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Horizontal restraints Manas Kumar Chaudhuri Advocate & Head Competition Law Policy & Practice, J Horizontal restraints Manas Kumar Chaudhuri Advocate & Head Competition Law Policy & Practice, J Sagar Associates, Advocates & solicitors, New Delhi, India 8 – 10 August, 2007 Mauritius

What are they • Agreements between enterprises engaged in identical or similar trade of What are they • Agreements between enterprises engaged in identical or similar trade of goods or provision of services • Agreements can be business arrangements, understanding or action in concert • Can be formal or informal • Can be in writing or oral • May or may not be enforceable by legal proceedings 2

What are they (contd. ) • Between competitors supplying substitute products or services • What are they (contd. ) • Between competitors supplying substitute products or services • Raises a natural concern of anti-competitive practice • Parties to the agreement may raise their prices - allows firms to fix prices (i. e. collude) - may lead to loss of rivalry and softening of price competition 3

What are they (contd. ) • Marketing joint venture - may involve firms directly What are they (contd. ) • Marketing joint venture - may involve firms directly fixing prices • Production joint venture - a vehicle for information flows between the parties enables the collusion easier 4

Types of Horizontal Agreements • Cartel • Bid rigging • Collusive bidding • Joint Types of Horizontal Agreements • Cartel • Bid rigging • Collusive bidding • Joint Venture 5

Cartel • Includes an association of producers, sellers, distributors, traders or service providers who 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 • Members may agree on prices, total industry output, market share, allocation of customers, allocation of territories, bid-rigging, establishment of common sales agencies and division of profits or combination of these 6

Public & Private cartels • Export cartels and Shipping conferences are examples of Public Public & Private cartels • Export cartels and Shipping conferences are examples of Public cartels • Depression cartels have been permitted by sovereign governments to mitigate crisis arising out of excess capacity • OPEC is a sovereign cartel of nations 7

Export cartel • Most competition or anti-trust laws exempt export cartels so as to Export cartel • Most competition or anti-trust laws exempt export cartels so as to enable the sovereign Government to earn profits out of exports • Statutory exemptions in Competition Law reflect the intentions of the sovereign Governments • Caveat – an export cartel of a country becomes an import cartel in another – comes within the mischief of “effects doctrine” 8

Shipping conferences • Agreement on freight rates, passenger fares over different shipping routes • Shipping conferences • Agreement on freight rates, passenger fares over different shipping routes • Allocation of customers, loyalty contracts and open contracts are some of the policies amongst the shippers which are historical in origin • In some jurisdictions, these are statutorily exempted from being scrutinized under the Competition Law – but the position is increasingly changing 9

Private cartel • Members derive mutual advantage • Advantages are not known or likely Private cartel • Members derive mutual advantage • Advantages are not known or likely to be detected by outside parties • Mostly viewed as being per se illegal being most pernicious • Subject matter of anti-trust or competition law • Penalties are huge at times three times the profit earned by the members of the cartel or 10% of financial turnover of preceding three financial years whichever is higher • In India it is not per se illegal but shall be regarded to cause appreciable adverse effect on competition in India – hence onus would lie upon a respondent to rebut the charge 10

Bid-rigging • Particular form of collusive price-fixing • Firms coordinate their bids on procurement Bid-rigging • Particular form of collusive price-fixing • Firms coordinate their bids on procurement or project contracts • Two forms - firms agree to submit common bids – eliminating price competition - firms agree on which firm will be lowest bidder and rotate in such a way that each firm wins an agreed upon number or value of contract 11

Bid-rigging (contd. ) • Forms of Bid-rigging - Bid suppression Complementary Bidding Bid rotation Bid-rigging (contd. ) • Forms of Bid-rigging - Bid suppression Complementary Bidding Bid rotation Subcontracting 12

Collusive bidding • Collusion refers to combinations, conspiracies or agreements among sellers to raise Collusive bidding • Collusion refers to combinations, conspiracies or agreements among sellers to raise or fix prices and to reduce output in order to increase profits • Distinct from cartel, does not require a formal agreement or understanding • Economic effects of collusion and cartel are the same and often the terms are used interchangeably 13

