The OFT And Leniency

This article was initially published in the June issue of Competition Law Insight.

The implications of the recent guidance for whistleblowers

In December 2008, the OFT published its final guidance document – Leniency and no-action: OFT's guidance note on the handling of applications (OFT803) (the Guidance) – which gives would-be leniency applicants and their advisers comprehensive and often very practical advice. The key objectives of the Guidance are:

• to create predictable, flexible and effective leniency procedures in the UK;
• to align the OFT's leniency policy for corporate immunity from civil fines as much as possible with the OFT's noaction policy for individual immunity from criminal prosecutions; and
• to ensure that the UK's criminal cartel offence does not have a chilling effect on leniency applications to the European Commission.

Overall, the Guidance – which supplements the primary sources of the OFT's leniency and no-action policies set out in the OFT's December 2004 penalty guidance and its April 2003 cartel offence guidance – achieves these objectives. It now offers in final form detailed clarifications and novel procedures to address concerns expressed by businesses and their advisers in the past (such as the short-term, no-names OFT markers in cases where an applicant also wishes to apply for immunity to the European Commission). In marked contrast to the OFT's merger regime, it is particularly welcomed that the OFT has further strengthened its commitment in the Guidance to offer confidential guidance to would-be applicants on "any aspect of the OFT's leniency and no-action programmes" (para 2.1).

The Guidance is the culmination of a three-year review process. The reasons for the delay of the publication of the final notice (following the publication of the draft final guidance in November 2006) may be explained by the fact that the OFT has recently gained some novel criminal prosecution experience under the cartel offence provisions of the Enterprise Act in the Marine Hoses cases. This will have informed its final guidance, in particular on the issue of requiring admissions of dishonesty and the issuing of noaction letters. The OFT is also understood to have tried (albeit unsuccessfully so far) to agree arrangements to obtain better upfront certainty regarding any potential exposure of individuals to criminal prosecution in Scotland.

While the Guidance is useful, it is also long and detailed, and this may explain why it has not been the subject of much commentary so far. This article sets out to do two things. First, it gives a succinct summary of a number of significant practical requirements imposed by the OFT on leniency applicants under the Guidance. Second, it highlights several key developments in the OFT's Guidance that leave important questions unanswered and which are likely to be areas where the OFT's practice may continue to develop as a result.

Practical recommendations for would-be applicants

The OFT's Guidance supplements the principal leniency and no-action policy documents. It contains important practical and procedural advice for leniency applicants, which applicants should follow to protect their ability to make a successful leniency application. A number of key requirements contained in various different sections of the Guidance are set out below in checklist format:

Practical pre-marker requirements

• From the moment a company "is contemplating applying for leniency", ensure that potentially relevant documents are preserved and not tampered with (footnote 55).
• Maintain lists of all individuals who know about the contemplated (and later actual) leniency application and require these people to sign strict confidentiality undertakings (para 8.16).
• Focus on covert or remote reviews of potentially relevant hard copy and electronic documents (para 8.23).
• Wherever practicable, use forensic experts when undertaking electronic document reviews to protect the evidential integrity of any captured electronic data (para 8.25).
• Where individuals inadvertently become aware of the internal review, provide a "cover explanation" (para 8.24).
• Do not interview high-risk individuals at the pre-marker stage. This includes former employees and directors or individuals who have joined the business from the likely target of the OFT's future investigation (para 8.21).
• Where interviews are conducted, witnesses must be interviewed separately and must not discuss their evidence with any other witness (para 8.27). The interviews should be conducted in a "balanced way" – for example, without exposure of the individual to evidence of other witnesses or evidence the individual would not have had access to at the relevant time, as this would risk "contaminating" the individual's own recollections (para 8.27).

• Prepare a "careful note" of all internal investigatory steps taken and retain that note until the conclusion of any proceedings (para 8.26).

Practical post-marker requirements

• Use "best endeavours" (and record these) to secure the full co-operation of relevant individuals (para 8.7).
• Monitor co-operation of employees and directors and report any reasonable suspicions of non-cooperation to the OFT without any delay (para 8.8).
• Consult the OFT before taking any disciplinary action against individuals that may jeopardise their continued cooperation (footnote 52).
• Discuss any required disclosures to banks and/or auditors with the OFT first (para 8.13).

