Companies could claim back competition fines

A High Court decision could open the door for UK companies to recover fines imposed on them for competition law infringements from the employees and directors involved in the infringement.

Lovells' Competition law practice issued the following statement:

This judgment raises important issues for companies as well as directors and employees and insurers providing D&O cover. Companies that infringe competition law are subject to increasingly large fines and are potentially exposed to substantial damages claims from those harmed by their anti-competitive conduct. It had been thought that companies were unable to recover such fines and damages from the directors and employees responsible because the company's claim would be based on its own wrongdoing and so would be prevented by public policy. The High Court has decided that public policy does not necessarily prevent such claims, opening the door to claims against directors and employers and their insurers in future.

Background

This case arises from the ongoing investigation by the UK's Office of Fair Trading into collusion between supermarkets and dairy processors in relation to the retail prices of certain dairy products. The OFT entered into an "early resolution" or "fast track" agreement with certain supermarkets, including Safeway. Safeway is likely to receive a fine of £16.5 million, minus any reduction achieved for co-operating through the procedure. Safeway brought a claim for damages against certain former directors and employees who it alleges were responsible for the anti-competitive activity.

The judgment

The defendant directors/ employees applied to strike out the claim against them arguing that Safeway's claim must fail as a matter of public policy for two reasons:

(i) it infringed the principle of public policy that a person who commits an illegal or unlawful act cannot bring an action to recover damages which result from his own wrongdoing (referred to as ex turpi causa non oritur actio); and

(ii) it would be fundamentally inconsistent with the UK competition regime. They argued that there was no provision in the Competition Act 1998 for direct civil liability on directors or employees for conduct which led to a company infringing the Act, and that if Parliament had intended there to be such a remedy, it would have said so. They also argued that the objectives of the penalties under the Competition Act (punishment and deterrence) would be frustrated if the claimants could pass on the fines to the defendant employees and directors.

The High Court ruled against the directors/employees, concluding that Safeway had a real prospect of success at trial and of defeating the public policy defences. It considered that, while breach of the prohibition in Chapter I of the Competition Act is sufficiently serious and morally reprehensible to engage the ex turpi causa rule, for the rule to preclude the company's claim, the wrongful acts must be those of the company itself for which it was primarily or directly liable, not merely acts of its employees which could for some purposes be attributed to it. The Judge concluded that breach of the Chapter I prohibition was not something for which a company was itself primarily liable in the sense required by the ex turpi causa defence, unless the anti-competitive conduct concerned had been approved by the board or shareholders (it had not in this case) or were the acts of the company's "controlling mind" or "alter ego" (such as in a one man company). Safeway, therefore, had a good argument that the ex turpi causa defence did not apply.

The High Court also did not accept that passing on penalties to the people who actually took part in the unlawful acts would be inconsistent with the UK competition regime. Although the Competition Act applies to undertakings and not individuals, it did not follow that individuals cannot owe a company duties on normal common law principles to ensure that the company complies with its statutory obligations. The Judge concluded that the "suggestion that undertakings will only be deterred from breaching the Act if they are prevented from suing the individuals who caused the breach is completely illogical".

The High Court therefore dismissed the application to strike out the claim and allowed it to go to a full trial.

Importance of the case

This is the first UK case in which the courts have indicated that a company may have a good claim to recover a competition law fine or penalty from its employees and directors. The same argument would apply to a claim to recover damages a company was liable to pay for anti-competitive conduct.

The ability to bring such claims is obviously of financial importance to companies, particularly given the increasingly large fines being imposed and the exposure to substantial damages claims that results from a finding of infringement. Claims of this kind are only likely to be worthwhile in cases such as this when the directors/employees concerned were covered by D&O insurance. This case is likely to be of particular concern, therefore, to D&O insurers.

Although individuals in the UK involved in certain cartels can face criminal sanctions and orders to disqualify them as directors, these powers are rarely used and apply only in limited circumstances. Any kind of competition law infringement could result in exposure to a damages claim of this kind and this could itself prove an additional deterrent to anti-competitive activity.

The existence of potential personal liability on the part of the individuals involved may, however, create unwanted difficulty for companies seeking to defend themselves from allegations of involvement in cartels. A company which is subject to a competition law investigation will need the assistance of employees and directors involved in the anti-competitive activity, but they may be less willing to co-operate if they could be exposed to personal liability and may want protection from potential claims before doing so. There may well be conflicts of interest between the individuals concerned and the company and they may require independent advice separate from that provided to the company.

Despite the additional deterrence that personal liability brings, the case may not be good news for the OFT, as it will make individuals less likely to cooperate with companies investigating anti-competitive activity and make it more difficult for companies to take advantage of the OFT's leniency programme.