The Competition Appeal Tribunal described the fines as ’excessive’ but that doesn’t mean cover pricing is suddenly okay

Last Friday the Competition Appeal Tribunal gave its first judgment in respect of six of the 25 appeals lodged against the fines imposed by the Office of Fair Trading (OFT) following its six year investigation focusing on “cover pricing” within the construction industry.

While confirming the unlawfulness of the practice, tribunal considered the OFT’s fines to be excessive and disproportionate, and reduced the total sum imposed upon the six appellants from about £42m to about £4.4m.

The nature of the clear criticism of the OFT’s fining policy and procedure suggests that similar reductions may be expected in the 19 remaining appeals, although it remains to be seen whether the OFT will seek to appeal the tribunal’s judgment to the Court of Appeal.

Common grounds of appeal

The majority of appeals argued that the OFT erred in:

1. overstating the seriousness of “simple” cover pricing, ie where no compensation payments were made;

2. applying an incorrect year of turnover for the purposes of calculating fines;

3. unfairly applying a uniform minimum deterrence threshold (“MDT”) to the fines.

The tribunal held that “simple” cover pricing was materially distinct from bid rigging as ordinarily understood and, while clearly illegal, was less serious. Therefore, cover pricing should be fined with a starting point of 3.5% of relevant turnover, rather than the 5% starting point adopted by the OFT, so as to distinguish it from hard-core cartel practices.

In addition, the tribunal held that the OFT erred in calculating relevant turnover by reference to the last business year prior to its 2009 decision, rather than the year that in which the infringement ceased. In a number of appeals, the time period from actual infringement to the OFT’s decision was eight or nine years, meaning the fine imposed was by reference to turnover “wholly remote” to the infringement.

With regard to the minimun deterrence threshold, the tribunal held that it was incorrect to apply uniformly an MDT of 0.75% of each party’s total global turnover achieved in the business year prior to the OFT’s decision. The tribunal considered such uniform application to be mechanistic, given that the OFT had failed to assess of individual factors relevant to each party.
In view of these apparent errors, the CAT held that the fines imposed to be excessive and disproportionate.

Vindication for the construction industry?

Not quite. Cover pricing remains a serious breach of competition law, and the tribuanl has confirmed that fines were the appropriate sanction.

Further, although the tribunal reduced the level of fines imposed by the OFT, the tribunal’s judgment provides a clear message that cover pricing is now commonly understood to be unlawful, so future infringements are likely to receive harsher penalties and criminal prosecution of individuals.

The judgment highlights the importance of ongoing competition law compliance within the construction sector, so as to ensure that there is no inadvertent “crossing of the line” between legitimate commercial practices, and those which risk infringing the competition rules.

Bernardine Adkins, a partner at Wragge & Co, represented Thomas Vale, one of the successful appellants, in front of the OFT and the Competition Appeal Tribunal.