Cartel Regulation In The United Kingdom

"An extract from The 2007 European Antitrust Review, a Global Competition Review special report - www.globalcompetitionreview.com"

After receiving a multitude of new powers in 2004¹ and publishing consumer and business ‘guides’ on the application of these powers in 2005², in 2006 the UK’s Office of Fair Trading (OFT) set about using these powers. The OFT reported that it opened 23 cases involving possible cartel activity and launched formal investigations in relation to seven cases where it had reasonable grounds to suspect a cartel infringement had occurred.³ Of particular note, in the last financial year it conducted 92 on-site inspections in seven cases, some of which were carried out using its criminal enforcement powers, in conjunction with the Serious Fraud Office. Although it is not clear how many of these were in relation to cartel cases, this is a high number of inspections. Also, it entered into 22 conditional leniency agreements, a clear sign that its guidance on leniency and its relatively ‘open-door’ approach to questions regarding the leniency procedure has encouraged businesses to come forward.⁴

The increase in anti-cartel activity has also changed life for private practitioners: at times this year we have had more cartel work than in any other area.

Priorities and settlements

Perhaps the most interesting development of 2006, however, was the manner in which the OFT settled the Independent Schools case. Although in relation to any investigation of an alleged infringement of the chapter I prohibition the OFT has a number of options for ending its investigation (the main ones being: (i) a case closure announcement – either on the basis that there was no evidence of infringing conduct or that the infringing conduct would cease and not be carried out in the future; (ii) negotiated commitments with the undertakings involved in the case; and (iii) an infringement decision together with penalties), it had never before published details of a case where there was a negotiated outcome to remedies after a statement of objections had already been issued to the parties involved. The manner in which this was done reflects not only the OFT’s innovative approach to finding solutions to competition law issues but also its emphasis on ensuring its resources are effectively allocated and casework prioritised. Nevertheless, these priorities will need to be carefully balanced with the interests of complainants and potential damages claimants, as is shown by two appeals to the Competition Appeal Tribunal (CAT) against OFT decisions to close investigations.

In a number of speeches during 2006, Philip Collins (the OFT chairman) and Vincent Smith (the OFT’s director of competition enforcement) mentioned the need to prioritise the OFT’s enforcement casework.⁵ Vincent Smith noted that the OFT had been using six criteria for prioritising casework for the past 18 months, which are:

• the likely size of the consumer detriment arising from the behaviour identified;

• the strength of the evidence at any stage – in particular, whether there is enough evidence to justify going forward to the next stage and whether there is a reasonable prospect that the OFT will be able to gather the evidence it needs to make out its case within a reasonable time frame;

• the type of case – in particular, whether this is a hard-core case;

• the special circumstances of the case – whether vulnerable consumers are affected and whether there has been anything about the conduct of the parties which makes this case stand out;

• policy considerations. In particular, whether this case will help develop the law and whether it has a particular deterrence value; and

• whether the OFT is best placed to act and whether there are other means (for example, through advocacy or by private enforcement) of achieving the same ends.⁶

The OFT also created a new unit, the Preliminary Investigation Unit, to screen and prioritise cases.

In the Independent Schools case, the OFT agreed a fine of £10,000 per school as a penalty for exchange of information between schools about intended fee levels.⁷ More than 50 schools were involved and they admitted their participation in the exchange of sensitive information in breach of competition law. The schools also agreed to make ex gratia payments totalling £3 million to a charitable trust fund to benefit the pupils who attended the schools during certain academic years. The OFT stated that it would then proceed to a final formal decision for each school. An ‘agreed resolution’ after the issuing of a statement of objections has not been previously done under the Competition Act 1998, and the OFT does not have specific powers to accept such negotiated settlements in cartel cases (in comparison to part 8 of the Enterprise Act 2002 which allows undertakings to be accepted in relation to consumer enforcement). However, both the OFT and the European Commission have commented in the past year on the US plea bargaining system and the benefits it has, and there could be more of these types of settlements in the UK.⁸ Settlements mean that proceedings are shortened, a clear benefit for both the OFT and the parties involved in terms of resource allocation and expenditure. In its Annual Report 2005-2006, the OFT states that where the law provides flexibility, it will adopt a proportionate approach to enforcement: as well as accepting commitments instead of proceeding with a formal infringement decision, the OFT will agree outcomes in infringement cases where appropriate. It states: "Expect, then, negotiated settlements – ‘structured settlements’ as they have been called – to become a greater feature of both competition and consumer enforcement going forward. I believe that this will help us to progress our caseload more effectively and also help us better to reach proportionate outcomes in our enforcement casework."⁹

