CA98 decision - market sharing by Arriva plc and FirstGroup plc

Competition Act 1998 Decision of the Director General of Fair Trading *No. CA98/9/2002 Market sharing by Arriva plc and FirstGroup plc. 30 January 2002 (Case CP/1163-00) SUMMARY The Director General of Fair Trading has concluded that Arriva plc and FirstGroup plc have infringed section 2 of the Competition Act 1998 by entering into a market sharing agreement involving bus routes in the Leeds area. This agreement had as its object the prevention, restriction or distortion of competition within the UK. Financial penalties have been imposed with the fine for Arriva plc calculated as £318,175 and for FirstGroup plc as £529,852. However, both companies have benefited from the leniency scheme as they provided the Director General with evidence of the activities of the cartel. As a result, Arriva plc’s fine has been reduced by 36 per cent to £203,632 and that for FirstGroup by 100 per cent to nil. 1 [* Certain information has been excluded from this document in order to comply with the provisions of section 56 of the Competition Act 1998 (confidentiality and disclosure of information). Excisions are denoted by [...]. Where possible, following such reactions, wording has been added and this has been placed in square brackets and is in italics.] Office of Fair Trading 1 I A. 1. THE FACTS The Complaint A complaint, in the form of an anonymous letter, was received by the Office of Fair Trading (‘the Office’) on 21 July 2000. It contained allegations that Arriva Yorkshire2 had entered into agreement with First Leeds3 to swap bus routes. It referred to routes 223 and 224 and routes between Leeds and Holt Park. The letter alleged that further route swapping would take place. B. The Undertakings ARRIVA 2. Arriva plc (‘Arriva’) a UK based company, is the ultimate holding company of a group of companies specialising in bus and coach services in the UK and elsewhere in Europe. It is also present in the rail market. Its subsidiaries include Arriva Yorkshire Limited (‘Arriva Yorkshire’); Arriva Yorkshire North Limited; Arriva Yorkshire South Limited; Arriva Yorkshire West Limited and K Line Travel Limited (‘K Line’) (together, the ‘Yorkshire subsidiaries’) which provide passenger bus services in Leeds and the surrounding area. Arriva had bus depots in Castleford, Dewsbury, Leeds4 and Wakefield that served the Leeds area. The registered address of Arriva and the Yorkshire subsidiaries is Admiral Way, Doxford International Business Park, Sunderland, Tyne and Wear, SR3 3XP. Between four and six members of the Board of Directors of Arriva sit on the boards of the Yorkshire subsidiaries5 and an executive director has direct line management responsibility for one or more of the core businesses of Arriva.6 Mr Stephen Clayton, a member of the Board, is responsible for the UK bus operations of Arriva (one of its core businesses) and is on the boards of the Yorkshire subsidiaries. According to their Annual Reports for the year ended 31 December 1999, the ultimate parent company and controlling party of the Yorkshire subsidiaries is Arriva. 3. 2 3 4 5 6 See paragraph 2 below. See paragraph 5 below. Arriva acquired a lease on the Leeds Depot when it took over K Line in March 1999 – see paragraph 11 below. Information from individual annual reports of the Yorkshire subsidiaries for 1999. Arriva plc Annual Report 1999, pages 20 and 30. Office of Fair Trading 2 4. Total turnover for Arriva was £1,534.3 million (UK turnover £1,355.9 million) in 19997 and the turnovers of the Yorkshire subsidiaries were as follows:Arriva Yorkshire Arriva Yorkshire North Limited Arriva Yorkshire South Limited Arriva Yorkshire West Limited K Line FIRSTGROUP 1999 1999 1999 1999 19998 £19,316,000 £2,155,000 £2,121,000 £12,787,000 £1,284,000 5. FirstGroup plc (‘FirstGroup’) is the ultimate parent company of a UK based passenger transport group specialising in bus and train transportation whose registered address is 395 King Street, Aberdeen, AB24 5RP. It is one of the leading passenger bus and train operators in the UK.9 Two subsidiaries of FirstGroup are Quickstep Travel Limited (‘Quickstep’) and Yorkshire Rider Limited (‘Yorkshire Rider’) which run passenger bus services in Leeds. The registered address of Yorkshire Rider and Quickstep is Kirkstall Road, Leeds, Yorkshire, LS3 1LH, which is also the address of one of FirstGroup’s bus depots in Leeds. There are also bus depots at Henconner Lane, Bramley, and at Cherry Row, Leeds. Mr Robert Duncan is a Director of FirstGroup and both subsidiaries and Mr Ian Davies is a director of Yorkshire Rider. At all material times Yorkshire Rider traded as First Leeds. The principal activity of Quickstep (trading name First Quickstep) was and is the provision of bus operations in West Yorkshire through an agency agreement with Yorkshire Rider.10 Quickstep held operator’s passenger service licences (‘O’ licences) for bus routes in and around Leeds. [… ]The director of the Yorkshire division is Mr Davies.11 The ultimate controlling party of Yorkshire Rider and Quickstep is FirstGroup.12 7 8 9 10 11 12 For year ending 31 December 1999 for all financial data. K Line was taken over on 8 March 1999 and the previous accounts were to 30 April 1999. The above figure is for the 8 months to 31 December 1999. FirstGroup Annual Report to 31 March 1999. Quickstep Travel Limited Annual Report 1999 page 2. Witness statement of Mr Duncan dated 1 November 2000, paragraph 4. Information from financial reports for 1999-2000 of Quickstep and Yorkshire Rider. Office of Fair Trading 3 6. Total turnover for FirstGroup was £1,480.3 million, of which £1,470.4 million was generated in the UK, for the year ending 31 March 1999. Total turnover was £1,817.8 million, of which £1,548.7 million was UK turnover, for the year ending 31 March 2000. The turnovers for the relevant subsidiaries were as follows:Yorkshire Rider Quickstep 1999/2000 1999/2000 £87,417,000 £1,953,000 C. 7. The Investigation Enquiries into the complaint began on 31 July 2000. They led to an investigation under the Competition Act 1998 Act (‘the Act’).13 The Director General of Fair Trading (‘the