UK: Criminal cartel offence in UK: public attitudes

Introduction

The acquittal in June 2015 of two directors prosecuted under Section 188 of the Enterprise Act 2002 (the "cartel offence") in connection with a cartel concerning the supply of galvanised steel water tanks for water storage might be seen as an embarrassment for the Competition and Markets Authority (CMA). In the face of an admitted cartel, a jury declined to find dishonesty, and therefore guilt. As we explain in this article, these acquittals mark a point of inflection. The change to the cartel offence which removed the requirement to prove dishonesty in relation to conduct taking place after 1 April 2014 was designed to make successful prosecutions more likely. In light of the change, business managers and directors are now more likely to face personal sanctions for breaches of competition law, even though the juries may remain unconvinced that cartels merit criminal condemnation.

The acquittals

The galvanised steel water tanks case was the first criminal prosecution brought by the CMA. Its predecessor, the Office of Fair Trading (OFT), had not had much success prosecuting the cartel offence. Although Section 188 has been in force since 2003 and a number of "hard-core" cartels to which the offence could have applied were uncovered by the OFT during this period, this was only the third cartel offence case to proceed to trial in the UK.

Clive Dean (of Kondea Water Supplies) and Nicholas Stringer (of Galglass), directors at rival suppliers of galvanised steel water tanks, were prosecuted under the cartel offence and accused of dishonestly agreeing to engage in bid rigging. Two other directors of companies involved in the arrangements were not tried: Peter Snee (of Franklin Hodge Industries) pleaded guilty, and a director from a fourth company secured immunity from prosecution when his company successfully applied for leniency.

The facts of the case were not materially disputed. In brief, there had been arrangements to allow the suppliers to win bids at certain prices, thus allocating customers between competitors and inflating prices. Dean and Stringer's defences were that this was not dishonest. For conduct that took place prior to 1 April 2014, the prosecution must prove that a defendant acted dishonestly in their participation in an anti-competitive arrangement. The applicable dishonesty standard is the standard criminal test from R v Ghosh ([1982] QB 1053), by which a defendant will only be guilty if his or her conduct is dishonest by the ordinary standards of reasonable and honest people and he or she realises, at the time, that reasonable and honest people would regard the conduct as dishonest.

In this case, greed – as a motivator for dishonesty – became the key issue. Defence counsel argued that the defendants were not being greedy: their conduct was designed to save their businesses and the jobs of employees, not to feather their own nests. Some of the language used in closing argument went directly to this point, in typically theatrical style. Not every untruth, the jury was told, is criminal: Father Christmas, the Tooth Fairy, and compliments to one's mother-in-law may not be true, but are not criminal. Jurors would not expect businesses always to be open and honest with their customers: "Do you know what is in a chicken nugget? Do you want to?". The jurors were told that the men on trial worked hard and lived unflashy lives, driving second hand cars and paying off mortgages. The "evil" underpinning dishonesty - greed -was not present.

Clearly, dishonesty is not the same as greed. There are plenty of cases of theft and fraud where the amounts taken are small, and are not stolen to furnish an extravagant lifestyle. Indeed, the Court of Appeal in Ghosh explained that Robin Hood would fail the dishonesty test, on the basis that when he stole from the rich, he knew that ordinary people would consider his actions dishonest. This is not to say that greed cannot be a factor in applying the Ghosh test. Juries are allowed to decide what is dishonest according to the ordinary standards of reasonable people, and so, it is open to a jury to decide that cartel behaviour is only dishonest where the cartelist is greedy.

Given the factors which apparently motivated the conspirators in the galvanised steer water tanks case – with the emphasis firmly a drive to survive a tough economic climate – the jury took a mere two and a half hours to unanimously acquit Dean and Stringer.

Public attitudes

In the Hammond/Penrose report that formed the policy decisions preceding the Enterprise Act 2002, it was anticipated that there would be six to ten prosecutions under the criminal cartel offence per year. The steel tank acquittals are the latest disappointment in an underwhelming enforcement regime – two trials, returning zero convictions.

But perhaps this is outcome is less surprising when viewed through the prism of what we know of public attitudes to competition law. In May 2015, the CMA published research which showed that the majority of individuals with senior management positions in business did not know it was illegal to discuss prospective bids in a tender process with competing bidders, or to agree to allocate customers. Only one fifth of respondents were aware that imprisonment was a possible penalty for competition law infringements. There is no reason to believe the public at large would have any better understanding of the law. The jury in the steel tanks case was clearly prepared to believe that cartel conduct is not, or at least not always, dishonest.

This may be considered a failure of the OFT and CMA's wider public advocacy to date, that even after twelve years since the introduction of the cartel offence, the public do not readily understand cartels to be harmful. Defence counsel in the steel tanks case was able to position competition authorities as "pedantic" regulators concerned with obscure economic policy, a stark contrast to competition policy rhetoric. Cartels are prohibited in multiple jurisdictions worldwide and the UK is by no means alone in criminalising cartelists. American courts, for example, have described cartels as the "supreme evil" of competition law.1

That public attitudes and authorities' positions appear to be so out of step with each other naturally makes prosecutions more difficult. As a result largely of the OFT's concerns about the difficulties in prosecuting the offence, the Government consulted on amending the cartel offence. Consequently, the Enterprise and Regulatory Reform Act 2013 removed the UK dishonesty requirement for conduct that takes place on or after 1 April 2014 and introduced a strict liability test with a complicated set of exclusions and defences. The conduct of Dean and Stringer in the galvanised steel tanks case predated this, which is why the jury was asked to consider the old test.