The key issue for the OFT to consider when prioritising its workload (either when closing certain cases or when entering into negotiated settlements) is what effect it will have on the injured parties, particularly whether or not settlements impinge on their ability to bring private enforcement actions. The recent House of Lords’ judgment in the Crehan case¹⁰ may also have effects on parties’ ability to bring private enforcement actions (this is considered in a separate article, ‘UK private antitrust litigation’, by Lesley Farrell included later in this handbook). In addition, the OFT will want to ensure that such settlements do not increase the likelihood of challenges to its decisions before the Competition Appeals Tribunal (CAT), as parties in both merger and infringement cases have shown they are very willing to appeal OFT decisions to the CAT if the OFT outcome is adverse to their interests. Philip Collins, Chairman of the OFT, has commented that although the Independent Schools case had a number of exceptional features which facilitated this approach, its success has encouraged the OFT to consider whether to use a similar approach in other cases.¹¹ However, he noted that if there is a settlement then undertakings that have suffered loss are less likely to sue for damages and, that settlements would be "most often used where the OFT believes the persons who may have suffered loss or damage as a result of an infringement are unlikely to seek damages before the courts".

In the past year, complainants have shown they will challenge the OFT’s decisions to close cases if the decision adversely affects their interests. The OFT closed a number of investigations in 2006, including an investigation into whether the Surrey Law Society circulated among its members anonymised results of a survey it had conducted on hourly litigation rates charged by its members; and an investigation into panel arrangements which Law Firm Services Limited had with solicitors to assess progress of conveyancing transactions. In both cases, the parties took steps to change their current behaviour. It also closed two cases where it found no evidence of anti-competitive agreements (one involved suppliers of polyurethane foam; and the other related to alleged petrol price coordination by Cyma Petroleum UK Ltd and Elm Tree Filling Station). Two further case closure decisions, both involving allegations of collective boycotts which were closed on the basis that the case no longer constituted an administrative priority for the OFT, are being appealed by the original complainants to the CAT.¹² In one of these cases, Cityhook Limited v Office of Fair Trading, the appellant submits in its notice of appeal that the OFT did not properly apply its six ‘prioritisation criteria’ to the facts available to it. In both cases, the appellants are asking the OFT to reopen the cases. It is not apparent whether the CAT will have jurisdiction to hear all such cases. This will depend on whether a case closure by the OFT amounts to a ‘decision’ of a type that can be appealed to the CAT under section 47 of the Competition Act 1998. In respect of the Cityhook case, a hearing has been scheduled for January to decide whether the case closure amounts to a ‘non-infringement decision’.

The OFT has already reopened one case (where Claymore Dairies and Express Dairies complained to the OFT that Robert Wiseman and other Scottish milk suppliers were party to market sharing and price-fixing agreements) after the complainants appealed the case closure to the CAT. In this case, the jurisdiction of the CAT to come to a decision was not in question as the then director general of fair trading had actually come to a decision that the chapter I prohibition had not been infringed. The CAT’s decision was stayed pending the OFT’s decision in the case. On 6 September 2006, the OFT issued a provisional decision finding the six Scottish dairies had engaged in price fixing by sharing pricing information, coordinating price increases and agreeing not to compete for each other’s customers.¹³ Although this is only a provisional decision, to which the parties will be able to respond before the OFT comes to a final decision, on an initial view it would seem that the complainants’ appeal of the OFT’s case closure to the CAT was worthwhile – and it may encourage further appeals on case closures based on administrative priorities.

