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Focus: UK's first contested criminal cartel prosecution collapses

19 May 2010

In brief: Recently, the first contested cartel case brought by the United Kingdom's competition regulator against British Airways executives collapsed, following the recovery of previously undisclosed materials held by the leniency applicant, Virgin Atlantic Airlines. The executives facing criminal cartel charges were acquitted in a major setback for the regulator, and Virgin's immunity from penalties as the whistleblower is now under review. In Australia, there have been no criminal cartel prosecutions since cartel conduct was criminalised in July last year, but the UK experience demonstrates some of the potential pitfalls for immunity applicants and prosecuting authorities. Partner Wendy Peter (view CV), Senior Associate Verity Quinn and Lawyer Jane Rennie report.  

How does it affect you?

  • The obligation on an immunity applicant to provide continuous and complete cooperation involves a high level of diligence in locating documents.
  • The immunity applicant's disclosure obligation is not frozen in time. If new forensic processes become available that make the recovery of missing or corrupted files possible, immunity applicants may be under an obligation to review past production to ensure full disclosure.
  • Failure to meet this obligation may result in revocation of immunity, exposing the immunity applicant (including its executives) to prosecution and criminal sanctions.
  • We can expect the Australian Competition & Consumer Commission (the ACCC) to learn from the embarrassing collapse of the UK regulator's case and take a much more active role in ensuring it has obtained all relevant documents from immunity applicants.

The collapse of the Office of Fair Trading's case

The UK's Office of Fair Trading (the OFT) was alerted to an alleged arrangement between Virgin and British Airways (BA) to fix the level of fuel surcharges between 2004 and 2006 when Virgin approached the OFT to admit its involvement. Virgin and its executives were granted corporate and individual immunity in exchange for full cooperation with the OFT. Virgin struck a similar deal with prosecutors in the United States. The OFT then pursued BA and its executives. Following settlement of civil proceedings with BA, the OFT commenced criminal proceedings against four BA executives, all of whom pleaded not guilty. These were the first contested criminal cartel proceedings commenced in the UK.

The discovery process

The events that precipitated the OFT's decision to withdraw charges stemmed from the collection of documents from Virgin's computer system following its approach to the OFT. At the time of the initial forensic review of emails, a group of emails dating from 2005 was found to be corrupted and could not be retrieved. The OFT says that inquiries made of Virgin's lawyers during its investigation did not suggest the corrupted files were likely to be relevant, and no indication was given that they formed a substantial body of material. After the commencement of the trial against the BA executives, however, almost 70,000 emails were recovered following work by lawyers defending the executives. These included emails from a former Virgin employee who was to give evidence against the executives, which suggested that Virgin had decided to raise fuel surcharges before any contact with BA. Following the production of these emails, the OFT advised the court that it was withdrawing the proceedings, as it was inappropriate to continue in the circumstances.

What happens to Virgin and BA now?

In the wake of the withdrawal of proceedings due to the late production of documents, the OFT is reviewing whether Virgin met its disclosure and cooperation obligations as an immunity applicant. For its part, Virgin maintains that it did not withhold evidence from the regulator but it can be expected that the OFT will be understandably sceptical about this claim. Ultimately, the OFT's review might result in the revocation of Virgin's immunity from proceedings for cartel conduct. It can be expected that the US Department of Justice will also be examining the extent of disclosure by Virgin and its immunity from criminal proceedings in the US. Meanwhile, BA is considering a challenge to the fines of more than £121 million it had agreed to pay in the civil proceedings brought against it by the OFT.

The OFT's response

The OFT has acknowledged responsibility for its part in the 'oversight', although it maintains it acted properly in bringing the prosecutions. Interestingly, the production of the additional documents was the result of the defence lawyers pushing Virgin for production of the missing files, not the OFT. The OFT appears to have assumed that Virgin had provided full production of relevant materials and did not revisit the issue of the corrupted files, instead relying upon indications from Virgin's lawyers that the files were not relevant or substantial. For future cases, it is likely that the OFT will be more proactive, involved and demanding of immunity applicants to ensure it has obtained all relevant materials from an immunity applicant before commencing proceedings, and will certainty be leaving less to the judgment of the immunity applicant.

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Lessons for the ACCC and Australian businesses

The obligations of immunity applicants in Australia are similar to those in the UK. Under the ACCC's immunity policy, an applicant is required to provide 'full disclosure and cooperation' to the ACCC. This obligation is expressed in ACCC guidelines as relevantly including 'providing to the ACCC promptly and at the applicant's own expense all evidence and information in their possession or available to them, wherever located, regarding the cartel conduct for the duration of the investigation and any subsequent court proceedings' (emphasis added). Where an applicant fails to meet its obligation of full disclosure and cooperation, the ACCC can revoke immunity.

The ACCC's approach to document production by immunity applicants hasn't yet been tested in the same way as the OFT's. We can expect the ACCC will now be looking to ensure that they adopt procedures for document production that are demonstrably thorough and regularly reviewed, so that when the time comes for Australia's first criminal prosecution, the Commonwealth DPP will not be in the embarrassing situation the OFT is now facing. The ACCC is likely to take an increasingly active role in ensuring it has extracted all relevant documents from immunity applicants.

Counsel for the defence in the BA proceedings criticised Virgin's rush to leniency, suggesting an application had been made before Virgin had properly determined that there was in fact a cartel. However, most companies faced with the discovery of pricing discussions between staff and a competitor will have to make a very quick decision about whether to seek immunity. In Australia, the common course is to obtain a marker, which holds the potential applicant's place in the queue for immunity (usually for around 28 days), but allows some time to gather together information about the conduct. The BA case is unlikely to change the 'race' for immunity in Australia, as applicants will continue to need to act quickly to be the first to contact the ACCC and then use the 28-day period to gather more information and make more detailed assessments of the conduct.

The collapse of the case throws into question the OFT's decision to grant immunity to Virgin and to commence proceedings against BA without having all relevant materials before it. It also calls into question the commencement of a prosecution when the immunity applicant has not admitted dishonesty, the fault element required in criminal cartel offences in the UK. This case should highlight for the ACCC the dangers of instituting proceedings before full disclosure has been confirmed and all elements of the offences are made out. The challenges that criminal prosecutions raise are well understood by the ACCC. As Graeme Samuel has commented, 'Investigations into cartels are some of the most complex and difficult investigations that the ACCC undertakes. Proving a criminal cartel offence will take that difficulty to a new level.' The BA case is likely to make the ACCC even more aware of the high standards of preparation and evidence required, although in Australia the ACCC has the benefit of a review of the evidence by the Commonwealth DPP, who is the prosecuting authority in criminal cartel proceedings.

For immunity applicants in Australia, the BA case reinforces the ongoing nature of the obligation to provide full disclosure and cooperation. That obligation does not come to an end once initial production has been made nor when proceedings are issued and, if new forensic processes become available that enable the recovery of deleted or corrupted files, applicants may be expected to review past production to ensure full disclosure is maintained, or risk losing their immunity.

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