Creating an Effective Cartel Busting Regime
As New Labour collapsed so did its system of economic regulation
Price-fixing is the most damaging form of anti-competitive activity. Gordon Brown was right to focus on tackling price-fixing. Unfortunately he adopted the unexportable American criminal competition (or in US parlance ‘antitrust') model and sought to apply it to our shores, with a stunning degree of ineffectiveness. So far the OFT has obtained zero convictions under Section 188 of Enterprise Act 2002 (the Cartel Offence). The new adminstration needs to remedy this major failure quickly by learning from both Gordon Brown's mistakes and those of the European Commission to deliver a more effective and proportionate response to the threat posed by price-fixing.
Yesterday as Gordon Brown faced the final collapse of New Labour and the exit of his Adminstration from power one of the pillars of New Labour's system of economic regulation also collapsed. In the central criminal court the four BA executives charged with price-fixing under Section 188 were cleared. Following further evidential investigation emails were discovered which demonstrated that no collusion had taken place the Office of Fair Trading withdrew its case. Back in 2001 Gordon Brown had trumpted the criminalisation of price-fixing between competitors as the most significant and toughest aspect of the modernisation of UK competition law. In the White Paper preceeding the Act Brown had talked up the prospects of criminalisation as a means to significantly deter price-fixing across the economy. Unfortunately between June 2003 and May 2010 there have been no successfully criminal convictions initiated and brought to a successful conclusion by the OFT.
Gordon Brown was correct to identify that price-fixing is in the words of US Supreme Court Justice Scalia ‘the supreme evil of antitrust'. In competition policy terms price-fixing between competitors is the most damaging form of anti-competitive collusion, pushing up prices for consumers and supressing innovation across whole industries.
Unfortunately Brown's and New Labour's infatuation with American legal models fundamentally undermined the political determination to tackle price-fixing. Seduced by the messanic zeal of the US Department of Justice to bring down international price-fixing rings and its high annual tally of dozens of gaoled executive price-fixers, Brown thought this tough enforcement regime could be repeated on this side of the Atlantic. Unfortunately Brown and his advisers did not look close enough at how the American model works to realise the American cartel busting regime was not going to be easily exportable.
In a revealing paper published by Fordham University in 2006 entitled Criminal Enforcement of Antitrust Law-Problems with the US Model US white collar criminal defence attorney Leslie Jacobs highlighted the way the compound effect of the aggressive application of conspiracy, evidential and plea-bargaining rules made it possible for the US Department of Justice to readily obtain guilty pleas from corporate executives. To give one example US prosecutor were permitted to offer radical plea bargain deals. These would involve plea bargains with relatively low gaol terms for guilty pleas of around 18 months to three years. An executive with a failed not guilty plea would not only face the US Department of Justice demanding a gaol sentence at the top of the potential scale of up to 10 years, but also the prospect that the Department would bring a second charge of obstruction, for which the maximum sentence was up to 20 years, to be run consecutively with the first charge. As even with good behaviour inmates in US Federal prisions will serve a minimum of 80% of their sentence a mid-tariff price-fixer with an obstruction charge could easily face almost 10 years in gaol. It is not surprising therefore that the incentive to plead guilty was extremely strong amongst corporate executives charged with price-fixing.
Jacobs also raised concerns about the very broad concept of conspiracy which captured many more individuals into the scope of the criminal charge and a weakened standard of proof in US Federal Courts, which again assisted in obtaining convictions and encouraged defendants to plead guilty. By contrast English judges would never accept such dilution of consipiracy standards or the standard of proof. In addition, the English courts have always taken a hostile attitude to plea bargaining. The English courts would be likely to view the application of additional charges to the same facts in the context of a plea bargain case to amount to an abuse of process. There would in addition be significant problems in relation to a US approach to criminal prosecution in the UK in respect of the application of the European Convention on Human Rights, particularly in respect of fair trial rights contained in Article 6.
