Cartels

Cartels are (usually secret) agreements not to compete, through price-fixing or market sharing or in other ways. Secret cartels are regarded as very serious crimes in the UK as well as in many other countries. But the law also, for instance, prohibits supermarkets from agreeing a minimum selling price for alcohol, even though this would support the Government's alcohol policy. Cartels are prohibited because they lead to customers paying more (and often much more) than they should for their products. Companies can be fined very large amounts (up to 10% of annual turnover for each year of the cartel) and individual company executives can in serious cases be sent to jail for up to 5 years and/or made to pay unlimited fines. In addition, customers can - at least in theory - seek compensation via 'private actions' in the civil courts - to get back the money they overpaid as a result of the actions of the cartel.

The main cartel offences are:

It is also illegal for organisations to consult each other about pay rates, for instance. 

Possibly the most famous cartel investigation was carried out by the FBI into the international Lysine cartel. It became the subject of a Hollywood movie The Informant and two rather racy books. Click here for further information. The FBI's surveillance videos can also be found on YouTube - search for 'Lysine'.

It is important to distinguish cartels from tacit collusion which happens when firms fail to reduce prices because they reckon that this would only cause their competitors to reduce their prices, so they would all be worse off.  This important subject is discussed on the Market Studies and Investigations webpage.

Anonymised sharing of cost and other information, for instance via a trade association, is generally OK. But cross-company collaboration, for instance to increase alcohol prices, is not allowed - click here to read a note about alcohol pricing.  Similarly, competing railway and bus companies are not allowed to agree ticket prices on shared routes which can lead to very puzzled passengers.

Sometimes, however, it makes sense for companies to collaborate even if this breaks the letter of competition law.  One example was during the 2020 Covid-19 crisis when the Government and the CMA jointly announced that no enforcement action would be taken against supermarkets and other companies which found it necessary to work together in the interests of consumers, for instance to secure efficient supply chains in the face of hoarding and panic buying. Click here for further detail.

On the other hand, home delivery company Ocado was criticised because it sold 'Waitrose' and 'M&S' products for different prices than those retailers charged in their shops.  Ocado had to point out that competition law forced it to set its own prices for such products, reflecting its own estimates of distribution cost and demand.

And if there is only a small number of companies active in the market, even the announcement of future prices (or price rises/reductions) can be problematic as they can facilitate price coordination because they reduce each player's uncertainty about the activities of its supposed rivals.

Equally, it is generally OK for companies - such as vehicle manufacturers - to cooperate to improve the quality and safety of their products - by introducing standardised autonomous systems, for instance. But the EU Commission have taken strong enforcement action against vehicle manufacturers who have done the opposite - agreeing not to improve their products and/or not to compete on quality.

Manufacturers used to be allowed to set retail prices, and withhold stock from any retailer who tried to compete with another retailer by selling at a lower price. But this retail price maintenance, which clearly prevented price competition, has now been illegal for many years.  Limited RPM is however still allowed where thought necessary to deter price cutting achieved by making lower quality products - such as pharmaceuticals. It has also been allowed where thought necessary to stop small shops etc. being competed out of business by large rivals. It is worth noting, however, that the hard-fought abolition of RPM in the book trade does not seem to have destroyed that market.  And, although legal RPM is still alive in pharmacies and pharmaceuticals, it is frequently criticised, not least for the damage it does to the finances of the National Health Service.

Cartel investigations into the behaviour of UK companies are carried out under Chapter I of the Competition Act 1998 which closely mirrors what is now Article 101 of the Treaty on the Functioning of the European Union (TFEU). Criminal prosecutions are brought under Section 188 of the Enterprise Act 2002.

Exemptions, including Block Exemptions

Agreements are exempt from the Chapter I prohibition if they contribute to improving production or distribution, or promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit.

An agreement may be individually recognised as exempt by a competition authority or a court and, in addition, certain types of agreement will be treated as automatically exempt if they meet conditions set out in a ‘block exemption’ regulation or order applicable to that category of agreements.  There are currently two block exemptions:-  R&D and Specialisation.

Franchising (i.e. exclusivity within the franchised area) is generally often OK where there seems to be an associated public interest. For instance, no-one would invest in a new franchised restaurant or luxury goods retailer if a competitor could next day open up a similar business just down the road.

