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NATIONAL LAW SCHOOL OF INDIA UNIVERSITY

BANGALORE

PROJECT ON

“International Cartel”

SUBJECT: Competition Law

TRIMESTER-II

2012-13

UNDER THE SUPERVISION OF

Prof. N.L. Mitra

National Law School of India University, Bangalore

SUBMITTED BY:-Ronak Karanpuria

LL.M. (Business Law)

Student ID No.: 534

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Acknowledgement

I express my deep sense of obligation and gratitude to Prof. N.L. Mitra, National Law

School of India University, Bangalore, for his invaluable guidance and persistent

encouragement in the preparation of this project work.

I am deeply indebted to all the Indian and foreign writers and judges whose writings and

decisions have been duly cited in this work and have given me inspiration and light during

preparation of this work.

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RESEARCH METHODOLOGY

Aim and Objective

The Aim of the research paper is to determine the scope of Competition act, 2002

w.r.t. International Cartel. The Object of this paper is to analyse the working of

International Cartel, their effects on market and the enforcement activities by state to

regulate or prohibit such cartel.

Research Problem

To find out the jurisdictional defects due to which such cartel are promising and

flourishing in different countries.

Hypothesis

Loopholes in law & lack of resources had led to ineffective prosecution & punishment

of cartel activities

Research Question

1) What are the implications of International Cartel in relevant market in India?

2) What are the reasons or factors due to which enforcement agencies fail to

prevent or regulate such cartel?

Research Methodology

In this paper the researcher has primarily used descriptive and analytical methodology

of research. The researcher mainly relied upon the secondary sources which include

books, Reports, Journal, magazines, online articles and legal databases.

Scope

The scope of this paper is to find out the legal aspects of power & limitation of union-

state with respect to freedom of trade, commerce within India.

Limitation.

The field study would have been desirable but due to paucity of time this paper is

limited only to the theoretical aspect of International cartel which have been gathered

from various sources including books, articles, and journals.

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Sources

In this paper various secondary source have used by the research student in the form

of books, article from various journals and also internet sources have been used.

Mode of Citation

A Uniform mode of citation is followed throughout this paper.

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Table of Content

S.No. Particulars Page No.

1 Introduction 6

2 Theory of International Cartel 7

3 Cross-Border effect of International cartel 8

4 Jurisdiction Issues 10

5 Conclusion 11

6 Bibliography 12

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Introduction

Cartel1 is the most serious economic offence in any country which hampers the growth of the country & it is just not limited to particular country but has broaden its scope like a cancer in other parts of the world, where cartel comprised of firms from more than one country, were work for many years nominally illegal due to their secret nature. International cartel activity therefore was largely invisible and secretive in nature but in early 1990s with change in government policies & role, U.S. & EU developed & increased their enforcement activity which increases the number of prosecutions to prevent or prohibit cartel activities.

Enterprise when involved in anti-competitive agreements by the way of forming a cartel when they agree to restrict output or set prices, they may set target or minimum prices, rig bids at auctions, set volume or market share quotas, allocate markets geographically or allocate major customers to specific member firms. International cartels are distinguished by the fact that the cartel members are comprised of firms from more than one country. In the first half of the twentieth century, when many countries promoted rather than prosecuted inter firm cooperation, international cartels affected a wide range of goods. With falling tariffs and a rising number of multilateral trade agreements, international trade has increased, expanding the range of products at risk for international price fixing.

However, the fight against cartels is a legally and practically demanding task. First of all, cartel by definition is a secret agreement about their behaviour where agencies have to put extra efforts to detect such activity. Secondly, specialised human resource is needed with sophisticated technology and efficient & effective law to punish culprits. Thirdly, sophisticated leniency programmes are needed to destabilise such conspiracies. Fourthly, the investigation of international cartels tests the limits of agencies’ jurisdictional reach, so high cooperation b/w commissions in different country by way bilateral agreements of sharing of evidence and witness is required. Last but not least, the growing trend to criminalise cartel behaviour obliges many agencies to work to a particularly high standard of procedure and proof.

With liberalization and globalization, government moved toward consumer welfare by providing subsidies at different level and due to privatization of market, and cutting edge competition, consumer get benefited through lower prices and better products and services. But when competitors agree to forego competition for collusion or doing other anti-competitive practices, consumers lose those benefits. The competitive process only works when competitors set prices independently. Secret cartel agreements are a direct assault on the principles of competition and are universally recognised as the most harmful of all types of anticompetitive conduct.

