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Cartel Update
Cover pricing in the construction sector condemned as OFT concludes biggest ever UK cartel case
In October, the Office of Fair Trading (OFT) finally issued a decision in its long-running investigation into 'cover bidding' in the construction industry in England. Fines of £129.2 million were imposed on 103 companies.
Cover bidding - where a company in a tender process obtains pricing information from a competitor in order to submit a bid that is sure to lose - was at the centre of this investigation. The OFT has concluded that this practice was widespread in the construction industry but has nevertheless come down hard on the companies pinpointed in this investigation.
Going forward, construction companies need to take care to comply with competition law in bidding for construction contracts and more widely in the way they do business. Competition compliance training will help companies to avoid the kinds of penalties meted out by the OFT last month, not to mention the management time and reputational issues which go hand in hand with an OFT investigation.
To find out more about the online compliance training programme offered by MMS, contact Catriona Munro on 0141 303 2385 or catriona.munro@mms.co.uk.
OFT fines construction recruitment cartel
Another story with relevance to the construction sector also hit the headlines in October. Eight recruitment agencies were found to have been involved in price-fixing and the collective boycott of another company in the supply of candidates to the construction industry. Fines totalling £39.27 million illustrate how seriously this behaviour was viewed by the OFT. The companies were found to have agreed to fix target fee rates for the supply of candidates to intermediaries and certain construction companies from late 2004 to early 2006.
The infringing companies were A Warwick Associates, CDI AndersElite, Eden Brown, Fusion People, Hays Specialist Recruitment, Henry Recruitment, Beresford Blake and Hill McGlynn. Construction companies which used their services in the relevant period may have been overcharged. It may be possible to take legal action to recoup any overcharge paid for these recruitment services or, at the very least, use this information in negotiating terms with recruiters in future.
Power transformer producers fined € 67.6 million
for market sharing cartel
The European Commission has fined seven companies a total of €67.6 million for participating in a cartel in power transformers. The transformers in question are used to modify the voltage in electricity transmission networks.
Between 1999 and 2003, Japanese and European producers of power transformers operated an oral market sharing agreement, where they agreed that the Japanese members would not sell power transformers in Europe and the European members would not sell power transformers in Japan.
ABB Switzerland received the highest fine of €33.75 million, which included a 50 percent increase for recidivism, having previously been fined by the Commission in 2007 for taking part in another illegal cartel involving gas-insulated switchgear (see below). Siemens also participated in the power transformers cartel, but escaped a fine due to its role as a whistleblower, having been the first cartel member to apply to the Commission for leniency.
The total fine represents an amount equivalent to 67 per cent of the parties' combined sales in the power transformer market in Europe at the time of the infringement. Neelie Kroes, the European Commissioner for Competition, has emphasised that the Commission will not hesitate to increase fines for repeat offenders.
This case is the latest in a series of efforts to open up the markets for supplies to the energy markets. In 2007, the European Commission issued a landmark €750 million fine on a group of suppliers of gas-insulated switchgear (heavy electrical equipment used to control energy flows in electricity grids) in a bid to secure genuine competition in EU electricity markets. Appeals are currently pending against the Commission's decision in that case.
Purchasers of power transformers can take action to recoup any losses incurred from four years of potential overcharge.
Click here to read the summary of the Commission's decision in the power transformers cartel.
JJB and Sports Direct under investigation
JJB Sports and Sports Direct International, leading sports retailers in the UK, have confirmed they are being investigated by the OFT and the Serious Fraud Office (SFO) for a suspected cartel in the sports retail market. The investigation is examining the period between June 2007 and March 2009.
Raids were conducted by the OFT on 10 September 2009 at both JJB's and Sports Direct's premises. This was prompted when JJB made a leniency application to the OFT in January. Under the OFT's leniency programme, a company and its employees can receive immunity from prosecution and fines, if they cooperate continuously and completely with the OFT and refrain from any further participation in the investigated cartel.
The SFO investigation is focusing on suspected offences under the Fraud Act 2006 and Enterprise Act 2002, which could lead to criminal penalties.
In 2003, JJB was fined £8.373 million (reduced to £6.7 million on appeal) for its involvement in the replica football kits price-fixing cartel.
Sports Direct acquired 31 JJB stores between November 2007 and December 2008. In August 2009, the OFT referred this acquisition to the Competition Commission for a full merger investigation.
As highlighted in our August/September edition, company directors responsible for breaching competition laws can be disqualified from holding any directorships for up to 15 years. Introducing a competition compliance programme will minimise the risk of becoming involved in such behaviour and may help the company's and directors' defence if an infringement nevertheless occurs.
UK
UK merger fees doubled
The fees payable to the OFT by parties notifying a planned merger doubled as of 1 October 2009. The new rates will apply to all parties who cease to be distinct enterprises after 1 October 2009. They will not apply to cases decided by the OFT after 1 October in relation to parties who ceased to be distinct enterprises before that date.
