A growing number of jurisdictions treat ‘hard-core’ cartel conduct as crime, in the belief that the threat of incarceration is necessary for deterrence. For many years, the US was the only active criminal cartel enforcement regime in the world. Cartels were first prohibited under the US Sherman Act 1890 as misdemeanours, and became a felony in 1974. The US Department of Justice regularly secures convictions of firms and individuals – many of whom agree to serve custodial sentences under negotiated plea agreements – from around the world. In the past 20 years, there has been an international movement towards the US model. Around 25 jurisdictions have criminalised ‘hard-core’ cartel conduct, including the UK, France, Ireland and Australia – with many more having adopted criminal offences that relate only to bid-rigging in public procurement. Most of these jurisdictions have chosen to retain their civil enforcement powers in parallel, so as to use criminal enforcement selectively.

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However, there is still disagreement over whether cartel conduct is morally offensive enough to justify criminalisation. Cartel criminalisation has been justified exclusively on deterrence grounds and has not come about as a result of popular concern for the harmful effects of anti-competitive conduct. Competition authorities do occasionally draw vague parallels between cartel conduct and theft or fraud, but these parallels largely arise in the context of public relations exercises and are invoked regardless of whether the enforcement process is criminal or civil. Critics argue that cartel criminalisation is an example of the criminal law being misused to prohibit conduct that is morally ambiguous, and that it is another example of ‘over-criminalisation’. Conscious of these legitimate criticisms and shortcomings, a number of scholars have sought to formulate normative justifications for cartel criminalisation that do not rely on a deterrence theory. Instead, these authors focus on delinquency and on how cartels amount to cheating or subverting the competitive process.

Such arguments build on the assumption that members of society expect markets to be competitive and believe cartels are undesirable. This paper, available here, tests this question empirically by using public surveys from the UK, Germany, Italy and the US to analyse critically the extent to which normative justifications for cartel conduct have empirical backing. It finds strong evidence to suggest that there is a public expectation of competition between firms, and that most ordinary people understand that cartel conduct is harmful and should be punished. However, there is only weak support for imprisonment for cartel activity, and perceptions of cartel wrongfulness are comparatively weak next to other forms of wrongdoing.

Section 1 sets out the main objections to subjecting cartel conduct to criminal law.

There is a long-standing debate among criminal lawyers over what categories of wrongdoing amount to a crime and the criteria against which they should be judged. In the context of this debate, a critique of ‘over-criminalisation’ has developed which is largely directed at regulatory offences – i.e. offences that seek to control conduct that lacks the moral condemnation purportedly inherent in crime. Such a trend is said to contribute to a significant blurring of the line between civil and criminal law, and has resulted both in the overuse of criminal law outside of its traditional context, and its under-enforcement.

Some of these arguments have been aimed squarely at the criminalisation of cartels. While it is the harm caused by cartels that underpins the deterrence arguments for cartel criminalisation, a central tenet of the over-criminalisation critique is that harm alone does not provide an automatic justification for the use of criminal law. In particular, it is argued criminal law should not be utilised simply as a mechanism for creating deterrence without addressing the issue of moral stigma. It follows that cartel criminalisation should be criticised because: (i) it seeks to signal the seriousness of cartel conduct without making clear what is morally reprehensible about it; (ii) there is no clear evidence of society’s moral condemnation of cartel conduct, or even an awareness that such conduct is harmful. For these reasons, cartel offences may be perceived as lacking legitimacy and as damaging all criminal law.

Turning to the UK’s cartel offence, the author notes that it did not result from bottom-up moral outrage at the harmful effects and delinquent nature of cartel conduct. Instead, it was a top-down policy, reflecting the general willingness by the UK government to use a wide range of policy tools for regulatory control, including criminal ones. The act of criminalising cartels and the adoption of the standard of dishonesty (borrowed from the law of theft and fraud) would, it was thought, signal the seriousness of cartel practices. Yet, only five individuals have been convicted since the cartel offence was adopted over a decade ago.

