Paper for the CLT Conference on Avoiding Competition Law Problems in Commercial Agreements: 23 November 2004
The Enterprise Act 2002 (the “Act”) came into force on 20 June 2003. The headline-grabbing change has been the introduction of a new criminal offence for taking part in cartel activity. However, it also introduces other important changes in relation to merger control, disqualification of directors for breaches of competition law, super-complaints to the Office of Fair Trading (“OFT”) by certain consumer bodies, new market investigation powers and improvements to the private enforcement of competition law. These changes give the UK one of the most rigorous competition law regimes in the world. Each of these areas will be examined in turn.
Criminalisation of cartels
The most radical element of the Act is the introduction of a new cartel offence under s. 118 of the Act.
Definition of the offence
Any individual found guilty of dishonestly agreeing with one or more other persons that two or more undertakings will take part in cartel activity is liable to an unlimited fine and/or up to five years in prison. Cartel activity relates to horizontal agreements only (i.e. it only covers agreements between businesses operating at the same level in the supply chain, that is to say competitors) and is defined as direct or indirect price-fixing, limiting supply or production, sharing markets or customers and bid-rigging.
The test for dishonesty is that used in criminal law (R v Ghosh): the act in question was dishonest by the standard of a reasonable and honest person and the individual knew that they were acting dishonestly. The offence will be committed whether or not the agreement is actually implemented and irrespective of whether the individuals in question have the authority to act on behalf of the business. Agreements reached oversees may still be prosecuted in the UK if some subsequent action is taken to implement the agreement in the UK (s.190(3)). This requirement may be satisfied by a phone call or e-mail to a UK subsidiary telling it to act in a certain way, whether or not the UK company actually changed its behaviour. It is worth noting that the offence (together with the offences of conspiracy to commit the offence and attempts to commit the offence) will be extraditable (s.191), so individuals may be extradited from the UK to other countries which have similar charges, such as the US, and vice versa.
Under s.190 of the Act, the cartel offence may be tried in either a magistrates’ court, where the maximum punishment is six months imprisonment and/or a maximum fine of £5,000, or before a jury. In this case, the maximum penalty is five years in prison and/or an unlimited fine. Prosecutions will generally be carried out by the Serious Fraud Office (“SFO”) in close co-operation with the OFT, given its experience in dealing with complex fraud cases.
In an attempt to encourage whistle-blowing, the OFT can issue a no-action letter which grants immunity from prosecution to individuals who come forward with information on a cartel (s.190(4)). A no-action letter is a written notice issued to the first individual that comes forward to the OFT, confirming that he or she will not be prosecuted for carrying out illegal cartel activity. There are certain conditions to be met, such as admitting participation in the offence, providing full details of the cartel activity to the OFT, fully co-operating with the OFT during its investigation and refraining from further participation in the cartel, unless directed by the OFT (see the OFT’s The cartel offence: Guidance on the issue of no-action letters for individuals). A similar scheme has been very successful in the US, which also has a criminal offence for undertaking cartel activity. However, even if the conditions for a no-action letter are met, the OFT may decide not to grant one where it believes it already has, or is in the process of gathering, sufficient information to bring a successful prosecution of an individual without the information provided by the whistle-blower. There is therefore a risk for individuals who approach the OFT and legal advice is essential. However, the OFT’s Guidance states that initial approaches may be made on an anonymous basis, which gives some comfort.