Where the acquired business has a turnover of less than £20 million, the fee will now be £30,000; if the turnover is between £20 million and £70 million, the fee is £60,000; and over £70 million the fee is £90,000.
In 2006, the (then) DTI decided that the full cost of various types of statutory services should be recovered by the relevant party. The increase in merger fees reflects the costs of authorities dealing with mergers and is an attempt to recover the average costs involved.
Click here to read the 2006 impact assessment and announcements on the increase in fees.
Merger control: OFT consults on draft guidance on exceptions to duty to refer and undertakings in lieu
The OFT has published for consultation revised guidance on the exceptions to its duty to refer merger cases to the Competition Commission (CC), and its ability to accept undertakings in lieu of a reference.
The OFT has a duty under the Enterprise Act 2002 to refer a merger to the CC for investigation if it believes that it creates a realistic prospect of a substantial lessening of competition within a market in the UK. However, there are a number of circumstances in which the OFT may use its discretion not to make a referral.
One of these exceptions is the 'de minimis' rule, which is used by the OFT in cases where it believes the market concerned is not of sufficient importance to justify a reference to the CC. In its 2007 guidance "Mergers-substantive assessment", the OFT raised the threshold of what may constitute a de minimis market to £10 million in annual turnover, but retained its discretion to refer cases below the threshold where the impact of the merger is likely to be particularly significant. The new draft guidance states that the OFT has considered the de minimis exception in around 20 cases and has applied it in 10 cases.
The new draft guidance describes the OFT's developing practice since the Enterprise Act came into force and seeks to explain in more detail the cases in which the OFT may make a CC reference even though some factors point in favour of using its de minimis discretion.
The guidance also articulates how the OFT assesses whether the expected impact of a merger outweighs the public cost of a reference to the CC, and how the OFT can use this discretion not to refer in order to reduce overall merger review costs.
Click here to read the OFT's consultation.
Competition Commission publishes decision on groceries market "competition test"
The Competition Commission ("CC") has once again recommended the introduction of a competition test as part of the planning regime for larger grocery stores in highly concentrated local areas.
As reported in our February/March edition, in July 2008 Tesco challenged the CC's decision to introduce the competition test to be applied in assessing planning applications for the construction or expansion of large grocery stores. In April 2009, the Competition Appeal Tribunal ("CAT") upheld Tesco's application for review, on the ground that the CC, in its report, had failed properly to consider certain matters which were relevant to its recommendations. As a result, the CAT referred the matter back to the CC for reconsideration of its decision. The CAT was concerned that the CC had not fully considered the potential detrimental effects on consumers and competition, if a retailer was unable to expand to meet demand and make developments which would enhance the welfare of consumers.
In reconsidering the issue, the CC used various scenarios to assess the impact of the test on representative local areas. It compared consumer welfare for different outcomes under the different market scenarios. The CC concluded that the competition test will be of benefit to consumers. However, recognising that the test could have a significant effect on grocery retailers in highly-concentrated areas, the CC has now recommended including a de minimis provision to allow retailers to make an extension of less than 300 square metres in a single store within a five year period. This is an entirely new addition to the CC's original recommendation.
Unsurprisingly, Tesco has announced it does not agree with the CC's recommendation. It believes the test would block investment and create delay and unpredictability in the planning system. Tesco objects to the CC's decision to use theoretical models rather than real towns and stores to assess the impact of the test. Other than having secured the inclusion of the de minimis provision, Tesco is essentially in the same position as it was before its successful CAT challenge.
The government has ninety days to comment on the CC's recommendation. Whilst the government is not obliged to follow any recommendation from the CC, it will give serious consideration to such recommendations.
Click here to read the CC's final decision.
Click here to read the CAT decision.
EU
When is a connection close enough?
English High Court clarifies its jurisdiction to
hear cartel damages case
Can a party thwart an action being brought in the courts of one EU jurisdiction by raising a claim in the courts of another, less attractive, EU jurisdiction? Such a practice is known as the "Italian torpedo", due to Italy's slow court system and its popularity for claims being raised for a "negative declaration" (whereby a claimant asks a court to declare that no cause of action exists). The effect of such an "Italian torpedo" is that while a claim is running in the courts of one EU jurisdiction (which, in the case of Italy, would generally run notoriously slowly), no action on the same issue can be raised in the courts of other EU member states.
Dow and Bayer have challenged the jurisdiction of the English High Court to hear a claim for damages for loss suffered as a result of their participation in a synthetic rubber cartel.
Tyre makers including Cooper, Pirelli and Michelin lodged their claim for damages in the English High Court in 2007. In response, Dow and Bayer recently challenged the Court's jurisdiction, arguing that none of the cartelists were English companies and that only two meetings of the cartel had taken place in England. They argued this was not enough to establish a 'close connection' with England.
