On 18 October, parliamentary scrutiny of the Enterprise and Regulatory Reform Bill (the Bill) passed to the House of Lords, following completion of the Bill's passage through the House of Commons the previous day. As previously noted (see, most recently, Edwards Wildman Client Advisory: Bill Setting Out New Competition Law Regime Scrutinised by UK Parliament), the Bill implements the UK Government's decision to establish a new Competition and Markets Authority (CMA), through a merger of the Office of Fair Trading (OFT) and Competition Commission, and to reform various aspects of the UK competition regime, including antitrust enforcement, mergers and market investigations.
While most of the proposed reforms are largely procedural in nature, the Bill also includes an important change to the scope of the criminal cartel offence. It is currently a criminal offence, under s.188(1) of the Enterprise Act 2002 (EA02), for two or more individuals dishonestly to agree to implement specified arrangements between undertakings. The "arrangements" so specified include arrangements to fix the price for the supply of a product or service in the UK, to "limit or prevent" supply or production, to divide supplies or customers and to rig bids. Vertical agreements are excluded from the scope of the offence. On conviction, an individual found guilty of committing the cartel offence may be sentenced to up to five years' imprisonment and/or an unlimited fine.
The requirement that the individuals must have acted dishonestly for the offence to be committed was designed to ensure that only the most serious forms of anticompetitive conduct were criminalised, reflecting the perceived need for a high threshold of individual culpability (reflected in the offence's mens rea or 'guilty mind'), before such a punitive criminal conviction could be imposed. Since the offence was introduced, however, the OFT has argued that the dishonesty requirement imposes too high a burden in practice and that this makes it difficult for it to bring prosecutions. Although it is hard to verify this claim, the Government is clearly disappointed that there has not been a single conviction under the cartel offence, except for one case in which the defendants pleaded guilty before the UK court pursuant to a plea bargain entered into with the United States Department of Justice. The Government has therefore accepted the OFT's argument and the Bill accordingly deletes the word "dishonestly" from s.188 EA02. The impact of this change is potentially dramatic, since it effectively makes any agreement between individuals for undertakings to engage in certain, defined types of arrangement a strict liability offence, irrespective of the individuals' intention or the arrangements' impact on competition.
Government originally sought to head off criticism of this move by providing in the Bill that the offence will not be committed if the customers buying goods or services affected by the arrangement in question are given "relevant information" about the arrangements prior to agreeing to buy the affected products or services or if such information is published before the arrangements are implemented. Although this offers some comfort, it did not remove the basic problem that removal of the dishonesty requirement, without its replacement by an appropriate alternative test capable of distinguishing legitimate from illegitimate conduct, means that the scope of the offence had still been substantially increased beyond the type of hard core cartel conduct that it was originally designed to combat. In addition, the introduction of a publication procedure to take potentially problematic arrangements outside the scope of the offence, introduce a level of formalism into the UK regime that has not been seen since the repeal of the unlamented Restrictive Trade Practices Act 1976 in 2000. As a result, the proposed changes to the offence were criticised by several witnesses, including legal practitioners, who gave evidence during the House of Commons Committee Debate. Although the House of Commons debate over the changes was frustratingly short, some of the criticisms raised were picked up by the Opposition, which at least elicited a promise from the responsible Minister to "reflect on" the points raised "to ensure that we get the provision absolutely right".
The outcome of this reflection was revealed on 9 October 2012, when the Government included further changes to the scope of the cartel offence with a large number of more technical amendments to the Bill. The changes alter the cartel offence in two ways, as follows:
The amendments introduce three new defences to the offence. These will be available if an individual charged with the offence can show that he or she:
did not intend that the nature of the arrangements concerned would be concealed from customers at all times before entering into the agreement in question;
did not intend, at the time of the making of the agreement, that the nature of the arrangements would be concealed from the CMA; or
took reasonable steps to ensure that the nature of the arrangements would be disclosed to professional legal advisers for the purposes of obtaining advice before their making or implementation.
The amendments also introduce a statutory requirement for the CMA to publish guidance on the "principles to be applied in determining, in any case, whether proceedings for an offence … should be instituted".
These amendments were passed by the House of Commons, without debate, on the Bill's third reading in the Commons on 17 October 2012 and therefore now form part of the Bill that has passed to the Lords.
The new amendments raise more questions than they answer. In particular, it is unclear how an individual charged with the offence will prove to the requisite standard that he or she did not intend to conceal "the nature of their arrangements" from customers, particularly in circumstances where normal commercial confidentiality considerations may apply. What is clear is that this defence is unlikely to be available to genuine cartelists, since it is in the nature of a cartel that its existence is known only to its members and kept secret from their customers. More difficult to understand is how an intention not to conceal arrangements from the CMA can be proved in practice, given that there is no positive obligation on parties to disclose commercial arrangements to the CMA in the first place. Again, this defence seems to be have been drafted more to define situations in which it should not be available, i.e. secret cartels, than to provide a genuinely useful defence for legitimate commercial arrangements. The third defence should be easier to apply, since whether an individual has sought legal advice on specific arrangements should be objectively verifiable. It will be interesting to see how far this defence will be relied upon in practice, however, since its use may lead to scrutiny at trial of the advice actually received, notwithstanding the strict position on legal advice privilege. In such circumstances, it is unlikely that parties to a cartel will escape criminal liability simply because they had asked a lawyer before entering into it whether such a course of action would be illegal!
The new duty on the CMA to publish prosecution guidance is more welcome. The apparent intention behind this requirement is to enable the CMA to clarify that "legitimate behaviour" will not be prosecuted. (In adopting such an approach, the Government is presumably building on the generally positive reception of the 'joint prosecution guidance' produced by the Serious Fraud Office and Director of Public Prosecutions to coincide with the coming into force of the Bribery Act 2010.) If the CMA's cartel offence guidance delivers such clarification, it should give parties to genuinely legitimate arrangements significant comfort. It will not remove concerns altogether, however. While the exercise of prosecutorial discretion to limit the category of conduct against which prosecutions are brought should reduce concerns over the prosecution of legitimate agreements, it does not prevent that conduct being criminal in the first place, which has various consequences including under the UK's extremely onerous money laundering regime.
The lack of any debate of the latest amendments in the Commons means that it will be left to the House of Lords (where Second Reading of the Bill debate is scheduled for 14 November) to pick over what is now a highly convoluted clause. If the Bill becomes law in its current form, the UK will still have moved from having a narrowly defined criminal cartel offence to a potentially much wider offence, constrained only by defences whose availability and scope is uncertain. This reflects an inherent difficulty of defining a cartel purely by reference to the form of the agreement, without reference to the individual intent of those involved or the agreement's impact on competition. This necessitated an approach based on defining the offence by reference to what it is not, rather than what it is, which was inevitably going to raise drafting challenges. The position has been further complicated by the fact that the Government had to avoid the offence being viewed as part of "national competition law", since this would have caused significant complications due to conflicts with the EU civil competition law regime.
Ultimately, parties to legitimate business arrangements may have to rely on the comfort that, by introducing these changes, the Government will have created an offence that is so unwieldy that it will be almost impossible to prosecute in practice. There is no little irony in the fact that this was the original motivation for removing the dishonesty requirement in the first place.