Director’) applied to the High Court and the Court of Session for warrants to enter premises of the two undertakings in England and Scotland, and exercise powers under section 28 of the Act.14 Warrants were issued on 4 and 6 October 2000. Unannounced visits to the premises15 took place on 10 and 11 October 2000 and copies of documents were taken. On 16 March 2001, a Notice under section 26 of the Act16 was issued to the TAS Partnership Limited (‘TAS’), specialist consultants in public transport, and specified documents and information were received by the Director as required in the Notice. The Director also received documents from the Traffic Commissioner of the North Eastern Traffic Area in Leeds.17 Mr Neale Wallace, the Managing Director of Arriva Yorkshire and Managing Director of Arriva Passenger Services for Yorkshire and Mr Peter Harvey, Divisional Director of Arriva Passenger Services for Yorkshire, gave witness statements dated 5 December 2000 and they were interviewed by investigation staff of the Office on 25 January 2001. Mr Harvey is on the boards of all the Yorkshire subsidiaries and Mr Wallace is on all except that of K Line. Mr Christopher Applegarth, Company Solicitor of Arriva, gave a witness statement dated 5 December 2000 and he attended both interviews 8. 13 14 15 16 17 Section 25 of the Act: ‘The Director may conduct an investigation if there are reasonable grounds for suspecting - (a) that the Chapter I prohibition has been infringed…’ Section 28 gives powers to enter and search premises and take copies of documents or remove originals. For list of premises visited see Appendix, p. 21. Section 26(1) of the Act: ’For the purposes of an investigation under section 25, the Director may require any person to produce to him a specified document, or to provide him with specified information, which he considers relates to any matter relevant to the investigation.’ Documents relating to the registration and de-registration of buses between March and July 2000. Office of Fair Trading 4 on 25 January 2001. In addition [..other staff..] accompanied by a solicitor, were interviewed on 25 January 2001. 9. Mr Davies, the Divisional Director, Yorkshire, for FirstGroup, gave three witness statements dated 2 November 2000, 31 January 2001 and 1 June 2001. He was interviewed by investigation staff of the Office on 25 January 2001. Mr Stephen Graham, the Managing Director of First Leeds, one of the trading arms of Yorkshire Rider, gave two witness statements dated 2 November 2000 and 29 January 2001. He was also interviewed on 25 January 2001. Mr Michael Herdman, the Managing Director of First Huddersfield, another trading name of Yorkshire Rider, gave a witness statement dated 2 November 2000. Mr Duncan, a Director of UK Bus for FirstGroup and on the main board of FirstGroup, gave a witness statement dated 1 November 2000. Mr Richard Harris, the Commercial Director of First Leeds, gave a witness statement dated 11 April 2001. 10. On 20 October 2000, Mr Wilfred Moston and Mr Paul Roter were interviewed by investigation staff of the Office. They were the previous owners of K Line, which was taken over by Arriva on 8 March 1999 but it retained Mr Moston and Mr Roter, on a self-employed basis, to run K Line until January 2000.18 D. Background 11. On 8 March 1999 British Bus plc,19 a member of the Arriva group of companies, acquired Ambermile Limited, the holding company of K Line which traded as Taylor’s Coaches in Leeds. Arriva became the ultimate parent company of K Line, whose main activities were the provision of passenger bus services and the hire of motor coaches in Leeds and Huddersfield. K Line ran buses, including commercial services on routes 1B and 96A to the north of Leeds city centre.20 It held ‘O’ licences21 from the Traffic Commissioner to run those routes. The purchase by Arriva included interests in two bus depots, one in Huddersfield and one in Leeds. The latter was owned by K Line’s pension fund and had been let to the company. Arriva retained the services of K Line’s two owners, Mr Moston and Mr Roter, to continue running the K Line services, including bus routes 1B and 96A, a 30 minute service between Leeds and Holt Park. Those routes ran head to head with two identical routes run by FirstGroup. Arriva told FirstGroup of their purchase around July 1999.22 18 19 20 21 22 See paragraph 11 below for further details. Acquired by Arriva in August 1996. Witness statement of Mr Wallace dated 5 December 2000, paragraphs 3 and 5. See paragraph 5 above. Witness statement of Mr Harvey dated 5 December 2000, paragraph 13. Office of Fair Trading 5 12. Arriva carried out an audit of its acquisition, K Line, in December 1999. Arriva became aware that routes 1B and 96A were not profitable and during February 2000 Mr Wallace and Mr Harvey (Arriva) considered whether those routes should be deregistered.23 13. FirstGroup ran commercial bus services on routes 223 and 224 between Leeds and Halifax via Cleckheaton. On those routes Arriva ran a very limited commercial service and subsidised evening and Sunday services under tender to the West Yorkshire Passenger Transport Executive (‘WYPTE’).24 In order to run its tendered service on those routes, Arriva had to run one bus a day from Halifax to Leeds to position the bus for the tender. That bus was run as a commercial service rather than as an ‘out of service’ bus. Arriva’s bus fares were on average 10 to 15 per cent lower than the fares of FirstGroup.25 First Leeds’s buses generally ran at half-hourly intervals with the two routes diverging for a short distance between Westgate and Westfield Lane in Halifax. First Leeds also ran an hourly express service, M62, between Leeds and Halifax. E. The Agreement 14. Mr Harvey arranged a meeting26 for 14 March 2000 at 2.00 pm in a private room at the Cedar Court Hotel, Wakefield, West Yorkshire. The participants were Mr Wallace and Mr Harvey from Arriva and Mr Davies and Mr Graham from FirstGroup. Also present at the meeting were Mr Moston and Mr Roter. 