Cartels and criminality

Sir Jeremy Lever QC

Monckton Chambers, Gray’s Inn

and

John Pike

7 New Square, Lincoln’s Inn

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Cartel agreements, conspiracy to defraud and the ‘statutory offence’ Cartels per se have not been regarded by the

common law as criminal

…but can there be criminality involving cartels and the common law offence of conspiracy to defraud?

…does the introduction of the statutory offence impinge on the common law?

…what are the comparisons with and implications for competition law?

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

The common law and cartel agreements Cases in support of the traditional view

Hearn v Griffith (1815) 2 Chitty 407

Jones v North (1875)LR 19 Eq.426

The Mogul Steamship Co v McGregor [1892] AC 25 (HL)

AG Commonwealth v Adelaide SS Co [1913]AC 781

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Jones v North (1875)LR 19 Eq.426

“There is nothing illegal in the owners of commodities agreeing that they will sell as between themselves at a certain price….”

Vice-Chancellor Bacon

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

The Mogul Steamship [1892] AC 25 (H.L.) An agreement by shipowners in a “liner

conference” to fix freight rates and exclude competition (e.g. by subsidizing ‘fighting ships’ to operate in tandem with the competitor’s liner sailings at ruinous rates) was legal and the cartelists could not be sued for damages in tort.

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Adelaide SS Co [1913] AC 781(P.C.) The cartel agreements were not illegal under

Australian Statute because the mine-owners honestly believed that what they were doing was in the interests of the wider society and economy…

..and there was no “detriment to the public”

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Public policy in respect of cartels

19th Century laissez faire - the problem of the trade cycle

Cartels are good-trade depressions and IDAC

Keynes mitigates the trade cycle

Cartels and trade protection are bad. 1940s start of the competition enactments

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Current policy on cartels “…in the United States it has long been recognised that cartels

are simply a sophisticated form of theft…” Gordon Brown 18.6.2001

Cartels are generally “unlawful”

There is nowadays a presumption that cartels are wrong and dishonest if hidden, because the customer reasonably assumes that he is acquiring a product or service either for business or personal purposes, at a price that has been determined in a non-cartellised market

The perception of what is honest in respect of cartel activity changed in the post-War years from what it had previously been

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Cases in support of common law criminality in cartel cases

R v De Berenger (1814) M & S 67

R v Lewis and others (1869) Cox CLC 404

Scott v Brown , Doering, Mcnab & Co [1892] 2 QB 724 CA

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

R v De Berenger (1814) M & S 67

Conspiracy to manipulate Govt. stock prices by spreading a false story, via a bogus army officer who landed in Dover, that Napoleon had been killed by cossacks.

Dishonest manipulation of prices is illegal

The conspiracy damaged or risked damage to the rights or interests of third parties.

It was not necessary to establish that anyone in particular had been deceived or had suffered or been threatened with financial loss.

The dishonest intention sufficed.

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Scott v Brown [1892] 2 QB 724 (C.A.)

“if persons, for their own purposes of speculation, create an artificial price by transactions which are not real, but are made at a nominal premium merely for the purpose of inducing the public to take shares, they are guilty of as gross a fraud as has ever been committed, and of a fraud which can be brought home to them in a criminal court.”

Wright J at first instance

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Jones v North (1875) LR 19 Eq.426

This is a good example of conspiracy to defraud since the parties’ use of cover prices was clearly intended to mislead the Birmingham Corporation into a belief that it was receiving competitive bids

A perverse finding of fact

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

R v Lewis (1869) Cox CLC 404

“actions by fraudulent persons - who were disposed....to endeavour to play hide and seek with the law-…[ should ] lay it to heart that, so long as they only exaggerated, they were safe: but let them take care they do not slip into ‘specie misrepresentation’, for so soon as they did so the criminal law would punish them for their conduct.”

Willes J

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

R v Wai Yu-Tsang [1992] 1 AC 269 (P.C.) The greater the efforts of the parties to a

cartel to keep it secret, the more readily a jury might infer that the cartelists had an actual and dishonest appreciation that loss or risk of possible loss by counterparties would, or was likely to follow from the cartelists’ conduct.

It would not be a defence to establish that the defendants’ motives were actually benign.

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

The statutory offence-EA 2002 “ an individual is guilty of the statutory offence if he

dishonestly agrees with one or more persons to make or implement, or cause to be implemented, arrangements of the following kind relating to a least two undertakings (A and B)..”

Arrangement covered include only ‘hard core’ offences like price-fixing, limiting supply, or production, dividing markets or bid-rigging (“core” anti-competitive agreements)

Note the ambiguity of the word ‘dishonestly’.

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Background to the New Law “The new criminal offence will send out a strong message to the

perpetrators, their colleagues in business, the general public and the courts”

Patricia Hewitt, second reading of the Enterprise Act 2002

“ The second principle is to establish a strong deterrent for anti-competitive behaviour. The Competition Act introduced fines for firms which engage in anti-competitive behaviour, but did not provide a deterrent for those individuals who engage in hard core….”

