Settling for settlement: the European Commission's new cartel settlement procedure.

• Published date: 22 December 2010
• Author: Kelley, Molly
• Date: 22 December 2010

I. INTRODUCTION

Cartels, or agreements between competitors that restrain competition, have long been a problem for free-market economies. In The Wealth o[ Nations, Adam Smith observed that "[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." (1) In Smith's lifetime, there were no laws against such conspiracies. (2) Now, cartels are considered "the supreme evil of antitrust." (3) Traditionally, the United States has led the way in enforcing antitrust laws. (4) But recently, European regulators have reinvigorated efforts against anticompetitive cartel behavior. For instance, the European Commission recently fined a group of marine hose makers $173 million for an international conspiracy to rig bids, allocate markets, and fix prices on their products. (5)

High profile cases, like the marine hose prosecution, reflect Europe's effort, beginning in the early 2000s, to modernize antitrust enforcement, especially by concentrating on combating cartels. (6) But even with competition regulation, secret agreements to illegally control prices, markets, and bids remain as problematic as ever in the European Common Market. Such conduct constitutes "the most egregious violations of competition law which injure consumers in many countries by raising prices and restricting supply, thus making goods and services completely unavailable to some purchasers and unnecessarily expensive for others." (7)

As the European Union continues to crack down on cartel activity using serious penalties to punish and deter such behavior, (8) businesses in the European market (9) must understand and follow European competition rules in order to avoid or minimize fines resulting from a European Commission investigation into their practices. (10) To assist firms with compliance, antitrust regulators have developed mutually beneficial leniency (or amnesty) programs. Leniency allows regulators to offer immunity to a violator of article 101 in exchange for disclosing information on the cartel and cooperating with the investigation. Leniency programs not only benefit cooperative firms, but they also promote the regulators' goal of deterring anticompetitive behavior by increasing the risk of cartel activity and by making cooperation and compliance more attractive. (11)

In accordance with the goal of deterrence and to expedite resolution of violations charges, in June 2008, the European Commission's antitrust section, the Directorate General of Competition ("DG Comp"), introduced a new settlement procedure for cartels. (12) The settlement program, offered at the DG Comp's discretion at the end of an investigation, is distinct from the leniency program. The settlement procedure provides cartel members the chance to assess adverse evidence and forgo litigation by settling their cases, in exchange for a ten percent reduction in fines otherwise imposed. (13) The procedure aims to free up resources and save time by providing the DG Comp with a shortened way of resolving clear violations. (14) DG Comp prosecutors hope to be able to open new investigations in the time they save. Overall, this goal is based on the theory that a more efficient DG Comp will reinforce deterrence and thereby promote market compliance with antitrust laws. (15) But will the new settlement procedure really deter cartel formation and operation? This Note will explore the background, scope, and effectiveness of the European Commission's antitrust regulatory powers, especially its power to regulate cartels. (16) This includes a discussion of the DG Comp's regulatory toolkit, including potential fines, the amnesty program, and the settlement procedure introduced in June of 2008. The Note predicts that the new settlement procedure, which has only been successfully used once since its inception, (17) will not make the European Commission a more efficient regulator. Therefore, the new procedure will not achieve its goal of promoting deterrence. The Note concludes by suggesting alternate methods of achieving the DG Comp's goals.

II. BACKGROUND: EUROPEAN COMMISSION ANTITRUST AUTHORITY AND JURISDICTION

A. The European Commission as an Antitrust Enforcer

The European Commission, the law-making body of the EU, (18) is empowered with broad jurisdiction (19) by the Treaty on the Functioning of the European Union to regulate anticompetitive activity. (20) Specifically, article 101 of the Treaty (21) empowers the European Commission to bring enforcement actions against cartels that affect trade between Member States. (22) The DG Comp is the bureau of the European Commission that is dedicated to enforcing European competition laws, (23) and it is headed by a Commissioner. (24) It has "the authority to issue implementing regulations and decisions that establish law." (25) In further accordance with article 101 of the Treaty, the DG Comp also prosecutes collusive practices considered inconsistent with the principles of the Common Market. (26) This includes agreements which, by their object or effect, prevent, restrict, or distort competition within the Common Market. (27) Article 101 has been used to challenge "joint buying, joint selling, joint ventures and strategic alliances, and data exchanges" between horizontal competitors, as well as activities between vertically related suppliers, manufacturers, and franchisees or distributors. (28) As in the United States, these prosecutions begin with detailed investigations into a company's behavior. (29)

