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Distributive Effects in the Competition Policy in the Framework of Administrative Enforcement

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Russian competition enforcement is among the most active in the world [Avdasheva, Kryuchkova, 2013]. At the same time the Russian competition agency has recently been criticized for the predominance of quantitative outcomes over qualitative (extremely high number of cases, many of which, after analysis, are irrelevant to competition law protection) and for weak economic analysis [Girgenson, Numerova, 2012]. One recent trend of the Russian competition policy development is an enthusiasm about ex-ante norms of practice in certain industries. During the last few years, industry-specific rules were developed. They include e.g. the Law On the Fundamentals of the Regulation of Trade (2009), a Code of Fair Practices in the Groceries-Suppliers Contracts (2012), the Automakers’ Code of Conduct (2013). Along with sector-specific laws commercial practices (as well as detailed regulations of contract terms) they became a typical part of behavioural remedies in merger cases as well as in decisions on abuse of dominance. The number of cases on abuse of dominance (thousands annually) is decreasing only because of the increasing number of warning letters that have been issued by the competition authorities (between one and two thousand annually).

All these specific features of the Russian competition law enforcement are closely interrelated. Under administrative procedural rules in force, a significant share of cases is inspired by the complaints of alleged victims of anti-competitive practices. Such a large number of cases acts as a limit on resources:   expertise time and efforts dedicated to the given case (investigation) seem to be insufficient. Under limited resources standards of evidence become weaker in investigation. Weak standards of evidence in cases generate lousy practices not only for other competition agencies (the regional divisions of the Federal Antitrust Service are sufficiently independent from the Central Office) but also for courts and for the companies. Abundance of cases under investigation inspires the efforts of FAS to prevent typical causes for investigations. The same abundance of investigations explains the support of Russian companies to ‘ex-ante antitrust risk management’ by adopting industry codes of fair practices, company’s commercial codes of practices etc.

One of the main factors contributing to all these developments is an enormous attention to the distributive effects of competition rules enforcement and compliance in contrast to the effects on coordination, incentives and allocation of resources. I use distributive effects or distributive efficiency standards as a tool first introduced by Lerner [Lerner, 1944]. Distributive efficiency means that decreasing marginal utility of money redistribution from rich to poor leads to an increase in social welfare. Until recently, the concept of distributive efficiency was rarely recognized by antitrust economics. However this is not always the case. Not only the classics of law and economics mentioned the importance of income transfers to which social welfare is not neutral [Tullock, 1967]. In an early paper on the welfare standards of merger review Williamson explicitly mentioned distributive effects of mergers under analysis [Williamson, 1968].  In the institutional economics literature, distributive effects play a more important role. That role includes the explanation of the emergence of institutions as rules on coordination by conflicts on issues of distribution [Knight, 1992]. An interesting point is that the difference between the two main welfare standards of antitrust enforcement [Blair, Sokol, 2012; Hovenkamp, 2012] relates to the issue of distributive effects. By applying a consumer surplus standard we believe implicitly or explicitly that the extra-unit of money consumers pocket will contribute more to social welfare than that in the hands of sellers.

The discussion on the distributive effect and its relation to the effects of a practice (and correspondingly, the prohibition of the practice) on the allocation of resources, the motivation of market participants and productive efficiency go far beyond this short note.  However, the distinction between distributive effects on the one hand and effects on coordination, motivation and allocation, on the other, helps us to understand the specific motives of the Russian competition enforcement. One of the most popular slogans of the competition authority is ‘Our goal is to protect the weak party in the contract’ – and this goal perfectly corresponds to the ideal of ‘distributive efficiency’. If we take a closer look at the enormous number of investigations of the Russian competition authority, we will find that an overwhelming part is about investigations on abuse of dominance [Avdasheva, Kryuchkova, 2013], among which, cases on exploitative types of abuse have the main share.

Looking at the Codes of Fair Practices approved by the Russian competition authority, we immediately mention that the key is to understand the difference between the approaches that the Codes take. The most evident example is the contrast between the Grocery Supply Code of Practice (UK) and the corresponding provision of the Law on Fundamentals of the Regulation of Trade (RF). In general, GSCOP attempts to introduce rules prescribing how to conclude and enforce contracts at first place, by this it aims to prevent abuse of bargaining power of large groceries. In turn, Russian law focuses mostly on distributive issues. That is one of the reasons why many provisions of GSCOP are not presented in the Russian law (no changes of supply procedure, no retrospective variation of contract terms – the rules which are trying to prevent abuse of bargaining advantage ex post). At the same time the provisions of the Russian law put enormous attention to distributive issues (no wholesale quantity discount exceeding 10%; no ‘pure’ up-front slotting allowances as well as ‘disguised’ slotting allowances).

The special attention to distributive effects among the values of the Russian competition policy is explained not by ideological reasons only (although they are of course important). Historically, the protection of competition was merged with the protection of consumers in the activity of FAS. Many Russian experts cannot distinguish between the principles of these two policy areas as yet. The FAS is responsible for the enforcement of sector-specific rules on non-discriminatory access to network facilities. We cannot deny the fact that enforcement of access for new entrants in these industries takes into account the impact on allocative efficiency (through competition) On the other hand, the immediate goal in practice is to protect new entrants from a discriminatory use of essential facilities with no regard to ‘pure economic efficiency’ standards. By the way, that is the reason why the economic analysis of the ‘non-discrimination’ ideal in terms of antitrust raises so many questions [Pittman, 2004].

