What do I do if...I suspect my business has breached competition law?

00:00:06 David Lee, Host

Hello, my name is David Lee, and welcome to Podcasts by Brodies. In this latest episode, we're looking again at how Brodies' experts deploy their insights and experiences to answer the deceptively simple question often asked by clients, "What do I do if…?"

Today we're asking a question highly pertinent to running a business, "What do I do if I suspect my business has breached competition law?"

Charles Livingstoneis a partner in the government regulation and competition team at Brodies and head of the competition practice, and Jamie Dunne who is a senior associate in the same team who specialises in competition law. Welcome to you both.

Charles, to begin with briefly, what is competition law?

00:00:57 Charles Livingstone, Partner

So competition law is the name that we give to set of rules that have been put in place in the UK and the EU and in most countries around the world that are designed to encourage a free market and a competitive economy by making businesses compete with each other to sell their products and services.

And it also incentivizes innovation, offering better prices, offering better quality. That's largely with the consumer in mind getting a better good or service than they would otherwise.

It's generally accepted as a policy matter, that competition is necessary for markets to deliver for consumers on the basis that markets that cartelize - where everybody's colluding with each other - or that are monopolised by just one or possibly two very large providers, they tend to be run more for the benefit of the producers than of the consumers. So, competition law tries to ensure that that companies don't collude with their competitors and don't abuse a dominant market position.

In terms of how competition law is enforced - in the UK, the principal enforcement authority is the Competition and Markets Authority or the CMA, which we'll be talking about a lot. Other authorities and other jurisdictions, can sometimes be interested in conduct that happens in the UK if it affects their markets, so conduct in the UK that affects trade within the EU, the European Commission, for example, might be.

And also within the UK, there are certain sector regulators such as Ofcom and Ofgem that have jurisdiction to enforce competition law in respect of the sectors that they regulate.

So that's the sort of high-level competition law landscape.

00:02:50 David Lee, Host

OK. Thanks very much, Charles and Jamie. We're talking here about breaches of competition law. So how can competition law be breached?

00:03:02 Jamie Dunne, Senior Associate

So, there's quite a few ways in which people can find themselves breaching competition law, but they really all centre around a business advantaging itself to the detriment of its customers.

As Charles says, there's really two key limbs to that.

The first one is what we call anti-competitive agreements or concerted practices. Concerted practices are really just looser arrangements, understandings, gentlemen's agreements type thing, but anti-competitive agreements or concerted practices that are between competitors are generally against the law, unless there's some redeeming feature to them - perhaps they enhance economic efficiency or something like that. It's very rare that any agreement is going to be falling into that category, but it is possible to find that kind of exemption.

So to give you an idea of the kind of thing that would be an anti-competitive agreement, an agreement between competitors to fix their prices, to share or split geographical territories or customer groups to rig bids. To decide between themselves who is going to win a particular bidding exercise and act accordingly, or to restrict their output so you're in agreement that well, if we if we produce less than the market price will go up.

So an agreement along any of those lines is subject to quite severe sanctions they're really quite severely punished and in some cases can even lead to prison for those that are responsible for them.

Moving along a little bit from that, it's a breach of competition law to exchange commercially sensitive information and the reason for that really is that uncertainty about what your competitor is going to do is really what is needed for healthy competition.

If you don't know what your competitor is going to do, then you have to assume they're going to do the thing that's going to be most challenging to you and act accordingly, and that benefits consumers. So competition law doesn't like exchanges of information about business plans, that kind of thing.

Then agreements between firms that are at different levels of the supply chain can also be anti-competitive. So, if a manufacturer requires a retailer that's selling their products not to sell them below a certain price, for example, then that would be a breach of competition law as well.

The second limb is that competition law can be breached where what we call a "dominant firm" abuses its position. So, a firm with so much power in a given market that it can basically do what it likes, it doesn't have to worry about competitors because they're so much smaller than it.

And for that kind of business, there are certain things that they're not allowed to do, but we're not going to really go into any further detail today because there's only a very small number of businesses that applies to and it's not the kind of thing that tends to come as a surprise. So we'll be focusing on that first limb for the rest today.

00:06:19 David Lee, Host

Great. Thanks very much for that, Jamie. So let's look at some examples here.

Which business sectors are most susceptible to breaches of competition law and can you give us some specific examples?

00:06:34 Jamie Dunne, Senior Associate

Yeah, sure. So traditionally, there are certain sectors that are more prone to breaching competition law than others. Industries in particular where everybody knows each other or where there are only a few players in the market, or indeed where margins are really thin, are all sectors that are at particular risk.

