Beware the legal pitfalls of bid-rigging

There are many lessons the waste sector can learn from the OFT's investigation of the construction industry cartel. Rosemary Choueka outlines the key points

In September 2009, the Office of Fair Trading (OFT) found that 103 companies in the construction sector had been involved in illegal bid-rigging. Fines totalling £129.2m were imposed, making this the largest cartel ever investigated in the UK and the largest penalty imposed to date.

The investigation focused on bid-rigging activities, including the industry-wide practice of cover pricing – this involves bidders contacting a competitor to ask for a price to quote for a particular job, which was designed to ensure that those bidders would not win the job, but the competitor giving the price would.

The cartel and the OFT’s investigation of it have implications well beyond the world of construction. The pitfalls of co-ordinating business activities with competitors, even when this is common industry practice, cannot be ignored, and the importance of complying with competition law should be appreciated by every business in the UK.

Key lessons

One of the most significant facts was that cover pricing was endemic in the industry and had been for years. It was so common, and felt to be such a vital part of the process, that textbooks advised construction companies to engage in cover pricing. Many of the companies did not consider that it would be illegal.

None of these facts prevented the OFT from concluding that cover pricing constituted illegal bid rigging, which is a hard core breach of the competition rules. So it is clear that industry practice is no defence in the event of anti-competitive behaviour.

Many of the business involved in the cartel were small local firms, bidding for local projects. The fact that the OFT pursued them vigorously shows that ignorance of competition law is no defence, and size is no barrier to being investigated.

Parallels in the waste sector

The waste sector shares a number of features with the construction sector that suggest that waste management businesses should be particularly concerned to take heed of the construction cartel and its outcomes.

Like the construction industry, the waste sector is characterised by a few major national players, and a large number of regional and smaller players. Many of these businesses will never have had the need for sophisticated legal advice and are likely to be unaware of the requirements of competition law.

Businesses in both sectors must comply with a large amount of industry-specific regulation, leaving little time to consider compliance with more general but more specialist rules such as the competition legislation. Waste firms win a large proportion of their work through tender processes, particularly when supplying to the public sector). The potential for illegal bid-rigging activities is increased in such sectors.

In addition, the waste sector is quite a close-knit community. Typically, attendance at trade association meetings and events can be cause for concern in competition terms, as such occasions bring together large numbers of competitors in a forum where they are encouraged to talk about their business activities. It is a small step from participating in such discussions legally to illegal exchanges of competitively sensitive information, such as pricing data. The pitfalls seem even greater when set against the penalties for getting it wrong.

Businesses involved in anti-competitive conduct can not only be fined up to 10% of worldwide turnover, but will also find that any anti-competitive agreement may be invalid and unenforceable. Individuals involved in cartel activity may be jailed for up to five years if criminal action is taken against them.

Directors may be disqualified from acting as such for up to 15 years. Finally – and perhaps most commercially significant – the reputational damage that is caused to a company implicated in a cartel may hamper its ability to win business for a long time after the illicit activity is discovered.

Manage the risk

Competition law exposure is just one of a number of risks that any business needs to manage. Identify the sorts of competition law risks that your business faces, and assess how serious they are and consider putting in place relevant compliance training and procedures to deal with these issues.

Avoid discussing sensitive business information with competitors, in no matter what type of situation. Review your approach to competition law compliance on a regular basis, and seek specialist advice where necessary.

Rosemary Choueka is a partner and head of EU, competition & regulation at Lawrence Graham

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