The OFT’s virtuous circle – who needs friends!

The OFT's virtuous circle – who needs friends!

One of the OFT's roles in life is “making markets work well for consumers” the most important mission in that regard is to track down and single-out agreements between businesses which, to use the vernacular, are ‘bent' which have as their object or effect the prevention, restriction or distortion of competition. They procure evidence using all available modern means permissible by law and licence . That includes the tools of the ‘spook' fraternity.

Research commissioned by the OFT shows that one in three smaller construction firms believes it is harmed by unfair practices, and four in 10 firms say they are aware of anti-competitive practices in their sector.

As any competition lawyer will know many different types of agreement may fall within the prohibitions. Chapter I of the Competition Act 1998 (where the agreements at issue have an effect on trade within the UK ) and Article 81 of the EC Treaty (where the agreements at issue have an effect on trade between Member States of the European Union) provide an identical illustrative list of examples of agreements to which they apply:

• fixing purchase or selling prices or other trading conditions,
• agreeing to limit or control production, markets, technical development or investment,
• sharing markets or supply sources,
• applying different trading conditions to equivalent transactions, thereby placing some parties at a competitive disadvantage.

Solicitors who, in advising clients', come across agreements, correspondence, or other documentary evidence that might suggest the existence of a cartel must amongst other things issue a strong cautionary warning of the extensive investigatory powers of the OFT and the draconian penalties at stake if one is convicted.

Not only may businesses that infringe Chapter I or Article 81 be held liable for financial penalties of up to 10 per cent of their annual worldwide turnover¹, the law also provides strict penalties against individuals involved in cartels. So individual corporate responsibility arises.

Section 188 of the Enterprise Act 2002 introduced a criminal offence for individuals who dishonestly engage in cartel arrangements by agreeing with one or more other persons that undertakings will fix prices, limit supply or production, share markets or be involved in bid-rigging arrangements in the UK. The offence only applies to agreements between undertakings at the same level in the supply chain, i.e. horizontal agreements.

Further, directors of companies that have infringed Chapter I prohibitions and/or Article 81 of the EC Treaty may also be subject to Competition Disqualification Orders (CDOs) under the Company Directors Disqualification Act 1986. So the long arm of the law is very real and reaches deep. The OFT will view very seriously the involvement of directors or senior management in any infringement, and such involvement will increase the likelihood of an application for a CDO being made against such directors under the Company Directors Disqualification Act.

To avoid such penalties, the OFT has put in place a “leniency programme”, which actively promotes denunciation. Under the programme, a business may receive total or partial immunity from fines that the OFT could apply for infringements of the Chapter I prohibition and/or Article 81 if it comes forward with information.

Total immunity is available to the first member of the cartel to come forward with relevant information, and who:

1. provides the OFT with all the information, documents and evidence available to it regarding the existence and activities of the cartel;
2. maintains continuous and complete cooperation throughout the investigation;
3. has not taken steps to coerce another undertaking to take part in the cartel activity; and
4. has ceased its involvement in the cartel from the time it comes forward with information.

For those that ‘shop or squeal' reductions in penalty of up to 50 per cent are also available where the business (1) is not the first to come forward with information but does so before the OFT has issued a statement of objectives, and (2) would have qualified for total immunity had it not been a coercer.

An important consideration, given that a business with evidence of a cartel may be concerned about its identity being disclosed, is that the OFT will endeavour , in most cases, to keep the identity of such businesses confidential throughout the course of the investigation.

Cartels in the construction industry hurt sub-contractors, contractors and employers alike. The OFT therefore also encourages individuals to put their perceived sense of morality and loyalty aside and to denounce anti-competitive practices. Individuals who come forward with information about their involvement in a criminal cartel offence may be granted total immunity from prosecution (a la supergrass) in the form of a 'no-action letter' issued by the OFT. In order to benefit from a no-action letter, an individual must satisfy certain conditions, including admitting participation in the criminal offence and maintaining continuous and complete cooperation throughout the investigation.

This system, however, only works in England & Wales, as in Scotland, the Lord Advocate will simply “take into account” an individual's cooperation with the OFT when deciding whether to bring a prosecution.

Businesses are these days under intense pressure to avoid engaging in anti-competitive cartel conduct. The risk of being caught by the OFT is significantly higher (due to both the increased investigatory powers of the OFT and its clever leniency programme), and the price to pay, if convicted, constitutes a real threat with potentially enormous consequences. One can perhaps see back stabbing supplanting the culpable back scratching of the cartel! By all events this law creates a “virtuous circle”, in that it will, no doubt, encourage even more business folk and individuals to take advantage of the OFT's leniency programme and denounce prohibited agreements for the benefit of us all. I will drink to that.

1. For example in 2003 Manchester United, the Football Association and JJB Sports, the country's biggest retailer of replica shirts, were among 10 businesses fined a total of £18.6 million for price fixing; in 2001 Hoffman-La Roche of Switzerland received a fine of 462m euros for colluding to fix the price of vitamins. In 2003 Argos was fined £17.3m reflecting its high turnover, and Littlewoods was fined £5.4m for fixing the price of toys and games last but not least Sotheby's auction house was fined more than 20 million euros (£13m) by the European Union for operating a price-fixing cartel in the 1990's.