The R&D exemption relates to certain research and development agreements that are entered into between two or more parties. For example, two competitors may agree to carry out R&D together, or that one will carry out paid-for R&D that is financed by the other, to ensure that the R&D can benefit from their combined know-how, expertise and/or resources. Entering into such an agreement increases the likelihood that the competitors will achieve earlier breakthroughs in their research or product development, and helps the parties to allocate their resources more efficiently. Subject to meeting the conditions set out in the R&D BER, and the agreement not containing any prohibited restrictions, the R&D agreement may benefit from the block exemption.

The Specialisation exemption relates to certain unilateral and reciprocal specialisation agreements, alongside joint production agreements. For example, this could involve a situation where two competitors work together to produce certain products (goods or services) jointly (for these purposes, ‘Product A’ and ‘Product B’) in a way that will enable them to lower their costs, which in turn could lead to lower prices for consumers of Products A and B. Alternatively, they may agree on a reciprocal basis that one of them will cease producing Product A and buy it instead from the other, while the other ceases producing Product B and buys it from the other.

Chapter I investigations

It can be hard to prove that a secret cartel exists. There will be little if any written evidence, and all the members of the cartel have a vested interest in maintaining the secret.   Competition Authorities (such as the CMA in the UK) therefore generally offer leniency to the first cartel member to confess. Such whistle-blowing is a powerful weapon because one cartel member can never be sure that other members will remain silent, so the more nervous may quickly confess - see for instance the Estate Agents case below, and also UBS avoiding a €285 million EU fine - see the story towards the bottom of this web page.

Another example of such whistle-blowing led to British Airways being fined £121m by the OFT for fixing long-haul fuel surcharges, followed by a $300m (£148m) fine from the US Department of Justice for colluding over cargo and long-haul surcharges.  (The UK fine was subsequently reduced to £58m in part to reflect BA's cooperation with the inquiry.)   BA was brought before the authorities after Virgin Atlantic blew the whistle on conversations between senior figures at both airlines over the surcharges - a levy added to tickets to cover the rising cost of oil. Virgin escaped penalties because they broke the cartel by going to the authorities. It is interesting to note, however, that both Virgin and BA may be required to pay damages to customers as a result of class action law suits. It is also interesting that this led to the first contested cartel prosecution - see further below.

Somewhat ironically, Virgin Atlantic themselves became subject to an OFT investigation in April 2010 when Cathay Pacific sought leniency in connection with alleged price fixing discussions on the London-Hong Kong route.

But another major investigation was only a limited success. The OFT in 2009 imposed fines totaling £130m on 103 construction companies for bid-rigging and cover pricing, and £40m on six recruitment firms supplying the construction industry, for price-fixing and a collective boycott of an intermediary firm. The investigation into the construction industry was triggered by an eagle-eyed auditor at Nottingham University Hospital NHS Trust whilst, in the recruitment companies' case, two of the companies blew the whistle on what was going on. (Cover pricing involves a company that (a) was invited to bid for a contract, but (b) did not want to win it and (c) wanted to remain on the client's tender list. This company then asks a real bidder to tell them what high ('cover') price would ensure that they did not win the contract - and then bidding at this high price.)

But a number of the companies charged with cover pricing appealed to the Competition Appeal Tribunal (CAT) and had their fines greatly reduced - in one case from £17.9m to £1.7m. The companies successfully argued that their cover pricing was long-standing in the industry, had done little harm, and that the OFT's methodology for calculating the fines was unfair. I do not know, but I suspect, that the OFT thought that the apparently innocent cover pricing was itself a cover for taking turns at bidding for contracts. Once a pattern had been established, so all the likely bidders had worked out whose turn it was without needing to communicate with each other, it would then make sense for the other companies to put in apparently innocent cover prices so as to leave the field clear for the chosen winner, who need not, of course, submit a particularly competitive bid. But there is little point in having these suspicions if you can't prove them in front of the CAT.

Another high profile cartel involved around 50 UK independent schools, including Eton College, Harrow and Westminster, who shared information about their costs and so about their likely fee increases. This cartel was hardly secret and ceased as soon as the schools realised that their behaviour was illegal. They each then paid fines averaging £70,000 each. The schools also undertook to make separate voluntary contributions totaling £3m into a new charitable educational fund, in what the head teachers acknowledged was an "imaginative solution to a trying inquiry".

[The successful construction industry appeals to the CAT and the somewhat odd school fees investigation did seem to suggest that the OFT's judgement and/or choice of cases had been somewhat flawed. This impression was also encouraged by the failure of the BA prosecution, summarised below.]

