City law in practice… Cartel-busting

With Manchester United and the Football Association being investigated for price-fixing, Husnara Begum gives the lowdown on cartels and looks at the OFT’s increased powers under the new Enterprise Act


Manchester United Football Club (MUFC), the Football Association (FA) and some big-name sports manufacturers and retailers are expected to converge on Wembley Arena this month after the Office of Fair Trading (OFT) agreed to hold a joint oral hearing as part of its two-year investigation into the illegal price-fixing of England and MUFC replica football shirts.

The big showdown will bring together the management of the 10 companies being investigated, their legal advisers (including magic circle firm Freshfields Bruckhaus Deringer for the FA and national firm DLA, which is advising several parties) and witnesses, hence the need for a venue the size of Wembley. The hearing was due to start on 3 March, just as Lawyer 2B went to press.

Dawn raids on Umbro and JJB Sports.

It is understood that the ongoing investigation began in summer 2001, when the OFT raided Umbro’s headquarters in Cheshire and searched JJB Sports’ base in Wigan after alle-
gations of price-fixing, contrary to Chapter I of the Competition Act 1998.

The competition watchdog’s in-quiry focuses on allegations that Umbro, which manufactures replica kits for a number of football clubs, deliberately inflated the price of England and MUFC football shirts by preventing retailers from selling the shirts below the recommended retail price of ú39.99, and threatened to restrict deliveries to stores offering discounts.

Rule 14 Notices

After almost a year of collecting evidence, last May the OFT issued a Rule 14 Notice to the 11 companies it accused of entering into anticompetitive agreements in breach of the Competition Act.

Rule 14 of the Competition Act 1998 (Director’s Rules) Order 2000 requires the OFT to provide a written notice to each person who it considers is engaged in a conduct which has led to an infringement. The notice warned the 11 companies that the OFT proposed to make a decision that they had been illegally fixing the price of Umbro replica football shirts.

Companies face hefty fines of up to 10 per cent of their UK turnover going back three years. But under the tough new regime, there will also be the threat of jail

The companies that were sent a notice included: All Sports, Blacks Leisure Group, the FA, Florence Clothiers (Scotland), JJB Sports, John David Sports, MUFC, Sportsetail and Umbro Holdings. Debenhams was also sent a notice, but after assessing submissions the OFT dropped its action against the department store.

After the notice was issued, the companies were given between six and eight weeks to make submissions to the OFT before it made its final decision. It is understood that the FA, which is accused of price-fixing over the sale of England shirts on the internet, applied to the OFT for leniency (typically a reduction in the fine). In exchange the FA, advised by Freshfields, agreed to cooperate with the OFT during its inquiry.

Due to the size and complexity of the investigation, a second Rule 14 Notice was issued last November to the remaining 10 companies, in which the OFT set out fresh evidence to back accusations that they were illegally fixing the price of replica football shirts manufactured and supplied by Umbro.

The companies were then given another opportunity to make further oral and written representations to the OFT before the joint hearing in Wembley Arena.

If found guilty, the companies face hefty fines of up to 10 per cent of their UK turnover going back three years. But under the tough new regime, introduced by the Enterprise Act 2002, there will also be the threat of jail sentences for individuals guilty of anticompetitive behaviour.

Criminalisation of cartels

The competition provisions of the Enterprise Act are due to come into force during spring/summer 2003 and are largely complementary to the Competition Act, which will remain in force with some minor amendments. They will bring about a number of radical changes to the competition regime that currently exists in the UK, including the criminalisation of so-called ‘hardcore’ cartels.

Jargon-buster
Price-fixing

Businesses involved in price-fixing agree not to compete on price and instead to charge customers the same price for goods and/or services.

Market sharing

Businesses involved in market sharing agree not to operate in each other’s markets, so essentially each business has a monopoly within a particular geographic region or sector.

Bid-rigging

Businesses involved in bid-rigging agree to disclose details of their bids during a tender process and agree the winner beforehand.

Output restrictions/selling quotas

Businesses deliberately restrict output or lower selling quotas in order to artificially inflate prices.

The Enterprise Act will bring UK competition law closer to that of the US regime, which already carries criminal sanctions and gives authorities powers to jail individuals (see the Sotheby’s and Christie’s case, for example).

A cartel is a group of businesses that engages in collusive activity in order to eliminate or reduce competition. Instead of competing with each other, members of a cartel might agree to deliberately charge higher prices in order to boost their turnover, or to restrict supplies in order to artificially inflate prices.