The OFT may launch a criminal investigation where there are reasonable grounds for suspecting that a cartel offence has been committed (s. 192(1)). As cartels are often hard to detect, due to the inherent secrecy involved, the OFT has been given increased powers of investigation in relation to its criminal investigations, in addition to its existing civil investigation powers. These are based broadly on the powers available to the SFO under the Criminal Justice Act 1987 and include:
the power on written notice to compel individuals to answer questions, to provide relevant information or documents and ask for explanations of documents or their whereabouts (s.193). This power applies not only to the individuals being investigated but also to anyone reasonably believed by the OFT to have relevant information. The term “documents” covers information recorded in any form, including in electronic form;
the power to enter, using reasonable force if necessary, and search premises under warrant and to take relevant documents (including copies of information held electronically) and ask for explanations of documents or their whereabouts (s.194). Where it is not reasonably practicable to determine whether or not material is seizable, the OFT may seize the material and sift through it later. When executing a warrant, the OFT officers do not have to wait for any legal advisors to arrive before starting the search, but they may be prepared to wait a reasonable amount of time where it intends to exercise its ‘seize and sift’ powers; and
subject to authorisation by the chairman of the OFT and approval by the Office of Surveillance Commissioners, powers of intrusive surveillance, such as planting surveillance devices in residential premises, hotel rooms or private cars, (s.199) and the power to interfere with property to install surveillance devices (s.200), as set out in the Regulation of Investigatory Powers Act 2000 and the Police Act 1997. The OFT also has the power to carry out directed surveillance such as watching a person’s office, can authorise covert human intelligence sources (i.e. informants) and can access communications data, such as phone records.
The OFT’s power to obtain documents either on written notice or during a search does not include documents that are subject to legal professional privilege (s.196). Furthermore, s.197 protects individuals’ rights not to incriminate themselves. It states that a statement made by a person in response to a requirement imposed by the OFT using its powers of investigation under the Act may only be used in criminal proceedings against him or her:
where that person is being prosecuted for some other offence and, in giving evidence, he or she makes a statement that is inconsistent with the statement and if evidence relating to it is adduced or a question relating to it is asked by him or her (or elicited on his or her behalf); or
where he or she is being prosecuted under s. 201 of the Act for making a false or misleading statement (see below).
As well as the main cartel offence, there are also related offences under s.201 of the Act. These are unreasonable failure to comply with requirements to answer questions or provide information or documents (punishable by up to six months in prison and/or a fine of up to £5,000), making false or misleading statements (leading to up to two years in prison and/or an unlimited fine) and intentionally obstructing an investigation (with a maximum punishment of two years in prison and/or an unlimited fine). Destroying, concealing or falsifying documents can lead to up to five years in prison and/or an unlimited fine.
Disqualification of directors
The power to disqualify directors is another new power introduced by the Act. S.204 of the Act amends the Company Directors Disqualification Act 1986 to allow the OFT to apply to the court to order the disqualification of directors whose companies have breached competition law. This is wider than the cartel offence, which only covers hardcore horizontal cartel activity. These orders are called competition disqualification orders or CDOs. CDOs may also be applied for by the sectoral regulators.
Granting of CDOs by the High Court
On application for a CDO to the High Court by the OFT (or a sectoral regulator), the court must make a CDO against a person where:
a company of which that person is a director commits a breach of competition law (this covers breaches of Article 81 and 82 EC and breaches of the Chapter I and Chapter II prohibitions in the Competition Act 1998); and
the court considers that that person’s conduct (which includes omissions) as a director makes him or her unfit to be concerned in the management of a company.
This therefore applies to any breach of competition law, no matter how trivial. This is to provide the maximum deterrent effect possible and to allow the OFT increased flexibility in deciding when to apply for a CDO. In deciding whether or not to make a CDO, the court must consider whether:
the director’s conduct contributed to the breach of competition law (irrespective of whether or not the director knew that the conduct infringed competition law);
their conduct did not contribute to the breach but they had reasonable grounds to suspect that the conduct of the company constituted a breach and they failed to take steps to prevent the breach; or
they did not know but ought to have known that the conduct in question breached competition law.
This means that a director could be disqualified even where they were not aware of the conduct in question. The maximum period of disqualification is 15 years. Once disqualified, it is a criminal offence for that person to be a director of any company or to take on roles relating to the management of a company. Any alternative to a CDO is a competition disqualification undertaking (“CDU”). This has the same effect as a CDO but it is a binding commitment given by the individual to the OFT, rather than being a court order. A CDU can be offered by the individual concerned when he or she receives notice that the OFT intends to seek a CDO.
