The Enterprise Act 2002 received Royal Assent last November and will come into force this summer.
Among new provisions dealing with insolvency and the enforcement of consumer legislation, the most controversial reform concerns competition law - in particular the decision to criminalise 'hardcore' cartels. In this Briefing we outline the provisions of the new Act and its likely effect
Offenders go underground
The tough new approach towards cartels - described by the European Union's competition commissioner Mario Monti as 'cancers on the open market' - is partly modelled on the US system where on average 25 people are imprisoned for cartel offences every year. Cartel investigations affect all companies in every sector of the economy. In the past couple of years investigations in the UK and abroad have included businesses as diverse as:
local bus services
no fewer than 17 orthopaedic shoemakers in Denmark.
The new criminal offence will work alongside the civil fines for companies under the Competition Act 1998.
Companies involved in cartels will also remain exposed to investigation and fines from the European Commission and to civil damages claims from disgruntled competitors or customers.
Case study: four ceiling tile companies
In July 1998 the Restrictive Practices Court made orders against ceiling tiles suppliers which between them supplied more than half the ceiling tiles in the UK in respect of price-fixing agreements.
The Court made orders against four companies and accepted undertakings from a fifth not to continue with price fixing agreements or enter into any similar agreements in the future. The case was originally brought to the attention of the Office of Fair Trading by two anonymous individuals who pieced together notes from agreements which had been torn up and thrown away.
How the law might work Mr A and Mr B are old friends. Mr A is the regional sales manager for Company X, which makes widgets. Mr B is the regional sales director for Company Y, which also makes widgets.
Over an informal drink one evening, Mr A and Mr B decide that their lives will be a great deal easier if they simply divide the territory in half, with Mr A selling exclusively to the eastern half and Mr B to the western.
The Office of Fair Trading cannot use a statement which it has obtained using its power to compel a person to answer its questions as evidence against that person, unless the statement is deliberately or recklessly false or misleading.
But suppose the OFT, using this power to compel an answer, asks Mr A: 'Did you enter into a market-fixing agreement with Mr B?' and Mr A says: 'Yes, it's a fair cop.' The OFT cannot use that statement as evidence in prosecuting Mr A.
However, the OFT should then ask Mr B the same question, not neglecting to inform him that Mr A has spilled the beans. Mr B will doubtless inform on Mr A.
There is nothing to prevent both Mr A and Mr B being prosecuted, using Mr A's evidence against Mr B and Mr B's evidence against Mr A.
Prove innocence rather than guilt Although all businesses should be aware of the law, it is possible that two or more individuals come up with a market-sharing arrangement unaware of the fact that they have committed a crime.
They might exchange letters outlining their agreement but the plan is never put into action and the letters are duly consigned to the wastepaper bin.
This raises an interesting issue. Under Article 6(2) of the European Convention on Human Rights (as enshrined in the Human Rights Act 1998), 'everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law'.
Whether or not the accused intended to conceal facts when he destroyed the documents appears to be an essential element of the crime itself - because if he had no such intention, the Act says that he is not guilty. But the Act expressly puts the burden on the accused to prove that he did not have that intention, which seems to fly in the face of the Convention.
Paying the penalty
Anyone who fails to comply with the requirements of Sections 193 and 194 of the Act is guilty of an offence which can lead, on conviction, to a maximum sentence of six months in prison and/or a fine.
Anyone who gives false or misleading information, or recklessly gives information which turns out to be false or misleading, has also committed an offence punishable by up to two years imprisonment and/or an unlimited fine.
A director of a company may be disqualified for up to 15 years if his company breaches competition law and he knew or ought to have known about this breach.
The offence of falsifying, concealing or destroying relevant information is as serious as the actual cartel offence itself.
Hence anyone who falsifies, conceals, destroys or disposes of any documents which he knows or suspects to be relevant to any actual or possible cartel investigation by the Serious Fraud Office or the Office of Fair Trading, is guilty of an offence for which he could receive up to five years in prison and/or an unlimited fine.
Moreover, anyone who has thus falsified, concealed or destroyed documents 'is guilty unless he proves that he had no intention of concealing the facts disclosed by the documents' from the SFO or OFT.
Act gives Office powers of police
The Enterprise Act gives the Office of Fair Trading extensive investigation powers:
The chairman of the OFT now has (along with the chief constables of police forces around the country and the Commissioner of the Metropolitan Police) the power to authorise intrusive surveillance such as phone tapping, filming and bugging. He can only grant such authorisation if it is 'necessary for preventing or detecting' a cartel offence, although it is hard to see why the OFT would want to exercise this power for any other purpose. Additionally, the chairman of the OFT cannot grant authorisation for intrusive surveillance 'except on an application made by an officer of the OFT', which is no doubt intended to reassure us all that civil liberties are safe.
Under Section 193, the OFT can require anyone it is investigating, and anyone it thinks may have relevant information, to answer questions or produce documents.
The person who produces documents is obliged to explain them, and if the documents are not forthcoming the OFT can demand to be told where they are.
Under section 194 the OFT can obtain a warrant to enter premises (using reasonable force) and search for documents, and require anyone to explain the documents or where to find any which appear to be relevant.
The Act introduces a power to disqualify the directors of a company which breaches the competition laws from holding directorships for up to 15 years. In some cases - for example, where a director did not know about the cartel but the court decides that he should have done - this may be far more worrying than the cartel offence.
For further information
The DTI website (www. dti. gov. uk) provides an electronic copy of the Act and explanatory note.
The Office of Fair Trading website (www. oft. gov. uk) provides an overview of the Enterprise Act, a note on 'no action letters' and press notices on case studies.
About the authors
Michael Polling is a senior associate in the projects and construction group at Simmons and Simmons and Nathalie Dreyfuss is a solicitor in the EC competition/regulatory group. They can be contacted by telephone on 020 7628 2020 or by email: email@example.com or nathalie. dreyfuss @simmons-simmons. com