Reassessing Penalty Framework for Anti-Competitive 'Cover Pricing': Kier Group plc & Others v. Office of Fair Trading [2011] CAT 3

Introduction

The case of Kier Group plc (2) Kier Regional Ltd v. Office of Fair Trading ([2011] CAT 3) represents a seminal moment in the enforcement of competition law within the United Kingdom's construction industry. This judgment, delivered by the United Kingdom Competition Appeals Tribunal on March 11, 2011, addresses appeals from multiple construction companies fined by the Office of Fair Trading (OFT) for engaging in "cover pricing" — an anti-competitive practice.

The background of the case lies in the extensive investigation conducted by the OFT over five and a half years, which uncovered widespread instances of bid rigging in the construction sector. The primary issue revolves around the methodology employed by the OFT in calculating penalties, particularly the use of the Minimum Deterrence Threshold (MDT), and whether these penalties were proportionate, fair, and reflective of the infringements' nature and impact.

Summary of the Judgment

In the Decision, the OFT imposed total penalties of approximately £129.2 million on 103 undertakings for infringements of the Competition Act 1998, primarily involving "simple" cover pricing. The Tribunal received appeals from 25 companies, with the majority contesting the penalties imposed. The core of the appeal questioned the OFT's penalty calculation, specifically the Step 1 starting points and the application of the MDT at Step 3, which often resulted in disproportionately high fines.

The Tribunal, after thorough examination, found significant flaws in the OFT's approach. It criticized the rigid application of the MDT mechanism, which was applied without adequate consideration of individual circumstances and relied solely on total worldwide turnover, leading to excessive and unfair penalties. The Tribunal proposed adjustments to the penalties, advocating for a lower Step 1 starting point for "simple" cover pricing and rejecting the mechanistic use of the MDT.

Ultimately, the Tribunal varied the penalties, reducing them substantially to reflect a more proportionate and just approach, thus setting a new precedent for how anti-competitive practices should be penalized in the construction industry.

Analysis

Precedents Cited

The Judgment referenced several key precedents that influenced the Tribunal's decision:

Napp Pharmaceutical Holdings v OFT: Established that price-fixing and bid-rigging are serious infringements often committed intentionally, setting a foundation for assessing the seriousness of anti-competitive conduct.
Case C-397/03 P Archer Daniels Midland Co v Commission: Highlighted the importance of considering turnover that reflects an undertaking's economic situation during the infringement period.
Musique Diffusion Francaise v Commission: Emphasized a holistic approach in assessing the gravity of an infringement, considering factors like turnover in the relevant market and the undertaking's overall economic power.
HIH Casualty and General Insurance Ltd v Chase Manhattan Bank: Limited applicability as it dealt with contractual relationships and misrepresentations unrelated to competition penalties.

These precedents collectively underscored the necessity for penalties to be proportionate, considering both the nature of the infringement and the economic status of the infringing entity.

Legal Reasoning

The Tribunal delved into the legal framework governing the imposition of penalties under the Competition Act 1998, focusing on subsections 36 and 38, which empower the OFT to set penalties and provide guidelines for determining their appropriateness.

A critical examination revealed that the OFT's Penalty Guidance, particularly the Steps 1 to 5, was intended to ensure penalties were reflective of the infringement's seriousness and served as effective deterrents. However, the OFT's rigid application of the MDT at Step 3, which amplified penalties based solely on worldwide turnover, disregarded the individual circumstances of each infringer and the actual impact of their conduct.

The Tribunal concluded that:

The Step 1 starting point for "simple" cover pricing was excessively high at 5%, recommending a reduction to 3.5% to better align with the infringement's nature.
The MDT mechanism was applied mechanistically, leading to disproportionate penalties that did not account for specific company circumstances or the actual harm caused.
The narrow definition of relevant markets by the OFT skewed turnover assessments, further exacerbating the unfairness of penalties.

Consequently, the Tribunal advocated for a more nuanced and case-by-case approach in penalty assessments, ensuring that penalties are just, proportionate, and serve their deterrent purpose without being unduly punitive.

Impact

The implications of this Judgment are profound for both regulatory bodies and the construction industry:

Regulatory Guidance: The Tribunal's critique of the MDT mechanism and the Step 1 starting point necessitates a reevaluation and potential reform of the OFT's Penalty Guidance. Regulatory bodies may need to incorporate more flexibility and discretion in applying penalties.
Proportional Penalties: There is now a clearer mandate to ensure penalties are proportionate, reflecting both the infringement's severity and the infringer's economic capacity, thereby fostering fairness in enforcement.
Industry Practices: Companies within the construction sector and beyond will likely reassess their bidding and pricing strategies to avoid anti-competitive practices, knowing that penalties will be calculated with greater scrutiny and fairness.
Legal Precedent: This case sets a judicial precedent that may influence future competition law cases, emphasizing the need for balanced and individualized penalty assessments.

Ultimately, this Judgment fosters a more equitable competitive environment, aligning penalties with both legal principles and practical business considerations.

Complex Concepts Simplified

Understanding the intricacies of competition law and penalty calculations can be challenging. Here are some key concepts from the Judgment explained in simpler terms:

Cover Pricing: This is a tactic where one company submits a deliberately high bid for a contract so it can be invited to bid again in the future, giving it an unfair advantage without genuinely competing for the contract.
Minimum Deterrence Threshold (MDT): A mechanism used by the OFT to ensure penalties are large enough to deter companies from engaging in anti-competitive practices. It involves adjusting fines based on factors like total worldwide turnover.
Step 1 Starting Point: The initial percentage of turnover used to calculate the basic penalty before any adjustments are made for factors like duration or specific deterrence.
Proportionality: The principle that penalties should fit the severity of the wrongdoing and the financial capacity of the infringer, ensuring that punishments are fair and just.
Totality Principle: This entails assessing the overall penalty in light of all infringements to avoid excessive fines and ensure fairness across different cases.

Conclusion

The Tribunal's judgment in Kier Group plc (2) Kier Regional Ltd v. Office of Fair Trading underscores a pivotal shift towards more judicious and equitable penalty assessments in the realm of competition law enforcement. By challenging the OFT's reliance on rigid penalty frameworks and advocating for a more individualized approach, the Judgment promotes fairness and proportionality, ensuring that penalties serve their intended deterrent purpose without overreaching.

For regulators, this represents a call to refine penalty guidelines, introducing greater flexibility and discretion to account for the diverse circumstances of different companies and industries. For the construction sector and other industries alike, it signals an expectation of ethical compliance and fair competition, fostering a healthier market environment.

Ultimately, this judgment not only rectifies the immediate injustices faced by the appellants but also sets a cornerstone for future competition law cases, emphasizing the judiciary's role in balancing enforcement rigor with fairness and proportionality.

Reassessing Penalty Framework for Anti-Competitive 'Cover Pricing': Kier Group plc & Others v OFT [2011] CAT 3