A judgment of the English High Court published on Friday 15 January concerning the potential liability of executives for cartel activities could have wide reaching implications for companies and employees implicated in cartels, for insurers and for the Office of Fair Trading’s (OFT) leniency policy and its fledgling settlement procedure.
In Safeway Stores and Others v Twigger and Others,1 the Court dismissed an application for strike out against claims brought by three Safeway companies (now owned by Morrisons) against former directors and executives relating to the OFT’s investigation into a cartel involving supermarkets and dairy processors. The decision means that the claims - seeking to attribute responsibility to those directors and executives for the fine that the OFT will impose on Morrisons in respect of Safeway’s involvement in the cartel, and for legal costs incurred in the OFT investigation - can now proceed to a full trial.
On its face, the judgment raises significant issues about the scope for companies to seek to recover competition fines from individuals, and for insurers potentially having to foot the bill. The possibility of similar action may be attractive to companies that have acquired a business and then found themselves subject to an investigation by a competition authority concerning conduct under previous management. However, suing employees and/or directors to recover a competition fine is likely to be less attractive where ownership is unchanged and there is a continuing relationship with the executives involved in the alleged conduct. This is because, in most situations, responding to a competition investigation requires the close co-operation of those individuals, in particular if leniency and/or early resolution (settlement) with the competition authority are attractive options.
After explaining the background to the case and the Court’s reasoning, this note considers the implications for companies and executives involved in cartel investigations in greater detail.
The OFT’s dairy investigation
In 2005 the OFT opened an investigation into a suspected cartel - in breach of the Chapter I prohibition in the Competition Act 1998 - involving the main supermarkets and a number of dairy processors. The conduct in question related to four alleged initiatives agreed between the supermarkets and dairy processors that were designed to increase payments to dairy farmers in 2002 and 2003 and which resulted in an increase in the retail price of milk and certain other dairy products. By the time of the investigation, Morrisons had completed its acquisition of Safeway.
In December 2007, following the receipt of an OFT statement of objections in September 2007, Safeway entered into an “early resolution” agreement with the OFT (as did Asda, Sainsbury’s and four dairy processors). Under the terms of the agreement, Safeway accepted liability for involvement in the cartel and undertook to co-operate fully with the OFT in its investigation. In return for the admission and ongoing co-operation, Safeway will receive a reduction of up to 35 per cent of the fine that the OFT would otherwise impose - the precise discount to be confirmed in the OFT’s final decision, which has not yet been made.
Morrisons is one of two parties (the other being Tesco) that decided to fight on and subsequently received a supplementary statement of objections from the OFT in July 2009. The OFT’s final decision - should the OFT confirm its view that the conduct in question constitutes an infringement of the Competition Act - is expected later in 2010.
The claim against the directors and employees
Three companies in the Safeway group (the Claimants) - acquired by Morrisons – have brought a claim in the Commercial Court for damages and/or equitable compensation against eight former Safeway directors and employees (the Defendants). Specifically, the Claimants are seeking an indemnity from the Defendants against liability for the penalty that will be imposed by the OFT in its final decision (likely to be nearly £11 million) and to cover legal costs incurred in responding to the OFT investigation. According to the judgment, the real target of the claim is the directors and officers (D&O) liability insurance that is available to the Defendants that, presumably, would pay out if the claim is successful.
The Claimants' case, which is primarily based on alleged breaches of the Defendants’ employment contracts and/or fiduciary duties owed as directors to the Claimants, is that the Defendants breached their obligations by (i) participating in and facilitating the initiatives and (ii) not reporting the initiatives to their respective superiors and/or to the board of directors of any of the three Safeway companies. Alternatively, the Defendants are said to have been negligent in their conduct. In addition, the claim alleges that the Defendants conspired to procure the companies’ participation in the unlawful acts by seeking to raise Safeway’s retail prices for the products concerned, and that these unlawful acts were aimed at the companies.
The strike out application
The Defendants' strike out application contended that the claim against them should be barred as a matter of public policy on two grounds:
- because a claim for an indemnity against the liability of the Safeway companies under the Competition Act is contrary to the principle of “ex turpi causa non oritur actio” - the common law rule that a claimant is not able to pursue a cause of action that arises in connection with his own illegal act (often referred to as the “illegality rule”); or, as an alternative
- because the claim is fundamentally inconsistent with the scheme of the UK competition regime, which targets corporate entities and does not impose direct civil liability on directors or employees.
The Court was not convinced that either ground is necessarily sufficiently robust as a defence to warrant striking out the claim and dismissed the Defendants’ application. The Defendants are expected to appeal.
