Passing the buck

Cartel statistics produced by the European Commission reveal it imposed fines totalling over €10 billion for competition law infringements during the period 2004-2009. With individual fines on companies exceeding €1 billion, it is not surprising that businesses are increasingly keen to offload liability onto the directors and employees responsible. This objective took a step closer recently, when the English High Court gave W M Morrison leave to sue former staff over a £10.7m fine from the Office of Fair Trading (OFT). But is such action a case of shutting the stable door after the horse has bolted and, if so, how can businesses manage the risk of anti-competitive behaviour at every level?

In 2005, the OFT began investigating collusion between supermarkets and dairy processors, in relation to the exchange of commercially sensitive information about certain dairy products in the UK. In 2007, it concluded “early resolution agreements” with certain parties, including Safeway, under which they admitted liability, agreed to cooperate with the OFT and to pay a fine. Safeway agreed to pay almost £16.5m once the OFT concluded its investigation, which would later be reduced to £10.7m for cooperating. Morrison has since acquired the Safeway group, so will be liable to pay this fine.

However, companies in the former Safeway group have now brought claims for damages and compensation against former directors and employees for the £10.7m fine. Safeway alleges the directors and employees breached their employment contracts and duties owed to the company, by participating in and facilitating the price fixing initiatives, and failing to report them to their superiors or board of directors.

The defendants applied to have this action struck out, on the basis that the claim is contrary to public policy and inconsistent with the competition regime. However, the court rejected this argument, ruling the claim should be allowed to proceed to trial.

The public policy defence – which runs that a person must not benefit from his or her own wrong – would only be available where the company has direct responsibility for the acts in question. As the wrongful acts were not endorsed by the board of directors or by shareholders, Safeway could not be deemed directly responsible for them.

The court also held that employees owe a duty to their employer not to put them in breach of competition law. It is, therefore, rational that a penalty for breaching competition law could potentially be passed on to the individuals who commit the unlawful act.

While this case is the first in which a UK company found guilty of price-fixing has tried to recover its OFT penalty from the individuals involved, such actions are a relatively well trodden path where other types of legal breach are concerned. Shareholders might also, in principle, be able to bring damages claims, known as derivative actions, against company directors, for breach of their duties owed to the company and shareholders.

The final outcome of this case will have implications for both companies and individuals. If Morrison wins, it could make employees more hesitant in helping the competition authorities with investigations, fearing they will share in the penalty for any anti-competitive practices discovered.

This lack of disclosure would have a knock-on effect on a companies’ ability to settle cases early; unable to co-operate fully, they would not benefit from leniency programmes and potentially miss out on reduced or fully-waived penalties. Today, almost all cartels come to light because companies uncover anti-competitive activities and "blow the whistle" on competitors, to reduce their own exposure. If this source of information dried up, competition authorities would face real problems in pursuing investigations. Therefore, there may be a competition law policy argument against recovering these fines from employees.

Of course, attempting to recover thousands or even millions of pounds from individuals will only be beneficial if they have the means to pay the penalty. Many directors may have directors’ and officers’ insurance, which could potentially cover this liability. In fact, as the court commented, Safeway's action is largely targeted at the individuals’ insurance rather than the individuals themselves. Where individuals do not have such insurance or personal wealth, there would often be little point in pursuing them.

A win for Morrison would certainly serve as a reminder of the harsh consequences of breaching competition law. Individuals should be mindful not only of the potential damage to their career, but also to their personal finances. In 2008, three individuals involved in the Marine Hoses cartel were jailed for periods of up to three years. More recently, four BA executives were charged in relation to the fixing of air passenger surcharges for transatlantic flights and now potentially face similar sanctions for their alleged involvement in this cartel.

The risks facing individuals for competition law infringements are constantly on the rise. The Morrison's case was pursued under English law, but the tactic is one which could be seen repeated across other European jurisdictions. Understanding the main rules of competition law has therefore become a vital tool for employees and directors alike.

An effective competition compliance programme will enable companies to manage the risk of infringements, as well as making it clear to employees and directors where the line of illegality sits. And if, despite best efforts, an infringement of competition law should occur, a sound competition compliance process will bring the issue to light quickly and ensure it is managed in a manner which mitigates damage. Ultimately, the only way to win the competition blame game is to make sure you never have to play.