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Saving the Unsaveable? Reforming the Cartel Offence

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About The Author

Keir Baker (Former Editor in Chief)

Keir is a Trainee Solicitor currently in the fourth and final seat of his training contract at a major US law firm. He is a law graduate from Selwyn College, University of Cambridge. Outside the law, Keir is an accomplished goalkeeper in both football and hockey, as well as a keen actor and pianist. He is a long-suffering supporter of Middlesbrough FC.

Disgrace does not consist in the punishment, but in the crime.

Vittorio Alfieri

Though heavily influenced by the provisions of European Union competition law, one of English competition law’s diverging elements is the cartel offence. Initially introduced by Section 188 of the Enterprise Act 2002 (EA 2002), the offence allows criminal sanctions to be imposed by the Competition and Markets Authority (CMA) on any individual who agrees with another to engage in cartel activity. It works alongside the civil regime that applies to businesses (typically referred to as undertakings) and is outlined in Chapter I of the Competition Act 1998 (CA 1998) and Article 101 of the Treaty on the Functioning of the European Union (TFEU).

Since its introduction, however, the cartel offence has been widely criticised for lacking in effectiveness. Utilised rarely, it has only seen two successful prosecutions – one of which must be considered a pyrrhic victory, as the credit for it is attributable mainly to the US authorities working alongside the CMA on the case. Indeed, frustration at the offence’s lacking enforceability was such that the government implemented substantial reforms in 2013 aimed at increasing its potency for the future.

This article examines the value of these reforms, expressing concerns that the reforms will result in major practical problems. But, more importantly, it suggests that any future attempts at reforming the offence are futile so long as imprisonment remains a potential sanction, arguing that this – combined with the lack of a clear signal as to why cartel activity warrants moral condemnation – undermines the willingness of juries to find individuals guilty of committing the cartel offence. 

Examining the Initial Offence

The cartel offence was intended to provide an added element of deterrence to English competition law. Parliament drew inspiration from the USA’s model that originated from Section 1 of the Sherman Act 1890 which – after seeing Congress upgrade cartel activity to a felony in 1974 – resulted in the average prison sentence for defendants in cartel cases standing at 24 months between 2010 and 2015 and criminal fines reaching $3.6 billion in 2015.

It was felt by Parliament that the threat of up to 5 years' imprisonment, up to 15 years' director disqualification and the potential for an unlimited fine or asset confiscation would add bite to the purely economic consequences of the civil regime contained in the CA 1998.

The initial incarnation of the offence was outlined by Section 188(1) of the EA 2002, which held that:

[A]n individual is guilty of an offence if he dishonestly agrees with one or more other persons to make or implement, or to cause to be made or implemented, arrangements [outlined in Section 188(2)] relating to at least two undertakings (A and B).

Section 188(2) of the EA 2002 listed the offending arrangements as ones that:

  1. directly or indirectly fix a price for the supply by A in the UK (otherwise than to B) of a product or service,
  2. limit or prevent supply by A in the UK of a product or service,
  3. limit or prevent production by A in the UK of a product,
  4. divide between A and B the supply in the UK of a product or service to… customers,
  5. divide between A and B customers for the supply in the UK of a product or service, or
  6. are bid-rigging arrangements.

This formulation, though comprehensive, appeared beset with problems that undermined the capacity for the offence’s enforcement. Indeed, the CMA’s predecessor – the Office of Trade Trading (the OFT) – were only able to pursue three cases: the Marine Hoses case, which saw the conviction of three individuals, though the credit for this was largely attributed to the actions of the US authorities, the Fuel Surcharges case, which saw procedural failures committed by the OFT cause the case’s collapse, and the Galvanised Steel Tanks case, which saw the CMA achieve one guilty plea but two other members of the cartel acquitted.

The 2013 Reforms

Concerned by these problems, the Government sought to increase the offence’s enforceability by enacting the Enterprise and Regulatory Reform Act 2013 (“the ERRA 2013”). The centrepiece to these reforms is the removal of the ‘dishonesty’ element of the cartel offence, which means that – irrespective of its impact on competition or the intentions of the parties – any agreement of the type listed in Section 188(2) of the EA 2002 is illegal. The offence has therefore become one of strict liability, subject to the defendant successfully invoking one of the new exclusions or defences that were introduced to Section 188 of the EA 2002 via Section 47 of the ERRA 2013.

