Competition law: the new regime begins

Executive Summary

The new Competition Act 1998 comes into force on 1 March 2000.  Businesses need to be aware that:

• competition law which was previously of little practical relevance to small and medium sized enterprises (SMEs) in the UK, could now apply to SMEs even where they are active only in local markets;
  
• failure to comply with the new Act could result in companies being fined up to 10% of their annual UK group turnover for each year of infringement up to a maximum of 3 years;
  
• directors, employees and other officers of companies who obstruct investigations by the UK’s competition authorities could face unlimited personal fines or up to 2 years in prison; and
  
• the best means of ensuring no breach of the Act is to have in place a competition compliance programme.

Businesses have, therefore, only a short time to prepare.

Since the Competition Act received the Royal Assent on 9 November 1998, much has been written about the impending new legislation (and indeed, Kirsty Middleton of Dundee University has previously commented on the draft bill in the Journal) (JLSS, August 1998, Vol 43 No 8).  In an article to appear in a future edition of the Journal consideration will be given to the application of the Act in a specific industry, using the IT sector as a case study.  Since Kirsty Middleton’s Journal article, the Bill has become an Act and a number of finalised and draft guidelines and rules have been issued in respect of specific aspects of the Act.

Given this, what are the key points of which businesses should now be aware? This article gives a broad overview of the main issues.

Why has the Act been introduced?

The Act has been introduced to:

• give the UK a much more effective competition regime, in line with the Government’s aim to boost consumer rights and protections; and
  
• to harmonise the UK regime with that existing at the EC level so as to ease compliance and to minimise the costs to business of ensuring such compliance.  Indeed Section 60 of the new Act provides that the UK authorities, when reaching decisions, should ensure consistency with the existing EC case law and EC Treaty principles.  Relevant decisions and statements of the European Commission should also be taken into account.

Similar regimes have been recently introduced in countries across the EC, such as the Netherlands.

What does the Act do?

The Act contains 2 central prohibitions:

• The Chapter I prohibition.  Based on Article 81 of the EC Treaty (formerly Article 85 EC), this prohibition bans agreements or practices which have an effect in the UK or a part of the UK (and can therefore include local markets) and which have the object or effect of preventing, restricting or distorting competition.
  
• The Chapter II prohibition.  This reflects Article 82 of the EC Treaty (formerly Article 86 EC) and bans the abuse of a dominant market position (again, in the UK or a part of the UK).

The Act also grants the Director General of Fair Trading (“DGFT”), who is currently John Bridgeman, powers of enforcement which are much stronger than those which he previously held.  The DGFT will exercise these powers through his Office of Fair Trading (the “OFT”).  There are provisions dealing with the concurrent jurisdiction of utility regulators under the Act and these are summarised below.

The Chapter I prohibition bans what types of practice?

There is no exhaustive list of the types of practices which might be. outlawed by the Chapter I prohibition.  However, from the terms of the Act, the guidance issued so far in respect of the Act, and the considerable body of existing EC case law, the following (non-exhaustive) list contains examples of practices which could be caught by Chapter I:

• Price Fixing:This is the most obvious form of anti-competitive practice.  Price-fixing between competitors will be banned.  Price-fixing cartels have been attacked several times at EC level. For instance, in Polypropylene ([1988] 4 CMLR 347]), a price-fixing cartel was condemned by the European Commission.
• Market-Sharing:The sharing of markets (by customer or by geographic area) will also be caught by Chapter I.  In the first decision where a fine was imposed as a result of the breach of EC competition law, the members of a quinine cartel who, amongst other practices, had divided up markets between them were fined ECU 500,000 (Quinine [1969] CMLR D41).
• Fixing Trading Conditions:The fixing of trading conditions (e.g. the terms and conditions applying to the provision of goods or services) pursuant to an agreement between competitors can also be caught by Chapter 1.  This is most likely to appear in the context of a trade association’s activities.
• Bid-rigging:This is also known as collusive tendering, where companies essentially agree, before submitting tenders for a contract, who is to win the tender.  The nominated successful tenderer then pitches its bid below an agreed price, whilst the other bidders tender above that price.

This happened frequently in the case of Pre-Insulated Pipe Cartel (OJL 024, 30th January 1999).

• Information Exchanges:The exchange of information among competitors on sensitive trading issues such as prices or detailed sales data can be struck down.  In the Tractors case ([1993] 4 CMLR 358 (upheld on appeal)), UK tractor manufacturers such as John Deere and New Holland Ford were found guilty of breaching competition law by exchanging very detailed (and almost current) sales data.
• Controlling investment/production:Agreements among competitors to limit production or investment in a particular market may be caught by the prohibition.  For instance, the European Commission fined a Dutch quota scheme in the dairy sector in the late eighties (MELDOC, [1989] 4 CMLR 853).
• Joint Buying:Joint buying, and joint selling also, is where groups of buyers (or sellers, as appropriate) agree only to buy (sell) at certain prices, thus limiting competition in that sector.  This may also be subject to the Chapter I prohibition.

