Building blocks

The Office of Fair Trading (OFT) suffered a major setback last week when the Competition Appeal Tribunal (CAT) reduced the fines it had imposed on six construction companies that had taken part in a price-fixing racket.

Lawyers say the decision will force the OFT to reassess how it calculates penalties against companies found to be in breach of the law. The opportunity to do just that has arisen with the Government’s timely consultation on the merger between the OFT and the Competition Commission being announced today.

The aim is to combine the two agencies to create a single Competition and Markets Authority (CMA), which, the Department of Business said, would reduce costs and speed up investigations.

The CAT’s ruling, which was handed down late last Friday (11 March) – unusual timing for any court – contained some serious lessons for the OFT. And that was before it delivered the full decision on all the 25 cases appealed.

To recap, in September 2009 the OFT issued fines totalling £129.5m against 103 construction companies found to have abused price-fixing laws. Of those penalised, 25 issued appeals against the level of the fine. Last week, the CAT issued judgments in six of those appeals, reducing the combined £41.78m fine by 90 per cent to £4.4m. Judgment is outstanding in the remaining 19 cases, where separate issues such as appeals on liability are being decided.

The OFT found the construction companies guilty of cover pricing, a process that involves deliberately submitting higher tenders with the aim of remaining on the client’s tender list for future contracts instead of winning the contract actually being tendered for.

The seriousness of that crime, ruled the CAT, was not enough to justify the levels of fine imposed.

Typically fines against companies found to have infringed competition rules are calculated by applying a percentage figure to the abuser’s turnover in the market affected by the infringement. In this instance the companies were each fined 5 per cent of their respective turnovers, with 10 per cent levied from the most serious offenders.

The CAT reduced the figure to 3.5 per cent and recommended that the OFT re-examine its starting point because the range of fines may be too narrow.

Like many of its regulatory peers, the OFT has wanted to move towards a system whereby any fine will deter others from doing the same. The inner workings of how precisely it calculates the level of fine for deterrence were first revealed in the 2007 case Makers v OFT, which concerned bid-rigging in the roofing industry.

In that appeal the OFT argued that it did not think that a penalty based on turnover in the relevant market provided enough of a deterrent if the undertaking achieved less than 15 per cent of its total turnover in that market.

Therefore, the approach has been to add the percentage seriousness figure to 15 per cent of turnover of the abuser’s total group, rather than the turnover of the market it affected. This is know as the Minimum Deterrence Threshold (MDT) formula.

The CAT was critical of the blanket approach, stating that the OFT had failed to explain why it applied the 15 per cent threshold to all but had used it as a “blunt instrument”.

The OFT must strike a balance between the responsibility of the perpetrator and deterrence factors to maintain proportionate regulation. The OFT weighed the fine too far in favour of the deterrence factor and, in doing so, the balance was lost.

Culpability must not be lost to the deterrent factor, the CAT said.

Lawyers say the case will also hold lessons for the FSA, which has a very similar regulatory framework as the OFT and which also wants to deter offences.

Meanwhile, the OFT is facing some significant challenges this year. This includes Morrisons leading an appeal against an OFT fine of £225m for agreeing to fix the price of tobacco products. RyanAir has also asked the CAT to look at whether the OFT can investigate its aborted takeover of Aer Lingus (20 January). And, don’t forget, there are 19 more judgments to be delivered in the construction companies case.

If the lessons of this matter have not been learned it will be an embarrassing year for the OFT.

This at a time when the Government wants its regulators to be seen to have teeth. A merger with the Competition Commission, while not welcomed by all, could provide a clean slate on which to start afresh.