Moreover, the requirement of dishonesty – the moral element of the offence, according to which a cartel would only amount to a crime if the conduct was objectively dishonest and the defendant must have known that their conduct was dishonest by those standards – was dropped in 2013 because the government felt that it was hindering the enforceability of the criminal provisions, since many jurors might not view cartel conduct as dishonest. Originally, it was thought that dishonesty would be obvious from the actions of those responsible. However, the UK authorities found it difficult to present evidence in a manner that demonstrated this. Some authors have suggested that this state of affairs was a consequence of cartels not being perceived as morally wrong. This contention appears to be supported by the historically tolerant treatment of cartel arrangements in common law. One might also point to inconsistencies in how cartels are treated in law. For example, many competition law regimes do not apply to certain industries, such as agriculture and public utilities. Cartel rules are also sometimes deliberately designed to apply to domestic markets only, meaning that it is lawful for firms to enter into export cartels. Thus, criminal behaviour is perfectly permissible (and sometimes even encouraged) when it is directed at foreign markets.

Section 2 identifies the main normative justifications for criminalisation.

It may be argued that the arguments against criminalising cartel conduct are to some extent flawed, because the greatest economic harm in the modern economy comes not from traditional property offences such as theft or fraud, but from sophisticated forms of corporate wrongdoing that are largely hidden. Even when uncovered, many of these (including cartel conduct) can be complex and do not usually produce the necessary critical mass of harm needed to attract widespread media coverage or cause public outrage – yet they must be dealt with effectively all the same.

Such deterrence-based arguments must nonetheless face three main criticisms. These are that: (i) it is difficult to quantify, with any accuracy, what a deterrent penalty should look like (especially as cartel prohibitions do not generally engage in any analysis of effects); (ii) strict adherence to deterrence theory would lead to unfair and disproportionate outcomes (e.g. the imposition of enormous punishment for a small violation, as a result of weaknesses in the rate of detection); and (iii) even if penalties were in some way ‘optimal’, the assumptions of rational decision-making and of availability of accurate information about punishment and likelihood of detection that underpin deterrence-based arguments for criminalisation are very doubtful.

Conscious of these shortcomings, a number of academics have sought to formulate normative justifications for criminalising cartels. The first of these justifications argues that the moral offensiveness of cartel conduct is heightened by their characteristic determination to defy the cartel prohibition and to take steps to avoid detection. The moral wrongfulness therefore arises not only from the act of price fixing itself, but from the fact that price fixing is hidden. A second argument focuses on the act of price fixing as a form of cheating that subverts competition. The argument is, in short, that criminalisation can be justified on the grounds that cartelists fail to ‘play by the rules’ of the marketplace and that they ‘carve out a self-exception to the general social rules governing distributive justice’. The third argument focuses on identifying a basis for cartel criminalisation in retribution theory. This approach suggests that criminal punishment should arise where individuals have made choices that society deems wrong, rather than focusing on the prevention of future crime. In the context of cartels, these wrongs can relate to ‘stealing’ the overcharge from consumers, and ‘deceiving’ consumers by not telling them that they are paying a cartelised price.

Section 3 presents and interprets the results of a survey regarding public perceptions of cartel wrongfulness.

The key issue underpinning the strength of the normative arguments in support of criminalisation discussed in the section above is the extent to which ordinary people expect markets to be competitive and recognise the harmful nature of cartels.

The absence of empirical evidence directly related to the criminalisation of cartels is a particular weakness in the existing literature. Looking at empirical findings on the attitudes to, and perceptions of cartels among ordinary members of the public allows one to test a number of assumptions that are relevant to the debate on cartel criminalisation. First, such findings allow one to test the hypothesis that consumers expect markets to be competitive and that separate undertakings will set their prices independently of each other. Secondly, they help us understand the extent to which there is popular condemnation of cartel conduct, the level of stigma attached to it and the severity of punishment that is thought to be appropriate.

The empirical study in question consisted of four online public surveys carried out in the UK, Germany, Italy and the US between 27 June and 15 July 2014. These surveys were designed, translated and piloted within the University of East Anglia’s Centre for Competition Policy, with the assistance of a number of competition law academics from each of the subject jurisdictions. The sample sizes were 2,509 (UK), 2,648 (Germany), 2,521 (Italy) and 2,913 (USA). These surveys were actually a follow-up of a 2007 study carried out only in the UK, which asked a variety of questions relating to price fixing. The US was included because it has by far the most active criminal antitrust enforcement regime in the world. Germany and Italy were selected so that attitudes in the UK could be compared with those of other EU Member States.