Fifpro, which represents professional footballers, went to the European Courts in 2015 accusing FIFA of operating a cartel. The case was settled in 2017 after FIFA agreed to numerous improvements in the way that the large clubs handled their players' transfers etc.

It is interesting to note that pricing intentions do not have to be communicated direct from one party to another. A number of UK supermarkets were brought before the courts after they had sought, in/around 2002/2003, to co-ordinate increases in their retail cheese prices by telling their cheese suppliers about their intentions. [They did this with the apparently unselfish intention of paying more for the cheese they bought, so that the cheese suppliers could in turn pay more for their milk, so helping hard-pressed dairy farmers. Again, one is forced to wonder whether there might not have been a more gentle (and less expensive) way of bringing this 'cartel' to an end, once it had been spotted.]

Much more seriously, the American competition regulator, the Department of Justice, won a $450m settlement from Apple as the company had colluded with several publishers - more or less in the open! - to remove e-books from Amazon's Kindle store and increase their price (when sold by Apple) from $9.99 to $12.99 or even $14.99.    E-book buyers were reimbursed $400m. 

Our own Royal Mail was fined over £40m in France in 2015 after its subsidiary General Logistics Systems pleaded guilty to agreeing fuel surcharges with other delivery companies such as TNT, Fedex, DHL, and DPD - the latter being subsidiaries of Deutsche Post and La Poste respectively.

It was reported in January 2015 that Oscar Pistorius' family firm had been charged with fixing South African agricultural prices since 1995. As so often, another company had claimed leniency as a reward for whistle-blowing.

The CMA fined a number of UK pharmaceutical companies £50m in early 2016 for entering into 'pay and delay' agreements under which GlaxoSmithKline paid a number of smaller companies to delay introducing generic competition for its anti-depressant drug paroxetine. The companies may appeal as they saw the payments as a way of avoiding litigation over the validity of GSK's patents.

And a refrigerator supplier was fined over £2m in 2016 for having imposed 'minimum advertised prices' on its retailers - otherwise knows as resale price maintenance.

The CMA, in the same year, accused top model agencies of "agreeing a common approach to pricing" and so driving appearance fees up to £500,000 a day for work on a major campaign - and giving the newspapers a rare opportunity to publish a lengthy competition policy story as an excuse for also featuring some very attractive models.

And this CMA press release neatly describes the operation of an Estate Agents cartel - and the CMA's whistle-blowing/leniency policy:

A group of estate agents – all based in the Burnham-on-Sea area in Somerset – had a meeting and agreed to fix their minimum commission rates at 1.5% with the aim of making the agents involved more money, so denying local home owners the chance of getting a better deal when selling their property. “With a bit of talking and cooperation between us, we all win!” was their rationale.

Email evidence also explained how “the aim of the meeting…will be to drive the fee level up to 1.5%” and “…it’s really important we all give it the priority it deserves (making as much profit as possible!)”. At the meeting they agreed to form what is known as an illegal ‘cartel’ – when two or more businesses agree not to compete with each other. The estate agents took steps to ensure the minimum fee agreement was kept to by emailing each other when a specific issue arose, such as accusations of “cheating” on their agreement. Each business also took it in turn to “police” the cartel to make sure everyone was sticking to the agreement - parties were to report any issues “to the policeman immediately and get the matter resolved rather than let it fester and risk the agreement falling apart!!!!”.

The CMA imposed fines totalling £370,084 on 5 of the 6 estate agents involved in this cartel. The sixth business involved was not fined as it was the first to confess its participation in the cartel under the CMA’s leniency policy and cooperated with the CMA’s investigation.

The CMA fined ComparetheMarket £18m in 2020 for preventing insurance companies from offering better deals through rival websites.  The CMA had previously targetted price comparison websites whose Most Favoured Customer (MFC) contract clauses had stopped hotels etc. from offering cheaper prices than those advertised through the price comparison sites.  Although price comparison sites facilitate competition between suppliers such as hotels, they severely limit the ability of such suppliers to offer lower prices than shown on the comparison sites on which they pay significant commission.  This tends to increase prices across the board.

And Illegal Retail Price Maintenance is far from dead.  The CMA in 2020 fined several musical instrument manufacturers and retailers for agreeing that such products would be sold at or above minimum prices.

