GUJARAT NATIONAL LAW UNIVERSITY

COMPETITION LAW: Vitamin Cartel- A Case

Study

Submitted by:

AAKRITI SINGH (16A003)

RIPUL SWATI KUMARI (16B130)

BATCH: 2016-2021

Submitted to:

Dr. Udayakumara Ramakrishna B.N.

Assistant Professor of Law
Gujarat National Law University

1
 TABLE OF CONTENTS

Sr. Context Page No.

No.
1. 3
ACKNOWLEDGEMENT
2. 4
INTRODUCTION
3. 4
DEFINITION OF CARTEL
4. 5
INTRODUCTION TO THE CASE
5. 6
ARTICLE 81
6. 9
ARTICLE 82
7. SOLUTION TO THE PROBLEM 10

Dealing with Business

Capacity Building of CCI officials
Action against Existing Cartels
Tie-ups with Media Houses and Consumer
Organisations
Government Policies

8. 12
CONCLUSION

2
ACKNOWLEDGMENTS

We hereby express our sincerest heartfelt gratitude to our faculty

Dr. Udayakumara Ramakrishna B.N. Professor of Law, Gujarat
National Law University for his guidance and supervision. This
project has enabled us to see the subject of “Competition Law” in
a different light all together and we are sure that our new found
interest will stay with us forever.

3
INTRODUCTION

The two main provisions of the EU antitrust law, Articles 81 and 82 of the EC Treaty,
regulate business agreements and trading activities in Europe. In this article, these
provisions and the vitamin cartel case in 2001 will be discussed.

DEFINITION OF CARTEL

Firms generally detest competition, as it drives away profits and takes away their freedom
over market activities, such as pricing and output from their control. In any market
therefore, competing firms have an incentive to coordinate their production and pricing
activities so as to mimic like a monopoly, in order to increase their collective and
individual profits by restricting market output and raising the market price. Collusion
among independent firms in the same industry to co-ordinate pricing, production or
marketing practices in order to limit competition, maximize market power and affect
market prices is referred to as a “cartel”.

A cartel can be a result of either explicit agreements or implicit collusion. Explicit

agreements occur when the cartel members actually meet to decide how to control the
market. Because such collusion is illegal in jurisdictions with effective competition laws,
such a formal agreement is likely to be highly secret and would be a result of covert
meetings, which might involve nothing more than a “casual” lunch among company
presidents, a “chance” meeting at a conference of industry executives, or company
decision-makers skulking around back alleys in the dead of the night discussing price
charges.

Firms that engage in explicit collusion are usually shrewd enough to avoid the documents
falling in the hands of anti-trust authorities. Implicit collusion, also termed tacit collusion,
occurs when the members through their actions show their willingness to engage in
collusive behaviour. An example of tacit collusion is price leadership where one firm
takes the lead of setting a price that will boost profits for the entire industry and other
firms then go along with this price, knowing that they stand to benefit by doing so. With
no formal agreement, prosecuting firms engaging in implicit collusion is difficult and it
has been used as a defence mechanism even by explicit cartels.

A cartel needs to be profitable for members to take part in it, given that it is illegal and
has risks associated with its formation and existence. The decisions to engage in the
agreement are functions of the associated risks and factors such as the probability of
being detected by the competition agency and the penalties or fines to be imposed play
the largest role. Other factors which are considered by the members include the gains in
profits associated with cartel formation, costs of coordination and monitoring for the
cartel, the opportunities to cheat and the extent to which the cartel can punish cheating
members.1

INTRODUCTION TO THE CASE

On 3rd February, 2004, the United Kingdom along with Ireland and the Netherlands
jointly filed an amici curiae brief in Empagran S.A, et al v Hoffman La-Roche Ltd et al
(the Empagran case) before the US Supreme Court in April 2004.

The UK submitted a brief because the case was of considerable importance for the future
jurisdictional scope of US law in this area and it is important the US courts are aware that
their decision has implications for competition regulation in other states as well as the
US. The UK was concerned that if the US courts entertain treble damages claims on facts
like these, it could undermine international competition law enforcement and also create
the potential for ‘forum shopping’ The UK Government believes that the most effective
way to detect and stop anti- cartel activity is to encourage mutual respect and co-
operation between countries and anti-trust enforcement agencies and that it would be
consistent with international law for the US to decline jurisdiction in this case. The
Empagran case is a class action by claimants from Australia, Ecuador, Panama and the
Ukraine who purchased vitamins from members of the Vitamins cartel in transactions
during the period from 1 January 1988 to February 1999. The Vitamins cartel (a
conspiracy of US and foreign manufacturers and distributors of bulk vitamins) engaged in

1
http://www.cci.gov.in/images/media/completed/cartel_report1_20080812115152.pdf

5
global price-fixing and market sharing arrangement. The claimants seek redress for the
losses they have suffered from their purchases. These purchases, however, took place
overseas, outside the US domestic market.

