Cartels are (usually secret) agreements not to compete, through price-fixing 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 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.
And anonymised sharing of cost and other information, for instance via a trade association, is generally OK.
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.
Competition Authorities (such as the OFT in the UK) generally offer leniency to the first cartel member to confess. This is a powerful deterrent because one cartel member can never be sure that other members will remain silent. One good example of such whistle-blowing led to British Airways being fined £121.5m 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. 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 totalling £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 totalling £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.
There has yet to be a successful contested prosecution in the UK. The problem is that individuals cannot be prosecuted successfully unless it can be shown that the person acted 'dishonestly'. This test requires 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 so 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
It would be good if a cartel's over-charged customers could successfully claim compensation from their suppliers, for this would counteract the economic harm that had been done by the cartel. Indeed, the OFT and others had hoped that such 'private actions' might over time allow OFT to devote less resource to cartel busting. There was a feeling that larger companies should be left to pursue their cartelised suppliers through the courts, thus cutting OFT's costs and perhaps also acting as a much greater deterrent to future cartels. Unfortunately, however, it has proved very difficult to get damages claims through the courts for at least two reasons: buyers are often small and dispersed; and larger, immediate buyers can sometimes pass on the costs to downstream buyers so it is hard to identify who has lost what.