(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.