“Phases of the moon” • American steel conspiracy firms used the phrase – “phases “Phases of the moon” • American steel conspiracy firms used the phrase – “phases of the moon” for submitting bids • Which among them would submit the low bid to win the contracts • Coordinated behaviour – often referred to as tacit collusion or conscious parallelism • Sometimes compensation is given to unsuccessful bidders by dividing some percentage of profits of successful bidders 14

Joint Venture • An association of firms or individuals formed to undertake a specific Joint Venture • An association of firms or individuals formed to undertake a specific business project • Becomes a competition issue when they are established by competing firms – horizontal agreements • Usually justified on grounds that the specific project is risky and requires large amounts of capital • Capital cost high so is risk • Weigh the potential reduction of competition against the potential benefits of pooling risk, sharing capital cost • Increasing debate worldwide as to what degree to which JVs should be subject to competition law 15

Joint Venture (contd. ) • In India under section 3(3) proviso, JVs which would Joint Venture (contd. ) • In India under section 3(3) proviso, JVs which would be able to stand the legal scrutiny of enhancing economic efficiencies would come within the purview of “rule of reason” test unlike “shall be presumed to cause appreciable adverse effect on competition” – though prima facie a horizontal agreement • CC, UK recently concluded that the anticipated JV between Kemira and Terra could damage competition in the market for the supply of Carbon Dioxide as well as those related chemical products 16

How to deal • Most cases of Cartels or Bid-rigging or collusive bidding are How to deal • Most cases of Cartels or Bid-rigging or collusive bidding are secret business arrangements • Conspiracy between and among competing enterprises – mostly with culpability of mind • Direct evidences against the arrangement are a remote possibility hence a challenge 17

Leniency Programme • Total or partial reduction of fines applied to enterprises that co-operate Leniency Programme • Total or partial reduction of fines applied to enterprises that co-operate with competition authorities in cartel investigations. • Under section 46 of the Indian Competition Law the disclosure must be true and vital – which on satisfaction of the Commission can entail lesser penalty than prescribed under the Law 18

OECD on Hard Core Cartels • Member countries should ensure - effective sanctions to OECD on Hard Core Cartels • Member countries should ensure - effective sanctions to deter firms and individuals from participating in such cartels; - powers to detect and remedy such cartels including powers to obtain documents information and to impose penalties for non-compliance 19

OECD on Hard Core Cartels (contd. ) • Member countries should take into account OECD on Hard Core Cartels (contd. ) • Member countries should take into account - co-operation consistent with a requested country’s laws, regulations and important interests - voluntarily share information and documents and also, when necessary, compulsorily share such information and documents subject to laws, regulations and effective protection of commercial sensitive interests - invites non-member countries to associate themselves with the recommendation 20

Estimate of overcharge to Developing Countries • • • Vitamins Citric Acid Bromine Seamless Estimate of overcharge to Developing Countries • • • Vitamins Citric Acid Bromine Seamless Steel Tube Graphite Electrode Lysine $ 1. 71 billion (90 -99) $ 67 million (91 -95) $ 8 million (95 -98) $ 1. 19 billion (90 -95) $ 975 million (92 -97) $ 43 million (92 -95) [Year of operation between 1990 and 1999] 21

Vitamins Cartel Operated from 1990 to 1999. Cartel members shared information relating to – Vitamins Cartel Operated from 1990 to 1999. Cartel members shared information relating to – price fixing, market division, information sharing among members to enforce the cartel agreements, bid rigging (in some cases). Annual global sales averaged $ 1. 34 billions during the conspiracy. Estimated price increase generated by the cartel to be 35%, which is the figure used for the overcharge calculations. US, Japan, Canada, Switzerland Germany were involved. The impact of the cartel on the developing countries may also have been felt by consumers importing vitamin-enriched foods for human and animal consumption because their prices would have been raised by the Cartel. The overcharge of $1. 7 billion calculated – though underestimate – yet substantial. 22