Unresolved critical issues

In its Guidance, the OFT has confirmed its generally flexible and commonsense approach to handling leniency and noaction applications. In many respects, this is in stark contrast to the European Commission's much more form-based and rules-driven approach to leniency matters. However, the Guidance does not resolve all critical issues faced by a would-be applicant and does not offer practical guidance in all respects. This article looks at three particular areas of critical importance to a potential leniency applicant, where genuine uncertainty remains and the OFT's practice is likely to continue to develop in the future: (1) the problems associated with the OFT's requirement to have a genuine intention to confess; (2) the limitations the OFT seeks to impose on a company's pre-marker internal investigations; and (3) the use the OFT says it can make of information submitted by a failed bona fide applicant.

Genuine intention to confess

The final Guidance provides additional information on how the OFT interprets the precondition for leniency of having a "genuine intention to confess". More specifically, the OFT Guidance arguably contains a stricter test in this regard than the previous drafts. It now requires that "there must be an acceptance by the undertaking that, as a matter of fact and law, the available information suggests that it has been engaged in cartel conduct in breach of the Chapter I prohibition and/or article 81 of the EC treaty" (para 3.1; emphasis added).

This goes beyond what the OFT requires in its penalty guidance, which merely asks for the submission of all relevant evidence and does not demand any admission of legal liability. It also goes beyond what the European Commission requires from applicants under its 2006 leniency notice, which only asks for the disclosure of relevant facts and does not demand any admissions of legal liability.

Having said this, the OFT's new wording retains (deliberately, one assumes) a degree of ambiguity. It is clear, for example, that the use of the word "suggests" stops short of a need for an unequivocal declaration that a certain set of facts does indeed amount to cartel conduct in breach of the Chapter I prohibition of the Competition Act 1998. It remains to be seen what this revised requirement will mean in practice for applicants, as leniency applicants will continue to resist making any admissions of legal liability and will wish to restrict their co-operation to providing the OFT with relevant facts.

Limitations on pre-marker internal investigations

The Guidance reconfirms that the OFT views the evidential threshold for gaining a marker as "relatively low", and asks applicants to keep their internal investigation "as limited as it can be at the pre-leniency stage" (para 8.21). This represents a tightening of the OFT's position on this issue.

While it is understandable that the OFT wishes to protect the surprise element of any future dawn raids, for instance, a company may quite legitimately want to explore the extent of its exposure before deciding whether to apply for leniency to the OFT. The company will also wish to establish whether there is a need to make simultaneous parallel leniency applications in other jurisdictions, and the evidential threshold for approaching other authorities for leniency may differ. The European Commission, for example, applies a considerably higher initial evidential threshold than the OFT. (This point is recognised in the Guidance at para 8.19.) Finally, a company would want to consider whether to seek confidential guidance on any substantive issue arising out of its internal investigation before deciding whether to apply for a marker.

For all these reasons, a would-be applicant will need to consider carefully the scope and nature of its pre-marker internal inquiries to ensure that it has a good understanding of its exposure while not jeopardising its ability to obtain OFT immunity. It may wish to consult the OFT on the potential scope of its internal investigations on a confidential and nonames basis at an early stage.

Information from a failed leniency applicant

The Guidance now also contains additional sections on the use the OFT may make of information submitted by a failed bona fide leniency applicant. The November 2006 guidance distinguished between "self-incriminatory information" and "basic factual material". However, this distinction has been far from obvious in practice, as leniency applicants are required to make submissions of fact and not law (subject to the comments made above). Whereas self-incriminatory information could not be used by the OFT against the failed applicant, the OFT reserved its right to use basic factual information against the failed applicant. The new Guidance on this controversial issue has been expanded but important uncertainties remain.

The Guidance continues to distinguish between "selfincriminatory" information (para 8.33) and other information. Other information can fall into two categories. First, there is information which "could have been obtained through public sources" (para 8.34). Second, there is non-public information which is of a "purely factual nature (as distinct from being selfincriminatory)" (para 8.35).

The final Guidance still does not address the issue of where the dividing line is supposed to be between "purely factual" and "self-incriminatory" information. After all, the strongest self-incriminatory information is often "purely factual". Further, the new emphasis on "public" information is unhelpful against the background of the OFT's leniency policy which (in contrast to the Commission's 2006 leniency notice) is not limited to "secret cartels". As a result, applicants are free to report public conduct under the OFT's leniency policy and – subject to the usual rules – are in principle eligible to obtain immunity for such conduct. In such cases, information which is brought to the OFT's attention under the leniency policy could have been obtained through public sources but is also self-incriminatory.

Given the increasing willingness of EU competition authorities – both at Commission and national level – to pursue public or semi-public information exchange cases as alleged cartel cases, any uncertainty concerning the status of potentially public information in the context of a failed bona fide leniency application is worrying for potential applicants. So this is another area where businesses and their advisers will wish to seek specific early comfort from the OFT on a confidential and no-names basis before deciding whether to apply for leniency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.