Lastly, to be successful in detecting, investigating and prosecuting international cartels, competition agencies have to rely on instruments and skills which are not

1 See, cartel means arrangement(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. In practice, this is generally done by fixing prices, limiting output, sharing markets, allocating customers or territories, bid rigging or a combination of these. Cartels are harmful to consumers and society as a whole due to the fact that the participating companies charge higher prices (and earn higher profits) than in a competitive market. , available at http://www.concurrences.com/anglais/droit-de-la-concurrence-150/glossaire-des-termes-de/cartel?lang=en (last visited on 12 Jan 2013)

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common place in other anti-trust work. As the 2002 OECD report Fighting Hard-Core Cartels notes, because cartel behaviour is illegal, and even criminal in many jurisdictions, the participants take pains to conceal it. That secrecy makes discovering and proving violations much more difficult for enforcement agencies2.

Theory of International Cartel

For the analysis of International Cartel3, generally it has been described as of three

types:

Type I: Hard Core cartel4,

Type II: Private run export cartel5,

Type III: State run, export cartel6.

The three common components of a cartel7 are: 1) an agreement; 2) between competitors; 3) to restrict competition. The agreement8 that forms a cartel9 need not be formal or written, it may be oral or any be any form of understanding or arrangement. Cartels10 almost invariably involve secret conspiracies. The term competitors most often refer to companies at the same level of the economy (manufacturers, distributors, or retailers) in direct competition with each other to sell goods or provide services. There are four categories of cartel conduct that are commonly identified across jurisdictions: price fixing; output restrictions; market

2 http://www.internationalcompetitionnetwork.org/uploads/library/doc346.pdf (last visited on 12 Jan

2013) Report prepared by the ICN Working Group on Cartels ―Defining Hard Core cartel conduct‖ 3 United Kingdom’s Office of Fair Trading website explains:

In its simplest terms, a cartel is an agreement between businesses not to compete with each other. 4 Hard Core cartel made of private producers from at least two countries who cooperate to control

prices or allocate share in world market 5 Private export cartel where independent, non state related producers from one country take step to

fix price or engage in market allocation in export market but not in their domestic market. 6 State run export cartel are due to politically or economically conditions of a country, certain activities

are permitted. The agreement can be at the level of Governments, where countries, who have a common resource in high demand, decide to agree on common marketing strategies, and a good example is the Organisation for Petroleum Exporting Countries (OPEC), 7 Sec-2(c) Competition act, 2002 "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 8 Sec-2(b) Competition act, 2002 "agreement" includes any arrangement or understanding or action in

concert,— (i) whether or not, such arrangement, understanding or action is formal or in writing; or (ii) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings 9 “Cartels are agreements between undertakings, such as agreements and decisions, or concerted

practices which restrain competition . . .” Netherlands Competition Authority website 10

“Cartel definition: Arrangement(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.” European Commission, DG Competition, Glossary of Terms used in EU Competition Policy

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allocation which can take any form. Price fixing11 is any agreement among competitors to raise, fix, or otherwise maintain the price for a product or service. Price fixing12 can include agreements to set a minimum price, to eliminate discounts, or to adopt a standard formula for calculating prices, etc. Output restrictions can involve agreements on production volumes, sales volumes, or percentages of market growth. In market allocation competitors divide markets among themselves to either allocate specific customers or types of customers based on products or territories. In a bid-rigging13 conspiracy, competitors may set high bid, rotate winning bid, divide bid or combination of any. But success or failure of any cartel depend on number of factors like product or services they are dealing, countries in which they are operating, market conditions, substitutable product, profit margin, entry barriers, number of firms in the industry, characteristics of the products sold by the firms, production costs of each member, behaviour of demand & frequency of sales and their characteristics.

Cross-Border Effect of International Cartel

Till date, almost nothing has been done on international cartels, in India. India is also believed to be a victim of overseas cartel in soda ash, bulk vitamins, petrol etc. However, it is not as though India has remained untouched by international cartels. A study done by Simon Evenett and Julian L. Clarke estimates that the overcharges in India during the conspiracy period of the vitamins cartel14 were US$25.71mn. Cross-

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“A cartel is generally considered to include conduct by two or more competitive businesses such as: price fixing; market sharing including bid-rigging or customer sharing; and/or production or sales quotas.” Australian Competition and Consumer Commission website 12

The following are also considered price-fixing : 1) Agreement on price increase; 2) Agreement on a standard formula, according to which prices will be computed; 3) Agreement to maintain a fixed ratio between the prices of competing but non identical

products; 4) Agreement to eliminate discounts or to establish uniform discounts; 5) Agreement on credit terms that will be extended to customers; 6) Agreement to remove products offered at low prices from the market so as to limit supply and

keep prices high; 7) Agreement not to reduce prices without notifying other cartel members; 8) Agreement to adhere to published prices; 9) Agreement not to sell unless agreed price terms are met; and 10) Agreement to use a uniform price as starting point for negotiations.