And so one such industry would be the construction industry that's been especially susceptible to breaches, and in fact the OECD described the construction industry as being prone to "endemic collusion," which is not the nicest compliment to have!

And there's been a lot of activity by the CMA in relation to construction businesses. They recently announced £60 million of fines and three more director disqualifications in relation to a bid rigging cartel that involve 10 different construction companies. So it is a focus for them.

There's been quite a long line of infringements in the construction sector and you know, cumulatively millions of pounds in fines, lots of director disqualifications, and even in some cases, individual criminal liability, as I mentioned earlier. And one recent breach that took place in fact, in in the rolled lead sector of construction, also saw a private damages action brought against some of the participants. So it's important to note that in addition to that public enforcement of competition law, firms that engage in this can also find themselves facing private enforcement action by competitors or customers that lose out.

So particularly construction, but other industries that the OECD has said are prone to competition risk includes chemicals, cement and concrete, food products, but there's really no sector that is immune. This is something that covers everybody.

00:08:45 David Lee, Host

OK. Thanks very much, Jamie. And earlier on Charles, Jamie talked about severe punishments for breaches of competition law, but I guess that's just part of the potential consequences of a breach.

Can you take us through those broader consequences including those potential punishments and penalties?

00:09:05 Charles Livingstone, Partner

Yeah. So this is the scary part! Jamie's already mentioned a lot of the regulatory punishments that can be imposed but interestingly, in surveys the deterrent that's come out on top when businesses have been asked, "what would most concern you about a competition breach?" The number one answer was an adverse impact on the company's reputation and brand.

You know, if you're in the press as having breached competition law essentially at the expense of your customers, that's not good for the brand and it's not consistent with the ESG focus that so many businesses have at the moment. And obviously individual reputations of those who participate in a breach can also be harmed.

But beyond that, once you get into those regulatory punishments, the fines can be very heavy. So the, the ceiling on the fine that can be imposed most by the Competition and Markets Authority and indeed by the European Commission and the EU, is 10% of worldwide group turnover. So competition law doesn't really respect the different corporate entities it looks at these things on a group basis in order to establish what that maximum fine can be.

That can be, a very, very big maximum number. Fines don't all get, well, often don't quite get to that maximum, but sometimes they do. One of the fines in the construction case that Jamie mentioned, that appears to have been that maximum 10% threshold.

Then on the criminal side, the maximum penalty there is up to five years in prison for individuals who participate in one of the more serious cartels and or an unlimited fine. Then company directors can be disqualified for up to 15 years, and it's important to note that the risk of that is highest if the individual director has been involved in the breach, but they don't necessarily have to be.

So, a director can be disqualified even if the CMA just thinks that they should have known about the conduct, or even that they failed to put in place proper internal compliance processes that would have resulted in the conduct not taking place in the first place.

Then Jamie's mentioned court actions including on a class action basis by customers or competitors who suffer a loss because of the competition breach. Then at the operational coalface of these sorts of things, agreements that are contrary to competition law, are void and unenforceable. One thing as lawyers that we'll definitely tell our clients is that you want your agreements to be enforceable. So sometimes it's better to, not to push the envelope and just to stop short of taking that risk because there's not much point in, shooting for the moon in terms of putting restrictions on the counterparty, if you can't actually enforce those.

And then the final one, even if a business is found not to have committed a competition breach, if it's suspected of one and it's investigated, then you're talking about very significant financial management and reputational costs just from dealing with and being subject to that investigation.

So even if no enforcement action is ultimately taken, it's a real headache to deal with these things so much better to not just comply but be seen to be taking steps to comply.

00:12:50 David Lee, Host

And how often, Charles do we see that kind of nuclear button being pushed and somebody actually going to jail as a result of competition breaches? Is that quite rare?

00:13:00 Charles Livingstone, Partner

So, it has been rare but and I don't want to get too techie, but the criminal offence as originally drafted was very hard to prove. It was amended a few years ago so that it will be easier to prove and it will depend less on the subjective state of mind of the person involved and be much more interested purely in what they did.

So the Competition and Markets Authority has certainly been doing a lot on the director disqualification front, which shows a focus on trying to get individual minds concentrating on competition compliance, not just corporate minds. They have secured some guilty pleas recently for individual participants in cartels. I think to date we've seen more suspended sentences and things like that rather than jail time, but that's probably because I think the individuals have generally conceded that they were guilty. If somebody was to fight that and be found guilty after a trial, then you know you might be looking at much more significant penalties.