This list is not exhaustive. However, these types of practices are not uncommon in everyday trade, and in particular, sales staff will need to be aware of the hazards of engaging in such strategies.

When does the Chapter II prohibition apply and what practices does it prohibit?

The Chapter II prohibition will only apply where a company has a dominant market position.  As a rule of thumb, this is where a company has a market share of 40% or more, but a company, in particular circumstances, might still be found to be dominant notwithstanding a sub-40% share.  Bear in mind that this could mean e.g. a 40% share of the local market rather than just a share of the total UK market.

Where a company does have a dominant market position, there are certain trading strategies which it might be wary of engaging in, so as not to harm competition in its market:

• Abusive Pricing:The company must take care not to use its dominance to charge excessively high prices.  In a case involving the market for bananas, the European Court of Justice (the “ECJ”) held that “charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied is...an abuse” (United Brands [1978] 1 CMLR 429, quoted at page 9 of the OFT’s Chapter II prohibition guideline).
• Discriminatory Pricing:Where the same price is charged to different categories of customers, or different prices are charged to the same category of customers, this discrimination can be an abuse. In the Hilti case ([1985] 1 CMLR 282, upheld on appeal), Hilti was fined for (amongst other practices) offering better pricing terms to the principal customers of Hilti’s main competitors compared to its other customers.
• Discounts/Rebates/Loyalty Bonuses:Closely connected with discriminatory pricing is the use of discounting or rebate schemes, or loyalty bonuses, to win and retain customers from competitors.  For instance, BPB was fined for using loyalty payments to have builders’ merchants agree to stock only BPB’s plasterboard (OJ [1989] L 10/50, upheld on appeal).
• Predatory Pricing:The under-cutting of a competitor with the intention of driving that competitor out of the market can be an abuse when carried out by a dominant undertaking.  AKZO was fined ECU 10,000,000 for using predatory pricing to try to exclude a smaller competitor, ECS, from the UK and Irish markets for benzoyl peroxide ([1991] ECR 1-359).
• Vertical Restrictions:There is a whole range of other practices which, when carried out by a dominant company, could constitute a breach of the Chapter II prohibition.  These are discussed in the OFT’s guideline on the Chapter II prohibition and include re-sale price maintenance, tying in sales (bundling), and full line forcing (forcing a buyer to buy a whole range rather than just one product).

Again, the above list is not exhaustive, but if a company is dominant, it needs to take care not to act abusively or it may find itself in breach of the Chapter II prohibition, even if it is only dominant in a local market.

And if there’s a concern that a practice/agreement may be breaching the Act?

An agreement or practice can be notified to the OFT for guidance (or even a full-blown decision) as to whether it is in breach of the Act.  Where guidance is sought, this affords the notifying undertaking the chance to amend its agreement if it is in breach.  It is intended that there will be fees for notifying though - £5,000 for seeking guidance and £13,000 for seeking a full decision.  It is not intended that there will be a reduction in these fees for SMEs, a point on which the Government has been criticised.  Where an agreement is notified for a decision as to the application of the Chapter I prohibition, an exemption can also be requested (there are no exemptions under Chapter II).  Exemptions take one of 3 forms:

• a parallel exemption.  This is where the agreement in question already has an exemption at the EC level;
  
• a block exemption.  This is where the Secretary of State has issued an Order that a particular category of agreements, so long as they comply with certain specified conditions, will obtain the benefit of an automatic exemption; and
  
• an individual exemption.  It is this exemption which can be requested by notification to the OFT.  In broad terms, an individual exemption may be granted to an agreement which contributes to improving production or distribution, or technical or economic progress, and allows consumers a “fair share of the resulting benefit” (Section 9(a) of the Act).  Any restrictions in that agreement though must only be those which are indispensable to delivering the objective of the agreement and must not have the effect of eliminating competition in respect of a substantial part of the products or services in question.

Is there a de minimis provision?

The OFT has indicated that it will not consider the Chapter I prohibition to have been breached where the aggregate share of the parties under investigation on the UK market in question is no more than 25%.  The OFT will not consider, in such circumstances, that there will have been an ‘appreciable’ effect on competition.

There is no equivalent de minimis provision for the Chapter II prohibition.

However, where conduct has been found to be anti-competitive and it is a “small agreement” (in respect of the Chapter I prohibition) or “conduct of minor significance” (in respect of the Chapter II prohibition), the offending companies will escape a fine.  The Secretary of State has yet to define the terms “small agreement” and “conduct of minor significance” but it is thought that these will be defined by reference to the turnover of the companies involved.

