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Trustbusters have got better at detecting cartels and bolder in punishing them.
But incentives to fix prices remain strong
Mar 29th 2014 | NEW YORK
THE International Cartel Workshop might sound like a coaching session for
would-be price-fixers. But the biennial event, run by the International Bar
Association, is in fact an opportunity for lawyers to learn how their clients
can avoid falling foul of the law, how to respond if they do and what is on the
minds of the competition officials who attend. The latest get-together, held in
Rome in February, featured a three-day-long hypothetical in which delegates
acted out a loosely scripted scenario featuring a fictional American
camera-maker that discovers its sales team has been colluding with European and
Japanese rivals, and tries to limit the damage by reporting the sin to the
authorities.
Grey suits, wooden acting and hour-long scenes about document discovery are not
everyone s idea of gripping drama. But cartel enforcement is a hot topic in
boardrooms. Fines and jail terms have shot up in recent years, greatly raising
the costs of collusion. Big firms such as GE and Bosch have assembled teams of
in-house lawyers that focus solely on the issue.
Even for the biggest companies, ensuring compliance is hard. On March 20th
Brazil s cartel office announced a probe into 18 firms involved in the
construction of train systems, including Siemens of Germany (which alerted
authorities to the alleged conspiracy) and Alstom of France. The 15 rail
contracts being investigated had a combined value of 9.4 billion reais ($4
billion); fines could be for a similar amount. This week prosecutors charged 30
executives from a dozen of the companies.
Collusion comes in many forms: agreements to raise, freeze or even lower
prices, to co-operate in tenders, not to compete in certain markets and so on.
Price-fixing can be horizontal (among competitors in a particular product) or
vertical (involving, say, a manufacturer and its dealers).
There is agreement on right and left (a few ber-libertarians apart) that
cartels are bad. They impose higher prices on customers, reduce incentives to
innovate and raise barriers to entry. One estimate suggests that overcharging
costs consumers in poor countries around the same as those countries get in
foreign aid. It s tempting to see it as victimless because each customer is
hurt only a little, says Mark Whitacre. But it s bank robbery without the
mask and gun. He should know. In 1992 he blew the whistle on a global
conspiracy to fix the price of lysine, an animal-feed additive. His story
inspired a 2009 film, The Informant , starring Matt Damon.
Cartels have historically tended to form in industries with standardised
products that inspire little customer loyalty, such as industrial components or
road-building. Studies suggest that two-thirds of cartels are in industries in
which the top four firms have 75% or more of the relevant market. Their median
duration is five years, but some last decades.
In recent years, however, international conspiracies have been bust in fields
as diverse as seat belts, seafood, air freight, computer monitors, lifts and
even candle wax. A growing number of cases are in digital commerce, such as
e-books, and in finance, most recently interest-rate and foreign-exchange
benchmarks. The financial-market version of a smoke-filled room is the online
chat room for traders.
Some of these cartels have involved a dizzying number of alleged conspirators.
According to court filings, representatives of 20 or more airlines met in
airports, restaurants and other places to discuss the pricing of international
air-cargo services. They were caught in 2006 and forced to pay penalties of
more than $3 billion.
Cartels often form in response to tectonic shifts in the competitive landscape,
such as falling trade barriers or the advent of disruptive technologies.
Manufacturers and retailers react to such pressures by squeezing their
suppliers. Squeeze too hard, though, and those suppliers might feel forced into
an existential response , says John Connor of Purdue University.
That appears to have happened in America in car parts, the subject of the
largest criminal investigation yet pursued by the antitrust unit of the
Department of Justice (DoJ), according to Brent Snyder, who heads its
criminal-enforcement efforts. Companies used code names, met in remote
locations to fix the prices of starter motors, seat belts, radiators and more,
and followed up with each other to make sure the collusive agreements were
being adhered to, the DoJ alleges. It began raiding the companies in 2010.
Twenty-six firms, many of them Japanese, have already pleaded guilty and agreed
to $2 billion in fines. Two dozen people have been charged. There is more pain
to come: cases brought so far involve 30 parts, but trustbusters believe the
prices of 100-150 may have been manipulated. Other cartel authorities are on
the case, too. On March 19th, the European Commission fined five makers of
automotive ball bearings 953m ($1.3 billion). Five days later the commission
said it was investigating several car-parts makers suspected of fixing prices
for exhaust systems.
The scale of the car-parts case owes something to the structure of the
industry. By approving just a few suppliers of each part, which erected
barriers to entry and encouraged supplier concentration, the direct victims,
carmakers, may have created fertile conditions for cartel activity. Some may
have been ripped off by firms they part-owned. Toyota owns 22% of Denso, which
allegedly swapped information with rivals on requests for quotation made by
Toyota for heater panels.
