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We may not have heard the last of the OFT's cover pricing fiasco

Costs orders in excess of £1.5 million in favour of about half of the 25 successful appellants were made against the OFT by the Competition Appeal Tribunal over the past week and there are more costs applications yet to be determined. 

The OFT argued that it shouldn’t have been liable as a matter of public policy for any (or only nominal) costs even if an appellant had been successful, absent unreasonable conduct or bad faith by the OFT.  Quite rightly, the Tribunal rejected these arguments and said that the starting point in appeals should be that the successful party recovers its reasonable costs.

Is this an (expensive) end of the road for the OFT in the cover pricing saga?

This was the OFT’s largest ever investigation in terms of the number of parties investigated. The OFT imposed fines totalling £129.2 million and it held the investigation out as one of the great successes of its competition law enforcement in the UK. 

However, 25 of these companies appealed and the Tribunal dramatically reduced the level of penalties in most cases by 70-90%.  

The Tribunal found that the OFT’s methodology for fixing the penalties was flawed resulting in excessive and disproportionate penalties. Nevertheless, the OFT considers that the judgments don’t undermine the important deterrence effect achieved by its original decision in the construction sector more generally and that the Tribunal made clear that the practice of cover pricing is clearly illegal.

It points to independent evaluations that the OFT’s action has already increased awareness in the industry, contributing to behavioural change and effective deterrence.

But with the benefit of hindsight, could the OFT have approached this whole case in a different way?  It was clear that this was a widespread industry practice and there were other ways of tackling the issue. The OFT has other tools, such as market studies, to review widespreadmarket practices. 

The OFT could also have been more open to the invitations to work more closely with the industry trade associations to raise awareness and bring the practice to an end.  Instead, it devoted huge resources to a formal Competition Act investigation resulting in a flawed outcome and expensive litigation.

The OFT use of a fining method known as a Minimum Deterrence Threshold to increase penalties on some parties for deterrence purposes was one of the key contributors to the excessive and disproportionate level of the fines.

Its decision to employ this method in the construction and construction recruitment cases was arbitrary, especially given that they did not use it in other cartel investigations such as in the tobacco and dairy sectors. 

As a consequence of the appeals, the OFT has this week launched a consultation on a fundamental review of its policy on to how it will set penalties in the future.

It considers that strong enforcement action backed up with significant penalties play an important role in deterring companies from failing to comply with competition law, and the starting point for calculating future penalties are likely to be significantly higher (up to 30% of relevant turnover).

The OFT is unlikely to be overly concerned by the costs orders – they are a minor sum compared to the much larger amounts from the penalties already pocketed by the OFT and HM Treasury from companies that didn’t appeal.  

Given the errors made by the OFT, the OFT’s failure to reassess those penalties in accordance with the principles established by the Tribunal is likely to be challenged - it has been reported that some of those companies are considering their options.  The cover pricing saga may not therefore be quite over yet.

Pinsent Masons partner Alan Davis

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