On 11 March 2011, the Competition Appeal Tribunal (CAT) handed down its judgment in respect of six appeals lodged by 25 companies against the magnitude of the fines imposed by the Office of Fair Trading (OFT) following its investigation into the UK construction sector.

Although acknowledging the procedural difficulties arising for the OFT in handling the largest investigation it had ever undertaken, the CAT deemed the fines imposed by the OFT in respect of cover pricing in each of the six cases under appeal to be disproportionate and excessive.

Accordingly, the CAT has significantly reduced the OFT's initial penalties, as imposed after any leniency reductions, across the six cases. While judgments are awaited in respect of the remaining appeals, this judgment indicates that further substantial reductions may be expected.

Further, the CAT's significant fining reductions underline the importance of evaluating at an early stage any possible grounds for appealing regulatory penalties imposed; while the appellants may receive reductions upon their fines, the remaining companies fined by the OFT that did not appeal the decision are now unable to do so under the current legal framework.

Industry awareness: the importance of competition law compliance

There can be nobody within the UK construction industry who is now unaware that "cover pricing" is a clear and serious breach of competition law.

Where cover pricing was previously "endemic" within the construction sector, the OFT's investigation has been an undoubted catalyst in informing the industry's widespread acknowledgement of the need to ensure compliance with competition law.

Cover pricing: a clear and serious breach

Importantly, in reducing the magnitude of the fines imposed by the OFT, the CAT has not in any way sanctioned the illegal practice of cover pricing.

Cover pricing remains a clear and serious breach of competition law; it is intended to deceive customers as to the extent of competition for tendered work, and is capable of affecting the prices charged by tenderers to customers.

Ongoing compliance: a "must have", not a "nice to have"

Further, the need to ensure ongoing compliance is arguably even greater following the CAT's judgment. The publicity surrounding both the OFT's investigation and fines mean that any subsequent competition law infringements, particularly with regard to cover pricing, are likely to attract significantly higher fines and possible criminal investigation.

This was noted by the CAT when it suggested that, if cover pricing was to occur in circumstances where the unlawfulness of the practice was clear (e.g following the CAT's judgment), it may well be appropriate to impose a higher starting point in the calculation of fines.

Therefore, it would be prudent for companies to ensure that they foster an ongoing management-led compliance culture, and implement robust competition compliance programs in accordance with the OFT's "best practice" guidance.

"Cover pricing" is not equivalent to a "bid rigging" cartel

While confirming that cover pricing constitutes a clear and serious breach of competition law, the CAT revisited the OFT's consideration of the seriousness of cover pricing, so as to ensure the seriousness of the practice was appropriately reflected in the level of fines imposed.

Where the OFT considered cover pricing to be akin to bid rigging, the CAT took a different view; the CAT held that on a sliding scale of seriousness, cover pricing should be regarded as less serious than bid rigging in the circumstances of the cases in question.

In its reassessment, the CAT distinguished cover pricing from a typical bid rigging cartel-type scenario, noting that while the purpose of a cartel is:

"to prevent competition by agreeing the price which it is intended that the client should pay... [the] purpose [of cover pricing] is quite the reverse, namely to identify a price which the client will not be willing to pay".

Further, the CAT noted that the thin profit margins typically achieved within the construction industry did not suggest that cover pricing resulted in the substantial overcharging of customers, again distinguishing the practice from a typical cartel-type scenario.

Mitigating factors not given adequate weight by the OFT

Further, the CAT gave greater weight to certain mitigating factors than the OFT did previously .

Although not altering the unlawfulness of the practice of cover pricing, the CAT did consider that these mitigating factors had a bearing on the seriousness of the infringements.

As a general observation, the CAT acknowledged the apparent "blind spot" within the construction sector as a whole regarding the legality of cover pricing.

In particular, the CAT noted that industry textbooks and training materials created the impression that cover pricing was a normal and acceptable practice where a company does not wish to win work.

Consideration was also given to the accepted motivation that cover pricing was driven by an industry perception, that where a company did not submit a tender, it risked exclusion from future tender lists.

In addition to these mitigating factors, the CAT also identified a number of inconsistencies with regard to the OFT's fining policy, including the year of business turnover used to calculate fines, and the uplift resulting from the imposition of an additional deterrence threshold upon the fines.

Excessive and disproportionate nature of the fines imposed

On this basis, the CAT held that in all circumstances the fines imposed by the OFT were excessive and disproportionate, in particular given both the lesser harm that was likely to result from the practice of cover pricing when compared to bid rigging, and the industry's then general uncertainty as to the legitimacy of the practice.