This article was first published in the September issue of Civil Engineer Surveyor International.
IN May 2011, the Competition Appeals Tribunal (CAT) dramatically reduced the fines that the Office of Fair Trading (OFT) had imposed on 103 firms in the construction sector. The fines were imposed because the OFT found that the practice of cover pricing was a hard core restriction of competition. They amounted to £129.2m, but were reduced by the CAT by over 50% to £60.7m. At the same time, the OFT also fined recruitment companies in the construction sector £39.27m for fixing fee rates in construction recruitment (together with a collective boycott). The fines were ultimately dramatically reduced by the CAT to £8.1m.
These (partially) successful CAT appeals were a victory for the companies involved. The CAT pointed to muddled thinking and errors in analysis on the part of the OFT, although part of the OFT's errors sprung from the sheer number of construction companies involved and the difficulty in coordinating so many parallel cases. However, the underlying message of the cases should not be a vindication of commercial practices in the industry. Rather, it should be noted that competition law is onerous, that failure to comply with competition law can be extremely costly and that significant effort is required to ensure that business practices do not infringe the competition rules.
There is a broad understanding that belonging to a cartel is illegal. However, the persistence of infringements indicates that it may not be understood that the concept of a cartel is far wider than agreeing prices; it covers less obvious interaction between competitors and suppliers, including the exchange of sensitive confidential information, in particular:
- An infringement may take place in the absence of an agreement to restrict competition between the participants — they commit an infringement by reaching a concurrence of wills which influences competitive behaviour — even if it does not amount to an agreement to restrict competition.
- To prove that a cartel exists, it is not necessary to demonstrate that the agreement had the effect of restricting competition. This is because certain categories of infringement are regarded as inherently anti-competitive, regardless of the effect on competition. For example, an agreement to fix prices which was never put into practice infringes competition law.
- Liability can arise from a discussion at a single meeting.
- It is no defence that a practice is widespread or has always been assumed to be innocuous. In the construction industry, the use of tender processes by local authorities which were designed to achieve the lowest prices gave rise to the widespread practice of bid-rigging and cover pricing. Tenderers erroneously assumed that if they had never intended to make a realistic bid, putting in a higher cover bid was innocuous.
- Simply receiving confidential information (or being present when it is discussed) can be enough for an infringement to have been committed. Nor is it necessary for an exchange of information to be reciprocal.
- It is not just relationships with competitors that are sensitive – those with suppliers and customers can also give rise to serious infringements. For example, an exchange of sensitive information between competitors through the medium of a supplier would be just as serious as a direct infringement (and all those involved would be liable).
The exchange of strategic information is treated with suspicion by competition authorities because although they acknowledge that there may be legitimate reasons for information to be shared between competitors, especially with safeguards, such disclosure can result in anti-competitive collusion or make existing collusion more effective (for example, by allowing participants to detect and retaliate against those who depart from the collusive plan).
As in the case of cartel behaviour itself, it is not necessary for the competition authority to demonstrate any negative effect on competition as a result of the exchange. The risk of infringing competition law in this way will arise, not just where customer prices are disclosed, but also where any of the elements of a pricing policy are exchanged (for example, discounts, costs, terms of trade and rates and dates of change). Other confidential matters, such as bids and customer lists and targets, should also remain confidential. A recent case of the European Court of Justice (ECJ) confirms how seriously the exchange of competitive information is treated. The case involved the exchange of information between five Dutch mobile telecoms network operators. The information in question was not pricing information and its exchange did not restrict competition. The ECJ confirmed that an exchange of information which is capable of removing uncertainties between market participants as regards the timing, extent and details of modifications to prices must be regarded as anti-competitive.
Penalties for infringement
In dealing with infringements in the construction sector, the OFT has used its power to impose fines on those that breach the competition rules. The legal maximum fine is 10% of UK turnover (the European Commission can impose penalties for infringements that may affect trade between EU member states and can impose fines of up to 10% of worldwide turnover). There are also other consequences of an infringement. Third parties who have suffered loss as a result of the infringement may also bring damages actions. In the UK, individuals responsible for hardcore cartel activity may be found guilty of the criminal cartel offence and can be fined or imprisoned (for up to five years) as a result. The OFT has not used this power in construction cases, but the Dutch authorities imposed fines of €10,000-250,000 on executives of construction companies found guilty of cover pricing (in addition to fining the companies themselves over €3m in total). Directors may also be disqualified for up to 15 years.
Recent CAT judgments
The substantial reductions in fines made by the CAT in the construction recruitment and cover pricing cases should not be taken as indicating that it believed that the OFT adopted too hardline an approach to the infringements. In the recruitment case, three of the parties did not challenge the OFT's findings (though they did argue that the fine was too high). The CAT made it clear that the OFT rightly emphasised that the infringements were very serious
Click here to view table
The CAT’s judgments in the cover pricing case distinguished cover pricing from bid rigging and held that cover pricing was a less serious infringement. However, it was careful to clarify that cover pricing is nonetheless a serious infringement and that future instances would be dealt with very firmly by the CAT. The OFT made the same point in its announcement in May 2011 that it would not appeal the CAT's judgments and said it would impose substantial financial penalties in future cases and would also consider the use of sanctions on individuals (see table above).
Future risk of infringement
When it announced that it would not appeal the CAT’s judgments to the Court of Appeal, the OFT referred to the substantial deterrence effect of its original judgment and the change in attitudes that had been achieved by its actions. The OFT also referred a report by Europe Economics published in June 2010, which showed a noticeable improvement in the behaviour of construction companies since the OFT’s decisions and a heightened awareness of competition law. The UK Construction Industry Competition Law Code of Conduct, introduced on 20 August 2009 in response to the OFT's cover pricing investigation, may also have had an effect on attitudes to competition compliance in the industry.
However, the Europe Economics report also shows that of the firms with no experience of the OFT, very few (7%) had introduced competition law training and not many (only 19%) said that the OFT's actions had affected their behaviour. Moreover, 13% of contractors believed that cover pricing was a common practice and around one-third said they had been disadvantaged as a result of bid rigging by their competitors.
Lessons to be learnt
Companies operating in the construction industry should be under no illusion about cover pricing and any other form of bid rigging, such as bid suppression or rotation — these practices are illegal and are likely to be punished severely. Companies should appreciate that although the CAT reduced fines in the cover pricing case partly because of a misconception in the industry that cover pricing was acceptable, no such mitigation will be available in future. Companies and individuals involved in any such practices in the future will be at greater risk of fines, imprisonment and/or disqualification.
The construction industry continues to be in the OFT’s spotlight. The OFT is carrying out a market study into the UK aggregates sector, which was prompted by concerns raised by a number of parties to mergers before the OFT. The regulator was expected to publish its findings on the market study in July 2011 and will decide whether to take enforcement action, investigate the market further or recommend changes.
All this underlines the need for firms to have an effective competition law compliance policy so that employees understand their employer’s obligations and their own responsibilities. Failure to do