Contributed by Himanshu Shrivastava

Cartels, the puppet masters of greed, pulling strings to choke fair competition and inflate prices, constantly adapt and innovate to evade scrutiny from governing bodies. The hub-and-spoke cartel represents a similar evolution of cartels, moving in the same direction. This blog aims to offer a preliminary understanding of the hub-and-spokes model of cartels, along with delving into some of its classic case studies and legal measures aimed at its prevention. It further dives into the topic of sanctioning cartels, with a particular focus on the recently introduced Leniency Plus Regime.

INTRODUCTION

Cartels compete in the same industry and seek to reduce market competition by deploying an array of tactics, such as supply reduction, price fixing, and collusive bidding. Their activities harm customers by increasing prices and reducing transparency. It may also precipitate another adverse scenario by discouraging innovation, erecting barriers for entry of new firms, or preventing existing firms from innovating in product design, production processes, and firm’s structures. In most jurisdictions, including India, cartels are regarded as illegal and promoters of anti-competitive behavior. Section 3 of the Competition Act of 2002 and numerous other regulations, including the Competition Commission of India (Lesser Penalty) Regulations 2009 (the Leniency Regulations), address anticompetitive arrangements, such as cartels.

HUB-AND-SPOKE CARTEL

Hub-and-spoke Cartel represents a modern iteration of the traditional cartel networks. It involves a central ‘hub’ coordinating collusion among ‘spokes,’ typically smaller firms or subsidiaries, to achieve anti competitive objectives. The hub facilitates communication and agreements, while the spokes adhere to these arrangements, collectively influencing market dynamics. This structure poses significant challenges for legal and regulatory enforcement. Proving collusion within these arrangements is challenging due to the indirect methods of communication and coordination employed by participants. To establish collusion and ensure accountability among the implicated parties, authorities might have to depend on circumstantial evidence, disclosures from whistleblowers, or meticulous scrutiny of communications and financial documentation.

CLASSIC CASES OF HUB-AND-SPOKE MODEL OF CARTELS

Let’s explore a selection of notable cases of hub and spoke cartels across three common law jurisdictions – India, the United States, and the United Kingdom. By exploring these cases from such diverse legal landscapes, we can gain valuable insights into the prevalence and implications of hub and spoke models in different regulatory environments.

India—  In its analysis of cases like Fx Enterprise Solutions Limited Case No. 36 of 2014 and Jasper Infotech Case No. 61 of 2014, the Competition Commission of India (CCI) focused on potential violations under the Competition Act, 2002. These cases involved allegations that hub-and-spoke arrangements were being used to facilitate resale price maintenance (RPM), where suppliers mandate the minimum prices at which resellers can sell their products. However, the CCI refrained from formally identifying these arrangements as hub-and-spoke cartels.

The Builder’s Association of India v. The Cement Manufacturers’ Association and Others Case No. 29/2010

The Builder’s Association of India v. The Cement Manufacturers’ Association and Others case is a prime example of the hub-and-spoke cartel in India. Here, the Cement Manufacturers’ Association (CMA) acted as the hub, helping 11 major cement companies coordinate their actions. Instead of directly communicating with each other, these companies used the CMA to exchange sensitive information about prices, production, and supply. This coordination led to suspiciously aligned pricing patterns and controlled dispatch schedules in late 2010. The Competition Commission of India (CCI) saw this as a violation of the Competition Act, 2002. They pointed to evidence like similar price increases, synchronized reductions in supply, and unusually high profit margins to show the companies were acting in concert. The CCI imposed hefty penalties, reaffirming that even indirect coordination through an intermediary can lead to serious consequences.

USA — Interstate Circuit, Inc. v. United States 306 U.S. 208 (1939)

A “hub” for motion picture exhibitors, Interstate Circuit forced different movie distributors (spokes) to increase the prices of second-run cinemas, where the rates were often low, by entering into anti-competitive agreements. Interstate stipulated a minimum price for first-run films and forbade double features in a demand letter it delivered to its eight movie distributors, naming the recipients on the front of the document. The Supreme Court used the letter to identify a rim, noting that the movie exhibitor had given all distributors advance notice that the proposal would be considered by others and that there was potential profit through coordination by listing the recipients on the front of the letter, providing “a strong intent for collusive action.”

