Cartel Indicators. RAHAT KAUNAIN HASSAN Member (Legal), Competition Commission, Pakistan

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1 International In-house Counsel Journal Vol. 3, No. 9, Autumn 2009, Cartel Indicators RAHAT KAUNAIN HASSAN Member (Legal), Competition Commission, Pakistan The term cartel meaning written challenge originates from medieval French word Cartel, from Italian Cartello, from Latin Carta i.e. card. It came to mean written agreement between challengers in 1692 and the term acquired sense of a commercial trust in 1902 via German word Kartell. 1 It is interesting to point out that the term cartel itself is not a legally defined term either in EU or in US and in other competition regimes, it is generally covered through various expressions/terms inter alia concerted practices, conspiracy prohibited agreements. However, interestingly, in India the term has been incorporated as part of law through the Competition Amendment Act, 2007 and is defined as: "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. Owing to the character of the offence which is in nature of a conspiracy one cannot have an exhaustive definition - however, some of the most obvious of its facets are reflected in the above cited definition. In the recently passed decision by Competition Commission of Pakistan ( CCP ) 2 it has been observed that: in a horizontal cartel as in the present case, the Agreement whether termed collaboration or cooperation is in effect a conspiracy amongst competitors and is bound to impact adversely the consumers. The triple C factor (conspiracy amongst competitors against consumers) would invariably exist in all such cartels. (Emphasis added). In the said decision cement manufacturers have been found guilty of cartelization and a penalty of 7.5% of turnover in the case of each Member Undertaking based on last annual accounting statements has been imposed. (The penalty amounts to PKR.6.3 billion approximately 50 million Euros and 75 million US dollars). 1 Origin of the word cartel Dictionary.com 2 CCP s decision in the matter of Show Cause Notices issued to all Pakistan Cement Manufacturers Association and its member undertakings (F. no. 4/2/sec.4/ccp/200uu8u), International In-house Counsel Journal ISSN print/issn online

2 1448 Rahat Kaunain Hassan The CCP in one of its earlier judgments in the cartel matter of Pakistan Banking Association & Others 3 with respect to violation of Section 4 i.e. prohibited agreements under the Ordinance, importantly, highlighted some of the essentials of a cartel: Cartel formation or cartel-like behaviour does not always pertain to raising the price of product or services to a level higher than the one prevailing under normal competitive conditions. Cartel formation or cartel like behaviour is established where price is fixed, regardless whether it is raised, lowered or even rendered stagnant. Here it is also important to dispel the misconception that establishing an actual adverse effect on customers is essential to determine cartel like behaviour. In cases falling under per se violations no further inquiry is needed. With regard to secrecy again the fact that it has come out in the open would not take it out from the purview of the violations committed. Simply put, cartel is an agreement amongst willing competitors, the competitors collude on any business aspect (whether capacity utilization, division of markets, introduction of innovation etc.) rather than taking such decisions competitively. (Emphasis added) The thrust of a cartel is the collusive behaviour for a common cause ; amongst willing competitors or parties that collude and unite on any business aspect, rather than taking such a decision competitively. In this article I have attempted to highlight some of the significant indicators of a cartel which may serve as an aid in identifying the prohibited agreements and its participants based on some of the cartel precedents. 1. SHARING CONFIDENTIAL INFORMATION: In the British Sugar Plc 4 case the European Court of First Instance held that an undertaking will be held liable for sharing confidential information with competitors. Such sharing of information is viewed as eliminating uncertainty as to the future conduct of competitors in the market. Furthermore, those receiving the information may inevitably take into account, directly or indirectly, the information obtained in order to determine the policy they intend to pursue in the market. Even those undertakings that are merely in receipt of such information may also be held liable because it shows their anti- competitive purpose/intention/spirit e.g. receipt or sharing of confidential information such as price tables, market allocation graphs or future policies, (information that generally other undertakings would preserve as business secrets). In the case of Tate & Lyle Plc, British Sugar Plc and Napier Brown Plc v. E.C. Commission Court of First Instance (Fourth Chamber) 12 July 2001, the Court found that the mere receipt of confidential business information such as price tables and market graphs is evidence of anti-competitive behaviour since it eliminates uncertainty as to the future conduct of competitors in the relevant market and inevitably effects future commercial policies of the undertaking. 3 CCP s first cartel case decided vide Order dated 10 th April, 2008 after the promulgation of the Ordinance in October, 2007 in the matter of Pakistan Banking Associations and Others, 4 Tate & Lyle Plc, British Sugar Plc and Napier Brown Plc v. E.C Commission [2001] 5 C.M.L.R 859.