Available at Rai, Q & Saroliya (2003), ―Restrictive and Unfair Trade Practices – Where Stands the Consumer?‖ CUTS, India, p. 16 13

"bid rigging" means any agreement, between enterprises or persons referred to in sub-section (3) engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding 14

See, Leading producers of vitamins including Roche AG and BASF of Germany, Rhone-Poulenc of France, Takeda Chemical of Japan formed a cartel dividing up the world market and price fixing for different types of vitamins during the 1990s. The cartel operated for over 10 years and later prosecuted with the help of Rhone-Poulenc which defected from cartel and cooperated with US authorities. Roche paid fines of US $ 500 million and total fine collected exceeded US $ 1 billion in the US alone. The overcharges paid by 90 countries importing vitamins were estimated to the tune of US $ 2700 million during the 1990s. The analysis also revealed that jurisdictions with weak cartel

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border anticompetitive practices may occur, inter alia, through international cartels and cross-border mergers. Likewise Soda-Ash Cartel, Lysine Cartel15, Graphite Eltrode cartel, LCD cartel, Air Cargo cartel16, Citric Acid cartel, OPEC cartel, IATA cartel, rubber cartel, the peroxide cartel, carbon brushes cartel, copper plumbing tubes cartel, dram cartel17 etc. are some of the famous global cartel mostly punished by US or EU anti-trust bodies. Although they cannot be compared to international cartels in terms of adverse effects, cross-border mergers may also have a considerable impact on economies by changing the structure of the relevant market, thereby increasing exposure to anticompetitive practices. Therefore, it is important to eliminate the anticompetitive effects of cross-border mergers and fight against cartels. Five countries – Brazil, Chile, Mexico, the Republic of Korea, and Turkey – are a group of countries that followed the lead of traditionally developed countries and have become active enforcers against international cartels. However there are certain cartel which raises awareness among people some of them are the UK football replica kit cartel, Korean apartment price cartel etc18.

Although they have increased their enforcement, these five countries are still small players in prosecuting international cartels, compared with the United States of America or the European Union (EU). For instance, during 1990–2007, the United States Antitrust Division convicted 67 international price fixing crimes. For the same period, Brazil, the most active country in the group, investigated 10 international cartels. Another active county, the Republic of Korea, prosecuted eight international cartels during 2000–201119. For some international cartels, there is a tendency of regional division. The Republic of Korea investigated global cartels involving information technology products, such as the cartels relating to colour display tubes, cathode ray tubes and thin film transistor liquid crystal displays, while Brazil and Chile have been silent on those cartels. In the refrigerator compressor cartel, the situation is reversed. While the Republic of Korea is quiet, Brazil and Chile are investigating the case.

enforcement regime suffered more. Damage wise, India incurred overcharges of more than US$ 25 million (Clarke and Evenett, 2003) 15

See, Lysine is an amino acid that stimulates growth and results in leaner muscle development in dogs, poultry and fish. It is also mixed with corns and is an input for feed products. Between 1992 and 1995, five producers belonging to Japan, Korea and US controlling more than 97% of the global capacity engaged in price fixing, allocation of sales quota and monitoring of volume agreements. The DoJ undertook searches with the cooperation of FBI and on the basis of subpoenaed documents together with tape recordings of meeting of the conspirators could make out a strong case of colluding on lysine prices around the world for three years. available at http://en.wikipedia.org/wiki/Lysine_price-fixing_conspiracy (last visited on 12 Jan 2013) 16

See, AIRLINES CARTEL: The Competition Commission in South Africa referred to its Competition Tribunal, a case alleging that four airline companies had conspired to simultaneously announce in May, 2004 a fuel surcharge in identical amounts. After the investigation, prompted by news reports of the price increase, an airline applied to the Commission for leniency under the Commission’s Corporate Leniency Policy. The applicant cooperated with the Commission and was not cited as a respondent and the Commission recommended a fine up to 10% of the turnover of each of the respondent, available at http://www.competition-commission-india.nic.in/speeches_articles_presentations/GR.BhatiaArticle.pdf (last visited on 12 Jan 2013) 17

