Airline cartel fines could be better used

Financial Times, October 16, 2007

An International Competition Trust Fund should be accessible to any developing country’s government and/or non-profit institution to promote competition culture through generation of awareness and capacity-building, say Pradeep S. Mehta

Record fines of more than $500m have been levied on British Airways and Korean Air Lines by the UK and US competition authorities for their part in a web of global conspiracies in airline travel.

These fines will accrue to the British and American treasuries. In the case of the US, private action against the airlines is bound to be taken to seek compensation for American travellers.

The victims of these cartels are from all over the world, rather than residents of the US and the UK alone. The question arises as to who will defend the claims of non-residents and whether they will be compensated at all. The problem is that in the developing world, competition regimes are either weak or non-existent. For their consumers the hope of recovering compensation by local action is rather dim.

If damages suits in the US are successful, compensation will be paid to its citizens only. It would appear unfair to compensate only one group of passengers and indeed paying damages to individual customers may be cumbersome. Hence a popular opinion is that such damages should be used to promote education about competition in developing countries. Greater awareness would speed up the legislative process in such countries and strengthen their competition culture.

Competition culture and enforcement in rich countries is fairly advanced. Under the provisions of the UK Competition Act 1998, which grants amnesty to whistle-blowers, Virgin Atlantic squealed on British Airways. BA admitted to the Office of Fair Trading that it had fixed rates for air-cargo shipments between March 2002 and February 2006, and co-ordinated fuel surcharges with Virgin between August 2004 and January 2006. During that period, the surcharges rose from £5 to £60 per ticket for BA and Virgin Atlantic long-haul flights. These cartels are also facing action in Australia, South Africa and other countries with developed competition regimes.

A suggestion to create a fund out of such fines to assist the developing world was proposed by the Czech Republic at the annual United Nations Conference on Trade and Development intergovernmental group of experts meeting on competition policy and law in Geneva in July. The Czech proposal stirred up quite a storm. In the debate, the delegate from the US Department of Justice suggested that the Czechs should start such a scheme in their own country and then advocate it to others; in other words, “put your money where your mouth is”.

In fact, in the US, quite often fines in antitrust cases brought about through private class actions are put into a trust account to pursue education and research on competition law issues. From time to time the courts authorise distribution of unclaimed funds from the settlement of class action cases to charitable or educational entities closely related to the nature of the case under a legal doctrine called cy pres , a legal tag meaning “next best use”.

In June, the George Washington University Law School received a cy pres award of $5.1m to endow a centre for competition law. The award resulted from a successful class-action antitrust lawsuit. The centre’s mission would include sponsoring and conducting research into competition law and its private enforcement, organising conferences for judges, executive officials, academics and lawyers, serving as a resource for those seeking to promote private enforcement in competition law in the US and abroad, and enhancing the skills of current and future private practitioners of competition law.

The law school at Loyola University in Chicago received an award to establish the Institute of Consumer Antitrust in 1994. The Vitamin Cases Consumer Settlement Fund (California), created out of a settlement with manufacturers in the case of a bulk vitamins cartel, has already made 52 grants totalling more than $29m for a wide range of projects involving food delivery to the needy, antitrust enforcement and public policy, nutritional and health outreach, food quality, professional education and training and nutrition research. More is in the pipeline.

The vitamins case was one of the 16 egregious international cartels that operated during the 1990s. Others included electrical equipment, graphite electrodes and food additives. Developing countries’ imports of goods from the cartels in 1997 amounted to $81.1bn, or 6.7 per cent of their imports. With an estimated increase in price of between 20 and 40 per cent, one can calculate a range of estimates for the overcharges paid by developing countries in 1997, if all 16 of these cartels were operating during that year. These overcharges are in the range of $16bn to $32bn, equivalent to between a third and two-thirds of the total annual multilateral and bilateral aid received by developing countries in the late 1990s.

Thus, the case for strengthening the enforcement and advocacy activities of competition authorities in the developing world vis-à-vis damages from legal action against cartels is strong. This can be done through the creation of an International Competition Trust Fund, to be managed by a credible inter-government organisation such as the World Bank. Such a fund should be accessible to any developing country’s government and/or non-profit institution to promote competition culture through generation of awareness and capacity-building. Such a project would make eminent sense and promote the agenda for competition law and -policy worldwide

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