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Cartels, Markets and Crime: A Normative Justification for the Criminalisation of Economic Collusion

Cartels, Markets and Crime: A Normative Justification for the Criminalisation of Economic Collusion

Author: Bruce Wardhaugh
Publisher: New York, NY: Cambridge University Press, 2014. 376p.
Reviewer: Brent Fisse | September 2016

Cartels, Markets and Crime advances a normative justification of the criminalisation of cartel conduct based on Rawls’ Theory of Justice.    It is an interesting addition to the literature, much of which is dominated by law and economics theories and contentions.

The main arguments advanced in Cartels, Markets and Crime may be summarised as follows:

  1. Criminal sanctions threaten loss of property or liberty and are a legal order’s most coercive mechanism for regulating conduct. Normative justification for the use of such sanctions is required given that, absent such justification, the state is in much the same boat as a kidnapper or burglar.
  2. The justification for preventing harm in society, by using society’s most coercive social institution, rests in the type of harm which is sought to be prevented. Only harms to our most fundamental interests (what might be regarded as welfare interests) are the proper subject for protection by the criminal law. Cartels cause harm to the market as an institution. The market provides a means of allocating goods with the least interference with individual freedom. Given the fundamental role which the market has in a liberal society as its means of distributive justice, it is justifiable to criminalise conduct which undermines this institution. Cartel conduct undermines confidence in the market by imposing hidden rules on market activities.
  3. By contrast, cartel overcharges (appropriation of consumer surplus) are not seen by Wardhaugh as a fundamental harm that justifies criminalisation.
  4. A significant amount of unwanted conduct in the operation of business organisations arises from the agency model required to operate them, and the delegation of authority inherent in any agency arrangement. Imposing criminal liability on business organisations for this behaviour will encourage the appropriate monitoring of corporate agents. Such collusion usually has its origin in the corporate hierarchy at a level well below that of the board. The English Tesco rule of imputing liability to a corporate entity on the basis of the state of mind and conduct of the entity’s “directing minds” is unfit for this purpose. A rule of vicarious liability is warranted. A defence of corporate due diligence is inappropriate.
  5. There is a practical justification for the imposition of individual criminal liability. Applying economist Becker’s deterrent calculus, higher fines against corporations are required than are now imposed. This “deterrence gap” can be closed by the imposition of additional individual sanctions of a criminal nature.
  6. The promotion of consumer welfare is the dominant but not exclusive goal of US anti-cartel policy. Consumers in effect have a property interest in consumer surplus, which makes comparisons involving legal and moral inferences between theft and price-fixing more accurate. The goal of protection of consumer surplus regards the market as society’s institution for distributive justice. Further, the US imposes criminal liability vicariously, by imputing to a firm the conduct of its agent irrespective of that agent’s position in the corporate hierarchy. Individual criminal liability is imposed on corporate agents who engage in cartel activity on behalf of their firm. The deterrence gap is thereby closed, so that “recidivism in the US is currently low to non-existent”.
  7. The EU’s anti-cartel policy has a multiplicity of goals and it is difficult to regard either the protection of consumer welfare or the use of the market as a system of distributive justice as two fundamental norms. The case for criminalising cartel conduct at the EU level may therefore lack force. Other justifications, possibly political or based upon expediency, must be given.    
  8. In the UK the wrongness of price-fixing is not the appropriation of consumer surplus but the existence of and reliance on a hidden rule (the current cartel offence requires a clandestine agreement to fix prices). This approach differs from that in the US and the EU.
  9. It is unlikely that a global consensus can be reached on the core values to be protected. Legal systems “are nothing more than institutionalised incentive structures,” and how individuals respond to incentives depends on various cultural differences. The idea of a global solution based on the US model is misguided:

    given the social and economic structures in which the American system was born and out of which it evolved, with the resulting values it protects, it is rather incongruous (if not naive) to assume that it is appropriate to transplant it into other systems with their own (and differing) conceptions of the values served by the marketplace.

    A better alternative would be convergence along regional fronts. Regional alliances and agreements are likely to represent or flow from common norms.

The Rawlsian analysis presented in Cartels, Markets and Crime is far-reaching and ambitious. Not all readers are likely to be convinced by it.

First and most fundamentally, why wed the analysis of cartel criminalisation to Rawls’ Theory of Justice? What if one rejects that theory? What are the implications of competing theories of justice including Nozick’s Anarchy, State and Utopia and Sen’s The Idea of Justice? (Consider eg H.A. Al-Ameen, Antitrust: The Person-Centred Approach (2013)). What if one takes the view that the Theory of Justice relates to distributive justice and is opaque or incoherent on corrective justice? (See further M Tonry (ed), Retribution has a Past: Has It a Future? (2011) ch 9; A Amatrudo, “Other Theories of Justice” (2016) 8(1) Journal of the Theoretical & Philosophical Criminology, 18).

