Developing Ukrainian Competition Law: the International Price-Fixing Angle
International price-fixing cartels-why should Ukraine worry?
The fact that the Brussels based European Commission has imposed over EUR 9 billion in fines for price-fixing in just four years may well not impress many executives or lawyers in Kiev. What they may well ask is what do huge EU fines for price-fixing have to do with them? There is a very good answer to that question. Both Ukrainian businesses and the Ukrainian state can be the victims of heavy overcharges by international price-fixing cartels. Worse still there is evidence that international price-fixing cartels deliberately target states such as Ukraine with higher overcharges than they impose in the US and the EU. The reason is simple. Price-fixers fear that if they impose too high overcharges which look very different from prices in a competitive market not longer after there will be a knock on the door from the FBI executing a Federal search warrant or from a EU official with a European Commission warrant backed up by the French CRS riot police or the London Special Branch. This healthy dose of fear of US and EU regulators is underpinned by the reality that both regulators systematically survey the markets for suspect price movements. This surveillance operation together with the resources, formidable powers of investigation that are available to the US and EU authorities and the prospect of heavy fines makes even the most powerful group of price fixers think carefully about how far they impose overcharges without being noticed.
By contrast in states which do not have those powers and resources and with no major reputation for deploying such powers the price-fixers feel they can breathe easily. There is now a considerable body of evidence that international price-fixers outside the EU and the US impose much more significant overcharges.
The thesis of this paper is that states like Ukraine should not have to put up with being targeted with heavy overcharges by international cartels. Furthermore, given that international price-fixing is largely confined to foreigners it should be possible to build a political consensus to deal with this problem. The incentive to do so is further reinforced by the consideration that the Ukrainian state and business community are probably already owed at least several hundred million dollars in damages as a result of the activities of international price-fixing cartels operating on Ukrainian territory.
This paper argues that Ukraine should seriously consider developing a special regime to deal with international price-fixing cases both in terms of public enforcement and civil damages actions.
A further advantage of taking this international approach is that in dealing with international cartels experience will be gained on all sides in dealing with complex and heavyweight competition investigations and political consensus can be built in favour of applying the domestic regime with greater vigour in the future.
Price-fixing: the “supreme evil of antitrust”
Most competition or, in American legal parlance, antitrust issues are usually balanced between pro-competition and anti-competitive effects, which often are finely balanced and require extensive argumentation. However, price-fixing between competitors is one of the areas of competition law where there is little nuance. In almost all cases price-fixing in such cases suppresses competition; transfers wealth to the price-fixers; suppresses c onsumer welfare and innovation across entire market sectors.
It is not surprising therefore that the US Supreme Court Justice Scalia in the Trinko case referred to price-fixing as the “supreme evil of antitrust”1.
The difficulty for competition regulators, even those as formidable as the Antitrust Division of the US Department of Justice, was that cartels take place in secret and were very difficult to prove. In oligopolistic markets, where cartels frequently occurred, it was easy for defence lawyers to argue the absence of direct evidence of collusion that defendants were merely responding to the price movements of the market leader2.
The leniency revolution
In the early 1990s a number of lawyers and economists working in the Antitrust Division in Washington drawing upon analysis from game theory developed a Corporate Leniency Programme to induce cartelists to come in and confess. The core idea was that if cartelists were given a clear and guaranteed offer of immunity from fines and gaol sentences, combined with the prospect of high fines and vigorous enforcement, then they would come in and confess.
The Corporate Leniency Programme was launched in 1993. After a couple of years the programme really began to take off. From a situation prior to 1990 where very few cartels were ever uncovered and fines were very low, the Antitrust Division has now been able to impose fines running into hundreds of millions of dollars. It has so far imposed fines of over USD 10 million on 56 firms. In some cases the fines, for instance British Airways and Hoffman La Roche, have been to the tune of USD 300 million and USD 500 million, respectively. In all the Division has collected over USD 4 billion in fines since 1997 and is now obtaining significantly lengthy gaol sentences on individual executives3.
In some respects the European experience is even more impressive. The European Commission started later. It only adopted a true leniency programme in 2002. Yet in the last four years it has imposed in all over EUR 9 billion in fines. Some of the fines for price-fixing against firms such as Saint Gobain in the Car Glass Cartel for EUR 896 million, E.ON for EUR 553 million for the Gas Cartel and Thyssen for EUR 479 million for the Escalators and Elevators Cartel have been very painful for the companies involved4.
Leniency: the international angle
The success of the European Union and American competition regulators in uncovering cartels has triggered a wave of competition agencies across the world adopting some form of leniency programme, including Ukraine.
The difficulty, however, for many states is that an effective anti-cartel policy is not just about having a modern leniency programme. A leniency programme only works if it has a context of vigorous enforcement; sufficient resources to challenge price fixing combines and an effective and speedy system of judicial supervision. For example, at the beginning of the last decade Ireland had an extremely modern leniency programme, but no resources to prosecute cartels. It is no surprise, therefore, that at that time it received very few, if any leniency applications5.
While Ukraine faces some of the problems that affected Ireland6 it does now have some significant incentives to create a much more vigorous approach to prosecuting cartels.