The OFT also published a guideline, ‘Involving third parties in Competition Act investigations’, setting out guidance on how to submit complaints and what involvement complainants should expect to have in an investigation, particularly in relation to case closures, comments on provisional findings and cases it has decided not to take forward to a statement of objections. Guidance on how to set out a written, reasoned complaint (therefore giving the party ‘formal complainant’ status) is set out in Annex B to the Guideline.

A summary of the key decisions the OFT has taken this year is set out in the adjacent box. Other ongoing OFT investigations include ones into the recruitment services for the construction industry; private construction contracts in the East Midlands; and alleged price coordination by airlines in relation to fuel surcharges for long haul passenger flights to and from the UK.

Cartel regulation in the UK – the two-pronged approach

Cartel regulation in the UK operates on two levels, with the possibility of civil proceedings being brought against companies and criminal proceedings being brought against individuals. Full immunity from both types of action is potentially available under the OFT’s leniency programme, and both companies and individuals are actively encouraged to contact the OFT if they suspect cartel activity.¹⁴ If found guilty of an infringement, companies face large fines and employees can face prison sentences – with directors also subject to the possibility of being disqualified as a director for up to 15 years.

Companies – civil investigations

Companies and individuals who enter into agreements or collude to fix prices, limit or restrict production, share markets or ‘rig’ bids, will infringe chapter I of the UK Competition Act and article 81 of the EC Treaty.¹⁵ Such ‘hard-core’ cartel agreements are unlikely to benefit from any exemption from the competition rules. Companies found guilty of infringing competition laws face fines of up to 10 per cent of their worldwide turnover.¹⁶

Under the powers contained in the Competition Act, if the OFT has reasonable grounds for suspecting that UK or EC competition laws have been infringed, it may:¹⁷

• order the production of specific documents or information relevant to the investigation and take copies thereof (including documents stored in electronic form);

• carry out a ‘dawn raid’ on business premises with or without a warrant (the OFT will only have the power to conduct a thorough search of the premises and take original documents if a warrant is obtained);
• carry out a dawn raid with a warrant on private premises (eg, a director’s home or car) including the power to search the premises;

• in the case of a dawn raid carried out with a warrant, retain original documents for three months and investigators may take any other steps necessary to preserve the existence of documents;

• require an explanation of documents or information supplied or an explanation as to where a document might be found if it cannot be produced; and

• authorise ‘directed and covert surveillance’.¹⁸

Nevertheless, if the OFT carries out a dawn raid acting jointly with the European Commission under the Commission’s enforcement powers, the OFT will not have powers to take original documents or to authorise surveillance as it will only have the same powers as the Commission as set out in article 20 of Regulation 1/2003. If the OFT is carrying out an inspection to establish whether there has been an infringement of the Treaty on behalf of another member state’s competition authority or at the request of the Commission, then it will be able to use the full scope of the OFT’s own domes tic powers in carrying out the inspection (article 22 of Regulation 1/2003).

Individuals who fail to cooperate with an OFT investigation by not complying with a request, intentionally obstructing an inspection, destroying or falsifying evidence, or providing false or misleading evidence can face criminal sanctions.

The OFT conducted 92 on-site inspections in the financial year 2005/2006, with 34 of these being carried out without a warrant and 58 carried out with a warrant (in comparison with the previous year where only one inspection was carried out with a warrant in accordance with section 28 of the Competition Act).¹⁹

Under the Enterprise Act 2002,20 it is a criminal offence for individuals to dishonestly²¹ engage in cartel activity. The offence only applies to agreements between undertakings at the same level of the supply chain (horizontal agreements). Vertical agreements will therefore not fall within the scope of the offence.

The cartel offence will be committed irrespective of whether or not the agreement reached between the individuals is ever implemented, and irrespective of whether or not the individuals have the authority to act on behalf of the undertakings at the time the agreement is made. Individuals found guilty can be imprisoned for up to five years and face an unlimited fine. Company directors may also be subject to competition disqualification orders, which prevent them from being involved in the management of a company for up to 15 years.

