press release
Rough justice in flight?
8 August 2007
Following the fines handed to British Airways
last week for price collusion with Virgin Atlantic, Fiona Carter,
regulatory expert at law firm Browne Jacobson explains the legal
considerations behind the ruling.
Fiona points out that under the Competition
Act 1998, The Office of Fair Trading (OFT) has wide-ranging powers
to investigate and enforce the prohibition of anti-competitive
agreements (‘Chapter I’ prohibition) and abuse of a dominant market
position (‘Chapter II’ prohibition).
The Act gives the OFT power to enforce
production of specified documents or information, as well as to
enter and search premises without a warrant. To do this, the OFT
must have reasonable grounds to suspect a competition law
infringement.
In addition, the Enterprise Act 2002 makes it
a criminal offence to dishonestly engage in cartel behaviour. The
Act confers additional powers to the OFT, including:
- The power to require company representatives
to answer questions, and provide information or documents required
for an investigation.
- The power to enter premises under warrant and take possession
of relevant documents, including printouts or documents stored
electronically.
- The power to require people to explain documents.
- Surveillance powers.
Penalties
A business found to be a member of a cartel can be fined up to 10%
of ’relevant’ turnover. Fines are assessed according to the
seriousness of the infringement and turnover of the business in the
relevant market affected by the infringement in the financial
year(s) in question.
Conviction taking part in a serious cartel)
can result in an individual maximum penalty of 5 years imprisonment
in addition to a fine. The OFT can also seek disqualification of a
director for up to 15 years.
Fines can be markedly different from case to
case. BA was fined a total of some £270 million by the OFT in the
UK and the US Justice Department.
Depending on the details of the case, a scheme
can be applied to reflect leniency where merited. This divides
applications into three categories businesses seeking leniency can
apply for:
- Type A – the first applicant to come forward
where there is no pre-existing investigation receives up to 100%
leniency (i.e. zero fine) and immunity from criminal prosecution
and director disqualification.
- Type B – the first applicant to come forward where there is a
pre-existing investigation receives up to 100% leniency and
immunity.
- Type C – where an applicant is not the first one to
come forward, the OFT can still consider leniency if the applicant
offers "substantial added value" to the investigation.
BA & Virgin
The two airlines actively colluded on at least 6 occasions to
discuss and agree rates for fuel surcharges. Between August 2004
and January 2006, surcharges rose twelve-fold from £5 per long haul
ticket to some £60.
The argument is that BA and Virgin effectively
set and maintained an artificially high, anti-competitive price - a
clear Chapter I offence.
It is worth noting that in certain
circumstances, a breach of competition rules can be inadvertent. A
ruling is currently awaited on the construction industry’s practice
of ‘cover pricing’, where companies obtain a price from a
competitor in the tender process which is not designed to win the
contract.
This has been ruled as being clearly anti
competitive, but was standard custom and practice in the industry.
Companies currently under investigation claim they did not realise
that the practice was anti-competitive.
No such excuse appears to be available to BA
and Virgin, however. Both understood the law and they had anti-
competitive policies in place which they blatantly
disregarded.
OFT ruling
The OFT has applied the law to the BA/Virgin activity and reached
the expected results. As Virgin played the role of "whistle
blower", the company is entitled to Type A leniency, and as
such has been given 100% leniency and potential immunity from
further prosecution and disqualification.
On the surface, this may appear somewhat
"unfair" on BA, when it would seem that that this was an activity
freely entered into on an equal basis by both airlines. For the
OFT, however, it is a simple case of applying legal
principles.
This tends to be the approach taken by the
OFT: to apply principles rather than weigh up respective merits.
This is considered when setting the penalties, but not in initial
decisions on leniency.
From the OFT’s point of view, this approach
provides certainty and clarity to businesses when considering
whether to come forward. The counter-argument is that it can lead
to ‘rough justice’ in terms of the outcome.
However, the OFT’s 2006/2007 annual report
indicates that the OFT is committed to acting in a manner which is
"proportionate to the matter in hand". It is hoped that the concept
of proportionality and prospective outcomes will be considered
when, for example, decisions over the construction industry are
published.
Fiona points out that businesses have a
tendency to believe that the OFT is only interested in pursuing
"big business” such as BA and Virgin. However, the construction
industry investigation, which involves many mid-tier firms,
illustrates shows that its powers are equally applicable to smaller
firms.
“There is a real need for smaller
businesses to be aware of the risk of engaging in anti-competitive
practices,” Fiona warns.
save to PDF