Section 188A – The Exclusions

An individual does not commit an offence under section 188(1) if, under the arrangements—

  1. In a case where the arrangements would… affect the supply… of a product or service, customers would be given relevant information about the arrangements before they [transact with the parties]
  2. In the case of bid-rigging arrangements, the person requesting bids would be given relevant information about them at or before the time when a bid is made, or
  3. In any case, relevant information about the arrangements would be published, before the arrangements are implemented…

Section 188B – The Defences

  1. [A]t the time of the making of the agreement, [the defendant] did not intend that the nature of the arrangements would be concealed from customers…
  2. [A]t the time of the making of the agreement, [the defendant] did not intend that the nature of the arrangements would be concealed from the CMA.
  3. [B]efore the making of the agreement, [the defendant] took reasonable steps to ensure that the nature of the arrangements would be disclosed to professional legal advisers for the purposes of obtaining advice about them…

Evaluating the Reforms

Practical Problems

The reforms introduced by the ERRA 2013 should be viewed as an unmitigated disaster. For one thing, they fail to solve the initial practical problems that had impeded the enforcement of the initial version of the cartel offence. Furthermore, they introduce further difficulties, to the extent that the reformed offence can be considered more difficult for the CMA to apply.

This is evident particularly in relation to the new defences and exclusions. Though their introduction is justifiable due to the need to mitigate against potential false negatives that might occur because of the lowering of the mens rea threshold, the uncertainty surrounding their content and scope will cause several problems.

For example, as Peter Whelan explains, the defence contained in Section 188B(3) of the EA 2002 is impractically broad; there is no obligation to follow the lawyer's advice and, in light of client confidentiality, there is no way for the CMA to monitor the accuracy or legitimacy of the advice that is given. Ultimately, therefore, it must be concluded that the reform has left a lot of new legal uncertainties which a well-advised defendant could exploit.

It is also concerning that these add to the practical problems that the reforms left unchanged. Indeed, from an enforcement point of view, identifying conduct by individuals that represents the offence’s central actus reus is a monumental task: it is rare that business-savvy company directors agree to engage in cartel activity in a conventional manner. Instead, collusion will invariably be through subtle signals that makes gathering sufficient proof a demanding task. Indeed, though this might be feasible for cases under Article 101 of the TFEU or Chapter I of the CA 1998, which allow for competition authorities – in cases like the Dyestuffs case – to discharge the civil burden of proof by arguing that the parallel behaviour of undertakings “amounts to strong evidence of a concerted practice, if it leads to conditions of competition which do not respond to the normal conditions of the market”, this is less applicable to the cartel offence. Here, the relevant burden of proof is a criminal one rather than a civil one; the CMA must prove the key elements of the offence existed beyond reasonable doubt.

Furthermore, the CMA must also go further under the cartel offence than it does in cases under Article 101 of the TFEU or Chapter I of the CA 1998. Under the latter, it can discharge the civil burden of proof by showing only that the agreement has as its object or purpose the prevention, restriction or distortion of competition within the internal market without needing to show it would actually have that effect. However, in contrast, to meet the cartel offence’s requirements, the CMA would not only have to show that the defendant intended to make or implement one of the offending arrangements listed in Section 188(2) of the EA 2002, but also that their conduct would be able to have that impact.

All this causes the CMA problems, starkly demonstrated by what occurred during the collapse of the Fuel Surcharges case: it must run parallel civil and criminal cases – both of which involve different procedures – while utilising skills similar to those required by a Public Prosecutor, with which many of its members are unfamiliar.

The Need for Dishonesty

The case for removing the dishonesty element from the initial conception of the cartel offence appeared strong, and it was a move backed by the OFT. In truth, the definition of dishonesty was ambiguous, meaning that it was understood differently by different juries. This was illustrated in the CAT's recent judgment in Balmoral Tanks v CAT [2017], in which the CAT discussed the history of the long-running Galvanized Steel Tanks Cartel case.

Early on the criminal investigation, the CMA secured the first (and only) guilty plea under the original offence by one member of the accused cartel. Yet despite this, in the subsequent trial of two other members of the same cartel at Southwark Crown Court, the defendants were acquitted on the grounds that the jury were not persuaded that they had acted dishonestly.

The dishonesty requirement also allowed for defendants to escape prosecution through ingenious economic-based justifications: as cartel activity is carried out for benefit of companies rather than individuals, the defendant could argue his activity was done with the motivation of, for example, saving jobs that would potentially dispel the idea that the conduct was done ‘dishonestly’.

