Competition law – the basics
This guide was last updated in April 2008.
Introduction
Failure to comply with UK or EC competition law can have very
serious consequences.
Firms involved in anti-competitive behaviour may find their
agreements to be unenforceable and risk being fined up to 10% of
group global turnover for particularly damaging behaviour as well
as exposing themselves to possible damages actions from customers.
Furthermore, individuals could also find themselves facing director
disqualification orders or even criminal sanctions for serious
breaches of competition law (see OUT-LAW's guide to Anti-competitive behaviour under the Enterprise
Act).
As such, any business (whatever its legal status, size and
sector) needs to be aware of competition law, firstly so that it
can meet its obligations (and in doing so, avoid the penalties
mentioned above), but also so it can assert its own rights and
protect its position in the market place.
In the UK two sets of competition rules apply in parallel.
Anti-competitive behaviour which may affect trade within the UK is
specifically prohibited by Chapters I and II of the Competition Act
1998 and the Enterprise Act 2002. Where the effect of
anti-competitive behaviour extends beyond the UK to other EU-member
states, it is prohibited by Articles 81 and 82 of the EC
Treaty.
UK and EC competition law prohibit two main types of
anti-competitive activity:
- anti-competitive agreements (under the Chapter I and Article 81
prohibitions); and
- abuse of dominant market position (under the Chapter II /
Article 82 prohibitions).
Anti-competitive agreements (Chapter I / Article 81)
Both UK and EC competition law prohibit agreements, arrangements
and concerted practices businesses which appreciably prevent,
restrict or distort competition (or have the intention of so doing)
and which affect trade in the UK or the EU respectively.
Consequences of breach
Contravention of Chapter I or Article 81 can have serious
consequences for a company:
- firms engaged in activities which breach these provisions can
face fines of up to 10% of group global turnover;
- provisions in agreements which breach Chapter I or Article 81
are void and unenforceable (which may lead to the entire agreement
being unenforceable);
- firms in breach of Article 81 or Chapter I also leave
themselves exposed to actions for damages from customers and
competitors who can show they have been harmed by the
anti-competitive behaviour; and
- breach of Chapter I can result in individuals being
disqualified from being a company director and lead to and criminal
sanctions.
Types of agreement caught
Whether an arrangement is anti-competitive is assessed on the
basis of its objective or its effect on competition, rather than
its wording or form. This means that verbal and informal
'gentlemen's agreements' are equally capable of being found to be
anti-competitive as formal, written agreements.
Examples of the types of arrangement which are generally
prohibited under Chapter I and Article 81 include:
- agreements which directly or indirectly fix purchase or selling
prices, or any other trading condition (for example, discounts or
rebates, etc);
- agreements which limit or control production, markets,
technical development or investment (for example, setting quotas or
levels of output);
- agreements which share markets or sources of supply; and
- agreements which apply dissimilar conditions to similar
transactions, placing other trading parties at a disadvantage.
Cartels
Cartel behaviour between competitors is the most serious form of
anti-competitive behaviour under Chapter I or Article 81 and
carries the highest penalties. A 'hardcore' cartel is one which
involves price fixing, market sharing, bid rigging or limiting the
supply or production of goods or services. Individuals prosecuted
for a cartel may be liable to imprisonment of up to five years
and/or the imposition of unlimited fines.
Exemptions
The fact that an agreement is restrictive of competition does
not mean that it is automatically prohibited (unless it is a
hardcore cartel, see above). It may be that an agreement which
appears to fall within the prohibitions under Article 81 or Chapter
I is excluded or exempted from the provisions of the competition
rules.
For example, an agreement which would otherwise be caught by
Article 81 may be assumed to be harmless where the parties to it
have market shares sufficiently low that there can be no real
effect on trade between Member States. The same principle is
considered to apply, by analogy, to agreements otherwise caught by
Chapter I.
Other agreements which may have a real effect on trade within
the EU may, nonetheless, be exempted under a 'block
exemption' – a group exemption, which automatically exempts
agreements falling within its terms. Different block exemptions may
apply depending on the nature of the agreement or the market sector
concerned.
Each sets out certain criteria (for example, relating to the
market share of the parties and the types of restriction contained
within the agreement) which must be met in order for an agreement
to be block exempted.
Even if an agreement does not fit squarely within a block
exemption, it is still not automatically unlawful or unenforceable.
An agreement may be individually exempted on the grounds that its
restrictions of competition are outweighed by its beneficial
effects.