It should also be noted that in addition to the de minimis provision, there is also scope in the Act for certain types of agreements and practices to be excluded from the ambit of the Act altogether and this is discussed below.

Fines for infringement

It has now been announced that the maximum fine for an infringement of the Act will be 10% of the offending company’s annual group UK turnover for each year of infringement (up to a maximum of 3 years).

The OFT has issued draft guidance on how those fines are to be calculated. The Government is also considering what is to constitute ‘turnover’ for the purposes of the DGFT’s fining powers.

In essence, the level of the fine will depend, ultimately, on the duration and seriousness of the offence.  Mitigating factors will be taken into account such as whether the company in question had an effective competition compliance programme in place at the time.

It should also be noted that directors, employees and other officers of a company could face imprisonment of up to 2 years or unlimited fines for obstructing an investigation by the OFT.

What are the OFT’s powers of investigation?

The Act grants the DGFT two principal powers of investigation where he reasonably suspects that the Chapter I or Chapter II prohibitions may have been infringed:

• the power to request information; and
  
• the power to enter (and in certain circumstances, search) premises.

These powers will be exercised through the OFT.

The OFT will be able to make 2 types of requests for information.  The first type is an informal one - if the OFT asks for particular information, the recipient of the request need not comply.  However the second type is a formal request - sanctions (principally a heavy fine as noted above) will be imposed on those who refuse to comply.

The OFT can also enter premises to carry out an investigation - when unannounced, such visits are often called “dawn raids”.  The OFT can, without a warrant, enter premises, ask for documents to be produced or request that staff explain the contents of any documents.  With a warrant (which will be granted by the Court of Session, or in England, the High Court), the OFT can force entry to premises and, having entered premises (forcibly or not) proceed to search those premises.  ‘Premises’, importantly, includes vehicles and domestic premises used for business purposes.

Investigating officers can take copies of documents (but not communications between external or internal lawyers and the company).  Documents can even be taken away by the OFT for up to three months where a warrant has been obtained.

There is a defence against self-incrimination - no answer need be given to a question from the OFT which would constitute the admission of an infringement.  As noted above, the obstruction of the OFT’s investigatory powers could attract significant sanctions.

In the event of a dawn raid and if there is no in-house legal counsel on the premises, investigators will normally wait for up to one hour for external legal advisors to arrive, provided the OFT is satisfied that the investigation will not be prejudiced by such a delay.

It is, however, advisable to be prepared in advance for the possibility of a dawn raid. In particular the implementation of a compliance programme which is aimed at ensuring the company does not breach competition law is highly recommended.  The ready availability of a guide detailing how to respond to a dawn raid is also invaluable.

What is a compliance programme and how can it help?

A compliance programme is a programme designed to enable businesses to comply effectively with competition law.  The main elements are:

• a legal audit of the company’s existing agreements and practices;
  
• educating staff as to what competition law permits (and prohibits);
  
• establishing a compliance team;
  
• creating an on-going monitoring and evaluation system; and
  
• implementing an effective document management regime.

An important part of educating staff and ensuring a workable monitoring system is the production of a compliance manual.  This will, for example, state company policy on competition matters, outline basic concepts in competition law, list dos and don’ts and give contact details for the compliance team.  The manual should be direct, relevant and designed for everyday use.

As noted above, the OFT has already stated that it will follow the example of the European Commission in competition matters and treat more leniently those companies which, although they may have breached the Act, had an effective compliance programme in place at the time. In essence, this means that any fines which are imposed will be reduced.  The short term cost of setting up the compliance programme, can, therefore, save much expense in the future, not only in terms of reduced fines on infringement, but also in terms of saving management time.

Importantly, the Turnbull report was issued in 1999, offering guidance on how to comply with the Combined Code of Corporate Governance.  The report advises boards to ensure that internal controls are in place to manage areas of risk to their businesses.  The new Act will constitute one such area of risk and a compliance programme will be an effective element of the necessary risk management response.  It is widely believed that the recommendations in this report will be adopted by all companies (not just listed companies) as a standard of good business practice.

Transitional provisions and exclusions

The Act provides that certain types of agreement will be excluded from the application of the Chapter I and Chapter II prohibitions.  The Act also makes certain transitional arrangements.

The exclusions are summarised in the OFT’s guideline “The Competition Act 1998: The Major Provisions”.  They include for instance:

Agreements excluded from the Chapter I prohibition:

• An agreement subject to competition scrutiny under the Financial Services Act 1986, the Companies Act 1989, the Broadcasting Act 1990, or the Environment Act 1995;
• An agreement required to comply with a planning obligation;
• An agreement which has been awarded a Section 21(2) direction under the Restrictive Trade Practice Act 1976 (“RTPA”) - i.e. the restrictions in the agreement have been considered and have been found to be insignificant in competition terms; and
• An agreement constituting a designated professional rule.

