Litigation UK - June 2010

Until relatively recently, the implications of a UK competition law (antitrust) investigation for individual company directors were limited to inconvenience, potential embarrassment and higher legal bills. At worst, an individual implicated in an infringement could lose his or her job. Depending on the circumstances, they might also decide to avoid travelling to the United States, which has long taken an active approach to prosecuting cartel activity.

Since the introduction of the cartel offence into UK law in June 2003, the potential consequences for individuals have become more severe. Section 188 of the Enterprise Act 2002 made it a criminal offence for two or more individuals dishonestly to agree to make or implement arrangements that fix prices, limit supply or production, allocate markets or customers or rig bids. Individuals found guilty of the cartel offence face up to five years in prison or an unlimited fine. In addition, the Enterprise Act introduced a new procedure under which the UK Office of Fair Trading (OFT) can seek a court order to disqualify individuals involved in serious anticompetitive activity from acting as UK company directors for up to 15 years. The introduction of the cartel offence also facilitates the extradition of UK nationals to the United States for prosecution for cartel activity there.

The first convictions for the new cartel offence were handed down in June 2008, when three individuals were imprisoned for terms of up to 36 months (reduced to 30 months on appeal) for participation in a cartel concerning hoses for the transfer of oil onto ships. They were also banned from acting as company directors for between five and seven years, on the basis of their conviction for an indictable offence. Perhaps because of the rather obscure products involved, these convictions generated relatively little coverage at the time. Since the individuals in that case pleaded guilty, pursuant to a US plea bargain agreement, the OFT’s recent prosecution of the ‘British Airways Four’ for alleged cartel activity relating to passenger fuel surcharges represented the first time that the OFT was required to prove a cartel case before a judge and jury.

Although the OFT’s prosecution in that case collapsed, following the revelation that the defence had not been given timely access to potentially exculpatory emails, the offence remains on the statute book. The OFT stressed in its press release announcing the abandonment of its prosecution that its "commitment to investigating and prosecuting those who engage in criminal cartel activity is unaffected by today's decision" and it may now be keen to find a new case to demonstrate this. The OFT's recent confirmation that it is conducting an "ongoing criminal investigation into suspected cartel activity in the automotive sector" provides concrete evidence of this commitment. The OFT has also indicated a desire to make greater use of its director disqualification powers. As a result, it is still important to consider the public enforcement risks that exist for directors of companies implicated in anticompetitive behaviour affecting the UK.

A reminder that prosecution by the authorities is not the only risk faced by directors caught up in anticompetitive conduct was provided by a High Court judgment earlier this year. In a novel claim for the English courts, three Safeway companies (now subsidiaries of Morrisons supermarkets) are suing a number of their ex-employees and ex-directors, as well as an ex-chairman, for losses that the companies have suffered as a result of an OFT investigation into agreements between a number of supermarkets and dairies to increase the price of liquid milk, 'value butter' and cheese. Specifically, in December 2007, Safeway admitted to an infringement of the Competition Act 1998 through the exchange and disclosure of commercially sensitive retail pricing intentions and participation in retail pricing initiatives, for which the OFT agreed to levy a (reduced) fine of just over £10 million. This fine related to the period before Safeway was acquired by Morrisons, which agreed to pay a separate fine for its own involvement. The Safeway companies are now suing the individuals for an indemnity against liability for the Safeway penalty, and the cost of defending themselves against the investigation, based on breach of contract, breach of fiduciary duty, negligence and conspiracy.

In a judgment on the defendants' application for summary judgment or strike-out of the claim, which was handed down in January,1 the High Court confirmed that the claim could proceed. Crucially, the court concluded that there was a real prospect that the claimants would, at trial, be able to defeat a defence based on the principle of ex turpi causa. Under this defence, the claimants would be barred as a matter of public policy from recovering damages from the defendants, on the grounds that this would amount to benefiting from their own illegal act (i.e. the infringement of competition law). The court ruled that this was not the case here, since the companies' liability to pay the fine arose through the actions of the individuals concerned, acting as the companies' agents. As a result, although the claimant companies had to take responsibility under competition law for the consequences of the actions of their employees, the companies could not be said to be personally at fault. For such a finding of primary liability to be made, the court suggested that the competition law infringement would need to have been explicitly authorised by the companies' boards of directors or a majority of their shareholders. As the judge summarised, "the claimants have a real prospect of successfully defeating any defence based upon ex turpi causa at trial on the basis that their liability is not primary or direct so as to attract the necessary degree of turpitude".