3 Cartels TARGETED PRICES: In order to constitute a cartel, it is not necessary for undertakings to agree on a specific price. The European Commission held in Lombard s Club 5 that in instances in which target prices are agreed, if may be said that they have been implemented if the prices actually charged approach these target values (and not just if the targets are precisely achieved). Thus it is not necessary for undertakings to reach an agreement to fix an exact price. There can be a cartel even if there s merely a discussion as to target values or ideal prices between competing undertakings. This is the first banking cartel case establishing how banks fall within the purview of competition agencies. The EU Commission observed that sharing of target values and moving towards that target in itself falls within the purview of collusive behaviour. The court observed: The divergent interest of the cartel members may result in a consensus not being reached on all matters or in some points being vaguely formulated or glossed over. Formal agreement may never be reached on every issue. Moreover, there may be internal conflicts, breaches of the rules by members and, in some cases, stiff competition, going as far as outright price wars. None of these factors results, however, in the conduct in question not constituting an agreement and/or concerted practice if these pursue a single, common and lasting purpose. (Emphasis added) In United States of America v. F. Hoffmann-La Roche Ltd District Court (for the Northern District of Columbia) 20 May Parties were penalized for market allocation and price fixing; imposing the highest fine to date, in a cartel case in U.S., on a single undertaking in the sum of US$ 500 million. 3. PRICE PARALLELISM: Price parallelism such as a simultaneous and identical increase in prices between competitors indicates collusion as was seen in the American case of United States of America v. British Airways Plc and Korean Air Lines Co Ltd (2007) where both British Airways and Korean Airways simultaneously increased their fuel surcharges on cargo shipments and passenger fares on flights to and from America. The additional factors ( plus factors ) corroborating collusive behaviour were: (a) participation and discussion of the undertakings in the meeting, and (b) meetings to ensure adherence to the agreements fixing rates and (c) agreement evident from the minutes/records of such meetings. Both the undertakings were penalized for fixing the price for cargo shipments and passenger tickets; and the second highest fine (in US) in the amount of US$ 300 million dollars was imposed on each of the undertakings. The DG Khan Cement Company Ltd Vs MCA, 2006 CLD1237, is a Principal judgment on cement cartel/price parallelism in Pakistan. The Monopoly Control Authority s order was set aside by this judgment and Court laid down the principle that conscious parallelism is not in itself sufficient to lead to or permit an inference that a price fixing agreement or cartel exists. It was observed that evidence of a defendant s parallel pricing requires to be supplemented with plus factors. 5 Case T-198/03.

4 1450 Rahat Kaunain Hassan Various principles deduced from the decision of US courts of appeal were referred to. In this regard attention is drawn to paragraph 49 at page 1284 of the judgment (reproducing US judgement) which reads as follows:- Because the evidence of conscious parallelism is circumstantial in nature, courts are concerned that they do not punish unilateral, independent conduct of competitors They therefore, require that evidence of a defendant s parallel pricing be supplemented with plus factors The simple term plus factors refers to additional factors required to be proved as a prerequisite to finding that parallel action amounts to a conspiracy They are necessary conditions for the conspiracy inference.that show that the allegedly wrongful conduct of the defense was conscious and not the result of independent business decisions of the competitors. The plus factors may include, and often do, evidence demonstrating that the defendants: (1) acted contrary to their economic interests, and (2) were motivated to enter into a price fixing conspiracy. (Emphasis added) It is also helpful to refer to paragraph 53 at page 1286:- If such plus factors do exist in addition to parallel business behaviour, it would be open to the alleged conspirators to present material to show that it cannot be reasonably inferred by the Authority that they had entered into a price fixing conspiracy. They would be entitled to rebut the inferences being drawn from the parallel business behaviour and the plus factors. The reason is that the matter is being determined not on the basis of direct evidence, but on deductions being indirectly made and inferred from the facts and circumstances of the case. It is possible in such a situation that Authority may misread or draw the wrong conclusions from the circumstantial material and it is only right for the alleged conspirators to be entitled to present material to rebut the inferences. If the alleged conspirators fail to present any such material or the material presented is found to be deficient or unconvincing, then it can legitimately be inferred from the parallel business behaviour and the plus factors being relied upon that an agreement exists which is violative of section 6(1) of the Ordinance, and that there has thus been a violation of section 3 thereof. (emphasis added). 4. FACILITATION OPERATING AS DECISIVE CAUSAL LINK: In Organic Peroxides 6 the European Court of First Instance observed that an undertaking will be held liable for participating in a cartel if it facilitated or contributed to the cartel in any way. This could be in the form of arranging meetings or covering evidence of infringement on behalf of the perpetrators involved in the cartel e.g. hiding of agreements between the cartel group of undertakings and facilitation by the consultancy firm. 6 Case T-99/04.