15. The meeting started with Mr Harvey explaining that that part of K Line which operated in Huddersfield, would be transferred to Mr Moston and Mr Roter who would leave the Arriva group and run their own separate business there. Mr Harvey said that the new arrangements should not have an impact on FirstGroup.27 16. Arriva was considering giving up routes 1B and 96A, which involved five buses that were no longer profitable and did not fit in with the planned restructuring of K Line. 28 He indicated that the five buses might be used on the 223 and 224 routes. Mr Davies 23 24 25 26 27 28 Witness statements of Mr Wallace and Mr Harvey dated 5 December 2000 at paragraphs 20 and 25 respectively. Witness statement of Mr Wallace dated 5 December 2000, paragraph 26. Witness statement of Mr Harvey dated 5 December 2000, paragraph 9. Witness statement of Mr Harvey dated 5 December 2000, paragraph 26. Witness statement of Mr Harvey dated 5 December 2000, paragraph 26. Witness statement of Mr Wallace dated 5 December 2000, paragraph 23. Office of Fair Trading 6 said that FirstGroup would have to take a commercial view as to whether routes 223 and 224 could stand a further five buses.29 The meeting then ended. 17. Another meeting was arranged for 17 March 2000 at the same hotel. It took place in the lounge area of the hotel. It was attended by Mr Moston, Mr Roter, Mr Davies, Mr Herdman (FirstGroup) and Mr Wallace. Mr Moston and Mr Roter had separate discussions about their intentions for extra buses in Huddersfield with Mr Herdman.30 At the same time, Mr Davies told Mr Wallace that, if Arriva decided to put more buses on the 223 and 224 services, FirstGroup would be likely to de-register its services as there would be too high a concentration of buses on those routes with extra ones from Arriva.31 In his witness statement, Mr Wallace said that he had discussed the de-registration of routes 1B and 96A with Mr Davies and Mr Herdman and that they had agreed to carry out the registrations and de-registrations a number of weeks apart.32 Mr Davies said that he would wait until he had seen Arriva’s registrations before de-registering.33 According to written submissions from FirstGroup, Mr Davies and Mr Wallace only discussed the concept of staggered deregistrations, not precise timing.34 18. FirstGroup had arranged training on the Act for its officers and Mr Graham attended a session on 16 February 2000.35 Mr Davies received similar training36 and on 29 February 2000, the staff were issued with report forms on which to record any contact with competitors. 19. A memorandum signed by Mr Wallace and dated 25 January 2000, confirmed that he had received Arriva’s training with regard to the Act. 37 Mr Harvey was also aware of the Arriva Competition Compliance Programme under which the meeting on 14 March 2000 should have been reported.38 None of the staff reported the meetings of 14 and 17 March 2000 under their companies’ compliance programmes, although they reported other meetings with competitors on the relevant forms. 29 30 31 32 33 34 35 36 37 38 Witness statement of Mr Davies dated 2 November 2000, paragraph 8. Witness statement of Mr Herdman dated 2 November 2000, -paragraphs 8-13. Witness statement of Mr Davies dated 2 November 2000, paragraph 19. After the first meeting, Mr Davies and Mr Harris carried out an internal review of the bus routes under discussion. Witness statement of Mr Harris dated 11 April 2001, paragraphs 4-8. Witness statement of Mr Wallace dated 5 December 2000, paragraph 26. Witness statement of Mr Davies dated 2 November 2000, paragraph 21. Written submissions by FirstGroup in response to the Rule 14 Notice, paragraph 4.17. Internal document FirstGroup: List of Attendees, Competition Act Training. Witness statement of Mr Davies, dated 2 November 2000, paragraph 25. Memorandum from Mr Wallace to Mr D Turner, dated 25 January 2000 and witness statement of Mr Wallace at paragraph 29 (No 2). Witness statement of Mr Harvey dated 5 December 2000, paragraph 32. Office of Fair Trading 7 20. On 24 March 2000, K Line (trading as Arriva Yorkshire) using its ‘O’ licence number, applied to the Traffic Commissioner to register a new daytime bus service, five minutes ahead of the Quickstep (FirstGroup) bus service, on routes 223 and 224 between Leeds and Halifax via Cleckheaton starting on 7 May 2000, and to cancel the bus services on routes 1B and 96A from 7 May 2000.39 The Traffic Commissioner approved both applications by letter dated 29 March 2000. Quickstep applied on 20 April 2000 to cancel its 223 and 224 services with effect from 4 June 2000. FirstGroup absorbed the buses released by that cancellation into its general stock.40 The new K Line service used five buses in Arriva livery. K Line’s routes 223 and 224 differed slightly from those of FirstGroup and resulted in civil disruption from residents in the streets on the new route. K Line sought to amend the route and timetable of routes 223 and 224 on 12 May 2000 with immediate effect in order to prevent the public disorder. Those amendments were accepted, as were further variations to the timetable, which K Line applied for on 19 May 2000 and 12 June 2000. Finally, on 24 July 2000, K Line applied to de-register routes 223 and 224 from 4 September 2000. The registrations were cancelled from that date and routes 223 and 224 were transferred to the ‘O’ licence of Arriva Yorkshire West Ltd. Throughout that period Arriva Yorkshire West Limited had been running tendered services on routes 223 and 224.41 F. Submissions of the Parties 21. The Director need not address in this Decision every point set out by Arriva and FirstGroup in their written and oral submissions in response to the Rule 14 Notice. They both provided further information and clarification of the operation of the bus routes in issue. Certain matters presented in the Rule 14 Notice were resolved as far as this decision is concerned as a result of those submissions. SUBMISSIONS OF ARRIVA 22. Arriva accepted that its employee, Mr Wallace had acted in contravention of the Chapter I prohibition. Arriva, however, claimed in mitigation that he had been under internal and external pressure in relation to the performance of Arriva Yorkshire. Arriva recognised that the relevant market was the four bus routes excluding the tendered services.42 Arriva argued that the actual effects of the agreement had been minimal. There was no change to service frequencies or the standard of service. After 39 40 41 Applications and correspondence with the Traffic Commissioner. Witness statement of Mr Davies dated 2 November 2000, paragraph 17. Witness statement of Mr Wallace dated 5 December 2000, paragraph 2. Bus timetable from 6 January 2001. Office of Fair Trading 8 the agreement the only change was that the buses operating on the routes belonged to one operator. On routes 223 and 224 fares reduced due to Arriva’s pricing policy. 