00:14:17 David Lee, Host

OK. Thanks very much. So there are quite broad and potentially pretty devastating consequences of a breach. So Jamie, how might breaches tend to come to light?

00:14:33 Jamie Dunne, Senior Associate

They come to light in all sorts of different ways. For example, a company might be investigating something else, an HR issue, or a complaint between staff and realise that there has been a competition breach while reviewing internal emails or conversations or that kind of thing. It can come about because staff are receiving competition training and or they are seeing something on the news - and the CMAlikes putting things in the news for this reason - where the training or the news item makes them realise that, oh, hang on this thing that we've been doing for however long perhaps is actually against the law! So that's quite a common way for these things to crop up.

Also from due diligence exercises or policy changes that are associated with, or follow a change of ownership or corporate leadership. So, a business gets taken over by somebody else and they look at what's been going on and they realise that the business they've just taken over has breached competition law and decide to do something about it.

So all of these are ways in which, even if the people involved don't necessarily report it themselves, these things can be uncovered. Really the best way to make sure that there aren't any breaches going on or to flush them out , and do something about them if they are, is to put some proactive compliance measures in place and really give the business the opportunity to get ahead of the issue.

00:16:16 David Lee, Host

But then obviously if that doesn't work, Jamie and a business does become aware of a breach, what should it do then?

00:16:23 Jamie Dunne, Senior Associate

If a business thinks that there is a potential competition breach or competition issue, then the key thing really is to seek legal advice as soon as possible.

If there has been a breach, then the legal advice that a business gets may well be to blow the whistle on the arrangement and tell the Competition and Markets Authority about it using what it calls its leniency programme. That is that the first participants in any anti-competitive arrangement that blow the whistle on it, that tell the authorities about that arrangement going on have the potential to avoid all fines, avoid any penalties for individual employees and directors. Those individuals get immunity from criminal prosecution, but also from disqualification as directors.

If you're the first to tell the authorities about these things, a lot of the potential risks that Charles outlined a moment ago can be can be avoided - either completely or certainly strongly mitigated against.

So the idea of this leniency programme is that it destabilises anti-competitive arrangements. So it might be that you know if you're in a cosy little club and you're all talking about splitting prices or customers or geographic areas, knowing that there's this risk that somebody else in that cosy little club is going to tell the CMA about it so that they can get full immunity from any punishments means that you can't trust anybody else in the group.

There's always a risk that somebody else is going to go to the authorities and that destabilises these groups from working properly, because somebody is going to blow the whistle and the question is who does it first? And actually most competition investigations and fines and decisions do now arise from somebody blowing the whistle using that scheme and making a leniency application. So, it is a reason not to trust anybody else in these things certainly.

00:18:30 David Lee, Host

So that's becoming more common, Jamie. We see in more use of the leniency programme?

00:18:54 Jamie Dunne, Senior Associate

Yes, it's the way that the CMA starts most of its investigations and the way that a lot of a punishments derive from.

00:18:30 David Lee, Host

And those cosy little relationships, not quite so cosy afterwards, I'm guessing?

00:18:54 Jamie Dunne, Senior Associate

Yes, well…

00:18:56 Charles Livingstone, Partner

And if I could just come in on the point about the policy? Obviously when a policy is introduced, if there's a breach after that policy has been introduced, then the policy hasn't worked.

But in fact, uncovering past breaches is a that's an example of the policy working as intended, because for all the reasons Jamie just outlined, you actually want to know if you have previously been involved in a breach so that you can be the person to make the leniency application and not end up in a situation where you're on the receiving end of that.

00:19:27 David Lee, Host

Thank thanks, Charles. And maybe an obvious question in this context, but what is the role of legal advisors in this process?

00:19:36 Charles Livingstone, Partner

I mean, it may be an obvious question but there are some aspects of our involvement that won't necessarily be obvious to anybody that's not been through the process.

So the most obvious part is that we can advise on whether a breach is actually taking place. So if a client comes to us with a concern, we can look at that and give them a view on whether competition is a potential problem for them, and if that's not clear, we can carry out an internal investigation where that's necessary to establish the existence of a breach or to gather enough evidence to support making a leniency application. The involvement of external legal advisers can be quite important in this scenario, because in-house legal advisors communications with them are subject to privilege under UK laws of privilege. But they're not privileged under a number of other jurisdictions, including under EU law. So if anything was ever investigated by the European Commission and they could somehow get access to communications between an in-house lawyer and the company, there couldn't be a claim of privilege in that advice.