5 Cartels 1451 The consultancy firm was held liable for having decisive causal link on account of: (a) Organizing meetings (b) Reserving tickets (c) Reserving hotel rooms for representatives (d) Reimbursement to the representatives of their travel cost and (e) Hiding the principal agreement and its amended version at its premises were the factors for such determination The Court gave its finding that a sufficiently definite and decisive causal link between the activity performed by an alleged participant and the restriction of competition on the product market indicates its contribution to the cartel. Therefore it will be held liable for infringement of Article 81 of the EC Treaty as well regardless of whether it belonged to the same sector as the product market in question. On first case basis a lenient approach was taken by keeping the penalty low i.e COMMUNICATION & ECONOMIC EVIDENCE: These are two general types of circumstantial evidence: (a). Evidence of communication; to the extent it eliminates the probability of a coincidence between alleged participants of a cartel e.g. records of telephone conversations, travels to a common destination and notes or records of meetings in which they participated are factors that indicate the presence of a cartel. (Organic Peroxides Case) In the key points of OECD s background paper 7 it is stated that Of the two, communications evidence is considered to be more important. Communication evidence is evidence that cartel operators met or otherwise communicated, but does not describe the substance of their communications. It includes, for example, records of telephone conversations among suspected cartel participants, of their travel to a common destination and notes or records of meetings in which they participated. Communication evidence can be highly probative of an agreement. Almost all the circumstantial cases described by delegations included communication evidence; in some the evidence was compelling. b). Economic evidence either pertains to conduct or structure of the undertakings involved. The Organic Peroxides Case and United States of America v. British Airways Plc and Korean Air Lines Co Ltd appear to be based on conduct evidence e.g. simultaneous and identical price increases and evidence of facilitating practices. The structural economic evidence factors focus on high market concentration and homogenous products ; of the two, conduct evidence is given higher value than structural evidence. 7 OECD Prosecuting Cartels Without Direct Evidence Of Agreement (2006)

6 1452 Rahat Kaunain Hassan 6. ATTENDANCE AT CARTEL MEETINGS: Also, the mere presence of an undertaking at meetings where anti-competitive agreements were concluded shows tacit approval of the cartel and it may be held liable for infringement under the competition law. In Tate & Lyle Plc, British Sugar Plc and Napier Brown Plc v. E.C. Commission Court of First Instance (Fourth Chamber) 12 July 2001, Napier Brown (a sugar merchant) was a customer as well as a competitor and took the plea that it was present at the meeting in its capacity as a consumer. It was argued that it needed to gather information on the pricing policies of its suppliers and, as a merchant, it intended in reality to engage in fierce competition with the producers i.e. British Sugar Plc and Tate & Lyle Plc. The court observed: 63. Napier Brown took part in meetings which had an anticompetitive purpose and that, at the very least, it gave the impression that is participation took place in the same spirit as that of its competitors. 64. In those circumstances, it is for Napier Brown to adduce evidence to show that its participation in the meetings was without any anticompetitive intention be demonstrating that it had indicated to its competitors that it was participating in those meetings in a spirit which was different from theirs. 65. The arguments of Napier Brown, based on its capacity as a customer, do not constitute evidence to prove the absence of any anticompetitive spirit on its part, since it does not put forward any evidence capable of establishing that it had informed its competitors that its market conduct would be independent of the contend of those meetings. 66. Moreover, even if its competitors had been informed of that, the mere fact that it received at those meetings information concerning competitors, which an independent operator pre-serves as business secrets, is sufficient to demonstrate that it had an anti-competitive intention. The following penalties were imposed: British Sugar Plc (Principal sugar merchant) 39.6 million, Tate & Lyle Plc 7 million and Napier Brown Plc 1.8 million. Similarly, in Glass Cartel Case, the evidence uncovered by the Commission revealed several meetings at airports and hotels in different European cities where these companies discussed the allocation of car glass to be supplied for upcoming car models to be produced and renegotiations of on-going contracts, and exchanged commercially lucrative and confidential information. Car Glass Producers Cartel Case November, 2008: The European Commission imposed fines totaling almost 1.4 billion (the highest fine ever for a cartel as whole) on four companies. The Commission also imposed the highest cartel fine ever on individual undertaking Saint-Gobain for being a repeat offender thus increasing the fine by 60% ( 896,000,000). The Commission found four companies, namely: 1) Asahi & its European subsidiary AGC Flat Glass (Japan) 2) Pilkington (UK), 3) Saint-Gobain (France) and 4) Soliver (Belgium) engaged in illegal market-sharing and exchanges of commercially sensitive information in relation to deliveries of car glass in Europe between early 1998 and early The four companies controlled 90% of the glass used in new cars and for original branded replacement glass for cars at that time in the European Economic Area.