UK — Toys “R” Us v. FTC 221 F. 3d 928 (2000)

In 2003, the Office of Fair Trading, the UK’s Competition Law Enforcer, fined Hasbro, Argos, and Littlewood for entering an anti-competitive arrangement. Toy maker Hasbro served as a “hub” and negotiated anti-competitive deals with catalog sellers Argos and Littlewood “spokes” by finding the similar products in each company’s catalog on its own and convincing them to charge a suggested retail price. The hub conveyed a guarantee to toy producers (the spokes), even going so far as to send out the statement, “I’ll stop if they stop.” This presented a “compelling case for inferring a horizontal agreement,” according to the court.

LEGAL FRAMEWORK TARGETING HUB AND SPOKE CARTELS

The US and UK use inference standards and concerted practice models, respectively, to robustly establish the unlawfulness of ‘hub-and-spoke’ arrangements. In contrast, India’s regulatory measures in this regard are relatively less stringent. Before 2019, hub-and-spoke forms of cartel were rarely discussed in Indian competition law jurisprudence. The emergence of different hybrid and neo-anti-competitive agreements, like hub and spoke models, was first observed by the Indian Competition Law Reform Committee in 2019.

Now, in pursuit of further advancement, an explanation proviso has been introduced to Section 3(3) of the Competition Act through an amendment. Accordingly, entities that do not engage in the exact same or related trade will also be deemed to be parties to an anti-competitive agreement if they take part in or plan to take part in the agreement’s implementation. This includes those who assist in the facilitation of anti-competitive horizontal agreements, such as hub-and-spoke cartels, in which people or groups, including consultants and trade associations, function as middlemen to encourage collaboration.

SANCTIONING CARTELS AND THE LENIENCY PLUS PROGRAMME

The main purpose of sanctioning a discovered cartel is to establish deterrence; however, there is a very low possibility of discovering or, let alone, punishing all the existing cartels. Therefore, several experts argue that in situations where there is a successful prosecution, the total fine imposed on the involved cartels ought to be greater than the profit they made. For example, if the chances of finding and successfully punishing cartels were one in five, five times a fine should be imposed on all the discovered cartels. However, experts in competition law neither have a united opinion on this number nor is there any reliable data on revenue collection by such cartels.

Thus, in some cases, the optimal fine happens to be so trivial that it fails to attain deterrence, while in other cases, it would be so disproportionately high, leading to the financial ruin of the involved companies. In such a scenario, an alternative for sanctioning individuals so involved in this framework seems ideal. Sanctioning individuals serves two purposes: a fine so high imposed on one certain individual would dissuade them from entering any such framework, and it would facilitate enforcement agencies in incentivizing individuals to disclose the existence of such cartels.

India has a provision for leniency applications, which, in case of cartels, occurs when a member of a cartel comes forward to voluntarily confess their involvement to authorities in exchange for reduced or immunity from penalties. It helps uncover cartel activities and aids in prosecuting them. On February 20, 2024, the CCI published a notification titled CCI (Lesser Penalty) Regulations, 2024 (“LP Regulations”). The LP Plus regime allows for a penalty reduction when an applicant who has already disclosed a cartel (“first cartel”) provides truthful and complete information about a second cartel (“second cartel”). The applicant may receive up to a 30% reduction for the first cartel and up to 100% for the second cartel. This approach aligns with similar leniency programs in countries like the US, UK, Singapore, and Brazil.

By encouraging disclosure, the LP Regulations aim to strengthen cartel enforcement and deter anti-competitive practices in India. However, to be fully effective, the framework requires robust whistleblower protections and additional incentives for informants to uncover cartel behavior and promote fair competition.

CONCLUSION

The CCI’s enforcement policy is not new in the realm of hub-and-spoke setups. But there’s no doubt that adding these specifically to Section 3(3) of the Act will clear up the legal uncertainties and bring more clarity to the hub and spoke model of the cartel. However, applying this clause in a way that is in consonance with global norms may have some initial difficulties. Thus, for now, it would be beneficial to take a milder stance until the concerns highlighted by the new clause are clarified. The issue of delineating boundaries in competition law that separates ”positive information sharing” from ”anti-competitive information exchanges” is yet to be resolved, and to guarantee robust enforcement against hub and spoke cartels as envisaged in the Amendment Act, India must have more clarity in its information sharing jurisprudence. Secondly, the implementation of cartel detection mechanisms like Leniency Programme and Enhanced Leniency Programme are a significant step forward in combating anti-competitive practices, especially with regards to highly secret models of cartels such as the hub and spoke model. Furthermore, through the implementation of whistleblower protection measures and incentivizing individuals who share information, a comprehensive regulatory framework can be established in the future.