Citric Acid The citric acid cartel was established in 1991 and ended in 1995 Citric Acid The citric acid cartel was established in 1991 and ended in 1995 upon prosecution by the US Do. J, Canadian CB and the EC. Producers from the US, Germany, Switzerland, Netherlands, Austria and France agreed to fix prices and allocate sales in the global citric acid market. The firms created an elaborate and vigilant system to police the behaviours of the cartel members, sharing monthly sales figures and measuring each firm’s production against its quota down to a tenth of a decimal point. The cartel accounted for 75 -85% of sales in North America and Western Europe. Developing Countries imported a total of $400 million worth of citric acid over the five years of conspiracy. Taking a conservative estimate of a 20% price increase, the resulting overcharge totals $ 67 million 23

Bromine The Bromine cartel was established between Great Lakes Chemical of US and Dead Bromine The Bromine cartel was established between Great Lakes Chemical of US and Dead Sea Bromine of Israel. The two producers colluded to fix the prices of TBBA, DECA and 100% methyl bromide between 1995 and 1998. The cartel was prosecuted by the US, Do. J for price fixing behaviour in the US market. But as the cartel was later investigated by the EC and the two firms have a joint venture in the Middle East, it is assumed that the cartel and its effects were international in scope. Israel and the US are the main sites of production. Annual global sales of bromine totaled $800 million in the late 1990 s, two-thirds of which was by members of the cartel. Over the four years’ of conspiracy, developing countries imported approximately $59 million of bromine resulting in an overcharge to these countries to the tune of $8 million. 24

Seamless Steel Tubes Often referred to in trade as Oil Country Tubular Goods (OCTG) Seamless Steel Tubes Often referred to in trade as Oil Country Tubular Goods (OCTG) and are used in oil gas prospecting and transportation. The cartel was busted by the EC in December 1999, and fined $ 99 million for its illegal actions between 1990 and 1995. It comprised eight steel producers who operated under the title of ‘European-Japanese Club’ and reached an agreement to refrain from selling in the home markets of other members of the cartel, for the purpose of reducing competition in their respective domestic markets. EC confined its penalties relating to harm in Europe only. The imports to developing countries totaled $13. 08 billion and assuming a 10% higher price charged than competitive price, the overcharge equalled to $1. 19 billion. 25

Graphite Electrodes The graphite electrodes cartel to fix prices and allocate market shares worldwide Graphite Electrodes The graphite electrodes cartel to fix prices and allocate market shares worldwide was established in 1992 and busted in 1997. The cartel was investigated by a number of competition authorities and prosecuted in the US and Canada. The main members of the cartel were headquartered in the US, Japan and Germany but production was global. Global sales over the entire period of the conspiracy totaled $ 7 billion. Developing countries imported $3. 14 billion of graphite electrodes during the period of conspiracy. Overcharge to developing country purchasers of graphite electrodes based on a 45% price increase is $975 million 26

Lysine cartel began in 1992 and ended in 1995. Five producers from the US, Lysine cartel began in 1992 and ended in 1995. Five producers from the US, Japan and Korea fixed prices, allocate sales worldwide and monitored quota. The cartel was prosecuted by the US Do. J and the EC for its effects on their respective markets, but its effects is expected to have been felt worldwide. 95% of the market was estimated to have been controlled by the five cartel members. Developing countries imported a substantial $470 million of lysine over the period of the conspiracy. The OECD estimates a 10% price increase. Using this estimate, the overcharge to the developing countries amount to $ 43 million 27

Way forward • Capacity building and sustained competition advocacy and public awareness programmes • Way forward • Capacity building and sustained competition advocacy and public awareness programmes • International co-operation • Benefits from UNCTAD, ICN, OECD, World Bank Institute • Developing countries to balance between social welfare measures and benefits that could arise out of effective implementation of competition law and policy • Review old legislations, government policies and academic syllabi 28

Thank you manas@jsalaw. com 29 Thank you [email protected] com 29