This mistake was compounded by the decision to introduce the concept of ‘dishonesty' to the offence. This could have opened up an an entire field of excuses for defence lawyers to protect price-fixers from justice. The potential for endless arguments as to how the price-fixing might serve the public interest would have made any conviction problematic even assuming US procedures could have been adopted on our shores. It is noticeable that in other common law juridictions which have considered criminalisation a dishonesty test has been rejected. However, so few cases were brought under Section 188 this problem as a matter of practicality has never arisen as a major issue.
It is not therefore surprising that rather than the three to four successful criminal price-fixing convictions per year estimated at the time Section 188 came into force in June 2003 the number of successful convictions obtained by the OFT is currently zero.
There is one case involving defendants in the Marine Hose Cartel in which three defendants were successfully prosecuted under Section 188. However, those convictions cannot be deemed as obtained by the OFT. The three defendants were caught, tried and convicted in the United States. The defendants were able to argue that under the US-UK prison transfer scheme they would be able to return home and then obtain parole quite quickly. The defendants were able to use this reality as leverage with the US authorities to organise a plea bargain under which once convicted in the US they would be extradited to the United Kingdom where they would plead guilty to an offence under Section 188 and accept a sentence equivalent in length to the US sentence. This is less an example of a conviction obtained by the OFT as a ‘conviction gift' from the US Department of Justice to the OFT.
Whilst Gordon Brown was correct on in identifying the need to tackle price-fixing his identification of the correct remedy was fundamentally misconceived.
Equally, there are serious questions as to the effectiveness of the European Commission's approach to price fixing. The Commission has only one penal weapon: corporate fines. It has used this weapon with some vigour over the last five years. Between 2005 and 2010 the Commission has imposed E10 billion in fines for price-fixing. By contrast the US has only imposed fines of $5 billion since 1997.
There are a number of serious concerns in respect of the Commission's fining policy. Due process concerns in respect of the Commission to impose a fine without prior judicial authority; the ability of the Commission to alter penal policy by administrative guidance; the impact of very high fines on EU competitiveness and the danger of firms being forced out of business by very high fines.
However, the biggest problem with the Commission's fining policy, and one substantially shared with the OFT (outside the UK criminal competition regime) is that it provides no deterrent for the rogue director. Corporate fines do not affect the classic price-fixer, the sale director who gains a significant part of his compensation from his performance can price-fix with competitors, obtain personal benefit and not suffer any consequences. It is quite conceivable for a sales executive complicit in price-fixing to merely move to a firm in another market sector with good references from his previous firm just after an investigation into the cartel opens and before his complicity in the price-fixing is revealed.
As a consequence the Commission's (and the OFT's outside the criminal regime) approach of imposing heavier and heavier corporate fines has almost no deterrent impact on such individuals.
The lesson from the Commission's fining policy is that if the UK now abandons its criminal competition regime heavy corporate fines do not really provide a comprehensive answer to the incentives to price-fix.
There are alternative and potentially much more effective options available. For instance, the UK could repeal Section 188, and instead deploy the under-used Director Disqualification power combined with personal fines.
It is true that businesses could indemnify executives, but in such cases where executives acted with board approval the principal focus of penal policy will be corporate fines not individual fines. In such cases the penal approach would be DD for individuals and fines for the company. Personal fines would be applied where the executives were genuinely rogue, operating outside corporate policy and to their personal benefit, plugging a major hole in the deterrence policy of OFT civil price-fixing policy.
The DD power could be extended so that any manager, whether a director or not could be disqualified from being a director for a lengthy term, which would introduce a signficant degree of public shaming and reputational damage for the individuals concerned. This DD power could be butressed with new powers to fine individuals personally for price-fixing. Together this would bring a significant degree of personal responsibility to price-fixing cases. These cases being civil cases would be easier for the OFT to bring and win than criminal cases and would enhance the overall deterrence of the tougher civil regime. Combined with a proportionate corporate fining policy the UK could finally achieve a rigourous and effective cartel busting regime.