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Why did the cartel cross the road

10 Jun 2019 / competition law Print

Why did the cartel cross the road?

Hungarian watermelons, Dutch power stations, and US web platforms were among the subjects of cases cited when some of Europe’s leading experts in competition law met in London to debate what makes a cartel acceptable in law. 

The event was held on 22 March 2019 to mark the centenary of a very Irish case, played out against the drama of the independence struggle.

The House of Lords’ 1919 decision in McEllistrim v Ballymacelligott Cooperative Agricultural and Dairy Societywas one of the first to deal with the clash between the common law doctrine of restraint of trade and the requirements of long-term policy objectives – in this case, the need for investment in the dairy industry.

Competition law is still grappling with such problems today, the London workshop heard.

It was organised by Prof Imelda Maher of University College Dublin and Dr Niamh Dunne of the London School of Economics.

Restrictive rules

A notable participant was Joseph Mannix, principal of Tralee firm Mannix & Co. He is a great-grandnephew of Richard McEllistrim, who brought the case against restrictive rules imposed by the Ballymacelligott Cooperative Society in 1915.

“I was introduced to the case as a third-year undergraduate at Trinity, studying European Community (as was) law under Prof Mary Robinson – a wonderful teacher,” Mannix recalls.

He remains fascinated by the case, especially by the involvement of Kerry solicitors all the way through, culminating in the instruction of Serjeant AM Sullivan KC for the appellant before five Law Lords, headed by Lord Birkenhead, the Lord Chancellor. 

In their ruling on 24 March 1919, the lords found four-to-one for the appellant, reversing the order of the Court of Appeal in Ireland.

The judgment declared that the cooperative’s rule barring members from selling milk elsewhere, in effect for life, was “illegal as in restraint of trade and ultra vires the society”, and restored the first instance High Court judgment. The respondents were landed with the costs of the appeal, as well as the lower court actions.

Clash

Of course, the matter did not end there. In 1919, any clash between the cooperative movement – famously described as “applied Sinn Féinism” – and the British establishment was going to be highly charged.

Five months after the judgment, one of the creameries that Richard McEllistrim had been supplying, Slattery & Sons in Tralee, was blown up with gelignite. A note posted at the gate said: “There is a higher tribunal than the House of Lords, and that tribunal decided that Slattery’s Creamery no longer exists.”

Later, in 1920, the Ballymacelligott Cooperative was itself burned down by Crown forces in a celebrated clash between the IRA and the British Army Auxiliaries (known as the Black and Tans).

At the London seminar, economic historian Eoin McLaughlin (University of Cork) noted that the conflict divided the McEllistrim family itself. Richard McEllistrim’s nephew was IRA commander Tom McEllistrim – Joseph Mannix’s maternal grandfather – and founder of the Kerry political dynasty.

Vertically binding

McLaughlin’s research attributes the relative failure of Ireland’s dairy industry from the end of the 19th century to the inability of Irish cooperatives to enforce vertically binding contracts.

“This was an essential part of cooperation,” he says, “since, without it, creameries could not be ensured a regular or sufficient supply of milk, and thus the capital investment by farmers to found the cooperative might not be made in the first place.”

The obvious contrast is with Denmark, which successfully established co-operative creameries through contracts with member farmers that were enforced by the Danish courts.

Binding contracts

After independence, McLaughlin noted, the picture changed. Binding contracts were introduced under the 1928 Creamery Act, which made it illegal for cooperative societies to accept milk from members of other societies without the permission of the Department of Agriculture.

“The institutional problem was fixed, though the damage wrought by the legal struggle on social capital in the countryside would take longer to heal.” 

A century on, the idea that cartels can serve a higher public interest remains as controversial as ever, even in the Netherlands – a country with an historic tradition of collaboration to keep out the sea.

“The Dutch like cartels,” Maarten Pieter Schinkel (professor of competition economics and regulation at the University of Amsterdam) told the event, relating how two attempts to set up cartels for the long-term good had clashed with competition law.

Horizontal agreement

One was a horizontal agreement between energy utilities to cut polluting coal-fired generation. The competition authority ruled that consumers would suffer higher prices, while power stations over the border in Germany would have an incentive to increase their coal-fired output.

Another well-meaning effort was the ‘chicken of tomorrow’ cartel agreement between supermarkets and meat producers to improve poultry welfare standards. But this goal was worthy enough to merit an exception to competition law.

The issue would best be tackled by regulation, Schinkel suggested: “The government should say: ‘You can’t torture chickens’.” However, meat producers resist regulation because they still want to produce cheap ‘exploding chickens’ for export.

Dangerous

Collusion, even in the best of motives, is inherently dangerous, Schinkel concluded: experience has shown that once it is allowed for one purpose, it will spread to other things.

“The paradox is, if you want to create a cartel to do the right thing, you need to let the cartel reap the benefits. But if you let them do that, the consumer doesn’t benefit.”

A case where regulators did step in was that of the Hungarian watermelon cartel. Dr Katalin Cseres, also of the University of Amsterdam, related how an attempt to set a ‘fair’ minimum price for watermelons, despite political backing, ran afoul of the country’s competition authority. Here, politics triumphed, and the parliament took the domestic agricultural sector out of the competition law arena.

Public good

Georgio Monti, professor of competition law at the European University Institute, suggested that a public-good cartel must have both ‘input’ and ‘output’ legitimacy.

On the input side, it has to be open and transparent, proportionate to the public interest. The problem with ‘output legitimacy’ is measuring it. And any cartel must be reviewed and revised periodically to ensure it is achieving the objectives.

Technology giants

On less desirable cartels, Dr Pieter van Cleynenbreugel of the University of Liege raised the possibility of using article 101 of the EU Treaty to regulate technology giants.

He posited that, if web platforms amount to associations of undertakings, would decisions taken by the platform’s governing algorithms amount to decisions by an association? “If so, that would give us a tool to decide whether that is acceptable or unacceptable behaviour.”

The suggestion prompted a debate on how an algorithm-run web platform could be distinguished from a department store.

Co-operative movement

All this may appear a long way from the dispute over the fairness of rules set by Ireland’s embryonic cooperative movement.

But, in his opening keynote address, David Foxton QC, of Essex Court Chambers, London, described a key lesson of the McEllistrim judgment. It was that “the difficulty with the doctrine of restraint of trade is that its operation should, and does, differ markedly between different types of contract and different contracting contexts.

In addition, in determining what is an ‘acceptable cartel’, the extent to which the cartel is serving exclusively commercial or wider social objectives seems of obvious relevance.”

From Tralee to the House of Lords

Now, as in 1919, “the application of the doctrine of restraint of trade is highly context-specific”.

Given the number of contexts created by developments in public policy and new technology, the arguments that took McEllistrim from Tralee to the House of Lords will be around us for a while yet.

Michael Cross
Michael Cross
Michael Cross is news editor at Law Society Gazette of England and Wales