EU Competition law and Cartels - Essay Example

EU Competition law and Cartels Introduction The European Commission adopted a decision setting a cartel case in which Procter and Gamble, Unilever and Henkel were involved. The product markets involved the household laundry powder detergent in Belgium, Germany, France, Greece, Italy, Portugal, Netherlands and Spain. In the final outcome, Procter and Gamble and Unilever paid a reduced fine of EUR 315 200 000 while Henkel benefitted from immunity as the whistleblower. The Treaty of Lisbon prohibits anti-competitive practices under Article 101 (1) including any agreements relating to price-fixing. However, Article 103 (3) provides for exemptions if the market collusion is intended for technological innovation and distribution or when the agreement results to consumers’ a “fair share” of benefits or when the agreement does not risk elimination of competition in anyway1. Article 102 prohibits the dominant players from abusing their market power and strengths from exclusive dealing and discrimination in trade. The main purpose of cartels is to regulate the production, distributing and pricing of goods and services thus hindering free competition in the industry. Control of collusion and anti-competitive practices are governed by Article 101of the Treaty on the Functioning of the European Union (TFEU) while monopolies are regulated by Article 102 of the same Treaty2. Mergers, joint ventures and acquisitions are involving companies with substantial turnover in the EU are regulated by Council Regulation 139/2004 EC also refereed as the Merger Regulation. Any financial aid to companies provided by any Member State whether direct or indirect is governed by Article 107 of the TFEU. The conduct of the cartel infringed Article 101 of the TFEU and Article 53 of the EEA agreement. The conduct involved single and continuous infringement of the Heavy duty laundry detergent powder market in the above six member states3. The infringement was aimed at market position stabilization and coordination of the selling prices. The decision to investigate and inspect the premises of the above three companies was prompted by whistle blowing and subsequent application for immunity by Henkel in June 2008. Reduction under the leniency Notice (%) Reduction under the settlement notice Fine (EUR) Henkel 100% N/A 0 Procter & Gamble 50% 10% 211 200 000 Unilever 25% 10% 104 000 000 Henkel received total immunity since it informed the European Commission of the existence of the Cartel. The settlement procedure is guided by the Antitrust Regulation 1/2003 that grants the commission to use simplified procedure in the settlement in order to avoid lengthy investigations. The leniency policy is aimed at abstaining from prosecuting firms that inform the Commission of the existence of the cartel. Settlement is an efficiency process while Leniency is intended at gathering evidence of the infringement. Commission Regulation 773/2004 deals with the powers of the commissions, the complaints, rights and access to file. The regulation deals with the Leniency Notice 2006, guidelines for fines and the notice for co-operation with authorities4. The settlement policy requires an admission of guilt from the companies involved and requires the parties to immediately desist from the anti-competitive behaviour. The settlement procedure is only applicable to cartel cases. The settlement Notice rewards the parties for cooperation in the process. All parties benefit from a 10 percent reduction in fines since they contribute adequately to the settlement procedure5. In the above case, Henkel submitted immunity application in May 2008 and was granted conditional immunity in June 2008. According to Article 11 (6) of Regulation (EC) 1/2003, all the parties were invited to the bilateral settlement discussions in 2009. The parties were granted the files with evidence and an estimation of the possible fines during the discussions in June 2010. According to Article 10 (a) of Regulation (EC) 773/2004, the parties formally submitted their request to enter in to a settlement procedure. All parties accepted liability for infringement of Article 101 of TFEU and also Article 53 of the EEA Agreement. According to available evidence, there was inter-state trade thus the parties had infringed Article 53 of the EEA Agreement6. Although the infringement was related to an environmental initiative, it resulted to reduction of the Heavy Duty Detergent powder. The initiative led to market stabilization and price coordination. According to the initiative, none of the companies would use the environmental initiative to gain market share and competitive edge in the European Union level. The cartel agreed to make price increases indirectly since no prices changes were to be made after reduction of the product weights. The benefits like reduction in raw materials and packaging costs were not transferred to the consumers. The cartel also agreed to desist from promotional activities during the implementation stages. The Cartel also agreed to increase prices directly by the end of 2004. Article 101 (1) of TFEU prohibits the anticompetitive agreements of cartels. According to ECJ judgment in the case T- Mobile C-8/08 T-Mobile Netherlands BV of 4 June 2009, the court observed that information exchange is capable of removing uncertainty in the markets thus hindering free competition. A-G Kokott also ruled that the wording of Article 101(1) (a) of TFEU did not only deal with concerted practices that result in direct price increases but also indirect price fixation since the Article protects the immediate interests of consumers and also the market structure7. The court also ruled that presumption of casual relationships in the concerted practices of the parties is independent of the frequency and number of meetings since a single meeting is enough for parties to implement anticompetitive practices in the market. The court also founded that the object of the concerted practices was essential in determining the application of Article 101 and not the effects of the concerted practices8. Another case that involved settlement was the case of CRT glass producers that involved Asahi Glass Company, Schott AG, Nippon Electronics Glass Co and Samsung Corning Precision Materials Company. All parties received 10 percent fine reduction for agreeing to cooperate in the settlement