Criminal Sanctions for Competition Law: A Review of Irish Experience.

 Patrick Massey

 Director Compecon Limited.

Address to Competition Law Scholars Forum:

Decentralised Enforcement: From the Idea to the Reality

Glasgow Graduate School of Law, Thursday April 22^nd.

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Introduction.

The move to decentralised enforcement represents the most radical overhaul of EU competition law in over forty years. One of the interesting aspects of the new regime is the fact that, while national competition authorities will have power to apply EU competition law, they will do so using existing national enforcement procedures. Ireland’s competition legislation provides that breaches of competition law constitute criminal offences and managers and directors of offending firms may face imprisonment and/or fines for such practices. The present paper argues that jail sentences are an essential deterrent in the case of cartels, which are the most serious form of anti-competitive behaviour and the one that inflicts most harm on consumers. Arguably, therefore, dealing with cartels should be the main priority of competition agencies. It is not clear that the reform of EU competition law which comes into effect on 1^st May will be effective in rooting out serious anti-competitive behaviour, particularly cartels.

The new EU enforcement regime represents a welcome step forward. It continues the shift towards a competition law regime which is consistent with economic theory, a process which began with the Green Paper on Vertical Restraints.[1] This is quite important because competition law essentially attempts to implement economic policy, i.e. the promotion of competition, by legal means. As Whish observed:

“Competition law is about economics and economic behaviour, and it is essential for anyone involved in the subject – whether as a lawyer, regulator, civil servant or in any other capacity – to have some knowledge of the economics concerned”[2]

Undoubtedly the success enjoyed by the US authorities in the latter half of the 1990s in exposing and penalising international cartels in a wide range of industries such as lysine, vitamins, citric acid, and graphic electrodes highlighted serious shortcomings in the efficacy of the EU regime, namely that it allowed serious anti-competitive behaviour such as cartels to go largely undetected, a point recognised by Commissioner Monti who stated that:

‘We are not in a position to be active on our own initiative - to go on the ground and make investigations and dawn raids and identify the really threatening hard-core cartels.’[3]

The new regime, by freeing up resources at Commission level and enabling the Commission and the national authorities to pool their resources, has the potential to greatly increase efforts to crack down on cartels which are almost universally regarded by economists as the most serious form of anti-competitive behaviour. Indeed comments by Commissioner Monti and senior commission officials indicate that stepping up enforcement efforts against cartels is a major aim behind the reform programme.

Main Features of Irish Competition Legislation.

Unlike the EU Commission and competition agencies in virtually all of the other Member States, the Irish Competition Authority cannot rule on whether undertakings have breached competition legislation and cannot impose fines. The Irish Constitution reserves such functions to the Courts. In effect Ireland’s enforcement regime is more akin to the US than the EU. Although Irish competition law has provided for criminal penalties for breaches of competition law since mid 1996, it must be said, the results to date have been disappointing.

 Article 34.1 of the Irish Constitution gives the Courts sole and exclusive power (subject to Article 37) to administer justice. In the McDonald case[4] Kenny J. identified the characteristic features of a judicial function as generally involving a dispute as to violation of the law, and the imposition of a legal liability or criminal penalty which the State is obliged to enforce. Article 37 allows certain bodies other than courts to perform limited types of judicial function. Limited means that the effects of the exercise of such a function should not be unduly serious in their impact. The Supreme Court has defined a non-limited power as one that:

“…is calculated ordinarily to affect in the most profound and far reaching way the lives, liberties, fortunes and reputations of those against whom [it is] exercised.”[5]

 The net effect of these provisions is that fines may only be imposed on individuals and undertakings convicted of a criminal offence by the Courts. The Competition Authority’s function, therefore, is limited to investigating alleged anti-competitive behaviour. It cannot act as judge, jury and prosecutor. The power to prosecute any criminal offence on indictment is reserved to the Director of Public Prosecutions (DPP), an independent statutory officer.[6] Thus, where the Authority decides that an offence merits prosecution it can submit a file on the case to the DPP. The Authority may prosecute less serious offences at district court level and it may also bring civil proceedings to obtain an injunction and/or declaration that behaviour constitutes a breach of the Act. The Authority may not sue for damages.