The CMA leads most cartel investigations in the UK but many financial regulators do have similar powers, though they seldom use them as cartel investigations are beset with pitfalls and are best left to experts.  It was therefore interesting to see the Payment Systems Regulator in 2021 take on the Mastercard and others for agreeing not to poach each other's prepaid card customers.

Rangers FC, JD Sports and Elite Sports, the manufacturer of Rangers-branded clothing, were accused in 2022 of colluding to raise the price of short-sleeved home replica shirts from £55 to £60, to bring it in line with the prices being charged by Elite on Gers Online.  Elite and JD Sports quickly confessed and sought a degree of leniency.

Criminal Investigations

There has yet to be a successful contested prosecution in the UK. One problem was that individuals cannot be prosecuted successfully unless it can be shown that the person acted 'dishonestly'. The Government accordingly announced in March 2012 that it will no longer be necessary to prove dishonesty (although it will still be necessary to demonstrate an intention to enter into a price-fixing etc. agreement) and that cartel arrangements would not be prosecuted if the details were published (most likely in the London Gazette) before they are implemented.

The previous dishonesty test required the accused's actions to have been dishonest according to the ordinary standards of reasonable and honest people, and the accused to have realised that his/her actions were, according to those standards, dishonest. This is quite a stiff test because the offence is relatively new - and one of over 3,000 new criminal offences introduced in the UK between 1997 and 2006 - that a defendant might well argue that most people would not regard the discussion of prices with competitors to have been dishonest. Given that some cartels involve only informal communication, and that others are motivated by crisis or avoiding bankruptcy, the issue of dishonesty is clearly central to any prosecution. A YouGov survey, commissioned by the University of East Anglia's Centre for Competition Policy in 2007, showed that only 6 in every 10 Britons felt price fixing was dishonest, and only 1 in 10 felt imprisonment was an appropriate sanction. The issue raised enough concern in Australia for dishonesty to be dropped from the design of its criminal offence altogether. Some expert observers therefore wonder whether imprisonment can be a workable sanction at all, outside the context of US Anti-trust enforcement. Plea Bargains negotiated by US authorities, under the shadow of a full trial, play an instrumental role in regularly securing custodial sentences for antitrust violations. But a US-style system of plea bargaining does not exist in the UK.

It was originally hoped that the criminal offence, introduced in the UK by the Enterprise Act 2002, would lead to around six to ten prosecutions a year (Penrose Report, 2001 at 3.6). But only three executives have been convicted so far - and this was in the Marine Hoses case where the investigation and plea bargaining had taken place in the US. Indeed, the first contested prosecution - of BA executives (see above) - did not reach the courts until April 2010 and then collapsed before the prosecution had even begun to offer any evidence, mainly because Virgin found a large number of relevant emails only as the trial was starting, and it was not possible to analyse them properly without unacceptable further delay. The OFT's investigation and prosecution cost the taxpayer more than £1.5m, not including their contribution (if any) to the defence costs.

[It was striking that the OFT did not even attempt to prosecute individuals involved in the Construction Bid Rigging case which involved practices between a minority of firms more akin to a hardcore cartel, at huge cost to financially stretched local taxpayers.]

UEA's Andreas Stephan analysed the issues rather well in his 2010 blog:

OFT continues to pursue individuals, but is there a credible threat to price fixers?: News that the Office of Fair Trading made an arrest last week in connection with a cartel investigation shows the authority's determination to press on with criminal sanctions in cartel cases. However, following the collapse of the British Airways trial in May of this year, does the criminal offence really have a future in its current form?

The latest arrest came in connection with an alleged cartel between major international lorry (truck) manufacturers operating in the UK. Both criminal and civil investigations have been launched and a senior executive at Mercedes-Benz's UK operation was apparently arrested and released on bail. According to the Financial Times, the individual has 40 years experience in the commercial vehicles industry and sits on the board of the Freight Transport Association. He had also previously worked for a number of Mercedes-Benz's competitors. All the companies under investigation say they have agreed to cooperate, and the OFT has stressed that their investigations are at an early stage.

Following the collapsed trial of four British Airways employees, the OFT faces three challenges in trying to breathe new life in the failing cartel offence, in its current form:

Evidence Gathering - the British Airways trial revealed a seemingly blind over-reliance on evidence gathering by the cooperating party's lawyers through the leniency programme. This leaves prosecutors particularly vulnerable in a case where there is only one cooperating party. In order to ensure this does not happen again, the OFT must do more good old fashioned police work.

