British Supermarket Sues Former Employees and Directors for Antitrust Damages

(by Andreas Stephan) British supermarket Morrisons are suing eleven former employees (among them directors) for damages in connection with a cartel fine imposed by the Office of Fair Trading on Safeway group, acquired by Morrisons in 2004. They allege that the individuals breached their fiduciary duties by involving their employer in an illegal anticompetitive agreement. One of the individuals – David Webster, former chairman of Safeway – received almost £2m when Morrisons and Safeway merged. He is now the chairman of InterContinental Hotels. As the FT have put it, “now the company is looking for a payday of its own” as it tries to offset any damages recovered, against the fines Safeway agreed to pay the OFT.

The case concerns an Office of Fair Trading investigation into alleged price fixing between supermarkets and dairy firms in 2002-3. In December 2007, the OFT entered into an ‘early resolution agreement’ (a form of direct settlement) with Safeway. They accepted liability in principle for an infringement of competition law and agreed to pay a fine of £16 million, with a discount for cooperating and agreeing to enter into the settlement.

Morrisons is said to be attempting to recover around £10 million from the former employees, who were unsuccessful last month in applying to the High Court for the action to be dismissed.  They argued it went against the principle of ex turpi causa non oritur actio (from a dishonourable cause an action does not arise). This principle essentially allows courts to refuse a claim arising out of the plaintiff’s own wrongdoing. Fortunately, the High court had the good sense to recognise the nature of price fixing agreements. They found that the principle did not apply in this case because the decision to form a cartel was not made by the board of directors or other institution within the firm. Instead, the firm was vicariously liable for the behaviour of their employees under the Competition Act 1998. An attempt to argue that allowing the action would go against the intentions of Parliament (because the Competition Act addresses only undertakings, not individuals) was also rejected. The former employees even had the cheek to argue that undertakings will not be deterred from breaching the Competition Act if they are allowed to sue their employees. The court thankfully recognised that this argument was entirely illogical.

On the face of it, the present action for damages seems very promising. It is the first action of its kind (possibly in the world) and is a significant step towards ensuring individual cartelists bear some of the risk of their illegal behaviour, rather than leaving it all to fall upon the employer. It may also warm the cockles of those concerned about the UK’s struggling criminal cartel offence.

However, such actions might actually undermine effective cartel enforcement, which relies heavily on the success of leniency programmes. These provide the offer of immunity to the first firm to self-report, thus sparking a race to the competition authority.  As Michael Peel (Legal Correspondent for the FT) points out, the prospect of being sued by their employer will discourage individuals from blowing the whistle. For example, they may have no way of knowing if immunity is still available and so coming forward could still result in a hefty fine on their employer. 

Ultimately, such actions may prove to be extremely rare. This case is unusual because Morrisons (who did not own Safeway at the time) is still contesting its own involvement in the dairies case. They even managed to successfully sue the OFT for libel, when the authority became a little too gung-ho in its public statements. Where the individuals continue to work for the company, these actions will be unlikely because of the potential effect on share prices.

6 Responses to British Supermarket Sues Former Employees and Directors for Antitrust Damages

  1. David Gibbs says:

    It would appear to be a basic s.172/s.174 breach on the directors’ part. There can be quite a fine line between commercial misjudgements and negligence but breaching competition rules is likely to fall firmly in the latter’s category. Questions perhaps ought to be raised as to director disqualification and issues relating to white collar crime as well, especially since one of the main culprits is now chairman at InterContinental.

  2. Bruce Lyons says:

    An interesting twist to this case is that it raises the prospect of a powerful change to economic incentives in cartel formation. If a firm found guilty of a cartel offence can sue its employees, this passes a potentially massive risk onto the culprits. For example, the ten highest cartel fines by firm imposed by the EC, even correcting for appeals, range from €250m to €896m. Of course, there is no chance that such sums could be recovered from individuals, but even a tiny fraction would be sufficient to deter any sane potential cartelist because the personal gain from the easy life or profit-related bonus due to a successful cartel is unlikely to be on the same scale as the fine.
    One further observation. These top-of-the-range cartel fines are the sort of sums that have become sadly familiar as losses incurred by reckless bankers and traders in the last couple of years. Of course, the culprits in banking are not usually breaking the law. However, this comparison illustrates the excesses that result from distorted incentives for individuals who grab large slices of the upside and none of the downside risk of their actions. They just act recklessly and it is the wider economy that suffers. Admittedly, there are subtleties in identifying optimal risk in financial decisions, but there is no such subtlety in wanting to disincentivise cartelists. The Safeway/Morrison case, if successful, could be a hugely effective anti-cartel precedent.

  3. Andreas Stephan says:

    On 4 March 2010, the High Court allowed the former Safeway executives to appeal the judgement discussed above. The questions of law will be analysed again, this time by the Court of Appeal.

  4. […] However, the OFT is absolutely right to impose a significant (if not unprecedented) fine on an apparently serious breach of competition law, even in the face of the current economic downturn. The timing of the infringement in the early months of the credit cruch demonstrates the heightened danger of cartel practices during difficult trading times. Businessmen who would not consider price fixing to be an acceptable strategy during a boom, may look on it very differently where there is a real danger of unemployment or insolvency. It would be very easy for the OFT to succumb to pressure for ‘soft’ enforcement during an economic downturn. By instead pressing on with hard enforcement against cartel practices, the regulator sends out a strong message about competition which could ultimately benefit the economy and speed up the recovery.   There is also the intriguing possibility that the current shareholders could sue the offending executives. […]

  5. […] the risk of getting caught (in terms of corporate fines). Director Disqualification Orders, and the possibility of being sued by their employer, provide two possible alternative mechanisms for ensuring individual responsibility, but neither of […]

  6. […] million from the former Safeway employees.  In January, the individuals had been unsuccessful in applying to the High Court for the action to be dismissed. The case would probably have been the first action of its kind in competition law anywhere in the […]

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