The Criminal Offences.

Section 6 of the Competition Act, 2002, provides that undertakings who enter into, or implement an agreement, or make or implement a decision by an association of undertakings, or engage in a concerted practice that is prohibited by section 4(1) or Article 81(1) are committing an offence subject to criminal sanctions. Section 7 creates the offences of breaching section 5(1) or Article 82. The 2002 Act thus provides that breaches of Article 81 and 82 constitute criminal offences. As with breaches of national law the Act also enables the Authority the power to bring civil proceedings for breaches of Article 81 and 82. 

The Act distinguishes between what are commonly referred to as, “hard-core” competition offences and all other competition offences. Thus Section 6(2) provides that:

“In proceedings for an offence under subsection (1), it shall be presumed that an agreement between competing undertakings, a decision made by an association of competing undertakings or a concerted practice engaged in by competing undertakings the purpose of which is to-

(a)    directly or indirectly fix prices with respect to the provision of goods or services to persons not party to the agreement, decision or concerted practice,

(b)   limit output or sales, or

(c)    share markets or customers,

has as its object the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State or within the common market, as the case may be, unless the defendant proves otherwise.”

Subsection (7) defines “competing undertakings” as undertakings that do or can provide goods or services to the same applicable market, that is, goods or services which are regarded by customers as interchangeable or substitutable in terms of their characteristics, price and intended use or purpose. 

In the case of offences under Sections 6 and 7, other than those specified under section 6(2), a firm may be fined up to €3,000 on summary conviction, and up to €4m, or 10% of turnover, whichever is greater, on conviction on indictment. Under section 8(6) a director, manager or other similar officer or person who purports to act in such capacity, who consents to or authorises an undertaking to contravene section 6 or 7 is guilty of an offence as well and may be subject to similar penalties. Under Section 6(7), a director or key decision maker[7] of an undertaking found to have committed an offence under section 6 or 7 is presumed to have consented to such behaviour unless they can prove otherwise.

In the case of the section 6(2) offences, Section 8 provides that an individual:

(i)                  On summary conviction may be fined a maximum €3,000 and/or imprisonment for up to six months; and

(ii)                On conviction on indictment may be fined up to €4m or 10% of turnover and/or imprisoned for a maximum of five years.[8]

The provision of a maximum prison term of five years means that individual company executives suspected of engaging in such behaviour may be arrested and held for questioning for up to 12 hours. This addresses a major weakness in the previous legislation where there was no effective power to question individuals.

Why Price Fixers Should Go to Prison.

Undoubtedly one of the more interesting aspects of the Irish legislation was the decision to introduce criminal penalties for individual company executives as well as for companies. Critics have argued that criminal penalties, particularly prison sentences are inappropriate for competition law offences. It is also claimed that the burden of proof required in criminal cases makes breaches of competition law impossible to prove. The lack of successful criminal prosecutions is cited in support of this contention. 

Many areas of competition law constitute grey areas. In the case of cartels, however, there is virtually no room for debate regarding their object and effect. Cartels essentially involve managers and employees of rival businesses secretly agreeing to raise prices to their customers for the goods and services that they supply. The US Department of Justice estimates that a cartel will raise prices on average by ten per cent.[9] They are a conspiracy to defraud consumers and to deny them the benefits that should result from firms having to compete with one another to win customers or as the then head of the Antitrust Division put it less subtly “they are the equivalent of theft by well-dressed thieves.”[10]

Cartels are organised and operated by individuals and companies who calculate that they stand to earn substantial profits from such behaviour. The people behind cartels are not petty crooks; they are clever sophisticated business executives who have risen to senior management positions in their companies. Given that firms can earn substantial profits from engaging in cartels, serious penalties are required to deter such behaviour.[11]

Fining only the companies involved is unlikely to be effective in preventing cartels. It is the individual human persons who run companies who actually make the decisions to engage in cartels. Such individual frequently stand to gain directly from such decisions in the form of higher salaries, performance related bonuses, enhanced promotion prospects and other benefits as a result of higher profits generated from participating in a cartel. If only the company is subject to a fine for engaging in a cartel, it is the shareholders rather than the executives responsible who are penalised.[12] Fining the company in those circumstances will therefore have little deterrent effect. In fact such fines may simply be regarded as a “cost of doing business”.

