But what is an ‘early resolution agreement’? Essentially, it is a negotiated confidential settlement in which the level of the fine is agreed, and a significant reduction is given in return for an admission of liability and a pledge to co-operate with the OFT. This enables the OFT to cut short the investigation and avoid lengthy and expensive appeals.
This is a quantum leap in policy for the OFT. Settlement agreements have only been used by them twice prior to the dairies case, on both occasions in very different circumstances. In the first, the independent schools case, the OFT accepted a blanket negotiated agreement applicable to all the 50 independent schools investigated for price-fixing, with no admission of liability. The OFT commented at the time on the exceptional nature of the schools case and the fact that the settlement proposed, offered an innovative and proportionate outcome to the case.
The perceived success of this case “encouraged [the OFT] to consider whether such an approach might usefully be used in some other cases”, according to Philip Collins, chairman of the OFT, and led to the second use of early settlement, in the BA/Virgin fuel surcharges investigation. In this case, BA has apparently benefited from a reduction in penalty for “additional cooperation enabling the case to be resolved more speedily and effectively than would otherwise have been possible”.
So the dairies settlement, individually negotiated with multiple commercial parties, represents a further shift forward in policy, and is a sign of the growing confidence of the OFT in using innovative, flexible solutions in competition enforcement. Further evidence of this was seen in the ‘amnesty’ approach in the construction cartels investigations, using a tariff of reductions in the fines in return for confessions.
It is a mark of the OFT’s progress in recent years that they appear to be prepared to reach these novel solutions in something of a policy vacuum. There are no publicly available guidelines, policy statements or official notices to set out exactly what form a settlement agreement should take, what reduction in the fine should be applied and whether it should be available in every case. This ability to be confident and flexible has led to the variety of settlements we have seen to date.
Benefits for the OFT
So what’s in it for the OFT? The main - and most obvious - benefit to the OFT is getting a quick result. In the dairies case, the OFT has been able to resolve its investigation against the majority of the companies involved just over two months after issuing its statement of objections. The BA/Virgin case has been settled and the penalty imposed without even having to draft the statement of objections. And for schools, a settlement was reached in May 2006 and by early June, Philip Collins was able to say that “the resources which would have been expended on the case had it not settled have already been allocated to other hardcore cases”.
Contrast this with the replica football shirts case, which began with dawn raids in 2001 and only ended in the House of Lords six years later in 2007. Could this case have been cut short by early settlement agreements?
In addition, the OFT’s performance target, set by the Treasury, is to deliver measurable benefits to consumers of at least five times their annual budget. Early admission of liability and settlement of cases must go a long way to showing that this target is being met.
The challenges faced
Set against these obvious resource benefits are some policy reservations. Are the gains in operational flexibility outweighed by loss of transparency or risk of challenges for unequal treatment or judicial review on the basis that the case has not been properly heard?
Will the OFT always make early resolution available? The OFT’s director of competition enforcement commented in July 2006: “I do accept that there are some cases (possibly a relatively small subset however) which cannot be settled because they are so grave.” Are there cases more grave than secret price fixing between competitors such as that in the BA/Virgin or schools cases? Where will the OFT draw the line? Will early resolution be extended to other infringements such as abuse of dominance? While one can understand the OFT’s reluctance to tie up this flexible tool with specific guidelines, companies and their advisers may be left puzzled as to how the concept fits with the fining guidelines and the policy on leniency.
The OFT’s approach to early resolution agreements appears to be to apply the fining guidelines first, taking into account reductions for mitigating factors, and then to apply a negotiated and agreed percentage reduction for co-operation in the form of early settlement. This element remains confidential to the parties, and would not necessarily be calculated in the same way in any future case.
As for leniency, the effect of the early settlement procedure on the leniency regime is far from certain. Will the chance of an early settlement discount discourage leniency applications? Possibly - but a 100% reduction in the fine available for the first in line for leniency would presumably still be preferable to an unknown percentage reduction for early settlement. The difficult cases will be those where the evidence is sketchy and leniency is a hard call. Concerns about the impact on customers may mean the smaller cartelist rejects leniency - but why worry if comparable discounts would be available for early settlement?
Everyone’s a winner
Despite these concerns, early settlement looks set to stay and appropriate use by the OFT of this tactic should enhance its reputation for effective enforcement. It will also be potentially an attractive option for the parties in a cartel investigation. It is important to note that not all the companies in the dairy investigation accepted the offer and settled. Notably, Tesco fights on. However, those that did accept and settle have avoided long, drawn-out proceedings and crystallised their liabilities early.
The value of being able to move on cannot be underestimated even if a business believes it has a 50% chance of reducing the fine to zero on appeal, it would still face a lengthy period where shareholders and the marketplace would only see the possibility of a fine of up to 10% of turnover hanging over the company. Crucially, the share prices of the settling parties in the dairies case responded generally well to the announcement of early resolution, and that may be enough to sway even the doubters.
Ros Kellaway and Andrew Chandler are partners and Nicola Holmes an associate in the competition team at Eversheds.