The OFT has indicated in its guidance note Competition Disqualification Orders that it will carry out a five-step procedure when deciding whether or not to seek a CDO. First, it does not intend to apply for a CDO unless either the OFT, the Competition Appeal Tribunal (“CAT”), the European Commission or the European Courts have already decided that there has been a breach of competition law and that all rights of appeal have been exhausted. For European decisions, there must be some actual or potential effect in the UK. Second, the OFT will consider whether or not a financial penalty has been imposed for the breach. Where no penalty has been imposed, a CDO will not be appropriate.
Third, the OFT will consider whether the relevant company benefits from leniency (i.e. immunity from or a reduction in any financial penalty), as set out in the OFT’s Guidance as to the Appropriate Amount of a Penalty or under the European Commission’s Notice on Immunity from Fines and Reduction of Fines in Cartel Cases. The OFT will not apply for a CDO against the current directors of a company which benefits from leniency in relation to the activities in question or where the directors have been granted a no-action letter in relation to the cartel offence. However, where a director has been dismissed for his or her actions relating to the infringement, the OFT may consider seeking a CDO.
Fourth, the OFT will consider the extent of the individual director’s responsibility for the particular breach. Where a director has been directly involved in the breach (for example, by actively taking steps to carry out the infringement), the OFT is likely to apply for a CDO. Where the director improperly failed to take corrective action against the breach once he or she knew or suspected a breach was occurring, the OFT is quite likely to apply for a CDO. Where the director failed to keep himself or herself sufficiently informed of the company’s activities which constituted the breach, taking into account factors such as the director’s role in the company and the general knowledge, skill and experience of that director, the OFT does not rule out making an application for a CDO. This will depend on the OFT’s priorities at the time. The OFT does expect all directors of all companies to know that companies must comply with competition law and that price-fixing, market-sharing and bid-rigging are likely to breach competition law.
Finally, the OFT will take into account aggravating factors (which increase the likelihood of a CDO being sought) and mitigating factors (which reduce this likelihood). Aggravating factors include whether the director has been involved in breaches of competition law in the past, whether he or she destroyed evidence or obstructed the investigation by the OFT or the European Commission or encouraged continued participation in the breach after an investigation had been started. Mitigating factors include whether the director took quick remedial action once he or she became aware of the breach, whether the company was coerced by another company into carrying out the breach and whether the director took any disciplinary action against employees.
The OFT will look at the role and actions of each of the directors of the relevant company. Therefore, if the company that actually committed the breach of competition law is a subsidiary company, the OFT will also consider whether the directors of the parent company may have acted as de facto or shadow directors (i.e. persons acting as directors although they have not been validly appointed), for example by instructing the board of the subsidiary to take certain actions. The OFT has stated that it will consider shadow and de facto directors in just the same way as formally appointed directors.
The aim of the new cartel offence and CDOs is to act as a deterrent to individuals considering carrying out anti-competitive activity. There are likely to be only a small number of prosecutions and CDOs, and to date there have been no prosecutions under the Act or any applications for CDOs. However, individuals should be made aware of their responsibility for their own actions and the serious consequences that can flow from breaching competition law. Furthermore, businesses should consider reviewing and updating competition compliance policies, taking into account the new powers of the OFT under the Act, and even having a whistle-blowing policy, to ensure that it is prepared, should the worst happen.
Merger control reforms
The merger control provisions in the Act replace the existing framework that was contained in the Fair Trading Act 1973 (the “FTA”). There are two main changes to the previous system: decisions will now generally be taken by the OFT and the Competition Commission, rather than the Secretary of State, and the test against which mergers are judged has been changed to a pure competition test of whether there will be a substantial lessening of competition.
The first step in merger control is to decide whether the relevant thresholds have been met. The Act keeps the existing share of supply test, under which a merger is subject to UK merger control where the merger creates or enhances a share of supply of the goods or services of a particular description in the UK or a substantial part of it of at least 25%. However, the previous assets test has been replaced with a turnover test. This test is satisfied where the UK turnover of the target company is £70 million or more (s.23(1)).