For example, an agreement between two pharmaceutical companies
to develop a new drug is likely to be subject to the Chapter I or
Article 81 prohibition, as the two companies working together can
be seen to reduce the number of products being produced, by
preventing each company from working on independent projects.
However, the benefits for consumers resulting from such
co-operation (i.e. more investment, leading to better drugs which
reach the market faster), may be considered sufficient to off-set
any anti-competitive effects.
Abuse of a dominant market position (Chapter II / Article 82
prohibition)
Both UK and EC competition law prohibit businesses with
significant market shares unfairly exploiting their strong market
positions.
Consequences of breach
Contravention of Article 82 or Chapter II can have serious
consequences for a company:
- firms engaged in activities which breach these provisions can
face fines of up to 10% of group global turnover;
- conduct in breach of Article 82 or Chapter II can be stopped by
court injunction;
- firms in breach of Article 82 or Chapter II also leave
themselves exposed to actions third parties who can show they have
suffered loss as a result of the anti-competitive behaviour;
and
- breach of Chapter II can result in individuals being
disqualified from being a company director.
Type of behaviour caught
To be in a position of dominance, a business must have the
ability to act independently of its customers, competitors and
consumers. Establishing if a company is dominant requires a complex
assessment of a number of elements but, as a general rule, if a
business has a 50% market share there is a presumption that it is
dominant. However, dominance has been found to exist where market
share is as low as 40%.
Article 82 requires dominance in a substantial part of the
European Union, but there is no requirement under Chapter II that a
dominant position must be held in a substantial part of the UK,
meaning that, in theory at least, dominance could be considered to
exist in a fairly small area of the UK.
However, having a dominant position does not in itself breach
competition law. It is the abuse of that position that is
prohibited. Examples of behaviour that could amount to an abuse by
a business of its dominant position include:
- imposing unfair trading terms, such as exclusivity;
- excessive, predatory or discriminatory pricing;
- refusal to supply or provide access to essential facilities;
and
- tying (i.e. stipulating that a buyer wishing to purchase one
product must also purchase all or some of his requirements for a
second product).
Exemptions
There is no equivalent to the exemption for anti-competitive
agreements, whereby a firm's conduct may be exonerated because of
some compensating benefit. However, a dominant company may be able
to show that it has objective justification for otherwise abusive
behaviour in certain circumstances.
For example, a company may refuse to supply to a particular
customer based on its poor credit rating, which would amount to the
protection of legitimate business interests and not, therefore, to
abusive conduct under Chapter II or Article 82. It would only be
when such behaviour goes beyond what is necessary to protect the
business's interests that this would amount to abuse.
Enforcement of competition law
UK competition authorities and courts are empowered to apply and
enforce the entirety of Articles 81 and 82 of the EC Treaty, in
addition to their existing powers to enforce the Competition Act
1998. The Office of Fair Trading (OFT) is the principal competition
law enforcement authority in the UK, though there are a number of
sectoral regulatory authorities with similar powers to enforce
competition laws in their respective sectors (for example, OFGEM
for the electricity sector and OFWAT for the water sector).
The UK competition authorities have significant powers to
investigate suspected anti-competitive behaviour (including
entering and searching business and private premises with a
warrant) and to impose significant fines on businesses found to
have infringed competition law. Criminal sanctions are also
possible for the most serious breaches of competition
law (see OUT-LAW's guide to Anti-competitive behaviour under the Enterprise
Act).
The risks associated with being a party to an anti-competitive
agreement or abusing a dominant position are serious. In addition
to the consequences already highlighted in this article
(substantial fines for both businesses and individuals, void and
unenforceable agreements, damages actions and criminal sanctions),
a further key deterrent for businesses is the major disruption and
damage to a company's reputation which would arise from lengthy
investigations or subsequent litigation from customers, competitors
and consumers.
Achieving compliance
In view of the severe consequences of non-compliance, we
recommend that businesses should regularly review whether the
company's practices and agreements comply with competition law. For
any company (and especially any company with a significant share of
the markets in which it is active), it is vitally important to
promote an understanding amongst employees as to what type of
behaviour is and is not permissible under competition law.
One practical way to promote an understanding of competition law
amongst employees is for a company to devise and actively implement
a competition compliance policy that is specifically tailored to
that company. Not only does this minimise the risk of being
non-compliant in the first place, but if a company is investigated
for anti-competitive behaviour, evidence of a competition
compliance policy may be taken into account by the OFT and European
Commission and could lead to a reduction in fine.
Contacts
For further information, or if Pinsent Masons' competition lawyers can assist in designing a
bespoke competition law compliance policy to suit your company,
please contact:
For further information, please contact any of the
following:
