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January 25, 2013

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Leniency As Tool For Busting Cartels


- Vinod Dhall, Chairman [ Dhall Law Chambers ]

Vinod Dhall

The “leniency” tool has enabled competition authorities to record a higher level of success in dismantling cartels. This tool has remained relatively untapped in the Indian regime.

Cartels draw perhaps the most attention from competition law authorities globally. The quantum of penalties levelled on those participating in a cartel has been enormous across jurisdictions. To quote from some recent examples- the European Commission (“EC”) in a car glass cartel fined the manufacturers a total of EUR 1.3 billion; in another cartel, relating to gas insulated switchgear, Siemens was fined about EUR 396 million. In the TFT-LCD cartel, the United States (“US”) and the EU authorities announced significant fines in 2010; the total fines in the US exceeded USD 890 million.

The Department of Justice Antitrust Division (US DOJ) is the primary cartel enforcement agency in the United States and the courts have the powers to impose penalties as well as prison sentences; recourse to appeal is available. In the case of intra-state cartels within the USA, the state administrations can also look into cartels. Private parties can also approach the courts for damages.

In the EU, the European Commission (“EC”) is the foremost competition law enforcement agency. An appeal in the first instance lies to the General Court and thereafter to the Court of Justice. In India, the Competition Commission of India (“CCI”) has the jurisdiction to investigate cartels; its decisions can be appealed to the Competition Appellate Tribunal and then the Supreme Court. Although the cartel law regime in India is only about three and a half years old, the CCI has come up with a number of hefty cartel penalties. Earlier this year, CCI fined 48 liquid petroleum gas (LPG) cylinder makers INR 1.65 billion (approximately USD 33 million) for bid rigging during tenders invited by Indian Oil Corporation. Later in the year, the CCI imposed a penalty amounting to INR 6300 crores (approx. USD 1145 m) on eleven cement companies.

In many of its penalties, the CCI has relied merely on ‘circumstantial’ evidence, that is to say where documents or other evidence supporting collusion between the concerned enterprises wasn’t discovered. The proximity in price movement of different enterprises was a major determinant of the existence of a cartel in many of these cases.

In US and the EU, cartels are generally indicted based on more robust evidence. In many of the cases, the punishment was a result of a ‘leniency’ application from a participant of the concerned cartel, that is to say when a member of the cartel himself approaches the competition authority with evidence and is looking for a reduction or waiver in penalty. According to the US DOJ, of the approximately 50 international cartel investigations underway at any given time, typically more than half are initiated by a leniency applicant; and, of the USD 5 billion in fines the US DOJ collected from 2000 to 2009, over 90% was from investigations assisted by a leniency applicant. In the United States, parties have sought the benefits of the leniency programme in a number of notable recent cases, including for example in the cartels relating to air cargo, liquid crystal display panel, dynamic random access memory, rubber chemicals, vitamins and graphite electrodes markets. This evidences the effectiveness of the tool in bursting cartels.

In the EU as well, most of the major cartel findings are based on information provided by a leniency applicant. For instance, last year in the washing powder cartel, Henkel was the first to inform the EC about the cartel and it received full immunity from fines. The EC also reduced Procter & Gamble’s and Unilever’s fines by 50% and 25%, respectively, in view of the quality and the timing of their applications. In another case relating to LCD cartel, Samsung was the first company to bring the cartel to the EC’s attention and meet the conditions for immunity and it was granted 100% immunity. LG also obtained a 50% reduction in fine.

One of the key reasons for a number of leniency applications in these jurisdictions is the fact that it is easier for the applicant to qualify for amnesty. This was not the case when the leniency law was introduced in these countries. In 1978, when the leniency law in the US was established, the US DOJ had a higher degree of ‘prosecutorial discretion’ which did not work very well. However, in 1993 when the policy was revised to limit this prosecutorial discretion, the DOJ saw a flurry of leniency applications. On similar lines, in February 2002, the EU substantially revised its law enforcement against cartels including leniency resulting in cartel findings as stated above.