The expansive reading of the US Foreign Trade Anti-trust Improvements Act (FIAIA)
taken by the US Court of Appeals in this case, if supported by the US Supreme Court,
would allow US courts to hear claims for losses in cases with only a minimal connection
with the US. The case involves losses suffered by foreign claimants in foreign markets
for conduct outside the US. Ironically the US Foreign Trade Anti-trust Improvements Act
(FTAIA) of 1982 was originally enacted to limit the jurisdiction scope of US anti-trust
law

ARTICLE 81

Article 81 prohibits agreements or undertakings between companies that are considered

anti-competitive and makes them automatically void. Such arrangements include direct or
indirect price fixing, control of production and technical development, territorial
restrictions, applying dissimilar conditions to various parties, and reaching an agreement
subject to supplementary obligations. An example of a horizontal agreement between
competitors might be agreeing to set a minimum price for their products. A vertical
agreement that falls foul of the article might be a retailer selling certain goods exclusively
within a particular area.

There are uncertainties surrounding this article. The terms "agreements" and
"undertakings" are loosely interpreted. Therefore formal agreements as well as any
evidence of arrangements or meetings between competitors (e.g., an oral agreement) are
subject to examination or unannounced inspection under Article 81.

In 2001, eight companies were fined more than €800 million for participating in a cartel
to eliminate competition in the vitamin sector. Mario Monti, the European Commissioner
for Competition at the time, stated that these companies "charged higher prices than if

6
there had been real competition between them, harming consumers and allowing the
companies to make illicit profits." The statement could not be more elusive.

What is real competition? According to Dominick Armentano in Antitrust: The Case for
Repeal, “Competition is an open market process of discovery and adjustment, under
conditions of uncertainty, that can include interfirm rivalry as well as interfirm
cooperation.” If companies decide to cooperate with each other and share data and
information to make a projection for the future, they should be able to do so. After all,
they would not exchange information unless it was beneficial. For instance airlines form
alliances to enable passengers to collect and redeem miles and points across airlines.

In this vitamin case, eventually thirteen companies around the world shared information
with each other. They included successful companies such as Hoffmann-La Roche, the
market leader and the first producer to synthesize vitamins A and E, and the only
producer of both vitamins until the late 1960s (in 2002 the company sold the vitamins
and fine chemicals division to DSM). The commission stated that the idea behind the
cartel was to freeze the market shares in vitamin supplies at the 1988 level among
companies. The companies seemed to be happy with the arrangement as some could
protect themselves during a downturn. In 1994, there was a rapid increase in demand for
vitamin E for human consumption (para 225). Rhone-Poulenc, one of the companies
involved, had to revise its production accordingly. If, however, the increase did not give
Rhone-Poulenc it’s 16% of the market production that was previously agreed upon, other
companies would purchase goods from Rhone-Poulenc to compensate for the shortfall.
Therefore these companies voluntarily entered into agreements with their competitors, as
it was preferable to do so.

The raison d'être of Article 81 is the claim that such agreements and concerted actions
harm consumers as they eliminate competition. Hence, Monti’s use of the term “illicit
profits.” This case was not unique to the European Union but was subject to antitrust laws
around the world including the United States, Canada, and Australia. The arguments of
competition authorities and emotive journalists have been more or less the same: innocent
consumers have been victims of “some of the world's most powerful companies secretly

7
orchestrating the conspiracy.” A class-action lawyer in Canada even said that “Every
single consumer in Canada …has to be compensated, because a wrong was committed.”
Yet how does anyone know what the price would be if there had been "real competition"?
That particular price has to be known in order to figure out “illicit profits,” presumably
meaning those earned by setting prices above the “real competition price.”

On the US case, Lew Rockwell commented in 2000: “there is no way to tell what the
correct price for vitamins should be apart from real-life market settings.” No one is
capable of master calculation of right prices except entrepreneurs who, after putting out
their products in the market, leave their success or failure to the hands of consumers. For
instance, there is hot chocolate powder, which contains nine different vitamins.
Consumers don't check the contributing costs of those vitamins; they only check how
much the powder is per unit (500g, for example) before deciding whether or not to buy
some. It is immaterial to them how much the producer has to pay for each vitamin
ingredient. Likewise, the hot chocolate producer decides how much he is willing to pay
for each ingredient. Therefore it is not convincing to claim that consumers have been
harmed as they willingly purchase these goods. Until the investigations began, hardly
anyone claimed that the price of vitamins had soared over the years due to the cartel
because vitamin prices simply have not increased sharply.

One objection against the article based on legal grounds is that it disregards the privity of
contract between parties. In order to maintain a sound business relationship, parties enter
into an agreement voluntarily. By enacting competition law, businessmen must pay close
attention to actions of those who are not party to the contract. To avoid any invalidity in
the future, businessmen will want to know, before entering into an agreement, if the
commission approves of such an agreement, disapproves of it, or approves of it only on
certain conditions. Effectively, the commission disrespects the ability of companies to
enter into a business agreement voluntarily. Furthermore, anyone not a party to the
agreement, who considers himself a victim (e.g., consumers, other competitors), can
bring an action against those who are parties to the agreement. The implication is that
parties to the agreement face arbitrary contention and hefty fines or damages, potentially
for any agreement they make.

8
Certain cases are exempt from Article 81. If the companies in question are small and have
“no effect” on intra-EU trade, they will not be subject to the provisions under Article 81
(de minimis). Also if companies collaborate for a research and development purpose, they
are exempt.

