Breach of competition law can have a serious impact on a business, leading to agreements being void, fines based on global turnover, criminal prosecution for directors involved, third party actions for damages and reputational harm.
As such, compliance with competition law should be high up on the business agenda and there should be clear procedures in place to ensure employees understand and comply with the legal requirements. Businesses which hold dominant market positions should ensure their employees are properly trained on what behaviour will be considered abusive.
In the UK competition law is governed by the Competition Act 1998. If an agreement will also affect trade between EU member states, the UK competition authorities will also apply EU law, namely Article 101 of the Treaty of the Functioning of the European Union.
An agreement may be caught by Chapter 1 of the CA 98 if it:
- is an agreement between undertakings, decisions by associations of undertakings or concerted practices;
- which may affect trade within the UK; and
- has as its object or effect the prevention, restriction or distortion of competition within the UK.
What types of agreements are caught?
Agreements, decisions or practices which:
- Directly or indirectly fix purchase or selling prices;
- Limit or control production, markets, technical development or investment;
- Share markets or sources of supply;
- Apply dissimilar conditions to equivalent transactions;
- Make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which have no connection to the subject of the contract.
Types of common commercial agreements or clauses which should be considered carefully for anti-competitive features are:
- Agency agreements;
- Distribution agreements;
- Restrictive covenants;
- Franchise agreements;
- Exclusivity agreements;
- Supply contracts;
- Research and development agreements;
- Intellectual property licences and agreements;
- Agreements or practices where undertakings exchange or share information;
Further, any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the UK (Chapter 2 of the Competition Act 1998). If trade between member states is also affected, EU law, namely Article 102 of the Treaty of the Functioning of the European Union, must also be considered.
What is an “agreement”?
An agreement can be formal or informal, written or oral, and does not have to be legally binding.
What is an “undertaking”?
An undertaking is any natural or legal person capable of carrying on commercial or economic activities relating to goods or services. Therefore an undertaking can include companies, partnerships, sole traders, non-profit making partnerships or companies, state undertakings carrying out an economic activity and non-UK undertakings if the agreement is implemented in the UK.
The agreement must involve two or more undertakings which are independent of each other. Therefore, agreements between businesses forming part of the same corporate group will generally not be caught.
What is a “decision between associations of undertakings”?
A body can be classified as an “association of undertakings” irrespective of whether it carries on any commercial or economic activities of its own. However, it must be a self-standing entity, usually with members, for instance trade associations, agricultural co-operatives and sports associations.
A decision between associations of undertakings can include rules, recommendations, resolutions of management, and rulings of the chief executive. The question is whether the object or effect of the decision is to influence the conduct or coordinate the activity of members.
What is a “concerted practice”?
A concerted practice is a form of practical cooperation, knowingly entered into by the parties which is intended to amount to substitution for competition in the market.
Contact or communication which influences market behaviour may be caught if such conduct leads to, or would have led to, a different result if the undertakings had not embarked on the conduct.
Will it have an “appreciable effect”?
The prohibition only applies where an agreement brings about an appreciable restriction on competition. This involves an investigation into the geographical and product market in which the agreement will or does operate. An agreement will not have an appreciable effect on competition within the UK if:
- it is an agreement between actual or potential competitors and the combined market share of the parties does not exceed 10%; or
- it is an agreement between undertakings which are not actual or potential competitors and the combined market share of the parties does not exceed 15%.
The market shares of the group of companies to which the contracting companies belong must be included (not only the shares of the contracting companies themselves).
However, the appreciable effect or deminimis rule does not apply to agreements involving hardcore restrictions including:
- agreements between competitors which seek to fix prices; divide or share the market; or limit production; or
- agreements between non-competitors including resale price maintenance obligations, and restrictions on who a product can be sold to.
If the parties’ market shares exceed the thresholds above, this does not automatically mean in itself that any restriction on competition is appreciable. Where the thresholds are met, the authorities would look at the content of the agreement and the structure of the markets affected.
What agreements are excluded or exempt?
Some agreements are excluded from Chapter 1 including mergers and concentrations (which have separate rules), competition scrutiny under other enactments (e.g. Broadcasting Act 1990 and Communications Act 2003) and planning obligations and other general exclusions (e.g. public policy).