Hard Core Cartels – Third Report on the Implementation of the 1998 Recommendation–OECD. available at http://www.oecd.org/competition/cartelsandanti-competitiveagreements/35863307.pdf (last visited on 12 Jan 2013) 18

Id at n. 17 19

unctad.org/meetings/en/SessionalDocuments/ciclpd16_en.pdf (last visited on 12 Jan 2013)

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Jurisdiction Issues

One of the main issues international communities like OECD or ICN & any anti-trust commission have to deal with, when it investigates international cartels relates to the discovery of evidence located outside its borders. In order to exercise its investigation powers and compel the production of evidence found outside its borders sufficient understanding & co-operation between member countries are required because it involves issues regarding international trade law, sovereignty & prestige of country where big firms of that country are involved in criminal activities in other countries. Another conflicting issue is some countries consider cartel activity as civil offence and impose penalty while other consider as a criminal offence and impose serious deterrence fine and punishment. But international cooperation on the basis of bilateral agreements enables enforcement agencies to share case related information, albeit subject to number of limitations. The European Courts develop different principles20 to deal with jurisdiction issues regarding cartel activities. First is the "intra-enterprise doctrine" where jurisdiction based either on the so-called "economic entity" doctrine in Dyestuffs21

(also called the "group economic unit" doctrine), whereby the conduct of a subsidiary active in the EC is attributed for antitrust purposes to the parent company seated outside the EC but exercising its corporate control on the subsidiary22 based on the cumulative presence of three factors: the subsidiary must carry out the parent's instructions, it must have no real autonomy and the parent must exercise decisive influence over the subsidiary in respect of the infringement. Second is the "implementation doctrine" was introduced in Woodpulp23. The Court held that under Article 81 EC-Treaty jurisdiction exists over non-European firms outside the EC, if they "implement" an anticompetitive agreement reached outside the Union by selling their products to purchasers inside the Union. Third is the "effects doctrine" was embraced by the Court of First Instance in Gencor24. The "nationality" of firms is irrelevant for the purposes of antitrust enforcement and the effects doctrine covers all firms irrespective of their nationality. Stating that the application of the Merger Regulation to a merger between companies located outside EU territory "is justified under public international law when it is foreseeable that a proposed concentration will have an immediate and substantial effect in the Community25, despite the fact that the judgment deals with only cross border mergers issues but it is equally applicable jurisdiction issues relating to international cartel.

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See a critical view in I.Schwarz/J.Basedow, Restrictions on Competition, Chapter 35, Vol. III, Private Int'l Law, Int'l Encyclopedia of Comparative Law, 1995, at p. 48 21

Case 48/69, ICI v Commission (Dyestuffs), [1972] ECR 619, 661-663, at paras. 125-141 22

See, A brief word on the facts of this case: at a meeting in Switzerland in 1976 various European dyestuff manufacturers had agreed on uniform price rises for certain products in the countries of the Common Market. The British firm Imperial Chemical Industries also participated in this agreement. The United Kingdom was not yet a member of the EC at that time. ICI did not implement the price rises in the EC member states itself: this was instead done via subsidiaries in these countries. However the Commission imposed a fine on the British parent company and the company appealed to the Court, arguing that it could not be held to account for the conduct of its subsidiaries. The Court did not allow the appeal and stated that "the fact that a subsidiary has a separate legal personality is not sufficient to exclude the possibility of imputing its conduct to the parent company" 23

A. Ahlström Osakeyhtio and Others v Commission (Woodpulp-I), [1988] ECR 5193, 5242-5243, at paras. 11-18. 24

Case T-102/96 Gencor Ltd v Commission [1999] 4 CMLR 971, at paras. 90-92 25

http://www.concurrences.com/anglais/droit-de-la-concurrence-150/glossaire-des-termes-de/Effects-doctrine

