15 September 2011

CAC sets new precedent for penalty calculation

Engaging in cartel behaviour such as price fixing or market division can attract massive penalties from the Tribunal. In a recent judgment, the Competition Appeal Court (CAC) set aside two recent penalties imposed by the Tribunal on Southern Pipeline Contractors and Conrite Walls respectively, for their participation in two different cartels. The CAC also substituted the penalties for significantly lesser fines. Substituting its own penalty for those of the Tribunal (rather than referring the matter back to the Tribunal for redetermination) is somewhat unprecedented and betrays a view from the higher court that the Tribunal seriously misdirected itself.

In its decision, the CAC effectively established two important principles. The first is that in coming to a decision on the level of a fine, the Tribunal must take into account a number of factors expressly laid out in the Act. In the cases in question, the Tribunal did not make the necessary enquiries and therefore came to a conclusion that was not justified and failed to take into account mitigating factors on the one hand, and assumed the presence of aggravating factors on the other.

The second principle laid down by the CAC was that the listed factors should be applied to a base-line turnover determined with reference to the turnover derived from sales affected by the cartel conduct - referred to as "affected turnover". This serves to partly resolve the ongoing debate at the Tribunal as to whether it should look to total turnover or only affected turnover when calculating the penalty. However, the CAC also indicated that the percentage that may be applied to this baseline figure could be as much as 30% (following the EU model) and that the figure could be multiplied by the number of years the cartel was in existence.
The CAC was at pains to point out that the statutory reference to 10% of total turnover is relevant only after all the factors listed in the Act have been applied to the affected turnover, to make sure that the eventual figure arrived at does not exceed 10% of total turnover. In referring complaints, the Commission's point of departure to ask for the statutory maximum of 10% of total turnover to be imposed is evidently not based on a proper construction of the test laid out in the Act.

While the use of affected turnover as a point of departure sets a lower base-line for penalty calculation than total turnover, it's now very clear that the penalty may be a percentage of that baseline well in excess of 10%, which in turn may result in higher fines than those in the past where 10% of affected turnover was used as the maximum.

The Commission has apparently lodged an appeal against the CAC decision so it seems it will be some time before the dust settles on this issue.

Nick Altini, Director, Competition

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