The core point, overlooked in Ukraine and in a number of other transition economies, is that the major international price-fixing cases busted by the US Antitrust Division or the European Commission also have a major impact on their economies. Transparency International’s most recent Global Corruption Report suggests that the estimated losses due to price-fixing by international cartels could exceed the total volume of development aid given to developing and transition countries7. Given the weak antitrust laws and enforcement capabilities in many developing and transition countries, international cartels were found to have significant higher overcharges in Latin America and Asia than in North America and European Union8. This view is reinforced by the evidence stemming from research into the Vitamins cartel. The Vitamins cartel was the largest ever to be uncovered. Hoffman La Roche, BASF and other major vitamin manufacturers over a decade fixed the global price of virtually all types of vitamins across the globe. Uncovered by the US Antitrust Division, the cartelist paid over a billion dollars in fines to the US government and another billion euros in fines to the European Commission (in addition they paid a further couple of billion dollars in treble damages in the US).
However, research into the operation of the cartel established that because of the threat of severe penalties in the US and the EU, the overcharging by the price-fixing cartelists was quite modest in those territories.
The overcharges were significantly higher in states without an effective anti-cartel regime9. This results in the strange situation that while the EU and US are modestly affected by overcharging they have the means to recover enormous sums in fines and damages from price-fixers. Meanwhile those states who are affected to a far greater degree than the EU and US usually recover very little if anything from the same cartelists.
States like Ukraine are vulnerable to their consumers, businesses and their state services being hit by significant overcharges by international price-fixing cartels. Yet there are almost no parallel public enforcement measures taken against such cartels, nor private actions being brought.
Focusing on international price-fixing cartels
There is a strong argument for saying that the Antimonopoly Committee (AMCU) should seek support for focusing on the damage that Ukraine suffers from international price-fixing cartels.
This would involve putting the resources and procedures in place to be able to prosecute such cartels locally. To a significant extent the AMCU would be able to piggy back on the work of the US Antitrust Division or the European Commission supplemented by its own local investigations.
This would necessarily involve investigating major Western businesses operating in Ukraine. To operate effectively against such businesses the AMCU would need to consider whether its procedures need overhauling. Such factors as a streamlined investigative procedure, including world class leniency procedure, would have to be considered as part of any reform programme. Equally there is a strong argument to run cartel prosecutions before an expert judge. An expert competition judge will find it easier to deal with complex economic evidence. In addition, open court hearings where defendant price-fixers face the full glare of publicity would be likely to encourage most price-fixers to settle rather than fight such proceedings where they are caught red handed by the evidence from a leniency application.
Ukraine could also seek to develop a specialist competition court where consumers, businesses and the state could sue price-fixers in international cartels for damages.
A further development would be to consider dealing with such international price-fixing cases in cooperation with other non-EU European states. There is already a precedent for doing so via the Energy Community Treaty which applies the EU’s energy acquis to European states outside the EU. The advantage of developing a Competition Community Treaty is that its connection with the EU would allow Ukraine and other states to become part of the information system of the association of the European Commission and EU Member States competition regulators, known as the European Competition Network. This would allow Ukrainian regulators to receive information to prosecute their cases and coordinate raids against suspect cartelists. This would significantly reinforce the deterrent effect of competition agencies such as the AMCU and reduce the likelihood that cartelists would specifically target Ukraine with very high overcharges.
International cartels — the entry point to effective antitrust enforcement
By creating an effective international competition enforcement regime and developing a Competition Community Treaty system, the AMCU, local competition law practitioners and the state bureaucracy would be able to develop the most modern techniques in dealing with complex antitrust investigations which could be later applied domestically. In addition, the success of the international competition regime would build political support for a more vigorous domestic regime.
At the very least, focusing on the damage inflicted by international price-fixing cartels would protect Ukrainian consumers, businesses and the state from very heavy overcharging and prove that Ukraine is no soft touch.
Professor Riley would like it be known that there is a Competition Law Scholars Forum Call for Papers for a London Workshop in September 2010. The Call for Papers focuses upon cartels and leniency. The workshop will be held at City Law School in central London on 2 September and any Ukrainian academic or practising lawyers with an interest in the subject are invited to submit an abstract to him on a proposed topic. For further details see www.clasf.org.
1 Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004).
2 The point was underlined in Wood Pulp where the European Commission sought to rely solely on economic evidence to prove the cartel and lost the case because of the plausible alternative explanation derived from economic theory that the defendants were merely responding non-collusively to the price movements of the market leader. See Joined Cases C-89/85, C-104/85, C-114/85, C-116/85, C-117/85 and C-125/85 to C-129/85 Ahlstr?m Osakeyhti? and Others v Commission  ECR I-1307.
3 Hammond, Recent Developments, Trends and Milestones in the Antitrust Divisions Criminal Antitrust Enforcement Programme (2008) ABA Antitrust Section Annual Spring Meeting, GW Marriott Hotel, Washington DC.
4 Cartel Statistics, Situation as of 19 May 2010, European Commission, Brussels.
5 Happily the Irish Competition Authority later obtained additional resources and powers which during the past decade have seen a number of notable successes against price-fixing cartels.
6 OECD, Ukrainian Competition Law, 2008 Policy Brief, OECD, Paris.
7 GCR (2009) xxvii, Transparency International Washington DC.
8 ibid Chapter 3, Mehta, Corruption in Market Competition: Collusion and Cartels, 27-28.
9 Clark & Evenett, The Deterrent Effect of National Anti-Cartel Laws: Evidence from the International Vitamins Cartel, Working Paper (2002).