Duty to refer
Where either of these thresholds is met, the OFT must refer the merger to the Competition Commission for further investigation where the OFT believes that it is or it may be the case that the merger may be expected to result in a substantial lessening of competition (the “SLC test”) (s.22 and 33). The OFT originally interpreted this as meaning that there had to be a significant prospect that the merger would significantly lessen competition (see the OFT’s Mergers: substantive assessment guidance). However, the Court of Appeal in the IBA Health decision in February 2004 held that this is not the correct test. Instead, the OFT must form a reasonable and objectively justified belief that it may be the case that, as a result of the merger, competition may be substantially lessened. The words “may be the case” mean that the OFT has a wide margin, between the fanciful and a degree of likelihood of less than 50%, in which it is required to exercise its judgment whether or not to make a reference. Where the degree of likelihood is more than a 50% chance, the OFT should refer the merger.
The OFT has now amended its guidance so that it will now consider whether there is a realistic prospect that the merger has resulted in, or may be expected to result in, a substantial lessening of competition.
If this threshold is satisfied, the OFT now has a duty to refer the merger for consideration by the Competition Commission (or seek undertakings in lieu of a reference if this is appropriate to remedy the identified adverse effects of the merger). Previously under the FTA, the OFT made a recommendation to the Secretary of State, who then decided whether or not to refer the merger. Under s.22 and 33 of the Act, the OFT only has discretion not to refer a merger that meets these thresholds where:
the market concerned is not of sufficient importance to justify a reference;
the arrangements in question are not sufficiently advanced or likely to proceed to justify a reference; or
customer benefits arising from the merger (such as lower prices, higher quality, greater choice or greater innovation) outweigh the substantial lessening of competition.
Competition Commission investigations
If a merger is referred to the Competition Commission, it then carries out a full investigation to determine whether the merger has caused, or may be expected to cause, a substantial lessening of competition (s.35 and 36). This replaces the previous public interest test under the FTA, although in practice this was largely competition based, and so there are unlikely to be significant differences in the application of the new test. However, the Competition Commission does now have the power to consider customer benefits of a merger and may even clear a merger where these benefits outweigh the negative effects of the merger. This is likely to happen only rarely.
Having considered the effects of the merger, the Competition Commission can either prohibit the merger, clear it unconditionally or clear it subject to conditions (called remedies). Unlike under the FTA, it is the Competition Commission that makes the final decision, rather than the Secretary of State following a recommendation from the Competition Commission.
Residual role for Secretary of State
Although political decision-making has been removed in relation to most mergers, the Secretary of State does hold a residual role in certain special cases (s.42 and 59), in particular regarding defence-related mergers and mergers that raise defined public interest issues (currently national security and public interest considerations relating to the newspaper industry, such as plurality of the media).
The procedure for carrying out investigations remains broadly the same, although the Act does tighten up the timetable for merger investigations: the timetable for the review of merger notices has been changed to a maximum of 30 working days (previously 35) and the Competition Commission now has 24 weeks from the date of the reference to complete its investigation. This period was six months under the FTA. The OFT and the Competition Commission may now also suspend these timetables if companies fail to provide information and the Competition Commission can impose monetary penalties for late or non-provision of information or non-attendance of witnesses at hearings (a maximum fixed penalty of £20,000 and daily penalties of up to £5,000 per day). There is also a new right to apply for review of decisions taken by the OFT, the Competition Commission or the Secretary of State. Appeals are made to the CAT. The CAT cannot substitute its own decision on the merits of the case but it is able to review the reasonableness, lawfulness and fairness of any decision and require it to be reconsidered by the relevant body if appropriate. This happened in the IBA Health case discussed earlier, where the merger was referred back to the OFT for reconsideration.
The OFT also now has the power to prevent parties to completed mergers from taking further steps to integrate their businesses before the OFT makes a decision on whether or not to refer the merger to the Competition Commission.
Damages claims in the Competition Appeal tribunal
The Act introduces the Competition Appeal Tribunal (the “CAT”), which replaces the previous Competition Commission Appeals Tribunal. The CAT is entirely independent of the Competition Commission and has the power to review decisions on mergers or market investigation references made by the OFT, the Competition Commission, the Secretary of State or any sectoral regulator.