There are other limitations on the effectiveness of fines on companies for engaging in cartels. US research indicates that, in the case of almost half of all firms found to have engaged in cartels, imposing the optimal level of fines would have bankrupted them. Such an outcome is clearly undesirable, not least because it would effectively penalise all of the firm’s employees, the vast majority of whom are not responsible for price fixing.

Effective deterrence of cartels requires that the individuals within a company responsible for the decision to participate in a cartel must face penalties. Fines for such individuals are one option. The obvious difficulty with fines is that the individual’s employer may reimburse them, thus negating the deterrent effect. In New Zealand consideration has been give to the idea of making it illegal for firms to reimburse employees fined for competition law breaches.[13] This in turn raises the question of how such measures can be enforced. In contrast, however, individuals cannot pass a prison sentence on to their company.

There are other reasons for believing that imprisonment is likely to provide a strong deterrent to cartel behaviour. Unlike many violent crimes, participation in a cartel is not the result of a moment’s passion or transient rage. Unlike many criminal actions undertaken in the heat of the moment, those contemplating participating in a cartel are far more likely to weigh the benefits from such participation against the consequences of getting caught and, therefore, take the threat of imprisonment into account. In addition, imprisonment may be a particularly strong deterrent for white collar individuals. The DTI reported that 83% of UK competition law experts favoured the introduction of criminal penalties for cartels.[14]

Until the mid 1970s, price fixing was classed as a misdemeanor in the US. Over the past decade, the Department of Justice has successfully prosecuted an average of thirty five people a year. The Department’s cartel immunity programme has resulted in many firms coming forward, admitting their participation in cartels and providing evidence against their co-conspirators. In recent years, roughly fifty percent of immunity applications received under the programme, involved cartels that were previously unknown to the authorities, suggesting that increased prosecutions of individual executives for participating in cartels are having a deterrent effect.

Of course if one accepts the argument that jail sentences for executives are necessary to deter cartel behaviour, then the lack of such penalties both at EU level and in many Member States suggests that EU competition law is unlikely to be wholly effective in deterring such behaviour. Undoubtedly that constitutes a serious problem. Joshua identified the lack of criminal sanctions as a serious weakness of EU competition law.[15] Obviously an EU criminal code is some way away and it is unrealistic to expect that such provisions would be put in place to deal with cartels. Regulation/1/2003 by providing for the decentralised application of EU competition law and allowing Member States to apply it using their existing national law procedures means that individual Member States may impose such sanctions. Of course having criminal sanctions in only some Member States inevitably limits the deterrent effect of such sanctions. A potentially more fundamental problem is that the Commission is likely to want to grab the biggest cases for itself and prevent those Member States that wish to from imposing criminal sanctions. As Joshua warned:

“The perverse result in Britain [and Ireland] would be that double-glazing salesmen fixing prices in the local pub could go to jail, while the biggest pan-European cartels would at most risk administrative fines on companies. Clear, justice would fall into disrepute quickly if the smallest cases were the ones receiving the stiffest penalties.”[16]

Civil Fines Not the Answer.

The Irish Competition Authority has sought powers to impose fines on parties for breaches of Articles 81 and 82.[17] Such calls have been rejected by the Government. As already argued fining companies will not deter cartel behaviour. There are, however, strong grounds for not giving the Authority power to impose fines in non-cartel cases. From an economics perspective, penalties in the form of fines are inappropriate in such cases, regardless of whether such fines are civil or criminal. Second there are fundamental problems with having the same agency acting as judge, jury and prosecutor; although this is the regime which operates both at EU level and in other Member States.

Non-price vertical restraints, such as exclusive distribution agreements, cannot automatically be described as either pro or anti-competitive, and a detailed analysis based on the individual market circumstances in each case is required. Similarly, it is widely recognised that there is frequently a fine line between aggressive competition and abuse of dominance. As there is no consensus as to what does and does not constitute anti-competitive behaviour in such cases, penalties would appear to be inappropriate. Where investigations show such practices are anti-competitive, requiring firms to discontinue such behaviour would appear to be an appropriate remedy. Penalties may be appropriate where a firm subsequently breaches such an order.