Furthermore, the court rejected the defendants' argument that such a claim would undermine the civil competition regime, by allowing a culpable company to offload liability for an infringement onto its directors and employees, and hence onto their insurers. The court gave this line of reasoning short shrift, concluding that "it would be startling if the defendants … could not owe duties as a matter of law not to put their employers in breach of competition law" and that it could not follow from the law "that individuals cannot owe the company duties on normal common law principles to ensure that the company complies with its statutory obligations". In the view of the court, the claim simply involved the application of "well-established principles of the common law", which remained unaffected by either the Competition Act's prohibition of anticompetitive behaviour by companies or the Enterprise Act's prohibition of cartel conduct by individuals. As a result, the claim was allowed to stand.

On 30 April 2010, the OFT announced that, in light of additional evidence, it had reduced the duration of the infringements relating to liquid milk and value butter.2 This has caused the OFT to reduce the fines to be imposed under the early resolution agreements from a total of £116 million to approximately £70 million and to drop Morrisons from the investigation altogether. Although this will have an impact on the value of the claim by the Safeway companies, the damages case is otherwise not affected by this development. More significantly, the defendants were swiftly granted leave to appeal the High Court's decision to allow the claim to stand to the Court of Appeal. The appeal, which will focus on the public policy implications of the judgment, is due to be heard in November.

Comment by Becket McGrath
Partner, Competition Law Group (London)

The shift in UK competition policy towards making individual directors and employees personally liable for their involvement in competition law infringements will probably survive the OFT's defeat in the 'British Airways Four' trial. It also appears to have been unaffected by the recent change in government. Whether this will remain a matter for the public enforcement bodies only will depend on the outcome of the appeal in the Safeway case, which is bound to be watched closely by competition lawyers and company directors alike. In the meantime, the OFT and European Commission continue to impose heavy fines on companies for competition law infringements, making it clear that penalties for individuals (along with civil actions for damages against infringing companies) are viewed as a complement for such enforcement measures, rather than a substitute.

1 Safeway Stores Ltd, Safeway Ltd and Stores Group Ltd v. Simon John Twigger & Ors [2010] EWHC 11 (Comm), QBD (Flaux J), judgment of 15 January 2010.

2 See OFT Update on Dairy Investigation, Press Notice 45/10, at http://www.oft.gov.uk/news-and-updates/press/2010/45-10.

Contacts

The information in this article is for general guidance only and is not intended to be a substitute for specific legal advice. If you would like any further information please contact:

Becket McGrath
Partner, Competition Law Group (London)
t: +44 (0) 20 7556 4125
e: BMcGrath@eapdlaw.com