23. Arriva claimed that any fine should be proportionate. SUBMISSIONS OF FIRSTGROUP 24. FirstGroup took no issue with the Director’s assessment in the Rule 14 Notice that First Leeds and Arriva were party to an agreement in relation to mutual de-registration of services 1B and 96A and 223 and 224 that infringed the Chapter I prohibition. 25. FirstGroup submitted that the agreement had had minimal effect. The relevant markets for routes 1B and 96A were made up of sub-markets. On those routes there was competition on frequency on the Headingley corridor from other FirstGroup buses and a small independent bus company. There had been no effect on fare levels and FirstGroup ran double-decker buses whereas those withdrawn by Arriva had been single deck vehicles. There had been no agreement between Arriva and FirstGroup that neither party would re-enter the market on the routes that they had withdrawn from and there were no restrictions on re-entering the market, apart from the necessary 42 days notice to the Traffic Commissioner. Accordingly all the submarkets on routes 1B and 96A were either contested or contestable. However, for passengers travelling the whole length of bus routes 1B and 96A there would be no substitutes. 26. Similar considerations applied to routes 223 and 224 with overlapping from Arriva buses on parts of the routes. FirstGroup believed that the withdrawal from those routes had had little effect on passengers in terms of frequency as Arriva ran two buses per hour as FirstGroup had done. FirstGroup referred to the Director’s suggestion that Arriva’a fares were lower than those of FirstGroup, which remained free to return to the market as did any other operator. 27. Notwithstanding that leniency had been granted FirstGroup submitted in mitigation that its employees had received compliance training in which market sharing in circumstances similar to those in the infringement had been specified as banned under the Act. FirstGroup took compliance training very seriously and there had been nothing else that it could have done to establish appropriate internal reporting and clearance mechanisms to alert its employees to their responsibilities and obligations under the Act. However, as a result of this case, FirstGroup have reviewed their procedures and improved their monitoring of adherence to compliance. FirstGroup 42 Written submissions by Arriva dated 15 November 2001, Executive summary, point 4. Office of Fair Trading 9 argued that it had co-operated throughout the investigation with the Office. Therefore, it should be given credit for those factors by the Director making an appropriate deduction from his calculation of the penalty. II A. LEGAL AND ECONOMIC ASSESSMENT Introduction 28. Section 2(1) of the Act provides that any agreements between undertakings, decisions by associations of undertakings or concerted practices which may affect trade within the UK,43 and have as their object or effect the prevention, restriction or distortion of competition within the UK, and in particular, those which share markets, are prohibited unless they are exempt in accordance with the provisions of Part I of the Act.44 Accordingly, to find an infringement of the Chapter I prohibition,45 the Director must establish that there has been an agreement between Arriva and FirstGroup which may affect trade within the UK and has as its object or effect the prevention, restriction or distortion of competition. B. Agreement between undertakings and/or concerted practices 29. The European Commission has stated that: ‘From the case law of the Court of Justice of the EC and the Court of First Instance it may be seen that an agreement within the meaning of Article [81](1) can be said to exist when the parties have reached a consensus, even in broad terms, as to the lines of their mutual action, or abstention from action in the market. It may involve joint decision making and commitment to a common scheme. It suffices that the undertakings in question should have expressed their joint intention to conduct themselves in the market in a specific way. The 43 44 45 Under section 2(3) of the Act, subsection (1) applies only if the agreement, decision or practice is, or is intended to be, implemented in the United Kingdom and under section 2(7), ‘United Kingdom’ means in relation to an agreement which operates or is intended to operate only in a part of the United Kingdom, that part. Under section 60 of the Act, in the application of the Chapter I prohibition, the Director is required to ensure there is no inconsistency with either the principles laid down by the EC Treaty and the European Court or any relevant decision of the European Court. The Director must also have regard to any relevant decision or statement of the European Commission. The Chapter I prohibition came into force on 1 March 2000. It does not have retrospective effect. Office of Fair Trading 10 agreement does not have to be made formally or in writing, and no express sanction or enforcement measures need be involved.’46 30. The term ‘agreement’ can properly be applied not only to any overall plan or to the terms expressly agreed but also to the implementation of what has been agreed on the basis of the same mechanisms and in pursuance of the same common purpose. An agreement may consist not only of an isolated act but also of a series of acts or a course of conduct. Concerted practices are also prohibited. 