The story about the cartel and the cunning Carmen

FORBES Latvia | Opinion Piece

Once upon a time there was a fabulously wealthy man named Alphonsus who lived in the Kingdom of Latvia. His wealth consisted of two beautiful daughters and a 95% stake in JSC “LatPrece”. His eldest daughter Carmen was particularly quick-witted and had been helping her father at work since she was a teenager. His youngest daughter Josephine was a professional basketball player.

Alphonsus had only two problems in life: JSC “EstPrece” and JSC “LitPrece”, whose owners created fierce competition in JSC “LatPrece”. Price wars among the three competitors had been ongoing since the mid-nineties, and Alphonsus hadn’t been able to withdraw more than three million euros in dividends a year for two consecutive years. Dad became sad, and Carmen felt sorry for him. She turned to her sister so that they could both figure out what to do.

After hearing Carmen’s story, Josephine was puzzled: “How did Dad and his competitors let the situation become so absurd? You know, Carmen, the years devoted to sports have allowed me to understand an important thing in life. If you want to win, you need to be able to work in a team and work with people. What if we invited Andrew and Peter, the sons of the owners of “EstPrece” and “LitPrece”, over for lunch? I believe we can solve this problem!”

Without further ado, the girls met with Andrew and Peter. The four young, ambitious people got along well and agreed to persuade their parents to end their price wars and raise prices so that within the next five years or so they could offset the losses their companies had suffered during the mad price competition period. They worked on it, and within four years the competitors recovered their losses.

However, Carmen still didn’t feel satisfied. What’s the point of working and developing if the power positions in the market remain unchanged? The market had been stagnant since the decision to end the price wars was made because prices had become the same for everyone. The quality of the goods could be improved, but according to the director of the development department at least ten million should be invested for the consumers to notice any improvement in the quality of the goods. “That will cost us an arm and a leg!” Carmen thought.

Then Carmen remembered that before meeting with Andrew and Peter, she already had a plan B in place. Carmen always knew that negotiating prices with competitors was an infringement of the Competition Law and that in case of an infringement all competitors would face a penalty of up to 10% of their annual turnover.

Without warning anyone, Carmen decided to take the brave step and sink the businesses of “EstPrece” and “LitPrece”. She read in the law that the company that turns to the Competition Council first and confesses involvement in a cartel does not have to pay a penalty. The cunning Carmen hoped that her company “LatPrece” would not be imposed a penalty.

The Competition Council initiated a case and found an infringement. “LatPrece” was imposed the maximum penalty, while “EstPrece” was severely penalised and “LitPrece” – a company operated by Andris – received an 80% penalty reduction. As a result, Carmen’s father asked his daughter to consider choosing a different profession because he was very disappointed with his daughter’s reasoning skills. Meanwhile, Peter was dismissed from the board of “EstPrece”. It turned out that he had comforted the shareholders during the investigation proceedings, claiming that the infringement would not be detected because the agreement among the four young people had not been confirmed in writing.

***

There is a moral in every fairy tale, and this story is no exception.

First, we will find out whether the shareholders of “EstPrece” had a good reason to blame Peter for relying too heavily on the assumption that the Competition Council would have to find written evidence to establish an infringement. Sadly, the form of evidence is only of relative importance in competition cases. It would be enough with Carmen’s sincere confession for the Competition Council to learn about the essential terms of the agreement among the competitors. Even in the absence of written evidence, the Competition Council’s extensive investigative powers would allow it to learn about the competitors’ conduct immediately after the fateful meeting. If the authority can track the history of price changes, it would see that after the meeting all three competitors not only stopped lowering prices, but even increased them. Thus, one meeting participant’s confession and information regarding the conduct of the undertakings under the terms of the non-written agreement would be enough for the Competition Council to carry out its work. For the sake of clarity, it should be noted that in some cases an infringement can be found even before the competitors are able to implement their agreement. But let’s leave this scenario for another time.

Second, this story may not demonstrate an obvious infringement. Indeed, “LatPrece”, “EstPrece” and “LitPrece” had not even agreed on a specific price or price increase, however, the Competition Law prohibits any “price fixing”. The young people should have known that price fixing is a very broad concept in competition cases; depending on the situation, the nature of the goods and their distribution methods, even negotiations regarding a specific price element may distort competition. The last aspect specifically – the ability of an  agreement to restrict competition – is crucial. It is presumed that negotiations, agreements or exchanges of information that reduce an undertaking’s uncertainty about the strategic plans of their competitors are considered to be anti-competitive. Namely, in our story the children agreed that the companies of their parents would end their price war and that after the end of the price war they would keep the prices high enough for at least five years so that the companies could make up for what they had lost. This means that the competitors promised not to fight for each other’s customers – at least not by offering a better price – as well as agreed on the duration of their agreement.

The example described in the story would be considered a severe violation of the Competition Law and the Competition Council would be entitled to impose the maximum penalty.

Third, it might be interesting for the reader to find out how Andris obtained an 80% penalty reduction despite Carmen’s cunning, but seemingly ill-considered plan. It is indeed possible for an undertaking that is the first to admit its participation in a cartel to receive full immunity from penalty. However, let’s not forget that it was Carmen and Josephine who prompted Andrew and Peter to agree on a cooperation that replaced the fierce competition among the companies – Competition Law does not allow the cartel initiator to obtain full immunity from penalty. In addition, we know that Carmen visited the Competition Council unprepared and without discussing her visit with others. It is important to emphasise that the Competition Council only rewards (with immunity or penalty reduction) those who provide sufficient information on the nature of the cartel. This means that Carmen may not have provided useful information, whereas Andris may have timely decided to cooperate with the Competition Council and may have provided information or evidence that significantly supplemented Carmen’s story – and that may be how he obtained the penalty reduction. As it is in sports, the winner isn’t always the one who runs to the Competition Council first. The winner is the one who knows the rules of the game.

Dear reader – don't get involved in a cartel, know the rules of the game, and don't pay penalties!

 

by Jūlija Jerņeva, Partner, Latvia

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