Competition Law Liability for Directors Until relatively recently, the implications of a UK competition law (antitrust) investigation for individual company directors were limited to inconvenience, potential embarrassment and higher legal bills. At worst, an individual implicated in an infringement could lose his or her job. Depending on the circumstances, they might also decide to avoid travelling to the United States, which has long taken an active approach to prosecuting cartel activity. Criminal Cartel Enforcement Since the introduction of the cartel offence into UK law in June 2003, the potential consequences for individuals have become more severe. Section 188 of the Enterprise Act 2002 made it a criminal offence for two or more individuals dishonestly to agree to make or implement arrangements that fix prices, limit supply or production, allocate markets or customers or rig bids. Individuals found guilty of the cartel offence face up to five years in prison or an unlimited fine. In addition, the Enterprise Act introduced a new procedure under which the UK Office of Fair Trading (OFT) can seek a court order to disqualify individuals involved in serious anticompetitive activity from acting as UK company directors for up to 15 years. The introduction of the cartel offence also facilitates the extradition of UK nationals to the United States for prosecution for cartel activity there. The first convictions for the new cartel offence were handed down in June 2008, when three individuals were imprisoned for terms of up to 36 months (reduced to 30 months on appeal) for participation in a cartel concerning hoses for the transfer of oil onto ships. They were also banned from acting as company directors for between five and seven years, on the basis of their conviction for an indictable offence. Perhaps because of the rather obscure products involved, these convictions generated relatively little coverage at the time. Since the individuals in that case pleaded guilty, pursuant to a US plea bargain agreement, the OFT’s recent prosecution of the ‘British Airways Four’ for alleged cartel activity relating to passenger fuel surcharges represented the first time that the OFT was required to prove a cartel case before a judge and jury. Although the OFT’s prosecution in that case collapsed, following the revelation that the defence had not been given timely access to potentially exculpatory emails, the offence remains on the statute book. The OFT stressed in its press release announcing the abandonment of its prosecution that its "commitment to investigating and prosecuting those who engage in criminal cartel activity is unaffected by today's decision" and it may now be keen to find a new case to demonstrate this. The OFT's recent confirmation that it is conducting an "ongoing criminal investigation into suspected cartel activity in the automotive sector" provides concrete evidence of this commitment. The OFT has also indicated a desire to make greater use of its director disqualification powers. As a result, it is still important to consider the public enforcement risks that exist for directors of companies implicated in anticompetitive behaviour affecting the UK. Civil Liability for Directors A reminder that prosecution by the authorities is not the only risk faced by directors caught up in anticompetitive conduct was provided by a High Court judgment earlier this year. In a novel claim for the English courts, three Safeway companies (now subsidiaries of Morrisons supermarkets) are suing a number of their ex-employees and ex-directors, as well as an ex-chairman, for losses that the companies have suffered as a result of an OFT investigation into agreements between a number of supermarkets and dairies to increase the price of liquid milk, 'value butter' and cheese. Specifically, in December 2007, Safeway admitted to an infringement of the Competition Act 1998 through the exchange and disclosure of commercially sensitive retail pricing intentions and participation in retail pricing initiatives, for which the OFT agreed to levy a (reduced) fine of just over £10 million. This fine related to the period before Safeway was acquired by Morrisons, which agreed to pay a separate fine for its own involvement. The Safeway companies are now suing the individuals for an indemnity against liability for the Safeway penalty, and the cost of defending themselves against the investigation, based on breach of contract, breach of fiduciary duty, negligence and conspiracy. In a judgment on the defendants' application for summary judgment or strike-out of the claim, which was handed down in January,1 the High Court confirmed that the claim could proceed. Crucially, the court concluded that there was a real prospect that the claimants would, at trial, be able to defeat a defence based on the principle of ex turpi causa. Under this defence, the claimants would be barred as a matter of public policy from recovering damages from the defendants, on the grounds that this would amount to benefiting from their own illegal act (i.e. the infringement of competition law). The court ruled that this was not the case here, since the companies' liability to pay the fine arose through the actions of the individuals concerned, acting as the companies' agents. As a result, although the claimant companies had to take responsibility under competition law for the consequences of the actions of their employees, the companies could not be said to be personally at fault. For such a finding of primary liability to be made, the court suggested that the competition law infringement would need to have been explicitly authorised by the companies' boards of directors or a majority of their shareholders. As the judge summarised, "the claimants have a real prospect of successfully defeating any defence based upon ex turpi causa at trial on the basis that their liability is not primary or direct so as to attract the necessary degree of turpitude". Furthermore, the court rejected the defendants' argument that such a claim would undermine the civil competition regime, by allowing a culpable company to offload liability for an infringement onto its directors and employees, and hence onto their insurers. The court gave this line of reasoning short shrift, concluding that "it would be startling if the defendants … could not owe duties as a matter of law not to put their employers in breach of competition law" and that it could not follow from the law "that individuals cannot owe the company duties on normal common law principles to ensure that the company complies with its statutory obligations". In the view of the court, the claim simply involved the application of "well-established principles of the common law", which remained unaffected by either the Competition Act's prohibition of anticompetitive behaviour by companies or the Enterprise Act's prohibition of cartel conduct by individuals. As a result, the claim was allowed to stand. On 30 April 2010, the OFT announced that, in light of additional evidence, it had reduced the duration of the infringements relating to liquid milk and value butter.2 This has caused the OFT to reduce the fines to be imposed under the early resolution agreements from a total of £116 million to approximately £70 million and to drop Morrisons from the investigation altogether. Although this will have an impact on the value of the claim by the Safeway companies, the damages case is otherwise not affected by this development. More significantly, the defendants were swiftly granted leave to appeal the High Court's decision to allow the claim to stand to the Court of Appeal. The appeal, which will focus on the public policy implications of the judgment, is due to be heard in November. Comment by Becket McGrath Partner, Competition Law Group (London) The shift in UK competition policy towards making individual directors and employees personally liable for their involvement in competition law infringements will probably survive the OFT's defeat in the 'British Airways Four' trial. It also appears to have been unaffected by the recent change in government. Whether this will remain a matter for the public enforcement bodies only will depend on the outcome of the appeal in the Safeway case, which is bound to be watched closely by competition lawyers and company directors alike. In the meantime, the OFT and European Commission continue to impose heavy fines on companies for competition law infringements, making it clear that penalties for individuals (along with civil actions for damages against infringing companies) are viewed as a complement for such enforcement measures, rather than a substitute. Endnotes 1 Safeway Stores Ltd, Safeway Ltd and Stores Group Ltd v. Simon John Twigger & Ors [2010] EWHC 11 (Comm), QBD (Flaux J), judgment of 15 January 2010. 2 See OFT Update on Dairy Investigation, Press Notice 45/10, at http://www.oft.gov.uk/news-and-updates/press/2010/45-10. Contacts The information in this article is for general guidance only and is not intended to be a substitute for specific legal advice. If you would like any further information please contact: Becket McGrath Partner, Competition Law Group (London) t: +44 (0) 20 7556 4125 e: BMcGrath@eapdlaw.com