The need for rules to define appropriate play on the economic battlefield has received global acceptance. The most entrenched and widely accepted of these rules is that forbidding cartels. Compliance requires teaching the rules and enforcing them. Yet enforcers, companies and individuals continue to struggle with old and new challenges regarding these rules because they are not necessarily intuitive to an ordinary business person, and enforcement comes in many forms from many directions using varying definitions.
We explore here a few undercurrents influencing today’s global cartel enforcement and how they may affect businesses and their efforts to avoid violating the rules, including (i) the trend to push onto these corporate enterprises more of the workload to teach government’s rules and enforce them; (ii) how the rules are becoming more complicated with algorithms, big data and market indices; and (iii) the constant tension with sovereignty rights and jurisdictional cooperation.
The government–corporate partnership with leniency and compliance programmes
Only individuals can actually perform the conduct that constitutes a violation of cartel rules. Corporations are a government-sanctioned means for individuals to pool resources and collaborate in pursuit of an overall common profit objective in a single enterprise. This vehicle has been found to be so efficient that most business now is conducted through such government-chartered collaborative enterprises. Cartel rules, which focus on concerted behaviour, accept corporate coordination and come into play only for inter-enterprise conduct, not intra-enterprise conduct. But the cost for sanctioning corporation coordination is the now near unanimous acceptance among enforcers worldwide that corporations should take responsibility for teaching cartel rules, finding any deviations, and then assisting government enforcers to impose sanctions.
Policies for leniency and to incentivise compliance programmes reflect this trend to push more work onto corporations. Striking at the profit objective of these enterprises, steep fines and other monetary penalties are designed to drive corporations to give attention to cartel rules. Unfortunately, global developments may be changing the scales on the costs and the benefits for companies to take on this work. As leniency policies and cartel enforcement has spread across jurisdictions the simple balance that has weighed in favour of corporate disclosure may be adversely affected. Leniency now means substantially preparing the case against the co-conspirators with all available witnesses and documents, and doing that for multiple jurisdictions. Coordination across jurisdictions’ competing demands is not easy. Some jurisdictions that have developed a more aggressive enforcement agenda have leniency policies that are unpredictable. The costs and the complexity of meeting the terms for leniency have reduced transparency. Add to that the proliferation of private civil damage actions, spreading from the United States to Europe to Australia to Latin America and beyond, and the cost of disclosure has dramatically increased. Some in the defence bar have questioned whether the leniency prize is still worth the price because of the costs and unpredictability of dealing with multiple jurisdictions. Enforcers need to grapple with the concern that the corporate incentives for partnering with enforcement agencies via leniency programmes is significantly diminished when the burdens and inconsistencies in programmes become overwhelming and consider affording some relief.
With regard to compliance programmes, developments have been more favourable. A growing number of jurisdictions have determined that leniency programmes alone may not be sufficient to incentivise companies to undertake comprehensive training and aggressive monitoring. Some enforcers apply a discount to the monetary penalty of a company that has engaged in misconduct if the company previously had implemented a ‘good’ competition compliance programme. Discounts of up to 50 per cent may be available for a compliance programme. Other jurisdictions, notably the United States, historically have refused to give any discount to a company with a pre-existing compliance programme on the basis that the programme obviously was not 100 per cent effective. In more recent years, however, the United States has given a sentencing discount for compliance programmes implemented after an investigation has started that dramatically change the culture of the company. On the other side of the balance, the United States has imposed a monitor when the company did not appear to have sufficiently embraced a compliance culture. Moreover, the Antitrust Division of the US Department of Justice held a Corporate Compliance Roundtable in April 2018 to explore how it could better support compliance programming and has suggested that the policy against discounting fines for comprehensive compliance programmes, even if not fully effective, is under review.
Budgetary and practical constraints limit the activities of government enforcement agencies. Pushing more of the work onto corporations spreads the workload and the expense, and corporations are well-placed to assist with teaching the rules, monitoring compliance and pulling together the evidence of wrongdoing. It would be unfortunate if the global adoption of leniency programmes detracted from the incentives of companies to shoulder these burdens.
Complications for cartel rules
Algorithms, the internet and big data are changing the way businesses are making strategic decisions, including on pricing. Algorithms that collect and analyse large amounts of relevant market data have clear benefits for the businesses that use them. They can help businesses become more efficient, maximise profits and provide more targeted product recommendations. Without the algorithm, it would be virtually impossible to collect and analyse a similar volume of data. The use of algorithms has the possibility of driving consumer benefit and also to help businesses develop and produce more personalised products and services, and potentially with more personalised prices.