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Conclusion

Cartel due to their secret nature, require effective penalty and punishment reason being ideal way of setting a fine is somewhat difficult to apply in practice, because of unavailability of data, lack of co-operation, difficult to assess and prove the benefits derived from cartel activities and almost impossible to determine the probability of detection. In assessing the effectiveness of these types of sanctions, the possibility to impose high fines is regarded as a matter of importance by many, even though the methods chosen to determine the appropriate amount of a penalty still vary. Furthermore, the significance of the personal liability of the decision-makers is stressed. Some agencies also emphasise the effectiveness of criminal sanctions as a deterrent. However imposing fine or punishment has their inconveniencies like imposing too high a fine on a company might have the undesired effect of bankrupting it and thus harming competition even further. When it comes to fining individuals, it is admittedly difficult to prevent their reimbursement by the companies they work for. Prison sentences might constitute very effective deterrents but their imposition implies very high procedural and substantial standards and guarantees. However dealing with number of issues like the way the progress of investigation move, to be in prominent manner like dawn raids, search, seizure, special magistrate or special trained police & experts to deal with such situations to coordinate the sharing of information and strategies among the teams and ensure overall consistency of approach26. Some jurisdiction provide where companies indulge in bid-rigging they might be excluded from public procurement for a period of years if proved, like companies directors get disqualified if found indulge in contrary duties as given in respective companies act. Similarly some jurisdictions like U.S. & EU provide for leniency program where a cartel member itself surrender and produce evidence before authorities to get leniency in respect of fines & punishment if found indulge in cartel activities. It is clear from the from the comparison between MRTP act & Competition act, 2002 that the CCI has been much better empowered to tackle cartel cases than its predecessor the MRTPC. This fact is well illustrated by the Competition Acts: • Explicit definition of cartel • Incorporation of a leniency programme • Powers to impose fines against cartel members • Explicit provision for exercising jurisdiction for actions taking place outside India (having an effect in India). Having this regard with the above discussion author conclude that although CCI has not punished any international cartel, but that does not mean that it can’t prosecute & punish international cartel in future, as its powers is increased the fact required is the co-operation with other foreign commission for the exchange of information regarding witness and other direct or circumstantial evidence to deter such cartel activities and protect consumer and provide free flow of trade within global scenario.

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International Competition Network - Anti Cartel Enforcement Manual– April, 2005 available at http://www.icn-bonn.org/Anti-Cartel_Enforcement_Manual.pdf

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Bibliography

Primary Sources:

1. Competition act, 2002

2. Sherman Act, 1890

3. Anti-Trust Act, 1914

4. Enterprise act, 2002

Secondary Sources: Article: 1. Hard Core Cartels – Third Report on the Implementation of the 1998 Recommendation –OECD. Available at http://www.oecd.org/competition/cartelsandanti-competitiveagreements/35863307.pdf 2. International Competition Network – Working Group on Cartels – Report - Defining Hard Core Cartels Conduct Effective Institutions Effective Penalties – 6-8 June, 2005 available at http://www.internationalcompetitionnetwork.org/uploads/library/doc346.pdf 3. International Competition Network - Anti Cartel Enforcement Manual– April, 2005 available at http://www.icn-bonn.org/Anti-Cartel_Enforcement_Manual.pdf 4. Document No.TD/RBP.CONF:6/4 of 5th September, 2005 regarding “A Synthesis of

Recent Cartel Investigations” – United Nations Conference on Trade &

Development(UNCTAD). Available at

unctad.org/meetings/en/SessionalDocuments/ciclpd16_en.pdf

5. Consultation Paper of Office of Fair Trading – April, 2003 regarding Powers for investigating criminal cartels. Available at http://www.oft.gov.uk/shared_oft/business_leaflets/enterprise_act/oft515.pdf 6. COMBATING CARTEL IN MARKETS – ISSUES & CHALLENGES By G.R. BHATIA1 available at http://www.competition-commission-india.nic.in/speeches_articles_presentations/GR.BhatiaArticle.pdf 7. I.Schwarz/J.Basedow, Restrictions on Competition, Chapter 35, Vol. III, Private Int'l Law, Int'l Encyclopedia of Comparative Law, 1995, at p. 48 8. Rai, Q & Saroliya (2003), ―Restrictive and Unfair Trade Practices – Where Stands the Consumer?‖ CUTS, India, p. 16 List of Cases:

1. Case 48/69, ICI v Commission (Dyestuffs), [1972] ECR 619, 661-663, at paras. 125-141

2. A. Ahlström Osakeyhtio and Others v Commission (Woodpulp-I), [1988] ECR 5193, 5242-5243, at paras. 11-18.

3. Case T-102/96 Gencor Ltd v Commission [1999] 4 CMLR 971, at paras. 90-92