7 Cartels 1453 The Commission initiated enquiry on its own, following a tip off from an anonymous source. Since Asahi filed leniency notice and cooperated fully, its fine was reduced by 50%. 8 Author: Rahat Kaunain Hassan The author would like to thank Ms. Wajeeha Saif for providing research Assistance Ms. Rahat Kaunain Hassan is Member (Legal) at the Competition Commission of Pakistan. She received L.L.B degree from the University of the Punjab and the L.L.M degree from King's College London. She is a recipient of the coveted Britannia Chevening Scholarship and specialized in the Law of International Finance and International Business transactions. She founded and was a Partner at the Law Firm in Islamabad, Hassan Kaunain Nafees, Legal Practitioners & Advisers, and before joining the Commission had over 15 years of practice as a corporate and commercial lawyer. She has also been a partner at the international law firm, Amhurst Brown, in Islamabad and has also served at the Securities & Exchange Commission of Pakistan as General Counsel/Executive Director (Law & Securities Market Division). The Competition Commission of Pakistan (CCP) was established on 2nd October, 2007 under the Competition Ordinance, 2007 (the Ordinance ) as a quasi judicial, quasi regulatory, law enforcement agency having a specialized umbrella jurisdiction over the economy as a whole. The Ordinance repealed Monopolies Restrictive Trade Practices (Control and Prevention) Ordinance, 1970 (MRTPO) and replaced the old style Monopoly Control Authority (MCA) by CCP, a modern agency a five Members collegiate body. Major aim of this Ordinance is to provide for a legal framework to create a business environment based on healthy competition towards improving economic efficiency, developing competitiveness and protecting consumers from anti-competitive practices. Although this organization has been established only recently (almost sixteen months old) it has been very proactive; CCP activities in such a short span include: Some landmark decisions re: Pakistan Banking Association and six banks penalized for cartelization, A leading telecom company found guilty of SIM locking and product tying An educational institution found guilty of tying computer sales to admissions Fauji Fertilizer / Fauji Bin Qasim delinked by ensuring appointment of independent directors Institute of Chartered Accountant of Pakistan ICAP penalized for minimum fee fixing, stock exchanges penalized for discriminatory floor imposition 8 Full judgment is awaited

8 1454 Rahat Kaunain Hassan Important proceedings underway re: Karachi Stock Exchange abuse of dominance National Refinery s refusal to deal, cement manufacturers cartelization, Karachi Port Trust s collusive tendering Secretary APCMA obstruction matter Cartelization and exclusionary conduct in Liquid Petroleum Gas sector Newspapers cartelization, deceptive advertising by four banks deceptive advertising by two cellular companies Extensive and focused advocacy efforts (assisted by a small DFID/WB grant) The CCP has held six seminars (two with international competition experts) and innumerable bilateral/roundtable deliberations with sector-specific regulators, lawyers, business leaders, and professional bodies.

Cement Cartel Cases: Lessons for India s Competition Law Regime

Cement Cartel Cases: Lessons for India s Competition Law Regime Introduction India is the second largest producer of cement in the world, only after China. 1 The cement industry is a vital part of the