Even where there is a high degree of unanimity that behaviour may be harmful, it is not clear that fines constitute an effective deterrent. Take predatory pricing as an example. A firm engaging in predatory pricing is prepared to incur substantial short-term losses in order to eliminate a rival. It seems unlikely that the prospect of the additional cost of a possible fine would deter it from engaging in such behaviour. Most economic models of successful predation involve firms that are engaged in various different markets so that successful predation in one market allows to firm to earn excess profits not only in that market but in others as well, i.e. – it depends on building a successful reputation as a predator. Is it really likely that potential entrants, having seen a dominant firm eliminate a would-be entrant in one market through a predatory strategy, would be encouraged to try their luck by the imposition of a fine on a predator? It would still be in the dominant firm’s interest to establish a reputation for predation even at the risk of a fine. That is not to suggest that criminal sanctions are appropriate in such circumstances. The fact that such behaviour is so difficult to identify with certainty means they would be inappropriate as they would inevitably involve a high risk of false findings of guilt.  

Scherer and Ross point out that penalising firms for abuse of dominance rather than tackling the dominant position itself requires continuous monitoring of dominant firms’ behaviour, if it is to be anything other than an occasional “lightening bolt,”. They argue that:

“It is better…to take once and (one hopes) for all whatever structural actions are needed to restore effective competition and then stand back and let market processes do their job.”[18]

Massey[19] argued that Article 82 should be adjusted to allow for structural adjustment where appropriate, and Regulation 1/03 gives the Commission power to impose such a remedy. Many commentators have observed that the massive fine imposed on Microsoft by the Commission is relatively insignificant, given that company’s massive financial resources. Rather it is the potential for the obligations which the Commission is seeking to impose on Microsoft to allow for effective competition that is the real penalty.

If fines have a deterrent effect, as their proponents would suggest, then, when the dividing line between what is and what is not harmful is unclear, there is a significant likelihood that firms will play safe and avoid competing too aggressively for fear of overstepping that line. In other words they will not only discourage anti-competitive behaviour, but they will also deter firms from competing, which is obviously the opposite of what is intended. Even if it does not actually discourage competitive behaviour, the threat of fines may significantly increase compliance costs for business seeking to ensure that they do not inadvertently step over the line.

In the United States, criminal sanctions only apply to “hard-core” cartel behaviour. Rule of reason matters including monopolisation cases, which are the US equivalent of abuse of dominance, are dealt with by civil actions which do not involve penalties.

In Ireland’s case, a system of civil fines for some offences and criminal penalties for cartel offences would provide poor incentives for the Competition Authority. In setting enforcement priorities the Authority would face a choice between pursuing serious infringements with a very high burden of proof and less serious infringements with a lower burden of proof. Faced with such choices, an agency wishing to be seen to be doing something is likely to channel resources into less serious cases because they have a higher chance of success. Over time this would create a perception that civil penalties were “working,” while criminal ones were not. Pressure to substitute civil for criminal penalties for “hard core” offences would grow, although, as previously argued fining companies is unlikely to deter them from engaging in cartels.

There would appear to be more fundamental grounds for questioning a regime where the same agency investigates, decides and imposes sanctions for breaches of competition law as is the case both at EU level and in most Member States. Inevitably this raises the possibility of wrongful findings of anti-competitive behaviour (false positives). It is extremely difficult for someone closely involved in a matter to view the facts with a dispassionate eye. This is the rationale behind the common law principle that one should not act as prosecutor and as judge and jury. Although, from a common law perspective this appears unfair, the ECJ has rejected the suggestion that this approach is contrary to the rules of natural justice.[20]