Secondly, many agree that cartels cause serious harm and undermine the important institution of the market but deny that cartel criminalisation is justified. They contend that civil or administrative penalties against corporations and individuals would be a more cost-effective and less drastic means of prevention. Cartels, Markets and Crime does not answer that question squarely.    The analytical tack taken by the author is essentially: (a) to put utilitarian normative justifications to one side as being “contentious” (pp 21-22); (b) to advance a Rawlsian normative justification for cartel criminalisation (to protect the market as a fundamental social institution) as a “supplement or substitute” for Mill’s approach (p 23); and (c) to flesh out the operational implications of that normative justification by canvassing “pragmatic grounds” and “practical justifications” (p 13). Those last-mentioned pragmatic grounds and practical justifications are vital to coming up with a workable approach to the control of cartel conduct but are not derived from Rawls’ Theory of Justice.

The analysis in Cartels, Markets and Crime would be more persuasive if it were thoroughly to explore the application of the utilitarian principle of least drastic means as a constraint on how Rawlsian harm by cartels is to be prevented. In particular, under what circumstances is it necessary to use criminal sanctions rather than civil sanctions in order to achieve the deterrence of cartel conduct and/or to reflect a retributive theory of punishment in relation to cartels?

Thirdly, cartel offences generally are considered to be workable only if they create per se liability (i.e., do not require assessment of competition effects or the application of a rule of reason).    This is largely because of the greater complication that juries would face if required to make an assessment of competition effects or to apply a rule of reason. On one possible view, a Rawlsian approach is inconsistent with per se liability (see A Ayal, “Counter-Intuitive Fairness in Antitrust” (2012) 8(3) Journal of Competition Law & Economics 627–662 at 654-59). These and other questions of legal design are not answered in the Theory of Justice; they are outside the scope of that work.

Fourthly, the insight that cartel conduct causes harm to the institution of a market is not new and does not depend on whether or not one proceeds from a Rawlsian position (see eg A MacCulloch, “The Cartel Offence: Defining an Appropriate ‘Moral Space’” (2012) 8(1) European Competition Journal 73-93). From a utilitarian perspective, the market is a key driver for generating benefits efficiently, and cartel conduct seeks to distort and manipulate that process. That approach is reflected in the Australian cartel offence (see C Beaton-Wells & B Fisse, Australian Cartel Regulation (2011), 2.4.1.4).

Fifthly, the concept of “hidden rules” is difficult to fathom. It is contended that:

Fairness, whether in law, the market, a game or in any other aspect of our life, precludes the existence of hidden rules, known only to some yet expected to be adhered to by all. The regulation of the environment of exchange is a fundamental part of those laws which regulate markets, whether they are of wide application (e.g. consumer protection law) or more narrowly focused (e.g. securities law).

The conduct of the hard-core cartelist strikes at our expectations for a fair environment for exchange. By agreeing on prices, quantities and markets with illusory ‘competitors’, the cartelists have created hidden rules, known only to themselves, but by which all [i.e., all of them] are expected to play. (p 45)

It is difficult to understand why the principle of fairness should be limited in that way. Overt rules that flagrantly breach a principle of distributive justice are of no less obvious concern than hidden rules and possibly may be of greater concern given the bad example they set for others.    In the context of cartels, overt cartel conduct may be severely anti-competitive, as is illustrated by the OPEC oil cartel. The UK cartel offence now requires secrecy as an element but that is inconsistent with the approach taken under US, Canadian and Australian law and is ill-considered.

Sixthly, much of the analysis of corporate criminal liability echoes law and economics analyses of this topic. This seems odd in a work that seeks to offer a normative justification for cartel criminalisation. The literature on normative justifications for corporate criminal liability includes detailed explorations of the concept of corporate fault and how that concept might be expressed in a workable way (see e.g., C Beaton-Wells & B Fisse, Australian Cartel Regulation (2011), 7.4).

Seventhly, the treatment of individual criminal liability takes Becker’s economic theory of deterrence as its starting point. Individual liability is treated as a useful complement to corporate liability because it can close the deterrence gap that results from corporate fines that are lower than the amount computed using Becker’s calculus.    This approach is difficult to reconcile with the widely held utilitarian and non-utilitarian view that individual accountability is a prime means of social control and not merely a tool ancillary to corporate responsibility (see B Fisse & J Braithwaite, Corporations, Crime and Accountability (1993)). It is more plausible to surmise that individual actors in a Rawlsian original position would be repelled by the postulate that individual responsibility is merely a backstop to corporate liability in cases where corporate liability alone is unlikely to be effective.

Finally, while intriguing philosophically, the quest in Cartels, Markets and Crime for a fundamental norm that justifies the criminalisation of cartel conduct is unlikely to persuade lawmakers. The prime question in their eyes is whether or not subjecting corporations and/or individuals to criminal liability rather than civil liability is likely to increase the deterrence of cartel conduct in a cost-effective way. Answers to that question can be informed by sociological research, including empirical studies of attitudes to deterrent threats and managerial behaviour within corporations. They are difficult to discover from behind a veil of ignorance.

Brent Fisse, Brent Fisse Lawyers, Sydney, Adjunct Professor of Law, University of Sydney

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