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UK competition law compliance: guidance for businesses and directors

Mark Friend, Louise Tolley, Allen & Overy Insight, July 6, 2011.
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The OFT has published a package of materials aimed at helping companies establish a culture of compliance with UK competition law, and considering the specific position of directors and their responsibility to detect and prevent infringements.

Compliance - why bother?

The potential sanctions for breach of competition laws are well known. Companies face large fines - up to 10% of their global group turnover. Well known examples are the cases of Microsoft (fined €497 million for abusing its dominant position by tying Windows Media Player with its Windows Operating System) and BA (fined £121.5 million for fixing the price of fuel surcharges). Companies can also be ordered to change their behaviour or (in the case of a breach of EU antitrust rules) even sell off assets. Reputational damage and the possibility of private damages actions by disgruntled customers or competitors which have suffered loss as a result of the breach must also be factored in. And on top of all this, individual employees (including directors) can face personal sanctions.

The importance of understanding the basics of competition law, and ensuring that companies are complying with the rules, is therefore self-evident. The Office of Fair Trading (OFT) recognises this, and states that it is "keen to help" businesses and directors fulfill their obligations. As part of this pledge, it has published a package of materials aimed at assisting compliance. These are contained in a Compliance Webpage and include a "Quick Guide" aimed at giving the basics of competition law to owners and directors of small businesses, and a film to increase awareness of how to comply. Most interestingly, the OFT has finalised the two sets of guidance on which it consulted late last year:

- "Company Directors and Competition Law"

- "How your business can achieve compliance with competition law"

Directors - great expectations?

An additional responsibility

Directors face risks over and above those of standard employees. In addition to the risk of being found guilty of the "cartel offence" and subjected to a fine and/or a period of up to five years in prison, directors may also face disqualification from acting as such for up to 15 years. The OFT published revised guidance last year on when it is likely to apply to the court for a director disqualification order on competition law grounds. Even if a director did not directly contribute to the breach of the competition rules, he may face a disqualification order if:

- he had reasonable grounds to suspect that the company’s conduct constituted a breach and he took no steps to prevent it; or

- he did not know, but ought to have known, that the conduct amounted to a breach.

This additional sanction is reflective of the role of a director in the management of a company, which gives him particular responsibilities vis-à-vis competition law compliance. The OFT’s guidance aims to explain these responsibilities, and how to discharge them successfully. It is closely linked with the second set of guidelines, and the two should be read in parallel.

A sliding scale of expectation

The guidance explains what the OFT expects of all directors, e.g. to understand the most serious forms of infringement, to be able to recognise risks, and to update and refresh their knowledge on an ongoing basis.

However, the OFT recognises that the role of director may vary both between and within companies. The guidance aims to clarify the level of understanding and type of conduct expected of different types of director:

- Executive directors are generally expected to have a more detailed understanding of the way the company operates on a day-to-day basis. Non-executive directors, on the other hand, are not expected to have such intimate knowledge, but are expected to challenge decisions and actions of the executive directors to ensure a commitment to competition law compliance, and that steps are taken to identify and mitigate risks.

- Executive directors with responsibility for "higher risk" areas of the business are expected to take greater steps to prevent, detect and bring to an end competition law breaches in their areas. For example:

■ A director with responsibility for the team that sets prices should, in the event of an unexpected price rise, check the reasons for the increase.

■ Sales directors are expected to recognise whether there is a high risk of cartel activity due to staff having frequent contact with competitors at trade association meetings.

■ A director with responsibility for commercial contracts should understand the potential competition concerns arising from the types of agreement his company routinely enters into, e.g. exclusive arrangements with long duration, agreements with distributors relating to terms of resale, or joint selling/purchasing agreements.

■ Directors in charge of commercial strategy are expected to be able to identify risks that their company holds a dominant position in a particular market

- More generally, where a director has direct management responsibility, he should be aware of the exposure to competition risk of his staff and ensure appropriate training or measures are put in place to mitigate these risks.

- Directors in smaller companies are likely to have greater knowledge of the day-to-day operations of the company and more likely to be aware of actual or potential competition law breaches. In larger organisations, directors may not be so close to the action, but nevertheless must take steps to ensure appropriate systems are in place to prevent, detect and bring infringements to an end.