The change in the law

The consequences of the new test, for post 1 April 2014 cartel conduct, is a simpler job for the CMA - one which does not require the CMA to prove any element of belief on the part of the individual in question. Now, provided the involvement of a defendant in the cartel can be established, the defendant will be guilty unless he or she can point to one of the new statutory exclusions (customers of the cartelists were informed of the conduct; or the agreement was made pursuant to a legal requirement) or an applicable defence (the defendant did not intend for the conduct to be concealed from customers; the defendant did not intend for the conduct to be concealed from the CMA; or the defendant took reasonable steps to disclose the agreement to professional legal advisers for the purposes of obtaining legal advice).

These changes caused significant debate in their development. The debate centred on the two-part rationale for the abolition of the dishonesty test put forward by the Government and the OFT: that dishonesty in relation to cartel conduct was difficult to prove to a jury, and the resultant dearth of successful prosecutions would mean the deterrent effect of the criminal offence would be weakened. In these regards, the steel tanks case supports the OFT's argument for a change in the law.

The change must increase the likelihood of successful conviction for post 1 April 2014 conduct, as juries will no longer be required to find dishonesty. It would therefore be wrong for executives, managers and directors to take comfort from the CMA's loss in the galvanised steel tanks case. Rather, individuals should understand that the personal risks they face in being non-compliant are increasing, and compliance teams should seek to ensure their boards and executives understand how competition law applies to their business and how to identify risks. Further, as successful prosecutions become more likely, the appeal of immunity through leniency and no-action agreements with the CMA will be ever more attractive; which in turn leads to a greater likelihood that cartel conduct will be uncovered.

However, at the policy level, the new law raises a serious question about whether it is appropriate that cartel conduct be criminalised absent any finding of dishonest intent. Theft and fraud require the defendant to have behaved dishonestly; a business person can now be found guilty by virtue of his or her agreeing or implementing a cartel or bid rigging agreement, even if a jury is prepared to accept the conduct had respectable motivations such that it was not dishonest. There is a question about the legitimacy of criminalisation where public opinion (reflected though jurors' opinions) does not see the criminalised conduct as morally reprehensible. And we would expect that the CMA would want to focus criminal enforcement efforts on the most egregious cases, so it may be that in essence, the application of a dishonesty test has moved from the courtroom to the prosecutor.

In any event, the removal of the dishonesty requirement does not strengthen the CMA's position as regards historic behaviour, i.e. any conduct that pre-dates 1 April 2014 (where there is still a requirement to prove dishonesty). This leaves the CMA in a difficult position. This is not just a case of "once bitten, twice shy". In deciding whether to prosecute, the CMA must apply the "full code test": and only prosecute where there is a "realistic prospect" of conviction, and it is in the public interest to prosecute. If it is the case that juries are reluctant to find cartelists dishonest, a proper application of the full code test might suggest that in cases similar to galvanised steel tanks there can be no realistic prospect of conviction under the old law.

Competition disqualification orders (CDOs)

These challenges to a successful criminal prosecution are not to say that the CMA will not pursue individuals for historic conduct. Where prosecution is not feasible, we expect the CMA will be quicker to use its separate power to disqualify directors, for a period of up to 15 years. They have had this power since 2003 but so far have used it only rarely.

In order to impose a CDO on an individual, the CMA must persuade a court that:

  1. there has been a competition law infringement by a business that the individual is a director of; and
  2. the individual's conduct as a director makes him unfit to be concerned in the management of the company.

Critically, this conduct element does not require (and has never required) a finding of dishonesty. Moreover, a CDO can be imposed where a director ought to have known that the relevant conduct was a breach of competition law. The Guidance suggests that the CMA has high expectations of directors in this regard and as a matter of policy will seek disqualification for directors that turned a blind eye or stuck their heads in the sand.2 Given the relatively low bar required to impose a CDO, compared to the difficulty of proving the old criminal offence, directors may find the CMA begins to favour the CDO route for conduct prior to 1 April 2014.

Sui Generis

The cartel offence continues to sit uncomfortably in the canon of criminal offences, and within the UK competition law regime. Here is an offence that to date has led to only three (uncontested) convictions but the reform of which is of sufficient concern to business that it attracted written submissions from 49 interested parties. It is unusual in that it is a wrong predominantly committed in the name of the company; but the company itself cannot be criminally liable. And as this article shows, while the Government is at pains to point out that it is a "serious" offence, and it is one that carries a possible sanction of five years' imprisonment, it has no requirement that the defendant be blameworthy, and the public does not readily accept cartel behaviour as criminal.

Footnote

1 Verizon Communications v Law Office of Curtis V Trinko (2004) 540 US 398 at 408.

2 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/324978/oft510.pdf

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