15 November 2007
Cartels are bad for business. But how can buyers spot one and how can they go about claiming compensation if they fall victim? Antony Barton reports
Buyers probably didn't need the Office of Fair Trading (OFT) to tell them they are in a great position to uncover vendor cartels. But the watchdog has done so as part of its crackdown on anti-competitive practices. And it wants them to report suspicious activity.
The incentive is clear. According to Stephen Blake, deputy director of the cartels group at the OFT, cartels increase prices by reducing or removing competition. And they eliminate the incentive for suppliers to innovate and operate more efficiently.
Recent high-profile cases include British Airways (BA), which was fined almost £270 million for colluding with Virgin Atlantic to fix the price of fuel surcharges on long-haul flights (Web news, 2 August).
And in April, the European Commission fined Dutch brewers Heineken, Grolsch and Bavaria a total of more than ?273 million (£186 million) for running a beer cartel in The Netherlands.
But it isn't restricted to mega-deals and it is in the hard-to-spot lower level cases where buyers can help out. Blake says almost no industry is safe: "Cartels can crop up pretty much anywhere, in any sector and not always where one would expect."
So what should buyers do? The OFT suggests watching out for suppliers that deviate from normal competitive practices. This includes:
increasing their prices by around the same amount at around the same time;
using the same discount structures;
quoting similar prices;
refusing to supply a customer because of their location, showing no fear of competition.
When a company runs a competitive tender, a cartel may agree which of its members should win the contract. Questions buyers should ask are:
do some suppliers unexpectedly decline an invitation to bid?
is there a rotation pattern to who wins contracts?
is there an unusually high margin between the winning and losing bids?
do all bid prices drop when another supplier, or non-cartel member, enters the competition?
do one or more of the same bidders consistently fail to win contracts?
For the OFT to investigate a case, Blake says it expects written evidence and an explanation of why it is reasonable to suspect that the reported conduct can relate only to a cartel.
He adds: "We have a range of powers, including the power to search premises, but they can only be exercised where we have reasonable suspicion an infringement has been committed."
Cartels infringe on the Competition Act 1998 and may also be in breach of Article 81 of the EC Treaty. International deals may also fall foul of other nations' regulations. Guilty firms can be fined up to 10 per cent of worldwide turnover and, under the Enterprise Act 2002, individuals can be imprisoned for up to five years and face an unlimited fine. Virgin Atlantic escaped the BA case without a fine because it received immunity for being the first to report the cartel under the OFT's leniency programme.
As well as helping to end a cartel, buyers should also think about compensation. Rob Murray, managing partner at law firm Cohen, Milstein, Hausfeld and Toll, which specializes in collective action for cartel cases and is representing claimants for the BA case, says: "The question is whether you can prove you were damaged by the cartel and what level the overcharge was for the goods you purchased."
He says the construction, chemical and shipping industries are typical cartel territories, where there are a few major players who decide "life would be a lot easier if they had secret discussions to carve up the market between them and make their bonuses a lot more easily".
He adds there is increasing evidence that cartels take elaborate steps to remain concealed, with members using code words and pay-as-you-go mobile phones to elude detection: "Vigilance is always key to breaking rackets."