Being honest, many concepts that imply the importance of distributive effects are borrowed by Russians from European competition law. The most important example is excessive (in term of the Russian competition law – high monopolistic) pricing. We can argue that the ban on excessive pricing potentially increases allocative but not distributive efficiency. However we cannot deny the fact that distributive effects of the provisions on excessive pricing take place. It is also difficult to deny that every action to prevent excessive prices would be supported because of its distributive effects at the first place. Considering all these issues, we would recommend Russian FAS to follow European practice and to apply provisions on excessive pricing very cautiously (and very rarely). However, I expect that the immediate reaction would be the following:  distributive effects will be ignored in a developed market economy but not in a transition economy with heavy structural imbalances.

The same story also occurs with the Codes of Fair Practice for automakers and groceries. The very idea of developing a Code was borrowed from abroad. Having understood the difference between the requirements of the UK GSCOP and its Russian equivalent, we can hardly insist that the only goal of the industry-specific requirement in the UK was to improve the allocative efficiency in the foods and groceries market. Guiding documents state clearly that their goal is that “large retailers treat their main suppliers lawfully and fairly”. In other words, distributive effects are also important here.

Enforcement of competition rules in the framework of administrative law brings additional complications. It is easier to proclaim the protection of competition but not the competitors when a developed private enforcement is in place. We can simply presume here that huge distributive losses due to monopolization (abuse of dominance) practice will incentivize private lawsuits. It is more difficult to reject the evidence on distributive effects under the system of administrative competition rules enforcement. Even if we are giving much  less weight to private complaints in comparison to what competition authorities in Russia do now, it is impossible to refuse considering complaints at all. In turn, complaints are inevitably caused by actions with a high impact on private pay-offs and on distribution.

Finally, from a ‘pure economic’ point of view, it is doubtful that distributive effects never affect competition. It is definitely not so in the conflicts between incumbents and entrants in regulated network industries. Of course, we can argue that other policies than competition policy should take these effects into account. But, how to explain why competition policy should not? Global experience of competition policy is not so straightforward. Taking this logic further, if the implementation of the Code of Fair practice for the industry is competition policy, why behavioural remedies on prices for Russian companies is not competition policy?

The argument on the negative impact of excessive antitrust enforcement towards a practice that has large distributive effects but at the same time has important effects on incentives and allocation is more understandable. Russian experts articulated the danger of bans on socially beneficial practices (in the sense, proposed for instance by [Bork, 1978]) many times. The typical reply of competition authorities is easy to foresee: ‘Large business has much more options to adapt to every regulation with lower cost that small customers (including households and industrial customers) do, and you can be right only in the case when distributive effects are neglected. Please explain why we should neglect them completely’.

It is evident that the emphasis on distributive effects of competition law enforcement made by Russian FAS is beyond all possible justifications. The problem is however caused by the fact that it is not so easy to find clear guidance for interpreting distributive effects of anti-competitive practice and even more importantly how to interpret the impact of distributive effects on competition.

To conclude, in order to develop advice for the Russian competition authority the right question to be answered is the following on: where should we draw a line between the combination of allocative effects on the one hand and distributive effects on the other, such that will make the practice eligible for competition policy intervention and that will make the practice definitely non-eligible?  This is the main issue, and international experience is extremely important on the recent stage of the development of the Russian competition policy.

 

References

 

Avdasheva S., Kryuchkova P Law and Economics of Antitrust Enforcement in Russia. HSE Working Paper Series, PA ‘Public Administration’, 2013.

Blair R.D., Sokol D.D. Welfare Standards in US and EU Antitrust Enforcement. Fordham Law Review, 2012, vol. 81. No 5, pp.2497-2541.

Bork R. The Antitrust Paradox. New York, Free Press, 1978.

Girgenson I., Numerova A. A Reform of Russian Competition Law: It’s a Long Way from Brussels to Moscow.  Journal of European Competition Law and Practice, 2012, Vol. 3, No. 3, pp. 293-299.

Hovenkamp H. Implementing Antitrust’s Welfare Goals. Fordham Law Review, 2012, vol. 81, No 5, pp. 2471-2496.

Knight J. Institutions and Social Conflicts. Cambridge University Press, 1992.

Lerner A. The Economics of Control: Principle of Welfare Economics. New York, MacMillan, 1944.

Pittman R. Russian Railways Reform and the Problem of Non-discriminatory Access to InfrastructureAnnals of Public and Cooperative Economics, 2004, vol. 75, No 2, pp. 167-192.

Tullock G. The Welfare Costs of Tariffs, Monopolization and Theft. Western Economic Journal, 1967, vol. 5, No 3, pp.224-252.

Williamson O.E. Economics of an Antitrust Defense: the Welfare Trade-Off. American Economic Review, 1968, vol, 58, No. 1, pp. 18-36.

Are penalties for cartels excessive and, if they are, should we be concerned?