The Enterprise Act gives the OFT the power to conduct a criminal investigation if there are ‘reasonable’ grounds for suspecting that the cartel offence has been committed. The OFT will also work in close cooperation with the Serious Fraud Office (SFO) if it appears that the case concerns ‘serious or complex fraud’.²² The OFT’s powers of criminal investigation are very similar to those given to the SFO under the Criminal Justice Act 1987, such powers include the ability to:

• compel individuals to answer questions and to provide relevant information and documents and take copies thereof;

• enter premises, whether business or private, under a warrant and search for any relevant documentation;

• seize any material, in whatever form and including originals, thought to be relevant to the investigation (including legally privileged or irrelevant documents if it would be impracticable to separate out the material while on the premises – the separation of such documents will be carried out at a later stage);

• carry out ‘directed and covert surveillance’;²³ and

• in some cases, carry out ‘intrusive surveillance’ of both business and private premises in relation to those suspected of being involved in a cartel, which may lead to the covert installation of surveillance devices in property (ie, bugging).²⁴

The criminal and civil investigations are designed to run concurrently and there are provisions allowing the disclosure of information between the two investigations.²⁵

As well as the prospect of facing criminal sanctions, company directors may also be subject to competition disqualification orders (CDOs), which prevent them from being involved in the management of a company for up to 15 years. The Enterprise Act gives the OFT power to apply for a CDO before the courts against any director, (including persons acting as directors) of an undertaking that has infringed the Competition Act or articles 81 or 82 of the EC Treaty where the director’s conduct makes him unfit to be concerned in the management of a company.

To date, the OFT has used neither the cartel offence, nor the sanction of a CDO in prosecuting a cartel case. In the financial year 2005/2006, however, raids were carried out on parties in the construction industry in conjunction with the Serious Fraud Office in which the OFT first used its criminal enforcement powers. Also, on 22 June 2006 the OFT confirmed that it was conducting criminal and civil investigations into alleged price coordination by airlines in relation to fuel surcharges for long-haul passenger flights to and from the UK, noting that the criminal investigation was being carried out under the Enterprise Act. Proceedings in both cases are still pending and their outcomes are likely to be watched closely by competition advisers, the press and the business world alike.

The leniency programme

One of the effects of the OFT having such powerful sanctions at hand to enforce competition law is that its leniency programme becomes all the more attractive to companies and individuals who might otherwise face large fines, prison sentences and CDOs. Under the leniency programme, the OFT can reduce fines for businesses that ‘blow the whistle’ on cartels and, provided certain conditions are satisfied, give total immunity to the first parties who come forward. In the financial year 2005/2006, the OFT entered into conditional leniency agreements with 22 undertakings in relation to nine cases, resulting in a reduction of the total fines imposed in cartel cases from £4.696 million to £1.864 million.²⁶ This is a large increase from the six leniency agreements entered into by the OFT last year, with a corresponding reduction in the level of fines imposed (total fines were reduced to approximately 40 per cent of their original amount via leniency, compared to a reduction to approximately 70 per cent in 2004/2005). Again, the leniency programmes of the OFT and European Commission have changed the nature of private practitioners’ work in this area: we have found ourselves making leniency applications on 24 hours’ notice (even by telephone) and preparing detailed submissions for clients seeking leniency.

The leniency programme in relation to civil proceedings is set out in the OFT Guidance as to the appropriate amount of the penalty²⁷ and in the OFT’s interim note on leniency and no-action.²⁸ Provided certain conditions are satisfied, the OFT will grant full or partial immunity from fines to those companies which come forward and inform them in full about cartel activity.

To receive 100 per cent immunity from a fine automatically, the company in question must be the first undertaking to come forward and provide evidence of cartel activity before the OFT has commenced an investigation (either civil or criminal) (‘Type A’ immunity). In cases where the OFT has already started an investigation, full immunity from fines is still available for the first company that approaches the OFT, but such an award is made at its discretion (‘Type B’ immunity). To qualify for Type B immunity, the company must contact the OFT before it has issued written notice of its proposal to make an infringement decision (a ‘statement of objections’) pursuant to a breach of chapter I or article 81, and provide information which ‘adds value’ to the OFT’s investigation. The UK regime provides for a third type of immunity, ‘Type C’ immunity. This refers to the situation where an applicant is not the first to come forward and there is already a pre-existing civil or criminal investigation. To qualify for Type C immunity, the applicant would need to approach the OFT before it issues a statement of objections or launches criminal proceedings.

