“From 1 March, the UK will move from having one of the most permissive competition regimes in the world to one of the toughest. The new law gives my officials the power to enter premises and require the production of documents. I will be able to impose penalties on those who abuse a dominant market position or enter into secret deals to destroy competition in order to keep prices high for UK consumers. The days of anti-competitive practice are over.”
John Bridgeman, Director General of Fair Trading.
The law relating to competition underwent a radical change at the beginning of March, when the Competition Act 1998 became law. The Act contains two powerful prohibitions: one on anti-competitive agreements that affect trade within the UK, and one on the abuse of a national or local ‘dominant position’.
These prohibitions will attract swingeing fines if the Office of Fair Trading (OFT) imposes a penalty – of up to 10% of their UK turnover for up to three years. Competitors, consumers and interest groups will have a right to sue for damages in the civil courts. For companies with significant market power, the law will also prohibit some types of unilateral commercial conduct.
The Act has swept away a bundle of 1970s legislation on restrictive trading agreements and resale price maintenance. By bringing the two legal regimes into line, the expectation
is that the burden on industry will be lightened. The other side of this coin is that companies that operate only within the confines of the UK – and which previously could largely afford to ignore the EC laws – will now be subject to this powerful and unpredictable legal instrument.
Any agreement that has an anti-competitive object or effect will be prohibited unless it is excluded from the law altogether, or is exempted under special provisions. Transactions that we would not normally consider to be ‘agreements’ will also be covered – such as those that were never put into writing, or were not meant to have legal effect. Agreements with competitors will almost always be prohibited.
An agreement, for example, to fix purchase or selling prices; to divide territories; or a no-poaching agreement to allocate customers or suppliers, will all attract the prohibition, as will trading boycotts. But there is also a vital exclusion relating to ‘vertical agreements’.
Under this exclusion, most agreements in the supply chain will be excluded from the Act unless they contain any provision restricting prices or pricing conduct, or they are concluded by a company having a dominant position in the relevant market, and contain restrictions on competition.
Apart from the above exclusion, there are some other agreements that will also be excluded – such as the rules of certain professional bodies, mergers, transactions which are regulated by other laws, etc. Other agreements will be exempted from the new law – either on a case-by-case basis, or by category. Any agreement that is exempt from EC competition law will automatically be exempt from the UK law.
For companies with significant market power (even in a local market), the law also prohibits some forms of conduct, even where they are not based on agreements. Conduct will be prohibited if it amounts to an ‘abuse of a dominant position’. A company is in a dominant position where it has sufficient market strength to act independently of its competitors. This will depend not only on market share, but also on the ease or otherwise of new competitors entering the market.
Although the new law has already entered into force, it is not too late for companies to reduce their potential exposure. They should carry out an audit of agreements and practices, especially those that influence conduct on the market, such as contacts with competitors, exclusive or long-term supply agreements. These should be analysed to see whether they could be regarded as anti-competitive. This may need assistance in some cases from lawyers, economists or from the OFT.
Agreements or practices that are prohibited should be modified as soon as possible. In doing so, companies should be careful to consult with all the parties to such agreements to avoid any claims of breach of contract. If a prohibited agreement might benefit from an exemption, companies should prepare to make an application to the OFT.
The one thing you should not do is ignore the new law because it gives the OFT vigorous powers of investigation. Officials of the OFT can enter any premises (including the homes of employees), with a warrant if necessary, demand to see documents and computer files, take copies of them, and question any member of staff. The OFT will also be encouraging ‘whistle-blowers’ to contact its 24-hour cartel task force with evidence of cartels and other anti-competitive conduct.
At a roundtable discussion hosted by the London office of US law firm Arnold & Porter it was emphasised that lawyers would have to rely heavily on economists in assessing whether companies are in breach. The panel included Mark Allen, Association of British Insurers; Jim Begg, Dairy Industry Federation; Howard Cartlidge, head of competition group, Olswang; Dr Sebastian Eyre, competition policy adviser, Gas Consumer Council; Tim Frazer, partner, Arnold & Porter; Deirdre Trapp, partner, Freshfields, and was convened by Adrian Lithgow of Levick Strategic Communications.
The group heard that assessing whether you are acting anti-competitively now has to be examined using policy, economics and law. In spite of the guidelines, it throws the burden back on industry and their advisers. It is always going to be less clear than it was before.
At the event, Freshfields’ Trapp commented: “It is part and parcel of Government economic policy. This drive for consumer protection – the ‘Rip-off Britain’ story – produces frantic price cutting, whether or not the economics of the market will justify it. It is a fantastic way of reducing inflation without the Government having to lift a finger – and there are votes in it.”
But Begg felt it would do little to protect businesses squeezed by unfair competition because of the bureaucracy involved. “Interim measures will help, dawn raids and all the rest of it, but I still wonder whether everything that is planned is going to prevent people going out of business while the legal procedures drag on,” he said.
When the panel was asked whether the Act is so broad that it will be difficult to implement, the response from Trapp was “the guidance that has been issued by the OFT has been substantially helpful. They have tried to create exemptions that seem reasonably sensible. The major area of uncertainty is that for every exemption there is a clawback. That is causing some unease. There is a wide element of discretion about what can and cannot be pursued by the OFT. You wonder where the agenda is and whether the OFT will be getting a fair amount of direction as to what they would like to see examined”.
Howard Cartlidge agreed with this “from the OFT’s point of view, because they have so much discretion in terms of clawback and in terms of interpretation, it is easy to implement because they can usually find a reason to intervene. The difficulty is more for businesses and their advisers in deciding when the OFT is going to jump in”.
Representing the Gas Consumer Council, Eyre emphasised: “Utilities are going to have big problems, because they are less used to competition; it has only been going for two years. Concurrency issues lead to three things. You have got to look at the way in which European law is going to be interpreted by the national authority, you have got to look at the way in which the OFT then produces a set of competition guidelines in relation to the sectoral regulators and sectoral regulations also have to get their story right”.
The question of whether economic factors determined whether business practice is within the acceptable definitions of the Act was put to the panel. Begg said: “The overriding influence is economic. I would be amazed if any change from the existing situation took place, which at the end of the day relies very, very heavily on economic theory practice. It seems to me that at the end of the day it is down to economic arguments. Take price discrimination. It is not necessarily always a bad thing, but very much the key indicator of anti-competitive activity. It is down to economic analysis to prove or disprove that”.