In 2001, the then Director of Criminal Enforcement, US DOJ with regard to the benefits of a leniency policy stated, “the amnesty programme has been responsible for detecting and prosecuting more antitrust violations than all of our search warrants, consensual – monitors audio or video tapes and cooperating informants combined. It is unquestionably, the single greatest investigative tool available to anti-cartel enforcers”. But how useful is the tool to an antitrust authority depends also on how easy it is for a potential applicant to make a leniency application and to receive the benefit.

So far, in no case, has any party to a cartel approached the CCI with a leniency application. One reason might be that until recently, the CCI did not impose deterrent penalties on cartels, so there was little incentive for any party to break ranks with other members of the cartel. Another reason could be a credibility issue: if a party did apply for leniency under the Act and was found by the CCI to be eligible for the same, would it actually be given lenient treatment and if so, to what extent? The CCI has wide discretion relating to the level of financial penalty and the extent of its reduction for a leniency applicant. The CCI may impose a lesser penalty (that is, grant leniency) on a member of an alleged cartel if such member has made a “full, true and vital disclosure” as per Section 46, of the Competition Act, 2002 (“Act”). The Competition Commission of India (Lesser Penalty) Regulations 2009 (“Regulations”) set out the conditions to be satisfied to be granted leniency, the applicable procedure and the sliding scale of leniency. In terms of the Regulations, the first applicant for leniency may be granted full immunity if he/she satisfies the following conditions:

"Given that cartels are considered to be the ‘supreme evil’ of antitrust law, an attractive leniency policy could become a potent tool in the hands of the CCI."
  • The applicant makes vital disclosure by submitting evidence of a cartel enabling the CCI to either:
  • form a prima facie opinion regarding the existence of a cartel, if the applicant comes up before the CCI has formed its prima facie opinion and directed the DG to investigate the matter; or
  • establish the existence of cartel, bid-rigging, and/or other anti-competitive practice, if the applicant comes up after the DG has commenced the investigation following the orders from the CCI, and
  • Without such disclosure, the CCI or the Director General would not have sufficient evidence to establish a violation.
  • The applicant continues to cooperate with the CCI during the inquiry.

Subsequent applicants may also qualify for reductions of lesser degrees, by submitting evidence that adds value to evidence already available to the CCI and/or the Director General on similar conditions. It is not clear from a plain reading of the Regulations whether a subsequent applicant is eligible to apply at both the prima facie stage and the investigation stage.

The Regulations contemplate that the discretion of the CCI, with regard to reduction in monetary penalty is to be exercised having due regard to the stage at which the applicant comes forward with the disclosure; the evidence already in possession of the Commission; the quality of the information provided by the applicant and the entire facts and circumstances of the case. Further as per the Regulations, upon meeting the criteria, the applicant ‘may’ be granted partial/full immunity. This seems to vest a great degree of discretion with the CCI.

Further, as the CCI has not received any leniency application so far, there is no precedence available to gauge what may be regarded as quality information, etc.; in practice, this leaves an environment of uncertainty for a potential applicant. Consequently, there seems to be a need to better incentivise disclosure by making the leniency programme more attractive and certain which may provide reasonable assurance to a potential applicant with regard to the benefits flowing out of sharing information with the CCI.

It may be noted however that the applicant for leniency, even if successful in obtaining leniency cannot gain immunity from a claim for payment of compensation to customers or consumers injured as a result of the operation of the cartel or other anti-competitive practice.

Given that cartels are considered to be the ‘supreme evil’ of antitrust law, an attractive leniency policy could become a potent tool in the hands of the CCI. Also, as expressed by the Office of Fair Trading (“OFT”), the benefit of dismantling cartels in terms of economic prosperity and for consumers has proved much greater than that of punishing firms which have cooperated with competition authorities.

Disclaimer–This article represents personal views of the author and does not purport to be and should not be treated as professional guidance or legal opinion on any subject.

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