The European Commission has, on a number of occasions, made wrongful findings of anti-competitive behaviour. In Wood Pulp,[21] for example, the Court of First instance rejected the Commission’s findings on the grounds that there was insufficient evidence to prove collusion. Similarly, in Airtours the Court found that the economic evidence simply did not support the Commission’s decision that the merger would be anti-competitive.[22] In the UK, where the OFT has power to impose fines, the Competition Appeals Tribunal found fault with the OFT’s decisions in three of the first five appeal cases referred to it.[23] Kolasky has pointed out that, in the US, the FCC, which unlike the antitrust agencies can block mergers without having to go to court, had adopted a lesser standard of proof than would be required by a court.[24] Similarly Kovacic has argued that the Commission has blocked mergers on occasion on the basis of evidence that would be thrown out by a US court.[25] Kobayahsi has shown that the standard and burden of proof required influence the frequency of false positive and false negative errors.[26] This suggests that what is required is a more fundamental reform along the lines suggested by Montag who proposed that responsibility for initial decisions in infringement cases be transferred from the Commission to the Court of First Instance.[27]

Enforcement Must be Credible

Although Ireland has had criminal penalties for breaches of competition law since 1996, the results to date have been extremely poor. Since mid 1996 the Authority has brought a handful of civil actions where it secured undertakings from parties to discontinue certain behaviour. There have been two successful summary prosecutions. Files have been sent to the DPP in four cases but there has not been a successful prosecution on indictment to date. Such results must be set against the fact that the Authority has repeatedly stated that the pursuit of cartels is its top priority.

Until recently the Authority could argue that the poor outcome was due, in large part, to weaknesses in the legislation combined with a lack of resources. The 1996 Act, which first introduced criminal penalties, for example, only permitted the Authority to copy documents located in the course of searches, while the “best evidence” rule normally requires original documents.[28] Similarly the lack of powers to question individuals under the former legislation proved to be another major obstacle to the successful conduct of investigations. In one case where a file was referred to the DPP, the Gardai (police) were requested to carry out a further investigation but they reported that they received “virtually zero cooperation” from the individuals that they interviewed. Many of these difficulties have been addressed by the 2002 Act, although some weaknesses remain, a point which I will return to below.

The Authority’s resource problems reached such a crisis level in 2000 that its Annual Report for that year described it as “barely operational”.[29] A subsequent memo written by the Authority Chairman in March 2002 indicated that because of resource constraints, files recommending criminal prosecutions in cartel cases had lain dormant in the Authority for more than a year.[30] Not surprisingly no successful prosecutions were brought on foot of those investigations.

Although many of the legislative and resource problems have been addressed, the indications to date do not suggest that a dramatic upsurge in enforcement activity is likely. In one case, books of evidence were prepared and charges drafted at the direction of the DPP[31] but, almost two years later, no prosecution has been brought and, in a recent reply to a parliamentary question, the Tanaiste indicated that a criminal prosecution was no longer being pursued.[32] The Authority’s Annual Report for 2003 states that in a full year it expects to produce:

Ø      One full cartel investigation leading to enforcement proceedings; and

Ø      A handful of civil actions.

This is in spite of an increase in staff of 85%, the assignment of two Garda Detective Sergeants to the Authority to assist in cartel investigations and the fact that additional Garda have been made available for participation in searches. The Report also indicates that 85% of complaints received by the Authority were closed without any further investigation.

It must be recognised that tough penalties, such as those contained in the 2002 Act, by themselves, will not deter anti-competitive behaviour, if people believe that there is little likelihood of being caught. The prospect of the Authority bringing one cartel case per year suggests that the likelihood of getting caught for engaging in such behaviour is extremely remote to say the least. Far too much of the Authority’s efforts have been channeled into undertaking industry studies rather than enforcement, which is obviously a great comfort to those engaged in cartels. In enforcement terms its time that the Authority got off the ditch and started delivering results on the pitch.

Problems with the 2002 Act.

The 2002 Act addressed many of the shortcomings that were contained in the Competition (Amendment) Act, 1996. It has strengthened the Authority’s search powers, in particular enabling it to seize original documents. Increasing the penalties for individual executives in cartel cases indicates recognition that such practices cause serious harm to the community at large. It also means that individuals accused of engaging in such behaviour can be detained and questioned by the police for up to 12 hours. Nevertheless some problems remain.

