09 Jul 2013

(by Andreas Stephan) The 2013 drops the requirement of dishonesty and excludes cartel agreements made openly. At a late stage three additional defences were introduced (s.47 ERRA). The defendant can show they did not intend that the nature of the arrangements be hidden from either their customers or the competition authority. It will also be a defence to show that a defendant took reasonable steps to disclose the nature of the agreement to lawyers, in order to get advice, prior to its making or implementation. Writing on this blog a couple of months ago, my colleague Peter Whelan expressed concern that this defence could pose a . Here I reflect on how this defence could pan out.

The Problem

The central problem with the defence is that there is no obligation on the individual to follow the legal advice. What is missing from s.47 is an extra sentence along the lines of “…and must have taken reasonable steps to comply with / act on that advice”. In addition, lawyers cannot approach the competition authority where they suspect a cartel has been formed despite the seeking of legal advice. In England and Wales, communications made in order to get advice for the purposes of carrying out fraud (defined widely) do not enjoy legal privilege, but communications advising how to avoid committing a crime or warning that proposed actions could attract prosecution do. Lawyers are only under an obligation to disclose information relating to money laundering and terrorist financing.

Why Did The Defence Come About?

All three defences were introduced to appease opposition from the business community to the proposed reforms to the cartel offence. It is notable that only the OFT and a handful of academics supported the removal of dishonesty. Most business groups and practitioners were against the reform. While the Confederation of British Industry did eventually accept the idea of dropping dishonesty, they warned that a failure to provide other protection to prospective defendants “risk[ed] criminalising a wide range of standard commercial transactions” and that the primary defence of having engaged in the conduct openly was “considered unworkable by business and likely to create a chilling effect on normal business activity”. We know from debates in Parliament that these were the sorts of concerns that led to the introduction of the defence. In responding to an (unsuccessful) move by Lord Whitty to have the defences reduced to mitigating factors, Lord Viscount Younger of Leckie stated:

“[the defences] build upon the present approach of the Bill of blessing arrangements that have been published or notified”.

In justifying the new defences, he went on to distinguish between “legitimate behaviour” (that could rely on the defences) and behaviour that is “clandestine to a high degree”, adding “that is where the bar is set”. It is questionable whether ‘clandestine’ reflects an attempt to align criminal cartel activity with deception, or whether it refers to some level of secrecy. The latter would make the distinction somewhat messy, because it would suggest that only cartel conduct carried out in secret should attract criminal prosecution, even though a secrecy element was considered and rejected in the Government consultation. Regardless of this, it is important to note that all three defences were apparently driven by a common justification.

Given the opposition to reform from the business community and the overwhelming majority of legal practitioners, the OFT and the Government should receive some credit for pressing ahead with the removal of dishonesty. Unfortunately, the defence concerning legal advice appears to have been one of three defences thrown in at a late stage to curtail stronger opposition from the CBI and other business groups during the closing legislative process.

Is the defence a fatal flaw?

Not necessarily. On the face of it, simply consulting a lawyer beforehand may be enough for a cartelist to protect himself from criminal prosecution. However, relying on this defence in practice may be more difficult and we do not yet know how the courts will interpret the defence.

First of all, it is important to remember that while these defences may provide protection from criminal prosecution, they do not prevent a civil infringement decision by the competition authority or the imposition of corporate fines. They also do not provide any protection from private actions for damages. This makes it unlikely that firms will start to cartelise openly or inform their customers of anti-competitive practices.

So what of rogue employees operating outside the institutions of the firm? There is clearly a danger of abusing the defence here in order to avoid criminal prosecution. However, these individuals will find it difficult to seek advice from their employer’s lawyers without arousing suspicion, as they have a responsibility to the firm first and foremost. The determined rogue employees will therefore need to (i) be familiar with the definition of the cartel offence and its defences in advance of the infringement and (ii) seek advice from an independent legal representative.

Secondly, the defence may not end up operating in this way. The UK’s new Competition and Markets Authority (CMA) is yet to publish guidance on how the new cartel offence will be prosecuted. While this cannot be used to change the law, the way in which it deals with the defences could influence how they operate in practice. The crucial question is how the courts will interpret the defence and its purpose. It is of course for Parliament to make law, not the courts. However, there are many examples in criminal law where the courts have interpreted the law (and Parliament’s intentions) in such a way as to avoid an undesirable outcome. The defence of seeking legal advice is unprecedented in criminal law. Imagine if a fraudster or a thief could escape criminal conviction simply because they consulted a lawyer before committing their crime. Recognising such a sweeping defence would risk making a mockery of the criminal justice system.

It could in fact be argued that taking reasonable steps to follow the legal advice was Parliament’s intention. Seeking legal advice and then ignoring it would clearly place the conduct in the “clandestine category”, described by Viscount Younger of Leckie, and could hardly be described as “legitimate behaviour”. Indeed ignoring legal advice is arguably more clandestine than forming a cartel under the suspicion that it is illegal. Legal privilege is such that the conduct has not been made openly, published or notified to customers or the CMA. This defence would therefore be inconsistent with the nature of the new cartel offence and the purpose of the three exclusions. It would also put the defence at odds with the concerns raised by the CBI, as ignoring legal advice cannot be said to reflect “standard commercial transactions” or “normal business activity”. Unless the defendant takes reasonable steps to act on the legal advice, that legal advice is wrong, or one of the other defences is satisfied, then the defence of seeking legal advice should surely fail.

The courts could also decide that the defence will do exactly what it says on the tin, requiring further legislative change before the UK finally has a fair shot at an effective criminal cartel enforcement regime.

R v Cox and Railton (1884) 14 QBD 153; R v Gibbins [2004] EWCA Crim 311, CA.

Bullivant v Att-Gen of Victoria [1901] AC 196

Proceeds of Crime Act 2002, ss. 337-338

Memorandum submitted by CBI on Enterprise and Regulatory Reform Bill to the Public Bill Committee. June 2012

See comments by Viscount Younger of Leckie: Hansard HL vol 743 col 1057 (26 February 2013)

Hansard HL vol 743 col 1058 (26 February 2013)