- OFT Sets Tougher Fines for Infringements of Competition Law Including Cartels and Abuses of Dominance
- September 19, 2012 | Authors: Davina Garrod; Ted Henneberry; Miguel Vaz
- Law Firm: Bingham McCutchen (London) LLP - London Office
On Sept. 10, 2012, the Office of Fair Trading (“OFT”) published a revised guidance (the “Guidance”)1 on how it will set penalties in cases of breach of competition law. The Guidance follows a public consultation procedure which took place in October 2011. The OFT decided to update its prior 2004 guidance2 in light of recent judgments of the Competition Appeal Tribunal and the Court of Appeal where a number of fines imposed by the OFT were revised and the transparency of the fine-setting procedure criticized. In exercising its discretion to enforce penalties, the OFT states that it intends to “impose proportional financial penalties which are severe for the most serious infringements of competition law” such as agreements that fix prices or share markets, cartel activities and abuses of dominant position. It is expected that breaches of competition law will now see higher fines, on average, as the OFT will have the power to set the starting point to calculate the final amount of a fine three times higher than before.
I. Maximum Starting Point for Penalty Calculations Increase to 30 Per Cent of Relevant Turnover, From 10 Per Cent
The Guidance increases the maximum starting point for penalty calculations from 10 per cent to 30 per cent of relevant turnover. This change gives the OFT the ability to (i) impose penalties that reflect more accurately the seriousness of the infringements and (ii) ensure that the threat of penalties will deter both the infringing undertakings and other undertakings from engaging in anti-competitive activities in the future. There are two aspects of deterrence: deterring undertakings which are subject to the decision from engaging in future anti-competitive activity (specific deterrence) and deterring undertakings at large from breaching competition law (general deterrence).
Setting forth an improved multi-step approach to setting fines (see further details in section 2 below), the OFT’s Guidance proposes a number of key changes to the 2004 guidance, including:
Clarifications on the definition of aggravating and mitigating factors (including the circumstances in which a party's compliance efforts may be treated as a mitigating factor);
More transparent assessment of the proportionality of the fine (which now takes place after assessment of mitigating and aggravating circumstances);
Clarification of some details of the way in which the starting point for penalties is set (including the use of turnover from the year preceding the end of the infringement); and
Application of reductions in fines under the OFT's leniency programme for settlement agreements and for financial hardship.
II. New Six Step Approach to Calculating Fines
(i) In the first step, the OFT will assess the seriousness of the infringement. The more serious the infringement is the higher the starting point of the fine will be (up to 30 per cent of an undertaking’s relevant turnover3 in the affected market in the year preceding the end of the infringement).4 The OFT generally considers price-fixing, market-sharing and other abuses of dominance as particularly serious breaches of competition law.
When assessing the seriousness of the infringement, the OFT will look at a number of relevant factors such as the nature of the product, the market shares of the parties, the market structure, entry conditions, and the impact of the infringement on consumers and competitors.
(ii) In the second step, the OFT will calculate the duration of the infringement. This is a relevant calculation since, for infringements that last for more than one year, penalties may be multiplied by no more than the number of years of the infringement.
(iii) During the third step, the OFT will analyse aggravating and mitigating factors which will then lead to an upward (aggravating) or downward (mitigating) adjustment in the amount of the fines. Aggravating factors comprise, inter alia, the leading role of an undertaking in a cartel, recidivism and intent. The OFT considers that companies that cooperate with the investigation, terminate the infringement as soon as the OFT intervenes and take adequate steps to ensure compliance with competition laws should benefit from a reduction in their fine (mitigating factors).
(iv) Step four sees the OFT exercising its discretion to adjust the fine for specific deterrence and proportionality, taking into account the financial situation of the infringer and the conditions of the affected market. For example, if an undertaking has most of its turnover outside the affected market and for that reason the fine to be applied does not have enough deterrent effect, the OFT might decide to increase the level of the fine.
(v) In step five, the OFT adjusts the fine in order not to exceed the threshold allowed by law (10 per cent of the worldwide turnover of the undertaking in its last business year). At the same time, the OFT takes into account any previous fines imposed by the European Commission or other European regulators punishing the same infringement in order to avoid double jeopardy.
(vi) Finally, when applicable, the OFT applies a final reduction to the amount of the fine for undertakings that used the OFT leniency program or applied for settlement.
III. Higher Fines Expected Whilst Maximum Fining Threshold Remains
The Guidance brings the OFT in line with the European Commission as well as other European competition authorities’ approach to fines.
Despite the increase in the maximum starting point for penalty calculations to 30 per cent of the undertaking’s relevant turnover, the OFT will still not be allowed to fine undertakings above the maximum threshold of 10 per cent of the company’s worldwide turnover. Even though the maximum threshold of fines was rarely achieved in past years, on average, it is expected that breaches of competition law will now see higher fines as the OFT will have the power to set the starting point to calculate the final amount of a fine three times higher than before.
In spite of the much welcomed Guidance, fines likely will remain unpredictable in cases where the companies decide to cooperate with the OFT since in the early stages of an investigation, unlike the European Commission, it does not provide sufficient clarity for early resolution and settlements.
1 OFT's guidance as to the appropriate amount of a penalty - OFT423, September 2012.
2 OFT's guidance as to the appropriate amount of a penalty - OFT 423a, December 2004.
3 The relevant turnover is the turnover of the undertaking in the relevant product market and relevant geographic market affected by the infringement in the undertaking's last business year.
4 Please note that the final maximum amount of any fine imposed remains capped by statute at 10 per cent of the undertaking’s worldwide turnover in the previous business year - only the starting point of the fine can be higher if the OFT so decides - see below for further details.