The Court’s reasoning
The illegality rule
The judgment considers the illegality rule and its application to competition law infringements at some length. Two conditions must be satisfied for the defence to apply:
- the Claimants must have committed an illegal or unlawful act; and
- the illegal or unlawful act must be sufficiently serious to engage the rule.
The Court was satisfied that the second requirement was met, accepting that acts in breach of the Chapter I prohibition in the Competition Act (which prohibits anti-competitive agreements) involve the necessary element of moral reprehensibility to be considered sufficiently serious. However, in the Court’s view the wrongful acts in this case could not be said to be those of the Safeway companies (condition (i) above) for the purposes of the illegality rule. Rather, the acts or conduct in breach of the Competition Act were acts of the Defendants as directors and/or employees acting as agents for the companies.
The Court drew a distinction between the different bases on which liability can be attributed to a company:
- Where the primary (or direct) rule of attribution applies - for example, where unlawful acts have been approved by the board or by shareholders - the unlawful acts are those of the company "personally", presumably because in carrying out such a resolution an employee has implemented a decision of the directing mind or will of the company. The Court determined that the case law required direct liability for the illegality rule to be engaged. Given it would be very unusual for a cartel to be approved at a board meeting let alone by shareholder resolution, cartel conduct is unlikely to fall within this form of liability.
- Where liability is through the application of the normal principles of agency or vicarious liability of its employees and directors - this was the basis on which the Court concluded that Safeway should be seen to be liable for the acts. There was therefore a good arguable case that the relevant wrongdoing was not the personal wrongdoing of the Safeway companies themselves, so the illegality rule should not be applicable.
- Where liability is imposed for the purpose of a particular legislative intent - the Court rejected the submissions of the Defendants that the effect of the Competition Act was that their acts were attributed to the Claimants for all purposes, on the basis that this point is simply not addressed by the Act.
The Claimants also argued that the illegality rule could not apply on the basis that Safeway was the true victim of the Defendants' wrongful acts because the shareholders in the companies were “innocent” of any wrongdoing. The Court was prepared to accept that there was a sufficiently arguable case that English law supports the possibility of an “adverse exception” to the illegality rule applying in these circumstances, and that this could provide an alternative basis for defeating the defence.
The Court concluded that the Claimants have a real prospect of defeating a defence based upon the illegality rule at trial. In reaching this conclusion, the Court stated that the fact that the damages that the Claimants are seeking to recover consist primarily of an administrative fine does not preclude recovery of that fine from the employees who had been involved in the unlawful conduct.
Inconsistency with the scheme of the Competition Act
The judgment spends much less time considering the second public interest ground - that the claim should be barred as a matter of public policy on the grounds that it was fundamentally inconsistent with the Competition Act. The Defendants argued that there was no provision in the Act that imposes direct civil liability on employees or directors for conduct leading to the infringement and that if Parliament had intended to do so it would have provided such a remedy in the legislation. Two arguments were made to support the submission that Parliament never intended that individuals should be subject to indirect civil liability for competition law breaches:
- Parliament, through the Enterprise Act 2002, thought it appropriate to introduce a specific cartel offence (which is not a civil remedy), to provide a way of imposing criminal liability on individuals in relation to the most serious types of cartel conduct (which is limited in its application, in particular requiring evidence of an individual dishonestly agreeing to involvement in the infringing conduct); and
- the only civil sanction aimed at directors as individuals in relation to breaches of the Competition Act is the provision for director disqualification, which does not include the imposition of a financial penalty.
The Defendants also pointed out that the purpose of fines under the Competition Act is to punish and deter infringing conduct and to reverse unjust enrichment of cartel participants, objectives that would be frustrated if the Claimants could pass on their liability through recovery of the fines from its employees and directors.
The Court did not accept any of the Claimants' arguments based on inconsistency with the scheme of the Competition Act and concluded that the Claimants also had a real prospect of defeating the second public interest defence at trial. The Court’s view was that the Claimants' cause of action was not novel, but involved the application of well-established principles of the common law. The Court did not accept that the scheme of the legislation could preclude individuals owing duties to ensure that a company complies with its legal obligations. In its view, had Parliament intended to limit the effects of these principles of law in relation to competition law, Parliament would have done so expressly in the legislation.
The possibility of companies implicated in cartel decisions seeking to recover fines and legal costs from the employees and/or directors involved in the infringing conduct will raise big questions for companies, executives, insurance companies and cause wider concerns for the competition authorities.