Agreements excluded from the Chapter I and I or Chapter II prohibitions:

• An agreement or conduct to the extent to which it would result in a merger within the merger provisions of the Fair Trading Act 1973;
• An agreement or conduct which would be a merger subject to the scrutiny of the EC Merger Regulation; and
• An agreement or conduct to the extent to which it is made or engaged in to comply with specified legal requirements.

The above lists are not exhaustive but, suffice to say, there are a number of exclusions available from the Chapter I and Chapter II prohibitions.

It is currently envisaged that, with some exceptions, vertical agreements (e.g. an agreement between a wholesaler and a retailer) and land agreements will be excluded from the application of the Chapter I prohibition. Vertical and land agreements are not considered in detail here although the new EC vertical agreements block exemption should also be borne in mind.

There are also transitional provisions in the Act in respect of the application of the Chapter I prohibition.  These are complex and therefore are only considered in general terms in this article.

The RTPA (which requires the furnishing to the OFT of certain restrictive agreements) will be repealed as of 1 March 2000.

What happens under the new Act to agreements caught by the RTPA?

Broadly, agreements made prior to 9 November 1998 and properly registered and cleared under the RTPA will be excluded from the application of the new Act.  Pre-9 November 1998 agreements not caught by the RTPA at all will receive a one year “transitional period” (i.e. the new Act will not apply until 1 March 2001).

Agreements made between 9 November 1998 and 1 March 2000 are only registrable under the RTPA if they contain an element of price-fixing or they vary agreements previously furnished under the RTPA.  These agreements, if duly registered and cleared under the RTPA before 1 March 2000, will receive an exclusion from the Chapter I prohibition.  Agreements made between 9 November 1998 and 1 March 2000 which are not registrable under the RTPA will receive a one year transitional period.

Agreements made on or after 1 March 2000 will not be caught by the RTPA (which will, of course, have been repealed).

The register of those agreements which have been furnished to the OFT under the RTPA will remain publicly accessible, but it is expected that access will gradually be limited.

Most agreements made pre-1 March 2000 will receive at least a one year transitional period before the Chapter I prohibition will apply.  Generally, the Chapter I prohibition will only apply immediately as of 1 March 2000 to agreements which have not been duly registered under the RTPA and to agreements made on or after 1 March 2000.

Five year transitional periods will be available to certain utilities agreements.

There are provisions for the DGFT to extend or terminate transitional periods in certain circumstances.  There are also provisions in the Act dealing with orders and undertakings under the old regime, together with ongoing Restrictive Practices Court proceedings.

Even from this brief review of the exclusions and transitional periods available under the new Act, it is obvious that these are complex and care needs to be taken in their application.

Concurrency

As noted above, the new Act also provides that sectoral utility regulators will be able to exercise powers concurrently with the DGFT under the Act when agreements (or conduct) relate to activities in the relevant regulated sector.

Who are these regulators?  Why do they have concurrent jurisdiction?

The regulators given such concurrent powers are OFTEL, OFGAS and OFFER (now OFGEM), OFWAT, ORR (the rail regulator) and OFREG.  The intention is to combine these regulators’ pre-existing powers (which principally exist under utilities legislation or through licences) with the new Competition Act powers to ensure that the consumer benefits.  In any situation potentially falling under both the Act and a regulator’s existing powers, that regulator will only be able to use his sectoral powers or its powers under the Act, not both.  It is up to the regulator to decide on the best way of proceeding.

So, what if a particular agreement or practice potentially falls within the jurisdiction of both the DGFT and one or more of the regulators?

The sectoral regulators and the DGFT have formed a Concurrency Working Party to advise on these situations.  Where the DGFT and relevant regulators are unable to agree who should exercise jurisdiction, it is envisaged that the Secretary of State will decide.

To whom should agreements or conduct be notified?  In practice, the notification will always be sent to the DGFT, together with an additional copy for every regulator into whose competence the notification might fall.  A further copy should be sent directly to such regulator(s).

In general terms, the impact which the Competition Act will have on the utilities sector, particularly in light of these concurrency provisions, is expected to be significant. For instance, OFWAT has already indicated that it is contemplating using the new Act to open up English water companies’ pipelines to new entrants to the water market.

The Scottish water industry is also bracing itself for the impact of the Act.

Conclusion

This has been no more than a brief overview of the main points in the Competition Act 1998.  Suffice to say though that with the new threat of heavy fines on companies and the possibility of company directors or employees being imprisoned or becoming personally liable for fines, companies, no matter their size, should consider putting in place a competition compliance programme as soon as possible.

Bear in mind too that a number of finalised or draft guidelines/orders are expected to be issued in the last weeks prior to 1 March 2000.

In the next article on this topic, consideration will be given to the application of the Competition I Act 1998 in the IT sector.

Richard J. CockburnMember of Shepherd & Wedderburn’s Competition and Regulation Group