B. Fines and Leniency." Sticks and Carrots of Enforcement

One way the DG Comp enforces anti-cartel policies is by using the "stick" of heavy fines against high profile corporations. (30) The revenue from these fines helps offset the dues that member states in the EU regularly pay. Large fines against high-profile firms may enhance the DG Comp's reputation, but no part of the money is used to finance the institution of the DG Comp. (31) For this reason, from an enforcement perspective, well-publicized fines are most useful because of their deterrent effect. (32)

For violations of article 101, the Commission has the power to impose fines of up to ten percent of an infringing firm's prior year's turnover. (33) If the cartel's infringement has relatively small affects, the amount of the fine may be reduced in accordance with the doctrine of proportionality. (34) Conversely, aggravating factors may increase the fine. For example, firms that had long participated in a cartel and firms with previous antitrust violations are subject to a higher penalty. (35)

Like the United States, where regulators may impose criminal penalties for antitrust infringements, (36) certain European Member State national governments also provide for criminal penalties such as prison sentences

in cartel cases. (37) However, unlike its American counterpart, Sherman Act section 1, (38) article 101 does not authorize the European Commission to impose criminal penalties. (39)

In conjunction with fines, another effective enforcement tool of the EC has been its leniency program. (40) Essentially, leniency offers the "carrot" of total immunity or reduced fines to the first cartel member to give regulators information about the cartel's operation. (41) By creating a powerful incentive for each cartelist to be disloyal, leniency increases the risk of cartel behavior thereby deterring cartel participation. The program has been quite effective. (42) Indeed, the program has encouraged firms to self-regulate for antitrust violations. (43) In a significant way, it has also allowed the DG Comp to become more efficient: the information provided by leniency applicants saves the DG Comp the trouble of conducting full investigations. (44)

C. The Directorate General of Competition: A Victim of Its Own Success

The successful leniency program has been both a blessing and a curse for the DG Comp. (45) On one hand, as noted above, leniency has promoted deterrence by incentivizing individual cartel members to be disloyal and inform on fellow members. On the other hand, the attractiveness of the leniency program has caused a flood of leniency applications. In fact, these applications are overwhelming the DG Comp workforce, which already had its hands full. (46) Though responsible for a large jurisdiction, the European Commission is a relatively small governmental body: in fact, "[t]here are fewer officials working for the Commission in all departments than are employed by any one of the major departments of the UK civil service." (47) Moreover, within the Commission, the DG Comp is a relatively small bureau. (48) Therefore, there is legitimate concern that a DG Comp overburdened by leniency applications is less able to carry out its essential tasks, such as investigations into the market. (49)

D. Direct Settlement. An Attempt at Solving Problems and Promoting Goals

On June 30, 2008, the Commission introduced Regulation 622/2008, which provides for direct settlement. (50) The purpose of direct settlement is to alleviate the backlog of pending cases (51) resulting from the success of the DG Comp's leniency program. The DG Comp hopes direct settlement will not only alleviate the strain, (52) but also deter cartel behavior. (53)

Like the leniency program, direct settlement seeks to reward cartelists that cooperate with regulators. Unlike the leniency program, settlement is available only after initial investigation when the DG Comp has obtained enough evidence to bring an enforcement action. (54) The settlement process (55) allows cartelists to see the evidence against them (56) and to be informed of the range of potential fines. (57) At this point a cartelist may opt to forego defending an enforcement action and instead acknowledge liability. (58) In return, the DG Comp may reward the cartelist's

acknowledgement by reducing the amount of the fine otherwise imposed by ten percent. (59)...