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There is a growing concern among some scholars and practitioners that penalties for companies participating in a cartel have become excessive in the sense that they are more than sufficient to deter and may be causing social harm. Here I will argue that, even if there is validity to those claims, it is imprudent to begin lightening up on enforcement.

There is no doubt that “cartel fines from public enforcement … are staggering”[1] and that, when a cartel operates in a jurisdiction allowing for private customer damages, the amounts can be vastly higher than staggering, shall we say gargantuan? Of course, the incremental profits earned through collusion may as well be staggering or even gargantuan. Thus, any assessment of whether penalties exceed or fall short of what is necessary to deter cartel formation requires a careful comparison of penalties with those profits while taking account of the likelihood of cartel members ever paying those penalties.

Recently, some studies have pursued such an analysis. Using a traditional approach that compares the profit from colluding with the expected penalty (which equals the penalty multiplied by the probability of discovery and conviction), Connor and Lande (2012) argue that penalties are in the under-deterrence region.[2]  However, a different conclusion is reached in Allain, Boyer, and Ponssard (2011) who take issue with the method and estimated overcharges used in the Connor-Lande study and conclude that “the current level of EU cartel fines is adequately dissuasive.”[3] Consistent with this methodological critique, my own analysis suggests that penalties are significantly more deterrent than is generally recognized because they accumulate over time and cartel formation is deterred as long as cartel stability is undermined which is a less stringent criterion than making collusion unprofitable. [4]

Due to the lack of good data, all of these findings are tentative but my task at present is not to critique these analyses. Indeed, for the sake of argument, let me suppose that current enforcement policy exceeds that necessary to make collusion unprofitable. Even given that, it is not clear that we should be any less aggressive in our enforcement.

Even if penalties are at a level to make collusion unprofitable, are managers aware of this fact?

The global vitamin cartel was one of the big early successes in this new regime of enforcement. Hoffman LaRoche was given the largest fine in U.S. history of $500 million and private customer damages were more than twice as large. In spite of imposing fines and damages in the billions of dollars, these penalties fell short of the incremental profits from colluding in the U.S. market.[5] Collusion was ex post profitable! Of course, those penalties were levied around 2000 and, since that time, some jurisdictions – in particular, the EU – have increased their penalties and, as mentioned above, some studies find them at levels that make cartel formation ex ante unattractive. But this begs a question: What do managers believe? Do managers believe that the vitamins case is representative? Or are their beliefs more in line with the findings in Allain et al (2011)? Managers may witness cartels being discovered and prosecuted in other markets and hear about the fines and damages (as well as possibly prison sentences) but they surely have rather limited information about the illicit profits (and how it compares to those penalties) and especially about the likelihood of having to pay those penalties if they chose to collude. We can calculate the expected profit from forming a cartel – and that is relevant information – but it isn’t clear that is the calculation going on in the head of a manager when he is contemplating forming a cartel. For that reason, it would seem unwise to lighten up on enforcement based on calculations comparing collusive profit with expected penalties. It is prudent to wait until there is convincing evidence that cartels are actually being deterred. While it is admittedly difficult to collect such evidence, it is not impossible and doing so is necessary before stemming the tide of intensified enforcement.[6]

Even if penalties are at a level to make average cartels unprofitable, what about above average cartels?

The most vociferous calls that penalties are excessive relate to the European Commission’s 2006 Fine Guidelines, which is the focus of the analysis in Allain et al (2011). (And, with private customer damages developing in the EU, over-enforcement claims are sure to be accentuated.) Here, it is critically important to recognize that fines have been shown to be sufficient to deter collusion based on the average cartel overcharge. EC fines are tied to revenue in the affected markets and not to incremental profits or customer losses, so the penalty does not scale up with the overcharge. If we take these estimates on face value, the only cartels that will form are those with abnormally high overcharges which are the ones imposing the largest losses on consumers. This is hardly reassuring.

The problem here resides in the penalty formula not being proportional to the additional profits from colluding. While I have not engaged in a systematic analysis of competition authority practices, my sense is that an EC-style revenue-based formula is typical. That is the case in the U.S. as well. Though U.S. Sentencing Guidelines have a maximum of “not more than the greater of twice the gross gain or twice the gross loss,” apparently that sort of calculation is not standard practice when the U.S. Department of Justice sets a fine.[7]

That cartel profits are not taken account of in setting or negotiating fines is a criticism of both the competition authority and the body that sets their budget. One defense of this practice is that it is too costly to calculate those profits. That does not seem credible. There are many plaintiffs who perform exactly that exercise for much smaller markets involving much smaller sums. If a plaintiff can engage in a cost effective calculation of the impact of collusion on profits when hundreds of thousands of dollars of claims are at stake then a competition authority should be able to do so when millions of dollars of fines are at stake. A second defense is that a competition authority has limited resources and it is better for it to use those resources to develop additional cases. That is a valid point but then the argument should be made to increase the competition authority’s budget so they can engage in the proper setting of fines. We must remember that the ultimate goal is not to convict and penalize cartels but rather to deter their formation, and that requires tying penalties to illicit profits. This point is worth emphasizing as competition authorities may attach too much weight to disabling cartels relative to deterring cartels. But let me not dwell on that point as it will be the focus of a future post on this blog.

