, fraud and deception in most of the countries which has criminal sanctions. This article also explores the limitations and challenges in criminalizing cartel: notably, the social and public attitude towards the cartel and with respect to its implementation. By keeping in mind those merits and hurdles in the criminalization of cartel, this article suggests in the specific context of India to cautiously move from administrative or civil penalties to criminal liability.

Introduction

Cartels are a formal association of producer or manufacturer who tries to control competition or force restrictions on trade or business. So basically, it means an agreement between men not to compete with each other and control sales and prices. These restraints are also called as Anti -competitive, antitrust, monopolies restrictive trade practices etc in India. 1

One of the important things is that they can occur in any industry. These agreements destroy the spirit of competition and reduce consumer welfare. In India, cartels can be seen in many sectors like cement, tyres etc. All these agreements affect the consumers’ choice, raise the price, restricting its supply which makes the goods and services available only to some.2

‘Cartel’ is defined under Section 2(c) of the Competition Act, 2002 which says that “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 services. “The competition Act also gives four categories of horizontal agreements, including cartels between enterprise involved in the same or similar manufacturing or trading of goods or services to have an appreciable adverse effect on competition. First which directly or indirectly determines prices, second, which limits or controls product supply, markets, technical development, investment or provision of service or limits and control quantities, third, which share or divide markets and last which results in rig bidding.3

Some of the main features of cartels are; there should be an agreement or an arrangement and understanding, the parties to this agreement must be part of trade, the agreements must aim in limit or control of production, sale or price of goods and services. The purpose of a forming cartel is to share and agree to uniform price and also for market sharing arrangements. These are formed by the industries which have the same line of business. So, the parties to these agreements limits and regulates the distribution of products or services in the market and also control the selling price of a certain product.4

These restrictive methods are unlawful conspiracies and are illegal for which can be challenged in courts. Cartels are encouraged by business house as result of many advantages. The main aim of a cartel is to improve the position of the profits of the parties of the agreement. Another important aspect is that cartels can be categorised into public cartels and private cartel. Competition laws forbid private cartels. Public cartels means those in which government will be involved and government shields such cartels from legal actions the purpose of private cartel is only for the profit or advantage of the members who constitute it. Private cartels are subject to legal actions under the trust laws. Whereas public cartel passes the profit or benefits the whole population. Identifying and breaking cartels is one of the significant parts of the laws of competition. But proving of which is not very easy.5

Competition Commission Of India

The statutory authority to enforce the Competition Act is the ‘the competition commission of India’.6

This authority was established by the central government on 14th October 2003. Its main function is to prohibit anti-competitive agreements which are having an appreciable adverse effect on competition in markets of India. In India, entertainment, pharmaceuticals, public procurement, transport (excluding railways) and construction (including cement) are the top five sectors where cartels were found.

The Competition Commission of India after inquiry, concludes that any agreement is in the contravention of the provisions of the Act with respect to cartels, it may pass such order or issue such directions as it may deem fit like discontinuance of the cartel agreement or forbid on re-entering into such agreements or even for modification of the cartel agreement.7

In addition to that, CCI may also impose a penalty upon each producer, seller, distributor, trader or service provider involved in such cartel of up to three times the profit for each year of the duration of such agreement or 10 percent of the turnover for each year of its duration, whichever is higher. The CCI also has the power to impose lesser penalties on cartel members in accordance with the regulations framed thereunder.

The fine imposed by the CCI is based on various alleviate or aggravating elements such as deterrence, harm caused to the public and competition, duration of the cartel, subsequent infringement by the parties, the authoritative taken up by the firms in the collusion, Cooperation with the Commission, the activities that effects competition, the limited participation of firms etc. The sanctions imposed under the Competition Act are civil in nature, and the proceedings are civil proceedings. The Competition Act does not prescribe any criminal sanctions for violations of its provisions and thus no imprisonment is provided for under the Competition Act for cartel conduct.8

The Competition Act prescribes imprisonment only in cases of contravention of the orders of the CCI, the furnishing of false evidence or documents, or the non-furnishing of details, etc.