Only in the past quarter-century has price-fixing been treated as worse than a
misdemeanour. Before then, most companies saw it as like going 5mph over the
speed limit, says Roxann Henry of Morrison & Foerster, a law firm. Collusion
has been illegal in America since passage of the Sherman Act in 1890. But the
nation s enforcers started to get tough only when the brazenness of the lysine
conspiracy became apparent in the 1990s (members were recorded joking with each
other about the FBI infiltrating their meetings).
Since then, policing and penalties have grown harsher. The maximum corporate
fine in America has increased tenfold. The European Commission can fine
companies up to 10% of group turnover. Fines levied on both sides of the
Atlantic have jumped over the past decade (see chart). Europe s national cartel
offices are busier, too. This year Germany s has fined brewers 106m and sugar
distributors 280m.
America leads in putting price-fixers behind bars. The average jail term has
risen, from eight months in the 1990s to more than two years. The DoJ uses
Interpol red notices (arrest warrants) to put pressure on foreigners indicted
in cartel cases to submit to American jurisdiction. The European Commission can
only bring civil cases, but criminal penalties can be imposed in Ireland and
Britain, where they are being strengthened. Authorities in large emerging
markets are also getting tougher. In India, the worst that colluding firms
needed to fear before 2009 was a cease-and-desist order. Now they face heavy
fines.
A cartel-busting cartel
With a growing share of cartels being global in scope, competition authorities
are doing more of what those they police are not supposed to do: sharing
information and working in tandem. The Japanese Fair Trade Commission played an
important role in the American-led investigation into car parts. In the biggest
cases, offenders can be hit with suits in a dozen countries.
Japan s tougher stance matters because its companies have long had a lax
attitude to collusion. A lawyer tells of a meeting last year with an executive
at a Japanese manufacturer who claimed that collusion was a thing of the past;
the lawyer s next meeting at the firm was with a middle manager who said he had
been taken to meet several competitors soon after being hired. Asian firms
often treat employees convicted of price-fixing as a soldier who took a bullet
for the company , says Robert Lande of the University of Baltimore s law school
though this is not solely an eastern habit. When Mr Lande looked to see what
had become of dozens of price-fixers from various countries who had been jailed
between 1995 and 2010, he found that roughly half had been rehired by their old
employer or by another firm in the same industry.
Cartels are difficult to root out without help from insiders. To aid detection,
the DoJ developed a leniency programme that provides incentives for companies
to confess and snitch on rivals. This has become so successful that around 50
other countries have copied it. Most big cases today stem from such
confessions.
Under the American programme, the firm that spills the beans can avoid fines,
and its employees are spared prison. The second and third through the door can
secure lesser benefits, though no criminal immunity, if they provide useful
information. Under a policy known as amnesty plus , a co-operating firm that
exposes a separate conspiracy can secure partial immunity in that
investigation, too. Samsung, for instance, was the source for several probes
into computer monitors and television tubes. Leniency schemes are designed to
be trees that grow more and more branches as edgy companies, fearful that
rivals will squeal first, reveal hidden sins, says Ms Henry.
The flip side of leniency is that authorities take a particularly hard line
against firms that, when admitting to one conspiracy, do not confess to
participation in others. In 2011 Bridgestone paid a fine for colluding over
marine-hose prices. Because it failed to disclose that it was up to the same
tricks in car parts, it had to pay an elevated fine of $425m for the second
transgression.
Some countries are employing eggheads to search for suspicious price patterns
by screening markets. These statistical tests have proved most effective in
markets with lots of data, such as financial benchmarks and derivatives, though
they have also been useful in cement and fishing: they provided the first
evidence of manipulation of the London Interbank Offered Rate (LIBOR) in 2008
and, last year, of foreign-exchange rates.
Not everyone is convinced by screening. The DoJ ditched it after concluding
that it produced too many false positives. Grand-jury subpoenas can rock
companies, says Scott Hammond, a former DoJ cartel-enforcement chief, now with
Gibson, Dunn & Crutcher, another law firm. It is a mistake to unleash them
based on tests that have falsely pointed to wrongdoing.
Rosa Abrantes-Metz of New York University s Stern School of Business, whose
number-crunching helped expose the LIBOR affair, thinks the Americans are too
sceptical. She argues that market screening, like the medical sort, is useful
as an indicator that prompts further investigation.
Price-fixers also have to worry about the growth of civil litigation, which
almost always follows action by competition authorities, and in which
cartelists can face treble damages. Private suits in America generated awards
and settlements of $33 billion four times the level of official fines between
1990 and 2008.
Most suits are class actions brought by consumers or corporate customers, but
large companies are increasingly opting out of these to bring their own cases,
as Ford has done in car parts. In all, 28 car-parts suits have been filed in
American courts. Adding to the pain, state attorneys-general have become more
forceful in asserting claims on behalf of government purchasers and state
residents.