So engaging external lawyers as soon as possible, and indeed not creating a paper trail and phoning either an in-house lawyer or an external lawyer in the first instance is generally a good idea so as not to create a potentially unprivileged paper trail before everybody kind of has a grip on what's going on.

But if our advice is that there is likely to be a breach, then we can advise on the costs and benefits of making a leniency application. As Jamie outlined, that can't protect against reputational damage or private litigation, but it does protect against all the regulatory matters, fines, prosecutions, etc.

But even in relation to litigation and reputation, leniency will still give some informal protection because it's the parties that get fined, who tend to make the headlines.

If the decision is to make a leniency application, then we can make that approach to the CMAon a no names basis. So protecting the client up to the point where it knows whether leniency is actually going to be available. What we do is we tell the CMA the market in which the anti-competitive conduct is taking place. The CMA then goes away and checks if they're already investigating something in that market and if they aren't, they'll come back to say that full immunity is available, and at that point we have to disclose the clients name and the conduct for which we're seeking leniency.

If the CMA comes back and says full immunity isn't available, then that essentially means they are in fact already investigating something in the sector and probably the thing that we were getting in touch with him about in that case. The client can decide whether to just sit tight or to still volunteer information, because even if you're not the first in the door, you won't be able to get full immunity, but you might still get up to 50% reduction in fines if you offer useful information.

And then if and when leniency application is made, we'll manage that process with the CMA answering their questions, providing further information to help the investigation and really just acting as a kind of a buffer between the client and the CMA.

00:22:57 David Lee, Host

OK. Thanks very much, Charles and obviously no business wants to get into this position where they're having to make these very challenging decisions about whether to actually volunteer the information. So what about prevention? How can businesses actually reduce the risk of breaches of competition?

00:23:14 Charles Livingstone, Partner

At the risk of sounding like a broken record between Jamie and me, the best way really is to implement a compliance programme, so to take proactive steps and generally the minimum that you would include in that is a competition policy and staff training with particularly intensive training for staff in key risk areas, which tends to be places like sales people who are customer facing, people who know what prices are being charged, although it can also arise in unexpected areas like human resources.

The CMA's recently Issued guidance on breaching competition law in relation to personnel issues, recruitment issues, that sort of thing. But the policies and training etcetera, they only really work if they're backed up by clear and regular communications from the senior management of a business emphasising the importance of compliance. And certainly that's the CMA's message that compliance starts at the top.

So the point of such a programme is to educate staff on the types of conduct that would be a breach and provide guidance and mitigation measures to hopefully avoid certainly deliberate breaches, but even inadvertently engaging in that conduct. Because without training companies face the what we sometimes call the "ignorance risk" - so staff may breach competition law simply because they're not aware either of what competition law is or that what they're doing is a breach of competition law. So you can get staff engaging in prohibited behaviour without realising it and things like exchanging commercially sensitive information can fall into that category.

Generally we would produce a policy that will give details of those issues and also set out what to do, who to contact, et cetera. If an employee is concerned that there's been a potential breach and the other value of the policy is that it puts staff on notice of the consequences for them of being involved in a competition law breach, or of not reporting relevant information. That then means that the company has disciplinary options available to it, if somebody does engage in a breach. That doesn't mean that you're necessarily going to sack somebody straight away because you might need their cooperation for the purposes of a leniency application. But having that disciplinary option kind of then gives you the leverage to ensure their cooperation.

But the sorts of mitigation measures that would be covered in in a compliance policy and in training they are things like don't enter into an agreement with competitors about price, about sharing customers or territories, about limiting production or about any bids, don't exchange or discuss commercially sensitive information. So basically anything from which a competitor you get information about your own market strategy or vice versa.

Get legal advice before entering into agreements with competitors unless they're ordinary arm's length standard term agreements, so joint ventures, R&D agreements, things that would be called partnerships or collaborations and also getting legal advice on things like distribution agreements if they're going to include things like price controls or exclusivity terms.

And then the overarching message for all of it, whether it's part of a policy or just free standing to clients, if you think you might breach competition law, get legal advice as soon as possible. Because for all the reasons we've discussed around leniency, time is very much of the essence.

00:26:46 David Lee, Host

Thanks very much, Charles, and thank you to Jamie too for your tremendous insights today in what is quite a complex area of the law.

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