Even if penalties exceed what is necessary to make collusion unprofitable, where’s the harm?

As all cartels are harmful, on first glance it would seem misplaced to worry that penalties exceed levels sufficient to deter. But, as has been noted by others, there are at least two sources of social harm from excessive enforcement. First, firms may avoid legitimate activities out of fear that their behavior would be misconstrued as collusive. Second, at least in the case of the U.S. where there is an overly active litigation scene, customers may pursue unjustified cases with the hope that the prospect of legal fees,  discovery, and the small chance of having to pay large customer damages will induce settlement by innocent suppliers.

I’m skeptical of these concerns, at least for the U.S. The standards for proving guilt for a Section 1 violation have always been high. Furthermore, Twombly has raised the bar as now discovery can be avoided unless the plaintiff can plead “facts that are suggestive enough to render a §1 conspiracy plausible.”[8] At present, it is quite difficult for a plaintiff to get past the pleading stage without some reasonably convincing evidence that there was collusion and it was of the unlawful variety.

Even with that skepticism, the first concern should not be dismissed out of hand. I could imagine a scenario in which companies may choose not to form a trade association or a research joint venture because of the possible misinterpretation that their actions have the intent to coordinate prices and allocate markets. But again, show me the evidence! We have clear-cut evidence of cartels continuing to form and causing harm to consumers. If the claim is that enforcement is harming companies not engaged in collusive practices then evidence is needed of these deterred legitimate activities before enforcement is weakened.

Another potential harm that, to my knowledge, is generally not mentioned is that senior management may put in place costly mechanisms to monitor lower level employees from colluding. Even if enforcement is so severe that collusion is not in shareholders’ interests, employees may still collude in order to improve their perceived performance within the firm. Senior management may then need to spend resources to detect and deter lower level employees from participating in a cartel, just as it might put in place monitoring systems to detect and deter accounting fraud and embezzlement.

On this point, AkzoNobel – a notorious cartelist involved in at least nine cartels in the last 15 years – issued a Competition Law Compliance Manual to its employees in 2008. CEO Hans Wijers states in no uncertain terms: “The Board of Management considers compliance with competition law to be more than a legal requirement; it is core to AkzoNobel’s value of integrity and responsibility. … Disciplinary action will be taken against any employee who violates competition law. … In this area we are a ‘zero tolerance company’.” This is all well and good but are they investing resources to monitor employees and not just warn them? If not then perhaps senior management is not so concerned with their employees colluding which suggests that penalties are not excessive and causing harm.

In conclusion, before making enforcement less aggressive, I would say: Show me the deterrence of cartels. Show me the harm from over-deterrence. Until that is done, competition authorities should continue to “keep the pedal to the metal” and maintain an enforcement policy that is “fast and furious.”

 


[1] George L. Paul, “Leniency Programs and Growing Fines: The Risk of Over Deterrence, White & Case, Winter 2009; p. 1.

[2] John M. Connor and Robert H. Lande, “Cartels as Rational Business Strategy: Crime Pays,” Cardozo Law Review, 34 (2012), 427-90.

[3] Marie-Laure Allain, Marcel Boyer, and Jean-Pierre Ponssard, “The Determination of Optimal Fines in Cartel Cases: Theory and Practice,”Concurrences – Competition Law Journal 4-2011, 32-40; p. 32. However, for a different view, see Emmanuel Combe and Constance Monnier, “Fines Against Hard Core Cartels in Europe: The Myth of Overenforcement,” Antitrust Bulletin, 56 (2011), 235-76.

[4] Joseph E. Harrington, Jr. “Penalties and the Deterrence of Unlawful Collusion,” The Wharton School, University of Pennsylvania, November 2013 (Economics Letters, forthcoming).

[5] John M. Connor, “The Great Global Vitamins Conspiracy: Sanctions and Deterrence,” American Antitrust Institute, Working Paper 06-02, February 2006. The vitamins cartel was even more profitable in the EU and other countries.

[6] One method for assessing the impact of a new policy on the latent population of cartels is devised in Joseph E. Harrington, Jr. and Myong-Hun Chang, “Modelling the Birth and Death of Cartels with an Application to Evaluating Antitrust Policy,” Journal of the European Economic Association, 7 (2009), 1400-35.

[7] This statement is based on Gregory J. Werden (U.S. Department of Justice) in an email correspondence with Yannis Katsoulacas, December 4, 2013.

[8] Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) at 556.

Australia’s Proposed Supermarket Code: UK Lessons Missed

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Australia’s retail grocery sector is among the, if not the, most highly concentrated in the world. The two vertically integrated chains, Coles and Woolworths, enjoy 70% of sales in dry grocery goods and 50% of sales in fresh grocery goods. Self-evidently, this has implications for competition in the sector and in turn for the prices, range and quality of grocery goods available to consumers. The power of the chains affects the business strategies, if not survival, of other grocery retailers and businesses participating in the supply chain directly and indirectly, including primary producers. More generally, supermarket power affects many facets of Australian society, including the social fabric and sustainability of communities, employment opportunities, the environment, public health and animal welfare.