Cartel members employ a lot of techniques to avoid the detection and proper function of a cartel. Some of these techniques are secrecy, retaliation threats, compensation schemes. Due to just discussed techniques cartels are very difficult to detect. 9

They can involve many firms in the industry and customers are really in a position to detect the existence of cartel. The existence of cartel has to be proved by circumstantial evidence. For this very reason CCI has been provided various means and instruments for detecting cartels. The most effective is the leniency programs.10

These programs provide immunities or reduction in sanction for cartel members that cooperate with CCI.

In almost every country Anti-competitive agreements are prohibited. Generally, these are treated as civil offenses but in countries like USA, EU etc. cartels face criminal sanctions and in some countries the authorities have the power to carry out raid with respect to the investigation of cartels. further, we can find many variations in the objectives of the competition laws formulated in different countries too. In India, as per the report of the special project on “Cartel Enforcement and Competition” for the 2018 International Competition Network (ICN) Annual Conference in New Delhi, many surveys have been conducted concerning cartels As of July 31, 2017, 669 final orders/decisions have been issued by CCI ( Competition Commission of India). It has passed a total number of 136 orders that have contained substantive discussions on cartelization under section 3(3). 55 orders out of 136, passed under section 27 of the Act, where infringements were found after a detailed investigation, usually resulted in Financial penalties and remedies. Therefore, it is very clear that Cartelization is very much prevalent in India. The laws pertaining to cartelization has not achieved its objective of prohibiting it.

Criminalizing of cartel

The Institutional setting of US cartel enforcement could give us a better insight on the significance of criminalization of Cartels. The history of cartel enforcement in US can be identified into three broad periods. Pre 1980s, the first period had relatively limited number of cartels along with minimum penalties. The second period involving the years from 1980 to 1995 there was an increase in the no. of cartels prosecuted, with only a narrow increase in the penalties. From 1995 to the present, lower number of cartels were prosecuted, with higher fines. One of the key cartel enforcements was The Sherman Act 1890 which had set a maximum fine of $5000 dollars, which was further raised to $50000 per count. Later several amendments were enforced to prohibit cartels. the major enforcements were the merger guidelines 1982, Criminal enforcement act of 1984 and Antitrust Criminal Penalty Enhancement and Reform Act (ACPERA) in 2004. The acts were criminalized to reduce the no. of cartel which was rampant then. And these acts were proved to be very effective.11

The way to look into modern or recent development regarding cartel enforcement, they are more characterized by the introduction of more critical and rigid policies. There is a trend towards tougher and harsher penalties. These supporting penalties represent credence that cartel criminalization and application of custodial sentences will give a more effective deterrence in competition systems, thus bringing a superior tool to combat cartels. From an early age, we can see the tradition of criminalizing monopoly or cartel behavior and also substituted enactments regarding competitive practices during the temporary failure of markets. This cannot be considered as a base for criminalization but can only prove that criminal sanction of cartel is not a new thought and also it indicates the universality which can be taken as a baseline for more thoughts on reasoning of criminalization12

Cartel as theft fraud and deception

One way in putting forward in criminalizing cartel is by focusing on two areas of conduct which are more related to price-fixing (i) Theft and (ii) Fraud and Deception The concepts of overpricing give a notion that cartels is in a form of theft. A competitive market price is considered as fair when it is taken by both buyers and sellers as a result of demand supply which is difficult to be influenced by either party. But on the other hand, fixed price is the outcome of a secret agreement by sellers.13

So, the purchasers who have been buying these overpriced products are the victims of injustice. As a result of which they are deprived of their rights to have a fair goods and service consumption that leads to loss in wealth and property which are being enjoyed by the members of the cartels .A conduct that takes advantage of public assumption that market competitive in nature is a kind of fraud and deceptive. Any activity that intends to take property or wealth which is in contravention of antitrust laws is a kind of fraud and this amounts to deception and false pretense which are both considered as crime. Bid rigging, a very popular form of cartel also gives an evidence of fraud representation. These observation gives a valid basis to criminalize cartels.

