Competition Act comes of age

Last month heralded the first anniversary of the UK’s Competition Act. When the main part of the Act came into force a year ago, it promised a major change to the

competition regime in the UK and was expected to have significant effects on most businesses. This article looks at whether this

expectation has been met and if so, how the Act has manifested itself

on British business. However, before looking at the Act’s impact, it is worth briefly turning to the main provisions of the Act and instruments available to the regulatory authorities to enforce the Act.

Enforcement

The Act is closely modelled on EU Competition Law, in particular Article 81 and 82 of the EC Treaty which prohibit anti-competitive agreements and abuse of dominance, respectively. The UK Act is based upon two similar prohibitions. The first prohibition is against agreements restricting or distorting competition within the UK or a part of the UK (“the Chapter I Prohibition”). A typical agreement caught by the Chapter I Prohibition would be an agreement that has as its purpose or effect to fix prices or share the market. However, such an agreement will only fall within the scope of the Act if it has an appreciable effect on the market. The Director General of Fair Trading (“The DGFT”) who administers the Act has stated that an agreement between businesses with a combined market share of less than 25% is unlikely to have an appreciable effect.

The second prohibition is against the abuse of a dominant position within the UK or a part of the UK (“the Chapter II prohibition”). Under the Act, dominant position is determined on a case by case assessment. The market share of the business in question is one of the main factors for determining dominance. Even though the Act does not provide a fixed market share threshold for dominance, the DGFT has announced that it is unlikely that a business will be dominant if its market share is below 40%.

The Act provides for different types of exemption from the Prohibitions. Businesses may apply for an individual exemption from either Prohibition by notifying their agreements or conduct. A notification can either be made for a decision or for guidance. The principal difference between a decision and guidance is that a decision is binding on the DGFT whereas guidance is non-binding on the DGFT. The reason why guidance cannot be binding on the DGFT is that guidance is confidential so that third party views cannot be taken into account. In contrast, notification for decision is a public process i.e. third parties are invited to comment so that a full consultation can take place. In addition to these types of notification, the DGFT has developed a practice for “informal guidance”. Informal guidance has no statutory basis. It corresponds to the “fireside chat” practice developed by the DGFT under the merger regime. Other possibilities for exemption are the block exemptions as issued by the Secretary of State. The block exemptions provide for automatic exemptions (no notification is necessary) provided that certain conditions set out in the block exemption in question are met. So far, one block exemption has been made covering vertical agreements (i.e. agreements between businesses on different levels of the distribution chain) and land agreements.

The Act also introduced wide investigation and enforcement powers for the DGFT. The investigation powers cover on-site investigations, including so-called dawn raids, and production of specified documents or information. The enforcement powers include fines of up to 30% of UK turnover for infringement and imprisonment where investigations are obstructed.

Finally, the Act provides, for the first time under UK competition law, that a business may seek remedies such as damages or interdict in local courts against anti-competitive behaviour affecting their commercial dealings.

What has happened since

implementation?

The general expectation that the Act would significantly impact on the commercial practices of UK business has proved right. Both the former and the present DGFT have shown signs of willingness to use the new powers granted to them under the Act. Considering that the DGFT has had to find his feet with the new regime, we have indeed witnessed an active first year under the new Act.

The Act has changed competition practice in the UK from a notification/decision driven regime to a complaint/prohibition driven regime. The main message which the DGFT has been trying to get across is that businesses should complain when they are subject to or aware of anti-competitive conduct. To create awareness of the new rules, the DGFT has been organising talks, sending out training material and been much more active in issuing press releases. The intensive campaign under the mantra of  “complain; do not notify” has resulted in an approximate three-fold increase in the number of complaints to the Office of Fair Trading (“OFT”). Under the old regime the OFT received around 1,200 complaints annually. In this first year of the Act’s operation the number of complaints are reported to be running at an annual rate of approximately 3,000. It is not anticipated that all of these complaints will reveal major infringements of the Act. The OFT expects that only 20% of the complaints will result in serious investigations. The experience has been in some cases that the mere fact of a complaint to the OFT has ended in the desired result for a complaining party. The OFT is for instance aware of a good number of refusal-to-supply cases where the complaint has been withdrawn as a direct result of the business complained of recommencing the supply once it was informed that a formal complaint had been made to the OFT.

