The case of Safeway Stores Limited & Others v. Twigger & Others explored for the first time in the UK the issue of employees' liability to a company for competition penalties imposed under the Competition Act 1998 (the "Competition Act"). The Court of Appeal unanimously concluded that Safeway Stores Limited ("Safeway") could not sue its former directors and employees to recover around £10 million in respect of penalties to be imposed on Safeway by the Office of Fair Trading (the "OFT") for Safeway's participation in price fixing.
We will consider the case in more detail and explore whether, notwithstanding its findings, there is a shift from corporate to individual responsibility in the enforcement of competition law in the UK.
Safeway v. Twigger
In January 2005 the OFT launched an inquiry into alleged competition law infringements arising from various initiatives of Safeway, other supermarkets and dairy processors. The OFT found that four of those initiatives allegedly raised the prices of milk and dairy products for consumers. The price increases were apparently passed back to dairy farmers who from 2000 had taken action to increase the prices paid to them.
In December 2007, Safeway and the OFT entered into an early resolution agreement as to the terms upon which the OFT investigation into Safeway's practices would be resolved which covered a period up to April 2004, when Safeway was acquired by another chain, Morrisons. Similar agreements were reached with other supermarket owners. As part of its agreement, Safeway admitted that its participation in the initiatives, through the repeated exchange of commercially sensitive retail pricing information, breached the Chapter I prohibition of the Competition Act, which prohibits anti-competitive agreements.
The OFT has yet to conclude its investigation and issue its decision under the Competition Act but has indicated to Safeway that when it does, the penalty that will be imposed may be as much as £16.5 million, reduced to around £10 million if Safeway continues to cooperate.
Safeway brought a claim in the High Court for damages to recover this penalty and the costs of dealing with the OFT against a number of former employees and directors. Safeway claimed that each of the defendants had participated in, and implemented, the initiatives and in doing so, had breached their employment contracts and/or fiduciary duties to Safeway by failing to report those initiatives to their superiors or the boards of directors of any of the Safeway companies. Safeway also claimed that these former directors and employees were negligent.
Prior to filing a defence refuting the allegations, the former directors and employees applied to the High Court for summary judgment against Safeway, or for an order to strike out the claim, on the basis that such claim was barred as a matter of public policy on two grounds. First, that it infringed the principle that a person should not benefit from his own wrongdoing, as expressed in the Latin maxim ex turpi causa non oritur actio. Second, that it was inconsistent with the Competition Act.
Action Cannot be Based on Claimant's Wrongdoing (Ex turpi causa non oritur actio)
The classic application of the rule would be where a criminal seeks to recover compensation for losses caused by his criminal act. To borrow an illustration from another case; "If two burglars, Alice and Bob, agree to open a safe by means of explosives, and Alice so negligently handles the explosive charge as to injure Bob, Bob might find some difficulty in maintaining an action against Alice." The rule has over time been extended to cover anyone seeking to recover compensation for losses either caused by or flowing from his illegal or immoral act.
The first question that the High Court had to consider was whether an infringement under Chapter I of the Competition Act was of a nature that the rule could apply. The High Court held that such an infringement did have sufficient "moral reprehensibility and turpitude" for the rule to apply; case law clearly shows that an agreement in breach of Chapter I is an illegal agreement, and the OFT's penalty for such a breach is similar to a fine for a criminal act, having only a deterrent, and not a compensatory, purpose. Safeway did not dispute this part of the first instance judgment on appeal.
However, the High Court found that the infringement was not caused by Safeway; Safeway's liability under Chapter I was not personal or direct, it as a company was merely vicariously liable for the defendants' breaches of duty. As it had not itself personally committed the breach, it was not seeking to benefit from its own breach – and so the ex turpi defence did not bar the claim against the directors. Further, the High Court did not see that the claim was of itself inconsistent with competition law. Accordingly, at first instance the court dismissed the application for summary judgment/strike out and allowed Safeway to continue the claim against the employees and directors.
The employees and directors appealed on the point of whether Safeway as a corporate entity could be said to be personally liable so as to engage the ex turpi maxim. The Court of Appeal overturned the High Court's decision on this point and held the penalty was personal to Safeway, that the rule applied and therefore the claim against the employees and directors failed. In doing so, the Court of Appeal had regard to the fact that in the UK, it is only possible to bring civil proceedings against undertakings, not individuals, for competition infringements.
Public Policy Considerations
It is clear that the ex turpi rule arises from the public policy consideration that if an individual is liable for an illegal act, he should not be able to use the civil process to compensate him for losses he suffered as a result of this illegality. In this case, had the directors been held liable for the penalty, this liability may have passed to Safeway's insurers under their directors and officers (D&O) insurance, which would have exposed the insurance market to the possibility of indirect claims in respect of competition penalties. The Court of Appeal's decision closes this avenue off. It also avoids the conflict which would arise between directors being encouraged to whistle blow on companies while being liable for any fines imposed on their company as a result of this whistle blowing.
Director's Liability for Competition Infringements in Other Circumstances
There are numerous other personal considerations for directors under English competition law.