To receive full immunity or a reduction in fine, undertakings must also:

• provide the OFT with all information, documents and evidence available to it concerning the cartel activity;

• maintain continuous and complete cooperation throughout the investigation;

• end its involvement in the cartel as soon as it informs the OFT of the existence of an infringement (unless directed otherwise by the OFT); and

• not have taken steps to coerce another undertaking to take part in the cartel.

Companies considering applying for leniency may approach the OFT for confidential guidance before deciding whether to come forward. Such guidance usually takes the form of a ‘hypothetical’ discussion on a no-names basis about a particular factual matrix, with the idea being that the company can be reasonably sure of its position before making an application. An undertaking can ask its legal adviser to contact the OFT to inquire whether it would be the first company to blow the whistle on the cartel. However, before contacting the OFT, the adviser should ensure that there is a ‘concrete basis’ for suspecting that his or her client has participated in cartel activity and that the company intends to confess. The undertaking concerned must have this intention, as the OFT will only confirm that Type A immunity is available on the understanding that if it is, the company will then immediately apply for leniency. If Type A immunity is not available, the company is free to consider other options.

A successful application for Type A immunity will be one where the applicant provides the OFT with sufficient information for it to ‘take forward’ a credible investigation. In practice, this means that the information provided by the leniency applicant must allow the OFT to exercise its formal powers of investigation (for example, onsite inspections). To encourage companies to report cartel activity as soon as possible, businesses are not required to furnish the OFT will all relevant information at the time of their leniency application. Instead, undertakings can put down a ‘marker’, effectively reserving its rank in the leniency ‘queue’, and provide more substantial information within an agreed time frame. To obtain a ‘marker’ a company must inform the OFT of the nature and emerging details of the suspected infringement, and give an explanation of the information uncovered thus far.

The OFT has made it clear that even if Type A immunity is no longer available, companies should not be put off in applying for Type B immunity. Even though the granting of immunity is discretionary in Type B situations, the OFT has said that they expect to award immunity in the majority of Type B cases.

The OFT will not grant leniency where there is evidence that the applicant took steps to ‘coerce’ another undertaking to participate in the cartel (the ‘coercer test’). Although the OFT has not presented a definition of coercion, it states in its interim note that there are two elements to the test: first, there must be evidence of an unwilling participant in the cartel; and second, that there are clear and positive steps from the coercer to pressurise that unwilling participant to take part.²⁹ The OFT does not consider that the coercer test will be of relevance in the majority of cartel cases, and has set a high bar in relation to the behaviour required and the evidence needed to prove that coercion took place.

Immunity from prosecution is also available for individuals.³⁰ The two leniency programmes are designed to work together meaning that a successful corporate Type A immunity applicant will automatically receive individual immunity for all current and former employees and directors of the company.³¹

To obtain immunity from criminal prosecution (known as a ‘noaction letter’), individuals must give a full and truthful account of all the relevant facts and provide the OFT with any evidence in their possession or under their control. Only in those cases where the person is clearly a principal offender in a dishonest cartel arrangement will he or she have to admit full participation in the offence, including an admission of dishonesty. This represents a change in policy for the OFT which previously required that all individuals seeking leniency must admit to participation in the criminal offence. The OFT has also stated that where an undertaking is found to be a coercer, individuals within that undertaking who did not themselves play a coercing role will not be denied individual immunity on coercer grounds.

Individual immunity will also be given to all current and former employees and directors, in those companies which have successfully obtained Type B immunity. No-action letters may be given to such individuals no matter how serious their role in the cartel.³²

In Type C cases, where the applicant is not the first to come forward and there is a pre-existing civil or criminal investigation, no-action letters will be issued much more sparingly. To obtain a no-action letter in a Type C situation, the individual must provide ‘substantial added value’ to the OFT’s investigation. If the individual had a peripheral role within the cartel they are more likely to be granted individual immunity (but only if they are able to provide added value).