Not surprisingly then, the retail grocery sector and the strategies of Coles and Woolworths, in particular, attract a high degree of public interest, regulatory scrutiny and political attention. Consistent with a global trend, the sector has been the subject of a large number of public inquiries and investigations in recent years. A wide ranging Australian Competition and Consumer Commission (ACCC) investigation into allegations of unfair trading and anti-competitive conduct by the supermarket chains is under way. Concerns relate to various supermarket strategies including with respect to acquisitions, supply chain management, private labels, pricing, advertising and packaging and diversification into other sectors such as petrol, liquor and financial services.

Several cases concerning alleged breaches of Australia’s competition and consumer law, the Competition and Consumer Act 2010, have been litigated over the last decade, with mixed results, and a range of law reform proposals have been debated and some introduced including in the areas of merger review, misuse of market power, collective bargaining by small businesses, price discrimination, codes of conduct and unit pricing. A forthcoming independent review of competition policy and law has the retail grocery sector squarely in its sights.  In response to the public controversy, and in anticipation of the forthcoming review, in late 2013 the supermarket chains and supplier representatives released a draft of a new voluntary code of conduct intended to self-regulate supermarket-supplier relations.

The proposed code of conduct is intended to govern key aspects of the commercial relationship between supermarkets and their suppliers and, on its face, addresses many of the concerns ventilated by suppliers in recent years concerning their terms of trade with Coles and Woolworths.  Terms must be documented clearly in a grocery supply agreement and must specify certain matters such as quantity and quality requirements, duration of the agreement and the circumstances in which the agreement may be terminated. Agreements may not be varied retrospectively. Certain terms are not allowed such as terms requiring supplier payments for shrinkage, wastage, stocking or shelf positioning. There are limits on the circumstances in which products may be delisted and suppliers are not to be required to predominantly fund promotion costs.

The code should also offer some comfort to suppliers in relation to the protection of their confidential information and intellectual property in competing with supermarket own brands.  Suppliers have been concerned about retailers copying the branding and packaging of their products, giving rise to a more general concern that in the longer term suppliers will be disincentivised from investing in product innovation by such practices. Under the code retailers are not to infringe supplier intellectual property rights in developing own brands and will not use confidential information provided by suppliers relating to product development, pricing and promotion for purposes other than those for which it is disclosed.

Some have expressed cynicism about the supermarkets’ motivations in agreeing to the code, describing it as aimed at diluting political concerns and heading off any attempt to introduce more draconian remedial measures such as market capping and divestiture. Others have made the obvious point that the code will not alter the underlying economics of supermarket-supplier relations; nor will it weaken the market power of the majors or strengthen the bargaining position of primary producers, many of whom do not deal directly with the supermarkets.  It will also not address concerns associated with the major supermarkets’ leveraging their power in the grocery retail market into other sectors such as liquor, fuel and financial services.

The code is not intended as and will not be a substitute for the laws that deal with anti-competitive acquisitions, misuse of substantial market power and unconscionable conduct. The ACCC will continue to monitor supermarket acquisitions and its investigation into potential breaches of the prohibitions on misuse of market power and unconscionable conduct by the supermarkets is ongoing. The Chairman has promised an outcome to that investigation in 2014. The government’s forthcoming review of competition law will also examine the effectiveness of the existing legal prohibitions and remedies in addressing the issues besetting the sector. No doubt the outcome of the ACCC’s investigation will be highly influential in the attitude taken by the review committee to these issues and to calls for legal reform.

Others have expressed cautious optimism about this latest development in the ongoing debate about supermarket-supplier relations in Australia, pointing out that the code will act as a useful adjunct to the existing statutory framework. It will provide suppliers with greater transparency and certainty and access to a range of dispute resolution processes, supported by the threat of ACCC intervention and formal enforcement proceedings where disputes prove intractable. Such provisions and processes may shift at least some bargaining power in favour of suppliers, even if they do nothing to alter the basic structure of the grocery retail market and its high degree of concentration in particular.

That said, there are significant limitations on the code’s likely effectiveness. These limitations are highlighted by comparison with the model that has been adopted in the United Kingdom in response to similar concerns that have arisen in Australia in relation to the grocery retail sector.

First, the consequences for breach of the Australian code can include declarations, injunctions, damages and a range of remedial orders that could require contractual terms to be changed and payments to be refunded. However, the law does not provide for penalties to be imposed for breach of the code. This is a serious weakness. The potency of any form of regulation is significantly enhanced by, if not ultimately depends on, the credible prospect of escalation to severe sanctions in the face of non-compliance.

Contrast the position in the UK.  A groceries supply code was introduced in that country in 2013 (see Grocery Code Adjudicator Act 2013), administered by an independent statutory officer – the Groceries Code Adjudicator. Consequences for breach of the code include a maximum penalty of 1% of UK turnover from the retailer. This would equate to a maximum financial penalty ranging from £10m to £500m (based on 2012 annual accounts) depending on the UK turnover of the retailer concerned. What is more, where the code is found to have been breached the costs of investigation can be recovered from the retailer.

