The Federation of Small Businesses has warned that UK productivity growth will continue to stall...
20 FAQs people ask about cartels.
- What is a cartel?
- What are the 'hardcore' cartel offences under the 2002 Enterprise Act?
- Are there any exceptions where businesses are allowed to collaborate?
- Can we be caught by the cartel rules even if we haven't made an agreement to take part in a cartel?
- Do the cartel rules still apply if we are small businesses?
- Do the cartel rules apply if the customer suggests that we collaborate with other businesses?
- What if we operate under a distribution agreement that limits our freedom to compete?
- Does it count as a cartel if we collaborate with another business just for a one-off project?
- Could a purchasing consortium be a cartel?
- How much information are we allowed to share with our competitors, for example, in a benchmarking study or through our trade association?
- Who regulates competition and investigates cartels?
- What will happen if the regulator thinks we are part of a cartel?
- What are the penalties for taking part in a cartel?
- Can I personally be prosecuted if my business is part of a cartel?
- Can businesses that are victims of a cartel sue for compensation?
- What should I do if my business is part of a cartel?
- What should I do if I think my business is the victim of other businesses acting in a cartel?
- What are the rules if we have a monopoly or a dominant market position even without collaborating with our competitors?
- What happens if a merger or joint venture creates a cartel or a monopoly?
- Can a small business be a monopoly?
1. What is a cartel?
A cartel is an agreement between businesses not to compete with each other. For example, a business and its competitors might agree not to compete on price or they might share out customers rather than competing to win orders.
Being part of a cartel is prohibited by the Competition Act. In addition, certain 'hardcore' offences are covered by the Enterprise Act (see 2).
2. What are the 'hardcore' cartel offences under the 2002 Enterprise Act?
Broadly speaking, the hardcore offences are:
- price fixing – including, for example, agreeing limits on the discounts you offer
- market sharing (sharing out customers rather than competing for their business)
- limiting production or supply, for example, to maintain artificially high prices
- bid rigging (where cartel members agree among themselves what bids they will make in a tender rather than competing honestly)
3. Are there any exceptions where businesses are allowed to collaborate?
Operating a cartel – collaborating with competitors to reduce competition – is almost always an offence. There are two exceptions:
- you can collaborate with another business in bidding for a contract so long as this is with the knowledge and consent of the customer
- you can agree not to compete with a joint venture in which you are involved
More broadly, businesses are generally allowed to collaborate if this does not reduce competition. This is usually the case where the businesses do not normally compete, for example, if they work together on different parts of a project or are at different levels in the supply chain (eg a manufacturer and a distributor).
There are a number of special cases and exemptions:
- Many research and development agreements are permitted so long as the companies' combined market share is at most 25%.
- Some other specialisation agreements between businesses with a combined market share of at most 20% are permitted (see 20).
- Special rules cover technology licensing agreements.
- Certain industries (eg shipping) have exemptions.
The penalties for anti-competitive behaviour can be severe. You should take advice before any collaboration if you are concerned that it may not be permitted.
4. Can we be caught by the cartel rules even if we haven't made an agreement to take part in a cartel?
The cartel rules apply if you have any form of understanding that you will take part in a cartel.
You might even be caught out if you inadvertently act in an anti-competitive way. For example, discussing your pricing plans with a competitor – for whatever reason – might contribute to a common approach to pricing and accusations of price-fixing (see 10).
Similarly, you might employ a freelance buyer, knowing they also work for your competitors and they're likely to obtain a similar price for your purchases and theirs. If you have had no discussion about this with your competitors, you are not in a cartel agreement. However, you need to take care that your use of this buyer is not challenged as anti-competitive or an infringement of the 'hardcore' offence of limiting supply, since the buyer will have considerable power over purchasing prices (see 2). You should take legal advice.
5. Do the cartel rules still apply if we are small businesses?
Yes. Whatever the size of your business, you must not take part in a cartel or commit any of the 'hardcore' offences such as price-fixing (see 2).
Other competition regulations generally focus on businesses that are large enough to have an appreciable impact on the market. In some specialist markets, however, such businesses could be small.
6. Do the cartel rules apply if the customer suggests that we collaborate with other businesses?
You are allowed to collaborate on a bid provided that you have the knowledge and consent of the customer. For example, you might openly collaborate with another company to submit a joint tender for a contract that neither of you could fulfil independently.
However, although you might be encouraged to collaborate on a particular bid, the other cartel rules still apply.
7. What if we operate under a distribution agreement that limits our freedom to compete?
As long as the distribution agreement is between you and your supplier, rather than with the other distributors, you are unlikely to be breaking the cartel rules.
There are, however, regulations under the Competition Act that cover distribution agreements. A distribution agreement cannot fix the price you sell at or prevent you from selling 'passively' to customers from outside your territory who approach you. If the supplier has a market share of 30% or higher, the agreement cannot prevent you selling outside your territory.
8. Does it count as a cartel if we collaborate with another business just for a one-off project?
There are a few special cases where you are allowed to collaborate with another business, for example, certain kinds of research and development agreement (see 3). But otherwise, anti-competitive agreements with your competitors are not permitted, even if they only apply to a one-off project.
9. Could a purchasing consortium be a cartel?
A purchasing consortium is unlikely to be considered a cartel unless it forms part of a wider agreement to reduce competition between consortium members.