Class actions are less common but on the rise in Europe, with Britain, Germany
and the Netherlands leading the way. In some countries impediments remain, for
example rules that hamper document discovery. To remove these the European
Commission has proposed a directive that would harmonise laws and procedures.
The wages of sin
Despite more-severe punishments, cartels still form all the time. Messrs Connor
and Lande think they know why. In a joint paper, Cartels as Rational Business
Strategy: Crime Pays , they argue that deterrence is still too weak. They
studied 75 cartels and concluded that these could typically raise prices by
20%. That is double the estimate used by America s Sentencing Commission when
setting guidelines for fines and jail terms. Factor in the small chance of
being detected, which the authors put at one in five, and American cartel
sanctions are only 9-21% as large as they need to be to offer optimal
deterrence. A lawyer at the Rome conference recounted a recent meeting with an
executive from a large cement group: He said it s hard to stop fixing prices
when it s still so worthwhile.
The authors suggest increasing not only sanctions but also the chances of
detection by increasing enforcement budgets, which are tiny compared with the
fines levied: in 2012 the DoJ s antitrust arm took in 16 times more than it
cost to run. Presumably, the DoJ s Mr Snyder would not turn down an increased
appropriation, but he is less keen on quintupling penalties, which he fears
would bankrupt companies and thus crimp competition. We want [cartelists] to
feel adequate pain but we also want them to remain viable. We re not in the
business of reducing competition.
Despite evidence that penalties are still too small, defence lawyers complain
that the authorities cause alleged cartelists unnecessary pain by applying
antitrust laws extraterritorially. Each jurisdiction is meant to base its
penalties on the amount of business affected in its territory. But when
commerce crosses borders there is sometimes double-counting (known in the trade
as the bump ). Jurisdictions often co-ordinate their actions but they do not
have to take account of each other s fines, and do not always agree.
Some firms have fought back. After AU Optronics of Taiwan was indicted and
fined $500m by America for collusion in LCD panels, the company and two
executives challenged their convictions, arguing that much of the alleged
activity took place elsewhere. Last December a court ordered the executives to
be released, pending appeal, suggesting that the panel of judges had doubts
about the government s case. However, the state is usually hard to beat once a
case goes to trial: in 2003-12 it won 657 of the civil and criminal antitrust
cases it brought before American courts; just 28 were lost or dismissed.
The outcome of private actions is more even. Many cases are dismissed for lack
of evidence. Take the suit brought by grocers against America s three big
chocolate-makers, Hershey, Mars and Nestl , alleging co-ordinated price
increases in 2002-07. A judge recently sided with the defendants, stating that
their pricing decisions, while largely identical and effectively simultaneous,
were nonetheless timed and orchestrated in such a way to achieve whatever
momentary pricing advantage they could over their competitors.
Trials expose grey areas in cartel law.Emails that reveal overt price-fixing
make for a cut-and-dried case. But is it a conspiracy if a firm announces a
price increase and soon afterwards rivals raise their prices to the same level?
Has technology that allows rapid-fire price changes, such as the algorithms
used in online travel, blurred the meaning of agreement and made it difficult
to distinguish announcements from discussions among rivals?
One problem is that competitive and collusive markets can look very similar. If
firms are pricing at marginal cost, and costs (of commodity inputs, for
instance) are bouncing around, then prices shift together in a perfectly
competitive industry, just as they might in a cartel. Competition authorities
try to get around this problem by looking not only at pricing but at
profitability too; profits in collusive environments are higher than those in
competitive ones.
Trustbusters have worked hard to spell out where they consider the line between
right and wrong to be, says Brady Dugan of Squire Sanders, another law firm.
But their thinking is not uniform. The European Commission, for instance, often
treats an exchange of information as collusion, even if there is no agreement
to fix prices. The DoJ needs to see an agreement, though this does not have to
be in writing.
These ambiguities mean it can be difficult for firms accused of collusion to
decide whether to settle or fight. For cartelists that have not yet been
accused, the decision over whether to confess or sit tight can be a tough one,
too. Confession is usually the best option if the company is sure it is the
first in the cartel to step forward and it senses a growing risk of detection.
But for a firm that suspects others have already confessed, thus securing all
the available immunity slots or penalty discounts, it might make sense to keep
quiet, then litigate rather than capitulate when accused particularly in
jurisdictions where trustbusters wield civil penalties only.
The European Commission, for instance, has sometimes struggled to make its
case, especially when much of the conduct took place on other continents. Of
the 25 airlines it initially went after for fixing air-freight prices, 13 that
offered little or no co-operation avoided fines. Competition authorities want
all our clients to believe that coming clean is always the best option, says
an antitrust lawyer who represents large European companies. But from the
board s perspective that s sometimes simply irrational.