The Office of Fair Trading ("OFT") has published revised guidance (the "Guidance"), effective as of 10 September 2012, relating to the appropriate amount of penalties to be imposed on companies that breach Chapters I or II of the Competition Act 1998 (the "Act"). The OFT has a statutory power to impose penalties on any undertaking that intentionally or negligently infringes the prohibitions under the Act, and is required to publish guidance as to the appropriate amount of the penalties that will be imposed. The Guidance comes in the wake of several CAT appeal judgments that have criticised the OFT's approach to penalties, and therefore provides clarification on a number of key principles.
The key changes in the Guidance include the addition of a six-step procedure for calculating fines, an increase in the starting point for penalties (from 10% to 30%), and additional aggravating and mitigating factors. A copy of the Guidance may be found in full here.
Under the Guidance, instead of the former five-step process, financial penalties will be calculated using the following six-step approach:
- Calculation of the starting point
- Adjustment for duration.
- Adjustment for aggravating or mitigating factors.
- Adjustment for specific deterrence and proportionality.
- Adjustment to avoid exceeding the maximum penalty and to avoid double jeopardy.
- Adjustment for leniency and/or settlement discounts.
The six-step approach will still be subject to the principle of equal treatment, meaning that the OFT must approach similar situations in the same way, unless there is objective justification for doing otherwise.
Step 1 – the starting point
Under the Guidance, the OFT can now apply a rate of up to 30% of an undertaking's relevant turnover, taking into account: (i) the seriousness of the infringement; and (ii) the relevant turnover of the undertaking.
As before, the more serious and widespread the infringement, the higher the rate will be. The Guidance highlights activities such as price-fixing, market-sharing activities and predatory pricing being particularly serious infringements, which will attract a rate towards the upper end of the range.
The "relevant turnover" will typically be the turnover of the undertaking in the relevant product and geographic market for the financial year preceding the date when the infringement ended, and will usually be based on the undertaking's audited accounts. However, the Guidance provides that, in exceptional circumstances, a different figure may be used if it is necessary in order to reflect the true scale of the undertaking's activities (for example, where remuneration is based on commission fees). In deciding whether to depart from the usual approach, the OFT will consider a number of factors, including whether the remuneration is decided by the seller of the services (i.e. the relevant undertaking) or the client.
Step 2 - duration
The Guidance has been amended to reflect the OFT's current practice, such that:
Where an infringement lasted for more than one year, the penalty may be multiplied by a number not more than the number of years of the infringement.
Where the total duration is less than one year, then the OFT will treat that duration as a full year for the purposes of calculating the number of years.
Where the total duration lasted for more than one year, then any part years will be rounded up to the nearest quarter year (or, in exceptional circumstances, to the nearest full year).
In exceptional circumstances, the OFT may decrease the starting point where the infringement lasted for less than one year.
Step 3 - aggravating or mitigating factors
The Guidance has reversed the order of the previous penalty steps, so that adjustments for aggravating or mitigating factors are now made at Step 3. The key changes to those factors are as follows:
- Where there are repeated infringements by the same undertaking under the same provision of the Act, an uplift may be made. However, the OFT will usually only take into account infringements made within the previous 15 years and only if they had a UK impact.
- An additional "aggravating factor" where persistent and unreasonable behaviour delays the OFT's enforcement action (though the exercise of a party's full rights of defence will not be treated as “unreasonable”).
- A discount of up to 10% may be available if the undertaking can demonstrate that sufficient steps were taken to ensure compliance (depending on the size of the business and level of competition risk).
- Discounts may be given in respect of compensation payments, however, this is likely to be only in exceptional circumstances.
Step 4 - proportionality and specific deterrence
At this stage, the OFT will assess whether the proposed penalty is appropriate and proportionate overall. It may then make further adjustments (whether up or down) to account for the size and financial position of the undertaking, taking into account factors such as the total turnover, cash flow and industry margins at the time of the imposition of the penalty (though, the OFT may consider the undertaking's position at the time of the infringement instead).
Step 5 - double jeopardy and maximum penalty
No significant changes have been made to this step. As before, the maximum penalty imposed cannot exceed 10% of the worldwide turnover of the undertaking in its last business year. Therefore, at this stage, the final penalty will be adjusted to comply with this cap and to take into account any penalties or fines imposed by the European Commission or by a court or body in another Member State.
Step 6 – exemptions and reductions
The Guidance specifies that, in very exceptional circumstances, the OFT may reduce a penalty where the undertaking is unable to pay, due to its financial position. The OFT has also formalised its practice of reducing the final penalty, where the undertaking has entered into a leniency agreement or has agreed a settlement with the OFT. The OFT is also currently consulting on its guidance on the handling of applications for leniency and no-action letters (see http://www.oft.gov.uk/shared_oft/consultations/ OFT803suppcon.pdf for more information).