Nevertheless, a purchasing consortium with a significant market share might be considered anti-competitive. If members of the consortium agree what prices to offer suppliers, or who will place purchase orders with which supplier, you could be investigated for breaching the Competition Act.
10. How much information are we allowed to share with our competitors, for example, in a benchmarking study or through our trade association?
There can be a fine distinction between sharing best practice and engaging in anti-competitive behaviour.
Any sharing of information with your competitors runs the risk of being considered anti-competitive. The key issue is the type of information you share and whether this affects future competition. For example, discussing your pricing plans with your competitors is likely to be anti-competitive – particularly if you all then increase prices in an apparently co-ordinated way. Similarly, sharing information on your marketing plans could present problems, particularly if you then appear to share out the market among yourselves. On the other hand, sharing historical information is less likely to cause problems.
A trade association or forum discussing new developments and best practice would not generally present a problem. Again, however, you need to ensure that this does not lead to anti-competitive behaviour. For example, agreeing common industry standards might reduce competition between members.
If in doubt, take legal advice, rather than run the risk of being investigated – and possibly prosecuted – for anti-competitive behaviour.
11. Who regulates competition and investigates cartels?
The key regulator is the Competion and Markets Authority (CMA). The CMA undertakes its own investigations into whether markets are properly competitive and can also respond to complaints of anti-competitive behaviour.
The largest businesses may also be regulated and investigated by the European Union Commission.
12. What will happen if the regulator thinks we are part of a cartel?
The Competion and Markets Authority (CMA) has extensive powers to investigate. For example, the CMA might require you to provide information or produce documents; they could also get a warrant to search your premises.
13. What are the penalties for taking part in a cartel?
Your business could be fined up to 10% per cent of its worldwide turnover. Fines are not normally imposed on smaller businesses (with a combined turnover of up to £20m) unless they have been involved in price-fixing.
In addition, the Competion and Markets Authority (CMA) might apply for individual directors to be disqualified from being a director for up to 15 years. Individuals involved in cartel activities can be prosecuted (see 14) and could receive up to five years in prison and/or an unlimited fine. Other businesses may also be able to sue your business for compensation (see 15).
Penalties are more likely to be severe if the CMA considers you to have acted intentionally or negligently and if more senior individuals within the business were involved.
14. Can I personally be prosecuted if my business is part of a cartel?
Dishonestly operating a cartel is a criminal offence. If you are personally involved in the cartel agreement, either as a director or an employee, you could be prosecuted. Penalties include up to five years imprisonment and an unlimited fine. You may also be disqualified from being a director.
15. Can businesses that are victims of a cartel sue for compensation
Yes. They can sue your business for any financial loss they have suffered as a result of your cartel activities. Similarly, customers can sue if they suffer loss as a result of a company abusing a dominant market position.
If you have already been fined by the Competion and Markets Authority (CMA) or have admitted to acting in a cartel, this will prove the existence of the cartel. The level of compensation might typically include any loss customers suffered from overcharging due to price fixing among cartel members. A claim might also be made for exemplary damages based on the profits made by cartel members.
16. What should I do if my business is part of a cartel?
You should stop your involvement and confess to the Competion and Markets Authority (CMA). If you cooperate with the CMA, you may be granted immunity from prosecution or be given a reduced fine (both for your role as a business and as an individual). The prospects for leniency are greatly improved if you are the first member of the cartel to come forward.
Even if you are granted full immunity, you may still face legal action from other businesses that have been harmed by your anti-competitive behaviour.
You should discuss your situation and the likely outcome with your legal advisor.
17. What should I do if I think my business is the victim of other businesses acting in a cartel?
Complain to the Competion and Markets Authority (CMA). It will discuss your complaint with you and may launch an investigation if deemed justified. The more evidence you can provide to back up your complaint, the better.
18. What are the rules if we have a monopoly or a dominant market position even without collaborating with our competitors?
You must not abuse a dominant market position. Whether your business is dominant or not will depend on your market share (typically 40% or more) and the nature of competition in your market.
Setting unfair prices, either as a seller or as a purchaser, is an abuse of your market position. Similarly, you must not use your position to limit competition, for example, by leaning on your suppliers not to sell to your competitors.
19. What happens if a merger or joint venture creates a cartel or a monopoly?
If a merger results in a substantial lessening of competition, the Competion and Markets Authority (CMA) may investigate. This can lead to requirements to take steps to reduce the impact of the merger, or even to a merger being prevented.
Mergers between smaller businesses (turnover below £70 million) will not be investigated unless between them they supply or buy at least 25% of a particular type of goods or service across the UK (or a large part of it).
Depending on the agreement, a joint venture may create a cartel. For example, two businesses each producing the same two products could agree to rationalise production, so that one business produces one product (and supplies it to the other) and vice versa. Specialisation agreements like this may be permitted so long as the benefits outweigh the loss of competition, and the combined market share of the two businesses is 20% at most.
Your legal adviser will review the competition implications as part of any merger or joint venture transaction, and advise you on the best way to proceed.
20. Can a small business be a monopoly?
If you are the only business supplying your product to your market, you have a monopoly no matter how small your business. Similarly, you could have a dominant market position if your competitors are much weaker than you. A relatively small business could be dominant (or even a monopoly) in its particular local or niche market.
The Competion and Markets Authority (CMA) might take action against you, but will not impose financial penalties as a result of conduct of minor significance – typically where your business has a turnover of less than £50m. However, other businesses might still be able to claim compensation for any damage they suffer as a result of your abuse of a dominant market position.