Second, in Australia, again unlike in the UK, there is to be no dedicated independent agency or officer charged with educating the sector about the code, providing guidance on its interpretation (such as the meaning of dealing in “good faith”), monitoring and reporting on compliance and mediating or arbitrating disputes. While some of these roles will be played by the ACCC, the code appears to envisage that educative and monitoring functions will be performed primarily by a committee of an industry roundtable. All of the dispute resolution processes prescribed by the code are to be conducted privately or with a mediator/arbitrator appointed by the parties. The ACCC becomes involved only where those processes are unsuccessful and/or there is a unilateral complaint to the Commission about breach of the code.

By contrast in the UK, funded by a levy paid by the largest supermarkets, the Groceries Code Adjudicator (Christine Tacon) is tasked with all of the functions that the Australian code proposes be performed by an industry committee. In addition, the UK Adjudicator has substantial investigatory and enforcement powers, backed by the threat of imposing substantial sanctions subject to Parliamentary approval. Other tools at the Adjudicator’s disposal include the power to make recommendations about what a retailer should do in order to comply with the code and the power to require that a retailer publish information about an investigation. These are significant ‘naming and shaming’ tools that, in practice, may be sufficient to achieve suitable outcomes without having to impose financial penalties. The Adjudicator has said she regards penalties as ‘the last resort’.

Importantly too, Tacon – a person of long-standing experience in the food production and retail sectors – sees it as a key aspect of her mission to build trust between her office and the industry and amongst industry participants themselves. This will be critical in enabling her to perform her role under the code and ultimately in potentially changing the behaviour that has prompted its introduction. While it is easy to harbour some scepticism about the prospects of such trust-building initiatives, early reports appear to be positive on this front. Tacon has met with the retailers’ code compliance officers and supplier representatives who apparently have responded positively. She reports that already there is a change in behaviour by the retailers with suppliers indicating that they are enjoying greater flexibility over where they source packaging and reasons for delisting are being set out more clearly with reasonable notice being given.

Whether or not the Australian code succeeds in repairing the broken trust between suppliers and the major supermarkets in Australia remains very much to be seen. However failure to emulate some of the strengths of the UK system makes it hard to shrug off the cynicism that justifiably accompanies most attempts at self-regulation. It may also explain in part why groups such as the National Farmers’ Federation withdrew from the code negotiating table and why their Victorian counterpart have dismissed the code as ‘pure spin’; whereas in the UK the new adjudicative scheme enjoys widespread (even if qualified) support, including from the National Farmers Union.

If penalties are to be available for breach of the Australian code it will require an amendment to the provisions of the Competition and Consumer Act 2010 that govern codes of conduct. Similarly, legislative action would be required to establish an independent adjudicator, either as part of or separate from the ACCC.  Bruce Billson MP, the Minister for Small Business, who is overseeing the government’s forthcoming review of competition law has said that if the code, as currently proposed, proves ineffective then steps will be taken to give it more ‘teeth’.

However, waiting for the (arguably) inevitable failure of the code before introducing more stringent measures does not commend itself as sensible policy. Nor is it likely to engender confidence amongst those in the Australian supplier community who have been crying out for government to take robust action in relation to supermarket power and behaviour for years. If anything, the ‘wait and see’ strategy will only reinforce the perception that the supermarkets wield as much political power as they do market power.

 

Caron Beaton-Wells was the co-convenor of a major public symposium on supermarket power, held by the University of Melbourne and Monash University, in August 2013. The UK Groceries Code Adjudicator participated in the symposium by video. For information about the symposium, including Christine Tacon’s video, see http://www.law.unimelb.edu.au/clen/news-and-events/supermarket-power-symposium/flushcache/1/showdraft/1.

New edited book: Integrating Public and Private Enforcement of Competition Law – Implications for Courts and Agencies (Oxford/Portland: Hart Publishing, 2014)

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Philip Lowe and Mel Marquis, eds., Integrating Public and Private Enforcement of Competition Law – Implications for Courts and Agencies (Oxford/Portland: Hart Publishing, 2014)

Many readers of this blog will be familiar with a long-running string of books on competition law published by Hart, the European Competition Law Annual series, which I edit with Philip Lowe. The most recent edition of the Annual was published this week. The book can be ordered at the following webpage:

 http://www.hartpub.co.uk/BookDetails.aspx?ISBN=9781849463515

At the moment, it is available in hardback and it will also be published as an e-book.  

The book contains papers presented at the 16th Annual EU Competition Law and Policy Workshop, which I organized with Philip at the European University Institute in Florence on 17-18 June 2011. On that occasion the group discussed the use of private rights of action before national courts, and the prospects for legislation and soft law initiatives at the level of the EU. My original plan to time the publication of the Annual so that it followed the Commission’s publication of a legislative proposal was jeopardized when certain controversies about the scope, contours and ‘horizontality’ of the package held up that process. The book nearly went ahead without the possibility to react to any such proposal. But – just this side of the point of no return, the Commission courteously stepped forward with its combined hard law/soft law package in June 2013. This permitted me to update the text to make sure it reflected, so far as time would allow, the Commission’s ideas and recommendations. Of course, the final version of the Directive remains to be seen – in May 2014, as we understand, assuming no nasty surprises pop up. When we look back, not everything in the book will seem prophetic. But the collection nevertheless provides useful perspectives – none of the chapters is tied to any particular configuration of measures.     