When deciding upon the appropriate jurisdiction for a damages claim, there are two key elements to consider: the place where the damage occurred and the place of the event which gave rise to the damage. Dow and Bayer argued that, since most of the cartel meetings took place outside England, it would difficult for the claimants to show that much of the damage was caused as a result of those meetings that were held in England.
The High Court concluded that the English courts do have jurisdiction to hear the action. Three of the parties to the action are domiciled in England. Some of the main players in the cartel had sold products in England, which established a good case that the agreements infringing Article 81 had been implemented there.
Despite the fact that an action was pending in the Italian courts, by which one member of the cartel sought to obtain a negative declaration that no cartel existed, the Court ruled that the English proceedings could continue. The High Court found that Italy was not the 'centre of gravity' of the case. Cartel members and purchasers were all based and registered in different countries, and cartel meetings took place in different countries. Proximity with Italy was not a significant factor.
This case follows on from the High Court judgment in Provimi v Aventis in 2003, where the Court held a claimant can raise a private damages action in England in respect of all its European losses. The cartelists were domiciled in France and Switzerland. The purchasing companies sued the cartels' English subsidiaries on the basis that the activities in England had been essential to the successful operation of the cartel across Europe. The High Court held there was no need to prove any knowledge of the cartels on the part of the cartelists' subsidiaries; the mere implementation of cartels by subsidiaries was enough to establish their liability. The Commission decision on the cartel had been delivered in respect of the undertakings as a whole, which includes all subsidiary companies forming part of the larger group.
The outcome of the Dow and Bayer challenge, and the Provimi judgment, will be of interest for anyone involved in private damages claims. They suggest that claims based on Commission decisions can be brought in England against English domiciled subsidiaries, even if the subsidiary was not directly involved in the infringement and knew nothing about the operation of the cartel.
International
US antitrust consultation on horizontal
merger guidelines
The US Department of Justice (DoJ) and Federal Trade Commission (FTC) have announced their intention to conduct a public consultation process to consider potential revision of their Horizontal Merger Guidelines. The Guidelines (in force since 1992) are used to evaluate potential competitive effects of mergers and acquisitions between companies operating at the same level of trade (i.e. competitors and potential competitors). The DoJ and FTC intend to develop revised Guidelines that offer more clarity and better reflect practice. It is hoped this will result in enhanced transparency and give businesses greater clarity when making merger decisions, resulting in a more competitive marketplace that will benefit consumers.
This revision of the 1992 Guidelines is seen as part of a wider effort by the Obama administration to tighten up antitrust enforcement. The administration has already demonstrated its intention to take a tougher stance on the abuse of a dominant position by individual businesses. Particular industries, including technology, airlines and healthcare, have been targeted in an attempt to reduce anti-competitive behaviour in the US.
Several key areas are to be examined in this review, including the overall method of analysis used by the agencies. The approach taken in the European Guidelines, and how merger reviews could be handled more effectively when multiple jurisdictions are affected, will also be considered.
The DoJ and FTC will hold public workshops and are also inviting comment from any interested parties.
Companies around the world may be keen to monitor the progress of this consultation and the impact it could have on their business or industry. If you would like to submit a comment on the proposals, please get in touch with our EU, Competition & Regulatory team.
Hong Kong proposals for new Competition Act
With Hong Kong recently confirming that it will be introducing new competition legislation during the 2009/2010 session, competition policy is set for further expansion on the international stage.
Hong Kong's Commerce and Economic Development Bureau (CEDB) announced new details relating to the proposed cross sector Competition Bill. The Hong Kong government confirmed that it is to adopt an adversarial system for enforcement of the competition law regime by the introduction of a Competition Commission and Competition Tribunal. China's competition law came into force on 1 August 2008. Already we have seen the Chinese Ministry of Commerce - the Chinese national competition authority - reject a substantial proposed transaction under this new competition law. This proposed acquisition was by the Coca-Cola Company of the Huiyuan Juice Group, a Chinese manufacturer and distributor of fruit drinks (as reported in our March/April edition). Other acquisitions under the new scheme, whilst having been allowed, often have significant conditions imposed on them (as was the case in the acquisition by the brewer InBev of Anheuser Busch).
May 2009 also saw provisions of the Indian Competition Act 2002, dealing with anti-competitive agreements and abuse of dominance, coming into force. The Act's merger control regime is also due to come into force. This regime will introduce the mandatory filing of all mergers, acquisitions and all other 'combinations'. Last year, Mozambique and Trinidad and Tobago also started to develop the framework to enable them to introduce a competition policy.
These are some indications of the expanding international coverage of competition law. All businesses with operations or sales in Hong Kong should be taking steps to prepare for compliance with the new regime.
Contact Us
If you think your business may be affected by any of the above, or if you have any other questions, please contact:
Michael Dean
Partner
0141 303 2415
michael.dean@mms.co.uk
Catriona Munro
Partner
0141 303 2385
catriona.munro@mms.co.uk
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