Agreements are allowed if they have more positive effects than negative effects. But why
would companies enter into an agreement unless they can benefit from it? And the only
way they can benefit is by satisfying their customers, in which case all such agreements
have to have more positive effects than negative ones.

In addition the commission will be lenient to a company that cooperates with commission
investigations or blows the whistle on a competitor with whom it entered into a collusive
agreement. If this is the case, a malicious company could enter into an agreement with its
competitor with the specific goal of reporting to authorities so as to inflict damages on
that particular competitor.

ARTICLE 82

Article 82 prohibits any abuse of a dominant position by a company. Two main issues
arise from this: dominant positions and abusive behaviors.

A company is often said to have a dominant position when it has over 40% of the market
share. This in itself is not a contravention of Article 82. How do we know what the
relevant market is?

If a company makes chocolate, the following might be considered: Where is the

chocolate mainly sold? Are there close competitors? Does the company have its own
distribution network? Does it have favorable access to raw materials compared to its
competitors?

The commission might define the relevant market as a confectionary market in Europe or
it can be narrowly defined as a luxury chocolate market in England.

9
Once the market is defined and the dominance determined, the commission looks at any
behavior that might be considered abusive. Examples are overcharging customers,
predatory pricing, barriers of entry to competitors, and making the sale of one product
conditional on the sale of another.

According to the commission report called EU Competition Policy and the Consumer,
"dominant companies have the economic strength to act without having to take account
of either their competitors or their consumers." This is false. All companies are subject to
close scrutiny by consumers. A company that used to thrive can collapse if consumers are
not satisfied. Consumers have no obligation to purchase goods made by certain
companies in a free market. No company is immune to ever-changing consumer tastes.
Some may seem indestructible precisely because managers are able to adapt to various
situations and endeavor to continue making profits.

One might wonder what would have happened had the vitamin companies not shared
information with each other. Hoffmann-La Roche was said to have a world vitamin
market share of 50% and its range was the widest of all vitamin products. The
commission could have begun an investigation under Article 82 for the company's
dominant position, but it was accused instead, under Article 81, of raising the prices of
vitamins. If the company ever decreased its prices, it might have been accused of abusing
its dominant position to drive out competitors through predatory pricing.2

SOLUTION TO THE PROBLEM

Dealing with Business

It is important to educate business houses/associations on cartels. There have been

instances where business houses or associations form a cartel without having an
understanding of the fact that their action would come in the ambit of being a cartel. The
practice becomes a norm without proper knowledge and prosecution of cartelisation.
Reader-friendly booklets and pamphlets should be prepared and published with case
studies from around the world, explaining what cartels are, the harm that they cause and
2
http://mises.org/story/2601

10
how to report them. This would help to curb cartel activities and business houses could be
stopped from forming a cartel or running an existing cartel. Private notification or
complaint is an important source of information to trigger cartel cases. A cordial
relationship with the business houses, consumers and media should be developed and
encourage them to give information about cartel activities in the industry.

Capacity Building of CCI officials

It would be important to build in-house capacity on the understanding towards cartels.

There is not much experience that could be gained from the past and hence the officials
who would be interacting with business houses, association etc, need to have a sound
understanding of cartels, thus they should undergo training programmes that would give
them an exposure on cartels. In addition to this, external advisers should be involved as
experts for providing training programmes. It is also important to build the capacity of
staff on issues relating to software, as explained above. It would be beneficial to hire IT
experts who could then train the staff in-house.

Action against Existing Cartels

In recent time, various media houses have reported the maiden attempts of business
houses to form a cartel. There have been several reports of cartels in cement, steel,
pharmaceuticals time and again. Commission can undertake in-depth study of such
sectoral cartels and come out with their own analyses. The study would be undertaken for
the purpose of in-house capacity building of the officials for better understanding of the
workings of cartels.

Tie-ups with Media Houses and Consumer Organisations

Often cartels are reported in the media, which have a lot of useful information on the
activities that take place in the market. Officers should build a relationship with media
and consumer organizations, which could act as informers and provide the Commission
with vital information on existence of cartels.

11
Government Policies

As brought out in the report, there have been cases where government procurement
policy or its implementation created incentives for formation of cartels. Hence, while
investigating a case, the Commission should keep this factor in mind. It is important to
create an environment that discourages formation of cartels rather than continue to detect
and prosecute cartels without doing much about the root causes.3

CONCLUSION

The EU antitrust law leaves many businessmen in a fog. It is difficult enough satisfying
fickle consumers. On top of that, they have to devote a lot of time and resources into
complying with regulations that in fact hamper competition in markets. The regulators
are effectively saying that they know more efficient ways of organizing markets than
those who actually buy and sell. As a person with no experience of running a restaurant,
if I told a restaurant owner how much meat and vegetables to buy per day, how many
bottles of lemonades to buy, how many waiters to hire and so on, it would be disastrous.
Such knowledge can only be gained through experience and no super calculation can
compete with that.

***

3
http://www.cci.gov.in/images/workshop/14_15march07/14udai.pdf.

12