- Compliance directors are expected to have a greater knowledge of competition law than their colleagues. However, the OFT emphasises that despite their particular role, it does not expect them to have any greater awareness of specific infringements by the company than any other director. Importantly, the very fact that a company has appointed a compliance director does not absolve the other directors of responsibility for competition law infringements.

This might appear a rather onerous list of expectations and requirements. However, directors can take comfort in a clear statement by the OFT that it is unlikely to apply for a disqualification order against a director who is committed to competition law compliance, and has taken steps to mitigate competition law risks in a manner appropriate to the level of risk in question, which might include taking legal advice before, e.g., entering into the agreement that ultimately resulted in the breach.

This leads naturally on to the second set of OFT guidelines.

Businesses - how to comply

As noted above, the reasons for businesses wishing to comply with competition rules are evident: to avoid potentially severe sanctions. However, engaging in compliance activities can benefit a company even in the event that a breach is found by the UK authorities.

The OFT notes that whilst there are no automatic discounts in the level of fine if a business has established a compliance programme, where "adequate steps" have been taken to ensure compliance with competition law, the fine may be reduced by up to 10%. Following the process summarised below may be sufficient to amount to "adequate steps" for these purposes.

A core commitment to compliance

The OFT recommends a process to assist a company in achieving a "competition law compliance culture". The OFT stresses that this is a "suggested, not mandatory," process, and what will be appropriate will vary from business to business depending on its nature, operations, and size. However, it seems that a minimum set of "reasonably equivalent measures" will need to be adopted in order for a company to improve its chances of benefiting from a fine reduction.

At the heart of the process is a core commitment to compliance - requiring senior management, particularly the board, to demonstrate a clear commitment to competition law compliance. This commitment should filter its way down through all levels of the hierarchy of the organisation. The idea is that the more familiar a workforce is with the notion of competition law and how it may affect them, the more likely that the company will succeed in mitigating the risks of infringement.

The four step process

The OFT advocates a four-step approach to achieving a compliance culture:

1. Risk identification

The company must identify its key competition risks. Depending on the nature of the business and its operations, these could be cartels (including the direct or indirect exchange of commercially sensitive information between competitors, a current competition law "hot topic"), or other potentially anti-competitive agreements such as those granting exclusivity, setting terms at which customers must onsell, or joint selling or purchasing. The company must also consider whether it might hold a dominant position in any particular market and, if so, should consider carefully any conduct which might represent an abuse of this position, such as refusals to supply, tying or bundling products, or non-cost justified rebates or discounts.

2. Risk assessment

The risks identified must then be assessed - the OFT recommends categorising them as low, medium or high. One way of doing this is to look at the degree of staff exposure to competition law risk. High-risk staff could include those with roles in senior management, sales and marketing departments, purchasing and procurement, and those dealing regularly with competitors, attending trade association meetings or new employees who have joined from a competing firm.

3. Risk mitigation

In light of these risks the company should implement training programmes, policies and procedures, or other measures to attempt to import a compliance culture into the organisation. The OFT suggests that training programmes should be tailored to the industry and to the employee’s particular role. Examples of policies or procedures which could be put in place include:

■ Requiring employees to obtain approval before joining trade associations, or attending any trade association events.

■ Clear instructions on what to do if an employee receives what he/she believes to be commercially sensitive information from a competitor.

■ Ensuring lawyers review significant contracts for compliance before they are entered into.

■ Rewarding employees for proactively taking steps to raise competition concerns.

■ Requiring staff, each year, to make a declaration that they have complied with competition law.

4. Review

Stages 1 to 3 above should be reviewed regularly to ensure the risks have not changed (e.g. as a result of an increase in the company’s market power) and the commitment to compliance remains strong. There is no standard review period: it could be annual, or less frequent. It might also be necessary to carry out a review outside the regular review process, e.g. if the company is under investigation by a competition authority, if a new business has been acquired, or if evidence of a potential infringement is uncovered.

So, what now?

It is important to ensure that your business and directors are familiar with the issues set out in the OFT’s guidance documents. The best way to ensure compliance with UK competition law is, as the OFT recommends, to create a culture of compliance and to implement a compliance programme. And even where a potential breach has already been identified, it is not too late. The OFT specifically notes that the 10% reduction in fine might still be available where the company takes steps quickly to implement compliance measures when it first becomes aware of the infringement.

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