Are you clear on what a cartel is? For many, the notion of a cartel may conjure up images of Columbian drug barons or underhand oil deals – not something you need to worry about when it comes to your own business practices and the law. Or is it? You may be surprised to hear that the reality and risk of cartels is actually a lot closer to home, explains the Karen Campbell White of the Competition and Markets Authority (CMA) …
In 2017, after an investigation by the CMA triggered by a tip-off to its cartels hotline, two firms that make furniture parts – including drawers that go into beds sold by companies such as Silentnight – were fined £2.8m for being part of an illegal business cartel. Another company confessed its involvement, co-operated with the CMA, and, as a result, avoided a fine.
A business cartel involves companies that agree to fix or co-ordinate their prices, rig bids for contracts, divide up who should have which client and where, and to exchange commercially sensitive information.
The businesses in the furniture parts case broke the law by avoiding competition on price and sharing out which customers they would supply. This reduced customer choice. The cartel created the illusion that they had competed against each other to give customers the best deal, when in reality they had colluded to keep prices up.
As well as market sharing, they also admitted to co-ordinating prices, including through bid rigging and exchanging commercially sensitive information. Their bid-rigging behaviour included the exchange of sensitive pricing information to enable tactical bids. A search of one of the businesses’ premises found a handwritten note in a senior employee’s desk - it detailed a rival’s costing system for drawer fronts.
There was a fine uplift for senior employee involvement. Meetings took place where rivals deliberately divided up the market - agreeing not to go after each other’s clients.
Witness evidence relied on in the CMA’s decision on drawer fronts included statements such as: “In the course of the meeting, we came to an understanding that if he agreed not to attack our customers, we would agree not to attack his”; and “It was agreed therefore that I would provide him with our prices with a view to him quoting a significantly higher price to Silentnight such that they wouldn’t get the business.”
This case proves that cartels can happen in your sector, and that the CMA will root them out. And this isn’t the only example of anti-competitive practice. In January 2014, the European Commission imposed fines totalling €114m on firms operating in the UK, Austria, Belgium, Estonia, France, Germany, Hungary, the Netherlands, Poland and Romania.
Vita, Carpenter, Recticel and Eurofoam were major producers of flexible polyurethane foam used in mattresses, sofas and car seats. For five years, they co-ordinated prices. To do this, they ran meetings at all levels of their management across Europe to co-ordinate their illegal activity.
Consequences of cartels
The consequences speak for themselves. Based on the evidence, if a business breached competition law: it can be fined up to 10% of turnover; its directors can be disqualified from acting as a director or carrying out other specified business roles for up to 15 years; and, in criminal cases, individuals involved can face prison sentences and fines.
Yet despite the dangers, research reveals that many businesses are still unclear about what cartels look like, and the risky business behaviours that could put them in danger of breaking the law: only 57% of those polled know that it is illegal to fix prices, and 41% don’t know that attending a meeting where rivals agree prices is illegal; over half (59%) don’t know that agreeing to split up and share customers with competitors is illegal; and just under half (48%) don’t know that bid-rigging – where competing bidders secretly agree who will win a contract and submit fake bids – is illegal.
It is in everyone’s interest to be clear on where the legal line lies when it comes to meeting and talking shop with competitors. One recent legal ruling has shown that attending only one meeting where commercially sensitive information is discussed can lead to fines.
Business life means we need to collaborate to progress, and avoiding competitors completely isn’t realistic – that’s why knowing the ground rules of competition is vital.
Karen Campbell White is the head of compliance, stakeholder and reporting for the Competition and Markets Authority. Interested parties can find out more about competition law and how to report anti-competitive activity by visiting the CMA website, where they will find short videos about cartels and how to report them, case studies, an online quiz, and a cartel checker that assesses whether provided information is enough to start an investigation, and if it should be reported. Anyone in any doubt about a competition issue or that thinks they may be at risk of breaking the law should seek independent legal advice.