At the same time, use of pricing algorithms may constitute or facilitate collusion, and some enforcers fear ‘digital cartels’. Algorithms designed to price products take in a broad set of factors and then run a complicated analysis. This technology allows a business to react extremely quickly to a change in a competitor’s price or run a very complicated analysis into the pricing of competitive products. These same analyses could be run to help sustain a cartel by detecting attempts to cheat on an agreement. Moreover, there is a concern that algorithms could collude without human agreement. According to the head of competition enforcement in Russia, new types of anticompetititive agreements without human participation are already a modern reality, and the agency is taking steps to enforce against ‘digital cartels’. Margrethe Vestager, the European Commissioner for Competition, has warned that companies need to understand what the algorithms they use actually do: ‘What businesses can and must do is to ensure antitrust compliance by design. That means pricing algorithms need to be built in a way that doesn’t allow them to collude.’
The United States, however, has signalled that without a human agreement to fix prices, use of algorithms will not give rise to liability, at least criminally. Senior officials have emphasised that algorithms are a tool, or a means, to achieve a particular goal, but that it is humans that still determine and agree on that goal. But the internet and algorithms still raise cartel concerns. An example is the US case against a senior manager of an e-commerce business who agreed with a different company to use particular pricing algorithms with the intention of coordinating prices for the sale of wall posters on Amazon Marketplace.
Enforcers around the world are looking closely at creative means of addressing internet and data issues, and this seems also to be resulting in a greater blurring of vertical and horizontal enforcement. The Lithuanian Competition Authority found that online travel agencies had violated competition law when Eturas limited the possibility of applying more than a 3 per cent discount when the agencies used the Eturas online travel booking system. Eturas sent a message to travel agencies announcing a new technical restriction that put a cap on discount rates, whereby any discounts in excess of the cap would be automatically reduced. The European Court of Justice found that the agencies that knew of this message, even if they had not taken any further action in response, could be presumed to have participated in a cartel. There was no explicit agreement to collude on price. It was the use of the same pricing algorithm by the travel agencies to monitor prices, and knowing that others were using the same algorithm, that were subject to the cartel allegations.
Further blurring the lines, the European Commission brought its first resale price maintenance case in years, imposing fines on four electronics manufacturers for fixing the prices offered by their online retailers. According to the Commission, the manufacturers intervened with online retailers who offered products at prices the manufacturers considered to be low. The manufacturers threatened to block supplies from the retailers offering ‘low’ prices. The manufacturers were able to effectively track the resale prices through the use of an algorithm. The Commission indicated that since most retailers use algorithms that automatically adjust retail prices to those of competitors, the resale price maintenance practice had a vertical impact (between the manufacturer and retailer) and also a horizontal impact (across retailers).
While there remains significant uncertainty in this area, we can be confident that use of algorithms has the attention of enforcers and that companies will need to focus on this ever-changing area.
Market manipulation of indices has triggered high-profile investigations and convictions. Conduct related to foreign currency exchange rates (forex), the London Interbank Offered Rate (LIBOR), and the Euro Interbank Offered Rate (EURIBOR), have resulted in significant fines from enforcers around the world, as well as massive follow-on civil litigation. For example, the largest fine paid for a US antitrust violation is that for US$925 million for forex manipulation. And private civil litigation in the US has challenged the use of other pricing indices where horizontal competitors pool pricing information then use the index for contract pricing.
Some enforcement of market manipulation has used cartel rules while other enforcement has focused on fraud charges or regulatory requirements. Some market manipulation conduct is consistent with the hallmarks of a cartel – albeit using newer technology, as daily chat rooms replaced the proverbial smoke-filled room – but most of the benchmark manipulation cases move beyond the simple bid rigging, price fixing, and market allocations one normally associates with a classic cartel. Instead, market manipulation today often deals with intangible, complex digital tools, indices or benchmarks that then may arguably influence pricing, and not necessarily the pricing of the product that is the subject of the index. In addition, in a traditional cartel, the cartel members’ incentives and benefits are aligned, as they all hope to profit from higher prices. In some of these cases, however, the financial benefit to the firms is not clear. Both participants and victims may have heterogeneous positions in products that can be adversely or positively impacted from multi-directional manipulation. Many of the manipulated benchmarks also reset daily, further complicating the potential harm analysis.
Market manipulation represents an area of substantial enforcement overlap among enforcers, even within the same jurisdiction, as any given scheme can fall within the jurisdiction of several competition and other enforcement agencies across multiple countries. Some have argued that combating market manipulation is best achieved through cartel enforcement over sector-specific regulatory rules, or vice versa. Others are more comfortable with a dual approach. In September 2018, the chief executive of the UK’s Competition and Markets Authority recognised that well-structured regulations can foster competitive conditions, specifically cautioning competition authorities to ‘be neutral across tools and across institutional boundaries.’ At a minimum, when a group of traders call themselves ‘The Cartel’ and engage in conduct that justifies the moniker, cartel enforcement will likely remain a significant part of the conversation.
Today, companies involved with market indices or benchmarks, especially those that require competing companies to pool information, should promote compliance with the understanding that market manipulation can constitute a somewhat square antitrust peg being inserted into a round enforcement hole. In addition to discouraging intra-firm communication and promoting good document hygiene – while warning that ‘documents’ include chats, texts, snapchats and social media – companies must try to understand how the tools are used and the manner in which their employees’ conduct can affect the tools.