Individuals are at liberty to apply for individual immunity on their own account, without having to wait for the company to approach the OFT. If an individual within an undertaking does report the cartel on his or her own before the undertaking comes forward, the company will lose guaranteed corporate and individual immunity, in circumstances where it otherwise would have qualified for it (ie, where the company would have been a Type A applicant). In such a situation, the OFT may still grant corporate and individual immunity at its discretion, depending on the value that the OFT is likely to gain from the additional evidence supplied by the company, and at what stage in the investigation the evidence is provided. The ability of an individual to self-report before a company further increases the incentive for undertakings to make a prompt application for Type A immunity before any of their employees do so.

It is clear that the establishment of civil and criminal offences for cartel activity, together with two concurrent leniency systems, creates a situation where the interests of a company may differ from those of its employees. This potentially significant problem means it is wise for individuals to seek separate legal representation if they are concerned about their possible liability for cartel activity in the UK.³³

The ‘leniency plus’ regime allows companies to benefit from a further reduction in fines if it gives information in relation to a second, unrelated conspiracy. The information supplied would have to be sufficient to allow it to qualify as a Type A applicant in relation to the second conspiracy (in other words, the information supplied must not be in relation to a cartel already under investigation by the OFT, or be in relation to a cartel about which another company has already given information).

The benefits of seeking leniency are obvious, particularly in Type A situations where companies will automatically receive a 100 per cent reduction in any fine, and all relevant employees and directors will be awarded no-action letters. Nevertheless, in deciding whether to apply for leniency, companies and individuals should also take into account a number of other factors:

• Does the conduct amount to a cartel and is the OFT likely to be able to make the cartel allegation ‘stick’? That is, will the OFT be able to gather sufficient evidence to establish the infringement to the requisite legal standard of proof (civil or criminal) and successfully defend it before a court? In our experience, this can be a very difficult decision as a company will not know what evidence the OFT already has, or what it may subsequently receive from other companies, particularly as a result of the leniency applications (ie, it does not know what it does not know).

• The ‘reputational’ effects. Although cartels are illegal, whistleblowing can have important implications for both a company’s and individual’s relationships with third parties (both commercial and personal).

• If the cartel activity affects jurisdictions outside the UK, undertakings and individuals must consider whether to make parallel applications to other competition authorities (eg, the European Commission or US Department of Justice). Obtaining immunity from prosecution in the UK will not prevent infringement proceedings being brought by other competition authorities in relation to offences committed in other jurisdictions.³⁴

• Leniency applicants should be aware that information submitted to the OFT under the UK’s leniency programme can be passed on to overseas agencies (including the European Commission). Nevertheless, the OFT has stated that it will generally only do so after having sought the prior consent of the provider.³⁵

• In relation to the granting of a no-action letter, the OFT states that immunity from prosecution will not extend to an offence relating to the cartel behaviour, but which is clearly severable – such as the corruption of a public official. This means that although individuals can obtain immunity from prosecution in relation to the cartel offence, they are not immune from actions that may be taken by other government agencies, such as the SFO. Individuals can, however, take some comfort from the fact that in the OFT’s interim note on leniency, the director of the SFO has confirmed that if an individual has been given a noaction letter in relation to particular cartel activity, the SFO will not attempt to prosecute that individual for the cartel behaviour with a charge of conspiracy to defraud.³⁶

• Parties should also be aware that the leniency programme does not provide companies with immunity from damages actions that might be launched by aggrieved third parties. This makes the control of information supplied under a leniency application even more important, as the ‘escape’ of any damning evidence may prove very costly for the parties involved.

The UK’s cartel regime is developing swiftly, with parties increasingly taking the opportunity to start investigations (either as complainants or as Type A immunity applicants) and, at the other end of the timescale, with both complainants and undertakings that have received an OFT infringement decision extending these investigations via appeals to the CAT and the English courts. Though the OFT may seek to keep its cartel workload in check by closing, settling or reaching infringement decisions as soon as possible in relation to any particular case, its encouragement to parties to come forward and notify it of possibly infringing conduct means that it is unlikely to find itself with a reduced caseload in the near future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.