Part of the Colly Bristow Competition Law Survival Pack

Company directors and in-house counsel need not be experts on competition law, but they would be mistaken to think it was wholly irrelevant to all but the biggest companies. A price fixing agreement between the only two pubs in a village could be unlawful. Similarly, a merger does not have to affect competition UK-wide to need regulatory approval. Even those whose activities have no competition law aspect can be victims of others' behaviour and able to do something about it.

There are three pillars of competition law:

Behavioural: The prohibitions of

  1. "Chapter 1" anticompetitive agreements between businesses; and
  2. "Chapter 2" abuse of a dominant position by a single business.

Compliance:

  1. The regulation of mergers.

This article concerns the behavioural and, within that, mainly anticompetitive agreements. For discussion of merger regulation, see here.

Anticompetitive Agreements

Even an agreement with limited geographical reach can be anticompetitive and, crucially, some prohibited behaviour may seem like sensible business practice, and not obviously wrong. An innocent breach should not result in the law's most chilling sanctions - being fined 10% of your turnover, directors' disqualification and imprisonment - but it may lead to a lesser fine, contracts being held invalid, or being sued by those who think they have suffered as a result.

The restriction

"Anticompetitive agreements" is shorthand. The prohibition is against:

  • (i) agreements between businesses,
  • (ii) decisions by business associations or
  • (iii) concerted practices

which

  • (a) may affect trade, and
  • (b) have as their object or effect the prevention, restriction or distortion of competition

unless they are exempt because of the benefit they confer on the public. [1]

This is sometimes called the "Chapter 1" prohibition, after the chapter of the Competition Act containing it. Article 101 of the Treaty on the Functioning of the European Union is almost verbatim of Chapter 1. The key difference is that Article 101 says the agreement must affect trade between EU member states. If it does not, it is only UK law which may be violated. Everything we say below applies to UK law (Chapter 1) and European law (Article 101) unless otherwise stated.

The "object or effect" …

It is only necessary to tick one of the two boxes of "object or effect". If the objective of an agreement is to harm competition, it is unlawful even if that objective is not achieved. Also, it is possible to violate the law unwittingly, as agreements with the effect of harming competition can be unlawful even if the harm was not intended.

… of "prevention, restriction or distortion of competition"

This can range

  • from flagrantly abusive price fixing and bid rigging;
  • via the blinkered looking only at one's own interests, such as a retailer insisting that its lease in a shopping centre includes a clause preventing the centre from granting leases to competitors;
  • to seemingly sensible agreements to divide the market in the interests of efficiency, like two water cooler companies agreeing to cover different halves of town.

You should also be wary of sharing information with competitors if this could lead to an unspoken understanding or gentlemen's agreement.

Exemption

There are various possibilities for exemption:

Agreements of minor importance (de minimis agreements): The European Commission has said "horizontal" agreements between competitors are of minor importance if the parties' combined market share is under 10%, and agreements between non-competitors are of minor importance if each party has under a 15% share of its own market. This is European law, but the UK regulator, the OFT, tends to have regard to it too when applying Chapter 1. [2]

Strictly, de minimis agreements are "exceptions" to the rule, as they do not fall within Article 101 in the first place. The "exemptions" below fall within it, but are rendered exempt by Article 101(3).

Block exemptions: There are various block exemptions which, again, are essentially market share tests. The key ones are:

  • The block exemption for "vertical" agreements between businesses in a distribution chain if each party has under a 30% market share at its level of the chain.
  • The block exemption for horizontal R&D agreements if the parties' combined market share is under 25%, or "specialisation" agreements if it is under 20%.

Horizontal agreements merit special attention from the authorities as they are between parties who ought to be competing, but R&D agreements can promote innovation and specialisation agreements - where one party stops production and purchases from the other instead - can promote efficiency.

The main block exemptions are European law, but the Competition Act gives them parallel effect in the UK.