Another way of persuading that there is a need to criminalize cartels is that it ensures better deterrence.14

Introducing criminal sanctions brings a new level of deterrence by detecting the source of illegality. It can be both imprisonment and fine. Majority of legal reporters which recommend criminal sanction for being in cartel activity, find ideas for their arguments in the theory of deterrence. From the above, one can state that: if criminalization has to succeed one should be having a normative structure justifying the existence of criminal cartel sanctions and for informing such normative structure deterrence and /or retribution theory must be considered as the potential criminal theories.15

US officials have also articulated that criminalizing cartels as the conclusive tool to establish effective enforcement of cartels. There have been arguments that one of the most important and successful features of US cartel enforcement is the application of criminal laws and penalties and some remarked that prison sentences are most deterrent for extreme cartel activity like bid-rigging, price fixing etc.

Challenges for criminalizing of cartels

Debates on cartel criminalization must be beyond deterrent laws and policies to other variants which might affect the success of enforcement of competition guidelines. The implementation of criminal sanctions with respect to anti-cartel enforcement gives a number of challenges that are to be met to achieve the objectives in practice without breaching the existing legal standards or weaken the legitimacy of the pertinent antitrust regime. To understand it more, it is important to differentiate between “top-down” and bottom up approaches.

A “bottom down” approach is when there is a public dissatisfaction of cartel and unanimity to put an end to such activity. Whereas “top-down” approaches are based on deterrence logic and is to prove criminalizing cartel by the government to improve enforcement. “Top down” approach is used in most of the jurisdiction than the “bottom up” approach to criminalize cartel. But as it looks sensible, “top-down” approach often receives criticism mainly because the debate extends to the sphere of criminalization. The perception of morality comes in for promoting criminal regime.16

So it is very important to take the perspective of the public on cartel and criminalizing it. Another challenge in criminalizing is regarding substantive provisions with respect to criminal offence.17

The main issue is that the way in which each jurisdiction would have framed the definition of cartel. Sometimes definitions may be framed in such a way that it makes it difficult to promise a successful criminal prosecution. There are certain cases in which it might be defined too general and vague which may result in over deterrence. Other challenge is in this context with the procedural and institutional provision regarding prosecutions of the criminalizing cartel in different jurisdictions.18

Conclusion

The main objective of competition law is to grant consumers the free choice of goods and services at a fair and reasonable price and at a most appropriate quality. Without a fair competition, it would affect in inefficiencies, bad service and quality which damages consumer welfare. Cartels are considered to be one of the main anti- competitive agreements, which is prohibited under competition law in almost all the jurisdictions. It is considered as the most serious competition violation which effects the economy of a country. In India, the Competition Act of 2002 has been established and it prohibits any such cartel activity. Although in India, CCI (Competition Commission of India) the statutory body established to enforce competition law which is civil in nature, criminalization of cartel in jurisdiction like USA have proven to be more effective.

As cartel is a serious offence and it has to be taken more gravely and seriously than lightly. Since it involves huge companies and large amount of money, it effects the whole economy of the country and it is easier for them to come out of it as the penalties are civil in nature. It is universally approved fact that criminal penalty gives more deterrence than civil penalties like fine or compensation. So, for more effective enforcement criminalizing cartel is required. A strong point in favour of criminalizing cartel is that these activities can be conceptualized as theft or fraud and deception. So through a cartel when a consumer is denied of a product with a reasonable price and when the persons involving in cartel enjoy the profit it becomes a form of theft and when a cartel present false statements or non- disclosure of such activity it becomes a form of crime which has to be taken seriously.