More importantly, the Act introduces various changes, making it easier for private parties to seek redress for breaches of competition law (in addition to the existing right to bring damages claims in the courts). The CAT now has the power to hear damages claims for third parties who has suffered loss or damage as a result of a breach of UK or EC competition law (s. 18). Certain specified bodies may also bring representative claims for damages, brought on behalf of groups of named individual consumers (s.19). In both cases, an infringement of competition law must already have been established either by the OFT or the European Commission. Claims may be made where there has been a breach of Article 81 or the Chapter I prohibition in the Competition Act 1998, or a breach of Article 82 or the Chapter II prohibition in the Competition Act 1998. No claim can be brought while the decision in question may still be subject to an appeal. The CAT is bound by the previous finding of infringement on which the claim is based. The first such actions were lodged before the courts in February 2004 by two UK companies seeking damages from participants in the vitamins cartel, who were found by the European Commission to have infringed Article 81(1). The cases have yet to be decided.
In relation to representative claims, the Secretary of State may specify bodies that will be permitted to bring actions on behalf of consumers. These consumers must be individuals and must not be receiving the goods or services in question in the course of his or her business. In this case, damages will be awarded directly to the represented consumers although the CAT can award the damages to the specified body with the agreement of the individual concerned. No bodies have as yet received permission to bring representative actions under this s.19 procedure.
Businesses should be aware of these improvements to private actions for losses caused by competition law infringements and, if necessary, review current agreements to assess the likelihood any agreements could lead to the company being sued.
S.11 of the Act includes reference to so-called super-complaints. These are complaints made by designated consumer bodies to the OFT (or the relevant sectoral regulator) where any feature or combination of features of a market are harming consumers to a significant extent. They are aimed at features of a market as a whole, not the behaviour of individual businesses. Examples include the structure of a particular market or the general conduct of firms operating within a market. Eligible bodies must be designated by the Secretary of State and currently include the National Consumer Council and its wholly-owned subsidiary Which?, the Consumers Association and Citizens Advice.
Once a super-complaint is made, the OFT has 90 calendar days to respond. In its response, the OFT must state whether or not it intends to take any action and, if so, what action it proposes to take. The OFT can take any action it deems necessary using its powers under the Act. For example, it could refer the market to the Competition Commission (discussed below), take enforcement action under the Competition Act 1998 or recommend changes to legislation.
The most recent example of a super-complaint was that made by Which?, acting on its own initiative and on behalf of the General Consumer Council for Northern Ireland, on 15 November 2004. This super-complaint to the OFT relates to the personal current account banking market in Northern Ireland.
Market investigation references to the Competition Commission
Market investigations under the Act replace the system of monopoly enquiries that existed under the FTA. The aim of these investigations is to inquire into markets where it appears that the structure of the market (such as barriers to entry or vertical integration) or the conduct of undertakings and/or their customers active in the market (such as co-ordinated behaviour or standard industry practices) is harming competition. A reference may be made in response to a super-complaint, discussed above.
Reference by the OFT
The OFT under s.131 of the Act, has the power to refer a market to the Competition Commission for investigation, as well as the sectoral regulators. To make a reference, the OFT must have reasonable grounds for suspecting that one or more features of a market prevents, restricts or distorts competition in relation to the supply or acquisition of goods or services in the UK or a part of it. The OFT has published guidance on the way that it intends to apply its powers in respect of market investigations (see Market investigation references) (the “Guidance”). The Guidance states that a restriction, distortion or prevention of competition will occur not only when companies take steps that adversely affect the ability of other companies to compete, but also when companies fail to compete as effectively as in a competitive market. The OFT will assess the effect on competition at all levels of the supply chain in relation to the production or supply of particular goods or services.