procedure. The parties to the cartel supplemented price coordination of bulb glass across EU member States and exchanged sensitive market information. The cartel actions infringed Article 101 of the EU Treaty and Article 53 of the EEA Agreement9. The settlement policy has several advantages for the European Commission, the consumers and the parties involved in the cartel. The parties benefit from reduced fines and shorter investigation procedures10. The Commission benefits from faster administrative process and reduction in the supervision costs since the parties agree to immediately desist from the anticompetitive practices. The Commission will experience low number of appeals in the court since the parties admit guilt and agree to desist from the anticompetitive practice11. The Commission does not have adequate staff to investigate the cartel behaviours thus will benefit from the settlement policy. From the consumers’ point of view, there are numerous benefits since they immediately experience a reduction in the prices of the products. Consumers are able to enjoy a variety of goods due to innovation in the free markets. However, the companies to the cartel are prohibited from negotiating with the Commission on the infringement or the applicable fines since the Commission has exclusive powers to determine the reduction in fines depending on the parties’ degree of cooperation in the investigations12. According to Article 101 (3) of the TFEU, the Agreements that contribute to consumer benefits are exempted. The EU has established guidelines for the exemption of the Horizontal Agreements which are commonly referred as the guidelines on the applicability of Article 81 of the EC Treaty to Horizontal cooperation agreements OJ (2001) C 3/213.The argument by the three producers on developing a new product that is environmentally friendly can be justified according to Article 101 (3) if the agreement meets the criteria for exemption. Such agreements should lead to economic benefits and consumers must receive a share of the benefits. The agreement must not eliminate competition and must result to efficiency gains14. The types of horizontal cooperation that is covered by the Article include joint purchasing, licensing agreements, joint sales, research and development agreements, exchange of information and joint production15. In assessing the nature of horizontal agreement, the Commission will review whether it violates Article 81 (1) on prohibitions16. Standardisation agreements are also covered since the producers may agree to develop common standards like the minimum safety of the products. Article 101 (3) provides for automatic exemption for certain specilisation agreements and research and product development agreements. Horizontal agreements occur if the parties operate at a similar level in the supply chain such as competitors in the market. Horizontal agreements may result to cartel risk thus leading to severe penalties by the Commission. In assessing the potential impact of the horizontal agreement, the potential of anticompetitive behaviour will be based on the market size of the parties, the level of exchange of confidential information and efficiencies to be gained from the agreement17. In joint production, the combined market share of the parties involved in the agreement must not exceed 20 percent of the total market and must not include any restrictive provisions18. In joint purchasing agreements, the market positions of the parties to the cartel must be different while the purchasing and selling markets must be different also. In joint purchasing, the combined market share of the all parties to the agreement must not exceed 15 percent both in the selling and purchasing markets19. The geographic selling markets must be different and parties should desist from exchanging sensitive information on the prices and volumes of purchase. Joint marketing and distribution agreements that are also referred as Commercialisation agreements have the potential of creating a cartel and coordinating the market prices. The Agreement should not include market sharing agreements and must not result to commonality of costs. Article 101 (3) provides for Technology Transfer exemption provided the total market share of the two competitors involved does not exceed 20 percent. Such agreement should not limit the parties’ ability to determine prices, output or include any exclusive license to particular geographic markets20. The EU competition law grants exemption to agreements on research and development activities. The agreement should aim at promoting technical and economic efficiency. Research and development exemption is governed by Article 101 (3) of the TFEU but combined market share of the companies must not exceed 25 percent. The parties must have unlimited access to pre-existing technical knowledge of the competitors and all parties must have unrestricted access to the research and development results. Once the market share of the parties exceed 25 percent, the exemption will last for two years while if the combined market share exceeds 30 percent, the exemption will continue for only one year following the year when the market threshold was exceeded. The Agreement should not aim at granting one party exclusive right to the research results or fix prices to customers after the joint research and development activities on the environmentally friendly product21. Procter and Gamble, Henkel and Unilever cannot justify their anticompetitive practices using Article 101(3) since their Agreement aimed at lowering the benefits to consumers through indirect prices increases. The Agreement also aimed at restricting promotional activities thus hindering any possible prices reductions to the consumers. The agreement contravened Article 101 (1) of TFEU and Article 53 of EEA Agreement thus cannot be exempted under Article 101 (3) of the same Treaty22. Article 174 of TFEU sets out the environmental agreements that parties can make like agreements that aim at reducing pollution emissions. The parties may set the minimum product standards and provide common objectives like recycling of waste materials and utilization of energy efficiently. Under Article 6 of the Treaty, the Commission seeks to promote environmental awareness policy but Member states are required by Article 10 and Article 86 of the same Treaty to ensure their internal