The surveys found that around two thirds of respondents in the UK, Germany and Italy expect competitors to set their prices independently of each other. Less than one in three people surveyed felt that it was normal for competing businesses to talk to each other about prices (the number was one in five in the UK). These results suggest that consumers are far from indifferent to the way firms set their prices, with two key implications. The first is that there appears to be a competitive norm in each of these countries: members of the public both expect businesses to set their prices independently of each other, and object to them talking to each other about the prices they charge. The second implication is that, where competing firms depart from the competitive process to form a cartel, most consumers will continue to rely on the assumption that prices are being set independently, unless told otherwise by the firms. This may very well constitute an empirical basis for arguing that attempts to hide or suppress the disclosure of information about the existence of a cartel amount to deception. The clear expectation of independent pricing arguably makes such a cartel objectionable, in the same vein as deliberate misrepresentations or the submission of a rigged bid.

Regarding whether consumers find price-fixing to be objectionable, only 53% of Britons and Italians thought price fixing was illegal and, surprisingly, only 41% of Americans – the number for Germany was 75%. A clear majority of respondents in each of the four jurisdictions recognised that price fixing is harmful to customers and felt that it is deserving of punishment. This included support for public naming and shaming, in addition to the payment of fines and compensation.

At the same time, the limits to people’s willingness to condemn cartel behaviour become apparent in relation to imprisonment. Support for the imprisonment of cartelists stands at around one in five in the UK, Germany and Italy, and around one in four in the US. This may reflect an absence of the clear sense of moral stigma as regards cartels. The same group of respondents were then asked to think about how serious or objectionable price fixing was compared to other forms of wrongdoing. These ranged from traditional offences like theft and assault, to other forms of business wrongdoing, such as tax evasion and insider trading. Respondents felt strongly that offences resulting in physical harm (assault, drink driving, misleading consumers about product safety) were significantly more serious than price fixing. The key comparisons they made were between cartels and theft, fraud and other forms of financial crime. Respondents were fairly split on whether theft was more serious or about as serious as price fixing, and the results were similar in relation to corporate tax evasion. But when asked to compare cartels with fraud, a clear majority of respondents in all jurisdictions except Italy felt that price fixing was as serious (around 40% felt that it was less serious). The results were similar in relation to insider trading too. However, for all of these offences, the net results indicated that price fixing was viewed as less objectionable than any of these offences. Indeed, price fixing was only viewed as being significantly more serious than copyright theft.

The paper ends with concluding remarks.

The results suggest that there is empirical backing for normative arguments for cartel criminalisation, without the need to rely solely on harm and deterrence arguments. In particular, there is a clear expectation among ordinary members of the public that competing businesses calculate their prices independently of each other. Therefore, cartel arrangements that allow competing firms to act like monopolists go against what is generally expected by citizens in a free market economy. It follows that cartels subvert the competitive norm expected of markets, and that consumers will continue to assume that prices are independent unless they are told otherwise.

The survey results strengthen each of the normative arguments for cartel criminalisation. The study therefore goes some way in helping to establish what is morally reprehensible about cartel conduct. Combined with the very significant social harm caused by cartels (which is generally not disputed), this may provide a sound justification for labelling cartel conduct as crime.

Yet, the results and normative arguments presented above do not defeat the critics of cartel criminalisation completely: the relatively weak support for the imprisonment of individuals is also significant, although in the UK support appears to have increased significantly since 2007. The weak level of support for imprisonment is also problematic because the sanctions that do enjoy strong public support (corporate fines, individual fines, private damages and director disqualifications) can be administered effectively by means of a purely civil enforcement regime.

 

Comment:

It has always struck me that academics and policy-makers have a propensity to address legitimacy questions by focusing on the number of legitimate reasons for doing something that they can think of, instead of focusing on the level of (empirically measured) legitimacy enjoyed by the action with the public at large. Anecdotally, I think that a good rule of thumb is that the actual (empirical) legitimacy of a certain rule is likely to be inversely proportional to the number of normative justifications for its legitimacy advanced in the academic literature.

Given this, and particularly for a matter as sensitive as criminalisation, I think this paper is an extremely valuable piece of work – even if I think I sense a pro-criminalisation bias, and I am not sure I can follow all the implications that the author derives from the empirical findings.

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