This is the third in our series of updates setting out key aspects of the reforms to UK competition law.  It focuses on the revised cartel offence, arguably the most radical and controversial feature of the new regime.  Our earlier updates on the creation of the Competition and Markets Authority (CMA) and on the concurrency regime for regulated sectors are here and here.

What is the cartel offence?

The cartel offence was created by the Enterprise Act 2002, criminalising the involvement of individuals in hard-core cartel activity, namely price-fixing, market-sharing, bid-rigging and limiting output.  The maximum penalty is five years’ imprisonment and/or an unlimited fine.  For the cartel offence to apply, the cartel activity must involve reciprocal conduct on the part of two or more competitors, i.e. unilateral activity is not caught.

It is important to remember that this criminal law offence, catching the activity of individuals working for a company, is entirely distinct from the prohibition of cartels and other anti-competitive agreements under the Treaty on the Functioning of the European Union (TFEU) or the Competition Act 1998.  The civil law prohibition imposes potential fines on the companies themselves.  Although distinct, the two sets of rules (civil and criminal) can apply simultaneously.

Why the cartel offence needed changing: the difficulty of proving dishonesty

The cartel offence will be the same as before, with one critical difference: under the old regime, it was necessary to prove that the offence was committed dishonestly, namely that the individual acted in a dishonest manner according to the standards of reasonable and honest people and must have realised that others would consider the actions to be dishonest in that way. 

The dishonesty requirement has been removed, since it has effectively been blamed for the difficulties the authorities, and notably the now former Office of Fair Trading (OFT), have encountered in prosecuting this crime.  The history of cartel offence enforcement has been as follows: 

  • There has only been one conviction: in 2008, three individuals were jailed for up to three years in the Marine Hose cartel, having pleaded guilty in a plea bargain with the US Department of Justice (and their sentences were subsequently reduced on appeal).
  • There have been no cases brought by the OFT itself.  A contested case (relating to a fuel surcharges cartel) collapsed immediately before a trial hearing in 2010.
  • In January 2014, an individual was charged with involvement in a cartel concerning steel water storage tanks.
  • Several other cases are known or rumoured to have been commenced and then abandoned at a relatively early stage.

This is a meagre track record and a far cry from the level of convictions expected in 2003, when the offence first took effect.  The dishonesty requirement was always intended to represent a hurdle over and above the tests for cartel activity under the civil law prohibition, but finding evidence of dishonesty has proved impossible and the hurdle has come to seem just too high. 

The government therefore hopes that, by removing the dishonesty requirement, it will increase the number of prosecutions and convictions and thereby restore the deterrent effect of the cartel offence.

Exclusions and defences will replace the dishonesty requirement

The removal of the dishonesty requirement will clearly mean that these rules will catch a far greater range of commercial conduct.  However, instead of dishonesty, a complex system of exclusions and defences will limit the application of the cartel offence. 

There are four exclusions any of which will prevent application of the offence:

  • The notification exclusion where customers are given information about the companies concerned and sufficient information about the activity to show there is a cartel offence issue (together, “relevant information”).
  • The publication exclusion where relevant information is published in a format to be decided from time to time by the government (which has in its guidance designated the London, Edinburgh and Belfast Gazettes).
  • Notification of bid-rigging arrangements where bidders provide relevant information before the bid is made.
  • Compliance with a legal requirement under the TFEU or a UK statute.

Where the offence is established, there are also three potential defences:

  • There was no intention to conceal the arrangements from customers.
  • There was no intention to conceal the arrangements from the CMA, although this does not mean a particular form of notification as such.
  • Reasonable steps were taken to disclose to (internal or external) legal advisers for the purposes of obtaining advice about the nature of the arrangements before their implementation.  The defence may still apply even where the advice is not followed.

How will the exclusions and defences work?

As implementation nears, there is growing debate and uncertainty about the scope of the amended rules and also about what the exclusions and defences mean and how they will be applied:

  • The removal of the dishonesty requirement means that, in principle, certain forms of commercial collaboration between competitors which may be exempted from the civil prohibition for anti-competitive agreements could nonetheless be criminalised.
  • As a result of the exclusions and defences, it could be argued that the new rules on this offence effectively replace dishonesty with secrecy as the defining feature of a criminal cartel.  There may be many instances where normal business confidentiality could be mistaken for illegal secrecy.
  • The general emphasis on openness could lead to directors, or even nervous employees below the management level, publicising activities as a means of self-protection. There may be a glut of publications and unnecessary notifications to the CMA.
  • Of all the exclusions and defences, the legal advice loop-hole is likely to be the most used and perhaps abused, with some parties obtaining advice from which they can benefit, even where they ignore it.  Deciding what is a “reasonable” step to obtain such advice will not be easy.

All of these points may be difficult to decide for juries, who were not even given the opportunity to apply the old dishonesty test.

Whether or not the new rules do lead to more notifications or requests for legal advice on the part of individuals, companies are likely to need to consider, more than before, the general compliance position from the joint perspective of corporate and individual liability.  They may need to consider whether individuals may need or seek separate advice and whether there is a conflict of interest between employees and the company.