The article demonstrates that offences like cartel captures the moral wrongfulness and this can impact the scope of the offences but one must also be careful to make sure that its scope must not be beyond the application of cartel to its formation. When we look into an example of USA Antitrust laws which are criminalized are seen to be as most effective in combating cartels. Whereas one important argument in approval of criminalizing cartel is to attain effective deterrence but is not easy to implement. The discussion on combating cartel through criminalizing cannot be restricted only to the technical aspect to deter the behavior of cartel but also must consider the jurisdictional provisions which are needed for an effective criminal system. This includes enforcement of criminalizing cartel in the social context, with respect to substantial provisions and also the procedural and institutional design. Therefore, there is a need to criminalize cartels in India for a better and effective deterrence and must be introduced very cautiously.


1 D.P. Mittal, Competition Law and Practice 91 (Taxmann Publications, New Delhi, 3rd Edition, 2011

2 Combating Cartels in India by Deshwal Vishakha, available at: https://ssrn.com/abstract=2385937 (last visited on October 20, 2013).

3 Competition Act, 2002 (Act 12 of 2003).

4 Harsh Vardhan Dhanik & Arup Singh, Cartels in Indian market: measures and standard for its enforcement by cci and its effect on economy and consumers, International journal of legal & social studies.

5 Pranav Pathak, Cartelisation: Recent trends and issues faced by India– International Journal of law and legal jurisprudence studies

6 PK Basu Majumdar’ Penalising Anti-competitive Agreements and Abuse of dominance, 7 NUJS L. Rev. 225 (2014)

7 Sahithya Muralidharan and Chaitanya Deshpande, Scope for Intersection Between Antitrust Laws and Corporate Governance Principles vis-à-vis Cartels Deterrence in India, (2016) 9 NUJS L Rev 93, SSC Online.

8 S.M. Dugar, Guide to Competition Law 193 (LexisNexis, New Delhi, 6th edn., 2011).

9 G R Bhatia, ―Combating Cartel in Markets-Issues and Challenges‖, Vol.no XXXVI, Chartered Secretary, July 2006.

10 Competition Act, 2002 (Act 12 of 2003), s.46.

11 Vivek Ghosal and Daniel Sokol, The evolution of US cartel Enforcement, The journal of law and economics, Vol, 57,No S3, The contributions of Robert Bork to Antitrust Economics (August 2014), pp.S51-S65, The University of Chicago press for the Booth School of Business, University of Chicago and the University of Chicago Law School, https://www.jstor.org/stable/10.1086/676070.

12 Ezrachi, Ariel, and Jiøi Kindl. “Criminalization of Cartel Activity – A Desirable Goal for India’s Competition Regime?” National Law School of India Review, vol. 23, no. 1, 2011, pp. 9–26. JSTOR, www.jstor.org/stable/44283736.

13 B Fisse, ‘Reconstructing Corporate Criminal Law: Deterrence, Retribution, Fault, and Sanctions’ (1983) 56 S Cal L Rev 1141.

14 R Posner, ‘Utilitarianism, Economics and Legal Theory’ (1979) 8 JLS 103.

15 Peter Whelan, Cartel Criminalization and the Challenge of ‘Moral Wrongfulness’, Oxford Journal of Legal Studies, Vol. 33, No. 3 (2013), pp. 535–561.

16 A. Ezrachi and J. Kindl, Cartels as Criminal? The Long Road from Unilateral Enforcement to International Consensus in Criminalising cartels critical studies of an international regulatory movement (C. Beaton-Wells & A. Ezrachi eds., 2011).

17 C. Harding, Business Collusion as a Criminological Phenomenon: Exploring the Global Criminalization of Business Cartels, 14 CRITICAL CRIMINOLOGY 181 (2006).

18 J. Joshua, DOA, can the UK Cartel Offence be Resuscitated? In Criminalizing Cartels Critical Studies of An International Regulatory Movement, C. Beaton- Wells& A Ezrachi eds, 2011.