In addition to the analysis of EU-level efforts to stimulate and steer the development of private enforcement, the experiences of various national jurisdictions are discussed. The privileged jurisdictions are those that we have often focused on in this series: many within Europe and North America. The experience of the United States in matters of private enforcement was considered, unsurprisingly, to be a crucial point of reference. Of course, this leaves whole continents and ‘culture zones’ unexamined, which is a pity. But other works, perhaps in the spirit of the collected country reports edited by Bert Foer and Jonathan Cuneo (International Handbook on Private Enforcement of Competition Law, Edward Elgar, 2010), will hopefully serve that function.

AG Opinion in Kone: EU ‘Effectiveness’ Law Wades Further into National Civil Litigation

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I recently stressed that the EU Damages Directive will not be a normative island; it will interact with a swelling body of preliminary rulings under Article 267 TFEU (‘Perchance to Dream’, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2371338). One case to watch closely will be Case C-557/12, Kone and others. On 30 January 2014, Advocate General Kokott delivered her Opinion. If the ECJ follows her, the judgment will affect antitrust litigation before national courts in Europe because (i) it will harmonize certain principles governing damages actions, and (ii) it will imply greater potential exposure to damages relative to a contrary outcome.

The question submitted by Austria’s Supreme Court, the Oberster Gerichtshof, was this:

“Is Article 101 TFEU […] to be interpreted as meaning that any person may claim from members of a cartel damages also for the loss which he has been caused by a person not party to the cartel who, benefiting from the protection of the increased market prices, raises his own prices for his products more than he would have done without the cartel (umbrella pricing), so that the principle of effectiveness laid down by the Court of Justice of the European Union requires grant of a claim under national law?”

So: can a plaintiff recover damages from cartelists for an overcharge even if it is not imposed by the defendants but by a non-colluder that charged a higher ‘but-for’ price attributable indirectly to the collusion. But behind this question is something of a Kompetenz-Kompetenz issue: is the scope of liability for the umbrella price a matter to be determined by national law, subject to the EU law principles of equivalence and effectiveness? Or does the issue belong to EU law, in which case Member States are pre-empted from adopting any ipso facto rule that bars recovery of losses occasioned by such umbrella prices.

The case arose from the well-known ‘elevators cartel’, where the European Commission itself sued on behalf of the EU (see Case C-199/11 Otis, not yet reported). In Kone, the claimant is ÖBB Infrastruktur AG. This rail sector company had purchased elevators from a non-infringing producer but had allegedly paid an overcharge of around 1.8 million euros for them. The latter sum represented an appreciable share of a combined overcharge on the order of 8 million euros. Suing in Austrian court, ÖBB Infrastruktur sought to recover that combined sum from the four infringing firms (Kone, Otis, Schindler and ThyssenKrupp).

Under Austrian law, on grounds of foreseeability or remoteness, a cartelist cannot be held liable for the umbrella prices of a non-infringer.

AG Kokott finds that the question of principle regarding the possibility to seek damages in umbrella pricing scenarios is to be governed by principles of EU law. While national law (i.e., absent harmonizing legislation at EU level) determines procedural details such as which courts have jurisdiction to hear claims, which time-limits apply and how evidence is to be adduced, Kokott explained that the Courage/Manfredi/effet utile principle that ‘any individual’ (which literally extends beyond direct/indirect purchasers) is entitled to seek compensation for losses if causality is shown flows fundamentally from Article 101 TFEU, which of course has direct effect (paras. 23-25, 28, 32). Likewise, under paragraphs 95-96 of Manfredi it is EU law that determines that a victim of anticompetitive conduct is entitled to claim damnum emergens and lucrum cessans damages, plus interest.

It is clear from legal literature that ‘constitutive conditions’ of the EU right to antitrust damages, such as the expansive standing rule mentioned above (‘any individual’), are defined by EU law (see Komninos, EC Private Antitrust Enforcement, Hart, 2008, p. 192). Kokott offers the following rationale with regard to why the question of whether to allow plaintiffs to claim losses for umbrella pricing is a matter of EU and not national law:

“If the legal criteria by which national courts assess the civil liability which those participating in an agreement, decision or concerted practice within the meaning of [Article 101] owe to certain persons for certain kinds of loss were to differ fundamentally from one Member State to another, there would be a risk of economic operators being treated differently. This would not only run counter to the fundamental objective of European competition law, which is to create framework conditions that are as uniform as possible for all undertakings active on the internal market (‘level playing field’, it would also be an invitation to ‘forum shopping’.” (para. 29; emphasis in original; footnote omitted)

Kokott omits the fact that, due to striking differences in national procedures from one Member State to the next, forum shopping in Europe is already a reality. The UK, Germany and the Netherlands attract litigation where companies can afford to manage litigation there and where jurisdiction is established, while in many more Member States antitrust litigation remains sporadic at best. Whatever form the Damages Directive takes, it seems unlikely to alter that state of affairs fundamentally.

