The Dangers Of Cartels.

Syedur Rahman and Nicola Sharp consider two recent cartel cases
and examine why businesses must take care not to become involved in such
behaviour.

At first glance, the worlds of modelling and furniture
making would appear to have little in common.

Yet they are linked by two recent decisions from the
Competition and Markets Authority (CMA). Both decisions indicate the extent to
which anyone in business has to be careful to avoid becoming involved in
illegal cartel activity – and the costs that can be incurred if you do.

In the furniture case, the CMA issued two decisions;
formally finding three companies guilty of illegal cartel conduct and imposing
fines that totalled £2.8 million. The decision came after two of the companies,
Thomas Armstrong (Timber) and Hoffman
Thornwood, had admitted market sharing, coordinating prices, rigging bids and
exchanging commercially sensitive information. The third company, BHK (UK), had
admitted involvement in cartel activity soon after the CMA began its
investigation. It was not fined because it was the first to come forward and so
benefited from the CMA’s leniency policy.

In the second case, five model agencies and their trade
association were fined a total of more than £1.5 million. The CMA found that
the agencies and the association, the Association of Model Agents (AMA),
colluded instead of competing on prices for modelling services.

The parties regularly shared information regarding
particular customers, the prices they were likely to charge and negotiations
that had been conducted. As a result, there were instances where the agencies
had agreed on minimum prices or pricing scales.

As well as this, the AMA and the agencies regularly sent out
emails to other agencies encouraging them to turn down prices suggested by
customers because they were too low. These emails, which were known as “AMA
Alerts’’, were viewed by the CMA as an attempt to fix prices across the modelling
industry.

This activity was happening while discussions were being
carried out with a variety of customers; including well-known clothing
companies, online fashion retailers and high-profile consumer goods companies.

Argument

There is an argument that companies facing such accusations
could make about transparency in the market place. Many companies accused of
cartel behaviour have countered with the opinion that they are simply making
sure that they have got their pricing right.

They can only do this, they argue, by knowing what their
competitors charge and by making sure they are not undercutting it or charging
too much. If they undercut their competitors, they argue, they are driving
prices down in the market, which harms everyone in it. And if they look to
charge too much, their business will suffer as potential customers will do
business with their rivals, whose prices are lower.

These arguments could be made in any industry: furniture
making, modelling and every other business where customers are charged for
goods or services that could be provided by more than one company.

Enterprise Act 2002

But these arguments count for nothing when it comes to
competition law. The Enterprise Act 2002 created the offence of cartel
behaviour in UK law. Cartel behaviour includes price fixing, bid rigging,
market sharing arrangements and deliberate restrictions on production or supply
of commodities.

It is not hard to see how the cases mentioned above fall
foul of this law. The maximum penalty for the offence is five years in prison.
People have been jailed for the offence.

Directors and employees involved in such activity can be
held personally criminally liable for such an offence. This should serve as a
stiff warning to those in business to seek legal advice at the earliest
opportunity if they have any concerns that they may be breaching the Enterprise
Act.

Immunity

In the case of the furniture makers, we touched on the
leniency policy that led to BHK (UK) not being fined.

The Enterprise Act contains provision to grant criminal
immunity to individuals “for the purposes of the investigation or prosecution
of offences’’. Putting it bluntly, if you report your cartel behaviour and
offer to co-operate with the authorities, the CMA may agree not to prosecute
you.

In such circumstances, you have to proceed carefully. Taking
advice from solicitors well-versed in this law and experienced in dealing with
the relevant authorities is the only way for someone to achieve the best
possible outcome if they are embroiled in a cartel situation.

The prosecution of cartel behaviour is not something unique
to the UK. It is viewed by the authorities as a global phenomenon and can often
involve enforcement agencies from numerous countries investigating behaviour that
spans continents.

There is also the possibility that customers – for example
the clients of the model agencies mentioned earlier – may make huge civil
claims for damages against those found guilty of cartel behaviour.

There are, therefore, a number of reasons why a company
should seek legal help if it believes it has committed cartel behaviour. What
should also be emphasised, however, is the importance of preventing such
behaviour in the first place.

Companies should be introducing compliance procedures to
eliminate the potential for cartel behaviour. The risk of cartel activity can
be “designed out’’ of the way a company works, ensuring it will not face the
problems we outlined in the furniture and modelling industries.

Only by taking such a planned approach can a company be
certain that it will not be the subject of accusations that it is part of a
cartel.

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