Ten notifications

The DGFT’s recommendation to businesses to focus on complaining about anti-competitive behaviour rather than notifying agreements really seems to have hit home. Not only has the number of complaints trebled, but also the number of notifications for a decision has been surprisingly small. There have only been ten notifications for decision since the Act came into force. The notifications have been by businesses in a broad variety of industry sectors from phone distribution to horse-racing to insurance and financial services. Brief details concerning each notification are set out at [Table X]. Given the confidential nature of guidance, there is no information publicly available on the number or nature of the notifications for guidance which the OFT have received. Over and above this, practitioners are well aware that very many more potential notifications have been dealt with by “informal guidance” which has proved a quicker and cheaper means of seeking regulatory “comfort” for clients.

The First Decision

The first and so far only DGFT decision under the Act was published on 25/01/01. The decision cleared the General Insurance Standards Council’s (“GISC”) Rules (“the Rules”). The GISC is a self-regulatory body for the General Insurance Industry and was established to create a harmonised set of standards for its industry members. The GISC’s reason for requesting a decision was that it would be regulating the whole of the general insurance community in the UK which it estimates comprises up 16,000 eligible members. Membership of the GISC is currently voluntary but in the course of 2001, the GISC intends to prohibit members from carrying on general insurance activities with any intermediary which is not operating the GISC regime. The Rules apply to all the members of GISC and indirectly to appointed agents and appointed sub-agents. The Rules cover any insurance activity or product such as selling, advising and brokering insurance. The DGFT found that the Rules did not have as their object or effect an appreciable prevention, restriction or distortion or competition within the UK for the purpose of the Chapter I Prohibition. It is interesting to note that the DGFT did not find it necessary to come to a final view of the relevant market in this case given his finding that the Rules were not restrictive of competition. This demonstrates that the DGFT has followed the custom and procedure of the European Commission in this respect.
Investigation and Leniency Procedures
On the cartels front, DGFT used his dawn raid powers for the first time in the autumn of last year when raiding the offices of First Bus and Arriva north and south of the border. The DGFT had initiated an investigation of alleged market sharing of bus services in Leeds. It has also been reported that there have been four applications for leniency to the OFT’s cartels unit by “whistle blowing” ex-cartel members in exchange for their co-operation to bust the cartels. The considerable fining powers which the Act confers on the DGFT have not yet been used in this first year but with a few cartels known to be under investigation, the first use of financial sanctions should not be far off. It will be interesting to see whether the talk of harsh financial punishment for serious offenders involved in areas such as cartels and bid rigging will be fully metered out.
Direct Action
The novel right of direct action against anti-competitive practices before local courts introduced by the Act has been taken up by business. It appears that, despite the costs involved, some businesses have not been shy to take cases into their own hands, bypassing the DGFT and instigating direct action through the courts. It is believed that up to 20 claims have been taken before local courts throughout the UK. Some of these have ended in out of court settlements. It will be interesting to follow whether this right of action and the focus of the DGFT on complaints rather than notification will change the character of the regime from regulatory to litigious thereby giving it the same flavour as the US competition regime. However, the US concept of “treble damages” and the prevalence of contingency fee based actions are significant incentives in that jurisdiction for
anti-trust litigation; concepts which are foreign to our legal culture.
Compliance Programme
The new competition regime has meant a significant regulatory burden for business. The Prohibitions under the Act are wide and the investigation and enforcement powers of the DGFT are considerable. Businesses are faced with the harsh reality that the DGFT discourages notifications but will fine businesses that infringe the Act. Not surprisingly many businesses up and down the country have invested in compliance programmes and staff training. This is particularly true for businesses which have high market shares or with niche products or service lines or those which operate in sectors known to have caught the regulator’s eye in the past. Compliance programmes have proved attractive to many businesses if only due to the fact that the DGFT has announced that such a programme, when properly implemented, is regarded as a mitigating factor by the DGFT should a business be subject to investigations under
the Act.
An active first year but what
about the future?
The first year under the Act has demonstrated substantial, though restrained, activity by the regulatory authorities. Although the Act has provided a fairly steep learning curve for UK business and its legal advisers, our personal opinion is that there has been great willingness to incorporate the new regime in everyday business practice. It will be of interest to see whether the regulatory authorities will be able to keep up the momentum generated in this first year of the Act’s enforcement.
Further Information
For any practitioner wishing to keep informed on the further developments of the Act and on UK competition matters in general the OFT website at www.oft.gov.uk is a useful point of reference. The site provides clear and helpful information about the provisions of the Act and its enforcement by the DGFT. The site is very user friendly. It contains a public register which lists all notifications. It also contains information and guidance on how to complain, on notification procedures, technical guidelines on the Act and on leniency procedures.
Lisa Pontoppidan and Helen Matheson are solicitors in the competition law practice at McGrigor Donald