If EU law, i.e., Article 101, is the law that decides the issue, what are the conditions in which compensation for umbrella pricing may be recovered? Kokott’s gambit here is to redefine causation as a concept of EU law. She takes as her substantive model the requirement of a ‘sufficiently direct causal nexus’ under Article 340 TFEU (non-contractual liability of the EU). A criterion of sufficiency does not necessarily mean that a defendant’s conduct must be the sole cause of injury, but it must be at least a contributing factor (para. 36). When companies fix prices or share markets, it cannot be assumed that the umbrella pricing of a third party will interrupt the causal chain; to the contrary, it may well be that the overcharge imposed by the third party, and hence the loss suffered by its customer, is ‘entirely foreseeable’ (para. 37) and may for that matter be quite desirable from the standpoint of the cartelists (who might otherwise lose a larger share of sales). This is particularly so where, as in Kone, the cartel covers a significant proportion (but not the ‘lion’s share’) of the relevant market. “The stronger the cartel’s position is on the market concerned,” Kokott says, “the more likely it is that the cartel will have a significant impact on pricing levels on that market as a whole and the less scope there is for an operator not party to the cartel to have any meaningful influence of his own over the market price.” (para. 47; footnotes omitted)

Kokott therefore has no doubt that at least in cases such as this, it is legitimate to claim that losses from umbrella pricing are foreseeable. The infringing companies advanced further arguments to the effect that such losses fell outside the protective scope (Schutzzweck) of Article 101, and that there could be no civil liability because there was no ‘context of unlawfulness’ (para. 54). I pass over this discussion to save space (see paras. 61-69 for Kokott’s rejection of these submissions; and on the futility of excluding plaintiff classes based on the ‘protective scope’ of Article 101, see Komninos, especially p. 193).

Let us come to three additional claims of the infringing companies. First, they contended that any losses sustained as a result of such pricing were unintentional. Second, compensation for umbrella pricing is not a means for a plaintiff to recover unlawful profits. Third and inevitably: allowing recovery of damages for prices charged by a third party is tantamount to allowing recovery of punitive damages.

None of these arguments found much sympathy. The first would not be a ground for avoiding liability under standard tort principles. Indeed, many discussions about foreseeability in tort law would be irrelevant if subjective intent to cause injury were a decisive criterion. This is not altered by the fact that under a particular tort regime intention or negligence may be part of the culpability element in determining fault. So, for example, a successful government compulsion argument might completely exonerate an undertaking from allegations of an infringement, in which case there would be no question of recovering damages. But if misfeasance is established, a defendant will normally be responsible for its foreseeable consequences. To take a famous example, it would not matter that the plaintiff has a ‘thin skull’ (which does not of itself break the chain of causality). But Kokott does not quite adopt the latter line of reasoning. She opines instead that, since losses arising from umbrella pricing are foreseeable, the cartelists effectively ‘condone’ them and from this it can be deduced that they have acted negligently or recklessly (para. 75).

The second argument presupposes that only unlawful profits gained by the defendants can be recovered. This flimsy proposition was also rejected, as it sought to confuse claims for compensation with claims for restitution: “A claim for compensation is primarily concerned not with recovering from the injuring party the excess that has accrued to him but with awarding to the injured party reparation for the loss he has suffered as a result of the injuring party’s unlawful conduct.” (para. 78; footnote omitted)

With regard to the punitive damages argument, Kokott pointed out that (whatever national law may dictate) EU law ‘does not in principle’ prohibit such damages; this follows from paragraphs 92 and 93 of Manfredi. But more fundamentally she rejects the analogy drawn to punitive damages. When a plaintiff recovers losses due to umbrella pricing (and its other losses), it is being made whole; this has nothing to do with punitive damages, which, if permitted by national law, enable a plaintiff to recover more than she has lost.

In concluding, the Advocate General circumscribed her Opinion as follows:

“The solution which I have proposed does not mean that cartel members will automatically and in every individual case be required to provide compensation to customers of undertakings not party to a cartel […]. Rather, it will always be necessary to carry out a comprehensive assessment of all the relevant circumstances in order to determine whether the cartel in the case in question has given rise to umbrella pricing. Shifting the umbrella pricing issue from the level of pure theory to that of the production of evidence seems to me to be the best way of contributing to the effective enforcement of the European competition rules […].” (paras 84-85)

With regard to the production of evidence, plaintiffs might come forward with studies or other evidence showing that umbrella prices have in fact been adopted on the market. In accordance with standard EU law principles, the reliability of such evidence would be assessed by national courts. (See footnote 49)

Kone will be an important case. Kokott favors a centralization of the issue of the boundaries of liability and of the substantive approach to causation. Her reasoning will not be welcomed, to put it mildly, by those wary of the subversion of national civil procedure (the souverainistes), or by those who attach greater value to localized experimentation and interjurisdictional competition. But as regards the scope of liability, plaintiffs in Europe already have to deal with poor access to justice. The Directive will be only a partial solution (see the ‘Perchance to Dream’ paper mentioned above). Plaintiffs should not be made worse off by restrictive liability rules such as the contested Austrian rule. To preclude them from claiming harm from umbrella pricing would be quite out of line with the ‘polluter pays’ principle that should guide private antitrust litigation. As Kokott states: “[i]t would be eminently unfair to extend unilateral preferential treatment to the cartel members, the very persons who are guilty of serious infringements of the competition rules, in the form of a categorical exclusion of umbrella pricing from the ambit of their civil liability, particularly since this would […] create inappropriate incentives from the point of view of the effective enforcement of the competition rules.” (para. 87)