However, the reforms overlooked the importance of the dishonesty requirement to the underlying justification for the very existence of the cartel offence; it added a crucial tool by which community morality could be harnessed to explain why cartel activity should be treated worse than other anti-competitive behaviour. The reformed offence lacks any such device that performs this moral signalling function; Peter Whelan’s contention that the moral wrongness element is now one of deception is unsatisfactory, for that is insufficiently explicit to laymen and operate as that moral signal.

The Potentially Fatal Flaw

Debates over the concept of moral signalling may seem a purely academic exercise. But this overlooks the importance of the idea that a key part of what makes something a crime is condemnation by the community. In the words of Henry Hart, a crime is:

[N]ot simply anything which a legislature chooses to call a ‘crime.' It is not simply antisocial conduct which public officers are given a responsibility to suppress. It is not simply any conduct to which a legislature chooses to attach a "criminal" penalty. It is conduct which, if duly shown to have taken place, will incur a formal and solemn pronouncement of the moral condemnation of the community. 

Thus, the inclusion of the dishonesty element in the initial cartel offence was required to show juries – which consist of laymen that represent the notion of the community – that the activity in question was wrong and worthy of condemnation. And the need for such an element must not be underestimated; courts (and juries) are always typically hesitant to impose criminal charges on behaviour that they do not view as sufficiently reprehensible to warrant the stigma of a conviction. Without the dishonesty element, the cartel offence flounders in this context.

However, in the view of this article, even the reintroduction of the original dishonesty requirement would be insufficient to fully meet the need for a moral signalling function to explain why cartel activity warrants criminal sanctions. Parliament needed to introduce something stronger to truly engage with the question as to why criminalisation was necessary or appropriate.

The reasons for this are twofold, with the first being that, because the activity covered by the offence exists outside the traditional realm of what is considered criminal and more suited to civil proceedings, something exceptional was required to show jurors – and the public of which they consist – why cartels were worthy of their moral condemnation. This is compounded by the fact that – as Alison Jones and Rebecca Williams explain – the drive for criminalisation was not a bottom-up process which harnessed moral outrage (as occurred with the introduction of Section 33 of the Criminal Justice and Courts Act 2015 to tackle revenge porn) but a top-down process introduced on the legislature’s own initiative.

Conclusion

This article contends that the failure of Parliament to clearly articulate the moral wrong that underpins the cartel offence is the key cause of its lack of potency, particularly given the severity of the punishment that can be imposed. Indeed, the CMA knows that in the minds of the jurors, sending an individual to prison requires significantly egregious moral conduct that can be difficult to identify in cartel cases. As the Head of the Bundeskartellamt (the German equivalent of the CMA) Andreas Mund reportedly suggested, imprisonment should be considered a “severe weapon” that has no place in the “rarely… crystal clear matter” of cartel violations where “the lines are often blurred.”

Inspiration for resolving the offence’s enforceability problem might be found abroad. The success of the USA’s model might be attributable to its clearly articulated reasons behind the criminalisation of the offence: as Former Deputy Assistant Attorney General Scott D. Hammond explains, cartels are considered in American law:

[T]o have no legitimate purposes and serve only to rob consumers of the tangible blessings of competition Cartels, therefore, are not properly redressed with just a liability rule designed to compensate victims. Rather, participation in a cartel is viewed in the United States as a property crime, akin to burglary or larceny, and it is properly treated accordingly.

Danish law might also provide a useful reference point, with Section 299(c) of the Danish Penal Code holding that an individual can face up to 6 years’ imprisonment where their participation in a cartel was ‘deliberate’ and ‘of a grievous nature’ based on its scale and adverse effects. Other European countries, such as France and Greece, ground their conception of the cartel offence in fraud.

However, it is submitted that a more sustainable method of increasing the enforceability of the cartel offence is to remove imprisonment as a potential sanction. There is little evidence of its success outside the USA – in Canada, for example, no cartel offender has spent any time in prison since 1996 – and, with the UK competition law landscape already filled with provisions heavily tinged with EU influence, adopting a USA-style system is simply not feasible. Greater use of fines imposed upon individuals as well as undertakings – the preferred approach of the Bundeskartellamt in Germany – or Director Disqualification Orders would allow the deterrent effects of a criminal punishment to be maintained without the curbing of enforceability that comes from the reluctance of juries to impose imprisonment.

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Tagged: Commercial Law, Competition, Criminal Law, European Union, Regulators

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