31. The prohibition on collusion does not deprive undertakings of the right to adapt themselves to the existing or anticipated conduct of competitors. However, it ‘…strictly precludes any direct or indirect contact between [economic] operators, the object or effect whereof is either to influence the conduct on the market of an actual or potential competitor or to disclose to such a competitor the course of conduct which they themselves have decided to adopt or contemplate adopting on the market.’47 32. In assessing whether there has been an agreement the Director considers the actions of the undertakings. For the purposes of the Act, he finds that the Yorkshire subsidiaries are part of the single economic entity ultimately controlled by Arriva, and that Yorkshire Rider and Quickstep are part of the single economic entity ultimately controlled by FirstGroup. 33. On the basis of the evidence set out in Section I and the respective admissions of the parties,48 the Director finds that a market sharing agreement was arrived at as a result of the meetings between Arriva and FirstGroup staff on 14 March and 17 March 2000. Those meetings were not reported in accordance with their respective companies’ compliance schemes. The Director notes in particular that Mr Wallace and Mr Davies had discussed and agreed to staggering the registrations and deregistrations of the bus routes. The actions of Arriva and FirstGroup in de-registering and registering bus routes, which resulted from their agreement, were part of their common plan to influence each other in the conduct of the market. Accordingly the Director is satisfied that there was an agreement between undertakings for the purposes of section 2(1) of the Act. C. 46 The Relevant Market Commission decision (1999/210/EC) British Sugar OJ [1999] L76/1 at paragraph 66, 22 March 1999. Joined cases 40-48/73 Suiker Unie and others v Commission [1975] ECR 1663, p.1942, paragraph 174. See paragraphs 22 and 24 above. Office of Fair Trading 11 47 48 34. There is only an obligation on the Director to define the market where it is impossible, without such a definition, to determine whether the agreement is liable to affect trade in the UK and has as its object or effect the prevention, restriction or distortion of competition.49 No such obligation arises in this case because it involves a geographic market sharing agreement which has as its object the prevention, restriction or distortion of competition. 35. Nevertheless market definition is the first step in the process of assessing penalties.50 PRODUCT MARKET 36. The Director believes that the majority of bus passengers travelling the whole length of the routes in question were unlikely to have had a realistic choice of travelling by other means, whether by car, rail or by an alternative bus route. The Director believes, therefore, that those options were unlikely to have exerted strong competitive pressure on operators servicing the routes in question.51 37. The agreements between the parties concerned commercial services only, though tendered services also operated on one of the routes.52 Given that different competitive mechanisms operate in commercial services on the one hand and tendered services on the other, the Director will include only commercial services within the market definition in this case. 38. Therefore the relevant product market is the supply of commercial local bus services. GEOGRAPHIC MARKET 39. On the demand side, the market is potentially narrow because passengers on local bus services will generally not regard a journey on one route as an adequate substitute for a journey on another. The Director has also considered whether the potential for supply-side substitution - the ability of competitors to switch resources between routes - might make it appropriate to include other services and routes in the definition of the market. The position on the supply side is less clear. Although such substitution is technically feasible, there are a number of factors in this case that might constrain it. They include traffic congestion, the configuration of routes and 49 50 51 52 T-62/98 Volkswagen AG v Commission [2000] 5 C.M.L.R. 853, paragraph 230. The Director General of Fair Trading’s Guidance as to the Appropriate Amount of a Penalty, March 2000, OFT 423, paragraph 2.3. See, for example, MMC report on Arriva plc and Lutonian Buses Ltd, November 1998, Cm 4074, paragraphs 2.24 and 4.4. See paragraph 13 above. Office of Fair Trading 12 depots and the possibility of retaliatory action on other routes.53 It is difficult to judge how those factors might constrain the scope of supply side substitution and it is therefore possible that the market could be defined as wider than the individual routes that were the subject of the agreements. 40. For the purpose of calculating the starting point for the financial penalties, the Director takes as the relevant geographic market or markets the routes covered by the agreement. This was accepted by Arriva 54 and not contested by FirstGroup. D. Prevention, restriction or distortion of competition 41. The Chapter I prohibition expressly prohibits agreements, that directly or indirectly share markets.55 It is established case law that there is no need to take account of the concrete effects of an agreement in order to conclude that it is prohibited by section 2 of the Act when it is apparent, that it had as its object the restriction of competition.56 42. The object of an agreement for the purposes of the Director’s analysis is to be found by the objective assessment of the aims of the agreement.57 The object of the agreement between Arriva and FirstGroup was clearly to share markets geographically by mutual withdrawal from the relevant bus routes.58 This prevented, restricted or distorted competition within the meaning of section 2(1)(b) of the Act. Market sharing or market dividing is included in the OECD definition of ‘hard core cartels.’59 In addition, the Director notes the high market shares of the parties in the relevant 53 54 55 56 57 58 59 The Director notes that pursuant to the market sharing agreement Arriva moved five bus workings from routes 1B and 96A on to routes 223 and 224. In part, this is because Arriva’s main depots and existing core services are to the South of Leeds. It is