Take the strain
2 September 2002
The proposed introduction of criminal sanctions for certain anticompetitive activities under the Enterprise Bill has captured the media's attention and sent ripples through the country's boardrooms. However, it is a further new measure contained in the bill that might have a wider impact - the power to disqualify directors for up to 15 years for competition law infringements by their companies.
UK and EU competition law currently imposes no liability on individuals for breaches of competition rules, whether by way of criminal penalties or otherwise. Penalties, by way of fines, are imposed on the infringing company. Thus it is the shareholders, rather than individual directors and employees, who bear the consequences of competition law infringements.
The only way in which criminal sanctions might be imposed under the current system is through an arguably strained interpretation of the offence of conspiracy to defraud. Earlier this year, the Serious Fraud Office (SFO) raided a number of pharmaceutical manufacturers, alleging a possible price-fixing arrangement involving a fraud on the National Health Service. In order to secure criminal sanctions against those allegedly involved, the SFO would need to show that there is a point at which price fixing becomes a conspiracy to defraud and that point has been reached in the alleged circumstances. These would seem to be two very substantial hurdles to overcome.
By contrast, in the US, which has had criminal sanctions for competition law infringements for many years, 11 people were incarcerated last year for competition law breaches and two dozen more were sentenced to other forms of confinement, such as house arrest. The importance of compliance with competition laws is well understood by employees and directors of US businesses.
While the threat of possible imprisonment will help focus the corporate mind on competition laws in the UK, it is likely that the power to impose criminal sanctions - a potentially unlimited fine, or five years imprisonment, or both - will be exercised relatively infrequently. A criminal sanction can only be sought in respect of a limited range of competition law infringements relating to certain horizontal (or cartel) arrangements, namely price-fixing, limitation of production or supply, market-sharing and bid-rigging that are implemented in whole, or in part, in the UK. The offence will be committed regardless of whether the agreement reached is implemented as intended. Vertical arrangements, such as resale price maintenance and predatory pricing, are not caught. The prosecuting authority, which can be either the Office of Fair Trading (OFT) or the SFO, has to prove dishonesty. This will be no easy task in all but the clearest of cases.
The test for dishonesty was established in R
Ghosh . It requires a jury - if the charge is being tried on indictment - to determine whether what was done was 'dishonest' by the ordinary standards of reasonable and honest people and, if so, whether the defendant had realised that the actions were dishonest according to those standards. Only when a jury can answer yes beyond reasonable doubt to both questions is dishonesty proven.
When the Government first proposed criminal sanctions, the corporate world feared the worst. It was thought that executives could shortly be behind bars for 'innocent' breaches of competition laws. However, the reality is quite different. A person will not have behaved dishonestly if they merely become aware of the existence of a cartel, even though they take no action to end it. A person is unlikely to be prosecuted if their involvement in the cartel was only peripheral (see the OFT's guidance on 'No-Action Letters for Individuals', published in July 2002 for consultation purposes). Someone who acts on legal advice that tells them that an arrangement does not breach competition law, even if later the advice is shown to be erroneous, or if that person is provided with legal advice that is equivocal - for example, there is a fifty-fifty chance that a proposed arrangement is anticompetitive - and then proceeds with that action nonetheless, is unlikely to be prosecuted.
Further, if a person admits to their involvement in a criminal offence and fully co-operates with the authorities throughout an investigation, that person could receive a no-action letter from the OFT, giving protection against prosecution.
The OFT will have power to apply for Competition Disqualification Orders (CDOs) against directors of companies involved in anticompetitive activity. CDOs will be available in a broader range of circumstances than those that will give rise to criminal liability. The elements required for a CDO to be made need only be proven on the balance of probabilities before a judge alone. The availability of a CDO is not limited to cartel activity, but can be sought in respect of any infringements of UK or EU competition law. It is not necessary to prove dishonesty. If a breach of competition law has occurred, the court must consider whether the director's conduct makes him unfit to be concerned in the management of a company. This is a much lower standard than dishonesty. The court must consider whether the director's conduct contributed to the breach, whether the director had reasonable grounds to suspect that the conduct of the undertaking constituted the breach and took no steps to prevent it, or whether the director did not know but ought to have known that the conduct of the undertaking constituted the breach. However, even if a director is unaware of the competition law infringement, a CDO may, in appropriate circumstances, be made against him.
If a board of directors has resolved that the company should engage in activity that constitutes a breach of competition law, the OFT may also seek CDOs against the entire board.
If the sanctions contained within the bill are to have the desired deterrent effect, one would expect the OFT to be rigorous in its application of the new laws. That said, the OFT was cautious in applying the Competition Act 1998 to cartel activities in the early days of that act and it is likely to wait until it has a watertight test case before pursuing its first criminal prosecution under the new bill. So it may be sometime before such a case arises. We are more likely to see applications for CDOs arising out of proven breaches of competition law. Given that the test in such cases is relatively low compared with the criminal offence, one suspects that the prospect of such orders may have a more significant impact on company behaviour than the more esoteric criminal offence.
Martin Coleman is head of the competition and EC department and Jenny Stevens is a senior lawyer, both at Norton Rose