An agreement may be exempt if the competitive disadvantage is outweighed by an economic benefit, for instance, it improves production or distribution or promotes technical or economic progress which allows consumers a fair share of the resulting benefit. Further, the competitive restrictions must not be indispensable to achieving those objectives and it must not eliminate competition in the relevant market.
An agreement may fall into a block exemption – these are exemptions adopted by the Secretary of State upon recommendation from the CMA.
Abuse of Dominance
To assess dominance you first need to look at the relevant product market and the relevant geographical market.
Breach of competition law can have devastating effects including severe fines based on global turnover, criminal prosecution for the directors involved and serious reputational damage. Therefore businesses which hold dominant market positions should ensure their employees are properly trained on what behaviour will be considered abusive.
What type of behaviour will be considered abusive?
Chapter 2 of the Competition Act 1998 sets out the following non-exhaustive list:
- Directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
- Limiting production, markets or technical development to the prejudice of consumers;
- Applying dissimilar conditions to equivalent transactions with other trading parties, placing them at a competitive disadvantage;
- Making the conclusion of contracts subject to the acceptance of supplementary obligations which have no connection with the subject of the contracts.
Abusive behaviour to be aware of includes:
- Excessive high pricing;
- Predatory pricing;
- Output restrictions;
- Refusals to deal;
- Discriminatory pricing;
- Unfair contract terms favouring some customers over others;
- Tying; and
- Margin squeeze.
Are you dominant in your market?
The types of behaviour set out above will only fall foul of Chapter 2 if the company exercising such behaviour is dominant in the market which may be affected.
The classic definition for dominance laid down by European case law is an undertaking which is in “a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors and ultimately of the consumers.”
To assess dominance you first need to look at the relevant product market and the relevant geographical market in which you operate.
Once the market has been defined, it should be assessed whether you have market power. Do you have the power to behave independently of competitive pressures which allows you to charge higher prices than if you faced effective competition, to engage in anti-competitive conduct and exclude or deter competition from the market?
The following thresholds are considered in assessing dominance. Where a company has a market share:
- exceeding 50%, dominance is presumed;
- less than 40%, the company is usually not considered dominant but may be dominant dependent on the circumstances;
- 24% or less, it is presumed not to be dominant.
Dominance can also be collective where two or more undertakings are able to behave to an appreciable extent independently from their competitors. This can be as a result of express agreements or licences between the relevant undertakings; the legal framework; or structural links.
Are there any exclusions?
Certain conduct will be excluded from Chapter 2 including:
- Mergers (these are covered by a separate competition regime);
- Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly insofar as the prohibition would obstruct the performance of the particular task assigned to it, for instance postal services;
- conduct to comply with a legal requirement;
- conduct specified in an order of the Secretary of State to avoid conflict with international obligations; and
- conduct to comply with an order of the Secretary of the State where there are exceptional and compelling reasons of public policy.
Competition and Markets Authority
The Competition and Markets Authority (CMA) (which replaced the OFT and Competition Commission) is responsible for ensuring compliance with competition law. Its responsibilities include:
- investigating mergers which could restrict competition;
- conducting market studies and investigations in markets where there may be competition and consumer problems;
- investigating where there may be breaches of UK or EU prohibitions against anti-competitive agreements and abuses of dominant positions;
- bringing criminal proceedings against individuals who commit cartel offences;
- enforcing consumer protection legislation to tackle practices and market conditions that make it difficult for consumers to exercise choice;
- co-operating with sector regulators and encouraging them to use their competition powers;
- considering regulatory references and appeals.
Penalties for breach of competition law
If the Competition and Markets Authority finds that there has been a breach of competition law, depending on the offence committed:
- the agreement may be void and unenforceable;
- the undertaking may be ordered to cease or modify its conduct;
- the undertaking may be fined based on worldwide turnover;
- individuals involved (or those who ought to have known) may be disqualified as directors for up to 15 years; and
- individuals may be criminally prosecuted resulting in fines or imprisonment.
Third parties may also bring an action for damages in the high court or, in appropriate cases, an injunction may be sought.