Introduction to UK and EU competition law
UK businesses must comply with UK competition law, and, where their activities may affect trade between Member States, EU competition law as well. Trade between Member States may be affected even by trade that takes place within the UK alone, as it may, for example, hamper penetration of the UK market by another Member State.
UK competition law almost exactly mirrors EU competition law
There are two main branches to competition law: one regulating anti-competitive behaviour/agreements between two or more businesses, and one regulating the abuse by one business or a group of business of its/their dominant position in a particular market. Often the authorities (in the UK, the Office of Fair Trading) argue that the market is a small segment of a larger market. In one case, the market was bus services in the Leeds area.
Anti-competitive behaviour/agreements between two or more businesses
It is important to understand the difference between a horizontal and a vertical agreement. A horizontal agreement is one between competitors or potential competitors. A vertical agreement is one between parties at different levels of the supply chain, such as a supplier and a purchaser.
end user ———————————-end user
The authorities regard horizontal agreements as more likely to be anti-competitive than vertical ones, as these transactions typically have an increased likelihood of involving some form of collusion between competitors which has the effect of limiting the “value” the customer receives. So horizontal agreements are dealt with much more strictly and harshly than vertical ones for this reason and the Enterprise Act 2002 (criminal offences, etc. – see below under ‘Penalties’) only really applies to horizontal agreements.
Any agreement/collusion/co-operation between two or more parties, which has as its object or effect, or potential effect, the distortion or restriction of competition, is outlawed.
The ‘agreement’ does not have to be in writing. It includes any form of co-operation, including a nod and a wink, a concerted practice, an exchange of letters and a decision made by, or standard terms and conditions adopted by, an association of organisations.
Types of agreement which may have an anti-competitive effect include-
- price fixing;
- market partitioning, sharing customers or sharing supply sources;
- limiting or controlling production, markets, technical development or investment;
- predatory pricing.
Price fixing agreements
These are usually horizontal. They are viewed extremely seriously and carry heavy, strict penalties.
Do take special care if-
- sharing with any competitors information about prices, or about planned price changes, or any intended action regarding prices; it is especially important not to do this in relation to individual customers;
- you ask competitors about their costs and prices, especially in relation to individual customers;
- if any competitor wants to tell you information about their costs and prices, especially in relation to individual customers.
Do not allow yourself to collude, or appear to collude, over prices as a result of any information about costs, prices, discounts etc. which you have received.
Consider whether to leave a meeting or room or the vicinity of a discussion if-
- you are asked to discuss in front of competitors information about prices, costs, discounts etc.; and make a note of the fact that you did so;
- a competitor starts talking about prices, costs, discounts, etc., unless you are in a public place and other people are around who are not competitors so that there can be no suggestion of collusion; make a note of the fact that you did so, or what happened if you did not leave.
Businesses should have procedures in place, and ensure that these are known within the business, to enable reporting of breaches of competition laws or circumstances where a breach may have, or could be about to, occur. Everyone within the business should be able to report in confidence any suspicions that competitors or suppliers are colluding on prices or customers, or that the business in which they work is or may be breaching competition laws; for example, if competitors were present at a meeting in which they may have unintentionally given or obtained price information.
Market sharing agreements
These are again usually horizontal. They are also viewed extremely seriously and are also subject to severe penalties.
Do not without properly considering the legal implications:-
- agree with a competitor, or potential competitor, which customers each of you will deal with;
- discuss with a competitor, or potential competitor, quantities to be sold or produced;
- discuss with a competitor, or potential competitor, the geographic areas into which, or customers to whom, you sell or intend to sell;
- agree with a competitor to divide up a market – product or geographic – or share customers or supply sources, in any way not mentioned above.
Do consider carefully-
- leaving a meeting at which competitors start talking about these types of matters, and make a note that you did so;
- reporting breaches of competition laws, or circumstances where a breach may have or could be about to occur, if you suspect your competitors or suppliers are colluding on such things, or even that your business may be doing so (see the article entitled ‘Companies are Inadequately Prepared for Changes in Competition Law’ under ‘The Leniency Program’).
Agreements limiting or controlling production, markets, etc.
These can be horizontal, where, for example, competitors agree on output, but are often vertical, for example, an agreement between a supplier and a distributor whereby the supplier grants the distributor an exclusive territory.
Vertical anti-competitive agreements are regarded as much less likely to be anti-competitive than horizontal ones, and, in fact, can have positive effects in that they often allow participants to develop a market, and encourage investment in that market. Because the law only prohibits agreements which have an ‘appreciable effect’ on the market, such vertical agreements are exempt if they meet certain criteria.
The following is a list of deal terms which might be required to have specific authorisation internally, perhaps after legal advice has been taken, before being proposed or accepted-
- the restriction of the buyer’s ability to determine its sale price, without prejudice to the possibility of the supplier imposing a maximum sale price or recommending a sale price;
- the restriction of the territory into which, or the customers to whom, the buyer may sell;
- the restriction of active or passive sales to end users by members of a selective distribution system (being where the distributors are appointed on the basis that they meet certain criteria of the producer’s) operating at the retail level of trade;
- the restriction of cross-supplies between distributors within a selective distribution system;
- the restriction agreed between a supplier of components and a buyer who incorporates those components, which limits the supplier’s ability to sell the components as spare parts to end users or repairers not entrusted by the buyer with the repair or servicing of its goods.
If the agreement is horizontal and has the object of distorting competition, it is highly likely to breach competition law regardless of how small the effect on the market. The authorities assume that the parties have achieved their objective. Cartels are an obvious example.
Abuse of dominance
The second limb to competition law regulates dominance in the market.
Dominance is defined as the ability to act, to an appreciable extent, independently of competitors in the same market. Dominance is presumed where a business has over 50 per cent of the market, and is presumed not to exist where it has less than 40 per cent.
Some examples of conduct likely to be regarded as ‘abusive’ are-
- imposing excessive prices;
- predatory pricing (where an organisation will deliberately incur short term losses by charging its customers less for products than it costs it to produce or buy them, in order to eliminate a competitor);
- refusal to supply;
- applying different conditions to equivalent transactions, thereby placing some parties at a competitive disadvantage;
- attaching unrelated supplementary conditions to a contract.
If you suspect your business is involved in or a victim of abuse of dominance, you should carefully consider reporting this to the Office of Fair Trading.
The parties involved in anti-competitive activities such as an infringing agreement or abuse of dominance can be fined up to 10 per cent of their worldwide group turnover. The level of the fine depends on how serious the infringement is, and fines will be reduced for mitigating factors, including coming forward with information at an early stage. Cartels are the most heavily fined.
In addition to fines, any business that has been injured by the infringement may sue for damages in the courts.
Cartels are now a criminal offence and individuals who have participated in a cartel can be imprisoned for up to five years. Directors can also be disqualified from acting as a director for up to 15 years.
The terms of an infringing agreement are automatically void and unenforceable.
The Office of Fair Trading and the European Commission may enter premises unannounced to conduct a search for evidence of infringements. These searches are commonly called dawn raids because they usually happen first thing in the morning.
During a dawn raid, officials will-
- take a copy of any document they consider relates to the subject-matter of their investigation, which will be set out in the notice they are required to produce on arrival;
- demand of any person on the premises an explanation of any such document;
- demand any person on the premises to state to the best of his/her belief where any such document may be found;
- demand the compilation by anyone in the Company of information on, eg. market share, or a particular market.