markets are not distorted by any Agreements. Article 81(1) of the Treaty clearly outlines that horizontal agreements on environmental issues should not restrict competition and should include all the competitors23. Standardisation agreements that aim at meeting minimum product safety and quality standards may be exempted by the Commission. There is no block exemption of standardisation agreements but certain industries like Insurance industry can receive automatic exemption on the standards if the agreement benefits consumers and leads to more innovative products. Standardisation agreements should include the views of all participants and stakeholders in the industry and be guided by good faith in the disclosures. Information exchange may be exempted is the consumers can benefit from the availability of the information or it signals quality to the consumers24. Less successful market participants should access information on the dominant participant product quality, costing and distribution in order to improve their product offerings25. Stabilizing market position through cartel activity refers to anticompetitive behaviours that aim at limiting the output of the member parties, controlling the prices of the parties and restricting the parties from accessing certain territories. Cartels engage in horizontal price fixing and horizontal market allocations through exchange of sensitive market information like the volumes of goods produced or the likelihood of raw material price changes26. Success of leniency programme The leniency policy offers companies that self-report their cartel activities total immunity from fines27. The policy also offers a reduction on fines to the other parties to the cartel. The first party to provide evidence benefits from 30 to 50 percent reduction in fines while the second party benefits from 20 to 30 percent reduction in the penalties while the subsequent parties each receives a 20 percent reduction in penalties28. The leniency applicants provide critical information to the Commission on the existence of the cartel. According to the game theory, three strategies are available to the parties to the cartel. The parties may choose to collude, to collude without the leniency policy or collude with the leniency policy. The leniency programmes are geared at undermining the efforts of cartels by creating incentives for firms that disclose cartel activities29. In analyzing the success of leniency programmes, we shall consider a two firms namely f and g. The firms can choose to either collude or compete with one another in the market. Firm collude compete collude (b, b) (d, a) compete (a, d) (c, c) The profits are ranked as follows: a>b>c>d and 2b>a+d>2c According to the above game, the two firms will not collude under perfect information since the expected total payoff is lower. The two firms will collude if the cartel-internal incentives constrains are contravened since the expected profits from the cartel are higher than the fines on detection. If firm f confesses on the cartel activities, firm g will also experience lower fines. If firm f does not self-report, firm g is better off since it has the opportunity to confess the cartel activities and receive immunity. The nature of the leniency programme makes confession of the cartel activities a major strategy for all the firms involved30. Leniency programme is an excellent tool of curbing the activities of cartels since it minimizes wastage of resources in investigating the activities of all firms31. The programs ha led to increase in the detection rate of the Commission on cartel activities. Most of the recent cases including Exotic fruit case, power cables, Occupant safety systems and Container shipping cases involved settlement and leniency policies. The Commission is not adequately equipped with personnel thus must utilize leniency and settlement policies to eliminate cartels32. Conclusion EU competition law prohibits anticompetitive and antitrust practices of cartels. Article 101(1) of TFEU prohibits cartel activities like market stabilization and price coordination through price fixing and output determination. Article 53 of EEA Agreement also prohibits inter-state anticompetitive behaviours. The settlement policy seeks to reward firms with reduction in fines for cooperation during the investigation process. The firms that self-report the cartel activities can benefit from immunity of fines under the leniency policy. For the settlement process to commence, the parties must acknowledge liability for the infringement, and indicate consent to not request for access of the file. The settlement policy is beneficial to both the EU and firms since it facilitates cooperation in gathering evidence and reduces the fines paid by the firms. The settlement policy enables consumers to enjoy a variety of products are reduced prices. The settlement Article 101(3) of the same Treaty grants certain exemption to collusion behaviors depending on the intention of the collusion. If the collusion Agreement results to fair share of the benefits to consumers or product innovations and does not contain any provisions that restrict competition, the Commission can grant an exemption to the activities under Article 101(3) of the TFEU. The EU leniency programme has been successful in detecting and reducing the number of cartel activities. The leniency program creates incentives for firms to report on collusion and price fixing activities. The EU should utilize the settlement policy and leniency programs to eliminate the activities of cartels and other antitrust behaviours in the markets. Bibliography: B, Andrea and R, Stefanie. EU law after Lisbon. Oxford. Oxford University Press. 2012. B, David and R, Lennart. European competition law: a practitioner’s guide. Hague. Kluwer Law International. 2005. B, Ivo and B, Jean-Francois. Competition law of the European Community. Hague. Kluwer Law International. 2005. B, Ivo. Due process in EU competition proceedings. Alphen. Kluwer Law International. 2011. C, Damian. European Union law: text and materials. Cambridge. Cambridge University Press. 2010. D, Maher. EC and UK Competition law: commentary, cases and materials. Cambridge. Cambridge University Press. 2004. J, Alison and B, Sufrin. EC Competition law: text, cases and materials. Oxford. Oxford University Press. 2008. 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