also likely that Arriva would be able to move bus workings between routes 223 and 224 and routes 254 and 255, which in part run on the same route to the South of Leeds. On the other hand, FirstGroup absorbed the buses withdrawn from routes 223 and 224 into its services generally in Leeds. However, the Director does not regard this as evidence of supply side substitution because this switching of resources did not take place to challenge incumbents. See paragraph 22 above. Section 2(2)(c) of the Act. Joined cases 56 & 58/64 Consten and Grundig v Commission [1966] ECR 299; Case C277/87 Sandoz v Commission [1990] ECR I-45; Case COMP/36.545/F3 - Amino Acids, Commission decision of 7 June 2000, OJ L 152, 7.6.2001, p.24 at paragraph 230. Joined cases 29 & 30/83 CRAM & Rheinzink v Commission [1984] ECR 1679. Case 41/69 ACF Chemiefarma v Commission [1970] ECR 661 at paragraph 128 and case T374/94 European Night Services v Commission [1998] ECR II-3141 at paragraph 136. See The Director General of Fair Trading’s Guidance as to the Appropriate Amount of a Penalty, March 2000, OFT 423, paragraph 1.8. Office of Fair Trading 13 market60 and in the public transport industry in the UK and the significance of their operations in Leeds and West Yorkshire. 43. For the reasons set out above, the Director finds that the market sharing agreement had the object of preventing, restricting or distorting competition within the UK. E. 44. Effect on trade within the UK The agreement between Arriva and FirstGroup was implemented within the Leeds area. For the purposes of the Chapter I prohibition, the UK includes any part of the UK where an agreement operates or is intended to operate. 45. By its very nature a market-sharing agreement restricts competition and may have an effect on trade. The actual effect on trade was felt on the routes covered by the agreement in question. F. Further finding of the Director 46. The Director carried out exhaustive enquiries to ascertain whether there had been any further route swaps as alleged in the anonymous letter that started his investigation. However, no evidence to substantiate that allegation was found. CONCLUSION ON APPLICATION OF CHAPTER I PROHIBITION 47. The Director has concluded that Arriva and FirstGroup entered into a market sharing agreement in relation to specified bus routes in the Leeds area. The agreement resulted from meetings held by staff of the undertakings at an hotel on 14 and 17 March 2000. Arriva and FirstGroup have admitted that their staff took part in meetings at which an agreement was reached between them with the object of sharing geographic markets. Evidence of registrations and de-registrations of the bus routes in question confirmed the agreed route changes. The Director finds that the agreement infringed the Chapter I prohibition. 60 100 per cent of the market on the complete routes 1B and 96A and 223 and 224. Office of Fair Trading 14 III. THE DIRECTOR’S ACTION 48. This section sets out the action which the Director is taking and his reasons for it. A. Directions 49. Section 32(1) of the Act provides that, if the Director has made a decision that an agreement infringes the Chapter I prohibition, he may give to such person or persons as he considers appropriate such directions as he considers appropriate to bring the infringement to an end. 50. As the infringement is not continuing, the Director does not propose to make a direction. B. Penalties 51. Section 36(1) of the Act provides that, on making a decision that conduct has infringed the Chapter I prohibition, the Director may require the undertaking concerned to pay him a penalty in respect of the infringement. The ‘undertaking concerned’ comprises those legal bodies forming single economic entities and falling under the ultimate control of Arriva or FirstGroup. No penalty which has been fixed by the Director may exceed 10 per cent of the turnover of the undertaking calculated in accordance with the provisions of the Competition Act (Determination of Turnover for Penalties) Order 1998 (‘the Penalties Order’).61 52. Arriva and FirstGroup do not benefit from the limited immunity from penalties for small agreements since their combined applicable turnover exceeded £20 million62 in the business year ending in the calendar year preceding the one during which the infringement occurred.63 53. The Director may impose a penalty on an undertaking that has infringed the Chapter I prohibition only if he is satisfied that the infringement has been committed intentionally or negligently.64 54. The Director is satisfied that Arriva and FirstGroup have intentionally or negligently infringed the Chapter I prohibition. The meetings at which the agreement between 61 62 63 64 Section 36(8) of the Act and SI 2000/309. See paragraphs 4 and 6. Section 39(1) of the Act and Regulation 3 of the Competition Act 1998 (Small and Conduct of Minor Significance) Regulations 2000, (SI 2000/262). Section 36(3) of the Act. Office of Fair Trading Agreements 15 Arriva and FirstGroup was entered into were held in an hotel (one in a private room) and were not reported as contacts with competitors in accordance with internal company compliance procedures, even though other meetings with competitors were reported. Each member of staff involved was at a senior level in their respective undertakings and they had all undergone compliance training. In addition the parties de-registered and registered the bus routes a number of weeks apart, which the Director considers was a device for covering up their anti-competitive behaviour. The differences between the recollections of Mr Davies and Mr Wallace with regard to this matter are not material.65 They could not have been unaware that their agreement had the object or would have the effect of restricting competition. METHOD OF CALCULATION 55. The Director has published Guidance as to the Appropriate Amount of a Penalty (‘Guidance on Penalties’) as required by section 38(1) of the Act.66 The Director must have regard to the Guidance on Penalties when setting the amount of a penalty.67 56. The Guidance on Penalties sets out a five-step approach that the Director will follow to calculate the amount of a penalty. STEP 1: STARTING POINT 57. The starting point for determining the level of penalty is calculated by applying a percentage rate to the ‘relevant turnover’ of the undertaking, up to a maximum of 10 per cent. The ‘relevant turnover’ is the turnover of the undertaking in the relevant product market and relevant geographic market affected by the infringement in the last financial year. To be consistent with the Penalties Order, the Director considers that the last financial year is the business year preceding the date when the infringement ended. There are two separate markets affected by the infringement, namely commercial bus services on routes 1B and 96A and routes 223 and 224. The preceding financial year for Arriva is the year ending 31 December 1999 and for FirstGroup the year ending 31 March 2000. 