Individual exemption: An agreement falling outside the block exemptions is not necessarily unlawful. It is just outside the safe harbour of certain lawfulness which they confer. It will be lawful if it contributes to

  • (i) improving production or distribution, or
  • (ii) promoting technical or economic progress,

while allowing consumers a fair share of the resulting benefit. [3]

For example, in the case of the shopping centre, it may be permissible to grant exclusivity to an "anchor" tenant like a department store, as it can be impossible to build a centre without one. If any anchor tenant would insist on exclusivity it may be worth allowing it because of the customer benefit in the centre being built.

Exemption only applies if the anticompetitive part of the agreement is necessary for the benefit. In other words, anticompetitive provisions cannot piggyback an agreement which benefits customers in some other way. Also the anticompetitive provision must be minimised. For example, perpetual exclusivity for an anchor tenant may not be allowed if a few years' exclusivity would be enough to attract one.

When the Commission publishes a block exemption, it publishes parallel guidance on how agreements falling outside it are to be assessed for individual exemption. Still the assessment can be difficult, which is why block exemptions exist for easier cases.

Hardcore restrictions

Some restrictions, like price fixing or bid rigging are considered to have the object, not just the effect of harming competition. They are therefore always unlawful, even if they would otherwise be exceptions or exemptions under the above tests. A particular one to watch out for, especially in vertical distribution agreements, is the restriction on "passive" selling. Exclusive distribution agreements can be lawful under the above tests, in which case it is permissible, for example, to stop your distributors actively selling into each other's exclusive territories. However, any attempt to stop them selling to a customer from another territory who approaches them would be unlawful.

Market definition

Any analysis under Chapter 1 or Article 101 must include a definition of the market being analysed. To be a "market", there must be a hermetically sealed, or at least partially sealed ecosystem in two regards:

  • The geographical market: In the case of the two pubs mentioned above, the village might be a valid market definition if other pubs were too far away to be a close competitive constraint on them.
  • The product market: For example, pencils might not be a market to themselves if a reasonable number of customers thought biros or pens were an acceptable alternative.

Enforcement and Leniency

Investigations of anticompetitive collusion can start because the suspicions of the OFT or a sectorial regulator like Ofcom are aroused by complaints about things like high price or profit, or low quality, variety or innovation, especially as compared with similar markets. From there, the regulators have investigatory powers, including:

  • To request information.
  • To conduct "dawn raids" of a business's premises and even directors' homes, and take copies of documents.
  • To engage in covert surveillance.

In cartel cases, whistle-blowing participants can get up to 100% exemption from fines. The idea, of course, is to sow the seeds of mistrust among cartel members. Investigations can therefore get started for this reason instead.

The level of leniency depends mainly on what evidence is furnished and how soon the participant comes forward. For example, was an investigation already ongoing? Were they the first to come forward? Second, third, etc. leniency applicants may still get some (declining) concession.

Abuse of Dominance

This article goes into less detail on abuse of dominance on the assumption that dominant entities are unlikely to need this Survival Pack to introduce them to competition law. Victims of abuse of dominance may, however, be interested in the pack's Guidance on actions for damages.

Suffice to say, abuse of dominance is prohibited by Chapter 2 of the Act and Article 102 of the Treaty, which again are almost verbatim of each other save that Article 102 is only violated if the abuse affects trade between EU member states. Both provisions specifically site:

  • (a) imposing unfair prices;
  • (b) limiting production;
  • (c) applying dissimilar conditions to equivalent transactions; or
  • (d) making contracts subject to conditions which have no connection with the subject of the contract. [4]

Although not separately listed, refusal to supply may also be abusive.

Dominance does not have to amount to a monopoly. It can simply be an ability to act to an extent independently of one's competitors. Thus, an unfair price can be too high, but it can also be too low if it is with a view to driving competitors out and then increasing the price again; so-called "predation".

Another classic example of abuse is so-called "margin squeeze", where a vertically integrated company which is dominant in the upstream market charges its downstream competitors a price which does not permit them to make an economically viable margin.

There are no exemptions. Rather, behaviour with a sufficient public benefit would not be abusive. However, similar to the de minimis exception, Chapter 2 provides that, if a business has a turnover of under £50m, conduct which might otherwise be considered abusive is presumed to have "minor significance", rendering the business immune from financial penalty. Such conduct may still be investigated by the OFT and the immunity withdrawn, although not with retrospective effect vis-à-vis penalty.