Sovereignty and jurisdictional cooperation
Each country or jurisdiction has its own set of laws and regulations that address cartel conduct. Some are more focused on local or domestic cartels, while some are more focused on international cartels. There are wide variations in the types of systems (criminal versus civil versus administrative) used to deter and punish cartels, as well as in the range of conduct penalised, the evidence standard required to trigger penalties, and the potential range of sanctions (criminal or civil corporate fines, administrative sanctions, incarceration for executives, debarment and more). Differences in each country’s system and concerns for sovereignty can make jurisdictions reluctant to condone another jurisdiction’s efforts to prosecute cartel conduct that took place within its borders or to allow another jurisdiction to prosecute its companies or citizens under legal standards inconsistent with its own.
Some jurisdictions, like the United States, have a cartel enforcement agency that combines the investigative functions and competition expertise with prosecution functions, including criminal prosecution, in a single agency. US cartel enforcers investigate cartel offences, decide whether to proceed criminally or civilly, administer the leniency programme, choose which companies and executives to target, and negotiate to resolve charges, subject to judicial review. Other jurisdictions have a system with one government agency with a competition law focus and expertise investigating cartel conduct, while another entity, usually a general public prosecutors office, has authority to bring criminal charges. Canada and Japan exemplify this type of dual agency system. The latter type of system can face challenges having both necessary government entities share the same knowledge, experience and priorities regarding whether and which potential cartel cases should be pursued and subject to criminal sanctions. Likewise, such a split system can create complications in the efficient and transparent processing of cartel leniency applications. This year Canada went through an extensive intra-governmental agency process to develop a revised leniency programme, which required support by both the Canadian Competition Bureau and the Crown Prosecutors Office.
Jurisdictions have communicated frequently over the past two decades through organisations such as the International Competition Network (ICN) and various bar association programmes and conferences, as well as technical assistance and secondment programmes. But the world is still far from consensus and consistency in rules, laws and best practices in cartel enforcement. Significant sharing of evidence across borders, mutual legal assistance in the form of witness interviews and document seizure, on behalf of other jurisdictions, and extradition of fugitives have all increased in the past decade. Still, jurisdictions vary in their willingness to accept another jurisdiction’s legal action and in a willingness to extradite individuals, particularly its own citizens, for cartel offences elsewhere. The ruling in United States v Allen, 864 F.3d 63 (2d Cir. 2017) held that evidence obtained from witnesses in the UK, under due process procedures different from those required in the United States, and then shared across borders with US prosecutors, tainted other evidence in the US case. The ruling should remind enforcers working across jurisdictions that differences in their systems are real and legally significant, and while international cooperation can be a boon to prosecutors, it is not without risk. The ruling also reminds defence counsel to probe such cooperation.
While jurisdictions may cooperate and play nicely on the world enforcement stage, each has independent interests. ‘State action’ is generally exempt from antitrust enforcement. Countries retain discretion to refuse to act upon international assistance requests and to oppose what is perceived as another jurisdiction’s overreach. And countries do not always accord deference to others. The US Supreme Court in Animal Science Products, Inc v Hebei (decided 14 June 2018), rejected giving automatic deference to China’s Ministry of Commerce to defend four Chinese sellers of vitamin C on the ground that Chinese law required them to fix the price and quantity of vitamin C exports, but focused on whether deference should be given to the Ministry’s interpretation of Chinese law, not whether the law could be a defence.
There is still hope for growing consensus. This summer, US Assistant Attorney General Makan Delrahim launched an effort to attempt to standardise antitrust enforcement, requesting that 140 competition commissions worldwide sign on to a framework of common principles on issues such as transparency, confidentiality, conflicts of interest and judicial norms. Talks among regulators around the globe are ongoing, but will no doubt be a major focus of the upcoming ICN meeting this autumn and beyond. Multiple cartel enforcement agency leaders, including from the US and EU, have stated publicly this year that they appreciate the burdens of prompt and full compliance with leniency programmes around the world simultaneously, and will make an effort to coordinate and streamline requests, to minimise duplication where possible. Defence counsel will need to hold them to these promises.
Without transparency and clear rules, it can be challenging for global corporations to understand and fulfil their roles. Where dozens of jurisdictions are not only imposing different rules and practices regarding cartel conduct, but investigating and reaching decisions in ways that vary dramatically, international companies and business people can find themselves caught between a rock and hard place, and exhausted from attempts to understand expectations and prohibitions in each jurisdiction. And the costs of defence and sanctions continue to grow. Yet, the trend to have firms teach and enforce cartel rules in the digital world has firmly taken root, and the challenges are likely to multiply.
The authors would like to thank Megan E Gerking and Robert W Manoso for their assistance with the chapter.