Less rhetoric, more restraint required in “cartel crackdown”

Hard-core cartels should be distinguished from beneficial cooperation. Flickr
The recent settlement of a class action against cardboard manufacturers, Visy and Amcor, has been reported as providing a further boost to the “crackdown” on cartels in Australia.

Unfortunately, coverage of this kind is simplistic and masks the host of difficult policy, legal and practical issues associated with effective regulation of cartels in Australia and around the world.

Cartel definition

First, there is a problem of terminology and definition. The language of “cartels”, coupled with colourful analogies such as “cancer” and “theft” favoured by politicians and enforcers, may be helpful in securing headlines.

However, it tends to obscure the fact that a “cartel” in this context in essence involves collaboration between competitors. Such collaborations can take many forms.

Some collaborations, like joint ventures in the technology or resource sectors, offer significant economic benefits, driving investment and innovation that would not otherwise be possible.

Some collaborations involving collective negotiation provide for a more level playing field in dealings by small business with their larger customers or suppliers.

Other collaborations may be tacit and involve the behaviour that is currently the focus of attention in the banking sector – so-called “price signalling”. Such behaviour is likely to be ambiguous in its purposes and effects. As many in the legal and business community have pointed out, the government’s proposed reforms deal poorly with the ambiguity.

The challenge for lawmakers is to ensure that so-called ‘hard core’ cartels – secret and damaging conspiracies amongst powerful businesses – are sufficiently distinguished from other forms of beneficial cooperation amongst competitors. Laws that are over-reaching and chill legitimate welfare-enhancing business activity are detrimental. They are not in the interests of Australian businesses and consumers.

Cartel statistics

Second, there is a problem of detection and measurement. There are few hard facts available about the extent of cartel activity affecting the Australian economy and the degree of economic harm that such activity has caused. Overseas research tells us that cartels last on average for five to six years. They impose a “mark up” on prices of anywhere between 5 and 50%. Only one in six or seven cartels is detected.

The methodology employed in producing such figures is contested. Their applicability in the Australian context is also problematic.

The ACCC’s enforcement record in this field is not all that telling either. There has been only a handful of major cases brought over the last 35 years. The Visy/Amcor cartel case is the most well-known. But there have been others in the airline, air-conditioning, fire protection, vitamins and express freight industries. The majority of cases have been brought against small to medium size businesses. And on average the penalties (most of which have been negotiated by the ACCC) fall far below the statutory maximum.

The much touted penalty of $36M imposed on Visy is an outlier (and is considerably below international standards in any event). The median corporate penalty between 2000 and 2009 was around $800,000, less than one tenth of the statutory maximum of $10 million which then applied.

Cartel sanctions

Third, there is a problem of sanctions. In 2009 the ACCC finally succeeded in its longstanding campaign to see criminal sanctions introduced for serious forms of cartel conduct. However, the case for criminalising this type of conduct is yet to be tested fully in Australia. The case was built on three principal platforms. Each of these is unstable.

The first is that criminal sanctions, and jail time especially, are necessary to adequately deter business people from engaging in this type of conduct. But this assumes such people are aware of the sanctions available, think it likely they will be caught, consider that, if caught, the ACCC or DPP will prosecute them, and view the likely result as a sentence to a term of imprisonment.

Such assumptions are counter to a large body of research in the behavioural sciences. Such research indicates that individual decision-making about compliance with the law is affected by a range of dispositional, normative and situational factors that dilute the potency of criminal sanctions as a deterrent.

Second, criminalisation advocates argue that cartel conduct is immoral and so should attract the level of social disapproval that other established forms of criminal activity attract. But the moral basis for criminal censure of cartel behaviour remains uncertain and is a matter of consensus predominantly amongst competition law enforcers.

A large scale survey of the Australian public conducted in 2010 by the University of Melbourne Cartel Project suggests that lay people are not as strident in their condemnation of business colluders. Of the 1300 respondents, less than half thought that price fixing should be a criminal offence and less than 20% thought that it was conduct for which the responsible individuals should go to jail.

Thirdly, in making the case for criminalisation, proponents have said repeatedly that Australia is falling behind international best practice, pointing to the US in particular. The US may well represent the gold standard in criminal anti-cartel enforcement methods. But those methods are underpinned by a legal system and culture that differs in many ways from ours. The US system stacks most of the cards in the favour of the prosecutor and against the defendant and provides minimal opportunity for the judge to umpire. It is not a system we are likely to import.

Outside of the US, in the UK for example, there has been little criminal enforcement action to speak of.

Cartel compensation

Fourth, there is the problem of compensation. So far, almost all of the attention in Australian anti-cartel enforcement has been on public sanctions pursued in proceedings brought by the ACCC. It is ACCC enforcement that generally brings cartel activity to light and is therefore a necessary precondition in most cases to compensation claims by victims. However, after detection, there are serious questions as to whether private enforcement is being unreasonably obfuscated.

The Visy/Amcor case is a case in point. In that case, the claimants had to prove the existence of the cartel despite both Amcor and Visy having admitted it to the ACCC, fight the ACCC for access to documents to assist in proving their case, and overcome a series of interlocutory disputes and judicial delays in deciding procedural points, all at enormous expense and in the face of significant risk and uncertainty.

For those concerned that the settlement may “open the floodgates” to such claims, a reality check is needed. This is only the second cartel class action that has reached resolution to date and, in light of the obstacles, there is little basis for thinking many more will follow.

Where to from here?

There are no quick or easy answers to these questions. It is time that opinion leaders and policy shapers abandon the rhetoric and tackle the complex issues raised by the cartel ‘problem’ in a more balanced and constructive way. Such an approach may sacrifice headlines but is guaranteed to make for better law, policy and practice in regulating cartel conduct in Australia.

Associate Professor Caron Beaton-Wells is the head of The Cartel Project at the University of Melbourne www.cartel.law.unimelb.edu.au and co-author of Australian Cartel Regulation: Law, Policy and Practice in an International Context, 2011 (with Brent Fisse)