Dishonesty and Credibility - in order to secure convictions, the OFT must convince a jury that the defendants behaved dishonestly. This hurdle requires 'hardcore' evidence that the individuals knew what they were doing was wrong, such as efforts to conceal cartel arrangements. The BA trial seriously damaged the credibility of the criminal offence, and of the OFT, not least because the alleged evidence primarily consisted of e-mails rather than physical meetings. Juries may initially be unwilling to convict individuals on the basis of such evidence, especially when faced with defendants who are otherwise presented as upstanding members of society. While there is a general understanding that cartel practices are bad, the British public and business communities are yet to be convinced that they should be treated as criminal.

Case Selection - The only convictions under the criminal offence (Marine Hoses) were seriously criticised for arising out of duress following a US plea bargain, and for concerning an obscure (upstream) industry with little popular appeal or recognition. The OFT keenly pressed forward with British Airways in response to those criticisms, but overlooked fundamental weaknesses in the case. Unless the Trucks investigation uncovers evidence with more teeth, it risks going the same way as British Airways.

Many will argue that these challenges are irreconcilable and that the current law should be repealed. Those advocating imprisonment as being of central importance to effective cartel enforcement (this author included) would prefer a new offence not based on dishonesty, managed by an agency with greater criminal prosecutorial expertise. The danger is that the failures of the current offence will be seized upon by those preferring a purely civil approach to cartel enforcement in the UK. Meanwhile, the OFT has two further investigations open into car electrical equipment suppliers and the manufacture of polythene film, bags and sacks. On the one hand, we should hope that, if an offence is found and a case is brought to court, it is backed by robust evidence and palpable dishonesty. On the other, this may simply prolong the life of a criminal offence that many see as ineffective and unfit for purpose.

Algorithms

Oxera published an interesting report in 2017 on algorithmic pricing and its effect on consumers and markets. They noted that the digital revolution had led to a significant growth in companies' ability to capture, store and analyse data about their customers, competitors and the wider world, through faster processors, cloud storage, and advances in machine learning. Increasingly, companies are using this information to develop algorithms that set prices for them, leading to different consumers being charged different amounts for the same good or service. But there had been extensive recent press coverage of the risk that price-setting algorithms, using artificial intelligence (AI), have the potential to collude among themselves, to the detriment of consumers.

At the same time, others suggest that the use of algorithms can be efficient and pro-competitive, leading to outcomes that benefit consumers through faster adjustments to prevailing market circumstances.

Oxera explored these two contrasting positions, noting that:

Private Actions

Click here to read about how customers who are damaged by cartel activity can take private actions in the courts in order to gain compensation for their losses.

European Commission Activity

DG Competition have completed a good number of cartel investigations, some involving the UK. 

This report in May 2019 caught my eye:

The European Commission has fined Barclays, RBS, Citigroup, JP Morgan and MUFG (formerly Bank of Tokyo-Mitsubishi) a total of €1.07 billion for taking part in two foreign exchange spot-trading cartels. The commission said that some traders at the banks had "exchanged sensitive information and trading plans, and occasionally coordinated their trading strategies through various online professional chatrooms". UBS received full immunity for revealing the existence of the cartels, thus avoiding an aggregate fine of about €285 million. One chatroom was called Essex Express 'n the Jimmy because all the traders but "James" lived in Essex and met on a train to London. Other chatroom names used were: Semi Grumpy Old Men, Three-way Banana Split, Two and a Half Men, and Only Marge. Eleven currencies were involved, including the euro, dollar, pound, Swiss franc and the yen. 

And there was a rather nice German case reported in The Guardian in 2019:

Germany's "sausage cartel" included over 20 companies that had conspired to keep sausage prices high by using their "sandwich position" between meat suppliers and supermarkets, a regional court in Düsseldorf ruled on Tuesday.  The court rejected the appeal of food producing company Wiltmann and ordered it to pay a fine of €6.5 million ($7.5 million) for price fixing. Company executive Wolfgang Ingold should personally dish out €350,000. ... "The cartel was set up to last," presiding judge Ulrich Egger said on Tuesday, comparing the sausage producers to a "small family."  According to the judge, the firms' representatives would consult by telephone and agree on raising the prices of their products.  "It was also determined who would lead the way, based on tactical reasons," the court said.

Martin Stanley

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