Implications for companies and executives
Companies which have been fined by the OFT or European Commission for competition law infringements undertaken by employees or directors may feel encouraged to sue the individuals concerned to recover the loss, in particular in situations such as Safeway Stores where there has been a takeover after the cartel events and the executives in question are no longer with the business. If the Claimants succeed at trial, there is no reason why such companies could not also seek an indemnity against damages claimed by victims of a cartel in so-called “follow on” actions, should they be brought. Covering fines and damages claims of millions of pounds will be beyond the resources of most executives, so companies are only likely to consider recovery claims where D&O or other insurance policies can be claimed against.
However, companies that discover involvement in a cartel or find themselves in an OFT or European Commission investigation will need to consider carefully the implications of the Safeway judgment on their options for responding to allegations of anti-competitive conduct:
- The prospect of being named as a defendant in legal proceedings and being personally liable for the financial consequences of a cartel finding will be a frightening prospect for most directors and employees.
- Those individuals with the most knowledge of the infringing conduct will be reluctant to co-operate in an investigation that could result in claims against them for the financial consequences on the company.
- This could undermine the willingness of employees to support a company’s application for leniency, where full and continued co-operation with the competition authority is a pre-requisite to obtain immunity from a fine.
- These same implications arise for settlement agreements, such as an early resolution agreement offered by the OFT, where the reduction in fines is dependent on continued co-operation during the course of the investigation.
This concern about the unwillingness of employees to co-operate will also arise when a company wants to defend against allegations of anti-competitive conduct - even where the company believes that the implicated individuals have clean hands, since those individuals will need to consider the risk that the company will come after them if the competition authority finds otherwise.
To address this risk, individuals involved in the alleged anti-competitive conduct may now require a ‘no action’ undertaking from the company that no claim will be made against them.
Implications for insurers
Insurance companies will be carefully considering the implications of the judgment for D&O and other insurance policies. D&O agreements will differ in scope and coverage and insurers will need to determine whether their D&O policies are sufficiently widely worded to cover claims based on competition law infringements. Where they could allow the recovery of competition fines, insurance companies may consider adding specific exclusions, increasing excesses and/or charging higher premiums. One can envisage directors and senior employees specifically requesting cover against competition law related liabilities and insurers developing policies to meet this demand.
Wider competition policy concerns
(i) Immediate concerns about leniency and settlement
The competition authorities will have concerns about the potential impact of the judgment - in particular if confirmed at trial - on the effectiveness of cartel leniency and settlement policies. These policies are designed to encourage companies to come forward and volunteer evidence about competition infringements, and to relieve the burden on the authorities in investigating unlawful conduct. A reduction in the willingness of employees to co-operate in investigations and hence the ability of companies to fulfil their obligations under these mechanisms to co-operate and deliver up effective evidence to support the authorities' allegations could, in particular, hinder the ability of the OFT to target cartels under its enforcement programme.
(ii) The effectiveness of the deterrent effect of fines
The judgment could also have more fundamental competition policy implications. In particular, the Court’s view that the consequences of anti-competitive conduct can be attributed to individuals rather than the company raises a question about the effectiveness of enforcement action taken by competition authorities, which are primarily based around the threat of fines on companies. To the extent that these fines are recoverable indirectly through the D&O policy of the individuals involved, this must undermine the deterrent effect of corporate fines. At the least, this could reduce a company’s incentives to maintain an effective competition compliance programme. That said, in terms of the effectiveness of compliance programmes, the risk of directors or employees being personally targeted by a civil claims for damages might increase individual compliance.
(iii) Whether the undertaking is really the innocent party
The Court’s willingness to accept an argument that the Safeway companies were the “innocent victims” of the conduct sits uncomfortably with the fact that competition law imposes duties on “undertakings” (i.e. companies, groups of companies and other entities carrying out economic activity). Undertakings are held liable for infringement of competition rules and fines regardless of whether the unlawful activity can be said to be directly or vicariously attributable to a company.
Competition authorities have to date taken an approach which ignores arguments that the board or shareholders may not have been aware of conduct, and have instead focused on corporate responsibility and the responsibility of the board of directors to exercise control over all activities undertaken in the name of a company. The European Commission, in particular, follows this logic by typically imposing ultimate responsibility for competition law infringements at the highest level of a corporate group, on the basis that the parent can exercise ultimate control over the activities of its subsidiaries. The victim argument also overlooks the fact that a company’s shareholders will benefit, at least in the short term, from the fruits of cartel activity, whether in additional profits and/or share value.
Until the case has gone to trial, it is too early to conclude that the case is a real threat to effective competition law enforcement. However, on the basis that the competition authorities will not tolerate a situation in which companies can effectively insure against the risk of being fined (as well as the threat to the effective operation of leniency and settlement programmes), unless the insurance industry reacts by excluding such risks, then it may fall to the government to introduce an amendment to the Competition Act that specifically excludes claims against executives to recover competition fines.