58. The Director has been told that, for operational reasons, Arriva is only able to give him an estimate of the ‘relevant turnover’ on bus routes 1B and 96A during the year ending on 31 December 1999. Again, to be consistent with the Penalties Order, 65 66 67 See paragraph 17 above. The Director General of Fair Trading’s Guidance as to the Appropriate Amount of a Penalty, March 2000, OFT 423. Section 38(8) of the Act. Office of Fair Trading 16 where a business year does not equal 12 months, the Director considers that the ‘relevant turnover’ shall be the amount which bears the same proportion to the ‘relevant turnover’ for that business year as 12 months does to the shorter period. For routes 1B and 96A, Arriva provided figures for the period 7 April 2000 to 6 May 2000, when it ceased to run buses on them, which, when grossed up on an annual basis produced an estimate of [….]. Arriva had no discernible commercial turnover on routes 223 and 224.68 In the absence of any other figures, the Director accepts that estimated figure of [….] as the starting point for Arriva’s financial penalty. 59. The turnover of FirstGroup on bus routes 1B and 96A and 223 and 224 was a total of [….] in the financial year ending 31 March 2000. 60. The actual percentage rate, which will be applied to the relevant turnover, depends upon the nature of the infringement. The more serious the infringement, the higher the percentage rate is likely to be. The Director considers market sharing to be amongst the most serious infringements caught by the Act due to the significant harm it may inflict on the competitive process. The result of withdrawal of one operator from each route was to increase the market share of the other to near monopoly levels. Accordingly, the Director has set the starting point for the penalties at 10 per cent of ‘relevant turnover’. The starting point of Arriva’s financial penalty is [….] and that of FirstGroup [….], which is 10 per cent of the ‘relevant turnover’. STEP 2: ADJUSTMENT FOR DURATION 61. For the purposes of this decision, the Director considers that the infringement ended at the latest when FirstGroup applied for leniency.69 The Director has not increased the penalty for duration since the infringement lasted less than one year. STEP 3: ADJUSTMENT FOR OTHER FACTORS 62. The penalty figure reached after the calculations in steps 1 and 2 may be adjusted as appropriate to achieve the Director's policy objectives of reflecting the seriousness of the infringement and deterrence. From their annual accounts it can be seen that in terms of group UK turnover FirstGroup and Arriva are companies of roughly equal size.70 As far as the infringement was concerned, they participated equally, although the initial meeting was arranged by Arriva.71 To ensure that the penalty acts as an 68 69 70 71 See paragraph 13 above. The date when the infringement ended is not material to the penalties in this case because the infringement lasted less than one year. See paragraphs 4 and 6 above. See paragraph 14 above. Office of Fair Trading 17 adequate deterrent to similar arrangements in the future by these undertakings, by other bus undertakings and more generally, the Director has increased the penalty by […a subsantial sum - over £500,000 between the two companies…]. This increase is significant in relation to the revenues of Arriva on the routes in question. The Director considers, however, that any lesser increase would not act as a sufficient deterrent. It is less significant in relation to the revenues of FirstGroup on the routes in question, but the Director considers that increasing the penalty by the same amount nevertheless amounts to a sufficient deterrent for FirstGroup. 63. Accordingly, having regard to the Guidance, the Director intends to adjust the penalty72 so that the penalty for Arriva after step 3 is £318,175 and for FirstGroup is £529,852. STEP 4: ADJUSTMENT FOR FURTHER AGGRAVATING AND MITIGATING FACTORS 64. The basic amount of the financial penalty, adjusted as appropriate at steps 2 and 3, may be increased where there are other aggravating factors, or decreased where there are mitigating factors. AGGRAVATING FACTORS 65. The staff of both Arriva and FirstGroup who participated in the meetings on 14 and 17 March 2000, at which the arrangements for market sharing were made, were all at a senior level, albeit within the subsidiaries for which they carried responsibility in and around Leeds. The Director considers that the involvement of senior executives (including divisional directors) of two major public transport undertakings in the agreements is an aggravating factor and he has therefore increased the penalties by 10 per cent. MITIGATING FACTORS 66. Although Arriva claimed that its staff had been acting under duress or pressure the Director did not find that allegation proved, nor, in his view, is internal pressure to achieve targets or the pressure from difficult market conditions pertinent to the issue of mitigation. In any event, Arriva arranged the meeting on 14 March 2000. However, the Director recognised from copies of training manuals and evidence that training had taken place and from documents reporting contacts with competitors that the parties both had genuine compliance systems in place which appeared to be 72 OFT 423 March 2000, paragraph 2.8, ‘The assessment of the need to adjust the penalty will be made on a case by case basis for each individual infringing undertaking.’ Office of Fair Trading 18 generally followed and adhered to. As a result the penalties would be reduced by 10 per cent. 67. The Director is normally minded to give a reduction in a penalty when a party has cooperated with his investigation. However, as both Arriva and FirstGroup benefit from the leniency programme and as a condition of being granted leniency they both agreed to co-operate with the Director, he does not consider that there should be an additional reduction in the penalties under this head to reflect that co-operation. 68. After completing all the steps in the calculation the Director imposes a penalty on Arriva of £318,175, and on FirstGroup a penalty of £529,852. STEP 5: ADJUSTMENT TO PREVENT MAXIMUM PENALTY BEING EXCEEDED AND TO AVOID DOUBLE JEOPARDY 69. The final amount of any penalty imposed under section 36 may not exceed 10 per cent of the turnover of the undertaking calculated in accordance with the Penalties Order. The above penalties do not exceed 10 per cent of the applicable turnover of Arriva plc or FirstGroup plc, which are the relevant undertakings. LENIENCY 70. Under the terms of the Director’s leniency scheme, FirstGroup, as the first party to the cartel to approach the Director, after he had started his investigation, and provide evidence thereof, was granted 100 per cent immunity from any financial penalty.73 The granting of leniency in a letter dated 2 November 2000, and signed on behalf of FirstGroup and the Director, was conditional on FirstGroup providing evidence of the cartel, co-operating with the Director throughout his investigation and complying with 73 Guidance on Penalties, paragraph 3.7. The grant of immunity by the Director after he has started an investigation is discretionary. ’In order for the Director to exercise his discretion to grant immunity to the undertaking he must be satisfied that the undertaking should benefit from immunity, taking into account the stage at which the undertaking comes forward and whether or not at that stage the Director has sufficient evidence to make a decision that the Chapter I prohibition has been infringed.’ Office of Fair Trading 19 the other conditions set out in paragraph 3.4 of the Guidance on Penalties.74 The Director is satisfied that FirstGroup complied with those conditions and accordingly, the penalty calculated for it is reduced to nil. 71. Arriva approached the Director with a request for leniency second and was granted leniency in a letter dated 8 December 2000, on the same conditions as FirstGroup but only to the extent that any penalty would be reduced by 36 per cent.75 The Director is also satisfied that Arriva has complied with the conditions for its leniency and, as a result, the penalty for Arriva is reduced to £203,632. LEVEL OF PENALTY 72. The Director requires Arriva to pay him a penalty of £203,632 in respect of the infringement set out in paragraph 31. The penalty must be paid by 3 April 2002. PAYMENT OF PENALTY 73. If Arriva fails to pay the penalty within the deadline specified above, and has not brought an appeal against the imposition or amount of the penalty within the time allowed or such an appeal has been made and determined, the Director can commence proceedings to recover the required amount as the civil debt. 74 75 Guidance on Penalties, paragraph 3.6, ‘Total immunity for the first to come forward after an investigation has commenced. In order to benefit from the possibility of total immunity under this paragraph: the undertaking seeking immunity under this paragraph must be the first to provide the Director with evidence of the existence and activities of a cartel before the Director has given written notice of his proposal to make a decision that the Chapter I prohibition has been infringed; and conditions (a) to (d) in paragraph 3.4 must be satisfied’ namely; ‘the undertaking must: a) provide the Director with all the information, documents and evidence available to it regarding the existence and activities of the cartel; b) maintain continuous and complete cooperation throughout the investigation; c) not have compelled another undertaking to take part in the cartel and not have acted as the instigator or played the leading role in the cartel; and d) refrain from further participation in the cartel from the time it discloses the cartel.’ Guidance on Penalties, paragraph 3.8. ‘Undertakings which provide evidence of the existence and activities of a cartel before written notice of a proposed infringement decision is given, but are not the first to come forward, or do not meet all the requirements under paragraphs 3.4 or 3.6 of the Guidance on Penalties will be granted a reduction in the amount of a financial penalty which would otherwise be imposed of up to 50%, if the following conditions are met: the undertakings must: a) provide the Director with all the information, documents and evidence available to them regarding the existence and activities of the cartel; b) maintain continuous and complete co-operation throughout the investigation; and c) refrain from further participation in the cartel from the time they disclose the cartel.’ Office of Fair Trading 20 30 January 2002 JOHN VICKERS DIRECTOR GENERAL OF FAIR TRADING Office of Fair Trading 21 APPENDIX Premises visited by officers exercising powers under section 28 of the Act. Arriva Premises Admiral Way, Doxford International Business Park, Sunderland, Tyne and Wear SR3 3XP Head office and registered office of Arriva. Registered office of the Yorkshire subsidiaries. 24 Barnsley Road, Wakefield, WF1 5JX Trading address of Arriva Yorkshire. FirstGroup Premises 395 King Street, Aberdeen, AB24 5RP Head office and registered office of FirstGroup. Kirkstall Road, Leeds, West Yorkshire, LS3 1LH Registered office of Yorkshire Rider and Quickstep. Cherry Row Depot, Ruby Street, Leeds, LS9 7RG Site operated by First Leeds as a bus depot and office complex. Henconner Lane, Bramley, Leeds, LS13 4AD Office of Fair Trading 22 Site operated by First Leeds as a bus depot. Office of Fair Trading 23