The presumption in section 6(2) of the Competition Act, 2002, that ‘hard-core’ activities have the object of preventing, restricting or distorting competition represents a partial move towards the US position where ‘hard-core’ cartel activities are regarded as illegal per se. Under US law, the prosecution need only prove the existence of a cartel agreement and the defence is precluded from trying to show that such conduct was justified. The position was summarised by the US Supreme Court in Northern Pacific.

“[T]here are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.”[33]

This approach minimises the costs of enforcement and maximises deterrence, while the risk of errors can be reduced by limiting the rule to behaviour that is clearly harmful.[34] The Hilmer Report advanced similar arguments in favour of the retention of Australia’s per se prohibition on price fixing.

“The current per se prohibition of price fixing is warranted on the basis that the occurrence of efficiency-enhancing price fixing agreements is rare, that the benefits of identifying and permitting efficiency enhancing price fixing agreements in a court setting are outweighed by the enforcement and judicial costs of a competition test and the benefit from the certainty induced by such clear rules.”[35]

The Irish legislation stops short of making cartels illegal per se. Section 6(3) of the Irish Act, however, provides that a defendant can claim that an agreement, which is contrary to Article 81(1) (or Section 4(1)), satisfies the four conditions contained in Article 81(3). The effect of section 6(3) is that juries may be required to assess complex economic arguments and will, at the very least, greatly increase the length and complexity of cartel cases.

The fact that Article 81 applies a bifurcated test and the exemption requirements are part of the Treaty pose obvious difficulties in this regard. The CFI has stated that, as a matter of law, there are no anti-competitive agreements which could not be eligible for exemption.[36] In spite of this, the then head of DG Competition, argued that so-called “hard core” restrictions such as price fixing could not satisfy the requirements for exemption so that “although Community law does not formally work with per se prohibitions in respect of which no defence can be raised, there is no practical difference.” [37] As Joshua observed, Article 81 “is ill-suited to form the basis of a criminal charge”.[38]

Before the 2002 Act was passed, the Authority Chairman criticised the failure to include a good definition of hard core cartel offences in the legislation.[39] The Authority originally argued that section 6(3) should not apply to the “hard core” category of arrangements. Section 179 of the UK Enterprise Act 2002 creates a specific cartel offence. This provision was included to avoid the need to have complex economic evidence presented to juries[40] and it would appear provide a way around the difficulty that the EU Treaty. The Competition Authority subsequently proposed including a similar provision in the Irish Act but the Department advised the Minister against this on the basis that: “The UK system is different.”[41] The failure to introduce a specific offence along the lines provided for in Section 179 of the Enterprise Act, 2002, constitutes a serious weakness in the Irish legislation.

Conclusions

Historically EU competition law has been overly bureaucratic with far too much of the Commission’s resources being absorbed in dealing with notifications while serious infringements such as cartels, have gone undetected. Regulation 1/2003 should increase the effectiveness of EU Competition Law by increasing the resources available to pursue serious anti-competitive behaviour and eliminating the need to deal with innocuous behaviour. Nevertheless, the absence of criminal penalties in the form of prison sentences for individual executives responsible for engaging in cartels remains a serious weakness in EU competition law. It is important, therefore, that the Commission does not prevent those Member States that wish to do so from imposing such sanctions, particularly in the most serious cases, in order to maximise deterrence.

Longer term, however, deterring cartels requires a fundamental reform along the lines proposed by Joshua involving the establishment of a single European Cartel Authority with the power to investigate and prosecute serious hard-core cartels before an independent court.[42] In this regard the failure to seriously debate such a measure represents something of a missed opportunity. As Stelzer observed:

“Seriously, I believe you will find that it will be a long while before mere fines will destroy the culture of price fixing that permeates British business.”[43]

It seems to this author at least that such views apply with equal force throughout the EU.

The success of the reforms also depends on national authorities rising to the challenge of applying EU law. Obviously this requires that such agencies have adequate resources; that legislation provides for effective penalties but perhaps, most important of all, as Irish experience illustrates, there must be a desire to root out serious anti-competitive behaviour.

© Compecon Limited 2003.

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