Lord Sainsbury, Under-SS for DTI, Lords second reading

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Comparison of statute to common law The statutory offence is specific

Under common law, individuals and companies can be prosecuted

Reckless conduct is excluded from statute but not the common law

Under common law third parties’ interests must at least have been put at risk

Under statute prosecution can be initiated only by the Director of the SFO or with the consent of the OFT

The common law offence carries up to ten years imprisonment whereas the cartel offence carries up to 5 years

The discretion of the SFO under common law is based on the Code of Conduct for Crown Prosecutors and is unspecific; the EA 2002 provides for statutory immunity

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Concurrent processes in common law and/or statute Even if the indictment under conspiracy to defraud is

the same as the statute, that is no bar

Eastern Archipelago Co v The Queen (1853) 2 EL & BL 856

“…yet where an offence was antecedently punishable by common law proceeding as by indictment, a statute prescribes a particular remedy in case of disobedience, that such a particular remedy is cumulative, and proceedings may be had either at common law or under statute”

Cited with approval in R v Barnett [1951] 2 KB 425 at p.427

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Should prosecutors use statute or common law? Prosecutors and courts are familiar with ‘conspiracy

to defraud’

Conspiracy to defraud: 27% of all offences charged by SFO

Concepts of dishonesty easy to put to a jury

The offence covers a wide range of dishonest activity

…and is flexible enough to deal with crimes which may otherwise be difficult to codify and explain to a jury

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Advantages of statute Legal certainty

Part 6 of the Enterprise Act is tailor-made and specific to the actual crime

S190(4) enables the OFT to give formal ‘no action letters’ (outside Scotland) to individuals who give information - unique in criminal law

The use of the common law would undermine the effectiveness of this leniency provision, except insofar as it is mirrored by the code for Crown Prosecutor’s ‘public interest’ test.

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Retail Price Maintenance RPM is not amongst the objectionable arrangements described

by s188 of the Enterprise Act.

If they are dishonest, why should not vertical agreements be criminal if their object or effect is to raise prices higher than they would be otherwise?

The behaviour of participants in RPM arrangements may satisfy the required elements for ‘conspiracy to defraud’ so long as the elements of dishonesty, harm and intention are met.

However there is a danger that the common law might be used in connection with competition law infringements which raise complex economic issues and in relation to which there is already well established law. Eg luxury goods restrictive distribution systems

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Relationship between common law and competition law EC competition law provides for very large fines of

Euro 1-20m for serious infringements and Euro 20m+ for very serious infringements (mirrored by OFT fining power)

Such fines are much higher than those that would be likely to be imposed by a UK criminal court

Economic studies in the USA have shown that faced with “ the very likely benefits arising from engaging in a cartel, the expected fine is unlikely to act as a meaningful deterrent” (The White Paper preceding the Enterprise Act)

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

UK competition law Part 6 of the Enterprise Act shares the US view of the

potential criminality of cartels

Cartels are a sophisticated form of theft

Fines as deterrents are insufficiently effective

Fines are in any case unfair because“…the real participants will have been the few executives involved. Very large fines would damage innocent employees, shareholders and creditors who have done nothing to harm consumers or break the law”- the White Paper preceding the Enterprise Act

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

The contradictions EC competition law is civil and emphasises deterrence by the

possibility of very high non-criminal fines. There is no criminal sanction.

UK criminal courts have not to date imposed fines that would be applicable by the European Community or OFT.

Latest UK Government policy sees fines as a weak and in some ways unfair deterrent and the Enterprise Act therefore provides for the prosecution of individuals who have been involved in specifically defined “bad cases”.

In the area of criminal conduct, the common law may be contrasted with Government policy as realised in statute because it envisages the prosecution of individuals and corporations, for a very wide variety of economically injurious conduct where there has been dishonesty.

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Conclusions If the relevant conduct occurred before the coming into force of

Part 6 of the EA 2002, then the individuals can be prosecuted, if at all, only for the common law offence of conspiracy to defraud and not under statute.

If the conduct in question occurred subsequently, the prosecution has the option of prosecuting under statute and/or the common law.

Factors to be taken into consideration may include the fit of the facts to the specific statutory provisions and ease of presentation to a jury.

While competition law deals adequately with companies, it may be felt that a criminal prosecution under the common law would help the prosecution and allow for fines to reflect the fairness concerns addressed in the White Paper in respect of fines.

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Dishonesty Dishonesty is the element common to the common

law offence and the statutory offence

Will a jury be entitled to convict simply on the basis that individuals or companies have acted dishonestly by ostensibly competing while knowingly participating in covert schemes to drive up prices

..and have taken advantage of the assumption of third parties that they were engaged in normal and honest competition with each other?

The “mock auction” case: R v Lewis and others (1869) Cox CLC 404

Sir Jeremy Lever QC, Monckton Chambers, Gray’s InnJohn Pike, 7 New Square, Lincoln’s Inn

Issues for Corporations Public policy towards cartels has changed

To more active enforcement of the “sophisticated theft” concept Towards the American model

The common law offence of conspiracy to defraud which captures corporations is available to prosecutors

Prosecutors have good reasons to choose to use the common law

Senior executives are personally exposed to up to 10 years in prison if personally involved in cartel agreements

The need for internal compliance on cartels: The corporation is vicariously exposed to criminal charges through the criminal activities of its employees

The dangers from ‘whistleblowers’ as the law on cartels becomes known and frightened executives seek immunity

Cartels and criminality

Sir Jeremy Lever QC

Monckton Chambers, Gray’s Inn

John Pike

7 New Square, Lincoln’s Inn