By Pradeep S Mehta
Need to penalise members who benefit from such practices.
Trade associations play the important role of mobilising voices of different players across sectors, which makes it easy for advocacy purposes as well as for negotiating issues of common interest to the members. However, in the process, associations often go beyond their legal mandate and end up being avenues for anti-competitive behaviour.
In June 2015, the Competition Commission of India (CCI) penalised two associations, the Kerala Film Exhibitors Federation (KFEF), an association of theatre-owners, and Film Distributors Association (FDA), Kerala, an association of film distributors, for engaging in anti-competitive practices that prevented the screening of new films by members who were not part of the two associations. CCI imposed a penalty of R56,134 on KFEF and R45,189 on FDA. The president and general secretary of KFEF and FDA, who were actively involved in the anti-competitive decision making, were also penalised. In December 2014, CCI had also imposed a fine of R75,315 on FDA and members of its executive committee for imposing fixed revenue sharing patterns as distributors’ share.
The two are not the only associations that CCI has cracked down on over the past year. In January 2015, CCI imposed a fine of R2,60,463 on Dumper-Owners’ Association (DOA) for facilitating cartelisation by its members. The competition authority also imposed a fine of R1,26,029 on the association’s office bearers for their role in the process. The same month, CCI also imposed a penalty of R2,65,423 on Himachal Pradesh Society of Chemists and Druggists Alliance (HPSCDA) and R28,276 on the president/office bearer of HPSCDA for facilitating anti-competitive practices. In February 2015, CCI imposed a fine of R2.28 lakh on Kiratpur Sahib Truck Operators Co-operative Transport Society Limited (KSTOCTS) and an undisclosed amount, calculated as 5% of the average income of the last three preceding years on the office bearers of KSTOCTS.
This has also ushered in a new debate on who really should bear the highest burden when fines are imposed: the trade association, the office-bearers of the association, or the members of the association. In general, trade associations can be very powerful in killing competition among their members by forming a cartel. A cartel is costly to organise as individual members have to invest in methods of agreeing on common positions and monitoring each other without being detected. The association thus becomes a cost-cutting avenue through which the same objective can be met. Thus, ensuring that trade associations refrain from engaging in such practices is very important. Examples from Pakistan and Japan during the same period also show that there is now a common view regarding associations and their roles in killing competition.
In February 2015, the Competition Commission of Pakistan (CCP) imposed a penalty of Pakistani rupees 140 million on Pakistan Automobile Manufacturers Authorised Dealers Association (PAMADA) for fixing rates for automobile body repairs and paint jobs. PAMADA had also imposed a policy where its members had to seek no-objection certificate from previous employers before hiring a former employee of a fellow automobile dealer. In January 2015, the Japan Fair Trade Commission (JFTC) issued a cease-and-desist order to Abashiri Concrete Products Association after the association designated a seller for each user and imposed a discount rate limit of 10%. JFTC also imposed a total of $47.43 million (5,859 million yen) as surcharge (fine) on members of the association for engaging in the conduct.
While the competition authorities in both countries took action, some differences in approach can be evident from the decisions. In India, there is separate treatment of the trade association, its members and office bearers, unlike in Japan and Pakistan. In India, the competition authority frowns upon the association more than its members, given that it is only the associations together with the office-bearers that were penalised while the members of the associations were not fined. In Japan, the trade association was simply given a cease-and-desist order, while the members were asked to pay the fine (surcharge). In Japan, a ‘surcharge’ rather than a fine is imposed as JFTC is not a judicial body.
Penalties generally serve two purposes: A deterrent tool, and a way of making sure that there is redistribution justice, where illegal rents are extracted from the benefiting agents. For the latter purpose, fines are calculated in relation to the direct benefits that one would have enjoyed from the damage. Associations normally profit from membership fees, which may not be related to individual firm productivity but would be uniform across firms. However, it is the firms who are the members of the association that benefit most from cartels as they enjoy higher profits. Thus, the firms should also be penalised more, even if they were forced by the trade association into the conduct, since there is a need to expropriate the rent they would have enjoyed for redistribution justice. Also, since it is the office-bearers who actually take the most active part in enforcing the cartel, they should also be penalised in their individual capacity, since they can also be from member firms, elected on a rotation basis.
Based on this argument, CCI and CCP may have left the real beneficiaries who profited from the transactions unpunished. This might call for ensuring that the members of the association, the primary beneficiaries of the anti-competitive practices, are made more liable once probes establish their roles. Although the members of the cartel should be punished more, there should also be liability on the part of the association, as they are often the instigators. Thus, fines on the association should be seen more as serving the deterrent purpose, to discouraging similar practices in future. Cases where the association only escapes with a cease-and-desist order appear to trivialise the situation. In most cases, these associations actually force the members to play ball.
Cornelius Dube of CUTS contributed to this article.
The author is secretary general, CUTS International