The OFT is not obliged to make a reference, even where the conditions for a reference are met. The Guidance states that it will take into account four factors when deciding whether or not to make a reference:
whether it would be more appropriate for it, or the sectoral regulators, to deal with the issues in another way, in particular under the Competition Act 1998;
whether undertakings in lieu of a reference may be a suitable way of addressing the identified problems;
whether the scale of the problem in terms of its adverse effect on competition and its detrimental effect on customers justifies a reference; and
whether there is a reasonable chance that appropriate remedies would be available to address any problem identified by the Competition Commission.
The OFT will usually carry out an initial investigation itself, before deciding whether or not to refer the market to the Competition Commission for a more detailed investigation. Ministers may also make a market reference to the Competition Commission in certain limited circumstances, where the Minister is not satisfied with a decision of the OFT not to make a reference or where Ministers are not satisfied that the OFT will reach a decision on whether to make a reference within a reasonable time (s.132). These powers will only be used in exceptional cases.
As with mergers, the OFT may accept undertakings in lieu of a reference where appropriate, in order to remedy any adverse effects on competition which would otherwise be the subject of a reference (s.154). The Guidance states that this power will only be used on rare occasions.
Competition Commission investigations
Once a market has been referred to the Competition Commission, it carries out a detailed investigation to determine whether or not any feature(s) in the market referred to it prevents, restricts or distorts competition in the UK (or a part of it) and publishes its report. This investigation can take a maximum of two years (s.137), although the Competition Commission has indicated that it expects most investigations to take between 12 and 15 months. If any adverse effects on competition or detrimental effects on customers are identified, the next step is for the Competition Commission to decide what action is necessary to remedy these negative effects (s.138). The Competition Commission must take into account any relevant customer benefits at this stage. Remedies may be either legally binding undertakings or orders and can be structural or behavioural. The OFT is responsible for monitoring compliance with these undertakings and orders.
The Competition Commission has power to request the production of information and documents and to require individuals to appear before it. Failure to comply with these powers is an offence. In addition, the Competition Commission has the ability to impose financial penalties for failure to provide information within the set timetable or at all (a fixed penalty of up to £20,000 or a daily penalty of up to £5,000 or both (see Competition Commission Statement of Policy on Penalties).
Residual role for the Secretary of State
Although most decisions will be made by the Competition Commission, the Secretary of State does retain a residual power to intervene where public interests arise in a market investigation (s.139). The only public interest specified so far is national security (s.153). She does this by giving an intervention notice, which may be served on the Competition Commission within four months of a market reference being made to it. Alternatively, if the OFT has not yet made a reference but is considering accepting undertakings in lieu of a reference, an intervention notice may be served on the OFT. Once an intervention notice is served, the Competition Commission must decide on any adverse effects on competition and what remedies are appropriate, as normal. However, it then reports its findings to the Secretary of State. If the Secretary of State decides that a wider public interest consideration is relevant to the proposed remedies, she will take action, taking this consideration into account. If the Secretary of State decides that in fact no public interest consideration is relevant, the matter will revert back to the Competition Commission to take action, as normal. As with mergers, decisions of the OFT, the Competition Commission and the Secretary of State taken in relation to market investigations can be appealed by those who are sufficiently affected to the CAT.
The Competition Commission is currently carrying out market investigations into domestic bulk liquid petroleum gas and store cards.
Some of the new powers of the OFT and the Competition Commission under the Act are already being used successfully, such as the power to carry out market investigations and the use of super-complaints. However, the powers that have caught the headlines the most, the power to imprison individuals for illegal cartel activity and the power to disqualify directors for breaches of EC or UK competition law, have not yet been exercised. No doubt, the OFT will be keen to use these powers as soon as it has a suitable case, to show that it really does now have some teeth, when it comes to enforcing competition law. As a result, companies should ensure that directors and employees are aware of these powers and the company has sufficient competition compliance systems in place to ensure that breaches do not occur or, if they do, that the company knows what to do about them.
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 The current sectoral regulators are the Office of Communications, the Gas and Electricity Markets Authority, the Office of Water Services, the Office of Rail Regulation, the Office for the Regulation of Electricity and Gas (Northern Ireland) and the Civil Aviation Authority.
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 OJ 2002 C45/3
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