Part 6 of the Enterprise Act imposes criminal sanctions against individuals who dishonestly take part in hardcore cartels, such as price-fixing, market sharing, bid-rigging and the imposition of output restrictions or selling quotas.
Directors whose companies are found to be operating hardcore cartels will be held personally liable under the act and could face a prison sentence of up to five years and an unlimited fine.

Additionally, their companies will continue to be subject to the civil regime, which allows the OFT to impose fines.

In addition to the criminal sanctions, it will be possible for company executives to be disqualified from holding a directorship for up to 15 years. The court may issue a Competition Disqualification Order against a director whose company has breached competition law, and because it considers that the person in question’s conduct as a director makes them unfit to manage a company.

Big brother may be watching

The Enterprise Act will also give sweeping powers of investigation to the OFT. These include the right to make unannounced dawn raids on the homes of company directors and the power to seize original documents, computer files, bank statements and financial records. The OFT is authorised to gather this information with a notice issued to it under powers similar to Section 2 of the Criminal Justice Act 1987. If directors fail to comply with the notice, then that in itself is a criminal offence.

Following the raid, the parties will be required to submit evidence at a compulsory hearing.

Additionally, the Regulation of Investigatory Powers Act 2000 gives the OFT new surveillance powers, allowing it to follow directors and to snoop on their email and telephone records.

Investigations into hardcore cartels will generally be led by the OFT, but in the case of very serious cases, the Serious Fraud Office (SFO) will take a more prominent role. Paula Riedel, a managing associate at magic circle firm Linklaters, says: “Unlike the OFT, which carries out dawn raids after 9am, the SFO will arrive at 6.30am and get people out of bed.”

The big carrot: immunity to whistle-blowers

In a move to encourage whistle-blowers to disclose details of anticompetitive behaviour to the competition regulators, the OFT will be allowed to issue ‘no action’ letters. These letters will give the whistle-blower complete immunity from prosecution if the OFT and SFO are satisfied that the informant has not played a leading role in any illegal activity, and if they believe that they could successfully prosecute with their evidence.

To gain immunity, the whistle-blower will first have to admit to participating in a criminal act and give a full account of all relevant information. They will have to continue to cooperate with the OFT and SFO, and only participate further in the cartel activity if directed by them to do so.

The new whistle-blowing rules are similar to those introduced by the EU last year. Under the new EU rules, the first company to confess to price-fixing will receive total immunity from fines, provided that the information supplied is strong enough to allow the competition directorate to undertake a dawn raid on the other cartel members. Anyone else that subsequently comes forward and provides ‘added value’ information will also be eligible for significant leniency, although not for full immunity.

Companies face hefty fines of up to 10 per cent of their UK turnover going back three years. But under the tough new regime, there will also be the threat of jail

Jargon-buster

Price-fixing

Businesses involved in price-fixing agree not to compete on price and instead to charge customers the same price for goods and/or services.

Market sharing

Businesses involved in market sharing agree not to operate in each other’s markets, so essentially each business has a monopoly within a particular geographic region or sector.

Bid-rigging

Businesses involved in bid-rigging agree to disclose details of their bids during a tender process and agree the winner beforehand.

Output restrictions/selling quotas

Businesses deliberately restrict output or lower selling quotas in order to artificially inflate prices.

Price-fixing examples
Argos and Littlewoods: vertical – price-fixing

Last month the OFT fined Argos and Littlewoods a record ú22.65m for fixing the price of toys and games with Hasbro between 1999 and May 2001 in breach of Chapter I of the Competition Act.

Argos was fined ú17.28m because of its high turnover, while Littlewoods was fined ú5.37m. Hasbro was granted full leniency, and its potential penalty of ú15.59m was reduced to zero because it provided crucial evidence that initiated the investigation and cooperated fully with the OFT.

However, in November 2002 the toymaker was fined ú4.95m for entering into price-fixing agreements with 10 distributors. The fine had been reduced from ú9m with leniency. Hasbro was granted only partial leniency in that case because it initiated and imposed the agreements on the distributors.

Christie’s and Sotheby’s: horizontal – a cartel

Last October the European Commission (EC) fined Sotheby’s ú13.6m for illegally fixing fees with Christie’s between 1993 and 2000.

The move followed a decision in the US to jail Sotheby’s main shareholder and former chairman Alfred Taubman for a year. Taubman was also fined $7.5m (ú4.7m). London-based Christie’s escaped a fine in Europe after helping the EC with its investigation. Christie’s was also granted concessions in the US for cooperating with the regulators.