A report prepared for the OFT (the "2007 Report") by Deloitte & Touche LLP into what motivates directors to comply with competition rules highlighted (perhaps unsurprisingly) the importance of sanctions which operate at the individual, as opposed to corporate, level. In order of importance, the 2007 Report found what most motivated directors were: (1) criminal penalties, (2) disqualification of directors, (3) adverse publicity, (4) fines against the company and (5) private damages actions by customers or other third parties damaged by the anti-competitive actions of the company. The 2007 Report shows clearly that corporate fines were not sufficient in themselves to encourage compliance and has been used as a basis for OFT enforcement priority ever since.
The UK through the Enterprise Act introduced individual criminal liability for any director (not companies) found guilty of engaging in hardcore cartel activity, with sanctions of up to 5 years imprisonment and/or an unlimited fine. The use of this sanction has had a chequered history to say the least, both because the requirement to prove dishonesty on behalf of the director is a high bar to reach. The first, and successful, case came about as a result of a plea bargain in US proceedings. The second, as reported in the Fasken Martineau newsletter: Year-in-Review: Europe 2010 ended in disaster. The requirement to prove dishonesty in such cases is now subject to review as part of a wider ranging consultation.
Competition Disqualification Orders
One of the suggestions put forward in the 2007 Report was the greater use of competition disqualification orders ("CDOs") which were introduced by the Enterprise Act 2002. A CDO is a particular type of director's disqualification order, which are used to disqualify directors (including de facto directors and persons in accordance with whose directions or instructions the directors of the company are accustomed to act) who are unfit for office. A CDO disqualifies a director for up to 15 years where (a) their company breached competition law and (b) the court considers that their conduct makes them unfit to be involved in company management. To obtain a CDO there is no requirement to prove dishonesty to the criminal standard, as is required for the cartel offence, which ought to make use of CDOs attractive.
The deterrence factor of CDOs has, however, been severely diminished by the fact that one has never been granted. Therefore, the OFT launched a consultation which culminated in June 2010 with the OFT publishing new guidance which clarified directors' responsibilities in relation to competition law and confirmed that the OFT will actively pursue the enforcement of CDOs in relation to breaches of EU and UK competition law. The guidance makes clear the importance of implementing a rigorous compliance policy throughout a company and of encouraging a culture of compliance. It also emphasises the need for all directors to be fully aware of competition law and provides, "while the OFT and Regulators do not expect that directors should have specific expertise in competition law, they do expect that every director of every company ought to know that price-fixing, market sharing and bid-rigging agreements are likely to breach competition law."
The guidance also contains a number of important policy positions:
- Actual knowledge is not required: the OFT will be concerned not only with directors who were directly involved in an infringement, but also those directors who should have known or suspected competition law breaches at a company;
- Immunity: directors who fail to co-operate with any leniency process in an OFT investigation will not be offered immunity from CDOs whereas those that do co-operate and whose company benefits from leniency will be immune;
- No prior decisions: exceptional cases may exist where the OFT believes it would be appropriate to apply for a CDO even though no prior decision or judgment has been issued regarding a breach of competition law. In such instances, there would be a burden on the OFT to satisfy the court that an infringement had been committed. As well as being more transparent and precise about the circumstances in which it would consider director disqualification, it seems that the OFT is also trying to alter the manner in which directors think and behave. It also seems likely that the OFT is moving towards a situation where, as a matter of routine, when investigations are commenced the OFT seeks to identify whether a director is liable to disqualification.
Comparison with Other Legal Jurisdictions
The reasoning of the Safeway decision is not followed elsewhere in Europe. For example, in a number of jurisdictions, including France, Spain, Germany, the Netherlands, Austria, Denmark and Hungary, directors may be liable for breaches of competition law by their companies, either by way of individual fines or by claims brought by those companies or the shareholders of the companies. There are no criminal sanctions against directors for breach of central EU competition rules.
It appears that the position in Canada is not very clear. On the one hand, there is the decision in Gra Ham Energy, which like the Safeway decision, suggests that a corporation convicted of criminal wrongdoing cannot recover any liability for fines or monetary penalties from another party allegedly responsible for causing the loss (in that case, not a director or employee, but rather a supplier of equipment). Like in Safeway, the court found that the ex turpi principle precludes the off-loading of criminal liability. At the same time, in the U.S. Caremark Derivative Litigation, there was no suggestion that if the directors caused the company to act in such a way as to expose it to criminal liability, recourse against those directors would be precluded. It is not obvious that different principles would apply in Canada.
At the end of the day, it is arguable that the issue would not arise very often (at least with directors and officers). In conspiracy cases in Canada, the usual outcome is that corporate defendants are convicted and subjected to substantial penalties, whereas the directors and officers are not. In such an instance, the corporation would not have the benefit of a conviction to establish liability on the part of the directors and officers. Indeed, in the absence of a conviction, the director / officer may be able to secure indemnification from the corporation, thereby rendering ineffective any claims by the corporation.
The Court of Appeal's decision in Safeway would appear to put an end to the prospect that directors and employees (and their insurers) may be personally liable for penalties imposed on their companies, which will be a huge relief to directors, employees and insurers given the high amounts involved. While Safeway applied for permission to appeal to the Supreme Court, this permission has been refused.
In any event, it is clear that there is a growing trend in enforcement to seek to hold directors directly responsible for breaches of competition law under other procedures. With a clear indication that ignorance will not be a defence in CDO proceedings, directors face greater scrutiny in their day to day activities. The extent to which this will truly deter them from taking part in, or turning a blind eye to, anti-competitive conduct will not be clear until we have some precedent of the use of CDOs.